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Joe Saluzzi On The Stock Market And The Broader Economy
And no, no discussion of HFT, predatory algos or flash orders. Tune in for a broader, comprehensive market analysis.
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Another classic post from Spock (aka Rasputin) at Pru Bear Chat:
"Without resorting to a bunch of past-tense "snapshot" fancy charts and
graphs of various "M's", and with minimum verbiage and NO links for a
change, please allow this Vulcan to lay out the simple case for
why--and how--the Fed and Uncle Sugar will continue to re-blow asset
bubbles, especially in housing and stocks.
First, the "Why":
Because
the Fed is on the hook for TRILLIONS of fiatscos of toxic, dead trash.
Much of it real estate related in the form of MBS,
CDOs/Squareds/Cubeds. Furthermore, the Fed has ALSO flung plenty of
fiat to other securitizations such as those for motorcycle loans,
credit card debt and student debt, among other junk
And please
don't forget that the Fed has also backstopped the entire money market
sector, and Uncle Sugar is NOT ONLY in the mortgage finance business in
a big way with the nationalization of Fannie, Freddie, FHLBs and the
pumping up of Ginnie (to the tune of SEVEN TRILLION FIATSCOS), but also
is in the auto manufacturing business too (with the nationalization of
GM and Chrysler).
(Spock): So, clearly the Fed and Uncle
have a vested interest in re-inflating asset prices, especially houses
and stocks, as the Fed is on the hook in a major way for the
backstopping of these sectors. Therefore, it is in the Fed's best
interests to re-sky housing, keep the stock markets and money markets
levitated, and otherwise keep the sheeple spending and speculating in
order to EVER have the hope of dumping the toxic trash they have taken
in--either back to the Wall Street gamblers from which they received
the gunk, or on to Uncle Sugar's lap.
In addition, Uncle needs
the asset bubbles to reflate so that his houses continue to
"appreciate", the lambs become wild speculators again, and his tax
revenues rise.
Now for the "How":
By hook or crook, by
currency debasement, by Uncle becoming the "mortgage provider and
landlord of last resort" for ten million homedebting sheeple, by
continued and increased "Cash for X" programs, by more and more
"Algo/Igor/Robo" action in the stock markets, by punishing "Cash
Hoarding Seditionists" and taxing their PRINCIPAL if necessary to
compel them to spend and speculate, by monkeying with the tax laws to
give more incentive to go into debt for commercial real estate
projects, by Uncle becoming the "employer of last resort" and creating
make-work jobs to keep sheeple occupied and able to make some kind of
monthly payments for McMansions and McAutos", and by more "Stimulus
Packages" of upwards of THOUSANDS OF FIATSCOS of direct payments to
lambs, with the explicit orders to "Go crazy, folks, go crazy!!!"
(Spock):
And the above list is by no means exhaustive, rather this Vulcan is
attempting to keep his commitment not to assault the reader with too
many words to describe the simple premise under which the Fed and Uncle
are now operating:
Inflate AND die. (Translation: Inflate
asset bubbles until the next, even greater blow off top and collapse
and reflation "Convulsion".)
(Spock Conclusion): It would be
a grave mistake to believe that the Fed and Uncle are incapable of
inciting another series of asset bubbles, aided and abetted by the
gambling animal spirits that dwell in the sheeple, and which can be
re-ignited with perhaps minimum effort.
And if not minimum effort, then maximum coercion.
The
Fed needs the asset bubbles to unwind its bloated balance sheet. Uncle
(and state and local governments too) needs the asset bubbles to
maintain power and to keep tax revenue flowing.
Therefore, they
will stop at NOTHING to accomplish their goals, even if it means
trashing the U.S. fiatsco, collapsing the Treasury market (no problem
there, because the Fed will gladly step up and buy every single debt
instrument proffered by Uncle Sugar, thereby keeping interest rates
low), and Uncle growing even LARGER and more pervasive--as hard as that
might be to imagine.
(Spock): This isn't about math, it's about power. Survival. "Wash, Rinse, Repeat". "Convulsions". Sheeple-steering. Control.
"Hard
math" (as poor, deluded, "realists" like Denninger are finding out, to
their chagrin) has been tossed out the the window at the fortieth floor.
Indeed, it's a miracle they've gotten this far. Thirty-eight years and counting since the abandonment of Bretton Woods.
And
now that they have indoctrinated two generations of sheeple worldwide
to accept fiat currency/fractional reserve lending/central
banking/securitization/derivatives as absolute "gospel", we are ALL
doomed to endless cycles of "Infinite Fiat".
And right now the world's central banks and governments are kicking up the "Money Machine" into high gear.
And the lambs will fall into line and go berserk with spending and speculation...if given the proper prodding.
