Dave Gonigam – June 11, 2012
- Up, down, all around: Crazy market reaction to the fix for Spain’s zombie banks. Dan Amoss assesses whether this will be only a “down payment”
- Three years in a row? Greg Guenthner with a chart showing U.S. stocks at a turning point
- What if all that “record corporate cash” was a myth? Barry Ritholtz with disquieting details from a new Fed report
- In which Chris Mayer fancies himself a KGB agent: Our globe-trotting correspondent’s first 5 dispatch from Mongolia
- Two ways to measure the dollar’s value… skepticism about the “productivity” miracle made possible by IT breakthroughs… a possible explanation for the man whose paid-up home nearly landed on an auction site… and more!
Well, now… This might be the shortest-lived pop from a “Europe-is-fixed” announcement yet.
The Dow gapped up 85 points on the open. As we write, it’s surrendered all 85 of those points… and 40 more for good measure.
Which isn’t nearly as entertaining as Spain’s benchmark IBEX 35 index. It opened up nearly 6%… only to see the entire gain shrivel away by the close.
“By Monday morning,” writes our macro strategist Dan Amoss, “the market was already questioning the details of this half-baked plan.”
The plan emerged yesterday after yet another emergency conference call: Spain will follow Greece, Portugal and Ireland in receiving funds from the European Union after being locked out of the sovereign bond market.
A measure of how the news is being received comes from a Reuters dispatch: “Confused and anxious Spaniards heaped scorn on Prime Minister Mariano Rajoy on Sunday for portraying a 100 billion euro European rescue of the country’s zombie lenders as a triumph.”
“Zombie lenders”? Not only do the reporters depart from the typical dreary wire service prose… they adopt the usage of “zombie” as Bill Bonner applies it!
“Here’s the key problem,” Dan explains. “Once entering the bailout shelter, there is no returning to private-sector bond markets.”
“Loans from the ESM (European Stability Mechanism), which is expected to be ratified by July, act to subordinate other lenders.”
That is, in the event of a blowup, the ESM gets paid first. That gives other bondholders zero incentive to stick around, lest they get the same treatment Chrysler and General Motors bondholders got three years ago.
“Spain clearly wanted to make news about any sort of bailout by this week, ahead of the Greek elections next Sunday,” Dan goes on. “But haste makes waste.”
“For starters, Spanish officials claim this €100 billion bailout is a credit line with no strings attached. That’s simply not true. There will certainly be strings attached, because German public opinion simply will not stand for an unconditional Spanish bank bailout.”
The most important question now, says Dan: “How will this plan be politically acceptable?
“Spain must convince its voters that this bank bailout will not result in an EU-administered austerity program like the one in place in Greece. The best way to do that is to promise to the EU that bank shareholders and debt holders will suffer losses, which would make the €100 billion go much further toward shoring up the banks.”
That’s important… because the banks need a lot more than €100 billion to become solvent again. “Otherwise, if there are no restructurings and we just see cash infusions via EU loans to the Spanish government, the needed cash will ultimately amount to several hundred billion euros — a politically unacceptable amount.”
“Whether the €100 billion winds up as just a down payment on the next bailout depends on the next set of decisions. Markets will rise or fall based on those decisions.”
“For the third straight year, we find ourselves in the midst of a mid-year correction,” says Greg Guenthner, assessing when U.S. traders and investors might start buying shares again.
Greg passes along this chart from renowned technician Arthur Hill. “He notes that the 2010 and 2011 corrections in the S&P 500 looked remarkably similar. Each correction was a three-wave sequence consisting of an initial drop, followed by a rally and finally a lower low that proved to be the all-important bottom.”
Greg added the bold red lines himself, to focus our attention on the large-scale moves. “Notice the first move lower, the relief rally, and the final washout during the first two corrections,” he says. “After each of these corrections, a powerful first thrust quickly pulled the market off its lows, beginning a new rally.”
Here we are again. The initial drop began in April. “And after a big move lower on Friday June 1, the market has stabilized and moved higher. The question now is whether that day marked a true bottom, or just the end of the first wave of what has recently been a typical summer correction.”
