Mid-day links and market news

Rounding up some of the more interesting news items and blog posts that I've come across this week. Set a spell and enjoy our mid-day linkfest.

1. Der Spiegel interviews rogue trader Jerome Kerviel: "I was merely a small cog in the machine".

2. John Paulson trims BofA stake, sells all Goldman Sachs shares.

3. David Tepper sold financials during his "everything will go up" speech on CNBC, but he was pretty honest about it, finds John Carney.

4. Huge Ireland linkfest and other news from Credit Writedowns.

5. Your StockTwits handle is the 21st century trading badge, writes Chicago Sean.

6. Derek Hernquist on the intersection of patience and speed, plus some wisdom from Dickson Watts.

7. If you follow me on Twitter and StockTwits, you probably know that Joe Fahmy (see blogroll) is one of my favorite stock traders to follow on the stream. Here's the most recent StockTwits TV ep. of The Next Big Move with Joe Fahmy. Always worth watching.

Thanks for stopping by. Reminder: you can keep up with our posts via RSS and follow all our real-time updates and links on the Finance Trends twitter feed and on StockTwits.

Macro themes dominate the investing world

The rise of global macro investing and the increased importance of weighing macro themes in everyday investing were the subject of this recent Wall Street Journal piece entitled, "Macro Forces in Market Confound Stock Pickers" (Hat tip: Abnormal Returns).

An excerpt from that piece:

"The market turmoil has battered many investors over the past few years. But for stock pickers like Neuberger Berman LLC's David Pedowitz, it has made their entire investing approach feel like an exercise in futility.

Mr. Pedowitz buys and sells stocks based on research and analysis of individual companies. His investment strategy, he says, has been upended by a tidal wave of "macro" forces—big-picture market movers like the economy, politics and regulation.

More and more investors aren't bothering to pore through corporate reports searching for gems and duds, but are trading big buckets of stocks, bonds and commodities based mainly on macro concerns. As a result, all kinds of stocks—good as well as bad—are moving more in lock step.

"It's unbelievably frustrating," says Mr. Pedowitz, who helps manage $4.5 billion for wealthy clients and has 25 years of investing experience. "It's enough to make you crazy."

That kind of talk has become widespread on Wall Street as stock pickers discover that long-held investment strategies are no longer working very well..."

Note that Gregory Zuckerman, author of The Greatest Trade Ever, is a co-writer of this article. Which makes sense, given that the main subject of his book, John Paulson, was a convertible arbitrage trader turned macro-focused hedge fund manager who scored big with his now-famous subprime short trade.

Paulson's not the only one to embrace the macro approach; exhaustive researchers and value oriented stock pickers, David Einhorn and Michael Burry have also delved into macro investing in recent years with their subprime-related short trades and forays into gold, farmland, and commodities.

The authors of the WSJ piece note that in the aftermath of the 2008 financial crisis, many investors woke up to the fact that a big picture theme or an "unexpected" storm can wreak havok on their investment returns. Now, they are starting to look more at big picture trends in the economic and geopolitical spheres, as they realize these events can greatly influence their performance.

Witness this quote from David Einhorn:

"For years I had believed that I didn't need to take a view on the market or the economy because I considered myself a 'bottom-up investor,'" said hedge-fund manager David Einhorn of Greenlight Capital last year. "The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

There you have it. The big picture outlook has permeated the investment world. Is this a temporary vogue in favor of macro investing, or are we all, to some extent, global macro investors now?

Related articles and posts:

1. Michael Burry: an up & coming macro star? - Finance Trends.

2. Must hear interview with John Burbank of Passport Capital - Finance Trends.

Michael Burry: an up and coming macro star?

Michael Burry is best known for his successful subprime CDS short trade during the great housing bubble of the mid-2000s (recently detailed by Greg Zuckerman in The Greatest Trade Ever, and in Michael Lewis' The Big Short).

What you may not know about Burry (if you haven't perused the ex post facto celebratory literature) is that he began his career as a value investing med student sharing ideas & research with fellow stock pickers on popular message boards like Silicon Investor, as well as on his blog, the now defunct valuestocks.net.

