Saturday, 15 January 2011

Weekend Update January 15, 2011

“The world is a place that’s gone from being flat to round to crooked.”

Mad Magazine.

Baltic Dry Index. 1439 -105

LIR Gold Target by 2019: $30,000. Revised due to QE.

Why did I take up stealing? To live better, to own things I couldn't afford, to acquire this good taste that you now enjoy and which I should be very reluctant to give up.

Cary Grant. To Catch A Thief.

This weekend, nothing has changed on Wall Street. The Squids, as ever, are dedicated to separating their marks from their cash. And so we roll onward to the next Lehman that wipes out the fiat currency system as we know it. Stay long physical gold and silver, plus select gold and silver mining stocks. America’s corrupt crony squid system is determined to crash the world as we came to know it. Below, this week’s developments as those charged with keeping the system honest, look the other way for whatever reason.

"If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy."

Warren Buffett

SEC Probes Financial Firms on Possible Sovereign Fund Bribes

By Joshua Gallu - Jan 14, 2011 6:42 AM GMT

The U.S. Securities and Exchange Commission started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds, according to two people with direct knowledge of the matter.

The sweep in part focuses on whether banks, hedge funds and private equity firms paid placement agents to win access to the state-owned money, said the people, who declined to be identified because the investigation isn’t public. An agent working with a sovereign wealth fund may be considered a government official, making interactions with that person subject to the Foreign Corrupt Practices Act.

“The SEC takes a broad view of who is considered a government official,” said Gary DiBianco, an attorney at Skadden Arps in London. “Accordingly, we can expect the SEC will view sovereign wealth fund employees as government officials under the FCPA, and the SEC will closely scrutinize relationships with consultants or agents who may have connections to state-controlled entities.”

The nature of the probe recalls a spate of public corruption cases in the U.S. where money managers were accused of making improper payments including campaign contributions to win contracts from public pension funds. The agency adopted new rules last year to curb so-called pay-to-play practices.

Entertainment Benefits

The SEC investigation was previously reported on the Wall Street Journal’s website late yesterday. The newspaper said the SEC sent letters to Citigroup Inc. and Blackstone Group LP. SEC spokesman John Nester declined to comment, as did Citigroup spokesman James Griffiths. Helen Winning, a spokeswoman for Blackstone in London, didn’t immediately reply to an e-mail sent outside of regular business hours.

Texas Short Seller Fights China Fraud in $20 Billion U.S. Shares

By Dune Lawrence - Jan 13, 2011 10:10 PM GMT

On an April afternoon in 2009, in his home office near Austin, Texas, John Bird was hunched over his computer trying to figure out if a Chinese company some 6,500 miles away was anything close to what it claimed to be.

A silver-haired short seller, Bird, 62, projects an air of relaxed amusement. His philosophy is reflected in a sticker from “The Big Lebowski” over his door: “The Dude Abides...”

Some things he takes very seriously, including what he calls the “sanctity of math.” On that afternoon it was being defiled in his eyes by the claims of China Sky One Medical Inc., a maker of slimming patches and hemorrhoid ointments. Sky One, according to its annual report, was selling out its inventory and resupplying almost every seven days. That, Bird says he knew from experience in business, was impossible.

Sky One, Bird would find, wasn’t the only stock recently arrived from China to defy financial speed limits, Bloomberg Businessweek reports in its Jan. 17 issue. It’s one of about 370 Chinese companies -- with a combined market value of at least $20 billion -- that have obtained U.S. listings since 2004 without the rigors of initial public offerings.

Some of them have reported numbers making Bird suspect what he calls “flat-ass” fraud. The Securities and Exchange Commission hasn’t until recently paid much public attention to what Bird describes as a pattern, at a time when investors are still recovering from the Bernie Madoff Ponzi scheme.

Chinese Reverse Merger

Bird’s first business venture -- before real estate development, a music venue called Club Foot and a direct-mail marketing firm -- was a chain of nine movie theaters in Austin in the 1970s. Audiences ate through stores of popcorn and candy every three days or so, while cups and buckets took months to run out, for an average turnover of eight to 10 days. Sky One’s inventory, Bird figured, ought to move more slowly, because cardboard boxes for packaging and adhesives for patches are bought in bulk, and used bit by bit as orders come in.

They’re turning their supplies over faster than a doughnut shop, Bird says he thought. Or, as he later put it, “It’s like somebody telling you they just drove over here at 600 miles per hour. It’s not going to happen.”

