Financial Crisis

[Naam]

Got twelve minutes?

Great video and I really love the site.

Only ran across this website in the last dew days, but there is so much on it, and the presentations are superb. If you need a break from "the crisis", then check it out.

Here's another one to get you thinking.

(I deliberately put in the direct YouTube link because it seems to work faster than the embedded video in Thai Visa, at least for me)

would any kind soul please explain to me how i manage to find time watching yewtewb video clips? big thanks in advance.

:jap:

[waza]

Got twelve minutes?

Great video and I really love the site.

Only ran across this website in the last dew days, but there is so much on it, and the presentations are superb. If you need a break from "the crisis", then check it out.

Here's another one to get you thinking.

(I deliberately put in the direct YouTube link because it seems to work faster than the embedded video in Thai Visa, at least for me)

would any kind soul please explain to me how i manage to find time watching yewtewb video clips? big thanks in advance.

:jap:

Better time management............ PS: good video, guys

Edited September 10, 2010 by waza

[midas]

here we go again !

Zero Down Mortgages Restarted by the Biggest Subprime Lender in Town - Fannie

Good news folks... the "no skin in the game" mortgage is back. You know the game right? It's a one sided bet where the buyer can only win. If the house goes up, you pocket that and hopefully get that granite countertop you so deserve with the home equity. If it doesn't go up.... you walk - but only after living in the home rent free for at least 18-22 months as you strategically default your way to a mountain of savings while waiting for the sheriff to show up. If you are smart you can save at least $30K during this time. There are no losers here (except the U.S. taxpayer).

http://www.fundmymutualfund.com/2010/09/zero-down-mortgages-restarted-by.html

[churchill]

The Financial Industry Is A 'Gigantic Parasite' We Don't Need Anymore

http://www.businessinsider.com/andy-xie-the-world-doesnt-need-the-financial-industry-anymore-2010-9

[churchill]

Chinese Bestseller Slams Goldman Sachs For Crisis

'Goldman Sachs & Co., reviled in the U.S. for its role in the financial crisis, is now getting hammered in the world's No. 2 economy with a sensationalist new book accusing the investment bank of trying to destroy China.'

'Li, in an online chat, said the book was no exaggeration.

"The real financial battle is even more dramatic than my book, according to my knowledge of the markets," he said. "Goldman Sachs is the hand behind the financial crisis, maybe even its cause." He soon plans to publish a third book about the company.'

'The Chinese-language book also accuses Goldman Sachs of involvement in the recent Dubai and Greek debt debacles and the wider European financial and fiscal crises'

....http://www.npr.org/templates/story/story.php?storyId=129415988

[LaoPo]

Chinese Bestseller Slams Goldman Sachs For Crisis

Wait untill the English translation is published....and the real storm will rise...

Maybe reality is even worse, meaning the mind boggling powers behind the scenes within companies like Goldman Sachs abusing their powers.

"Last month, a U.S. federal judge approved a settlement calling for Goldman Sachs & Co. to pay $550 million to settle civil fraud charges that the Wall Street giant misled buyers of mortgage-related investments. In the settlement, Goldman acknowledged that its marketing materials for the deal omitted important information for buyers.

The penalty was the largest against a Wall Street firm in SEC history. But the settlement amounts to less than 5 percent of Goldman's 2009 net income of $12.2 billion after payment of dividends to preferred shareholders — or a little more than two weeks of net income."

From the same link, Churchill provided:

A book titled "Goldman Sachs Conspiracy" is displayed Wednesday Aug. 25, 2010, in Chongqing, China. Goldman Sachs & Co., reviled in the U.S. for its role in the financial crisis, is now getting hammered in the world's No. 2 economy with the sensationalist new book accusing the investment bank of trying to destroy China.

http://www.npr.org/t...oryId=129415988

LaoPo

[thaidrew]

Well well well, maybe things are looking up, although I will be very surprised if it gets the nod.

Never mind, at least it is a small step in the right direction.

"On Wednesday, immediately after Prime Minister's Questions, Douglas Carswell MP will be introducing a moderate and conservative ten-minute rule bill which would introduce sound property rights and contract to monetary deposits. It is potentially of profound importance and I am delighted to support him."

Full story here.

