Curried Wealth Building
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December 4, 2011
Issue 176  -  Miscellaneous Thoughts
 
 
This week I have limited time so I'm going to hit some issues very quickly.
 
Housing
 
Housing has been getting some surprisingly good press lately.  Sorry to rain on the comeback parade, but things could get worse soon:
 
 

New Wave Of Mortgage Defaults On Horizon

By Ben Popken on November 9, 2011 11:00 AM0 views
 Some of the crappiest mortgages ever made were issued in 2006, and right now those 5-year introductory teaser periods are expiring. That's leading to a 300% increase in monthly payments for already strapped borrowers, and it's what's driving the first increase in delinquent mortgages since 2009, a banking expert tells Credit.com.

By 2006 and 2007, lenders had run out of most eligible borrowers and started chucking their lending standards out the window. Loans were being made to people who were already spending more than 40% of their income on the debt they already had. No matter, the loans could be bundled, securitized, blessed by lazy ratings agencies, and sold off to pension plans and international investors. A swath of the loans being made at the time had introductory teaser periods where the borrower didn't have to pay towards the principal and interest could be allowed to rack up. The intro period was often about five years.

Well it's been about five years and now the chickens have come home to roost. The monthly payments are shooting up 300% and we're seeing the delinquencies. The defaults will come down the road, and then the foreclosures. The damper on home prices could last until 2015, says Credit.com.

"The good news is we're getting all this behind us," Dr. Joseph R. Mason, a banking professor at Louisiana State University and a senior fellow at The Wharton School told Credit.com. "But it takes time."

 
Yes, it's good news unless you have one of these "great" loans.  This will only add to the strain on the housing market and should quell any uptick in prices.  Keep in mind there are also millions of bank owned properties that are being held off the market so that they don't have to put their real value on the books.  This is also a reason they don't kick more people out of their homes.  They don't want to sell the property and show it's real value.  They can't afford that because it will drive prices down even faster:
 

Average New House Price Drops To Lowest Since 2003



Today's new annualized home sales print was 307k, below expectations of 315k (yet oddly better than last month's downward revised which moved from 313k to 303k, wink wink nudge nudge Census bureau). This is not to be confused with the actual number of houses sold which came at a whopping 25k, and the third month in a row in which under 500 homes sold in the over $750,000 category. Yet the most notable data point was the average new house sale price which dropped to $242,300. This is the lowest price since 2003! Something tells us that an MBS LSAP is pretty much guaranteed at this point.
 
I see housing going back to 1998 levels as they overshoot to the downside.  That is when it will make the most sense to buy properties.  One chart to give more credence to the fact that housing is nowhere near a comeback:
 
 
 
Banking Truth
 
The real reason banks are existent today is little known in the general populace.  Here is short blurb with a lot of truth:
 

The Real Reason Eurozone Countries Are Drowning in Debt

Why should banks be able to borrow at 1.25% from the E.C.B.’s unlimited fountain of euros, while the tap is closed for governments? The conventional argument is that for governments to borrow money created by their own central banks would be “inflationary.” But private banks create the money they lend just as government-owned central banks do. Private banks issue money in the form of “bank credit” on their books, and they often do this before they have the liquidity to back the loans. Then they borrow from wherever they can get funds most cheaply. When banks borrow from the E.C.B. as lender of last resort, the E.C.B. “prints money” just as it would if it were lending to governments directly.

The burgeoning debts of the Eurozone countries are being blamed on their large welfare states, but these social systems were set up before the 1970s, when European governments had very little national debt. Their national debts shot up, not because they spent on social services, but because they switched bankers. Before the 1970s, European governments borrowed from their own central banks. The money was effectively interest-free, since they owned the banks and got the profits back as dividends. After the European Monetary Union was established, member countries had to borrow from private banks at interest—often substantial interest.

And the result? Interest totals for Eurozone countries are not readily accessible; but for France, at least, the total sum paid in interest since the 1970s appears to be as great as the French federal debt itself. That means that if the French government had been borrowing from its central bank all along, it could have been debt-free today
And so it goes.  This is so obvious if you think about it logically, that it is amazing that more don't see it.  Why can banks lend to themselves at lower and lower rates while countries (who created the central banks) are cut off?  It just shows you who runs whom.
 
More Banking Truth
 
That gold is a threat to the banking system is self evident to a thinking person but is denied categorically by most.  Finally some proof that the obvious is correct:  (GATA letter)
 
 Dear Friend of GATA and Gold:

Denying a recent freedom-of-information request from a citizen of the United Kingdom, the Bank of England has insisted on secrecy for its swapping and leasing of gold from the national reserves.

