In Search of the Perfect Investment

I do not like where this is heading. I want little, if any,  equity exposure. Gold is my hedge. Cash is my savior. I have more cash than ever. I’m worried.

We escaped October’s often one-day huge plunge. But it’s hard to believe we’ve escaped it with our brilliance (just a bit of luck, maybe),  especially in the face of:

+ Europe’s continuing Eurozone mess. See below.

+ The world’s accelerating economic slowdown — China, America, Europe, etc. I don’t know if slowdowns can accelerate. But you get the message.

+ The overarching pall from MF Global and its huge impact on investor confidence.

Today, I want you to read some important stuff. First, from today’s New York Times, an excerpt:

Words of a Euro Doomsayer Have New Resonance

Bernard Connolly, an independent analyst, once worked for the European Commission.

LONDON — The euro zone was crumbling, just as he had long predicted, yet Bernard Connolly, Europe’s most persistent prophet of doom, still faced a skeptical audience.

“The current policy of lending plus austerity will lead to social unrest,” Mr. Connolly told investors and policy makers at a conference held this spring in Los Angeles by the Milken Institute, arguing the case that Greece, Italy, Portugal and Spain could not simply cut their way to recovery.

“And one should not forget that of the four countries we are talking about, all have had civil wars, fascist dictatorships and revolutions. That is history,” he concluded, his voice rising above the chortles and gasps coming from the audience and the Europeans on his panel. “And that is the future if this malignant lunacy of monetary union is pursued and crushes these countries into the ground.”

Mr. Connolly has been warning for years that Europe was heading for disaster. As a European Union economist in the early 1990s, he helped design the common currency’s framework, but then he was dismissed after he expressed turncoat views. In 1998, just months before the euro’s introduction, he predicted that at least one of Europe’s weakest countries would face a rising budget deficit, a shrinking economy and a “downward spiral from which there is no escape unaided. When that happens, the country concerned will be faced with a risk of sovereign default.”

Now, as the European debt crisis that began in Greece threatens to engulf even France along with Italy and Spain, Mr. Connolly’s longstanding proposition that the foisting of a common currency upon so many disparate nations would end in ruin is getting a much wider hearing. Hedge funds looking to bet on a euro zone breakup scour his research reports for insights.

Longer-term investors who listened to his decade-long recommendations to steer clear of the bonds of Greece, Italy, Portugal and Spain are congratulating themselves for not falling into the trap that bankrupted MF Global, the investment firm run until recently by Jon S. Corzine, the former Goldman Sachs executive and New Jersey governor. …

In 2005, when Greek, Portuguese and Irish bonds were trading at rates barely higher than Germany’s, Mr. Connolly’s work at AIG Financial Products persuaded a small group of hedge funds and independent investors to bet on a euro zone crackup.

They did so by buying the credit-default swaps of what he saw as the most vulnerable European countries.

When fears that those countries would default took off in 2008 and 2009, sending the values of those swaps skyward, they were able to sell — reaping large profits.

“It took a while, but we finally were able to monetize Bernard’s views on Europe,” said James Aitken, who worked with him at AIG Financial Products and describes his job at the time as translating Mr. Connolly’s arcane musings into actual investment strategies. …

“He is anguished,” said Mr. Aitken, who runs his own research service for investors, Aitken Advisors, from his home in London. “He sees where this is going and is warning against the human tragedy.”

Yra Harris, a trader on the Chicago Mercantile Exchange, is another of Mr. Connolly’s supporters in the investment world. “Bernard is like no one I have ever met,” he said, citing his work as inspiration for some recent profits he made selling Italian bond futures. …

Read the full article here.

The continuing fallout from MF Global. A reader has all his IRAs in MF Global. Yuch.

The second piece I want you to read is from Ann  Barnhardt, an independent introducing brokerage company. She talks about the fallout from MF Global:

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

Perhaps the most ominous dynamic that I have yet heard of in regards to this mess is that of the risk of potential CLAWBACK actions. For those who do not know, “clawback” is the process by which a bankruptcy trustee is legally permitted to re-seize assets that left a bankrupt entity in the time period immediately preceding the entity’s collapse. So, using the MF Global customers as an example, any funds that were withdrawn from MFG accounts in the run-up to the collapse, either because of suspicions the customer may have had about MFG from, say, watching the company’s bond yields rise sharply, or from purely organic day-to-day withdrawls, the bankruptcy trustee COULD initiate action to “clawback” those funds. As a hedge broker, this makes my blood run cold. Generally, as the markets move in favor of a hedge position and equity builds in a client’s account, that excess equity is sent back to the customer who then uses that equity to offset cash market transactions OR to pay down a revolving line of credit. Even the possibility that a customer could be penalized and additionally raped AGAIN via a clawback action after already having their customer funds stolen is simply villainous. While there has been no open indication of clawback actions being initiated by the MF Global trustee, I have been told that it is a possibility.

