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Market Overview
In the 67 years since the ending of World War II both political parties have shared power with little significant extreme changes in economic conditions during the various administrations, save two. During the Presidency of Jimmy Carter (1976-1980), the US experienced the worst inflation the country had seen since the Civil War. Three years of a double-digit rise in the Consumer Price Index (CPI), a prime rate of 21.5% and residential mortgage rates of 16% or more led to a severe recession and stagflation by 1980 at the end of Carter’s one-term Presidency. The other is the current Presidency of Barack Obama where unemployment reached almost the same level as it did at the end of Carter’s Administration and out-of-control budget deficits of nearly $5 trillion in 4 years bringing the total unimaginable Federal debt to an unmanageable $16 trillion. As we’ve been reminded over and over again the blame for this fiscal catastrophe rests with the prior Republican Administration but future historians and bipartisan economists will simply record the numbers which will speak for themselves.
The Carter and Obama Administrations have a number of characteristics in common. Namely:
● Centralization of power and control in the hands of the Federal Government.
● Subscribe to the flawed theory that Keynesian fiscal and monetary policy advocating deficit spending will create economic growth and reduce unemployment.
● Increasing estate and income taxes on the wealthy are necessary to balance the budget and promote equalitarianism.
● Increasing entitlements and benefits for lower income citizens and the poor will end poverty and social injustice in America.
● Both Carter and Obama are pawns of a global elitist organization known as the Trilateral Commission that was organized by Zbigniew Brzezinski and David Rockefeller in 1973 to create a “New International Economic Order.” This August group which lists 87 members from the US plus 337 from other nations plans to utilize the current US and global financial crisis to destroy what remains of our national sovereignty and subvert the US into the governance of the United Nations. (Every President of the US elected since 1973, with the exception of Ronald Reagan, has been a member of the Trilateral Commission. At this moment a search can’t reveal whether or not Mitt Romney is a member.)
● Both President Carter and Obama had inept foreign policy which led, in part, to disastrous attacks on US embassies in the Mid-East and ultimately played a major role in their defeat for a second term.
There’s more, but CMV has made its’ point. As Yogi Berra reportedly once declared, “When you get to the fork in the road – take it.” We’ve now passed that fork. Does America continue on the current path to the left or reverse its’ direction to the right? An Obama victory on November 6th would have created a pre-determined economic catastrophe that would end our sovereignty, make us wards of the United Nations, and foster a “nanny state” where free enterprise and freedom can’t co-exist. Fortunately, Barack Obama and his minions of collectivists will suffer an ignominious defeat and Mitt Romney and Paul Ryan will be faced with the arduous task of rebuilding America.
Unfortunately and surprisingly, Wall St. doesn’t concur with CMV’s outlook on the election. Here are the results of Barron’s Fall 2012 Big Money Poll of 131 institutional investors:
● Who will win the 2012 Presidential Election?
Obama 74%
Romney 26%
● Which candidate would be best for the economy and the stock market?
Obama 17%
Romney 83%
● Describe your investment outlook through June 2013.
Very Bullish 2%
Bullish 44%
Neutral 27%
Bearish 22%
Very Bearish 5%
The polling concludes that an Obama victory would be decidedly negative for the economy and the stock market but 46% say they’re bullish, which appears to CMV to be contradictory. Wall St., however, always sees the cup half-full despite any looming storm. Here are some other forecasts that re-enforce this point.
● Larry Fink, CEO of Black Rock, the world’s largest asset manager, says the Fiscal Cliff and the ongoing problems in the Eu will cause a Recession in the US in the first quarter of 2013.
● According to Lombard Street Research, going over the Fiscal Cliff could result in a potentially disastrous 5.2% reduction in GDP but they do not expect that to happen.
● One vocal critic who wished to remain anonymous opined to Barron’s, “Bernanke and Co. now risk damage to both the dollar and the Fed’s own balance sheet. This is the biggest mis-allocation of capital in the history of mankind.”
● BCA Research thinks that Romney could win the popular vote but Obama the electoral college. They also believe that a possibility exists for a tie in the electoral vote which then would result in a Republican-controlled House to determine the victor.
Imagine, if you can, months of lawsuits, recounts and turmoil and renewed uncertainty and its’ effect on the economy. CMV concurs on the prospect of a tie in the electoral vote which would have to be negative for the equity market. CMV will repeat itself. This is the most significant election in the Nation since Abraham Lincoln.
