This Week in Barrons – 5-2-10:
The Truth Shall Set You Free...
There is an old saying - "there are 3 sides to every story". Well, unfortunately there’s only 1 truth. There are multiple spins, avoidances, exaggerations – but there’s only 1 truth.
Goldman apparently hid the fact that they didn't want billions in toxic sludge on their books when the housing market was destined to blow up, so they tarted it up, and sold it to any investor they could con into believing it was a "good investment". Recently, internal emails have surfaced where in European office members were telling GS top brass that many of their clients were shocked and outraged when they actually figured out how lousy the ingredients of the investment were and they feel “Mis-Represented”.
How about the phrase: "Deficits don't Matter?" If that’s true – then why on earth are people raising a fuss over Greece? And if debt isn’t a problem, who cares about Spain, Portugal, Italy, Ireland, the UK, Japan, the US for that matter? So statements like: "Deficits don't Matter" is not the truth. Let’s look at a couple un-truths that happened just this week:
- Morgan Stanley was fined over metals trading. The Commodity Futures Trading Commission (CFTC) assessed $39M of fines on Morgan Stanley (MS) for breaching rules in the precious metals and oil markets.
- Federal prosecutors have opened a criminal probe into whether Goldman Sachs (GS) or its employees committed securities fraud connected to mortgage trading. Meanwhile, sources said Goldman may soon settle its fraud case with the SEC. The SEC has an "unlimited supply of ammunition" in the form of e-mails and records it could release, and Goldman doesn't want those documents aired in public.
- A Judge ruled this week that Goldman Sachs (GS), Citigroup (C) and several other high-profile banks will have to defend themselves against allegations that they conspired to rig bids for municipal investment contracts and derivatives. Fifteen California cities and counties brought the suit against the banks.
How about the largest un-truth of all: “The Housing Market has bottomed!” According to Morgan Stanley - strategic mortgage defaults have risen to 12% of all mortgage defaults, with borrowers more likely to stop paying their mortgages (and divert spending elsewhere) the higher their credit scores and the larger their loans. So with retail sales are soaring – let’s do a little math here. Last week we learned that 7 million homes are now delinquent. So with about a million of those being “strategic” where people are saying: "to heck with paying $2,000 a month on this house, I'm going to just live here until they kick us out and in the mean time I'm buying an iPad, and a new TV". So that’s billions of dollars that are being diverted from paying mortgages (the single largest living expense) to being spent elsewhere – like clothes and other retail sales items. Well who pays for the house – well eventually we do. The banks will eventually foreclose and be forced out of business - taken over by the FDIC (which is bankrupt now and will need a bail out) – and that bailout money comes from you and me.
Lastly – (Bloomberg, April 29th) - Since the U.S. recession began in December 2007, Congress has extended the length of unemployment benefits for the jobless three times – which is the limit. The line of 99 weeks is the quiet limit – and a mark that hundreds of thousands of Americans have already reached – and in coming months - the number of those who will receive their final government check is projected to top 1 million. Do you think those without unemployment benefits will be able to pay their mortgage?
So we have 18 separate countries in the ‘extended’ Europe that are insolvent for the most part. We have the worlds most "well known" banking institution getting fraud investigations and potentially criminal investigations. We have Morgan Stanley getting fined for "breeching the rules" in the commodity game. We have retail sales being spurred by "strategic" mortgage defaults (fraud). There is no recovery, there is simply "free money" from Uncle Sam.
Now if you wondered why gold and silver started to move this week – the truth is that the world is slowly coming to grips with the truth. Friday the market dipped – it should have crashed – and having it end at the DOW 11,008 – tells me that a lot of people wanted to hold this ‘psychological level’ before the weekend. And it appears that the deal with Greece will be approved – so Greece will live on, only to default in the future instead of now.
So the question becomes: If they rescue Greece, does the market just resume its climb looking at DOW 11,700+ or do we see them rush in, push us back up to the recent high of 11,258, only to make a triple top and we roll back down? Obviously the jury's out, but I'm in the camp that we’re going to push the triple top and roll back down – but potentially for a slightly different reason. A few weeks back I talked of shorting the market, buying inverse ETF’s – well one element of notice lately – is the large influx of "amateur" investors starting to flood into the market. History shows that when the "sheep" finally figure it's time to get in, the big boys are more than happy to sell overpriced stocks to them, and get short for the fleecing of the sheep. Honestly – when “Joe Sixpack” is rushing the gates to get in, 99% or the time your best bet is to "get out".
Let’s assess where we are - we dove back into some metals – commodities last week and are currently:
- Long: GG at $43
- IAG at $17
- SLW at $18
- And SSRI at $20
- I’m also thinking about diving back into VXX – which is a much longer term play.
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Until next week – be safe.