Wednesday, May 26, 2010

Personal Trades- Week of May 24th

The front page of "Money and Investing" section of the Wall Street Journal on Monday reported that the massive financial regulation bill, which is making its way through Congress now, will lower some big bank credit ratings, meaning their borrowing costs will be higher in the future.  The banks mentioned specifically in the article were Citigroup and Bank of America.

I already had my eye on buying put options on Bank of America (BAC) prior to the article and when I saw that Bank of America stock was actually higher in the morning and afternoon session after reading it, my interest piqued even more so.  This meant that their options might be trading abnormally cheaply, which made no sense to me, given the chaos of the Euro and of the European banking system as whole.  So I looked into BAC's options pricing and, not surprisingly, liked what I saw.  The news and the stock price contradicted itself, especially in light of the European financial situation.

I bought to open 10 BAC $15 June puts at $0.50 and 20 BAC $14 puts at $0.28.

Also, as I am long the iShares Silver Trust ETF (SLV) (at an average price of $12.45) but also believe that silver will continue to fall short-term against the dollar, due to flight to quality from the European situation, coupled with its dramatic recent run-up, I purchased 5 SLV $17 puts at $0.40 and 10 SLV $16 puts at $0.15.

I feel as though I received a good price-point for each of these contracts, although I would have liked to have paid $0.25 for the 20 BAC $14 puts.  In hindsight, I feel as though I reached for that contract emotionally, rather than waiting for the price of volatility to swing back in favor, as, after all, there is still nearly a month until the contract expires.  This is why people should write down rules to investing and adhere to them.  I am working on developing mine with experience attached to it.

On May 25th I purchased to open 10 BAC $13 puts at $0.25, 25 SLV $15 puts at $0.08 and 5 CEDC $20 at $0.50.

I queued each of these orders prior to the market's open, knowing that the market would open much lower based on Asia and Europe's overnight activity.  I entered the orders in hopes of grabbing them early in the session and quickly turning them over for a nice profit.  Unfortunately, that nice profit came and went in the blink of an eye within the first 30 minutes of the session, and I was, of course, indisposed with other obligations at the time.  A very poor mistake on my part.

It obvious that I reached for each of these contracts and might have hell to pay for them in the short-term.  I am nervous that the market will open strong tomorrow, causing me to get crushed in the process, however, I believe that the correction we have experienced over the past few weeks is not over for the U.S. market, and I remain convinced that I will achieve a nice gain with the majority of these contracts.  That is not to say, however, that I won't sell into major gains, in an effort to play with "house money."  This is my objective, and it will always be my objective, especially in the volatile options market.

It is very evident that I should have created rules for myself regarding the options market prior to my delving into them.  I know better than that and am disappointed in myself for that lapse of judgment.  I plan on having template in place within the next day or so, specifically regarding enter and exit strategy, and then continuing to develop that plan as I gain more experience.


As of the close on May 25th, my holdings stood at (last trade price):

Short Sales:

- 300 shares of WFMI short at $40; ($39.54/share)


Put Options:


- 3 CEDC $25 at $0.45; ($2.90)
- 5 CEDC $20 at $0.50; ($0.50)

- 10 BAC $15 June puts at $0.50; ($0.59)
- 20 BAC $14 puts at $0.28; ($0.32)
- 10 BAC $13 puts at $0.25; ($0.19)
 
- 5 SLV $17 puts at $0.40; ($0.41)
- 10 SLV $16 puts at $0.15; ($0.18)
- 25 SLV $15 puts at $0.08; ($0.07)

Tuesday, May 25, 2010

Gold Rising as Euro Weakens Spurs More Speculation

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6f.XxAJB0Rc

I have no doubt that the demand for gold will be strong for some time to come.  One can hardly watch a news program without being inundated with gold commercials.  However, unlike many pundits, I believe that the U.S. dollar index will increase in value against gold over the short- to mid-term, much as we are seeing in today's market.

We are in a deflationary environment and have been since 2007, when the housing bubble began to collapse.  The dollar will remain king until there is no reason to believe it has value and/or we start to find true growth in the economy.  Both of these instances are still far off on the horizon.

Check out the latest installment of My Prediction on the Economy and Market for insight into my simple 2-step approach on how you can conserve your wealth during this tumultuous time period... and how you can grow your wealth too!

Economists See Solid U.S. Growth

http://online.wsj.com/article/SB10001424052748704167704575258620270541194.html?KEYWORDS=economists+see

Even more reason to short the market in the time period ahead.  Less consumer saving is a short-term economic solution, but it is also one that is quickly reversed, as we saw in 2008.  The more optimistic economists and market pundits get, the more conviction I have that the market is due for a big correction. 

Personal Trades- Week of May 10th

As pronounced in my recently published third installment of "My Prediction on the Economy & Market," I started to purchase put options against some of the more volatile stocks that I have had on my radar for quite some time.

As cited in May 11th's Bloomberg story posted here on Common-Sense-Investing, the Euro continued to weaken against the dollar after the EU and IMF extended a $1 trillion loan to Greece.  To me, that triggered my instincts to look for a European company that might be dramatically effected by such news.  I knew I already had one in a company that I have loved for over a decade, Central European Distribution Company (CEDC).

CEDC is the largest vodka manufacturer in Poland and Russia, as well as the owner of another large distillery in Hungary.  It is based in the U.S. and started out as purely a distribution company in Poland but has recently delved into production of vodka, looking to increase its margins, while maintaining their already market-leading distribution position in Poland.

I became aware of CEDC in 2000 after doing some market research following a three-month internship in Poland.  I thought of working there someday but hesitated to purchase its stock, after a bad experience in owning micro-cap stocks, which it was at the time with a market valuation of around $100 MM.  For the next decade I kicked myself for not owning it, as the stock price shot up more than 20 times.

In 2008, I jumped at the chance to own the stock after it sunk from $70 to $20.  I later sold it for around $30 and then jumped back in when it fell back to $20; however, I sold it that same day after Congress failed to pass TARP the first time around.  I watched as my favorite little-known stock fell all the way to $6/share in March 2009.  I listened to their quarterly call, which was ironically held around that time, and thought to purchase a small amount of it, remembering my plan to average cost purchase the shares, but instead hesitated.  The stock jumped past $12 within days, and I hesitated the purchase the stock, knowing that the economic downturn was not over but overlooking the effect of government inflation.  CEDC rose to over $40 most recently and remains one of my favorite long-term ideas.

I have maintained my knowledge of Polish knowledge since the days of 2000 and know that as Germany and Western Europe goes, so does Poland.  Knowing that the Euro was going to continue to collapse after reading the Bloomberg article on May 10th, I jumped at the chance to buy put options on volatile CEDC, which had fell more than 15% two days prior due to a lowered outlook, then the next day rose 15% on news of the bailout.

I purchased 3 June $25 puts at $0.45 on May 10th without hesitation-- the stock was trading at $30, up from $26 the previous day-- not understanding why the market had priced them so cheaply, especially in light of the falling Euro.  The options, which expire on June 25th last traded at $2.00.

In hindsight, I should have purchased many more options given the price, coupled with the news of the falling Euro, but I also understood just how quickly one could also lose money in options and hesitated.  A lessen I hope to overcome the next time I see a steal.

On May 13th I read Whole Foods' conference call on Seeking Alpha and noted the companies exceedingly optimistic outlook for the remainder of the year and 2011.  Knowing that the firm's sales had fallen dramatically during the latest recession, I knew that their comparable numbers, as also noted by management, were exceedingly low.  I was stunned at the level of optimism of management and saw that the stock had been upgraded and was at a 52-week high (with an equally high P/E to boot) on the same day as a falling market, and checked out their options.  I liked what I saw, even though the options were close to their expiration date.


I purchased 10 May $40 puts at $0.15, believing that the stock would fall along with the stock market out of fear of the collapsing Euro.  WFMI was trading at $42.50 at the time, meaning that the market had discounted the stock's volatility by a ridiculous margin.  I sold 5 options at $0.65 the next day and 2 at $1.00 on May 21st.  I allowed the remaining 3 options to exercise and now hold 300 shares of WFMI short.  The stock closed at $39.24 on May 21st.

I continue to have conviction that the stock market will fall for the foreseeable future, acknowledging that it will ebb and flow like all markets do.  Therefore, I will remain cautious on short-term options and will continue to look for cheap, long-term put option contracts in which I can invest a significant amount of my portfolio.  I have total conviction in my long-term outlook for the economy and plan on making money this time around after not being prepared the last time.

