Free Preview of November CMV Newsletter

Hello World,

Below is a preview of the CMV (Contrarian Market View) Newsletter for November. See the end of this post for a free book offer with the purchase of a subscription to the full monthly newsletter. (Note: due to the limitations of a blog post the appearance of this preview is not as it will appear in the actual subscriber copy.)

H. L. Quist's

Contrarian Market View

Newsletter

Market Overview

CMV deliberately delayed the November issue in order to incorporate the two major events that will have a significant impact on our country and our economy for the next two years:

THE ELECTION, and

THE FEDERAL RESERVE STIMULUS

It didn’t make sense to speculate on what may happen when we could be more definitive.  CMV apologizes for your angst over the delay.  The election represents a resounding rebuke of the ideology of Collectivism and the Democrat’s agenda that they didn’t reveal and the voters didn’t want.  The great irony of this historical event is:

BARAK OBAMA WAS THE BEST THING THAT

HAPPENED TO AMERICA!

Why?  BO woke up a sleepy citizenry whose passivity and complacency allowed Hope and Change to come to power in 2008.  Now, the Republicans must deliver and not succumb to the big money special interests and business as usual that has governed for the past 50 years and has brought this country to the abyss.  It’s CMV’s view that if the Republicans fail to deliver, the Tea Party will become a new THIRD PARTY and play a pivotal role in 2012 and the future. You read it here first.

The first order of business is to stop the fiscal bleeding (deficit spending) but within months there could be blood in the streets.  Numerous cities and states in America have been and are relying next year on the federal government to bail them out.  Unknown to most Americans, 30% of California’s debt issuance in 2010 has been subsidized by the federal government in a program known as Build America Bonds. California is not alone.  30% of Illinois’ debt and 40% of Nevada’s debt has also been subsidized.  New York state has spent in excess of 250% of its’ tax receipts over the last 10 years.  Some of these funds have been used to continue pension payments and salaries.  Will the “new” Congress have the fortitude to tell the states to go cold turkey or will it be business as usual?  Make no mistake about it, budget cuts and reversal of socialism is going to be accompanied by considerable rancor.  There won’t be ‘reconciliation.’

Let’s look at the positive.  CMV believes that there will be a sea change in public sentiment in 2011 that will reverse high unemployment and increase the nation’s GDP and tax receipts.  Large US corporations, small business owners and investors, and those individuals who are the decision makers can now, more confidently, invest in America.  CMV forecasts that the economy’s performance (absent an outside event) will surpass most economists’ projections next year.

The Fed’s long anticipated announcement on QE2 was much ado about nothing.  Bill Gross (PIMCO) said it was “neutral.” In short, the Fed’s combined purchases of treasuries and other assets will total $110 billion per month which was already baked into the cake.  Also contained in the announcement was the Fed’s commitment to retain all rates at their present level for “an extended period of time.”  The Fed’s goal is to create inflation that will ostensibly create new jobs while maintaining historically low interest rates.  Sounds more oxymoranic than axiomatic doesn’t it?

Two economists at Goldman Sachs wrote a piece on October 25^th that, in their opinion, the Fed really needs to buy a staggering $4 trillion in assets to get the economy rolling.  That’s in addition to the Fed’s current bloated balance sheet of $2.3 trillion.  The numbers are as incomprehensible as they are unsustainable.  The question that should be asked, is, Why will QE2 work when the $800 billion stimulus Plan and QE1 did not?  CMV will answer its’ own question.  Change in public SENTIMENT.  If business and the public are fearful of its’ government, no amount of liquidity could move the yardsticks.  QE2 and a change in SENTIMENT (post-election) could lead to overkill and a year from now the “I” word (that’s not impeachment) will be on everyone’s lips. The Fed’s goals is to push investors out of bonds and into higher risk assets.  Can you say: REAL ESTATE?

Here’s how the law of unintended consequences will negatively impact the Fed.  They presently have $1,079 trillion of 30 year fixed-rate MBS (bonds) on their balance sheet.  If (actually when) interest rates rise from 4% to 5%, the net asset value of those MBS securities will decline by about $162 billion!  To the Fed it matters not.  Their assets are derived from funny money but to bond investors it’s real money. The bond bubble will burst.  Before that occurs, however, CMV and its’ subscribers will be on the stage and out of Dodge.  In the interim however, let’s ride the wave of asset inflation.

Quantifying Risk

Let’s assume that you’re a subscriber of CMV or have previewed an issue on-line and have a brokerage account with a major Wall St. firm. You’ve observed that certain names recommended by CMV have produced outsized gains YTD in excess of 100%. You suggest to your broker that you would like to add a few of these names to your portfolio.  In all probability your broker’s reply will be:

“You don’t want to buy that company. It’s too RISKY!”

It matters not that for the past 10 years ending 12/31/09 you have been at risk in an S&P 500 Index Fund which has produced a zero return.  It matters not that your “blue chips” GE, MSFT, et al, have been dead money for 10 years.  So, what’s at work here?  First, your broker is probably unfamiliar with sectors such as precious metals, uranium, rare earths, commodities, etc. and you can be assured that your broker will be DOWN on what he or she isn’t UP on.  Secondly, the Wall St. firm may not allow their reps to buy those names, and thirdly, which is the point of this piece, they don’t know how to Quantify Risk.

The following methodology has been utilized by your writer for many years particularly in a market environment that exists today that, properly administered, results in these outsized gains.  Small and large fortunes can be realized in “penny stocks” in the resource sector but an investor must apply a different set of rules in order to Quantify Risk.  Here are a few:

1.  Sector Rotation & Momentum:

As CMV has repeated over and over, understanding the MACRO picture is critical to investing which is the microcosm. Grasping the significance and purpose of the devaluation of the US Dollar would have enabled the investor to see that there would be a major sector rotation to precious metals, commodities and a short position in the USD.  Risk is minimized when you secure a position in the very early stages of a sector rotation that gathers momentum as CMV will illustrate below.

2.  Sector Fundamentals:

What sustains a sector rotation over a larger time span is a supply-demand imbalance.  Most analysts will take a position that gold is a “timing” asset class and it only appreciates when there’s fear in the global markets or when inflation (which the talking-heads on CNBC say is non-existent) effects the CPI.  Almost entirely ignored is the fact that gold bullion has appreciated from $253/oz to $1,350/oz in 10 years, and investor, commercial and industrial demand far exceeds annual supply. 

