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Saturday, December 18, 2010

2011 Predictions and Investment Themes

Hal Blackwell’s Predictions for 2011
On my website I claim the title “futurist”. No state or federal license is required to make the claim but a list of predictions for the coming new year is mandatory. Without further adieu:

1. The financials, with Bank of America leading the way, will be the best preforming sector on the NYSE in 2011. 
With the Fed Funds rate stuck at zero and the Federal Reserve unsuccessfully battling to keep mortgage rates low, the spread between short and long term rates will widen. The wider the spread, the more money banks make. Banks making historic profits borrowing money from the Federal Reserve for free will continue to be satisfied with the bounty earned by investing in “risk free” treasury debt. Banks will not have to lend money into the economy to make outrageous profits. Usually increased profits at financial institutions bode well for increased lending but not in 2011. Mortgage “put back” fears are overblown.
2. Unemployment will rise to 11%.
The stimulus created in the new tax measures recently approved by Congress will keep the unemployment rate steady at 9.7% through the first two quarters of 2011. But as that stimulus begins to fade and Republicans threaten to cut spending, the economy will start to turn south again. Cuts by state and local governments will add to the ranks of the unemployed. 
3. Jim Demint will emerge as a front runner for the Republican presidential nomination.
Demint has built his political career on the principles that are gaining favor with independent voters. Very few Senators can say, “I told you so!” Demint is presidential, comes across as trustworthy and is smart. He can also raise a cazillion dollars from the Tea Party constituents at the drop of a hat. 
4. The Mexican government suspends the writ of amparo (Mexican hebeas corpus) in a last ditch effort to hunt down and destroy the drug cartels and avert complete anarchy. 
The drug cartels will continue to operate with complete immunity in Mexico. The rule of law in the country will become subjugated to the indiscriminate violence and corruption. As the conflict deepens the trickle of illegals coming across the US border turns into wave of refugees.
5. The state of California will end the year in dire need of a bail out.
Another decline in the real estate market coupled with refugees coming across the Mexican border will put a sever strain on state and local governments. There will be a record number of defaults on municipal bonds in California and the cost of borrowing will force federal intervention in 2012.
6. The Real Estate market will take its final leg down.
“Water treading” in the Real Estate market comes to an end. The number of foreclosed properties going on the market coupled with higher mortgage rates (despite QE2) will finally drive the market to its bottom.  
7. Merger and deal activity on Wall Street will have a record year. 
As inflation fears creep into the board room, the piles of cash sitting on corporate balance sheets will be used to vertically and horizontally integrate. Some really strange partnerships emerge as organizations desperately look for places to invest mountains of cash. 

8. House Republicans play politics and refuse to make any hard decisions preparing to take on Obama in 2012. 
Our political leaders stay in power by demonizing the other side of the isle. We are likely to see some government shutdowns and other rhetorical moves to claim the moral high ground to impress the political center. Nothing of substance will be done to address the deficit.