Monday, May 24, 2010

My Prediction on the Economy & Market (continued)

Based on my previous articles, right about now, you may be asking yourself, "If our country's finances are in such peril, why will the dollar strengthen?  Why wouldn't gold or commodities, which traditionally have a negative correlation with the dollar, be the place to invest?"

As I discussed in my previous articles, nearly all goods, currencies and investments, including precious metals, fell in price during the market crash of 2008.  This was due to people panicking, hoarding their currency and attempting to pay down their bills and/or save their cash on hand in preparation for more hard times to come.  The government provided the banking industry with TARP and TALF, in hopes that rescuing them would give the banks the security needed to push them to lend again.  As we now know, lending standards have increased dramatically since the mortgage bubble popped and, in turn, rather than lending out the government’s money, the banking industry has been using it and the Federal Reserve’s cheap lending rates to pad their own pockets and continue on their merry ways with the same risk taking that got them into their predicament in the first place.

Rather than selling securitized mortgages, these cheap loans to the banking industry are being swapped for Fed-subsidized derivatives, stocks and bonds and other investment vehicles, using the Fed's zero percent rate in order to make money off the backs of the government's artificial inflation and, thus, creating much of the rise in the stock market.  In return, bank profits have soared, allowing them to quickly pay back the government’s (forced) loans and they are now, once again, back to their high times… on the coattails of investors who took their hype... and bait, hook, line and sinker.

In my opinion, the crash that happened just a few, short years will most certainly repeat itself.  The financial industry will, once again, get caught with their pants down and be forced to sell securities all at the same time, just like occurred in 2008.  Already nervous investors, who bought into the market hype, will once again find themselves grasping for anyone who willing to take their securities off their hands.  Only this time, investors will be less willing to take on the risk, as major world currencies, led by the Western industrialized nations, lose investor confidence.  We see this already happening with Greece and the Euro.  Even after the IMF and Europe’s nearly $1 billion rescue, investors the next day sold the Euro in favor of precious metals and the U.S. dollar.  The Euro has lost 20% to the dollar in the weeks since.

The U.S. dollar, in my opinion, will be the last Western currency to lose its value, even though it should probably be one of the first, due to our previously discussed perilous fiscal position.  This will again be the case, just as it was in 2008, because investors view the U.S. dollar to be the safest currency on the planet, due to it being the world's reserve currency.  Our treasuries are largely considered to be the single safest investment in the world, as is commonly referred to in the investment world as the “risk-free rate.”

This perception is not to be underestimated and, therefore, will, once again, be the single-most popular investment in the world.  As witnessed already, this perception is the only reason why our bond yields have remained lower than most anywhere in the world, even though our supply of debt on the world market has increased dramatically, to stupefying levels.  This is due to sovereign wealth funds still craving our treasuries.  As such, even though a massive quantity of dollars is on the market and will be even more so in the future, demand, in my opinion, will outweigh supply, at least temporarily, and again push the U.S. dollar back to 2008 levels and higher.

Perception is not the only reason why the dollar will soar.  Practicality is also at play.  Investors, as well as much of the world’s industrialized population, are heavily in debt and since the U.S. dollar is still the most heavily used currency in the world for global transactions, the dollar will retain its value even more so than other currencies.  Investors, corporations, and the world’s citizens still have bills to pay… and they will pay in dollars.

Mortgages will also play a part in strength of the dollar, but in a way that seems non-commonsensical to most.  Personal, corporate and public bankruptcies will play a huge role in the strength of the dollar, as will the vaunted system called the fractional reserve banking system.  As previously discussed, loose bank reserve requirements and loan underwriting allow banks to create credit out of thin air under the fractional reserve system, creating something called the money multiplier effect.  However, in times of trouble, that credit can just as easily disappear.

When someone, for instance, defaults on a mortgage that credit is vaporized from the money supply just as quickly as it was created.  As we saw just a few years ago, this creates a massive deflationary effect on the economy, since dollars are less plentiful.  When the cause is a systemic dilemma, such as with the mortgage crisis, credit evaporates quickly, creating deflated prices almost instantaneously.  This is partly the reason why nearly all good prices collapsed during the latest crisis, in conjunction with the U.S. dollar playing the role as the world's reserve currency.

The U.S. mortgage crisis still lingers beneath the surface more than most news people care to admit, and it will again play a large role in the coming period.  As of February, nearly 25% of all mortgages were underwater, or the value of the mortgage was worth more than the underlying asset (home).  When you factor in the number of adjustable rate and Alt-A mortgages that are due to reset this year, as shown here by Credit Suisse, it appears imminent that many more mortgages will be underwater, as the supply of homes onto the market dramatically overwhelms the number of buyers.  Repossessions are expected to reach 1 million this year, according to RealityTrac.  During the quarter ending in March alone, the number of repossessions was 16% higher than the year prior.  The number of banks on the FDIC watch list now stands at 775, as of the end of March, versus 702 at the end of 2009.

Just like in 2008, I predict the FDIC will attempt to calm the populous as the number of banks on their continues to rise, however, as discussed in my last article, we already know that the FDIC is broke.  There will be no way for the FDIC to continue to guarantee consumer certainty without intervention by the government.

Traditionally banks have offset defaults by creating additional loans, increased banking fees, decreased interest rates in checking accounts, etc.  However, in times of mass uncertainty, such as during the recent mortgage crisis, banks become fearful of making another bad mortgage or loan, and resort to government for assistance or through calling its other mortgages or loans, as was done during the Great Depression.

The latter choice is one that, I believe, the banks will eventually have to take as, the public sentiment against rescuing the banking industry this time around will make it much more difficult to pass a TARP-like bill.  Citizens have seen little return on their taxpayer investment and now realize that we cannot afford to further burden our already fragile economy and financial situation.  More importantly, the world and the Federal Reserve understand that point as well, which will make a bailout option one that could literally break the back of our economy.  It is during this time that I believe citizens will eventually realize that the FDIC is broke and as banks fail, they will understand the fragility of the fractional reserve banking system personally through loss of their once-believed safe FDIC-backed deposits.

The U.S. will face an interest rate dilemma and the turning point will most likely be when the U.S. government faces the option of either bailing out the banking industry again or biting the bullet and cutting entitlements and government spending, allowing the banks to fail.  Based on the sentiment in the U.S. at the moment, it is my hope that the latter might occur before the former, but that could also be determined on when exactly the next crisis happens.  It is much tougher for a politician to stand on principals, not spending, especially in an election year, but the nation is now aware that it is the right move, just as FDR's Secretary of Treasury, Henry Morgenthau, Jr. realized, eight years after he helped to create the New Deal.  Whether the government will make the right decision may be too much to ask, although it is my hope that the people's voice will prevail.

There has been a lot of talk during the past couple of years about the dollar being replaced with a basket of currencies.  During the impending economic environment, there will be more such talk; however, the world is not yet ready to make such a change.  Everyone realizes that the emerging markets, the BRIC nations (Brazil, Russia, India, China), in particular, will be the world’s growth engine for decades to come, but none of these nations is ready to take on that responsibility or is able to absorb the dramatic transfer of wealth without creating a huge economic debacle for their own country.

China, for instance, is still a very poor nation with a population that traditionally saves approximately 40% of their income.  China must transform its citizens from savers into spenders in order to grow its industry and, in turn, its economic wealth.  China also has a significant problem with its disparity of wealth, as the nation’s wealth is in the hands of relatively few people.  Most people don't realize that the per capita income of China is just $3,600.  China must grow economically from within in order to expand its citizens’ purse pockets.  Changing a culture takes time and China is no exception to that rule.

I could continue further as to why I believe the dollar will remain strong for the foreseeable future, at least temporarily, however, the above are my principal reasons.  Yes, they are many of the same that contributed to the dollar’s strength in 2008 and will also, in my opinion, be the same explanations for why this pattern will repeat itself.   

The caveat to my reasoning, however, is that the dollar will continue to gain in strength in the time period ahead and climax, just like it did in March 2009, but this time the it will collapse and there will be no other place to invest, save for one, precious metals.

It is my belief that we are on the prefaces of a total economic collapse.  The world, for the most part, as a whole, has inflated their respective currencies in hopes of staving off imminent economic disaster.  Rather than take the sound economic action in allowing businesses to fail and recessions to occur, world governments have chosen, instead, to take the political response by inflated their currencies and, in turn, created the beginning of a meltdown the likes of which the modern world has not seen.  The Fall of Rome is imminent, and, in the end, gold and precious metals will prevail, just like it has for millenniums.

