Wednesday, September 15, 2021

Weak Oversight Plagues Audits of Billions in Private Assets

Having seen the way that companies with debt are calculating EBITDA and cash flow this does not come as a surprise....Aivars Lode

"Research by the government and data from the auditing industry trade group show significant flaws in audits of private organizations, particularly those done by smaller firms.
This self-policing system covers the vast majority of U.S. audits, including more than 5 million private companies, some with billions in revenue, Labor Department data show. It also affects tens of thousands of pension funds, endowments, local governments, charities and billions in government grants, according to the auditing industry trade group. Investors in these companies, pensioners, donors to charities and local taxpayers are among those who could lose if auditors fail to detect problems."
Click to read full article: Weak Oversight Plagues Audits of Billions in Private Assets
By Jean Eaglesham and Coulter Jones from Wall Street Journal

Tuesday, March 9, 2021

Two Worlds: So Much Prosperity, So Much Skepticism

 Don’t know what this means for the stock market... Aivars Lode

The demand for forecasts grows after a surprise. It’s quite an irony. Surprises make you feel like you’re not in control, which is when it feels best to grab the wheel with both hands, listening to those who tell you what happens next despite being blindsided by what just happened.
That’s where we are with Covid and the economy. Ten months after the surprise of our lifetimes, everyone wants a clear map of the future. Who wins? Who loses? When will travel recover? Will work be the same? Have we learned our lesson?
But the most important economic stories don’t require forecasts; they’ve already happened. And they tend to be the most overlooked, because when everyone’s focused on the future it’s easy to ignore what’s sitting right in front of us.
I want to tell you two of the biggest economic stories that aren’t getting enough attention.
One is that household finances might be in the best shape they’ve ever been in. Ever. That might sound crazy, and it’s easy to overlook because of the second story: Covid has dumped kerosene on wealth inequality in ways we’ve yet to fully grasp.
To read this interesting blog by Morgan Housel click below:

https://www.collaborativefund.com/blog/two-worlds/

Wednesday, January 27, 2021

How Volkswagen’s $50 Billion Plan to Beat Tesla Short-Circuited

Interesting article and points to why Tesla may end up being like Amazon ... successful and dominant.  Aivars Lode

Five years and nearly $50 billion into the auto industry’s biggest bet on electric vehicles, Volkswagen CEO Herbert Diess and his guest, Chancellor Angela Merkel, stood in anticipation as the first ID.3, Germany’s long-awaited answer to Tesla, rolled off the assembly line.

The event at the company’s flagship EV plant just over a year ago marked a “systemic shift from the combustion engine to the electric vehicle,” said Thomas Ulbrich, leader of the ID.3 effort.

The car, however, didn’t work as advertised. 

It could drive, turn corners and stop on a dime. But the fancy technology features VW had promised were either absent or broken. The company’s programmers hadn’t yet figured out how to update the car’s software remotely. Its futuristic head-up display that was supposed to flash speed, directions and other data onto the windshield didn’t function. Early owners began reporting hundreds of other software bugs.

After years of development, Volkswagen decided in June last year to delay the launch and sell the first batch of cars without a full array of software, pending a future update, which is now scheduled for mid-February. Tens of thousands of ID.3 owners will have to bring their cars in for service to have the new software installed.

“After that the software will be regularly updated over the air,” Mr. Ulbrich said in an interview. 

Friday, October 30, 2020

Bond defaults mean almost total losses in new era of bankruptcies

Could this be the trigger for the Stockmarket's next crash?  Aivars Lode

Three cents. Two cents. Even a mere 0.125 cents on the dollar.

More and more, these are the kinds of scraps that bondholders are fighting over as companies go belly up.

Bankruptcy filings are surging due to the economic fallout from COVID-19, and many lenders are coming to the realization that their claims are almost completely worthless. Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies — if that.

While few could have foreseen the pandemic’s toll on the economy, the depth of investors’ pain from corporate distress was all too predictable. Desperate to generate higher returns during a decade of rock-bottom interest rates, money managers bargained away legal protections, accepted ever-widening loopholes, and turned a blind eye to questionable earnings projections. Corporations, for their part, took full advantage and gorged on astronomical amounts of debt that many now cannot repay or refinance.

It’s a stark reminder of the long-lasting repercussions of the Federal Reserve’s unprecedented easy money policies. Ultra-low rates helped risky companies sell bonds with fewer safeguards, which creditors seeking higher returns were happy to accept. Now, amid a new bout of economic pain, the effects of those policies are coming to bear.

Debt issued by the owner of Men’s Wearhouse, which filed for court protection in August, traded this month for less than 2 cents on the dollar. When J.C. Penney Co. went bankrupt, an auction held for holders of default protection found the retailer’s lowest-priced debt was worth just 0.125 cents on the dollar. For Neiman Marcus Group Inc., that figure was 3 cents.


