The Assault on Enterprise

by Addison Wiggin & Ian Mathias

  • Rising taxes, Wall Street crooks, government boondoggles… Abundant evidence underpinning our theme for Vancouver

  • Gold Slaughter 2010… and an urgent question from Byron King

  • June jobs report… when even good news is bad

  • The biggest news for dividend investors in more than a year

  • Readers sound off on central banking… South Africa, the World Cup, Al’s big mansion… and more!

  We’re less than three weeks away from the start of the Agora Financial Investment Symposium in Vancouver. And it appears our choice of a theme for this year — Assault on Enterprise: How to Invest in an Age of Rising Taxes, Wall Street Crooks and Government Boondoggles — is more apt than ever.

It’s not easy picking a theme for the speakers and attendees from 29 countries to rally around. Most of the marketing materials need to be prepared months in advance. And despite the title of this piece… forecasting is a speculative and dicey business.

We hit the nail on the head in 2008. Our theme that year, View From the Peak, came packaged with the prescient subtext “Any mountaineer will tell you, the most dangerous part of the climb is the descent.”

Sure enough, the CRB Index peaked one week — to the day — before the conference began.

The collapse in the commodities markets, while steeper in grade than most, mirrored just about every market index around the globe. Bailouts and stimulus ensued. Those ghosts — the legacy of the Panic of ‘08 — are coming back to haunt us anew this week…

  First, we were treated to the revelation that Ben Bernanke and Tim Geithner — then still capo at the New York Fed — put taxpayers on the hook for tens of billions of dollars in junk bonds from Bear Stearns.

Bernanke and Geithner told Congress at the time that the bonds were investment grade.

These are the “assets” the Fed generously agreed to bring into its balance sheet when it arranged for J.P. Morgan Chase to pick over Bear’s carcass. Were it not for a lawsuit filed by Bloomberg News, we still wouldn’t know about this.

As it is, we’re not holding our breath for the Justice Department to open a perjury investigation.

  We’ve also been made privy, for the first time, to the sweet deal Washington gave the big banks during the AIG bailout.

Buried in some documents recently released by a congressional panel is this: One of the government’s conditions of the bailout was that AIG forfeit its right to sue its assorted counterparties over any monkey business in the mortgage securities AIG insured.

Of course, now that the SEC is alleging Goldman Sachs knew full well the mortgages were hinky, it’s dawning on AIG executives and shareholders that this might have been a raw deal.

Too bad for them. But it’s icing on the cake for Goldman … and Merrill Lynch, Deutsche Bank, SocGen, etc.… who were the counterparty recipients of the loot, collecting $46 billion of AIG bailout money along the way.

  Then there was Goldman’s claim this week that it couldn’t say exactly how much money it makes on derivatives trading, because the income is too “integrated” into the rest of its business. In fact, Goldman’s CFO told the Financial Crisis Inquiry Commission, “We generally do not have a derivatives business.”

Really? According to the Office of the Comptroller of the Currency, Goldman held $49.1 trillion in notional derivatives contracts at the end of the first quarter. Or $41.1 trillion, if you just want to count the commercial bank side of Goldman’s business. Either way, it’s only No. 4 on the list of U.S. derivatives holders.

The top four banks hold derivatives contracts “worth” roughly 16 times US GDP.

Worldwide, derivatives contracts total $615 trillion, according to the Bank for International Settlements. Thus, those four banks also hold more than one-third of the world’s total.

  Maybe it’s just coincidence, but this week, a host of observers are stepping up to call BS:

  • Veteran retail industry analyst Howard Davidowitz, on an unspoken cause of the credit crisis: "It was a massive fraud… a gigantic Ponzi scheme, a lie and a fraud… and it gets back to the accountants valuing the assets incorrectly… Where were the accountants? They did nothing, checked nothing, agreed to everything” and took millions of dollars in fees while "shaking hands with the CEO"

  • MSNBC’s Dylan Ratigan: "The stock market at this point, which used to be a reflection of the future value of actual businesses in this country, has been turned by our government and our banks into little more than a paper-shredding facility… 70% of the volume is computers that are run by the banks playing Ping-Pong with stocks for 10 seconds at a time."

Ouch.

In the face of all of this, you might be tempted to retreat to nothing but cash and gold. But we prefer to fight back against the Assault on Enterprise. We’ll be strategizing the week of the 19th in Vancouver with literally dozens of investment recommendations for every level of risk appetite.

