This Week in Barrons - 4-7-13

This Week in Barrons – 4-7-2013

“It’s just a Job.”… Muhammad Ali

I remember when Muhammad Ali said: “It’s just a job.  Grass grows, birds fly, waves pound the sand.  I beat people up.”  Well, on Friday we received the monthly JOBS report, and everyone was expecting that our economy had created 200,000 jobs in the month of March.  When the number turned out to be 88,000 – everyone was shocked.  But wait – it gets worse – the real number was ‘negative.’  You see the Bureau of Labor and Statistics (BLS) has a “Birth/Death’ model, which (in it’s basic form) says that for every ‘X’ amount of people that lose their job, some lesser amount go out and open their own business and hire.  There are no tax returns, receipts, forms or real proof of this – just empirical guessing.  In March they said that the ‘Birth/Death’ model created 92k jobs.  So, if we take away the ‘Birth/Death’ numbers (92k) from our 88K job creation number – our real job creation for March was actually a negative 4,000 jobs.  [For those who may wish to follow this number – go to: www.bls.gov - and in the top right there's a search box – type in ‘birth death’ – it will deliver you a page of links – go to the first one that says ‘CES Net Birth/Death Model’ – and that will give you the ‘birth/death’ adjustments.]

The report also revealed that 663,000 people had dropped out of the workforce in March, bringing the total to 90 Million Americans who are no longer even looking for work.  This was the biggest monthly increase in people dropping out of the labor force since January 2012.  Adding insult to injury, the labor force participation rate plunged to 63.3% - its lowest level since 1979.  Therefore, the jobs report wasn't just poor; it wasn't just a hiccup; it is a horror show, and a continuing nightmare.  Oh – least I forget – the permanent disability roles soared to record highs as we added another 83,000 last month.  This brings U6 unemployment to slightly over 14%.

Moving on, I have told you (on occasion) that Obama and his henchmen are drooling over your IRA and 401K accounts.  They want them and are going to find a way to get them.  President Obama's budget (to be released next week), will ask Congress to limit how much wealthy individuals can keep in IRA’s and other retirement accounts.  A senior official said that the proposal would save the government over $9B over a decade, while also bringing more fairness to the tax code.  This official continued: “Wealthy taxpayers can currently accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.  Under the plan, a taxpayer's tax-preferred retirement account, like an IRA, could not finance more than $205,000 per year of retirement.”  So the plan is to limit how much we can all put away for our retirement.  Really?  So if you currently spend $240k a year in your retirement, the new plan won’t allow you to have that much in an IRA.  The thinking will start off by going after the rich, but it will be a very short time before the dollar amount line gets redrawn on what is acceptable for retirement.  It’s all sounding a little bit like Cyprus to me.

Many of you have written about gold and silver, and let me address those two precious metals in particular.  I always start by asking: Are the things that pushed gold to $1,900/ounce, and Silver to almost $50/ounce, still valid?  Gold and Silver basically just "sit there", and keep your wealth safe.  For example:  in 1920 you could buy a nicely made suit for an ounce of gold, and the same is true today.  Let’s examine a couple headlines because I think the same things that impacted us then – impact us now:

-       (Reuters)       N. Korea is both volatile and dangerous.  Hagel cites growing threat from nukes.  The standoff with South Korea escalates as North shuts border.  China voices serious concern.

-       (NY Times)   Oil tanker operator Frontline (FRO) says it is rejecting some cargoes as excess vessel supply continues to drive down charter rates.  Rates for the industry’s biggest ships have plunged 75% year over year.  In fact an average run today from Saudi Arabia to Japan looses $3,012/day. 

-       (NY Times)   Sub-Prime lending has returned to the auto business with a passion.  In 2012 (according to Standard & Poor’s), lenders sold $18.5 billion in securities backed by subprime auto loans, compared with $11.75 billion in 2011.  The pace has continued so far this year according to Deutsche Bank AG.

-       (Reuters)       The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit.  This is an effort that officials say will help power the economic recovery, but skeptics say could open the door to the risky lending practices that caused the housing crash in the first place.

