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H. L. Quist’s
Contrarian Market View
Newsletter
Market Overview
Every six months Barron’s conducts a survey from 10 members of its’ RoundTable who are recognized as experts on the equity and bond markets. The shift in their outlook from January to June is remarkable and foreboding. Eight of the panelists were bullish to very bullish as 2012 began but their mood as changed, as reflected by the title of Lauren R. Rublin’s, Barron’s, June 11, 2012 feature “Caution: Sharp Turns Ahead.” Here are a few of their consensus views:
● The “investment legends” on the panel are worried about the state of the world, in particular Europe, where sovereign debt woes could lead to more bank failures and mounting investment losses.
● The panel is concerned about China’s slowing economy.
● The experts are also concerned about the so-called fiscal cliff of automatic tax hikes and spending cuts that will take effect in January 2013 unless a lame duck Congress rescinds them.
● Most of the Pros expect the Federal Reserve to launch a third round of quantitative easing in an effort to juice the economy and rouse the job market but they don’t expect QE to be successful.
What is remarkable here is that with the exception of Felix Zulauf and Marc Faber, most of these panelists are normally perma bulls. They make their home with firms that manage assets and certainly don’t want to take a position that would discourage or dissuade investors from keeping their funds under their management.
CMV has consistently relied upon Felix Zulauf, who is President of Zulauf Asset Management in Zug, Switzerland, for not only his view from abroad, untainted by Wall St. incest, but he is one of the few who is not afraid to tell it as he sees it. Anyone who calls Zug home must be unvarnished. Grab yourself a stiff drink. Here’s what Felix says, which is not too different from January:
● “The industrialized world is burdened by a calamitous mountain of debt. In the next 12 months, the financial system is at risk of collapsing.”
● “I expect the disintegration (of the EU) to begin in the second half of this year.”
● “In the past 10 years the notional value of derivatives worldwide has grown from $100 trillion to almost $800 trillion...It is a dangerous situation.”
● “China won’t be able to save us as they did in 2009. Most US-focused investors might not understand it as they see (US) corporations doing well.”
● “The potential exists for a broad-based nationalization of the credit system, capital controls and dramatic restrictions on financial markets. Some might even be closed for some time.”
● “I also continue to recommend buying gold if it breaks below $1500. That could lead to a shake-out in the $1300's, but gold will offer protection in the coming years because it is true money.”
● When asked if there was any opportunity in equities, Felix replied, “Only on the short side.”
Downright sobering, but do not ignore what Zulauf has to say.
One of the barometers to support Zulauf’s views is the precipitous drop in oil prices. Brent crude has fallen from $126/BBL to $90 or more than 25%. Most OPEC countries will soon be selling oil at a loss if crude plummets further. The obvious culprit is a slowing global economy and no infusion or QE from the Fed. Another dynamic has also emerged. US domestic production has created an excess supply in North America! CMV encourages President Obama to take credit for the reduction in the price of gasoline. We hope you get the duplicitous over-reach.
The US market reacted unfavorably to the non-reassuring Fed comments after the FOMC meeting on June 20th. Wall St. was expecting QE 3. Alan Abelson said in his “Up & Down Wall St.” column:
“Bernanke and Co. would unveil some ingenious scheme to get the economy’s adrenaline flowing again and enable it to free itself from the deepening malaise into which it was sinking...for all intents and purposes he (Bernanke) has as the cliche goes, run out of ammo and he knows it.”
Abelson’s choice of the word “malaise” was insightful and historic. You will recall that Jimmy Carter used that term to describe the condition of the US economy in the late 70s. Carter’s address to the nation came to be known as the “Malaise Speech” and was a lynchpin that led to his defeat in 1980. Omens are ominous and omnipresent.
