Treasuries May Crash, But Shorting Them Isn’t Worth the Risk

jeffrey_matuellaEditor’s Note: The following is a guest post by J. Tyler Matuella.

J. Tyler Matuella is the Publishing Manager at the University of Virginia’s Center for Politics. He also is the author of “Unsustainability in Today’s Sustainable Development” published in Development and Cooperation Magazine, Verge Magazine, and World Review of Science, Technology, and Sustainable Development. He’s majoring in International Business and Accounting at UVa’s McIntire School of Commerce.

Chasing the Next Treasure-y

Everyone has heard about the famed handful of investors-Michael Burry and John Paulson, amongst others-who saw the real estate bubble forming in the early 2000’s and purchased the lucrative credit default swaps to cash-in when the system collapsed. A couple of those investors made billions in a few months from essentially shorting mortgage-backed securities. Now it seems like there’s a new fad on the Street to discover the next bubble and short it, in hope of making record returns. Many of these hungry investors have turned their beady eyes to the U.S. Treasury market.

Record deficits, the European PIGS, and the Greek debt bailout have put sovereign solvency on the short list of investor concerns since the 2008-2009 financial crisis. Even as the world has seemingly recovered from the dark trenches of the crisis with the resurgence of the equity markets, many investors are still waiting for the real bang.

But they’re not just referring to the Eurozone debt turmoil across the pond. There has been a lot of talk recently about shorting U.S. Treasuries right here at home as sentiment about the unsustainability of the debt has reached a fever pitch.

Real Concerns, Real Consequences

The concerns are valid. Some people are worried that the U.S. government’s ballooning debt, coupled with a decreasing demand for Treasuries as the equity markets heat back up, will force the U.S. government’s borrowing rate to rise.

On a more pessimistic note, other investment analysts think that gridlock in the nation’s political system will prevent the government from passing tax hikes and spending cuts that are needed for the government to rein in the debt-the eventual implication is a Greek-like debt crisis. As Treasury Secretary Timothy Geithner warned in early January, “Even a short-term or limited default would have catastrophic economic consequences that would last for decades.”

Perhaps the best case scenario (for the United States, at least) for the fall of Treasury prices is that there’s a compelling argument for significant inflation in the near future. Massive amounts of increased government spending, tax cut extensions, and record low interest rates indicate that the economic system is flooded with cheap, pent-up money that will have to be spent at some point. When that happens, inflation will take charge and Treasury yields will have to jump to continue attracting investors. But at least the inflation will eat away the value of the U.S. national debt.

Small Upside, Large Downside

Short positions are already risky. Such is the case with any investment that has a finite upside and an unlimited downside-(although the downside of shorting Treasuries is not unlimited since most investors won’t accept large negative yields). Treasuries take the risk to a different level, however, and I will explain why it’s nearly impossible to earn a huge profit from simply shorting a bond or using a credit default swap on U.S. debt.

If bond prices fall, theoretically the return from shorting a U.S. Treasury could be anything from a few cents, to the entire value of the bond if the government defaults. To those who are convinced that Treasuries will tank because the insolvency threat is real and coming, then it doesn’t sound like a bad investment.

But there’s a key problem with that logic. Even though it may seem obvious, U.S. debt is denoted in dollars. That’s a critical distinction from Greek or Portuguese debt, which is denoted in a supranational currency-the Euro-rather that their own national currency. If investors are looking to earn landslide profits from a steep fall of Treasury prices because of rampant inflation or government default, then that very situation will correspondingly come with a huge decrease in the purchasing power of the U.S. dollar. Since U.S. debt is denoted in dollars, the purchasing power of that windfall profit from the Treasury short could drastically reduce the real return, depending on the severity of the price drop. There won’t be an opportunity to protect the profit by converting it to a foreign currency because the dollar value will simultaneously drop as the winnings are earned.

