Pump and Dump
September 30, 2010
By John R. Taylor, Jr.
Chief Investment Officer
At the Jackson Hole conference near the end of August, Fed Chair Bernanke informed the markets that they should anticipate the Fed’s announcement of a new quantitative easing (QE II) effort in the near future. In response, the global equity markets began a powerful rally, which continues today. In the US, the stock market gave us the strongest September since 1939, and Bernanke is still advertising his future plans to inflate the money supply, stimulate inflation, and reflate the economy. The Fed’s strategy seems to go beyond the famous Greenspan ‘put’ or even the Plunge Protection Team, which is rumored to be on the bid whenever US equities are down sharply. Bernanke is being proactive. In the street vernacular, Bernanke’s words are pumping up the prospects for a future liquidity boom, and a very strong equity market. The next step in this process, as carried out by Wall Street’s more scurrilous denizens, would be to dump their lousy equity positions on the market at inflated prices – hence ‘pump and dump.’
Strange thing, the US Treasury has lots of stock to sell: Citibank, AIG, and General Motors. It seems that the US authorities are very interested in making as large a profit as possible on the TARP program and its other equity positions, perhaps trying to draw our attention away from the Fannie Mae and Freddie Mac messes. General Motors is currently worth somewhere between $60 and $85 billion dollars, up from zero eighteen months ago, and at any valuation over about $67 billion, the US would break even. As the offering will be finalized in a month or so, the pressure to get a good price will last for a while. Prior to that AIA, AIG’s very profitable Asian arm, should be sold for around $40 billion, allowing the repayment of AIG’s line of credit from the NY Fed with some left over. Even Citibank, the last of all the banks still owing money to TARP, looks to be a winner. For the government this Houdinilike escape from the horrifyingly large TARP bailout of almost exactly two years ago is a tremendous success, for those buying out the government’s position: caveat emptor!
Standing on its own, the outlook for the equity market is not rosy. Earnings have been boosted by cost reductions, by productivity, and by absorbing competitors with excess cash. The outlook for future growth can not be good when the mean forecast for GDP growth in the US next year is around 2% and even that is dependent on some optimistic projections for final sales and exports. With those facts weighing on the market, should the US government be out pushing equities to climb higher? It seems that it is the Fed’s and the administration’s highest priority to have the S&P rising every month. A quick review of the correlation tables shows that a climbing S&P has equaled a falling dollar, climbing commodity prices, and higher inflation. As there is no inflation to speak of – and fear of deflation is
rampant in some quarters – this strategy seems to have little risk, at least for the government and the average US family. Bernanke and his friends in the Treasury seem to be pulling a fast one on the world, inflating US assets and deflating US liabilities through a falling dollar, while giving the US companies a chance to fund themselves cheaply. The only ones who are harmed are not voters or, if they are, they don’t have many votes. However, those who own the most US assets and will be financing the US in the future can not be pleased by this. It might be that the Eurozone is short-sighted allowing the euro to rise (see A Race to Two Bottoms, September 23), but the US is not thinking about the long term either. This is a very short term game. If the economy does go into a recession next year, as we expect, equities will decline anyway, and the government’s escape will only be temporary.
TARP II will need to be rolled out alongside QE II and many will be left with a sour taste in their mouths.
h/t Teddy KGB
If the original Wall Street was a portrait of an era, its moral universe was relatively clearly drawn. Blue Star good, corporate raider bad. Penthouse good, insider trading bad. Bud Fox straps on wings and flies too close to the Gekko sun. Hubris leads to a fall. Contemporary art and willowy blondes only take you so far, it turns out. Malefactors are punished. The universe is restored to balance.
This time, Gekko is a repentant father longing to make amends to win his daughter’s approval who also essentially steals a fortune from her to get back in the game.
Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male puffing on a phallic cigar who can’t wait to gloat about his prowess at making money.
Gekko is a teacher who shares his knowledge. At times, one could swear that one had wandered into a parallel universe version of An Inconvenient Truth, as Gekko lectures us on the hazards of leverage and financial meltdown. Particularly priceless is when he calls a group of young students “ninjas”—no income, no job, no assets—adding, “You have a lot to look forward to.” But the same guy who observes that the mother of all evil is speculation turns up later in the film dressed in a power suit and giddy over his ability to turn $100 million into $1 billion. I don’t think he earned it at $25 an hour; leverage must have figured in there somewhere.
If we fast-forward 23 years to Wall Street: Money Never Sleeps, we are treated to a curiously different kind of moral equation, the morality of “and also” rather than “either or.”
