Higher Interest Rates Forecast Market Correction

November 22nd, 2010

Every precious metals investor should be concerned about China, one of the world’s fastest growing economies, raising its rates and rising yields. Changes in the rates affect stock prices. China is leading the world and we can see the fears are profound as sell-offs this week were much stronger than any of the relief rallies. If China’s market corrects then the commodity market, which was fueling the equity market, could experience a severe correction. It’s a domino effect.

Despite the Fed’s enthusiastic plan to monetize debt and artificially keep interest rates low through bond purchases, yields have risen aggressively for the last 13 weeks. The QE2 program was designed to lower interest rates to improve borrowing and liquidity. Instead the opposite occurred, QE2 is initiating higher borrowing costs. I don’t believe it is coincidence that Ireland’s debt problems surfaced following QE2.  China is now on the verge of raising rates to combat imported cheap dollars to bid up Chinese assets, which is putting pressure on markets globally. Rising rates kills equity and commodity markets, which are heavily built on margin borrowing.  The Long Term Treasury ETF (TLT) broke through the trend it had from May until the end of August. This previous trend was largely a result of a deflationary crisis where investors ran from risky assets like the euro to the dollar, and long-term Treasuries were pushing yields to ridiculously low levels. As fear in the markets decreased, due to a temporary stabilization in Europe and the US, investors ran to equities and commodities.

International reaction to QE2 has not been positive. There is an increased risk of emerging markets combating inflation, which may slow down the global recovery. Fears of China and emerging markets raising rates make investors unsure where to turn.

Asset classes have reacted negatively to China’s expected move. Distribution is apparent through many sectors and many international markets. Rising interest rates have a direct influence on corporate profits and prices of commodities and equities.

When studying interest rates it’s not the level that is important, it’s the rate of change. Interest rates have had a dramatic increase these past two months and we may see that affecting the fundamentals in the economy shortly.

The recent downgrade on US debt from China, who is our largest creditor, signals demand for US debt has been waning. I’ve been highlighting the decline in long-term Treasuries since the end of August. This rise in interest rates puts further pressure on the recovery as the cost of borrowing increases. Economic conditions are worsening in Europe and emerging markets in reaction to quantitative easing and imported inflation. Concerns of sovereign debt issues are weighing in Europe. As yields rise so do defaults and margin calls.

If the 200-day is unable to hold the bond decline and we continue to collapse, then rising interest rates could negatively affect the economic recovery. Borrowing costs to insure government debt are reaching record levels internationally. Ireland is expected to take a bailout. Greece, Spain, and Portugal are in danger as well.

Commodities have significantly moved higher along with the equity market for September and October as investors left Treasuries to return to risky assets due to the fear of debt monetization through QE2. Global equity markets have been rising. But the question is, how long? This makes investors reluctant to take on debt, which is the exact opposite of what the Fed’s goals were. Rising yields could lead to a liquidity trap and deflationary pressures.

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Higher Interest Rates Forecast Market Correction

Commodities, ETF

VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products

November 22nd, 2010

Less than two weeks after I mapped out the various VIX exchange-traded products (ETNs + ETFs) in The Evolving VIX ETN Landscape, that landscape has has already changed dramatically. The first surprise was the launch of the C-Tracks ETN on CVOL (CVOL), a direct competitor to VXX, one week ago today.

The bigger change, however, is a suite of six new VIX-based ETNs on the way from VelocityShares (see filing) to be issued by Credit Suisse (hat tip to Adam Warner, who may be de-blogging for awhile, but is still tweeting his thoughts.) In the updated VIX ETP graphic below, I have coded the new VelocityShares products with a (V) suffix. In terms of covering the existing waterfront, the new VelocityShares products include VIIX and VIIZ to compete directly with VXX and VXZ, with the inverse XIV to compete against XXV.

The innovations come in the form of new leveraged ETNs as well as a new inverse ETN which targets VIX futures with a five month maturity. In the +2x space, these are TVIX (one month target maturity) and TVIZ (five month target maturity). In the inverse space, the new entry is ZIV, which has a five month target maturity.

For volatility traders, these are exciting developments. While I have no idea what the timeframe is for the launch of the new VelocityShares products, I can already envision dozens of exciting trades…which has me wondering why I am blogging about this instead of opening up a hedge fund…

Related posts:

Disclosure(s): short VXX at time of writing



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VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products

ETF, OPTIONS, Uncategorized

FDIC: 903 banks in trouble. What to do …

November 22nd, 2010

Martin D. Weiss, Ph.D.

Martin here with an urgent update on the next phase of the banking crisis.

Just this past Friday, the government released new data showing that the FDIC’s list of “problem banks” now includes 903 institutions.

That’s ten times the number of bad banks on the FDIC’s list just two years ago.

The banks on the list have $419.6 billion in assets, or SIXTEEN times the amount of two years ago.

And yet, these bad banks are …

Just the Tip of the Iceberg!

How do we know?

Because the FDIC has consistently neglected to include the most endangered species on its list of problem institutions — the nation’s megabanks that are among the shakiest of all.

The FDIC doesn’t reveal the names of the banks on its list — just the number of institutions and the sum total of their assets.

Still, I can prove, without a shadow of doubt, that the FDIC’s list of problem banks is grossly understated and inadequate.

Consider what happened on September 25, 2008, for example.

That’s the day Washington Mutual filed for bankruptcy with total assets of $328 billion.

But just 30 days earlier, according to the FDIC’s own press release, the aggregate assets held by the 117 banks on its “problem list” were only $78 billion.

In other words …

Washington Mutual alone had over FOUR times the sum of ALL the assets of ALL the banks on the FDIC’s list of problem banks!

Obviously, Washington Mutual was not on the FDIC’s list.

Obviously, the FDIC missed it. Completely.

Also not on the FDIC’s list: Citicorp and Bank of America, saved from bankruptcy with $95 billion in bailout funds from Congress. Just these two banks alone had over FORTY-SEVEN times more assets than all of those the FDIC had identified as “problem banks.”

Some people in the banking industry seem to think the FDIC can be excused for missing the nation’s largest bank failures for the same reason that blind men groping in the dark can’t be blamed for missing an elephant in the room.

But the fact is that the FDIC even missed the failure of a relatively smaller bank: IndyMac Bank.

When IndyMac failed in July 2008, the 90 banks on FDIC’s “problem list” had aggregate assets of $26.3 billion. But IndyMac alone had $32 billion in assets. Evidently, even IndyMac was not on the FDIC’s radar screen.

This is …

Easily One of the Greatest
Financial Scandals of Our Time

The FDIC’s problem list is supposed to guide banking authorities in their efforts to protect the public from bank failures. If the FDIC is missing all the big failures, where does that leave you and me?

Heck — it’s bad enough that they refuse to disclose the names of endangered banks. What’s worse is that they’re hiding the truth from their own eyes.

And with so many misses so evident, you’d think they would have changed their ways by now.

Not so.

Even as I write these words to you this morning, banking authorities are AGAIN failing to recognize, analyze, scrutinize, or tell the public about the real impact of the most intractable disaster of this era:

Major U.S. Banks Still Extremely
Vulnerable to the Foreclosure Crisis

Here are the facts …

Fact #1. JPMorgan Chase, Wells Fargo Bank, and Bank of America each have more than $20 billion in single-family mortgages that are currently foreclosed or in the process of foreclosure.

Fact #2. Each bank has at least DOUBLE that amount in a pipeline of foreclosures in the making — $43 billion to $55 billion in delinquent mortgages (past due by 30 days or more).

Naturally, not all of the past-due loans will ultimately go into foreclosure. But these figures tell us that the biggest players are not only in deep, but could sink even deeper into the mortgage mayhem.

Fact #3. Combining the foreclosures and delinquent mortgages into a single category — “bad mortgages” — the sheer volume still on their books is staggering:

  • JPMorgan Chase (OH) has $65 billion in bad mortgages …
  • Wells Fargo Bank (SD) has $68.6 billion, and …
  • Bank of America (NC) has $74.9 billion.

Fact #4. The potential impact of these bad mortgages on the bank’s earnings, capital — AND SOLVENCY — is dramatic. Compared to their “Tier 1″ capital …

  • SunTrust (GA) has 57.6 percent in bad mortgages …
  • Bank of America has 66 percent in bad mortgages …
  • JPMorgan Chase has 66.8 percent, and …
  • Wells Fargo has 75.4 percent.

