Saturday, August 11, 2012

CMV August, 2012

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SPECIAL NOTE:   Due to vacation schedules there will be no September CMV – the CMV will resume with the October 2012 issue.

Market Overview

“Everyone Wants To Go To Heaven But No One Wants To Die.”
– Anon

That’s clever and it might even evoke a wry smile but, what the heck does it mean?  Here’s an example that supports CMV’s often controversial, but introspective, view of the world.

Greece is a nation that has so burdened itself with debt to sustain the lifestyle and the comfortable retirement of its’ citizens that it faces a collapse of its’ democratic form of government, its’ economy and its’ society.  Few Greeks however see the inevitable outcome and won’t  sacrifice their expectations necessary to survive.

Similarly, there are municipalities and state governments in the US that have discovered the profound validity of Anon’s philosophy.  Stockton and San Bernardino, California are the most recent municipalities that have filed bankruptcy, along with 25 other cities in the US.  Their burden of “heavenly” entitlement or legacy costs has exceeded their ability to meet these contractual obligations.

As these cities and states grapple with the inevitable there remains the hope that the President will win re-election and that Uncle Sugar will continue to fund these benefits and no one will have to die.  Ultimately, of course, the Federal government faces the same reality that it can’t continue to fund its’ obligations also but to most, heaven can wait.

Friday’s (August 3rd) jobs report from the Bureau of Labor Statistics (BOLS) indicated an increase of 163,000 additions from July’s 64,000.  The markets in the US rallied sharply on the news ignoring the fact that factory jobs decreased by 25,000 last month and BOLS added 377,000 jobs as a “seasonal adjustment.”  It is generally acknowledged that approximately 200,000 new jobs must be created to reduce unemployment which now stands at 8.3%, David Rosenburg (Barron’s August 6, 2012), who is Gluskin-Sheff’s Chief Economist, says the report was a “head fake” and calls it “disingenuous.”  CMV believes we can expect BOLS to issue more disingenuous reports in September and October leading up to the election.

Despite the reliable Economic Cycle Research Institute’s (ECRI) forecast that the US will soon be in another recession, the DOW gained 217 points on Friday (August 3rd) to hit 13,096 up 7.19% YTD.  The S&P 500 rose 25.99 points closing at 1,391 up 10.61% YTD.  The NASDAQ Composite was up sharply by 58.13 points ending at 2,968 and 9.81 points higher YTD.  It is interesting to note that the S&P all-time high of 1,422 is just 2.3% above Friday’s close.  Based upon the S&P’s price/earnings (PE) multiple and the expected 12 month earnings, the PE is now a little over 13 times.  The market usually stalls when the PE reaches 14.  With the S&P within 2% of its’ all-time high, and closing in on 14X, the index is at a critical juncture.  Will there be a breakout to new highs or will it fail?  Much depends on GODOT. (Taken from the Broadway play “Waiting for Godot” which in CMV’s production the lead role is played by Ben Bernanke.  GODOT is a pseudonym for God.)

The Fed at it’s recent Open Market Committee Meeting concluding on August 1st, failed to intervene or provide any stimulus in the form of  QE 3 that would (ostensibly) juice the equity and commodity markets.  You will recall that GODOT (Mr. Bernanke) created Quantitative Easing #1 and #2 as well as Operation Twist #1 and #2 with mixed results.  Yes, we enjoyed higher stock prices but we also endured higher gasoline and food prices. So if, as ECRI forecasts, the US economy is slowing and a recession is at hand, what does GODOT do? Some pundits claim GODOT is out of bullets and any more intervention would be ineffective.  In the play, GODOT never arrives and the actors are left waiting.  Is it deja vu all over again?

There’s another key actor in this global economic play;  Super Mario (Draghi),the President of the European Central Bank (ECB).  Last week he said the ECB “will do whatever it takes” to save the euro.  The markets in Europe and the US both rallied.  A week later Super Mario declared that the ECB “may do whatever it takes” to save the euro and the markets tanked.  Appropriately, Super Mario has become the NATO man – No Action Talk Only.  So, it appears that the Western world and to a large extent, the Eastern, are anxiously awaiting the NATO man and GODOT.  In CMV’s opinion, these two actors will be forced to “show” and resort to the printing press and further dilution of their fiat currencies.  Bill Gross, the world’s largest bond manager at PIMCO said on August 1, 2012:

“Unfair though it may be, an investor should continue to expect an attempted inflation solution in almost all developed economies over the next few years and even decades.  The cult of equity may be dying, but the cult of inflation may have only just begun.”

It has become abundantly clear to CMV that all the previous attempts at stimulus have not created growth in GDP which is precisely what is fundamentally required to increase job opportunities and increase tax revenue.  We’re not economists but it seems that when the level of federal debt exceeds 100% of GDP, growth of 4% or greater becomes near impossible. When the federal government has to borrow $.40 out of every dollar to meet its’ cash flow needs and offers its’ citizens a near-zero return to invest in its’ debt securities we are reaching a stalemate.  The prospect for a change in the direction of the economy is based upon an illusion which is not a strategy.  Read Real Return Investing, on page 9 carefully.

The Coming Confiscation

America is about to face financial Armageddon and our country and its’ citizens are totally unprepared to meet the crisis that looms ahead.

The first of the 78 million baby boomers are turning age 66 this year and are eligible for full Social Security (SS) benefits and Medicare.  Most Seniors buy into the myth that there’s a $2.7 trillion trust fund to guarantee their SS income for life.  The inescapable truth is that the federal government has spent all of these funds to pay the nation’s bills for decades and the funds in trust are only IOU’s from the US Treasury.  And, the Treasury owes bondholders $16 trillion and has to borrow new money just to pay interest on the debt.

In the January 2012 edition of CMV, we revealed the astounding growth in Social Security disability claims and the abuse or gaming of the system that is taking place.  In June, 2012 the Bureau of Labor Statistics (BOLS) reported that private employers added 80,000 jobs for the month which was extremely disappointing and caused a sell-off in the US stock market.  Incredibly, also in June, 85,000 workers filed for total and permanent disability.  In the 3 year period from June 2009 to last month over 3.1 million employees have gone on Social Security Disability which nearly doubled the number of recipients up to that period.  As CMV disclosed, the Social Security Disability Fund is separate from the Old Age Survivors Insurance (OASI) fund cited above.  Due to the excessive number of disability claimants the fund will be depleted within two years.  Where will the money come from to continue these payments?  It’s the same dilemma that will soon appear for retirees also. There are only two sources – taxpayers and money printing.  CMV believes that the checks will continue to beneficiaries but there’s a catch that virtually few of these recipients has even considered possible.  Each check received will become worth less and less and less until they become worthless.  Just like pensioners experienced in the Weimar Republic in Germany from 1921 to 1924.

The rise in the cost of Medicare and Medicaid with the advent of the Boomers, will begin to accelerate exponentially and faster than the growth of the Gross Domestic Product (GDP).  Since 1997, the Medicare law required that payments to physicians were to be cut.  These cuts have been included in the budget (except for the past 3 years where there was none) but Congress has “modified” the requirement each year and the reductions haven’t taken place.  That makes the Congressional Budget Office’s (CBO) numbers misleading and grossly understates the problem.  Medicare is now 3.7% of the GDP and should more than double in the next 20 years.  Add to that Medicaid and all the other entitlement programs and they will eventually consume most of Federal revenue.  Congress prefers to target a future date for this to happen which is of little concern to them.  They have kicked the can down the road never considering that the road would end.

The critical question that affects ALL Americans is, where will the money come from to meet the promises that the US Government has made to its’ citizens?  The following is not what you would expect to learn.

Three years ago in your writer’s book,  How To Profit From The Coming Inflationary Boom And Avoid The Next Crash (Yes, there was an asset inflationary boom in 2009 and 2010), the subject of a source of capital to meet the voracious government appetite was addressed.  The except from page 23 was as follows:

    Daniel D. Show offers a glimpse into America’s new collectivist mind set and the prospect for the governments takeover of private retirement accounts.  The Administration and the House Committee on Education & Labor have heard a proposal by Teresa Ghilarducci, Professor of Economic Policy Analysis at the New School for Social Research in New York, to eliminate tax breaks (thus increasing tax revenues) for 401(k), IRA’s and similar retirement plans and convert them into Guaranteed Retirement Accounts (GRA) managed by the Social Security Administration. – Offshorefinancialsolutions.com - also Review & Outlook online at Wall St. Journal November 14, 2008 — http://online.wsj.com/article/SB122662401729126813.html

Private pension assets held in IRA’s 401(K) and other plans represent the largest untapped sources of capital in America.  What Ghilarducci says here is that the American public is too ignorant to manage their own money and therefore the Federal government is a better source and can guarantee retirement income.  What this form of “Confiscation” would not provide is protection against the inevitable devaluation of the US dollar and erosion of the retiree’s purchasing power, as cited above.  CMV believes, on a minimum basis, these private accounts will be required by mandate to invest a large percentage of these assets in government debt securities.  The Japanese government initiated this requirement a number of years ago.  If Barrack Obama wins re-election, it may be wise to consider terminating your plan(s), pay the taxes in 2012 and continue managing these assets outside a qualified tax-deferred vehicle.  CMV would also suggest that you discuss this matter with your CPA and consider your tax consequences and potential penalties before making this important decision.

The following adds credibility to the above.  The California Public Employees Retirement System (CALPERS) is the largest public employee pension plan in the US which hardly means its’ the best managed.  CALPERS  0.57% return over the past 5 years is, in part, responsible for the fact that the plan is about 25% underfunded which means that it may not be able to meet the obligations of its retirees.  The California State Senate has just passed a bill that would expand the CALPERS system into the private sector.  Huh?  State lawmakers want to extend their mis-managed plan to all businesses in California with more than 5 employees!  As Thomas G. Donelan, the editor of Barron’s, points out in his June 25, 2012 editorial, California workers might be gratified for this opportunity to pool their pension assets with CALPERS if not for their secondary role as taxpayers.  He says, “As such they are already on the hook for pensions promised to several million public workers, using money that doesn’t exist.”  If you haven’t connected the dots, this is a desperate move by the State to create a new source of cash into the fund so they can push the inevitable shortfall down the road. Our public pension plans are becoming Ponzi schemes.  Can you imagine what an impact a 30% to 40% decline in stocks and a prolonged bear market would have on CALPERS and other retirement funds?

The CMV Healthcare Solution
In response to requests from our readers, a few who claim to be amongst the intellegencia, CMV will offer its thoughts on one of the most pressing issues of our time – HEALTHCARE.  It is and has been our long-held position for over 20 years that any program managed by the Federal Government, any single payer system or any one shoe fits all type of system is doomed to fail and make what is today a looming nightmare an outright financial and human catastrophe. First, a look at the numbers.

