The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Former paid subscribers to the printed version are now receiving LIFETIME subscriptions, and subscriptions to the printed version are no longer being accepted. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
This year the stars were correctly aligned, and we were able to head to Florida right at the beginning of February, and I would be able to attend all of the days of the show. Unfortunately, I got some godawful stomach virus a few days before our scheduled departure.... not the flu, but some kind of virus which makes you want to crawl up into a tiny ball and go hide in a corner to die. It also has the unpleasant side effect of causing you to empty your bowels about every ten minutes. (Too bad I wasn't scheduled for a colonoscopy when this bug passed.... I was clean as a whistle.)
Anyway, I was left so weak that we delayed our departure; and I could make only the last day of the show, Saturday February 10. My wife also came along, and we have a standard operating procedure. She goes into the exhibit area and hassles the vendors, and I go to the seminars of my choice. I had missed the Thursday evening seminar with Jim Stack of InvesTech that I wanted to attend, but I was able to go to the Saturday AM seminar on Canadian royalty trusts with Roger Conrad (scheduled speaker).
Unfortunately, Roger was stuck in DC with the flu (not my dreadful stomach virus.... just the flu), but he was ably replaced by Neil George and Elliott Gue. They told the audience that in their opinion, royalty trust dividends under the proposed taxation scheme that will take effect after the four-year grace period will likely shrink to yields of about 6% to 8%; and this shrinkage is mostly, but not entirely, already reflected in the trading prices of the units.
Any chance the politicians will figure out that tax revenues are greater under the present tax structure than they will be once the new punitive tax levels are in place? Not a chance, they said. Look for mergers of trusts and/or acquisitions of them by U.S. energy companies. (I should emphasize, this was a very worthwhile seminar.)
An afternoon seminar provided a "look ahead" for the economy and stocks by a panel of "experts" from Standard & Poor's. I would say there were about 300 people in the audience. At the beginning of the session, the moderator asked for a show of hands, how many people thought stocks would be higher at year's end, and how many lower. Most hands went up for "higher"; only about a dozen (one of them mine) for "lower".
What a wonderful contrary indicator..... almost as good as a raging bull on the cover of Time or Newsweek. When everybody is of the bullish persuasion, who's left to buy? The seminar itself was a classic case of linear projection.... stocks higher, but maybe not quite as much as 2006. The economy robust, but maybe a little less robust than 2006. (For the record, I think we're in a mild recession, because the government understates consumer price inflation by about 2-1/2%, which has the effect of overstating GDP growth by the same percentage.) The softness in housing (otherwise known as the popping of the housing bubble) will not put us into recession, according to the panelists. Nope. No way.
The latter half of the seminar was on how great S&P is, and how they derive their ratings, about which I could care less; so I joined my wife in the exhibition hall. It was now after 1 PM, and we were getting hungry. So we decided to buy something to eat from the food concession area at one end of the exhibit hall.
Let me backtrack a bit. The money show was held at the Gaylord Palms resort, which is, I think, technically in Kissimmee. That is, in the middle of nowhere.... at least for the next few years, until the surrounding area gets built up. The resort is brand new. They built it with plenty of parking, as ordinances require of convention hotels. But when you get there, you find they charge $10 for you to park your car. There is no shortage of parking spaces; they charge this fee because they can, just like the theme parks do. So the "free" money show admission is actually at least $10, because there is no alternative place to park.
Now you're hungry, and the food prices are comparable to a Manhattan hotel's room service. Ordinary hot dog in bun, $5. Small bowl of chili, $4 (cheese topping is free). Bottle of water, $4. Bottle of juice or iced tea, $5. Can of soda, $3. So my wife and I spent $36 on "lunch", and we were still hungry. The only consolation is that one of the exhibitors had advised my wife that these prices were cheaper than what the hotel was charging in its little village/restaurant area.... as we found out later when we spent $8 there for two small dishes of ice cream. Pity the exhibitors staying at the hotel.... $280 and up per night for a room, and food priced as if it were encased in gold. And the pool was closed for repairs.
Memo for next year: Bring peanut M&Ms in wife's purse to stave off hunger, and eat lunch on the way home. This "free" money show had cost us $54 for a single half-day.
