A Real Rally Killer

by Addison Wiggin November 18, 2010

  • Even Rubin’s worried… QE2 puts U.S. in “terribly dangerous territory”

  • Reasons for today’s rally… and the cold reality behind them

  • California postpones auction, Philly gets a downgrade… New developments in the muni meltdown

  • U.N. warns of accelerating food crisis; U.S. Agriculture secretary unworried… Huh?

  • Readers check in: Gold-trading margins, turkey prices and the airport scope-n-grope

This is all it takes for a rally? An IPO of the “all-new” General Motors and the Irish government finally admitting, “Well, yeah, maybe we might like a bailout after all”?

Whatever. It’s good for 172 Dow points as we write. The S&P is a hair’s breadth from 1200 again. It’s as if Robert Rubin and Warren Buffett didn’t say a peep in the last 48 hours about the “dangers” resulting from $600 billion in new money from Uncle Fed.

If you missed that, let’s get you up to speed…

Rubin, the former Treasury Secretary and Citigroup chief, said QE2 puts the United States in “terribly dangerous territory.” Speaking at a panel in New York that also featured former U.S. comptroller general and I.O.U.S.A. protagonist David Walker, Rubin said the Fed plan “has a lot of risk,” and the reaction from overseas has been “horrendous.”

Rubin even sees an “implosion” in the bond market next time the federal government approaches the debt ceiling.

At present, the national debt total is just shy of $13.8 trillion. The ceiling is currently set just below $14.3 trillion.

Given the torrid pace of debt accumulation during the first six weeks of fiscal 2011, the day of reckoning will arrive no later than March. We’ll then know how serious the new Tea Party members of Congress are about refusing to raise the limit.

Rubin worries at that point, Singapore, Hong Kong and Malaysia might decide to start bailing on their Treasury holdings. “They could say ‘the Chinese are stuck but we’re not.’”

Even Warren Buffett, for all his praise of bailouts this week in the New York Times, is nonetheless worried just a bit about QE2. “I don’t get very enthused when central bankers start targeting higher inflation,” he told CNBC.

“I think it has a psychological effect on how people think about the future of money if they think the government will monetize debt. And… once unleashed, that can be a little bit difficult to put back in the bottle.”

But that’s all a few months down the road. Today, as we said, Wall Street’s having a party. Let’s see why…

Shares of General Motors opened up 6% in their first trading day since the 2009 bankruptcy filing. Uncle Sam’s stake in the firm, 66% at its peak, is now back to 37%.

This is a remarkable achievement for a company that has no confidence in its own financial reports. It’s right there in GM’s prospectus filed with the SEC: ”Our disclosure controls and procedures and our internal control over financial reporting are currently not effective.”

But for all the attendant hoopla, GM shares will have to rise another 65% for taxpayers to break even. No wonder the new CEO is walking back his predecessor’s promise last January that taxpayers might even make money on the bailout.

 Ireland’s finance minister has told Parliament it would be a “very desirable outcome” for his republic to get a bailout from the IMF, the European Union or a combination thereof.

Ireland has yet to issue a formal bailout request, but this statement alone has convinced traders of nearly every asset class that the latest phase of the euro crisis is over. Among currencies, the euro has firmed nearly a half-percent to $1.359. The dollar index has fallen back below 79.

“There is a lot of noise in the markets,” says Options Hotline editor Steve Sarnoff, between “GM’s IPO, municipal bond funds’ waterfall and returning sovereign debt fears, to name a few.”

“Currencies may continue to be the key, with dollar strength bearish for equities and dollar weakness helpful to stocks and commodities.”

No matter what the direction of the markets, Options Hotline subscribers can make money. In fact, they’ve had a chance to double their money four times since August, using the “windfall codes” he sends out every Sunday night. But it’s only through this coming Sunday night that you can grab a membership at half off. Here’s where you can get yours.

Something else that’s put wind in Wall Street’s sails — a nice uptick last month in the Conference Board’s leading economic indicators…

Unfortunately, if you break it down, the only real improvement shows up in the index’s three financial components — the S&P 500, the yield curve and the money supply.

The other seven economic components — everything from building permits to unemployment claims — are either flat or worsening. Heckuva job, Bernanke.

A day after we chronicled the start of a meltdown in the municipal bond market, new developments are pouring in…

  • California postponed auctioning $10 billion in short-term debt from yesterday to today. Officially, the hitch is a new lawsuit over the state’s plan to sell and then lease back 24 office buildings — itself a desperate revenue-raising scheme.