Real Estate
The good news in this market has confounded experts as well as pundits who maintained that a rebound in the housing industry was years away. Robert Shiller, one of the industry’s most visible and prominent experts on a national basis said a year ago that a significant improvement in home building was at least 5 years from occurring. One of Arizona’s most recognized experts maintained in April, 2011 that no recovery in the residential housing market was in sight because, “No one was showing up” – meaning there was no net immigration of people into the state. What happened? Why did these experts miss the dramatic turnaround in this industry?
Investors
Over two years ago your writer met with several companies that were acquiring single family homes, restoring them and renting them out to tenants who, in most cases, couldn’t qualify for financing to purchase. Early in this game one company was making acquisitions at auctions and direct sales at a price below “Par” or as much as 50% below replacement cost. About the same time, your writer spoke to the Arizona Real Estate Investor’s Association (AZREIA) and observed an extremely motivated and successful group of individual entrepreneurs who had the courage and insight to pursue this opportunity, which validated our forecast. Surprisingly, however, few seasoned real estate professionals truly saw what was occurring. One Realtor commented during a speech your writer was delivering, “Yes, but these (investors) aren’t real sales.” What the professional and the experts missed was three fold:
One, investors were motivated by double-digit yields of 10% to 15% when other investments produced little or no return.
Two, investors were motivated by the security of a hard and secure asset in a dynamic growth area (Phoenix), and
Three, the unexpected liquidation of inventory of homes on the market (which was over 60,000 at the time) plus the “shadow inventory” reduced the total inventory to less than 25,000 in less than two years.
Now, of course, supply can’t meet demand and prices are accelerating at almost warp speed. Realtors are upset because their traditional home buyers can’t buy a house at a reasonable cost. Investors have the dilemma that there are no bargains and the stream of investor capital is pouring in from Australia, Canada, United Kingdom, the EU, US Hedge Funds and Ltd Partnerships, which is a harbinger of things to come.
On a national basis here is some supporting data from the October 18, 2012 edition of the Wall St. Journal. Single and multi-family construction is now running at its’ highest level in four years at a seasonally adjusted rate of 872,000 units in September. That’s up 15% over the past August and 34.8% over September last year. Michael Feroli, the chief economist at JP Morgan/Chase & Co., said that the current pace could add two percentage points to the Nation’s GDP which struggled to finish at 1.3% in the third quarter. New building permits, a barometer of future construction, rose 11.6% also the highest level since 2008. The highest area in the US is the Western Region where new building rose 20.1%. The best of the west is Phoenix which leads all sections of the US in sales and new construction.
The National Association of Realtors (NAR) reported recently that existing homes were selling at a seasonally adjusted annual rate of 4.75 million units, up 11% YOY. Inventories, NAR reported, were 20% below a year ago and is the lowest since 2005 and represents about a 5.9 month supply. More importantly, the median home price has risen 11.3% YOY to $183,900, according to NAR.
One factor that has led to the surge of single family homes is the return of buyers who suffered through foreclosure but now are eligible for financing. The WSJ referred to these buyers as “boomerang” buyers. According to Moody’s Analytics, there are about 729,000 FHA mortgage holder households who were foreclosed upon three or more years ago who are now eligible to apply for a FHA mortgage. That number, Moody’s says, will grow to 1.5 million by the first quarter of 2014. These numbers do not include former mortgage holders of Fannie and Freddie or commercial banks. Given historically-low mortgage rates, accelerating demand and low inventories, the real estate inflationary boom forecast by H. L. Quist in his “How To Profit From The Coming Inflationary Boom: And Avoid The Next Crash” has already become a reality in 2013 and could continue subject to the election, the fiscal, monetary and regulatory cliff and the prospect for economic chaos spelled out below.