-       (CNNMoney.com)    November 26, 2008 -- Gasoline prices declined for the 70th straight day, falling below the $1.87 per gallon mark, according to a national survey of credit card swipes at gasoline stations  $1.87?  In 2013 I'm paying $3.89 here in Pittsburgh.  That's an increase of 108% in 5 years!

(Reuters)       Thanks largely to the U.S. Federal Reserve; Jeffrey Nelson was able to put up a shotgun as down payment on a car.  Money was tight last year for the school-bus driver and neighborhood constable in Jasper, Alabama, a town of 14,000 people.  One of his cars had already been repossessed, and medical bills were piling up.  And though Nelson's credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294 loan from Sub-Prime lender Exeter Finance Corp so Nelson and his wife could buy a charcoal gray 2007 Suzuki Grand Vitara.  All the Nelsons had to do was to cover the $1,000 down payment.  For most of that amount, Maloy accepted Jeffrey's 12-gauge Mossberg & Sons shotgun, valued at about $700.  In the ensuing months, Nelson and his wife divorced, he moved into a mobile home, and (unable to cover mounting debts) he filed for personal bankruptcy.  His ex-wife, who assumed responsibility for the $324-a-month car payment, said that she would probably file for bankruptcy in a couple of months.  When they got the Exeter loan, Jeffrey, 44 years old, was happy "someone took a chance on us."  Now, he sees it as a contributor to his financial downfall.

Okay, so if we all agree that the main reasons for the gold and silver rise are still in effect, why on earth are gold and silver not increasing in value?  The banksters know the "real deal", and all across the world central banks are buying up gold.  China has been very active, and judging by the way the BRIC countries just shrugged off using the dollar for trade between them, the days of the US dollar being the world reserve currency are indeed limited.  So at the central bank level, they are in gold and silver accumulation mode.  But if they are buying gold, why would they send their minions out to mock it, disrespect it and push its price down?

-       #1 – With the price lower, they can buy more.  But that’s the ‘easy reason’ to figure out.

-       #2 – Gold has always been the safe haven and inflation fighter.  It definitely doesn’t look good when you're bailing out Cyprus by stealing customer deposits if gold and silver are soaring.  Don't forget the reason they're pushing the stock market higher is "perception of wealth".  People see the markets rise and "think" that the economy is doing well.  If they can get people thinking that "if " things were really bad gold would have gone higher, they have won the psychological game.

-       #3 – Over the past few years, to keep the gold price from increasing, the very central bankers that have been accumulating gold, have also been ‘leasing’ the gold to the bullion banks that sell it into the various markets.  As we look around the globe we see that no less than ALL of the recognized Central banks have forward leased between 25 and 35% of their gold.  They “lease it” / “rent it” to bullion banks.  Because it's not sold, they get to keep it on the balance sheets despite it physically not being there.  So the bullion banks rent it from the Central banks, and they in turn SELL it in order to meet demand.  Because most buyers do NOT take physical delivery of the asset(s), this leveraging effect keeps the price down on the gold and silver itself.

Now you may ask the question:  "If the central banks have rented it out, and the bullion banks have sold it into the market, isn't keeping the gold on the balance sheet as an asset a Ponzi scheme?"  Yes – it is.  As long as there's no tremendous rush by any one Central Bank to get their "leased" gold back, then it goes on and on.  But what happens if the Central bank of Venezuela says "I want our gold back."  Uh Oh.  Now there's a problem. Because some portion of that reserve currency gold has been leased out.  Now the calls have to go out to the bullion bank "get the gold back".  Well they can't just "get it back" – they need to take the next round of leased gold from some other country and satisfy the Venezuelans demands for the physical metal.  Okay, problem averted.  But what happens when Germany demands their gold to come home?  And Switzerland?  And New Zealand?  The result (thus far) is that Germany has allowed the world 7 years to deliver it – because the gold isn't there.  And if Germany said: "No, we want it now."  Gold would soar to $2,500 overnight.

