January 2010

INTERNATIONAL. Renowned investor, economist and author Peter Schiff said by following the advice of the same people who helped guide the US economy to the precipice of total collapse, President Obama now threatens to push it over the edge.

In his weekly commentary posted Friday on the Euro Pacific Capital website, Schiff analysed this week’s State of The Union address by the US President, saying the essence of the current program is for more government spending and larger deficits.

“While he [President Obama] did call for tax cuts for the middle class and offered what amounts to bailouts for those struggling to repay student loans, such cuts do nothing to promote growth in the near term and will add to the deficits in the long term,” Schiff wrote.

Schiff, who regularly appears in the role of a bearish pundit on numerous financial news networks said Obama fails to understand that the only reason the US economy rose to the top in the first place is that “the government left it alone.”

He quoted Spanish philosopher George Santayana’s words “those who cannot learn from history are doomed to repeat it,” to make a point that the US President “cannot even learn from the mistakes of his immediate predecessor, to say nothing of those he made himself while in the Senate or during his first year as president.”

“We are surely doomed to repeat them, perhaps more quickly than Santayana could have imagined,” Schiff said.

Schiff then went on driving a clear wedge between his economic beliefs and the prevailing thinking of the Obama administration.

“Rather than tightening the reins on the reckless monetary policy that undermined our savings, diminished our industrial output, inflated asset bubbles, and led to reckless speculation on Wall Street and excess consumption on Main Street, we are loosening them further, Schiff wrote.

“Rather than repealing regulations that distort markets and create moral hazards, we are adding new ones that do more of the same. Rather than cutting government spending to reduce the burden it places on our economy, we are increasing both the amount of the spending and the size of the burden,” he added.

“Rather than making government smaller so that the private sector can grow, we are making government bigger and forcing the private sector to shrink. Rather than paying off our debts we are taking on even more. Rather than encouraging people to save we are enticing them to spend. Rather than creating jobs, we are merely creating unemployment benefits.”

“As a result, instead of seeding the soil for a real recovery we are setting the stage for a prolonged depression,” Schiff concluded,

Peter Schiff is an American economist, author, commentator and popular video blogger who regularly appears in the role of a bearish pundit on numerous financial news networks. Schiff, the author of ‘Bull Moves in Bear Markets’ is a licensed stock broker and the president of Euro Pacific Capital, a brokerage firm founded in 1980 and later reincorporated in 1996, now headquartered in Connecticut.

In September, Schiff made official his long-expected US Senate bid for this year’s elections.

INTERNATIONAl. Billionaire financier George Soros is the latest to enter the gold bubble debate, warning that with interest rates low around the world, policymakers are risking generating new bubbles which could cause crashes in the future.

Speaking Thursday to The Daily Telegraph, on the fringe of the World Economic Forum, Soros said: “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment”.

The ultimate asset bubble is gold,” he added.

Investors are piling into the metal amid fears both of potential inflation and fading faith about the stability of previously-assumed safe assets such as government debt, Soros told the newspaper.

Having risen around 40% in 2009 and topping US$1,225 an ounce last month, gold has attracted a lot of interest from investors as well as analysts and media pundits trying to predict its future dirction.

Forecasting asset prices such as commodities has never been a precise science. It involves a good understanding of historical precedents, monetary policies, supply-demand balances, fear factor taht drives investors and many other variables.

What constitutes a bubble?

Is it the rate of growth in the last year regardless of its magnitude? Is it a comparison with historical real values? Is it linked to speculation? Is it Supply and Demand fundamentals? Is it all of the above?

The debate on asset bubbles, especially gold, has been raging for some time, attracting the attention of prominent investors and commentators incuding Nouriel Roubini, calling it a barbaric relic, Jim rogers who in contrast sees gold at US$2,000 within a decade, Marc Faber who sees US$1,000 as a floor and Gold Hand Maktari who had pedicted US$1,200 in 2009.

So, is gold in a bubble?

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), who predicted the current financial crisis said in December the rally in gold prices is developing into a bubble and the precious metal faces “significant risks of a downward correction”.

Writing in a research note published by the Financial Times, Roubini said: “The recent rise in gold prices is only partially justified by fundamentals, and is in part a bubble that could easily go bust.

“The recent rise in gold prices is only partially justified by fundamentals, and is in part a bubble that could easily go bust,” warned Roubini in the report provocatively titled: “The new bubble in the barbaric relic that is gold.”

Speaking in an interview with Dave Nadig of Index Universe (IU.com) in October Roubini said: “My view is to stay away from risky assets. Stay in liquid assets”.

