Wednesday, December 5, 2012

CMV December 2012

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SPECIAL NOTICE:

It is with extreme regret that we will end the publication of the Contrarian Market View with this issue.

Most of you do not see or believe what is about to unfold in America and specifically the control of all media.  Any day the House of Representatives will attempt to pass HR 2471 which will allow the Federal government to access and read all online communication without a warrant.  In our opinion all conservative media including FOX News, talk shows such as Rush Limbaugh, Mark Levin and a host of others and all newsletters including CMV will be pressured and harassed to silence their dissenting voice.

Our focus will now be 100% committed to managing assets for our clients and attempting to find financial security in an extremely challenging environment.  If we can assist you in your planning or need additional information, please contact me.

Good luck and God Bless you and your family and God Bless the United States of America.




Market Overview

First and foremost CMV must and will unequivocally admit to its error in forecasting President Obama’s “landslide loss” for re-election.  In retrospect we were reluctantly swayed by the unequivocal convictions of Carl Rove, Dick Morris and the Rasmussen polling organization whose accuracy in past presidential elections was unrivaled.  It’s near unimaginable that Mitt Romney would garner 3 million less Republican votes than John McCain recorded in 2008.  Here’s one reason why.

Terry E. Branstad, the Republican Governor of Iowa, stated convincingly that his state (though the polls projected an easy Obama victory) would post a victory for Mitt Romney.  Branstad said (to paraphrase) “I know every county in my state and the enthusiasm and turnout for Romney will make Iowa a red state.”  The Governor was wrong.  What happened?  In CMV’s opinion the state’s Ron Paul supporters did not vote for the Republican candidate.  You’ll recall that Ron Paul secured about 33% of the primary vote in Iowa and Paul scored impressively in other states also.  To Paul supporters Romney wasn’t a Conservative and they stayed home.  You also may recall that Ron Paul was completely ignored at the Republican Convention and none of his ideas were included in the platform.  Additionally, Republican corn farmers, who have profited by the ethanol alternative energy plan favored by the Obama Administration voted for the President.  Equally noteworthy is that it appears that a large bloc of the senior sector also did not vote for the Republican candidate, which in our opinion will come back to haunt those who rely on Medicare.

The bottom line, in our view, is that Democrats of all stripes, banded together despite their philosophical and ideological differences, to win the Presidency.   The Republican s nitpick and are too narrowly principled to win.  Barrack Obama is a Democrat in name only and his vision for America won’t be shared by a large percentage of the Democratic party within two years.  Maybe Paul’s supporters had it figured out.  Let Obama destroy American Exceptionalism and the economy and even the masses will clamor for Conservative change.

A good example that supports the above is the noteworthy story of Hostess Foods, the maker of Twinkies (which we used to buy for $.02 in the 40s),  Devil Dogs, HoHos snack cakes and Wonder Bread.  As one pundit put it, “Hostess was eaten by a parasite.”  The company, unable to reach an agreement with one of its unions, has decided to liquidate and lay off 18,500 employees rather than endure another strike.  Hostess posted sales of $2.5 billion in 2011 but lost $341 million due to labor-rule burdens that included $52 million in workman’s compensation claims in 2011.  The company has 372 collective bargaining agreements and is required to maintain 80 different health and benefit plans, 40 pension plans and had a mandated $31 million increase in wages and health care for 2012.  Hostess simply faced an inevitable collapse and they chose to sell their brand names while they had value.  As cited below, this dire picture of entitlement over-burden will also include state and municipal employees all over the US.  The Mercer Company, which is one of the largest employee benefit firms in the country, says that of 1500 S&P companies reporting, there is $617 billion in under-funding in company pension plans.  Millions of Americans, union and non-union, are not going to receive what they expect to receive at retirement but most refuse to see it.  The long-term implications are ominous.

Although all the signs surround us, very few observers have factored in even more dire implications also.  The WEATHER.  According to the Department of Agriculture’s Drought Monitor, most of the farm producing Plains States are experiencing a severe drought as CMV has previously reported.  Despite the fact that this area has been through this before, those who contend that man-made climate change has caused this condition, need only to see Ken Burns’ “The Dust Bowl” a 4-hour documentary just released Thanksgiving week.  From 1931 to 1939 there was virtually no appreciable rain in an area from the Dakotas south to eastern Colorado, New Mexico and the panhandles of Oklahoma and Texas and east to Nebraska and Kansas.  A confluence of events at the turn of the 20th century including the Homestead Act, World War I, mass immigration from Europe, land speculators and “briefcase farmers,” the plains, lush in native buffalo grass, became the target of dry land farming.  The invention of tractors and the high demand for wheat resulted in hundreds of millions of acres to be tilled which destroyed the deep root system of the native grasses and set the stage for one of the most incredible and catastrophic events in American history – The “Dust Bowl.”