The way gold is dealt with by the Central bank is basically the same as any fractional banking.  They only keep a "fraction" of the deposit on hand the rest is loaned out.  All is fine until everyone wants their gold back at the same time.  I tend to think that every day we get closer and closer to a gold panic.  Right now, the Central bankers are being "gentlemanly" with each other and giving ample time for the bullion banks to get their act together and raise the physical metals.  But it is my guess that as all these insane printing schemes are found to be death spirals, Europe and the US and Japan and other places go into hyperinflation, and gold will push higher.  Also, if any one of the major Central bank Countries panics and demands their gold back immediately, there's going to be a "gold war" for possession.  At that point the price of gold will increase dramatically.  Keep an eye on China.  They want their currency to be either the new global reserve, or at least a major part of it, and they’ve got a lot of gold to back it.

So, is gold and silver done?  I don’t think so.  It is depressing to see how well the Central banks have managed to cap its price.  My guess is that when the dust settles, gold will be well over $2,500, and silver between $70 and $100.  So in my mind, gold and silver are still worth holding.

The Market:

I have run out of superlatives to use for this market.  Words like: resilient, strong, controlled, manipulated, and bankster driven.  I am my own worst enemy, because I try and use logic and reason to understand things.  A common logical argument that I often have with myself goes like this:  "If the economy is a fraud, and companies are increasing earnings per share by either tricky accounting schemes and/or buying back shares – then how are stocks going up?  Stocks are supposed to go up because of organic growth, sales, and revenues, coupled with a good cost structure.  Then this market should be shorted".  But then the other argument says:  “Markets go up because there are more buyers than sellers.  Buy the darn market you idiot.  Bernanke's only got ONE thing he can point to if he leaves his position next year, and that is the stock market.  He can't create jobs.  He can't create growth.  He can print money.  And money will find its way to the market.  He will not let it roll over."  I continually realize that Bernanke Bucks are going to trump everything for a while.  Logic, reasoning, and fundamentals are currently worthless.  

Heading into Friday's jobs report, we had the perfect set up for a market correction.  And when a market is trading at 14,500 a correction is more like 800 points.  Coming into Friday we had no less than 5 horrid economic reports behind us.  The economy is creaking and groaning, and a poor jobs report should have pushed it over the correction edge.  We dipped 171 points after the open, but by the close were down a measly 40 points.

So despite the market being perfectly set up for a pull back, they've papered it over.  They defended the S&P support at 1540, and by the close both the Financials and the Russell small caps had both managed to get back up and over their 50-day averages.  While I'm fully aware of why Bernanke won't let a major market "crash" occur, I'm really surprised they won't let a normal every day correction take place.  All we can do is hold our nose and take positions.  Yeah, it stinks like 5-day old fish, and that's why we hold our nose.  Everyone on the planet is now pretty much aware that this market isn't acting normally and is piling in until the market implodes.  That implosion could be Monday, or next February – and is solely dependent upon The Ben Bernanke and his Banksters.

We're heading into earnings season.  Earnings will be made to LOOK good – but they won’t BE good.  Will the market use that as the excuse to sell?  Ever since the market ignored the PMI, the ISM, the bad housing sales, and the lousy jobs numbers – I don’t know exactly what to think.  I’m currently leaning long, but I am worried that the light that I’m seeing in the tunnel – is not the end of the tunnel, but rather that of an oncoming train.

Tips:

Last week I sold out of both COST and SNDK for a $2/share profit, and am sitting with one position.  For next week, like my friend DS – I’m looking for a re-entry point for LNG (a natural gas play). 

My current short-term holds are performing nicely (with gold and silver still lagging):

-       NUAN – in 19.10 (currently 20.48) – stop at entry,

-       SIL – in at 24.51 (currently 17.19) – no stop yet

-       GLD (ETF for Gold) – in at 158.28, (currently 153.00) – no stop ($1,575.40 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 26.43) – no stop ($27.20 per physical ounce).

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

Please be safe out there! 

Disclaimer:

Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, RF Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .

Please write to <rfc@getabby.com> to inform me of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference .

If you'd like to view RF's actual stock trades - and see more of my thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is my handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0

To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/>
Until next week – be safe.

