A dead cat bounce is a market that retraces half of its decline before retesting lows.  When a market falls at the speed and the magnitude that this market fell, the resulting dead cat bounce can and in fact does look like a renewed bull market.  But the fact is that a lot of Dow points to the upside does not change this probable reality of a continued bear market. 

Simple math: If a market has rallied 3500 points or 50% off the bottom relative to a 7000 Dow coming off of a high of 14000, one needs to keep in mind that 3500 points relative to the actual starting point of 14000 is only 25%.  So the markets 50%  rise off the bottom is a perfect retracement to fill the gap and is a dead cat bounce.  The “rally” we have experienced over the past year and a half has been a technical correction based on the traders understanding of charting and back filling gaps.

The FUNDEMANTALS (ex government spending) of the economy have not improved and the market is way over extended based on real economic activity which has actually deteriorated further. The way to protect investment capital going forward into 2010-2013 is to substantially reduce your exposure to equities.

Jan 22, 2010

The Federal Reserve, Treasury and Banks- modern day bank robbers

The billions of supposed profits earned by the banking industry in 2009 is nothing more than a transfer of wealth from the American people to modern day bank robbers which may well be foreign governments, powers and funds. Folks this is the fleecing of America happening right before our eyes. 

Here is how the con works:

1.    As the Federal Reserve and Treasury continue to take hundreds of billions of mortgage backed and asset backed securities, off of the balance sheets of “banks” they are essentially absorbing the loss that these “banks” would have been writing off in 2009 instead of posting a profit (the profit belongs to the American people). The profit/loss is a direct transfer from the bank to  the Fed and Treasury.   

2.    The TARP money that was loaned to these banks was a shill to take our eyes off of the real fraud that was being perpetrated on the American people.  This money is equivalent to the money in the register (TARP) vs. the money in the vault (i.e. banks have leveraging the full faith and credit of the Federal Reserve and U.S. Treasury combined). 

3.    The next part of there plan is FREE MONEY.  The Fed loans money to it “members banks” at 0% and then its members turn around and buy the Treasury bonds that were issued to bail them out and then our Treasury pays them 5% interest on the money we loaned them. 

Imagine if you could borrow money from your friend at 0% and then loan it back to him for 5%.  WHAT A DEAL!!! (BTW your friend deserves a lobotomy).  But this is exactly what our non elected officials have and continue to do while elected officials stand by and watch. 

4.    Step four, Convert from an investment bank to a commercial bank.  Now, investment banks like Goldman Sachs and Morgan Stanley are backed by the full faith and credit of the US Government and even more important, they have unlimited access to borrowing through the Federal Reserve “bank”. Prior to this these pirates had to depend on the capital markets for their liquidity and short term cash requirements.  The capital markets are institutional investors that are savvy and know how to read a balance sheet and measure risk.  They held these investment banks accountable (sort of…in the end their all scratching each others backs). That is why commercial paper and other money market instruments seized up when the S#$@ hit the fan.  Sophisticated investors would no longer lend these guys money.  So where did they turn?  They went to the so called “lender of last resort” the Federal Reserve and Treasury who not only agreed to loan them money, but they did for nothing and they also agreed to take all of their bad investments onto the balance sheet of Hedge Fund USA. 

5.    Step five is involves allowing these same banks to exchange toxic assets for Treasury bonds and then borrow against those treasuries at 0% so that they can lever up and buy more and more and more.  What this means is that the banks took non performing assets that were in default and for all tense and purposes worthless and exchanged them for government bonds paying 5%.  Then they took those bonds and placed them as collateral with the Federal Reserve in order to borrow more money so that could buy more bonds with the proceeds.  With these new bonds they are able to repeat the cycle over and over again at will.  Remember how we read that many banks had levered up 10x against assets on route to getting into this mess?  Well they have done the same thing using Treasury bonds.  Lets look at the math:

$1000 non performing assets creating a loss on the books of the bank of $800 to be written off in 2009.