Woe unto he who cannot see the desperate motivation of TPTB to re-blow bubbles and their awesome power and capability to do so."
ahaha "Uncle Sugar" lol
Don't discount too readily market forces which do not care to see the dollar devalued too greatly. It is the world's reserve currency, after all, and that provides great impetus for corrective market action(s).
RT, thanks for sharing that. I agree completely that no effort will be spared, anything is possible, in this greatest reinflation effort in history. It is of course all about power and control.
"Therefore, they will stop at NOTHING to accomplish their goals..."
Absolutely correct. Everything is at stake; everything. There is no "quit" in them, no self-control, no stepping back from the brink. If they do nothing, if they stop trying to reinflate, they lose. They have no choice but to follow this path to wherever it leads. It's not academic, and it never was. This might be an economic event, but first and foremost it is a political event. Economics is about what gets made, but politics decides how the output gets distributed, who gets to skim from the stream of economic activity.
My disagreement with Denninger (and Mish) has always been their inability to imagine things happening that were outlandishly, overtly wrong, illegal, immoral, etc. Neither of them seem to be able to allow themselves to accept that a system as corrupt as this one can exist; Denninger constantly demands in his posts: "How long are you going to stand for this?" He simply cannot believe that such outwardly, openly illegal actions are undertaken daily by this Fed and government. This inability may speak to their (KD and Mish) own personal inner sense of right and wrong, but it nevertheless IMO casts doubt on their prognostications.
We are living in a criminal conspiracy and we are the marks.
as offputting and pretentious as denninger is
his question is fundamentally correct - how
long will people sit as spectators in their
own immolation before they are moved to act?
if they watch as passive spectators while
their wives are being gang raped what in god's
name will move them to act?
Denninger is right, America hasn't put the remote down yet.
Seriously, do any of you guys actually talk to people? Read anything but ZeroHedge (which I love)? People have put down the remotes (geez, I'm sick of the put-downs) and are protesting in the streets and town halls. It's not just about the health care bill, it's about protesting the corruption and desecration of the Constitution. All of us out here aren't idiots just glued to the TV for Pete's sake.
"People have put down the remotes and are protesting in the streets and town halls"
Not to mention entire PALLETS of ammunition are being sold from Wal-Marts within minutes of arriving....I'm just sayin'...
Doesn't matter at this point. If they haven't figured it out yet, chances are it's too late to change things anyway.
Bingo. Extremely well said.
we the people .
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Yeah, it is Mish and KD's tendency to see ineptitude in the place of utter corruption that makes their analysis less than perfect.
They seem to think that things are just being badly run, or mismanaged, not purposely mismanaged!
It has to do with what you are willing to believe your fellow man is capable of. If you wish to believe that politicians and public servants are just bad at what they do there is much less of an onus to do something about it personally, versus the facing the reality of systemic fraud and corruption and collusion and conspiracy by the powers that be.
denninger is schizophrenic on the issues - he
doesn't allow exploration of alternate theories
of failure...
they could be due to incompetence or bad judgment
as well as policy biases but they could be due
conspiratorial motives to bring about results
which could not happen without the presence
of crisis....
it stretches credulity to believe that a string
of bad judgment calls and enforcement failures
could be the result of random accidents of
incompetence....
Agreed. GOOGLE: Operation Northwoods for example. I would imagine that they are ready to go live with something huge next. This scheme can't go on too much longer without a great distraction. Expect the unexpected.
On last aside, let's recall this: On September 10, 2001, Secretary of Defense Donald Rumsfeld held a press conference to disclose that over $2,000,000,000,000 in Pentagon funds could not be accounted for. Rumsfeld stated: "According to some estimates we cannot track $2.3 trillion in transactions." According to a report by the Inspector General, the Pentagon cannot account for 25 percent of what it spends.
Pretty soon, we're talking about real money.
What happens when foreigners don't want to play anymore?
http://www.321gold.com/editorials/denninger/denninger082209.html
Sadly, what you say is immaterial. Maybe you are correct that Denninger's personal sense of fairness doesn't allow him to believe it is corruption and not gross incompetence at work. Maybe you are correct in that corruption exceeds the gross incompetence.
You both lose in the end.
Last year, last month, last week, Friday, and today, tomorrow, next week, next month, and next year corruption and gross incompetence was and will still be at work, and getting rewarded just as handsomely as they have in the past. You will pay for it, Denninger will pay for it, and I will pay for. As will our kids and grandkids.
And it will continue because for all the belly-aching we do, we will let it continue. We will do nothing. Exposing it for what it is has done nothing and will do nothing.
ZH and MT and all the blogs are like valium; they stabilize our mood, make us feel a little better, but leave us in the same underlying condition. We're all impotent.
We're the same as the rioting mobs in the heart of the Koran Belt who protest when a Danish cartoonist disparages their particular brand of superstition: they end up killing each other even though they're on the same team. For us, the occasional loon goes postal amidst his colleagues or the completely innocent.
