Opt Out of Social Security

September 27th, 2010

“The Social Security Trust Fund is misnamed. It cannot be trusted, and it is not funded.”

–Former US Comptroller General David Walker, July 2010.

If David Walker – who was essentially the US government’s accountant from 1998-2008 – can make jokes like that about Social Security, we’re in trouble. Indeed, as we noted in our essay “The End of Social Security as We Know It”, the Social Security Trust recently began paying out more than it is taking in. Over the next 75 years, the Fund will require an additional $5.4 trillion to pay for scheduled benefits.

Given the deplorable fiscal condition of the Social Security Trust Fund, some forward-looking Americans are asking, “Why can’t I just opt out?” Even middle-aged members of the Baby Boom generation are wondering if there will be any Social Security left for them when the time comes…and if they wouldn’t be better off abandoning the government’s mandatory retirement plan.

So can you opt out? In a word, yes.

How Do You Feel About a Horse and Buggy?

It’s true; you can opt out of Social Security…if you belong to a fiercely independent religious culture like the Amish.

Back in 1954, when the Social Security Administration first began taxing and covering “agricultural workers,” the Amish took issue with Social Security’s forced participation. The program, also known as Federal Old Age, Disability and Survivors Insurance, is a pretty brash affront to the Amish credo. Not only are the Amish famous for “taking care of their own,” but the whole concept of insurance goes against their faith. As people extremely serious about God’s plan, they don’t take kindly to a government-mandated hedge against His prerogative.

So in the late ’50s, the Amish started their resistance to Social Security. Naturally, they were quiet and reasonable about it. Some put money into a bank account and insisted the government place a lien on it. At least that way, some Amish thought, they weren’t voluntarily paying into the program. Others signed a petition and sent it to Capitol Hill. But, naturally, the IRS paid no attention. The IRS kept insisting that FICA taxes be remunerated…until eventually many Amish just stopped paying.

The whole conflict came to its climax in 1961 when the IRS went after one of these “delinquents,” Valentine Byler. Long story short, he owed over $300 in back Social Security taxes, so the IRS repo’ed three of his six horses. No kidding. (At one point in this fiasco, Reader’s Digest reported a judge berating the government’s representatives, “Don’t you have anything better to do than to take a peaceful man off his farm and drag him into court?” Apparently not.)

To the Amish’s credit, they kept resisting the FICA tax, insisting that it violated their 1st Amendment right to practice religion free of government interference. Byler’s story, as you can imagine, was a real hit with the media and within a few years the IRS caved under public pressure. In 1965, the government passed a law that allowed US citizens to opt out of Social Security.

Of course, only a small minority of Americans can legally stop paying Social Security taxes and strike their beneficiary status. In order to qualify for the IRS’s exemption, you must:

  • Convince them you are part of a religion that is “conscientiously opposed to accepting benefits of any private or public insurance that makes payments in the event of death, disability, old age or retirement.”
  • Have a ranking official of this religion authorize that you are a true believer
  • Prove that your religion has been established – and continually opposing insurance – since at least 1950.

So unless you are Amish, Mennonite, Anabaptist or part of another very small religious sect, odds are you’re stuck paying (and receiving) Social Security for the foreseeable future. Still, we won’t fault you for trying: Look around for Form 4029…you’ll have to file with the IRS if you seek Social Security exemption. Be careful what you wish for…exemption might be the swan song for your life, auto and health insurance, too.

Learn from the Amish

Even though your opt-out chances are slim to none, there’s plenty to learn from the Amish battle against Social Security.

1) This story should serve as a reminder of what the whole program really is: insurance. When FDR first introduced Social Security in 1935, he said it would “give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” It was never intended to be a program in which nearly everyone paid in and nearly everyone expected to be fully paid out…even though that is what it has become today.

We suspect that kind of insurance language will return. The rich – who are so exceptionally unpopular these days – might soon be reminded they are not “average” and that Social Security was not designed to supplement their fat 401(k)s. (Whether that is in any way ethical, or even what qualifies you as “rich” in America, is a debate for another Daily Reckoning.) At the least, expect this cash-strapped government to raise the wage base for the Social Security tax or institute a benefits means test in the near future.

2) The framework of Social Security is flexible. There are plenty of people alive in America today who were around before this program even existed. Those same people saw it amended and reformed many times in the ’30s, ’40s and ’50s. Exceptions have been made along the way. And in 1983, under the Greenspan Commission, the government gave Social Security yet another dramatic reform.

Thus, there is no reason to think Social Security can’t be amended again, for better or for worse. Maybe the government, like it did in the ’80s, will change the rules and hike taxes, raise the retirement age and reduce benefits. Or if you are as persistent as the Amish, perhaps you can influence legislation in your favor. (Your odds increase dramatically if you own or control a large multinational corporation.)

3) Most importantly, like the Amish, expect a self-sufficient retirement. “The best revenge is living well,” the saying goes. Thus the best way to survive the plight of the Social Security Trust Fund is to not need it in the first place. Take a page from the Amish playbook and minimize your taxes…contribute the most you can to your company’s tax-deferred 401(k) plan. Better still, enroll in a self-directed 401(k), where you can invest in stable, dividend-yielding companies that might compound your returns. A few of those companies might even have a dividend reinvestment plan (DRIP) where you can use those quarterly payments to reinvest in the underlying stock… That’s a double serving of perfectly legal tax evasion.

There’s something to be said for the Amish way of taking care of your own, too. Their lifelong financial planning doesn’t just revolve around their individual net worth, and neither should yours. If there’s money to spare, set up some tax-deferred accounts for family members. Not only could it empower them, but depending on your situation, you might be able to alleviate your own tax burden at the same time. They’ll thank you 10-20 years from now, when David Walker’s joke isn’t quite so funny.

Regards,

Ian Mathias
for The Daily Reckoning

Opt Out of Social Security originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Opt Out of Social Security




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

A Historical Perspective of the Social Security Nightmare

September 27th, 2010

“The arrogance of officialdom should be tempered and controlled, and assistance to foreign hands should be curtailed, lest Rome fall.”

– Marcus Tullius Cicero, 55 B.C.

What rhymes with Cicero? Not much. But if, as the saying goes, history itself rhymes, today’s welfare-warfare state has plenty worth holding up against the soft, fading light of that long-fallen empire: Corrupt politicians…predatory bankers…ruinous military misadventures to faraway lands…a gluttonous citizenry feeding at the trough of public monies and, of course, the insidious, ridiculous illusion that any single participant could have made one jot of difference to the great charade as it unfolded before their very eyes.

The charade to which we refer is the very same phenomenon the Roman poet Juvenal referred to as “bread and circuses” in the tenth of his Satires. It is the superficial appeasement of the masses by the political class who, seeking to prevent massive uprising and revolt against their rule, doll out meager alms in the form of mass distraction. The success of this grand dupe depends on, and excels because of, the widespread assumption that the political class is working for the benefit of their employers, the taxpaying populace, rather than, as is the stark, impassionate reality, their merely effecting to do so. Nothing, not a sunrise at midnight, not a man immortal, could be further from reality. Far from serving their masters on bended knee, elected officials behave more like dogs than public servants, entirely dependent on their keepers for food and forever assuming they will be around with a doggy bag to clean up their mess.

“Government,” as Frédéric Bastiat, writing some 1,800 years after Juvenal, expressed it, “is the great fiction through which everybody endeavors to live at the expense of everybody else.”

And so we come to better understand our own predicament today. When a lending institution lends too much and is repaid too little, the poisoned olive branch of government extends. When a profligate spender – with sufficient influence in the public sphere, mind you – falters under the weight of its own obligations, the state appears with a bottomless cup. Multi-trillion dollar bailouts, and more still to come. Schemes, scams and stratagems that, we are told, are all for our own good. From the floor of Congress to the evening news, a trumpet calls all “men and women of reason” to fight against “total collapse of our system”…to lead us back from the “edge of the abyss.”

