Thursday, September 30, 2010

Free Preview of October CMV Newsletter

Hello World,

Below is a preview of the CMV (Contrarian Market View) Newsletter for October. See the end of this post for a free book offer with the purchase of a subscription the full monthly newsletter. (Note: due to the limitations of a blog post the appearance of this preview is not as it will appear in the actual subscriber copy.)

October, 2010

H. L. Quist's
Contrarian Market View

Market Overview

Given your inquiries and comments, many CMV subscribers are confused, flummoxed and depressed. The common thread in the preponderance of your emails and calls is your inability to determine the future direction of the economy or in a more macro sense, the direction of the country. This issue of CMV is deliberately dedicated to bring clarity and profitability into your life. Focusing on the economy and reducing the possible outcome to a minimum, CMV envisions three distinct scenarios looking forward to 2011 and beyond:

1. The Bernanke Re-Flation Plan Succeeds
On September 21st, the Federal Reserve's Open Market Committee made it abundantly clear that it wants more INFLATION. The Committee announced, "Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability."

In short, we know what the Fed will do. What we don't know is, will their strategy be successful? CMV believes it will and it could open the door to enormous profit-making opportunities for you — IF you dare to share CMV's vision.

Under this scenario the following results most likely would occur:

The new Congress would cut off additional stimulus funds, extension of unemployment benefits etc., thereby putting more pressure on the Fed to create "growth and employment opportunities." (As stated)

The Fed would undertake massive Quantitative Easing (QE-2) which would flood the markets with liquidity and further devalue the US dollar.

Stock and commodity prices would surge as a result and the appetite for risk would become ravenous. Bond investors would nail down profits while freeing up multi-trillions of investment capital that eventually would find its' way into real estate.

In the early stages of the RE-FLATION CYCLE, manufacturers and retailers would discover pricing power and new profit margins, employment demand would increase, consumer sentiment would turn positive and the illusion of permanent prosperity would return echoing the sights and sounds of THE GREENSPAN PLAN of 2002.

THE BERNANKE RE-FLATION PLAN is another short-term fix that ultimately results in another longer-term problem — a crack-up boom. As the Wall St. Journal editorial opined on September 23rd, "Central Bankers who wish for more inflation usually get their wish, and the result is rarely benign." In the interim, however, enormous profits can be realized. (See pages 15-18)

2. The Bernanke Re-Flation Plan Fails.
Ultimately it will. It's simply a matter of time. CMV's position is that there is one LAST RODEO — meaning, the RE-FLATION PLAN will be the last desperate attempt to cover up all the Fed and political transgressions of the past 50 years. The only question is, will the US (and most of the world) have a temporary reprieve before THE GREAT RECKONING? CMV's answer is yes.

Let's reduce these two widely divergent scenarios to the minimum. Given a choice between INFLATION and DEFLATION (aka Depression) what choice would bankers take? Inflation, of course! Why? The Fed believes (firmly) that they can prevent Inflation from getting out of control. Deflation, on the other hand, is a death knell that has little chance of resuscitation. Although it hardly needs to be said, the following results would quite possibly occur.

Gross Domestic Product (GDP) would continue its decline and return to negative in 2011-2012.

Unemployment would rise significantly above the Bureau of Labor's fallacious 10% and consumer sentiment would plunge. Prices of most goods and services would decline dramatically as demand disappears.

The Federal Debt and the Budget Deficit both would explode as the Treasury's tax revenue plummets and QE-2 balloons. An international monetary crisis looms large as the prospect of default by the US on its sovereign debt becomes possible.

Fed Chairman, Ben Bernanke, has resolved that this scenario will not occur on his watch.

3. Slogging To The Future.
What in the world is a "slogging economy?" A perfect model is Japan from 1990 to the present. Remember, Japan's efficient and torrid economy in the 1980s was the model for all the world to duplicate. What has the 20 year SLOG produced?

The Nikkei Dow reached almost 40,000 at the end of 1989. A resounding crash took the index down to 7,000 and their market has never recovered.