Regards TD

http://call4reform.us1.list-manage1.com/track/click?u=7396d6c5dc44c9d3b64d8265c&id=3099e539e9&e=0929977d58

[hhgz]

"...the reason of the illegal invasion of Iraq and thought/mentioned the oil issue."

Oh, please. Bush43's invasion had nothing to do with oil. After his presidency was decided by the judiciary, rather than the voters, he wanted to be sure he'd get reelected. He invaded Iraq simply to make Americans fearful. With Tom Ridge's assistance - admitted by Tommy boy - Bush43 kept American'e on edge for most of his entire presidency. The hoax generated by him and his administration - Saddam had plans to invade and destroy the US - was the greatest ever perpetuated. Just for the record, though, oil had nothing to do with it, regardless of what you've been told.

[pkspeaker]

just thanking all the contributors to this thread, reading through it with all the links is like an excellent book for free..keep up the good work

:jap:

Edited September 13, 2010 by pkspeaker

[12DrinkMore]

If this "rogue trader' gets chucked behind bars for five years

http://www.independe...rs-2078292.html

then why aren't new jails being constructed to house the dam_n bankers, who committed EXACTLY the same offences.

"Once the banks got their victims' trust they made up excuses to carry out operations that were not needed or that were substandard.

They would then find more and more excuses to go back and take more money

The were aggressive and bamboozled the government and many of the victims said they felt frightened by them."

Mr Playle added: "The banks preyed on the population and groomed them over months, relentlessly exploited them while demonstrating no skills in finance"

Edited September 14, 2010 by 12DrinkMore

[thaidrew]

This popped up and caught my attention but it is a little over the top for me so perhaps some of you more attuned to this type of presentation can make sense out of it and even perhaps post a more concise short version for the less capable like me.

From what little I can digest it is all about an alternative reserve currency, pro's and con's.

http://www.imf.org/external/np/pp/eng/2010/041310.pdf

Regards TD

[12DrinkMore]

Here we go, the great export led UK recovery is beginning to show.

http://www.independe...ed-2077711.html

Oh, sorry if I got you GBP enthusiasts all up and excited about the rise back to 72 THB. I was lying.

By now, I'm sure you're waiting on tenterhooks to know how the UK's trade position stacks up at present. For goods and services in total, the July deficit, at $4.9bn (£3.20bn), was the worst since August 2005, when the trade data were distorted by the global effects of Hurricane Katrina. Taking the total over the last three months (and hence reducing the Katrina effect), the deficit stood at £13.2bn, the worst since, well, the worse ever, in fact.

While other nations have increased their connections with the emerging world over the past 25 ears, Britain has seriously lagged behind. The economic and financial crisis seriously upset trade patterns around the world but, pre-crisis, it's clear that Britain had been heading in the wrong direction. Exports to emerging nations fell from 4 per cent of UK GDP in 1985 to 3.5 per cent in 2008 (and to just 2.6 per cent in 2009, as the collapse in world trade reached its nadir). US exports to emerging nations went up marginally, from 1.5 per cent of US GDP to 3.7 per cent.The really big changes happened elsewhere. Germany's share went up from 5.3 per cent to 11.6 per cent, Japan's from 3.7 per cent to 6.7 per cent, Australia's from 3.5 per cent to 7.1 per cent and Switzerland's from 5.3 per cent to 8.2 per cent. And emerging nations have continued to expand trade with each other: China's exports to other emerging nations rose from 2 per cent of GDP to 9.5 per cent over the same period.

So part of Britain's problem is its ongoing habit of exporting the wrong kinds of things to the wrong parts of the world. Focusing on the exchange rate as a source of "rebalancing" gives completely the wrong message. Our economy won't rebalance until we recognise that the world has changed.

It's as if British industry has been asleep for the past quarter of a century, seemingly unaware of the emergence of economic superpowers which already are promising to become the biggest markets for western products. It's about time we woke up.

Yeah, the wake up call.

This is not going to happen. 99.9% of the UK population are fully expecting a return to wealth based on house prices rising at 10% each year. Instead of encouraging self-sufficiency and independence, the State has fostered an atmosphere of dependence to such an extent that it is now prohibitively difficult to start up new private business. The UK, instead of being individually innovative is now waiting for the State driven miracle of recovery.

And how is this for clutching at straws?

http://www.independent.co.uk/news/business/news/european-commission-upgrades-uk-growth-forecast-2078307.html

The report said the announced increase in the UK VAT rate next January should encourage higher private consumption in the fourth quarter of 2010 too, sparking another acceleration in growth in the fourth quarter.

