Learn From Buffett

So I see that silver hit $50 an ounce recently.

A lot of sages have been vindicated on that one - notably Jim Rogers who's long been saying that silver (and palladium) had better ROI prospects than gold.

Check out that chart. Do you see that low in the mid-late 90s?

Around $5 an ounce is where Warren Buffet dumped a ginormous silver investment. That was when breakthroughs in digital photography destroyed the old camera technology which had constituted huge industrial demand for silver. Recall Eastman Kodak's stock (a Dow Jones Industrial component) got absolutely crushed.

So what else is that *sage* doing now that we can learn from?

I say take a good look at Wells Fargo. Buffett, while a long-time investor, arrogantly added to this investment in the high 20s.

To be clear for a few Morons....I'm saying to short the stock just as I am via long-term puts. It's probably time for me to buy some more now that I think of it. (I just did today actually.)

Jim Rogers Shorting Warren Buffett?

Old buddy Jim Rogers said recently:

"I'm short a large western financial institution that everybody thinks is terrific."

Hmmmm....

Any guesses as to which one?

I'll bet it's the one I'm heavily short - Wells Fargo - if only because of his *terrific* hint.

Reality - Still Postponed Indefinitely

Wells Fargo reported its fantasy-land earnings today. Here's the money quote which is worth preserving for future reference:

"We believe quarterly provision expenses and quarterly total credit losses have peaked," Chief Credit and Risk Officer Mike Loughlin said in a press release.

Bond markets have rallied in the past year. Most of these Big Bank earnings from the likes of JPM, BAC, WFC, are from simply marking up the paper value of their fixed income - much of which is still very toxic. They aren't dumping any of these securities, so the risks of these long-term instruments have not been eliminated or even mitigated. Note the banks deceptively refer to these unrealized, and unsustainable gains as *trading profits* - as if they have a legitimate business operation, one that will consistently generate *profits*. Just wait and see. Once the bond market jitters return, all of a sudden their so-called traders will be wildly unprofitable, again.

Of course, that's not the extent of the financial legerdemain. ALL OF THESE BANKS have billions upon billions of loans held *off the books*. And guess what....those aren't exactly their *good loans*!

The banks are flat-out BANKRUPT. They misrepresent lie about profits and hide losses.

AND they are leveraged to the hilt! See prior post - Capitol Thievery - where Wells Fargo clearly admits they are levered 15 to 1 - meaning they only have $1 in the bank for every $15 of liabilities.

I don't know about y'all, but I'll take the OVER of that 15 multiple.

I bought more puts today. 2012 January 25-strikes for just under $2 apiece.

See also - Greek For Moronic Bankers.

EVERYONE Should Quit Trading!

Obama Rips Banks, Proposes Ban On Proprietary Trading

President Obama stepped up the heat on big banks Thursday, saying he would fight to ensure that their "binge of irresponsibility" never happens again.

He proposed limits on banks' size and proprietary trading and said he would work to "rein in excessive abuse that brought down our system."

He said banks "backed by the American people" shouldn't be allowed to own or sponsor hedge funds and private equity funds for their own profit, while putting customers at risk.

About the new proposed rule that'd limit the proprietary trading of banks, the head of the New York Stock Exchange, Duncan Niederaurer said,

....implementation is challenging. As a student of the market I can tell you that it all blurs together...

But he's also a *Former Managing Director of Goldman Sachs*!!!

Supposedly, Goldman trades 20 times as many shares for their own account than they do for their customers.

I have no problem with Goldman gambling its own money; but they shouldn't be brokering trades as well. Doing both entails almost the biggest conflict of interest imaginable.

Look, I'm against most regulation of markets. The fund managers (and their investors) who willingly give their trades to Goldman and get ripped off....they deserve the bad fills and whatnot.

But within a regulated market, it's not hard at all to segregate trading and brokering. Any and all arguments against doing so are specious and fall flat.

I got sidetracked here.

Look, it's not *proprietary trading* that got all these banks in trouble.

It was the gambling implicit in no-money-down, high-priced mortgages in residential AND commercial real estate. And credit cards too!

