David Stevenson (MoneyWeek, UK):

It’s not been a great week for British bankers.

There’s the ongoing spat between RBS and HM Government over how much the former’s heavy hitters can pay themselves in bonuses. Then there’s the embarrassing yet somehow inevitable revelation that our banks are the ones most exposed to Dubai – with RBS top of the pile, naturally.

Meanwhile, French President Nicolas Sarkozy has been unable to disguise his glee that Europe’s new finance minister is a Frenchman, who he clearly believes will take the City down a peg or two.

But these are just niggles compared to the real dangers the banking system faces.

The cheap money that the UK’s lenders have been enjoying is about to dry up, for one thing. But worse still, while central banks have been flooding the world with money, a dangerous imbalance has been building up in the banking sector…

Click here for the rest of Mr. Stevenson’s insightful article at MoneyWeek, UK.

Enough alliteration. Let’s talk business.

While I will never complain about a day that sends almost every position in our portfolio into the green, there are way too many red flags in the air for me to celebrate today.

Sure, the TFN Strategic Trader portfolio currently boasts six plays worth double-digit gains (47%, 44%, 50%, 10%, 29%… and 200%), but it’s a contrarian mix if I’ve ever seen one.

In other words, if our current portfolio is on fire (and it is), something is not right with the nation’s economy.

As with most things American, all we have to do is turn to The Donald for an answer.

Earlier today, Mr. Trump phoned his friends at CNBC. He had a bone to pick and he knew his the staff of “financial experts” – who gladly fill in when a Today Show gab is missing – would lend an ear.

Trump gets a lot of press time, but most of us agree the only thing he’s an expert at is bankruptcy proceedings. Taking his financial advice is like getting a clipping from a blind barber – another of Trump’s apparent flaws.

Sometime during the past few weeks, a bank must have looked at Trump’s credit record and said, “No way, Jose,” because the king of narcissism is angry at the banking industry.

He tells his audience that banks must be forced to lend more of that taxpayer cash they are sitting on. Trump believes the economy will never recover unless the banking sector loosens its standards and starts writing checks again.

Um, Mr. Trump, isn’t that what got us into this mess? Guys like you taking massive loans without a way to pay and then calling a bankruptcy lawyer.

Really, what could go wrong if we follow Trump’s advice and allow the government to force banks to lend?

Sure, most of those shaky loans will never get paid back and we’d be in a worse financial fiasco in eighteen months, but boy would it feel good now.

And there lies your problem. In a world where reality-show wannabes make front page news for embarrassing the White House and a golf star’s car accident gets more press time than Iran’s recent nuclear moves, it is all about feeling good now.

Who cares what tomorrow’s consequences will be? Somebody will bail us out. We feel good now.

It’s sad to say, but that’s the same logic driving the stock market these days.

Sure, the dollar is eroding fast, unemployment is above 10%, the national debt is off the charts, taxes are on the rise, and corporate earnings are stagnant, but dang it, it feels good to pretend it will be a “V-shaped” economy.

Anybody with half a financial brain knows it will all crash down someday, but too many of them just hope and pray that somebody will step in and fix it.

I know from the comments I received about my recent gold commentary, many Notes readily understand what’s to come. That’s why they are rushing to the “safety” of gold.

But let me warn you once again; gold’s recent run has as much to do with the nation’s feel-good-now mentality as the Salahis’ sudden rise to fame.

The collateral on both sides will not be pretty.

My advice? Go short. If it works for TFN Strategic Trader members, it will work for you.

*** With all of this talk about healthcare reform, Afghani strategy, White House crashers and gold’s 30% run, one industry has been greatly overlooked. And, once again, the action comes thanks to the folks in Washington.

The ethanol industry – which was recently plagued by bankruptcies and production shutdowns – is soaring these days as it awaits word from the EPA that ethanol allowances in gasoline could be raised from 10% to 15%.

Here’s a bit of what I told TFN readers earlier today:

“The ethanol industry is having yet another good day. After near political abandonment, the nation’s biofuel sector reeled from the pain of a wave of bankruptcy filings earlier this year.

“But now, thanks to some more political maneuvering the industry is once again finding itself on the leader board.

“Should you get used to it?

“Before we answer that question, let’s look at the catalyst for the action. Today was supposed to be the EPA’s deadline for a decision that would allow gasoline blends to contain up to 15% ethanol versus the 10% cap now in place.

“But word this morning says the EPA is not ready to make its decision quite yet. It now wants to make the decision by sometime next summer. Judging by the day’s pricing action, the Street views this as a positive sign.