The loose lending terms that investors have agreed to mean that by the time corporations file for bankruptcy now, they’ve often exhausted their options for fixing their debt loads out of court. They’ve swapped their old notes for new ones, often borrowing against even more of their assets in the process. Some have taken brand names, trademarks and even whole businesses out of the reach of existing creditors and borrowed against those too. While creditors always do worse in economic downturns than in better times, in previous downturns, lenders had more power to press companies into bankruptcy sooner, stemming some of their losses.

The pandemic is upending industries like retail and energy, making it unclear how much assets like stores and oil wells will be worth in the future. The underlying problem for many companies, though, is that they have astronomical levels of debt after borrowing with abandon over the previous decade, then topping up with more to get them through the pandemic.

For bondholders, the kind of liabilities that companies have added makes the problem worse. Loans have been a particularly cheap form of debt for many companies over the last decade. Those borrowings are usually secured by assets, leaving many corporations with more secured debt than they’ve had historically. That means that unsecured bondholders end up with less when borrowers go broke.

“We’ll see companies gradually hitting the wall — it’s just a question of when and how fast,” said Dan Zwirn, founder of Arena Investors, a $1.7 billion investment firm with an emphasis on credit. “There’s just going to be way more downside.”

By Bloomberg Investment News

Wednesday, September 30, 2020

JPMorgan Paying $920 Million to Resolve Market Manipulation Probes

See Chapter 4 of my first book "This Time It's Different - Not!" that describes how commodities get manipulated. I wrote about this more than a decade ago... and it's still going on.   Aivars Lode


JP MORGAN Chase & Co. agreed to pay $920 million and admit misconduct tied to manipulation of precious-metals and Treasury markets, regulators said Tuesday.

The settlement resolves investigations by the Justice Department, Commodity Futures Trading Commission and the Securities and Exchange Commission. The fine is the largest the CFTC has ever imposed for spoofing, a type of market manipulation, the agency said.

“Spoofing is illegal—pure and simple,” CFTC Chairman Heath Tarbert said. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are.”

The settlement is just the latest move from prosecutors and regulators that began cracking down on spoofing in 2014. Since then, the Justice Department has charged 20 people with spoofing-related crimes, and banks and other financial institutions have collectively paid more than $1 billion in fines tied to civil and criminal spoofing probes.

The agreement announced Tuesday is particularly notable because it involved claims that traders spoofed to manipulate the price of Treasury securities, one of the largest and most liquid trading markets in the world.

Spoofers enter and quickly cancel large orders in an effort to deceive others about supply and demand. The tactic can move prices in a direction the spoofer favors.

Four former JPMorgan precious-metals traders were charged last year with crimes tied to spoofing, including racketeering, an offense more typically found in cases against organized crime entities. The traders have pleaded not guilty and are fighting the charges. Two other ex-JPMorgan traders pleaded guilty in 2018 and 2019 to crimes tied to spoofing of precious metals futures.

The unlawful trading in gold, silver and other precious metals involved a total of 10 traders, according to Justice Department documents made public Tuesday.

Two traders who formerly worked at Deutsche Bank AG were convicted last week in Chicago federal court of wire fraud tied to spoofing allegations. The traders were acquitted on one count of conspiracy.

Congress outlawed spoofing in the 2010 Dodd-Frank financial overhaul law, making it easier for regulators and prosecutors to punish conduct they believed was manipulative. The Justice Department’s Fraud Section, based in Washington, has been particularly active going after individual traders accused of spoofing. 

“Dodd Frank made it very clear, that this is against the law to do and there are now personal consequences—you can go to jail if you spoof,” said Travis Schwab, chief executive of Eventus Systems Inc., a trading surveillance and risk-management software provider. “That really ratchets up the bar who is involved in these cases—that goes to Justice being involved as opposed to just the regulator—and it ratchets up the consequences.” 

The agencies’ announcements confirm news of the fine that was first reported last week. The claims include allegations that JPMorgan traders manipulated Treasury securities from 2015 to 2016, the SEC said in a settlement order. 

The Justice Department said JPMorgan agreed to a deferred prosecution agreement through which the bank admitted wrongdoing on its precious-metals and Treasuries trading desks. The deal suspends a prosecution of the bank on two counts of wire fraud and requires JPMorgan to cooperate with related investigations and continue improving its compliance and oversight programs.

The SEC’s investigation involved spoofing in the $20 trillion market for Treasury bonds and notes and other securities. The Justice Department’s settlement also covered that conduct. 

“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, co-President of JPMorgan Chase and CEO of the Corporate & Investment Bank. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs.”

The spoofing spanned at least eight years and involved hundreds of thousands of misleading orders in precious metals and U.S. Treasury futures contracts, the CFTC said. 

The total fine includes a penalty of $437 million, restitution of $311 million and disgorgement of $172 million, the CFTC said. Disgorgement is the requirement to pay back profits illegally earned.

Five former traders on the bank’s Treasurys desk were involved in spoofing from 2008 to 2016, according to Justice Department documents, which didn’t name the individuals. The traders knowingly entered orders on electronic trading platforms they didn’t intend to fill, hoping the prices would trick other traders into thinking supply or demand was changing.

