RF's Financial News

RF's Financial News

Sunday, October 10, 2010

This week in Barrons - 10-10-10

This Week in Barons – 10–10-10:

Whistling past the Graveyard
This week:
- Mortgage applications and refi’s fell for the fifth straight week - despite the lowest mortgage rates ever recorded.
- Banks want to foreclose and sell the houses cheaper, to make their money on the spread, but they can't because no one can follow the paper trail.
- Global investors, screwed by the likes of Goldman are starting to push back via lawsuits.
- The jobs report showed that we lost 106k jobs (95k + 11k in the birth/death model) – and the real underemployment number rose to 17%.
- AND this past week 2,343 to 1 (sellers to buyers) of the largest corporations in the world – were selling their own stock rather than buying it! Yep the CEO’s and CFO’s are "gettin out while the gettin is good". Oracle insiders alone sold a whopping $465 Million dollars worth of their stock!

Yet the market went up. It broke over 11K and held it for the weekend. Now with gold and silver rising, bonds rising, insiders bailing out, mutual funds posting their umpteenth week of withdrawals, and a horrid employment report, should the market have gone up? It's rising because the Fed will continue to push fairy tale money into a bloated system. The Banks and Wall Street get the first cut, so they have no problem pushing stocks higher. Now, if the Fed does not react with another $2 - 2.5 TRILLION worth of stimulus – we will slide into a deep dark depression, AND some major banks will fail. Our credit economy was built on low down payments and easy monthly payments, and unless everyone is allowed to have that same level of leverage again, there is going to be a "new normal" and that new normal is economic activity on a much subdued level. So, Item One: we have 41 million on food stamps now, record bankruptcies, and millions out of work without access to unlimited credit. They can't "borrow themselves out of the hole". Item Two: Jobs. Sanofi just announced it was laying off 25% of it's American workers – notice they said "American". Item Three: We are no where close to a bottom in housing! Foreclosures had to be halted in many states because of bad paperwork? It seems that all along the way – during the bubble – we didn't care about recording deeds and liens properly. Now – currently the foreclosure industry is about 18 months behind – and is made up of two pieces: Piece #1: If you’re not paying your $1,500 or $2,000 a month mortgage each month, you have a lot of monthly money to go buy "stuff" with – such as: clothes, iPads, TV's, music players you name it – and people are using their mortgage money to live large. Piece #2: With all of the excess paperwork – it seems that the banks can’t figure out who owns the liens on the houses. So, judges have called a halt to a lot of the foreclosure process. We now have moratoriums in over 23 states until regulators can dig through the mess and figure out just who owns what. This allows people a little bit longer to ‘live large’ but puts a big crimp on the banks. You see – due to a recent change in the regulations – Banks now really DO want to foreclose, because if they foreclose and then blow the house out with a "short sale", Uncle Sam picks up the tab for the shortfall. In other words, if the original mortgage was for $500k, and the house now ‘short sells’ for $150k – the taxpayer makes up the $350k difference! If this moratorium continues, banks that were looking to make a fortune turning over cheap properties are going to take a big hit, but "folks" squatting in the houses get a stay of execution. And to add insult to injury – as more and more homes sit in foreclosure, more and more local Governments are going belly up. Governments need tax revenues to survive – and with swarms of houses paying no taxes, incomes at the town level continue to fall. And further on - townships are re-evaluating their real estate taxes and seeing homes assessed at 300K, only coming up at 100K now, thus taking in considerably less in tax dollars on down the road.

But wait - just this week, Goldman Sachs was sued this week by LBBW because it lost $37M in a Goldman-sold CDO deal. Goldman advertised the deal as being "Safe, Secure, and Nearly Risk Free". But inside this deal, it was 33% subprime and 46% "mid-prime" mortgages – which (naturally) all defaulted and LBBW took the hit. Now LBBW wants Goldman to admit to “committing fraud and, or, was negligent in marketing and selling the notes". LBBW is laying the groundwork for hundreds of these legal suits.

It gets worse – J.P. Morgan – who at one point was short 30% of the entire worlds silver production – is watching silver continue to climb. Who's making up for the losses? Are we staring at a situation where some of these monster short sellers are about to go under without another bail out? I believe we are. The short sellers have lost control of the manipulations and they are in dire straights.

We are going to get QE2. It’s not an accident that gold and silver have gone up against 73 fiat currencies of the world. As countries try to devalue their currency, gold and silver will do what they've done for centuries - preserve your buying power. You see - the Fed can create money but cannot control its "velocity". Meaning making the money is only half the job – the other half is getting it into the hands of those who will go and spend it. You see Bernanke thought that if they printed enough money, the banks would lend it out, consumers would eat it up and we could party like it's 1999 again. But the Banks didn't lend it - they instantly parked it right back at the Fed and made the interest rate spread with NO risk. So there was no velocity. Then the FED pushed business credit, but to quote one businessman - "I don't need credit, I need customers". So the Fed has been pushing the MARKET higher – so everyone feels rich enough to start spending. Well, we're over 11K – and the individual investor is still scared - (he should be, he's been fleeced twice in ten years) – and the sentiment surveys show a drop in confidence. So, the only question is, how far will they push the market? Honestly, I didn't really think they'd get it this far. It’s becoming increasingly clear that the world has had about enough of our economy and is scrambling to diversify out of our Treasuries – leaving the FED as the only customer for our paper, either Government or Corporate. That has never gone on all that long – and I have a feeling we're about to find out how far they can go.

The Market...
DOW 11K - I'm amazed. Who would have thought – when we bought SLW on May 14th, 2009 at $3.25 – that it would be $27 now. The shares of UYM at $10.50 at the time, are now worth $39. Our NGD that we purchased at $2.59 is now worth $7.00. Yes, the world certainly believes in the metals and miners.

Okay, so what happens now? The first scenario is that in the fall of the second year of a Presidency, stocks generally run up into December – because investors know that the midterm elections probably produced gridlock and they don't have to fear new policies. Then on top of that, we know that at some point Bernanke is going to unleash holy hell via Quantitative Easing, giving Wall Street even more money to go peddle stocks with. That is a powerful combination and could push us straight up from here. Scenario two is a bit bleaker with earnings season is upon us and we already know what the insiders think – they’re leaving their company’s stock in record numbers. Is it possible that despite the Presidential cycle and the Fed's money printing, enough companies give lousy guidance to derail the run for a bit, even allow for a mini rug pull so Wall Street can pick everyone's pocket?

Unfortunately - we could continue to 12K and beyond – stay strong into the elections and then see the bottom fall out, or we could have a rug pull at any moment. I honestly wish I could be more decisive. Pay special attention to materials and metals, since a weaker dollar makes commodities of all kinds more expensive. But it's prudent to use smaller positions and hang near those sell buttons just in case.

Let’s review our holdings:
GDXJ – a basket of gold miners
GG – IAG – NG – individual gold miners
GLD – PHYS – pegged to the price of Gold itself
SLW – SSRI – silver miners and indexes
AUY – specific miner – heading into earnings season
VXX – volatility index (for the long haul)
I did pick up some AAU @ 3.10

If the market continues to have legs – you may want to look at: MME over 35, MDT over 34, UYM over 39, and BTU over 52.

I’m still looking at the miners – because with the recent run up in the metals – their earnings could be a real up-side surprise – look at: ABX over 48, NEM over 65, and NGD over 6.90

We’re still in and out (mostly out these days) of TZA, DXD and SDOW on a daily basis (these are ETF’s that allow you to invest directly in the market going ‘down’ – for those that do not like to ‘short’).

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:
Until next week – be safe.

R.F. Culbertson

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