It’s (ex-)Goldman Sachs again. No surprise. The former head of Goldman Sachs ran MF Global into bankruptcy, and was almost going to pocket 12 million dollar “severance” package. What a way to finish!

Actually, I highly suspect that Corzine is that stupid to buy up European debts using a leverage of more than 40-to-1. I suggest investigators to look into the counter-party of whom selling the European debts to MF Global. Maybe Corzine was to lead MF Global to pay up what Goldman Sachs bought previously (while leaving Morgan Stanley to burn and drop).

And the story doesn’t stop there. As with all futures market, there is no equivalent of FDIC nor SIPC insurance. MF Global even dared to use clients’ money of some 600 millions to mop up their mess. That is a serious crime. People should go to jail for this, but I doubt that would happen. And that was done under the helm of ex-Goldman.

After 3 years since 2008 financial crisis, nothing is learned, and nobody went to jail. Occupy Wallstreet will only get bigger.

The article at New York Times has the best coverage in my opinion. You do need to create a guest account to read it.

Where is the Volcker’s Rule? Yeah, and Goldman Sachs became a bank in the shortest amount of time ever in 2008, and still borrowing from Fed for nothing, trading the money from the subsidy by taxpayers into oblivion. If Federal Reserve didn’t save Goldman Sachs, it would be dead by now.

Frugal at 1stMillionAt33.com

I have watched AMZN rose 4 fold from 40s, but I still hesitate to buy into it today. My biggest problem with AMZN has always been with its sales tax advantage.

The pricing of goods at AMZN is extremely (anti-)competitive. It actually changes real-time against ongoing sales at various stores. The moment that there is a sale at Target or Walmart for a particular item, Amazon will lower its price correspondingly. I have observed this phenomenon through my past shopping experiences on HD camcorders, camera, etc. Sounds like a good deal at Amazon?! NO, unfortunately. The price that they lowers to always ranges from about a tiny saving of 3% to actually spending more by 3% after adding shipping. This is after considering the no-sales-tax “benefit”. Am I going to save just $5 to $10 on a $350 to $500 item, just to fatten Amazon’s employees and shareholders wallet, and short-change my local state/city government? I’m sure that many people would, but I won’t.

Therefore, I’m not surprised at all hearing that Amazon will cut ties and move out of states that threaten to recover the sales tax. The fact of matter is that when you look at the financial income statements at Amazon (for example 2010), you will see that if Amazon starts to pay a 8% sales tax out of its revenues, there is absolutely no profits left. Instead of 1.15 billion profit, it would be 1.38 billion loss. Please note that taking out 8% sales tax from the revenue is obviously not the right approach. But if the pricing is 8% higher, consumers may choose not to transact at all. Likewise, if the cost is 8% higher for Amazon, Amazon may choose not to sell the goods at all. The end result is likely to be a lot less profitable sales and shrinking revenue.

I would like to see a fair playing ground for all companies versus the internet-only companies. And I am an advocate of a federal sales tax for a reduction in income tax. In this age, there is no longer any boundaries between states, and having different sales tax rate across states simply don’t work anymore. A flat sales tax to replace all income tax would encourage savings instead of spending. A fixed percentage of the collected sales tax should go to the local state, and each state can further impose different income tax structure to supplement any necessary shortfalls.

Although the day for a flat national sales tax may never come, I hesitate to buy the stock of a company that simply lives on sales tax. I think internet business is good for certain products, but not all. Making the market to be free from all anti-competitive practices would give consumers the best stores & final prices.

As I stated back in 2009 that US debt would be $13.5 trillion by the end of 2010, it is now $13.9 trillion today. Here is a plot based on US treasury data for total debt:

Notice the gradual increasingly slope with shortening timeframe. This is a typical behavior of a super-exponetial function that is destined to “collapse” in the future. The debt obviously won’t collapse due to payback, but possibly “collapse” through massive inflation or repudiation. This is the chart that any US citizens should keep an eye on. If the chart continues its own pattern of increasing slope with shortening timeframe for slope change. Then one definitely be prepared.

