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The CMV Recommended List grew 45.17% in 2010!!!
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NASDAQ Composite +17.36%
Below is a preview of the CMV (Contrarian Market View) Newsletter for January, 2011. See the end of this post for a free book offer with the purchase of a subscription to 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.)
January, 2011
H. L. Quist’s
Contrarian Market View
Newsletter
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January 14, 2011
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11:30 a.m. - 2 p.m.
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Market Overview
Absent the following events that could have a material impact and alter or change our outlook for 2011, CMV offers its’ Contrarian forecast for 2011. These “X” factors are:
1. A Cyber attack on Wall St., the banking industry or government that would significantly impair commerce and confidence in our government ability to curtail this type of activity.
2. A series of terrorist attacks on highly visible and innocent targets that would instill fear in the populace.
3. A breakout of hostilities in the Korean Peninsula or the Mid-East.
Assuming none of these above events occur, here is CMV’s best guesstimate of major events that will influence your business, your investments and your family in 2011.
1. The Economy and Financial Markets Will Surprise to the Upside.
Barron’s Magazine polled 10 prominent strategists and investment managers who collectively see the S&P 500 finishing 10% higher than this year’s close at 1258 or 12.80%. Despite the Fed’s Reflation Plan to prop up asset prices while maintaining interest rates at historical lows they all agree that inflation will not be a problem. David Kelly at JP Morgan Funds forecasts the highest S&P earnings at $98/sh for 2011 and the 10 year T-Note at 4.25% by the end of 2011. When questioned as to what sector will best perform in the year ahead, 5 out of the 10 picked technology as the number one performer. Remarkably, none of the 10 experts chose precious metals in their four or five favorite sectors. One could assume that they missed the numero uno sector (gold funds) which have out-performed all sectors for the past 10 years. CMV’s position is that S&P earnings are going to be tempered by higher raw material costs and the 10 year T-Note could be a full 100 BPS or more above the consensus of 4.00% despite Bernanke’s attempt to “cap” it. Inflation by the end of 2011 will be the most off-repeated word in the English language but remains foreign to Wall St..
Despite the fact that the US economy will not reach the Nirvana of robust earnings, low interest rates and no inflation as forecast by these experts, the economy and the markets will surprise to the upside and you should be fully invested after mid-January. An added impetus will be provided by the major banks who will aggressively increase their business lending in 2011 contrary to prominent pundits.
2. The Us Dollar Loses Luster.
CMV described in the December issue that China and Russia had organized the Shanghi Co-Operation Organisation (SCO) which garnered very little notice in the US media. In mid-November China allowed its’ currency, the yuan, to be bought and sold outside the mainland for the first time. This is a critical step moving to full convertibility of the yuan and Americans are oblivious of the impact this will have on the international financial landscape and the value of the USD. The goal of China and Russia and other states that are coming on board SCO, is to circumvent the USD in international trade and allow countries to settle transactions in currencies other than the USD. The dollar has been the world’s reserve currency for over 60 years and 2011 will mark the beginning of the end of the dollar’s role. When China severs the yuan’s link to the USD, the value of our currency will sink like a rock in a swimming pool and the prices of imported goods will skyrocket.
3. The “Shock and Awe” Real Estate Loan Program.
The Obama Administration is actively in negotiations with Fannie Mae (FNM), Freddie Mac (FRE), and the Federal Housing Administration (FHA) to develop a new government program that would be aimed at reducing loan balances where borrowers owe more than their homes are worth. FNM and FRE which own or guarantee about half of the all the mortgages in the US, would transfer the reduced loans to the FHA and of course, losses will be absorbed by you guess who! In addition FNM and FRE and other lenders plan to recoup somewhere between $200 and $400 billion from banks who sold them the toxic subprime loans. CMV expects FNM and FRE to be “restructured” ostensibly using the bank proceeds. CMV sees this imitative as a “game changer” and will stop the bleeding in the residential real estate market in 2011 if the plan comes together. The plan will be adopted by the US Treasury and the Obama Administration without review of Congress and the cost heaped on you and I, the taxpayers.
