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Conferences Current Daily Commentary (2005) (Public)
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Duncan	10-Jun-05, 07:38 AM (GMT)
"reflection of economics"
Fao Simon Fairclough U say… property prices are to a very significant extent a reflection of national and local economic conditions d indeed what is say is valid I would concur with you http://www.learntotradefutures.com/dcforum/DCForumID16/463.html top post if the Dow index, is set to head, way south that’s my take, btw then property prices, are due to follow south the mistake people make, in all markets, is looking to near the smart money, always takes counsel, from the macro picture Cordially http://www.shortorlong.com/ understanding markets one must have a plan with fixed rules & patience, & DISCIPLINE, to be able to implement ones plan From: Duncan Robertson
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Duncan	10-Jun-05, 08:57 AM (GMT)
1. "ever heard of 'full disclosure' ? - why?"
m to be good at trading d you must start, with a plan you can follow m you have to wait for days until the bird arrives just like the big move d you need a plan first m with nearly no risk. d you start out, with a plan that comprehends risk a plan that has proved itself in the past that you can explain to yourself and the forum m we have an advantage with not working in an office, no one breathing down our necks. d = independence to follow a plan the plan needs to have worked in the past; as you say that helps big time and the plan needs to be, something you can run with you have to, believe in the plan m if i had a plan that works d you would know from back testing, that it had worked in the past and generally, you can only have upside by going public generally tho criticism of your plan by rat bags who would not be able to tell you why your plan was no good; could have the potential to hurt your psyche alternatively those rat bags may bring to the surface, issues you did not look at generally speaking, openness has more value than remaining in closure mode the forum is open and its sure helped me m the last place i would put it would be on any web site. d this would depend on what you were trying to achieve; and what you interpreted as downside in so doing to you there would be upside potential from your disclosure of your plan but you dont have a plan presently
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Duncan	10-Jun-05, 09:59 AM (GMT)
2. "get out of debt and save; don't speculate"
CAN IT HAPPEN AGAIN? Larry LaBorde Last Friday night my wife Puddy, my son and I went to the movies. We saw the new movie, Cinderella Man. While the movie was inspiring in that it featured a man's come back or a second chance, the backdrop for the movie was the Great Depression. The main character was living in a nice house and earning a good living at the beginning of the movie. As the movie progressed the family moved into a cheap one room apartment, sold all their furnishings and talked about how their investments failed. Hunger set in and the husband finally in desperation went on relief and sent the children to live with relatives. Other fathers in the story left home in despair feeling they had failed their families. After the movie while we were walking to the car Puddy asked if I thought things could really get that bad again. I calmly stated that I thought they could actually get much worse. You see while there are some things that are similar there are other things that are very different. The easy parallels are an over valued stock market, too much stock speculation, Elliot wave cycles and others. The differences are: excessive debt (corporate, government & personal) is everywhere you look; a negative savings rate; zero equity left in our personal homes; much of our manufacturing base has left the country; our fiat dollar has evaporated significantly and continues to do so; our financial institutions hold vast derivative positions, and our trade deficit just to name a few. During the great depression Henry Ford bragged that the Ford Motor Company never had to borrow money. Henry Ford simply built up all the cars he could with his parts inventory and told all his dealers they had to each buy 5 or so cars and put them in their inventory or have their dealerships pulled. He then simply closed the plant and sent everyone home until further notice. While Ford did not have to borrow money he made each of his dealers do so. With today's labor laws sending everyone home to wait out the depression is impossible. Furthermore Ford Motor Company is so deep in debt that they may not be able to pull out of it even if the economy stays healthy. Back then most big companies had little or no debt and large cash reserves. That is hardly the case today. All of the above items may tend to make another depression much worse since we seem so ill prepared to face it. Since we are mired in debt with little savings set aside any set back will be immediately painful. Do you think most families have a 6 month emergency fund saved up or do you think most are living paycheck to paycheck? We do not even own our homes anymore. The banks own them lock stock and barrel. We have refinanced all the inflated equity right out of them with ARMs. Disaster struck in the South after the WBTS (war between the states for those of you who graduated from public schools) because people who owned their homes outright could not afford to pay the property taxes. How many people do you know who own their homes outright anymore? It was much more common to own your home without any debt then than now. We have also exported many of our manufacturing jobs out of the country. This destroys our ability to create wealth. Our government debt is held more and more by foreigners. If they face hard times in their own country they may sell the US debt they hold in order to raise money for their needs back home. That could result in a lot of selling with no one purchasing our debt forcing us to monetize our debt. This could result in rubber stamping a lot of zeros on our currency. We have even become a net importer of food. It seems we can not even feed ourselves now when a few years ago we not only fed ourselves but exported large quantities of our surplus food. So could things ever get that bad again? We hope they ONLY get that bad. Just in case, get out of debt and save; don't speculate. Invest in 5,000 years of history. Invest in gold and silver. Larry LaBorde, Silver Trading Company www.silvertrading.net June 9, 2005 Larry and his wife Puddy both live in the occupied South with their two almost grown children and Haley the wonder dog. Larry manages the family drilling company and also sells gold and silver bullion through Silver Trading Company at www.silvertrading.net Please send your thoughts or comments to Llabord@silvertrading.net Please note that I am no means a financial advisor. You must perform your own due diligence. As my daughter likes to say, "Daddy, if you know so much about money why don't we have more of it?"
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Duncan	10-Jun-05, 09:59 AM (GMT)
3. "Does it make sense to save?"