Bread and circuses…

What then, when the Treasury is spent and the Fed’s arsenal deployed? When debts sold off to once willing foreigners inevitably come due? When the children to whom this legacy of larceny is left realize the hand they were dealt and demand, with clenched fists of their own, a fair and equal opportunity, the chance to ruin or succeed based on their own generation’s cowardice or courage? What comes after the determined destruction of the nation’s currency…again?

Nowhere is Bastiat’s observation better reflected than when the looking glass is held up to Social Security. The ruse, sold to American’s under the same old banners, fraught with “safety net” misnomers and “falling through the cracks” platitudes, is up. On September 30, this Thursday, six years ahead of schedule, the “fund” officially goes into the red. What will they tell us next? What price must we pay in order that the grand charade is allowed to go on? What story must we now swallow?

Don’t fret, Fellow Reckoner. They’ll surely think of something. And that’s precisely the problem.

Joel Bowman
for The Daily Reckoning

A Historical Perspective of the Social Security Nightmare originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
A Historical Perspective of the Social Security Nightmare




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Be Careful Chasing Gold and Silver, Overbought Condition Could Lead to Correction

September 27th, 2010

At the end of July I published a series of articles calling an important buypoint in precious metals.  To see my archived article from that point click here http://goldstocktrades.com/blog/2010/07/21/trading-method-signals-buy-gold/.

In these articles I mentioned a target of $21 by the end of the year.  Right now silver has reached that target after making an explosive move higher.  Silver has made a 15% gain in 5 weeks.  I have found having targets and taking profits at overbought conditions is crucial in a trading strategy.  As a trader it is of primary importance to understand long term trends and in a bull market to add to positions when they are on sale and take profits when it is receiving a premium.  Using oscillators to determine warning signals to buy and sell are extremely helpful but needs to be used carefully.  Breakouts could lead a momentum indicator to stay at an extreme ratio for an extended period of time which is the case for silver and gold at the moment.

Using momentum indicators forces me to prepare for a correction or prevents me from buying into a frenzy when a stock is overextended. These indicators help me to trade against the market herd, and become contrary at extreme buying frenzies.  Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them.   Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high reward and low risk when structured correctly.

The best way to play this market is to buy gold and silver when it hits the support trend line and is oversold, and take profits as it approaches the rising resistance line.

Silver’s move has been parabolic and is very overbought.  A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pullback to support.  It has had 5 up weeks with a 15% gain from my buy signal at $18.30.  It has also been overbought for an extended period so to sustain this rise without a correction is highly unlikely.  To enter at this point would not be prudent according to my strategies.

Instead there are some miners who are coming out with great news that are oversold at the moment.  I believe these miners will outperform even if bullion corrects.  Mergers and acquisitions are increasing with the recent purchases of Andean Resources by Goldcorp outbidding Eldorado Gold, Kinross buying Redback, Continental Minerals being bought out by Jinchuan Group .  A weak dollar combined with emerging market growth will cause more interest from overseas to buy natural resources.  Base metals have been performing very strong.  There have been some recent breakouts in some uranium and molybdenum plays which I will be telling my premium readers about in the next couple of days.  Most of the gold and silver miners I follow have resources with low cash costs and close to infrastructure.  A lower gold and silver price will not impact these miners as much as other miners with higher cost projects.

To find out about which specific stocks I am researching go to my website at http://goldstocktrades.com.

Disclosure: I own gold and silver bullion and mining stocks.

Read more here:
Be Careful Chasing Gold and Silver, Overbought Condition Could Lead to Correction

Commodities

When Zombies Buy Gold

September 27th, 2010

Last week it looked like the feds’ efforts to reflate the US economy might be working. Gold was hitting one new high after another. Stocks were going up too.

The Dow rose nearly 200 points on Friday. Gold hit $1,300…but couldn’t close at that level. When trading came to an end gold was $2 short of the $1,300 mark.

What’s up? It’s hard to know. If gold is going up, analysts reasoned, it must mean something. What? The obvious explanation is that inflation is coming.

So the advisors told their clients to buy gold. The economy must be improving they said. The recession ended more than a year ago. The recovery hasn’t been as strong as anyone wanted. But there must be a recovery underway…and it must mean that inflation and gold will go up.

We’re sitting in a JetBlue airplane as we write…heading back up to Baltimore. Each seat has a TV screen on the back of it. A few years ago, you could get away from TV by getting on an airplane. Now, there it is right in front to you…

…which is all part of the creeping zombification of the US. Music plays all the time. It’s in cars. It’s in shopping malls. Some people even listen to it when they work. It’s like prison…or the Orwellian future…where noise is blared out 24 hours a day, so you never have a chance to think.

And now there are all the Blackberries, iPhones, iPads…to say nothing of regular cellphones and portable computers.

And then, there’s TV. You go to a bar. In addition to the music, there’s often a TV screen.

With all these sources of distraction people don’t have any time to think. Who has time to wonder how the dollar has any value at all? Who worries that those pieces of paper could go the way of all trash…to the dump? Who thinks about it at all? Not many people…

Instead, most people go through the day like zombies – watching TV…listening to someone else’s music…surfing the Internet…chatting…schmoozing…distracting themselves…

The passengers on the plane act like zombies…watching other zombies on TV…listening to music…reading airport novels….

Then, on the screen in front of us, there’s a fellow selling…gold! He’s the second one we’ve seen. “Should you own gold,” is the caption on the screen. A man named Scott Carter is advising customers to buy the yellow metal. Apparently, his company has been in the business for 50 years…

Hmmm… This is something new. The last time we saw gold on TV was an ad for a fellow who was BUYING gold. “Got gold? You can get CASH” was last year’s ad. The advertiser told viewers that they should take advantage of high gold prices to get rid of their unwanted jewelry…exchanging it for cold, hard cash.

Only the cash wasn’t all that hard, after all. That was about a year ago. And today, the cash is worth about 20% less than the gold.

But who cares? We’re talking zombies here. Who cares what happens to them?

When the zombies start buying gold, though, the bull market enters its last stage. Ordinary people do not own gold now. They do not understand that the financial system is in jeopardy. And they cannot imagine that the dollar is not a safe place for their wealth.

As for inflation, they’re for it. They have mortgages to pay. And for many of them, those mortgages are higher than the value of their houses. They’d like to see their debts reduced, by inflation.

They’d like to see their assets lifted up by inflation too. And their earnings.

Okay… Inflationary increases are not “real”. The real value of the assets doesn’t increase, just because nominal prices go up. But the zombies don’t know that.

Bill Bonner
for The Daily Reckoning

When Zombies Buy Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
When Zombies Buy Gold




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Durable Goods Fall, But Business Spending is Up

September 27th, 2010

As Chuck informed all of you on Friday, I have got the conn on the Pfennig today and tomorrow as he was called down to Jacksonville for a few meetings. As always, Chuck left me with a few tidbits to get me going, so I’ll kick off today’s missive with Chuck’s view of the markets:

On Friday, the US data printed much softer than expected, and for the first time in a long time, bad data results did not mean a dollar rally! Instead, fundamentals would have the dollar selling off from a Durable Goods Orders print that fell 1.3%, and New Home Sales that were flat… And that’s what happened!

The euro (EUR) added to its gains moving well into the 1.34 handle. And the Aussie dollar (AUD) is now within’ spittin distance of 96-cents!

Speaking of Aussie… The Australian government announced on Friday that their deficit had narrowed, and that they were sticking to their forecasts for a return to budget surpluses in 2011… Ahhh… How sweet that would be!

