Wednesday, May 2, 2012

CMV - May 2012

Hello World,

The Contrarian Market View Newsletter is now free.

Listen to my podcast explaining the changes in my podcast March 26th.

H. L. Quist’s
Contrarian Market View

Market Overview

Barron’s publishes its’ BIG MONEY poll twice a year, in the Spring and in the Fall.  It reflects the responses of 125 money managers nationwide.  55% of the professional money managers responding to the Spring (April 23, 2012) poll call themselves bullish or very bullish on the outlook for stocks through the middle of next year.  Only 14% are bearish or very bearish.  The bulls expect the Dow Jones Industrials to rise by 6% through year end to 13,756 and add another 3% to reach 14,183 by mid-2013 or an approximate gain of 10% in the next 14 months.  Here are some of the other key views from the BIG MONEY pros:

What will be the best and worst industries over the next 6 to 12 months?
                                Best        Worst
Basic Materials        4%        18%
Energy                       8%        11%
Financials                  31%        16%
Technology                31%        0%
Utilities                        3%        30%

What is your outlook for these asset classes?
                                  Bullish    Neutral    Bearish
US Treasuries            2%        17%        81%
Corporate Bonds        14%        53%        33%
US Dollar                    43%        43%        14%
Real Estate                  41%        49%        10%
Oil                              29%        47%        24%
Gold                            5%        50%        44%

What will be the best performing asset class?
Equities        73%
Real Estate        10%
Precious Metals    7%

What will be the worst performing asset class?
Fixed Income        59%
Precious Metals    16%
Cash            13%

What is most likely to occur in the US in the next 12 months?
Inflation        52%
Deflation        4%
Stagflation        18%
None            26%

Will the Federal Reserve initiate Quantitative Easing in the next 6 months?
Yes        39%
No        61%

Who will win the 2012 Presidential election?
Obama    66%
Romney    34%

Although the above is a short list of questions that the professional money managers responded to what conclusions (and contradictions) can we glean from them?

1.  US equities are the Sector to be invested in despite growing problems in the EU, rising interest rates, increased taxes, and the prospect of Barrack Obama will have four more years to undermine the Capitalistic system.  CMV agrees that US equities – especially technology – should outperform all sectors up to that watershed moment in November.  Beyond that, who knows?

2.  CMV agrees with the BIG MONEY that rising interest rates off the present historic low levels will negatively impact the fixed income sector.

3.  52% of the respondents agreed that inflation would be most likely to occur in the year ahead but only 5% were bullish on gold.  That infers that the Pros see little or no correlation between the loss of purchasing power and the prospect of higher gold prices.  CMV does not agree.

One week later in Barron’s, after news that the US Gross Domestic Product (GDP) came in at a mere 2.2% vs. a more robust 3% in the fourth quarter of 2011, the sentiment suddenly took on a more bearish tone.  Multiple references were made to the sudden shift in the economy last spring when CMV changed its’ view from bullish to bearish.  Concerns of the “financial cliff” that the US faces with the expiration of the Bush tax cuts reared its’ ugly head.  Investors must keep in mind that money managers have an inherent bias to a bullish outlook for equities and a bearish outlook for alternative investments.  The money managers do not want to say anything that will motivate their clients to take money out of their accounts or seek alternative investments they don’t offer or subscribe to.  CMV retains an open mind and takes a Contrarian view.

On April 24, 2012, a new government report indicated that Social Security, which pays benefits to 56 million Americans, will exhaust its’ reserves by 2033, three years sooner than estimated just a little over a year ago.  The disability fund, which has been further depleted by fraudulent claims, will be broke by the year 2016.  Given the recent reduction in payroll taxes which reduce income to these two funds, the next estimate will accelerate the time table when funds will be exhausted.  Don’t call them “trust funds.”  Congress violated that trust years ago when borrowed 100% of the money and gave recipients an IOU at near zero interest rates to provide the benefits.  Congress has avoided the coming crisis in Social Security for 30 years.  Don’t expect that to change until the “fit hits the shan” and the Federal government goes broke.

A recent front page article in the WSJ entitled “Stunned Home Buyers Find The Bidding Wars Are Back,” indicated that buyers are bidding up prices on residential real estate due to supply shortages.  A chart indicating the changes in inventory and the months of supply available, listed Phoenix at the top where supply has dropped 43.5% in one year and a nation-leading low of only 2.4 months of supply is available.  CMV saw this coming a year ago when we interviewed several companies that had accumulated large amounts of investor capital to purchase and re-model foreclosures.  Meritage Homes Corp., a Scottsdale-based builder, just reported a 36% increase in orders for the last quarter vs. the previous year period.  If mortgage lending standards ease and if appraisals change to reflect the new market dynamics, a robust boom could be underway this year.  So much will depend on macro economic events, which are outlined below.

