Beware the fabulous money machine

Spencer Jakab penned an interesting commentary for FT Weekend on the Federal Reserve's $52 billion profit (unaudited) for 2009. Here's an excerpt from that piece, "Beware the fabulous federal money machine":

"Unlike its New York brethren though, the Federal Reserve has a literal licence to print money, minting some $52bn in profit last year and paying $46bn in dividends to its shareholder, Uncle Sam...

“The man on the street doesn’t understand the $46bn earned by the Fed and given to the Treasury,” laments David Kotok, chairman of Cumberland Advisors.

Financial markets do, and it is making them increasingly skittish. The Fed’s profits stem largely from its purchase of mortgage securities, a programme that is slated to end in about a month at some $1,250bn. The first hurdle is weaning the market off this money-printing exercise. That alone could lead to an unwelcome rise in mortgage costs. More daunting will be soaking up the excess cash created before it sparks inflation in the real economy.

The most straightforward and obvious method, selling the securities, would be likely to crush the mortgage market while wiping out its “profits” from the operation to date. Instead, it will be likely to soak up the excess funding in the banking system – a delicate task that could lower inflationary expectations and cement a recovery if done right or spark deflation if botched..."

Jakab goes on to discuss the problems of the likely losing positions on the US Treasury's bailout portfolio, and the fear over what will happen when these artificial props to the economy are removed.

In a housing & lending market now dominated by Fannie Mae and Freddie Mac, what happens when you can no longer maintain that taxpayer-funded level of support?

Related articles and posts:

1. Fed profits: $52 billion in 2009 - Fortune.

2. How the Federal Reserve earned its profit - Econbrowser.

Alphatrends weekly market wrap

Brian Shannon of Alphatrends takes us through his Weekly Wrap on Stocktwits TV with a technical look at the major US market averages and a view to the trading week ahead.

Brian's technical analysis videos tend to highlight the action of leading stocks and the major averages in multiple timeframes (hourly, daily, & weekly charts).

While I'm not as familiar with his trading style as others might be, I do like to check out his videos on a regular basis, in addition to following Brian's trading notes and market thoughts on Twitter.

Take a look at Shannon's market wrap, and if you like what you see, you can find additional episodes (and a variety of additional trading and investing themed content) at the Stocktwits TV archives.

Altucher: Things I learned from Vic Niederhoffer

When James Altucher mentioned (on Twitter) that he was preparing an article about lessons learned while trading for Victor Niederhoffer, I knew that was one essay I'd be looking forward to.

Here's James on, "Ten Things I Learned While Trading for Victor Niederhoffer":

"I traded for Victor Niederhoffer for about a year starting in 2003. I was up slightly more than 100% for him, primarily trading futures using a quantitative approach. During that period I had one down month: June 2003.

Victor was a top trader for George Soros before starting his own fund in the ’90s and then writing the classic investment text “Education of a Speculator.” He then suffered one of several blowups in his career when his fund crashed to zero while on the wrong side of a couple of bets during the Asian currency crisis in 1997 (most notably, he was short S&P puts when the market crashed that year).

Despite that, Victor has consistently traded his own portfolio quite successfully and is one of the best traders I’ve seen in action. He still posts his daily comments on trading and the markets at his site dailyspeculations.com.

Here are 10 things I learned during my time trading for Victor: ..."

Read on as Altucher talks about the importance of testing your ideas, optimism, fearlessness, and protecting your downside (there's a lot more here too). Enjoy the essay and the lessons.

Richard Russell: Last Man Standing

Even though I'm able to read Richard Russell's Dow Theory Letters at the town library (they are subscribers), it's nice to find snippets from his daily remarks up on 321gold. It's convenient, and I can easily share samples of his excellent writing with others.

Here's one that I'd like to share with you, a recent update from Russell on gold and the state of America's finances called, "Last Man Standing".

"A final thought. One could stay in US dollars and gold. If the dollar goes to hell, rising gold could make up for the loss in purchasing power.

A hundred years ago gold and silver were the only items accepted as money. Paper money was carried around because it was convenient as opposed to gold and silver, which are heavy. Besides, if you had any doubt about your paper, you could turn it in at any national bank for gold, "the dollar was as good as gold." Furthermore, the dollar was backed by one of the strongest and most prosperous nations on earth.

Today the dollar is backed only by "the full faith and credit of the United States," the greatest debtor the world has ever seen. Questions are now arising about the credit-worthiness of sovereign debt. Many analysts believe that the US will never, ever, be able to pay off its debt, which is now not only rising but is compounding.

It's obvious that the Obama administration is putting off the solution of our debt and deficit problems to other future administrations. This is always a dangerous procedure.