A narrowing budget deficit – which by the way is only $54.8 billion, a HUGE positive yield differential, and a not collapsing China – has the Aussie dollar on the rally tracks, and now there’s another broker (BNP) that’s calling for the Aussie dollar to reach parity to the US dollar in 2011… Again, take these broker calls with a grain of salt… But you do now have two large brokers that say their research teams believe the Aussie dollar will hit parity in 2011…

And gold and silver were not able to push past the levels they traded at on Friday morning at the time the Pfennig was sent out. But don’t despair… And while you can’t say that anything ever moves in one direction, I truly believe gold and silver to be positioned to move higher… Of course, that doesn’t rule out that they could very well move lower first!

Thanks to Chuck for getting us kicked off this morning. As he pointed out, the US Durable Goods orders were softer than expected, but in direct contradiction to what would be expected with the weaker data, the US stock market moved higher and the dollar slipped lower. So what happened? Let me explain. The Durable Goods orders are broken up into two different series: one with transportation and one without. This is done to smooth the volatility, which large orders in the aerospace industry bring to the overall number. In July, Boeing booked 130 orders for planes, but only booked 10 orders in August. This helped contribute to a 10% drop in transportation orders and moved the overall index down 1.3%, but the number ex-transportation actually climbed 2% in the same period. This was double what economists expected, and had the stock jockeys dancing in the streets.

The jump was mainly due to increased spending for US business equipment including computers and phone gear. Spending by businesses to replace outdated equipment could keep the US economic recovery going in spite of the reluctance of the US consumer. This positive spin on the durable goods number took the stock market higher and the dollar lower, which is more along the lines of what we have come to expect. As long as the US economy can limp along, the global recovery will continue and the dollar will get sold on poor fundamentals. The only hope for those predicting another dollar rally is poor economic data, which would generate another round of “safe haven” buying for the greenback.

As confidence in the global economic recovery rises, investors are turning back to the carry trade. But the funding currency is no longer the Japanese yen (JPY) or Swiss franc (CHF), it is the US dollar. Last week’s announcement that the FOMC would keep rates low for an “extended” period has convinced investors to borrow dollars and sell them to invest the proceeds into higher yielding currencies. The recent strength of the Swiss franc and Japanese yen have caused investors to turn away from them for funding these leveraged trades. Positioning data point to growing US dollar short positions, with investors moving funds into the high yielding commodity currencies. The carry trade can have a huge influence on the currency markets, and now that the US dollar is the funding currency of choice, further dollar weakness is inevitable.

The return of the carry trade helped push the Australian dollar over 0.96 and near a two-year high versus the US dollar. The Aussie has been the second best performer this year and as Chuck pointed out earlier, many are now predicting it will hit parity before the end of the year. Economic fundamentals certainly seem to support a $1 Aussie! The RBA will make a rate announcement next week, and many are now looking for a quarter point increase. A move higher by Aussie’s central bank could be just the thing the Aussie dollar needs to push through parity with the US dollar.

The euro has held stable over the weekend in spite of warnings about the government’s bailout of Anglo Irish Bank. The announcement later this week regarding the predicted costs of the bailout has focused the currency market’s attention back on the state of the European Union. Der Spiegel sent a shot across the bow of the euro when it reported that the European Commission lacks confidence in the viability of German regional lenders. We have warned readers that the European debt problem isn’t over yet, and this story has refocused investors’ attention onto the negative structural issues in Europe.

But the euro has shook off all of these worries and climbed all the way to $1.3506 this morning. This is the first time the euro has moved above $1.35 handle since April. I read several research reports over the weekend that are warning investors of this quick climb by the euro. Chuck pointed out last week that the euro gapped from $1.31 to $1.34 in just two days, so there certainly seems to be the basis for a short-term pull back to “fill these gaps.”

We are also seeing a bit of verbal intervention by some of the banking leaders in Europe. Europe’s largest economy, Germany, is dependent on exports, and the recent euro strength could threaten the export-led recovery. European leaders have begun to try and jawbone the markets, letting them know there are still some questions regarding the health of their financial system. These recent warnings definitely smack of a bit of verbal intervention in order to try and slow the pace of the euro appreciation.

A quick look at the economic calendar for the rest of the week tells me we should have a quiet start to the week. Today we will see some regional fed reports, and tomorrow we will get another look at the US housing market with the release of the S&P/CaseShiller numbers. We will also see September’s consumer confidence numbers, which are predicted to have slipped a bit. Wednesday is a “no data” day, but Thursday and Friday will make up for it as they are chock full of economic reports including GDP, personal income and spending, construction spending, vehicle sales, ISM Manufacturing index, Core PCE, and the weekly jobs numbers. Should make for an exciting end to the week.

To recap… US durable goods data on Friday were down, but after transportation orders were removed, the data showed that business spending actually increased. The good vibes in the US markets caused investors to take on more risk, selling the US dollar as the funding currency of the carry trade. The Australian dollar continued to rally toward parity, and the euro held stable in spite of bank warnings.

Chris Gaffney
for The Daily Reckoning

Durable Goods Fall, But Business Spending is Up originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Durable Goods Fall, But Business Spending is Up




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Durable Goods Fall, But Business Spending is Up

September 27th, 2010

As Chuck informed all of you on Friday, I have got the conn on the Pfennig today and tomorrow as he was called down to Jacksonville for a few meetings. As always, Chuck left me with a few tidbits to get me going, so I’ll kick off today’s missive with Chuck’s view of the markets:

On Friday, the US data printed much softer than expected, and for the first time in a long time, bad data results did not mean a dollar rally! Instead, fundamentals would have the dollar selling off from a Durable Goods Orders print that fell 1.3%, and New Home Sales that were flat… And that’s what happened!

The euro (EUR) added to its gains moving well into the 1.34 handle. And the Aussie dollar (AUD) is now within’ spittin distance of 96-cents!

Speaking of Aussie… The Australian government announced on Friday that their deficit had narrowed, and that they were sticking to their forecasts for a return to budget surpluses in 2011… Ahhh… How sweet that would be!

A narrowing budget deficit – which by the way is only $54.8 billion, a HUGE positive yield differential, and a not collapsing China – has the Aussie dollar on the rally tracks, and now there’s another broker (BNP) that’s calling for the Aussie dollar to reach parity to the US dollar in 2011… Again, take these broker calls with a grain of salt… But you do now have two large brokers that say their research teams believe the Aussie dollar will hit parity in 2011…

And gold and silver were not able to push past the levels they traded at on Friday morning at the time the Pfennig was sent out. But don’t despair… And while you can’t say that anything ever moves in one direction, I truly believe gold and silver to be positioned to move higher… Of course, that doesn’t rule out that they could very well move lower first!

Thanks to Chuck for getting us kicked off this morning. As he pointed out, the US Durable Goods orders were softer than expected, but in direct contradiction to what would be expected with the weaker data, the US stock market moved higher and the dollar slipped lower. So what happened? Let me explain. The Durable Goods orders are broken up into two different series: one with transportation and one without. This is done to smooth the volatility, which large orders in the aerospace industry bring to the overall number. In July, Boeing booked 130 orders for planes, but only booked 10 orders in August. This helped contribute to a 10% drop in transportation orders and moved the overall index down 1.3%, but the number ex-transportation actually climbed 2% in the same period. This was double what economists expected, and had the stock jockeys dancing in the streets.

The jump was mainly due to increased spending for US business equipment including computers and phone gear. Spending by businesses to replace outdated equipment could keep the US economic recovery going in spite of the reluctance of the US consumer. This positive spin on the durable goods number took the stock market higher and the dollar lower, which is more along the lines of what we have come to expect. As long as the US economy can limp along, the global recovery will continue and the dollar will get sold on poor fundamentals. The only hope for those predicting another dollar rally is poor economic data, which would generate another round of “safe haven” buying for the greenback.

