Where is the bottom?

Over the past several days I have been asked two questions over and over. Where is the bottom, and where would I invest? They are difficult questions, and I don’t have great answers.

It has taken the market 4 months to reach the lower target for the Dow Jones that I called for on November 18th 2008. Once it reached that point I expected another 500 point drop, which took a week. At this point some 55% of my predictions from last year have happened. And that is a conservative estimate.

Since that time I have spoken with many former stockbrokers, business owners, and investors. And from all these discussions, the political environment, and what I believe, I can say the following with confidence in my mind.

The Dow will flounder between 7100 and 6600 for as long as the next 9 months.
Any upside movement in the market will be temporary.
If any global political events heat up in the next 9 months, things may get far worse.
Gold and oil will run sharply first.
A major bank will fail.

Since the start of 2009, the Dow Jones Index has lost 20% of its value. This was predicated on a liberal Democrat taking office as President, a Democrat-run Congress, the addition of $800 billion (not including interest but rounding up slightly) in spending called a stimulus package, and the fact that some $350 billion of authorized bailout is pending use.

None of this is a positive for the economy. Every large investor and institution could see that. I believe that major investors took the time from October until December to pull out most assets from the market. December was a time when small investors entered the market, and some short seller closed their positions. Which led to an artificial rise in the markets, seen by small investors and some media as confidence in President Obama.

From Jan. 2nd and on (at the latest), I believe large investors have shorted the market – if not just before that time. I believe that they foresee little opportunity for an investment over the next 18 months. Bonds are worthless at these interest rates (especially if inflation grows even half as some expect). Corporations are troubled by negative growth for at least 2 more quarters, and the continuing credit squeeze. Thus stocks are inadvisable, generally.

But I do not see large shorts to close their positions yet. They are waiting for a signal from the Oval Office and Congress. IF the Obama Administration goes forward with creating a nationalized healthcare, costing tens of billions of dollars to start, and Congress goes forward with the currently whispered 2nd stimulus (of the Obama Administration), then the shorts will increase and the Dow will go far lower.

The result of continued spending is that tax rates for the “wealthy” and corporations must increase. Where else will the money come from? And wealthy is a relative term. Because as the just passed stimulus package has made clear $75,000 for singles and $150,000 of couples is the threshold. And since corporate taxes were promised to increase 10% during the Presidential campaign, that cuts the current profits. Including transaction costs and taxes, the Dow would need to go down roughly 800 more points to give a decent net profit. If the cost of the Government is increased the assurance of who will pay grows exponentially.And thus the profit needed must as well.

But a friend mentioned something interesting to me. The market is always wrong at the top and bottom. With maybe some 90% of the market negative currently, we must be near or at capitulation. Which I agree with. Except normally at the top or bottom of a market there is an obvious near or mid-term expectation. There is none now.

There is virtually no sector of the market that can be observed to have an obvious benefit under the current political plans. Nor in the current private markets. Thus there is no area for capitulation to rush forward to. Thus it will not happen.

When the markets do reach the profit point of acceptance, and close their positions, where will they invest?

It is my expectation that the safest and smartest positions to create are in oil and gold. Only in those 2 arenas are we able to see assured continuous demand. Every other sector is questionable on time and return. Especially in this political environment.

There are companies in these sectors, or related ones, like Alcoa that trade at below book value now. This is an interesting value. But expectation of near-term growth is null. Yet at some point the vital raw goods will be needed, and demand plus speculation must drive the prices higher. And as that price rises, without another sector to compete with any real assurance, there will be a run – latter to be followed by another crash in those sectors.

At the very best, I expect some sectors of the market to show better than expected numbers in the 3rd quarter. Those that took short positions and closed out long positions in mid-2008 might have the same result for the 2nd quarter, but that will be far fewer companies than in the 3rd quarter.

This is a recipe for very flat to downward trends in the market.

Still there is hope. But it takes a lot of patience, building of positions in small steps, and no expectation of a reward (ie a return of 15 – 25%) for 18 to 30 months from now.

There is my answer. Take it as you will.

Dow Jones at 7600 - what I said, right and wrong

Back on November 18, 2008 I made a prediction. I said that in the first quarter the Dow Jones Index will hit 7600. I then proceeded to explain why it will do this and what will be happening. With the Dow having crossed my target I will reflect on what I said then.

“…auto makers are now first in line to ask for their own bailout,… And Congress will likely pony up the money for each of them.”

In fact the auto makers asked Congress for $50 billion dollars. As a surprising move, probably meant to give citizens the impression that Congress has some idea of what it is doing, the auto makers only received $15 billion.

Keep in mind that like the credit bailout, auto makers claimed at the time that the entire amount was needed or they would fail. To date the auto makes have not failed (though they have laid off workers, which was inevitable) nor has the economy though less than all the funds requested have been used.

“So far a 2nd stimulus plan is being conceived, growing from an initial hidden $50 billion, to $150 to $300, and now is being speculated at $500 billion dollars. Nancy Pelosi doesn’t just screw up, she does it with swings to the bleachers.”

House Speaker Nancy Pelosi not only hit the bleachers, she hit it out of the park. The stimulus package is being signed by President Obama today at the eye-popping total of $787 billion. But only Democrats think there is no waste in the stimulus.

“This means that New York City will get crushed this year.”

So far the budget of New York State is so bad that Gov. Patterson is in the process of taxing citizens based on weight. And who knows what will be next, but be assured the State is in severely bad condition.

“President Obama will get inaugurated and the Dow will drop 500 points.”

In fact the Dow dropped every day from the start of 2009. On the inauguration the Dow jones Index dropped 337 points. Not the 500 I expected, but close enough.

“Oil prices should stabilize at around $65 - $70 per barrel to start the year…”

I am completely wrong. They are currently at about $37 a barrel of crude oil. The economic crisis is keeping demand way down, and so far oil is not being used as an alternative investment.

“Gold and precious metals should all increase dramatically in a similar manner to that of 2008.”

As of today, Gold hit $973.80 an ounce. It is within $36 of an all-time high, set last year.

“Growth in China will likely stall as well, especially since the boost from the Olympics will have faded.”

The World Bank has stated that real exports will be down 7.5% in 2009 (at 3.5% versus 11% in 2008) and the growth in that nation will slow to 7.5%, or down 1.9% from 2008.

“Taxes will increase roughly 3% on all income groups.”

Wrong so far, but just wait for it.

“Several mid-sized financials will fail, blame will go to short-sellers and corporate greed.”

Expectations are that this is on the horizon.

“Confidence in the U.S. Treasuries will weaken, and several nations will begin to sell in hopes of buying national debt of England and a few isolated nations.”

Thankfully I am wrong on this so far. I pray to remain incorrect. But there is no reason for any nation to buy Treasuries at below 5%. It’s just not worth it.

“Unemployment will hit a 20 year high, again raising fears of a depression.”

I cannot count the number of times Democrats, and President Obama, have stated we are in or about to be in a depression. Call it fear mongering if you want to be honest, but it’s a daily statement without question.

Unemployment recently broke a 28 year record.

“Iran and Russia will take aggressive stances in the world stage.”

They have been blustering a bit of late. But they have not taken a full-blown aggressive stance. Yet.

“If I am as correct as I was in 2008, then 60 - 70% of what I have said will occur, though not exactly in my timeframe.”

Well looking at it empiracally I would say that I have got it about 55% right so far. The 1st quarter isn’t over yet either. World politics can shift in a minute, so that might push up my percentages at any time. And honestly I don’t what the rest of what I expected to come true. It would mean devestation to millions.

I will stand by a though I made at that time as well though. I expect things to get a bit worse and hold through the second quarter. But given I had no idea what the stimulus package would entail, nor such a enormous wasteful pricetag I will ammend my thoughts.

The 2nd half of 2009 will be just as bad, if not worse than the first half. There is no stimulus in the stimulus package. There is nothing to preserve or create jobs. No sound person would use any of the paltry amounts the stimulus will provide to do anything but save, pay bills, or watch evaporate if gas and/or oil prices move up at all.

