UNCOMMON COMMON SENSE
For People Who Think
Just because you do not take an interest in politics doesn't mean
politics won't take an interest in you! -- Pericles (430 B.C.)
Aubie Baltin CFA, CTA, CFP, PhD.THE AMERICAN FINANCIAL CRISIS
February 3, 2009
Before you can ever solve a problem, you must first define what that problem is.
and you must then differentiate between cause and effect in order to fret out the Real Problem. We must not get caught up in chasing effects and consequences or the REAL UNDERLYING PROBLEM: The massive overhang of unsold home or the real problems can never be discerned or solved. All the rest of the so called problems are merely effects and consequences of five years of overbuilding; the direct result of the massive speculation generated by 1%, No Money down, Liar loans. Only after the problem is defined can we go back to fundamental economic principles that can then easily solve the problem since all the effects soon disappear once the problem is solved.
If you have an over supply of anything, what does any reasonable businessman do? Why Lower the Prices of course. We have all witnessed this from almost every retailer this past Xmas season (from Walmart to Macy's and GM to Mercedes and Ferrari). This is the First Law of Economics: The LAW OF SUPPLY AND DEMAND. Not only is it that simple, but we have actually seen it at work in solving the S&L crisis. Granted this crisis is much bigger. Nevertheless, the Laws of Economics do not change because of size or for any other reason; if it did, then it would not be a law.
So what are we doing? Exactly the opposite of what should be done. We have already spent $700 Billion in TARP funds and now we are about to spend another $800 billion all in an effort to prop up real estate prices. It didn't work for FDR and it won't work for OBAMA, who like FDR, will turn what should be a 2 or 3 year Recession at worst into a 16 - 20 year DEPRESSION.
THE SOLUTION IS: A NEW RESOLUTION TRUST CORP (RTC)
We need to set up a new RTC and maybe we could even get Bill Seidman if not to run it to at least act as an advisor. The objective is to buy any and all toxic assets that the banks want to sell and get them off their books at 30 cents on the dollar. Not only would that strengthen their balance sheets, but it would also put a floor to the price of all of those toxic assets, that at the moment have no bids. That would then both enable and encourage the Banks .to keep and at that price would be encouraged to work out their problems on their own. In turn, it would also open up an active trading market for these assets, since it would now give private capital a downside risk that could be measured; bring private capital into the picture
Another step that could and should be taken is for the time being at least, eliminate the necessity for providing audited financial statements when raising money from the public. (How can you provide audited statements when a good portion of assets cannot be priced?) This would allow the banks to do a rights offering to their existing shareholders in order to raise new capital without destroying the existing shareholders by completely diluting shares. Remember, most of the shareholders are not the fat cats that most think they are. In reality, the great majority are Americans who are invested in Pension Funds, IRA's and 401K's and that includes all union and government pension funds. These are the real owners of America's companies.
SOUNDS SIMPLE: WELL IT IS, AS IS EVERY GOOD SOLUTION
SUPPORTING housing prices by breaking contracts, reducing interest rates and reducing the size of the mortgage will not eliminate the problem. In fact, it will actually make the problem worse by making the overhang of homes last longer. The big danger is that it will drive the country into Depression. Everyone is only worried about borrowers, but what about the lenders? Remember that the lenders are not really the banks, they are just the conduits, the facilitators. The real lenders are the country's SAVERS: The owners of the IRA's and 401K's, Pension Funds and Insurance Companies. There are always at least 2 sides to every equation, that is why it's called an equation. I have never heard one word of concern about the Savers and Lenders. What about the 70-year-old construction or factory worker who saved his whole life for his retirement and managed to accumulate $500,000. Where is he now supposed to invest his hard earned money? In 2% or 3% Treasuries and CD's when he used to be able to get 6% to 10%? Is he now forced to speculate in the stock market that he knows nothing about? NO Country can prosper without Savings. We should not jeopardize the entire country to save a few homeowners who bought homes that they could not afford in the first place in their attempt to speculate and get in on what they thought was a sure thing.
Only profitable and growing companies can create jobs and pay ever-increasing decent salaries. Attacking America's most innovative, fastest growing and most profitable companies and then complain about "outsourcing" has to be the height of folly.
