Here is a free preview of the May issue of the Contrarian Market View Newsletter, May issue. (Due to the format limitations of a blog, the actual newsletter is better looking.)
See the bottom for a free book offer with purchase of a subscription to the newsletter.
H. L. Quist's
Contrarian Market View
H. L. Quist's
Contrarian Market View
Three major events have recently occurred that directly impact the markets: The PIIGS Debt crisis in Euroland, the oil disaster in the gulf and President Obama's declaration of war against Goldman Sachs. In CMV's opinion the confrontation with Goldman and the New Regulatory Legislation signals a shift in power from Wall St. to Washington. There is the prospect of a new MOTU — Master of the Universe and he resides in the White House. The Banksters are getting their "just desserts" but will unleash a counteroffensive to retain their turf. This is a cogent moment in US history. Understand its significance!
Barron's which is a reliable source of data for CMV, compiles a quarterly consensus of "Big Money Managers" as to their outlook for the stock market going forward in 2010 and 2011. Here's what the Pros are thinking this spring.
--Only 46% of the Pros consider themselves bullish or very bullish down from 59% in the fall survey.
--16% of the Pros consider themselves bearish compared with 13% last fall.
--38% of the Pros consider themselves neutral compared to 28% in November.
The bottom line? After a blistering 14 month rally off the March 9, 2009 lows, the experts are saying the market is showing signs of "buyer's fatigue." Caution is the by-word.
Some of their other majority consensus of note:
Where will the DJIA be at the end of 2010:
Bulls 11,285 (no upside this year)
Bears 9,825 (an 11% correction)
Bears 9,825 (an 11% correction)
Predictions Dec. 2010 Dec. 2011
GDP Growth Rate 3.05% 2.39%
S&P Profit Growth 19.2% 8.6%
US Inflation Rate 2.47% 2.87%
10 Yr T-Note Yield 4.19% 4.67%
Oil $83.23 $85.38
Gold $1,150.12 $1,193.92
CMV finds the above predictions, barring a double dip recession, bordering on the absurd. As indicated in this issue the "Inflation Jeannie is Out of the Bottle". It's a given that inflation rates (CPI) as stated by the Bureau of Labor Statistics (which historically grossly understates true inflation) will in fact be two or three times greater than the "official" rate used above. CMV, however, forecasts a rate closer to 8% to 10% for the true CPI. Closely tied to inflation, of course, is the 10 Yr T-Note Yield. CMV sees a yield closer to 6% or more by the end of 2011. To forecast a gold price of $1,193/oz by the end of 2011 represents an inability to comprehend the supply and demand fundamentals and the potential collapse of the global fiat money system. In short, it's CMV's opinion that this select group of institutional investors who probably manage trillions of capital, are stating what results they want and require of the market and not what is reality. Do you want these folks managing your money? CMV will re-visit these "predictions" in January, 2011. If we're wrong, we'll acknowledge it!
There's a well-worn cliche that says "follow the money" usually in reference to financial malfeasance. CMV prefers "follow the Smart Money" when it comes to investment opportunities. Here are some examples that reinforce CMV's position that "the bottom is in" in real estate.
Scott Rechler sold his real estate company, RXR Realty at the top of the market in 2007 for $4.1 billion. Rechler is now acquiring commercial properties on Long Island, NY which are in default on their debt or in foreclosure. The Wall St. Journal reported on April 28, 2010, that pension funds and other large institutions will pour $34 billion into real estate in 2010, double the 2009 amount.
What is remarkable in this instance is that this is the group of investors that took some of the biggest hits during the meltdown. Re-igniting a fire where you've been burned is solid evidence that fear is dissipating.
A more graphic story of the rebound in this industry is General Growth Properties, Inc. When the nation's second largest landlord filed for bankruptcy last year, it's stock collapsed to a low of $.33/share! The stock is now $15/share — a very nice gain for Contrarians. Other REITS have substantially outperformed most sectors in the equity market. And, perhaps the best anecdotal evidence of recovery is that Astrella Pharma, Inc. is building a new $150 million, 425,000 square foot, two-building office complex near Chicago. And, the mega player in hospitality, Starwood Capital, has raised $2.8 billion to buy distressed hotel properties world-wide.
On the residential side the S&P Case-Shiller home price index for 20 metro areas showed some very positive results vs. one year ago. Cleveland +3.2%; Dallas +2.6%; Minneapolis +3.0%; Los Angeles +5.3%; and San Francisco +11.9%. When your author delivered two talks to real estate investors in November 2009 in the Bay area, attendees were already reporting full price offers. As expressed under the heading Inflation, the (potentially) greatest impact on all real property values to the upside is coming with the anticipated devaluation of the USD accompanied by inflation. The coming real estate boom could be quite dramatic but of relatively short duration. If you're an investor or are contemplating a purchase, think exit strategy as you buy. More on that later.
