RF's Financial News

RF's Financial News

Sunday, October 17, 2010

This week in Barrons - 10-17-10

This Week in Barons – 10–17-10:

Ben Bernanke = Pass - Fail
Some of you know me as a Professor at CMU – and in that capacity - very few people take the courses that I teach “Pass/Fail” – but those who do – often do so because they ‘lack the time’. Well – Mr. Bernanke – let’s assume you’re one of those people – taking my course – Pass/Fail.

As Steve Forbes wrote me this week: “I'm always flabbergasted at the CNBC's of the world and their absolute rejection of the notion that we're not headed for a catastrophic meltdown. They report the day-to-day life of traders, without consideration of what's happening in the real world. For example: in today's Seattle Times, they are advertising ‘resort style condominiums’, which originally went to the market from: $380k to $990k, are now one the auction block starting at $145k. This is in a prime, suburban area with all of the typical design highlights. You do the math – but taking a 40% haircut – 40 cents on the dollar – what is ‘Fair Market Value’ (FMV) anymore?”
- Well, I guess Ben just didn’t have the time to concentrate on housing, so Housing = ‘F’

Last week the world met to try and get a grasp on the global currency wars that we predicted so long ago, and which have come true. It seems that Gold has risen against 72 out of 72 fiat currencies around the world – with the U.S. and Zimbabwe falling into the same boat. What everyone was hoping for was a global agreement to emerge, but each country was sticking to its guns, knowing silently that their only hope for survival was to have their currency beat everyone else’s to the bottom.
- Well, I guess Ben just didn’t have the time for Currency either = ‘F’

Remember when Mr. Bernanke told us that our banking system was solid, and there was not a chance that anything bad could happen – and then the banking system imploded. Then he said subprime mortgages were contained, and there was no chance of a contagion that worked into other mortgage arenas – and then subprime imploded and now even prime mortgages were found to be fraudulent. Well a good friend Jacob Hawkinson wrote me this week about the most recent foreclosure fiasco – it seems as if in the mass of securitization, IOU’s, MBS’s, REMIC’s, MER’s (and the list continues) – it seems as if some people either forgot or ‘forged’ other people signatures in order to get the mortage/loan paperwork thru the conduit. The main thinking on any home title is that you need a clear ‘chain of title’. That is to say: you can endorse the loan/note as many times as you please, but you have to have a clear chain of title right on the actual note: I sold the note to ‘Moe’, who sold it to ‘Larry’, who sold it to ‘Curly’, and all our notarized signatures are actually, physically, on the note, one after the other. Now, if for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay. Now – let me repeat that – If the chain of title of the note is broken, then the borrower no longer owes any money on the loan! And what if some of those ‘signature enhancers’ (people who over-looked or faked signatures) – were investment banks. Well, now we get to sue the Goldman’s of the world for all kinds of issues – again!
- Well, I guess Ben just didn’t have the time for Foreclosures either = ‘F’

Now Mr. Bernanke is indeed a very smart fellow – and he knows exactly what is happening. What is Ben spending his time on – the answer is ‘inflation’ vs ‘deflation.’ And one of our major debt holders – China – is quite troubled over what we've been doing and what we continue to tell them to do. I can't say I blame them. We have a Treasury Secretary (in charge of Trillions of dollars), but couldn’t file a tax return? We have a Central banker who never saw a single issue coming our way, but now supposedly knows how to fix them. And we just announced to the world that some 60 Million U.S. mortgages ($ Trillions) and more Mortgage Backed Securities might be/could be/probably are fraudulent and potentially worthless. The fraud other nations are seeing:
- Steven Rattner (former car-czar) is finalizing a deal with the SEC over his role in a "pay to play" scandal involving New York's public pension fund – he’ll pay $6M and agree to a two-year ban from the securities industry
- Angelo Mozilo, CEO of Countrywide has agreed to pay the biggest fine ever assessed to an executive of a public company - $67.5 million.

Getting back to Ben – what Ben needs, is to get money into the hands of the U.S. consumer so that they can ‘shop till they drop.’ And without being able to write everyone a check ‘personally’ – he went to the most common vehicle he could manage – the stock market. Remember 2 years ago when Ben Bernanke said to a Senate committee: “a gradual increase in economic strength will be evident as asset prices (stocks) rise. Because as asset prices rise (stocks), the economy will get better.” Steve Sjuggerud’s research confirms that in 83% of the cases – following ‘Fed’ cash injections – the stock market was higher. Ben told us two years ago that asset prices would rise. He could NOT have known that unless he was going to make it happen.
- Well, Ben definitely had time for Market Manipulation = ‘PASS’

The Market:
So, if Ben’s directive works – asset prices (stocks) will go higher, and people will "get richer" and hopefully feel better and spend some money. That's the ONLY reason this market is at 11K! In fact, new data show us that the stock market saw it's 23rd consecutive weekly outflow of money via mutual fund redemptions, with $5.6 billion pulled out for the month. Only the Fed has pockets big enough to off-set billions fleeing from the ‘consumer’ side of the market.

So, we've been telling you all along to lean long, but keep a finger near the sell button – and so far that’s been working. But understand that this market – like a rubber band – is getting pretty stretched.

Since Friday was options expiration day, and it ended the session essentially flat – honestly – it’s hard to determine if they're looking to take a breather here, or "push for more returns".

Congrats to one of the readers who wrote in about a trade on Friday - SLAB – if it were to get over $38.10 it could run – well it ran immediately to $39.69 – congrats there!

Let’s review our holdings:
GDXJ – a basket of gold miners
GG – IAG – NG – AAU – 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)

Consider snapping up some NGD (New Gold) as it’s run over the 6.90 target we had on it.

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, and NEM over 65.

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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