Search results matching tag 'Bailout'

Another New Record Level For Gold!

ChuckButler — Wed, 04 Nov 2009 15:19:53 GMT

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In This Issue..

* Risk players come back out to play...
* Waiting on the Fed's statement...
* Yield differentials come into focus...
* Lisbon Treaty gets signed / ratified...

And Now... Today's Pfennig!

Another New Record Level For Gold!

Good day... And a Wonderful Wednesday to you! Well... Did you see the strong performance that Gold put in yesterday? And it didn't stop yesterday, overnight Gold is up another $7 on top of the +$20 gain it had yesterday... I've got some info on that, we can talk about later...

Oh Shoot Rudy! Let's talk about it right here, right now! It's not every day that Gold not only goes past its previous all-time record high, but obliterates the previous figure! I know you're wanting to take a peek at the price of Gold in the currency round-up portion of the Big Finish, so go ahead, and then come on back... How'd that $1,090 and change price look to you? Pretty sweet, eh? That is as long as you are a Gold holder!

So... What put the tiger in Gold's tank yesterday and overnight? Well, the weaker dollar helped... The thought became clearer that the cartel, I mean the Fed will keep rates on hold this week helped... But the real beef came from the announcement that the Reserve Bank of India was buying the 200 tons of Gold from the IMF... I know, I know, I told you yesterday that I thought it would be a "wash" for the dollar and the Gold price... But that was before I learned that the Reserve Bank of India paid for their $6.7 Billion dollars worth of Gold with... SDR's!

So... Either, the Reserve Bank of India (RBI) didn't want to get rid of their dollar reserves... (yeah, right!) or... The IMF didn't want anything to do with dollars, and preferred receiving SDR's! (for those of new to class, a SDR is a basket of currencies to make one unit called a Special Drawing Right, of which the IMF uses, and has been rumored to be the replacement for the dollar as the reserve currency of the world... The one government, one currency thing)

I'll pin my colors to the mast of the IMF not wanting anything to do with dollars at this point! Been there, done that, bought the T-shirt!

So... The price of Gold is nearing $1,100... I reminded my beautiful bride last night that just 2 months ago I told a group of close friends that they should seriously be considering buying Gold as it had slipped to $940 an ounce... I wonder what they think when they see Gold at nearly $1,100... I'm sure the V-8 head slap is going on all over my neighborhood!

OK... So what's going on with the currencies, as the dollar has had the hammer for 3 consecutive days now... Well... The dollar is back on the slippery slope this morning, as those same thoughts about the cartel, I mean (crying out loud Chuck, why can't you get that thought about the Fed really being a cartel out of your mind!) the Fed, will keep rates unchanged this week, really emphasizing the fact that Australia has raised rates 50 BPS so far, and Norway has raised them 25 BPS... There are places to go where you can get higher yields...

I get a kick out of some people that call the desk here, and say... "I'm looking for a high yield of around 8-10%, with no risk... Do you have that?" Sure, right here in my back pocket! NOT!

The FOMC meeting will be a 2-day meeting, so get the board games out, find the deck of cards, and make sure you have good batteries for the Battleship Game! When the Fed Heads get tired of the board games, and all, they'll announce tomorrow afternoon that they are going to leave rates unchanged, and that while they see improvement in the economy, sans the 3.5% 3rd QTR GDP, it's too soon to remove the accommodating rates... How do I know that? I don't... But, I'll bet a Krispy Kreme to a dollar that what they say is pretty darn close to that!

The key will be to see if the Fed Heads, led by Big Ben Bernanke, leave the words regarding the how long the low rates will remain, "extended period" for if they do... The dollar will immediately be sent to the woodshed once more, without passing Go, and without collecting $200! So... The statement following the rate announcement is the key tomorrow...

So... The euro is 1-cent higher this morning, the Aussie dollar is about 1-cent higher, and so on... Those that bought at yesterday's blue light special prices will be smiling like a Cheshire Cat this morning!

OK... I have to talk about this... For I've received a ton of emails about it...

Quite a few readers have sent me Nouriel Roubini's interview knowing that Mr. Roubini has long been a fave of mine.
Well... Mr. Roubini talked about the "mother of all Carry Trades" being the dollar, of which I told you had become the new funding currency for the Carry Trade a few months ago...

Mr. Roubini also talked about how this was fueling a huge run-up in the prices of risk assets... I've also told you about that, and how... Should the U.S. do the double dip that a huge sell off of stocks would probably occur, and cause an adverse affect on the risk assets of currencies and commodities....

So... All in all... Nothing new... So I was surprised that readers wanted me to comment on this... Well, the caveat here is that Mr. Roubini is calling for a massive sell off of the risk assets when the correction comes... He doesn't specify when this will happen...

I've also said that the risk assets have gone too far too fast, and that a correction is due... So, let's move on from there...

I see where Marc Faber is saying that the correction will net the dollar 10% VS the euro... Again, he doesn't say when this will happen, but that it will...

But again, as diversification people, with our eyes fixed on the horizon that shows that the only way the U.S. Gov't can repay their debts is with cheaper dollars... We just batten down the hatches for this correction, for we know that on the other side of the correction is another massive move upward...

There was something else that I wanted to talk about... And it's something that I'm sure I'll get a few emails about... Good and bad... But here goes... Did you see that Ford announced a nice profit for the last quarter... CAPITALISM ISN'T DEAD! Three cheers for Capitalism! Maybe that's all I'll say about it, for if I went into how I feel that Capitalism is getting beaten like a rented mule, I might start talking about stuff that doesn't need to be discussed here!

So way to go Ford! Didn't take bailout money... And 1 year later books a profit! Whereas GMAC is in need of additional bailout money, and Chrysler is Fiat now... Great use of taxpayer money wasn't it?

Here I go again... Sorry, didn't mean to go on this tangent about this stuff... It's just that I have no idea why this doesn't just tick off any American that reads about this stuff! But not to worry, the Gov't has more plans to spend money they don't have!

Hey! Earlier I talked about Australia's rate increases... Well, the Reserve Bank of Australia (RBA) is running scared these days... Scared that their rhetoric about rate increases is going to push the A$ to parity with the green/peachback... So guess what the RBA members have decided to do? You've got it! They're going to "tone down" their interest rate hike rhetoric... RBA Gov. Stevens said that the 28% gain in the A$ this year VS the U.S. dollar would be a good inflation fighter, and allow him to slow down the rate increases...

Well... Don't get off the A$ love train just because the RBA Gov. Stevens suggests that he could slow down rate increases... The A$ already enjoys more than 300 BPS of yield differential to the U.S. dollar, Japanese yen, Canadian dollar, and Swiss franc!

And the Lisbon Treaty that was hung up in the Czech Republic, has finally been signed by the Czech Republic's President, thus completing the rounds, and putting the Treaty in place. Now, I'm not a big fan of the Treaty, but... It's what the Eurozone needed to remain viable, and so it it's done... This removes the albatross from around the euro's neck, and will shut those people up that keep talking about a collapse of the European Union, and the euro...

Chris Wood is filling in for good friend David Galland this week on David's daily letter called "Casey's Daily Dispatch"... Anyway, Chris Wood had this to say yesterday, which I believe just about sums it all up regarding the Fed and Treasury here in the U.S....

"A group of federal agencies including the FDIC, Federal Reserve, and Office of Thrift Supervision just released new guidelines for how banks deal with troubled commercial real estate loans. And get this:

Under the guidelines, loans to creditworthy borrowers that have been restructured and are current won't be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance.

Yes, you read that correctly. Banks won't have to show losses "solely" because the collateral has fallen in value below the loan. Perhaps most incredible is that this move is being applauded by the business community. The next step will be a federal move to facilitate refinancing that same collateral."

Chuck here again... That's pretty amazing, don't you think? First the financial institutions were allowed to drop the "mark-to-market" on their collateral... And now this... And people still question why foreigners are growing very weary of these things, and becoming quite scared regarding their dollar backed holdings? They shouldn't question any longer, eh?

And then there was this...

Remember how excited I was that Ron Paul's bill to audit the Fed was going to discussion? I thought, surely (hey! Who's Shirley?) this would be it... The Fed would finally get audited, and treated like the Corporation they are! But, then Ty Keough sent me this, and my hopes were dashed...

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been "gutted" while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

"There's nothing left, it's been gutted," he said...

OK... To recap... Gold is soaring! Gold has reached a new record all-time high! The dollar has given back some of its gains the past 4 days as traders begin to realize that the Fed is going to keep rates unchanged tomorrow. The Gov't is up to its usual tricks regarding collateral and the bill to audit the Fed.

Currencies today 11/4/09: American Style: A$ .9080, kiwi .7245, C$ .9425, euro 1.4770, sterling 1.6525, Swiss .9770, European Style: rand 7.7365, krone 5.7150, SEK 7.0580, forint 187.60, zloty 2.89, koruna 17.6650, RUB 29.27, yen 90.80, sing 1.3970, HKD 7.75, INR 47.06, China 6.8270, pesos 13.22, BRL 1.7280, dollar index 76.14, Oil $80.02, 10-year 3.48%, Silver $17.43, and Gold... $1,091.70

That's it for today... I hear that my colleague on the Currency Capitalist newsletter that I do for the Sovereign Society, Ashish, is going to fill in for me at the Conference that I'm missing, and give my presentation on the Treasury Bubble... He'll do a great job! We've had 4 consecutive days of sunshine, and you should see the people, they are smiling again! I began making my plans for Spring Training with the family last night... Whenever I do that, I get all geeked up and ready to leave now! But I have 4 months to go! UGH! First we have our move to the new building next door, then Christmas, then New Year's, Orlando Money Show, and then finally March! Oh, and there's a conversion to a new system thrown in there somewhere! It's a moving target so we don't know for sure, but it will be HUGE! OK... Well, as with every day, it's time to go, so I hope you have a Wonderful Wednesday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

I'll Take Sweden: Socialism, Free Markets, and the Nanny State

Charles Krakoff — Thu, 01 Oct 2009 20:36:00 GMT

In the eyes of many Americans, “Sweden” is shorthand for everything we don’t want America to become. It’s a tradition that goes back some way. In the 1965 movie I’ll Take Sweden, Bob Hope is an executive whose company sends him to Sweden, and he takes his teenage daughter, played by Tuesday Weld, largely to get her out of the clutches of her dead-end, guitar-playing boyfriend, played by Frankie Avalon, whom she wants to marry. Long story short, Tuesday falls in love with a suave Swede, only to find he has some strange ideas about premarital sex. Enter Frankie, who has traveled across the sea to try to win his girl back. He breaks his guitar over the degenerate Scandinavian’s head, and takes Tuesday back to America and married life in a trailer park, with Dad beaming proudly.

Opponents of President Obama’s proposed health care reform, massive deficit spending, takeover of the banking and automotive industries, and other “statist” excesses defend their position by saying those things are fine if you want America to become like Sweden, but we don’t, thank you.

John Stewart’s Daily Show ran a series a few months ago reporting on the horror that is modern day Sweden. The show’s ace investigative reporter went around interviewing people of all walks of life, from former members of ABBA to business executives, doctors, government officials, and factory workers, all of whom professed satisfaction with their lives and with the way Swedish society is organized. The reporter concluded that there had to be some kind of Invasion of the Body Snatchers thing going on, with most Swedes’ brains having been taken over by an alien life form that made them unaware how miserable they really are.

The only thing wrong with this picture is that it’s not really true. It is true that Sweden was an early adopter of the sexual revolution, the Swedes enjoy mixed saunas and sensible cars, and Sweden has colonized much of the world with Ikea, which for all its commercial success looks like something a state bureaucrat with fascist leanings might have invented.

Oh, and it is a welfare state. Sweden does provide benefits to the unemployed and it gives all its citizens free health care and education, and taxes them pretty highly in return. The combined income and social security tax for high earners is over 48% (including mandatory pension contributions), but that is not too far from the U.S. where earners in the top 5% can pay as much as 40%, depending on income taxes in their home state. And Sweden’s corporate tax rate is only 28%, compared to the 35% U.S. corporate tax rate and average effective combined Federal and state rate of 39.3%.

Sweden is far from being the statist, socialist nightmare that many Americans imagine. The government last week announced deep cuts in personal income taxes “to stimulate the economy,” together with planned reforms to improve the business climate and create incentives to start companies.

It may be their Lutheran heritage that has imparted to the Swedes some common sense and a work ethic. The maximum $1,650 after-tax monthly employment benefit is hardly lavish, and in most cases it expires after 300 days. The government offers retraining, employment subsidies and reduced employer social contributions to encourage companies to hire the unemployed, with additional enticements such as lower minimum wages and flexible contracts for hiring people under 25. Similar youth employment incentives proposed two years ago in France, drew hundreds of thousands of students into the streets in protest.

On health care, Sweden’s single-payer system came under intolerable stress in the 1980s, with rising costs and growing waiting lists for medical procedures. The government devolved substantial power to county councils, and gave them freedom to introduce market-based reforms, which most have done. Hospitals have been privatized and the market share of private medical practitioners is on the rise. Many kinks still need to be worked out, but Stockholm, which has been most aggressive in introducing market-oriented reforms, has shown impressive results.

Still and all, Sweden is socialist, isn’t it? And that has to be a bad thing, right?

In a word, no. Sweden is a leader in privatizing public pensions. Though mainly state-owned corporations historically accounted for about one fourth of the market capitalization of the Stockholm Stock Exchange, the government has privatized or plans to privatize most of its crown jewels, including the stock exchange itself, the Apoteket pharmaceutical distribution monopoly, the former alcohol manufacturing and distribution monopoly Vin & Sprit, and major state-owned telecoms, real estate, and financial firms. Industry itself has always been overwhelmingly in private hands, and Sweden has a lot of world-renowned companies for a country of only nine million people, including Volvo, SKF, Ericsson, Skanska, Electrolux, Sandvik, Atlas Copco, Ikea, and H&M.

In the 1990s Saab and Volvo sold their passenger car divisions to General Motors and Ford, respectively, while holding on to their lucrative truck, heavy equipment, and aerospace operations. This past spring, as GM teetered on the edge of bankruptcy, and the U.S. government started crafting its takeover of GM and Chrysler, the Swedish government firmly rejected the idea of a Saab bailout. “The Swedish state is not prepared to own car factories,” said Maud Olofsson, the Minister of Enterprise. The World Economic Forum ranks Sweden the fourth most competitive economy in the world, just behind Switzerland, the United States, and Singapore.

