Tuesday, September 15, 2009

Lehman Lessons, "Confidence" Game, $1000 Gold, the Oil Squeeze, and More!

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5 Min Forecast
September 14, 2009

  • Lessons learned? The 5 ponders the meltdown of '08 and where we go from here
  • Housing market hangover: Why a larger down payment makes you a worse credit risk
  • The "confidence" game: Amoss, Sarnoff on where U.S. stocks go from here
  • Gold clings to $1,000… Byron King's long-term outlook
  • Chris Mayer on the "oil squeeze" that has Americans caught in the middle

 A moment of silence, please, as we begin this morning. For it was on this date a year ago the slow-motion financial meltdown suddenly accelerated to warp speed.

Of course, Lehman Bros. went to the great investment bank in the sky. But it was also when the feds arranged the shotgun marriage of a failing Merrill Lynch to a moribund Bank of America. And AIG's collapse into federal hands was taking shape, if not yet a done deal.

Years of debt and securitization finally caught up to the FIRE (finance-insurance-real estate) sector of the economy. The titans of finance refused to come clean about the real value of the "assets" they sat on… and finally it came time to pay the piper.

Dan Amoss, whose recommendation of Lehman put options generated 462% gains earlier that summer, wrote in this space a year ago, "Think about how much better off Lehman Brothers would be if its management hadn't put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not." (Dan has two more bets on stumbling banks in Strategic Short Report right now.)

So the heavy hitters of the finance sector have surely learned their lessons and proceeded to mark down their "assets" to realistic levels over the last year, right?

You wish. Even mainstream economists like the Nobel laureate Joseph Stiglitz say we're in a worse pickle now. "In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz told Bloomberg over the weekend. "The problems are worse than they were in 2007 before the crisis. It's an outrage."
  Nor has the proximate cause of the meltdown -- irresponsible mortgage lending -- been worked out, either. Before the housing bubble got under way in earnest, lenders would turn you down if your overall debts including the mortgage payment totaled more than 36% of your gross income.

Now, after everyone supposedly has learned his lesson, Internet message boards are crackling with stories of the Federal Housing Administration still accepting loans in which the borrower has a debt-to-income ratio of 64%.

  As yet another indicator of how out of whack the real estate market remains, we point to the weekly newsletter of the California Association of Realtors, sent along to us by a faithful reader.

Not only can you still get a mortgage with less than a 20% down payment, you're now punished with a higher interest rate if you put down 20% or more. The reason? The CAR says Fannie Mae and Freddie Mac "consider these borrowers to be more of a credit risk since they are not required to purchase private mortgage insurance."

That's right. Put more money down and you're a higher credit risk. Love it.

  No observance of this anniversary would be complete without a presidential speech -- which should be done around the time this hits your inbox. Mr. Obama will use the occasion to propose giving more powers to the Federal Reserve.

We should not be at all surprised. After all, Sept. 11 resulted in more powers for the very agencies that missed all the warning signs of the attack. Likewise, the Fed already had the power to stop its member banks from leveraging up to insane levels and never lifted a finger to exercise it.

We like Ron Paul's take better.

  And how do ordinary people feel about the response their government leaders have made to the crisis? Americans are, as our friend Doug Casey would put it, "a bunch of whipped dogs." Rather, they're supremely sanguine compared with much of the rest of the world.

For all the honeymoon-is-over talk surrounding Obama, we're struck by how much grumpier people seem to be elsewhere. Americans are as satisfied with the actions of Obama and Congress to the same extent Russians are satisfied with those of the Putinocracy.

We should note here that Russian GDP contracted at a breathtaking 10.9% last quarter, while consumer prices are rising at a better-than-10% clip.

  The U.S. stock market opened down about 0.5% this morning after another slight move down at the end of last week. Traders were unmoved on Friday by higher-than-expected consumer confidence numbers. As one pundit pithily explained it to MarketWatch, "Confidence only matters if it translates into an increase in spending." We take this as a sign the mainstream is finally catching on that the consumer is tapped out.

Then again, maybe not, as we turn to the present-day reflections of Dan Amoss. "Stock market bulls continue to buy on the basis that confidence -- not a recovering labor market -- is all we need to have a roaring economic recovery."
"We can't accurately label what's happening now a 'jobless recovery,' because the labor market has yet to even stabilize -- let alone recover. Hiring intentions remain near an all-time low, and there's little reason for hiring activity to pick up on a sustainable basis. The National Federation of Independent Business index that measures job openings fell to a 27-year low in August."

"In my view, stocks have rallied far beyond any link with their depressed intrinsic values, and continue to rally on the basis of Ponzi psychology."

  Which doesn't mean the rally can't go on a while longer.

"Shorts are still getting squeezed and stocks may move even higher in the week ahead," says our options guru Steve Sarnoff. But "I see potential negative divergences developing and the conditions for a short-term top are being set. I want to see more evidence for the market's next decisive move."

Thus, Steve is keeping his powder dry this week and holding off on a recommendation for Options Hotline readers -- a rare pause for him. That makes now an ideal moment to pick up a year's membership in Options Hotline for half price, in plenty of time for his next recommendation this coming weekend. You can secure access to Steve's unmatched 10-year record of success here.
  Gold is hanging on for dear life to $1,000. After setting a record close of $1,004.85 in New York on Friday, it's gyrating above and below four figures today.

Gold has pierced $1,000 several times in the last 18 months, but never stayed there for long. It might not this time, either. UBS analyst John Reade says speculators' net long position in gold reached a record high last week. In the past, that's signaled an average 5% sell-off.

