The US is jealous of the French economy and lifestyle?

Although I find this laughable, bonehead NY Times Columnist Paul Krugman believes otherwise.

This is the same Paul Krugman who is predicting a massive recession. Please, Paul, for humor's sake, let's compare the U.S. to France.

GDP : US - $12.455 Trillion , France - $2.126 Trillion according to the IMF

If you take into account Purchasing Power Parity (PPP), the US is around $12.229 Trillion compared to France's $1.835.

Unemployment : US - 4.4%, France - 8.4%

Krugman is certainly a smart man. You don't go to the schools he attended if you aren't a bright guy. Somewhere along the line though, he was misguided and his economics and sense of what Americans want or feel seems to be way off. He continues to be a pessimist in the current economy while the U.S. outperforms France year after year.

China learning well from U.S. Economists

As one of the fastest growing economies in the world and one of the largest, China could easily be arrogant, unresponsive and even disrepectful to the U.S., a former Cold War nemesis. That does not seem to be the case however, considering the trend of decisions made by the Chinese version of the FED, with counsel from U.S. bankers and economists.

The Wall Street Journal reported today that China lifted bank reserves in an attempt to help control growth. Although growth in double digits seems very appealing to most investors, the Chinese Central Bank and U.S. economists realize it may actually pose a huge recession threat down the road. With a lesson learned from the U.S. housing bubble, created by Alan Greenspan's flawed monetary policy, China is attempting to prepare itself and provide a soft-landing to the world's second largest economy (GDP using PPP).

Though the graph suggests no recession problems, you can be sure that growth will be tough to sustain at such a high rate. If China can curb its growth now at 8-9%, it will be able to sustain it for a much longer period of time with less volatility, such as the graph suggests. However, if they continue growing by double digits, the threat of a bubble burst is likely, one that could ultimately ruin the economy or set Chinese progress back severeal years.

Economic Worries for the U.S. Economy

Despite weak GDP performance in the first quarter of 2008, the equity markets continued their climb today with the Dow closing at yet another record high. All of this came amidst talk of a potential recession, a weak Dollar, and declining markets abroad. With this seemingly unstoppable run continuing, there are still several factors that worry me about the current economy.

First off, let me make it crystal clear that I am still Bullish on the stock market and economy in the long run. However, there are too many factors signaling a struggle ahead. Lets begin with the inflationary pressure on the economy. The CPI and PCE both rose to suggest higher prices across the broad economy. Although prices in commodities continue to increase, I do not see these increases in the CPI and PCE repeating themselves for more then a few months. Commodity prices are being driven by international demand and growth, not domestic. Therefore, rising commodity costs are not being translated into actual inflation for most ordinary Americans except in the form of gasoline.

Another concern I have relates to the Fed's competence and the inverted yield curve it created. Greenspan is out, so I will wait to see how Bernake handles a fragile situation. Many bears argue we have never seen an inverted yield curve without a recession following. This fact is entirely accurate, yet may not be in this unique situation. The Fed mishandled rates in 2002-3 by sending them too low, creating the massive housing boom. Without properly limiting growth and speculation in the housing sector, the expected happened in when the bubble burst. Sub-prime spillover and sharp declines in housing prices and sales are not what worries me though. The drastic lowering of interest rates was overdone compared to inflation numbers. Additionally, it hurt the USD, which dropped steeply between 2002-4.



In an attempt to try and generate a perception of normal inflation, the Fed has increased the amount of money it prints to provide a short-term wealth. This will only worsen inflation in the long run as prices of goods and service remain constant the value of the dollar drops even more. To help control inflation, the Fed keeps focusing on raising the short-term FF rate instead of both the short and long or just the long. This has created the inverted yield curve, which undervalues long-term lending. Why would anyone borrow for the long term when they can get short-term returns at higher rates? Not to mention, it makes the U.S. pay back larger debts sooner rather then later.

Lastly, corporate profit records of late have been derived from operations abroad, not domestically. These profits are good since the companies making them are many of those headquartered in America. But, the income and revenues being attained globablly does not help our economy in terms of GDP, employment, and other factors. When you consider most of the returns on the investments made internationally stay outside the U.S. boarders, it really has no net affect on our country except for aiding to drive the equity markets higher. Also, if you consider the gains of the Euro and Pound against the USD, it makes sense that these companies continue to report record earnings. It must be near impossible for Wall Street to predict income and revenues generate across the world, let alone exchange rates to translate those earnings and sales.