Sweden went through its own financial and banking crisis in the early 1990s when a real estate bubble collapsed, GDP dropped by 5%, total employment fell 10%, and the central bank briefly jacked up interest rates to 500% to prevent a run on the krona. The state took over a fourth of the country’s banking assets to save the banking system, at a cost of 4% of GDP. In 1994 the budget deficit stood at 15% of GDP. The government quickly restored the banks to private ownership, cut government spending, and introduced liberal economic reforms that enabled the economy to rebound quickly and to capitalize on the emerging IT and telecoms boom. From a 2008 budget surplus of 2.5% of GDP, this year’s expected budget deficit is 2.2% of GDP, and is forecast to widen to 3.4% in 2010 before returning to balance. Not bad for the worst global financial and economic crisis since the Great Depression, and an awful lot better than America’s projected deficit of 13.1% of GDP this year and 9.6% next year, not to mention the boom years of 2001 to 2008, when the Bush Administration ran average annual deficits of more than 4% of GDP.

Sweden is not perfect. The nanny state sticks its nose into too many corners of personal life. An eight-year-old boy in Lund had his birthday party invitations confiscated at school when he failed to invite two of his classmates. This violated rules on “inclusion.” Government has launched an investigation of parents who use the family computer to access porn sites, which their kids might then be able to access. In the 1970s Sweden, the home of former heavyweight champion Ingemar Johanssen, banned boxing as too violent for the pacific society it had become. TV advertising is banned from programs targeting under-12s, while movies with even a hint of violence get a rating that bans under-12s from watching, even if accompanied by their parents. Toy guns –even water pistols – were outlawed. Alcohol taxes are among the highest in the world, and you can see the unhealthy consequences on the overnight duty-free “booze cruises” from Stockholm to Helsinki, which end with bleary-eyed Swedes (and Finns), still drunk, stumbling onto the pier, their shoes encrusted with vomit. But e-commerce, home DVD players, the end of internal border controls in the EU, and a general feeling that things had gone too far have started to win some battles with the nanny state. You can buy toy tanks and bazookas now, and in 2007 the ban on boxing was repealed.

As the U.S. government, first under George W. Bush and now under Barack Obama, becomes ever more statist, and as Americans accept eavesdropping on telephone conversations, bans on trans fats ,and proposals to tax soft drinks as something governments have every right to do, Sweden – never anywhere near as socialist as popular imagination would have it – has steadily moved in the opposite direction. Our paths will cross, if they haven’t already done so. One can only be grateful that when Americans realize the limits of state intervention in our personal and economic affairs we will have the Swedish model as a guide to start putting ourselves back on the right track.

Association of Investor Awareness - Week of 06/25/2009

AIAAdvocate — Thu, 25 Jun 2009 14:32:00 GMT

In This Issue:

Mixed Economic Signals Worry Investors
Another Kind Of Bailout Is Also A Concern
A New Economic Reality Is Emerging
For Efficient Companies, Slow Growth Can Be Profitable
Your Best Strategy Now
Three Analysts And A Fool Have Recommended This Stock
The Bottom Line This Week

In our last issue we remarked that "the rally may be getting short of breath." Shortly thereafter, the huffing and puffing began in earnest. On Monday of this week, definite wheezing sounds were heard as the bull dropped to its knees just short of pushing the market into positive territory for the year. Perhaps the old boy was out of shape after letting the bear take over for six months.

In any event, since May 28 the Dow dropped 0.8% while the Nasdaq managed to squeak ahead a miniscule 0.8%. More importantly, both measures slipped 3.0% and 1.7% last week – and they are even lower now.

Mixed Economic Signals Worry Investors

It is not possible at this early juncture to know if the bear has returned. However, we can say that many of the economic "green shoots" that have attracted so much attention of late are beginning to look a bit wilted.

Sales of existing homes are typical of the economic signals that are making investors nervous. Sales increased 2.4% in May, which suggests that the housing market is finally turning around. At the same time, however, home prices dropped again and are now 16.8% lower than they were a year ago. Economists can't decide if the increasing sales offset the negative consequences of declining prices. Until the matter is settled, many investors are taking a time out.

There are also mixed signals about inflation and interest rates. On the one hand, rising oil and commodity prices are clearly inflationary. Ditto for the money supply that is shooting up due to all the king-sized bailouts from Uncle Sugar.

But at the same time, wages are dropping, layoffs are increasing, household wealth is plummeting, and several states are on the edge of bankruptcy – all of which point to continued deflation. Since the tug of war between inflationary and deflationary forces could go either way, many investors are sitting on their money.

Lastly, investors were counting on a solid global turnaround in the coming months. Those hopes were put in question when the World Bank reported that growth would contract 2.9% this year instead of expanding 1.7% as previously predicted. Oops! Even if the numbers are not spot on, the reversal in the outlook is disconcerting.

Another Kind Of Bailout Is Also A Concern

It's not just investors who are nervous about the economy. The grand poobahs at America's largest companies are also moving their chairs closer to the door. In fact, many company officers are leaving the party altogether.

According to TrimTabs, a respected group of investment analysts, in June insiders at S&P 500 companies unloaded $2.6 billion worth of shares, vs a paltry $120 million purchases – and the month isn't even over yet. That lopsided ratio indicates that many executives believe the business outlook is not very good. Although company insiders are not always right, their track records are much better than from Wall Street number crunchers who aren't on the front lines.

A New Economic Reality Is Emerging

Of course, the disappointing green shoots news is no surprise to our readers. We have been arguing for months that "a recovery will probably be more modest" than most analysts and investors expect. Instead, the economy is probably just settling into a lower pace of activity where it may remain for years.

The biggest impediment to a strong rebound is this recession isn't just another contraction in the business cycle. Instead, the economy is adjusting to major structural changes in banking, credit, trade, manufacturing, consumer credit, and many other conditions – all of which are scaling down.

For example, many homeowners and realtors think that rising home sales indicate that the housing market will soon be moving up again. That may be true in many markets. However, rebounds to anywhere near pre-collapse levels are almost certainly out of the question for several years.

Likewise, manufacturers will probably need to rehire some workers to replace inventories that have been drawn down over the past year or so. But another all-out production boom is very unlikely. The outlooks are similar for the other engines of growth.

The biggest change is occurring on the social front. The madcap spending binge of a few years ago is being replaced by the desire to be frugal and put money away for the future. Even people with good incomes are changing their spending habits. The old phrase "He who dies with the most toys wins," is being replaced with "A penny saved is a penny earned." Since consumer spending is two thirds of the economy, the new thrift indicates that growth will be very modest for some time to come.

For Efficient Companies, Slow Growth Can Be Profitable

Some readers may wonder how any companies can possibly prosper given the big economic problems that dominate the news.

The answer is that the front pages don't tell the whole story of what is happening in America. The economy has a lot more going for it than banking, housing, and auto making. Although earnings are down in nearly every industry, most companies are still in the black.

That's especially true for multinational firms that do a substantial amount of business in countries with stronger growth rates than in the U.S.

Your Best Strategy Now

Thanks to the rally, we have seen excellent gains in our blue chip stocks. Although the upturn may have a second wind and continue for another few weeks, we think the possible rewards are not worth the risk. Accordingly, this would appear to be a good time to take some profits off the table.

Stocks that you intend to keep for the long haul you should protect with stop loss orders. If you are a conservative investor, using a tight stop of 10% might be in order, although choosing 15% would give prices more wiggle room.

More aggressive investors should consider using a 20% or a 25% stop to protect against a large loss in case the market is blindsided by an unforeseen event.

All investors who use stop loss orders should make them trailing stops that will follow any additional price rises every step of the way. The most effective trailing stops are based upon a percent of the price, but you can also choose fixed prices if they suit your needs better.

We also think you should make use of a correction to buy high quality stocks that fall significantly in price. All the high quality stocks that we have been recommending of late should be on your list including: ConAgra Foods (CAG) http://finance.yahoo.com/q/bc?s=CAG, ExxonMobil (XOM), http://finance.yahoo.com/q/bc?s=XOM, Hormel Foods (HRL) http://finance.yahoo.com/q/bc?s=HRL, Colgate Palmolive (CL) http://finance.yahoo.com/q/bc?s=CL, and Procter & Gamble (PG) http://finance.yahoo.com/q/bc?s=PG. We think the blue chip group is as close to being a sure long term bet as Wall Street ever offers.

A bit more aggressive, but with prospects to match, are Alcoa (AA) http://finance.yahoo.com/q/bc?s=AA, Deere (DE) http://finance.yahoo.com/q/bc?s=DE, General Electric (GE) http://finance.yahoo.com/q/bc?s=GE, and Caterpillar (CAT http://finance.yahoo.com/q/bc?s=CAT. All the companies are tied to the global economy, they are very efficient, and they can prosper even in a slow growth environment.

A new investment that we believe has excellent prospects is the iShares MSCI Emerging Markets Index ETF (EEM) http://finance.yahoo.com/q/bc?s=EEM. Emerging nations are growing much more strongly than in the U.S., and they should continue to do so. The BRIC countries in particular (Brazil, Russia, India, and China), are developing their large internal markets and are becoming less dependent upon exports to Europe and the U.S. The BRIC countries are also signing currency exchange agreements with each other to reduce their dependence on the U.S. dollar – but that's a story and an opportunity we must leave for next time.

THREE ANALYSTS AND A FOOL HAVE RECOMMENDED THIS STOCK

Last month we reported on a significantly undervalued China stock we had been following for quite some time. Those of you who took a position in Universal Travel Group (NYSE Amex: UTA) http://finance.yahoo.com/q?s=UTA have been rewarded with a very nice upward move of 44%, with Wednesday's close at $10.10.

Since moving to the American Stock Exchange, UTA has been showing up on more radar screens than a 757. The Company was profiled by "The Motley Fool CAPS" on June 23, 2009. One comment that caught our attention was..."Universal Travel has outpaced the other 11 stocks in the CAPS Travel Services sector by orders of magnitude. Shares of the growing travel company are up nearly 50% over the past month (and up more than 223% year to date),compared to the 6% increase across the sector since late May."

You may recall that Universal Travel specializes in online and customer representative services. The Company offers packaged tours, air ticketing, hotel reservation and agency services. They racked up some great numbers from 2005 through 2008: 202% Compound Annual Growth Rate (CAGR) ... they have no long-term debt ... $16.2 million in cash ... $30.2 million in working capital... and earnings of $14.5 million for the full year ending 12/31/08.

By our calculations, they have earned $1.20 ttm, and at a closing price of $10.10 on 6/23/09, they are still trading at less than a 8.5 P/E multiple. Comparable industry multiples range from 25 to 43 times earnings...even with its recent share price increase, Universal Travel has a lot of upward potential.

Three independent analysts have issued recommendations on UTA in the past eight months...the latest indicating a price target in the $16 to $18 range. We think that could be conservative, given the average P/E multiple of 34 might suggest a price approaching $40 per share. Given the Company's YOY growth of top and bottom lines, that's certainly possible in the next 12 to 18 months.

Go to http://cnutg.ir.stockpr.com/ for more details.

The Bottom Line This Week

The green shoots that most investors have been expecting are here, but they are developing more slowly than expected. We think the reason is the U.S. economy is adjusting to a lower level of growth instead of making a traditional post recession rebound.

Fortunately, well-established companies are adept at squeezing profits from slack markets. At the top of that list are our top-rated blue chip companies. All of them may be purchased if a correction makes their prices attractive again.

Investors who will accept extra risk in return for the prospect of higher profits should look to emerging markets where growth rates remain high. Among them, the BRIC countries appear to offer the greatest long-term potential, with China leading the pack.

In the interest of full disclosure, John M. Casson, Executive Director of AIA is president of Casson Media Group, Inc. (CMG), an affiliated company. CMG has received cash compensation and allocated $2500 for the transmission of this publication as part of a comprehensive corporate communications services agreement for Universal Travel Group. Although the Research and Editorial Staff of AIA conducts independent research and analysis, you should be aware of this potential conflict of interest.

The $33,000,000,000,000 Question

JohnMauldin — Mon, 11 May 2009 17:48:03 GMT

It has long been my contention that we are entering an extraordinary period of time in which using historical analogies to plot market behavior is going to become increasingly problematical. In short, the analogies, the past performance if you will, all break down because the underlying economic backdrop is unlike anything we have ever seen. It makes managing money and portfolio planning particularly challenging. Traditional asset management techniques just simply may not work. Buy and hope strategies may be particularly difficult to navigate.

Part of the reason we are co challenged in our outlook is that we are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope. And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency? This week's Outside the Box gives us some very basic data points that illustrate the challenge very well. But the problem is that even though we can see the challenge, it is not clear what the final outcome will be, other than stressful volatility as the market reacts.

This week's OTB is by my good friends and business partners in London, Niels Jensen and his team at Absolute Return Partners. I have worked closely with Niels for years and have found him to be one of the more savvy observers of the markets I know. You can see more of his work at www.arpllp.com and contact them at info@arpllp.com.

John Mauldin, Editor
Outside the Box

The $33,000,000,000,000 Question

The Absolute Return Letter
May 2009

"Never in the history of the world has there been a situation so bad that the government can't make it worse."

-Unknown

Is the crisis really over?

Commercial paper spreads have come down dramatically. Libor rates are (hmm - almost) back to normal. Even high yield spreads are narrowing. It certainly appears as if the credit crisis is well and truly over or, at the very least, the light which most of us think we can see at the end of the tunnel is no longer that of an oncoming freight train.

No wonder equities are currently enjoying one of their best spells ever. And while equities continue to go up and up, most of us are left scratching our heads. Is this the real thing or will it go down in history as 'just' another bear market rally? Not so long ago, the entire financial system stared Armageddon in the face. Now, only a few months later, equity markets behave as if all the worries of yesterday have been washed away. How is that possible?

The great bank illusion

The current bull market began in earnest in the second week of March, but what really got everyone going were the surprisingly good Q1 US bank earnings which were reported during the first half of April. Most commentators interpreted the numbers as the clearest piece of evidence yet that we are now firmly on the road to recovery.

Of course US banks made good money in Q1. The environment created for them is the equivalent of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy - courtesy of the US tax payer - a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!

Liquidity is trapped

The problem for the rest of us is that the banks are not sharing the candy they have been handed. Much of the liquidity created by the central banks remains trapped in the financial sector (see chart 1). Quite simply, the multiplier is not doing its job, as many banks prefer to hoard cash rather than increase lending at this juncture.

This is both good and bad news at the same time. Good because it implies that we probably do not have to worry too much about the inflationary effect of the aggressive monetary easing currently taking place; bad because it means that the economy is not going to kick back to life as quickly as everyone would like – and expect.