The July 7/8 , 2012 edition of the WSJ had a feature article by Janet Adamy and Tom McGinty entitled “The Crushing Cost of Care.”  The numbers below were provided by the Congressional Budget Office (CBO) which is, ostensibly, unbiased – if there is such a thing today.

Seniors, naturally, are the sickest of all Americans and account for the vast majority of all healthcare spending.  In 2009, according to the CBO, the top 10% of all Medicare beneficiaries who received hospital care accounted for 64% of the program’s hospital spending.  In 2011, Medicare’s net expenditures totaled $480 billion or 13.5% of ALL federal expenditures.  The CBO projects that Medicare costs will grow at an average increase of 5.7% per year through 2022 and will equal 16.2% of ALL federal budget expenditures at that time.  A further breakdown shows that 6.6% (1.6 million) of Seniors who received care in their final year of life accounted for 22.3% of total hospital expenditures!  The obvious conclusion?  Limit the benefits for Seniors in their final years.  Obamacare plans to cut $575 billion from Medicare over 10 years, and if you are age 70 or over, and you need a heart or kidney transplant, hip replacement or another form of expensive procedure the Independent Payment Advisory Board (IPAB), a 15-member committee, whose purpose is to ration care, will decide whether or not your procedure is acceptable.  Those over age 70 can expect to receive ‘comfort care’ and little, if any, extensive procedures.

On July 4, 2012, President Obama named Dr. Donald Berwick from the Harvard Medical School as his Healthcare Czar.  Dr. Berwick was knighted by the Queen of England for his support of Britain’s National Health Service that is well-known for its’ rationing of care.

Additional “rationing” is likely for Medicaid patients also.  Over-looked by most observers, the Supremes (Supreme Court) voted 7 to 2 ruling that the Federal Government could not penalize states that refuse to enroll millions more of low-income people in their existing programs.  The State of Maine, for example, immediately moved legally to drop 20,000 Medicaid recipients from the state’s rolls including 19 and 20 year olds to save $10 million over the next year.  Wisconsin, Alabama, Texas and other states are expected to follow.  Doctors are refusing to take patients because they can’t afford to treat them.  The Federal government currently contributes around 57% of the financing for Medicaid programs for the states, but sets restrictions on how the money is used.  A legal confrontation between the financially-strapped states and the Department of Health & Human Services is bound to ensue.  Depriving possibly millions of low-income people from healthcare may save the states precious dollars but it certainly doesn’t address the critical issues of offering care to everyone.

So, what is CMV’s solution?

A Two Tier Healthcare System

First, we should all recognize that there is a segment of our society that can’t possibly pay for their healthcare or pay premiums for insurance but they must have access to care.  An expansion of the current free Medicaid program would be Tier 1.

Second, we should all recognize that there is a segment of our society that can afford to pay for their healthcare (self-insure) or pay premiums for health insurance.  These citizens would be eligible for Tier II.

One system can’t serve both segments of our society.  Here’s why.  As the Federal government continues to reduce its reimbursement to doctors, hospitals and all healthcare providers, those facilities and professionals, who are presently at the top end of the scale, will be forced out of the business.  How many doctors will pursue a profession where their education costs $250,000 or more, and results in earning $70,000 or less per year?  What hospital will make $100s of millions of capital investments in new facilities and the latest equipment with a continued reduction of reimbursement?  Why spend billions in research when no one can afford the treatment?  The best and the brightest of our young people will find another career and in a short period of time our entire healthcare system will be on a par with third world healthcare.  Ironically, in retaining TIER II, TIER I patients could receive better care.  Unfortunately, the Obama Administration’s goal is to eliminate all profit incentive in the healthcare system which will guarantee a reduction in the quality of care and the number of providers when more are desperately needed.

A recently revealed survey of physicians on FOX News (July 10th) indicated that 83% of the doctors polled would leave their professions if Obamacare is not repealed.  A two-tiered system could  prevent that. [The study polled 699 participants of the group “Doctor Patient Medical Association.”]

Equalitarians and the PC crowd will reject the Two Tier System out of hand because it’s not equal, fair or is socially unjust.  The alternative is a nation gone bust where competent, high quality healthcare will be found in another country.

Obama’s Imperial Presidency

This is the title of Kimberley Strassel’s Potomac Watch column that appeared in the July 5,2012 edition of the WSJ.  The Myth Buster covered this revealing and timely piece in his Podcast on July 8th.  If America wants an insight into what President Obama’s second term may look like, they only have to know how he governed during the past three and one-half years.  Strassel says, “Mr. Obama has granted himself unprecedented power.”  She adds:

“Mr. Obama proposes, Congress refuses, he does it anyway.”

There is a short summary of various issues and how this “Imperial President” changed the outcome to fit his ideology and his political objectives:

    Law                Result            Presidential Mandate
●   The Dream Act        Congress Rejected        Executive Order
●   Medical Marijuana        Congress Wouldn’t Repeal    Justice Department Won’t Prosecute
●   Defense of Marriage Act    No Congressional Repeal        Justice Department Won’t Defend
●   No Child Left Behind        Congress Change Failed        Department of Education Waivers
●   Cap & Trade            Congress Wouldn’t Pass        EPA Intervenes
●   Union Card Check        Congress Wouldn’t Pass        Stacked National Labor Relations Board
●   New NRLB Members        Senate Wouldn’t Confirm        Declared Recess & Appointed
●   Internet Regulations        Congress Wouldn’t Pass        FCC Ruled Unilaterally
●   Fast & Furious        House Held Justice in Contempt    Executive Order Stalemate
●   General Motors Bailout    Bond Investors Subordinated    Over-ride Contract Law
●   States Clean Up Voter Rolls    States Prohibited            Evoked Voting Rights Act
●   States Fracking Rules        No Federal Jurisdiction        New Federal Authority
●   War in Libya            Congressional Consent Required    No Consent Obtained.
Based upon the above and given an unimpeded four year additional term, what can Americans expect from this second-term President?  Supported by a Justice Department that’s clearly above the law of the land, there will be a teutonic shift in the balance of power where Congress will be irrelevant and impotent.  The Rule of Law which has made the United States of America the premier jurisdiction to do business in all of the world will continue to fracture and will become a haven for crony capitalists and our version of the Russian oligarchy.  What escapes our media  is that Venezuela, Argentina, Bolivia and other Latin American countries have become Marxist totalitarian states that in short order will soon collapse – again.  For those with a short memory, the Argentine economy collapsed in 2001 and the country defaulted on all its’ sovereign debt owed to US banks.  Geez!  Maybe that’s the plan for Obama’s America!  The present $16 trillion of Federal debt which will explode to $20 - $25 trillion over the next four years, will never be paid in full.  That would fit perfectly with this Administration’s goal to lesson America’s power and image in the world and destroy the Capitalist system.

Capitalism Under Fire

Charles Murray has penned a feature article entitled “Why Capitalism Has An Image Problem” in the July 28/29 edition of the WSJ.  It is both timely and instructive because it shapes the essence of the current presidential race.

Murray, unafraid of over-stating the case, says:

“...Capitalism is the best thing that has ever happened to the material condition of the human race.  From the dawn of history until the eighteenth century, every society in the world was impoverished, with only the thinnest film of wealth on top.  Then came capitalism and the industrial revolution.  Everywhere that capitalism didn’t take hold, people remained impoverished.  Everywhere that capitalism has been rejected since then, poverty has increased.”

In America today, in what was the most successful nation in the history of mankind, “capitalist” has become an “accusation” according to Murray.  The “creative destruction” that is the essence of the system is now seen as evil and anyone who is successful and rich is so because that successful entrepreneur made someone else poorer.  Mitt Romney, whose tenure at Bain Capital clearly established him as a successful capitalist, has been branded by the left as an enemy of the people and a person who hadn’t done anything to deserve his wealth or money.  The demonization of Romney has been the tactical strategy of the President and his campaign staff that’s effectively changing the argument that capitalism is not the answer to America’s economic malaise.

To build their case, the Progressive and Marxist left only has to point to those capitalists on Wall St. whose rapacious greed destroyed the residential real estate market early in the last decade and impoverished a large section of America’s middle class.  CMV has written extensively on those “Masters of The Universe” (MOTU) which was a cabal of Wall St., banking, government and political participants who carried out this coordinated scheme that, in retrospect, had to be deliberate, or on a minimum basis, careless and reckless.  The MOTU became the “enablers” who created a perfect environment for candidate Obama and his leftists to exploit the evils of capitalism and the outcome was inevitable.  That same argument is being made today and it resonates loudly with those that can pin the blame on someone else for their failure and look to government to provide for their success.

Murray states that capitalism must repair its image.  All of us must reinforce the virtue of success and that capitalism is the economic expression of liberty.  The challenge is ominous.  This basic concept is no longer acceptable in most of our schools nor in many American homes.  It isn’t sufficient just to point to the death of democracy in Greece or the failure of European socialism.  Mitt Romney, to be successful in November, must borrow the Reagan message of American (and its’ capitalist system) as the “shining city on the hill.”  Rumor has it that Reagan’s hologram will introduce Mitt Romney at the Republican Convention.  This “appearance” of President Reagan would be spooky but memorable and perhaps a film clip of the former President’s 1980 question “Are you better off today than you were four years ago” will be adequate.

A friend sent me a quote from one of America’s foremost novelists and philosophers who wrote this piece over fifty years ago.

“Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed.”  —Ayn Rand

Real Return Investing

Paul Brodsky, who has graced these pages several times, is a principal in QB Asset Management (qbamco.com) and an author of what CMV believes is the most articulate synopsis of macroeconomic issues as well as the Federal Reserve System and the overriding monetary problems that the Fed has created.  Brodsky has also offered up a practical and relatively simple strategy that would solve the current “global balance sheet - centric malaise brought about by the end of an almost 40 year global credit cycle.”  Here are some concepts that you need to grasp.

●   Both creditors and debtors are starved of base money (currency in circulation and bank reserves held at central banks) with which to service debt.

●   Conventional monetary and fiscal policy responses seeking higher growth and more efficient spending cannot work.

●   Credit money is created (in the fractional reserve banking system) and is all money in existence that is not base money.

●   US bank deposits held domestically and abroad total about $20 trillion while base money is $2.7 trillion.  The gap separating credit money deposits from base money defines systemic leverage.

●   The significantly over-leveraged banking systems and a highly indebted public is currently pressuring monetary authorities to de-leverage credit money by creating more base money.  As money creation is less disruptive (in the short-term) than credit deterioration base money inflation is most likely to continue which is the purpose of this exercise.

