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Association of Investor Awareness - Week of 07/29/2010

Research & Editorial Staff — Thu, 29 Jul 2010 21:13:00 GMT

In This Issue:

Double Dip, Or Onward & Upward?
Many Winners Should Have Further To Go
Inflation, Deflation – Or Neither?
Beating The Bushes For Returns
The Bottom Line

After nearly six weeks of uncertainty, investors finally decided the outlook for the economy was improving enough to justify higher stock prices. Since our last newsletter in June, the Dow and the Nasdaq went up 3.4% and 2.1% respectively. Nearly all the gains came during the last two weeks.

Double Dip, Or Onward & Upward?

The stock gains notwithstanding, the recovery is still on shaky ground. With growth at an anemic 2.5%, it would not take much good or bad news to push the economy either way.

To make the matter even harder to call, many industries are growing strongly, but others are still losing money.

On the positive side of growth are the multinational blue chips that do a great deal of business overseas. Their profits are rolling in thanks to the healthy global economy. China, India, Southeast Asia, much of South America and many other regions have cooled off a bit, but most analysts think that's all to the good.

If you will forgive our lack of humility, we wish to remind readers that we identified the potential of blue chip companies many months ago – and have been shamelessly recommending them ever since. As a sector, these stocks have consistently been the market's best-performers. We think they will remain market leaders for quite some time.

On the negative side of growth is the housing industry that usually contributes about 10% of America's GDP. It isn't just the developers and construction workers who are suffering. Banks, realtors, title companies, timber companies, furniture makers, and dozens of other enterprises are linked to home sales. Unfortunately, mortgages for home purchases fell to a 14 year low last month, which doesn't bode well for the future.

Many manufacturers are not much better off. The big exporters are doing well, but smaller firms that primarily serve domestic markets are having a tough time.

Much of the retail industry is also just limping along because nervous consumers are clutching their wallets more tightly than ever. Consumer confidence dropped again in June, which suggests that people won't become big spenders again anytime soon. Recent polls indicate that the new frugality may last many years.

The conclusion we come to is that official economic numbers, and the labels that apply to them, are not of much value. Investors need to look for specific sectors that are doing well and pick the best stocks within them. That way, good profits can be obtained even if the broader economy is struggling.

Many Winners Should Have Further To Go

As to what to buy, there is no better group than the blue chips we recommended last month. They are no longer as cheap as they were, but they are still attractive for long-term accounts. Here is the list again:

Updates:

BP (BP) was recommended in our May issue as a speculation. It was right after the disastrous Gulf oil spill. Shocked investors plummeted the stock from $45.58 to $36.52 where we thought it was oversold. BP has since started to inch back up and is now selling for $37.71. We expect more gains, but we rate the stock as a hold for now.

General Electric (GE) just raised its dividend a surprising 20% in an effort to show it is over the worst of the financial crisis and expects to do well going forward. GE remains a buy.

Citigroup (C), JP Morgan Chase (JPM), and Wells Fargo (WFC) all reported rising second quarter earnings. Ditto for Goldman Sachs (GS) whose earnings set a new record. We continue to think the big banks will deliver excellent profits longer-term. All four banks are still buys.

Eli Lilly (LLY), Johnson & Johnson (JNJ), and Merck (MRK) are still feeling the effects of investors' nervousness about the new health care law. Several expiring drug patents are also a concern. We continue to think the negative impact from the law on drug prices will be more than offset by the millions of new people who now have insurance. We are also impressed by the many new drugs that are on the way. The three companies remain buys.

Inflation, Deflation – Or Neither?

Washington has been pumping so much money into the economy to stimulate growth, many analysts have been expecting a stiff round of inflation. So far, that old monetary plague has failed to appear.

The main reason inflation is nowhere to be found is most of the government's stimulus money is still stuck in the banks. Mr. Bernanke at the Fed has been cajoling the tightwads to open their vaults and make loans to deserving businesses.

However, the demand for money has fallen off a cliff. Businesses are unwilling to go into hock to expand their operations when demand for products and services is low. For the near-term at least, the stimulus funds are not an inflation threat.

Investors, who always seem to be worried about something, have switched their concern from inflation to deflation. The latter occurs when money leaves the economy due to business failures, personal bankruptcies, unemployment, falling home prices, and the like.

When money goes poof, the remaining dollars become more valuable and prices decline. People see the trend and they wait for even lower prices before they will spend money. It is a self-fulfilling expectation that keeps the downturn going.

All in all, deflation is bad for the economy. It is also very hard to fight. The Japanese have been battling deflation for 15 years with little success.

At this point, we don't think either inflation or deflation is a threat to the recovery. The most likely outlook is for very low inflation for an extended period of slow economic growth.

At the same time, we expect unemployment will remain high, incomes are likely to be frozen, and the economy will still feel like a recession for millions of consumers.

Beating The Bushes For Returns

The biggest problem investors are having now isn't finding rising stocks, it's getting a decent return on their cash. As part of the Fed's attempt to stimulate the economy, the agency pushed interest rates almost down to zero. That's great for borrowers, but terrible for depositors and people who are trying to live on their fixed income returns.

Fortunately, in the low inflation economy we have today, cash isn't losing much buying power while it sits on the sidelines. Getting deposits to gain headway is much harder, but not impossible.

One solution is to put money into stocks that pay good dividends, and have been doing so for many years. One such company that is already on our buy list is Eli Lilly (LLY). The stock is currently is paying 5.6%, vs 3.04% for 10-Year Treasury Bonds. Merck (MRK), another pharmaceutical company we recommend, is paying 4.4%. Both stocks should also give long-term investors attractive capital gains.

For the best CD rates, we suggest that you visit www.bankrate.com and click on CDs & Investments. Pick the maturity of the CD you want and click Search. Underneath the name of each bank will be a series of stars that indicate the institution's safety rating. All the banks have FDIC insurance. Nevertheless, we suggest that you select CDs from institutions with at least 4 out of the possible 5 stars.

For 1-year CDs, these were the top three banks that fit the ratings criteria as of July 27:

SallieMae	1.55%	No minimum deposit	https://banking.salliemae.com/
CapitalOne	1.50%	$5,000 minimum dep	http://www.capitalone.com/directbanking/
Ally	1.47%	No minimum deposit	http://www.ally.com/bank/high-yield-cd/

The Bottom Line

Stocks broke out of their holding patterns in July and pushed the market back into positive territory for the year. Considering the lackluster economy, the market's performance is better than it could be.

The bluest of the blue chips have been doing the best of all. We think they will stay on top over the next few months. Fortunately, we have been favoring the big blues all along. Many of them are still very attractive.

Finding good fixed income returns is much harder. However, many blue chips with dividends are delivering better yields than Treasuries, plus they offer good prospects for long-term capital gains.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time...

Eurozone Confidence Rises...

Chuck Butler — Thu, 29 Jul 2010 14:50:28 GMT

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In This Issue..

* Currencies rally
* German unemployment drops...
* RBNZ hikes rates 25 BPS...
* CBO & the inconvenient debt...

And Now... Today's Pfennig!

Eurozone Confidence Rises...

Good day... And a Tub Thumpin' Thursday to you! They figured it out! Finally! And in time I might add, given we hook our camper up to my vehicle on Sunday! In the end... The guy at the auto shop said, "if we would have only listened to what you were telling us"... I said, "yes, eventually, everyone realizes that!" HAHAHAHAHAHAHA!

OK... Front and Center this morning, I have to tell you that we've had a HUGE currency rally overnight, and the rally still has legs through the European session, for, I've seen the euro inch higher as I booted up my computer! What's got the currencies, led by the Big Dog, euro, so wound up this morning? Ahhh grasshopper... Come, sit, and let me tell you the story of an ancient warrior, no wait, let me tell you about the rally!

First things first... Well... We've got a huge shift going on right here in front of our eyes, folks... The momentum has shifted toward selling dollars, based on the fears that the U.S. nascent recovery is failing... Of course, You, being a well informed Pfennig reader, already knew that... And when I told you a couple of months ago, that the euro's bottom would be around 1.20 (it was actually 1.1877 on June 6th), you were all over that like a cheap suit, and now that everyone else is joining our bandwagon, you are smiling like a Cheshire Cat!

Then there were two pieces of data in the Eurozone that really got things going for the Big Dog, euro... First report was that Eurozone Confidence in the economic outlook rose to the highest level in more than two years this month... And the second report showed that German unemployment fell to its lowest level since November of 2008. (remember November 2008? It appeared the sky was about to fall, with credit default swaps imploding, and Lehman Bros. no more, etc., etc.)

So... Drum roll please... The euro is trading around 1.3085 this morning... But it's not just a euro story... We have the other "little dogs" joining the Big Dog in getting off the porch and chasing the dollar down the street. For instance, the Aussie dollar (A$) recovered from the blow of a soft CPI print, and went right back over 90-cents. And the Canadian dollar /loonie is back above 97-cents this morning... So... The rot on the U.S. economy's vine is being exposed for what it is, and suddenly Europe's problems don't look so bad any longer...

And Gold? Well, even with the recent trading theme of selling Gold when the euro rallies, is on hold this morning, with Gold rising a bit...

Yesterday, I talked to you about how Gold had gotten whacked by over $20 on Tuesday... Yesterday, I did some additional research and saw this piece on Ed Steer's newsletter on Gold and Silver... Here's Ed...

"Yesterday was options expiry in the over-the-counter market... and today is options expiry in the Comex futures market. So what are the odds that yesterday's take-down was engineered for the benefit of the bullion banks so that another big whack of call options would expire out-of-the-money? No odds at all dear reader, as what you saw yesterday was pure collusion on the part of the bullion banks... with the CFTC and your gold and silver companies looking the other way."

Now... I've told you for quite a few years that I believed that Gold and Silver prices were manipulated by the Big Boys... The list of people that believe that is growing by large numbers every day, but yet the CFTC (regulatory body) drags their feet... It disgusts me to no end...

While I'm disgusted, I might as well talk about our deficit... In our monthly newsletter to clients called: The Review & Focus, I call our deficit: An Inconvenient Debt...

Well, there's no lack of people screaming from the rooftops about our debt these days, I doubt there are more than a handful that have been screaming as long as I have... But yesterday it was the Congressional Budget Office (CBO) with this little ditty...

"Further increases in federal debt relative to the nation's output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades.
Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels."

And to add to that... Bill Gross of PIMCO fame, has this to say about the deficit, "deficit spending by governments that seek to maintain artificial levels of consumption can be compared to flushing money down an economic toilet."

OK... Enough of that! Let's go back to the euro for a minute... You know what? The last time the euro was above 1.3050, was the morning that we found out that there would be a 1 Trillion euro Eurozone bailout... The date? May 10th...

The euphoria of that morning didn't last long, and soon the euro was losing ground again, every time a ratings agency announced a downgrade, or there was insurrection in the Eurozone streets... Shoot Rudy, just 2 weeks ago, the euro was 1.2585... As I said a week or so ago, the rise has been quite quick, and strong... That scares me a bit, as the markets always seem to get ahead of themselves too quickly, but... With the momentum shift in focus going to the U.S. these days, maybe the rise is warranted.

I'm one that believes that a euro above 1.30 doesn't do the Eurozone economy much good at this time... When the economy is roaring, sure a stronger euro helps fight inflation, but when the Eurozone economy needs exports to feed its economy, a stronger than 1.30 euro doesn't help...

I told quite a few people in Vancouver last week that I truly believed that until fundamentals creep back into the markets, I saw the euro range trading... Above 1.30, is outside the "range"... So... Watch for that, today...

Let's talk about something else... How about the Reserve Bank of New Zealand (RBNZ)? The RBNZ did, as we expected, raise rates 25 BPS last night, and they also did what I expected them to do, which was to talk dovish in their statement, thus watering down the affect the rate hike would have on kiwi. Without the RBNZ turning yellow belly, I suspect kiwi would be trading above 73-cents... So, thanks RBNZ... NOT!

And remember yesterday, and plenty of times in the past, when I told you that the RBNZ doesn't do kiwi any favors, attempting to talk down the currency every change they get... Well, here's the RBNZ Gov. Bollard who said, "The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand's economic outlook and moderation in our export commodity prices."

Shame on you Mr. Bollard... If you don't like your currency, it will come back to haunt you one day, when you'll be begging for foreigners to buy the currency... And I hope they shove that statement and the others that you've made about kiwi in your face!

OK... Tomorrow, besides being a Friday, the Friday before my summer vacation begins, and a payday Friday, will also be a big day for economics here in the U.S. as the first print of 2nd QTR GDP will probably show that the U.S. economy grew at a pace that's not going to help the unemployment problem for sure... The forecast is for a 2.5% growth rate... My suspicion is that it would be between 2 and 2.5%, so, a little weaker than forecast. You can attribute that to me not wearing a rose colored moniker!

But, before we go there tomorrow, we have to deal with the usual fare on a Tub Thumpin' Thursday, and that is the Weekly Initial Jobless Claims, which continue to add over 400,000 newly unemployed each week... Last week it was 464,000, and this week is expected to be 460,000... OUCH! And the Continuing Claims, something that I keep an eye one but don't always talk about, is a very awful looking 4,500,000... UGH!

Then there was this... The U.S. Office of the Comptroller of the Currency is billing an "investor round table" on mark-to-market accounting rules as a chance for investors and regulators to share their views. As it turns out, the only investors allowed to participate make up a small group invited by the government. Others won't even be allowed to listen in, according to The Wall Street Journal.

Yeah... Chuck here... I bet you can figure out who that "small group" is, right? Let's see... Goldman Sachs, Citigroup, JP Morgan, (remember Goldman became a "bank" during the stimulus handouts)... Like these guys have any idea what it's like to be a "community bank" or even a small "regional bank"...

That's like lawmakers creating financial regulation. They aren't in the trenches, and anything they write won't take long before those that are in the trenches find loopholes. That would be just a plain, outright silly thing for lawmakers to do, right? Oh Wait! They already did that!

To recap... The currencies are in the middle of a strong rally led by the Big Dog Euro, who saw Eurozone Confidence rise, and unemployment in Germany fall this month. There seems to be a huge shift in what investors are focusing on, shifting from Europe to the U.S. and that's not good for dollars. The RBNZ did raise rates 25 BPS, and also talked down the currency, and Aussie dollars bounced back above 90-cents after falling to 8910-cents the day before due to a soft print of inflation.

Currencies today 7/29/10: American Style: A$.9035, kiwi .7280, C$ .9705, euro 1.3085, sterling 1.5640, Swiss .9580,... European Style: rand 7.2955, krone 6.1010, SEK 7.2375, forint 216.55, zloty 3.0575, koruna 18.8870, RUB 30.15, yen 86.90, sing 1.3620, HKD 7.7655, China 6.7760, pesos 12.65, BRL 1.7680, dollar index 81.55, Oil $77.29, 10-year 2.99%, Silver $17.60, and Gold.... $1,166.10

That's it for today... Well, it sure was nice to get back into the "routine" in the morning, and not have to deal with car stuff... I know that most the people here come in to work, see my car, and feel relieved that I'm here... HAHAHAHAHAHAHAHAHAHA! Now that's funny! It's more like, they see my car, and get feel nauseated! It was 100 degrees here yesterday... WOW! Reminds me of when I was a kid, and we had a week where every day it got above 100... And guess where I was? OUTSIDE! Because I was a kid! And... There was no such thing as "central air conditioning" at our house! So, when I hear people say this is the hottest summer, I think back to that summer of long ago (yes, it was a long time ago!) Little Delaney Grace was at the house yesterday when I got home, and she was singing Do, re, mi, fa, so, la, ti, do... She is so darn cute! Time to go... I hope your Thursday is Tub Thumpin'!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Subscriber Alert 7/28/10

Steve Cook — Wed, 28 Jul 2010 16:41:00 GMT

SUBSCRIBER ALERT
7/28/10

Gold has broken its intermediate uptrend and satisfied our time and distance discipline. Accordingly, our Portfolios are selling their gold (GLD) position down to a 5% total position in each Portfolio. However, I don’t want to reduce the Portfolios’ overall invested position, so the proceeds are being invested in the ETF’s of Austrialia (EWA) and Brazil (EWC)

Consumer Confidence Tumbles...

Chuck Butler — Wed, 28 Jul 2010 12:13:43 GMT

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................................................

In This Issue..

* Currencies range trade
* Aussie CPI prints soft...
* RBNZ to hike rates tonight...
* Oil drop pushes loonies lower...

And Now... Today's Pfennig!

Consumer Confidence Tumbles...

Good day... And a Wonderful Wednesday to you! I'm writing from home again this morning, as I have to deal with my car again. They told me it was fixed, I drove it about 10 miles to find out it wasn't! UGH! I must have the guy that failed "car repairs" 10 times before passing...

OK... The currency action yesterday was, while range traded, up and down, and all around. Yesterday morning I told you that the euro had broken above 1.30, and I would check it to see how long it remained there... Well, this time it was more than 10 minutes, and the euro rose to 1.3040... But then the rug was pulled from under the single unit, and it was back below 1.30 it went... In fact, it fell to just above 1.29, before then turning around once again and heading higher, eventually ending the day at 1.30.

The "rug" that was pulled from under the euro was Consumer Confidence data here in the U.S. The Consumer Confidence Index followed June's sharp drop, with another drop that was larger than expectations. The Index fell to 50.4 from the prior month's 54.3... The declines in the "present situations" and "expectations" components of the Index represent the lowest levels since March of this year.

You know me, I've always wondered, who wrote the book of love, no I mean, why consumer confidence was so strong given all that bad stuff around us. I always said, "they sure didn't survey me"! So, maybe, just maybe, Consumer Confidence is finally capturing what's really going on in the economy...

The initial knee jerk reaction to the Confidence data was that the world was ending, and dollars and Treasuries would be the only salvation... But, eventually, calmer heads prevailed, when the yield differentials of other countries to the dollar and Treasuries came into light. I've talked about this quite a bit in the past, regarding yield differentials holding a lot of weight, and going further out on the horizon, it sure doesn't look like the U.S. will be able to narrow those differentials...

The Aussie dollar (A$) got whacked overnight, here's the skinny... Aussie CPI (Consumer Inflation) printed at .6% in the 2nd QTR... Now... That's a good thing, right? Well, not if you were counting on another rate hike from the Reserve Bank of Australia (RBA) when they meet next week. Recall on Monday I said if Aussie CPI was .8% or above, the rate hike was "on"... So... We had a lot of buyers come into the A$ the past week, driving the A$ through 90-cents, because they believed the RBA would be raising rates next week... When they saw the color of the 2nd QTR CPI, they took those trades off the table, and the A$ fell back below 90-cents, again...

I wonder how long it will take before investors figure out that this, softer, 2nd QTR CPI is just what the RBA was going for, when they were the first country to raise rates, and then continue to raise rates for the next 6 months? This is "good" for the A$, and the Aussie economy...

So, here's an opportunity for the New Zealand dollar / kiwi, to play catch-up to the A$... The Reserve Bank of New Zealand (RBNZ) meets tonight (their Thursday), and like I've said since the last rate hike by the RBNZ, I expect them to raise rates in New Zealand tonight...

But, don't expect a "run-up" of kiwi after the rate announcement... I truly believe the RBNZ will try with all their might, to talk down the kiwi, with dovish statements, in hopes of throwing the dogs off the scent, of another rate hike...

The RBNZ "used" to be one of my fave Central Banks, especially when Don Brash was the Gov. The RBNZ, these days, are not "protectors" of the currency's value... And that, ticks me off!

I told the general crowd at the Agora Wealth Symposium last week, that I truly believed that we're going to see home prices drop another 10%... (yes, I know, the Case-Shiller report yesterday showed that home prices strengthened this spring) And here's one of the reasons I believe the price drop is coming... A record 269,962 U.S. Homes were seized in the 2nd QTR, according to RealtyTrac Inc. Foreclosures will probably top 1 million this year!

And... The share of homes empty and for sale, known as the vacancy rate, is the same now, as it was a year earlier. 3.7 million holes are sitting empty, and yet, we continue to build new homes... And the Mortgage Bankers Assoc. says that a record 4.6% of U.S. mortgages were in foreclosure in the first 3 months of this year...

Oh, and getting back to the Case-Shiller report... I wonder where they got their numbers? You see... According to Realtors, the U.S. median home price had fallen 29% in February, to $164,600, an 8-year low! OK... Wanna know what the high was during the housing bubble? $230,300 in July of 2006...

OK... That's depressing, eh? But... You've got to be armed with facts and figures if you're going to make a claim like I did last week, in front of 900 people!

Well... The bad print on U.S. Consumer Confidence socked it to commodities yesterday... The price of Oil fell over $2, and Gold tumbled more than $20! Now... One would think that a lack of Confidence would have boosted Gold... But NOOOOOOOOO! In the words of John Lennon, strange days indeed, so peculiar momma!

And, with the price of Oil dropping $2, the Canadian dollar / loonie backed away from 97-cents, once again... This back and forth stuff really gives me a rash!

OK... You're going to love this morning's "Then there was this"... Or... If you're like me (and I apologize if that's the case) then it will probably really tick you off!

I saw this on YAHOO Finance... A U.S. audit has found that the Pentagon cannot account for over 95 percent of $9.1 billion in Iraq reconstruction money. The $8.7 Billion in question was Iraqi money managed by the Pentagon, and not part of the $53 Billion that Congress allocated for rebuilding...