When the rain stopped and the winds blew, the top soil became airborne.  Clouds of billowing dust a mile high and hundreds of miles wide made night-time out of daylight.  Arizonans will recall the “Haboob” of 2011 that engulfed the Phoenix area.  In 1937 the “Dust Bowl” had such an event 79 times and each was more powerful.  An ecological and human disaster followed.  Adults and children died from dust-filled lungs and the Great Depression was the final blow that devastated farming communities throughout middle America.  John Steinbeck’s “The Grapes of Wrath” fully grasped the tragedy caused by man’s greed and nature’s wrath.  World War II and the cyclical change in the weather ended the crisis.  But, this not the end of this story.

Much of this area is now irrigated farm land and water has been provided by one of the nation’s largest natural underground aquifers called the Ogallala.  Over the past 60 years, however, drawing water has reduced this water supply 50% according to Burn’s documentary.  Experts have indicated that the aquifer will be essentially dry in 20 more years.

As CMV has reported numerous times the allotment of water to the San Joaquin Valley in California, which provides a substantial portion of America’s fruit and vegetables, has been severely curtailed.  Add to the loss of production there to the prospect of the eventual loss of the Ogallala to the plains and we have a prescription for a food shortage that will impact everyone.  In the 1930s the “Okies” set out for California.  Where will our farmers go in the future?  What have you done to guarantee a food supply for your family?

. . .

In a decided shift in tone, there are a number of positive factors that all of us can be thankful for on this Thanksgiving Day.  The following is brought to you from Wells Capital Chief Investment Strategist, Jim Paulson, via Gene Epstein’s “Economic Beat” in Barron’s.

●   From an October 2009 high of 10.0%, the unemployment rate has declined to 7.9%

●   The labor force is steadily rising despite the fact that 3.8 million potential male workers are unemployed.

●   Consumer confidence has returned to a 5 year high of 82.7%.  Normal is 90%

●   Housing activity is improving and housing starts in October were 42% higher than a year ago.

●   The stock market may finish its fourth consecutive year of positive returns but the S&P 500 Index remains 11% below its’ October 9, 2007 high.

●   A revision to the third quarter’s GDP growth is expected to show a much stronger pace, close to 3%.



The Fiscal Cliff

One pundit wrote that anyone who mentions the word “cliff” ought to pay a tax.  The continual discussion is getting laborious but there’s more to this tax and budget expenditure issue that you would glean by the talking heads on TV.  The editors of the WSJ provided the best insight in their “Review & Outlook” section November 15, 2012.

The President has declared that “the math tends not to work” when he asserts that closing tax loopholes wouldn’t provide enough revenue for a budget deal and raising tax rates would produce more government revenue.  The WSJ says that the President is being disingenuous.  For one, capping all deductions at $50,000 for all taxpayers would produce $749 billion in extra revenue over 10 years.  Reducing the cap to $25,000 would raise an additional $1,286 trillion and as Mr. Romney proposed reducing the cap to $17,000 would raise tax revenue by an additional $1,747 trillion.  These estimates were produced by liberal economists at the Tax Policy Center.  In comparison, Mr. Obama’s proposal to raise taxes on capital gains, dividends and income above $200,000 would yield  only $823 billion over 10 years or a piddling $82 billion per year when the deficit has been running over a trillion a year for the past 4 years.  The obvious question is, why is Mr. Obama so insistent on raising tax rates now when more revenue can be raised by reducing deductions?  The WSJ concludes: “He really doesn’t care if there’s a budget deal this year that avoids the cliff.”

The President’s position set in concrete is that any budget deal must raise $1.6 trillion in tax revenues which is twice the amount he agreed to with House Speaker John Boehner last year.  And, there will be absolutely no cuts to Medicare, Medicaid and Social Security.  Basically it is a deal the Republicans can’t approve so we will all fall off the “cliff,” there will be a recession next year and the Republicans will be to blame.  The WSJ maintains that “the President is playing a game of political chicken with the economy,” and they conclude:

“We’re beginning to think he (Obama) wants to go over the cliff this year.”

For the sake of argument let’s say there was an agreement to raise tax revenue by $1.6 trillion over 10 years by virtue of increasing the tax rates on the wealthy and there was an additional $1.6 trillion increase in revenue from limiting deductions for all taxpayers.  That would total $3.2 trillion over 10 years or $320 billion per year.  Here again with the deficit running over one trillion per year for the past four years there would still be a $700 billion shortfall per year going forward.  With 10,000 people retiring every day and all entitlements rising parabolically the deficit would widen.  The increase in the interest on the federal debt alone will approach a Trillion dollars a year.   Those type of numbers will NOT quell the angst in the financial markets and a decided downturn in the economy in 2013 could be unavoidable.  And, no mention has been made that the total federal debt limit of $16.4 trillion has already been breached and by law the US Treasury can not exceed that limit (the President just proposed that any debt limit be removed).

CMV recalls the mantra of this Administration.  “Don’t let a crisis go to waste.”  It’s Obama time.  It’s time for “revenge” as the President stated just before the election to his delirious supporters.  Revenge against the wealthy.  Now is the moment that he can “fundamentally change America” by destroying Capitalism.  Obama is the agent for change and the Trilateral Commission and their 39-year goal to create a totalitarian state is at hand.  Mitt Romney had to be defeated.  He wasn’t a member of that elite group that will soon offer all the Americas and the EU the New World Economic Order that will rescue all of us from the coming economic chaos and despair.

