RF's Financial News

RF's Financial News

Saturday, June 12, 2010

This week in Barons - 6.13.2010

This Week in Barons – 6-13-10:

“I Love It When a Plan Comes Together!”
After seeing the movie “A-Team” this evening – I was reminded that ‘plans’ and ‘soap operas’ have a way of keeping their audience riveted to the screen. Currently Europe's bursting at the seams, Japan's facing financial melt down, and the US is mired in debt that's mathematically impossible to repay. To get into these positions, bankers broke rules, created "exotic" assets, fudged numbers, kept two sets of books, and incorrectly rated virtually everything. The watchdogs in charge of making sure none of this happened were either complacent, or incompetent, or both. Then of course there's the issue of jail. In the movie the A-Team went to jail (erroneously but they were there) – however in our real-life, well scripted soap opera not one of the power brokers that caused the damage to our system went to jail – not a banker or any of the ratings agencies.

Soap operas keep people coming back because you never really know what's going to happen next. Well in our real world soap, what keeps me coming back is the simple fact that this soap opera plan effects my life. When Nixon decoupled us from the gold standard in 1971, it gave the bankers the green light to virtually do anything that they wanted. It gave our politicians the green light to spend on any entitlement or pork program they desired. I really wish more people would "tune in" and watch the real world soap opera called "our economy" and see just how completely warped things are.

On Thursday the stock market roared higher by almost 300 DOW points – but what changed?
- The news out of China was that their exports gained some incredible 50% - and if they are shipping 50% more goods - that means the world is buying 50% more goods, and therefore the global consumer is back – BUT wait – at 9:36 AM on Friday we learned that the Baltic Dry Index dropped another 3.9% - extending an 11-session losing streak in which it's dropped 21.9% - and a huge 14.5% on the week. This index measures demand for base commodities aboard bulk carriers, and is considered a barometer of economic demand. Well – if China is exporting 50% more goods, how are they getting it around the globe if the Baltic Index is crashing?
- Also on Thursday the initial jobless claims fell "unexpectedly" by 3000 folks. That’s a good thing – yes – BUT wait – it appears that last weeks initial jobless claims number was "revised higher" by 6000 people – so Thursday’s drop wasn’t really a drop at all.
- Then we heard that production in Japan was going along well and their GDP data suggested that they too were looking good – BUT wait – at 7:51 AM - Naoto Kan warned that Japan could face a debt crisis similar to Greece's unless it urgently deals with its growing national debt.
- Then at 7:35 AM we found out that UBS is the target of a preliminary forgery investigation by Luxembourg prosecutors, in relation to how the Swiss bank oversaw funds connected to Bernie Madoff.
- Then at 7:59 AM (timed to coincide with the release of its 2009 mortgage report) the FBI reported planning a nationwide crackdown on mortgage fraud, with hundreds of people likely to be arrested next week on charges such as inflating home appraisals and encouraging document falsification.
- Steve Forbes wrote to tell us à 7.5 million loans are in some stage of delinquency or foreclosure – which means that there is an 8.5 million "shadow inventory" of homes (over a two-year supply) that need to close just to clear the overhang of distressed properties. 25% of all current mortgages are ‘underwater’ – causing more and more homeowners to just walk away. These strategic defaults accounted for 35% of the December 2009 defaults — up from 23% in March of 2009. And the ‘zinger’ - nearly 70% of all of the loans that were modified - re-default within 12 months.
- But with all of this – and a 20% under/unemployment rate – How could the Michigan Consumer Index rise to its highest level in two years last week?
- Then there is a new Single Stock Circuit Breaker Rule that says if an S&P 500 stock rises or falls 10% in a 5-minute time period, a market-wide trading pause will occur in the stock for at least 5 minutes. The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion. However – the opening and closing price of a stock will NOT be subject to the 10% move threshold – in that the markets are open between 9:30 AM and 4:00 PM – and this rule will only be in effect between 9:45 AM ET and 3:35 PM – allowing the Goldman’s of the world to profit early and profit late. You potentially wondered why the last 30 minutes of trading lately has been absolutely ‘crazy’?
- And finally – the BP Soap Opera – understand that BP cannot pay for the clean-up and the reparations. No single company can withstand all the health ramifications – the property value loss – and the loss of tourism – especially to the ‘sunshine state.’ BP will either have to be bailed out, or go belly up in it's American unit.

The Market:
Understand that Bull markets do not create 300 point up days; however, Bear market bounces do! The issue however is that you really never know how far one of those bounces will go. So – does the bounce prove to be another one-day wonder, or does it have legs – my feeling says that it has more legs. The Market will not allow all of those ‘put buyers’ to succeed – and it needs to take more people in on the ‘long side’ and then when it's satisfied that it's got as many suckers as it can get, it's going to roll lower. I still think we have a date with DOW 9,000 this summer. The fact that on Friday we pulled out a flat day, proves to me that they are a lot more brave people out there. In past weeks, they would have never held the market up on a Friday fearing some nasty news out of Europe that may cause a nasty gap down on Monday. But Friday everyone was OK holding in there – and therefore, I suspect we have some more upside to come. If we can get past 10,255 there's no reason we can't flirt with 10,500 soon enough. That being said - no matter how far a bounce takes us, even if it's beyond that number, it's still a bounce in a Bear Market – and in due time being “SHORT” will be the right way to be.

We’re still almost totally in metals:

- GG at $43, IAG at $17, SLW at $18, SSRI at $20, GDXJ at $27, GLD at $115.86, NG at $6.64 and PHYS at $11.65

If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.

R.F. Culbertson

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