The report by the Special Inspector General for Iraq Reconstruction accused the Defense Department of lax oversight and weak controls, though not fraud.

"The breakdown in controls left the funds vulnerable to inappropriate uses and undetected loss," the audit said.

Chuck again... No fraud? What, did they forget to take their rose colored glasses off before entering the audit room?

To recap... The currencies range traded yesterday, with the euro leading the way. The A$ lost ground overnight when their 2nd QTR CPI was softer than expected. The RBNZ meets tonight, and I expect rates to go higher in New Zealand. And Consumer Confidence in the U.S. fell again for the second consecutive month, pulling the rug from under commodities, with Oil falling $2 and Gold falling $20...

Currencies today 7/28/10: American Style: A$ .8945, kiwi .7275, C$ .9695, euro 1.2990, sterling 1.5575, and Swiss .9455, ... European Style: rand 7.3725, krone 6.1725, SEK 7.3260, forint 218.60, zloty 3.0910, koruna 19.2960, RUB 30.25, yen 87.75, sing 1.3660, HKD 7.7670, INR 46.74, China 6.7778, pesos 12.66, BRL 1.7670, dollar index 82.11, Oil $77.25, 10-year 3.03%, Silver $17.62, and Gold... $1,165.00

That's it for today... A bad night for my beloved Cardinals in NY last night... I had to attend a "parents meeting" for the football players last night, so I missed the game, which I would have been so upset about! I looked around the room at the size of these kids... WOW! Alex has his work cut out for him, for he sure doesn't match up size wise... But he can do it, he's strong as an ox, technically sound, and has a bulldog's attitude that he gets from someone in the family... (HA!) those that played ball with me in school back "in the day" would say he's the carbon copy of me... Now that's a scary thought! (for him!) Any way... I've got to get this out the door, and get over to the car dealer, so I can get to work! I hope you have a Wonderful Wednesday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Financial Reform or Government Takeover Revisited

Gary D. Halbert — Wed, 28 Jul 2010 00:28:00 GMT

IN THIS ISSUE:

Financial Regulatory Reform Becomes Law of the Land
Doesn’t Solve “Too-Big-to-Fail” or Fannie/Freddie Mess
Reform Creates a Massive New Government Bureaucracy
Changes to Bank Regulations – Not Too Restrictive
Some Derivatives to be Regulated & Traded on Exchanges
Reform Law’s Effects on Other Financial Players
New Bureau of Consumer Financial Protection

Financial Regulatory Reform Becomes Law of the Land

Last Wednesday, President Obama signed into law the new financial regulatory reform bill entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” I wrote about financial reform earlier this year, but I want to revisit the issue again this week. Clients and readers need to have a clear understanding of what this sweeping legislation may or may not accomplish, and how it could affect not only your investments, but also the privacy of your personal financial information.

The final bill that President Obama signed was very similar to the Senate version of financial regulatory reform, which I summarized in my April 20 E-Letter. As you may recall, I argued at the time that we already have plenty of regulators and plenty of regulations, and we just need the regulators to do their jobs.

President Obama and Congress, on the other hand, delivered us a 2,300-page law that its co-author, Senator Chris Dodd, admitted publicly that no one knows what all is in it. Yet President Obama promised that “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more tax-funded bailouts, period.” Unfortunately, that is not true as I will point out later on.

Before I move on to more specific elements of the new financial reform law, I want everyone to understand the following point. When President Obama called for the $787 billion (stimulus) in 2009, Congress had to approve it by passing the law and appropriating the money. When President Bush called for the $700 billion in 2008 (TARP) to bail out the banks, Congress had to approve it by passing the law and appropriating the money.

Yet with the passage of the new financial reform law, appointed (unelected) bureaucrats in the Treasury Department will make those decisions, and they will not need congressional approval. Yes, Treasury Department bureaucrats will unilaterally decide under the bill’s “orderly liquidation process” how much of the taxpayers’ money to hand out to troubled firms.

Also, the Dodd-Frank bill, for the first time in our history, gives the federal government the right to seize and liquidate any businesses if they are believed to have “systemic risk” (ie - risks that could threaten the economy or the financial system). This part of the new law applies to banks, thrifts and credit unions, but also to non-banks. This authority will be vested in the yet-to-be-created Financial Stability Oversight Counsel (“FSOC”) which will consist of the Treasury Secretary, the Chairman of the Federal Reserve and eight other unelected officials (read: political appointees).

If the Financial Stability Oversight Council deems a firm to have systemic risk, it can require the company to voluntarily downsize, OR it can move in, fire the board of directors, remove and/or replace management, or it can immediately put the company into liquidation. Many view this power as a violation of the 4th Amendment (I agree), so I expect this to be fought out in the courts in the months and years ahead.

But the power grab doesn’t stop there. The Financial Stability Oversight Counsel is also empowered to create another new government agency to be called the Office of Financial Research (“OFR”). The OFR will have the power to demand any records it wants from any financial firm – repeat, ANY financial firm. If a financial firm does not cooperate, the OFR has subpoena power to seize whatever records it wants – including records on individual accounts.

Big Brother just got a whole lot bigger!

Unfortunately, this power grab is riddled with opportunities for political abuse. You have a group of hand-picked regulators making life-or-death decisions for companies that are, in their opinion, too-big-to-fail. You can just imagine how this could affect the political contributions that large companies make to influential members of Congress.

Aside from the direct political implications, the existence of the FSOC, the OFR and the Bureau of Consumer Financial Protection (discussed later on) could have potentially serious implications for the business cycle and the markets. Over time, these new regulatory agencies will make clear what types of business activities they approve of and which ones they don’t. As this occurs, it would only be natural that financial companies would adjust their business models accordingly.

Doesn’t Solve “Too-Big-to-Fail” or the Fannie/Freddie Mess

Dodd-Frank also does not solve the “too-big-to-fail” problem. Thus, Dodd-Frank does not remedy the fundamental cause of the economic meltdown of 2008, which was the government’s decision to shift the costs of bad investment decisions from corporate executives to taxpayers.

While the government now has the power to seize and liquidate any firms that it deems to have “systemic risk,” that does not mean there won’t be too-big-to-fail companies, now or in the future. Under the new law, the FDIC will still take over big troubled financial firms. It will then do whatever it must to both stabilize the financial system and maximize the value of failed firms’ assets, so to minimize the costs of the resolution process. In order to achieve financial stability, the FDIC will have to cover many of the big firm’s obligations to creditors.

Thus, too-big-to-fail is still alive and well. Rather than eliminating too-big-to-fail and government bailouts, the new reform law will institutionalize them. Even the Congressional Budget Office agrees that taxpayer-funded bailouts are still possible.

Nor does the bill do anything to remove the elephant in the room – Fannie Mae and Freddie Mac – neither of which are mentioned in the new law. The costs of the Fannie/Freddie bailout will reach nearly $400 billion this year, according to the Congressional Budget Office, and could approach $1 trillion before all is said and done. Roughly 70% of all US mortgages are held by Fannie and Freddie, which between them hold $5 trillion of home mortgages in their portfolios.

Fannie and Freddie are still losing billions by the month on bad mortgage investments and taxpayers are still on the hook. This means the housing crisis is far from being resolved and, thanks to the continuing high rate of foreclosures, could plunge the economy back into recession at any time. Of course, Fannie and Freddie reportedly continue to make lavish campaign contributions to politicians on both sides of the aisle (including Chris Dodd and Barney Frank), and that may explain why they were left untouched by the new financial reform bill.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Reform Creates a Massive New Government Bureaucracy

As you probably have heard, this new reform law will create another vast government bureaucracy over the next two years. A total of 13 brand new federal agencies will be created. Thousands of new federal employees will have to be hired, trained and housed in new government facilities. We will very likely never know how much money this will cost, since some of the new agencies will be funded by the Federal Reserve (that’s a whole other story).

As discussed above, the Financial Stability Oversight Council (“FSOC”) will be the first new agency created, and it will oversee the other 12 new federal agencies, including the Office of Financial Research which will have subpoena power to demand private records from any financial firms it chooses.

But the FSOC also has another daunting mission. Its 10-member unelected council is charged with peering into the future and identifying new financial threats before they become systemic. That’s a tall order, especially when financial crises are always different. Somehow I don’t quite see Tim Geithner, or Hank Paulson before him, being able to foretell the future!

Surprisingly, the 2,300+ page financial reform bill fails to address the hundreds of specific rules and regulations that will have to be devised and written by Washington bureaucrats over the next year and-a-half. Harvey Pitt, a former SEC Chairman (2001-2003), said the following shortly after the Senate passed the financial reform bill: We’re about to receive legislation that could be entitled “The Lawyers’ and Lobbyists’ Full Employment Act.”

Changes to Bank Regulations – Not Too Restrictive

At this point, let me summarize most of the new regulations on banks and financial institutions in the financial reform bill. First, a new national bank regulator, the Financial Stability Oversight Counsel noted above, will replace the two agencies that currently oversee national banks and thrifts – the Office of the Comptroller of the Currency and the Office of Thrift Supervision (“OTS”). Before the financial crisis of 2008, the OTS provided loose oversight of banks and S&Ls.

For example, the OTS let banks avoid setting aside money for future losses. Specifically, banks were allowed to assume that even the riskiest mortgages would be repaid. That’s why many risky lenders chose the OTS as their main regulator. The reform law seeks to prevent so-called “regulator shopping” by creating one regulator for all national banks and thrifts and other financial firms.

Next, banks will be required to maintain higher internal capital requirements. Capital is the stable money banks sit on. It includes money not at risk, such as shareholder equity. Regulators will decide how much more capital banks must have to cover unexpected big losses. The law instructs regulators to raise these standards, but they apparently will have some discretion.

The bill purports to ban “proprietary trading” by banks. That’s when banks place bets for their own profit, rather than for their clients. It’s unclear how strictly the ban will be enforced, and there are loopholes as I will discuss below. Also, it can be hard to tell, for example, whether an investment is intended to benefit a bank or its clients, and whether federally insured deposits could be put at risk by these trades. Regulators will draft rules after doing a study.

The proprietary (“prop”) trading ban is part of the so-called “Volcker Rule,” named for former Fed Chairman Paul Volcker, which was loosely incorporated into the new financial reform bill. Volcker, who is now a White House adviser, argues that banks should stick solely to holding deposits and making loans. He thinks deal making and investment banking should be left to firms that taxpayers wouldn’t have to bail out, as was the case when the Glass-Stegall Act was in place from 1932 to 1999. But the powerful banking lobby was successful in preventing a return to Glass-Stegall.

In the end, the ultra-strong banking lobby was able to block the complete ban on prop trading, and instead got Congress to limit prop trading to 3% of the banks’ internal capital holdings, which is still a very large number, especially among the nation’s largest banks. The new reform bill, as best we can tell at this point, does not limit the amount of leverage that banks can use in their prop trading activities. Thus, the 3% limit effectively does little to avoid another financial crisis.

Another part of the Volcker Rule that was adopted will limit banks’ investments in hedge funds and private equity funds. The new rules limit banks from having more than 3% of their capital in such funds, but here again, 3% among the nation’s largest banks is still a very large number.

Finally, I should point out that these new bank regulations and requirements, some of which seem appropriate, will result in higher costs to bank customers over time. As always, corporations pass along higher operating costs and taxes to their customers in the form of higher fees. So as these new rules and regulations are put into place over the next two years, we will very likely see costs and fees increase on almost all financial transactions.

Some Derivatives to be Regulated & Traded on Exchanges

Many financial derivatives will be regulated for the first time. Derivatives are investments whose value depends on the future price of some other investment. Stock options and commodity futures are examples. Many companies use derivatives to reduce risk (hedging). A company might hold a derivative whose profit would allow it to recoup part of the cost if a raw material’s price soared. Before the crisis, some investors used derivatives purely for speculation. Some, for example, made side bets on the housing market going up or down.

Under current rules, many derivatives are traded outside of the view of regulators. The new law requires that most derivatives will be traded openly on exchanges and will be monitored by clearinghouses for the first time. These intermediaries settle trades and are on the hook if the owner can’t pay off on its derivatives contracts. Clearinghouses will require derivatives buyers and sellers to set aside money (margin) for each contract in case their bets go bad.

Banks and other financial firms supposedly won’t be able to trade derivatives that are thought to pose the most risk. It will not be clear which derivatives are considered the most risky until the new regulations are written. The ban is designed to protect taxpayer-insured bank deposits from being used to cover losses caused by derivatives trading. If derivatives losses wiped out a bank’s capital, taxpayers could still have to pay up. But under the new law, banks will still be allowed to trade most derivatives, thanks to the powerful banking lobby.

Other derivatives operators will face tougher oversight. Examples include companies that sell purely speculative derivatives to hedge funds and wealthy investors. Derivatives companies will be required to set aside money to cover possible losses. And the companies can be punished for using derivatives to mask the health of a business or a foreign government. The idea is to block deals like the one in which Goldman Sachs was accused of arranging to help Greece hide its deficit.

There are exceptions to the clearinghouse and exchange-trading requirements. One is for non-financial companies that use derivatives solely to offset business risks (hedging). They can still trade derivatives outside of exchanges and clearinghouses. And they won’t have to set aside money to cover possible losses. They will have to report their trades to regulators, however.

Reform Law Effects on Other Financial Players

Credit rating agencies will be held more accountable. Before the financial crisis, they gave high ratings to some investments that turned out to be worthless. Under existing case law, the agencies can’t be sued for ignoring an investment’s risks, except in cases of fraud. The new reform law would eliminate much of that protection, and investors will be able to sue credit rating agencies for recklessly ignoring risks. Also, the agencies must explain more fully how they assign ratings. If an agency performs poorly over time, the Securities and Exchange Commission could cancel its registration.

The new law will also reduce the influence of the three big rating agencies – Moody’s, Standard & Poor’s and Fitch Ratings. Regulators and government agencies have used their ratings to decide which investments are appropriate for, say, banks and pension funds, which enjoy some government backing. But the reform overhaul lets the SEC and other regulators develop new ways to grade investment risk.

Still undecided is how to address the rating agencies’ conflicts of interest, in that they’re paid by the banks whose investments they rate. Before the crisis, the agencies lowered standards to compete for banks’ business. One option is to randomly assign investments to agencies to rate.

On another front, shareholders of public companies will be allowed to weigh in on pay packages for top executives. They can vote to approve or disapprove of pay deals as part of the proxy process. That’s the annual ballot that shareholders use to elect boards of directors. The votes on pay will be held at least once every three years. But shareholders will not be able to block pay packages they see as excessive, as their votes will be nonbinding.

Shareholders may also find it easier to nominate board members and therefore have a chance to influence a board’s decisions. Fewer shares will be required to qualify a stockholder to nominate a director. Under the new reform law, directors who represent shareholders may be more likely to vote to limit pay and/or reduce the company’s financial risks.

Hedge funds have previously been only lightly regulated, but the reform bill requires those with $150 million or more in assets to register with the SEC as a Registered Investment Advisor (“RIA”). This will subject hedge funds to periodic examinations (audits) and be required to disclose more information about their trades. This is a big change for hedge funds.

New Bureau of Consumer Financial Protection

The new reform law calls for the creation of a vast new agency, the Bureau of Consumer Financial Protection (the “Bureau”), which will have broad sweeping powers with the specific mandate of consumer protection on financial products. The Bureau will be housed in the Federal Reserve and the Fed will fund its budget, yet the reform law states that the Bureau will be independent of the Fed (… hmmm).

The Bureau will have the authority to write rules for consumer protections governing all financial institutions – banks and nonbanks – that offer consumer financial products or services. Only the Financial Stability Oversight Council, by a 2/3rds vote, can overturn a Bureau rule. State attorneys-general are empowered to enforce certain rules issued by the Bureau.

The Director of the Bureau will be appointed by the President and confirmed by the Senate. Elizabeth Warren, the director of the Congressional Oversight Panel (and who I quoted at length in last week’s E-Letter), is considered the favorite to become the Director of the Bureau.

The scope of this new agency will be huge, as it will oversee all of the large banks, all mortgage-related businesses, payday lenders, student loan lenders and also any large non-bank financial firms. Smaller community banks must comply with the Bureau’s rules and regulations, but enforcement will be carried out by existing bank regulators. The only financial entities with an exception to the Bureau’s rules are auto dealers and mobile home sellers that offer financing, along with real estate brokers and accountants.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions – Another Government Power Grab

Financial regulatory reform was President Obama’s top legislative priority after healthcare reform was passed, despite widespread public disapproval. The Senate passed the financial reform bill only with the help of three Republicans. The final financial reform bill signed by the president was over 2,300 pages long. No one has read the entire bill, save for some congressional staffers. Thus, no one knows what all is really in it, as Senator Dodd admitted.

At least 13 new federal agencies will be created, and hundreds of new rules and regulations will have to be written over the next two years. Thousands of new federal employees will have to be hired, trained and housed in new federal buildings. This will add tens of billions to the budget deficits each year going forward.

As noted above, the main new agency with the most power, the 10-member Financial Stability Oversight Council, will be made up of the Treasury Secretary, the Chairman of the Federal Reserve and eight other presidential appointees. These will be very cushy jobs that will rotate whenever the party in the White House changes. It is only reasonable to expect at least some of these jobs will go to people to whom the president owes favors, rather than based solely on qualification.

These people will identify those companies – banks and non-banks – that they deem to have “systemic risk,” and they will have the power to unilaterally seize these companies and shut them down if they so choose. It is widely expected that this particular power will be challenged in the courts as a violation of the 4th Amendment (search and seizure rights).

Just as important, the financial reform bill transfers many key functions and oversight away from Congress (elected officials), and its approval, to the Treasury, the Fed and the SEC (un-elected officials). Think of President Obama’s $787 billion stimulus program and President Bush’s $700 billion TARP program, both of which had to be approved by Congress. Going forward, these new Treasury agencies will make those decisions with no authority needed from Congress. This is a huge power grab for the president and the Treasury Department. Frankly I’m surprised Congress went along with it.

We needed a streamlined regulatory reform bill, one that addressed “too-big-to-fail,” among other things. Instead, the new reform bill institutionalized bailouts. We didn’t need a huge new bureaucracy. We didn’t need legislation that will further restrict bank lending, especially for small businesses and individuals. We didn’t need another two years of uncertainty while these new regulators write hundreds of new laws that may affect virtually all types of businesses. We didn’t need legislation that will likely result in higher fees for all Americans who have a bank account.

But President Obama wanted it, and Congress was happy to oblige, if only by the narrowest margin thanks to three Republicans in the Senate.

Wishing you smaller, not bigger, government,

Gary D. Halbert

SPECIAL ARTICLES

The Ugly Truth About Financial-Regulatory Reform (from former SEC Chairman)
http://www.thedailybeast.com/blogs-and-stories/2010-07-14/a-failed-financial-bill/

Financial Reform: Wall Street Outsmarts Congress – Again
http://www.thedailybeast.com/blogs-and-stories/2010-07-15/financial-reform-how-wall-street-will-outsmart-congress/2/

Running through a minefield, backwards

John Mauldin — Tue, 27 Jul 2010 15:02:15 GMT

Before we get into today's Outside the Box I want to clear up a few ideas from this weekend's letter. There have been posts on various websites equating my piece on deflation with Paul Krugman. They say I am advocating kicking the can down the road and not reducing the deficit.

Wrong. What I have been trying to point out for several years is that we have no good choices. We are down to bad and very bad choices. The very bad choice (leading to disastrous - think Greece) is to continue to run massive deficits. The merely bad choice is to reduce the deficits gradually over time. As I try to point out, reducing the deficits has consequences in the short term. It WILL affect GDP in the short term. Krugman and the neo-Keynesians are right about that. To deny that is to ignore basic arithmetic.

I am not for kicking the can down the road. Not to begin to deal with the deficits, and soon, risks an even worse problem. But - and this is a big but - I don't want to stomp on the can, either.

Now, let's get into this week's Outside the Box. I offer you a very intriguing essay by those friendly guys from Bedlam Asset Management in London. They argue that Belgium's sovereign debt should be suspect, and is the country that could be a "sleeper" problem. This is a very interesting read, with a lot of history. It is not too long and very interesting. Enjoy. (www.bedlamplc.com)

Your thinking sovereign debt is the biggest bubble of all analyst,

John Mauldin, Editor
Outside the Box

Running through a minefield, backwards
Part II - farewell Flanonia?

The last issue concentrated on sure sovereign default by Greece, Spain and Portugal - partly due to hopeless economic numbers but more because of various 'soft' issues. For, just as the numbers in a company's balance sheet theoretically provide all that is required to understand and value it, the reality is that squishy issues, such as the quality of management, staff morale or even simple luck can make a mockery of these numbers. Part I also emphasised the futility of gnawing at the bone of the de facto bankruptcy of these three countries. Backward looking investment never makes money; better surely to recognise the sovereign default cycle has further to go, and so spend time identifying the next unexpected candidate.

On the numbers alone, the most likely casualties are the UK and US in that order, but both have good odds of escaping. Many hard issues help. In America, one such is the dollar's currently irreplaceable role as the world's reserve currency. In the UK, the relatively excellent debt duration (i.e. it is spread over many years rather than near-term) is a plus. Each also has good soft issues: the market likes the new British government's tax and slash policies so is a willing buyer of UK debt, whilst the Asian central banks have so many US bonds they simply self destruct if they refuse to keep buying.