CMV has a reputation for “connecting the dots” when most will only see them as “spots.” It was recently announced that there was a merger of the Rothschild Investment Trust of Europe and the US based Rockefeller Financial Services. Tyler Durden of zerohedge.com termed the new entity “Rockchilds.” To 99.9% of the world population this would garner no significance. To the 00.1% who know who the Bildenbergers are and who really call the shots in the global political and banking arena, the merger is a harbinger. Both of these banking families bought assets worldwide at pennies on the dollar after the crash of 1929. Could it be that New World Order elites are pooling their assets for the next big opportunity? The EU is being “looted” as we write.
Last month CMV informed its’ readers that the Federal Reserve had approved the location of three Chinese government controlled banks to not only operate in the US but to make acquisitions in our country. Let’s play a game of Chinese Checkers:
● There are reportedly as many as hundreds of banks in the US that are under “watch” for insufficient capital and are prospects for closing and/or merger.
● The Federal Deposit Insurance Corp. (FDIC) is undercapitalized and does not have the funds to pay depositors of shuttered banks.
● The Chinese government owns over a trillion of US Treasuries and other securities and wants its’ yuan or renminbi to become the world’s reserve currency.
You don’t suppose that China and the US have struck a deal that allows the Chinese to lever its’ trove of US debt, that could become of questionable value, and, at the same time take its desired first position of prominence in the dying Western-Centric Fiat Monetary System?
Anna Swartz, the wife of Milton Friedman and co-author of A Monetary History of the United States, written in 1963, recently died at the age of 96. Anna and Milton had argued that mistakes that the Federal Reserve made in the 1930s turned the stock market crash into the 10 year Great Depression. In 2002, Ben Bernanke, then a Federal Reserve Board Governor, honored Mrs. Swartz by saying:
“I would like to say to Milton and Anna: Regarding the Great Depression you’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
A short-term flash back. It was in 2002 that Bernanke and his mentor Alan Greenspan initiated the sub-prime refi strategy to avoid a recession that led to the crash of 2008 and the severe recession that followed. Four years later the Boomerang (Michael Lewis’ book) has returned and “Helicopter Ben” finds himself and his board in another box of the Fed’s own making. Sorry Anna. Sorry Milton. Ben lied. He did it again. Is The Earth Running Out Of Minerals?
“The Meek shall inherit the earth but not its’ mineral rights!” – J. Paul Getty
Getty was, of course, one of the world’s most renown oil barons who apparently had a sense of humor along with his enormous wealth. There’s another aspect of Getty’s musings which he would have had little insight into, or focus on, during his lifetime. Given the unsustainable global proliferation of debt, the meek will most certainly inherit nothing but intangible promises and scant hard assets and real money. And, developing this point further, the diminishing supply of the earth’s assets will make this issue take on a greater significance and value.
The WSJ had a feature article on June 5, 2012, written by John Miller with the same title as the heading of this piece. Is mankind rapidly depleting the earth’s natural resources? Here are some of the key minerals that lie beneath the earth’s surface and their estimated reserve life.
Gold 18.9 years
Oil 46.2 years
Natural Gas 58.6 years
Metallurgical Coal 82.0 years
Copper 136.0 years
Iron Ore 590.0 years
Potash 610.0 years
What precipitated this discussion was the announcement by Google, Inc., CEO Larry Page and film director James Cameron in April when they launched Planetary Resources, Inc. to explore for these minerals on other planets and asteroids. On the surface (excuse the pun) it would appear that there is ample mineral resources here on earth, but they’re becoming more difficult to find, more costly to mine, and the grade is getting lower. Gold, a prime example, is not being discovered in large enough quantities at sufficient grade to make most mines feasible. One of the great mysteries of human history is the theory that planet earth has been mined by extraterrestrials thousands of years ago. (Google Peru Alien Mining.) Maybe those visionaries Page and Cameron aren’t so spacey after all.
