Gold in Uncharted Territory with Silver Following Along

Many reasons have been given for the rise in Gold and Silver during the month of October but overlooked by the mainstream press is an important point; the beginning of the 2010 United States fiscal year. Spending is expected to balloon to upwards of $3.55 trillion dollars with a budget deficit of $1.75 trillion dollars.

It is clear that the next bubble is not in US Treasuries but in the US Government itself. Under Bush II, government was allowed to expand far in excess of what was necessary. Discretionary spending exploded and deficits were allowed to run rampant. Sprinkle in a massive increase in US Treasury issuance along with artificially low interest rates, a touch of monetary supply growth while interest rates were being increased, the collapse of the US real estate market severely weakening the US banking system, and you sow the seeds for the massive increase in government spending we have today.

Three points are certain at this moment in time.

The first is that the United States, with the amount of debt outstanding and coming down the pipeline, is not able to undertake a policy of raising interest rates from these low levels to normalized levels for a number of years.

The second point is that Asian economies, starting with Australia, are going to lead the rate cycle as their economies and banking sectors have weathered the storm in better shape than the US and Europe. Expect to see conventional and unconventional (by Western standards) monetary tightening during this cycle.

The increased focus on Asia will provide investors with very interesting opportunities in a number of sectors.

The third and final point is that Gold and Silver will only go higher from here over the next 6 month period with a spike in price during the March-May time frame after which we trade sideways for at least a year in order to digest the run higher and the increase in gold supply coming on market from new mines coming into production.

The peak in Gold should coincide with a peak in Silver as well along with a test of the USD lows made last year.

In terms of supply, we should remember that Penasquito, Goldcorp’s massive mine in Mexico, is scheduled to come into commercial production in January of 2010. This supply of gold, silver, and zinc should be enough to keep each market in a sideways range for some time until the supply is properly digested.

Investors who do their homework should find themselves well rewarded by the end of the first quarter next year.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Gold in Uncharted Territory

Many reasons have been given for the rise in Gold this week but overlooked by the mainstream press is an important point; the beginning of the 2010 United States fiscal year. Spending is expected to balloon to upwards of $3.55 trillion dollars with a budget deficit of $1.75 trillion dollars.

It is clear that the next bubble is not in US Treasuries but in the US Government itself. Under Bush II, government was allowed to expand far in excess of what was necessary. Discretionary spending exploded and deficits were allowed to run rampant. Sprinkle in a massive increase in US Treasury issuance along with artificially low interest rates, a touch of monetary supply growth while interest rates were being increased, the collapse of the US real estate market severely weakening the US banking system, and you sow the seeds for the massive increase in government spending we have today.

Two points are certain at this moment in time.

The first is that the United States, with the amount of debt outstanding and coming down the pipeline, is not able to undertake a policy of raising interest rates from these low levels to normalized levels for a number of years.

The second point is that Gold will only go higher from here over the next 6 month period with a spike in price during the March-May time frame after which we trade sideways for at least a year in order to digest the run higher and the increase in gold supply coming on market from new mines coming into production.

The peak in Gold should coincide with a peak in Silver as well along with a test of the USD lows made last year.

We should remember that Penasquito, Goldcorp’s massive mine in Mexico, is scheduled to come into commercial production in January of 2010 as well. This supply of gold, silver, and zinc should be enough to keep each market in a sideways range for some time until the supply is properly digested.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

4th Quarter Investment Thoughts

I would like to start by making a comment on my last article. Globally, there are values in financial stocks in countries not hit as hard as the US and Europe. My bearish stance is US based, not global.

If one takes the time to look they can find good values, especially in Asia and Canada where banks are lending and making solid profits.

Recent home sales numbers were positive. Inventories are being cleared from the system; which given the new wave of resets is a very good sign. There is a question of what will happen in 2010 when the tax credits expire. I have a pretty good idea on how this plays out in the coming year but would like to see more data before my thesis gets solidified. In the meantime, if sales and inventories continue to fall, properties in the grey market will likely come online. The faster this glut of grey market properties work their way through the system the quicker we can return to normal.