At this point I would imagine gold hitting $1150, crude oil eventually getting back to about $60 (mostly through alternative investment speculation and production cutbacks). I fear but expect unemployment to hit 10% by the end of the year. The 4th quarter will be horrible. Inflation will likely run 3% higher. The Dow Jones Index can be expected to drp another 500 and stabilze there over the next few months.

Again I will say that I hope I am wrong. I want to be completely wrong by the end of the year. I want to laugh at what I expected with tears of joy. But I doubt it.

I’m at 55% and we are only in the middle of the 2nd month of the year. With a liberal Democrat President, a Democrat-led Congress that is headed by 2 of the most incompetent (in my opinion) politicians in decades, and expectations of spending that might have been called astronomical only a few years ago.

But we will see. Do let me know what you think.

The Dow Jones Index does not lie

Unless one of the better turn arounds of the stock market history occurs in the next 10 minutes, the Dow Jones will have fallen several hundred points, around the range of 7900 or less (a mere 300 points from a target I predicted over 3 months ago). This is happening at the same time that the Senate has pass the economic stimulus package created by House Speaker Nancy Pelosi, bloated by Democrats, and touted by President Obama. So I have to wonder, exactly which people involved with the economy think this is a good plan?

This plan, and the extensive bailouts that President Obama’s tax dodging Treasury Secretary Geithner, are proposing obviously have not convinced the critical group of Americans that good times are anywhere close to the horizon. Since these investors also represent a large portion of the small and mid-sized business owners in America, as well as the world, I expect only one thing. All the emphasis of gloom and fear drummed up by Democrats will actually come to pass. Just as a result of their actions, and not the inaction they claim.

Unemployment in the nation is bad. Not quite the nearly 11% level that the policies of the Carter Administration created, but President Obama and the Democrat-led Congress have just gotten started. We currently hover at 7.8% unemployment, with the seeming goal of 25% reached in the Great Depression getting closer to the crosshairs each day.

None of this has stopped any Democrat, including the President from pressing forward. We have waste and pet projects, call them earmarks by another name, and little hope of improvement. Just look at what is planned.

“$10 million for urban canals, $2 billion for manufacturing advanced batteries for hybrid cars, and $255 million for a polar icebreaker and other "priority procurements" by the Coast Guard.”

That says nothing of the $100 million to be spent on Honey bees and similar items I cannot imagine creating jobs.

“The plan that we've put forward will save or create 3 million to 4 million jobs over the next two years.” – President Obama

“The president's own economists, in a report prepared last month, stated, "It should be understood that that all of the estimates presented in this memo are subject to significant margins of error."

But the polispeak is great. The promises of improvement sound fantastic when you include supposed facts that no one can ever corroborate. And the inclusion of key words like “save” helps keep the polispeak from becoming an outright lie, while showing the absolute lack of confidence that the plans instill. Yet this is good enough for the average American that does not review transcripts nor listen intently to ever word. But those who invest and run companies do, more often than not.

“The economic stimulus bill would allocate about $20 billion to help hospitals and doctors transition from paper charts to electronic health records for their patients… By itself, the adoption of more health IT is generally not sufficient to produce significant cost savings, the Congressional Budget Office reported last year.”

Again it is the confusion of facts and expectations, without proof, that keep many Americans from noticing the horrendous ramifications of the stimulus package and continued bailouts. The examples are not limited to just these few statements, but a collection of comments to the public since Pelosi first stumbled into the idea of another stimulus package in October (then priced at $50 billion total), and the factual items in the nearly $900 billion (actually over $1 trillion when interest is included modestly) terms.

The Dow Jones Industrial index is a forward indicator of the mind of business and economic health. Often it overreacts to the actions around itself on any given day. And there will be more than enough pundits and economists declaring just that, if the major news media that has invested so much into President Obama bothers to investigate that much. But economists don’t work the stock market. Stock brokers and business owners do. And without the degrees, charts, and visions of Santa delivering a healthy economy they have concluded, since January 2nd, 2009 that things are going to only get worse.

So I ask you, who do you believe? Congress and the Executive Administration that routinely fail to pay their taxes, write bad checks, organize pay-offs, and lie about the job they were elected to do (Barney Frank)? Or the guy who signs your check, watches the economy in action every day at every tick on the Dow, and the guy that will give either of those 2 enough money to expand their business and employ more people?

I was a stockbroker, so my opinion is biased. But you can look at the facts and the carefully stated words for yourself. Just don’t look at the value of your 401K while you do so.

Don’t say I didn’t warn you

I have been talking about the economy and what would happen if a Democrat would win since late 2007. When it became clear that President Obama was the Democratic nominee I discussed how the stock market would react to his win. And after the election I forecasted what would likely happen to the Dow Jones Index on inauguration day.

I hit the nail on the head. Well close enough to that anyway. I called for a 7600 Dow on or shortly after the inauguration. I called for a 500 point drop on inauguration day. And I detailed how the economy would continue to tailspin to levels last seen in the Carter Administration.

The Dow Jones Index closed down 332 points. The Dow currently sits at 7949. That’s down 4% from Friday and 12% since the start of the year.

Some will want to blame this all on President Bush, but the reality from Wall Street is that a Liberal Democratic President is a negative for the economy. If only ½ the economic promises made on the campaign trail come true the national debt will tower over any level seen before, and none of the plans are good for private business. And that is bad for investing.

Still crude oil is at lows, and the inflation hitting food has not increased in a while. So maybe Joe Public doesn’t realize how bad things will get, yet. But Wall Street is preparing. And they are looking at the long haul.

I still target the low of the first half at about 7600. I still believe that the money wasted on the mortgage/ credit bailouts will increase drastically. I say again that the 2nd stimulus plan will be a worse waste of money than the first under President Bush. And I insist that the Democrat-led Congress under Pelosi and Reid are the worst Congress in at least my lifetime.

I really hope to be wrong. But so far I am 4% or 349 points from being exactly on target. Any spike in oil prices, a run on gold, a blip in the value of the dollar, continued fighting in Israel, or any of a number of anti-American nations - and terrorist groups - beating their chests (as Vice President Biden promised will happen) and my targets will be exceeded. And all the feel-good talk prior to the inauguration will evaporate.

Yes the stimulus plan will be a great political boost for our new President. And public opinion will soar, until everyone realizes that the extra $60 a week (or less) will not prevent them from losing jobs. Or that at some point soon you will be paying taxes for a house you don’t own. Or paying for a healthcare system that is substandard and as convoluted as any department of the Government. Stock will lead the way down.

But there is time to avoid all this. Congress can reel back all the new additional spending. President Obama can give up on the 2nd stimulus plan. Taxes could be cut, at both the corporate and personal levels. And departments of the Government could be trimmed of wasteful spending.

In a pig’s eye.

Congress is going to spend more than what has been used to bailout the financial industry as the first shot in the bow. Additional money will soon be needed to balance the financials already continuing to flounder, not counting those that will follow like dominoes. And the auto industry that stated flatly that a penny less than $50 billion in a bailout would mean Chapter 11, will become bankrupt as they did not get their money.

Increased regulation will increase cost, and fail to increase good business decisions. And companies will fail. The stock market will lead it all down. Lines will form for Government corporate handouts. The national debt will soar.

Sounds bleak doesn’t it. It should. It is happening before your eyes. By the end of the 1st quarter Joe Public will feel it, badly. Just in time for taxes.

And if I am only as correct as I was about my prediction for the inauguration, well you can see what that will mean. I hope, honestly hope, that I will be wrong.

I really want to be wrong. But what I see in the marketplace tells me that I am right. That double digit inflation and unemployment are mere months away. And that it will last at least as long as the Obama Administration, if not longer.

So since putting your money in a bank will gain you nothing, the taxes on investments make that plan dumb for anything with a return in the next 2 years, and gold is already moving just wait. Wait and take small bites all the way down. Because America will rebound at some point. Because I hope to be wrong soon. The reward from that will be better than me eating crow, it will be a stronger economy.