So yes, FDIC-insured banks probably shouldn't be rolling the dice like Sol.

But selling 20 or 50-1 leveraged homes to José Sixpack has proven far riskier.

Getting back to Obama for a minute. He's right to be slamming the banks - even it he's clueless at the to extent of Big Government culpability in their behavior. They were born of leverage for crying out loud, with their fractional-reserve sanction, FDIC insurance, and whatnot.

You see while Obama inveighs against banker's "binge of irresponsibility"....

Not only will this anti-trading rhetoric do nothing to lower the risk profile of Bank of America, JP Morgan, Wells Fargo, Citigroup, et al,....we're still left with very little to combat the *binge of irresponsibility* from politicians. Consider the hypocritical irony of Barney Frank, serial apologist for Fannie, Freddie, and subprime lending, up there next to the podium. What a farce!

Trading Update - January 2010

Yesterday I bought some Jan 20 puts in Wells Fargo. I bought the 2012s for 2.10 or so.

That stock was 7.80 10 months ago, it could easily get slammed again.

If it does, I'll buy stock one-to-one against my puts and turn them into synthetic calls for a ride back up. I have TWO FREAKIN' YEARS.

I really like this purchase.

I knew a guy in on the Philly Stock Exchange who made a boatload, maybe $1 million or so, during the '87 stock market crash.

He had *3/8s puts in Solomon Brothers*. Ironically, maybe a 20 strike as well. I think the stock blew through it something fierce, he similarly turned the puts into *synthetics* and was long for the violent retrace.

Remember, Wells Fargo is bankrupt. A lot can happen in two years: terrorist attacks, dollar crash, Treasury crash, etc. And my risk is a mere 2 pts!

Say WFC drops to $11 where I buy stock, and then retraces to $24 where I sell. In that case, I'll have made 13 dollars on a 2 dollar bet, PLUS I'll still own the original put for more possible flipping! This type of strategy would be called trading *long volatility* or *long gamma*.

Allow my broke-a$$ to dream, will ya?

Side Note - Yesterday I parted with my shares of Stillwater Mining, the palladium play. I sold it for 13.77 a share; I had purchased it at 3.31 last February. Watch it go to 50.00 now!

Capitol Thievery

It's well known among us few perspicacious minds that all of the banks are insolvent.

Their *earnings* reports are pure flights of fancy. They simply make up numbers that have no relation to economic reality - all condoned by an econo-illiterate, incumbent Big Goverment. Remember those empty-skulled pols *relaxed* mark-to-market accounting in 2009.

For quite some time now, the big banks have buried toxic loans in so-called off-balance sheet entities. But this crime is in the process of being reined in. These banks will soon be obligated to *consolidate* their books. Read how they are responding to that impending reality:

Citigroup, JPMorgan Urge Relief From Higher Capital Requirement

Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. asked U.S. regulators for a reprieve from meeting higher capital requirements taking effect next year, arguing that lending and the economic recovery would be harmed.

Banks should be given three years to raise capital for offsetting assets and liabilities that must be brought onto their balance sheets, Citigroup Chief Financial Officer John Gerspach said yesterday in a letter to regulators. Requiring banks to "assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty," he wrote.

Regulators including the Federal Reserve and the Federal Deposit Insurance Corp. sought comments on whether to permit a "phase-in" of capital requirements rising under a change approved by the Financial Accounting Standards Board. The rule passed in May eliminates off-balance-sheet trusts known as Qualifying Special Purpose Entities, forcing banks to move billions of dollars of assets and liabilities onto their books.

The capital requirements "will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks," said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.

"We strongly support a phase-in period for the rule changes," according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert. The change would take effect for annual reports after Nov. 15.

‘Crowds Out’

The rule "could lead to the result that every $1 billion of additional capital held from newly consolidated assets ‘crowds out’ more than $15 billion in loans," Paul Ackerman, Wells Fargo’s treasurer, wrote in a letter yesterday to the Fed, FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision. The comment period ended yesterday.

