Tag: goldman sachs

Make money like Goldman Sachs (new video)

Posted on by The INO.com Team

Goldman Sachs (NYSE_GS) declared record earnings of $3.4 billion for the three months prior to June, only months after it accepted government assistance. My gut reaction is how can an institution that so embodies Wall Street be making so much money as if the credit crisis never happened.

In today's short video I'm going to be analyzing the stock of a Wall Street juggernaut known as Goldman Sachs. The video shows you how you could have used MarketClub's "Trade Triangle" technology to make a ton of money just like Goldman Sachs.

I'd love to hear what you think about the Sachs bounce back or your thoughts on where this stock is headed in the future. Please watch the video with my compliments.

All the best,

Adam Hewison
President, INO.com
Co-creator, MarketClub

America Will Print As Much As It Takes

Posted on by The INO.com Team

Today I'd like you to welcome Dr. Duru from Drduru.com. I've known the good Dr. for a while now and spending time on his site has really given me a great perspective on the markets. I contacted him and asked him if I could use his article from a few months ago as it's very timely. Please enjoy!

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I originally wrote this two months ago, but I believe it is worth repeating in light of the Fed's historic actions on Tuesday.

"...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation...If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation." - Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. on November 21, 2002: "Deflation: Making Sure "It" Doesn't Happen Here."

We should find it odd that we are in a deflationary-style panic when our Federal Reserve has a chairman in Ben Bernanke who is absolutely committed to printing as much money as it takes to prevent deflation. Then again, our Treasury has a leader in Hank Paulson who is a former CEO of Goldman Sachs...and that did not prevent the investment banking universe from completely blowing up.

An old high school friend of mine pointed me back to Bernanke's famous remarks from 2002 (thanks, Mitja!). It made for a fascinating read given the current financial crisis. (I am embarrassed to admit that I always thought Bernanke was the originator of the concept of dropping dollars from a helicopter, but it was actually economist Milton Friedman. Bernanke referred to Friedman's helicopter in this speech). In this 2002 speech, Bernanke explored several novel academic ideas that he now has a chance to test out in real time. Many of the creative ideas that the Federal Reserve has cooked up to battle our financial crisis seem to have had their genesis in Bernanke's scholarly endeavors. Bernanke could never have guessed what was in store when he warned his audience that "I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise."

Bernanke's hypothetical exploration was focused on the tools the Federal Reserve might wield when reducing the target for the federal funds rate to 0% failed to arrest a deflationary spiral. I think it is fair to say that the Federal Reserve is currently stretching policy remedies as far as they can go BEFORE being forced to drop interest rates this low. To date, dramatic rate cuts have only served as temporary and fleeting relief with no imminent prospect for solving the fundamental problems of a crisis in confidence. Soon after Bear Stearns failed, I am sure the Fed realized that rate cuts had become largely ineffective. Indeed, over the course of the last three scheduled Fed meetings, rates were held at 2% even as the credit markets continued to deteriorate. Last week's globally coordinated rate cut signals that the U.S. will not slip down the path to 0% interest rates alone. True to form, this unprecedented move did nothing to relieve the system's stress. The S&P 500 has so far fallen another 10% since then and credit markets have continued to worsen. At this point, I have to wonder whether the central bank authorities will even bother pushing rates all the way to zero.

What makes the current crisis so particularly difficult for the Fed is that some of the basic requirements of a functioning economy have been wiped away. Back in 2002, Bernanke noted that even after the deflationary shock of the burst tech bubble and 9/11, the fundamentals of the economy remained sound: "A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks." It of course turns out that the regulatory regime was NOT sufficient. Bernanke went on to note that "The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly." Needless to say, the Federal Reserve is now struggling to keep up with the pace of change in financial conditions. The Fed has had to stretch and creatively interpret its legal powers in a desperate effort to keep up.

The Treasury has also joined the Fed in this mad dash, jumping from one proposal to the next. The latest switch features Paulson coming around to the idea of buying stakes in banks and putting the $700 billion "Troubled Asset Relief Program" on hold. This represents a complete turn-around from Paulson's earlier comments to the Senate Banking Committee on Sept. 23, 2008: "Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure. This is about success” (from the New York Times).

So, we face a lethal combination of never having experienced anything quite like the current financial crisis along with agents of governance who have been forced to make up rules and create solutions on the fly as we descend rapidly. Add to this wicked brew an intricate web of volatile global dependencies. We should not be surprised that the crisis of confidence remains so deeply entrenched.

