Story Time with JDH

[davidslane]

Bravo JDH.

Your take on Western decidance is spot on.
Just a slightly more subdued rant than Mr. Rick Santelli from CNBC this week.

I must add, that you did leave out one very important point.


Not only did consumers not create wealth through borrowing, banks did not make wealth through leveraging.  US banks leveraged their risky assets 20 to 1 to increase their profits.  European banks leveraged their risky assets 50 to 1 hoping to catch up for years of underdevelopment in Eastern Europe all at once.

When the assets went bad, the leverage was forced to be unwound and these banks lost decades of value to where most on now insolvent.


So, we can expand blame beyond just consumers. Greed takes unregulated capitalism to its worst self. And now we are seeing a facade of higher standards of living going away as that made of wealth evaporates.




The danger of the mass failure of European banks is going to be awful. It will keep the dollar from losing value as the euro will get crushed.




Look at a chart of gold for this decade. You will see that gold does 6 months spikes. Once a new peak is hit, gold retraces about 80% of that 6 month spike within a couple of months. Then it takes 18 months to get back to that peak. But within 6 months of that retest, we see a 50% gain in a 6 month spike.

That means 6 month spike, followed by 18 month consolidation and then 6 month spike.

But this time around, we saw only a 12 month consolidation before we retraced the peak from the last spike. If we follow pattern, we should see a 6 month spike of 50%.  The old history suggested we wouldn't see the next 50% spike until the fall, but maybe it will happen now going into October.

A 50% spike would be $1,500 for gold.
The DOW may see the low 6000's if this happens.


BUY GOLD stocks.




My last item for the day.

Throwing good money at bad banks or bad car companies is a waste --- unless it temporarilly averts a irrational crash in an economy or financial system.

Sometimes throwing good money to delay events can save more money in the end.  For instance, I think the US car companies can be brought into slow bankruptcy now and it will be much less damaging than 3 months ago to the US economy.  The savings in residual closings, unemployment and market crashes will be much less now. Same goes it we nationalize Citicorp and BofA now rather than 3 months ago.

Lastly, about that stimulus. Most of it went to US states (who can't borrow) as kind of loans to prevent states from firing teachers and police/fire fighters.

But as for the spending part (which was quite small), I'm all for creating artificial projects to give people job who couldn't find jobs via the shrinking private sector ---- provided, those jobs create long term value for the country (ROI) and wouldn't normally have been created by the private sector because the ROI for a private company wouldn't have been high enough or come fast enough for private enterprise to take on the same projects ---- wiring up rural areas or fixing bridges or water systems are great examples.

We give people jobs, lower unemployment payouts, receieve income taxes, and fix infrastructure which should offer positive ROI over time while lower unemployment during a recession. It should be a win-win.

[sunseeker]

JDH
Re: Consumer goods. I worked as an electrician for some time, so I can empathise with you. In most cases you couldn’t get hold of the spare parts to repair an appliance, and it was usually more cost effective to buy a new appliance if you could. Making repairs an unviable proposition.
The other side of the coin:
A friend told me some years ago that he was trying to buy a brand new motor cycle. He had tried everywhere in the area to get hold of one but he couldn’t. I knew someone who had a motor cycle dealership, and so next time I saw him I asked him why?  Well he said we can get hold of the motorcycles but it’s more profitable when they arrive to strip them all down, re-box all the parts, so I can sell them as original spares (the sum of the parts being considerably more than the whole). The frames and other bibs, and bobs were of little use so he sold them for scrap. It was just sound business sense. Hardly enviromently friendly though.

Good to hear from you again DSL (you have been a bit quiet of late).
That was a very good and informative post.
That’s a Dow/Gold ratio of about 4. Which seems to be in line with current expectations. 3 wouldn’t be out of the question in the light of the severity of the situation.

We are clearly in uncharted territory, and any thing could happen. Expect the unexpected seems to be the best course of action.
 
ATB

[bluefish621]

Nice stories and they're real and honest. I was raised by people who reached adulthood in the '30's and I've collected many stories from these people. I've worked hard since age 12 or 13 to help support myself, and saved regularly.
The Kondratief cycle best explains what just happened to the world. Every third or fourth generation suffers irrational exuberance, takes on great debt and then suffers a period of debt liquidation and misery.
Our economy is truly global now and the poorest in the world will suffer the most. I'm lucky to have some assets and enough fishing skills to catch and eat fish for most of the year in eastern long island; surf-fishing.
At present I have PM investments and some Dines penny stocks and I still work and collect social security; unfortunately my cash is earning pitiful returns, so much for being frugal enough to accumulate some funds!