"That sort of information will get the attention of politicians, if not the regulators," said Robert Willens, a former managing director at Lehman Brothers Holdings Inc., who now runs his own tax and accounting advisory firm in New York.

Citigroup, the New York-based bank that yesterday reported a third-quarter profit of $101 million, argued that bringing off-balance vehicles onto its books would lead the bank to cut financing for securitizations that fuel credit-card lending, residential mortgages and student loans. Additional consumer loans will be cut as well, Citigroup said.

"We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements," Gerspach wrote.

Citigroup spokesman Stephen Cohen and JPMorgan spokesman Brian Marchiony declined to comment beyond the content of the letters. Julia Tunis Bernard, a spokeswoman for San Francisco- based, also declined to comment.

Pooled Loans

Lenders recorded profits before the U.S. subprime mortgage market collapsed by selling pooled loans to off-balance-sheet trusts, which repackaged them into mortgage-backed securities. Banks sold those securities to other off-balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by deteriorating home loans.

What's astounding about this, this news/reality, is that absolutely NO ONE really gets it.

THE BANKS ARE BANKRUPT. THEY'RE ADMITTING THAT IF THEY HAVE TO RECOGNIZE THEIR HIDDEN LOSSES....THEY'LL BE UNDERCAPITALIZED, i.e. BROKE!

They are going *urge relief from a higher capital requirement*???

That's just a dissembling way of saying they are levered out their wazoo.

So how levered are the largest banks of our fractional reserve, government-sponsored monopoly?

Well, it's right there in the article. Wells Fargo implicitly says that for every $1 billion loss they ADMIT, they will have to reduce loans by $15 billion.

In other words, these banks are LEVERED a whopping 15 to 1!

By that math, if a mere 7% or so of depositors try to take their cash out....Wells Fargo wouldn't have a nickel left for anyone else.

And note the disgusting politicking. Wells Fargo (management) is threatening legislators with *we'll cut our lending if you push enforcement of this new rule*.

This is complete bull$hit!

They absolutely can raise capital - a hundred billion if they want. They can float stock and/or zing bondholders with a haircut. They just don't want to.

Instead, they are going to continue to CAPITALIZE on the gullibility of Congress, the passivity of Moronic investors, and the pockets of disenfranchised taxpayers.

Taxing Issues

Normally, a year of losses following a year of sizable *unrealized* gains would be easy to tax manage.

Except this year, I made a bunch of dough through March. See - Knocking The Ball Coverless! and An Aggressive Flattening - for *nostalgia*.

So this year was poised to turn out with a lot of realized capital gains and unrealized losses, again - at least until this past week when I rejiggered my portfolio.

I had to decide which losing positions to kill, and whether or not to re-build them in like instruments.

So last week, I took sizable losses on GS(short), EEV, QID, and FXP to offset my sizable realized gains on SRS, FAZ, WFC, etc. from last winter.

And, I bought Jan 2011 100-strike puts on Goldman Sachs and 30-strike puts on Wells Fargo, and a few more Jan 20 FAZ calls.

I've thought a lot about those levered ETFs over the past year and I still maintain that mathematically illiterate people have somewhat over-rated their decay. The problem wasn't decay so much as it was Bank of America going from 2.50 to near 20.00, Wells Fargo tripling, Goldman more than doubling, etc. Simple math said a 3X levered short would spiral to zero, and it did.

But for the moment, I am only shorting banks and REITs via long-dated puts. The high stock prices combined with relatively low premiums make this a no-brainer - at least versus dealing with the imperfection of leveraged ETFs. There's plenty of leverage in these bets, and I don't have to worry about path-dependency and some of the political risk of the ETFs. Click the first link above to see the outsized gains I made with out-month puts on Wells Fargo last year. And then contemplate the risk/reward profiles of today's banks' option prices for yourselves.

