Our Take on Goldman, Another Trade of the Decade, A Sector to Sell and More!

by Addison Wiggin & Ian Mathias

  • The real trade of the decade: How one $1,000 investment could have turned to over a million… in one day!
  • Our take on the Goldman Sachs fiasco
  • So is it time to sell? Our options trader, value investor weigh in
  • Plus, Byron King with one sector definitly worth selling… right now


  Goldman, those bastards.

What’s really interesting, as always, is the story that no one is telling. The SEC is either stupid or corrupt for announcing their suit on options expiration Friday, the most volatile day of the month.

April 170 Goldman Sachs puts, which would have expired worthless had the SEC waited until today, rose 140,000% on Friday.

Anyone with an extra thousand bucks and some insider info on Friday morning could have made just shy of a million and a half by Friday afternoon.

There was surprisingly large volume in these “out of the money” puts the days before… who in their right mind would bet on such a large fall for such a typically stable company? Someone who knew what was coming. Maybe someone in the SEC should look into that, too.

Heh. Maybe someone already did.

  In case you missed it, here’s the quick and dirty on the SEC’s suit against Goldman Sachs:

  • Uber-billionare hedge fund manager John Paulson — the guy that was oh-so “smart” to see the subprime fiasco coming — allegedly pays Goldman to assemble a CDO of destined-to-fail mortgages, which Paulson then bets against. No problem there, happens all the time. Paulson is not named in the suit
  • Goldman pockets Paulson’s fee (in some way or another) then turns around and sells these securities labeled triple AAA to investors in Europe. They end up spread across banks in Holland and Germany. The SEC claims no party was informed the CDO — called Abacus 2007-AC1 — was built to fail. Oops. Fraud by omission
  • Goldman, at some point, also bets against Abacus 2007-AC1. “Hedging” Goldman calls it. Following Paulson’s lead… meh, maybe not such a bad move, but not exactly on the up and up, either. Still not likely criminal.

Paulson banked a billion when Abacus 2007-AC1 blew up. Goldman got to keep Paulson’s fee, the profitable sales of Abacus and its own hedge profits… though it still claims the lost money in the long run.

  The SEC lawsuit itself is, like the one they filed against Bank of America for lying to their shareholders, far from frightening.

It’s civil, not criminal — no one’s going to jail. The complaint cites about $1 billion in fraudulent transactions. Goldman’s market cap is $84 billion. And there’s already a no-name patsy lined up: Fabrice Tourre, the ONLY Goldman employee named in the SEC complaint. A French guy, to boot. How sweet.

The worst damage Goldman is going to see out of this may already be done. Goldman stock fell 13% Friday, wiping out $10 billion in shareholder value. If history is any guide, the media will do their best to make a real story out of this over the next week. Goldman will get a slap on the wrist later this year… and back to business as usual.

  Are you shocked? C’mon. This kind of fraud happens all the time.

“Now that the SEC announced it is charging Goldman Sachs with securities fraud,” writes our Dan Amoss, “maybe we’ll see a long overdue shift to prosecuting the fraud that permeates the financial system.


“While more prosecution of fraudulent mortgage origination is nice, accounting is the bigger issue that regulators need to deal with. ‘Mark-to-myth’ accounting is taking the U.S. banking system down the same path as post-bubble Japan.


“While we need to see the SEC push for a return to honest accounting in the banking and brokerage sector, but I’m not holding my breath. The Treasury Department has trillions in new bills, notes and bonds to sell over the next few years, and it needs the primary dealers to assist in the greatest intergenerational theft in history.”

Dan wasn’t in on the 140,000% returns on Friday, but you can sure bet our copywriters wish he was! If you think this Goldman story is going to tank the market, now would be a good time to investigate Dan’s rationale behind an impending correction. You can do so, and place your bets, for $1, right here.

  Funny, too, how the Goldman suit was announced a week before the first vote on financial reregulation in Congress.

At this point, not even the most upright Republican (heh, we know how funny that sounds, too) will stand in the way of Chris Dodd’s financial reform bill. Main Street ire for the Wall Street hustle is boiling over and the political will is there…bankers, traders, shorts, selling anything synthetic… they’re coming after you next.

Your favorite community organizer has already scheduled his trip to New York this Thursday to discuss the financial reform bill.

  Europeans don’t want to miss out on the fun either. Britain and Germany are already publicly mulling suits against Goldman on their own. Gordon Brown was really mean. He said Goldman’s maneuvering showed a certain “moral bankruptcy.” Ouch. Considering the fiscal condition of the U.K., that’s pretty funny as well.

  The S&P 500 fell 1.6% on Friday, almost solely on the Goldman news.

What kind of rational investor sells his shares in U.S. Steel (down 3.5%) on Goldman’s problems? The kind that has margin calls, redemptions and quant models insisting he does so.

  GLD, the physical gold ETF, fell an unusual 2.1% on Friday, too.