Meanwhile investors are growing cautiously optimistic about the GDP outlook for the second half of the year with many now forecasting modest growth – at least in the United States. Only a fool would suggest that GDP would shrink by 5-10% per quarter in perpetuity, as has been the case over the past two quarters. The economic slowdown is now decelerating and, as I pointed out last month, there are good reasons why we may see a temporary lift in economic activity later this year, but it will almost certainly prove transitory.

We are still in a bear market

The dangerous conclusion to draw from the experience of the past few weeks is that all is now well and dandy and it is time to load up on stocks again. I cannot emphasize it strongly enough: The bull market of March-April 2009 is almost certainly a bear market rally but, as one of my partners pointed out the other day, NYSE saw four 20%+ rallies between 1929 and 1932 (see chart 2). Bear market rallies can be extremely powerful and hence deceiving.

The problems are not over yet. Not by a long stretch. It will take longer than 18 months to unwind the excesses of the past 25 years. Analysts at Morgan Stanley reckon that the 15 largest banks which between them have shrunk their balance sheets by about $3,600 billion so far in this crisis, will shed another $2,000 billion in 2009¹. If you do not share my pessimism, please take a quick look at chart 3 below. The US financial sector debt load (as a % of GDP) is now 117%. In the early days of the great bull market in 1982, the same number was 22%. Households are not much better off with total household debt now at 96% of GDP vs. 47% in 1982.

Further write-offs to come

The IMF reckons that both European and US banks - but in particular the European ones - are well behind the curve in terms of recognizing their credit crunch related losses. According to the IMF, there is at least another $1,500 billion to come. So when the US banks reported surprisingly good numbers for Q1 it was certainly not because the economy had suddenly and miraculously revived itself, but because some of the oldest tricks in the book were used to gloss over much bigger problems².

As the recession bites into the lives of ordinary people, banks will face losses not only on sub-prime mortgages but on all loan products. As you can see from chart 4, sub-prime is indeed a small fraction of the total loan book for the US banking sector.

Delinquencies are on the rise

And that is precisely what is beginning to happen as illustrated in chart 5. Delinquencies are now on the rise on all mortgage products; however, whereas sub-prime started to deteriorate as early as 2007, it is only recently that delinquencies related to Alt-A and adjustable rate mortgages have taken off, and prime and jumbo loans are only now starting to suffer.

These are all temporary problems, though, however bad they may appear. By far my biggest concern at the moment is the enormity of the debt problem facing most OECD countries. In the March issue of the Absolute Return Letter I referred to an important study conducted by Carmen Reinhart and Kenneth Rogoff back in December of last year³ which I would like to re-visit (see chart 6).

Banking crises run and run

Reinhart and Rogoff studied every banking crisis of the past generation and made some startling observations. One in particular caught my attention. It has to do with the subsequent rise in government debt which, according to Reinhart and Rogoff, has been "... a defining characteristic of the aftermath of banking crises for over a century". According to the authors, governments inevitably underestimate the ultimate cost of a banking crisis, because the indirect costs (such as falling tax revenue in subsequent years) end up much higher than predicted.

The IMF estimates that the cost of the current crisis to the United States will eventually reach 34% of GDP or close to $5 trillion. However, the Obama administration, through its various implicit and explicit guarantees, is already using a number close to $9 trillion⁴. And Reinhart and Rogoff's historical average of 86% of GDP implies an ultimate cost of over $12 trillion!

The IMF is too optimistic

I have a lot of respect for all the good work being produced by the people at the IMF; however, they are sometimes too politically correct for my taste; maybe too afraid of stepping on someone's toes. So when they go public, as they did recently, with an estimate of how much the current crisis would ultimately cost, their projection will more than likely prove hopelessly inadequate.

The true cost is important, because it has to be financed through new bond issuance, and it is my thesis that the sheer size of this tsunami will eventually overwhelm the world's bond markets. As you can see from chart 7, using the official IMF estimates, the twelve most industrialised of the world's G20 countries (in my book known as the Dirty Dozen) will have to issue about $10 trillion worth of new bonds to cover the cost of the current crisis.

The final cost will be enormous

However, if you (like me) believe that IMF underestimates the true cost of this crisis, Reinhart and Rogoff offer a more realistic approach (see chart 8). Using their least costly case study (Malaysia 1997) as our best case scenario, the true cost comes to $15 trillion. If one uses the average of 86% instead, the cost jumps to a whopping $33 trillion. I didn't even bother to produce a worst case scenario - it all got too depressing!

I need to put the $33 trillion into perspective, because it is so big that it is almost incomprehensible. According to Wikipedia (see chart 9), total private wealth across the world today is about $37 trillion less the losses incurred in 2007-09, so the real number is probably closer to $30 trillion now. Total global savings (loosely adjusted for the big losses in 2008) are probably somewhere in the region of $100 trillion. In other words, financing this crisis could absorb one-third of total global savings. No wonder Gordon Brown looks tired!

Where do we find the money?

Obviously, governments may buy a portion of these bonds themselves, but they cannot afford more than a fraction of the total unless they want to challenge Mugabe as the ultimate master of illusion. Neither should investors hold out for sovereign wealth funds to do the dirty work. As is clear from chart 9, the total amount of wealth accumulated in these funds is pocket money when compared to the projected bond issuance over the next few years.

Hence it comes down to the price at which governments can attract sufficient demand from people like you and me. One of two things may happen. Either this crisis will ignite such a bout of deflation that investors will happily own government bonds yielding 2-3% or the deflation scare goes away ultimately, the global economy recovers and bond investors demand much higher yields for taking sovereign risk. I am not yet sure which scenario will prevail, but I do know that both are quite bad for equities longer term. Take your profits!

Niels C. Jensen

¹ "Doomsday is on hold but banks will still feel further pain", The Financial Times, 30^th April, 2009.

² In particular one US accounting rule change (FASB rule 160) explains a large part of Q1 profits.

³ "The Aftermath of Financial Crisis", Carmen Reinhart & Kenneth Rogoff, December 2009.

⁴ http://zerohedge.blogspot.com/2009/04/bail-out-for-dummies-part-1.html

Bank Stress Test Results

IanWyatt — Tue, 05 May 2009 17:01:00 GMT

Your Daily Profit
May 5, 2009

*****Stress Tests are a Joke
*****The New Bailout
*****How to Profit from Toxic Assets

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Fellow investor,

The Treasury’s stress tests are now, officially, a joke …

First, the outcome looked as if all banks would need to raise capital. Then it was reduced to just three. Now it “might” be “about 10” of the 16 banks subjected to the Treasury’s toothless stress tests that may need to raise additional capital to withstand further weakness in the economy.

And the report isn’t even supposed to be out until Thursday. The Obama administration is doing its level best to make sure the market is perfectly prepared for the results of the stress tests.

While it’s probably wise to consider the impact of the stress tests on the financial markets, I can’t say I approve of rigging the tests to achieve a preferred outcome.

*****Bloomberg reports that financial stocks made their biggest gains in a month yesterday on “optimism about the tests.”

That “optimism” is better described as the realization that the stress tests are fundamentally flawed and the government is prepared to handle the capital issue by letting the banks convert the preferred stock the government owns from TARP loans into common stock.

So basically, the government is saying that banks don’t have to repay TARP loans. The banks can just issue more stock. It’s appropriate that shareholders should bear the risk here. It’s completely inappropriate that taxpayers have to accept bank stock in lieu of cash.

This is really just another bailout.

Converting preferred shares to common stock gives the banks a convenient way top boost “tangible common equity.” It’s basically an accounting trick. But since there’s only $110 billion left in TARP, and Congress almost certainly won’t approve any more funds, it’s a convenient solution.

*****The stress tests are supposed to establish a bank’s viability if the economy gets worse. But apparently the worst-case scenarios that underpin the stress test are nowhere near worst-case.

For instance, for the current period, regulators reportedly used 7.9% unemployment. Current unemployment is 8.1%. For 2010, the stress tests use 10.3% unemployment. But at current rates, unemployment will hit 10.3% this year, not next year.

Of course, it could be a moot point if the economy improves. But what if things do get worse? Geithner is playing a dangerous game here.

*****Right now, the toxic asset plan (PPIP) hasn’t been getting much discussion. But this plan, complete with loans from the Fed, is another way banks can raise money. And it would be much better for the economy.

Our analysis shows that some publicly traded private equity groups could make tremendous profits by participating in the Public-Private Investment Program. Our top “toxic asset” recommendation is already up 18%. To get my full report in the subject click HERE.

That’s it for today, I’ll talk to you tomorrow.

Ian Wyatt
Editor
Daily Profit

P.S. Quite a few readers have recently asked about options trading and a couple of you specifically asked about options on banks undergoing the recent "stress tests". And you know those results come out on Thursday. I recently interviewed options expert Bryan Bottarelli from Bottarelli research on what he sees as the best options trading opportunities going forward. Click this link to find out more about his service and how investors can make profits from options trading.

Has Wall Street Taken Over Washington?

IanWyatt — Wed, 22 Apr 2009 17:02:00 GMT

Your Daily Profit

April 22, 2009

*****The Quiet Coup
*****Newsletter Advisors

Fellow investor,

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*****I received a very topical question from a Daily Profit reader …

Do you think that Obama is a legitimate "for the ordinary people" real deal, or is he just another cleverly marketed pretty face representing the interests of the ruling class? If you prefer call them the rich, the wealthy, the owners, the bosses … whatever works for you. In the end they are the same people. I deliberately did not label them as capitalists because I believe that they are corrupt capitalists, scamming the game in their favor even though their performance is proven to be mediocre. In real capitalism, ability and performance matter. As in, let the failed banks, brokerages, etc fail and allow the strong to take them over. When I read about these recent government led bailouts it becomes clear that we have been set up and conned into taking the hit for the unworthy managers, making it possible - inevitable - for the rich to triumph regardless of their audacious arrogance and incompetence. This is not what I understand capitalism to be - and it stinks!

I have to admit, I started to get sucked in by the President’s charm the day he stood on the steps of the Capitol and told us of the sacrifices and hard work that lay ahead for Americans.

I also must now admit that I am extremely disappointed in how President Obama he has dealt with continuing problems on Wall Street. He has repeatedly shown that he is unwilling to take a hard line with the likes of AIG, Citigroup, Goldman Sachs and all the rest.

When the bankers can dictate policy, America is in serious trouble. That’s what got us to where we are now and quite frankly, President Obama doesn’t seem to be changing this situation, for whatever reason, and you’re right: it stinks.

Wall Street has essentially robbed America. And now Washington is driving the getaway car. Washington is essentially helping Wall Street with the cover up, doling out ridiculous sums to maintain the status quo.

Americans should be outraged. Why there aren’t massive protests against the way Washington is continuing to let Wall Street run the show is beyond me. I’m not talking about partisan actions like the “Tea Parties” to protest tax hikes. And there aren’t any specific policies that have led to this situation. It’s a culture, a revolving door between Washington and Wall Street.

Treasury Secretary Tim Geithner’s plan to overpay banks for the toxic assets using taxpayer money is a prime example of just how sick the system is. And it’s complete and utter BS. Take the banks over, fire all executives, remove the boards of directors, strip out the toxic assets and sell the banks back to private investors. Period. That’s the only way to end this mess.

So long as the Obama administration continues to place the interests of Wall Street above the interests of Americans, it cannot be considered an agent of change. And I couldn’t be more sad about the unwillingness of those in power to do what’s right.

There is an excellent article in this month’s Atlantic that discusses how Wall Street has essentially taken over Washington. It should be considered required reading. Here’s the link.

*****It’s Newsletter Advisors Wendesday. Today, we get another round of options trading ideas from Bryan Bottarelli of Bottarelli Research. Enjoy.

Ian Wyatt
Editor
Daily Profit

Exclusive Interview: Three Top Picks From Bottarelli Research

To stay on top of the market volatility, I once again pulled up a chair with Bryan Bottarelli. As you know, his service – called Bottarelli Research - consistently delivers solid performance. That’s why it’s always smart to get his top trading ideas and share this information with Daily Profit readers like you. He is currently editor for three services that trade options (his flagship service), LEAPs and small caps.

Q: Hi again Bryan. Every time we talk, you have some great trading strategies. So let’s get right into it. What’s working for you right now?

A: Over the last 5 weeks, we witnessed one of the strongest market rallies since the 1930s. But throughout this upward push, I told my Bottarelli Research members that I was extremely skeptical of the move. You see, a good chunk of the rally was fueled by a record profit report from Wells Fargo, which appeared very suspicious. After all, nobody had a clue as to how Wells Fargo reported their blowout earnings. What’s worse, WFC refused to provide any details on how they arrived at their numbers!

But here’s the important thing…even though I didn’t trust the rally, that didn’t mean that my Bottarelli Research members didn’t profit off the rally. You see, in previous interviews, I’ve spoken about the trading tactic that entails “not fighting the tape.” In other words, if the market wants to move higher, don’t fight against it. I admit, that’s quite difficult to do, especially if you do not believe that the upside move is for real. But when it comes to successful trading, adopting this strategy is a critical element of profitability.

Given the fact that the markets were rallying, I identified two specific market sectors that looked to have strong upward momentum. Those two sectors were Chinese-based telecom companies and small cap biotech companies. Since both of these sector groups were exhibiting results that were out-performing the major market averages, I carefully recommended adding upside calls on China Mobile Limited (CHL – NYSE) and Dendreon (DNDN – Nasdaq). Specifically, I recommended the DNDN April 5 Calls (UKO DA) for $1.75 per contract and the CHL May 50 Calls (CHL EJ) for $1.25 per contract. Two days later, we sold both positions for gains of 42.86% and 21.60% respectively. And remember, we took these profits despite the fact that we did NOT believe in the market rally.

Q: What did your members think of these trades? Did you give them both the BUY and the SELL signals for the DNDN and CHL trades?

A: For the most part, my members agreed that the rally was bogus – but they also understood that it was important to get positioned to profit as the upside move continued. As a result, they were quite pleased with the outcome of these trades.

As you can see, Bottarelli Research is designed to not only give profitable trade recommendations – but it’s also intended to offer you an unbiased look at the financial events that are moving the markets. While every money manager is telling you to “hold for the long term,” and every financial television show is telling you to “buy this bottom” Bottarelli Research members understand that the true value of my service comes in the brutally honest assessment of the market’s daily moves.

In terms of the second part of your question, I always give BUY and SELL instructions for every single recommendation that I make. That way, you always know when to enter and exit each position.

Q: Can you offer us three new trades that someone can act upon right now – and hopefully be just as explosive?

Right now, I feel like that the markets have temporarily topped out – and we’re now due for some selling pressure. Therefore, I’m currently getting my Bottarelli Research members positioned in three powerful “Ultra” positions, which move at a rate of 2x and 3x their respective benchmark averages. If we experience the pull-back that I expect, all three of these plays will catapult aggressively higher.

