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Below is a preview of the CMV (Contrarian Market View) Newsletter for April, 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.)
The comparative results for March, 2011 were as follows:
The CMV Portfolio + 5.04%
Dow Jones Industrial Avg. + 6.41%
S&P 500 + 5.42%
NASDAQ Composite + 4.83%
Early in March, The Myth Buster (TMB) was interviewed on radio station WEKZ in Monroe, Wisconsin, about 20 miles from Madison, the recent center of America’s universe. Scott Peterson, the host of “The Morning Mess” asked TMB, “We’re so embroiled in this controversy, can you give us a sense of what is happening in our country? You’re good at seeing the big picture.”
In a macro sense what we are seeing is the result of a breakdown in our nation’s infrastructure – social, political and economic, which has been evolving for over 50 years. A confluence of the destruction of all of these sectors coming together at the same time has created a state of chaos. Since Wisconsin was my birthplace, the interview made TMB reflect on his childhood and in particular the role of our teachers and our educational system in the forties and the fifties.
Our teachers, in this bygone era, were the ultimate ‘gate keepers’. Most of them must have deemed it their responsibility and in fact their mission in life to not only educate their students but to mold them into good citizens who would become the future of America. Building character was one of the primary objectives of our teachers. Lying was admonished by instant peer humiliation – “liar, liar your pants are on fire.” Cheating and particular cheating on tests was cause for expulsion from school. As students we respected our teachers and all adults always responding, “Yes Sir” or “Yes Ma’am.” We may not have like the administration of their rule of law but we conformed to it. When our teachers reported our miscues of behavior and deficiencies to our parents, they, in most cases, supported our teachers and administrated their own form of punishment at home. The message to us was always clear and unambiguous. RIGHT was RIGHT and WRONG was WRONG. Grey was not an option.
Truant Officers constantly combed the ice cream parlors, soda shops, pool halls and theaters for miscreants who were playing hooky. TMB’s high school principal, a short but sturdy man and a graduate of West Point, was an authoritative figure who possessed a big stick but in my recollection, never had to use it. Our teachers, coaches, and administrators molded us into good citizens and most of them thrived upon the satisfaction that their mission was accomplished despite their financial sacrifice.
So, where are we now? A high percentage of high school students can neither read nor write. Students are murdering students, students are shooting teachers, teachers are having sex with their students and teachers are cheating on tests to secure more funding. Education, has hardly “progressed” in the past 50 years. When and why did it all go wrong? Since TMB has experienced and witnessed it all, he’ll offer this insight.
While interviewing a former high school coach for a history of the school, the coach said, “In the fifties, you kids tried to do everything we asked you to do. In the sixties, the kids questioned everything we asked them to do. In wasn’t enjoyable anymore and I quit teaching and coaching.” Our West Point principal was offered a position as head of a new high school which he refused in the late 50s saying, “My day is over – times are changing.” What was the “change” that these two educators saw as early as the late 50s and early 60s?
Students became “empowered.”
Remember “Black Board Jungle” and other films that made heros out of teens who challenged teacher and parental authority? And, when teachers pointed out that Johnny was having problems in school, the parents sided with their kids deflecting the blame on the ‘system’ that wasn’t flexible enough to meet their child’s special needs. The POWER was initially transferred from those that rightfully administered it to the students and parents who abused it and the educational system that served the nation so well for 200 years begun to crumble. Perhaps, in part, a response to this transfer of power in the sixties, was the National Education Association and The American Federation of Teachers, which have empowered themselves to the extent that the issue now is all about them – not the students.
As children of “The Greatest Generation” (those born in the late 1920s and 30s), we (including your author) contributed to not only the decline in our educational system but the End Of America As We Knew It (EOAAWKI). How? My generation did NOT insist that the system that fostered and molded us, must continue. We abandoned our heritage and each generation that has followed has denigrated and diminished it more. America now has reached the breaking point. We desperately need a catharsis – a cleansing and a rebuild of not only our educational system, but America’s entire infrastructure. That should be OUR mission and that is our hope.