And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.

Remember, derivatives contracts are NOT NECESSARY in the commodities markets. The cash commodity itself is the underlying reality and is not dependent on the futures or options markets. Many people seem to have gotten that backwards over the past decades. From Abel the animal husbandman up until the year 1964, there were no cattle futures contracts at all, and no options contracts until 1984, and yet the cash cattle markets got along just fine.

Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.

To my clients, who literally TO THE MAN agreed with my assessment of the situation, and were relieved to be exiting the markets, and many whom I now suspect stayed in the markets as long as they did only out of personal loyalty to me, I can only say thank you for the honor and pleasure of serving you over these last years, with some of my clients having been with me for over twelve years. I will continue to blog at Barnhardt.biz, which will be subtly re-skinned soon, and will continue my cattle marketing consultation business. I will still be here in the office, answering my phones, with the same phone numbers. Alas, my retirement came a few years earlier than I had anticipated, but there was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law.

As for me, I can only echo the words of David:

“This is the Lord’s doing; and it is wonderful in our eyes.”

With Best Regards-
Ann Barnhardt

Inquiry is said to discover (that) MF Global Tapped Clients. That’s the headline on a story in today’s New York Times business section. An excerpt:

The missing money strikes at the very heart of the futures industry. Brokerage houses and traders have long depended on the promise that customer cash will be kept separate from the firm’s money. This ensured that even if the firm were on the cusp of collapse, customers could safely access their money.

To unravel the mystery, the federal government has dispatched an assortment of regulators and criminal investigators. The Commodity Futures Trading Commission is leading the search for the missing money.

Investigators believe that money was transferred from the futures business to its securities brokerage division, according to people with knowledge of the inquiry. The Securities and Exchange Commission is helping to trace where that money went. The Federal Bureau of Investigation, meanwhile, is examining potential criminal wrongdoing, and the United States attorney’s offices in Chicago and Manhattan have issued subpoenas in the matter.

Of interest to authorities are these two main businesses run by MF Global. The futures side of the operation traded contracts for wheat, corn and metals. That is where the customer money went missing. The other side, which focused on securities, was where the firm placed a $6.3 billion bet on the sovereign debt of five European countries. Those wagers alarmed investors when they were disclosed, prompting a crisis of confidence that led to the firm’s demise.

For the full piece, click here.

“Buying gold is just buying a put against the idiocy of the political cycle. It’s That Simple”

That’s the quote of Kyle Bass, one of today’s most talented hedge fund manager. He has made a recent fortune for him and his clients by correctly forecasting European debt problems.

If you do nothing today, please watch this BBC News interview with Mr. Bass. It’s brilliant. Best interview I’ve watched in years.

If that link doesn’t work,  click here.

Harry plays “doctor.” There are regular, minor injuries at my tennis club. The standard answer is Advil, Aleve  and/or a fancy gadget to affix around the injured area, e.g. a wrist brace. These drugs, like all drugs,  are dangerous — especially to the stomach where they can cause ulcers. A better approach is icing, rest and … the most difficult …  figuring what caused the problem and changing your stroking. A wrist injury can be caused by a bad grip or too much top-spinning.

If you wish to take Advil or one of the other ibuprohens, then pop a Prilosec. That will reduce your stomach’s production of acid and hence Advil’s ill affects. Alternatively, take Tylenol, with little affect on your stomach.

Harry Newton who wonders where this will all end. It’s sadly ain’t pretty. And then there’s Congress’ Super-Committee, trying to figure a budget fix for the U.S.

Our Federal Government is still holding shares of GM, despite the fact that the shares have fallen 30% since the IPO. Maybe the Feds haven’t heard about our Inviolate Stop Loss Rule. Why didn’t they sell at 15%?

John F. Kennedy once said “Washington is eight square miles surrounded by reality.”

Harry Newton once said that he wouldn’t trust any one (or all) of the members of the super-comittee to organize a queue for an outhouse.