4. The Bond Bubble To An Asset Bubble.
The Federal Reserve Board Chairman’s goal is to create asset inflation by driving investors from near zero return bonds to higher risk appreciating assets — stocks, commodities and eventually real estate. In CMV’s opinion, Mr. Bernanke will succeed in the near term. There is an almost inestimable amount of trillions in government, corporate and municipal bonds that are, and will be ever-increasingly, diverted to risk assets. Viola! Asset inflation. We have Mr. Bernanke’s “100% certainty that the Fed can control inflation.” CMV believes that the Chairman will fail on this promise. Unfortunately, with Federal deficits running in excess of a trillion per year, the US Treasury issuing new debt and re-funding old debt at about $4.3 trillion per year, interest rates will rise, reminiscent of the late 70s. In late 2011 and into 2012 CMV believes that US bond investors will conclude that they will never be paid back with anywhere near close to the same purchasing power and the Fed will find itself in a series of accelerating QE programs which will inevitably lead to Hyper-Inflation. CMV doesn’t know what the time frame may be but in the end trillions of dollar denominated debt will disappear and never be repaid. More on pages 3 and 4.
5. City and State Governments Will Default.
Meredith Whitney, the Wall St. analyst who accurately forecast the sub-prime debt crisis well in advance, recently said that there will be “fifty to one hundred sizable Muny defaults amounting to hundreds of billions of dollars in the next 12 months.” In addition, some analysts are also including the states of Illinois, New York and California as candidates for default. Many defaults would have occurred in 2010 had it not been for $140 billion in Build America Bonds that these governments used to pay interest on old debt, salaries to employees and pension payments to retirees. The BABs are scheduled to end on December 31, 2010.
On December 27, however, Republican Congressman John Mica said, “I can almost guarantee” that the program for subsidized bonds will be funded next year. Ignoring the Tea Party’s mandate, Mica is playing to Wall St. which made $700 million in the past 2 years on fees off of BABs! Proving once again that the system is corrupt and will fail.
Austerity measures could be met with denial, anger and rioting. It’s human nature for US citizens to take the position that ‘It can’t happen here” and refuse to accept the possibility that we’re no different than Euroland, Latin America or even third world countries. Civil unrest could be the primary event of 2011 and 2012. George Soros, who CMV revealed as “the most dangerous man in America” basks in the glory of the chaos he’s created in his quest to kill the capitalistic system and profit from its demise.
Ben’s Inflation Bubble
It is difficult for the average person to grasp the meaning of the term and the presence of “inflation” for a number of reasons:
-- We’re constantly reminded by the talking (Wall St.) heads on CNBC that “there is no inflation” because it undermines their purpose of a “Goldilocks” economy..
-- The Bureau of Labor Statistics has modified the methodology that produces the Consumer Price Index (CPI) to the extent that the index is worthless. Removing food prices from the core index at a time when these prices are exploding is a perfect example how government deceives its citizens while it steals from them.
-- Economists tell us that we can’t have price inflation during periods of high unemployment, low money velocity and low GDP growth whereas it has suddenly appeared when those conditions exist.
-- People don’t equate Fed monetary policy and fiscal stimulus with asset and price inflation which is the direct result of current policy. Inflation is first and foremost a monetary phenomenon.
Let’s look at some specifics:
Corn is closing in on $6.00/bushel — up 50% since June.
Spring wheat is $12/bushel — up 20% from a year ago.
Feeder cattle is $124.75/100 wt — up 25% from a year ago.
Coffee is $2.25/lb — up 7.5% in a week.
Sugar is $32.5/lb — up 12% in a week.
Cotton is $1.50/lb — up over 100% in a year.
