Dave Gonigam – September 21, 2011
- Two eyebrow raisers: Feds point fingers at “a global Ponzi scheme” while Lloyd’s mysteriously withdraws a lawsuit against Saudi Arabia
- Washington expands its drone war: An intriguing investing angle becomes even more lucrative
- Waiting on the Fed: Stocks drift while a little-known indicator points to “new” recession
- Gold steady as worldwide vaults fill up
- Financial crisis debate turns into a real slugfest… Video goodness below
- Readers sound off about Keystone pipeline and the ingenious new ways Uncle Sam tracks you worldwide
Here’s an eyebrow-raiser on a Wednesday morning: The feds have revised their lawsuit against an online gaming site called Full Tilt Poker.
Not only was it violating the gambling laws, prosecutors say, it was “a global Ponzi scheme.”
Here’s how they say it worked: Members had deposited $390 million, but the site had only $60 million on hand. Turns out the proprietors had pocketed $444 million for themselves over the previous four years.
Leave aside the pot-kettle issue of the U.S. government labeling anything a Ponzi scheme. Ponder this: $60 million in assets, compared with $390 million owed to depositors? That’s only 6:1 leverage!
Before 2008, the major investment banks were leveraged nearly 40:1. Fannie Mae and Freddie Mac, nearly 80:1.
Now we know what Full Tilt Poker really did wrong: It failed to obtain a Federal Reserve charter.
Here’s another eyebrow-raiser: A unit of the insurer Lloyd’s of London, which sued the Kingdom of Saudi Arabia for indirectly aiding and abetting the Sept. 11 attacks, has suddenly dropped the suit.
The suit was filed in U.S. federal court less than two weeks ago. Lloyd’s sought $215 million it had paid out to victims of the attacks, claiming al-Qaida was backed by banks and charities acting as “agents and alter egos” of the Saudi Arabian government.
On Monday, Lloyd’s filed to drop the suit. No one from Lloyd’s law firm will say why. Legal scholars are baffled.
Hard not to wonder what kind of phone calls ricocheted back and forth between Washington, London and Riyadh the last few days.
Here’s an aspect of the “War on Terror” that’s easier to get a grasp on: The “drone war” described here last Friday is expanding.
“The Obama administration is assembling a constellation of secret drone bases,” reports today’s Washington Post, “for counterterrorism operations in the Horn of Africa and the Arabian Peninsula as part of a newly aggressive campaign to attack al-Qaida affiliates in Somalia and Yemen, U.S. officials said.”
“It’s a conscious recognition,” says an anonymous senior military official, “that those are the hot spots developing right now.”
The unmanned aircraft will be based nearby, in Ethiopia and Djibouti… and faraway, in the Seychelles, a cluster of islands in the Indian Ocean.
So there’s little doubt that the number of U.S. drone strikes will continue to grow, perhaps at the same exponential scale they have up till now: More than tripling from 33 in 2008 to 118 last year. They’ve already been used in Yemen and Somalia… and Iraq, Afghanistan, Pakistan and Libya.
The number of drone aircraft, only 60 a decade ago, is more than 6,000 today. Chances are that number will continue to grow, too: As dramatic as it is to send in special forces to “take out” suspects, it’s a lot easier and less risky to do it with a drone operated by someone sitting at a control panel in Nevada.
A growing trend, backed by endless dollars from the federal government: sounds like an intriguing investment opportunity. And it is…
Problem is, the two big U.S. makers of drones are Northrop Grumman and General Atomics. Both of them are large, diversified companies that have many other lines of equipment they sell to the Pentagon and other governments around the world. Sorry, there’s no pure play for drones.
But… One of the most critical metals that go into drone aircraft yields a possibility. “It’s a silvery white metal,” says Byron King, “and one of the lowest-density metals there is. That means it’s very lightweight.” Yet it’s six times as strong as steel.
Among the major advantages Byron cites…
- It resists rust, even at extremely high temperatures
- It has a high melting point
- So it holds its mechanical properties up to extremely high temperatures
- It’s stronger than steel
- Transparent to X-rays
And as you can imagine, it has many applications other than drones: Commercial aircraft, satellites, automobiles and nuclear power, to name a few.
New applications are coming along every day. In the military alone, an alloy of this metal plus aluminum “could become an essential element in gun sights, rocket launch rails and guidance systems,” says Byron.
