So here are the threats, in no particular order.

Failure to Institute Appropriate Reforms

A year after the failure of several major institutions and Congress has not implemented any meaningful type of reform. Capital requirements have not been increased. Instead of breaking up the too-big-to-fail institutions, the government is allowing—in effect, encouraging— them to grow. Credit default swaps still do not have a central clearinghouse and are still treated as securities rather than insurance. The shadow banking system remains unregulated. The government is continuing to prop up housing prices via tax credits and is continuing to give home loans to risky people for only a measly 5% down payment.

Based upon the prior examples alone, any future crisis has the potential to be much worse because of the failure to institute adequate and necessary reforms.

A Major Country Defaulting on its Debt

I’m not talking about Argentina or Turkey. I’m talking about a country like Japan (see this article), the United Kingdom, or the United States. Now, a credit downgrade might be more likely, but I think its well within the realm of possibility that any one of these countries could default within the next decade unless their governments address their budget deficits and spending habits.

According to the OECD, Japan’s debt to GDP ratio will likely rise to 197% next year. I bet that the United States will have a debt to GDP ratio of 100% next year. The United Kingdom will have a debt to GDP ratio of about 72% next year, the greatest its ever been in thirty years.

Inflation

Future inflation is the biggest thing about which everyone is worried, therefore this is probably the least likely to occur within this next decade. However with that said, inflation and the side-effect of rising interest rates has the potential to negatively affect a country’s debt situation. Increasing the costs for a country to service its already massive debts could very well induce a death-spiral that forces a country to default on its debt. Can you just imagine what it would be like for Japan or the United states if they were forced to pay double the rate for its long-term debt? I imagine it would not be very pleasant.

And as a reminder to those of us in the U.S., rates rose from the 50s to the 80s and rates declined from the 80s to 2010. Financial history is cyclical and there is nowhere to go but up for rates. Rates will eventually begin another 30-year journey upwards.

Conversely, since we are talking about just the next decade, a decade of world-wide deflation could probably be the most likely scenario simply because very few people consider it likely.

Global Catastrophe

Here are some catastrophic events that could serious consequences for global economies and markets:

• a 9/11-type terrorist attack somewhere in the world
• a global pandemic that kills millions of people
• a nuclear war: Israel/Iran; India/Pakistan; any other imaginable/unimaginable combination of countries
• a virus or bacteria or insect that destroys a large percentage of the world’s crops and food supply

As a sidenote, its not worthwhile to consider any scenario with a Mad Max-type result. When we’re in a wasteland fighting each other for fuel there is definitely not going to be any financial market to worry about.

“The Next Bubble”

“The Next Bubble,” whatever that might be, is probably another conventional threat to financial markets. Everyone knows they happen periodically and everyone knows that with all the money being printed by the government, this money has to go somewhere if people aren’t using it to pay down their debts.

Here are some potential future bubbles:

• Oil/Natural Gas – Hard to imagine, but it could happen again.
• Commodities – I’ve been reading how China has been stockpiling vast amounts of commodities to hedge against a depreciating U.S. dollar; perhaps this will be the next bubble?
• Debt – After so many investors were burned by equities and complex securities, investors have turned to “safer” government and corporate debt for their investment needs. If investor psychology has shifted towards a general preference for debt, this preference will eventually shift at the peak of demand as it always does.
• Real Estate – Another real estate bubble? I think its entirely possible. We’ll call it the Double Bubble. Prices are being propped up in the United States. Apparently there is a bubble in Canadian real estate (of all places). China is also a likely candidate.
• China – China in general is a place where people worry about a bubble forming.
• Alternative Energy – Solar, wind, geothermal, cold fusion (haha). Might become a bubble. I don’t know. But these alternative energy investments will surely suck if global demand for fossil fuels is near zero for the next decade.

Summary

In summary, I was able to envision five threats to the financial markets over the next decade: a major country defaulting on its debt, inflation (or an unexpected decade of deflation), global catastrophe, and “The Next Bubble.” I would be very interested to hear my readers’ thoughts and ideas on this subject. Its very hard to think about the future and possible black swan events, but definitely a worthwhile effort.

