My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

Doug Casey on the Collapse of the Euro and the EU

Here are some of my recommended action steps to help you with
implementing Doug Casey's recommendations in his recent article for
LewRockwell.com (http://lewrockwell.com/casey/casey105.html)

1) Buy $10,000 worth of precious metals if you have none. Put 80%
into gold coins from your home country. I recommend tenth ounce gold
coins because they are more tradeable, but they have a higher premium
over the spot price of gold. Go to www.kitco.com or www.apmex.com to
learn the spot price of gold and silver and the associated premiums
for various coins.

http://www.apmex.com/Category/504/American_Gold_Eagles_2012__Prior.aspx

Put the remaining 20% into one ounce silver coins or junk silver
coins. Junk silver is not "junk". That is the name of US dimes and
quarters from before 1965. Their composition is 90% silver.

http://www.apmex.com/Product/27/90_Silver_Coins___100_Face_Value_Bag_.aspx

2) Have printed cash on hand to buy valuable tools of production for
your side business from desperate sellers locally (e.g. Craigslist) or

3) I disagree with Doug Casey that the gold mining stocks are cheap
right now. Visit some of the gold mining stock articles on my blog to
see why I don't think they are so cheap. Here is one to start wiith:
http://www.myhighdividendstocks.com/category/stocks-that-pay-small-dividends/...

Subscribe today for free at www.myhighdividendstocks.com/feed to
discover high dividend stocks with earning power and strong balance
sheets.

Be seeing you!

How the New York Stock Exchange Really Works

This gem of an article reprint from LewRockwell.com back in 2009 shows the hidden role of the specialist in the stock exchange.  This is a definite must read.

* * * * * * * * * *

August 19, 2009

How the New York Stock Exchange Really Works

Posted by David Kramer on August 19, 2009 08:34 AM

Richard Ney on the Role of the Specialist
by Michael Templain

"The story is told that after he had been deported to Italy, Lucky Luciano granted an interview in which he described a visit to the floor of the New York Stock Exchange. When the operations of floor specialists had been explained to him, he said, 'A terrible thing happened. I realized I'd joined the wrong mob'" (1Ney, 8).

It was with these words that Richard Ney began his first of three books on the nature of the New York Stock Exchange. Ney wrote over 20 years ago, a time when a 750 Dow was high and today's volumes were beyond imagining. Some of his material is dated, and must be read in the light in which it was written. But the main premise of his books is still true: that the specialist exists not to ensure the free and orderly trade of stock in a particular company, but to fatten upon the innocence and ignorance of the small investor.

The New York Stock Exchange is not an auction market (2Ney, 86), though many investors still hold onto that image. It is a rigged market. Volume is an effect of price. Prices are controlled absolutely by the specialists, the 'market makers' in individual stocks. It was this discovery that led Mr. Ney to eventually give us small investors a priceless gift: enlightenment.

"Studying the transactions in each stock, I became immediately conscious that, on too many occasion to be a coincidence, a stock would advance from its morning low and then, often during the afternoon, would show an up-tick of a half-point or more on a large block of anywhere from 1,500 to 5,000 or more shares. This transaction seemed to herald a transformation in what was taking place, for immediately thereafter the stock would begin to drop like Newton's apple. Before I could find out what caused this, another question presented itself: What caused the same thing to happen at the low point in that stock's decline? For it was also apparent that a block of stock of the same size often appeared on a down-tick of a half-point or more, after which the stock quickly rallied. Together these two facts seemed to give a stock's pattern continuity. At the end of several days of investigation, I discovered that these transactions at the top and bottom of a stock's price pattern were for the specialist's own account. ... Clod that I was, I had at last recognized that, although the study of human nature may not be fashionable among economists, it is never out of season" (2Ney, 9).

The specialist is part of a system. First, he is part of that rare fraternity of men who are all specialists in an exchange. It is a small private club, to whose membership one can only be born. The specialists of the Dow 30 exhibit the spirit of 'all for one, and one for all'. If one of the 30 is having problems, the other 29 wait for him, before they move onto their next agreed upon campaign (2Ney, 172). The rest of the specialists take their lead from watching the Dow 30.

But the system is more extensive and more powerful than just the specialists. The specialists are the heart of the exchange. The exchange, in turn, has practical control of the major corporations, banks, insurance companies, and brokerage houses in this country. These, in turn, influence news reporting and the regulatory agencies.

ADVANTAGES OF BEING A SPECIALIST
The specialist has many advantages, many tools to use to pry dollars from unsuspecting investors and mutual funds. Chief among these advantages is his book. In his book he can see at a glance all the buy and sell orders from the public and the funds. His book tells him of potentially massive sales above and below his current price. This gives him a great advantage when he is trading on his own investment and omnibus accounts.

Because of his book, the specialist sees shifts in trends long before anyone else. This gives him a great advantage. The specialist will buy heavily at the bottom of a slide (at wholesale) then advance prices and sell, at heavy volume, at the peak of the rally (retail). He will then sell short and take prices down. The turning points of a rally will be marked by heavly volume in the Dow 30 (3Ney, 85-89).