As confidence in the global economic recovery rises, investors are turning back to the carry trade. But the funding currency is no longer the Japanese yen (JPY) or Swiss franc (CHF), it is the US dollar. Last week’s announcement that the FOMC would keep rates low for an “extended” period has convinced investors to borrow dollars and sell them to invest the proceeds into higher yielding currencies. The recent strength of the Swiss franc and Japanese yen have caused investors to turn away from them for funding these leveraged trades. Positioning data point to growing US dollar short positions, with investors moving funds into the high yielding commodity currencies. The carry trade can have a huge influence on the currency markets, and now that the US dollar is the funding currency of choice, further dollar weakness is inevitable.

The return of the carry trade helped push the Australian dollar over 0.96 and near a two-year high versus the US dollar. The Aussie has been the second best performer this year and as Chuck pointed out earlier, many are now predicting it will hit parity before the end of the year. Economic fundamentals certainly seem to support a $1 Aussie! The RBA will make a rate announcement next week, and many are now looking for a quarter point increase. A move higher by Aussie’s central bank could be just the thing the Aussie dollar needs to push through parity with the US dollar.

The euro has held stable over the weekend in spite of warnings about the government’s bailout of Anglo Irish Bank. The announcement later this week regarding the predicted costs of the bailout has focused the currency market’s attention back on the state of the European Union. Der Spiegel sent a shot across the bow of the euro when it reported that the European Commission lacks confidence in the viability of German regional lenders. We have warned readers that the European debt problem isn’t over yet, and this story has refocused investors’ attention onto the negative structural issues in Europe.

But the euro has shook off all of these worries and climbed all the way to $1.3506 this morning. This is the first time the euro has moved above $1.35 handle since April. I read several research reports over the weekend that are warning investors of this quick climb by the euro. Chuck pointed out last week that the euro gapped from $1.31 to $1.34 in just two days, so there certainly seems to be the basis for a short-term pull back to “fill these gaps.”

We are also seeing a bit of verbal intervention by some of the banking leaders in Europe. Europe’s largest economy, Germany, is dependent on exports, and the recent euro strength could threaten the export-led recovery. European leaders have begun to try and jawbone the markets, letting them know there are still some questions regarding the health of their financial system. These recent warnings definitely smack of a bit of verbal intervention in order to try and slow the pace of the euro appreciation.

A quick look at the economic calendar for the rest of the week tells me we should have a quiet start to the week. Today we will see some regional fed reports, and tomorrow we will get another look at the US housing market with the release of the S&P/CaseShiller numbers. We will also see September’s consumer confidence numbers, which are predicted to have slipped a bit. Wednesday is a “no data” day, but Thursday and Friday will make up for it as they are chock full of economic reports including GDP, personal income and spending, construction spending, vehicle sales, ISM Manufacturing index, Core PCE, and the weekly jobs numbers. Should make for an exciting end to the week.

To recap… US durable goods data on Friday were down, but after transportation orders were removed, the data showed that business spending actually increased. The good vibes in the US markets caused investors to take on more risk, selling the US dollar as the funding currency of the carry trade. The Australian dollar continued to rally toward parity, and the euro held stable in spite of bank warnings.

Chris Gaffney
for The Daily Reckoning

Durable Goods Fall, But Business Spending is Up originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Durable Goods Fall, But Business Spending is Up




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Movie Review of ‘Wall Street: Money Never Sleeps’

September 27th, 2010

“Wall Street: Money Never Sleeps” (2010). Oliver Stone, director. 20th Century Fox, 133 minutes.

In some ways “Wall Street: Money Never Sleeps” (2010) feels more like a remake than a sequel of “Wall Street” (1987), the iconic film that focused on the inner workings of the financial markets and the scandals involving junk bonds and insider trading of the 1980s. The film earned Michael Douglas an Oscar for his portrayal of Gordon Gekko, the ruthless insider who takes down several companies before he is finally caught. His character’s name has become so tied to Wall Street shenanigans that business schools reference him in their courses. Hedge fund manager Anthony Scaramucci called his investment memoir, “Goodbye Gordon Gekko” (2010), knowing that no one would have any trouble understanding the reference in the title. Similarly, libertarian reporter John Stossel borrowed Gekko’s most famous line, “Greed…is good” for the title of one of his best known TV specials (1998).

The new film begins with Gekko being released from prison, so we know the time frame is 15 years after the events of the first film. But it all seems so familiar, as though we have been here before. It opens with the same sweeping panorama of the New York skyline, this time with the Twin Towers conspicuously absent. Once again the story focuses on a young, ambitious investment broker trying to break into the big time and keep up with the pros, but instead of Charlie Sheen as Bud Fox, the new kid on the block is Jake Moore (Shia LaBeouf). Once again we watch the ticker tape of the young broker’s first big trade falling steadily until the thud of the closing bell at the end of the day. Once again the wise fatherly stockbroker is named Lou (perhaps because Oliver Stone’ own father, Louis, was a stockbroker). Once again the young broker is trying to get funding for a company he believes in. We even see the same real estate broker (Sylvia Miles) that Bud Fox used in the original “Wall Street.” And yes, Charlie Sheen does make a cameo appearance, with a babe on each arm, channeling his alter ego from the TV show “Two and a Half Men” more than the sadder but wiser Bud from the 1987 movie.

The story line is similar, too. Gekko wants revenge against a rival investor, and he uses the cocky young broker to help him get it done. The details are different, but the story is essentially the same. While “Wall Street” focused on the junk bond/insider trading scandals of the mid-1980s, “Money Never Sleeps” focuses on the economic meltdown of 2008. New York hedge fund trader and wunderkind Anthony Scaramucci acted as a technical advisor on the film, and the result is technically accurate, though sometimes to a fault. As the film moves from boardroom to boardroom and talking head to talking head, it is often difficult to understand and process their words before the next dialogue-heavy scene appears. At 2 hours and 13 minutes, the film is long, and the editing is a little too tight. We keep stumbling into conversations that have already started, between people who already know what is going on.

Often those conversations and talking heads are presented in split-screen projections, along with a graph or two, so while we’re still listening to one speaker, the next one has already started. It’s almost as though the editors knew they couldn’t make the movie any longer, but they couldn’t bear to throw anything out, so they presented it all at the same time. Some of the computer graphics are pretty cool, like the one that outlines London’s Tower Bridge in the background as it demonstrates a company’s rise and fall. I suspect that ten years from now those graphics will look dated and hokey, however.

I happened to attend a private screening in Manhattan with a theater full of investment brokers and financial experts. They all loved the film, even those who said they seldom go to movies. I’m sure that for them, the dialogue was as simple to follow as a primer. But at one point I just decided to stop trying to understand all the techno-jargon and just focus on the storyline: Something bad is happening. And those two attractive young lovers are caught up in it. That worked for me.

The two young lovers are Jake and Gekko’s daughter, Winnie (Carey Mulligan), who hasn’t seen or spoken to her father in several years. Jake wants to bring the two of them together again, ostensibly “to help her heal,” but really to get closer to his idol, Gordon Gekko, who, despite being a jailbird, is still packing in the crowds on the lecture circuit, where he is promoting his new book, “Is Greed Good?”

Once again, the film shines when Michael Douglas is on the screen. Yes, he is older, but he still has that great self-confident smile, that swagger. He’s still talking about greed, and he’s still just as flippant. He quips, “Once greed was good.  Now it’s legal…” and everyone laughs cynically, as though greed was ever illegal. I wanted to counter, “Theft is illegal. Fraud is illegal. Greed is human nature.”

