I asked Bob Moriarty of 321gold.com for some thoughts on my post from yesterday, luckily for me he took the time to answer me and his reply was that I should put more definition and background into it. So, I'll give you something that I think will clarifiy alot of what I wrote yesterday:
Why was AIG so important to bail out? I think this question is crucial, because it reveals a big hole in the derivatives conundrum. When bankers wanted to free up more credit so they could increase leverage or pass on bad paper, they had to (actually, still have to) have a good credit-worthiness of that particular paper/asset. And the only way to get a good credit-rating on bad assets is through insurance! So, companies like AIG insured, for example, the sub-prime loans and when these bad papers became worthless AIG couldn't pay up their insurance because they had not expected such a big loss - or they simply choose to not expect it for short-term profit.

To not confuse anyone, the insurance is not generally refered to as an insurance, they are called CDS's (credit default swap) and handled like bonds and not like traditional insurance (so really anyone can be an insurer in this business). And let me also add that CDS's are not only used to insure 'bad paper', but also stocks like Lehman Brothers.

And then AIG was bailed out because they were so important to sustain credit-ratings and therefore the value of these worthless assets ... now who knows how much money the US government will have to throw away into this monster? By the looks of it, this thing is far from over; in fact, the derivatives market has grown since the bail-out! Maybe the bankers are using the little credit-worthiness the US still has to milk the cow as much as they can before the fraud is no longer sustainable.

I know alot of people have trouble understanding the derivatives market, and that's no big surprise since the bankers themselves are mostly clueless as well - in fact they usually don't even know what it is they're holding. How many times haven't we heard the same thing lately - some bank that has been untouched by "credit losses", declares itself completely free of these silly papers that all the other stupid banks are holding, and then a few months later they turn up millions (or billions) of so-called credit losses. Well, let's look at the big picture to try to get some clarity:

First there was the repeal of the Glass-Steagall Act of 1933 in the US, along with plenty of deregulation in the the rest of the world in the late 90's. Basically the repeal of the above mentioned act and deregulation in the world at large, was nothing more than to allow credit institutions to also be directly involved in investments. The problem here is that an institution that is able to create credit and also act as an investment company has the ability to create any kind of leverage it wants through derivatives or re-packaging of interest-rate yielding papers. These companies can use credit with investment vehicles in any way they want, and that's the reason that this regulation was created in the first place.
The derivatives market has completely exploded since this deregulation. In 1999 the derivatives market stood at about 50 trillion USD, today it stands at almost 700 trillion! The world economy is only worth something like 50 trillion today, soon to be less of course. This is simply telling you that the deregulation has created a completely out of control leverage in the system... the losses have only just begun, they keep coming in and there doesn't seem to be any end in sight.
The main problem here is that most derivatives that have been created rely on stability in the system, or a kind of financial status quo. We all know that basically there are no status quos in the financial industry, and so these financial instruments (if you will) are tuned into a narrow economic scenario ... and now that yields and values are jumping up and down - these derivatives become frozen or worthless.

Ok, that's the big picture, but how can we know how much of the derivatives market that is actually bad? Well, sadly I don't think that's possible but the size of the derivatives market is telling us that this must be alot of false value. You can't create 650 trillion of value in 10 years by manipulating financial papers and credit, something is definitely wrong here. This is mostly leverage... that is, fake prosperity, just like the "prosperity" you get by loaning money to buy crap you don't really need.

I don't know if that clarified anything to you? Then there's the problem of getting all the details right, maybe I'll try to delve into the different specimens of the derivatives waste-land some day when I have too much free time on my hands... oh, and here's a complimentary music video:

So, for my first stock-analysis I'll present an exploration company. I should warn you that my analyses of stocks are never too exhaustive, what I'm looking for are all the facts of a company that I need to decide if I'm buying or not; so it might not suit everyone. Anyway:

