Curried Wealth Building
Finding an Edge

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May 15, 2011
Issue 147  -  Where We Are and
Where We're Going?
 
 
I thought I'd take this week to just provide an overall summary of where we are in the financial markets.  This is an excellent time to do this as the markets are at what I consider a cross roads and confusion reigns.  To make this a little easier to follow, I'll divide things up into several areas. 
 
Stock Market 
 
As you may have read, I sent out an email this week warning about making purchases in the near term.  I have moved to the sidelines for several reasons.  First a chart:
 
 
 
What this shows is the last 3 year  performance of the Dow Jones 30.  These are 30 of the largest companies on the planet and how they are doing is obviously important.  If you notice the bottom was 6900 back in March of 2009.  From that point on it's been a heck of a ride.  Over two years of uptrend is pretty rare.  We are at the end of lifespan for bull markets.  We are also running out of gas as you see peaks toward the right of the chart not quite popping up as high as the previous surges.  This indicates a tired bull.  I don't like to play with tired bulls.  Tired bulls eventually exhaust themselves and a healthy correction occurs.  This must come at some point.  QE2 is supposedly ending at the end of June.  If this happens, and I think it will, it will lead to a tanking of the market.  Holding out for 10% more on this market just doesn't make sense to me when a correction of 30% or more is equally as likely. 
 
Another thing that could cause the market to crash is the high frequency trading (HFT).  As a quick recap, this is the way major firms on Wall Street do their business.  Here's a brief explanation from Zerohedge.com:
 

"It's Not A Market, It's An HFT 'Crop Circle' Crime Scene" - Further Evidence Of Quote Stuffing Manipulation By HFT

 
Submitted by Tyler Durden
  • Recently we posted a required reading analysis by Nanex in which the market trading analytics firm presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks, in which thousands of cancelled quotes would reappear each second with a definitive periodicity and regularity, around the time of the May 6 flash crash. Aside from the fact that it is illegal to indicate a quote without a trade intent, this form of quote stuffing is in fact manipulative when conducted by HFT repeaters in specific "shapes" as it actually moves the NBBO actively higher or lower, in cases pushing the bid/offer range up to 10% higher without even one trade ever having occurred, simply by masking a big block order which other algos interpret as bid interest and pull all offers progressively or step function higher (or vice versa, although we have rarely if ever seen the walking down of a stock over the past 18 months). It is as if the HFT lobby has been given the green light by the powers that be that it is safe to activate merely the bid-size quote stuffing algorithms, and not worry: the fact that the market is so one sided in its quote stuffing patterns is sufficient reason to worry of a concerted effort to push stocks higher, initiated from the very top, and effected by not only the Primary Dealer community but by the end-market "liquidity providers." Today, courtesy of Nanex we demonstrate that this type of illegal stock manipulation continues rampant to this very day, and the SEC still fails to acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices, which have given up responding to fundamentals and merely move up or down based on quote stuffing interventions by those who plead innocence and claim to only be providing liquidity. Well take a look at the millions in fake, and thus illegal, bids demonstrated below and tell us just how any of this manipulation is "providing liquidity" - the second the patterns break, the algos responsible for the churn pattern disappear, thus eliminating numerous levels of so called bid liquidity below the NBBO: break enough patterns and you have another flash crash as the market once again goes bidless.

    So while the SEC continues to pander merely to the interests of the market manipulation lobby, and is now doing it in more style than ever by refusing to answer to FOIA requests going forward, here is Nanex with yet more evidence that we no longer have a market, but merely a daily recurring crime scene.

    In our original Flash Crash Analysis report, we dedicated a section to an observed phenomena we termed "Quote Stuffing", in which bursts of quotes (at very high rates) with extremely unusual characteristics were observed.

    As we continue to monitor the markets for evidence of Quote Stuffing and Strange Sequences (Crop Circles), we find that there are dozens if not hundreds of examples to choose from on any given day. As such, this page will be updated often with charts demonstrating this activity.

    The common theme with the charts shown on this page is they are obviously all generated in code and are algorithmic. Some demonstrate bizarre price or size cycling, some demonstrate large burst of quotes in extremely short time frames and some will demonstrate both. In most cases these sequences are from a single exchange with no other exchange quoting in the same time frame.