To put 20 trillion debt increase for perspective, the entire global stock market valued at $49.1 trillion in March 2010. When USA run out of other people’s money to use, the only way left is obviously to simply print more (as if USA hasn’t done it yet through two rounds of quantitative easing).

I’m not changing my current projection for a US debt/currency blow-up in 2016/2017, unless the above debt chart changes its super-exponential pattern, and/or that the time has gone beyond 2022 without any problems. Let’s see if Tea Party & Ron Paul who just took the helm of Domestic Monetary Policy Subcommittee can effect a direction change in the coming years.

There is a serious mortgage paper fraud bubbling to the surface. I was aware of this several years ago, but I was not aware of the magnitude. It is so serious that I think it can easily turn the whole world up side down (for the second time, I guess).

Some background first. The US bankers and Wallstreet or more properly called “fraudsters” first selling all the worthless “mortgage-back” securities back by phantom 100% financing loans from 2005 to 2007, cheating the entire world out of savings. They turned the world up side down with the financial crisis, and then had Paulson from Goldman Sachs being the US treasurer at that time, saving their ass with taxpayers’ money, transforming or rather downloaded all the worthless mortgage paper onto Fannie Mae, Freddie Mac, and AIG. Of course, everyone thought that was a great mission accomplished.

Now, when they try to foreclose homes, but lawyers demand to see the promissory notes, they find out, “Damn, where is that piece of crap?” Imagining all the homes that cannot be foreclosed on, due to missing documentations for the promissory notes? All the mortgage-back securities now will be truly back by NOTHING!

Here is what I will venture to guess the potential outcomes.
1. The only way to foreclose these homes will be through non-judicial foreclosures (including California, the home fraud center). Rather than getting nothing for the mortgage paper, it’s far better than getting something for it. Once the avalanche starts rolling, every bank will start scrambling to sell the homes out of the flood gate. Home prices will fall by another 20% in the coming 2/3 years. Or at the minimum, the shadow inventory of the homes on bank’s balance sheet will dramatically rise.

2. If this is not resolved through Congress passing a new law, back-patching the shoddy works by bankers, and the news start to spread around the whole world, US dollar will drop to a new dramatic low. Imagine another 3 trillions loss (out of 11 trillion) on Fannie Mae/Freddie Mac backed debts, all USA government owned? By the way, if this event unfolds, stock markets will panic first, but later will reverse to break 52 weeks high. Bonds will plummet for sure. Real estate will go into extended nuclear winter.

3. New laws get passed through Congress to save the bankers’ ass. Congress initially side with home squatters in the name of protecting voters, until all the law-abiding citizens take the street, demanding fairness. Then Congress realizes that it’s too late to stop the revolution by the majority of the law-abiding citizens, turning to lawless resolutions everywhere.

Just some crazy ideas. But certainly less insane than what has been going on in US real estate markets. And all of the rotten apples (Wallstreet bankers, home speculators, and all the mortgage “consultants”) are still in there unbelievably.

Helicopter Bernanke has been chosen as the Person of the Year 2009. That is just ridiculous in my personal opinion.

For someone along with Greenspan created the single biggest housing bubble (in size) in human history so far, bailing out all the guilty parties and mopping up all the mistakes with even greater mistakes through printing of more free money, he is “coined” as the savior of the economy from another great depression. A country does not attain prosperity through devaluing its own currency. Such acts when the confidence game is up will be met with great consequence. I have no doubts that history in the future will not have kind words for Bernanke, nor Greenspan (whose reputation has already been turning thru this financial crisis).

Aren’t you glad that banks are paying back all the TARP money? I guess all of them are hopeful eternally, and wishing that all the option ARM and alt-A borrowers will be paying back more when they start to reset to 25-year amortization schedule, starting now until the end of 2011. I think banks are very likely to negotiate all the option ARM mortgages back to 30 years or longer if possible. However, the biggest problem is that once the mortgages are re-negotiated, the mortgage payment will NO LONGER be less than the prevailing rent. Furthermore, who is going to pay down more principal towards a property that is already 10% to 20% under-water? I expect that the two factors combined will cause significant portion of the borrowers to simply walk away, or become home squatters to take advantage of one year of free rent through foreclosure process.

