Thursday, April 15, 2010

America Is Back Part III: Foreclosure Filings

An update to Tuesday's America Is Back Part I: Free Housing, today we received last month's foreclosure numbers.

Realty Trac has reported, "Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005."

Banks are ever so slowly beginning to file on the 7.4 million (and counting) Americans who are not paying their mortgage and living for free. 
This number puts us on track for 4.4 million foreclosures this year, double last year's record of 2 million. 

This massive flood of inventory hitting the market at bank auction fire sale prices should help spur the media's make believe housing "recovery" that is still underway.

In other news, the home buyer tax credit expires next week.  The coming losses at Fannie and Freddie (who are now providing 100% of the new mortgages being issued with tax payer dollars) should be staggering and beyond the most dire predictions.

The trillions in coming losses for Fannie and Freddie will just be added on to the annual $2 trillion in Federal deficits, not including social security which is now running in the red.

This morning we also received word that China was once again a net seller last month of $11 billion in treasury debt.  Japan, our second largest creditor was a net seller as well.

However, these concerns will easily be off-set by our stock market, which is on its way to making millionaires of every hard working American in our country.

America is Back Part II: The Stock Market

I was in my office working this afternoon when a young man came in to speak with me.  After talking about a few business related topics, he asked me how my 401k was doing.

"Pretty good," I said.

"Man, mine is doing fantastic," was his reply.  "I'm invested in a lot of high growth mutual funds, and my portfolio was up about 10% in just over 30 days."

Then he told me about some kind of green line that he follows on his fidelity investment screen.  The green line tells him when he will be able to retire, and how much income he'll be able to live on.

I told him that if his high growth/high risk mutual funds were to run into any problems, at least he was young enough to recover over time.

Then he got up to leave, and I don't think he even heard or understood the last thing I said.  Recover?  America has already recovered, he only needed to focus on that 10% growth over 30 days.

Besides, what does a real estate guy know about stocks?

I believe much of the discussion around America being back is based on the current price of the Dow Jones Industrial Average.  The DOW.  People assume the stock market is the best available tool to gauge the strength of the American economy.

There are times during history, however, when we have seen that the market is wrong.  Think back to just a few years ago during October of 2007 when the DOW crossed over 14,000.  18 months later the market was under 7,000.  So which was right, 14,000 or 7,000?

The only way to answer that question is to look at the two best determinents of future stock market direction: value and sentiment.  Last week I discussed value in Is The Stock Market Expensive?  Value is what long term fundamental investors use to pick stocks.  Guys like Warren Buffett.  They like to buy when stocks are cheap and stay on the sidelines when they get expensive.

So what would cause an investor to buy a stock when it is already expensive?  That is where the second determinent comes in which is sentiment.  We have seen throughout history that people make irrational decisions based on emotion when it comes to investing money.  They tend to follow the crowd, which pushes markets up and down past the point where a rational investor would buy or sell.

So how does this help us?

Because as an investor you can track the extreme sentiment in the market using various tools.  (Aside from people talking about their 401k)

One of those tools is the Daily Sentiment Index.  In the chart below there are two lines, the top line shows the DOW price and the line below it shows the Daily Sentiment Index.  Extremes on this index help traders know when they are close to a short term top or bottom.

For example, in March of 2009 the sentiment index clocked in at 2%.  That meant that 98% of investors at that time thought the market was going lower.  (The market has since risen 78% from that low)  Today we reached 92% optimism.  This means only 8% of investors think that the market is going lower. 

Other major sentiment indicators such as the put/call ratio, the advisor's survey, and the NYSE trin, are all painting the same picture:

Investors across the board all believe in mass that the market is headed higher.  They had the same time of sentiment during the spring of 2000 and the fall of 2007.

Now, just because a market is expensive and sentiment is at an extreme does not mean a market cannot get even more expensive and sentiment cannot get even more extreme.

It just means being in this market is purely a bet on momentum and speculation.  Or, maybe the economy will come back and justify these prices because after all:

America is back.

Tuesday, April 13, 2010

America Is Back Part I: Free Housing

As you can see by the magazine cover I've posted to the right, Newsweek has decided to announce that America is back.  We have once again regained our prosperity and it is clear sailing from here.

I love waking up in the morning during times like these.  It is like living in a cartoon world.

To show my appreciation for Newsweek magazine, I've decided to dedicate this entire week to writing about how America is finally back.  A special thanks goes out to our political leaders, the Federal Reserve, and the media for bringing us back to prosperity.  This is for you.

