Below is a preview of the CMV (Contrarian Market View) Newsletter for June , 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 YTD results for May 27, 2011 were as follows:
YTD 52 Weeks
The CMV Portfolio - 2.54%* +44.99%
Dow Jones Industrial Avg. +7.46% +22.74%
S&P 500 +5.84% +22.19%
NASDAQ Composite +5.43% +23.92%
* Realized gains in Silver and Gold shares in April are not reflected in this number. Current software does not credit any gains or losses on names that are sold YTD. CMV is attempting to find a new program that meets our needs.
Richard Russell's "Dow Theory Letters" which was first published in 1958, is the longest-running investor newsletter continuously written by the same person in the financial industry according to several sources. Given Russell's historic presence, world-wide recognition, and proven past track record, CMV readers should pay close attention to what Richard has had to say recently about gold:
"Gold-- The desperate battle to keep gold below 1500 continues. I watched the erratic action of gold near yesterday's close. I'm fascinated to see whether June gold can close above 1500 or whether the anti-gold contingent can manage to knock gold down (again) below 1500.
The action is now so blatant that it literally screams of manipulation. At its high yesterday, June gold sold at 1506.50. At yesterday's close, June gold was trading at 1498.10. It's almost embarrassing to watch the action. What we're seeing is the anti-gold crowd and the manipulators vs. the great primary trend of gold."
The battle about gold closing above 1500is that once above 1500, technically gold will be on its way to 2,000.And from there 5,000 will be the target. So 1500 is a psychological barrier that, from the bull's standpoint, must be bettered. But from the anti-gold crowd's standpoint, gold must be held (on a closing basis) below 1500.
The answer: As I see it, the primary trend of gold remains bullish. In due time, gold will gather the strength to close above 1500. The gold-bears will be defeated. It's only a matter of time.
The panic to buy gold will override everything else. It will be one of the greatest financial phenomena that most of today's investors will ever see. It will blot out everything else like a cloud blotting out the sun.
After the calm, comes the storm. We've been watching ten years of gold climbing amid an atmosphere of calm. The great gold tsunami lies ahead. It will be historic."
CMV believes this octogenarian has it right.
A Major trend , that the US and the global economy is slowing, may be developing in mid-May just as talk of a "double dip" occurred one year ago after the "flash crash." The Institute of Supply Management (ISM) index of leading indicators which gauges a broad cross section of the US economy, foretells of a slowdown. Goldman Sachs just issued a SELL recommendation on Intel (INTC) indicating that the demand for semi-conductors is waning.
In the retail sector the Gap reported a 23% drop in earnings citing increased raw material and labor costs. The Wall St. Journal article stated that analysts were "surprised" at the drop. Surprised? When the price of cotton had risen in 18 months from $.45/lb to over $2.00/lb the handwriting was on the wall but obviously some experts couldn't read the message. CMV reported months ago that bottom lines would be "squeezed" by raw material costs. Polo Ralph Lauren Corp. also reported a 36% drop in earnings which sent its' shares down 11% on May 25th. There are exceptions however. Limited Brands which owns Victoria's Secret just reported robust earnings. No wonder. Victoria's real secret is that it uses so little cotton in its translucent nighties that they were unaffected by the 300% rise in cotton!
In the casual and luxury sectors, Starbucks has priced its' favorite stimulant of choice, the latte, at $5/cup. Coffee beans have risen 164% in 5 years and management blames speculators. Jewelry retailer Tiffany reported an exceptional 25% gain in profit in their most recent quarter as the nouveau riche get richer. A unique phenomenon is occurring in consumer spending that escapes a pedestrian view. It appears to CMV that almost all increases in gross sales is coming from an increase in prices which distorts the amount of goods sold in YOY basis.
According to government officials, high gasoline prices, government budget cuts and weaker consumer spending has caused the economy to exhibit weaker growth in the first quarter than estimated. The US Commerce Dept. revised its' GDP estimate down to 1.8% for the first quarter of 2011. The final fourth quarter number for 2010 was 3.1%. Given the plethora of negative economic data, why isn't the stock market taking a hit? Bob Paisani on CNBC offered a remarkable insight. Traders are anticipating that despite claims to the contrary, Ben Bernanke will continue the QE stimulus this month. That's exactly what CMV stated in the last issue of CMV.