Real Estate

In Phoenix and some other areas of the US, there is almost an euphoria growing in the residential real estate market as the number of sales and the rise in median home prices are gaining momentum.  In contrast, however, when the financing sector of this market is examined, storm clouds are gathering ominously on the horizon.

With the election over, we now discover that the Federal Housing Administration (FHA) is insolvent.  As of the Federal Government’s fiscal year ending September 30, FHA’s liabilities exceeded its’ assets by $16.3 billion according to a WSJ piece dated November 20, 2012 and the gap could balloon to almost $100 billion in a worst case scenario.  In 2009, the WSJ predicted that this day would arrive but the Journal was soundly rebuked by the then FHA Commissioner, David Stevens who said that the WSJ was “just plain wrong” and “I can say undoubtedly that the FHA fund is playing a key role in the housing recovery and poses no immediate risk to the American taxpayer.”

As most of us observed, FHA was aggressively expanding its’ loan guarantee program to prop up home prices in 2007 to 2009 when the market was crashing.  While this helped the Obama Administration politically, it arguably prolonged the recovery by failing to let prices find a bottom.

With about a trillion in loan guarantees outstanding, the WSJ reports the percentage of loans that are now seriously delinquent and expected to reach a total of $70 billion in claims are:  25.82% of FHA’s 2007 loans, 24.88% of 2008 loans, and 12.18% of its’ 2009 loans.  This is precisely what happens when government responds to political rather than market incentives.  The other more pervasive problem is that there is no personal accountability and the losses are simply passed on to taxpayers.  And, here’s where the rubber hits the road.  As CMV reported last month, approximately 700,000 FHA borrowers will now qualify for new financing in 2013, after a three-year wait following foreclosure plus an additional 1.6 million in 2014.  Where will the money come from?  U NO WHO!

Typical of an irrational and delusional government agency, the FHA believes that they can rebuild their reserves by principally increasing their premiums for mortgage insurance.  They’re already raised premiums three times over the past two years from 0.9% of the loan amount to 1.15% one year ago and to 1.25% in early 2012. The proposed new rate will be 1.35%.  On a $300,000 FHA loan where the borrower makes a 5% down payment, the insurance premium will be approximately $347.00/month. In the past, mortgage insurance premiums would be waived after certain conditions were met.  Just recently the FHA announced that it will no longer offer waivers and the borrower will pay the premium for the life of the loan.  We calculate on a $200,000 loan with a P&I payment of approximately $910/month, the FHA mortgage premium would be about $200/month or 22% of the P&I payment before the new increase.  We could be at the point where the premiums are prohibitive, but since the government is the lender of last resort, what options are there?  That gives us a perfect segue to Fannie and Freddie.

At the height of the presidential election campaign, Americans were told by the Treasury Department (in a press release entitled “Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac”) that the Treasury would reduce the Government Sponsored Enterprises (GSE’s) portfolio of loans by 15% / year.  Recent reports indicate, however, that the two GSE’s are not shrinking in size and Fannie Mae, in particular, is expanding.  Fannie had 5,800 employees in 2008 when it was taken over by the government and as of early 2012 it had ‘bulked up” to 7,000 employees.  Rule #1 – Bureaucratize never downsize.

When the US Treasury bailed out both GSE’s, part of the deal was a cap on the mortgage assets that they own.  Fannie was permitted to own $729 billion as of December 31, 2009.  Fannie’s current balance sheet, however, lists $2.9 trillion in mortgages.  The un-admitted policy is simply this: The Federal Government and the Obama Administration, through its agencies FHA, FNMA, FRMC, VA and the US Department of Agriculture Rural Loan Program, wants to control the residential housing market and the question of profit and loss or solvency is not an issue.  This model fits perfectly into the redistribution scheme because the highest taxpayers will carry the bulk of the burden.

Aside from the above, a new trend is being established in the residential market.  Like the “olden days” and during tough economic times like The Great Depression, families are re-gathering under one roof.  Households could now consist of grandparents, their children who own the home and the jobless grandchildren who have returned home.  Lennar, is one homebuilder marketing one multi-generational model as “Next Gen–The Home within a Home.”  Pulte Group surveyed 1,000 homeowners and found that 72% of them who had aging parents living with them plan to renovate or buy a new home.  The next step is communal living for survival.

The (Unknown) Clinton Legacy


All US presidents, at least those since World War II whom we have observed and studied, have sought to achieve their place in history and create their own legacy by accomplishing great things  while they are in office.  Some have tried to repair their damaged image after they have left the presidency.

Richard M. Nixon’s term ended in disgrace with his resignation.  Despite his efforts to ameliorate his image later in his life, his legacy has been relegated to re-opening America’s relationship with Communist China.  Jimmy Carter’s legacy was foiled by an out-of-control inflationary economy that morphed into stagflation coupled with our US Embassy employees held hostage for 444 days in Iran.  Carter’s concerted effort for the past 32 years to recast himself as a statesman and a peacemaker has fallen woefully short to recast his legacy.

