Agora Financial’s Rude Awakening

Jump to Comments

Laguna Beach, California

· Why oil at $40 just won’t (and can’t) last,
· Commodities gear up for Bull Market, Version 2.0,
· Merrill’s dishonorable mention and plenty more…

Eric Fry, lobbing hand grenades from Laguna Beach, California…

It’s companies like Merrill Lynch that make companies like Merrill Lynch look bad. The “Thundering Herd” may have established a new high-water mark for Wall Street chutzpah and greed.

Wall Street’s extreme greed and perverse sense of entitlement are nothing new, of course. But even so, Merrill’s recent behavior merits a dishonorable mention. In early December, Merrill’s Compensation Committee, at the behest of then-CEO John Thain, dispensed about $4 billion in bonuses to top management. Did these bonuses represent a just and reasonable reward for a job well done? Or gang rape?

Let the reader decide. But before deciding, let the reader ask himself, “If no rape occurred, why do Merrill shareholders and U.S. taxpayers feel so violated?”

Here are a few of the pertinent details, courtesy of the Financial Times:

“Merrill and BofA shareholders…voted on December 5 [to approve BofA's takeover of Merrill]. Three days later, Merrill’s compensation committee approved the bonuses, which were paid on December 29. In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

“Within days of the compensation committee meeting, BofA officials said they became aware that Merrill’s fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional Tarp money.

“Last week, BofA said it would be receiving $20bn in Tarp money, in addition to the $25bn that had been earmarked for it and Merrill last year. It was then revealed that Merrill had suffered a $21.5bn operating loss in the fourth quarter.”

Did you follow all that? Merrill’s compensation committee doled out $4 billion in bonuses just days before Merrill’s management went hat-in-hand to Washington to beg for $20 billion. And why did they go begging for more taxpayer dollars? Because about the time the Merrill execs were cashing their bonus checks, they “discovered” that the firm’s fourth quarter would produce an “unexpected” loss of $21 billion.

Here’s my question: If the $21 billion loss was such a shock to the top executives at Merrill Lynch, why did these folks receive any bonuses at all. Any finance company executive who could have been shocked by a large loss in the fourth quarter should be tending sheep for a living, or issuing driver’s licenses, because that executive knows absolutely nothing about the financial markets here on planet earth.

So who ordered these large, premature bonuses at Merrill, you may be asking? The man himself, John Thain. Remember, this is the guy who cashed a $15 million check one year ago, just for agreeing to come over and redecorate the corner office while Merrill completed its death spiral.

Thain spent about $1.2 million to adorn his office with ostentatious baubles of one sort or another. His preposterous purchases included an $87,000 area rug, a $68,000 “19th century credenza” and a $35,000 “commode on legs.” $35,000 seems like a lot of money for a “commode on legs”…until you consider that Merrill paid $15 million for Thain.

Fortunately, Thain’s abuse of power ended abruptly yesterday, as BofA CEO, Ken Lewis pushed him out the door. But let’s weep not for Thain. He rides off into the sunset on a pony we taxpayers purchased for him, and carries saddlebags brimming with our gold.

Unfortunately, there is no posse in pursuit! Where are the white hats when we need ‘em? Where are the hangin’ judges? Is Thain’s behavior so different from Bernie Madoff’s, the man who orchestrated a massive hedge fund fraud?

Madoff tried to dispense $300 million to friends, immediately before his arrest. Thain successfully dispensed more than $3 billion dollars to friends, immediately before asking the government for $20 billion more. Which one of these frauds is more criminal?

For as long as America’s hanging judges let the horse thieves to ride out of town, the American financial markets will remain a perilous destination for investment capital. Without true law and order, the financial markets will merely consume capital, not multiply it.

As long as CEOs may engage in legal acts of corruption and fraud, a mattress will provide better returns than the stock market. Therefore, the cautious investor will want to invest even more cautiously than usual…And he will want to be as certain as possible that he is investing alongside an honorable management team.

Of course, the cautious investor might also consider the sorts of investments that CEOs cannot destroy. Commodities come to mind.

Crude oil, wheat and gold do not care how many commodes John Thain buys with taxpayer money, or how many billions of dollars worth of unwarranted bonuses he doles out to fellow insiders. The commodity markets only care about supply and demand…and that’s about all.

For the moment, commodity demand is slowing and commodity prices are plummeting. But past performance is not necessarily indicative of future returns. On a 3- to 5-year view, commodities seem severely undervalued.

Consider the following data point: During the last six months the BKX Index of Bank Stocks has fallen 41%. Hardly a surprise. But over the same time frame, the CRB Index of commodity prices had dropped more than 50% and the Goldman Sachs Commodity Index has plummeted 65%.

Maybe commodities deserve a second look. Dan Denning offers a specific suggestion below…

— A New Approach to Investing in Gold —

Gold & Options Trader Presents:

Suddenly, everyone’s talking about GOLD. But what they don’t know about are “Vancouver LEAPERS”

Here’s How To Use “Vancouver LEAPERS” To Make Huge Gains in the Coming Blowoff Phase of the Gold Rally

The last time we saw a gold market like this, some investors made 971%, 2,464% and even 3,987% with little-known “LEAPER” stocks.

Today, you have a once-in-a-lifetime chance at similar gains for as little as $500…Details Here

—————————————–

Oil is Too Darn Cheap
By Dan Denning, Editor of the Australian Daily Reckoning

Prices communicate information…unless they’re communicating disinformation. Crude oil has plummeted more than $100 a barrel since the middle of last year, and now costs about what it did five years ago.