What you are about to read ranks near the top of the “it can’t be true” list but unfortunately it is true.

On Friday, April 27, 2012 Kimberly A. Strassel in her WSJ Potomac Watch column revealed the existence of President Obama’s “hit list” which CMV has called the “fecal scroll.”  The President has recently posted on one of his websites, “Behind The Curtain: A Brief History of Romney’s Donors” and proceeds to shame eight private citizens who donated funds to his opponent.  He described the donors as all having ‘less than reputable records’ and that “quite a few” have also been “on the wrong side of the law” and profiting at “the expense of so many Americans.”  The President, who has the power of the IRS, the INS, the Justice Department, the DEA and the SEC has just put these names (with more to come) on “wanted” posters in government offices according to Strassel.  The President and his minions of far-left radicals are using intimidation of the worst kind to scare the public into not contributing to Mr. Romney.  You can assume that Strassel, the WSJ and any other writer (including CMV) who outs the President in an unfavorable light will also be targeted.  Strassel says, “If Mr. Obama isn’t going to act like a President, he bolsters the argument that he doesn’t deserve to be one.”  Amen.

Events That Changed Our Lives

Historians gather the facts of past events, dissect them, and offer us a meaningful picture of not only what occurred but relate the future impact that these events had upon our lives.  Some monumental events and their outcomes weren’t assessed as such at the time and were recognized later.  Others were so subtle they escaped the focus and the meaning of their happenstance which greatly impacted us and will continue  to shape our lives.

The following is CMV’s historical perspective of past life-changing events in America with the intention of preparing you for a future event that could soon occur which will most certainly be a demarcation point in American history.  Rarely do we have the opportunity to have insight to a future event and make preparations accordingly.

October 29, 1929 – The Stock Market Crash and The Great Depression

A limited number of insiders knew that the crash orchestrated by the Federal Reserve was coming and preserved their wealth while perhaps 98% of the population lost everything in the next few years.  What no one knew was that the aftermath would last for 12 years.  Franklin Delano Roosevelt (FDR) took office in 1933 and embarked on an all-out Keynesian New Deal of government intervention and spending that set a precedent for our present administration.  By 1936 unemployment dropped from 25% to 15% and it appeared to most Americans that recovery was taking place as FDR easily won re-election.  FDR, however, made a colossal blunder when he promoted a massive tax increase on the rich of 70% and by 1938 the country suffered a recession within a depression.  Many historians, and certainly Progressives, fail to recognize or admit that the New Deal failed.  Secretary of the US Treasury Henry Morgenthau accurately summed up the outcome in 1939 as follows:

Angry at the Keynesian spenders, Morgenthau confided to his diary May 1939:  "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot."  – The Journal of Economic History, Vol. 43, No. 2 (Jun., 1983) (quoted with reference in  wikipedia).

December 7, 1941 – The Attack on Pearl Harbor

World War II ended the Great Depression.  Within a year after the attack every able-bodied male over 18 and under 60 was employed in the military or, often like my father who had a rheumatic heart condition, were employed in defense industries.  For the first time women left home for strategic jobs that had a lasting impact later on the American family, but few assessed its’ significance at the time.  Few historians relate the influence that Winston Churchill (a distant cousin of FDR) had on getting a reluctant US population into the war.  A strong case can be made that FDR “goaded” the Japanese into the attack and US intelligence knew it was coming.  The Atomic Bomb ended the War but it also initiated an ever-present fear that influences us today.  It was a Capitalist system and America’s unmatched work ethic and dedication that built the greatest war machine in the shortest period of time in world history.  The inescapable lesson however, that we can’t ignore, is that when all efforts fail to revive the economy, a war can be the cure.  Is the Mid-East next?

November 22, 1963 – JFK’s Assassination

Some historic events do not precipitate a change in our lives but mark a societal departure from the past.  JFK’s assassination has been referred to as the “Death of Innocence” and it did mark a young generation’s rejection of moral and ethical mores of a past conservative period in time.  The “Occupy Wall St.” movement has been gathering momentum for over 40 years and this entitlement mind-set will play a pivotal role in the breakdown in civil society that lies ahead.

