Wednesday, June 18, 2008
Executive Summary
- Relatively benign stock market index performance is masking severe financial weakness
- Judging by their stock charts, several good-sized banks might file for bankruptcy soon
- Financial market liquidity supplied by the Fed is at odds with their words that "credit market conditions are improving"
- The assets of the banks under duress are many, many multiples of total FDIC assets
"Pay no attention to the man behind the curtain!" barks the booming voice.
Unfortunately for the dumpy, balding ‘wizard,’ the curtain has already been removed and he’s been spotted.
The first two weeks of June (2008) have been all about knowing where to look. Let’s peel back the curtain.
Let me begin with a personal story. One of my main trading accounts was with a company called Lind-Waldock, a very reputable, stable, old company that got bought out by fast-flying Refco. All seemed well for the first few months, I had the same broker at the other end of the phone and I noticed no difference in my trading experience. But I was wary of Refco, so I kept a live stock chart up on my computer monitor, which I kept a close eye on. One day, the stock price of Refco took a stomach-wrenching dive, losing nearly 20% in a single hour. I immediately called my broker and shifted my funds out of that company that very day. I even got a call from the head of the division asking me to remain, insisting that all was well, and explaining that the stock was falling on the basis of unsubstantiated and certainly untrue rumors. It turns out that the rumors were true; Refco was involved in some shenanigans and had clumsily tried to hide billions in losses by stuffing them in an off-shore subsidiary. Refco was actually insolvent and ultimately went bankrupt. And it was also true that my money would have been safe even had I not moved it, but my position on these matters is to bring the money home and ask the detailed questions later.