Exchange the NPA to $1000 in US Treasury @ 5%.

Income $50

Bank then places this bond as collateral for a loan of $1000.  Bank buys another bond.

Income $50

Loan 0%=0

If this is repeated 5x the total interest earned From Treasury Bonds= $250

Interest paid on all loans at 0%= $0

Annual Government guaranteed yield?  25%

If we carry this leverage out to a 10x the yield is 100% a year.  THEY GET ALL OF THEIR MONEY BACK IN ONE YEAR!!!

Why do you suppose the banks are no longer interested in being in the business of loaning money to business and consumers?  Why should they when the government is willing to give them guarantees of this sort, while insuring them against loss? 

This is called “crowding out” and is perilous sign of things to come.  The government is crowding out business and consumers because they need the banks to lever up with Treasury bonds, to pay for all of the bailouts of same.  It is a virtual circle created by our government, Treasury, Federal Reserve and its member banks. 

AND WHEN THE MUSIC STOPS ON THIS SCAM, THE PUBLIC IS ON THE HOOK TO COVER THE LOSSES AGAIN.  REMEMBER…THESE “BANKS” ARE FDIC INSURED!!!

This is why the Fed is in a quandary to raise interest rates. When they do this whole thing will unravel and everybody will head for the door at the same time. 

When it begins to unravel, interest rates will slowly begin to rise, which will push up the cost of carrying the trade and then this increase in rates will accelerate.  At the point that the cost of the money exceeds that rate on the bonds held as collateral, the yield drops to zero.

But here is the MAJOR problem; at some point the yield on this trade will drop to zero and the positive arbitrage carry will invert and go negative.  And when this happens, the impact on bank earnings will be sudden and irreversible.  Banks will find themselves holding government debt that is no longer worth what they paid for it nor what they owe on it.  A $1000 face value Treasury with a 5% interest rate may only be worth $500!!!  Now what do they do??? BILLIONS OF DOLLARS WILL NEED TO BE WRITTEN OFF AGAIN, UNTIL ALL OF THE BANKS EQUITY IS GONE.  AND THEN THE GOVERNMENT WILL NATIONALIZE THEM AND THE AMERICAN PUBLIC WILL OWN NOTHING MORE THAN A LIABILITY.

What is happening between these two points as banks post profits and pay outlandish bonuses to themselves, is that the  billions being distributed by and to banks as “profits” is nothing more and nothing less than a criminal act of treason and a confiscation of our nations wealth by and through “banks” committed by the Federal Reserve, Treasury, the US government.

If you are a greedy speculator who could give a rip about our country and want to reap profits beyond your wildest dreams, then short as many treasury bonds as you can on margin, with the opportunity to buy them back at penny’s on the dollar within the next 24 to 36 months.  Make sure you can carry the trade and pay the margin expense.  But rest assured, this will be a blood bath unlike anything the markets have ever seen.  And people who thought they owned the safest investment in the world will learn the hard way that irresponsible fiscal and monetary policy of a government, regardless of its size can have a devastating and lethal impact on its lenders. 

In the end, maybe they deserve it.  How does one come to believe that a country with 12 trillion in debt should pay 0% interest on its debt???  As an old friend of mine once said…thinking so does not make it so! 

This is why we MUST get every American into the market and out of fixed stored savings.  ING has opened 6.6 million accounts on the promise of high interest rates.  Bank of America 5.5 million accounts into Keep the Change on the same promise.  People want to save; they are feeling the need and these institutions have figured that out.  But, the supposed “high interest” they pay on these stored savings vehicles and the principal itself is becoming worth less and less with each passing day. 

The media, MUST let go of the distraction about “costs” and the inefficiency of mutual funds and other means that make equity investing possible to the mass consumer.  This is harming people not helping them.  The cost is nothing compared to the harm of economic segregation.  The message we should be telling Americans is that they CAN NOT afford to be out of the market.  They MUST be in at all costs!!!  The equity markets are by nature the only beast blood thirsty and wicked enough to combat the glutton minded fiscal and monetary policies of the past decades. 