Tier 1 capital does not include their loan loss reserves. But even if you included them, the exposure is still huge.

Moreover, this data is based on the banks’ midyear reports. Since then, we believe the situation has gotten worse.

And these numbers reflect strictly bad home mortgages! It does not include bad commercial mortgages, credit cards, construction loans, business loans, and more.

Here’s the key: Based on their size alone, we KNOW that none of these giant institutions are on the FDIC’s list of “problem banks.”

Yet they are all definitely WEAK, according to our Weiss Ratings subsidiary, the source of this analysis on bad mortgages.

Moreover, “weak” means “VULNERABLE,” according to the analysis of the Weiss ratings provided by the U.S. Government Accountability Office.

To help make sure your money is safe, I have four recommendations:

Recommendation #1. Don’t keep 100 percent of your savings in banks. Also seriously consider Treasury bills — bought through a Treasury-only money market fund or directly from the Treasury Department.

Don’t be put off by their low yield. The primary goal of this portion of your portfolio should not be the return on your money. It’s the return OF your money.

Recommendation #2. The only real risk in holding U.S. Treasury bills is the likelihood of a falling U.S. dollar. But don’t let that alone prompt you to run away from safe investments and rush into high-risk investments. Instead, stick with safety and protect yourself from a dollar decline SEPARATELY, with hedges against inflation, such as gold.

Recommendation #3. For checking accounts, money market accounts, and CDs that you have in a bank, be sure to keep your principal and accrued interest under the FDIC’s insurance limit of $250,000.

Recommendation #4. Given the magnitude of the potential crisis … given the limited resources of the FDIC … and in light of the strong anti-bailout sentiment of the new Congressional leadership … I feel you must not count exclusively on the FDIC or any government entity to guarantee your savings.

Instead, make sure you do business strictly with financial institutions that have what it takes to withstand adverse conditions on their own, even without a penny of government support.

Do your best to avoid banks with a Weiss rating of D+ (weak) or lower and seek to do business with banks that we rate B+ (good) or higher. Stay safe.

Good luck and God bless!

Martin

Read more here:
FDIC: 903 banks in trouble. What to do …

Commodities, ETF, Mutual Fund, Uncategorized

Oppenheimer Considers Active ETF Space, Mutual Fund Conversion Possibility

November 22nd, 2010

As reported by InvestmentNews, OppenheimerFunds is contemplating entering the actively-managed ETF space by converting existing mutual funds into Active ETFs. William Glavin, President and CEO of Oppenheimer, spoke at the Money Management Institute’s conference in New York last week.

Glavin said that Oppenheimer has been considering the Active ETF space for a long time and if they do go down the conversion path, they wouldn’t just be launching clone versions of their existing 65 funds. The SEC has not yet approved any previous applications for mutual fund conversion into ETFs. The benefit of converting active mutual funds into Active ETFs is that the track record of the mutual fund can get carried over to the Active ETF, provided that the investment strategy remains largely similar. Also, the ETF would achieve instant scale if the legacy mutual fund already had a substantial asset base as those assets would get rolled over into the Active ETF. These two points could serve as big advantages for issuers who go down this route because one of the biggest issues holding investors from being comfortable with Active ETFs is the absence of a long performance history. The oldest actively-managed ETFs have only been around for about 2.5 years and many have also found it hard to achieve scale as investor assets have only trickled in. Mutual fund conversion could potentially side-step both those issues, thereby giving the issuers a strong advantage over competitors in the space.

The topic of mutual fund conversion into actively-managed ETFs has been raised only intermittently. It was first mentioned by Grail Advisors’ CEO, Bill Thomas, who discussed with us the benefits of conversion in an interview back in May. Then in June, Huntington Asset Advisors became the first company to file for the launch of actively-managed ETFs that two of its existing mutual funds would roll into. Randy Bateman, President of Huntington Asset Advisors, spoke with us as well on the subject, describing his firm’s plans in detail. Since then, Oppenheimer has been the first to discuss mutual fund conversion plans.

Glavin also said that it could address the transparency concerns raised from the holdings disclosure required in Active ETFs by launching products in broad markets such as large-cap growth equities, where managers can complete position changes within a day easily. “But in an emerging markets fund, it can take 30 days to unwind a trade, and if we have to disclose that trade on Day One, we can’t do it”, added Glavin.

ETF, Mutual Fund

Neuberger Berman Latest Entrant In Active ETF Arena

November 22nd, 2010

Neuberger Berman, an asset management firm based out of New York, has filed with the SEC to launch actively-managed ETFs. The firm’s filing contained generic details on what type of assets the funds may invest in and what investment strategies it may employ. Firms at this stage of the product development process try to keep their application for exemptive relief from the SEC generic and broad so that if granted, the managers have enough flexibility in the types of investment strategies they can bring market. In this case, Neuberger Berman specified that their funds may invest in equity or fixed-income securities in US or non-US markets, as well as in foreign currencies and possibly other funds and ETFs.

Providing detail on the initial fund planned, the application indicated that its expected investment objective is to seek long-term growth of capital by investing primarily in US and non-US equities that could be small, mid or large-cap stocks. As with all actively-managed ETFs in the US, the fund will provide market participants information regarding any change in portfolio composition on a T+1 basis. Neuberger Berman Management would serve as the advisor to these funds.

Neuberger Berman joins a long list of other major financial players who have shown interest in launching actively-managed ETFs. The SEC though has been slow to grant approval for the numerous filings that have been made from players like Eaton Vance, JP Morgan, Legg Mason, T. Rowe Price and AllianceBernstein. As a result, the approval process can take anywhere from 6 months at the earliest to 2 years as many providers have seen. The lack of clarity from the SEC on their stance on actively-managed ETFs has been a major hurdle for many product managers because their product development cycle becomes entirely dependent on receiving approval for their proposed Active ETFs.

ETF

Chart of the Week: European Stocks Holding Up Well

November 22nd, 2010

Six months ago the European sovereign debt crisis was flaring up and my chart of the week was the Flight-to-Safety Trade.

With the joint EU-IMF bailout of Ireland unfolding over the weekend and the future of Greece and Portugal in the euro zone also being called into question over the course of the past two weeks, this seems like a good time to compare the performance of Europe against some of the other continents.

While relative performance is almost always dependent upon the date one picks as a starting point, I still think many will be surprised to see in this week’s chart of the week below that at least over the course of the past six month,s Europe (VGK) has performed on par with Latin America (ILF) and has significantly outperformed Asia (VPL) and the United States. Should Europe be able to finish the year without giving up any ground to its counterpart regional ETFs, I think the continent should be allowed to exhale and declare victory, at least for 2010.

For more on related subjects, readers are encouraged to check out:

Disclosure(s): none
[source: ETFreplay.com]



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Chart of the Week: European Stocks Holding Up Well

ETF, Uncategorized

The Gold & Silver Play Has Gone To Greed?

November 22nd, 2010

The past few months it seems the gold and silver play has been getting a little crowed with everyone wanting to own gold. While I am a firm believer that these precious metals are a great hedge/investment long term, I can’t help but notice the price action and volume for both metals which looks to me like they are getting exhausted.

Silver – Daily Chart
The silver chart below shows an extremely high volume reversal candle in early November which typically leads to lower prices and some times a major change in the trend. That being said silver remains in an uptrend with the possibility of a bullish pennant forming. On the other hand there is a possible head and shoulders pattern forming. I will be looking for light volume sideways chop keeping a close eye for a possible neckline breakdown or a momentum thrust to the upside for a possible trade.

Gold – Daily Chart
Gold is forming a bullish and bearish pattern also giving us a mixed signal. I am currently neutral on gold and not really looking to take part until we get some type of clear price action.

US Dollar – 60 Minute Chart
The dollar has shown some strength recently. The US dollar play has been to take the short side, and a couple weeks ago we saw the dollar breakdown from yet another consolidation. It seems like everyone shorted the dollar yet again. That could have been a key pivot low for the dollar. On the weekly chart that bounce was off a major support trend line helping add some fuel to the rally I would think.