To most observers Bill Clinton has overcome his darkest hours of impeachment to become, not only one of America’s most popular presidents, but has enhanced his legacy during the past 10 years.  To CMV, however, Clinton left an indelible imprint on the Office of the Presidency of the US that has profoundly impacted not only the Oval Office, but our entire society and culture.  This “legacy” is not found anywhere in Bill Clinton’s bibliography.  It is a CMV original.  It is unknown – until now.

Last spring CMV observed the PGA Tour’s Humana Challenge Golf Tournament in Palm Desert, California, which was formally known as the Bob Hope Classic.  This tournament, sponsored by Humana Corp. (The health provider) bills itself as a partnership with the Clinton Foundation dedicated to build healthier lifestyles.   Clinton, known in the past for his workaholic 100 hour work weeks while subsisting on junk food, had a quadruple by-pass surgery in 2004 that probably prevented a heart attack.  He reportedly is now vegan and his Foundation is active in Haiti, Africa, Latin America and Europe to improve health and living conditions.  A laudable and worthwhile endeavor.

What struck us as remarkable, though, was how the Golf Channel reporters covering the Tournament, as well as the media in general, “gushed” over the ex-President.  No words were adequate or flowery enough to describe the outstanding character and the goodness of this man whose dedication to the various areas of extreme poverty was almost Mother Teresa-like.  Long forgotten was the dark side of the 42nd President of the US and what provides an ironic twist to the ex-President’s legacy.

William Jefferson Clinton won the election in 1992 with only 43% of the vote thanks to a 3-way split of the electorate between Clinton, George H. W. Bush and Ross Perot.  The first baby-boomer president entered the White House despite the baggage of numerous scandal-ridden events that dogged him.  There was the BCCI bank money-laundering scheme, the Mena, AK drug smuggling ring, Trooper-gate where state troopers ostensibly arranged for the Governor’s trysts, as well as Whitewater, a real estate promotion gone bad.  As the “boy” Governor of Arkansas, he acquired the nick-name of “Slick Willie” which was not in reference to his hair-do.  All the myriad of alleged misdeeds, however, would pale in comparison to what would occur in the first few months in 1993 while President of the most powerful nation in the world.

Buried and long forgotten is the shocking and mysterious death of Deputy White House Counsel Vincent W. Foster in July, 1993, barely 6 months into the new Administration.  Foster, who was a childhood buddy of Clinton dating back to grade school in Hope, Arkansas, later became a partner with Hillary Rodham Clinton in the Rose Law Firm in Little Rock.  Prior to his White House appointment, Foster was intimately involved in all the Clinton’s dealings including Whitewater and knew where all the “skeletons were buried.”  He was attempting to complete the tax returns for Whitewater and draft the President’s Blind Trust at the time that his body was discovered in Fort Mercy Park near the White House – a victim, according to the FBI and the Office of the Independent Counsel, of a suicide.

Not so say a number of reliable sources.  The Western Journalism Center hired 3 competent investigators who concluded that Foster’s death was “inconsistent with suicide” and that the White House Deputy Counsel did not die in Fort Mercy Park.  In Failure of Public Trust, written by John Clarke, Hugh Turley & Patrick Knowlton (who was a key witness) concluded that Foster’s death was a cover-up.  Accuracy in Media also did an exhaustive study of the death and autopsy photos that show a possible second gun shot wound to Foster’s neck.

There is probably no other president with such a clouded past as Bill Clinton but it was the Lewinsky affair that specifically qualifies this “Teflon Man” for this unknown though dubious legacy.  For those of us who attended grade school and high school in the 1940s and 1950s, lying, cheating and stealing were absolutely verboten.  Any one of these infractions (sins) would expose any of us to peer ridicule and possible expulsion from school.  Was there anything more humiliating than “liar, liar your pants are on fire?”  Bill Clinton, 10 years younger and a product of the rebellious sixties, grew up in an era where Progressives determined that character-building teachings were old-fashioned and out-of-date. When he faced perhaps 100 million or more American viewers on nationwide TV that day in January, 1998, he said:

“I did not have sex with that woman, Monica Lewinsky.”

The President was strong, forceful and angry as he pointed his finger at all of us and lied about his affair with Ms. Lewinsky.  It was as if the President was chastising all of us for falsely accusing and pre-judging him as guilty of an adulterous affair that created an unwarranted crisis in the country.

So, what is the point of this discourse?

Bill Clinton lowered the bar not only for future presidents but he also re-wrote the code of conduct that had previously shaped the character of all of America’s youth since the founding of the Republic.  The fact that Clinton was impeached by the House of Representatives for lying under oath and obstruction of justice, but acquitted by the Senate, sent a clear message to all America that lying was not a sin and not an issue in the governance of the nation.  What has followed in the past 12 years is an unprecedented breakdown in the rule of law, fraud, unethical behavior and corruption which has permeated the realm of politics, business and social discourse.  Corruption will continue to escalate under the current Administration and undermine all aspects of our society and will inevitably culminate in the collapse of our economy.  Truth and American Exceptionalism has died.  A rebirth can only occur when the present groundswell towards Marxist Totalitarianism is soundly rejected and Americans return to the moral and ethical values that gave birth to this once great nation.