Here are my significant current positions in descending order of magnitude:

FAZ shares and Jan 20 calls

SRS shares

GE shares, short

SPG puts Jan(2011) 65-strike and Jan(2011) 50-strike

SWC shares

CDE shares

WFC Apr 24-strike puts, Jan(2011) 20-strike puts

JPM Jan(2011) 30-strike puts

GS Jan(2011) 100-strike puts

I've had some real extended trading woes over my 14 year career - but the past nine months rank up there with the worst of them.

Meanwhile, everything else in my life is blazing on all cylinders. So who the eff am I to complain? Life is darn good; and there's far more to it than money - even if I spent almost all of my life thinking(?) otherwise.



Though obviously, I am still hoping, and betting(!), that the *magazine jinx* is still regnant!

Click graphic to enlarge.

Not Trading Update

So the market, particularly financials, rallied today on Obamian optimism - on the idea that printing money for pork and shifting bankruptcy from banks to the Federal government is bullish for equity holders.

Yawn.

I admit I barely know what happened today as I am too busy managing my brood and packing for the 1,600 mile drive back north. There was a Fed meeting?

Not only shouldn't I have shorted Goldman Sachs a few days ago near 67.00 - it was most definitely a mistake to whack it again recently at 77.00! [It bounced from 59.00 to 87.70 in six days.]

But look at the SKF....at least I dumped it near $200. Today I started buying again at 120.90, after the close.

If time permitted I could have a whole lot of fun talking about the liars at Wells Fargo. Look at how it popped today (above graphic) after reporting admitting a $2.6 billion quarterly loss. Thankfully I covered my short close to $14. I would love, JUST LOVE for it to pop again - the higher the better - just so long as I don't whack it too early, a la Goldman. For some Wells background see my prior post - Wells Fargo Number Fudging.

Back to the suitcases....

Driving out in the AM.

Trading Update - Knocking The Ball Coverless!

So I'm cleaned up on my bank shorts now. I dumped my sizable SKF position late today at an average price of 195.11. My cost basis, as far as I can tell, was 132.20.

I also let out my remaining short positions on my least favorite bank - Wells Fargo.

I covered my since-exercised Jan 30 puts and my April 30 puts. The Jan flip was from 3.18 to 15.74. And the April put profit was the difference between my 4.80 purchase price and today's sale at approximately 16.32. Both trades were initiated 4 months ago.



Now if I were a partisan Moron....I might suggest that the stock market WAS NOT enthused by today's Presidential inauguration coronation.

Of course it matters not which stooge is the impotent figurehead - this stock market would be tanking even if I were taking the throne. [Possibly, anyway.] Asset prices (stocks, bonds, and real estate) are still too far divorced from economic reality.

It feels really satisfying to take these positions off. With the profits, my first goal is to coax a Naples extension out of Mrs. C-Nut - who had the misfortune of flying home this morning....to 2 feet of snow in our driveway!

She asked if she could call a plow....I soberly reminded her how bad the economy was and informed her that the shovels were on the back deck.

Next, I'm going to figure out how best to parlay these profits into some long-commodities and short-Treasuries positions. I could also very easily buy a ton more oil (DXO) here but just don't have the appetite at the moment.

Another Sun-Will-Come-Out-Tomorrow Moron

Here's Wells Fargo CEO waxing bullish on house prices:

"We're not at the end," Stumpf said. "My suspicion is there is some more to go. But we're starting to see some early signs that maybe we've reached the bottom in housing or close to it."

This reminds me of Ken Lewis, who in June of this year (sneakily through his spokesman) said:

...the most likely scenario is one in which the economy does not deteriorate significantly...

He couldn't have been more wrong!

For that, see my old post Ken Lewis, Still Not Fired?

Getting back to WFC.

I am not shorting Wells Fargo directly these days. Instead, I am opting for the whole basket of Moronic banks via SKF. This way I get short exposure to Bank of America, Citigroup, JP Morgan AND Wells Fargo in one fell swoop.

The idea that we are at or near a bottom in housing is delusion of the highest order.

They are not foreclosing on deadbeats; the homes that do go to auction aren't selling; the few that sell are fetching 45 cents on the *note*; homebuilders continue to add supply to the market; Northeastern cities still haven't been seriously hit; and layoffs are just starting.