He then founded Scion Capital, a hedge fund devoted to his own unique brand of value investing and short speculating. As a witness to the relentless rise in real estate prices and the simultaneous plunge in borrowing standards for home mortgages, Burry decided to become a self-taught expert in subprime mortgage lending and the market for asset-backed securities based on these loans. His fund soon shifted its focus to shorting subprime bonds via the CDS market, and the rest, as they say, is history.

Now beyond these facts that anyone can find through an article search, I think there is another aspect of Burry's investing career that is coming to the fore: Michael Burry as global macro investor.

Last week we highlighted Bloomberg TV's interview with Burry, in which the California investor said he was investing in agricultural land, gold, smaller tech companies, and small cap companies in Asia.

While Burry is no longer managing funds for clients, he is definitely looking farther afield in his own investment portfolio. As he noted to Bloomberg, increased correlation in the price movements of asset classes has made it more difficult to find unique trades and investment opportunities.

So Michael Burry has moved well beyond his original focus of value investing and value-focused short selling of US shares, to an approach that embraces a variety of asset classes (land, gold, stocks) at home and abroad. In this sense, he is building on the global macro approach of his earlier subprime trade: combining a top down view of economic trends with intensive research in an effort to find the proper investment vehicle to express (and hopefully profit from) his view.

In this, he is joined by other successful investors, like John Paulson, whose own subprime short trade helped Paulson & Co. expand from its original mandate as a merger arbitrage & event-driven fund, into one of the largest hedge funds in the world with sub-funds devoted to gold, real estate, and macro bets on a US economic recovery.

While media attention surrounding Michael Lewis' book, The Big Short, tended to cast a disparaging light on Burry and his fellow subprime shorts (CBS' "60 Minutes" patronisingly dubbed him a "Wall Street Misfit"), it's nice to see him getting a chance to share his views on investing and the US economy through recent editorials in the NY Times and on Bloomberg TV.

Burry's most recent appearance on Bloomberg TV was edited down to a series of 3 minute clips for the web, but you can read the full transcript of his interview here (thanks to Bloomberg TV and Heidi Tan). If you're interested to find out more about his macro view, including his take on the post-housing bubble stimuli and the US and global economy, be sure to check this out.

BurryTranscript

Even though Michael Burry is now a private investor, we'll be keeping an eye out for more of his macro views and investing ideas. I hope he'll continue to share his thoughts in the future, because he seems like a very sharp guy, motivated to self-learning and investing on the basis of his own findings & views.

Hedge funds scale back trading

Hedge funds have scaled back their trading and are favoring cash over pressing their convictions in big directional trades.

Bloomberg reports that it may amount to more than the usual summer lull, as the uncertainty hanging over global markets has left many a trader wary of unseen risks.

"...Reeling from the worst second-quarter performance in a decade, hedge funds have scaled back trading as they struggle to figure out where markets are headed amid sometimes vicious crosscurrents in stock, commodities and other markets, according to brokers and managers.

“There’s a degree of being frozen in the headlights, of not knowing what sectors to emphasize, of what securities to emphasize,” said Tim Ghriskey, chief investment officer of Solaris Asset Management LLC, a firm in Bedford Hills, New York, with $2 billion in hedge funds and conventional stock funds.

Hedge-fund managers, who oversee $1.67 trillion in assets, are reluctant to put money to work as they are buffeted by a wide range of often conflicting political and economic forces, from fiscal policy in Europe and the U.S., to what regulations will be imposed on the financial-services and energy industries, to the growth prospects in China. In turn, smaller and fewer trades may make it harder for funds to rebound from losses incurred since May, when the industry suffered its worst decline in 18 months..."

More on the worries over economic slowdown at the link above, plus comments on the recent paring back of long stock trades by Barton Biggs versus John Paulson's convictions about a US economic recovery and his firm's large positions in US financial shares, gold mining shares, and gold.

Seth Klarman profiled in Bloomberg

Hedge fund manager and author, Seth Klarman (Baupost Group) was recently profiled in Bloomberg for his investing acumen, as well as for the enduring popularity of his 1991 book, Margin of Safety.

