Tuesday, September 29, 2009

Can We Ever Pay Off Our National Debt?

Hello All

As I sit here and watch the dollar tank once again tonight overseas, I wonder if the market is slowly coming to the conclusion that the USA will never be able to pay back the trillions of dollars that they have borrowed.

I really thought about yesterday's Jim Rickards interview on bubblevision today. Folks, I don't see how we escape this crisis without a dollar devaluation of 50% or so. This is the only way we will ever be able to pay off the ugly debts that we have accumulated.

So what are the unintended consequences of such actions? I'll be damned if I know. Inflation is an obvious answer but the social consequences would not be known until such an event occurred.

We are in uncharted waters. I can't make any sense of the stock market or the bond market at this stage. The fraud and manipulation at this point is unprecedented.

What's amazing is the banks continue to take advantage of the destabilization of our economy. I am beginning to believe that Wall St doesn't want to see a recovery because the chaos is creating so many profitable opportunities.

If we see an economic recovery, interest rates must rise, and this would be catastrophic to housing(higher lending rates) and thus the banks balance sheets.

Here is a nice example of why chaos is good for Wall St:

There is another "old school" bond game that's going on right now. The banks are borrowing short from the Fed at next to nothing(2% or so) and then buying the long end of the yield curve(4% or so) and pocketing the spread. This is why you have seen the long end of the bond market collapse over the past several weeks.

This is a beautiful game for the street for now but things can change in a hurry according to the pros:

An old bond trader friend of mine explained to me that he watched the same thing in the late '70's. It was a beautiful game while it lasted. The problem is they all got caught with their pants down when Volcker took rates to 12%.

Those long end bonds with a 6 or 7% yield from the '70's don't look so hot when it costs 12% to borrow a few years later!

You see folks, these games can only go on for so long before drastic actions must be taken in order to prevent ourselves from blowing up. When the party is over and rates soar(which I believe is right around the corner), the primary dealers and others holding these bonds are going to get killed.

One potential Black Swan in the bond market is the "audit the Fed" bill that's flying through Congress right now. The Fed is already screaming fire as they try and prevent this bill from going through.

If this passes, the Fed will be exposed for what they are: A fraudulent bunch of broke gangsters that are holding a bunch of worthless paper in an attempt to bailout their banking buddies. The Fed is a sham and everyone knows it.

I expect the rhetoric out of the Fed to soar as this bill gets closer to passage. It's already started. You can almost guarantee that they will warn us that such a move would threaten the whole financial system if this bill passes. I say bull****. We have been through much tougher times before. No one is too big to fail!!!! We will survive this crisis and move on.

The Fed however wants you to think the world will end if their balance sheet gets exposed. My questionn here is if they were legit then why would they be so resistant to an audit? Companies are audited all of the time! Their resistance to this bill proves their guilt IMO.

The Bottom Line:

The games never seem to end. Many of my contacts on the street are extremely skeptical of what's going on in the markets. A few see no way out for the Fed and the economy. In fact, I have never seen people from Wall St so bearish. They are usually a jolly group.

Many of them are now beginning to focus on how to profit from the collapse that seems almost impossible to avoid at this point.

The bulls own the market for now. Fundamentals don't matter when you are betting on a recovery. If the analyst's revise earnings down from .20 a share down to .05 on a company before earnings season and they come in at .10 it's a huge beat! Yeah ok, go ahead and tug the other one.

The mirage of Wall St continues but you need to wonder if their run is about over. A collapsing dollar and the Fed's response are what I am focusing on right now. If I had to guess, the Fed will do nothing with interest rates unless inflation really runs wild.

As a result, the metals are still the place to be long term. The street is beginning to realize that the only way we pay back our trillions in debt is by devaluing the currency.

The IMF will pick up our slack with a new currency in order to stabilize world trade as we clean up our mess by taking down the dollar in order to pay off our debt.

This is going to be a very painful experience for America.

Monday, September 28, 2009

Jim Rickard Nails it

Brilliant analysis here From Jim Rickard. this is about the only viable solution that I see to this economic nightmare.

A dollar devaluation is unavoidable at this point because we simply have dug ourselves too deep a hole. Get used to the term SDR(Special Drawing Rights). Here is a definition for those that are interested.

The IMF is being prepared to keep world trade stabilized via SDR's while we devalue our dollar by 50% in order to payoff debt.

IMO, Gold and other metals and commodities are a must hold as a hedge in preparation for this.

I can't embed this for some reason right now so here is the link:

Sunday, September 27, 2009

Fleckie Strikes again

Good Morning All

I am a big Bill Fleckenstein fan and I thought his most recent post was very insightful.

Bill recently attended a conference in NYC where the best and the brightest shared their world views on the economy.

The biggest star at the conference was legendary hedge fund manager John Paulson. IMO, this guy is the smartest guy on Wall St. He made billions betting against the subprime market in 2007.

The returns in his fund are simply breathtaking year after year. According to Bill, Mr. Paulson had some very bullish comments around gold:

"Paulson holds court I don't think I would shock anyone if I said that the day's headliner at the conference was Paulson (though the other speakers were equally fascinating to me). Everyone wants to know what he thinks because he made so much money on the subprime collapse. But it should be noted that he puts his pants on one leg at a time, too, and thus can be wrong like the rest of us.

