Monday, September 10, 2007

Signs of the Economic Apocalypse, 9-10-07

From Signs of the Times:

Gold closed at 709.70 dollars an ounce Friday, up 4.1% from $681.90 at the close of the previous week. The dollar closed at 0.7263 euros Friday, down 1.1% from 0.7340 at the close of the previous Friday. That put the euro at 1.3768 dollars compared to 1.3624 the Friday before. Gold in euros would be 515.47 euros an ounce, up 3.0% from 500.51 for the week. Oil closed at 76.70 dollars a barrel Friday, up 3.6% from $74.04 at the close of the week before. Oil in euros would be 55.71 euros a barrel, up 2.5% from 54.35 for the week. The gold/oil ratio closed at 9.25 Friday, up 0.4% from 9.21 at the end of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 13,100.70 Friday, down 2.0% from 13,357.74 for the week. The NASDAQ closed at 2,560.21 Friday, down 1.4% from 2,596.36 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.37%, down 16 basis points from 4.53 for the week.

It’s happening. Gold and oil up sharply, stocks and the dollar down, and the job numbers for August in the United States showing an actual reduction. All this can be attributed to the housing collapse. Unfortunately, that collapse has not yet come close to running its course. It’s just building up a head of steam:
Record drop in pending home sales

Index that measures contracts being signed for existing home sales drops to lowest level since 9/11 attack.

Chris Isidore

September 5 2007

NEW YORK ( -- The meltdown in the mortgage market caused the biggest drop on record in July for pending home sales, taking the index down to the lowest level since the month that included the Sept. 11, 2001 terrorist attack.

The National Association of Realtors' pending home sales index, which measures contracts to buy existing homes, fell 12.2 percent to a reading of 89.9.

It is the second lowest reading on record for the seven-year-old index, trailing only the 89.8 reading in September 2001. Economists had been looking for only about a 2 percent decline in the latest reading.

"There's bad reports and then there are truly awful ones. This is clearly the latter," said Mike Larson, real estate analyst for independent research firm Weiss Research. "Even I'm shocked by a 12 percent decline."

But Realtors' spokesman Walter Molony said the large drop isn't a surprise, given that the problems in the mortgage markets seen in July and August were the biggest disruption to the home buying market since 9/11.

"It's difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren't closing because mortgage commitments have been falling through at the last moment," said Lawrence Yun, the Realtors' senior economist, in the index report.

…The months of July and August saw rising delinquencies and defaults cause problems in the sale of mortgage backed securities. In August Countrywide Financial, the nation's leading mortgage lender, had to tighten its underwriting standards and drastically cut back many types of loans used by borrowers with less than top credit or those needing loans of greater than $417,000. Other lenders pulled out of the mortgage market altogether…

Friday saw an acceleration of the trends with gold rising sharply and stocks falling sharply:
U.S. Stocks Retreat on Payroll Drop; Bear Stearns, Alcoa Fall

Lynn Thomasson

Sept. 7 (Bloomberg) -- U.S. stocks tumbled, wiping out this week's gains, after the first monthly decline in payrolls since 2003 spurred concern the economy is headed into a recession.

General Motors Corp., Alcoa Inc. and Bear Stearns Cos. dropped after analysts slashed profit estimates. A gauge of homebuilders slid to the lowest since May 2003 after Beazer Homes USA Inc. said it received default notices from a lender.

Stocks in Europe also fell after the unexpected decrease in U.S. payrolls stoked speculation that credit-market losses will lead to a contraction in the world's largest economy. The yield on the two-year U.S. Treasury note sank to the lowest since 2005 as traders anticipated a Federal Reserve interest rate cut.

The Standard & Poor's 500 Index lost 24.09, or 1.6 percent, to 1,454.46 as of 3:04 p.m. in New York. The Dow Jones Industrial Average fell 238.99, or 1.8 percent, to 13,124.36. The Nasdaq Composite Index slid 52.71, or 2 percent, to 2,561.61.

“It's a headache for stock investors,” said Keith Wirtz, who helps manage $22 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. “You've got to worry about whether we're going into a massive slowdown.”

Employers cut 4,000 jobs last month, compared with a 100,000 gain expected by economists in a Bloomberg survey. Manufacturers, builders and the government led the drop in payrolls. All 10 industry groups in the S&P 500 declined following the report.

