Ponzi, Soros, and Hoarded Toilet Paper

May 17, 2013

  • “The substance of the American Dream”… laid bare as a Ponzi scheme
  • Good news for bullion and juniors? More than meets the eye to the “Soros dumps gold” story
  • “The rally that no one loved,” and why Elmerraji says it’s still not over
  • If you missed out on “the biggest fire sale in history,” Chris Mayer is back with a second chance
  • Corporate accounting fraud, and how to turn it to your advantage
  • The great Venezuelan TP shortage… a glimpse at the seamy underbelly of sunny jobs numbers… two contrasting and revealing views of gold… and more!

  “Mark Zuckerberg,” gushed CNBC’s anchors one year ago tomorrow, “has accomplished the substance of the American dream.”

The people who bought public shares of his company? Not so much…

Facebook went public on May 18, 2012.

More than a year earlier, we smelled a rat. “If and when the IPO happens — like any good Ponzi scheme — retail investors, those last in the door, will get stuck holding very expensive paper,” Addison suggested.

Peter Thiel, who became the company’s first big investor in 2004, cashed out last August, as soon as the three-month “lockup period” after the IPO expired. Zuckerberg himself unloaded some shares, although that was mostly to pay his tax bill.

“Which brings to mind my general maxim on IPOs,” said our own Chris Mayer the day FB first traded publicly: “insiders selling what they no longer want at prices they’d never pay.”

  “Soros Is Selling Gold. Should You?” reads the headline at Yahoo Finance.

Mainstream financial media have a simple job — beat you over the head with a two-by-four that’s painted in black and white, stripped of nuance, insight or — heaven forbid — useful advice.

Although The 5 comes to you free of charge, we still aim higher. And so it goes with the Soros gold story.

Before we set out on our journey, let’s get a navigational fix…

100  Another day, another slide for the metals. At $1,370, gold is barely $50 above its April 15 low. Silver’s at $22.46.

  Once again, dollar strength is a contributing factor in the metals’ struggles.

Relative to other fiat currencies, the greenback is on a roll; the dollar index sits at 84.3, a level last seen in July 2010.

  So… What the heck is Soros up to, and does it even matter?

In early 2010, gold was still below $1,200 and Soros cryptically remarked, “The ultimate asset bubble is gold.” Gold bashers projected their own biases onto Soros and concluded he thought a bubble was well under way and about to pop.

Not so. “It’s all a question of where are you in that bubble,” he said later that year. “The current conditions of actual deflationary pressures and fear of inflation are pretty ideal for gold to rise.”

Last month, Soros was again taken out of context when he told a Hong Kong newspaper, “Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold.” Business Insider’s headline? “Soros: Gold Has Been Destroyed as a Safe Haven.”

Here’s what he said before the safe haven line: “When the euro was close to collapsing in the last year, actually, gold went down, because if people needed to sell something, they could sell gold. Therefore, they sold gold. So gold went down together with everything else.” Just like the 2008 panic, when gold slumped 30%, we might add.

And here’s what he said after the safe haven line: “But the central banks will continue to buy them, so I don’t expect gold to go down.”

He said that on April 7, when gold was around $1,575. Eight days later, it touched $1,321. Heh…

  Now we have some context in which to examine Soros’ latest gold moves.

This is the week hedge fund managers file their quarterly 13-F forms with the SEC. The headline the financial media have latched onto is that during the first quarter of 2013 Soros Fund Management dumped 12% of its stake in GLD, the big gold ETF.

But get this: Soros added 1.1 million shares of GDX, the ETF of big gold miners. And while he trimmed his position in GDXJ, the junior miner ETF, he also bought 1.51 million GDXJ call options — betting on a bounce.


It’ll be another three months before we get a handle on what Soros was up to as gold swooned in mid-April. And even then, 13-F forms are something of a black box: As we’ve pointed out before, bullion holdings don’t have to be disclosed.

It wouldn’t surprise us if Soros was buying physical with both hands at $1,321 on April 15… but we’ll likely never know.

Heck, compared to Soros, the Chinese are models of transparency.

  The major U.S. stock indexes are making another run at record highs today. At last check, the Dow is this close to 15,300 and the S&P has cleared 1,660.

Consumer confidence numbers clocked in this morning at the highest level in nearly six years, while the Conference Board’s leading economic indicators jumped 0.6% for April.

  “This rally just isn’t stopping,” says our trading specialist Jonas Elmerraji — “and for the doubters, it’s not for a lack of trying.

“Welcome to the rally that no one loved. Bears are coming out of the woodwork, asking how the S&P 500 could possibly manage another up day when earnings/valuations/jobs numbers/housing stats don’t support it. Fact is, the market is moving higher, and it’s time to think like a trader: I’m happy to buy an overvalued stock as long as it gets more overvalued before I sell it.

“Is the market overbought right now? Sure.”

Jonas is looking at the two-week “relative strength indicator” in the S&P. We’ll spare you the technician-speak; for our purposes, it’s worth noting the number looks overbought for the second time since the S&P began its run-up six months ago. “Both times, the big index has been at the top of its price channel. But look at what happened last time: The index continued moving higher.

“I’m expecting the same from here.” And no doubt eyeing some juicy trading setups for readers of his STORM Signals Elite trading service.

  “I see a big opportunity for investors to pick up commercial property on the cheap,” says Chris Mayer.

We think we heard him smacking his lips in the same way he did in early 2012 when he spotted “the biggest fire sale in history.” Then, the opportunity was in real estate that European banks needed to unload to raise cash. To date, his readers have parlayed that fire sale into 57% gains… and they’re holding on for much more.