August, 1971 – Richard Nixon’s Metamorphosis

This is one of history’s most subtle events that has dramatically changed the lives of All Americans.  Your writer was returning from a weekend of water skiing and beach time with his family on that Sunday in August, 1971 when Richard Nixon made his historic-making announcement from the Oval Office.  NO, it wasn’t his resignation.  The President revealed that the US would no longer exchange US dollars for gold bullion at $35/oz with foreign governments.  The world was awash in US fiat dollars and millions of ounces of US gold had already left Ft. Knox at the absurdly-fixed price of $35/oz.  Anticipating that there would be a sudden devaluation of the USD the next day, Nixon also announced that he was going to institute wage and price controls on all US goods and services!  It was important and thus memorable to your writer since we owned a number of rental properties and that meant the dreaded “rent controls.”  Nixon proudly announced that he was now a Keynesian.

The USD did indeed decline – a resounding 7.5% but Henry Kissinger negotiated a deal with a reluctant Saudi Arabia to accept US fiat “petrodollars” in exchange for oil.  OPEC, after accepting a declining USD for oil for 2 years announced on October 17, 1973 that they would no longer export their oil to the US.  Every American was affected.  Most had no clue what macro monetary events had occurred that created this crisis.  The Deflation that followed ended the wage and price controls, but created enormous economic imbalances that led to the rampant double-digit inflation in the late 70's.  Nixon is remembered for Watergate and his resignation.  That event had little impact on our lives.  Nixon’s metamorphosis to Keynesian economics began America’s road to serfdom.  In 1971 the US Federal debt was a mere 38% of GDP.  It is now nearly 100% and the USD has lost 80% of its purchasing power since then.  A Federal debt and unfunded entitlements totaling $100 trillion are America’s Waterloo.  This Administration’s plan to confront this issue will grossly impact every American except the uber-rich and it could destroy our middle class which is already teetering on the brink.

September 11, 2011 – The 100 Year Religious War Begins

The visible agony of this event re-awakened our psyche of the attack on Pearl Harbor 60 years prior.  For a brief shining moment America was united once again but within six months it was apparent that we were no longer the nation of the past.  For purposes here we will focus on the economic ramifications.  The stock market crash of April, 2000 and 9-11 caused a significant reversal in consumer sentiment as fear dictated our reluctance to spend.  An overt opportunity presented itself for the “Merchants of Debt” to create a vehicle that would drive obscene profits for the Banksters and the consumer-homeowner into bankruptcy.

October, 2002 – The Greenspan Plan

When Ben Bernanke, then Vice-Chairman of the US Federal Reserve Bank, gave his infamous speech in 2002 your writer knew a major Fed initiative was about to unfold.  You should recall that Mr. Bernanke said there would never be a depression in this country (again) because the Fed has at its’ disposal a new technology called the “printing press.”  If that didn’t work he offered, the Fed could drop $100 bills from helicopters to start a spending spree.  The audience laughed but they should have cried.  The Masters of the Universe (MOTU) on Wall St. knew (as your writer did) that it was time to get fully invested and thus began the Great American Re-Fi that affected just about every citizen not only in the US, but throughout the world.  The powerful Troika of Wall St., Congress and The Federal Reserve created an unprecedented scheme that your writer determined by as early as 2005,  was doomed to fail.  Well documented in The Aftermath of Greed... and the sequel How To Profit From The Coming Inflationary Boom..., the Greenspan Plan was hatched on the assumption that:

    1.  Real property values would not decrease more than 5%, and
    2.  Interest rates would not increase.

A seriously flawed strategy.  Your writer’s July, 2005 program to deal with the impending crisis was “Downsize Now and Securitize Your Future.”  Few bought it, but everyone paid the price for not seeing the coming ‘aftermath.’

September 15, 2008 – Lehman Bros. Takes A Fall

The manic boom was long over prior to this date but when you had prominent CNBC hosts like Larry Kudlow saying, previously, that this event was a sub-prime real estate problem and the equity markets would not be impacted, investors bought into his and other’s “line” and the party continued a full two years beyond its true demise.  The unfortunate legacy of this event, which will equal the Crash of ‘29 when it runs its full course, and its’ aftermath is:

1.  None of the miscreants, including the instigator and author of the plan, have acknowledged their role in the devastation that has followed and none have gone to jail,

2.  These MOTU and their abuse of power paved the way for election of a Marxist revolutionary who has succeeded in aggravating the problems plaguing America.

3.  The Nation’s unsustainable debt bubble now allows for the devise of a desperate plan that will relegate the United States of America to a subservient status.

