A Total Wipeout

Addison Wiggin – November 29, 2011

  • Lehman 2008, American Airlines 2011: Seeing the inevitable from six months out…
  • S&P adds 40 points in two days: Marc Faber on how long the rally can last
  • Housing still stuck in a funk, but little-known indicator stops flashing red for a double dip
  • Nouriel Roubini misfires in a new Twitter war over gold
  • The rising cost of Christmas (but not the “core” measure)… Reader sees only two possibilities behind the derivatives bubble… What the heck is an “Income SAFE IOU”?… and more!

   And then there were none.

With a Chapter 11 filing by American Airlines parent AMR Corp. this morning, every major U.S. airline has had a date with a bankruptcy judge since the terrorist attack on the World Trade Towers on Sept. 11, 2001.

Operations will continue as is.

Like the other carriers that went before it, the filing will give AMR the vaunted “breathing room” to keep the lights on while the long-term question of who’s left holding the bag — the unions? fuel suppliers? — gets sorted out in court.

   “AMR repeatedly defended itself against speculation of an impending bankruptcy,” says a dispatch from the Dow Jones newswire, “and the company had stressed it has no plans to restructure in court.”

More than six months ago, Strategic Short Report’s Dan Amoss saw it coming. He noted on March 18, 2011, that American’s avoidance of bankruptcy court was hardly a badge of honor: “In the capital-destroying airline industry, one should view it as a competitive disadvantage.”

“The kind of restructuring and cost cutting AMR requires may only be possible in Chapter 11, a process that usually results in a total wipeout of the stock’s value.”

“A Chapter 11 bankruptcy filing is possible soon,” he wrote here in The 5 in an update issued on Nov. 18. “In theory, AMR has enough cash to sustain losses and roll over its maturing debts for a few more quarters.”

   In reality, AMR has few assets it can put up as collateral in a “debtor in possession” loan.

“In order to maximize the chances of a successful Chapter 11 restructuring,” Dan writes, “and avoid a tragic Chapter 7 liquidation — management would want to enter bankruptcy with as much cash as possible.”

And that’s what they’re doing. Dan recommended shorting AMR on March 18, when shares were $6.62 each. This morning, they’re hovering around 30 cents.

For readers who followed his recommendation, that’s a 95% gain.

For his long-time readers, this is reminiscent of his 2008 call that Lehman was going down — nearly five months in advance.

April 25, 2008: Dan recommends Lehman put options
June 11, 2008: Dan recommends taking half the position off the table — for 224% gains
July 11, 2008: Dan recommends closing the position for a gain of 462% in less than three months.

   “AMR,” Dan says in an email this morning, “will hopefully serve as an example of how bankruptcy is supposed to work in the USA (unlike our experience with the banks).

“Investors’ claims need to be reduced in order to restore health to the operation, and it will be interesting to see how it plays out.”

   AMR notwithstanding, the major U.S. stock indexes are adding onto yesterday’s big gains.

Fitch announced after the close yesterday that it was keeping U.S. government debt rated AAA, but putting Uncle Sam on negative watch.

No matter. This morning the S&P 500 is knocking on the door of 1,200 — up 40 points from Friday’s close.

   “The rally came from a very oversold level,” Vancouver veteran Dr. Marc Faber says, commenting on the rally we suggested was ill-fated yesterday. “We have a very strong support on the S&P between 1,100-1,150,” the good doctor told Fox Business this morning.

“And usually, the December month is a strong month, as well as January, so we have seasonal strength and oversold conditions and we can rally, but I don’t think you should expect too much. I think we’ll get into overhead resistance when the S&P rallies another 5% or so between 1,250-1,300.”

Longer term, “We will have very high volatility in asset markets that will continue for a long time,” he tells King World News. “Like we saw in the ’70s or post-1930 or in the late 1930s — we had very high volatility.”

His recommendation? A portfolio split equally among gold, stocks, real estate and cash. Similar to one you’ll find here.

   If you’re pining for signs of recovery in the housing market, you won’t find them in the latest Case-Shiller home price index.

The index fell 0.6% in September. The year-over-year decline is 3.6%. Both of those drops are worse than even the most-pessimistic guess among dozens of economists polled by Bloomberg.

Of the 20 cities in the index, Atlanta, Phoenix and Las Vegas hit new crisis lows. Atlanta fell 4.1% in September.

   Alas, a little-known recession indicator has stopped flashing red — at least for now. The Philadelphia Fed’s State Coincident Index — crunching four employment indicators from all 50 states — clocked in at 76 in October.

Readings below 50 have predicted every recession of the last 30 years, with only one false alarm — last year, in the midst of QE2.

Or is that two now? The index sat below 50 from May through August, but recovered in September to 64 — and added 12 more points last month.


Well, the Fed continues to roll over all the Treasuries it bought during QE2, which some pundits label “QE 2.5.”

The monetary mandarins may be succeeding in postponing the inevitable. But we remain on guard for whenever they run out of paper clips and rubber bands to hold the whole thing together.