Right now AMZN has a P/E ratio of about 70. That seems way too high for a company that has operating margins of only 4.26%. Contrast Amazon with Walmart, a traditional brick and mortar outfit that sells nearly just as much stuff as Amazon and has been building its web presence and is now allowing other people to sell via the Walmart website. Walmart has an current operating margin of 5.65% and a P/E of only 15.

It looks to me that there is a lot of hope built into the stock price of AMZN. I would definitely consider shorting AMZN while going long Walmart. I might have mentioned before shorting an outfit like Nordstrom’s and going long Walmart, but I am now realizing that a -AMZN/+WMT trade might be a better fit as both companies are more similar to each other.

So when might one go short AMZN? That’s a tough question. I bet that AMZN could get up to 150 before not too long. High-flying stocks always seem to fly too high for too long before falling back to earth from the weight of more realistic expectations.

MACON, Ga., Oct. 30, 2009 (GLOBE NEWSWIRE) — Atlantic Southern Financial Group (Nasdaq:ASFN) today reported a net operating loss of $8.3 million, or $1.97 per diluted share, for the third quarter of 2009 compared to net loss of $347 thousand, or $0.08 per share, in the third quarter of 2008. The net operating loss was primarily driven by elevated credit costs including an $11.4 million provision in the allowance for loan losses.

Atlantic Southern’s net operating loss for the first nine months of 2009 was $11.8 million, or $2.80 per share. Including the non-recurring charge for goodwill impairment from the second quarter of 2009, the net loss for the first nine months of 2009 was $31.3 million, or $7.44 per share compared to net earnings of $1.6 million, or $.35 per share, for the first nine months of 2008.

“We continue our strategy of aggressively addressing problem credits,” stated Mark Stevens, President and Chief Executive Officer of Atlantic Southern Financial Group. “During the third quarter of 2009, we saw an increase in non-performing assets. Unusually high levels of loan loss provision have been necessary as management addresses asset quality deterioration associated with the real estate downturn.”

Yep, you read that right. A loss of 7.44 per share for the first nine months of this year, or just a loss of 2.80 per share if you don’t count the non-recurring charge. And really, is a goodwill impairment really nonrecurring in this case? Aren’t there always going to be recessions and aren’t banks always going to write down loans or good will during these times?

Anyways, net interest margin declined again as well as the allowance for loan losses/non-performing loans ratio and shareholder’s equity. I can’t wait to see the data they filed with the FDIC as I would like see how their loan portfolio has deteriorated. If I had any money above the insured limit at Atlantic Southern, I would be pulling that portion out of there.

Also, if I had the time, I would like to be interviewing some of these executives and employees of these supposedly safe and conservative small community banks in order to find out just what exactly they were thinking when they were sowing the seeds of destruction for their shareholders. I would turn it into some sort of short story or allegory… Or hey, why the hell doesn’t the local paper do this? Some sort of 5-part investigatory series detailing what has happened to the local financial institutions and how management and boards of directors ran their companies into the ground? I think the locals public would eat this up. I don’t think this is rocket science, but I guess most of the paper’s staff has been laid off, so maybe they just can’t pull this off?

October 27, 2009:   Recently several GreenBank customers have received an e-mail appearing to be from the FDIC which is absolutely fraudulent in nature.  GreenBank HAS NOT been named as a “failed bank” by the FDIC.  If you are a recipient of this fraudulent email DO NOT open the link.

I have a feeling that scams like this have been proliferating so that some short sellers can benefit illegally from people’s uncertainty regarding the financial health of their local banks.

