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April, 2010
H. L. Quist's
Contrarian Market View Newsletter
H. L. Quist's
Contrarian Market View Newsletter
Market Overview
The Economy:
Double Dip or Skinny Dip? In market terms, is the economy headed for a second recession or is a recovery at hand and is it time to jump back into the pool? (Swimsuit or not!) Contrary to a plethora of pundits who maintain that the US is on the precipice of financial collapse, CMV believes that the economy is going to surprise on the upside. We were courageous and correct when we re-committed to the equity market on April 1, 2009, and firmly believe that the economy will continue to outperform its' most vocal critics.
There's no question that portents of gloom and doom from Conservatives — particularly since the passage of Obamacare --- have obscured the positive. Be assured, CMV has not switched allegiance and moved to the left. Our position has always been consistent — when addressing the issue of money, you must separate political ideology from economic reality. A little history to make the case in point.
1975 - 1977
The oil embargo and Nixon's self-inflicted crisis and humiliation sent the economy and the markets into a free fall. The Dow fell 50% and the real estate market gave your writer the opportunity to buy a bankrupt premium residential property in Phoenix for $22/sq. Ft. Despite the election of a Trilateral Socialist as President who resurrected (again) John Maynard Keynes, we experienced a V correction within those two years. Look at the charts. The Dow rebounded 100% off its lows. And, by 1978 the real estate and commodity markets (Gold to $850/oz) were going ballistic despite rapidly rising interest rates. The prime rate rose to 21.5% and mortgage rates to 17% by 1980. Of course, the inflationary ‘crack-up boom' followed in 1980, but those investors and pundits who focused on the political and fiscal ineptitude of Jimmy Carter, missed the boat to Omaha. (Buffet discovered value investing in Omaha during this time period.)
1983 - 1985
The Recession of 1980-82 initially was a nightmare for Ronald Reagan. Official unemployment of 10.4% was higher then than the peak experienced in 2009. Despite Paul Volker's determination to kill the inflation dragon with high interest rates, the GDP jumped to 5.1% in the first quarter of 1983, 9.3% in the second quarter and remained at an incredible 8% for the next three quarters. The Garn- St. Germain Act, Supply Side Economics, Michael Milkin and The Plaza Accord were the stimulants which led to Black Monday in 1987, and the real estate collapse of 1989. The recovery in 1983 to 1985 was indeed robust and we suspect that those liberals hoping for Reagonomics to fail also missed the boat to Omaha.
1991 - 1993
The collapse of the real estate market — primarily commercial — the enactment of FIRREA (Financial Institution Reform and Recovery Enforcement Act) which formed the Resolution Trust Corp and closed 747 banks and thrifts in the US, created a similar mind-set amongst the real estate industry that exists today. Your writer forecast a real estate boom in 1992, which proved to be the longest and most profitable period in real property value growth in US history. It also marked the beginning of the .com bubble. Another robust recovery for those that had vision and courage and took a Contrarian view in 1991. (Isn't that what this is all about?)
2002 - 2005
The bursting of the .com bubble beginning March, 2000 followed by 9-11 brought a new level of negative psyche to all markets. "The Greenspan Plan," so named by this writer, was a deliberate strategy promulgated by the Federal Reserve to stimulate consumer spending. Memories should recall that it was the RE-FI cash-out phenomenon that not only created a "shop to you drop" mentality, it also gave birth to the sub-prime residential and credit bubble and Wall Street's Master of the Universe (MOTU) highly-leveraged and speculative bets. What most observers and participants failed to see early in the fall of 2002, was the rebound opportunity for all asset classes. This writer strongly encouraged investors to get fully invested in real estate, equities and commodities in the fall of 2002. Gains in equities and commodities of 200% to 400% from 2002 to 2006 were common. The key, of course, was an exit strategy to get the hell out of Omaha in 2007.
2010 - 2011
The rebound in the equity markets from March, 2009 has been rewarding to those who had capital and courage. Your writer re-committed to equities on April 1, 2009 — one year ago. The snap-back in gold from $700/oz in November,. 2008 to $1,220 one year later was as spectacular as it was rewarding for Contrarians. Real estate has not joined in the party because of the extent of physical and psychological damage brought on by the MOTU, well-documented by this writer in both of his books. So, what is CMV's outlook for the next two years?
1. Blue Chip Economic Indicators, a poll of 50 economists, all maintain that there will NOT be a second recession in 2010 and 2011. CMV agrees. The "crash" will come later.
2. The Blue Chip consensus expects the GDP to be a little less than 3% this year and a little over 3% in 2011. They also forecast unemployment to drop to 8.8%, by the end of 2011. CMV forecasts a higher GDP in the range of 4% to 5% for both years and unemployment to dip to 8% by the end of 2011.