Several yeas ago CMV introduced its’ readers to Nautilus Minerals, Inc., who had discovered a massive high grade gold and copper deposit at the bottom of the ocean floor off Papua New Guinea, created by epithermal or volcanic vents. Visualize a massive vacuum cleaner placed on a barge sucking up fine-grained sand laden with these minerals. You would surmise that ocean mining would be more cost effective than drilling and excavation on Mars, but who knows?
A Right Hook To The Left
Gov. Scott Walker’s surprise defeat of the recall election in Wisconsin was a right hook to the face of the left and marked a shift in the “political mood and assumption” in the nation according to Peggy Noonan in her WSJ Declarations Column (June 9/10/, 2012). The assumption was that “public employee unions with their manpower, money and clout, get what they want. If you move against them, you will be crushed.” Mr. Walker was not crushed. He won by 7 points and the national public mood has changed. Getting control of the state’s budget (now a surplus) by taking actions resisted by the public unions, Gov. Walker proved that his conservative fiscal change was right for the state and all of its’ citizens.
Perhaps even more stunning were the results in California. Citizens in the cities of San Jose and San Diego overwhelmingly voted to reduce pay and entitlements in order to avoid possible bankruptcy that is destined to plague municipalities in the Golden State as well as the nation. Stockton, CA will file for bankruptcy this week. Reason has prevailed over hysteria. Working for a city for 25 years and retiring at full pay with free healthcare for life is no longer a right regardless of the consequences. A large number of union members figured it out. If they didn’t back off and compromise, their jobs and benefits would be in jeopardy. If they had won in Wisconsin, they would have lost.
Noonan was early to make a critical observation. She said, “The Obama Administration suddenly looks like a house of cards.” Her perspective was prophetic. In short order since June 9, 2012:
● Intelligence leaks, ostensibly directed from the White House to the NY Times to boost the President’s image, were in Sen. Diane Feinstein’s (D-CA) words, “the worst breach I’ve ever seen.”
● The House of Representatives is about to hold Eric Holder, the President’s Attorney General, in contempt of Congress for refusing to release documents pertaining to “Fast & Furious.” The President has evoked Executive Privilege despite the fact that he had no knowledge of the event.
● The Supreme Court on June 28, 2012 will render its’ decision on Obamacare. Even a partial ruling against this Administration’s signature initiative will be devastating to the President.
● When leftist late-night comics like John Stewart begin making jokes at the President’s expense, the image of “Mr. Cool” begins to melt.
● 43 Catholic institutions have filed 12 separate lawsuits against Obama’s Administration for violating religious freedom. The President has succeeded in awakening the Christian Silent Majority.
● A video of the meeting between Vladimir Putin and President Obama on June 18 in Mexico as very revealing. Putin’s body language and dour look exhibited complete disdain and disrespect for the US President.
● Despite 3 years of US negotiations and weak sanctions Iran continues to develop nuclear weapons confident the US will not act decisively.
● As the European Union struggles to stay afloat and relevant, President Obama and Treasury Secretary Tim Geithner have been blaming the EU for America’s economic problems. The “blame game” is what this leadership does the best.
● Bill Clinton, James Carville, Jimmy Carter, and other Democrats have openly questioned and criticized the President’s policies and a number of his party unfaithful have suggested that it would be their preference that the President not make an appearance in their district. There are even whispers that Hilary would be a better candidate for President. Don’t laugh. It could happen on the floor of the Democratic Convention.
In short, the White House is in panic mode as some polls demonstrate that Mr. Romney has drawn even with the incumbent four months before the election. As Noonan says, “He (the President) isn’t even trying to lead, he’s just trying to win.” Don’t expect action on a budget, the fiscal cliff or any urgent issues until after the election. What should concern all Americans is what strategy this radical group of Marxists could deploy to remain in office. Their goal to “fundamentally change America” into a totalitarian state requires more time. They won’t let a crisis go to waste even if they have to create one.