   Precious metals have moved little in the last 24 hours. Gold is at $1,714. Silver is a shade above $32.

   Holdings in ETFs and other exchange-traded products backed by gold hit a record high last week, according to Bloomberg. The total is 2,350.8 metric tons.

Meanwhile, hedge funds and other speculators have grown their net long position in gold for four straight weeks, according to the Commodity Futures Trading Commission. The last time that happened was in March… when gold was around $1,400.

If you’re looking to add to your own gold stash, be advised the clock’s running out on our one-of-a-kind gold offer. A reminder: One Gold Buffalo, 10 Silver Eagles, a unique storage solution for these metals… and we’re practically giving them away when you consider the value of everything else in this unprecedented package deal.

We’ve never offered something like this before… and likely never will again. The offer comes off the table at 5:00 p.m. tomorrow.

   “The gold standard no longer can be viewed by the capable as a refuge for lunatics and hacks,” writes our friend Ralph Benko, addressing celebrity economist Nouriel Roubini.

Three months ago, Roubini went on Twitter to claim gold was in a bubble. Not satisfied with attempting to take down the yellow metal’s role as wealth protector, he now seeks to punch holes in gold’s potential to back a currency.

Thus has Roubini, among other things, engaged in a Twitter war with Tangent Capital Management chief and Currency Wars author Jim Rickards. “But in prosecuting that war,” Mr. Benko writes, “professor Roubini steps on a land mine.”

Roubini resorted to the common shibboleth of the gold standard contributing to the Great Depression. But the gold standard in the 1920s was no gold standard at all; it was a “gold-exchange” standard in which Britain redeemed pounds in both gold and U.S. dollars, touching off a spiral of inflation in both Britain and the United States.

“Professor Roubini enjoys international prestige from his claim to have foreseen the collapse of the housing market and the attendant 2008 recession,” Mr. Benko concludes. “His failure to distinguish between two superficially similar but substantively different monetary regimes threatens his credibility and, if noted, maybe his tickets to Davos.”

We have it on good word Mr. Benko is keeping a short list of advocates for a move forward to 21st-century gold standard… and a return of “commodity” money to the people. As opposed to the “political” money that has caused such a mess since 1971. The list is up to some 30 writers, analysts and thinkers globally. More details as they unfold.

[Ed. Note: In Currency Wars, Jim Rickards “takes readers around the world and behind closed doors to explain complex financial and political currents with absorbing firsthand anecdotes,” writes Laissez Faire Books executive editor Jeffrey Tucker.

You can get your own copy, and any other title at LFB, at 20% off by following this link.]

   Want to do the holidays up right? For the first time, it’ll cost you six figures.

Each year PNC Financial Services surveys the prices of every item enumerated in “The 12 Days of Christmas,” talking to everyone from jewelry stores to dance companies to pet stores.

Total cost this year: $101,119, up 4.4% from last year, and outpacing the 3.6% increase in the consumer price index.

Biggest component of that figure: The seven swans a-swimming. And since that’s repeated six times in the song, you’re talking 42 swans total… which comes to $37,800. Seems the price of fresh swans is up 12.5% over last year.

Because they’re foodstuffs, the government excludes them from the “core” Christmas index

“The telling statistic of this report,” says Melanie Pelayo of the money management firm Financial Perspectives, “lies in which items saw prices remain stagnant.”

“Of the six that didn’t see an increase, half of them had their expense totaled in the cost of labor, which still remains stubbornly flat.” Sure enough, the maids a-milking, ladies dancing and lords a-leaping held steady in price.

Heck, the maids make minimum wage, according to PNC. Guess the SEIU hasn’t gotten around to organizing them yet.

   “It makes you wonder,” a reader writes after our item about the growth of the derivatives trade, “what our government’s objective is when they let FDIC-insured institutions gamble with their depositors’ money.”

“The events that unfolded in the fall of 2008 exposed how our financial system was at risk from these types of instruments and why our ‘leaders’ in Washington deemed it necessary that they prevent these institutions from all failing at that time. It was hard to understand, but I reluctantly accepted it and thought now we know better and we will avoid these mistakes in the future.”

“Now I see this report, and not only did we not learn anything, we have increased our exposure to the same extreme risk we had in 2008. I guess the Dodd-Frank bill has saved us from those nagging $5 fees on our bank statements, but it has done absolutely nothing to protect the financial system of the USA, as evidenced by additional risk the major banks have taken on.”

“I can see only two possible explanations for what has happened: 1. Our members of Congress are incredibly naive, or 2. Our members of Congress are willing to sacrifice the citizens of the USA for the benefit of a few, including themselves.”


Addison Wiggin
The 5 Min. Forecast

P.S. Godspeed to Ron Smith. At age 69, the veteran talk show host on WBAL radio here in Baltimore has announced his retirement, effective immediately. Last month, he announced he had stage-four pancreatic cancer… but he would press on with his show when able.

