This week in Barrons - 08.30.09

This Week in Barrons – 08-30-09:

Thoughts:
I’ve been fielding mail – many surrounding the same set of questions – how can government owned / operated institutions such as Fannie / Freddie / Citi / and AIG be doing so well – when but 3 months ago they were bankruptcy candidates – and by all counts – at least 2 of the 4 should currently be in bankruptcy? Along those same lines, I listen to people on CNBC tell me how AIG should be a $300 stock. So I ask you: “How many of the toxic assets have been retired?" Answer: “Who knows – but evidently the market doesn't think it's a problem". Then there is Ms. Blair (FDIC Chairperson) who honestly tells us that banks are in a whole lot of trouble and it's going to take years to sort it out. Their list of troubled banks has grown from 280 to 416 recently, all in the ‘red’ for over $299 Billion dollars, a 15 year high, and that (a) 28% of banks are now unprofitable, (b) Non-current loans now make up 14% of all loans (a normal range for that number is < 4%), and, (c ) charge offs have soared 48%. Oh, and did I say that the initial jobless claims came in at 570,000 once again. What I can’t figure out is how AIG can put Hundreds of Billions of dollars of toxic loans in the ‘mark to model’ category, the FDIC tells us that 416 more banks are in trouble – with 84 failing, people continue to lose their jobs at an alarming rate, and people are talking ‘green shoots’ and we are out of the recession?

Obama just appointed Ben "helicopter" Bernanke to another term. The market rejoiced – after all - where else can they find a gent so willing to completely indebt the middle class for decades on end, and at the same time collude to give bankers their bail out money, allowing them to make billions? My simple question is: Is Ben really fixing anything, or just delaying the inevitable? Aren’t we all a little bit amused when we hear: “Housing has bottomed” – and we find out that (a) Uncle Sam is giving away $8K dollar bonuses to first time buyers, (b) the FHA has lowered credit and income restrictions and is allowing 3% down payments, and (c ) banks have now started packaging toxic loans with prime loans and selling them as AAA again. Not to mention the tidal wave of foreclosures sitting "off the books" just waiting for the right time to hit the market.

Meanwhile, China is rapidly doing just about anything they can to get away from "dollars" and since selling them on the open market will crush the value of the ones they still hold, they've decided to go on a global shopping spree.
LOS ANGELES (MarketWatch) -- The president of China's well-financed sovereign wealth fund said his group plans a massive, ten-fold expansion of its overseas investment this year. China Investment Corp. President Gao Xiqing said the fund's foreign holdings will go from $4.8 billion last year to "several tens of billion dollars.” Allow me to clarify: China holds a lot of our dollar denominated paper, and they're trapped. Each day the dollar sinks in value, but if they try and unload them, the dollar will sink faster. So, instead they are now going to the market and purchasing raw materials, businesses, land, toll roads, etc. We are in the first stages of seeing a massive "dollar exit" and it could get ugly. That is why Gold and Silver are destined higher. If you don't have any of either, may I make a suggestion - get some.

One of the more interesting items we follow closely is the Federal Reserve, their monetization of debt, and of course the tug of war between the Feds and Senator Ron Paul – to bring you up to speed:
- The Federal Reserve, headed by Ben Bernanke is actually a private banking concern, and despite them making monetary policy for our Country, they will not allow ANYONE to see their books.
- Ron Paul introduced a bill that ask for a complete audit of the FED – who they were lending to, how they are actually monetizing our debt, and as you can imagine, they are fighting against that.
- Bloomberg had a question a bit ago – “Who’s getting the bail out money” – and the FED answers “none of your business.”
- Well Bloomberg took the FED to court – and the first court ruled for the FED – citing ‘state secrets’.
- Surprising – upon review – the appeals court overturned the ruling, stating that because the taxpayer was on the hook for this money - they should be able to see where it goes.
- The FED has gone ballistic, flooding the courts with all types of ways to block it, and appeal the ruling. The FED is saying that it's much better for us to guess, speculate and be completely in the dark about a bank’s integrity and possible insolvency.
- The FED is crying that if we don't let them do as they please with no oversight from anyone at any time, the system will collapse.
- I find it interesting, that if we were to go to one of their banks for a loan, they would make us produce documents proving our income, our payment history, money on hand, and assets. Yet according to them, WE the people (who are on the hook for the money the FED is doling out) have no right to see which banks are getting what because it might stigmatize them. Excuse me?
- You should do anything you can to help Ron Paul and HR1207 through the Senate! Remember the words of former Federal Reserve Board Chairman Arthur Burns, when asked about all the inflation he brought about in 1971 before Nixon's re-election, he said “The FED has to do what the president wants it to do, or it would lose its independence.” That’s’ about all you really need to know – yes? In fact, Chairman Bernanke stated on November 14th 2007, "A considerable amount of evidence indicates that Central Bank transparency increases the effectiveness of monetary policy and enhances economic and financial performance".

The Market:
We are coming into the single most interesting time of the ENTIRE year. The mad dash rally that started back in March has indeed been powerful, one of the most stunning run-ups since the monster bounce of 1933. But with next week running into the holiday weekend, with all the big hitters coming back from their stays in the Hamptons, the daily volume will indeed pick up, and they are going to "push" this market where they want it in the short term. But layered across all of that, we have major influences from several areas converging. For all the green shoot baloney and talk of a recovery, it seems that Insiders are selling at the single fastest pace virtually on record. Individuals who run the companies are not waiting for a higher market. Many (who got crushed in the down turn) are sitting there hoping for DOW 10K, so that they can pull their money out. Then of course the question: Where would the market go, to take the maximum amount of money from the most amount of people?

All these factors are going to come into play over the next 3 weeks. Remember back in March when we were predicting DOW 9600? Well we came to 9600 and abruptly stopped. And do you potentially think that some of that government printed money – has landed in Citi, Fannie, Freddie, and AIG – driving those stocks immensely higher (beyond all logic)? I’m having a hard time calling the next move, bit I see two very distinct possibilities. Scenario 1) We see the market slide (potentially heavily) this week – then when the big hitters come back after the Labor Day Holiday, we dip just a bit more and then "boom" another incredible push higher that takes us to 10K. Scenario 2) The market continues higher this week, and when the big hitters come back, we continue up for a few more days then out of the blue, "boom" down for a thousand points quite quickly.

Either of these scenarios are possible and they both make equal sense to me, and I do think that the dip is ‘buyable.’ The next 3 weeks will be the most critical of the whole year. I would advise using smaller trading positions and don't be afraid to take profits when they are available.

TIPS:
- we’re holding the GDX (a basket of gold mining stocks) with No Auto Stop
- we sold NGD (a gold miner) for 27% profit
- we’re holding MOO (agricultural business ETF)
- we’re holding IPI (a potash hold – again in the agricultural theme)
- If you can hold your finger on the ‘sell trigger’ – there’s ‘daily’ money to be made in the volatility associated with Citi (C ), Fannie Mae (FNM), Freddie (FRE), and AIG (AIG) – but remember the ‘sell’ button.

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

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

Until next week – be safe.

R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com/