This Week in Barrons - 08-23-09

This Week in Barrons – 08-23-09:

Thoughts:
A Culture of Corruption:
Roll that around your tongue for a few minutes. Try and get the flavor of what it says. For example: an X-Credit Suisse broker was found guilty of fraud. Eric Butler, a former Credit Suisse (CS) broker, was convicted of securities fraud in connection to the sale of millions of dollars of subprime securities to corporate clients. Butler could face as much as 45 years in prison, though the judge said he's unlikely to impose such a strict term because Butler operated in a "culture of corruption." What is the judge saying. The judge is saying that the financial business is so filthy, diseased, and fraudulent that lying, stealing, and cheating are actually normal behavior. This is:
- why the SEC was no where to be found (on 4 separate occasions) concerning Bernie Madoff,
- or why GE had to pay a fine for announcing fraudulent earnings numbers,
- or why Paulson bailed out the crooked bankers that took down the system,
- or why Bear Sterns was assassinated,
- or why $2 Trillion dollars in bail outs has basically disappeared,
- or why the Term Asset Backed Securities Loan Facility needed to extend (for 6 months) their $1 Trillion dollar bail-out program (if things were going so well)
- or why Readers Digest just had to declare Chapter 11,
- and why we’re on track for a $2 Trillion dollar deficit – which is hopelessly beyond our ability to pay,
- and why some journalists are actually referring to the U.S.A. as a ‘Banana Republic’!

We’re coming off a $14 trillion loss of household net worth, which represents a 20% implosion of the consumer balance sheet coupled with a post-bubble credit collapse, which means that despite the government stimulus, despite the brave heroics of Jim Cramer and the PPT, the economy is going to be limping along for a prolonged period of time as savings rates rise and debt ratios decline.

However – on this anniversary of WoodStock please realize:
- Job suicides have risen by 28%
- Keeping up with rising food and energy prices and job stress have produced uproars at the "town hall" meetings
- Obama’s popularity is sinking like a stone
- In bad times (just like Woodstock) the silent majority wakes up and gets very, very vocal.
- The silent majority is saying: "Hey if I can't spend my way to glory, maybe the Government shouldn't either.” Because Thursday’s headline read like this: WASHINGTON (Reuters) - The Obama administration will raise its 10-year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report next week.
- The National Debt is growing at approximately $3.92 BILLION per DAY and is roughly $12 Trillion dollars.

On Friday night, three more regional banks failed. Then on Saturday, another one bit the dust. I believe that makes 81 this year, and 114 in the past 20 months. Our original estimate was for 550 to croak, and we are well on our way.

What about housing? The latest sales figures showed a jump in sales from 0 to $125k, a smaller jump from $125 to $250k, from 250 to $500k they were down and from 500 to $2 mill they were down over 30%. So, what we are seeing is twofold: (1) 31% of the homes bought were first time buyers taking advantage of an 8K dollar tax credit that the administration put in place as an incentive, and (2) 37% of the homes sold were foreclosures and distressed property. With millions more foreclosures waiting in the wings, and with the incentives to end in November, we can expect sales to slump once again – Housing has NOT bottomed.

What about manufacturing? The Philly Fed came in +4%, the first time in ages it was positive. However, employment in the index was -12%, prices paid were +10%, while prices received were -1.5%. So, with inventory at a minimum, they had to boost some production to replace and restock the shelves. But inventory replacement is a far cry from having to increase capacity utilization to meet strong demand. Like housing, this is a short-term phenomenon.

The Market:
Tuesday night someone popped a pin into the Chinese market and the Hang Seng fell hard. That rattled the world and mid-week our futures looked bleak at best. But on came the cheerleaders à CNBC and Jim Cramer were on telling us why the bear arguments were silly, china doesn’t mean anything, and that rising oil prices proves demand and that's why we should not worry. Then out of the clear blue, on no news, the market soared 100 points in 14 minutes. Why? Markets just don't move 100 points in 15 minutes for no reason.

Remember back in March, with the DOW plunging to 6600, we stated in this letter that we were on the verge of a massive rally that would go further than anyone thought possible, and we picked 9600 – and now here we are at 9505. However, this rally has lacked one thing – real ‘smack-downs.’ It’s missing the 200 and 300 point down days that are common in a Bear Mark rallies. My guess is that because the Fed and Uncle Sam are juicing this market with all they got, they've been able to keep the monster smack downs at bay.

Now do we continue higher, flirting with 10K soon, or are we ready yet to roll over once again and take some of the steam out of this? My guess is that we are working on forming something of a "short term blow off top" here soon. That means we could easily see several more strong up days, putting us in a massively overbought condition and then "poof" the air comes out and we put in a significant drop. Over the next week or so, I would not be surprised to see us reach up, way up, and then roll over and fall back.

Watch for the pace of the action to accelerate. As shorts scramble to cover and the media makes a circus out of the new highs, we could see multiple "fast gains", but I suggest you be very careful. It's fun riding the wave higher, it's not so much fun getting caught in the curl and wiping out. So, take this run for what it is, a bear market manipulated joy ride. Just don't overstay your welcome, because one of these days Mr. Bear will want to take another bite.

TIPS:
- we’re holding the GDX (a basket of gold mining stocks) with No Auto Stop
- we’re holding NGD (a gold miner) @ $2.48 – hard stop @ 3.25
- we’re holding MOO (agricultural business ETF)
- we’re holding IPI (a potash hold – again in the agricultural theme)
- I still like CIEN over 14 if it gets there. There's a huge gap to fill from 14 to 17 it created last September
- I like PCX over 10.05
- I like CBI over 15.00
- I like MRVL over 14.30
- I like over 25.00
- I like BTU over 36

If I dive into anything this week – it will have a hard stop associated with it!

Until next week – be safe.

R.F. Culbertson