SACO INVEST

Longer Term Look at S&P 500

noreply@blogger.com (sacoinvest) — Sat, 31 Oct 2009 15:17:00 +0000

Longer Term Look at S&P 500

via AlphaTrends by alphatrends on 10/31/09

The trendline from the March lows was broken this week, but trendline breaks do not assure a reversal, they indicate a slowing of the trend. The SPY is still showing a weekly pattern of higher highs and higher lows. A break below the October low of 101.64 would create a lower low, but that would not be the ideal short entry as the market has already expended quite a bit of energy getting to these levels. A lower low followed by a rally which falls short of the 110 area would be of more concern, especially if the volume were to trail off significantly on such a rally.

The majority of earnings reports for the third quarter are now behind us and it appears to be a case of “sell the news”. This past week a lot of participants were reminded of the importance of a strong defense as the market started to acknowledge risks after what has been a great rally.

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Be Prepared for S&P's Tricks and Treats

noreply@blogger.com (sacoinvest) — Sat, 31 Oct 2009 02:12:00 +0000

Be Prepared for S&P's Tricks and Treats

JEFFREY COOPER OCT 30, 2009 2:30 PM


		A sweet break may be just ahead.

Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a 2-week trial FREE trial of his daily commentary and nightly day and swing trading picks, click here.

It’s a dead man’s party
Who could ask for more?
Everybody’s comin’, leave your body at the door
Leave your body and soul at the door
-- "It’s A Dead Man’s Party" (Oingo Boingo)

The above title for tape may not be remembered by some of you, but the tape of the prior patterns of blow-offs from 1929, 1987, and the current tape should be stuck in your memory.

The blow-off from March 2007 to June 2007 mirrors the above pictures. Note that the first high came in June with an overthrow in July 2007, which is reminiscent of the S&P pattern now with a high in September and what looks like a possible overthrow in October.

It's important to remember that the overthrow in July 2007 is a fractal of a larger overthrow of the July peak in October 2007.

The 10-minute chart from the swing high this October appears to be a fractal of the break from last September on the dailies/weeklies. Is the S&P tracing out a hump right shoulder on this snapback, which is backtesting the break from the Bearish Ascending Wedge shown on the SPY yesterday?

I say hump right shoulder because they're often dwarfed and short-lived. Theoretically, if the market survives and holds a test of 1048 to 1050, it could buy some time and extend what I believe will be a right shoulder/backtest.

The market needs a test of 1048ish, but this is a market that's been testless as much as it’s been topless. To be sure, Hoofy has been on the beach in St. Tropez.

The bottom in March wasn’t tested either, which to me speaks to the herd mentality of the market. It's driven by something we can’t quite identify. It's a market that despite the fractals and DNA to past patterns is, in many ways, unrecognizable. One day, everybody wants out at the same time; the next day, everybody wants in at the same time. It’s running on high-octane emotion. And, that makes for a dangerous trading market.

Yesterday, I stated that after an intense sell day (Wednesday), an up opening is usually a sell. Usually -- not always -- that's correct. But there's something unusual about this tape; something that feels synthetic. The clue to yesterday’s trend days was the ability to hold after the first hour and the behavior after the first pullback.

Beat-up names were bought for month-end window dressing as Spyder baskets were run all day to provide a backstop and a tailwind, as the big seller(s) lifted a leg from the severe oversold condition as offered as a possibility yesterday. Was it a one-day wonder? Note the one-day wonder after the breech of support in 1987 just prior to the bottom falling out. The message is clear: Trade below Wednesday’s lows in short order could be an elevator, not an escalator.

The S&P reversed strongly from first trendline support while trendline support from the March/July lows was violated.

Trick or treat? Which is the support line that counts? Is a bigger break just ahead? If history is any guide, I think the answer is yes.

One reason may be that largely unnoticed is the fact that yesterday, Citadel reopened for redemptions by investors who were frozen out last year. Over the next month or so, many funds will reopen their gates as well. After a near-death experience in 2008 and a good year in 2009, will many investors get out? At the same time, for the first time in three months, many funds can "legally" sell stocks. Once fiscal year end on October 31 is past, I suspect they'll be taking your money and be moving to the sidelines as fast as they can. The herd mentality magnified over the last two days with the flood gates opening for many hedge-fund investors, I think the odds favor the downside given the fractals and the dynamics of "year end." But we could just as easily see a new swing high as 950 S&P.

Conclusion: The market should open down and stay down today if there aren't more paint-the-tape buy programs around, which is generally not condoned on month end, but that doesn’t mean they won’t happen anyway. If the S&P makes a new high over Thursday’s high today leaving a Minus One, Plus Two sell signal, will it behave like Baidu (BIDU) did Thursday morning from the same set-up? The market needs a pullback to test the lows, so until that occurs, I think the strategy is to short stocks at resistance until proven otherwise -- especially as I think a bigger break is around the corner.

The dollar is the linchpin under the microscope here. The Dollar Index suffered an outside day down yesterday on the approach to its overhead 50-day moving average. It's pulled back quickly to its 20-day moving average. If 75.25 to 75.50 holds and the dollar turns back up and offsets yesterday’s high, it should explode. I think the dollar should rally for at least three to six weeks and to a minimum of 78.

I wouldn't become too complacent about the smell of paint on the tape going into October 31. If the patterns from 1987,1929, and 2007 mean anything, a break of Wednesday’s low could mean it’s a dead man’s party.

Trading Lessons:

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No positions in stocks mentioned.

Jeff Cooper is the author of Jeff Cooper's Daily Market Report and also provides private trading consultation to clients.

30/10/2009 - Chart of the Day

noreply@blogger.com (sacoinvest) — Sat, 31 Oct 2009 02:08:00 +0000

Chart of the Day

For some perspective on the current stock market rally and how it compares the 1929-1932 bear market (which also included bank failures, bankruptcies, severe stock market declines, etc.), today's chart illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As today's chart illustrates, the duration and magnitude of the current Dow rally (hollow blue dot labeled you are here) is greater than any that occurred during the 1929-1932 bear market.

Notes:
- Where's the market headed? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.

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Quote of the Day
"Years of practice enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass." - Jesse Livermore

The Weekly Report For October 19th - October 23rd, 2009

noreply@blogger.com (sacoinvest) — Sat, 24 Oct 2009 11:53:00 +0000

Commentary: The markets were able to decisively clear resistance and build on the current rally this week. While Monday and Tuesday ended as indecisive narrow range days, Wednesday brought a gap higher in the markets following an upbeat earnings report from Intel Corp. (Nasdaq:INTC) and JPMorgan Chase (NYSE:JPM). The markets were able to hold most of the gains for the week despite a negative close on Friday. With the markets firmly above prior resistance, it appears a new leg higher has begun. The prior resistance area should act as support on a pullback to test these levels.

IN PICTURES: 7 Tools Of The Trade

In looking at the chart for the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, prior resistance was near $107.35, which was actually tested on Tuesday. This is a key level; a failure to hold this area will signify a failed breakout and continued range-bound consolidation. The level to watch for a larger reversal would be the September low near $102. (For further reading, check out The Anatomy Of Trading Breakouts.)

Source: StockCharts.com

The Diamonds Trust Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is also clearly above prior resistance. The resistance area was holding back prior rally attempts near $98, and DIA ended up trading in a base that resembled an ascending triangle. The measured move for this breakout is taken by measuring the move from the lower portion of the pattern to the top and then projecting a move of this magnitude from the breakout area. This would suggest DIA rallying toward the $104 area.

Source: StockCharts.com

In a very interesting development, the iShares Russell 2000 Index (NYSE:IWM) ETF, which tracks 2,000 companies, is showing a divergence from its larger cap peers. IWM has yet to decisively clear resistance near $62.30. This is interesting because IWM captures a larger sample of stocks and shows weakness in a key group. A breakdown in IWM from this level would be a sign of market weakness and will likely translate to breakout failure from the other groups.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) lies somewhere between SPY and IWM. On the one hand, QQQQ has been able to clear resistance and has held above this level for a few days. However, it hasn’t been able to distance itself from this area, and the longer it hangs around, the more likely a failure becomes. At this point, it is still a breakout, just not a strong one. With earnings on tap from Apple Inc. (Nasdaq:AAPL) come Monday, it is likely that we will know fairly quickly which way this ETF is headed.

Source: StockCharts.com

Bottom Line
It’s interesting that the market has left enough doubt in the current breakout to offer key arguments for both sides. Currently, the technical picture is pointing higher, as most of the indexes are trading near new recovery highs. There are clear levels of support underneath most averages and stocks, and these are the levels that should be watched moving forward. With earnings season in full gear, expect the volatility to increase from day to day, so it remains important to focus on these levels rather than getting caught up in the day's emotions.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Shipping Group Staying Afloat

noreply@blogger.com (sacoinvest) — Sat, 24 Oct 2009 11:42:00 +0000

Shipping Group Staying Afloat

Commentary: The 200-day moving average is commonly used as the defining line between a bull stock and a bear stock. One of the reasons behind this is that the 200-day moving average encompasses a full year's worth of trading. One common rule of thumb used by traders is to trade stocks above their 200-day moving averages to the long side, and to sell or avoid stocks on the other side of the average. Typically, the 200-day moving average will act as support once a stock is able to trade above it long enough to cause it to slope upward.

IN PICTURES: Eight Ways To Survive A Market Downturn

In reviewing some sectors, I noticed that shippers are on the verge of making a decisive move above their 200-day moving averages. Many of these stocks have been vacillating above and below this average, as they continue to consolidate in a sideways pattern. Shipping stocks were looking strong in a weak market yesterday, and are toward the upper ranges of some resistance levels they have established over the past few months. If they can clear those levels, it could lead to an important bottom, and ultimately higher prices. (For more, check out Support And Resistance Reversals.)

Excel Maritime Carriers (NYSE:EXM) for instance, is trading in a large symmetrical triangle, with the EXM hugging a cluster of the 20, 50, and 200-day moving averages. If EXM can clear this base, it should signal a test of the June high. One key level to watch is the bottom of the base near $6 and $5.50. Failure below these levels would be ominous for this stock. (For related reading, check out Trading Failed Breaks.)

Source: StockCharts.com

Genco Shipping (NYSE:GNK) is another shipper trading in a symmetrical triangle. There is a clear trendline connecting the recent peaks, and it appears that GNK is testing this resistance area. The measured target for this breakout would place GNK near $32 a share, so this is definitely worth keeping an eye on. The level to watch on the downside is right around the rising 200-day moving average. This level has been acting as support, so a failure here would be a bearish development.