Like all other small exploration stocks OAR has taken a good beating and dropped from a high of 1.20 to 0.08 in only six months. The mcap is now about 2M CAD. The reason I got interested in this company in the first place was because one of the guys who made the great discovery of Aurelian Resources is involved. Other than that management looks pretty good with lots of experience, but of course that's no guarantee of any nice finds (or further financing). OAR has projects in Colombia and Ecuador; at this time the projects of Ecuador are in very early stages (and government in Ecuador is a little nuts), so therefore I will not go into detail on these. The main thing this company has is the Alto El Toro project in Colombia. The project is optioned (for mining and exploration) and requires payment of totally $10.25M over a three year period (20% has already been paid), as well as a contract to drill a total of 6000m (3000m already done). OAR has no signifacant debt at this time and a positive cash-position of about $1.5M. The Alto El Toro is a very interesting project, it consists of a couple of quartz-vein gold and silver mineralizations of a width of at most a few meters, the veins are open at depth and the main two veins are today measured at hundreds of meters of mineralized lengt with up to 3.4km of known fault-lines. What the company is looking at now is to expand the known mineralizations in all directions and to find new veins. The ore-grade is very good - average grade of recent sampling is at 19.4g/t gold and 40.6g/t silver. The area of the project has seen alot of primitive mining and some is still ongoing on the property, on a very small and insignificant scale. I would say that in comparison with other really cheap junior exploration companies, OAR definitely has one of the most promising exploration properties I've seen. From what I can tell from the recent drill-results, all they have to do is drill in vicinity of the known veins and they will find lots and lots of really great mineralizations. Management describes the potential of the property as 'excellent' and I couldn't possibly disagree. Sadly, with such a great project they still have to pay about $8M more to acquire it and then pay for more exploration. With the trouble of obtaining money these days there is a very strong reason to be worried if you are holding shares in this company. The only real chance that the Alto El Toro project will go all the way (and I think it can) is through a joint-venture with a larger mining-company. That's the most likely way they're going to get money for the project, a bank is not going to finance something they don't understand or with such a high risk. Further dilution by equity financing is possible, but then there's the dilution and again the problem of perceived risk by investors.

To sum it up, the main project of OAR is really really great ... but the market isn't. This is the reason why the company is valued so low and also the reason why you could lose all of your money - OR make lots of money if you're lucky. I'd say chances that OAR will get further financing is about 50%. But, as I said, if the financing is solved chances are very good for success.

Lots and lots of bail-out money has been created all over the world lately, clearly the US is in a "superior" lead when it comes to bail-outs. Alot of well-informed people are saying that this will lead to very high inflation, which is very possible. But what is constantly missing in the inflationary descriptions is how exactly all this bail-out money is going to make it into the real economy. By the looks of it, the bail-out money has been moved into the banks, who have then started buying bonds (what else can they really do?) - and we have seen a very high demand for US-bonds since the bail-outs started. Basically, if the banks want to be/stay solvent they have to put their money in bonds (preferably US-bonds), so by this perspective there couldn't possibly be any high inflation since it's kind of a zero-sum game where the government hands out money and then gets it all back. But, there are of course other problems - all the US-debt that foreigners are holding doesn't look too attractive to hold in the face of this, although the trend of late is a "demand" for dollars - or the pulling out from smaller (or growing) economies by dollar-investors. Foreigners holding US-bonds want out and the imbalances that the beloved global economy and central-banking has created are going to bring everything crashing down (even further - then there's the derivatives market as a little bonus ... but that's for another post!). I think we will see inflation, but it won't come directly from the bail-out, only indirectly from those foreigners who have been lending money like there's no tomorrow to the US, and who are now forced to start spending those dollars until they're worthless.

In my first post I would like to try to make my position clear about economics, investing and all that is related. I wouldn't want to put myself in any category of economic viewpoint, but I guess that I come fairly close to the Austrian school. How a person like Keynes can be the most famous economist, or even known is beyond me. But I guess it's no big mystery since most people of the world or the west don't even have a clue about how our monetary system works or that there are any alternatives. People in general seem not to be aware that we have money that is based on debt or that the constant manipulation of interest-rates of a central bank creates these unnecessary swings/malinvestments in the economy and all the distress it brings with it. This does not mean I favour precious metals although I must admit that this is probably the best place to be invested right now and for some time looking forward. The issue of monetary policy is one of my main interests since it has such important consequences and as it is also the main cause for the current economic crisis. For those who are not well-acquainted with a sober viewpoint of economics (or the political side of it) should go to youtube and watch some videos of Ron Paul, Marc Faber or Peter Schiff.

As far as investments (mostly stocks) are concerned I usually just focus on whether the economic climate favours this company, if it is valued too high, if its financial balance is good and its ability to earn money or make me money by being bought out... In the past greed has made me disregard these very common-sensical considerations, especially when it comes to junior-mining or it-stocks ... some say the trend is your friend... Well, as I've learned from my former mistakes, I'd say if the trend is mostly based on greed - then get out.