No more. “I basically can no longer do it,” he said moments before his show was supposed to start yesterday.

“I’m now in hospice care at home… I’m just not up to it. So you have to face that kind of thing. Basically, the curtain is coming down right now. I’m bidding everyone a very fond farewell.”

We wish him likewise. We extend a special thanks for his support of the Daily Reckoning and our books through the years. Mr. Smith is a good man and a friend.

Looking for a rock-steady, reliable 8-10% return on your money? No, it’s no longer possible with “traditional” income-investing vehicles.

But there’s another solution… one that brokers and financial advisers have no incentive to tell you about. Here’s Jim Nelson of our income desk:

Navigating Your Way Through a Choppy, Zero-Percent Interest Rate World

Part Two: Forget the Stock Market…
Use This Alternative Income Secret Instead

“I cannot figure out how to invest to earn a steady retirement cash flow… without putting my money at relatively high risk during these volatile times,” Jack Lovkin, a doctor from Michigan, recently told me.”

Dr. Lovkin was one of dozens of Agora Financial Reserve (link to AFR promotion) members to share their deepest concerns and frustrations about their financial future.

“I want to get better income,” succinctly says reader Stephan Kooper. “To pay for inflating prices.”

And reader AK shares this, “I am self-employed, 57 and plan to work as long as possible. Right now I worry about loss of capital if stocks plunge…”

If you’re a Reserve member… and have written in… thank you for your comments. I’ve read every single one. I’ve heard your frustrations and fears.

Now after more than seven months of painstakingly researching just about every possible way to generate income… and after countless hours spent on all-night report writing sessions… I’m finally ready to share with you the first of a few alternative income secrets.

Each secret is designed to get you back your original dreams of living your life financially worry-free. And each one is carefully positioned completely outside any schemes you may have been sold in the past.

Today, we’ll start with a secret that I call “Income SAFE IOUs.”

Done right, I believe “Income SAFE IOUs” can safely return 8-10% per year in income, with the potential for additional (and significant) capital gains within a few years.

Perhaps best of all, “Income SAFE IOUs” don’t have anything to do with the stock market. They’re not risky options. And they’re far away from any U.S. Treasury bonds.

In short, this secret allows you to:


Unfortunately, I’d bet that 99 out of every 100 people don’t have a clue these “Income SAFE IOUs” exist. That’s because there’s no money in them for brokers.

As you know, financial advisers earn up to a $50 commission each time they convince someone to trade a stock. But in comparison, they earn only a small $1-2 commission on “Income SAFE IOU” trades. And that doesn’t count the time it takes to explain the alternative investing style of this secret.

So you can see that brokers and financial advisers simply aren’t incentivized to teach you about these “Income SAFE IOUs.” That’s why you most likely haven’t heard about them.

But I believe this secret can safely generate up to five times the income you may currently be receiving in your savings account. All without ever touching the volatile stock market.

Here’s an example of how these “Income SAFE IOUs” work…

I’m sure you’re familiar with Sirius satellite radio. They’re the home of the always controversial Howard Stern Show.

But when it comes to investing in Sirius’ business, their stock doesn’t seem like the place to be. After all, they’ve gone from $8 per share… down to pennies… and back up to $2. All in the span of just a few short years. And they don’t have the cash to pay their stockholders a dividend.

Because of this, most people would write Sirius off completely. But what you probably don’t know is that a few years back, Sirius issued an alternative way to invest in their company…

They quietly issued a few “Income SAFE IOUs.”

While their stock went on a wild ride… and paid no dividends… these “Income SAFE IOUs” — bought at the right time — paid a massive 21% cash yield.

With a $15,000 investment, you would have seen biannual paychecks…each in the amount of $1,625.

That’s enough to double your money in just a few short years.

Best of all, you would have known on upfront dates exactly WHEN those $1,625 checks would have arrived.

And here’s what makes these “Income SAFE IOUs” so, well… safe.

Unlike stocks… or savings accounts… or really any other typical income idea, the payments behind “Income SAFE IOUs” are secured by contract law.

As long as a company stays in business, they MUST continue to pay out the agreed-to terms to their “Income SAFE IOUs” holders.

Compare that with a stock and you’ll see the difference. In stocks, corporate executives can cut dividend payments at any time.

In closing, I’m here to show you that you don’t have to be frustrated by today’s economy. You don’t have to be frustrated by Washington’s print-and-promise money schemes. You can take back your financial future.

But you must look outside the conventional ways of generating income. You must look beyond stock dividends. And you must research new ideas like the “Income SAFE IOUs” I’ve told you about.

Otherwise, you’ll be stuck with everyone else — sitting in pay-nothing savings accounts and waiting around for stock dividends that may or may not be there.


James Nelson

P.S. In tomorrow’s overtime briefing, I’ll introduce you to the second secret I’ve found for you. I call this one “The 5 Minute Income BOOST.” And as you’ll see, for literally just five minutes of work, you can boost typical dividend payment by more than 10 times.


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