Roubini said asset prices have gone up as a result of liquidity in the system, however he sees a correction looming.

” I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes,” he said. “I don’t believe in gold,” Roubini added.

Explaining his reasoning, he added: “Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity. So there’s no inflation, and there’s not going to be for the time being”.

“The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression”.

“So all the gold bugs who say gold is going to go to US$1,500, US$2,000, they’re just speaking nonsense,” Roubini said. “Without inflation, or without a depression, there’s nowhere for gold to go,” adding maybe it could happen in three or four years from now. “But not anytime soon,” he said.

Jim Rogers’s view

In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in US bonds.

“I cannot conceive of lending money to the US for 30 years,” he said. “Other than that, I don’t see any bubbles going on, unless he knows something the rest of us don’t know.”

Rogers thinks that Roubini is wrong about the threat of bubbles in gold and some other assets.

In an interview with Bloomberg Television last month, Rogers said many commodities are still down from record highs. The price of gold will double to at least US$2,000 an ounce in the next decade, he said.

Roubini replied by saying Rogers’ forecast is “utter nonsense.” “Maybe it will reach US$1,100 or so but US$1,500 or US$2,000 is nonsense,” Roubini said.

Jim Rogers reaffirmed his view that gold will reach US$2,000 an ounce over the next decade as government’s money printing will lead to higher prices and, on the supply side, no new mines have been opened for decades.

In a recent interview with wallstcheatsheet, Rogers, explaining the variables that will push gold higher, said: “It’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it”.

Additionally, no new large gold mines have been opened in decades, Rogers said, adding that “some of those mines are over 100-years old and…are all depleting”.

The legendary investor also said central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

“If you adjust Gold for inflation and go back to its former all-time high in 1980, Gold should be over US$2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs,” he said.

“I suspect that given all the money printing in the world, we will see much higher prices for hard assets,” he added.

Robert Prechter

Earlier this week Robert Prechter of Elliott Wave told CNBC that this is perhaps the last chance to get out of stocks with the DJIA “in quintuple digits.” He also believes that stocks will fall below the March 2009 lows.
Prechter, agreeing with Roubini’s view, believes that if deflation comes, gold could see a 40% drop from its peak. He feels gold is overbought and starting a new bear move there anyway.

Marc Faber

Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said Gold won’t fall below US$1,000 an ounce again as central banks print money to help fund budget deficits.

Speaking at a conference in London on last month, Faber said: “We will not see less than the US$1,000 level again”.

“Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”

Gold prices having held above the upside breakout, Faber now sees the US$1,000-mark as the new floor.

China will keep buying resources including gold, he said.

“Its demand for commodities will go up and up and up,” he added. “Emerging economies will grow at the fastest pace.”

Strategy Garden

The arguments for or against gold beeing in a bubble seem compelling. “This, in our opinion calls for a short term consolidation period where bulls and bears fight it out within a narrow range of US$1,050-US$1,150, says a research note from Stategy Garden, the publishers of BI-ME.

The report sees a period of high volatlity in 2010 on exceptional circumstances and uncertainties about the strength of the recovery and the effect of exiting stimulus activities.

Gold Hand Maktari

The potential volatility in gold prices in 2010 is also shared by one of the most astute forecasters of bullion prices, Gold Hand Maktari.

In a recent email statement received by BI-ME, Gold Hand Maktari says “2010 will see a roller coaster ride with the gold market, thanks mainly to the gradual stability of the global economy and the US Dollar rising and falling to new highs and lows throughout the year.”

The statement, whose source could not be verified by BI-ME, said: “Gold could reach new highs of up to US$1,600 plus per troy ounce in 2010 and set an all time high once more however, due to the global stabilization of the world economy, we will in no doubt see gold plummet. I see gold dropping at some point after heavy gains, to and around the US$900 mark, and dont be surprised at all if it falls further.”

“2010 is a time to be very cautious especially as the economic outlook seems to be improving. 2010 will see an average gold price of US$1,150-US$1,190.”

“We all predict prices to reach a certain high or low in the coming months or years and few are ever correct however, as I stated in 2008 and 2009, we would see gold reach up to US$1,200 by the last quarter of 2009, few would have seen that on the cards,” the ‘Maktari’ statement said.

From the previous post, it becomes very apparent why there has been such a significant rally in the dollar.

The Greek crisis represents a crucial test for the European Union since a default, or a bailout that prevents one, would be a serious blow to the credibility of the euro. Membership in the shared currency demands that governments keep their budgets under control.