So when the hands of banks are tight, and they will tighten even more on the new loans. Some will probably go under and join the weekly FDIC’s Friday parade, and some may come back and ask for government money again. Ha, except that for the second time when they want to dip the “honey pot” again, the money will not be available because American and politicians will be so upset and simply shut down the institutions. If they are able to sustain without asking for more money, you can be sure that lending in economy will take a dive, driving USA onto the same Japanese-style deflationary track. But don’t worry, our beloved Helicopter Bernanke will come in his helicopter in a hurry, bombing free money from the sky at the fastest speed. It is likely that in the not-too-distant future, we will see a more volatile stock market, dropping at first due to the resurgence of financial crisis, and then zoom back up and onto new highs (higher than 2007) due to out-right devaluation of US dollar.

By the end of 2010, US fiscal deficit will probably end at 13.5 trillion dollars or more. The speed that it will increase will be exponentially faster until it collapses. Before US goes full speed on this exponential debt curve, there may be still a chance of stopping before the point of no return. But such opportunity does not exist as long as Bernanke is still in office as Federal Reserve chairman. I guess Greenspan will be remembered as the Bubble Man, while Bernanke may be remembered as the Bubble-death Man, who would blow up the final bubble in $US and US bonds, without any further ability for US to attract/wield global capital.

Hindenburg omen is one of the rare stock market crash signals. The fact that it is rare makes it even more significant. A rare signal or event in the Shannon’s information theories (the backbone of the modern day digital communications) is considered to contain higher amount of information. And this information from Hindenberg’s omen is obviously not a good news.

I have written about Hindenburg omen (H.O.) before on my site at 1stMillionAt33.com in 2006. Although in 2006 H.O. signal did generate a 7% declines out of the stock market, it was by no means a “stock market crash”. The current Hindenburg omen was triggered on June 6th 2008, and has been confirmed by subsequent repeated H.O. signals. The previous confirmed H.O. was in October of 2007, and stock markets definitely had a serious correction afterwards. The success rate for H.O. is only about 25%, or 1 crash in every 4 signals, and it will last for about 120 days during which it could crash. But if you could avoid those mini-crash period as a buy & hold investor, you obviously will do so much better.

If you study the details of H.O. signal, it indicates an unhealthy stock market advance, with both new 52-week highs and new 52-week lows among different companies going on simultaneously in the stock market. The resolution for an unhealthy stock market is often a substantial decline (if it happens). It’s obvious that in the current state of stock market, the financial companies are breaking new lows, while energy stocks are breaking new highs. Isn’t that a bit scary with the crude oil advance stopped at $140? What’s going to propel the general stock market indexes higher, when crude oil is knocked out by the fear of a slowdown in global growth?

With stock market technicians that I follow, Frank Barbera, Bill Cara, Jack Chen, Bob Hoye, and John Hussman all jumping into the bearish camp, I am fearful that a decline is just about anytime.

You’d better watch out, you’d better not cry …. Unfortunately, I am guessing that Bernanke Santa Claus will not be able to save this one.

Best luck.

Frugal at 1stMillionAt33.com

I think few people realize that America/the world is facing the biggest financial storm ever, and how dangerous it is for investing in stocks before a full implosion. The housing-induced credit crisis has gone far beyond anyone can potentially control, probably not even the Fed.

Reading over so many current/future proposals from politicians and bloggers, I have my own thoughts in this. For sure, there simply isn’t a solution without pain. But there can certainly be solutions that are more fair and less pain.

One of the most fair and easiest way to help propping up the housing market is to subsidize all the buying or holding cost for primary residences. Instead of helping on the sell-side directly, the government can help the buy-side. Of course, the subsidy will indirectly go into sellers. But the solution is market-based.

Why is this a fair solution? For sellers, there is simply no direct bailout. For anyone who chooses to buy, the buying decision is done on the open market where everyone else is competing on the same ground with subsidy, and existing real estate investors will also be helped with a more stable housing price. For any renters who choose not to buy and take up the subsidy, their decision is solely of their own based upon their evaluation of the current housing market and personal circumstances.