Of course, I am not a fortune teller, but this is my best hypothesis, using history as my guide, as to what will transpire in the coming period ahead.  It will be a frightening time, but using patience, history, foresight and common sense, this will probably be the biggest transfer of wealth in U.S. history, surpassing even the formation of the Federal Reserve.

It is my belief that that transformation has already started, with the collapse of the Euro, subsequent fall of the world stock exchanges and rush to safety by investors to bonds, treasuries and cash.

Barring any significant changes to my investment thesis, below is the plan that I will be adhering to and the one that I am advocating to my friends and family.  In my opinion, it is not only the most safe, but it is one that just about anyone can follow.

Basic 2-Step Plan:

1. As stated above and in previous articles, I believe that staying liquid is the easiest way that a person can protect themselves, for the time being, from the already begun collapse in the market.  The best way to do this is two-fold: open a bank or trading account that holds short-term U.S. treasuries or keep cash in a non-safety deposit safe.

The reasoning is quite simple.  U.S. short-term treasuries are the most safe, least interest rate sensitive securities in the world.  They are able to be withdrawn in the event of a bank holiday and, since they have the full backing of the U.S. government, they are not subjected to FDIC protection limits.  Holding short-term treasuries through one's bank or in a trading account/mutual fund is the best way to achieve safety.

Most people do not realize that holding cash in a bank's safety deposit boxes is not immune to bank seizure.  It is for that reason, that I would suggest holding cash in a safe, secure location in an equally safe and secure apparatus.  Quite obviously, keeping cash on hand is a strategy that one might like to keep to themselves, as it is one not immune to theft; however, it is a strategy that keeps your cash where it belongs-- in your possession.

(Gold will fall just like other goods during this time period, and I will explain why in my next article.)

2. The dollar will continue to strengthen for a given amount of time before it, too, collapses under the weight of our nation's massive debt.  When it reaches its pinnacle, that is precisely when I will be putting a majority of my investments into gold and silver.  How will I know when the pinnacle is reached?  Obviously, I won't know the exact date, but this is where history offers me some clues.

When news about the strength of the dollar or the weakness of commodities, such as gold and oil, are in bold print on the front page of the Wall Street Journal that is just one pronounced buy signal to look for.  Other signs will be those similar to the headlines at the end of 2008 and beginning of 2009.

Late-December of 2008 was the high-point for the U.S. dollar but the low-point of the U.S. stock market was in early March.  Here are a few of the headlines as well as the Federal Reserve yields from that time period.  Both of these are facts that I plan on using to my benefit in the coming period ahead.

Dollar High (12/28/08):
Federal Reserve Interest Rates- 12/28/09 (4-week & 3-month U.S. treasuries were both at 0.01%, the weeks prior, the 4-week was at 0.00% and the 3-month at 0.03%.)

"Gold, Not So Golden in 2008, Loses Chance to Be Market Star: 'Get-Me-Out Effect' Offsets Metal's Appeal as a Haven" - 12/29/08- WSJ
 
Dow Low (3/9/09):
Federal Reserve Interest Rates- 3/2/09 (4-week & 3-month treasuries rose to 0.18 & 0.30%, respectively.)

Korea's Crisis of Confidence - 3/4/09- WSJ

Mexico Steps Up Dollar Sales Central Bank's Move Seen as Effort to Stem Peso's Free Fall - 3/6/09- WSJ

Foreigners Sweat as Chinese Firms Teeter No Road Map Exists in Bankruptcy Cases; Like a Rubik's Cube- 3/5/09- WSJ

Will Value Investors Win the Day?: Wait Five Years and See.  In today's market, people may lose a lot of money before they make more. Yet even times like these could prove profitable in the long run for value investors.  - 3/4/09- WSJ

New Fears as Credit Markets Tighten Up - 3/9/09- WSJ

By this time, oil had risen to about $50/barrel from near $30/barrel at the end of December.  Gold had risen from close to $700/oz to over $900/oz.

I expect a steeper curve the next time the dollar reaches its high-point, as I believe it will quickly thereafter lose its appeal, but above are similar headlines that I expect going-forward, although I feel there is a high likelihood that the headlines might be more striking going-forward, now that world governments have tried to spend their way out of a recession.

For the more advanced investor or risk taker, I would consider adding an additional step by including short selling and derivatives into your investment approach until the time to switch to gold arrives.  I, personally, started to take this step last week by purchasing put options.  I will detail my purchases in coming articles and in a timely manner.

However, while one can dramatically increase their wealth using these investment vehicles, it is important to note that one can also lose a lot of money too.  Therefore, I would advise one to take small steps and to learn as much as one can about these approaches prior to using them.  For most, the best approach will probably be to stick with the 2-step program, as conserving one's wealth is the most important part of investing.

In coming articles, I will further explain why I believe that gold is at a temporary high and why I believe it will fall, along with the other goods.  I will also share my personal trades, both good and bad, so that you can learn with me through this tremulous period.

Thursday, May 20, 2010

Toxic CDOs Beset FDIC as Banks Fail

http://online.wsj.com/article/SB10001424052748704314904575250811941096220.html?mod=WSJ_Heard_LEFTCarousel

Socialism will fail during the coming period ahead.  It never has worked as an economic/political system, and it won't work here either.  Runs on the bank will happen again and the FDIC won't be able to protect their banks.  Expect higher limit guarantees ahead in order to prevent runs, but don't fall for it.  Return here in the coming weeks to understand how you can protect yourself and your assets.

Wednesday, May 19, 2010

Gold Prices Dip as Investors Go for Cash

http://finance.yahoo.com/news/Gold-Prices-Dip-as-Investors-tsmf-1629084990.html?x=0&sec=topStories&pos=2&asset=&ccode=

Expect more of this to happen, folks.

I will be publishing my detailed outlook this weekend.  Recent family matters have made my ability to write a bit more complicated, and I am still adjusting to these new changes.  I apologize for my tardiness.  It is my hope that my next article will not disappoint.

C.J.

Tuesday, May 11, 2010

Euro, Stocks, Commodities Retreat as Bailout Optimism Ebbs

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoqf1g8oJEg4&pos=1

Friends, the not so shockingly little reported story about the bailout news over the weekend was that the Euro actually weakened yesterday against the U.S. dollar.  Today that trend is continuing and there are rumblings already that the dollar and Euro might be valued on a 1:1 basis sooner rather than later. 

Monday, May 10, 2010

EU Crafts $962 Billion Show of Force to Halt Crisis... Stocks Rally

http://preview.bloomberg.com/news/2010-05-10/eu-ministers-craft-928-billion-show-of-force-to-halt-crisis-buoy-euro.html

http://preview.bloomberg.com/news/2010-05-10/euro-gains-most-18-months-on-support-plan-stocks-surge-greek-bonds-soar.html

This is eerily familiar to the U.S. bailout of the financial industry just a few years ago.  Prepare yourself for some very, very tough times ahead, folks.  This is the U.S. financial industry on a global scale, starting with the continent of Europe!

Just as I did after the Bear Sterns failure, I will be using this upward momentum to sell stocks and get liquid.  This time around, however, I will be buying puts and/or getting short the market.  In case my economic and investment outlooks are incorrect, however-- I believe a deflationary depression is ahead of us, not an inflationary one, even though the governments of the world are trying their best to make it one-- I am considering buying a small portion of precious metals.  It's always better to be safe than sorry, after all. 

As I said in an earlier article, I plan on expediting the publishing of my investment thesis since the markets are beginning to resemble that of the U.S. in 2008.  I will publish at least part of my investment strategy this week, so that in case something dire happens sooner rather than later, you can be well-informed or, better yet, prepared for the worst.

Sunday, May 9, 2010

My Prediction on the Economy & Market (continued)

Let us continue now with our understanding of the U.S. Federal Reserve system...

The U.S. Federal Reserve Bank publishes two reports called the M1 and M2, which give the status of the U.S. money supply.  The M1 reports the total of the amount of physical currency and checking accounts in U.S. banks.  The M2 reports the total of M1 + savings and money market accounts and CDs.

Prior to 2006, the U.S. Federal Reserve Bank published the M3 report (the broadest measure of money), which included M1 + M2 and large deposits, institutional money market funds, and other large liquid assets.

As stated in my previous article, the U.S. Federal Reserve system is a fractional reserve system that allows for the expansion of the money supply via loans, thus multiplying the amount of currency in the economy based on the Federal Reserve's reserve requirements (money multiplier) -- the lower the reserve requirement, the higher the multiple created by the banking system.  The broader based M2 and M3 expound upon the effects of the money multiplier and, therefore, show just how much credit is in the banking system.