The standout surprise candidate for sovereign default by end-2012 is Belgium. A decent country; civilised, at peace, wealthy and globally competitive in several areas. Moreover, first glance at the numbers gives no particular reason to expect Belgium to default. Its potential financial problems have been on the radar screen for so long that we have grown used to them, rather like those many parents who fail to recognise the repulsiveness of their offspring. With net government debt of €400bn, it is hardly a huge world borrower in absolute terms. Yet default could occur almost entirely by accident and the ripples be far greater than its size warrants, because of its position as the de facto federal capital of the EU. Belgium's hastening car crash is not in current bond prices or exchange rates.

The glue has dissolved

There are five reasons why Belgium has hung together for the last 180 years: Britain, God, the King, fear and most importantly, money. Before addressing these, it is necessary to understand why Belgium exists at all. When in 1815 Britain was the Big Beluga after the battle of Waterloo, it wanted a buffer state to contain France. The easy solution was to give the area now known as Belgium to one of its staunchest allies, Holland. Unfortunately, King William I of the now-renamed United Netherlands was not, even according to Dutch history books, the smartest primate in the zoo, and he suffered from the diplomatic skills of a water buffalo. Holland (or the Kingdom of the Netherlands to give it its official name) had a long history of Calvinism. This was unpopular with the newly acquired Dutch and French Catholic subjects alike. Moreover, by deliberately ensuring the French were under-represented in all parts of government, yet overtaxed, the embers of resentment smouldered. These grew hotter in 1823 after an attempt to make Dutch the official language for the whole population. Surprisingly, full rebellion was ignited by the staging of a sentimental patriotic opera in Brussels in 1830. The crowds poured out of the theatre and went on the rampage. As Britain still wanted a buffer state, and was still the world superpower, it quickly moved to ensure the creation of a new country called Belgium, uniting Flanders and Wallonia (hence Flanonia might have been more appropriate).

The people, having suddenly been rebranded, opted for a French king. Britain growled, ever mindful of France's latent imperial ambitions, thus a minor German duke's second son was chosen instead. After nine years' skirmishing, as Holland held onto a few strong points, and a minor invasion by France, Holland withdrew to sulk.

The Dutch king's alienation of his many Dutch speaking but Catholic subjects in Belgium united them with their French counterparts, providing a powerful glue to hold society together well into the late twentieth century. Now, like most of Western Europe, society has rapidly turned secular. In 1967, 43% of the population attended Catholic mass every Sunday. By 1998 (the last year in which the Roman Catholic Church produced data) this was down to 11%. It is estimated to have fallen by 0.5% p.a. ever since, possibly accelerating given the latest sex-scandal investigations. (The Bishop of Bruges confessed to an unpleasant 20-year history and resigned; the police then raided and sealed off the Archbishop's palace, also the national catholic HQ on similar charges. The investigation continues.)

In line with this trend, reverence for the monarchy has also waned, although most of the country's kings have done a good job given they have forever walked the high wire over ferocious political and linguistic divisions. Little needs to be said of the fear quotient. Belgium has suffered from three highly aggressive neighbours: Germany, France and the Netherlands. It was a popular sport for each to routinely stomp all over the area. They have all changed their ways. Leaving aside a lack of clout, the British are now wholly ignorant of how or why they created Belgium at all.

The language chasm

Belgium is a federation of three states: Flanders in the North, where Dutch (Flemish) is spoken by the native Flemings; Wallonia in the South where the official language is French; and thirdly the all-important region of Brussels. This is surrounded by Flanders although the majority of the region speaks French. The linguistic divide is well-known, but this is not of the Mandarin vs. Cantonese or Castilian vs. Catalan spat variety. It is aggressive. Ten metres either side of the official linguistic border, the other language does not exist. Municipalities can and often do insist official documents and meetings only take place in their local language. This draconian legal divide was foolishly legislated into place in 1980 and has become more intolerant every since. Belgian politics are so culturally divided that all 12 of the major parties break down on linguistic lines and cannot stand in the other language area.

A shifting balance of power

Post-independence the balance of power shifted to the French speakers. The richer Flemish Belgians were highly dependent on Holland's colonial trade and capital. Post independence, this stagnated and so they concentrated on successfully out-breeding the French over the next 150 years. Meanwhile the French speaking south boomed. The development of iron, steel, coal and heavy industry - funded by French, and to a lesser extent German, capital and supplied by the major mineral deposits nearby - put all the financial and industrial power into Walloon hands. Like their previous masters in Holland, this was gradually abused. Almost all higher education was in French; plump political posts always went to French-speakers.

Meanwhile, the Flemish-speakers developed into a distinct but majority underclass. By the early 1970s, the wheel had again turned. Today, 75% of GDP is accounted for by the service sector as industry withers. The majority Flemings now sit in the financial chairs and have not hesitated to embark on a little light payback, such as splitting up key universities into Flemish and French speaking sections from 1968 onwards. The relative wealth of the Flemings is simply overwhelming. Their income per head is 118% of the EU average - the French-speakers 85%. Per capita productivity is 20% higher. They make up over 70% of the skilled labour force. French unemployment is twice that of the Flemish speakers.

Per capita, subsidies for French speakers are 50% more than for the Flemish. In short, Flanders funds and props up Wallonia.

This has not been lost on the ever chaotic voting system. Recent headlines have screamed that the independence parties have taken over. A slight exaggeration. True, the Flemish speaking, free market and pro-independence Vlaams Belang (VB) party won the most seats in the 150- member lower house, with an increase from 17 to 27 (in line with the wealth divide, the second largest party with 26 seats is the French-speaking Socialist "welfare" party). But this does not ensure separation, even though in those areas where it was allowed to stand, VB and its sympathisers won over 40% of the votes. Belgian law requires that at least four of the 12 "major" parties (seven Flemish and five French) form a government with at least one from each state. Hence, once again various caretakers are manning the desk. There is no elected government.

The most heated and longest debates in parliament concern two issues: language superiority and the French speakers demanding, and to date getting, an ever greater and disproportionate share of the welfare pie. Up north, not surprisingly this is unpopular. The result is net government borrowing equal to 100% of GDP. Not quite as bad as Greece and a few other miscreants, but add a budget deficit of 6% of GDP and a too-high a structural deficit, and Belgium is in the top fifth of over-borrowed nations globally, a position it has steadfastly maintained for the last 30 years. It has even been worse. Throughout most of the late 1980s and 1990s net government debt averaged 114% of GDP.

As with several Mediterranean countries, Belgium was a huge beneficiary of joining the euro (it was the first to do so) because the implicit German guarantee allowed heavy borrowing at much lower interest rates. Before joining the euro zone, general government net interest payments in 1992 absorbed a whopping 10.3% of GDP. In 2009, even after the collapse and necessary bailing out of its banks, especially the big two of Fortis and Dexia, interest payments were only 3.6%.

Follow the money

High debt and gradual linguistic separation have been a constant for 30 years. The recent elections confirm the trend of accelerating separatism. Yet these are likely to morph faster than expected into a financial problem because of Brussels.

Much to the dislike of most politicians across Europe, Brussels is the de facto Federal Capital. A small city; and only 1.1m people live within the "Brussels region". It is wealthy, with income per head 233% above the EU average. Moreover, despite being only a tenth of the Belgian population, it accounts for over a fifth of GDP. The reasons are well-known. Since the early 1950s treaties presaging the European Union, money has poured into Brussels. The EU Commission alone employs 25,000 people, the EU parliament another 7,000. There are over 10,000 registered lobbyists and more diplomats and countries represented in Brussels than in Washington. Then there are 1,200 accredited journalists (which may explain why expenditure on expenses accounts alone was €800m in Brussels in 2009). Just for direct running costs (i.e. rentals and electricity), the EU pumps $1bn into Brussels every year. Yet this money fountain is not only the EU. 40% of the population comes from outside Belgium, as it is headquarters to a range of other organisations which have developed into an administrative cluster. The better known includes groups like NATO, where Brussels is the European HQ with 5,000 employees. The range includes the weird, such as the heavily funded, big employing World Customs Organisation or EURATOM.

All these foreigners, usually funded by their overseas governments, are amongst the very highest earners in Europe, creating a major multiplier effect on schools, restaurants, cleaners, auto sales or house building. Originally majority Flemish-speaking, now most locally born Brussels residents speak French, the result of policies introduced when they were at the top of the economic tree. Yet Flemings - residents and commuters - still dominate the better paid and skilled jobs, hence Brussels is the only part of Belgium where both languages must co-exist by law. Some local French speaking politicians have been muttering darkly about doing to Flanders what Flanders wants to do to Wallonia, i.e. spin out of Flanders or even Belgium itself. This is because the money spigot is about to jam.

Turning off the taps

As the third richest region in Europe (after Luxembourg and London) it could in theory exist as a wealthy city-state cum federal capital, but such a dream is a chimera. Derided eurocrats live a life apart. Even Brussels-born residents who benefit from their largesse often complain that the many organisations have created rich ghettos from which they are excluded. That these eurocrats are out of touch has been demonstrated both by pay and expenses enough to make a third world dictator blink, and recent demands for pay rises.

There is a commonsense test to apply to the financial future of Brussels. Most European countries are net recipients of aid from the EU. Of the minority putting money in, Germany dominates. Other small contributors such as Scandinavia or the UK are co-joined triplets with Germany. Forced to slash their own capital, social, and welfare budgets following the financial crash, they will not put more into Brussels. It is a matter of time before each country decides to reduce its net or gross cheques written out to various Brussels organisations; hence the second most important engine of Belgium's economy (after the wider economy of Flanders) suffers its first ever post-war squeeze. This means it has less largesse to spread around - particularly in Wallonia

Moreover, Brussels is no longer so logical a geographic centre for a federal capital since the EU expanded eastwards. This has not been lost on the Germans (Brussels' most significant honey provider). Its press and politicians have suggested for example that NATO be moved from a largely neutral country with minimal military capability to one with a little more vim, such as Germany. France would murder to get its hands on more EU institutions. Even the UK, ever-equivocal about what it really wants form the EU, and outside the euro zone, would like a few pointless but foreign funded pork barrels like EURATOM. Such major political changes will take time. Turning off the money spigot is easier and will happen sooner.

How it plays out?

What is evolving in Belgium is old news. The problem now, as for divorcing couples, is how to divide up the assets, or more precisely in Belgium's case, its sovereign debt. It is noteworthy that the government is chary in producing full data on how much Brussels and Flanders subsidise the minority Walloons, but roughly speaking the national debt should probably be split about 35:65 Dutch:French. Yet relatively poor Wallonia simply could not service nearly €260bn of national debt (€175,000 per person in employment). Meanwhile, wealthy Flanders would emerge with a budget surplus, a minute structural deficit and debt to GDP the lower than any EU nation outside of Scandinavia. The imperative for Flanders, along with the scope for argument, is clear.

There is a growing risk of a faster than expected dissolution of Belgium which will result in sovereign default; this is based on a belief in the inability of the individual nations within the euro zone, let alone the EU institutions themselves, to realise that as nations unravel, speed is of the essence. To repeat, the net €400bn national debt is chicken feed - less than half the loss racked up by America's AIG in 2007-8. And in wealthier times, the dream then shared by most of its members, of a politically united Europe would have ensured a quick bailout led by Germany. Mrs Merkel has already discovered that small cash subsidies to the profligate, such as Greece, are very expensive electorally. So foot dragging and evasion are sure to be the political order of the day. As the divorce commences, little is gained in double guessing the next phase. Whether Flanders goes alone as a fabulously rich small state or joins up with Holland (now the religious issue is moribund) is a moot point. Equally, whether France chooses to absorb Wallonia into greater France (Sarkozy's wild card to escape likely electoral defenestration?) or to subsidise Wallonia as a client state again, is also an unknown. On every topic, there is no agreement on how these regions should evolve, nor who is responsible for the debts, further ensuring delay.

Investment conclusions

If markets have re-learned one lesson recently, it is that small events have disproportionate results. Belgium ranks as the world's 20th economy by size, accounting for 0.8% of world GDP. Greece before the fall was No. 28, with 0.6%; its problems continue to shake markets, both because they were unexpected and because of the risk of a domino effect. So too would be the problem with Belgium. It is yet another reason why government bonds are toxic and why at some stage their yields will blow out, thus capital values fall.

Obviously, not holding Belgian shares on a medium term basis is sensible unless valuation work has fully taken account of these unexpected risks (clients have zero exposure). Once again the euro would fall and the German export machine boom. Equity markets would rattle around for a while but then absorb the key lesson. For Belgium is yet another example, as if one was needed, that the supply of government bonds over coming years will continue to soar to unprecedented levels even. All commodity prices tumble when the supply is perceived as infinite. Meanwhile, equities would benefit.

Regards
Bedlam Asset Management plc

A Taxing Divorce?

Chuck Butler — Tue, 27 Jul 2010 14:47:41 GMT

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In This Issue..

* New Home Sales ignite risk
* Currencies rally...
* Oil rises to $79, pushing loonies higher...
* Deutsche Bank has minimal exposure to GIIPS...

And Now... Today's Pfennig!

A Taxing Divorce?

Good day... And a Terrific Tuesday to you! A very long day back in the saddle yesterday for your Pfennig writer. So, I'm dragging the line a bit today... Plus getting in and out of a regular car, for someone with my handicap is not something you'd want see or do! It's a pain! But... My car is in the shop... I certainly hope they get it fixed soon, as that's the vehicle we use to pull our camper to Table Rock Lake! And... We "were" going to leave on Sunday!

Well... Yesterday morning, I told you the currencies, for the most part, were flat... That didn't last too much longer... The U.S. printed, what the media and markets thought was a fabulous New Home Sales report, and the rally in risk assets was "on"! With stocks and currencies in rally mode, Gold and Silver backed off... I'll talk about that trading theme we've seen lately in a minute, but first... Let's talk about the Housing data...

It's true that the New home sales in June jumped 23.6% to 330K units from May's downwardly revised record low of 267K units. The rise beat market expectations for an increase to 312K units.

The better-than-expected rise in new home sales in June follows the large downward revision to the previous month's already record low, but still represents the second lowest pace of new home sales since records began in 1963.

Think about that for a minute, folks... Whenever you see a piece of data print and it looks too good to be true, it probably is. First you have to see what the increase is compared to, in other words, what time frame... Because anything that does year-on-year, will be comparing current data to the "absolute worst data" in the depths of the current recession, before the Government spending, stimulus, and economic "tricks" began to get played...

And let's not forget that to sell those homes, builders had to slash prices once again... The average price for a new home has now fallen to 2003 levels... Although I don't like to talk about this, but the price slashing does go along with my call that home prices will continue to fall... UGH!

So... Everyone was all excited about the New Home Sales data, but forgot to look under the hood... I really don't think that getting all excited about the 2nd worst pace of New Home Sales since records began in 1963, is anything to get me all lathered up!

BUT! The euphoria got the risk assets of stocks and currencies rallying again, so what-ev-er!

Now, let's come back to the trading theme that we've seen recently regarding the euro and Gold... Both are offsets to the dollar, so when you see the euro in rally mode, it only makes sense that Gold should be in rally mode too... But that's not been the case recently... Give or take a day here and there, when these two didn't trade this way... If the euro rallies, Gold declines VS the dollar... It's as if the markets are saying, "we don't need Gold, if the euro is going to chase the dollar"...

But, I've got news for these knuckleheads... The euro is NOT out of the woods, and to put all your eggs in the euro's basket, instead of allocating some to Gold's basket, is just not a wise move, in my opinion...

Eventually, this trading theme will correct... Which means these two (Gold and euros) will return to trading side-by-side VS the dollar... When? I have no idea... But it will happen, that... I'm sure of!

Speaking of the euro... I saw it break above 1.30 a few times yesterday, only to be shot down.... Which reminds me of a great 70's song... I don't wanna be lonely
Don't wanna be, be shot down, be shot down!

The euro has broken above 1.30 this morning, while I've been typing my fat fingers to the bone, let's see how long it remains there this morning before being "shot down"...

After the New Home Sales data yesterday, and the risk assets of stocks and currencies began to rally, it meant that those currencies that received all the love during the "risk off" days, like dollars, yen, and Swiss francs, all were sold... And are weaker this morning.

The Canadian dollar / loonie sure isn't weaker! The Loonie is back above 97-cents VS the dollar to the south of Canada. I don't know if you chart the Oil price that I include in the currency round-up each day, but if you don't, you'll want to know that Oil is back above $79 this morning, which has been a steady climb for the past couple of week. And any time the price of Oil is rising, we should see the bias for a stronger loonie!

Speaking of bias... The South African Rand is on a tear lately, as it recovers to a 3-month high... I did see something that caught "my eye" yesterday... And that is that S. African unemployment was 25% WOW! That's awful! But at least they come out and say so! Here in the U.S. we have unemployment near those levels, but the Gov't only reports it to be 9%... Go figure...

There are all kinds of rumors swirling around the markets today about the Brazilian real, and whether or not the Brazilian Central Bank (BCB) is going to step in to stem the real's two month rally. The BCB could intervene and sell reals, in an attempt to keep the currency from getting too strong. You know where I stand on this, folks... It's wrong! It's wrong for a Central Bank to debase its own currency, and if they sell it, doesn't it send the message to the markets that they don't want it, so why should you?

So... Let's hope the BCB keeps out of the intervention game for the real has wild enough swings day-to-day, it sure doesn't need its central bank adding to the volatility!

Yesterday, I just kept seeing headline after headline about how the Eurozone Bank Stress Tests weren't tough enough... However, I did see something from Deutsche Bank, that led me to believe that at least Deutsche Bank was on terra firma... Deutsche Bank printed a better than expected 2nd QTR earnings report, but more importantly, they also revealed their holdings of debt from the (GIIPS)... Deutsche Bank confirmed that their exposure to this debt was minimal...

Now... Isn't that interesting... The rumors were that German Banks held tons of GIIPS debt, but a bank as large as Deutsche Bank said their exposure was minimal...

Then there was this... I saw this while going through the Wall Street Journal... The title is: "A Taxing Divorce"... "U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have been in sync on most issues during the past three years, but recent comments from the officials suggest they are on opposite sides of a tax issue, according to The Wall Street Journal. Bernanke told lawmakers that he supports continuing tax rates that expire early next year. Geithner, on the other hand, said those tax rates should be allowed to expire."

Interesting, eh? Yes, I saw a quote from Geithner about how the wealthy had to pay more taxes...

A memo to Tim Geithner... If you pay them, I'll pay them...

To recap... The risk assets of currencies and stocks rallied yesterday after New Home Sales data captured the imagination of the markets. Gold followed the trading theme we've seen lately, selling off, when euros rally. Oil is back above $79, and that has the loonie in rally mode, and the rumors are swirling regarding Brazil's Central Bank and whether or not they will attempt to stem the real's recent rise.

Currencies today 7/27/10: American Style: A$ .9065, kiwi .7375, C$ .9720, euro 1.3025, sterling 1.5545, Swiss .9460, ... European Style: rand 7.3030, krone 6.1380, SEK 7.2615, forint 217.75, zloty 3.0750, koruna 19.2545, RUB 30.19, yen 87.40, sing 1.3605, HKD 7.7665, INR 46.65, China 6.7781, pesos 12.64, BRL 1.7615, dollar index 82.06, Oil $79.09, 10-year 3.02%, Silver $18.21, and Gold... $1,184.70

That's it for today... I was "lost" last night with no Cardinals game... So I watched a bit of the Tigers and Rays... Both pitchers took no-hitters into the 6th inning. The Rays' pitcher (Garza) pitched a complete game no-hitter. The Tigers' pitcher was from my beloved Missouri University, so it held my attention for a few minutes... It was good to get back yesterday, do truly miss everyone when I'm away... I leave again (hopefully) on Sunday for my summer vacation with the whole family, including little Delaney Grace! The lights just went out here in the office... Now they're back on... That was weird! Ok, with that I'll wish farewell for today, and hope your Tuesday is Terrific!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

No More Stress Tests....

Chuck Butler — Mon, 26 Jul 2010 14:35:52 GMT

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................................................

In This Issue..

* Stress Tests don't reveal much...
* Risk Assets should rally...
* RBNZ meets this week to raise rates...
* Loonies rally on surge in Oil price...

And Now... Today's Pfennig!

No More Stress Tests....

Good day... And a Marvelous Monday to you... Hopefully, your Monday is working out better than mine has so far... I'm writing from home, with all kinds of technical difficulties this morning. I had car problems and had to turn around and come home. Now, I've not been able to "connect"... This is starting out about as bad as my trip home from Vancouver on Friday that turned into Saturday!

Not that you read the letter to hear about my travel problems, but I had to stay the night in Dallas, and fly home Saturday... UGH! So, I'm still beat, and now I have this car problem to deal with as soon as I get this ready to go out!

Well... Did you hear on Friday that the Federal Budget Office has updated their forecast for the Budget Deficit this year? What was originally a forecasted deficit of $1.6 Trillion has been improved to $1.47 Trillion... While that might be considered an improvement it would still be worse than last year's $1.4 Trillion Deficit, and looking further out, the forecasts get darker and darker...

Yes... I read that Friday night in my hotel room, the last room the hotel had available! Not that I wasn't already at the boiling point, but then came across that story, and I immediately headed to the bar! (not really... I called room service!)

The one day sell off of the currencies and commodities, ended up being just that! A one-day sell off! The currencies look pretty flat so far this morning, with nothing staring at me and saying "look at me!"

