RF's Financial News

RF's Financial News

Sunday, January 30, 2011

This week in Barrons - 1-30-11

This Week in Barons – 1–30-11:

I’m Melting … I’m Melting (says the World):

Let me start off by saying – I’m not a scholar on Middle Eastern policy – and although Egypt and it’s surrounding nations don't necessarily import or export enough to even be a blip on the fundamentals of our (or the Chinese) economy, but political change causes instability everywhere. Right now the world is looking at the oil shipping lanes and wondering if they'll become choked. Will similar upheavals in countries around Egypt threaten the Saudi Arabian oil fields? Egypt was often Israel’s only friend in the region, and will a change in regime make Israel move to expand its military first strike options?

Currently – we have food riots popping up all over as three things have impacted the corn/wheat complex. 1) Weather (droughts and floods), 2) Bernanke's printing press mentality is pushing the price of everything higher, and 3) our U.S. policies are allowing the farm states to make ethanol mandatory. Former Vice President Al Gore has admitted that he made a mistake promoting corn ethanol during his presidential campaign in 2000. Al Gore says he was more concerned with garnering votes from farmers in Tennessee and Iowa than with what was best for the environment. Corn ethanol received US$7.7 billion in subsidies from the U.S. government last year. These subsidies are up for renewal soon, and the debate is becoming heated. And for each country that faces something of a similar upheaval in their Government situation, oil will remain stubbornly high. Which means higher oil and gasoline prices, which instantly and negatively affect general wealth.

Now – combine this for a minute with FASB’s most recent ‘mark-to-market’ ruling that reversed a proposal that would have required banks to use mark-to-market accounting standards. Banks have lobbied fiercely against fair-value accounting, contending it introduces added volatility and could have made the financial crisis worse. Supporters of the mark-to-market standard argue it would improve transparency and highlight potential weakness at banks. The point appears to be moot now, as the FASB's preliminary vote on the matter would allow banks to continue valuing many of their loans at amortized cost as they do now. Taking a step back, the idea behind accounting is that if you have an asset, you "mark" that asset to what it would be worth TODAY if you sold it. That's gives it, it's "market value". Well, because the banks are holding so many assets that they ‘for example’ paid a dollar for, that are now worth 15 cents – if they marked them to ‘market’ they would instantly have to declare themselves insolvent. So, they all got together and the FASB (Financial Accounting Standards Board) granted them the ability to 'mark to model’. That is where you simply mark the asset to the value it WOULD have – if it were a performing asset. Is that value real? Could you sell it for that? No. It just makes the banks look like they're swimming in money; they can announce ‘great earnings’ and their CEO's get millions in bonus money.

Now – combine this with last week’s piece: http://www.cnbc.com/id/41198789. Where it showed that because the Federal Reserve could suffer losses on its massive bond holdings – it adopted a little-noticed accounting change with huge implications: it makes insolvency much less likely. Could the Fed have gone broke? The answer to this question was 'Yes,' but is now 'No.' "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

Now – combine those with the fact that banks are allowed to accrue interest on non-performing mortgages until the actual foreclosure takes place, which on average takes about 16 months. That is to say, all the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. “This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.” - Forbes.com

In 2005’ish our unemployment rate was hovering around 5%. People were taking out "cash out" refi's and enjoying themselves - buying cars, boats, pools and vacations. We were BOOMING. Now, we just finished up 2010:
- the unemployment rate according to Obama is 9.6% - under-employment is over 18%,
- 7 to 8 million jobs have been lost,
- Home values have fallen by 30 - 50%,
- The market crash of 2008 wiped out trillions in wealth,
- Yet somehow corporations are posting RECORD profits. How can they be posting profits during a recession that are better than the wild giddy boom times of 2005 – 2006? Ah, I love creative accounting!

Remember – this charade will end when China and Russia say it will end. They are in control now. They have money - we have debt and accounting fraud. When they are tired of the U.S. playing these games – and when they have systems in place to absorb the blow – that’s when this all ends.

The Market:
I don’t know whether my prediction will come true? Last week we asked the question: “Is it time to go to cash?" – and I thought we were within 2 weeks of diving into our first significant dip. So, on Friday the market took it's first legitimate dip. Was this the start of the "big dip?" I honestly don't know – because often a new month brings in new money. My feeling was that they'd run us up through through the first 2 days of February or so, and THEN dump us. But of course with all the tension we saw in the Middle East, no one wanted a big long position going into the weekend – so we sold off on Friday.

Now if nothing happens this weekend, we could pop up nicely on Monday. Many will think it's just a one day dip and rush back in. If that happens, I'll stick to my prediction that sometime late in the week, or next week, we see the next plunge - and it should be a fast sharp one that catches many by surprise. But if there are too many unanswered questions coming into Monday, it's not unreasonable to think the big dip is upon us now.

Many have asked us when we think the gold/silver bear raid will end. I’m presently looking at 9 different silver/gold related investments that I feel will pay off in the near future. What we just witnessed in the metals market was a deluxe bear raid, so they could drop the price of metals, cover more of their shorts, and even buy long at a cheaper price.

We still have some of our gold and silver stocks – with our long term holds looking like: SLV at 25.81, NG at 6.825, AAU at 3.02, DNN at 2.71, AVARF at 4.00 and USSIF at 0.61

We are still nursing N – which is flat for us.

A couple miners that I’m looking at right now are: IAU over 13.20, SLW over 31.50, NAK, AG, SLV over 27.45, NGD over 8.40, UXG, and more NG. If they all look attractive – I’ll potentially start with IAU, SLW, NGD and SLV.

If you’d like to view my actual stock trades – and see more of my thoughts – please 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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