R.F. Culbertson

<mailto:rfc@getabby.com>

<http://rfcfinancialnews.blogspot.com>

This Week in Barrons - 3-31-13

This Week in Barrons – 3-31-2013

“He that has ears to hear, let him hear” … Matthew 11:16

By now, many of us are all too familiar with Cyprus.  Because of all the bad debts, the Cyprus banking system has folded up like a ‘cheap suit’.  They needed ‘bail out’ funds, in order to pay their ‘criminal banksters’ that made the mistake(s) in the first place.  As a result, any and all accounts at the Bank of Cyprus with deposits of more than the insured 100,000 euros ($128,225) will lose 37.5% of their value after they are converted into a class of bank shares.  The Bank of Cyprus will freeze another 22.5% in each of these same accounts until the Cyprus’s bailout terms have been met. The money will be placed in a fund that won't earn interest, and it could see an even larger write-off.  The remaining 40% will earn interest but the money will be temporarily frozen for liquidity purposes.  Cyprus’s Finance Minister Michalis Sarris this week estimated that 40% of the deposits would be converted to bank shares.

This is truly a shock to the system.  We TRUST all of our systems.  Our systems have become so much a part of our lives that we don't even give them a second thought.  When you turn on a faucet you believe that water will come out of it 100% of the time.  When you flick the switch or push the ‘on’ button you expect electricity.  When you turn the knob on your gas range, you expect fire.  If any one of those systems misfires, your day is going to drastically change course.  We’ve built that same trust in our banking system.  We don’t think twice about it, but unfortunately it hasn’t worked properly for the past 35 years.  In the last 10 years our own ‘banksters’ have broken every law and have virtually bankrupt the world.  Our ‘banksters’ approved mortgages for dead people, and mortgages for people that couldn't pay.  They then bundled those same mortgages, called them "prime" investments, and sold them to companies, pension funds, and other countries.  Meanwhile those same banks (because they knew they weren't worth anything) shorted those very investments.  Can you imagine the audacity?  You’re sitting with a client who runs a pension fund for firemen, and you sell him millions of dollars worth of trash, telling him that it’s a safe and sound investment.  All the while your boss is writing up short sale contracts on those same investments, knowing that they’re not worth the paper that they’re printed on.

In the case of Cyprus, their ‘banksters’ placed huge bets on Greek debt, and the bets went sour.  The Cyprus banks became insolvent.  The EU rushed in with funds, ideas, and more ways to kick the can down the road.  Cyprus is a tiny island country of 1,000 people that produces less than the state of Vermont, but is a banking HUB because it is willing to accept money from all corners of the globe – taxing it a little, and using it a lot.  But the Cyprus banksters have run out of ways to get others to pay for their crimes.  Well, it took a while but they did what I said every bank would ultimately do – ‘Raid the Depositors.’  But we built this system based upon TRUST.  The EU has just thrown TRUST out the window, and replaced it with the words: “Contribute to our own Liquidity.”  The EU is calling the act of raiding depositor’s money – a "contribution" to the welfare of Cyprus.

Now, if you're John Q. Public in Spain, and you just saw the EU approve Cyprus’s raiding of depositor’s money, what would you do?  Here in the US we have the FDIC (which is bankrupt) supporting our deposits up to $250,000 (in any one bank).  Is everything over $250k fair game now?  Are we sure that Citi or Goldman won't raid our accounts like Cyprus has done?  

In my class at CMU on Thursday someone asked me: “How can it be that half of our graduating seniors don’t have jobs yet, but our stock market is reaching all time highs?”  During this past week we saw consumer confidence fall, the Purchasing Manager’s Index fall, housing sales fall, and more than 6 economic reports miss expectations.  We can’t make a real housing recovery, can't create jobs, can't spur economic growth, but we can push the market higher and create the wealth effect.

Recently the BRICS (Brazil, Russia, India, China, and South Africa) just created a $100B infrastructure bank that will be used to help developing countries that run into trouble.  They also decided that trade between their nations would be conducted in their native currency, NOT in the US dollar.

In the past two weeks my best friends and I have attended two ‘hack-n-slash’ movies about destroying the U.S. White House and our economy.  I’m desperately hoping that life does NOT imitate art.  I wish you all a Happy Easter and to quote Matthew 11:16 -  “He that has ears to hear, let him hear.”