     
    This is the way the market runs now.  Machines are in control.  Sad but true.  Too bad these machines have no brains and can run amok causing all sorts of market anomalies and crashes.  These computers generate mucho profit for Wall Street.  In fact it leads to this nonsense:
     
     

    Bank of America Had Perfect Trading Period in First Quarter

    May 05, 2011
     
    (Updates to add trading revenue in the third paragraph)

    May 5 (Bloomberg) -- Bank of America Corp., the first of the largest U.S. banks to disclose how many trading days yielded gains in the first quarter, had a perfect record for the period.

    Trading-related revenue was positive every day and exceeded $25 million on 98 percent of days during the year’s first three months, the Charlotte, North Carolina-based lender said today in a filing with the U.S. Securities and Exchange Commission. In 2010, it had gains on 90 percent of trading days, with perfect records in that year’s first and third quarters, according to previous filings.

     

    JPMorgan Joins Bank of America in Perfect Record for First-Quarter Trading

    By Michael J. Moore - May 6, 2011 10:49 AM ET  
  •  

    Signage is displayed outside of JPMorgan Chase & Co. headquarters in New York. Photographer: JB Reed/Bloomberg

    JPMorgan Chase & Co. (JPM), the second- largest U.S. bank by assets, joined Bank of America Corp. (BAC) in reporting a perfect trading period in the first quarter.

    JPMorgan’s revenue linked to market risk was higher than $160 million on seven of the period’s 64 trading days, the New York-based lender said today in a filing with the U.S. Securities and Exchange Commission. The average daily revenue was $112 million, according to the filing.

     
    So we have TWO banks that had PERFECT trading records for a whole quarter!  Of course this is impossible without cheating.  Trading, and I do a LOT of trading, is not easy.  Being right 60% of the time can provide huge gains.  Being right 100% of the time?  Not possible.  This HFT is one of the ways they do it.  One day, some day, these machines will crash us again.
     
    I truly believe that the Fed won't have a problem with the market crashing as this will provide the impetus for QE3 to "save the system."  For me, I'll just watch from the sidelines.  Once QE3 is announced, it will be safe to jump back into the broad markets as inflation starts up again.
     
    Interest Rates and the Dollar
     
    Speaking of the Fed, one of their mandates is the preservation of the purchasing power of the dollar.  They have absolutely sucked at this as I've detailed on numerous occasions.  If your job was to protect chickens and your boss came back and you lost 98% of them, I don't think he'd keep you as an employee.  That's the Fed's record since inception.  The dollar's buying power is down 98%.  Their poor performance has continued over the last year, until just recently.  Cue chart:
     
     
    This is a graph of the dollar index.  This is something that you hear a lot about and may not even know what it is.  It's a composite of the exchange rates between various currencies around the world.  The exchange rate is how much of a foreign currency you would receive for a dollar at any given day, and these rates change constantly.  As the dollar gains value against the other currencies, the dollar index rises and vice versa.  Here is a graph showing the components:
     
     
    The largest component is the Euro, which is actually 16 separate countries combined.  Enough with the background.
     
    As you see in the chart the dollar has bounced very fast, and this index typically moves veeerrrrrrry slow, so that is significant.  This is merely a blip on the overall downtrend in the dollar, but it causing havoc in commodity markets.  As the dollar rises, our interest rates can rise which is good for the dollar, but very bad for those on the debt train.  These people NEED low interest rates.  Especially considering something like this:
     
    Zillow
     
    SEATTLE, May 9, 2011 /PRNewswire/ -- Home values in the United States fell faster in the first quarter of 2011 than they have in any quarter since 2008, when the housing market experienced its worst performance, according to Zillow's first quarter Real Estate Market Reports(1). The Zillow Home Value Index(2) fell 3 percent from the fourth quarter of 2010 to the first quarter of 2011, and declined 8.2 percent year-over-year to $169,600. Home values have fallen 29.5 percent since they peaked in June 2006.

    Negative equity reached a new high mark with 28.4 percent of single-family homeowners with mortgages underwater at the end of the first quarter, up from 27 percent in the fourth quarter of 2010. A homeowner is in negative equity when they owe more on their mortgage than their home is worth.

