RF's Financial News

RF's Financial News

Sunday, November 13, 2011

This Week in Barrons - 11-13-11

This Week in Barons: 11–13-11:

These are the Worst of Times…

I prefer the company of peasants because they have not been educated sufficiently to reason incorrectly. ~Michel de Montaigne

Are we there yet? Are we at the bottom? Can we trust people again? Well, according to Jack Abramoff (past DC Lobbyist): “As many as a dozen members of Congress and their aides took part in insider trading based on foreknowledge of market moving information, sometimes gaining several hundred thousand dollars. But it's basically legal, because the SEC has largely determined that trading stocks based on advance knowledge of action in Congress is not insider trading.” What? If you or I get a phone call from someone in a high level position at a public company, and we go and act on that news – you, the informant and I can all be imprisoned. But if you're a US Congressman and you get that same phone call; then, you can go act on the information, and it's deemed as "fine" by the SEC. How does such a double standard exist?

Is it safe? Have we solved the currency issues?
“According to China's National Foreign Exchanges Administration, China's gold reserves have recently increased. Recently China has been opening their own mines and buying mines around the world, thus accumulating both spot buying in the market, and their own production capacity.” For many years, U.S. Central Banks sold their gold holdings. They stopped selling in 2009, and became buyers of the metal again. Most nations want more exposure to gold; however, gold supply is limited and if everyone wants it at the same time, it pushes the price up. No one wants to buy anything that's been driven higher, so they have done everything they can to accumulate it, while at the same time, not disrupt the price.

Or are we simply re-arranging the deck chairs on the Titanic:
“Standard and Poor’s reported this week that ALL BANK earnings in Q3 were from Credit/Debit Valuation Adjustments (CVA/DVA). This is where the lenders booked profits as their credit-worthiness declined.” Yes – that is the same as a Bank making money – betting against itself.

And just when you thought it was safe to purchase GM stock again:
“The United Auto Workers retirement trust fund, which provides health benefits to over 820,000 people, has underfunded by almost $20B, due to rising medical costs and poor investment performance.” This week when the CEO of GM was asked about their underfunded pension, he flat out said: "I'm not going to talk about that".

And last but not least – those pesky European Banks:
“European banks are sitting on heaps of exotic mortgage products and other risky assets that predate the financial crisis, in addition to all that Eurozone sovereign debt. Royal Bank of Scotland (RBS) is exposed to nearly €80B worth of risky mortgage assets, eight times more than its sovereign debt burden. Also: HSBC Holdings = €54B; Deutsche Bank = €51B; and ING = €36B.” The issue here is not only the amount, but also how far and wide the insurance on those amounts lead – U.S. fair warning!

So – can we still win the war or are we fighting a meaningless battle? Each day I get closer to moving in with the camp that says it's over. The Eurozone has had ample time to ‘fix things’ (over 18 months starting with Greece) – and they still haven’t – because they can’t.

You see, between 1944 and 1971 the world experienced incredible global stability and growth because the major economies of the world kept their currencies in balance with a basic gold standard. Debt loads remained manageable, because they could only create currency as long as it was pegged to a loose value of gold. Markets were free to set interest rates, and savers were rewarded with stable and realistic returns. As more people saved their money, pools of currency were created which banks could then lend to productive companies and create more jobs. But when the Bretton Wood accord was demolished in 1971, and President Nixon closed the "gold window", by 1974 we were thrown into one of the most horrid recessions of our modern history. Likewise, our current system of money supply creation, and constant borrowing is destined to fail, no matter how hard everyone "agrees" to keep things stable.

So what do we know? While the US dollar is still loosely recognized as the "reserve currency", everyone now understands that it's a fantasy. It's not stable, it's not pegged to anything, and a group of 12 people at the Federal Reserve can print as much money as they think they want or need at the drop of a hat. But behind the scenes there are choices. It seems to me, that the first big push is going to be for SDR's (Special Drawing Rights) to act as the new reserve currency. The only difference between SDR’s and the paper dollars we have now is that the International Monetary Fund and/or the World Bank would be the only issuers. And yes there are groups working on the concept of a Gold and Silver standard again. However, right now, to have gold be used as a reserve, the price would have to be somewhere around $7,000 per ounce, to "cover" the dollars in circulation, and to encompass all the world’s currencies the price of gold may have to reach $40,000 / ounce.

We predicted in 2001 that gold would be the single best investment idea, because we connected the ‘debt dots’ and those ‘dots’ added up to a picture that was unsustainable. We hit the wall in 2008, and now the entire world is suffering the consequences of printing too much currency, promising too many things, and not being able to shoulder the load. Hopefully when we emerge on the other side, we'll have the intelligence to realize that often simpler is better.

The Market:

Wild ride this week – ya think? Everyone knows that Greece is impossible to save, with Italy running a close second. Most believe that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are ready for slaughter, and as they fall away, it’s going to spread to the U.S. Now, I remember the days where you would ‘go long’ for 4 months, and you made your money as the market made long grinding runs. You didn't go short for a day, but rather you would go short for 2 months. But when today’s volatility causes a market to fall 400 points in a day, and then recover again in two days - trading houses make a years worth of profits in two days. In fact, during the month of October – if we totaled all of the daily swings – they totaled over 10,000 points! If you're addicted to charts, the pattern on the S&P is a bit scary right now. Unless we get some more points, and soon, we'll have developed a pattern of "lower highs". We desperately need a close over 1,275 on the S&P to give the bulls a glimmer of hope that this bullish run is going to last. If we put in another close or two below that, we could be in for more downside, before our next bounce. Unfortunately with this chop, I think you only have a few choices. You can just buy gold and silver and wait. Or, you can learn how to be more nimble by using the tools that modern investing platforms give us.

Just because you have a job, doesn't mean you can't put in conditional orders. By following me on Twitter, I might say that I like a particular stock over $30.00. Well, with today's advanced platforms you can put in a conditional buy order – to buy a number of shares that particular stock if it gets to $30.05. If it does and your order gets filled – you can then put in a conditional ‘stop/sell’ order at $29.70. In some ways I find that it works better than sitting in front of a screen all day. It takes the emotion out of the decision. You don't double guess yourself out of a trade. You have a defined entry, and a defined stop. We let the market take care of the rest.


We have some profits in our long positions, but I'm guarding them closely. I'm not yet convinced they're going to get this market up yet, so we might have to cash out and wait on a better market "mood". If we don’t get more bad news out of Europe on Sunday, we might be able to add to Friday's gains. Our current short-term holdings include:
- GLD at 157.49 – now at 174.05, and
- SLV at 28.00 – now at 33.7,
- DIA at 121.24 – now at 121.55,
- MRVL at 14.66 – now at 14.92,
- NBR at 20.00 – now at 20.53.

If things roll over consider playing the short side using HDGE.

And to all the Vets out there, I salute you for your service.

To follow me on Twitter and get my daily thoughts and trades – my handle is: “taylorpamm”.

Please be safe out there!

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