RF's Financial News

RF's Financial News

Saturday, August 28, 2010

This week in Barrons - 8-29-10

This Week in Barons – 8-29-10:

How Do You Know What's Real?
From an academic stand-point, during every downturn of the last 25 years, one thing you could count on was that people would "huddle" – meaning that people would cluster around the TV instead of going out to eat, or to the movies. Well this week this piece of news came across my desk: “The number of subscribers to cable, satellite and telecom TV services in the U.S. fell for the first time ever, in the second quarter. The U.S. multichannel TV market lost 216,000 customers last quarter, vs. a gain of 378,000 a year ago. Now, is that because more are using the Internet, or is it because people in foreclosure, with no jobs - have no way to pay it – or both?

This week brought us a tremendous amount of horrid economic news:
- existing housing sales fall 27% month over month
- home "inventories" are at their highest levels ever recorded
- new home fell 12.4%
- durable goods orders were up 0.2%, BUT after you take out transportation, they fell 2%, AND after you remove aircraft they fell 5%.
- 34 out of our 50 states are showing deficit spending for 2011 – the worst are: Nevada at 54%, Illinois at 41.5%, New Jersey at 38.3%, Arizona at 36.6%, North Carolina at 30.3%, Connecticut at 28.9%, South Carolina at 25.6%, California and Colorado at 21.6%, Florida at 20.2%, and New York at 37.3%. And it gets worse in 2012.

How are the states going to get the money to plug those holes? Raise taxes or cut services or both. And wouldn’t that mean even more job losses – YES. Is unemployment still 9.5% - well the Bureau of Labor Statistics tells us that if you add the people that fell ‘off’ the unemployment roles – the figure is approximately 17% - and if we include the ‘under-employed’ that raises the bar to over 25%.

One element is clear is that John Q. Public is finally ‘scared.’ For the first 7 months of this year - individual investors have pulled $32 Billion out of mutual funds. Also the amount of people pulling money out of their 401k's for "hardship withdrawals" is moving up rapidly. This is the slow motion train wreck that I continue to harp on. Look at the market, on down days we’re seeing large volumes and on up days anemic volume. As the economy deteriorates, as more people cut back, how can Obama continue to preach recovery?

If you want a true barometer of economic activity – examine adult toys – for example power boats. Factually – outside of charter fisherman – no one really needs a boat – and when the bills begin to pile up – the toys begin to go. Right now – a boat that sells new for $130,000 – will sell one or two years old for $40,000. That’s right – less than 30 cents on the dollar.

In terms of what you should do: (a) don't over extend, (b) save your money, and (c ) learn how to short the markets. Gold and Silver won't make you rich, but they will protect you from inflation and deflation when they hit.

Oh and by the way, (2 years ago) when I originally stated my prediction of DOW 5,000 – I think I was alone. Now it’s becoming crowded down here because this week several big name "analysts" have come out with DOW 5K predictions. The latest came from Charles Nenner, a gent who has made some accurate calls in the past said: “Stocks are currently in a bear-market rally, and looking at charts and past trends, unemployment and leading indicators suggest the Dow will drop to 5,000 in the next two to two-and-a-half years, and things look really bad for the next 10 years.”

The Market:
It’s getting harder and harder to manipulate a market – as more and more people get out of it. With people taking money OUT of their 401k's just to live on, and $32 Billion coming out of mutual funds this year already – it’s becoming more and more difficult to pull off big rallies.

But Friday we had a nice rally. The street wanted to hear more about how Bernanke and the Fed would flood the world with liquidity. Well he didn't say that. He said he was standing firm, but if the economy got weaker then he would use more easing and "other tools" to stimulate the market. At first they market fell on the news – we were red by 50 points moments after the statement – but then we ended the day up 164 points.

Did Bernanke really say anything we didn't know? I don't think so. GDP was substantially revised downward. Unemployment is still a problem. First-time jobless claims came in at 473k rather than 500k the week before. Honestly, all Friday was - was a slightly over-sold bounce. On the 17th we were at DOW 10,480, then fell to 9,937 and now we’re at 10,151 – off 350 points for the week.

This time the problems that we face are different. This is a credit and balance sheet recession not a business cycle one. And the responses to this recession are going to be different as well. We've had overnight lending at 0% for YEARS now – that’s new. We gave out Trillions of $’s in bail outs – that’s new. We took over GM – that’s new. We gave people $8,000 to buy a house – that’s new.

The Fed is going to fight this recession with all that they have – and we’re going to see wild, massive runs higher – and in particular this bounce could last for another couple of days into Monday or Tuesday. But then it will fade and we will be looking at September – historically the weakest month of the year, with no earnings and nothing but infighting as the politicians fight over the elections – I think we can lean short again soon.

We’re in metals and beginning to strengthen our positions in ‘short’ ETF’s: We’re back in TZA, DXD and SDOW (all 3 inverse market ETF’s. We’re also in the VXX because we see increased volatility coming. The metals we like for a long time – unless something dramatic occurs. The ETF’s we’re in and out of – depending upon the feel of the market.

If we see a continued run – you may want to look at CTXS over 59.5 for example.

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’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a 4 months or so ago now:

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

R.F. Culbertson

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