Just as it did one year ago the European debt crisis has festered again. Greece's band-aid fix, as forecast by CMV, didn't cure the problem and major surgery separating the Greeks from the EU will ultimately be necessary. One of the European Central Bank's (ECB) governors, Christian Noyer of France, labeled the call for a restructuring of Greece's debt a "horror scenario." Barely a year after receiving a $115 billion bailout from the ECB and the IMF, Greece is on the brink of a default, again. Then there's the remaining PIIGS (Portugal, Ireland, Italy, Greece & Spain). The problem can simply be reduced to this: The strategy of all of the central banks in the Western World is to inflate the debt crisis away. In order for that fix to work, the creation of more debt must produce at a minimum, increased growth and increased tax revenue. If a slowdown occurs, as anecdotal evidence indicates, the last resort is ominous in its result. The creation of more fiat money will ultimately lead to hyper-inflation and a ‘crack-up boom.'
What Europe and the US are beginning to experience is an "Inflationary Recession" or stated in another term "Stagflation." The worst of all worlds. Rising prices and stagnant growth. The Western World is reaching the tipping point. As CMV has stated previously, we're witnessing the beginning of the end of the western-centric fiat money system. More than ever you need to understand what is unfolding here and develop a strategic plan to survive financial Armageddon.
Philosophers, futurists, analysts and writers often speak of Paradigm Shifts, Black Swans and use other obscure terms to chronicle macro economic events that most observers can't understand or, more importantly, can't quantify or relate to. But when a reliable, knowledgeable and trusted source says, that, "There is, in fact, a paradigm shift – perhaps the most important economic event since the Industrial Revolution, occurring" it behooves the reader to not only take notice but take action.
Alan Ableson, the erudite writer for Barrons' and a mentor to CMV, introduced his readers to Jeremy Grantham of GMO, LLC in the May 16th edition. GMO is an advisor and asset manager to large institutional and individual investors worldwide, with minimum investment capital of $10,000,000. His firm is paid big bucks by big players to be right. On the GMO website you'll discover Jeremy's recent posting entitled, "Time To Wake Up: Days Of Abundant Resources and Falling Prices Are Over Forever." The bottom line is that the world is using up natural resources at an alarming rate and "this has created a permanent shift in their value."
In particular, Jeremy says the global population which now numbers 7 billion will rise to 10 billion by 2100 (according to the United Nations) and this explosive growth, Jeremy warns, will "have eaten rapidly into our finite resource of hydrocarbons and metals, fertilizer, available land and water." Ableson adds, "Despite a massive increase in fertilizer use, the growth in crop yields per acre, has declined from 3.5% in the 1960s to 1.2% today." We should all revisit the Malthusian Theory advanced 200 years ago which forecast that the world would run out of food to feed the population.
A table accompanies Grantham's piece, which estimates China's share of world commodity consumption. Some notable numbers are:
Cement 53.2% Steel 45.4%
Iron Ore 47.7% Copper 38.9%
Coal 46.9% Eggs 37.2%
Pigs 46.4% Oil 10.3%
Back in the 60s and 70s when your writer was closely involved in agribusiness, farm products such as wheat was under $4.00/bushel, corn about $2.50/bushel and gasoline was about $.25/gallon. The grains have more than doubled and of course gasoline has skyrocketed. Grantham's point is that absent a global depression on the scale of the 1930s, these prices will continue to rise. This isn't a short-term supply / demand imbalance. This is a PARADIGM SHIFT. Commodity prices have reached a "new normal."
The Fed Myth Debunked
(By The Myth Buster)
(By The Myth Buster)
Ever since the Federal Reserve Act was passed in 1913, the US Central Bank has assured Americans that it acts independently and its' monetary policy is not influenced by Congress or political pressure. David R. Kotak and Joseph R. Mason, in a Barron's article dated 5/23/11 assert that recent Federal Reserve Board appointments and new regulatory responsibilities under last year's Dodd-Frank law substantiate their claim that the Fed no longer acts independently.