So we can all be encouraged by the population buying more stuff on credit before the prices are hiked up in January. Actually the rise in VAT will also have the effect of boosting GDP, so maybe the UK government should put up VAT by say 0.2% month?

This will effectively boost the GDP by around 1.5% and simultaneously increase government income.

Hey, this could be a winner!

Edited September 14, 2010 by 12DrinkMore

[BlackJack]

China has large holdings in US Treasuries. But given the slump that US has been in, the dragon nation has grown increasingly edgy about the dollar in recent times. And it has not refrained from hinting that it may shift to other currencies. Now in its latest move, China, the world's second biggest energy consumer is planning to team up with Russia, the world's largest energy supplier to start trading in each other's currencies. And thereby diminish the role of the dollar in global trade. Moreover, the two economies are concerned that increased volatility in currencies is putting global recovery at risk.

So far the dollar has enjoyed the undisputed status of the world's reserve currency. This is despite its economic fundamentals not supporting the fact. One reason is that the euro is also in a precarious position with many European countries being saddled with huge debt. But China and Russia also have their own set of problems. Nevertheless, the US cannot afford to take its position for granted. Unless and until it cleans up its act, the dollar being dislodged from the top cannot be entirely discounted.

from The 5 Minute WrapUp

I said this months before and now becoming a reality

[BlackJack]

"...the reason of the illegal invasion of Iraq and thought/mentioned the oil issue."

Oh, please. Bush43's invasion had nothing to do with oil. After his presidency was decided by the judiciary, rather than the voters, he wanted to be sure he'd get reelected. He invaded Iraq simply to make Americans fearful. With Tom Ridge's assistance - admitted by Tommy boy - Bush43 kept American'e on edge for most of his entire presidency. The hoax generated by him and his administration - Saddam had plans to invade and destroy the US - was the greatest ever perpetuated. Just for the record, though, oil had nothing to do with it, regardless of what you've been told.

The First Persian Gulf War,. Jan.–Feb., 1991, was an armed conflict between Iraq and a coalition of 32 nations including the United States, Britain, Egypt, France, and Saudi Arabia. It was a result of Iraq's invasion of Kuwait on Aug. 2, 1990; Iraq then annexed Kuwait, which it had long claimed. Iraqi president Saddam Hussein declared that the invasion was a response to overproduction of oil in Kuwait, which had cost Iraq an estimated $14 billion a year when oil prices fell. Hussein also accused Kuwait of illegally pumping oil from Iraq's Rumaila oil field.

The UN Security Council called for Iraq to withdraw and subsequently embargoed most trade with Iraq. On Aug. 7, U.S. troops moved into Saudi Arabia to protect Saudi oil fields. On Nov. 29, the United Nations set Jan. 15, 1991, as the deadline for a peaceful withdrawal of Iraqi troops from Kuwait. When Saddam Hussein refused to comply, Operation Desert Storm was launched on Jan. 18, 1991, under the leadership of U.S. Gen. Norman Schwarzkopf.

the rest is history!!

Read more: Persian Gulf Wars — Infoplease.com http://www.infoplease.com/ce6/history/A0838511.html#ixzz0zU767vJB

[churchill]

The largest arbitrage ever documented

http://ftalphaville.ft.com/blog/2010/09/14/342286/the-largest-arbitrage-ever-documented/

[12DrinkMore]

You want scary? Now this is scary.

http://www.bloomberg...ond-yields.html

The assets of corporate pensions relative to their deficits, known as the funded ratio, fell to 70.1 percent in August, also the lowest in at least 10 years, from 75.6 percent the month before, according to the Milliman 100 Pension Funding Index. Pension plan assets declined $17 billion last month to $1.076 trillion, a loss of 1.12 percent.

Apart from the ratio of pension fund assets to bank bailouts, a direction I don;t even want to head, does anybody see this as realistic?

The median expected monthly return for plans in the index is 0.65 percent for 2010, a yearly return of 8.1 percent.

Now this has to be one of the biggest frigging mysteries of the entire cosmos. A yearly return of 8.1%, year in year out? That has never been achieved in the past and is, IMO, utterly unachievable. Don't forget that these "(mis)managed pension funds" are all subject to management fees, dealing fees and other such expenses, which have to be added onto the 8.1% growth.