Sector Overview
1. Cash & Fixed Income
According to Randall W. Forsyth in his Current Yield Column in Barron’s, June 25, 2012, Government Bonds continue to behave more as portfolio insurance policies against upheavals in Europe than traditional debt securities. The Fed’s decision to extend its’ Operation Twist (like it did last summer) by lengthening maturities of its’ Treasury portfolio in an attempt to reduce long-term interest rates, was a non-event. The equity markets were looking for QE 3 and when the Fed didn’t deliver the DOW took a 250 point hit and West Texas Intermediate Crude oil dropped below $80/BBL. The Fed’s action will certainly drive down commodity prices and may result in increased profit margins to manufacturers and relief to consumers. Global market Trends magazine made an interesting observation. They believe that the Fed has ditched its’ last chance to stimulate the economy since the FOMC doesn’t meet again until August. Therefore, they speculate, the Fed has decided to abandon the President who now sees a US economy headed south which would deliver a death knell to his re-election. Since Mitt Romney has openly criticized Bernanke’s handling of US monetary policy and has indicated he would replace the bearded one, an interesting dynamic emerges. CMV takes the position that QE 3 now would be too early timed because its’ negative impact on higher gas and good prices would hit the voters just prior to the election. Also, the FOMC can call a special meeting at any time and make a change in policy. Given the current sudden erosion in the economic numbers, this appears to us to be the most likely outcome.
2. US Equities
If you don’t have Felix Zulauf’s market opinion fresh in mind (page 2), re-read it. CMV has long maintained that the total public and private debt are unsustainable and would reach a tipping point where defaults would become inevitable. The chickens have come home to roost, so to speak. CMV believes that the US equity market faces an extreme challenge going forward the remainder of 2012 and into 2013, interrupted by a spontaneous rally keyed off two major events:
1. The Fed’s new “sterilized” bond buying program (or some other neologism) which they will maintain would provide needed funding to the US Treasury without creating inflation, and,
2. A Romney victory in November.
These potential rallies will be interspersed by possible sovereign debt defaults, a worsening conflict in Syria and Iran, a US budget and debt limit crisis and the sober reality that austerity and deficit reduction will be met with rancor and unrest not only world-wide but also here at home.
The Moody’s downgrade of Bank of America and Citigroup 2 notches to Baa2, and close to junk status, sent tremors through the US financial markets. Goldman Sachs was downgraded 2 notches to A3 with JP Morgan-Chase holding the highest ranking of US money center banks at A2. It makes investors nervous and US corporations reluctant to invest in expansion and hiring. Third and fourth quarter GDP could surprise to the downside. Rumor has it that Basel III will make gold bullion a Tier I asset which could assist the acceleration of gold’s price.
3. International Equities
The perception amongst many investors is that emerging markets have and will outperform the US going forward. The BRICS however (Brazil, Russia, India, China and South Africa) have been sinking like a brick. The MSCI Bric Index is down 20% this year including dividends. Capital is fleeing many of these markets which will aggravate the situation. The Marxist regime in Argentina is implementing all kinds of currency controls which could result with a repeat of another sovereign debt default like the one that occurred there in 2001. Brazil, which was a magnet for investment two years ago is also experiencing serious problems. The bottom line: Bring your money home. The US is the best house in a bad neighborhood.
4. Hard Assets
Under this President’s leadership the US has entered into the “twilight zone.” The land of the unimaginable. In June the American Fuel & Petrochemical Manufacturers filed suit against the EPA challenging a requirement for refiners to blend gasoline with cellulosic ethanol or pay to EPA a penalty called a “waiver fee.” One problem. Cellulosic ethanol doesn’t yet exist in commercial quantities but the EPA wants refiners to pay $6.78 million in fees for 2011 for failing to blend in 6.6 million gallons of a product that didn’t even exist.