Some investors have bought credit default swaps on U.S. debt that pays in Euros. However, the exact same problem occurs in that situation as well. Large per-trade profit margins for retail investors are restricted because foreign banks will charge a premium, around the time of the crash in Treasury prices, to insure U.S. debt because they’re not only dealing with the chance of default, but also the foreign exchange risk. CDS are even more risky since they only pay out in the event of an actual default, and it’s very difficult to imagine that the U.S. government would choose to default instead of just running the printing presses more.

The chart below shows the nature of the restriction of real return per bond if an investor does a “simple” short on a 10-yr bond purchased at $100 face-value :

real_return_from_short_position_vs_fall_in_10yr

Is It Still Worth It?

Now that we can see there’s inherently only a small to medium upside to shorting the U.S. Treasuries, the question remains, is that limited potential for gains still worth the risk?

The easy answer is that it depends on investors’ risk tolerance. If you’re a big risk taker or someone with lots of cash like a hedge fund, and if you can afford short term losses and don’t mind earning smaller margins per trade, then go for it. The potential for large absolute gains from making high-volume, small-margin trades still exists on a day-to-day basis without harm to the currency. Investors take advantage of small bond price movements every day. However, as I argued before, any large drop in bond prices will be self-defeating and inherently restricting. The “big bang” of profits that investors found in shorting the real estate market in 2008 simply doesn’t exist in the bond market, in part because of the different nature of the financial instruments used.

To more risk-averse investors, trying to profit by day-trading in the bond market may prove particularly difficult, given the current state of world affairs. If the events in Tunisia and Egypt have taught us anything in the past weeks, it’s that the prices of equities and Treasuries are not governed by purely market forces. Between January 25th and January 30th, investors exited equity positions and fled to the security of U.S. Treasuries amidst fears that turmoil in the Arab world could roil economic growth and pressure oil supplies.

Even with all of the convincing economic evidence for why bond prices should have been falling, bond prices rose for almost a full week while equities fell. Once investors realized their fears had no economic grounding, bond prices fell back and equities returned to normal. If someone shorted bonds that week, they would have lost a lot of money-the problem is that every economic model in the world couldn’t predict what happened in Egypt.

A Riskier Way to Short the Treasury Market

For small-cap retail investors who are certain that bond prices will fall in the coming months, there’s an alternative to take advantage of the fall in bond prices and still earn a huge return without the currency risk. Some inverse U.S. Treasury ETFs, such as the Horizons BetaPro U.S. 30-Year Bond Bear Plus ETF (HTD), allow investors to use leverage to short the U.S. bond market. This ETF is denominated in Canadian dollars, and it hedges against exposure to the U.S. dollar every day. As long as the investor considers the denominated currency’s home country to be “debt-stable,” then this investment avenue effectively reduces the currency risk.

However, there are some salient problems with investing in inverse ETFs-especially levered ones-from a risk-return standpoint. The returns on a daily basis of HTD, for example, range from +200% to -200% because of the leverage. As a result, holding onto these types of funds for more than a few days can be deadly. Treasury prices may fall for four straight days, earning the inverse ETF investors massive returns with leverage, but only one or two days of small to medium-sized losses later can negate multiple days’ gains, even to the point where the net return on investment is negative. While market fundamentals exhibit compelling evidence for why Treasuries should consistently fall, a little political turmoil around the world could cause Treasuries to rise again short-term and severely hamper the returns from inverse ETFs. Since investors really shouldn’t hold onto these levered inverse ETFs for more than a few days at a time because of the compounding high risk of doing so, investors will have to keenly get into them just before the debt crisis in order to earn massive returns-that is, if a U.S. debt crisis occurs at all.