I can’t wait.

Gold, oil, stocks, Democrats and 2009

Last year I was looking at the gold markets and speculated that gold would surge along with several of the gold stocks. On December 6, 2007 I rebuffed the claims of Goldman Sachs when they stated to sell gold. At the time the spot price was $855.

In January of 2008 I pointed out a few gold stocks:

• Streettrack Gold Trust
  
• Barrick Gold Corp.
  
• Agnico Eagle Mines Ltd.
  
• Goldcorp Inc
  
• Western Goldfields Inc
  
• Agnico-Eagle Mines Ltd
  
• Alamos Gold Inc
  
• Anatolia Minerals Development Ltd
  
• European Goldfields Ltd
  

- each of which was soaring. At the same time I was pointing out my belief of what would happen to gold spot prices, oil, and the Dow Jones Index.

"All stock markets, all financial markets, move on emotion first. That’s given. And few things are more emotional that 1.25 basis point moves by the Fed in a week. But fundamental facts of the markets always come to fore and correct the emotion. To me, $1000 gold, and higher gold stocks across the world, is as fundamentally sound today as when I discussed it earlier this month and in December of 2007."

Which lead me to state

"Now I will go one step better. If supply remains constrained, as we can see is likely, and the U.S. economy has the mild recession now being stated by the Federal Reserve. If oil production is cut, in combination with the recent U.S. refinery accident that has placed pressure on capacity, and Senator Barack Obama becomes the Democratic nominee for the President of the United States. If all those actions occur, which seem 80% probable to me at this time, then I believe that gold spot prices in excess of $1125 are possible by the end of this year. Commensurate with this move should be gains among the gold mining stocks across the world."

How close did I get? $1035. Close enough for me and many others. And then gold drifted down. The power outages in South Africa were resolved, oil prices peaked and then dropped. The world was consumed with the problems of the mortgage bailout and then the credit crisis. Major financial institutions failed and/or were on the brink of collapse as politicians (like Barney Frank), The Fed, and the Secretary of Treasury all scurried around like rats on a sinking ship.

Now we have entered 2009 with several important facts known. Interest rates are at all-time lows, the mortgage crisis has yet to be abated, oil is on the rise again - albeit from lower levels than seen in recent years. The American economy is leading the world into a depression, and at our helm is a new inexperienced highly liberal Democrat. None of these things are positives.

The American Government is about to spend even more money than all of 2008 combined, with a Democrat-led Congress that has no desire to reign in the Democrat President. Both his policies as stated and his indicated primary goals are wastes of money on a grand scale few countries could ever command as their GDP.

Thus we are seeing gold sit at $879, the Dow at 9034. That's just about 2000 points lower than my initial expectations for 2008, but above the lows of the year - barely. What will happen next?

In a move much like what was seen in 2008 we will see gold and gold stocks rise. I again call for gold spot prices to hit $1125, with gold stocks reaching new 52 week highs. This will likely be coupled with a reduction in oil production, increases in crude oil prices (to a high of around $105 a barrel again), an ethanol glut, higher energy costs, increase home losses, the failure of more financial institutions, the bankruptcy of at least 1 major auto company, and higher unemployment.

The new stimulus plan envisioned by President Obama, some $850 billion dollars (about 5x the Bush stimulus), will stabilize investor fears and consumer confidence for 1 quarter. Then the resulting fact that most of the money was spent on mortgages, credit cards, bills, or placed into bank accounts and mattresses will be seen. And the economy will drop again. The stock market will drop to about 7600 - as I stated in 2008. The bear will roar.

Gold and gold stocks will be one of a few places investors and those that fear financial institutions will run to. Crude oil will be another. Demand will outweigh supply, and emotion will propel prices ahead of that. For 9 months of the year the economy will be abysmal.

If I am as correct as I was in 2008, then my expectation for gold will be in excess of 90% correct. In terms of the Dow I am being overly generous, if my past predictions are accurate. And Crude oil will likely exceed and then under-perform my belief.

While many will feel my thoughts are overstated, as they did and were partially correct in 2008, I believe that the overall outlook is less stable than in 2008. Politics internationally are as bad with Israel and Palestine trading rockets and Iran moving forward on creating nuclear weapons. Fewer banks are making loans, and fewer people and businesses are qualified to get them. Democratic spending is looking to increase the national debt to levels unseen, without any real expectation of improvement. Government interference with private business is greater than ever before - with the Government consistently proving it has no clue on how to run anything.

It is quite early in the new year. Our new President has yet to be sworn in. Much in the world is in flux. So I hope to be wrong, I hope very wrong, in what I am predicting. But I believe that at the end of this new year I will be no less than 60% correct. How you act on that is up to you.

Dow 7600? Believe it

As the 4th quarter moves steadily towards the holidays and businesses across the nation collectively hold their breath, I decided to look forward to 2009. What are some of the things that I see coming economically in the new year?

Dow Jones Index at 7600. Yep that’s a bleak statement. It’s not what anyone is asking for in their wishlist to Santa this year (except a few masochistic short-sellers). This is definitely a lump of coal.

But I will say something that you really aren’t expecting. That’s the upside in my view.

The 4th quarter of 2008 is going to be bad. Very Bad. We all know it. We knew it when before Halloween businesses were already getting their Christmas displays in order. They needed sales that bad. And still do.

Unemployment is up, financial companies are laying off people in the thousands, and the prospect of inflation looms larger by the day. Add to that recipe a Democratic President (a historically bad indicator for the economy) who’s policies – based on his voting records – are extremely left leaning, a Democrat-led Congress, the worst Speaker of the House ever, and you get a big mess.

But there is the fact that over $1.2 trillion has been spent this year to bailout the mortgage and credit crisis. The money has been the worst spent money I have seen since Waterworld was made. And the fact that no one has control over how or where this money is being spent, just means that it is being spent poorly and ineffectively.

So all that is left to look forward to is the thought that the auto makers are now first in line to ask for their own bailout, to be followed by retailers, pharmaceuticals, airlines and probably every other industry in America. And Congress will likely pony up the money for each of them.

But let us not forget that Congress has included the people in their spend at will program. So far a 2nd stimulus plan is being conceived, growing from an initial hidden $50 billion, to $150 to $300, and now is being speculated at $500 billion dollars. Nancy Pelosi doesn’t just screw up, she does it with swings to the bleachers.

Any one of these things would not hurt the stock market that much. And the by-product of severely deflated oil prices would be a boon to business in the mid-term. But it’s all happening at once. Saving on energy doesn’t matter much when you have no sales revenue.

The weakness in the stock market can bee seen in that just before the presidential election, the big institutions watched the polls and sold to get out of the way before President Obama was voted in. His promises to raise taxes, and his historic voting record were not overlooked. The only pause in selling came to allow smaller investors a chance to buy into the market and raise prices for the next wave of selling. My guess is that most of the money is sitting in cash right now, waiting for an opportunity in anything but stocks. At least in the U.S.

This means that New York City will get crushed this year. Bonuses from financials are getting scrutinized and thus being cut across the board. That means less money in the tri-state area, and thus a bad Northeast holiday season. That means the east coast will suffer and the nation as a rippling effect.

I’m sure some believe the polispeak that Wall Street and Main Street are separate – a concept only politicians could come up with. But this is how I see it all playing out.

Holiday sales will be off from last years rate, further pressuring the Dow Jones Index. Unemployment will increase going into the New Year, and inflation will start to rise.

President Obama will get inaugurated and the Dow will drop 500 points. This is not a racial reaction, but a political one. Within a week or so of that date a $300 billion 2nd stimulus plan will be passes raising the market temporarily. Several forward indicators will suggest a negative 4th quarter and 1st quarter 2009. Home sales will drop again – due to fewer loan approvals. Home prices should drop in proportion, with foreclosures increasing.

Oil prices should stabilize at around $65 - $70 per barrel to start the year as speculation and alternative investments will drive the price higher. Gold and precious metals should all increase dramatically in a similar manner to that of 2008. Growth in China will likely stall as well, especially since the boost from the Olympics will have faded.