Rare earths are a current phenomenon.  Since China controls 97% of the world’s production of rare earth elements that are absolutely essential for a digital and green world and is cutting exports to Japan and the US, fundamentals are driving the price of the metals and thus the stock price.

3.  Microcaps (Penny Stocks):

Most large brokerage firms will not allow their reps to purchase penny stocks for their clients. Certainly, brokers and investors have incurred massive losses in this arena but here’s how you can reduce your chance of loss and improve the upside:

a.  Management

Choose companies that have executives who have achieved prior success.  Use the “net.”  You can find out just about anything on anybody searching the Internet.  A past failure or SEC censure is a red flag and there are lots of them. 

b.  Stock Prices & Capitalization

For names under $1.00/sh look for companies with no more than 25 to 50 million shares outstanding. Early stage exploration companies, for example, will need to raise additional capital which means dilution to existing shareholders.  If an exploration company has 50 million shares out and sells out for one billion cash the investor will realize $20/sh. If a company has 300 million shares out, the investor would realize $3.33/sh

Assuming that the microcap has the ore in the ground but the grade and the total resource hasn’t been established as yet, the lower the entry price into the stock the better.  As the price rises the investor’s risk increases. If you’re in a stock at $.50/sh and it rises to $1.50/sh (which happens all the time) fed by speculation and day traders and the news then is disappointing or problems occur, the stock could retreat very quickly to your entry price.  At that point if you’re still in the stock you need to make a decision to sell or hold.

c.  Political Risk

You would prefer to invest in a country that respects private enterprise like the US, Canada, Australia, etc.  A classic example how bad a good opportunity can become virtually worthless is the story of Chrystallex (KRY).  The Canadian company had discovered and proved up a 20 million ounce gold resource in Venezuela.  KRY was ready to begin mining and had shipped millions of dollars of equipment to Venezuela.  Hugo Chavez and his government withheld final approval and essentially confiscated the property.

d.  Patience

There are three ways to play this market.  One, when the stock doubles, sell.  Two, when the stock doubles, sell half and let the rest ride.  Three, go for the home run or four-bagger (investor lingo for hoping the stock will quadruple in price).

In many situations, it is a matter of the individual investor’s mind-set, objectives and financial situation.  The old adage “you’ll never go broke taking a profit” holds true but you can make a profit on 9 trades and lost it all on the tenth.  The SERIOUS MONEY is made by those who identify the right name and patiently hang in there until the company achieves its goal of a sale or production.  One reader bought REE in March around $3.50/sh.  It dropped to near $2.00 in July.  He called CMV and said it was a “stupid” recommendation and he sold.  In October the stock reached $12.  He had no patience and no comprehension of the fundamentals.  CMV can also err. When REE shot up almost 300% from July to October, CMV sold half its client’s position with the intent to buy the stock back again after a correction. The correction was modest and short-lived.  We’re not infallible but we did discover a sector that was off almost everyone’s radar.

This tutorial is by no means complete but we hope it is helpful.  The opportunity to profit in microcaps in the resource and commodity sectors will be available for a limited time period going forward. CMV’s position is clear and concise.  Make some serious money while the opportunity exists and then get the heck out of the markets.  CMV’s value to you is discovering the opportunity and to advise you when the game is over.

Rare Earths Revisited

The global rare earth elements market which has produced spectacular returns in 2010 for CMV subscribers and clients, has amped-up to a new level.

The Japanese, who import 100% of their needs of REEs (about 32,000 metric tons or 24% of world demand) are involved in a serious confrontation with China which controls 97% of the supply.  With the Chinese hinting at a further reduction of exports, the Japanese have allocated 100 billion Yen ($1.2 billion) for the development of the elements offshore.  The US, which has a demand for 8% of the world supply has Molycorp Minerals, LLC (MCP) fast-tracking their closed mine in California to be in production by next year.  Rare Earth Elements (REE) which owns the Bear Lodge property in Wyoming and has seen its share price soar more than 300% in the past 90 days, has completed a feasibility study on its property which shows an exceptional internal rate of return (IRR).  CMV has been cautious in adding to positions in both companies recognizing that China could be rationing it’s exports as a negotiating ploy in the World Trade Organization (WTO) talks to head off protectionist policies originating in the US, Japan, and Europe.  A concession by China on its exports could precipitate a correction in MCP and REE which would be an excellent re-entry point in both names.  Demand should exceed supply for several years.  Mines don’t open or re-open overnight — especially in environmentally-challenged California.  As CMV goes to press a correction is taking place which has been over due.  Please take note that there is a newly issued ETF (REMX) that will allow investors a broad diversification in these companies.

The Real Dirt On Real Estate

Just when you thought you saw a light at the end of the real estate mortgage tunnel, the light turns out to be a train that threatens to leave the tracks.  My good friend and first class realtor, Ann Heins, has forwarded the following information that is a MUST read for everyone who has any skin in the game — any game!  The breadth-taking disclosures were provided by David Kotok (www.cumber.com) from an unimpeachable source whom he wishes to remain anonymous.

Most of you are aware that the mortgage-backed securities (MBS) were sliced and diced into tranches of home mortgages rated from AAA, the least likely to default, to junk, the sub-prime debt.  Different tranches were sold to a wide array of investors worldwide but specific bonds were not actually signed over to the bond holder-investor.  The Mortgage Electronic Registration System (MERS) was set up to be the repository of the securitized mortgages to direct the defaulted mortgages to the appropriate tranches of the bonds.  MERS didn’t hold any mortgage notes and the Real Estate Mortgage Conduits (REMICs) didn’t own the notes either.  The bottom line is that somewhere between the REMICs and MERS the chain of title was broken.  In order for the mortgage note to be sold or transferred to someone else and be turned into a MBS, this document has to be physically endorsed to the next person.  All the signatures consist of the ‘chain of title.’ If for any reason any of these signatures are skipped, the mortgage note is no longer VALID.  Since the chain of title is broken it is conceivable that the borrower no longer owes any money on the loan. 

Were you able to translate that sentence?

The dirt becomes even murkier.

