Another Fun Week Produces An Offical Market Correction
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The market opened the week with little action and sectors trading on their own merits. Tuesday, however, is when the turmoil began, and grew as the week progressed. The accumulating concerns over growth, currencies and debt, combined with current statistics on jobs, the impact of the falling Euro, and new potential financial regulation, to over whelm investors, institutions and hedge funds. In comparison to the Flash Crash, selling was controlled, but the lack of both new money stepping in to buy and little bottom fishing, was no match for the selling, with the market declining 3.90% on Thursday. Friday saw the market open lower, but quickly reversed itself within the first hour and half, as some buyers came back into the market, and the day ending with a 1.50% gain. It was an encouraging close, given that investors typically close out positions over the weekend, and therefore depress prices near the close, but in this case the last half-hour of trading saw the market go up. The damage however was done, and the week ended off 4.23%, with only 39 issues advancing. The loss of 10.65% from the April 23 high now classifies this as the first official correction of the current Bull market, which began on March 9, 2009 (a correction is defined as a 10% decline from the previous high, based on the close). The expected slower growth and stronger US Dollar continued to push down oil, which closed at US $70, a 20% decline from the $87 April month-end close. The lower oil cost will help keep US inflation low, and keep product costs lower (especially for imported Euro component parts), as well as keep gasoline prices down for consumers. Gold, one of the traditional alternatives in declining markets, pulled back to 1178, after running up to 1231 last week, as U.S. Treasures emerged as the flight-to-safety preference. Other news served more as background items, sometimes sparking market reactions, including a poor first-time jobs claim report, an FDIC report that 10% of U.S. banks are classified as troubled, an escalated estimate of the Gulf of Mexico oil spill’s economic and ecological damage, and the likelihood of additional regulatory limits on banking activities. There were positive items as equity analysts increased their 2010 earnings estimates, corporate capital expenditures picked up, and surveys showed that more companies planned to hire this year. Uncertainty, appreciation for risk, and protecting profits, however, ruled the market this week, and most likely will continue to do so for a while.
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SP500_20100521.doc
Original source for this article: Business Week
Ignorance is expensive
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Baltimore — It is too late to debate. A debt-fueled crash is imminent.
I made a promise to my wife late last fall. Once the holidays were over and she was well on her way to recovery after a recent surgery, we would hit the local furniture stores and redecorate our living room.
Next time I make such a promise, I’ll research current furniture prices first. With four-digit price tags for a simple sofa, it is no wonder just about every furniture pusher is hocking no-payment, no-interest plans to unload their stock.
As a cash-only kind of guy, I didn’t fall for the gimmicks. But judging by the looks on the salesman’s face when I handed him a pile of crisp bills, I am in the majority.
For years, all sorts of retailers offered “money-saving” financing schemes to entice cash-strapped buyers into the checkout line. For somebody with the financial might to pay off such accounts before the massive interests and penalties kick in, these plans really could save some dough.
But as Congress was eager to prove recently, most Americans end up in a very expensive trap. That’s why the folks in Washington outlawed the no-payment plans starting next month. Our leaders know the dangers of getting in too deep.
Why shouldn’t they? Washington’s got $12 trillion of debt to manage that it isn’t making payments on, at least not any substantial payment.
If you and I tried what Washington is doing – paying off debt with more debt – they’d put a stop to it in a heartbeat. But because they are too concerned with the next election to listen to some geeky economist, our lawmakers keep hiking down a deadly path.
If you listen to the growing chorus of pundits (I am one of them), that path is going to lead to a dead-end in the very near future.
One look at the gold markets today (an ounce is up by more than fifteen bucks) will show you investors are once again worried about the strength of the American economy. With an employment market that is the worst since the Great Depression began (a U6 reading of 17.3%), the hopes of an easy, painless recovery are waning fast.
In an economy leveraged to the max by credit, “painless” is never an option.
While lawmakers and government policy makers are worried about propping up the average Joe, a new, virtually unstoppable crisis is building. The collapse of sovereign debt – the money owed by the world’s governments – is going to be huge.
The only way out of the situation is severe pain. Venezuelans know what it feels like. Chavez and his politicos cut the value of the nation’s currency in half last week to battle the nasty effects of a crippling recession.
Just imagine the ramifications as this wave slowly creeps across the globe. One country after another, in a rapidly growing crescendo will be force to restructure their economy and their balance sheets to battle the natural effects of credit overload.
National banks will default. Inflation will soar. Stimulus will be a word of the past. Welfare programs will be cut.
The only good thing is the government’s natural tendency to continue growing will be destroyed.
Washington and its global counterparts will be forced to contract. There is no debate. It won’t come after months of political debate. Instead, the markets will do the thinking for them. Eventually, nobody, not even China, will lend to us or our over-burdened brethren.