[richmanch]

Thanks JDH, and everyone else who's been posting. I always like to hear from fellow investors and not newsletter writers, because I don't really know whose interest they're serving.

Of course, I will disagree with some of what you said. I see the same things that you see, but I don't attribute it to a generational shift, as if somehow people nowadays just don't know the value of a dollar, etc. And there has always been crappy merchandise--certainly a bit more now, but that's a matter of degree. The reason you might have an old, awesome panasonic radio is because it was the best of it's kind back in the day and was built to last...there were plenty of cheap radios that went to the landfill after a few years...

(I guess that statistics show that, over the years,  most people's debt has grown while their savings  has not--so in this respect, I agree, and it's made this credit crisis even worse).

This terrible market is not a result of a corrupt ethos, but just the coincidence of some unfortunate circumstances. Poor regulation, technology/housing speculation, etc. I've been posting about some real estate adventures in my area (south florida), and out looking today, and it seems almost worse than last week. The housing help that Obama trotted out will have virtually no material effect down here, as far as I can tell (agree with DSL though--I have no prob with the stimulus).

This is just going to take time. DOW 2000? Jesus, that would be wild. I've lost some money for sure, but not too bad. David's great book rec "Bulls Eye Investing" (which was pretty good about predicting this bear market [though doesn't get all that Roubini face time]) talks about the dubious idea of relative gains and losses. But I can't help but think about my situation in relative terms--it would be too depressing otherwise. I'm just trying to stay in the game and not get wiped out/permanently scarred, because there will be a great bull market beginning in a few years.

Prediction: I think the DOW will have a torrid 1500 rally. But, I don't know if it will first drop another 1000. Good luck everyone.

[MetalMeister]

Very good article, JDH, enjoyed the reality.

Dow 2000?

If you draw a line from 1932 through 1982 (I forgot to mention, earlier, do this on the DOW historical chart) then you get around DOW 4000.   

http://finance.yahoo.com/echarts?s=^DJI#symbol=^DJI;range=my

If you think all the false wealth started around 1990, you get DOW 2633.

If you think it all started around 1982, then you get DOW 811.

Compare those guesses with the National Debt Chart:

[Beginner]

Am fascinated with David’s reasonong about the squash of the euro saving the dollar.

We all know the US is the greatest debtor nation in the whole world.  Some, with a different idea than David’s,  are plugging the theory that the only way to solve the problem of US debts is to let the dollar collapse just as the German mark collapsed in the 1920’s thus absolving Germany from having to pay crippling war reparations. 

Then these theorists say a new currency, the amero, will emerge and include the independent countries of Canada and Mexico along with the US, and allcompletely debt-free.

Of course the amero theory is tough titty for the countries holding vast quantities of paper dollars in the form of Treasury Notes, etc, like China, Japan and the oil-producing countries of the Middle East, not to mention the little guys and their pension funds and other investments.

But look at David S. Lane’s idea:

"The danger of the mass failure of European banks is going to be awful. It will keep the dollar from losing value as the euro will get crushed.”

Now let’s just follow this line of reasoning of David’s to its logical conclusion and the dollar could be saved and resurrected! 

According to David’s line of thinking we can let the burgeoning masses of unemployed Chinese have their energies directed at Russia instead of at the Chinese government.  China, with a more than one billion population and Russia with a mere 140 million (Russia’s suffering population is declining at the rate of 700,000 a year) in a vast empty land stretching from Europe to Alaska, filled with raw materials and oil sorely needed by the Chinese.  So set these two countries at loggerheads with one another and they will nuke one another out of existence (Japan, of course, no lover of Russia over the Kurile Islands incident, will line up with China).  Hey presto!  The Chinese and Japanese debts are no more because China and Japan are no more.

As for those Middle East oil-producing countries, once a nuclear fray starts everyone else will join in, including all the Middle East countries, and including North and South Korea, not to forget India and Pakistan and probably lots more I can’t even recall right off.

So, with the help of a few nuclear war games all US foreign debt will be amortized and everyone can start all over again from scratch!  Caramba!  A debt-free USA!

And a much smaller world population to boot.

Hang on to them thar dollars!