People began contesting their foreclosures on the chain of title issue.  The banks had retained “foreclosure mills” to speed up the massive volume of defaults and these law firms, quick to observe the broken chain of title, may have fraudulently through “robot-signing” repaired the chain of title.  Stories of employees holding up documents to windows to forge signatures and having at ready an ample supply of notary stamps are running rampant.  One law firm in Florida where the smell from the swamp originated, has processed 72,000 foreclosures this year!  Now, the title companies are refusing to insure the titles.  To add to a Halloween Witches Brew of toil and trouble Fannie and Freddie are demanding that the banks re-purchase about $250 billion of loans that lack proper documentation.

Murkier becomes mud.

Congress, anticipating a catastrophe heading into the elections and bowing to the banking lobby, passed the Interstate Recognition of Notarization’s Act so that the foreclosure mills forged and fraudulent documents would not be scrutinized by out-of-state judges.  The Senate passed the bill by voice vote so there would be no record of who voted for the bill.  The President, pocket vetoed the bill to avoid the wrath of millions of affected homeowners.

The top of the bottom line is simply this.  What happens to our fragile economy when citizens realize they don’t have to pay their mortgages?  Not only is the chain of title broken, the Rule of Law is breaking down which is a threat to all of us and the entire country.  More corruption thrives in this environment created by those Masters of The Universe in banking, Congress and on Wall St., who have assumed no personal responsibility for this crisis and have retained their wealth and retirement free from remorse and restitution.

Could Bank of America Shares Fall to $2.50?

That is the title of an article written by Steven M. Sears in the October 25^th edition of Barrons. To most sophisticated observers the major money center banks have successfully survived the financial crisis and more specifically, the mortgage mess.  Bank of America, however, with recent revelations of the legality of home foreclosures and the quality of mortgage assets, a conflicting picture emerges. (See Page 4 The Dirt On Real Estate).

Super sophisticated option traders are betting that BofA stock, currently as of October 24^th, at $11.36/sh could fall to $2.50 by 2013.  Traders are buying PUT contracts (betting that the stock will fall) that will expire in January 2013. What do these traders know that most observers don’t? Here’s an insight.

The Federal Reserve Bank of NY, PIMCO and Black Rock have essentially accused BofA of selling them $47 billion of mortgage-backed securities with enough “junk” that they have impaired the earnings of these buyers.  Traders believe that there is a long litigious road ahead for BofA, and in the end BofA will pay multi-billions to settle. In effect, the market has judged the bank guilty.

How did BofA find itself in this unenviable position?  In one of the most ill-timed and ill-conceived decisions in the banking industry, BofA bought Countrywide Financial for $4.1 billion in 2008, at a time when it should have been apparent to anyone who could fog a mirror, the mortgage end game was nigh.  Rumor now is that the US Treasury “encouraged” a shot gun wedding.

In mid-October, 2010, Angelo Mozilo, the former CEO of Countrywide, agreed to pay the Securities & Exchange Commission (SEC) $67.5 million penalties to settle civil fraud and insider trading charges.  Most of Mr. Mozilo’s financial penalties will be paid by, you guessed it, BofA, along with two other former executives.  As part of the settlement, Mr. Mozilo agreed to a life-time ban from serving as an officer or director of a publicly-held company.

Unknown to most readers is that this settlement is directly tied to Mozilo’s “pump and dump” scheme whereby he sold $140 million in Countrywide stock when he knew the end game was near and investors took a massive hit when the stock became almost worthless.  Still pending, it should be noted, are criminal charges against the “sub-prime mortgage king.”

Another twist to this story is “The Friends of Angelo” who received “sweet-heart loans” from Countrywide.  An investigation into the mortgage mess and the influence peddling that occurred, reveals that 30 Senators or Senate employees received VIP loans from Countrywide.  For some strange reason a further investigation and charges have been delayed.  Jail time for the sun-baked and tanned Mr. Mozilo would be a heinous penalty!

. . .

This is from my friend Nick Tommer in Washington (state) who reports:

Why I’m Depressed

Over five thousand years ago, Moses said to the children of Israel, “Pick up your shovels, mount your asses and camels, and I will lead you to the Promised Land.”

Nearly 75 years ago, (when Welfare was introduced) Roosevelt said, “Lay down your shovels, sit on your asses and light up a Camel, this is the Promised Land.”

Today, the present economy has stolen your shovel, taxes your asses, raised the price of camels and mortgaged the Promised land!

I was so depressed last night thinking about Health Care Plans, the economy, the wars, lost jobs, savings, Social Security, retirement funds, immigration, etc. . . I called a Suicide Hotline: I had to press 1 for English; I was connected to a call center in Pakistan: I told them I was suicidal.  They got excited and asked if I could drive a truck.

THE CMV RECOMMENDATIONS

The CMV Portfolio is up 25.23% YTD vs. The S&P 500 at a little north of 5.00%.  Advisory clients who are concentrated in Sectors 4, 5, & 8 have unrealized gains of 30% to 50% YTD.

The rest of the newsletter is only available to paid subscribers and includes the portfolio of recommendations.

"GREED" and "PROFIT" are now available for you iPad users.

You can also pay for the year's subscription to the CMV (just $99) plus receive both books free (USA addresses only) by clicking here for the paypal payment window link.

Financial Questions? Contact hlquist at djmwealth dot com

Free Preview of October CMV Newsletter

Hello World,

Below is a preview of the CMV (Contrarian Market View) Newsletter for October. See the end of this post for a free book offer with the purchase of a subscription the full monthly newsletter. (Note: due to the limitations of a blog post the appearance of this preview is not as it will appear in the actual subscriber copy.)

October, 2010

H. L. Quist's

Contrarian Market View

Newsletter

Market Overview

Given your inquiries and comments, many CMV subscribers are confused, flummoxed and depressed. The common thread in the preponderance of your emails and calls is your inability to determine the future direction of the economy or in a more macro sense, the direction of the country. This issue of CMV is deliberately dedicated to bring clarity and profitability into your life. Focusing on the economy and reducing the possible outcome to a minimum, CMV envisions three distinct scenarios looking forward to 2011 and beyond:

1. The Bernanke Re-Flation Plan Succeeds
On September 21st, the Federal Reserve's Open Market Committee made it abundantly clear that it wants more INFLATION. The Committee announced, "Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability."

In short, we know what the Fed will do. What we don't know is, will their strategy be successful? CMV believes it will and it could open the door to enormous profit-making opportunities for you — IF you dare to share CMV's vision.

