The Fixed Income Daily

Gold and Silver Are Profitable Safe Havens

2011-07-20T14:44:00.000-07:00

History has shown that people who are in power, or want to be in power, or who are afraid of losing power; will do irrational things at the wrong time and shock routine events to spin out of control.

Unfortunately, the politicians in Washington are still behaving like circus performers; they are playing with the debt ceiling limit that should not be an issue, rather, a routine procedure. It has turned into something dramatic and somewhat dangerous because S&P and Moody's both stated this week that they were going to place the AAA credit rating of the U.S. government on negative watch.

Moody's also stated that because of this change they would include GSEs and about 7,000 different municipal bonds issues on credit review for possible downgrade. There are over 2 million different outstanding bond issues.

I have no idea whether or not Congress will do the right thing before August 2, and raise the debt ceiling limit. It would be the rational and logical thing to do.

History has shown that people who are in power, or want to be in power, or who are afraid of losing power; will do irrational things at the wrong time and shock routine events to spin out of control. That is a possibility at this point in time, not a probability. However, we cannot really rule it out. So the next 10 days will be very, very, important.

We are at a historical crossroad. Leaders here in the U.S. and globally are required to employ sagacious judgment to keep the world from falling into the abyss. It will be touch and go. I outlined last August the long-term case for $5,000 an oz. gold. Two months later in October, I listed 10 reasons to buy gold at $1,300 an oz. I continue to recommend gold and silver as one half of a barbell portfolio strategy. The fundamentals have not changed.

The whole world is watching Washington navigate uncharted waters and the repercussions of our elected officials not doing the right thing is enormous; not just because of how it would affect us but particularly how it could set off a domino effect of negative consequences with every partner in our trading block. If we do default, how will global markets react? The latest Treasury bond auctions showed the U.S. having no problem in selling debt. Could the world markets overlook our ineptitude without extracting a price, short-term?

What is under reported here in the U.S. is the turmoil breaking out across Europe resulting from their austerity measures. We've almost forgotten about what's going on in Greece. We are ignoring what Ireland is currently experiencing and now those same political and social disturbances which befell those countries are about to break out in Italy.

Italy is a $2 trillion economy. It is the second largest economy in Europe and if their capital market comes under attack like those of Greece and Ireland, whose economies are a fraction the size of Italy's, then all bets are off. Were this happening to Italy in isolation it would be an enormous financial situation. If Washington does something truly foolish you now have two major events overlapping. This is how perfect storms begin or how black swans are created.

The U.S. economy is still healing from the Great Recession of 2008. The latest anemic GDP numbers, flat housing numbers and swelling unemployment figures show that this economy is still extremely fragile. If Congress votes to enact significant spending cuts at this time, this economy will slip into recession. Goldman Sachs’ 2012 forecast is under review. A Bloomberg survey of 60 economists recorded a median estimate for 2012 is 3%.

Raising the debt ceiling limit and appropriating funds are two separate issues that have been conflated for political purposes. The first is for past expenditures while the second is for current operations. The federal debt is a long-term problem that must be addressed. Multiple foreign wars only exacerbate the total amount due. Likewise, dollars spent overseas on other countries’ infrastructure are the least productive use of U.S. taxpayers' money.

Jobs are an immediate problem which requires additional spending if you wish to continue this economy’s expansion. Government spending, according to the Bureau of Economic Analysis, contributed a combined 1.1 % to growth from 2008 to 2010, while the economy overall grew 0.3%.

The White House and Congress both want to do something big to cut long-term spending. Both political parties so far have rejected a clean raise the debt ceiling limit law that's been done dozens of times in the past.

Washington’s spending is contributing greatly to this economy’s marginally positive but retarded GDP. Reduce public spending without a real pickup in private spending and hiring and our GDP goes negative. Main Street isn’t being informed that the risk of a new recession increases with the reduction in federal disbursements throughout the economy. What Congress is selling is an abstract notion of spending cuts in esoteric programs to citizens that warned government two summers ago to keep its hands off their Medicare.

Short-term, a slowdown from austerity measures should benefit high quality bonds. The market risk [interest rates] posed by a slowdown would be if Bernanke panics and begins flooding the economy with liquidity. That will debase the dollar, in theory.

Considering the quantity of outstanding debt that requires serving; over $7 trillion in wealth destruction over the last three years, tenuous political situations in other nations, the deleveraging that America is going through, an aging population, and our high unemployment and productivity rates, inflation isn't going to be universal; at best it will be selective.

Credit risk for high quality bonds would appear if the economy went to an entirely different level of economic contraction - to depression. Meanwhile, there is no longer a high correlation between equities and the broader economy; however, equities will kneel before a serious financial or economic jolt when they do occur.

In this new world order that’s been created in the past 25 years, going forward, the effects of inflation on the global economy will produce three groups; winners, losers, and the unaffected. How is this possible? Will we not experience 1970’s style inflation? The short answer is no.

The 21st century global economy isn’t monolithic with recalcitrant variables as in the past. Labor, capital, raw materials, finished goods, and even creativity, are now portable in a way never imaginable 40 years ago. Also, the popularity of variable rate debt in business provides capital with elasticity heretofore unknown to counteract inflation. Every economy today is unique; in one sense a virtual construct, malleable, enabled for the first time by a digital world.

Today, investors can choose to have virtually 100% foreign currency risk in their cash portfolio. A resident of Nevada or Arizona or Florida can benefit from the collapse in those local real estate markets by renting or leasing instead of buying. Speculators can profit from the rising food or petroleum prices in Brazil or India while at the same time defray local rising costs by becoming a vegetarian and by driving an electric car or using public transportation.

Businesses can operate from seven continents. They can select from seven billion potential employees. A firm today can speak to one employee or 100,000 employees simultaneously – in multiple languages. Time and space have been erased.

In our 21st century world, an individual can construct whatever economy they desire with greater ease and specificity than ever before. This also means that the 20th century world we knew is decaying and, eventually, will cease to exist. There is no going back. During this period of transformation from the old to the new, gold and silver are profitable safe havens.

New Year, New Bank Failures

2011-01-09T05:19:00.001-07:00

In 2010, we witnessed 157 banks closed by the FDIC. They were either taken over by stronger hands or liquidated and depositors were given back their deposits.

On this first Friday of the New Year, only two banks were shut down. According to the BlogSpot the Bank Blog:

“The "honor" of the first bank to fail in 2011 belongs to First Commercial Bank of Florida based in Orlando. …It had approximately $598.5 million in total assets and $529.6 million in total deposits was closed. First Southern Bank of Boca Raton, FL has agreed to assume all deposits and acquired most of the assets. In addition, they have entered into a loss sharing agreement with the FDIC.

The second bank to fail this week is Legacy Bank of Scottsdale, AZ. … Legacy Bank had approximately $150.6 million in total assets and $125.9 million in total deposits was closed. It was acquired by Enterprise Bank & Trust of St. Louis, MO raising their asset level to over $2.5 billion, a roughly 6% increase.”

Below are several links to different interactive maps of bank closures: an WSJ interactive map of the banking crisis since 2008, a version by Bankrate.com, then, my personal favorite, Portal Seven, and finally Bank info Security’s Failed Banks and Credit Union (24 CU’s shuffled off this mortal coil in 2010) interactive maps.

WSJ

http://graphicsweb.wsj.com/documents/Failed-US-Banks.html

Bankrate

http://www.bankrate.com/finance/savings/map-of-failed-banks.aspx

Portal Seven

http://portalseven.com/banks/Failed_Banks_Map_2011.jsp

Bank info Security

http://www.bankinfosecurity.com/articles.php?art_id=2092

Why the redundancy? It’s called research and it protects analysts and analysis from becoming lazy and eaten alive by “Black Swans”. Besides, variety is the spice of life.

The foremost question for 2011 is which group will hit the 100 institution finish line first; the number of FDIC bank closures or the number of municipalities to default on bond payments or file for reorganization under Chapter 9?

For those of you unfamiliar with Chapter 9, Title 11, of the United States Code, the following is a short description taken from Wikipedia:

“Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts. Most famously, Chapter 9 was used by Orange County, California in 1994 to adjust its debts.

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.^[1][2]

The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District,;^[3] however, a similar act was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX).^[4] Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.^[5] The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.”

Therefore, if the 112^th Congress refuses to assist states this year, their “tough love” approach may include modifying Chapter 9, to allow states to reorganize, too.

Katy-bar-the-door, if foreign creditors of the U.S. ever decide to perform a “tough love” credit analysis of America’s annual deficit spending over the last 10 years by both political parties.

The U.S. profile worsens with ongoing maintenance costs of rising poverty rates and persistently high unemployment, mutating employment characteristics and opportunities, an aging population, exploding medical costs and 50 million uninsured citizens (while dead birds fall from the sky and dead fish wash ashore, mystifying officials); and a slowly crumpling, complex, and very expensive infrastructure.

As disturbing as our internal footprint is, our annual trillion dollar expenditure for homeland security and open-ended global military commitments, housing over 800 active operating bases, rests precariously upon on stagnant personal incomes and falling tax receipts. The Fed Chairman, Ben Bernanke, instructs America to be patient; jobs will return in four or five years.

Educational test scores, a mighty predictive tool forecasting future individual or collective wealth, explicitly from the quickest growing population segment, are out of synch with societal needs.

Our soured social and political discourse and extreme political recklessness is everywhere in the air and on display before our allies, trading partners, and foreign lenders of last resort to see.

Let’s hope the benefactors of our cash flows prefers their biggest borrower and financial liability becoming this new, edgy, erratic, 21^stcentury emerging America economy versus the former, stable, predictable, 20^th century American middle class.

Here Comes 2011

2011-01-05T11:13:00.000-07:00

Welcome to 2011, the year of the Long-Term Evolution (LTE), A.K.A., G4 wireless connectivity. Only Verizon Wireless is offering it as I write this, but only through USB Modems. Smartphones will be out later this year; so it’s here but just not available now to change your life.

The promised upgrade in broadband, whether we want it or can afford it, is a perfect metaphor for the upcoming collision between economic reality and political machinations. One of three things will happen as the 112^th Congress is sworn in; a) it will continue business as usual, b) it will change spending in Washington DC, or c) our creditors will take away our charge card. America is unprepared for all three. Choice b would be not to raise the federal debt – much easier said than done. Choice a will debase the Dollar and cause inflation before the second leg of the 2008 Depression starts (Oh, and you thought we were pass that crisis?).

In 2010, the big winner was gold and silver amongst other commodity products. Below are finviz.com charts showing 1 year, 6 months, 3 month returns of the major futures markets. Silver was up 83.5% and Gold was up 29.5%. Stock averages trailed; The Russell 2000 was up 26.3%; NASDAQ 100 was up 19%; the S&P 500 was up 12.9%, followed by the DJIA, which was up 11.2%.

The 30-year Treasury Bond was up 5.6% for the year and the 10-year Note was up 4.2%. The US Dollar was up 1.2%. However, December was unkind to the 10-Year Note, as it lost 3% and the 30-Year Bond lost 4.2%.

On Monday, the stock market blasted off into triple digit territory, closing up 93 points. Optimism was everywhere in the air, not to mentioned an extra 850 billion in tax cuts to goose prices. I believe the DJIA will cross 14,000 this year and the S&P 500 will also cross 1450. The market will be wildly overvalued at that point, as the market is currently only recklessly overvalued, with more potential headwinds in the second half of the year from a slowing Chinese economy, a double-dip recession in Europe, and housing bubble collapses in Australia and Canada.

Gold and silver was savaged this Tuesday morning; February Comex gold last traded down $44.60 at $1,378.30 an ounce. Spot gold last traded down $36.40 at $1,378.50. The London P.M. gold fix was $1,388.50 versus the previous P.M. fixing of $1,405.50. Silver futures for March delivery fell $1.617, or 5.2 percent, to $29.508 an ounce, I expect a consolidation period could last until the spring. This will range-bound gold’s price to $1,300 to $1,500.

Cost-Push inflation is being reflected in oil and food prices. Gasoline is now over $3.00 a gallon, on its way to $4-$5 a gallon this year. This inflationary pressure will weigh on a fragile consumer’s pocketbooks, therefore, GDP growth. Higher prices, combined with city and state firings of employees (layoffs is when you have a chance of getting your old job back) suggests higher unemployment and increase the chances a double-dip recession by the end of the year.

Fed Chairman, Ben S. Bernanke, has openly expressed a desire to inflate asset prices while holding down inflation on the theory that not doing so will reopen the door to deflation.

The minutes to the December 14^th FOMC policy meeting was released today which said in part, “While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment,”.

Only a neurosurgeon’s scalpel could be so precise. In my view, we can only wait to see which of the Fed’s missions will fail.

Conventional Wisdom is propagating that the private sector will ride to the rescue of the economy and President Obama’s reelection. Why would they? Demand is absent in the marketplace for goods in all but the luxury segment. Even the low-end retail segment is fading. Bottom-up stimulation is being withdrawn from the economy as state budgets, which spend locally, are being slashed, unmercifully.

If American business was serious in creating jobs here in America, they would be demanding trade protectionists’ measures to protect American workers. Once upon a time, business and the Chamber of Commerce did such things. Sadly, if we update the year by a decade, as the Eagle’s sang in their song Hotel California, “We haven’t had that spirit here since 1969”.

Below are my 2010 predictions with comments. Four of my predictions were right, three were too early, and four missed the mark. Without government intervention, my record would be eight out of eleven. The take away is I was too conservative in my thinking which err on the on the side of caution for investors. Since the economy and the financial markets are disconnected like never before, and the government’s heavy hand has all but destroyed real price discovery, analyzing what is happening and predicting the consequences of those findings are becoming more and more a fool’s errand.

2010 Predictions	Result	Comments
I. The bond market will suffer its worst lost since 1994.	Wrong	Too early. The bond market began selling off in the 4^th quarter. QE II artificially suppressed interest rates.
II. Gold will surpass $1,800.00 per oz.	Wrong	Too early. The direction was right, the magnitude was off. It went from $1,100 to $1,421 or 29.5%.
III. The Democratic Party will lose the House and barely retain the Senate.	Right	Bingo.
IV. The FDIC will temporarily run out of funds to shut down bad banks.	Wrong	The FDIC left open 900 bad banks otherwise they would run out of funds.
V. At least two states will default on their general obligation bond interest payments, roiling the municipal bond markets.	Wrong	Too early. The municipal train wreck will occur this year.
VI. Either, Tim Geithner, Lawrence Summers, of Ben Bernanke, will leave the administration before 2011.	Right	Lawrence Summers, bye bye.
VII. State and Federal taxes will rise in 2010.	Wrong	Silly me. I thought politicians would do the right thing instead of extending the Bush tax cuts.
VIII. Inflation will rise above 5% at least one quarter in 2010.	Wrong	Prices are rising but it is not being reflected in the CPI. Stay tuned.
IX. The yearly high for stocks will occur in the first half of the year.	Wrong	Quantitative Easing II (QE II) saved the stock market.
X. At least one western democratic government will fail and be replaced with another democratically elected government.	Right	The UK and Australia
XI. Residential real estate prices will drift lower YOY on the S&P Case-Shiller HPI	Right	Year-on-year, sales are up 0.2% for the 10-city adjusted index but are down 0.8% for the 20-city index

Should the Feds Create Inflation? This Time It Is Different

2010-12-08T12:13:00.000-07:00

Through the bombs bursting in the Korean Peninsula’s air, minutes of the FOMC meeting were released Wednesday. The division over Quantitative Easing II (QE II) wasn't as intense as the 58 year old NoKo/SoKo conflict. However, I have reservations with this logic in 2010 of affirmative voting Fed members’ confidence behind QE II theory of inflating asset prices will put a halt to deflation.