President Obama will be forced to state that he will not raise corporate taxes, and a smaller increase in capital gains will be proposed. Taxes will increase roughly 3% on all income groups.

HD television service will cause a disruption across the nation and millions realize they need different television set, and will spike retail sales – but this is a false increase in the economy. It will be read as a positive indicator by politicians though.

Several mid-sized financials will fail, blame will go to short-sellers and corporate greed. Increased regulations will be passed that will not address the potential for bad business decisions, and the markets will sell again in fear of a more socialized America. The first rounds of nationalized healthcare will be discussed. The national debt will run higher, the deficit even more so as new spending will have no check from Congress.

Confidence in the U.S. Treasuries will weaken, and several nations will begin to sell in hopes of buying national debt of England and a few isolated nations. There will not be a run on America as this would instantly plunge the world into a depression. But the fear will accelerate pressure on the markets. The Fed will lower interest rates again to counter these fears, and to again increase loan availability. Inflation will start to gain attention in the media.

Unemployment will hit a 20 year high, again raising fears of a depression. And Iran and Russia will take aggressive stances in the world stage. Oil will run on this fear, as will gold. But direct crisis will be averted for the time being.

I expect all of this to happen in the first quarter of 2009. It is my expectation that to some degree every item I mentioned will occur. The importance and effect of each of these items will depend on timing and reaction as they all play off of each other. But the net result will be a 7600 Dow Jones Index, or lower.

I expect that this will be the bottom of the market. Smaller investors will flee the markets, and discussion of Federal intervention to save 401K’s will begin. This will also be seen as socialistic, but the need will outweigh these fears. The market will likely hover in this bottom range for the 2nd Quarter.

I’m not sure what might happen next.

I hope that I am wrong an most of these expectations. I would love to see the market gain confidence and rally in the face of these events. I hope that President Obama can rise to the occasion and lift the economic and personal spirits. But that is yet to be seen.

If I am as correct as I was in 2008, then 60 – 70% of what I have said will occur, though not exactly in my timeframe. Take that as you will.

Keating 5, Tony Rezco, William Ayers - a lot of bluster while candidates avoid the economy

Wow, the words are flying now. The Presidential race has taken a step to overdrive as both the candidates attack each others past. And the points picked by the McCain campaign seem to have the Obama campaign flustered to say the least.

The Obama campaign has been targeting the investigation of McCain in relation to the Keating Five investigations. Senator McCain was vindicated in that investigation and found to be without blame. Yet this was a huge problem at the time, and may again be, as the economy flounders in the wake of the mortgage bailout and the credit crunch.

With all eyes on the Dow Jones Index, which had dropped as low as 781 points down in the day. Expectations that all the problems of the mortgage crisis were averted by the $700 billion bailout have been proven false, which really should be no surprise. Europe and other world markets are now facing their own problems which again rippled from the initial failure of the Fed, Barney Frank and Chris Dodd on their Congressional banking committees, and President Bush. Note that neither Senator Obama nor Senator McCain were responsible for this economic fiasco. But with the introduction of the Keating Five Obama is trying to paint McCain as fiscally irresponsible.

Of course if the record is to be looked at only McCain has tried to reform Fannie Mae and Freddie Mac and highlight problems while Democrats denied the existence of a problem. And only McCain actively worked on improving the bailout plan from what was essentially a blank check to an unwatched Treasury Secretary, with repayment going to Democratic pet projects of dubious nature (ACORN) instead of the public.

The McCain camp has targeted the highly questionable association of William Ayers and Senator Obama. I admit that I have trouble with the close association of the potential next President with a known, and self-admited, terrorist that actively was involved with the bombing of Government buildings on American soil and remains unrepentant. And it is accurate that Senator Obama has initially described their association as a friend, and has backed away from that since the early Primaries while the major news media has avoided all discussion of the matter.

The McCain camp has also targeted the association of Obama with Tony Rezco and Rev. Wright. I disagree with these associations being used against Obama as much as I disagree with The Keating Five tactic. Obama has never been found to have been influenced by either man in this voting record since he engaged in politics in Illinios. Without a reason to be alarmed, their less than perfect public images are just mud to be thrown at the candidate. And I have discussed my thoughts about the attacks using Rev. Wright, which I feel are a sidestep to a racial attack, in depth during the Primaries when Senator Clinton first used the tactic.

But the fact is that neither of these items being used by each camp address the fact that the economy will be weaker and troubled during at least the first year of the next President’s term. It is unrealistic that further cuts to taxes will be immediately available to stimulate the economy. It is equally unrealistic that adding 800 billion in new spending will be possible.

Right now Senator Obama is talking about taking on House Speaker Nancy Pelosi’s dream of a second stimulus plan. Considering the over $1 trillion spent this year just on failing banks and finance companies I can’t imagine where this money would come from, or how it would be any more effective than the first stimulus plan. Infact it would be less effective considering the economic landscape.

As for McCain he continues to believe that lowering corporate taxes is the only solution, which I believe will be a hard sell.

The fact is that right now the drop in the Dow Jones Index, and the up coming horrendous 4th quarter earnings that will reflect the slowdown in the economy, are helping Senator Obama and Democrats. There is no logical reason for this, since both Parties were equally lax and culpable in the creation of this problem (though arguably Democrats are slightly more at fault especially if the past is considered). But if the economy continues to falter drastically, and the promise of a 2nd stimulus plan gains attention (as it likely will) the chance of Obama winning the election increased dramatically.

And if that is what happens, for the reason of the economy, the real pain will start. In my opinion the weakest plan, and the least fiscally flexible plan, is held by Obama. With him in office, and a Democratic Congress again, I expect new record low approval ratings, double digit inflation, double digit unemployment, and an increase in taxes of all Americans by 7 – 15% minimally. Essentially a return to the environment that President Carter created.

But we will see if I am correct and if the various mudslinging attempts of the campaigns have any backlash.

2 bad bailout deals out and what is next at bat?

The bailout deal that was rejected on Monday by the House of Representatives was a bad deal. And the result was a Congress divided, a media blitz, polispeak galore, finger pointing, and a 777 point drop in the Dow Jones Index.

Most focus on the drop in the Dow Jones. The media love to play that up. I even heard the number increasing as the night went on. Some newscasters call the drop “a nearly 800 point drop”, or “nearly a 1000 point fall”. Talk about exploiting the facts to gain viewership.

The fact is that nothing that happens will stop the drop in the market. The second that short-sales are allowed back into the market, bigger drops will occur. All that stopping these trades has done is increase the power of the drop. Because while the numbers look big right now, the actual affect is not nearly as big. That’s because of the current value of the Dow Jones Index. But as the Dow drops, these big sell-offs become more meaningful and powerful. And they feed a bear market like honey.

But the bailout, now trying to be spun into a “loan” by pundits and politicians, is horrible. Because it fails to answer 2 simple questions. How much is being assumed in bad debt, and how do taxpayers get repaid?

The first problem goes like this. Under the deal laid out on Sunday, at least 3 separate payments would be given to Treasury Secretary Paulson to buy bad loans. The value of what he pays for the loan is unknown. Would he pay the original price of the loan, the current value, the real absolute value? No idea, nor was one required by the legislation. Thus he could buy all the bad debt at the top price, ensuring taxpayers could never break even or be repaid.

The second problem is that there has been nothing said on how taxpayers get the money back. The money is coming out of our pockets. We know that. To the tune of about $10,000 per person. And it will likely be collected from higher taxes for EVERYBODY. But how are we to be repaid. Will we get tax credits in the future? Or a check? Or guaranteed lower taxes (though how much lower and lower than what level is yet another question)? If you can’t say how we will get repaid how can we believe we ever will.