Under this scenario the following results most likely would occur:

The new Congress would cut off additional stimulus funds, extension of unemployment benefits etc., thereby putting more pressure on the Fed to create "growth and employment opportunities." (As stated)

The Fed would undertake massive Quantitative Easing (QE-2) which would flood the markets with liquidity and further devalue the US dollar.

Stock and commodity prices would surge as a result and the appetite for risk would become ravenous. Bond investors would nail down profits while freeing up multi-trillions of investment capital that eventually would find its' way into real estate.

In the early stages of the RE-FLATION CYCLE, manufacturers and retailers would discover pricing power and new profit margins, employment demand would increase, consumer sentiment would turn positive and the illusion of permanent prosperity would return echoing the sights and sounds of THE GREENSPAN PLAN of 2002.

THE BERNANKE RE-FLATION PLAN is another short-term fix that ultimately results in another longer-term problem — a crack-up boom. As the Wall St. Journal editorial opined on September 23rd, "Central Bankers who wish for more inflation usually get their wish, and the result is rarely benign." In the interim, however, enormous profits can be realized. (See pages 15-18)

2. The Bernanke Re-Flation Plan Fails.
Ultimately it will. It's simply a matter of time. CMV's position is that there is one LAST RODEO — meaning, the RE-FLATION PLAN will be the last desperate attempt to cover up all the Fed and political transgressions of the past 50 years. The only question is, will the US (and most of the world) have a temporary reprieve before THE GREAT RECKONING? CMV's answer is yes.

Let's reduce these two widely divergent scenarios to the minimum. Given a choice between INFLATION and DEFLATION (aka Depression) what choice would bankers take? Inflation, of course! Why? The Fed believes (firmly) that they can prevent Inflation from getting out of control. Deflation, on the other hand, is a death knell that has little chance of resuscitation. Although it hardly needs to be said, the following results would quite possibly occur.

Gross Domestic Product (GDP) would continue its decline and return to negative in 2011-2012.

Unemployment would rise significantly above the Bureau of Labor's fallacious 10% and consumer sentiment would plunge. Prices of most goods and services would decline dramatically as demand disappears.

The Federal Debt and the Budget Deficit both would explode as the Treasury's tax revenue plummets and QE-2 balloons. An international monetary crisis looms large as the prospect of default by the US on its sovereign debt becomes possible.

Fed Chairman, Ben Bernanke, has resolved that this scenario will not occur on his watch.

3. Slogging To The Future.
What in the world is a "slogging economy?" A perfect model is Japan from 1990 to the present. Remember, Japan's efficient and torrid economy in the 1980s was the model for all the world to duplicate. What has the 20 year SLOG produced?

The Nikkei Dow reached almost 40,000 at the end of 1989. A resounding crash took the index down to 7,000 and their market has never recovered.

The outrageously over-valued real estate market which sported the highest inflated prices in the world collapsed about 70% and has only recovered modestly since the 90s. The Japanese acquired trophy real estate properties all over the world at premium prices such as Pebble Beach, the Rockefeller Plaza, etc. and either walked from their obligations or sold at severe discounts.

Interest rates for both borrowers and savers have consistently been the lowest in the world. Global investors have for years borrowed in Yen at about one percent and invested elsewhere at much higher yields in what is known as the "carry trade." The lesson learned is that low interest rates did not result in domestic economic growth. Is the US dollar the carry trade currency of the future?

The point of this exercise is that, in CMV's opinion, option number one is the most likely. The outcome of a successful RE-FLATION will present unique and alternative investment opportunities for those who dare to be different. As you will soon discover by reading the remainder of this issue of CMV, the INFLATION TRADE has already begun. Here's the bottom line:

The Bernanke Re-Flation Plan, if successful, should present unique profit opportunities for outsized gains that should be realized during the next two to three years. An inflation-induced boom will end in a resounding crash. You and your family are dependent on your ability to see that the future isn't what it used to be!

RARE EARTHS (REE)

It appears that most readers of CMV have missed the opportunity in Rare Earth Elements that was presented to them many months ago. Advisor clients of H. L. Quist, however, discovered them in their portfolios. To get your attention and validate CMV's recommendations here are some of the results:


Symbol Date - Recommended Entry - Price/Sh Current - Price/Sh Unrealized Profit
MCP -- 8-20-10 -- $13.00 (1) -- $26.00 -- 100%
REE -- 1-01-10 -- $3.86 (2) -- $8.60 -- 123%
TASXF -- 8-01-10 -- $.81 -- $1.84 -- 128%

(1) #1 on the NYSE with an increase of 25.3% for the week ending 9/24/10.
(2) In July, 2010 the price/share declined to $2.00. Ranked #1 on NYSE/AMEX at 36.8% increase for the week ending 9/24/10

What are these 17 elements and what are they used for? Molycorp Minerals (MCP), the owner of a mine in Mountain Pass, California, and has the richest REE deposit outside of China, provides the following:

"Rare Earth materials create enabling technologies that are found throughout Hybrid Electric Vehicles (HEV), Plug-in HEVs (PHEV), all-Electric Vehicles (EV) as well as in standard gasoline or diesel vehicles. Powerful neodymium-iron-boron (NdFeB) magnets are vital in the electric motor and regenerative braking systems found in the above electric vehicle categories and are also crucial to several other systems in the vehicles. Virtually all HEV, PHEV, and EV on the road today also rely on Rare Earths (primarily lanthanum) in the battery pack which stores energy normally wasted during coasting and braking and saves it until needed by the electric motor. To estimate positive impacts to our environment, the US EPA assumes each HEV will have twice the mpg and only half the emissions as an equivalent gas or diesel vehicle. For every 100,000 HEVs (such as the Toyota Prius) that replace existing vehicles we save well over 1 million pounds of CO2 emissions per year and 4.8 million gallons of fuel. HEV, PHEV, and EV contain from 20 to 25 pounds of Rare Earths, where a standard vehicle can contain on the order of 10 pounds. Demand for energy-efficient electric vehicles is growing significantly. Global demand is projected to be 4 to 6 million vehicles per year by 2013 so the impact on the Rare Earth market could be staggering. Additional Rare Earth supply sources must come on line to support this growing industry. Hybrid electric vehicles: Headlight glass: neodymium. Hybrid electric motor and generator: neodymium, praseodymium, dysprosium, and terbium. Component sensors: ytterbium. LCD screen: europium, ytterbium, cerium. Glass and mirrors polishing powder: cerium. UV cut glass: cerium. Diesel fuel additive: cerium and lanthanum. Hybrid NiMH battery: lanthanum and cerium. Catalytic converter: cerium/zirconium and lanthanum." Source: Molycorp Minerals, 23 Jul 10

In August, the Chinese government which controls 97% of all the existing production of REEs, announced that they would cut their exports which amounted to about 64 million metric tons in 2005, by 70%. Two of the primary REEs, cerium oxide and lanthanum oxide increased in price by over 2,000% on the news! Now, here's the big news — if the above is not compelling enough to get your attention — from the September 24th issue of the WSJ:

"The Department of Defense is completing a study to identify the potential national security risks of rare-earth dependency."