That QE II will create a wealth effect and stimulate consumer spending, the easy stuff like the dubious weekly Jobless Claims dropped to 407,000 from a previous week upward revision to 441,000, from 439,000 is showing a positive trend.

Also, The Reuter's/University of Michigan's Consumer sentiment index rose for November to 71.6 and third quarter GDP growth was revised up to a 2.5% annual growth from an estimate of 2.4%. The hard stuff, physical things like durable goods and housing (found below) tell a different story. Durables orders in October fell 3.3 percent, a figure below the median market forecast decline of 0.1%.

Unfortunately, the Fed’s beautifully elegant thesis isn’t growing inside a sealed petri dish with exact ingredients from the 1930’s or 1970’s. Therefore, past performances do not guarantee future results.

For those of us old enough to remember the 1970’s it was a far different world. During that period, current dollars had greater purchasing power than holding them until tomorrow, so it was logical for consumers to spend money immediately. However, the basic financial infrastructure for consumers was the opposite of what it is today.

Take credit cards; this was a relatively new consumer product. Interest rates were fixed, unlike today. Shoppers would hand their credit card to a merchant and the merchant would pick up the phone and call an authorization center for approval. Then, the card would be placed in a manual charge card machine to make an impression on carbon paper for the shopper to sign after approval was granted.

Holding and servicing fixed debt during “normal” inflationary times is easier to do if incomes are rising, mirroring the change in inflation. Virtually every credit card issued today has a variable rate. Wages have been stagnant in the US for ten years and Ireland just announced an austerity plan which includes cutting minimum wage which could become a harbinger of things to come in America.

If we experience prolong inflation, the interest rate on consumer debt will be adjusted upward to cover issuers rising costs, accordingly. This will cancel any presumed benefits for creating inflation.

Mortgages were different then, too. Adjustable rate mortgages did not exist. When you purchased a 30-year fixed mortgage, you could plan for your next 360 mortgage payments. This became problematic during the real estate bubble of 2003-2007. Teaser rates tied to Prime, LIBOR, the 11^th district, T-bills, COSI, etc, that allowed borrowers to qualify disappeared after 12, 24, or 36 months. Real mortgage payments undermined the false real estate prosperity of the day.

In the 1970’s mortgages were also assumable in many instances. The fixed mortgage came with your home. Think what our current housing market would look like if residential real estate came with mortgages. Would housing markets have experienced 30%, 40%, 50% in value or more, with assumable loans attached? Is a house easier or harder to sell with an assumable mortgage?

Maybe this is an opportunity for the Department of Treasury to self-refinance mortgages directly with borrowers. New Home Sales reported the average price fell 8.0 percent to $248,200 while sales of new homes which fell 8.1 percent to a much lower-than-expected annual unit rate of 283,000. The median price of a new home plunged 13.9 percent in October to $194,900, a seven year low.

Existing home sales were even worse. Sales fell 2.2 percent in October to a 4.43 million annual unit rate. The year over year change is a staggering 25.9%. Supply on the market has returned to 10.5 months. The median price fell an additional six tenths to $170,500. The average price moved two tenths higher to $218,700.

Consumers were protected in other ways. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws. Heretofore, banks were limited by law as to what interest rate they could charge customers.

Then, there was collective wage bargaining. The apex of organized labor existed in this time frame. For employees, price inflation was met with multi-year wage contracts, negotiated wage increases, and Cost Of Living Adjustments (COLA). Employers could better plan their labor costs and workers would not fall too far behind, too quickly. In retrospect, these automatic triggers helped exacerbated moderate inflation as it fulfilled structural price increases.

Manufacturing as well as capital was neither nimble nor mobile in the pre-digital age. Employers were more inclined to sit down with workers and arrive at a schedule of wages and benefits both sides could live with. Relative labor peace in the US resulted from this tack verses a more confrontational civil disobedient approach on the European continent.

The America I just described no longer exists. Instead of a fairly closed economic system capturing Ben Bernanke’s domestic asset price inflation action, the global economy will absorb our inflation, spilling into overheating emerging economies. This will cause resentment toward our predatory monetary policy.

At home, stubbornly high unemployment continues as more hiring of temporary and contract workers identify firms that are practicing company before country, and a deteriorating financial system that is biting disproportionately into financially vulnerable consumers’ thinning disposable income.

Municipalities are moving closer to default, just like Europe, under the weight of this radical redistribution upward of capital since the repeal of Glass-Steagall Act. The probability of a double-dip recession followed by uncapped interest rates and a widening chasm between Tiffany & Co. and Target customers, and rising corporate profits grows.

The Ben Bernank offers other lesser reasons why QE II is necessary, such as a goal of optimal employment, without any major tax or infrastructure jobs initiatives coordinated with other quarters of government. I think their reasoning and aiming needs more work.

Intermission on the Stage of World Finance

2010-11-14T15:24:00.002-07:00

Intermission on the Stage of World Finance

The G-20 Summit is over and the US has walked away without a major commitment. From the US perspective this has been a failed summit. The remaining G-19 member's outlook could be interpreting this as a success. Our developed and emerging nations economic partners stood up to the minimum demands of the United States. It will not be the last time this outcome occurs.

As recent calls from various interests for a return to a global gold standard, US quantitative and non-quantitative easing proposals, emergency standby EU guarantees on possible defaulting Irish debt, currency wars, protectionism, and inflation/double-dip recession concerns are washing across the globe, notwithstanding Friday's blood-letting on Wall Street, two fundamental events are occurring concurrently that may or may not be escaping investors awareness.

The first phenomenon is the acceleration of the structural evolution occurring in international commerce. The brunt of this change falls completely on US financial shoulders. Once upon a time our successful or unsuccessful economic conditions rose or fell primarily on our own predilections.

Raw materials around the world were consumed or ignored, without regard to supply or cost, by the capricious needs and changing desires of the US. Many nations benefited from sharing their natural resources with us.

Today, the role of puissant global power is being performed by an ascending Zhongguo or People's Republic of China (PRC). The US is controlling less and less of our own economic fate. Fears ran through global markets overnight as China's October inflation rate of 4.4% exceeded the prior's month 3.6%. Also, China's Consumer Price Index in October rose to an annualize rate of 12.1% up from the previous month's 5.2%.

As a result, Every US market was hit with selling; the DJIA fell 90.52 or .8% to 11, 192.58; the S & P 500 fell 14.33 or 1.18% to 1199.21 and NASDAQ fell 37.31 or 1.46% to 2518.21. The Bond market was hit worse; the 2-year, 10-year, and 30-year Treasury all fell on Friday, the day that Ben Bernanke started QE II by purchasing $ $7.23 billion in Treasuries coming due between 2014 and 2016.

In commodities, gold lost $35.00 or 2.49% to $1368.30; silver fell $1.39 or 5.07% to $26.015, oil lost $3.08 or 3.51% to $86.53.

Two things; first, global markets and their economies are concerned that China may begin a series of interest rate hikes to cool off their economy, thereby, stifling global growth and second, 15 years ago markets weren't concerned about the Central Kingdom's inflation rate.

As disconcerting as this may be for the US investors this is the shape of things to come. The final cost of deregulation, NAFTA, one-way free trade, access to cheap labor, and open markets, plus developed nations' seed capital generously pouring into emerging markets stretching over the last 20 years has produced today's critical mass for a radical realignment of global economic power and market share. International capital will proceed with this new perspective on global economics.

The second fundamental shift occurring, particular to the US economy, is the inevitable demise of the later 20th century business model in the 21^st century. Corporations pursuing an endless mission of maximizing shareholders value from endless rising cash flow levels and robust Deltas on the back of an ossifying American economy will discover that that formula for success is breaking down. The formula began breaking down at the onset of a NAFTA induced globalization.

This morning I spoke with a retired senior executive from the insurance industry and a friend. He told me that this week MetLife was exiting the long-term care insurance business. This follows other insurance companies that have exited both the fixed and variable annuity business in the last year. The insurance industry is realizing that their investment portfolios are becoming incapable of generating sufficient returns to sustain several of their traditional business lines going forward. Insurance industry mergers and acquisitions will only kick the can down the road - not solve the problem.

Moreover, medical, pharmaceutical, and technological innovation over the next decade may extend their customer's average lifespan 5 to 10 years or greater, crimping future earnings. Corroborating this thesis, Bill Gross of Pimco made a confession about this new reality and the subsequent detriment to the future performance of his $2 trillion portfolio in his November letter to investors.

Performing objective analytical [connecting the] dot work, this is precisely the precarious position airline and automobile industry union workers and their unions found themselves, over the last decade, now facing municipal workers.

Austerity ideologues and the main stream media demonize and batter retirees and their unions who merely want their mutually agreed to benefits upon retirement. These contractual terms were earned in good-faith negotiations much like the negotiated terms of a mortgage contract. They are not the villains; the true villains are simple math and careless long-term assumptions.

Failure of the marketplace to deliver non-guaranteed but optimistic presentations of average annual assumption rates, promoted as achievable by the investment industry, revealed the limitations of the marketplace and free markets. Securing organizations asset management business was the motive. Everyone suspended disbelief.

I recently attended a Global Asset Allocation Summit and Emerging Managers Summit, both events hosted by Opal, and I was mildly shocked to hear that pensions and trusts are still clinging to 8% and 9% average annual return assumptions for their portfolios. That orthodoxy was never seriously challenged by most attendees. The predominant asset allocation still comprise of equities, fixed income, and real estate. Alternative Investment percentages are insignificant.

While such returns were obtainable during the secular bull market of the 1980's and 1990's, investment portfolios now are confronting a secular bear stock market, a collapsed credit market restricting liquidity, punk consumer demand, and a residential real estate market in depression. For the foreseeable future, a consistent domestic 8% - 9% average annual return in a traditional asset allocation mixture is doubtful.

Realize that the inability of the marketplace to deliver on these ring size returns is only the effect. The cause of this arrested development is the before mentioned structural change in international commerce which renders the general usage of the 20th century US business model itself unrealistic. The average American is absorbing petite returns on her principal in CDs and T-bills, flat wages, and shrinking net worth from stock market and real estate losses.

Retiring baby boomers comprise a significant portion of affluent consumers. That generation's consumption appetite and spending patterns has forever changed. Consumers, representing 70% of today's US economy, are also gun-shy from one too many bubbles bursting, lately, to aggressively invest anymore. Consumer sentiment surveys oscillate from month to month, a clear sign of uncertainty and anxiety.

Reconciling never ending corporate earnings increases with stunted cash flows and insecure disposable income from a matured economy captained by a constipated government,
lacking a coherent industrial, fiscal and monetary policy and supposedly driven by upset and untethered voters, is unrealistic.

Once, a $.50 cup of coffee is now a $4 Starbucks Venti Iced 24 oz. Caffé Vanilla Frappuccino/Soy/Whipped Cream; a $.25 phone from a phone booth is now a $125 monthly mobile smartphone bill from Verizon; free broadcast TV is now a high-speed internet and premium $200 monthly cable bill from Comcast. Free daycare in a single paycheck home is now a $200, $300, or $400 weekly Kender Care daycare expense for both working parents.

Daily expenses that were recently considered trivial are now deemed luxuries for many. I would avoid many retail stocks whose products for consumers are totally discretionary in nature.

The dreaded disease afflicting our economy is the big C - change. There is no cure. It is inevitable. How capital is managed differently, in a new century with different parameters, is equally important as where and when to invest.

The last global intermission began shortly after the end of World War I and concluded after the end of World War II. The curtains are falling on that mid-20^th century world that we inherited from the greatest generation whether or not we approve or are prepared for the aftermath.

Make no mistake; we are in another historical intermission. The datasets and impermanent financial laws of physics of the 20^th century are approaching their expiration date.

10 Reasons to Buy Gold at $1,300.00 an Ounce

2010-10-11T01:00:00.000-07:00

1. Technical Breakout

From a technical analysis perspective, there has never been a better time to own or purchase gold. Every tradable asset has what is known as support and resistance. Support is the value by which any asset is assumed safe for buying. This is determined by previous price levels.

When prices reach this level more buyers than sellers step into the market. In the latest leg of the gold bull market, $1,000 has been established as the new floor.

Resistance is the price by which assets cannot move beyond because of an overhang of existing supply in the market. After gold reached $850 an oz. in 1980, those unfortunate buyers at that price level waited 30 years, watching the price of gold fall below $300 an oz. before $850 eventually was taken out.

The price of gold traded briefly in 2008 and 2009 in a range between $725 and $1,025 before rising short-term and long-term trend lines confirmed that the path of least resistance of the price of gold was upward.

2. Undervalued on an Inflation-adjusted Basis

If you calculate the cost of gold from it 1980 high of $850 an oz., on an inflation-adjusted basis, the price of gold today would be $2,250 an oz. At today’s price around $1,318 an oz., gold can increase $900 before it would equal its 1980 high. From there, its price can expand from increase demand.

All assets trade in cycles. Before the end of a cycle an asset becomes overvalued. Likewise, at the beginning of a cycle, an asset has been neglected by its market and is undervalued. Gold, having cleared overhead resistance, is now free to seek its 21st century value; including overshooting that fair value before the cycle ends.

3. A Store of Value

The major stock averages 10-year average annual return is virtually zero. Over the last three years, residential real estate has lost 25% to 50% of its value, depending on the market you’re referencing, yet gold has been up nine of the last ten years. This should continue.

The market meltdown of 2008 nearly destroyed the credit market. Real estate is the most credit dependent asset there is. The Mortgage-Backed Securities market, which provided the liquidity for the mortgage industry has not been repaired. Therefore, a structural cap has been placed on the future value of real estate.

U.S. stocks rose in value in the 1980s and 1990s because of deregulation, loose credit, and undervaluation. The inflationary 1970s made stocks poor investments relative to hard assets. By the beginning of the 1982 secular bull market in stocks, the average market multiple for stocks, the number of times over earnings stocks are bought for was between five and ten. Currently, the P/E (price x earnings) ratio for the S & P 500 Index is 17.08.

4. A Rising Asset in a Rising Asset Class

The soft and hard commodity complexes are on a roll. There are various recessionary and depression levels for many assets here in the U.S. towards home ownership, unemployment, commercial real estate vacancy rates, etc. But demand in Asia (the 21st century center of the universe) and South America is strong and getting stronger, monthly.