Even publications like Fortune are joining the gloom-and-doom club:
Danger: Steep drop ahead
Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall.

Jeremy Grantham

September 5 2007

(Fortune Magazine) -- Credit crises have always been painful and unpredictable. The current one is particularly hair-raising because it's occurring amid the first truly global bubble in asset pricing. It is also accompanied by a plethora of new and ingenious financial instruments. These are designed overtly to spread risk around and to sell fee-bearing products that are in great demand. Inadvertently (to be generous), they have been constructed to hide risk and confuse buyers.

How this credit crisis works out and what price we end up paying has to be largely unknowable, depending as it does on hundreds of interlocking and often novel factors and how they in turn affect animal spirits. In the end it is, of course, the management of animal spirits that makes and breaks credit crises.

But even if this crisis is contained, we are facing some near certainties that should be understood.

First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels.

House prices are in genuine bubble territory in the U.S., Britain and many other markets. In Britain and in some critical large cities in the U.S., for example, the multiple of family income has risen to over six times from below four times, and in London last year the percentage of first-time buyers was the lowest since records began.

From these high levels, prices are guaranteed to fall. In doing so, they will reduce consumer borrowing and spending power. They will also increase mortgage defaults, most of which lie ahead, and lower financial profits and confidence.

Second, profit margins are at record levels around the world. They have lifted stock prices directly alongside the rising earnings. They have served to raise P/E multiples as well, for surprisingly, investors on average reward higher margins with higher P/Es. This is fine for an individual stock, but for the entire market, multiplying boom-time profits by high P/Es is horrific double counting and sends markets far too high in good times (and far too low in bad times).

Higher margins also indirectly raise prices by providing more cash flow for buybacks and takeovers. So high profit margins offer multiple supports for the market, but they will certainly decline. They are the most dependably mean-reverting series in finance: If high margins do not attract greater competition, then a wheel has fallen off the capitalist machine. For U.S. and developed foreign markets, fair value (defined as normal P/E times normal profit margins) is about one-third below today's level, and for emerging markets it is about 25 percent lower.

Third, and most important, risk will be repriced. Last year a broad base of risk measures - including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality vs. low-quality stock values - reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk.

For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better.

Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. All of this has been provided.

These conditions always produce excess and are always extrapolated. Unfortunately, like almost all other investment factors, they eventually move back to normal.

As wonderfully favorable factors cool off, asset prices will be under broad pressure, and risky assets will be under extreme pressure. If the credit crisis gets out of control, this will happen quickly and painfully. The important point to make here is that even if all works out well on the credit front, it will still happen slowly.

What makes all this market instability so much more dangerous is the fraud and criminality that seems to be anywhere in the economy where you turn over a rock. Where would the U.S. economy be without the housing bubble, ridiculous amounts of debt at all levels (consumer, business, and government) and out-of-control war spending? As for the latter, Rolling Stone ran a long piece on fraud in Iraq war spending by the Bush regime. Here are a few excerpts:
The Great Iraq Swindle

How Bush Allowed an Army of For-Profit Contractors to Invade the U.S. Treasury

Operation Iraqi Freedom, it turns out, was never a war against Saddam ­Hussein's Iraq. It was an invasion of the federal budget, and no occupying force in history has ever been this efficient. George W. Bush's war in the Mesopotamian desert was an experiment of sorts, a crude first take at his vision of a fully privatized American government. In Iraq the lines between essential government services and for-profit enterprises have been blurred to the point of absurdity -- to the point where wounded soldiers have to pay retail prices for fresh underwear, where modern-day chattel are imported from the Third World at slave wages to peel the potatoes we once assigned to grunts in KP, where private companies are guaranteed huge profits no matter how badly they f*** things up.

And just maybe, reviewing this appalling history of invoicing orgies and million-dollar boondoggles, it's not so far-fetched to think that this is the way someone up there would like things run all over -- not just in Iraq but in Iowa, too, with the state police working for Corrections Corporation of America, and DHL with the contract to deliver every Christmas card. And why not? What the Bush administration has created in Iraq is a sort of paradise of perverted capitalism, where revenues are forcibly extracted from the customer by the state, and obscene profits are handed out not by the market but by an unaccountable government bureauc­racy.