When it happens, it won’t be pretty. Unfortunately, it is happening far faster than anybody predicted.
Every day, I prepare for the horrific headlines.
You should too.
***One of my favorite classes in grad school was a statistics class. I know I am not supposed to admit a fondness for the subject, but there is nothing better to shut somebody up than the right set of numbers and a statistical formula.
Correlation analysis is good for anything from finance to fisheries management. But I like it most when it proves Washington’s fiscal ignorance.
According to a recent Associated Press study, Washington’s construction-related stimulus package has done nothing to improve local economies. No matter how much Uncle Sam sent local bridge workers and road constructors, the study was unable to find any correlation to employment figures. None!
One would think that would instantly eliminate any calls for another round of stimulus, but we all know the truth. It will only force Washington to ask for an even larger sum of cash or a new set of statisticians.
The Obama administration just doesn’t get it. In an economy valued at over $14 trillion, even a hundred billion in construction spending won’t create more than a ripple, especially when the tide is gushing in the opposite direction.
The only thing saved or created by Obama’s massive spending is the notion that stimulus works. Politicians say it is worth every penny. But those of us that bother to run the numbers know the truth.
The truth is, we’re in trouble.
Original source for this article: Contrarian Profits
You get what you deserve
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By Andrew Snyder, TodaysFinancialNews.com
Baltimore — (TFN): Well, look at that. There are consequences for our actions. Even in this day and age when it is virtually illegal to step on your neighbor’s toes or wish the corner beggar a Merry Christmas, we are still held responsible for our wrongdoings.
Just ask Balloon Boy’s old man. The trickster just got sentenced to ninety days in jail, with two thirds of the time allocated to a work release program. But even better than his time defending himself from shivs and bathroom sneak attacks is the four-year time span in which it is illegal for him to profit from his eye-popping stunt.
So long book deal. In four years, it will be Balloon Boy? Who?
I wish there was similar legislation for the folks in Washington, some sort of law that banned rule makers and regulators from profiting from their own outrageous stunts.
Chances are folks like Pelosi, Reid, Geithner and Bernanke would be out of a job.
After last week’s close-call confirmation vote in the Senate, many pundits are saying Bernanke should be out of a job regardless of the law.
I have a feeling the position is shared by Oliver Garrett, the CEO of Casey Research.
Read what he just sent me and you be the judge:
Ben Bernanke is a dubious choice to be named “Person of the Year” by Time magazine. While Time’s Managing Editor Richard Stengel credits him with recognizing early and reacting appropriately to the ongoing financial crisis, in reality, he was wrong time and again with both his predictions and his remedies.
Just remember these gems:
• On July 1, 2005, Bernanke stated without hesitation that we were not experiencing a housing bubble: “I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”
• November 2005, on derivatives: “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” And “the Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”
• February 15, 2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
• February 2008: “I expect there will be some failures of smaller banks” (Bear Stearns collapsed a couple of weeks later).
• But then again, I guess in regards to his nomination we are talking about achievements in 2009. That was the year Bernanke said, “Currently, we don’t think [the unemployment rate] will get to 10 percent.”
This is the same chairman of the Federal Reserve who told us that Fannie and Freddie were “adequately capitalized” and “in no danger of failing.”
Unfortunately, he has not just been wrong about housing, unemployment, banking, and derivatives — his policies have directly contributed to all of the problems we now face.
High unemployment and the weak dollar threaten to further undermine our economy, yet his policy is to just keep borrowing.
The massive debt his policies have foisted on the American taxpayer is weakening the U.S.’s position as global economic leader and hurting already tenuous relations with foreign governments.
Bernanke has supported the policies of Greenspan and our current and previous administrations – the very policies that got us into this mess. He has supported the leveraging of the American economy to rescue companies long past saving and the borrowing of billions from foreign governments to line the pockets of corrupt investment bankers.
I could recommend a few alternative names for runner-up, if Time’s criteria are really as dubious as they appear:
• Lloyd Blankfein from Goldman Sachs for robbing taxpayers legally
• Rick Wagoner of GM for taking the world’s largest car maker to bankruptcy in a quarter-century
• Tim Geithner for ensuring that all of our bankers prospered during the worst financial crisis since the ‘30s
• Tiger Woods for providing the nation with great dinner conversations and helping to spur tabloid sales.
Bernanke is insistent on using inflation to make our personal debts seem small, all the while setting the country up for a much larger disaster long term. Bernanke is borrowing from Peter to pay Paul… and robbing taxpayers to pay Peter.
As you may have noticed, the government will not save you from the reverberations of a declining U.S. economy. You’ll have to take matters into your own hands… and no one is better at pointing the way than the editors of The Casey Report.