PS  Did you know there is an army recruitment campaign going on?  Anyone in need of a job just has to join the army.  Might be a good time to invest in defense stocks too if you are that way inclined.

Not that I take David’s predictions about the euro squash all that seriously.  Most of my cash is in euros and is going to stay that way for a while.

[Bottomfeeder]

I have to side with DSL on this one the Euro is going to get crushed, more than it already has.

I also think that the USD will hold on, as the US for some reason is still considered somewhat of a safehaven.

Strong currency plays from here look like the Canadian and Aussie dollars.

The Euro has way too many problems to hold up, including the "independent" currencies in the region that support it.  Much much more complex problems, not to mention "the inflation fighting" mantra that the EU central bankers have to operate from.

IMO...the Euro and the British Pound are in some serious trouble.  Go look at their debt vs. GDP, frightening. 

[davidslane]

Read John Mauldin's article from this past week:

http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2009/02/20/while-rome-burns.aspx


Somebody I read (I think it was Steve Saville) wrote that when gold had it's run in the late 70's (or maybe it was in the 30's), it was against a rather stable US dollar.


Robert McHugh is predicting a short, fast rally in the major markets into March 21, followed by a wave 3 of 3 cataclismic fall in the major markets. If that happens, we may see gold go to $1,500. Today may have been the first step in setting up for that fall.

Could make for an interesting late March/early April.
Remember last year's late March?

[MetalMeister]

Got absolutely killed in silver today.  Gold not so bad.  Read an article that says the hedgies were dumping gold today and that accounted for some of it. 

Seems some might be picking the bottom (or at least a temporary bottom) and diving in to make a killing.  If I were them, I would look at the bigger picture(s)...

Maybe JDH should counsel some of these companies and report the stories to us?

Has anybody checked to see how the U.S.'s equity investments are doing?

Here's one!!


AIG: The bailout that won't quit

The world's largest insurer is expected to announce yet another bailout iteration next week. But some say its options are limited.

http://money.cnn.com/2009/02/24/news/companies/aig_bailout/index.htm?postversion=2009022416

On Oct. 8, just three weeks after its initial loan, the New York Fed extended an additional $37.8 billion life line in the form of a new lending facility from which AIG could borrow to fund its businesses.

But it still wasn't enough. AIG had to borrow more and more from the government just to post collateral on its credit default swap agreements, and the fee for the loans became too punitive.

On Nov. 10, the government completely overhauled AIG's bailout. It reduced the bridge loan to $60 billion and cut the interest rate. The main Fed extended the borrowing period to five years, and the New York Fed created two new lending facilities.

[jjj000]

Robert McHugh is predicting a short, fast rally in the major markets into March 21, followed by a wave 3 of 3 cataclismic fall in the major markets. If that happens, we may see gold go to $1,500. Today may have been the first step in setting up for that fall.

Could make for an interesting late March/early April.
Remember last year's late March?

This would fall somewhat in line with the observation I made regarding rallies/drops surrounding options expiration (see my other post in the Feb thread).

However according to my observations I would count on the March rally high being in the first week or two of March - say by 3/9.  That would give us about 2 weeks and change of upswing from today.  Then the market low would be a couple days after options expiration - say around 3/18 or 3/19.  I called the market low yesterday, so assuming that continues to hold true, just lends more weight to the pattern.

Cataclysmic drop though?  We'll just have to wait and see.  It would only make any short plays taken in mid-March that much more profitable though, so no worries there from a trend/swing trade perspective based on the pattern I noticed...

[Beginner]

David S. Lane wrote:

"Read John Mauldin's article from this past week:

http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2009/02/20/while-rome-burns.aspx"

Thanks. Excelent article David.  Europe is in a mess. Real scary.  Am already moving out of euros into dollars, then into gold, finally.   

[MetalMeister]

Check out this article as the writer mentions Richard Russel"

http://www.investmentrarities.com/thebestofrr.html

Just finished reading that article David put up.  Thanks DSL.  Agree Europe is definitely in a mess.

My guess is that if they fall, we fall.  Not as bad as them but bad.  Dominoes.

I especially liked the Aggregate Sovereign Credit Risk chart.  I was extremely surprised to see Canada and Australia in that list.  I need to research them more.  I saw where Canada's banks are the best in the world these days in an interview with their Prime Minister just two days ago so I am a little confused by this list.  Canada has all private banks, did no subprime lending.