Sky One and the other companies have moved onto U.S. exchanges through a process called a reverse merger, in which a closely held company buys a publicly traded shell company -- and retains the U.S. listing as its own instead of extinguishing it, as usually happens in takeovers. Bird says that many reverse merger companies are deceptive, at best, about their numbers.

‘Thumbing Their Noses’

The questions Bird raised from his 70-acre spread northeast of Austin touched off a dispute among short sellers, auditors and regulators over the quality of companies with operations in China and shares on U.S. exchanges.

“The whole thing has no place to go but to blow up,” Bird says. “That’s a rational position for an investor to start with -- that every one of these Chinese reverse mergers is a fraud.” Executives of the companies in China, he says, are “thumbing their noses” at investors in the U.S.

----Returns for Chinese reverse merger companies totaled 43 percent for the five years through 2010, even with a slide of 23 percent last year, according to Roth Capital’s analysis. The Russell 2000 Index was up 25 percent in 2010 and the Nasdaq Composite Index climbed 17 percent.

----The SAIC is the Chinese government agency responsible for market supervision, regulation, and enforcement. According to a SAIC filing, Sky One’s operating unit, Harbin Tian Di Ren, had 2008 sales of 6.93 million yuan, roughly $1 million at 2008 exchange rates. Yet to the SEC, Sky One reported 2008 sales of $91.8 million, with Tian Di Ren accounting for at least 65 percent, or $59.7 million.

Bird ordered more reports to trace Sky One customers and suppliers; he says the paperwork showed companies too small to generate the orders or inventory Sky One reported.

----“As these companies are scrutinized, investors will uncover the facts behind the ‘Chinese Curtain,’” Kaplan wrote in a Dec. 3 report. “Many of these stocks may prove to be valueless.”


The Curious Case Of The REE Companies That Aren’t

by Gareth Hatch on January 14, 2011

In the last few weeks a curious meme has been propagating throughout the rare-metals ecosystem, both online and off. It started on a few obscure blogs, but quickly reared its ugly head at outlets such as Benzinga, Seeking Alpha, TheStreet, Street Insider and even CNBC.

I’m talking about the rare-earth companies that aren’t.

A handful of commentators have got it into their heads that companies such as China Shen Zhou Minerals and Resources (AMEX:SHZ), Qiao Xing Universal Resources (NASDAQGM:XING), General Moly (AMEX:GMO) and Thompson Creek Metals Company (NYSE:TC) are rare-earth companies. Those a little late to the game have simply been copying the garbage put out by the earlier hacks, and before you know it, a Potemkin village of new rare-earth companies has been born.

We can thank the Van Eck Rare Earth / Strategic Metals ETF (REMX) for some of the confusion – or more specifically, the apparent inability of giddy investors and commentarati to actually read and comprehend the description of this fund, beyond the third and fourth words of its title. Perhaps that’s a little too much to ask these days, I don’t know. Two of the four companies above (General Moly and Thompson Creek) are featured in this fund. Again – for the record, they neither produce rare earths nor are they developing rare-earth projects.

The same goes for the other two companies, but the reason for their emergence as faux rare-earth companies is less clear. Others who have spotted the issue have suggested that something nefarious might be afoot. In the past month, China Shen Zhou Minerals and Resources has seen its stock more than double; Qiao Xing Universal Resources almost doubled before settling at an increase of around 55% in the same period. these might be good stocks; they might even be good mining companies. They are not, however, rare-earth companies.

The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again!

I read this headline from the Financial Times and said to myself, “Okay Reg, Don’t say ‘I told you so’”. Thus, you won’t hear it from me, at least not this time. As reported today in the Financial Times: Goldman reveals fresh crisis losses and Goldman’s republished results present a new picture

Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.

Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs??? and I did it without being privvy to Goldman’s financial innards. It was more or less common damn sense. Goldman and its employees do not walk on water, they do not shit gold, and they cannot perform miracles. If one takes an objective approach to their equity analysis, and simple plug the numbers into a spreadsheet (objectively) you would have come up with the exact same conclusions that I gave my subscribers all of these years. Let’s reminisce, shall we?


"If the financial system goes down, our business is going down and, trust me, yours and everyone else's is going down, too."

Lloyd Blankfein. CEO Goldman Sachs. November 8, 2009

More on Monday.


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