July 4, 2012 – EOAAWKI (The End Of America As We Knew It)

Numerous well-informed sources* are speculating that the US has already entered into an agreement with China that proposes to Re-Balance The Global Economy.  The formal announcement could come as early as July.  (Hence the arbitrary date of July 4th, chosen by CMV which may become to be known as DEPENDENCE DAY.)  Whether it’s July or another date is not material.  The principal significance of this currency plan is that it will mark the beginning of the end of the Western-Centric fiat money system, a system controlled and dominated by the British pound and the US dollar for almost two centuries.  China has not, up to this date, been a member of this August “club” and is now prepared to take a prominent role in a new global monetary system.  Make no mistake – it is the pending collapse of the European Union and the euro and the United States and the dollar that will elevate China and the BRICS (Brazil, Russia, India, China, and South Africa) to a prominent role in the global governance that they so desperately covet.  We are witnessing, much sooner than experts had forecast, the transfer of wealth and military power from the West to the East.  The CHINA ERA is about to begin.

Aside from the evidence CMV offers to you below (online references) what proof does CMV have that supports a new currency plan?

1.  CMV broke the news a year ago that the BRICS (led by China) formed the Shanghai Co-Operation Organization for the purpose of trading amongst themselves without using the USD.

2.  China, Russia, and India have been accumulating massive amounts of gold bullion ostensibly to back their currencies or a new currency.

3.  Most of OPEC will not accept USD for payment of oil.  Iran sells primarily to Russia, China, Japan, South Korea, India and the EU, and has circumvented the present western-controlled banking system.

4.  On June 1, 2012, China opens the Pan Asian Gold Exchange (PAGE) to compete directly with the London Metals Exchange and the US COMEX.  Gold will not be priced in USD at the PAGE.

5.  The Chinese yuan is now, for the first time, available for trading in New York, London, and other major markets in order to compete with the USD, the euro and the pound.

In essence, there has already been a de-facto abandonment of the USD as evidenced above but at present the USD has not significantly retreated in the Forex Market.  In general, what would happen if the USD loses its’ status as the world’s reserve currency or is one of the basket of five currencies that will take the place of the USD?  CMV doesn’t know what is coming down, if anything, but the diminution of the value of the USD would mean:

1.  The cost of imported goods will increase in price, which includes just about everything.

2.  Americans could experience a significant increase in the cost of living (inflation) without a commensurate increase in income.

3.  Interest rates could suddenly spike.

4.  Bond yields could suddenly rise and their market value will fall.  The present bond bubble inflated by 30 years of declining yields could burst.

5.  US goods will be more competitive and manufacturing should increase creating more jobs.  The US Administration will claim that this re-balancing program is good for the US and downplay the negatives.

6.  Gold bullion and other precious metals should reach new highs within a relatively short period of time.

7.  The demand for hard assets including real estate should increase despite the increase in interest rates similar to the period 1976 to 1980.  US equities should increase in value until interest rates rise significantly.

This perspective by CMV is simply an attempt to give the reader a “heads-up” on what could occur. Be alert and look for the clues that a major change may take place.  Unfortunately, we have a President whose ideology promotes the destruction of Capitalism and the reduced prominence of America on the world stage.  The Global Re-Balancing Program corresponds with his goals.  He must not be allowed to fulfill them.

James Davidson,

Porter Stansberry, “China’s 5 Year Plant”

Larry Edelson. Weiss Research, “The Great Betrayal of 2012"

The Great California Exodus

The Opinion section of the April 21-22, 2012 edition of the WSJ featured the above entitled piece which was an interview of Joel Kotkin by Assistant Editor Allysia Finley.  Kotkin is a leading US demographer and “Truman Democrat” who cites what is driving the middle class out of the Golden State.

Once the Mecca of ambitious and creative minds that fostered companies like Intel, Apple and H-P, the fastest growth entity now in the Golden State, according to Kotkin, is government and its’ product is red tape.  According to the Tax Foundation, California has the 48th worst business tax climate and its’ personal income tax is highly progressive and is the third highest in the US.  And, Governor Jerry Brown, like his mentor, Barrack Obama, wants to raise taxes on millionaires.  The dynamic that will ultimately (soon) turn the California dream into a nightmare is that the State’s progressive policies are driving out the moderate and conservative middle class and its’ remaining constituents become even more left wing.  Kotkin says, “the state is run for the very rich and the very poor and the public employees.”  Nearly 4 million people have left the state in the last two decades.  Kotkin says, “Almost all the major tech companies have moved stuff to Salt Lake City.”  Apple just announced that it is building a $304 million campus in Austin, Texas and adding 3600 jobs there. The message for Barack Obama is that states without an income tax are experiencing much higher growth rates than the national average, but that fact will be ignored.