An excerpt from, "Klarman Tops Griffin as Investors Hunt for 'Margin of Safety'":

"Seth Klarman almost doubled his hedge fund’s assets to $22 billion in the past two years as the industry shrank by sticking with the off-the-beaten-path investments he’s pursued since starting out in 1983.

Unlike John Paulson, who made $15 billion by betting against home mortgages, Klarman didn’t see one big trade that would profit as markets began to collapse. The founder of Baupost Group LLC focused on corporate bonds he calculated would yield solid returns even if the economy got worse.

“We didn’t have the degree of conviction Paulson had,” said Klarman, whose views are so closely watched by investors that his out-of-print book, “The Margin of Safety,” is offered on Amazon.com for more than $1,700. “We don’t deal in absolutes. We deal in probabilities,” he said in an interview at his Boston office..."

Check out the full piece above for more on Klarman's super-impressive investment returns (risk considered) and investing philosophy.

You can also find more about Klarman and his book, Margin of Safety, in our related posts section.

Related articles and posts:

1. Seth Klarman: Margin of Safety - Finance Trends.

2. Margin of Safety: reader notes - Finance Trends.

3. Seth Klarman: Lessons from 2008 - Value Plays via Finance Trends.

4. Seth Klarman resource page - Value Stock Plus.

Features of the week

Some Friday reading (and viewing) for ya.

1. Obama challenges financial industry to join regulatory overhaul - Bloomberg.

2. Marc Faber says China exhibits 'Danger Signals', symptoms of bubble building (w/ video) - Bloomberg.

3. Jeremy Grantham on bubbles - FT.com.

4. Renegonomics: are deadbeat borrowers fueling consumption? - Laurence Hunt's Blog.

5. Rail traffic recovery continues - PragCap.

6. John Paulson turns bullish on housing, economy - MarketWatch.

7. View From the Top: Mohamed El-Erian talks to FT about economic recovery, the US dollar, and the state of financial markets - FT.com

Thanks for checking in at Finance Trends; you can keep up with our posts and musings via RSS and Twitter. Have a great weekend, and be excellent to each other.

Market Shrinkology - Greatest Trade Ever

"Dr. Phil" Pearlman examines some of the important psychological trading themes at work in Greg Zuckerman's book, The Greatest Trade Ever, in this latest episode of Market Shrinkology on Stocktwits TV.

This particular episode happened to come at an interesting time, given the recent uproar over Goldman Sach's alleged impropriety in structuring and selling certain CDO deals to institutional clients, which Paulson & Co. (John Paulson is the central figure of Zuckerman's book) helped structure as a subprime vehicle they could sell short.

I think Phil does a great job of addressing not only some of the ethical questions that have cropped up around Paulson's trade in recent days, but the psychological factors (namely, "disposition effect") that were at work for investors like Paulson, Michael Burry, Andrew Lahde, and others who made their foray into this subprime short trade.

What does it take to enter and hold on to a big longer-term winning trade when almost everyone (including some of your investors) tells you you're wrong? Have a look as "(the real) Dr. Phil" deconstructs the psychology behind the Greatest Trade Ever.

Related articles and posts:

1. Interview: Greg Zuckerman (Greatest Trade Ever) - Fin. Trends.

2. Michael Burry: Betting the Blind Side - Vanity Fair.

3. FSN interview: Richard Eckert (Lahde Capital) - Finance Trends.

It's a Goldman kind of Friday

The SEC's civil suit against Goldman Sachs, accusing the firm of fraud in structuring certain mortgage backed CDOs (ABACUS 2007-AC1), has been the financial story of the day.

According to the SEC complaint, Goldman let a large hedge fund (Paulson & Co.) influence its structuring of synthetic CDOs, which were subsequently sold on to bullish clients (buyers such as pension funds and other large investors) under the premise of their being assembled by an independent party.

Wall Street Journal has the details:

"According to the SEC, Goldman structured and marketed a synthetic collateralized-debt obligation, or CDO, that hinged on the performance of subprime residential-mortgage-backed securities. The CDO was created in early 2007 when the U.S. housing market and related securities were beginning to show signs of distress, the SEC complaint said.

"Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc., with economic interests directly adverse to investors in the [CDO], played a significant role in the portfolio selection process," the complaint said.

The complaint said Paulson had an incentive to stuff the CDO with mortgage-backed securities that were likely to get into trouble. SEC enforcement chief Robert Khuzami alleged that Goldman misled investors by telling them that the securities "were selected by an independent, objective third party..."

The SEC's suit against Goldman Sachs has been the buzz of the day. Everyone is talking about it in the blogosphere, the business news media, and on Twitter and Stocktwits.

People want to discuss the political implications of the story, as well as forecast what is likely to happen to the principal parties involved: will there be a large fine/settlement, who will be thrown under the bus, why did this news just happen to come out on an option expiration Friday, and so on. Business Insider has even dedicated a special section to the Goldman Sachs story.

Meanwhile, it's interesting to note that the details of Goldman's CDO deals with Paulson & Co. were openly detailed in chapter 9 of Greg Zuckerman's book, The Greatest Trade Ever. John Paulson and his team met with various Wall Street firms (Deutsche Bank, Goldman Sachs, Bear Stearns) to discuss and negotiate the creation of new CDOs from pools of risky mortgages.

Paulson & Co. were open about their desire to short most tranches of the CDOs through the purchase of credit default swaps (CDS) on these CDO instruments. Some bankers (Scott Eichel at Bear Stearns, among others) turned down Paulson's proposed deals, while others (like Goldman) gladly accepted and negotiated with Paulson on the collateral backing the deals.

According to Zuckerman's book and Paulson's quotes, the bankers were ultimately responsible for what went into the CD0s that were sold to investors. It's worth pointing out that all those who took the bullish side of the trade did so of their own accord, and that "some investors were even consulted as the mortgage debt was picked for the CDOs to make sure it would appeal to them." (Zuckerman, page 181).

Having said that, Goldman probably should have been more forthright in dealing with its clients, instead of telling them (as the SEC complaint alleges) that the mortgage-backed CDOs they were buying were structured with the help of an "independent, third party".

Update: NPR interviewed Greg Zuckerman to get his thoughts on the Goldman Sachs charges and John Paulson's role in the CDO deals. Do check this out, as he quickly fills us in on some main points that people were guessing about (or just wildly wrong about) on Friday.

Related articles and posts:

1. Michael Burry explains his subprime CDS trade - Finance Trends.

2. FSN interview: Richard Eckert (Lahde Capital) - Finance Trends.

3. Lessons from John Paulson - Finance Trends.

4. NPR talks to Greg Zuckerman (Greatest Trade Ever) - NPR.org.

FSN interview: Richard Eckert (Lahde Capital)

There's a great interview in the latest Financial Sense Newshour with Richard Eckert, the former CFO/risk manager at Lahde Capital Management.

The interview topic: "The Greatest Trade Ever: An insider's behind the scene view of how a hedge fund made millions out of the credit collapse."

For those who don't recall, Lahde Capital is the small Santa Monica hedge fund set up by Andrew Lahde, which profited mightily from short bets on the subprime housing market. After raking in his dough, Lahde famously kissed the hedge fund world goodbye in a widely circulated, and widely discussed, farewell letter to clients.

Lahde is also one of the main investors profiled in Gregory Zuckerman's book, The Greatest Trade Ever, a treasure trove of information on the subprime crash and the hedge fund managers who profited in the downturn.

As I come to the end of Zuckerman's book, one thing that I'm totally struck by are the obstacles that investors like Andrew Lahde, Michael Burry, and John Paulson met in executing their subprime trades and keeping those trades on in the face of financial worries, personal doubts, and total opposition to their ideas from nearly everyone they came in contact with (including their own investors).

How did they maintain their vision and stay with their winning trades until the end? That's an interesting subject, and perhaps FSN's interview with Richard Eckert will shine a little added light on that, and other aspects of Lahde's trade as well. Enjoy.