According the St. Louis Federal Reserve, the M2 has increased more than 250% since 1995 alone, while the M3 increased by the same percentage, that is, until 2006, when the Federal Reserve discontinued the measurement because it believed that the "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."  Theorists believe that the Federal Reserve discontinued the M3 in order to mask the massive expansion in the credit market created by the Federal Reserve and its reserve requirement and lending policies.

Shadowstats continues to report the M3, based on government supplied data, as well as other government information.  It reports that the M3 now stands at about $14 trillion, up from just above $4 trillion since 1995, an increase of 350% in just 15 years time.

While the M3 rate of growth has slowed since the mortgage crisis due to much tighter lending rates and loss in credit due to foreclosures, the Federal Reserve has increased the U.S. monetary base from $400 billion to $2 trillion from 1995 to present day, with the bulk of that increase occurring from the end of 2008 to 2010, when the Federal Reserve increased the monetary base from $800 billion to $2 trillionThat's an increase of 250% in little over one year!  And that is before the money multiplier takes effect!

Just imagine what would happen to home prices or the price of gas if the lending market was as loose as it was just a few years ago.  It is also important to remember that once currency is printed, it is rarely contracted from the system.  Government likes currency in the system, so the money multiplier will have an effect on the system... it's just a matter of when.

To make matters worse, however, the Federal Reserve began buying mortgage-backed securities under the lesser known Term Asset-Backed Securities Loan Facility (TALF).  Unbeknownst to most Americans, the TALF program, which was created by the Federal Reserve on November 25, 2008, will purchase up to $1 trillion (up from originally $200 billion) of AAA asset-backed securities.  Since the facility was created by the Federal Reserve and not the U.S. Treasury department, it did not require congressional approval in order to be created.

This facility is in conjunction with the widely known $700 billion Troubled Asset Relief Program (TARP), which the U.S. Treasury Department used to bail out the banking industry and General Motors but also used to purchase collateralized debt obligations (CDOs), which were the highly illiquid, nearly impossible to value securities that the financial markets created to pool sub-par mortgages together in order to meet the AAA status of the rating agencies.  CDOs were one of the main reasons for the failure of the mortgage market.  It is widely thought that these securities will be deemed worthless, due to the lax ratings given to mortgages during the mortgage bubble.

It is my hope that these facts open your eyes to just how much power the Federal Reserve, a private institute, wields over each of us.  The data above, coupled with the information provided in "The Creature from Jekyll Island" hopefully makes you more competent than 99% of the American population regarding the U.S. banking system and alerts you to just how fragile and manipulative our banking system really is.

Now that I have discussed the banking system and its issues from the creative and lending standpoint, please allow me to address FDIC and the false sense security that the government has used to give its citizens in the U.S. banking industry.

As I stated in my previous article, the government created the Federal Deposit Insurance Corporation (FDIC), which guarantees individual bank deposits up to a specified amount-- currently $250,000 per individual account, under the Glass-Steagall Act of 1933.  The FDIC is able to guarantee this money by charging each bank a small fee to participate in the insurance program.

However, a little known fact is that the FDIC collected no premiums from 1996 to 2006, which is precisely when the housing bubble began and ended.  In order to make up for this deficit, as well as to keep from having to dramatically raise premium rates, thus effecting bank profitability, Congress granted the FDIC the authority to borrow up to $500 billion from the U.S. Treasury, up from its previous $30 billion limit.

From December 2008 to March 2009, the deposit insurance fund reserves fell from a projected $55.2 (a reserve ratio of 1.25%) billion to just $13 billion (a 0.27% reserve ratio).  In fact, it was reported less than six months later that the total insurance reserves reached a staggeringly low $684.1 million.  Bank failure rates had increased so dramatically during that time that the FDIC was forced to revise its estimated cost of bank failure over the next four years to $100 billion from $70 billion and required insured banks to prepay $45 billion in premiums in order to replenish the fund.  In effect, the fund was admitting that it was insolvent, even though the fund is required to keep a balance equivalent to 1.15% of insured deposits.

According to a Reuters article, the FDIC expects 2010 to be the height of bank foreclosures created because the real estate/mortgage bubble.  Last year, 140 banks failed.  In 2008 that number was 25.  And in 2007, just 3 banks failed.

To date, 68 banks have failed this year-- double the rate of last year.  According to a CBS Marketwatch article in February of this year, Gerard Cassidy, a banking analyst at RBC Capital Markets, who was one of the first analysts to warn of the bank failure situation in 2008, stated that "if the average bank that fails in 2010 has $1 billion in assets and it costs the FDIC 28% of those assets to shut it down, that means failures could cost $49 billion to $56 billion this year."

Using our data above, this could render the deposit insurance funds insolvent, especially if Mr. Cassidy's projections wind up being optimistic.  Granted, the fund is able to borrow up to $500 billion of tax payer money in order to replenish its coffers; however, given what we know about the Fed's excessive monetary base creation and the CDO purchase programs by TARP and TALF, I believe it is safe to assume that the U.S. will be borrowing money for a long time to come and, in turn, devaluing our currency at break neck speed.

Before I dive into my thesis, please allow me to show you just how big of an issue our overspending has become...

In 2009 the U.S. gross domestic product, or our country's total economic output for the year, was between $14.2 and $14.4 trillion, depending on who is calculating the total.  Our total output for the year was approximately 25% of the world's output; however, our total amount of external debt held in 2009 was $12.2 trillion, or about 94% of our GDP.  While that is only roughly 23% of the world's external debt and other Western nations, such as the United Kingdom, are in much worse fiscal shape than we are in, our debt last year equaled our entire economic output for the year!

When you consider that our estimated national debt is supposed to rise $1 trillion per year over the next six years (2010 included)-- meaning that our external debt could be, conservatively, $18 trillion-- and our GDP, which is estimated to be equal to roughly the same amount, will in almost all likelihood grow much, much slower than the estimated 7% annual compound interest rate suggested by the government (it hasn't grown at or above 7% since 1959), our country's fiscal survival appears very grim. 

Greece has recently experienced a debt crisis in which the premium of its bond rates over the historically stable German Bund have increased close to 100% during the course of 2010.  As of the most recent data point in the CIA World Factbook, Greece's external debt as a percentage of GDP was 153%.  Ironically, Germany's was 185%.  The U.K.'s, incidentally, is a mere 365%.  This looks like peanuts compared to our 94%; however, keep in mind that the government's estimated 7% year-over-year GDP growth rate is drastically inflated, which leaves us, therefore, right in the eye of this hurricane, especially considering our propensity to spend and our ever-increasing appetite for entitlement (social) programs.

As the U.S. dollar continues to be the dominant currency of choice regarding world payments and is still considered a generally "safe" investment, we will probably stay in the eye of the storm longer than most.  However, let me share a statistic that will, hopefully, prevent you from resting on your laurels.

Entitlement programs, such as Social Security, Medicare, Medicaid and now health care reform, are issues and problems that our politicians have, honestly, no desire to talk about due to their polarizing nature.  However, it is precisely these entitlement programs that are destined to be the demise of our magnificent nation unless they are dramatically cut and reformed.  None of these programs have ever been paid for and their massive increase in our nation's debt is absolutely and unequivocally staggering.

Many U.S. citizens are unaware that these entitlement programs are listed under a heading called "unfunded liabilities" in one of our nation's two accounting books.  Yes, the government uses more than one accounting book.  It helps to mask the country's real problems to its citizens, you see.  Of course, maintaining two sets of books is very illegal for corporations or citizens to do.

What it is that government is hiding is the tiny fact that our current unfunded liabilities is $108 trillion or $351,189 per citizen or 750% of our estimated 2010 GDP!

So, you see, our country's finances are in a heap of trouble-- seemingly, much more so than that of Greece, although, admittedly, I do not know the position of its unfunded liabilities.  Luckily for us, however, Europe is leading us into this massive sovereign debt crisis.  It is my belief that the dollar will strengthen for quite a while as Europe struggles but that we will also follow in Europe's footsteps.  After all, our government has followed in Europe's economic and social policies, which have created similar (or worse) fiscal problems... why will our outcome, therefore, be any different?

In my next article, I will tell you why I believe this to be true, how you can prepare yourself for the volatile period to come and how you can able to profit from it.  Until then, friends, be sure to stay abreast of the market and stay liquid, unless you feel comfortable shorting or wading into the derivatives market.

Saturday, May 8, 2010

EU Finance Chiefs Race to Ready Emergency Fund Before Asian Markets Open

Does this seem eerily similar to TARP to anyone else?

