Saturday, August 13, 2011

France Enters The Contagion

8 days ago on a calm Friday evening S&P decided to downgrade the debt of the United States.  This past week the markets were rocked in one of the wildest weeks in trading history.

While most felt that the market turmoil was due to fears about United States debt, the market responded by flooding into US treasuries bringing rates down to all time record lows.

The real reason for the turmoil was due to the contagion that took place over in Europe.  The markets understand that a US downgrade now puts tremendous pressure on S&P to downgrade the debt of France. (currently AAA)

A downgrade of French government debt would then put pressure on French banks which saw their stock prices destroyed this week. 

There is a bigger concern now in place as well.  The European bail out fund called the EFSF (their TARP) is now almost exclusively backed by the credit ratings of Germany and France. (both AAA)  If France were to be downgraded, that would leave Germany standing alone to backstop almost all the the toxic debt throughout Europe. (Greece, Portugal, Ireland, Spain, Italy, Belgium)  If at some point, and we have not hit that point yet, Germany's politicians (or the people that vote them in) decide it is too much too take on, things will get very nasty.

The European Central Bank (their version of the Federal Reserve) has, up until now, played their hand very conservatively.  They have only monetized (printed money to purchase) about $80 billion in Greek, Irish, and Portuguese debt.  In comparison, just the most recent version of quantitative easing (QE2) from our Federal Reserve was $600 billion in size.

The ECB has pledged that they will begin to purchase the debt of both Spain and Italy.  This was the most important news event of the year, which I discussed in The ECB Announces The Final QE.

Where do we go from here? 

Spanish cities have begun to approach bankruptcy.  Italian banks are loaded with toxic debt and bail outs appear to be nearing.  France's GDP disappointed heavily this week raising concern over their ability to finance deficits.  California's budget deficit continues to surge as their incoming taxes continue to shrink in size.  Municipal bonds all across our country were downgraded this week after the US S&P downgrade.  Japan and the UK have massive looming government debt issues they are beginning to face.

The entire world is awash with toxic subprime debt that is all interlinked throughout the global financial system like a mine field covered in nitroglycerin.  The stage is set for the next Lehman to be triggered, but no one knows where the first explosion will come from.

A defensive portfolio built for a worldwide financial war is what will be needed to survive, and those that come out the other side will have the opportunity of a lifetime to purchase assets on sale.

WSJ: Mark Cuban

Incredibly good interview with the Dallas Maverick's owner Mark Cuban.  He known as a loud mouth sitting courtside, but he is a ridiculously intelligent and successful business owner and investor.  One of my favorite people out there if only for his burning desire to learn and work toward creating businesses and being a more successful investor.

Friday, August 12, 2011

4 Day History

The graphs below show previous times we have experienced 4 consecutive days with moves over 4 percent in the stock market.

Thursday, August 11, 2011

DOW Up 420 - Gold Smashed

This market is certainly not for the faint of heart.

The stock market began to roar this morning when news came from Europe that there would be bans on short sales, just as our stock exchanges banned short sales on financial companies in the fall of 2008.

When the ban on our financial stocks was announced back in 2008 there was a massive rally in both the general market and the financial stocks, and then they fell over 48% over the next few weeks.

Gold was smashed this afternoon as investors moved back into the "risk on" trade.  Margins were raised on gold last night after trading, which usually leads to sharply lower prices the following day as investors have to raise cash to cover the margin calls.

Gold is also way overdue for a sharp correction.  The recent spike was unsustainable, just as silver's spike was unsustainable earlier this year.  Will it fall further from here?  Is this a temporary bottom?  I have no idea, but I believe prices will be much higher two years from now.

The interesting part of gold's move today was that the gold mining shares rose in the face of the underlying commodity sell off.  It has been widely speculated that the recent trade amongst hedge funds has been to go long gold bullion and short gold mining shares.  This has left the mining shares deeply undervalued in comparison to the underlying price of bullion.

Will the miners begin to catch up now?  I have no idea, but I believe well managed mining stock share prices will outperform bullion over the next year. 

Time Magazine

Wednesday, August 10, 2011

DOW Falls 520

With the economy disintegrating, unemployment surging, home prices falling, and stocks now collapsing, Obama has decided to celebrate his accomplishment on the year by announcing he'll be taking the end of August off to head to Martha's Vineyard to vacation.

We can only hope our President has loaded his personal portfolio with gold and has shorted everything involved with America in terms of investments.

$1,800 Gold

With the stock market continuing its collapse, gold moments ago crossed the $1,800 barrier.

After a brief rally in stocks yesterday, when Bernanke told the markets he would keep interest rates at 0% through mid 2013, the market is once again paying attention to the drama unfolding in Europe.

Today the contagion has spread to France, where their bank's share prices plunged across the board amidst rumors that failures could be imminent.

Italy saw its stock exchange once again free fall to limit down.

Because our banks are interconnected to those around the world, the American financials have been taken out with the trash.  Rumors abound that Bank of America, the most underwater and insolvent bank in history, may need additional government funding to support its toxic debt and massive employee bonuses.

Under the smoky haze of the global financial rubble, more and more investors are beginning to put together the pieces and understand how the final endgame will play out.

With the financial system insolvent, and the governments that back them insolvent, the last remaining saviors are the central banks to preserve the current system.

They will do this with a tsunami of printed currency that will wash upon the shores and destroy whats left of the middle class and poor in the Western world.  Banks will be saved and the record setting bonuses will remain untouched.

Then comes violence.  Then comes five digit gold.

Monday, August 8, 2011

The Mask Is Removed

I get up early every morning, pour myself a cup of coffee, and spend a few hours churning through financial articles and information surrounding the markets.

I then try and digest the information and present it in a way that is easy to understand on this site.  Most of what I have been discussing over the past 2 years, based on my analysis of market information, has been negative.

That is because the fundamentals of the global economy have been deteriorating, rotting away under the surface.  Nothing has been healed or fixed since the financial crisis of 2008. It has only been masked by trillions in government spending and central bank printing.

But the true mask has been the stock market.

When I write negative information on this site it is brushed aside and scoffed at by some because the market is rising.  Investors look for a reason to justify the rise, and "this time is always different."

I spent countless hours every week explaining the implications for the explosion of European debt.  I talk about unemployment and falling home prices.  I write articles every week discussing the unsustainable and reckless spending in Washington. 

Readers take in the information but then they read how the United States government debt is rated AAA.  They watch the stock market rise every day and can taste the euphoria around them as Americans "wealth" increases with the paper prices of shares in their 401k.  People fill the restaurants and the malls.

This week the mask was removed.  The DOW fell 630 points today taking trillions away from Americans in retirement income. 

This is not the crisis. 

The Federal Reserve and global central bankers will respond, and they will respond with force.

The European Central Bank has already announced they are ready to purchase enormous amounts of Spanish and Italian debt.

We receive word from the Federal Reserve tomorrow.  The market will hang on their every breath.

The crisis is not when the United States government debt is rated AA.  It will come when it is rated at its true value: Junk. Worthless. 

It is a crisis that began 40 years ago when president Nixon took the world off the gold standard.

The final show is coming.  Gold stands ready.

For Hot Summer Days