To fully appreciate the cause and effect that’s going unnoticed in virtually all areas of the US (except farming country) is the incredible boom in farm land prices. According to the WSJ (December 9, 2010) two tracts of farmland in O’Brien County in Iowa sold recently for $9,700/acre. The article says that “land fever is running rampant” in the mid-west. John Deere & Co. Says that net farm cash income will rise 31% this year and it’s the most profitable agricultural year in US history! CMV can’t think of any group of hard-working Americans who deserve it more but consumers won’t agree. Do Not blame it on our farmers!
Land prices are a factor of higher crop prices but what’s driving crop prices? Some experts claim there’s a global food shortage particularly in China but there’s also the inescapable fact that our exports are priced in USD and our currency is melting as fast as a snowball in Phoenix in July. Washington is ecstatic that exports are soaring but now you know why the reign of the USD is going to end — and much sooner than experts figure.
Here’s another aspect of this emerging picture that isn’t obvious. Americans, since 2008, have been buying groceries and goods on a “just in time” basis or a few items at a time. When it becomes apparent to homemakers that prices are escalating they’ll buy in larger quantity. Bingo — demand impacts supply — prices increase and panic buying could ensue. Consumers will be shocked by the increases in food prices in 2011.
Another sign of the times. Copper has popped to $4.25/pound. It has been reported that one US source is hoarding close to a billion dollars of copper by warehousing the metal at the London Metal Exchange! China is utilizing the same technique hoarding uranium, rare earths and gold. The Chinese have this whole future scenario figured out and are trading dollars now for goods needed later. In addition to massive price increases, could we see a trade war? We’re on the cusp — The Future isn’t what it used to be!
Ben Bernanke’s objective through QE2 is to create asset inflation and at the same time (with 100% certainty) control wage and price inflation. Will he follow in the footsteps of his mentor, Alan Greenspan, who set out to inflate real property prices but failed to intercede to curtail the mania that followed? Or, will he turn off the QE spigot and raise the Fed funds rate? In CMV’s opinion, the Fed Chairman doesn’t make that decision — the banksters and politicians who “anointed” him make that decision. Bernanke is simply a hired gun. By the end of 2011 the economy will be running on all cylinders and the banksters and the President won’t want it to stop. The result? Ben’s Bubble — the Fed’s FIFTH since the seventies. Asset bubbles create profits. Investors take profits and pay taxes. It’s like the 1990s all over again. The same market frenzy during the .com bubble created a budget surplus and made Bill Clinton the teflon man. BO wants to replicate his success.
As CMV has reiterated numerous times — this new bubble is the “Last Rodeo.” Our creditors will lose confidence in our fiscal and monetary management and will refuse to lend to the world’s largest debtor nation..Our citizens will also lose confidence in the purchasing power of their currency. The result? HYPERINFLATION. Ben will lose his job and the privately controlled Federal Reserve Bank of the United States will be dissolved. When? It’s just a matter of time.
The 2011 (Good) Surprise
In September 2010, CMV saw a change underway in the economy that most economists, market analysts and observers missed. While most experts were focused on the “double dip” and a decelerating economy ahead, CMV saw stealth evidence that the US economy was about to surprise on the upside in the fourth quarter. Here are some observations that validate CMV’s forecast for a sharp economic rebound in 2011.
-- The Nation’s GDP rose at a 2.6% rate in the third quarter of 2010 and the consensus projection was a 2.4% growth for the fourth quarter. CMV saw a massive increase in exports amongst other signs that would result in a much higher GDP growth in Q4. The port of Los Angeles’ activity was nearly at 2007 levels. Barron’s had boldly forecast a 4% GDP increase and CMV saw an increase of 4.5%. As of this writing economists are scrambling to revise their estimates upward for Q4 and the year 2011.
-- The cost of money was never cheaper and corporate balance sheets were never stronger at the end of Q3. Private Equity firms and Wall St. can’t resist “free money” plus the obvious flow of funds exiting bonds that would be a catalyst for a dramatic turnaround in the stock market and corporate investment. Wal-Mart and Coca Cola borrowed massive amounts of capital through the sale of bonds at an absurd yield of a fraction over T-Notes. CMV rests its case. Bernanke’s QE2 announcement in August was frosting on the cake. The “Fix” was in.