Gekko continues, “Greed makes the bartender take out three mortgages he can’t afford … Greed makes parents buy a $200,000 house and borrow $250,000 against it to go shopping at the mall … Greed got greedier with a little envy mixed in … They took a buck and shot it full of steroids and called it leverage.” He’s right about those things happening. Many people who are underwater on their mortgages got there today by borrowing the equity out of their homes and using it to pay off credit cards, invest in businesses, or pay their children’s college tuition. Or, yes, go to the mall. Others got there because they bought at the top of the market, expecting the bubble to continue rising. But they couldn’t have done it without banks giving them outrageously unsubstantiated loans. So why are we bailing them out? Greed was always legal. It just wasn’t healthy.

And maybe the economy needed to get sick enough for us to learn that. Today people are using debit cards more and credit cards less. They’ve figured out that airline miles and rewards points aren’t really free if they come with 18.6% interest rates. It has required some belt tightening, but that’s a good thing in times like these. We’ve learned, as Gekko says, that “money is a jealous lover. If you don’t watch her carefully, in the morning she’ll be gone,” and that “speculation is a bankrupt business model.” As private citizens we are becoming more frugal and setting our own houses in order. Many businesses are building up their cash reserves instead of borrowing money, so they will have more to spend on future investments. In this economic climate, it’s in their best interest to do so. That’s called capitalism. And it works. Greed is good, but self interest is better.

Jo Ann Skousen

for The Daily Reckoning

Movie Review of ‘Wall Street: Money Never Sleeps’ originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Movie Review of ‘Wall Street: Money Never Sleeps’




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

Movie Review of ‘Wall Street: Money Never Sleeps’

September 27th, 2010

“Wall Street: Money Never Sleeps” (2010). Oliver Stone, director. 20th Century Fox, 133 minutes.

In some ways “Wall Street: Money Never Sleeps” (2010) feels more like a remake than a sequel of “Wall Street” (1987), the iconic film that focused on the inner workings of the financial markets and the scandals involving junk bonds and insider trading of the 1980s. The film earned Michael Douglas an Oscar for his portrayal of Gordon Gekko, the ruthless insider who takes down several companies before he is finally caught. His character’s name has become so tied to Wall Street shenanigans that business schools reference him in their courses. Hedge fund manager Anthony Scaramucci called his investment memoir, “Goodbye Gordon Gekko” (2010), knowing that no one would have any trouble understanding the reference in the title. Similarly, libertarian reporter John Stossel borrowed Gekko’s most famous line, “Greed…is good” for the title of one of his best known TV specials (1998).

The new film begins with Gekko being released from prison, so we know the time frame is 15 years after the events of the first film. But it all seems so familiar, as though we have been here before. It opens with the same sweeping panorama of the New York skyline, this time with the Twin Towers conspicuously absent. Once again the story focuses on a young, ambitious investment broker trying to break into the big time and keep up with the pros, but instead of Charlie Sheen as Bud Fox, the new kid on the block is Jake Moore (Shia LaBeouf). Once again we watch the ticker tape of the young broker’s first big trade falling steadily until the thud of the closing bell at the end of the day. Once again the wise fatherly stockbroker is named Lou (perhaps because Oliver Stone’ own father, Louis, was a stockbroker). Once again the young broker is trying to get funding for a company he believes in. We even see the same real estate broker (Sylvia Miles) that Bud Fox used in the original “Wall Street.” And yes, Charlie Sheen does make a cameo appearance, with a babe on each arm, channeling his alter ego from the TV show “Two and a Half Men” more than the sadder but wiser Bud from the 1987 movie.

The story line is similar, too. Gekko wants revenge against a rival investor, and he uses the cocky young broker to help him get it done. The details are different, but the story is essentially the same. While “Wall Street” focused on the junk bond/insider trading scandals of the mid-1980s, “Money Never Sleeps” focuses on the economic meltdown of 2008. New York hedge fund trader and wunderkind Anthony Scaramucci acted as a technical advisor on the film, and the result is technically accurate, though sometimes to a fault. As the film moves from boardroom to boardroom and talking head to talking head, it is often difficult to understand and process their words before the next dialogue-heavy scene appears. At 2 hours and 13 minutes, the film is long, and the editing is a little too tight. We keep stumbling into conversations that have already started, between people who already know what is going on.

Often those conversations and talking heads are presented in split-screen projections, along with a graph or two, so while we’re still listening to one speaker, the next one has already started. It’s almost as though the editors knew they couldn’t make the movie any longer, but they couldn’t bear to throw anything out, so they presented it all at the same time. Some of the computer graphics are pretty cool, like the one that outlines London’s Tower Bridge in the background as it demonstrates a company’s rise and fall. I suspect that ten years from now those graphics will look dated and hokey, however.

I happened to attend a private screening in Manhattan with a theater full of investment brokers and financial experts. They all loved the film, even those who said they seldom go to movies. I’m sure that for them, the dialogue was as simple to follow as a primer. But at one point I just decided to stop trying to understand all the techno-jargon and just focus on the storyline: Something bad is happening. And those two attractive young lovers are caught up in it. That worked for me.

The two young lovers are Jake and Gekko’s daughter, Winnie (Carey Mulligan), who hasn’t seen or spoken to her father in several years. Jake wants to bring the two of them together again, ostensibly “to help her heal,” but really to get closer to his idol, Gordon Gekko, who, despite being a jailbird, is still packing in the crowds on the lecture circuit, where he is promoting his new book, “Is Greed Good?”

Once again, the film shines when Michael Douglas is on the screen. Yes, he is older, but he still has that great self-confident smile, that swagger. He’s still talking about greed, and he’s still just as flippant. He quips, “Once greed was good.  Now it’s legal…” and everyone laughs cynically, as though greed was ever illegal. I wanted to counter, “Theft is illegal. Fraud is illegal. Greed is human nature.”

Gekko continues, “Greed makes the bartender take out three mortgages he can’t afford … Greed makes parents buy a $200,000 house and borrow $250,000 against it to go shopping at the mall … Greed got greedier with a little envy mixed in … They took a buck and shot it full of steroids and called it leverage.” He’s right about those things happening. Many people who are underwater on their mortgages got there today by borrowing the equity out of their homes and using it to pay off credit cards, invest in businesses, or pay their children’s college tuition. Or, yes, go to the mall. Others got there because they bought at the top of the market, expecting the bubble to continue rising. But they couldn’t have done it without banks giving them outrageously unsubstantiated loans. So why are we bailing them out? Greed was always legal. It just wasn’t healthy.

And maybe the economy needed to get sick enough for us to learn that. Today people are using debit cards more and credit cards less. They’ve figured out that airline miles and rewards points aren’t really free if they come with 18.6% interest rates. It has required some belt tightening, but that’s a good thing in times like these. We’ve learned, as Gekko says, that “money is a jealous lover. If you don’t watch her carefully, in the morning she’ll be gone,” and that “speculation is a bankrupt business model.” As private citizens we are becoming more frugal and setting our own houses in order. Many businesses are building up their cash reserves instead of borrowing money, so they will have more to spend on future investments. In this economic climate, it’s in their best interest to do so. That’s called capitalism. And it works. Greed is good, but self interest is better.

Jo Ann Skousen

for The Daily Reckoning

Movie Review of ‘Wall Street: Money Never Sleeps’ originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Movie Review of ‘Wall Street: Money Never Sleeps’




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

September 27th, 2010

I have to say the current stock market breakout has been one of the weaker technical (chart) breakouts in terms of volume, momentum, and internals.

Let’s take a look at the current picture of Daily Chart market internals on the Dow Jones and NASDAQ Indexes year-to-date.

Let’s start first with the Dow-30 Index:

Let’s break it down by indicator.