GS and C and BAC and JPM and Bernanke and Geithner and everyone else knows this. They will continue to rob us because they can. They are both above the law and out of our collective reach.
Has any one of the folks who caused this mess lost his job? Is a single one of those who caused the mess poorer than they were in 2007? Is a single one of them feeling in the least bit contrite?
Did I just drop the soap in the shower?
Thank you for your comment - many of us are horrified at what is happening. Marc Faber will be proved right - this will all end in disaster. He has predicted Zimbabwe style hyperinflation with 100% certainty and while it might not be that bad anything remotely close will be a disaster for the US. Bush gave them a big bailout but Obama has handed them the keys to the Treasury and the printing press. Millions of Americans are going to have their savings wiped out by inflation in the coming years.
Internet financial generals and academic economists like BB fight the last war with outmoded weapons: NeoKeynesian Deficit Inflationary Usury that created the very problem today: insolvency. The only thing that may save US here is productive jobs and savings, and government piling on more deficit spending is a long way from understanding that.
Fact is, government was not bankrupt in 1929 like it was in 1999. We have a long way down to fall.
Look at Gold vs Commodities, M-3 shadowstats or out the empty mall windows and smell the deflationary coffee.
Why else are biggest forex traders long the dollar?
My simple response to your comment is this: many of us have been complaining about government corruption-via-money-control for a long time. The central bank is THE enabler of big government. I believe this crisis will result in central banking and government "management" of the economy being revealed as the fraud that they are.
When "the few" complain it is all too simple to ignore them. The numbers are growing rapidly, though, and the crisis is far from averted. The Austrian school has been expecting this event for decades, and has the documentation to prove it. The message is spreading.
Crisis presents opportunity for change. The liberty that is my birthright is closer within my grasp than it has ever been in my 50+ years of life. You can give up if you want to. What a waste.
Or are big government, monopoly media, taxpayers and voters the enablers of the Central Bank?
There is only one way to deal with Uncle Saccharine, and that is to go our own way.
They may own the regulators. And they may simply own most of America. However, they don't own the billion or so
.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
currently
Agreed, KD's post are very well written, as he is very good putting the numbers together. But all that does for me is quantify how much money printing will need to take place.
Look at this post:
http://market-ticker.denninger.net/archives/1362-Why-Recovery-Calls-Are-...
He shows a graph of consumer credit contracting by $100B and counting, and 2.5T outstanding.
Does he realize the Fed is going to print $1.25T for agency MBS alone, and another $200B for agency debt? So just to prop up the GSE debt market that foreign investors have walked away from, Bernanke is going to print the equivalent of over half the outstanding consumer credit in this country. In a year.
Add in AIG, Bear, Citi, BofA, TALF, etc, and Bernanke will have printed the equivalent of the entire consumer credit in this country.
And this is nothing stopping him from printing more. He could literally monetize air. He doesn't need an excuse, because no one is asking for one.
More and more creative cash for trash programs. First we had cash for BS and Lehman, TARP, then AIG CDSs, then cash for first time homebuyers, then cash for clunkers.
Now what? Will someone pay me cash for old light bulbs? I will sell all mine for a $1000 each to eliminate the possibility that someone might use them instead of CFLs.
Then of course I will offer my old CFLs for $1000 to rid the environment of mercury.
RT, you make me shake and sweat with drooling anticipation!
Denninger is lost for sure in bright light reality.
All systems go. You were serious right!?! Lol
Whatever. This guy is still imbuing the financial wizards behind the curtain with all knowing power. They've fucked it all up so badly it's insane to believe they can control it.
Can you prlease provide a link to the prudent bear chat site?
Very well said, this is exactly what is going on.
spock forgot about all the foreign entities the fed has backstopped and all of the currency swaps keeping the dollar afloat....
so much corruption so few brain cells....no one can keep up with it any more.
"Because the Fed is on the hook for TRILLIONS of fiatscos of toxic, dead trash."
The Fed is on the hook for nothing. They can print as much money they want and they don't give account to none but themselves. The real money they have given to banks just sits there to cover the remaining couple trillions of losses plus what comes next.
"Inflate AND die."
No, its not that. Its impoverish and live.
Financial Bubbles have one reason behind them: wealth transfer.
Well, if there is no wealth any more among the sheeple (because their debt burden has topped) don't expect to see another property bubble soon.
Much wisdom here.
TG mentored by Rockefeller agent K and Rothschild agent RR at IMF on the classic central banker scheme to tax, inflate, default and repo.
Does anyone with an IQ over 120 seriously believe after devaluing the dollar 98% versus the price of gold we are on the precipice of hyperinflation?
Then flee to Zimbabwe.
RT, as much as we like your Avatar along with the Miss Universe Trump d'oiel bread and circus, we must demur with Spock and most hyperinflationists.