What Kotkin doesn’t mention is the business and family exodus to Arizona.  A new mandate in California requires that a third of the state’s energy must come from renewable sources like wind and solar by 2020 and California’ current electrical costs are already 50% higher than the national average.    California companies can warehouse goods in Arizona at 50% to 75% less than in the Golden State.  Comparable homes can be purchased in Arizona at about one-third the cost in the coastal area.  Residential sales by California residents has been propelled with recent liquidity in the real estate market in certain California areas which is allowing the citizens to move.  Commercial and residential Realtors should aggressively market to our western neighbor.  Last summer the State of Colorado flew a plane up and down the beaches in California with a banner inviting residents to come to their state.

The most outrageous case of hypocrisy has taken place in the Bay area.  Readers will recall the President’s hyper-promotion of “shovel-ready jobs” as an integral part of his massive stimulus bill.  One such project was a $6 billion bridge from Oakland to San Francisco.  The President and his legions of policy wonks crowed continuously over the jobs, jobs, jobs that this and other projects would create. The big day came and lo and behold the bid for the bridge was awarded to a Chinese firm!  To add insult to injury the construction company imported Chinese labor to work the project.  Bay area unions were incensed.  Remarkably, the story broke on ABC by Diana Sawyer.

The President’s Slippery Slope

Peggy Noonan, who provides insightful sensibility every weekend in her Declarations column in the weekend WSJ, has two recent pieces that foretells that the President’s image as “Mr. Cool” is slip-sliding away. On April 1, 2012 Peggy opined that “Obama increasingly comes across as devious and dishonest” and is “an operator who’s not operating in good faith.”

To Wit:

The “shift,” Noonan says began on January 20th with the President’s mandate that agencies of the Catholic Church would have to provide birth-control services the church finds morally repugnant.  Faced with a sudden and forceful blowback the President offered an “accommodation” that even his supporters found as devious.  “Not ill-advised, devious” claims Noonan.

Then there was the open mic conversation with Russian President Dmitry Medvedev where President Obama said, he would have “more flexibility” in his negotiations with the Soviets once the election is over, assuming of course that he will be victorious.  President Obama didn’t even bother to offer an explanation and joked about the incident during a later meeting.  “It was all so.. creepy” says Noonan.  Like, how many other off-the-record deals have been made.

Noonan’s point is that the President had about two years to form a bond with the broad electorate. He had a limited period of time to understand what the real concerns of the American people were which was a “looming financial calamity, unemployment, declining home values and foreclosures,” according to Noonan.  The new President never understood our concerns.  His ideas came from his “hermitically-sealed inner circle which operates with what seems in an almost entirely abstract sense of America,” Noonan wrote.  So, the primary focus was on health care and alternate energy and the wasteful loss of billions of dollars to his most ardent contributors.

The net result is this, Noonan opines, “Something’s happening to President Obama’s relationship with those who are inclined not to like his policies.  They are now inclined not to like him.”

Noonan’s even more compelling piece entitled “America’s Crisis of Character” appeared on April 21-22, 2012.  A Gallup Poll completed that week indicated, that only 24% of the Americans polled feel we’re on the “right track” as a nation.  That’s a historic low.  Most would attribute that to a poor economy.  Noonan believes, however, and CMV concurs, “People are finally worried about America’s character and what kind of adults we are raising.”

A few examples graphically illustrate that something is terribly wrong:

•   A tourist is beaten and robbed in Baltimore witnessed by a group of young people who are so busy taping it on their smart-phones that no one helps the victim. The youtube video not only displays the gruesome incident, it reveals the laughter of the young people.

•   Then there are the surveillance tapes of teenagers who swarm into stores, steal everything they can and run out.  Numerous incidents occurring all over the country are referred to as “flash robs.”

•   The highly publicized General Services Administration’s (GSA) scandal of a lavish four-day conference in Las Vegas, should present a visual of not only wasteful spending of taxpayer money but the videos of GSA employees mocking and joking about being on the taxpayer’s dole.  Not long ago government employees were considered as mindless bureaucrats and drones.  Now they are “cool” – way too cool and decadent.  There isn’t even a remote possibility that any of them think they have done anything wrong.  The GSA doesn’t need to be reformed.  It needs to be dismantled.

•   The US Secret Service was considered the “best of the best” as government employees.  We all had the image of them as firm, athletic men, dressed professionally in black suits and ties who were tough and disciplined and most importantly of all, were prepared to take a bullet for the President.  But this is the “Obama Era.”  The agents in Columbia were dressed in t-shirts, wrinkled khakis and sweaters and looked like members of a dysfunctional college football team.  While in Columbia planning for the President’s attendance at the Latin America Summit, the SS men invited 20 or more “working girls” to their hotel rooms.  Fortunately for Americans who still care (and we’re a rapidly dwindling number) one of the hookers demanded an $800 payment for services.  When the SS agent offered $30 a fracas broke out and the local police were called.  Aside from the question of potential compromise of security, what this incident reveals is that people of strong moral character who make critical decisions involving national security is no longer a prerequisite for the job.  On a minimum basis, you would think that SS agents would know how to be serviced secretly.  These are the President’s men.  They’re a reflection of him and the image is fading.

