This Week in Barrons - 7-21-2013

This Week in Barrons – 7-21-2013

Why Aren't We Saved?

As you may know, I’m no fan of the Federal Reserve.  I think they’re unconstitutional and we would be much better off without them.  That being said: after all of this Fed stimulus, why isn’t this recession over and growth back to normal levels?  After all, we just spent the past two days hearing The Ben Bernanke deceiving us about the economy.  But there was one item of truth that came out of the hearings: The Government isn't helping the situation.   

The Ben Bernanke spent 2 days this week, talking to Congress in what used to be termed: the "Humphrey Hawkins" meetings.  Here's a remark from The Ben Bernanke that should have red flagged all the NSA computers: "Wall Street hasn’t benefited from the Fed’s actions any more than Main Street.”  Sir, how incredibly smug and arrogant of you?  While most of "Main Street" is scared to death of losing their part time jobs – and figuring out IF and HOW they’re going to have healthcare benefits in the New Year – bonuses and salaries at Wall Street Banks have been soaring.  Citizens that have had the good fortune to be able to hold stocks have seen their fortunes increase; meanwhile, those living on Main Street only see their expenses go up!  Didn’t The Ben Bernanke buy up all the ‘toxic sludge’ mortgages that Wally Street bankers had on their books?  Doesn't The Ben Bernanke buy all of the bonds from the Wall Street Primary Dealers giving them massive profits?  Doesn't The Ben Bernanke still allow "Mark to Model" fantasy accounting for banks, turning those banking losses into fictitious profits?  In return – ‘Main Street’ receives Debt Payments.

Consider for a moment the Fed’s statement: “We would like to maintain 2% inflation.”   For years they’ve been successful in selling ‘Main Street’ on how wonderful it is that our currency devalues at a couple percent each year.  Inflation literally means that our currency is "worth less" each year, and we’re being convinced that we should want ‘more of it’?  Economists will tell you that currency devaluation is good for growth.  I disagree.  It’s good for bankers.  It’s good for debtors.  It stinks for ‘Main Street’. 

In years past, the Fed appeared to be the savior to our economy.  If things were too slow, they'd change the interest rate picture, inject some liquidity, and in due time the economy would perk up and begin to grow again.  If things then got a little too hot, they would pull back on the reigns, tighten rates and slow down the train.  Many thought they had it all figured out, and nothing bad could ever happen again.  So why can't our economy seem to gain any traction this time?  Why are we going on 5 full years of incredible stimulus, trillions printed, and the economy is just barely alive.  It is my notion that in the past, we HAD an economy – rather than the façade of one that we’re currently experiencing. 

Think for a minute about the last ‘business friendly’ regulation that has been passed in the last 25 years.  Hummm – let me think:

-       The EPA and DEP are attempting to put coal mining – completely out of business.

-       To open a new WalMart, on average it takes 6 years and millions of dollars worth of studies – just to get to the point of breaking ground.

-       I have friends that spent tens of thousands of dollars on permits just to get a small manufacturing business created.  Just prior to the first shovel of dirt being turned, the EPA changed the rules – delaying their project another 18 months.  They eventually abandoned the project – and the jobs that would have gone with it.

Between an increase in taxes, mandatory health care, much tougher EPA and OSHA regulations, more required types of Insurance along with an increase insurance rates, mandatory disability insurance, an increase in legal and filing fees – is it any wonder that owner-operated small business is at it’s lowest level since records began?  One reason we aren't seeing a booming economy is because our Government (and it’s over- abundance of regulations) is killing the engine for growth.

Next up we have demographics, and they aren't pretty.  If you go back to the 60's and 70's when America was the creditor to the world and anyone that wanted a job could find one in a matter of 5 days – the demographics were much different than today.  After the WWII the GI's came home, went to college via the GI Bill, bought houses, and opened all manner of businesses.  Many created wealth and had children.  But we (as a society) tend to go overboard, spend too much, and take on too much debt.  Today, thousands of baby boomers are trying to retire and can't.

-       Each day almost 4,000 boomers reach the retirement age of 65 (and that number will grow for the next 8 years).  But due to the Fed’s 2% inflation policy (which is really closer to 8%) everything costs too much.  Baby Boomers are finding that they didn't save enough, and can’t retire.