Functionally economically Illiterate people, like our politicians and journalists, have absolutely NO idea from where wealth comes, how it is generated and accumulated, nor do they know how it was accumulated by our parents and grandparents in the first place. Many have never understood that in order to thrive, one must "produce more than one consumes," accumulate savings and let it grow at compound interest rates. Real investment can only come from our real savings or borrowed from some other country's real savings. Net new investment is what leads to increasing job creation, rising middle classes, rising incomes and improved living standards. Creating money out of thin air only produces Inflation and/or Stagflation. These truths and virtues are NEVER mentioned in today's schools, not even in courses on Economics and Finance.
"A dollar down and a dollar a week, you can have anything you seek."
For the last 35 years, people (acting like children), have been taught that they can have anything they want "Now" by borrowing and unwittingly becoming debt slaves of the banking community as the true PRICE (after compounding interest, fees and penalties) of the purchase is NEVER clearly explained or understood. They believe wealth is represented by the things they have but don't really own and solutions to all of their problems come from government, rather than from their own efforts. The Bible teaches, "Never Invest in Material Things: They are not lasting." We are about to learn what that all means.
People are being taught that they can rely on a Nanny Government for health care, child care, food, welfare and now JOBS. They do not realize that government is invested in making them dependent children rather than independent adults. As dependents, the power over their lives is transferred to their government masters and their "crony capitalist" partners. To be truly independent, the power must rest with each individual.
"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else.
When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."
Increasingly Bigger Government is signaling the fall of the America we have known and loved. By creating persons who are SOMETHING FOR NOTHING citizens, and once Obama's tax cuts for those who don't pay taxes are implemented, the economic Illiterates will constitute 60% of the US population. That is an enormous percentage of the population that will be completely illiterate when it comes to economics and therefore incapable of making good decisions. These people are the CAPTIVE victims of the government and banking systems and have been and continue to be the sheep to be fleeced by the elites and public servants.
THE STIMULUS PACKAGE
Point of fact: If the public actually ran out and spent all the dollars and used some of that "FREE" money as down payments for larger purchases, which is supposedly the solution to the country's economic problem, when taken to its logical conclusion - it would precipitate hyperinflation, greatly exacerbate the situation and trigger the downfall of our currency. That is why Gold has now surpassed the S&P 500 and it won't be all that much longer before it surpasses the DJII as well.
Most people WRONGLY believe that inflation is equities-friendly: Anything larger than 1% or 2% per year inflation rate is sure death for most equities. In reality, what has happened to the stock market, over the last 10 years, is that it has tanked in both nominal and real terms. If a firm is insolvent, no amount of inflation changes that fact. Productivity is measured by one's income, not by paying for things with inflation. Inflation creates more systemic problems and nurtures the very inefficiency which engenders insolvency. Inflation further impairs the fundamentals of the economy. Thus, even if the Fed can keep the stock market from falling in nominal terms, it is going to tank in real terms. Simply printing money does not produce ANYTHING except pain and misery. Yes, you can wipe out the debts of the indebted through hyperinflation, but you then end up destroying all savings and savers in the process.
What is to be consumed must first be produced
HONESTY AND INTEGRETY - not just sometimes, but at all times. There is no such thing as being a little bit pregnant. Timothy Geithner's first major fumble, even before becoming Treasury Secretary and apart from fudging on his taxes and the immigration laws and more importantly, being partially responsible for today's financial crisis, highlights his complete lack of judgment (a leopard never changes his spots) when he publicly accused our number one creditor (China) of tampering with their currency. This was just downright dumb and highlights his complete lack of political acumen. This is especially foolish when the country you're making accusations from is the biggest manipulator of currencies, commodities, derivatives and precious metals in the history of mankind. Let's not forget that major Treasury auctions are coming up on an increasingly frequent and regular basis, so don't be surprised if China decides to vent its displeasure by, if not outright boycotting the next auction, at least cutting back on its purchases. If China doesn't buy, there are many other sovereign purchasers who are going to pass as well. Nobody wants to be the last one out the door. If that happens, it will be the catalyzing event that sends Gold to $2500 before the summer and the U.S. Dollar index to below 60. NEED I SAY BUY GOLD? If the U.S. Treasury auctions begin to fail, not only will the U.S. be incapable of kiting checks to itself - it will trigger a global flight to safety in Gold and Silver, while initiating a stampede for the exits out of U.S. dollar-denominated assets. Foremost among those will be Treasuries and Agency Debt. Are you all not now very pleased that we started shorting the long Treasuries last month, by buying TBT and or its calls? (Bought TBT at $43 and/or the June 45 calls @ $3.00.)