There are approximately 55 million mortgages in our country.  We received data today that 7.4 million people are not paying their mortgages, but still living in their homes.  13% of all mortgages.

Think about that for a second.

Imagine if you could stop paying your rent/mortgage payment every month.  How much would that help your bottom line?  How much more would you have to spend on restaurants, clothes, and cars?

Much more.  And this has been a major contributor to America's comeback. Estimates show that about 50% of those 7.4 million are not paying on their mortgage because they are smart.....i financial vocabulary they are "strategically" defaulting because they are underwater.  They owe less than the home is worth so they'd rather not pay and live for free.

The banks don't want these mortgage loans or the homes.  I watched the movie 2012 last week, and I imagined the people in New York City looking up at the tsunami wave that was about to wash over the city as the same feeling the banks have today looking at the coming foreclosures.

Last year we had 2 million foreclosures, a new record up from the previous year's 1.8 million.  Estimates show that we are moving ever closer to the point where 40% of the 55 million mortgages will be underwater.  How long before those people make the smart.....i mean....."strategic" decision to live for free?  What is 40% of 55 million?  What would that do to home prices?

That is a silly question.  Let's focus on America's new found wealth from their free living.  Let's focus on their new ability to spend that money on iPads and iPods.

America is Back.

Sunday, April 11, 2010

The Greatest Story Never Told

**I am not a financial advisor, I recommend speaking with one before making any investment decisions**

In April of last year I wrote an article titled, The Greatest Investment The World Has Ever Seen.  Due to some incredible news in the precious metals market over the past few weeks, I would like to write Part II of that article, as the saga has revealed groundbreaking new information.

I would recommend reading Part I before we move forward to get a brief foundation on precious metal price manipulation.

I have been investing in precious metals since the fall of 2005.  Over that period I have ridden the rollercoaster of prices rising, falling, and rising again.  Investing in metals is what originally sparked my interest in understanding monetary, financial, and economic history.  I have read what seems like an endless amount of financial information.

I made my first silver investment when prices were at $7.20.  Over the past 5 years I have seen the price explode up to $22 and come crashing back down to $8.  The ride up was exhilarating, the falls were excruciating.  Over time I continued to read, study, and learn.

I now pay very little attention to the price.  I concentrate on the number of ounces that I own, not a dollar amount.  If silver falls by 50% tomorrow I look at that as a good thing because I can now purchase twice as many ounces as I could the day before.

Some of the main topics I discuss on this site are government deficits, money printing, and a poor economic environmentt.  These three create a dream investment for a precious metals investor.  However, there is a fourth element that has been present during this bull market, the one that makes this the greatest story never told.

The precious metals markets are tiny in size when looking at the total number of physical ounces that can be traded.  However, surrounding the small physical market there is an enormous paper market that makes bets on the direction of prices.

Prices are determined by their demand on the COMEX.  (Chicago Mercantile Exchange)  If an investor purchases an ounce of gold from the COMEX it is the responsibility of the exchange to have that ounce of gold available for delivery should the investor want it.  Many precious metal investors have claimed over the years that the COMEX does not have all the gold it has promised.  If a large number of investors asked for the metal, it would default and not be able to deliver.  For years this has been something of a folk tale. 

That was until two weeks ago. 

A rogue London trader named Andrew Maguire contacted representatives of the CFTC (Commodity Futures Trading Commision - they oversee the COMEX) to show them how manipulation of the market was taking place by a few large banks; one in particular.  He told them the exact time that enormous sell orders would take place on the COMEX and showed how the banks would take down the price to profit.

He did this on multiple occassions.  The CFTC paid no attention to Andrew, so he decided to send the information to a private organization.  That group took it public over the past few weeks and the story has exploded. (You will not hear about it on the mainstream news, similar to how no one heard about subprime until the story was over)

Two weeks ago the CFTC held a hearing to determine the risk to the COMEX from these naked short positions held by the few large banks that hold them. After hearing from multiple witnesses, some called to defend the banks, all of them testified that there were approximately 100 paper metal shares traded for every 1 real ounce backing those paper shares.

Let me help explain. You have called the COMEX and asked to purchase some gold or silver trusting that your money is now backed by gold or silver in a bullion vault. However, what investors do not realize is that they have just signed up for a game of musical chairs.