SAVINGS Don Stott A truism in any economic system, is that savings are the source of capital for development. In an ideal, honest situation, a bank can loan only what is has on deposit. If a person wanted to start a company to make widgets, and it would cost $100,000 to start the company, it is to be assumed that he would have a minimum of $20,000 or 20% of the required amount himself. The would be entrepreneur, would then need to borrow maybe $80,000 from the bank, with which to start his company. The new company would probably have $80,000 worth of tangible assets, and the bank would have a lien on those assets, to secure its loan. The bank might charge 8% interest for the loan, which was secured with the widget firm's assets, and the entrepreneur would have saved $20,000 to begin his operation. The bank would loan its depositors' (savers) dollars to fund the loan. The savers would be receiving maybe 4% interest for allowing the bank to loan their money. The difference between 4% and 8%, gives the bank a profit, and pays for its employees and facilities. The businessman who is going to make widgets, has saved $20,000 for his adventure. The borrower of the $80,000, has secured his loan to the bank. He has used his savings as seed money, and the bank has loaned its depositors' (savers) money. All is well, and the risk is spread according to the risk taken. The bank has risk if the business fails, and may not be able to recover its $80,000 if the liened upon tangibles aren't worth that much. The depositors are at slight risk, as their money has been loaned, but the bank undoubtedly has insurance to cover depositors' risk. The entrepreneur has risked the most, as not only does he owe the bank $80,000, but he has invested his savings in the venture. This is how it ought to be, and was until FDR began his Presidency. Think about it for a minute. The widgets were going to be made in the USA, out of raw materials mined in the USA, the bank was a U.S. bank, and the depositors were American citizens. The widgets were going to be sold in the USA, and were made with American labor. The bank loaned money it had on deposit from savers. It was all so nice. But it isn't nice any longer, because the model for savings, investing, venturing into a new business, etc. are all twisted out of shape so much, that the process is totally unrecognizable. Americans are saving less than one percent of their earnings. We are at the very bottom of the savers of the entire world. Notice, that in the above model situation, the only credit involved, was from the bank, who loaned its depositor's funds at a profit. Americans were buying homes, and borrowing money to buy them long before FDR. The first savings and loan company was in the 1850's in the Frankfort section of Philadelphia. They loaned money deposited by savers in the same way that the bank loaned the $80,000, but for a longer term. The loans for the homes were secured by a lien on the home. A mortgage if you please. The balance was not upset, and savers financed borrowers, as it should be, and always was in America…until 70 years ago. Why don't Americans save? Two reasons, but in the main, one big one. The main reason, is that they have nothing left after paying bills with which to save. Americans, as well as their government, are in debt to the tune of close to $50 TRILLION dollars. Some say $70 trillion. Americans generally owe for everything, and this includes just about everything they use, live in, and even eat. When the normal situation existed 70 years ago, there were no credit cards…if you can imagine that. No plastic money, and for that matter no plastic. Homes were financed at 80%, not 100% or even 115%, as is a common situation with second mortgages now. Cars might have been financed for a brief period of time, with a hefty down-payment, but what goes on now, was unheard of 70 years ago. Car ads now, don't even mention no interest finance, but rather how much per month the lease will cost. Bankruptcies are at all time highs, as are foreclosures, meaning the economic situation of 70 years ago, is long gone. Still, we hear that the economy is booming. Can this be true, when no one is saving, and debts are at all-time highs? Some say yes, because home ownership is at all-time highs, and the stock market hasn't crashed. Supposedly, jobs are being 'created,' and everyone seems to be happy and well. How can this be, when no one is saving, when saving is supposedly necessary for economic growth? If there are no savings, where is the capital coming from to 'create' all these new jobs? I place the single quotes around the word 'create' because I don't think government can create jobs, only destroy them. I am reminded of the laid off computer whiz, whose job was taken by someone in India, and he was working at three menial jobs to equal his former salary. Instead of one job, there are now three. Is this progress? Getting back to savings: Some may say that they are saving by increasing equity in their homes, which few do, or are owners of stocks. This is an increase in equity, and part ownership in a corporation, but is not savings, which can be quickly accessed or withdrawn, in a normal situation. Home equity and stock ownership, are not savings which can be loaned by a bank to a would-be entrepreneur. Formerly, the funds for buying a home or starting a business, came from savings. Now, few banks or S&L's take any risk at all in financing a home. They charge a 1% fee, which is their profit, and promptly sell the mortgage to Fanny Mae or Freddie Mac, which creates money out of nothing, since they are a semi-arm of the federal government. Banks which have less on deposit than they loan, can create money by simply placing the funds in the borrower's account, thereby creating money out of thin air. No savings necessary. Credit card debt, further increases the money supply, as does deficit financing of government debt, lopsided trade deficits, plus high percentage mortgage and auto debt. What used to be a well lubricated, easily understandable, economic scenario, has now developed into one huge debt ball, which unfortunately, is rolling downhill with increasing speed. As has been mentioned twice before in my columns, those who saved by contributing to pension funds, are being defrauded. Those dollars, which are true savings, have been removed from paychecks, but have not been placed into the pension funds, and employers have not been contributing their share. These savings have evaporated in far too many instances, resulting in no savings. How can a nation consume what it doesn't produce? How can a nation have a booming economy, when everyone owes everyone, and there are no savings? How can a government which is a world wide power, have more debt than any other nation? How can the whole thing continue to operate, when the debts are equal to, or in excess of value? The word is "BUBBLE." What is a bubble? A bubble, by definition, is a stretching of an element beyond its normal size. How does this happen? It happens by thinning its walls, lessening its strength, and increasing its size. It looks grand. Look at a typical bubble. Ever chew bubble gum? (Remember 'Bub' and Fleer's double bubble?) I have, and a lot of times, especially when I was a kid. The bigger the bubble gets, the thinner its surfaces are, till it gets so thin, that it bursts. Soap bubbles are the same phenomena, as are economic bubbles. Well, how about buying gold and silver? Isn't this saving? It is certainly protecting ones self from decreasing value currency, and makes a lot of sense. It shouldn't be necessary to buy gold and silver to protect ones self, because saving in the currency should be a viable means. Saving in gold and silver doesn't give banks money to lend, because the wealth is in your hands or safe, and not in the form of dollar savings accounts in a bank. Banks don't need your savings to loan anyway, because they can create money out of nothing. Is anyone saving? Anywhere? Does it make sense to save? Isn't savings what makes everything work? Without savings, won't the economic system crash? More next week on savings, but in the mean time, protect yourself. June 9, 2005 Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com