Our only consolation (temporary salvation) is that there is a Mexican standoff going on: If they don't buy or, what's worse, start to sell our Treasuries, what happens to their existing $ trillion holdings? And what happens to their exports? The world's big holders of U.S. T-bills are nervously waiting to see who will pull the sell trigger first. The entire worth of the United States dollar is predicated on "Confidence" and it, like Humpty Dumpty, is teetering on the edge. If panic set in, the dollar will fall and all the king's horses and all the king's men
!. This will be the event that plunges the United States into the deepest depression in its history, and will essentially be the catalyzing event that dethrones America from its position of prominence. Do I hear the rumblings of WW III?
Is America too delusional to take its medicine?
Until America starts listening to other than just the same old insider Pollyannas, it will hardly be aware of its problems. So far, there has been no self-examination and no soul searching. Our politicians are looking to place blame and find a few scapegoats in order to keep the focus off the real culprits, themselves. Therefore, there has yet to be any sober identification of the fundamental flaws that have crept into the American character since the Declaration of Independence. Foremost among them is a foolish and all-pervasive American pride that precludes the first step that must be taken in the recovery of any junkie or alcoholic whose behavior has become self destructive to themselves as well as to those around them. That is an unqualified admission and acknowledgement of his/her own destructive behavior: Living on a mountain of debt and borrowing from Peter to Pay Paul the absolute minimum payment.
OBAMA IS THE KEY
Obama acknowledged his absence of economic comprehension, which he reinforced by his appointment of the same foxes who busted up the chicken house in the first place. Their solution is to Print More Money! We can solve all the problems by printing more money! The pathetic thing about the manner in which the American government feigns genuine concern over its impending financial implosion, is that all these stuffed suits strutting around like arrogant roosters don't realize that time has finally run out. They will still be around when the ever increasing Social Security/Medicare burden of the retiring Baby Boomers kicks in, not to mention the increased health care costs for the uninsured and the illegals. The U.S. deficit will soar to as much as 100% of GDP by 2012. The only solution is a rapid about-face RETURN to Free Market Capitalism that formed the basic principles of our ORIGINAL Constitution and was the basis of the AMERICAN Economic Miracle in the first place.
The worst outcome will be either our financial enslavement to China or worse, our complete subjugation to a one-world Fascist (Socialist) Government in Le Hague with the complete loss of our values and principles that we have espoused since the American revolution. These values have now become ever so hollow and faint as the country loses not only its conviction as to the Sanctity and Righteousness of Individual Freedom, but also its ability to defend them abroad, and ultimately, to defend and practice them at home.
JOBS JOBS JOBS
SOLUTIONS: NOT JUST CRICICISMS
Any fool can criticize, so I will offer alternative solutions instead. From time to time, we hear from an occasional analyst, economist and even the odd politician, that what is required is a return to Free Market Capitalist principles. Well, that's all well and good and something that I obviously agree with, but we never seem to get any concrete examples. OK then, I'll give you some:
FREE MARKET CAPITALIST SOLUTIONS
#1 Oil: I hope you all have not forgotten the helpless feeling of being held hostage by the Oil producing states as Oil hit $145 bbl, since we are now enjoying the pleasant effects of falling oil and gas prices brought to you by the Laws of Supply and Demand (just as I explained would happen when I recommend selling oil short at $140). Do you realize that the USA has potentially the world's largest Oil, Natural Gas and Coal reserves in the world, yet we are being held back from developing them by a small minority of the population made up of environmentalists, their lawyers, friendly judges and their bought-and-paid-for politicians. If Obama is the slightest bit interested in his legacy, he has no more than 6 months to either make or break it. It is time that he use his massive political capital that he has masterfully built up (while he still has it) with his Democrat-controlled Congress and unqualified support of all Republicans to push through a comprehensive energy Bill that includes a massive drilling program that no government before this one could possibly have accomplished. He surely would also have the support of the great majority of the People.
