RF's Financial News

RF's Financial News

Sunday, December 19, 2010

This week in Barrons - 12-19-10

This Week in Barons – 12–19-10:

Remember the Day!
December 25th is right around the corner. It’s a truly magical day. It’s a day when the world puts down their weapons and for one day we have ‘Peace on Earth – Good Will Toward Men’. Yes it’s a truly magical day!

But unfortunately – we know the end is coming:
- The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress.
- U.S. Postal Service workers who handle letters addressed to Santa at the North Pole say more letters ask for basics – coats, socks and shoes – than ask for extras: dolls, video games and computers.
- 6 more small banks on Friday – bringing the total to 157 closed this year.
- Payrolls decreased in 28 U.S. states and the unemployment rate climbed in 21.
- This week marked the 32nd consecutive outflow from domestic equity mutual funds – equaling $2.7 billion versus $1.7 billion last year.

This week Moody's Investors Service warned this week that it may downgrade Spanish government debt, citing the country's refinancing needs next year and the strain of recapitalizing its debt-strapped banks. Moody's said a downgrade could be triggered by "Spain's vulnerability to funding stress given its high refinancing needs in 2011," a problem that "has recently been amplified by fragile market confidence.” Spain's debt problem could worsen "should the cost of bank recapitalization prove to be higher than expected," Moody's said in a press release, adding that there are concerns whether Spain can achieve the needed "sustainable and structural improvement." Europe is a disaster. There are destructive riots raging in Greece, in Italy they're protesting; in Ireland the ECB is shoveling money as fast as Bernanke is over here. No matter where you look except for Russia, China, India, Brazil things aren't going so well.

But not to fear, this week we learned that consumer prices went up a mere 0.1%. The Empire state manufacturing report came in, and it went from -11 last month to +10 this month. The only reason we're seeing economic activity is because Ben Bernanke has expanded the Fed's balance sheet to record levels. Perhaps Ben understands that after spending $2.5 Trillion in stimulus - the best he could get was a sub par rebound. But the tug of war is brewing. Wall Street wants to do it's regularly scheduled “rug pull” to fleece the American investor – but Ben’s giving Wall Street money to support prices so that people "feel wealthy" as their stocks go up. It's an interesting tug of war for sure.

But remember: EVERY single dollar in circulation came into being as a DEBT. Meaning the U.S. says that it needs dollars – so the U.S. asks the Treasury to print some money – well if the Treasury doesn’t have it (which they don’t) they go to the Fed (Mr. Bernanke) and ask for it – and Ben naturally says YES – but it comes with an interest payment (say 3%) due to the FED in ‘real dollars’. Now there comes a point when just the interest on all the money we've borrowed from the Fed, is bigger than we can pay and still keep things moving along. That day is here – because all the interest due the Fed is now our 5th biggest expenditure right behind defense. In 2009, we the people paid $383 Billion in interest to the Fed, and this year will be more. That's 11% of our entire U.S. budget that is going toward paying the Federal Reserve interest on money it didn't have and printed out of thin air.

Also notice that in the face of all the Fed's efforts to keep interest rates down – they are indeed rising. Now - are they rising because of the imagined economic strength, or are they rising as people around the globe flee the dollar and rates have to rise in order to attract buyers? My feeling is that the world does not want dollars any more. Russia has agreed to use the Chinese currency in trades between the two nations. As this continues and expands, two things will happen. Silver and gold will be looked to as a safety haven against fiat currency, and interest rates will continue to rise - not in a straight line of course. The Fed will step up its efforts - but in the long run – it’s inevitable. How do you think real estate will fare if rates go to 6% when they couldn't sell them at 3.95%? In September home prices fell in 18 of the 20 metro areas tracked by Standard & Poor's Case-Shiller composite home price index – which was worse than August. "There is a large supply of houses on the market," says David Blitzer, chair of the index committee at Standard & Poor's. "And further, hidden supply due to delinquent mortgages, pending foreclosures or vacant homes." The top 5 urban areas of decline are:
- Cleveland where prices dropped a scary 3% in September alone.
- Minneapolis, where home prices have retreated for three straight months, most recently declining by 2.1% in the month of September.
- Portland, where housing prices fell by 1.9% in September.
- Dallas, where the town's football team isn't the only thing sinking this fall. Home prices fell 1.6% in September after sliding 1.2% in August.
- And Phoenix, where the residential real estate market in Phoenix has cause for concern, trending downward by 1.5% in September and 1.3% in August.

The Market:
The market is putting in a top – there’s no question about its intentions. But the Fed, buying Treasuries from Wall Street banks, and paying them billions in premium, is countering the mutual fund redemptions and hedge fund scale backs. Those banks are then using the new money to gamble in the market, and keep it higher than it would normally be.

The big question is: Can the Fed's billions offset the exodus from all the funds? I truly don't know the answer to that and frankly I don't think anyone does. We have never seen this before. Right now we've got all manner of "technicals" screaming "TOP". From the over the top bullishness, to the daily, weekly and monthly stochastics to the buying/selling pressure, to the volume, to the
"Hindenburg Omen (HO)." For those not acquainted with the term, the Hindenburg Omen is a series of technical observations that has occurred ahead of every major "crash" in the last 50 years. Now there is a catch - although no crash has ever occurred that wasn't preceded by an HO – but we have had HO moments that didn't develop into anything. In other words a Hindenburg is not a perfect predictor – and can be observed yet the market remains flat or even goes higher. The bottom line is that, Hindenburg Omens are indeed something to take notice of, but not necessarily to panic over. It does however support the theory that we are nearing a major top. For weeks now I've been suggesting that we are working on a top in the market, and that it's going to be a significant top. This latest omen simply augments that outlook.

We are still above the November 4 closing high of 11,444, which means you can consider the market still being in something of a "breakout", but it's a pained and strained move. On Friday because of the options expiration day, I thought that in order for the market to impart the most pain on the most people, the most likely thing it could do for the day was to trade sideways, and we'd probably end the day flat to slightly red – we did!

So this is it - the week ahead of Christmas. Does the market have one more shot left in it? Will Bernanke double down on a POMO buy and give his Wall Street buddies a bunch of new billions to push the market up with? Or do we simply burn out here, hobbling and trading sideways until year-end? My guess is that we trade sideways – but the ‘darling stocks’ such as DECK on Friday can still push higher toward the New Year!

Be careful out there folks, it's getting extremely choppy. I "think" they're going to get us a bit higher, but right now I'm calling almost 50/50.


Tips:
Let’s review our holdings:

This week we were stopped out of FCX, GG, SLW and SSIR – all with very nice gains indeed. Investing is a discipline – we set our stops – and when a stock hits them – we sell. Now it’s possible the materials guys come roaring back – naturally we’ll have to watch the dollar, but it's sure possible. Right now I’m not seeing anything jump out at me as a screaming buy for Monday.

Our Long Term Holds look like:
SLV at 25.81 - up 10%
NG at 6.825 - up 90%
AAU at 3.02 - up 44%
DNN at 2.71 - up 21%
AVARF at 4.00 – flat even
EXK at 7.40 - down 7%
USSIF at 0.61 – spec play (penny stock) down 6%

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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