-- The election results, in CMV’s opinion, had much more of a significant economic impact than most may have been willing to admit. A huge cloud of “uncertainty” was lifted from the shoulders of those businessmen and women who make the decisions on corporate expansion, capital investment and hiring that ultimately would reverse the unemployment picture. An increase in new jobs in Q1 2011 will lead to a further increase in 2011 GDP. CMV cautioned however that unemployment would not drop to (what has been considered normal) 5 to 6% The “new normal” will be more like 8% but that will still spur the economy in 2011.
-- As late as the end of November the National Retail Foundation and retail pundits were projecting a modest increase in Christmas sales. CMV, the true Contrarian, saw a much different picture. Consumers were saving at a 5% to 6% rate during the entire year of 2010, credit card outstanding consumer debt was finally declining and “frugal fatigue” would result in a robust Christmas season. As of this writing sales are estimated at $451 billion, or up nearly 4% over 2009 and very close to 2007 highs. The surprise of course, was Internet sales up about 15% to $36 billion and a new phenomenon appeared which foretells problems for the sector. Best Buy reported a dramatic drop in sales. Why? A potential buyer walks into Best Buy shopping for a wide-screen TV with all the bells and whistles and gets the full demo and info from the sales clerk. He then pulls out his cell phone, locates a site that directs him to an Internet vendor that offers exactly the same model for 20% less. Before the ex-potential customer leaves the store he buys the TV on-line. Retail sales may be up on the aggregate but there is a massive marketing shift and re-apportioning of the pie. Another certainty, sales taxes are coming on all on-line transactions — but prices will still remain cheaper.
For those experts who maintained steadfastly that consumer spending would not increase when there’s high unemployment, don’t know how to assess a change in public sentiment. CMV takes the position that American’s should be accumulating as much cash and investing every available dollar in order to prepare for the Great Reckoning which is a virtual 100% certainty. We just don’t know WHEN.
Your writer was on a panel with two other pundits over a year ago. One was the Treasurer of the State of Arizona and the other a stock market broker and analyst. Both of these experts maintained that there wouldn’t be an upside economic reversal (the likes we’re about to see) because so much money was lost and consumers and investors were so psychologically damaged they would refrain from taking any risk. Since March, 2009 the S&P 500 has produced a return of 81.6% through November 2010. High beta stocks not including the resource sector are up a hard-to-believe 213.3% according to Barron’s! As a testament to investor’s appetite for risk, margin debt is now $269 billion which is the highest since the over-leveraged market prior to the September 2008 crash. These panelists like a majority of Americans, missed the “bus to Omaha.”
CMV can understand our State Treasurer’s negative outlook. Every day he had to deal with a mounting deficit and borrow $2 billion to keep the lights on at the Capitol. CMV fully recognizes that the fiscal situation at all levels, federal, state, and city, is unsustainable and can not continue. The choice that leadership at all levels has taken is to INFLATE the problem away which is now underway. Like an Alka-seltzer, its’ a ‘Fizz’ or, temporary relief. Assets will appreciate, tax revenues will increase and an euphoria of relief will change sentiment and all will appear that all is well again. CMV’s value to you is that amidst all the gloom we saw the bloom despite the fact that the petals will again wilt and fall. NOW is the time to make serious money. By the time that the herd decides to join the game it will be too late. The party will be over.
Randall Forsyth writing in Barron’s on December 17, 2010, articulated exactly what CMV has told you ad nauseam:
“...the Federal Reserve’s adoption of QE2 may turn out to be mere footnotes to the bigger story. 2010 could be the watershed marking the beginning of the end of the dollar-based, Western-centric monetary system...”
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Happy New Year!
-- H. L. Quist