Foxconn in China, Apple (AAPL) Computer’s primary supplier recently gave its employees a 66% wage increase following 10 work-related suicides. Average U.S. wages have been flat for 10 years. Russia’s heat wave this summer severely reduced its wheat crop. Palladium, silver, coffee, cotton, wheat, pork bellies, and lean hogs are all up significantly for the year. The emerging market countries were not as leveraged as the west; therefore, their economies rebounded faster from the global recession. Their demands for commodities are driving up prices.

5. Upcoming Currency Devaluation

Last week, the Financial Times reported that Brazilian finance minister Guido Mantega said central banks are locked in an “international currency war”. The U.S. Treasury Secretary Tim Geithner is currently pressuring the Chinese to adjust the Yuan against the dollar. Japan is manipulating the Yen to increase exports. Other exporting countries are deliberately attempting to drive their currency lower to expand their respective domestic exports. Unfortunately, this race to the bottom cannot be won by all.

Europeans fled the Euro this spring after Greece debt problems appeared to be growing. Now, the Euro is surging because Ben Bernanke has all but signaled the availability of QE II or QE Lite after the November elections. The U.S. dollar became the least bad currency in the world and a safe haven. That is changing.

The U.S. economic recovery, which is now forecasted to struggle until 2015, will compel currency debasement by the Feds and compel countries and investors to reexamine their dollar holdings. This will add significant downward pressure on the dollar and upward pressure on the price of Gold.

6. Gold as an Upcoming World Reserve Currency Component

This story ran in Reuters at the end of September:

Dollar to remain world's reserve currency—Lockhart

(Reuters) - The U.S. dollar will remain the world's reserve currency, though some diversification over time is inevitable, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.
"It's very far-fetched ... that the dollar will lose much of its position in the near term as a reserve currency," he said in response to an audience question after a speech at the University of the South.
"I do, however, expect a gradual reduction in the dollar's role as the rest of the world diversifies and some new currencies become qualified to be held as a reserve currency," he said.

It’s rumored that discussions are underway by various countries to prepare for when the U.S. dollar is no longer the world's reserve currency. China, Brazil, Russia, and France are in talks, with the aid of the International Monetary Fund (IMF), when the world loses faith in the dollar.

Central banks from around the world have stopped selling their gold. This is a reversal from your normal practice for much of this decade which implies that the value of gold is on the ascent.

Since no single currency has the ability to replace the dollar, a basket of currencies and gold will be created. Until such time, the informal reserve currency has defaulted to gold.

7. A Shift in Supply/Demand

The World Gold Council reported on second-quarter demand rising 36% compared with the second quarter of 2009, to 1,050 metric tons. Investment demand rose 118%, to 534.4 tons, and of that segment, ETF demand represented 291.3 tons, which was a 414% rise over 2009's second quarter.

Worldwide demand for gold is rising. From gold bar dispensing ATM machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD, IAU, PHYS, and SGOL. The U.S. Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. However, Thursday evening, the U.S. Mint opened the 2010 American Gold Eagle Proof Coins, Rust was discovered forming on the Bank of Russia’s 2009 "St. George the Conqueror" .999 fine coins.

Domestically, baby boomers will live longer and will need more principal in order to sustain their lifestyle. This will necessitate the need to diversify away from paper assets and into hard assets such as silver and gold as inflation returns.

8. A Momentum Play

The return on gold this year is forcing money managers to throw in the towel and adjust their allocation for the yellow metal. Managers will have the remaining 90 days of 2010 to salvage their portfolio’s return for the year.

The year-to-date return for the S&P 500 Index is 3.8%, the DJIA is 4.9%, the NASDAQ 100 is 8.2%, and the Russell 2000 is 9.6%; while gold is up 22.7%, silver is up 37%, and palladium is up 43.8%. True alpha, and the path of least resistance is precious metals.

9. Betting With the House

For the price of gold to collapse from current levels, congress would need to enact legislation to correct the problems of wasteful spending, high unemployment, an expanding federal debt liability, and sensible tax increases.

The November elections of 2010 are completely irrelevant. Whether it is the Republicans or the Democrats who control Washington DC, the government's inability to correct the problems that persist in today's economy will continue. The price of gold will move higher whether it's gridlock or austerity by the GOP or of fiscal stimulus by the Democrats.

Thomas G. Dolnan’s Barron’s editorial dated October 2 observes:

Even a step in the right direction would face huge opposition. A permanent 10% cut in retirement benefits of all kinds, and the same cut applied to health-care spending, including doctors' and hospital fees, would be worth maybe $150 billion a year. A 10% cut in military spending was worth about $60 billion last year. It could occur automatically if the wars wind down. A 10% cut for everything else the government does except pay interest would be worth about $120 billion.
These would be real cuts from last year's spending, not a reduction from the rate of growth, with allowances for inflation and population growth. But they would take us only a quarter of the way to a balanced budget.
The expiration of the Bush income-tax cuts and restoration of the estate tax would raise about $400 billion a year. The tax hike and the 10% cut together would leave another $700 billion a year to be cut or taxed. Fortunately, that happens to be the advertised cost of the anti-recession programs.
Such spending cuts and tax increases are a reasonable program for national renewal—and for political suicide. So don't ask why candidates aren't proposing spending cuts to balance the budget. Borrowing is so much easier—until no one will lend.

10. The US stock and bond markets are predicting no growth in the future.

The yields on bonds and corporate earnings through cost-cutting informs sober investors that between now and 2015, the U.S. economy will struggle and will be unkind to equities.

Stock rallies are no longer a proxy for economic growth. Stocks can just as easily rise because of a drop in the dollar allows foreign buyers to purchase U.S. stocks at a discount.

Corporate culture, the ego to the stock market’s id, no longer cares about long-term goals and results, when the future is always 90 days away. Therefore, long-term, as we now know it is a contemporaneous creature that is shallow but dangerous. This environment debases paper assets and benefit hard assets.

10 Reasons to Buy Gold at $1,300.00 an Ounce

2010-10-11T00:47:00.001-07:00

1. Technical Breakout

When gold prices reach this level, more buyers than sellers step into the market. In the latest leg of the gold bull market, $1,000 has been established as the new floor.

2. Undervalued on an Inflation-adjusted Basis

If you calculate the cost of gold from it 1980 high of $850 an oz., on an inflation-adjusted basis, the price of gold today would be $2,250 an oz. At today's price around $1,318 an oz., gold can increase $900 before it would equal its 1980 high. From there, its price can expand from increase demand.

3. A Store of Value

The major stock averages 10-year average annual return is virtually zero. Over the last three years, residential real estate has lost 25% to 50% of its value, depending on the market you're referencing, yet gold has been up nine of the last ten years. This should continue.

4. A Rising Asset in a Rising Asset Class

The soft and hard commodity complexes are on a roll. Despite, various recessionary and depression levels for many assets here in the US towards home ownership, unemployment, commercial real estate vacancy rates, etc., demand in Asia - the 21st century center of the universe, and South America - is strong and getting stronger, monthly.

Foxconn in China, Apple Computer's primary supplier recently gave its employees a 66% wage increase following 10 work-related suicides. Average US wages have been flat for 10 years. Russia's heat wave this summer severely reduced its wheat crop. Palladium, silver, coffee, cotton, wheat, pork bellies, and lean hogs are all up significantly for the year. The emerging market countries were not as leveraged as the west; therefore, their economies rebounded faster from the global recession. Their demands for commodities are driving up prices.

5. Upcoming Currency Devaluation

The Financial Times reported that Brazilian finance minister Guido Mantega said central banks are locked in an "international currency war". The US Treasury Secretary Tim Geithner is currently pressuring the Chinese to adjust the Yuan against the dollar. Japan is manipulating the Yen to increase exports. Other exporting countries are deliberately attempting to drive their currency lower to expand their respective domestic exports. Unfortunately, this race to the bottom cannot be won by all.

Europeans fled the Euro this spring after Greece debt problems appeared to be growing. Now, the Euro is surging because Ben Bernanke has all but signaled the availability of QE II or QE Lite after the November elections. The US dollar became the least bad currency in the world and a safe haven. That is changing.

The US economic recovery, which is now forecasted to struggle until 2015, will compel currency debasement by the Feds and compel countries and investors to reexamine their dollar holdings. This will add significant downward pressure on the dollar and upward pressure on the price of Gold.

6. Gold as an Upcoming World Reserve Currency Component

This story ran in Reuters at the end of September: Dollar to remain world's reserve currency—Lockhart

SEWANEE, Tenn., Sept 28 | Tue Sep 28, 2010 6:59pm EDT

(Reuters) - The U.S. dollar will remain the world's reserve currency, though some diversification over time is inevitable, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.

"It's very far-fetched ... that the dollar will lose much of its position in the near term as a reserve currency," he said in response to an audience question after a speech at the University of the South.

"I do, however, expect a gradual reduction in the dollar's role as the rest of the world diversifies and some new currencies become qualified to be held as a reserve currency," he said.

It's rumored that discussions are underway by various countries to prepare for when the US dollar is no longer the world/s reserve currency. China, Brazil, Russia, and France are in talks, with the aid of the International Monetary Fund (IMF), when the world loses faith in the dollar.

Central banks from around the world have stopped selling their gold. This is a reversal from your normal practice for much of this decade which implies that the value of gold is on the ascent.

Since no single currency has the ability to replace the dollar, a basket of currencies and gold will be created. Until such time, the informal reserve currency has defaulted to gold.

7. A Shift in Supply/Demand

Worldwide demand for gold is rising. From gold bar dispensing ATM machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD, IAU, PHYS, and SGOL. The US Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. However, Thursday evening, the US Mint opened the 2010 American Gold Eagle Proof Coins, Rust was discovered forming on the Bank of Russia's 2009 "St. George the Conqueror" .999 fine coins.

8. A Momentum Play

9. Betting With the House

Thomas G. Dolnan's Barron's editorial dated October 2 observes:

Even a step in the right direction would face huge opposition. A permanent 10% cut in retirement benefits of all kinds, and the same cut applied to health-care spending, including doctors' and hospital fees, would be worth maybe $150 billion a year. A 10% cut in military spending was worth about $60 billion last year. It could occur automatically if the wars wind down. A 10% cut for everything else the government does except pay interest would be worth about $120 billion.

These would be real cuts from last year's spending, not a reduction from the rate of growth, with allowances for inflation and population growth. But they would take us only a quarter of the way to a balanced budget.

The expiration of the Bush income-tax cuts and restoration of the estate tax would raise about $400 billion a year. The tax hike and the 10% cut together would leave another $700 billion a year to be cut or taxed. Fortunately, that happens to be the advertised cost of the anti-recession programs.

Such spending cuts and tax increases are a reasonable program for national renewal—and for political suicide. So don't ask why candidates aren't proposing spending cuts to balance the budget. Borrowing is so much easier—until no one will lend.

10. The US stock and bond markets are predicting no growth in the future. The yields on bonds and corporate earnings through cost-cutting informs sober investors that between now and 2015, the US economy will struggle and will be unkind to equities.

Stock rallies are no longer a proxy for economic growth. Stocks can just as easily rise because of a drop in the dollar allows foreign buyers to purchase US stocks at a discount.

Corporate culture, the ego to the stock market's id, no longer cares about long-term goals and results, when the future is always 90 days away. Therefore, long-term, as we now know it is a contemporaneous creature that is shallow but dangerous. This environment debases paper assets and benefit hard assets.

The Baby Boomer’s Case for Gold

2010-09-17T08:44:00.000-07:00

This summer saw another bifurcated performance by the markets as the current paradox of wealth and economics continues. Trading continued its impersonation of Fay Dunaway’s character Evelyn Mulwray answering Jack Nicholson, an obtuse Los Angeles private detective J.J. Gittes, in the1974 movie classic, Chinatown.

As investors demanded answers about the state of things, likewise as in the movie, the market’s binary answer to the question of recovery or not oscillated between the economy is producing – corporate profits/recession, corporate profits/recession, corporate profits/recession. Both answers are true.

This topography is tricky for Wall Street to navigate. The economy must appear fragile enough to ensure that the two trillion dollars Bush tax-cut is extended while both the market and economy isn’t bad enough to scare off investors. The calculus to suppress the price of gold is even trickier; until it’s time for the price to rocket upward. Meanwhile, the disappearing middle class assumes that their needs are a factor in these equations.

On Labor Day, President Obama announced a tiny $50 Billion long-term infrastructure program to rebuild roads, railways, and runways. Jobs are expected to materialize well after Democrats are expecting historic congressional defeats in the November election chiefly because of a U-3 unemployment rate at 9.6% and rising. The rising U-6 unemployment figure is 16.7%. High unemployment, the reciprocal to high labor cost, is good for businesses bottom line.

The American working class’s raison d’être, ascension to middle class status became an inconvenient pursuit for the application of supply-side economics. These upper deck fans of Gordon Gecko’s brand of parasitic capitalism, also, among some of the highest paid global workers, misses the obvious internal conflict for gleefully embracing the religion of Maximizing Shareholders’ Value (MSV).

Investors and upwardly mobile workers in the last three decades were convinced by politicians and Mad Men particularly that they were not one and the same. Unfortunately, unlike a centrifuge that can separate like densities in a tube, a MSV’s thesis is extracted from today’s well paid workers on the road to prosperity and from their future generations’ standard of living.

Given this environment, baby boomers face a cacophony of advice, a cornucopia of information, and a cavalcade of confusing and contradictory data as they sail into retirement.

Once prudent, now quant post Second World War standards concerning finance and money, inculcated into our middle class formula of ideas and value system, ceased producing acceptable results over the last decade. Regrettably, zero became the average annual return on equities during this period. The return on residential real estate is even worse.

As current interest rates on certificates of deposit stay below 2% and long-term treasury obligations pay below 4%, nominal yields are an insult. Corporate debt such as IBM is being issued a few basis points above its treasury counterpart. Other corporations are contemplating issuing 50 and 100 year maturities as the markets salivate.

This year, the winning income strategy has been a portfolio of dividend paying stocks over bonds. The current risk/reward parameter, in both stocks and bonds, and the premium being offered for such an undertaking, is a disproportionate proposition, whether we recover or sink into a global depression.

We continue to witness Modern Portfolio Theory and the Efficient Market Hypothesis lose its practical value for investors, as we did so in 2008 and 2009.

Furthermore, political gridlock circles the globe as one government after another is challenged by private market forces – hedge funds, principally through Forex and credit spread trading. Irresolute leaders are making shortsighted and timid decisions.

Each passing day takes us farther from a 20th century of calibrated knowable unknowns into a 21st century of mounting unknowable unknowns which historically leads to ad hoc mischief and turmoil.

The appropriate characteristics of gold bullion and precious metals are an imbued antidote to today’s financial crisis and the correct mid-term solution for alternative investments. Yet, gold is constantly ridiculed as a “gold bug” vehicle in the main stream media.

Every financial crisis produces real gold bugs. Eventually, the inflationary 1970’s created more gold bugs faster than Ben Bernanke can print dollars. In time, this will happen again. However, the price level for gold is unremarkable, given the sheer size of the aggregate global money supply of tens of trillions of dollars, even more in outstanding debt, and ubiquitous domestic and global political uncertainty.