You may recall that CMV summarized Brodsky’s solution to the Fed’s present dilemma by monetizing gold.  The US base money now is approximately $2.7 trillion.  The US gold bullion supply (reportedly) is about 8300 metric tons. If you divide the total base money supply by the gold supply the Shadow Gold Price (SGP) would be $9,961/oz.  Since the credit crisis of 2008 and the rapid expansion of the Fed’s balance sheet to $2.7 trillion the SGP has ballooned from about $3,000/oz to nearly $10,000.  The only way (other than through massive credit de-leveraging) that the Fed can avoid the accelerated devaluation of the USD and historic inflation is for the Fed to monetize gold to stabilize the USD.  The Fed would tender for all privately owned gold near the SGP of $10,000/oz and would purchase the gold through newly issued Federal Reserve Notes which would flow to the banks in the form of new net deposits.  This would be a discrete monetary event and a simultaneous de-leveraging.  The USD would then be pegged to the new price of gold.

Assuming the Fed continues its’ present policy of expanding base money, what options does an individual have to preserve and protect their purchasing power and secure their future?  Brodsky recommends:

Treasure

That’s TREASURE, not Treasuries!  He’s citing fine art, rare property and gold.  Treasure does not have to have any functional utility.  It needs to be scarce, have ongoing demand, easily verifiable and portable.  The wealthy investor, Leon Black just exchanged $120 million of devaluing dollars for a painting by the artist Edvard Munch entitled “The Scream.”  Not many of us could attend a Sotheby’s auction and bid on such a piece but we could acquire rare stamps, baseball cards, historic items and the like.  Real property in key locations is not portable but will always have real value.  In the late 1970s when monetary and price inflation were out of control, and home mortgage interest rates ballooned to 17%, investors were purchasing real property to convert their currency to hard assets.  Future activity could be more dramatic as interest rates are at historic lows and the small investor would utilize leverage.

We believe that this exercise and Brodsky’s expertise should make the reader focus on the anomaly that lies ahead and that there is a solution.

2016: Obama’s America

Gerald R. (Jerry) Molen is an Oscar-Winning film producer whose credits include “Rain Man”, “Minority Report,” “Twister,” Schindler’s List,” and “Jurassic Park.”  His latest film is what Molen terms an “educational documentary” entitled “2016: Obama’s America (Love Him, Hate Him, You Don’t Know Him)” .  The film was just released and hit the theaters July 27th.

Much of the factual data in the film is based upon the research compiled by author Dinesh D’Souza for his book “The Roots of Obama’s Rage” which has quickly become a best seller and has touched off a massive controversy.  Molen said in a recent interview by Jay Fernandez of “Indiewire” when Fernandez asked if movies can be an effective art form; “I think so.  I don’t think there’s anything more powerful than the visual image...like “Schindler’s List” that had a great impact on society.”  Molen’s objective is to educate the public whom he believes doesn’t know Obama’s background or what his hidden agenda is for America if he should gain another term.  Asked by Fernandez if Steven Spielberg, a strong Obama supporter and a close friend of Molen’s would be invited to a screening, “Absolutely.”  Fernandez followed up, “Would he (Spielberg) want to see it?”  Molen laughed and said, “I don’t know.”

There’s a “Quist Twist” to this story.  Your writer has met with Molen and the Oscar-winning producer has reviewed a screenplay of “The Future Isn’t What It Used To Be” taken from a novel by the same title, written by your writer.  Ironically, this time-travel story takes place in the year 2053 after America has suffered from financial collapse and is in chaos.  A coincidence?  Our concern is that given Hollywood’s proclivity to rabidly support the radical left, that Molen’s stature will considerably slip and he will be ‘black-listed’ in Hollywood.  As we write, an all-out effort is being made to prevent this film from showing in theaters across the US.

We’ve not had an opportunity to review Molen’s film.  Do everything you can to find a theater that will run the film and invite all the people you can reach to see it.  America didn’t know who this President was as a candidate in 2008.  The story is now being told accurately and effectively.  No excuse this time.  Get ready for the “October Surprise.”

Updates

The Heretical Banker – Break Up The Big Banks

Sanford Weill just disavowed the work and ambition of his lifetime.  This banking giant, who built Citigroup through a myriad of acquisitions including Travelers Ins. Co., in 1998 and who led the industry’s lobbying effort to repeal the 1930s Glass-Steagall Act which prohibited commercial banks from doing investment banking, stated recently on CNBC that “what we should probably do is...split up investment banking from banking.”  The banking industry was in shock when Weill added, “I am suggesting that they be broken up so the taxpayer will never be at risk...mistakes were made.”  This coming from a man who enlisted the help of President Bill Clinton and Fed head Alan Greenspan to repeal the Act in 1999 that was the major obstacle to the banks taking aggressive and leveraged speculative positions, which gave the nation the sub-prime debacle.  Weill stepped down as Chairman of Citi in 2006 and sold his stock back to the mega bank for $47/sh.  Two years later the stock had lost 90% of its value.  Maybe, just maybe, Weill’s conscience forced him to admit it all was a mistake.  Now, we’ve got Dodd-Frank which, like interest, compounds the problem and the taxpayers remain at risk.

The Banksters Strike Again

The Student Loan Marketing Association (SLM Corp), more commonly known as Sallie Mae, was a Government Sponsored Enterprise (GSE) formed in 1972 to provide loans principally to college students.  Sallie has been about as successful as its’ GSE cousins Fannie Mae and Freddie Mac but little fanfare has focused on another taxpayer bailout that’s about to transition from the problematical to the absurd.  Here’s why.

There is now approximately one trillion dollars of student loan debt outstanding and about 90% of it is federally (read taxpayer) guaranteed.  The remaining $10 billion are private loans.  In July, the newly-created Consumer Financial Protection Bureau issued a report concluding that Congress should consider allowing borrowers to discharge their private student loans through bankruptcy.  What’s coming, of course, is a change that will also permit Sallie Mae borrowers to utilize bankruptcy to discharge their debt thereby making US taxpayers liable for the balance due.  First the President and Congress cut student loan interest rates by about 50% and now he’s telling young voters that he’s making it easier for them to avoid repayment at all.

You may recall that CMV labeled those large institutions of higher learning as “Monoliths” in discussing the Penn State debacle.  No one (that we know of) has made the correlation of the creation of these “Monoliths” with Sallie Mae.  Since the advent of Sallie in the early 1970s, the cost of a college education became affordable to a huge number of students who otherwise couldn’t have afforded it.  That is what was intended.  As attendance swelled however, so did the size and influence of the colleges which inflated tuition costs at an annual compound rate of nearly 8%.  Now, this college debt bubble is imploding and the “Monoliths” will be forced to downsize and the borrowers will be offered a reprieve.  The hard reality is that most of the trillion dollar debt will never be paid and the lessons of Econ 101 won’t be learned.  The “Monoliths”?  Enrollment will start to plummet as young people will go on-line to get their education.  Someone moved the cheese – again.

NOTE:

SLM Corp was a publically-held corporation that originated and serviced student loans as a Government Sponsored Enterprise (GSE).  It was, in effect, a middle man which earned substantial fees and paid outsized compensation to its’ officers and principals and had little or no risk as loan losses were absorbed by US taxpayers.

Political Correctness

Congressman Trent Franks (R-Az) serves on committees charged with oversight of the President’s Cabinet members and their agencies.  He recently signed onto five letters to the Inspector General of five different federal departments charged with National Security, asking them to look into concerns over the Administration’s noticeable and demonstrable shift in policy towards the militant Islamist groups known as the Muslim Brotherhood.  Here are a few cogent paragraphs from Franks’ letters:

“The Muslim Brotherhood network within the United States became publicly known during the 2008 Holy Land Foundation trial (the largest terrorism finance trial in U.S. history) where the evidence showed that the Muslim Brotherhood's goal in North America is, in their words, to ‘destroy Western civilization from within,’[1] which their own writings have said includes establishing an advisory presence inside top U.S. institutions. The Brotherhood has also identified 29 groups in the United States as ‘our organizations and organizations of our friends.’ (Reference the government's evidence in the Holy Land Foundation Trial, N.D. TX (2008), specifically "An Explanatory Memorandum for on the Strategic Goal for the Group in North America ," and see United States v. Holy Land Foundation et al. (No. 09-10875)(2010).  For a partial list of exhibits, see http://www.txnd.uscourts.gov/judges/hlf2.html)

“The letters to the Inspectors General provide many examples that merit concern. First, the Department of Homeland Security granted a secret security clearance to Mohamed Elibiary, a man who had expressed support for Holy Land Foundation trial defendants. Mr. Elibiary also was reported to have been a featured speaker at a conference in honor of notorious radical Islamist Ayatollah Khomeini. The Obama Administration placed Mr. Elibiary on the influential Homeland Security Advisory Council, where he advises on information sharing within the intelligence apparatus.

“Also of concern was the State Department's grant of a visa – in violation of federal law – to Hani Nour Eldin, a member of the Egyptian terrorist group, Gamaa Islamiya. The leader of this group is Omar Abdel Rahman, better known as the ‘Blind Sheik,’ who is now serving a life sentence for his involvement in terror plots including the 1993 bombing of the World Trade Center. Eldin was subsequently given access to the White House itself, where he reportedly pled for the release of the Blind Sheik from U.S custody. Egypt's Muslim Brotherhood President Mohammed Morsi, openly supported by the Obama State Department, is also calling for the release of the Blind Sheik.

“Other examples include meetings held by the Attorney General and other senior Justice Department officials with representatives of unindicted co-conspirators named in the federal prosecution of the Holy Land Foundation terrorism-financing conspiracy.  Preeminent among these was one of the largest Muslim Brotherhood affiliated organizations in the United States: the Islamic Society of North America (ISNA).

“Heightening these concerns was the refusal by the Attorney General to proceed with the prosecution of three of the Holy Land Foundation’s unindicted co-conspirators – ISNA, the Council on American Islamic Relations (CAIR) and the North American Islamic Trust (NAIT). The Attorney General failed to pursue this prosecution in spite of the fact that the record from the Holy Land Foundation trial obviously supported proceeding with the prosecution of the unindicted co-conspirators.

“To collaborate in this administration's political correctness and pretend that these issues are not real is to potentially put innocent lives at risk in the pursuit of preventing anyone from feeling uncomfortable.

“In spite of these examples (representing only a small part of my reasoning for signing the subject letters), the Obama Administration has announced that it will now engage with the Muslim Brotherhood, stating it is in Washington’s interests to deal with parties “committed to non-violent politics.”

“Somehow, the Obama State Department has failed to notice decades of history whereby Hamas, the Palestinian branch of the Muslim Brotherhood, has violently killed and maimed innocent Israeli, Palestinian, and American civilians. What is even more startling and tragic, is that this carnage continues under the watchful eye of this Administration.

“I am not sure which should alarm America more, this Administration’s seeming blindness to the violent and extremist nature of the Muslim Brotherhood, or the Administration’s willingness to overlook it in the name of political correctness.

Political Correctness (PC) has become one of the most dangerous, destructive and insidious concepts or mandates ever to be conceived.  PCers portend to preach tolerance as the centerpiece of their philosophy. What’s occurred, however, is that it has bred complete Intolerance of those who disagree with any notion or cause promulgated by the PCers!  If you agree with Mr. Franks you are not a concerned US citizen – you are an Islamaphobe or racist.  CMV suspects that there’s something more sinister at work here.