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Duncan	10-Jun-05, 09:59 AM (GMT)
4. "ignorance and stupidity"
DING DONG WHO DO THEY THINK THEY ARE FOOLING? Mike Hoy I never cease to be amazed at the blatant levels of ignorance and stupidity that exists in the world today. The games that are being played in the financial markets can only end in one way; badly! With the Fed having raised the short term interest rates at least eight times in a row; one must be totally in the dark to not question how the long term rates can fall at the same point in time short term rates have risen by 2%. This defies all forms of logic. The reasons why this is happening is real simple and I believe the mysterious buyer, who is probably based out of the Caribbean, is real hard at work and making all his elves work overtime to print the money to pay for it. This act of buying the 10 year bond and moving it to new high prices and yields below 4% has been brought on by a desperate attempt to avoid disaster in the hedge fund industry and real estate industry. Take, for example, GM and Ford having their bonds lowered to junk status; this alone should put upward pressure on the long term interest rates as a result of bringing to light the risks associated with investing in junk bonds. Newton has to be rolling over in his grave. This is very serious business as there has been an unquenchable greed, by the hedge funds, to acquire the highest yielding paper on the street for the last several years, using the greatest leverage possible, to maximize the profits in the "carry trade game." Rumors abound everywhere about the losses in hedge funds as a result of the squeeze put on by rising short term interest rates coupled with the losses, in principal, from GM and Ford being downgraded to "Junk Status." Most people do not realize the risk the financial system faces with the leverage that has been added to the system by the hedge funds. The individuals behind these hedge funds care little about the repercussions of being wrong and the havoc that they will bring to the system. They have no fear or respect of the consequences of being on the wrong side of the trades they make. With the 10 year bond rising in value the hedge funds have been given an opportunity to sell their bonds and exit their positions before they get hit again. The mysterious Caribbean buyer seems to have created great liquidity, in the long term bond market, at a time it was needed most. For the last several years the Chinese and Japanese have been the largest buyers of the 10 year bond. There is no question that the Chinese and Japanese are no longer the buyers; this alone should put heavy upward pressure on interest rates to replace the buying that is no longer coming from these two countries. With no buying or very little buying of our bonds from the traditional buyers; who is left to buy the never ending stream of new paper in the market? I can think of only two choices; hedge funds with their leverage and "Uncle Sam." Can you say "Monetization?" Another example of this type of stupidity is the housing market. There is no underwriting being done on these interest only mortgages in dealing with the inevitable reality of rising interest rates coming down the road in one to two years. Over half the mortgages being written in California are interest only mortgages. This is the mortgage of preference because the buyers cannot afford traditional 15-30 year mortgages. I am very aware of the long standing dream of each individual to own their own home; but at some point in time the fact will resurface that not everyone can or should own their own home. The real estate speculator is another growing breed of addict who has accepted the interest only mortgage with open arms. Why would an individual, whose only intention is to flip or trade a property, want to spend a dime more than he absolutely has to, out of his own pocket, in the pursuit of his trade? He won't and this is where the problem comes in. As rates rise the value of his properties will fall and he will then find himself underwater on his sound investments. The most devastating risk to the real estate industry is the potential for the buyers to disappear overnight. One day these people may wake up and find that they are the "greater fool!" This is the second reason that the long bonds have fallen in yield. Just try to imagine the havoc that will happen as mortgage rates begin to rise. A simple 2% increase in the rates being charged on interest only loans will bring on a landslide of new foreclosures. As these peoples homes hit the market the value of all real estate is coming down and that will be a fact of life that no amount of manipulation and wishful thinking is going to change. The real question I have is who has been stuck with ownership of these soon to be worthless mortgages? Do you think the possibility exists that many of the mortgages have found their way into Money Market Funds? Most of you do not realize that when Long Term Capital Management LTCM went under that there were money market funds whose net asset values fell below $1.00. The "boyz" immediately stepped in and brought the values back up to par and swept the whole thing under the carpet; kind of like "Anderson." The real losers will be the home owners who were sucked into buying these trash mortgages when they could have taken advantage of all time low interest rates and bought a traditional mortgage, on a house that they could financially afford, when rates were at their lows. Two to three years down the road these people will look back and wonder how they could have been so stupid. They will boil when they think of the encouragement they received to buy the bigger home with the more affordable mortgage. Worst of all will be the financial hardship that will have been created to pay for an asset that can not even be sold at a price close to paying off the mortgage. Why are the long term rates coming down? Real simple; to give the hedge funds a chance to bail out on their long term trades and to attempt to continue the foolishness in the mortgage industry. There is no question that the Fed will pump the system to whatever level it needs until it can no longer pump at all. We are destined, as a country, to face both the ravages of inflation and deflation at the same time. INFLATION VERSUS DEFLATION = STAGFLATION I break this down into two sections "necessities" and "luxuries." The necessities of life are going to experience inflation which will most likely