If You Do It, Do It Right

Going short on bonds probably isn’t the best way to take advantage of a debt downgrade or rising inflation in the U.S. vis-à-vis going long on metals. But for investors who insist on taking the risk, the best way that I have heard to do so is to short the bond, take the money gained from the sale of the borrowed bond, and immediately put it in a forex Euro futures contract. That way, the investor locks in the exchange rate and preserves the purchasing power of the initial investment. Even if the dollar greatly depreciates in the meantime, the investor will still walk away with a solid gain. Depending on how far the bond price falls, the investor could still earn 60-70% per trade, though that size return is highly unlikely. In addition, the risk of betting against the world’s reserve currency over the course of an entire yearlong contract makes it an even riskier position, and perhaps more apparent why shorting Treasuries may not be worth the risk.

Playing the Game Requires Knowing the Risks

The dollar still holds strong as the world’s reserve currency, which could prove an obstacle in the future to investors who short bonds amidst political turmoil in the Middle East. And since large profits (per trade) from shorting bonds are very unlikely even in the event of a debt crisis, it doesn’t make sense for most small-cap, retail investors to play the high risk, low return game that characterizes the bond market. However, for those who insist on profiting from shorting the potential debt crisis in the United States, doing a regular short and putting the initial payout in a forex Euro futures contract may be the best way to produce solid returns with minimal currency risk.

Activision Blizzard (ATVI)

A couple months ago I opened a position in Activision Blizzard (ATVI). Blizzard is the Pixar of the gaming industry. All of their games are blockbusters. The most notable title World of Warcraft collects $15/month from their millions and millions of players.

I got interested in the stock after picking up Star Craft 2, another blockbuster game from them. I knew that game was going to sell better than expected. I had been watching pro Star Craft 2 tournaments that were run off the game’s beta for a few months. At that point the game was already getting a ton of attention from gamers.

I wanted to bet on Blizzard. Blizzard was a private company before 2008, but merged with Activision December 2007. So I can buy Blizzard stock now… or really I have to buy the whole company. And although Blizzard is only a part of the company now, Activision is no slouch either with hits like Call of Duty and Guitar Hero. I’m bullish on videogames. This looks like a good play.

One thing that will not be baked into the stock price is the success of Star Craft 2 as an esport. There is a lot of upside here.

The original Star Craft (and Brood War expansion) are huge in South Korea, where there are multiple TV stations devoted solely to casting Star Craft games. Players are licensed by the government. While it’s been huge in Korea, it’s only been a relatively small movement in the rest of the world. However, since Star Craft 2 has come out, the rest of the world is getting on board with Star Craft as an esport and (more importantly) as a spectator sport.

Star Craft 2 is slowly taking over social video sites. Channels like Husky Starcraft and HD Starcraft have over 300,000 subscribers. The livestreams of Star Craft 2 players (good list here provided by Team Liquid) are often the most streamed channels on live streaming sites like UStream and Justin.TV. The game has an audience.

Blizzard also already collects royalty fees from companies running Star Craft 2 tournaments, such as the GomTV GSL in South Korea and the Major League Gaming events in the United States. These royalty fees are super small right now, and not a major source of revenue for a $16 Billion company. The business model now is the use the tournaments as a way to get exposure for the games and keep them relevant between production cycles. However, I think there is a large business in broadcasting these esport games in the future. Activision Blizzard will have the experience to take advantage of it.

Brief Note on Goldman Sachs

Goldman Sachs Tower in Jersey CityI wanted to comment briefly on the whole Goldman Sachs thing. The accusation, if you aren’t familiar, is that Goldman, with the help of or on behalf of John Paulson, created these mortgage CDOs that were basically setup to fail. That would allow John Paulson and Goldman to short the CDOs while at the same time Goldman sold them to their clients.

It’s all a lot more complicated than that of course. Goldman Sachs is a big company that does a lot of stuff. They have clients on different sides of the market all the time. Which is why they may be able to use some kind of “client duty” argument as written about on businessweek.com here.

There is a middle ground here, between two knee-jerk reactions… anti-Goldman voices saying “it’s so simple” and pro-Goldman voices saying “it’s so complicated”. Goldman can’t be held responsible for everything they do on behalf of clients. True. However, they can’t just use stand ins and subsidiaries to manufacture the illusion of a separation of interests. If there really is some person or hive-mind that knew the whole story as we know it now and let it happen, or worse engineered this to happen… then that person or those persons need to be dealt with.

