And The Winner Is… Smith & Wesson!

November 7, 2012

  • Dow down nearly 300… Smith & Wesson up 10%…The 5’s take on a nonsensical election…
  • The Treasury auction where no one shows, a brokerage with leverage of 286-to-1 and eight more too-big-to-fails: three more post-election gray swans
  • More election-themed reinforcement for gold bulls… but Greg Guenthner advises caution in the short term…
  • Britain revokes U.S. independence… reader criticism of our nonexistent format change… a small-business owner who tells it like it is… and more!

  “I was going to vote for Ron Paul,” one Virginian told our local news station here in Baltimore, “I guess now it’ll be Barack Obama.”

He makes about as much sense as anyone during this election.

  As you might imagine, we don’t have much to say about it. Except maybe to look in the mirror and chastise ourselves a bit.

With Obama’s win, we’ll have to endure at least three months of his team preening. They’ve already claimed the victory a “referendum” on the president’s progressive agenda… higher taxes, stifling regulation, nationalized health care, drone wars overseas…. what’s not to like?

The results are a bit surprising, we will say that much. Obama has won 303 of the electoral votes tallied as of this writing. Romney only cajoled 206 out of mostly rural areas. Nationally, that’s a thumping by any means. In the popular vote, 2.5 million more people — so far — have voted for the incumbent than those casting a ballot for his challenger.

Still, over 50 million people voted for Mitt Romney.

  “The sooner Obama’s policies fail completely,” we quote The 5 from Sept. 28, inciting the first mob that would soon morph into the “War on The 5,” “(which a quick tour of history tells us they will)… the sooner we can get back to the core principles of private enterprise, capital accumulation, investment and cooperation…”

This morning, we look around and ask: Who’s left to make that argument?

“The white portion of the electorate dropped to 72%,” say analysts on NBC. “The president won just 39% of that vote. But he carried a whopping 93% of black voters (representing 13% of the electorate), 71% of Latinos (representing 10%) and also 73% of Asians (3%). What’s more, despite all the predictions that youth turnout would be down, voters 18-29 made up 19% of last night’s voting population — up from 18% four years ago — and President Obama took 60% from that group.

“Obama’s demographic edge creates this dilemma for the Republican Party: It can no longer rely on white voters to win national elections, especially in presidential cycles. Indeed, according to the exit poll, 89% of all votes Mitt Romney won last night came from whites, compared with 56% for Obama… Come 2016, the white portion of the electorate will probably drop another couple of points, to 70%…”

To remain even tangentially relevant, the Republican Party will have to ditch its exclusive appeal to white males… and make the pitch for free markets and civil liberties to a broader audience.

We don’t think they’re up to the challenge (Not that the current bunch ever believed in free markets or civil liberties, either.) Not with their current leaders, anyway.

  Oh, well. On Monday, we promised to “get back to our roots”: forecasting doom. Should be easy enough this morning. We’ll do so by identifying three more “gray swan” events — those unlikely items it doesn’t take a mystic to see coming.

100  Gray swan #4: Treasury auction fail!

“The consequences would be too dire to think about,” writes EverBank Direct president and Vancouver stalwart Frank Trotter.

“Remember years ago,” he says, “when youthful demonstrators asked, ‘What if they gave a war and nobody came’? Today, a similar rhetorical question would be, ‘What if the Treasury held a debt auction and nobody bid?’

“One of the important questions that neither candidate addressed is ‘What is the debt capacity of this country? How bad do things have to get before people and countries won’t loan us any more money?’ I don’t know the answer. But one thing I can say with confidence is that we don’t want to find out. And we aren’t there yet.

“The United States has a huge economy and can likely support more debt — especially if lenders see us taking steps to get our financial house in order. This doesn’t mean I think that is good — for the record, we do not — but it’s likely we have some more running room until we’re caught by the predator.”

In the meantime, the dollar’s slow-motion meltdown will carry on. Our guidance on how to deal with it — published earlier this year — still stands.

  Gray swan #5: The fantastic, imminent collapse of a small brokerage firm in Connecticut. Rochdale Securities “is in advanced talks to save the firm,” according to Bloomberg — either an outside cash infusion or an outright sale.

Late last month, a Rochdale trader bought about $1 billion in Apple stock. The shares then dropped. (What? AAPL can fall?) This wouldn’t be a problem… except that Rochdale’s capital at year-end 2011 was all of $3.5 million.

We’ll do the math for you: That’s leverage of 286-1. On a single trade.