… It was an awful idea, perhaps the worst America has ever tried on foreign soil. But if you were in on it, it was great work while it lasted. Since time immemorial, the distribution of government largesse had followed a staid, paper-laden procedure in which the federal government would post the details of a contract in periodicals like Commerce Business Daily or, more ­recently, on the FedBizOpps Web site. Competitive bids were solicited and contracts were awarded in accordance with the labyrinthine print of the U.S. Code, a straightforward system that worked well enough before the Bush years that, as one lawyer puts it, you could "count the number of cases of criminal fraud on the fingers of one hand."

There were exceptions to the rule, of course -- emergencies that required immediate awards, contracts where there was only one available source of materials or labor, classified deals that involved national security. What no one knew at the beginning of the war was that the Bush administration had essentially decided to treat the entire Iraqi theater as an exception to the rules. All you had to do was get to Iraq and the game was on.

But getting there wasn't easy. To travel to Iraq, would-be contractors needed permission from the Bush administration, which was far from blind in its appraisal of applicants. In a much-ballyhooed example of favoritism, the White House originally installed a clown named Jim O'Beirne at the relevant evaluation desk in the Department of Defense. O'Beirne proved to be a classic Bush villain, a moron's moron who judged applicants not on their Arabic skills or their relevant expertise but on their Republican bona fides; he sent a twenty-four-year-old who had never worked in finance to manage the reopening of the Iraqi stock exchange, and appointed a recent graduate of an evangelical university for home-schooled kids who had no accounting experience to manage Iraq's $13 billion budget. James K. Haveman, who had served as Michigan's community-health director under a GOP governor, was put in charge of rehabilitating Iraq's health-care system and decided that what this war-ravaged, malnourished, sanitation-deficient country most urgently needed was . . . an anti-smoking campaign.

… Town-selectmen types like Haveman weren't the only people who got passes to enter Iraq in the first few years. The administration also greenlighted brash, modern-day forty-niners like Scott Custer and Mike Battles, a pair of ex-Army officers and bottom-rank Republican pols (Battles had run for Congress in Rhode Island and had been a Fox News commentator) who had decided to form a security company called Custer Battles and make it big in Iraq. "Battles knew some people from his congres­sional run, and that's how they got there," says Alan Grayson, an attorney who led a whistle-blower lawsuit against the pair for defrauding the government.

Before coming to Iraq, Custer Battles hadn't done even a million dollars in business. The company's own Web site brags that Battles had to borrow cab fare from Jordan to Iraq and arrived in Baghdad with less than $500 in his pocket. But he had good timing, arriving just as a security contract for Baghdad International Airport was being "put up" for bid. The company site raves that Custer spent "three sleepless nights" penning an offer that impressed the CPA enough to hand the partners $2 million in cash, which Battles promptly stuffed into a duffel bag and drove to deposit in a Lebanese bank.

Custer Battles had lucked into a sort of Willy Wonka's paradise for contractors, where a small pool of Republican-friendly businessmen would basically hang around the Green Zone waiting for a contracting agency to come up with a work order. In the early days of the war, the idea of "competition" was a farce, with deals handed out so quickly that there was no possibility of making rational or fairly priced estimates. According to those familiar with the process, contracting agencies would request phony "bids" from several contractors, even though the winner had been picked in advance. "The losers would play ball because they knew that eventually it would be their turn to be the winner," says Grayson.

To make such deals legal, someone in the military would simply sign a piece of paper invoking an exception. "I know one guy whose business was buying ­weapons on the black market for contractors," says Pratap Chatterjee, a writer who has spent months in the Mideast researching a forthcoming book on Iraq contracts. "It's illegal -- but he got military people to sign papers allowing him to do it."

The system not only had the advantage of eliminating red tape in a war zone, it also encouraged the "entrepreneurship" of patriots like Custer and Battles, who went from bumming cab fare to doing $100 million in government contracts practically overnight. And what business they did! The bid that Custer claimed to have spent "three sleepless nights" putting together was later described by Col. Richard Ballard, then the inspector general of the Army, as looking "like something that you and I would write over a bottle of vodka, complete with all the spelling and syntax errors and annexes to be filled in later." The two simply "presented it the next day and then got awarded about a $15 million contract."