lead to hyper-inflation while the luxury sector is going to go into the tank for the purpose of funding the money to pay for the necessity sector. Real estate, homes, SUV's are all luxuries while gas, utilities, food, housing costs, insurance, taxes; the things we write a check for every month are all considered necessities. Stagflation is the wave of the future. It seems that the American people are going to pay a terrific price for the Fed's mistakes. I know some of you may be thinking that if a recession comes that interest rates will fall. Normally this would be correct but we are in a different part of the cycle. Normally a recession can be reversed within six months of lowering rates; if this was a normal recession then we should have seen this work three years ago. Instead our leaders took the easy path and led us right down the road to disaster with their strategy of lowering rates to all time lows. The only thing these people accomplished is addicting the American public to debt and destroying the concept of saving. This process has drained all equity out of their homes leaving the citizen in debt up to his eyeballs with a mortgage that will rise with the interest rates. Like I said in my last article "Tick,Tock,Tick,Tock," the fuse is lit. CHINA The next topic I want to address; is the topic of our government and the stance it is beginning to adopt with countries like China. There are all kinds of pressure being applied to the Chinese to float their currency. Why would the Chinese want to float their currency when they know that doing so would take their US Dollar reserves and immediately reduce them by 25-30%? Do you really think the Chinese want to take a haircut of that nature? I don't and I think it is real arrogant of our government to try to shove this down their throat! I believe our government is making a very big mistake; similar to the belief that the Saudi's want to lower the price of crude to save the gluttonous US Citizen money on their fuel bills so they can continue to plunder the world's natural resources with reckless abandon. I feel there is no way the Chinese will float the Yuan until they have spent the $400,000,000,000 they have in US reserves. They will spend this money and when they do they will be on a shopping spree to buy the best foreign natural resources the "X-Great American Dollar" can buy. What they can't spend on natural resources they will spend on building the infrastructure in China and increasing their gold reserves. The repatriating of these dollars will bring about inflation that even the Fed will recognize. I also find it very interesting how they still continue to brainwash us into believing that there is no inflation. The simple act of telling the Chinese to float their Yuan is also proof that the Fed is welcoming inflation. If the Yuan rises in value against the dollar just what is the end result of the rising cost of goods coming into this country from China? Golly, that seems to be inflation in its purest form. This too, will have a bad end. THE FRENCH The last point I want to address is the fact that some people are calling for a resurrection of the Dollar as a result of the French deciding not to play ball with the rest of the "boyz." For some reason many think that this is a reason or an excuse to buy the Dollar. I am sure the hedge funds are all over this buying the Dollar in the belief the Dollar will rise again. The only problem is the fact that what we are really seeing is the rest of the world coming around to the idea that the Euro is no better than the Dollar. They may think that the Dollar is the place to be but the only thing they will find out, in the end, is that both the Dollar and the Euro are on board the same ship and that ship is the Titanic. Have you ever really thought about the name "Titanic?" Seems to me the Titanic should have been called the "Minnow!" For the first time I believe that we are seeing the street say that both the Dollar and the Euro are "Junk!" This is a very important point to understand because it also should be the signal that the next leg of the gold bull is about to be unleashed. After all what do they have left for an alternative? I have said before that the time will come when all currencies fall at the same time because of the lack of faith in paper and debt and gold will be the last resort. There is no question that as these foreign countries dump the Dollar that interest rates will rise and I believe they will rise to much higher levels than most can even begin to comprehend at this point in time. I will be in Vancouver this weekend for the 2005 World Gold, PGM and Diamond Investment Conference. I can be reached at or through the Adanac Moly Corp (a sponsor of GOLD-EAGLE.com) and Goldrea Resources booth. Feel free to stop by and say hello! I am looking to have an article ready for those of you on my free e-mail list that will include a new name or two. If you are not on my list you can be placed on my list, at no charge, by replying to the link below. Mike Hoy mhoy@neb.rr.com 9 June 2005
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Duncan	10-Jun-05, 10:03 AM (GMT)
5. "gold at $400-410 should be a floor price"
http://www.gold-eagle.com/editorials_05/gerbino060905.html ROAD MAP ON THE MINING STOCKS Kenneth J. Gerbino Gold and commodities are going higher in this decade. The graph below shows how commodity prices are relatively priced versus the cost of living. Two important things about the chart is that commodity prices the last four years have already risen by 50%, but from a historic perspective the move looks as if it is just beginning a new and prolonged trend. The inflation adjusted price level today is the same as 1932 at the depth of the U.S. depression when commodity prices had collapsed. Scarce resources such as beachfront property or certain metals are a function of Mother Nature, not man. Men can make machines to make millions of widgets and influence the price by overproduction, but certain metals, and other natural things like oil take billions of years to form and are not subject to the laws of oversupply unless these commodities are found in abundance. In the case of metals and natural occurring commodities, the supply is limited. But populations grow continually over time generally increasing demand. This, plus inflation from money supply increases will add to upward price pressures. The graph above states the obvious, that the commodity decline from the 80's and 90's is over. A prolonged and strong across the board increase in many commodity prices is under way. This will influence inflation rates and move the price of precious metals higher in the years to come. The above graph is your road map. Inflation Math Made Easy Using the very simple and accepted classical measurement of what to expect as an inflationary prediction one would turn to money supply increases. Add 10% more money and you should expect 10% increases in prices sooner or later. Technology and higher productivity helps keep prices down, but many goods are consumed and destroyed which limits supply. Eating a donut means the supply of donuts has just gone down. Established interests deny printing money creates inflation but over the long term it is hard to dispute. From 1971 to 1975 (5 years) the U.S. money supply increased 33.5 % and over the next 5 years (1976-1980) inflation