Based on the final youtube 6/30/09 splice, Joe Saluzzi has been wrong for at least two months, as permabears short since March 6.
Now Meredith Whitney in her Jackson Hole youtube, Jackson Hole being an apt metaphor for Deficit Government Sacks if ever there were, seems to have gone over the abyss to the dark side.
She observes fears of bank solvency (Freudian slip?) are well behind us, saying no more than 8% bank liquidity will be lost, and forecasting no more than 300 bank failures versus the 1000+ when Bush Clinton and company last robbed banks. Elaine Garzarelli, say it isn't so.
We have learned with Washington, Franklin, Jackson, Kennedy, Jefferson, Madison and others to never bet against America, but to frequently short government and bank tyrants.
Does the dollar gain authority from the Federal Reserve, from the people who use it or In God We Trust?
Now that gold and silver more than quadrupled with purported government attempts to reinflate, do we seriously expect them to work anymore?
Rather, anyone who studies the Gold:Commodities chart may discover we are in deflation, and have been in nominal terms since last year, and real terms since February:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
As some have noted here, there are so many dollars in surplus trade partner hands, Federal properties including the Strategic Oil Reserve and Alaskan energy fields may be seized by foreign creditors before the dollar defaults. Consider also Uncle Sacchrine still has the biggest Air Force and Navy.
Gold and silver coins may become so many worthless wet piper dream magic beans. When is the last time the corner grocer actually took them in to pay for their goods?
Bank exchange holiday or no, cash in hand is still defacto legal tender, devalued as it is. In fact, we think there is a possibility that the dollar, cut in half in less than a decade, may reach new highs.
TD, any chance you have a clip of your talk with Pimm Fox last week? Word is you talked HFT aftermarket Thurday.
This seems to still be working:
http://media.bloomberg.com/bb/avfile/Markets/Analyst_Calls/vrT.qGWIoYPk.mp3
I did a search at BB and couldn't find it...thanks so much.
Just listened to the show. So equity execution algorithms are now considered high frequency as well??? This kind of thinking underscores my reservations about the "expertise" of those representing this site. Electronic execution and high frequency are not even in the same league. Which leads to the comment about high frequency players being active in the options market. I would sure love to see some numbers/facts on that one.
There are links to it in the forums..
Saluzzi is somewhat off on mortgages, and doesn't go far enough on cash for clunkers since it hurts the poor.
1. He says people try to pay their mortgage before other debts, so this is indicative of financial distress. The main determinant of defaults is whether a borrower is underwater. People who invest in mortgages thinking a borrower will necessarily pay their mortgage before other debt is nuts. For example, if a borrower has no net equity in their house, and needs a car to commute to work, I'd bet they pay their car loan before their mortgage.
2. Cash for clunkers hurts the poor because it reduces the supply of used cars. This increases the price of used cars, and so, is effectively a regressive tax on the poor.
Yes, but in addition to depriving the poor of motor transportation, will drive them to using buses and public transit.
What a boon for the transit workers union and SEIU. More campaign funds to stoke more deprivation of liberty.
Great point I hadn't though of that. It's a power curve - feeding upon itself.
Unions are not the problem. When unions were stronger, the USA was stronger. The corporate and banking oligarchs are the problem. Now that they are stronger, the USA is weaker.
#2 is an excellent point.
1. he was talking about prime mortgages, which do have equity, your assumption seems geared towards alt-a or subprime.
2. i'll agree with you on this point.
The fact that Saluzzi was talking about prime mortgages is irrelevant. Negative equity is one of the most significant determinants of defaults in prime, as well as other mortgages. Further, many prime mortgages have negative equity; the number is increasing, and prime mortgages are far more likely to default if they are underwater. Fitch warned about this earlier this year; link below. And there have been various articles about this.
http://www.housingwire.com/2009/03/24/fitch-warns-on-prime-rmbs-cites-negative-equity/
You are correct, the equity, or lack thereof, is the main determinant of defaults.
You are also correct in that people will pay their cable bill, credit cards, etc before they pay an underwater mortgage. Not in every case, but in many cases. And this behavior is becoming more prevalent as the stigma attached with defaulting on a mortgage lessens.
You can't drive your house but you can sleep in your car.
Mighty Whitey vs. Mr. T:
http://www.crashx.com
He don't suffer fools - he just pities them, FOOL! :) Anyway, it's an article about the intolerance of the pseudo-intellectual left and the bigotry aimed at the ever convenient white male strawman/scapegoat. Has nothing to do with this article - but my site gets ZEROtraffic.com. So click in, spread the word, all that crap. Gonna go check on my ribs now.
"And the lambs will fall into line and go berserk with spending and speculation...if given the proper prodding."
