BNCC Update

A while back, I started covering BNCCorp as a result of some "whispering" I heard regarding the company's mortgage banking operations.  My opinion was, basically, that this was a fairly risky investment based on the low volume of shares traded and that a valuation of the shares would likely show that the stock would not provide a high enough return given the liquidity risk.  I didn't publish that article because over the last couple of days, the volume is up significantly at about 10 times the average and it at least looks like someone is accumulating shares.  I don't really know why that would be happening now, since the latest quarter wasn't terribly impressive in my opinion.  For the time being, I'm keeping an eye on this stock.

Incompetence compensation

Ballmer’s Pending Departure Only Makes His Mistakes More Obvious

In regular early trading, Microsoft shares were up 7% in to $34.68. Since Ballmer owns some 333 million shares, news of his retirement actually boosted his own net worth by about $1 billion.

Yeah, it's a crazy world we live in where incompetence is rewarded with extreme compensation.  But worse, when the incompetent quit, they get rewarded for that as well.  So, here's proof of my own genius: "I quit."  See?  I didn't get rich.

But this article is about Ballmer's mistakes, which included "his failure to develop a successor, or even a strong cadre of possible successors."  Um, given his own ineptitude, wouldn't that actually be something he did right?  Do stockholders really want an incompetent CEO grooming their own successor?  Why?  So they can have more of the same?  So now we can fully understand why Microsoft (MSFT) is up so much today: Ballmer "screwed up in reverse," as Hawkeye Pierce would have put it.  This kind of thing makes me truly wish people would recognize that I'm quite capable of making mistakes, as much or more so than others, even Ballmer.

Keep your fingers crossed

Nasdaq trading halted due to technical issue

"If I was back in the days of 10 years ago managing 300 traders I'd put the directive out to every one of them 'we don't put any orders in at the open' ... no one trades for 60 minutes," said Joe Terranova, chief market strategist for Virtus Investment Partners and a CNBC contributor.

Yeah, I love being dependent on technology.  I was having a pretty good day.  Now, who know?  At least I don't have any trades outstanding.  The frequency of technical "glitches" seems to be getting out of hand.  Which reminds me.  I dislike the term "glitch."  It's a word people use when they don't really know what happened, as is the case here.  I think the folks that run the exchanges should know what happened.  I certainly hope they don't just reboot and keep their fingers crossed.  Finger crossing never works for me.

The uneven playing field

How many 'busted' trades? They don't know!

It seems like they should, but it's not surprising that they don't.

Many of the trades that Goldman Sachs erroneously placed through the New York Stock Exchange, the CBOE and Nasdaq have been or are in the process of being cancelled by the exchanges.

I'm pretty sure that if I made a bad trade then just told these folks that it was all just a big mistake, I'd just be out of luck.  After all, if I go bankrupt, it won't cause a financial meltdown.  But I think I deserve the same consideration as Goldman Sachs (GS) does.

It seems odd, to say the least, that this kind of information is unavailable. It means that we can't answer some basic questions about the frequency and fairness of trade cancellation.

The fairness question is important. Smaller market players are very suspicious that big traders-Wall Street banks and larger hedge funds-are granted cancellations regularly, while others just get ignored. One trader told me he had tried to have trades cancelled a few times but never received satisfaction.

So, I guess I'm not alone.

"Anyone but Goldman would have just had to eat the loss," another trader said.

Well, I suspect there may be a few other select players that get special treatment.  The market is rigged, end of story.  The best a small investor can do is to avoid making the same mistakes that the big traders can make and get away with, and to be aware that the playing field is, in fact, uneven.

Let's make stock trading more personal

Goldman Sachs technical error causes erroneous U.S. option trades

Goldman Sachs said in a statement the firm does not face material loss or risk from the issue.

But then, later in the article:

Potential losses could range in the millions of dollars, the source said, but it was unclear just how many transactions were involved and what any final cost would be.

Yeah, our markets work just fine.  So, somebody makes a mistake, or in this some software malfunctions, and apparently, somebody else ends up the loser.  Either that or millions of dollars in losses are immaterial to Goldman Sachs (GS).  Regardless, I do wish the exchanges would ban automated trading, or at least put a requirement to actually hold a position for more than a fraction of a second.  Or even better, just return to the old days when traders stood on a street corner shouting out buy and sell orders.  It would make the whole stock trading business a whole lot more personal.  And, the exchanges could sell tickets to spectators.  I'll bet that business would be great, especially if the exchanges allowed disagreements to be resolved through physical means, as opposed to the current "my computer is closer to the exchange than your computer so I win" nonsense.  So, in case I haven't been clear, I don't like automated trading.  I don't like reading that some people lose money because other people failed to control their own software.  And yes, I realize that this article never directly said that any of that happened and I'm reading between the lines some.  But if I didn't do that then I wouldn't have anything to say about anything.