After "lunch" my wife dragged me to a few booths she particularly wanted me to see. One booth, she said, was staffed by really nice people.... Canadians. She and they had talked a great deal about Canada. No, I said to her, you're not supposed to like the vendors, you're supposed to hassle them and prove what frauds they are. But these people are really nice, she said, and I want you to meet them. So I did.
Indeed, they were very nice.... quiet and unassuming. So I asked them what they were promoting. A junior gold mine, they said. Where?, I asked. Primarily in Mongolia, they said. Mongolia? Nice, stable, corruption-free Mongolia? Later, my wife asked if we (meaning me) could buy a little of what they were selling. Oh sure, why not? So you will, in this month's issue, find 100 shares of Entrée Gold added to the Inheritance portfolio.... a purchase which clearly violates Investing Principle #439, Never buy a junior gold stock with an accent égu in its name.
Ah well, I can think of much less interesting ways of
losing money. Like parking and eating at the Gaylord
Palms.
The first boomers start retiring in the next few years, and in order to maintain their standard of living, they need to sell their stocks. The problem with this is that as boomers begin to sell, without additional buyers the stock market will go down. This is bad for those who are still trying to use the market as a savings device, and may lead to a premature rush to the exits. The stock market has provided many with paper wealth, but that paper wealth must eventually be converted into cash. Therefore, as individual boomers retire, it is in their interest to maximize their own return by cashing in and selling their stocks (and/or other assets such as real estate) as quickly as possible - before others have a chance to. This is a defensive mindset - the complete opposite of that which prevailed during the expansive '90s. - Michael Nystrom
Investors, policymakers, and politicians have now succumbed to a dangerous complacency. After four fat years, convictions are deep that nothing can derail a Teflon-like global economy. That's the time to worry the most. I have a gnawing feeling we'll look back on the current period with great regret. - Stephen Roach
There was a time when being a millionaire was a big deal. If you had a million dollars other people would bend a little in your presence. They were polite and deferential to you, perhaps hoping that you would buy them dinner, or leave them something in your will. Plus, they would think you an intelligent fellow - "if he's that rich, he must be smart", they would say to themselves. Those days are gone. After the recent run-up in asset prices, if you have only a million dollars your friends and neighbors will probably take pity on you. "Poor Janet", they'll cluck at the bridge club. "She and Earl probably don't have more than a million between them". They might even take up a collection on your behalf. - Bill Bonner
Leaving aside ethical questions, which depend on the reader's personal sense of justice, the fact is that there are practical limits beyond which consumers simply become incapable of paying. In fact the "Merchants of Misery" may well enjoy a period of fervid growth in the initial phases of the contraction. However at some point social mores will switch from a general acceptance of aggressive debt promotion and massive profit margins earned on the poor to a sense of disgust and a desire to reform. No doubt there will be a new wave of anti-usury laws targeting Second Tier enterprises like rent-to-own, check cashing and pawn shops. No tree grows to the sky. Eventually the three-decade promotion of debt to the highest risk groups will backfire, leading to unprecedented losses through exceedingly high rates of default. - Jeffrey Webster [editor, Investment Sense]
One of the reasons bubbles keep getting bigger and bigger is because the Fed has a history of being ready and willing to act. Market participants know the Fed is ready and willing and plan on the Fed bailing them out when risk gets blown out of the water.... There is a curious thing about those shock absorbers, though: It seems they have to get stronger and stronger to work. The last "shock absorber" took interest rates down to 1% while creating the mother of all bubbles in credit lending and housing. What's next, ye great wizards? The best way to limit risk is to not let asset bubbles and risky conditions foment in the first place. Instead, the charlatans at the Fed are depending on shock absorbers to cover up their own mistakes. Eventually (perhaps it has started already, perhaps not), one of those shock absorbers will fail. That is when the charlatans at the Fed will be exposed for what they are. - Mike Shedlock
With risk premiums at record lows, issuers of credit derivatives can borrow money at or near the Fed Funds rate. And that in turn means that we do not need the Fed to print money, anyone can. That is precisely what has been happening; however, the credit created is not without risks - more often than not, credit derivatives contain risks that only the issuer properly understands.... Why is it that the Fed doesn't intervene and try to stem excesses in the credit industry? We find the answer by circling back to the consumer: If the Fed were to do something about the spiraling credit expansion in the derivatives markets, the imposed tightening would quite likely hurt the consumer. Typically, a recession would not scare the Fed, but globalization has put the fear of deflation on Fed chairman Bernanke's table. Tight credit could cause a collapse in the housing market and in consumer spending; what has been a great boom would turn into a great bust. - Axel Merk