Byron has tracked down a company with a tiny market cap — $42 million — sitting on what could be a huge supply of this critical metal. “This fast-growing company already has secured some important government contracts,” he says, “and brought onboard a retired general to facilitate even more lucrative government contracts.”
In other words, the potential is nearly limitless, as Byron explains in his newest presentation. Learn why it’s best positioned to capture a huge share of this $707 billion market, right here.
Markets everywhere are in suspended animation today, awaiting whatever the Federal Reserve says at the end of its two-day meeting this afternoon.
The major U.S. stock indexes have been up, they’ve been down but mostly they’ve done nothing today.
The conventional wisdom — presumably priced into the market at this point — is that the Fed will pursue “Operation Twist.”
The idea was first pursued 50 years ago and given the name based on the Chubby Checker song of that era.
Ben Bernanke’s head on Chubby Checker’s body…
Under such a plan, the monetary mandarins would “twist” the yield curve by selling Treasury debt maturing in three years or less… and buying 7- and 10-year Treasuries. This would hypothetically lower long-term interest rates. Because, you know, a 10-year Treasury yielding less than 2% is still too much.
Whatever they decide, count on it punishing savers even more than they’re being punished now. Look for a full breakdown in tomorrow’s 5, courtesy of Dan Amoss and Michael Pento.
If Fed governors are looking for an excuse to step on the monetary gas even harder than the markets anticipate, they now have it in the form of the August State Coincident Index from the Philadelphia Fed.
This little-known index compiles four employment indicators from all 50 states. A sustained drop below the 50 level is a flashing-red recession warning… and the number has been sub-50 for four straight months.
The only false alarm the index has sounded since 1980 was last year: QE 2, for all its other failings, did manage to forestall the onset of a new recession — at least as defined by the wonks at the National Bureau of Economic Research. Your mileage may vary.
Gold is wavering above and below $1,800 as the Fed decision looms. The spot price as of this writing is $1,803. Silver is doing a better job of holding the line above $40, with a bid at $40.41.
Operators of gold vaults are looking to expand for the first time in years. The vault of Swiss Precious Metals, located in Singapore, is almost full up, according to Bloomberg.
Barclays is adding space, and Brink’s and Deutsche Bank are thinking about doing the same. Australia’s Perth Mint is finally filling up after an aggressive build-out back in 2003.
The demand “is totally compatible with the current financial and political global turmoil,” says Swiss Precious Metals CEO Jean-Francois Pages.
Translation: Given the lunacy in governments and central banks worldwide, we can’t expand quickly enough.
If business TV were this entertaining in the United States, we might be tempted to watch it once in a while…
This is a panel discussion about the global financial crisis on Russia’s NTV network. Property developer Sergei Polonsky gets agitated and tells the tycoon Alexander Lebedev he sometimes feels “like bashing you in the face.”
Lebedev, who owns two of Britain’s biggest daily newspapers, proceeds to haul off on Polonsky.
“Unfortunately,” Lebedev wrote on his blog after the fact, “NTV viewers cannot see how Polonsky behaved during the 1½-hour recording. Everybody could see that he was absolutely off his head.”
As you watch this clip, don’t overlook the studio backdrop. Funny… We know the demise of the dollar is a recurring theme on Russia’s English-language satellite channel RT, but it appears be grist for domestic audiences, too.
American TV could learn a few lessons from this: Maybe Steve Forbes and Warren Buffett Jell-O wrestling over tax rates on “the rich.”
OK, maybe not. Sorry if you were eating when you read that…
“The Keystone pipeline will provide oil to keep North America running,” a reader writes. “No pipeline from Alberta to the Gulf Coast equals the oil being sold to China and lost forever to the people of the United States.”
“No oil in the U.S. means no crops being raised and no trucks to carry the food to the people and no fuel for the people to get to the food. Real soon, no problem. Half, maybe two-thirds of Americans starve to death; the land will support the survivors.”
“I know some farmers who had ‘eminent domain’ put a major pipeline across their land. Much noise and gnashing of teeth — until the land rental checks from the pipeline company started arriving. Sudden quiet across the land. Don’t even ask: It is ‘free’ money every year and they keep their money matters very private.”
“I was going to write and explain the pipeline,” writes another, “but when you see the type of people who govern your country, most of the others would never understand.”
“Please note,” writes a reader after our review of how IRS rules are affecting Americans with foreign bank accounts, “the reason the TD Bank objected is that they have over 1,000 branches in the U.S.”