The Market:

Like the “Little Engine that Could", this week The Ben Bernanke chugged, snorted and pulled this market to all time highs.  Now what?  While Europe melts, and our Central banks amass huge quantities of Gold (while keeping a lid on the price) – what happens now?  As long as the printing presses keep printing, we have no other choice but to see higher markets.  Combined with what is going on in the rest of the world, the US market looks good to foreigners; therefore, any dips will be bought.  

But let’s do a reality check and examine the company - Caterpillar.  CAT is the epitome of global construction. They're bigger (by market cap) than all of their competitors combined.  If someone is going to build something of any consequence, Caterpillar products will be involved.  Yet while the S&P and DOW push their way to all time highs, CAT is dropping in price.  That says volumes about the reality of the global economic picture.

But given they’re printing so much money, how does the FED prevent the market gaining 1,000 points in one day?  The answer is that the FED sends out mixed messages as to when the money printing will stop.  On the same day as one FED member says: “The economy can use more monetary assistance from the FED, we need to be more aggressive,” you have another FED member saying: “I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy, if it resulted from a significant improvement in the outlook for labor market conditions.”  The goal here is to tell everyone not to worry, the punch bowl will be full for years to come, and then temper it with another message saying they might pull the punch sooner than later.  That keeps the market moving up while he's printing, but keeps the really big players from putting in tens of billions at one time, and driving the market up too far too fast.

We have no choice but to hold our nose, lean long and hope for the best.  Yes, watching CAT tumble makes me think that maybe we're about to see a correction, a profit-taking binge, but (in my opinion) it will be short-circuited and this dip is buyable.  The "new monthly money" will be applied early this coming week, and if we're going to get a pull back, it will be over the next few weeks as earnings disappoint.  Be careful out there – and celebrate the holiday! 

Tips:

Last week I sold SNDK for a $2/share profit, and am sitting with three (non metal) positions.  For next week, I’m liking RF Micro Devices (RFMD) over $5.45, Vale S.A. (VALE) over $17.35, and Intuit (INTU) over $66. 

My current short-term holds are performing nicely (with gold and silver still lagging):

-       COST – in at 104.10 (currently 106.08) – stop at 105.10,

-       NUAN – in 19.10 (currently 20.12) – stop at entry,

-       SNDK – in at 52.19 (currently 54.99) – stop at 54.50,

-       SIL – in at 24.51 (currently 18.15) – no stop yet

-       GLD (ETF for Gold) – in at 158.28, (currently 154.50) – no stop ($1,594.80 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 27.26) – no stop ($28.29 per physical ounce).

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

Please be safe out there! 

Disclaimer:

Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, RF Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .

Please write to <rfc@getabby.com> to inform me of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference .

If you'd like to view RF's actual stock trades - and see more of my thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is my handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0

To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/>
Until next week – be safe.

R.F. Culbertson

<mailto:rfc@getabby.com>

<http://rfcfinancialnews.blogspot.com>

This Week in Barrons - 3-24-13

This Week in Barrons – 3-24-2013

“We are NOT Cyprus.  We are NOT some 3^rd World Country!”

Last week’s report produced a lot of mail telling me that the U.S. would never confiscate our money – this is America, not some 3^rd world country – we’re too big to fail and have too many rules.  Not to ‘beat a dead horse’ – but the U.S. DID exactly that in 1933.  President Franklin D. Roosevelt saw the economy grinding to a halt, and needed a way to kick start it out of the “Great Depression.”  His cabinet decided the best way to expand the economy was to expand the money supply.  But in 1933 the money supply (unlike today) was backed by gold.  So to expand the money supply we needed to have more gold on hand, and the only way to obtain more gold quickly was to demand it from the American citizens.  On April 5^th, 1933 Executive Order #6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce.  Under the Trading With the Enemy Act of 1917, as amended by the recently passed Emergency Banking Act of March 9, 1933, violation of the order was punishable by a fine up to $10,000 or up to ten years in prison, or both.  This prompted hundreds of thousands of citizens to turn in their gold at their local Federal Reserve Bank – in exchange for $20.67 – the accepted, general price for gold at that time.