One knows that the US consumer lending market is on its last legs when lenders like Bank of America consider illegal immigrants a hot market for their loan products, because everything better has already been mined. - Thomas Au
Did you see David Walker on 60 Minutes this weekend? The US Comptroller General is panicked about what he sees as a 'bleak' fiscal outlook ahead. The funny thing is, no one is arguing with him -- it is a case of the Emperor with no clothes. Everyone knows he is right, but no one wants to talk about it. - Frank Barbera
My guess is that mounting worries about the stock market are about to deliver a devastating blow to a housing sector already verging on collapse. It doesn't take a rocket scientist to see that that a full-blown housing bust could further depress stocks, setting in motion a destructive spiral as powerful as the financial asset boom that preceded it. Fed to the rescue? For years we've been hearing that the central bank would never allow such a thing to happen. Well, it is happening, or at least it is beginning to happen, and the Fed has barely shifted gears. Meanwhile, for all of his unconvincing talk about the supposed threat of 'inflation', one could say in his defense that Bernanke has merely been trying to distract us from the infinitely worse menace of deflation. To believe otherwise is to infer that the guy lacks the intelligence and the imagination to foresee how the deleveraging of the world's $370 trillion derivatives market might play out. We think he is smarter than that, and that is why we are holding to our lunatic-fringe prediction that administered rates are not only about to fall, but to fall quickly. - Rick Ackerman
The current train wreck unfolding in the sub-prime lending sector provides a good preview as to what will happen to the entire credit-financed bubble economy when the funding dries up. Contrary to the self-serving rhetoric of Wall Street and housing industry shills, the entire mortgage sector is not insulated from sub-prime. In fact, sub-prime is just the tip of the credit iceberg. Beneath the surface lie similar problems in Alt-A and prime loans, where borrowers also relied on adjustable rate mortgages to purchase overpriced homes that they could not otherwise afford. With the sub-prime market drying up, most first-time home buyers will be unable to buy. Without those "starter-home" buyers, the trade-up buyers (most of whom have the ability to make down-payments and are therefore considered "prime borrowers") will be unable to sell their existing homes, and hence unable to trade up. This brings down the entire house of cards. Home prices must collapse, affecting all homeowners, regardless of their credit ratings. - Peter Schiff
In simpler times, a home loan going bad would affect only the particular lender. Enough defaults would put the lender out of business. And that would be the end of it. But today a wave of defaults can send a shock through the portfolios of financial institutions around the globe, including hedge funds, banks and pension funds far removed from the troubled borrowers. Imagine an electrical circuit with thousands of connections. No one designed it. No one tested it. No one has a diagram for it. It just grew. Now, because of its size and power and pervasiveness, everything depends upon it. So what happens when one of those thousands of connections burns out? No one really knows, but I say it's a circuit you should disconnect from before the world learns the answer. - Doug Casey
One of the legacies of the bull market that began in December 1974 and ended in January 2000 is the conviction that speculation and financial engineering are enduring and self-sustaining engines of economic growth. From 1974 to the third quarter of 2006, financial assets held by Wall Street firms soared from 1.3% to 20.5% of GDP. The rate of ascent is even faster than the Fed shows, because their figures do not include hedge fund assets, which are estimated to have hit $2 trillion in November. Including this figure raises Wall Street's total assets to a mind-boggling 36.6% of GDP. Financial firms survived the plunge of 2000 to 2002 and thrived through the rebound of 2002 to 2006 by pushing clients', and increasingly their own capital, into riskier investments. By amplifying the leverage and rechanneling the speculative intensive from technology in 2000 to housing in 2005 and commodities in 2006, financial firms kept the fire alive. Thanks to hedge funds, leverage and financial engineering have been pushed into every available asset class.... Of course, the financial industry's position so close to the center of the mania can only mean one thing; it is only a matter of time before it joins tech stocks, real estate, and commodities in the great turn lower. - Steven Hochberg
It is highly likely that the buyers of 10% of the homes that were sold in the last two years would not have qualified to buy those houses, and it is possible it could be 15% or more. That would have probably taken a lot of the irrational exuberance from the housing market, and avoided the bubble and the aftermath. I know there are those who blame it on Greenspan and his creation of cheap money. I don't buy that. He aided and abetted, maybe. But it was sloppy lending practices that were just as much or more to blame. If you take 10 15% of the potential buyers from the market going forward, that is a serious problem, especially as you are adding homes to the market from foreclosures. The notion that we saw a bottoming of the housing market in January is ludicrous. Housing bottoms take years to accomplish, not a few quarters. - John Mauldin