increased by 55%, and gold went to $850. The 5 years from 2000 to 2004 has seen our money supply increase by 30.4% and I don't believe it is hard to imagine at least a future 30% increase in prices over the next 5 years. This would average an inflation rate of 6 % annually with precious metals logically going up at least that much, which would equal a $562 gold price in 5 years. Inflation is also coming to China (money supply up an average 13% for 7 years in a row)- and that will surely have a strong effect on gold demand in the next few years. With higher inflation, interest rates will then have to go up, bonds will go down, and industrial stocks will have a tough time. An economist at the Bank of International Settlements informed me a few weeks ago that the global derivative markets are $279 trillion for exchange traded derivatives but there is an additional $220 trillion in over-the-counter trade derivatives. These numbers are large enough to make one a conservative investor especially when one considers that even a 1% default rate in these speculative and leveraged financial instruments would equal almost the entire U.S. money supply. Ex-Federal Reserve Board Chairman, Paul Volcker's recent Washington Post opinion article was titled; An Economy on Thin Ice . He basically warned the establishment that a "financial crises" was possible if things did not change. Policy makers in every country know what the guy in the street knows. There is no free lunch. If someone does happen to get one, you can bet that somehow someone somewhere will pay for it. Governments globally are run by an elite group of people who are elected on promises. They all know that if you do not keep the people happy, sooner or later you are either voted out or strung up. The solution for the last 20 years for these voted-in officials has been to print money and run up government debts…but do not stop the parade. But now the parade could be running out of steam and the financial repercussions could be severe. I have never been an alarmist or a doom and gloom person, but bad economics (from too much debt and money printing) is bad economics. When and if things go bad, it will pay to have liquid assets that are no one else's liabilities and regardless of any disruptive economic scenarios will stand up and be there as a store of value. Precious metals are actually the only liquid asset that can claim that position. The U.S., Japanese, Indian and Chinese economies are still positive. However, as we go forward their stock markets will have a tough time as inflation returns and interest rates follow to the upside. The main concept I think of when buying a mining company is how much "money in the ground" do I own. If Paul Volcker is right, then the value of mining stocks will rise significantly. A good investment premise in this day and age is to own companies that allow you some financial security and insurance, but also give you exposure to growth and future cash flow. Only certain precious metal mining stocks really qualify. I would guess that 9 out of 10 of the mining stocks out there do not qualify therefore stock selection is crucial. Portfolios should be diversified across at least a dozen mining companies that have the goods in the ground and are well financed or positioned to bring on new production in the years to come. You want growth to look forward to and also plenty of value in the ground to ultimately protect our wealth. Remember risky exploration companies give you none of the above. The high-risk end of mining should only be for a very small part of your portfolio. Gold mine supply declined 4.9% in 2004 and there was strong jewelry demand (+5.2%) even with gold above $400 most of the year. Because of this steady and increasing demand sector and because there is at least a 5-10,000 tonne short position in gold (bullion banks and mining hedge books), it is most likely that a gold price below $410-415 is very unlikely. If gold were to go to $500- 600 then this short position could be catastrophic for the shorts. Bankruptcies for the bullion banks and professional oblivion would be the fate of anyone remotely responsible. Therefore I expect plenty of short covering on all sell-offs. This is why I feel gold at $400-410 should be a floor price. Any dips below this level most likely will be short-lived. For more articles on gold, mining stocks and the economy please visit our website. Kenneth J. Gerbino 9 June 2005 Kenneth J. Gerbino & Company Investment Management 9595 Wilshire Boulevard, Suite 303 Beverly Hills, California 90212 Telephone (310) 550-6304 Fax (310) 550-0814 E-Mail: kjgco@att.net Website: www.kengerbino.com
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Duncan	10-Jun-05, 10:28 AM (GMT)
6. "just how successful were "they" (MM)"
http://www.safehaven.com/article-3229.htm June 10, 2005 Conspiracy Theories and Market Tops by Mike Shedlock Does anyone recall some of the bizarre theories circulating around in spring of 2000? When things started declining I remember hearing "They are just trying to steal your shares", and "They missed the big runup in JDSU and are pushing it down so they can get in". The counter-argument circulated in the chat rooms was "don't fall for it, the 'gorilla' is worth any price, just hang on". I am sure there were plenty of other conspiracy theories floating around and thinking back on it now, if there was a Wall Street conspiracy at all it was to get you to hang on and stay the course even though Henry Blodget, Mary Meeker, and others knew the stocks they were touting were worthless. I am not much of a conspiracy buff but if in fact there was a conspiracy, people were 180 degrees wrong about just what it was. JDSU fell from 153.42 to a low of 1.32 where it sits right now. As conspiracy theories go, just how successful were "they" at "sealing" your shares? Fast forward to 2005. The new conspiracy theories just happen to be about Real Estate. According to this article, talk of bubbles in housing is a conspiracy by Wall Street to get you out of real estate and back into equities because "they are after your money". That's hilarious. Investment U was laughing about it and so am I. As for whether or not there is a bubble, "home sales as a percent of the economy are now at 17%. For the statisticians out there, that's 3.4 standard deviations from the mean. For the non-statisticians out there, speculation in home buying is literally off the charts. Said another way, it's not a Wall Street conspiracy that speculation in housing is at a statistical extreme; it's a fact." Hmmm. Is the real conspiracy (if there is one at all) the exact opposite of what people think? Are real estate agents in conjunction with lending institutions encouraging people to buy houses or condos they know (or should know) their clients simply can not afford? Are they encouraging sucker investments just as Mary Meeker and Henry Blodget hyped garbage at the top? After all, do banks or mortgage lenders or real estate agents care what the aftermath is as long as they get their initial cut? Who does care as long as mortgages can be dumped off on Fannie Mae? Fannie in turn "guarantees" the mortgage (trillions of dollars worth) and repackages the stuff selling it to pension funds looking for extra bits of yield. It's a great system for banks because they know Easy Al will come to their rescue just as he has done many times before. Nah, that can't be it. There are no conspiracies just paranoia. After all, "It's a totally new paradigm" and 3.4 standard deviations from the norm proves it. Now go buy that Florida condo before it goes up another $50,000 in "value" tomorrow. Mike Shedlock / Mish http://globaleconomicanalysis.blogspot.com/ Michael Shedlock (Mish) worked in the financial services industry for 20 years at some of the top institutions in the country including Harris Bank, the Bank of Montreal, Bank One, First National Bank of Chicago, and First Data Corp. Mish is currently doing economic and investment research for a number of clients. Copyright © 2005 Mike Shedlock