Someday, we will achieve financial stabilization. When we get that relief, we will finally be able to focus on the future, a future in which we reconstruct our financial systems to prevent this kind of disaster from ever happening again. Perhaps we can even think through how to prevent the creative geniuses of financial engineering from dreaming up new pending disasters. In 2002, Bernanke recognized that the best approach to dealing with deflation is not allowing it to happen in the first place: "The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place." Today, this statement almost sounds naive given the tsunami of events that have overwhelmed our financial watchdogs. Today's basic prescription of prevention would have been to stop the growing bubbles in credit and in housing before their inevitable collapse triggered a perilous deflationary spiral.

Unfortunately, Bernanke's predecessor, Alan Greenspan, absolutely refused to acknowledge definitively that a housing bubble existed. By the time he expressed any concern, the housing bubble had already reached breathtaking levels of madness. Greenspan was also a big fan of complex derivatives and debt securitization because they supposedly were so effective in spreading risk around. Instead, they have been very effective in spreading the contagion of panic and collapse. Greenspan has recently tried to defend his legacy, and I have written critically of his defense. One of Greenspan's fundamental problems is that he under-appreciated just how extreme the bubble mentality can get. In an interview with the Financial Times, he admits that financial modeling has failed to account for "...the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve." (This suggests that future generations will learn little from the fall-out of our latest bubbles just as this generation has learned precious little from past bubbles!)

Most importantly, Greenspan has long argued that there is nothing the Fed can or should do even if it could recognize a bubble. He repeated this claim in his interview with the Financial Times: "But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own." This philosophy may finally be changing. Back in May, the Wall street Journal reported that Bernanke has started research into methods for preventing bubbles. Until some solution is found, the main tool at the Federal Reserve's disposal will be to print as much currency as it takes to smooth over the pain from the collapse of bubbles...and thus sow the seeds of the next financial calamity.

I am not sure what magic moment will finally pull us out of this financial downward spiral. But I can look ahead to that day when we achieve stabilization in the financial markets and recognize all the massive amounts of liquidity sloshing through the system. Will the planet's central banks be able to withdraw these supports in time to avert massive inflation? I doubt it. I am skeptical because no one will be sure when the crisis is absolutely over. Caution will rule the day and supports will stay in place far longer than necessary just to make sure no risk remains of falling backward. By then, a lot of clever people will already be far down the path of devising new ways to put excess credit and liquidity to work. So, looking further (into an unknowable timetable), I want to be positioned for a day of surging reflation, and perhaps even rampant inflation. Famed commodity bull Jim Rogers suggested something similar when he made "inflammatory" remarks about future inflation risks on CNBC International on Thursday night (click here to watch). America is committed to printing as much money as it takes to prevent deflation. I am willing to bet that there is enough paper and ink in the world to make it so.

Be careful out there!

By  Dr. Duru
December 18, 2008

Is now the time for a bear market rally?

Posted on by The INO.com Team

I've been in contact and reading the blog Psychologyofthecall.com for a few months now and from what I've read they seem to be on top of a number of issues. I asked them to answer one question for me...Is now the time for a bear market rally? Here's their answer:

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The ongoing global financial crisis has made perma bears look like geniuses, yet the Psychology of the Call team (POTC) senses the imminent appearance of a bear market rally for four good reasons.

1) President elect Obama's first speech and chief of staff pick, Mr. Rom Emanuel, were very bearish for the market; we are confident both of those negativities will change soon. POTC believes Mr. Obama's goal in the coming days and weeks will be to do everything popular to be re-elected to a second term in just four short years. He understands that half of U.S. citizens are in some way affected by the mayhem of the recent sell off; Americans expect transparent leadership and policies now.

It's that second pivotal term where Presidents are more inclined to show their true colors, especially in terms of openly hell bent left or right policy. We remain confident and are prepared for a lag effect Thanksgiving Obama rally to begin this week, as his centrist appointments and policies begin leaking through hedge fund insiders. We are not waiting for New Year to enter long positions, as that seems to be the easiest and most ‘herdish’ trade today: we remain forward thinking contrarians and are going long the S&P emini contracts into Thursday's death spike.

We believe President elect Obama will appoint some Wall Street friendly names to his first administration, doing so to satisfy his political appetite to win that critical no holds barred second term in 2012.