After all, he wasn't that much more right about what was liable to happen than a handful of others, such as Grant and my friend I often refer to here as the Lord of the Dark Matter (who's quoted, for example, in "The trouble with techs right now" and "Will economy's green shoots wither?").

However, what Paulson did was to take his views and express them brilliantly,which may also have been a function of just how well he understood the situation. Thus, given Paulson's recent track record, those who have a bullish viewpoint on gold naturally want to know what he thinks.

In short, he believes that money printing by the government will ultimately lead to a good deal of inflation.

Parenthetically, while deflationary chatter certainly has the headlines and the upper hand regarding folks' opinions in the short run, I see quite a body of sharp investment minds coming to the conclusion that in a social democracy with a fiat currency, essentially all roads lead to inflation.

In any case, Paulson is convinced that gold will be a very good way to protect himself from the eventuality of currency debasement (i.e., inflation). He observed that if one thinks about gold in a three- or five-year time horizon (instead of hour to hour, day to day or week to week), the probability increases of gold being higher over time -- and, most likely, much higher.

I had not thought about gold from that point of view, but that is exactly right. Consequently, if folks have positions that are reasonably sized, it makes volatility -- especially when it's downward, as was the case last week -- much easier to accept. "

The Bottom Line

Food for thought. It appears that the things we own(housing, cars etc.) are dropping in value while things that we need(fuel, food) are becoming increasingly more expensive. This makes the inflation/deflation argument a tough sell for both sides.

This is hardly the recipe for a strong economic recovery. Let's not forget that we will also eventually be forced to deal with our soaring budget deficit. In short, this means much higher taxes for everyone. The politicians are lying when they say they will only tax the rich.

If we see the healthcare reform bill pass I predict the tax rate in this country will be 50%. Canada's tax rate is 51% in order to pay for this. Take a look at any of the westernized countries that have national healthcare and you will see a similar tax rate.

I advise everyone to read Bill's article. The mood at the conference he attended which included the best and the brightest was extremely bearish. My contacts on the street have been telling me the same thing.

Be careful with your money folks. Please diversify your nest egg in order to protect yourself from the nasty storm we are about to sail into.

Friday, September 25, 2009

Deflation Straight Ahead?

Hi All

Sorry it's been so quiet around here. Keep checking in because I will post when I get a chance.

Let's get to the markets:

Hmmmm.....Is that the smell of Deflation in the air? The market sure seems to be acting like it.

Let me preface my deflation take by stating that the market is totally manic right now. I expect both inflationary and deflationary panics as the US economy stands on the brink of collapse.

Earlier this year, the Fed turned on the printing press as the economy collapsed hoping that companies and consumers would feel more confident and start spending as things appeared to get back to normal.

As much as we hate it, the Fed must replace the consumer during tough economic times until both the consumer and corporations heal their balance sheets. This usually works very effectively during a mild recession: 1987, 1990, 2001 anyone?

As companies and the consumer recover, the Fed can then yank their liquidity once the economy stabilizes and the private sector is stable enough to stand on it's own.

The problem we have this go around is the economy collapsed in 2008. The Fed has tried to react like it always has and attempted to replace the private sector. What we are slowly learning is that the balance sheets of the consumer this go around are practically beyond repair.

How does an average Joe ever pay off a $600,000 30 year home loan? Answer: He doesn't.

As a result, the Fed is in a real jam with few options. They can't replace the consumer forever because the deficits would eventually destroy the dollar. However, if they pullout, the economythen collapses because the private sector is too damaged to replace them. This would assuredly lead to a deflationary death spiral like we saw in Japan in the '90's and here in the US in the 1930's.

The Bottom Line:

So what will the Fed do? That's the million dollar question. Do they spend spend spend until they create a currency/hyperinflation nightmare?

Or....

Do they fold their hand and let the economy collapse via deflation?

The market appears dazed and confused on this issue. Before this week, the market was screaming inflation as the metals, stocks, and other commodities went on a tear.

This week things changed after the Fed statement. The market began to sell off and both bonds and the dollar started to to rally. What was most noticeable was there was a lot of buying in the long end of the bond market(10/30 year).

This price action screams deflation. The reason I say this is why would anyone buy a 30 year bond at a 4% yield if they expect inflation to rise 10% a year? Answer: They wouldn't because they would be 6% in the hole each year.

So is it deflation or inflation? We have seen panics in both directions in the past few weeks. I don't expect this to change much in the near future.

The future of the dollar and the world economy is very much in the air. This is a time where investors must focus on capital preservation versus yield.

IMO, diversification is a must for both inflation and deflation.

Batten down the hatches folks, there is a nasty storm on the horizon.

Wednesday, September 23, 2009

Nothingburger!

That's what the Fed gave us today.

This is what happens when your bankroll is dwindling and the economy sits on the brink of collapse. The Fed has just about run out of options.

Their plan of stimulating the economy until the "real" economy can heal itself has failed. How long can they keep this zero interest rate game going without destroying the dollar? My guess is the Fed runs out of money before the economy heals.

The damage has already been done when it comes to the economy. The Fed's "tourniquet" is no longer working. The patient(the economy) is about to bleed out.