These are just some things to consider in the short-term. Once GDP growth heads back towards 3-4% in the 4th Quarter, you can be assured that a new big rally will begin. Unless, of course, the current rally just never dies. As Larry Kudlow says, "It's the greatest story never told" and I expect many Americans to continue to reap benefits of investing in stocks, mutual funds and ETFs.

Why the equity market is still the best play

Over long periods of time, nobody can argue that the equity markets always return higher yields then the bond market. Bonds are used because of their safety, but I would argue that anyone planning on investing over a 10-year period or more should just as well invest in stocks. Some argue, however, that high short-term yields present an adequate substitute for equities.

When you examine the current T-Bill yields, you find them extremely low. So what purpose would that give to invest in bonds? Looking at outside factors, you would realize that the USD has started to take back gains against the Yen, Euro and Pound. If you couple the gains in the Dollar with record high tax revenues, which in turn help decrease the deficit in the budget, Bonds would seem attractive because yields would continue to increase. However, as my fellow blogger Rufus quickly corrected himself, he explained, "Of course, the second act is the market explodes, again and the "bond" holders take a bath."

Therefore, even if the bond market rallies in the coming few months and stalls the equity boom, eventually the stock market will pull through and continue to mount significant gains. Some will argue that the spread between bond yields and commodities is too vast and one or the other will increase or decrease, respectively. With inflationary pressure in the market beginning to wane, the odds are against a momentus rally in the fixed-income market. From this, you can predict that commodity prices will slide some, although with global growth and demand as strong as it is, a larger then normal spread is not all that worrysome.

Grading the Democratic Debate (All Participats)

Hilary Clinton - D

Sen. Clinton did nothing short of disappoint me when I already have little respect and confidence in her. Instead of providing unique solutions to the questions and problems posed, she spend most of her air time lashing out on the Bush Administration. Although I am not a fan of many Bush policies, Clinton needed to use this time to impress those who aren't sold on her instead of using her breath for her personal vendetta.

Why does she despise the Bush Administration so much? Yes, he supposedly lied to the American public. But then again, didn't her own husband do the same? He turned out to be quite a solid President, despite failing to get most of his agenda passed through Congress. You have to assume that the White House received the same intelligence as Congress when this Iraq situation began, a war she voted for originally. She also voted for the invasion of Afghanistan, yet seems to regret most of her votes. Instead of blaming others for her mistakes and flawed political record, it would have been much nicer to see her come out firing with some good ideas and a sound political platform, neither of which we received from her tonight. She also showed her anti-free trade platform with her ideas of protectionism and regulation to run the country from the economy to health care. Clinton was even more vague on her health care plans then Obama, but at least she didn't say she wanted to hike taxes outright. Last I checked, we weren't in a communist country Senator Clinton!

Even worse, she still comes off negatively in many American's mind. I can't put my finger on exactly what it is, but she seems snobby, arrogant, and obnoxious. A poster on a forum I read suggested her tone as caustic and explained, " For starters, as a male, she comes off as the type of wife that most men don't want. Not that she is a strong female, that's cool, she just comes off as a caustic female. She just doesn't come off as a very nice lady. I don't think I'd want her in my circle of friends."

Maybe this criticism is unfair, but it seems apparent with 40%+ of the public disliking her, she has a real mountain to climb. Other candidates like Obama and Edwards seem to be more likable, similar to how the public perceived Bill Clinton and George W. Bush during campaigns. If the Dems want a real shot at winning, I'm convinced they need to run either Obama or Edwards instead of another Kerry or Gore (though he obviously could/should have won).

Barack Obama - A-/B+

Obama was solid tonight. He once again spoke elegantly and showed reasons why he could be a successful President. Instead of bashing the current administration, Obama gave some resounding solutions and unique, detailed initiatives he would like to help pass. Additionally, he seemed to have sound balance in his foreign policy stance. Although he wants a quick troop withdrawal, he understands the fundamental problems of the Middle East well and redirected an attack on a quote the moderator tried to tie onto Palestinian sympathy. Despite his campaign aimed further left then Clinton, he seems more eager to work with both sides of Congress and you get the feeling that the Republicans will have higher respect for him as President.

Obama was very vague on his funding of the proposed universal health care which he supports. Subsidies are a distinct possibility, as is the improvement of inefficient health care services. Although I like the idea of private health care due to the enormous amount of potential problems it might bring.