The outrageously over-valued real estate market which sported the highest inflated prices in the world collapsed about 70% and has only recovered modestly since the 90s. The Japanese acquired trophy real estate properties all over the world at premium prices such as Pebble Beach, the Rockefeller Plaza, etc. and either walked from their obligations or sold at severe discounts.

Interest rates for both borrowers and savers have consistently been the lowest in the world. Global investors have for years borrowed in Yen at about one percent and invested elsewhere at much higher yields in what is known as the "carry trade." The lesson learned is that low interest rates did not result in domestic economic growth. Is the US dollar the carry trade currency of the future?

The point of this exercise is that, in CMV's opinion, option number one is the most likely. The outcome of a successful RE-FLATION will present unique and alternative investment opportunities for those who dare to be different. As you will soon discover by reading the remainder of this issue of CMV, the INFLATION TRADE has already begun. Here's the bottom line:

The Bernanke Re-Flation Plan, if successful, should present unique profit opportunities for outsized gains that should be realized during the next two to three years. An inflation-induced boom will end in a resounding crash. You and your family are dependent on your ability to see that the future isn't what it used to be!


It appears that most readers of CMV have missed the opportunity in Rare Earth Elements that was presented to them many months ago. Advisor clients of H. L. Quist, however, discovered them in their portfolios. To get your attention and validate CMV's recommendations here are some of the results:

Symbol Date - Recommended Entry - Price/Sh Current - Price/Sh Unrealized Profit
MCP -- 8-20-10 -- $13.00 (1) -- $26.00 -- 100%
REE -- 1-01-10 -- $3.86 (2) -- $8.60 -- 123%
TASXF -- 8-01-10 -- $.81 -- $1.84 -- 128%

(1) #1 on the NYSE with an increase of 25.3% for the week ending 9/24/10.
(2) In July, 2010 the price/share declined to $2.00. Ranked #1 on NYSE/AMEX at 36.8% increase for the week ending 9/24/10

What are these 17 elements and what are they used for? Molycorp Minerals (MCP), the owner of a mine in Mountain Pass, California, and has the richest REE deposit outside of China, provides the following:

"Rare Earth materials create enabling technologies that are found throughout Hybrid Electric Vehicles (HEV), Plug-in HEVs (PHEV), all-Electric Vehicles (EV) as well as in standard gasoline or diesel vehicles. Powerful neodymium-iron-boron (NdFeB) magnets are vital in the electric motor and regenerative braking systems found in the above electric vehicle categories and are also crucial to several other systems in the vehicles. Virtually all HEV, PHEV, and EV on the road today also rely on Rare Earths (primarily lanthanum) in the battery pack which stores energy normally wasted during coasting and braking and saves it until needed by the electric motor. To estimate positive impacts to our environment, the US EPA assumes each HEV will have twice the mpg and only half the emissions as an equivalent gas or diesel vehicle. For every 100,000 HEVs (such as the Toyota Prius) that replace existing vehicles we save well over 1 million pounds of CO2 emissions per year and 4.8 million gallons of fuel. HEV, PHEV, and EV contain from 20 to 25 pounds of Rare Earths, where a standard vehicle can contain on the order of 10 pounds. Demand for energy-efficient electric vehicles is growing significantly. Global demand is projected to be 4 to 6 million vehicles per year by 2013 so the impact on the Rare Earth market could be staggering. Additional Rare Earth supply sources must come on line to support this growing industry. Hybrid electric vehicles: Headlight glass: neodymium. Hybrid electric motor and generator: neodymium, praseodymium, dysprosium, and terbium. Component sensors: ytterbium. LCD screen: europium, ytterbium, cerium. Glass and mirrors polishing powder: cerium. UV cut glass: cerium. Diesel fuel additive: cerium and lanthanum. Hybrid NiMH battery: lanthanum and cerium. Catalytic converter: cerium/zirconium and lanthanum." Source: Molycorp Minerals, 23 Jul 10

In August, the Chinese government which controls 97% of all the existing production of REEs, announced that they would cut their exports which amounted to about 64 million metric tons in 2005, by 70%. Two of the primary REEs, cerium oxide and lanthanum oxide increased in price by over 2,000% on the news! Now, here's the big news — if the above is not compelling enough to get your attention — from the September 24th issue of the WSJ:

"The Department of Defense is completing a study to identify the potential national security risks of rare-earth dependency."

