(Peace and Security come from God!)
Silver Stock Report
by Jason Hommel, March 18, 2008
King Solomon, who wrote proverbs, was granted Godly wisdom, and has the solution to the bankruptcy problems of modern finance. He says to stop taking on the risks of others, to avoid becoming “surety for your friend”, and if you have done so, then humble yourself, and beg to get out!
Proverbs 6:1 My son, if you become surety for your friend, If you have shaken hands in pledge for a stranger,
2 You are snared by the words of your mouth; You are taken by the words of your mouth.
3 So do this, my son, and deliver yourself; For you have come into the hand of your friend: Go and humble yourself; Plead with your friend.
4 Give no sleep to your eyes, Nor slumber to your eyelids.
5 Deliver yourself like a gazelle from the hand of the hunter, And like a bird from the hand of the fowler.
Proverbs 11:15 He who is surety for a stranger will suffer, But one who hates being surety is secure.
Proverbs 17:18 A man devoid of understanding shakes hands in a pledge, And becomes surety for his friend.
Proverbs 22:26 Do not be one of those who shakes hands in a pledge, One of those who is surety for debts;
27 If you have nothing with which to pay, Why should he take away your bed from under you?
The problem with society today is that most people are gutless wimps, cowards afraid of their own shadows, jumping at the rustling of the leaves. The fear is so predominant, people are afraid of the truth, afraid to tell the truth, afraid to hear the truth.
Everyone wants to try to “offset risk” by trusting other people; nobody wants to trust themselves. It’s why I get so many emails, too.
Even people who read my letter, very few seem to want to hold their own silver; they’d rather have faith in the promises of other men, rather than have faith in God’s provision, and obey God’s command to be a wise steward.
But risk does not go away; it just gets transferred to the dumbest traders in the room who are therefore least able to shoulder the risk, the fools who have become the surety, and who provide for the “security” for another. All bankers, no matter what the modern financial product, have only one general proposal, and it goes like this: “Give me your money now, and I’ll protect you from risk, and give you more money later, (maybe).” Only the terms and conditions are slightly different.
If you put money in a savings account, that’s the offer.
If you buy a CD, T-Bill, or any type of bond, it’s the same thing.
If you buy futures contracts, it’s the same offer.
If you buy puts, it’s the same offer.
If you buy calls, it’s the same offer.
If you buy insurance, it’s the same offer.
If you buy the ETF’s of silver and gold, it’s the same offer.
If you buy an account of silver and gold, it’s the same offer.
But that quiet “maybe” at the bottom of the contracts means that you might not get your money back at all, in the event of bankruptcy or “counterparty risk” or defaults or “force majeure”, which means events beyond their control, in case they can’t handle the risk they took for you, that you were too fearful to handle.
There is another kind of offer, one that’s worse today; it’s to take the other side of those trades. You can get money now, but take on nearly unlimited risk. You do that whenever you sell anthing short. When you take on unlimited risk like the banks, you can get margin calls if your trades go against what you expect. When you take on that unlimited risk, you have become “surety for a friend”.
On Friday, certain put options on Bear Stearns made 1000% in one day as the stock dropped from $50-30, followed by more several 100% gains today. Those who sold the puts had a margin call, and had to put up the cash within 24 hours.
Something like that may have happened to Bear Stearns in another market, as they said their financial situation deteriorated within 24 hours on Friday.
On TV today, a man asked, “I owned $200,000 worth of Bear Stearns stock 3 months ago, and now it’s worth $3000. Where did my money go?”
The money was spent when he bought the stock from other traders; he didn’t have money, he had stock. Stock is a percentage ownership of a company. If a company goes bankrupt, because it can’t meet it’s margin calls, then stockholders usually get nothing.
What is unusual about the Bear Stearns case is that no bankruptcy actually took place, so nobody really knows what kind of margin call they got and could not pay; the potentially unlimited liability remains hidden and unknown, and was taken on by JPMorgan, who now will shoulder the risk. JPMorgan basically said to the Fed, give us $30 billion now, and we will shoulder the risks and meet the unmet obligations. JPMorgan said, “We will be surety for our friend”, Bear Stearns.
We can speculate on what brought down Bear Stearns. It is said that Bear Sterns was heavily involved in mortgage lending, and was number 2 in the industry. Lehman Brothers was number one. So now, many are looking for them to have trouble next, especially since their stock was down nearly 40% at one point today.
MarketWatch: Wall Street watches Lehman walk on thin ice
Analysts who cover broker Lehman Brothers Holdings Inc. watched closely from the sidelines Monday, loath to add to market speculation that the firm may be the next major brokerage to falter.
However, look at this:
Options traders are making big bets that Lehman stock will drop an additional 24% by Thursday, when March options expire, Dow Jones Newswires reported. Traders also are betting that the shares will continue to plummet over the next month.