John Edwards - A-/B+

Overall, Edwards almost stole the show. Despite seemingly fewer questions, he actually answered more conservatively then either Obama or Clinton. That fact is interesting because he was supposed to be running the campaign furthest to the left. You have to wonder if his ads will focus on that profile while his debates and speeches will try and attract more moderate Dems and even liberal Republicans.

What really impressed me with Edwards was his composure. Calm and collected, he delivered detailed, well-pronounced (although he has that southern accent) replies. He reminded me some of Bill Clinton, although not quite as friendly. However, he still was much more appealing then Hilary in terms of vocals.

Edwards best answer of the night was his abortion response. Although Edwards clearly stated that he was pro-choice, he appealed towards the middle and even the Republican side of the line almost perfectly. He conceded that the issue is very personal and important to most voters, claiming we need to accept everyone's opinion on the situation. That type of sympathy appeal was not made by Clinton and might prove to come back and hurt her chances of ultimately winning both the Primary and Presidency, should she advance.

Had Edwards not suggested raising taxes to fund his universal health care program, he may have received a better grade. Once he uttered repealing the Bush tax cuts, it was a huge hit to his camp right away. With the economy and stock market performing like it is, tax increases could cause severe, detrimental damage.

Bill Richardson - B

Richardson looked goofy and almost as if he was trying too hard at times. His speaking was decent, but not good. His hand gestures were almost a little too overwhelming for me. He definitely gained credibility by standing up for his own personal views and opinions, not necessarily those associated with his party. He announced that he was pro-gun control, would use the military if necessary, and has been a known supply-sider when it comes to economics.

In addition, Richardson looked solid on some key aspects of current political issues. First, Richardson displayed his prowess and experience in foreign policy by answering several questions and making it a point to mention his work in that area of the political sphere. The moderator pointed out he received 4 Nobel Peace Prize nominations and Richardson himself further pointed out his familiarity with foreign diplomacy when referenced his work with North Korea.

Lastly, Richardson may be aided by his role as Governor instead of Senator. Like he vehemently explained, he deals with these decisions and issues first-hand, on a daily basis in New Mexico. That type of pressure and the need for quick, decisive action sometimes is harder for Senators since they are transitioning roles.

Joe Biden - D+

Biden did not leave much of a mark on this debate. He had a personal "attack" if you will that he failed to respond to, rendering him as defenseless. Unlike Obama and even Clinton to some extent, Biden didn't defend his name. Although he isn't really a lasting 2008 candidate, moves like that might cost him in the future. Also in the last half, like Hilary, he focused more on attacking the Bush Administration instead of responding with thorough, sound answers.

Dennis Kucinich - D

Give me a break. This guy might be the biggest pushover in the history of Washington. How he landed a seat is beyond me. He was basically against anything militaristic in nature. He solely desires to rely on diplomacy to solve foreign issues. Apparently Rep. Kucinich doesn't understand that terrorists do not negotiate and even if they do, they cannot be trusted. He sounds like the type of politicians who belong in France. Appeasement is not the answer, just ask those French cowards. Germany used them for years in the early half of the 19th Century. The leaders we are dealing with in North Korea, Iran and terrorist organizations are replicas of Hitler. We can all thank god that Mr. Kucinich won't be the President anytime in his life, except maybe for a local committee.

Mike Gravel - F

Who is this guy? I can honestly say that Sen. Gravel would not have been elected in any other state except Alaska. They must really be desperate or maybe they don't care much up there. Instead of answering questions, Gravel bashed his counterparts for this and that. On top of that, he yelled the moderator for asking too few questions to him, proclaiming his seniority. Maybe if he realized how unimportant he is to the Democratic Presidential Campaign he would understand. Gravel is an absolute joke.

Chris Dodd - B

Dodd has some good experience at it showed. For someone who has been in the political realm as long as he has, public speaking should be easy and it showed. He has some sound responses to questions and actually solidified himself as a leader in the Democratic party. He was for civil unions, but not gay marriage.

Could Protectionism Actually Hurt the Dollar?