Comment Comments

Ben Bernanke’s Huge Gift to Taxpayers

This article is mostly about the fact that the Fed has to turn over the majority of its profits to the Treasury and how this fact has actually helped reduce the deficit.  Nothing really surprising or earth-shattering if you have any idea how the Fed works.

And apparently, there are plenty of people who don't understand how the Fed works.  Just take a look at the comments.  Of course, we could hypothesize that at least some of these people don't really believe what they have commented, but are trolling.  I personally don't like trolling because: 1) People say they are trolling to cover for their own lack of knowledge, and 2) Trolling contributes to the spread of a whole lot of B.S. since at least some people won't know any better and proceed to repeat what they read elsewhere.  So, here are my responses to some of the comments.

What a bunch of lies.
The government creates the assets and creates the money to buy the created assets. It controls price of the assets it buy and it controls the interest it pays itself. Then, it calls all of it profit. It is like Enron with no accounting rules.

I'm not sure what "lies" this author is talking about.  It may very well be similar to Enron, except that Enron didn't have the ability to print its own currency.  Now, I'm not taking the stance that everything the Fed has done is beyond question; as long as those assets remain on the Fed balance sheet, we don't know what the final outcome will be.  The Fed may have to take a loss on some of those assets, but to my knowledge, there is no reason to assume that the Fed will ever have to sell any of its assets.  But there are certainly scenarios under which the Fed might need to sell assets at a loss.  This doesn't make anything a lie though.

How many Fed Bucks to date? $4 trillion? How many jobs? Follow the money....it sure looks like it gets pumped into the giant siphon of Wall Street. It's nice to know that the very richest on the planet will continue to be set for life. It's not so nice to know that the rest of the country isn't getting the same benefit.

Yeah, it may look that way, but that's not Fed money getting pumped into Wall Street.  The interesting thing is that the Fed money is for the most part, sitting in bank reserves, earning interest at 0.25%.  This is why we don't have hyperinflation, at least not right now.  Could we?  Yes.  The rally in stocks is from investors pumping more money into the stock market.  Some of that money is going there because there are no real returns anywhere else.  And for the record, "the very richest on the planet" will continue to be set for life regardless of what the Fed does, pretty much.

I just don't understand why people want to blame the Fed for the increasing disparity in incomes here in the U.S.  Fed policy has also helped contribute to the rebound in home prices, which has benefited the middle-class as well as anyone else, and perhaps more so.

Jerry- Bernanke missed the biggest economic event of his lifetime (housing bubble) with all those credentials while Ron Paul, with no formal training in economics, called the bursing of the housing bubble exactly as it would happen way back in 2003, yet Congress refused to listen.

This type of argument always makes me laugh because there's always someone who "calls" the future, like Ron Paul apparently did, "way back in 2003."  Say a bad thing is going to happen long enough, and sooner or later you'll be right.  Worse, then lots of people will think you're a genius.  I'm not convinced that anyone "missed" the housing bubble.  The Fed was raising interest rates, but mortgage rates stayed stubbornly low, fueling the housing bubble.  Talking from experience, I can say that there were a lot of people that said the Fed needed to LOWER interest rates, and that would fix everything.  I find it doubtful that Ron Paul called the bursting of the housing bubble "exactly as it would happen" either.  I'm not sure Ron Paul can explain exactly what happened now.  And I'll bet that Ron Paul wasn't speaking his own mind when he "called" the housing bubble; I suspect he heard it from someone else, but of course, it's Ron Paul that's a genius.  Nothing against Ron Paul - I'm not sure there's a single person who can explain exactly what happened, although there are plenty of people who probably think they know exactly what happened.

So, let me take this opportunity to make a place in history for myself: There's going to be a recession, and it's going to be bad.  Now, I've just got to sit back and wait.  Sooner or later, I'll be right.

I love coming here daily to hear the arm chair macro experts say where Ben is getting it wrong. Ben is brighter than 99.5% of the population and is an expert in his field.

Me too (referring to the coming here daily part, not the brighter than 99.5% part).  But economics is so simple, even a caveman can do it, so everyone is clearly an expert because they took economics in high school.  Just like that high school financial literacy class makes everyone a financial genius.  Just ask people and most will tell you that they're more knowledgeable about economics, finance, and likely whatever other subject they took a class in than the average person is.  Oh yeah.  And they're better drivers than average too.  Which makes us humans, as a species, pretty damn special.  Way better than your average species.