The BIG news on Friday were the results of the bank stress tests from the Eurozone, and just like I told you... They were pretty much worthless, much like the ones performed here in the U.S. last year. Basically, in the end, the stress tests revealed that banks need to raise 3.5 Billion euros of capital, which ends up being about 1/10th of the lowest analyst estimate... Which means... Now there are questions about whether or not the stress tests were tough enough... Ain't that tough enough?

I have to think that eventually this week, we'll see the markets begin to fell better about the stress tests, and return to risk assets... I see that Goldman Sachs, who have been beating the drum for the euro for a couple of months now, have raised their estimates for the euro, joining Wells Fargo, HSBC, and Deutsche Bank, in predicting a stronger euro...

But just because these guys think the euro will get stronger, doesn't mean it will... Look at Morgan Stanley, who told their clients to sell kiwi and buy dollars, they've now retreated, called off the trade, and booked losses... So... The BIG BOYS aren't always on the ball, eh?

You have to take in all thoughts and weed out the ones that don't make sense... Like owning dollars and Treasuries... But, we've been through all that, eh?

Since I just spent a week in Canada, talking about the Canadian dollar / loonie seems appropriate, I would think... The loonie has been up and down like a ROTC soldier doing push-ups for every point my beloved Missouri Tigers score! (It's a Mizzou thing) I would have to think that rising Oil prices would push the loonie higher this week, especially after the stress tests are now a thing of the past...

Yes, the Eurozone stress tests had far reaching tentacles, and if they had shown bad stuff, the risk assets all over the world would have felt the pain. But they didn't, so... We carry on!

The higher yielding currencies are about to be dealt a minor blow, as Japanese regulations begin to control the amount of debt used to boost trading leverage... For years, and we talked about this before, Japanese housewives would supplement the family's income stream by doing her own "Carry Trades"... The Gov't now allows a 50 times leverage for committed cash... But, when we turn the page on 2010 to 2011, the leverage will be cut to 25 times committed cash....

One would think this to be a good thing for Japanese yen... Which makes you go HMMMM! Because, didn't you believe, because I know I believed that the Japanese Gov't didn't want a stronger yen? Well... They implemented this regulation, and the unintended consequence will be a stronger yen! DOLTS!

Always, always I tell you, be yourself... No wait! I always tell you that there are these unintended consequences when things are done and not thought out first!

In Australia... This is a BIG week, no wait, next week is the BIG week, no... They both are Big Weeks! First of all, This week, we'll see the color of Australia's latest CPI (consumer inflation) if it prints as badly, then I would have to say that my call for an August 3rd meeting rate hike would look to be on terra firma... I would say that a CPI print of greater than .8% for the 2nd QTR would signal a rate hike.. So, look for that on Wednesday!

Across the Tasman, the Reserve Bank of New Zealand (RBNZ) will meet this week (Thursday) and I truly believe that they will raise rates by 25 BPS (1/4%)... But, the benefit that kiwi will receive will be held by the statement following the rate announcement... Here, I think the RBNZ will try to water down the rate hike and talk dovish... If they do that kiwi will drift... If they have a hawkish tone, kiwi will rise... Or least, that's how I see the cards falling for kiwi this week...

Back here in the U.S., the data cupboard is chock-full-o-data this week... Today we'll see New Home Sales data for June... Tomorrow it will be the S&P/ CaseShiller Home Price Index, and Consumer Confidence. Wednesday, Durable Goods, and the Fed's Beige Book prints. Thursday we'll see the usual Initial Jobless Claim, and 2nd QTR GDP (preliminary), along with Personal Consumption... So, a hot and heavy week with data...

Then there was this... I read this weekend that the number of U.S. Banks that have failed so far this year reached 100! So much for our "bank stress tests?! The real kicker though is that the number of banks on the FDIC's list of "problem banks" is up to 775... You may recall that 3 months ago, the number was around 700... So, there's been quite a few added, eh?

But not to worry... My employer, EverBank, is not among those "problem banks"! We just finished booking another impressive quarter, and, we're rising like a bullet on the hit parade charts!

To recap... The currencies are pretty much flat this morning, awaiting the NY trading desks to open. The Eurozone stress tests revealed that about 3.5 Billion euros need to be raised in Capital, which was far less than forecast, and that fact should light a fire under the risk assets this week. The RBNZ meets this Thursday, and should be raising rates 25 BPS, and if Australia's CPI that prints on Wednesday, is greater than .8% (2nd qtr) then we could see a rate hike there too.

Currencies today 7/26/10: American Style: A$ .8970, kiwi .7290, C$ .9670, euro 1.2930, sterling 1.5505, Swiss .9520, ... European Style: rand 7.3835, krone 6.1970, SEK 7.3280, forint 221.70, zloty 3.12, koruna 19.4290, RUB 30.30, yen 87, sing 1.3650, HKD 7.7680, INR 47, China 6.7786, pesos 12.71, BRL 1.7730, dollar index 82.41, Oil $78.29, 10-year 2.98%, Silver $18.05, and Gold... $1,187.50

That's it for today... So... I have to say that everyone should go to Vancouver this time of year at least once in their lives... Chamber of Commerce weather for sure! And the air is so clean! The Agora Wealth Symposium was good, it was great to see all of our clients, and readers of the Pfennig... I even signed up a few new readers, or "converted them to Pfennig readers" as I call it during my presentations! Like I said at the top, my travel plans got all messed up with storms in Dallas, and I spent the night there, instead of being at home... I was NOT a happy camper! But, it is what it is, or was, and I carry on! I got home just in time to accompany my beautiful bride to her High School reunion... And no, I'm not saying what year reunion it was! Ok... I've got to get my car to the dealer, get a loaner, and get to work... We'll talk tomorrow! I hope your Monday is Marvelous!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Monday Morning Chartology-7/26/10

Steve Cook — Mon, 26 Jul 2010 13:23:00 GMT

The Market

    Technical

     Monday Morning Chartology

    S&P has successfully challenged the down trend off the April high and closed Friday above the most recent high. So notice the higher low and now a higher high.

    Gold is hanging in there right on support. If stocks run, we could get weakness in gold. If so, as I said previously, our Portfolios will Sell at least a portion of their positions to protect profits.

    VIX remains above support.

   Fundamental

    It is 8:15am and the futures are looking up a bit. I mention it because I wanted to see how investors digested the EU ‘stress test’ over the week end and their mood Monday morning. Despite my skepticism, the Market seems fine with ‘test’.

Economics

   This Week’s Data

   Other

    More on the euro and the EU sovereign debt problem (medium):
    http://www.minyanville.com/businessmarkets/articles/euro-europe-greece-debt-soveriegn-debt/7/16/2010/id/29192?camp=featuredslidealso&medium=home&from=minyanville

    M&A activity is increasing (short):
    http://mjperry.blogspot.com/2010/07/m-activity-in-2010-highest-since-2007.html

    The June Chicago Fed index of business activity declined (short):
    http://econompicdata.blogspot.com/2010/07/chicago-fed-reports-slowing-economy.html

At the Tipping Point (Again)

John Nyaradi — Sun, 25 Jul 2010 17:38:00 GMT

To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Volatility was the name of the game last week as the bulls struggled back and nearly managed to push the S&P 500 above the all important 200 Day Moving Average. As I mentioned during the mid-week updates this struggle will resolve itself one way or other in the coming days as the markets battle between negative macro indicators and positive earnings news.

If the 200 Day Moving Average can be breached and held on the positive side, one could see another strong up leg ahead. If this attempt fails, then lower prices or the current trading range will very likely continue.

Today we switch to “Yellow Flag Flying,” expecting choppy prices ahead.

Looking at My Screens

The indicators remain mixed with the Dow and Russell 2000 and NASDAQ 100 now above their respective 200 Day Moving Averages and the S&P 500, our major market barometer, below its 200 day average but having successfully breached the psychologically important 1100 level and a solid close above its 50 Day Moving Average.

We remain overbought on a short and medium term basis which is bearish while sentiment remains relatively neutral with not much conviction on either side of the trade.

The View from 35,000 Feet

Macro economic news was poor this week with new unemployment claims unexpectedly rising from 464,000 to 472,000 and the ECRI (Economic Cycle Research Institute) annualized indicator dropping to -10.5 from -9.8 and breaching the all important -10 level which has been an accurate forecaster of recession for more than 40 years. This week’s reading was its lowest since last May as the current recovery was getting under way.

The big news items were Dr. Bernanke’s testimony to Congress in which he said the recovery was ongoing but that we are in uncertain times and that the Fed stood ready to assist the recovery with more “quantitative easing” if conditions required. Stocks plunged hard on his first day of testimony and rallied hard on the second, reflecting the confusing nature of today’s markets.

Good earnings from Caterpillar and UPS helped the market higher and on Friday the results of the European banks “stress tests” were made public with just 7 out of 91 “failing” the tests.

Over the weekend I’ve been reading almost unanimous opinion that the stress tests weren’t stressful and this was reflected in the Euro dropping after their announcement. The major complaint was that the tests ignored most of the banks’ sovereign debt holdings which would be similar to ranking your credit score without including your home mortgage, and so there’s speculation in both the mainstream financial press and “blogosphere” that markets won’t “buy” the outcome of the tests on Monday when they reopen. We’ll have to wait and see how that goes.

But Europe clearly has ongoing problems as Moody’s placed Hungary on review for a possible downgrade and the European LIBOR is at recent highs, indicating stress in the credit markets.

Furthermore, as we discussed last week, bond prices remain priced for Armageddon as the 2 Year Treasury yield remains at lows as the bond market ignores the current rally in equities.

What It All Means

The tug of war continues and we will be ready to respond in either direction. A very compelling argument can be made for a rally or a selloff based on both fundamental and technical indicators. If the 200 day moving average is broken to the upside, there likely will be a massive short covering rally and if the index fails to break higher, then the major indexes are superbly positioned for a significant slump on the order of 8-10% or approximately S&P 900-950.

The tone will be set when trading begins in Asia and Europe and we get the first hint of the response to the European banks’ stress test. With the Euro falling on Friday and the 3 month Eurobor at highs for the year, the early response to the results was negative and if this if followed through in the equity markets, lower prices would likely be ahead.

Highest probability for the coming days would be a decline within the trading range we have been in as macro indicators could likely continue their negative streak, earnings remain positive, market participants remain suspicious of the true health of the European banks and technical indicators trump for the short term ahead.

The Week Ahead

It will be another exciting week with major economic reports and ongoing earnings reports, although with fewer bell weather companies reporting than last week.

Economic Reports:

Monday: June New Home Sales

Tuesday: May Case/Shiller Home Price Index, July Consumer Confidence

Wednesday: June Durable Goods, July Fed Beige Books

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Friday: Q2 GDP Revision, July Chicago Purchasing Managers Index, July Final University of Michigan Consumer Sentiment.

Earnings:

Tuesday: BP, DuPont, US Steel

Wednesday: Boeing, General Dynamics

Thursday: Exxon

Sector Spotlight:

Leaders: Copper, Brazil, Homebuilders

Laggards: Bonds, Japanese Yen, VIX

All the best, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.

Disclosure: PSQ, SH, RWM, SKF, SPY Put Option

Some Thoughts on Deflation

John Mauldin — Sat, 24 Jul 2010 17:35:00 GMT

Some Thoughts on Deflation
The Super-Trend Puzzle
The Elements of Deflation
Maine, New York, Turks and Caicos, and Europe

The debate over whether we are in for inflation or deflation was alive and well at the Agora Symposium in Vancouver this this week. It seems that not everyone is ready to join the deflation-first, then-inflation camp I am currently resident in. So in this week's letter we look at some of the causes of deflation, the elements of deflation, if you will, and see if they are in ascendancy. For equity investors, this is an important question because, historically, periods of deflation have not been kind to stock markets. Let's come at this week's letter from the side, and see if we can sneak up on some answers.

Even on the road (and maybe especially on the road, as I get more free time on airplanes) I keep up with my rather large reading habit. This week, the theme in various publications was the lack of available credit for small businesses, with plenty of anecdotal evidence. This goes along with the surveys by the National Federation of Independent Businesses, which continue to show a difficult credit market.

Businesses are being forced to scramble for needed investments, generally having to make do with cash flow and working out of profits. This is an interesting quandary for government policy makers, as 75% of the "rich" that will see the Bush tax cuts go away are small businesses.

There was a great graphic (that I now cannot find) showing that all net new jobs of the past two decades have come from small businesses and start-ups. And yet as of now, when structural employment is over 10% (if you count those who were considered to be in the work force just a few months ago), we want to reduce the availability of revenues to the very people we want to be hiring new workers, and who are cash-starved as it is.

It is not just that taxes will go from 35% to just under 40%. It is the increase in Medicare taxes coming down the pike, too. We are taking money from private hands, where it has the potential to increase productivity, and putting it into government hands, where it will do nothing for growth of the economy. There is no multiplier for government spending. And tax increases reduce potential GDP by a multiplier of at least 1 and maybe 3, depending on which study you want to cite.

I understand that taxes have to go up. I get it. But we would be better off having a discussion of where we want to tax dollars to come from before we risk hurting an economy that will barely be growing at 2% in the 4^th quarter, and may be well below that. It is the increase in taxes that has me concerned about a double-dip recession.

That being said, the announcement by several prominent Democratic senators that they think we should extend the Bush tax cuts is significant. As I said a few weeks ago, we should not experience a double-dip recession absent policy mistakes. A slow-growth world, yes. But an actual double dip is rare.

If Congress were to extend the Bush tax cuts for at least a year, until the presidential commission on taxes is done with its work and THEN have the debate, it would make me far more optimistic. And it would be quite bullish for stocks, I think. Businesses would know how to plan, at least, for a year, and the economy would be given more time to actually recover. I am not ready to channel my inner Larry Kudlow, but from what we see this summer it would make me more optimistic and reduce the chances of a double-dip recession significantly.

Some Thoughts on Deflation

Inflation in the US is now just below 1%, whether you look at the CPI, the Cleveland Fed's measure, or the Dallas Trimmed Mean CPI. The Fed's favorite, the PCE, is also approaching 1%. The Dallas numbers are a little behind, but they are at all-time lows.

The classic definition of deflation is an economic environment that is characterized by inadequate or deficient aggregate demand. Prices in general fall, and normal economic relationships start to fall apart.

The Super-Trend Puzzle

I am a big fan of puzzles of all kinds, especially picture puzzles. I love to figure out how the pieces fit together and watch the picture emerge, and have spent many an enjoyable hour at the table struggling to find the missing piece that helps make sense of the pattern.

Perhaps that explains my fascination with economics and investing, as there are no greater puzzles (except possibly the great theological conundrums, or the mind of a woman, about which I have only a few clues).

The great problem with the economic puzzles is that the shapes of the pieces can and will change as they rub against one another. One often finds that fitting two pieces together changes the way they meld with the other pieces you thought were already nailed down, which may of course change the pieces with which they are adjoined; and suddenly your neat economic picture no longer looks anything like the real world.

(Which is why all of the mathematical models make assumptions about variables that allow the models to work, except that what they end up showing is not related to the real world, which is not composed of static variables.)

There are two types of major economic puzzle pieces. The first are those pieces that represent trends that are inexorable: they will not themselves change, or if they do it will be slowly; but they will force every puzzle piece that touches them to shift, due to the force of their power. Demographic shifts or technology improvements over the long run are examples of this type of puzzle piece.

The second type is what I think of as "balancing trends," or trends that are not inevitable but which, if they come about, will have significant implications. If you place that piece into the puzzle, it too changes the shape of all the pieces of the puzzle around it. And in the economic super-trend puzzle, it can change the shape of other pieces in ways that are not clear.

Deflation is in the latter category. I have often said that when you become a Federal Reserve Bank governor, you are taken into a back room and are given a DNA transplant that makes you viscerally and at all times opposed to deflation. Deflation is a major economic game changer. You can argue, as Gary Shilling does, that there is a good kind of deflation, where rising productivity and other such good things produces a general fall in prices, such as we had in the late 19th century. And as we have experienced that in the world of technology, where we view it as normal that the price of a computer will fall, even as its quality rises over time.

But that is not the kind of deflation we face today. We face the deflation of the Depression era, and central bankers of the world are united in opposition. As Paul McCulley quipped to me this spring, when I asked him if he was concerned about inflation, with all the stimulus and printing of money we were facing, "John," he said, "you better hope they can cause some inflation." And he is right. If we don't have a problem with inflation in the future, we are going to have far worse problems to deal with.

Saint Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. That is, if the central bank prints too much money, inflation will ensue. And that is true, up to a point. A central bank, by printing too much money, can bring about inflation and destroy a currency, all things being equal. But that is the tricky part of that equation, because not all things are equal. The pieces of the puzzle can change shape. When the elements of deflation combine in the right order, the central bank can print a boatload of money without bringing about inflation. And we may now be watching that combination come about.

The Elements of Deflation

Just as every school child knows that water is formed by the two elements of hydrogen and oxygen in a very simple combination we all know as H2O, so deflation has its own elements of composition. Let's look at some of them (in no particular order).

First, there is excess production capacity. It is hard to have pricing power when your competition also has more capacity than he wants, so he prices his product as low as he can to make a profit, but also to get the sale. The world is awash in excess capacity now. Eventually we either grow the economy to utilize that capacity or it will be taken offline through bankruptcy, a reduction in capacity (as when businesses lay off employees), or businesses simply exiting their industries.

I could load the rest of the letter with charts showing how low world capacity utilization is, but let's just take one graph, from the US. Notice that capacity utilization is roughly in an area that we associate with the bottom of past recessions (with one exception).

Deflation is also associated with massive wealth destruction. The credit crisis certainly provided that element. Home prices have dropped in many nations all over the world, with some exceptions, like Canada and Australia. Trillions of dollars of "wealth" has evaporated, no longer available for use. Likewise, the bear market in equities in the developed world has wiped out trillions of dollars in valuation, resulting in rising savings rates as consumers, especially those close to a wanted retirement, try to repair their leaking balance sheets.

And while increased saving is good for an individual, it calls into play Keynes' Paradox of Thrift. That is, while it is good for one person to save, when everyone does it, it decreases consumer spending. And decreased consumer spending (or decreased final demand, in economic terms) means less pricing power for companies and is yet another element of deflation.

Yet another element of deflation is the massive deleveraging that comes with a major credit crisis. Not only are consumers and businesses reducing their debt, banks are reducing their lending. Bank losses (at the last count I saw) are over $2 trillion and rising.

As an aside, the European bank stress tests were a joke. They assumed no sovereign debt default. Evidently the thought of Greece not paying its debt is just not in the realm of their thinking. There were other deficiencies as well, but that is the most glaring. European banks are still a concern unless the ECB goes ahead and buys all that sovereign debt from the banks, getting it off their balance sheets.

When the money supply is falling in tandem with a slowing velocity of money, that brings up serious deflationary issues. I have dealt with that in recent months, so I won't bring it up again, but it is a significant element of deflation. And it is not just the US. Global real broad money growth is close to zero. Deflationary pressures are the norm in the developed world (except for Britain, where inflation is the issue).

Falling home prices and a weak housing market are one more element of deflation. This is happening not just in the US, but also much of Europe is suffering a real estate crisis. Japan has seen its real estate market fall almost 90% in some cities, and that is part of the reason they have had 20 years with no job growth, and that the nominal GDP is where it was 17 years ago.

In the short run, reducing government spending (in the US at local, state, and federal levels) is deflationary in the short run. Martin Wolfe, in the Financial Times, wrote the following last week (arguing that that the move to "fiscal austerity" is ill-advised):

"We can see two huge threats in front of us. The first is the failure to recognize the strength of the deflationary pressures ... The danger that premature fiscal and monetary tightening will end up tipping the world economy back into recession is not small, even if the largest emerging countries should be well able to protect themselves. The second threat is failure to secure the medium-term structural shifts in fiscal positions, in management of the financial sector and in export-dependency, that are needed if a sustained and healthy global recovery is to occur."

Finally, high and chronic unemployment is deflationary. It reduces final demand as people simply don't have the money to buy things.

Deflation that comes from increased productivity is desirable. In the late 1800's the US went through an almost 30-year period of deflation that saw massive improvements in agriculture (the McCormick reaper, etc.) and the ability of producers to get their products to markets through railroads. In fact, too many railroads were built and a number of the companies that built them collapsed. Just as we experienced with the fiber-optic cable build-out, there was soon too much railroad capacity, and freight prices fell. That was bad for the shareholders but good for consumers. It was a time of great economic growth.

But deflation that comes from a lack of pricing power and lower final demand is not good. It hurts the incomes of both employer and employee, and discourages entrepreneurs from increasing their production capacity, and thus employment.

That is why it will be important to watch the CPI numbers even more closely in the coming months. The trend, as noted above, is for lower inflation. If that continues, the Fed will act. I did a summary of Bernanke's 2002 speech on deflation a few weeks ago. For those who didn't read it, here is the link.

If the US gets into outright deflation, I expect the Fed to react by increasing their assets and by outright monetization, buying treasuries from insurance and other companies, as putting more money into banks when they are not lending does not seem to be helpful as far as deflation is concerned. More mortgages? Corporate debt? Moving out the yield curve? All are options the Fed will consider. We need to be paying attention.

One final thought before I hit the send button. Recessions are by definition deflationary. One of the things we learned from This Time is Different by Rogoff and Reinhart is that economies are more fragile and volatile and that recessions are more frequent after a credit crisis. Further, spending cuts are better than tax increases at improving the health of an economy after a credit crisis.