The chart below shows the recent rally and breakout to the upside. Currently the dollar is pulling back to test the breakout level (support). It will be interesting to see how this week unfolds. If the dollar bounces then we just may see metals break below their necklines to make another heavy volume drop.

Weekly Precious Metals Update:
In short, I have mixed feelings for gold and silver. Yes I think they are good long term plays, but after the run they have had it is also very possible a much deeper correction is about to take place and we may not see new highs for another year. That is a long time to have money sitting in an investment when it can be put to work in other investments. I know the herd (general public) is all head over heals in love with gold and silver which is one of the reasons why I think we are nearing a top if we didn’t already see it a couple weeks ago.

Don’t get me wrong I’m not saying to sell of go short metals… not yet anyways. They are both still in an up trend but some interesting things are unfolding which could cause big action in the coming weeks.

Join my trading newsletter and get my ETF trading signals, daily analysis and educational material: www.TheGoldAndOilGuy.com

Chris Vermeulen

Read more here:
The Gold & Silver Play Has Gone To Greed?




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

The Gold & Silver Play Has Gone To Greed?

November 22nd, 2010

The past few months it seems the gold and silver play has been getting a little crowed with everyone wanting to own gold. While I am a firm believer that these precious metals are a great hedge/investment long term, I can’t help but notice the price action and volume for both metals which looks to me like they are getting exhausted.

Silver – Daily Chart
The silver chart below shows an extremely high volume reversal candle in early November which typically leads to lower prices and some times a major change in the trend. That being said silver remains in an uptrend with the possibility of a bullish pennant forming. On the other hand there is a possible head and shoulders pattern forming. I will be looking for light volume sideways chop keeping a close eye for a possible neckline breakdown or a momentum thrust to the upside for a possible trade.

Gold – Daily Chart
Gold is forming a bullish and bearish pattern also giving us a mixed signal. I am currently neutral on gold and not really looking to take part until we get some type of clear price action.

US Dollar – 60 Minute Chart
The dollar has shown some strength recently. The US dollar play has been to take the short side, and a couple weeks ago we saw the dollar breakdown from yet another consolidation. It seems like everyone shorted the dollar yet again. That could have been a key pivot low for the dollar. On the weekly chart that bounce was off a major support trend line helping add some fuel to the rally I would think.

The chart below shows the recent rally and breakout to the upside. Currently the dollar is pulling back to test the breakout level (support). It will be interesting to see how this week unfolds. If the dollar bounces then we just may see metals break below their necklines to make another heavy volume drop.

Weekly Precious Metals Update:
In short, I have mixed feelings for gold and silver. Yes I think they are good long term plays, but after the run they have had it is also very possible a much deeper correction is about to take place and we may not see new highs for another year. That is a long time to have money sitting in an investment when it can be put to work in other investments. I know the herd (general public) is all head over heals in love with gold and silver which is one of the reasons why I think we are nearing a top if we didn’t already see it a couple weeks ago.

Don’t get me wrong I’m not saying to sell of go short metals… not yet anyways. They are both still in an up trend but some interesting things are unfolding which could cause big action in the coming weeks.

Join my trading newsletter and get my ETF trading signals, daily analysis and educational material: www.TheGoldAndOilGuy.com

Chris Vermeulen

Read more here:
The Gold & Silver Play Has Gone To Greed?




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Four Reasons To Watch Indonesia ETFs

November 22nd, 2010

As emerging Asia continues to remain at the forefront of economic growth, Indonesia has positioned itself in a place to become a global economic powerhouse which would likely benefit the Market Vectors Indonesia Index ETF (IDX) and the iShares MSCI Indonesia Investable Market Index Fund (EIDO).

One reason Indonesia is positioned to fare well in the near term future is its relationship with China.  With its close proximity to the world’s second largest economy, Indonesia has bloomed to be China’s third largest trading partner which has enabled the nation’s GDP to grow and attract foreign investors and is expected to continue to reap these benefits as China continues to grow.  In fact, the International Monetary Fund expects Indonesia to grow nearly 7 percent in the coming year. 

Another reason to consider Indonesia is its supply of resources and relative self-sufficiency.  The nation of islands is a member of OPEC but doesn’t export oil, instead uses its oil production to turn the wheels of its own economy.  By doing so, Indonesia shuns itself from the volatility of crude oil and the potential imbalances in supply and demand of the commodity which could devastate a growing economy.  Furthermore, the Asian nation is rich in other resources which enables it to increase food production as its population becomes wealthier, which helps mitigate the effects of inflation and dependency on other nations. 

Thirdly, Indonesia has a young, robust and educated workforce which often leads to higher productivity and an intangible competitive advantage in the global arena.  More than half of the nation’s population is under the age of 30 and workers are willing to work for a far lower wage than workers in China, making it ideal for manufacturing and outsourcing. 

Lastly, the Indonesia economy is similar to the US economy in that it is self-driven by its own consumers.  Nearly 60 percent of Indonesia’s GDP is generated through domestic consumer spending and research indicates that domestic consumption is improving.   

At the end of the day, an opportunity seems to exist in the aforementioned Indonesian ETFs and investors could potentially look to Indonesia as the developing world continues to figure out a way to spark their respective economies.

  • Market Vectors Indonesia Index ETF (IDX), which allocates 26.8% of its assets to financials, 20.5% to industrials, 15.5% to consumer goods, 12.6% to energy and 9.2% to telecommunications. 
  • iShares MSCI Indonesia Investable Market Index Fund (EIDO), which allocates 29.7% of its assets to financials, 15.4% to industrial materials, 14.3% to consumer services, 13.3% to consumer goods and 11.3% to telecommunications.

Disclosure: No Position

Read more here:
Four Reasons To Watch Indonesia ETFs




HERE IS YOUR FOOTER

ETF, Uncategorized

Four Reasons To Watch Indonesia ETFs

November 22nd, 2010

As emerging Asia continues to remain at the forefront of economic growth, Indonesia has positioned itself in a place to become a global economic powerhouse which would likely benefit the Market Vectors Indonesia Index ETF (IDX) and the iShares MSCI Indonesia Investable Market Index Fund (EIDO).

One reason Indonesia is positioned to fare well in the near term future is its relationship with China.  With its close proximity to the world’s second largest economy, Indonesia has bloomed to be China’s third largest trading partner which has enabled the nation’s GDP to grow and attract foreign investors and is expected to continue to reap these benefits as China continues to grow.  In fact, the International Monetary Fund expects Indonesia to grow nearly 7 percent in the coming year. 

Another reason to consider Indonesia is its supply of resources and relative self-sufficiency.  The nation of islands is a member of OPEC but doesn’t export oil, instead uses its oil production to turn the wheels of its own economy.  By doing so, Indonesia shuns itself from the volatility of crude oil and the potential imbalances in supply and demand of the commodity which could devastate a growing economy.  Furthermore, the Asian nation is rich in other resources which enables it to increase food production as its population becomes wealthier, which helps mitigate the effects of inflation and dependency on other nations. 

Thirdly, Indonesia has a young, robust and educated workforce which often leads to higher productivity and an intangible competitive advantage in the global arena.  More than half of the nation’s population is under the age of 30 and workers are willing to work for a far lower wage than workers in China, making it ideal for manufacturing and outsourcing. 

Lastly, the Indonesia economy is similar to the US economy in that it is self-driven by its own consumers.  Nearly 60 percent of Indonesia’s GDP is generated through domestic consumer spending and research indicates that domestic consumption is improving.   

At the end of the day, an opportunity seems to exist in the aforementioned Indonesian ETFs and investors could potentially look to Indonesia as the developing world continues to figure out a way to spark their respective economies.

  • Market Vectors Indonesia Index ETF (IDX), which allocates 26.8% of its assets to financials, 20.5% to industrials, 15.5% to consumer goods, 12.6% to energy and 9.2% to telecommunications. 
  • iShares MSCI Indonesia Investable Market Index Fund (EIDO), which allocates 29.7% of its assets to financials, 15.4% to industrial materials, 14.3% to consumer services, 13.3% to consumer goods and 11.3% to telecommunications.

Disclosure: No Position

Read more here:
Four Reasons To Watch Indonesia ETFs




HERE IS YOUR FOOTER

ETF, Uncategorized

Viewing the Key Support and Resistance Levels to Watch on China Shanghai

November 21st, 2010

I’ve had a couple of requests lately to take a look at China’s Shanghai index ($SSEC) and indeed there’s something interesting going on in the charts.