It has been long assumed by most observers that the Fed's independence has been protected by the 14 year staggered terms of its seven governors. That veil of protection was eroded during the second Bush administration when Senator Chris Dodd (D-Conn) used his Chairmanship of the Senate Financial Committee to hold up the confirmation of two Bush appointees and the Board was short two governors during the worst financial crisis since the Great Depression. As a result, Fed watchers have no written record of any discussions held by the Board concerning the merger of Bear Stearns, the purchase of toxic bank debt or the failure to bail out Lehman Brothers. The Fed still operates with 5 governors.
Under the new Dodd-Frank law the Fed is to fund the as-yet-unspecified-activities of the new Consumer Financial Protection Agency, headed by an ultra-left Tzarist Elizabeth Warren, despite the fact that it has no oversight power over that agency. Kotak and Mason maintain that Congress will continue to use the Fed's balance sheet to fund various programs that circumvent the traditional appropriation process.
As a side note, you'll recall that it was the co-author of Dodd-Frank, namely Barney Frank, who publically declared in 2003 that Fannie and Freddie had no "explicit or implicit or no wink-‘n-nod guarantee" by the US Treasury that created a $160 billion loss for taxpayers. It should also be mentioned that it was Frank's demand that Fannie and Freddie adopt "quotas" that the "evil twins" make sub-prime loans to unqualified borrowers. Congress passed Dodd-Frank without the text of the regulations. We're about to discover what's contained in the Bill. Dodd and Frank were co-instigators of the financial chaos and are the co-authors of the law that governs the industry they corrupted. Gheez!.
A new threat has emerged which has promised to end this charade. Ron Paul (R-Texas) who is Chairman of the House Panel which oversees the Fed's activities has subpoena power and intends to "audit" the Central Bank. He could also introduce legislation to end the Fed as we know it.
The bottom line is that the Fed has been the key instrument in all of the 12 boom and bust economic cycles in the US since 1974 save the first one in that year, caused by the oil embargo. The Greenspan Plan in 2002 paved the way for the real estate bubble and subsequent collapse that has devastated middle class America. We're now experiencing the "Bernanke Bubble."
Read "The Creature From Jekyll Island" by Edward Griffen. You'll understand why the Fed myth has been debunked and why the Federal Reserve Act should be repealed.
The Oil Enigma
As CMV outlined in its' SPECIAL BULLETIN dated April 19, 2011, Goldman Sachs (GS) announced eight days earlier that they were selling all commodities and "demand destruction" would end the commodity rally. In particular, GS indicated that there would be a sharp decline in the price of crude oil. The market responded with a brief 15% decline in the price of crude, as well as a corresponding drop all across the commodity sector. Five weeks later (on May 24th to be exact) GS did a 180° reversal and took a bullish stand on oil. A Wall St. Journal article the following day said, "Goldman has a history of making influential recommendations to buy or sell certain commodities, including a 2008 call for oil prices to reach $200 a barrel that helped fuel the rise to record price levels that year."
No one, including the WSJ, bothered to ask the obvious. What facts changed GS's outlook on oil and other commodities in just five weeks? CMV has speculated that GS's announcement on April 11, 2011 was timed to placate the BRICS (Brazil, Russia, India, China and South Africa) who were demanding that the US "control" commodity prices and "stabilize" the USD. As an ancillary benefit, of course, traders profit from the movement in prices. They make gains on both bullish and bearish moves. A lawsuit filed by the Commodity Futures Exchange (CFTC) on May 24, 2011, accused Arcadia Petroleum of manipulating oil prices in 2008. The CFTC has more work to do.
Adding to the emerging murky oil picture is recently obtained information that has previously escaped the eye of the media and oil analysts.
Accoring to a May 22, 2011 WSJ article, the Prudhoe Bay oil discovery in Northern Alaska in 1968 (which is the largest oil field discovered in the US) gave birth to the famed Trans Alaska Pipeline which at its' peak in the late 1980s carried 2 million BBL of oil per day 800 miles overland to the Port of Valdez in just 3 days. Now, due to dwindling production on the North Slope, the pipeline only carries one third of the volume it once did and it takes 5 times longer to get to its destination. But decreased production is only the tip of the iceberg on the slippery North Slope.