Although some Democrats claim to be in favor of protectionism to help bolster the U.S. Dollar and curb outsourcing and the trade deficit, John Rutledge, former Reagan Economic Advisor and current President of Rutledge Capital, says it may actually cause an inverse affect. Over the past year, the U.S. Dollar Index has declined sharply while falling substantially against the Euro, Pound and Chinese Yuan. The important aspect to note in these declines against other notable currencies is that only the Yen and Yuan have a significant impact on the U.S. economy because China and Japan are two of our prime exporters and trade partners. Europe and England fail to pose nearly the threat that Japan and China do should the U.S. Dollar really free-fall against those currencies, which essentially would drive up inflation.

Democrats believe protectionism will help maintain the value of the U.S. Dollar, when in fact, the opposite needs to happen to help control outsourcing and decrease the number of imports into the U.S. If the Dollar falls significantly against the Yuan and Yen, manufacturing and production in the United States will ultimately become cheaper and in theory, our manufacturing sector will actually begin to expand again to adequately supply the public with their needed goods and services. However, the only possible scenario for the USD to decline drastically enough against the Yen and Yuan is free market forces, not government regulation or policy-making.

Additionally, Rutledge went on to explain that the USD should stabilize vs. the Yuan and maintain its success with the Yen. His theory for the slowing of the USD decline against the Chinese currency was based on increased speculation on the Yuan and the theory that recent run-ups by the monetary unit have created a bubble that will likely burst at some point in the next couple years. Keeping the USD strong against the Yuan will be key for controlling inflationary pressure in the economy, but likely will continue to contribute to outsourcing and a lack of trade balance with China.

The solution to this dilemma is simple; let the Yuan run its course and lower corporate tax rates in the U.S. to make business investment and production more attractive.

Did Alan Greenspan Ruin the Current U.S. Economy?

During the tenure of Alan Greenspan, from 1987-2006, the U.S. economy grew significantly. Although these gains helped solidify America as the unquestioned global leader in finance, production, and wealth, it came with a stiff price. We are only beginning to realize the affect of Mr. Greenspan's focus on short-term monetary and fiscal policies that dominated during his last four to five years.

There is certainly no question that Mr. Greenspan maintained stability in the economy from his entrance during Reagan's Presidency to the end of Clinton's. However, the effects of Greenspan's economic policies are certainly being felt. Outsourcing, weakness in the U.S. Dollar, an inverted yield curve, high inflation and repercussions from an unnecessary housing bubble are all presently hampering the American economy.

Despite obvious flaws in Greenspan's policies, he won't get all of the blame. Natural factors, decisions of other leaders, and actions taken by other countries or parties outside of Greenspan's control played a significant role. But, these outside factors surely could have been combated in a more effective manner by our former head of the Federal Reserve.

The 2008 election is critical to the importance of our free market, capitalistic economy. Some Democratic Presidential and Congressional candidates such as Hilary Clinton are proposing protectionism to try and combat outsourcing and trade deficits. This type of legislation will surely put our economy into a slump. Any economist who completely dismisses outsourcing as at least a minor problem does not view economics in an objective light. However, outsourcing really stems from our protectionist approach to the U.S. Dollar in the late 90s and early part of this decade. High costs for merchandise in the U.S. force countries who import American goods to look elsewhere for goods of similar quality and value. Part of this outsourcing problem cannot be directly tied to Greenspan, who has limited control over the wage inflation and more importantly benefits received by U.S. workers. Labor Unions, health care costs, and a variety of other issues compound the actions of Greenspan to intensify the outsourcing effect. Nevertheless, Greenspan's continuous use of short-term methods to boost the U.S. Dollar or maintain its high levels against other global currencies are linked directly to our current outsourcing problem.

Along with outsourcing, Greenspan's short-term bolstering of the strength for the U.S. Dollar has contributed to its current struggles. Money supply was not properly utilized to preserve a stable Dollar, as it has shown with the decline against the Euro from 1.12USD/1E to .75USD/1E. The Dollar's substantial drop has occurred during times of economic prosperity across the globe, including both the U.S. and Europe. A weak dollar hurts the wealth of the nation and also disrupts tourism and travel overseas. Over-tightening and protectionist measures on the dollar generally hamper the economy, as evidenced by our rapid growth in the late 1990s, followed by the recession of 2001-2.