To deal with these 2 major issues the politicians that were trying to rush this version of the bailout proposed this bit of eyecandy. Executives would no longer get ‘golden parachutes’. Yea! It’s nice that the Government is in effect starting on the path to regulate how much money anyone should be paid. It’s very socialist of them. Still I can agree that paying someone that bankrupts or severely damages a company millions is folly. Though I see no problem paying them is they create a bigger stronger more profitable company than they took charge of. But the legislation is unclear if a great executive doing a great job is free of the same stipulations and restrictions.

And all of this says nothing to the power suddenly endowed to the offices of Secretary of the Treasury and Fed Chairman. They get control of more money than 1/3 the countries of the world make combined. And if you think that Congress can watch over those positions and keep them in check remember that it was the brilliant and attentive eyes of Banking Committee leader Barney Frank that said in July of 2008 that Fannie Mae and Freddie Mac could not fail, and that he saw no problems in the financial markets.

And another unseen problem of the bailout deal that was thrown out is its effect on the nation. This deal would have effectively kicked out the last leg holding New York as the financial center of the world. And it still might happen. And with that loss of status means tens of millions of dollars lost to the nation and New York State.

This is not a game with obvious consequences. Some things have to be thought about. And because some of those most responsible for this mess don’t want the blame, they are insisting on the most speed in passing the buck and a deal.

The bailout will cost over $1 trillion by the time it’s all said and done. The stock market will fall as the dust settles and every industry with debtors lines up to be next to be paid. And eventually things will improve. Such is the nature of markets and trade.

But if the main questions I have asked are not answered in future bailout proposals, because of the rewording of what the deal is called, or political favor to a Presidential candidate, or rushing to soften the ultimate downturn of the bear market, or just because no one was smart enough to ask, then the real cost will be far worse than just the money thrown away.

Are mining stocks the safe haven from the bailout crisis?

There is no deal on the bailout of the U.S. financial markets as of this moment. Treasury Secretary Paulson is in the White House as I type trying to create a new plan. The Congress is busy trying to make their own plans as well.

That is the situation that the world markets will be facing tomorrow. And in the wake of this revelation I expect that the Dow Jones Index and other markets will retreat in the face of an unsure weekend. Which means that this is a great market for mining stocks.

I have already mentioned that I feel that coal mining is a great area for the future, based on the need of alternative sources of energy to crude oil. But when the markets are in turmoil, and with direct talk from the likes of Warren Buffett stating that the potential of failing to get a bailout deal done is akin to a financial Pearl Harbor, well there is just 2 place you can bet people will go – gold and oil.

Gold is the traditional hedge in worrisome times. And crude oil has gained in popularity as a hedge as demand has increased in China and other developing nations. Both of these items are limited commodities, and require mining to bring them from the earth that surrounds them.

In the immediate short-term gold will have to fluctuate to handle the demand for safety. Which means that the gold supply will diminish and mines work harder to make up the difference. In the short and long-term oil is both required for energy needs and depleting the finite supply.

And I have to say that mining stocks look great because of all these factors. Why?

There was an old saying from when I was a stockbroker

“You may or may not get rich looking for the gold vein, but if you own the picks and axes you’ll never go poor.”

Companies with proven assets in coal, gold, and oil are the picks and axes of this market and on into the future. The world needs these commodities for safety and energy. No matter the financial outcome, and perhaps because of it, these valuable commodities have to come up to the surface. And mining companies are the means to do so.

With the decreased liquidity in the capital markets, competition is reduced and weaker companies will be forced to merge with bigger and stronger companies. Thus supply will be centralized into fewer hands. With demand up, profits will increase.

Now some would say that this is a temporary blip. And were this the spring I would agree. But with winter and cold weather approaching, and the fact that a slow 4th quarter is all but guaranteed in the U.S. this small blip should last for 6 months from this point.

Plus the fact that a Democratic President has usually been met with a lower market day one. In this case, Senator Obama has yet to declare that the current bailout of $1 trillion (including AIG and Fannie Mae and Freddie Mac) will disallow his initiatives on healthcare and other social programs. So the damage, unless he changes his stance, will even be worse.

When you consider all this, I come to the conclusion that mining stocks are one of the few safe havens in this tumultuous market. If you disagree, please do let me know why.

Financial stock weaken, but coal looks great

Back when I was a stockbroker (I know, it’s a bad word today) I had a buddy that love to quote this old brokerage saying.

“Bears make money, Bulls make money. But pigs just get slaughtered.”

Obviously the Board members of AIG, Lehman, Bear Sterns, Washington Mutual, and more than a few other financial companies didn’t know that saying.

But the blood is in the water and panic is in the streets. Ok, enough of the sayings. The fact is that the financial markets are screwed right now. We have hit my target of 10,800 on the Dow Jones Index – though not in my timeframe. My target of foreclosures has been exceeded, currently targeted at 9%. And my list of probable factors are being checked off 1 by 1.

So far:

1. Confidence in all financial will go lower forcing the need for more liquidity
2. Several institutions will fail - focused mostly on those dealing with housing markets first
6. Home foreclosure will hit 5.5%
11. Republicans will be blamed

Now that is only 4 out of 15 on my checklist, but they are the big ones. Gold is rising as a hedge to the dollar and to protect assets. As is crude oil. The Dow has nearly hit my December target of 10,200.

So what do we do?

I say buy. There is no greater time for profit than when everything is in a freefall down. Of course picking your time and which stock is essential. I like the financials, because the winners will rally strongly once things settle.

I would avoid Citigroup. They insure their own product and had massive exsposure to bad mortgages. I would avoid Insurance companies since I expect that regulation restricting their abilities to own other assets will be restricted shortly.

But what else is there to buy. In every down market something always goes higher. And there are always leaders on the way back up.

Coal is a great area. Energy is one of the top 5 issues on the minds of voters. Politically it’s a go to industry. Increasing coal use is positive because it means less foreign oil, increased business domestically, increased international trade, and cheaper energy prices to consumers.

Also if coal is liquified then we see the potential for a fuel that is carbon-nuetral as compared to oil. The cost of this process is about $35 per barrel equivalent to oil. That means a savings of some $55 or more dollars per barrel at current prices. Yet at this moment production is minimal.

And coal is plentiful. At current energy consumption rates there is enough coal to power the entire world for 57 years, or just the U.S. for 164 years. And did I mention that the U.S. has the largest reserves in the world. This says nothing of the coal-bed methane that is a potential energy source as well.

A couple of interesting names in the sector include:

Arch Coal
International Coal
Walter Industries
Peabody Energy
Patriot Coal
Massey Energy
Alpha Natural Resources

Now if we are seriously looking for options in this difficult market, taking into consideration political advantages, energy needs, stability, domestic economic benefits, and isolation from the turmoil of the financial markets we have to look at coal. It just seems like smart money to me.

The financial industry will be merging and bouncing around. There will be regulation and political fights about who is doing the right thing. The dollar and crude oil and gold will get stronger or weaker and then back. Smart money looks at panic and sees the road to profit in the future.

Eventually, perhaps even now, financial stocks are attractive but you will get lumps in the near-term. Gold is too emotional. Crude oil is where everyone is trying to get away from. But you like to get on the internet right? Like lights at night? Want to watch TV and stay warm? Energy is the answer, and Solar, wind, biomass and other alternative energy sources don’t exist – nor will they for at least a decade.

It makes sense to me. So like I used to say as a stockbroker

I love life!

Predicting the U.S. economy for 2nd half 2008 and 2009

Well how much fun are you having today? If you hold investments, it may not be a fun day at all.

Back in the 4th quarter of 2007 I said I believed the Dow Jones Industrial Index would hit 11,000. I thought this would be a move in the late 1st to 2nd quarter. I was wrong… on the timeframe. But this is not a pat yourself on the back kind of moment.

With Indy Mac having failed and fears rampant over whether Freddie Mac and/or Fannie Mae will follow there should be no doubt that the Dow will cross into the 10,800 area on Monday. Add crude oil prices that are continuing to rise on fears from Iran and you get a bad situation. But perhaps the real culprit for this current situation is the Fed (Federal Reserve).

The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters.