The first one is called the Direxion Financial Bear 3X Shares (FAZ), which moves at a rate of 300% of the inverse daily performance of the Russell 1000 Financial Services Index. In other words, if the Russell 1000 Financial Services Index moves down 3% on the day, the FAZ is designed to move UP 9%.

Right now, I feel that our financial system is in one of the most fragile moments in history. Over the last five weeks, the sentiment on Wall Street seems to indicate that the problems have been addressed – and all the problems in the financial system have now been corrected. I do not believe this one bit.

Don’t let the Fed and the Treasury pull the wool over your eyes. From what I’m reading, 16 of the top 19 banks in the nation are technically insolvent. What’s worse, if any two of the 16 insolvent banks go under, they’ll totally wipe out all remaining FDIC insurance funding. This is a very scary situation. And it makes a very strong case for owning the FAZ right now.

If you look at the FAZ chart below, you’ll see that this was a $120.00 asset in early March. Now, after a furious rebound in the financial sector, you can own FAZ for under $11.00! If we see another aggressive pull-back in the financial sector, you could realistically see the FAZ return to their March highs. Heck, if it moves up to $50.00, that’s still a 400% gain from current levels!

My second pick is the UltraShort Real Estate ProShares (SRS), which moves at a rate of twice the inverse of the Dow Jones U.S. Real Estate Index. Similar to the FAZ, the SRS has fallen aggressively in recent action, pushed lower by a near-term recovery in the Real Estate sector. But if you study the time-horizon and the percentage decrease of past real estate collapses, you’ll realize that we’re nowhere near the bottom.

Housing prices are down 28% from their bubble peak in 2006, but they still have a ways down to go before getting back to their pre-bubble levels. You see, the average real estate crisis sheds 35.5% of the value off homes. And the worst crisis on record peeled off 54%. So, if we’re experiencing just an “average” crisis, you can expect prices to move down another 7% to 10%. And in the world of real estate, this move could easily take another year or two. Now, if we hit the levels that we reached during the worst-ever crisis, you can expect another 26% drop. In other words, we could be only halfway through the current crisis. Ouch. In short, you can expect more problems in the commercial real estate sector. As a result, adding SRS makes a lot of sense as well.

And finally, my third pick is the Ultra Gold ProShares (UGL), which moves at a rate of twice the performance of gold bullion. If the markets begin to pull back, as I expect, then you’ll see a rush of investment dollars flowing back into gold. Therefore, adding the UGL at today’s low values puts you in position to leverage any upside move in gold at a 2 to 1 rate.

Considering the unprecedented levels of U.S. debt (both on a governmental and consumer side), I feel that owning gold exposure is one of the safest and smartest plays you can make right now. I strongly recommend that everyone own gold in their portfolio.

Editor’s Note: For a limited time Bottarelli Research is extending a special 9-month discount for any Daily Profit readers who want to join his service. If you’re interested in taking this special discount, follow the link below (and choose the special 9-month offer noted with a red star).

http://www.bottarelliresearch.com/options/offer/H9DQFVY943/

How to Recover From the Bear Market

GaryHalbert — Tue, 14 Apr 2009 20:05:16 GMT

IN THIS ISSUE:

Editors Note – The Fed Bails Out Insurance Companies
The Case for Aggressive Allocations
Third Day Advisors
Scotia Partners
Combining Both Programs

Editor's Note - Bailouts for Insurance Companies

Just hours after I sent you last week's E-Letter which alerted you to the serious financial troubles among the nation's largest insurance companies, the Treasury Department announced that TARP bailout monies will now be available for insurance companies. As I indicated, the insurance companies have desperately lobbied for bailouts, and now it looks like they will get them, at least for those that have recently bought up banks or other chartered financial institutions to qualify. I can't say I'm surprised.

Stay tuned as your insurance company may soon be controlled by the Obama administration, along with the banks, General Motors and who knows what else will follow.

Introduction

When you write a weekly E-Letter such as this one that goes out to over one million people, you can expect to get criticized from time to time. After all, people who disagree are more likely to respond than those who agree and appreciate the information provided – nothing new about that – especially since some of my weekly commentaries are devoted to political issues which are almost certain to draw responses from those who disagree with my conservative views.

Recently, however, I have received some criticism from a few readers regarding the fact that I include discussions about the investment programs that my firm recommends in these E-Letters. This comes as somewhat of a surprise, since this E-Letter is provided free of charge, and no one is forced to read it. Still, some readers insist that I should not write about the investment programs I believe in, as to them it somehow taints the integrity of the E-Letter.

I could not disagree more, especially given that we have just witnessed one of the most severe bear markets in history and two bear markets in less than a decade. The active management investment programs I recommend have served to significantly reduce losses in this bear market, and thus they are more relevant than ever. I can only guess that the criticism is coming from those who don’t want to be reminded that their buy-and-hold, low fee portfolios were recently gutted (50% or more) by the Bear Market Express.

This aversion to investment topics may also be indicative of how so many have been misled for so long, and feel they must now stay the course and hope that the market returns to its historical norms. They may make adjustments to their overall portfolio but, as I see it, this is tantamount to rearranging the deck chairs on the Titanic. Of course, everyone is entitled to their opinions.

My firm, on the other hand, is offering a lifeboat to those mired in the clutches of buy-and-hold strategies that have not only failed to meet their investment needs, but in many cases, have resulted in huge losses that have pushed investors even further away from their eventual goals. The reason I mention the investment programs we recommend is that I firmly believe that they offer a viable alternative to some of the failed buy-and-hold strategies that have been so prevalent in the marketplace for many years.

Apparently, many of you are coming around to my point of view regarding active investment strategies that have the flexibility to move to cash or hedge long positions in bear markets. We were pleasantly surprised when about 300 of you who read this E-Letter registered for our March 25 Webinar with Scotia Partners and hundreds more have viewed the recorded version on our website since then. And we have seen the largest influx of new clients and new money in many years in just the last 3-4 months, sadly thanks to the bear market.

Even some mainstream financial advisory firms are now dipping a toe in the active management waters. I am amused at some of the commercial ads that urge investors to come in and visit with an investment counselor to learn of “new” strategies for the current market. In all likelihood, you’ll learn about some of the same strategies I’ve been recommending for almost 15 years.

So, let it be known that from time to time I will continue to discuss how active management strategies can fit into your portfolio. This week, I will revisit two of the money managers that we recommend. You can either read on and see how these two managers have made money this year, despite the bear market, or settle back in your buy-and-hold deck chair and disregard the remainder of this week’s E-Letter. It’s your choice.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Aggressive Programs May Help Recovery

As I have mentioned many times in this E-Letter, the goal of basic active management is to attempt to move to cash in down markets to reduce portfolio risk. However, some investors seek out programs that use leverage or can go both net long and net short in the market for the aggressive portions of their portfolios.

In such programs, the potential for profit (or loss) exists no matter what the market’s direction. As I have written before, I characterize this type of program as being one where the best defense is a good offense. Unfortunately, many of these programs are available only to wealthy investors through hedge funds.

Fortunately, there are aggressive investment programs that are open to virtually any suitable investor. In light of how many retirement portfolios have been decimated by two bear markets in less than a decade, even moderate investors may want to consider having an aggressive investment or two in their overall portfolio. Of course, these allocations should be only a small portion of the assets, but it IS possible to include small allocations to aggressive investment programs and still end up with an overall moderate-risk portfolio.

With that in mind, I’ll spend the remainder of this E-Letter highlighting two aggressive money managers that you have previously read about in these pages. In the discussion below, I’ll briefly summarize the strategy employed by each manager as well as update their performance information.

After that, I’ll show how a combination of these programs might be a viable alternative for aggressive investors who want to diversify their portfolios by including two leveraged, long/short active management strategies. If you would like to learn more about active management strategies in general, see the link to my Absolute Return Special Report in the Conclusion section below.

Third Day Advisors Long/Short Programs

Back in January of 2005, I first introduced Third Day Advisors and its founder, Ken Whitley. The original Third Day program we recommended was the Aggressive Strategy, which allowed aggressive investors the ability to have a leveraged long and short exposure to the Nasdaq 100 Index. Over time, Ken has applied his signal to other market indexes, but all are based on the same underlying trading model.

Ken’s money management strategy is a proprietary blend of momentum, trend-following and overbought/oversold indicators. There are ten basic indicators that Ken uses to analyze the market, with a number of sub-indicators that also factor into each trading decision. Each indicator “votes” on whether to be long, short, or neutral in the market. The model is 100% mechanical, though Ken does reserve the right to override his system’s signals in the case of a national emergency.

Depending upon the market index, Third Day selects among index mutual funds available from the Rydex family of mutual funds. These funds are part of the Rydex Dynamic class of funds that seek to provide investment returns that correlate to 200% of the daily performance of the underlying index. Separate funds are provided for positive and negative (inverse) correlations.

The Third Day investment strategy does not currently employ any traditional stop-loss techniques to automatically exit losing trades. To limit risk, Ken varies his allocation based on the relative strength of his trading signal and market volatility. As a general rule, his allocations may range from a low of 15% to a high of 100% of the account value, depending upon the program. However, maximum allocations are rare and Ken’s various programs are projected to be in cash (money market fund) an average of 42% of the time in any given year based on historical performance.

The lack of a formal stop-loss trades and frequency of trading are additional reasons why Third Day’s investment programs should only be considered for the aggressive portion of an investor’s portfolio, where high volatility and significant periodic drawdowns can be tolerated.

Performance Evaluation

Both the Third Day Aggressive Strategy and S&P Plan have turned in strong performance so far in 2009. As of the end of March, the Third Day Aggressive Strategy posted a gain of over 13% for the first quarter of 2009, while the S&P Plan gained 11.20% over the same period of time. This is even more impressive when compared to the S&P 500 Index which was down over 11% (including dividends), even after an impressive March rally. Of course, past performance is not necessarily indicative of future results.

The Third Day Aggressive Strategy has the longest track record of all Third Day programs with actual trading beginning in November of 2001. This strategy trades the NASDAQ 100 Index, which is often seen as a proxy for the high-tech market sector. Over the course of our experience with this program, we have seen that the heavy high-tech weighting of this particular stock index results in it sometimes deviating from the direction of the overall market. Therefore, investors who elect the Aggressive Strategy should do so with the knowledge that it may be more of a tech sector program than one that is based on the broad market.

In light of the tech sector concentration in the Nasdaq 100 Index, Third Day also began to apply its trading signals to other market indexes. In 2006, the Third Day S&P Plan began actual trading. After watching its performance for a while, we began recommending it to our clients who wanted an active management strategy based on more of a broad-market stock index. Though the S&P Plan had a shorter actual track record than the Aggressive Strategy at the time, we were comfortable recommending this new program because we knew it was traded based on the same signal that Ken Whitley had been producing since 2001.

The actual performance information below provides detailed monthly returns and time window analysis for both the Aggressive and S&P Plan programs. This format will help you to more easily compare the two Third Day programs based on their actual performance. Keep in mind that all of the performance information shown is net of management fees and expenses.

Please see Important Notes at the end of this E-Letter.

As you evaluate Third Day’s performance, it should become clear to you that Ken’s Aggressive Strategy performed much better in the 2000 – 2002 bear market than in the most recent market downturn. Based on our research, we feel that this difference is largely due to a “disconnect” between the tech-heavy NASDAQ 100 Index and the broad market stock indexes.

Third Day’s S&P Plan, on the other hand, was better able to maintain more value during 2007 and 2008 than the Aggressive plan, again owing to the fact that this program is based on the broad market S&P 500 Index rather than the NASDAQ 100 Index. Remember, however, that past performance is not necessarily indicative of future results.

While we would like to have seen the S&P Plan pick up more gains from inverse (short) trades during the worst of the bear market, we have realized that Ken’s trading model is not as adept at handling high-volatility markets as are other programs, such as the Scotia Growth S&P Plus Strategy that I will discuss below.

However, we feel that the Third Day S&P Plan may be a good alternative for the aggressive portion of your portfolio when the market eventually bottoms out and volatility decreases. Also note that both the S&P Plan and Aggressive Strategy have posted double-digit gains as of the end of March. Past performance, however, does not guarantee future results.

The minimum investment for the Third Day program is $50,000 and it is custodied at Rydex Investments. You can obtain more detailed information about Third Day’s strategy and performance on our website at the following link:

http://www.halbertwealth.com/advisorlink/thirdday.php

At this link, you can also learn about an even more aggressive Third Day program called the Ultra Aggressive Strategy. This program also trades the tech-heavy Nasdaq 100 Index, but does so with trade allocations that can be as high as 100% of the account value. As always, read all descriptive and disclosure information on these programs before deciding to invest.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Scotia Partners – Riding the Waves of Volatility

As I mentioned earlier, Third Day’s investment programs experienced difficulty when faced with the high volatility that has characterized this bear market. Scotia Partners’ investment programs, on the other hand, have seemed to almost embrace the increased volatility, performing much better in the bear market than during the previous rally phase of the market.

In 2008, the Scotia Growth S&P Plus Strategy gained over 77% net of fees and expenses, when the S&P 500 Index fell 37%. So far in 2009, the Growth S&P Plus Strategy has posted a gain of over 28% as of March 31, while the S&P 500 Index is still under water. Since its inception in August of 2004, the Growth S&P Plus Strategy has produced an annualized return of 38.83% as of the end of March, while the S&P 500 Index can muster only a negative 4.76% over the same time period. Past performance, however, cannot guarantee future results.

Based on our daily monitoring of Scotia’s performance and trading, we feel that its success has come largely due to portfolio manager Cliff Montgomery’s trading strategy that seeks to trade only on those days that offer the best statistical probability of success. Otherwise, he’s content to sit on the sidelines in the money market awaiting the next opportunity.

Scotia’s Growth S&P Plus investment strategy is a combination of two proprietary trading models developed by Scotia’s owner, Cliff Montgomery. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model seeks to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. Once the long-term trend is identified, the intermediate-term trend is then determined using similar analysis. Only when the intermediate and long-term trends are in agreement will the basic model issue a trading signal.

With the overall market trend identified, the basic model looks for short-term movements against the trend. In other words, the strategy seeks to take advantage of the possibility of a “reversion to the mean.” Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

In addition to the basic trading model, the Scotia’s Growth S&P Plus program also incorporates a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. As I have said in the past, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Like the Third Day programs, Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. However, unlike Third Day, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal.

Because of the selective nature of the trading models, the Growth S&P Plus Strategy has historically been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short for an additional day. However, if even one indicator disagrees with the others, the model exits the market and goes to cash.