When he desires he can even make large block trades without entering them into his book. In this way the public is never made aware of those trades. Should the specialist want to supply a buy or sell order from his own accounts, rather than from public orders on book, he can and will do so (1Ney, 156). Ney cites specific examples when his customers orders were ignored while the specialist completed orders for his own accounts.

When serving as the market maker, the broker's broker, the specialist trades from his Trading Account, which is to be used to service the needs of the market. However, he also has Investment Accounts (plural). His Segregated Investment Accounts put him directly into competition with every other investor in his stock. The reason for he has segregated investment accounts is that they enable him to convert regular income into long-term capital gains (1Ney, 113).

In addition, he also trades on Omnibus accounts, taking orders from a friendly bank on behalf of friends, family, and himself (1Ney, 58). Although he is not allowed to be both long and short in his Trading account, he can take the opposite stance in his Investment or Omnibus accounts (3Ney, 130).

A Specialist will often not have any shares in his trading or omnibus accounts. If public demand for shares suddenly increases, the Specialist is more than happy to supply those shares to the public by short selling. This, of course, forces the Specialist to take the price down soon thereafter, so that he may cover his short sales at the lower price. Or, the Specialist may sell from his Investment Accounts, establishing a middle or long term high (1Ney, 61), and then take the price down. Whichever strategy he employs, a large public demand for stock ultimately drives the price of that stock down, not up.

Distribution of large amounts of stock can be done from the specialist's trading account, usually as short sales. The trading account can then be covered by transferring stock from the long-term investment accounts into the trading account (1Ney, 64).

The existence of the specialist's Investment and Omnibus Accounts is ultimately detrimental to the public. "In a stock with only a small capitalization or floating supply, the segregation of large blocks into long-term investment accounts for the specialist further decreases the supply of the stock available to the public" (1Ney, 61)

The specialist has absolute control over price. He can match the buys with the sells in any way he sees fit. He can raise the price of the stock 3 points in three trades, and open the next day down 5.

The seeming unpredictability of stock prices is due to the fact that prices exist at the whim of the specialist. A stock is only worth what the specialist is willing to pay for it at the moment. The fluctuations you see are, in fact, the evidence of how the specialist is working out his inventory problems to meet his short-term, intermediate-term, and long-term goals (2Ney, 172). The specialist will sometimes 'leap frog' his prices up or down, creating a gap. This is done to keep a group of investors from buying or selling at a particular price. 'Leap Frogs' show specialist intent.

Ney offers specific examples where specialists opened stocks considerably lower:
August 8, 1967 Chicago and Northwestern Railroad opened down 39 points.
October 21, 1968 one of the preferred stocks of TRW opened down 28 points.
February 4, 1970 Memorex opened down 29 1/2 points (1Ney, 15)

"With $8,000, you can buy $10,000 worth of stock, but with $8,000 in stock, any Stock Exchange member can buy $160,000 worth of stock for his own segregated investment account" (1Ney, 112).

Because most investors have margin accounts, and the margin account agreement allows their brokers to lend their shares, specialists have an unlimited number of shares to borrow and sell short (1Ney, 68).

Margin agreements also allow the broker to use their customer's shares as collateral without the customer's knowledge or permission. This practice is fraught with dangers. In November, 1963, the Ira Haupt brokerage firm (NYSE), which dealt in both stocks and commodities was caught unwittingly in a scheme by one of its commodities customers to leverage nonexistent salad oil. The failure wiped out the partners of the firm and left it owing some $37 million in debts. "To compound Haupt's and the New York Stock Exchange's problems, it was impossible to return the stock to customers because the stock (held by the brokerage firm for its customers) had been pledged to banks by Haupt" (1Ney, 122).

Margin accounts usually allow the broker to borrow any cash in the account to use for his own purposes at no interest, even to lend back to the customer for margin purchases, at interest (1Ney, 119).

At the bottom of a cycle of a stock, having panicked customers into selling, the brokers and specialist borrow the customers' money to make their own long-term purchases; using their advantageous margin to acquire large amounts of stock. At the top of the cycle the process is reversed. Customers are paid back their money by the brokers and the specialist selling their shares to customers at a profit. The insiders even have extra cash to loan customers for margin purchases (1Ney, 136).

Another powerful tool for the specialist is the short sale. Though the specialist is responsible for 85 percent of the short selling done in a stock, the Exchanges are loathe to print any timely data on specialist short sales (2Ney, 94)(3Ney, 234). The specialist uses the short sale to control both downward and upward movements of stock (3Ney, 88).

The private investor or mutual fund can only sell short on an up- tick. The up-tick rules serves only to trap the public into selling short at the bottom, as the specialist drives the price down without a single up-tick for the public's use (1Ney, 72). But the specialist need not even create an up-tick to sell short. The SEC has been careful not to publicize its rule 10a-1(d), in which sub-paragraphs (1) through (9) exempt the specialist from the up-tick rule (2Ney, 97)(3Ney, 126, 215).