  • Moody’s has downgraded Philadelphia’s debt from A2 to A1, the sixth-highest investment grade. Regular readers will recall Philly came in worst in a recent ranking of municipal pension systems; assets can cover promised benefits only through 2015.

  • Moody’s also dealt a downgrade to San Francisco, saying the city “ended fiscal 2009 with a balance sheet that was weaker than at any time in the prior ten years.”

  • Hamtramck, Mich., a Detroit suburb, is looking to join Vallejo, Calif., on the short list of cities filing for bankruptcy

  • Investors pulled $115 million out of muni bond funds last week — the first net weekly outflow in seven months, according to Investment Company Institute. And that predates the meltdown that began on Monday.

Meredith Whitney, the analyst who achieved celebrity with her bearish call on Citi three years ago, warns that munis’ reputation for low default risk is simply the result of “nirvana capital markets and state budgets” for the last 30 years.

“It is a $2.8 trillion market, $1 trillion owned by individual investors,” she says. “When you see a spate of defaults, you will see indiscriminate selling. That will be a system-wide issue.”

If you have munis in your portfolio, we urge you to take a good look at them, and how much risk you might be running. Then we invite you to check out some alternative sources of investment income, courtesy of Jim Nelson and Lifetime Income Report.

Gold prices have recovered a bit from their drubbing on Tuesday, with the spot price up to $1,350.

China is making new noises about adding to its gold reserves. The daily 21st Century Business Herald cites a “a person providing consulting services to the Chinese government” as saying the Middle Kingdom hopes to accumulate gradually, so as not to drive up the price simply by its own buying.

China is the fifth-largest gold holder among world governments, but the metal amounts to just 1.6% of its foreign exchange reserves.

“Prices have risen alarmingly and at a much faster pace than in 2007/8,” warns the United Nations Food and Agriculture Organization in its latest forecast on food prices.

Between the Russian drought and an unexpectedly poor U.S. corn harvest, “the international community must remain vigilant against further supply shocks in 2011 and be prepared.”

Soybean prices are up 18% so far this year, and corn prices 37%, even after recent pullbacks. Wheat is up 44% since the end of June. And yet…

“I’m not sure that commodity prices necessarily translate directly and proportionately into food costs,” says U.S. Secretary of Agriculture Tom Vilsack.

He figures producers will eat the rising costs before consumers do. “There are a lot of people in the food chain that are taking a bite out of the apple.” Thus, his agency forecasts 2010 food prices will rise at the slowest pace since 1992.

Presumably that’s by using the same sort of “substitution” yardsticks (where consumers buy hamburger instead of steak, keeping their beef costs stable) that led the Department of Labor to conclude retail food prices rose only 0.1% last month.

Our item yesterday on wholesale turkey prices rising 28% over last year prompted several field reports from readers on retail prices…

  • Iowa: “Turkey prices at retail grocery stores in this area are $0.68 – $0.88/per pound. Similar to sales from last year.”

  • Arizona: “The chains (Fry’s Safeway and local Basha’s) have ads this week going down to 29 cents a pound (limit one, with $25 purchase, of course).”

  • Tennessee: “The local Kroger had turkeys at 37 cents a pound and the local Walmart matched it. Frozen turkeys in Sam’s Club yesterday were 89 cents a pound.”

  • New Zealand: “Please send all your turkeys to New Zealand. We are paying over $5 per pound.”

“I noticed your comments,” a reader writes, “about recent drops in the price of gold and silver partly due to recent increases in the margins by the Chicago Mercantile Exchange.

“Could you please explain whether there are any laws and regulations regarding when and how much these exchanges can increase their margins (fees), or are they allowed to manipulate the prices of the markets whenever they want?

“Please also comment whether the above significantly changes your views on the future of silver, gold and other commodity prices.”

The 5: Resource Trader Alert editor Alan Knuckman replies: “Trading futures/commodities outright is a leveraged play with theoretically unlimited risk. The gains and losses occur at a fast rate because of the approximately 20-to-1 deposit requirements versus paying the full cash value.

“To trade a gold contract, long or short, the deposit is over $6,000 with a cash value on the 100 ounces today at $134,000. That upfront cash would be enough to pay for nearly a 5% one-day move in gold before putting the account in negative territory.