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Duncan	10-Jun-05, 10:28 AM (GMT)
7. "Times Magazine has been a great contrarian indicator"
http://www.safehaven.com/article-3225.htm June 10, 2005 Critical Juncture in the Markets by Henry To Dear Subscribers and Readers, Please note that we switched from a 100% position to a 50% long position in our DJIA Timing System on Tuesday morning at DJIA 10,555. The reason for this pre-emptive move has been partly explained in our commentary over the weekend along with what I wrote last night in our discussion forum. For now, we will continue to hold - but we are definitely getting more wary of the market here. The only reason why we are still holding onto our 50% position in our DJIA Timing System at this point is the fact that the DJIA has now most likely taken upside leadership away from the NASDAQ. Again, don't be surprised if we completely switch to a neutral position sometime in the next few trading days. Note: We will be conducting another short survey in this weekend's commentary. Please help us out and participate! Okay, I admit - I erred. I was going to provide an update on the Fed Flow of Funds data during this morning's commentary but then I realized that the latest quarterly data (for the first quarter of 2005) would not be released until later today. As a side note, one of the most significant problems when it comes to writing an economic commentary is the fact that timely data is very difficult to get your hands on - once you do get it, the information is already stale and you can't use it anymore. That being said, one can get a very insightful look at the U.S. economy by studying the Flow of Funds data - along with the fact that the data is good enough for long-term observations. But I digress. Luckily for me, there is always something interesting going on in the stock market for me to comment on. The day before yesterday, it was rising oil prices, rising bond prices, rising stock prices and rising housing prices - all happening at the same time. Yesterday, it was exactly the reverse. This is another problem with writing a commentary on the stock market. Today you can be a hero and tomorrow the market can turn on you and you can be a "zero" in a matter of 24 hours. For example, as stated in one of my messages in our discussion forum, I shorted Google at a price of $294 and change on Tuesday morning. As I am writing this, I am sitting pretty - but likewise, this position can turn on me on a dime - and the next minute I would be regretting that I have ever posted that message up there for all to see. We saw what is perhaps a significant reversal in the oil price yesterday - as the WTI crude shot up on a huge drawdown in inventories (as opposed to an increase) but then promptly reversed in price during the late morning and early afternoon - closing at the day's low of $52.54 a barrel despite the huge drawdown. As of yesterday evening, the WTI is down $2.49 for the week. Sure, the White House revised GDP growth lower for the rest of this year from 3.5% to 3.4%, but this wasn't totally unexpected. In fact, I am surprised it hasn't been revised much lower - as all the leading indicators around the world are pretty much heading down. We also saw the Dow Industrials taken upside leadership away from the NASDAQ - along with a severe weakening in the share prices of major internet issues such as Google, Yahoo!, and eBay, even though the NASDAQ was only basically flat in the last two days. The price of the long bond also experienced a classic one-day reversal on Friday in the midst of very bullish sentiment. Even though volume was not very high, I believe it was an authoritative-enough signal to be considered as a "sell signal" - as I discussed in last weekend's commentary. Okay Henry, the decline of oil prices, stock prices, and bond prices were obvious, but what of housing prices? Aren't they still booming? Yes, they are. In fact, most of the homebuilding stocks that I keep track of are either at or near all-time highs, but as I discussed in our "Update on the Housing Bubble" commentary last Wednesday, I feel the time is now ripe for a top in various regions around the country. Of course, there is no "national housing bubble" just as there were no "stock market bubble" in early 2000 since many value stocks completely tanked during the latter part of 1998 to early 2000, but that is just playing around with words. In fact, as I said in our commentary, such a divergence in housing prices around the country is IN FACT evidence of the existence of a housing bubble. The timing is always difficult, but I am now going to stick my neck out and predict that within the next 9 to 12 months, we will see a general softening in single-family home prices in some of today's hottest states, such as (in order) Nevada (an annualized rise of 31.2% in single-family home prices in the first quarter per the OFHEO), California (25.4%), Hawaii (24.4%), Florida (21.4%), and Maryland (21.0%). Just in case any of our readers have further doubts about such an impending top, perhaps we should take a cue from one of the greatest contrarian indicators of them all: Historically, the Times Magazine has been a great contrarian indicator. Of course, this is not the fault of the editors - it is just that the reporters of the Time Magazine have usually try to be as mainstream as possible when it comes to writing stories about the United States or the world. However, when an investment/speculation class such as real estate becomes mainstream, then one is definitely nearer the end of the trend rather than the beginning of it. Keep in mind, however, that I am not calling for a crash in the housing bubble. I am merely calling for a softening of prices - most likely in the states that have seen housing prices gone up the most in the last few years. I will come back to this later but let's go ahead and update one of the charts that we saw last week - now that the OFHEO has updated the most recent State House Price Index data up to the first quarter of 2005: Annualized Appreciation in Housing Prices of Selected States vs. the U.S.