I am very tempted to get short right now although I didn't put any positions on today. My spidey sense is telling me that investors are on the brink of realizing that Rome is still burning.

I have seen some horrifying evidence of this anecdotally when I talk to friends involved in banking. Companies are panicking in reaction to this crisis and don't know what to do. They are trying to make 10 workers do the work of 30. Their ability to lend their way through this crisis has dried up.

They have run out of options!

Bill Gross from PIMCO(who I think is a genius) has consistently talked about the new "normal" of our economy which is low to zero growth.

Many businesses are still leveraged up hoping that a gigantic recovery can save them from blowing up.

This ain't happenin folks no matter how bad CNBC wants it too. Welcome to the modern version of The Great Depression.

You think it's bad now? IMO you ain't seen nothing yet.

Tuesday, September 22, 2009

The dollar, MBS, and the Fed

Hi All!

It's been a long day but thought it was important to discuss a few things tonight. Tomorrow is a big day because we hear from the Fed. The buzz on Wall St is all about the Fed's 80% ownership of MBS and all ears will listening to see if they plan on continuing their purchases of MBS.

Before I explain this let's take a look at the 1 year chart of the dollar because I thought this was the news of the day:


My Take:

That is one ugly chart. We are once again testing the key support level of 76. If this doesn't hold we could easily retest the recent lows of 72. If we break there? Find a desk to hide under because you could potentially see an unwind of the dollar.

Gold was up sharply once again as the dollar dropped. This is a deeply disturbing trend. Gold is now much higher than it was the last time the dollar was down around 72.

This tells me that the world is beginning to question the value of paper dollars as we continue to spend trillions that we don't have. This move in gold isn't an inflation trade IMO.

This is a total fear trade where investors are beginning to question the value of everything whether it be stocks, the dollar, or real estate. They are flocking to things that have historically held value. Gold has done so for thousands of years.

Things are getting pretty chaotic folks. This dollar problem is a very serious situation.

The Fed

Tomorrow's statement by the Fed is critical tomorrow IMO. Word is now out that the Fed now owns 80% of the newly issued MBS market since the market crashed. Essentially this means since the crash that the Fed has financed almost all mortgages wether it be FHA or Freddie.

This news has been floating around the street for a week now but it finally got some attention by the media today.

This is an extremely dangerous situation because the lending that's being done right now in a desperate attempt to keep the housing market alive is still piss poor.

You can qualify for an FHA loan with a credit score of 620 and a down payment of around 3%. To FHA's credit they have risen the minimum credit score up to 620 from 580. However, this type of buyer is hardly a lock to pay a loan back!

If I was a bank I would have no interest in doing a loan with a guy with a 620 credit score, especially with only 3% down!

And their lies the problem folks. The banks have no interest in doing these loans anymore because of the risk involved. So as a result: THE GOVERNMENT ESSENTIALLY NOW HAS TO FINANCE THE WHOLE DAMN HOUSING MARKET BECAUSE THE BANKS HAVE NO INTEREST IN DOING BAD LOANS WITH PEOPLE WHO HAVE 620 CREDIT SCORES!

This is absolute insanity people! What pisses me off about this situation is at least last time we created the housing bubble the banks took the losses.

THIS TIME WHEN THESE LOANS FAIL IT WILL BE THE TAXPAYERS THAT TAKE THE HIT BECAUSE THE FED NOW OWNS ALMOST ALL OF THE MBS MARKET INSTEAD OF WALL ST!

We will be the ones eating the loans of these idiot first time home buyers that bought a house with essentially no money down when you include their 8k tax credit.

Folks, when is this insanity ever going to end? How many times can Uncle Sam repeatedly shove it up the taxpayers behinds? Any future losses will be our problem not the banks because WE THE PEOPLE own these mortgage backed securities via the Fed.

This is what makes tomorrow's Fed announcement interesting. They have already spent over $900 billion of the $1.25 trillion that was targeted for MBS purchases.

They must now announce what their future plans are before this fund gets depleted. If they announce that they plan on winding down this program, you could see one hell of a nasty dump in the markets tomorrow.

Now of course I think we have a better chance of seeing god before we see the Fed pull liquidity so I don't expect them to stop buying the MBS's. They must do so because there will be no home loans without their guarantee.

Why?

Because the banks know most of these loans are garbage and the pigmen have no desire to do the bad loans without a government guarantee. I mean Christ, the delinquency rates on FHA loans is approaching 20%! Why on earth would a bank want any part of this?

The Bottom Line

If the Fed shocks the world tomorrow and ends the purchasing of MBS, you can expect to see strength in the dollar and a collapse of the stock market(especially in the financials).

If the Fed continues it's Ponzi ways and announces more MBS buybacks, expect the dollar to tank and the commodities to continue and rise.

Basically folks, there will be no housing market if the Fed stops buying MBS because the banks won't take on the risk of doing bad loans. The only way you would pull a loan out of them in this scenario is with 20% down and a near perfect credit score with a DTI of less then 36%.

As a result, my bet is on the second scenario where the Fed continues to drop worthless dollars out of helicopters!

The move up in gold and the collapse of the dollar in front of the announcement today only reinforces my thoughts that the Fed has no plans to stop spending. I am sure "the word is out" on the their plans.

As I have said a million times before: This is not going to end well.