Any serious talk about a new global reserve currency, partially containing gold, replacing the US dollar, would implicate a gold price in the five figures range. The ownership of gold today as a core portfolio holding is not only to hedge against inflation, a rise in prices, deflation from credit contraction, but also, hyperinflation, and a collapse in a nation’s currency, to preserve accumulated wealth.

You ask why trust gold now when most financial professionals are opposed to acquiring bullion at current prices? Before reviewing some macroeconomics metrics demonstrating the logic for this decision, ask yourself: why were financial planners parroting in 2001, 2002, 2003, 2004, and 2005, that over time all stocks rise in value; did stocks obey their wishes?

Why did stock brokers and investment advisers insist that you never want to be out of the market, as recently as the second quarter of 2008, but by 2009, it was “too late” to get out? In their mind, a “blue chip” bear market would not occur. Few investment professionals could even offer sound portfolio hedging strategies with options, as protection against the unthinkable.

Were you warned by advisers that the AAA ratings from credit rating agencies were being purchased by investment product packagers - euphemistically called credit enhancements - like two-for-one call drinks at happy hour?

Did you discuss the risk from opaque and unsecured packaged investments, be they, the gargantuan publicly traded ones or the bespoke private placements, during the roaring 2000’s by your registered investment advisory firm which had a fiduciary responsibility to work on your behalf?

If you were really fortunate in making money during the 1982-2000 secular bull stock market and your net worth rose in excess of seven figures, then you probably retained a hedge fund for the fee of 2/20 to lose a portion of your principal over the last three years.

Did your mutual fund or variable annuity company recommend dollar cost averaging? What is your net worth now? How often were precious or rare earths metals suggested as an alternative investment as these unloved stepchildren posted profits year after year? Are advisers suggesting bullion and rare earths metals now; at what percentage of your portfolio?

The credit crisis and market meltdown of 2008 has been officially named the Great Recession: to show investors that the event itself was manageable and that the extent of probable damages to the economy and the markets were quantifiable. Both of these conclusions were premature, then, and untrue now.

The carnage inflicted by the swift collapse of the 2003-2008 Structured Investment Vehicle (SIV) gold rush was unlike any market/economic contraction witnessed by contemporary investors. The last financial upheaval of this magnitude experienced by investors was the 1930’s Great Depression. Each event was unique. Mark Twain quipped once “History doesn’t repeat itself - at best it sometimes rhymes”.

The comparative “rhyming” components between 1929 and 2008 crashes includes the shift in wealth distribution to the top 1%, reckless amounts of leverage, and a underwriting frenzy of securities for fees over an organic economic benefit.

In 1928, the top 1% share of total pre-tax income was 23.9%. In 2007, the percentage was 23.5%. Prior to the 1929 crash, stocks could be margined up to 90%. In 2007, homes could be mortgaged up to 125%, with stated income, alone.

After the First World War, country bonds were issued by Europe, South America, and Asia, sold to everyone by Wall Street, and experienced massive defaults which exacerbated the 1930’s global depression.

In the roaring 2000’s, orgasmic inducing fees overrode prudence, as sublime to ridiculous derivatives were packaged and sold around the world by Wall Street, causing countries such as Iceland, Ireland, and Greece to become nearly insolvent. Yet, in 2009, Wall Street paid out $149 billion in bonuses, roughly 1% of our $13 trillion dollar annual GDP.

Worldwide demand for gold is rising. From gold bar dispensing machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD and SGOL.

The US Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. Rust was discovered forming on the Bank of Russia’s 2009 "St. George the Conqueror" .999 fine coins. The supply/demand curve for gold is moving outward. New highs for the price of gold have been made recently in all major currencies.

The interest on debt and the debt itself, without raising taxes is unsustainable. This “new normal” will wreck the US economy and the government’s questionable AAA credit rating.

Not China, not Russia, not North Korea, not Iran, not terrorists...According to Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff, the "single biggest threat" to American national security is the US national debt, which is either $8.85 trillion (public debt), $13.4 trillion (total national debt), $20 trillion (total debt including GSE debt), or $124 trillion (total debt including unfunded obligations), depending on one's definition of the word "debt."
Washington Post: August 27

The amount of debt that the US has outstanding is troubling but our debt structure is even worse. In FY 2010, the US Treasury issued $2 trillion in treasury obligations. One and one-half trillion dollars was in rollover debt and $500 billion in fresh issuance. These numbers can only rise in the short term. We are a hopelessly credit driven, not cash oriented, transactional society.

Our credit structured economy, of which, 70% of GDP, is consumer driven. Income utilization for the bottom 95% is primary for debt servicing. Government policies favors continuously buying goods and services by consumers while optimistically believing such activity occurring increases wealth and while reduce debt.

This spiraling upward is the conveyor bell for individual upward mobility. Absent GDP growth, expansion quickly turns to contraction, then, disinflation, and deflation. Except for a few speculators, ultimately, a loss in personal net worth ensues.

Likewise, when the amount of debt becomes too great to service from current cash flows, the economy and asset prices will collapse to sustainable levels. That process can take years. Meanwhile, except for a few speculators, ultimately, a loss in personal net worth ensues. Rising interest rates someday will destroy this current economic model.

The critical mistake made in measuring the totality of legitimate outstanding debt leading up to the 2008 meltdown was underestimating the degree of dishonesty employed by accounting gimmicks, reckless amounts of leverage, lax regulatory supervision, and offshore transactions to hide levels of risk.

Another mistake make in addressing the problem, once uncovered, was paying off legally dubious derivative claims with the moral and ethical weight of Las Vegas betting slips, suspending mark-to-market accounting, or smuggling over two trillion dollars in worthless toxic debt onto the books of the Federal Reserve Board, thus, guaranteeing nasty consequences in the future.

In essence, saving individual companies instead of the financial system itself is delaying final closure to the financial crisis.

The looting of our economy was the gravest of matters and was performed with full knowledge and consent. These mortal sins were the exclamation mark on this recent period of greed and avarice.

A global economy so sophisticated, and so interconnected, and has the wherewithal to produce such wreckage compels us to abandon or greatly curtail our unfettered mercantilism policies. Otherwise, the next seismic event will be greater.

The unintended consequences of callous policies pursued by special business interest and executed by rented elect officials shall radically change who we are as a country over the next decade. We can recover from this tremendous hole we find ourselves in but it requires great leadership and political will. Until then, a greater financial divide will broaden and deepen between the haves and have not’s.

Rationing of goods and services will flourish. Political stability will deteriorate, as unemployment trends higher, tensions will build, and the first 21st century generation will be lost to economic depression cloaked inside an arithmetic mean. That is the price we shall pay.

Baby Boomers’ choices must mirror where we are going, not where we have been. Paper assets in 2000 and real estate in 2006 crossed over from being an ally to an enemy to wealth accumulation for the average investor, and will continue to do so, for years to come.

In anticipation of this global redistribution of wealth, and as global US market share declines to the benefit of emerging markets, the supply/demand curve for precious metals and rare earths will fundamentally raise the floor on the price of gold. The US dollar’s purchasing power will also decline over time.

Baby boomers planning on living for the next 20 years must really consider gold as a core long-term holding in one’s portfolio, and not just a short-term trade or a token position, to maintain your family’s net worth, purchasing power, and liquid asset needs.

Will the Price of Gold Reach $5,000?

2010-08-20T14:02:00.000-07:00

All the current chatter these days on whether or not to reduce a portfolio’s exposure to gold is, to put it bluntly, a short term trader's conversation. A crowded trade, whales exiting a crowded trade, is it deflation or inflation? Gold is the inferior commodity to soft commodities such as wheat; gold’s current price elasticity, and more, all sound reasonable.

However, if you are a trend position builder and/or a long term investor of gold, we shall now review other important long term considerations that transactional traders omit from discussions.

If credit rating agencies have become less duplicitous, since the last decade, when they were arguably complicit in financial high crimes and misdemeanors, the US government’s credit rating must appear on someone’s credit watch list, inside of two years, if not, altogether downgraded to less than AAA. This is a plus for gold.

Between now and 2015, the global economy, measured in regional or national terms, will experience a protracted slowdown. In reality, a truer 21st century metric, for the production and consumption of goods and services, is seven billion individual, micro-economies. Nevertheless, the US will fair far worse than several developed nations and most emerging countries. The US 20th century debt structure is unsustainable with 21st century cash flows.

The US is also the largest component of the current global economy. Since the signing of NAFTA in 1994, US taxpayers has underwritten emerging markets’ growth through free-market supply-side economic policies. This change in industrial policy has stunted our internal ability to robustly expand our GDP. America’s only way out is discovering a transformative “next new thing”.

Realistically, in 2010, the Chinese economy simply isn’t large enough to save the world from economic contraction and, subsequent, global political instability. Only the American economy, if it were still functioning properly, could do the job. But it does not and can not; another plus for gold.

Currently, wasteful spending on virtually every federal budget item, especially defense as reported by the Inspector General and Homeland Security‘s TSA - both scared cows, is criminal. Our $13 trillion economy is under taxed for the services and standard of living we once demanded for ourselves as Americans.

More than 40 out of 50 state budgets are upside down, regardless of their blue or red political hue. Education has been marked down from an investment to an expense. The privatization of public assets are sure to begin in 2011. This financial insolvency and economic uncertainty serves as a Petri dish for elevated gold prices, in the next five years.

Too many multinational and offshore corporations are allowed to skirt their legitimate financial obligations, while our military police the world, and our morbidly obese military budget consumes evermore anorexic tax receipts. The dollar and US debt will eventually be ostracized in the financial community by investors. Gold will be embraced.

Maximizing shareholder’s value is the petard we hoisted our middle class onto. The homicide of America’s 20th century economic miracle, will show, we participated as both perpetrator and victim. Leaving in place strategic assets - the building blocks for future generations, and their higher standard of living, is an anathema to short term maximization - and its cannibalistic fatal flaw. The dollar’s purchasing power will diminish relative to gold.

The references above indicts the value of the US dollar over the next five years. Already, waiting in the wings, are competitive conspirators such as China, Russia, France, and Brazil, orchestrating the dollar’s eventual replacement as the world’s currency. The de facto world reserve currency emerging today is gold bullion.

How high will the price of gold go? The inflation-adjusted price today for gold is more than $2,200 an oz. There are models with gold reaching $5,000, $6,000, and $8,500 dollars an oz. One outlier has gold pegged at $36,000 per oz. Pick a number. How much debasement will the dollar experience over the next five years; 5%, 10%, 25%? Will the dollar still exist in five years?

The global average annual income per person is rising. There are a billion people coming online in the 21st century who now can afford a second meal in their daily diet. Tens of millions of individuals with rising incomes can afford to save by investing in jewelry or ingots or coins that store value such as silver and gold.

These new participants in [supply] globalization economics and [demand] international consumption will, push precious metals’ supply/demand curve outward, thus, changing its price elasticity.

History has shown that economic catastrophes, from the Dutch tulip mania of the 1630’s, to England’s 1720 South Sea Bubble, and France’s 1720 Mississippi Bubble, are ultimately expressed much like three-act plays.

Returning to the present, Act I, for the sake of illustration, was the over leveraging of the US economy the previous three decades. The private sector, public sector, and the federal government all sinned. The spices of human greed and amorality, by way of packaging and repackaging asset-backed securities until synthetic derivatives were created from thin air, became essential to the final flavor of this recipe. This dish, then, served to investors worldwide induced the 2008 global financial meltdown.

Act II are the economic repercussions; business failures, personal bankruptcies, home foreclosures, new rules and regulations, the abortion of long standing public policies and programs, migration of populations, and the destruction of towns and neighborhoods.

Also, there is a desire for the criminal prosecutions of the apparatchiks supervising the economic meltdown (although, so far, they and their superiors seems immune from prosecution and jail time). In short, social progress based on past economic prosperity is thrown into reverse and anxiety, resentment, fear, and political anger swells. Gold becomes trustworthy.

Act III is just beginning; the comeuppance for disastrous political policies and financial ruin. Business and political leaders who were in charge will be accused of violating their respective trusts with constituents by failing to protect that which the masses worship and prize most - economic and national, identity and security, As sclerosis permanently invades once functioning markets, people will insist individuals be held accountable. Gold is the beneficiary in this environment.

If past is prologue, scapegoats will be created, politicians will be driven from office in disgrace, political parties and governments may collapse. History will turn another page, begin a new chapter, for better or for worse. Currencies will be debased, hollow sovereign debt and dubious private wealth will rot on the garbage heap of time.

The only constant now, as before, is change and gold, for the long term.

The Market Is Just Not Into Main Street Anymore

2010-08-03T09:56:00.003-07:00

August Commentary: The Market is Just Not into Us, Anymore

I’m reminded of the story about the recently deceased arriving at the gates of Heaven and being told that he has freedom of choice he may visit both Heaven and Hell before making his eternal decision. After visiting Heaven for the day he journeys down to Hell.

The most incredible party witnessed in history is going on. The most beautiful people he had ever seen were there. The finest food and drink from the four corners of the planet was being served. The greatest band he had ever heard played every one of his favorite songs and sounding never better, from each stage of his life.

The next morning he returned to Heaven, rendered his decision and apologized for choosing Hell, along with conveying his thanks for the heavenly hospitality.

Upon returning below, the music was gone; so too were the beautiful people and the fabulous food and drink. All that remained in the dark cave was coal, fire, shovels, and heat. When he demanded to know where everyone and everything went; Lucifer winked and replied:

“Yesterday, you were a prospect. Today, sir, you are my client.”

Throughout 2010, and for the last decade, equity returns have produced practically nothing for all its troubles. Then, why do investors continue tolerating an insane amount volatility and risk of principal, for punk rewards - we are holding on to a once profitable relationship that no longer exists.

There; it had to be said.

This 30-year affair between the American middle class and financial markets has been counterproductive over the previous decade. Analysts and money managers are like your mate’s best friend who looks straight into your eyes and lie to your face. “The relationship is fine.” “You are imagining things.” “Every relationship has its highs and lows; you two are experiencing a temporary low period, that’s all.” “You think you could do better without her?”

These examples mirrors a few mindless talking points investors hear bantered about each day on business channels, describing investors’ net worth reduction and why any concern, on your part, is totally unnecessary. Let’s recall how this relationship started by returning to the beginning of this latest chapter.

Wall Street was a rich man’s playground - until the inflationary 1970‘s. At that point, the rich stop buying stocks. P/Es on stocks fell to hat size levels. Prior to the stagflation and inflationary 1970’s, it mattered little that commissions were fixed and burley. The last secular bill market ran from 1950 to 1965. Potential brokers were invited and groomed, by white shoe firms, to introduce themselves to and to form relationships, with the affluent.

In 1962, self-employed individuals or unincorporated businesses became eligible to self-direct retirement accounts through Congressional legislation with the establishment of (Eugene) Keogh or HR (10) plans. Twenty years later, employers asked the same question, differently: Why shouldn’t employees have the same freedom to self-direct their retirement account (thereby, removing corporate responsibility for employees’ retirement).