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Check Out YCharts.com

Image representing YCharts as depicted in Crun... Got an email from the friendly folks at ycharts.com. I’m sure you all have your favorite chart sites and tools. Most of these sites don’t offer much more than the basics or hide some stuff behind fees. So I almost didn’t look at YCharts. However, their charts are really nice, and they can chart some data not available on other sites like EPS/Revenue/ROE growth. Take a look if you haven’t already.

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Will There Be Another Jackson?

So I was reading this New York Times article, and it said the following:

But even if nobody achieves album sales on a Jacksonian scale, couldn’t he or she be an artist every bit as popular, every bit as loved, every bit as listened to?

Probably not. The pop-idol field — like every field that can lead to super-fame — is more crowded than it has ever been, and the variety of routes to stardom keep growing.

Oh give me a break! Want to know what lesson I learned in life? EVERYBODY, and I do mean EVERYBODY is replaceable. The sooner you learn that, the sooner you can get on with your life and make sane decisions.

I was 8 years old when Elvis Presley died, and I was in California at the time, or was it North Carolina? I don’t exactly remember, but I was living in the US. When the death of the King was announced it was a bombshell. For me it did not matter since I really did not know who Elvis was.

And now with the death of Jacko I am actually kind of lackluster about it. Not because he was not talented. Namely because at the height of Jacko I was a heavy metal head and well many of my friends had some very unkind words about him. Me I did not like his style, but I did understand the man had talent.

Jacko is indeed the King of Pop and he will be remembered. Just like the King of Rock and Roll, Elvis Presley is remembered.  Time will not take away from either of these kings because they will be remembered. But to say that there will never be another King is just downright nuts!

The following paragraph in my mind illustrates how the human mind filters out to support a narrative:

That’s why even Michael Jackson would have a hard time becoming Michael Jackson these days. Come to think of it, Farrah Fawcett, who also passed away this week, would never have become Farrah Fawcett if she showed up in that red, one-piece bathing suit today. In the ’70s, she became the fantasy of choice for every post-pubescent teenage boy in the country, selling 10 million posters of her iconic, high-beam smile. Now, there are so many vixens grinning seductively from so many Web sites and lad mags that no single woman could ever commandeer the public imagination in quite the same way. There is no “this year’s model” anymore. There is this week’s model, and that’s about it.

The flaw in this thinking is that somebody like Jacko would do the same thing he did back then today. You have to remember like Elvis, Jacko defined the era. And if Jacko were born today you could say he might define the next era of whatever that may be. Jacko was Jacko because of the times, and if here were put in another time period then he would be a reflection of that time period.

Now regarding the comment of Farrah Fawcett, well that is just plain not thinking, because there is one vixen who actually has replaced Farrah Fawcett. Drum roll, one guess here…  Pamela Lee Anderson! She was the quintessential babe of Baywatch that the ENTIRE world lusted for. Did you know that Baywatch was one of the most popular TV shows world wide! And I am guessing its because of the storyline!! Hint, Hint. Ironically she had a one piece red bath suit, just like Farrah Fawcett.

My point is that while Jacko was a goal post in the legacy of music there will be another superstar. What needs to be remembered is that super star might not appear for another decade! After all the King of Rock and Roll and King of Pop did set high standards.

So how does this relate to the stock market? Simple humans always tend to think, “oh things have never been this bad, or this is a new economy now” And whenever I hear those words I think, yupe we are about change track because the unexpected is about to happen! So when people say we are going to fall off the cliff and the world is going towards hyper-inflation I say take a deep breath look around and smell the roses.

Though I do hope Jacko finds his peace! God bless…

Microsoft Has Become a Zombie Corporation!