Related posts:

1. Michael Lewis on Charlie Rose: The Big Short - Finance Trends.

2. Michael Burry: Betting the Blind Side - Finance Trends.

Michael Lewis on Charlie Rose: The Big Short

Michael Lewis, well-known storyteller and author of The Big Short, joins Charlie Rose for a discussion of the financial crisis and the real-life characters in his new book, who saw the collapse coming and profited by shorting the subprime housing market.

There are many remarkable aspects to this story, but perhaps one of the most interesting themes to emerge from this discussion is Lewis' realization that the events chronicled so memorably in Liar's Poker were not, as he thought at the time, the end of an era, but rather the beginning of one that only seems to be ending now in 2010.

Enjoy the interview, and click over to our related posts for more insight on hedge fund managers Michael Burry, Andrew Lahde, and John Paulson, who profited from the subprime short trade and were profiled in Lewis' and Greg Zuckerman's latest books.

Michael Burry: Betting the Blind Side

Michael Lewis has a new book coming out called, The Big Short. It's supposed to be an account of the financial crisis and how the "US economy was driven off a cliff", thanks to the drive for cheap housing and the toxic investments Wall Street packaged around this goal.

Vanity Fair has published an excerpt from Lewis' book called, "Betting on the Blind Side", which highlights the subprime-housing short trade of California hedge fund manager, Dr. Michael Burry.

"In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings.

He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P.

Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds."

We mentioned Burry in yesterday's post, highlighting a passage from Greg Zuckerman's book, The Greatest Trade Ever, which pinpoints the moment that Michael Burry and John Paulson's subprime short aspirations were realized in the creation of credit-default swaps (CDS) tied to mortgage bonds.

I'm halfway through Greatest Trade Ever now, and Lewis' account of Burry's subprime trade should prove to be an engrossing companion piece to Zuckerman's book. You may even want to print the VF article out, as it's a lengthy excerpt from Lewis' book.

Interview: Greg Zuckerman (Greatest Trade Ever)

Matt Davio at MissTrade recently interviewed Gregory Zuckerman, writer and author of, The Greatest Trade Ever, a new book about the "short" subprime real estate trade and the fortunes made by speculators and investors like hedge fund manager John Paulson through their persistent effort in carrying out that trade.

After watching this interview and hearing all the great insights on what made John Paulson's trade a breakthrough winner for his firm & for his investors, I decided that Zuckerman's book should be at the top of my reading list. Can't wait to check it out.

Related articles and posts:

1. Lessons from John Paulson - Finance Trends.

2. 'Greatest Trade Ever' podcast w/ Gregory Zuckerman - Slate.

3. MissTrade "Trader Talk" interviews - Vimeo.

John Paulson's new gold fund + lessons

It's been a big week for the cottage industry of John Paulson-watching.

The Paulson & Co. fund manager is set to launch a dedicated gold and gold mining equity-focused fund at the start of next year, in which he'll invest $250 million of his own money.

You may recall that Paulson's earlier forays into gold ignited a new rush into gold by hedge funds and investors piggybacking on the trades of sophisticated hedge fund managers. JP's new fund signals his continued positive outlook for the precious metals sector over the intermediate to long-term.

That's not all that's happening in the world of John Paulson. Investors have pored over his firm's recent 13-F filing and letter to investors, while his comments on Bank of America (Paulson & Co.'s largest position in the financials sector) have fueled publicity over a divergence of opinion with bank analyst Meredith Whitney on the stock's outlook.

Plus, there are gathering opinions on Gregory Zuckerman's new book, "The Greatest Trade Ever", which details the fund's (now legendary) short subprime CDS bet, and its role in pushing Paulson & Co. into the investment world limelight.

If that's not enough, you can also catch Zuckerman's recent Wall St. Journal piece adapted from that book, or check out Eric Jackson's fine article, "What John Paulson could teach us". This is one I'm currently reading, and it contains some great insights on the team (including Paolo Pellegrini) that put together Paulson & Co.'s housing trade strategy. Do take a look.