Amidst all the growing euphoria in the real estate world there’s always underground activity that follows the scent of money. You’ll recall that in March, 2012, five of the nation’s largest banks (Ally Financial, Inc.; Bank of America Corp.; Citibank, Inc.; JP Morgan/Chase & Co.; and Wells Fargo & Co.), agreed to a $25 billion settlement over charges that they had improperly processed foreclosures. To date, the states have received $2.5 billion of the total, but only one billion of that amount has been designated for some type of homeowner aid while another billion will go to the states general fund according to an October 18, 2012 feature article in the WSJ. In California, Democratic Governor Jerry Brown opted to put the state’s entire $410 million payout into existing state obligations over the objection of State Attorney General Kamela Harris, also a Democrat, who said the funds should go to distressed homeowners. As readers of CMV are well aware, the LeftCoast is broke and has been feeding from the federal trough for the past four years. High Noon is at hand and there’s no Gary Cooper to save the state. Arizona isn’t innocent of “fast fingers” either. Jan Brewer, a Republican (who possesses a prominent and notorious finger herself) along with the legislature chose to divert nearly one half of the state’s bounty from the $98 million settlement to the state coffers.
Another underground caper was recently revealed by Catherine Reagor who is the Arizona Republic’s guru on real estate. Her October 10, 2012 column states that in late July almost 300 Fannie Mae foreclosed homes in Metro-Phoenix were “quietly” purchased for $34 million in a cash deal by the Ltd Partnership called SFR 2012-1 US West based in Pasadena, California, which turns out to be an entity created by Fannie Mae. The buyer nor the prices paid for the homes has not been disclosed. Taxpayers have been subsidizing both Fannie and Freddie to the tune of over $150 billion over the past four years. A little transparency from the “evil twins” would be appropriate. The two Government Sponsored Enterprises (GSEs), which were fraught with fraud and insider dealing subsidized by you-know-who, were a major contributor to the sub-prime fiasco.
Which Cliff?
Most of the discussion today pertains to the expiration of the “Bush Tax Cuts” that will expire on January 1, 2013, which will result in income tax increases for all taxpayers in almost all brackets. This event has been dubbed the “Fiscal Cliff” and we are constantly bombarded with images of the family automobile with all of us seated inside driving off a cliff. As unnerving as this may be, there are, in CMV’s perspective, three cliffs facing us on the road ahead. In addition to the Fiscal, there is the Monetary and the Regulatory. A brief summary will provide you with a more complete picture of what we face.
Fiscal:
Without going into much detail the marginal tax rate will increase the most for the lowest bracket up to $17,400 for married joint filers from 10% to 15%. For those earning between $17,401 and $70,700, the marginal tax rate will remain at 15% and the higher three brackets up to $388,350 will see an increase of 3%. Those joint filers over $388,350 in taxable income will experience an increase from 35% to 39.6% or a 4.6% increase in the marginal tax rate.
President Obama has proposed extending the “Bush Tax Cuts” to those whose income is under $250,000 and has threatened to veto any tax bill that will not increase taxes on those earning over $250,000. Congressional Republicans want the “Bush Tax Cuts” extended for all taxpayers citing that most small businesses in the US are “S” Corporations and pay at the personal rate. Increasing taxes in a weak economy, the Republicans argue, is an Rx for disaster.
Most observers, however, fail to realize there are other tax increases that affect everyone. The 2% Social Security (FICA) will be reinstated. The 3.8% health care tax will apply to all taxpayers and the Medicare tax on individuals will increase from 2.9% to 3.8%. As a salaried employee your share of the Medicare tax will increase from 1.45% to 2.35%. The highest earners could see their effective tax rate rise from 35% to 44.3% and when state income tax is added the tax will approach 50%. Bruce Watson, who writes the tax section of AOL’s Daily Finance blog, estimates that the average family will see their taxes increase from $1,550 to $6,400 per year.
For investors and savers the tax increases are much more onerous and will have a decided impact on the financial markets. Taxes on passive income (dividends and interest) will increase from 35% to 43.4%, including the healthcare tax. The long-term capital gains tax will increase from 15% to 23.8% including the healthcare tax. For the wealthy who have accumulated a sizeable estate, the increases are confiscatory or should we say “redistributory.” The lifetime exclusion for estate and gift taxes is now $5,000,000 for an individual and $10,000,000 for both spouses. The excess over that amount is subject to a 35% tax. If the present law doesn’t change the lifetime exclusion will revert to $1,000,000 and the tax rate will increase to 55%. Many small family businesses, farms and ranches will have to be liquidated to pay these taxes or be encumbered by a first lien to the IRS for a long-term payout.