“Smart money” wants to keep the dumb money in stored savings vehicles, because this is non dilutive to the pyramid scheme that is being funded by our own Federal Reserve and government.  Trillions of dollars are being pumped into the system in order to feed the beast.  The beast begs to be fed in order to live (Fed and fed…interesting).  So, Middle America MUST feed the beast too in order to fend off purchasing power poverty.   

It is not a perfect solution and it is a “high cost” system using rich mans math.  But when we compare what is happening to the purchasing power of stored savings, it is a MUST. 

In my view, the “percentage of assets under management” debate is absurd. It is a calculation for the rich, not main street. What is relevant is helping folks understand the concept of “marginal utility value” like electricity to stay warm versus the marginal value of operating an electric razor.

There is a real dollar cost of technology, legal, accounting, transfer, clearing and settlement and these systems are the gateway to economic prosperity and freedom for the middle and lower classes. Just as if they were starting a business, consumers must invest in the start up costs associated with building wealth.

The communistic view that one need not invest, but rather they are entitled to receive the best price is delusional and destructive (in my

opinion) to the long term financial health of our middle class. The issue is democratization through creating supply at market rates, which as a percentage of assets under management may look different than the traditional ratios. But if a person sticks with it long enough they too will be able to dictate the terms that they are willing to pay for the marginal value delivered over and above the fixed cost to maintain their account.

In closing here is an example:

$1 invested everyday for 67 years at 10% grows to $1,000,000 (est.). If the fee is $52 a year they will pay a total of $3,484 dollars over the

67 years. Yet, each and every year they paid 14% of the amount invested in fees. Is this smart?

The $52 is the utility value of saving and aught to be viewed as consumption in the early stages. But over time the ROI on the fees makes really good sense.

A Bear in Hibernation

First let me explain the general concept of a “bull market” versus a “bear market”.  A bull market describes an overall market condition that is increasing in value and a bear market describes one that is decreasing in value. 

Over the past several years, the U.S. stock markets have experienced a bull market that has driven prices to unprecedented levels.  The Dow Jones Industrial Average has broken above 13,000 for the first time in history.  This has created a lot of excitement amongst speculators who are buying stock in hopes of raking in oversized short term gains.

The purpose of this letter is to prepare you for what will inevitably come to pass.  I am not a market timer, fortune teller or doom and gloomer.  But I am a realist and a professional with 20 years experience in the financial markets and my goal is to impart to you what I have learned.

Here is what I want you to “bare” in mind (pun intended).  The Bear will awaken and when he does he will devour those who have wandered off of the trail of good investment planning.  The timing of when the bear will awaken is anybodies guess, but rest assured he will awaken.  This means that the stock market could drop 20% or more and if you are not prepared you may be tempted to bail out and potentially lose money unnecessarily.

Be true to your vision and plans for the future and be committed to your goals.  This will produce peace and abundance and less stress and fear as the markets fluctuate.  For example, let’s say that your goal is to invest $10 a day.  If the share value of your investment is $10, you will buy one share with your $10.  If the share value drops to $8 you will buy 1.25 shares with the same $10.  Your average cost in this example is now $8.88 instead of $9.  If you keep buying as prices decline, you continually lower your average cost.  This is called Dollar Cost Averaging and it is a highly effective antidote to “Bear Markets”. 

The good news for those using the DailyIRA dollar cost averaging system is that it allows you to put money away every day that the stock market is open, .  You can start with as little as $1 and you can adjust your contributions up or down with the click of a button.

Think of it this way, seeing a bear on a hike in the woods can add to the excitement IF  you have the right equipment to defend yourself.  But if you are not prepared and have no plan to protect yourself, you are asking for trouble.  The same principle applies to investing.  So have a plan and stick to it. 