Updates

Illinois the “Un-fixable”

CMV recently wrote of the State of Illinois’ coming financial crisis which has now been validated by an opinion piece in the WSJ on November 11, 2012 with the above title.  The Commercial Club of Chicago, a business group, wrote that, because the November elections did not bring in lawmakers willing to push for real reform, the State’s $200 billion debt now threatens education, health care and basic public services.  The group also concluded that the State’s unfunded pension liability of $95 billion is heading for a “meltdown” and the crisis has “grown so severe” that it is now “un-fixable.”  And, get this.  The State currently has $6 billion in accounts payable past due for 6 months!  The Illini are deadbeats.

Illinois has become the poster boy of things to come in many areas of America.  A not so shining example of what happens when corruption becomes the rule of law and its’ citizens firmly believe that their jobs, pensions and health care will continue unabated and are guaranteed.  The Greek tragedy will be repeated in the streets of Chicago.  CMV’s inference that the State could be bailed out by its’ “favorite son,” the President, was seconded by the WSJ which said, “More likely is that the politicians keep abdicating and will hit up President Obama for a Federal bailout.”

Note: The Obama Administration has already funneled $100's of billions to Illinois, California and other blue states that has not been budgeted or accounted for.

The College Debt Bubble

You may recall that CMV wrote feature articles (December, 2011 and August, 2012) on how the various student loan programs (that have added up to one trillion dollars) have subsidized the building of massive “monoliths” called colleges and universities across the nation.  Hard evidence that this era is over and the repercussions that are about to unfold are illustrated in a WSJ feature article (November 23, 2012) entitled, “The Cost Of Dropping Out – Millions Struggle With High College Debt and No Degree.”  The following dropout numbers are jaw-dropping.  One Washington, DC study found that 58% of the 1.8 million borrowers whose student loans became due in 2005 hadn’t received a degree and 59% of those students were delinquent or in default.  A college degree in the past was considered to be a ticket to the middle class and financial security.  Now, there are 1.9 million unemployed college graduates plus those that never completed their degree and the ramifications are ominous. What are some of the possible outcomes?

●   The present student loan debt bubble has now burst and most of the trillion will never be repaid.  We expect that the President will “forgive” a large portion of the debt.

●   As part of this Administration’s redistribution scheme US taxpayers will incur the losses.

●   Universities and colleges will be forced to downsize even though the Federal government may adopt a free tuition policy.

●   The traditional model of awarding credits based upon classes and hours attended will change to a “competency-based” approach, favoring students who must work while going to school.

●   More students will earn degrees on-line and at community colleges avoiding high tuition costs and student loans.

Sub-Prime Debt Goes Prime Time

In a previous issue CMV brought to your attention that financing for new auto sales was about to rise dramatically.  An update supports our previous report.  Auto lending was the fastest expanding segment of consumer debt in the second quarter of 2012, totaling $750 billion.  In particular, demand for loans to buyers with sub-par credit commanding higher interest rates is nearing pre-recession (2009) levels but lenders are gearing up for more.  GM just announced that it had purchased the international operations of Ally Financial, Inc., after the company abandoned auto lending 6 years ago.  Banco Santander SA, the Spanish bank which is reeling from the EU debt crisis, is raising $6 billion for its’ US consumer finance unit to make auto loans enticed by the profitability of the secured debt. In CMV’s opinion the auto manufacturing and auto lending business is headed for the same head-on crash that it first experienced in the early 90s when the real estate market tanked and again in 2008-09 when the fit hit the shan.  Lending to non-credit worthy buyers in the past two periods and again currently creates an illusion of demand which allows the auto makers to churn out record volumes of new cars that keep their union employees fully employed.  No one seems to be concerned about the defaults and repos that will inevitably occur.  Our personal borrow-to-spend economic growth model is deeply flawed based upon a short-term fix strategy and to hell with the consequences.  Our government economic growth model is print and pretend and portends a hyper-inflationary “crack-up boom” is near at hand.

The Chinese Are Coming – (They’re Already here)
CMV has repeatedly reported on the Chinese inroads to the US including the US Fed’s authorization to allow Chinese banks to enter the US and also acquire US institutions.  Now, the Chinese are entering the US energy market.  The town of Medicine Bow, Wyoming, population 300, will be the target for an advanced facility that will convert coal to gasoline and would hope to capture and re-use carbon dioxide that would otherwise be emitted into the atmosphere.  China Petrolchemical Group, an arm of the state-owned Sinopec Group, will spend about $2 billion and create up to 2,300 construction jobs and 400 full-time employees.  The company did not reveal how many of the employees they would import from China as they have on other projects but they did say that they would purchase steel from China to keep costs down. They also indicated that they would establish retail gas stations in the US in a few years.  What chance do you think there is that the Obama EPA which is committed to killing all fossil fuel development, will deny a permit to Sinopec?