No matter how dire the economic trend, double- or triple-digit gains within 12 to 24 months are easy if you discover the right opportunities to profit. Find out more by clicking here.
*** That’s it for this week. The TFN offices are closed tomorrow and Friday for the holidays and I’ll be spending the days with friends and family.
Even if you are not a fan of Christmas and all it stands for, my wish for you is to at least share in some of the pleasantries and delights of the season. There are far too many folks that won’t be able to this year.
Original source for this article: Contrarian Profits
What if They Stop Buying our Debt?
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Doug Hornig, senior prognosticator at The Casey Report, analyzes the alarming trend of U.S. federal debt and its future implications.
“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.
Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.
As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.
Chart of U.S. national debt holders, domestic and foreign
Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.Treasury bond sales graph
So what does all this mean?
It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.
Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.
Projected U.S. Debt
As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.
Original source for this article: Contrarian Profits
How to play the dangerous dollar
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Baltimore – (TFN): The dollar is a dangerous entity these days. Never has there been such a globally important currency with as much political and financial manipulation.
The distortions from reality are mind-boggling, yet all of us depend on the status of the simple fiat for our financial wellbeing.
The person with the most skin in the dollar game is, no doubt, President Obama. The nation’s economy hinges on the fate of the greenback and the White House knows it. That is why it is doing anything it can to slow the slide.
Even if it is entirely psychological.
Today, reports are flowing from Washington that show Obama may have plans to use up to $210 billion in TARP money to lower the nation’s ever-increasing deficit.
It is creative accounting at best and a $210 billion bribe at worst.
While the average Oprah-watching, Crocs-wearing American won’t take a second out of their do-nothing day to read below the feel-good headline, there is a handful of us that are actually paying attention.
With this idea of “paying down our debts,” it is vital to remember the Treasury didn’t pull the $700 billion in TARP funds out of some cavernous account.
We borrowed that cash. And now Obama wants to use the borrowed money to pay back our debts, minus a year’s worth of interest of course. It’s like taking out a loan to pay off your mortgage.
The timing of these rumors is more than suspicious.
Just yesterday, China slapped the currency markets in the rear by once again raising the notion of dumping the dollar and making a sudden change in its exchange-rate policy.
Ironically enough, less than 24 hours later, Obama has a $210 billion check in his hand ready to “repay” our debt.
It is money from one hand, around the back, and into the other.
But it gets better.
Obama is not the only one trying to mask Uncle Sam’s debt problems. Just about every exporting country in the world is desperate to keep the dollar strong.
They have to. Their economies depend on it.
Rumor has it countries like Russia and South Korea have been buying dollars on the open market over the past few weeks, in an effort to keep the greenback’s slide from gaining even more momentum.
The governments would rather risk devaluing their reserves than allow their economies to suffer from the effects of a weak dollar.
Looking forward, the question is how long can the manipulation last? How long can the dollar remain artificially inflated? And how long until the markets naturally take care of the situation?
While we may not know the exact answer to any of those questions, it does not take an economics scholar to realize the outcome will be horrific, at least for those of us with dollars in our pockets.
*** The solution? Buy gold. According to the top dog at Canada’s behemoth gold miner, Barrick, we have every reason to believe we surpassed “peak gold.”
That means all the easy gold has already been stripped from the ground and supplies are only going to shrink from here.
According to the CEO, Aaron Regent, global gold production peaked in 2000 and is expected to continue declining into the foreseeable future. So far, mine production is down by nearly 10%.
The news of increasing supply constraints comes at a time when demand is already surging. For those of you that were under the bleachers during Econ 101, it means prices will continue to rise.
There has been a lot of discussion about a sudden collapse in gold prices as many investors believe the current boom is merely a fear-induced bubble. Two or three months ago, I would have bought the story. But not now.
The dollar is simply too weak and foreign reserves are accumulating gold too quickly for prices to fall sharply.
China’s immense buying alone is enough to limit near-term fallout. The country has already doubled its gold reserves and Beijing continues to be a major buyer.
Just one more reason for bulls to send prices higher.
*** Just so you can’t say I don’t let you in on anything for free, I’m going to toss a freebie your way.
With gold prices reaching into record territory, it is a perfect week for Van Eck to release its Market Vectors Junior Gold Miners ETF (NYSE:GDXJ). The freshly created fund gives investors a stake in 38 small- to mid-sized gold miners.
For investors looking for a simple way to take advantage of the gold bull with some additional leverage, this is the ETF to do it.
Thanks to the speculative nature of junior miners, expect shares to beat the market when gold prices are surging and underperform when the bears return. For now, there is plenty of upside potential.
Original source for this article: Contrarian Profits