In addition, the House Committee on Science & Technology in late September began marking up a bill that would encourage the US government to hedge against rare earth shortages. It's well within the area of possibility that the federal government would declare rare earths as "strategic to the national security" and purchase a proven deposit. Could MCP or REE be a prospect?

The Re-Flation of Real Estate

First, the bad news:

The Central Planners in Washington now recognize that despite all the loan modification programs like HAMP and other initiatives, the housing sector is not going to lead America to an economic recovery. In fact, it could lead to either Option #2 or #3 as outlined in the MARKET OVERVIEW, (Page 1). There are about 11 million residential properties whose mortgage balances exceed the home's value and a shadow inventory of an additional 3.7 million vacant homes. David Rosenberg, Chief Economist at Gluskin Sheff says, that if prices drop another 5% to 10%, 40% of all American homeowners would be "underwater" on their mortgages. That would be catastrophic for not only the homeowners but the real estate industry and the US economy.

Added to this witches brew of "toil and trouble" is that investors in 2,300 residential mortgage securities, worth approximately $500 billion, are suing the banks that originated or are servicing faulty subprime mortgage loans to repurchase them. The lawsuits contend that the originators stuck them with "flawed loans marred by poor underwriting and faulty appraisals" (WSJ September 23, 2010). Can you say fraud?

Here are a few of the prospective re-purchasers and their potential liability:

Bank of America -- $35.2 billion
J. P Morgan Chase -- $23.9 billion
Deutsche Bank -- $14.1 billion
Royal Bank of Scotland -- $ 9.4 billion

And, the list goes on. The question is, to what extent will these buy-backs effect the reserves of these banks? The principal benefactors of the buy-backs would be Fannie and Freddie and by proxy, the US taxpayer.

The Good News?

If, and it's unquestionably a big IF, the BERNANKE RE-FLATION PLAN is successful, there should be re-mediation of the mortgage mess. Here's why. Mortgage debt is a constant. The appreciation of real property values through inflation will reduce the number of 11 million homeowners that are underwater. More importantly it will change market sentiment and psychology.

A significant number of home owners, witnessing an uptick of home prices in their neighborhood, will be encouraged to pay their mortgage and wait to walk. Investors also witnessing the uptick will be encouraged to invest risk capital in search of a higher return and the residential market will be on its way to recovery. CMV believes that, as simple as this solution may seem, RE-FLATION will begin to fix the problem. Funny, why didn't the MOTUS (Masters of The Universe) think of that?

Or, have they?

Serious Money

Macro Investing

A good friend and former client shared with your author that he had interviewed recently with an advisor who, after analyzing the portfolio mostly intact from your author's management four years ago, stated that the client was too over-loaded in one sector and needed to ‘diversity.' The over-loaded sector was precious metals. The advisor's recommendation? Sell the Precious Metals and diversify into an array of equity funds. Completely ignored was the past ten year performance of the names in his previous portfolio.

For example, Oppenheimer Gold & Special Minerals Fund (OPGSX). During the past ten years, this fund has had an average annual return of 24% which includes the precipitous drop of 30% during the crash of 2008. In fact, this sector is the only one that has not only made a 100% "V" correction but has gone on in 2010 to robust new highs up 35% as of September 24, 2010. Most individual names in the portfolio mirror this result. The message here is that:

TRADITIONAL PORTFOLIO MODELS ARE DOOMED TO FAIL

My friend is again my client.

It is CMV's opinion that the investment climate in America and quite possibly the entire world has radically changed. The clouds are dark, foreboding and unpredictable. Buy & Hold, Asset Allocation, Model Portfolios, and even stock picking based upon earnings and fundamentals are no longer the keys to wealth accumulation. Macro Investing with Active Management has become the new model for sophisticated investors.

David Einhorn of Greenlight Capital said in a recent WSJ article:

"For years I had believed that I didn't need to take a view on the market or the economy because I considered myself a ‘bottom-up' investor. The lesson I've learned is that it isn't reasonable to be agnostic about the big (Macro) picture."

Mr. Einhorn has placed a huge macro bet that gold prices will continue to rise because of concerns that the out-of-control US budget and federal debt has a negative impact on the US dollar. Do you want to follow the "smart money" or follow the advice of an advisor who still believes that Microsoft, GE and GM are good growth stocks?

There is no question that High Frequency Trading (HFT) has un-leveled the playing field. Another "Flash Crash" is almost inevitable. Super computers such as "The Beast" featured previously in CMV contribute greatly to market volatility. On any day the HFT is buying high risk assets and the next day makes a 180° turn to safe-haven US treasuries or currencies.

CMV took a Macro View years ago when he told audiences and clients that Macro Trends were the key to investing. Realtors, for example, refused to accept the fact that the boom was unsustainable.

The irony, of course, is that there is SERIOUS MONEY to be made in MACRO INVESTING at exactly this point in time and CMV can position you if you are serious about SERIOUS MONEY.

Assuming that the BERNANKE RE-FLATION PLAN succeeds these are a few of the Macro sectors that should significantly outperform any other investing strategy:

The Devaluation of the US Dollar — Sell Short

The Appreciation of Precious Metals — Buy Long

The Panic Demand for Rare Metals — Buy Long

The Number One Alternative Energy (Nuclear) — Buy Long

The Rise in Interest Rates (US Treasuries) — Sell Short

The Rise in Commodities — Buy Long

There is one critical supposition to support CMV's Macro Investing. If CMV is correct, the US is at the cusp of a short-term inflationary cycle that could morph into Hyper-Inflation. All of the above sectors should perform extremely well given this environment BUT it will come to a calamitous end when it has run its' course in a "crack-up boom." CMV's strategy is simple and direct:

Make Huge Gains And Get The Heck Out of Dodge!

