Saturday, July 17, 2010

Matt Simmons On BP

Great interview this weekend on King World News with Matt Simmons discussing the BP oil spill.  After capping the oil leak and "solving all the problems," Mr. Simmons gives his latest target price for BP:

$0 (Bankruptcy)

Hint: There is another gusher not shown on the news still leaking into the gulf.

The interview can be heard by following the link here.

For those that understand options (and believe Matt Simmons) shorting BP stock at 37 (today's price) down to 0 (Bankruptcy) can be a very profitable bet.

Long Way To Go

The following chart provides a great visual on why banks are holding the shadow housing inventory off the market. The red line represents property values, and the blue line represents the mortgage debt or what Americans have to borrow to purchase homes.

Home values since the Spring of 2006 have fallen from $20 trillion down to $13 trillion.  The total mortgage debt, however, has only fallen $270 billon. 

The gap seen provides a glimpse at how far "under water" homeowners now find themselves.  More importantly it shows the health of the financial system.  If banks had to mark their assets to market, instead of myth, they would instantly be insolvent.

This is why they are currently hoarding the free cash they are receiving from the Federal Reserve, and it is also why as our economy moves back downward during the second half of the year the Federal Reserve is going to have to think of new and creative ways to get printed dollars into the hands of consumers.

Look for helicopters in the sky this Christmas as they may finally decide to start dumping money from the air.

The Peddler Of Nightmares

Michael Pento takes some time to speak with the talking heads at CNBC on Friday and causes outrage from the ridiculous Simon Hobbs when he explains such things as common sense and real economic facts.

Simon calls him a "peddler of nightmares." Fantastic Video.

Friday, July 16, 2010

Another Peak Under The Surface

Yesterday  I discussed the week's economic data in Looking Under The Surface.  This morning the markets were hit hard with two more punches to the stomach.

The weekly ECRI leading economic indicators index has hit -9.8.  I discussed this indicator in detail in The Stage Is Now Set.  As a reminder, over the past 42 years a -10 reading has coincided with a recession. (Meaning we have now "officially" entered the double dip that is "officially" impossible to enter according to the media)

After catching its breath the market received the University of Michigan's Consumer Sentiment report which fell off a cliff down to 66.5 from the previous 76.

Remember that our ponzi economy is based entirely on consumers going into debt to buy goods they do not need.  Consumer sentiment is the indicator that judges how likely they are to further burden themselves with additional debt.

The week's economic data continues to be a complete blood bath across the board.

We can now only hope and pray for our fellow Americans still brave enough to be in the stock market.

Thursday, July 15, 2010

Looking Under The Surface

My company recently purchased an apartment complex in Raleigh, North Carolina.  I've been in Raleigh this week helping them out with the management transition.  The apartment community is gorgeous, and I would imagine residents or people driving by would be shocked to know the community was purchased in bankruptcy.

This weekend when I get back to Charlotte I plan on spending some time in the Epicentre in uptown Charlotte.  It is the city's newest attraction featuring bars, retail shopping, and a great hotel.  The building deserves its name as it provides an amazing atmosphere both inside and out.

Visitors to the great Epicentre would probably be shocked to know the Epicentre received foreclosure papers this morning.

My reason for giving these two examples is to show the importance of viewing something not how it looks on the outside, but also by taking a look at what lies under the surface.  Looks can be deceiving.

Since July 1st the stock market has experienced a magnificent rally.  Today we find out that the BP oil spill has been capped, and that Goldman Sacs has settled with the SEC for $550 million after robbing the American taxpayer of hundreds of billions in wealth.  This good news brought the market back from a large sell off early in the day.

When the stock market goes up, people feel good.  If it looks good, things must good.  Right?  Let's take a look at what lies under the surface.  The following is the economic data we received in the last 48 hours:

1.  The broadest measure of money supply, M3, turned negative in December of 2009 and has fallen month over month since.  A broad fall in M3 is catastrophic for an economy dependent on growth.

2. Mortgage loan applications have fallen to the lowest level since 1996

3.  The Baltic Dry Index (measures global trade) has experienced its longest fall in 15 years

4. Small business confidence this week feel to 88 from 92, reaching a three month low

5. 25% of Americans have a credit score under 599 and cannot get access to desperately needed financing

6. Retail sales are down .5%, Auto sales are down 2.3%, a massive drop off

7. The Philly Fed (measures manufacturing) plunged this morning to 5.1.  The consensus was at 10.

8. The Empire Manufacturing Index plunged to 5.08 on expectations of 18.  It was at 19.57 as of last release!

9. Non seasonally adjusted initial jobless claims this morning came in at 513,347.  Emergency Unemployment Claims fell by -236,162.  Extended jobless benefits fell by -18,580.  These last two represent the people unemployed for so long that they no longer qualify for government assistance, also known as the most likely to riot when hungry.

10. Stock market (equity) mutual funds showed the largest sell off in three months.  It has now been 10 straight weeks of equity mutual fund sell offs with the money moving into the bond fund.

This last one is important and probably puzzling to the average market observer.  Remember this huge stock fund sell off came at a time when the stock market rocketed higher over the past week.  How could this be possible?  What we saw last week was what is known as a short covering rally.

When investors sell a stock short a they must buy that stock back at some point in the future to collect their profits.  This happened last week in a major way as commercial investors took profits across the board.

The stock market now has a beautiful exterior right after its sharp rally upward, just as the bankrupt building does that I worked in today, and just as the foreclosed Epicentre does that I will be having drinks in this weekend.

However, if you plan on putting money into the stock market today, please take another look at what lies under the surface.

Monday, July 12, 2010

Psychology Of The American Investor Today

The front page article in the Wall Street Journal this morning is titled, "Small Investors Flee Stocks, Changing Market Dynamics."  It focuses on a topic I discussed briefly in Second Half Outlook 2010 that the public has been moving out of stock mutual funds for 9 consecutive weeks and into bond funds. 

The article interviews a wealthy retired couple in San Antonio, Texas.  The man says he has lost faith in the stock market.  Here is his statement that I found the most interesting regarding moving money out of stocks and into bonds:

"I won't make 8% on my money.  I will make 4% or 5%, but the money will still be there."

If this man is investing in bonds yielding 4-5%, then he is investing in 30 year treasury bonds, or bonds that are even more risky.

What no one has told this gentleman is that if interest rates rise, his bonds will lose value.  If he invests in state and local government debt they could default. (This is coming)  If he invests in corporate debt the business could default. (This is also coming)  Why does this man not know this? 

The reason is that he does not remember the last bear market in bonds.  It was during the 1970's and ended in 1981.  We have been in a 29 year bull market in bonds, and they are now more expensive than any time in history.  They are in the final stages of an enormous bubble.

That being said, I believe bonds will outperform the stock market over the next 6 months.

Over the next 10 years?

Stocks will perform much better, and it is terrible to know that after the NASDAQ bubble and the real estate bubble, the American people are now putting all their money into the last great bubble: The Bond Market.

As Mark Twain said, "history does not repeat, but it does rhyme."

Steve Wynn

Steve Wynn meets with CNBC to discuss the American economy.

He is a casino resort/real estate developer who is worth $1.5 billion.