Related articles and posts:

1. John Paulson: The man who made too much - Portfolio.com.

2. John Paulson in Bloomberg Markets - Finance Trends.

Bill Fleckenstein: wary of dollar, long gold

William Fleckenstein has some very interesting things to say about the US dollar, gold (with quotes from John Paulson), and an impending turn in inflationary psychology in this new Minyanville article.


Bill is also seen here in this Bloomberg TV interview, explaining why he is currently long gold stocks and looking for future short opportunities in the market.

He also makes a few choice points about the Fed's culpability in bringing about this financial crisis, and why we can't "print our way to prosperity". Check it out.

Related articles and posts:

1. Bill Fleckenstein on PPIP, inflation - Finance Trends.

2. FSN interview w/ Bill Fleckenstein - Finance Trends.

Gold rises to new record price

Certainly one of the biggest stories of yesterday's market action is carrying over to today; gold's breakout to new record highs.

We spoke quite a bit about gold in yesterday's Twitter stream, noting that gold's latest upsurge has come amidst a global tide of inflationary worry and growing anti-fiat money sentiment. This is quite remarkable, as much of gold's rise this decade was, previously, widely perceived as a "weak dollar story".

Reuters shares this quote from gold watcher and newsletter writer, Dennis Gartman:

"Gold's rise is not a dollar phenomenon but an "anti-currency" phenomenon as money is flowing away from almost any and all currencies.".

Interestingly enough, today's coverage from the Financial Times seems to take an opposing tack, quoting an analyst who noted the lagging performance of gold in euro terms:

Eugen Weinberg of Commerzbank said: “The fact that the rally of gold prices is mainly attributable to the weak US dollar at the moment is clear if we look at the price of gold in euro terms. At €710 a troy ounce, this is still 10 per cent lower than the all-time peak recorded in February 2009.”"

However, Bloomberg's article coverage of gold's new price highs yesterday cited inflation as a mounting global concern, alongside quotes from analysts and investors who noted the metal was acting as "a hedge against all currencies".

It's been a while since we covered the gold market in depth, but then a round of all-time highs usually seems to get everyone's attention. For more on the subject, please have a look at these previous gold commentaries in the related articles section below.

Related articles and posts:

1. John Paulson, hedge funds move into gold - Finance Trends.

2. Gold's place as a reserve currency - Gillian Tett via Gata.org.

3. Gold hits all-time highs (Jan. 2008 roundup) - Financial Sense.

4. The Invisible Crash: book review - Financial Sense.

Paolo Pellegrini interview on Bloomberg

Paolo Pellegrini, the man who helped John Paulson structure his short trades in the subprime mortgage bond market, is the subject of a new Bloomberg profile.

An excerpt from that piece:

"Paolo Pellegrini has a nose for trouble. He saw it in rising housing prices in early 2006, when he cranked through decades of home price data and concluded the bubble was poised to burst. Pellegrini then helped engineer a massive bet against subprime mortgages that catapulted Paulson & Co. hedge funds to 2007 gains of as much as 590 percent -- and firmwide profits of more than $3.5 billion.

Pellegrini, 52, pocketed tens of millions of dollars, allowing him to buy a couple of what he laughingly calls “entry- level supercars”: a silver Ferrari F430 with a base price of $168,000 and a black $109,000 Audi R8.

By April 2008, the Rome native smelled danger again. Nearly six months before the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc., he and his colleagues saw that the unfolding crisis would trigger U.S. government intervention: bank rescues, a stimulus plan and yawning deficits. That move would eventually undercut the dollar and U.S. stocks, unleashing market havoc, Pellegrini reasoned.

“The losses would be massive,” he says. “I knew the policy response would be commensurate...”"

Read on for more about Pellegrini's investment strategy at PSQR, his thoughts on the Fed, the US dollar, and more.

You can also catch Pellegrini in this Bloomberg TV interview, where he makes some interesting points about inflation and the relative health of household balance sheets between 2007 and today.

Contest winners + Features of the Week

Thanks to everyone who participated in this week's blog contest. I really appreciate all the feedback and suggestions that were offered to help us improve the blog.