Rochdale president Daniel Crowley says his firm is “the victim of an unauthorized trade.” Funny how these trades are always “errant” or “unauthorized”; the dog invariably eats the homework.

It would all be hilarious except for one unsettling question and one unsettling fact.

The question: How many other brokerages might be way out there in the blue, riding on a smile and a shoeshine?

A “mere” 30-1 ratio was enough to take down Lehman and Bear Stearns in 2008.

  Gray swan #6: More bailouts on the way.

The bailout risk today is actually greater than it was in 2008. “Neither President Obama nor Mitt Romney,” writes The New York Times’ Gretchen Morgenson, commenting on what should have mattered during this fall’s slapfest, “has really addressed one of the nation’s most pressing economic issues: the risk that one day, taxpayers might have to bail out swashbuckling financial institutions again.

“Dodd-Frank,” Ms. Morgenson goes on, “actually widened the federal safety net for big institutions. Under that law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits. At the same time, those eight may avoid Dodd-Frank measures that govern how we’re supposed to wind down institutions that get into trouble.

“In other words, these lucky eight got the best of both worlds: access to the Fed’s money and no penalty for failure.”

For the record, those eight are most of the clearinghouses that settle options, bond and derivatives trades – including the Chicago Mercantile Exchange.

The fact Ms. Morgenson has been writing about these outrages for the better part of a decade in the newspaper most read and respected in the national power structure… and the situation only gets worse after 2008… says volumes, none of them good.

  With the election out of the way, it’s a “risk-off” day.

Never mind the above-mentioned swans: Traders are suddenly remembering a boatload of tax increases and spending cuts are due to take effect in another 54 days… and Europe still isn’t “fixed.” As such…

  • The Dow has slid below 13,000. The S&P’s grip on 1,400 is tenuous at best
  • Oil is down 3%, to $85.69
  • 10-year Treasury yields are their lowest in a month, at 1.64%
  • The dollar index has firmed to 80.8.

In this context, gold’s performance is… well, interesting. Like stocks, gold zoomed up yesterday. Today, it’s given up some of those gains, but for the moment is still holding the line on $1,700 — $1,707, to be precise.

  In keeping with our gold-and-the-election theme this week, we examine an intriguing chart.

It’s the gold price ever since our original Trade of the Decade in 2000 — incorporating the 65-week moving average, a favorite indicator for technically inclined gold bugs. Note when the price falls below the average and what happens in subsequent years…

“While inevitable may not exactly mean imminent,” muses Byron King this morning, “this election is entirely positive for future gold and silver prices. We’ll live in a bouncy price environment, of course, but generally the trend is upward. Gold and silver may not be the trade of the [current] decade, but certainly a good bet for four more years.”

  Still, you might want to hold off on your next precious metals purchase for the moment: “If you want a clearer picture of where gold might be headed in the near term,” writes Greg Guenthner, “it always helps to check out a chart of the dollar:

“Here we have the dollar index poking its head back above its long-term moving average after a strong move off support at 79.

“If strength in the U.S. dollar continues, you might have a chance to buy gold at lower prices soon enough. Gold continues to bounce between $1,550 and $1,800. Maybe a move closer to the bottom of its yearlong trading range is in order before another meaningful push higher:

[Ed. Note: Greg and our other resident technician, Jonas Elmerraji, are embarking on an experiment. They’re looking for at least 75 readers, with whom they’ll share a host of tips and techniques aimed at making them better traders. We’re talking trades that can turn $1,000 into $5,240.

No experience necessary. And the best part: You won’t have to stay glued to a screen with charts all day to make this trading strategy work. Learn how you can participate — at no cost to you — by following this link.]

  “In light of your failure in recent years to nominate competent candidates for president of the USA, and thus to govern yourselves,” Queen Elizabeth writes to me via email this morning, “we hereby give notice of the revocation of your independence, effective immediately. (You should look up revocation in the Oxford English Dictionary).

“Her Sovereign Majesty Queen Elizabeth II will resume monarchical duties over all states, commonwealths and territories (except Kansas, which she does not fancy).

“Congress and the Senate will be disbanded,” Her Majesty goes on. “A questionnaire may be circulated next year to determine whether any of you noticed.”

The Queen lays out the rules: It’s not flavor, it’s flavour. We are no longer to realize, but to realise. “Generally, you will be expected to raise your vocabulary to acceptable levels (look up ‘vocabulary’),” she suggests.

On the shortlist of her required changes: July 4 will no longer be a holiday. We’ll have no guns, lawyers or therapists. We’ll now need permits for vegetable peelers.