9. The European sovereign debt crisis continues to boil under the surface. 
The German’s are on record as saying they will stand behind their Euro partners. We can expect a bailout in Italy, Spain, Portugal, Ireland (again) and possibly Belgium. The German’s should be able to “kick the can down the road” for at least one more year. If there is a “restructuring” of Spanish or Italian sovereign debt all bets are off. The second great financial collapse (the Great Depression was the first) will be under way in earnest. Such a “restructuring” would be the death of the Euro and signal that the ECB’s best efforts (along with secret Federal Reserve assistance) were unable to prevent such a calamity. The European banks are loaded down with Euro denominated sovereign debt.
10. Civil unrest in Europe will escalate dramatically.
As European governments face economic reality; their populace will still deny the certainty of arithmetic. Denial of services most Europeans view as entitlements will spur an ever larger segment of the population into the streets.
11. The China story will take a different turn as its economy begins to overheat.
China is in the midst of a real estate bubble. As the government tries to reign in inflation by raising rates there is a good chance this bubble will pop. The Chinese government, flush with cash, will be able to cope with the collapse but this will put dramatic deflationary pressure on the global economy. As inflated commodity prices revert to the mean, the imminent danger of global deflation looms as 2011 comes to a close.
12. The Korean peninsula will be reunited as the North Korean government collapses under the strain of China’s pressure and dissension within the military.
After a short and desperate military action the North Koreans will have their towel thrown in for them by the Chinese. The DMZ will be flooded with refugees as the world pours aid into the North.
13. The Iranian’s will explode a nuclear devise or demonstrate a “dirty bomb” ballistic missile capability. 
The Iranians will gain a nuclear devise or a “dirty bomb” capability. The world will come to know what the “Mahdi” is and why it is important. Tehran will start the first phases of a campaign to hold the world hostage in an attempt to destroy Israel. 
14. The war in Afghanistan fails.
The Obama Administration’s proclaimed date of withdrawal coupled with a lack of commitment to “win” the war, will be the key to the demise of US efforts there. The President will attempt to declare victory and leave. The White House will use verbiage similar to “we have done all we can do”. Obama’s dependency on the far left wing of the democratic party will demand a US withdrawal and politically he will have no other option but to withdraw US forces.
15. The Obama administration will descend into chaos.
In an effort to bolster his reelection prospects the President will make a schizophrenic move to the political center. The left wing of the democratic party will threaten to run primary opposition. Several candidates on the left of Obama will emerge.  A crisis along the Mexican border, as violence spills into Arizona and California, and rising unemployment will reveal political miscalculations and core incompetencies within the administration. The Obama presidency will be rendered powerless to deal with these escalating economic and national security challenges.
Note: Do not be surprised if the White House is rocked with scandal. There has been too much money flowing through government and too much ill will in powerful places.
Signs my predictions are coming to pass will include the following:
  • A significant run up in the S&P 500 (1,243 currently) to 1,390 occurs as bond holders sell due to inflation fears and insufficient yields in the fixed income arena. 
  • Interest rates begin to rise as the debt market demands higher yields. Higher interest rates choke off the anemic recovery.
  • The Federal Reserve announces QE 3 in late summer as the optimism sparked by the stock market’s run up fades.
  • Summer 2011 brings increased volatility back to the market.
  • Market sells off in late September and early October 2011.
Signs that I am completely off my rocker:
  • If the move up in the financials is confirmed by increased revenue within the transportation sector. This would mean I am way off base!
  • The US Treasury curve starts to flatten.
  • The price of gold collapses.
  • Interest rates start to decrease at the beginning of the year.
  • The Chinese government quits trying to curb inflation.
  • The US dollar strengthens significantly.
  • Inflation fears subside in the first and second quarters.
  • The price of oil decreases in the first half of the year.
  • The Iranians allow complete inspections of their nuclear facilities.
Summary: Predictions for December 31, 2011 
S&P 500 950
Dow Jones 10,000
10 year US Treasury Yield 2.45%
Spot Gold Price $2,300
GDP 2.5% 
Investment themes for 2011
  • Buy gold on the dips
  • Buy US financial institutions too big to fail (Bank of America, JP Morgan, Wells Fargo, Morgan Stanley Smith Barney, AIG)
  • Short high yield muni bonds
  • Lighten fixed income portfolio now, hold the cash, when the yield on the 10 year US Treasury goes under 3.1% mid year, start dollar cost averaging on the long end of the curve
  • Dollar cost average into high dividend paying large US cap stocks. On brisk moves up in the market buy put leap options 15% out of the money (they should be cheap during the first half of the year)
  • Increase emerging market exposure, Brazil, Argentina and Australia  
  • Remember to always hedge, even I am wrong now and then!
Final note:
I know this is a dreadful forecast. It is, however, based on sound economic principles and one common sense axiom of life- “there is no free lunch”. To think America can borrow trillions of dollars, default and walk away having only paid the price of an extended period of 9.7% unemployment ignores the laws of nature. To think we have paid a penalty commensurate with our folly is to deny the ying and yang of the universe. Sorry.

Thursday, December 16, 2010

Fed Action Leaves Little Doubt

Fed’s Action Leaves Little Doubt
If anyone wondered if the Fed finally had a handle on America’s economic predicament the recent interest rate spike should dispel any lingering vestiges of doubt. The Fed’s much ballyhooed QE2 seems to have backfired. Instead of lower, or steady, interest rates (the stated purpose for QE2) the very opposite has occurred in a humbling blow to the intellectuals at the Federal Reserve.
Fed Chairman Ben Bernanke came on 60 minutes to assure us he could stop inflation “in 15 minutes” using rate hikes. Mr. Bernanke’s ability to keep rates low to help the sputtering economy is now the question riddling the bond markets. Already having taken the Fed Funds rate to zero Mr. Bernanke’s monetary six shooter is out of “traditional bullets”. The latest ammunition, a mammoth purchase of US treasury debt has unexpectedly had the opposite effect. Over the last three weeks, the 10 year US Treasury bond has seen a historic spike in its rate, over 30%.
Remember when bond prices go down, rates go up. In order to bid bond prices higher Mr. Bernanke announced that he would be stepping in to participate in the auctions (or marketplace) to keep bond prices high. There appears to be only one hitch in his giddy up. The Fed has agreed to buy US Treasury debt with longer maturities. When the folks did their arithmetic, and some figuring, they came to the conclusion Mr. Bernanke was just egging the politicians on, and encouraging Congress to borrow more. A mouth watering Federal Reserve has that effect on politicians. 
Mr. Market is not easily fooled. Inflation fears generated by Mr. Bernanke’s actions set off a selling of US debt (remember lower bond price, higher interest rate).
The risk to our economy is that rates will spike and choke off the fragile recovery. The Federal Reserve’s communistic manipulation of the economy further validates that free market capitalism is able to heal our economy that the “central planning” model. How can Americans have confidence in a process that achieves the exact opposite of its desired result? Mr. Bernanke’s contention on 60 minutes that there was no cost involved in expanding the Federal Reserve’s balance sheet is a troubling insight into how Fed governors view the limit of their abilities.
The Fed is fast losing credibility and thus its grasp of monetary policy. 
The Fed is right about one thing. If interest rates go up now it will be like stepping on the throat of a barely breathing economy on life support; not some overheated recovery. 