Loan reserves must be raised at all financial institutions. That especially means Fannie Mae and Freddie Mac. And several institutions need to fail. That of course means that some people will lose their homes. Nothing can, or should be done about that.

When I some will lose their homes I don’t just mean the roughly 4% of homeowners that are in default. I include in that group those that will fail this winter due to the cost of heating oil increases. I expect that in total some 7% of homes are in danger of foreclosure this year. While it’s not a nice thing to say, they need to lose their homes for the economy to survive.

This is not unlike the enormous wash-out that occurred when the internet bubble broke in the stock market. Money was lost, as it should have been, and opportunities were created. Those that made bad financial decisions, whether corporate or individuals, lost and others benefited from that loss. It’s a standard cycle in the markets.

Of course what is likely to happen is that Congress (with it’s 9% approval rating – sure to go lower) will take taxpayer money and bailout homeowners and financial institutions alike. Thus more water will fill the leaky tub. Undoubtedly the current Administration will be blamed (even more than they should) and the war in Iraq (and possibly Afghanistan) will be identified as the cause of all these ills. Which is false.

The outcome will probably be a surge for Senator Obama, who prefers a bailout. This may lead to him being elected and higher taxes to pay for that bailout. And if anyone thinks a bailout of this size will be limited to just the top 1% of the nation they are insane.

I believe, looking at current factors several things are highly probable:

1. Confidence in all financial will go lower forcing the need for more liquidity
2. Several institutions will fail – focused mostly on those dealing with housing markets first
3. Interest rates will increase by 1pt by the end of 2008, increasing another 1pt early in 2009.
4. Crude oil prices will jump to maybe $160 a barrel by mid-September as winter starts, with a commensurate move in heating oil prices.
5. Gasoline will reach $5.15 a gallon
6. Home foreclosure will hit 5.5%
7. Bankruptcies will increase by 3%
8. Higher energy prices will be blamed for the further slowdown in corporate profits and significantly lower (negative) holiday sales in the 4th quarter.
9. A Democratic Congress will be re-elected
10. Senator Obama will likely be elected
11. Republicans will be blamed
12. Taxes will be increased for all incomes by 3% by 2009
13. Corporate taxes will be increased by 10% early in 2009
14. Inflation will soar unchecked by 3 - 5%
15. Unemployment will grow to 8.5% by December 2008

While each of these items may or may not happen they are all interrelated. I expect each item to happen, at least to the degree I stated, generally in the timeframe given.

As money tightens, gold will be a hedge and prices for all precious metals will soar again. Credit will get severely crunched, and credit card rates will fly. The debt load on the average American will increase from the current $6,000 to $8,500. Most of this increased debt will be from higher energy costs. Thousands of small businesses will shutdown.

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama – for the reasons stated – then I further expect a drop to 9,300 during 2009. A significant bear market indeed.

The main problem is that the solutions being looked at now raised taxes and increased liquidity, fail to resolve the actual problem. And the combination will weaken the dollar, to a point where holding U.S. bonds is unattractive. I won’t even mention the increase in retirees and Social Security.

But there is opportunity. I see the housing markets as a great buy, for those willing to hold for 5 years. Buys in the secondary city markets will probably do best having a lower purchase cost and holding value better.

Several financial stocks will be excellent buys. Some have far better balance sheets than others, but will be blasted by the same investor fears as those in bad shape. Companies like Citigroup are trouble spots as they reinsure their own loans and thus hide them better on the balance sheets. Financials will lead the markets down, but they also will signal the start back.

Coal will likely start to regain interest in the quest for alternative energy sources. I expect nuclear energy will also get a push, with at least 1 new nuclear plant being authorized to be built in 2009. I expect a call to switch to ethanol produced by grass and sugar to go initially unheeded until mid-2010. Further harming the ethanol push is the fact that there will be a glut of ethanol by mid-2009 through 2011.

Bond rates will be more attractive in 2009 than today with the likely increases in interest rates. Of course inflation rises will remove that benefit.

There may be other sources of opportunity but they will be guided by factors including but not limited to:

Iran
Iraq and Afghanistan wars
Crude oil prices
Heating oil prices
Inflation
Unemployment
Manufacturing and Industrial layoffs
Retiree growth rates
Healthcare costs
International political stability
Another terrorist attack on the United States

That is the outlook that I have based on what is currently ongoing in the world today. Some of this is just my on interpretation, some my deduction. But I believe that if only ½ of my expectations occur, the general outcomes as stated are accurate.

But look around and determine your own answers. Better to be prepared than taken by surprise.

Looking at the Dow Jones Index and the economy - 3.14.2008.3

As the Dow Jones Index tumbles again, down some 200 points today, I had to look back on some of the things I’ve said recently. I can’t say I am surprised at the condition of the market, nor the outlook being discussed now. On reflecting I found that I mentioned many of these things back in November 2007.

“The Fed's huge new credit facility, announced on Tuesday, "can help in a rather small way ... but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital," National Bureau of Economic Research President Martin Feldstein noted.

And I stated.

“I had a friend recently ask me what I thought would be happening to the economy, and my answer was it’s going to get bad. Perhaps recession bad. And I added that the current group of Democratic candidates may only make it worse.

I say this because of several factors. Not the least of which are, the housing crisis, the financial sector, the cost of oil, and potential tax ramifications based on the current plans announced by candidates.”

Perhaps I was too general. Maybe I could have been more clear.

“One broker, whom I respect and consider quite sharp [even when I disagree], had an interesting comment on my predictions. I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

Maybe if could have seen what would be the effects

“The facts are that China and India need gold. Even in a global slowdown their demand has increased pressure on supply. Recession and inflation fears and a lagging stock market in the United States have not diminished though they are not leading world headlines this moment. Oil prices are foreseeable going to continue higher and place more pressure on world economies, especially if OPEC cuts production rates as expected. And the prospect of a Democratic President in America is generally seen as a negative for the stock market, further spurring a move to gold to hedge investments.”

Fine, all that having been said at points in the past, what do I have to say now?

We need to see the stock market crash. Seriously it needs to drop to my target of 11,000 I called for in 2007. And every single action by the Fed and Congress to stop this will only create a bigger and longer lasting problem.

At the moment the Government is trying to create an artificial floor for the market. The reason is to give investors a false sense of hope and a bit of political momentum. Neither is worth the problem it is creating. The Fed has reacted too slowly and in moderation thus not correcting any of the liquidity issues. Huge rate cuts may look impressive, but since they don’t have an effect for months if not a year, the short-term effect is windowdressing. A series of stagard smaller cuts (started far earlier) over a period of time is far more effective.

Injecting money into the pockets of citizens is also a waste of money. The momentum and problems are not with people failing to buy things, it’s with the cost of the things being purchased. If oil costs are up 40% then there is just that much less to spend in a discrectionary manner.

Giving people money in the middle of chaos means that the money will either go to pay immediate bills or stashed away for the possible immediate need to pay a bill. Rather, let the emotion and the weakness in the market play out and then give the stimulus. Otherwise you are throwing money down a drain hoping it will eventually clog if you dump enough. And we are weakening the dollar in the process, which hurts the very economy we are trying to fix.

The financials are not done with the mortgage crisis. Some would like to divert attention from this, but the fact is that we are still in the crisis. And a great number of people will lose their homes. The housing market will have it’s crash, which is long overdue, and credit will be harder to get. All of which is normal.

For too long people have had too much credit without any security to back it on. A full generation of young adults have grown up thinking that this was the norm. We need this correction to get back to reality.

Want lower oil prices? Develop new sources of energy. Not because it’s an ecological thing to do, or because of some nightmare dreamed up based on barely enough information to make an estimate on. We need to do it because it will create jobs that can’t be exported, will lower dependance on oil, and infuse the economy with cash. It also means that the equity structure of the market will change, several blue chips will lose value and new ones will be created. Such is a dynamic market, which we don’t have now.

Gold will strike my target of $125 and oil $1125 this year. And they will both do so far faster than I expected if we continue to weaken the dollar and fix they symptoms and not the problem. Loss is part of an investment, as is long-term gain based on fundementals. To try to prevent one prevents the other.