As the flow of oil diminishes the freezing temperatures greatly enhances the chance of clogging which increases the risk of ruptures and spills. Ice crystals congeal wax which WSJ says "potentially turning the 48 inch pipeline into the largest tube of chap-stick in the world." The solution is two-fold. 1) Get more oil into the pipeline or 2) find a technological solution that would prevent the oil from turning into thick molasses. The Department of the Interior holds the key to increased production to solve #1. If a decision to issue new drilling permits are delayed long enough the pipeline would be forced to shut down. At that point, by law, the pipeline would have to be dismantled and a victory for the multitude of environmental groups who would gloat over its' demise while the price of crude would escalate.
Even more ominous is what is occurring in the Arabian Peninsula. Entitled, "Facing Up To The End Of Easy Oil," a feature article in the May 24th WSJ, Saudi Arabia became the world's largest producer of oil due to its' vast reserves of high-quality light crude. As the fields of "easy oil" begin to dry up the Saudi's are resorting to drilling for much heavier and thicker oil which is more difficult to recover and costs more to refine into gasoline. Wood MacKenzie, a Scottish energy consulting firm says, "The easy oil is coming to an end..." Other analysts say "peak oil" has been reached in the Arabian Peninsula and that Saudi Arabia has pumped out 50% of their reserves. The Saudi's have constructed giant boilers to pump steam into the ground in order to extract the heavy oil. The technological challenge and the cost of recovery however, pales in comparison to the growing Arab Spring revolution that threatens to disrupt production throughout the region.
One more unmentioned development that will directly and immediately impact the supply of US imported oil. Venezuela is the number four exporter to the US. America possessed one of the few refineries in the world that was able to refine the heavy-sour crude (high in sulphur) produced in Venezuela. Hugo Chavez has recently inked a deal with China which will finance a to-be-built specialized refinery with all the production going (surprise) to China.
The bottom line is clear, oil and gasoline are going to become short in supply and high in price. Refer to page 17 for suggested recommendations to deal with an inevitable outcome.
The International Malevolent Fund (IMF)
Dominique Strauss-Kahn (DSK) the head of the International Monetary Fund (IMF) recently dominated the headlines with his (alleged) sexual assault on a housekeeper in a plush New York City hotel. While most observers were focused on the sensationalism of the sordid event, they wouldn't connect the dots to a much bigger story. Namely, what is the IMF, what does this organization do and why is DSK's behavior a metaphor and a window into the clandestine activities of this powerful globalist organization?
In 2004 an insider, who was appropriately labeled an Economic Hit Man (EHM), told the compelling true story of how global organizations such as the World Bank, the Agency for International Development (USAID), the IMF and other entities have utilized taxpayer money to further empire building and funneling mega billions of dollars of profits to major global corporations. John Perkins was the EHM. The title of his book, "Confessions of An Economic Hit Man," is a tale that would rival any fictional espionage thriller. A must read!
Perkins says in his Preface:
Economic hit men (EHMs) are highly-paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from the World Bank, the U.S. Agency for International Development (USAID), and other foreign "aid" organizations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet's natural resources. Their tools included fraudulent financial reports, rigged elections, payoffs, extortion, sex, and murder. They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalization.
I should know; I was an EHM.
Once you read this book you'll understand the metaphor. These "elites" have been raping the global landscape for years in the guise of assisting underdeveloped countries. But, in the end they indentured these countries to the extent that some of their economies fail, countries go bankrupt, chaos reigns and individual lives are ruined. (Think Greece.) Of particular interest to Americans is the fact that the US contributes 17% of all the funding to the IMF and it isn't very comforting to know that we're paying a $3,000/day hotel tab for IMF heavyweights like DSK who routinely use taxpayer money to live lavishly. Of principle importance is that the IMF could play a pivotal role in the new global monetary system that would replace the US dollar as the world's reserve currency.
A case in point would be the nation of Zimbabwe. An opinion letter written on November 12, 2009 by Thoms J. Hornes (Google: IMF/Zimbabwe) is entitled "IMF Contributes to Zimbabwe's Hyperinflation." Zimbabwe printed 21 trillion Zimbabwe dollars starting in 2005 to payback its' debt to the IMF which eventually caused an inflation rate in excess of one trillion percent per annum and devastated the country. The IMF's position is that Zimbabwe didn't enact the "macro-economic and structural reforms," recommended by the IMF concurrent to making the loans. (Neither has Greece!)
