Thursday, May 20, 2010

Gold and Silver Update

This past weekend I discussed the importance as an investor of using tools and information to help predict future events.

I used the example of tracking the CDS for country debt, which is important at a time when sovereign/government debt is in question around the world.

Another tool to help determine future markets events, especially in the short term, is the Daily Sentiment Index, which I have discussed in the past.

Last week gold reached a record high on the sentiment index at 98% bullish for two trading days.  This was a record high for the yellow metal.  Silver clocked in at 95% bullish.  This meant that 95% of investors felt that silver was going higher on that trading day.

When investors are all on one side of a trade, it usually means there is a short term correction coming.

You did not need the sentiment index to tell you this.  Anyone could have turned on their news during the week and heard over and over from every guest how much they love gold and how it needs to be a part of their portfolio.

Most of these same guests felt that gold was the last investment you would want to hold when it was $700 a year and a half ago.  (The CNBC dummy talking heads provide great short term indicators to help you know when NOT to buy an investment.  They are almost like clockwork.)

Ultimately gold and silver are going far, far higher.  However, during every bull market you experience strong corrections which are a healthy sign.  It helps shake out the weak hands, like the people you see on television.

The strong investors build cash during market highs and add to their position when they pull back.  They root for corrections because they understand the big picture.  All the rest is noise.

Real Estate Update

We received real estate news this week from the Mortgage Bankers Association and Moody's:

- 1 out of every 7 homes is currently not paying their mortgage. With 51 million mortgages in America, that is 7.2 million homes not paying.

- 1 out of every 20 homes is in foreclosure. That leaves obvious math showing the number of delinquent homes soon to be in foreclosure. 

- Commercial property fell .5% in February.  Prices are down 25% from a year earlier, and down 42% from the October 2007 peak.

It is important to remember this is all occurring with the mortgage market fully nationalized (government now provides over 97% of all new home loans), and additional stimulus like home buyer tax credits.

When our government debt begins to implode like what you are seeing overseas (and it will), the artificial support under home prices will be removed and the collapse in home prices will finally begin.

FDIC Update

Today we received an update on the solvency of the FDIC.  This is the company that backs the savings in your bank account.

The following chart shows the ratio of the FDIC assets relative to the deposits they insure:


You are reading it correct.  The number is below zero.  Not only do they have $0 available to back the savings deposits, they currently owe $20.9 billion.

This number will get far worse as the assets they acquire every Friday night during banks failures continue to depreciate in value. (Commercial Real Estate)

So who backs the FDIC? The Federal Government.  The Federal Government is currently $13 trillion underwater and borrowing $2 trillion every year to stay solvent.

Who backs the Federal Government?  The Federal Reserve.  With a printing press.

Sunday, May 16, 2010

Tracking The Contagion Spreading

There are many tools an investor can use today to try and piece together clues on the direction certain markets are heading in the near future.

One of the best of the sign posts to watch over the past 12 months has been the activity in the Credit Default Swaps market for country debt.  "CDS" are a fancy word for insurance for debt.

If you want to buy a house the mortgage company asks that you own insurance on the house to protect their investment.  An astute investor in the real estate market would track the cost insurance companies charge homeowners in various parts of the country.

If they charge very high rates to insure a home, it means they feel it is a risky investment, and that the likelihood of default is higher than in other areas or investments.

The same applies for CDS; country debt insurance.  If an investor decided a few weeks ago to purchase some debt in Greece and they wanted to buy some insurance on that debt just in case Greece were to default, the rates on the insurance were extremely high.

This raises the cost to invest and pushes down the price of Greek debt.  (In the bond world prices going down means that rates are rising)

This was obvious a week ago, but the astute investor was watching the CDS insurance rates rising back in late 2009.  You could smell the smoke coming from Greece back when CNBC was still reporting about the record bank profits.

So the important question today, (and moving forward) is what is happening in the CDS market right now?

The big money (the smart money) moves in early and shorts (bets against) the CDS market before the public becomes aware of the problems.  Last week we saw the largest short position by far taken against the UK.  The second largest was in France.

The big money has moved on from the PIGS (Portugal, Italy, Greece, Spain) and is now moving toward the larger names.  They are betting that the contagion will continue to spread beyond the Euro Zone's control.

I have been talking for weeks about the order in which countries would be attacked.  I felt that it would begin first with the PIGS, then move to either Japan or the UK (we got that answer this week), and it would finish with the United States.  I assumed that when they attacked the United States, they would begin first with the state debt before taking on the ultimate monster: The US Federal debt.  The $107 trillion looming disaster.

This week the state CDS saw their first signs of trouble.  The following chart shows the CDS spreads for California, Illinois, and Michigan.  Their chart is beginning to look very similar to the PIGS overseas:


Illinois is now expected to be the first state to fail (or more likely: receive bail out) due to the fact that they have already stopped making many payments.  California will follow soon after and Michigan will be right behind.

So have no fear, all the fun and excitement overseas will soon be within our own borders, and the debt problems in the United States are far worse than any other country in the world by far.