The deal charged Custer Battles with the responsibility to perform airport ­security for civilian flights. But there were never any civilian flights into Baghdad's airport during the life of their contract, so the CPA gave them a job managing an airport checkpoint, which they failed miserably. They were also given scads of money to buy expensive X-ray equipment and set up an advanced canine bomb-sniffing system, but they never bought the equipment. As for the dog, Ballard reported, "I eventually saw one dog. The dog did not appear to be a certified, trained dog." When the dog was brought to the checkpoint, he added, it would lie down and "refuse to sniff the vehicles" -- as outstanding a metaphor for U.S. contractor performance in Iraq as has yet been produced.

Like most contractors, Custer Battles was on a cost-plus arrangement, which means its profits were guaranteed to rise with its spending. But according to testimony by officials and former employees, the partners also charged the government millions by making out phony invoices to shell companies they controlled. In another stroke of genius, they found a bunch of abandoned Iraqi Airways forklifts on airport property, repainted them to disguise the company markings and billed them to U.S. tax­payers as new equipment. Every time they scratched their asses, they earned; there was so much money around for contractors, officials literally used $100,000 wads of cash as toys. "Yes -- $100 bills in plastic wrap," Frank Willis, a former CPA official, acknowledged in Senate testimony about Custer Battles. "We played football with the plastic-wrapped bricks for a little while."

The Custer Battles show only ended when the pair left a spreadsheet behind after a meeting with CPA officials -- a spreadsheet that scrupulously detailed the pair's phony invoicing. "It was the worst case of fraud I've ever seen, hands down," says Grayson. "But it's also got to be the first instance in history of a defendant leaving behind a spreadsheet full of evidence of the crime."

But even being the clumsiest war profit­eers of all time was not enough to bring swift justice upon the heads of Mr. Custer and Mr. Battles -- and this is where the story of America's reconstruction effort gets really interesting. The Bush administration not only refused to prosecute the pair -- it actually tried to stop a lawsuit filed against the contractors by whistle-blowers hoping to recover the stolen money. The administration argued that Custer Battles could not be found guilty of defrauding the U.S. government because the CPA was not part of the U.S. government. When the lawsuit went forward despite the administration's objections, Custer and Battles mounted a defense that recalled Nuremberg and Lt. Calley, arguing that they could not be guilty of theft since it was done with the government's approval.

The jury disagreed, finding Custer Battles guilty of ripping off taxpayers. But the verdict was set aside by T.S. Ellis III, a federal judge who cited the administration's "the CPA is not us" argument. The very fact that private contractors, aided by the government itself, could evade conviction for what even Ellis, a Reagan-appointed judge, called "significant" evidence of fraud, says everything you need to know about the true nature of the war we are fighting in Iraq. Is it ­really possible to bilk American taxpayers for repainted forklifts stolen from Iraqi Airways and claim that you were just following orders? It is, when your commander in chief is George W. Bush. There isn't a brazen, two-bit, purse-snatching money caper you can think of that didn't happen at least 10,000 times with your tax dollars in Iraq. At the very outset of the occupation, when L. Paul Bremer was installed as head of the CPA, one of his first brilliant ideas for managing the country was to have $12 billion in cash flown into Baghdad on huge wooden pallets and stored in palaces and government buildings. To pay contractors, he'd have agents go to the various stashes -- a pile of $200 million in one of Saddam's former palaces was watched by a single soldier, who left the key to the vault in a backpack on his desk when he went out to lunch -- withdraw the money, then crisscross the country to pay the bills. When desperate auditors later tried to trace the paths of the money, one agent could account for only $6,306,836 of some $23 million he'd withdrawn. Bremer's office "acknowledged not having any supporting documentation" for $25 million given to a different agent. A ministry that claimed to have paid 8,206 guards was able to document payouts to only 602. An agent who was told by auditors that he still owed $1,878,870 magically produced exactly that amount, which, as the auditors dryly noted, "suggests that the agent had a reserve of cash."

In short, some $8.8 billion of the $12 billion proved impossible to find. "Who in their right mind would send 360 tons of cash into a war zone?" asked Rep. Henry Waxman, chairman of the House Oversight Committee. "But that's exactly what our government did."

Because contractors were paid on cost-plus arrangements, they had a powerful incentive to spend to the hilt. The undisputed master of milking the system is KBR, the former Halliburton subsidiary so ubiquitous in Iraq that soldiers even encounter its customer-survey sheets in outhouses. The company has been exposed by whistle-blowers in numerous Senate hearings for everything from double-charging taxpayers for $617,000 worth of sodas to overcharging the government 600 percent for fuel shipments. When things went wrong, KBR simply scrapped expensive gear: The company dumped 50,000 pounds of nails in the desert because they were too short, and left the Army no choice but to set fire to a supply truck that had a flat tire. "They did not have the proper wrench to change the tire," an Iraq vet named Richard Murphy told investigators, "so the decision was made to torch the truck."