3. The Blue Chip consensus expects consumer spending to remain in the 1.2% to 2% gains. CMV accurately forecast a robust fourth quarter of 2009 and sees the consumer much more confident going forward. The pundits say the consumer won't spend when unemployment remains high. CMV reminds the reader that unemployment remained above 10% from January through June of 1983, yet real consumer spending soared at an annual rate of 6.1%. CMV does not expect a repeat performance of 1983, but spending could surprise on the upside. Ford's sales and profits will be the industry's leader.
A few words on REAL ESTATE. Given the volume of e-mails and the anguish expressed by Realtors and developers, capitulation must be near. One Realtor remarked, "It will take several years for the market to recover," Employment opportunities are emerging in markets like Phoenix, which created 20,000 new jobs in February. Migration will soon follow. A new "enhanced" mortgage relief plan has just been announced (March 26,2010) which will require mortgage servicers to reduce principal if homeowners owe up to 15% more than the home is worth, to reduce payments to within 31% of the income and to skip payments altogether for the unemployed. Sophisticated investors are now willing to exchange zero returns on bonds for risk assets. Your writer's Realtor spouse and daughter have had more activity in the past month than in the past two years. Deals have been made, escrows opened and closed. There is a light at the end of the tunnel and it isn't a train! Market psychology can change rapidly. It's time to get back into the pool.
The China Syndrome
Do you remember the 1979 flick starring Michael Douglas, Jack Lemmon and the appropriately cast "Pink Lady" Jane Fonda? The film dealt with a cover-up of a potential meltdown of the Ventana Nuclear plant in California. Today, the potential for a currency meltdown between China and the US looms as ominous as a nuclear version.
At issue is China's past decision to peg its currency, the Yuan, to a fixed rate of 6.83 to the US dollar. The US claim (by the Keynesians) is that the resultant undervalued Yuan or currency manipulation combined with Chinese export subsidies has resulted in burgeoning trade deficits for the US, weakening our own manufacturing base and loss of millions of American jobs while China has prospered mightily. Recently, 130 members of Congress wrote a letter to the US Treasury demanding that unless China revalues the Yuan upward, the US should impose tariffs on Chinese goods. That's just what the US needs — a trade war with its number one banker. Duh!
To the Chinese, perception is more important than reality. If they bow to US demands, they appear weak, therefore China will delay the inevitable longer and when it best serves its interests And, what will be the result to the US when China revalues? US imports from China (which just about now covers everything) will appreciate in price thereby aggravating our inflation picture. On the plus side, our exports will be more competitive thereby expanding the US manufacturing base and reduce the trade deficit. Which do you prefer?
The bigger picture, of course, is that China has accumulated $2.5 trillion in US dollar reserves. They hold the ultimate trump card and already is re-shuffling the deck to recycle the shrinking dollar. What happens when China creates sufficient internal demand for its goods and doesn't need the US market? Our children could be speaking Mandarin. The most significant Mega-trend of our lifetime has been the shift in global power from Great Britain after World War II to the US and now from the US to China.
A Showdown At The OK (Gold) Corral
CMV and The Myth Buster have often reported on the market manipulation of gold and silver suppressing the price of both metals. A formal hearing was held at the US Commodity Futures Trading Commission on March 25, 2010. The charges presented to Gary Gensler, Chairman of the Commission were:
Comex data shows that the price of gold and silver are suppressed.
There is a direct correlation of price suppression and the positions of two US banks.
The Bank Derivatives Reports from Treasury Department Office of the Comptroller of the Currency (OCC) indicates these two banks are JP Morgan Chase and HSBC (formerly Hong Kong Shanghai Bank).
Appropriate enforcement action is required.
This writer's friend and hero, Bill Murphy, who founded The Gold Anti-Trust Action Committee (www.gata.org) many years ago, has implicated the US Government, the Federal Reserve and the major bullion banks as the perpetrators of the illegal scheme. Their motive, GATA says, is to maintain the purchasing power of the US dollar artificially high by concealing inflation and as a result, keep interest rates artificially low. Given the backdrop of the precarious state of the US and global economy, this issue has more relevance today than ever before. CMV suggests that you go to www.marketforceanalysis.com (Adrian Douglas) for a summary of the claims. To highlight the issue, from July to November, 2008, the two banks cited above went from having just 9% of the total net short position of silver to 99% thereby representing the entire net short position which is illegal. A short position is intended to suppress the price and the holder profits at a decline in price. As CMV indicated in previous issues, JP Morgan Chase, by virtue of its short position, would have been in serious financial condition if the price of silver increased. Of critical importance to you as an investor, JP Morgan Chase is the custodian of the silver in the SLV ETF. HSBC is the custodian in the GLD ETF. It's conceivable that neither of these institutions have the metal to meet their obligations as custodians.