The Administration now has two Democratic governors from Missouri and Colorado and trade union representatives who favor the completion of the Keystone Pipeline in opposition to the President. Closer to home in Arizona key Republicans on the Natural Resources Committee have released internal e-mails from US government scientists that reveal that some environmental impacts were ‘grossly overstated’ and ‘very minor to negligible’ for uranium mining in Northern Arizona. Secretary of the Interior, Ken Salazar ruled that over 1,000,000 acres of land be withdrawn from mining purposes for 20 years. The e-mails support the contention that Salazar blatantly ignored their own scientific evidence to advance the Administration’s agenda. It’s similar to the President appointing the Super Committee to come up with a budget plan and then completely ignoring the results of Boles-Simpson because it didn’t fit the President’s spending agenda. One of the best long-term investments is Uranium (Ux) despite the action above.
5. Precious Metals
CMV has subscribed to The Dines Letter off and on for over 30 years. Your author first became interested in precious metals and gold in the 70s when it became lawful to own bullion for the first time. Franklin D. Roosevelt confiscated all privately-owned gold in 1933. Jim Dines was the only reliable source of information in the 1970s when he was labeled a “gold bug” and when we saw the meteoric rise of gold go from $100/oz to a high of $850 by January 1980. We profited handsomely and continue to use Dines as a trusted source of information. So, what does this “master” say as gold plunged back down again this month to $1,566/oz and threatened to reach its’ triple bottom of $1,525?
Dines has developed what he calls the Dines Greed/Fear Oscillator. Fear is now driving investors to the safety of government bonds – principally US and German and out of what they perceive as “risk” assets including gold. Dines says in his June 22, 2012 newsletter:
“Both gold and silver are in near-term downtrends, but have so far held above their December, 2011 lows, and could rally near those levels.”
He goes on to say:
“Of course, the ultimate safe currencies are gold and silver, but their day is ahead.”
And,
“We think that gold and silver will be making an important Bottom Formation sometime soon. A matter of months. Perhaps sooner...”
CMV concurs precisely. Dines also sees the current global deflation and currency debasement leading to Hyper-Inflation. Keen minds travel the same road.
To quote a source that doesn’t fit the a mold of a “gold bug” or “extreme conservative” we look to Simon Mikhailovich, co-founder of Edelweiss Capital, who emigrated from Russia to the US in 1979. He is convinced that the worst is yet to come for the global economy and has gold bullion stored in various locations around the world outside the banking system. He says in a June 4, 2012 edition of Barron’s:
“If this devaluation of financial assets proceeds apace and the moment of clarity comes for many investors in the West who realize the need to diversify into assets that can protect against devaluation, demand for physical gold has the potential to rise dramatically.”
Amen.
6. Commodities
The fear of the “Dreaded Double D” (Deflation and Default), has created downside pressure on all commodities with the exception of the Grains which have rallied sharply due to hot and dry weather in the farm belt.
Conventional wisdom says prices will continue to decline as the global economy heads for another recession. A reversal in this view will take everyone by surprise. Competitive currency devaluation, absent a total collapse of the global financial system, will ultimately lead to massive inflation and the prospect of Hyper-Inflation.. CMV sees a scenario whereby food products reach a severe supply-demand imbalance and prices of all commodities skyrocket. Hard to believe but that’s what happened in Latin America in the mid-1980s and is re-occurring in Argentina as we write.
7. Real Estate
Two years ago your author’s spouse, who has had over 30 years experience as a successful residential realtor, announced that it was time to hang it up. “There’s no activity. The market is dead. It is time to retire and do the things I have always wanted to do,” she said. “Not now dear,” her husband and advisor emphatically stated. “There’s another short-term boom ahead. It’s the last rodeo. When this ones over it is really over.” Sure enough. That’s exactly what has happened. Activity is accelerating, prices are rising and her listings are sold in a matter of days and weeks. Few well-seasoned professionals including my spouse saw this coming. CMV did.
Where are the buyers coming from? A June 12, 2012 WSJ article articulates the unexpected source.