I think we can take it as a given that there is another recession in front of the US. That is the natural order of things. But it would be better to have that inevitable recession as far into the future as possible, and preferably with a little inflationary cushion and some room for active policy responses. A recession next year would be problematic, if not catastrophic. Rates are as low as they can go. Higher deficits are not in the cards. Yet unemployment would shoot up and tax collections go down at all levels of government.

That is why I worry so much about taking the Bush tax cuts away when the economy is weak. Now, maybe those who argue that tax increases don't matter are right. They have their academic studies. But the preponderance of work suggests their studies are flawed and at worst are guilty of data mining (looking for data that supports your already-developed conclusions.)

Professor Michael Boskin wrote today in the Wall Street Journal:

"The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy. (The University of Chicago's Harald Uhlig estimates $3.40 of lost output for every dollar of government spending.) Either the president is not being told of serious alternative viewpoints, or serious viewpoints are defined as only those that support his position. In either case, he is being ill-served by his staff."

As noted at the beginning of this letter, I find it very encouraging that there is a movement among Democrats to think about at least postponing the demise of the Bush tax cuts until the economy is in better shape. Those who advocate letting them lapse are in effect operating on our economic body without benefit of anesthesia. If they are wrong, the consequences will be most severe.

We need to think any tax increase through very thoroughly.

Maine, New York, Turks and Caicos, and Europe

Vancouver was a lot of fun. The Agora Symposium had some very good speakers, and if they invite me back again some time, I intend to stay for the whole event. The Whiskey panel on Wednesday night was a hoot. The opinions shared were quite varied, with a lot of humor and some good-natured arguments. And I am going to try and get a link to some of the speaker presentations, if they will let me post a few.

I am rounding the corner and seeing the home stretch on my book. I hope to have a first draft in a few weeks, and then not take more than a month on edits and rewrites. I need to get it done, because my travel schedule the first part of August is hectic. I go with son Trey to the annual Shadow Fed fishing trip in Maine, which this year will be covered by Bloomberg TV and radio, then I'm back to New York for an evening , on to DC for some consulting for the Defense Department, and then off for five glorious days in the Turks and Caicos, courtesy of Barry Habib and his family (of Mortgage Market Guide fame). I am sure I will get a little work done, but I intend to spend lots of time pleasure reading.

Then in mid-September I go to Europe. We are still finalizing the details and will let you know the schedule soon.

I took the Agora team at their word and brought a bottle of chardonnay to the panel with me, sharing some of the precious liquid. (It was a Kistler given to me by my Canadian partner, John Nicola.) Of course, it was soon gone. Some considerate attendee brought me another large wine glass filled with chardonnay, evidently worried about the arduous, thirsty work I was doing arguing with Porter Stansberry. I really did want something to drink, and for whatever reason did not sip but just took a big gulp. Turns out it was pure scotch, not chardonnay. I did keep from choking, but I decided that discretion being the better part of valor, I'd better share the scotch as well. And next time, I will sip first.

Your just enjoying life now while I worry about the future analyst,

John Mauldin

The Closing Bell-7/24/10

Steve Cook — Sat, 24 Jul 2010 16:00:00 GMT

Next week I leave again. Since I don’t depart till Tuesday morning, I will do a Monday Morning Call. I don’t return till the following Tuesday. So that week, I will do a Morning Call for the balance of the week plus a Closing Bell.
************************************************************************

Statistical Summary

   Current Economic Forecast

2009
   Real Growth in Gross Domestic Product:        -1.0 - -2.0%
   Inflation:                                1-2 %
   Growth in Corporate Profits:                                  0- -5%

2010 (revised)

   Real Growth in Gross Domestic Product:        +3.0- +4.0%
   Inflation:                                1.5-2.5 %
Growth in Corporate Profits:                                       10-20%

Current Market Forecast

    Dow Jones Industrial Average

        Current Trend (revised):
          Short Term Trading Range                     9645-10725
          Long Term Trading Range                      6432-14180

        2009    Year End Fair Value                                9440-9460

        2010    Year End Fair Value (revised)                 10095-10115

Standard & Poor’s 500

     Current Trend (revised):
        Short Term Down Trend                           1009-1147
          Long Term Trading Range                        666-1575

         2009    Year End Fair Value                      1165-1185

        2010    Year End Fair Value                     1240-1260

Percentage Cash in Our Portfolios

    Dividend Growth Portfolio                  21%
    High Yield Portfolio                       20%
    Aggressive Growth Portfolio              22%

Economics

The condition of the recovery remains uncertain, though the economic environment has improved recently. However, for the moment, I continue to rate the economy, a neutral for Your Money. There was a dearth of data this week and what there was did not paint a particularly pretty picture. So you might ask, what’s with the above statement about a better ‘economic environment’?

(1)    yes, the economic stats haven’t been great but they have been less bad than many expected. As I noted in Friday’s Morning Call, that is not a clarion call to get positive; but if the numbers aren’t deteriorating at the rate of consensus expectation, then either the ‘double dip’ will be of a lesser magnitude than estimates or may not occur at all,

On the other hand, the ECRI leading indicators just gave a ‘recession’ reading:
http://www.zerohedge.com/article/ecri-leading-indicator-breaches-critical-10-threshold-hits-105

(2)    this earnings season is coming in quite well and more importantly, revenues are beating estimates and managements are providing optimistic guidance,

(3)    oil is no longer spilling out of the leaking BP well. While there are still hurdles ahead, it appears that the worst of this situation is behind us,

(4)    the macroeconomic data out of Europe is better than forecasts. In addition, results from the banking ‘stress test’ were released Friday afternoon: most banks passed. To be sure, the skeptics on this test may be proven right; and as you know, I have my own doubts. So there remains the potential for bad news out of Europe; however, at the moment, it is not obvious,
http://www.businessinsider.com/chart-of-the-day-heres-the-adverse-economic-scenario-european-banks-were-tested-on-2010-7?utm_source=Triggermail&utm_medium=email&utm_campaign=CS_COTD_072310

And this assessment (short):
http://blogs.reuters.com/felix-salmon/2010/07/23/the-silver-lining-to-the-lenient-stress-test/

(5)    Chinese economic data as well as actions by its fiscal/monetary authorities suggest that the country is heading for a ‘soft landing’,

(6)    there are growing signs that the Obama economic/social/political agenda has reached its limits. I am hesitant to get too jiggy this far ahead of the elections; but that is the way the cards are playing out at the moment.

And here’s the reason why there is no room for celebration (short):
http://gregmankiw.blogspot.com/2010/07/midsession-review.html

Bottom line: not that different from our last Closing Bell: ‘each of the above...l holds the potential to be a major economic positive. Of course, ....there is enough ‘hair’ on each to make it is unlikely that they will all prove to be pluses. On the other hand, it would probably be equally unrealistic to assume that none of these factors will ultimately lead to an improved outlook for the US economy. So as skeptical as I may be on any one of them, I believe that in total the prospects for a double dip have lessened and the odds of our short term forecast (an economy struggling but nonetheless growing) playing out have gotten better. Indeed, there is even some chance that the longer term outlook (an economy growing but at an historically below average pace) could be somewhat improved if Obama is not faking His recent Clintonesque moves to the center--but I am not making any bets on that one.’

This week’s data:

(1)    housing: weekly mortgage applications rose 7.5%; June housing starts were very disappointing [which is OK because we already have too many houses] though existing home sales were not as bad as expected,

(2)    consumer: weekly retail sales were on the positive side of mixed; weekly jobless claims rose more than anticipated,

(3)    industry: no data this week,

(4)    macro: June leading economic indicators came in better than estimates.

    The Economic Risks:

(1)    the economy is weaker than expected.

(2) Fed policy (reading the data correctly).

(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).

(4) protectionism (Free trade is a major positive for world and US economic growth.).

(5) fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.).

(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)

Politics

Both the domestic and international political environments are negative for Your Money.

The Market-Disciplined Investing

Technical

The indices (DJIA 10424, S&P 1102) successfully challenged the upper boundary of the down trend off the April high and then the last high of the down trend--in effect insuring that the Averages have followed a higher low with a higher high (than 10413, 1099). This re-sets the trend to a trading range which I speculate will be defined by 9645-10725, 1009-1147. Increasing my comfort level is (1) higher volume on big up days, (2) better breadth and (3) the gradual improvement in our internal indicator. The VIX remains the negative hold out; while trading down, it still closed above major support.

Bearish sentiment near highs (short):
http://www.bespokeinvest.com/thinkbig/2010/7/23/sentiment-checkup.html

Bottom line:

(1) short term, the indices are likely re-setting to a trading range probably defined by 9645-10725, 1009-1147,

(2)    long term, stocks are in a trading range defined by the 2002/2009 lows [S&P 666-766] and the 2000/2007 highs [1545-1575]. Importantly, I think that equity prices will continue to recover within that range but it will be a slow and volatile process.

   Fundamental-A Dividend Growth Investment Strategy

    The DJIA (10424) finished this week about 6.0% above Fair Value (9833) while the S&P closed (1102) around 9.9% undervalued (1224).

This week’s news flow provided additional clarity to many of the headwinds that have overhung the Market of late (see the Economics section above). Even better, stocks, at least as defined by the S&P, remain undervalued; and that notion is bolstered by the increased level of M&A activity which suggests that corporate management agree. And the even better news is that those corporations have gobs of cash on their balance sheet to facilitate this activity; and if that isn’t enough, they can borrow all they want at the lowest interest rate in decades.

Certainly, all is not coming up roses. There remain questions on the EU sovereign debt problem, the ultimate capping of the BP oil spill and just how Obama will react to His and dems poll numbers that are in a waterfall formation. Really bad news from any of these could turn prices on a dime. So I have no intention of driving to the hoop to get fully invested. However, barring some devastating piece of news, our Portfolios will be working their way toward a 15% cash position; though as I noted Friday, prices are at the high end of (what I think will be ) the trading range. So most of our Portfolios’ activity will be at lower levels of the trading range.

This chart indicates that stocks are still over valued:
http://www.ritholtz.com/blog/2010/07/total-market-capitalization-as-of-gdp/

17 reasons to be bullish, from David Rosenberg no less (short):
http://pragcap.com/17-reasons-to-be-bullish

This week, our Portfolios Bought a small amount of stock when equities broke out of their down trend.

           Bottom line:

(1)    our Portfolios will carry a higher cash balance than pre-financial crisis but it will be more a function of individual stock valuations and less on macro Market technical trends,

(2)    we continue to include gold and foreign ETF’s in our asset mix because we continue to believe that inflation is the major long term risk. An investment in gold is an inflation hedge and holdings in other countries provide a hedge against a weak dollar and exposure to better growth opportunities,

(3)    defense is still important.

                                                                                          DJIA                    S&P

Current 2010 Year End Fair Value*               10105 (revised)                        1250 (revised)
Fair Value as of 7/31/10            9833                    1224
Close this week               10343                   1104

Over Valuation vs. 7/31 Close
    5% overvalued                    10324                    1285
    10% overvalued                    10816                    1346
    15% overvalued                            11307                    1407

Under Valuation vs. 7/31 Close
    5% undervalued                            9341                     1162
   10%undervalued            8849                      1101
    15%undervalued                            8358                    1040

* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term   cyclical influences. The model is now accounting for somewhat below average secular growth for the next 3 to 5 years with somewhat higher inflation.

The Portfolios and Buy Lists are up to date.

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.

Subscriber Alert-7/23/10

Steve Cook — Fri, 23 Jul 2010 19:40:00 GMT

SUBSCRIBER ALERT
7/23/10

Three things have occurred this afternoon: (1) the Market has at last demonstrated some follow through, (2) the indices are above the 10412, 1099 level meaning that both are going to set a higher high and (3) investors appear satisfied with the results of the EU ‘stress test’. My bottom line is that stocks have now re-set to a trading range.

On the other hand, as I noted in today’s Morning Call assuming trading range upper boundary of 10725, 1149, the risk/reward at current levels are not particularly positive and I am not convinced that the EU sovereign debt problem has been solved. However, I still want to start the process of putting cash to work. Hence, our Portfolios are going to take the tentative step of taking down their cash position by 1%. The Buy candidates focus primarily on (1) those stocks that a portion of their holdings were Sold earlier this year when they broke their up trend and (2) those stocks that are on the Buy Lists.

At the moment, the following orders are being entered:

In the Dividend Growth Portfolio: additions to ExxonMobil, Abbott Labs, Hormel, Federated Investors and a new partial position in Sigma Aldrich.

In the High Yield Portfolio: ATT and Federated Investors.

In the Aggressive Growth Portfolio: Franklin Resources, Amphenol, Strayer Education.

To be clear, I recognize that there is a reasonable probability that these stocks could be bought later at lower prices. However, there is some probability that investors will began to discount no ‘double dip, a wholesale turnover in Washington in November and more responsible fiscal policy likely to come out of that revolution. Therefore, this small initial step is a hedge that that scenario could develop short term,

Judgment day has arrived for Euro banks…

Chuck Butler — Fri, 23 Jul 2010 14:36:43 GMT

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In This Issue..

* Judgment day for European banks...
* US data beats estimates, but is still bad...
* South Africa leaves rates unchanged...
* Fannie and Freddie still in limbo.

And Now... Today's Pfennig!

Judgment day has arrived for Euro banks.

Good day. And welcome to what hopefully will be a fabulous Friday for everyone. I know it will be a good one for me, as I am heading out the door as soon as I get this written. My son is playing in the Show Me Tournament this weekend which is Missouri's little league state championship. Should be a fun weekend of baseball, but a bit hot as temperatures are expected to stay right around the triple digits.

I will start off this morning's Pfennig with a note from Chuck who is wrapping up his presentations at the Agora Financial Investment Symposium in Vancouver. Chuck will be flying home later this morning, but sent me the following last night before turning in:

"Well... I just finished my "guide to the EverBank Global Toolkit" presentation...
There were more than 150 people in the room, and I had a coffee break following my presentation, which meant... I stayed there until every last question had been answered!

The buzz around the conference today, was the HUGE run-up of the currencies and metals yesterday... That was fun to watch, especially when I was up in front of 900 people for the General Session, telling them that they needed to be diversified!

The data was mixed, with Existing Home Sales falling by less than forecast, but the number of people filing Initial Jobless Claims rose to 464,000 last week. The fears of bad stress tests in Europe, faded, and risk was put back on the table...

With risk back on the table, for the day, The Aussie dollar (A$) took the pole position, for as I've said many times, the A$ is a proxy for global growth...

So... By the time I get to Phoenix, she'll be rising... And, the Eurozone bank stress tests will probably be leaking to the public... I'll go out on a limb here, and say that we'll probably see a small bank or two or three show stress, this way, the media, being dumb as a box of rocks, will think, "wow! That test was for real!" and Armegeddon will have been averted... That should underpin the euro, for the trade the last couple weeks has been to sell the rumor and buy the fact... They sold euros waiting for the results, they'll probably buy them when the results print... Or maybe this all gets thrown in the trash! You just never know!

Well, we're winding down the day here... I hope you have a great weekend!"

Chuck mentioned the stress tests in Europe, which have been dominating the news wires this morning. These tests are supposed to assure investors that the European banks which survived the recent financial crisis are strong enough to continue to operate. Thus far only one bank, Hypo Real Estate in Germany, is known to have failed the tests, but since it has already been taken over by the government, its capital levels aren't an issue. The tests will cover 91 banks in 20 European Union countries and are really nothing more than a PR campaign for these banks; trying to give the public enough comfort to trust these institutions with their deposits.

The key to these tests will be their transparency. If the report simply states which banks failed and which passed they will be largely useless for analysts and investors. These results need to give specifics on the assets of the banks and the valuations of these assets in addition to the levels of capital. Many of the economic ministers of the different European countries involved have come out and assured everyone that their major banks passed the tests, so it would really be a shock if any of the major banks failed the tests. I am siding with Chuck's thoughts that a few of the banks will fail, and those will be taken over by their country's government or enter into agreements to merge with or sell to stronger rivals.

A story in the Wall Street Journal this morning raised the possibility that in Spain, many regional savings banks recently agreed to enter into mergers that are designed to fortify their balance sheets. But that wasn't accounted for in the stress tests, which were based on data from the end of 2009, and heading into the tests, several of these banks were among the short list of banks that might have trouble passing.

The results of the tests will be published around lunch time here in the states, so we could get some volatility in the last few hours of trading.

Yesterday the dollar moved lower vs. most of the major currencies after data released in the US dimmed the outlook for a strong US economic recovery. Initial jobless claims came in above expectations, but continuing claims were slightly below. Existing home sales were also not as bad as expected, falling just 5.1% compared to expectations of a 9.9% slide. And finally, the leading indicators fell .2% compared to expectations of a .3% decline.

While most of the data beat expectations, the numbers don't paint a rosy picture for our future economic prospects. The data shows why Chairman Bernanke continues to keep the possibility of additional stimulus if the US economy doesn't continue to improve. But not all central bank heads believe additional stimulus is what is needed.

In an article written for the Financial Times, ECB head Jean-Claude Trichet is pounding the drum for belt tightening by the developed world. Trichet was never a fan of the 'quantitative easing' techniques used by the UK, US, and Japan and most recently the ECB itself. And now he is urging these central banks to quickly remove all of the excess capital which they have injected into their economies. "With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: "stimulate", "activate", "spend"! A large number fortunately had room for manoeuvre; others had little room; and some had no room at all and should have already started to consolidate." Trichet warns in the article.

The best performer vs. the US$ overnight was the British Pound which shot up almost 1.2% in the past 24 hours. The pound moved higher after a report showed UK June retail sales rose more than economists predicted and another reported the UK economy grew at the fastest pace in four years during the second quarter. GDP in the UK rose 1.1% during the second quarter, almost twice the .6% rate predicted by economists.

Oil moved higher, further helping the pound sterling and also pushing the Mexican Peso and Norwegian kroner higher. Mexico's peso was the second best performer vs. the US$ for the day and the week. Investors looking for higher yields have begun moving funds down into the Mexican markets where they can get large interest rate differentials to the US.

Both the Brazilian real and Canadian dollar moved higher throughout Thursday's trading day, but then retreated in overnight trading. The loonie is still poised for a nice weekly gain vs. the US$, as are all of the commodity based currencies.

South Africa's central bank left rates unchanged for a second meeting in a row as consumer spending showed a recovery and wage costs surged. South Africa has cut interest rates seven times since December 2008, and some investors felt we would see another cut. But the World Cup, which ended July 11th fueled wage demands and pushed up prices in many of the major cities, pumping up risks of inflation.

President Obama signed an extension of the unemployment benefits, but an article which appeared in this week's Economist magazine raises the question of one of the major issues still facing this administration: What to do with Fannie Mae and Freddie Mac?

In 2008, Fannie and Freddie were placed into 'conservatorship' by the US government. This move was meant to be temporary, and meant to stabilize the housing sector without an outright nationalization of the institutions. But the two mortgage companies continue to lose money which is being taken from the Treasury ($145 billion so far), and no one from the administration seems to know what to do with them. Treasury Secretary Tim Geithner has promised to address the matter by early next year, but has yet to suggest just what he will do.

These two firms guaranteed 96.5% of all newly originated mortgages, so no private mortgage insurer seems able to step in and fill the huge void which would be left by the exit of either firm. The companies have guaranteed $5 trillion in mortgages, and continued weakness of the housing market will undoubtedly increase the losses on this portfolio. It will be interesting to see what solution eventually occurs, but as the Economist article suggests, I don't see the government getting out of the housing business anytime soon.

The additional losses will need to be financed, adding to the national debt. So for the currency markets the continuing losses will equate to a higher debt load for the US, and eventually a weaker US dollar.

To recap.. The stress tests will finally be unveiled, and will probably be a non-event for the Euro. US data beat estimates, but still show the economy is in trouble, Trichet urges central banks to start pulling in the liquidity, South Africa kept rates unchanged, and Fannie and Freddie continue to rack up losses for the US taxpayer.

Currencies today 7/23/10: American Style: A$ .8939, kiwi .7267, C$ .9610, euro 1.2914, sterling 1.5433, Swiss .9568, ... European Style: rand 7.4353, krone 6.1706, SEK 7.3149, forint 222.16, zloty 3.1543, koruna 19.5005, RUB 30.355, yen 87.2, sing 1.3709, HKD 7.7698, INR 46.945, China 6.7799, pesos 12.7348, BRL 1.7581, dollar index 82.378, Oil $78.85, 10-year 2.97%, Silver $18.14, and Gold... $1,197.60

That's it for today... As I said earlier, I am heading out the door as soon as I hit the send button. Thanks to Chuck for letting me pfill in for him this week, I enjoyed writing the Pfennig each morning. He will be making the long journey home from Vancouver today, and will be back in the saddle on Monday morning. I hope everyone has a Fantastic Friday and a Wonderful Weekend!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Stocks are probably re-setting to a trading range

Steve Cook — Fri, 23 Jul 2010 13:18:00 GMT

The Market

    Technical

    The Averages (DJIA 10322, S&P 1093) put in a great day yesterday busting through the upper boundary of the April to present down trend (9027-10226, 951-1080) authoritatively. In fact, yesterday’s move qualified this break based on distance. Given the extreme volatility of late, I would like at least one more day of time. In addition, while it is clearly a positive that stocks have made that higher low (than 9645, 1009), it would bring great comfort to have the Market make a higher high--which is not that far away (10413, 1099).

For the first time in months, volume was actually comparable to that of down days and breadth was strong. Our internal indicator improved. The only negative was the VIX which was down but remained above a critical support level.