The private sector, as late as the early 1980’s, offered new workers employer-sponsored defined benefit (DB) retirement plans. Investment risk and portfolio management are entirely controlled by the company. Payouts are calculated on factors such as salary and duration of employment. If there is a short-fall on investment returns, companies are obligated to dip into earnings to cover the difference.

Luckily, for corporations, bottom line margins and much of today’s $1.6 trillion in cash, sitting on the balance sheets of corporations, is safe from being encumbered by DB plans and their retirees.

DB plans are still owned by many public sector workers. Currently, these plans are routinely vilified in the press as parasitic in nature. Defined Contribution (DC) retirement plans, enthusiastically launched in the 1980’s as DB plan’s chief competitive product, and were sold primarily by ridiculing DB plans as being inferior to self-directed accounts. DC plans’ major weakness, an unknown future payout to retirees, became its major marketing strength.

Men with ambition, real men, theoretically, could make untold millions playing the stock market. Accepting a DB plan’s corset over unlimited retirement income potential was the providence of the dull-witted or the lazy, lacking in motivation, vision and imagination.

The tiny requirements for raking in bushels of filthy lucre, for your golden years, as the pitch went, were reading Peter Lynch books and by faithfully watching Louis Rukeyser’s Wall Street Week; “as you know, over time, all stocks increase in value.”

Because of the internal logic of DC plans’ supposition from 1980’s Wall Street, it was antithetical for Human Resource departments and mutual fund companies to argue, at the beginning of a secular bull market, in favor of capping pedestrian, formulaic, DB plan payouts. Unrestricted, free market-based, DC plans were vastly superior on every count.

Beside, where did DB plans’ returns really come from? They came from the stock market! Eliminate the middle man; keep for yourself all the returns your hard earned dollars generate in the stock market. Mr. Hare, meet Mr. Tortoise.

The accelerants fomenting this new mindset, when stocks such as Boeing, Walt Disney, Mattel, and many others, sold for $5 dollars a share or less, were de-regulated commissions, Merrill Lynch’s new Money Market Account, and Sears acquisition of Dean, Witter, Reynolds (now Morgan Stanley). Additionally, declining inflation and interest rates, tax cuts, and deficit spending, helped deliver to Wall Street the middle class aspiration of champagne wishes and caviar dreams.

Over the next 20 years it was a world wind affair with unbridled infatuation. Mutual fund sales loads were cut from 8.5% to 4.5%. Exchange privileges inside mutual fund complexes were established. Letters of Intent, reducing sales fees further, became standard. Investors began choosing stock investment over precious metals, over real estate, over all other asset classes.

Stock market DC plans, became the preferred method of saving for retirement. Dividend Reinvestment Plans (DRIP) and stock purchase plans, compounding returns, also became more popular, adding fuel to the roaring stock market fire. Owning equities were touted by every financial services company. Consequently, more workers chose DB plans, year after year, playing at the big boys table.

Fictional character Gordon Gecko became the Pontiff of American financial idolatry and fictional prosperity. In the late 1980’s, banks begin selling mutual funds and insurance; and vice versa. Charles Schwab introduce the no load mutual funds Fund companies created A, B, C, and D shares, offering various sales load configurations.

In the 1990’s, everyone made money playing the stock market. The beginning of online trading even made it easy to do. The WSJ ran a recurring article featuring a chimp throwing darts, selecting stocks, and comparing his returns with professional money managers. That’s when you know when you are in a secular bull market.

The 14-member investment club from Beardstown, IL, the Beardstown Ladies became national celebrities for reporting earning compound annual average returns of 23.4%, over 10 years, thru 1993 - until they were audited.

Their actual return was 9.1%. By 1997, the Ladies had upped their stock picking skills and annual average returns over 10-years increased to 15.3%, yet, they still lagged the S&P 500’s 10-year return, during this period, of 17.2%.

Yes, we were so in love with each other. Then, dark clouds appeared and forever changed the future – Glass-Steagall was repealed.

Early in the next decade, Wall Street’s wandering eyes caught a glimpse of augmented proprietary trading and underwriting fees. Enhanced leverage, donning smaller and more provocative capital reserves, heretofore, disapproved of among prudent men, became desirable and lusted after by all. Scandalous risk was in vogue.

Investors’ trading commissions and management fees were a competent and faithful, if somewhat, plain way for firms to earn revenue. It was like home cooking five nights a week and backyard grilling on the weekends – safe, predictable, fulfilling, and bland.

Conversely, trading the firm’s capital and collecting securitization fees was the long-legged, redheaded, man-eating, gorgeous knockout, swinging from your arm each night, walking into your favorite hangouts.

Are you still dollar-cost averaging into your funds? Maximizing 401k and IRA contributions? Sporadically purchasing round lots of a few hundred or a few thousand shares of stocks, at discounted prices? This was no longer enough for descendants of the Buttonwood Agreement.

Once Wall Street felt the rush from mainlining mortgage-backed securities, the relationship with John and Jane Q. Public was doomed.

Any hope of salvaging this fraying union ended in 2008. We were unsuccessful in getting American finance off the narcotic of toxic assets; kicking this addiction to fast money, infinite fees and profits, and nympholeptic bonuses. A clean and sober banking system, facing tough new regulations, would function properly, yet again.

Regrettably, the wrong crowd appeared to offer help – Buffett, Paulson, Geithner, Blankfein, Bernanke, and Geithner – peddling TARP, Quantitative Easing, credit facilities, and government guarantees.

Immediately, overnight loan orgies were being held at the Feds’ discount window. The decency of mark-to-market accounting was scoffed at and ignored. Banking hedonism ran amuck on the streets of Manhattan and through the halls of Congress. Someone had shot the sheriff and the deputy, too.

It’s over. In a world of globalization, high frequency trading, melt-ups, flash-crashes, and algorithms, Wall Street doesn’t need the American middle class anymore; Need proof? Here is a snapshot from the internet of an Investment Company Institute chart displaying flows into LT Mutual Funds thru 07/21/2010:

The stock market was up 7% in July despite the fact that equity mutual funds experienced outflows in each of the last 12 weeks.

Wall Street borrows pure, uncut, scratch – at 0% - directly from Mr. Big; Washington DC. Treasury auctions are co-dependent enablers of this bankrupt practice. There is no turning back. Investors will make the wrong choice during a flash crash or flash bounce and will lose.

Somehow, that someone is always John and Jane Q. Public.

A Brief Weekly Review and Outlook

2010-07-26T19:42:00.000-07:00

Last week was a continuation of an exuberant market during earnings season and a flailing economy complete with bad housing data and seven additional FDIC bank closings. The bulls argue corporate balance sheets while bears focus on the economic data. So, which is safer; driving looking into the rear view mirror or the windshield?

There is near unanimous agreement in the market that deflation has defeated inflation. Unanimous consensus always makes me nervous. Looking around the US, deflation is prominent, with all things real estate. However, US real estate is losing its impact, month by month, on the global economy.

What cannot be timed is when global growth, and the inflation that comes with it, overrides the drag of American real estate.

The amazing Treasury bond market is like sleeping with a very large snake; hopefully, you wake up first. The bond market is pricing in a near depression, perhaps, while the stock market is celebrating business as usual. Or, the rest of the world is madly purchasing US debt, thereby, driving down yields, as there is no safe alternative to treasuries, at the moment. The wild card is government intervention – or the lack of it – from an economic perspective.

On the other hand, the municipal bond market continues to offer a much better yield, although, 41 out of 50 states are insolvent, and all five Gulf States are exposed to loss of revenue and clean up expenses from the BP oil spill.

Gold was up $1 buck last week. Gold is still outperforming stocks for the year.

The week ahead offers more corporate earnings reports and several important economic reports.

The Second Quarter T.K.O.

2010-07-05T06:48:00.005-07:00

Friday morning the big number, the BLS Employment Situation, landed with a thud. The unemployment rate drifted down to 9.5%, private sector jobs increased by 83,000, the non-farm payroll employment loss was 125,000 and the birth/death rate adjustment figure was 144,000. Government jobs shed 90,000 and 652,000 job seekers left the market. Two-hundred twenty-five thousand temporary census workers were let go. The average workweek fell 0.1% to 34.1 hours and the average earnings also fell 0.1%.

Before we pick up our swords and shields in the third quarter to do battle for gains and profits with a rising Euro, a weakening dollar, massive state and local spending cuts, possibly minimum wage wages for California state employees, a chronically ill housing market, fugitive employment and falling consumer confidence, let’s review the barrel we found ourselves spinning in throughout the second quarter.

The second quarter was one of the most brutal trading quarters I have seen in 27 years, in investing. Here are a few second quarter headline stats from the WSJ MarketBeat Blog: for the DJIA - down 1082.61 points, or 9.97% to 9774.02, the worst quarterly performance since 1st Quarter 2009; S&P 500 Index - down 138.72 points, or 11.86% to 1030.71, the worst quarterly performance since 4th Quarter 2008; and NASDAQ - down 288.72 points, or 12.04% to 2109.24, the worst quarterly performance since 4th Quarter 2008.

These loses are comparable to those we experienced when we were in the thick of the meltdown. Unlike the express elevator to hell we were trapped in the last half of 2008 and the first quarter of 2009, this was a Six Flags rollercoaster ride that took our cash, our lunch, and our sanity. Investors should not hold their heads down in shame. Professionals did not trade this quarter well either. If this quarter had been a boxing match they would have stopped it. This was not an investors’ market and the last week in the quarter told the story.

Referees stop fights when fighters can no longer protect themselves in the ring. Boxers cannot block punches, jab, counterpunch, move on their feet, or throw a combination. Their eyes have a glassy stare. They are unaware of their circumstance.

The last week of the month and quarter is for profit taking and window dressing. Markets are purposely traded. This market, this week, responded not at all based on its whereabouts. Compare the first quarter to the second quarter.

In the first quarter, the market rallied from the start of the year until January 19th. It sold off until the first week in February. Then, it counterpunched and fought it way back to new yearly highs to end the quarter. The beginning of April saw the same fight in the market. A rotation in sectors kept the market moving forward. Traditional punches landed but did little damage to the rally.

Before the second quarter bell ranged, on March 29th, the 7-year Greek auction bombed. On April 19th, the yield spread between Greek and German bonds hit 469 basis points. Then, on April 20th, the BP oil spill occurred. These events rocked the market. On May 6th, the flash crash occurred and markets never really recovered. The market staggered for the rest of May. Investors should have exited the market here. Money managers were tightly clenched throughout June by FinReg negotiations in Washington. Markets and investors set themselves up to win the second quarter on points with improving economic data being released this week. The improvement in the economy did not materialize.

A market hurt and running out of gas whose only hope of surviving was avoiding any more blows and to catch a break. Luck turned out not to be a lady, but rather, a loud, nasty, violent drunk. The oil spill worsened with failed attempts to cap the well, accompanied by pictures of gulf coast estuaries being damaged, innocent wildlife being murdered, and the first hurricane to enter the Gulf of Mexico in June in 15 years. Also, actions of austerity around the world by governments – our allies - were counterproductive to the US economy recovery narrative. The Euro’s fall reversed. The unemployment picture did not improve.

The rally from the spring of 2009 was predicated on the assumption that economic recovery would support higher valuations. Without significant improvement going forward, the markets were overvalued. The only market that withstood the shots of international governmental policies, macroeconomic trends, and supply/demand curves was the mellow yellow – Gold. Au – 196.9665, which refused to be knocked out.

One of the most stunning championship fights in history was the 1965 rematch between, then, current Heavyweight Champion Mohammed Ali and former Heavyweight Champion Sonny Liston. For years, boxing fans argued about the “phantom punch” which knocked out Liston in the first round. Today, we’re still debating what caused the May 6th flash crash. The bottom line is that the explanation or truth for either event is moot; history has recorded Sonny Liston’s loss in a small auditorium in Lewiston, Maine and the 1,000 point drop within minutes did grave technical and psychological damage to the markets.

This third quarter market is no longer the same cyclical bull rally that began in the spring of 2009. The bell has rung, the secular bear is advancing across the ring and he is fighting mad.

The Perfect L-Shaped Recovery

2010-06-29T18:49:00.000-07:00

Since no one else will ask the question, I will; why in 2010 must the legislation of basic human integrity, still, is necessary? I know, man and money are not the stuff, of which, virtue is made, however, when will it sink in that tempting fate, especially during a secular bear market, ultimately, is a loser’s game?

The FinReg follies have concluded with TBTF banking left unmolested. If there were men, or women in charge, who would have said years ago, “…no thank you, this firm prefer not to do business in this manner”, the notional value of outstanding credit default swaps alone would not eclipse the insane $65 trillion dollars being demanded by Kim Jong-il, North Korea’s Supreme Leader, as reported in Forbes from an AP story, as war reparations from the US.

The denture-wearing Dodd-Frank Act is being hawked as the toughest regulatory piece of legislation since the 1930’s. Reinstating Glass-Steagall, strictly enforcing the Securities Acts of 1933, 1934, and the 1940 Investment Act would have been faster, cheaper, and more powerful. Progressive Republican, Judge Ferdinand Pecora is undoubtedly disappointed at the latest scion of his depression era handy work and he’s been dead since 1971.

If the BP Deep Horizon Project Manager had said “not on my watch” and stopped operating the drilling rig once it was discovered and reported that too many short cuts had placed the overall safety of the men, facility, project, and gulf of Mexico, into question.

Is it too much to ask that a dollop of integrity be used in Washington DC, as we enter the double-dip of the Great Recession, so that the proper mixture of program cuts, war funding, and tax increases is crafted with intelligence and vision?

Gee - 20?

North of the border, an amoral group of desperados, thieves, cutthroats, land pirates, scallywags, and mercenaries, oh yes - I’m not speaking of illegal immigrants invading Arizona, I’m referring to the G-20 confab being hosted by Toronto, Canada, at a cost of $1 billion dollars, to protect world leaders. The meeting ended with Europe committed to austerity measures while the US favors more spending.

I guess if you have almost destroyed the global banking system, the global financial markets, turned home ownership from a lifetime achievement reward into a daily nightmare, robbed the soon-to-be retired of their nest egg with a zero return over the previous decade, while paying actual retirees next to nothing for the use of their principal, and insisting that everyone’s standard of living for the next decade must become austere, for the greater good, then, protection to the tune of $21M an hour, including overtime, over a two day period, is necessary.

The European Union is on suicide watch, China’s foot is on the stimulus break before home prices and wages reach outer orbit, and Australia is smothering mining stocks with new taxes; so mining, one of Australia’s most powerful industries, smothered the career of the previous PM, and replaced he with a she. The USA and its states are broke, so are many of its citizens; the velocity of money is nearly a negative number, unemployment is not falling - but home prices are, The Gulf of Mexico is a challenge unto itself. Purchasing equities is a low priority.

The Bear Market

The secular stock market will experience severe head winds for the next few years. Highs in the popular averages have been made for 2010. The street is beginning to accept that there is no V-shaped recovery on the horizon; or a U-Shaped, nor a W-Shaped - the winner of the 2010 Post Great Recession Economic Silhouette is the letter L.

