Curried Wealth Building
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June 12, 2011
Issue 151  -  Is a Large Correction Too Obvious?
With the stock market now down for 6 straight weeks, I see numerous calls for a large further fall.  In fact, I am expecting a large fall.  This set me to thinking that the obvious is usually wrong, especially in the investment world.  There are many indicators that we are due for a larger correction.  First the margin levels are very high.  This is the amount of money borrowed to buy other stocks.  This is at a higher level than in 2007 before the fall.  Secondly, the cash position of the mutual funds is very low: (contrary investor)
There just isn't enough money to buy stocks, right?  Lastly there are fewer and fewer stocks making new 52 week highs.  Generally this does indicate things are going to get bad.  So what if everyone is wrong?  Everyone can't be right, so logic says they are wrong.  This would mean that the stock market will head higher sooner, rather than later. 
What could be a catalyst for that?  Well obviously QE3.  What if all this talk of QE3 not being needed is just a diversion.  A surprize QE3 will have A LOT more oomph than an expected one.  If a QE3 is announced unexpectedly, there will be one hell of a rally as then much higher inflation is on the way. 
I am going to start easing back into the stock market this week, maybe 20% or so. 
A resumption of the money printing is really the only viable path as we, and a lot of other countries are buried in debt and liabilities:
This chart shows 2008/9 levels and today they would only be worse, but you can see the sheer amount of debt is just untenable.  There must be relief to this load and inflation is the ONLY palatable alternative.  Deflation would just make the whole world sink into a depression greater than the dark ages.  No one benefits from that as rioting, anarchy and utter chaos would result.  The only way to rid the world of this debt is inflation.  Inflation is on the way.  If they have to issue money by check, debit card, helicoptor, whatever, it will happen.  This will allow the elites to get there money out first and preserve their wealth.  That is the most important thing to them. 
How to do that?  Hard assets.  Gold, silver, land, oil, food, anything that you can touch or hold.  All other assets will fall or rise much slower than the inflation rate.  To show this in a much clearer way, another chart:
This shows debt verus liabilities for various countries.  Liabilities are social security type programs, medicare type programs and government pensions.  As you can see, these types of things absolutely dwarf the "debt."  Usually on the order of 10 times greater.  How can these countries make good on these promises.  The ONLY way is inflation.  Pay these off in ever cheaper currencies.  This prevents riots as the masses don't understand that inflation is the same as a tax.
The ultimate driver to this outcome is the housing market.  Here is the latest on that front:

66% Of Las Vegas Mortgages Are Underwater, 27.7% Of Total US Housing Debt Has Negative And Near-Negative Equity

Submitted by Tyler Durden

Following yesterday's news out of Zillow of a 0.77% drop in April home values compared to March, today we get an update from CoreLogic which in turn looks at the latest trends on "underwater" (or negative equity) mortgages in the US. In summary: "10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011, down slightly from 11.1 million, or 23.1 percent, in the fourth quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the first quarter. Together, negative equity and near-negative equity mortgages accounted for 27.7 percent of all residential properties with a mortgage nationwide. In the fourth quarter, these two categories stood at 27.9 percent." The most impacted state is Nevada, which has 62.6% of all mortgages underwater (with another 4.8% in near-negative), followed by Arizona, Florida and Michigan. California is fifth with 30.9% of all homes underwater. We doubt these millions of "homeowners" are benefiting much from the wealth effect.

Highlights from the report:

  • Data Highlights Nevada had the highest negative equity percentage with 63 percent of all mortgaged properties underwater, followed by Arizona (50 percent), Florida (46 percent), Michigan (36 percent) and California (31 percent). The negative equity share in the top 5 states was 39 percent, down from 40 percent in the fourth quarter. Excluding the top 5 states, the negative equity share was 16 percent in the current and previous quarter.
  • Although the slight decline in the national negative equity share was primarily due to slight improvements in the hardest hit states, which include Nevada (-2.7 percentage points), Arizona (-1.3 percentage points) and Florida (-1.3 percentage points), the majority of states either remained unchanged or had minor increases.
  • Las Vegas led the nation with a 66 percent negative equity share, followed by Stockton (56 percent), Phoenix (55 percent), Modesto (55 percent) and Reno (54 percent). Outside metropolitan areas in the top 5 negative equity states, the metropolitan markets with the highest negative equity shares include Greeley, CO (38 percent), Boise (36 percent), and Atlanta (35 percent).
  • While the average negative equity borrower was upside down by $65,000, there were wide disparities by state (Figure 3). New York borrowers were upside down by an average of $129,000, the highest average in the nation, followed by other high housing cost states: Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000) and California ($93,000). Ohio’s negative equity borrowers were upside down by $31,000, the lowest average in the nation, followed by Indiana ($34,000) and Minnesota ($38,000).
  • Not only was the decline in prices a clear force driving negative equity, but borrower equity extraction also significantly increased the risk of a negative equity position. While only 18 percent of borrowers with no home equity loans were underwater at the end of the first quarter, 38 percent of borrowers with home equity loans were in a negative equity position. Over 40 percent (4.5 million) of all negative equity borrowers have home equity loans.
  • While borrowers with positive equity averaged 1.2 loans per property (Figure 4), this incidence rises to 1.6 loans per property for negative equity borrowers and it continues to rise the deeper the property is underwater.
  • Not only does the incidence of home equity loans raise the probability of a negative equity position, but it also raises the severity of that position. A negative equity borrower without home equity loans is upside down by an average of $52,000, versus an upside down average of $83,000 for a negative equity borrower with home equity.
  • The default rate generally rises as the current combined loan-to-value ratio (CLTV) increases; however there are differences between default rates for negative equity borrowers with home equity loans vs. those without (Figure 5). At moderate levels of negative equity (up to 115 percent CLTV), the default rate for borrowers with home equity loans is slightly higher than those without. However, for those with severe negative equity (115 percent CLTV and above), the relationship reverses and the default rates for mortgage loans without home equity perform slightly worse.
There is NO other way out of this mess except inflation.  66% of owners underwater!!!  How can you possibly get out of this huge burden of debt WITHOUT inflation.  I can think of no other way.  There may be another way, but I haven't seen it.  Politicians ALWAYS take the course of least resistance while at the same time protecting their masters, the banks.

Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went

Submitted by Tyler Durden
Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank. Having been thus exposed, many speculated that going forward the US central bank would primarily focus its "rescue" efforts on US banks, not US-based (or local branches) of foreign (read European) banks: after all that's what the ECB is for, while the Fed's role is to stimulate US employment and to keep US inflation modest. And furthermore, should the ECB need to bail out its banks, it could simply do what the Fed does, and monetize debt, thus boosting its assets, while concurrently expanding its excess reserves thus generating fungible capital which would go to European banks. Wrong. Below we present that not only has the Fed's bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal. In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!
From the same story, here is the graph showing the theft:
As I said all along, the QE efforts are only for the banks.  Remembering the Federal Reserve is owned partially by foreign banks and this chart is no surprize.  So as this giant debt ball comes crashing to the ground do they let the entire population sink into a debt abyss?  Unlikely.  Inflation is the only way to save the day.  So it shall be.  Position your portfolio accordingly.
GORO  (closed $24.20, down $2.95, average price paid $6)
I am fairly convinced that GORO is under assault from a professional shorting operation.  This is a scheme used by hedge funds to drive a stock down in price so they can profit.  If you short a stock you have sold it without having it.  The shares were borrowed from someone else.  Eventually you must restore the shares to the lender.  If the price has fallen, you pay less to buy the shares back and you get to keep the difference.  To pull this off requires a fairly elaborate plan.  First the shares are shorted.  More shares are shorted as the price falls.  In conjunction with this, the message boards are populated with a plant(s) to create FUD. (fear, uncertainty and doubt)   This is done in a variey of ways. The most common is just many, many posts with cries of Scam! and P.O.S!  This is usually in conjunction with more sophisticated bashing.  Usually done by 1 or more intelligent posters who spend a LOT of time on the message boards yet claim they have no shares.  They merely want to "warn" the average investor the horror that is the company in question.
More shares are shorted at strategic times to create more doubt, which triggers some to sell.  This whole process (and this is the case with GORO) occurs with literally NO news from the company.  The stock is driven down on the basis of no new news and the shorting activity.  As the price falls, more investors get scared and sell.  This drives the price even lower.  This can take place over many months or several weeks.  Eventually, the stock is driven down  violently, which shakes out even more shares.  At this point the shorts are covering, buying the shares back.  This is very easy as they are doing it by buying the shares from the scard sellers.  At this point the stock can begin to climb again.  This is often done numerous times over a fairly long time period and is most successful on a stock such as GORO which has risen on expectations and is having a rough patch. 
Eventually the shorts give up when real news is coming up and they move on to greener pastures.  I expect to see this last surge down shortly.  
Another operation, which I have seen in the past, is the same as above, but the hedge fund is ACCUMULATING shares.  They sell shares at strategic times to scare people who then sell.  This operation also uses the message board plants.  This is a very bullish scenario for a stock as the price will quickly rise when the operation stops.  This happens when the hedge fund has filled their target quota of shares.
Either of these scenarios is only a short term phenomeon and should not scare long term investors.  In fact this would be an excellent time to add to your position.  The price could fall further, but I view the $16 level as the worst case scenario and would load the boat there.  
Mexus Gold  (closed $.19, down $.01, average price paid, $.22) 
Alexco Resource Corporation -  AXU  (closed $7.32, down .39, recommended at $7.90) 
Stocks    (Current status, out, sold on March 18)
Planning to buy back 20% this week.
Physical Gold  (Closed $1,532,  down $8,  average price paid $395)
Physical Silver  (Closed $36.20,  up $1.01,  average price paid $5.31)
I'll close with a very cool video of another rube goldberg machine done in a music video.  This is the largest one I've ever seen and the music is kind of catchy too.  (thanks to Craig E.)  Have a great week!