Wednesday, December 8, 2010

New Tax Law Promises Each American BOHICA

New Tax Law Promises Each American BOHICA
BOHICA (pronounced bo’ hic a’) is a medical term most often used by comedic proctologist. The acronym stands for Bend Over Here It Comes Again. The agreement by Republicans and President Obama on legislation designed to avert the catastrophic expiration of the “Bush tax cuts” is the latest in a long line of government probes. 
Regardless of your stance on Mr. Obama’s agenda, one must be in awe of his ability to borrow and spend money. Given the results of last month’s election, the chances of another stimulus package passing through a Republican controlled House is as strong as a fresh vapor on a hog farm. Yet, with this new law, that’s exactly what he gets; a $390 billion stimulus package!
By increasing spending and expanding the deficit in the face of last month’s election, the Congress and the President have spit in the face of the American electorate. Republicans nor Democrats get it. Do we really need any further proof our government doesn’t work? Balancing the “give with the take” is entirely subjugated to reelection efforts. The concept is nonexistent in the Washington lexicon.
On probably the most critical piece of legislation having to do with job creation since the onset of the Great Recession our political leaders kicked the can down the road again. Two years from now (probably during another lame duck session of Congress following the presidential election) our esteemed friends will present us another tax law with equal or even less deliberation. It’s the quality of work our politicians have found acceptable to Americans.
In return for his agreement to not raise taxes on the highest income earners (small business owners who are going to create jobs, if any get created), Mr. Obama negotiated a 30% reduction (FICA tax cut from 6.2% to 4.2%, the media is reporting a 2% reduction!) in the amount workers must pay in Social Security tax and a 13 month extension of unemployment benefits.
A quick look at the legislation reveals three disheartening aspects of the law. 
First, and foremost, not a single hard decision was made. Our govern refuses to govern.  The report received from the “debt commission,” with legitimate ways to curb the deficit, is a macabre joke in the hands of these perpetual campaigners.
Incredibly, these boneheads on both sides of the isle, who ballyhooed endlessly about their commitment to fix Social Security, have decided to cut funding going in to the program. Social Security is on a collision course with mathematics and this legislation ignores the reality of addition and subtraction. 
The extension of the unemployment benefits will cost about $120 billion. Was there any consideration given to the idea of reducing spending to pay for this? Don’t be ridiculous!
Twenty three days is not long enough for such a debate! Unfortunately, twenty three years would not be long enough for this debate. 
What are the immediate ramifications of this new law? First I would say that a double dip recession is now almost completely off the table and I can assure you that a double dip recession was America’s best case senerio. The stock market will probably do well over the next two years (sell your bonds now!). Unemployment will stay about the same.  Ben Bernanke’s commitment to QE 3, 4, 5, 6 ……. assures that stock market prices will remain steady or slightly improved. The economy may also improve marginally over the next two years, enough to get Mr. Obama reelected. But there is no free lunch.
The inescapable truth is that America is headed for a day of reckoning which is beyond anything in our nation’s history. Americans do not have a context for measuring the woe that will eventually befall this nation. And it is coming, make no mistake about it. This “balancing of accounts” will surprise Washington and Wall Street because our policymakers are not trained to think like this. Alan Greenspan, David Walker, David Rosenberg, Mohammed El Arian, Nessim Taleb, and Nouriel Roubini do know how to think in this context. Don’t take my word for it, read what they are saying.
My speculation above that we have put off, for at least two years, this day of reckoning is predicated on no monumental unforeseen strain being forced on the economy. A large natural disaster, an attack on the homeland, gasoline at $5 per gallon, or a cascading collapse of European banks and/or sovereign debt issuers changes everything. Of course, lurking out in the future is the unimaginable event. They are the most likely to occur and potentially the most devastating. 
The American economy’s ability to put food on grocery store shelves is dependent on the US government being able to sell US Treasury debt at auction and have the Federal Reserve Bank buy what other countries or investors don’t want. How long can the Federal Reserve issue checks backed by the very same debt being purchased? No one knows, but everyone agrees not indefinitely. On 60 Minutes Sunday night Mr. Bernanke stated that he felt “100% confident” he could control inflation by raising interest rates. What Mr. Bernanke did not say was that every time interest rates rise the US government debt sitting on the Federal Reserve’s balance sheet loses value. 
What difference does the Federal Reserve’s balance sheet make? Good question. No one knows, but if history has any credibility as a teacher, one day the value of the assets on the Federal Reserve’s balance sheet will be the only thing that matters to America. What day will that be? That, my friends, will be the day of reckoning; the mother of all BOHICAs. 