Watch out below!!!

http://preview.bloomberg.com/news/2010-05-08/eu-finance-chiefs-race-to-ready-emergency-fund-before-asian-markets-open.html

http://online.wsj.com/article/SB10001424052748703338004575229763092666450.html?mod=WSJ_hps_MIDDLETopStories

Prechter and Rogers

I am on record as agreeing with Robert Prechter's theory of the economy and what to expect in the coming months and years ahead.  Now, it appears, that Jim Rogers is also in the same camp, too.  When both agree, I would heed their advice and try to make some gains in the market by shorting, buying puts or just staying in cash, and I will be echoing this advice in the coming weeks ahead.

U.S. stock markets will shed gains swiftly: Prechter 

http://www.reuters.com/article/idUSTRE6465TI20100507

Jim Rogers' Latest Bearish Calls: Shorting U.S. and Emerging Market Indexes

http://seekingalpha.com/article/203844-jim-rogers-latest-bearish-calls-shorting-u-s-and-emerging-market-indexes?source=feed

Friday, March 5, 2010

My Prediction on the Economy & Market

(The following article was started on March 5th, 2010.)

I have been wrestling for months now about one question: inflation or deflation?

The other night, while chatting with a friend, it all finally came together for me.  Epiphanies don't come around very often, but when they do, boy, does it feel good!

I have been following the likes of Peter Schiff (gold bug), Jim Rogers (agriculture bug) and others since my return to the States in 2007.  I knew that something was seriously wrong with our economy then, just as I do now.  Everywhere I turned, it seemed as though every well-proven prognosticator seemed to be on the side of inflation, due to the combination of the Fed running its printing presses 24/7 and our massive government and personal debt.  However, during the crisis at the end of 2007 and beginning of 2008, all investment classes fell precipitously, save for one-- cash.

I understand that the demand for cash occurred prior to the stimulus package and was in the midst of the bank bailout package enacted by Congress, which created a huge influx on capital to the market-- all inflationary events.  But while I understood that inflation will be present in the future, based on simple economics (supply/demand), however, I also couldn't stop asking myself, "why would 2007 not repeat itself during the next crisis?"

So I kept reading, researching and asking myself the same question over and over again, "inflation or deflation?"

Then I read "Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression" by Robert Prechter.  It is the only book that I have read or heard of, which states that deflation, not inflation, will be the problem of the future.  After tearing through 400+ pages in less than three days, I let the question percolate-- "inflation or deflation?"

Then, finally, after months of thought, the answer hit me while I was explaining "Conquer the Crash" to a friend of mine.  He asked me what I thought was in store for the economy in the months and years ahead.  After regurgitating what I had been reading and hearing, he asked me again, "yeah, but what do you think?"

CLICK!

I present you with my thesis below-- exactly as I told my friend-- on what I expect to happen in the economy and investment community in the months and years ahead.

Before we delve right in, however, let's first take a look at the facts of the past:

At the end of 2006/beginning of 2007,
- The massive bubble in the housing market climaxed.
- Commodities reached all-time highs during this same period.
- Stocks reached all-time highs as well.

Then the housing market collapsed, essentially, overnight.
- Reason?
- Crisis in confidence in the hyper-inflated mortgage market.

Along with the housing market, the prices of everything else fell along with it, including precious metals, save one investment.
- U.S. Treasuries, T-bills and currency

Why?
- People were scared.  They also had massive credit bills (mortgage, credit cards, loans) to pay-- only currency can pay off debt.

In return,
- The U.S. dollar became extremely expensive.  So much so, in fact, that Warren Buffett stated in Berkshire Hathaway's annual report in 2008 that the "U.S. Treasury bond bubble of late 2008" might go down as an extraordinary event in financial history, just like the Internet bubble of the 1990s and housing bubbles of the 2000s.


Thesis:

The U.S. dollar is about to get much much more expensive.  Then, it will become very, very cheap.

Unfortunately for Mr. Buffett, whose Berkshire Hathaway earlier this year made the largest acquisition in the firm's history with the purchase of what is widely considered to be the best-run railroad company in the U.S., Burlington Northern, and for the hoards of the gold and commodity bugs, all goods are about to get much, much cheaper than they were in March 2008, which was the market low during this latest crisis.

"But the government has been printing currency like crazy, there's no way that'll happen-- inflation is imminent!," you say.

I agree.  The government is printing a lot of currency; however, it is creating much more credit than currency... and there is a BIG difference between the two.


Time for a classroom lesson:

Grab some caffeine, it's about to get boring... BUT I can virtually guarantee you that 99% of the people in the U.S. do not know what you're about to learn.  Fortunately for you, it's information that will open your eyes to a brand new world, one that will allow you to understand just how significant the problems in the U.S. (and world) are and just how significant they will be in the coming months and years ahead.  Sadly, this is information that no one in the media discusses or is anything that you will learn in college-- maybe not even in graduate school-- let alone high school.  But it is information that literally affects all of us each and every day and, therefore, is information that we should grow up knowing and learning about.

Before we start, please allow me to make one distinction clear.  In today's society, we tend to use the words money and currency interchangeably.  However, there is a HUGE difference between the two.

Money is something that holds value, which can be exchanged for goods.  Throughout history, only gold and silver have been continuously recognized as money.  There have been times throughout history where other goods, such as salt, have also been considered money, but only gold and silver have remained constant.

Currency is a medium of exchange that one can use in order to purchase something that has value.  It is derived from the word current and, therefore, must remain in movement in order to be valuable.  The U.S. dollar is a currency because there is nothing valuable about a piece of paper standing on its own-- it's just a piece of paper.  The U.S. dollar is valuable because it is backed by the full faith and credit of the United States.  However, if U.S. dollars were to lose favor due to debasing its currency, for instance, it would become worth less and, if it were printed relentlessly by the U.S. Treasury, then it might become worth close to nothing at all.  Currency must be spent in order to be valuable.

Now, let's start with some history...

Throughout history, only two items have consistently been accepted as money-- gold and silver.  Gold and silver have always been rare metals, while other items, such as salt, have gone from once rare and in high demand (for its ability to store meat) to simple commonplace.  However, gold is so rare that if you stacked up all of the gold that has ever been discovered, it would not fill two Olympic-size swimming pools.  And although silver is not nearly as rare as gold, and, therefore, holds much less value, it is considered to be one of the best conduits of energy and, therefore, is used in nearly all electronics.  While gold and silver have consistently held monetary value throughout time, both have been endured the treatment of being the forgotten children of civilization as well.

Generally speaking, whenever civilizations have found themselves in precarious situations, became greedy, or just plain manipulative, almost, without fail, they have found a way around the gold (and silver) standard.  Straying from the gold and silver standard has come by using less of it in coinage, as the Romans did, or by creating currency valued in gold and then debasing it by allowing the gold standard to disappear completely, as we have now with the U.S. dollar and other currencies.  Typically, this debasing has usually occurred toward the end of a civilization, mainly, from a civilization overextending itself militarily or by accumulating massive amounts of debt.

The U.S. dollar, except in a few instances, has always been backed in some fashion by gold and/or silver.  Those instances were during the Civil War, during a short period from 1777-1788 and during the War of 1812.  The gold standard in the U.S. was later breached in 1971 under President Nixon and has remained as such, making it the longest period of time that our nation has not adhered to the the historical standard, but more on that later.

Let's first talk about the Federal Reserve system...

The current Federal Reserve system was created under the Federal Reserve Act of 1913 by largely a Democrat partisan vote.  The act created a private, decentralized system that was intended to put the monetary system outside the reach of Wall St.  The Republicans favored a centralized bank, much like that of the European system, which would have kept the government in control of the system and, in turn, would have allowed Wall St and the financial industry to impact the country's monetary policy through lobbying and/or bribery, etc.

A not so well-known fact, however, is that Senator Nelson Aldrich, who was largely in charge of regulating the banking industry, was the person most responsible for the creation of the Federal Reserve system.  Aldrich, whose daughter was married to John D. Rockefeller, Jr and was close friends with J.P. Morgan, created the framing for the Federal Reserve system at a secret meeting with some of the most powerful and influential financiers, who represented 25% of the world's wealth at the time, at a resort on Jekyll Island, GA in 1910.  The Aldrich Plan was intended to create a central bank, which Aldrich himself had originally opposed prior to studying the European banking system.  The plan was so reviled in Congress when it was introduced that it took three years to pass.

