RF's Financial News

RF's Financial News

Sunday, February 14, 2010

This week in Barrons - 02-14-10

This Week in Barrons – 2-14-10:

Our Thoughts:
“Babies don't need a vacation. When I see them at the beach I go over to them and say: 'What are you doing here? You haven't worked a day in your life!' … Steven Wright

For the longest time no one cared about gold and I couldn’t get anyone to even consider investing in it. Now, all I’m hearing is: "it's too high, it's going to come down". Gold is not a stock to be traded and flipped. You buy gold for one reason: It’s money! If you took $1,000 in the year 2000 and put it in your mattress – it would purchase about $750 worth of stuff today. If you took $1,000 in gold and put it into your mattress in 2000, it would purchase about $2,333 worth of stuff today. Gold preserves buying power. Now, you do have the issue of ‘last man in’. In fact, there are some very powerful people that want gold down under $1,000. First, the bankers that have gigantic short positions would love nothing more than to be able to get out of some of those on the winning side. But you also have an entire world (China, India, and Russia) that understands that gold is money, not a trading vehicle, and they want to buy it. They would rather buy gold at $900 than at $1,200. Gold carries no debt, no derivatives, no mark to model, you can't print it, or push a button and instantly "have some".
And as currencies of Greece, Spain, Italy, Ireland, Portugal, Dubai, and others are imploding daily, gold will be seen as the ultimate money at some point – but patience needs to be on your side on this trade.

I had a friend who was a clown. When he died, all his friends went to the funeral in one car. … Steven Wright
- Corporate bankruptcy filings rose 7% last month, with an average of 342 businesses filing for bankruptcy every day in January.
- Pressure is continuing to increase on wealthy borrowers, with serious delinquencies for prime jumbo mortgages rising to 9.6% from 9.2%, a 32nd straight monthly increase.
- Defaults on FHA-backed loans passed 9% in December, ending the year at 9.12%, up from 6.82% a year earlier and 8.94% in November

With the Fed suggesting they're going to stop buying bad mortgages in March, with the Commercial Real Estate market set to experience resets in the fall and into 2011, with jumbo loans imploding, with millions of foreclosed homes sitting idle – what happened to the loan ‘rework’ program?

Do you think that when they asked George Washington for ID that he just whipped out a quarter? … Steven Wright

Now think about this for a minute – (a) it’s not good for a bank to rework a loan from $300k to $200k – they immediately lose a lot of money in interest income and princpal – just to keep someone in their home. But how is it that "some" banks are making a fortune keeping the foreclosure house. One that is making a lot of noise recently is the Indymac Bank story. In July of 2008, Indymac was closed, and the assets were sold to One West Bank – that is owned by a Goldman Sachs VP along with George Soros. What you find is that if a bank “re-works” a loan – they will definitely lose money – but if they do NOT ‘re-work’ the loan - they stand to make a fortune as the FDIC is forced to ‘pay up’ and who pays – you and I end up paying to help the FDIC remain solvent (this video will tell you the entire story). http://www.thinkbigworksmall.com/mypage/player/tbws/23088/1459958

I drive way too fast to worry about cholesterol. … Steven Wright

The government is thinking quite seriously about "borrowing" our savings, and using them to create massive work projects and infrastructure improvements. In its basic form, we (the U.S.) have begun to save rather than spend. Over the past two years the savings rate has risen dramatically. Well, in a consumption society, if people are saving instead of spending, then you start to see a deflationary spiral. Ben Bernanke’s approach has been to cut interest rates to "zero" while at the same time, injecting monetary stimulus. Uncle Sam now looks at all the money sitting in 401K's, pension and savings plans, and is thinking of a way to ‘use’ that money. Right now the Treasury needs money, so the Federal Reserve "prints money", buys T-Bills, and WE have to pay the Fed back with interest. Currently the Chinese and the rest of the world are buying our debt – but what if – Uncle Sam DEMANDS that the 7,000 banks and institutions, loan the US the Trillions of dollars in savings accounts and money markets to buy our debt. We keep the money in our country – and WE (the people) suddenly own our own National Debt? Be very careful here as you are going to hear about a new "retirement" option, or a mandate to the banks that they have to lend Uncle Sam their reserves. As we speak the Money Market industry has been in talks with the Fed, about how to set up this game. With over $3.2 Trillion sitting in money market funds, and fund managers finding little in the way of "good investments", they actually like the idea of a guaranteed Fed payback. And Uncle Sam plans on spending your ‘savings’ to invest in stimulus – work programs – anything to keep GDP rising. And YES – this WILL put us even DEEPER in debt than we currently are – but elections are coming.

Which begs the question – can we spend our way out of a recession without creating either a depression or terrible inflation – the answer is NO. I think the U.S. will continue to borrow and spend ever-increasing amounts just to keep the GDP from rolling negative. There will be no slowdown in fiscal insanity, and our debts are going to continue to pile up until there is a coordinated global implosion - devaluation. All the debt bubbles from Greece to Ireland, from Spain to the UK, from Dubai to the U.S. are just floating around looking for a pin. It's my guess they'll find one. Stay long precious metals.

The Market:
I live on a one-way street that's also a dead end. I'm not sure how I got there. … Steven Wright

The wicked chop continues. The DOW and the S&P haven't been able to put in back to back "up" days since Feb 2nd. We get 150 points up, followed by 100 points down, or 65 up followed by 140 points down. Taking positions is akin to suicide. When the market enters a period of wicked chop like this, it "usually" signals a change is coming. Well, given the market ran UP from March of last year thru January of this year, then the most logical "change" would be one of a FALLING market instead of a RISING one. Except for the manufactured counter trend rallies, I feel that the path of least resistance is going to be "down". Yet the fact is, the PPT (plunge patrol team) is going to throw the kitchen sink at this market – in order to preserve the 2010 elections. There’s a lot of talk out there suggesting that more stimulus money is coming to market, earnings are going to soar, and yes the markets will rise. My guess is - the stimulus will keep the market moving sideways, not up. Frankly we've been looking for a mindless 300 to 500 point romp to sell shorts into, but so far we haven't seen one. If we get the romp, we'll ride it long, and then start shorting and buying puts. If we have one more leg down before a good bounce, we'll short that lightly, and then flip to long for the bounce. It's a traders market right now, and that's all we can do.

I saw a bank that said "24 Hour Banking," but I don't have that much time. … Steven Wright

We’ve sold out of everything – and are on the way toward finishing selling our 401k’s as well. The market has been a choppy mess for weeks, and I would honestly just sit on your hands and do nothing – seems to be the smartest strategy as of late. But if you must trade:

I would short the DIA under 99.00
I would short the SPY under 106.00.

Now if they get their act in gear will I go long? No. I would play the bounce be ready to short the romp higher.

Until next week – be safe.

R.F. Culbertson

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