Disclosure: I had a Microsoft position which I unloaded at a slight profit due to the fact that I have lost complete faith in the current management of Microsoft.

I was surfing the web and every now and then I like to check the website MSDN.Microsoft.com. I check it out because I write .NET code, and I use Office in my solutions. So that I don’t confuse people to like .NET and C# quite a bit, and I like Office 2007, but my love of Microsoft ends there.

I use to be a Microsoft Regional Director (1997 to 2001) which meant I was a third party that evangelizes their technology. I quit being a Microsoft Regional Director because at that time I had a mid manager meeting where I said, “open source is going to present problems for you.” At the time I was listened to, but ignored. Though 8 years later Open Source has changed the development landscape to the determent for Microsoft.

Now I have another commentary and it is that Microsoft has become a zombie corporation. A zombie is something that has no life, and rambles from corner to corner uttering words that are unintelligible to most people. For example consider the following  article and another. Code words uttered that are unintelligible to anybody but Microsoft, and it is chasing the Nokia’s, Palm’s and Apple’s of the world.

This is what a zombie does and it is what Microsoft is doing. But why stop there. They announced and launched a new Zune player. The version is 3.0 and those that follow Microsoft know Microsoft gets the killer product at 3.0. At least they used to a decade past. The new Zune player is quoted as being the iPod Touch killer.

How else can you explain this statement from Chris Stephenson–general manager of global marketing for Microsoft Zune regarding the just-announced Zune HD (as quoted by CNET’s Ina Fried)?

"This device is created to go head to head with the iPod Touch."

Yet it is not an iPod touch killer. In fact it is a day late, and dollar short of being an iPod Touch Killer. So what is the problem here? Simple MANAGEMENT is too busy drawing little diagrams and slides on what technology will be created a decade down the road. Management is acting like a zombie as offered by the following comment.

An app store: One of the touch’s key features is Apple’s App Store. Microsoft sounds ready to launch something similar for games, but what about other applications? Seitz says that the company looked at the top 20 apps people used on the touch and found that most were games. Without a cell radio and constant Internet, this makes sense. The Zune team also wants to avoid duplicating work being done by the Windows Mobile team, and it doesn’t make sense to have two separate app stores.

This is completely misguided since the coolness of the iPod is not just games. The coolness of the iPod is the fact that it has the ability to do what the user wants. For me that is news, and data. Games is a third option. This is what makes the Apple portable device such a killer platform.

But the zombie bits don’t end there. I surfed to Jesse Liberty’s website and in particular I was interested in the article on how to teach a programmer. I actually disagree with Jesse since it is not about technology, but about solving problems. This is why Apple is so effective since it attempts to solve problems for a particular clientele. It is also why Oracle is doing so well in this market.

What bothered me is that I was constantly asked to install Silverlight. But when I did want to install I got a screen that said, “hey you are ok everything is installed.” I closed my browser, opened the browser, went to his page, and I got the same nag saying I needed to install the latest version of Silverlight. I had this problem in the past and this is why I ignore Silverlight. The fact that Microsoft has not solved this problem shows that they are more interested in pumping technology that actually solving my problems. For reference I have NEVER received this error with Flash.

I could go on, with examples being Vista, and a whole host of other technologies. It all boils down to the problem that Microsoft is a zombie corporation. Even as Goldman Sachs upgraded MSFT I would not touch Microsoft.

The bigger problem that I see with the share price of Microsoft is that too many Microsoftie’s want to sell! The moment MSFT moves up there will be selling pressure as people want to cash out. That is a train I want to avoid.

But Microsoft does not have to be a zombie corporation. In fact Microsoft has many things going its way. If I had to restructure Microsoft here is what I would do.