There are 100 investors that have purchased 1 ounce of gold, however, there is only 1 ounce available in the vault for those 100 investors. When they try to sit down, or take delivery, 99 out of 100 will not be able to collect.

You can listen to an interview with Andrew telling his account of the events here.

And you can listen to an interview with the organization that brought the story to light and testified at the CFTC hearing here.

You can read the full letter sent by the whistleblower Andrew Maguire here.

So what does this all mean?  It means you are currently staring at the greatest investment opportunity of our lifetimes.  Far greater than the dot com mania or the real estate mania.  When this bull market turns manic, and investors realize there is no metal available to purchase, there is no limit to how high gold and more specifically silver prices will rise.

The crucial factor if you decide to purchase metal is to make sure you have a chair to sit down in when the music stops.  You want to have real metal, not a paper promise.  I have recommended ways to purchase metal on the link to the right, "what should I invest in today."

Let me give you a word of caution:  The metals market is like riding a bucking bronco.  Prepare for massive price swings along the way.  I would recommend focusing on accumulating a specific number of ounces, not a dollar price target.  This way you can view pull backs as what they are: opportunities.

When will investors get nervous and ask for delivery?  I have no idea.  It could be this week.  It could be five years from now.  All I know is the longer the ponzi scheme continues, the longer I have to purchase precious metals at fire sale prices.  I welcome the naked short positions from the large banks with open arms.

Let The Bail Outs Begin, Again

This weekend Greece leaders are meeting with members of the European Union, the European Central Bank, and the IMF. (International Monetary Fund)

They are meeting to discuss a topic that has become common place in our language over the past 24 months: Bail Out.

A few weeks ago when it became clear that Greece did not have the ability to pay on the debt it borrowed, I stated that the ultimate outcome would come in the form of a bail out from the IMF and ECB. Why did I believe this would be the final outcome?

The ECB and the IMF have the ability to print money out of thin air. 

The European Central Bank is the European Union's version of the Federal Reserve.  They are in charge of the money supply and the interest rate banks are lent to in the EU.

The IMF is the world's central bank.  It is a global bank that all central banks around the world contribute money to.  The IMF currently has $750 billion in funds ready to be lent to banks or countries that run into trouble.  Here is where they received the majority of their funds:

United States: $100 billion
Japan: $100 billion
European Union: $178 billion
Norway: $4.5 billion
Canada: $10 billion
Switzerland: $10 billion
Korea: $10 billion
Australia: $5.7 billion
Russia: $10 billion
China: $50 billion
Brazil: $10 billion
India: $10 billion
Singapore: $1.5 billion
Chile: $1.6 billion

I pulled this information from the IMF website which you can view here. 

All central banks are private companies.  They are not government entities. They print money, lend it to governments and charge interest on the money they lend.

Governments then tax citizens to pay for this interest.  The central banks are owned by a group of the wealthiest people in the world.  Names like Rockefellar and Morgan.  The names that have wealth beyond Bill Gates and Warren Buffett.  They do not control companies, they control countries.

The reason I am explaining this is so you can understand what you are hearing in the news.  When you hear that the IMF will be bailing out Greece, you need to understand that the IMF receives their money from central banks around the world.  Those central banks create the money they send to the IMF by printing it, and they charge interest on that money.  That money comes from the taxpayer.

The reason I believe that the final outcome for a Greek bail out will be a central bank bail out is because the central banks have to bail out Greece, just as they had to bail out United States financial institutions back in 2008.

If Greece were to default in a disorderly way it would trigger massive bank losses, and more importantly, it would trigger massive losses in the derivatives market which is currently $600 trillion and growing.  For example, estimates show that the German banking system would incur losses of $150 billion should Greece fail, not including derivative losses.  This would create another domino effect in the financial markets, similar to what we saw in 2008, that the Central Banks cannot allow.

When you understand the larger picture and how the game of bail out is played, it is far easier to see how events will occur before they do and how to prepare your investments for that outcome.

For a more detailed understanding of how the global financial system was created and currently works, I would recommend reading "The Creature From Jekyll Island," by G Edward Griffin.

Once Greece is bailed out, others will follow suit.  I would imagine the domino will fall first in Greece, then move to Italy, Portugal, Spain, the UK, Japan, and end with the USA.

All bail outs will involve printed money, which is paid for by the citizens through taxes and inflation.  The more money that is printed, the more money they use to "save us," the more interest they collect.