The scenario is similar to how tech companies had to wait for equipment purchased by dot.coms who went bust to work their way through the system in 2001 and 2002 before they started to see any growth.

The recent pullback in gold and silver is a pause that refreshes. Gold seems to be tracking the dollar which is headed for a retest of the lows made in 2008 which retested lows made in the 1980’s. The key is what happens next year during the period of time when we retest. Do we dare look back to what happened more than 25 years ago? I have a pretty good idea how this scenario plays out through 2010 but once again need to see more data before my thesis become solidified.

Neutral to bearish in hard commodities. There are some seasonal factors at play here and the technical charts do not look strong at all. An upside breakout would turn me into a bull but I believe each metal, with the exception of gold and silver, needs to take a break and reassess its fundamentals vis-a-vis stockpiles and supply-demand fundamentals.

Agriculture stocks continue to provided fantastic value and returns if you are willing to do your homework.

Sugar should underperform relative to other soft commodities.

The broader market is likely headed higher after a correction but there are better returns elsewhere outside the major indexes. The next group has yet to emerge and assume leadership in the market so what we are seeing is not the beginning of a bull market but rather a correction in a long-term (decadinal) sideways movement.

The Fed statement spoke about extending the mortgage securities purchase program into the first quarter of next year. This is an admission that they will not be able to wind down this program as fast as programs like TALF.

Rates will end up staying low in the Unites States much longer than people expect. I believe that those looking for a rate hike in 2010 will be disappointed.

The real question going forward in monetary policy is ‘Who globally will lead the charge to raise rates?’

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Cirque du Soleil OVO review

Having seen 15 out of the 20 current shows I believe it is safe to call myself a Cirque veteran. What I enjoy the most out of each show is seeing how they can push themselves with each new show in terms of acts, costumes, characters, etc.

OVO, the newest touring show from Cirque du Soleil, succeeds in each area. The premise of the show is simple. A day in the life of a group of bugs with all their frenzied excitement until a new bug arrives carrying a mysterious egg. The bug takes a liking to a certain member of the group and the feeling is mutual.

The costumes were amazing works of art once again. Sitting up close I was able to notice less of the traditional tight fabric and more of what seemed to be a shell or skin reflecting the insect characters. Some parts of the costumes were removable so the performers could perform their required acts but they all looked like exotic bugs in a field somewhere.

The acts themselves were a wild mixture of old and new with something for everyone in attendance. For the adults there was a subtle eroticism in the pole balancing and flying ropes. The children were enthralled by the costumed characters, the antics of the ants during the foot juggling, and the blossoming love interwoven with the antics of the clowns.

Traditional acts such as the loose wire and the flying act had their envelopes pushed into new realms. Balancing and contortion had changes as well with the addition of an all female balancing group and a spider web addition to the stage which set the backdrop for contortion.

But the best was saved for last when the massive rock wall which served as the backdrop for the stage came into play. It is safe to say that you will not look at a rock climbing wall in the same way again.

One of the biggest changes was the addition of more dancing, taking the place of traditional clowning after a particularly intense act in order to lighten the mood and prepare the audience for the next act.

Aromas were also used to enhance the overall experience. Damp earth to start (a morning dew?) and flowers later on.

The music took on a new approach as well with the musicians themselves taking a more active role in the performance on a couple of occasions stepping out from their traditional area.

There were a number of acts which generated a complete ‘wow’ factor leaving you wondering how much practice, care, trust, and lack of fear went into the creation of the show.

OVO is an excellent addition to Cirque du Soleil’s touring group in which they reinvent themselves once again and push the envelope of their shows on all fronts.

Why I am Bearish on Financial Stocks

After seeing quite a large rally from the March lows the market appears to be extended and indicators (stocks above 200 day moving average, market PE, bullish/bearish %’s) are signaling some rough seas ahead. While stock could conceivably move higher there are a few reasons why I am bearish at the present time.

