RF's Financial News

RF's Financial News

Sunday, July 31, 2011

This week in Barrons - 7-31-11

This Week in Barons –7–31-11:

Republicans vs Aliens:

Yes, I saw the movie “Cowboys vs Aliens” this weekend. And yes, it would have been better filmed solely as a western – without the aliens. And yes, I realize that the roots of the movie date back to a comic book. And not to take political ‘sides’ – but realize that there is a comic book ‘side’ of what’s going on in our government today. And like that – many of us (including me) miss the ‘finer points’ of what's really happening in the market place. Allow me to fill in some gaps:
1 – Going back a little bit - Lehman was crashing – the market was at 6,600 – the Government (‘Aliens’) started a program (QE1) where they would give banks a lot of money – with no obligation to pay it back – and the banks started playing ‘Cowboy’ in the stock market. Results: The market went up. And then we hit a ‘soft patch.’
2 - Another ‘Alien’ program was announced – QE2 – where The Ben Bernanke announced that he would begin buying Treasuries to keep rates down and put money in the system. Now – it’s ILLEGAL for The Fed to do this – so they are required to purchase treasuries from 18 primary ‘Cowboy’ dealers – such as Goldman Sachs (GS), J.P. Morgan (JPM), etc. Now everyone knows what J.P. Morgan pays for treasuries – but NO ONE knows what The ‘Alien’ Ben Bernanke PAYS it’s ‘Cowboy’ dealers for them. JPM could mark these up 100% or 200% and no one would know!
3 – One more time: The Ben Bernanke is head of a privately owned banking cabal called The Federal Reserve. The Federal Reserve prints money out of thin air. Institutions like JPM are shareholders of the Federal Reserve. They sit in private rooms with The Ben Bernanke, and when The Ben Bernanke wants to buy treasuries – he goes to JPM and buys them. What are the prices – no one knows – but they’re not cheap!

For most of 2010/11 the monthly average spend for QE2 was about $80 billion. Assuming a 100% mark-up that means that the banker/’Cowboys’ get $40B per month of free money to play with. So they take their billions and buy stocks, and (as history shows), the market shrugs off the soft patch and soars even higher. But eventually the stimulus runs out. Now it’s mid summer, and the economic news is getting worse and worse each day. Honestly, stocks only move up when there are more buyers than sellers. Now what if consumer confidence is rattled so much – due to all the talk of the debt ceiling and downgrades, that people stop buying everything? And what happens if the U.S. Treasuries are downgraded – and all of it hits the skids. That is the day that QE3 will be announced. They won't call it QE3, they'll attach some esoteric name to it, but it will be the same thing. The ‘Alien’ Ben Bernanke is going to hand more stimulus to the ‘Cowboy’ banks, try and keep rates down, and the banks will go back to playing reckless ‘Cowboy’ in the market. I think QE3 will happen in the fall, which will ignite a major market run into the year-end.

- Jeffrey Immelt (CEO of General Electric) is the White House "Jobs" Advisor. Recently GE decided to send their entire X-Ray/MRI division to China. They will be hiring thousands in China and spending over $2B in China – and Jeff is the White House “Jobs” Advisor? The reason Jeff gave: On any given day, a manufacturer in this country might have to deal with any of up to 38 regulating bodies. EPA, DEP, OSHA, FCC, FDA, EEOC, NLRB, etc.
- On Thursday, CNBC had a phone conversation with David Stockman the former CBO director and Reagan’s economic budget director. He laid it right on the line, he called the US a banana republic, here’s the link: http://video.cnbc.com/gallery/?video=3000035640
- JT sent us an interesting idea: Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time. Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some suggest that the Treasury create two $1 trillion coins, deposit them in its account in The Federal Reserve and write checks on the proceeds.
- Currently: 50.5M Americans are on Medicaid, 46.5M are on Medicare, 52M on Social Security, 5M on SSI, 7.5M on unemployment insurance, 44.6M on food stamps and other nutrition programs, and 24M get the earned-income tax credit, a cash income supplement. NONE of this includes the ObamaCare entitlement that will place 30M more Americans on government health rolls! In 2010 payments to individuals were 66% of the federal budget, up from 28% in 1965. We now spend $2.1 trillion a year on these wealth redistribution programs, and the 75M baby boomers are only starting to retire.
- Mr. Obama (arguably) is the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years is higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

Please – when I say be careful out there – please be careful out there!