Let’s take a look at the confluence support and resistance levels on both the Weekly and Daily charts and set-up the next likely plays depending on how price acts at those levels.

SSEC W

The chart above is the Weekly Structure, wherein the most important immediate information is the confluence resistance at 3,200 and confluence support at 2,800.

Let’s start first with the resistance.

Keeping it as simple as possible, we have a horizontal price trendline from the prior April 2010 high at 3,200 which also intersects with the 200 week SMA, currently positioned at 3,209 (call it 3,200).

Ok – so that held as key resistance last week and hinted at a possible decline which occurred, and now the attention turns to the confluence EMA support at 2,800.

That’s because price rallied off this level this week – it’s the 20w EMA at 2,807 and the 50w EMA at 2,805.  Again – let’s call it 2,800 even for reference to traders.

That sets up the weekly chart structure with the following “IF/THENs”:

IF confluence support holds at 2,800, THEN look to play a potential move back up to the resistance at 3,200.

And of course the alternates:

IF support FAILS at 2,800, look to play a downside break to lower support which might include the September low at 2,600 or even the 2010 low at 2,400.

And… IF confluence resistance should break, look to position long on a move up to prior resistance either at 3,300 or 3,400.

With that in mind, let’s drop down to the daily frame for a tighter reign on price:

Here’s a cool little trick – notice  how price pushed up to the 3,200 high last week and then stalled with reversal candles at the 3,150 area.  A negative momentum divergence formed at the upper Bollinger Band, which sets up an aggressive trade (short).  Price then fell to the lower EMAs in a successful short trade.

That’s what happened on the daily chart, but you could have been better armed to short – if that was your goal – by watching the key 3,200 confluence resistance area (price and moving average) via the Weekly Chart above.

That alone is a good lesson in integrating two timeframes.

Anyway, what we have here is the 200 SMA which might hold as support at the 2,800 level – so far price is bouncing off this important SMA.

Beneath that we have two price levels to watch as potential support – being 2,700 and 2,550 – which are just simple pure price levels from prior zones.

Short-term traders can trade price pivots (bounces) around these key levels, while intermediate-term traders might want to wait for these levels to break or hold before positioning or repositioning if need be.

If this is the beginning of a new price leg down, look for a retest up to the 3,000 level to occur, fail to break above 3,000, and then the new leg down to form.  As such, watching if that retracement materializes, and if so, what happens at 3,000, will be key.

Otherwise, keep focused on the Weekly levels mentioned above.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Viewing the Key Support and Resistance Levels to Watch on China Shanghai

Uncategorized

Viewing the Key Support and Resistance Levels to Watch on China Shanghai

November 21st, 2010

I’ve had a couple of requests lately to take a look at China’s Shanghai index ($SSEC) and indeed there’s something interesting going on in the charts.

Let’s take a look at the confluence support and resistance levels on both the Weekly and Daily charts and set-up the next likely plays depending on how price acts at those levels.

SSEC W

The chart above is the Weekly Structure, wherein the most important immediate information is the confluence resistance at 3,200 and confluence support at 2,800.

Let’s start first with the resistance.

Keeping it as simple as possible, we have a horizontal price trendline from the prior April 2010 high at 3,200 which also intersects with the 200 week SMA, currently positioned at 3,209 (call it 3,200).

Ok – so that held as key resistance last week and hinted at a possible decline which occurred, and now the attention turns to the confluence EMA support at 2,800.

That’s because price rallied off this level this week – it’s the 20w EMA at 2,807 and the 50w EMA at 2,805.  Again – let’s call it 2,800 even for reference to traders.

That sets up the weekly chart structure with the following “IF/THENs”:

IF confluence support holds at 2,800, THEN look to play a potential move back up to the resistance at 3,200.

And of course the alternates:

IF support FAILS at 2,800, look to play a downside break to lower support which might include the September low at 2,600 or even the 2010 low at 2,400.

And… IF confluence resistance should break, look to position long on a move up to prior resistance either at 3,300 or 3,400.

With that in mind, let’s drop down to the daily frame for a tighter reign on price:

Here’s a cool little trick – notice  how price pushed up to the 3,200 high last week and then stalled with reversal candles at the 3,150 area.  A negative momentum divergence formed at the upper Bollinger Band, which sets up an aggressive trade (short).  Price then fell to the lower EMAs in a successful short trade.

That’s what happened on the daily chart, but you could have been better armed to short – if that was your goal – by watching the key 3,200 confluence resistance area (price and moving average) via the Weekly Chart above.

That alone is a good lesson in integrating two timeframes.

Anyway, what we have here is the 200 SMA which might hold as support at the 2,800 level – so far price is bouncing off this important SMA.

Beneath that we have two price levels to watch as potential support – being 2,700 and 2,550 – which are just simple pure price levels from prior zones.

Short-term traders can trade price pivots (bounces) around these key levels, while intermediate-term traders might want to wait for these levels to break or hold before positioning or repositioning if need be.

If this is the beginning of a new price leg down, look for a retest up to the 3,000 level to occur, fail to break above 3,000, and then the new leg down to form.  As such, watching if that retracement materializes, and if so, what happens at 3,000, will be key.

Otherwise, keep focused on the Weekly levels mentioned above.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Viewing the Key Support and Resistance Levels to Watch on China Shanghai

Uncategorized

Wall Street Cover-Ups, Deceptions and Lies

November 21st, 2010

Martin D. Weiss, Ph.D.

Let’s say you put a big chunk of your nest egg in a life insurance policy with an A+ company.

You invest another sizable amount in a portfolio of high-rated corporate bonds and tax-free municipal bonds.

Then, feeling safe and secure with most of your funds, you take a flyer on a few stocks that a dozen separate research analysts have unanimously rated as a “buy” or at least a “hold.”

You assume you’ve made informed decisions based on the best research the world has to offer.

The reality: Even in the absence of bubbles, busts, recessions or dollar collapses, you could suffer wipeout losses.

Hard to believe this could actually happen? Actually, it already has happened; and I want to make absolutely certain you don’t get caught in Wall Street deceptions like these in the future. So this morning, let me tell you what they are.

Their primary source: Legalized payola and massive conflicts of interest.

The primary result: Distorted research and inflated ratings on hundreds of thousands of companies, bonds, stocks, and investments of all kinds.

The threat to you: Far bigger losses in your investments than you would have anticipated otherwise.

Today, I’ll tell you about deceptions in the insurance industry. Next time, we can talk about equally egregious deceptions in other financial sectors.

“Weiss Had Better Shut the
@!%# Up or Get a Bodyguard.”

The year was 1988, and I had been rating the financial strength of the nation’s banks and S&Ls for over a decade.

My father, J. Irving Weiss, already an octogenarian, was helping me with the analysis. And one afternoon I told him that my ratings firm, Weiss Ratings was going to start rating insurance companies.

I can never forget his first words: “Check out First Executive [the parent of Executive Life Insurance],” he said. “Fred Carr’s running it. He’s trouble, and he’s knee deep in junk bonds. Follow the junk and you will find your answers.”

I did, and I found quite a few life insurance companies that were loaded with junk bonds, one of which was First Capital Life, to which we gave a financial strength rating of D-.

I was generous. The company should have gotten an F.

But within days of my widely-publicized warnings on First Capital Life, a gaggle of the company’s lawyers and top executives flew down to our office. They ranted. They raved. They swore they’d slap me with a massive lawsuit and put me out of business if I didn’t give them a better rating. “All the Wall Street ratings agencies give us high grades,” they said. “Who the hell do you think you are?”

I politely explained that we never let personal threats affect our ratings. And unlike other rating agencies, Weiss Ratings never accepts a dime from the companies we rate. “We work for individuals,” I said, “not big corporations. Besides,” I continued, opening up the company’s most recent quarterly report, “your own financial statements prove your company is in trouble.”

That’s when one of them delivered the ultimate threat: “Weiss better shut the @!%# up,” he whispered to my associate, “or get a bodyguard.”

We did neither. To the contrary, we intensified our warnings. And within weeks, the company went belly-up, just as Weiss Ratings had warned — still boasting high ratings from major Wall Street firms on the very day they failed.