Again, what kind of right-minded investor sells his pseudo-gold on word of an unraveling financial scandal? The kind that’s worried about John Paulson. The prevailing excuse for GLD’s fall on Friday was Paulson’s massive stake in the fund, the largest of any individual investor. Maybe the scrum would force him to liquidate, the thinking went — better to get ahead of it.

Bullion, too, took a hit. The barbarous relic fell $20 on the Goldman news, but has stabilized at $1,135.

Heh. Gold ain’t what it used to be.

  So with all the fuss, is today a good day to sell your stocks?

“Friday’s breakdown in stocks,” writes Options Hotline guru Steve Sarnoff, “led by weakness in the financials, might ground highflying bulls like ash from the Icelandic volcano grounded European air travelers.

“We shall see if stocks are now set for a serious correction to unfold over the weeks ahead. My indicators see an increased likelihood that will be the case.”

  “I like what Seth Klarman writes about selling,” Chris Mayer says, adding a value investor’s perspective, “in his classic book Margin of Safety. “‘There is only one valid rule for selling: All investments are for sale at the right price. Decisions to sell, like decisions to buy, must be based on value. Exactly when to sell — or buy — depends on the alternative opportunities that are available.’

“That sums it up pretty well. We buy specific stocks for a reason or reasons — the investment thesis, as folks in the business like to say. When those reasons are no longer valid, you should sell. They may no longer be valid because the idea has played out and the stock isn’t cheap anymore or doesn’t give us that margin of safety. Or perhaps events happened differently. Or perhaps the idea turned out to be a mistake. These are all good reasons to sell.”

  “Sell tanker stocks,” Byron King ordered his Outstanding Investment readers last week — a precise demonstration of the technique Chris Mayer describes. “I’m nervous about shipping rates as I peer out at the horizon. Container shipping is already in the dumps, what with the global recession that’s NOT ending, despite what you hear from Big Media.

“Now, looking ahead, I’m concerned with profitability in the tanker biz. Things could get very bad, considering the continuing slowdown in the use of refined products in both North America and Europe. Sure, Asia is booming for energy products. But in and around Asia is also a hyper-competitive, cutthroat market for shipping.

“So I don’t want to wait until the tankers hit any rocks (so to speak). Change course now and haul away.”

  Eight banks failed over the weekend. The FDIC scooped up regional banks from all corners of the U.S., bringing the yearly count to a nice, round 50.

  Last today, a judge agreed last week to hear a case over which activist group owns the true right to call themselves the “Tea Party.” The case, which will be tried in Florida (of course), will be contended by DOZENS of plaintiffs verses Fred O’Neal, some Florida lawyer (of course) who got the rights to the trademark and intellectual property back in August.

The real issue, best we can tell, is this O’Neal fellow is giving certain candidates the “official” Tea Party seal of approval… some of whom might not be as republican/centrist/conservative/liberal as “true” tea partiers desire.

A study was released last week claiming the Tea Party represented set of Americans who are wealthier and more intelligent than the average. Given this lawsuit, we seriously doubt the latter.

  “When a national sales tax was first proposed almost 20 years ago,” a reader writes of the tax debate, which, curiously, began on April 15, “I read up on it thoroughly. It seemed to make sense to some of the top economists (not the government ones, of course). I particularly remember one comment that said, ‘Of course, that would make the United States the most desirable place to work in the world.’

“The weird part is the negativity I have noticed that jumps up from seemingly all quarters when the idea is mentioned. Personally, I do think it would work, but that is not my point here. Imagine a tax system in which one is forced to provide its government every one of the tiniest details about their personal finance, and therefore their personal life, and be harassed at least once a year to do this, meanwhile holding over its citizens’ heads the constant reminder that they can be fined and even thrown in jail if they don’t follow all the rules, even though it takes years of training to learn enough of these rules that you can correctly guess how they should be actually applied.

“Wait a minute! That is the tax system we already have. When I hear someone scoff at a national sales tax, I can’t help being reminded of cattle that aren’t comfortable being outside the barbed wire.”

The 5: Moo.

  “Do people not understand that any kind of a VAT or sales tax puts the burden on those who make the least?” another asks. “Low-wage earners spend every penny they make just to survive. High-wage earners have a portion of their income that they can save or invest, on which they would pay no tax!

“A flat tax on every penny of income is the only fair tax. Everyone would then have ‘skin in the game’ and would be less likely to vote for more handouts.”

The 5: Proponents of taxation always seem to think the arguments for or against a particular plan are about fairness. Whoever said life was fair? We ask our kids that all the time, but rarely do we get an answer.


Addison Wiggin

The 5 Min. Forecast

P.S. Tomorrow, we’re broadcasting our free online event with Greg Guenthner. He’s been collecting questions about over-the-counter and bulletin board stocks, such as:

• The difference between bulletin board stocks, penny stocks and microcap stocks

• How much money you need to get started

• The reliable, specific signs that point to a stock’s potential breakout.

Greg runs our most expensive service. But he’ll answer all your questions tomorrow for free. Sign up today. Details here.



Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More