The actions of the Plunge Protection Team prove that it's all baloney. The "free market" is merely a public relations myth with no basis in reality. Saving the system will always take precedent over ideology, just as the "invisible hand" will always be overpowered by the manicured and nettlesome fingers of banking elites and Wall Street bigwigs. It's their system and they're not going to let it get wiped out by some silly commitment to principle. The free market system is supposed to be "self-cleansing" through cyclical purges of over-inflated equities and over-extended speculators. Do we really want "central planning" from an unelected Market Nanny that rejiggers the system according to its own economic interests? The Plunge Protection Team may wrap itself in pompous rhetoric, but it operates like a Fiscal Politburo, inserting itself into the market in a way that promotes the narrow interests of its own constituents. It's an outrage. - Mike Whitney
Last week the Bureau of Labor Statistics re-benchmarked the payroll jobs data back to 2000. If you are worried about terrorists, you don't know what worry is. Job growth over the last five years is the weakest on record. The US economy came up more than 7 million jobs short of keeping up with population growth.... Over the past five years the US economy experienced a net job loss in goods-producing activities. The entire job growth was in service-providing activities -- primarily credit intermediation, health care and social assistance, waiters, waitresses and bartenders, and state and local government. US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.... No sane economist can possibly maintain that a deplorable record of merely 1,054,000 net new private sector jobs over five years is an indication of a healthy economy. The total number of private sector jobs created over the five year period is 500,000 jobs less than one year's legal and illegal immigration! ....The economics profession has failed America. - Paul Craig Roberts
The Soviets sent the equivalent in economic subsidies of eight Marshall Plans to Cuba, which was not a war ravaged continent of 300 million people but an island of 6 million people who shortly before had enjoyed a higher per-capita income than half of Europe. These Cuban citizens had owned more TVs per capita than any European country, had enjoyed the services (some free, most extremely cheap) of more doctors and dentists per capita then citizens in the U.S. or Britain and had never emigrated from their homeland. Instead, in the '40s and '50s when Cubans could get U.S. visas for the asking and Cubans were perfectly free to emigrate with all their property and family, fewer Cubans lived in the U.S. than Americans in Cuba. At the time Cuban laborers earned the 8th highest wages - not in Latin America, but in the world.... 40 years later Castroite Cuba emerged from this Soviet largesse with among the lowest per-capita incomes in the Hemisphere, a lower credit rating than Somalia, fewer phones per capita than Papua New Guinea, fewer internet connections than Uganda, and 20 per cent of her population gone - all at total cost of their property and many at extreme cost to life and limb. An estimated 70 thousand perished by exposure, drowning or the jaws of sharks while desperately fleeing a nation formerly richer than Japan and swamped with European immigrants. - Humberto Fontova
Anyone who lives in the United States or the European Union and watches politics knows Fascism is afoot.
The Patriot Act was passed to "combat Terrorism and other purposes." Well, those "other purposes" are
no less than the enslavement of the public by the politicians. Quietly in small amendments to other legislation
the Congress and president have instituted the mechanisms and beginnings of capital and currency controls,
into every aspect of the American financial system, i.e. banks, brokerages, etc. Every person who works in
these industries are now the cops of the coming US and EU police states. The money laundering regulations
have removed any shred of financial independence and privacy from regular everyday life from honest
taxpaying citizens worldwide. We are all criminals now, until proven innocent. Would someone please tell me
how many terrorists have been stopped through these regulatory actions? In a twelve trillion dollar US
economy and a 50 trillion dollar world economy how many millions have been removed from terrorists
hands, at a cost of how many 10's billions in compliance costs? - Ty Andros
Hmmmm... not a bad call. The February 27 market break was a classic case of systemic failure on a small scale. There was no premonition. There were no technical stock market indicators pointing to a sudden market downdraft (other than measures of overvaluation, which do not predict a timeframe). They still don't. Even "Timer's Trend" gave no clue of what was about to happen. Nevertheless, a sudden 9%-plus downdraft in the Shanghai stock market triggered a sudden modest aversion to risk worldwide, pummelling most all of the world's stock markets in sync. (Global markets tend to wax and wane together.)