You underestimate the sea change in psychology, sir. Even the sheeple are giving ear to the cued-in 5%. They understand more fully know the game. They are looking in the rear view mirror in disgust at their wild spending abandon. NO, if large sums pass into their hands, they will allocate it reasonably. They will pay down debt, hoard savings (but not in fiat currency), they will buy more utilitarian and less luxurious goods.
There is real antipathy to conspicuous gaudy consumption. Without it, the ability to blow asset bubbles cannot organically grow.
Only gov't can reenter the obscene world of credit expansion. They have been repudiated in private sector. Revolution will come if they continue their financial outrages.
Saluzzi is a bad-ass. He seems the kind of guy who would smoke a box of Ref Marlboro's drink a bottle of Jack Daniels, and then go shoot some traffic signs with a semi-automatic weapon. I like him; and only wish he was one of the 40 contributors to ZH; maybe he is.
Comparing styles, Saluzzi is Project Mayhem.
nope; PM is Daniel Ivandjiiski
Bah, National Enquirer says Daniel is founder of this site, and currently nailing Edward's former mistress.
i don't think daniel is a founder...just saying
Don't MAKE me discredit you. My mommy and daddy were important people and gave me an important position at an important paper. Question me at your peril, bitch. It doesn't matter what YOU think now, does it?
I have it from a good source he is nailing Michelle Caruso-Cabrera.
Nice...
http://project000.typepad.com/photos/uncategorized/2008/07/07/michelle_c...
Props to Tyler!
i'd tap that
Sweet.
it stretches credulity to believe that a string
of bad judgment calls .
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
The Fed is in a war of binary proportions. Do to little and us rats sell it off and do too much and the dollar becomes the new peso.
They may think they can win but they will fuck it up somewhere down the line.
They might even get war powers to do with what they want as most of what they have started is against many laws and regs.
An uprising? Nah. No? Then why are people to live in tent cities.
You'd think that the interviewer in this piece might have had the common courtesy to have pronounced the "zz" in Joe's name in the Italian fashion rather than in the tasteless, Americanized way in which he did. Made him appear the real rube.
Saluzzi threaded the needle nicely here, making the necessary distinctions between trading and the economy. It is every bit the by-product of a self-interested media that the so-called "recovery" enjoys the marketing currently given it, something not unlike the "success" accorded to the Bush/Petraeus troop "surge" in Iraq a while ago. Perhaps as much as the "surge's" outcome was the consequence of a payoff of Sunni militias that could have been worked by 30,000 bursars instead of soldiers, our so-called "recovery" rests on similar quicksand and will soon go up in smoke as has the "surge".
agree with everything joe says...............
Found the cause of colony collapse disorder in bees.
(1) Bees deviated from fundamental mission. Stopped harvesting pollen, nectar, plant resins and became more interested in creating product within the hive
(2) They created imaginary instruments upon the diminshing values of real creation within the hive and made a velocity of trading for insurance, swaps, forward contracts, futures.
(3) When parasitic psychology invaded the hive and predominated among field workers who gather, making them instead turn inward on false trades-numerous other microscopic parasites infested them. Not only was the gathering of essential materiel neglected, but the subsystems of the bees' communion with nature were impaired.
(4) Between drones and the multiple layers or parasites sapped the productivity, workers increasingly consumed more stored reserves and pollen than were produced in the same year.
(5) Winter and hardship exacerbated the cull. Striving against indolence and magnifying production became a scoffed at, barberous relic of the father generation. The quick fix, honey money, and sweet juice infusions promised by the evergreen queen were relied upon.
(6) The stores were exhausted, every particle consumed, the imaginary trading instruments became supercilious. The bees began to die. Unhelpful was the desertion of the few real productives. Cannibalism became state policy "just to get through the rough spot".
(7) The bees unlearned the art of collecting nature's bounty and scorned the blessings of harvesttime.
(8) Cornucopia undone. Dead and diseased insects devoid of purpose.
Collapse.
I like the analogy, but you forgot to mention the evergreen queen's RF frequency jamming (of) workers' IFR, causing a verigo-ish JFK, Jr syndrome. It's been renamed "Israeli Acute Paralysis Virus".
http://ddr.nal.usda.gov/dspace/handle/10113/131
Poster #45618
"as offputting and pretentious as denninger is
his question is fundamentally correct..."
He's neither offputting nor pretentious. He IS passionate and (rightly) angry.
Cheeky Bastard
Re post #45636
"Saluzzi is a bad-ass... (etc)".
I wasn't sure when I read those first few words but agreed with it when I'd read the rest of your post! Saluzzi's excellent.
DavidC
he is offputting and pretentious - he goes
overboard in his rhetoric and html at times
and is always
patting himself on the back about his brilliant
clairvoyance....
that makes him offputting and pretentious...
if you like it - fine.
We should send some trades toward Themis.....thanks Joe!
