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FREE PREVIEW of the February CMV Newsletter section. (The recommended list is available only to paid subscribers.)
(The actual newsletter is better looking, due to the limitations of blog posts.)
March, 2010
H. L. Quist's
Contrarian Market View Newsletter
Introduction
A CONTRARIAN is someone who looks at things differently than the majority of people. That definition fits H. L. Quist and CMV perfectly. In market parlance when 80 to 90% of investors are certain that the market is going to continue upward, the contrarian heads the other direction. Conversely, when the news is about as bad as it can get, the true contrarian is usually on the ground floor buying. That's what you can expect from H. L. Quist's Contrarian Market View (CMV).
CMV is not a market timer, but we don't want to be 100% exposed at a major turn in the market. In the past ten years there were two occasions to be defensive, significantly change the asset allocation, or be out of the market altogether.
March 2000 to October 2002
July 2007 to April 2009
The results, in the above case, were significant as most participants are painfully aware (Pages 68 - 75 How to Profit From The Coming Inflationary Boom and Avoid the Next Crash, by H. L. Quist). CMV anticipates that market volatility will continue in the future and our form of Active Management will serve the investor well.
In most cases, CMV anticipates that most readers will manage their own assets. In addition, most readers/investors will use CMV's specific recommendations to compliment their existing portfolios according to their own risk tolerance, time horizon and suitability. The recommendations included in this newsletter are principally aggressive and speculative in nature and should be used to offset or compliment the investor's complete portfolio. When determining what percentages should be in various asset classes, the reader/investor should list ALL of their assets such as cash in all accounts, life insurance and annuities, IRAs, 401Ks, commodity accounts, investment real estate, etc. The principal point of this exercise is that most advisors totally ignored alternative investments such as gold, oil, commodities etc. in past allocation of assets and not only failed to realize the gains these assets provided in the past 10 years, but they didn't have these gains to offset the losses in the .com bubble bust and the sub-prime market meltdown. Going forward Buy and Hold is not a prudent investment strategy.
Here is an example:
Risk Tolerance % Allocated to CMV
Conservative 10%
Moderate 15%
Aggressive 30%
Speculative 50%
The above is simply an example of how the reader/investor may want to use this newsletter and the
recommended portfolio. Please consult with your adviser and conduct additional research on your
own.
Market Overview
InflationThis topic is a major focus of CMV for two primary reasons:
1. It could be the single most important factor to you in your investment, financial, retirement, business and personal planning going forward, and
2. Americans are inundated with manipulated information that demonstrates that the threat of inflation does not exist.
The following information is provided by Jeff Nielson writing for Bullion Bulls Canada in the February 20, 2010 edition entitled, "Bank Lending Plummets as Wall Street Strangles Economy." Nielson quotes extensively from John Williams' Shadow Government Statistics (shadowstats.com) whom CMV has also relied upon for factual (truthful) data on the US economy.
Nielson says, "John Williams now believes that US hyperinflation could kick-in as early as this year." Nielson adds, "However, with phoney inflation statistics pretending that there is no inflation in the US, many are asking ‘where is this inflation?' Confusing the issue further, a stubborn group of ideologues insist that there can't be inflation — because we are headed for a deflationary implosion."
To illustrate the point, the US Bureau of Labor Statistics (BOLS) indicated in mid-February that the Producer Price Index (PPI) rose 1.4% in January, or over 20% on an annualized basis. The PPI reflects the cost of finished goods which ultimately, of course, are passed on to consumers. In contrast, the PPI was a negative number in 2009. But BOLS is quick to add, if oil and food increases (which none of us consume !) are removed from the index, the gain is only .04% and therefore not a harbinger of inflation.
Similarly, the January Consumer Price Index (CPI) showed an increase of 2.6% over December, 2009 and, annualized, over 30%! However, when "seasonally adjusted" the increase was reduced to only 0.2%. Jay Bryson, an economist at Wells Fargo was quoted as saying in a Wall St. Journal article that there were substantial declines in rent, education and healthcare. Arizona universities (as some of the rest of the nation) just announced up to a 30% increase in tuition and the largest provider for health insurance in California, Anthem Blue Cross, just reported a 39% increase in some premiums effective May 1st. CMV suspects that none of these numbers will ever see the light of day at BOLS. John Williams reports that inflation was 9.8% in January. Who do you believe?
So, why would BOLS under-report or adjust the numbers to minimize inflation?
1. To convince the consumer that prices of goods and services are not increasing and therefore stockpiling or hoarding isn't necessary.
2. To minimize the cost of US Treasury borrowing. The Treasury currently pays approximately $360 billion interest on $10 trillion of debt at exceptionally low rates. The government will need an additional $2-3 trillion in new financing in 2010 alone. Interest on the Federal Debt will be the largest line item soon in the country's budget.