In our (informed) opinion, there is a deliberate policy of this Administration to undermine the American culture and foment unrest.  The Muslim Brotherhood makes absolutely no attempt to hide its’ goals and its’ intent “to destroy Western Civilization from within.”  PC gives the perfect cover.  Its’ been almost 3 years since Major Nidal Malik Hasan went on his pre-mediated rampage at Fort Hood and killed so many Americans.  PC allowed it to happen and just maybe it will exonerate him.

Chinese Checkers

You’ll recall that CMV reported on Larry Edelson’s (Uncommon Wisdom) report from Shanghai that an agreement had been made by the US Government and their counterparts in China whereby the Chinese would allow their currency, the yuan, to rise and the US Dollar would decline.  It now appears that 1) Edelson’s assessment was wrong, or 2) the Chinese have changed their minds.

In a feature article in the World News section of the WSJ (July 26, 2012), the Chinese have reversed their strategy.  After two years of trying to boost the value of the yuan vs. the USD (making their exports to the US more expensive) the Chinese yuan has fallen 1.1% vs. the USD this year after rising 4.7% against the USD last year.  Premier Wen Jiabao said in mid-July, “The task of promoting full employment will be very heavy and we must make greater efforts to achieve it.”

CMV cynically suggests that now that the Chinese have secured major concessions from this Administration (allowing Chinese banks to locate in the US, trade US Treasuries directly, etc.) they will renege on any previous arrangement or maybe there wasn’t a currency deal after all.  Bottom line – the Chinese are going to do what is in their best interests and there’s very little this Administration can effectively do about it.

Proliferate Ponzis

Despite the fact that Charles Ponzi invented the scheme that bears his name almost 100 years ago and died penniless in 1949, the gallery of his copycats continues to grow.  CMV reported on perhaps the greatest Ponzi con man of all time, Bernie Madoff, but followers continue to proliferate. We reported on our personal experience with MF Global and Jon Corzine who has successfully avoided any unpleasantness in his scheme because he has friends in (very) high places where corruption reigns supreme and there’s no recourse to curtail it.  On August 1, 2012, the trustee in the MF Global case announced that customers of MFG would recover about 90% of their capital that was supposedly secure from Corzine’s fingers.  Your writer sold his claims against MFG 3 months ago for 90% of the value of the accounts so our buyer/investor will absorb more loss than we did.

Most of you have not heard of Robert Allen Sanford whose recently collapsed Ponzi of $7 billion earned him a sentence of 110 years, or one Russell Wasendorf, Sr., who owned Peregrine Financial Group, a commodity brokerage firm, in Cedar Rapids, Iowa.  $225 million in customer money is missing in this true Ponzi because all the bank records and customer statements have been ‘manufactured’ by Wasendorf for 20 years!  What is remarkable about this man is that he married, attempted suicide and has his scheme uncovered all in the same week!  Ponzi schemes end abruptly.

What is further noteworthy here is that these Ponzi’s are a definitive sign of the times.  People desperately want to get rich quick. They ignore the obvious potential flaws because they have little patience and as a result are a perfect mark for the con man.  Expect more Ponzi schemes to proliferate in the future.

The largest Ponzi in mankind’s history, however, is our Old Age & Survivorship Insurance system – Social Security.  Payments to retirees, the disabled and the widows and orphans will be dependent on new money from new participants to sustain itself and its’ unsustainable when there is only 1 payee for every 2 receivers.  In all probability all those paying into the system now who are under age 30 will never receive anywhere near their projected benefits.  UNLESS, the system is changed.

Sector Overview

1.  Cash & Fixed Income
    Incredibly, in mid-July, US Treasury auctions produced all-time record low loan yields for all two, five and seven year notes and the 10 year T-Note fell to 1.38%!  Within a week the yield re-bounded to 1.54% and the 30 year rose to 2.63% from 2.55%.  While low rates have been great for corporate elite borrowers it hasn’t done anything for small businesses and most importantly, nothing to create growth.  What we’re experiencing, in CMV’s opinion, is that low rates are no longer the elixir to stimulate the economy and have been absolutely devastating to savers which has also contributed to lower GDP.  Bernanke’s one-trick pony is no longer in the race.

Evidence that the above is true is the fact that the US Treasury Dept. plans to offer floating rate securities, its’ first new product in 15 years, to attract investors.  The new product won’t be available for another year and will be a two-year note.  In another development, the Federal Reserve expressed deep concern over the big “repo market.”  The Fed sees a need to rein in a $1.8 trillion market that allows Wall St. Banks to fund their trading business using investors money market funds held by companies like Fidelity Investments and Federated Investors, Inc.  HELLO!  Think Jon Corzine and MF Global.  Chances are investors aren’t even aware that this practice exists.

CMV is of the opinion that Treasury yields are going to rise and the US bond market will be the next bubble du jour.  We’re getting close to the time to hedge this risk and short this market.

2.  US Equities
    We’re experiencing the “dog days of summer” but maybe it’s best to let “sleeping dogs lie.”  Despite the fact that many traders are on the beach or in the rarified air of high country, the US market has been remarkably resilient.  As reported above, the S&P 500 is with 2% of its’ all-time high and given all the uncertainty in the EU, the Congress, the Fed, the election, and the “fiscal cliff,” it is indeed remarkable that there hasn’t been a correction.  Traders needn’t be at their desks however.  High Frequency Trading is on automatic which has an enormous influence on the market.  Just as long as the algorhythms don’t decide to sell.  CMV sees a number of issues that could be positive SHORT-TERM for the US equity market.

    1.  A favorable resolution of the EU debt crisis.

    2.  A favorable move by the Federal Reserve that could stimulate the “risk on” trade.

    3.  A Mitt Romney victory in November with a Republican controlled Senate and House.

CMV is of the opinion that the US equity market is going to be challenging in 2013 and beyond.  We believe that all investors should consider a professionally managed hedged portfolio.  Our advisory services with Dynamic Wealth Advisors include an investment manager with a 14 year track record using a hedging strategy. We would be pleased to discuss your situation to determine how a strategy such as this could help accomplish your objectives.

3.  International Equities
    We haven’t discussed Latin America for quite some time and dramatic changes have occurred there which are noteworthy.  Brazil is a case in point.  In 2010 the Brazilian GDP clocked in at 7.5% growth, consumer demand fueled inflation was double digit and the central bank’s policy rate was over 12%.  Billions of foreign capital poured into the country fueled by Brazil’s vast natural resources including the largest discovery of oil offshore in the Americas.  Now Brazil is the victim of its’ own success.

The middle class, which went on a spending spree, binging on new luxury cars, electronics and vacations now find themselves deeply in debt and the economy has fallen like a rock.  GDP has plunged to 1.5% (similar to the US), the bank rate has declined to 8.00% and policymakers are searching for an answer as things could get worse.  The spotlight on Brazil is indicative of a global slowdown that has spared virtually no one.  There are few opportunities in this Sector at present.

4.  Hard Assets
    Strange things are happening in the oil patch.  In March, West Texas Intermediate Crude Oil (WTIC) was about $110/BBL.  When the global economy turned south, demand decreased and WTIC fell to $77/BBL in June.  Suddenly crude is at $92/BBL as we write despite little improvement in the demand side.  Inexplicably gasoline has risen $.24/gal in the US and as much as $.40/gal in some areas like Florida which is up 9% and Michigan up 12% for the month.  There’s a little irony here.  These two states are swing voter states that presently have the President leading in the polls.  It’s no secret that this Administration is dead set against hydrocarbons and is doing everything it can to restrict domestic production.  It appears that the recent price increases are coming back to bite the President where it hurts the most.

CMV remains bullish on the oils and is particularly wary of an October surprise in the gulf.

Natural Gas (NG) has been the big winner in this Sector.  In April, 2012, NG was under $2/BTU after a mild winter left supply at a historic level, 6% higher than normal.  Suddenly the market changed as one of the hottest summers on record created a massive increase in electric power for air conditioning and utilities switched power from coal to NG.  NG rose 50% to over $3/BTU in a couple of months, and one expert sees $4 by next year.  This proves one of CMV’s core Contrarian beliefs.  When any commodity reaches a historic low in price something always occurs which changes the dynamics of that market.

5.  Precious Metals
    CMV believes that we’ve arrived at the point of maximum pessimism and bearish
sentiment in this Sector. The Contrarian sees an enormous buying opportunity not unlike September, 2001 when gold was at about $275/oz., just prior to 9/11.  The major difference then vs. now is that the downside risk then was negligible.  The principal risk then was that the price of gold would remain range-bound and would see little or no appreciation and there were plenty of pundits who forecast just that result.  For 11 years it has gained every year and outperformed every Sector.  At $1,620/oz today there is an unmistakable downside risk but the following experts believe the upside potential justifies the risk.

●   The Daily Wealth Trader says that the global race to devalue currencies will push investors into gold.

●   Steve Sjuggerud first recommended gold in his June 2002 issue of True Wealth and since he wrote that piece gold has gone up 11 straight years.  He agrees that gold now is at “maximum pessimism.”

●   Jeff Clark in his S&A Short Report says gold is approaching a short-term buy signal.

●   Eric Sprott of Sprott Asset Management forecasts $150/oz silver within two years.

●   John Doody who writes Gold Stock Analyst believes that silver will have greater gains than gold and has launched a new newsletter focusing on silver.

Most of these analysts have a PM bias.  What’s important is that there’s a large number of non-gold bugs who also see the upside.

6.  Commodities
    On July 24, 2012 the droughtmonitor.uni.edu/ produced a color-coded map of the US depicting drought areas of the country from D0 Abnormally Dry to D4 Exceptionally Dry.  It looks like someone had burned a hole in the middle of America’s bread basket.  Corn, wheat, soybeans and almost all crops have been severely impacted. Corn can be found in just about everything we consume which historically was priced at $2.50 to $3.00/bushel and is now over $8.00 and no one knows what the final production number will be but it could be catastrophic.  Ranchers and farmers are liquidating their herds of cattle and hogs because they can’t afford to feed them.  Prices for beef and bacon are relatively cheap because of the current liquidation but will rise next year.  Chicken has already increased in price and has depressed earnings at Buffalo Wild Wings and other “chicken stores.”  Shortages and price increases of basic food products could be, coupled with devaluation of the USD, a trigger point for inflation at a level that could be devastating to the consumer.  There are a number of commodity investments that may exploit this situation. We offer portfolios with investments in this area and would be pleased to discuss if they may be appropriate for your portfolio.