In addition, the House Committee on Science & Technology in late September began marking up a bill that would encourage the US government to hedge against rare earth shortages. It's well within the area of possibility that the federal government would declare rare earths as "strategic to the national security" and purchase a proven deposit. Could MCP or REE be a prospect?

The Re-Flation of Real Estate

First, the bad news:

The Central Planners in Washington now recognize that despite all the loan modification programs like HAMP and other initiatives, the housing sector is not going to lead America to an economic recovery. In fact, it could lead to either Option #2 or #3 as outlined in the MARKET OVERVIEW, (Page 1). There are about 11 million residential properties whose mortgage balances exceed the home's value and a shadow inventory of an additional 3.7 million vacant homes. David Rosenberg, Chief Economist at Gluskin Sheff says, that if prices drop another 5% to 10%, 40% of all American homeowners would be "underwater" on their mortgages. That would be catastrophic for not only the homeowners but the real estate industry and the US economy.

Added to this witches brew of "toil and trouble" is that investors in 2,300 residential mortgage securities, worth approximately $500 billion, are suing the banks that originated or are servicing faulty subprime mortgage loans to repurchase them. The lawsuits contend that the originators stuck them with "flawed loans marred by poor underwriting and faulty appraisals" (WSJ September 23, 2010). Can you say fraud?

Here are a few of the prospective re-purchasers and their potential liability:

Bank of America -- $35.2 billion
J. P Morgan Chase -- $23.9 billion
Deutsche Bank -- $14.1 billion
Royal Bank of Scotland -- $ 9.4 billion

And, the list goes on. The question is, to what extent will these buy-backs effect the reserves of these banks? The principal benefactors of the buy-backs would be Fannie and Freddie and by proxy, the US taxpayer.

The Good News?

If, and it's unquestionably a big IF, the BERNANKE RE-FLATION PLAN is successful, there should be re-mediation of the mortgage mess. Here's why. Mortgage debt is a constant. The appreciation of real property values through inflation will reduce the number of 11 million homeowners that are underwater. More importantly it will change market sentiment and psychology.

A significant number of home owners, witnessing an uptick of home prices in their neighborhood, will be encouraged to pay their mortgage and wait to walk. Investors also witnessing the uptick will be encouraged to invest risk capital in search of a higher return and the residential market will be on its way to recovery. CMV believes that, as simple as this solution may seem, RE-FLATION will begin to fix the problem. Funny, why didn't the MOTUS (Masters of The Universe) think of that?

Or, have they?

Serious Money
Macro Investing

A good friend and former client shared with your author that he had interviewed recently with an advisor who, after analyzing the portfolio mostly intact from your author's management four years ago, stated that the client was too over-loaded in one sector and needed to ‘diversity.' The over-loaded sector was precious metals. The advisor's recommendation? Sell the Precious Metals and diversify into an array of equity funds. Completely ignored was the past ten year performance of the names in his previous portfolio.

For example, Oppenheimer Gold & Special Minerals Fund (OPGSX). During the past ten years, this fund has had an average annual return of 24% which includes the precipitous drop of 30% during the crash of 2008. In fact, this sector is the only one that has not only made a 100% "V" correction but has gone on in 2010 to robust new highs up 35% as of September 24, 2010. Most individual names in the portfolio mirror this result. The message here is that:


My friend is again my client.

It is CMV's opinion that the investment climate in America and quite possibly the entire world has radically changed. The clouds are dark, foreboding and unpredictable. Buy & Hold, Asset Allocation, Model Portfolios, and even stock picking based upon earnings and fundamentals are no longer the keys to wealth accumulation. Macro Investing with Active Management has become the new model for sophisticated investors.

David Einhorn of Greenlight Capital said in a recent WSJ article:

"For years I had believed that I didn't need to take a view on the market or the economy because I considered myself a ‘bottom-up' investor. The lesson I've learned is that it isn't reasonable to be agnostic about the big (Macro) picture."