In hindsight, it seems to me that the real culprit for this failure was not Shanghai, but the beginning of the unwinding of the yen-carry trade.... as the yen has appreciated sharply against the dollar and other favored yen-carry-trade currencies since. Of course, no major player in the yen-carry trade would take on positions without "insuring" them by hedging currency-fluctuation risk.... but somewhere far down the derivatives food chain somebody took a beating, so the yen-carry trade business is now under increased strain, and is likely continuing to be unwound.
To the heightened risk of this unwinding I would also now add this month's virtual collapse of the subprime mortgage market in the U.S. Those bad loans have been sliced and diced into so many places that the downgrading of this credit is likely to have a worldwide impact.... and again, somebody far down the food chain will take a real beating.
(As an aside, is there anything mentioned here I haven't been warning about for months.... or years?)
Looking at the silver lining.... the best possible outcome would be to have a series of mini-systemic failures, like February 27, leading us into the return of the bear market and into recession/depression.... because this would give people time to adjust and rearrange their affairs accordingly, with less long-term damage to the world's major economies. The alternative, where you wake up one morning to find that overnight the world's derivative markets have collapsed, all major banks are technically bankrupt, the dollar is toilet paper and the world's central banks are running the money-printing presses at full speed, is too frightful to contemplate.
One of the advantages of mini-failures, such as February 27, is that they tend to relieve the pressure for awhile (like a volcano periodically venting steam before it eventually blows its top). I had originally expect stock market tops in January and mid-March 2007. Instead, we got a more or less steady climb right up to the systemic failure at the end of February. I still expect a secondary stock market top about now (March, possibly as late as May) and the overall market to exhibit a sawtooth pattern for the next several months. Into May, I suspect stocks will be overall neutral.... with mini-systemic failures (the downlegs of the sawteeth) similar to March 13 likely, and stocks recovering in between these downlegs. From May to at least November, the seasonally unfavorable period for stocks.... and possibly into 2008.... I expect a downtrending (bear) market overall, with the sawtooth downlegs providing most of the losses in the bear.
As these mini-systemic failures occur they will have the effect of progressively weakening the overall financial system and making it more likely that we might see The Big One in late 2007 or early 2008. Sorry, no odds yet for The Big One.... I'll re-evaluate this as the bear grinds on and the financial structure weakens. (This is my expectation of financial risk behavior; it can be superseded at any time by geopolitical events.)
From March 15 through April the odds that a
systemic failure (mini- or otherwise) will occur are
about 55%, in my opinion; thereafter, they revert to
about 2 in 3.
A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $109,196.83 (see below)
Increase: $ 9,196.83 [+9.20%]
COMMENT on "Inheritance": The portfolio shown reflects the transition of Peoples Energy to Integrys (still makes me think of whale deposits on the beach); and the addition of 100 shares of Entrée Gold, at my wife's request.
The portfolio cost (normalized) is $108,800.96 with $54,269.88 currently in cash or near-cash.(The cash from redemption of a partial share of PGL is not yet reflected in this balance.)
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,668.04
Increase: $ 9,969.04 [+93.18%]
COMMENT on "PIG": I continue to "roll over" 3-monthT-bills, one per month.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $28,776.19
Present value: $35,599.11
Increase: $ 6,822.92 [+23.71%]
COMMENT on Roth IRAs: There is no change from the last issue.
D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity non individual-stocks retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 74.37%; T-bills and money-markets, 5.55%; TIAA-CREF inflation-indexed bonds (retirement), 16.68%; TIAA real estate, 3.37%; TIAA-CREF High-Yield II, 0.03%. A few days ago I switched all of the money market funds in my TIAA-CREF IRAs into TIAA traditional, yielding 4.5%, on the theory that the Fed may be driving down short-term interest rates sooner than most observers expect, in an attempt to stave off the rapidly-onrushing recession.
TIAA-CREF values, 13Mar2007: stock, 238.76; equity-index, 93.32; MM, 23.96; bond, 80.97; inflation-indexed bond, 47.57; real estate, 280.19; TIAA current yield in SRA, about 4.82%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of March 8, 2007.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given February 27, 2007.
NEXT ISSUE - will likely appear in April 2007.