Monday, December 6, 2010

The $400 million question for Bank of America

The $400 million question for Bank of America
My guess is that when Wikileaks dumps on Bank of America the “ecosystem of corruption” Assange has referred to in his remarks will be revealed by inquiries centered around the old Watergate question asked by former Senator Howard Baker- “What did they know and when did they know it?”
In August of 2008, I was working on a large renewable fuels deal as a financial advisor at Merrill Lynch. My client wanted to set up an escrow account to facilitate the infusion of an equity investment arranged by Jasper Capital in Dubai. The initial deposit my client wanted to make was $400 million dollars. After two weeks of scouring the organization for the person who could set up this mundane, administrative account, complex director Don Plaus had to inform me that Merrill Lynch would be unable to accommodate my client. This development was perplexing beyond words. Stranger still was Mr. Plaus’ steadfast refusal to offer any explanation.
To this day I do not know why Merrill Lynch was unable to accept these funds (management gave me the “go ahead” to call a competitor who promptly set up the account). I can only speculate that the transfer of foreign currency into the account would have created some liquidity demand the firm was unable to meet. Given the events that befell the firm in September of 2008 30 after this private admission to me by Merrill Lynch management, it is safe to conclude that the firm’s financial condition was the sole reason for this inability to accept a large foreign deposit.
The ramifications of the admission that, in early August of 2008, Merrill Lynch’s ability to conduct business had already started to erode considerably, are immense and wide ranging. One can only speculate on the degree of panic that had gripped the management team in these dark hours. But no legitimate historical review of the crisis will be complete until the psychology of these decision makers is examined in context. The facts are no doubt embarrassing to those involved as they plotted and schemed to preserve shareholder value while attempting to managing a crisis of their own making.
Given the circumstances, I am sure the management team felt they had carte blanch to misrepresent facts and shade the truth to prevent the panic from moving down the organizational chart and out on to Wall Street. Any double talk will be attributed to a concern for the markets.This “concern for the markets” was awfully convenient for this group whose personal fortunes were at risk should the information leak out. 
Outside of this claimed altruistic motive, the management team at Merrill Lynch had more undeniable pragmatic concerns. The primary danger, short of a complete financial collapse, was retention of the “Thundering Herd” of financial advisors that represented the core of Merrill’s ability to earn money. If the “Herd” suspect the firm was in serious financial straits, a mad rush out the door would have ensued. There would have been nothing left to sell Bank of America on September 15. My request for a measly escrow account threatened to "out" these guys in a way I am sure was completely out of left field.
The decision makers at Merrill Lynch knew the firm was toast at least by mid August 2008, but probably much earlier. Acknowledgement of this timeline produces a legitimate list of profound questions:
  • Did Merrill Lynch have the right not to disclose these realities to their financial advisors?
  • Did Merrill Lynch have a duty to their clients to warn of an impending crisis?
  • If Merrill Lynch did not have a duty to warn clients, did the clients know they were on their own? (they had no idea)
  • Did regulators know about Merrill’s situation?
  • Did Merrill mislead regulators?
  • If regulators did not know, why?
  • Did Merrill Lynch have a duty to inform regulators?
  • Were Merrill Lynch and the regulators in cahoots to keep their plight from the public (in order to protect the public)?
  • How was Temasek talked into reinvesting in Merrill Lynch at this time? Was full disclosure made?
  • What principles were guiding the decision making processes at a firm in the midst of a crisis that posed a systemic risk to the global economy?
The last question is the most important because these financial institutions still pose a systemic threat to the global economy. I think Assange has been made privy to the same arrogance that colored my experience with this “apparatus.” The attitude of these elitist is beyond comprehension of the average American. On the level playing field of a free enterprise economy such a sense of entitlement does not exist. The systemic necessity of their organization’s success has created in the minds of these Wall Street kingpins an inglorious distortion of the contribution they make to the American standard of living. This distortion is common to those who believe their ends justify their means. Such minds dominate the highest strata in our financial services industry and these grandiose distortions still pull the levers behind Wall Street’s curtain. The eradication of these rascals should have been the silver lining of the crisis but that has not come to pass, yet.
The almost unchallengeable power centered on Wall Street has moved the financial services industry out of the realm of  Friedman Capitalism into the oppression of monopoly. Bank of America does business with 1 out of every 2 households in this country! This benefits no one but Bank of America shareholders and the firm’s highly paid bankers. In exchange for this systemic risk, working class Americans receive zilch. Brake Bank of America up now!
If Bank of America decides to share with the public why Merrill Lynch could not accept the $400 million deposit and refused to offer me an explanation, hell will have frozen over. Their arrogance will never allow them to answer such a question; but it should not stop the media from asking the question and demanding an answer. Where is the fourth estate on this matter? I beg the media to step forward and ride to America’s rescue! Bank of America/Merrill Lynch owes the taxpayer an explanation posthaste! There is no need to wait for a Wikileaks document dump. The time is now!
I will have more on Merrill Lynch’s escapades in future blogs. Stay tuned.  
Hal Blackwell is the author of “Secrets of the Skim.” You can visit him at