Denninger is overlooked and underappreciated. His posts seem more weighty than any other bloggers in my opinion. If only they could be insinuated in every person's brain this would be a different world.
The message is great, its diffusion is just weak for now.
As a plus, the mushroom nuclear clouds make some impact.
LATE TRADING MADE EASY
There's one more Canary relationship worth dwelling on, perhaps the biggest and dirtiest of them all: Bank of America. BofA would take the "one-stop shopping" concept even further than Security Trust.
The BofA connection was forged in April 2001, when Ted Sihpol, a broker in the private-client services department, cold-called Eddie Stern. Would he be interested in trading mutual funds through the bank? "It was," says one person familiar with the case, "like a fly cold-calling a spider."
The bank offered up its own Nations Funds for timing. It provided a credit line (ultimately $300 million) for Canary. And it provided derivative facilities--and a peek at portfolio holdings--so that Stern could short its funds. "Bank of America was lending us the money that we used to market-time their funds," marvels an ex-Canary employee.
Bank of America offered Stern something else: his own electronic trading terminal so that Canary could late-trade mutual funds. Using this system, Canary could enter mutual fund trades--and get that day's prices--as late as 6:30 P.M. And not just the Nations Funds. Stern could late-trade all the other fund families in the bank's clearing system--hundreds in all.
Even before the terminal was installed, Sihpol and his colleagues were helping Stern engage in late trading, SEC and New York regulators charge. They say Stern would submit "proposed" fund trades by fax before 4 P.M. so that Sihpol could time-stamp them before the deadline. Then, after 4 P.M., Canary traders would phone in final instructions. If Canary canceled any "orders," the brokers discarded the trading ticket. Those that were confirmed were submitted for processing as though they'd been properly placed.
The trading platform, installed in mid-2001, made late trading even easier. With its own terminal, Canary could bypass the brokers altogether, submitting late trades almost invisibly, as though it was simply an administrative arm of the bank.
In January 2002, Charles Bryceland, Sihpol's boss, e-mailed the bank's head of asset management, offering "accolades" to all involved in the Canary relationship: to the Nations Funds executive for "giving access ... for market-timing activities," to the private lending department, and to Sihpol. "It is always nice to enter a new year with a success like this," he wrote. "Thanks to all team members who have contributed to this profitable relationship."
EDDIE STERN'S BOILER ROOM
At the end of 2001, a year in which the S&P 500 fell by 13%, Canary returned 28.5% to its investors, even after management fees. Stern's results drew money like a magnet. During 2002, Canary's assets mushroomed from $400 million to $730 million--including $340 million from outside investors. With his ability to borrow from Bank of America and CIBC, Stern had around $2 billion he could time.
Which meant, of course, that Stern was more desperate than ever for timing capacity. He--and other timers--branched out into timing variable annuities, an insurance product with an investing component. Some annuity companies later claimed to know nothing about the timing activity--even though some hedge fund employees underwent physical exams before the insurance companies would sell them annuities they could time.
Stern's trading volume was enormous. In addition to the approved timing capacity, Stern often tried to trade "under the wire," using a hidden channel like Security Trust or Bank of America, hoping to go undetected. "A fund would allow us to get in and out five or six times," says a former Canary hand, "and we'd do it ten times. Canary always went for a few more."
How much did Leonard Stern know? It's impossible to say, but as with everything related to the family business, he was a looming presence at Canary. One former employee recalls him sticking his head into a conference room where Eddie was running a meeting. "My sons," he gushed proudly. "They're making me so much money!"
By 2002 there was little effort inside Canary's office to hide what was going on. The Bank of America terminal was out in the open. Stern responded personally to an Internet timing solicitation, leaving his initials and phone number. And the pace of the office was odd by Wall Street standards. As a former Canary employee recalls, "I had a brokerage background, where I always saw all the excitement going on before four o'clock to get the trades in before the market closed. At Canary it was just the opposite. Nothing was done until after-hours."
One Canary employee remembers the frenzied activity after the market closed on Oct. 16, 2002. The Dow had plunged 219 points that day, and the Nasdaq fell by 50. But after the close, IBM announced a stunning earnings surprise, beating expectations by 3 cents a share and signaling a new direction for the market. Canary's traders jumped in, using their late-trading access to buy funds at the 4 P.M. closing price that reflected the 3% drop that day in the market. Sure enough, shares leaped the next day--the Dow by 238 points, the Nasdaq by almost 40. Canary made a killing.
As 2002 came to a close, it was clear that Canary was going to have another good year. That December, Eddie Stern threw a year-end party for his employees at the Tribeca Grand, a chic new Manhattan hotel built by the Stern family. Before the party began, Stern led everyone to the hotel's private theater for a screening Eddie thought his staff would appreciate. The lights darkened and on came a movie about a young man who immerses himself in the dark, sleazy underbelly of Wall Street. They watched Boiler Room.
