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.
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September, 2010
H. L. Quist's
Contrarian Market View
Newsletter
H. L. Quist's
Contrarian Market View
Newsletter
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.
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.
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:
soroswatch.com
discoverthenetworks.org
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?
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.
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 hlquist@djmwealth.com
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
"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.
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:
soroswatch.com
discoverthenetworks.org
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 hlquist@djmwealth.com
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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