For years Goldman Sachs, has arguably claimed the title of Grand Master of the Masters of the Universe (MOTU) which this author featured in this newsletter and two books that chronicled the root cause of the recent global financial meltdown. Given that the firm has had not one but two of its recent former chairmen serve as Secretary of the US Treasury, and alumni serve on the Federal Reserve Board and other influential government positions, it should come to no one's surprise that GS's continual conflicts of interest would ultimately result in allegations of fraud. Your author revealed the "side bets" or as they're now called "Synthetic CDO's" as "Avatars" or virtual CDOs that had no underlying real estate assets which was such a critical component of the market collapse.
Of all the transgressions, actual or perceived, by GS, the most damaging is that they may have killed the goose that laid the golden egg. GS with the other MOTUs, became the ENABLERS. They branded capitalism and capitalists as the bad guys whose insatiable greed robbed the middle class. The Enablers allowed the "fundamental change in America" to take place and with it a new MOTU -- The federal government. Yes, Goldman will take a hit, but the real "hittee" will be America's real source of strength, small business and the middle class.
This piece warrants another GS success story that appeared in Business News on April 21, 2010.
How Goldman Sachs Screwed Ghana
In 1998, Ashanti Gold was the 3rd largest Gold Mining company in the world. The first "black"
company on the London Stock Exchange, Ashanti had just purchased the Geita mine in Tanzania,
positioning Ashanti to become even larger. But in May 1999, the Treasury of the United Kingdom
decided to sell off 415 tons of its gold reserves. With all that gold flooding the world market, the
price of gold began to decline. By August 1999, the price of gold had fallen to $252/ounce, the
lowest it had been in 20 years.
Ashanti turned to its Financial Advisors - Goldman Sachs - for advice. Goldman Sachs
recommeded [sic] that Ashanti purchase enormous hedge contracts - "bets" on the price of gold.
. . . Goldman recommeded that Ashanti enter agreements to sell gold at a 'locked-in' price, and
suggested that the price of gold would continue to fall.
But Goldman was more than just Ashanti's advisors. They were also sellers of these Hedge
contracts, and stood to make money simply by selling them. And they were also world-wide sellers
of Gold itself.
In September 1999 (one month later), 15 European Banks with whom Goldman had
professional relationships made a unanimous surprise announcement that all 15 would stop selling
gold on world markets for 5 years. The announcement immediately drove up gold prices to
$307/ounce ,and by October 6, it had risen to $362/ounce.
Ashanti was in trouble. At Goldman's advice, they had bet that gold prices would continue
to drop, and had entered into contracts to sell gold at lower prices. These contracts were held by
a group of 17 other world banks. Ashanti found themselves being forced to buy gold at high world
prices and sell it at the low contract prices to make good on the contracts. The result? In a few
weeks time, Ashanti found itself with 570 million dollars worth of losses. It had to beg the 17 banks
not to force the execution of the contracts.
Who served as the negotiator for the 17 banks and Ashanti? Goldman Sachs. The same
company that designed the contracts for Ashanti (making a profit in their sale).
The basic bankruptcy of Ashanti drove its stock price from an all time high of $25 per share
to a paltry $4.62 per share. Thousands of investors -your blogger among them - lost their
investments almost overnight as Ashanti was declared insolvent.
In the end (2003), Ashanti was purchased by their largest African competitor, AngloGold,
a British company headquartered in South Africa, who bought them for a song. The Financial
Advisors to AngloGold? You guessed it: Goldman Sachs.
The destruction of Ashanti Gold by Goldman Sachs was saturated with fraud and conflicts
of interest: Goldman Sachs served as Ashanti's Financial Advisors; profitted [sic] form [from] the
contracts they designed and marketed for Ashanti; was involved in the manipulation of the gold
prices on which the contracts depended; represented Ashanti's creditors when the contracts went
bad; and profitted as the Financial Advisors to the company that picked up the Ashanti corpse for
pennies on the dollar.
And, of course GS was the advisor to the now bankrupt nation of Greece. Historians fifty years from now will pinpoint this era of greed and the marks left by these MOTUs as the day that American Capitalism died. Thanks Goldman. You didn't follow Adam Smith's "invisible hand" to make capitalism work because you had your hand in everyone else's pocket!
In the event you haven't heard "The Myth Buster's" podcast on the Internet or seen his video on YouTube (hlquist), the Inflation Jeannie is out of the Bottle. On April 22, 2010, the National Inflation Association reported that US food inflation was spiraling out of control.