(The Financial Markets)

When the next crash occurs CASH will be king. That cash may be in Canadian or Aussie dollars or Swiss francs but those that have no debt and cash will be wealthy, independent and positioned to seize opportunity. The non-believers will become wards of the government.

The Inflation Jeannie Reappears

CMV's favorite metaphor has lifted her lovely body out of the bottle. While the talking heads on CNBC continue to remind us that "there is no inflation" evidence to the contrary is surfacing everywhere. To wit:

Arizona cotton farmers are celebrating as they prepare for the harvest of this year's cotton crop. Early in 2009 the market price of cotton was about $.40/lb. Last week, cotton for October delivery reached $1.09/lb — the highest price since (get this) the Civil War!

Retailers, with lean inventories and current and discounted sales are faced with a major dilemma. Should they restock at higher prices or wait and hope they can get through the Christmas rush with current inventory.

In a related sector, Nike reported a 9% increase in operating profit of $559 million in its latest quarter due to improvement in demand for its athletic apparel and less costly discounting. What impact will the 150% increase in cotton prices have on Nike next quarter?

The travel industry has reported that Americans have spent much more on airplane seats, hotel rooms and rental cars than experts had projected. Hotel revenue which plunged 30% from 2007 to 2009 has now recaptured all the decline in less than a year. Revenue passenger miles has returned to 2007 traffic levels at the airlines which have increased fares 3.9%. Travel employment increased 2.5% in the second quarter of 2010. What's ahead? Increased prices, of course.

Steel prices have risen for some types of products as high as 12% and as low as 1% since this past summer. China, which produces about 50% of the world's output, has cut production 3% to 5% and recently increased its prices on plate steel by 12%.

Other base metal prices that have risen off their 2009 lows are:

Aluminum + 65% -- Nickel +154%
Zinc +105% -- Copper +164%
Tin +120% -- Titanium +265%
Lead +151%

The penultimate evidence that inflation is poised to have a decided impact on personal budgets will be witnessed by shoppers. Commodity prices have already seen a market increase this year.

"GREED" and "PROFIT" are now available for you iPad users.

You can also pay for the year's subscription to the CMV (just $99) plus receive both books free (USA addresses only) by clicking here for the paypal payment window link.

Financial Questions? Contact hlquist at djmwealth dot com

-- H. L. Quist

Free Preview of June CMV Newsletter

Hello World,

Here is a free preview of the June issue of the Contrarian Market View Newsletter, May issue. (Due to the format limitations of a blog, the actual newsletter is better looking.)

See the bottom for a free book offer with purchase of a subscription to the newsletter.

June, 2010 H. L. Quist's Contrarian Market View Newsletter

Market Overview
This June edition of CMV is critical because your author is forecasting a major cyclical change in the economy going forward. Since January CMV has forecasted a Pro-growth, asset inflation based economy and a Bullish outlook. Up to May this picture has remained intact with equity and commodity prices providing positive returns and precious metals enjoying exceptional double-digit returns. Despite a slight increase in interest rates our three long bond recommendations all exhibited positive returns. Real Estate seemed to be turning the corner as our recommended REIT was up 17% YTD and the Empire Residential Opportunity Fund, LLC, private placement was meeting its forecast.

That picture has now changed. A Market decline that could test the 2009 lows is a distinct possibility. Why?

1. The Greek Tragedy:
The unexpected awareness that Greece was about to default on its' sovereign debt owed to global banks, made the rest of the world painfully aware that all was not well in Euroland. Fear that four other EU members (Portugal, Ireland, Italy and Spain) were all in the same boat (Titanic II) unnerved the capital markets. Greece, the worst of the lot (which should never have been admitted to the EU), has government debt which is 124% of the country's GDP. The US is now at a 90% ratio to GDP which is a signal of future declining economic growth. More detail is discussed below but the lesson to be learned (but won't be) here is that any welfare state dominated by public unions, onerous regulations, a growing government bureaucracy, high taxes and political allocation of capital is doomed to fail. The PIIGS ‘R' US.

2. Chinese Checkers:
Most of us played the game as kids. It was easy until you lost your marbles. The Chinese had an easy game also. They manufactured cheap goods, sold them all over the world and built up fat profits and reserves. Trouble is they had their own version of the Greenspan Plan — cheap easy credit that created a speculative bubble that has now burst. The Shanghai stock market is down almost 30% YTD and their real estate bubble has also burst. China is the number one customer for EU goods. A contraction in China would further impair EU growth.

3. The Flash Crash:
On May 9,2010, CMV issued a SPECIAL BULLETIN in response to the Flash Crash suggesting to Conservative investors that they raise cash (Bonds) 80% (#1) and retain 20% in Gold & Silver (#5) and other suggestions based upon our Risk Tolerance Model. At this point the crash was an unexplained glitch and the economic fundamentals hadn't significantly changed. By May 18th, however, the equity markets penetrated the lows of the Flash Crash and it was evident to CMV that a major change was in the wind. CMV issued another SPECIAL BULLETIN on May 18th that suggested that all investors go to a minimum of 50% cash in Sectors #2 and #3 and hold on Hard Assets (#4), Precious Metals (#5), Commodities (#6), Real Estate (#7) and Special Situations (#8).

Based upon fundamental and technical data as of May 30th, CMV concluded that there is a high degree of probability that signs of Disinflation are evident which could precipitate a major market reversal beyond a 10% to 20% correction.

Is The Pro-Growth / Inflation Trade Over?

For those of you who follow The Myth Buster on Internet Radio (Gabcast) you're familiar with the "Inflation Jeannie" who (anthropomorphically) is a dead ringer for Barbara Eden from the 60s sitcom "I Dream of Jeannie" who escapes the narrow confines of her bottle at the command of her Master.

On the April 26, 2010 broadcast the evidence that Jeannie had escaped from her bottle was evident everywhere. The March Producer Price Index (PPI) had a dramatic 1.4% increase. Food prices were up year over year — Vegetables 56%, Fruits & Melons 29%, Eggs 34% and so on. Oil was up 120%, Lumber 59% and Rubber 74%. The signs of an Inflationary Trend were conspicuous. Suddenly, however, Jeannie disappeared. What happened? The Myth Buster suggested on a May 25th YouTube video that the "Deflation Devil" may have kidnaped Jeannie. Lo and behold, CMV has discovered that this seemingly odd couple who are as divergent as fire and ice have Hooked Up! Could there be such a phenomenon as an Inflationary Depression? A strange occurrence but let's look at what is happening.

