2 April 2010
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Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
Another week of the DJIA moving up on a straight line to who-knows-where? Maybe asking why it's moving up is a better question.
The Daily Chart looks strange too. Each day, the DJIA trading range can be found crossing my Dashed Line.
DJIA at 11,000 by Wk 130? My Proprietary Technical-Analysis' Model indicates it will.
Below are the DJIA Volatility's 5-Day M/A & BEV Chart
Volatility is nowhere to be found in this market. Someday that will change, but don't hold your breadth waiting. Dark forces roam the moors.
The only interesting thing happening in the Stock Market this week is my Step Sum. Well after all, it was a shorten week with Passover and Easter. But every week it's the same routine: 4 of 5 or this week, 3 of 4 trading days seeing the DJIA advance with only slight effect upon the its valuation.
This isn't going to last forever. There will come a week when the DJIA will see 4 of 5 trading days closing down. When such a week comes our way, what will the DJIA do? If Mr Bear sweeps away weeks or even months of the Bulls advance in the DJIA with only a few down days, I would interpret that market action as the "Policy Makers" manipulation of the Stock Market coming undone. But it's an election year, and we all know what that means.
Maybe the biggest problem Mr Bear has going against him is that with all the market manipulation by the Federal Reserve and US Treasury, the US Government now owns, and is currently holding a significant percentage of the shares Listed on the NYSE and NASDAQ. Can they legally own shares, and stash them away in secret Wall-Street Accounts? I don't know. If this is illegal, do you think that would stop them from reducing the supply of the market's public float by buying and holding shares off the market anyways?
Impossible you say? Not to my way of understanding how the markets work. If the "Policy Makers" want "Stability" in the Stock Market, they must support it by purchasing shares at above Free Market Prices from the weak hands who are dumping them. And since September 2008, a lot of shares have been dumped into the market at prices lower than the "Policy Makers" approve of. Maybe you and I aren't the only ones waiting for volume to return with the upside. Maybe the "Policy Makers" have some inventory they also want to dump into the market.
I've frequently commented on the reversal in the relationship between Stock Valuations and Stock Volume. During Bull Markets, Volume Rises up as people run towards Wall Street. During Bear Markets, Volume collapses as People flee from Wall Street. But starting in 2000, this pattern reversed itself. There has to be a reason for this violation of market behavior that has existed from 1900 to 2000: one hundred years!
It might be that the "Policy Makers" have been "Stabilizing" the Markets so frequently in the past few years, that in secret accounts located in the Big NY Financial Houses, the "Policy Makers" hold 10% to 50% of the total float of the Listed Companies in the NYSE and NASDAQ. Mind you - I'm not saying this is a fact. But this hypothesis would explain why the DJIA's Valuation and Volume has been acting so strangely for the past few years.
It's just a hypothesis. Maybe someone with more knowledge than I of the workings of the Stock Market, may want to take up.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
The Fed is Monetizing the US Debt
I was watching CNBC, but listening to the radio, as Doctor Bernanke was giving testimony before Congress last week. I didn't miss anything. CNBC was running text summaries of key points in Doctor Bernanke testimony, one was the Fed is not Monetizing the National Debt. This is an incredible statement; it's an outright lie.
The numbers published in Barron's, show that from November 2008 to March 2009, the Fed's take of the US National Debt increased from 4% to 16% of the total float. The Fed's Balance Sheet has now increased to where the Fed ignited the double digit inflation in the late 1970s and early 1980s. The problem isn't that the Fed owns 16% of the US National Debt; it's the purchasing of an additional 12% of the total float in the US Treasury Market, since October 2008, with Monetary Inflation.
We should not underestimate the impact the Federal Reserve has on Market Valuations and our society in general. If the Fed hadn't purchased 12% of the Treasury Bond Market in the past 18 months, would current yields on the Long T-Bond now be under 5%? I suspect they would be closer to 10% than to 5%! And if the current yield on the Long T-Bond was closer to 10% than to 5%, would it have been possible for the Congress and President Obama to have passed their "Healthcare Bill?" I don't think so. And if the markets started thinking of interest rates in double digit terms, would the DJIA currently be rising up to 11,000 during an Election Year? Absolutely Not! So think of how hard the Fed is working to keep America happy for the coming November Elections.
I included a Y/Y% plot of CPI, showing the impact of the Fed's Monetization of the National Debt has been in the past. The time lag between "Monetary Policy's" cause, and its effects upon CPI can be years. Except in November 2008, when CPI crashed as the Fed began its most reckless episode of Monetizing Debt since 1950, and possibly in its history.