In perhaps the ultimate example of military capitalism, KBR reportedly ran convoys of empty trucks back and forth across the insurgent-laden desert, pointlessly risking the lives of soldiers and drivers so the company could charge the taxpayer for its phantom deliveries. Truckers for KBR, knowing full well that the trips were bulls***, derisively referred to their cargo as "sailboat fuel."

In Fallujah, where the company was paid based on how many soldiers used the base rec center, KBR supervisors ordered employees to juke the head count by taking an hourly tally of every soldier in the facility. "They were counting the same soldier five, six, seven times," says Linda Warren, a former postal worker who was employed by KBR in Fallujah. "I was even directed to count every empty bottle of water left behind in the facility as though they were troops who had been there."

Yet for all the money KBR charged taxpayers for the rec center, it didn't provide much in the way of services to the soldiers engaged in the heaviest fighting of the war. When Warren ordered a karaoke machine, the company gave her a cardboard box stuffed with jumbled-up electronic components. "We had to borrow laptops from the troops to set up a music night," says Warren, who had a son serving in Fallujah at the time. "These boys needed R&R more than anything, but the company wouldn't spend a dime." (KBR refused requests for an interview, but has denied that it inflated troop counts or committed other wrongdoing in Iraq.)

One of the most dependable methods for burning taxpayer funds was simply to do nothing. After securing a contract in Iraq, companies would mobilize their teams, rush them into the war zone and then wait, citing the security situation or delayed paperwork -- all the while charging the government for housing, meals and other expenses. Last year, a government audit of twelve major contracts awarded to KBR, Parsons and other companies found that idle time often accounted for more than half of a contract's total costs. In one deal awarded to KBR, the company's "indirect" administrative costs were $52.7 million, and its direct costs -- the costs associated with the ­actual job -- were only $13.4 million.

Companies jacked up the costs even higher by hiring out layers of subcontractors to do their work for them. In some cases, each subcontractor had its own cost-plus arrangement. "We called those 'cascading contracts,' " says Rep. Van Hollen. "Each subcontractor piles on a lot of costs, and eventually they would snowball into a huge payout. It was a green light for waste." …

There’s more but you get the idea. The fraud and criminality extends to the markets as well. Here is Dennis Hudson on the possibility than as much as 50% of stocks are actually “counterfeit.”

Counterfeit Stocks

Bearing in mind that any trigger can set off the others, perhaps the most intriguing and overtly threatening is the issue of counterfeit securities. Be sure of it, if you own stock or mutuals, you are almost certainly holding from 10-50% counterfeit or more.

Most people are not terribly sophisticated about stocks (they have better things to do, like having a life), so we need to first explain a few things so everyone can see the true nature of the counterfeit threat. You may own only blue chips, the trading of which is mediated by two parties, your broker and a floor specialist. Trades in lesser stocks are mediated by your broker and a market maker ("mm"). For practical purposes, market makers and specialists perform much the same function- they bring buyers and sellers together. Stocks listed on the Amex involve neither market maker nor specialist- the Amex is fully computerized. For the sake of simplicity, I'll talk only about how market makers operate, and that can be roughly translated into how specialists operate as well. But the Amex is not immune from what I'll describe, merely by virtue of lacking mm's and specialists, and you'll see why.

Do you have a pension coming to you one day? A lot of pension money goes into stocks. You might want to keep that in mind while reading this.

To be fair to legislators, regulators, mm's and specialists alike, whether they deserve it or not, I want to begin by explaining why counterfeit shares, up to a point, actually benefit the markets. This brings us to the perfectly legal procedures known as naked short selling ("nss") and short selling ("shorting") in general. Let's start with shorting.