Well, this has been fun, but I've really got to get to work.  Have a great day everyone, and leave a comment so I know there are some real people reading this stuff.

Disaster or buying opportunity?

Walmart Earnings Disaster Exposes a Collapsing Economy: Davidowitz

"I don't think we're in a recession right now, but I think there's a 50 percent chance we'll be in one next year," Davidowitz shouts, and there's nothing the government is going to be able to do about it. "We've spent all the money, we've borrowed all the money, and we're in the tank."

 Yeah, I don't know.  I think we've really been in a recession for about a decade now, but my definition of a recession is a bit broader than the government's.  Otherwise, this is true, and we're probably headed for disaster.  We have spent all the money.  We have borrowed all the money.  But, we're not in the tank yet.  We've still got a long way that we can fall.

But, you know, I was really hoping that Walmart's results really were because Walmart (WMT) did suddenly get stupid, at least relative to Walmart shoppers.  Not so much because it might mean the economy was better than it really is, but that consumers were finally wising up to what Walmart and others are doing: they're making profits from government (for lack of a better term) welfare.  These companies can pay lower wages because the government will subsidize those wages, and then those subsidies get spent at, you guessed it, Walmart.  In case you haven't guessed, this isn't my favorite business model, and one that I think will ultimately ruin the U.S. economy, if nothing else does that first.

Unfortunately, it appears that sinking retail sales isn't just an affliction of the Walmarts of the world; Macys (M) also announced disappointing results indicating, perhaps, that more-affluent shoppers are cutting back as well.

As I'm writing this, the Dow is down 200+ points on the day.  Is it a buying opportunity?  It could be, but I think the market has a way to go down before I'd jump in with both feet.  Rising interest rates are making stocks more expensive, and for a while, at least, I expect to see more of the same.  I could, though, change my mind tomorrow, or even later today, so make sure and follow me on Twitter, or Google+, or subscribe to my RSS feed.  I'm going to add a Facebook page soon, so be on the lookout for that as well.

Is Paul Krugman right?

Okay, so I'm taking a clue from Yahoo Finance and putting a Nobel prize winner name in the headline to attract attention.  I truly am sorry.

Paul Krugman is Right, It Turns Out, About ‘Uncertainty’

I suppose that depends on your perspective.  The so-called "experts" of the world thrive on twisting ideas to make them fit reality, gaining fame and wealth for themselves in the process.  So, with that in mind, let's take a look at this article, piece by piece.

New York Times columnist and Nobel-prize winning economist Paul Krugman is taking on the role of mythbuster: in his latest column "Phony Fear Factor" -- he claims to have already blown up the following economic myths:

• Monetary expansion needn't cause hyperinflation.
• Budget deficits in a depressed economy don’t cause soaring interest rates.
• Slashing spending doesn't create jobs.
• Economic growth doesn't collapse when debt exceeds 90% of G.D.P.

First, let me say this: The article has actually reversed the supposed myths.  For example, "Monetary expansion needn't cause hyperinflation" is not the myth.  It is the reality, while the myth, if there is one in there, is that monetary expansion always causes (hyper)inflation.  The others are similarly backwards, so I'll be referring to the myths as they should apparently have been worded.

The first myth is that monetary expansion causes hyperinflation.  Of course it doesn't always, and anyone who believes that monetary expansion always has some predictable result probably needs to go back to school, or, perhaps should just leave the thinking to someone else.  To use economic terminology, monetary expansion leads to inflation, ceteris paribus, or all other things equal.  But if the velocity of money slows down while the currency base expands... well, it depends on exactly how much of each change there is.  It isn't inconceivable that there would be deflation even with monetary expansion.  I'm not sure that this was ever a myth at all.  Did some people believe that the current Fed expansion of the monetary base might lead to hyperinflation?  Of course they did.  Look what happened to gold prices over the last few years.  This time, those people appear to have been wrong.  but to assume that they will always be wrong would be a huge mistake.

The second myth is that budget deficits in a depressed economy cause soaring interest rates.  In a true market economy, interest rates would have risen, maybe enough to be referred to as "soaring."  But this isn't a true market economy and interest rates are being held artificially low by the Fed.  The Federal Government is free to borrow as much as it wants because the Fed is willing to loan as much as the Federal Government wants to borrow.  But in a free market economy, the scarcity of loanable funds would force the government to pay ever higher interest rates.  With the Fed, there is no scarcity of loanable funds.  The Fed will just print more, and interest rates stay low.