A Real James Bond Was Murdered

Neil Heywood, a British consultant, tooled around Beijing in a silver Jaguar with “007" on his license plate and created an air of intrigue as he seemed to have a direct connection to Bo Xilai, a big-time Communist (now ex) party leader.  Most observers in China though that Heywood was a fraud until the aspiring “007" met his untimely death and a real clandestine mystery began to unravel.  It turns out that Heywood was connected to the British secret spy agency M16 and that he reported  Xilai’s secret activities to the British government.  The police investigation revealed that Bo was plotting to undermine the ruling politburo and the investigation also revealed his self-dealing and corrupt practices.  Bo’s wife, Gu Kailai, who was often referred to as the Jacqueline Kennedy of China, was found guilty of poisoning Heywood.  Other than the intrigue, this story, which we have followed for almost a year, indicates that there truly is a power struggle in China and all is not well in the country that aspires to be number one.


Sector Overview

1.  Cash & Fixed Income


The normal seasonal trend of outflows of funds from treasuries to equities could reverse this year due to the threat of the FISCAL CLIFF and a desire for investors to seek the safe-haven of bonds.  Scott DiMaggio, Director of Global-Fixed Income at Alliance-Bernstein says,  “Even if we don’t go over the cliff, some of the policies that come out of it can still be pretty negative for stocks.”  Some experts who are pessimistic about a favorable resolution of the tax and budget issues, see a fall in the 10 Year T-Bond to 1.2% from the present 1.7% yield.  We don’t have long to wait.

There’s a rather unsuspecting outcome that could also impact the treasury market.  Under Operation Twist, the Fed has been funding its’ long-term Treasury purchases with proceeds from the sale of short-term debt that has kept the 10 Year and long-term mortgage rates low.  Problem is, the Fed is running out of short-term Treasuries to sell.  To keep buying them in 2013 the Fed would likely need to create new bank reserves thus expanding the amount of cash in the financial system and increase the size of the Fed’s balance sheet thereby increasing the prospect of inflation.  In addition some Fed officials have expressed concern that the Central bank has become such a big player in Treasuries and mortgages these markets could become illiquid and stop functioning properly, according to a November 23, 2012 article in the WSJ.  The bottom line is simply that the US can’t continue to run deficits of $5 billion per day to infinity.  The October, 2012 budget deficit was $122 billion up from $98 billion in October a year ago.


2.  US Equities

10 Stocks Account For 88% Of S&P 500 Earnings Growth
    Morgan Stanley's US Equity Strategy team led by Adam Parker just published their 2013 outlook for the stock market.  They're calling for the S&P 500 to end next year at 1,434.
    The massive research note included a lot of interesting information about the stock market including this: just 10 companies are accounting for 88 percent of all of the earnings growth in the S&P 500 this year.
    For 2013, the sources of growth are expected to be much more diversified with the top 10 names driving just 34 percent of growth.
    Still, the biggest names will play a big role next year. "Notably, Apple, Bank of America, Microsoft, GE, and Google are forecasted to be one-quarter of the entire S&P500’s earnings growth in 2013."


The above chart (in full newsletter on Yahoo Groups site) speaks volumes.  All of those 10 names are large cap or mega cap companies and the potential upside for appreciation of their stock price is limited by virtue of their capitalization.  During the past year they have benefitted from the Risk Off sentiment and have been a safe haven for investors.  AAPL recently has been an exception.  Good earnings but a significant drop in share price.  One of the great ironies in the US equity market, given the Risk Off sentiment, is the lack of fear.  The Chicago Board of Options Exchange Volatility Index or VIX has been benign.  The VIX is an index calculated from the prices that investors are willing to pay for options tied to the S&P 500's stock index.  As investors become nervous they pay more for the options therefore driving up the value of the VIX.  The VIX closed at 15.14 on Friday, November 23rd which is remarkably 5 points below its’ two-decade historic average of 20, while at the same time $9 billion exited ETFs and mutual funds the week ending November 23rd.  Some experts feel that this is a sign of complacency and a warning that there could be volatility ahead.  An unlikely favorable resolution of the FISCAL CLIFF could spark a rally and likewise a stalemate could cause a sell-off.

3.  International Equities

What a mixed bag!  It’s a matte of the good, the bad and the ugly.  First the good.

Most investors probably wouldn’t consider Pakistan and the United Arab Emirates (UAE) as an investment opportunity in emerging markets but as Reshma Kapadia, who writes for Barrons’ and has stated in her November 19, 2012 column, the MSCI Pakistan index is up 20% this year and the MSCI UAE is up 21%

China’s picture has been bad but that could be changing.  The country’s manufacturing index showed its first expansion in 13 months indicating a turnaround for the Chinese economy.  The WSJ also reports that China is likely to loosen its’ monetary policy now that inflation pressures have begun to recede.  However, Byron King at the Daily Resource Hunter, reports that Chinese citizens are taking $50 billion a month illegally out of the country.