  Longer term, however, there's little doubt where things are going. "Is there an upper limit to gold prices?" asks Byron King provocatively. "I expect to see the gold price rise, but slowly and in a long series of plateaus. I also expect to see pullbacks, usually based on world monetary and political events."

"How it all unfolds for us as investors will depend on when, and to what degree, monetary-driven inflation begins to bite into the economy. When it becomes totally obvious, it'll probably be too late to protect and preserve your wealth and purchasing power."

That means if you haven't already, now's the time to start accumulating precious metals, mining stocks and energy shares. Byron issues a new energy recommendation later this week for members of his premium service Energy & Scarcity Investor. "I'm really excited about it," he says, figuring it has at least the same 209% potential he delivered on a tiny oil producer during the summer. "I've been talking with people on four continents to narrow the focus down to this one investment idea."

Here's where you can get access the moment Byron issues his buy signal.

  Chris Mayer sees an "oil squeeze", of sorts, on the immediate horizon. Americans find themselves caught between developments in both Canada and Mexico.

Mexico's Cantarell oil field, once the world's second largest, "is dying even faster than expected," says Chris. Oil production has slowed to 500,000 barrels a day, from over 2 million barrels a day in 2005."

"What this means to Americans is that we are going to lose a close and friendly source of oil. We'll have to plug that hole by buying more oil from the Middle East, or Canada."

But Americans are hardly the only consumers of Canadian oil output anymore. "China just bought itself 3 billion barrels of Alberta oil," Chris notes. "PetroChina paid $1.9 billion for a 60% stake in Athabasca Oil Sands Corp."

"We've long known that China has eyed the oil sands in Canada with desire. So the transaction is not a surprise, but it does signal that the oil sands are back. The price China paid just for the oil sand assets comes to about 60 cents a barrel. That is a price that brings us back to the level of some deals in 2007 and 2008."

Oil sands production is expensive. Not doable when oil is $33 a barrel as it was early this year. But at $70, it starts looking pretty good. Chris has an oil sands play primed for "unlimited upside" in the Capital & Crisis portfolio.

  The dollar index has worked its way back up to an even 77.0 this morning. Ordinarily, that would put a hurt on oil, but oil has barely budged at $69.35.

  The data cupboard is bare today. Tomorrow will be a different story -- wholesale prices and retail sales, among others. We're looking forward to them as much as we're awaiting failing eyes and bad knees in middle age. Bring it!

  We can't let the day go by without noting what may be the first sovereign wealth fund to go belly up. Not surprisingly, it's based in Dubai.

What did in Istithmar World is what did in Lehman and the whole laundry list of high finance's casualties -- too much debt. (As irony would have it, the fund was headed up by a former Lehman exec.) Up to 90% of its purchases of such assets as Barneys New York were financed with debt.

Barneys is now negotiating to stay out of bankruptcy court, and other Istithmar World plays like Cirque du Soleil and a marina in the Caribbean that caters to the world's biggest yachts are likewise in trouble as even the uber-wealthy trim their sails. Hey, it's tough all over.

We're traveling with Agora Financial's managing editor Chris Mayer to Dubai in October to evaluate a potential JV there. Dubai has busted. Property values have pitched and jawed down 47% year over year. But you know what they say… the time to invest is when there's blood flowing in the streets.

  "Every day and in every way the public sectors (governments) are thinking up and implementing new programs to steal, cheat and shaft their citizens," a reader writes. "This results in a smaller private sector that is the creator of meaningful jobs, while the public sector creates more high-paying and unnecessary jobs that suck the blood out of us all. This restricts the real job growers from going ahead because of this government interference. Will we ever wake up?"

The 5: Funny you should ask. Last Friday, we traveled to Tampa, Fla., to meet with our friends at Odyssey Marine. If there ever was a scheme in place to shutter someone's private enterprise, Odyssey and its case with the Kingdom of Spain is it.

You may recall from our coverage here in The 5, Odyssey is in the business of finding lost treasure at the bottom of the ocean. A couple years ago, in an operation code named, The Black Swan, Odyssey found $500 million in coins off the coast of Gibraltar. For its efforts, their ship was impounded by the Spanish navy and the ship's captain was placed under arrest. The Spaniards subsequently sued Odyssey in U.S. district court.

The story is outrageous and intriguing in its own right… but the details of the case that we learned on Friday are even more astounding. The D.C.-based lawyer who filed in Tampa on Spain's behalf is a member of a rival archeological society and is a law partner with the firm that spawned U.S. Attorney General Eric Holder. Last week, the U.S. Justice Department has filed an amicus brief on behalf of Spain, rather than its own citizens.

Spain announced last week too it's sending troops to Afghanistan for the first time. Reversing a policy it had set of noninvolvement with the war on terror first set following the Madrid bombings of March 2004. Hmmmn…

We're not much for conspiracy theories. But this story is getting really interesting. We're considering using Odyssey as a case study in a new film detailing the pitfalls of entrepreneurship in an age of increasingly ambitious, aggressive and beguiling Western governments. Let me know what you think…

Addison Wiggin
The 5 Min. Forecast

P.S.: Friday, as you know, was the eighth anniversary of Sept. 11. Ironically, we were standing in the security line at Baltimore Washington International Airport (BWI) at the time the first plane came in. The entire airport ground to a halt to observe a moment of silence.

Within earshot, maybe a thousand people stood absolutely still and quiet. It would have been eerie, if not for the jackass behind me yelling into his cell phone "I don't know what the f*%k the hold up is… there's a problem with the security machines or something." He only got off the phone long enough to yell, "Let's move it," to no one in particular.

After a minute, the machines whirred back into action, the security stooges began checking passports again. Normal conversations resumed around me. And the day continued, business as usual.

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