Written October 2006

Keep in mind that it was not long ago that we read about Fannie Mae and Freddie Mac.  These are the harbingers for bad policy and the hand writing on the wall for what is coming.  The $500,000 tax exemption was the jet fuel that hurled our housing market into debt bubble serfdom. 

When the “dotcom” bubble burst, prices of anything that even looked or smelled like a dotcom company dropped in value 30% almost over night.  Worse, pure play “dot-coms” dropped 70%+ or went out of business.  The driver of this sort of “sell off” is that if a company is connected in anyway shape or form to projections that created the inflated values, then it needed to be “market to the market” through a re-valuation of current business expectations.  This process is to be applauded, because it immediately allowed the market to re-set valuations and investors that took risks in pursuit of above market returns paid the price through a loss of capital.  It is through this process that capitalism works.

Now, let’s look at the real estate market and what has transpired and how it is NOT playing by those rules.  If you have been reading the newspapers you see headlines like “Real Estate Market Drops first time in 15 Years.”  These stories go on to report that the market has dropped 1 to 3%.  This my friends is a joke.  A 3% decline is not even a correction, let alone a bear market.  The stock market moves that much in an hour when major news hits the wire. The fact is that the housing market has experience far more damage than listings or closing prices reflect, but because it is such a slow market, prices take a long time to reflect value adjustments. 

But, rest assure if your house was listed on the NYSE and it could be re-valued in real time on a day to day basis, it would be down substantially more than what the media is quoting.  If we were to take into consideration your mortgage and your ability to pay your mortgage, this may even hurt value further, based on the risk of default that you represent. 

The interesting thing here is that ignorance is not bliss.  Markets are “markets” regardless of how efficient they are and they will have their way.  Look at Eastern European countries, Japan, South America or other economies where markets have not been allowed to fail via control, manipulation or excess financial engineering.  The result has always been the same…economic collapse.  Just because one wishes it were not so, or that one becomes unwilling to accept the reality of a loss, does not change reality.  As the old saying goes “wishing it so does not make it so.”

It is possible that people who are buying houses today thinking that they are getting a good deal, may be in fact paying a huge premium over what the house would be worth if it were market to the market.. When you are buying into a market that is rising prices adjust quickly upward because of the greed factor.  But, when prices are falling they move very slowly because of denial.  This dynamic creates a window for smart money to unload in what can be disguised as a “buyers market”.  In the stock market there is an old adage  “you don’t want to try and catch a falling knife”. 

If you look at the behavior of the real estate market over the past several years, it makes the dotcom bubble look like child’s play.  This debacle to my thinking will become the single most catastrophic economic event in the history of the financial world.  Bigger then the stock market crash of 1929, bigger than World War II (in economic terms), bigger then the oil embargo of the 1970’s, bigger than the 1987 stock market crash and bigger then Enron, Worldcom and all of the other scandals combined.

And it is not just Sub-Prime that is the issue.  This is going to touch every aspect of the housing market.   Valuations have gotten so far out of line with income that it is frightening.  In the same period where the housing market doubled, personal incomes rose single digits.  The mantra that people buy a “mortgage payment” not a house is going to come back to haunt millions of people all across the nation.   The message that the American public was sold was that the price you paid did not matter, so long as you could afford the payment (a strategy borrowed from the auto industry.  “What payment can you afford on this lease?”)  This propaganda is poison to sound decision making and will come with a steep price to pay for society.

Here is something to think about.  When the stock market crashed in 1929, the primary cause was people buying on what is called “margin”.  Buying on margin is the act of buying stock with borrowed money.  For example, let’s assume you could buy $1000 dollars worth of stock and all you would needed to “put down” was $100 dollars.  In this case, if the stock went up 10%, you would make $100 and thereby double your money.  Conversely, if the market dropped 10%, then you would lose 100% of your money.