First, we have the NYSE McClellan Oscillator (a smoothed measure of Advancers minus Decliners, also known as “Breadth”) and then we have the actual “Breadth” chart underneath.

Because the daily AD-Line (Advancers minus Decliners) is volatile (it’s light gray), I smoothed out the raw data with a four-day simple moving average which we’ll use as our indicator – it’s dark blue.

Ok so what do they say?

The Dow broke above the key resistance at 10,700, held above it, then ‘re-confirmed’ the breakout on Friday.  During the breakout, Volume, Momentum, and Breadth all declined.

You can see volume if you look closely above, but the glaring picture is clear when seeing the negative divergence – shown with red arrows – in both the McClellan Oscillator and Breadth.

First, the McClellan Oscillator registered a LOWER high in the indicator currently than it did at its chart peak in July.  Notice price is higher than its respective peak in July – that’s a longer-term (external) divergence.

We also have an immediate negative divergence – or an internal divergence – as Friday’s oscillator high was not as high as that not just on Monday’s breakout, but is not as high as the peak in early September when the Dow pushed to 10,500.  Strange.

The smoothed average of breadth shows the same, only the recent peak was earlier on the break above 10,300.  Really strange.

The picture is the same on the NASDAQ using NASDAQ-specific internals:

The picture is roughly identical – down to the internal and external divergences.

Notice that Breadth (blue) also is not making a higher indicator high than the peak reached in July or the chart indicator peak in June.  Very strange.

So we’re left with the conclusion that market internals do NOT support this recent breakout.

While that’s a fact, it does not logically follow that price is required to fall down just because internals are not supporting this rally.

It’s certainly a caution signal for bulls – but the recent ‘rally at any cost’ activity is also a warning for bears.

Unless you’re an intraday trader who can trade both directions without bias, it’s probably best to wait for a corresponding breakdown signal in price before trying to short this ‘breakout’ market.

And if you’re a swing trader, this is not the typical breakout pattern situation that would compel you to jump off the sidelines aggressively and go long – if you’re not already in after the immediate break.

In other words, we may have had a price break, but if we look under the hood at the strength of the breakout, it doesn’t look like a strong one.

Dow Price Resistance is nominally 10,900, while NASDAQ resistance is 2,425 (and S&P at 1,170) – all of which come from the price swing highs in May.

Watch the market extremely close and do not bias yourself too greatly in either direction – as in, the market MUST continue its rally because it broke out… or the market MUST decline because there are divergences.

Take a moment to read my prior updates:

Measuring Current S&P 500 Market Internals in a Strong Rally

SPX Breakout – Is this Really It?  Tips on Trading Breakouts

and

SPX Levels to Watch and Realities You Must Know

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

Uncategorized

Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

September 27th, 2010

I have to say the current stock market breakout has been one of the weaker technical (chart) breakouts in terms of volume, momentum, and internals.

Let’s take a look at the current picture of Daily Chart market internals on the Dow Jones and NASDAQ Indexes year-to-date.

Let’s start first with the Dow-30 Index:

Let’s break it down by indicator.

First, we have the NYSE McClellan Oscillator (a smoothed measure of Advancers minus Decliners, also known as “Breadth”) and then we have the actual “Breadth” chart underneath.

Because the daily AD-Line (Advancers minus Decliners) is volatile (it’s light gray), I smoothed out the raw data with a four-day simple moving average which we’ll use as our indicator – it’s dark blue.

Ok so what do they say?

The Dow broke above the key resistance at 10,700, held above it, then ‘re-confirmed’ the breakout on Friday.  During the breakout, Volume, Momentum, and Breadth all declined.

You can see volume if you look closely above, but the glaring picture is clear when seeing the negative divergence – shown with red arrows – in both the McClellan Oscillator and Breadth.

First, the McClellan Oscillator registered a LOWER high in the indicator currently than it did at its chart peak in July.  Notice price is higher than its respective peak in July – that’s a longer-term (external) divergence.

We also have an immediate negative divergence – or an internal divergence – as Friday’s oscillator high was not as high as that not just on Monday’s breakout, but is not as high as the peak in early September when the Dow pushed to 10,500.  Strange.

The smoothed average of breadth shows the same, only the recent peak was earlier on the break above 10,300.  Really strange.

The picture is the same on the NASDAQ using NASDAQ-specific internals:

The picture is roughly identical – down to the internal and external divergences.

Notice that Breadth (blue) also is not making a higher indicator high than the peak reached in July or the chart indicator peak in June.  Very strange.

So we’re left with the conclusion that market internals do NOT support this recent breakout.

While that’s a fact, it does not logically follow that price is required to fall down just because internals are not supporting this rally.

It’s certainly a caution signal for bulls – but the recent ‘rally at any cost’ activity is also a warning for bears.

Unless you’re an intraday trader who can trade both directions without bias, it’s probably best to wait for a corresponding breakdown signal in price before trying to short this ‘breakout’ market.

And if you’re a swing trader, this is not the typical breakout pattern situation that would compel you to jump off the sidelines aggressively and go long – if you’re not already in after the immediate break.

In other words, we may have had a price break, but if we look under the hood at the strength of the breakout, it doesn’t look like a strong one.

Dow Price Resistance is nominally 10,900, while NASDAQ resistance is 2,425 (and S&P at 1,170) – all of which come from the price swing highs in May.

Watch the market extremely close and do not bias yourself too greatly in either direction – as in, the market MUST continue its rally because it broke out… or the market MUST decline because there are divergences.

Take a moment to read my prior updates:

Measuring Current S&P 500 Market Internals in a Strong Rally

SPX Breakout – Is this Really It?  Tips on Trading Breakouts

and

SPX Levels to Watch and Realities You Must Know

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

Uncategorized

3 Government Warnings of Financial Fiascos!

September 27th, 2010

Martin D. Weiss, Ph.D.

For my family, fiscal balance is not — and never was — a partisan issue.

My father, for example, had little interest in politics but was passionate about savings, hard work and avoiding waste.

When I was a toddler, he used to sit me on his knee, teaching me and my older brother that money is not a toy or a game; it’s to be valued, kept in a piggy bank, and treated with due respect.

And later, by the time I was a teenager, that same lesson had evolved into an equally serious discussion about sound banking, avoiding excess debt and balancing the government’s books.

Also at the time, Dad was fighting the greatest budget battle of the 20th century. He had just founded our nonpartisan Sound Dollar Committee. And with the blessing of friends like Democrat Bernard Baruch and Republican Herbert Hoover, he was busily rallying grassroots support for President Eisenhower’s extremely unpopular proposal to balance the budget of fiscal year 1960.

Dad taught us that when any country, family, or corporation lets its debts grow beyond reason, they follow one of three paths. —

  • They go bankrupt …
  • They cheat the system, or …
  • They do the right thing by tightening their belt and trying to work even harder.

Most of the time, Dad explained, most people and institutions do the right thing.

Some get the idea right away. Some take longer to figure it out. But sooner or later, voluntarily or involuntarily, they realize it’s the only real choice.

Households, start shunning credit, saving more, and spending less.

Banks that don’t go under move swiftly to cut back lending and build up cash reserves.

Politicians, he’d say with a laugh, are not nearly as smart. But even they eventually get it.

The tipping point, he estimated, comes when federal deficits grow beyond around 5 percent of GDP. Then, beyond that threshold, there are only three conceivable scenarios:

Scenario A — Bankruptcy. The government defaults on its debts and is promptly blacklisted by lenders, plunging the nation into extreme poverty and political upheaval.

Scenario B — The Cheating and Stealth. The government prints paper money to fund its debts, trashing its currency and leading to a calamity similar to the default scenario.

Scenario CAusterity. The government makes swift spending cuts, shrinks in size, and encourages the entire society to make similar sacrifices.

martinandirving 3 Government Warnings of Financial Fiascos!