Wednesday, December 1, 2010

Wikileaks Spooks Big Banks

Wikileaks Spooks Big Banks
“Too big to fail” banks in America have much to fear from Wikileaks’ promised document dump scheduled for early in 2011. My book “Secrets of the Skim” outlines some of the misfeasance likely to be made public by Wikileaks. The website, run by Jillian Assange, claims to have in their possession documents that will expose abhorrent behavior by executives at one of America’s banking behemoths. Mr. Assange was quoted as saying, "it will give a true and representative insight into how banks behave at the executive level in a way that will stimulate investigations and reforms, I presume." 
Consensus seems to be that the bank in question is Bank of America. This speculation is fueled by comments Assange made about a year ago. The timing of that statement seems to preclude the subject matter being the auto signing of foreclosure documents. Since Mr. Assange has wryly theorized that his disclosures would bring down “one or two banks” my guess is he has some scoop on Merrill Lynch. Assuming Bank of America is involved and only one executive’s hard drive is in Wikileaks’ hands, it is fair to speculate the target only gets plural if Merrill Lynch is boiling again. 
Having had a front row seat at the Merrill Lynch masquerade, I suspect these documents will disclose how the elitist institutional financiers in this country operate in conflict with their client’s interest. It is a secret the industry is desperately trying to keep from the public and the single aspect of their business practices that would demand immediate regulatory action. It is the type document dump that fits Wikileaks’ MO as well. 
These institutions have scattered billions of dollars down Madison Avenue to create an image to engender public trust and to cloak their real agendas. Their image is a bought and paid for house of cards. Bank of America’s cards are particularly shaky right now.
Wall Street spent millions on lobbyist to shape the financial reform legislation to avoid having to adhere to the “fiduciary” standard. If Wikileaks has copies of an executive’s documents communicating, in a transparent way, concerns about the possibility and ramifications of such legislation it would be explosive. These documents would most likely expose why having to act in their client’s best interest is the death nail to the “too big to fail” business model. The industry, Bank of America in particular, is aware of this meteorite heading for their earth. Mr. Assange’s destruction of one or two banks could (should) turn into the destruction of a business model that encompasses Morgan Stanley Smith Barney, Wells Fargo Advisors, Merrill Lynch, Morgan Keegan and UBS. 
The wirehouse wealth management industry is blinded by an innate hubris that bellows behind the closed doors high a top the enclaves on Wall Street. As I describe in “Secrets of the Skim” these guys have a sense of entitlement when it comes to collecting their “skim” off of our nation’s financial dealings that will infuriate American investors. Joking about the lame deals closed to earn high commissions and laughing at their good fortune of earning commissions on “blown up” client accounts is common place among certain bankers (in closely guarded circles).
Assange is, by now, well aware he’s holding a straight flush and is boldly playing up his hand. He’s not bluffing. You can bet banks are scurrying to find out who is in his crosshairs and budgeting funds for damage control. This episode could cost a pretty penny and the careers of a few unfortunates who are caught with their nickers down. The bank will make examples of these rogues and proclaim their ranks free from such rascals. 
The insulated bankers will plan to spread a few billion more down Madison Avenue and in the halls of Congress to regain their footing. They figure an innocuous fee slipped deep into a disclosure form will crank out the needed dollars. Moves like this make bankers laugh the loudest behind their contrite expressions. Why not? It has worked so well in the past. 
I despise Assange and Wikileaks for betraying US national security and betraying America. He should be stopped at all cost; right after he publishes these documents stolen from this “too big to fail” monster bank that threatens our markets and free enterprise system. Assange owes America. It’s time Americans (and the scores of honest bankers) to have the last laugh.

Wednesday, November 24, 2010

Is It Time To Buy Stocks?

When to Buy Stocks
Since October 2008’s dark days, investors have wondered when, or if, they should again invest in the stock market. The years 2009 and 2010 witnessed a massive repudiation of stock funds as investor sought the perceived safety of fixed income (bond) funds. $235 billion moved from stock mutual funds in 2008 and 2009. Seven months into 2010  $34 billion have followed that same path. Retail investors have turned their noses up at the risk associated with stock mutual funds (and with good reason- the majority of stock mutual funds are underperforming their benchmark, meaning investment results from buying an indexed ETF (Exchange Traded Fund) was greater (with much less risk) than paying for an active fund manager).
Institutional buyers and traders with their stock trading computers churning algorithms have brought the market back to levels that are starting to lure retail investors back into the “risk trade” or least provoke thought along those lines. Minuscule returns in the fixed income market are making many investors itchy to get back in the stock market. So how do you know when to make the move? 
Here is a tried and true method for making the decision.  
Rule number one- never try to time the market. If you feel like it is time to buy- that is the best indication it is time to sell and vice versa. When, and if, you decide to get back into the market, deploy a “dollar cost averaging” strategy. For example if you decide to put $100,000 back in the market do so at $10,000 per month. This takes out the emotional aspects of market timing and smooths out any unfortunate market swings. Only ignorant rookies violate rule number one and they end up paying for it.
Rule number two- done try to catch a falling knife. If the market is down and stocks look cheap some people will buy. Retail investors are more likely than not to fall into a what is known as a “value trap.” Judging that a stock is worth a price just because its price was higher just recently, is not a good way to value stocks. Let the professionals do that. Trying to pick a bottom in the stock market is a fool’s game. Wait on prices to show a steady increase. The risk associated with buying stocks in a rising market is exponentially less than picking winners amongst a bunch of losers.
Deciding to get back into equities means answering the fundamental question of whether or not an increase in the market’s value is foundational or just traders moving money around. A good rule of thumb is that the market reflects foundational value when the S&P 500 (forget about the Dow Jones Industrial Average) shows gains with three characteristics. First the volume is high on days when the market is up, secondly the rally is led by the financial sector and third the move is confirmed by an increase in the transportation sector shortly after the first two criteria have occurred.
Information to make these determinations is straight forward and available to anyone who can sign on the internet. Comparative volume figures in chart form can be found at Market Data. Just type “volume” in the sites search prompt. 
To judge whether or not a rally (increase in S&P index) is being led by the financial sector go to Yahoo Finance. At the symbol prompt, enter XLF which is the symbol for the financial sector ETF. With a little effort one can use the new interactive charts on Yahoo to overlay the S&P index chart on the XLF chart. If the market is on a sustained uptrend and the XLF line is above the S&P line, its time to pay attention to what’s going on and start looking for conformation from criterion number three. 
If the volume is high and the rally is being led by the financials it’s time to check the transports. The ETF for the Dow Jones transportation sector is IYT. Just go to Yahoo Finance and put “IYT” in the symbol prompt and the chart will come up just like a stock symbol.
If the market has a stable foundation on an upswing the financial sector will be leading the way (the XLF will have a greater gain in value than any other sector) with high volume. The confirming metric will be a slight uptick in the transportation sector.
This is a logical progression. Banks make good loans and start making money first. The markets recognize this and begin to buy broadly across the economy. Once the money loaned is put to use, the transportation sector revenue finally begins to increase. Sequence is important because a firm foundation is built in the stages I have described.
Right now NYSE market volume is low, everything is going up except the financials and the transports are flat. In other words, hold tight.
Market fluctuations in this environment can play havoc on an investors nerves. Low returns in fix income coupled with the losses suffered in 2008, fuel anxiety not to miss the next big move up in equities. Use these tools and they will protect you from your emotions. In this game emotional decisions equal losses.
Happy Thanksgiving to all of you and thank you so much for your support!