  1. Ballmer is put in retirement. He is given his formal adieu’s and told to buzz off. I feel Ballmer is the major reason why Microsoft is a zombie corporation.
  2. All of top level management is put under review for effectiveness. Effectiveness here is the ability to innovate and grow a business profitability. Those that don’t cut it are fired.
  3. For the remaining management they are put under review for being effective in terms of innovation and building a business. Not all are fired, but are asked to focus on the new direction of Microsoft. 
  4. 30% of tech projects are cut! It is an arbitrary number, but Microsoft has a dismal technology R&D record and they need to learn that you need to create useful technology. Examples being things like Oslo where to this day nobody can really explain what they are trying to solve and for whom it is useful. This is too nebulous. 
  5. Microsoft needs to focus on the technologies that their Open Source people have been building. The Microsoft dynamic language runtime, IronPython, F#, etc people have generated real buzz and real interest with real solutions. Keep these folks going.
  6. Make Windows client open source without any addons (eg IE, etc). Take the raw Windows operating system client and give it away under an Apache license with the catch that nobody can call it Microsoft Windows, but must call it [My Own Operating System]. While this will not bring in revenue it will ensure that Windows survives and thus ensures products like Office, and Visual Studio have revenue streams. Without this action Windows client might actually disappear and hence kill off the company called Microsoft. Because if Windows fails then so will all of the other products. Windows has become the liability.
  7. Drop Windows Mobile, Zune, etc since these are loss leaders. Apple beat you, even though Apple had no cred. The mobile market is too difficult for somebody who walking around like a zombie.
  8. Drop Windows Search like Bing. Yet again another example of not innovating, but playing catch up. Microsoft should buy out a company like Wolfram since they have a neat “search” engine called Alpha that has real potential.
  9. Focus on Cloud Computing and its legal ramifications. Cloud computing is an unwritten slate where there is no single dominate player. Cloud computing allows Microsoft to leverage its server software as a service.
  10. Allow the IIS/ASP.NET/SharePoint and Internet team to write to any operating system that they wish. This team is a winner! They are doing everything right, so why saddle them down with the anchor that has become Windows. Let them blossom.
  11. Visual Studio/.NET/Dynamic Languages are winners as well and let them write for any platform they wish. No more focus on Windows.
  12. Windows Server, SQL Server, Exchange should be allowed to do what they want. They are enterprise level software and as such should be allowed to focus on the enterprise and things like cloud computing, etc.

These recommendations are hard decisions, but if you look at IBM, Apple, and a host of other corporations that have survived they made those hard decisions. Compare that to the companies that failed to change and adapt. Those companies had dogma, and collapsed with examples being Wang, Apollo Computer, Digital Corporation, Sun, etc. The tech industry is littered with examples. 

As a final thought Microsoft should ask itself, “Is Apple and Google really scared of me?” The honest answer is a NO! I have been long enough in the industry to know that there was a time when NOBODY wanted to compete against Microsoft. No venture money would go towards corporations that said they had a better product than Microsoft. Those days are long gone. Now people just laugh and yawn when Microsoft comes out with their “killer” product. So you should think hard about buying Microsoft stock.

Would I change my opinion if Windows 7 does well? No…

My Debt Discussion Continues (Velocity of Money) Important!!!

Chris wrote to me the following comment:

Debt is the biggest issue facing us all.
I found this video on YouTube which really opened my eyes to the importance of getting out of debt: http://www.youtube.com/watch?v=50bWUrKAbwU
I am sure you will be as amazed as I was.

Chris, sorry to disappoint you, but I was not amazed. Not because what he was saying was not true. In fact he is saying the truth, but the fact that he is misleading the truth. What he is saying about getting out of debt and the fractional banking system is not entirely correct because he is missing the rest of the equation.

If you are wondering about missing the rest of the equation, go to Wikipedia and search for Simon Newcomb. What he did in 1855 was quantify an equation on the quantity of money of money. Quite an important equation actually.

His equation was as follows

MV = PQ

This says that the money and its velocity is equal to the prices of their products and their quantity.

