RF's Financial News

RF's Financial News

Sunday, June 19, 2011

This Week in Barrons - 6.19.11

This Week in Barons – 6–19-11:

The Child is the Father to the Man?
First off – Happy Father’s Day to all you dads out there. We may not always be in control, but ‘hopefully’ we’re part of the solution. Unfortunately we as Fathers will someday need to ‘fess-up’ to our children how we created such a financial disaster that only ‘bankruptcy’ and ‘devaluation’ can mend. As Steve Forbes writes: “Consider this: (a) we haven't paid off the Savings and Loan bailout from the late '80's, (b) our Government has borrowed ALL of the cash from the Social Security System, with forward estimates in excess of $50 Trillion owed, and (c) the Medicaid estimates are in the range of $30 Trillion owed. Now, how will future generations pay for these debts? What is the business model? Just how much “Government Help" can this economy and its constituency afford?”

As President Obama prepares to come to Carnegie Mellon University this week, to talk on Jobs and the Economy – it begs the questions: "What Jobs?" “What Recovery?” “What Economy?” People are acting like we came out of a recession, and if you remove the stimulus money – we’re still in a recession.
- The Philly Fed Report (a measure of economic activity) was at 44 in March, dropped to 18 in April, and fell to -7.7 in May!
- China’s inflation continues to accelerate.
- Well's Fargo stopped doing reverse mortgages, refusing to (for example) give people the $290k to live in their house for the rest of their lives, knowing that in the end the house may only be worth $160k.
- Initial jobless claims were still over 400k this week (that’s bad).
- Inflation is close to 10.5% and climbing.
- Real under-employment numbers are 22%.

Without QE3 to talk about - Greece is now the issue. As long as there is free money to play with, nothing's ever a problem, but as soon as the money dries up, then we care about Greece, jobs, and inflation. Realize with the trillions that we injected into the economy – very few jobs were created, very few factories were built, the ‘Food Stamp’ (Government Assistance) expanded dramatically, and no one responsible for the melt down of ‘07 – ‘09 went to jail.

With Greece, we continue to kick the Greek can down the road. They will eventually HAVE TO DEFAULT – and probably will take Spain, Portugal, Ireland, Italy, and Belgium with them. But where's the money coming from? The hard working Germans can only do so much. France is facing social program bills they cannot pay. So this is Central bank money. Our major Wall Street firms hold approximately $160 Billion dollars worth of Greek credit default swap debt. Now, did they hedge that by laying off some of that risk to someone like an AIG? Maybe, but no one’s talking there. As of right now, when Greece folds, our "Too Big To Fail" banks will again be begging to be saved. And if they did lay off the risk, what reinsurer has that kind of resources, and who saves them? That's right, just you and me and the Father’s Day children.

Now – here’s where it really gets interesting – right now we are witnessing a credit lockdown that’s under the radar. We are also witnessing a quiet run on some very large European banks. Yield spreads are widening, and credit is becoming more costly. Fear is just beginning and will get worse. Over in Europe, UniCredit (based in Italy) is going through a quiet "bank run", where depositors are slowly withdrawing funds, as they know the austerity measures imposed in Italy, Spain, Greece are forcing bank losses and UniCredit is the bank behind a lot of those other banks.

Now, why is our stock market selling off (losing over 1,000 DOW points in a month)? I believe that The Ben Bernanke truly believes that the economy is going to stand on it’s own, and Wall Street knows this is absolute horse manure, wants more free money, and will hold The Ben Bernanke hostage until he agrees to give it to them. Remember the only element President Obama can point to is the stock market for his re-election! Yes, Wall Street will eventually get it's wish – QE3, 4, and 5 – but until it’s announced, the markets will continue to slide. And when it's announced we'll get the counter rally back up. Now as we approach 2012, don’t be surprised if you hear of yet another war in the Middle East, a big one involving ground troops, Syria, and a host of other nations. History is complete with examples of how major wars are created when global economics are unraveling.