More importantly, there is NOW the availability of drilling rigs that Bush could never have had since previously, they were booked up drilling all over the world except right here at home. Drilling both on shore and off would create an almost immediate 350,000 jobs that would not cost the government one cent. As a matter of fact, the government would collect $ billions from the sale of oil leases and $ trillions more starting in about 5 years as all our new-found oil begins to come to market. (They could then easily borrow against that assured future source of revenue.) Can you just imagine what would happen as first 1, then 2 then 5 million barrels come to market from our new domestic wells? First the price of oil drops drastically, then our balance of payments deficits come tumbling down along with the concomitant strengthening of the US dollar and last but not least, to the economies of the sponsors of terrorism come crashing down (Russia, Iran Venezuela the Arab States etc.). I almost forgot, "Say good-bye to our deficits both trade and budget."
The Initial surge of employment would shortly be followed by further job increases in all the supporting industries such as construction, steel and pipe producers, etc. and all the other services such as trucking, machinery and truck manufacturing
. I think you get the picture. All that would not cost the Treasury anything, it will actually fill its coffers with revenue from income and corporate profit taxes even after the tax incentives (cuts) the government must give in order to encourage a most rapid beginning, such as:
- Permanent Corporate Income Tax Cut to 20% (remember that 20% of something is a lot more than 35% of nothing).
- A 100% write-off on all new investment for the next 5 years starting in 2010. This would very quickly spur new capital investment by all companies in all industries, not just oil related industry.
- TORT REFORM: Use the full force and power of the Obama Government, like no Government before could have ever done, to begin tort reform and push through projects over the objections and stalling tactics of the environmentalists.
- And most importantly, a new, friendly and positive attitude toward business.
#2 Nuclear: The exact same things as #1 above applies to nuclear power plants and their construction. These too must be helped by the government to speed up the regulatory process and overcome the environmentalist road blocks by initially building on closed military bases that will revitalize their devastated communities in the process and have a significant impact on the most job devastated of all industries, construction.
#3 The Reduction in Corporate Income Taxes, in conjunction with the limited 5-year 100% write-offs of investment, would go a long way to encourage all companies both domestic and foreign to restart and/or start their modernization and investment plans and programs ASAP. What do you think that would do to job outsourcing?
#4 Infrastructure: Right now the government is not only broke, it is in debt up to its eyeballs. At this moment in time, we cannot afford to pay the standard 5 to 10 times the going rate for construction that all federal government contracts entail: Nor can we afford the time delays that are also a part of all government projects, even if we had both the time and money.
TOLL ROADS AND BRIDGES: FREE MARKET SOLUTION
We can best rebuild our major roads and bridges very quickly by the government selling off the rights to build toll roads and toll bridges to the private sector. It would not cost the government any money and actually, they would collect quite a few $ billions. The best part of it all is that it could be started relatively quickly all over the country because not all the projects would be federal. Each state and municipality could give out their own contracts while still maintaining control over the pricing of the tolls. In so doing, they would also be absolved of the obligation and expense of maintaining the roads and bridges. A little COMMON SENSE goes a long way.
There is more, a lot more, but these are the simplest and most easily explained and implemented solutions. The biggest negative that I can see is that there would not be a need for any new, big government bureaucracies to be created and the politicians and unions won't like that. But then again, is the economy in dire enough straights that the politicians will do what is right for the country and put their own personal agendas on the side for once?
HOW NOW DOW?
If there is one thing we can all agree on about Obama, it is that he is a very dynamic and captivating speaker. For the last couple of weeks he has been engaged in negative politicking, talking down the economy and in turn the stock market in his attempt to gain support for his Stimulus Package. And every time the market tried to rally; between his speeches and all the negativity surrounding his choices for staff and Pelosi and Reid's Pork Bill, the market would sell off instead. The good news was that the Market did not crash even though it had every reason and opportunity to. Fortunately the Public's attention span is extremely short; so that once the Bill is passed and all the appointments are behind us Obama can then get back to doing what he does best: instilling the public with enough hope and optimism to generate a 1,500 to 3,000 point rally.
DO YOU HAVE THE COURAGE TO STAND ALONE?
Are you all not now very pleased that we started shorting the long Treasuries last month, by buying TBT and/or its calls? (bought TBT at $ 43 and or the June 45 calls @ $3.00) If you have not already taken this position you can do so on any short term strength in Treasury's due to FED manipulation.