(1Q 1976 to 1Q 2005) - More of the same for now, as Nevada is still at the top of the rankings (out of all 50 States) when it comes to appreciation in housing prices for the first quarter of this year. Again, the question is: What do these five State Housing price indices have in common with one another, besides the fact that all five States have experienced significant increases in housing prices over the last two years? Answer: Subsequent to each period of significant appreciation , housing prices in all five states have always followed with significant declines or stagnation. The great divergence among some of the hottest states continues. Please note that the recent rise in housing prices in the markets outlined above are at or above their historical peaks - even during the mid to late 1970s when inflation were running at 10% to 15% each year (notice that these are nominal, not real increases). How long can this go on? No one really knows, but at the risk of "beating a dead horse," I am going to present to you another chart that I constructed using the OFHEO data from all 50 States: Difference Between the Annualized Appreciation in Housing Prices of the Top 5 Hottest States vs. the U.S. (1Q 1976 to 1Q 2005) - Prices have always declined when both the annualized appreciation of housing prices in the United States and when the differential between the annualized appreciation in the top five U.S. States and the whole of the U.S. are at such elevated levels. That being said, housing prices (in general) will most probably not crash. Rather, real estate prices in most of the currently hot states will most likely underperform for years to come. The above chart shows the average annualized appreciation of the top five hottest States (in each quarter) vs. the annualized appreciation of housing prices of the entire United States. The red line shows the difference (what I termed the "divergence"), while the blue line shows the annualized appreciation of housing prices in the United States. Please note that in all three instances (of the last 30 years) when both the divergence and the annualized appreciation of U.S. housing prices were this high, real estate prices in general have subsequently underperformed in the coming years. Again, as I discussed on the above chart, real estate prices will, in general, not crash - but I would not be surprised if some of the most speculative markets will. As an example, the cover story in the Time Magazine starts off with this paragraph: John Williams, a disc jockey from Long Beach, California, is available for weddings and birthday parties. He also does real estate closings. Williams, 40, recently decided to hitch his fortunes to the Southern California home market, buying houses, fixing them up and - in the parlance of our times - flipping them for a quick profit. "I saw so many friends and colleagues getting rich," he says. "I wanted to get rich too." Williams has made some money - he flipped his first two properties for a combined gain of $27,000 - and quickly discovered he's not alone. "I went to look at some homes in Palmdale-Lancaster ," he says, "and the woman showing me and a group of other investors around was a hairdresser who works for Century 21 on the side. We went into Taco Bell for lunch. The girl at the register heard us talking, and she told us she just got her mortgage broker's license." A host of reasons have been given for the "this time is different" scenario, such as that today's workers are spending more time at home (telecommuting) or that today's kids are moving out and buying homes at a younger age. I do not dispute these reasons. Moreover, while the real median income of Americans have only be inching slightly higher over the last 30 years or so, the incomes of the top percentiles of the population have been rising much faster, and thus are more likely to overpay for high-end homes more than ever. The most recent decline in the yield of the long bond has also convinced many analysts (and many of these same analysts have been calling for higher rates over the last two to three years) that mortgage payments will continue to remain affordable enough to sustain the currently frothy market. Like I said, I do not dispute these reasons, but do they currently hold water? In our last commentary on the U.S. Housing Bubble, I stated that the analysis of comparing U.S. median home prices with the S&P 500 (in order to show that the former is historically undervalued) is a flawed analysis. This week, I will argue that many of these reasons do not hold water. These arguments would only hold water if many of the recent buyers of homes have the intention to personally live in them. In that case, I don't care how much you pay for a home as long as you can afford the mortgage payments. However, as a recent Fortune article stated, a recent study released by the National Association of Realtors determined that investors now represent 23% of the home-buying public (this number also includes people who are in the market for second homes). The number of pure investors is currently estimated to be about 10% - twice the amount of the historical average in the United States. At the same time, interest-only mortgages only represented 1.6% of all new mortgages as recently as 2001. In 2002, this number jumped to 6%. By the end of 2004, it has jumped to 23%. Various numbers are now being thrown around but interest-only mortgages are now estimated to account for approximately 30% of all mortgages originated in the United States today. The following Bloomberg article (sent to me by a subscriber) is a must-read, IMHO. The percentage of interest-only mortgages has skyrocketed despite the continuing decline of mortgage rates. At the current rate, interest-only mortgages will account for nearly 40% of the entire market by the end of this year. Is this sustainable? Maybe - under an interest-only mortgage, you typically only pay interest for five years - and then the amortization of principal kicks in. In addition to having a higher monthly payment due to the fact you are paying down principal as well as interest, this higher monthly payment will be further exuberated due to a shorter amortization period, typically 25 years in a 30-year mortgage. The rise of interest-only mortgages is an issue of affordability as well as an issue of speculation, but increasingly, it looks like it is the latter. I believe we are now close to "exhaustion" - made the more authoritative given that my "global slowdown" scenario increasingly looks like it is going to come to fruition. I also want to point out another interesting phenomenon that is happening in the commodity world and which partially relates to what I just discussed about housing prices in the above paragraphs. Following is a weekly chart of the prices of lumber from the end of 2003 to the present: Lower highs in lumber prices not confirming the recent rise in domestic housing prices. Barring an oversupply of lumber, how much of this recent decline is due to the global slowdown in construction (particularly China) and how much is due to the loss of momentum in the U.S. housing market? As discussed on the above chart, the recent lower highs in lumber prices have not been confirming the continuing appreciation in housing prices and new home sales. How much of this weakness is due to the current slowdown in China and how much of it due to the potential loss in momentum in the U.S. real estate market? We will most probably find out in the months ahead. For now, I will urge all investors in single-family homes in the hottest areas of the United States take a step beck and reevaluate their financial situations. True, there should not be any major crashes, but when you are so leveraged... well, one gets the idea. As for me, please keep in mind that I am only expecting a major softening in demand in various parts of the Untied States - perhaps accompanied by slight declines in home prices