This is the first of potentially many sovereign defaults. We’ve had the Corporates, through the financial sector, the Bear Stearns, Lehmans, AIG and General Motors to name just a few. The bailouts were numerous and exalted: Citi, Bank of America, Goldman Sachs to name the most egregious.

Here we potentially have a member of the EU, defaulting, in Euro’s, to the financial markets. Why, and how, is this such a disaster if Greece defaults?

Financial markets, it is feared, would respond to a default by selling off the bonds of other struggling euro governments. That would make it more costly for them to borrow money, deepening their predicament.

With fiscal easing, and the running of massive deficits worldwide, this isn’t simply a Greek problem. It showcases the potential hazards of running massive deficits, and then not being able to access the capital markets to roll over, or issue new debt, at the current ridiculous low interest rates. The cost of servicing debt fast becomes prohibitive.

Europe as a block, the United States, China, all face the same problems, it’s simply that the US, China, etc, don’t actually have to comply with a previously agreed limit on the deficit that can be run. In Europe, the limit was agreed by the member states, thus severely limiting the usual trick of simply devaluing the currency like Mr Hugo.

Spain, Portugal and Ireland also have large deficits, with Spain announcing Friday that its budget gap had swollen to 11.4 percent of gross domestic product from an earlier estimate of 9.4 percent.

Luckily, Britain never joined the Euro, otherwise Gordon [cretin] Brown could be added to this list, and a British default would have the markets jumping.

It [the crisis] is essentially a failure of government to control costs through a responsible management of the economy and an understanding of economics. Once the ability to raid the money supply had some limits imposed, the end game was inevitable. The best outcome in the long run I feel is a default, it will have horrible short-term repercussions, but, government has to know that there must be a limit to taxpayer largesse, taken without even consultation.

If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or ’stronger’ euro zone economies and their debt,” said Geoffrey Yu, a currency strategist at UBS.

“Spain, Italy, Austria and Belgium — together accounting for more than 35 percent of the euro zone economy versus just over 6 percent for Greece, Portugal and Ireland combined — may then be next in the firing line,” he added.

Fiat currency collapse. Distinctly a possibility. Gold.

Will governments let Greece default? I think not, primarily as it sets a precedent, that as stated, could start the basis of a bank run on the Euro, with investors pulling money [selling the euro] and putting it into almost certainly the dollar, and the smarter ones into silver and gold.

If, there is no bailout – the run to the US dollar initially will eviserate the dollar carry trade and the short covering will add an intensity to the rally in the dollar that will collapse many of the risk assets purchased with the short sales of the dollar. This will potentially catch and destroy some more Hedge Funds etc.

Greece might turn out to be the Bear Stearns of Sovereign debt. They allowed Bear to fail, this as much as Lehman, fueled the panic in 2008 across the financial markets. Will they risk a Greek failure to then move on to find a Lehman in the Sovereigns, or even a Citi?

All tough talk aside, I think not. Politicians have no cojones, they are spineless, weak and incredibly dim.

DAVOS, Switzerland (AP) — Greek and European officials moved Friday to quash market buzz that Athens could find itself in too deep a financial hole to save itself, potentially saddling European governments with a costly bailout.

Prime Minister George Papandreou and the EU denied reports that European governments had engaged in bailout discussions, stressing that Greece itself must carry through on its plans to cut an alarming deficit.

“Any discussion of a ‘Plan B’ is simply not in our vocabulary,” said Greek Finance Minister George Papaconstantinou at the World Economic Forum in Davos, Switzerland, where he and Papandreou have been giving assurances of their determination to carry through on a difficult plan to get spending under control in the next several years.

“We’re not going to be drawn into this, we’re not going to participate in it,” Papaconstantinou said during a meeting with reporters. “We’re going to do what needs to be done to reduce the deficit.”

The Greek crisis represents a crucial test for the European Union since a default, or a bailout that prevents one, would be a serious blow to the credibility of the euro. Membership in the shared currency demands that governments keep their budgets under control.

Financial markets, it is feared, would respond to a default by selling off the bonds of other struggling euro governments. That would make it more costly for them to borrow money, deepening their predicament.

Spain, Portugal and Ireland also have large deficits, with Spain announcing Friday that its budget gap had swollen to 11.4 percent of gross domestic product from an earlier estimate of 9.4 percent.

Greece’s deficit is at an estimated 12.7 percent in 2009 though the government has pledged to bring it below 3 percent by the end of 2012.