Also, thanks to Aaron at MagsDirect.com for his help in sponsoring the contest giveaway, 2 free 1-year subscriptions to The Economist. I'm sure our contest winners will appreciate the prize.

I've selected Maria at Bear Mountain Books and John at Controlled Greed as this week's contest winners. Thanks for voicing your suggestions along with our other commenters (they were ALL great!), and I will email you to confirm your prize and pass your mailing info along to the publisher.

Now for some Friday links; our "Features of the Week".

1. Financial media coup d'etat - Wall St. Cheat Sheet.

2. John Paulson buys banks hit by credit crisis - Bloomberg.

3. Charting the markets: "Where to look next" - Quint Tatro.

4. Natural gas: down and out and unloved - Frank Barbera.

5. America: fat, drunk, and stupid is now way to go through life - Burning Platform.

6. The "Second American Revolution" has begun - Gerald Celente. (Hat tip: Bear Mountain Bull)

7. A "Four-Step Healthcare Solution" - Hans Hermann Hoppe, Mises.org.

8. Beware of confirmation bias - Financial Philosopher.

9. Do we really need daily doses of news? - Growthology.

10. Last Word: Les Paul (video) - NY Times.

Thanks for reading Finance Trends Matter. You can also keep up with our RSS blog feed, and follow this link to hang out with us on Twitter.

Have a great weekend, everyone.

John Paulson & Joseph Stiglitz: massive mispricing

Video discussion featuring John Paulson (Paulson & Co. hedge fund chief) and economist Joseph Stiglitz discussing the "massive mispricing" of mortgage backed assets during the real estate bubble. Hat tip to Street Capitalist.

Surprisingly, Paulson makes the claim that government had nothing to do with the conditions that fueled the mortgage finance & securitization bubble. He also says that the government "had to step in" to prop up the banking system due to fears of systemic collapse.

This opinion is in stark contrast to our view, and that of most other Austrian-school thinkers. Simply stated, the easy money and credit conditions which primed this real estate bubble would not have been available without government or central bank interference in the market for interest rates.

The widely held notion of this latest boom-bust cycle as a "free-market failure" is incorrect. It should instead be recognized for what it is: a failure of US monetary policy.

Related articles and posts:

1. Excellent timing: John Paulson - Finance Trends

2. John Paulson in Bloomberg Markets - Finance Trends

3. John Paulson, hedge funds move into gold - Finance Trends

Obama's plan could boost Fed's power

Dear leader Obama is speaking out today on another of his far-ranging plans to "save the world"; this time it's a proposal to reshape financial industry regulation and expand the powers of the Federal Reserve.

Bloomberg has the details:

"President Barack Obama said his plan to refashion supervision of the U.S. financial system is needed to fix lapses in oversight and excessive risk taking that helped push the economy into a prolonged recession.

The proposal, much of which will be subject to approval by Congress, sets out the biggest overhaul of market rules in more than seven decades, adding an additional layer of regulation for the biggest firms. It would create an agency for monitoring consumer financial products, make the Federal Reserve the overseer of companies deemed too big to fail, and bring hedge and private equity funds under federal scrutiny.

“This was a failure of the entire system,” Obama said at a White House event that included the leaders of the Treasury, the Fed and other regulatory agencies. “An absence of oversight engendered systematic, and systemic, abuse.”

The announcement marks the beginning of what promises to be a political battle that’s likely to alter the president’s plan. Obama, who has called the “sweeping overhaul” of regulations one of his top domestic priorities, said wants to sign legislation to enact it by the end of the year."

Note the grand legitimizing theme: we need this overhaul due to "a failure of the entire system" (read: managed capitalism) and a supposed "absence of oversight" in the financial sector.

However, as anyone who has studied the situation already knows, many of the huge disasters of this financial panic have occurred in the most regulated sectors of the economy, namely the "too big to fail" banks and insurance firms.

As hedge fund manager John Paulson pointed out in last fall's DC hearings on hedge funds and the financial crisis, it was the heavily regulated banks which contributed most to the building panic due to their overleverage and imprudent bets on mortgage-backed bonds.

