RF's Financial News

RF's Financial News

Sunday, March 6, 2011

This week in Barrons - 3.6.2011

This Week in Barons – 3–6-11:

Watching ‘The Ben Bernanke’ Squirm:

I don't know if you've noticed, but Ben Bernanke has been getting more and more smug recently. But the attacks on the Federal Reserve have been coming faster and more furiously. On Tuesday, Ben was getting his dose of "Humphrey Hawkins" questioning from Congress, and you could tell the questions were a bit more "hardball" than usual. There was one period where he was getting questioned about Federal Reserve "legality." The Charter clearly says the Federal Reserve can NOT buy Treasuries straight from the Government. So, out of the clear blue, Congressman Schumer says: “Mr. Bernanke, you're prohibited by law from buying government debt, so it is our understanding that you have others buy government debt and then you buy it from them - yes?"
Bernanke: "Yes"

Now this is called a Ponzi scheme and just because you can print money – doesn’t make it any less criminal. The Fed has two mandates: (a) to keep full employment, and (b) to keep inflation contained. Well they have failed miserably on both items. Discounting the 42% weighting that the CPI gives our housing index – consumer inflation is running between 6 and 7%. To add insult to injury, The Goldman Sachs are the ones helping Ben out in terms of buying government debt – and ‘coincidentally’ The Goldman Sachs went an entire quarter without a losing trading day. In the last two years Goldman lost money a total of 25 days. The odds of that happening without insider trading, and illegal knowledge are 0 - completely impossible. One thing I do know is, and I stand firm – as they are arranging the chairs on this Titanic - gold and silver will continue higher.

As we speak, we are still beholden to foreign oil. Out of curiosity – did you know that the US went off the gold standard the same year the EPA was created? Richard Nixon removed us from the gold standard in 1971, the same year that deals were made that all oil, and ultimately most trade would be conducted in dollars. But there were objections raised concerning America having oil that it could produce – and luckily for President Nixon – the EPA was there to regulate its production (or non-production).

But things – they are a changin’. The dollar is very quickly becoming un-installed as the world’s sole reserve currency. Just this week China said again: “China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency's international role. The central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily."

James Taylor wrote me about the three pillars of the dollar’s fall from grace. First, changes in technology are undermining the dollar's monopoly. Nearly everyone carries a hand-held device that can be used to compare prices in different currencies in real time – so there is room in the global economic and financial system for more than one international currency. Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China's yuan. Finally, there is the danger that the dollar's safe-haven status will be lost. Foreign investors (private and official) hold dollars not simply because they are liquid but because they are secure. The U.S. government has a history of honoring its obligations, and it has always had the fiscal capacity to do so. But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or whether it resorts to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

Now, when the dollar drops from Global reserve status, no one will want dollars and certainly no one will want treasuries. We will then be forced into developing our own energy sources again – and enter shale gas deposits. With shale gas technology we can run every power plant at a cost basis that is less than half of oil or a third of coal. Once the dollar is removed – the deals to purchase foreign oil are relaxed – and internal, domestic production comes to life. If this peaks your interest – look at the charts of Approach Resources (AREX), GeoResources (GEOI), or Gulfport Energy (GPOR) – great looking charts – better looking futures!

The Market:
So what happened this week – well – we got the non-farm payroll report on Friday – which said we created 192K jobs and the unemployment rate fell to 8.9%. On the surface that was right – and after 3 years of stimulus spending, bail outs, mortgage rewrites, quantitative easing part 1 and 2, and literally hundreds of spending programs designed to get the US out of the recession/depression we entered when the housing market blew up and the banking sector failed – gaining 192k jobs is a far cry from wonderful – but it’s at least moving in the right direction – yes?
- Well - of the 192,000 jobs – 112,000 of them were ‘fake’ jobs statistically created by the government’s very own ‘birth/death’ model – those jobs don’t really exist – so we’re down to 80,000 new jobs (that’s not good).
- And the falling unemployment rate to 8.9% was due to the job participation pool falling to it’s lowest level in 26 years. In other words, many more people simply stopped looking for work, and when you do that, you fall off the report (that’s not good).
- Wages of the workers were flat to down (that’s not good).
- The Challenger report on Wednesday said that more layoff announcements hit in February of 2011 than in February of 2010 (that’s not good).

I think we’re still in a ‘danger zone’. After setting hitting a high of 12,398 back on February 18th, we've pulled back to 11,998, and bounced up and down between 12K and Thursday's high of 12,283. In “normal terms" when the market gets choppy, some form of big move is brewing. I think we're putting in some form of short-term top and we have some lower numbers coming, but that’s a tough call considering that Bernanke has made it clear he wants the market higher. Overall, Ben is going to have to really push to keep this market up. I think we should roll over and at minimum test the 12K level again. If we lose that, the next stop is the 50-day moving average at 11,944. However, lately my track record of picking highs and lows has been questionable at best, but to my defense - we’ve never been in a situation before where it's common knowledge that the FED is behind this run, so things are decidedly "different" right now. For me to consider that they're going to ramp us upward, we'd need to see a close or two over that spike high of 12,283 on Thursday. If they do that, then they'll probably get us back to challenging the Feb 18 high, but if they fail, we should then be seeing lower numbers.

Our long holds looking like: SLV at +34%, NG at +87%, AAU at +26%, DNN at +42%, AVL at +85%, and USSIF at +16%.

In our short-term holds we have:
N up 13%, SLW up 30%, FRG up 25%, QSURD down 2%, NGD up 15%, PAL up 6%, AUGT up 14%, EXK up 26%, SVM up 10%, and AGRO off 3%

We bought more SLW last week – potentially will load up more on Silver side (especially if there’s a pull-back this week at all) – and look at the shale gas drillers that I mentioned – good lookin’ charts.

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 4 months or so ago now:

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Until next week – be safe.

R.F. Culbertson

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