Mr. Einhorn has placed a huge macro bet that gold prices will continue to rise because of concerns that the out-of-control US budget and federal debt has a negative impact on the US dollar. Do you want to follow the "smart money" or follow the advice of an advisor who still believes that Microsoft, GE and GM are good growth stocks?

There is no question that High Frequency Trading (HFT) has un-leveled the playing field. Another "Flash Crash" is almost inevitable. Super computers such as "The Beast" featured previously in CMV contribute greatly to market volatility. On any day the HFT is buying high risk assets and the next day makes a 180° turn to safe-haven US treasuries or currencies.

CMV took a Macro View years ago when he told audiences and clients that Macro Trends were the key to investing. Realtors, for example, refused to accept the fact that the boom was unsustainable.

The irony, of course, is that there is SERIOUS MONEY to be made in MACRO INVESTING at exactly this point in time and CMV can position you if you are serious about SERIOUS MONEY.

Assuming that the BERNANKE RE-FLATION PLAN succeeds these are a few of the Macro sectors that should significantly outperform any other investing strategy:

The Devaluation of the US Dollar — Sell Short

The Appreciation of Precious Metals — Buy Long

The Panic Demand for Rare Metals — Buy Long

The Number One Alternative Energy (Nuclear) — Buy Long

The Rise in Interest Rates (US Treasuries) — Sell Short

The Rise in Commodities — Buy Long

There is one critical supposition to support CMV's Macro Investing. If CMV is correct, the US is at the cusp of a short-term inflationary cycle that could morph into Hyper-Inflation. All of the above sectors should perform extremely well given this environment BUT it will come to a calamitous end when it has run its' course in a "crack-up boom." CMV's strategy is simple and direct:

Make Huge Gains And Get The Heck Out of Dodge!
(The Financial Markets)

When the next crash occurs CASH will be king. That cash may be in Canadian or Aussie dollars or Swiss francs but those that have no debt and cash will be wealthy, independent and positioned to seize opportunity. The non-believers will become wards of the government.

The Inflation Jeannie Reappears

CMV's favorite metaphor has lifted her lovely body out of the bottle. While the talking heads on CNBC continue to remind us that "there is no inflation" evidence to the contrary is surfacing everywhere. To wit:

Arizona cotton farmers are celebrating as they prepare for the harvest of this year's cotton crop. Early in 2009 the market price of cotton was about $.40/lb. Last week, cotton for October delivery reached $1.09/lb — the highest price since (get this) the Civil War!

Retailers, with lean inventories and current and discounted sales are faced with a major dilemma. Should they restock at higher prices or wait and hope they can get through the Christmas rush with current inventory.

In a related sector, Nike reported a 9% increase in operating profit of $559 million in its latest quarter due to improvement in demand for its athletic apparel and less costly discounting. What impact will the 150% increase in cotton prices have on Nike next quarter?

The travel industry has reported that Americans have spent much more on airplane seats, hotel rooms and rental cars than experts had projected. Hotel revenue which plunged 30% from 2007 to 2009 has now recaptured all the decline in less than a year. Revenue passenger miles has returned to 2007 traffic levels at the airlines which have increased fares 3.9%. Travel employment increased 2.5% in the second quarter of 2010. What's ahead? Increased prices, of course.

Steel prices have risen for some types of products as high as 12% and as low as 1% since this past summer. China, which produces about 50% of the world's output, has cut production 3% to 5% and recently increased its prices on plate steel by 12%.

Other base metal prices that have risen off their 2009 lows are:

Aluminum + 65% -- Nickel +154%
Zinc +105% -- Copper +164%
Tin +120% -- Titanium +265%
Lead +151%

The penultimate evidence that inflation is poised to have a decided impact on personal budgets will be witnessed by shoppers. Commodity prices have already seen a market increase this year.

"GREED" and "PROFIT" are now available for you iPad users.

You can also pay for the year's subscription to the CMV (just $99) plus receive both books free (USA addresses only) by clicking here for the paypal payment window link.

Financial Questions? Contact hlquist at djmwealth dot com

-- H. L. Quist

Sunday, September 5, 2010

Free Preview of CMV Newsletter - and An Interview with H L Quist

Hello World,

Below is a preview of the CMV (Contrarian Market View) Newsletter for September.