7.  Real Estate
    CMV recalls that approximately three years ago Larry Silverstein, who is rebuilding the World Trade Center site in New York City, was interviewed on CNBC and proclaimed that the demand for office space at WTC far exceeded supply and several million square feet had been committed.  He started construction on WTC #3 in mid-2010, which was intended to be 80 stories containing 2.5 million square feet.  Construction has stopped at 8 stories recently because there are no tenants.  WTC #4 was halted at ground level because zero percent was leased and WTC #4 is just 51% leased.  WTC #1 being developed by the Port Authority of NY and NJ and is 55% leased.  The principal reason given that demand for office space has evaporated is that Wall St. financial firms, traditionally the reason to build, are downsizing, 1) because of the economy, and 2) margins are shrinking as the industry faces tougher regulations.  There is a trend in our business to become independent of the major firms and operate on-line rather than in luxurious quarters.  The cheese has been moved again.  Silverstein’s over optimism failed to assess the public psyche.  Who in the hell wants to be in a high rise at WTC?

In a different context there’s a niche market in commercial properties for users and their agents.  Tenants are becoming owners of their properties.  The Small Business Administration is funding the acquisition of office and retail space for occupant owners.  The buyer puts up only 10% down payment and the SBA guarantees 50% of the loan and the originating bank provides the remaining 40%. JP Morgan/Chase and Bank of America are very active in this market and the number of these loans has soared.  This program is termed the SBA 504 plan.  It is designed for businesses that have less than $5 million in revenues and less than 500 employees.  Tenant/owners are discovering that their payments in many cases are much less than rent.  Commercial brokers take notice.

Catherine Reagor’s Real Estate column recently in the Arizona Republic, has cited RL Brown and Greg Burger’s “Phoenix Housing Market Letter” forecasting new homes sales in 2012 of 10,000 vs. 7,100 last year.  They predict that 14,000 new home permits will be issued this year and 16,000 next year.  This compares to 64,000 permits issued in 2006.  These increases are in line with CMV’s assessment of the market going forward.  We’re heading into a future that has no precedent in American history.  It is not only difficult to forecast but even harder to develop a 3 to 5 year plan.

8.  Special Situations
    This Sector, which features mostly microcap stocks, is the most ignored, unloved and beaten up of any market.  Almost without exception the stock price on most of these names followed by CMV are lower than they were after the Lehman Bros. failure and market crash of 2008.  All are in the Natural Resources Sector.  The sub-Sectors include:

1.  Gold and silver
2.  Platinum and Palladium
3.  Rare earths
4.  Uranium
5.  Oil
6.  Potash
7.  Graphite, Vanadium and Beryllium

1.  James Dines (The Dines Letter) who was the “first gold bug” in the 70s, says that precious metals are searching for a bottom which he predicts might occur “around August.”  It’s August.   A breakout above $1,640/oz in Au and $30/oz in Ag will attract capital to the Sector.  As bullion prices increase the Senior Miners will respond first, then the Juniors and last the Explorers.  The highest risk and reward should be realized in the Explorers.

2.  Platinum and palladium will principally track auto sales worldwide which are now in decline.  Strong sales have been supported by sub-prim auto debt.  Remember 2007?

3.  Jim Dines reports in his July 20, 2012 newsletter:

“...China continues its’ stranglehold on Rare Earths...because they will be required for critical growth industries of the future: cell phones, military missiles, hybrid and electric vehicles, clean-diesel, auto catalysts, super magnets for wind turbines, computer hard drives, phosphor-LCD, plasma and digital music players.”  In fact, Dines says, China is stockpiling REEs for the next uptick in demand and higher prices.  The Dines Rare Earth Index is down about 60% from its’ 2011 high.

4.  Uranium (Ux) U3o8 price is currently at $49/LB down about $8/LB since May.  Despite the Fukushima nuclear accident in March, 2011, the demand for uranium exceeds supply and the deficit is expected to grow.  Established producers represent one of the best long-term holds in the resource Sector.

5.  We’ve stated the case for oil on page 17 above. All investors should have an allocation in this Sector.  The majors are paying around a 5% dividend which beats the heck out of Treasuries.

6.  Potash is a sleeper and given the short and long-term fundamentals with the coming food shortage fertilizer will be in high demand, and higher prices are baked into the drought.

7.  CMV reported extensively in the July issue on these “new age” metals.  If you need an update please call.

Just a reminder that there will not be a September issue of CMV because our staff will be on vacation.  We’ve deliberately made this issue extensive in both depth and length in hopes that it will fill the void.


Coming In The OCTOBER ISSUE:    The October Surprise!

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

Sunday, July 15, 2012

Podcasts

Hello World,

If you have not heard my recent podcasts catch the latest one today (Sunday, July 15th) and prior ones at the podcast link.

H L Quist - The Myth Buster Podcasts

We will be on vacation for 2 weeks, so check out the podcasts and look for us to return the weekend of August 11th.  Be sure to listen to today's podcast for information on the CMV.

-- H. L. Quist

Wednesday, June 27, 2012

CMV, July 2012

Hello World,


The Contrarian Market View Newsletter is now free.

Visit my podcast site for weekly updates from The Myth Buster



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

Tuesday, June 5, 2012

CMV, June 2012

Hello World,


The Contrarian Market View Newsletter is now free.

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



H. L. Quist’s
Contrarian Market View
Newsletter


Market Overview


Concern (and even fear) that the US and global economy may be headed south by the end of May jolted the markets worldwide.  Anecdotal evidence from a number of sources reinforced that notion:

●   The Jobs Report was dubbed horrible and ugly by pundits.  Estimates of newly created jobs ranged from 130,000 to 150,000.  The final number (which will be revised) from the Bureau of Labor Statistics came in at 69,000 and sent shockwaves throughout the markets.  Overlooked by most was the fact that the April Report was revised downward from 115,000 to 77,000.  One economist estimated that there are 18 million Americans competing for 3.7 million jobs!

●   The Conference Board reported that its’ Consumer Confidence Index fell to 64.9 from 68.7 in April.  Analysts had expected it to climb to 70.  Consumer spending is about 70% of GDP which doesn’t bode well for the second half of 2012.

●   The Dow Jones Industrial Average (Dow) lost 274 points on June 1, falling to 12,118 giving up all its’ gains for the year.

●   The Conference Board Index of US Leading Indicators declined in April, the first in 7 months.

●   The Philly Fed Index was also negative as the 10 Year Treasury Note plunged to a historic low of 1.46%.  Germany’s comparable bund yield fell to 1.37%.  Japan, still mired in a 20 year deflationary quagmire hovered around 1%.  Rates that normally signal a recession – or worse.

●   Greek citizens rushed to withdraw hundreds of millions of euros from their country’s banks which sent an ominous signal that this tragedy could mark the end of the world’s first Democracy.  If a Pro-Bailout coalition can’t come together in the June 17th elections, chaos could accelerate.

To counter the economic “malaise” and the threat of global deflation, several events have recently taken place that contradicts this data:

●   The elections in France and Greece were a referendum against austerity.  European leaders gathering at a Group of Eight summit recently at Camp David agreed that there must be a “balanced approach” between growth and fiscal discipline.  Austerity is out, reflation is in.  Massive money printing could produce a “sugar” high.

●   Manufacturing jobs are returning to the US by virtue of a debased US dollar.  Whirlpool Corp. has re-opened a plant in Greenville, Ohio that makes Kitchen Aid hand mixers that were previously made in China.  Ohio has made remarkable advances under the leadership of its’ Republican Governor John Kasich.  The Burns Harbor steel mill, an aging 50 year-old facility in Indiana, has been rejuvenated thanks to modernization by its’ foreign-based owner ArcelorMittal of Luxembourg.  Hopefully both labor and management won’t repeat their errors of the past and this trend will continue.

●   Chinese officials have reversed their previous position to slow their economy and have recently announced that bank reserves margins have been decreased and interest rates have been reduced.  On May 22, Premier Wen Jiabao announced that the government would aggressively seek infrastructure projects throughout the country spending $157 billion out of a total fiscal stimulus of $635 billion.  China is the only country that has the cash reserves to do it.

On May 4, 2012 host Maria Bartiromo interviewed Jim Rogers, Chairman of Rogers Holdings on CNBC.  Jim is a well-known author and investor who is a proponent of the Austrian School of Economics.  In 1973, Rogers co-founded Quantum Fund with George Soros and when he left 10 years later the fund had amassed a gain of 4000%, while the S&P 500 advanced about 50%.  Regrettably, Jim’s market savvy helped enable George Soros to create a multi-billion net worth which he is now utilizing to destroy the capitalist system that made him an exceptionally wealthy man.  In 2008 Rogers moved himself and his family to Singapore where he observes a global economy that he says by 2013 will be in a “real mess.”  Jim had some additional insightful comments during the interview.

As the JP Morgan’s derivative fiasco, “a terrible egregious mistake” (Jamie Dimon’s words) was the topic du jour, Maria asked Jim what his thoughts were on the subject.  Without battering the proverbial eye the commodity expert said:

“...the person running their (JPM) commodity trading doesn’t know what he’s doing. I’m short the stock.”

When Maria interviewed Jim in December 2011 the “cold” topic was gold as it had plunged from a high of $1920/oz in August to a low of $1525 at that point.  Maria asked, “Do you think gold will go lower?”  Jim’s reply:

“I hope it goes lower and consolidates more so I can buy more.”  (Ironically that was the low and Au rallied to $1785/oz within 90 days.)

Maria recalled that conversation and found it apropos to ask Jim again (as gold was at $1555/oz as they spoke) if it was going lower.

“I’m not ready to buy yet.  India which is the largest importer of gold is trying to discourage gold consumption because it negatively impacts their balance of trade.  All commodities are under pressure because of the strength of the dollar as a safe haven. It’s not a safe haven but people think it is.  The central banks are all printing money.  Get a tractor Maria!  Farming is where you should be investing.  Equities are not coming back!”

(The above was taken from your author’s notes and not from a transcript of the interview. CMV believes however that it captures the essence of Roger’s views.  A few days later gold broke out $60/oz to close at $1,621/oz as investors sought a safe haven.)

In May the US Commerce Department levied anti-dumping duties of more than 31% against 61 Chinese solar companies and nearly 250% on some smaller outfits.  US taxpayers have already absorbed nearly a billion in losses on government guaranteed loans to US solar companies and now the Administration is asking the American consumer to pay more for solar cells from China.  The only winner here, according to a May 19, 2012 article in the WSJ, is Solar World AG, a German manufacturer and six other companies who filed for relief through the World Trade Organization.  The Chinese must be scratching their heads in disbelief given all their current negotiations with this Administration.  It comes as no surprise to Americans, however.  We are accustomed to flip-flops, inconsistencies, contradictions, and flat out lies from this group in the Beltway who are in constant touch with the weatherman to determine which direction the wind is blowing – and where the votes are.

A good example of the overbearing arrogant mind set of this Administration is the case of Al “Crucify Them” Armendariz.  He was the regional EPA administrator who was forced to resign after he was seen on video describing his desire to “crucify” oil and gas companies.  As Senator Jim Inhofe of Oklahoma replied after seeing the video, “there are Armendarizes all over this Administration.”