Monday, November 22, 2010

Irish Banking Bailout Not a Good Sign

The Irish Banking Bailout 
The Irish banking bailout story on the front page of the WSJ this morning spawned a reflection on how the 2008 financial crisis unfolded. Surveying the damage in December of 2008, Wall Streeters collectively wondered, “how did we miss it?” The collapse of Bear Stearns, the plunging stock prices of US financial institutions and the fiasco at Freddy and Fannie left market watchers mystified as to how blind they had been not to see the sign post. The crisis had been a massive freight train barreling down the tracks, blowing the whistle, and they had missed it. After the fateful weekend in which Lehman Brothers filed for bankruptcy and Merrill Lynch was purchased by Bank of America, the market actually ended higher for the week the following Friday.
If the global economy “double dips” pundits and economist will look back at the episode in Greece as the first overt sign that systemic problems were lingering and much graver than was thought at the time. I can mentally overlay the Greek inability to publicly fund their debt to the break down in auction market securities in early February 2008. In retrospect the destruction of the ARS market should have been a siren alert that the situation was extremely dire and was sure to get out of hand. The Greek situation has all the same markings.
The Irish banking crisis validates the foreshadowing characteristics of the Greek bailout. It offers two concerning aspects that fit a scenario of a developing crisis in which the significance of the Greek debacle is under estimated. 
Last week the Irish policymakers were declaring that no “bail out” was necessary. Something obviously changed their tune. Circumstances were not what the financial leadership perceived or the circumstances changed at light speed. In either case, such sudden direction adjustments indicate Irish financial matters are unstable. 
The other indication that things might not be going as plan across the pond is the use of EU funds to bail the Irish out. When the 175 billion euro fund was created, the IMF and EU officials speculated that by its very existence fears regarding European banks’ liquidity would be quelled, making the actual use of the funds unnecessary. This is obviously not the case in Ireland. 
Those of us who feel we are not out of the woods yet view these conditions with great suspicion. We cling to the notion that until the employment situation improves, residential home prices stabilize, the government stops issuing debt at historical levels and the Federal Reserve stops printing money at historical levels the economy is on very shaky ground at best. 
No thinking person suggest that our global monetary and fiscal policy is sustainable. It’s like a long distance runner sprinting out of the gates to conquer a marathon. The runner and the crowd know he has no chance to complete the race unless he hits a maintainable stride. If he continues to sprint, the question is not if he will collapse short of the finish line, but when. The Irish banking bailout is analogous to our runner feeling a blister starting to form on his heal. A Spain and Portugal banking bailout will indicate a blister is forming on the other heal. Run Forrest, run!
Meanwhile, we have the stock market trading at pre crisis levels and bullishness is rampant. Looks and feels a lot like November of 2007 if you ask me.
Hal Blackwell is the author of “Secrets of the Skim” and foresaw the 2008 financial crisis.  

Saturday, November 20, 2010

GOB Economics

GOB (Good Ole Boy) Economics
I have undertaken to write this blog for the purposes of translating complex economic concepts expressed by eggheaded, intellectual pontificators, and other such offenders, for the benefit of people who actually have a life. The cause is noble since these issues effect American families in profound ways and will only become more important as the financial crisis matures. But I want to take a pause and reverse the flow of information. Hopefully the intellectual pontificators will muster the humility to learn a thing or two from the “folks.” Somehow I doubt it but here’s my attempt.
As the Federal Reserve embarks on QE2 (the second round of printing money on a historically massive scale) the time is right to apply some common sense thinking the eggheads and intellectual pontificators would do well to consider. Sometimes those charts and graphs mix with other academic accruements to garble the obvious. There are a few principles any “good ole boy” (GOB) could share with these “masters of the long words” which are pretty darn profound. 
First, any GOB can tell you that nobody gets something for nothing. Although your average GOB doesn’t understand the actions of the Fed, he could tell Fed chief Bernanke that trying to bail out the US economy painlessly by printing money ain’t gonna work, at least the way you think it is gonna work. If you give something to somebody you’re taking from another. GOBs know there ain’t no free lunch. GOBs wouldn’t be buying into the line that when inflation rears its ugly head a masterful exit strategy will make all this free money disappear painlessly and we will all live happily ever after. GOBs know better than that to their credit, and to the discredit of those making monetary and fiscal policy.
GOBs know there comes a time to “man up” and take the medicine when a screw up happens. Bet on the Cowboys to win the Super Bowl when Tony Romo gets hurt means its time to pay up. GOBs hit up the boss for some overtime or sell the bass boat. Wall Street, our government and the American consumer pushed in all the chips betting on the US the real estate market and lost. A GOB would know its time to “man up.”
Economic theorist and intellectuals refuse to accept these common sense truths. GOBs know that inevitable consequences are less painful faced sooner rather than later. We face a crisis of leadership in America. We have no one out there willing to lead us into the pain we are sure to suffer. Where we as a country need to be is on the other side of this pain; and there ain’t no detours. Americans have a choice: deal with it on our own terms or have our responses dictated by events. 
Unfortunately our country’s decision makers are politically unable to be proactive. Every GOB knows Congress is broken. Every GOB also knows that the worst possible time to be making important decisions is when the heat is on, mistakes are bound to happen. America’s dysfunctional way of conducting its affairs is not sustainable and these hard choices are soon to be forced upon us. Something tells me the GOBs will be more prepared and less surprised than the brainiacs who stare at the situation day after day. GOBs have a life. 
(Note: the word “ain’t” is listed in the GOB dictionary)