President Barrack Obama (BO) in appointing Mr. Gensler to Chair the CFTC has vowed to clean up the corruption and bring transparency to these markets. Question is, will Gensler look into the abyss now confronted with these facts and clean up the mess or will he retreat and the bankers will maintain their control, as they have since 1913? CMV maintains that investors could demand delivery of bullion at contract expiration which will blow the lid off this entire scheme and both metals could reach levels never envisioned.
As a side note, despite the manipulation, gold has, since 2000, appreciated 10.1% a year against an average of All currencies. Some examples are:
US Dollar 14.9%
Swiss Franc 10.1%
UK Pound 15.1%
China Yuan 12.6%
Think back to 2000 and all of the financial advisers that told their clients that gold was "too risky" and a "barbarous relic." Pretty sound advice, huh?
One very important anomaly. The USD has rebounded in March from 81.00 to a high of 82.20 on the index which normally would be negative for gold. In spite of this dollar rally, gold has risen from $1,085/oz to $1,113/oz. We may have reached the point of BIFURCATION. Just like 1977 to 1980, gold will rise despite dollar strength and a dramatic increase in interest rates.
Interest Rates
CMV reported in the March issue of the "failed" auction of US Treasuries. 11% of the bonds at the February 10th auction were purchased by the Federal Reserve due to the lack of bids. A sudden drop in investor demand in the weak March 22nd auction further highlights the scenario forecast by The Myth Buster over a year ago. The 10 year note jumped from about 3.65% to 3.89% despite the fact that it was not offered in this auction. So, what is causing rates to rise?
Concern in Europe that Greece and other countries (PIIGS) may default on their debt.
The passage of Obamacare and the prospect of higher deficits in the US.
Social Security will record its first cash flow deficit (about $29 billion) in history this year, six years before forecasts.
US Treasuries have a higher yield than some US corporate bonds — a first in US history.
Echoing this concern, Steve Rodosky, head of Treasury and Derivative Trading at bond giant PIMCO said he was increasingly worried about the US fiscal outlook. In two days, 30 year mortgages were quoted at 5.125% up from 4.875%. Rates on many mortgages are linked to the 10 year Note. For CMV readers, TBT, our bond short strategy rose sharply from about $47/ sh to almost $50. Volume on the ETF skyrocketed from 5 million shares to over 15 million. The handwriting is on the wall. Read it! TBT should be a core holding. The Bond Bear Market has begun.
Additional fiscal concerns. Charles Krauthammer, who is a brilliant political analyst and who appears nightly on FOX News, said on Bill O'Reilly's Show on March 22nd, that the BO plan to raise hundreds of millions of dollars annually to attempt to meet the President's horrific deficits is a VAT — Value Added Tax — The European's answer to the constant dilemma that the US most assuredly faces. For those of you who haven't experienced it, you'll be forced to tack on a 10% to 25% (or more) tax on every retail purchase you make. (Possibly excluding food and health care.) Add $6,000 to that car you buy. When will this happen? Immediately after the mid-term election to be effective January 1, 2011. (Germany 19%, France and Italy 20%, Scandinavia 25%).
The biggest concern facing middle class America is the real prospect of the US Government's conversion of 401(K) and IRA and other retirement accounts. Sound absurd? In H L Quist's How To Profit From The Coming Inflationary Boom And Avoid The Next Crash, (p. 23) he cited nine months ago that the House Committee on Education and Labor had reviewed a proposal by Teresa Ghilarducci, a Professor of Economic Policy Analysis at the New School for Social Research in New York, to eliminate tax breaks for 401(K), IRAs and other retirement plans and convert them into Guaranteed Retirement Accounts (GRA) managed by the Social Security Administration. Now the focus has shifted to require that these plans purchase US Treasury Debt! These Marxists are totally committed to redistribute America's wealth and they can't resist this pool of trillions of dollars of private capital — particularly now when investors are backing off the purchase of US paper. If this attempt to "fundamentally change the United States of America" doesn't create a revolt, nothing will.
President BO, is doing his best to solve the unemployment problem. It is estimated that the IRS will hire 16,000 new employees to administer Obamacare and they've set aside $10 billion dollars in start-up funding. Unemployment in Virginia in counties close to DC have only 4% unemployment prior to the expansion of the IRS. The massive and highly remunerated bureaucracy that will grow during this presidency will absolutely destroy any chance of fiscal sanity.
What does this all translate to? Where are we, as a nation and it's economy, headed?
Rising inflation, morphing into;
Hyper-inflation, which leads to;
A Crack-Up Boom, which ends in;
US default and bankruptcy.
The only thing CMV can't tell you is, WHEN.
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-- H. L. Quist