over the coming years. This has historically been true and I expect it to be true, once again. Now, let's move on to the stock market. I will make an exception this time and update the daily chart of the Dow Industrials vs. the Dow Transports for our readers in this mid-week update: Daily Closes of the Dow Jones Industrials vs. the Dow Jones Transports (January 1, 2003 to June 8, 2005) - While the Dow Industrials actually held up pretty well during the last three trading days (it actually rose 16 points despite the general weakness of the stock market), the Dow Transports was not so fortunate - as can be seen on this chart. The Dow Transports declined 92 points over the last three days - an ominous sign given that oil prices have been declining as well. Since the major cyclical bottom in October 2002, the Dow Transports has also been the leading index - signaling that the Dow Industrials is in grave danger here. Normally, I don't want to show this chart during the middle of the week since I believe investors can get a clearer picture by focusing on weekly action instead of daily action. However, the huge 75-point decline in the Dow Transports yesterday definitely changed the equation. For the week so far, the Dow Transports is down 92 points. As I said on the above chart, please note that the Dow Transports has been leading the Dow Industrials ever since the last cyclical bottom in October 2002. Conclusion: The stock, bond, commodity, and housing markets are now at a critical juncture. I do not believe all four markets will fall at once - but the recent weakness all across the board is starting to worry me. In the stock market, it is the recent weakness in Google, Yahoo, and eBay (readers may want to note my somewhat bearish note on both Yahoo and eBay in our discussion forum posted on Monday), along with the fact that the Dow Industrials has taken upside leadership away from both the NASDAQ and the Dow Transports (which has usually meant continuing general weakness in the stock market given the history since October 2002). For more risk-adverse investors, try to look for a good opportunity to trim down on your large cap growth/brand name positions that I have been asking our readers to hold since May 4th. Make no mistake - we are currently still 50% long in our DJIA Timing System solely because the Dow Industrials has been outperforming. If the stock market exhibits further weakness next week, then don't be surprised to see us switch to a totally neutral position in our DJIA Timing System. I will come up with a better conclusion on housing prices this week, including what any potential strategies in taking advantage of the coming weakness (notice I did not say "crash") in housing prices. Signing off, Henry K. To, CFA MarketThoughts.com Independence Capital Management, LLC. is the investment advisor to the hedge fund Independence Partners, LP. Marketthoughts.com is a service provided by Independence Capital Management, LLC. The mission of Independence Capital Management, LLC. is to provide the highest level of performance, service, integrity and education to our readers. This involves providing insights into the factors that will affect the stock market and individual stocks - helping our readers to maximize returns in favorable investment climates and protecting assets in unfavorable climates. We provide our readers with a weekly commentary designed to educate subscribers about the stock market and the economy beyond the headlines. This commentary usually involves focusing at the fundamentals and technicals of the current stock market, but may also include individual sector and stock analyses - as well as more general investing topics such as the Dow Theory, investing psychology, and financial history. Copyright © 2005 MarketThoughts.com
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Duncan	10-Jun-05, 11:48 AM (GMT)
8. "um"
http://www.safehaven.com/article-3227.htm June 10, 2005 The Yield Curve - Greenspan's Blind Spot? by Paul Kasriel Fed Chairman Greenspan testified today before the Joint Economic Committee (JEC). As an aside, the JEC is one of the best committees in Congress. Why? Because it has no legislative authority. In other words, it can do no harm. Greenspan did not break any new ground in today's testimony. Although economic growth has slowed, Greenspan does not see further slowing. Inflation is contained. The recent spike in unit labor costs is partially the result of one-off increases in bonuses and stock-option redemptions. Housing is "frothy" in some regional markets, but there is no national housing bubble, according to Greenspan. There are no material threats to the national economy if some of the housing froth dissipates. In his prepared comments, Greenspan cut and pasted from the May 3rd FOMC policy announcement in that the FOMC still "believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." So, the Fed will keep raising the funds rate by 25 basis points per meeting for the foreseeable future. But how far into the future is foreseeable? That is, does Greenspan know the level of the funds rate that would be "neutral"? No. Greenspan said that the Fed did not have the expertise to determine ahead of time what the level of the neutral funds rate is. But he would know it when it got there. So, the neutral funds rate might be 3.25% or 5.25%. All we could infer from Greenspan's comments is that he believes the current 3.00% funds rate is below neutral. As Greenspan nears the end of his Fed tenure, he is showing uncharacteristic humility in that he still is baffled by the decline in the 10-year Treasury yield in the past year. Although he notes that historically a flattening yield curve has been associated with future weaker economic growth, he does not believe that this is the message the yield curve is sending today. But Greenspan seems to have a blind spot when it comes to flattening yield curves. This is illustrated in Chart 1. Chart 1 Back in 1988, the 10-year Treasury - fed funds rate spread narrowed from 125 basis points in August to 35 basis points in December. I remember that someone asked Greenspan whether this was a sign that economic growth would be weakening. He responded that the narrowing spread did not presage slower economic growth and continued to raise the fed funds rate, pushing the funds rate above the 10-year yield in 1989. In 1990, we experienced a recession. Between January and March of 2000, this yield spread narrowed from 121 basis points to minus 3 basis points in April. The Fed then raised the funds rate another 50 basis points in May of 2000, inverting the yield curve even more. The economy slipped into a recession in 2001. Chart 2 Chart 2, which I repeat from yesterday's commentary, shows the regular negative relationship between this yield spread and the ISM Manufacturing New Orders index. As the spread has narrowed in the past year, the New Orders index has plunged toward the 50 level. But Greenspan says it is different this time, just as he said back in 1988 and 2000. Paul L. Kasriel, Director of Economic Research The Northern Trust Company Economic Research Department Positive Economic Commentary "The economics of what is, rather than what you might like it to be." 50 South LaSalle Street, Chicago, Illinois 60675 The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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