Monetary:
The current Federal Debt ceiling, which was bitterly debated and reset a year ago is $16.394 trillion. At present the debt is about $16.300 trillion and the limit will be breached just after the election. Another rancorous debate is about to occur and the Republicans vowed last year not to increase the ceiling unless commensurate spending cuts were included. If President Obama is re-elected and the Dems retain control of the Senate, the Monetary Cliff could precipitate a US Treasury default and an onerous and catastrophic re-rating of US debt.
Regulatory:
Most Americans will not have this third leg of a wobbly stool in mind when trying to deliberate the uncertainties that lie ahead. Jim McTague, who writes his DC Current column for Barron’s (October 22, 2012) adds clarity to a foggy picture. He says that “CEOs are keeping an eye on the Federal Register where final rules from government departments and agencies are announced and published after passing through the bureaucratic pipeline. Post-election, the Environmental Protection Agency (EPA) alone could wreck havoc on the economy with a flood of new mandates that will cost businesses hundreds of billions of dollars.” He adds that there are 620 rules in the EPA pipeline just 3 years into the Obama Administration. One rule, McTague writes, would declare large swaths of the US “closed for new business,” until emissions are reduced to meet lower caps. In one study 351 power companies including 150 biofuel producers seeking new building permits were turned down because they couldn’t meet new mandates. A coal-fueled power plant on the Navajo Indian Reservation near Farmington, NM, and 2 others that serves a four state area, have announced that they will shut down soon. The Obama Administration is determined to kill the coal industry but doesn’t have an alternative to meet energy demand. The Navajos will lose 1700 jobs and $500 million in revenue.
Lisa Jackson’s EPA, despite numerous losses in court actions throughout the US, has raised the bar to an outrageous level. Her agency has taken an action to not only expand the EPA’s authority, it plans to prevent an Alaska gold and copper mining project from development, prior to the firm’s submission of their plans for government approval. The Pebble Partnership has spent a decade and $132 million exploring what would be the largest mine in North America, which should be reviewed and permitted by the US Army Corps of Engineers. Mrs. Jackson’s EPA wants to supercede the Corps. A district judge in Alaska has ruled that the EPA’s view that it could “unilaterally modify or revoke” a Corps permit “at any time” was a “stunning power for an agency to arrogate to itself when there was no mention of it in the statute.”
The bottom line? Given four more years, the Obama Administration, utilizing the fiscal, monetary and regulatory cliff could absolutely destroy the US economy. What most Americans don’t realize is that it is a deliberate design of the Trilateral Commission and its pawn, Barack Obama. We’ve only had a preview of how the President plans to “fundamentally change America.” If re-elected the Trilaterals and the President will have “mission accomplished.”
Note: On October 25, 2012, The Daily Caller reported that Mark Levin’s legal group, Landmark Legal Foundation, has filed suit against the EPA to force the agency to publically disclose what regulations it intends to implement after the presidential election. This action confirms CMV’s position that these regulations have the power to effectively destroy the US economy.
Big Brother
Your writer first read the novel “1984" by the British visionary George Orwell, in the late fifties while in college. To the average American reader then, who enjoyed unbridled freedom, the prospect of an all-powerful, all omniscient and all controlling government seemed absurd and too “futuristic” to be believable. Your writer, however, had the opportunity to spend a considerable amount of time with Russian athletes (then the USSR) in 1959 and discovered first hand how Orwell was able to create his vision of the future of “Big Brother is Watching You,” modeled after Josef Stalin’s brutal totalitarian state.
This personal experience should be interesting and insightful. As a member of the US Track & Field Team that competed against the “Rooskies” (as we called them), my roommate (world record javelin thrower Al Cantello) invited our two competitors to dine with us one evening in Philadelphia. They soon pointed out to us that we were being followed by their police. When your writer became too “friendly” with a female member of the Russian team, another official quickly interceded. After the meet was over your writer proposed a vodka toast to his opponent. He refused the drink knowing that Big Brother was watching. There were no “defections” during this “Friendship Meet” between the world’s two most powerful nations. The political tension then was as thick as molasses and equally as sticky. In short, the USSR was an “Orwellian” state.