Harkening back to 2007, I would like to give credit and thanks to Credit Suisse for the following graph.

http://i650.photobucket.com/albums/uu223/dcurban2009/136440158-O.jpg

As one can see the initial tsunami of bad loans has receded and financial stocks have been licking their wounds and repairing their balance sheets but we are at the beginning of the second wave. This second wave of option reset mortgages will do more damage because of the already weakened state of banks.

The relaxing of mark to market rules has helped repair balance sheets but there will continue to be problems throughout 2010 and into 2011 until the 2nd wave of resets recede.

As the resets continue, non-performing loans continue to rise, causing additional strain on an already weakened banking sector. It is unlikely that we will see a significant drop off in non-performing loans until the bulk of the option resets are completed.

Bank failures continue on a weekly basis with the problems being felt mainly by small and medium sized institutions. Some larger weakened institutions have succumbed to the pressure as well. Recent comments that the FDIC may need additional capital should sound a warning bell across the financial space.

While the housing data has been bullish due to buyers assistance programs, one needs to keep in mind that the reported figures are month-over-month data, not year-over-year. As we get into the fall and winter months the MoM figures will decrease as seasonal patterns take place.

Housing inventories continue at a high level, with many homes being taken off market and rented until the selling climate improves. As we continue through the resets, it is likely that inventories stay high until the potential overhang from option and agency ARM’s clears. Any spurt in new home construction will slow the housing inventories from being worked off in a timely manner.

Retail sales numbers continue to be disappointing, although we are entering a period where comparisons will be much easier. The year over year data shows a 9.4% decline in June and an 8.3% decline in July. Again the YoY data is more telling than the MoM data.

High levels of unemployment will constrain spending and GDP growth into 2010 and later. Government stimulus programs will provide the necessary counterbalance to weakness in consumer spending helping to guide the economy through this difficult period.

This is not an approval for the governments polices but one needs to note that a similar path is followed in every recession. The authors problem lies in the wasteful programs and high deficit levels that state and federal governments carried coming into the recession which only exacerbates the problem going forward. Spending that is targeted at areas to provide future growth is preferred over the construction of dog parks.

So while global economies are likely to come out of the recession without much problem (Japan will be an exception) GDP growth in the US is likely to be below normal levels.

Inventory restocking will give a bump to GDP growth in the coming quarter as will government stimulus programs. This combination will set the stage for renewed consumer and business confidence in the coming years but first we will need to get through the a possible double dip recession in 2010.

So while the market itself may move higher I see better value and higher upsides in the precious metals and agriculture sectors where there are some very interesting values globally. Quite often the best values are off the beaten path.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Investment Thoughts (August 3rd, 2009):

Not going to chase the market for a number of reasons, but most of all we should see a retest of the March lows sometime in the distant future, maybe a year or so. The US banking sector is still not healthy and has been propped up by regulatory rule changes.

So while financial stocks may be doing well at the present time they will not be the leaders in the new cycle for a variety of reasons. Among them are the mark-to-market rules, increasing non-performing loans, and difficulty in earning a solid NIM in a 0% cost of funds environment.

In order for a new bull market to begin, a new sector must take up the leadership mantle. The leaders from the previous cycle do not lead in the new cycle.

Technology is unlikely to provide leadership as R&D budgets continue to get cut. Businesses are unlikely to commit to major capital spending programs, despite a 0% interest rate environment, amidst falling revenues and uncertain consumer demand. Consumer uncertainty about the future will translate to a cautious business environment going forward.

It may sound strange to say this but with top line revenue growth falling and earnings estimates being met by cutting employees and R&D budgets, this is not a healthy sign for the future.

Without top line revenue growth earnings momentum will be difficult to maintain. You can only cut so much staff and R&D. At some point revenues need to grow and that will only come through increased consumer confidence.

When you combine an US unemployment rate that has gone from 5% to 9% and 70% of US GDP being made up of personal consumption, it is no surprise that consumer demand is weak and consumers are tightening their budgets. We will need to see strong hiring in order to get consumers feeling better about the future and opening their pocketbooks.

I am not a proponent of massive budget deficits but right now government spending is propping the US economy from falling off a cliff. This happens in every recession so there should be no surprise here.