No fuc_king way is this going to work out, no way at all.

Edited September 14, 2010 by 12DrinkMore

[teatree]

Got twelve minutes?

Great video and I really love the site.

Only ran across this website in the last dew days, but there is so much on it, and the presentations are superb. If you need a break from "the crisis", then check it out.

Here's another one to get you thinking.

(I deliberately put in the direct YouTube link because it seems to work faster than the embedded video in Thai Visa, at least for me)

would any kind soul please explain to me how i manage to find time watching yewtewb video clips? big thanks in advance.

:jap:

You have over 12,000 posts on TV, I think you can probably find the time.

Edited September 14, 2010 by teatree

[12DrinkMore]

In my pursuit of getting a clear picture of how the banking system works, the following popped up.

http://www.webofdebt...helicopters.php

There are a few interesting links to follow from that page. So now I have to move away from the simple model of "fractional reserves" to the next model, where banks are not constrained by the reserves they hold. I am not sure what this model is called.

The textbook model is obsolete because banks don't make lending decisions based on how many reserves they have. They can always get the reserves they need. If customers don't walk in the door with new deposits, the bank can borrow deposits from other banks, something they can now do at the very low Fed funds rate of .2% (1/5^th of 1%). And if those deposits are not available, the Federal Reserve itself will supply the reserves.

Hmm, well OK, presumably that means that although there is a requirement for the banks to hold reserves, these reserves can also be loans from other banks or the central bank, which are unlimited.

The amount of debt that banks can issue is governed by the BIS, those guys in Switzerland, through Basel I, Basel II and now Basel III.

The article also states that the Bernanke's Trillion has not added to the overall money supply, but simply swapped one liquid asset for another liquid asset. Here I have an issue in understanding this concept, as I suspect that the assets (mostly mortgage backed stuff) that Ben has purchased were not sold to him at market value, so effectively the loss has been donated to the banks in order to maintain their "Basel" rations. Ben is totally against any audit of the FED, possibly for this very reason. so will we ever know?

And where is all this leading? Maybe the MMT guys really do have the "Get Out of Jail Free" card. So far nobody around this thread, except me, have brought up this model of sovereign finances in our fiat based system. The UK and the States certainly have this option of adopting this model and extending their policies accordingly.

The model, in a nutshell, states that a sovereign state can simply print up all the debt free money it needs to finance itself and the economy. Taxes and bonds are issued to mop up excess liquidity, and so the government is not constraint by tax receipts, deficit budgets and repaying of interest on bonds. The only difficulty I can see in applying this model is that there has to be a large measure of restraint and the money has to be spent wisely. Unfortunately our elected loonies demonstrate no restraint and no wisdom; so the UK is being forced, maybe unnecessarily, into a longer recession/depression due to increased taxes and austerity measures to balance what is, in fact, a budget that does not have to be balanced. The Eurozone have their hands tied in this, because they have enthusiastically committed themselves to EUR-slavery.

So why does the IMF keep hammering on about sovereign debt, sovereign budgets and austerity? Surely it is not the case that they don't want the worlds' population to be prosperous and have a large degree of autonomy? I think a little bit of questioning regarding the motives of these global organisations should be made.

There was a recent posting about the introduction of the SDR as a replacement for the USD in global trade. I am totally against this. Firstly it would give the IMF and associated friends a lot more power and secondly I strongly suspect it would be used to hinder the transfer of economic power from the west to the east. At the moment the SDR is based on a basket of USD, GBP, EUR and JPY. I seriously doubt that when this basket is discussed (every five years and coming up in the next few months) that the IMF will change the weightings to represent the new global reality, where China, India and Asia are becoming the world's largest economies.

[Abrak]

The article also states that the Bernanke's Trillion has not added to the overall money supply, but simply swapped one liquid asset for another liquid asset. Here I have an issue in understanding this concept, as I suspect that the assets (mostly mortgage backed stuff) that Ben has purchased were not sold to him at market value, so effectively the loss has been donated to the banks in order to maintain their "Basel" rations. Ben is totally against any audit of the FED, possibly for this very reason. so will we ever know?

The other consideration when thinking about what QE is trying to achieve is the 'velocity of money' or 'V'.