Bottom line: I think the odds are that the Market is re-setting itself into a trading range probably defined by 9645-10725, 1009-1149. However, I would like to see some follow through--something that neither the bulls nor the bears have been able to produce in the last months. Further assuming that the new trading range’s boundaries are 9645-10725, 1009-1149 then there is more risk than reward in investing at current price levels.

   Fundamental

    Headlines

(1)    all the economic indicators (jobless claims, existing home sales, leading economic indicator) released were down; but all of them were not down as much as forecast. I know that it is a push to argue that conditions are good because they are not as bad as expected. However, everyone knows that the US economy has hit a soft patch; the argument has been whether or not it means a ‘double dip’; and if the downside momentum is moderating, then it changes the probability of a ‘double dip’. That doesn’t mean that there won’t be one; but if the likelihood has lessened and it will be reflected in stock prices,

(2)    earnings continue to surprise on the upside [see below]. Perhaps more important, as the link in yesterday’s Morning Call illustrated, revenues are better than anticipated. Remember that the bear case during first quarter earnings season and coming into second quarter earnings season was that corporations were spiking profits due to cost cutting but there was no top line growth. Well, guess what? We are getting improvement in sales,

(3)    the European manufacturing index came in above expectations. Could I be wrong regarding the economic health of the EU? I am convinced that we have not seen the last of the EU sovereign debt problem. But what if the recently imposed austerity measures by several of the largest economic players in combination with improving bank balance sheets as a result of the ‘stress test’ turn out positive? Notice that is a question not a statement.
http://www.investmentpostcards.com/2010/07/23/euro-zone-no-evidence-of-a-double-dip-recession-yet/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

(4)    Harry Reid announced that ‘cap and trade’ was dead.

(5)    several dems are publicly advocating the extension of all of the so called Bush tax cuts.

The implications of tax policy on the Marker (medium):
http://www.ritholtz.com/blog/2010/07/taxes-and-the-stock-market/

The potential significance of (3) and (4) above can’t be under estimated. To be sure, Obama got His healthcare and financial regulatory reform. But the above are signs that He has basically shot His liberal social agenda wad and that economically speaking, the Market now knows the worst news--at least with respect to the issue of misguided US political/social/economic policies.

    Bottom line: perhaps the worm has turned with respect to US fiscal policy, the risk of a significant slow down in Chinese economic growth and capping the ultimate cost of the Gulf cleanup; although I am not convinced that the EU has solved its sovereign debt problems. Nevertheless, in total a lot of negative pressure has been lifted from the Market; and coupled with a more positive growth in second quarter corporate revenue, there is a reasonable case for improved equity valuation. As I noted above, there is a technical argument for not getting overly aggressive at this point in putting cash reserves to work; however, if the Market can absorb the EU ‘stress test results due to be released at noon today, the more upbeat technical and fundamental outlook persuades me to put a small amount of cash back to work.

    Thoughts on Investing—from the Apprenticed Investor

Learn the Magic Formula!
Become a Stock Market Genius!
Get Inside the Millionaire Mind!
Become a One Minute Millionaire!

That's the message of several new books that, for lack of a better phrase, purport to have discovered the magic formula for investing.

Umm, I don't think so.

Sorry to be such a party pooper, but there is, of course, no such elixir. It takes some smarts, lots of hard work and a little bit of luck to be a successful investor.

But you probably knew that already, didn't you? Successful investing requires effort and intelligence. We know it needs an ongoing self-evaluation process, one that requires constant adaptation and improvement. It demands a well-thought-out plan that is meticulously executed, with good record-keeping and data-mining.

The best investors aren't looking for a big miracle. Instead, they seek small ways to improve their performance, such as a capital preservation strategy that ensures minor losses do not become portfolio-wreckers. To outperform the markets requires attention to hundreds of small details such as knowing when to be a more aggressive and when to throttle back; when to do nothing; using risk management.

The best investors know their own weaknesses, and know how to keep their emotions in check.

Lastly, it never hurts to have the fair winds of chance blow your way. But magic formula? If it were that easy, then everyone would be rich.

    News on Stocks in Our Portfolios

    A positive write up on several of our holdings (short):
    http://seekingalpha.com/article/216067-6-dividend-aristocrats-worth-considering?source=email

    Murphy Oil (Dividend Growth Portfolio) is selling its refinery properties and redeploying the proceeds ($1.7 billion) into exploration and production.

    More second quarter earnings per share reports:

               Reported        Expected

Schlumberger        $.68            $.68
Bucyrus Int’l            .89            .97
Federated Investors        .46            .39
Leggett & Platt                         .34            .30
Nucor                .29            .26
Canadian Nat’l RR          1.08            .98
VF Corp            1.00            .77
UPS               .84            .77
Sigma Aldrich             .81            .77
Sherwin Williams         1.72            1.64
Microsoft               .51            .46
3M                   1.54            1.48
CR Bard           1.39            1.36
Phillip Morris            1.00            .97

    Notice all the earnings ‘beats’.

Economics

   This Week’s Data

    June existing homes sales fell 5.1% versus expectations of a 9.0% decline.
    http://www.calculatedriskblog.com/2010/07/existing-home-sales-decline-in-june.html

    June leading economic indicators decreased 0.2% versus estimates of -0.3%
    http://econompicdata.blogspot.com/2010/07/leading-indicators-more-fed-please.html

   Other

    Rail traffic continues strong (short):
    http://mjperry.blogspot.com/2010/07/rail-traffic-continues-to-post-gains-vs.html

    More good news from Europe (short):
    http://econompicdata.blogspot.com/2010/07/british-are-coming.html

Politics

Domestic

The first of many unintended consequences of the fin reg bill (short):
http://cafehayek.com/2010/07/10324.html

Dispatch: China Factors in U.S.-South Korean Relations

John Mauldin — Thu, 22 Jul 2010 20:40:00 GMT

The key to being a great chess player is to think ahead. True grandmasters think ahead not by just one or two steps, but a full game. The key to winning is determining the most likely moves of your opponent, among what seem at first glance to be hundreds of possibilities. The same can be said of finance. Knowing what to expect from key world players is critical to investing.

STRATFOR is an intelligence agency available to the public. If you want to know what to expect from different nations and leaders around the world, you read these guys. Founder George Friedman has developed a methodology for predictive intelligence that gives his readers a clear understanding of what to expect. While at first glance there seem to be dozens of options for nations and leaders, once you evaluate each option logically, it becomes easier to predict their actions. Today I'm including a video analysis, one of STRATFOR's many daily reports, that provides insight on what's next for the players in the Far East and their relationships to the United States. Click here to watch the video, and don't forget to sign up for their free weekly email reports and special offers.

'Unusually Uncertain' times…

Chuck Butler — Thu, 22 Jul 2010 13:58:04 GMT

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In This Issue..

* 'Unusually Uncertain' times push the $ lower...
* European data show further strength...
* Goldman economists need a vacation...
* China to unveil the 'secret sauce'???

And Now... Today's Pfennig!

'Unusually Uncertain' times.

Good day. Another busy day here at EverBank yesterday, but today promises to be a bit of a break. All of our visitors left late yesterday afternoon, and the systems which I have been testing are down for the next few days. The weather also looks like it has finally calmed down a bit after Thunderstorms rolled through again yesterday afternoon. The markets probably won't calm down, as we have a plethora of data releases today along with further testimony from Bernanke and the release of the European stress tests.

Fed Chairman Ben Bernanke was on the TVs here on the trading desk for most of the day yesterday. Big Ben was up on Capitol Hill to give his semiannual report on monetary policy and the economy, and didn't paint a particularly rosy picture of the future of the US economy. While Fed officials plan for the exit, "we also recognize that the economic outlook remains unusually uncertain," Bernanke told Senators on the Banking Committee. These two words 'unusually uncertain' sent shock waves through the markets. After all, less than 4 months ago Bernanke was outlining how the Fed would be draining the liquidity from the banking system as the US economy looked to be expanding. Now he is warning the Senators that the Fed is prepared to take additional policy actions as needed to stimulate the economy. "We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability."

So where does that put the dollar? The currency desks took the greenback lower in trading after Bernanke's comments, as any chance of a near term interest rate increase were dashed. Bernanke and his compatriots are going to continue to ignore any worries about the long term inflationary impact of their actions as they concentrate on getting the US economy back to 'full utilization of productivity'. Currency traders know that Bernanke is running out of ammunition in his war against a double dip. Interest rates are already near zero, and he has pumped as much liquidity as possible into the banking system.

The euro got a boost from data again this morning. As I wrote earlier this week, the European data has consistently been surprising markets on the upside, and today's data was no exception. European industrial orders unexpectedly increased in May amid signs the region's debt crisis is easing. Industrial orders rose 3.8% from April, easily beating economists' estimates of a drop of .1%. For the year, industrial orders jumped 22.7%.

Another report showed growth in Germany's manufacturing and service industries unexpectedly accelerated in July. An index based on a survey of purchasing managers in German services industry rose to 57.3 from 54.8 last month. That is the highest in almost three years. The data point to a stronger than expected start to the 3rd quarter. Obviously the eurozone is benefitting from the drop in the value of the euro (could this have been Merkel's plan all along?).

While the data out of Europe continue to surprise on the upside, data here in the US looks to disappoint. Today we will get the weekly jobs numbers here in the US, which are expected to show a futher increase to 445k claims. Later this morning we will see existing home sales which are expected to have dropped nearly 10% in June. Along with the housing data we will get the Leading Indicators which are expected to have fallen .3% in June after a .4% rise the month before.

None of this data to be released today in the US is positive, and the only hope for those looking for dollar strength is that the numbers are not as bad as what is expected.

The dollar index moved lower, and is approaching what some say is a 'critical support' zone. Technical analysts over at JPMorgan Chase & Co. predict the index will tumble to around 80 if it weakens through the zone between 82 and 81.44. According to JPMorgan analyst Niall O'Connor, this zone represents a 'sustained breakout' in April and the 50 percent retracement of the rally that began in November 2009. In the interview which appeared on Bloomberg, O'Connor said the dollar would consolidate for a few more weeks before extending lower. Neither Chuck nor I typically pay much attention to these technical indicators, but when the techies are saying the same thing as the fundamentals it certainly makes a stronger case.

Mike Meyer printed off a story from Bloomberg yesterday afternoon which he thought I should share with the Pfennig readers. Chuck has had a pretty good record of being able to call the long term trends of the currency markets, but always tries to remind readers than predicting the short term moves are impossible. The article Mike wanted me to share with you quoted Jim O'Neill who is the chief global economist at Goldman Sachs International as saying "Anybody who thinks they can get foreign exchange right all the time should be in a lunatic asylum."

The story poked a bit of fun at the Goldman Sachs' economist who has reversed his outlook for the euro twice in two months. Goldman now believes the dollar will weaken against the euro by January as US growth slows. In June, after the euro hit a four-year low, O'Neill said the dollar would surge to a seven year high. According to the article "The euro rallied the most this year, gaining 6.9% against the dollar, following Goldman's June bearish call. After the bank switched its views July 14 to a bullish euro outlook, the currency surged for a day before bouncing back down."

O'Neil worries about what the bank stress tests due out tomorrow will uncover; but is still looking at fundamentals pushing the US$ lower and boosting the euro.

Our own currency guru, Chuck Butler is keeping an eye on the trading screens in Vancouver this week (he has Bloomberg on his laptop) and sent me the following to share with readers:

"So... What's wrong with this statement that ran across the Bloomberg screens yesterday... "Yen rises as European stress tests, slowdown concerns boost safety demand."

Give up? Oh, I know you know the answer! How in the world does the country with the largest debt, become a "safe haven"?

The real McCoy when it comes to a "safe haven" is Gold...

Here's Ed Steer from his excellent newsletter on precious metals... "the Russian Central Bank's gold holdings were updated for June... and they showed that they purchased another 200,000 ounces. Their total gold reserves now stand at 22.8 million troy ounces... which is 709.2 tonnes. So far this year, the RCB has purchased 2.1 million ounces for their reserves... and that's a lot!"

And there was my answer to the question on Tuesday, when someone at the conference asked me why Gold gained $10 that day...

Who will be the next Central Bank to step to the plate and knock the ball out of the park, with a large Gold purchase?

OK... Big Ben Bernanke deep sixed the currencies yesterday... Oh brother did he! Big Ben told lawmakers that the Fed Heads "remain prepared to eventually raise interest rates from almost zero and shrink a record balance sheet"...

Now... Why did that statement deep six currencies? Well... All the world was beginning to believe my thoughts that I've repeated over and over again for months now, that, the Fed would not be raising interest rates this year. So... Then Big Ben says that the Fed remains prepared to raise them... That scared the bejeebers out of market makers, investors, etc.

But here's the problem with that... He didn't say WHEN! So... Ok, Big Ben and the Fed Heads are good Boy scouts... They are prepared! I would guess they have been prepared to raise rates for 6 months... Unfortunately, they can't! and therefore they won't!

But that didn't stop the markets from sending the risk assets to the woodshed on Wednesday... Woodshed Wednesdays... Interesting..

The other thing that scared the markets was this "uncertainty" that Big Ben had about the future of the economy... So, once again, we're rewarding the dollar, for unforeseen problems... Makes as much sense as... Calling yen and dollars "safe havens"!"

And finally, a story out of China said the People's Bank of China will begin publishing a measure of the yuan's value 'regularly' to help it manage the exchange rate against a basket of currencies and not just the dollar. China announced a few years ago that it would be moving from the peg to the dollar to a peg against a basket, but never revealed what currencies were in the basket. Deputy Governor Hu Xialoian said the nominal effective exchange rate publication would gradually become a reference for exchange rate adjustments. We have always assumed the basket was based on the amount of trade China does with its partners, but the specific currencies and weightings have never been revealed. This move is seen as a step toward making the weightings more transparent.

To recap.. Bernanke deep-sixed the dollar with his 'unusually uncertain' comment. Data out of Europe continue to surprise on the upside, Goldman's top currency analyst throws in the towel, Chuck suggests investors look at gold as the true safe haven, and China may start to reveal what drives the value of their currency.

Currencies today 7/22/10: American Style: A$ .8889, kiwi .7210, C$ .9613, euro 1.287, sterling 1.527, Swiss .9587, ... European Style: rand 7.5375, krone 6.2025, SEK 7.3395, forint 220.28, zloty 3.1826, koruna 19.5646, RUB 30.4402, yen 86.82, sing 1.373, HKD 7.7733, INR 47.1275, China 6.7797, pesos 12.7918, BRL 1.7808, dollar index 82.66, Oil $76.94, 10-year 2.91%, Silver $17.81, and Gold... $1,188.18

That's it for today... My son, Brendan, got to watch the Cardinals extend their win streak to 8 games last night at Busch Stadium. I was invited to go with he and his friends, but had a quiet night at home instead. I was glad I made that decision when the alarm went off this morning, as he didn't get home from the game until after midnight (the boys had to get a midnight snack at Steak n Shake after the game). I will have a chance to catch up on the emails today, as our test environment is being taken down for the next two days. I have been spending most of my time testing the new computer system which we will use for the WorldMarkets desk. We are hopeful to have it installed before year-end. Christine is here with the breakfast sandwiches, so got to go. Hope everyone has a Tub Thumpin Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Review of Lowe's (Aggressive Growth Portfolio)

Steve Cook — Thu, 22 Jul 2010 13:26:00 GMT

Company Highlight

Lowe’s Companies operates a chain of building materials and home improvement superstores in the US, Canada and Mexico selling appliances, lumber, paint, flooring, millwork, fashion plumbing, tools, hardware and lighting. The company has grown its profits and dividends 15-25% over the last ten years and earned a 10-18% return on equity. As with most housing/retail related companies, LOW went through a rough period in 2009. However, profits should improve as the economy recovers as a result of:

(1) continued expansion of its sales base through new store openings,

(2) improvements in efficiency via cost controls and a newly implemented inventory control system,

(3) its proven strategy of enhancing the customers shopping experience and adding more product selection should allow it to continue to take market share.

LOW is rated A+ by Value Line, has a 23% debt to equity ratio and its stock yields 2%.

Statistical Summary

                Stock       Dividend         Payout      # Increases
                Yield      Growth Rate     Ratio        Since 2000

LOW         2.0%           12%            27%              8
Ind Ave     2.6               5                 37               NA

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2000      Margin       Rating

LOW         23%           12%            3                 5%            A+
Ind Ave      27              14              NA               5             NA

   Chart

    Note: LOW stock bounced sharply off its March 2009 low but then peaked on a short term basis in May 2010 and subsequently fell below the lower boundary of the up trend off the March low and a short term support level, pushing it into a down trend where it has remained. LOW did manage to surpass the down trend off its February 2007 high (red line) and the November 2008 trading high (green line) though it has since trade below the latter. The blue line is the lower boundary of an up trend dating from 1995; the wiggly red line is the 30 day moving average. The Aggressive Growth Portfolio owns a 50% position in this stock having sold shares at higher prices when it broke support. Our Portfolio would Buy shares at current levels when, as and if its technicals improve. Profits would be taken at $52.

http://finance.yahoo.com/q?s=LOW
7/10

    News on Stocks in Our Portfolios

    More second quarter earnings reports:

                      Reported         Expected

Abbot Labs (DG)               $1.01            $1.00
Total System Svc (DG)       .25                .23
United Technologies (DG)    1.32            1.16
Eli Lilly (HY)            1.24            1.10
Qualcomm (AG)       .57               .54
Kinder Morgan Energy (HY)    .35               .39
Coca Cola (DG)    1.06            1.03
Caterpillar (HY)    1.09               .85

Kinder Morgan Energy Partners also raised its quarterly distribution from $1.05 to $1.09 per unit.

Still a time for doing nothing

Steve Cook — Thu, 22 Jul 2010 13:20:00 GMT

The Market

    Technical

    The indices (DJIA 10210, S&P 1069) traded positively early in the day, rallying to touch the upper boundary of the down trend off their April high and then rolled over. This leaves them in a down trend defined by 9039-10255, 965-1085. I wondered out loud in yesterday’s Morning Call whether the positive Apple earnings (reported after the close Tuesday) would push stock prices through the resistance offered by the upper boundary of the current down trend or if yesterday would be a mirror image of Tuesday (i.e. up early but down big on the day). Well, I got my answer.

    Volume picked up (as it does on most down days); breadth was terrible with the flow of funds number very concerning. The VIX traded higher suggesting that stocks will retain a negative bias. In spite of all this, our internal indicator remains positive.

    Bottom line: I continue to believe that our internal indicator is telling us that stocks will likely make a higher low (than 9645, 1042). However, there is not a lot of opportunity cost in being patient. (the S&P is only 16 points away from successfully challenging the upper boundary of the down trend); so for now I remain on the sideline, Buy List in hand.

    Doug Kass addresses the high frequency trading crowd (medium):
    http://www.thestreet.com/story/10812870/1/kass-mr-market-loses-his-balance.html?kval=dontmiss

    The S&P and that pesky 50 moving average line (short):
    http://www.bespokeinvest.com/thinkbig/2010/7/21/sp-500-turns-back-at-the-50-dayagain.html

   Fundamental

    Headlines

    Three items to discuss:

(1)    earnings continue to come in generally positive, especially for the large multinationals. Yesterday it was Coca Cola, Abbott Labs and United Technologies. Those reports coupled with the outstanding Apple earnings released after the Market closed Tuesday put a positive spin of Wednesday early pin action. While sentiment subsequently turned negative, I want to repeat a theme that may be taking place and bolsters our current investment strategy, that is, that much of the world’s economies are growing faster than the US; so large multinational companies {like KO, ABT and UTX, all of which our Portfolios own} can still produce above average earnings growth as a result of foreign sales and stocks of foreign companies [and, hence, the ETF’s that buy them] may offer better opportunity than US stocks.

(2)    the factor that appears to be responsible for yesterday’s intraday reversal was Bernanke’s congressional testimony. Remember that rumors of Uncle Ben announcing an easing in Fed policy helped push Tuesday’s Market higher. Well, there was no easing--so maybe disappointment played a role in the decline. Other than that Bernanke added little insight into current Fed thinking on the economy. Last week he had suggested that the economy was growing slower the Fed’s current published forecast; and he reiterated that yesterday. That’s not news.

(3)    the least talked about but the one that carries the most significant long term implications is Obama’s signing of the financial regulation bill. Not to beat a dead horse, but this monstrosity solves none of the problems that caused the latest crisis and adds over 500 new regulations on the financial industry. There is no telling what the unintended consequences of those 500 regulations will be; but if history is any guide, they won’t be positive for the long term secular growth of the economy.

This stands on its own; government for morons (short plus a 3 minute video). And by the way, this was produced using Your Money:
http://www.zerohedge.com/article/wall-street-reform-neanderthals

Bottom line: despite Wall Street’s negative take on Bernanke’s comments, the Fed still expects 3-3 ½% real economic growth in 2010 and 3 ½-4% in 2011. If I could buy a guarantee on that forecast, I would do it in a heartbeat, because that would solidify a key assumption in our Valuation Model--meaning that based on that forecast, stocks are undervalued. That suggests that if I had any balls, I’d be spending cash today. But given the volatility to which our Portfolios have been subjected over the past two years, I think that discretion remains the better part of valor. So until the technical picture improves, I would rather pay up when there is more certainty.