This will feel bad, and unemployment may hit, gasp, 8%. 30 years ago that was a massive win. And it’s not a bad thing. If we aren’t throwing money at the public because they aren’t as comfortable as they were 5 years ago. If politicians had balls they would say this. Social entitlements should only be for those in need, not thouse that need to want.

The end of the 1st quarter will be another round of write-off for financials. And the market will continue to flounder as they try to stabilize their losses. At least one major financial will fail (actually will be forced to merge because they are too big to fail). And at 11,000 the market will stabilize and slowly rise. Growth will begin at that point at a moderate and unimpressive 1% or 7% in the market.

If gold moves as I expect, and the Government stops wasting money in stimulus plans, then there will be a sale in the commodity and an influx in the market. If wind and solar get a few positive laws there will be a spur in that arena and oil will drop slightly after hitting my target. IF taxes are increased, as was voted on yesterday, then the problem will extend into 2009 3rd quarter.

Patience, calm and paying attention to the underlying fundementals will do investors and homeowners more good than cutting rates and suggesting purchases of new Ipods that people can’t afford to have anyway. Shifting energy plans away from ethanol, which is driving up food prices and thus inflation, is also smart.

What will I do with my $600 from the Government stimulus plan? Leave it in the bank until I have a bigger purchase item I need for my business. I’ve already cleared my debt, and keep minimal revolving credit. My investments are balanced and long-term so the current moves don’t faze me. Unlike the Governments rush to do something – even if they have no idea what to rush and do, I have a plan and that allows me to sit and wait to see what happens.

So now you have my thoughts. I’ve factored in the lower refining levels due to the accident earlier this year. I’ve factored in the lesser supply of gold from South Africa, and the Olympics in China. I’ve looked at the real estate market, and the Dow Jones. So until the Dow hits 11,000 (plus minus 100 points or so – I’m not that good) oil and gold rise further and we enter the 3rd quarter it’s just time to accept the pain. But I’m sure this being an election year all of that will get mucked up by political ambitions.

We shall see.

Warren Buffett and International Monetary Fund pressure Gold prices

Gold prices took a bit of a hit with news hitting the markets early on Tuesday’s trading day. Lifting the general markets is the news that Warren Buffett has offered to provide reinsurance coverage for municipal bonds. While this does nothing for non-municipal securities, nor the mortgage backed loans that have caused severe losses across the financial markets, the move by Buffett has added to the confidence levels of investors. Early gains on the Dow Jones Index have hit 224 for the day.

Added to this is news that the International Monetary Fund (IMF) is planning to sell gold into the market. Approved over the weekend, the news was announced Tuesday and has driven down the April gold futures prices slightly. Gold continues to maintain above $920, but the ultimate effect of the sale has yet to really factor into the market.

Considering that South Africa, responsible for the 2nd largest amount of gold in the world, has reduced supply numbers due to power outages in that country the timing of the IMF sale seems to be an attempt to balance demand and keep prices lower.

"However, the fact that dips are still drawing very strong buying interest, and with the rest of the precious complex pushing higher, it seem likely gold will follow,” said James Moore, an analyst at TheBullionDesk.com.

The real thought to keep in mind is that if the offer by Warren Buffett instills enough confidence in the U.S. markets that investors feel a recession will be short-lived, profits in gold will likely be taken and depress the price. The IMF sale will have a real affect on gold spot prices, but will likely only have a short-term effect considering the lack of supply from South African mines.

Another factor that I believe has not hit the market yet are the 1st quarter results of the financials and banks still plagued by sub-prime mortgage loans. While Project Lifeline is being announced at 11:30 and will include home owners that are not in the sub-prime category, it does not affect losses that have already occurred. I continue to expect that all major losses will not be fully accounted for until the end of the 2nd quarter, thus still a pressure on the markets and positive for gold investors and stocks.

As these facts are absorbed by the markets, increased volatility and further upward pressure on gold should continue. It’s likely that the Philadelphia Gold and Silver Index and Amex Gold Bugs Index will reflect this pressure. Several Canadian gold miners are also likely to have a short-term boost as they will have increased sales due to lack of competition.

Perhaps most important will be the timing of all these events. If they are moderately spread out and occur individually I expect that they will not be able to retard the move in gold. Combined or occurring close together the effect will be magnified.

Presidential candidates proffer economy fixes, but are they worth voting for?

What a day yesterday was. 300 off the Dow Jones Index, an attempt by a couple of unions to change the course of the Nevada Caucus and Bob Johnson apologizes to Senator Barack Obama. What could possibly happen next?

Well the financial news is something that I expect every Presidential candidate to comment on. There will be more calls for rebates from Democrats, and Republicans will try to promise to keep the tax cuts put in place by President Bush. None of this will actually have any affect on the markets, because only one of them will have any voice on the matter, but that will happen in 2009. That’s a whole year of pain and actions by the Fed and our current President to try to sway the downfall.

As I’ve stated previously, this is neither a surprise to me, nor is there a quick fix that will resolve it. All the hoopla that the various candidates are sure to spin is just an attempt to get panicky voters to choose them.

I restate what I said previously about the ‘stimulus packages’ that have been mentioned to date.

“An example is say you own a home. You are behind on the heating bill, because of the huge increase in oil prices. You spend the money on the heating bill bringing you even, until next month when you have another high bill to pay. That rebate was a waste.”

Plus several of the leading candidates of both parties have all flipped their positions. Democrats that hated the tax cuts and called them ineffective for months are now introducing their own plans to boost the economy. And Republicans that disliked the tax cuts are now in favor of them.

But I’m sure you will hear a lot more about specific plans before Monday arrives.

Just remember this, no matter what plan is announced oil is still nearly at all-time high levels, many mortgages are still failing and/or at risk of failing – and not all of them are sub-prime. Food prices are increasing as ethanol production is diverting corn and wheat to this less efficient alternative fuel source and with recent laws mandating increased usage on a national level we can expect even higher prices. The financial sector is not done writing-off their losses for making the bad loans, and more money will be coming from overseas to prop them up.

Net net, there is no quick fix and any candidate who wins will need to realize they will be walking into a mess. I would suggest you don’t look at who has the best ‘sounds great’ plan, but who can deal with multiple issues best.

Because the fact that attention is now turning to the economy, which has long been a issue of importance among citizens according to my polls, does not remove the importance of all the other issues America faces. Our next President must deal with a difficult economy, illegal aliens, a war in Iraq and Afghanistan, and keeping the nation safe against insane fanatics that want us dead because we exist.

The pundits and candidates may like to address only one popular poll issue but America is more than just one thing. We need to pick the best person for every issue in America, and those that we are not expecting.

You get one vote, make it count.

Citigroup matches predictions, is recession next? - 1.15.2008.1

Some days I wish I was not previously a stock broker. Sometimes I hope that what I feel are likely outcomes in the stock market do not come to fruition. But time and again I find that I get it right, not always on the timing or the exact figures, but the trend. And I did it again.

Back on December 26, 2007 I wrote a post Will 2008 be a lump of coal or a nice present for investors? In essence I felt that the beginning or 2008 would be a horrible year for many investors. This also went in line with my thinking about gold and gold stocks.

Directly I stated,

“I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

Key in on the fact that oil has already hit $100 a barrel this year, and Citigroup announced

“The biggest hit came from a $18.1 billion write-down in the value of its investment portfolio. But the bank also set aside $4 billion on Tuesday to cover anticipated losses on loans to U.S. consumers — a sign that deflated home prices, high energy and food costs, and rising unemployment are making it difficult for many customers to keep up with their payments.”

I am wrong in that the Dow Jones Index closed today at 12,501. That is a far cry from 11,000 but all the financials have yet to announce their losses, oil has not maintained $100 a barrel or more, the Fed is cutting rates, and all the 4th quarter numbers are yet to be reported. Even so, the Dow now stands 12.5% below the high and beyond correction territory. It is a mere 7.5% from a bear market.

