RF's Financial News

RF's Financial News

Sunday, August 1, 2010

This week in Barrons - 8-1-10

This Week in Barons – 8-1-10:

With a Wink and a Nod (hint – hint):
Winks, nods, and hidden handshakes – when it comes to the market - they are all codes that stand for something. But beware – something peculiar this way comes:
- "A nation can survive its fools, and even the ambitious. But it cannot survive treason from within. For the traitor appears not a traitor; he speaks in accents familiar to his victims, and he wears their face and their arguments, he appeals to the baseness that lies deep in the hearts of all men. He rots the soul of a nation." --Marcus Tullius Cicero 42B.C
- “The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie."-- Dr. Joseph M. Goebbels
- "Once a government is committed to the principle of silencing the voice of opposition, it has only one way to go, and that is down the path of increasingly repressive measures, until it becomes a source of terror to all its citizens and creates a country where everyone lives in fear." -- Harry S Truman

Why begin like this: (a) for the past year we have had to deal with a healthcare plan that no one knows what it will cost or how it will take place. The signers of the bill said “we have to pass the bill to find out what's in it". The population doesn’t want it – yet you're getting it rammed down your throat. (b) now we have FinReg – another 2,300 page bill that does NOTHING for the middle class American. It gives the Federal Reserve almost dictatorial power. It does nothing to address the problems with Fannie Mae and Freddie Mac, nor does it eliminate "too big to fail". It does nothing to eliminate the horrific bubble in the derivatives market, nor to reform the organization most responsible for the recent financial crisis - the Federal Reserve. AND buried deep in the bill (Section 929l) is the fact that the SEC is exempt from any and all inquisitions via the Freedom Of Information Act, or any other request via the public sector into what they are doing.

Now combine this with the following (many of this stats from Yahoo) :
- 10,000 people make 30% of the TOTAL INCOME IN THE U.S. – leaving 99.99% to fight over the remainder
- 83% of all U.S. stocks are in the hands of 1% of the people
- 61% of Americans "always or usually" live paycheck to paycheck, which was up from 49% from 2008 and 43% from 2007
- 66% of the income growth between 2001 and 2007 went to the top 1% of all Americans
- 43% of Americans have less than $10,000 saved for retirement
- 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32% increase over 2008.
- For the first time in U.S. history, Banks own a greater share of residential housing net worth in the United States than all individuals combined
- Today the average Federal worker earns 60% MORE than the average private sector worker
- The bottom 80% of Americans hold 7% of the liquid financial assets
- 40% of employed Americans are in service jobs that are near or below the poverty line
- For the first time in U.S. history - over 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.
- 21% of our children are living below the poverty line!

Now as you think across a dramatically shrinking middle class – and how the Government is sooo much a part of our lives – think about the effect that has on elements such as: retail sales, housing, and medical care.

The Market:
A week ago we got another ‘wink and nod’ from Ben Bernake as he suggested that the FED might not want to pay interest on excess banking reserves all that much longer. What that means is that currently Banks can borrow from the FED for 0%, then lend back for an interest rate – and that has been one of the reasons why lending is down 25% (or more), and why small business can't get loans. Honestly - why would you loan money to a business (obviously taking on risk) when you can loan back to the FED and get a guaranteed return? You wouldn't and neither do the bankers. But if Ben’s signal for them to stop paying interest is correct – we are going to see a flood of money hit this economy – which could almost instantly cause a pick-up in all sectors of the economy – even jobs. Why - November Elections!

Now you know that I’ve been preaching DOW 9K – and many of your most recent questions surround – so where does it go from there? Well, if I’m right - where it goes from there will be "up" and up big. If I’m reading the winks, nods and secret handshakes correctly we should see the market fade and fade, and then one day (probably in September) we'll hear news about how banks are lending like mad. We'll see contracts get signed and companies hire people – and the market will roar higher on the news, possibly hitting 12K. This would be the push in advance of the 2011 - 2012 recession/depression. When that last big bundle of cash and lending runs out – the only Ben has is stimulus at that point – and that’s when ‘hyper inflation’ will hit. With hundreds and hundreds of billions let loose from the banks to the economy, interest rates will rise, and economic activity will rise, and prices will rise (maybe even on houses for a brief time). But, beware when that is over (post election) we will be left with higher rates, no more stimulus, banks with no reserves, and a nightmare on our hands.

Back at 11,200 I stuck my neck out and said "that's it, we're going down, and we'll see DOW 9K this summer". We got lucky because in early July we got to 9,600, and then came roaring back. Many you wondered if that's as low as we were going to get and I said that I didn't think so. It was getting to easy for the shorts and put buyers, and they needed to get shaken out – and we ran 1,000 points.

My biggest question lately, is "will they keep pushing us up and up, luring in more people, or would they be satisfied that they knocked out the shorts, and then roll us over for new lows ahead of the fall "insanity run up". Frankly - I still don't know. On Friday we had GDP for Q2 come in below expectations at 2.4%. But the Chicago PMI and Consumer Confidence came in slightly better than last weeks disaster. Therefore ‘they’ could have ‘sold the news’ but didn’t and that implies that they aren’t done pushing this market higher? Granted we're only at 10,464 and we were at 10,600 as the recent high. I'm guessing they have their sights on reclaiming that level, but to think they can get us substantially higher than that is a stretch. As much as I'm sure they'd love to, funds are bleeding redemptions, we have elections coming up rather soon, we're looking at tax increases, and I just don't know that they have the firepower to pull it off.

We’re in metals and in and out of a couple small positions in ‘short’ ETF’s: We’re back in (and out) of 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)

As you see above – the metals we like for a while – unless something dramatic occurs. And if we fade thru August – the inverse ETF’s are a smart play – and potentially look for the ‘wink and nod’ in September for the ‘insanity run’. Please be careful out there.

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.

If you’re into movie mash-ups à here’s one that my oldest son did à It’s nearly 100,000 views – so good for him!

If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a month or so ago now:

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

R.F. Culbertson

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