The relationship between Money Supply (M) and the economy (PQ) is described by the axiom of MV = PQ

By velocity it simply means this. A Bt1000 note is money, you have it in your wallet, but it doesnt stay there long. You spend it give it to someone else who spends it/puts it in the bank/taken out through an ATM etc. It literally goes round and round pretty fast. Now a UST or MBS is money of sorts, it doesnt have the same velocity but it is money.

So it seems a bit misleading to say that the Fed actions were about replacing one 'liquid' asset with another 'liquid' asset. What happened during the crisis is that say 'MBSs' fell in value but, just as importantly, became totally illiquid so that their 'velocity' collapsed. Buying them up with more 'liquid' assets clearly increased liquidity as a whole as well as liquidity in the underlying assets that were bought. Ultimately the Fed's actions didnt increase the money supply but prevented it from falling and the velocity of money collapsing.

[Abrak]

The amount of debt that banks can issue is governed by the BIS, those guys in Switzerland, through Basel I, Basel II and now Basel III.

As you rightly point out, asset growth is now restricted more by capital adequacy rather than fractional reserves.

What amazed me when the proposed Basle 3 CA rules came out, was what the actual Basle 2 rules were.

According to what I have read the minimum 'equity' (which might or might not be described as tier 1 capital adequacy) is (before Basle 3) 2%. That means something along the lines that a bank needs 2% of equity along with funding (hopefully 98% deposits at virtually no cost) in order to finance its loans/punting etc (derivatives dont count as they are off balance sheet.)

Now of course you might not have enough deposits so you may need to borrow at virtually 0% in the inter-bank market. And I am sure Basle 2 needs you to have a bit more capital. Say a bit of sub-debt or maybe a bit of sub-sub-debt (perpetual) but dont worry it wont cost you much as 9 out of 10 times this will be guaranteed by your local Government (who is also guaranteeing your deposits and yes the one who you are going to tell to piss off if he wants to regulate your bonuses.)

I mean with that scam how people think that the owners of gold are going to inherit the earth is beyond me - I know they will get to go to heaven (assuming they havent been kiddy fiddling) but that is a different argument.

[12DrinkMore]

There has been more sabre rattling between the Yanks and the Chinese.

So should the Chinese withdraw the "flexible peg"?

Here are two articles saying no.

http://www.businessw...s/D9EFRQSG0.htm

"Indeed, 'markets' were permitted to manipulate currencies in a way that made some sovereign governments and central banks look like penniless orphans," said the agency, which has railed for years against U.S.-style liberal economics.It referred to the role of money speculation, price confusion and trade distortion in the global economic crisis, and said fluctuating exchange rates were a threat to international commerce and a likely alibi for rich-world nations ready to raise tariffs or enact other protectionist barriers to shield flagging industries from international competition.

http://www.realclear...myth_98401.html

Moving to currencies themselves, contrary to the modern view suggesting that they should rise and fall based on a country's underlying economic outlook, for the above reasons it becomes apparent that this widely held supposition is false. Currencies are not commodities, instead they're merely concepts along the lines of an inch being an inch. If managed properly, their value once again shouldn't change.

Who benefits from the massive fluctuations in currency rates that we have been seeing? Once again the likes of Goldman Sachs & Co. Ltd. For producers it is a big headache, especially those engaged in global production; buying, selling and manufacturing over many different countries. And for governments it is also a big headache, as the effects of currency movements make keeping the economy on the rails even more difficult.

As the BIS is central for clearing the international flows of currencies, I wonder if they could somehow put the brakes on the amount of capital sloshing around that isn't directly related to trade?

[Naam]

the financial crisis is over! one and a half day not a single posting in this thread.

Edited September 16, 2010 by Naam

[Naam]

As the BIS is central for clearing the international flows of currencies, I wonder if they could somehow put the brakes on the amount of capital sloshing around that isn't directly related to trade?

the BIS in Basel does not handle "normal" payments but concentrates on holding cash of sovereign countries and intra-sovereign payments.

[teletiger]

What a great idea Herr Naam. Lets get the big fox to regulate the small fox that's guarding the hen-house.

The central banks are the problem. You want the banker to the central banks to solve the problem. That might work.....or not.

What about stopping the scaffold building? This things gone way past it's center of gravity. Let's have some price discovery. Let's see what "stuff' is really worth. Up the capital requirements of banks. Let the failures fail. After the crash we can pick through the bones. Ahh... the revenge of the "Morts".