You might think, velocity of money, HUH? Velocity of money refers to the term of how often money is cycled. Think of it as how often a dollar bill exchanges hands. If the dollar bill exchanges hands many many times then you have a high velocity, and if not well then you have no velocity.

The velocity of money is the key to any functioning economy and that is what was missed in the great depression. The velocity of money collapsed. But the fact that we do have a velocity is what causing people to have an over-sensitivity to hyper-inflation. Let me explain the equation.

First let’s say you have a money supply of say 100 USD, and let’s say that your current velocity is 1. This means multiplying the money supply with 100, and 1 gets you 100.

Second let’s look at the right side, if the product quantity is 10, then to fulfill the equality of the equation the price of the products will be 10 (10 times 10 equals 100).

With fractional requirements you increase the velocity of money since that same dollar is being recycled more often. So to make the equation balance you need to alter the right side and assuming you have a constant consumption the price would equal 20.

Now assuming you believe it was this easy you would say, “but Christian this is hyper-inflation”, and indeed this is exactly what everybody is talking about. So I don’t argue that the equation is right, and don’t argue that we could have hyper-inflation, but here is where I disagree.

I don’t believe the consumption of goods will remain constant. In fact I believe that the consumption of goods will increase, if you can get other countries to consume. But to get them to consume you need them to spend and soak up the dollars that they need. For that to happen you need traders to move out of currencies and into commodities. And that has happened quite effectively. The result is that those commodity based countries will get the excess currencies and spend them. This in turn will result in jobs for the west because there will be increased trade.

This is why I do believe so long as there is more consumption inflation will have a hard tie since in the west there will be a lack of ability to pay for the higher prices. A sort of buffer against inflation will be created where the west will slow things down.

Now let’s take the opposite approach. Imagine for the moment that you reduce the money supply and the velocity. You know no debt, no nothing. Then to make the equation meet up you would have to reduce the number of products that are consumed or their prices.

And it is at this point a devils circle begins. Since you are forced to reduce quantity or prices you are forced to lay off people, and thus have less consumers, who will consume less. My point is that the equation is a very fine scale that could get tipped either way towards depression or inflation. It is the task of the central bank to control the money supply and velocity.

So I am not arguing for uncontrolled debt. I am arguing for controlled managed debt. Because without debt our world would be very very different. And I don’t think for the better.

How The Republicans Might Completely Self-Destruct

It is interesting to see, but I think the Republicans might actually self-destruct. Remember that the Republican party was the result of the whig party self-destructing. Though the question is can the Republican party self-destruct? Sure it can, after all the Progressive Conservatives of Canada are no more, Conservatives of the UK are a shadow of a party, and the SPD (one of Germany’s oldest party) is self destructing.

So what could be that watershed moment for the Republicans? The Fiat Chrysler deal.

Indiana’s state treasurer, Richard Mourdock, has objected to the deal. He oversees public pension funds holding $42.5m (£26m) of Chrysler’s $6.9bn secured debt, and he claims that a "foreign corporation" is unfairly benefiting from the Detroit motor manufacturer’s difficulties.

"Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government," said Mourdock, who is a Republican.

Of course you can argue America is a land of law and therefore they should have their day in court. While I agree on this principle, the additional issue at hand is that the law of the land is relative and depends on the mood of the people and the government.

Remember that the USA was a land where slavery was tolerated and that the idea of having segregated washrooms was actually a good idea. Even though one could argue that the constitution did not allow those things from the start. But America being America adapted, grew out of those habits and the country a better place to live. But that brings us to the question of having a day in court.

I agree that they should have their day in court, but are they ready to suffer the consequences? With every decision there is a good side and bad side. While Richard Mourdock argues that they would get more money in bankruptcy court I actually think otherwise.

The reason is because car companies by themselves have little value. There are already enough car makers and there is no car that the world absolutely has to have. Car plants are very specific things, as there are no general machines. Each and every car making machine is a custom piece of engineering for the car maker. I know because I used to design machines for the car makers. This means if you were to buy a seat making machine it would be for a particular car and make. You can’t just buy a seat making machine and hope that it works for another car. That leaves the question who on earth would buy a car making plant? Answer, NOBODY! Fiat is buying Chrysler it with no money down, and Magna only bought Opel with lots of money from the German government.