The Securities Exchange Act of 1934 prohibits pegging, the act of artificially holding a stock's price at a certain level for the advantage of the person or persons doing the pegging. However, SEC rule X-9A6 (1940) allows pegging by specialists in order to 'maintain an orderly market' while a large-block distribution of shares is taking place (2Ney, 117).

THE CORPORATION, THE SPECIALIST, AND THE EXCHANGE
The specialists and brokers hold shares "in street name" for investors, and therefore can vote the proxies for those shares. Officers in a corporation must report to the SEC any trading they do in the shares of their own company. Yet the Specialist reports his profits in trading the shares in that same corporation to no one (1Ney, 54-55).

The specialist, one of his partners, a friendly broker, their lawyers, or their bankers, often sit on the company's board of directors, which makes the specialist privy to information before the average trader. Where an officer of a corporation is held strictly accountable to the SEC for his use of 'inside information', the specialist and fellow brokers are accountable to no one (1Ney, 54-55).

"It is an ideal situation. When you control a corporation's proxies, everyone is sympathetic to your point of view and your choice of directors. This is the other reason why nearly every major corporation listed with the Exchange (NYSE, M.T.) has a broker or a broker's banker on its board. It gives the exchange a pipeline to that corporation" (1Ney, 90).

Large brokerage houses, large banks, and the New York Stock exchange use dummy corporations as fronts to hold large portions of stocks in corporations. A list from any large corporation of its largest stockholders will be a roll of these very dummy corporations, who show up on list after list of major stock holders in America's largest corporations (2Ney, 19-23).

The intertwining of interests runs even deeper when the relations of Wall Steet's top Law firms are examined. For example, in 1974 the New York Stock Exchange's legal counsel also represented Chase Manhattan Bank. Both entities, through their dummy corporations, were large stockholders in scores of major U.S. corporations (2Ney, 26).

THE EXCHANGE, THE SEC, THE FEDERAL RESERVE, AND THE WHITE HOUSE

"The bankers' man, Senator Carter Glass, who steered the Federal Reserve Act through Congress in 1913, had maintained that the Federal Reserve banks would be merely 'lenders of money.' The only collateral they were to accept was notes that could be paid when, in the course of business, goods and services had been manufactured and distributed. However, almost from the day of its inception, the Federal Reserve System set about making loans on common stocks" (1Ney, 103).

Who sits on the Federal Reserve Board? ... Chief officers of banks and corporations, all of whose companies are controlled by the Exchange (1Ney, 103-105).

Billions, perhaps trillions of dollars worth of stocks are now held by banks as collateral for loans. This too works to the advantage of the specialists. For, to protect their interests, banks will issue stop orders to sell the stock before it falls below a certain price. The specialist holds those stop orders in his book and therefore knows exactly where a large number of shares can be had, and at what price they can be purchased. One quick sweep down those ranges of prices will deliver to the specialist the inventory he desires for short and mid-term purposes (1Ney, 101).

On June 30, 1934 President Roosevelt appointed Joseph Kennedy to be the first Chairman of the SEC. Only 4 months before, Kennedy, along with Mason Day, Harry Sinclair, Elisha Walker, and others were found to be responsible for operating 'pools' that were actively manipulating stock. When these, "poolsters withdrew and the boom collapsed the administration denounced the men who operated them" (1Ney, 215). But what's a little denouncement between friends?

The stock markets had been headed downhill since December of 1968. On May 26, 1969 a party was held at the Nixon White House. In attendance were John Mitchell, Maurice Stans, Peter Flannigan, thirty five guests from Wall Street, fourteen industrialists, seven bankers, five heads of mutual and pension funds, and two heads of insurance companies. The next day a bull rally began on Wall Street. May 27th saw the Dow Jones 30 average rise by 5 per cent in one day (2Ney, 71).

On April 17, 1971, President Nixon, who along with Attorney General Mitchell had been a Wall Street lawyer (Maurice Stans was a broker), appeared for photographs with friends from the New York Stock Exchange. Nixon recommended the public to invest in the market. By April 28th the market was in a steep decline. Nixon circulated, "to 1,300 editors, editorial writers, broadcast news directors, and Washington bureau chiefs a list of the stocks of ten corporations that had advanced during the past year" (2Ney, 32).

There is a revolving door between the exchange and Washington. SEC Chairmen 'retire' to go to work for the Exchanges or major brokerage houses at many times their government salaries (2Ney, 50-63). SEC Chairman Hamer Budge was found by Senator Proxmire's investigation to be making frequent trips to Minneapolis to confer with officials of IDS. IDS was under investigation at the time by the SEC. After leaving the SEC, Budge took the position of Chairman of the Board with IDS (2Ney, 56).

NEWS AND FINANCIAL REPORTING
It is highly unlikely that we will see news reports critical of U.S. stock exchanges, or of the specialist system. There is a simple reason for this. All news organizations are corporations and do but reflect their management's views. Corporations that own media have specialists influencing the choice of management. Newspapers, magazines, and television are but extensions of the corporate world.