Current threats of recession are also correlated to Greenspan's poor handling of the Fed's interest rate control. Following the recession in our economy, the Fed made multiple, massive rate cuts. These cuts were detrimental for two reasons: they caused the housing bubble of 2003-6 and created an inverted yield curve for treasury bonds. With interest rate cuts in 2002 and 2003 to ultra-low levels, the Fed produced a housing boom that is still affecting us today. By over-cutting, Greenspan generated too much liquidity for the marketplace, thus ensuring heavy asset investment of all sorts. The problem with this massive amount of liquidity was that it was coupled with extremely low interest rates. Housing was the obvious choice for investors and the immediate boom that followed was one of unsustainable proportions. I thought that the Fed was supposed to curb growth in order to control volatility, peaks and troughs, and ultimately enable growth longevity. Apparently I was wrong.

Another key consequence of cutting rates too low was the mishandling of temporary debt vs. long-term debt. One of the main reasons the U.S. Treasuries are considered sound investments is not only because of the "guaranteed return", but also the decency of that return. However, when Greenspan cut rates, they targeted long-term rates in too many cases. This poor action spawned an environment where short-term rates actually exceed long-term returns. Why would an investor tie his capital up longer if he can't get a higher rate? While Sen. Clinton preaches her worries about China and other countries controlling high amounts of U.S. debt, she need not look further to blame then our own Federal Reserve and Treasury Department. Now, America needs to pay off China & Co.'s borrowed money faster then normal. This is the type of action that creates political instability. In addition, the theory of the inverted yield curve suggests there will be a significant slowdown or potential recession. Investors in long-term yields are demanding lower rates because they fear the economy will plummet and those rates will actually decline even more as GDP growth and inflation fall. But, what happens if inflation doesn't decline like was previously expected? So far, inflation has actually been prevalent as evidenced by the commodity gains and our economy might enter the dreaded environment dubbed "stagflation".

As if his horrible policies weren't enough, Greenspan came out not long after the huge February correction and predicted a recession was "likely". Despite his retiree status, Greenspan sent more fear through the minds of consumers, investors, and businesses alike. Conveniently, after the stock market (and economy to an extent) rebounded and stayed its upward course, Greenspan came out again and denounced his previous prediction.

Hopefully that was the last we will hear from Greenspan, unfortunately, I wouldn’t count on it.

Who is to Blame for the Virginia Tech Massacre?

First off, let me say that my thoughts and prayers are with the families, friends and colleagues of the victims in Blacksburg. That was one of the most despicable acts I have ever seen. The young man who committed them is a selfish coward, who obviously had serious mental problems. There is plenty of blame to go around for this incident.

You can start with the V. Tech police department and President, who failed to secure the building and lockdown the campus after the first shootings. Had they done this and taken a more preventative approach, this catastrophe may never have happened or at least not to the degree it took place. Also, universities and colleges should run criminal, psychological and other sorts of background checks before admitting prospective students. While this may not have prevented the tragedy that occurred today, few can argue that it would really hurt.

Next you can look at our weak gun control laws in this country. No matter what party you are in, there is simply zero reasons to oppose gun control to at least a certain magnitude. Assault rifles, automatic and semi-automatic guns have no place in the hands of society, despite this incident arising from handgun usage. Secondly, more extensive background checks are needed and the NRA needs to get their arrogant heads out of their behinds and actually show they might care about situations like this. I do agree with the protectionism of the 2nd Ammendment for our Constitution, but understand there is need for modification too. After all, aren't these rules called Ammendments for a reason? Shouldn't we be allowed to continuously update these laws as times change? It is clear to me that Americans are too irresponsible to allow full freedom under the 2nd Ammendment. Regulations on gun types, clip sizes and round speeds will not only decrease the number of victims of these derranged, pathetic cowards, but they also can aid in the success of law enforcement.

Some media members and Americans blame our culture for this violence instead of actually placing the blame on the individuals themselves. American culture is far more censored than any other developed country of note. How much further are you really willing to go? Asian cartoons and movies are filled with violence, yet they never seem to have such problems. Part of the reason is that the violence in television and other mediums in Asia rely on old-fashioned fighting, instead of gun use. If there is one aspect of American (and probably Western culture in general) to criticize and point fingers towrads, it surely must be gun perceptions. Too often in urban and action movies, guns are portrayed as "cool" and symbols of power. Using them on other humans without the same level of protection is about as cowardly as Muslim extremists who commit suicide bombings on civilians.

In the end, the blame needs to come back towards the individual and his/her actions. This kid decided to selfishly take others lives instead of just ending his. Depression is a terrible disease and as someone who has experience at least a minor level of it during my lifetime, I never once blamed anyone I did not know for feeling sorry for myself. I definitely do not condone the murder of his girlfriend, but at least we knew his motive (albeit a horrific one). What did those other 32 people do to deserve their lives to be disrupted like this? How about their families, friends, classmates, faculty and all of the thousands affected by this unbelievable act?