All of these banks are facing mounting losses IN EVERY LINE OF BUSINESS. Sure, Wells Fargo is wresting tax credits from the government....but don't they need *income* to offset in the first place?

All of these banks face further dividend cuts. They're all going to have to raise equity, again.

Yee Haw!!! - Riding the Wall Street Bull

For a day anyway.

Got beat yesterday. With the Dow dropping 440 points to near 7,500, my *spread* went against me.

I am essentially long oil and oil stocks which got hammered. I am also short long term Treasuries through TBT. Both of those positions killed me.

Against that I have my massive short position in Wells Fargo. With Citigroup dropping like a stone, Bank of America threatening single digits, and JP Morgan falling off a cliff, Wells Fargo dropped a mere 1.87 yesterday. If it traded in line with the other banks, down 3-4 points, I'd have fared okay.

Instead, I lost a good chunk of money Wednesday and Thursday.

Luckily, today I made it back.

The Dow rallied 500 points in the final 90 minutes to close at 8,046.



Here's what I've been doing since Tuesday:

With the market tanking, I went *bargain* hunting.

I bought Simon Property Group, yeah the mall REIT I've been short most of the year, at 41.86. Sold it yesterday at 43.65. Today it traded as low as 33.79. That stock was $100 two months ago!

I added to TBT, my long term Treasury short ETF. Was a horrible purchase. Bought at 57.74. This thing dropped below 50 the next day! Remember, this is a long term disinvestment. Who's going to keep buying 30 year Treasuries yielding 3.7% going forward? Can't wait to see the international reaction to our *Federal tax receipts* come the new year.

I got long the XAU synthetically at 77.00. In this *baby with the bathwater* selloff it fell to 67.48 yesterday. This morning it opened up 6 or 7 points. I dumped my position at the equivalent of 76.70 in the index. And, what do ya know, it ran up another 10 points. The index closed up 18.72 today to finish at 88.80. [Gold, the physical commodity, rallied 54 bucks today to close at $799 an ounce.]

I bought a smidge of FSLR at 104.57. Was trying to buy a little *alpha*. It didn't work.

On Thursday, just about the only good thing I did was sell my NASDAQ-100 position, the QQQQ at 27.22. It closed yesterday, at the multi-year low of 25.56.

Then today, I bought it back at 25.46 and sold it at 3:51pm - after the big rally, at 26.42.

Now as for Wells Fargo....did I pick the wrong bank to short or what?

It was down 4.5 points the past two days. Meanwhile, JPM dropped 9 points between Wed and Thur, AND was down another 3.5 points today.

Furthermore, Bank of America fell 25% over Wed and Thur. AND Citigroup positively imploded falling from 8.66 on Tuesday afternoon to close at 3.77 today - a loss of 57%!!!

For kicks, I bought 1,000 shares of Citigroup at 6.28 on Wednesday. I figured, what's the worst that could happen? I could lose $2,000-$3,000.

So here I am, two days later down $2,500!!!

It's a real test of fortitude not to buy a *chunk* more and try to scalp it. So far I have resisted.

Make no mistake...this is scary. If depositors start lining up to take their money out of Citi who knows what that will do to our fiat ponzi scheme. This keeps me up at night - AND I don't even own anything; no home; no mutual funds. Ignorance is bliss!



Another from the *alpha seeking* file was STP - Suntech Power Holdings - a Chinese Solar Company (who cares what it is really?). I bought some at 5.80 on Thursday. I was actually reading an *old* Forbes magazine and I read Jim Oberweis' recommendation to buy it. In the October 27th issue, he said to buy it AT $35 PER SHARE!!!!

In his defense, he wrote the column on October 2nd. So that 83% he lost his readers actually occurred over 1.5 months. So he's vindicated, right?

Oh yeah. In that same issue Ken Fisher said to buy Bank of America at $34. What a total bleepin' idiot!!! BAC flirted with single digits today (down to 10.01) before closing at 11.47. The sheeple have given this man, what, something like $46 billion to *manage*?