    Meanwhile, foreclosures(3) rose throughout the first quarter as banks unfroze moratoriums and allowed foreclosures to resume. Foreclosures had fallen in late 2010 due to the slew of moratoriums brought about by the "robo-signing" controversy. In March, one out of every 1,000 homes in the country was lost to foreclosure.

    With substantial home value declines, as well as increasing negative equity and foreclosures, Zillow forecasts show it is unlikely that home values will reach a bottom in 2011. First quarter data has prompted Zillow to revise its forecast, now predicting a bottom in 2012, at the earliest.

     
    More and more people are going upside down on their homes.  As I've been saying for awhile, houses are not at a bottom yet and won't be for some time.  There are millions of uninhabited homes in this country which MUST be worked off the market before things can turn around and move higher.  This is just gravity.  If interest rates rise, and as inflation rises, this will have to happen, houses become even more unaffordable.  Think about this for a second.  If a family wants to buy a home today and 30 year interest rates are about 4.25%, a payment on a $250,000 loan is $1230 for interest and principle.  A simple 3 percent rise in interest rates would make the payment $1705.  That is nearly $500 more a month.  This has a direct impact on house prices.  As the rates dropped in the early 2000's houses were artificially driven higher in price.  
     
    Most people don't buy a house based on the price but on the monthly payment they are able to pay.  Obviously, if the payments move up by 38%, this has to move house prices down by a similar amount.  In our example, if the couple could afford the $1230 a month, their affordable loan at 7.25% would only be $180,000.  I don't think people realize how easy it would be for interest rates to climb this amount.  I bought my first house in 1988 and my rate was 10.5%.  You don't want to know how much of a loan the couple could afford at this rate but I'll tell you anyway...$135,000. 
     
    This means that housing prices would have to fall nearly 50% from current levels.  This is NOT impossible.  It has happened before.  If you have a mortgage, it is highly advantageous to lock in these low rates for as long as possible.  Don't overextend as some encourage, as the future is unknowable and you want to make sure you can afford the loan under ANY circumstances.  I believe hyperinflation is on the way, but there are no guarantees.
     
     
     
    Metals and Commodities
      
    The commodities have been an incredible roller coaster.  I believe that they will continue down for awhile.  This is the Fed's plan to try and set up QE3.  They can't have the commodities at record levels and then start QE3, that would set off a tsunami of buying which is the last thing the Fed wants.  Keep the sheep on the treadmill.  They must take these down for now.  I think this will last for a very short period of time and will be accomplished through the paper markets.  If you have money ready to invest, it would probably be better to hold off.  For the metals, the summer is traditionally the slow period and gold and silver stocks are usually weak.  If the Fed takes gold and silver down lower, this will accentuate this drop.  THIS will be the time pounce.  I'm not saying to sell anything gold/silver related, unless you have a high margin level. Of course, you should not sell anything in physical category as these are your life boats. 
     
    Gold and silver have a long way to go on the upside and there is really no stopping them.  They can only be slowed with trickery and paper deceptions.  The real stuff will win out and true price discovery will be in effect.  Expect to see many more of these in the coming years:
     
     
     
     
    Positions
     
    GORO  (closed $27.00, down $.16, average price paid $6)
     
    This past week GORO reported their first quarter results.  Rather than just cut and pasting the press release here is my take:
     
    Negatives:

    1.  Didn't want to commit to over 500 tons per day of processing for 2011.  (would have liked to see a potential to get above 500)
    2.  Not much exploration going on.  Looks like that is kicking in now, but would have been nice to see more than $500k spent.
    3.  Only has 850 tons per day processing as a goal for 2012.  That seems low to me.

    Positives:

    1.  Stoped ore will be much richer than developmental ore which is being used now.  (this is the ore in the actual vein rather than from the digging of the tunnel to the vein)
    2.  Water all pumped out and cleaned down to level 6.
    3.  Engineers involved to stop a flood from happening again.
    4.  Manuel, their foreman is basically bringing in experienced personnel from other companies (poaching) by paying more.
    5.  30 days per level to construct.  This means that once the mine is clean, and it looks like that will take another month, then we could reach level 12 or so by year's end.
    6.   El Rey (another of their properties) work will restart once mine is back to form.  2/3-3/4 ounce per ton of gold after processing at 100-200 tpd would yield 21,000-49,000 ounces au eq a year of dore gold by itself!.
    7.  Even with a not so great quarter they STILL were able to pay all expenses on a GAAP basis.
    8.  43-101 work begun.  Hired engineering firm to help.  Gave a rough goal of year's end.  This document will open up the Canadian investment front which is very big in mining.
    9.  Says they are pleased with sampling of veins at the upper levels.
    10. First profit.
    11.  Able to increase dividend to $0.04 a month.  This speaks volumes to me.