The performance information below tells the whole story. As you review this information, again remember that all numbers are actual returns and are net of fees and expenses, and that past performance cannot guarantee favorable future results.

Please see Important Notes at the end of this E-Letter.

As you evaluate Scotia’s performance, you see that its performance has increased dramatically since mid-2007. If you superimpose a graph of the CBOE Volatility Index (VIX), you will find that Scotia’s jump in returns coincides with a big jump in market volatility, as measured by VIX.

Initially, we thought that this might be an indication that Scotia’s programs were somehow “short-biased,” meaning that they entered into predominantly short trades, which would be favorable in a bear market. However, such a bias would be detrimental in a bull market, so we analyzed the individual trades to determine if there were any bias patterns. Our findings were significant:

Over the period of time from the inception of the Scotia S&P Plus Strategy (August of 2004) through December of 2008, Scotia had the following trading history:

165 Long Trades vs. 113 Short (Inverse) Trades
Win/Loss Ratio – Long Trades - 72%
Win/Loss Ratio – Short Trades - 65%
Win/Loss Ratio – All Trades - 68%
(Past performance does not guarantee future results.)

As you can see, there were actually more long trades than short trades, and a higher number of long trades were successful. The conclusion to be drawn is that Scotia’s Growth S&P Plus Strategy does not appear to have any specific long or short bias. However, because of the increased volatility generally associated with bear markets, such periods have the potential to produce greater relative performance than bull market periods.

The minimum investment for the Scotia Growth S&P Plus Strategy is $25,000 and funds are also held at Rydex Investments. You can obtain more detailed information about Scotia’s programs, including a less aggressive option known as the S&P Moderate Growth Strategy, on our website at the following link:

http://www.halbertwealth.com/advisorlink/scotia.php

As I noted above, literally hundreds of my readers have heard Cliff Montgomery personally explain the specifics of Scotia’s money management strategy via our recent webinar. If you missed it and would like to watch and listen to the full webinar discussion (including all charts), click on the link below:

http://www.halbertwealth.com/webinar/sco20090325/scotiawebinar.php

A Combination Approach

As you have no-doubt observed as you reviewed the above performance information, returns in any given time period can be significantly different – even among aggressive investment alternatives that are traded in a similar manner. Third Day’s Aggressive program did better than Scotia during some years in the up markets between 2003 through 2006, but not in others. Scotia has outperformed Third Day during the volatile bear market that began in 2007, but who knows how long this increased volatility may last?

If we had a crystal ball and could know exactly what kind of market environment to expect in the coming months and years, it would be easy to determine which of these programs to include in your portfolio. However, since we don’t have a crystal ball and most of the “experts” have been horribly inaccurate in their forecasts of what market conditions to expect, we have to find another way to take on the possibility of changing market environments.

If you feel that Scotia and/or Third Day would be suitable for a portion of your portfolio and are within your risk tolerance, I suggest that you consider combining the two programs within your aggressive portfolio allocation. While the past performance of these programs cannot guarantee success, we have seen that each has shown the ability to excel during certain types of market environments. Plus, these programs are not correlated with each other, with an R-squared value of only 0.02.

I would like to be able to provide a hypothetical illustration of these two programs together, but the disclosures necessary to do so would be too onerous in an already long E-Letter. Suffice it to say that, in some cases, combining programs can produce a smoother performance with lower drawdowns. While it’s granted that no combination would outpace Scotia’s recent performance, it is also important to realize that no market environment lasts forever, which is why it’s important to have a combination of programs in a diversified portfolio.

While it is difficult in this E-Letter setting to illustrate a combination approach, you can get an idea of how a combination of these two programs would behave by contacting one of our Investment Consultants at 800-348-3601 or by e-mailing info@halbertwealth.com. Plus, our Consultants can also show you how to incorporate less aggressive actively managed programs into your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I hope that by now you have seen that allocating a percentage of your portfolio to aggressive investment programs may help you to recover from the ravages of the bear market. Just keep in mind that aggressive allocations are not suitable for everyone and that such allocations should be kept to a small percentage of the overall portfolio, especially for moderate-risk investors. Never take on more risk than you should in an attempt to quickly recover all of your investment losses.

If you would like to receive more information about any of the programs I have discussed this week, give one of our Investment Consultants a call at 800-348-3601 or e-mail us at info@halbertwealth.com. You can also request information via our online request form. We also have other programs more suitable for less aggressive investors, so be sure to ask about them as well.

If you would like to learn more about active management strategies in general, I invite you to download my Absolute Return Special Report. This informative document explains the difference between active and passive management in much more detail, and also provides expanded descriptions of active management strategies you may want to consider for your own portfolio.

I hope that my discussion of the various actively managed programs available to you through my company is of benefit to you. I realize that some may not be in a position to invest right now, but it’s still important to know about these strategies for the future. We sometimes get calls from long-time readers who suddenly find themselves the recipients of a retirement plan rollover, inheritance, proceeds from the sale of a business or other large lump sum and are glad that they learned about active management before they had the money to invest.

In closing, I want to make it clear that my comments regarding complaints are not in any way an indication that I do not appreciate your feedback. I and my staff go over every response generated by my E-Letters, and I always appreciate your thoughts, concerns and questions. However, in regard to discussing the active management strategies we recommend, I feel it necessary to be outspoken for a number of reasons.

First, I feel that these strategies embody some of the best active managers in the country, and all have undergone our strict due diligence review before being recommended. Second, my firm has been evaluating and recommending active money managers for close to 15 years, so we’re not the new kids on the block. Keep this in mind when your buy-and-hold broker has a sudden revelation about active management strategies.

A final reason that mentioning these programs is important is that the financial media are now catching on that investors are leaving buy-and-hold strategies in droves. In some respects, that’s good. However, it also concerns me because some investors may become the victim of scam artists or enter into investments they don’t understand, all for the promise of making up all of their losses.

It’s a dangerous world out there for the investor, and there is no shortage of individuals who would be more than happy to separate you from the remainder of your nest egg. Therefore, to the extent that I can prevent that from happening, I feel it is my duty to do so and I make no apologies for it. As always, please read the Important Notes and disclosures that follow my signature below.

Offering hope for investors bitten by the bear,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), Third Day Advisors, LLC (“TDA”) and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS and TDA in exchange for introducing client accounts. For more information on HWM, SPL, TDA or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), the NASDAQ Composite Index and the NASDAQ 100 Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from those of the Advisors and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index, the NASDAQ Composite Index and the NASDAQ 100 Index is not meant to imply that investors should consider an investment in these trading programs as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite Index or the 100 NASDAQ stocks that comprise the NASDAQ 100 Index. Historical performance data represents actual accounts in programs named Scotia Partners Growth S&P Plus, Third Day Aggressive Plan and Third Day S & P Plan, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in these programs are managed similarly, the results shown are representative of the majority of participants in each of these programs. The signals are generated by the use of proprietary models developed by Scotia Partners and Third Day Advisors with the objective of participating, on a leveraged basis, in trading days with the highest probability of success. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to these trading programs.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the trading programs’ performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in these programs; (iv) Purcell Advisory Services (for Scotia) and Third Day Advisors will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the trading programs’ fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Management fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Dividends and capital gains have been reinvested. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

The Room – 04/03/2009

DavidGalland — Fri, 03 Apr 2009 15:00:00 GMT

Dear Readers,

In the March 6, 2009 edition of this missive/blog/column/whatever you want to call it, I listed three "Desperate Measures" the U.S. government might turn to next in its futile attempt to rearrange the ruined economy into something more resembling a perfect world.

Suspend "mark to market" rules. At the time of my initial write-up (which you can read here), highly placed sources within the financial services industry that I spoke to were of the opinion that no significant changes would be made, for the simple reason that to do otherwise would risk destroying what little credibility was left for the financial sector.

As you now know, the government has strong-armed the FASB into modifying the rules, essentially allowing companies to "mark to model." Which simply means that the same financial wizards who helped create the models so pivotal to causing the mess in the first place are now free to dust those models off, give them a little tweak, and use them to fabricate more attractive values for the toxic waste than the market was willing to assign. Some might term these rule changes outrageous, fraud even... I call it business as usual.
Bad bank. The government has moved forward with this initiative as well, essentially rigging up a system that literally guarantees that a very small handful of firms -- likely just four or five -- will receive the sweetheart deal of the century, at the same time that the U.S. taxpayer gets the short end of the stick… right up the side of the head.
Fed buys long-term Treasuries. This, too, has now come to pass and is likely to accelerate. While there are many ways that one could describe this latest initiative, I find it best to keep these things simple... it's called inflation.

Maybe next week, I'll try to come up with some new candidates for desperate measures, but for now I would like to turn my attention to the much-anticipated and widely watched G20 meeting that has just wrapped up in London.

I imagine, because it is such a headliner event, many of you expect me to wax with some vitriol about it, but I fear I must let you down.

Sure, it bothers me that our president traveled to the event with an entourage of 500, including secret service agents, paper carriers, and other lucky sycophants -- all of whom were put up in grand style at taxpayer expense. (By way of comparison, my Portugal-based correspondent General Watson reminded me that when Maggie Thatcher was prime minister, for state visits, she used to travel commercial with a small group of aides. Often times, the other passengers were unaware she was even on the plane. )

This sort of excess is somewhat ironic and maybe even a little hypocritical, given Mr. Obama's derogatory comments about companies flying executives to corporate meetings in places such as Las Vegas, a topic I briefly touched upon last week.

I cannot begin to imagine what sort of costs are involved in transporting all those people -- along with three presidential helicopters and any number of stretch armored limousines -- to Europe, then keeping them in clover for a week... but I suspect it would be more than enough to keep the occupants of a moderately sized city in some third-world country in food for a decade or so.

G20 Meeting, Who Cares?

While I often don't succeed, I try to focus these weekly comments on matters that are actually of some importance -- on a broader scale, and to me personally. With that filter in place, the G20 meeting barely registers a blip.

Sure, there were a lot of fine-sounding speeches by politicians, but since when are those worth the paper they are written on? And yes, they managed to agree in principle to give over $1 trillion to the IMF – a topic I’ll have more to say about in a minute. In addition, they promised to collectively put the shoulder to the wheel in an effort to create a massive, new, global regulatory regime.

Run for cover? Hardly.

On the radio yesterday, I heard an African intellectual bemoaning the fact that the G20, by its numerically limited scope, excluded the representatives -- and therefore bypassed the inputs and opinions -- of over 180 other, lesser nations whose names did not make it onto the invite list.

Now, let me ask you, when it comes to implementing the high-sounding pronouncements that emanated from the G20 meeting, what are the odds that this collection of talk-a-crats will actually be able to come together to the extent required to create a functioning bureaucracy that delivers on its promises at any time in, say, the next 1,000 years?

Which makes the laments of the above-mentioned African intellectual all that more laughable. Can you imagine political junket-goers from 200 countries getting together and accomplishing anything other than drinking the hotel bar dry?

For the source of my skepticism, look no further than the United Nations.

(One thing I do find mildly amusing at gatherings such as the G20 is a circus of professional protesters who flail their thin arms at the rather better-equipped, truncheon-wielding security forces. The source of my humor is that the vast majority of these individuals are there to encourage the representatives of the world's governments -- the very same governments whose names should appropriately be entered into the blank following the question "Who is most responsible for the mess the world is in?" -- to further expand and extend their powers. Memo to protesters: the solution to bad government is not more government.)

The IMF

It seems somewhat ironic that the IMF, which was founded in 1944 as part of the Bretton Woods arrangement, should now be viewed as a possible source of the world's salvation.

In the way of history, its original purpose was to "promote international monetary cooperation," specifically by attempting to maintain fixed exchange rates for the world's many currencies. The idea was that the IMF would step in whenever a country suffered from a temporary deficit in its balance of payments. To help the country avoid having to debase its currency to meet its external obligations, the IMF will provide a short-term loan. These loans came with "strings" attached, in the form of various demands for monetary reform following the Keynesian principles favored by the functionaries of the organization.

According to a briefing paper prepared by the CATO organization for Congress (which they'll never read anyway)...

Read the complete paper here

In addition to spawning a coterie of kleptocrats around the world, the IMF has also failed miserably in its role of managing the global monetary system, witnessed by the persistent inflation the world has suffered since its founding.

(As for the fixed rate system it was supposed to be managing, that came to a sudden halt when the U.S. government closed the window on gold convertibility, a central tenet of the same Bretton Woods agreement that birthed the IMF.)
So what function does the IMF currently serve? Shedding light on that topic is Ken Ewert, writing in The Freemen...

Why then, the widespread support for the IMF? The reason is more straightforward than many of us would like to believe. When governments speak of the need for "increased economic coordination," what they mean is that governments around the world want to better synchronize their inflationary monetary policies. Inflation is politically expedient for every government in our age. It temporarily stimulates economic activity and in so doing buys considerable political favor. Only later when the unpleasant effects appear -- rising prices, economic dis-coordination, consumed capital, and unemployment -- does the inflation become a political liability. The illusive goal pursued by governments around the world is to reap the political benefits of inflation without paying its subsequent costs.
Even so, perhaps out of sheer frustration or even spite, the Chinese, Russians, and any number of other nations are now openly discussing the idea that the IMF should be given both the resources and the responsibilities to create a new international monetary regime that would serve to demote the U.S. dollar to just another currency, albeit a still very important one.

Ed. Note

The G20 moves the world a step closer to a global currency

Read it here.

Many observers assume the Chinese are bluffing when they raise the topic of pushing the U.S. dollar aside as the world's reserve currency... or that these comments were otherwise cooked up in a Beijing political meeting to give the Obama administration pause in its headlong rush to debase of the U.S. dollar.

Those assumptions could prove wrong -- the Chinese may be sincere in their calls for a new monetary regime. I say that after reading a paper written by Zhou Xiaochuan, governor of the People's Bank of China, titled "Reform International Monetary System. ”

I highly recommend that you at least give the article a quick scan, because it shows that Zhou has a clear understanding of the various monetary systems and a clear preference for currency that is "anchored to a stable benchmark and issued according to a clear set of rules." He goes on to take a direct shot at the world’s fiat monetary system, saying, correctly, "The acceptance of credit-based national currencies as a major international reserve currencies, as is the case in the current system, is a rare special case in history."

Read his essay by clicking the link here.

As per above, I am completely confident that despite China's wishes, the world's leading governments won't be able to get out of their own way long enough to produce a new monetary system -- let alone one that is based on something other than political hot air. That leaves the door open for a single country to decide to break the mould by backing its currency with gold or some other basket of tangibles. That, of course, we shall watch for with some anticipation.

Before leaving this subject, I thought I'd share the contents of a message that our own Bud Conrad sent across this morning on the topic of China and the beefed-up IMF Special Drawing Rights...