JP Morgan’s Other Shoe To Drop Is Silver

Jaime Dimon, the Chairman of the nation’s largest bank ($2.3 trillion in assets) suddenly called a press conference on May 10th (that preempted his bank’s shareholder’s meeting on May 25th) to disclose that the bank had a $2 billion plus loss on a complex derivative bet blaming employee “error, sloppiness and bad judgement.”  Three key executives, including Bruno Michel Iksit, known as the “London Whale” for his big positions in credit markets, were terminated for their role in the wrong way bet.  It appears that this was a rare instance where Jonah devoured the whale or perhaps, the Whale was beached.

Dimon, who has been extremely vocal speaking out on the Obama Administration’s Dodd-Frank Bill and its’ restrictions and reporting requirements for US banks, has given the President ammunition to aggressively pursue additional stiffer regulations.  Only four days after the revelation of the loss at JPM, the Justice Department has been called in to investigate the matter.

As painful as the $2 billion loss is to JPM and its’ shareholders (which could add up to twice that amount), it could only be a tip of the iceberg that could sink the Titanic bank.  JP Morgan Chase & Co. possess another more massive derivative bet as part of its’ $71 trillion derivative position that could bring the bank to the brink if the position reverses.  We are talking silver bullion here – a short position, betting that the price of silver (Ag) will continue its’ decline from its’ present $28/oz.  Here’s the story.  It reads like a John Grisham mystery novel, only it’s true.

When JPM acquired Bear Stearns & Co. in the Federal Reserve shotgun marriage in March, 2008, it also inherited Bear’s commodity Trading Book including a very large short position in silver bullion.  At that moment Ag was about $21/oz.  By October when Lehman Bros. bit the dust and there was no bailout, Ag had declined to about $9/oz – a decline of 60% and according to Peter Krauth at Money Map Report, JPM was racking in paper profit of about $200 million per day.  It wouldn’t be a stretch to assume that JPM may have paid for their acquisition of Bear with the gains they made on Bear’s Trading Book in Ag.

The 60% decline in the price of Ag created huge investor losses and lawsuits claiming manipulation and control of Ag prompted the Commodity Futures Exchange Commission to initiate an investigation of the silver market and in particular JPM’s role in that market.  Little headway was achieved and it appeared that, once again, investors long silver would be defeated by the manipulators.  That all changed when a silver trader in London who had been employed  by JPM for 40 years, blew the whistle. Andrew McGuire had all the records and all the orders from management that would substantiate that JPM and others did indeed successfully manipulate the market price of silver.  The story gets, as the Brits say, “dicey.”

Six weeks after McGuire testified in New York and while driving in London with his wife, a car suddenly emerged out of nowhere and struck McGuire’s car with a crushing and potentially lethal blow!  The attacker backed up and sped away striking a pedestrian and two other cars in his effort to flee.  A chase scene, worthy of an Ian Flemming novel, with police cars and helicopters in pursuit finally captured and arrested the assailant.  Lo and behold however, the “hit man’s” name was never revealed and no one was ever jailed!  CMV”s persistent use of the term “banksters” seems to fit after all.

JPM reduced its’ Ag short position in August, 2010 and coincidentally by 2011 Ag rallied almost parabolically to close to $50/oz!  Within a matter of days in early May aided by the mandate requiring long investors to post double their margin requirements. Ag began a precipitous sell-off to about $33/oz and JPM profited handsomely.  In what proved to be a “dead cat bounce” silver rallied back to $43/oz by late August and then, aided by the EU crisis and the risk-off trade momentum, silver bullion collapsed to end 2011 at around $27/oz.

At the time of this writing Ag is at $28/oz and it appears that both gold (Au) and Ag have based for a significant rally that could not only challenge the $50 high but breakout to new ground.  Two critical questions remain:

1.  What event or circumstance could occur that would alter or end JPM’s ability to control the price of Ag?  And,

2.  Could Jaime Dimon and JP Morgan-Chase & Co. survive another back-to-back highly leveraged derivative bet gone bad?  The present loss could be in the $2-4 billion range.  A $50/oz silver price could translate to a loss of many multiples of that number assuming the bank doesn’t “cover” its’ shorts.

First, China is the “game changer.”  The Pan Asian Gold Exchange (PAGE) opens in June.  The Hong Kong Mercantile Exchange (HKMEX) opened a year ago in May and has already accumulated over one million contracts in Au and Ag.  The HKMEX will soon introduce trading in the Chinese  renminbi and this will allow Chinese citizens the ability to trade in their own currency and not the US dollar.  It will also permit trading in an Ag contract of 1000 troy ounces vs. 5,000 on the US and London exchanges. For the first time, small Chinese investors will be able to trade futures in their own currency.  Ag demand already exceeds supply. Now, a growing demand that JPM can’t control will push prices higher.

Secondly, as CMV has reported many times, the opening of these two exchanges represents a major shift in power and control from West to East.  The London Metals Exchange, the NYMEX and the Chicago Mercantile Exchange are part of the Western-Centric (Fiat) monetary system that has enjoyed a monopoly for over a century.  The US Federal Reserve’s announcement this month that it had approved the entry of three Chinese banks to locate in the US, is further evidence that the “Global Re-Balancing Program” is well underway.  All of the above must be noted in the ivory tower at JPM-Chase & Co.  Eric Sprott, who is one of Canada’ s leading asset managers, told your author personally that “silver will reach $150/oz within two years (from October, 2011) and the shorts will have their heads handed to them.”  Remember, to cover their short position, JPM will have to buy Ag contracts at the existing market further exacerbating a rise in price.  Massive inflation will add frosting to the celebration-cake that silver bulls will savor.  The Lone Ranger Rides Again!  Hi Ho Silver, Away!

Why Societies Fail

CMV regards James Dale Davidson’s Strategic Investment as an invaluable resource.  In his May issue he introduced us to anthropologist and historian Joseph A. Tainter who is considered one of the world’s foremost experts on why societies fail.  CMV subscribes to the theory that seeing the macrocosm or the big picture is essential to comprehending the microcosm or the small picture.  Evidence of this approach at work is looking at America today.  Tainter says in his book, The Collapse of Complex Societies:

“Once a complex society enters the stage of declining marginal returns, collapse becomes a mathematical likelihood, requiring little more than sufficient passage of time to make probable an insurmountable calamity.”

The following are a few examples how the increasing complexity by government in the US reveals declining or negative marginal returns.

1.  Healthcare:

Per capita healthcare costs in the US have risen from about $1,200 in 1982 to $7,960 in 2009.  The Organization for Economic Co-Operation & Development (OECD) indicates that despite the highest cost/capita in the world, the US ranks last among 17 wealthy countries in success in its’ healthcare system.  The study included health indicators such as life expectancy, premature mortality, death from cancer, infant mortality and other measures.  This study was conducted prior to the Obama Administration’s expenditure of $1.7 billion on healthcare without increasing the supply of services.

2.  Education:

The US leads the world in total spending on education but ranks ninth in science performance and tenth in math compared to 11 other leading economies.  Costs range from a low of $10,896/student in Idaho to a high of $38,896 in Washington, D.C., that has one of the worst school systems in the US.  In testing 15 year-old students in 65 countries, China-Shanghai with a per capita outlay of $1,326/year leads the world in scoring.  The US is throwing more and more money at solving the problems in education and getting narrower marginal returns.

Finally, there are some school systems that see the real problem Progressivism has caused and are attempting to reverse the long-term decline of education in the US.

3.  US Military:

History is replete with Empires whose military costs contributed significantly to the collapse of the empire in question.  The Soviet Union is a recent example.  The US Department of Defense indicates that Defense spending in 2010 was $707.5 billion.  When “off budget” items are included the cost is closer to double that amount.  Even the lower number is 50% less than China. Tainter reveals in his book that the “Roman Empire provides a classic example how increasing complexity to resolve problems leads to higher costs, diminishing returns, alienation of a supportive population, economic weakness and collapse.”  Sound familiar?

It should be quite apparent to the reader that the US has been initiating a strategy of excessive complexity that is not only providing diminished returns, it is a recipe for a collapse of the American Empire – precisely the goal of its emperor.

Davidson reports that the Obama Administration has taken action to make it virtually impossible for US citizens to leave the country.  He indicates that 742 American per hour are exiting the US.  That is 17,808/day or 552,048/ month!  To curtail the exodus Congress and this Administration have made it now impossible to open a foreign bank account. The Foreign Bank & Financial Account Report and the Foreign Account Tax & Compliance Act imposes onerous and costly regulatory mandates on foreign banks that have American customers.   That’s why Eduardo Saverin, Face Book’s Co-Founder, has revoked his US Citizenship and moved to Singapore.  He cashed out, paid his taxes and got the heck out of Dodge.  In addition, the Administration has proposed new regulations to make it near impossible to obtain a US passport.  Davidson outlines a long list of questions to be required in an application that would be impossible for most applicants to complete.  The most absurd is that men, if applicable, and  without a birth certificate, would have to provide details of their circumcision.  Failure to provide this and any information would allow the bureaucrats to deny your passport for reasons that you filed an “incomplete application.”  The US is moving rapidly towards Totalitarianism and its’ citizens are oblivious to what’s occurring.

Updates

Enemies List:

In the May 2012 CMV (Market Overview) we highlighted Kimberly A. Strassel’s April 27, 2012 WSJ Potomac Watch column that revealed the existence of President’s Obama’s “enemies list.”  Specifically one of his websites “Behind The Curtain: A Brief History of Romney’s Donors.”  Amongst eight donors that the President listed who were “on the wrong side of the law” and were profiting at the “expense of so many Americans” and other shameful and derogatory claims, was Tom O’Malley, Executive Chairman of PFB Energy.  Mr. O’Malley responded to his listing on the President’s ‘fecal scroll’ by the following letter to the editor of the Wall St. Journal on May 6, 2012.

Letters To The Editor

May 6, 2012
The Things I Did to Get on Obama's 'Enemies List'

Kimberley Strassel's April 27 Potomac Watch "The President Has a List" reports some serious allegations. I have not made too many lists in my more than 50 years in business, so I was quite surprised to see my name on President Barack Obama's "enemies" list.

My most recent business venture, PBF Energy, bought the closed-down Delaware City Refinery, spent $400 million to fix it and reopened it with a United Steel Workers unionized work force. More than a thousand high-paying jobs were created in a state where unemployment had become a real problem.

PBF also bought a refinery in Paulsboro, N.J., one that was scheduled to close. Thus, more high-paying unionized jobs were saved in New Jersey.

If this gets you on the enemies list, it would be good for the country if the list were expanded. It would seem that I got on the list because I gave to the Romney PAC. I have also run a fund-raiser for New York's own senator, Chuck Schumer, who I believe is still a Democrat. I hope this doesn't get me on another list, because the amount involved exceeded the Romney contribution.