The Greeks started it all in May when the country was faced with a default on its sovereign debt. Suddenly the global recovery was in question. And, the prospect of a debt default in additional Euroland countries (PIIGS — Portugal, Italy, Ireland, Greece and Spain) created a crisis of liquidity and confidence. The perception that the global economic recovery was over became the theme and Deflation became the focus. The International Monetary Fund (IMF) (to which US taxpayers contribute 17% of the capital) and the European Central Bank created a one trillion dollar bailout package to stem the crisis. The real Greek tragedy however, is that this play is written to fail. Loans made by the German and French banks to the PIIGS exceed their total capital. Once the contagion spreads to the other PIIS the European Union and the Euro are TOAST.

Like a playwrite, the Banksters and the politicians know the tragic end of this drama. They have scripted the bailout to fail. Why? The goal is a one world government and a one world currency — the WOCU. The coming financial panic and crash of the USD and Euro will usher in a cleverly-crafted script that will roll up all of the US and Euroland debt and turn the last act to FARCE.

Remarkably, within a month the US economy has seemingly reversed from a pro-growth, asset inflation trade to a ‘double-dip' Deflationary contraction. On May 22nd the DJIA fell 376 points or 3.6% as the "Smart Money" (hedge funds and traders) began unwinding highly leveraged trading strategies. (2008 revisited?) Commodities were hit hard as oil was off 2.7% and gold also took a similar drop as fear again emerged. Investors took profits and raised cash. Reflecting the perception of deflation the 10 year T-Note yield dropped to 3.26% — a 60 basis decline from its recent high yield. On May 20th, a lead article in the Wall St. Journal headlined, "INFLATION AT 44-YEAR LOW" which cited that consumer prices had increased only 0.9% in April. In the same issue, however, the WSJ reported that beef prices were up 14% to 32% and cotton prices rose 70% in the past year which would soon be reflected in apparel prices. A mixed bag of "flations" for sure.

The strongest evidence that the US is in a calm before the storm comes in the form of the US money supply growth and the velocity (turnover) of money. The Federal Reserve discontinued a public release of M3 (a broad range of money in circulation) five years ago to obscure transparency. British and European monetarists however, have continued to track the numbers and the stock of money in the US has dropped 9.6% in the three months ending in April 2010. Tom Congdon, a Professor from International Monetary Research said, "It's frightening. The plunge in M3 has no precedent since the Great Depression." Why is this occurring when the Keynesians in Washington are deficit spending like crazy to simulate the economy? (And buy votes.) The FDIC is pressuring banks to raise capital asset ratios and shrink their risk assets by not making new loans. Absent bank lending to small businesses and real estate, the recovery will fail.

Back to the improbable "hook up" between the Inflation vixen Jeannie and the dastardly devil Deflation. Is there such a beast as an INFLATIONARY DEPRESSION? Yes! As the economy slows in the US during the second half of 2010 toward the mid-term elections, disinflation will alarm consumers, investors and the politicians who are in the majority. To counter the sudden trend change, the Fed, the US Treasury and the Keynesian-Controlled Congress will resort to creating more fiat currency and deficit spending and potentially mandate bank lending that will cause inflation and the prospect for hyper-inflation. Once the American public losses confidence in the value of its currency, the game is over. The Devaluation of the US Dollar will make almost all goods and services more expensive — thus Inflation. CMV forecasts a +50% probability that this scenario will unfold within the next year.

The Precious Metals Group

This sector has emerged as a focal point for a number of reasons, therefore warrants special consideration in this issue.

On May 18, 2010, CMV sent out a SPECIAL BULLETIN which issued a SELL recommendation on GLD and SLV — the gold and silver ETFs. As previously documented in prior issues, CMV is deeply concerned that these two ETFs trusteed by J. P. Morgan Chase and HSBC banks could conceivably NOT have 100% of the gold and silver bullion backing the outstanding shares. IF that ultimately proves to be true, the spot price of both gold and silver could increase significantly but the shares of GLD and SLV may not appreciate correspondingly. Rather than assume an additional risk that, at this point, is difficult to assess, CMV felt the best course of action is to replace these two ETFs with new shares that represent that they have 100% of the bullion. The results in the Portfolio on May 19, 2010 were as follows:

Sales Price/Share Profit/Loss YTD
GLD $119.49 11.35%
SLV 18.57 12.27%


CMV recommended new positions in PHYS (Sprott Physical Gold Trust) which was at $11.96/share on May 19, 2010. Sprott recently announced that they raised $243 million through an offering in order to purchase more bullion. The offering was dilutive to existing shareholders and the stock declined about 10%

CMV also recommended SGOL ETFs Gold Trust which is also the Trustee for PPLT and PALL on our list. (Go to www.etfsecurities.com). It was added to the CMV portfolio at $121.80/share. These shares track the spot price of the underlying metal, the shares are 100% backed by gold bullion, the bullion is stored in Switzerland and the holdings are audited twice a year. ETFs also offers silver shares SIVR and CMV has added it to the portfolio at $17.00 / share.

In order to get a grasp of the magnitude of the greatest financial scam not yet exposed, go to Adrian Douglas' www.marketforceanalysis.com and read LMBA OTC Market "Alchemists" Turn Paper Into Gold. The LMBA is the London Bullion Marketing Association which is the largest bullion exchange in the world. Douglas reports that LMBA's website shows that a net of 20 million ounces of gold are sold every day which translates to an equivalent of 25% of the annual global gold production changing hands on the LMBA each day or $5.7 trillion per year.

Bottom line — that amount of gold simply doesn't exist! With demand skyrocketing in Euroland with citizen's trading the sinking Euro for bullion and millions of Chinese hoarding the shinny metal, demand far outstrips supply. Douglas estimates that 50,000 tonnes of gold has been sold that doesn't exist and there's anecdotal evidence that LMBA is offering large premiums of cash in lieu of bullion for settlement of future contracts. Enough said?