The third myth is that slashing spending creates jobs.  No.  I don't know anyone that thinks this.  Slashing spending and cutting taxes proportionately could have the effect of spurring job creation.  But the idea that simply cutting spending will somehow create jobs is ludicrous.  So, if all consumers just decided to not spend any money, we're well on our way to 4% unemployment, I guess.  Of course not.  It isn't spending cuts that creates jobs; it's the tax cuts that should go along with those spending cuts that will give consumers more money to spend.  But if consumers don't spend that money, then even tax cuts won't do any good.  Another way to look at this is to realize that the best thing government can do to spur job growth is to butt out.

The final myth is that economic growth collapses when debt exceeds 90% of G.D.P.  Now, think about this for just a second.  Let's say I'm going to make $100,000 this year, so I go out and borrow $90,000 payable in 1 year at 0% interest that I can just roll over into new loans every year.  Is my economic standing doomed?  Not so long as my interest rate is 0%, and actually, I might be able to manage at as much as 10% or more.  I realize that this isn't exactly the case for the government.  Their interest rate isn't 0%.  I used that example to show that the collapse is not so much dependent on the dollar amount of debt as it is dependent on the interest rate.  As far as the dollar amount of debt compared to G.D.P. goes, it is dependent on whether anyone wants to loan the government money with a debt level that high.  Of course, in our artificial world, the Fed stands willing to loan however much the government wants to borrow, so even that isn't an issue, at least not at the moment.

But the article I'm addressing isn't really about Mr. Krugman.  I think maybe they put his name in the headline just to get attention.  Reference a Nobel prize winner and suddenly people are interested.  On the other hand, mention me and at best people will say, "Who?"  before moving on to the funny papers.

No, this article is about uncertainty.  More specifically, it is about something called the Economic Policy Index "which has plunged to levels not seen since 2008. 'Uncertainty has improved,' says Newman."  Um, no.  Regardless of how people feel about the uncertainty of the future, it is always uncertain.  The future is never more certain, or less certain.  It is always uncertain.  However, people may feel more, or less, certain, but in reality they are still just as uncertain as ever.  Nobody can know what the future holds, no matter how certain they are of the future.

Now, it might be useful to know how uncertain people feel about the future.  In fact, if people in general are more certain about what the future has in store for them, then they will act with increasing confidence, and that is a good thing, at least when the economy is recovering from a big, bad recession like the one we've just experienced.  Confident people spend more, and this in turn leads to increasing demand and job creation, which in turn make people even more confident.  Eventually, though, that confidence turns to overconfidence, and that's where it appears we are right now, at least that's the impression I get when I read this article even though that wasn't the impression I think I was supposed to get.

The part of the video that struck me the most was when the participants started talking about how "all the tail risks are behind us."  Um, no.  Only the ones we expected, which are really the risks to be least worried about.  It is the unexpected risks that can really wreak havoc.  Those risks are still there.  They didn't go away because we somehow muddled through our problems.

Krugman brings it full-circle: "The truth is that we understand perfectly well why the recovery has been slow, and confidence has nothing to do with it. What we’re looking at, instead, is the normal aftermath of a debt-fueled asset bubble..."

He's right, you know.  Unfortunately, he probably doesn't care much (and neither do many people) whether I agree or not.  The main thing, though, is I don't think we're out of the woods yet.  I don't think anything has been "proven" here.  We still don't know if the economy is going to finish the collapse that was started in the financial crisis.  There is still significant uncertainty in the world despite people thinking it's all behind us, and that thinking is what will make those unseen tail risks all the more destructive should they arise.

If we assume, then, that people in general really believe that those bad "tail risks" are all behind us, then it is likely time to head for the fallout shelter, in a metaphoric sense at least.  The time to be defensive is when everyone else believes "the worst is over."  Of course, it may be some time before the really bad, surprising tail risk hits us, so it probably isn't really time to move completely into that fallout shelter.  But I do think it's time to start building a defensive position, and at least open the door to that shelter.

BNCCorp: Some Background

Some people would say that history is already priced into a stock and is, therefore, irrelevant. I think, though, that a thorough understanding of how the stock got here is needed in order to understand where the stock might be going in the future. For that reason, I’m going to start including some short background research articles for the stocks that I’m following, or considering following, beginning with BNCCorp (BNCC), a regional bank holding company headquartered in Bismarck, North Dakota.