With the passing of the Federal Reserve Act of 1913, however, occurred one of the greatest transfers of wealth in world history.  The reason?  The fractional reserve baking system.

Fractional reserve banking is the banking practice by which banks are only required to keep a fraction of their deposits on reserve, currently about 10%, and are allowed to loan out the remaining amount.  By loaning out their deposits, however, banks are, in fact, creating additional money supply that would not otherwise be in the marketplace, known as the money multiplier and, thus, the transfer of wealth begins.

An example of the money multiplier effect is as follows:

You deposit $100 into the bank.  The bank is required by the Federal Reserve to maintain a minimum reserve of 10% of deposits.  Therefore, the bank can lend out the other 90% of your initial deposit, which creates a maximum increase in the money supply of $900 from your original deposit.
 
A problem with this system, however, is that since only a fraction of a bank's deposits are required to be on reserve, if many people wish to withdraw their money from the bank simultaneously, also known as a "run on the bank," the bank might have a very difficult time coming up with all of the money requested.  During the Great Depression runs caused many banks to fail and, in turn, many people to lose all of the money that they had in the bank.  As a result, the government created the Federal Deposit Insurance Corporation (FDIC), which guarantees individual deposits up to a specified amount-- currently $250,000 per individual account.  The FDIC is able to guarantee this money by charging each bank a small fee to participate in the insurance program.

Another piece of information that is hardly discussed is that typically a bank has the right to call one's outstanding mortgage at any time.  While this tactic is atypical, it is one that many banks can should it need to come up with currency quickly, such as in the case of a run on the bank.

Before we continue, let me add a little known fact about the relationship between the U.S. Treasury and the Federal Reserve...

It is a little known fact that the U.S. Treasury must borrow money from the Federal Reserve, in the form of U.S. Treasuries, in order to print more money.  Therefore, the U.S. Treasury cannot mathematically ever repay its debt to the Federal Reserve, at least in the form of U.S. dollars.

For a full history on the how the Federal Reserve was created and why, please check out "The Creature from Jekyll Island" by Edward Griffin.  Griffin also gave a speech some years ago in Los Angeles that encapsulates the events and book in about an hour.

Grab another cup, the history lesson is now continuing...

Let's fast-forward a few years now to 1944.  It was in that year that world leaders met at the United Nations Monetary and Financial Conference for three weeks in Bretton Woods, New Hampshire to discuss the world's monetary system.  It was during this meeting that the allied nations agreed on the U.S. dollar as the world's reserve currency under the stipulation that it always be backed by gold.

As stated in my article "Seek Refuge in Modern Day Communism":

"The world understood that inflation was the enemy of any economy, having seen the extraordinary hyperinflation created by the Weimar Republic of Germany, where the money supply grew so rapidly that bills printed just a week prior were deemed worthless.

However, after enduring some of the complexities that maintaining a currency to a fixed price of gold created-- such as other countries' reserves growing more quickly than the United States', and the U.S.'s choice to pay for the Vietnam War and The Great Society programs through inflation and not increased tax revenues-- the gold standard officially ended in 1971, when the U.S. closed the gold window, thus making the dollar and gold nonconvertible."

Before we go any further, however, let me state something that many people might not remember:

In 1933 the government, under Executive Order 6102 during the Roosevelt administration, banned the ownership of gold-- except U.S. gold eagle coins, which were legal tender-- and fixed the price of U.S. dollars to gold at $35/oz.  The executive order remained intact, even after President Nixon announced in 1971 that U.S. dollars would no longer be convertible into gold. The limitation on gold by U.S. citizens was repealed on December 31, 1974 under the Ford administration but by that time, the value of gold in the world market had soared in value to $186.50 on the London exchange, meaning the U.S. dollar had lost over 80% of its value during a 51-year time span on the global market.

Demand for gold over the next six years skyrocketed as U.S. citizens devoured supplies of gold, in hopes of protecting their already lost fortunes.  Gold on January 21, 1980, the day after President Reagan was sworn into office, reached $850/oz-- a 450% increase in six years time on the world market and a whopping 2,400% increase from the U.S. fixed rate during the same time period.

Let us remember this lesson-- the U.S. government can change the rules at any time and will do so in order to preserve itself, regardless of how much damage it inflicts on its citizens.

In the coming weeks I plan to continue our history lesson, as well as give further insight into my investment thesis over the coming months and years.  I will attempt to expedite my writing, as it appears that my thesis might just be on an expedited path, given the recent strength in the U.S. dollar due to the crisis in Greece and the heightened anxiety in Europe, as well as the anticipation that China is overheating.  Until then, I suggest staying as liquid as possible.

More to come soon!
C.J.

Wednesday, September 30, 2009

Worthwhile Economist Articles

Below are some of the Economist articles that I found to be informative and/or interesting during the past two weeks. Enjoy!

Africa:

A catastrophe is looming (East Africa): Governments are at their wits’ end to keep their hungry people alive.


The Americas:

The strange chill in Chile: After presiding over Latin America's big success story for two decades, the centre-left Concertacion coalition looks tired and divided.

The Bachelet model (Chile): A politician on top of her game.

Economic vandalism: A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?

Playing with fire: By succumbing to domestic pressures, America has started an alarming trade row with China.

Charlie Rangel's taxes: Those who write the laws should obey them.

Creative tension (Google): The internet giant seeks new ways to foster innovation.

Stuck in the delta: Californians continue fighting over water, but vow to try making peace.

El Paso's small step: Reform advocates want an honest and open debate on drug policy.


Asia:

Driving in the right direction: Chinese motorists face unprecedented prices at the pump.

Poodle or Pekinese (Japan)?: Yukio Hatoyama has to clarify some contradictory messages to the world.

Fashion victims (Japan): Beleaguered firms are merging at last—but cost-cutting is still taboo.

Demonstration effect (Nepal): Having walked out, the Maoists try to march back in.

Where power lies (Thailand): Coups are such an old-fashioned way of running things.

V not yet for victory (Vietnam): An impressive recovery may create problems of its own.


Europe:


Behind golden doors (Russia): President Dmitry Medvedev sets out a modernisation agenda, but he may yet be undercut by his prime minister, Vladimir Putin.

The Vladimir and Dmitry show: Vladimir Putin prepares the stage for his re-entry.


Global:

A bad climate for development: Poor countries’ economic development will contribute to climate change. But they are already its greatest victims.

Measuring what matters: Man does not live by GDP alone. A new report urges statisticians to capture what people do live by.

It's life, Jim: House prices are creeping up again. That may not last.


Middle East:

Not over yet: Three months after his disputed re-elections, Iran's president, Mahmoud Ahmadinejad, is still failing to reassert his-- and his government's-- grip.


Et Cetera:

Breathing more easily: The air inside airplanes could soon be cleaner and more comfortable to breathe.

Daddy's girl: A non-obvious explanation for why girls without fathers have sex earlier.

Norman Borlaug: With wheat and plough, he helped avert famine.

Saturday, September 26, 2009

Noteworthy - Week of September 20th

The G-20 met in Pittsburgh, PA this week and agreed on a deal to coordinate economic policies; however, the deal does not include an enforcement mechanism. The group of 20 also came to a partial agreement on banking compensation and agreed to end energy subsidies but didn't set a deadline for the action. The U.S. was also able to persuade Europe to back a shift in the ownership of the IMF to the developing nations.

President Obama announced at the g-20 Summit on Friday that Iran is on a path toward global confrontation if it doesn't come clean with its nuclear activities when the two countries meet on October 1. Iran had admitted earlier that it had begun construction of a second enrichment facility but stated that it did not break the International Atomic Energy Agency rules in doing so. The U.S. and its allies had been watching the site for years.

Earlier in the week, the U.N. met in New York and adopted an antinuclear resolution targeting nations that use civilian nuclear technology for military purposes. Critics say that the measures are unenforceable. Notable speakers included: Libyan leader Moammar Gadhafi, who rambled incoherently at times during his first address at the U.N. in 40 years; Iranian president Mahmoud Ahmadinejad, who last week reiterated that the Holocaust is a myth, accused a small minority for causing trouble in the Middle East; Israeli Prime Minister Benjamin Netanyahu unleashed harsh words toward the U.N. for giving credence to Ahmadinejad by allowing him to speak while himself holding Nazi documents of the Holocaust; President Obama addressed the U.N. for the first time, called for a "new era of engagement" with the world. Critics lampooned the speech as one of the harshest toward Israel in their alliance as well as a weakening of the U.S. President's stance in world politics.

House Democrats, lead by Speaker Nancy Pelosi, continue to press for a public option in the health care reform bill.