I can't believe that the president has authorized such a self-destructive strategy and can only suggest that he and his administration may want to disown the author of the list, whoever that may be.

Tom O'Malley
Executive Chairman
PFB Energy
West Palm Beach, Fla.
– http://online.wsj.com/article/SB10001424052702303916904577376121349763842.html

This is what American politics has become – assassins of character, uncivil, intimidating, scandalous and in this case, factually inaccurate and libelous.  We are ruled by a Thugocracy where there are no rules of conduct except retention of power through any means possible.  And, this tactic of fear is only a harbinger of things to come and tell-tale sign that the great American experiment is about to fail.

Global Re-Balancing

In May, CMV also featured our view that a currency deal with the US and China had already been sealed and that, to quote ourselves, “The China Era is about to begin.”  Evidence that the transition has continued to unfold was the release on Wednesday, May 9, 2012 by the US Federal Reserve Bank, news that the Fed had approved plans by three state-backed Chinese banks to expand in the US including the first acquisition of a US retail-banking network by a state-owned Chinese lender!   In addition, the US Treasury approved China as a “primary dealer” for the purchase and sale of Treasuries by-passing Wall St.  CMV suspects but doesn’t know, that the Fed and the Treasury do not want anyone to know the activity and volume in this market between the two countries.  This approval and dealer status is an indication that the currency deal with China has many ramifications.  It reinforces China’s goal to have its’ currency, the yuan, recognized and traded internationally as a step to ultimately be the world’s reserve currency.  Although most Americans will not grasp the significance of the Fed’s decision, to the Chinese this is a VERY BIG DEAL.  They’re now a member of the Western bankers elite “club.”

The Greek Tragedy Plot Thickens

The Greek leftists, led by 37 year-old Alexis Tsipras and his Syriza party may have secured sufficient power along with the neo-Nazi, and other leftist groups in the recent elections to reject the austerity measures imposed upon the country in order to obtain additional funding from the IMF and the ECB. So, what does Tsipras and Syriza and the left want?  One, it not only refuses to accept austerity measures, it refuses reform of any kind.  It opposes reducing the bloated and corrupt state bureaucracy and the inept educational system.  Rather than downsize its’ civil service, Tsipras has suggested hiring an additional 150,000 more people in order to reduce unemployment.  The major issue is that the leftists refuse to pay Greece’s sovereign debt which would mean not only an immediate exit from the eurozone but also from the EU.  Rumors have it that Greece is printing its’ own currency, the drachma, in anticipation they will abandon the euro.  CNBC has been running 3 days of specials focusing on the possible outcome and its’ ramifications.

This rejection of austerity is not confined to Greece.  France and the Netherlands just rejected the conservative solution also. This wave of anti-austerity will not only spread throughout the EU, a like referendum will take place in the US in November.  There is, at present (and that could change), a strong possibility that Barrack Obama and his legions of leftists, will win in November.  It that occurs here, HYPERINFLATION is a near certainty and EOAAWKI will follow.  Plan for the worst and pray it doesn’t happen!

NOTE: Thanks to Takis Michas for his insight into the Greek situation in the May 9, 2012 edition of the WSJ.

Pension Shock

CMV has written profusely on the dilemma that faces state, county and city employees throughout the US who, potentially, face severe cuts in their pensions and healthcare benefits as there simply is not adequate funds in their plans to meet the promised benefits.  Some cities like Pritchard, Alabama; Central Falls, Rhode Island; and Vallejo, California have filed Chapter 9 under the bankruptcy code for municipalities.  Employees in Pritchard and Central Falls experienced a 50% cut in their pensions after the filing.  Once a state, county or city seeks bankruptcy protection they loose almost all chance of securing tax-exempt bond financing.  Vallejo, after successfully implementing austerity, is recovering nicely.

A new wrinkle has occurred that heightens the possibility that public employee pensions will be cut.  The Northern Mariana Islands, 5,000 miles off the coast of California, is a US Commonwealth.  Last month the Island’s government took a different approach. Their retirement plan filed Chapter 11 and could have set a precedent for public pension plans all over the US since the various governments themselves wouldn’t file and their bonding could ostensibly remain intact.  The Mariana case is an example where employee benefits became so generous the Commonwealth couldn’t pay them.  Partly at fault was a 2007 law promoted by Harry Reid and Nancy Pelosi that raised the Commonwealth minimum wage from $3.05/hour to $7.25/hour over 10 years.  There’s a distinct message here for public employees like those in Wisconsin who are prepared to recall Governor Scott Walker and beef up their pensions and benefits.  If they win, they lose!  The future is NOW but most can’t or don’t want to see it.

Iceland – A Triumph From Despair

CMV reported on the story of the financial collapse of Iceland so well told by Michael Lewis in his latest book Boomerang.  In 2008 the country was the first victim of the bankster-induced financial catastrophe but remarkably, it is the first country to rebound, which is a lesson for all to recognize – especially Americans.  Iceland is a member of the European Union but it retained its’ own currency, its’ own central bank and monetary policy and did not have to rely on policy-making decisions made by a bureaucratic pyramid in the Euro-zone, which those countries in the EU are now hostage to.  The Icelanders devalued their currency by 50% vs the euro, and their exports of, primarily, fish skyrocketed.  Their GDP went from a minus 7% in 2009 to a plus 2.4% in 2011.  Iceland, unlike any of the rest of the world, let its’ banks fail and made foreign creditors take the losses vs. their own taxpayers.  To combat consumer prices increasing 26% since 2008, the Icelanders have rejected costly imports and despite the fact that their currency is 50% less in euros the fishermen take home twice as much kronur for the same amount of fish and they’re way ahead despite the inflation.  Icelanders, all 325,000 of them, are unique and their experience probably can’t be replicated but Greece is a likely candidate to depart the EU and re-issue the drachma which could trade as low as six to one vs. the euro.

Author’s Note: Iceland was settled prior to the year 1000 by Scandinavian explorers who also settled Greenland and the North American continent beating Christopher Columbus by almost 500 years.  Today, the Island remains almost exclusively one ethnic group whose work ethic and stoic disposition have enabled them to recover from the crisis.

California – A Day Of Reckoning

Faced with the largest state deficit ($15.7 billion) in the country, Governor Jerry Brown has made a pronouncement that he and Californians thought they would never, never, never, ever hear.  He said:

“California has been living beyond its’ means.  The United States of America... has been living beyond its’ means...A lot of people spend more money than they take in.  Well there has to be a balance and a day of reckoning.”

Brown proposed a 5% cut in state worker’s pay, a $3 billion cut in medical care for the poor, welfare, in home services for the disabled and child-care subsidies.  He also warned that there would be another $6 billion in cuts mostly to schools if voters reject another increase in taxes.  Despite these reductions, state spending will increase by 5.6% to $91.4 billion next year.  Herein lies the moment of truth not only for California but for other state, county and municipal governments.  If Americans reject “austerity,” bankruptcies will follow and civil unrest will resemble Greece.

Fannie and Freddie

After 4 years of losses totaling $116 billion, Fannie has reported a $2.7 billion profit in the first quarter of 2012.  The principal contributor to the gain is that home price declines have slowed and fewer mortgages are in foreclosure.  The mortgage giant also announced that it will pay a $2.8 billion dividend to the US Treasury Department.  Both Fannie and Freddie have been paying a 10% dividend on certain preferred shares despite huge losses since 2008, with taxpayer’s money!  At one time, China owned $375 billion of US government debt principally of Fannie and Freddie.  It appears that China’s exposure to the “evil twins” has been reduced but it would be worthwhile knowing if China has any of the Preferred Stock that has continued to pay a high dividend since the two agencies failed in 2008.

* * *

Sector Overview

1.  Cash & Fixed Income
    Witnessing the decline in the yield of the 10 Year US Treasury Note to 1.46% by June 1st, was ‘noteworthy’ and downright ominous.  Yields that low have never been seen in the US, and raises concerns that they signal a recession or worse, a depression. Consider the fact that the 10 Year yielded 2.40% in March. This drop represents not only a flight to safety by EU investors, it also reflects a further slowdown in our domestic economy.  The Germans just sold a Bund offering with a zero premium!  But, as Thomas G. Donlan, Editorial page Editor of Barron’s points out (May 21, 2012), “it [the US] needs to end the government’s market manipulation that creates a popular delusion of risk free investing.”  Low interest rates, in addition to the concept of too big to fail, encourages banks to take on leveraged risk that continues to create fear in the markets.  Derivative exposure has not abated.  It remains at $700 trillion and JP Morgan-Chase & Co has about 10% of that amount.  As Rick Santelli (the bond editor) said on CNBC recently, rising interest rates, “will be catastrophic” for the bond market.  This event, if and when it occurs, will also represent an incredible investment opportunity.

2.  US Equities
    The Axiom “Sell in May and go away” would have been a sound strategy as the Dow declined over 1,000 points to end the month (June 1st) at 12,118 and lose all its’ gains YTD.  The S&P 500 followed in lockstep ending at 1,278 down from the 1,400 level but held onto a modest gain of 1.6% YTD.  Remarkably, the S&P is almost exactly where it was one year ago, and if you go back to the market low of October, 2002, the gains for almost 10 years are near zero!  The May malaise was due to the continued saga in the EU and the sense that the US was headed for another Recession as it did a year ago.  The Jobs Report was the trigger point that sent the Dow down 274 points (2.2%) and the S&P 32.29 (2.46%) on June 1st.  In the August, 1979 edition of Business Week, the cover forecast the “Death of Equities.”  That theme is popping up again with market mavens predicting a new bear market.  CMV believes that investors seeking positive returns in US Equities will be “challenged” going forward.  For those who continue to HOLD equities in this Sector you should consider hedging your portfolio.  Through an asset  management firm, Dynamic Wealth Advisors offers a separate account program that hedges equity positions with options.  We welcome your inquiry to learn about this program and determine qualification.

3.  International Equities
    At some point in time and that time could be eons away, the EU could offer significant value which is to state the obvious.  Many investors don’t realize however, how the instability and economic downturn in the eurozone has impacted the global economies.  The EU is China’s number one customer (20%) and exports to this region have plummeted.  Six months ago China was concerned about an overheating economy, inflation and civil unrest due to wage demands.  The Politburo was forced to employ a tight monetary policy to slow down the economy. Now, Chinese officials have announced a reflationary expansionist policy that includes massive infrastructure building programs.  As a result China’s Pacific Rim countries like Australia, South Korea and others who feed off the spoils of the Red Empire as well as US heavy equipment manufacturers, have rallied.  As CMV has emphasized, the Reflation Plan is global – the EU, China and the US are committing to the Keynesian theory of more deficit government spending and more debt.  Will it work?  Yes, temporarily.  Another short-term fix that delays the inevitable and creates an insurmountable problem down the road.  Prior to that date, however, we want to get the heck out of Dodge which simply means, to be in cash.