“The six-year slide in US home prices and the dollars weakness against some currencies are driving a property-buying binge by Asians, Canadians, Europeans and Latin Americans eager to own a piece of America.”
International buyers accounted for $82.5 billion or 8.9% of the $928 billion in residential real estate in the 12 month period ending in March, 2012, up 24% from the year prior. 62% of these buyers paid cash for the properties and Arizona was one of the top 5 states to benefit.
Total foreign direct investment in corporate acquisitions and real estate totaled $234 billion in 2011 according to a separate WSJ article on June 15, 2012. The pertinent question is, will this trend continue? Will the problems in the Eurozone accelerate the capital flows or will the US lose its’ luster as a safe haven? That’s difficult to assess but an inflationary scenario could accelerate and drive this market higher. Your author, who has taught a CE class in real estate for 19 years reminds his students to seize this opportunity while it lasts. How long? Only the Shadow knows. Remember, when citizens lose confidence in the value of their money and in the leadership to cure the nation’s problems, there’s a rush to hard assets – real estate and precious metals. Could this be a repeat of 1976 to 1980? Only the Shadow knows. (Old folks will remember the “Shadow.”)
8. Special Situations
CMV firmly believes that we’re rapidly approaching the time when Contrarians take a Contrarian view and back up the truck and load up on hard assets. Look principally to gold and silver producers who are profitable and whose shares have been beaten to death, down 50% to 70% and represent one of the greatest buying opportunities of a lifetime. The same can be said for uranium, rare earths, copper and other base metals. Last month CMV related the story of Kyle Bass, the hedge fund manager who has accumulated the largest store of nickel coins outside the US mint.
CMV would like to introduce you to three “new age” metals or alloys that will change the products we use everyday in ways totally unknown to 99% of the world. Briefly, they are:
1. Graphite (Graphene)
Graphite has been around for centuries. Highly Ordered Pyrolitic Graphite (HOPG) or Graphene was discovered just two years ago and the scientists who separated it from graphite received the Nobel Prize for their work. This mineral is tougher than diamonds, is almost invisible, conducts heat and electricity better than copper, stretches like rubber and weights next to nothing. Samsung will soon introduce a TV which has a screen almost as thin as wallpaper. China presently has 80% of the supply of Graphene but a small Canadian mining company has a proven resource of 8 million tons valued at $20,000/ton. The stock is presently under $1.00/sh.
2. Vanadium
This product is known as “Liquid Metal” and has the unique ability to retain and store electricity. Applied to an electrical power grid, this new metal can provide emergency power and avoid brown-outs. Applied to microprocessors this metal could revolutionize this industry. 95% of all vanadium is presently imported from Venezuela, Russia and South Africa – not exactly reliable sources. A small American company has discovered 120 million pounds of this material in the US and the Preliminary Economic Assessment (PEA) indicates that the capital investment in infrastructure will have a payback in only 2.4 years. The stock is currently under $1.00/sh.
3. Beryllium
This material has the unique property to radiate heat away in what is known as Thermal Diffusivity. It is 30% lighter than aluminum, six times stiffer than steel, doesn’t oxidate, doesn’t spark and has a very high melting point. This alloy is critical to the US Dept. of Defense for aerospace, satellites and nuclear development. The company has proven resources to mine in Colorado, Utah and Brazil. Shares are currently under $.14/sh. This is a fully integrated company from mining to product development.
Historically, there have been periods in time when new discoveries revolutionize various industries and ironically some have occurred when the economy is in recession. The development of silicon and the microchip comes to mind. The US and global economy was in a funk in the early 90s when the .com craze made fortunes for millions of investors. Make no mistake about it, the companies above that are pioneering these new metals are high risk but then again what isn’t in this environment? Investments in microcaps like these should not be made unless you can afford to lose 100% of your capital investment. If you want to learn more, please give me a call at (602) 840-4117. At a time of crisis there’s always opportunity.
-- H. L. Quist
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