In the new film, Gordon Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male who can’t wait to gloat about his prowess at making money. (20th Century Fox)
This “and also” value system also comes across in Gekko’s attitude to innovation. He is clearly cynical about clean tech and derides the “fusion delusion” as the next bubble. In his words, “the only green is money.” Yet at the end of the film, he gives $100 million away to support alternative energy and do something “good” with his money.
• Randall Lane: Wall Street on Wall Street
• Randall Lane: Gordon Gekko’s Secret Revealed
The film’s title may hold its final moral clue. If money never sleeps, then can greed not be far behind, even in these pinched times? No one in the film seems to be hurting for nice apartments and clothes, for example, even with a financial meltdown that has come from “the mother of all bubbles.” As Gekko himself puts it, “Greed got greedier with a little envy thrown in.”
So we’d all like to find a little absolution in these troubled times, and in fact in the end Gekko’s daughter does melt and forgive him, while we on the other hand—adding up all the “and alsos”—don’t know whether to follow suit.
This “and also” value system comes across in Gekko’s attitude to innovation. He is cynical about clean tech, yet in the end, he gives $100 million to support alternative energy.
Gordon, make up your mind. Maybe a little therapy would help.
Dubbed "Mr. Creativity" by The Economist, John Kao is a contributing editor at The Daily Beast and an adviser to both public and private sector leaders. He is chairman of the Institute for Large Scale Innovation, whose i20 group is an association of national innovation "czars." He wrote Jamming: The Art and Discipline of Business Creativity, a BusinessWeek bestseller, and Innovation Nation. He is also a Tony-nominated producer of film and stage.
Get a head start with the Morning Scoop email. It's your Cheat Sheet with must reads from across the Web. Get it.
For inquiries, please contact The Daily Beast at editorial@thedailybeast.com.
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Pump and Dump
September 30, 2010
By John R. Taylor, Jr.
Chief Investment Officer
At the Jackson Hole conference near the end of August, Fed Chair Bernanke informed the markets that they should anticipate the Fed’s announcement of a new quantitative easing (QE II) effort in the near future. In response, the global equity markets began a powerful rally, which continues today. In the US, the stock market gave us the strongest September since 1939, and Bernanke is still advertising his future plans to inflate the money supply, stimulate inflation, and reflate the economy. The Fed’s strategy seems to go beyond the famous Greenspan ‘put’ or even the Plunge Protection Team, which is rumored to be on the bid whenever US equities are down sharply. Bernanke is being proactive. In the street vernacular, Bernanke’s words are pumping up the prospects for a future liquidity boom, and a very strong equity market. The next step in this process, as carried out by Wall Street’s more scurrilous denizens, would be to dump their lousy equity positions on the market at inflated prices – hence ‘pump and dump.’
Strange thing, the US Treasury has lots of stock to sell: Citibank, AIG, and General Motors. It seems that the US authorities are very interested in making as large a profit as possible on the TARP program and its other equity positions, perhaps trying to draw our attention away from the Fannie Mae and Freddie Mac messes. General Motors is currently worth somewhere between $60 and $85 billion dollars, up from zero eighteen months ago, and at any valuation over about $67 billion, the US would break even. As the offering will be finalized in a month or so, the pressure to get a good price will last for a while. Prior to that AIA, AIG’s very profitable Asian arm, should be sold for around $40 billion, allowing the repayment of AIG’s line of credit from the NY Fed with some left over. Even Citibank, the last of all the banks still owing money to TARP, looks to be a winner. For the government this Houdinilike escape from the horrifyingly large TARP bailout of almost exactly two years ago is a tremendous success, for those buying out the government’s position: caveat emptor!
Standing on its own, the outlook for the equity market is not rosy. Earnings have been boosted by cost reductions, by productivity, and by absorbing competitors with excess cash. The outlook for future growth can not be good when the mean forecast for GDP growth in the US next year is around 2% and even that is dependent on some optimistic projections for final sales and exports. With those facts weighing on the market, should the US government be out pushing equities to climb higher? It seems that it is the Fed’s and the administration’s highest priority to have the S&P rising every month. A quick review of the correlation tables shows that a climbing S&P has equaled a falling dollar, climbing commodity prices, and higher inflation. As there is no inflation to speak of – and fear of deflation is
rampant in some quarters – this strategy seems to have little risk, at least for the government and the average US family. Bernanke and his friends in the Treasury seem to be pulling a fast one on the world, inflating US assets and deflating US liabilities through a falling dollar, while giving the US companies a chance to fund themselves cheaply. The only ones who are harmed are not voters or, if they are, they don’t have many votes. However, those who own the most US assets and will be financing the US in the future can not be pleased by this. It might be that the Eurozone is short-sighted allowing the euro to rise (see A Race to Two Bottoms, September 23), but the US is not thinking about the long term either. This is a very short term game. If the economy does go into a recession next year, as we expect, equities will decline anyway, and the government’s escape will only be temporary.