PROFITS, PRICES & PROBLEMS
Corporate profits (now at historic highs) amongst the S&P 500 companies were about 8.2% during the last quarter of 2010 and the third consecutive quarter above 8% according to S&P data outlined in the March 26/27, 2011 edition of the Wall St. Journal. US corporations have bene running lean – minimizing payrolls and cost cutting, but according to many experts, that favorable environment will end when earnings are reported for Q1, 2011 at the end of March.
Decreasing margins due to increases in raw material and commodity prices as noted by CMV in March. Profit margins tend to be “mean-reverting” – meaning that when they’re at extreme levels as they are presently, they will revert to the mean. During the past 15 years the average profit margin is 6.1% so a reversion is due. For example, Nike just reported that gross margins have dropped 1.1% and the stock dropped 9.5% with their report. The S&P GSCI Commodity Index has jumped 14% this year alone which has pushed the Producer-Price Index (PPI – Wholesale price index) up 1.9% in February which is a “whopper.” As reported later in CMV, supply disruptions will only aggravate the situation.
Wholesale food prices alone rose a record 3.9% in February, the highest since 1974, which CMV has continually reminded its readers, was the beginning of the highest inflationary period in the US since the Civil War. Wholesale energy prices gained 3.3% during the same month reflecting the turmoil in the Middle East. Despite all these indicators pointing north, economists like Paul Ashworth at Capital Economics say, “With an unemployment rate that’s still near 9%, there isn’t going to be much domestically created inflationary pressure.” Some readers might find this statement comforting. CMV doesn’t.
Another area that’s off the inflation radar is the rapid rise in drug prices despite pressure on the drug companies to reduce them. In 2010, the average price increase was 6.9% according to Barclays Capital which followed an increase of 6.8% the year prior. Some popular drugs have increased double and triple this amount. Plavix is up 13.2%, Liptor 12.4%, Gleevec 20.9% and Benicar (for high blood pressure) an incredible 29.3%. Not to worry, Obamacare will resolve the problem.
Every week Barron’s interviews a prominent analyst or asset manager. CMV found Lawrence C. Strauss’ interview with Stephanie Pomboy, President of Macro Mavens, enlightening and timely. Pomboy is “dubious about the strength and durability fo the recovery...so, absent some kind of dramatic change in the consumer’s willingness to borrow or a dramatic increase in job creation, I just don’t see the ingredients for a durable recovery.” Stephanie goes on to say:
• “But it is almost laughable to think that the Fed can tighten in this environment.”
• “It is delicious in its irony that, in a way, the QE is really the driver of this commodity bubble...nevertheless, I see continued QE inflating this commodity bubble to a point that something breaks...I view commodity price-inflation as really a major margin squeeze for the corporate sector...”
Asked what trades make sense, Stephanie opined:
• “I would be long hard assets, including gold and Treasuries...”
• “I would play by selling or being underweight small-cap stocks.”
• “I would be looking to short the financials again. I think we’re going to have some mortgage mayhem.”
Stephanie supports CMV’s macro view. Inflation without real growth. She really nails the crux of the issue when she indites Fed monetary policy:
“The problem is that we serially try to inflate our way out of these problems, rather than taking the pain and letting the economy actually cleanse itself.”
Thanks, Stephanie. You’re a Doll!
THE MOST DANGEROUS MAN IN AMERICA – TAKES CENTER STAGE
The September, 2010 issue of CMV depicted George Soros as “The Most Dangerous Man in America.” You may have brushed off the warning just as 99% of the American population would, placing little import to his impact on you, your investments and your future. This “wizard behind the curtain” so described in The Myth Buster’s March 22nd Podcast, has taken stage center to reveal his plans to “Remake The Entire Global Economy” acceptable to, of course, George Soros.
Thanks to Dan Gainor, a Boone Pickens Fellow and Media Research Center’s Vice President for Business and Culture, whose article appeared on the Fox Forum, we have advance notice that Soros intends to re-organize the entire global economic system. On April 8th, a group that Soros has funded with $50 million will bring together about 200 academic, business, and government policy leaders to form a “multilateral system” where America is a subservient player. All the participants have one thing in common – they are all bought and paid for by George Soros.