Fifty years later, the United States of America, is rapidly approaching a police state and the diminishing individual freedom is done all in the name of protecting us from our enemies and criminals. The Patriot Act passed in 2001, began an unprecedented intrusion of governmental power and invasion of privacy which no longer exists. 80% of the automobiles sold in the US now have “event data recorders” (EDRs) that record all our driving habits in case of accident. Google, Twitter and Facebook users have willingly provided in-depth personal details of themselves, stored in a server somewhere to be recalled by anyone. In 1949, Orwell envisioned “telescreens” which were “two-way” and Big Brother could observe all their citizen’s moves. Today we have “robo cops” and cameras everywhere to track our every move. Marketers know all your personal proclivities and shopping habits and target their products to us. Within a short period of time, the Federal government will know everything there is to know about us, will be able to pick us out from a crowd with facial recognition technology and will know where we are or where we will be at any time. CMV is only touching the surface here as technology complicitly and compliantly provides data to a government that desires to control every aspect of our lives.
Note: CMV would like to acknowledge and thanks James Dines (The Dines Letter) for his recollections of George Orwell’s “1984" and its’ application to 2012. We are certainly riding the same wave.
Technological advances are becoming a powerful weapon for our offshore enemies also. Iranian hackers have stepped up a campaign to disrupt financial institutions and recently specifically targeted Capital One Financial Corp. and BB&T Corp. The attack carried out by a group that calls itself Qassam Cyber Fighters has a super sophisticated program known as itsknoproblembro and has been successful at disrupting services at US financial institutions and plans to unload further attacks on an ongoing basis. These attacks could be in retaliation for US and Israeli cyber attacks on Iranian nuclear facilities which has probably been successful in delaying the production of a nuclear weapon.
The Low tech attacks are also continuing. In mid-October Quazi Mohammed Rezwanul Ahsam Nafis tried to detonate what he thought was a 1,000 pound car bomb outside the Federal Reserve Bank of New York, aiming to destroy the US economy. His mistake was in trying to get assistance via the internet and he recruited an FBI agent who posed as an al Qaeda facilitator. There’s just a little irony here. There’s a greater chance that the Fed will destroy itself and the US economy given the Fed’s 100 year pursuit of a flawed monetary policy than it being bombed by terrorists.
CMV would be derelict in its’ responsibility to its’ readers if we didn’t mention the attack in Benghazi, Libya on the US Consulate there. Even if you read major publications, you would have missed “it” because it wasn’t ‘newsworthy’ to most of the print media. Recent revelations indicate that as early as two hours after the attack began, emails from State Department were sent to US intelligence officials as well as the White House situation room, reporting that the Consulate was under attack. The Islamist group Anar Al-Sharia was responsible and they also planned an attack on the US Embassy in Tripoli – five days before the US Ambassador to the UN was publically saying that the attack was a public protest in response to a video. Three requests were made by the endangered Americans and the CIA and State Department reportedly denied assistance. A heavily redacted copy of one of the emails appeared in the October 25th edition of the Arizona Republic. On a minimum basis President Obama, US Ambassador Susan Rice and Secretary of State Hilary Clinton deliberately deceived the American people and for some yet unknown reason, tried to cover up this catastrophic event that left our Ambassador and three other Americans dead. The truth, unfortunately, won’t be told until after the election, if ever. This event should be the tipping point for America to rid itself of a President whose interest is not in the Nation’s best interest.
Sector Overview
1. Cash & Fixed Income
Treasury yields were basically locked in their pre-QE 3, pre-Fiscal Cliff range of concern as the 10 year finished at 1.75% near the end of October, and the 30 year at 2.91%. Despite large inflows into bond funds BofA Merrill Lynch sees a rotation out of bonds in 2013 and that 37% of surveyed fund managers would sell bonds to buy equities.
A major focus has been on Municipal Bonds and the potential loss of their tax-exempt status as part of the debate over deficit reduction and tax reform. The Obama Administration takes the view that since the wealthy are the prime beneficiaries of these tax-exempt bonds this exemption should terminate on existing as well as new issues and the interest income should be taxable. There is also in the mix a discussion about eliminating federal interest payment subsidies for Build America Bonds (BABs) which have prevented potential municipal bankruptcies over the past four years but added hundred of billions to the Federal liability picture.
BABs have also allowed a few states to avoid financial Armageddon. Take Illinois as a leading example. The State’s debt per capita is the highest and its’ credit rating is the worst in the US. Illinois is ‘essentially insolvent’ and can’t pay its’ bills much less contribute to the State’s pension fund that has an unfunded liability of $85 billion. A recent teacher’s strike was settled giving union members a 15% increase in pay. The State can’t pay current salaries much less the new benefits. Sometime after the election you can expect headlines depicting the fate of the State. CMV wagers that the Obamas won’t retire to Illinois next year which is a model of failed Obamanomics.