When Richard Ney's first book, The Wall Street Jungle, came out it was on the New York Times best seller list for 11 months. Yet the New York Times would not review it. The Wall Street Journal refused to take an ad from a New York bookstore that featured The Wall Street Jungle (2Ney, 30).

All three of the major networks were wary of having Ney appear. NBC banned only two people from appearing on the Tonight show with Johnny Carson: Ralph Nader and Richard Ney. Not only do large banks, brokerage firms, and corporations advertise on television, they also are the largest stock holders (2Ney, 33- 34).

SPECIALIST STRATEGY
The specialist should be thought of as a merchant with some rather unique inventory problems and opportunities. His goal, always, is to buy at wholesale prices and to sell at retail. This applies to his actions in the course of trading day as well as a year of trading.

At the bottom of a slide the specialist will buy heavily for his trading, investment, and omnibus accounts. His goal then becomes to raise the price of his stock with his wholesale inventory intact. In practice, though, he may have to sell shares to meet public demand. This will cause him, then, to lower the price to re-accumulate his inventory before he can proceed to higher levels.

A rally begins while the price of the average stock is still falling. "Major rallies begin and end with the unexpected," (3Ney, 184).

To stimulate public demand for his stock, near the high the specialist will raise the angle of the rising prices dramatically for the stock. True to one of Ney's axioms that prices beget volume, the public will rush into the market place at the rally high. The specialist can now sell his accumulated inventory to fill the increased demand. Heavy Dow 30 volume at the high is evidence of heavy short sales by the specialists (3Ney, 113).

When the specialist has sold all his inventory, and has sold short, he will then begin a downward slide of prices so necessary to his plans. Slides are a mirror of rallies. Near the bottom, the specialist will increase the angle of price decline, alarming investors, scaring them into selling their shares to the specialist who needs them to cover his short sales, and to build a new inventory at wholesale. The media will remain bullish, or cautiously optimistic throughout a slide, until the last two weeks, when they will turn suddenly bearish (3Ney, 158).

TIPS FROM RICHARD NEY:
Specialists in the most active stocks will require more time than their fellow specialists to move stocks up or down, or to cover at the top of a rally or the bottom of a slide (2Ney, 84-85).

Specialists may use a rally as a 'stalking horse' for a later rally. Price is used like a geiger counter to locate volume (3Ney, 149).

During the typical bear market, or slide, the specialists will usually bring prices up on Fridays, to keep investors hopes alive (2Ney, 92).

Leaders of the rally in the Dow 30 will often act as 'screens' for the price declines of the other 24 or 25 Dow stocks.

Each stock exhibits its own distinct pattern or rhythm of price behavior (2Ney, 189).

THINGS OF WHICH TO BE AWARE
How can you spot the nadir of each high and low? Ney says to look at volume very closely. In particular look at the volume of the individual Dow 30 Industrial stocks (2Ney, 171). Get to know these specialists' habits. Follow what they do. Patterns of behavior will emerge.

Ney emphasized that a sense of timing was critical for survival in the market (2Ney, 149).

Ney was convinced that detecting Specialist short selling was a key. Specialist short selling at the peak of a rally should be detectable through increased volume.

Richard Ney used charts extensively. Ney was quick to point out that what is really being measured in his charts is not the behavior of the masses in the marketplace, but the techniques of the specialist in an individual stock as he maneuvers to solve short-term, intermediate-term, and long-term inventory problems (1NEY, 259).

Ney points to the gaps in prices that develop when a specialist is trying to 'catch up' with the market. These gaps, be they up or down, signal specialist intent (2Ney, 172).

"Investors assume that what happens in the economy or to the corporation in terms of earnings or sales determines the trend of stock prices. ... The most misleading element in this type of analysis is that it ignores the basic needs and motivations of the specialist system" (2Ney, 150).

We, as consumers react to certain critical numbers. Specialists know this. Specialists use the 10's (10, 20, 30, etc.) and 5's (5, 15, 25, etc.) in their strategies. They will use these numbers to elicit heavier buying or selling from the public. Often too, though, they will avoid critical numbers to avoid buying or selling stock when they do not wish to do so (2Ney, 155-156 & 163).

NEY'S SMALL INVESTOR TRADING RECOMMENDATIONS (1Ney, 297-301)
1. Do not buy the acknowledged leader in a field. Buy the number 2 or 3 company. These companies are more likely to be subject to bull raids by the specialists (1Ney, 298).
2. "Nothing puzzles me more than an investor's willingness to pay more than fifty dollars a share for stocks. Buy low priced stocks. It's percentages you're after and you'll get them in these stocks in a bull market" (1Ney, 298).
3. Invest only in stocks listed on the NYSE.
4. Do not buy secondary offerings from your broker.
5. Buy only stocks whose prices have fallen at least 35 to 50 percent.
6. "The rule, 'Cut your losses and let your profits ride,' was invented by a broker" (1Ney, 298).
7. The average investor need not worry about tax brackets, so do not hesitate to sell at a profit. "A short-term gain is better than a long-term loss" (1Ney, 299).
8. Own your stock. Do not use margin.
9. Do not sell short.
10. Do not allow your stock to be borrowed (via a margin account; M.T.)
11. Credit balances should be immediately transferred to your bank.
12. Do not leave your stock with your broker in street name.
13. Invest only in growth oriented, not income, stocks.
14. 4 to 5 stocks in a portfolio is plenty.
15. Make arrangements with your bank to receive your stock.
16. If there has been a major advance from the summer lows, look for the public to begin selling 6 months hence.
17. Big block sales at the end of a run-up (usually marked by heavy volume) marks the imminent decline in price.
18. Look for bull raids in May, up from the April 15th tax low.
19. Never enter stop or limit orders.
20. If you are interested in a stock, learn its specialist's habits.
21. Stocks that are ideal for bull raids are those that decline as close as possible to an angle of 45 degrees.