It isn’t difficult to find global support for such a grandiose scheme when this man has given more than $7 billion to “open society foundations” and funded 1200 organizations such as MoveOn.org, the Center for American Progress and other far-left America and capitalist-hating organizations, according to Gainor. Soros was also the largest contributor and most singularly responsible person for the elevation of a totally unknown Senator from Illinois to the Presidency – beholden to his benefactor. NEVER underestimate Soros’ power and determination. He gloats at the chaos he has created – deliberately.
Speakers and supporters of Soros at this conference will be:
• Paul Volker, former chairman of the Federal Reserve Board,
• Economist Jeffrey Sachs, a recent recipient of $50 million for his UN Millennium Project which advocates significant tax increases on US citizens to pay for leftist policies.
• Joseph E. Stiglitz, a former senior VP and economist of the World Bank and Nobel Prize Winner in Economics who is opposed to ‘free markets.”
• Rob Johnson, a former managing director of Soros Fund Management who, during the fiscal crisis in the US, called for the resignation of all the top executives of all the major banks.
In Soros’ mind re-organizing the world order will also involve the United Nations and of course, increasing the US financial responsibility there and at the same time diminishing our influence. If there was ever an opportunity to check out of the UN and cancel their lease in NYC, now is the time.
How could this “takeover” effect all of us? Some of CMV’s observations:
1. America’s power and sovereignty will be undermined thus accelerating the dumming-down of our country. (Go to Soros’ Open Society website and read his objectives.)
2. A new global currency scheme would terminate the US dollar as the world’s reserve currency and would result in a massive devaluation of the USD.
3. A re-making of US capitalism in the form of centrally-managed international capitalism, (A marriage of Capitalism and Communism which, three years ago, The Myth Buster coined as “COPITUALISM”)
4. Despite the support of numerous corporate elites, most true entrepreneurs embodying the American spirit, should revolt at the prospect that their opportunities to work hard and succeed will be undermined for the benefit of a society dependent on government.
5. The prospect of a “turf war” between the Soros group and the present Banksters and Masters of The Universe on Wall St. looms large. CMV has consistently taken the position that the inevitable global monetary crisis would be utilized to precipitate the New World Order. The remaining question will be, who is IN and who is OUT? Is the recent action taken by the FDIC against the former top executives of Washington Mutual and their wives for illegally moving cash and houses to shield the assets from legal claims a portent of things to come? Who of us wouldn’t champion that action? That’s precisely why Soros will get support.
Soros and his followers are advocates for Social Justice through the re-distribution of wealth. His “open society” envisions a world where 95% of the population are Proles (proletariat) and the elite 5% Inner-Party have all the wealth and power. Revisit George Orwell’s 1984. Corruption is everywhere and the corrupt are in control.
March Madness – Washington-Style
The Obama Administration has a new plan to cure the 22.5% of all mortgage holders who find themselves underwater or have negative equity in their homes. It’s madness. But, why not, it’s March.
The plan is to force the nation’s banks, namely Bank of America, Wells Fargo, and JP Morgan Chase, et al, to cough-up a fine of $20 billion that would be re-distributed to prospective voters who are underwater, prior to the November 2012 elections. This “settlement” is for the banks “unfair and deceptive business practices” that would also open the door for additional litigation by the homeowners at a later date. The Attorney Generals of each state has the Administrations’s settlement proposal on their desks. This proposal plus HAMP and all the other loan modification programs have only succeeded in giving “homeowners the false hope that they can stay in homes they can’t afford, delay foreclosures that are probably inevitable and prevent prices from finding a bottom” according to an OPINION piece in the WSJ.
What is possibly more noteworthy here (more MADNESS) is that this settlement is the brain-child of Elizabeth Warren, the Harvard Professor who is now the head of the new Consumer Financial Bureau, that intends to dictate the allocation of credit to the nation’s banks. As a vivid example of how this administration bends the law to suit its’ own agenda, the Frank-Dodd Act required that this new agency be approved by Congress. When it became clear that Congress would deny its’ approval, President Obama gave Ms. Warren the unprecedented position to report directly to him and Treasury Secretary Tim Geithner to not only start the agency but receive funding without consent and without a budget! In case you haven’t received the message, Madness prevails and the rule of law is near terminal.