In 1980 Au (Gold) was worth $800/oz. The DOW Jones Industrial Average was near 800 and the Au/DJIA ratio was one to one. The DOW enjoyed a ratio of 40:1 in 2000 over gold when paper (.com) assets were the most valuable. Today the ratio is 8.5:1 and some experts are forecasting that the ratio will soon return to 1:1 with Au and the DJIA at 5000. Think about that as people throughout the world are losing confidence in their fiat currency and paper assets.


Real Estate
CMV has consistently taken the position since its' first issue in January that the commercial and residential real estate markets would improve as the overall economy exhibited positive growth. The Wall St. Journal, in a May 19, 2010 feature article, "Home Prices projected to begin Rebound in 2011," cited a survey of 92 economists completed by MacroMarkets LLC. Despite a very wide divergence in five year projections in price increases from a high of 37% to a decline of 18%, the consensus was a 12% increase by 2014. The very next day (May 20th) the WSJ ran another feature article that indicated that 14% of mortgage loans were delinquent or in foreclosure process as of March 31, 2010, but that didn't include about 2.6 million households that were 90 days or more past due but weren't in the foreclosure process. The first article will elicit optimism, the second, a decidedly pessimistic view as more foreclosures would come on the market. CMV's observation is that neither of these reports takes into consideration a weakening economy and more job losses.

The commercial real estate market, at least in the Phoenix Metropolitan area, represents a more ominous picture. A feature article that appeared in the May 30, 2010 Arizona Republic entitled "Brokers Project Cascade of Failure" featured prominent Real Estate professionals who maintain that both commercial lenders and borrowers are continuing "to live a lie" by refusing to respond to billions of dollars of bad loans. They call this approach to the problem as "Extend and Pretend" which means lenders continue to renew the delinquent loans in hopes that the market will improve. Banks do not want the property back because "They don't want to sell it for $.25 on the dollar," one Broker said.

The Metro-Phoenix vacancy rates have climbed to 12% and the average rent has dropped to $16.61/sq. ft.. The article said that 25% of the existing loans are doomed to foreclosure and another 50% could go either way. Again, this outlook is ‘considering' an improving economy. If CMV's current assessment of a second recession is correct, this market will worsen and property values will decline significantly. CMV recommends a Sell on all shares of the Vanguard REIT (VNQ) which locks in a gain of 10.66%.

The Coming Break-Up of the United States?

While all the angst and turmoil has been focused on Arizona's Senate Bill 1070, racial profiling and amnesty, there's a much larger issue at stake in the immigration debate. Let's look at a historical perspective that most readers won't have in focus.

There are various anti-American Irredentists groups (Mexican) that are strongly advocating the return of Southwestern lands (including a portion of Arizona) unjustly taken by the US after the Mexican-American War.

The following summary of these anti-American groups is taken from Allan Wall's website VDARE.com. Wall is an American citizen living legally in Mexico and is married to a Mexican citizen.

Reconquista: Calls for the formal return of Mexico's lost territories to Mexico. As early as 1982 a Mexican columnist, Carlos Loret de Mola, visiting Los Angeles (even then) saw massive emigration as an opportunity for re-conquest. He wrote a column entitled "The Great Invasion: Mexico Recovers Its Own." By shear demographics de Mola believed Mexicans would control the Southwestern US.

Aztlán: Chicano activists living in the US created this movement. The Chicanos believe that Aztlán was the homeland of the Aztec people but there's no consensus over where Aztlán was located. The activists claim that their origins can be traced linguistically to various American Indian tribes but at least one Mexican archaeologist believes Aztlán was in Central Mexico in the state of Nayarit. The principal organization teaching the Aztlán doctrine is MECH a or Movimiento Estudiantil de Chicanos de Aztlán. They strongly believe that it's their destiny to reclaim the territories of their forefathers taken by "the Brutal ‘gringo' invasion." The Mayor of Los Angeles, Antonio Villariagosa is a Mechista. One could argue that the Mayor has already achieved the Mechista's goal.

Rebubulica del Norte: This movement which advocates the break-up of the US is the creation of the University of New Mexico Chicano Studies Professor Charles Truxillo. He wants the Southwest to secede from the US and form the Republica del Norte with its capital in Los Angeles. This probability is not as far-fetched as you may think. There is presently a bill in Congress to grant indigenous Hawaiians their own territory. And, the Virgin Islands are an "insular" territory of the US which has self-rule but the islanders are US citizens.

Why is this important to CMV? Your author has an ability to see mega-trends that could effect all aspects of our lives. It is our view that there is emerging a convergence of a major economic crisis with the above immigration/reconquista issue which could have dramatic political, social and economic ramifications for our city, state and our country.

Politically, the right and left are becoming polarized over this issue — particularly in Arizona and the Southwest. Watch the recent YouTube video where the Deputies in Maricopa County Sheriff's Office told Mayor Phil Gordon (who favors a "Sanctuary City"), to "Shut up and don't call us racists!" There is an inevitable ugly and violent confrontation ahead unless reason and debate intercede. What most Arizonans don't know is that Gov. Jan Brewer has also signed HB2281 which bans ethnic studies in Arizona schools that are race-based, radical, separatist or revolutionary and promote the overthrow of the US which Wall asserts on his website.

Financially, the cost of welfare, food stamps, school lunches, medical, education, border control and imprisonment for illegal aliens is bankrupting states and the country. One estimate indicates that the cost is $338 billion per year. The problem is certain to become more acute as the states and the US enters a second recession.

The above figure is not adjusted for the estimated $428 billion paid by illegal immigrants in various taxes and purchase of goods - GDP. Since the numbers of either side of the issue can't be accurately verified, states and the US will look to the economic impact of laws like SB1070 either through enforcement or reaction to the laws.

The convergence of these two issues will in CMV's opinion occur within a year. Incidentally, CMV has read SB1070 in its entirety, as everyone should.


Free Books Offer! Click here to subscribe to the CMV monthly newsletter for one year - only $99.00 AND receive a copy of The Aftermath of Greed: Get Ready For The Coming Inflationary Boom and How To Profit From The Coming Inflationary Boom and Avoid the Next Crash, Free with free shipping - This free book offer is open to US residents. Both books are shipped to a single address. Please remember to include your mailing address to receive the books when clicking on the link.

-- H. L. Quist

SEE ALSO, my youtube video on the Deflation Devil on the side bar.