•   Closely associated with this incident but even more indicted is the LA Times story and picture revealing US troops in Afghanistan who posed with bloody body parts of suicide bombers.  A US soldier who brought the pictures to the Times was “very concerned about what he said was a breakdown in...discipline and professionalism” amongst our troops.  The US has ordered our young people to perform mission impossible in Afghanistan and the morale of men and women is deteriorating – rapidly.

In his books and ruminations for many years, your writer has often decried the decline of America’s moral and the ethical culture.  It began in the 1960s but most young people and their parents welcomed the change as a liberation from the conservative and restrictive confines of our past.  Progressivism has succeeded in destroying the character building teachings of prior generations and each decade and each generation that has followed has diluted America’s moral and ethical base.  We’ve now arrived at what CMV has termed EOAAWKI – The End Of America As We Know It and the terrible consequences are at hand.

The Abuse Of Freedom Will Result In The Loss Of It.


The “Toxic Twins”

CMV has reported on numerous occasions of the running battle between the Obama Administration and Edward DeMarco who was appointed by this Administration as acting Chief of the Federal Housing Finance Agency (FHFA).  DeMarco’s job was to preserve and protect the assets of Fannie Mae and Freddie Mac in the taxpayer’s interest.

Mr. DeMarco has been under enormous pressure from the Obama Administration to write down the principal on millions of home mortgages now owed by the “evil twins” or as the WSJ refers to them. – “The Toxic Twins.”  The Democrats are determined to fire their hire or in the alternative, find a way to circumvent him.  DeMarco maintains that FHFA’s research shows that if a borrower is in distress, writing down a mortgage can cost more for taxpayer’s than other loss-modification strategies.  He also believes that economic models can’t capture the risks of moral hazard. In addition, about 80% of homeowners who are underwater continue to make their mortgage payments so why should taxpayers subsidize those who can afford to pay?  And, of course, homeowners could stop making payments if they knew the government will reduce their debt.

Mr. DeMarco is steadfast but the US Treasury intends to make him an “offer he can’t refuse.”  The Administration wants to use $20 billion in leftover Troubled Asset Recovery Program (TARP) funds to subsidize these write-downs.  DeMarco appears willing to compromise given his “prospective” alternatives.  Rather than use these funds to pay down the federal deficit you can bet mortgage reductions are coming and the losers are Americans who pay their mortgages on time.

The China Purge

The convoluted mystery of the apparent murder of British citizen Neil Heywood and the expulsion of former Chinese Chongqing party chief Bo Xilai gets dicier.  Now it appears that Bo’s wife Gu, may have played a role in Heywood’s murder.  Bo’s real problem appears to be his reactionary “Maoist” views and his ordered closing of Wal-Mart in his Province .  Ironically, the government shut down any reference to the scandal on the internet providing evidence that totalitarianism is still alive and well in China.  It appears that China’s internal security chief Zhou Tougkang, a member of the Politburo and a close friend of Bo, is also in the “cross-hairs” of party chief Hu Jintao. There’s no question that an internal purge is taking place in China and no one knows when and where it will stop.  The impact on economic decisions is also in question.  How does all this play out given the prospect of an anticipated US currency re-balancing program with China and the BRICS?  Who knows, but in all probability Hu will prevail and economic considerations will trump the messy purge and the death of Mr. Heywood will remain a mystery.  Where is James Bond when he’s needed?

Pink Slime

The beef industry calls the product “finely textured beef.”  ABC News called it “pink slime” and the public promptly reacted by not buying hamburger and beef prices plummeted.  As CMV has previously reported the massive and persistent drought in the southwestern US has forced ranchers to sell their herds because they couldn’t afford to feed them.  Live cattle spot futures had risen to over $1.30/lb and feeder cattle to nearly $1.60/lb.  Since the media-contrived-scare, future prices have dropped over 10% and McDonald’s and supermarket chains have stopped carrying hamburger with the additive.  So, what is this seemingly grisly product?  Finely texture beef begins as fatty trimmings of cow flesh from which the fat is removed, treated with ammonium hydroxide gas, then mixed with untreated ground-up cow flesh to reduce bacteria and create most of the hamburger Americans eat.  As a result of the media scare one meat processing plant has shut down and another has filed for bankruptcy and hundreds of jobs have been lost.  What has been gained?  A short-term decline in beef prices which could have been orchestrated by those whose focus and bias is to convince the American public that there is no food inflation.  On the positive side, a further erosion in the public’s confidence in the media.