Source: StockCharts.com

Diana Shipping (NYSE:DSX) is showing a different type of consolidation, but the general thesis remains the same. It has been consolidating above its 200-day moving average, and is close to testing a resistance level above the base it has been building. There is still overhead resistance near $19, but a break above $15 could lead to a test of this level fairly quickly. This in itself would represent a move of more than 20%.

Source: StockCharts.com

Eagle Bulk Shipping (Nasdaq:EGLE) is a shipper with a chart that closely resembles that of DSX. DSX has been trading in a descending channel over the past few months, after a sharp move higher and an equally sharp move lower in April though July. This consolidation appears constructive, and a move above the descending trendline marking the recent peaks could lead to a test of the April highs. Currently, GNK is already starting to clear this level, and could be in the process of a breakout.

Source: StockCharts.com

Bottom Line
Many of these shippers had a violent move off the lows they hit in March. Of all the sectors, this may have been the hardest hit at a time when investors were fearing the second coming of the Great Depression. Without debating what stage of an economic recovery we are in, the chart patterns are holding much promise for this group. This group is also capable of violent moves in both directions, so while it is definitely a group worth watching for the upside potential, traders must also adhere to strict money management rules. With a little followthrough, this group may make an assault on its April highs.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Good-Bye, Microsoft Money! 16 Powerful Personal Finance Programs

noreply@blogger.com (sacoinvest) — Sat, 17 Oct 2009 01:15:00 +0000

http://www.getrichslowly.org/blog/2009/07/01/good-bye-microsoft-money-16-powerful-personal-finance-programs/

Good-Bye, Microsoft Money! 16 Powerful Personal Finance Programs Print

Wednesday, 1st July 2009 (by J.D.)
This article is about Ask the Readers, Savings, Tools

As of today, Microsoft Money is no longer available for purchase. Microsoft has essentially conceded that there’s no demand for the product. From the website:

With banks, brokerage firms and Web sites now providing a range of options for managing personal finances, the consumer need for Microsoft Money Plus has changed. After suspending annual updates of Money Plus in 2008, Microsoft is announcing today that we will no longer offer Microsoft Money Plus for purchase after June 30, 2009.

Now that Microsoft has thrown in the towel, where does that leave existing users of Money and Money Plus? Some of them are worried. I’ve received several e-mails about this recently, including this one from Lee G.: “Microsoft just left us in a lurch by killing Money. Any suggestions on finance software? I’m not really a fan of Quicken, but would entertain it.”

First, it’s important to note that Microsoft intends to support Money Plus at least through 31 January 2011. Until then, you can still get stock quotes and use the software’s billpay feature. After that time, the online functions may (read: “probably will”) expire. If you’re a Microsoft Money user, you still have 18 months to find a replacement. The Money FAQ offers this helpful advice to guide you:

A number of online personal finance management and planning tools are available, many for free, on the Web. Other software solutions may be for sale from companies other than Microsoft. For general account information and transactions, your bank Web site may provide the best solution.

It would have been nice if Microsoft had provided a list of these “personal finance management and planning tools”. Since they didn’t, I spent a couple of hours surveying the current options. Here are 16 powerful personal finance programs to take the place of Microsoft Money:

AceMoney is a Windows desktop app that offers all the features you’d expect: downloadable transactions, budgeting, investment tracking, and more. AceMoney costs $30, but a free “lite” version is available.

Budgetpulse is a free “upbeat” way to manage your money. It offers standard budgeting and tracking features, as well as international compatibility. One of this program’s stated goals is simplicity; it doesn’t try to do a whole lot other than track your core accounts.

Buxfer started as simple tool for tracking debts and has grown into a more comprehensive financial management tool. It allows users to import data from their bank and credit card accounts, set spending limits, track shared expenses, and more. iPhone app available.

ClearCheckbook is “an extremely easy to use tool that helps you balance your checkbook and manage your money. Think of us as an online checkbook register with the added bonus of viewing reports, setting budgets, creating reminders and more.” A premium version adds features. iPhone app available.

Expensr seems to be similar to Budgetpulse. It too offers simple account tracking. Expensr includes some social networking components, allowing you to compare your money habits with other broad groups that you select.

Geezeo allows users to create and manage a budget while obtaining support from other members. According to the intro video, Geezeo also has the ability to track investments. Mrs. Micah tried Geezeo and liked the goal-setting and community aspects of the tool.

Mint has become the Big Daddy of online personal-finance apps, with almost a million registered users. Mint offers support for investment accounts, which is cool, and allows users to create personal budgets. I’ve heard both praise and complaints from Mint users, so it sounds like something you’ll need to try to see if it’s right for you. (Here’s an early Mint review from a GRS user.) iPhone app available.

Moneydance is a full-featured desktop personal-finance manager. It’s available for Mac, Windows, and Linux. Moneydance offers budgeting tools, investment tracking, and many built-in reports. Because I prefer a desktop money app, I’m very tempted to try this.

moneyStrands is the new kid on the block. Based in part on a financial management tool from Spain, moneyStrands offers all of the features you’d expect (though no investment-management yet). This tool offers lots of budgeting goals with highly-configurable alerts (”let me know when I’ve spent $30 on coffee this month!”). It also allows you to compare your finances with other demographics (not individual users, but groups of users). If you prefer Spanish, this app is for you. iPhone app available.

Mvelopes is a web-based version of the envelope budgeting system. It automatically connects with most banks and offers a free billpay service. This looks like a slick product, but it’s by far the most expensive program on this list. At a minimum, it costs $7.90 per month.

Quicken is perhaps the most popular personal-finance software available today. It’s fairly comprehensive and well-supported, but not without problems. Old versions are “sunset-ed” at regular intervals, forcing users to upgrade if they want to continue using certain features. I use Quicken for Mac, which supposedly updates investment portfolios automatically. Supposedly. My copy is broken though, and I can’t get it to update correctly. There’s an online version of Quicken, but to be honest, I haven’t heard good things about it. iPhone app available (though users don’t like it).

Rudder sounds like a tool for those who don’t want a lot of extras. As with all of these programs, it allows you to connect to all of your accounts. It also helps you schedule upcoming bill payments. Rudder claims that its “secret sauce” is a widget to help predict your future cashflow. iPhone app available.

Thrive is another online tool similar to Mint. It offers a budgeting component, as well as prompts for when to pay bills and how much to pay. It also encourages users to save. (This feature sounds neat.) Thrive features tools to help users plan for the future.

Wesabe was one of the first online personal-finance apps. It sports a dedicated base of hardcore users. In fact, one of Wesabe’s strengths is its active community — users draw support from each other, sharing tips and ideas. Here’s my review of Wesabe from 2006. (Disclosure: I am on the Wesabe advisory board.) iPhone app available.

YNAB is popular among GRS users, especially those for whom budgeting is important. I haven’t used this software myself, but I know that it allows you to import bank transactions, pay bills, etc. YNAB isn’t for users who want to track investment accounts, but is good for those who want to emphasize budgeting.

Yodlee is the grandpappy of online money-management software. It’s the platform on which many tools, including Mint, are based. But Yodlee also offers its own personal-finance product called MoneyCenter. As you’d expect, it provides the same account-tracking functionality that most of these applications have, but it doesn’t feature budgeting as prominently. Yodlee offers tight integration with most banks, and also has a billpay feature. iPhone app available.

From what I’ve seen, these apps are a lot alike: the desktop programs offer similar feature sets, and the online tools are all close cousins. There’s not a lot to differentiate them. Wesabe has a great community, Mint tracks investment accounts, and moneyStrands offers a Spanish-language option. Each program offers something unique. But is there any one app that knocks it out of the park? I don’t know. What do you think? Which option would you recommend for refugees from Microsoft Money?

For myself, I’ll continue to use the desktop version of Quicken on my Mac. It’s not perfect, but I know its quirks.

Addendum: Many commenters also recommend gnucash, a free Open Source money-management tool. I considered listing gnucash, but discarded the idea because the software is billed as an “accounting” package. GRS readers report that it’s actually very suitable for personal finances.

Note: There are many other specialized personal-finance apps out there: PearBudget for budgeting, Fuelly for tracking gas mileage, etc. I’ll do a run-down of these in the future.

A Discourse on the Method . . .

noreply@blogger.com (sacoinvest) — Thu, 15 Oct 2009 01:59:00 +0000

A Discourse on the Method . . .

via The Big Picture by Guest Author on 10/14/09

. . . of Rightly Conducting the Reason and Seeking Truth in Contemporary Economies & Markets, with sincerest apologies to the memory of Rene Descartes.

Seventeenth century medicine, Moliere observed, was a field where most men died of their remedies and not of their diseases. So too, twenty-first century interventionist monetary policy seems to kill more wealth than if recessions were left alone to run their course. Instead of bloodletting, our “physicians” pump us full of liquidity until we explode, and then pump more into us as we lay gushing.

In the US our chief surgeon, the Fed, has been able to operate unilaterally, virtually unencumbered by Congressional restrictions or mandates, so that Wall Street banks (its literal owners and first constituency) don’t die. And the Fed needn’t worry about claims of malpractice because, as we now see, when push comes to shove its insurance carrier is the US Treasury, which is another way of saying the same taxpayers that lay bleeding.

Transitive properties still hold: if A equals B and B equals C, then A must equal C. Applied here: if US taxpayers (A) fund the US Treasury (B), and Treasury backs the Fed (C), and the Fed backs Wall Street banks (D), then US taxpayers (A) back the ongoing profitability of Wall Street banks (D). Perhaps this explains why all those crisp new electronic dollars created from thin air last fall went directly to creditor banks rather than to debtor homeowners?

Saving the system was generally perceived then to be saving the US economy or saving the commercial paper market or saving depositors from losses. In fact these systems were never at risk given the Fed’s willingness to print money and cover all bets. Whether carefully designed or the result of impulsive reactions, there was a decision made at the highest levels of government. The only conclusion to draw was that the “system” saved was the system of government intermediation into the private sector economy and it was accomplished by saving the government’s ports of entry — Wall Street’s largest and most influential banks.