Are you hedged for that contingency Herr Namm? We know your wife is. Better start collecting them brownie points.

Regards.

[teletiger]

The good ship Europe just hit an iceberg. IMF announces no more money for Greece.....'cause they need it elsewhere.

"Portugal may be required to seek assistance from the International Monetary Fund (IMF) to address the problems of external financing."

Warning: dodgy google translator.

"Portugal may be required to seek assistance from the International Monetary Fund (IMF) to address the problems of external financing. The conviction is three former finance ministers, heard by the DN, they say that rising interest rates and falling demand in the issuance of treasury bills (see box) will lead "sooner or later" to a situation where the State can not put in the debt markets."

http://dn.sapo.pt/inicio/economia/

A quick tack to starboard.......only to run into this:

"Government perilously close to calling in IMF, report warns"

http://www.independent.ie/national-news/government-perilously-close-to-calling-in-imf-report-warns-2341197.html

and this.....

"Defaulting on Anglo debts now on agenda"

http://www.independent.ie/opinion/analysis/defaulting-on-anglo-debts-now-on-agenda-2341142.html

Thank God it's Friday.

Of course, the whole thing can be found on the superb...Zerohedge.

Regards.

[teletiger]

A ticker quote on a previous headline has just changed to this

"International Monetary Fund hasn't ruled out putting together more aid for Greece".

Apparently the search down the back of the armchairs came up trumps.

Regards.

[Naam]

1. What a great idea Herr Naam. Lets get the big fox to regulate the small fox that's guarding the hen-house.

2. The central banks are the problem. You want the banker to the central banks to solve the problem. That might work.....or not.

3. What about stopping the scaffold building? This things gone way past it's center of gravity. Let's have some price discovery. Let's see what "stuff' is really worth. Up the capital requirements of banks. Let the failures fail. After the crash we can pick through the bones. Ahh... the revenge of the "Morts".

4.Are you hedged for that contingency Herr Namm? We know your wife is. Better start collecting them brownie points.

Regards.

1. the idea is not mine. i only pointed to the fact that BIS, Basel does not handle mosquitoshit sized payments.

2. perhaps the central banks are your problem, definitely not mine.

3. any stuff is only worth the value somebody is willing to pay or to barter for.

4. take a wild guess from where all the money came from which enabled my wife to hedge for a few contingencies.

5. goldbugs who can lay their hands on their physical gold any time they please are either poor people or crazy.

6. goldbugs who are able to carry their physical gold across borders are paupers.

7. investors who put all their eggs in one basket are not investors but ignorants.

8. wet dreams require rubber sheets to protect the mattress from staining.

next!

[pkspeaker]

This article discusses aspects of current securities trading that supports what Stiglitz is talking about in the video on post #7802[about 4 minutes into it; and also the video on post#7826 .. reading thru this thread is seems like alot of people are questioning Capitalism in itself where as I think the problem is the American Capitalist model, it seems to be institutionally corrupt..and what I mean by that is corrupt practices take place but they are perfectly legal..one of these practices is the financial sector stuffing money in their pockets, while industries go bankrupt.

http://articles.moneycentral.msn.com/Investing/CompanyFocus/how-the-stock-market-is-killing-jobs.aspx?utm_source=twitter&utm_medium=twitter

How the stock market is killing jobs

Today's rapid-fire, anyone-can-play market makes it tougher for small companies to raise money to grow and hire. Do we need a new market to save the economy?

[Related content: stocks, investing strategy, stock market, jobs, Michael Brush]

By Michael Brush

MSN Money

While economists debate whether we're headed for another Great Depression, we're already in one of another sort: a great depression in the number of stocks available on U.S. stock exchanges.

In fact, this may be one reason for the economic woes that swamp us now.

Bing

Do small caps outperform large caps?

The number of stocks trading on U.S. exchanges has declined a troubling 39% over the past 15 years, while the numbers continue to rocket higher virtually everywhere else in the world.

Experts blame the revolution in the U.S. stock market since the mid-1990s. That has changed the game for the pros and brought in throngs of small investors. But it's also made the U.S. market a tougher place for young, creative companies that need capital to grow.

Do profits await in small caps?

View more MSN videosGo to CNBC

What we need is a brand-new stock market.

* Find an online broker and start trading

The moribund marketplace

This market revolution brought a host of transformational changes: online brokerage accounts, cheap trades, fast trades and a proliferation of electronic exchanges. This allowed many more everyday investors to dive into stocks.