Well, not coincidentally, GreenBank stock has not been doing well. Mr. Niswonger, a wealthy individual, has even filed a 13D with the SEC declaring his ownership of 9.94% of outstanding shares. Here is a large excerpt from his well-written letter to the bank’s board of directors:

In this context, I am writing to request that you as a Board consider a proposal to bolster the capital of the Bank and, thereby attempt to resolve any market and regulatory concerns related to future credit deterioration. Additional capital would also provide an opportunity to position the Bank as a viable candidate for any asset dispositions that may become available as other institutions in our service area are resolved through the regulatory process. I am particularly concerned about the underlying and ongoing deterioration in asset quality due to the relative concentration in real estate lending. This deterioration, combined with recently announced management changes presents the Bank with a significant challenge going forward. However, there are many positive attributes of the Bank which I am convinced make it a viable player in the Tennessee market. I would like to help the Bank through this difficult period by identifying and participating in a material injection of additional capital – possibly $25 to $40 million. With additional capital and a proactive approach to the real estate exposure I believe the Bank can prosper once again given its established deposit franchise and branch network.

While reported results may not indicate a current need for capital, I do not believe that we can dismiss the trends in real estate values and the impact that trend has had to the Bank and its peers. As the recent earnings and guidance from SunTrust demonstrate (reporting a nearly $400 million dollar after tax quarterly loan loss provisions), it is premature for banks to declare a “bottom” for real estate asset values. I fear the Bank’s concentration of real estate lending will result in additional loan write-downs and will have a negative impact on the capital account. As leading stakeholders we have a duty to the shareholders and employees to obtain additional insight into that exposure and the potential impact to the Bank. I would anticipate a confidential third-party review of the loan portfolio to provide me with that insight prior to making any investment.

An infusion of capital will reduce the Company’s risk profile in these uncertain times, allowing the Bank to reassert itself as one of Tennessee’s leading financial institutions, and improving the lot of all stakeholders and the communities served by the Bank. Additional capital will allow the Bank to execute an organic expansion plan and to make opportunistic acquisitions, steps that will likely improve shareholder value. Many industry experts have opined that the current industry conditions represent a generational opportunity for healthy, well capitalized regional and community banks. Additional capital would permit management and the Board to consider acquisition of failed/failing banks, and take advantage of loss-share transactions that seems compelling. Additionally, I believe more capital will help improve conditions for the Bank employees. Capital should foster growth and growth in turn should foster career opportunities and attract new management candidates as the Bank addresses the announced departure of Mr. Puckett.

Because the Bank’s charter contains a provision that limits the rights of shareholders that acquire in excess of 10% of the outstanding shares without your consent, I am formally asking that you waive these limitations. Waiver of these limitations can be qualified, and is provided for by Tennessee law. Your consent at this stage in no way limits your ability as a Board to negotiate the terms of any future capital infusion, or to consider if a capital infusion is in the best interest of the Bank and all of its shareholders. My hope is that you will consider this proposal as a positive opportunity to advance the Bank’s best interests.

At the beginning of the week I made several changes to the portfolio. I got rid of my Autonation holding which had a return of over 100% and replaced it with a pair trade of long Walmart and short Nordstrom’s. The portfolio already had a slight hedge via SH, an ETF that is short the S&P500. The portfolio is also short both ERX and ERY, the triple-leveraged energy ETFs.

Thus, as it stands the portfolio still has 7 long positions and 4 short positions. Or, to be more accurate, two pair trades, a short position, and six long positions. I look forward continuing to outperform the S&P500 via Tickerspy.

Notice how quickly vehicle sales returned to historic low levels.

The first method discussed is the capital asset pricing model (CAPM) which uses the past instability of the prices of a publicly traded stock as a proxy for future risk. This was interesting, but ultimately unattractive for me as a value investor. High volatility or price instability does not necessarily mean a stock is riskier. I actually think such an assumption is quite dumb as high volatility can actually provide attractive entry points for a stock that make the purchase extremely low-risk.

Next is the venture capital method which does not really apply to me.

Finally, the article discusses the 9% discount rate and how it allows an investor to avoid speculative booms and take advantage of the inevitable speculative busts that follow. I highly recommend reading this article if you are an investor or if you ever are discounting future cash flows to determine if you should purchase or sell a business.