TARP II will need to be rolled out alongside QE II and many will be left with a sour taste in their mouths.
h/t Teddy KGB
If the original Wall Street was a portrait of an era, its moral universe was relatively clearly drawn. Blue Star good, corporate raider bad. Penthouse good, insider trading bad. Bud Fox straps on wings and flies too close to the Gekko sun. Hubris leads to a fall. Contemporary art and willowy blondes only take you so far, it turns out. Malefactors are punished. The universe is restored to balance.
This time, Gekko is a repentant father longing to make amends to win his daughter’s approval who also essentially steals a fortune from her to get back in the game.
Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male puffing on a phallic cigar who can’t wait to gloat about his prowess at making money.
Gekko is a teacher who shares his knowledge. At times, one could swear that one had wandered into a parallel universe version of An Inconvenient Truth, as Gekko lectures us on the hazards of leverage and financial meltdown. Particularly priceless is when he calls a group of young students “ninjas”—no income, no job, no assets—adding, “You have a lot to look forward to.” But the same guy who observes that the mother of all evil is speculation turns up later in the film dressed in a power suit and giddy over his ability to turn $100 million into $1 billion. I don’t think he earned it at $25 an hour; leverage must have figured in there somewhere.
If we fast-forward 23 years to Wall Street: Money Never Sleeps, we are treated to a curiously different kind of moral equation, the morality of “and also” rather than “either or.”
In the new film, Gordon Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male who can’t wait to gloat about his prowess at making money. (20th Century Fox)
This “and also” value system also comes across in Gekko’s attitude to innovation. He is clearly cynical about clean tech and derides the “fusion delusion” as the next bubble. In his words, “the only green is money.” Yet at the end of the film, he gives $100 million away to support alternative energy and do something “good” with his money.
• Randall Lane: Wall Street on Wall Street
• Randall Lane: Gordon Gekko’s Secret Revealed
The film’s title may hold its final moral clue. If money never sleeps, then can greed not be far behind, even in these pinched times? No one in the film seems to be hurting for nice apartments and clothes, for example, even with a financial meltdown that has come from “the mother of all bubbles.” As Gekko himself puts it, “Greed got greedier with a little envy thrown in.”
So we’d all like to find a little absolution in these troubled times, and in fact in the end Gekko’s daughter does melt and forgive him, while we on the other hand—adding up all the “and alsos”—don’t know whether to follow suit.
This “and also” value system comes across in Gekko’s attitude to innovation. He is cynical about clean tech, yet in the end, he gives $100 million to support alternative energy.
Gordon, make up your mind. Maybe a little therapy would help.
Dubbed "Mr. Creativity" by The Economist, John Kao is a contributing editor at The Daily Beast and an adviser to both public and private sector leaders. He is chairman of the Institute for Large Scale Innovation, whose i20 group is an association of national innovation "czars." He wrote Jamming: The Art and Discipline of Business Creativity, a BusinessWeek bestseller, and Innovation Nation. He is also a Tony-nominated producer of film and stage.
Get a head start with the Morning Scoop email. It's your Cheat Sheet with must reads from across the Web. Get it.
For inquiries, please contact The Daily Beast at editorial@thedailybeast.com.
<b>News</b> the Old Media Won't Tell You: More Trash at One Sparsely <b>...</b>
12774581 Commentshttp%3A%2F%2Fbigjournalism.com%2Fmpleahy%2F2010%2F10%2F03%2Fnews-the-old-media-wont-tell-you-more-trash-at-one-sparsely-attended-left-wing-rally-than-at-all-the-tea-parties-around-the-country-in-a-year-and-a-half%2FNews ...
Midterm election results could mean bad <b>news</b> for climate change <b>...</b>
Dem-originated energy legislation, including cap and trade, may be on life support under a GOP House majority.
CBS <b>News</b> Reporter Arrested for Growing Pot | PopEater.com
Police arrested CBS News correspondent Howard Arenstein and his wife, along with reporter Orly Azoulay, Saturday for drug possession with intent to di.
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