Replying on October 24 to GATA supporter James Burn, who sought a more precise accounting of the British gold reserves, Bank of England spokeswoman Jackie Keating wrote that the gold swap and leasing information is "market sensitive" and its disclosure "would allow enquirers to find out what gold transactions have been taking place." This, the bank's spokesman wrote, would impair the interests of both the British government and the bank's "private customers," to whom the bank "owes a duty of confidentiality."

The statement thus confirms that the Bank of England is surreptitiously active in the gold market on behalf of both the British government and the bank's "private customers" and that the interest of British citizens in knowing how their government is meddling in supposedly free markets is quite secondary.

Thanks to our friend Bern, it thus has been demonstrated again that there is plenty of financial journalism to be done simply by pressing central banks with questions about their surreptitious activity in the gold market. Who will be the first mainstream financial journalist to attempt this and to have enough resentment about being shut out of the public's business that he publishes a news story about it? Is there such a mainstream financial journalist willing to risk his invitation to a few very nice Christmas parties and his access to highly placed official sources?

Of course it makes no sense if banks aren't involved in the gold market secretly to withhold these records of sales and leasing.  Banks are aligned against the gold market.  Please accept this and act upon it.
 
Employment Nonsense
 
Well, well, well, the unemployment fell to 8.6%, isn't that special?  Not really.  To understand, it only takes one concept that you need to wrap your head around: if you reduce the denominator in a fraction, the percentage will go down.  The Bureau of Labor Statistics basically just removed people from the roles, in fact over 300 thousand.  So those 300,000+ people are now on the dole and I'm supposed to be jumping up and down that the unemployment rate dropped?  Gag.  VERY few understand this and even fewer will mention it on television.  Here are some charts that explain the true situation quite well:
 
 
 
Lets see here, duration of unemployment at highest ever and the participation near the all time lows.  Does that sound like good news?  Another one:
 
 
Are we led to believe these people have retired and moved to their own islands?  What are they doing?  86 million people not in the work force?  For a government that is up against it as far as revenues, this chart doesn't bode well.
 
Fraud
 
Confirmation of the cronyism that is our current political/Wall Street environment:
 

Hank Paulson Tipped Off The Goldman-Led "Plunge Protection Team" About Fannie Bankruptcy 7 Weeks In Advance

Before we get into the details of Mr Mindich's curious relationship with the government, here is the gist of the BusinessWeek piece, which as noted focuses on Paulson who "said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” -- a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets."

The gathering comprised some of Wall Street's most storied investors. Mindich, a former chief strategy officer of New York- based Goldman Sachs, started Eton Park in 2004 with $3.5 billion, at the time one of the biggest hedge-fund launches ever. [Dinakar] Singh, a former head of Goldman's proprietary-trading desk, also began his fund in 2004, in partnership with private- equity firm Texas Pacific Group Ltd. Lone Pine's [Stephen] Mandel worked as a retail analyst at Goldman before joining Julian Robertson's Tiger Management LLC, one of the most successful hedge funds of the 1980s and 1990s. He started his own firm in 1997. [Daniel] Och was co-head of U.S. equity trading at Goldman before founding Och-Ziff in 1994. The publicly listed firm managed $28.9 billion in November. One other Goldman Sachs alumnus was at the meeting: Frank Brosens, founder and principal of Taconic Capital Advisors LP, who worked at Goldman as an arbitrageur and who was a protege of Robert Rubin, who went on to become Treasury secretary.

In other words the point of the meeting was nothing short of the former Goldman CEO telling all his former Goldman colleagues just what he was planning on doing in his capacity as Treasury Secretary.

Others also benefited:

Non-Goldman Sachs alumni who attended included short seller James Chanos of Kynikos Associates Ltd., who helped uncover the Enron Corp. accounting fraud; GSO Capital Partners LP co-founder Bennett Goodman, who sold his firm to Blackstone Group LP in early 2008; Roger Altman, chairman and founder of New York investment bank Evercore Partners Inc.; and Steven Rattner, a co-founder of private-equity firm Quadrangle Group LLC, who went on to serve as head of the U.S. government's Automotive Task Force. Another person in attendance: Michele Davis, then-assistant secretary for public affairs at the Treasury Department, who now represents Paulson as a managing partner at public relations firm Brunswick Group Inc. In an e-mail response to Bloomberg Markets, she referred all questions to Paulson's book on the financial crisis, “On the Brink” (Business Plus, 2010), which makes no mention of the Eton Park meeting.

No mention? What a shocker. Perhaps it may have to do with this:

The fund manager who described the meeting left after coffee and called his lawyer. The attorney's quick conclusion: Paulson's talk was material nonpublic information, and his client should immediately stop trading the shares of Washington- based Fannie and McLean, Virginia-based Freddie.