This price trend certainly contains some information – like the fact that demand for crude oil has been falling. But this price trend might also contain some disinformation – like the notion that the falling oil price is destined to continue falling.

Crude oil may not yet have found the bottom of its bear market, but we suspect the bottom is very near.

After all, the current depressed oil price results from two factors. First, the ongoing de-leveraging by speculative participants in the oil market has removed billions of dollars of “buying power” from the marketplace. As these participants have de-levered, they have sold oil into a marketplace that is fairly well supplied at the moment (so much so that OPEC is cutting production). Second, oil demand will be flat or slightly fall this year because of the worldwide financial slowdown.

Adequate supply plus stagnant demand plus speculative de-leveraging equals $42 oil. So why is the December 2010 oil contract trading nearly 40% higher at $59.57? What could possibly happen between now and December 2010 that would cause oil to go up 40%?

Well, for one thing you might be in the early stages of an economic recovery by then. Demand would have recovered. Shares could be higher. Everything could be fine.

But we can think of at least three reasons why the current oil price is headed much higher this year (not in 2010). First, the lower oil price is actually going to lead to lower oil production later this year and next. Oil production is declining to begin with. But the crash in prices has put the kibosh on exploration and production.

Second, as my colleague, Dan Amoss, noted one year ago in this column (A Sexy Import), the clear trend within the oil market is that traditional oil exporters are exporting less oil. There are several reasons for this.

One is that oil exporters are hoarding it now and waiting for higher prices later. Another is that oil exporters are consuming more of their own production, leaving less for export. And still a third reason is that the world’s largest oil exporters face declining production trends thanks to…you guessed it…Peak Oil.

Yes. Peak Oil has not gone away. It’s been sent to the corner while the Credit Depression hogs the stage. But Goldman Sachs oil analyst Jeffrey Currie issued a report yesterday predicting a, “swift and violent rise” in oil prices in the second half of 2009.

Currie told a conference in London that, “”Thirty dollar oil reflects the same imbalances that got us to $147 oil. The problems haven’t gone away. We still believe the day of reckoning is to come.” What problems?

There are still major infrastructure bottlenecks in the global oil supply chain. Currie says that despite the big fall off in demand, “This is not 1982-1983 all over again. The supply picture is radically different…the demand picture is radically different. The key difference is that today there are no large-scale next-generation projects that are going to save the world. Commodity demand is exponentially higher than it was.”

This brings us to the third reason oil prices should rise later this year: a new kind of speculator is entering the oil market. Bloomberg reports that, “Morgan Stanley hired a super tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from higher prices later in the year, two shipbrokers said.”

Dan Amoss calls this the oil-arbitrage trade, where supply is stockpiled offshore, and thus withheld from refiners, allowing existing gasoline inventories to be worked down. Then in six to twelve months time, when crude prices have moved higher, you simply park your ship at the terminal and cash in on the difference between what you paid six months ago (today) and the new market price.

It is normal for the oil futures to be in contango, where spot prices are lower than futures prices. What’s less normal is the amount of oil being stockpiled offshore.

“Frontline Ltd., the world’s biggest owner of supertankers, said Jan. 14 about 80 million barrels of crude oil are being stored in tankers, the most in 20 years,” Bloomberg adds.

We also suspect that oil as an inflation hedge will come back into vogue later this year, which might be adding to the appeal of buying today at bargain basement prices. What’s more, you can never discount (although you can never fully quantify) the geopolitical aspect of oil prices. A good general rule of thumb is the more war there is in the Middle East, the more likely oil is to go higher.

So what should you do? Resume investing in oil and oil stocks. Crude oil is simply too cheap…and that’s no lie.

— Bulletin Board Elite – Positions Now Open —

The first time, I called it beginner’s luck…

When it happened again, I called it a coincidence…

But after 9 stocks in a “secret” market one ace analyst was screening JUMPED to major exchanges – and major profits – in just a 12-month span, I knew he was hunting in the right place for huge gains.

In just the first six months of 2007, the AVERAGE top-tier stock in this all-but-unknown universe of securities gained 25,498%! Just $100 invested in the best of these on New Year’s Day would’ve handed lucky shareholders gains of $409,900 before the Fourth of July…

Starting RIGHT NOW, I’m offering those who respond to this dispatch a chance to turn even a small investment into a small fortune on this ace analyst’s best picks in this overlooked market

But you must act quickly: Only a few spots remain in this revolutionary services ranks. Full Details Here

—————————————–

[Rude Endnote: Taking their cue from the imploding U.K. markets and the continued selloff in the U.S. markets across Asia and Europe splashed red across investors screens today.

The Aussies were the worst hit in this neck of the woods with the All Ordinaries Index slumping a massive 3.83% to close at just over 3,300 points. Japan’s Nikkei 225 came in a close second, falling 3.81%, while the Hang Seng dipped a relatively mild 0.63%.

Over in Europe, London’s FTSE had slipped another 1.38% while France’s CAC and Germany’s DAX were down 2.02% and 2.34% respectively as we write to you this morning.

For it’s part, oil maintains it’s price around $42 while an ounce of that gold you’ve got under your mattress just gained $13 overnight and now goes for $869.

That’s all for the Rude work week. Please join us again tomorrow for your weekly wrap-up.
Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com