It's the reason why our children and grandchildren will not inherit the fun and easy life that we live. I've talked about sacrifice before -- our children will be making some of the sacrifices that my own generation made (and I hope one of the sacrifices won't be war)... "

Read on to understand why "Americans have forgotten the meaning of gold and silver", and check out more of Russell's remarks at the 321gold archive and at his website (linked above).

You'll see why he's one of the most fascinating writers around (on almost any subject), and you will definitely get some perspective from a guy who's been around and seen more than most.

John Allison on "Leadership and Values"

John A. Allison, then acting CEO and Chairman of BB&T bank (now retired), gives a talk on "Leadership and Values" at the University of Virginia's Darden School of Business.

Why am I linking to this lecture by John Allison? Very simply, Allison's excellent talk addresses a greatly overlooked theme in American business and life today: establishing one's code of personal ethics.

Now what makes John Allison qualified to deliver such a lecture?

Allison, who we highlighted (and who the NY Times profiled) in our post, "BB&T prefer liberty and reason to bailouts", grew the North Carolina-based BB&T bank by leaps and bounds while it gained plaudits from customers and the business community for its integrity and high rates of customer satisfaction.

While large banks and mortgage lenders across the country sank their customers, themselves, and our overall economy through their overexposure to residential housing and subprime mortgage loans, Allison and BB&T remained focused on ethical capitalism and engaging in "win-win" transactions that benefited the bank as well as its customers.

In his talks on "Leadership and Values", Allison, an admirer of Ayn Rand's philosophy of Objectivism, discusses the importance of integrity, examining your ethical framework, egalitarianism and moral relativism vs. objective truth, and the road to self- improvement.

We'll let John Allison do the talking now. Check out the video above, or see this more recent clip of a very similar talk at Marshall University with a Q&A session from students and community members. Enjoy the discussion!

Market Wrap: Chris Puplava & Co.

Guys, if you're taking a long view of the markets and studying up on economic trends this weekend, you might want to take a look at Chris Puplava's latest market wrap for FSO.

Chris has put together an update on the credit markets, with some thoughts on US Treasuries and the direction of long-term interest rates.

There's also quite a bit of data and commentary on China's holdings of US govt. debt and the "state of the states" - US state finances. Plus, you'll get a look at the economic recovery, bank lending practices, market sentiment indicators, and more. Lots to look at here.

And if you've got time to check out Martin Goldberg's recent market wrap on the Emerging Markets (and ETF $EEM in particular), you'll find some worthwhile technical commentary there as well.

Have a good weekend, and if you're surfing our part of the blogosphere, check back in for some new updates & video posts. See you then.

To short or not to short?

I'm reading some of the great stuff put out by the bloggers in the Stocktwits network and I wanted to share two great posts, from Joe Fahmy and Keith McCullough, on the pros and cons of short-selling.

The first post, by Joe Fahmy, is entitled, "Why I Hate Shorting Stocks". Here's an excerpt from Joe's lead in:

"When I called for a market correction in mid-January, I received several emails asking me why I don’t recommend short ideas. In my Introduction blog post, I talk about finding an investment philosophy that fits your personality…and quite simply, shorting is not for me.

The title of this article is not meant to offend anyone, as I never try to impose my trading style on anyone. I actually believe that shorting is a necessary part of the stock market and that short-covering can add stability to a correcting or “free-falling” market. Nevertheless, it doesn’t fit my personality and here are my reasons why: ..."

Joe is one of the most interesting and educational stock traders/bloggers I've followed on Stocktwits and Twitter. In this post, he has taken the time to lay out why, in his personal view, short-selling is not conducive to his personality and trading style.

As I noted in the comments section of his post, I think that even traders with considerable short-selling experience might benefit from his arguments. It's all about what works for you.

On the flipside, we have a post from Keith McCullough at the Hedgeye Blog which argues short-selling is a necessary component of risk management:

"If you want to be a warrior of risk management, you need to be able to survive the daily battles of short selling. This is not a blood sport, nor is it one that deserves the attention of your emotions. It’s a mathematical martial art that requires flexibility and laser-like focus.

Overall, I’m probably a better short seller and risk manager than I am long term investor. That’s probably because I have more experience in down markets than I have in up ones. I entered this daily battle of ‘don’t lose money’ at a hedge fund in the year 2000. The first 3 years of my ‘be right or be gone’ experience were in down markets. Call me biased, but the only business I trust owning for the long term is the one I am building with my own hands..."

There you have it. Two differing views on a long-debated subject of relevance for investors and speculators, each from professional traders sharing their thoughts on Twitter and their respective blogs. Hope you enjoy their thought-provoking posts!