“Companies across the industry are eager to push more of their product into the nation’s fuel source.

“One of the big winners today is Pacific Ethanol, the once highly touted California-based producer with subsidiaries in and out of bankruptcy court over the past year.

“Word that more ethanol production may be around the corner was enough for the company to pull the mothballs out of its Burley, Idaho production facility by January. The company owns a total of four production facilities, only one of which is currently operating.

“If the word from the EPA is positive, expect shares to continue to climb. As I write, traders are getting in (and out) at $0.87, up 56% on the day.

“Two more companies worth mentioning are…” To find out, keep reading here.

*** Finally, don’t forget about the question of the week: Is it a coincidence the weekly political roundtable programs air at the same time churches offer their weekly services?

We’ll discuss the various views on Friday.

Throughout the “sh*t hitting the fan” events of last fall, and the subsequent policy response, we’ve listened intently on what this Canadian had to say. The picture he paints today is one of bearish conviction. That’s exactly the reason he’s come under recent criticism as his ilk of ivory tower economists have started calling an end to this recession.

Though we don’t think he has anything to prove, he released a special report reaffirming his key points. You can read it in full here. But if you don’t have the time to peruse the twenty-two page (slightly wonkish) document, we’ve broken down the basic takeaway for you.

The equity markets have moved too far, too fast, and a correction is coming. Rather than buy into this rally, you should look at commodities. That’s because David believes that since 2001commodities took off on a secular bull market run.

Also, rather than hold US dollars, Rosie bets that the Canadian buck is a safer bet due to Canada’s smaller national debt (26% of GDP vs. 62% in the US), smaller budget deficit (-3.4% of GDP vs. -11.2% in the US), stronger banking sector (no Canadian bank needed a bailout), lower unemployment, and an economy more reliant on commodity exports like lumber, oil, natural gas and precious metals.

But the scariest–for holders of US dollars—forecast Rosie makes is that the US has yet to use a power policy tool: the devaluing of the greenback.

As Obama continues to take pages out of FDR’s playbook, he’s yet to devalue the dollar as FDR did in 1933. Rosenberg doesn’t say that the US policy wizards will directly devalue the dollar. Rather, he thinks it will happen by the expansion of the Fed’s balance sheet and the creation of freshly printed dollars.

We think he’s dead on about this call. The US’s “strong dollar” policy has become the latest oxymoron to enter the American vernacular. There is only one direction the value of the US dollar is going over the long-term—down.

Where exactly should you invest amidst this economic malaise? Here are the seven places to park your cash. Not surprisingly, our favorite precious metal tops the list.

1.) Gold

2.) Commodities

3.) The Canadian dollar

4.) Resource sectors of the stock market

5.) US sectors that have high foreign exposure (materials, tech, staples, healthcare)

6.) Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers)

7.) Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed income returns)

Three of the financial institutions that were key catalysts to the global financial crisis – and that owe the federal government billions of dollars as a direct result of those problems – have seen their shares triple in price so far this month.

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative “short squeeze” that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE:AIG) have soared from $13.14 to $50.23, as of Friday’s close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains,MarketWatch.com reported. Fannie’s shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddie’s shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares they’d sold short, traders told MarketWatch. AIG has 21% of its “float” – shares available to the public sold short, the sixth-highest proportion in the Standard & Poor’s 500 Index, according toBloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

“Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters,” Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. “With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?”

Trading in financial-services stocks has dominated the stock-market volume this month. So-called “day traders” have gravitated to once-questionable financial stocks and helped fuel those stunning gains – and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market’s slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter – after having posted six straight quarters in the red. It engineered a so-called “reverse stock split,” in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and “cover” their bets.

Despite the torrid run that AIG’s shares have been on, the insurance company’s bonds still trade at levels indicating the company’s shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

“The value of the company is still the same,” Boockvar said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurer’s $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poor’s 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as “Cash for Clunkers” ended with a last-minute flurry of activity.  Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.

While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC)reported that 416 institutions were on its “problem” list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and LehmanBrothers Holdings Inc. (OTC: LEHMQ) failures.  Regulators are investigating its weekly “trading huddles,” where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though
the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode.  Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner.  In fact, natural gas plunged to a seven-year low.