In fact, the leading insurance rating agency, A.M. Best, didn’t downgrade First Capital Life to a warning level until five days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company’s stock crashed 99 percent, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the Earth. Three of the company’s closest competitors also bit the dust. Unwitting investors — who did not have access to my ratings — lost $4 billion, $4.5 billion, and $13 billion, respectively.

Fortunately, those who had seen our ratings were ready. Weiss Ratings warned them long before these companies went bust. Nobody who heeded our warning lost a cent.

In fact, the contrast between anyone who relied on Weiss Ratings and anyone who didn’t was so stark, even the U.S. Congress couldn’t help but notice.

Congress asked: How was it possible for Weiss — a small firm in Florida — to identify companies that were about to fail, when Wall Street told us they were still “superior” or “excellent” right up to the day they failed?

To find an answer, Congress called all the rating agencies — Standard & Poor’s (S&P), Moody’s, A.M. Best, Duff & Phelps, and Weiss — to testify. But we were the only ones among them who showed up.

So Congress asked its auditing arm, the U.S. Government Accountability Office (GAO), to conduct a detailed study on the Weiss ratings in comparison to the ratings of the other major rating agencies.

Three years later, after extensive research and review, the GAO published its conclusion: Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren’t even competition.

But the GAO never answered the original question — why?

I can assure you it wasn’t because of better access to information than our competitors. Nor were we smarter than they were. The real answer was contained in one four-letter word: Bias.

To this day, the other rating agencies are paid huge fees by the issuers of bonds, insurance policies and other investments that you buy. In other words, their ratings are literally bought and paid for by the same companies they rate.

These conflicts and bias in the ratings business are no trivial matter.

How Deceptive Ratings Entrapped
Nearly Two Million Americans in Failed
Insurance — and Why It Could
Happen to You!

If you have insurance, don’t blindly assume it’s safe. In a moment, I’ll show you how two million others once made that mistake and lived to regret it. And to help you avoid repeating their error, it’s vital that you understand their story from start to finish.

The problems began in the early 1980s when insurance companies had guaranteed to pay high yields to investors of 10 percent or more, but the best they could earn on safe bonds was 8, 7, or 6 percent. They had to do something to bridge that gap — and quickly.

So how do you deliver high guaranteed yields when interest rates are going down? Their solution: Buy the bonds of financially weaker companies.

Consider, for a moment, what bonds are and you’ll understand the situation. When you buy a bond, all you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the U.S. government or a financially robust corporation, you won’t be able to collect a very high rate of interest.

If you want a truly high interest rate, you need to take the risk of lending your money to a less secure borrower — maybe a start-up company or perhaps a company that’s had some ups and downs in recent years. And you can earn even more interest from companies that have been having “a bit of trouble” paying their bills lately. (Whether you’ll actually be able to collect that interest or get back your principal is another matter entirely.)

What’s secure and what’s risky? In the corporate bond world, everyone agreed to use the standard rating scales originally established by the two leading bond rating agencies — Moody’s and S&P. The two agencies use slightly different letters, but their scale is basically the same: Triple-A, double-A, single-A; triple-B, double-B, single-B; and so on.

If a bond is triple-B or better, it’s investment grade. That’s considered relatively secure. If the bond is double-B or lower, it’s speculative grade, or simply “junk.” It’s not garbage you’d necessarily throw into the trashcan, but in the parlance of Wall Street, it’s officially known as junk.

And that’s what insurance companies started to buy: Junk. They bought double-B bonds. They bought single-B bonds. They even bought unrated bonds that, if rated, would have been classified as junk.

The key to their success was to keep the junk bond aspect hush-hush, while exploiting the faith people still had in the inherent safety of insurance. To make the scheme work, they needed two more elements: The blessing of the Wall Street ratings agencies and the cooperation of the state insurance commissioners, many of whom had worked for — or would later join — those same insurance companies.

The blessing of the rating agencies was relatively easy. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers.

If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: “We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance. It’s a win-win.”

The ratings process was stacked in favor of the companies from start to finish. They were empowered to decide when and if they wanted to be rated. They got a “sneak preview” of their rating before it was revealed to the public. They could appeal the rating if they didn’t like it. And if they still didn’t get a rating they agreed with, they could take it out of circulation by suppressing its publication.

Three newer entrants to the business of rating insurance companies — Moody’s, S&P, and Duff & Phelps (now Fitch) — offered essentially the same deal.

But instead of earning their money from reprints of ratings reports, they simply charged the insurance companies a fat flat fee for each rating — anywhere from $10,000 to $50,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades like candy. At A.M. Best, the grade inflation got so far out of hand that no industry insider would be caught alive buying insurance from a company rated “good” by Best. Nearly everyone (except the customers) knew that Best’s “good” was actually bad.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were getting so concerned about the industry’s bulging investments in junk and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the situation.

What’s a junk bond? The answer, as I’ve explained, was undisputed: any bond with a rating from S&P or Moody’s of double-B or lower. But the insurance companies didn’t like that definition. “You can’t do that to us,” they told the insurance commissioners. “If you use that definition, everybody will see how much junk we have.” The commissioners struggled with this request, but amazingly, they obliged. It was like rewriting history to suit the new king.

This went on for several years. Finally, however, after a few of us screamed and hollered about this sham, the insurance commissioners finally realized they simply could not be a party to the junk bond cover-up any longer. They decided to bite the bullet. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds. It was the beginning of the final act for the giant junk bond insurance companies.

The New York Times was one of the first to pick up the story. Newspapers all over the country soon followed. That’s when the large life and health insurance companies began to fall like dominoes — Executive Life of California, Executive Life of New York, Fidelity Bankers Life, First Capital Life — each and every one dragged down by large junk bond holdings.

And this was just the prelude to the biggest failure of all — Mutual Benefit Life of New Jersey, which fell under the weight of losses in speculative real estate.

How many people were affected? I checked the records of each failed company:

In total, they had exactly 5,950,422 policyholders.

And among these, 1.9 million were fixed annuities and other policies with cash value. If you were one of the 1.9 million, your money was frozen. The authorities wouldn’t let you cash out your policy. They wouldn’t even let you borrow on your policy.

What about the legal mandate for the guarantee funds to reimburse policyholders in failed companies? The authorities put their heads together and came up with a “creative” solution:

To avoid invoking the guarantee system, they simply decided to change the definition of when a failed company fails. Instead of declaring that the bankrupt companies were bankrupt, they decided to call them “financially impaired,” or “in rehabilitation.”

Then, after many months, the authorities created new companies with new, reformed annuities yielding far less than the original policies. They gave policyholders two choices. Either:

  • “Opt in” to the new company and accept a loss of yield for years to come, or …
  • “Opt out” and accept their share of whatever cash was available, often as little as 50 cents on the dollar.

It was the greatest disaster in the history of insurance!

So You’d Think That the Insurance
Industry Would Have Learned Its Lessons.

Not So!

Like the failed insurers of the 1990s, several large U.S. insurance companies, on the prowl for high yields, invested again in high-risk instruments. Junk bonds were still stigmatized, but a handy substitute for junk was readily available: Subprime mortgages.

And to make things even more exciting, some insurers added a whole new layer of risk: A special kind of bet known as a credit default swap (CDS) — a bet placed on the probability of another company’s failure.

Remember, in the prior episode, the rating agencies collected large fees from the companies for each grade. That, in turn, introduced serious conflicts of interest into the process and often biased the ratings in favor of the companies.

This time around, they did precisely the same thing: They collected the same kind of big fees. They gave out the same kind of top-notch ratings. And they covered up the same kind of massive risks.

In addition, S&P, Moody’s, and Fitch created a whole new layer of conflicts and bias: They hired themselves out as consultants to help create newfangled debt-backed securities, giving them a true lock on the industry: They created the securities.

They rated the securities. And then they rated the companies that bought the securities, collecting fat fees at each stage of the process.

Not only did that pad the bottom line of the rating agencies, it also gave them stronger reasons to inflate the ratings, ignore warning signs, postpone downgrades, and avoid anything that might bring down the debt pyramid they had helped to create.

The repercussions of this disaster were at the heart of the debt crisis, and as a part of the Regulatory Reform Act of 2010, Congress sought to address them. But …

The Fundamental Business
Model of the Big Four Rating
Agencies Has Not Changed.

