RF's Financial News

RF's Financial News

Sunday, June 14, 2009

This Week in Barrons - 06.14.09

This Week in Barrons – 06_14_09:

WASHINGTON (AP) - The No. 2 Republican in the House on Thursday compared President Barack Obama's plans for the auto industry to the policies of Russian Prime Minister Vladimir Putin, saying the White House has stripped credit holders of rights and given them to Democratic allies: "'Set aside the rule of law, let's strip secured creditors, bondholders, of their rights. Take them away outside of the bankruptcy process and give them to the political cronies and the auto workers' unions," Rep. Eric Cantor, R-Va., said in an interview with The Associated Press. "It's almost like looking at Putin's Russia," added Canton, the GOP's House whip. "You want to reward your political friends at the expense of the certainty of law?"

- According to the Center for Responsible Lending a new foreclosure starts every 13 seconds, equaling nearly 6,500 a day – the number of new foreclosure starts for the first five months of 2009 has reached one million
- One in 9 Americans are using federal food stamps to help buy groceries as the country's deep recession continues
- One out of every 6 dollars of American Income is some form of Government handout
- And then there’s Jim Cramer – who’s explaining how all the bad news is really ‘good news in disguise.’ For example: last week we learned that for the very FIRST time, Prime Borrowers defaulted on their loans more than Subprime Borrowers. The foreclosure rate on houses that carried prime loans spiked off the charts. So in my mind, I figured that even people with good credit and a down payment are getting so squeezed (or unemployed) that they can't afford to keep their homes. But according to Jim Cramer, this is a good sign - because those people DID put down a "down payment", so the banks are eager to take those homes back because they have value. It shows that banks are becoming stronger, and well lead to more lending and a reawakening in spending. HUH??

Our elected officials, and our Central bank are doing everything in their power to get people to spend money they don't have on things they don't need. They know there's nothing that's going to stop the depression from enveloping the nation and most of the world. The best they can hope for is that it happens in slow motion, versus an all out economic crash that hits like a tsunami all at once. However, once we do hit bottom, we're going to come out of this stronger. We are in a depression. It's going to get worse, much worse.

But as the retail sales number hit and it rose 0.5%. You could hear the cheers, the Kazoo's blowing on the exchange floor. The headlines went out over Reuters and Dow Jones news: “The consumer's not dead, he's getting ready to spend again!” Unfortunately, retail sales are not reported by units sold, but rather are reported by total dollars spent. So if you sold 10 widgets at $5 each one month ($50), and next month sold 5 widgets at $20 each ($100) – you would see a 100% increase in retail sales. Well the problem is that unless you live inside a refinery, gasoline has roared higher, gaining upwards of 50% in the last few months. And guess what - gasoline sales are included in the retail sales report. So it wasn't like we actually sold a lot more widgets last month, we just paid a lot more for the widgets we purchased – due to the huge increase in the cost of gasoline.

It’s these absolute distortions of the truth, these mis-directions of the facts that bother me. Retail sales were not strong, they were boosted by a huge jump in gasoline prices, and despite what Cramer says, rising gasoline prices are NOT good for our economy.

And then there are the ‘Bond’ sales this week. One morning Bond futures ‘soared’, and everyone asked why? CNBC came on saying that this is all “good news because foreigners were still willing to buy our treasuries.” Yet when you look over the report: To lure sovereign investors to buy our paper they had to jack interest rates up to 3.99% for the 10 year note, and 4.67% on the 30 year note. This was the biggest jump since May of 2007. Even then (if you connect the dots) it seems like our old buddies the FED came in and bought up about 18% of the auction. Think about that: the FED prints money out of thin air, then uses it to buy treasuries which is instantly a debt to the US, and requires we pay interest on it. Once again, only Jim Cramer could wrap "good news" around this.

So, with interest rates cracking 4% on the ten year, inflation is roaring and rates will go higher, possibly MUCH higher. This is why there was an all out attack on Gold this week. Right now, Germany and Dubai want their gold, but delivery seems a bit ‘slow.’ In fact, physical delivery demand is soaring. This has got to come to a head at some point, but for now realize that the central banks have been waging war on gold trying to suppress it, while physical delivery demand has been soaring for many months. Huge dislocations are taking place, and pretty soon we're going to see that resolve itself. If just 30% of the longs decided that they wanted physical delivery – the price would jump to $1,250. We're on record saying gold will hit $1,500 soon. We still believe it.

Lastly – since so many acres are delegated to producing an ethanol crop, the wheat, corn, bean crops were downsized. Now with the recent cooling of the heartlands, planting is behind schedule, and the yield is going to suffer. Well, for investment purposes keep an eye on agriculture where prices will rise as supply falls.

The Market:
Market? Well to be brutally honest, the market is really beginning to concern me. We see the plunge patrol team at work every single day saving the market from a roll over, and we have to ask, how long can they keep it up? My feeling is that I don't think the current rally is over and that higher prices are coming later in the summer. But in the very near term, I'm concerned about a good-sized drop out. I'm going to play very cautiously here this week and maybe into next. Yes we're long several stocks – and yes we’re up over 30% for the year. But there's a pretty good chance that not doing much in the near term will prove to be a decent idea. I could easily be proven wrong and we continue higher, the power of the PPT (Plunge Patrol Team) has been enormous lately. But if we do roll over for a bit, we'll lock in some more gains and wait to buy back in, because this is NOT the time to short the market for any length of time.

- we’re holding the GDX (a basket of gold mining stocks) with No Stop
- we’ve held SLW (silver) since the 3’s – our Stop is set for $9.50
- we’re holding NGD (a gold miner) from $2.59
- we’re holding MOO (agricultural business ETF) – from $32
- we’re hold XLK (a technology (minus healthcare) ETF) – from $17
- we’re holding IPI (a potash hold – again in the agricultural theme) – from $32
- we’re thinking about:
o DBA another agricultural name if > $28
o MOO more of it if > $39
o All commodities are doing well and another basket = GSG over $32 looks tempting
o I see more money going into the safety of utilities and even drugs – so AES (a utility stock) looks buyable over $10.80
o Finally – CHINA was once interesting at $80 – for speculation money – it’s now at $1.66 – so CHINA >$1.80 may be interesting.

- Now realize if the market rolls over – these roll over with it.

Remember the Blog http://rfcfinancialnews.blogspot.com/

Until next week – be safe.

R.F. Culbertson

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