 

The manager who described the Eton Park meeting says he also discussed it with an investigator from the FCIC. The discussion was confirmed by a former FCIC employee.

 
Now you don't suppose anyone benefited from this illegally?  Of course not.  They would be too worried about the authorities putting them in jail.  Wait.  No one's watching them?  No one's going to jail or even being indicted?  They can do whatever they want without fear?  Nevermind, they made a killing.
 
Fraud 2
 
Thanks to Craig for this tip.  More confirmation of the morass of immorality into which we've fallen:
 
Audit of the Federal Reserve Reveals $16 Trillion in Secret Bailouts
The first ever GAO(Government Accountability Office) audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill(HR1207), so that a complete audit would not be carried out. Ben Bernanke(pictured to the right), Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets.
 
Nevertheless, the results of the first audit in the Federal Reserve’s nearly 100 year history were posted on Senator Sander’s webpage earlier this morning.What was revealed in the audit was startling:$16,000,000,000,000.00 had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious - the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is "only" $14.5 trillion. The budget that is being debated so heavily in Congress and the Senate is "only" $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world.In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies.
 
That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion."This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else." - Bernie Sanders (I-VT)When you have conservative Republican stalwarts like Jim DeMint(R-SC) and Ron Paul(R-TX) as well as self identified Democratic socialists like Bernie Sanders all fighting against the Federal Reserve, you know that it is no longer an issue of Right versus Left. When you have every single member of the Republican Party in Congress and progressive Congressmen like Dennis Kucinich sponsoring a bill to audit the Federal Reserve, you realize that the Federal Reserve is an entity onto itself, which has no oversight and no accountability.Americans should be swelled with anger and outrage at the abysmal state of affairs when an unelected group of bankers can create money out of thin air and give it out to megabanks and supercorporations like Halloween candy.
 
If the Federal Reserve and the bankers who control it believe that they can continue to devalue the savings of Americans and continue to destroy the US economy, they will have to face the realization that their trillion dollar printing presses will eventually plunder the world economy.The list of institutions that received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and are as follows..
 
Citigroup: $2.5 trillion ($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America: $1.344 trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)
and many many more including banks in Belgium of all places
 
That's fantastic isn't it?  Secret bailouts totaling TRILLIONS!!!  And the little guy gets screwed left and right.  Don't worry about it though, because they are looking out for you.....yeah right.
 
GORO
 
Gold Resources is still in great shape.  There is no reason to sell if you have a long term time horizon for the money.  Even if there is a global collapse, this stock will continue to pay a dividend and grow its output ounces.  They could be paying a $2 dividend per share in 2 years.  The shorts will eventually leave and move on to other targets.  We could (and probably will) go lower from here, but unless you have another place to get this type of growing dividend, I don't recommend it. 
 
Alexco
 
Alexco is trading in lock step with the gold and silver markets.  It has been weak lately which is no surprise as other gold and silver companies have been weak also.  This is a terrific company that should be a homerun in the next couple years.  They don't pay a dividend, but they have gigantic growth potential.  I wouldn't mess with trading this one either unless you have a huge position. 
 
Mexus
 
Mexus has definitely been a huge disappointment this year.  The hopes of large quantities of cable piling up on the barge have been dashed.  They are now moving to the bigger cable.  The smaller cable, and this is conjecture, must be harder to pull than anticipated.  I believe that there are frequent stops required to pull this stuff up and the thinner diameter just isn't as profitable as it needs to be.  The good news here is that the company must think that pulling the larger cable WILL be profitable.  Otherwise they would have abandoned the cable pulling entirely.  They really didn't spend a lot of money on the effort and it was worth the gamble.  We should see in the next 12 months whether the larger cable is a different story.
 
On another  positive note, they are mining gold.  How much is the big question.  The company has been less than forthcoming with those details.  Without a projection and real results, it just isn't possible to accurately gauge the value of this effort.  I have large position and it would be difficult to exit the stock so I'm holding on.  At this price its also attractive to take a chance with some play money.  As difficult as it seems to believe, this company could still be a homerun.  At this point I'd settle for a single, but the potential is still there.
 
 
Stocks 
 
The stock market is a HUGE gamble at this point.  I'm out now and have no short positions.  I think the markets are extremely vulnerable to a large sell-off but it could just as easily continue higher from the "Santa rally."  If I could do it, I would remove my 401k funds and place them in physical gold and silver.  Unfortunately, this isn't possible with my plan.  I'm not advising you to do that, but I do believe that this strategy would more than make up for the taxes and penalties versus keeping these funds in general broad stock funds.  If a giant global sell off were to drag gold and silver down (and that probably would happen) I would be moving heaven and earth to get as much paper wealth into the physical.  Of course at that time, you will have to have nerves of steel as the panic and fear will be extreme.
 