2. US Equities
It had to happen. CMV has been citing for months that higher raw material costs and reduced revenues would “squeeze” earnings and lower equity prices. Our supposition is that QE 3 has supported the market beyond fundamentals and the time period when prices should have been negatively impacted and a correction should have taken place. The Dow Jones has dropped four out of the last six weeks down 2% for the week ending October 26th but remains up 6% YTD. The S&P 500 has outperformed the Dow up 2% YTD. A number of major highly visible companies such as Apple, Amazon and Caterpillar had disappointing earnings and others like DuPont and Xerox lowered their outlook going forward into 2013. Even Chipotle Mexican Grill, despite a 20% increase in earnings, saw their stock sell off 20% one day in mid-October. As of October 22, 2012 one out of every five S&P 500 companies had reported their earnings. Only 42% have seen third quarter revenue surpass analyst’s estimates which is the worst since early in 2009.
Jeff Clark points out in his October 23, 2012 “The Growth Stock Wire” that the Volatility Index (VIX) has broken out to the upside and appears to indicate rising volatility. He also says that the S&P 500 Index shows a topping pattern which often signals the end of a bullish trend. What the equity market really needs first is a positive resolution of the election which will remove some uncertainty.
We May Have To Wait A Lot Longer For The Corporate Earnings Rebound
After third-quarter earnings reporting, during which profit growth is expected to turn negative for the first time since the financial crisis, most Wall Street strategists were hoping that the worst would be over, setting up for a nice rebound in Q4.
As it turns out, however, the negativity coming through so far in corporate guidance for fourth-quarter earnings is nothing short of "stunning," says National Bank Financial economist Matthieu Arsenau.
As the chart below shows (Chart available in full file on Yahoo Groups), the ratio of negative earnings preannouncements to positive preannouncements for Q4 is at an all-time high: – Business Insider
3. International Equities
Since there are few opportunities in China, the Eu and other foreign markets (with the exception of Russia) and since this is the political season, CMV will focus on Latin America. Mary Anastasia O’Grady, who writes her Americas column in the WSJ every week, is an expert on Venezuela, a model of how a Marxist government can destroy an economy and impoverish the very citizens that it swore to support.
Henrique Capriles Radonski, the 40 year-old governor of the Venezuelan state of Miranda and his enthusiastic supporters, had fully expected to unseat Presidente Hugo Chavez, who has ruled the country for 14 years. The results however, showed that the Marxist leader had won another 6 years term by a wide margin of 11%, whereas polls showed that Radonski was ahead by four percentage points. How could this happen? The fact that Mr. Chavez had seized control of television and radio stations and the owner of the only independent station had to flee to the safety of the US, might have had something to do with the outcome. Chavez’ control of the voter rolls could have been another contributor. The rolls list at least 10,000 names between the ages of 111 and 129 and a total of 19 million eligible voters whereas there were only 11 million in 1999. The state-owned oil company, which is the country’s largest employer and government employees were required to supply a thumb print and a signature with their vote which may have influenced their choice of candidate. Venezuelans have “voted” themselves more inflation (now 20%) and price controls, a shortage of food since Chavez confiscated all the farms and production has fallen 30%, a 28% decrease in oil revenue, since the state confiscated all production, and a crime rate that has seen 155,788 murders since el Presidente took office in 1999.
Ms. O’Grady’s column shows a picture of Barack Obama greeting Hugo Chavez at the Fifth Summit of the Americas in Port-Of-Spain on April 17, 2009. Is this a portrait of things that could come to fruition in the US in the next four years?
Contrary to the picture in Venezuela and a number of other Latin American countries that have become totalitarian states, Brazil is far outpacing the US economy. James Davidson, who writes the monthly newsletter “Strategic Investment” and who has authored Brazil is the New America: How Brazil Offers Upward Mobility in a Collapsing World, has also established 3 companies there. He is very bullish on the country. Today Brazil is the world’s largest exporter of five major crops, the third largest producer of aircraft, as well as railcars, machine tools, footwear, and a host of other products. After being ravaged by hyperinflation and political corruption in the 1980s, Davidson believes that a conservative banking system gives Brazil the same business and investment opportunities that existed in the US in the late 1960s. (www.strategicinvestment.com)
4. Hard Assets
Somewhat lost in the presidential debate is the fact that US oil production now just about equals that of Saudi Arabia. The US Energy Department estimates that US oil and biofuels production will equal 11.4 million BPD in 2013, just below the Saudi’s 11.6 million BPD. We use 18.7 million BPD so we’re still dependent on foreign imports. A combination of increased production and improving fuel efficiency of the Nation’s cars and trucks indicate that imports could be cut in half by 2020.