Now the opportunity lies in the United States: “There are more commercial mortgages coming due this year than in any other year on record.”

This is territory Chris knows well from his days as a commercial lender: “Bankers largely make loans by looking backward at past financial results” — usually the last five years.

Uh-oh… Five years ago was 2008.

“Many of these loans don’t look so good after five years of slogging through a mushy recovery. Even though interest rates are low, credit is tight for all but the most creditworthy customers.”

The lenders, however, are another story: “The theory floating around banking circles these days is that banks are now more willing to foreclose on these properties. The banks are in much better shape — in many cases in better shape than they were heading into the crisis.”

That means they’re willing to foreclose — even if it means taking a loss — just to get the loan off their books and shareholders and regulators off their backs.

“So,” Chris suggests, “I can imagine what this new bone in the throat — that pile of $276 billion in debt — will do to the bankers involved. They are going to choke on it and spit up lots of cheap property.

“This is not an easy theme to play,” Chris acknowledges, “short of keeping a tab on your local market for opportunities to pick up a small commercial property on the cheap. (I plan to.)

“In the public markets, there are a few companies that do invest in distressed debt secured by real estate. And even fewer focus on that alone.” That’s where Chris is directing his premium subscribers in Mayer’s Special Situations.

  “Imagine a company that’s faking its income,” said famed short seller John Hempton. “It means one of only two things: It’s overstating its revenue or it’s understating its expenses.”

Mr. Hempton was a featured speaker last week, along with our own Chris Mayer, at the Value Investing Congress in Las Vegas. “One of his key points,” says our Dan Amoss, also in attendance, “should grab the attention of all investors and regulators: In most accounting frauds, corporate cash is rarely stolen by management; rather, cash balances that disappear are almost always the result of fake profits.”

Dan, in his role as our resident stock market vigilante, has spotted something funky in the books of a well-known retailer; played right, it could mean gains of up to 200%. Sorry, but “well-known retailer” is as specific as we can get out of respect to Dan’s Strategic Short Report readers.

[Ed. note: For two more days, we’re offering you the chance to sample every pixel of research we publish — Dan’s short plays, Chris’ Special Situations, Jonas’ near-term trades… everything.

That also includes Patrick Cox’s microcap biotech plays… Byron King’s new military-tech advisory… and Neil George’s “perpetual income” system.

We’re giving you the chance to check out the Agora Financial Reserve — our highest level of VIP service — for the next 30 days. “Consider this a ‘skeleton key,'” says our publisher Joe Schriefer, “unlocking every door inside the decade-plus of publishing some of the world’s best investment research services.”

It’s an unprecedented offer… and it comes off the table Sunday night, maybe forever.]

  Venezuela is out of toilet paper,” the Daily Beast article begins.

“In a scene reminiscent of Woody Allen’s Bananas,” the Beast goes on, “Commerce minister Alejandro Fleming proclaimed this week that ‘The revolution will bring the country the equivalent of 50 million rolls of toilet paper.'”

  “Why is the Venezuela running low on toilet paper?” The Week asks, appropriately.

The government blames the media. “There is no deficiency in production,” Fleming asserted, “but an excessive demand generating purchases by a nervous population because of a media campaign that has been created to undermine the country.”

Those dastardly hoarders!

Hugo Chavez’s successor, President Nicolas Maduro, takes it even further — claiming that “anti-government forces, including the private sector, are causing the shortages in an effort to destabilize the country,” reports The Associated Press.

Johns Hopkins professor Steve Hanke has a different theory: “State-controlled prices,” he writes, “prices that are set below market-clearing price — always result in shortages. The shortage problem will only get worse, as it did over the years in the Soviet Union.”

What was it the late Margaret Thatcher said? Socialism works until you run out of other people’s toilet paper? Something like that…

  “For the improving employment numbers, credit Obamacare,” a reader suggests. “My son just found a job, after more than a year unemployed, working in a convenience store. His new boss was very explicit that he would never be able to work more than 30 hours per week, at less than a dollar an hour over minimum wage, but he is working, and making employment numbers look better.

“So this convenience store pays for the same number of employee-hours per week, but it’s now spread over more people so as to keep all employees officially ‘part-time’ and thus ineligible for employer-paid medical insurance. Multiply that across all similar employers across the country and the number employed will rise, even while pay per person declines, at least for those who previously had a full-time job.

“But this effect should wear off soon, as July 1 is the date on which employment hours will be evaluated for Obamacare purposes. So employment numbers after that date may not look so good.”

  “You keep on promoting gold, silver, etc.,” says an evidently irate reader. “I believed you, but now I am losing a tremendous amount. I am greatly disappointed with you.”

The 5: The only way you would “lose” a “tremendous amount” is if you sold now at a price lower than you bought.

  “If my information is correct,” counters another reader, “the bullion market is exploding while the gold paper market is being manipulated into oblivion by the Fed & its cronies. What say thee?”

The 5: Nothing we haven’t said already. Although there’s an eye-popping chart that crossed our desk recently. We share it in the next issue of Apogee Advisory, coming out later today.

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

P.S. You’re really missing out if you pass up our test-drive offer. Not only do you get a “skeleton key” to the Agora Financial Reserve… but once inside, you’ll have a guided tour to all of our research services for the next 30 days. You won’t be left to fend for yourself, and you won’t be overwhelmed.

The offer expires in a little over 48 hours, so take the time now to decide whether you want to take advantage. Just know that we may never offer this high a level of access at this low a price ever again.


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