For the prudent conservative long-term Investor the best thing to do at this time is to stay in cash and continue to sell into the expected coming rally. For those of you who are looking for prudent speculations, I think its time to take the Bull By the Horns and try and go for a ride.
Buy 10 different positions use a 10% stop loss on each position so that you don't lose more than 1% of your capital you plan to speculate with on any one position and should you get stopped out on all 10 positions you would have only lost 10% of your capital. Another Choice is to buy options similar to the ones we bought last time for our Strangles and/or buy some more Straddles.
ON FRIDAY I bought: QLD, QLABA @$1.50: SSO, SOJBV @ $0.80
IBM, IBMBS @ $1.15 FAZ, FAZBJ @ $3.50 and BGZ, BGZBN @ $ 2.25
I also bought the February call on China; FXIBH @ $ 0.75
For myself, after having been stopped out of all my strangles (earning a small profit primarily because of IBM), I have reinstituted my long call options on the same indexes and stock. Today (Friday the 13, Birth Day) I purchased
Feb Calls, with the intention of rolling them over to March should the market begin to rally before the end of Next Week,
NOTE: Don't forget to Put in 20% stop loss orders as soon as you get filled and continue to maintain a 20 % stop as the market. USE end of Day Prices.
For your information I entered CNBC's $1,000,000 Trading Contest and while I did not win I ended up in the top 2% with a 58% return. The reason that I am mentioning the results is because I put 15% in each of 7 gold and silver positions and just held them I did not use the $100,000 that had to be allocated to currency trading only as I had no time for such nonsense. So in reality my return was in effect 65% ($588,000 on $900,000) By the way the rules did not permit me to buy any of the juniors like NXG, that tripled in price. You should have done just as well.
Well I don't really know what I can say that you don't already know, now that all the negative or worried Gold analysts have now all turned completely bullish with projections $1200 to $2500 flying around, except to reiterate my admonitions of the past:
- Do not try and trade by selling your core positions.
- Sell out-of-the-Money Calls while at the same time
- Sell out-of-the-Money puts as a way of either making money and or accumulating new positions at below today's prices;
- Don't chase new positions; instead use # 3 or buy into weakness.
The optimism is so high today that I am expecting a short-term pull-back, consolidation. But maybe not since the fundamentals for rising Gold and Silver prices have never been as strong.
As far as the $50 calls that were sold against AEM you should be able to buy them back and sell the May $55 Calls for roughly the same money or at most $1 less; As to the ABX, buy back the Feb 35 calls that you sold for $5.50 and sell the April $35 calls for a $0.25 credit.
Doing this is called rolling forward. But whatever you do, don't let your stock be called away. If for some reason it is, buy it back and sell the next month's calls. We still have a good long way to go before this Bull Market is over.
The Gold and Silver stocks are lagging behind Bullion because of the tremendous Fear of all currencies. But the Stocks will catch up and then outperform their Bullion. If you recall I often mention that there is nothing more powerful than a BULL MARKET powered by both Greed and FEAR: So far we are witnessing only the Greed Factor resulting in a flight from paper assets and a rush into Bullion. BUT rest assured: Before this market is over GREED will manifest itself as the Gold and Silver Stocks explode. Perhaps in conjunction with a break-out for Gold past $1035 in conjunction with a strong world wide Stock Market Rally.
GOOD LUCK AND GOD BLESS
To all my long-term subscribers: As you to examine your portfolios and if like most of my subscribers, you have shown a very nice profit for 2008 (unlike the 30% to 70% loses that the majority of investors have sustained in their 401K's pension, mutual, and hedge funds) do yourself a favor by extending your subscription today and then give a copy of UNCOMMON COMMON SENSE to your friends. This year will be as much if not more trying and challenging than 2008 was. You will need the benefit of a little foresight, along with a helping hand, to make sure we all stay solvent and prosper during the coming trials and tribulations...
I have spent my career trying to identifying major trends in the markets - and helping others to profit from them. By identifying the trends that will be happening tomorrow; trends that most analysts and investors notice only after they have already been well established and the majority of the easy have been made, we are presented with superior profit opportunities. In my newsletter, "UNCOMMON COMMON SENSE", I have often uncovered changes to the major trends before they even begin and then presents a goldmine of specific, actionable information that will help you profit even during the worst of times. Make me work for you, by subscribing to UNCOMMON COMMON SENSE at the still low, discounted Holiday Rate.
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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.
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