The final 1st qtr. GDP figure was 2.7%, down from 5.6% in the 4th qtr. of 2009. Consensus agreed at the outset that stimulus spending added roughly 2.5% in GDP growth.

That as a given, the organic GDP figures for the 4Q/2009 and 1Q/2010, respectively, was 3.1% and 0.2%. Averaging the two quarters, GDP growth is 1.65%. Congress, not passing the extension to unemployment benefits, is reducing in the economy, by an additional $5 billion, monthly, deposable income to aid spending, adding one more headwind to the recovery. Dodd-Frank will add to the cost of doing business. Massive layoffs are scheduled at the state and municipal levels. Tax selling will pick up as well.

In 2010, the way you win the money management game is by not losing.

Continue to buy gold on dips; GLD, IAU, SGOL, and gold bars and rounds. Cash is King. Don’t add to treasuries’ positions, with the 10-year note below 3%, and don’t sell any you may own– for now.

Apple Computer

Apple computer stock is a sell. The iPhone 4 is the greatest invention since electricity; this was proven with 1.7 million units being sold in the first three days. At the beginning of this year, everyone said the stock price would easily reach $300. It did not.

Some day it may reach that round figure, but not before the next market correction occurs. Apple will see $250 before it will see $300. It closed Friday at $266. If you want to own it, sell the 260 October put. If I’m right, the stock will come back to you. If you think I might be wrong, buy the 280 October call for insurance against a short-term bounce, though I doubt it.

Macro Trends: America’s New Chapter

2010-05-03T05:28:00.000-07:00

Macro Trends: America’s New Chapter

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Sir Winston Churchill - Speech in November 1942

There are moments in history when one or more events can change the fundamental direction of a nation. The most obvious contemporary example is the radical alteration in national defense following the World Trade Center attack by terrorists on 9/11. A political case in point would be the resignation of the 37th President of the United States, Richard M. Nixon. A third such occasion would be the regulatory fallout from the Three-Mile Island nuclear accident.

This past week, the first chapter of America’s 21st century was written. The Senator Carl Levin’s Permanent Subcommittee on Investigations’ 10 hour interrogation of Goldman Sachs executives; the fury unleash by the southwestern state of Arizona enacting its new anti-immigration law, and the BP’s environmentally catastrophic Gulf of Mexico drilling disaster.

Alone, these events would leave their respective acute scars upon the landscape after temporarily shaking public confidence and inflaming anger. Long-term effects on industrial and investment policy, and society, certainly, would be limited. This confluence of events, at this period in time of near total political polarization, by everyone on every subject, due to fundamental demographic changes and the recent domestic and global economic collapse, will trigger the periodic inevitable rewriting of the American narrative for the next generation. Investors and investment professionals alike must fully recognize this metamorphic moment we are in to successfully navigate tomorrow.

Goldman Sachs

It was a bad week for capitalism. The mightiest of the investment banks was mortally wounded on live television. The personification of Thatcherism and supply-side economics, which guided America’s industrial policy for the last thirty years, was exposed as being indifferent to the average citizen’s pain and suffering, rightly or wrongly, during and following the worst economic downturn since the Great depression. Two days after this public display, the SEC referred to the Department of Justice a criminal complaint of fraud against Goldman Sachs which compounded their image problem of indifference with moral infidelity.

As I wrote last week, no investment firm has ever survived a criminal conviction. On Friday, Standard & Poor’s downgraded shares of Goldman Sachs from a buy to a sell while Bank of America Merrill Lynch cut its rating on the stock to natural from buy. The price of its stock closed down for the week at 145 from a high of 161. For the month, GS traded as high as 186.

Goldman’s employees interested in a long career on Wall Street are planning, or will do so shortly, their exit strategy before the worst might occur. In the coming months there will be a brain drain on the firm. Weaker CVs and paycheck traders will remain on the sinking ship for as long as possible. Top management will be replaced as punishment for the significant drop in shareholders’ value as well as allowing trading profits to interfere with client relationships – and getting caught. The most conservative’s clients will leave first; firing the firm and choosing a competitor. Lawsuits will flood the company from bitter clients with a loss from previous deals. The government will allow them to bleed to death from a thousand cuts from investigations, innuendo, and prosecution.

Buy the GS Jan 2012 100 strike puts and/or sell the Jan 2012 100 strike calls and wait. Time is on your side.

The Economy

The FDIC has closed 64 banks to date with another 700 + on the problem bank list. Federal dollars from the stimulus bill is propping up economic data. Artificially low interest rates are lifting share prices. Real estate assets are dead money. The economy is much weaker than popular news stories would have you believe.

Global business will change the nature of our country this decade as well. Respective debt levels for the European PIIGS (Portugal, Ireland, Italy, Greece, and Spain) nations, is unsustainable. Europe as a whole is facing over the coming three years more than $2 trillion dollars in maturing debt. That much refinancing will be unavailable in the marketplace for high credit risk debt.

A three-year $146b rescue package has tentatively been approved by the EU and the IMF just for Greece, in exchange for a self-induced economic depression, cannot be repaid. It is delaying the inevitable default or restructuring on their debt. Meanwhile, this will cause protest and violence in the streets of Athens leading to an unstable political environment. Without austerity measures Greece’s debt will collapse causing the European Union to quickly unravel. There is only a 50/50 chance that the EU will still exist in 24 months. Either scenario can throw the world financial system into turmoil for the second time in four years.

The US over this same period has enormous and unsustainable funding requirements too.

Australia, Brazil, Canada, China, and India have raised interest rates as industrial and food commodity prices experience inflation. Australia announced a new 40% windfall profits tax on miners. China again raised its banking reserves requirement by 50 basis points. Another interest rate hike is expected later this year. Prices are rising here in the US as well; however, the reality of modern macroeconomics and the granularity of deflationary and inflationary forces coexisting across different asset classes in the same economy is an unfamiliar and difficult concept to grasp. Real estate prices will continue to slump, due to an absent of consumer credit and borrowing demand. Energy prices will move higher than previous thought, in part, because of the BP oil well fiasco (more on this later) and higher demand in Asia and South America. Food prices are higher.

As confidence falls and tensions rise later in the year, a substantial stock market correction will occur and gold will make new highs. Gold’s correction earlier this year did not break its long-term trend line.

Contrary to conventional thinking, a lower or very slowly rising Chinese Yuan against the dollar is in the US best interest. Consider this example: if you are PADI certified to scuba dive and understand buoyancy, think of role your weight belt plays. Your body mass (the dollar) is greater and heavier than your belt (the Yuan).

But the density of the lead weights in your belt assists you to descend. If the Yuan rapidly decouples from the dollar today, the dollar’s intrinsic properties, massive debt and deficit spending, low GPD growth, net imports, energy consumption, war, will cause the dollar to fall rapidly, accelerating a move away from the dollar as the world’s reserve currency.

Whenever this reign ends, America will be the last one to know.

The stock market has rallied since March 2009 on cheap money and undervaluation; the former is unsustainable and the latter no longer the case. In my predictions for 2010, I predicted market highs for this year would be made in the first or second quarter. I stand by that prediction.

Move to cash and gold bullion or bullion-backed ETF’s: SGOL, PHYS, and GTU.

Arizona Immigration Law SB-1070

Seldom will a single state law radicalize national politics. We witnessed that last week. Two months ago, conventional wisdom in Washington DC was predicting a horrible November for Democrats at the polls. President Obama actually would benefit from a weaker Democrat-controlled congress, was the thinking. Legislation passed into law would be more moderate and his base more docile and manageable.

Anger exploded in Hispanic communities across the nation like a well struck piñata when Arizona governor Jan Brewer signed into law a measure for local police, after contact, to question, identify, and detain people who might be illegally in this country, on reasonable suspicion. I live here in Arizona and that criteria could apply to one-half of the state’s population; two-thirds of the state’s population during the summer months. As a practical matter, a subset of American citizens would be guilty, until proven innocent. For some, Arizona has become France.

Yes, the Arizona/Mexico border is porous. Yes, the federal government has failed for decades to secure the border. And, yes it is a conduit for criminal activity. Lifting the prohibition on the consumption of marijuana, as a solution, would blunt border crime. But this porous, unsecured border is also a businessman’s pipeline for cheap labor. Once upon a time, unions were the gatekeepers of blue-collar jobs. After deregulation included breaking the back of unions, an incentive for undocumented workers to enter this country, and underbid for jobs, arose. Now, policing workers is left to the employers and the federal government – an unintended consequence of union busting.

On the other hand, this underground economy contributed to the US economy’s strength, including housing, without official statistical attribution, until anti-immigrant sentiments began driving workers away. This undocumented workforce bought starter homes allowing these homeowners to buy move-up homes. They spent money on fast food, goods at Wal-Mart, purchased movie tickets and bought big screen televisions. They rented apartment units to live in, tuxedos for weddings and graduations, and hotel rooms. That is one reason why reported economic data seems stronger than actual activity. The underground economy, or lack thereof, is always embedded inside official reports.

Furthermore, according to this December 2007 Congressional Budget Office (CBO) paper, unauthorized immigrants do pay state sales and property taxes; file state and federal income taxes, and pay into social security. Because they often use a fake social security number, the funds paid into SS is never withdrawn. States are also reimbursed by the federal government if an unauthorized immigrant is arrested and held for a minimum of four days by local authorities. Only a cynic would ask, in these tough times, could there also be a tiny profit motive embedded inside this new law?

Ten additional states, Colorado, Georgia, Maryland, Missouri, Nebraska, Ohio, Texas, Oklahoma, North Carolina, and Utah, have elected officials, promising to introduce bills in their respective legislatures, similar to the new Arizona law.

Animosity, on both sides of this issue, is growing. Many cities and organizations are calling for boycotts on all things Arizona. Several Arizona-bound meetings have been canceled. Colombian born, international singing star Shakira, flew into Phoenix on Tuesday to denounce the new law. Major League Baseball’s Players Union is calling to move the 2011 all-Star game from Phoenix. The GOP is rethinking letting Phoenix host the 2012 convention. A California tea-party group has retaliated by boycotting the city of San Francisco. In an unprecedented step, the Arizona Republic, the State’s largest newspaper, ran on the Sunday edition’s front page, an editorial in opposition to senate Bill 1070.

May Day protests, in 70 cities around the country, showed thousands of supporters of immigration reform out in the streets. Entertainer Gloria Estefan loaned her star power to the Los Angeles protest. U.S. Representative Luis V. Gutierrez (D-Ill.) allowed himself to be arrested at the protest in Washington DC, escalating demonstrating over this law to civil disobedience. Neither side is backing down.

The old political middle ground has been condemned, as no longer inhabitable by identity politics, and is, hereby, being demolished this election year, at the state level, by the will of the people; we will either lurch to the right or to the left.

BP Underwater Gulf Gusher

The most devastating event this week, both in terms of financial and social damage, is BP’s Gulf of Mexico deep sea drilling rig disaster; gushing from 200,000 gallons or 5,000 barrels of crude oil per day, to 1,000,000 gallons or 25,000 barrels per day, or more - no one knows for sure, into the ecologically sensitive Louisiana estuaries. Alabama, Louisiana, and Mississippi account for 19% of the US refining capacity.

A pipe from the Deepwater Horizon drilling rig, located 50 miles offshore and 5,000 feet below the surface, ruptured April 20th, ironically, the 40th anniversary of Earth Day. The explosion, which killed 11 workers, was first reported to be leaking about 40,000 gallons per day. That figure was revised three times.

A remote-controlled shut-off switch, called an acoustic switch and costing about $500,000, was not employed on this drilling rig. This devise is design to and could have stopped the flow of oil after the rupture. It is not required on rigs by the US. It is mandatory for offshore drilling by Norway and Brazil. Norway has used them since 1993. Some oil companies use this devise even when they are not required.

Double-hull tankers will see a pickup in business. Makers of cleanup materials will do well. Chemical companies will also play a part in the aftermath of the catastrophe. With the fishing industry destroyed at least for the next five years, it’s possible that Genetically Modified (GM) and farm raised crawfish, scrimp, and oysters may become an alternative supply of gulf seafood.

Expect to see a $1 to $2 impact to the price of gasoline this summer and spot oil above $100.00 a barrel, as the interruption of production, inspection of other offshore rigs, regulatory review modification, and the beginning gulf coast cleanup operations transpire. At this time, it is unknown how to cap the leak. Drilling a new well to stop the flow of this one could take two to three months to complete, experts say. There could be more than 10 million barrels of oil at that well location. America’s gulf coast has become the poster child for clean, renewable energy. That sector is no longer out of favor as this weekend.

The most famous comparisons for this oil spill are the January 28, 1969, Santa Barbara Well Blowout off the coast of Santa Barbara, California, losing 100,000 barrels and the March 24, 1989, Exxon Valdez oil tanker spill in Prince William Sound, Alaska, losing 240,000 barrels of crude.

The truest comparison, however, is the Ixtox1 oil spill in the Gulf of Mexico, 600 miles south of Texas. On June 3, 1979, the Mexican government-owned oil company Pemex was drilling an 11,000 feet deep well when the explosion occurred. In total, 352,400 barrels of oil escaped. It took 2 months for oil to land on the Texas coast versus 10 days for the BP spill. Experts did not finally cap off the leak until March 23, 1980.

ETF’s to buy: PZD, GEX, PBW, PTRP, GWO, EVX, GRN, QCLN

Summary

We are in a new century. The pages of history are forever turned by the winds of unexpected events and timing. We either curse or applaud that moment in time but what is impossible to do is to reverse its existence.

Move to cash and gold, avoid corporate bonds, short Goldman Sachs and the financial sector, and buy clean tech ETFs.

Goldman Sachs: The $64,000 Question

2010-04-23T14:45:00.001-07:00

My favorite hotel in Las Vegas is Steven Wynn’s Wynn Las Vegas and Encore. His Encore Macau opened on April 22. As revenue from Asia becomes a larger portion of Wynn Resorts Holdings, moving the headquarters from Las Vegas is being considered. If every American CEO demanded the responsibility for his or her company as does Mr. Wynn, American business would, instead of fearing the future of global completion, instead be relishing the sweet smell of opportunity. Lee Iacocca was that type of CEO at Chrysler. However, high stakes poker games, in high-roller card rooms on the strip, pales in comparison to the ultimate poker hand being played out between New York and Washington DC.

I have refrained from writing about the unexpected battle between Goldman Sachs (GS) and the United States of America. The outcome will determine the direction of the financial industry for the next generation. If I were a wagering man, I would not bet the fans’ favorite; the over-educated and overpaid Ṻbermensch investment bankers at 85 Broad St. versus the career civil servants. On the surface, Goldman has more money than God and a better rolodex. But I‘ve seen this movie before. If GS can contain this SEC civil complaint to its existing size and allow it to disappear, they can come back from this embarrassment. All will be forgotten about fraud charges.

It is a puzzlement why they chose instead to fight this civil complaint. Goldman Sachs has the financial and political wherewithal to make this disappear.