To this day, the insurance companies are still rated by the same rating agencies, in the same way with the same conflicts of interest.

This is also how the Wall Street rating agencies rate every issuer of corporate bonds, municipal bonds, mortgage-backed securities, and more.

ALL of the Big Four rating agencies — Moody’s, Standard & Poor’s, Fitch, and A.M. Best — continue to collect large fees from the companies they rate.

And the obvious conflict of interest that naturally flows from that financial relationship persists, leaving the danger of more ratings fiascos to come.

Next month, I will provide a solution to help you make sure your money is safe and STAYS safe. Stand by.

Good luck and God bless!

Martin

Read more here:
Wall Street Cover-Ups, Deceptions and Lies

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

Wall Street Cover-Ups, Deceptions and Lies

November 21st, 2010

Martin D. Weiss, Ph.D.

Let’s say you put a big chunk of your nest egg in a life insurance policy with an A+ company.

You invest another sizable amount in a portfolio of high-rated corporate bonds and tax-free municipal bonds.

Then, feeling safe and secure with most of your funds, you take a flyer on a few stocks that a dozen separate research analysts have unanimously rated as a “buy” or at least a “hold.”

You assume you’ve made informed decisions based on the best research the world has to offer.

The reality: Even in the absence of bubbles, busts, recessions or dollar collapses, you could suffer wipeout losses.

Hard to believe this could actually happen? Actually, it already has happened; and I want to make absolutely certain you don’t get caught in Wall Street deceptions like these in the future. So this morning, let me tell you what they are.

Their primary source: Legalized payola and massive conflicts of interest.

The primary result: Distorted research and inflated ratings on hundreds of thousands of companies, bonds, stocks, and investments of all kinds.

The threat to you: Far bigger losses in your investments than you would have anticipated otherwise.

Today, I’ll tell you about deceptions in the insurance industry. Next time, we can talk about equally egregious deceptions in other financial sectors.

“Weiss Had Better Shut the
@!%# Up or Get a Bodyguard.”

The year was 1988, and I had been rating the financial strength of the nation’s banks and S&Ls for over a decade.

My father, J. Irving Weiss, already an octogenarian, was helping me with the analysis. And one afternoon I told him that my ratings firm, Weiss Ratings was going to start rating insurance companies.

I can never forget his first words: “Check out First Executive [the parent of Executive Life Insurance],” he said. “Fred Carr’s running it. He’s trouble, and he’s knee deep in junk bonds. Follow the junk and you will find your answers.”

I did, and I found quite a few life insurance companies that were loaded with junk bonds, one of which was First Capital Life, to which we gave a financial strength rating of D-.

I was generous. The company should have gotten an F.

But within days of my widely-publicized warnings on First Capital Life, a gaggle of the company’s lawyers and top executives flew down to our office. They ranted. They raved. They swore they’d slap me with a massive lawsuit and put me out of business if I didn’t give them a better rating. “All the Wall Street ratings agencies give us high grades,” they said. “Who the hell do you think you are?”

I politely explained that we never let personal threats affect our ratings. And unlike other rating agencies, Weiss Ratings never accepts a dime from the companies we rate. “We work for individuals,” I said, “not big corporations. Besides,” I continued, opening up the company’s most recent quarterly report, “your own financial statements prove your company is in trouble.”

That’s when one of them delivered the ultimate threat: “Weiss better shut the @!%# up,” he whispered to my associate, “or get a bodyguard.”

We did neither. To the contrary, we intensified our warnings. And within weeks, the company went belly-up, just as Weiss Ratings had warned — still boasting high ratings from major Wall Street firms on the very day they failed.

In fact, the leading insurance rating agency, A.M. Best, didn’t downgrade First Capital Life to a warning level until five days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company’s stock crashed 99 percent, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the Earth. Three of the company’s closest competitors also bit the dust. Unwitting investors — who did not have access to my ratings — lost $4 billion, $4.5 billion, and $13 billion, respectively.

Fortunately, those who had seen our ratings were ready. Weiss Ratings warned them long before these companies went bust. Nobody who heeded our warning lost a cent.

In fact, the contrast between anyone who relied on Weiss Ratings and anyone who didn’t was so stark, even the U.S. Congress couldn’t help but notice.

Congress asked: How was it possible for Weiss — a small firm in Florida — to identify companies that were about to fail, when Wall Street told us they were still “superior” or “excellent” right up to the day they failed?

To find an answer, Congress called all the rating agencies — Standard & Poor’s (S&P), Moody’s, A.M. Best, Duff & Phelps, and Weiss — to testify. But we were the only ones among them who showed up.

So Congress asked its auditing arm, the U.S. Government Accountability Office (GAO), to conduct a detailed study on the Weiss ratings in comparison to the ratings of the other major rating agencies.

Three years later, after extensive research and review, the GAO published its conclusion: Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren’t even competition.

But the GAO never answered the original question — why?

I can assure you it wasn’t because of better access to information than our competitors. Nor were we smarter than they were. The real answer was contained in one four-letter word: Bias.

To this day, the other rating agencies are paid huge fees by the issuers of bonds, insurance policies and other investments that you buy. In other words, their ratings are literally bought and paid for by the same companies they rate.

These conflicts and bias in the ratings business are no trivial matter.

How Deceptive Ratings Entrapped
Nearly Two Million Americans in Failed
Insurance — and Why It Could
Happen to You!

If you have insurance, don’t blindly assume it’s safe. In a moment, I’ll show you how two million others once made that mistake and lived to regret it. And to help you avoid repeating their error, it’s vital that you understand their story from start to finish.

The problems began in the early 1980s when insurance companies had guaranteed to pay high yields to investors of 10 percent or more, but the best they could earn on safe bonds was 8, 7, or 6 percent. They had to do something to bridge that gap — and quickly.

So how do you deliver high guaranteed yields when interest rates are going down? Their solution: Buy the bonds of financially weaker companies.

Consider, for a moment, what bonds are and you’ll understand the situation. When you buy a bond, all you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the U.S. government or a financially robust corporation, you won’t be able to collect a very high rate of interest.

If you want a truly high interest rate, you need to take the risk of lending your money to a less secure borrower — maybe a start-up company or perhaps a company that’s had some ups and downs in recent years. And you can earn even more interest from companies that have been having “a bit of trouble” paying their bills lately. (Whether you’ll actually be able to collect that interest or get back your principal is another matter entirely.)

What’s secure and what’s risky? In the corporate bond world, everyone agreed to use the standard rating scales originally established by the two leading bond rating agencies — Moody’s and S&P. The two agencies use slightly different letters, but their scale is basically the same: Triple-A, double-A, single-A; triple-B, double-B, single-B; and so on.

If a bond is triple-B or better, it’s investment grade. That’s considered relatively secure. If the bond is double-B or lower, it’s speculative grade, or simply “junk.” It’s not garbage you’d necessarily throw into the trashcan, but in the parlance of Wall Street, it’s officially known as junk.

And that’s what insurance companies started to buy: Junk. They bought double-B bonds. They bought single-B bonds. They even bought unrated bonds that, if rated, would have been classified as junk.

The key to their success was to keep the junk bond aspect hush-hush, while exploiting the faith people still had in the inherent safety of insurance. To make the scheme work, they needed two more elements: The blessing of the Wall Street ratings agencies and the cooperation of the state insurance commissioners, many of whom had worked for — or would later join — those same insurance companies.

The blessing of the rating agencies was relatively easy. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers.

If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: “We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance. It’s a win-win.”

The ratings process was stacked in favor of the companies from start to finish. They were empowered to decide when and if they wanted to be rated. They got a “sneak preview” of their rating before it was revealed to the public. They could appeal the rating if they didn’t like it. And if they still didn’t get a rating they agreed with, they could take it out of circulation by suppressing its publication.

Three newer entrants to the business of rating insurance companies — Moody’s, S&P, and Duff & Phelps (now Fitch) — offered essentially the same deal.

But instead of earning their money from reprints of ratings reports, they simply charged the insurance companies a fat flat fee for each rating — anywhere from $10,000 to $50,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades like candy. At A.M. Best, the grade inflation got so far out of hand that no industry insider would be caught alive buying insurance from a company rated “good” by Best. Nearly everyone (except the customers) knew that Best’s “good” was actually bad.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were getting so concerned about the industry’s bulging investments in junk and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the situation.