Works Cited:
1Ney, Richard. THE WALL STREET JUNGLE, fifth printing. New York: Grove Press, Inc., 1970.
2Ney, Richard. THE WALL STREET GANG, third printing. New York: Praeger Publishers, Inc., 1974.
3Ney, Richard. MAKING IT IN THE MARKET. New York: McGraw-Hill, 1975

[The source for this essay is here. I posted my version of the entire essay because I edited out comments that the author Michael Templain made that I disagreed with, i.e., I felt he didn't grasp fully what Ney had written. You can read the original essay for yourself in order to make up your own mind. If you decide to read the books, read them in chronological order. They are impossible to find in a library, and are very expensive to buy used.]

Bookmark/Share | Suggest a Link

* * * * * * * * * *

Link to original article: http://www.lewrockwell.com/blog/lewrw/archives/33424.html

Subscribe today at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

One of many ways the BLS lies to you.

Daryl Montgomery from ETFguide.com wrote an interesting article on how the Bureau of Labor Statistics lies about the unemployment numbers.  He says that the headline unemployment number should be 9.6% instead of the government reported 8.5%.  The bottom line is that the economic recovery is a lie.  There will be a double dip recession in 2012.

The article is short.  It should only take you 5 minutes to read.

http://www.etfguide.com/research/747/23/The-Art-of-Statistical-Manipulaton--The-December-Jobs-Report/

(Hat tip to Mike for the article link)

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

TIP OF THE WEEK - Why MF Global went down and how you can protect your life's savings

December 16th, 2011

Jason Brizic

Investment institutions (like MF Global) can legally steal your assets and use your property for their own purposes.  They can do this because you have agreed to let them do this by consenting to their customer agreements.  Read the article below by Austrian economist, Doug French, for a devastatingly clear explanation of what killed MF Global and it customer’s [victims] savings.

Your savings and investments may not be safe in your brokerage accounts depending on the fine print in the agreements you consented to.  Some financial corporations have agreements that allows them to use your assets as their collateral in their bets in the derivatives markets.  Other financial corporation’s only claim to do this with your margin accounts; therefore, standard brokerage accounts and retirement accounts would remain untouched in that situation.

This means that an investor who had $100,000 in a money market account with MF Global could still be wiped out by the MF Global bankruptcy.  Most people think that their brokerage money is safe in money markets, but that is not necessarily the case depending on the customer agreements you entered into.

Action steps:

1)    Go to Google and perform a search using the name of your financial institution plus the word rehypothecation.  The results might scare you.

a.    For example Fidelity rehypothecation yields the following results: http://www.google.com/search?q=fidelity+rehypothecation&rls=com.microsoft:*&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1

b.    Click through a couple of the results until you find someone who dug out the applicable fine print from the customer agreements

2)    If the fine print says anything like what MF Global’s fine print said, then you have a decision to make soon.  You can keep the account or close the account.

“7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”

It isn’t clear to me at this time how the MF Global bankruptcy will be handled by the FDIC and the SIPC (http://en.wikipedia.org/wiki/Sipc).  There are proposals in congress to change what is covered and by how much.  Regardless of the actions of congress, ultimately the FDIC and SIPC are empty promises because they don’t have enough money to insure the assets they claim to insure.  The Federal Reserve would have to hyper inflate the money supply to back their insurance claims.  Doug French addresses this at the end of his article below.

* * * * * * * * * *

MF Global's Fractional Reserves

by Doug French

Recently by Doug French: Who Serves During Disaster?

 

 

 

Jon Corzine told the House Agriculture Committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date." The public is outraged that the former CEO of bankrupt global financial-derivatives broker and prime dealer in US Treasury securities MF Global doesn't know where the missing $1.2 billion in client funds went.

Corzine is the member a few exclusive clubs: he is a Goldman Sachs alum, former US senator, and former New Jersey governor. After the incumbent Corzine was beat by Chris Christie in the 2009 New Jersey gubernatorial race, the MF board probably rejoiced, believing the guy to fix their problems was suddenly available. Now he's in the club of taking a mere 20 months to create the eighth largest bankruptcy in history.