    My perception is that Matt Simmons is an alarmist; but you should still read this article on the BP oil spill (medium):
    http://www.zerohedge.com/article/matt-simmons-says-gulf-clean-will-cost-over-1-trillion-sees-bp-1-says-we-have-now-killed-gom

    The revenue ‘beat’ percentage has improved this quarter (short):
    http://www.bespokeinvest.com/thinkbig/2010/7/21/what-happened-to-top-line-weakness.html

Economics

   This Week’s Data

    Weekly jobless claims rose 37,000 versus expectations of a 19,000 increase.
    http://www.calculatedriskblog.com/2010/07/weekly-initial-unemployment-claims_22.html

   Other

    The case for being less worried about deficits and government spending (long):
    http://www.nakedcapitalism.com/2010/07/deficits-do-matter-but-not-the-way-you-think.html

    Positive economic news out of Europe this morning (short):
    http://econompicdata.blogspot.com/2010/07/signs-of-life-in-europe.html

Canada boosts rates….

Chuck Butler — Wed, 21 Jul 2010 13:28:08 GMT

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In This Issue..

* Canada boosts rates...
* BOE called out for quantitative easing...
* Indian Rupee to shine...
* China loosens grip on Hong Kong deposits...

And Now... Today's Pfennig!

Canada boosts rates.

Good day. We had some pretty unsettled weather come through the area yesterday and last night, with the lightening and thunder producing quite a show. The currency markets, on the other hand, were quite stable. The biggest gainer was the Yen, and the largest loser the Euro; but neither moved more than .65% vs. the US$. Tight ranges across the board for the currency markets.

Chuck had a busy day in Vancouver yesterday, but made time to send me the following to include in today's Pfennig:

"The Agora Investment Symposium has a record crowd this year... 900 people are here to attend the show... Add all the vendors, speakers, staff, etc. and we're probably around 1,000!
I've never spoken to a crowd of 900 people before, but it's not like I'll be able to see all 900, so... The beat goes on!

Well... Looky, looky, the Bank of Canada didn't play hooky! The Bank of Canada (BOC) did, as I told you they would, a long time ago, raise rates yesterday, following up their first rate hike of 25 BPS, with an additional 25 BPS hike...

The BOC though, really put a spanner in the works, by reiterating that the timing of further reductions in policy stimulus will be contingent on developments both within and outside of Canada. I also read that this rate hike was widely expected by the markets... WHAT? I can tell you that I was all alone on the limb after the last rate hike by Canada in telling you that they would hike again at the end of July... The rest of these guys? Johnny come-latelys!

Any old way... The C$ / loonie, didn't react well to the "hedging" done by the BOC... And I didn't either! The BOC needs to take care of business at home! Forget the rest of those bozos that didn't keep their houses in order! However, that "reaction" didn't last long, and soon the loonie was moving higher VS the dollar once again... The surge in Oil prices yesterday didn't hurt the loonie either!

The Canadian rate hike sure lit a fire under the A$, and all the other Commodity Currencies as well! They like it when their "brothers in arms" reflect the positive things that a rate hike presents... They love it when a plan comes together!

So... How about those Housing Starts here in the U.S? Following up on the NAHB lack of Confidence, you can now see why... Housing Starts fell 5.0% in June to 549K at an annualized rate from a downwardly revised 578K pace in May (initially reported as 593K).

If this report doesn't tell the Gov't that their expired tax credit didn't pull forward building activity that would have occurred later this year, then they are blind! (besides being cheaters, and full of lies!) Speaking of cheaters and liars, I saw this and heated up to the point of boiling!

Countrywide Financial Corp.'s controversial "VIP" mortgage program made 153 loans to employees of Fannie Mae, the giant, federally backed financial institution that helped fuel Countrywide's growth, according to a letter released Tuesday by Rep. Darrell Issa. Another 20 such VIP loans, which often provided mortgages on terms more favorable than those available to the general public, went to Freddie Mac employees, another big government-backed buyer of loans, the Issa letter said.

While it has been reported that VIP loans had gone to some officials at these enterprises, the latest information indicates the number of VIP loans to Fannie Mae and Freddie Mac officials was greater than previously known.

It was all a little incestuous, eh?

OK... I'm sitting here at the Agora Wealth Symposium (AWS) and people keep stopping by to say hi, and to tell me I'm looking good, which is nice, and I know what they mean when they say I look "healthy"... But... Like I tell them when they say it's nice to see you again, and I say... It's nice to be seen!

But the crowd is excited this year... It's amazing, simply amazing, in this time of war, deficits, collectivism, unemployment and housing declines that people can be this excited! I think I know why they are excited though... It's because they've been here for years, and listened to the group of speakers here, and done the things they needed to do to protect their portfolios from the messes that are now all around us...

More from the show tomorrow... You're man on Vancouver scene...."

A reader suggested that I put Chuck's contributions in a different color, so he could figure out who was writing what. I'll try that today and see how it works, but I think most readers can tell the difference between Chuck's elegant prose and my feeble attempt at stringing sentences together.

Minutes from the Bank of England's July 8th meeting were released today and showed the vote was 7-1 to keep rates unchanged. For a second month in a row, the one dissenting vote, Andrew Sentence, called for an increase in rates due to increased inflationary pressures. Inflation rates in England rose to a 17 month high in April and was reported at 3.2% in June, above the government's 3 percent upper limit.

But policy makers in England have been in concert with those here in the US, calling for an expansion of stimulus spending instead of a tightening of monetary policy. I'm sure US lawmakers will be grilling Fed Chairman Bernanke on what he intends to do to further stimulate the economy over the next two days of testimony. These calls for further borrowing and spending are getting louder as we risk slipping back down into the second leg of a double dip. But inflation is still lurking, and pumping further stimulus into the economy risks eventually causing an even greater inflationary spike.

The Economist magazine is one of my favorites, and a short column by Buttonwood especially hit home this week. The column complains about the British Govt's recent announcement that they would stop selling inflation linked bonds to the public. The move, according to Buttonwood, is an indication that Britian will continue to move toward monetizing their debt, inflating their way out of their debt problems:

"After all, the Bank of England recently bought £200bn of gilts, funding more than one year's deficit. This is debt monetisation as practised by Rudolf von Havenstein, head of the Reichsbank during the Weimar republic. Inflation is already above target and has been for several months but the Bank of England has kept rates at 0.5%.

Of course, such an idea will be laughed out of court. The Bank's move was "quantitative easing" designed to stabilise the financial system, not a way of funding a spendthrift government. But as they say in Yorkshire "they'll tell you owt", i.e those in power will give you any old excuse. After a while, you have to stop listening to what they say and start watching what they do. And the latter should make investors very suspicious."

Both Chuck and I have pounded on the BOE for being one of the first central banks to begin quantitative easing programs, and as Buttonwood suggests, the history of these types of programs doesn't bode well for inflation over the next few years.

Two countries which have a closer eye on inflation are Singapore and India. Both countries have central banks which have decided to use currency rates as a way to combat the growing inflationary pressures. The Singapore dollar has been one of the best performing currencies vs. the US$ this year, as their government has encouraged appreciation of their currency as a means to combat inflation.

India has used a combination of both interest rate increases along with currency appreciation to fight inflation in the past. As the global economy stabilizes and Asia continues to grow, I look for the Indian rupee to start appreciating. India's economy grew 8.6% in the first quarter of 2010, and continued robust growth is expected.

And I'm not alone in my calls for a higher Indian rupee. Currency strategists at Wells Fargo & Co suggest the rupee will strengthen over the next 18 months. Vassili Serebriakov, wrote in a research note yesterday that "Once global investor sentiment becomes more stable, India's robust growth profile and rising interest rates should attract foreign capital flows, putting upward pressure on the currency."

Rate differentials will continue to favor the Brazilian real where the central bank is expected to continue its aggressive pace of increases today. Policy makers are expected to raise the benchmark rate 75 basis points, keeping them at the top of all currency rates offered by EverBank. Inflation in Brazil has been above the bank's 4.5% target rate all year, and the higher rates are needed to cool the pace of economic growth.

Another country which has been looking to cool their pace of economic growth is China. Chuck sent me the following note on the world's fastest growing economy:

China takes over the pole position of top exporters this year...
China takes over the pole position of the world's largest auto market...

And now China ascends to the pole position of top energy users this year...

Germany, the U.S. Two bridesmaids now!

And there are still naysayers to China's economic power and ability to grow?

Well, I'm not one! And I'll tell you something else... With China becoming the top energy user, it truly reflects on the fact that China has built a fast growing consumer class!

So... The writers said that China would collapse because of this, that and other things, and one by one, they've been proved wrong... When will they ever learn? When will they ever.... Learn?

In what looks like another step in opening up their financial markets, Chinese regulators have agreed to let Hong Kong residents invest directly into higher yielding Renminbi deposit accounts. The Hong Kong Monetary Authority and the People's Bank of China yesterday signed an agreement allowing financial institutions to offer higher returns on Renminbi savings account to residents of the city.

Everbank continues to be one of the only banks in the US which offers Renminbi deposit accounts, but we have not been able to pay interest on these deposits. Hopefully the change in Hong Kong will enable us to offer some interest on these accounts. We will certainly keep all of you informed on any changes in the Chinese policies.

To recap.. Chuck updated us on the happenings in Vancouver, and let us know that Canada raised rates as he had been expecting. Buttonwood calls out the BOE for quantitative easing, the Indian rupee should appreciate according to Wells Fargo, and China is now the largest user of energy.

Currencies today 7/21/10: American Style: A$ .8835, kiwi .7174, C$ .9636, euro 1.2818, sterling 1.5257, Swiss .9517, ... European Style: rand 7.5167, krone 6.2601, SEK 7.3802, forint 222.64, zloty 3.199, koruna 19.7715, RUB 30.4369, yen 86.97, sing 1.3739, HKD 7.7748, INR 47.1669, China 6.7767, pesos 12.7601, BRL 1.7741, dollar index 82.93, Oil $78.10, 10-year 2.94%, Silver $17.84, and Gold... $1,195.50

That's it for today... How about those Cardinals!!! They won another last night to make it 7 in a row. I know it is still too early to make the call, but it sure would be nice to have another World Series in St. Louis, and this year the National League gets the advantage. It is looking like a beautiful morning, but I heard more Thunderstorms are going to be rolling through later today. Hope everyone has a Wonderful Wednesday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Review of Federated Investors (Dividend Growth and High Yield Portfolios)

Steve Cook — Wed, 21 Jul 2010 13:25:00 GMT

Federated Investors provides investment advisory, administrative and other services and products to its mutual funds (primarily money market funds) and separate accounts. It manages over $389 billion in assets spread among 145 mutual funds. The company earned an impressive 25-35% return on equity and grew profits and dividends at a 9-10% pace over the last 10 years. This record should continue as:

(1) the company’s dominant position in fixed income and money market asset management should give it a competitive advantage in a volatile, directionless equity market,

(2) product line expansion by adding more equity and fixed income offerings,

(3) geographic expansion as in enters more foreign markets.

     FII is rated A by Value Line, has only a 3% debt to equity ratio and its stock yields 4.1%.

    Statistical Summary

                 Stock     Dividend         Payout      # Increases
                Yield      Growth Rate     Ratio       Since 2000

FII             4.1%           8%              59%              10
Ind Ave      1.4             54                25                NA

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2000      Margin       Rating

FII             3%            28%            4                 18%           A
Ind Ave     35              16              NA               16             NA

   Chart

    Note: FII stock made good initial progress off its March 2009 low; however, in February 2010 it broke that up trend, then initial support and transitioned into a down trend. On the way up, FII surpassed the down trend off its January 2008 high and the November 2008 trading high. It recently broke the sharp down trend off April 2010 high, and then recently made a higher low off the July 2010 low. The High Yield and Dividend Growth Portfolios own 50% positions in FII. The upper boundary of its Buy Value Range is at $21; however, since stock was Sold at $25 in the recent decline, shares may be Bought back at current levels. Profits would be taken at $41.



http://finance.yahoo.com/q?s=FII
7/10

    News on Stocks in Our Portfolios

    Pepsico (Aggressive Growth Portfolio) reported second quarter earnings per share of $1.10 versus expectations of $1.08.

    Illinois Tool Works (Dividend Growth Portfolio) reported second quarter earnings per share of $.83 in line with expectations.

Johnson & Johnson (Dividend Growth Portfolio) reported second quarter earnings per share of $1.21 in line with expectations.

Linear Technologies (Dividend Growth Portfolio) reported second quarter earnings per share of $.54 versus estimates of $.51.

Altera (Aggressive Growth Portfolio) reported second quarter earnings per share of $.58 versus forecasts of $.50.

'Almost Persuaded'......Tammy Wynette

Steve Cook — Wed, 21 Jul 2010 13:19:00 GMT

The Market

    Technical

    The Averages (DJIA 10229, S&P 1083) surprised me yesterday. After poor IBM earnings and the lousy housing start number, equities sold off early on then rallied big time to close up strong on the day. Nevertheless, they remained within their current down trend (9039-10266, 965-1085), though clearly they closed near the upper boundary.

I said in yesterday’s Morning Call we needed to let the Market tell us if Monday’s bounce was a relief rally or the initial trade off a higher low (from 9645, 1009). With prices rising on bad news and on higher volume and improved breadth, it suggests that the latter may very well be the case. Supporting this notion is our internal indicator which continues to improve. The only hold out is the VIX--it sold off yesterday but stayed above support.

    How the S&P has performed following other days like yesterday (short):
    http://tickersense.typepad.com/ticker_sense/2010/07/not-many-days-like-today.html

    In addition, GLD rebounded in yesterday’s trading, closing above recent support which takes it off the potential critical list.

    Bottom line: yesterday’s reversal shouldn’t be ignored. On the other hand, given the recent volatility, today could be just a mirror image of yesterday. That said, if stocks break decisively above the upper boundary of the current down trend, I am going to assume that our internal indicator has been spot on, that Tuesday’s intraday low was indeed the higher low that I had hoped it might be and our Portfolios will start to nibble.

   Fundamental

    Headlines

    Not much occurred during the early Market hours yesterday save an ostensively poor Goldman earnings report. As noted above, the news Monday night (IBM earnings) and pre-open Tuesday (June housing starts) seemed to determine sentiment and trading early on; but they soon lost their impact. The rest of day was spent contemplating:

(1)    the likelihood that Bernanke will announce an easing in Fed policy during congressional hearings today. The rumor was that the Fed will cut its interest rate on bank reserves from 0.25% to 0% to incentivize banks to increase lending. Since this is one of the few bullets that the Fed has left in its arsenal if economic conditions don’t improve, based on current economic data, I can’t imagine the Fed wasting one of its few remaining resources at this moment, unless of course, Ben knows something that we don’t, in which case, such a move would be about as bad a news as we could get,

(2)    rumors out of Europe that the Spanish banks had passed the ‘stress test’ [actual results get reported Friday]. The only problem is we don’t yet quite know what the ‘test’ entailed and, therefore’ what ‘passing’ it means. I repeat, the last chapter to the EU sovereign debt crisis has not been written,

(3)    a big overnight bounce in the Chinese stock market being attributed to a report from a major Chinese investment firm that the country is headed for a ‘soft’ landing. That gave rise to the expectation/anticipation by US investors of improved Chinese demand. I doubt that this will quell the debate on the strength of the Chinese economy; however, on a broader note, it does appear there are significant chunks of the rest of the world that are doing much better than the US economically speaking. That suggests to me that   major US companies selling abroad can prosper even in an anemic domestic US market,

(4)    anticipating Apple’s earnings report after the close, which were a blow out. But as I noted above, it raises the question that based on the trading subsequent to IBM and TXN’s profit report Monday night, will there be any Market follow through to Apple’s earnings this morning or will today be a mirror image of yesterday?

Bottom line: I don’t want to get stampeded in one direction by a single day’s dramatic volatility. But there are positive events happening out there, stocks are undervalued and as I said yesterday, every day gets us closer to a potential revolution on November 2. If our technicals will confirm what I think is an improving scenario, our Portfolios will become better buyers.

    The latest from Doug Kass (medium):
    http://www.thestreet.com/story/10811525/1/kass-growth-is-giving-way-to-value.html

    The latest from David Rosenberg (long):
    http://www.zerohedge.com/article/qa-david-rosenberg-bearish-outlook

Economics

   This Week’s Data

    The International Council of Shopping Centers reported monthly sales of major retailers rose 1.4% versus the prior week 4.2% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales fell 0.6% versus the similar timeframe last month and increased 2.7% on a year over year basis.

    Weekly mortgage applications rose 7.6%.
    http://www.calculatedriskblog.com/2010/07/mba-mortgage-purchase-applications_21.html

   Other

    The rise in temporary employment continues (chart):
    http://mjperry.blogspot.com/2010/07/asa-staffing-index-24-above-same-week.html

    A ten minute (video) discussion on fiscal policy with two of my favorites: Barry Ridholtz and Keith McCullough:
    http://www.ritholtz.com/blog/2010/07/stimulus-battle-how-to-fix-the-economy/

    Here is another of those long but informative articles; this one on sovereign debt and how to assess the likelihood of default:
    http://mpettis.com/2010/07/do-sovereign-debt-ratios-matter/

Politics

Domestic

    Another 2000+ page piece of legislation; brought by an elected representative near you:
    http://mjperry.blogspot.com/2010/07/high-stakes-test-can-big-government.html

    More insight into how the budget process works (short):
    http://gregmankiw.blogspot.com/2010/07/government-spending-by-another-name.html

    This is a bit long but it is a great look at the workings of the Department of Justice:
    http://article.nationalreview.com/438362/the-case-against-the-new-black-panthers/andrew-c-mccarthy

    For some reason, today’s missive is loaded with long articles. This one addresses Obama’s antibusiness policies and their consequences:
    http://politics.usnews.com/opinion/mzuckerman/articles/2010/07/16/obamas-anti-business-policies-are-our-economic-katrina.html

Is Your Local Bank in TARP Trouble?

Gary D. Halbert — Tue, 20 Jul 2010 21:21:00 GMT

IN THIS ISSUE:

Small Banks in Trouble Due to TARP Money
See if Your Local Bank Took TARP Money
The Commercial Real Estate Bust Continues
Many Banks “Extend and Pretend”
The Economic Recovery Will Remain Weak

Introduction

You’ve probably read recently that most of the 17 largest banks that took Trouble Asset Relief Program (“TARP”) money have paid it back, with interest. They are no longer on the government dole. However, a new report from the Congressional Oversight Committee warns that over 600 smaller banks that took TARP money may not be able to pay it back. And the list is growing.

Furthermore, the report warns that if these community banks can’t pay the government back, they will have to be merged with other larger banks or go out of business altogether. The report also acknowledges that these TARP loans, which smaller banks were encouraged to take, should never have been offered in the first place. Surprise, surprise.

President Obama wants to create a $30 billion relief fund for these banks that are in trouble, but it seems to be going nowhere in Congress. Plus, some experts believe that $30 billion is not nearly enough to save the 641 smaller banks that may be in financial trouble primarily due to taking TARP money.

Action to Take: If you deal with a local bank, you should inquire as to whether or not they took TARP money and if they have paid it back.

Following that discussion, we take a fresh look at the current status of the US commercial real estate market. In short, the news is dreadful. The value of the collateral backing US commercial real estate loans has plunged from apprx. $6 trillion in 2007 to only $3-$3.5 trillion at the beginning of this year. The reason: commercial real estate values have collapsed.

Making matters worse, the number of commercial real estate loans reaching maturity, and needing to be refinanced, will reach new highs over the next few years. Thousands of properties will almost certainly be foreclosed upon, thereby making matters even worse. This dilemma does not bode well for the economic recovery.

Small Banks in Trouble Due to TARP Money

Last Wednesday, the Congressional Oversight Panel released a troubling new report on the state of small banks that took TARP money during the financial crisis. You may recall that Congress created the Congressional Oversight Panel (“COP”) in late 2008 when it authorized the Treasury to create the $700 billion TARP to bail out struggling banks.

The COP’s initial mission was to “review the current state of financial markets and the regulatory system.” It was given broad powers and authority to hold hearings, review official data, and write reports on actions taken by the Treasury and financial institutions and their effect on the economy. Basically the COP was Congress’ way to look over the shoulder of the Treasury.

The COP’s latest 130-page report paints a grim picture for the over 600 small banks that took TARP money in late 2008 and 2009. Basically, many smaller banks that borrowed TARP money are having trouble paying it back. The report warns that these banks may become vulnerable to takeovers or being shut down as a result.

According to the report, the Treasury lent over $25 billion of TARP money to 690 small banks – those with less than $100 billion in assets – aiming to stabilize them amid the financial crisis that struck in full force in late 2008. But many of the more than 600 smaller banks that got help “are now struggling to meet their obligation to taxpayers.”

As you will recall, most of the TARP money went to the 17 largest banks with assets over $100 billion, and they have emerged from the crisis relatively well. The report notes, “Most of these large banks have already repaid taxpayers, and many are now reporting record profits.” Yet many smaller banks are now having difficulty raising the capital necessary for repayment of their bailout funds, and by 2013 they face the prospect of having to pay higher charges for the TARP money that they received.

As with the largest banks, the smaller banks had to put up their own stock as collateral for the TARP loans, and according to the new COP report, those banks are required to pay the government a 5% annual dividend on their stock. In 2013, that dividend goes up to 9%, which will make it even harder for these banks to pay back the loans.