John Crudele of the New York Post used the Freedom of Information Act to gather information recently on Treasury Secretary Henry Paulson’s phone records one day last fall. It seems that beginning early in the morning of September 18, 2008 and continuing throughout the day – a day after the Dow Industrials dropped 449 points – Secretary Paulson spoke repeatedly with Lloyd Blankfein from Goldman Sachs and other Wall Street leaders. As Mr. Crudele points out, the Dow closed up 410 points that day. We don’t know whether these conversations affected market pricing and our interest here is not to prove whether there is a “Plunge Protection Team” aspect to the President’s Working Group on Financial Markets. We further presume any intervention would have been prompted by Mr. Paulson’s good intentions to restore order to the markets in a broader attempt to sustain confidence in the broader economy (perhaps, as Crudele implies by coordinating the funding of stock purchases to raise the indexes?). And, we are not going to complain that preferred banks and investors (i.e. BlackRock) knew information via direct contact with Treasury that the rest of us did not.

We don’t feel the need to prove conspiracy theories because our eyes and ears provide us reasonable conclusions, or to demand market fairness because we’ve known for a very long time that such an ideal does not practically exist. Along these lines it seems indisputable that there is now widespread acceptance of government intervention into the economy, banking system and the markets, whether through explicit fiscal and monetary policies such as Cash for Clunkers, Quantitative Easing, Debt Monetization, etc. or through the implicit, and perhaps surreptitious, sponsorship (price fixing) of financial markets. We think this widespread acceptance is a big deal and provides a fundamental guideline for investors as we discount future asset values: money and credit will be expanded at whatever pace and in whatever amounts are necessary to avoid a severe or prolonged economic contraction. Currencies will take the fall.

***

Against this backdrop we ask three questions: 1) Just when exactly did the Fed Put become a taxpayer Put; 2) if US taxpayers bail out the banks, the Fed and the Treasury, should we expect the banks, the Fed and the Treasury to bail out US taxpayers, and; 3) how should independent, politically agnostic investors play this?

We think the answer to the first question is that the Fed’s moral hazard has been with us since 1971 but becomes more obvious when currency bubbles burst and bank balance sheets implode. The second question was rhetorical. We can’t bail out each other when the economy’s total claims far exceed its manifest capital. We can only transfer paper back and forth, which in effect answers the third question for us. In this report we will consider the current method of economic distribution and how it doesn’t square with the majority of perceptions towards markets or with the national conversation surrounding economics and investing.

Opening the Kimono
Whether it is broadly recognized or not, the US has a bank-centric economic system in which the largest banks may behave as monopolistic utilities that inflate the Fed’s reserves by creating and distributing credit to the private sector. As such, the private sector banking system freely creates its own assets in the form of debt obligations, and is then able to charge interest on the assets it creates. These assets become government obligations when there is a system-wide disruption – not when an individual or business goes pear-shaped at a time when few others do. (It is safe to say that the US’s largest banks — not its Senators — comprise the country’s most exclusive club.)

Thanks to the US’s fractional reserve banking system — promoted and implicitly insured by Washington and the Fed — there is an almost unlimited amount of credit issued to the US private sector and implicitly collateralized by the production of the people and businesses to which the US banking system issues that credit. The obvious problem, however, is that the only way that public and private sector debtors can satisfy claims against them is with currency that doesn’t organically exist. So, the US banking system, with the endorsement of the US government (itself, the largest debtor), continually manufacturers more credit to pay off claims, which in turn further increases the amount of claims outstanding. This self-fulfilling monetary inflation promotes circularity reminiscent of an open-ended Ponzi scheme. (If Bernie Madoff could have printed currency in this manner then he wouldn’t have had a problem.)

This system ensures that the private sector must eventually become overwhelmed by debt that can only be repaid through government socialization. As a result of the necessary transfer of claims from debtor to creditor under this system, the US government (through the Fed) and the US banking system must ultimately (and now, presently do) control the means of production. Such is the US system of resource and wealth allocation.

If we were to attach a label to this system it would not be “free-market capitalism” characterized by private sector winners and losers operating under a system of natural incentives, and governed by the protection of fundamental property rights and contract law. The most honest description would be “bank-centric socialism” in which the real value of a nation’s resources and capital production takes a back seat (and is ultimately effectively confiscated) by the state and by the nation’s financial network.

This economic system must be managed constantly by an intervening government or else natural economic incentives would destroy excessive credit and capacity. Due in large part to the reserve currency status of the dollar, this model has also been adopted by other major economies. So, to perpetuate control it is reasonable to conclude that global governments create and foment economic inefficiencies in the form of excessive money and debt creation. We presume they do this to counteract natural short term economic corrections, which are politically sub-optimal.

The observations above should not be Cartesian insights to anyone who thinks about them for a minute and a half. Nevertheless, we feel we must pause to interject the disclaimer that we are not formally judging the merits of this economic system in its entirety because it may have evolved from what was once considered wise public policy within a broader social, economic and political context. We simply don’t know what may have prompted policy makers to perpetuate an unsustainable global economic system that promotes manic booms and busts – corruption, laziness, political expediency, or, we suppose, farsightedness or because it simply beat the alternatives? In this report we will not focus on intention but rather on making sense of the current state of US and global economies in an effort to better understand current, and anticipate future, asset valuations by better understanding true economic incentives.

***

If your child were to ask you what “being economical” meant, you might respond “finding ways to save money”. This simple notion is at the heart of the social interaction that is theoretically supposed to drive broad economies. If you are a builder and I am a cook, I will feed you for a year while you build my house. If other cooks offer to feed you for less, you would build their houses before mine. I might then reduce the price of my food to you depending on how badly I want a house. The point is that the natural dynamic of a diverse economy is to drive prices down as specialization and efficiencies prevail.

In large, mature societies where there might be overcapacity for builders and cooks, the natural tendency would be declining prices for goods and services, which in turn would suggest builders and cooks would be paid less. Some might decide to migrate into other fields where they might have more pricing power, which would serve to equilibrate prices at levels where supply and demand find parity. In an idealized real economy, lower wages and costs would engender the same affordability (and more leisure time). We would simply have smaller balance sheets.

There would also be room for lenders and leverage in a real economy. The cook might decide that instead of trading food for a house he would borrow from a bank, or even the builder, who would front the money needed to buy the materials and labor to build the house. In a real money system, it would be perceived that the value (purchasing power) of money tomorrow would matter as much as it does today, and so the loan would be collateralized, in full or to a great extent, by the home based on an accurate and sustainable price. As such, the cost of credit extended would be economically driven and the loan would facilitate the creation of capital for both the lender and the borrower.

The “economies” we have today are not economical or even capital producing because governments (or central banks, or both working in concert?) intervene to manage the overall price structure of goods, services and assets by controlling the money stock in general and certain prices in particular. The political dimension perpetrated by governments today provide a highly inflationary bias because money and credit are continually created, which in turn controls and distorts the pricing, allocation and distribution of collateral resources.

One of our dearly-departed grandfather’s-in-law paid $190 for his first car in the 1920s and another grandfather paid $680 for a car in 1938. Ask yourself this: Was the demand per capita for cars back then higher or lower than the demand per capita today, when cars cost $30,000? The difference is not shifting supply or demand, which in fact would argue for lower car prices today. The difference is the nominal amount of money and credit in the system.

For some reason government and market regulators have consistently ignored the consequences of excessive money and credit creation, which has further encouraged economic participants, wanting merely to maintain their lifestyles, to become increasingly indebted. Irresponsible private sector consumerism and borrowing should not be blamed for economic booms and busts. Consider that economic participants such as homeowners seeking merely to maintain the same purchasing power as their neighbors must borrow as much as their neighbors so that they will generate the same levered gain upon the sale of their home, providing them with adequate future purchasing power. The problem goes back to excessive money printing that politicians and policy makers control, and with which consumers must abide. In fact, those “irrational consumers” are behaving quite rationally by jettisoning their dollars.

We have noticed most commentators trying to deconstruct the current crisis are getting it wrong because they are beginning at the wrong place, as though its derivation was irrational lending and the consequent sub-prime blow-up, in turn leading to a crisis of confidence throughout all credit markets. This is like saying Christianity started with Ste. Francis of Assisi or that the common cold starts with a sneeze. The nexus of the problem was government turning a convenient blind eye to the banking system’s unabated, self-serving credit distribution, and the shortsightedness of credit buyers, caring only about short term relative performance, stuffing their portfolios with high current yields. There had to be dubious paper created; this time it just happened to take the form of sub-prime mortgages.

Consider that M3, the broadest monetary aggregate that included overnight and short term repurchase agreements between the Fed and the largest Wall Street banks, grew consistently at an average annual rate of about 10% between 1996 and 2006. (The Fed stopped publishing M3 in March 2006.) We believe this was where the rubber met the road in terms of levering up the economy. Banks, borrowers and consumers, flush with all this Fed/bank credit, shared the same wayward economic incentives — to take the overnight funding effectively provided by the Fed to structure, sell and assume debt, and to push out debt repayment so they could produce short-term satisfaction (consumers), fees (intermediaries) or positive carry (investors).

At some point economic fundamentals would inevitably demand reconciliation, and, sure enough, vagrants with mortgages eventually began defaulting. Most economic and market observers using models constructed for a real economy didn’t see it coming. They saw money and assets as “capital” and they never netted out the debt. They never realized (and many still don’t) that only unencumbered money is true capital, and that the crisis was not a credit crisis per se but a currency crisis – too many claims for money in the future that couldn’t possibly be satisfied without increasingly exorbitant rates of monetary inflation. There was a relatively inadequate amount of currency outstanding being discounted by inadequately low interest rates.

Ultimately, the growing cost of indebtedness would have to overwhelm the economics of capital production to the point at which it wouldn’t pay for businesses to produce goods and services. Servicing debt and sustaining lifestyles would have to become increasingly difficult for the masses. Unemployment would have to rise. Either the explicit price of money — interest rates — would have to be much higher or the amount of actual money (not credit) outstanding would have to increase by many multiples.

And so here we are. We currently see the unsustainability of finance-based economies in government balance sheets, which can no longer be funded with revenues. In the US, sixty-two percent of the government’s budget is pre-committed to entitlements and interest on Treasury debt (and that’s after a couple years of very low Treasury yields). The defense budget consumes half of what remains, leaving less than $500 billion for everything else. (Kind of puts all those new trillions in scary perspective, eh?)