First, listen the Sean Terry's interview with me at Flip 2 Freedom and read about the free book offer with the purchase of the CMV Newsletter.

Click here to go to the page to listen to or download the interview.

September, 2010
H. L. Quist's
Contrarian Market View

Market Overview

As evidence that CMV is NOT all negativity and gloom and doom, we'll resort to the contrary (as Contrarians are prone to do) and bring a little levity into your life. These puns are the gift of Mark Hanson of Hanson Advisors via my mentor Alan Abelson at Barron's:

--A man's home is his castle, in a manor of speaking
--A man needs a mistress just to brake the monogamy
--A hangover is the wrath of grapes
--Practice safe eating — always use condiments
--A lot of money is tainted — taint yours and taint mine
--Santa's helpers are subordinate clauses

And, the perfect fit for your author:
--The Myth Buster had a photographic memory but it was never developed

Okay. Let's get back to the grisly grind!

There's evidence that the macro economy is decelerating while the micro market (corporate earnings) accelerates. Some economists say that the second quarter GDP which was originally estimated as a gain of 2.4% (down from 3.7% in the first quarter) will be revised downward to 1.6%. The bond market has reinforced the threat of deflation with the 10 year US T-Note falling below 2.50%. Could yields fall further therefore enhancing CWA's position in TLT? Certainly, but our concern is that we may have squeezed as much lemon juice and made sweet lemonade as possible. The bond market has a top-heavy bullish consensus. We all need to keep in mind how the bond market and total return works. If the 10 year returns to a 3% yield from 2.50% bondholders will suffer a capital loss equal to the yield — a wash. If the yield rises to 4% as it did last spring ( and CMV forecast) the capital loss will be about 12%. Obviously, the economy must strengthen for this to happen — unless the absence of bond buyers dictate a higher yield. We'll monitor the "bond bubble" continually. (NOTE: On August 17th 30,000 call options were purchased on TBT at $33/sh indicating that there are Contrarians betting on higher interest rates.)

In response to the deflationary prospects, the big banks are loosening lending standards to businesses that gross less than $50 million per year. According to an August 17th article in the WSJ this is the first time this has occurred since late 2006 but loan demand is "weak." As CMV reported last month credit has been greatly expanded for auto loans and credit cards. As will be discussed below, standards for real estate lending will also be revised — or should we suggest, "loosened."

As the US dollar (USD) yo-yos up and down against other currencies, an anomaly is occurring. China has been a net seller of US Treasuries for two months in a row totaling $57 billion. Traders speculate that the Chinese are diversifying their $2.5 trillion in foreign currencies out of the USD in favor of Japanese Yen and the Euro. This would offer an explanation for the Fed's announcement that it would increase QE (quantitative easing — see page 4). Longer term, a further move by the Chinese in this direction could cause a sudden rise in interest rates and a problem for the US Treasury Bond market and the fragile US economy.

History buffs, like your author, recall the story of the crash of the German airship, the Hindenburg, in New Jersey in 1937. James Miekka, a blind mathematician is calling for a stock market crash this month — September. He's has dubbed his theory the HINDENBURG OMEN. Miekka has developed a formula that parses data like 52 week stock levels and moving averages of the NYSE. The trigger point for the confluence of his data was breached the week of August 6th and 14th. The mathematician says his theory has proven valid in all market crashes since 1987, but market analysts point out that only 25% of the Omen's appearances have led to significant market declines. IF (the IF in Life) the Met Life blimp goes down during the Ryder Cup maybe we should all take notice. CMV believes that there is better than a 50/50 chance that there will be a market decline of 20% to 30% more between now and the end of 2010 in addition to the 10% drop from the 2010 top. Don't be surprised however if there's a sharp rally in November if the Republicans and Independents take control of Congress.