What’s a junk bond? The answer, as I’ve explained, was undisputed: any bond with a rating from S&P or Moody’s of double-B or lower. But the insurance companies didn’t like that definition. “You can’t do that to us,” they told the insurance commissioners. “If you use that definition, everybody will see how much junk we have.” The commissioners struggled with this request, but amazingly, they obliged. It was like rewriting history to suit the new king.

This went on for several years. Finally, however, after a few of us screamed and hollered about this sham, the insurance commissioners finally realized they simply could not be a party to the junk bond cover-up any longer. They decided to bite the bullet. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds. It was the beginning of the final act for the giant junk bond insurance companies.

The New York Times was one of the first to pick up the story. Newspapers all over the country soon followed. That’s when the large life and health insurance companies began to fall like dominoes — Executive Life of California, Executive Life of New York, Fidelity Bankers Life, First Capital Life — each and every one dragged down by large junk bond holdings.

And this was just the prelude to the biggest failure of all — Mutual Benefit Life of New Jersey, which fell under the weight of losses in speculative real estate.

How many people were affected? I checked the records of each failed company:

In total, they had exactly 5,950,422 policyholders.

And among these, 1.9 million were fixed annuities and other policies with cash value. If you were one of the 1.9 million, your money was frozen. The authorities wouldn’t let you cash out your policy. They wouldn’t even let you borrow on your policy.

What about the legal mandate for the guarantee funds to reimburse policyholders in failed companies? The authorities put their heads together and came up with a “creative” solution:

To avoid invoking the guarantee system, they simply decided to change the definition of when a failed company fails. Instead of declaring that the bankrupt companies were bankrupt, they decided to call them “financially impaired,” or “in rehabilitation.”

Then, after many months, the authorities created new companies with new, reformed annuities yielding far less than the original policies. They gave policyholders two choices. Either:

  • “Opt in” to the new company and accept a loss of yield for years to come, or …
  • “Opt out” and accept their share of whatever cash was available, often as little as 50 cents on the dollar.

It was the greatest disaster in the history of insurance!

So You’d Think That the Insurance
Industry Would Have Learned Its Lessons.

Not So!

Like the failed insurers of the 1990s, several large U.S. insurance companies, on the prowl for high yields, invested again in high-risk instruments. Junk bonds were still stigmatized, but a handy substitute for junk was readily available: Subprime mortgages.

And to make things even more exciting, some insurers added a whole new layer of risk: A special kind of bet known as a credit default swap (CDS) — a bet placed on the probability of another company’s failure.

Remember, in the prior episode, the rating agencies collected large fees from the companies for each grade. That, in turn, introduced serious conflicts of interest into the process and often biased the ratings in favor of the companies.

This time around, they did precisely the same thing: They collected the same kind of big fees. They gave out the same kind of top-notch ratings. And they covered up the same kind of massive risks.

In addition, S&P, Moody’s, and Fitch created a whole new layer of conflicts and bias: They hired themselves out as consultants to help create newfangled debt-backed securities, giving them a true lock on the industry: They created the securities.

They rated the securities. And then they rated the companies that bought the securities, collecting fat fees at each stage of the process.

Not only did that pad the bottom line of the rating agencies, it also gave them stronger reasons to inflate the ratings, ignore warning signs, postpone downgrades, and avoid anything that might bring down the debt pyramid they had helped to create.

The repercussions of this disaster were at the heart of the debt crisis, and as a part of the Regulatory Reform Act of 2010, Congress sought to address them. But …

The Fundamental Business
Model of the Big Four Rating
Agencies Has Not Changed.

To this day, the insurance companies are still rated by the same rating agencies, in the same way with the same conflicts of interest.

This is also how the Wall Street rating agencies rate every issuer of corporate bonds, municipal bonds, mortgage-backed securities, and more.

ALL of the Big Four rating agencies — Moody’s, Standard & Poor’s, Fitch, and A.M. Best — continue to collect large fees from the companies they rate.

And the obvious conflict of interest that naturally flows from that financial relationship persists, leaving the danger of more ratings fiascos to come.

Next month, I will provide a solution to help you make sure your money is safe and STAYS safe. Stand by.

Good luck and God bless!

Martin

Read more here:
Wall Street Cover-Ups, Deceptions and Lies

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

How to Make Sure All Your Investments Are Secure

November 21st, 2010

Martin D. Weiss, Ph.D.

In it, I give you a very simple method to help greatly improve the probability that ALL the specific investments that you own — or are about to buy — are among the safest choices you can make.

I want you to make safer profits in stocks, mutual funds or ETFs … find the safest banks for your CDs, money markets and checking accounts … and buy strictly the safest life insurance, annuities and health insurance. Plus I want to help you …

Avoid the Deceptions, Cover-Ups and
Lies Still Common on Wall Street

Let’s say you put a big chunk of your nest egg in a life insurance policy with an A+ company.

You invest another sizable amount in a portfolio of high-rated corporate bonds and tax-free municipal bonds.

Then, feeling safe and secure with most of your funds, you take a flyer on a few stocks that a dozen separate research analysts have unanimously rated as a “buy” or at least a “hold.”

You assume you’ve made informed decisions based on the best research the world has to offer.

The reality: Even in the absence of bubbles, busts, recessions or dollar collapses, you could suffer wipeout losses.

Hard to believe this could actually happen? Actually, it already has happened; and I want to make absolutely certain you don’t get caught in Wall Street deceptions like these in the future. So this morning, let me tell you what they are.

Their primary source: Legalized payola and massive conflicts of interest.

The primary result: Distorted research and inflated ratings on hundreds of thousands of companies, bonds, stocks, and investments of all kinds.

The threat to you: Far bigger losses in your investments than you would have anticipated otherwise.

Today, I’ll tell you about deceptions in the insurance industry. Next time, we can talk about equally egregious deceptions in other financial sectors.

“Weiss Had Better Shut the
@!%# Up or Get a Bodyguard.”

The year was 1988, and I had been rating the financial strength of the nation’s banks and S&Ls for over a decade.

My father, J. Irving Weiss, already an octogenarian, was helping me with the analysis. And one afternoon I told him that my ratings firm, Weiss Ratings was going to start rating insurance companies.

I can never forget his first words: “Check out First Executive [the parent of Executive Life Insurance],” he said. “Fred Carr’s running it. He’s trouble, and he’s knee deep in junk bonds. Follow the junk and you will find your answers.”

I did, and I found quite a few life insurance companies that were loaded with junk bonds, one of which was First Capital Life, to which we gave a financial strength rating of D-.

I was generous. The company should have gotten an F.

But within days of my widely-publicized warnings on First Capital Life, a gaggle of the company’s lawyers and top executives flew down to our office. They ranted. They raved. They swore they’d slap me with a massive lawsuit and put me out of business if I didn’t give them a better rating. “All the Wall Street ratings agencies give us high grades,” they said. “Who the hell do you think you are?”

I politely explained that we never let personal threats affect our ratings. And unlike other rating agencies, Weiss Ratings never accepts a dime from the companies we rate. “We work for individuals,” I said, “not big corporations. Besides,” I continued, opening up the company’s most recent quarterly report, “your own financial statements prove your company is in trouble.”

That’s when one of them delivered the ultimate threat: “Weiss better shut the @!%# up,” he whispered to my associate, “or get a bodyguard.”

We did neither. To the contrary, we intensified our warnings. And within weeks, the company went belly-up, just as Weiss Ratings had warned — still boasting high ratings from major Wall Street firms on the very day they failed.

In fact, the leading insurance rating agency, A.M. Best, didn’t downgrade First Capital Life to a warning level until five days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company’s stock crashed 99 percent, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the Earth. Three of the company’s closest competitors also bit the dust. Unwitting investors — who did not have access to my ratings — lost $4 billion, $4.5 billion, and $13 billion, respectively.

Fortunately, those who had seen our ratings were ready. Weiss Ratings warned them long before these companies went bust. Nobody who heeded our warning lost a cent.

In fact, the contrast between anyone who relied on Weiss Ratings and anyone who didn’t was so stark, even the U.S. Congress couldn’t help but notice.

