Risk and Avarice: The Big Exhale

Last week was one of those “did I get any on you?” burps from the bloated underbelly of the market. And of course, everyone had something to say except me.
Jeffrey Saut:

The call for this week: We have repeatedly suggested that the “What, me worry?” attitude was setting investors up for a “fall” in that one of these times the market was going to start down and spill over into the long overdue 10%+ correction. Whether it is this week, next month, or next year is unknowable, but it is surely coming. We think there is enough damage that participants will wait and put on “rabbit ears” to deduce if the damage is contained or if it is spreading. — Investment Strategy, Raymond James

Eric Falkenstein:

…I don’t think investors are not so much re-evaluating the volatility or covariance of these assets, but rather re-evaluating the expected return. They are downwardly adjusting the expected forward payments independent of the discounting function, as the probability of default for sub-prime mortgages, or LBO’s, is being adjusted to more reasonable levels. Increasing the probability of default is not increasing risk so much as decreasing the expected return. They go together, of course, because higher default probability bonds have higher volatility too, but the expected return is the dog and the volatility of that return is the tail. — Repricing Risk

As the fog lifts, unsavory things bubble to the surface. Looks like the (1996 dollars) $6 billion Bre-X mess is about to conclude after 10 wasted years:

Justice too slow for some
Stan Buell is one of the lucky ones. The president of the Small Investor Protection Association lost only about $1,000 when Bre-X Minerals Ltd. cratered in the spring of 1997, obliterating billions of dollars worth of investors’ money.
Heralded as the biggest gold find in history, the Calgary firm’s property deep in the Indonesian jungle turned out to be perhaps this country’s biggest fraud, a discovery that touched almost every Canadian and sent shockwaves throughout the capital markets.
But holding someone to account has taken far longer than the speed at which Bre-X shares rocketed to $280 apiece before crashing back to earth. — NationalPost

Digging a hole all the way to China might be fun when kids try it at the beach, but in real life, all that glitters is not necessarily gold. The saga of Southwestern Resources Corp. and its tainted drill results continues:

Southwestern’s former CEO being treated for depression
“The swamp is draining, and we are going to see all the ugly frogs,” said John Ing, president of Maison Placements Canada.
Mrs. Paterson’s statement added to Southwestern’s nightmare, which started with her husband’s abrupt resignation from the company last month.
The Vancouver-based firm was flying high until June 18, when it announced that a pre-feasibility study on the China-based Boka project was unexpectedly delayed. Mr. Paterson walked out the next day, citing personal reasons.
Then last Thursday, the company unveiled a bombshell: some drilling results from Boka were apparently manipulated, and John Zhang, the chief geologist on the project, could not be reached. — NationalPost

Next, stories from the glass half-full.