Governments can’t get blood from rocks. They can’t tax their deeply indebted masses enough to produce revenues with which they can pay down their own debts. Though the US government has been able to patch things temporarily through even more borrowing, which brought the national debt to over 40% of GDP in 2008, it appears unlikely this trend can continue much longer. The Congressional Budget Office projects US debt to GDP will rise to almost 70% by 2019. But we may not make it that long.

In the second quarter, the Fed purchased just less than 50% of all Treasury auctions, more than the combined historical bulwark of auction demand comprised of foreigners, households and primary dealers. Worse, the Fed’s capacity for Quantitative Easing should extinguish itself in early October leaving hundreds of billions in Treasury securities to be priced by the whim (and theoretically better sense) of the markets. Would policy makers allow interest rates to rise when both public and private sectors are so deeply indebted? Or, should we expect further price controls on interest rates, like an extension of QE?

Clearly, the US economy, as we’ve known it for a generation, is in its evanescence. US policy makers, as the managers, promoters and now price setters of the US and global economies, are running out of bullets. Reasonable, objective analysts should agree that a new economic order is likely to assert itself in the coming months and years.

The current credit crisis is making it more obvious to the general public that the US’s wealth is being channeled away from individuals and businesses lacking sufficient wherewithal to meet their short term debt obligations towards individuals and businesses that hold excess currency or claims on those resources. The government itself will always be able to meet its obligations because its central bank can print and lend it money. Large US banks, effectively backed by government and the Fed, will survive too because they will be able to continue to create unlimited claims from thin air, call them “assets” and then charge interest to borrowers.

Conceptually and practically, bank-centric socialism ensures the nation’s currency and debt must eventually become one, and indeed even casual observers can now see that the US has arrived at that point. To have money in the US today is to generally owe money to banks, to the shadow banking system, to the government and to each other. Only a small minority of individuals would have positive net-worths were they to liquidate their assets and extinguish their liabilities coincidentally. Given the US’s aging demographic profile and baby boomers’ growing intentions to monetize home equity, we presume aggregate real net-worths will only decline further and by a substantial amount.

***

Where can taxpayers and investors (who aren’t money center banks) hedge themselves against this open-ended monetary inflation (assuming they don’t work for those banks and choose not to own shares in them because banks tend to pay their employees before they pay their shareholders)? Would the best hedge for the rest of us be buying puts on ourselves?

You bet. That would involve shorting our real wages and financial assets as they are increasingly inflated away. Global stores of value that reach beyond the sovereignty and apparent omnipotence of discrete governments naturally come to mind – precious metals, capital resources, relatively scarce commodities and businesses with sustainable margins. Yet there seems to be confusion surrounding these investment options, perhaps born from generally accepted lapses in logic. Certain economic and investment relationships should be clarified before discussing investment expressions.

Gold, for example, is not a hedge against rising prices, as most people think. It simply recognizes the pressure on banking systems to de-lever and the subsequent response of all major central banks to prop up their economies through money printing. (Properly, it is a hedge against monetary inflation, not a rising CPI.)

In the real money systems of the past, gold was scarce and served as the reserves of banking systems. In the fiat money systems of today gold has become even scarcer, as its supply remains relatively constant while the quantity of paper bank reserves soars. There is no natural economic law in a fiat monetary system suggesting that declining goods and service prices can’t occur coincident with rising gold prices. In fact, this relationship should be expected.

As we’ve discussed at length in the past and have seen occur recently, when credit deflates and output shrinks, monetary authorities, unconstrained by the forced discipline of scarcity, print more money to replace the evaporating credit. In fact, thanks to a recent doubling of the monetary base, total US credit has not declined despite the substantial private sector credit crisis. The supply of paper money and credit grows far faster than the relatively scarce supply of gold allowing the price of gold to rise in US dollar terms even as employment and real output stagnates or falls. So, the prices of scarce stores of value like gold may be independent of changing goods and service prices generally reflected in broad price baskets, and therefore unreflective of an expansion or contraction of an output gap.

We also think the output gap itself is misunderstood. Under a fiat currency system, there are three determinants of pricing: 1) supply, 2) demand and, 3) the stock and velocity of money. Clearly, with wages stagnating and/or contracting and employment declining there is less demand for goods and services. Yet few economists seem to formally acknowledge that the same conditions that cause demand to contract also cause supply to contract. Fewer workers working fewer hours means less goods, services (and assets) being produced as well as being demanded.

An extreme example makes this point clear. Zimbabwe, determined to pay down nominal foreign debts and maintain nominal output growth, has been printing trillions of Zimbabwean dollars. Demand for goods and services in Zimbabwe is approaching infinity (due to mistrust in the currency as a store of value), as productive supply craters towards zero (again, due to mistrust in the currency in which wages are paid). The point is that the ultimate determinant of supply and demand (the variables determining an output gap) is the confidence in the means of exchange from transactions. A debasing currency reduces transactions, which reduces supply as well as demand.

We Are a Social Species, For Better or Worse
In his book, Descartes’ Bones, which provided the inspiration for the sweep of this narrative, Russell Shorto described the wall of traditional thinking faced by Rene Descartes, the father of dualism. Descartes asked and answered questions related to reconciling nature, previously explained awkwardly by centuries-old Aristotelian theory, with more scientific logic that an independent mind was capable of producing:

“Layers of tradition had built up for understanding reality. Centuries of robed scholars and scribes had bent in tallow-tapered light over parchment sheets and leather bound manuscripts, mouthing words, quill-scratching, rubricating, memorizing, parsing and analyzing and adding levels to the hoary infrastructure that had these categories as elements and that was applied as an increasingly unwieldy tool to explain natural phenomena, human behavior, history, the universe. But on what ground did they stand, these classifications? How could one trust them? How do we know they aren’t nonsense? As Descartes put it, devastatingly, ‘The best way of providing the falsity of Aristotle’s principles is to point out that they have not enabled any progress to be made in all the many centuries in which they have been followed.’”

We feel the same way Descartes must have about contemporary economics. To be clear, we’re no Descartes and John Maynard Keynes was no Aristotle. Thanks to the wisdom of others (who also tend to toil in relative obscurity), we know economic silliness when we see it and Keynesianism is it. The widely accepted false premise of Keynesian economics, (effectively that rational supply and demand incentives can occur naturally over time within a baseless monetary regime managed by government intervention), implies that policy makers will continue to misunderstand or underestimate (or purposely ignore) far more fundamental economic relationships.

From a purely economic point of view, pricing, production, employment, consumption and investment incentives are best understood when viewed through the prism of money, as the Austrian School suggests. If the money stock were to be kept constant (at whatever level), rational economic participants would make rational decisions. As policy makers and politicians lever up the economy; however, money itself overwhelms the capital it can produce. The more leveraged the system becomes, the more frequently people and businesses handling money need to exchange it for goods, services and assets. This constant state of monetary inflation and increasing velocity diminishes money’s value in relation to production, goods, services and assets. That’s why nominal prices must rise, and historically do.

A Keynesian based economy must therefore run on confidence – confidence in a baseless money keeping or increasing its purchasing power; confidence that policy makers will not become corrupted by politics; confidence that output can contract, interest rates can rise, or that an unforeseen national crisis can occur without jeopardizing the basic functioning of goods and service transactions. It is a loosey, goosey proposition that encourages centralization of power around elders at the top of society’s pyramid. Incentives naturally collide. Individual and collective wealth and property are ultimately shifted through the process of inflation based upon the whims of a few men and women.

Political ideology becomes secondary because all major political parties in all major economies agree that government should remain in control. Lost is the basic notion that natural incentives of the people that comprise an economy must inevitably force the political dimension past the point of being able to sustain popular confidence. This basic truth is misunderstood (or purposely ignored) by the vast majority of economic and market participants, and by observers practicing or accepting Keynesian economics (which is to say most all economists and investors today).

We again feel the need here to remind that we are not necessarily judging the societal and political virtue or vice of having a government and/or a central bank dominate a nation’s economy by having the effective ability to increase and diminish the value of private property and control the value of its productive resources. As Americans, we acknowledge that: a) our democratic society openly accepts being taxed in return for government services and protections and, b) most Americans are implicitly judging that their quality of life – in present, nominally material terms – is more important than controlling their own destinies. Our only formal assertion is that policy makers in the US today are greatly distorting natural economic law and promoting mal-investment. (They are also being disingenuous with their constituents, making it far more difficult for trusting investors to understand where true value lays.)

We are not alone on this branch. Independent voices arriving at similar conclusions seem to be seeping into the the public discussion more frequently. The link below will take you to a recent CNBC excerpt in which analyst Jim Rickards voices his take on the motivations and behavior of the Fed and how policy makers are trying to delay the dollar’s demise: http://www.cnbc.com/id/15840232?video=1275517570&play=1. Arthur Laffer’s recent opinion piece in the Wall Street Journal (http://online.wsj.com/article/SB10001424052970203440104574402822202944230.html) also reminds how the Great Depression was produced by excess money and credit creation, and then compounded by a devaluation of the dollar versus gold. There are many more independent voices. We are all speculating, to be sure, (just as Keynesians are), but the coalescing of conclusions that independent observers seem to be reaching implies more than a passing notion: Central banks are eventually corrupted by politics and, if given a baseless currency, will work to destroy it in return for short term benefits at the expense of broader, more severe economic consequences.

So why isn’t the fallacy of Keynesian economics (that it is mere political engineering rather than true economic theory) better know today? In a recent Huffington Post article, Priceless: How the Federal Reserve Bought the Economics Profession, (www.huffingtonpost.com/2009/09/07priceless-how-the-federal_n_278805.html), Ryan Grim concludes after a long and compelling investigation that; “the Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession. This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.”

It would seem reasonable that experts throughout government, Wall Street and academia (including the esteemed institutions at which we worked and from which we matriculated) have been susceptible to adopting and, since the Great Depression, internalizing, a convenient philosophy (certainly convenient for government and Wall Street). Such a widespread abandonment of natural economic law would invite a narrow faction to dominate public policy debates.

Too conspiracy-minded for you? Are we really supposed to believe that the entire US economy has been corrupted by a system prioritized towards mutually-shared convenience for power bases in Washington and on Wall Street? Is the banking system, which prints and holds the people’s money and, as creditor, enjoys first claim on the people’s assets; positioned to inevitably take ownership control over substantial amounts of economies’ wealth? We are not concerned at the charge of looking for witches that don’t exist. We (like you) doubt two people in Washington can keep a secret, let alone hundreds over a long period of time. But that doesn’t mean that a system wasn’t set up originally that would ensure that as long as people behaved rationally, certain outcomes would be perpetuated.

