This Week in Barons – 7-4-10:
“I Gots to Get Me One of These…” Independence Day (the movie)
Happy 4th of July! Thanks to Steve Forbes and Jim Taylor for input to today’s Barons. What we saw this week was fear – not necessarily fear of our own economy but rather the economy that’s driving global expansion – China! As China’s economy slows (transitioning from exporter to importer) – our hopes for expansion now rest in the hands of someone else. The U.S. Debt to GDP ratio now mirrors Japan where household numbers on personal debt have moved from 68 to 98% over the past 10 years – which is simply too much debt to service both expansion and a robust market.
Currently, we need to worry about a ‘mentality shift’. The mental shift from there being ‘optimism’ and something ‘better’ being just around the corner – to that of resignation and defeat. The impact of this recession extends far beyond the 16.6% who are underemployed:
- 55% of adults in the labor force say that since the economic slump began they have suffered a spell of unemployment, a pay cut, a reduction in hours or have become involuntary part-time workers
- 15% of Americans say the U.S. economy is in good shape
- 62% of Americans have cut back on their spending
- 48% of Americans say they are in worse financial shape now than before the recession. Those with annual household incomes below $50,000, and those between 50 and 64 are being viewed as in the worst shape.
- We are experiencing the biggest financial meltdown in the post-World War II era – as household wealth fell by about 20% from 2007 to 2009.
- 26% of Americans say that when their children reach their age, their children will have a worse standard of living – up from 10% a decade ago.
- 32% of adults now say they are not confident that they will have enough income and assets to finance their retirement – up from 25% a year ago.
Some ‘disturbing’ facts:
- The SEC settled this week with Gary Aquirre for $755,000 – a lawyer that was wrongfully terminated for ‘aggressively’ pursing an insider-trading case involving the hedge fund Pequot Capital Management. WHAT?? → he was fired for "aggressively pursuing an insider trading case" – isn’t that what we pay the SEC to do? OK – then did we fire the FOUR (4) SEC investigators for NOT pursuing Bernie Madoff – NO! OK when Goldman Sachs posts 100% perfect trading histories (NO LOSES) – so can anyone really do that without insider information – NO – but is that being actively pursued – NO!
- Illinois stopped paying it’s bills this week.
- 7.9 million jobs lost – most forever
- Fannie – Freddie bailout could cost taxpayers over $1 Trillion
- Home Sales → Pending home sales plunge a record 30%. Remember that dramatic drop in home sales last month – well - Foreclosures accounted for 31% of those U.S. home sales in Q1 (according to RealtyTrac). And the average price for foreclosed properties was 27% below that of regular sales. In a normal market only 1 to 2 percent of home sales are foreclosures FYI (so this is significant.)
- The June ISM (manufacturing) index fell 20.6 points from 89.9 in May – to 69.3 in June – WOW!
- Congressman Ron Paul sponsored a bill to audit the FED – with 320 co-sponsors – it came back from the Senate – and 114 co-sponsors ‘jumped ship’ and reversed their stance – I wonder why?
- KRUGMAN: 'We are now, I fear, in the early stages of a third depression' – but a push for new Internet sales taxes; Would draw $23B”
- We are IN a depression – that is being covered up by food stamps, unemployment benefits and some 30 other Government programs. The depression will get worse.
JOBS Report: Look at Friday's jobs report – it was a horrifying disaster. After trillions of dollars spent on stimulus – the BEST we can do is lose more jobs? Not only did 600K people just give up looking for work, the workweek itself contracted, as did hourly earnings. On TOP of that – imagine if the birth/death model didn’t say we ‘created’ 147,000 ‘phantom’ jobs – subtract those – and we revised the previous months jobs report lower. To add insult to injury – and to quote Richard Vedder (director of the Center for College Affordability & Productivity in Washington, D.C.) “We have credential inflation in America. A college degree has become mundane and ordinary. We used to send kids to college to become lawyers and doctors. Now we send them to college to work at Walmart."
I will have another update on the ‘oil patch’ (some potential ways to play the oil stocks) coming out on Tuesday of this week.
The jobs report stunk as we knew that it would. The market tried to "hold up" in the face of it, but couldn't hang on. We ended the day 46 points lower. So, we just came through a very poor quarter, where the market is down some 10%. Many are telling us that the worst is behind us and we should expect a rising market. My question is why – what’s changed? Hype over earnings season – maybe?
On a short term technical basis the market is "oversold". However, some of the single biggest train wrecks we've ever had came while the market was oversold technically. The 50 day moving average fell under the 200 day in the S&P and that is called a "death cross", meaning it shows that in the short term the market is very weak. Then we had a DOW theory bear market confirmation as the transports and the industrials hit and closed on lower lows. That’s two very powerful signals that "all is not well". If the market was truly free (no plunge patrol team – etc.) we'd fall 2000 points in the next two weeks. But the market is NOT free so it’s very hard to figure out the short-term moves. But the long-term moves are fairly well set in stone – we will be heading lower, much lower. My target is DOW 5000. But to get there we will have to be on a very wicked, volatile ride. My guess is that we shoot a bit lower this week and then they "rush in" and try and hype us higher into earnings season. But then after that's over, I see no reason why we won't fall back pretty substantially seeing DOW 9,000 this summer. And whether that happens in 2 weeks or 2 months – that is the question.
I think you can short the rallies and buy the big dips. I wouldn't be against buying long term put options against the major averages on any big market moves higher.
Oh yes – Gold and Silver. They were both attacked this week by hedge funds selling to raise cash and central banks beating on it. I expect them to sell more and yes - I'll be buying.
We’re in metals and ‘short’ ETF’s: This week we purchased TZA, DXD and SDOW (all 3 inverse market ETF’s (that is to say these ‘Exchange Traded Funds’ increase in value when the market goes down):
- 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 → FYI for the second time in two weeks, the Gold ETF (GLD) surged above resistance at 122 and then moved back below with a long red candlestick. The overall uptrend in GLD remains in place, but there is considerable resistance in this area. First support is set at last week’s lows. Second support is set at the May low.
- DXD an inverse DOW fund we bought in at $31.50, SDOW is a 300% short – but please be careful here as things move quickly, and TZA a small cap 300% Bear fund as well we bought in @ $8.60 – again be careful here.
Please enjoy the 4th of July with family and friends – because in the end – that’s what really matters → ‘honestly’ this money stuff is secondary!
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Until next week – be safe.