-       45% of all working households have NO retirement assets.  Another 20% don't have enough to last a year.  Now add on to that the age factor, the loss of productivity, the accompanying increase in medical expenses – and it’s not a pretty picture.

-       Lastly, in the 60's, 70's, (and especially through the bulk of the 80's and 90's) people considered their home as their savings account.  Today, we still have over 7 Million homes ‘upside down’ on their mortgages.  We have millions of foreclosures still lurking in the shadows.  So at a time when millions of baby boomers are facing old age, they have no money and their homes can't save them.  

The biggest demographic "group" in our country is rushing headlong into a working retirement, which squeezes an already lousy job market.  21 year olds shouldn't have to fight with a 70 year old over a cashier job at Kmart. 

So, why isn't the Fed pulling levers and pushing buttons in order to fix this recession? They can’t.  This is not solely a monetary problem.  This is a much bigger problem.  No longer will printing money and cutting rates spur big jumps of economic activity.  The economy has been changed at its core, and QE can't fix that. 

-       We’ve never had 50 Million people on food stamps.

-       We’ve never had so many on disability.

-       We’ve never been this far in debt (as a nation).

-       We’ve never lost so much manufacturing.

-       We’ve never had this much regulation.

-       We’ve never had an entire generation (as big as the Baby Boomers) all facing retirement with no means to retire.

-       We've never had a housing market drop so far, and recover so slowly.

-       We've never had prices so high with wages so stagnant.

-       We’ve never had a stock market that cares not about earnings or valuations but simply ‘stimulus’. 

-       We’ve never had bankrupt cities.

-       We’ve never had soaring medical and energy costs.

-       We’ve never had a debt load that ‘mathematically’ is impossible to repay.

-       We’ve never had our top prescription drugs (as a nation) be tranquilizers, antacids, and erectile dysfunction pills!

I still think that the only way past this is thru gold and silver.  For 12 years now I’ve been preaching that buying gold was the single best thing anyone could do.  In 2007 I added silver to that list.  If the dollar is going away, if the entire global financial situation needs a reset – then replacing fiat dollars with a precious metal still sounds responsible to me.

This recession is not over.  The stock market only reflects Bernanke Bucks being jammed into a system that allows Wall Street and the bankers to get bigger bonuses. Detroit has just declared bankruptcy (the biggest city so far to do so), and joins 35 other municipalities that are also bankrupt.  Chicago (for example) has seen it’s ratings slahed 3 notches.  Chicago’s outlook is “Negative", and they recently announced the lay-off of an additional 1000 teachers.  

The Ben Bernanke can keep us alive on a respirator, but he can't fix the underlying disease, and that makes for dangerous times.

The Market:
 

I’m seeing major things happening in gold and silver.  The major banks are dramatically changing their futures contracts from being ‘net short’ to ‘net long’.  Recently J.P. Morgan (JPM) has demanded physical delivery for its silver contracts, something quite rare in the futures business.  (FYI - most commodities are bought and sold for the dollar gains, not really to take possession of the underlying asset. By demanding delivery, the supply system will indeed be in for a shock if this persists.)  JPM has one of the biggest gold warehouses on earth.  Yet for months the amount of eligible gold on hand has fallen.  Late Friday evening, it fell once again, leaving less than a single ton of the metal available.  Two years ago JPM had 3 Million ounces of gold available for delivery – today they have 46K ounces.  Along that same line, I’m seeing multiple countries now requesting their gold to be delivered back to them from the various Central bank vaults.  There is currently a shortage of the physical metal.  All the while, China and several other countries are adding to their gold stockpile.  Something is in the wind.  There is a tremendous "get what you can grab” going on by both Central banks and Sovereigns, and the rigged "paper gold price" take down of the metal was clearly a way to get speculators to sell their gold.  We are approaching a critical mass, where the physical metal may not be available for delivery.  What happens then?  My guess is that they the price will start to rise as those that didn't sell, look at this as an opportunity to "make some fast dollars".  

Look at the miners.  This group was ‘given up for dead’ – but recently Morningstar came out with a 5-Star rating on the group due to their extremely limited downside.  AUY for example, was trading at $8.60 on 6/27, and it closed Friday at $10.50. That's 23% in two weeks of trading.

