RF's Financial News

RF's Financial News

Sunday, November 27, 2011

This Week in Barrons - 11-27-11

This Week in Barons: 11–27-11:

What Happens in Europe – Doesn’t Stay in Europe!

Europe isn’t Vegas – Europe is Toast! You might not know it yet, but you will want to care about what's happening in Europe. Why - because what happens in Europe – is NOT going to stay in Europe. It is going to come here, and YOU are going to get hit with it. Most analysts are going to tell you that Europe will have a plan, but they won’t. Not in any normal sense anyway. There are 6 desperately broken countries that need from $8 to $30 trillion to be made solvent again. No one has that kind of money, and frankly Germany (who has worked hard, saved, not run up debts) is being asked to shoulder the load and a) they can't, and b) they shouldn't. All the machinations we are seeing, all the plans to make plans, all the EFSF's and ECB's are just smokescreens to buy time. The only answer that seems to make sense is that the ‘broken countries’ will leave the EU, go back to their own currencies, default, get their act completely together and then attempt to rejoin the Euro. Will this actually happen - probably not. Instead, we'll probably see a push to continue bailouts with money no one has, until it all collapses.

In any event, the issue here is this that we ARE exposed to Europe. Not only will the top 4 economies of the world be forced into serious slowdowns by European austerity and lower GDP levels, but every nation from the U.S. to China, to Russia, to Brazil has a monetary stake in the banking system there. In our case, the estimates are that U.S. banks have at least $650 Billion in credit default exposure. Do any of our banks have $650 Billion to spare – nope! Some have pushed off parts of their exposure to other insurance companies, and those companies are in no better shape to withstand demand for payment than the banks are.

So, while people rush the stores in their desire to shop till they drop, few are aware of the fact that we face a situation that is virtually 4 times worse than the Lehman Brothers debacle, and the economic contraction we had in 2008. There is no magic bullet to fix this mess. We are in a slow motion train wreck. Let's (for a minute) take the alternate look. Let's just suppose that incredible austerity, along with timed bailouts from the IMF (International Monetary Fund) all work. Well along with austerity come less credit and less spending, and when one of the largest economies of the world (Europe) has to cut back on "buying stuff", it leads other countries (China, the U.S., and the BRICS) to cut back as well. Thus we have a global synchronized recession or depression on our hands. So if the Euro zone comes apart (probable) there will be huge fall out, and we will feel it here for certain. If the Euro zone holds together but has to cut back economic activity, we are going to feel it via recession or depression.

What do we do about it? Save money, stay out of debt, and own physical gold and silver. There’s a reason why gold has appreciated over 20% this year! In the past few weeks gold and silver have sold off. Some of that is because big time funds that were getting redemption calls had to raise cash. If all your equities are underwater, but you're up $500 an ounce on your gold and you have 10,000 ounces - you sell some gold to stave off the redemption calls. Well, this has some people worried. Gold has fallen from $1,850 to $1,650 recently and that has the usual bevy of anti-gold folks laughing and calling for ‘bubbles.’ What they forget is that for the past 10 years gold has been the best performing asset. And at a price of $1,850 it’s up 27% year to date, and at $1,650 it’s still up 20%!

Silver is just $30 an ounce. You can buy 10 ounces of it for what a family spends going to a football game. As fiat currencies continue to melt down, as the Euro zone dissolves, as we are forced to endure another round of QE (Quantitative Easing), and probably bail outs – no other investment makes sense?

This Christmas, do something that 90% of your neighbors won't. Give your children and your friends some silver dollars as gifts. In a few years when other gifts are out of date, those silver dollars will be worth twice what you paid.

The Market:
The market just went through its worst Thanksgiving Week since 1973, and the worst in percentage terms since 1932. This was all out selling. Some of it was panic over Europe, some of it was panic over MF Global, some of it was because of the Credit downgrades of Portugal, Hungary and Spain, and some of it was "raising cash" to fend off the redemption and margin calls. But it was ugly!
It was especially ugly because 70% of the time the market goes up during Thanksgiving week. The market usually starts heading higher in October, giving us the year-end rally – but so far, not this year. Now, I’m the guy calling for the breakdown of the Euro. I'm the guy who thinks we’re "doomed" economically. Yet I’m also NOT wholesale short this past week. Why, because I also know that we're just one announcement away from QE3.

In 2009, The Ben Bernanke unleashed QE1 (Quantitative Easing 1). We went from DOW 6,600 to over 12,000. So if you shorted at that point, you were crushed. When the market softened up again, The Ben Bernanke came out with QE2, and we put in highs of almost 13,000. Again, if you were short ahead of it, you were hurt very badly. Now with the economy slack, employment soggy, and the market in turmoil – we’re awfully close to hearing of QE3. And that’s what keeps a lot of short sellers out of the market.

QE3 will NOT solve anything, and (like Europe) it kicks the can down the road, but it will create a market run that pushes the market to all time new highs – all on printed money. Heading into December, there must be a last ditch effort to put on a good show, or a lot of fund managers are NOT going to get the holiday bonuses they want. And if they don't muster up some form of rally soon, you can consider that proof positive of just how ugly things really are out there. I'm looking toward leaning long into any late rally if it comes. But if we do get a ‘Santa Claus’ rally, and once it has some distance on it, we're going to start looking at long term put options for the inevitable market fall.

On Friday the market did it’s best to put on a brave show ahead of a weekend, and yes we ended the day red – but only by a few points. In many ways that could have signaled that the selling is over for a while. Nothing goes straight down, and we've been going down a lot of that lately. So, a bounce is in the cards, and if nothing really stupid comes out of Europe this weekend, we might see some green next week.

2012 is going to be quite a remarkable year. You might witness the breakup of Europe, and another 2008-style meltdown here. We're going to see if someone defeats Obama for President. And we're probably going to see an even more volatile market than what we’ve had this year.

Remember - Gold is up over 20% from a year ago – and over 27% from it’s lows during the year - $1,270+ to $1,650+ on the close on Friday. Have your other equity decisions performed that well? Please consider buying more physical Gold and Silver before it’s too late.

We’re out of virtually everything except:
- GLD at 157.49 – now at 163.50, (I’ll be buying more this week),
- SLV at 28.00 – now at 30.22, (I’ll be buying more this week),
- And HDGE at 25.30 - now at 27.23. (If we get a bounce – I’ll be selling this and buying in later.)

When the bounce comes (and it will), we will use it to start to scale into some long term puts. We are now close enough to 2012 and 2013 that we can buy long dated puts that I completely believe will be rewarding. I still believe that the DOW will visit the 4,500 level in approximately mid-2013, but we’ll start loading puts when the market turns back up.

Speaking of options, I think that it's also time to buy some inexpensive call options on the DOW and S&P. Why? Well along with people liquidating a lot of positions, one of the other issues is that we're coming through a 4-day weekend where no one wanted to be too long. Therefore, if nothing stupid happens, Monday could be a decent day. I'm thinking of the Dec 11th (weekly) S&P 119 calls are only $1.49 now. Could the SPY’s make 119 by December 11th, absolutely – and taking 10 contracts could be rewarding.

Other than that, remember to celebrate the weekend – it’s my favorite holiday (for many reasons).

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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1 comment:

  1. R.F.,

    Any advice for those of us out there that are interested in buying physical gold and silver? Seems like a lot of different options but didn't know if you had any suggestions?

    Thank you for being diligent about your weekly posts, it has become a part of my sunday afternoon reading ritual.