Monday, September 21, 2009

Currently Trading? Watch Yourself!

Sorry it's been quiet around here folks.

There really hasn't been much to talk about and things have been very busy at work so I haven't had much time to blog.

I will continue to be here but my posting may be reduced until things settle down at work. Like everyone else right now, the heat is on to produce in the corporate world as we march through this brutal recession/depression. My situation is no different.

Back to the markets:

It's amazing to me that the market can continue to ignore all of the negative news and continue to move higher. The market has truly turned into a casino at this point.

I have thought a lot about why the market is acting so irrationaly rigth now. It has pretty much morphed into nothing more than a bubble blowing/specualtion machine.

I believe one of the key reasons the market is acting this way is the ease in which the retail investor can now go long or short via leverage.

Inverse ETF's can be bought just as easy as any stock. Etrade, Think or Swim, and the other trading platforms have now made buying options a piece of cake.

As a result, the ability to speculate in the stock market has become much more accessible. More importantly, investors can also speculate using much higher leverage than ever before.

This is a very dangerous developement because many of the people using these financial instruments have no idea what in the hell they are doing.

Wall St has taken advantage of the new "leveraged" retail investor IMO.

I mean think about it:

The number of "fish" in the trading pond is now larger(easier access to speculate) plus they are highly leveraged via ETF's and options. This makes the average trader a sitting duck for the wolves on Wall St.

Why?

Because the retail investor becomes much easier to manipulate as a result of being so highly leveraged. This makes it easier to force them out of positions. They don't have the deep pockets to sit on positions especially when they are leveraged up. Don't think Wall St doesn't know this. As a result, it doesn't take much to force them to cover.

The best analogy I can come up with here is poker. The poker pros love when the "fish" take a seat at the table because more times then not the "fish" will be taken to the cleaners. The same goes for Wall St.

Why is Wall St so much better then the retail investor?

A) They know information before you do. How many times has the market moved before a big announcement was made? Is this fraudulent? Of course, but it is what it is and it's a HUGE advatage.

B) This is their profession! They are much more experienced when it comes to the intangibles like trading sentiment.

C) Wall St is filled with math geeks that graduated with 4.0's from MIT. These geeks can use their quants in a market like this to look for inconsistencies in the markets which enables them to find numerous trading opportunities. HFT's anyone? Short covering rallies?

I mean just think of all of the short covering rallies that we have seen recently. Many of these rallies are triggered by the trading desks when they place huge long positions on stocks or ETF's that are too heavily shorted. Commercial Real Estate is the most blatant one that comes to mind.

This one defies belief in my view. There is no rational reason that we have seen many of the REIT's double or even triple from the lows. Defaults continue to soar, most of them can't rollover their debt, and the retail consumer continues to collapse.

Most of these companies would be dead if the mark to market accounting standards hadn't disappeared. The only reason the REIT's are alive is because the government refuses to kill them.

The Bottom Line

Wall St is lining their pockets with the retail investors money.

I believe the reason this rally has been so sharp is because many of the retail(and some professional) traders continually keep getting caught short.
Remember: Calling tops and going short is just about as successful as calling bottoms and going long. Both strategies usually put you in the poor house.

Go surf the net and you will see what I mean when it comes to the leverage being used by the average investor:

Hop on any trading site/investment forum and see what investments they are talking about. It's very rarely a stock. It's almost always the SPY, IYR, SDS,FAZ,SRS etc.

Many are convinced that they are the next "Warren Buffet" of trading. They pull charts and graphs and try to scalp a few points on the S&P. When this collapse is done, I would love to see what the average return is for the average day trader.

Let me also say that there are a small select few that can do this and make money consistently. However, the majority will end up getting toasted for the most part. A 50 year veteran trader in the trading pits once told me "Jeff: Traders die broke". I have always remembered those words.

It's time to get back to fundamental investing folks.

What ever happened to buying and holding a stock that you like? What ever happened to buying treasuries and CD's and focusing on preserving capital when the economy takes a cliff dive? I guess this "old school" type of investing is way too boring in this new greedy ADD world that we live in.

What's sad here is most traders will blow themselves up just like they did after the tech bust. What's scarier this go around is the speculation is 10x worse because we now have highly leveraged ETF's with terrible "slippage" that weren't available during the tech bubble.

I will be the first to admit that I dabble in these trades but it's never more than 10% of my nest egg. My advice is to stay away from trading right now. The fundamentals are non existent, and the market is totally irrational at this point.

Sunday, September 20, 2009

China: Don't Believe the Hype?

I am a big Vanguard fan and I thought this was a fascinating look at what is going on in China from the inside economically.

Can China really become the engine of economic growth that the world desperately needs without the US consumer? My thought is no way but you decide:

Saturday, September 19, 2009

S&P Technicals and a few thoughts

I haven't been able to make much sense of the market recently but today I found something that was interesting regarding the technicals.

Check out this trader who is one of the big S&P players in the pits. He explains that the market is looking to roar back up to S&P 1100 in order to fill a gap from last Sept. when the market collapsed.

I thought this was some excellent insight:




My take:

I haven't seen the market this bullish in a long time. This is very often followed by a large correction. Everyone now thinks the recession is over. We all know this is utter horse****.