Thursday, November 11, 2010

Debt Commission Report

November 11, 2010
Debt Commission Report
The President’s Deficit Panel threw some cards on the table yesterday by releasing a “preliminary report” on how to make our nation’s economic infrastructure sustainable. One had to be encouraged that both the far right and far left hated the commission’s ideas. That’s a good start. The bad news is that President Obama and Congressional Republicans failed to offer any support. Wonder why (tongue in cheek)?
From what I can discern the commission’s recommendations deserve to be taken seriously. There is honest debate to be had on some of the finer points to be sure, but over all a good start was in evidence. The political realities in America however, make a serious, constructive conversation impossible. The only element of the debt crisis more dangerous than the debt crisis itself, is America’s political inability to make hard decisions until they are forced upon us. The commission’s report is a most poignant case in point.
Every politician running in the mid term elections caterwauled that the focus of our government should be “on jobs.” Democrats want to create jobs with more government spending while the Republicans want to provide tax cuts for businesses in hopes they will start hiring with the extra money. Both of these approaches are damaging to the deficit (the much larger issue) and are frankly out of the Constitutional preview of government. But that campaign stump speech doesn’t draw a crowd, at least not a pleasant one.
What we have now is not much different than the apparatus that centrally planned the Soviet economy into ruin. Congressmen are primarily lawyers who refuse to acknowledge their ability to manage the economy is equal to their Constitutional mandate to do so. Congress‘ job is to past laws to protect our freedoms, not manage the economy. Paradoxically, if they would stick to that mandate jobs would be created. But Americans just don’t get that concept. It is not comprehendible by an electorate epitomized by Jay Walkers on Leno’s late night gig.
I am convinced America’s greatness will be compromised because our leaders have strayed so far from this basic concept which was the very thrust of our founding documents the revolutionary movement that spawned them. Ironically, it is the one that made us great in the first place. How did we stray so far from what made us great?  
All I can say to the Debt Commission is good luck. If their proposal is implemented in total America might have a chance. More likely, it’s fate will be a disembowelment by special interest groups, addicted to the power and money emanating from Washington. In the latter case America may not be delivered from the choke hold of the nation’s debt, but it’s most ardent enemies, on the far left and far right, will be outed. 

Monday, November 8, 2010

Citi Bonds v Merrill Lynch Notes

Citi Bonds v Merrill Lynch Notes
I was not so shocked to find the headline “Citi Debt Funds Probed By SEC” on the front page of the Wall Street Journal this morning. The story outlines how Citi Group, through its minions at Smith Barney, was selling proprietary products designed to mimic a bond index. The products were allegedly being sold as having the same risk profile as the index, which was false. 
When the financial system’s liquidity evaporated, the true nature of the instruments was reflected in a 71% loss of value. Turns out these bond replacements had used debt to enhance returns. Citi stepped in to swallowed enough of the loss to only put investors out 61%. The difference might be an indication of how much money was being scrapped off the top by Citi Group when they were sold. That’s just my guess.
When is the SEC going to get around to looking at the Merrill Lynch practices I outline in my book “Secrets of the Skim”? Merrill was doing the same thing with their structured products. Enticing clients to move large cap allocations into proprietary instruments that used debt and derivatives to track an index (the S&P 500 was a favorite), Merrill Lynch misrepresented the risk associated with the investment just like Citi Group. Does the SEC think that Citi was the only player in this game? 
Since the Merrill Lynch products were debt instruments on paper from such illustrious firms as Bear Stearns, Lehman Brothers, and AIG, their risk profiles were drastically different from a basket of large cap stocks. The use of debt to enhance returns also skewed the risk/return curve.
If the SEC is concerned about the bond vipers at Citi they should also be concern about the structured product masters at Merrill Lynch. 

Thursday, November 4, 2010

Stockman is spot on!