It also opened the way for computerized high-frequency trading of millions of shares for tiny gains on each one, because trading costs are now so low. Much of the action has shifted to trading indexes instead of stocks. (Read "Is investing (in companies) dead?")

All this made the stock market a far more hostile place for small companies, because the changes steamrolled an old Wall Street regime that once nurtured and supported newbies. Instead, the vast scale of rapid-fire, index-based trading favors big companies.

The result is that decidedly fewer small companies are joining the market each year through initial public offerings, or IPOs. Though the numbers are up over last year -- read "3-D IPO and other hot new stocks" -- they're not close to what we saw in the booming 1990s.

This means fewer companies can raise capital to invest and grow, and we're losing the jobs and growth they might have created.

The new market

There may be a fix: a new stock market that would cater to small companies and bring back the old ecosystem that used to support them.

This is the master plan of David Weild and Edward Kim, two small-capitalization-stock experts who work for auditing firm Grant Thornton. Weild and Kim advise small companies on how to go public. A cynic might argue they're just trying to drum up business and, to some extent, they are.

But they're also both career experts in the small-cap market. So their idea for a new but old-school stock exchange for small-cap companies may not be as wacky as it sounds. (Read their plan here; it's a .pdf file.)

As an investment banker, Weild helped bring more than 500 companies public earlier in his career at Prudential Securities. Kim once actively supported the market in small-cap stocks as a research analyst at Robertson Stephens, one of the small-cap specialist brokerage shops put out of business by the stock market revolution, and as a trader at Lehman Brothers.

The damage done

If you doubt their view that big changes in the market have created problems for our economy, consider the case:

* The number of stocks on U.S. exchanges has declined by nearly 39% since 1997, the peak year for U.S. stock listings. Adjusted for a bigger economy, listings are down 55% since 1997. And the total is down 22% since 1991, so this isn't just the result of all those dot-com companies that blew up when the tech sector crashed.

In contrast, the number of listed companies in Hong Kong, which trades many Chinese stocks, has nearly doubled since 1997. "We are the only market in the world that has a steady decline in listings since 1997," Kim says.

* The reason the U.S. has fewer listed stocks is simple: Fewer small companies are going public. The U.S. has averaged 166 IPOs a year since 2001, compared with 530 a year, on average, from 1991 to 2000. We need 360 a year just to keep even as companies disappear -- a number we haven't seen since 2000.

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* Particularly troubling is the decline in very small IPOs raising just $5 million to $10 million in capital -- deals that used to be routine. "Many advisers won't do a deal under $50 million," Kim says.

* Why does this matter? Intel (INTC, news, msgs) went public in 1971, raising just $8 million and trading with a market cap of just $51 million after the IPO. Even accounting for inflation, "that is not the kind of deal that would get done today," Kim says.

Lost jobs

Fewer companies going public hurts us all, because small companies can simply grow faster than huge companies.

As many as 22 million jobs may have been lost since 1997 because the stock market is less hospitable to small companies. Weild and Kim get at this estimate by taking the number of jobs typically created by a young company each year, then multiplying it by the number of "lost" IPOs and the number of years they would have been in business.

Of course, many entrepreneurs who might have gone public still go into business and raise capital in other ways. But those businesses might have grown a lot more had they had been able to go public and used the stock market machine to raise cash.

"We believe there is a high correlation between IPOs that didn't happen and jobs that did not get created," Kim says.

The decline in IPOs also hurts early-stage developmental companies -- think two geniuses in a garage cooking up the next Google (GOOG, news, msgs). That's because venture capital firms use IPOs to cash out and free up capital to invest in new startups. "If they can't get exits, they have trouble raising more funds," says Kim.

He believes the decline in IPOs helps explain a relative decline in early-stage investing in capital-intensive industries such as semiconductors and drug development, in favor of social-networking websites that need far less capital.

"The decline in listings has serious implications for the economy," agrees James Angel, a stock market expert and professor of finance at Georgetown University's McDonough School of Business. "Without new listings, we basically have no new companies in the long run."

The 'Great Delisting Machine'

What's caused all this? Weild and Kim blame it on the "Great Delisting Machine." That's their moniker for the series of regulatory and technological changes that lowered commissions and democratized the stock market.