The news continues to get worse. Everywhere I go right now whether it be a restaurant, a retail store, or a bar is completely empty. As far as I am concerned, we are in a depression right now as we speak. I had a cab driver in the city tell me that he routinely made $400 on an average Saturday night a few years ago. He said today he is lucky if he makes $150.

I see nobody out anywhere! It actually creeps me out. Sometimes I feel like Will Smith from that movie "I am Legend" where the world gets wiped out by a massive plague.

Speaking of spooky: There is now some frightening data out there showing that the delinquency rates on FHA loans is now over 20%. It appears to me that FHA is nothing more then another Freddie/Fannie housing bubble.

Folks, you can't expect people to pay loans back when they only put 3% down. Most of these buyers have no business owning a house. They are renters disguised as home buyers!

I wouldn't even think of buying a house until this Ponzi lending goes back to "old school" standards which is 20% down with a DTI(debt to income) of 36% or less. When FHA blows up(and based on these delinquency rates it most assuredly will) I believe you will finally see lending get back to where it needs to be.

The problem is when this FHA blowup finally occurs, housing prices will once again plummet because who has 20% to put down on a house? Just about 20% of this country isn't working! Many can't even afford to put food on the table right now!

In the bubble areas many homes still sell for 500k in the nice burbs. Who in the hell has 100k to drop on a down payment for one of these crapbox McMansions at a time in which the economy is imploding?

Higher end housing is totally screwed. Jumbo loans are now unaffordable in this new world of higher interest rates for large loans. The banks don't want to lend huge sums of money, period! The risk for losses is simply too high!

The Bottom Line

Will 1100 be the level where stocks roll over? I really have no idea right now. I like the above trader's premise though. I'll be honest: I can't invest long or short when I don't understand what the market is doing. I can remember Warren Buffet saying the exact thing about tech stocks. He avoided the whole sector because he didn't understand it.

In the long run this was a very prudent and wise decision. The one thing that I do know is that the dollar is collapsing because we are carrying trillions in debt. I will stay in metals in order to protect myself from a potential collapse in the dollar.

Could the Fed raise rates in order to prop up the dollar? Yes, but they will destroy housing and the rest of the economy in the process. I don't think the Fed has the balls to do this.

If they do then gold and silver could get crushed. The odds in my view are that the gutless Fed will do nothing and continue to keep this debt bubble propped up.

If I see signs of this changing, I will sell off some of my metal protection and take some profits. For the most part I sit here in cash and bonds until things make sense.

In general my take on the economy is this: I am VERY scared. I am starting to see no way out without severe pain.

Monday, September 14, 2009

Time Bomb Time Out

I just wanted to let everyone know that I will be out until next week due to several work commitments.

Feel free to use the comments section as a forum to share your thoughts and ideas. I will hop on and add some thoughts when I have a chance throughout the week.

If I can grab a minute I may try to throw up a short post.

Good luck with your investments!

Sunday, September 13, 2009

Have Americans had Enough?

By the looks of Saturday's 1 million person Tea Party in from of the US Capitol it sure seems like it:


The sheeple are starting to get restless:

"As many as one million people flooded into Washington for a massive rally organised by conservatives claiming that President Obama is driving America towards socialism.
The size of the crowd - by far the biggest protest since the president took office in January - shocked the White House.
Demonstrators massed outside Capitol Hill after marching down Read more"

Quick Take:

1 million people in your backyard is pretty hard to ignore. The politicians on both sides of the aisle better wake up and take notice or they will find themselves voted out of office.

The economy is crumbling and all Congress knows how to do is just throw money at it. The money that will be needed to take care of us as we slowly sink into a depression is being spent bailing out America!

How many more millions will have to march on Washington before the politicians get it? Stop spending our money!

Americans are starting to wise up and I love it. We need to focus on fixing the economy.

Obama: Health care reform is needed but it can wait. There are higher priorities. Americans need these little things called jobs in order to live.

Coincidentally, futures are down sharply tonight. We have seen this show before where they ramp back up before the market opens.

The stock market should be interesting to watch tomorrow.

Saturday, September 12, 2009

Times are a Changing

Hello All

I wanted to go back in time today and look at the S&P since 1960:


My Take:

I just wanted to highlight the insanity of the markets since 1982. There are a few things to take notice of here.

First of all, investing in stocks since 1999 has been a disastrous investment strategy. The S&P sat at 1500 back then. It sits at 1042 today.

If you had simply placed your money in a CD you would have killed Wall St's bubble machine in terms of ROI.

I find the US's obsession with the stock market to be very fascinating. I mean for the last 10 years this country has gotten it's ass kicked by the thieves on Wall St and yet we keep coming back for more.

The bounce since March proves that we have not learned out lesson. I can't help but ask why we haven't? What has Wall St really done for you and your nest egg over the past 10 years other than send you to the poor house?

The 25 year bull run has hypnotized this nation into thinking the stock market will lead to riches when you retire. Historically, this simply hasn't been the case. Take a look above at the 20 years preceding 1982 bull run. Stocks went nowhere!

It's time for this nation to wake up and realize that bubble making machine on Wall St does not lead to riches. After such an enourmous rise, it's easy to see how this nation was mesmerized by the bull run since 1982.