As a stand-alone entity, MF Global was born in 2007 when it was spun off from UK hedge-fund giant, Man Group. MF booked revenues of $4 billion that year from interest earned by using its customers' funds, an operation that sounds like fractionized banking: short-term embezzlement used to make profits.

For banks, the practice was sealed in English common law in 1811 in the court case of Carr vs. Carr, where Master of the Rolls Sir William Grant ruled that debts mentioned in a will included bank accounts since the money had been deposited into the bank and wasn't earmarked in a sealed bag. The deposit was thus a loan rather than a bailment.

The same Judge Grant ruled the same way five years later in Devaynes vs. Noble, despite an attorney's argument that "a banker is rather a bailee of his customer's funds than his debtor … because the money in … [his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up."

In 1848, in Foley vs. Hill and Others, Lord Cottenham ruled,

"Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it.… The money placed in the custody of a banker to do with it as he pleases."

It's been clear sailing for bankers ever since. No questions asked.

At the same time, people are surprised that a commodity brokerage firm would misplace client assets. As Christopher Elias explains for Thomson Reuters,

"MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF's dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients' funds to finance an enormous $6.2 billion Eurozone repo bet."

Free bankers are always insisting that fractional-reserve banking is A-OK, as long as bankers inform depositors up front that the bank will be using their customers' money to make loans and investments.

That is exactly the case with MF Global. The company's customer agreements included the following clause:

7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.

Back in 2007, customer funds held by MF as collateral against commodities trades could be invested in two-year Treasuries earning north of 4.5 percent. But in the wake of the '08 meltdown, the Bernanke Fed has flattened yields to be counted in basis points. With these low rates MF Global revenues fell to $517 million in 2010.

The old bond trader Corzine thought he could juice up MF's earnings with a little financial razzle-dazzle. Thinking outside the box (and off the balance sheet), Corzine moved $16.5 billion in assets into repos. A repo involves putting up assets as collateral, assets to be repurchased later, and borrowing money against those assets. MF used an off-balance-sheet repo called a "repo-to-maturity" where the loan and the collateral in the transaction have the same maturity. US accounting rules consider the transaction a sale and the assets can be moved off the balance sheet.

Most of these assets were bonds from Italy, Spain, Belgium, Portugal, and Ireland, all paying healthy coupon rates that would easily cover the repo interest rate and provide a nice profit. MF Global would have virtually no skin in the game (their customers provided it) and be earning a nice interest-rate spread.

Although things have been rocky in euroland, the collateral value of the short-term bonds appeared safe with the guarantee provided by the European Financial Stability Facility (EFSF).

With the $16.5 billion in assets moved off its balance sheet, MF Global then ramped up a net-long sovereign-debt position of $6.2 billion on its balance sheet – exposure that was five times the company's net worth.

While the EFSF guarantee would insure against the default of the sovereign debt if the bonds were held to maturity, MF was still at risk to make margin calls, if the bonds dropped in price day-to-day. Elias writes,

"Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global's leverage reaching 40 to 1 by the time of its collapse, it didn't need a Eurozone default to trigger its downfall – all it needed was for these amplified costs to outstrip its asset base."

So while MF Global's eurozone bets had not defaulted, the company's liquidity was drained making margin calls and trying to meet short-term-debt obligations as the euro-crisis news flow out of Europe vacillated.

MF Global was able to leverage up its euroland bets by way of the rehypothecation of their clients' collateral. Hypothecation is pledging collateral for a loan. Like the mortgage on your house.

Customers of MF posted cash, gold, or securities as collateral to backstop their commodity futures and derivatives trading. MF would then take those customer assets to back its own trades and borrowing. Mr. Elias explains, "The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds."

Under US rules, a prime broker is allowed to rehypothecate assets to the value of 140 percent of the client's liability to the broker. The rules are more liberal in the United Kingdom, where there is no limit and in many cases UK brokers rehypothecate 100 percent of collateral value placed in their custody.

Elias writes that by 2007, rehypothecation was half the shadow banking system.

"Prior to Lehman Brothers' collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as 'churn'), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation."

All of this churning has created rivers of liquidity, much of it with no asset backing. And what assets do provide backing aren't the quality they used to be. The repo rules were liberalized in the Clinton era. So instead of AAA government paper being required, AA sovereign debt works just fine; after all, as James B. Stewart writes for the New York Times:

"The law also allows commodities firms like MF Global to use segregated customer funds as a source of low-cost financing for their own operations, but they are required to replace any customer assets taken from segregated accounts with supposedly ultrasafe collateral of the same value, typically United States Treasuries, municipal obligations and obligations whose payments of principal and interest are guaranteed by the government." [emphasis added]

Of course all this rehypothecating creates mountains of counterparty risk, all dependent on dubious collateral that has been pledged multiple times. The equivalent of having four mortgages on a house, each having been sold to other parties who have been told their mortgage is in first position. When the property value starts dropping or the borrower doesn't pay, only one lender will get there first and legal fistfights ensue.