Adding to this positive picture is the production and supply of natural and shale gas which is also responsible for increasing the production of “tight oil” trapped in shale. The US has such an abundance of natural and shale gas (that can be produced and marketed in the US at $2.66/thousand cubic feet), that it can be exported and sold as Liquid Natural Gas for two to three times domestic cost. Daniel Yergin, who is Vice-Chairman of IHS, a global analytics company, says that 1.7 million jobs have been added since the shale gas revolution has started and that could rise to three million by 2020. There is one major obstacle, however. The “Green Lobby” is opposed to all fossil fuel production, including gas, which was also lost in the debates.
5. Precious Metals
You may recall that we saw a BUY signal on August 22, 2012 when gold (Au) broke out of a trading range from about a June low of $1,525 to a high of $1,625. From $1,625 it moved smartly to just under $1,800/oz early in October and retrenched to $1,700 before closing at $1,712 on October 26th.
Silver (Ag) followed the same pattern from $28/oz on August 22nd to a high of $35 the first week in October. Both Au and Ag broke through their 50 day moving average, which now rests at $1,730 for Au and $32.87/oz for Ag.
Why the correction? If we’ve learned anything during the past 14 months, uncertainty creates a flight to US Treasuries which strengthens the USD and lowers the PM Group. The fear of a fiscal and monetary crisis has not moved Au and Ag north. If we knew, however, that taxes were going to increase and even though that would be GDP negative, the uncertainty would be removed and all markets including Au and Ag would respond and find their real value in the marketplace. On a larger scale, if we knew that Barack Obama would have four more years, most of CMV readers would consider that a multi-tiered negative but the markets would react more definitively. CMV and others see this event as very bullish for the PM Group despite being negative for US equities.
On June 18, 2012, the US Federal Reserve and the Federal Deposit Insurance Corp. (FDIC), circulated a letter to US banks that proposes to harmonize US regulatory capital rules with Basel III, promulgated by the Bank of International Settlements which is the world’s central bankers bank in Basel, Switzerland. Basel III is an international accord that tells a bank how much capital it must hold in reserves to establish the banks solvency and stability as a result of the recent banking crisis. This letter proposed that US banks now consider gold bullion as a Tier I asset which means that it would increase its’ weighting to 100% rather than 50% as a Tier III asset. This puts gold on an equal basis with any reserve currency or government bond. In simple terms, gold has returned to its’ former status as real money. This could be one of the principal reasons why China and central banks around the world are accumulating massive amounts of Au. In a recent internet recording Brian Hicks, the publisher of “Wealth Daily,” forecasts that gold bullion prices could double due to “Basel III” after January 1, 2013.
Collectively, central banks around the world, plus the International Monetary Fund (IMF) report that they own about 23,349 tonnes of gold which at today’s price represents about $1.3 trillion. Eric Sprott of Canada’s Sprott Asset Management says that central banks have been a massive unreported supplier of physical gold and that their gold reserves are negligible today. He says, “ ...a large portion of the Western Central banks stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counter-party leased it from them in years past. As this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely.”
Add to Sprott’s analysis, the distinct possibility that some of the gold bars stored at Fort Knox have proven to be gold plated tungsten and we’ve got the potential of one of the most explosive frauds in world history and that the stated supply of bullion is in question.
Keep tuned.
6. Commodities
This entire Sector has languished due to one major factor – China’s appetite for everything from the metals to food products has been starved due to the country’s planned and unplanned slowdown. One example tells the story – iron ore.
Through 2011, China’s steel production grew at an annual average rate of 16.5% according to Barrons’ Commodity Corner (October 29, 2012). This compares to this year’s 1.7% rate. China’s steel production accounts for almost 50% of all production worldwide, so the country’s economic slowdown has sent the price of iron ore plunging from a high in 2011 of $190/tonne to $87/tonne this September. China has recently announced a new stimulus program which includes massive infrastructure spending. If China’s plan comes to fruition, the price of iron ore as well as most all base metals like copper, lead, nickel, zinc et al will follow. The resurgence of home construction in the US will also add to the demand for copper and lumber.