Let's not forget the remarkable failure of OFHEO (now part of FHFA), the oversight committee tasked specifically to watch Freddie Mac and Fannie Mae, which somehow managed to sign off on Fannie and Freddie's accounting practices just before these "government-sponsored-enterprises" admitted to manipulating earnings in a huge accounting fraud scandal.

Actually, OFHEO released a lengthy report on accounting irregularities at Fannie Mae in 2004, but the warnings were largely ignored by the media and attacked by politicians friendly with the GSEs. Where was the saving grace of government regulation in this instance?

Obama's lecture on financial regulation also (conveniently) fails to recognize the enormous role that government had in fostering the conditions which built this crisis, namely the Fed's easy money policies (which gave rise to the housing bubble) and the expansion of a social engineering program designed to encourage homeownership, no matter what the eventual cost was to the individual or society.

We could go on and on in this fashion, but it's best to just cut to the chase and say what needs to be said. The government is seeking to expand its reach (and the Fed's) over the private economy, on the heels of a financial crisis it helped create.

For more on this, please listen to the Thomas Woods Meltdown interview and see the related articles below.

Related articles and posts:

1. Thomas Woods: Meltdown interview - Finance Trends.

2. The Bailout Reader - Mises.org.

3. The Myth of Systemic Collapse - Real Clear Markets.

4. Government intervention fuels the crisis - Finance Trends.

John Paulson, hedge funds move into gold

There was a good amount of buzz last week surrounding hedge fund manager John Paulson's move into the gold sector, one that coincided with the opening of a new Paulson & Co. fund (the "Paulson Real Estate Recovery Fund") that will invest in real estate.

Market Folly has more on Paulson & Co.'s investments in gold and the gold mining shares in, "Paulson & Co. buys tons of gold":

"The first major move that everyone will be talking about is Paulson's big entrance into gold. His position in the Gold Trust (GLD) is brand new and is brought up to a whopping 30% of his portfolio.

Now, there are indeed a few caveats with this move: Paulson & Co have said themselves that they have done so as a hedge, as they now own well over 8% of this exchange traded fund (ETF). Their hedge funds have a share class that is denominated in gold (instead of in US dollars or Euros).

Still though, that's quite a large hedge to have. Not to mention, Paulson also has a copious amount of gold miners now littered throughout his equity portfolio... And, such a massive position in gold and gold miners has to be for more than merely a hedge.

One other thing to consider with Paulson's portfolio is that these holdings listed above are only his long equity holdings. The main reason why we bring this up is because the holdings above represent only a piece of his overall portfolio pie. Many of the positions above are merger arbitrage and event driven positions. While his gold stakes may be a large part of the assets disclosed in this filing, they are not quite as big when you compare them to his total assets under management. So, keep that in mind..."

Jay at Market Folly also notes that other prominent hedge funds, including David Einhorn's Greenlight Capital and Stephen Mandel's Lone Pine Capital, have also recently made notable forays into the gold sector. So should we follow the hedge fund crowd into their recent gold trade?

Andrew Mickey offers an interesting take on this very issue in, "Why Gold Enthusiasm is 'Cool' Again". As he notes in the article, Paulson's Midas touch has made gold the new "cool" investment on Wall Street, which is enough to leave Mickey skeptical on the timing of this particular speculation.

"Right now, gold is the hot sector. Expectations are soaring and it is only a matter of time until the “hot money” finds something new. Gold is glittering now and it will do so in the future, but it’s best to buy it when it’s not being watched so closely.

Yes, I’ve bought gold and gold stocks in the past. I will be buying gold stocks again in the future. It’s all part of my personal investment plan which I’m sticking too.

Inflation is coming. Real assets and shares of producers of real assets will do exceptionally well in the years ahead. For now though, it’s best to look for value in the real asset sectors."

Check out the full piece at the link above (Hat tip to Richard Russell), and see why this writer thinks the recent gold chase has left some hard asset sectors overlooked and relatively undervalued.

Related articles and posts:

1. John Paulson in Bloomberg Markets - Finance Trends.

2. Video: John Paulson & Joseph Stiglitz - Finance Trends.