Given the nature of politics, he admitted the austerity scenario might sound unlikely.

But given the hard realities, Dad insisted it was actually the ONLY viable option for the United States.

Why After Seven 50 Years of Wild Spending, Austerity Is Now Inevitable

Dad won the battle of the budget in 1960. It was balanced, and the country suffered a moderate recession as a result. But throughout the half century since, even in years when the federal government supposedly ran a “surplus,” government spending has continued to grow by leaps and bounds.

What’s different today? Simply this: Previously, the federal deficit rarely exceeded 3 percent of GDP.

Now, it is running close to 10 percent — DOUBLE the level that we felt would be the tipping point of a fiscal crisis … and it’s doing so year after year!

But here’s the key: While Washington continues to treat money like a game, and while Wall Street enjoys its final fling of fantasy, three government entities have issued major warnings or taken actions that harken back directly to Dad’s lessons.

Each foretells of financial fiascos ahead — and each has the potential to outweigh any stock market rally.

Warning #1
Fed: Consumers Shunning Credit

chart 3 Government Warnings of Financial Fiascos!

The folks in Washington and on Wall Street may still be in la-la land, but average American families are finally waking up to the real world …

The Federal Reserve has now released new, landmark data proving that consumer credit is in the deepest depression on record.

Look. For decades, the U.S. economy was fueled and sustained by American consumers on a nonstop binge of borrowing and spending.

Indeed, in almost every year since World War II, consumers consistently borrowed more than they did in the prior year. The more consumers borrowed, the more they spent … and the more they spent, the bigger the revenues at the nation’s manufacturers and retailers.

But now, all that has changed! For the first time since the Great Depression, consumers are not only borrowing LESS, but they are also cutting back on prior borrowings — either because they’re defaulting and being FORCED out of the debt market or because they’re voluntarily trying to AVOID that outcome.

Ultimately, debt reduction in any form can help clean the slate for a future recovery. But right now, it means only one thing: Massive cutbacks in consumer spending!

The basic principle is very simple: No more easy credit; no more big spending! Instead, for the first time in at least two generations, we are witnessing a radical shift in consumer psychology — from splurging to cutting … from exuberance to prudence.

I repeat: In the long term, debt reduction is a good thing. But right now, it’s threatening to drive the U.S. economy into another tailspin.

Warning #2
NCUA Seizes Biggest Credit Unions

This warning comes in the form of stern action: On Friday, the National Credit Union Administration (NCUA) seized three wholesale credit unions that provide financing and investment services to more than 7,000 retail credit unions around the country.

The problem: Like the bailed-out banks and failed mortgage giants of recent years, these giant credit unions made big bets on commercial and residential mortgages. Their mortgages collapsed in value. They ran out of cash to cover the losses. And on Friday, regulators decided they were too far gone to save.

Result: All three will be shuttered … their executives will be fired … and their toxic assets will be scooped up by the government.

Moreover, this wasn’t the first time the government has been forced to act. All told, since March of last year, FIVE of the nation’s largest wholesale credit unions have gone under, representing a whopping SEVENTY percent of the assets among ALL of the nation’s wholesale credit unions.

Smaller retail credit unions, which deal directly with the public, are in better financial shape. But the large failed credit unions are at the core of the entire industry. They are the institutions that thousands of credit unions depend upon for financing and other services. And they are mostly in ruins, with the entire industry relying on yet ANOTHER government bailout to keep it running.

It’s a stark reminder of what happens when banks treat your money like a speculative game. And it’s one of many telltale signs that the financial crisis is NOT over. Quite the contrary, as Mike Larson has detailed here repeatedly, the housing bust, which triggered the crisis in the first place, is continuing — and so are its repercussions.

Meanwhile, banks that have not gone under are doing the only logical thing: They’re cutting back on lending, making it ever more difficult for consumers and businesses to get credit.

Warning #3
CBO: Deficit Armageddon!

The nonpartisan Congressional Budget Office (CBO), serving all of Congress regardless of party affiliation, is now raising the exact same alarms Dad raised years ago.

The CBO has announced that this year’s federal deficit will be the second largest in history.

It has disclosed data showing that, had it not been for some fancy accounting, this year’s deficit would actually be the LARGEST in history.

And it has issued the following very explicit warnings …

Rising probability of a fiscal crisis! The CBO writes: “In such a crisis, investors become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates.”

My take: It is a vicious cycle that can spiral out of control. The more the government borrows, the more interest it has to pay … and the higher the government’s interest costs, the more investors would question the government’s finances.

Timing of crisis unpredictable! CBO: “Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States; in particular, there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis.”

My comment: Typically, some outside event tips the shaky balance of supply and demand in the global marketplace for U.S. government debt. It could be a collapse in the dollar. It could be a major Fed announcement of a new round of money printing (”QE2″). Or it could be the sense that America’s political leadership is in disarray. But regardless of the specific trigger, the result is the same: Surging interest rates and severe difficulties in raising funds.

Fiscal crises and recessions can happen at the same time! Typically, interest rates go down in a recession and up in a boom. But when deficits are out of control, the opposite can happen. The CBO writes: “Fiscal crises around the world have often begun during recessions and, in turn, have often exacerbated them. Frequently, such a crisis was triggered by news that a government would, for any number of reasons, need to borrow an unexpectedly large amount of money.”

My analysis: Right now, the official federal deficit (before adjusting for accounting gimmicks) is running at about $1.3 trillion, or 9.1 percent of GDP, despite the so-called “recovery.” If, due to sinking consumer spending and more bank failures, we see a double-dip recession, the deficit could easily explode to $2 trillion.

Worse than Greece and Ireland? Unlike smaller countries, the U.S. benefits from its status as a safe-haven nation. But, warns the CBO, “the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors.”

My view: As I explained here last week, this is the key factor that differentiates the U.S. from Japan. Japan’s savings rates are still very high, and they finance almost all of their debt from domestic savings. In contrast, America’s savings rates, despite some recent improvements, are still among the lowest in the world, and the U.S. finances most of our debts by borrowing from investors overseas.

Recession is actually the LESSER of the evils! Turning to the possible government responses to the problem, the CBO follows Dad’s logic almost to the letter, writing that …

  • Bankruptcy — defaulting on U.S. debt — would be a disaster, making it extremely difficult for America to borrow for many years to come.
  • Cheating and stealing (e.g., printing money) — which, as Mike Larson explained on Friday, now seems to be what Fed Chairman Bernanke favors — would also be a huge mistake, again making it much harder for the U.S. to borrow in the future.
  • In conclusion, the ONLY viable option, says the CBO, is … austerity. Yes, they admit, it would have negative consequences, driving the economy into a deeper recession. But, they say, a deeper recession would be the lesser of the evils.

This is the urgent dilemma America faces right now: Do we want to continue playing games with our money … or do we want to treat it with the respect it deserves?

If we do the wrong thing, we will doom future generations — and ourselves — to impoverishment. If we do the right thing, more economic pain is inevitable. But outside the fantasyland of Washington and Wall Street, it’s the only viable option.

Whether you agree or not, I warmly welcome your comments. Click here to join the lively debate now under way on my blog.

And no matter what you believe, please don’t be hoodwinked by the same old tricks that Wall Street and Washington have always played in this kind of crisis.

Good luck and God bless!

Martin


About Money and Markets

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Commodities, ETF, Mutual Fund, Uncategorized

Can Active ETFs Really Prosper?

September 27th, 2010

The debate on the prospects of actively-managed ETFs carries on and it continues to be a divisive issue. The latest discussions took place at the Morningstar ETF Invest conference held in Chicago from Sept 15-17th. An entire session was devoted to the discussion of actively-managed ETFs by a panel consisting of the portfolio managers behind several Active ETFs on the US market.