3. To minimize the bank's interest costs from borrowing from the Federal Reserve as well as the costs to large corporations, hedge funds and private equity firms.
Most consumers and some observers fail to recognize that inflation is first and foremost a monetary phenomenon. It's simple arithmetic. When the government increases the supply of money at the fastest rate in history the price of that commodity (money) must fall. The devaluation of the USD is in reality, the definition of inflation. Those in control of the inflation numbers and those who benefit most from lower interest costs are deliberately masking what is about to unfold. John Williams believes that the "Inflation Jeannie's" appearance will be sudden and soon. CMV believes that the process will be more gradual allowing investors to realize gains from asset inflation before the ‘crack-up boom."
Bank LendingClosely related to the above analysis is the commodity or fiduciary element that creates this phenomenon — MONEY. The purpose of the TARP program was to save the banking system from collapse. Ostensibly, that mission has been accomplished (at the money center banks) and those institutions should now be in position to lend again as a requisite for recovery. That has not happened. Look at the chart below indicating the largest drop in commercial and industrial loans in history.
Source:
http://www.businessinsider.com/chart-of-the-day-commercial-and-industrial-loans-at-all-commer cial-banks-2010-2
Early 1990sNote the drop in loans after the real estate crash in 1990.
2000 to 2002Note the drop in lending after the .com bubble burst and 9-11.
2002 to 2007Note the dramatic increase in lending leading up to the sub-prime fiasco.
2007 to PresentNote the incredible drop from +$300 billion in lending in 2007 to a minus $300 billion currently.
So, where is the money going? Jeff Nielson calls it the "scorched-earth" strategy. Here, he says, is what is happening:
1. The Federal Reserve monetizes (prints) massive amounts of new money.
2. The Fed loans the money to the money center and regional banks (he calls them OLIGARCHS) at a nominal cost.
3. Instead of lending out these funds, the banks deposit the funds at the Federal Reserve where they earn 1% interest (ostensibly at no risk).
4. The Fed then uses these deposits to buy U S Treasury bonds which funds the massive US budget deficits, keeps interest rates low and the bond bubble from bursting. These purchases are from "direct sources" which are not named but we can now conclude The Fed is the primary buyer.
An event occurred on February 10th, that went unnoticed by perhaps 99% of the population. The US Treasury had, what many considered, a "failed" auction. Every week the Treasury auctions off gazillions dollars of debt to the highest bidder. Normally the bid to cover ratio is 2/3 to 1 for every bond sold, or in other words oversubscribed. More bidders than supply means lower interest rates. In this particular auction however, 24% of the bond issue was bought by direct buyers who are not identified. Shazam! Up steps Mr. Bernanke and the Fed becomes the secret "direct buyer" for an estimated 11% of the total purchases - a record.
Tim Geithner, the Secretary of the US Treasury when asked about this "failed" auction and the problems in Greece, was quick to respond. "The US will never lose its' AAA bond rating." To observers like CMV this is government doublespeak, meaning a downgrade of US debt is probably imminent. What then? US bond yields balloon, the USD falls and the Inflation Jeannie exits her bottle to party.
So, what have these "banksters" accomplished in this charade? One, they've "kicked the can" down the road. They are avoiding an immediate debt default by the US Treasury, providing a good portion of the various stimulus programs, feeding FHA, Fannie Mae, and Freddie Mac to shore up the housing market and in short — delay the inevitable collapse.
Secondly, and most important for readers of the CMV, the "scorched-earth" strategy will create an inflationary boom or as Nielson says "The Mother of all Rallies." In a last-gasp desperation move the banks, given an additional injection of money from the Fed, will begin a frenzy of lending abandoning (again) all lending standards creating Hyper-Inflation described by Ludwig von Mises, as a "crack-up boom."
Herein describes the problem and the opportunity. This scenario to CMV is clear. The timing is not. But, in all probability CMV will be able to gauge the process and keep you advised. You should not miss the opportunity to achieve gains in your portfolio during the "Mother of all Rallies," but before it's over CMV will probably advise liquidation of all assets. (And, where to shelter them.)
The Stock MarketThe Bears have come out of hibernation and it's not spring yet! The "fear factor" (that there will be a major decline in the market) is as high as it was in November, 2008, according to Shaeffer Investments. A poll of newsletter writers (not including CMV) shows that only 34.1% are Bullish which is the lowest since March, 2009, when the Bear market rally began. You may recall that CMV postulated in the January CMV newsletter that there could be a correction of 10% to 20%. Through February the correction is less than 1.0% Here is a quick insight into some of the Bearish soothsayers:
-- Meredith Whitney, who was one of the first analysts to call the sub-prime crash was Bullish until the end of 2009. In an interview with Maria Bartiromo recently on CNBC, she turned Bearish. Reason? The banks are under-capitalized.