The ugly is one of the most beautiful and promising countries in the world.  We should all cry for Argentina.  As Mary Anastasia O’Grady reports in her AMERICAS column in the WSJ (November 19, 2012) “Argentina Runs Out of Other People’s Money.”  President Christina Kirchner, who was re-elected to a second term in 2011, had based the country’s economic model on a $100 billion default in debt, a weak peso, protectionism, confiscation of private property, capital controls, broken contracts and high taxes.  In other words, other people’s money.  Now, the economy has a negative GDP, inflation is at 25% annually and rising taxes have angered the PorteƱos.  And, Ms. Kirchner wants to amend the constitution so that she can run for a third term.  To add to her and the country’s woes, a US judge has just ruled that Argentina must immediately pay its creditors (mostly in the US) the nation’s 2001 default which had been restructured to pay $.33 on the dollar.  Why is this important to you?  The US is following the same path to destruction as Argentina and most of the Socialist/Marxist countries in Latin America and Europe.  The politicians promise the masses to lift their standard of living but never deliver and worst of all, they bankrupt the country and impoverish the masses.

4.  Hard Assets

You’ve read the headlines.  The US is likely to surpass Saudi Arabia as the world’s largest oil producer as early as 2020.  (If our vision is a perfect 20-20.)  Even the Paris-based International Energy Agency (IEA) believes that the global energy map is being re-drawn.  Analysts believe oil production in the US will increase from the 18 million BBL/day now to 23 million by 2020.  Overlooked by those on the left is that these results have been accomplished by new technology made possible by private risk capital and not government subsidies (i.e., Solyndra).  It also wouldn’t have occurred if the industry wasn’t able to drill on private or state land free from the Feds and the EPA.  Energy independence, first articulated during the Carter years and virtually unattainable until fracking and horizontal drilling was developed, is now coming under attack and could come undone.

The Sierra Club and other environmental groups are demonizing fracking as they have coal and natural gas.  These groups simply despise all fossil fuels and are determined to stop their development.  The Feds and their heavy-handed arm of authority, the EPA, have been consistently losing court cases on grounds that fracking endangers the water supply and is hazardous.  The Feds are now employing a new approach.  They are set to attempt to over-ride state law and prohibit the states from leasing their lands to oil and gas companies.  If they are successful energy independence  will again be unattainable.  And, no one is asking the cogent question.  If you eliminate all the fossil fuels for the production of electricity, how will demand be met?  Have you purchased a portable generator yet?

5.  Precious Metals

As gold and silver continue to trade in a rather narrow range waiting for a break-out, numerous events are occurring that investors probably haven’t encountered that support the bullish prospect for the PMGs.

1.  The Federal Reserve and financial writers and analysts constantly report that the Fed owns 261.5 million ounces of gold (8100 tons) currently valued at about $450 billion.  Walker F. Todd, a former Federal Reserve Bank attorney and now a Research Fellow at the American Institute for Economic Research (AIER) wrote a letter to the Editor of the WSJ which dispels the myth that the Fed owns this horde of gold.  He states that under the Gold Reserve Act of 1934 (when FDR confiscated all privately owned gold from US citizens) the Fed transferred legal title to its former holdings to the US Treasury at an official price then of $42.22/oz.  The Treasury issued non-transferable gold certificates to the Fed to pay for the gold – about $11 billion.  If the Fed claimed the gold, its’ claim would be the smaller number.  This information is critical going forward because there are those who believe that the Fed could escape the eventual accounting consequences of its’ QE by marking up the value of the official price.  As CMV has said repeatedly, the real problem comes when the Fed attempts to deleverage its’ balance sheet.  Rapidly rising interest rates.

2.  Turkey recently acknowledged that it had exported $10.7 billion of gold bullion in the first 9 months of 2012 vs. $1.5 billion in all of 2011.  It appears that $6.4 billion went to Iran in exchange for natural gas.  Iran provides 18% of Turkey’s needs for natural gas but is restricted by US and European sanctions from receiving US dollars or euros.  Turkey is paying in gold.  Another bit of evidence that gold has become real money, given the out-of-control inflation in Iran, the gold is greatly benefitting that country.

3.  There remains a major disconnect between the price of gold bullion and the price of the mining stocks as pointed out by Tatyana Shumsky in the November 26, 2012 WSJ.  She graphically illustrates that the SPDR Gold Trust shares have had over a 100% gain since 2009 whereas the NYSE ARCA Exchange Gold Bugs Index is essentially flat.  Investors have favored bullion ETFs over the miners which contributes to the divergence.  One aspect Tatyana fails to mention is that many of the senior producers pay a nice dividend based on these depressed prices. $2,000/oz gold and $40/oz silver will change these dynamics and the change could come much sooner than people think.

4.  CMV reported last month that the Bank of International Settlements (BIS) had mandated that gold be considered a Tier I asset on the balance sheets of all banks making it equivalent to cash effective January 1, 2013.  Previously, gold was a Tier III asset and was valued at 50%.  In a surprise announcement the US Federal Reserve and the US Treasury, notified its member banks that they did not have to comply with various rules promulgated by the BIS.  As of this writing we do not know if this announcement applies to the gold rule or not.  Unlike European banks, only the 5 major money center banks, if any, hold gold bullion as reserves.  All banks, however, would have been able to accept 100% of the value of bullion as collateral.