The IMF's Gold

Those among you who find gold to be an attractive asset, which I suspect is most, are well aware that this week the IMF announced that it was likely to sell off 400 or so tons of gold in order to continue supporting the borrowing habits of its regular clientele.

While these special sales have been threatened in the past, this time around it looks like it might actually happen. While the idea of the sale might spook the gold markets for a bit, the actual event is likely to have little if any lasting effect… other than continuing to hollow out the IMF.

That's because the odds are very high that the gold will never actually make it onto the market, but instead will trade hands in an off-market transaction between the IMF and the Chinese or some other nation looking for the earliest opportunity to trade its much abused paper dollars for something of tangible value.

At this writing, of China's $2 trillion in reserves, only about 1% is held in gold. There has been credible talk of them boosting that percentage to as much as 10%.

At $900 per ounce, the math looks something like this…

At 32,000 ounces per ton, 400 tons equals 12,800,000 ounces. Multiplied by $900, we arrive at a total value of the intended IMF sale of $11.5 billion.

Ready to be deployed against that amount is as much as another 9% of China's $2 trillion reserves -- which adds up to $180 billion. And that's just China. Of course, there are any number of other countries sitting on piles of U.S. dollars and viewing the outlook for those dollars in fairly negative terms.

So, sure, the notion of a big IMF gold sale might spook the gold market a bit… but in the final analysis, it will amount to less than a hill of beans.

The Closing Door

Speaking selfishly, a human trait I won't apologize for, the headlong rush of global governments to debase their currencies might be viewed as something of a positive. That's because, being aware of it, we can take steps to arrange our investments in such a way that we should be able to profit from it.

Unfortunately, the currency debasement is only one of many actions we can anticipate that governments will take going forward. Because as they set about destroying their currencies, they’ll simultaneously be looking to raise revenue elsewhere -- specifically by squeezing the productive segments of society out of whatever money they can. But of course, until they actually put up The Wall, most people of means, in most countries, are still free to pick up their bags and move to climes where their capital is better treated.

Understanding that, one of the major initiatives that came out of the G20 soirée just ended was a rededication by the world's bureaucrats to tighten the vise on any country deemed to be overly capital-friendly. Doug Casey, who has long anticipated these developments, has warned that time is running short for U.S. citizens in particular to diversify globally.

Specifically, the gang of 20 announced they were going to use a list just published by the Organization for Economic Cooperation and Development to aggressively go after "tax havens." Regrettably, that list includes names such as Costa Rica and Uruguay, places that we know many of our subscribers have an interest in.

The implications of these moves on personal freedom are not to be sniffed at. While the G20 countries may lack the organizational skills to create a functional new monetary system or widespread regulatory regime, it is a fairly easy matter to apply financial pressures on “errant” countries. They have a lot of experience in that regard. And so, to quote the G20 communiqué on the subject, "We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over."

Few nations can stand up to the pressure of global sanctions, and so many if not most of those nations are likely to roll over. The only way to stave off this latest assault on the free flow of money would be if there were an eruption of a widespread public outcry, complete with rampaging mobs and a liberal throwing of rocks. But as you and I both know, that’s not going to happen.

Some of you may think that I am making much ado about nothing, but I believe it's important to view these sorts of developments not based upon the world as it now is… but rather as it could be.

That exercise is usually helped by taking a quick glimpse in the rearview mirror. And, looking back over history, you can find any number of examples where despots have taken control of governments and engaged in the wholesale confiscation of private property, either overtly or through determined inflation.

Up to this point in time, with some limitations, a person could always take some comfort in the idea that -- should push come to shove -- they will be able to escape to another jurisdiction with enough wealth to start over again.

In the brave new world we are headed for, that simply may not be possible.

As something of an experiment, I recently walked into a bank in Uruguay and asked for the papers required to open an account (one, I can assure you, that I would have fully disclosed), but was told in an apologetic tone by the bank manager that they would not accept accounts from Americans.

The door is closing, the noose tightening.

Letters from You

David again... as JK's email confirms, while there has been a huge pick-up in the interest in gold compared to even a couple of years ago, we are nowhere near the mania phase. In fact, if you step back and look at the situation dispassionately, you’ll note that gold has remained strong not because of but in spite of the current economic environment. An environment that includes, of late, a clear deflationary trend pretty much across the board in the commodity sector.

All of which is to say that once the environment for gold begins to change for the better and the consequences of today’s inflation begin to be widely felt, then and only then will gold really begin to move. In the interim, we can expect gold to fluctuate, which – for those of us who are comfortable getting positioned now, ahead of the crowd – simply means additional buying opportunities.

Miscellany

I'm sure the orphan will thank them later. It’s good to know that the poor orphans are safe from the horror of being adopted by zillionaire rock stars. Thanks in no small part to human rights groups, led by the Human Rights Consultative Committee, a coalition of 85 groups that apparently have nothing else to do with their time and their donors’ money, the Malawian government turned down Madonna’s request to adopt a second orphan from that country. Why should they oppose this adoption? Easy, it was out of heartfelt concern that the impoverished orphan might enjoy a better life than they. (Click here for more)
Kick them when they're down. This item also got my attention this week... “March 31 (Bloomberg) -- A Senate panel approved new restrictions on credit-card interest rates that are broader than those adopted by the Federal Reserve in December, brushing aside objections from Republicans and the banking industry.

“…The bill, known as the ‘credit card bill of rights,’ also would require the signature of a parent for a borrower under age 21, unless there’s proof of independent income or completion of a financial education course.”

So, let me get this straight. First the government bails out the banks, then promptly handcuffs them in their ability to price for the elevated risk of credit card loan losses, assuring that the money provided them will soon get flushed down a rat hole. Or, more likely, they’ll just stop offering credit. But wait -- isn’t that the very problem the government is trying to fix?

Now, I'm no fan of many of the practices of credit card companies, but I'm even less of a fan of the government establishing what is essentially price controls on the credit industry, with an added dose of nanny state thrown in via the requirement that adults – and anyone over the age of 18 is certainly an adult – must first take a course in finance prior to being allowed to get a credit card.

Do I think that adults will benefit from taking courses in finance? Of course. Do I think that they should be forced to it? Absolutely not. What's next, mandatory courses in parenting before being allowed to have a child?
Soup lines. Many commentators have observed that all that the current financial crisis is missing now is the sight of soup lines around the blocks of our cities. Actually, there's a reason these haven’t yet appeared. Namely that, thanks to the innovation of food stamps, the inconvenience of a soup line is no longer necessary. And at this point, according to a report just released by the Agriculture Department, fully 10% of Americans are now relying on food stamps for some portion of their daily bread. That is roughly 32,000,000 people – a very long line, indeed.

And on that unhappy note, I must sign off. As I do, a quick glance at the screens tells me that the S&P 500 is flat, taking a breather after the strong gains of last couple days. Given the onslaught of continued bad news, including the latest, poor unemployment numbers, the stock market should be in a freefall at this point.

And it probably would be if it hadn’t been buoyed up by the change in the "mark to market" rules that will soon usher in a new era of obfuscation and outright deceit. Those changes will also serve to extend the current downturn, for the simple reason that they postpone the value discovery process that ultimately must occur in order for some semblance of confidence to return to investment markets.

In the history books, I suspect that the best they'll be able to say about these rule changes will be "it seemed like a good idea at the time."

Meanwhile, I note that gold is below the $900 level for the first time in a while. I'd be very surprised to see a drop to below $850 anytime soon, and maybe never. If it were to happen, however, I’d be just one of many on the phone to the bullion dealer.

Until next week, thank you for reading and for subscribing to a Casey Research publication.

Sincerely,

David Galland
Managing Director
Casey Research

Have We Turned The Corner On The Recession?

GaryHalbert — Tue, 31 Mar 2009 20:31:08 GMT

IN THIS ISSUE:

Finally a Little Good News for the Economy
Geithner's Latest Toxic Asset Bank Bailout
Does the PPIP Have Any Chance of Working?
Fed to Buy $300 Billion in Treasuries & a Lot More
CBO Assessment of Obama's Record 2010 Budget
Conclusions, Market Implications & What to Do Now

Introduction

Some weeks, it's tough to find a good topic to write about. Then other weeks, I'm overwhelmed with all there is to write about, as is the case this week. So, we'll touch several bases in this week's E-Letter. We'll begin with the latest economic news, some of which was surprisingly positive (especially housing). Unfortunately, the latest good news does not necessarily mean we've seen the bottom of the recession or the bear market.

On Monday of last week, Treasury Secretary Geithner announced the much-awaited new plan to take toxic assets off the books of troubled banks. The plan is called the Public-Private Investment Program. Under this new program, the government along with private investors would buy up toxic assets by way of auctions to get these loans off the banks' books. But will the plan work? I'm not optimistic. We'll discuss this in some detail as we go along.

As if the Obama administration is not spending enough already, the Fed recently announced that it will print and spend over $1 trillion in the months ahead to buy at least $300 billion in direct purchases of Treasury securities and at least another $750 billion for purchasing more toxic assets from banks and other sources. Where will it end? No one knows.

In my March 10 E-Letter, I predicted that President Obama's $3.55 trillion federal budget for fiscal 2010 would result in a deficit of more than $2 trillion, as opposed to the administration's estimate of $1.75 trillion. Turns out I was wrong – the Congressional Budget Office predicted last week that Obama's 2010 budget deficit will hit $2.3 trillion. Wow, this will be bad! The CBO agrees with me that Obama's economic assumptions are too optimistic.

Following those discussions, I will give you my latest thoughts on where we stand in the big picture. With the latest smattering of good news on the economy and the nice rebound in the stock markets, some analysts are concluding that we've turned the corner on the recession and the financial crisis. I think it's premature to make that call, and I will not be surprised if we see another downward leg before long. In fact, it may have already begun. Let's get started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Finally a Little Good News for the Economy

As everyone reading this is all too aware, the economic news so far this year has been horrible. Rarely has any good news been seen in recent months. But there was some good news last week, and it came in a very good spot – housing. Existing home sales in February unexpectedly rose by 5.3% above January levels to an annual rate of 4.72 million units. It was the largest monthly jump since 2003; still, sales were down almost 5% below yearago levels.

The increase in sales of existing homes was strongest in the West and in Florida, one of the worst hit markets. February sales of existing homes in Florida rose 20%. Florida Realtors also reported a 15% gain in statewide sales of existing condominiums in February, continuing a trend in recent months for higher statewide sales of both the existing home and existing condo markets compared to yearago levels.

The median sales price for existing homes nationwide rose to $165,400 in February, the first monthly increase in over a year, but it remains 15.5% below yearago levels. Unfortunately, the inventory of unsold existing homes rose again in February, despite the improved sales figures, thus putting the backlog at an estimated 9.7 months supply at the current sales pace.

New homes sales also increased by 4.7% in February to an annual rate of 337,000 units. Economists had expected new home sales to decline to a rate of 300,000 annualized units, so this was welcome news. While the unexpected rise in new home sales might be seen as a positive movement for the beleaguered housing market, the February rate for new home construction is still the second-lowest reading since the last recession in 2002. The median price of a purchased new home fell to $200,900 in February, down over 18% from a year ago.

Housing starts jumped well above expectations in February, rising 22% over January levels. Rising housing starts might not sound like a good thing, as that could mean even more homes on the market, but reportedly over 80% of the February construction starts were for apartment complexes, not new single family homes. Also, building permits climbed in February for the first time in over a year.

On another front, durable goods orders rose a surprising 3.4% in February following six consecutive monthly declines. This news was bittersweet because the Commerce Department revised January durable goods orders further downward from -5.2% to -7.3%.

Elsewhere, the economic news continued to disappoint. Last Thursday, the government reported that 4Q GDP fell at an annual rate of -6.3%, down from -6.2% as reported last month. Consumer confidence continued to plunge in February to only 25.0, a new record low, down from 37.4 in January. However, the latest Rasmussen tracking poll shows that consumer confidence has rebounded a bit in March.

The Index of Leading Economic Indicators fell 0.4% in February. The LEI has fallen very sharply since the last peak in July 2007. The unemployment rate jumped to 8.1% in February from 7.6% in January. The consensus is for a rise to 8.5% in March and at least 9% by yearend. These are just a few of the negative reports we've seen over the last month.

In summary, while we've seen a few positive reports on the economy and the housing sector in particular over the last month, we are far from out of the woods on the recession and the financial crisis. Now, let's move on to the latest bank bailout proposed by Treasury Secretary Timothy Geithner.

Geithner's Latest Toxic Asset Bank Bailout

After Treasury Secretary Geithner announced his new Public-Private Investment Program (“PPIP”) on Monday of last week, the Dow Jones promptly rallied over 500 points. That followed a rally of almost 1,000 points since the low in early March. The Dow and the S&P 500 bounced just over 20% from their recent lows – that is until the latest near 5% downward reversal over the last two trading sessions (Friday and Monday). While the equity markets clearly liked the government's latest bank bailout plan, serious questions remain – such as, will it work, and will private investor groups want to get in bed with the government, which threatened to impose a 90% tax on AIG executive bonuses?

We'll get to those questions and others as we go along, but first let's examine how the Public-Private Investment Program is supposedly designed to work. In an online article in FORTUNE, CNNMoney.com's Jon Birger provided the following summary on how the PPIP is expected to work as follows:

“The [PPIP] plan tries to fix the banking crisis by encouraging the very behavior that got us into this mess in the first place -- using buckets full of leverage to buy mortgages, asset-backed securities and other so-called toxic assets. Moreover, it requires the participation of the very folks -- Wall Street bankers and investors -- whom officials in Washington have spent the last two months threatening and vilifying.

At its core, the Public-Private Investment Program (PPIP) harkens back to what the original bank bailout bill was supposed to do when it was first passed by Congress last fall: remove toxic assets from bank balance sheets, thereby freeing up more money for lending. The mechanics of the program would operate somewhat differently for stand-alone loans than for debt securities (basically bundles of loans packaged as asset-backed or mortgage-backed securities), but the general approach is the same. The government will match, dollar for dollar, any private-sector funds put towards buying these toxic assets.

And if that weren't incentive enough, the government will also facilitate cheap loans -- think of them as FDIC-guaranteed margin loans -- to private investors who will be able to leverage their distressed-debt purchases six to one.

Here's how it might work: Say a bank has a pool of residential mortgages with a $100,000 face value that are deemed good risks by the FDIC. The pool is then auctioned off, and in this example, the winning bid is $84,000. Of that, the government puts up $6,000, the private investor another $6,000, and the remaining $72,000 is financed via a FDIC-guaranteed margin loan.