BNCC data by YCharts

On January 14, 2008 BNCC announced plans to voluntarily deregister its common stock with the SEC and deregister with the Nasdaq global market. The company listed several reasons, including low trading volume of the stock, small number of individual investors, and cost of compliance with SEC regulations. The company does still maintain quarterly and annual reports that are substantially similar to those required by the SEC on its website (Source: Press Release). At the time of the announcement, the stock was trading much the same as it is today, closing at $12.65 on volume of 3,800 shares.

BNCC’s 2008 annual report showed net income of $2.22 million, or $0.67 per diluted share, with the company stating:

The key factors contributing to our earnings from continuing operations were an increase in net interest income due to the growth in our balance sheet, higher non-interest income from mortgage banking revenues, and reduced non-interest expenses. These improvements were partly offset by a $4 million increase in the provision for loan losses resulting from the difficult credit environment.

The 2009 annual report reflected much different results. BNCC showed a net loss of $20 million ($6.14 per share), largely due to a $27 million provision for loan losses. Also in 2009, the company “elected to participate in the U.S. Treasury Capital Purchase program because other forms of capital were generally not accessible by community banks.” This shows up on the balance sheet as approximately $21 million in preferred shares.

2010 turned-out to be an even rougher year than 2009. On January 26, 2010, the Office of the Comptroller of Currency (OCC) issued a Formal Agreement with BNC National Bank in Phoenix, because “The Comptroller has found unsafe and unsound banking practices relating to loan and investment portfolio management at the Bank.” Basically, the Formal Agreement required the bank to “develop, implement, and thereafter ensure Bank adherence to a written program to improve the Bank’s identification and monitoring of credit and underwriting exceptions to the loan policy.”

Later in 2010, the company discovered fraud on the part of one of its mortgage origination partners, AMS. While BNCC was carrying fidelity insurance, the insurance company balked at payment, with the result that BNCC’s 2010 annual report was even worse than 2009’s, showing a net loss of $22 million, or $7.13 per share. By this time, BNCC’s book value per share had fallen to $5.09.

Despite the dismal 2010 results, things started turning around for BNCC in that year. In November 2010, the company announced an agreement to sell some of its deposits and assets to Alerus Financial Group, a deal which was consummated in the first quarter of 2011. In November of 2011, the OCC terminated its formal agreement with BNCC, indicating the bank had successfully derisked its operations, at least to the satisfaction of the OCC. However, the previous couple of years had left the bank with little tangible common equity, and BNCC announced plans for an equity offering to raise capital. In the end, BNCC’s earnings in 2011-2012 proved sufficient to eliminate the need to raise additional equity financing, and the stock issuance was canceled in August 2012.

2011 results (EPS of $0.86) benefited largely from a reduction in the provision for credit losses, indicating higher credit quality of loans in the bank’s portfolio. 2012 proved to be a banner year for BNCC as the company earned $7.52 per diluted share, benefiting largely from mortgage banking results, a reversal of the valuation allowance on deferred tax assets, and a $7.5 million settlement on the previously mentioned insurance claim.



Which brings us to 2013. BNCC still has a bit of a hangover from its past difficulties, but the real questions are whether those problems, as well as future prospects for the company, are properly reflected in the current stock price ($12.50 at the time of this writing).

Gold and Jobs

Gold rebounds above $1,300 after jobs miss

Yeah, sorry.  Nothing to get excited about here, although the headline is, well, almost bullish.

Gold futures turned a steep loss into a small gain Friday after July payrolls growth came in short of expectations, leading analysts to say plans for the Federal Reserve to taper its bond buying could be pushed further out.

In other words, "leading analysts" say the Fed may give smart investors more time to unload their holdings before the big decline.  Oh wait, we've already seen a pretty big decline.  I expect more to come though.

“I believe gold will remain supported as long as the market believes tapering is off the table,” said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange, in emailed comments.

Why would anybody continue to hold gold knowing that the Fed will inevitably begin to taper?  I mean, it's "off the table" for what, another month?  Tapering is coming.  The expected accompanying inflation never happened.  Gold is set for a precipitous fall.  There's nothing magical about gold.  It is just another form of fiat money.  The only thing that ever gave gold any fundamental value was the gold standard.  Now, gold's value works just like the much aligned fiat dollar.  Gold's value only comes from the belief that someone else will give me the same value for an ounce of gold as I give someone else.  I can tell you right now, no matter how bad things get, I will likely not give anyone $1,300 value for an ounce of gold.  Unless I happen to know someone who would give me more than that, of course.  Consequently, I'm not buying gold at $1,300.