Just before the Zimbabwe economy collapsed in 2009, the nation's Central Bank was issuing a 1– trillion-dollar note! The actual note can be purchased today for about $5 (US) on e-bay. There are numerous lessons to be learned from this example of globalism and banking at its worst but few, if any, understand the implications for the US of a fiat money system that is in its death throes. In the meantime, DSK lives in a lavish $14 million dollar townhouse complete with gym, pool and other amenities at a cost of $8,500/day! These elites sure know how to spend someone else's money. That's the definition of a socialist.
A Real Estate Boom Begins!
It had to eventually happen. Only the timing and circumstance was delayed. The residential real estate market has sprung to life although most industry observers don't see or relate to the events that are occurring. CMV will limit its' comments to the Phoenix metropolitan area but these observations should be germane to many metropolitan areas in the US - except Detroit.
Investor Capital inflows are dramatically changing the landscape in the residential real estate market. After meeting with several successful market movers, property managers and getting industry feedback after your writer has spoken to five real estate groups in the past two weeks, an anomaly is taking place. Investors, anxious to buy residential property are discovering that bargain-basement prices for foreclosed and auctioned homes are rapidly disappearing and available inventory, particularly under $200,000 is rapidly declining. Banks are withholding REOs (real estate owned) from the market and refusing to accept short sales in anticipation of price increases. A principal with one company that buys homes, fixes them up and re-sells them, said that "the market is returning to par," meaning that an investor is now paying close to replacement cost for a home or condo that a year ago could be purchased at 50% of par.
The anomaly that has emerged is that the absorption is principally created by investors and not home buyers and a majority of residential users would prefer (or must) rent rather than buy a home. In some cases the monthly rental could be twice the amount of a mortgage payment. At some point this "spread" between ownership and rent will revert to the norm but for the intermediate term the return on investment (ROI) is attracting an inflow of capital from all over the world and it's the driver.
Several events are happening as CMV goes to press that could propel this market on an even faster track. The House Financial Services Panel has submitted the HOUSING & REFORM ACT of 2011 to Congress which will end the taxpayer bailout (if passed) of Fannie and Freddie and create five new "little" Fannies to replace the big fat one that failed. After a year of discussion and initial resolve to find a means to replace the "evil twins" without government guarantees, the proposed law, you guessed it, includes the full "faith and credit of the US government to back the mortgages" which will attract institutional money. The key, of course, is what will be the underwriting requirements and will renters qualify to buy? Stay tuned.
CMV has reported in numerous editions that the US Justice Department, the Attorneys General of all the states and the banks have been negotiating for months to reach a settlement on a fine to be paid by the banks for "improper mortgage-servicing practices " namely the "robo-signing" and other questionable practices that came to light last fall. The government has demanded a fine of $20 billion. The banks have offered $5 billion. CMV's guess is that the final figure will be around $10 billion. This settlement is to be paid to those who were wronged in the foreclosure process. What the amount will be that finally trickles down to the homeowner is anyone's guess. Will it be sufficient for a down payment to qualify for a FHA or Little Fannie loan? Just a thought. Politically, the present administration knows that they have to solve the real estate disaster before the 2012 election.
CMV forecasts that there will be a significant decline in residential inventory by the end of 2011 in Phoenix. Combined with the continued devaluation of the USD, there will also be a rush (and possible mania) to convert dollars to hard assets with real property prices reaching unexpected increased levels in 2012, unanticipated by even the most optimistic analysts and real estate experts. All this despite a "Shadow Inventory" of about 100,000 homes that could appear on the market.
On the other end of the financial spectrum, former Alaskan Governor and Vice-Presidential nominee, Sarah Palin, has bought a 8,000 square foot home in North Scottsdale, Arizona for $1,695 million. An investor, Ian Whitman, bought the uncompleted home a year ago from J. P. Morgan-Chase Bank for $800,000 according to tax records. Less completion costs, a high ROI in one year grabs the attention of both buyers, sellers, and investigators. This story will spread through the local real estate industry like a wildfire through range grass. It can (and will) change the psychology in the market place. Absent a collapse in the Muny Bond Market (quite likely) or a US Treasury default (not likely) this moment marks the beginning of a real estate boom in Arizona! You read it here first.
The rest of the newsletter is only available to paid subscribers and includes the portfolio of recommendations.
Subscription box in in the left side bar here on the blog.
"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.
-- H. L. Quist