CMV hasn’t mentioned Japan since the devastating earthquake and tsunami over a year ago.  In mid-May, the Nikkei 225 Index plunged to a four month low falling to the 8600 mark. It has declined 16% since reaching a one year high on March 27th.  The Japanese yen has rallied against the USD and the euro despite the government’s attempt to weaken its’ currency by utilizing its’ own QE programs.  There is a meaningful and relevant lesson to be learned from the Japanese experience.  In 1989 the Nikkei 225 reached a high just short of 40,000.  It has fallen 80% from that level and has never recovered despite massive government spending and attempts to stimulate their economy.  Long-term government debt has consistently hovered in the one percent range and citizens have realized little or no return on their savings. The point is, Keynesianism has not worked in Japan and will not work in this global “race to the bottom” – the attempt by nations to devalue their currencies in order to increase their exports.  This global “competitive devaluation” will most likely end up creating world-wide inflation and its’ evil twin, HYPERINFLATION.

4.  Hard Assets
    Last month US citizens were screaming for lower gas prices.  They got ‘em but they’ll have to absorb the correlation that created the relief – a slowdown in the US economy and lower demand.  West Texas Intermediate crude oil has fallen in price from $105/BBL to $83.  Will summer vacation travel change the dynamics or will prices remain at these levels?  We don’t know but CMV believes that this picture could dramatically change and prices will rise as early as early fall as a result of a currency crisis.  One remarkable change in this Sector has been the rise in Natural Gas.  CMV tried to find a bottom in this market but failed and capitulated last year.  Recently however, the price of Natural Gas has risen from below $2.00/BTU in April to $2.60 at the time of this writing - a gain of 30%.  Has this Administration and Congress finally got the message that gas is the cheapest alternative energy source in the US?  Will the T. Boone Pickens Plan be adopted or is there something else at work?

The Sierra Club and the “greens” had supported Natural Gas as a clean alternative energy and bridge fuel and had received $26 million in contributions from Chesapeake Energy to support, in part, the Club’s “Beyond Coal” campaign.  Now, the Club has done a 180 degree reversal and is mounting an all-out effort to kill the gas industry.  Why?  The greens have concluded that Natural Gas is too cheap and it would prevent the development of wind, solar and biofuel.  Their goal is to reduce the supply of gas and keep its’ price as high as possible.  Their real goal is to ban all fossil fuels regardless of cost and loss of jobs.

Barrack Obama and the EPA have also declared war on the coal industry.  In mid-May, the US Energy Information Administration reported a shocking drop in power sector coal consumption in the first quarter of 2012.  Coal-fired power plants are now generating just 36% of US electricity vs. 44.6% just one year ago.  It’s the Administration’s goal to gut the coal industry and electricity prices to consumers will skyrocket. Environmental regulations that go into effect in 2015 will cause the market-clearing price for electricity to climb from the current rate of $16/megawatt to $136/megawatt!  In Ohio, the price will rise to $357/megawatt.  Now we know why Natural Gas is up 30% and going much higher and why Ohio voters have turned against the re-election of this President. (Thanks to Phil Kerpen and foxnews.com for this information.)

Like a number of senior large cap gold miners, the mega oils are now a value buy.  Some of the names are off 30% to 50% and their dividend yield is now over 3%.  The same case can be made for the pipeline MLPs.   Yields are now very attractive plus they have the potential for significant capital gains.

One of the most exotic trades ever has just surfaced.  Kyle Bass, the flamboyant Texas hedge fund manager, has acquired an incredible amount of nickel coins at their face value of $.05.  He believes that they currently have a melt value of $.06 or 20% above the price.  They may cost the US mint about $.07 to produce them and expects the Mint to end circulation of the coins along with the penny.

5.  Precious Metals
    After a furious rally in January and February that propelled gold (Au) from $1,535/oz in December to almost $1,800/oz, the EU crisis has created a flight to safety which caused a strong rally in the US dollar.  This, in turn, has contributed to a three month sell-off since March that crashed the gold price down to near the December low – a 17% correction.  In fact, the gold bullion chart exhibited a triple bottom formation in May 2011, December 2011 and May 2012 and appeared to be headed to test the lows again.  The June 1st breakout changed everything.  The $60/oz rally signals a major shift in market fundamentals to hard assets.  The “smart money” now recognizes that massive monetary expansion in the EU, US and China is going to lead to global currency devaluation.  Gold will now become the “safe haven.”  QE 3 could be another match that ignites the fire.  The WSJ reported on May 24th that traders have purchased $1,850/oz out-of-the money calls on GLD for August expiration totaling 360,000 contracts.  In other words, traders may be expecting gold to rise over $300,oz by August, 2012, or they could be hedging their short positions.  (JPM?)  One trader speculated that a Greek exit from the EU could rally the euro and crash the USD benefitting Au.

Overlooked by almost all pundits, stock pickers and asset managers is the enormous value that has been created in the Au and Ag producers by this 3-headed monster of a correction in the metals.  A number of the largest and highly profitable senior mining companies are selling at 30% to 50% discount and have dividend yields of over 3%.  Fred Hickey, who is the top gun at the High-Tech Strategist and not a gold bug, tells Barron’s (Up and Down Wall Street, May 21, 2012) that his largest positions are in the senior producers.  He says, “The gold miners are cheaper today versus the price of gold than any time in this 12-year bull market.  No one wants to own them. That’s when I like to buy them.”  Spoken as a true Contrarian which your author subscribes to.

CMV has introduced its’ readers to Eric Sprott who is one of Canada’s most successful asset managers and authorities on PMs.  Here is critical supply and demand data that clearly establishes the fundamentals for this market going forward.

Although the paper gold price has been range-bound over the past month, the physical gold market has been undergoing staggering change. Earlier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year. 40 tonnes annualized equates to 480 tonnes per year - a massive number in a market that only produced 2,810 tonnes of mine supply in 2011.

If there's one thing we now know for certain, it's the fact that the market has completely missed the importance of the demand-side changes currently taking place in the physical gold market. China has now imported 436 tonnes of gold through Hong Kong over the past eight months. This compares to imports of a mere 57tonnes over the same eight month-period a year earlier (July 2010 -February 2011). The net new demand implied by this increase is 379 tonnes, which when annualized equates to 568 tonnes of new demand in a market that supplies 2,810 tonnes per year in mine production. These are astounding numbers. Recent IMF data also shows that at least 12 countries increased their physical gold reserves by 58tonnes in the month of March, with Mexico, Turkey, Russia and Kazakhstan making sizeable purchases. 58 tonnes annualized equates to 696 tonnes of demand per year. We know that central banks bought 439.7 tonnes of gold in 2011, and if the pace of recent central bank purchases continues, it will equate to another 256 tonnes of net new change in the physical gold market.

The significance of this demand shift is striking. If we combine china's implied net change of 568 tonnes with the central banks' net change of 256 tonnes, we're left with a demand shift of over824 tonnes vs. an annual mine supply of 2,810 tonnes. That represents close to a 30% net change in the physical gold market in2012. If we remove the portion of global gold production produced by China and the other non-G6 central bank gold buyers (like Russia and Mexico - because we know they're not sellers), we're now dealing with over 824 tonnes of demand change hitting an annual global mine supply of a mere 2,170 tonnes - representing a 38%shift. Although we have been continually reminded that 'fundamentals don't matter' in today's marketplace, there isn't a physical market on earth that can withstand that type of demand increase without higher prices over the long-run, and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last ten years. Even if we incorporate the estimated 1,600 tonnes of"recycled gold" that the World Gold Council insists on including in its annual gold supply estimates, the numbers above still suggest a net change of 19%.  Who is going to give up their gold purchases to make room for this scale of new demand? Where is the gold going to come from? We ask because we don't actually know.
We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world's annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum -there's only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.

– http://sprott.com/ Eric Sprott & David Baker, April 29, 2012

6.  Commodities
    As we reported last month, the “pink slime” and the mad cow disease scares raised havoc with beef prices but as we forecast, the bar-b-que season would rectify that.  In late May, live cattle and feeder cattle rallied sharply over $.05/lb and the severe shortage of supply should create much higher prices this summer.  Stock up now on livestock.  In the Chicago futures pits prices of lean hogs are going belly up to the tune of 26% over the past 9 months.  Retailers, however, are not discounting pork products which has in turn turned off consumers and reduced demand.  That same phenomenon is occurring across the food spectrum keeping prices stubbornly high.  Expect them to go higher this year despite recession fears.

7.  Real Estate
    The WSJ reported on May 23, 2012, that existing home sales were up 3.4% from March and the median home price increased from a year earlier to $177,400, the strongest year-to-year gain since January 2006.  Economists say the higher median price reflects rising values and the sale of fewer foreclosed homes.  Traditional home buyers are now competing with investors, which should push prices higher as interest rates reached a record low of 3.79% for a fixed 30 year loan.  On May 23rd the Commerce Department reported that new home sales for April rose 3.3% over March and up 9.9% over one year ago.  Prices for a new home rose to $235,700, up 5% YOY.  These numbers are a far cry from historic levels but these are the best news the industry has had since 2008.  Arizona is one of the country’s leaders in this Sector substantially out-performing the national averages.  CMV’s forecast was premature but accurate.

On May 26, 2012 Catherine Reagor’s column in the Arizona Republic indicated that single family home inventories in the Phoenix area have declined 50% and prices have risen 30% YOY!  An east Phoenix home was bought in a short sale in late September, 2011 for $218,000 and sold in late February, 2012 for $560,000 after it was completely remodeled.

8.  Special Situations
    The junior small and mid-cap gold and silver miners and explorers are even more under-valued than their senior cousins.  Several juniors have reported outstanding production and earnings and the market absolutely ignores them.  There’s a plethora of names that when bullion begins its’ move higher will suddenly become take-over candidates.  Given the current depressed prices fortunes will be made.  Buying this Sub-Sector now is a wise Contrarian play.

The fundamentals on Uranium (Ux) are getting exciting and the senior, junior and explorers are grossly under-valued.  Globally, nuclear reactors burn more fuel than all the mines produce.  It makes no difference that Germany wants to shutter its’ nukes and go green and Japan has already shut down 53 out of 54 of its’ plants.  Up to this point, the supply deficit has been filled by salvaging old nuclear warheads but that ends next year.  This is a long-term growth Sub-Sector.  Buy now and hold.

The REEs, likewise are grossly oversold and are out of balance.  Jim Dines (The Dines Letter) reports this month that, “...Rare Earths, a better set of fundamentals we’ve rarely seen; Rare Earth prices are still sky-high and rising again, yet the miners are in downtrends!  Something is not right, and a major economic downturn would fit the facts in the trenches, that commodity prices are still high in the real world of day-to-day transactions albeit probably headed lower.”

Opportunities abound in natural resources.  Now is the time to establish a position at discounts that we won’t see again for a long time.

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


-- H. L. Quist