We’re all booked up now, but if you can’t make it, you can still benefit from those recommendations — in real-time — with a service we’ve never offered before. Details forthcoming. This event is far too important to let slip. 

August gold futures on the Comex plunged yesterday to $1,206. The spot price actually fell below $1,200 — the biggest one-day drop since Feb. 4. You might call it slaughter… or you might prefer this phrase: “buying opportunity.”

Near as we can tell, gold fell victim to the same trend that for weeks had been giving it a lift — the vicissitudes of the euro. The Esperanto currency has firmed up to $1.26 this morning. Barely 48 hours ago, it was $1.22.

If the euro finishes today above $1.24, our currency specialist Abe Cofnas will have reaped 81% on a new “binary” trade he recommended to Master FX Traders on Monday. (One-half of that trade would deliver a 1,329% gain… Crazy stuff.)

For no particular reason, fears of an imminent implosion in the European banking system have faded for the moment. Everyone short the euro has had to cover his positions and raise cash — quickly. For that purpose, the gold they accumulated in May and June is plenty liquid.

Makes no sense to us either, but there it is. Take advantage.

  “Do you own precious metals?” asks Byron King, drilling down to basics. “And I don't mean your wedding ring, or a gold chain or the family silver service. I mean do you own a stash of gold and silver coins, ingots, bars, etc.?

“Because if you don't own any physical precious metals, then come to a full stop. Don't buy any stocks. Don't buy any bonds. Don't try to trade and punt your way to financial independence.”

“Whether you have $1,000 to work with, or $5,000 to work with, or $15,000 to work with… go buy some precious metal! Go for the bullion coins, and not the so-called ‘collectible’ coins. That is, if you're starting out, don't get pulled into paying multiple times the per ounce gold price for some ‘unique’ coin from way back when. Don't worry about the alleged numismatic value of the coins. Just go for the gold or silver.”

  The question some ask: Gold or silver? “That depends,” Byron continues. “One-ounce gold coins are in the $1,210 per ounce range, with per coin markups on top of that. So ounce for ounce, you might have more bang for the buck by buying silver coins. (More on Silver Eagles below…)

“It's up to you. Just get some metal. Build a position. Start with baby steps. But start.

“How much of your portfolio should be in precious metals? My advice is 5-10% of your total portfolio. So if you have a $100,000 portfolio, then about $10,000 ought to be in physical precious metals. Or more, if it helps you sleep at night. I've said it again and again. Buy gold and silver until you can sleep soundly.”

Only then are you in a position to invest in the shares of gold miners. If you’re ready, Byron has a dandy list of suggestions right here.

  The much-awaited June employment report was supposed to be awful, and it was. Total payrolls fell by 125,000 last month, the first drop this year.

  • 225,000 temporary Census workers were let go — no surprise there

  • Private employers added 83,000 jobs — whoops, “expert consensus” was for more

  • Average hourly earnings fell, and so did the average work week — wrong direction

  • The U-3 unemployment rate fell from 9.7% to 9.5%.

The last one, counterintuitively, is perhaps the grimmest sign of all. If anything, it was supposed to rise this month on account of more people returning to the labor force. But 652,000 people left the work force in June for one reason or another… the most popular being despair at finding a job.

There were 322,000 the month before, for a two-month total nearing 1 million despondent formerly employed Americans.

Remember, those are people who simply don’t count in the unemployment figures. If they’ve given up long enough, they don’t even count in the broad U-6 unemployment figure — which also fell this month, from 16.6% to 16.5%.

  The Street isn’t sure what to make of the unemployment numbers. The Dow and the S&P were more or less flat a half-hour after the open.

“You're going to hear a lot about risk appetite and investor flight to ‘safer’ investments this summer,” advises Penny Stock Fortunes editor Greg Guenthner. “American blue chips and Treasuries are the most logical safe havens during streaks of volatility, and we're all but certain these investment choices will be thrust to the forefront of the financial media as long as the current trends hold.

“However, we urge you not to confuse size with safety. When volatility is high, as it is now, the effects are amplified in the small-cap market.”

The volatility cuts both ways. Greg told his readers yesterday to close out a position for 48% gains. And he identified two more as good buys right now. As small-cap advisories go, there’s no better combination of low price and high value than Penny Stock Fortunes. Check it out here.

  An obscure transaction in the financial sector yesterday is about to open up a world of new opportunities to income investors, according to our dividend hound Jim Nelson.