[davidslane]

A bank (or country banks) could be at risk not necessarily because they directly took subprime loans on their balance sheets, but because they loaned to other banks in other countries that have subprime problems.

Or, they loaned to businesses in other countries who can no longer make payments due to currency devaluation (especially with Eastern Europe).

This is what is taking out Swiss and Austrian banks, too much lending to Eastern Europe.  The Eastern European companies have a double whammy: a recession and currency devaluation.




For jjj000: I don't get McHugh's newsletter, but I get his promo e-mails which said his Elliot Wave theory showed a market turning date for the spring soltace (I'm guessing March 21) in that the market would change directions around that date. And he is expecting a massive wave 3 of 3 down at that turn date.

So markets go up until March 21 and then a massive correction.

Seems plausible.
Not sure.

[MetalMeister]

On health of Canadian Banks:

http://open.salon.com/blog/myriad/2009/02/13/boring_solvent_canadian_banks

[Bottomfeeder]

JDH....that was a great write up.  Way to go on putting those shorts back on too!

I couldn't agree more with you obviously on the mark to market.  It is amazing that we have the slow moving, seemingly unaffected, if you will, SEC crawling forward on this issue.  They seem to operate in almost complete autonomy, while the US taxpayer dumps trillions to support even the performing assets.

Not being much of a conspirasist I have wondered why the Government would continue to essentially buy our most leveraged institutions at rock bottom prices instead of simply re-writing some legislation(long term solution) or ordering a temporary halt suspension or modification of the rules, as it only appears to be so obvious.

The "good" thinking among us might suggest that it is the only way to keep the lending going, either  that, or our government continues to just be completely incompetant.

However if one were to think that our Government is Imperialist in nature than one might be led to beleive that such a continuation of policy allows the Government to acquire assets around the world, through US institutions, from a very low risk position, directly benefiting from the global growth story.

Personally I have no idea, but it goes to my basic premise of follow the money and the opportunity to acquire heavily beat down (government protected) assets, which are the banks.

Unfortunately, I believe that there are two actions that must take place to allow the banks to gain a solid footing from 30-1 to 10-1 leveraged positions.  Suspension of MTM (no reason to take performing assets to 20% levels, causing you to need cash ) and secondly (at least) the clearance of position of the proposed bankruptcy cram down legislation.

While the first (MTM) is unreasonably holding down the assets on the balance sheets (and causing trillions of tax payer funding and equity loss), the second is keeping i institutions from being able to trade assets amongst each other, CAUSING the delay in those same toxic assets to actually be removed from those same troubled balance sheets. Yep.

The impact as I stated above is pretty obvious, but the unintended consequences are, that it is causing an increase (again) in overnight lending rates and funding.  I'm told worse than what is appearing in LIBOR (quotes) again creating some seizure in the credit markets.  Libor being so vital to all business, including small business, ala job creation! 

I think ideally one might hope that the cramdown legislation fails (re-writing of bankruptcy law) so our financial institutions can do what they must to come into compliance with SEC guidlines for capital requirements (if still overleveraged  - not anymore with all those tax dollars) on their own, and the overleveraged real estate buyers can do what they must do.  Otherwise the unitended consequences of third party exposure, would only cause further delays in the interbank lending systems, again further hurting growth, and causing taxpayers trillions in additional bank subsidies.

I think that eventually they will get it right.  Ideally, I think that they would have liked to get their grubby little hands (through stock) at the lowest levels, THEN suspend the MTM, realizing huge equity gains.  Unfortunately they were either late in rules suspension, causing 90% losses in Citi for example, or early in taking their stake through stock positions. (I think thats right).  Proof of stupid if you will.

From what I am hearing, people will be surprised when they hear about how well the stress tests are going in alot of these beaten down banks, which I believe are being conducted through current SEC market rules standards.  When the results get released there will be a big upside pop.  MTM suspension, another big upside pop, and clarity on cram down laws, depends on outcome. .  Hopefully bankruptcy laws don't need to have to be re-written because of a government created, poor regulation, and government continued recession.

To give some clarity to my posts recently, this is what I am talking about.  I don't know who is responsible for it or who is responsible for fixing it, however collectively this is what must be done.  This is in my mind the propellant for a huge, I mean huge bear market rally.  The one that makes everyone feel like the new bull has started, only to sell off again.   

This is what is necessary to have growth.

I am approaching FAS as an intermediate term play (3 months) to capitalize, betting collectively they will get it right.