“They also own one or two large U.S. brokerage firms, TD Ameritrade and thinkorswim, which I believe are being merged. This means that they have lots of property that the US government can seize.”
“Scotiabank was robbed by the U.S. government in a U.S. court 25 or 30 years ago. That is why you can see their branches all over the Caribbean and Latin America but they own little or nothing where Uncle Sam can attach it easily.”
“In many cases the banking reporting is as much work as the tax preparation. There is also a huge form for any U.S. citizen who owns a Canadian tax-free savings account. At our firm, we tell them to close them because the tax saving is less than the cost of preparing the form.”
The 5: Just as yesterday’s issue went out came word of a new wrinkle in the crackdown on “hiding assets offshore.” The Justice Department revealed a federal grand jury is looking into eight offshore banks.
This is an outgrowth of an IRS investigation into UBS launched in 2008. “The government’s enforcement efforts are a lot further along than had previously been disclosed,” former federal prosecutor Jeffrey Neiman tells Bloomberg. He worked on the UBS case.
The Justice Department won’t say which banks are targets, but it does say, “This enforcement effort has dealt fabled Swiss bank secrecy a devastating blow.”
Funny, your editor was under the impression it was illegal for the government to say a peep about something that’s before a grand jury…
“I’m in Panama now and had a meeting with our lawyers yesterday. While waiting for some paperwork, the inevitable small talk happened regarding the IRS, an upcoming free trade agreement, etc.”
“When registering a company with these lawyers, one must sign documents clearly stating no US citizens are involved. They simply don’t and won’t work with U.S citizens, because of the scrutiny they’ll have to bear within the coming years. They’re not hiding anything; it’s just that they are a well-established law firm and don’t need the hassle.”
“Plus, according to them and to the free trade agreement rules, the U.S. can fine Panama and in turn Panama would fine the law firm for anything that happens. As you clearly pointed out, it’s very easy for a law-abiding citizen, with not even too much money, to get into trouble.”
The 5: Interesting that Panamanian businesses are treating the trade agreement as a done deal.
It’s still tied up in a dispute between the White House and congressional Republicans. So is a deal with South Korea… and the one with Colombia that we’ve been following since our visit there.
“When Americans are considered persona non grata at foreign banks as a result of our government’s policies, it is a pretty good indication that things have gone too far.”
“FATCA is not the only problem. There’s FBAR, PFIC, KYC, IRS Form 3520, IRS Form 3520-A, FinCEN Form 105, and IRS Form 8300. Even the Census Bureau has reporting requirements if you want to ship your own gold coins or bullion to store in your own account overseas.”
“The collective reference for this alphabet soup assault on our freedoms ought to be ‘FUBAR.’ Maybe it is time to push back. How about an organized campaign by letter, email and telephone to Congress to demand the rollback of this morass of overbearing regulations currently imposed on us Americans by our own government?”
The 5: Petition the government for a redress of grievances? How quaint.
The 5 Min. Forecast
P.S. Shares of rare earth darling Molycorp tumbled 20% yesterday after J.P. Morgan slashed its upside target on the stock. That’s on top of bad news last week, when a longstanding deal with the Japanese conglomerate Sumitomo fell through.
“Looking back,” says Energy & Scarcity Investor editor Byron King, “we sold Molycorp out of the ESI portfolio at the right time and booked a nice gain. I don’t know where Molycorp will go from here, but my hunch is that there’s more downside than upside.”
Byron recommended getting out of Molycorp last January, for a 178% gain. He sees at least as much potential, probably more, in the producer of the silver-white metal described earlier in this issue. If you missed out the rare earths train, you can make up for that right now. If you did catch the rare earths train, you can shoot for a repeat.
Federal Appeals Court Aids and Abets the Assault on Enterprise
Breaking News: A federal appeals court in Atlanta just dealt a huge — though not fatal — blow to Greg Stemm and the crew at Odyssey Marine. Odyssey has been ordered to hand over the “Black Swan” treasure it discovered to the Spanish government.
We’ve been following the sordid tale for years now, both in The 5 and in the documentary Addison is hard at work on. If you’re not up to speed, some of the mind-blowing background is here.
On to the Supreme Court? Perhaps.
OMEX stock is down 39% after the decision. Yesterday it popped up 25%. We’re seeing some mighty funky action in the options market surrounding OMEX too. Much more to come tomorrow…