Be sure to avoid being surety!
(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!
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.
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.
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
However, look at this:
The Wall Street Journal: Lehman Finds Itself In Center of a Storm
Bloomberg: Lehman May Post Smallest Net Since '03 as Shares Fall
Businessweek: Is Lehman Liquid Enough?
Telegraph UK: Wall Street rallies to aid Lehman
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:
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,