The Bureau of Labor Statistics (BLS) released their Producer Price Index (PPI) report for March and food prices rose 2.4% which was the sixth consecutive monthly increase and the largest increase in 26 years! Readers may recall that CMV made the forecast in the February issue that food shortages could be the trigger point for inflation. Here are some of the price increases year over year that consumers are now experiencing:
Fresh & Dry Vegetables +56.1%
Fresh Fruits & Melons +28.8%
Beef & Veal +10.7%
Dairy Products + 9.7%
In addition, the price of cocoa has reached an all-time high. Chocoholics (which includes your author) will see the price of chocolate treats rise significantly or in the case of Hershey bars, you'll see the size of the bar diminish. The company has a multitude of molds that vary in size depending on the price of cocoa. The price remains the same but the unit cost rises. Same technology used by other manufacturers.
In the past year oil has more than doubled from a low of $34/bbl to $84. With the summer driving season about to begin expect gas to go to over $3.00/gallon — again.
Unnoticed by most everyone was a $20 billion loan made by China to Venezuela and Hugo Chavez. China covets Venezuela's oil production which will deliberately eliminate the US as its import customer. CMV is aware that the US has one of the few refineries that can handle Venezuela's sour crude. That's where the $20 billion comes into play. Couple that with an almost inevitable conflict in the mid-east over Iran's nuclear facility and oil goes to $200/bbl.
Business Insider.com recently reported that the "ISM Manufacturing Report Screams Inflation." The ISM Manufacturing Prices Index jumped 8 points in March with 17 industries paying higher prices for raw goods and zero reporting lower prices. These increases will soon show up in the rigged Consumer Price Index (CPI). Other notable raw material price increases since January 1, 2010, were:
Just as the residential real estate market and the home builders show signs of recovery, the price of lumber skyrockets. The National Homebuilders Association indicates that this 59% rise in lumber prices will translate to a $2,400 increase in a medium priced home. Consensus thinking in the real estate industry is that recovery will be slow and the time factor protracted. These folks aren't factoring in the sudden change that this monetary phenomenon called inflation can have on the entire industry.
CMV was early to the party when we issued the battle cry, "Get Ready For the Coming Inflationary Boom and Avoid The Next Crash! It's time to have a love affair with Jeannie before she becomes a naughty girl!
April 15th has passed but 47% of Americans didn't pay any federal income taxes. Either their incomes were too low or, in many cases, they qualified for enough credits, deductions and exemptions to eliminate their liability. On the other end of the spectrum the top 10% of earners, householders making an average of $366,000 (based upon 2006 numbers) paid about 75% of all federal income taxes. But, while almost 50% of the income earners pay zero tax, a large percentage of the population gets money back from the federal government. Under President Obama's Making Work Pay credit a couple receives as much as $800 and up to $400 for individuals. The Expanded Child Tax Credit provides $1,000 for each child under age 17 and the Earned Income Tax Credit provides up to $5,657 to low income families with at least 3 children. In short, government is creating an incentive not to work while at the same time increasing the federal debt. A trend that will surely end badly. LBJ's "Great Society" followed the same path.
When CMV forecast a mini-retail boom at Christmas and a surprising increase in consumer spending, critics said the consumer was "tapped out." What they failed to factor in is that there was a large percentage of the US population that had income that they never had previously, and by golly, we suspect they spent it!
This will all change, of course, with the prospect of a Value Added Tax (VAT) legislation that could be introduced this summer in Congress prior to the mid-term election. Think in terms of a 39% top tax bracket plus a VAT of 20% on top of the base rate. In addition, factor in a double digit inflation rate that will be a "game changer." The future isn't what it used to be!
In a recent April radio address, President Obama stated that his financial regulatory proposals were struggling in the Senate because, "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis." (Wall St. Journal April 20, 2010). Like all politicians who master the art of prevarication and hypocracy, it was Senator Obama that voted against tough regulatory legislation to rein in the lending practices of Fannie Mae and Freddie Mac in July, 2005. A very critical moment! You'll recall that it was the "evil twins" under quota mandates by Congress to make sub-prime loans to unqualified home buyers that has left taxpayers on the hook for about $400 billion in GSE losses. What the President fails to disclose is that he, as Senator, was the third largest recipient of Campaign contributions from Fannie and Freddie. According to recent Pew Polling, 80% of American's don't trust the federal government to solve the country's problems. As Ronald Reagan once said, "Government is not the solution to the problem, government is the problem."
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-- H. L. Quist
P.S. If you have not caught my youtube video or podcast on the Inflation Jeannie is Out of the Bottle, check the sidebar here on the blog.