Uncertainty about the strength of a global economic recovery is complicating the decision of when to end stimulus by central banks.

The Fed is looking at ways to rein in the flood of currency that it dumped on the market during the financial crisis without disrupting economic conditions. However, it extended the mortgage-purchase program this week, stating that consumer spending remains "constrained."

Lord Peter Mandelsohn, a leading international proponent of open markets, scrutinized foreign ownership of some British companies, stating that they might be a long-term disadvantage for the country. Mandelsohn's words come as Kraft is making a bid for Cadbury.

Long-term unemployment is taking its toll on citizens, making it tougher for them to find jobs and causing many to settle for union pensions and social security, rather than keep looking for work.

A vaccine that shows the first signs of preventing the spread of HIV is giving the health community hope that further breakthroughs aren't too far away.

Federal regulators said this week that banks and other institutions are facing $53 billion in losses on loans, triple that of the prior record set in 2002 and surpassing the total identified losses over the past eight years. The losses are expected to cause trouble for many banks, especially large regional institutions.

Credit-rating firms came under attack this week as lawmakers and regulators scrutinized their ratings process, after a former Moody's analyst came forward to state that inflated ratings continue within the firm.

The U.S. dollar was flat this week as risk-averse investors returned to it, briefly ending its decline.

U.S. bonds found earlier this year in Italy were, apparently, fake, according to a report by U.S. officials.

According to U.S. officials, the first al Qaeda cell in the U.S. since 9/11 has been discovered.

The U.S. is changing its approach toward Myanmar, enlisting a new set of sanctions and engagement policy in order to persuade the country's Junta to allow more democratic freedoms.

Three paper companies and the United Steelworkers filed an anti-dumping case against China and Indonesia this week.

The White House has delayed sending more troops to Afghanistan, as recommended by its appointed ground general there, in order to review its strategy.

The number of foreign-born residents of the U.S. declined this year for the first time since the 1970s.

The U.S. Air Force began its third attempt to buy $40 billion of tankers after controversy ended the two previous attempts.

Africa:

Oil-trading firm Trafigura Beheer said that it has agreed to pay $48.7 million in compensation to the people of the Ivory Coast, who say they were made ill by waste dumped there in 2006.


The Americas:

Protests erupted in Honduras this week as former president Manuel Zelaya returned to the country via means of the Brazilian embassy.

The dramatic rise in cocaine production in Peru has escalated fears that the violence and corruption associated with the trade will derail one of the fastest-growing economies in Latin America.

Oaktree won a $1 billion investment commitment from the China Investment Corp, which the L.A.-based company plans to invest in distressed debt and fixed-income assets.

Dell agreed to purchase Perot Systems for $3.9 billion. The assets of Perot Systems employee and H. Ross Perot friend, Reza Saleh, were frozen this week as the SEC accused him of insider trading.

Holiday jobs look to be scarce this year as pessimism reins over the retail market.

Teen retailers are designing stores to cater to parents.

Intel sees the PC market stabilizing this year.

Bank of America and J.P. Morgan Chase plan to loosen their overdraft policies amid recent uproar over the fees imposed by banks. Officials, however, plan to push forward on fee restrictions that banks can charge their customers.

Citigroup plans to narrow its focus to six major U.S. cities and will reduce its overall consumer lending credit card and "jumbo" mortgages in the U.S. and focus on affluent customers.

In a step toward measuring how as perform on social networking sites, Facebook agreed to a deal to provide ad data to Nielson.

Veteran Pepsi executive Michael White, who led the company's acquisition of its two biggest independent bottlers, is retiring by the end of the year.

The IRS extending is deadline for U.S. citizens to declare their foreign assets.

Small investors are placing big bets on currency markets.

Sara Lee agreed to sell its international skin-care and deodorants businesses to Unilever for $1.9 billion in order to focus on its food and drink businesses.

Marvel Entertainment Chief Executive Ike Perlmutter received stock options for more than one million shares of stock (a benefit to him of $34 million) after a subordinate opened discussions with Disney, which ultimately led to a merger.

HP is using the downturn in the technology market to undercut rivals' prices in order to gain market share.

Blackstone Group LP is looking into a possible deal to buy Anheuser-Busch InBev NV's theme parks, which could fetch the alcohol beverage company between $2-5 billion.


Asia:

Animosity toward the affluent is growing in China as the privileges of the sons and daughters of the rich become more apparent.

Computer makers such as Lenovo and HP are focusing on rural China as an area of growth.

L'Arc, a French themed casino owned by Macao casino magnate Stanley Ho, opened this week, driving casino shares in Hong Kong higher. Wynn Resorts is seeking to gain as much as $1.6 billion in its October IPO of its Macao assets.

Korean consumer sentiment is at a seven-year high. Strong department-store sales and mortgage demand has some believing that consumer habits there might be changing, as private consumption is expected to rise 4.2% this year.

South Korea will allow the sale of the iPhone there.

Long awaited South and North Korean reunions are set to begin this weekend with the hope that the program will bridge the two nations.

The Singaporean sovereign wealth fund said this week that they took in a $1.6 billion profit by selling 50% of their holdings in Citigroup earlier this month, benefiting from the U.S.'s bailout of the firm.


Commodities:

China's sovereign wealth fund, China Investment Corp., is becoming a large backer of natural-resources companies. The fund has bought billions of dollars worth of shares in companies during the past few months.

Chinese biggest steelmakers have given up hope on discounts for this year's iron ore prices and are now focusing on 2010 deliveries.


Europe:

The European Commission approved a $80.7 million aid package from Poland for Dell to build a factory there.

Siemens issued an ultimatum to the seven former executives tied to the bribery scandal, as the company tries to put the past behind it.

Russia welcomed foreign investment in developing a giant Artic gas project.

U.K.-based Tesco launched a "green" grocery store near Palm Springs, California this week under its Fresh and Easy brand in an effort to try to make name for itself in the U.S. Walmart and other retailers are also trying the same approach.


Oceania:

Australia's mining industry is struggling to fill jobs amid a quicker-than-expected recovery in the commodity sector.

A dispute over nearly $15 billion in allegedly misappropriated government money in Brunei by the youngest brother of the sultan of Brunei appears to be nearing a resolution.


Barron's:

This week's Barron's "Up & Down Wall Street" by Alan Albelson.

Barron's review of this week's market news and its preview of next week's market events.

Commodities Corner

Insider Transactions


The Economist:

The Economist's review of this week's politics and business news.

The Economist's Economic and Financial Indicators:
Overview
Output, prices and jobs
The Economist commodity-price index
Asia GDP growth forecasts
Trade, exchange rates, budget balances and interest rates
Markets
Unemployment benefits


Et Cetera:

Russia's richest man, Mikhail Prokhorov, has agreed to buy an 80% share of the New Jersey Nets basketball team and a 45% stake in the Brooklyn, New York arena and nearby residential and commercial towers for $700 million.

Educators are ramping up efforts to counter social isolation that some students experience by attending online high school. Doctors are also looking into how online isolation affects students.

Irving Kristol Obituary

Saturday, September 19, 2009

Noteworthy - Week of September 13th

This week yet another undercover investigation into ACORN was made public. This time, the investigation made its way to San Bernardino, CA, where, once again, an employee there gave the young pimp and prostitute couple advice on how to set up a prostitution business involving underage illegal aliens. This time, however, the employee admits that she used to run a call girl business, that Heidi Fleiss is her idol, and that she was in a violent relationship with her ex husband until she killed him, seemingly admitting to premeditated murder.

The next day, the senate voted to 83-7 to end HUD and transportation funding to ACORN. The seven senators voting to continue ACORN funding were: Dick Durbin (D-IL), Roland Burris (D-IL), Robert Casey (D-PA), Kirsten Gillibrand (D-NY), Patrick Leahy (D-VT), Bernie Sanders (I-VT) and Sheldon Whitehouse (D-RI).

That same morning ABC news anchor Charlie Gibson stated on Chicago's WLS-AM 890 that he "didn't know" about the ACORN undercover investigations and allegations, although Senior ABC White House Correspondent Jake Tapper had reported on his blog that the senate was voting to stop HUD and transportation funding to ACORN.

Senator Mike Johanns (R-NE) wrote Attorney General Eric Holder requesting an investigation into ACORN and Representatives John Boehner (R-OH), Eric Cantor (R-VA) and Dave Camp (R-MI) sent a letter to IRS Commissioner Doug Schulman to sever ties with the agency, which they state has received over $50 million from taxpayers since 1994.