In a normal stock trade, you try to buy low and sell high. In a short, you try to sell high and buy low, i.e., you are taking the position that the price will go down- and if it does, you will make money. A short works this way... let's say you believe that ABC Cookies (we'll call its symbol ABCC) is about to drop in price. You tell your broker you want to short $10,000 worth of ABCC. Your broker then lends you a number of shares equal to that amount for you to sell into the market (this whole process is at the click of a mouse or with a phone call). And you were right, the price drops 20%, at which point you instruct your broker to close the position. Your broker promptly buys the shares back for you at this new lower price. You sold the shares you borrowed at $10,000 and now you buy them back at $8,000 (note that if you're wrong and the price instead goes up, you will lose money). So your broker gives you your $2,000 profit, takes back the shares that were loaned to you, and all is well. Or is it?

The truth is, your broker often never owns the shares they loan you to begin with. This is called naked short selling (nss). All was done on trust and handshakes among you, the broker, the market makers, the buyer's broker, and the buyer. As long as the trade settles and everybody got what they wanted (or deserved), no harm appears to have been done. But what if you sell those phony shares but the buyer never liquidates their position (you might liquidate yours, but you'd be buying the shares back from someone else willing to sell)? The buyer is living under the old wisdom we talked about- buy and hold for years and years. So now there's $10,000 worth of phony ABCC stock just sitting out there, right? And if you multiply that times millions of transactions daily, times 250 days per year, times dozens of years since the practice began... well, you get the picture. But, there's supposed to be a legal mechanism to prevent this accrual of counterfeit in our financial markets.

Supposedly, before or seasonably after executing a naked short trade, mm's and brokers have to make arrangements to borrow or otherwise acquire the actual shares in question. It's an admirable concept, providing the markets with the benefits of liquidity while supposedly preventing massive counterfeiting. After all, when you make a trade, you want to do it now, not sometime next week after the real shares have been delivered to your broker for loan to you. But for many years, there was virtually no oversight of this, nor enforcement, nor even any apparent penalties for failure to comply. In other words, it put brokers and mm's on an "honor system", a ludicrous oxymoron if ever I heard one when applied to key players in financial markets.

And there's more to this. By putting counterfeit shares out there, and then failing to deliver the actuals shares in a seasonable manner (called "ftd's"- "fails to deliver"), brokers and market makers are constantly diluting the stock and either forcing its price down or at least preventing it from rising as it should over time. Why? Because the greater the supply is, relative to demand, the lower the price. I'll give you some concrete and disastrous examples of the effects of nss and ftd's on particular stocks in a minute, but first let's look at a much larger example of this unpleasant phenomenon.

As already noted, if you short a stock you profit by the price going down, not up, and you lose money if it goes up. Keep in mind also that shorting is the process of first selling and then buying back, the exact reverse of normal "long" trading. Back to the example of ABCC: suppose that a lot of people want to buy ABCC (we call them "longs") because some news just came out that the company might get bought by RJR Nabisco. Assume the stock is sitting at $30 when news hits. With this type of news, you would easily expect the price to jump to $45 that day. Longs flood into it, mm's start shorting (selling to the longs) and quickly run out of real shares, but they keep selling ghost shares anyway, more and more of them. So at first the price jumps to $33, then $35, then starts to stall at $37, until the longs (scratching their heads) stop buying. Meanwhile, the longs who have already bought fear a reversal and start selling like crazy, profit-taking, we call it.

The process gains momentum, even triggering automatic stop-losses in the accounts of longs who weren't even watching the market at the time, price finally settling at $25. A handful of longs who got out above $30 made money; all the other longs got screwed. So where'd all that other money go? Right into the pockets of the mm's. Remember, the mm's were shorting; at first they were losing money as the price rose from $30, but as it dipped back below $30, they started making money hand over fist. So you can see that it's always in their best interest to naked short a stock to death, which is exactly what they do whenever they can get away with it, which in turn gives you some idea of just how much of your own stock may be counterfeit.

Adding to the sense of fear and uncertainty last week was the strange case of a nuclear-armed B-52 “mistakenly” flying from North Dakota to Louisiana. This comes at a time of rampant rumors that Bush is crazy enough to launch an aerial attack on Iran. Here is Bill Van Auken:
Why was a nuclear-armed bomber allowed to fly over the US?

Bill Van Auken
7 September 2007

Wednesday’s revelation that a US Air Force B-52 bomber flew over the length of the United States armed with six cruise missiles carrying nuclear warheads has attracted amazingly little media attention.

The story, first broken by the Military Times web site based on tips from military officers, was relegated to the bottom of page 16 in Thursday’s New York Times and to page 10 of the Washington Post.