5.  As CMV has reported previously, the labor strikes in South Africa are causing an increase in the prices of platinum and palladium.  Demand for platinum this year will exceed 2011 by 400,000 oz., according to Johnson Mallhey a metals consulting firm.  Platinum has risen in price from around $1,400/oz in August to close at $1,586/oz on November 20, 2012.  There is about 15 months of inventory available but strong auto production, if it continues, will shorten this period.

NOTE: There was a sudden correction in gold of about $22/oz on November 28, 2012.  Reasons given by Bullion Desk and others was that the prospect of the break-down in negotiations to avoid the FISCAL CLIFF.  That doesn’t make much sense when the stock market rallied the same day.

6.  Commodities

CMV has subscribed to McMaster Online for many years to get a feel and a direction of this market which they dissect every day.  Here are a few highlights from McMaster’s November 29, 2012 report:

●   The Continuous Commodity Index is over-bought.  New recent low 11/28.  New recent high 11/27.  New 33 year high 07/03/08.

●   Lumber has broken out to a 5 year high on 11/28 to $340/thousand board feet in response to home construction.

●   Wheat is approaching $9/bushel as consumption has exceeded production in 6 out of the last 8 years.

●   Corn is approaching $7.50/bushel and reached a new recent high on 11/28.  Corn-based ethanol has supported US corn prices using 8.5 billion bushels in 2012.

What is important to note here is that key commodities are moving higher while the US economy is in a deflationary trend.  All the attempts by government to manage the economy is leading to supply and demand imbalances.  CMV sees commodity inflation as a trigger for wage and price inflation in the near-term future.

NOTE:  The current union demand that McDonalds double the minimum wage to $15/hour.

7.  Real Estate

Please refer to page 5 for CMV’s overview of this Sector.

8.  Special Situations
A.  Gold & Silver
    The explorers almost without exception have been beaten down to the point where many of their share price is less than cash in the bank.  CMV can’t think of any other Sub-Sector where the “Risk Off” sentiment has impacted share price so dramatically.  We are reminded of the period in 1990-1992 after the real estate market crashed and all the markets were depressed.  Explorers were pennies per share and there was little or no volume.  Being the Contrarian with pessimism at its’ peak, we bought a mix of explorers.  January 1993 was the turning point and suddenly Au jumped from $325/oz to over $440/oz within 6 months and the microcaps as well as the senior miners rose parabolically.  The current market reminds us of that point in time.  We are expecting a breakout from this oversold position within a couple of months.
B.  Platinum & Palladium
    Please refer to page 15 (5.)  for an overview.

C.  Rare Earths
    A feature article authored by Rhiannon Hoyle in the November 13, 2012 edition of the WSJ presented a very bearish outlook on this Sub-Sector.  He quotes Tim Dobson, Managing Director of Kimberly Rare Earths of Australia who says, “All of a sudden we have 400 years of rare earths being drilled out.  Smaller projects just aren’t viable anymore.  The impact on prices of certain REEs has been significant.  For example, a kilogram of lanthanum oxide used in oil refining and hybrid vehicles now sells for $13 a kilo vs. $110 a kilo a year ago.  The Chinese, who still control 90% of the world supply, have cut production drastically which may have an impact on prices.

D.   Uranium
    The Ux spot price has dropped from $44/lb in October, 2012 to $42 on November 26, 2012, hammered by the supply-demand cycle that effects all commodities.  In a November 26, 2012 article by David Sterman for the Financial Advisor web-site, the author maintains that “The phase of declining prices of Uranium appears set to change.”  He says that rising demand and falling supply are going to push Ux higher.  The spot price has risen $2/lb in the past week.  Specifically, Sterman says that Russia’s agreement in 1993 to supply decommissioned warheads for the US expires at the end of 2013 and US nuclear plants are now seeking alternate sources.

E.   Oil & Gas
    Please refer to page 14 for our overview on this Sub-Sector.

F.   Potash
    With world population rising, arable land decreasing, and demand for higher quality diets,  the need to maximize the efficiency of farmland is absolutely necessary.  Potash is the key ingredient for fertilizer. The coming food shortage as related above makes this Sub-Sector more necessary than ever.

G.   Graphite, Vanadium & Beryllium
    A recent research and development project for the development of the next generation rechargeable batteries using graphene with lithium iron phosphate materials hold much promise.  The batteries will be targeted for automobiles as well as mobile electronic devices.
    Vanadium is a chemical element and is a hard silvery gray, ductile and malleable transition metal that was long used for strengthening steel as well as preventing oxidation.  Its’ role as a new-age metal used for the mass storage of energy has opened huge opportunities.  Imagine a battery as large as a house to replace a power grid when it breaks down.
    Beryllium is another new age metal that has newly discovered application for a wide range of industries such as custom precision optical systems for defense, aerospace, laser, medical, process control and metrology.

If you want to learn more, please give me a call at (602) 840-4117.  At a time of crisis there’s always opportunity.



2 comments:

Anonymous said...

I am forever indebted to you for bringing forth you wealth of information to the rest of us! I am deeply saddened that you will no longer be publishing the CMV.

Our country *has* been fundamentally changed and we are in for a long and painful road ahead.

God bless you in your endeavors and THANK YOU again for all you have done for us!!!!!

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