What kind of subsidy will make sense? The easiest way is certainly done through mortgage interest reduction or tax deduction. The tax deduction cannot be limited by the amount of adjusted gross income, and has to be actually beneficial on top of the existing standard deductions. By reducing the overall housing cost, government will encourage more of it, and prop up the housing market.

Since 65% to 70% of the Americans are home owners, most of this housing aid will effectively become a tax cut for middle class. I suggest that 50% of the total amount of both property tax and mortgage interest from primary residence can be used as a tax credit (rather than tax deduction in the itemized section). Here are some examples of the housing aid scenarios, with loan interest at 6%:

1. $700K home in California with 20% down for someone with tax bracket at 28%:
Because loan amount is $560K, the interest is $42K a year, and the additional tax subsidy amount will be roughly (50% – 28%) * $42K / 12 months = $616 a month. This monthly subsidy will effectively lower the interest rate from 6% ($3357) to 4.25% ($2755). That will be a tremendous stimulus.

2. $500K home with 20% down for someone with tax bracket at 15%:
The additional tax subsidy amount will be roughly (50% – 15%) * $500K * (1-20%) * 6.00% / 12 months = $700 a month. This monthly subsidy will effectively lower the interest rate from 6% ($1852 payment) to 3% ($1686 payment). This is an even better deal for lower income people.

Effectively speaking, this tax cut will target middle-class home owners specifically. Using the assumption of a median home value of $240K, and an average tax bracket of 15%, this tax aid comes to be about $4032 dollar per family household, 110 million US households, with 70% home owners, it will be about $300 billion annually. I’m not going to re-do my numbers here, but probably instead of 50%, one could go for 40% of the interests as tax credit. This will adjust this bill from $300 billion to about $214 billion. I hesitate to go to much lower, simply because in California, where most of the housing problems are, you have to be at 25% to 28% tax bracket to afford the homes. Since one is already getting existing tax benefits at 25% to 28% through itemized deduction, the 40% as tax credit will only give 15% to 12% additional benefit.

Bottomline, this printing of tax money will be truly the best way of distributing the helicopter money, since it goes to the homeowners directly without discrimination, AND it is also tax-progressive. The rich who has a bigger loan do get a lot more, but only because they are paying a lot more for their home. But the middle class will not be left out at all, and will enjoy the biggest piece of the tax reduction. This will effectively encourage home purchase/consumption, and props up housing market. The solution is also market-based without ANY bailouts to those people who abuse the mortgage markets.

In respect to Republican tax position, this is a market-based solution. In respect to Democrat tax position, this is a tax aid for most of their incumbents. In respect to stock markets and US economy from Keynesian economics, this is a huge positive. Tax cuts stimulate economy. On the other hand, money from direct taxpayer bailouts go into the pockets of these fraudulent bankers and homeowners, and continue to encourage moral hazards and speculation.

Frugal at 1stMillionAt33.com

The chance of markets going into freefall mode is increasing as hours go by. Markets are being liquidated. The second strong sector XLE/OIH or the energy companies have fallen right at or below the lower band of Bollinger’s bands. The strongest sector GDX or the precious metals just had a sell signal from MACD signal.

I hate to sell any of my stocks right now, but things just simply do NOT look good. Tuesday opening may be down again it appears for the following reasons:
1. Financial sectors in Europe are crushed on Monday. All global markets have plunged from 4% to 8% on Monday. I have expected emerging markets to fall. But the problem is that they just started falling, with US stocks already breaking supports. Now, I just can’t imagine what would happen when emerging markets are 20%. Will US stocks be 30+% off instead??

2. US dollar index is rising STEEPLY to 76.866 (10:18 on Jan 21). This is ESPECIALLY scary. As I have said many times, for US stock markets to go up, US dollar MUST fall. Here are the currency quotes that I’ve obtained, ALL breaking recent high/low with US dollar gaining strength, except YEN:
EUR vs USD at 1.4485
USD vs JPY at 105.87
GBP vs USD at 1.9458
USD vs AUD at 0.8628
USD vs CAD at 1.0320
This is F***ing scary now, because yen carry trade unwind is in FULL force.