The Market:
As I'm sure you're all aware, the market has been sinking for days now, and with good reason. It's not just the debt ceiling; it's the credit worthiness of the nation as well. What do you do as a pension manager if your charter says you can only invest in AAA rated paper – and then the U.S. Treasuries are downgraded to AA+? Do you re-write your charter? Do you sell them out and go to private AAA rated bonds? Do you drop the US and look for notes issued out of Switzerland?

There's a lot of confusion, and tension over the mess we've gotten ourselves into. But one thing is for sure; the circus that you are witnessing is completely political in nature. Both sides are scaring seniors and those on disability that they won't get any checks because the mean people on the other side of the aisle won't let us spend more than we take in. As I write this on Sunday morning, there are still no decisions either way. My guess is that they hike the ceiling and come to some form of a deal. It might be a temporary deal to stave off the "no checks go out" threat, but a deal nonetheless. Factually, as SF writes:
- The US GDP for Q2 came in at 1.3%, AND Q1 was revised lower to 0.4%!
- Now remember, the U.S. Government’s "deficit " model is based on a pre-established revenue model – where GDP was presumed to be 3.9%. What revisions will necessary for a 1.3% forecast?
- How will the Government spend less, raise taxes, and still put people back to work at productive jobs? Neither political party has begun to address this economic reality.

FYI, This proves what we have been saying for months: There never was a recovery out of the recession. Despite hundreds of billions in stimulus (QE1 and QE2), the economy weakened horribly. A couple years back, when we were talking about the housing implosion and the debt implosion, I said something that probably less than 1% of you believed. I said "This time it's different". There would be no recovery to the Great America we once knew. Oh sure they can jerk the market around to suit them, but the true economy, where the middle class was the single largest group of relatively well off people is GONE! None of this will work for the long haul. They are still going to inflate the currency, so it devalues. There's a massive bear market ahead of us, the only question is the timing. I can make the argument via statistics that it should start later this year and build into to a full blown disaster next year. I can also however, make the case that they stave it off with QE3 until 2013, so the President doesn't look like the buffoon his policies represent. Imagine if the bear hits in the next 4 months, when it truly should – What could Obama campaign on next year: a failed economy, a failed market, Obama-care nightmares for employers, unemployment over 10%, housing still crashing – wow pick one!

In the short term, I think they get a deal done. I think we get some form of relief rally on that news, but it may be a short lived rally unless they hold a gun to the ratings agencies heads and make sure we don’t get the dreaded credit rating downgrade. Now, if we get a deal AND the ratings agencies come out and say: "With this new deal we feel confident we do not have to lower the US credit rating" we will see a rally of many hundreds of points in a very short period of time.

Last week we bought some ‘cheap’ call options on the DOW ETF (DIA) in anticipation of the deal being struck. If we do get the deal and a relief rally, we'll make some decent short-term cash. If we get a deal and the credit agencies back off of the downgrade, we're going to make more – we’ll see.

I continue to buy gold and silver. I like physical much better than buying the GLD or SLV, but I do both. I’ll say it again: “Look at Gold again – it’s at another all time high.” But do not buy it here. I still think we are going to get some form of deal announced, and gold and silver will take a hit on that announcement. When that happens, that will be the TIME to load up.

Our long term holds still look like: SLV, NG, AAU, DNN, AVL, SLW, SQM and USSIF.

This week we bailed out of CRK, POT and NBR flat – so no harm no foul there.

Gold is now over $1,630 per ounce – with Silver hanging over $40 per ounce. The miners took a hit with the rest of the market – so a buying opportunity is coming for them.

The theme continues to be simple – take profits and buy more gold, silver and energy.

Please be safe out there!

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