In 2010, I don't believe in Government statistics. CPI is suspect. And I expect an honest audit of the Federal Reserve, including its Gold Assets, would contradict much of what the Fed has published in its balance sheet since Alan Greenspan became the Fed's Chairman in 1987.
Has the Fed ever had to submit to an independent Audit? I don't think so! If the Fed has nothing to hide, why is this Creature of Congress resisting an independent audit? And our Congress, who wants to know everything about everybody, shows an uncharacteristic determination of * not * knowing anything about the Federal Reserve, except for what Doctor Bernanke is willing to tell it. If Doctor Bernanke said that the Fed is not Monetizing the Debt, that's good enough for Congress and CNBC. After all, if they corrected Bernanke, and told him "yes Doctor you are monetizing the National Debt", the Fed's Portfolio of US Debt would never rise up to 17% of the Treasury Market. Who then would purchase the trillions of dollars in new Treasury Debt Congress needs to finance their spending in the next few years?
Not the Foreign Central Banks. Since September 2008, they have refused to assume more than 25% of the total US Treasury Market. So by default, the Fed has been Monetizing the National Debt for well over a year. And the Fed will continue to purchase Treasury Debt with Monetary Inflation as long as Congress continues to spend dollars by the trillions. This is why Congress created the Federal Reserve in the first place: to fund their debts when no one else will.
After decades of Congressional testimony, where Congress allowed dubious Quacks like Doctors Greenspan and Bernanke to spout nonsense under oath; decades where Congress allowed academics to have their way with the World's Reserve Currency, it seems that no one in Washington or in the New York's media, wants to take responsibility of pushing Humpty Dumpty off his wall with a few well aimed questions. The correct answers are world changing. It's best not draw the public's attention to the coming catastrophe. Everyone in-the-know will let "Greedy Speculators" or some other domestic or foreign devil take the rap for the coming fall. After all, who could have anticipated total economic collapse with Washington supervising America's Financial Markets?
The "Policy Makers" Credo: The Public be Damned!
Over the weekend I finished reading Harry Markopolos' book: "No One Would Listen." Mr Markopolos was the whistleblower on the Bernard Madoff Ponzi Scheme. The SEC successfully ignored Mr Markopolos for 10 years. The link goes to an interview of Mr Markopolos by Eric King, and is well worth listening to in its entirety. But this interview doesn't replace reading his book for specific details in his dealings with the SEC.
I have readers who cringe every time they see "Policy Makers" or official jargon within quotation marks in my reports. To those readers, I say you only have to buy Mr. Markopolos' book to see what your tax money purchases in "Regulating" the "Free Markets." Because so much of what Officials say in effect means the complete opposite, I use quotation marks as a heads up that what they are saying, is not what is being said.
To the many victims of Madoff's crime, the following SEC's Mission Statement must sound very hollow:
"The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
"As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever."
- SEC Mission Statement
I bring this topic up as the now almost forgotten Madoff's Ponzi Scheme was actually only the latest, and so far, greatest failure of Washington's "Regulators" to protect the public. But what about Enron, Worldcom, Tyco, and the High Tech and Housing Bubbles? Altogether we are looking at frauds that have cost investors trillions of dollars, but the most devastating fraud in the list, the US Housing Bubble, technically wasn't even illegal.
The catastrophic mortgage collapse, which is still years from its final resolution, is the end product of Washington's "Affordable Housing Policy." Washington, using inflationary funding from the Fed, demanded banks and mortgage companies sell mortgages to people who could not service them. No bank in their right mind wanted these mortgages for their own assets. So Congress directed Fannie Mae (who like the Federal Reserve, is a Creature of the US Congress), to purchase them. Fannie's mission was to repackaged these "Socially Responsible" assets as AAA US Agency Debt, and market this Financial-Toxic Waste to a trusting world as US Government Certified Assets, safe for Widows and Orphans.
The mortgage fraud was in the trillions of dollars, dwarfing Enron, Worldcom and Tyco combined. But unlike these private sector frauds, no one went to prison participating in Congress's Housing Bubble. How could they? Congress legislated the mortgage debacle into law. In fact, the only bank officers who risked going to jail, were those who refused to make a 30 year mortgage to the chronically unemployed.
From the 30 Sept 1999 issue of the NY Times:
September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
- End NY Time Snippet-
I can make the case that Washington, and its "Regulators", have created a culture of moral hazard. Washington's only real achievement was creating a false sense of security in the public's mind, that fraud was a non-factor when they invested in America's Financial Markets. But actually, the America Markets have seen plenty of fraud since Washington became the new Sheriff on Wall Street.