For example, take a look at this memo from Fed Chairman Arthur Burns to President Ford in June 1975 (http://www.zerohedge.com/sites/default/files/Fed%20Arthur%20Burns%20on%20Gold%206%203%201975.pdf) in which Chairman Burns lobbies the President to side with the Fed against the Treasury to limit global central banks’ and governments’ ability to buy and sell gold at market prices. It would make sense that the Fed, as the banker for the banking system that effectively creates the nation’s currency (that had just become the world’s reserve currency), would not want a competing global currency with scarcity, like gold. Are we to think that the Fed’s position has changed since then?

As John Maynard Keynes himself declared: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…The process engages all hidden forces of economic law on the side of destruction, and does so in a manner which not one man in a million is able to diagnose.” Even himself Keynes understood the process he espoused.

We recognize our views above to be both contrarian and unyielding to the point where they may be off-putting to economists and investors used to passively playing the economic hand they’ve been dealt because they trust the good intentions of the dealer. And on that score we are sure policy makers are all fine ladies and gentleman looking to make things better for the vast majority of Americans. However, we also recognize that they are making it worse (a “fallacy of composition” if you will?). From an investor’s perspective, the dealer’s deck is limitless; it ensures all players will be nominal winners and that most all players will be losers in real terms because the chips they leave the table with will lose value as they play.

***

Our position would not be credible without a legitimate voice to dispute it. Marshall Auerback, a professional investor, friend and die-hard Keynesian with whom we discuss economies and markets regularly, offered cogent thoughts on the current situation from a different perspective:

““Money is not a commodity or a thing. It is an institution, perhaps the most important institution of the capitalist economy. The money of account is social, the unit in which social obligations are denominated. As Karl Polanyi argued, markets never sprang from the minds of higglers and hagglers, but rather were created by government.

The monetary system, itself, was invented to mobilize resources to serve what government perceived to be the public purpose. Of course, it is only in a democracy that the public’s purpose and the government’s purpose have much chance of alignment. In any case, the point is that it is a separation of the economic from the political — and any attempt to separate money from politics is, itself, political. Adopting a gold standard, or a foreign currency standard (“dollarization”), or a Friedmanian money growth rule, or an inflation target is a political act that serves the interests of some privileged group. There is no “natural” separation of a government from its money. The gold standard was legislated, just as the Federal Reserve Act of 1913 legislated the separation of Treasury and Central Bank functions, and the Balanced Budget Act of 1987 legislated the ex ante matching of federal government spending and revenue over a period determined by the celestial movement of a heavenly object. Ditto the myth of the supposed independence of the modern central bank — this is but a smokescreen to protect policy-makers should they choose to operate monetary policy for the benefit of Wall Street rather than in the public interest (a charge often made and now with good reason). So, money was created to give government command over socially created resources. As Randy Wray says:

Conventional wisdom holds that money is a private invention of some clever Robinson Crusoe who tired of the inconveniencies of bartering fish with a short shelf-life for desired coconuts hoarded by Friday. Self-seeking globules of desire continually reduced transactions costs, guided by an invisible hand that selected the commodity with the best characteristics to function as the most efficient medium of exchange. Self-regulating markets maintained a perpetually maximum state of bliss, producing an equilibrium vector of relative prices for all tradables, including the money commodity that serves as a veiling numeraire.

All was fine and dandy until the evil government interfered, first by reaping seigniorage from monopolized coinage, next by printing too much money to chase the too few goods extant, and finally by efficiency-killing regulation of private financial institutions. Especially in the US, misguided laws and regulations simultaneously led to far too many financial intermediaries but far too little financial intermediation. Chairman Volcker delivered the first blow to restore efficiency by throwing the entire Savings and Loan sector into insolvency, and then freeing thrifts to do anything they damn well pleased. Deregulation, which actually dates to the Nixon years and even before, morphed into a self-regulation movement in the 1990s on the unassailable logic that rational self-interest would restrain financial institutions from doing anything foolish. This was all codified in the Basle II agreement that spread Anglo-Saxon anything goes financial practices around the globe. The final nail in the government’s coffin would be to preserve the value of money by tying monetary policy-maker’s hands to inflation targeting, and fiscal policy-maker’s hands to balanced budgets. All of this would lead to the era of the “great moderation”, with financial stability and rising wealth to create the “ownership society” in which all worthy individuals could share in the bounty of self-regulated, small government, capitalism.

We know how that story turned out. In all important respects we managed to recreate the exact same conditions of 1929 and history repeated itself with the exact same results. Take John Kenneth Galbraith’s The Great Crash, change the dates and some of the names of the guilty and you’ve got the post mortem for our current calamity.

I will grant you this: Generally, free marketeers want to “free” the private financial institutions to licentious behavior, but advocate reigning-in government on the argument that excessive issuance of money is inflationary. Yet we have effectively given banks the power to issue government money (in the form of government insured deposits), and if we do not constrain what they purchase they will fuel speculative bubbles. So I can see the attraction of your argument for 100% reserve backed banking system. I’m sure the banksters would find a way to game that, but it’s a coherent and sensible position.””

Clearly, Auerback’s and Wray’s views are indisputable in that money, in any form including gold, is a commodity that provides no intrinsic value to sustain or improve life , and that any form of government can’t completely ignore money (if only to pay its military). But we would argue on behalf of free marketeers that all market participants – not just private financial institutions – would prefer to engage in truly free markets with sound money underpinning them. Anything less requires substantial government intervention in the form of shifting, reactive monetary policies and market regulations.

Either markets are free and fair for all participants or they are rigged games, managed by governments that allocate the spoils and burdens of tail risk. Government’s hard-wired alliance with its protected money distributors ensures they will always be protected through moral hazard and regulatory amnesty. Certain participants will always have an edge, and public awareness of this suggests there will be fewer sophisticated participants betting against the establishment. (Perhaps that is why policy makers do not try to hide some of their massive interventions, though they would likely prefer that people like us just wouldn’t try to define them.)

We are not zealots. Life’s too short, truth is truth, relative value is relative value and, fine people or not, we think policy makers behaving predictably and the legions of incurious investors following them present substantial opportunities. We recognize that the population’s willingness to accept compromise and proportional inequity in return for immediate access to easy credit, Wii and gasoline will allow economies and markets to continue to be government-managed. The only sensible bet then is to bet with government and to expect major inflation.

Exploiting Predictability
We think American policy makers will inflate away the relative burden of US debts by destroying the dollar and that most Americans will cheer them on. Policy makers are one stock market swoon away from inflating away the burden of US private sector debt. We could envision them saving the day through something resembling a “cash for clunker homes” program — sending newly created money to mortgage holders in the form of checks made out to their servicers. This would effectively cram down bank and shadow bank assets while not producing nominal bank losses.

It would also be economically stimulative (unlike sending money to creditor banks, as they did last year). Repaired homeowner balance sheets would raise nominal consumer spending power and confidence, the nominal value of homes and businesses, employment and even nominal wages, all while reducing the principal amount of debts and the ongoing burden of debt service. This, or something similar, might be the shape Mr. Bernanke’s famous “helicopter drop” would take.

Of course such a program would only shift the debt burden to the public sector, forcing the government to press the reset button on the currency soon afterward. But very few would care because American’s assets and liabilities are dollar denominated and very few have meaningful net savings. Retirees should be concerned, as should the ultimate creditors of dollar-denominated bonds (not to be confused with most fiduciary bond funds, presently unconcerned with real returns because they compete for nominal annual fee income).

Foreign holders of dollars should also care, but not as much as is generally perceived. Their central banks are also inflating their home currencies more or less in-kind with the Fed. US dollars are only marginally inferior (or superior) stores of value than Yen, Euros, Sterling, etc. (Despite FX fluctuations, no major fiat currency today should be expected to hold their purchasing power value over time, with the possible exception of economies with heavy natural resource output.)

Though we can’t prove it, we are of the view that powerful people inside and outside government have been negotiating terms of trade and currency reconciliation for a while now, and that we are likely in the late innings of these negotiations. Why else would gold have appreciated consistently over the last eight years as most public discussion has surrounded “deflation” and during a period when many major central banks publicly flaunted their gold sales? Why else would the US State Department accompany Tim Geithner’s Treasury to an economic summit this year with Chinese counterparts? Why else would Fed Governor Kevin Warsh publicly threaten to raise interest rates on the same day as a G-20 summit, if not to let foreign central banks know that the Fed intends to try to retard the dollar’s decline (followed the next week by Fed-lifer Donald Kohn’s retraction)? Why else would Chinese and Russian leaders periodically discuss a new global currency regime publicly, if not to threaten US policy makers with either dollar sales or outright gold purchases? Why else would crude oil spike to $145 a barrel in 2008 if not to give American politicians a taste of the future if they don’t come to the table? Why else would China’s government begin converting their dollars to natural resources and begin keeping most of the gold mined in their country?

***

One of the biggest headaches for central bankers is that while they can print unlimited monetary reserves and promote boundless credit, they cannot consistently direct where that money and credit flow. It would be irrational to expect dollar holders to find saving an attractive option, especially when low prevailing interest rates lock-in negative funding spreads. But that doesn’t necessarily promote consumption, as policy makers might hope. More likely it would promote paying down debts. Obviously, saving and paying down debt is not stimulative in the Keynesian realm of immediate satisfaction and would not reverse the inertia of rising unemployment.

It would also be a problem for central bankers if the private sector rationally decides to use the new money and credit to consume and/or store goods and services related to basic, relatively inelastic, commodity-oriented goods and services. Buying hard assets and resources would drive input costs higher, which in turn would raise the nominal prices of goods and services regardless of contemporaneous organic demand. So, if central bankers want to promote nominal output growth through money printing without substantial goods and service inflation, they must get an assist from other policy makers that may direct consumer incentives.

Should we expect new US legislative proposals to give new tax breaks to purchasers of new cars and computers, existing homes and commercial real estate; or to raise the capital gains tax on profits derived from “speculative” investing in commodities or commodity-related derivatives such as futures and ETFs? Should we expect the prime brokerage divisions of banks to cut back on funding hedge funds buying such products (again)?