Economically Speaking

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called “jobless recovery” when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation.  For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing.  New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006.  Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the “Cash for Clunkers” program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed.  Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward.  Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months.  Personal spending in July got a nice boost from the increase auto sales (“Cash for Clunkers” strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Weekly Economic Calendar

Source: Soaring Prices for AIG, Fannie and Other Financial Stocks Sending Mixed Messages to Investors ]]> http://www.contrarianprofits.com/articles/soaring-prices-for-aig-fannie-and-other-financial-stocks-sending-mixed-messages-to-investors/20240/feed 0 http://www.contrarianprofits.com/articles/china%e2%80%99s-bubble-warning-new-home-paradox-gold-production-sea-change-vancouver-updates-and-more/19271 http://www.contrarianprofits.com/articles/china%e2%80%99s-bubble-warning-new-home-paradox-gold-production-sea-change-vancouver-updates-and-more/19271#comments Tue, 21 Jul 2009 14:30:59 +0000 Ian Mathias http://www.contrarianprofits.com/?p=19271 China bulls beware… Chinese regulator warns of American-style housing bubble… Market rejoices over housing start rebound… should you be celebrating too? Dan Amoss on shorting the stock market’s recent strength… Sign of the times… Mexicans, Czechs no longer welcome in Canada… Plus, Byron King reveals an arresting historic gold chart…

“[We] must control the risk of real estate loans,” said a mystery banker. “In the first half of the year, our country’s banking loans expanded rapidly… but the loans growth has led to accumulated risks also increasing.” Our man of the moment said his banking sector had become “not prudent and impulsive” in issuing loans for new housing projects, many of which have falsified their capital levels to meet current standards. He urged lenders to “strengthen…

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity, less than four weeks after being informed they had enough to withstand a deeper economic slump. Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told June 1, people with direct knowledge said.

This means two things. 1) That the government’s stress tests were indeed a sham designed to coax investors back into bank stocks. 2) That the government expects more pain for the banking sector and isn’t prepared to have banks get out from under the TARP only to come back begging for federal aid at a later date.

As former New York Fed executive vice president pointed out recently, if banks repay TARP funds next week, “politically, the administration can claim a victory. They can claim TARP is working, we’re getting our money back and making a profit. But there are more shoes to drop in commercial and industrial loans, leveraged loans, and real estate.”

As we have attempted to make clear all along in Notes , this crisis boils down to a battle between hope versus facts. You know which side Team Obama and the mainstream press is on. And you know which side we’re on.

We know from Jeremy Grantham’s work on the “presidential cycle” that stock values rise on average 22% (based on the S&P 500) in the third year of a presidential terms relative to years one and two. This is not statistical noise. It’s evidence of the power presidents have to puff up stock markets through financial stimulus, political maneuvering and moral hazard.

Nobody who seeks political power is ever happy to give it up. So presidents try to give the economy a helping hand in time for elections. Bush, helped by a pliant Fed chief, did a better job at this than most. To say that the Fed’s monetary policy was loose in the run up to Bush’s reelection campaign is an understatement of epic proportions. George Junior had learned an important lesson from his father’s presidency: recessions don’t get you reelected.

Of course, the ensuing expansion of credit also helped by loose regulation of the shadow-banking sector and derivatives markets, couldn’t last forever. And the hero of the 2004 presidential elections left office during the biggest economic disaster since the 1929 crash.

President Obama knows his presidency will stand or fall on voters’ perceptions of his ability perform major triage on the wounded US economy. It does not, however, matter to Obama’s reelection bid if the economy assumes a sustainable pattern of growth; a good old-fashioned dose of ‘stimulus’ will do. Obama’s playbook is to borrow and spend America out of trouble. It is a short-term remedy at best. At worst, it will ruin the country.

The government will borrow 50 cents of each dollar it spends for the next year. To do this it will run the largest annual fiscal deficit since the US mobilized for World War II. There are only two ways to pay off the debt pile George W Bush and Barack Obama have run up. (President Clinton left office with a budget surplus.) The government will either raise taxes via the IRS or trigger inflation. It will likely resort to a combination of both.

This point is not lost on even Obama supporters. Warren Buffett had this to say recently about spiraling deficits:

A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.
Every country that has denominated its debt in its own currency and has found itself with uncomfortable amounts of debt relative to the rest of the world, in the end they inflate.
That becomes a tax on everybody that has fixed dollar investments.

Buffett thinks the ratio of debt to GDP in the US could reach 80% by 2011. Right now, the government has backstopped roughly 70% of the US economy with public funds. This is not a free market by any stretch of the imagination.
It is difficult to understand how the government will extract itself from this situation without triggering another collapse.

As we have said before here at Notes, traders and investors are now betting on Uncle Sam’s support of the market, not the market itself.

But in May of 2008, the answer was not as obvious as it is today. And so we wondered aloud, “How much is one trillion anyway?”