When the market crashed 1929, it fell 30% within a week.  This wiped out all of the equity for those who were buying on 10% margin.  So, after the crash, all of the bankers and regulators got together and raised the margin requirement to 50%.  This meant that a an investor would have to put up $50 for every $100 dollar of stock they wanted to buy and the stock would have to drop 50% before all of their equity would be lost.

But they DID NOT apply the same rules to the housing market.  Many folks to day have been able t buy a house with zero down.  And a large percentage of home buyers have put 10% or 20% down.  That means that a 20% decline in the housing market could wipe out all of the equity of millions of home owners.  

I am compelled to write this with regard to the healthcare debate that our country is in.  First, let me be clear that I am a fiscal, monetary and social conservative with moderate economic views.  I consider myself an independent and am registered accordingly.  I do not agree with Obama on 99% of the issues and like many am skeptical of his capacity, intentions and even his right to serve as President of our nation. With that said, I am just as skeptical of the insurance and pharmaceutical companies that control the choking points of the health care industry.  Consider the following:

• What would it cost to get a piece of mail from LA to NY if it were left up to Federal Express?
• What would it cost to air condition your home if the Public Utilities Commission did not exist?
• What would private industry charge you to pump water into your home if not for the PUC?
• What would Elementary school cost if it were priced like private Universities? 
• What would law enforcement cost if a public option did not exist?
• What would fire services cost if a public option did not exist?

I am a strong advocate of capitalism, but when it comes to “utility” type needs of society; it is not uncommon and indeed makes sense to have the “government” provide a foundational service to support availability and fair pricing.  Remember government is supposed to be “we the people”.  And while I get the mistrust of our government, at the core, the idea of eliminating the profit motive from healthcare makes sense and this point I would assert is long over due.

The healthcare industry is a monopoly.  For example you do not have to have a computer, or Microsoft windows or the internet or a car.  But we all have to have healthcare.  We do not have to have coverage, but to live we have to have healthcare.  So price fixing and corruption are part and parcel with this monopolistic industry.  It is analogous to giving a group of for profit companies the right to price and sell us the oxygen we breathe.  How many of us would want that?  How many of us believe that business today would sell us oxygen at a fair price?  Just look at the cell phone industry as an example; what they sell us the right to use the air waves and we all know they are gouging consumers.  Remember that corporate America is every bit as corrupt as the Government.

Have you ever wondered why we get water so cheap?  It is life sustaining and we can’t live without it.  In my view healthcare falls in the same camp.  To have only companies that want to profit off delivering healthcare is a PROBLEM and a BIG one at that.  I am of the belief that the insurance industry is causing fear and confusion with regard to what a public option would look like.  Think about this for a minute. The insurance industry earns upwards of 50 billion in net profits year in and year out.  If you were to add back all of the executive pay, marketing, commissions and fees adding up to hundreds of billions of dollars that is paid out year after year, you would discover enough money to insure millions of people.  Double goes for the Pharmaceutical industry (have you asked yourself why there is a drug store on every corner these days even out in the middle of nowhere?  BIG MONEY!).  The fact is that the number is as large as the stimulus package that was paid out in 2008, but in this case it would be every year and it would go directly towards creating a solution for our nation’s dire healthcare problem.  Put another way, if this money were absorbed for the benefit of society as a dividend to keep healthcare costs down, it would equate to a huge savings for society over time and each American would be a benefactor of this freed up capital that is currently going into the coffers of the healthcare monopoly, year after year after year, equating to trillions of dollars over time.

Personally I think a public utilities sort of arrangement makes the most sense.  Pharmaceutical and health insurance companies should be treated like utility companies whereby they are give rate increase approval to reach statutory ROI.  This would create private industry solution to a public “utility” need (i.e. healthcare) with a rate of return that mirrors that of a public utility company (i.e. 10%) that is given an implied guarantee and could even be subsidized by the government.  This is a model that Americans are familiar with and use every day when we flip the light switch on in their homes or when we run the bath.