But — and this is the big but for investors – redirecting investment would not affect the real loss of the dollar’s purchasing power and it would not impact the underlying appreciating value of certain property during a big inflation. It would not give incentive to commodity producers to take a loss on every good they sell, which means that miners, drillers and farmers would reduce their supplies while still demanding (and receiving) a disproportionate amount of that new money and credit. Relative scarcity of commodities needed for cars, homes, computers, etc. would lead to commensurately higher prices. Regardless of how clever policy makers and politicians try to be, inconvenient economic fundamentals will continue to get in the way.

The writing is on the Wall. Global monetary policy makers are gravitating towards a “solution” that calls for the IMF to issue Special Drawing Rights (SDRs) — a super-sovereign currency that would be convertible at some exchange rate into all the world’s existing currencies. It would be a fiat currency itself, a derivative on a derivative, backed by paper that is backed by nothing.

We suppose the IMF will have to print boatloads of SDRs initially to create enough liquidity and critical mass so that they could be used This would mean that much more of the constituent currencies that would ostensibly back the SDRs would have to be printed. The obvious consequence (intended or otherwise) would be a massive, one-time, coordinated inflation. When the press starts to prep us about SDRs as the means to lessen the pressures on US policy makers of maintaining the dollar as the world’s reserve currency, maybe we should quietly, among ourselves, think of the new currency as “Surplus Dollar Receptacles?”

Turning Theory into Practice
As the Fed and other central banks have been inflating their respective monetary bases rather dramatically over the last year, it is logical that gold has appreciated in dollar terms. (It is also logical that stock markets have risen. In monetary base terms, the S&P 500 would have to rise to 1300 just to match the real March ’08 lows!)

Global wealth holders (not to be confused with investors necessarily) have demanded gold over the last eight years in increasing amounts coincident with declining paper money purchasing power. It follows that these wealth holders will be greatly rewarded once more tactical investors, used to investing in financial assets, begin piling into “inflation hedges”. Though we have no idea whether the next short-term trend in precious metals will be up or down, we expect demand for them to go parabolic at some point once it becomes more “socially acceptable”.

At some point fiduciaries and investment committees will no doubt begin to fear a rising CPI. The trillions in allocable money should overwhelm the relatively tiny precious metal markets, and so we think bullion prices will rise many times in paper money terms. (In actuality, the value of bullion would remain the same while the value of paper money relative to it would drop. We see gold as a liquid money form that keeps its purchasing power regardless of how much paper central banks manufacture.)

We shouldn’t be anchored by nominal prices for precious metals in paper money terms. (Who would have thought $35 gold in 1971 would top out at over $850 nine years later?) Price ratios are the essence of relative value. (How many Dow Jones units may one buy with; a) a beach home in East Hampton; b) a trillion Zimbabwean dollars; C) an ounce of gold?) We expect precious metals prices to rise far more than the DJIA because we think investing one’s available resources today in enterprises that produce nothing but depreciating paper will provide negative real returns. Bond investments should fare even worse.

Rising precious metals prices merely signal the onset of rising prices in the stuff that really matters – money (like bullion) that holds its value, and assets, commodities and businesses that have inelastic demand properties (i.e. staples). Ultimately we expect to scale out of such plays at much higher prices in favor of plays with improving relative value, such as distressed (formerly over-leveraged) financial assets and certain fixed income products priced at much higher interest rates. Ratios will signal to us when it is time to act.

Best,
Lee & Paul

Paul Brodsky Lee Quaintance
pbrodsky@qbamco.com lquaint@qbamco.com

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Why the Dollar Won't Collapse Against the Euro

noreply@blogger.com (sacoinvest) — Sat, 10 Oct 2009 18:57:00 +0000

Why the Dollar Won't Collapse Against the Euro

JAMES ANDERSON OCT 09, 2009 3:20 PM


		Their problems are just as bad as America's.

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Editor's Note: This was posted in real-time on our Buzz & Banter. It is being republished here for the benefit of the Minyanville community.

Professor Krueger’s excellent Buzz post yesterday really crystallized some of my concerns about the dollar, so I decided to dig in a little on the Dollar Index (DXY) and trade imbalances.

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The Dollar Index was created by the Federal Reserve in 1973 to provide a trade-weighted average of the US dollar as it freely floated against global currencies. In 1973,10 currencies were used, but after the creation of the Euro, West German, French, Italian, Dutch, and Belgian currencies were combined in the Euro. Presently, there are six currencies in the DXY. The weights are as follows:

Euro = 57.6%
Japanese Yen = 13.6%
British Pound = 11.9%
Canadian Dollar = 9.1%
Swedish Krona = 4.2%
Swiss Franc = 3.6%

If you're thinking to yourself that this doesn’t exactly represent your view of the current global economy, welcome to the club. The DXY is calculated every few seconds by the ICE exchange for their Dollar Index futures product. Since the first trading of DXY futures in 1985, it adjusted only once, after the formation of the Euro. Looking in a simplistic way at the six components, there are four in manufacturing, one in hidden bank accounts, one in natural resources, and none in cheap labor.

Let’s look at trade surpluses and deficits. The top-ten trade deficits are listed below:

Analyzing the list: China -- cheap labor; Japan, Germany, Ireland, and Italy -- high-quality manufactured goods, drugs, etc.; everybody else -- energy. China is clearly the 800-pound gorilla in the room, and since it is, it’s not letting its currency strengthen. The dollar is weak against the yen, euro, and Canadian dollar. Anything else on the list doesn’t matter.

This data comes from the Census Bureau. Click here to see it.

Now let’s look at trade surpluses. The top-ten trade surpluses are listed below:

It's a mixture, but what I find interesting is that Australia and Brazil -- with two of the strongest currencies against the dollar this year -- actually run trade deficits with the United States.

Professor Kruger’s point -- that natural resource-rich currencies are the strongest against the dollar and may continue to strengthen -- seems very logical. But with the exception of Canada, we don’t run trade deficits with these countries. Only Canada is a component of DXY, so if the Brazilian and Australian currencies continue to strengthen, there will be no effect on the index.

Other than the natural-resource countries, what currencies can the dollar collapse against?

Not China -- they’re not playing the game. The euro? Look at those nice trade surpluses that Germany, Ireland, and Italy have. Are they willing to let the Euro climb to 2.00 or 2.50, and depress their already-weak economies to give American manufacturers a chance to take market share away from them? I don’t see that happening. How strong can the yen get? That I'm not sure of, but it's only 13.6% of DXY versus 77.3% for all the European currencies combined.

I just can’t see a collapse of the dollar against the euro when their problems are just as bad as ours. My thoughts after doing this analysis are that the weak dollar is too crowded a trade, that DXY is probably close to a bottom, and finally, that I'm going to start looking into Canadian stocks and maybe bank accounts.

Goo Goo Dolls E Avril Lavigne - Iris (Legendado) port

noreply@blogger.com (sacoinvest) — Sat, 10 Oct 2009 18:10:00 +0000

Toy Story 3 Official Theatrical Trailer

noreply@blogger.com (sacoinvest) — Sat, 10 Oct 2009 18:05:00 +0000

TOY STORY 3D Double Feature

noreply@blogger.com (sacoinvest) — Sat, 10 Oct 2009 18:04:00 +0000

Foreigner - Waiting for a girl like you

noreply@blogger.com (sacoinvest) — Tue, 06 Oct 2009 00:50:00 +0000

Foreigner - Waiting for a girl like you

So long, I've been looking too hard, I've been waiting too long
Sometimes I don't know what I will find, I only know it's a matter of time
When you love someone, when you love someone
It feels so right, so warm and true, I need to know if you feel it too
Maybe I'm wrong, won't you tell me if I'm coming on too strong
This heart of mine has been hurt before, this time I wanna be sure
I've been waiting for a girl like you to come into my life
I've been waiting for a girl like you, your loving will survive
I've been waiting for someone new to make me feel alive
Yeah, waiting for a girl like you to come into my life
You're so good, when we make love it's understood
It's more than a touch or a word can say
Only in dreams could it be this way
When you love someone, yeah, really love someone
Now I know it's right, from the moment I wake up till deep in the night
There's nowhere on earth that I'd rather be than holding you tenderly
I've been waiting for a girl like you to come into my life
I've been waiting for a girl like you, your loving will survive
I've been waiting for someone new to make me feel alive
Yeah, waiting for a girl like you to come into my life
I've been waiting, waiting for you, ooh, I've been waiting
I've been waiting
(I've been waiting for a girl like you, I've been waiting)
Won't you come into my life?

Foreigner - I Want to Know What Love Is

noreply@blogger.com (sacoinvest) — Tue, 06 Oct 2009 00:44:00 +0000

Foreigner : I Want To Know What Love Is Lyrics

I gotta take a little time
A little time to think things over
I better read between the lines
In case I need it when I'm older

Now this mountain I must climb
Feels like a world upon my shoulders
I through the clouds I see love shine
It keeps me warm as life grows colder

In my life there's been heartache and pain
I don't know if I can face it again
Can't stop now, I've travelled so far
To change this lonely life

I wanna know what love is
I want you to show me
I wanna feel what love is
I know you can show me

I'm gonna take a little time
A little time to look around me
I've got nowhere left to hide
It looks like love has finally found me

In my life there's been heartache and pain
I don't know if I can face it again
I can't stop now, I've travelled so far
To change this lonely life

I wanna know what love is
I want you to show me
I wanna feel what love is
I know you can show me

I wanna know what love is
I want you to show me
And I wanna feel, I want to feel what love is
And I know, I know you can show me

Let's talk about love
I wanna know what love is, the love that you feel inside
I want you to show me, and I'm feeling so much love
I wanna feel what love is, no, you just cannot hide
I know you can show me, yeah

I wanna know what love is, let's talk about love
I want you to show me, I wanna feel it too
I wanna feel what love is, I want to feel it too
And I know and I know, I know you can show me
Show me love is real, yeah
I wanna know what love is...

A Stick Figure Guide to the Advanced Encryption Standard (AES)

noreply@blogger.com (sacoinvest) — Sun, 27 Sep 2009 00:12:00 +0000

A Stick Figure Guide to the Advanced Encryption Standard (AES)

via Moserware by Jeff Moser on 9/26/09

(A play in 4 acts. Please feel free to exit along with the stage character that best represents you. Take intermissions as you see fit. Click on the stage if you have a hard time seeing it. If you get bored, you can jump to the code. Most importantly, enjoy the show!)

Act 1: Once Upon a Time...

Act 2: Crypto Basics

Act 3: Details

Act 4: Math!