The President and his gang of leftists have taken the position that any modification of Social Security in order to reduce the deficit is off the table in budget talks. You can anticipate that anyone who questions that stance will be demonized. Unknown to Americans it was reported on March 22, 2011, in the Arizona Republic that the Social Security Disability Fund (SSDI) will run out of cash in a couple of years. Here’s one reason why.
Puerto Rico has emerged as one of the easiest places in the US to qualify for disability benefits. In 2010, 63% of all applicants there won approval of their claims – four points higher than New Jersey and Wyoming. 9 out of the top 10 zip codes for disabled workers receiving benefits can be traced to Puerto Rico. Total disability recipients have ballooned from 6.6 million in 2000 to 10.2 million in 2010. What we undoubtedly have here is a massive abuse of the system and corruption within the federal employees who administer it. The Obama Administration announced that it was sending a team to Puerto Rico to investigate the matter. It’s reassuring to know that our taxes are judiciously appropriated. What the ‘beneficiaries” – yes, that’s what they’re called – don’t realize is that the fixed monthly payments will continue each month but within a couple of years they won’t buy anything.
Is China On The Verge Of Collapse?
In a recent must see video on “Dateline” narrated by Gillen Tulloch who resides in Hong Kong, he exposes China’s “Ghost Cities” that will absolutely dumbfound the viewer. More importantly to CMV, what does this revelation mean to the global economy?
Tulloch, with film crew aboard, toured 10 newly constructed cities that, for the most part, are uninhabited. Imagine, if you can, a modern city of shopping malls, high rise office buildings and apartments that are vacant! Tulloch reports that there are an estimated 64 million vacant apartments/condos in 16 of these “Ghost Cities” that were built to accommodate millions of people. Only one problem. The Chinese can’t afford to live there. He says this represents the greatest real estate bubble the world as ever known.
The average high-rise condo costs roughly $70,000 to $100,000. Buyers must pay 50% down and pay off the balance over 3 years. (Now that the US is fazing out Fannie and Freddie we could export their expertise to China.) Tulloch interviewed one homeowner who, living in ghetto-like conditions in the shadow of the high rises, makes $900/month and would never be able to afford the luxury of the condo. Demand for the units is virtually non-existent.
The viewer is also able to preview the South China Mall which was billed as the world’s largest, anticipating 70,000 shoppers per day. Visible in an interview is one sole toy shop owner who revealed that he made one sale that day but most days he never has a customer. The interview ended abruptly as the police forced Tulloch and his film crew to leave the mall.
What does this all mean in the global scheme of things?
1. These 16 massive projects created an incredible development boom that employed perhaps hundreds of thousands of workers who now are mostly unemployed. A sea of discontent is rising in China which could challenge the autocracy.
2. These projects greatly distorted China’s GDP numbers and raises the question, who were the developers? Who is responsible for the construction loans? How are the banks recognizing these loans? Sources indicate that the Chinese banks (owned by the government) utilize “creative bookkeeping” and their published numbers will never reflect financial reality. And China is trying to become a member of the Bankster’s New World Order?
3. The global perception is that China’s economy is booming and that the threat of double-digit inflation and rising interest rates and increased banking reserves are being initiated to slow the economy when the possibility exists that the threat may be a colossal collapse of their centrally-managed economy. This event, if it should occur, would be a game changer. (Remember the Soviet Union in 1998?)
Japan, of course, has different challenges of it’s own but the fallout from the earthquake has created unexpected disruption in the global supply chain. Japan produces 60% of the world’s computer chips. Cypress Semiconductor can’t finish its’ product line with the limited output from Japan. Its’ stock (CY) dropped 25% after the earthquake). General Electric and Boeing are also faced with a shortage of parts made in Japan. Even Toyotas manufactured here in the US require certain parts that can’t be shipped from their home country. Toyota also has been impacted by its’ inability to get rare earth elements from China for its hybrids.
At this point in the Re-Flation Cycle, the US has experienced a Fed induced Asset Inflation Boom and as reported last month the advent of Price Inflation. Add to this mix the prospect of a supply disruption and a supply-demand imbalance, the traditional text book definition of inflation becomes an onerous reality.
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--H. L. Quist