Morningstar also did numerous interviews with key attendees at the conference. One of the interviews was with Matt Hougan, Editor of IndexUniverse.com. In response to a question about the need for actively-managed ETFs, Matt expressed his scepticism on the suitability of the “ETF wrapper” for active management. He suggested that many of the numerous prominent fund companies that have filed applications with the SEC to launch Active ETFs have done so to set up “placeholders” that can allows them to launch these products at some point in the future – if they want to – and does not really mean they have committed to entering the space.

Such a sentiment has also been hinted at by other leading professionals in the ETF space that we have spoken to. Many have pointed out that the biggest hurdle that’s discouraging widespread adoption of the Active ETF structure from active managers is the daily transparency required of actively-managed ETFs. That requirement results in many concerns such as front-running of trades executed by the portfolio manager and the dilution of the value-added decisions that the portfolio manager makes, once the holdings become public. One major step to work around this issue was taken by iShares, which filed with the SEC proposing actively-managed ETFs with reduced transparency requirements.

On the first day of the ETF Invest conference, Rick Genoni – Head of ETF Product Management at Vanguard, also voiced his opinions on actively-managed ETFs on a panel and said that, amongst Vanguard’s clients, “No one is asking for actively-managed ETFs”. Whether that reflects a fundamental lack of need for such a product or just the lack of awareness amongst investors of the benefits of actively-managed ETFs over active mutual funds, is the million dollar question. Considering passively-managed ETFs took more than a decade to achieve the recognition of their benefits and demand that they have today, we might well need to wait a few years before finding an answer to that question about Active ETFs.

ETF, Mutual Fund

Chart of the Week: Gold and the Miners

September 27th, 2010

From a technical perspective, the big event in the markets in the last week is undoubtedly the breakout in the S&P 500 index, but since I devote so much time to the SPX and its derivatives, I thought the time is ripe to recognize gold for hitting a new all-time high and bumping up against $1300 per ounce.

To put a slightly different spin on gold, in the chart of the week below I have elected to include the gold futures continuous contract (red line) and also two popular ETFs for gold miners: GDX, the large cap version (top holdings of ABX, GG and NEM), shown below in a blue line; and GDXJ, the junior gold miners ETF (green line.)

As the chart of 2010 performance shows, gold futures have been the least volatile of the group and have had about the same performance as GDX. While GDX and GDXJ track each other fairly closely, note that GDXJ has distinguished itself with superior performance over the course of the last month or so.

Predicting the future of gold is a daunting task, but if the bullish trend continues, GDXJ clearly has the potential to continue to deliver outsized returns – with commensurate risk, of course.

Related posts:

[source: StockCharts.com]

Disclosure(s): long GDXJ at time of writing



Read more here:
Chart of the Week: Gold and the Miners

ETF, Uncategorized

Chart of the Week: Gold and the Miners

September 27th, 2010

From a technical perspective, the big event in the markets in the last week is undoubtedly the breakout in the S&P 500 index, but since I devote so much time to the SPX and its derivatives, I thought the time is ripe to recognize gold for hitting a new all-time high and bumping up against $1300 per ounce.

To put a slightly different spin on gold, in the chart of the week below I have elected to include the gold futures continuous contract (red line) and also two popular ETFs for gold miners: GDX, the large cap version (top holdings of ABX, GG and NEM), shown below in a blue line; and GDXJ, the junior gold miners ETF (green line.)

As the chart of 2010 performance shows, gold futures have been the least volatile of the group and have had about the same performance as GDX. While GDX and GDXJ track each other fairly closely, note that GDXJ has distinguished itself with superior performance over the course of the last month or so.

Predicting the future of gold is a daunting task, but if the bullish trend continues, GDXJ clearly has the potential to continue to deliver outsized returns – with commensurate risk, of course.

Related posts:

[source: StockCharts.com]

Disclosure(s): long GDXJ at time of writing



Read more here:
Chart of the Week: Gold and the Miners

ETF, Uncategorized

SP500 Internals, Dollar & Gold Pre-Week Analysis

September 26th, 2010

After a fierce equities rally on Friday, which I figured would happen, just not that strong; I have to wonder if there is some event or major decision in the works we don’t know about?

Friday’s rally could be something simpler like window dressing by the funds. This is when the funds buy up all the top performing stocks for month end reporting. They do this so that their investors think they are on the ball and know what they are doing. Window dressing will end Monday and from there we could see some profit taking (selling) start. But for all we know Obama could be extending the tax cuts for everyone or cutting payroll taxes etc…

It would only take one of these events to trigger a sharp up move in the market and that could be what Friday’s move was anticipating. That being said volume has remained light and during low volume session the market has a tendency to move higher. Sell offs in the market require strong volume to pull the market down, so until volume picks up there could still be higher prices just around the corner.

Let’s take a look at some charts…

SPY – SP500 60 Minute Intraday Chart

Last week we saw the market reverse to the down side with a strong end of say sell off. That set the tone for some follow through selling and for any bounces to be sold into. That being said, the market always has a way of surprising traders and it did just that on Friday gapping above Thursday’s reversal high causing shorts to cover and the typical end of week light volume drift to help hold prices up.

NYSE Market Internals – 15 Minute Chart

I like to follow some market internals to help understand if investors are becoming fearful or greedy. It also helps me gauge if the market is over bought or oversold on any given day.

These three charts below show some interesting data.
Top Chart – This indicator shows me if the majority of shares traded are bought or sold. When the red line spikes up and trades above 5 then I know the majority of traders are buying over covering their shorts. I call this panic buying because traders are buying in fear that the market will continue higher and they will miss the train. When everyone is buying you know a pullback is most likely to occur.

Middle Chart – This is the NYSE advance/decline line. When this indicator is below -1500 then the market is over sold and bottom pickers/value buyers will step in and nibble at stocks. But when this indicator is trading over 1500 then you know the market is overbought and there should be some profit taking starting any time soon.

Bottom Chart – This is the put/call ratio and this tells us how many people are buying calls vs put options. When this indicator is below 0.80 level more traders are bullish and buying leverage. My theory is if they are buying leverage for higher prices, then they have already bought all their stocks and now want to add some leverage for more profits. When I see the majority of traders bullish then I an sure to tighten my stops (if long) as top my be forming.

Putting the charts together – When each of these charts are trading in the red zone know I must be cautious for any long positions because the market just may be starting to top. Or a short term correction may occur.

UUP – US Dollar Daily Chart

The US dollar has been under some serious pressure with all the talk about quantitative easing (printing money). Obviously the more the Fed’s print the less value the dollar will have. The chart below shows a green gap window which I think once it is filled should put the dollar in a oversold condition for a short term swing trade bounce before heading back down. A bounce in the dollar will put pressure on equities, gold and oil.

GLD – Gold Daily Chart

Gold continues to grind its way up. This move is looking very long in the teeth and pullback will most likely be sharp.

Weekend Trading Conclusion:

In short, equities and gold continue to grind their way higher while the US dollar continues its grind lower. When I say the market is grinding I am implying the market is over extended and a reversal any day should occur.

Financial stocks like Goldman (GS) which typically leads the market has been strongly underperforming over the past week. Insiders were selling GS very strongly which is strange and makes me wonder what’s up there? With the financial stocks underperforming it sure looks like a market reversal is just around the corner.

If Friday’s rally was simply window dressing by the funds then it should end on Monday and with any luck we will see a sharp reversal to the down side early this week.

You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.

Let the volatility and volume return!

Chris Vermeulen
www.TheGoldAndOilGuy.com

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Read more here:
SP500 Internals, Dollar & Gold Pre-Week Analysis




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF, OPTIONS