The Wall Street Journal: Lehman Finds Itself In Center of a Storm
“Rumor has it ING is pulling all its lines to all the Street firms,”
Bloomberg: Lehman May Post Smallest Net Since ’03 as Shares Fall (Update1)
`Could Lehman go the same way as Bear? I hate to think of it.”
Businessweek: Is Lehman Liquid Enough?
And that has market players asking: Who may be next?
More Subprime Fallout: Some figure Lehman Brothers (LEH) may be vulnerable to a liquidity seize-up. . . .
The pounding Lehman shares took was understandable given concerns that its relatively heavy exposure to the subprime mortgage market puts its capital balance at risk.
“At Lehman, fixed income is very big. They were leaders in securitization of mortgages. Bear was No. 2,” says Christopher Whalen, managing director at Torrance (Calif.)-based Institutional Risk Analytics, which builds customized risk-management tools for audit firms and others. “That’s why everybody is looking at Lehman now.”
Telegraph UK: Wall Street rallies to aid Lehman
Wall street’s leading investment banks have rallied around ailing rival Lehman Brothers after the Federal Reserve Bank of New York urged them to support the institution in order to try and preserve financial stability.
Jason: The Fed is telling the other banks to think about or try to become “surety for their friend” Lehman Brothers.
Does this mean that the dumest people in the room, the biggest fools, according to the ancient King Solomon (and my modern understanding of what he said), is the Fed, or is it JPMorgan who received bad advice from the Fed?
The Telegraph continues:
It is understood the New York Fed contacted key executives at a number of leading banks, including Goldman Sachs, Citigroup and Morgan Stanley, to discuss Lehman’s situation over the weekend.
By yesterday morning, the banks’ prime brokerage departments – which service hedge fund clients – were under strict instructions not to do or say anything in the market that could damage Lehman.
The intervention is important because Wall Street fears a repeat of the events which led to the weekend’s rescue of Bear Stearns. The bank was fatally damaged when hedge funds closed out their positions, demanding immediate repayment of the cash.
One American banker said: “[We heard] from the top, ‘Do not encourage calls to Lehman clients. We want to run that up the flagpole. We don’t want another run on a bank.’ “
I’m the most tempted I’ve ever been to buy puts. I searched my morals very deep. I decided not to do so.
I feel that buying puts would be morally wrong because there are foolish, real people on the other side of the trade who are not thinking, but only using computer modeling, who don’t seem to be able to calculate the risk of default!
Buying puts is morally wrong because your profit comes directly at the expense or loss of another.
Furthermore, there would be counter party risk created in buying a put, and it could be that the seller of the put cannot meet their obligations.
I feel that buying puts would be morally wrong, because it would make me like a usurer of the worst kind. Puts would force, strangle, and enslave, the ignorant computer modeling put sellers to come up with the cash as a result of the margin calls, as the value of the puts went up, almost immediately.
Buying Puts would be morally wrong because it does not create anything, it only destroys.
Buying Puts would be morally wrong because it keeps your money in cash accounts denominated in dollars, rather than in real silver or gold.
Buying puts could be personally dangerous, as puts expire, and could go to zero value on the expiration date, and you could forget to sell them or exercise them in time.
Buying puts is dangerous because although we may be right in the long term, the short term can change with actions by the Fed.
Buying puts is dangerous because to do so would assume a lower dollar price for something in an era of hyperinflation, which tends to increase the price of everything.
Finally, buying puts could be dangerous, as the banks and/or regulators might want to seek reprisals against those who “unduly” profit.
Buying puts gets others to take the other side of the trade, and potentially ensnare themselves as they become the “surety” against collapse of other forms of surety that they can’t even evaluate or know about.
Again, you don’t have to trust the promises of men, and I advise against trusting or making all such promises. Instead, have faith in the provision of God, and trust yourself to become a wise steward of silver, and accept all the risks of being responsible for your own wealth.
One last note. If you decide that you want to be a wise steward of money, then diversify. Don’t put all your eggs in one basket. If you don’t know which of two investments is better, you don’t have to anquish about it. Simply split up the money, that’s why money is money, it can be split up, and it doesn’t destroy it’s value, they call that useful property of money, “divisibility”.
Are you somewhat unsure about the ETF’s you hold? Sell half, and get physical.
Are you somewhat unsure about the security of a safety deposit box? Then don’t keep all of your physical silver there, split it up, put some in a home safe.
Are you somewhat unsure which of two stocks to buy? Buy a little bit of both.
I own about 50 precious and base metals exploration and development stocks now. Ironically, my portfolio is a rock solid bastion of security in comparison to the financials right now. It’s odd to see the financial stocks moving more on a percentage basis up and down than the tiny, illiquid, cheap exploration stocks.