Also, Ken Fisher said to buy Citigroup at $25 in March. Listening to this guy would have absolutely killed you!!!

I covered my tiny BAC short at 13.84 the other day. It was tiny because it was hard to implement with all the *rule changing* (i.e. short banning) in September. I was short from 30.50.

I added to my erstwhile, flailing oil long, DXO. My average price is now 4.18. Funny Circus Bears was absolutely right when he claimed, 11 days ago, that I was a "little early".

However, I left myself plenty of room to average down. Still have more bullets if needed.

As for being early....I was early on SKF too. Early getting in, and waaaay too early getting out. That thing traded above $300 today. Of all the bunker-digging, end-of-the-worlders that I read, NO ONE, I mean NO ONE had a $300 target on the SKF. $200 or $250 are the high numbers I recall.



I almost forgot. I covered two-thirds of my Wells Fargo short today. I sold my January 22.5 puts for an average price of 4.91. Bought em at 1.55 in July.

And I covered my short stock position in WFC at $21.75. My cost bases I'd have to dig up - though the profits on this were far from spectacular. If memory serves me, I started putting some of this short on at 23.95 back in July and then some more around $27.00. Recall this stock spiked to the insane level of $44 in September. Of all my trading losses over the years, that *paper loss* was the most brutal. So it was a victory just get the money back.



This stock is definitely heading lower. I just needed to lighten up on it given my presumption that the overall market is due for a bounce. Of course I could buy the *market* against it - as I've been leaning that way on a short term basis, BUT I'd rather just clean up my account. I still own Jan 30 and April 30 puts on Wells.

The stuff I have now - oil and short Treasuries - are *investments* as much as they are trades. I'm comfortable holding them 6 months to a year.

One last *alpha seeker*....today I bought Google at $253.95. Dumping my long term holding near $450 has proven prescient, to put it mildly.

The Hilarious Jim Cramer

"My record of being right from 1980 to 2007 is, I think, unparalleled." - Jim Cramer, 11/07/08.

Hah! Very funny, Jim.

You really have to watch people with their *track records*. In 2006-2007, all you saw advertised by mutual funds and money managers was their *5 year returns*. Not a one was touting their *10 year returns* because those included the 2000 NASDAQ crash.

Similar to Jim Cramer, other bulls like Rich Karlgaard and Ken Fisher have also based their bullish bias upon the slender reed of their own 25 years of market experience.

What they failed to understand or account for, was the fact that interest rates have been declining over that time period. They overlooked the importance of multi-year bull market in bonds on their equity returns.

We're all biased by personal experience and we're all prone to get swept up by the momentum of short-term success....

So we must read history for intellectual ballast.

Note that Jim's buying Wachovia - which is the same as buying Wells Fargo - my biggest short position.

Wells just floated a secondary last week at $27.

Short term history tells us that not a single bank this year has *raised capital* and not fallen substantially lower.



The most recent example is Goldman Sachs who, in late September, sold a preferred stake to Warren Buffett, gave him warrants at $115, and then after the public waxed euphoric about the *genius's* blessing, Goldman peddled $2.5 billion in stock to the sheeple at $123.

Right now Goldman is trading 71.82 - only a month and a half later.

Wells Fargo and that turd Wachovia are going down, hard.

My record in the past 6 weeks is UNPARALLELED - if I do say so myself.

At Least One Bank Is Honest

$24 BILLION!!!

And the money quote from CEO Robert K. Steel:

"Although this has been a challenging quarter, Wachovia's underlying businesses remain solid and our franchise exceptionally attractive."

Obviously, suitor Well Fargo is trying to get them to write everything down - to *market value* before the merger closes for accounting reasons.

But this just shows y'all how ugly the banks' books really are when marked-to-reality.

I am sure Wells Fargo thinks that Wachovia's problems are *contained* in the toxic junk they bought with the Golden West Financial merger.

I would bet they ain't. Look for Well Fargo to end up losing a ton of money on Wachovia's other businesses and other, traditional mortgage book.

This is no time for a bank to be increasing its balance sheet.