Yet, if he chooses to select only hard line left wingers, the market will not rally. After witnessing the extremely well planned and hard fought victory, we would be shocked to see a concentrated (leftist) cabinet:. We are confident that will not occur.

2) The pressure from Warren Buffett on President elect Obama to call for a change in mark to market accounting from the SEC, or announce a huge infrastructure stimulus plan plays a factor in our short term bullish call as well.

Berkshire Hathaway just reported a horrible quarter, and even if Buffett is okay with paying higher taxes, we know he does not want to see his almost perfect legacy wither, wilt, and die in his waning years.
Other recent Buffett investments in Goldman Sachs (GS) and General Electric (GE) have underperformed as well, and both of those companies will survive this wickedly panicked market.

3) The financial sector could begin to stabilize as it shrinks. The S&P is heavily weighted with oversold financials.  Approximately 20% of the S&P value lies in financials, so be cautious. Regional banks could begin bouncing with 50%+ buy-out premiums. Rumors abound that Citigroup (C) is very close to bidding for a regional bank with government TARP money.
Story here

This would ignite a type of forest fire under financials, forcing many perma bears to cover their seemingly bullet proof short positions.

We will take advantage of what we view as monopoly money about to be used to boost stocks like Regions Financial (RF) and/or Suntrust Bank (STI).

4) Intel's (INTC) (see MarketClub's latest prediction here, ed note) report of lowering numbers after hours creates the perfect set-up for hedge funds to close or enter new positions before they step foot on Capital Hill, Thursday. Please remember these managers are either long, short, or in cash at this point, so we expect the INTC news to shake out the wounded, weak, and desperate long herd, and flush out the dynamic kings of cash, specifically Steven Cohen and Paul Jones: Story here

These managers are patiently waiting to take over your shares when your fear factor boils over Thursday, turning their greed gauge on auto pilot in search of inexpensive generals. Will you allow them that satisfaction?

Four examples of best-in-breed generals at these levels are: Apple (AAPL), America Movil (AMX), Chicago Mercantile Exchange (CME), and Google (GOOG).

POTC feels the S&P index could settle above 1,000 by Thanksgiving, and as the bear rally gains momentum from one or two other positive developments mentioned above, then 1,100 on the S&P could well be reached before we wish you a Happy New Year.

Psychologyofthecall.com

Greenspan denies blame for crisis, admits 'flaw'

Posted on by The INO.com Team

From our Media Partner Associated Press

Greenspan denies blame for crisis, admits 'flaw' this minute
By MARTIN CRUTSINGER and MARCY GORDON
Associated Press Writers

(AP:WASHINGTON) Badgered by lawmakers, former Federal Reserve Chairman Alan Greenspan denied the nation's economic crisis was his fault on Thursday but conceded the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a "state of shocked disbelief."

Greenspan, who stepped down in 2006, called the banking and housing chaos a "once-in-a-century credit tsunami" that led to a breakdown in how the free market system functions. And he warned that things would get worse before they get better, with rising unemployment and no stabilization in housing prices for "many months."

Gloomy economic reports backed him up. New jobless claims soared to just under 500,000 for last week, and Goldman Sachs, Chrysler and Xerox all said they were cutting thousands more workers. On Wall Street, the Dow Jones Industrial bounced erratically all day before finishing up 172 points _ after a two-day drop of nearly 750.

The financial crisis even prompted the Republican Greenspan, a staunch believer in free markets, to propose that government consider tougher regulations, including requiring financial firms that package mortgages into securities to keep a portion as a check on quality.

He said other regulatory changes should be considered, too, in such areas as fraud.

Also looking for solutions, another banking regulator told Congress the government was working on a loan-guarantee plan that could help many homeowners escape foreclosure as part of the $700 billion bailout legislation. That plan is being discussed by the Treasury Department and the Federal Deposit Insurance Corp., said FDIC Chairman Sheila Bair, who is pushing the idea.

Greenspan's interrogation by the House Oversight Committee was a far cry from his 18 1/2 years as Fed chairman, when he presided over the longest economic boom in the country's history. He was viewed as a free-market icon on Wall Street and held in respect bordering on awe by most members of Congress.

Not now. At an often contentious four-hour hearing, Greenspan, former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox were repeatedly accused by Democrats on the committee of pursuing an anti-regulation agenda that set the stage for the biggest financial crisis in 70 years.