The gunman, whomever he is, alienated his family, our country, his nationality, and most importantly the honor and dignity by which we live our lives. Unfortunately, he acted like the gutless bastard he is when he took his own life. We never will know for sure why he did these horrible things and what possessed him. Additionally, we also won't get our revenge. He is a weak, craven coward and may he suffer in hell for the pain and suffering he has caused.

Update on Fairfax Financial Holdings Scandal

Attatched is an article by Herb Greenberg (CNBC/Marketwatch) discussing further quotes from Morgan Keegan analyst John Gwynn.

The following was obtained through Goliath Business News Services...the free-site portion

"NEW YORK-One week after restating the results of a reinsurance subsidiary, Fairfax Financial Holdings Ltd. was named in a proposed class action lawsuit charging it with securities fraud for producing a range of allegedly false financial reports since 2004.

Lawyers representing two Fairfax bondholders filed the suit last week in U.S. District Court in New York on behalf of investors who bought Fairfax debt between March 2004 and March 2006.

The complaint, which also names Fairfax Chairman and Chief Executive Officer V. Prem Watsa and several Fairfax officers and directors, alleges that the company concealed the..."

Source : http://goliath.ecnext.com/coms2/summary_0199-5467572_ITM

In addition, a law website containing possible cases for individuals to become a part of posted this...

"Fairfax Financial Holdings Limited NYSE: FFH has been accused of securities fraud. If you are a current or former employee or are a member of any of Fairfax Financial Holdings Limited investment plans or profit sharing retirement plans you may be included in this possible Fairfax Financial Holdings Limited 401K or Employee Retirement Income Security Act (ERISA) class action. If you purchased or held Fairfax Financial Holdings Limited stock in one of those plans during the periods December 18, 2002 to July 25, 2006, you may have a claim.

Under ERISA, Fairfax Financial Holdings Limited employees can file a lawsuit against the company for putting stock options at risk. Fairfax Financial Holdings Limited employees have a claim if they can prove their employer violated its fiduciary duty to its employees. Fiduciary duty refers to a company�s responsibility to the people who invest in it. If an employer puts the company�s interest ahead of the investors�, it has broken its fiduciary duty. A fiduciary is a person that exercises discretion over the management of plan assets or exercises discretionary control over the administration of the plan.

ERISA is a federal law that sets minimum standards for pension and health plans set up by private businesses. ERISA was designed to protect people who participate in employee benefit plans, including employees with stock options in a company. Stock options are a form of compensation in which employees are given the opportunity to purchase shares of the company stock at a certain price.

If you have suffered from Fairfax Financial Holdings Limited 401K plan losses, you may qualify for damages or remedies that may be awarded in a possible Fairfax Financial Holdings Limited ERISA class action lawsuit. Please click the link below to submit your complaint and we will have a lawyer review your ERISA complaint. "

Source : http://www.lawyersandsettlements.com/case/fairfax-securities-erisa

Is Fairfax Financial Holdings the Next Enron?

It has been some time since our last major corporate scandals. Sure there are backdating of options investigations and CEO pay debates everywhere. But, since the Enron and MCI-WorldCom days, nothing has really stood out and made me fume like the following story. This could be the most complex, twisted story since that of the Enron downfall, in which many parties and players are at stake.

To understand the situation, we need to examine how Fairfax became an insurance giant. In 1985, CEO Prem Watsa came about as a disciple of Buffetism (i.e. theories and management practiced by Warren Buffet within Berkshire Hathaway). According to Fortune, the stock price appreciated from $3 to $600 (in Canadian Dollars). In 2003, after the wake of 9/11 and other costly disasters, John Gwynn of Morgan Keegan placed an "Underperform" on the stock because of "loss reserve deficiencies" of around $5 Billion. Over the next few days, the stock price declined by around 20% and Fairfax issued claimed the number was wrong. Although Gwynn came out not long after and declared the number was closer to $3 Billion, Fairfax believed his actions were intentional, despite the fact that Fairfax itself failed to release any estimates relating to difficiencies or excess reserves.