Why The BO Stimuli Have Failed

A picture is worth a thousand words. Study this chart carefully. Each colored line represents a period of recovery in employment after a recession all starting with a baseline of zero as a percent of job losses. At the bottom of the page is the number of months that elapsed before job losses recovered in percentage terms back to the baseline of zero. For example take the blue line which represents the recession of 1974 brought about by the oil embargo, Watergate and Nixon's wage and price controls. The recovery occurred in only 21 months ironically, after the election of another Keynesian, Jimmy Carter. Also, note the brown line which represents the beginning of the 1990 recession brought about by the collapse of the commercial real estate market. (Remember the RTC days?) It took 47 months for job recovery to take place, but job losses were fairly minimal. It is apparent that in each period the recovery time is longer. Why? The accumulation of more debt and the intrusions of more government.

Now, the scariest line of all — appropriately, the Red Line. Not only have the job losses been deeper (6%) the upward trend broke downward again in the second quarter of this year and projects that the recovery period could be extended off the page!

There is a factor that could change this picture. Productivity growth took a sharp drop in the second quarter. What does that mean? Companies are finding it more difficult to get more work out of existing employees and may need to hire more people.

An OpEd piece appeared in the August 9th edition of the Wall St. Journal by Michael P. Fleisher entitled, "Why I'm Not Hiring". Fleisher, a small business owner of Bogen Communications, Inc. in New Jersey, who employs 83 people, says that it costs him $74,000 per year to put $44,000 in salary into one of his employee's pockets and give her $12,000 in benefits. He says, "With government spending and deficits growing...and you know that more tax increases are coming — for my company, and even for Sally too...Now, adding to the insanity, there's Obama Care."

This story could have been written by millions of business owners in America. Are you one of them?

On August 18th, California's Comptroller indicated on CNBC that as of October 1st, the State will be out of cash and will be forced to issue vouchers for bills due. At the same time scientists revealed that an earthquake could occur any day along the San Andreas fault. If appears to CMV that it already has.

The Most Dangerous Man In America

Few Americans on either the right or left would ever consider the possibility that there could be a single person who had the financial resources, the ability to mobilize and motivate legions of people, the unapologetic goal of destroying capitalism and America's democratic form of government and its' way of life. But, there is such an individual. You need to know this man. His undisputable track record tells part of the story.

Kyle-Anne Shiver wrote in "The American Thinker," that this man "made his first billion in 1992 by shorting the British pound with leveraged billions in financial bets, and became known as the man who broke the Bank of England. He broke it on the backs of hard-working British citizens who immediately saw their homes severely devalued and their life savings cut drastically, almost overnight."

In 1997 this man almost destroyed the economies of Thailand and Malaysia. A Thai citizen called this man, "A kind of Dracula. He sucks blood from the people." This man had the power and the money to literally dismantle Yugoslavia and created massive economic problems in Georgia, the Ukraine and Myanmar. He was convicted of insider trading in France and fined $2.9 million dollars. He was also fined $2.2 million in Hungary for market manipulation as he had the assets and influence to move markets and profit from his trading without regard to the fact that Hungary's largest bank almost went bankrupt.

This "global parasite" as described by one writer, has set his sights on the destruction of America from within, without concern for its people and without conscience or remorse. He is an atheist who wants to undermine all of America's belief systems and moral values and create a financial crisis that will bring the most powerful nation the world has ever known to its' knees. He has already created a "Shadow Government" and an army of radicals who are in a position to carry out his goals of an "Open Society."

Who is this man? His name is George Soros — the real power behind the throne. You need to find out more. Go to the following:
Google: George Soros Anti-Christ
Google: Open Society

The paramount question that you must ask yourself:

How do you make a living, manage your investments and plan for retirement when there are those in power who want to destroy capitalism?

The US Dollar And QE 2

Some may look at the above heading and wonder why CMV would include Queen Elizabeth 2 (the ocean liner) in the same piece with the USD. In this case however, QE means Quantitative Easing which is a euphemism for the printing press or the Federal Reserve's creation of money out of thin air in order to buy US debt.