“BNY Mellon — the world's largest global equities depositary bank — announced it completed the acquisition of PNC's Global Investment Servicing (GIS) business,” Jim explains. “While that might not sound like an important news item in today's increasingly volatile markets, it could be the single largest piece of news since we started publishing Lifetime Income Report. Here's why…

“BNY Mellon controls the largest group of American Depositary Receipts we can trade. Already, we have several investments serviced by the bank. BNY Mellon is our favorite ADR sponsor because of its relatively low fees for processing international dividends.

“PNC's GIS business handles an enormous share of international mutual funds, along with other equities. By bringing these two together, we could see an increase in international investment options that pay solid dividends. More importantly, we might be able to get in on some new emerging market plays.”

And that’s on top of the great plays already producing steady income for Jim’s readers. One of them is so strong, he sees it as a viable alternative to a cracking Social Security system. You can read about it here.

  “The gentlemen from South Africa is absolutely correct regarding our banking system,” a reader writes. “It is the root of our financial woes. It is designed to work in this way: to limit does in need of money and benefit the ones who have it. Is it any wonder central banks are privately owned?

“Economic capital is the product of human endeavor. It is the product of time and energy expenditures by people in pursuit of their imagination and aided by their skills.

“Inflation, the miraculous balm the central banks peddle, erodes away at this capital, constantly devaluing our lifestyle, all in pursuit of paper money that in the end will be worthless, since it was so to begin with, and only given credence by government fiat and a well-lubricated propaganda machine connected as a filter between the masses and the central bank. It's a scam!

“Honestly Mr. Wiggin, and with all due respect, I fail to understand your reply to this gentlemen from South Africa. Are you simply being sarcastic or do you really think he is so unhappy about this reality that you must hope he is at least enjoying the World Cup? Very disappointing, I am sorry to say, for he meant well and he is most definitely correct.”

The 5: We’ve been reminded several times now that we were unusually and unnecessarily cranky that day. For that, we apologize. We printed the original letter because we are in agreement. We’ve also been writing The 5 for the better part of the last three weeks with World Cup games playing in the background.

The Netherlands, for example, just beat Brazil 2-1, forecast by yours truly, but received with much chagrin by the rest of the soccer fans in the house.

  “In response to your question,” our friend from South Africa responds, “of course I'm enjoying the World Cup. Bread and circuses! Just goes to show how effective that strategy is — even when you are 'on these guys,' they still catch you out.

“In South Africa, we are way ahead of the socialist curve. Despite the Rainbow Nation miracle (or perhaps because of it…), we now have more people on welfare than are actually working. One in 10 people complete a tax return. The remaining nine don't, but elect the government.

“Because of the democratic system and the parasite-producer ratio, the elected government cannot actually change tack — the will of the majority is to increase taxes (on others) and grant greater benefits (to themselves). There is no way out of this from within the system. Ultimately, the only 'solution' is for the system to eventually collapse, which does not benefit either producer or parasite.

“In the meantime, we enjoy watching the World Cup — on the telly, like most all South Africans. Can't afford a ticket. The irony is not lost on (some of) us.”

  “You guys are all a bunch of know-nothing hacks,” writes our last reader (facetiously, we think). “Al Gore, obviously, saw both global warming and the housing bubble years ago. Hence why he bought a mansion near the coast and then took out insurance on it to cover against the coming flood and bought put options against the insurance company that insured it.

“He'll enjoy living in a mansion for several years while it loses value, and then the flood will wipe away all his debt as the insurance company pays off the mansion that's ‘underwater.’ Then, he'll collect a fortune on his put options. The man is brilliant!

“Happy Independence Day, everyone!”

Enjoy the long weekend,

Addison Wiggin

The 5 Min. Forecast

P.S. There’s still time to grab a pair of MS-70 Silver Eagles courtesy of our friends at First Federal.

As we reported yesterday, demand should be intense now that it looks unlikely the Mint will issue proof or uncirculated Eagles this year. We do have a relationship with First Federal and may be compensated if you place an order. But as always, we wouldn’t make you aware of it unless we thought it was a good deal… and it is.

P.P.S. Monday marks the official observance of Independence Day. The markets will be closed, and so will we. Thanks for all the great advice regarding the giant black gum lying in pieces on the back lawn. Back at you on Tuesday! Enjoy.

rspertzel

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