The goal is to jump start the market for toxic debt and put the prices of these loans more in line with the underlying interest payments (which in some cases have declined far less than the market valuation of the loans or debt securities). Theoretically, once the PPIPs start buying and selling this stuff, the valuations will become clearer, opening the door to other private investors who may see opportunity but have shied away up until now due to the lack of price transparency.

That's the upside. The potential downside is what happens if prices continue to fall. And if you think taxpayers are mad now, just wait till they find out that, on account of government-sponsored leverage, a further 15% decline in the debt markets caused them to lose 100% of their investment in PPIPs. Says Tom Atteberry, co-manager of the FPA New Income bond fund: ‘I do see some irony in the fact that the proposed government solution to the problem looks a lot like a hedge fund and a primary broker -- with the primary broker being the federal government.'

There's also a question of whether Wall Street money managers will play ball with a government that has been bad-mouthing them and threatening them with confiscatory taxes. ‘If they go ahead with the 90% tax, nobody is going to want to work with the government,' says a top mortgage-fund manager, referring to the bill passed by the U.S. House of Representatives that would slap a 90% tax on bonuses paid to employees of bailed-out financial companies. ‘It's a deal killer,' says Rick Hughes, co-president of Portfolio Management Consultants, which directs $70 billion in institutional and retail accounts.

Even if the bonus tax isn't implemented, the mortgage-fund manager worries what might happen if PPIP works too well. He envisions a scenario in which money managers are hauled before Congress and accused of making millions on the backs of taxpayers. ‘I'd rather be attacked by a pack of wild dogs,' he says. There are other, more conventional ways that government involvement could discourage money managers from participating.

FPA's Atteberry notes that under the Treasury Department proposal, the FDIC would provide oversight to the PPIP funds. Atteberry says that if he were putting his firm's capital at risk, he'd want to know more about what ‘oversight' entails. For instance, will political considerations prevent investors from foreclosing on certain homeowners or force them to offer generous loan modifications? Says Atteberry, ‘Those are details you need to flesh out if you want to get private investors to come on board.'

Of course, it could be that some on Wall Street -- hedge fund managers in particular -- are so desperate for any source of income, they'll gladly accept these risks.

Prime brokers are extending less credit to hedge funds and investors are pulling out their money. So if the government now wants to become hedge funds' new BFF -- their new prime broker as well as their biggest investor -- why quibble about the details? ‘The reality is that a lot of hedge funds really don't have a business model any more,' says veteran Wall Street strategist Ed Yardeni. ‘The government is basically putting Wall Street back in business with a whole new business model, which is to take all the toxic assets, repackage them and re-sell them at a discount.'

‘Wall Street is getting paid to re-arrange the deck chairs on the Titanic -- but hopefully with a better outcome.'”

Many thanks to Jon Birger of CNNMoney.com for that summary. Obviously, there are still many unanswered questions about the Public-Private Investment Program. Geithner's roll out of the program last week was very short on details, and many private investors are going to be very wary of getting in bed with the government to buy up these toxic assets, even if the discounts are very attractive.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Does the PPIP Have Any Chance of Working?

If President Obama wants this plan to have any chance of working, he needs to make sure the Senate does not go along with the House in passing the 90% retroactive income tax on the AIG executives that received big bonuses. Hedge funds, private equity funds and the like will not want to pony up money to buy toxic assets if they fear that the government will change the rules on profit sharing in these PPIP transactions.

I have read several articles recently that indicated the Treasury was already planning to recoup the AIG bonuses by subtracting that amount from the next round of bailout money AIG will need. That would have been an easy way to get the money back and put the onus on top AIG management to claw back the bonuses. But the Democrats in the House couldn't resist the opportunity to grandstand in front of the American people with an illegal, retroactive 90% income tax on the AIG bonus money.

Political commentator Dick Morris has an interesting take on the PPIP. Morris believes strongly that President Obama wants the PPIP to fail. Morris is convinced that, while Obama says publicly that he does not want to nationalize the big banks, privately Obama and Rahm Emanuel would very much like to see the government take over these large money center banks that have taken bailout money.

Morris argues that this is precisely why the president has been lambasting Wall Street and the big banks for weeks now, in the hope that private investors will not jump into the PPIP with both feet. Morris also believes that this is why Obama packaged the PPIP as Geithner's plan, not his own, so that if it fails he won't get the blame. If it does fail, Morris predicts that Obama will then nationalize the troubled banks. I sincerely hope this assessment is wrong!

As noted earlier, the stock markets reacted extremely strongly following Geithner's announcement of the Public-Private Investment Program. If it is to have any chance of working, he needs to get the details out fast, including assurances that the government won't change the rules in the middle of the game. We'll see.

Fed To Buy $300 Billion in Treasuries & a Lot More

The Fed Open Market Committee met on March 17-18, and the policymakers approved some bold new (yet troublesome) actions. Citing that the economy continues to worsen and the credit markets are still dysfunctional, the FOMC voted unanimously to authorize the Fed to make direct Treasury security purchases of $300 billion over the next six months, with a suggestion that much more could be authorized later on if needed.

This move is controversial because the Fed will have to print the $300 billion to pay for the purchases of Treasury securities. Many fear that this action (and likely more to come) will further sew the seeds of significantly higher inflation when we emerge from this recession. But as I have written often in recent letters, the Fed is scared to death of deflation and will do whatever they feel is required to avert a debt deflation in the economy.

At the same FOMC meeting, Bernanke & Company also voted to double the Fed's purchases of mortgage-backed securities and take on more agency debt. That means the Fed will purchase another $750 billion in toxic mortgage-related securities this year. Between the Treasury purchases and the additional mortgage-related securities – all of which they will have to print money for - the Fed's balance sheet liabilities will skyrocket to well above $3 trillion this year.

Here are excerpts from the March 17-18 FOMC official statement:

“In these [bad economic] circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities… and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.”

Following this announcement, yields on 10-year Treasury notes plummeted in the largest one-day decline on record to near 2.5%, down from above 3% just two days before. Stocks also rallied on March 18 and since then (at least until the last two days), a clear indication that many investors approve of the Fed's unprecedented actions in buying Treasury debt directly and doubling its purchases of toxic assets.

But it should also be noted that the US dollar plunged on the news that the Fed would be buying $300 billion in Treasuries and another $750 billion in toxic assets, and the implication that those numbers may well go even higher later this year. Keep in mind that these numbers are in addition to the $2+ trillion budget deficit we will have in fiscal 2010 (more on that below) and well over $1 trillion in each of the next several years.

Given the staggering size of these numbers, I don't see the US dollar going anywhere but down over the next several years. Maybe that's why China is threatening to stop buying US Treasuries and calling for a serious discussion of a new world currency at the upcoming G-20 Summit on April 2. I will discuss this issue more in coming weeks.

CBO Assessment of Obama's Record 2010 Budget

In my March 10 E-Letter, I discussed President Obama's record $3.55 trillion budget for fiscal 2010, with its projected budget deficit of a record $1.75 trillion. I also discussed why I believe the deficit next year will be well north of $2 trillion. Last week, the supposedly non-partisan (but Democrat controlled) Congressional Budget Office (CBO) released its own analysis of President Obama's proposed budget for 2010 and the next 10 years.

The CBO estimates the 2010 budget deficit at $2.3 trillion; the budget deficits for 2009-2011 at almost $5 trillion; with deficits of $1 trillion or more each year thereafter to 2019, and concludes that Obama's budgets would add $9 trillion to the national debt over that 10-year period, if enacted.

If you recall, I noted in my March 10 letter that I believe the Obama administration used economic assumptions that were too optimistic. I pointed out that Obama's projections for GDP growth were too rosy. Likewise, I noted that his assumptions for unemployment were considerably too low. I concluded that discussion by saying: But it will not surprise me if the deficit is $2 trillion or more in 2010. Now the Democrat controlled CBO agrees with me!

Interestingly, Obama has routinely criticized George W. Bush for out-of-control spending, which is a well-deserved criticism. In Bush's eight years, he – with the help of Congress – added almost $5 trillion to the national debt. Obama's budgets would add almost twice that amount - $9 trillion - according to the CBO.

I think most people reading this would agree that a 2010 budget deficit of $2.3 trillion is simply way too much, even in this economic and financial crisis. While Obama says his budget is necessary to get the economy out of the ditch, it could make things worse by ruining America's credit standing in the world. Unfortunately, it looks like he has the votes to get most of his budget passed.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions, Market Implications & What To Do Now

The 20% bounce in the stock markets and the latest smattering of good news on the economy have led some analysts to conclude that the worst of the recession and the credit crisis are behind us. That could be, but the forecasters I respect believe we will see at least another 1-2 quarters when GDP will fall 6-7% or possibly more. So, I am not convinced we've seen the worst of the recession or the credit crisis. I hope I am wrong.

The good news (if we can call it that) is that the US was the first major economy to go into recession; it has suffered a more severe contraction than most other sizable economies, with the notable exception of Japan; and it would therefore be reasonable to assume the US will be one of the first major economies to turn the corner.

Yet in many ways, calling the bottom in the recession misses the point. Unlike past recessions that were followed by a strong recovery, I believe (and my best sources agree) that we face at least a couple of years of very slow growth when this recession ends. Yes, the government and the Fed are spending trillions like drunken sailors, but this economic and financial crisis is likely to put a damper on growth for at least several more years.

With that backdrop, investors have to consider the likelihood (or unlikelihood) that the US equity markets bottomed in early March. With the major market indexes having plunged over 50% from their peak in late 2007 to early March, it is easy to assume that we've seen the bottom. I, on the other hand, am not so convinced.

But that, too, misses the point in my opinion. Whether the bottom is in or not, I fully expect the equity markets to at least retest the lows seen early this month when the Dow fell to 6,500 and the S&P 500 fell to 675. And there is no guarantee that those lows will hold. Therefore, if you are looking to exit failed buy-and-hold positions in stocks, and move to more defensive strategies, I would suggest doing so now.

My greatest concern at this point is that the new Public-Private Investment Program may not work. As I have written in several recent letters, it is clear that relatively little of Obama's $787 billion stimulus plan will be spent this year when it is needed most. Thus, that means that it is even more critical that the PPIP get started quickly and that it succeeds. As noted earlier, there is no assurance that it will get up and running quickly, or that it will succeed (or if President Obama is fully behind it).

If the PPIP does not succeed, I would expect the US equity markets to plunge once again, and if so, buy-and-hold strategies will get hammered again.

If you have been considering alternatives to the buy-and-hold strategy for a portion of your equity portfolio, such as the active management programs I recommend – which can move to cash and/or hedge long positions - now may the time to get such strategies in place.

Remember, it does not matter where you live; we have hundreds of clients all across America.

Finally, we hosted our second Webinar with Scotia Partners on March 25. I'm very pleased to report that almost 300 of you registered for this opportunity to learn more about Scotia's very successful investment program. If you missed it, you can watch and listen to the full Webinar discussion (including all charts) at www.halbertwealth.com.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Obama Budget - $9.3 Trillion in Deficits says CBO
http://news.yahoo.com/s/ap/20090320/ap_on_go_pr_wh/obama_budget

Obama Sticker Shock (more CBO budget analysis)
http://online.wsj.com/article/SB123776518094909023.html

Uncle Sam's Hedge Fund (the Geithner bank bailout plan)
http://www.realclearpolitics.com/articles/2009/03/uncle_sams_hedge_fund.html

The Room – 03/27/2009

DavidGalland — Fri, 27 Mar 2009 15:31:00 GMT

Dear Reader,

The Las Vegas taxi driver was an old fifty-something, with a mullet hanging out of the back of his battered baseball cap and a potato sack gut hanging over his belt. Having driven a cab myself, long ago and far away, I habitually engage in cabbie chat, as I did now.

“So, how’s biz?”

“Horrible. Thanks to Obama, my family’s going to starve!”

“Really?” I asked incredulously, surprised by both the topic and the heat of his response. “How come?”

“Thanks to him trash talkin’ Vegas, we’ve had 110,000 room cancellations. Once the March Madness basketball tournament is over, this place is going to go back to being a ghost town, just like it was last week, and the week before that. My family’s going to starve thanks to Obama!”

“But they’re not actually going to starve, are they?”

“Yeah they are, I’m telling you. Starve, plain and simple. I ain’t making any money as it is, and once town empties out again, I’m going to go broke and my family is going to starve!”

“Wow,” I said, “so, what are you going to do? Move away?”

“Nah,” he said with no hesitation, explaining, “I like it here too much.”

With a quick and puzzled glance at the neon-illuminated cement wasteland through which the cab was speeding, I had a hard time imagining what attraction the place might have.

“What is it about this place you like so much?” So much, apparently, that he was willing to let his family starve in order to stay.

“Well,” he said in an almost professorial tone, “first, I get to see a lot of naked women. Second, I get a lot of ‘freebies’,” he said lustfully, sending a shudder down my spine. Call it rural naivety, but while I can understand that a working girl has to work, I had a hard time getting around the idea that she had to “work” with him. And for what, a free cab ride?

“Finally,” he concluded, “I like the weather. That’s about it.”

As I couldn’t think of anything else to say – at least not without risking offense -- to a man who was apparently comfortable with the idea of letting his family starve so he could continue to ogle, and apparently fondle, the women of this fair-weathered Sodom & Gomorrah, I turned my attention back to the surroundings.

And what surroundings they are. Lavish. Spectacular. Ridiculous. Some day in the future, perhaps 500 years from now, the gilded ruins of this testimony to humankind’s penchant for excess will be picked over and cataloged by archeologists for the benefit of primary school education.

Then again, with the way things are going, it could be just 50 years. I say that because City Centre, the world’s largest construction project, continues to be built on autopilot, even though it’s only about half finished. And this is just one of a number of other hotels and condo towers in a similar circumstance; started in a more optimistic time, but now merely adding to the unsold inventories that have made Las Vegas the epicenter of the real estate meltdown.

The place is in real trouble. Maybe the degenerated taxi driver will hang on, family be damned, but I suspect that an exodus from the place is inevitable. And can a cluster of mysterious large-construction project fires be far behind? (As an aside, if you own any insurance company stocks… run, don’t walk, to the selling window. It’s not just that certain doomed construction projects are likely to become fire hazards, but that insurance companies notoriously invest their capital in real estate and bonds, both of which are dead ducks, or soon will be.)

I am glad I saw Las Vegas when it was still at its prime. Soon, I suspect, it will be something akin to an urban war zone. As for Obama, the next time he gets an urge to take in a show, he might want to give the place a pass.

A Quick Musical Interlude, Then Something Different

I am going to try something different for the rest of this week’s missive, but before I get to that, I want to share a bit of music many of you may recall. But first, a little backgrounder.