Where does Washington find so many incompetent and stupid people to fill key positions in Government too craft, implement and regulate "Policy?" From American Colleges School's of Social and Political Sciences - where else?
Had Nikita Khrushchev managed American "Economic Policy" for the past two decades, would things currently be any worse? I'm not sure Nikita would have done a worse job.
Our schools of "Higher Education", and their cadre of apparatchik, who now staff the Federal Government's Apparatus, bears a heavy responsibility for the decline of the American Middle Class and Small Business.
The Big Picture of this story is illustrated in the Chart below, which was included in my letter to the CFTC in July 2009.
The plots are in units of production, not prices, and they beg the question: if US CinC is up 2389% (as of 2007, in 2010 CinC has risen to 2732% from 1960) why haven't the prices of basic materials followed? The answer: financial derivatives have been used to contain inflationary price pressure in commodities.
In 1960, when one thought of Futures, one thought of agricultural products like Pork Bellies and Bushels of Wheat. Futures were used by food producers, and processors, to hedge drought, crop and livestock disease or unseasonable crop-killing frosts. In 1960, there was no need for Financial Futures (Derivatives) for Interest Rates or Currencies as the US Dollar was still on the Bretton Woods Gold Peg of $35 Paper Dollars for each Ounce of US Treasury Gold held in Reserves. Well, that was the theory anyways. The Table below shows a different story.
Above, we see where by 1960, Washington had printed just under twice as many paper dollars as it had Gold in Fort Knox, and has continued to print more dollars ever since. But unlike now, this inflation of paper dollars was recognized as a problem.
This inflation of paper dollars was against the law. The Bretton Woods Monetary Accords was an international treaty, ratified by the US Senate and Signed into Law by President Truman in 1945. It stipulated the US Treasury would issue only $35 paper dollars for every ounce held in the US Gold Reserves. What the markets did with those dollars, and the prices of goods and services in those dollars was none of Washington's business! But Washington has always been contemptuous of its own laws. Still, in 1960, the evils of US Monetary Inflation have yet to be fully let loose upon the world.
Interest rates were contained, until Washington's Monetary Inflation forced the market to demand an Inflation Premium in the 1960s.
In 1960, currency exchange rates were fixed to one another. So there was no need for Global Business to "Hedge Currency Risks" as those "Risks" did not exist until Washington's Monetary Inflation broke the Bretton Woods Gold Peg in 1971.
Barron's only started publishing Currency Exchange Rates in their 01 September 1975 issue. The large swings in Forex Rates we see above are the result of Monetary Inflation by the US and Canadian Governments. It wasn't just Washington that was glad to get rid of the Gold Peg to Money. All Governments love inflation, and so hate rising Gold prices.
Forex isn't the only market suffering large oscillations in valuations. Commodities in general have suffered from the ravages of Dollar Inflation. Mining is a difficult business, especially when metal prices are so unpredictable.
It takes 10 years of damn hard work to bring a mine online. Many things can go wrong. But before 1971, mining companies at least could make economic feasibility studies assuming stable Interest & Forex Rates, and to a lesser degree, metal prices in their long term models. But shortly after 1971, Miners had to go to Wall Street to "Hedge":
- Interest Rates Swings
- Currency Exchange Rates
- Metal Prices
In 1960, these variables were considerations Mining may have had to deal with. But by 2010, they've become significant "Market Risks" Banks demand Mining companies "Hedge" before allowing them access to the Federal Reserve's "Liquidity Flows." The changes Inflation has made in the business of Mining, Banking and the Economy in general are horrible.
In 1960, a Bank could only make money in Copper Mining if they invested capital into a successful Copper Miner's new project. Before 1971, capital flows directed at mining produced profits for Investors, and the Banks. Investment Banking, decades ago, also provided good paying jobs for Wage Earners, and copper at affordable prices for the market. But in 2010, Banks don't give a damn if a new ore body is ever developed, or if a Wage Earner's children get fed. Modern "Finance" has "progressed" beyond producing things, as it now focuses on the creation of "Financial Products, serving the Needs of Industry" Well that is one was of putting it. The other way is to understand that modern Banking System now mines it wealth from the chaos of an Inflationary Monetary System.
The "Copper Market" is now controlled by trading paper "promises to deliver copper" at the COMEX, by people who have never dirtied their trousers with copper ore. Copper prices have more to do with what the Banks and "Policy Makers" think they should be, rather than supply and demand fundamentals.