"The list of regulatory mistakes and misjudgments is long," panel chairman Henry Waxman declared.

Greenspan, 82, acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that "a flaw in the model ... that defines how the world works."

He acknowledged that he had also been wrong in rejecting fears that the five-year housing boom was turning into an unsustainable speculative bubble that could harm the economy when it burst. Greenspan maintained during that period that home prices were unlikely to post a significant decline nationally because housing was a local market.

He said Thursday that he held to that belief because until the current housing slump there had never been such a significant decline in prices nationwide. He said the current financial crisis had "turned out to be much broader than anything that I could have imagined."

Greenspan's much-anticipated appearance before the House panel came as the Senate Banking Committee held its own hearing on what the government is doing now to get out of the mess.

Assistant Treasury Secretary Neel Kashkari, who is overseeing the $700 billion financial rescue effort that passed Congress on Oct. 3, said the administration was not only working to get federal purchases of bank stock started quickly but also the program to mop up troubled mortgage-related assets. He also said the government was working to make sure that directives in the legislation to help struggling homeowners avoid foreclosure were being addressed.

Kashkari said the plan could include setting standards that banks should follow for reworking mortgages to make them more affordable. He said the administration was considering a recommendation to provide government loan guarantees to cover the reworked mortgages to make the program more attractive to banks.

"We are passionate about doing everything we can to avoid preventable foreclosures," Kashkari told the committee.

The FDIC's Bair told the same Senate panel that the government needs to do more to help tens of thousands of people avoid foreclosure.

She said the FDIC was working "closely and creatively" with the Treasury Department to come up with a plan.

Greenspan was asked to defend a variety of actions he took as Federal Reserve chairman _ resisting recommendations to use the Fed's powers to crack down on subprime mortgages, for one. And opposing efforts to impose regulations on derivatives, the complex financial instruments that include credit default swaps, which have also figured prominently in the current crisis.

He said that outside of credit default swaps, the bulk of financial derivatives had not caused major problems. He said the boom in subprime lending occurred because of the huge demand for investment opportunities in a global economy, and he blamed the crash on a failure by investors to properly assess the risks from such mortgages, which went to borrowers with weak credit.

As for firms that package mortgages into securities, he said, "As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue."

On the billions of dollars of losses suffered by financial institutions because of their investments in subprime mortgages, Greenspan said he had been shocked by the failure of banking officials to protect their shareholders from their bad loan decisions.

"A critical pillar to market competition and free markets did break down," Greenspan said. "I still do not fully understand why it happened."

SEC Chairman Cox told the House panel that "somewhere in this terrible mess, laws were broken." And Snow said that lawmakers should have responded more quickly to his pleas for stronger regulation for mortgage giants Fannie Mae and Freddie Mac, which were taken over by the government last month.

In the meantime, Kashkari, the Treasury official overseeing the bailout program, said there has been much progress, resulting in "numerous signs of improvement in our markets and in the confidence in our financial institutions." Still, he cautioned, "the markets remain fragile."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Initial Public Offerings (IPOs) – Removing the Mystery

Posted on by The INO.com Team

Today we have the special honor of learning about IPOs from Zachary D. Scheidt who runs a fund that focuses on IPOs and their effect on the markets. His analysis is sought after daily with new IPOs and historic IPOs. Please take the time to read his article prepared just for Trader's Blog readers. Have a great Sunday.

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When I tell people that I run a fund that primarily trades IPOs, I often get a blank stare. It’s a bit of a shame that some of the more profitable opportunities on the street are often unrecognized and passed over by many individual investors.

Ironically, one of the reasons many people are not aware of a newly issued stock is because of restrictions placed on research firms who may know the very most about the new company. The regulations are actually in place with the intent of protecting investors from conflicts of interest, but even the best set of rules sometimes have unintended consequences. To understand how the process works, let’s start at the beginning and explain the complete IPO process.

Imagine you started a new company based on a new invention you created. You put your life savings into getting the patent, creating a prototype, and you have begun to sell this invention to a few retail shops around your hometown. The company is successful, but in order to truly realize its full potential, you need to build a factory for mass production, hire a bigger sales-force to market the product nationally, and you would like a way to get your capital back when you are ready to retire. Well you are probably a prime candidate to sell a portion of your company in an IPO.