“Corrections like this one can signal the beginnings of bear markets,” Greg warns. “Or they can simply serve as minor speed bumps on the route to higher prices. A push below last month’s lows would be the signal that we’re due for a deeper corrective leg. We’ll be watching things intently to act on any unexpected moves.”
We’ve tasked Greg and his colleague Jonas Elmerraji with beefing up our commitment to technical analysis. For the moment, their short-term trading advice is strictly limited to a small circle… but we expect to open it up to the general public in a few weeks. Watch this space.
Are the “record amounts of corporate cash” we’ve been hearing about the last two years an illusion?
“There was a slight discrepancy in the amount of corporate cash in Q1,” says Fusion IQ chief Barry Ritholtz, examining the Fed’s quarterly “flow of funds” data.
The “slight” discrepancy was buried on a Wall Street Journal blog entry early Saturday. “It was ‘up to’ $1.74 trillion,” says Mr. Ritholtz. “And by up to, I mean down from $2.23 trillion.”
“Did this money actually go missing? From the Fed report, its not clear whether or not this is based on a significant accounting revision from recent quarters — meaning it never was really there in the first place. Alternatively, the money actually was spent, and Corporate America added an additional half a trillion dollars in economic activity.”
“I suspect it’s the former.”
[Ed. Note: Attendees at the Agora Financial Investment Symposium have come to expect this sort of wry humor from Barry… except when he gets just laugh-out-loud funny.
“You guys put on a hell of a conference,” he’s kindly told us, “from my view as a speaker and someone who watched every presentation… smooth as glass.”
He’s back for this year’s event, July 24-27 in beautiful Vancouver. Have you registered yet? Fewer than 200 seats remain.]
Gold sits today around where it did at Friday’s close, $1,596. Silver’s moved up about a dime, to $28.66.
After a pop overnight on the Spain announcement, the dollar index is now back to 82.5 — still close to a two-year high.
“It has been strong of late,” acknowledges Samantha Buker, Addison’s collaborator on The Little Book of the Shrinking Dollar, “but there are two ways to look at the value of the dollar.”
Samantha ventured up to New York recently for an interview with Gregg Greenberg at TheStreet.com.
“If you look at it against the yen, against the euro — especially against the euro — sure, it’s been strong,” she says. But the other way to look at the dollar is through the prism of the chart we shared last week — showing how a dollar in 1971 is worth only 18 cents today. “I call that shrinking,” Sam says.
“A lot of experts we interviewed in the book,” she adds, “say we have 10 years for the dollar to start losing its reserve status.” Others put a shorter time horizon on it: five years.
However long it is, you have only a limited time to begin preparing. The Little Book of the Shrinking Dollar has nearly four dozen ways you can get started. You can learn about five of them, free of charge, right here.
“I arrived around midnight in Ulaanbaatar, Mongolia,” writes Chris Mayer with his latest dispatch from the road.
Chris has been on to the Mongolia story for over a year, when he first clued his readers in to Mongolia Growth Group at C$1.70 per share. Now it’s close to C$4… and he finally has a chance to check out the world’s fastest-growing economy for himself.
“I craved a shower after a 14-hour flight from Washington to Seoul and then another 3½ hours to UB. I turned on the bath water and it came out with a brownish tint and a vague chemical smell. But there is a filter the size of a toaster on the shower head. After turning that on, the water came out distinctly cleaner.”
Chris is staying at a hotel where, it’s been said, KGB officers were stationed when the country was still a Soviet satellite. “I liked to imagine a high-ranking KGB agent in my room, perhaps drinking vodka and smoking a cigarette after a hard day in the Cold War.”
“The economy is growing incredibly fast,” he says after his initial meetings. “Not surprisingly, there are lots of ways to make money… and lots of ways to lose it.”
More dispatches from Chris later this week. (If you haven’t checked out the investment fruits of his travels to date, here’s an unbeatable value on his book World Right Side Up.)
“In the 35 years I have been practicing rheumatology,” writes a reader weighing in on our is-technological-progress-decelerating debate, “I can say that the changes are huge.”