This rehypothecation activity may be the biggest credit bubble of all time, according to Elias. J.P. Morgan alone has rehypothecated over half a trillion dollars in 2011, Morgan Stanley $410 billion, Goldman Sachs $28 billion, and the list goes on.

Americans have been told US banks have little exposure to European sovereign debt, but according to the Bank for International Settlements (BIS), US banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal, and Spain. And while Germany is considered the belle of the Continental ball, Grant's Interest Rate Observer reports that Deutsche Bank is levered at 43:1 and the Bundesbank has doubled its leverage since 2007 when it was geared at 75:1 – these days the central bank is levered at 153:1.

Extreme leverage is a problem if the slightest thing goes wrong – anywhere. When the cost of swapping euros for dollars soared at the end of last month, a coordinated central-bank cavalry charged out of nowhere, cutting swap rates and establishing temporary bilateral-liquidity swap arrangements. Nobody but financial news junkies seemed to know or care.

The truth about the financial crash wasn't known until Bloomberg chased its request for information all the way to the Supreme Court to obtain documents that shed light on how much dough the Federal Reserve really provided the banks during the 2008 meltdown.

For instance, it turns out Wachovia shareholders got lucky as the bank was floated a secret loan from the Fed of $50 billion to keep the doors open while a sale could be arranged with Wells Fargo for $7 a share rather than shareholders having to take the buck-a-share offer from the wounded Citibank.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Wachovia's chief executive Robert Steel said at the time.

Right, no government support at all.

Instead of being among the bailed out, Corzine and MF Global are now joining Lehman, IndyMac, Colonial, and all the small-fry banks lacking the friends in high places needed to keep them afloat. In the fractional-reserve world, markets don't decide the winners and losers; government does.

Stewart writes for the NYT, "SIPC will replace up to $500,000 of securities and cash (but not futures contracts) missing from customer accounts at member firms," and the notion of even covering futures accounts has been floated on CNBC by Senator Debbie Stabenow, just as the FDIC replaces deposits up to $250,000. But covering the losses of clients and depositors is hardly the reflection of sound capitalism and the honoring of property rights.

Murray Rothbard wrote,

"If no business firm can be insured, then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention 'insurance' with a straight face. 'Deposit insurance' is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public."

So it's unlikely Jon Corzine knows where the $1.2 billion in customer money went any more than the president of a failed bank would know exactly where the customer deposits went.

The bigger issue is that, day by day, Mr. Corzine looks to be merely a canary in the fractional-reserve coal mine.

Reprinted from Mises.org.

December 15, 2011

Doug French [send him mail] is president of the Ludwig von Mises Institute and the author of Early Speculative Bubbles & Increases in the Money Supply. He received the Murray N. Rothbard Award from the Center for Libertarian Studies. See his tribute to Murray Rothbard.

* * * * * * * * * *

Link to the article on LewRockwell.com: http://lewrockwell.com/french/french143.html

For more tips of the week click here: www.myhighdividendstocks.com/tip-of-the-week

Legendary Investor, Jim Rogers, says times are going to get much worse

An excellent, straight shooting article on Jim Rogers thoughts.  Own real assets in times of high inflation.  Central bank money printing will lead to highly inflationary times.
 
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

Visual evidence of the European soverign debt crisis and worldwide recession.

The New York Times employs a bunch of Keynesian socialists, but they do produce some quality interactive visual graphics.  They recently produced an excellent visualization of the European sovereign debt crisis that you should take a look at.

http://www.nytimes.com/interactive/2011/10/23/sunday-review/an-overview-of-the-euro-crisis.html

Italy will defalt along with Greece.  The French banks are doomed without central banker bailouts.  The bailouts will be inflationary.  Europe is back in recession.   The US is next.  Stock markets will fall.  There will be high dividend stock bargains.  Keep your powder dry until near the next bottom.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

TIP OF THE WEEK - Create a budget and stick to it

Create a budget and stick to it

Jason Brizic

December 2nd, 2011

Sticking to a realistic budget will allow you to save for retirement or to create an inheritance.  You will need capital to start your side business or to start a new career that will fund your retirement.  Social Security and Medicare are the biggest ponzi schemes in the history of the world.  You can’t rely on them to fund your retirement at all if you are under age 55 right now.  So, you must budget for success later in life so you don’t end up a ward of a dying nation-state.

If you create a realistic budget and stick to it, then you will accumulate saving/capital to achieve your life and retirement goals.  You will reduce your stress levels when you stop living paycheck to paycheck.  Marriage is hard enough without the additional pressures of monthly money problems.  You will also be able to buy goods on sale for cash when you have accumulated savings.  People sell quality assets online (Ebay, Craigslist, the local classifieds) for pennies on the dollar when they get into financial troubles.  The role of the capitalist entrepreneur is to buy these assets cheap and to put them to profitable use by satisfying customers desires.

A generic goal should be to save at least 10% of your pretax monthly income for retirement.  Some people will need to save more and some will need to save less to fund their goals.  However, there are several tasks to complete first before you begin saving for retirement that some people skip.

1.     Use this money to pay down credit card and other high interest debts now (this doesn’t include your house mortgage).