Congress asked: How was it possible for Weiss — a small firm in Florida — to identify companies that were about to fail, when Wall Street told us they were still “superior” or “excellent” right up to the day they failed?

To find an answer, Congress called all the rating agencies — Standard & Poor’s (S&P), Moody’s, A.M. Best, Duff & Phelps, and Weiss — to testify. But we were the only ones among them who showed up.

So Congress asked its auditing arm, the U.S. Government Accountability Office (GAO), to conduct a detailed study on the Weiss ratings in comparison to the ratings of the other major rating agencies.

Three years later, after extensive research and review, the GAO published its conclusion: Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren’t even competition.

But the GAO never answered the original question — why?

I can assure you it wasn’t because of better access to information than our competitors. Nor were we smarter than they were. The real answer was contained in one four-letter word: Bias.

To this day, the other rating agencies are paid huge fees by the issuers of bonds, insurance policies and other investments that you buy. In other words, their ratings are literally bought and paid for by the same companies they rate.

These conflicts and bias in the ratings business are no trivial matter.

How Deceptive Ratings Entrapped
Nearly Two Million Americans in Failed
Insurance — and Why It Could
Happen to You!

If you have insurance, don’t blindly assume it’s safe. In a moment, I’ll show you how two million others once made that mistake and lived to regret it. And to help you avoid repeating their error, it’s vital that you understand their story from start to finish.

The problems began in the early 1980s when insurance companies had guaranteed to pay high yields to investors of 10 percent or more, but the best they could earn on safe bonds was 8, 7, or 6 percent. They had to do something to bridge that gap — and quickly.

So how do you deliver high guaranteed yields when interest rates are going down? Their solution: Buy the bonds of financially weaker companies.

Consider, for a moment, what bonds are and you’ll understand the situation. When you buy a bond, all you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the U.S. government or a financially robust corporation, you won’t be able to collect a very high rate of interest.

If you want a truly high interest rate, you need to take the risk of lending your money to a less secure borrower — maybe a start-up company or perhaps a company that’s had some ups and downs in recent years. And you can earn even more interest from companies that have been having “a bit of trouble” paying their bills lately. (Whether you’ll actually be able to collect that interest or get back your principal is another matter entirely.)

What’s secure and what’s risky? In the corporate bond world, everyone agreed to use the standard rating scales originally established by the two leading bond rating agencies — Moody’s and S&P. The two agencies use slightly different letters, but their scale is basically the same: Triple-A, double-A, single-A; triple-B, double-B, single-B; and so on.

If a bond is triple-B or better, it’s investment grade. That’s considered relatively secure. If the bond is double-B or lower, it’s speculative grade, or simply “junk.” It’s not garbage you’d necessarily throw into the trashcan, but in the parlance of Wall Street, it’s officially known as junk.

And that’s what insurance companies started to buy: Junk. They bought double-B bonds. They bought single-B bonds. They even bought unrated bonds that, if rated, would have been classified as junk.

The key to their success was to keep the junk bond aspect hush-hush, while exploiting the faith people still had in the inherent safety of insurance. To make the scheme work, they needed two more elements: The blessing of the Wall Street ratings agencies and the cooperation of the state insurance commissioners, many of whom had worked for — or would later join — those same insurance companies.

The blessing of the rating agencies was relatively easy. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers.

If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: “We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance. It’s a win-win.”

The ratings process was stacked in favor of the companies from start to finish. They were empowered to decide when and if they wanted to be rated. They got a “sneak preview” of their rating before it was revealed to the public. They could appeal the rating if they didn’t like it. And if they still didn’t get a rating they agreed with, they could take it out of circulation by suppressing its publication.

Three newer entrants to the business of rating insurance companies — Moody’s, S&P, and Duff & Phelps (now Fitch) — offered essentially the same deal.

But instead of earning their money from reprints of ratings reports, they simply charged the insurance companies a fat flat fee for each rating — anywhere from $10,000 to $50,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades like candy. At A.M. Best, the grade inflation got so far out of hand that no industry insider would be caught alive buying insurance from a company rated “good” by Best. Nearly everyone (except the customers) knew that Best’s “good” was actually bad.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were getting so concerned about the industry’s bulging investments in junk and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the situation.

What’s a junk bond? The answer, as I’ve explained, was undisputed: any bond with a rating from S&P or Moody’s of double-B or lower. But the insurance companies didn’t like that definition. “You can’t do that to us,” they told the insurance commissioners. “If you use that definition, everybody will see how much junk we have.” The commissioners struggled with this request, but amazingly, they obliged. It was like rewriting history to suit the new king.

This went on for several years. Finally, however, after a few of us screamed and hollered about this sham, the insurance commissioners finally realized they simply could not be a party to the junk bond cover-up any longer. They decided to bite the bullet. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds. It was the beginning of the final act for the giant junk bond insurance companies.

The New York Times was one of the first to pick up the story. Newspapers all over the country soon followed. That’s when the large life and health insurance companies began to fall like dominoes — Executive Life of California, Executive Life of New York, Fidelity Bankers Life, First Capital Life — each and every one dragged down by large junk bond holdings.

And this was just the prelude to the biggest failure of all — Mutual Benefit Life of New Jersey, which fell under the weight of losses in speculative real estate.

How many people were affected? I checked the records of each failed company:

In total, they had exactly 5,950,422 policyholders.

And among these, 1.9 million were fixed annuities and other policies with cash value. If you were one of the 1.9 million, your money was frozen. The authorities wouldn’t let you cash out your policy. They wouldn’t even let you borrow on your policy.

What about the legal mandate for the guarantee funds to reimburse policyholders in failed companies? The authorities put their heads together and came up with a “creative” solution:

To avoid invoking the guarantee system, they simply decided to change the definition of when a failed company fails. Instead of declaring that the bankrupt companies were bankrupt, they decided to call them “financially impaired,” or “in rehabilitation.”

Then, after many months, the authorities created new companies with new, reformed annuities yielding far less than the original policies. They gave policyholders two choices. Either:

  • “Opt in” to the new company and accept a loss of yield for years to come, or …
  • “Opt out” and accept their share of whatever cash was available, often as little as 50 cents on the dollar.

It was the greatest disaster in the history of insurance!

So You’d Think That the Insurance
Industry Would Have Learned Its Lessons.

Not So!

Like the failed insurers of the 1990s, several large U.S. insurance companies, on the prowl for high yields, invested again in high-risk instruments. Junk bonds were still stigmatized, but a handy substitute for junk was readily available: Subprime mortgages.

And to make things even more exciting, some insurers added a whole new layer of risk: A special kind of bet known as a credit default swap (CDS) — a bet placed on the probability of another company’s failure.

Remember, in the prior episode, the rating agencies collected large fees from the companies for each grade. That, in turn, introduced serious conflicts of interest into the process and often biased the ratings in favor of the companies.

This time around, they did precisely the same thing: They collected the same kind of big fees. They gave out the same kind of top-notch ratings. And they covered up the same kind of massive risks.

In addition, S&P, Moody’s, and Fitch created a whole new layer of conflicts and bias: They hired themselves out as consultants to help create newfangled debt-backed securities, giving them a true lock on the industry: They created the securities.

They rated the securities. And then they rated the companies that bought the securities, collecting fat fees at each stage of the process.

Not only did that pad the bottom line of the rating agencies, it also gave them stronger reasons to inflate the ratings, ignore warning signs, postpone downgrades, and avoid anything that might bring down the debt pyramid they had helped to create.

The repercussions of this disaster were at the heart of the debt crisis, and as a part of the Regulatory Reform Act of 2010, Congress sought to address them. But …

The Fundamental Business
Model of the Big Four Rating
Agencies Has Not Changed.

To this day, the insurance companies are still rated by the same rating agencies, in the same way with the same conflicts of interest.

This is also how the Wall Street rating agencies rate every issuer of corporate bonds, municipal bonds, mortgage-backed securities, and more.

ALL of the Big Four rating agencies — Moody’s, Standard & Poor’s, Fitch, and A.M. Best — continue to collect large fees from the companies they rate.

And the obvious conflict of interest that naturally flows from that financial relationship persists, leaving the danger of more ratings fiascos to come.

Good luck and God bless!

Martin

Read more here:
How to Make Sure All Your Investments Are Secure

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