“Unlike stocks, that ‘margin’ is not borrowed funds, but an actual cash deposit. The amount of margin you need to put up is a function of volatility. As individual markets get more or less active and the total daily dollar amount moves, a change in the deposit may be required. It is infrequent, not even a month- to-month occurrence, but sometimes necessary for protection if the cash value of the contract has significantly increased.

“The exchange wants the margin to be low enough to ensure liquidity and, therefore, efficient trade execution for all sides. At the same time, the deposit has to be large enough to protect counterparties when large moves occur.

“I have found over my 20 years that when the margin requirements are increased, it doesn’t impact the traders on the right side of the market — only those who are undercapitalized when the trade is going against them. Either they put up more money or get out.

“The exchange has no vested interest in the markets moving up or down as they make money on a small transaction fee per trade.”

As an aside, Alan notes that in Resource Trader Alert, “our investments are strictly limited-risk options where the maximum financial exposure is the premium paid. Gold option plays have been purchased multiple times in RTA over the past couple of years for $1,500 and less with fantastic success and multiple triple-digit returns.”

We consulted a spreadsheet to confirm this performance. During 2010 alone, Alan’s readers had a chance to rack up gold gains of 64% on March 17… 106% on May 6… 114% on Sept. 2… and 221% on Oct. 5. You can investigate RTA membership by reading this report.

As for our overall outlook on gold, it’s best captured in the title of a new presentation Byron King is due to issue next week called “Nine Ways You Can STILL Get Rich on Gold.” We’ll let you know as soon as it’s ready.

“Re: your sighting of ‘Slim’ at the train station about to leave town,” writes our final contributor. “I assume he didn’t care to be irradiated or groped at the airport.”

The 5: Congratulations, you’re the first reader to chime in unsolicited on the new and improved humiliation tactics — er, security measures — at airports.

Checking in from San Francisco, site of the latest shoot for his documentary on entrepreneurship, Addison writes, “We support those who propose nonviolent disobedience and very long security lines during the Thanksgiving holiday weekend.”

What say you? Do you support National Opt-Out Day… or do you believe it’s “supporting the terrorists”?


Dave Gonigam

The 5 Min. Forecast

P.S.: We’re just four days away from unveiling an entirely new approach to stocks — a system in tune with the realities of today’s market.

More important for you, it’s delivered stunningly consistent gains during an experiment that’s taken up much of 2010. Here with a preview is the man who’s been developing and fine-tuning that system.

Kings of the New Market (and How to Steal Their Secrets)

Dear Reader,

Yesterday we talked about how the market is becoming more and more turbulent.

Today we’re going to look at how to profit from this ever-increasing turbulence by updating your investing arsenal…

It’s definitely NOT by copying anything Warren Buffett does.

Don’t get me wrong, I’m not saying Warren Buffett is a nincompoop. But the fact is, his beloved “value investing” is a long-term strategy. Let’s not forget, too, with billions and billions in the bank, he can get an awful lot of deals you never will.

Worry not — there’s a better way to play this market for short-term, quick-fire gains… and it would make Buffett cringe!

But the fact is, Wall Street’s best-performing firms (including Goldman Sachs) are using this strategy as the “engine” to their secretive high-frequency trading (HFT) platforms… and reporting record-breaking profits because of it.

Consider also, HFT firms account for 73% of all U.S. equity trading volume!

I can assure you, this wouldn’t be so popular unless it worked. Better still, it doesn’t rely on a bull market. As long as the market is moving (up or down), these firms can, and are, making an absolute killing.

Again, I’m not saying buy-and-hold is dead. I am saying there’s a new way to make money in the market, and it’s ideally suited for volatility — which I expect we’ll see a lot more of in the coming years. But with this new strategy, that simply means there’s more opportunity than ever!

The good news is you don’t need to be a big Wall Street firm or a financial whiz to take advantage of this.

I know so for a FACT because… over the last few years, I’ve built a stock-picking strategy around the same engine Wall Street’s “robo-traders” use… and since September, I’ve been letting “regular” folk take this new strategy for a test-drive.

Would you like to learn more?

Then meet me back here tomorrow, and I’ll share how readers just like you have been bagging gains with this new strategy.

Plus I’ll also reveal the one simple step to take if you too want to take advantage of this (and I’m certain you will when you read the success stories in tomorrow’s Overtime).

Until then, take care.


Jonas Elmerraji

P.S.: Don’t forget about my e-mail on Monday, Nov. 22. It’s so important you read it as soon as it comes to your inbox. Because of this, I urge you to cancel ALL plans for Monday… even work!


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