A subscriber and new friend, the talented musical producer and film maker, Sadia Sadia, attended our Las Vegas summit and gave me as a gift a copy of Rick Wakeman’s autobiography, “Grumpy Old Rock Star.”

Those who recognize the name will remember Wakeman as the talented organist for the mega-band “Yes”… as well as the composer/performer for a huge body of solo work, including his much-acclaimed Journey to the Centre of the Earth.

While I wouldn’t count myself as a rock groupie and so Wakeman’s name evoked little in the way of recollection, I began to casually peruse his book, which is really just a collection of stories from his wild career, and got sucked right in. It was a big surprise… interesting, well written, and very, very funny.

As is the way with these things, reading the book reignited my interest in his music, and so I quickly stumbled back upon Roundabout by Yes, a forgotten favorite and one of the band’s best-known tunes. You can listen to it here.

(In the video, the guy dressed up in the glittery cape is Wakeman -- as gifted and as hard-living a rock star as has ever graced the stage -- so hard living, in fact, that he had two heart attacks at the age of 25.)

Now, as for the rest of this edition, I’m going to try to tell a story, but using snippets from other sources with, perhaps, a side comment thrown in now and again.

I am taking this approach because, frankly, since hopping on the plane to Las Vegas last week, the sheer volume of proposed new regulations, legislation, and plain idiocy have outstripped my processing abilities. It seems that every hour or two over the past week, there has been a breaking story that has me saying out loud, “What, are you kidding?” Or, “Wow… we’re really in trouble now!”

It came to me as I started writing to you this morning, that these many stories – rather than just random spatters of inanity – together form a distinct pattern. And the pattern seems to point to a new paradigm now materializing here in the U.S. and, by extension, the world.

As I think the following stories demonstrate, the new paradigm is not one any thinking person will embrace.

Eat the Rich

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead. There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few." (A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview)

One finds many charts in a federal budget, most attributed to such deep mines of data as the Census Bureau or the Bureau of Labor Statistics. The one on page 11 is attributed to "Piketty and Saez."

. . . Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration."

Messrs. Piketty and Saez have produced the most politically potent squiggle along an axis since Arthur Laffer drew his famous curve on a napkin in the mid-1970s. Laffer's was an economic argument for lowering tax rates for everyone. Piketty-Saez is a moral argument for raising taxes on the rich.

. . . Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum: "While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . It's a legacy of irresponsibility, and it is our duty to change it."

(The Obama Rosetta Stone, by Daniel Henninger, from the Wall Street Journal’s Opinion Journal.Com)

Supporters of Capitalism Are Crazy, Says Harvard

everyone knows

that

(

From

Mises Daily

by Thomas E. Woods, Jr. )

Obama's Latest No-Banker-Left-Behind Scheme

(From CounterCurrents.Org)

What’s Not to Support?

David again. With a deal that has the taxpayer lending the boys club 85.7 cents on the dollar, and assuming all risk should the loans failed to be paid back, who wouldn’t provide “support” to Mr. Obama? But at what cost? Well, at better than one trillion more dollars, if things go off the rails – as they almost certainly will. How do you spell dollar? D-O-O-M-E-D.

By the by, click the following link for an exceptionally well done graphic representation of just how much money a trillion dollars is. Call the family around and give it a click (then pass it on)… http://www.pagetutor.com/trillion/index.html

New York Tax Rise on Higher Earners Hinted as Budget Gap Rises

Not So Fast

Remember Wen?

March 23 (Washington Post)

***

March 25 (Bloomberg)

***

March 25 (Bloomberg)

Timothy Geithner

Zhou Xiaochuan

Barack Obama

David again. If these people are the smartest folks in the room, I wonder who’s cooling their heels in the hallway.

We’re from the Government and We’re Here to Help

9:02 p.m.

(Alec MacGillis on the Washington Blogging site commenting on Obama’s online Town Hall meeting)

***

Barack Obama

Paul Volcker

Peter Orszag

David here. But surely Volcker, that old cohort of President Reagan and champion of fiscal conservatism, won’t recommend punishing overseas investment or raising taxes by another $300 billion?

Sadly, you are laboring under a misconception (you’re not alone).

(Real Clear Markets, The Paul Volcker Myth, Feb 2008)

***

(“Paul Volcker Blasts Idea of Permanently Repealing Estate Tax,” Wall Street Journal, January 2003)

***

EPA Greenhouse Gas Declaration May Pressure Congress

General Motors Corp.

American Electric Power Co

David Bookbinder

…

David again. Don’t you love the “Congress can do it all in one shot” comment. And, yes they can. Even mentioning this sort of legislation in the face of all that now challenges the economy is near criminal. Especially in that it is almost certain to chase away the remaining companies that still endeavor to engage in manufacturing in the U.S..

Radio Worth Listening To. Do yourself a favor and find a comfortable seat and click here to listen to this audio interview of Lord Monckton from the G. Gordon Liddy Show. Monckton is one of the most well-informed – and entertaining – commentators on the topic of anthropogenic global warming on the planet.

“Hold the fort,” I can hear some of you saying. Liddy is a hard-core dogmatic. Hardly a balanced perspective. And you are right. While I have met Liddy on several occasions and enjoyed his company, a reading of his book Will indicates that he is far more than dogmatic. Insane is more like it.

But he does a competent job as an interviewer, and Monckton does a brilliant job as an interviewee. You have to sit through some oddish music in the beginning, but it’s worth taking a listen – no matter where you come down on the issue of man’s contribution to global warming.

Worth Watching… Closely

David, still here. In the following article from the Wall Street Journal, I have boldfaced the relevant words. Words have consequences, and the consequences of these words indicate we may be on the path to another ginned-up “conflict” of the “pay no attention to the man behind the curtain” sort. It could also be an early step toward gun control, a topic that many Americans pay close attention to (and, based on history, for good reason).

Here’s the article – as you read it, see if your mind begins to evoke, as mine did, visions of the author running around waving his or her arms at the new and impending “crisis!”…

address the crisis

the full Senate Committee on Homeland Security and Governmental Affairs, also will offer the highest level of attention from Congress on the issue thus far

extra $100 million

targeting the guns and money from inside the U.S

The government is girding for a possible Katrina-style disaster along the 2,000-mile-long Mexican border

Obama Announces Plans for More Funding for Afghan War

(Washington Post)

***

The End of Summer(s)?

The Innovator's Dilemma

(Adrianna Huffington writing in The Huffington Post)

David here. Don’t you love the “our remarkable president” bit of sycophancy? It reminds me of a conversation I had at the Las Vegas summit with a friend of some duration – an interesting and intelligent individual. It started when she told me she had been a big supporter of Obama’s, but now she wasn’t so sure. The conversation went something like this…

“Why were you such a big supporter?” I asked.

“You know, because he was for change,” she replied.

“Sure, but what does that actually mean? What change?”

“Oh, you know, change from the way Bush was handling things,” she said with a certain uncertainty in her voice.

“So, your vote for Obama was really just a vote against Bush’s policies?” I asked, thinking that wasn’t altogether a bad reason.

“Well, no, I don’t think so,” she answered. “There is something else. You see my father was black and my mother was white, like Obama, so I felt a connection.”

“Fair enough,” I commented, “But was that it? I mean, wasn’t there some particular philosophical point that rallied you behind Obama?”

“Well, er, I’m not sure. But I sure am worried about him now.”

I have always found it remarkable how many otherwise reflective people have a hard time expressing why they support one candidate and dislike another… often viscerally. It is, I believe, strong testament to the ability of the campaign team, and the media, to paint a picture that resonates with the target audience… a picture that, while attractive, more often than not completely lacks a tangible foundation.

Americans may not be very good at manufacturing “stuff” these days, but we are whizzes at selling stuff through multi-channel media campaigns, including fine-talking politicians.

As for Summers, I have previously mentioned that Olivier Garret and I heard Summers at a White House conference last year. When it came time for him to speak, he gave a very lucid and even passionate argument for making Bush’s tax rollbacks permanent (for the not irrational reason that to let them expire will amount to one of the largest tax increases in history, an increase that the economy can ill afford at any time, but especially now).

While I don’t have a full grip on Summer’s broader philosophical and academic views of the economy, I took it as encouraging that he was brought onto Team Obama, though from what I have heard since, it seems like he has grooved right in with the statist views now dominating in Washington. But maybe not, and so, per Huffington, expect him to be an early casualty.

“Fusion Centers” Expand Criteria to Identify Militia Members

(FOX News, 3/23/09)

David again. Be afraid… be very, very afraid.

Glimmers of Hope

Gordon Gets a Thrashing

(“General Watson,” friend and occasional Casey Research European correspondent).

David again. Here’s the video… and it is definitely a “must see” -- if you haven’t yet done so, and most of you probably will have, given the amount it is being emailed around. Click here to watch.

Given the amount of play this video has received, there is hope that the media will look to boost their ratings by finding other champions of fiscal sanity and providing them a soap box. Could happen. Probably won’t.

AIG, I Quit!

David again. Another item that has made the rounds this week is the letter of resignation from an AIG employee.

There is so much to the “evil bonus takers” story that the media, falling back on Ye Olde Witche Hunt as a circulation booster, has ignored, either deliberately or just because they are stupid.

The now famous AIG resignation letter sheds some much needed light, so read it if you haven’t.

Meanwhile, the net result of all of this grandstanding and outright thuggery (for a definition of the word, look up Andrew Cuomo in the dictionary) is that the top executives from AIG and other leading financial institutions are handing in their bonuses with one hand while signing new employment agreements with firms overseas that, as part of those new agreements, are agreeing to replace those bonuses as recruitment incentives.

Even without the enticement, who would possibly want to work for AIG these days?

And so, the American taxpayer, who is already into AIG for $200 billion, has just assured that the asset “we” have paid so dearly for is little other than a gutted shell run by second-rate people. Oh, and those second-raters will be forced to deal with trillions in remaining derivative contracts. It will be akin to asking monkeys to repair jet engines.

Of course, as the next wave of planes begin to fall from the sky, the government will again rush in… with your money.

In any event, the “Glimmers of Hope” part is that the soon-to-be-former AIG employee’s letter may, just may, help cool down the mob psychology that bordered on violence last week.

A Politician I Can Support

(Press TV, March 25)

Some Concluding Thoughts

David again. Remarkably, I could go on, but I fear I have tried your patience enough for one day. So, what are we to make of all these stories?

First, the Obama administration is clearly statist. And they apparently have set their sights on taxing the productive elements of society to the fullest possible measure. As I have noted in the past, however, businesses don’t pay taxes – rather, they just pass the taxes on to their consumers (or they go out of business). And so every time you see a new business tax, cover your wallet.

While the higher net worth individuals will, for a time, accept higher and higher tax burdens, unlike the proverbial frog in a pot of water that is slowly approaching boil, those with the assets to move will – when the temperature reaches uncomfortable – hop out of the pot and head to friendlier grounds.

Recognizing this truth, the Obama administration is already working on exchange controls. That is clear in the Obama campaign promise to use tax policy to punish companies that ship jobs overseas, a promise he is now putting into effect ala Volcker. Once those particular bricks are laid, adding on a few more layers in order to also wall in the individual is a snap.

Now, some of you – many perhaps – arrive at this point in time as supporters of Obama, and so bristle at my remarks. Just as do those of you who favor the views of the strident opposition from the “right,” unhappy at my quick jibe at Bush’s policies.

It behooves me, as the managing director of a company that makes its payroll by offering solace and substance to its subscriber base, to caper and scrape to our clientele. You, to be specific.

To the extent that I offend, I apologize. But only because that is not my intent, no matter the tone of voice I might use in these weekly musings. Rather, I sit here, like you, an observer of the world around us, and I try to make sense of things. Last week, I expressed outrage at the scramble to foist our current problems onto the backs of our progeny. Today, the pattern that is visible in the collection of articles here tells me things are moving quickly beyond the matters related only to the economy. And so, looking over the landscape, I am touched by an entirely different emotion… one of deep concern for the very nature of our society.

What does all this have to do with investing, some of you will angrily write?

That, of everything, has a simple answer: with a clear, albeit disturbing pattern now emerging, so, too, are the personal opportunities to protect yourself and to profit. Gold, silver, foreign investments, contrarian stock market opportunities, strategically structured futures and options strategies to take advantage of volatility – all those and more.

These are, of course, topics we cover in great detail in The Casey Report and our other publications. And to a lesser degree, these weekly ramblings.

Regrettably, because of my duties related to getting the next edition of The Casey Report out by this time next week, I need to leave it at that, despite my promise last week to share some of the highlights from our just concluded Crisis & Opportunity Summit in Las Vegas.

I will endeavor to do so next week. I just felt the material I covered here was more important, and hope you concur.

Miscellany…

Tokyo Phyle. One of our subscribers in Tokyo is looking to start a phyle. If you’d like to meet up with other Casey subscribers in that city, drop Kristen a note at phyle@caseyresearch.com.

You Are the Best! A quick note to say, as I have before, how wonderful it was to spend time with so many of you at the Las Vegas summit. After the event ended, virtually every speaker I talked to told me that the audience was the finest, most intelligent, and impressive they had ever come across. I couldn’t agree more.

Finally, because it’s sort of funny, I wanted to close by updating the story of my quick short on the S&P, using Scottrade. As you may recall, I used words to the effect that one of the advantages of an online trading account is how quickly you can short the market (in that case, using RSW, a 2X inverse S&P ETF). At one point during the day that I was writing that issue of The Room, I was up about $800 and was going to close my position with the quick profit, but got distracted by my son asking me to check out something he was doing on a video game. By the time I remembered my short, the market was closed. Long story short (excuse the pun), that gap in attention has, so far, cost me about $15,000.

I am, however, unconcerned. There is so much bad egg now baked into the cake that the rally of late simply can’t be sustained, and today appears to be wobbling. And so I will hold my inverse ETF shares and even add to them on any further rallies. I’ll let you know how it worked out when I finally close out the position.

In the meantime, I hope you gain some benefit from my experience. Namely, because something is easy – i.e., popping into an online trading account to make a quick trade – it also makes it more likely you will take the action, based on little more than impulse and a quick flush of emotion.

On that note, I will share with you Terry Coxon’s dictate. Which goes something like this, “The next time you spot a really, really exciting investment opportunity, one that you absolutely have to act on immediately, the first thing you should do is to look around for a comfortable chair, sit down in it, and take a few deep and relaxing breaths.”

Always good advice.

And with that, I sign off, thanking you for reading and for being a subscriber to a Casey Research publication. We work only for you, and it is a pleasure to do so.

David Galland
Managing Director
Casey Research, LLC.