THE WHISTLEBLOWER
Eddie Stern had a request for his new employee, Noreen Harrington: He wanted her to help persuade Goldman Sachs to let him time its mutual funds. The white-shoe firm had already turned Stern down, but Harrington had worked at Goldman for 11 years, and Stern thought that connection might help change the firm's mind. It didn't. The Goldman response was blunt: Why would the firm violate its prospectus and let someone make rapid trades? To do so would be illegal.
Harrington, 46, was a Wall Street veteran, though she'd never had much to do with mutual funds. After her Goldman stint, where she'd risen to managing director, she'd served as co-head of global fixed-income investments for Barclay's Capital. The Sterns had hired her in April 2001 to help diversify the family money that wasn't in Canary.
The Goldman request had come before she fully understood how Eddie Stern made his money. Gradually, she began to realize that something sleazy was going on. She'd seen Canary traders putting mutual fund orders through at 8 P.M. "There's big news," she recalls now, "and then there's a trade."
Finally, Harrington asked directly: "How can this be okay?" Stern said he had a legal opinion that everything he was doing was fine. Besides, he added, "If the regulators ever look at this, they'll go after the mutual funds."
By the summer of 2002, Harrington had left the Sterns' employ, unhappy with the atmosphere but not intending to blow the whistle. In fact, she even kept some of her own money in Canary. Nearly a year later she heard her sister complaining about how much money she'd lost in mutual funds and how worried she was that she'd never be able to retire. "I didn't think about this from the bottom up," says Harrington, "until then."
Impressed with Spitzer's success in cracking down on Wall Street analysts, she nervously placed a call to his office one morning and left an anonymous message: "I think you should investigate mutual funds because people are doing way too many trades and doing late trading after the close of business. There are violations of security laws by the hedge funds and mutual funds."
Even before Harrington's call, Spitzer's newly hired assistant attorney general David Brown had convinced his boss that he should start poking around the fund business. Fresh from three years at Goldman Sachs, Brown had concluded that the industry was not as clean as it appeared. In May 2003, Harrington came to Spitzer's office and told his investigators what she knew. Brown was off and running.
By then, Stern was winding down. In February, Invesco had finally cracked down, cutting back Canary's timing capacity, restricting the funds it could time, and reducing the allowable number of trades. Other fund companies also began imposing new restrictions. After four months Canary had made just 1.53% in 2003, lagging the market for the first time. On May 2, Stern advised his outside investors that he was returning their money. "Strategies that had worked well for a number of years have not worked recently," Stern wrote in his letter to investors. He concluded: "We hope that you considered the ride to be a good one."
A subpoena arrived two months later. Stern quickly liquidated mutual fund holdings and laid off most of Canary's staff. He retained Gary Naftalis, a top New York white-collar crime attorney, and within 60 days a deal was struck: Stern would pay $40 million in fines and restitution of improper profits and accept certain restrictions on his investing activities. But he wouldn't have to serve a day in jail. In return, he would become the star witness in a scandal whose scope has surprised even Spitzer's investigators.
Stern spent much of his summer talking to investigators. Then, on Sept. 3, the AG dropped his bombshell: STATE INVESTIGATION REVEALS MUTUAL FUND FRAUD, read Spitzer's press release. In addition to unveiling the Stern settlement, Spitzer released dozens of damning documents from Janus, BofA, Bank One, Strong, Security Trust--and Canary. The SEC didn't even learn of Spitzer's investigation until that morning, when enforcement director Cutler discovered that Spitzer had called a press conference. He phoned Spitzer and asked, "What are you doing?"
The SEC, the Justice Department, and numerous state regulators soon joined in what has become a massive investigation. But it is Spitzer who has led the charge. To date, his office (working with the SEC) has negotiated four mammoth settlements totaling more than $1.65 billion.
--Alliance has agreed to pay $250 million in restitution and cut fund-management fees by $350 million over five years. MFS has agreed to pay $225 million and slash fees by $125 million. Bank of America, eager to complete its merger with Fleet Boston/Columbia, agreed to a package for both itself and Fleet totaling $675 million--$515 in cash, plus another $160 million in fee cuts. All the firms have fired executives and agreed to management reforms.
--Spitzer has filed felony criminal charges against Bank of America broker Ted Sihpol and CIBC banker Paul Flynn, both of whom maintain their innocence. He has charged three top executives at Security Trust; one has pled guilty. Federal regulators have closed the firm. Spitzer has also won guilty pleas from a trader at Millennium Partners, who admitted to engaging in late trading, as well as a vice chairman at Fred Alger management, who confessed to destroying evidence concerning timing deals.
--At PBHG, co-founders Gary Pilgrim and Harold Baxter have left the firm and been charged with fraud by both Spitzer and SEC. New Jersey authorities have filed civil fraud charges against Pimco.