“For the patient with rheumatoid arthritis, the disease has gone from being life altering to merely annoying, from crippling to aggravating. The new medicines have changed lives in a dramatic way. DNA research of the ’80s and ’90s will influence mankind forever.”
The 5: Patrick Cox would agree. That research cleared the way for the coming wave of breakthroughs with stem cells, the nonembryonic kind. And that’s the start of events Patrick says will change the world and make early investors wealthy.
“IT advances introduced five-10 years ago have generally increased the productivity of the professional staff in our organization,” writes another reader, “but as the technology has become more accessible to the nonprofessional staff in the last five years, the technology has decreased their productivity.”
“Smart phones, texting and social media have only distracted my nonprofessional employees from their daily work. My employees are more productive in managing their personal lives, but at the expense of my business. They produce less today than they did five years ago because they spend their working hours posting on Facebook, shopping online and checking/sending their text messages.”
“Electronic medical record (EMR) systems are also supposed to be great timesavers, but they aren’t. Since integrating one into my office, instead of ‘halving the number of employees’ involved in maintaining medical records (according to the sales pitch), I’ve had to double the staff. Instead of dictating a report in one minute, I must now spend five minutes typing and editing my own report.”
“From my perspective, the great advances in IT in the last few years have not really had positive sum-total effect on our organization’s productivity. There is no doubt that things such as texting have increased my professional productivity, but for the nonprofessional worker, it just isn’t so. We might just as well have legalized marijuana.”
“This disgruntled owner,” writes a real estate broker about the gentleman whose letter appeared Friday, “may actually have an invalid title to his property.”
“This is possible due to the way that large numbers of mortgages were (illegally) sold into collateralized investments and subsequently foreclosed on. Almost without exception, such mortgages have been systematically foreclosed on by entities that actually had no foreclosable interest in the mortgage.”
“To expedite the process of collateralizing these loans, proper transfer, recording and control of the loan documents was abandoned in favor of a computer tracking system called MERS. MERS has now been declared illegal by at least one court. One result of the MERS process was that not only was the trail of note ownership lost, but many original documents were lost or destroyed.”
“There have been numerous cases in which fraudulently foreclosing entities that have been challenged in court to show proof of their standing to foreclose (produce the original note) have been unable to do so.”
“The efforts that these financial entities have undertaken to continue the scam goes far beyond ‘robo-signing,’ as one of the discovered frauds (the generating of fraudulent affidavits) has been called. Their methods have expanded to include generating fraudulent replacement ‘original’ notes that are very convincing to all but the most discerning eyes.”
“What I am sharing is more than a repeated conspiracy theory, as I have firsthand experience and hard evidence in hand proving my allegations.”
“The bottom line is that some of the original notes are bound to turn up in the hands of parties that actually do have the right to do a valid foreclosure. Just because another party has illegally foreclosed on and sold the property does not change the legal rights of the true holder of the note.”
“This is a new twist on the financial crisis that is looming in the shadows. Threatening the photographer that was paid a small fee (probably less than $100) is not a solution, but rather a way to not only lose your investment, but your freedom as well.”
“This is a real risk that buyers of foreclosure properties may face as this all shakes out.”
The 5: Amen. We’ve sounded the alarm ourselves, but the point bears repeating: It is now possible to buy a home for cash… and end up being foreclosed.
It was bad enough that mortgage lenders committed fraudulent inducement at the peak of the housing bubble (writing loans they knew couldn’t be paid back)… but it’s far worse that they’ve irretrievably muddied the title on potentially millions of homes and made a mockery of property rights.
Regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “Who would have imagined,” writes Steve Forbes in the current issue of Forbes, “a book could give you what you need to know about economics without ever sounding like a textbook?”
The book in question is Nathan Lewis’ Gold: The Once and Future Money, with a foreword by Addison.
We’re not sure why Mr. Forbes is only now discovering a book published five years ago… but we can’t argue when he says, “If all grasped its basic conclusions, the world would be an infinitely richer and happier place.”
That sounds like the sort of “world-improving” we can actually get behind — one person enlightening himself or herself at a time. You can get a copy and do your part at this link.