-- Doug Fabian is a big Bear booster. He says this market rally is a "Bear Trap" much like the 1930 rally of 48%
-- Paul Farrell of Market Watch has listed 20 reasons why the market will fail in 2012. (CMV believes that there could be a significant rally in the ensuing two years also ending around that time.)
-- Bloomberg is forecasting a "great reckoning" in the US economy, meaning deflation.
-- Forbes believes that, in a short period of time, the total Federal Debt will equal 90% of GDP and the US economy will arrive at the "tipping point."
And, the Bearish beat goes on.
Late 2009 when the soothsayers were 90% Bearish on the US dollar and calling for its' demise, CMV (through its alter-ego The Myth Buster) took the Contrarian View and forecast a Rally in the dollar. Sure enough, much to the surprise and chagrin of the Bears, too many of them crowded together on to the same side of the ship and it capsized. What does this have to do with the stock market? When the Bears become the majority here, it will be time for the stock market to continue its rally that began in March, 2009. It appears that we're close to that point.
What's Bullish to CMV? Look at recent reported earnings:
-- Sears reported quarterly earnings of $430 million, up double from last year.
-- Target reported quarterly earnings of $936 million, up 54% over the same period last year.
-- Priceline earnings doubled and expect bookings to rise 48% in 2010.
-- Whole Foods earnings jumped 71% over last year.
What do these companies have in common? They all represent consumer spending and specifically to lower demographic groups.
It has been reported that over 80% of the S&P 500 companies have earnings in excess of estimates. Namely:
-- John Deere - earnings up 19% in the first quarter of FY 2010, and they're re-hiring workers.
-- Caterpillar also reported robust earnings and they're re-hiring 600 employees in the next 60 days.
-- Edmonds Shoe Corp. is also calling back laid off employees.
-- H-P reported a 25% increase in earnings and forecast an increase in sales of 26% in 2010.
What we have here, in CMV's opinion, is a massive disconnect between the Bullish indicators of business (specifically large corporations) and the consumer versus the Bearish outlook of the banking and government sectors. The question we all want answered is, will the economy continue to improve (as evidenced above) DESPITE the burgeoning Federal Debt and the incompetency and divisiveness in our political system? Most Bears see the out of control Federal Debt and deficits as the Sword of Damocles that will come crashing down to cut off the lifeblood to our Capitalistic system. Will Keynesianism succeed? Stay tuned and informed.
Leadership?In February, the President signed an executive order creating a Bi-Partisan National Commission on Fiscal Responsibility and Reform. How absurd is that ... when the President's own budget proposal estimates that deficits will total $8.5 trillion over the next 10 years? According to the Wall St. Journal (WSJ) what the President is really trying to accomplish is "political cover" for huge tax increases scheduled for after the mid-term elections. The WSJ says this charade should be called the VAT (Value Added Tax) Commission because that will probably be the recommendation.
Representative Scott Garrett, (R, NJ) has introduced a bill titled the Accurate Accounting of Fannie Mae & Freddie Mac Act which would require an accurate accounting to taxpayers as to the total liability of these two mortgage giants now under control of the US Treasury. The massive losses that the "evil twins" plus the $1.6 trillion of their corporate debt are presently not included as taxpayer debt and, are in Washington terms, ‘off-balance-sheet' items. As CMV has reported on several occasions, losses will continue to mount, FNM and FRE executives will continue to receive outlandish bonuses and taxpayers will never know the true liabilities. In the end, our political leaders will bury the loss along with the twins. That's real "leadership."
In CMV's opinion, there is no other corporate market leader that was contributed more to the real estate debacle and the resultant financial collapse of the US economy than Goldman Sucks. Now we've learned that Goldman played a significant role in Greece's potential default on its sovereign debt! These Masters of the Universe (for humongous fees and commissions) advised the Greeks how to hide their ballooning debt off-balance-sheet — for a number of years until two weeks ago. Now the Grecians are rioting and storming the stock exchange and government offices to rally against budge cuts. Shouldn't they direct some of their ire to the true architects of this global chaos? (As CMV goes to press the Federal Reserve is opening an investigation into Goldman's involvement in Greece. Rots of ruck!)
For those of you who remain partisan, it's the call for change in all Leadership that is the mantra of the Tea Parties. These are former Democrats, Republicans and Independents that have got it figured out. And, this is the critical point: Inflation and its' big brother hyper-inflation are a direct result of loss of confidence in leadership and the value of the country's currency. This massive mountain of debt coupled with the change in public sentiment are the roots of the ‘flations.
. . .
The above is a partial preview of the March CMV Newsletter. To get all the information including the recommended portfolio, AND receive a copy of "Greed" and "Profit" subscribe today -
click here.
-- H. L. Quist