Government spending is adding a couple of percent to GDP at the current time. A significant portion of the stimulus money is targeted to be spent in the coming years which should help the recovery. The question is how much will it affect hiring which should translate into higher tax collection as well and possibly allowing the government to meet their optimistic projections for the 2011-2012 time frame, although it is not the authors opinion that the overly optimistic projections will not be met.

The biggest question concerning the recovery should come from the balance sheet of the Federal Reserve. It is Mr. Bernanke’s intention to begin shrinking the balance sheet of the Federal Reserve in the coming years bringing it back down to a reasonable level.

The largest problem is how much will the shrinking balance sheet constrain the economic recovery. In order for the Federal Reserve to sell the securities it now holds there needs to be a buyer on the other side of the transaction. It is unlikely that the capital will come from drastically higher leverage levels at hedge funds and banks. This means the capital needs to come from either foreign governments or the private sector. Capital coming from the private sector will mean less capital for investment purposes. Capital coming from foreign governments means competition for Treasury sales.

Any recovery will be slow and grinding which is not what the bull camp wants to hear.

So what am I doing right now? Sitting on the agriculture purchases I have made over the last six months. Farmland, fruit, vegetable, and sugar production has provided a nice hedge and decent returns. There is tremendous value in the sector with some stocks already surpassing pre-crash highs.

Gold and silver should begin moving to the upside in the next few months but I am content to wait for a washout correction. This should occur about the time we get either a peak in the US Dollar, the US equity market, or both. We have yet to see a 50% retracement from last years lows which is giving me pause, although there are some interesting trades in the large cap sector.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Green shoots?

Recent press reports concerning green shoots are leading consumers to believe that the economy has turned a corner and we are on the road to an economic recovery. However, one has to look at these reports with skepticism and filter through the noise in order to ascertain the real story behind the scenes.

GM and Chrysler’s bankruptcy and reorganization will drag down second half growth rates as long as both firms are in bankruptcy. The quicker both firms emerge the earlier we can start rebuilding consumer confidence.

Recent positive data emanating from the housing market should be watched with skepticism. Housing numbers are reported on a month-over-month comparative basis and with the average temperature rising more people are looking to purchase homes. Once fall rolls around, month-over-month comparisons will fall leading to skepticism about a recovery.

The US housing market will continue to take years removing the overhang currently in place. Uncertainty over the economy will give buyers pause before jumping into the market. An additional bulwark to a recovery in the housing sector is the banks reluctance to make loans. As long as the banking sector views holding bonds over making loans on a risk adjusted basis a housing recovery will be impeded.

Given the low amount of home equity available it is unlikely that homeowners will be able to use equity to fund durable goods purchases and home renovations. Even if a loan was written down to fair value, a bank will be unlikely to extend home equity credit after losing a significant portion of the loan and future interest income.

Since income growth will be slow due to uncertainty in the job market, consumers will not be in a mood to extract equity from their homes and will likely continue to rebuild their savings.

Consumers will spend on necessary purchases but it is unlikely that businesses will fund expansion plans until they see an economic recovery taking place.

Export growth will slow as overseas consumers and businesses look to the US for growth and leadership.

Recent dollar weakness should be viewed not as dollars leaving the country but rather investment dollars held in US Treasuries being swapped for foreign equities as funds who have missed the rally attempt to play catchup. Foreign third tier markets have jumped higher in recent weeks signaling an approaching short-term market top. Second half weakness should be met with a rise in the dollar as funds retrench ahead of the expected weakness.

The differentiator here is not foreigners pulling money out of the US but rather investment funds looking to catch a higher risk adjusted return in foreign markets after the run up in the US markets. This is similar to the events that happened in the fourth quarter of last year when overseas investments were sold and proceeds converted back into US Dollars.

Efforts to restrict government spending in a recession will cause growth to lag and risk causing the recovery to lose traction. Any efforts to restrict spending should be focused on government waste with efforts on projects which will create jobs now and in the next upcycle. Increased R&D spending along with infrastructure improvements are the projects which will provide current and future benefits. Dog parks and similar programs are wasteful spending which provides no short or long term benefits.