The Market
The Market fell, and fell, and finally got a shot at bouncing a bit. As I said above this is Wall Street pouting about no official QE program. They will continue to take this market lower, with the occasional bounce higher, until Bernanke cries uncle, or Obama and his cronies put a gun to his head and force him to come up with another stimulus package. Now, until we get that new program, the commodities market will tumble. We saw some of that with oil falling $10 quickly and several other commodities rolling over. Gold will hold up, Silver will eventually go higher – as it needs to get past the JPM (and others) naked shorts – but gold and silver will be looked upon as money, unlike oil, coal, copper, and lumber. The two-day bounce could work for another week, or it could end Monday, as it’s simply an oversold technical bounce, nothing more.

Now be careful if we don’t get some kind of resolution by the start of August concerning our debt limits, as Uncle Sam will become desperate. They've already borrowed from public pension plans and they are seriously looking at private 401k’s now, where there are trillions of dollars. It’s the traditional Central Bank ploy, print money, hope it lights an economic fire, continually uttering the words: “This time it’s different!” Unfortunately the pattern that repeats always involves the Government growing too large for itself, promising too much, expanding too far, and then at some point the money just isn't there to support it all. In the past it WAS different. I was reminded of that while watching the U.S. Open Golf tournament yesterday and seeing police close down a child’s lemonade stand (set up outside the tournament) because they didn’t have the correct permit!

It’s my bet that we make it through 2011, and in 2012 the fighting between Democrats and Republicans will be vicious. Yet, despite the money printing – jobs fall. Despite the currency devaluation – there’s no growth. Despite artificially depressing rates – homes don't sell because millions more are coming to market with foreclosure prices. But until then, there will be a QE3, that will try and support the sitting President, and whistle past the graveyard.

Not much has changed actually:
Our long holds still look like: SLV, NG, AAU, DNN, AVL, SLW, SQM and USSIF, but let me expand this section this week.

The papering over ‘old money’ with ‘new’ isn’t cutting it, and without larger amounts of money being printed, we have no choice but to fall. But say I’m wrong – what good is 1% money if no one can borrow it? Or what if a large spending program is announced, won’t that just further trigger hyperinflation? Doesn’t anyone find $10 for a pound of lunchmeat, $6 for a jar of mayonnaise, or $13.79 for a can of coffee excessive? Knowing that Wall Street will hold the market hostage until it gets the next round of free money, I think it's time to explore some longer-term, short side plays. Thinking 2013 – when the Euro could be gone, and Spain, Italy, Portugal, Belgium, Ireland, and Greece could all be back on their own currency after defaulting.

I'm considering taking on some longer term put options and inverse ETF's.
- On the DIA's (which is the proxy for the DOW) the bargain that I’m seeing is the January, 2013 - $120 put options – for $14 and paying $13.30. If you believe that the DOW will sink hard over the next 18 months then this is a no-brainer!
- On to the Financials (the XLY is proxy there), if we move all the way out to January, 2013 the $38 put options are $4.90 – and with Greece and everything else – these could pay out very nicely indeed.
- Oil has many reasons to come down. One is over supply. Two is the nations that pump it need money and if they can't get it by high prices, they'll pump more to lower the price and "push" people to indulge. The SCO is an inverse ETF that looks at oil. If it were to run to the 200-day moving average at 53.18, I'd be all in, and I could even get brave and try some at 52.50
- The DUG is also involved in energy, focusing on oil and gas but more along the lines of suppliers – a move over 32.00 is attractive.
- The DOG is the inverse DOW index and it looks good at 42, then 42.50 then especially at 44.
- And Sagar M writes: “With China being the fastest growing economy in the world, with only 1.8% of it’s reserves being in gold compared to an average 11%. If China increases it’s reserves to the average – it will require 6,000 tons gold (the world’s entire supply for 2 years). Continue buying gold because: (a) Limited gold production and limited production capacity, (b) Continuous buying by Central Banks, India and China, and (c) Relative weakness of US$ and inflation / deflation issues in the world economy.

We continue buying physical gold and silver and will actively lean on the short side going forward with double and in some cases triple EFT’s such as DXD and TZA. Please be safe out there!

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