Greek officials have spent much of this week trying to douse speculation and rumors, and talking up Greece’s plans for bringing its finances back in line with European Union guidelines.

“Greece is in a situation where we need to take very strong measures and structural changes in our country,” Papandreou said. “We need to restore confidence … We’re determined to implement the program.”

Asked about speculation that EU member states could provide some as yet undecided aid, he demurred.

“Talking about theoretical possibilities could end up becoming self-fulfilling prophecy,” he said.

European Union officials in public are offering only tough love, stressing that Greece must fix its problems, although economists tend to think that if a bailout were needed it would be forthcoming.

“There’s no bailout. There’s no way out,” French Finance Minister Christine Lagarde said, after a closed-door meeting with European Commissioner Joaquin Almunia and European Central Bank President Jean-Claude Trichet.

Almunia said that Greece had presented a program to rectify the imbalances and called it a “very ambitious” program.

“We are preparing recommendations to help the Greek authorities to implement 100 percent of this program,” he said, adding the country would have EU support and faced no risk of being booted from the euro zone.

“Nobody that knows some details about what the euro zone is would consider that any country — Greece or any other — will leave the euro zone,” he said. “On the contrary, there are quite a few EU members that are knocking on the door. They want to be in the euro area.”

Dominique Strauss-Kahn, chief of the International Monetary Fund, said Greece has much to do but that institution was ready to intervene, if asked.

“The country is in a difficult situation. The European authorities, including those in Brussels and at the European Central Bank, are working on it,” he said. “We at the IMF are ready to intervene if asked, but that is not a forgone conclusion and I think that inside the euro zone, there will be enough solidarity to deal with it.”

German Economy Minister Rainer Bruederle said Greece had to fix its problems. “British or German taxpayer cannot finance the failures of others. That is not a community,” he said at Davos. “Solidarity also means everybody adheres to common rules.”

In spite of the determined talk from Greek leaders, markets remained decidedly uncertain.

Concern about Greece’s stability, and its financial future, pushed the yield on its 10-year bond to 7 percent on Thursday, bringing the spread over the equivalent German government bond — a benchmark of solidity — to near 4 percent — an unprecedented and record difference.

Germany, the EU’s biggest economy and world’s second largest exporter, would most likely be the one to intervene with help to plug Greece’s deficit gap, were it ever to come to that.

Concerns about Greece have dogged the euro, which slid to a six-month low of $1.3913 on Friday, well below the 16-month high of $1.5144 set back in November.

Yields — a measure of risk — fell modestly on Friday after EU finance chief Almunia said there was no threat of a Greek default and Papaconstantinou’s denials of bailout talks.

“While the official rhetoric is having the desired effect of limiting the damage on Greek yields, action speak louder than words and it is by no means clear that that the Greek electorate have the appetite for the severe spending cuts needed to bring the budget back in line,” said Jane Foley, research director at Forex.com.

In Athens, Greece’s stock exchange was up 2 percent in midday trading Friday.

“There’s been a change in rhetoric in support of Greece,” said Platon Monokrousos, head of financial markets research at EFG Eurobank in Athens.

Though, talk of a bailout has been dismissed, the idea continues to gain increasing traction in the markets.

“I believe Greece will be bailed out if necessary because the implications of not doing so are hard to imagine,” said Kit Juckes, chief economist at ECU Group.

It’s not just Greece facing the skeptical eye of the markets.

“If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or ‘stronger’ euro zone economies and their debt,” said Geoffrey Yu, a currency strategist at UBS.

“Spain, Italy, Austria and Belgium — together accounting for more than 35 percent of the euro zone economy versus just over 6 percent for Greece, Portugal and Ireland combined — may then be next in the firing line,” he added.

Which is the Carry Trade. Essentially this trade seemingly drives all other trades before it. Greece has potentially driven again, a run to safety in the US dollar, pressuring the sale of risk assets [higher yield] everywhere.

Add to the Greece type of event, we also have political risk, Bernanke not being reappointed, Federal Reserve raising rates, Fiscal tightening, etc. Currently, for whatever reason, the dollar is rallying, possibly simply short covering started the rally and coincidental events simply magnified the response. Either way, the correlations are again high.

The warning on a technical basis for the dollar was apparent through all of November, if you were paying attention. Some were, some weren’t. The current analysis suggests that the dollar is again, on a technical basis, ready to fall. It has gone far higher than one would expect, but that is the nature of markets. On UUP, $23.80, looks to be the level at which, based on current trends, could be the failure point. Thus stockmarkets and commodities, may well still have some downside left.