As CMV reported in June, evidence is everywhere that the economy is decelerating. Nowhere was this view more poignantly illustrated as when James Bullard, who is President and CEO of the Federal Reserve Bank of St. Louis, was quoted in Barron's August 2nd from his piece entitled, "Seven Faces of Peril," that, "The US is closer to a Japanese-style outcome today than any time in recent history." For those who don't recall, the Japanese stock market (and later real property values) crashed in 1990 and have not recovered in two decades. Japan also used QE. What happened? The economy didn't ignite and the Yen fell 25%. In short, deflation has dominated the Japanese economy for 20 years and all government initiatives to cure the problem have failed.

CMV readily recalls that it was then Federal Reserve Board member, Ben Bernanke, who in 2002, delivered his famous "helicopter" speech titled "Deflation: Making Sure It Doesn't Happen Here," that addressed that very same issue eight years ago. That was when "Helicopter Ben" and his mentor, Fed head Alan Greenspan, hatched their cash-out real estate financing program to re- stimulate the economy. That strategy worked out so well we should all be positive about what Bernanke & Co. have in mind to get the consumer to spend today. What we are about to learn is the Fed can print more money, but it can't make people lend, spend or invest.

Bernanke's Fed purchased $1.75 trillion of Treasuries, mortgage securities and agency bonds to prevent a financial meltdown in 2008 when Lehman Brothers failed. Ben announced earlier this year that the Fed would no longer use QE and the Fed would shrink its' balance sheet. He lied. The Fed head has now reversed his position and announced on August 10th that the Fed would employ QE. This could be the Mother of All Quantitative Easings. You might say the "Queen Mother" or QE2

On August 11th, the markets reacted somewhat contrarily but definitively to Bernanke's remarks. The stock indices were down over 2%,the 10 year T-Note yields fell below 2.7% and the USD rallied 1.581 on the index. Gold was up fractionally. The markets are forecasting DEFLATION.

What does this mean to you, your business and your investments? CMV sees a relatively short period of Deflation followed by sharp increases in the prices of hard and soft commodities — the worst of both worlds because incomes won't be rising in concert.

Goldman's Supercomputer

Since the "flash crash" occurred on May 6th, millions of investment advisers, investors and regulators have attempted to determine how the stock market indices could fall 10% within two hours and then, miraculously rebound, resulting in massive losses and gains. To date there have been no formal explanation offered by the SEC or any other agency.

Up steps one Nick Guarino, Editor of the "Wall St. Insider" who says that the crash can be attributed to Goldman Sucks' high frequency Super Computer. Keep in mind that Guarino has been a target of the federal government for years which has attempted to prevent him from publishing his newsletter. Given that disclosure however, Guarino may have a valid point.

Guarino calls Goldman's Supercomputer the "Beast" which is wired into every stock and commodity exchange and allows Goldman to "front run" every trade on every exchange. The "Beast" which is the fastest and most sophisticated computer in the marketplace is buried 10 floors down in the bowels of Wall St. out of range and sight of nukes and terrorists and presumably, regulators. Front Running for the uninitiated, is illegal. The "Beast" knows where every buy or sell trade (and stop loss) is and automatically can jump in front of that trade which of course gives Goldman pennies per share advantage on every trade. Guarino says its' like playing poker and you know all the cards that your opponents are holding. Now we know how Goldman never had a losing day in the market in the first quarter of 2010 and had a net profit of $5 billion when just about everyone else was trying to stay afloat.

Add to this the angst of investors who may have owned stock in Accenture (ACN) that fell from $40/share to $.01/share in 30 minutes and rebounded to close at $40/share at the close. If an investor had a "stop loss" at say $35 his trade could have been executed (literally) at $20, $10 or $.01, thereby losing 100% of the investors money. The "Beast," programmed to sense the bottom of the market could have sold the stock at $40 and bought it back at $.01. The SEC "broke" most of these devastating losing trades so this type of profiteering didn't actually take place but it signals to all of us the new perils of investing in the market. Which begs the question, "Where does that leave the small investor?"

CMV can't evaluate whether or not Nick Guarino is correct in his assessment. Keep in mind however, Goldman paid a $500 million fine to the SEC to settle its involvement in the subprime mess. And, it was Goldman who advised Greece to "hide" its debt. And, it was Goldman who profited handsomely at the near-demise of Ashanti Gold in Ghana. And, it's entirely possible that the SEC and the Masters of the Universe on Wall St. know exactly what the cause of the "flash crash" was but can't or aren't courageous enough to go there. A final report is due in September.