Note: As CMV goes to press word comes that a case of Mad Cow Disease has been discovered in California.  Health officials assured the public that there wasn’t a threat to the nations’ food supply.  Cattle prices, however, took another plunge.

The Everyday Price Index

Closely related to the above distortion of fact is CMV’s persistent harp on the Bureau of Labor Statistics Consumer Price Index (CPI) which numbers are deliberately flawed to convince the public that there is no inflation.  The American Institute for Economic Research (AIER) has developed its’ own index for consumer prices which it calls the Everyday Price Index (EPI).  AIER maintains that food, fuel and prescription drugs are skyrocketing in price which the US Government ignores.  Their EPI jumped 1.3% January and 1.1% in February which on an annualized basis is well in excess of 10%!  For the same two months the government’s CPI increase was a minuscule 0.4%.  By EPI’s measure, costs increased 8.0% last year vs. 3.1% for the CPI.  As a forecast of things to come AIER thinks inflation could exceed 15% next year.  That number doesn’t include the potential impact of the Global Re-Balancing Program.

* * *

Sector Overview

1.  Cash & Fixed Income

During March we experienced a remarkable increase in yield of the 10 Year T-Note of almost 20% from 2.00% to 2.40%. April saw a reversal of this bias to higher rates when yields fell to 1.93% at month’s end. In part, due to the stream of disappointing economic data including the 2.2% GDP number, according to Randall W. Forsyth at Barrons’ who writes the Current Yield column.  Forsyth points out that auto production added a full 1.00% to the GDP number and that would likely not continue.  We need to keep in mind that the BIG MONEY poll, above, indicated that 81% were bearish on US Treasuries and 59% said that fixed income assets (bonds and utilities) would be the worst performing asset class.  At some point selling short this Sector could produce outsized returns.

2.  US Equities

The consensus after the markets excelled first quarter was that a correction was due in April and the cries of “sell in May and go away” were heard up and down the street.  Then came the last week in April and blowout numbers from Apple (AAPL) ignited a fire under this Sector that restored about 2% to the losses posted in the 3 weeks earlier.  What was also apparent was that the market was shrugging off bad news.  As the rain in Spain was not mainly in the plain and Spanish government debt exceeded 6% and sovereign debt was downgraded by S&P, the market appeared to ignore the problems in the EU unlike last summer when US Equities were held captive to EU woes.  Even corrupt corporate practices by Wal-Mart stores who ostensibly paid bribes of $24 million to Mexican officials in order to develop its’ operations south of the border didn’t get much downside traction in the US market except for Wal-Mart stock itself.  Corruption at the corporate and political level is prospering in the US.  As Alan Abelson so eloquently states in his “Up & Down Wall Street” column, “No matter what some denizens of Wall Street profess, principle, is not, and never has been, a synonym for principals.”

3.  International Equities

There is so much to report here we can’t possibly cover it all.  A few key issues:

ARGENTINA: President Christina Kirchner has “nationalized” the Spanish oil company YPF by expropriating 51% of the shares owned by Respol.  Kirchner, called a “thug” by global observers, has resorted to the same Marxist bent as her predecessor husband who was at the controls when Argentina went broke in 2001 and defaulted on its’s sovereign debt.  On the surface most observers believe that foreign capital will flee the country and hyper-inflation will again destroy the economy.  CMV speculates that a new player, China, could enter stage left.  Given the unknown, sell all Argentinian assets if you have any.

EUROPEAN UNION: Despite respectable earnings, 3 of Europe’s largest banks, Barclays, Deutsche Bank and Santander are bracing for trouble (WSJ, April 27, 2012).  The first quarter was strong but there’s an economic slowdown and potential defaults ahead.  The ruling party in Holland that is promoting austerity to remediate its’ fiscal duress, has collapsed.  It also appears that Nicolas Sarkozy will surrender his control of France to a socialist who has run on an anti-austerity platform.  There’s a schism in the EU.  The German’s and the Nordic countries want austerity.  They are now a minority going forward.  No one wants to admit it but the EU and the euro could fail much sooner than later.

ICELAND:   Former Prime Minister Geir H. Haarde is the first and only political leader in the world to be brought to trial for his involvement in the global financial crisis of 2008.  He was found guilty on one charge – neglect of his duties for not holding as many meetings as needed.  The judges concluded that Haarde could have done little to change the outcome and he received no sentence.  The Masters of the Universe remain undefeated.  MOTU 256 - Taxpayers 0.