2.     Once those debts are extinguished you can save this money each month to build up your 3-6 month emergency fund.  Let’s face it – there ain’t no job security in corporate America or in the government sector either.

3.     After the emergency fund is filled up you can begin saving for retirement.  I discourage the use of 401(k) plans, IRAs, and other schemes that limit your access to your own property and that the government can confiscate easily to shore up their ponzi schemes.  Here is a taste of things to come: http://www.sovereignman.com/expat/how-the-us-government-will-seize-your-retirement-account/

4.     Use your savings to capitalize your business, purchase precious metals, buy positive cash flow real estate, invest in safe high dividend stocks, and/or buy stable foreign currencies

Go to www.mint.com and create a free account.  You can easily create a budget there and monitor your progress.

P.S. Here is a link to budget for living in California on a $46,000 per year income (now that is some austerity, but considering the median household income in the USA as of 2009 was $50,221 about half of Americans are in this boat) http://www.mybudget360.com/the-perfect-46000-budget-learning-to-live-in-california-for-under-50000/ .

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Are Corporate Balance Sheets Really the Strongest in History?

Here is a good article on the myth that corporations are flush with cash and that their balance sheets are full of tangible assets.  I think I will begin reporting the percent of total assets in cash and the percent of tangible assets out of the total assets.  I like high dividend stocks with a high percentage of tangible assets.

* * * * * * * * * *

Are corporate balance sheets really the strongest in history?

by  John P. Hussman, Ph.D.

It is freely accepted by investors as fact that U.S. corporate balance sheets are the stronger than ever before in history. This view is largely driven by the significant amount of cash (checking deposits, savings deposits, money market funds, commercial paper holdings) on corporate balance sheets. Our difficulty with this view is that no single line item on a balance sheet is a sufficient indication of "strength." Most useful measures are derived from ratios at the very least, and ideally calculations across a variety of dimensions.

The best line item on corporate balance sheets today is typically "Cash and Equivalents." But while the amount of cash and cash-equivalents on U.S. (nonfinancial) corporate balance sheets has increased significantly, particularly relative to the cash-strapped lows of 2009, corporate cash is certainly nowhere near historical highs relative to debt. As a side note, probably the dumbest use of balance sheet data that we hear from time-to-time is when analysts talk about the P/E multiple of a stock "after you back out the cash," as if the cash line item can meaningfully be subtracted from the market cap of the equity. Really? If a company issues a billion dollars of debt, and then holds the proceeds in cash, does that suddenly make the stock "cheaper" because we can now back out that cash from the company's market cap? Um, no.

 
Read the rest of the article at http://www.hussmanfunds.com/wmc/wmc111128.htm
 
* * * * * * * * * *
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

Nigel Farage Nails the Eurocrats for the Disaster They Have Caused. He is the Ron Paul of Europe.

The Eurozone will breakup peacefully or there will be massive strife.  Neither outcome is good for the people who live in the USA, Europe, or Asia.  Nigel Farage is the Ron Paul of Europe.  He has been warning the Eurocrats for years about the disaster they are causing just like Ron Paul has in the USA.

There will be opportunities to buy high dividend stocks with safety of principal near the bear market lows.  The Euro will implode and take markets much lower than they are today.  Don’t believe the hype coming from the Eurocrat’s press releases and summits.  Don’t risk your savings on the ex-communist and present socialist pipedreams of a politically and fiscally unified Europe.

http://www.garynorth.com/public/8789.cfm

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets, so that you can make good purchases near the bear market lows.

Be seeing you!

But Is Everything Gonna Be All Right?

But Is Everything Gonna Be All Right?

by Ron Holland
The Daily Bell

Previously by Ron Holland: The European Union Uber Alles

 

  

"How much pain have cost us the evils that have never happened." ~ Thomas Jefferson

Worrying about the many economic threats in the news today really is a waste of time. So many people come up to me depressed, concerned and frozen into a total inaction and paralysis about domestic politics, foreign affairs, the dollar and the debt saying what are we going to do?

My answer is to quit worrying, take sound preparations and then get on with your life. Every generation and nation have had their trials and tribulations, success and failures and although today looks eerily like the 1930’s, this too will pass.

Although I’ve been retired from individual consulting for some time (still work with corporate clients) I receive a large number of inquiries from readers and former clients as well as current conferences attendees and they all ask what is going to happen? Will the dollar and US sovereign debt crash, what about the European Union and their problems, gold, oil and the scary situation in the Middle East?

They never ask whether congress or the US political system will get their act together "they know the answer" and except for the Ron Paul campaign everyone has basically given up on government solutions to the threats facing us today. The real underlying question from everyone is simply "Is everything going to be all right?"

A simple answer is despite positive assurances from Wall Street, Washington and the EU or the negative forecasts from doomsday prophets, no one really knows. While all the experts have opinions, as this is what experts are paid to do, the western world is dealing with such a complex series of problems now all at once, we really are in uncharted territory.

Read the rest of the article here: http://lewrockwell.com/holland/holland54.1.html

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!