    Overall, I am pleased.  I'd say that as the year progresses we will see much more production and higher profits.  Watch the dividend as that will be your clue as to what's really going on. If this were to be increased to $0.05, that would be super bullish.  I have no problem buying at these levels.  Of course it could also fall going into summer, so use some caution.
     
     
    Mexus Gold  (closed $.20, down .01, average price paid, $.22) 
     
    There was news from Mexus this week:
     
    Mexus Gold U.S. Updates Progress of Submarine Cable Recovery Crew, the Eight Brothers Mine in Sonora, Mexico and Caborca Santa Elena Project Update
     

    CARSON CITY, Nev., May 9, 2011 (GLOBE NEWSWIRE) -- Mexus Gold U.S. (OTCBB:MXSG - News) is a company engaged in the evaluation, acquisitions, exploration and development of mining properties and conducts salvage operations for the recovery of precious metals. C.E.O. Paul Thomson updates the following projects.

    Submarine Cable Recovery -- Project update

    C.E.O. Paul Thompson stated, "I am pleased to announce that the Submarine Cable Recovery Crew, headed by Captain Brain Farcy and Ken Setters along with crew has successfully located cable in the water off Washington State and at this time is proceeding forward with the lifting process." He went on to state, "Meanwhile the survey boat is being ready for shipment to Alaska with a dive team."

    Eight Brothers Mine, Sonora Mexico -- Project update

    Mr. Thompson reports, "While in Mexico the Eight Brothers Mining crew has been hard at work on grading the project and is nearly completed the bypass channel around the Eight Brothers Mine along with the special recovery equipment."

    Caborca Mine Santa Elena Mexico -- Project up date

    Friday May 6th, 2011 Mr. Thompson and the Caborca mine crew started building the site were the Trammel and Placer equipment will be located. In doing so the sons of the ranch owner showed Mr. Thompson how they use metal detector in the path to locate gold nuggets on the property. In the first ten minutes a 1.5 gr. Nugget was recovered where the placer plant will be located.

     
    Mexus has a lot of irons in the fire.  This is very unusual for such a small company and I believe that is slowing things down.  They have done what they said they would do but it has taken a few months longer than originally thought.  This is completely normal for a small outfit.  In good news, the Caleb, their tug boat, was out and about this past week.  They were searching for cables in Seattle area.  They were rumored to have found some of the bigger diameter cable.  This cable will be at least 3 times more valuable than the thinner stuff from last fall.  I expect to see the cable pulling to start up soon as indicated in the press release.  I fully expect that we will see some income this year.  How much they can actually produce will go a long way towards determining the share price.  As income is VERY rare in peewee mining companies, I believe any significant income will be played out in the share price.  I want to reiterate that this is a very risky stock with a high return potential but a nonzero chance of being a complete bust.  A major failure in the cable pulling, coupled with no gold production would take this stock much lower.  Do not put any money in here that you wouldn't mind losing. 
     
    Alexco Resource Corporation -  AXU  (New company, initiating an accumulate, current price $7.90) 
     
    This is a brand new company that has caught my interest.  They are a silver producer in Canada.  They have recently reported great results and the smashing of silver has brought the price down over 20%.  I believe this stock is very undervalued and has low risk.  As I stated above, we could see the stocks sink lower into the summer so buy in slowly, maybe 1/3 now and then wait another month or 2 to see what happens.  If the price drops below $6.50, it would be a tremendous buy and there would be no need to wait any longer to purchase.  I will be having a full write up about Alexco in the near future.  This is a stock in the category of GORO and not Mexus. 
     
    Stocks    (Current status, out, sold on March 18)
     
    Physical Gold  (Closed $1,495,  flat,  average price paid $395)
     
    Physical Silver  (Closed $35.30,  down $0.32,  average price paid $5.31)
     
    I'll finish this week with another video out of China showing someone with no quit.  Hopefully this can inspire some of you to excel this week!