Is America in a recession? Will gold spot prices hit $903 as have been projected by some brokerage houses? Will more Americans lose their homes?

I would say yes to all. I could very well be wrong, and I hope that I will be. But I don’t see an end to this problem in the near-term. The Fed cannot prevent many of these issues with the application of rate cuts.

Those that are in trouble, or will be, with their mortgages will not be helped by lower rates as that will not cap increased heating and gasoline prices. Small businesses are not going to be able to get new loans as easily even with lower rates as financials scramble to find cash to absorb the losses they are experiencing. Effectively some degree of pain must happen and is not preventable.

I say all this for one reason. So that you my readers can be prepared. If I am correct even in part, then this nation will encounter times we have not seen for quite a while. I doubt that we will see the inflation and unemployment that existed in the 1970’s (when I was a child) but I am sure that we will see levels that those under 30 have never experienced.

Credit will get crunched, and credit card debt will increase for a time. New loans will become far harder to achieve. And costs of fuel will go higher even if ethanol additives were readily available for widespread distribution today.

And then there is the political component. Don’t be lured into the cheap vote purchases offered by some candidates. The stimulus plan proposed by Senator Clinton, equating to $500 per person filing taxes is a ploy. It’s a one time gift that will help no one. It may help you pay a bill, say heating, for a month but will do nothing else for you. Rather a tax cut might help more, adding $50 a week to your paycheck. Either way, don’t sell your vote on a quick fix that is neither.

Further, if a Democrat is elected expect the impending pain to be trebled. Increased costs for nationalized healthcare and other social entitlements will hit the pocket books. That is not to say that a Republican in office will avert any of this. They will not. Just that the historical fiscal impact of a Democratic President is view more harshly, whether or not they are the best person for the position.

So my readers, be prepared. If I am right on the trend, and it seems that I am increasingly becoming so, those that are ready will endure best. And I only wish the best.

Was your home loan a good idea? - 3.22.2007.1

So everyone is scared about losing their homes, or the stock market crashing, because of the sub-prime loans made for years. Since the blip in the Dow Jones Index in February, and comments by Mr. Alan Greenspan, there has been constant news about the status of these loans that represent more than a million homes in the nation. And there is good reason to worry.

As teaser rates on mortgages are replaced my adjustable rates, many over 3 points higher than the market rate, late and missed payments are growing. Forclosures are growing and banking institutions of all sizes face drops in profit or worse as the year progresses. The ramifications go on and on. Virtually any nightly news will catch you up on all of this. Of course there are a few ‘minor’ things that are being left out.

By minor I mean minority, and when I say left out I mean overlooked. It’s a situation that is a blatant abuse, in my opinion, that is obvious to anyone that can count to 100. Now I’m sure you are wondering what I am talking about. You didn’t hear anything like this on the evening news, or your favorite cable news channel. That’s because the markets hate to mention an abuse that targets the poor, uneducated, and minorities. It’s like investing money for an elderly widow(er), take their money and you will get sued and lose guaranteed.

Specifically I mean that many sub-prime lenders swooped in on African Americans and Hispanics worse than vulture investors. This isn’t an opinion, though it’s not wholesale fact. I’ll explain.

It’s known, though not officially acknowledged, that an African American or Hispanic will virtually always be given a higher mortgage rate than a White person. To quote Mr. Jim Campen of the University of Massachusetts, “Blacks and Latinos have lower incomes and less wealth, less steady employment and lower credit ratings, so a completely neutral and fair credit-rating system would still give a higher percentage of subprime loans to minorities.”

The statement assumes that both groups are being given higher rates currently, and that the system is unfair or hardly neutral, which Mr. Campen does admit. It relies on the statistics of the census rather than individual data. It’s a great excuse to overlook what sub-prime lenders have done. It gives credibility to why a Black American is 3.8 times more likely to have a higher rate than a White, and 3.6 times more likely for Hispanic/Latinos.

That is both ludicrous and insulting. I am not a general statistic. I deserve better than an assumption that I cannot maintain a job, or that I will be paid less than another man, especially when being considered for a piece of the “American dream.” Loan originators are supposed to evaluate the person, based on the factual data before them. Mr. Campen’s statement seems to clearly state that this doesn’t happen, and you might imagine my shock being underwhelming by this.

Continued in part 2...

New stock market highs - 10.18.2006.1

Just something I wanted to pause and think about. Today the Dow Jones broke past 12,000 which is a new intra-day high. Big cheers, the market must be doing well and it must mean that everyone is making money in their 401 k and mutual funds. Well I’m sure that is what the big six and a few others would like you to think. I think its just stupid, all the hype about this. [The big six are the leading, well-known brokerage houses. This includes Merrill, Lehman and the others, all of which I dislike.]

Why am I not interested in the hype? Why don’t I think that most people are making money today and that this new high has yet to impact Joe Average? Because during the week of January 10, 2000 the Dow Jones Industrial Average hit 11908.5 and then continued to trend down to a low of 7422.27 on September 30, 2002. It’s taken the better part of a decade to reach a new high. That is significant. It means that many are just getting back to even.

Let me clarify what I’m thinking. I was a broker for many years (I left the industry, without ever being involved in a lawsuit, in 2001 for family reasons). Like all brokers I realize that the average investor does not know what they are doing. Average investors buy high, sell low, miss opportunities, and follow bandwagons on a regular basis. I have watched as former clients bought internet stocks, against my advice, because they were being bought and creating new highs – without being able to explain what the company did, and often with a company that had no history as it was a new IPO. For a while they made money, and then got killed. I’ve seen the same thing happen in biotechs, and various other industries. It wasn’t just the bubble that took down investors.

[For the record I did advise in one internet stock, AOL, and I did lose money during the downturn. But I did try to minimize losses and advised several 5 year plans to weather the crash, some were followed others not. I was not a genius for the market, but I was no fool either.]

Because so many were crushed in the crash, bad decisions were made. Most sold to make margin calls or just bailed out. Others never took the chance to buy when things were low. I recall the battles I had with multiple clients as the market opened after 9/11 and dropped to a low of 7926.93. Fear prevented a chance to regain funds lost from the bubble burst, primarily while others were frozen due to lack of capital. Many just had to hold on and wait for things to improve.

So if like many you owned GE Around Oct 2, 2000 (59.94) instead of around Feb 10, 2003 (21.30) today you would be down 24.38 (close was 35.56) or 40%. Maybe some liked Pharmaceuticals like Phfizer which was 48.13 around June 12, 2000 reached a low of 20.57 around Dec 5, 2005 and closed today at 28.10 for a grand return of a loss of 20.03 or 42% down. Maybe smaller companies were of interest like NITE which traded at 59.43 around March 20, 2000 dropped to 4 around Sept 30, 2002 and today had a close of 19.45 for a loss of 39.98 or 67%. Even if you like a story stock like SIRI you may have paid 69.44 around Feb 28, 2000 and not the .38 in the week of March 10, 2003 with a close today of 3.90 for a loss of 65.54 or 94%. [I did advise on positions with SIRI, NITE, GE, PFE, LEH and many other stocks. Former clients may have owned these stocks long term and had higher or lower cost averages than what is discussed.]

For those that could afford to buy-in and average down, life may be good. Most investors don’t though, whatever the reason. So the reality is that many are down today, or even, and the highs bring them no joy. The hype is just that. Many corporations are in similar situations too. It just annoys me to hear the talking heads on various programs trying to get people happy when the news isn’t really great. Or ads on television saying that people should go and invest on their own when they don’t understand what is involved. I find it irresponsible.

The economy is better, things have improved. Barring events like 9/11, or Enron, the markets will continue to grow. But hype will never help mom & pop investors. It does help some institutions though, like LEH which was 15.68 around Feb 14, 2000 and continued HIGHER to 78.70 on Oct 16, 2006.

Just keep this stuff in mind as you watch the talking heads spout how great things are in the market. Or you see that ad saying that you should invest on your own.

This is what I think, what do you think?