Economically speaking, the Future Exchanges, "Regulated" by the CFTC, are now only the instruments of "Policy." When in his October 2008 Congressional Testimony, Doctor Bernanke asked Congress for, and received "New Tools" to promote "Market Stability." He was in fact asking for new authority from the Congress to manipulate market prices. After all, had the prices in October 2008 (the DJIA -40% Crash) been the same as the prices in October 2007 (A Bull Market Top) would Doctor Bernanke have been in front of Congress asking for "New Tools?" Of course not!
Should we be surprised seeing Gold, Silver and the Price of Copper above collapse with the Stock Market in October 2008? These traditional refuges from chaotic markets were trashed on purpose, to deny capital an escape route from the Credit Crisis.
With the Banking System more than willing to fully cooperate with Doctor Bernanke, there was no need to ask Mining and Exploration Companies what they thought of the "Policy Makers" gutting a few quarters of their profits so Doctor Bernanke could save the Banking System: the same Banking System that for decades has been shaking down mining companies profits with their "Derivative Risk Products", and ignoring the need of discovering new sources of Vital Minerals for Industry. In a functional economy, these "Risk Products" would be traded one pit down from where they trade title deeds to the Brooklyn Bridge.
Wall Street has been selling Snake Oil to the public since 1971. The profits the Big Banks make are parasitic. Modern banking with its emphasis on "Derivatives Products", does not aid in actual capital formation. Rather, it weakens Productive Industry in general, while denying profits to people who invest in companies that produce real things and jobs in the market place. None of this would have been possible had Washington kept faith with the Bretton Woods Monetary Accords. And it was Academia that provided the intellectual cover to Bankers and Politicians to remove Gold from the Money Supply. And then these Keynesian Quacks taught generations of college students of the blessings of Inflation and Debt, and the "Evils" of Gold and Silver as Money. If you, or people you love, are being eaten alive with servicing debt, you now know why.
Minerals: the Next Big Thing!
I forget who said that to be successful in investing, investors need only to discover One Big Thing every 10 years, and then ride the trend to the end. He was right. And I believe the "Next Big Thing" will be minerals. The Age of Inflation is passing away. In the next 10 years, I believe that Tonnage will become more important than Basis Points. In a year or two, we'll look back, and see that the smart money in 2010 started to drift towards companies that offer something real to the world.
Other than urging my readers to purchase Gold and Silver coins, I don't like to give specific investment recommendations. But there are three exploration companies I really like. So with the understanding that my readers know that I have significant positions in these companies, and would greatly benefit from their share prices appreciating, and that mineral exploration is a risky business, and my comments are not intended as a substitute for your own due diligence, here they are.
- International PBX Ventures. TSE: PBX.V / NASDAQ: IPBXF
Smartstox has an interview with PBX's President & CEO George Sookochoff. Mr. Sookochoff's comments on PBX are more informative than anything I can add.
- Minera Andes. TSE: MAI / NASDAQ: MNEAF
Rob McEwen, a well known and respected figure in Canadian Mining, purchased controlling interest in Minera Andes a few years ago. Look at his bio given on the link. The man knows how to make money in mining.
- Eskay Mining Corp. TSE: ESK.V / NASDAQ: ESKYF
Eskay Mining hold a massive land package in prime Gold and Silver Mining Country. It abuts the now discontinued Eskay Creek Mine to the North, and has Seabridge's KSM Project, and Silver Standard's Snowfields Project to its East. Eskay is sitting in the middle of Elephant Country.
Smatstox also has an interview with the management of Eskay Mining you may find interesting.
Currently these are little companies, but they have been around for well over a decade. That's important as these companies survived the 1998-2007 depression in mineral exploration. They have faith in their projects, and hung on for the better days to come. I've been a shareholder for over 10 years too, and have seen the hard work management has committed in pushing their projects towards feasibility.
If you're looking for a high risk, high reward situation for your speculative portfolio, you may want to give them a look. When a little company, with only a few tens of millions in market-cap proves up a few billion dollars in Gold, Silver, Copper or all three in the same ore body, the results can be explosive. Unfortunately, as things have been for the past 10 years, frequently no one cared when they did. But I think the past 10 years were the bad old days. I'm optimistic that a major Gold Rush is coming our way in the next 10 years, and that will make all the difference.
And for your information, I have never, or do I now, receive any financial compensation in recommending these companies as investments. I just like these companies, so I'm giving them a little support.
2 April 2010
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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