--Massachusetts regulators and the SEC have charged Putnam and two of its portfolio managers with fraud in connection with market timing by Putnam employees. The firm later disclosed that at least 40 Putnam employees had been timing the firm's funds. The firm replaced its CEO and fired six portfolio managers. Massachusetts regulators have also filed fraud charges against Franklin Templeton for permitting market timing by Daniel Calugar, and against Prudential and a group of market-timing brokers in its Boston office. Prudential says it has fired more than a dozen employees. Bear Stearns, Citigroup, Merrill Lynch, and UBS Warburg have also fired brokers in connection with market-timing issues.
And there's more to come. Invesco and its CEO, Raymond Cunningham, are facing civil fraud charges from both Spitzer and the SEC. (Invesco's parent firm says it is seeking to settle the charges against the firm.) Bank One says it is expecting enforcement action by Spitzer for allowing timing in its funds. Janus, which has volunteered to pay $31.5 million in restitution for allowing a dozen timing arrangements, says it is seeking a settlement with the SEC. Strong Capital founder Richard Strong, who stepped down after Spitzer's office alleged that he market-timed his company's funds, awaits charges from the New York AG.
Although Eddie Stern was deeply involved in many of the illegal activities he has described to prosecutors, neither Brown nor Spitzer makes any apologies for his light treatment. "The truth is that we picked the absolute best person to bring in as our cooperator," says Brown. "He's given us 20 or 30 names of mutual funds, 20 or 30 names of hedge funds, ten late-trading vehicles." Adds Spitzer: "We realized having his cooperation would permit us to lay bare an entire array of relationships that were improper. He did get a good deal. People who are there early get good deals. We did the right thing."
Earlier this year Spitzer quietly settled his suit against the Hartz heir and dismissed the fraud complaint. The agreement bars Stern from managing outsiders' money for ten years, though he remains free to invest his family's wealth. In fact, he can even still own mutual funds.
An honest man.
did joe say that they are considering bringing back mark to market a/c rules?!
its like nuking my green shoots!! help!
Spock is right. TPTB WANT to reinflate the bubble. Wanting something and being able to do it are 2 different things. You can only trash the dollar so much before soaring commodity prices get you to the same spot. As the DX falls the Fed becomes more and more powerless to support the markets and economy.
You have to look beyond what they are trying to do and into the math of what they can do. When you do the math as Denninger has you come to conlcusion that the Fed is cornered. How much time this one last attempt to kick the can and avoid our day of reconing lasts is the only question. My guess is it's a matter of weeks or months before the market is forced to recognize the reality of the Fed/Treasuries predicament.
Yeah, my only fear is that the Fed has gone too far already. And it appears they have no intention whatsoever of stopping.
I think the point that most bears miss is - that the Fed and Uncle Sam have been blowing bubbles for the better of 2 decades, eversince Greenspan's heroics in rescuing the 1987 crash. The same tactic of pumping money at the financial assets and then real estate has worked unfailingly through the latin american crisis, Asian financial crisis, LTCM, dot-com era, and most recently in 2001/2/3. So market's DNA is imprinted with the mechanics of how bubble reflation and monetary stimulus works. Short of another catastrophic event, the market will not deflate for a long while.
Agreed, this is also what is driving the growing gap between rich and poor in this country. We are becoming a banana republic through endless money printing to stave off each crisis.
the Fed will probably print another $1T in the next four months, between all their programs. That money will go into the markets, private equity, etc, as the Fed intends. their hope is that money will be spent on something, anything, that can recreate another bubble. Maybe it will be tech again. Who knows. Maybe we will just have a stock market bubble a la 1987 without any real reason.
Whatever the case, i don't see this bubble deflating for years, either, 2011/2012 at the earliest.
http://www.ft.com/cms/s/0/90227fdc-900d-11de-bc59-00144feabdc0.html
Dr. Doom get's overwatered....vacillation give me U, a V and now W?
T he global economy is starting to bottom out
i stopped reading after this
Roubini is a sell-out and a fucking GS dog.
It seems clear that large groups are wholly incapable of manifesting moral conscience. They do not see, or cannot compute, right and wrong.
This entire national experiment, going back to 1776, was based on the individual and his conception of right and wrong. Now that the individual has been co-opted by absurdly powerful groups, the individual's conscience no longer retains any sort of power in the face of the corrupt organizations which control our lives.
What is the solution?
Revolution.
http://tinyurl.com/kofvyo
Swiss exchange plans high-frequency push
Switzerland’s stock exchange is set to adopt a new rulebook aimed at making the market more attractive to high-frequency trading firms, its new chief executive has said, despite the new breed of trader comes under growing scrutiny from regulators.
HFT getting set in concrete now , will not go away .
Salient point .
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
nicely done editing job on the video.