Epilogue

I created a heavily-commented AES/Rijndael implementation to go along with this post and put it on GitHub. In keeping with the Foot-Shooting Prevention Agreement, it shouldn't be used for production code, but it should be helpful in seeing exactly where all the numbers came from in this play. Several resources were useful in creating this:

The Design of Rijndael is the book on the subject, written by the Rijndael creators. It was helpful in understanding specifics, especially the math (although some parts were beyond me). It's also where I got the math notation and graphical representation in the left and right corners of the scenes describing the layers (SubBytes, ShiftRows, MixColumns, andAddRoundKey).
The FIPS-197 specification formally defines AES and provides a good overview.
The Puzzle Palace, especially chapter 9, was helpful while creating Act 1. For more on how the NSA modified DES, see this.
More on Intel's (and now AMD) inclusion of native AES instructions can be found here and in detail here.
Other helpful resources include Wikipedia, Sam Trenholme's AES math series, and this animation.

Please leave a comment if you notice something that can be better explained.

Update #1: Several scenes were updated to fix some errors mentioned in the comments.
Update #2: By request, I've created a slide show presentation of this play in both PowerPoint and PDFformats. I've licensed them under the Creative Commons Attribution License so that you can use them as you see fit. If you're teaching a class, consider giving extra credit to any student giving a worthy interpretive dance rendition in accordance with the Foot-Shooting Prevention Agreement.

Things you can do from here:

Subscribe to Moserware using Google Reader

Freddie Exec Compensation, Bandos, Market and more

noreply@blogger.com (sacoinvest) — Sat, 26 Sep 2009 14:19:00 +0000

Freddie Exec Compensation, Bandos, Market and more

via Calculated Risk by CalculatedRisk on 9/25/09

Michelle at Footnoted.org digs up the employment contract for Freddie Mac's new CFO: Taxpayer funded signing bonus at Freddie Mac?

• annual compensation of $3.5 million (this includes $675K in salary, $1.6 million in something called “additional annual salary” and $1.1 million in a target incentive
• a $1.95 million signing bonus
• immediate buyout of Kari’s house

Why is Freddie paying more than the private sector? And I bet Geithner is jealous about the house deal!

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com(financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

And the Bandos are moving on up in Miami! From nbcphiladelphia.com: After Miami's Ritzy Bubble Bursts, Squatters Move on Up

Miami's squatter problem has garnered national media attention over the past year and a half, as the foreclosure crisis threatened to transform the Magic City into something resembling a lawless, "Mad Max"-esque landscape.

The squatters mostly kept a low profile, moving in ... to neighborhoods where they could take over unnoticed.

But now come reports that squatters are seeking out more ritzy neighborhoods, including the pricey, tree-lined streets of Coral Gables.
...
A check of county records found that the home went into foreclosure over a year ago, just about the time residents said the alleged squatters showed up.

The bank which owns the property hired a realtor to sell it last month ...

Maybe the lenders should sell the foreclosed homes?

And from the LA Times: Calls to renew home buyer tax credit get louder in Washington. Yeah, an expensive, poorly targeted tax credit for those not suffering during the recession. This isn't as dumb as allowing the FHA DAP to continue (Downpayment Assistance Program - the poster child for bad housing policy), but close. Why not a "first-time renters" tax credit for anyone who hasn't rented for 3 years? That makes as much economic sense.

Things you can do from here:

Subscribe to Calculated Risk using Google Reader
Get started using Google Reader to easily keep up with all your favorite sites

Upload MP3 To YouTube with Mp32Tube

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Sat, 26 Sep 2009 13:43:00 +0000

Upload MP3 To YouTube with Mp32Tube: "

If you have tried uploading your MP3 files to YouTube, then you might know that YouTube does not support this feature. If you want to upload any MP3 file, then it needs to be converted to video format before uploading. Mp32Tube is a free service which allows you to upload MP3 files to YouTube through its interface. You don’t have to convert to any video format, only upload the MP3 file through Mp32Tube.

With Mp32Tube, you can select any MP3 file and then use an image as background. The background can be uploaded from your PC and it needs to be in .JPG format. You can upload the MP3 either to Mp32Tube’s account or to your account. If you want to upload to your account, you need to authenticate with your YouTube account.

Mp32Tube is a free service for uploading MP3 files with a background to YouTube. Mp32Tube plans to have a premium paid account with more features.

Mp32Tube Home Page

14 Great Cheat Sheets & Posters to Make You a Software Wizard

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Tue, 15 Sep 2009 00:27:00 +0000

14 Great Cheat Sheets & Posters to Make You a Software Wizard: "

It is a known fact that if you want to commit something to memory, continuous revision is the key. You read something every time you are at your desk and within days it becomes second nature.

To be able to revise quickly and often, it helps if the information is terse and to the point highlighting only the important aspects. Something like an application cheat sheet or a poster that you can print and pin to a board or keep on your desk.

Here are some application cheat sheets for commonly used software that will hopefully make you more productive.

Microsoft Office

Need to get that report typed and formatted quickly? Can’t find your way around the ribbon interface? Check these out:

Explains the ribbon interface, smart shapes, which format to choose and how to do things like adding a digital signature, protecting the document and other little tips. (Download)


Excel 2007 (Download)	Word 2007 (Download)

PowerPoint 2007 (Download)	Outlook 2007 (Download)

If you are interested in other Office applications or different version of Microsoft Office, Customguide is a great resource.

Browsers

Browsers are among most commonly used software these days. You may be using Firefox or Chrome or Opera or even Internet Explorer, the bottomline is you need to get online and browsers help you in doing so. It is always nice to know your browser inside out and have some tricks up your sleeves, here are some cheat sheets that should get you started:

Google Chrome

Contains keyboard shortcuts, command line switches and the about:urls (Go there) (PDF)

Firefox

Contains keyboard shortcuts, highlights important directories related to Firefox, and presents a trick or two. It has not been updated for a long time but the information still stands good for Firefox 3.5 (Go there) ( PDF )

Linux

This is a huge 18 x 18 in poster that presents you – “The Anatomy of a Linux System”. It has a plethora of information about Linux, top Linux magazines, top Linux sites. In addition, it lists the popular software on Linux systems along with the sites and useful books (it’s from O’Reilly after all) on each of them. (More) (Download)

Lists commonly used commands, switches and what they do. Good for beginners. (Download)

Looking for something a little more advanced? Linux Administrator’s Quick Reference card has you covered with the important files and commands you need to know for system administration. (Download) Credit: Jialong He

Vi/Vim

One of my personal favorites, I actually learned Vim way back using this. It is a complete tutorial and apart from the all inclusive version, there are ones for individual chapters. You can download the SVG versions and scale them to make a wallpaper if you like! (Download)

Photoshop

Concisely lists all the common Photoshop shortcuts you should know to make your work easier and faster. (Download for CS4) (Other Photoshop Versions)

Twitter

Twitter finds its way into everything these days, how could we not have a reference sheet for Twitter?

Packed with all kinds of information about Twitter including important pages, desktop clients, widgets and apps, a definition of various Twitter buzzwords and ethics! (Download)

Search Engine Optimization (SEO)

It has tons of information on what to include in tags, redirects, sitemap syntax, robots.txt syntax and much more. Presents lots of useful information in a tiny little booklet. A must for anyone working with SEO. (Download)

Looking for more?

I bet you are. Didn’t find the one you were looking for? Well there were too many of them to fit in one post. If you are looking for a specific application cheat sheet fire up the request in the comments section, someone might drop you a link. There are two great resources for posters and cheat sheets here and here. If you ever created one for yourself we would love to see them too!

Plus, don’t forget that MakeUseOf have our very own cheat sheets. Click here to check them out and if you like them, download them for free!

Did you like the post? Please do share your thoughts in the comments section!

New on Twitter ? Now you can follow MakeUseOf on Twitter too.

Related posts

Use OfficeTab To Give Microsoft Office Firefox-Like Tabs (32)

Top 3 FREE web-based Office Suites (Word, Excel, PowerPoint, etc.) (10)

OxygenOffice Pro: Enhanced Version of OpenOffice (4)

How To Make Microsoft Office 2007 Look Like Office 2003 (6)

How to Fix Microsoft Office Problems with MS Office Diagnostics (6)

Out of the Woods . . .

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Sat, 12 Sep 2009 15:06:00 +0000

Out of the Woods . . .: "

Pic o day - Neat Illusion

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Fri, 11 Sep 2009 02:36:00 +0000

Pic o day - Neat Illusion: "

Kaart: google classic - Boomerang

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Mon, 07 Sep 2009 12:49:00 +0000

Kaart: google classic - Boomerang: "

via http://www.boomerang.nl/kaarten/boomerang/google-classic/

Volatility

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Sun, 06 Sep 2009 22:13:00 +0000

Volatility: "

In my previous post on August 30, 2009 ("Swing in Trading") I have talked a lot about swing at the market open on August 28, 2009 by encouraging everybody to take a look at history to see what usually happens after such spikes in price during a side-way trading. I think, now, those who did not have chance to take a look at history understand what message I wanted to deliver. The massage was that this is important having access to historical charts. Ability to see the past gives you a tool to compare present price movement to the past, find similar patterns and act accordingly. I think the correction down we saw at the first half of this week (after my post) is the best witness of my words.

From my communications with other traders I know that many of them ignore analyzing history. The most popular way of trading is to take the most popular technical studies, apply the most popular setting and use the most popular trading strategies to generate signals. No offence, but personally I call it "gambling". With the same success you may go to casino.

The last person I communicated called himself an "experienced trader" and he was upset that a technical indicator does not work as it is told in the book… Again, no offence, but my answer is bs. This is great that people read books, go to the universities and receive education. However, real life, real job and real trading differ a little bit from what you read in a book and study in the university. Books and university gives you general knowledge and basic tools. However in real life, on real job in real trading you have to adjust what you learned, improve it and learn how to use it on practice. If you do not do it then you always going to be upset that a technical indicator does not work as it is told in the book and blame everything around in bad trading signals.

Most technical indicators were introduced 20-30 years ago, when nobody had access to intraday data and intraday charts. Most of the mentioned in the books setting for technical studies are for daily data and long-term trading. It is not a good idea to use the same indicators setting in intraday trading. It simply does not always work. When you look at 10-year chart you may ignore the market volatility because in 10-year frame you see market decline, market crash, recovery, up-trend, etc. Basically, you see different markets with different volatility in one time-frame. When you dig into intraday charts you cannot ignore volatility. On intraday levels, price trend acts differently in down-trend (high volatility), during the crashes (extremely high volatility), recoveries (middle volatility) and up-trends (low volatility). Respectfully, on intraday level a technical indicator setting should be adjusted in accordance to the market condition.

