RF's Financial News

RF's Financial News

Sunday, October 9, 2011

This Week in Barrons - 10-9-11

This Week in Barons: 10–9-11:

“As for Steve Jobs in Heaven – the ‘Pearly Gates’ are probably more of a ‘Brushed Aluminum’ and let’s NOT call them ‘Gates’”! … Paula Poundstone

Steve Jobs passed this week and I read a marvelous piece by Firas Raouf of Openview Partners on his passing and I’d like to quote one line: “Thank you for making it possible for my 80-year-old mom to start interacting with the world online. Until we bought her an iPad last year, my mom had never used a computer, had never texted, emailed or IM’ed. Had never read anything online, and only had the phone as her way of interacting with her children and globally dispersed friends and family. Because of your vision of building tech products with intuitive and delightful user experiences, my mom was able to make the leap online with pretty much no training or pain. Thank you!” I certainly share Firas’ thoughts, and my wishes and prayers go out to Mrs. Jobs and family. He certainly made a difference, and will be missed!

Shifting gears – BET founder Robert Johnson on the "FOX News Sunday" program said: "I didn't go into business to create a public policy success for either party, Republican or Democrat. I went in business to create jobs, to create opportunity, and to create value for myself and my investors. And that's what the President should be praising, not demagoguing us simply because Warren Buffet says he pays taxes more than his secretary. Mr. Buffet should pay his secretary more and then she will pay more."

I was always taught, if you're playing poker and you haven't figured out by the third hand who the ‘stooge’ is – it’s YOU! That's sort of how I feel about how we’re being played about now. We all see "Occupy Wall St" folks protesting, and many of them don't have a clue what or why they're protesting. As a society we were ‘sold’ on an idea that:
- We could be a consumption society;
- We could consume ourselves to wealth;
- We could be a "service" society instead of a manufacturing society;
- Debts don't matter;
- We don't need a currency pegged to gold;
- Letting ‘banksters’ run free was a good idea;
- Giving houses to people with no way to pay for them was a good thing;
- The rich were evil;
- And competition might hurt ‘Little Johnny's’ self esteem!

The other day President Obama was interviewed and he said: "No! People are not better off than they were 3 years ago"! That's probably the only honest thing I've heard come out of his mouth in 3 years.

- The Bank of Italy Deputy Governor sees a genuine risk of global recession, and calls for global monetary standards to safeguard savings.
- The U.S. Bank exposure to the Euro crisis may total = $640B!
- Wells Fargo may face a $8.79B cost for soured 2nd liens.
- Spain's credit rating was cut 2 levels on the spread of debt crisis.
- The housing bust is the worst since the great depression!
- Italy's credit rating was cut to A+ and Spain's to AA-, describing the outlook for both as negative.
- U.S. needs to generate 261,200 jobs per month to return to pre-depression employment by end of Obama’s second term.
- Consumer credit has contracted the most since May 1998.
- Portugal's credit ratings may soon be cut to junk!

My fear is that the U.S. cannot return to the glory it once had, when the things that made us great are now against the law.

The Market...

So, just how bad was the 3rd quarter? It was ugly! Hedge funds (in equities) lost on average 9.5%. Mutual funds saw massive outflows again. People are scared and rightfully so. For many years it was very fashionable to be a "contrarian" investor. You know the old adage: “Buy when there's blood in the streets. Sell when everyone else is clamoring to get in.” Thus you can make the point that this should be the greatest time to buy stocks we've seen in 80 years. People are scared, pulling out, the VIX (volatility index) is high, the economy's a mess, and the politicians are at each other’s throats. Could it get any better for the contrarian?
- Since the April highs we’ve seen the DOW fall from 12,800 to 10,400.
- We've seen unprecedented volatility.
- We've seen Europe continue to erode, now to the point where we're about to see our first outright defaults.

The problem with "Buying when there's blood in the street" is that they never tell you how deep the ‘blood’ is supposed to be before you buy. Is it deep enough when Greece defaults? How about when Spain rolls over? What about when the U.S. banks (that may have $640 Billion worth of exposure to Europe) take hits? It’s been several years since:
- The roll-outs of the stimulus plans,
- "Cash for Clunkers" and the 1st Time Housing Program,
- The reworked re-financing program,
- QE1, and then QE2,
- 9.1% unemployment (which is actually 16.4%),
- Falling housing, Higher national debts, No savings, and More senseless regulations!

Although the market is NOT the economy, and often goes in the opposite direction for prolonged periods, it usually does square up at some point. Supposedly the world is so smart that the market will start to rise 9 months ahead of an economic pickup. Then as the market runs and runs, the economy usually starts moving higher and higher, and then slowly the market will roll over and drop (while the economy still seems strong) and then finally the economy follows the market lower again. Over and over this has been the cycle.

So, for the market to start moving significantly higher from here, the worldly wizards would have to be thinking that 9 months out there's going to be a nice pick up in activity. If so – just where is the economy going to get the "oomph" from to fix itself in 9 months? It's been my premise that until The Ben Bernanke comes out with a true monetary stimulus plan, the market will be soft. And to that end, since June 1st the DOW has continuously made lower highs! That is not a pattern of strength. This week kicks off earnings season and CNBC is going to be foaming at the mouth as company after company announces they beat estimates by a penny. Yet how are they going to do it – layoffs! Layoffs have risen 117% percent this summer. So companies are making earnings (yet again) by cutting jobs, accounting tricks, and currency swaps.

Technically speaking – if the DOW can't get up and over 11,239 (which is the 50 day moving average) and put in a few solid closes, we have to imagine that we’re moving lower! I still think we go nowhere but sideways and down until The Ben Bernanke caves in and puts a $ Trillion more in the bankers hands. If the DOW were to hold up over the 50-day average, they could use the "great earnings" to try and power us up to the 11,600 level, where the next real fight will take place.

The economy has no reason to improve in 6 to 9 months; thus except for wide range ‘mood’ swings the equity market has no reason to improve and start a bull run. The risk is defined to the downside for now. But if The Ben Bernanke releases a huge stimulus, then we will indeed roar higher, kicking the can further down the road – but until then we're in danger, and short-term trades are the only game in town.

For Monday the action will be dictated by which rumor comes out of Europe over the weekend. Then (on Tuesday) earnings start with Alcoa. From there on out, sectors will be cheered or jeered depending on what the companies say, which will cause our insane market fluctuations to continue. Some have written in asking if my prediction of DOW 6,000 is still inline. Absolutely. I can't say when, but we could be on our way there right now. However, we do know The Ben Bernanke will come up with a spare $ Trillion to try and abort that. And we also know that the stimulus will wear off and we'll sink again, and the cycle will continue. This could go on until 2013 – but at some point we will sink back to those 2008 lows.

Am I still in love with gold and silver? Yes on both counts. I don't care how either of them behaves in the short term. I'm looking at them for the 2013 time slot. As Europe defaults, as currencies get kicked around, as economies slow – I don’t think people are going to be fast to "rush back" to fiat currencies. Some will want the metals and I’m in that camp.

This week I sold my DIA put options for over $6, and since we purchased them for $2.80 we are very happy about that!

In my short-term holds I have DOG, and SH (that are inverse ETF’s focused on the market going lower). I also have GLD and SLV. As I looked out across earnings season - this week I purchased some miners: FCX at 34.53 and some GDXJ at 29.01.

As this market continues it’s sideways and down movement – look at HDGE – a very nice ETF you can use to play the downside. It has moved from $20 in May to being closer to $30 right now!

This market is NOT for the weak of heart.

Please be safe out there!

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