However, history has shown us that secular bull markets are almost always followed by secular bear markets. These bear markets are needed in order to wipout the excesses of the previous bull. What the government is doing right now is preventing the bear from doing its work of "cleansing" the markets.

Once this cleansing is completed, the recovery can begin. The government's approach of "bailing out America" is doing nothing but preventing this process from occuring.

There will be no recovery as long as the Feds take this approach. The only only growth we will see as a result of this stupity will be in the form of taxpayer debt.

The reality here is this bull run was fueled by nothing other than cheap money. The easy money game is now over because we have borrowed as much easy many as humanly possible. It's now time to pay the piper and pay off the massive debts that we have run up over the past 30 years.

Take a serious look at the chart above. The S&P rose 15 fold until the collapse in 2008. The meteoric rise looks almost ridiculous.

I mean come on folks. Fundamentally did the economy really grow that much from 1982-2008? Consumption is what drives 70% of our economy. Did incomes rise 15 fold since 1982? Hell no! I can remember union steel workers in Pittsburgh making 70k a year back in the 1970's and the S&P was only at 100 back then! Remember folks, without rising wages in a consumption economy, its pretty tough to have continued growth.

Let me also note that a lot of the growth that was seen in the economy over the past couple decades was in the financial markets where debt was traded back and forth. This game is now gone too. The securitization markets have been essentially shut down except for government backed paper.

Now should we see some growth as the population of this country increases? Of course, but stocks have more than priced this in.

So how did we get here? It's pretty simple:

Our increased consumption via easy access to cheap money, greed, and an obsession with stocks are what pushed the stock market to such insane values. We have basically borrowed ourselves into oblivion and consumed as much as humanly possible. Stocks rose to unsustainable values as a result.

The Bottom Line

The days of easy money are gone folks. Banks are reducing the availability to credit. The word RISK actually means something on Wall St these days.

As a result, money will get much more expensive and I predict interest rates will rise as the world begins to walk away from our treasuries. Like Bill Gross from PIMCO explained: This is a new world and we need to adjust to this new reality.

Now am I saying you should avoid the stock market over the long term? Of course not. However, I think it should be a much smaller piece of your portfolio moving forward.

Diversification is a must as we all adjust to this new world.

Thursday, September 10, 2009

Something doesn't add up

I am starting to see some very strange divergences as stocks continue their daily climb.

Let's take a took at some weekly charts.

Stocks have been soaring as seen here on the SPY(S&P 500):

Treasuries have remained relatively flat despite a large rise today. Here is the TNX(10 year) and its sharp drop in yields:


Gold has also steadily risen throughout the week as seen here via GLD:


While the dollar has sold off severely:


Some Questions:

These are the big 4 that I follow each day, and I think the price action here over the past week is very interesting.

My first question is why are flight to safety assets performing so well after such a huge move in equities?

Bonds should be selling off hard as stocks rise and yet yields have stayed relatively flat. There was a strong BTC of about 2.9 on a 30 year bond auction today which is why yields dropped so sharply today.

This leads me to my second question: Why did a 30 year bond auction see such huge demand with a yield of only 4.2%? This is telling you the bond market is not worried about inflation. In fact, if anything, this is a signal that the market is scared to death about deflation.

This leads to my next question. Why is gold soaring in price if the bond market is worried about deflation? Gold typically trades higher when inflation fears are present although this is disputed by some economists.

My next question. Why is the market acting so afraid as stocks soar to new highs? Strong inflows into bonds and gold are fear indicators. Could there be a lack of confidence among the bulls regarding this recent rally?

Finally, my last question.

How far does the dollar have to freefall before the stock market takes notice? Folks, this crashing dollar is extremely worrisome for me. A strong economy is almost always is accompanied with a strong currency.

There will come a time when the dropping dollar turns into a serious headwind for the bulls. At what level? Who knows the way this wacky market is trading.

What I do know is energy prices are creeping up along with other commodity prices as the dollar drops. Meanwhile, here in the US, wages are flat and we are losing jobs by the hundreds of thousands each month.

This has the potential to stop the consumer dead in its tracks. Just go back to the days of $147 oil if you need to refresh your memory.

The Bottom Line:

None of these correlations add up folks. The market is trading like it has 5 different personalities. You might as well just call it Sybil these days.

Today alone: Sybil acted bullish, feared deflation, feared inflation, and traded the US currency like its not worth the paper its printed on(which it probably isn't).

Sybil's price action is extremely unstable and inconsistent folks.

This should concern all investors regardless if you are bullish or bearish.

Wednesday, September 9, 2009

Tuesday, September 8, 2009

Americans are Running out of Options

I wanted to throw a quick post up. Things are super busy so I don't have a lot of time tonight.

I did want to say a few things about the horrific consumer credit numbers today:

"By Greg Robb WASHINGTON (MarketWatch)-

U.S. consumers reduced their credit burden by a record amount in July, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion. This is the sixth straight monthly drop in consumer credit.

Consumers have retrenched since the financial crisis hit the economy in full force last September. Credit has fallen in every month since then except January.

Economists surveyed by Market Watch expected consumer credit to decline by $4.3 billion. This is the longest consecutive string of declines in credit since the second half of 1991. In the subcategories, credit-card debt fell $6.11 billion, or 8.5%, to $905.58 billion. This is the record 11th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell a record $15.44 billion or 11.7% to $1.57 trillion"

My Take:

Translation? The consumer is tapped out on credit and has no ability to borrow anymore. You gotta love our brilliant Wall St economists. they were only off 500% on their forecast of a $4 billion in credit availability versus the $21 billion reported.