Japan's parliament named Yukio Hatoyama as the country's new prime minister and Hirohisa Fujii, the country's new finance minister, among other posts this week. Mr. Fujii recently stated that the government should reject weakening its currency in order to help exporters.

A lobby group representing the largest banks in the world urged the G-20 nations to continue their stimulus programs and recognize the steps that the financial industry is taking to improve its practices. The IMF issued guidelines this week for ending bank relief.

The Fed is likely to buy $1.45 trillion in mortgage-linked securities despite possible resistance by a few regional Fed presidents.

The U.S. Treasury stated this week that it will shrink the emergency debt program that it started during the crisis in order to avoid hitting the $12.1 trillion debt ceiling. There is concern that the Fed will have to sell securities or print money in order to pay for interest payments.

Anti-Fed activists, led by Texas Senator Ron Paul, continue push for an audit of the Federal Reserve.

Foreign demand for long-term U.S. financial assets fell in July. China, Japan and the U.K. increased their holdings, but Russia, Luxembourg, Switzerland, Ireland and oil exporting nations decreased. Foreign investors also shunned U.S. corporate and agency bonds, as well as Treasury bonds and notes.

In a speech on the anniversary of the Lehman Brothers collapse, President Obama told Wall Street to "embrace serious financial reform, not fight it."

Citigroup is considering a multi-billion dollar sale of shares in order to minimize the government's share of the company. Under the potential scenario, the government would sell its shares in Citigroup as the company sells additional shares, a move that could net taxpayers profit as much as $10 billion.

After threatening to restrict U.S. imports of chicken and auto products, China said that it would like to openly discuss a trade solution between China and the U.S. Last week, President Obama moved to place a 35% tariff on Chinese tires, sighting unfair competition. China believes the tariffs are to support U.S. unions, are unfair and, contacted the WTO last week after the tariffs were initiated.

The rise in Asian markets has brought back the theory of decoupling, which was prominent prior to the financial collapse in 2008.

Fed Chairman Ben Bernanke stated that the recession is "very likely over" but added that the recovery is likely to be so moderate that it wouldn't produce many jobs.

William White, the well-respected former chief economist at the Bank for International Settlements, warned of a double-dip recession earlier in the week.

Senate Finance Committee Chairman Max Baucus (D-MT) unveiled his health care reform proposal this week. Some prominent Democrats are threatening not to back the bill, which is without Republican support and is estimated to cost $880 billion. The bill mandates, among other things, that all citizens have health insurance, which is likely to pinch middle class Americans the most. President Obama is pushing for union support on the health care reform bill, which allegedly contains mandates for union funding.

Russian President Medvedev called for change in the nation's "primitive" economy and corrupt practices in an attempt to separate himself from former President Putin. Medvedev stated that he could run for president in 2012. Last week, Putin signaled that he might run for president again in 2012.

The bankruptcy estate of Lehman Brothers is claiming that executives of the firm worked with Barclays to give the U.K. bank a "windfall" of at least $8.2 billion when it bought Lehman's broker-dealer business amid its fall from grace last year.

Losses by the largest U.S. credit card issuers eased last month but not enough to indicate that the business is improving materially.

The U.S. said that it would discontinue its land base missile defense agreement with Poland and the Czech Republic in favor of a mobile defense system. The announcement came on the 70th anniversary of the Russian invasion of Poland at the onset of WWII and is said to have damaged relations between both countries and the U.S. Russia applauded the move.

Turkey said that it is planning to spend close to $1 billion for its first long-range missile defense program.

Former Fed Chairman Paul Volcker, the current chairman of the White House's Economic Recovery Advisory Board, said that banks should not be allowed to place bets against their capital, rather only with their client's funds, this week. The statement is certain to stimulate debate over the topic, which may put him at odds with the Obama administration, who is requesting more oversight of the banks but does not restrict the industry's abilities as much.

Under a new proposed policy, pay policies of the banking industry would require approval from the Federal Reserve, a decision traditionally reserved for the banks' corporate boards and executives.

Dairy farmers are asking antitrust regulators to investigate their industry. Milk prices have dropped 36% in the past year, bringing prices to their lowest level in three decades. European dairy farmers are requesting their governments help prop up their industry.

The EU nominated Jose Manuel Barroso to a second term of the European Commission.

The Brazilian financial exchange is pursuing agreements with its counterpart bourses in Chile, Columbia, and Peru that would allow for cross-trading of stocks and derivatives.

Investors are using the U.S. dollar as a carry-trade, a move traditionally reserved for the Japanese Yen.

U.S. household wealth grew by 3.9% during the 2nd quarter, the first growth in income in nearly two years.

The FCC proposed new rules that would treat all internet traffic the same, meaning that applications that drain bandwidth will be equal to that of lesser uses.

Complex U.S. tax laws are costing many small business owners millions of dollars in fines, as after receiving word from the government that their tax shelters are abusive in nature.

Big power producers are fighting the derivatives bill proposed by the Obama administration, stating that the changes would make it more difficult to hedge against swings in commodity prices.


Africa:

The World Bank managing director, Dr. Okonjo Iweala discussed how the financial crisis has effected Africa.

The Americas:

Argentina is in the process of passing a bill that would limit the power of media conglomerates.

A federal judge threw out the SEC's proposed settlement with Bank of America, which failed to disclose to shareholders Merrill Lynch's planned bonuses prior to their merger with the asset manager.

Google bought a Carnegie Mellon spinoff that will helps its effort to scan and newspapers and books for internet distribution.

Kodak is raising $700 million in cash via a debt investment from private equity firm KKR.

Wells Fargo CEO John Stumpf stated that Wachovia's losses are "in the same zip code" as the firm's original estimates.

Adobe is buying web-tracking firm Omniture for $1.8 billion. The deal will help customers track and make money from websites that were created with Adobe products.

Blockbuster is planning to close up to 40% of its stores during the next two years.

Best Buy raised its forecast for annual earnings and stated that holiday earnings for electronics could be stronger than expected.

Twenty-three people, including nine American Airlines employees, were indicted on cocaine trafficking allegations.

The Department of Defense endorsed sending more troops to Afghanistan, making it easier for President Obama to folllow General Stanley McChrystal's recommendation, against the wishes of the Democrat majority Congress.


Asia:

Chinese farmers are raising their rent prices for their land, raising rural income purchasing power.


Commodities:

Corn prices rose this week as fear of a frost late next week damaging an underdeveloped crop.

The CME is expected to urge the CFTC to apply commodity-position limits across different markets so that they cannot circumvent the CME to sell on another exchange.

Natural gas rose more than 25% this week.

Mining firms are starting to resume capital spending, as companies gain confidence that demand and prices for commodities are improving.

The Anadarko Group said that it found oil this week off the coast of Sierra Leone, which could potentially open up a new oil region in the world.

U.K. firm Tullow announced that it has found the largest oil discovery in the Lake Albert region of Uganda yet-- a region where it has already found more than 700 million barrels of oil.

Italian gas and oil company Eni has decided against buying rival firm Tullow, citing cost concerns.


Europe:

Auto makers are pushing European governments to continue their "cash for clunkers" programs, fearing that sales could fall dramatically if the programs are allowed to expire.

The Italian government is offering the largest tax amnesty of all the nations thus far cracking down on tax evasion.

The Irish government proposed a plan to buy up to $132 billion in property loans from struggling banks in order to shore up their balance sheets and bring liquidity into the market. The country's recession is among the worst in Europe.

Turkey's central bank reduced its interest rates by 0.50% to 7.25% and suggested that it would continue to cut rates, even as news support that its economy is stabilizing.


Middle East:

Iran agreed to meet with the U.S., China, Russia, France, U.K. and Germany to discuss its nuclear program. The meeting will take place on October 1 but the location has not yet been finalized.


Oceania:

BHP Billiton, the world's largest miner, is hunting for mergers, having accrued more than $18 billion in cash during the last year.


Barron's:

This week's Barron's "Up & Down Wall Street" by Alan Albelson.

Barron's review of this week's market news and its preview of next week's market events.


The Economist:

The Economist's review of this week's politics and business news.

The Economist's Economic and Financial Indicators:
Overview
Output, prices and jobs
The Economist commodity-price index
Economic freedom
Trade, exchange rates, budget balances and interest rates
Markets
Foreign direct investment


Et Cetera:

In a study to determine how occupation affects happiness, business owners came out on top.

WSJ 2009 Technology Innovation Awards

Possible candidates for the Nobel Prize

Education for Executives

Patrick Swayze died of cancer at the age of 57. A video montage.