We answered the question from a variety of perspectives. For example: “One trillion seconds equals 31,546 years. One trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun. The average new car costs $28,400. $1 trillion would buy more than 35 million cars.”

Why did we bother trying to quantify the sum, one trillion? Because just a few weeks earlier, the International Monetary Fund had estimated that the global banking crisis would produce about $1 trillion of losses. Shortly thereafter, then-President George Bush delivered America’s first $3 trillion budget. Suddenly, the kind of arithmetic that required twelve zeros had become an exercise of national importance.

One year later, this exercise has become vastly more important. The IMF has doubled its estimate of banking sector losses to $2 trillion (while many private economists put the number between $3 and $4 trillion). Furthermore, the U.S. government of 2009 does not merely count its budget in the trillions of dollars, it counts its budget DEFICITS in the trillions of dollars. According to the latest estimates, President Obama’s very first budget will produce a deficit of $1.8 trillion in 2010. And that’s the OPTIMISTIC guess.

So where’s the shock over this shocking development? Where’s the awe? Where’s the national outrage over the mind-numbing cost of bailing out Wall Street’s self-serving speculators?

There isn’t any. No shock. No awe. No outrage…and the reason is very simple: almost no one gets it…literally. The numbers are simply too large.

“The scale of what President Barack Obama proposes to do to the American economy is so enormous, so far-reaching and so potentially disastrous that the [Republican] party is having a hard time describing it,” writes Byron York, chief political correspondent for the Washington Examiner.

“GOP message mavens are struggling with something that academics call ‘insensitivity to scope,’” York continues. “It affects us all; we can understand something on a small scale but have a difficult time comprehending the same thing on a massive scale. Insensitivity to scope is a major obstacle to understanding the Obama administration’s $3.6 trillion 2010 budget. People simply have trouble understanding a number so big. A recent poll asked Americans how many millions are in a trillion. Twenty-one percent of respondents got the answer right — it’s a million million. Most people thought it was a lot less.”

So that means that four out of five respondents got the answer wrong…and most of them guessed too LOW. No wonder a $2 trillion deficit doesn’t seem like a problem.

“[One GOP pollster] tries to explain it,” York goes on, “by asking people to think of a dollar as a second — one dollar, one brief tick of your watch. A million seconds, the pollster explained, equals eleven days. A billion seconds equals 31 years. And a trillion seconds equals 310 centuries…After a review of the Obama budget’s numbers before formal submission to Congress, Budget Director Peter Orszag said this year’s deficit will be $1.841 trillion — $89 billion more than previously estimated. If you’re listening to the ticks of your watch, that’s about 570 centuries.”

And let’s not forget that the Obama budget assumes the economy will be growing at a 3.5% annual rate by the end of this year. That’s a good number in GOOD times. In bad times, such as we are now enduring, a 3.5% growth rate is nothing short of delusional. So we’d guess that the actual budget deficit is likely to be much larger than the already-large numbers the Obama camp is tossing around.

What does all this mean for investors? Hard to say exactly…but not that hard to say inexactly. A $1.8 trillion funding shortfall is a great big hole to fill. Indeed, it is a hole so large that tax receipts could not possibly fill it. Foreign capital and/or domestic savings could theoretically fill it. But in the real world, that’s not likely – not at meager 3% and 4% rates of interest over ten to thirty years. So the most probable “solution” to the funding shortfall is also the most expedient one: the government will buy bonds from itself.

This ancient remedy to fiscal imprudence used to go by the name of currency debasement. But today this process comports itself with an air of sophistication by wearing the title, “quantitative easing.” Different name; same result: inflation.

The financial markets are picking up the scent already. Ever since March 18, when the Federal Reserve announced its intention to purchase $300 billion of Treasury debt, most financial markets began pricing in an inflationary threat. Gold, commodities and bond yields have been moving higher, while the dollar’s value has been moving lower.

“We are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope,” warns John Mauldin, editor of Outside the Box, “And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency? Even though we can see the challenge, it is not clear what the final outcome will be, other than stressful volatility as the market reacts.”

We’re guessing the volatility will be much less stressful for those folks who hold a significant amount of their assets in gold and commodities. And the stress might even morph into pleasure for gold-holders if, as we expect, the governments of the world enthusiastically pursue the stealth larceny of currency debasement. You can dress the debasement process in Harvard B-school jargon, surround it with Federal Reserve White Papers and re-christen it, “quantitative easing.” But after all that, you’ve still got the same old process of currency debasement, which produces the same old results: inflation and loss of purchasing power.

Source: The $1.8 Trillion Question