Before the mid-1990s, brokerages might have charged a $60 commission for a trade, and they quoted stocks with 25-cent spreads between the bid and the ask -- the price you sold a stock for and the price you bought it for. (The brokerages pocketed the difference.)

Regulatory changes took that bid-ask spread down to pennies, allowing virtually anyone to post quotes inside the bid and the ask, instead of just brokers and exchange specialists. Online brokerages knocked commissions down to just a few dollars a trade.

Here's one of the things we lost in that bargain: Old-school brokers used the profits from those commissions and the bid-ask spread to fund an ecosystem that supported small companies. They funded analyst research on small-cap companies, sales teams to work the phones and sell a company's story, and trading desks with enough capital to smooth out price moves in small-cap stocks by juggling supply and demand (all for more profit, of course).

All that's gone now -- and with it, a market that used to be friendlier to small companies. Now, small-cap research is scarce, so it's hard for investors to understand these businesses. The stocks can also swing wildly, because there are no trading desks committed to helping them grow.

"We think we automated in the name of progress and lower costs," Weild says. "But this ideology that faster and cheaper is better is incredibly misguided, and it's doing grave harm to the U.S. economy."

To bring back the old system, regulators such as the Securities and Exchange Commission would have to exempt a new exchange from the rules that killed the old system. But this is doable.

Pipeline Trading Systems, an alternative trading system that uses technology to help money managers disguise their intentions in the market, exists because it got exemptions from regulations -- like the requirement to openly display quotes in its system. Pipeline Trading Chairman Al Berkeley believes a new exchange for small-cap stocks is worth experimenting with, and he thinks regulators might be open to it. "The SEC is very sensible about this," he says.

Of course, not everyone believes we need a new stock exchange. "The global stock markets are not fundamentally broken," says Scott Laue of Savant Capital Management. Market Profile Theorems research director Michael Painchaud thinks theories about a broken stock market are just part of the overwhelmingly negative sentiment toward stocks.

3 small-cap buys

Painchaud also thinks the shortage of research on small-cap stocks can actually help investors, because it creates opportunities for anyone who does the homework needed to find good, undervalued companies.

A great example of this is the LSGI Technology Venture Fund, run by Joe Dancy. His fund has produced 11% annualized returns during its 11-year life -- compared with 4.6% returns for the Russell 2000 ($RUT) small-capitalization index -- by digging up cheap small-cap stocks with good prospects.

"Most folks don't have the time to research microcap firms, and institutions are ignoring them," Dancy says. He believes the current rush to bonds has particularly punished microcap stocks, creating some "incredible" opportunities for long-term investors. "Stock valuations for small companies are way out of line with their true value," says Dancy.

Click graphic to see interactive chart

GeoResources

Graphical chart for GEOI

One small company he likes is oil and gas producer GeoResources (GEOI, news, msgs). The company's expected production is worth $22 a share, says Dancy, but the stock sells for just $14.70. He also likes Evolution Petroleum (EPM, news, msgs), a domestic crude-oil producer that revives old oil fields by injecting them with carbon dioxide, which helps oil flow. This company's future production is worth $10 to $12 a share, but the stock sells for under $5 a share.

A third favorite is Ebix (EBIX, news, msgs), which sells software used by insurance companies that's increasingly popular. LSGI owns all three stocks.

Click graphics to see interactive charts

Evolution Petroleum

Graphical chart for EPM

Ebix

Graphical chart for EBIX

But wait a minute. If these stocks look cheap because they're ignored by the market, won't they always remain cheap?

Not really. You might have to be patient, but sooner or later, they can pay off big. With relatively few shares in the market, stock prices can rise quickly when a company's story catches on. And if investors fail to recognize these companies, competitors will -- and take them over. Shares of network security software company ArcSight (ARST, news, msgs), also an LSGI holding, shot up 39% last week when news leaked that it was shopping itself around.

"The merger-and-acquisition frenzy has just begun," says Dancy. "In a slow-growth economy, what better way to expand than by buying a fast-growing, profitable small- or microcap firm that is undervalued?"

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. At the time of publication, he did not own shares of any company mentioned in this column.

[teletiger]

A few bullet points and a link is the way to go here PK.

Regards.

[pkspeaker]

i know but too lazy

..and that one kinda have to read thru the short article to understand what hes saying

Edited September 18, 2010 by pkspeaker