Yesterday I saw the single best TV interview ever describing the realities of America’s financial plight. David Stockman’s (Ronald Reagan’s budget director) assertions during his appearance on CNBC with David Faber and Gary Kaminsky (link provided at the bottom of this page) was spot on. Every American should be required to see this interview before being allowed to vote. Granted Mr. Stockman has a book coming out soon, and he is trying to grab a few headlines, but the facts bare out his contentions. 
Mr. Stockman asserts, and I concur, that America is riding a monetary doomsday machine. During the interview Stockman uses a lot of industry lingo so I am going to attempt an interpretation.
As you may, or may not, know, the Federal Reserve announced today a plan to start buying US Treasury debt again to the tune of $900 billion. This is an effort to bring down long term interest rates. Usually the Fed dickers around with interest rates by changing the rate banks are charged to borrow money over night. Lower interest rates spur the economy by making everything cheaper. The Fed used all the bullets in this gun back in December of 2008 when it took the rate to zero in the midst of the financial crisis. 
Now the Fed is force to deploy a different strategy in order to lower long term rates. In the media you hear this plan referred to as “QE2”. “QE” stands for “quantitative easing” which is fancy language for increasing the money supply. QE1 has been tried and obviously didn’t work because we now have QE2. 
The eggheads at the Fed figure buying $500 billion worth of treasury debt is the same as lowering the short term rate by .5%. This is a really big move which will, theoretically, lower long term rates. To take such a drastic step these men behind the curtain must be awfully pessimistic about our country’s economic outlook. Upon closer examination (which they know is beyond most Americans) the move looks downright desperate if one considers the downside risk to this strategy. 
OK, so here is the downside:
A). Rates are at historic lows. Taking them lower will have a very limited effect. Proponents of the strategy admit the positive effect will be minimal but point out that the Fed can’t just sit by while unemployment is so high. They have to do something. This just proves that the Fed is not divorced from politics as it was designed. Making decisions this way just shreds the Fed’s credibility. When you have a fiat currency (not backed by gold or something like it) the central bank’s credibility is critical but this is a minor consideration at the moment.
B). The Fed is playing games with the world’s reserve currency, the US dollar. What I mean is that oil is priced in dollars, gold is priced in dollars and other currencies are measured primarily by their value compared to the US dollar. The Fed, by lowering interest rates, is trying to devalue the US dollar, which just happens to be the world’s reserve currency. 
When the dollar’s value is low the stuff we manufacture in the US is affordable to other countries. A low valued dollar brings tourist from abroad to spend money at US vacation spots. By the same token, if, for example, Brazil’s currency is strong relative to the dollar then we Americans won’t be going to Brazil on vacation or buying stuff they make. Brazilian stuff is expensive when their currency appreciates relative to the dollar.
During discussions about the financial crisis or studying the Great Depression in high school, some of you (who were awake) may have heard the term “beggar thy neighbor.” This refers to the practice of countries devaluing their currency to sell more stuff and grow their domestic economy at the expense of their trading partners. It is a short-sighted, selfish policy. 
Countries (Brazil is a good example) getting squeezed like this really only have one option and that is to have their central bank buy US Treasury debt. By having US Treasury debt on the balance sheet of the central bank, a nation’s currency has a value pegged closer to the US dollar. 
The Fed’s attempts to devalue the dollar is forcing these countries to buy a bunch of our debt they don’t really want. When these countries are forced to buy US debt, the price of the bond is bid up, the US dollar gains value and things balance out, theoretically. Unfortunately, the US government is borrowing, then spending money at such a rate that it doesn’t balance out. This, my friends, is a problem.
This discombobulated bond market also means that the interest rates on US treasury debt are contrived and artificial. These dynamics are allowing Congress to borrow trillions of dollars practically for free (really low interest rate). The lowest interest rates (the cheapest money) are on debt that comes due within 0 to 7 years. Americans are loading up on debt we must pay back pretty soon (smart business people are stretching out their debt to take advantage of these historically low rates). 
This practice reminds me of Wiley Coyote lighting the fuse on a stack of dynamite. It is definitely, no question, certainly, positively, going to blow up in our face. No one thinks borrowing in this fashion is sustainable. Our government is borrowing $100 billion per month but our economy is only growing by $50 billion per month. This is why Mr. Stockman is freaking out. This is why I’m freaking out.
Brazil is so angry about the deal, they boycotted the G 20 meetings in South Korea to protest the “currency war being waged against them.” Other countries are also taking steps to limit their exposure to the US deficit. Our global neighbors thought they were loaning money to Bill Gates but it was Fred Sanford in disguise. They don’t want to be forced to loan Fred any more money in order to protect domestic exporters and, by extension, their economies.
The blow up is going to come when (not if) interest rates rise. Since we have no idea what a true, market interest rate is, getting your arms around the problem is difficult at best. If interest rates were to increase by 5% (which is by no means out of the question) it is probable that the US government could not make the interest payment on the national debt with the amount of taxes being collected. In other words, the US would be flat broke. America would be unable to make payments on all this debt we are forcing down the world’s throat nor able to borrow any more. Defaulting on our debt will grind the global financial system a halt. Our global popularity is going to be right up there with the Black Plague. All those aircraft carriers we bought might come in handy.
C.) Problem B is the doomsday Mr. Stockman is rightfully concern about. But should the world survive the dollar being the “reserve” currency, the US might not. When interest rates increase, the value of bonds decreases. Since our central bank is loading up on bonds at very low interest rates, an increase in rates will destroy the Federal Reserve’s balance sheet. So what does this mean? The truth is no one knows, but it can’t be good. In all likelihood hyperinflation would make our currency worthless. This happened in Germany during the 1920’s. We all know what followed that escapade.
Mr. Stockman was asked in the interview by Mr. Kaminsky if there was a point at which our national debt would be just so large that we would be past the point of “no return.” Stockman, in a candid moment, said he thought we were already there. Later he back peddled as best he could but his true assessment slipped out. He tried to say that if Congress raised taxes and aggressively cut spending there might be a ray of hope. The chances of the Republicans raising taxes is just about as likely as the Democrats cutting spending. I have zero faith that Congress can act in any manner not motivated by the 2012 presidential campaign. We are up a smelly creek with no paddle.
What Mr. Stockman articulated is what I have been concerned about now for two years. I just needed to hear it from someone other than David Rosenberg. The Fed’s attempt to devalue the US dollar so aggressively is going to end badly, very badly. 
I will be blogging more on the implications of our monetary policy and provide a list of signals that the unraveling has started. Stay tuned.