This week the market was held hostage by The Ben Bernanke testimony.  Next week, I think that the traders will come back thinking that nothing has changed, and Benji’s going to keep the presses oiled and running hot.  If I’m right, there's no reason (other than the wildly overbought technicals) to keep everyone from buying more.  The big discussion is surrounding ‘tapering’ and honestly – it just doesn’t matter!  Even if The Ben Bernanke does announce and then commence to taper back from $85B to $65B – the market will most certainly drop an easy 1,000 points.  But then he will reinstitute  and (potentially) increase QE from the current $85B to $100B. 

Remember there are only two choices.  The FED either “prints forever” or pulls the plug and lets the global markets crash.  Unless those at the very top of the food chain have all agreed that the current global system can't be saved and are willing to start over, history says we will print and print until the weight of inflation takes us down by itself.  And what we heard from The Ben Bernanke during his testimony (twice) was that ‘if the data supported it, they may have to do even MORE accommodation.’  So, if the plan was to ‘crash the system’ – I don’t think he’d be talking about increasing QE.  So I’m on the side of continuing to print – and print no matter what. 

What about stocks?  Stocks are over-extended.  Today’s S&P is trading over 30% above it’s 200-week moving average.  We’ve never been 30% above that moving average before.  Secondly, the angle of ascent is showing that it’s climb is picking up the pace.  From April into May the S&P increased 128 points in just 23 trading sessions – before the market got shaken-up over "tapering".  Then from a low of 1560 on June 24, we gained an incredible 132 points in just 17 trading days.  The ascent is almost vertical.  Being this far over the 200-week average, and seeing a run this blistering, I could easily make the argument the market is going to need a break.  However, there seems to be no end in sight. 

We are cautiously long the market.  If they're going to manipulate it higher, we want in.  But don't forget, going back to November – we have not had any corrective pull back.  We are so overdue it is silly.  Yet they continue to take the daily POMO money and jam it into stocks and push them higher.  This will end one day, and it won’t be a fairy tale ending.

Tips:

This week we purchased some miners – and not just of precious metals – examine the following:

Company                              Description              2009 P/E        2013 P/E (est.)

Agnico Eagle (AEM)            Gold Miner                37.0                8.7      $28.20/sh.

Penn Virginia PVA)             Coal Miner                3.3                  1.0      $5.11/sh.

Barrick Gold  (ABX)              Gold Miner                6.8                  2.4      $16.56/sh.

Petrobras (PZE)                   Oil Producer             3.7                  2.9      $4.37/sh.

Peabody Energy (BTU)       Coal Miner                4.4                  3.8      $16.48/sh.

Ultra Petroleum (UPL)        Oil & Gas                   7.0                  5.1      $21.65/sh.

Newmont Mining (NEM)     Gold Miner                4.9                  4.2      $28.73/sh.

Kinross Gold (KGC)            Gold Miner                9.9                  4.0      $5.14/sh.

PetroChina (PTR)                Oil Producer             7.6                  4.0      $118.63/sh.

Arcelor Mittal (MT)                Steel Producer         6.8                  2.8      $12.72/sh.

The point being – these companies have been ‘beaten senseless’ by the market … and their downside is extremely limited (in my view) – while their upside is 300 to 400% in many cases.

My current short-term holds are:

-       SRPT – in at 41.08 (currently 44.25) – stop at 43.75,

-       NXPI – in at 32.51 (currently 32.69) – stop at 32.40,

-       ED – in at 59.01 (currently 60.49) – stop at entry,

-       FB – in at 25.61 (currently 25.93) – stop at entry,

-       AMAT – in at 16.02 (currently 16.56) – stop at entry,

-       JNJ – in at 89.00 (currently 92.42)  - stop at 91.50

-       BTU – in at 16.27 (currently 16.47) – no stop just yet

-       ACI – in at 3.95 (currently 4.12) – no stop just yet

-       SLW – in at 21.64 (currently 21.15) – no stop just yet

-       FCX – in at 28.47 (currently 28.51) – no stop just yet

-       SIL – in at 24.51 (currently 12.62) – no stop

-       GLD (ETF for Gold) – in at 158.28, (currently 125.21) – no stop ($1,293.30 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 18.90) – no stop ($19.45 per physical ounce).

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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