High frequency trading and the proprietary trading of Goldman and others is a game changer. It has turned investors into traders. How do you allocate a mix of mutual funds in your 401K and retain that allocation for an extended period or until retirement? You can't. You or your adviser must actively manage your assets on a daily basis. Would this be an appropriate time to have a portion of your assets "short" the market? Call or email me and let's discuss your situation.

Note: If CMV can be of assistance to you in addressing any of these issues call (602) 840-4117 or e-mail

The Mortgage Mess

CMV's alter-ego, THE MYTH BUSTER (TMB), has devoted considerable time and research over the years into Fannie Mae (FNM) and Freddie Mac (FRE) and what has become one of the most dominant deterrents to a recovery in the US economy — the real estate mortgage mess. The Myth Buster's YouTube video on the "Evil Twins" received 700 clicks in the first two days.

On August 17th, Tim Geithner, the US Secretary of the Treasury hosted a conference of housing finance experts to map a strategy that could cure a problem that not only plagues homeowners and the real estate and mortgage industries, but is unquestionably a major cause of the deceleration in GDP. For those of you who may not recall, it was TMB who, in 2004, cited the circle of corruption that existed at FNM and FRE, Congress and the mortgage industry. TMB correctly forecast that the "Evil Twins" would fail and would be a major contributor to the collapse of the residential real estate market.

Tim Geithner is the Chief Custodian of FNM and FRE (who should collectively be referred to now as "Feddie"), the mortgage giants who are in conservatorship. These two entities together with the Federal Housing Administration control 90% of the residential mortgage market. Geithner led off the conference with a very clear indication that the Treasury will re-invent the twins and the entire mortgage-finance system that will certainly include some role of the government. US taxpayers have already contributed $150 billion to keep the twins afloat during the past two years.

Critics were quick to respond. Anthony Sanders, a Professor of Real Estate Finance at George Mason University said in an August 18th WSJ article, "The government was complicit in easy lending standards and lack of regulation in driving up a huge housing bubble. Since government caused quite a bit of the trouble, to say, ‘see, you need us,' is twisted logic." Mr. Sanders hits the nail on the head but he's much too polite. Barney Frank, Chairman of the House Financial Services Committee and its members should have been expelled from Congress in their "parental" role with FNM and FRE. Franklin Raines, the former President of FNM who "cooked the books" and rewarded himself and his executives with bonuses based on fraudulent earnings, should be in jail. Angelo Mozilo, who was the head of Countrywide Financial that provided some of the "toxic" sub- prime loans to the "evil twins" should also be in jail. His trial will be held this fall so retribution remains possible. But we shouldn't hold our collective breadths. The "Friends of Angelo," who received special loans, occupy the seats of power in Congress.

After the conference on August 17th, 2010, Barney Frank was interviewed on FOX Business Network by Neil Cavuto. Frank said FNM and FRE should be "abolished" but was quick to add that the lenders "shouldn't be torn down without a replacement." He also alluded to a possible solution that would resemble the new FHA program whereby the government guarantees would be "self funded" by the homeowner-borrower via a mortgage insurance premium. (Yeah, like FDIC that is currently $40 billion in the red.) Kudos to Cavuto. He even got Barney to admit that "mistakes were made" by himself and Congress. We can be assured of one thing. This government is going to continue to control the home mortgage business. It's in their genes. However, a loss to the conservatives in November could change the direction of the mortgage industry. (A Gallup Poll on August 31st reveals that the Dems could lose 52 seats in the House.)

There was speculation that FNM and FRE would "forgive" a principal amount on every loan in its $5 trillion portfolio that was underwater. The amount of reduction would be sufficient to bring the debt down to the market value of the home. Whether or not this was discussed at this venue is not known. Mr. Geithner is scheduled to announce a plan in January — at the end of what may be a "lame duck" Congress. Remember, however, the Treasury could adopt a plan without approval of Congress. Is there a Residential Trust Corp (patterned after the 1990s RTC) in the future?

-- H. L. Quist

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