According to Fairfax VP Paul Rivett, several hedge funds including SAC, Exis Capital and Third Point short-sold the stock after Gwynn's downgrade since they were able to obtain the report before the information became public. They claimed the hedge funds made huge profits through the short sales, but continued to keep large amounts of short positions. Since a "short squeeze" was inevitable when the hedge funds wanted to cover their shorts, Fairfax argued they saw the better option of driving the stock price further and further towards zero.

The problem with this theory of Rivett and the rest of the Fairfax group seems to be the actual resulting price of their stock. During the middle of 2003, Fairfax's stock price tripled and rose from around $50/share to over $150, closing near $170 by the start of 2004. If these hedge funds conspired against Fairfax, they surely would have been able to signficantly limit the increase in the stock price, especially growth as dramatic and quick as Fairfax experienced during mid-2003. Additionally, the stock price continuously hovered between $100 and close to $200 per share from 2004 until 2007, recently eclipsing $200. Any statistical evidence of a conspiracy to manipulate the stock price should end after just looking at the Fairfax charts.

In addition to these charges of desperation, Fairfax has also been involved in some real "shady business" and questionable practices. The first group of them involves their accounting and insurance irregularities. In order to increase profits, they have used several tax schemes to effectively decrease the amount of taxes to be paid by loaning and investing some of their subsidiaries into other subsidiaries in different countries. They are currently being investigated by the SEC and Justice Dept., among other agencies. Spyro Contogouris, an investor with a flawed reputation himself (he was charged with defrauding some Greek Businessmen back in 2004) wrote a report questioning these accounting and insurances practices. By September the SEC decided to issue subpoenas to Fairfax to investigate these "unique" transactions. However, in June of 2006, Fairfax filed suit with the SEC, claiming Spyro was conspiring against the company. Interestingly enough, the very next day after filing their lawsuit against Spyro, the company restated their balance sheets, reducing shareholder's equity (and ultimately decreasing their assets). Spyro may have a suspect background himself, but he was apparently onto something in pointing out these non-traditional transactions made by Fairfax. Reduction in Stockholders Equity of 7-8% seems like a significant mistake for "accounting errors," especially those done by PWC, one of the Big 4.

Although Contogouris was arrested the day after he filed a lawsuit against Fairfax, PWC & Sitrick (a PR consultant hired by Fairfax), things still didn't add up well. Contogouris took his analysis of Fairfax off his website due to a request by his lawyers, but Gwynn also resurfaced in an odd way. He stopped covering Fairfax (despite his several years of expertise) claiming "litigation strategy designed by Fairfax to silence negative research" (pg. 86). Although conspiracy could be an option, the insurer may actually bullying analysts into placing "outperform" ratings on their stock or dropping them from the list of companies they cover. This practice is not only unethical, but may result in legal action from the SEC and cause a drop from the NYSE if found true.

By this point, you would expect the story to be coming to an end with the endless twists, turns and finger-pointing. But, there is more. Institutional Credit Partners was becoming curious about the lack of research reports on Fairfax, given the size and growth of the company. When one of their portfolio managers looked into acquiring information about unique accounting methods, he was seemingly intimidated and threatened by Marc Kasowitz, the head lawyer for Fairfax. Soon after, ICP employees reported stalkers to the FBI who linked the culprits back to Kasowitz's law firm. Although "Kasowitz denies having Gahan followed", he admitted to beginning an investigation into ICP (pg. 86). They even cited ICP for "highly abnormal short trading," although ICP does not in fact trade any equities. The firm solely invests and trades credit swaps (pg. 86).

Lastly, Fairfax was cited for another obscure transaction uncovered from March of 2003, one that was weird enough to make the New York Post. When questioned about the transaction during a conference call, Watsa told the analyst that Fairfax was already given permission by the IRS. Now, they said they never brought the situation before the IRS (pg. 86).

After reading this article several times, it seems obvious to me that Fairfax is attempting to cover something up. For as much finger-pointing as they want to do, crying "conspiracy!", Fairfax itself has many questions to answer. Although the company is set up well and could become an insurance giant itself, the various sketchy tactics and questionable methods emplored by Fairfax would make me stay as far away as possible. Despite a stock price flying past $200/share, Fairfax may be uncovered as the biggest scandal since Enron. If I were you, I wouldn't put my proverbial eggs in their basket.


All facts, figures, quotes and the overall storyline are courtesy of Fortune Magazine's March 19th, 2007 issue, "The Inside Story of a Wall Street Battle Royal" by Bethany McLean; pg. 74-86.