Lloyd C. Blankfein could potentially be reprising the role portrayed by Michael Milken 25 years ago. Then, Drexel Burnham Lambert occupied the role of Goldman Sachs. No one dared to even whisper a negative thing about Milken or Drexel in 1985, 1986 or 1987. That is, no one except Ivan bosky, an arbitrageur who plead guilty to securities fraud and implicated Michael Milken in several illegal securities transactions. Is there an Ivan Bosky orbiting John Paulson’s shop, or Abacus- 2007 AC1, that can be squeezed, either by Neil Barofsky, the special Inspector General for the TARP program, the SEC lead litigation counsel Richard E. Simpson, or Andrew Cuomo, New York State Attorney General?

Drexel invented the contemporary meme of masters of the universe. As the SEC civil complaint moved forward, a separate criminal probe was being developed by a little known United States Attorney from the Southern District of New York by the name of Rudy Giuliani. Long story short, after Bosky was convicted and implicated Milken in 1988, the SEC sued Drexel. The following year, Michael Milken was indicted on 98 counts of racketeering and fraud by a federal grand jury. To appreciate how important Milken and Drexel were at the time, their high yield “junk bond” financing deals accelerated the development of cable television, satellite communications, cellular telephony, resort casino gaming in Las Vegas and financed the beginning of the private equity firms. On April 24, 1990, Michael Milken pleaded guilty to charges of securities and tax violations.

Corporations can and do survive civil court convictions. Ask Bank of America (BAC) and Merrill. The kiss of death for a firm, however, is felony convictions. The US Government also has as much money as God; they also have subpoena power, a Justice Department, the FBI, the IRS, wiretaps, and the Racketeer Influenced and Corrupt Organizations Act (RICO). This current special poker game moreover features angry European countries, such as the UK and Germany, plus large angry pensions like CalPers.

Still, Goldman has to look over its shoulder for pissed-off former billionaires, the likes of Maurice “Hank” Greenberg from AIG (AIG) and Richard “Dick” Fuld, of Lehman Brothers – that may be amenable to some cosmic payback, or even singing recitals. The House of Sachs drew Judge Barbara S. Jones, whose career is steeped in racketeering and organized crime. If Goldman cannot get this case dismissed, and they are subsequently charged, prosecuted, and found guilty of felonies, the government will systematically put Goldman out of business, with the cold-blooded dispatch of Javier Bardem’s sociopathic killer, Anton Chigurh, in “No Country for Old Men.” Washington will view it as a necessary honor killing. It was Goldman’s decision to call and raise this pot when the possibility of extinction could have been removed from the equation.

So for me, the $64,000.00 question is this: It is both John Paulson and Goldman’s contention that ACA was aware, Paulson may be involved in selecting some of the mortgages for the CDO and ACA was never told that Paulson would be long. If Paulson had no greater assurance than 50% that Abacus – AC1 would fail, why would he take a position? Paulson admitted that wanted to make a killing. Why waste your time attempting to make a killing with a neutrally-structured vehicle? If he really believed the real estate market was about to crash he would want maximum exposure. Goldman would know this as well. Did Goldman not give equal advice to both clients in the same transaction? This is where their story falls apart.

The SEC complaint Against Goldman Sachs

2010-04-16T10:59:00.000-07:00

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

FOR IMMEDIATE RELEASE
2010-59

Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.

Additional Materials
Litigation Release No. 21489
SEC Complaint
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.

According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.

The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

# # #

For more information about this enforcement action, contact:

Lorin L. Reisner
Deputy Director, SEC Enforcement Division
(202) 551-4787

Kenneth R. Lench
Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4938

Reid A. Muoio
Deputy Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4488

http://www.sec.gov/news/press/2010/2010-59.htm

Discerning Trends and Fluctuations From Direction and Volatility

2010-04-08T10:50:00.000-07:00

There is a cornucopia of objective and subjective data flowing into the marketplace 24/7. Once out there, it’s twisted and molded into supporting or rejecting whatever narrative is being presented. It’s this world that we must employ all our analytical skills and investment experience to discern trends and fluctuations from direction and volatility.

On April 6th, it was reported in the New York Times from a story entitled “Upbeat Signs Revive Consumers’ Mood for Spending” the following statement:

The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”

On April 7th, The Federal Reserve Statistical Release G.19, Consumer Credit reported the following:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Econoday published this analysis to explain the report:

Highlights

Well the rebound for consumer credit lasted only one month. Consumer credit fell a steep $11.5 billion in February, sinking hopes that January's increase would mark the end of the steepest consumer credit contraction on record. A $5.6 billion upward revision to January, to plus $10.6 billion, does take some of the sting out of February's contraction as do preliminary indications for strong retail sales in March. But February's data are bleak, showing a $9.5 billion contraction for revolving credit and a $2.0 billion contraction for nonrevolving credit. Tight credit standards together with the consumer's mood to save are not helping the economic recovery. Stocks showed little initial reaction to the report.

Market Consensus Before Announcement

Consumer credit outstanding in January rose $5.0 billion, breaking a record of 11 consecutive months of decline. The gain was led by a $6.6 billion rise in non-revolving credit (car loans, mobile homes, education, boats, trailers, vacations). But revolving credit (credit cards) still declined by $1.7 billion.

Finally, add into the mix, auto sales that were reported on April 1st, and again Econoday explains:

Highlights

Vehicle sales in March proved much stronger than February, the first solid indication of what looks to be a strong month for retail sales. Sales of domestic-made cars and light trucks rose to an annual unit rate of 8.8 million, up more than 15 percent vs. February's 7.6 million rate. Improvement was broad based among manufacturers but was centered at Toyota (TM) where aggressive incentives led to a major jump for the troubled manufacturer. New car sales make up about 12 percent of total retail sales. Gasoline sales, which make up about 10 percent, also look to be strong in March given gains for demand, seen in the weekly EIA petroleum inventory data, and gains in price, also posted weekly by the EIA. Chain stores will round out the retail picture for March when they post results next Thursday.

Market Consensus Before Announcement

Sales of domestic-made light motor vehicles in February dipped 2.2 percent to a 7.7 million unit annualized pace, largely on severe snow storms cutting into showroom traffic. Imports, however, fared worse, dropping 7.9 percent to 2.7 million units. The import share was hurt by Toyota's recall-related stoppage of sales on certain models. Combined domestics and imports were down 3.7 percent to 10.4 million units from 10.8 million in January. Deal making by competitors going after Toyota market share could boost overall sales in March.

Question: Why did the market tank at the close Wednesday, after the release of the G.19 report, when it was already known February was a poor month for consumer credit? Between 3:00 pm and 4:00 pm Wednesday, this was the most significant news to come out?

Also, how do you square Ben Bernanke’s testimony before congress explaining the to keep U.S. interest rates low because of a fragile economy when the day before Australia’s central bank increased their benchmark interest rate, by a quarter percent to 4.25%, the fifth time in six months, over fears of inflation, following China’s changing position on inflation and rising commodity prices?

Are the Feds conflating a residential real estate inventory problem with GDP growth? Can we see a further drop in home prices, an expansion in the economy, and miss the beginnings of a cyclical turn in inflation? Will policy and politics interfere with sound but tough economic choices in Washington DC? What warning signal is the debacle in Greece sending to the U.S.? Will Paul Volcker be heard by the administration on banking reform and will Larry Summers be leaving the circus through the revolving door to Wall Street?

Man, and you thought the Duke/Butler NCAA basketball final was a cliffhanger.

U.S. Markets: A Week of Inexplicable Events

2010-03-25T10:29:00.000-07:00

You can excuse the average investor if, this week, he found himself and his thoughts drifting, perplexed and panicky. The inexplicable was found lurking everywhere starting with the normally spineless Democrats handing President Obama a historic legislative victory on healthcare reform, Sunday. Opponents feared that the $1 trillion price tag, and the disputable commandeering of 17% of the annual national budget was too ambitious, and that the increase in taxes necessary to cover an additional 32 million Americans health insurance would impede economic growth.

The stock market continued rising into the close; on Tuesday, up 102 points, on below average volume. The respective 17 month highs were 10,752.41 on the Dow Jones Industrial Average; 1,174.17 for the Standard & Poor’s 500 Index, and 2,415.24 on NASDAQ. Some call this a melt-up rally, a term describing a short squeeze in search of a pullback, which never comes, especially during end of the quarter window-dressing buying. If you don’t take any profits now at least buy SPY or QQQQ puts for portfolio protection in April.

But another inexplicable event occurred. Bloomberg reported that the 10-year US treasury swap spread closed negative for the first time ever. Ft.com/Alphaville provides a concise definition:

“A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps.”

The negative spread widen on Wednesday accompanied by a below average 5-year treasury auction priced at a 2.605%. The 10’s and 30’s sold off by the close at 3.83% and 4.72%, respectively. The treasury auction calendar is stuffed with offerings as far as they can see. At some point, the market will lose its appetite for governments. It may be happening now, if so, buy puts on TLT.

Another head-scratcher Wednesday was Pimco’s bond maestro Bill Gross comments on CNBC professing his affection for equities: “Let's suggest the economy looks good, that risk assets— whether it's high-yield bonds or whether it's stocks—have a decent return relative to the potential of declining bond prices," he said in an interview. "I'll go with the stock market."

We also learned what we already knew when S & P lowered Portugal’s credit rating, that the western world is broke. Before I forget, this day also included Google (GOOG) and Go Daddy quitting China, the US accusing China of currency manipulation, and financial regulation reform disappearing into a Washington DC black hole.

But enough about inexplicably strange; let us return to good old-fashion butt-ugly economic data. Negative housing data again filled the landscape pointing towards a funky economy in 2010 for the average citizen. The Mortgage Broker’s Association purchasing index, ending March 19, rose 2.75% while its refinancing index fell 7.01%. The average 30-year mortgage increased 10 basis points to 5.01%.

February new home sales fell 2.2%, to an annual rate of 308,000. Two years ago, the annual rate was above 600,000 homes. Supply swelled to 9.2 months while the median price of a home rose 6.1% to $220,500 and the average price up 5.1% to $282,600. The first-time home buyer tax credit ends in five weeks.

Finally, the US Census Bureau, 2009 State Government Tax Collection Data was released. State revenue was down in 2009 versus 2008 some $66.9 Billion dollars. Fourteen states saw their tax revenue fall 10% or greater. The fourth quarter figures are available at the end of March.

This snapshot of the market and the economy shows that things are far from normal, or what we once considered normal. The calculus that propelled investing over the last 30 years has dissolved. The new formula is being being created and tested in real time. The stock market and investing is currently unreal - it’s devolved awhile ago into, or, if you prefer, transformed itself into a momentum investing affair in an unraveling world.

This great casino awash with taxpayers’ cash can only speculate on when the world will end and where shall the end begin; Greece, Portugal, Spain, Italy, the UK? Who shall be savaged first and who shall be saved? Where can I hide and make a profit? It wasn’t in gold Wednesday; the yellow metal lost $15 an oz. due to a rising dollar. However, currently, the dollar is the dog with the least fleas – and it will not rise indefinitely.

If this report reads unfocused and schizophrenic, it’s the market, it isn’t me.

The Lazarus Rally in 2010

2010-03-10T10:45:00.003-07:00

This week marks the one-year anniversary of the market bottom for stocks following the 2008 collapse of the supply-side themed western financial system. A deceased stock market, the second week in March 2009; the major averages resurrected themselves, like Lazarus, on a holy-water flood of liquidity, more than any other cyclical bull market bounce in history.

The Dow Jones Industrial Average advanced March 9, 2009 to March 9, 2010, from a gut-wrenching 6,547.05 to 10,564.38. Likewise, the Standard & Poor’s 500 Index moved from 676.53 to 1140.45. The NASDAQ 100 climbed from 1043.87 to 1,901.38, over the same 365 days. These returns equal a decade’s worth of historical gains.

To those investors, who grew feathers, and ran to the sidelines, take heart; in investing, there are lies, damn lies, statistics, and market returns. At the beginning of 2009, the DJIA started at 8,801.72, the S&P 500 Index at 902.99, and NASDAQ at 1,212.24. Only the luckiest of people and your typical liar coolly strolled into the market that second week in March last year, aggressively bought stocks, and are still holding those positions.

Closer to the truth, an experienced bull investor last March probably started taking profits off the table in early summer. Or, they screwed up their courage in April or May and bailed in September, or year end. Anyone capturing these once in a lifetime returns should be running full page ads of their trade confirms announcing the opening of their new hedge fund. And why not, they could afford the advertising rates. Unfortunately, 2009’s trend will be swapped for market fluctuation in 2010.

So, where do we go from here? The answer for the stock market is quite different from the answer about the economy. Let’s first look at the stock market.

Stocks will not repeat the performance of the last 12 months. The last 12 months was fueled on liquidity and promised future growth. The future is here but the growth is not. Wall Street Cardinals assigned to Washington DC, Ben Bernanke and Timothy Geithner, will be less helpful to stocks over the next 12 months.

U.S. Quantitative Easing has an expiration date on its existence. Some central banks have already begun raising rates because their economies are moving forward, unlike ours. The retail customer has yet to return to the market, either through their company’s retirement account (which is hard to do when you no longer work for a company), or taxable investment accounts; when your 1%-2% bearing CDs and T-Bills, and falling home values no longer contributes to your positive cash flow.

Also, investors are going through Post Traumatic Stress Syndrome (PTSD). The dot.com bubble, the Enron era of scandals, the real estate depression, and 2008, has left baby boomers dazed and confused. They are reluctant to hop into the barrel one more time before retirement.

Despite paraphilic dispatches by CNBC anchors, reporters, and guests of an aroused recovery, to the contrary, the U.S. economy is impotent based on low tax receipts, high unemployment, and contracting housing prices and available credit. This is what occurs during a period of deleveraging.

Disposable income from the safest fixed income investments has all but disappeared. That retired couple that spent their 5%-6% interest from their fixed income portfolio to shop, to travel, and to dine has temporality lost over 70% of their purchasing power. Fewer transactions equals fewer sales taxes, in turn, equals less state and federal revenue. Becoming smaller becomes a vicious cycle.

In October and November of 2008, when extraordinary unilateral decisions were made to save the economy, two additional smaller adjustments would have made a huge difference; temporarily change the tax laws for five years, permitting individuals to write off all interest payments for credit cards, automobiles, etc. on their taxes, and to suspend for five years the provision in the Monetary Control Act of 1980 eliminating usury laws. Individuals would have extra cash inside their annual tax return and smaller monthly finance payments. How could banks complain since the Federal Funds target Rate was set December 16, 2008, at 0.00% -0.25%? Their return on borrowed capital is infinity.

Cities and states across the nation will become the biggest drag on the economy in 2010. Dramatic budget cuts to reduce a currently projected $180 billion shortfall are being debated for the 2010-2011 budgets, at this moment, thereby, violently truncating personnel and services.

Banks are still failing. The FEDS feel that they dare not raise interest rates without a very good reason. But, with banks not lending, or reducing credit lines to businesses, and credit cards rates were hiked before new banking credit cards laws were changed, I’m unsure who might be hurt by an increase. Top-down stimulus programs are inefficient and growing more unpopular. Both commercial and residential real estate are not improving And, the November elections will drive sagacity from public conversation.