But wait a minute. If Gold was $20/ounce, and the U.S. had already printed all the money that it could based upon the amount of gold that they had in storage, what good is buying gold from the public and paying $20 an ounce for it?  Isn’t that a wash?  Absolutely.  But once they obtained all the gold, and refined it into US bullion, the government then declared the NEW PRICE for gold to be $35/ounce.  You see by declaring that gold is NOW worth $35/ounce instead of $20 – they could print more money in order to bridge that 70% gap that they had just created.  And the American citizens just ended up eating a 70% currency devaluation as well as the corresponding inflation.  So to all that say: “The U.S. would NEVER do what Cyprus is trying to do” – well, they already did. 

Having said that, I know that owning gold and silver isn’t perfect.  But just last week, a glitch at Chase Bank had tens of thousands of depositors showing an online balance of $0.00.  This caused an immediate run on the bank’s ATM’s – and Chase was quick to apologize and update their balances.  But it begs the question: If you had to absolutely PROVE (on paper – without any help of electronic records) how much money you had in any given bank at any one time – could you?

I was reminded (by a reader) of the Stanley Druckenmiller article a couple weeks back, where Mr. Druckenmiller blasted the current administration and our current seniors for passing along an insurmountable debt burden onto our youth.  The title of the article was: “Don’t let your Grandparents Steal your Money.” 

Mr. Druckenmiller is one of the best-performing hedge fund managers of the past 30 years.  He points out that the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt our nation’s youth and pose a much greater danger than the country’s $16 trillion of debt currently being debated in Congress. “I am not against seniors,” said Mr. Druckenmiller.  “What I am against is current seniors stealing from future seniors.  Unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008.  What is particularly troubling is that government expenditures related to programs for the elderly rocketed in the past two decades, even before the first baby boomers started turning 65.  In 2011, Social Security, Medicaid and Medicare accounted for 44 percent of the government’s $3.7 trillion in expenditures, up from 34 percent in 1990.  The seniors have a very, very powerful lobby.  They keep getting more and more transfer payments from younger generations through what’s essentially a pay-as-you-go system.  As the elderly population rises, the number of workers who pay into Social Security is dropping.  By 2030, there will be about two workers per retiree, down from 3.4 workers in 2000.”

Mr. Druckenmiller thinks:

-       Stocks may continue to rise due to buy-backs and the new retail investor, but those gains probably won’t last due to too much leverage and too much debt.

-       We should change the eligibility ages for Social Security and benefit structure for wealthy retirees.

-       We need to remove the disincentives for those who would rather work in their later years.

-       We need to add a federal consumption tax because seniors consume about the same amount as people in their 20s or 30s, yet pay less in income taxes.

-       We need to tax dividends and capital gains so as to shift the tax burden as the population ages

-       To avoid double taxation, the government could abolish corporate taxes, which would also eliminate some incentives for companies to move business abroad.

We built a system of dependency and trust, and the system is breaking down.  I’m finding better places for my money than cash, and I figure those who live in Cyprus (about now) are finding the same. 

The Market:

This week, The Ben Bernanke held a Q&A session on the economy and the Fed’s actions.  After reading a prepared statement, he started talking about the thresholds that the Fed has established.  For example, they have stated that “the Fed will keep buying until the unemployment is under 6.5%".   The Ben Bernanke told us that these thresholds are just "signposts", not absolutes.  He then said that this very easy money policy could go on for a long time past those signposts.  Basically what he's telling us is that they're looking at everything, and there is no real way that he can stop printing.  The Ben Bernanke also admitted: "the stock market may be hitting new highs in nominal terms, but is still far away in real terms."  This is due to inflation, but it’s nice to hear our Central banker saying that while the DOW is hitting new highs, the returns are (in fact) lower.   

When I look at the market, the image that appears is one of a market that is desperately tired, in need of a rest, but that is consistently being jammed higher.  And then we have the issue of the "late comer".  A “late comer” is someone that has missed the entire 2009 to 2013 run up, and is NOW asking if it's time to jump back into the market.  On one of the technology bulletin boards I frequent, I noticed a post last week by a gent asking if the members thought it was a great time to finally get back in the market because the market had just put in its all time high.  I desperately wanted to ask him where he had been for the past 5 years, but I thought the better of it.  But then the responses that he got were even more interesting.  Many of the site's members pitched in to say that they had just recently jumped back into the market themselves.

