RF's Financial News

RF's Financial News

Sunday, September 27, 2009

This week in Barrons - 09-27-09

This Week in Barrons – 09-27-09:

Allow me to change the pace a little bit – and talk about one of the aspects of ‘trading’ that could help all of us going forward. As a backdrop: the economic reports continue to show incredible weakness, no matter how well everyone tries to spin them: (a) we saw the durable goods number plunge and the July number revised lower, (b) we saw housing sales slow, and the median price of those homes dip some 12%, (c ) we saw another half a million people need to sign up for first time unemployment benefits, and (d) we saw Congress approve extending unemployment benefits another 13 weeks (making it a total of 92 weeks of unemployment – almost 2 years!).

Factually the US is broke beyond repair – and is no longer a viable corporation. We have approximately $75 TRILLION worth of liabilities (Medicaid, Social security, tuition loans, FHA, Fannie, Freddie, etc) – and even if you raised the tax burden to 100% of all incomes – we would still be woefully short of what is needed. 95% of this debt all came after Richard Nixon removed the dollar from the gold standard, making our currency backed by simply the "full faith" of the US Government – allowing the FED to print money like madmen and to satisfy all the projects our Government pledges. As we speak we are looking at trillion dollar deficits for as far as the eye can see, and frankly those will rise even higher. The only way that I see of combating this is to slowly ‘devalue’ the U.S. dollar. The U.S. could ‘devalue’ its currency - making its outstanding debts more palatable. Here's how that works: if you allow your currency to fall in value, you are repaying debts with cheaper dollars. For example - if a dollar was to be instantly worth 50% less tomorrow, your salary would have to "double" to remain the same. So if you have a 100K dollar debt and were making 40K dollars a year, now you'd still have that 100K dollar debt, but your pay would rise to 80K a year. Now – as a backdrop to this – the dollar has been falling since 2001! But it is like ‘boiling the frog’ – do it slowly – and no one notices – do it quickly and all ‘heck’ breaks loose. The U.S. could also raise interest rates – which would temporarily halt the slide in our currency, but that would instantly bring lending to a halt. The housing that is selling will stop selling. The commercial loans that are being made will cease. It will be the final nail in our economy's coffin – so that won’t happen.

However, as the dollar becomes worth less and less, things that are "real" such as commodities get more expensive – this IS INFLATION. This is why oil is up in the $60 to $70 range despite all the developed nations using less of it. This is why food is up, energy is up, and gold is up to $1000 an ounce.

The bottom line is that the dollar is going to be removed as the global reserve currency and the transition is in effect as we speak. Already the IMF (International Monetary Fund) has begun to issue it's own brand of SDR's (Special Drawing Rights). This is what they are going to use as currency between nations that don't want dollar exposure, until they settle on the new Global reserve currency. And it appears that China is going to demand that their currency is (at minimum) a part of a basket of currencies and probably with some form of tie to a metal backing (gold). Just know that this is all taking place in the background of the UN, the G20, the IMF and all the central banks.

Now, builders and lenders are beginning to dust off an old pitch - "0" down, 100% mortgages. And what happens when these same mortgage fail (as before) - we, the taxpayers, get to bail them out yet again. But the only reason this will happen now is because they know that as they devalue the dollar, it all gets paid back with much cheaper dollars. The question is, will it really help the true economy? NO. In no time in history can I find that devaluing a currency is a good way to promote stability and recovery. Sometimes there's a short-term boost as your exports grow, but in the longer haul the inflationary effects weigh more heavily and then interest rates climb, effectively killing the economy. We will NOT break the mold – so stay long gold, stay long silver!

Market Tutorial: First rule – Wall Street is designed to ‘take’ your money – and if you don’t to deal with that on their terms, you're going to go home broke. Wall Street is not there to help you retire and get rich – it’s there to take every last penny you have and toss you in the dumpster. Wall Street does that by confounding, and confusing as many people as possible at any one time. Which means that each day you need to ask yourself: “What would the market do, to confound, confuse and take the maximum amount of money from people?"? If the answer is: “Go Up” chances are awfully good you're going to go up that day and vice versa. When you can’t answer that question (and most of the time we can’t) then (like the rest of us) you will spend a large amount or your trading time doing nothing – PATIENCE is a VIRTUE in trading. Let the market come to you. From 6600 to 8000 on the DOW everyone cried – “it’s just a bounce.” When it went to 9k their cries got louder. At 9600 people are ANGRY that they missed the biggest run-up in 70 years and want ‘desperately’ to get back in. My lesson for today is: Do Not Push Trades – But Let the Market Come to You! You do not need to, nor should you be trading every day. Sure missed opportunities stink, but there WILL BE ANOTHER. Wait on the ‘bull or bear’ to form – and then strike. Don’t EVER Push a Trade.

The Market:
Earnings reporting season is just about to get started. This market has run for months on ‘hope and air’ – while a significant percentage of people are hoping to sell out around 10K – while Trillions of $’s more stimulus is waiting to be released – while Unemployment is still a disaster – while Fund Managers that didn't own the market are trying to get in, while etc. We’re coming to an interesting “no mans land” where virtually anything could happen. Earlier this week, the DOW hit 9937, just shy of taking a swipe at DOW 10K, but we rolled over a bit. We are in no hurry to try and go short, not with the very, heavy hand of Ben Bernanke and lurking in the background. Ben and the PPT can move this market 200 points in a day by firing off well-placed futures trades. After a run up of this size, one may have thought that a pretty good sized pull back might have been in order – yet the way we ended Wed/Thur/Friday (down 80, down 30, down 40) – nothing was dramatic or scary. That gives us the thought that they still don't want to roll us over yet. My guess is that the first half of the week is ‘weak’, and then by Thursday (the new month and quarter) they will try and work the market higher ahead of the big deluge of earnings reports. One thing is quite certain, any company that disappoints (such as RIMM in the short-term) is simply going to be slaughtered. If enough of the early reporting companies can pull off an earnings miracle and deliver “Happy Talk”, the market very well make that last big "blast higher" that sends us over 10K for a bit. But, if we don't see enough of them making the grade, there's probably a good chance the market will use those bad reports for the excuse to send us lower in a hurry.

Be careful out there and Don't Push Trades. There are too many forces acting on the market to have anything considering a real "market feel", and when things are like that, we like to be sitting in cash waiting for the next development, either up or down.

- we’re still holding MOO – agricultural space ETF)
- we’re still holding IPI – agricultural – potash arena
- AMZN is a darling – and should move up when the market heals
- UYM we've played many times – and a move over 30.40 brings me in.
- DBB is interesting if it gets over 19.
- JOYG over 50 is a very interesting position.
- BUCY over 36.30 brings me in
- CHNG is a China play on Natural Gas – I see accumulation there – a move over 13.35 and we’re in.
- PDC is a U.S. play on Nat Gas - a move over 7 is good
- AGT is a small (speculative) gold play – a move over 0.65 pulls me in
- FMCN a move over 11.00 could be very rewarding.

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

Until next week – be safe.

R.F. Culbertson

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