Internationally, what we can see are sovereign debt problems and a suspect economy in Europe. Tensions growing in the Far East over; military bases, and now Toyota, with Japan; trade disputes and sanctions and political disagreements over Taiwan, Tibet, and Iran, with China. Plus, we have an amorphous exit strategy in Iraq and Afghanistan.

Adding up tapped out consumers, the continuation of deleveraging, near insolvent municipalities, and a gradual reduction of liquidity, what you have is a somber national economy with too few pockets of strength.

Traders relying on volatility and stock pickers that can hunt for appreciation will have several opportunities to feast, however, investors hoping for an expanding economy will soon wish for 2010 to be over with nothing but apples (AAPL) and chips (PEP) and cokes (KO) to snack on in the interim.

Recovery or Intermediate Bounce?

2010-03-09T04:24:00.000-07:00

The faint stirrings of economic activity appearing in the US economy is not unsurprising given where we were a few months ago and the monetary and fiscal response that ensued.

Deficit spending in the form of an $870 billion stimulus bill bailed out several states’ payrolls, extended unemployment benefits to millions, subsidised many ex-worker’s 'Cobra' payments, cut taxes, and funded grants and shovel-ready jobs to buoy local economies.

Twenty-two separate special liquidity programmes, outside of TARP and its $750 billion price tag, were hurriedly enacted guaranteeing commercial paper, asset-back securities of virtually any quality, increasing FDIC insurance per deposit to $250,000, insuring money market funds, plus offering access to the discount window for commercial banks, investment banks, financial and insurance firms. If you could fog a mirror or produce a note from your mother, you could tap Ben’s plastic.

A Quantitative Easing policy was implemented which dropped the cost of borrowing funds by banks to zero and increased big banks 2009 profits by an additional $34 billion. Taxpayers underwrote $1.2 trillion in agency mortgage-backed securities that were purchased to keep interest rates low.

Tax credits were given to car buyers and home buyers, corporation could recapture profits going back five years, and mark-to-market accounting rules were suspended allowing banks to craft the value of toxic assets on their books. One hundred and forty banks went out of business in 2009; four more were shut down last Friday, bringing the 2010 total to 20.

Many were sold to private equity groups that signed shared-loss agreements the FDIC that may place taxpayers on the hook for more money. These banks were not too big to fail. The Calculated Risk Unofficial Problem Bank List stood at 617, last Friday.

Yes, the economic free-fall we were in did abate. But, are we in recovery or is this an intermediate bounce? Here’s a clue: for the first time ever, Wal-Mart did not report an increase in sales, year-on-year. Most would agree they are the best merchandiser in the world.

The M-2 money stock as reported by the St Lewis Federal Reserve Board was near an all time high last year only for the economy to scratch out minimum results. As you can see, going forward, there will be a lesser amount of stimuli flowing into the economy, therefore, less liquidity to propel earnings growth for this cyclical bull rally.

Consumers are still repairing their private balance sheets. Less credit is being utilised by consumers. Savings’ is up while flows into equity mutual funds last year were a net negative figure. Moreover, high unemployment equals fewer paychecks which mean fewer 401K and IRA contributions into equity mutual funds – but not bond funds. At this point, going into a bond fund is akin to running up the staircase inside a burning house.

All, but the die-hard trader, and clients with convincing advisors promising a return of the bull and their principal, have decided to take a rest from getting rich via the stock market. That gamble paid off from last March until recently. Before the average investor comes roaring back in droves to the market, I’m afraid equities will be compelled to show more than the 2009 bounce.

And, before stocks can move higher on a sustainable basis, the economy must display true organic growth – and this it cannot do. Our disesteeming view of the European debt crisis cannot prevent the inevitable; a surging dollar short-term wreaking havoc on US exports, thus slowing the economy, and, possible seizing the international credit system.

There are entities that would love to poach Greek assets for pennies on the dollar in similar fashion to the erstwhile assets of Bear Stearns, Lehman brothers, General Motors, and AIG. Consequently, a putative resolution may be premature thinking. At home, state budgets across the nation will go through draconian cuts this year further adding drag to the recovery. One or two will default on their debt temporarily causing a non compos mentis municipal market.

Making money in the stock market in 2010 will take hard work and much luck. We did not mention the machinations of an election year.

Frankly, not losing money on the long song side of the market will be reward in itself.

Come to think of it, 2009 wasn’t a day at the beach either – unless it was Omaha Beach.

How to Successfully Rescue Residential Real Estate

2010-02-28T11:23:00.001-07:00

There is a growing uneasiness amongst analysts, money managers, and pundits about the nonresponsive residential real estate market. Even the business media are lowering their cheerleading pom-poms to acknowledge the dismal data being reported. Something is amiss.

Sales of previously owned U.S. homes fell in January 7.2% following a December decline of 16.2%. The annualized rate of 5.05 million was at the lower end of estimates ranging from 5.04 to 6 million homes. Also, reported home prices for federal agency sponsored mortgages fell in December 1.6%.

New home sales were reported for January at a 309,000 annual rate. This was below the consensus low of 345,000. This followed a December drop of 7.2% to 342,000 annual home sales.

The Mortgage Bankers Association reported purchase applications dropped 7.3% for the week ending February 19 to the lowest level since 1997.

The S&P Case-Shiller HPI Composite 10 and Composite 20 each fell from 158.49 to 158.19 and 146.28 to 145.90, respectively.

These negative numbers were posted while first-time home buyers tax credits are still in force.

A year ago, last January, I wrote an article prescribing a simple bottoms-up solution to the housing crisis. The Obama administration chose a top-down big bank model, instead. Since the crisis is still with us here is my idea in a nutshell:

The federal government should self-refinance the original mortgages directly with homeowners at 4% fixed for 20 or 30 years, ultimately turning these mortgages into GNMAs.

The new mortgage then would be split in two, for the borrower. The lender would receive the entire mortgage amount due, thereby, eliminating one mortgage from existence. The home owner will now have a first mortgage for the current appraised value of the home. This mortgage becomes completely assumable with the home. The government recovers this portion when the GNMA is sold.

The difference between the original mortgage and currently appraised value, or the second mortgage, is applied to the borrower‘s income tax filing over 20 or 30 years. Each year, regardless of one‘s tax liability or credit, Uncle Sam is due 1/20th or 1/30th of this second mortgage. The borrower has the right to pay off the second at anytime, without penalty. This is the government’s only exposure in this transaction.

Investors and speculators are not eligible for this program. But, if they sell the property back to the family that was foreclosed upon and evicted, they could quote their total cost for the purchase of the property, plus any improvements made at cost, plus a nominal interest rate on their total outlay. Or, investors and speculators could ignore this program and keep these properties that do not have an assumable GNMA mortgage in a new real estate market place which does and is growing day by day.

This program could start with $20 billion. It’s cheap at twice the price. Fannie Mae (FNM) has borrowed $59.9 billion since last April. Fannie Mae will seek an additional $15.3 billion in aid from the Treasury after posting a ninth consecutive quarterly loss of $16.3 billion.

That’s the basic plan. Let’s tease it out some more. Fresh appraisals are needed. Many unemployed workers from the real estate industry could began earning money again as appraisers. Major home builders like Toll Brothers (TOL), DR Horton (DHI), Pulte Homes (PHM), or Lennar Corp. (LEN) could offer a recertification program like the luxury car brands. We have heard stories about homes being stripped and or vandalized before they were abandoned. Let the established homebuilders hire their laid off construction workers to make repairs or even upgrade houses - at the home owners’ expense. It may not be as lucrative as their old business but their old business isn’t coming back anytime soon and it puts people back to work, now.

For the home owner who refinances, he now has several hundred dollars extra each month to pay off other debts like bank credit cards (watch payment delinquencies fall), or make repairs to his home, or buy a new computer for the kids, or resume saving for retirement, or start saving for that vacation that’s been deferred again and again.

Primarily, what this would do is provide what is currently missing from real estate - a spark. Suggesting a real estate purchase in today’s climate is akin to kissing a beautiful stranger who is coughing with a “cold sore” on their lip. I insist, you go first.

Moreover, this plan does not require anyone to invalidate contract law, modify bankruptcy courts protocol, write off principal amounts on loans, antagonize CMO investors, and perform other unnatural acts in finance.

I could pose a half dozen philosophical or moral reasons not to intervene in this manner. As a practical matter, it’s possibly America’s last chance to save the larger middle class for the next generation.

The Fed’s Other Discount Window Headline

2010-02-18T16:25:00.002-07:00

By now, everyone has heard about the Feds raising the discount window rate from ½ to ¾ percent. There was a second decision revealed in the press release that received scant attention;

“In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.”

The Fed will no longer be a temporary dumping ground for dubious assets. The pawnshop window is closing.

5 Reasons to Consider Buying SPY Puts Tuesday

2010-02-16T02:43:00.000-07:00

The way the stock market laughed off bad news last spring and summer is over. The market action since January 19^th shows that the momentum from excessive liquidity is ebbing before the recovery can bloom. Now, the market is searching for corroboration to justify current levels. Markets have become impatient. Without these signs, the market is vulnerable to negative news. Any of the following five situations could cause the market to tumble:

1. Wednesday is a pointed economic release day. MBA Mortgage Applications, Industrial Production, Housing Starts, and the Treasury Budget can offer a surprise.

2. Although, most Americans knew February 14th as St. Valentine’s Day; in China, it was the Middle Kingdom’s Lunar New Year. President Obama is meeting with the Dalai Lama over the objection of Beijing. Sino-US tensions will only rise.

3. Greece is the word. The countdown starts to see what type of austerity program the government will embrace and will it be enough for Angela Merkel and Berlin.

4. On Thursday, Wal-Mart (WMT) reports earnings. If their earnings disappoint it could pull the market down.

5. Minneapolis Fed President Narayana Kocherlakota and St. Louis Fed President speak this week. Inflation hawk Thomas Hoenig, of the Kansas City Fed, speaks about “Avoiding a Government Debt Crisis”. One worrisome word from any speech could spook the market.

The odds of at least one surprise occurring is a certainty. Expiration Friday, notwithstanding, the repercussions could be immediate. Until the correction is over, protecting your portfolio may be in order.

Bear Market Is Firmly Intact

2010-02-12T09:12:00.002-07:00

The market action Wednesday was as unwelcome as a new snow storm in Washington DC. Given that the DJIA closed up 150 points for the day on Tuesday and the market breathed a sigh of relief, yesterday's closing down 20 points, on lousy volume, suggests that the bear market is firmly intact.

The current usual suspects weighting on US markets include sovereign default by Greece and others; China dumping non-government-backed US assets on the market as Sino-US tensions rise; a growing chance of a double-dip recession, the Obama Administration scattershot spending and higher taxes; an uncertain global economy; and the coming crash of local and state governments. Which, and how many, of these potential events might occur causing a retesting of last March lows? More importantly, does anyone have any plan to respond if the worst comes to fruition?

Last week I was invited to deliver the keynote address at the Institute for Supply Management Executive Summits in San Diego, CA. Several people were surprised by my dour economic outlook. All I did was present the data set that are buried below daily business headlines; news which is seldom seen and rarely discussed.

Frequently, in conversation, I reminded people that both Republicans and Democrats are behaving foolishly - like immature teenagers. My proof, I submitted, was the greatest generation. In 1941, the top marginal tax rate was hiked from 81% to 88% to pay for the war effort. From 1944 until 1950, the top tax rate varied between 82 and 94%, staying throughout the 1950s at 91%.

In that period America expanded the middle-class. We also developed a world-class interstate highway system, funded the G.I. Bill of Rights, educated the next generation, built an affordable, post-secondary educational system, and maintained a thriving employment environment. Country came first; profits automatically followed. We must do more than selectively cut spending.

That generation imposed upon themselves sufficient taxes to pay off debt and grow the type of healthy society it envisioned for the nation. Perhaps living through a depression for a decade crystallized in their minds their dreams and aspirations. Subsequently, tax receipts from productive citizens and an expanding economy repaid the investment. Somewhere along the way, we stopped looking at our nation as an asset to fund and nourish, but rather its many parts as a liability to truncate.

Below is a chart of our top marginal tax in the 20^th century.

Click to enlarge image

Remember, this is the same generation that constructed Glass-Steagall to prevent another 1929 stock market crash. This generation passed laws preventing war-profiteering and pursued criminal convictions against lawbreakers. The CEOs of this generation drew salaries that were greater than other employees in the organization, but not by triple-digit factors. Succinctly, these men led by example, placing country before political party and civic duty above selfishness. And during this time frame, they enjoyed a secular bull market and became wealthy.

Without men and women like these, people with courage, poor choices, normal Washington DC gridlock, denial of our predicament and more, a painful downturn in the economy could develop into a calamity, as great, if not greater than, the Great Depression of the 1930s.

So, where are the serious men in our nation’s capitol?

Below is a chart of the DJIA from 1940 to 1960. Even with huge tax burdens, investors wealth increased five-fold over 20 years. By contrast, we have just exited a lost decade, receiving no long-lasting benefit from a top tax rate of 35%, and we may be entering another difficult decade.

Click to enlarge image

It was reported two days ago that China passed Germany as the world’s largest exporter. They also recently became the world’s largest manufacturer and buyer of automobiles. We will not export our way out of this economic situation. But the bear market will continue.

I do not see any corrective action being considered, certainly not undertaken, to confront the many problems appearing on the horizon. Fix the problem, and then change policy. Why is this concept so difficult to grasp? Unless the market has confidence in the leadership in this country, the lost decade will continue and intensify to the detriment of our financial system and our assets, the repository of our national wealth.

Today's Market: Bargain Hunting or Short Covering at the Close?

2010-02-05T15:09:00.001-07:00

At the close of trading Friday, the major averages recovered from being down throughout most of the session. Treasuries were higher (pricewise), the dollar gained strength, and gold and other commodities were lower. Was this price fluctuation or was it a meaningful trend change?

The close today was as chaotic and confusing as the jobs report released before the opening bell. Unemployment went down as more jobs were lost. As always, there was a conflict between the household survey and payroll data.

At 3:18 EST, the Federal Reserve Statistical Release, G.19 consumer Credit hit my inbox.

"Consumer credit decreased at an annual rate of 4-3/4 percent in the fourth quarter of 2009. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit was unchanged on net. In December, consumer credit decreased at an annual rate of 3/4 percent."

The rate of decrease is slowing in consumer credit, although, this report was largely overlooked by the market, as frazzled traders focused on staying exposed this weekend, to the potential animal spirits picking up steam, over Europe's upcoming sovereign debt meltdown.

Bulls took comfort in the receding bad news from first itineration government reports as bears contemplated longer term (the end of February) issues like the Special Liquidity Facilities expiring this month, dubious fluctuation employment data, and the eventual ending of Quantitative Easing. A trade war with China, could be brewing. I think this is another leg down in the market and Friday's close was the last rally, into which, one can sell.

This game continues Monday, after the Sunday's Super Bowl telecast.