Where on earth is this "recovery" going to come from when we have consumers that can't consume in an economy that is 70% driven by consumer spending?

How is J6P going to buy those next generation I-phones when their credit card is tapped out?

How are homeowners that have been living off of their credit cards in order to pay the mortgage going to survive and continue to make their payments as their availability to credit evaporates?

The way the market is acting right now is pure lunacy IMO. The fact that stocks continue to rise in the face of such news is unbelievable. The dollar was down hard again as the world continues to rapidly lose confidence in our ability to pay back our debts.

The risk of the US bankruptcy rises each day as we continue to write checks for money we don't have.

I mean look at the dollar over the past few days. Can the investment world be anymore clear in terms of sending a message about what they think about our fiscal strength as a result of our insane deficit spending? :


My Take:

A strong currency is the symbol of a strong economy. We are coming dangerously close to breaking levels in the dollar that could could trigger another deeper sell off.

We cannot handle inflation via a collapsing currency right now people. Wages are dropping and unemployment is through the roof! You will start to see catastrophic consequences here in the US if we continue down this path.

We already have over 35 million on food stamps in this nation. The dollar MUST be protected shortly or we are in deep trouble.

And if we decide to continue down this path?

Social chaos will become a serious threat because no one will be able to afford to live in this country. Our bloated mortgage payments, rising oil/commodity prices(oil was up over $3 today) thanks to a crashing dollar , and shrinking credit card limits are forcing many Americans to run out of options when it comes to putting food on the table.

I am seriously concerned about the dollar and Obama's obsession around deficit spending.

Its time for America to stop the bailouts and start paying off some bills!

Friday, September 4, 2009

Things that make you go Hmmmmm.....

Good afternoon folks!

Just a couple quick thoughts before we head into the holiday weekend.

Let's take a look at TNX today:


Now let's take a look at the dollar:


My Take:

All right now let me get this straight: We have gold holding its highs, treasuries majorly selling off, and the dollar collapsing after rising sharply earlier in the day.

Oh and of course stocks are also up! What a shocker!(sarcasm off).

Folks, the disconnect between whats going on in the economy and the stock market is at an all time high IMO. Unemployment rose to 9.7% today and the economy lost another 200,000+ jobs. How is this bullish?

The bulls say "things are improving". I say where? The greatest analogy I read today around this line of thinking is "after you slice the throat of a pig, the bleeding slows down after awhile".

The charts above tell me that we could be seeing a major flight out of the us dollar. In fact, we could be seeing a flight out of US assets all together based on the price action in bonds today. I was very curious to see if gold would hold its highs today and it has.

The Bottom Line

When the cats away the mice will play. I think the HFT's were able to take this casino higher today because everyone is in the process of heading to their favorite Labor Day spots.

My view has not changed. The fundamentals of this market are stunningly bad and worsening in my view. We should hit 10% unemployment by the end of the year. U-6 unemployment now sits at a stunning 16.8%. That's right folks, almost 1 out of 5 people are now out of work.

How is the economy going to grow when almost one fifth of the nation is not working?

The big boys are back from the beach next week. It will be interesting to see how they react to today's unemployment numbers and the big move in metals this week.

Keep an eye on gold, the US dollar, and bonds moving forward. If they keep acting like they did today, we could see a 5 alarm fire in no time in the stock market.

Well I am off for some R&R. Enjoy your Labor Day!

Thursday, September 3, 2009

Silver and Gold!

This is all I have to say today:



Jobs # tomorrow. Should be a market mover. I will have a full market update following the number.

Wednesday, September 2, 2009

A Crisis in Confidence

Let's take a look at gold today:

My Take:

Fear is creeping back into the markets folks. I see it in many areas. Treasury yields have collapsed as investors run for the hills into government bonds. You need to wonder(given our massive treasury issuance's) if this is the equivalent to running into a burning building.

Stocks have steadily fallen throughout the week as jittery investors look for someplace to hide.

Today it was quite apparent that gold and silver benefited from this flight to safety.

Right now its obvious that there is a lot of capital that is looking for a "safe haven" to ride out the storm. The problem is no one really knows where to hide! The confidence in the stock market has been shattered after such brutal volatility over the past 10 years.

When people ask me where to hide I must admit I have to just shrug my shoulders. I tell them that nothing is totally safe right now.

I mean let's go through the list of the supposed "safe havens":

1) Treasuries? HA! This may be the biggest bubble of them all. We are selling trillions of this stuff without the means to pay it back. Safe? Hardly. Shorting treasuries as a hedge is probably a smart thing to do if you park money here.

2) Money markets or CD's? Works for me as long as you are under the FDIC insurance limits. The problem here is will the dollar be worth anything over long term if we continue to print the USD like Monopoly money?

3) The mattress? Having a stash here in case of a banking holiday makes some sense, but anything more than that is just asking for disaster unless you live on top of a deserted mountain or live in an area with a 0% crime rate.

