RF's Financial News

RF's Financial News

Sunday, September 11, 2011

This Week in Barrons - 9-11-11

This Week in Barons –9–11-11:

"What is the point of being able to forgive, when deep down, you both have to admit you'll never forget?" … Jodi Picoult

This is the 10th anniversary of that dreadful day that forever changed most of our lives. I was on my way to teach a class at Carnegie Mellon University when monitors started showing ‘The Event’ in real time. The emotions cannot be described. ‘The Event’ touched virtually everyone that I came in contact with. My thoughts and prayers go out to everyone involved in that incredible day.

Switching gears – I don't understand The Ben Bernanke. Although he's certainly a very smart man, he has no problem lying and he does that often. Just the other day he said that he was perplexed as to why consumers aren't consuming more. Please – spare me the drama. I listened to Obama very intently thinking – this man is incredibly dangerous because of one thing – his ability to speak the written word. He is a tremendous, very dangerous speaker. He gets people very excited about Government (for once) doing the right thing, and then stabs everyone in the back for not doing EXACTLY what he says. He is a very good salesman. Both he and The Ben Bernanke are selling hopes and dreams – just not reality. In the past three weeks I've heard the world "entitlements" so many times my head is going to explode. The words normally refer to “Social Security”- referring to it as some form of ‘social program’ rather than a legal contract that you have paid into and the government has the obligation to pay back to you! For years Social Security had its own separate fund. Then Lyndon Johnson (looking to find money for his pet projects) found the Social Security account – and merged it with the General Account – and in an incredibly short period of time all the money was gone. I'm not saying that Social Security would be in great shape if they didn't raid the fund. I'm simply saying that Social Security would still be “Manageable.”

Continuing along the lines of politics – last week Dominion Resources applied for permission to turn part of its Cove Point, Md., terminal into an export facility. The Cove Point facility was built to "import" natural gas in liquefied state, but because we've found so much natural gas in the U.S. over the past ten years, Dominion is now looking to export it! We could easily increase production by 25% a year, creating thousands and thousands of jobs and not even put a dent in the supply we've found in the ‘Shale Deposits’ from NY to North Dakota. In fact, the biggest danger is that there is too much natural gas, and the price will fall! So where's the giant push from our politicians to get us off foreign oil and onto natural gas? I’m watching with anticipation the Dominion Resources request.

Globally, Europe's hanging on by a thread, and ‘frankly’ the PIIGS can't be saved. Greek default is just a matter of time. In Austria, they've made regulations that the general public can only buy approximately $20,000 worth of gold at any time. With Europe in such turmoil, people are doing anything they can to get rid of the Euro, and buy gold. You can bet similar actions will come to the UK and to the US as things continue to deteriorate. If you don't own gold and silver right now, I think you'd best "get on it" because I could see them trying that here.

The Market:
On Friday the DOW lost 300 points – most of it on developments from Europe. Just before the open we learned that a board member of the European Central bank decided to resign, which is usually a harbinger of bad news coming. So now it's all in Bernanke's hands, and he’s been playing tough, not mentioning more stimulus. There are several ideas floating around regarding the next Fed move, most of them revolving around the "Twist". This is simply a change in the way the Fed manipulates interest rates. By buying up short-term Treasuries, they have been able to keep short-term rates low. Now they might focus on longer dated paper, trying to drive those rates lower – thinking that corporations are not expanding because of excess long-term interest rates. (Honestly, corporations are not expanding because there's no demand. And (fyi) our country’s production output is running well below capacity.) On top of that, some think that a ‘Twist’ will spur housing. In my view, housing is in a death spiral, and no one wants to catch that falling knife. If 4.5% mortgages won't spur buying, it’s doubtful that 4.25% will either. So the ‘Twist’ isn't going to do much. And (of course) the Fed will continue buying treasuries with the billions that mature in the portfolio they have amassed, so in essence QE3 is in effect right now.

So, what else does The Ben Bernanke have up his sleeve? A couple months ago I suggested: "One day the banks are going to unleash all that excess reserve they've been hoarding and push it into the economy. It will be highly inflationary, but it will spur activity". I tend to think that one of the items that will be mentioned is that the Fed is going to back away from making the banks pull in more reserves. In fact, I think The Ben Bernanke might suggest that banks are overfunded compared to the risk and encourage them to reduce their reserves. This would be fancy talk for "Go forth and Lend", and that could inject between $1.5 - $2 Trillion into the system. Now that could be quite an interesting policy.

Obama is in trouble. The polls are showing that 87% of Afro-Americans think Obama's doing well, 48% of Hispanics and 33% of whites. Obama’s jobs speech was a complete flop on Thursday – nothing but another "Give a union man a job today, and we'll pay for it in the future" scam. So it’s left to The Ben Bernanke to potentially tell the banks to release $1.5 Trillion in reserves. He could easily tell banks to relax lending standards in order to buy more homes, cars, virtually anything! And if The Ben Bernanke comes out and let's his banks go nuts – we’re going to have the ‘mother’ of all stock market runs, with the ONLY fly in the ointment being Europe. Although a Greek default is immanent, it will be looked upon as a massive problem that could spread.

In the meantime, there have been various gold raids over the past week. The raids are coming closer together now, but it's evident they’re not working all that well. For example - on Friday – gold was beat down by $50 as 4,000 contracts were dumped in under 28 minutes. This is virtually impossible – and the only way that can happen is if the major bankers ‘literally’ call each other up, and determine a price they want for gold. On Friday they set their boxes to trade paper back and forth, each time a bit lower – it’s happens quickly and quite dramatic. However, over the course of the day gold was bid back up and cannot be stopped now. As I mentioned before, it’s just a matter of time until they put ‘buying restrictions’ in place.

We have some tough times ahead as unemployment will get worse, and businesses refuse to hire. Housing isn't going to recover for years, even if the Government "takes over" the foreclosed houses and rents them out as some have suggested. Be prepared, and raise some cash. If you're in “Long Only” mutual funds, be very, very careful. It’s my guess that a massive release of stimulus will propel the market higher, but it’s a head fake. In many ways you’re living thru historic times. Economically, the world has never seen what we're going through because until now the world was not a completely "fiat" basket of currencies. We're going to see some very disturbing things coming out of the EU, and contagion is not just possible, it's probable.

We had purchased GDX (which is an ETF basket of gold "miners") at the 61 level and we sold out of it at 67 on Friday. Although we think gold goes to 2400, miners are sometimes looked at as a way to get gold cheap, and other times as a "stock" that should be sold. Although I think the GDX has more upside to it, possibly much more, I'd like to see it bust up and over 67 dollars before getting involved again.

Gold is still around $1,850 per ounce, with silver being close to $42.

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

Please be safe out there!

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