It is likely that the green shoots people are seeing are not the basis for a long-term recovery and just the first bottom in a W shaped economic recovery.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

It is what it Is

When one looks at the stress tests recently completed by the US government one has to properly filter the noise. The government has released the results and metrics used in the ’stress tests’ which have been picked apart by many people. You can crunch the numbers and manipulate the statistics all you want but in the end it comes down to loss recognition on bad assets.

Right now there is a tug of war going on between the private sector and the government. On one hand, we have the government looking for greater oversight of the financial sector. On the other hand, we have a banking industry looking to get out from underneath the government’s umbrella believing that they can fix the problems on their own. In this case, both sides are wrong.

The financial sector can be self-policing with a greater emphasis on risk management as is the case in Canada. But the participants in the sector must accept a greater responsibility for their actions and that includes the potential for failure. Capitalism is not about bailouts it is about letting market forces dictate winners and losers.

The government cannot expect to go the route of pay regulation as it will contribute to a brain drain in the financial sector. Just ask anyone working for a Big 4 auditing firm if they are having problems recruiting talent after the Arthur Andersen debacle. This should be a warning to those who seek to regulate items like executive pay.

Sarbanes-Oxley did more harm to the US financial markets by forcing small to medium sized businesses to go private and chased away IPO dollars to markets such as Toronto, London, and Hong Kong.

For those who wish to pursue further regulation in the financial markets, it should be done in a way similar to the regulations which came into effect after the 1987 market crash. In other words, capital formation should not be inhibited in any manner.

Everything is Getting Better

Back in the middle of the financial meltdown last October I penned a quick article entitled [url="http://www.financialsense.com/fsu/editorials/urban/2008/1016.html"]Everything will be All Right in the End[/url]. At the time the world seemed to be falling apart but it is important to understand that although the skies seemed dark at the time, there is a light on the horizon.

Since then the banking industry has undergone stress tests, the creation of various governmental funding mechanisms, and the thinning of the herd in terms of smaller weaker banks being acquired by larger organizations. A sense of normalcy is slowly returning to the industry and as banks spend the appropriate time in recovery.

We are currently at the point where lending standards have tightened and banks feel that the risk/reward ratio is tilted in favor of holding government and corporate bonds rather than making loans. Good people with good credit can get loans in this environment however people who have no income and no job will have no access to credit as it should have been over the past five years. This has been lost in the noise about banks writing off mortgage balances and foreclosures.

We are in the same position today in terms of lending standards as we were at the bottom of every credit cycle going back as long as records are kept. What makes this cycle different from the rest was the movement of mortgages on the edge of the lending bell curve to the mean. Because these mortgages were securitized into illiquid MBS and then chopped and diced into even more illiquid securities the healing process in the banking system will take longer than normal.

So where do we go from here? The healing process will take a number of years as banks continue to deal with problem loans and rebuild their capital structures. The key is loss recognition. The quicker losses are recognized and put behind the bank the quicker they can move forward in terms of rebuilding the capital structures.

Once the capital structures are rebuilt, banks will continue to choose to hold bonds over making loans to less than creditworthy clients until the risk/reward ratio favors making loans to those clients. Any efforts by the government or private sector to return to the lending practices in the middle of this decade should be looked at as a worrisome sign. Even more worrisome would be a return to these lending practices by banks of their own accord.

One recommendation would be to allow Canadian banks, who have very strong capital bases, to acquire weaker banks in the United States. TD Bank made a sizable acquisition in acquiring Commerce Bank but other Canadian banks should be allowed to make acquisitions as well. After speaking with a number of professionals in Canada, they are showing a keen interest in expansion south of the border. Given the strong capital base and risk management practices employed in Canada, where the banking sector was recently rated the strongest in the world, the US government should be opening doors for our neighbors to the north. This would only strengthen the US banking system as a whole and strengthen any economic recovery.

We are back….temporarily

I am back temporarily to expound a bit on what is going on. Do not get excited but I feel the need to cut through the noise once again and give a bit of clarity.