With Bernanke remaining at the Fed, and Obama in Washington, both from a monetary and fiscal perspective, inflationary policies remain in place. Once Greece resolves, assuming Spain and/or Britain do not follow, we should see a resumption of the dollar carry trade.

The timing on this trade, has been bad. However, that said, the drawdown while uncomfortable, has remained within my acceptable range.

Thus, my [last] buy point, adding further shares @ $10.28

From Dr Brett,

But there’s an easy way to identify those who offer goods and services with integrity and those who don’t: Go to their websites or blogs and measure the ratio of self-promotional posts/articles to the number of substantive, informational posts/articles.

If you have substance, showing it is your best marketing strategy. If you don’t have substance, all you can bank on is hand waving.

We all put our best foot forward when we first meet someone we want to know. What vendors of goods and services put on their home pages represents their best feet forward. If there’s no substance there, caveat emptor.

Green Mountain Coffee released their earnings.

Revenues increased by 77%, sounds good, until you look at Operating Income, that increased by 7.5%, and Net Income declined by [-8.6%]

What happened?

SG&A increased by +52%
General Admin by +155%

This hurt margins obviously.

Receivables exploded. The 5yr average of Rec/Rev = +11%
The current ratio = +40% Thus GMCR are financing sales, never good.

Inventory/COG also deteriorated from +22% to +50% Again, not good. Both these metrics indicate a deteriorating position, that is already reflected within Net Income.

Financing for GMCR is getting harder. Accts Pay. deteriorating from 62% to 10.5%, thus, payments are being demanded faster from suppliers, this hurts cashflow and Working Capital.

Net Cash From Operations, a crucial metric, deteriorates by 76%. This is catastrophic, this really is the business, the explanation resides within the Accts Receivable & Inventories.

CapEx is up +130%. Much of it on a cash + debt purchase of a competitor. They overpaid. Look at Intangibles & Goodwill +70% Will they contribute to future earnings?

In short, a disaster, yet, as I type, Green Mountain Coffee is up some 9% on the day. This will, at some point become an excellent short sale candidate.


Jan. 28 (Bloomberg) — The Federal Reserve panel in charge of interest rates declared for the first time the U.S. economy is in “recovery” and took several steps to prepare investors for the removal of aggressive monetary stimulus.

The Federal Open Market Committee yesterday upgraded its economic outlook, reaffirmed it will end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities and expressed less confidence inflation will remain “subdued.”

“This is as close an admission that we are likely to see that the FOMC thinks the recession is over and the economy is on a self-sustaining recovery path,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Policy makers need to think seriously on how they are going to reset the message on the low rates policy.”

Central bankers repeated their pledge to keep the benchmark lending rate in a range of zero to 0.25 percent for “an extended period,” while noting the economy “continued to strengthen.” Kansas City Federal Reserve Bank President Thomas Hoenig dissented, favoring a quicker adjustment to the rate outlook message.

Hoenig “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” the FOMC said in yesterday’s statement.

Inflation “is likely to be subdued for some time,” policy makers said. Last month, the panel said inflation “will remain subdued.”

‘More Comfortable’

“They are starting to get more comfortable with the sustainability of the recovery,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut. “The downside risks that they were so worried about are probably still there but diminishing in importance.”

Policy makers are winding down the record amounts of credit they have provided since the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

The Fed also repeated that it will close four programs supporting money markets and bond dealers in February, as well as dollar swap programs with central banks in Europe and Asia.

The central bank is “prepared to modify these plans if necessary to support financial stability and economic growth,” the statement said. The Fed also said it is winding down the Term Auction Facility and will hold a final auction on March 8.

Confirmation Vote

Chairman Ben S. Bernanke, who faces a procedural vote in the Senate on his confirmation for a second term today, is looking for signs that the return to economic growth is accompanied by the prospect of stronger hiring and an increase in credit to people and businesses.

The Senate plans to vote on limiting debate and preventing lawmakers from blocking a vote on Bernanke’s nomination. As of yesterday, 50 senators said they would vote for or were inclined to support Bernanke, while 22 were opposed, according to a tally by Bloomberg News.

The U.S. unemployment rate held at 10 percent in December, while consumer credit dropped a record $17.5 billion in November.

“Household spending is expanding at a moderate rate, but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Fed said in its statement.

Employers “remain reluctant to add to payrolls,” and bank lending “continues to contract,” the FOMC said.

I’d forgotten that Green Mountain Coffee had reported. The good earnings report seems to have been interpreted well by the market, oh dear, because the earnings report, is actually a disaster.

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