RUSSIA:   The Obama Administration’s State Department is ceding over eight islands in the Aleutians chain that are part of Alaska to the Russian government without any consideration of value.  The area is known to contain oil but drilling is prohibited by the US.  What will the Russians do?  Drill baby drill!  Another egregious abuse of executive power.  It won’t stop until Americans stop him.

4.  Hard Assets

The big news in this Sector is the President attempting to divert rising voter angst over rising gasoline prices from himself to someone else.  As he asserted on April 17, “an irresponsible few” may be “illegally manipulating or rigging the energy market for their own gain.”  Like so many other claims that this President, who now is being characterized as Pinocchio, has made, this assertion proved to be – let’s say disingenuous.  John Felmy, Chief Economist for the American Petroleum Institute, explains, “If you argue that the price is artificially high because of speculation or manipulation, then you have a situation where the price is above the intersection of the supply and demand curves.  If this is the case, then you should see inventory building up.  And, they are not.”

Better yet a more revealing stat appeared in the April 27th edition of the WSJ that listed the average oil prices at which Persian Gulf governments have to receive for Brent Crude in order to breakeven.   Bahrain and Algeria have to receive over $120/BBL to breakeven.  Saudi Arabia is $75/BBL and the lowest is Qatar at about $55/BBL.  Oil prices aren’t going lower unless global demand falls off a cliff.  Investors should have a stake in the oil patch.

5.  Precious Metals

Gold as well as the entire Precious Metals Group (PMG) has been in a downtrend since the major break from the all-time high (in nominal terms) in September 2011.  After hitting a low of $1525 in December 2011, there was a robust rally that almost reached $1800/oz by March.  Then another sell-off that has created a wedge or flag pattern for the past 2 months ending with an uptick to the close of $1664/oz on April 27th.  So, where do we go from here?  Technicians say all pennant or flag patterns breakout when they narrow down to the end of the flag.  Gold could breakout north or south.  Dennis Gartman says that “Gold’s decade-long bull market is dead.”  He’s said that before and offers no apology when Mr. Market proves him wrong. Alan Newman, who writes Cross Currents, sees the next move for gold will be sharply higher but cautions that the equity and gold market could suffer a correction before that happens.  Jim Dines (The Dines Letter), the man who knows more about gold than Gartman would ever hope to, sees a major turn around in bullion and gold stocks in August.  Jim has been right so many times, calling major moves in gold, rare earths, uranium and the equity markets, you have to be a fool to ignore him.

CMV marries the technical with the fundamentals.  Fundamentally, the Global Re-Balancing Program will supercede all other factors which will take gold to new highs.  The charts tell us that the move is not far away.

6.  Commodities

As CMV has pointed out above, food inflation is poised to reach double digits (see page 12).  By bar-b-que time this summer beef prices will resume their climb and the shortage could become critical.  The US just sold the largest shipment of corn ostensibly to China and supply could become a major factor depending on this year’s harvest.  All investors should have a stake in this Sector.

7.  Real Estate

Please refer to our comments in Market Overview. CMV is comforted by the fact that our bold forecast that both the residential and commercial markets would improve considerably over the past year.  Forgotten by most is the dire predictions made by Case-Schiller and other experts who didn’t see any improvement in absorption and prices for years to come.  Being a Contrarian has its’ rewards.  Our only error is that all the incredible economic events of last year delayed the current activity.  We hope our view assisted you in your planning, marketing and investing.

8.  Special Situations

We could reiterate last month’s view on this Sector and remain 100% accurate in our assessment.  Gold and silver explorers are the most unloved, under appreciated and undervalued sub-sector in the market regardless what drilling results are released.  The reality is that senior and junior miners must add reserves to their rapidly depleting underground supply of ore.  It’s almost an axiom that the seniors will wait until the price of bullion rises to acquire reserves, when they could make cheaper acquisitions now.  That day is coming.  The time to buy the microcap explorers is when there’s no “love” in the air.  Be a suitor not a seller.

A good case in point is Uranium (Ux). China is on the prowl to acquire large quantities of Ux from companies around the world and according to the China Daily the Chinese are looking to make acquisitions in Canada.  As we reported last month China has 15 reactors in operation at present, 25 under construction and 50 more in the planning stage. Their appetite for feedstock is massive.  They’ve already made acquisitions in Australia and Africa.  CMV suggests that you subscribe to The Dines Letter to obtain his list of explorers that could be buyout candidates.

Call me at (602) 840-4117 to discuss strategic planning.

-- H. L. Quist

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