In any bubblemania I’m reminded of a quote: “the market can remain irrational, longer than you can remain solvent."  In other words, the market can keep doing (whatever it is doing), longer than any reasonable mind would think.  And secondly, as the mania begins to get ‘long in the tooth’, it invariably pulls in those that resisted all along the way.  I tend to think that some of the starts and fits that we’re seeing is a market that wants to rest, but the late comers detect any red as a pull back and jump in.

I’m positive for this coming week because we have just put in a tremendous quarter, and with the quarter ending next Friday, Wall Street would like nothing better than to be able to send out quarterly statements showing tremendous gains.  Between that and the folks jumping in late, I now know why there was no real correction in the last few weeks.

Let’s assume we reach an all-time high on the S&P this week, the quarter ends, and the new monthly money comes in.  Does the market just continue higher?  It could, simply because the underlying strength of the market is coming from a man with a printing press.  But here's a small question for you – what if you looked at the Fed's balance sheet, and it showed a figure that could only correspond to The Ben Bernanke printing $115 Billion last month, instead of the $85 billion that he told us about.  How would we figure out where the excess $30 Billion went?  Is it possible that when the market looks tired, and he knows something like Cyprus is coming down the pike, that he ramps up the digital press a little higher and spreads it around so that the market doesn’t go down?   

My point is that the market is beyond artificial at this point, and is bordering on absolute fiction.  Companies like Fedex, Caterpillar, Deere, UPS, Oracle and a dozen others have come out saying things are weak out there.  They are missing earnings, but the market still holds solid or goes up.  This is all because of Benji Bucks, and until they stop printing, there isn’t any real reason that the market can't keep going up.

While I'm still under the delusion that at some point we're going to get a 4 or 5 % pull back, the fact is that between Benji Bucks and latecomers to the party, we could easily just push higher.  My only problem with this is that the higher this market goes on a fake premise, the harder it is going to fall.  The people that jump in at 14,500 are going to look good if we get to DOW 16K.  But when the wheels come off, will they be smart enough to get out?  History says no, and that there will be much pain and suffering - again.  If we're going to get a pull back, it makes the most sense for it to start late in the first week of April - after they print up their quarterly statements, and all the managers can look like real geniuses.  Then the market could put in a correction.

I am playing this rally with caution.  I lean long, pick up a few stocks and do my best not to get blindsided.  As long as the DOW closes above 14,383 we should be able to keep the illusion alive.  A close under that would signal increased danger.  A close over 14,540 probably signals more gains to come.  But be wary of sector rotation.  One-day materials are bid-up in a big way, and the next two days are spent crushing the same sector that was bid-up.  It’s vicious out there, so be careful. 

Tips:

Last week I sold National Oilwell Varco (NOV) for no gain, WPX Energy (WPX) for no gain, and Iron Mountain (IRM) for $0.20.  I liked COST over $104 and bought it on Friday.  I currently like DECK, and would dive in around $50.80, or after it breaks over its Wednesday high of $51.16.  A couple miners like AUY have started to move, and are bringing NEM and AEM along with it.  We purchased some GDXJ (the ETF of junior miners) a while ago for our ‘long term’ account.  I’m seeing that the GDX (ETF of senior miners) is starting to move.  A move over $38.60 would put it on the radar – and the GDX getting over $39.30 would make it a buying opportunity.

My current short-term holds are performing nicely (with gold and silver still lagging):

-       COST – in at 104.10 (currently 105.20) – stop at entry,

-       NUAN – in 19.10 (currently 19.86) – stop at entry,

-       SNDK – in at 52.19 (currently 55.19) – stop at 54.50,

-       SIL – in at 24.51 (currently 18.15) – no stop yet

-       GLD (ETF for Gold) – in at 158.28, (currently 155.68) – no stop ($1,606.20 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 27.80) – no stop ($28.67 per physical ounce).

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

Please be safe out there! 

Disclaimer:

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