You might be thinking that I am a bit extreme, but I ask you to look at my track record of predictions in this scenario. In November of 2008 I said Fiat would be interested in Chrysler (nobody at that time would have thought that), and in March 2007 I also predicted that private equity would botch up Chrysler (which they did).

If the courts allow the appeal, Chrysler will go bankrupt, people will loose their jobs and the Democrats will point their fingers at the Republican party! So while the Indiana Republican Richard Mourdock might have won the battle he will most surely loose the war. Richard Mourdock might not even have the hallow victory because I am tempted to believe that he will get less money than now.

Again please do not mistake my blog entry as not wanting law and order. I am merely pointing out everything has two sides, a ying and yang, a double edged sword, etc…

Stock Shock. SIRI Documentary Coming out June 10th

The folks behind the new documentary Stock Shock: The Short Selling of the American Dream asked me to share the trailer with our readers. This would be an interesting movie for any of you who at some point owned shares in Sirius (SIRI) or XM (XMSR) Satalite Radio.

From the homepage:

Sirius XM Satellite Radio (SIRI) is one of the lowest priced stocks in the market. This, despite the fact the company is a virtual monopoly (having merged successfully with XM radio) and generates nearly 2.5 billion dollars each year with its 19 million subscribers. Even as Sirius XM has a growing number of fans and market potential, the stock has traded for as little as 5 cents per share making “short sellers” filthy rich.

More info at the official Stock Shock homepage.

Getting Rid of Smith-Barney is Good For Citi!

I am going to play the contrarian, getting rid of Smith-Barney is REALLY good for Citi. Many like on Fast Money say, "hey why on earth are you getting rid of the cash cow?" And with Citigroup getting a potential 10 billion, I am thinking WAY TO GO CITI!

Why do I think what I do? Because obviously I am the only one in the market thinking this.

“You’re selling out the future to get through the crisis of the present, and unfortunately they don’t have a lot of other choice,” David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said in a Jan. 9 interview.


I actually think Morgan Stanley is getting a dud. Let me explain.

I live in Switzerland, and I work for an investment bank. As such I know what what the future of brokerage business is going to be about. I know this because of what I hear from the grape vine.

The future is not in the business of Smith Barney. The reason is because those brokerage units are too expensive and offer too little value. The investment bank I work for has a retail brokerage and their fees and services are actually pretty crappy. I once asked about that, and informally the answer was, "we need about 500,000 CHF from you." Then we can offer Private Banking services.

Advice for lots of little people is expensive and does not bring in the returns that banks want. They simply cannot compete against the Morningstar’s, or CNBC, or MarketWatch’s of the world. These sites offer better advice, service and quality than a retail brokerage can. So that is strike 1 for Smith Barney.

The fees that Smith Barney charges for any sort of transactions are simply too high. The fees are from another era. Smith Barney, Morgan Stanley cannot compete with the E-Trades, Interactive Brokers, or Think or Swim brokerages. They offer better prices and better executions than what Smith Barney can ever offer. So that is strike 2 for Smith Barney.

So what could Smith Barney offer? Private Banking, and that is growing by leaps and bounds. But there is a rub. With Private Banking people want to save taxes, and with Smith Barney in the US that will not work. The US government is cracking down on offshore accounts putting Smith Barney at a massive disadvantage to the likes of Switzerland, Singapore and other countries.  So that is strike 3 for Smith Barney, and a strike out!

Smith Barney could be transformed, and that is the problem, because it costs money. Thus with Citigroup selling the unit they are actually doing a good thing, and focusing Citigroup, and not having to retool a dying business practice. Personally I wonder where Morgan Stanley will make money in the future. I am completely skeptical.