The traders sometimes entered the misleading orders on one trading venue, hoping to ease the fulfillment of orders on another platform at a better price. Spoofing often tricks computer models that trade using algorithms and may not be able to judge whether orders look genuine or not, regulators say.

Traders sometimes bragged about spoofing Treasury prices in messages they sent to one another, according to prosecutors.

“A little razzle-dazzle to juke the algos,” one trader wrote in a message in 2012, according to prosecutors. 

The conduct caused losses of $106 million to others trading Treasury debt and Treasury futures, the Justice Department said. The misconduct in the futures market for precious-metals caused losses of $205 million, prosecutors said. 

The SEC said the conduct ended in January 2016, after “certain personnel changes” were made on the desk that traded Treasury securities.

By Dave Michaels - Wall Street Journal

Tuesday, July 14, 2020

The Nasdaq Is Partying Like It’s 1999. What To Do About It.

All I can say is "Amen"..... Aivars Lode

Are investors ready for another Housequake?


Depending on your age, your view of the Nasdaq is different. If you are a baby boomer or older, you remember the time when “Nasdaq” might have been a slang term for Nirvana (the concept or the band, or both).

If you are under 50 years old, the Nasdaq is where the big, stable companies sit. Amazon, Microsoft, Apple, Facebook, Google, etc. They are the big, ubiquitous stocks and business that run our lives.

Let’s Go Crazy!

However, back in 1990s and the first part of this century, the Nasdaq was the Wild West of the stock market. Brazen young upstart businesses took the markets by storm.

The gains were so amazing, they were considered “one-decision stocks: you buy them and don’t have to sell them.” 1999 was essentially a one-type market. It was all-Nasdaq, all the time.

Then, in March of the year 2000, the Nasdaq 100 (QQQ) fell by over 79% in just under 3 years. Oh, it fully recovered…by the year 2015! Enough said.

Delirious

Now, of course nothing like this could ever happen again. OK, of course it could. But you don’t need a garden-variety 80% selloff to see that the same type of “Nasdaq will save us” attitude has quietly crept back into the stock market. Now, much of today’s investor base did not experience 1999, 2000 and the 15 long years that followed for the Nasdaq Index. So, all of this history is lost on them.

Sign ‘O The Times

The average S&P 500 stock was down over 10% from June 8 – July 7. The Dow was down over 6%. But the Nasdaq 100? It was up 6%.

One of 2 things is happening here. A new paradigm, or something that will be remembered as the second-coming of the Dot-Com Bubble. Fool me once, shame on you. Fool me twice, shame on me.

Baby, I’m a Star

Better yet, as The Who said, we won’t get fooled again. So don’t. Know what you own and why you own it. And recognize that one of the most powerful axioms in investing is this: if it looks easy, that’s when the risk is highest.

By Rob Isbitts - Sungarden Investment Management

Monday, June 22, 2020

Legendary investor Jeremy Grantham says the stock market right now is in the 4th 'Real McCoy' bubble of his career

My previous blogs talk about the fact that we are following a course with a similar trajectory to 2001 and 2008. That means that this is a second peak and a long crash is about to come about..... Aivars Lode

A stock market legend, Jeremy Grantham, seems certain that the US stock market’s strong recovery from its historic lows in March will end up in pain for investors.

“My confidence is rising quite rapidly that this is, in fact, becoming the fourth real McCoy bubble of my investment career,” he said in a CNBC “Closing Bell” interview aired on Wednesday.

“The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one.”

Grantham presented an alarming scenario in which uncontrolled day traders who are out of work and into heavy market speculation around bankrupt companies, including car-rental firm Hertz, may just be the most “crazy” market he’s seen in his career.

“It is a rally without precedence,” he told CNBC’s anchor Wilfred Frost, noting that the market rebound clashes with other harsh economic realities including a low point for health, unemployment numbers, and a rising growth of bankruptcies.

US stocks have been rallying in the past week despite investor fears over a second coronavirus wave and rising geopolitical tensions.

But a steady flow of government stimulus, that Grantham called a “favourable environment” for speculative investors, seems to have put a rocket under stocks and kept all major US stock markets climbing, with major US indexes up more than a third from their March lows.

On investor exposure to US equities, Grantham said: “I think a good number now is zero and less than zero might not be a bad idea if you can stand that.”

Grantham, a co-founder and chief investment strategist of Boston-based asset management firm GMO, is noteworthy for his accurate predictions related to three major prior market bubbles.

Grantham called Japan’s asset price bubble in 1989, the dot-com bubble in 2000, and the housing crisis of 2008.

In anticipation of those market downturns, he warned that stocks were overvalued both in 2000 and 2007, according to the Wall Street Journal.

Back then, he also mentioned how the relationship between home prices and income had become removed from reality, and that at least one large financial institution would fail.

The subsequent 2008 financial crisis proved his predictions right.

By SHALINI NAGARAJAN - Business Insider Australia