4) Stocks? HA! That's a funny one. This will make sense once the dividend yields get back up to around 6%. The average dividend yields right now are way too low given the risk you must take holding stocks at such elevated levels with high P/E ratio's.

5) Munies? I would stay on the short maturation end. Many states face the real threat of going bankrupt. California anyone? If you go there, avoid states with bubble economies.

6) High yield bonds? This has worked well over the past 6 months but I think this run is just about over. Corporate defaults are just beginning, and the Fed is rapidly running out of bailout money. Enter at your own risk.

5) Gold or Silver? I must admit I find myself gravitating towards these two. I own both metals, but there are risks here as well. Deflation can makes the metals risky, but the collapsing US dollar is an even bigger risk in my view.

The Bottom Line:

The way I see it, we could see 1932 all over again where both bonds and stocks collapsed. Take notice when you start seeing movements in gold. Moves higher in gold are a great fear indicator, and they can also be a great warning signal that inflation might be right around the corner.

If we do see inflation in the near term, it will be as a result of a collapsing dollar in my opinion. Remember, Argentina's currency collapsed 73% in a matter of weeks when the people lost confidence in its currency. Prices soared as a result.

What I see today is a lack of confidence in our economy and our government's response to it. Creating trillions of dollars in order to bailout a bunch of insolvent companies is making investors think twice as to whether or not they want to be invested in anything involving US dollars.

So what should you do with your retirement if almost every asset class looks shaky? Stay diversified in all of them and hope for the best. Also, hold something hard that will have value regardless of what the US does to it's own currency.

The way I see it, there really isn't much else you can do during such unprecedented economic times.

Must watch of the day:

As you can see below, the debt time bomb is ticking as our government is rapidly running out of money. That mattress option is looking better by the minute!:

Does the FDIC need a bailout?:

Analyst Jim Bianco thinks its possible:


Tuesday, September 1, 2009

Post Traumatic Crash Disorder?

You gotta wonder if the longs experienced a little bit of this today as September arrived.

As most of you know, last September was when the market begin its unprecedented fall as it ended the year losing about half of its value.

As I watched CNBC today, I couldn't help but notice how uneasy the talking heads looked as the market plunged nearly 200 points.

I had to laugh because everyone that I saw on the financial networks looked like they had seen a ghost as Mr. Market tanked in a matter of minutes after more "good news" was announced via the PMI.

The fact that the sell off pretty much came out of nowhere had to rekindle thoughts around the nightmare of last Sept/Oct. I bet there was a lot of Paxil popping during the commercial breaks on CNBC.

The bulls must be asking themselses: " Green shoots and the market still went boom? Whats going on?".

Folks, when the bulls are all in, you often see large moves to the downside when there there are no shorts left underneath the market to stop it from dropping.

Last year, the sell offs were usually triggered by some horrific event like a Lehman bankruptcy or a much larger jump in the unemployment rate.

I think what we saw today was simply an exhaustion of buying. Mos of the longs that are responsible for this bounce are mostly traders. Many of them are professionals and just trade the sentiment/momentum. They know all to well that going long AIG makes no fundamental sense. They don't care because the trend is the trend.

I always recall a veteran trader telling me "Jeff, its just a numba!". Traders in the pits for the most part don't care if the number moves up or down. They are in it to make clients money.

IMO, the last several months has been pure momo trading folks. The buy and holders are still on the sidelines for the most part.

The problem with this type of trading is it's not sustainable. Once insolvent or poorly run companies like Citi(C) or Fannie rise to a certain level their P/E's start to look ridiculous. AIG is a perfect example. Somehow this piece of garbage ran up to $55/share. Remember folks, this stock was under $10 before the government propped it up!

The valuation on AIG was ridiculous given the hundreds of billions in losses that are still on their balance sheet. Finally, an analyst came out today and stopped the insanity by slapping a price target of $10/share on this dog.

The Bottom Line:

We have known for months that the economy was continuing to deteriorate despite the rise in the stock market. When the banks were allowed to play with the houses money via funds from the government bailouts, it was easy to run the market up.

It appears this little game of pump and dump is about over. Once the market got to 1000-1050 on the S&P it pretty much flat lined.

Just a quick warning, if we see any follow through on the selling we saw today things could get ugly in a hurry because there is nothing sustaining the market at these levels.

The problem the bulls have right now is fundemantals. Sustainable earnings growth is a MUST in order for stocks to hold their prices after such huge gains.

We all know this earnings growth isnn't going to happen in this bailout dependant economy. The lack of short interest in the market sure won't help things either. High short interest underneath the market helps actually can help the longs because if the market moves higher, many of the shorts are forced to cover which can exacerbate a move higher.

On the flip side, short interest can also help prevent a sell off from turning into a plunge because many shorts may decide to cover at various levels.

If the short interest is light or non existant, there is nothing there to stop stocks from violently dropping deep into the red.

The ADP jobs report tomorrow is going to be a critical number for the markets. Investors are starting to question if stocks are overvalued, and if the job losses from ADP come in much higher than anticipated, a big sell off could ensue.

On the flip side, if the number comes in better then expectations, stocks may pop because the news was fairly positive today, and a better jobs outlook may embolden the bulls to believe that the recovery is for real.

Futures are flat for the most part now. Stay nimble tomorrow. Equities could get very violent on a big ADP number in either direction tomorrow morning.