And American beer is now to be referred to as “near-frozen gnat’s urine”… (at least she’s got some things right).

Click the Queen to see the blueprint for the new monarchy…

  “Your legitimacy is in question,” reads the subject line of an email opening a new front in the War on The 5.

“First, your recent format change away from actual recommendations and purveyor of investing news is a bummer!

[Didn’t happen]

“Second, you spout anarchist viewpoints in a world where limited government must exist to protect individuals from lynch mobs.

[Your opinion, of course.]

“Third, you ignore Ayn Rand personally while extolling her ideas on capitalism, and, worse, are silent about her philosophy’s underlying moral justification of capitalism.

[Never met the woman.]

“Why not say something that fights against the encroaching evil of collectivism in addition to tips on preparing for it?”

The 5: We decry the encroaching evil of collectivism! (In addition to tips on preparing for it.)

  “I don’t have any problem with The 5,” reads a dissenting opinion. “Been reading it since it started, and I like it just as much now as I did then. What the hell are people bellyaching about?”

  “I’ve been reading you guys from the start,” says another. “Dang, I can’t even remember when The 5 started (2006?), but I was on board after reading The Daily Reckoning and found it to be my daily must-read.

“Not sure what everyone is griping about. The format has been the same this whole time, replacing a few writers with different ones from time to time.

“I believe people don’t REALLY know what they want. They say they want straight info and to leave out the entertainment. I doubt it. They would probably get bored rather quickly and stop reading if all you had were manufacturing reports and inflation numbers.

“Second, they seem to think you don’t spend time testing ads. Leave it to folks who know nothing of the business to tell you how to run it. Granted, you should always listen to your customers, but I have the feeling that the ads are the way they are because they work. And if they didn’t work, well then, no more 5.

“Keep up the great work!”

  “I read your publication every day, and I love it,” says another, even as we run the risk of pulling a muscle patting ourselves on the back. “You have been enormously beneficial to me.

“Because of your warning of the coming economic crash, I got myself some income insurance in case I became redundant. As it turns out, I was fine during the crash… but lost my job a couple of years later, when your warning and my response to it really came in handy.

“Both The 5 and Whiskey & Gunpowder (sadly no more) have changed my view of the world. It’s a scarier place than I thought it was — but for this, I thank you. Ignorance might be bliss, but you won’t see it coming until it’s too late.”

The 5: Whiskey was folded into our Laissez Faire project.

  “Complainers be damned!” says our favorite reader today. “I like your format and what you have to say. And when I discuss things with my broker, we can have an intelligent conversation, and he even says I’m well-informed.

“Your column is like a cane for a blind man. You hit on a lot of things and don’t always explore every part of it, but you let us know what is important. The complainers can always skip what they don’t want to read. Some of the rest of us are interested.

“But some of the long-winded sales pitches are a drag for veteran readers. We know your qualifications, etc., etc. — get to the punch line. Halfway through the pitch, we’ve already decided to buy it. We know the quality/value is there. So maybe devise a short pitch or long pitch and a The 5 in 3 Min. Forecast for the truly pressed.”

The 5: Oy.

 “Regarding the (free) deeply researched information you guys share in introduction to the selling of your newsletters,” writes our last, “I love it!

“I’ve learned TONS reading those ‘diatribes leading up to a sales pitch,’ and I’ve forwarded many just so my friends could have the info in the introductions.

“I know these are incredibly serious, crucial and dangerous times, but I’m having more fun than I’ve had in years learning about the goings on in the world through your newsletters and utilizing the vast experience of your ‘staff of geniuses’ to explore great investment possibilities.

The 5 is just an absolute blast.”

The 5: Touche. Without you, it wouldn’t be possible.


Addison Wiggin

The 5 Min. Forecast

P.S. We’ve never met Mike Draper. But we already like the owner of a T-shirt place in Des Moines — inside the “security zone” where the president was campaigning Monday night.

The Obama campaign paid Mr. Draper’s establishment a visit earlier in the day. First, they told him he’d have to close four hours early. He said no. Then they told him he could stay open if he consented to a Secret Service search of his business. He said no again.

News accounts begged the question of what authority campaign people have in this matter. In any event, that was that… and Mr. Draper posted the following sign on the front door of his establishment.

The Obama people showed up again and called the sign “disrespectful.” After this, there’s a yawning gap in the news accounts. “The sign was removed from the window before Obama’s rally started Monday evening,” according to Yahoo News. A sign of things to come… prepare here.


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