Initially, I expected that precious metal sectors may be spared. My expectation came from the observation of the recent stock market fall as the new year opens. All markets fell, but precious metals went straight up. The currency markets indicated the same phenomenon as of now. However, energy markets later were not spared. Now precious metals stocks have corrected with gold spot almost reaching an all time high and have pulled back to $867. If gold price breaks $850 and then $835, along with Yen strengthening, then I think the black swan dive will be here with us.

Once the market opens on Tuesday, I tentavely think that I probably will purchase puts for February or March expiration (but maybe it’s too late already). The markets show no signs of improving. The last rally on last Wednesday kind of surpised me on the lack of followed-thru, because this sick market canNOT even rally for 1 day. That particular rally was intraday, and was LESS than 1 day. Maybe it is time to face the truth.

I don’t know how ugly this market will get. But the markets are probably more over-sold than the bottom in the last bear market of 2002/2003. Jumping out of the window maybe is the best way to avoid this train wreck now. (Boy, I’m not even panicking at this point. I don’t want to see how low this thing will go when I panic.)

Last night my wireless router is down. I had to connect my laptop directly thru ethernet physically to the wireless router, in order to get onto the internet and blog. Today’s post is therefore late than usual.

I spend some time shopping for wireless routers, and found a really good deal at target.com for the latest and greatest 802.11n router. It’s a D-link 802.11n router, and it’s only $40. If anyone is thinking of getting a new router, this N router is as cheap as other G/A/B router.

For those who are not familiar with 802.11 wireless technologies, 802.11b is the slowest. 802.11g is faster than 802.11b and the most common choice now. 802.11a is the least compatible and rare. And the new 802.11n is about 5X faster than 802.11g, and will be the next generation wireless technology for everyone’s home. Using 802.11n, one can probably transfer big files wirelessly at a very fast speed. More importantly, I believe in the next 2 to 3 years, you can watch HD TV wireless “everywhere” in your home. The speed of 802.11n is sufficiently to support multiple MPEG2 HD quality channels (not to mention that if you use MPEG4, you get more than double of that). There are still difficulties for wireless TV due to potential intermittent transmission quality. However, I think those problems can easily be solved, if you simply buffer a lot of video by combining the storage capacity of the hard disk from your PVR (personal video recording) system with 802.11n.

Anyway. It’s probably too much tech talk for someone simply looking for a cheap router. And in case if you are interested in the main companies who provide these wireless technologies, they are ATHR, BRCM, MRVL, listed in alphabetical order. I don’t advise buying any of those high-tech stocks however. But if you think of buying them, you may choose ATHR which is a very focused and strong player. Their design seems to be some 40% better in terms of cost than the competitors.

By the way, I wouldn’t worry so much about the “draft” N. 802.11n has been around for at least 1.5 years now, that I think any shipping products should be like 98% compatible with the final approved standard, if not 100%.

I saw this article the other day from thestreet.com. It spoke about CGMFX returning 50% in two months. That is simply INCREDIBLE for a mutual fund.

Don’t know if any of you picked up some shares in CGMFX or CGMRX when I first blogged about Ken Heebner and his funds back in April 2007. Heebner moves faster than you can track him. At that time, he was bearish on real estate stocks, bullish on mining and infrastructure stocks, neutral and slighly bullish on brokerage financial stocks. I think I checked his holdings, and he was holding brokerage stocks at one time. But he got out quickly for sure, and both of his CGMFX and CGMRX (supposedly a real estate fund) are showing big holdings in energy/infrastructure names. Yeah, he moves FAST.

If there is a second example of failure of Efficient Market Hypothesis (EMH) besides Warren Buffet, I would say Heebner is high on the list. He has beaten indexes year after year for so many years now. Incredibly record. I have to seriously consider buying his CGMFX really. Maybe EMH is garbage. Or at least it’s a garbage theory definitely to Heebner and the fund holders personally. Some people I guess can really time the market. And timing the market with a big mutual fund portfolio is certainly much harder than a small individual portfolio.

Don’t invest just based on my advice. Caution is always advised. Disclosure: I currently don’t hold CGMFX or CGMRX, but I wish I did 10 years ago.