New Position
 
 
This past week I initiated a new position.  The company is called MBIA Inc and is NOT a commodity play.  This company writes bond and mortgage insurance.  At present they are prohibited from writing new policies.  So why would I view that as good trade?  I found out about this company from Zero Hedge and I use that site for supporting arguments to purchase.  There are a couple compelling reasons to own this company.
 
1.  Huge settlement in the works.  MBIA writes insurance on bonds and mortgages.  When a company writes a policy, they require that certain requirements be met including collateral and proof of income.  Obviously, a lot of fraud occurred in these markets that make the policies written null and void.  The company is in the process of settling many lawsuits against the big banks (like Bank of America) for damages.  The potential here is huge as I've seen estimates of 3-5 billion dollars.  This, with a current market cap of 2 billion dollars.  This is a huge catalyst to the price of the stock.
 
2.  Huge Short Position, from Zerohedge:
 
It is no secret that MBIA has long been one of our favorite longs (and by longs it is really a contrarian bet on various bad things happening - our latest piece can be found here). Today, we are happy to see that BTIG has come out with an initiating coverage report on the name following virtually all the same logic we presented two months ago, only with a price target that makes even us blush: $22.50. To wit: "We are initiating coverage of MBIA with a BUY rating and a $22.50 price target which equates to a 1.0x multiple of 2012E year-end stand-alone adjusted per share book value of National ($26.26) less the holding company net debt per share ($3.73). Our valuation is based on our view that if MBIA is able to resolve the fraudulent conveyance and Article 78 cases challenging its transformation either through a settlement or a court judgment, the value of National will flow up to the holding company and to shareholders.... Given our view that the challenges to MBIA?s transformation will be resolved through a settlement and that its shares could nearly triple in a post-announcement short squeeze, we believe MBIA offers one of the market's most compelling risk-reward propositions. Following almost four years of uncertainty during which its status as a viable entity has been in question, MBIA appears closer to resolving the various challenges it faces, unlocking the value of National Public Finance Guaranty Corporation – the company?s public finance unit – to the benefit of shareholders, and resuming its role as one of the last remaining players within that industry." and the kicker: "We would note that the large short interest in the stock relative to its float - 28.5 mm shares short versus a float of 140.4mm shares – combined with highly concentrated institutional ownership could set the stage for a dramatic short squeeze as short sellers might have to scramble to find shares to cover." Remember: "Is MBIA A Volkswagen-Like Short Squeeze Candidate?"  Mmhmm.
 
In case you don't know what a short squeeze is, that is when those who are short the shares, meaning they have borrowed them and sold them, get recall requests.  When borrowing stock, you need to return them if they are recalled.  If there is an event, like oh say a 3-5 billion dollar settlement, there can be buying pressure in the stock.  This drives the price up and means the shorts are losing money.  They can then get margin calls, which force them to cover their shorts.  This added buying pressure drives the price up even faster which means other shorts get margin calls.  This can feed on itself and the more shares shorted, the tighter the squeeze.  The most famous short squeeze was in Volkswagon shares.  Here is the chart:
 
 
That tiny spike you see there happened in 2 days!  Low 200's to over 900 in 2 days.  Of course it crashed back down rather quickly as a short squeeze is NOT a sustainable pattern.  Now there is no guarantee that this stock will squeeze, but there are a few things which could send this into motion most obviously the settlement announcement with the big banks.  Also the huge institutional ownership is a great base of ownership from which a squeeze could build. 
 
This is a risky bet, but one other good aspect of this is that as the big banks go down, which I believe is inevitable, MBIA should go up.  Only risk play money here as this is by no means a sure thing.  If you have any questions let me know.
 
 
Positions
GORO (closed $20.20, up $.15, average price paid $6)
Mexus Gold (closed $.07, down $.01, average price paid, $.22)
AXU (closed $6.88, up $.22, recommended at $7.90)
 
MBIA (first mention $10.58)
Stocks (Current status, out)
I have no stocks in any of my retirement accounts, all cash.
Physical Gold (Closed $1747, up $38, average price paid $395)
Physical Silver (Closed $33.15, up $.85, average price paid $5.31)
 
This week I'll close with a startling starling video. (couldn't resist)  A flock of starlings is called a murmuration.  Starlings will often perform complex flying maneuvers before roosting for the night.  Have a great week!