Featured prominently in both newspapers and generally in media coverage were reassurances from a spokesman for the Air Force that it represented “an isolated mistake” and that “at no time was there a threat to public safety.”

This incident, however, has immense and ominous significance. Describing it as an “isolated mistake” begs the obvious questions of how a nuclear-armed B-52 was allowed to become airborne—ostensibly without the approval of senior officials—and who ordered this extraordinary flight, and why.

The B-52 took off from Minot Air Force Base in North Dakota and flew to Barksdale Air Force Base in Louisiana on August 30 after six nuclear-tipped Advanced Cruise Missiles were mounted on the pylons under its wings. Each of the warheads carried a yield of up to 150 kilotons, more than ten times as powerful as the US bomb that leveled Hiroshima at the close of the Second World War.

As far as is known, the incident marked the first time that a US plane has taken off armed with nuclear weapons in nearly 40 years. While bombers were kept in the air in the 1960s as part of the nuclear brinksmanship with the USSR, the practice was halted in 1968 after a series of accidents involving nuclear-armed B-52s. After that, bombers loaded with nuclear weapons were kept on alert at the end of runways for rapid takeoff until 1991, when this practice was halted as well.

A Pentagon spokesman said that the incident prompted an emergency call by the Air Force chief of staff, Gen. Michael “Buzz” Mosley, to Defense Secretary Robert Gates, adding that “it was important enough that President Bush was notified of it.”

In response to the episode, the Pentagon has announced that a munitions squadron commander at Minot has been relieved of his duties and several airmen have been decertified for handling nuclear weapons. It also reported that an investigation is continuing.

The Air Force announced in March that the Advanced Cruise Missile (ACM) is being phased out under a nuclear reduction treaty signed with Moscow in 2002, and it has been suggested that the weapons were being transported between the two bases as part of this process. The transport of weapons from one base to another, however, is normally carried out in the holds of C-17 and C-130 cargo planes, not fixed to the wings of combat bombers.

Someone had to give the order to mount the missiles on the plane. The question is whether it was a local Air Force commander—either by mistake or deliberately—or whether the order came from higher up.

The first scenario recalls nothing so much as the 1964 black comedy produced by filmmaker Stanley Kubrick, Dr. Strangelove. The film’s plot centered on the unilateral order given by a delusional air force commander, Gen. Jack D. Ripper, for an air wing to carry out an unprovoked nuclear first strike against the Soviet Union. The US president is shocked to find out that supposed failsafe systems barring any such strike without his direct order have been overridden.

Given the Pentagon’s claim that the incident represented a “mistake,” the Minot-Barksdale flight indicates that the present failsafe systems—either deliberately or inadvertently—do not prevent a single commander from deploying nuclear weapons.

Experts on nuclear weapons have described the episode as shocking and inexplicable. “It seems so fantastic that so many points, checks can dysfunction,” said Hans Kristensen, the Federation of American Scientists chief researcher on US nuclear forces. “That’s perhaps what is most worrisome about this particular incident—that apparently an individual who had command authority about moving these weapons around decided to do so.”

Representative Edward Markey, a ranking Democrat on the House Homeland Security Committee, issued a statement declaring it “absolutely inexcusable that the Air Force lost track of these ... warheads, even for a short period of time.”

Markey added, “Nothing like this has ever been reported before and we have been assured for decades that it was impossible.”

The second possibility—that the flight was authorized at a higher level—poses an even more immediate threat.

B-52s from Barksdale have been used repeatedly to strike targets in Iraq, firing cruise missiles at Iraqi targets in 1996 and 1998, and in the “shock and awe” campaign that preceded the 2003 invasion, carrying out some 150 bombing runs that devastated much of the southern half of the country.

Moreover, the weapon that was fixed to the wings of the B-52 flying from Minot air base was designed for use against hardened targets, such as underground bunkers.

Given the ratcheting up of the threats against Iran and the previous reports of plans for the use of “tactical” nuclear weapons against Iranian nuclear installations, there is a very real possibility that the flight to Barksdale was part of covert preparations for a nuclear strike against Iran.

If this is indeed the case, the claims about a “mistake” by a munitions officer and a few airmen in North Dakota may well be merely a cover story aimed at concealing the fact that the government in Washington is preparing a criminal act of world historic proportions by ordering—without provocation—the first use of nuclear weapons since the bombings of Hiroshima and Nagasaki more than sixty years ago.

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