7. Real Estate
Please refer to pages 3-5 for CMV’s extensive overview of this Sector.
8. Special Situations
This Sector, which primarily features microcap stocks focused on natural resources, is the victim of the “risk off” sentiment but should be the beneficiary of a breakout to the upside once the political and economic uncertainty is resolved.
A. Gold & Silver
The exploration companies are the most beaten up of any equities, some losing as much as 90% of their value in the past year despite the fact that most of them have proven resource in the ground. James Dines says in his August The Dines Letter, The precious metals should end their consolidation within a few weeks and then turn up. In fact, we are turning increasingly bullish on the beaten-down Toronto Stock Exchange, if only because everybody is so deeply pessimistic on mining stocks. Jim’s track record is unparalleled. CMV agrees.
B. Platinum & Palladium
Despite the fact that labor strikes have curtailed the production of these two metals in South Africa and available supply has plummeted, prices of platinum have fallen to a 6 week low due to the economic outlook in the EU and the reduction in the demand for autos. 30% of all platinum production is for catalytic converters to reduce auto pollution. Another factor is that rising labor and production costs and lower prices are severely effecting the bottom line of the South African miners. If prices don’t trend higher some of the mines could close which would reverse the metals trend.
C. Rare Earths
China’s largest REE producer announced on October 25th that it had suspended production in an effort to shore up plunging prices of these elements so critical to the electronics industry. China has about 30% of the REE deposits but accounts for 90% of the world’s production and their “centralized government management” effects the entire world. The US is coming closer to the production of REEs which will begin the end of China’s monopoly.
4. Uranium
Jim Dines introduced your writer to the most ignored and unloved energy source in the world (uranium) when its’ spot price was $7/LB in 2002. Within a couple of years U3O8 rose dramatically to $140/LB and the penny uranium stocks rose parabolically. That won’t happen again but the Fukushima nuclear power plant disaster has created some value in this Sector which has been over-sold. China is building a whole new generation of nuclear reactors anticipating their inability to meet their energy needs while the rest of the world debates the issue and runs the risk of the lights going out in the near future.
5. Oil & Gas
As CMV has stated in our Hard Asset Sector (page 11) this industry has been the one bright light both in the increasing demand for workers as well as investment opportunity. Microcaps drilling for oil and shale gas in the US have produced outsized returns. Of particular note are new developments in the Bakken Formation in Montana. A Romney victory will spur development on Federal lands which should present additional opportunities.
6. Potash
Fertilizer is one of the key opportunities in the commodity Sector. The failure of this year’s corn crop has reduced current supply to a mere 50 days and will cause farmers to plant considerably more acreage in the 2013 crop year. Corn requires a great deal of nitrogen because its’ yields are much higher per acre than those of soybeans or wheat. This is another sub-Sector that is a long-term hold.
7. Graphite, Vanadium & Beryllium
These “new age” metals have also suffered from the “risk off” sentiment that has negatively impacted all of the Special Situation sub-Sectors. In late October, however, the stock of one of the micro vanadium companies doubled on the market’s recognition of the vital role this metal plays in the mass storage of energy and steel production. Online you can hear an interview with Ron McDonald the former Canadian Secretary of International Trade, who has become a spokesperson for the vanadium industry. Another key component is that the world is now reliant on the supply of vanadium from such unreliable sources as China, Russia and Venezuela. There is now a proven resource in the US that will be North America’s only primary producer of this marvelous metal.
Demand for graphite for just one market – EV cars – will exceed supply by the year 2020, but its’ role in ion batteries will result in a critical shortage before that date. Graphite’s sister component graphene has more application as it is 200 x stronger than steel and so thin it can be transparent. A Canadian microcap just received a Preliminary Economic Assessment (PEA) of its proposed graphite mine that would have a pre-tax net present value of $246 million and a 32% pre-tax Internal Rate of Return (IRR).
Beryllium is now being tested for its technical and commercial viability for use in custom precision optical system for the defense, aerospace, laser, medical, process control and metrology industries.
If you want to learn more, please give me a call at (602) 840-4117. At a time of crisis there’s always opportunity.
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