The Congressional Oversight Panel’s chairwoman, Elizabeth Warren, said it was ironic that the government’s bailout program seemed to be offering its greatest benefit to big Wall Street banks when it was intended to stabilize the whole industry. She added, “TARP was not intended as a bailout for Wall Street, it was intended to provide benefit for the whole economy.”

The COP report warned, “If they are unable to access new capital by the time the dividend rate increases [in 2013], more small banks may become trapped, with no way either to escape the CPP [TARP loans] or to pay their required dividends.” The report further warns that this dilemma might leave small banks vulnerable as takeover targets, or force them into receivership by the FDIC.

The report goes on, “Consolidation or failure may be appropriate for some weak and poorly managed banks, but it would be unfortunate if well-run institutions were forced onto this path solely because of the CPP [TARP loans],” adding that the effect of the bailout on smaller banks may have been to weaken them.

The report warned that “the number of small banks that were once deemed healthy but that cannot make their dividend payment and repay their TARP obligations may grow,” adding that the end effect will be to further restrict lending and dampen the economic recovery. The report states that one in seven small banks that took TARP money has already missed a dividend payment, and fewer than 10% of these 600+ banks have repaid taxpayers.

Ms. Warren warned, “We are trying to wave a flag about a problem that’s already serious and is very likely to get worse,” particularly because many smaller banks have significant exposure to the commercial real estate market where borrowers are defaulting in growing numbers. I will have much more detail on the distressed situation in commercial real estate below.

Ms. Warren admits that the TARP loans to smaller banks probably never should have been made in the first place. The Treasury Department says it was an issue of fairness. To extend TARP only to the large banks would have put them at an unfair advantage over smaller banks. It now looks like that decision to make TARP money available to smaller banks (made by Bush’s Treasury Secretary Hank Paulson) backfired.

President Obama has been pushing for the creation of a special $30 billion fund to boost capital at small banks, but Ms. Warren doubts that this would be nearly enough relief to fix the problems with the dividend payments at smaller banks, much less the repayment of the TARP loans.

The bottom line is that this Congressional Oversight Panel report is sending two major warnings: 1) that some, perhaps many, of the over 600 banks that took TARP money will not be able to pay it back; and 2) if they can’t pay it back, they won’t be bailed out again. The report warns that they will have to be merged with other banks, or go out of business.

Action to Take: Check with your local bank to confirm that it is not one of the 690 that took TARP money. If it did, then you need more information on where they stand in terms of repayment.

Finally, here are links to two websites that list the banks that took TARP bailout money; I cannot attest to their accuracy, but they seem to be legitimate:

http://bailout.propublica.org/list/index

http://money.cnn.com/news/specials/storysupplement/bankbailout/

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Commercial Real Estate Bust Continues

As the Congressional Oversight Panel report emphasized, most smaller (and regional) banks have significant exposure to commercial real estate (“CRE”). And the situation in this key sector continues to worsen. Let’s put it in some perspective. At the height of the housing bubble in 2007, the value of the collateral underpinning total outstanding commercial real estate debt was estimated to be around $6 trillion. At the beginning of this year, it was estimated to have collapsed to $3-3.5 trillion. Yet the CRE market is still over four times the size of the entire credit card market.

Making matters worse, commercial real estate transactions collapsed 90% from 2007 to the end of 2009 – from $522 billion in sales to only $52 billion as shown in the following chart.

It is obvious that commercial real estate values have plunged in many, if not most, areas around the country. A few areas of the country have been largely spared, but the chart below is a reflection of CRE values as a national average. As you can see, the plunge has been devastating, even though we don’t hear a lot about it in the mainstream media. But we will in the next few years as the loans have to be renewed!

It is an understatement to say that the CRE market is underwater! It is painfully clear from the chart above how big the CRE bubble was and how incredibly fast it imploded. As the chart illustrates, CRE market values soared for seven straight years. Then most of that value disappeared in roughly a year-and-a-half.

The reasons why the commercial real estate market collapsed are in many ways similar to those that led to the housing meltdown. Prices had gone up so fast that the CRE market became a speculative boom. Lending became much too easy with relaxed credit qualification.

In the past, CRE deals were scrutinized in advance for strong financial reports, and most projects began the loan process with sizable downpayments. Most projects were expected to generate cash flow almost immediately upon completion. But as the credit bubble grew, lending standards were relaxed significantly, projections were greatly overstated and, of course, then came the financial crisis and the recession.

As noted earlier, the collateral behind outstanding debt in the CRE market is estimated to be around $3.5 trillion, second only to home mortgages which are estimated to be $4.5-$5 trillion in loans outstanding. Here again, this is a huge problem that we don’t hear much about – yet.

The collapse in the CRE market, and its devastating effects on small and regional banks, is a big reason why the banks are not lending, and this is one of the primary reasons why the economic recovery is so tepid this year. As noted above, many of the banks that are struggling have significant exposure to commercial real estate loans that are now underwater, including many that took TARP money and now can’t pay it back.

But the problem is not limited to those 641 small banks that took TARP money and have not paid it back. While their dilemma may be worse than small banks that did not take government bailout money, the collapse of the commercial real estate market is endemic to almost all small and regional banks. This suggests that lending among small and regional banks could be anemic for another several years, at least, as they work through the serious problems with CRE loans already on their books.

By now, I’m sure you have come to realize that the $3.5 trillion in collateral backing outstanding commercial real estate debt is a serious problem. Unfortunately, we haven’t seen the worst of it yet, as the following chart illustrates.

As you can clearly see, the number of commercial real estate loans that are coming due is projected to rise each year from now until 2013 and will remain high until 2018 according to research by Foresight Analytics.

CRE loans, unlike traditional home mortgages, are typically structured to roll over (refinance) every 5-7 years. In a normal economy with positive cash flows on most CRE properties, there is usually no problem in renewing these loans. But of course, we are not in a normal economy, and bank lending is down over 25% in the last couple of years.

According to research by JP Morgan, the worst of the CRE loans were originated in 2006 and 2007, many of which were collateralized by properties that were overvalued and in many cases, highly leveraged as well. These ugly underwater loans will have to be refinanced over the next few years, which could result in more downward price pressure.

When we combine this dilemma with the continued weakness in the housing market, you have a recipe for a continued slow economy, or maybe a double-dip recession, for the next couple of years or longer. At the very least, this explains why many small banks can’t repay their TARP loans and may well go out of business or be merged over the next few years.

“Extend and Pretend”

Some banks have a special technique for dealing with business borrowers who can’t repay loans coming due: Give them more time, hoping things improve and they can repay later. Banks call it a wise strategy. Skeptics call it “extend and pretend.” Banks are applying it, in particular, to commercial real-estate lending, where, during the boom, optimistic borrowers got in over their heads to the tune of tens of billions of dollars.

But the practice is creating uncertainties about the health of both the commercial property market and many banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets.

About two-thirds of bank commercial real estate loans maturing between now and 2014 are underwater, meaning the property is worth less than the loan on it, according to Foresight Analytics data. US commercial real estate values remain 42% below their October 2007 peak and only slightly above the low they hit in October 2009, according to Moody’s Investors Service. In the 1Q, 9.1% of commercial property loans held by banks were delinquent, compared with 7% a year earlier and just 1.5% in the 1Q of 2007, according to Foresight.

The Economic Recovery Will Remain Weak

I have maintained all year that the US economic recovery would be weaker than most forecasters suggested at the beginning of this year. I have also warned that a double-dip recession is not out of the question. Historically, deep recessions are followed by strong economic expansions, but not this time.

The credit crisis of 2008-2009 was unprecedented, and bank lending remains in the tank – down over 25% (and this number is underestimated, in my opinion) – from pre-crisis levels. And the news continues to get even worse. The latest Congressional Oversight Committee report is chilling, both in terms of the 641small banks that haven’t been able to repay their TARP loans, and the warning that many of these banks will have to be taken over or go out of business altogether.

Add to that the fact that most small and regional banks have significant exposure to commercial real estate that has plunged in value, and you have a recipe for a continued period of weak bank lending. Overall bank lending is not likely to rebound significantly anytime soon, and this suggests a continued weak economic recovery and high unemployment.

** Be sure to read the P.S. below my signature.

Wishing I had better news,

Gary D. Halbert

P.S. An Investment Event You Won’t Want to Miss!

As my long-time readers know, my Investment Advisory firm often sponsors live seminars via the Internet, often called “webinars,” that feature a variety of money management styles. On August 5th, we’ll be offering the latest in our series of webinars featuring the Long/Short Government Bond Program managed by Hg Capital Advisors, Inc. Considering the current state of the bond market, I believe this is a webinar you won’t want to miss.

With interest rates at or near historical lows, you may think that this would be an odd time to be featuring an investment strategy based on the 30-year Treasury bond. Conventional wisdom says that you should be moving out of bonds at this point in time, since interest rates are sure to start moving up at some point in the future. Even Bill Gross, manager of the world’s largest bond mutual fund, recently warned that US Treasury bonds have “seen their best days” and advised investors to head for the exits.

Yet, despite Wall Street’s conventional wisdom, long-term government bonds were the single best performing asset class for the first half of 2010. While we fully expect Mr. Gross to be right in the long run, there are short-term opportunities that can be exploited IF you have an investment strategy nimble enough to capitalize on both up and down movements in long-term bond yields.

The principals of Hg Capital have developed just such a system that can trade both long and short, depending upon the current trend in bond yields. This innovative strategy allowed the Long/Short Government Bond Program to produce a gain of over 60% in 2009, while the Barclay’s Long-Term Treasury Index posted a double-digit loss for the year.

Of course, past performance can’t predict future results and the ability to trade both long and short, coupled with 1.2X leverage on the long side, means that the Hg bond strategy is generally suitable only for the aggressive portion of an overall portfolio. However, for suitable investors looking for a way to potentially capitalize on trends in long-term bond yields, Hg Capital’s Long/Short Government Bond Program may be just what you’re looking for.

Our live webinar will feature Byron Haven and Ted Lundgren, two of Hg Capital’s principals and the developers of the bond strategy. You will be able to hear them describe their approach to the 30-year Treasury bond market and how they seek to capitalize on both rising and falling yields. You will also be able to ask them any questions you may have about their strategy and performance.

Again, the Hg Capital Long/Short Government Bond webinar will be held on Thursday, August 5, 2010 at 1:00 PM Eastern (10:00 AM Pacific). Seating is limited so I encourage you to click on the following link to register for the upcoming webinar at your earliest convenience:

https://www1.gotomeeting.com/register/460995961

SPECIAL ARTICLES:

Commercial Real Estate Crisis, Downward Spiral for Local Banks
http://www.huffingtonpost.com/2010/02/11/commercial-real-estate-wa_n_458092.html

To Fix Sour Property Deals, Lenders “Extend and Pretend”
http://online.wsj.com/article/SB10001424052748704764404575286882690834088.html

US housing starts suffer…

Chuck Butler — Tue, 20 Jul 2010 14:36:55 GMT

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In This Issue..

* Housing starts suffer...
* Stressful times in Europe...
* Aussie dollar moves higher...
* Canada to raise rates...

And Now... Today's Pfennig!

US housing starts suffer.

Good day.

The news which drove the markets yesterday was no big surprise for the desk. Homebuilder confidence here in the US dropped to the lowest level since April 2009 as the homebuyer credits expired. Today we will get additional data on the housing market which is expected to show US housing starts continue to fall while foreclosures climb. While prices steadied over the past couple of months there is still a backlog of homes facing foreclosure which will equate to a very slow recovery for the housing markets. And in the US, as the housing goes so does the economy; so the data is not a good sign for our nascent recovery.

Chuck had a long trip across the country yesterday, but went ahead and sent me a bit of information he wanted me to share with all of you Pfennig readers:

"Did you see that Moodys decided to downgrade Ireland's credit rating? Again... These guys a day late and dollar short! Wouldn't it have been nice to "know" that Ireland was "going to have problems" before they existed, so that if you had money invested there you could get it out?

When I arrived at the Hotel Vancouver for the conference, I immediately went to the bar, where my long time friend and bartender here, Kevin, greeted me, and I had the "carvery", which is what I have every year when I get here... It's great!

Any way... I was sitting at the bar with my glass of water and the "carvery", watching the TV behind the bar, when the news hit that the National Assoc of Home Builders confidence turned very pessimistic in July, even more than what was forecast... And guess what's causing all the bad vibes? The expiration of the government tax credit! I told you didn't I? I said that as soon as the tax credit expired home sales would circle the bowl... And next we'll begin to see home prices slide again...

Hey! I'm not wishing for this stuff folks! It's just how someone that doesn't believe the Govt's lies, or the Govt's "good intentions without realizing the unintended consequences of such good intentions"...

So... Fundamentally... News like that should send the dollar reeling... But no fundamentals were traded today folks... Look, a news story like this in the U.S. far outweighs the cut in Ireland's credit rating story...

Are we becoming "Comfortably Numb"? Hello, Is there anybody in there? Just nod if you can hear me. Is there anyone home... (one of Pink Floyd's all-time great songs!)

I mean, just last week, it was reported that Illinois had surpassed California with their debt level... Was that news here in the U.S.? Maybe on Chuck's radio station that he gets from the planet Mars!

Ok... Enough of all that... Here's Chris!"

European investors are selling the euro a bit this morning as we head into the NY open. The big story in Europe over the past few days has been the European bank stress-test results which are scheduled to be released on Friday. As with any big data release, predictions from traders have been all over the board. Yesterday the 'feel' of the markets was that the stress tests would show strength in the region's banking sector, and the euro moved higher. But today there have been rumors that a few major banks may actually fail the tests, and the euro has fallen back below $1.29 in a sharp move this morning.

But should anyone really be relying on these stress tests? After all, does anyone really think they are any more reliable than the stress tests which were performed on the US banks? This is simply a confidence game being played out by the banking regulators. After all, the banks are only as strong as their depositors confidence in them.

I believe the risk has moved against the euro, and the announcement of the stress tests could cause the euro to sell off. After all, if any of the 91 banks which were put through the stress tests fails, we would see confidence in the banking sector shaken. And if all of the banks pass the tests, investors won't believe the tests were tough enough. So the recent spike in the euro will probably be the short term high.

But in the longer term, the data indicates the euro should outperform the US$. A majority of the reports out of Europe have surprised on the upside, as the European economy has proven to be much more resilient than many economists thought. The sell-off in the euro has provided a good boost to exports in Germany and the Scandinavian countries. And with the recent auctions of government debt by both Spain and Greece are further proof investors have begun to put the European debt crisis behind them. According to one of the larger German banks, Commerzbank AG, the euro is likely to run up to $1.35 over the next three months. Currency technical analysts at Commerzbank are looking at what is called a 'double Fibonacci retracement' which would allow a rally to reach $1.3510 after pausing in the near term at $1.30.

The pound sterling fell a bit yesterday as Britian's June budget deficit narrowed less than estimated. Data released this morning by the Bank of England showed mortgage approvals fell in June as consumer confidence weakened. The soft economic data should keep the BOE from raising rates in the near term which will keep a lid on the value of the pound.

The Aussie dollar was down a bit in yesterday's trading, but rallied back strong overnight and has continued to move higher in European trading. The Australian dollar benefitted from better sentiment regarding the Chinese economy. China's stock market ticked up after the Chinese commerce ministry said domestic consumption will continue to rise.

This is the story both Chuck and I have been taking to the investment seminars which we are invited to speak at. While the Chinese economy has been built on exports, an expanding middle class is slowly pushing the world's fastest growing economy more toward consumption. A lot more needs to be done before trade is balanced in China, but the gradual building of wealth by the huge Chinese base of workers has begun to nudge China in the right direction. While naysayers have been calling for a dramatic fall in the Chinese economy, we believe they will continue to be the world's growth engine, posting near double digit growth over the next 3 - 5 years. And much of this growth will be due to their own internal demand, not just exports to Europe and the US.

So the positive news out of China has pushed the Aussie dollar higher. China is Australia's largest trading partner, and New Zealand's second biggest export market; so the positive news was well received by currency traders. Both the Aussie dollar and New Zealand's kiwi have been held down so far this year, so they may be overdue for a nice rally.

The Bank of Canada will be announcing a rate announcement later this morning, and an increase is what everyone is expecting. In fact, the markets have priced in another 2 more increases through the end of the year as the Canadian economy returns to growth. The risk here is that they decide to pause a bit if/when the US economy sputters later in the year. Governor Mark Carney may get worried about getting too far ahead of the US with regard to interest rates, and could look to slow down the pace on increases. There is typically a good press release following the rate announcement, so I will bring you more on this tomorrow.

I had a reader ask me to comment on the metals, so here you go. Both gold and silver were down a bit overnight, and are down 6% and 8.5% respectively over the past month. Volatility in the markets has calmed a bit, and both Gold and Silver seem to be treading water waiting for what I think will be another break out higher. The US economic data will probably disappoint, causing the global economic recovery to come back into question and forcing investors to take a harder look at the 'hard assets' of gold and silver.

To recap.. Housing continues to be a drag on the US economy, Europeans prepare for the release of the stress tests, the Aussie dollar rebounds on positive news regarding the Chinese economy, and the BOC is expected to raise rates this morning.

Currencies today 7/20/10: American Style: A$ .8759, kiwi .7123, C$ .9496, euro 1.2922, sterling 1.5179, Swiss .9485, ... European Style: rand 7.6271, krone 6.3027, SEK 7.3629, forint 224.92, zloty 3.200, koruna 19.637, RUB 30.5075, yen 86.80, sing 1.3749, HKD 7.7756, INR 47.3438, China 6.7783, pesos 12.909, BRL 1.7926, dollar index 82.602, Oil $76.70, 10-year 2.94%, Silver $17.54, and Gold... $1,178.05

That's it for today...Had some pretty massive thunderstorms roll through the area yesterday afternoon. Our new offices are on the 8th floor, and have solid glass walls giving us a tremendous view of the storms; very cool!! The Big Boss Frank Trotter got back from his trip over to England and Ireland and is back in the saddle. We are getting some visitors from the headquarters today, so better get this out the door and clean up my desk a bit. Hope everyone has a Tremendous Tuesday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Review of Kimberly Clark (High Yield Portfolio)

Steve Cook — Tue, 20 Jul 2010 13:23:00 GMT

Kimberly Clark develops, manufactures and markets personal care products (Huggies, Pull Ups, Kotex, Depends, Kleenex, Scott paper towels and Cottonelle tissue). KMB has grown its profits and dividends at a 5-8% annual rate over the past 10 years earning an amazing 35%+ rate of return on equity. As with many of our companies, Kimberly has had a rough go of it in 2009 suffering from currency translation problems as well as customers ‘trading down’ to generic brands. However, the company should begin to see improvement in its bottom line in 2010 as a result:

(1) significant cost cutting as well as better supply chain management,

(2) a ramp up in marketing and branding efforts,

(3) new product innovation,

(4) a significant stock buy back program.

KMB is rated A++ by Value Line, carries a 45% debt to equity ratio and its stock yields 4.2%

Statistical Summary

                 Stock      Dividend         Payout      # Increases
                 Yield      Growth Rate     Ratio       Since 2000

KMB          4.2%          4%               52%             10
Ind Ave       2.1             7                 40                NA

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2000      Margin       Rating

KMB         45%           37%            2                 10             A++
Ind Ave      45              17              NA              11            NA

   Chart

    Note: KMB stock made good initial progress off its March 2009 low. In December 2009, it successfully challenged the lower boundary of that up trend and has since traded in a range. However, KMB still trades above the down trend off its June 2007 high as well as the November 2008 trading high. The straight blue line at the bottom is the lower boundary of an up trend dating from 1996. The wiggly blue is on balance volume. The High Yield Portfolio owns a 50% position in KMB. It would Buy more stock at $50 and would reduce its position at $78.

http://finance.yahoo.com/q?s=KMB
7/10

InvestorsInsight.com | Financial Intelligence, Advice & Research / Investment Strategies & Planning for Individual Investors.

Association of Investor Awareness - Week of 07/29/2010

Double Dip, Or Onward & Upward?

Many Winners Should Have Further To Go

Inflation, Deflation – Or Neither?

Beating The Bushes For Returns

The Bottom Line

Until Next Time

Eurozone Confidence Rises...

Subscriber Alert 7/28/10

Consumer Confidence Tumbles...

Financial Reform or Government Takeover Revisited

Running through a minefield, backwards

Running through a minefield, backwards Part II - farewell Flanonia?

The glue has dissolved

The language chasm

A shifting balance of power

Follow the money

Turning off the taps

How it plays out?

Investment conclusions

A Taxing Divorce?

No More Stress Tests....

Monday Morning Chartology-7/26/10

At the Tipping Point (Again)

Some Thoughts on Deflation

Some Thoughts on Deflation

The Super-Trend Puzzle

The Elements of Deflation

Maine, New York, Turks and Caicos, and Europe

The Closing Bell-7/24/10

Subscriber Alert-7/23/10

Judgment day has arrived for Euro banks…

Stocks are probably re-setting to a trading range

Dispatch: China Factors in U.S.-South Korean Relations

'Unusually Uncertain' times…

Review of Lowe's (Aggressive Growth Portfolio)

Still a time for doing nothing

Canada boosts rates….

Review of Federated Investors (Dividend Growth and High Yield Portfolios)

'Almost Persuaded'......Tammy Wynette

Is Your Local Bank in TARP Trouble?

US housing starts suffer…

Review of Kimberly Clark (High Yield Portfolio)

Running through a minefield, backwards
Part II - farewell Flanonia?