Now an IPO is simply an Initial Public Offering – or the first time a stock has been offered to investors and traded on a public market. Typically, the business owner will offer only a portion of the company (for example lets use 30%) and keep the rest of the company as his own position. So we might assume that there are 300,000 shares being offered to the public and an additional 700,000 held by the business owner.

Typically, a business owner will go to an underwriter (you would recognize some of these firms such as Morgan Stanley, Goldman Sachs, Merrill Lynch or Lehman Brothers. An analyst at one of the underwriting firms would take a look at your business model, asses what he thinks it might be worth, draw up the legal papers (called a prospectus) and then begin to search for buyers who are interested in owning a piece of your company.

The underwriter may face challenges in finding buyers for your firm. After all, there is no history of this company trading, and investors would be taking a bit more risk on this relatively unproven company. Usually the underwriter tries to set a relatively attractive price on the issue so that he can find enough willing buyers and so that those buyers actually are likely to realize a gain once the stock starts trading. So lets assume that the underwriter believes the company is worth a bit more than $10,000,000 and we have already assumed there will be 300,000 shares offered and another 700,000 shares held by the entrepreneur.

After speaking with many clients about the offering, and possibly introducing management to some of these key clients, the issue is placed on the calendar and expected to begin trading on a certain date. Now its time for investors to put their money where their mouth is. The underwriter takes Indications of Interest (IOIs) from clients which means that the client actually tells the underwriter how many shares he would like to buy. If the deal has a lot of demand, it is considered to be “oversubscribed” and most clients will only get a portion of the stock they indicated for. However, if there is a smaller amount of demand, clients will likely get “allocated” the entire amount that they asked for.

Sometimes the price has to be adjusted as well to fit with the demand (if there is not enough demand, they may price the IPO stock below expectations in order to find enough buyers for the 300,000 shares being offered. If an IPO prices below the expected range, that is usually a pretty good indication that demand is light, and investors should be cautious as the potential for further weakness is much higher. Conversely, if underwriters sense strong demand for an IPO, they may actually price the deal above the range published in the preliminary documents. This is definitely a positive for the business owner who is receiving more for the 30% of the company he is selling. Ironically, investors who pay higher prices for the IPO have a better chance of making strong profits because the higher price points to extreme demand in the marketplace.

Once all the shares have been allocated and the wrinkles are ironed out, the stock starts trading in the open market and investors can buy and sell shares. At this point there is nothing different between buying this stock or any other public company. Often, there is great opportunity for trading gains as the company is less well known than existing stocks that have been trading for a period of years. This means that someone who is willing to roll up his sleeves and research the true value of the company may be able to uncover issues that are not yet fully discounted in the stock price.

The reason the market may not have all the fundamental facts priced in is because analysts associated with the underwriting firm are technically barred from issuing an opinion for a period of time after the deal is brought to the public. The rule is in place because there would be a conflict of interest between the underwriting firm and the business owner as the stock is being issued. It would be tempting for an underwriting firm to agree to publish an overly optimistic report in order to drive demand for the deal.

To counter this conflict, the SEC has required a “quiet period” during which an underwriting firm (who ironically knows more about the newly issued company than anyone) may not publish a recommendation. In the mean time, it is possible for individual investors to do their own homework and possibly buy into a company before the official analyst issues a report later. If the analyst is positive on the company it will likely drive the share price higher as the underwriting firm’s clients begin to buy the stock in earnest.

So for individual investors, the challenge is where to find IPO information in order to make an educated decision on whether to invest or not. I have found that a small website called morningnotes.com does a very good job of giving an overview of upcoming IPOs and how they will potentially trade in the open market. Secondly, Investors Business Daily keeps a running table of soon to be priced companies as well as recent IPOs. Finally, the SEC has all the formal documents that are issued by companies in the IPO process. While some of these reports will put you to sleep, there is good information as to the nature of each business, the balance sheet and income statement, and interestingly, who owns the bulk of the remaining shares.

Investing in IPOs should not be a mysterious process. There is ample opportunity to uncover hidden growth companies, and the information is available and is often free of charge. It just takes a bit of homework to determine the best companies.

Zachary Scheidt is the Managing General Partner of Stearman Capital, LP. The fund focuses on recently issued securities and companies issuing IPOs. Mr. Scheidt received his MBA from Georgia State University and has earned the Chartered Financial Analyst (CFA) designation. He authors a blog at www.zachstocks.com highlighting stock ideas for individual investors to pursue.