The simplest way of adjusting a technical indicator to the current market is

1. Find in the history periods with similar to the current market volatility and similar longer-term trend.

2. Find out what indicator setting would work best for you in those periods in history.

3. Try to apply the same indicator setting in current market.

In my understanding, the history is the strongest weapon in the arsenal of a trader and the most important component in technical analysis.

I think, I went out of my weekly posts topic. Coming back to it - see below the S&P 500 chart with the sentiment on technical studies I track. By the end of the week all technical indicators are bullish. The Nasdaq 100 and DJI technical analysis results look the same which is a good sign. There is still a room to the upper sensitive level.

The S&P 500 Chart with elements of technical analysis.

Bovespa 04/09/2009.

noreply@blogger.com (sacoinvest) — Sat, 05 Sep 2009 12:58:00 +0000

Brazil: Reactions to a Proposed Energy Law

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Fri, 04 Sep 2009 02:43:00 +0000

Brazil: Reactions to a Proposed Energy Law

September 1, 2009 | 1938 GMT

Summary

Brazilian President Luiz Inacio Lula da Silva submitted a proposal for a new oil law to the country's legislature. The proposal favors state-run energy company Petroleo Brasileiro SA (Petrobras) and shows that Brazil intends to protect its national interests when it comes to deepwater oil exploration and development.

Analysis

After a government review that began in 2007, Brazilian President Luiz Inacio Lula da Silva on Aug. 31 unveiled a much-anticipated proposal for a new oil law that will govern the exploration and development of the country's massive deep-sea pre-salt oil reserves. The new regulatory framework was highly anticipated as Brazil's pre-salt reserves — oil deposits located in the sea bed under thick layers of salt — are estimated to contain anywhere from 14 to 100 billion barrels of oil and could turn Brazil into a major oil exporter in coming years.

Stock prices in Brazil's state-run energy company Petroleo Brasileiro SA (Petrobras) plummeted on the release of the proposal, with the company losing 3.6 percent of its market value (about $7 billion) on Aug. 31 alone (though that was mitigated by a 1.4 percent rebound on Sept. 1). Although Brasilia might not actually pass the new energy law until next year, it is clear that Brazil sees its pre-salt oil reserves as a strategic national asset that needs to be protected by the state, even at the risk of slowing the influx of foreign capital and technology that the country is trying to attract to boost the reserves' development.

The most obvious aspect of the proposed law is its (fully expected) favoritism toward Petrobras, one of the world's up-and-coming energy companies and a majority state-owned enterprise. Petrobras would operate all of Brazil's pre-salt oil development projects. The government, through the National Petroleum Agency, would have the option of awarding a contract solely to Petrobras or asking for public bids to bring in other companies to share in projects. In public bids, companies would join in production-sharing agreements with the government rather than only acquiring concessions and paying royalties on revenues, as they did previously. This is meant to ensure that Petrobras gains knowledge and experience from outsiders who may bring better technology and expertise to the table when they sign on to a production agreement. Petrobras would be guaranteed a minimum 30 percent stake in any consortium (though this does not apply to pre-existing contracts). Contracts will be awarded to foreign companies that promise to preserve the greatest share of "profit oil" — a field's production minus the equivalent of costs — for the Brazilian government. The proposal is surprisingly candid about the role of what is, in effect, bribery in companies' bids for contracts, stating that the National Energy Policy Council will assess "subscription bonuses" (which are not required but are no doubt encouraged by the law) on an ad hoc basis.

The Brazilian government will also have the option of handing over to Petrobras certain areas that have not yet been opened to concession to other bidders. Petrobras and the government will work out the specifics of which geographical areas will be eligible and determine their value and the price that Petrobras will pay to have rights to the area transferred to it.

Since Petrobras will be doing a lot of costly and technologically demanding oil production in these deep pre-salt layers, it will need to raise a lot of capital. The government has claimed it will inject around $50 billion into Petrobras upon passage of the new energy law. Moreover, the proposed law allows for Petrobras to issue new shares to get funding, while not calling for the restructuring or reorganization of the company. This preserves shareholders' right to maintain or up their stakes and the government's right to increase its stake, while ensuring that stock increases will not be used to squeeze out foreign investors for arbitrary or political purposes.

The proposal contains a nationalist streak that grants the government great scope for intervention in the development of these strategic reserves. In particular, the law would give birth to a new state-operated company — called Petrosal — that would have a representative, with full rights to vote and veto, on the board of any energy consortium doing business in Brazil's pre-salt deposits. Because this company will not be allowed to invest in projects or take part in upstream development, it will not bring capital or technology or expertise to energy development projects. It will simply be an arbitrary government actor with the ability to put roadblocks along the way for energy producers as it sees fit.

Da Silva submitted the proposal to Congress with much fanfare, calling for it to be put on a "fast track" toward approval. But the proposal, published on the Petrobras Web site, must still go through the legislative process, and it must do so amid the politically charged atmosphere ahead of general elections in October 2010. Nevertheless, it reflects a years-long review by a commission consisting of several government ministries, and thus gives a good indication of what direction Brazil's government wants to take in making energy sector regulations that are in line with its strategic interests.

John F. Mauldin
johnmauldin@investorsinsight.com

Estimate Distances with Your Arm and This Rule of Thumb [MacGyver Tip]

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Fri, 04 Sep 2009 01:07:00 +0000

Estimate Distances with Your Arm and This Rule of Thumb [MacGyver Tip]: "

Quick anatomy lesson: the distance between your eyes is one-tenth the length of your arm. This is important, because it helps you estimate the distance between yourself and any object of reasonably known size to a rather accurate degree.

Let's begin this with a confession: I can't estimate distances worth a darn. 100 ft, 300 ft, 20 m, I can't really do it. Thankfully with this trick, we can get pretty accurate distance estimates with only the tiniest bit of math, a general idea of the size of the object you're estimating distance from, and an arm.

Basically, all you need to do to estimate a distance using this classic method is hold your arm out and stare at your thumb with an eye closed. Silly, yes, but it makes sense, because you'll switch which eye you look through and sort out how far the object appears to have 'jumped' to the side:

How far did it move? (Be sure to sight the same edge of your thumb when you switch eyes.) Let's say it jumped about five times the width of the barn, or about 500 feet. Now multiply that figure by the handy constant 10 (the ratio of the length of your arm to the distance between your eyes), and you get the distance between you and the barn — 5,000 feet, or about one mile.

Easy enough, and from a few quick tests with known distances, it appears to be accurate enough for ballpark figures.

The Old Farmer's Almanac has been around for as long as we recall, but it is still a great source for MacGyver-style tricks, even if this particular one requires no pens, matchboxes, or staples. Take a look at the link for more details on this estimation 'rule' and others and be sure to stop in the comments to share your oldie-but-goodie sort of tricks. Thanks, TechTalk WRLR 98.3FM!

How to Easily Estimate Distances [Almanac]

August 31, 2009 Stock Market Recap

noreply@blogger.com (Gastão dos Santos Sequeira - ORK) — Tue, 01 Sep 2009 02:49:00 +0000

August 31, 2009 Stock Market Recap: "

The day started of fin promising fashion for the bears as the indices gapped down in sympathy with a big drop in the Chinese market. But the bears were not able to capitalize on that early weakness. The market just meandered sideways for the rest of the session. There was minimal technical damage done to the indices today. I've made some minor downgrades to the short-term trends in the trend table but I don't think the bulls need to sweat as long as the March trendlines hold. Absent any big news I'm not expecting much out of the market this week, ahead of Labor Day, except possibly on Friday after the payroll data.

Trend Table

Downgrades to the short-term trends today...

*Trend*	Nasdaq	S&P 500	Russell 2000
Long-Term	Up	Up	Up
Intermediate	Up	Up	Up
Short-term	Lat(-)	Lat(-)	Down(-)

(+) Indicates an upward reclassification today

(-) Indicates a downward reclassification today

Lat Indicates a Lateral trend

*** I'm simply using the indices' relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

SACO INVEST

Longer Term Look at S&P 500

Longer Term Look at S&P 500

Things you can do from here:

Be Prepared for S&P's Tricks and Treats

JEFFREY COOPER OCT 30, 2009 2:30 PM

30/10/2009 - Chart of the Day

The Weekly Report For October 19th - October 23rd, 2009

Shipping Group Staying Afloat

Good-Bye, Microsoft Money! 16 Powerful Personal Finance Programs

http://www.getrichslowly.org/blog/2009/07/01/good-bye-microsoft-money-16-powerful-personal-finance-programs/

Good-Bye, Microsoft Money! 16 Powerful Personal Finance Programs Print

A Discourse on the Method . . .

A Discourse on the Method . . .

Things you can do from here:

Why the Dollar Won't Collapse Against the Euro

JAMES ANDERSON OCT 09, 2009 3:20 PM

Discover the Power of Strategy Trading

SEARCH:

Goo Goo Dolls E Avril Lavigne - Iris (Legendado) port

Toy Story 3 Official Theatrical Trailer

TOY STORY 3D Double Feature

Foreigner - Waiting for a girl like you

Foreigner - I Want to Know What Love Is

A Stick Figure Guide to the Advanced Encryption Standard (AES)

A Stick Figure Guide to the Advanced Encryption Standard (AES)

Act 1: Once Upon a Time...

Act 2: Crypto Basics

Act 3: Details

Act 4: Math!

Epilogue

Things you can do from here:

Freddie Exec Compensation, Bandos, Market and more

Freddie Exec Compensation, Bandos, Market and more

Things you can do from here:

Upload MP3 To YouTube with Mp32Tube

14 Great Cheat Sheets & Posters to Make You a Software Wizard

Microsoft Office

Browsers

Linux

Vi/Vim

Photoshop

Twitter

Search Engine Optimization (SEO)

Looking for more?

Related posts

Out of the Woods . . .

Pic o day - Neat Illusion

Kaart: google classic - Boomerang

Volatility

Bovespa 04/09/2009.

Brazil: Reactions to a Proposed Energy Law

Summary

Analysis

Estimate Distances with Your Arm and This Rule of Thumb [MacGyver Tip]

August 31, 2009 Stock Market Recap