Curried Wealth Building
Finding an Edge

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July 17, 2010
Issue 105  -  We're Screwed, Stock 
Market Rally Ahead?
 
 This week I'll start with a list of 23 statistics compiled by Business Insider:
 
1.  83% of all stocks are owned by 1% of the people.
2.  61% of all people usually or always live paycheck to paycheck.
3.  66% of growth in the 2000s went to the top 1%.
4.  36% of Americans contribute 0 to their retirement account.
5.  43% of Americans have less than $10,000 saved for retirement.
6,  24% of Americans say they have postponed their retirement age in the last year.
7.  1.4 million Americans filed personal bankruptcy in 2009.
8.  Only 5% of households have made enough extra income to keep up with housing costs since 1974.
9.  For the first time ever, banks own more housing equity than all individuals combined.
 
 
 
10.  Since 1950, the ratio of CEO salaries to the average worker at a company has went from 30:1 to 400:1.
11.  The bottom 80% of U.S. households hold 7% of total liquid assets.
12.  The bottom 50% of U.S. households hold less than 1% of total wealth.
13.  Average Wall Street bonuses were up 17% last year.
14.  Federal workers make over 50% more than the average private sector worker.
15.  The top1% of Americans own twice as much of the corporate wealth compared to 1995.
16.  Average time to find a job has risen to over 35 weeks.
17.   40% of Americans with a job work in the service industry, which has lower wages than other categories.
18.  For the first time ever, Americans on food stamps tops 40 million.
19.   In China a garment worker makes 86 cents an hour while in Cambodia they make 22 cents.
20.  Despite the financial crisis, the number of millionaires rose 16 percent in 2009.
21.  21% of all American children live below the poverty line, the highest rate in 20 years.
22.  The top 10% of Americans now earn about 50% of the total income.

I have paraphrased most of these to streamline the text but they are still rather sobering.  The middle class is basically disappearing.  The rich get richer and the poor get poorer.  This is a recipe for disaster.  The statistics basically show a country that is imploding from the inside at a very rapid rate.  Pension funds are what some of these workers are counting on, how are they doing:
 

Funding Status of U.S. Pensions falls to 74%, According to BNY Mellon Asset Management

Lowest funded status since February 2009

PR Newswire

BOSTON, July 13

BOSTON, July 13 /PRNewswire-FirstCall/ -- A combination of U.S. stock market declines and lower interest rates in June resulted in the lowest-funded status for the typical U.S. corporate pension plan since February 2009, according to monthly statistics published by BNY Mellon Asset Management.

The funded status in June declined 6.0 percentage points to 74.0 percent. Through the end of June, the funded status of the typical U.S. corporate plan is down 9.5 percentage points for the year.

The falling stock markets resulted in a decline of 2.3 percent in assets at the typical U.S. corporate plan, while liabilities sharply increased in June, rising 5.6 percent, as reported by the BNY Mellon Pension Summary Report for June 2010. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.

"Investors' fears sent U.S. stocks down 5.7 percent in June, which followed the 7.9 percent fall in May," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. "The second quarter decline of 11.3 percent in U.S. stocks was the worst quarterly performance since the fourth quarter of 2008."

The June rally in Treasuries led to a 39-basis-point drop in the Aa corporate discount rate to 5.34 percent, the lowest point since June 2005, according to BNY Mellon Asset Management.

"Pension plans experienced pressure from both the asset and liability side in June, and there doesn't appear to be a quick fix on the horizon," said Austin. "Poor asset returns and dropping interest rates are prompting both corporate and public sector plans to consider more active approaches to managing their funding strategies.

Interest in Liability-Driven Investing (LDI) strategies remains high, with many sponsors adding objectives such as deadlines to reach specific target funding levels."…

-END- 

 
This is another disaster, especially when you consider the statistics above in regards to levels of saving for retirements.  These accounts which are becoming more and more underfunded, don't look secure enough to generate enough retirement income to live.  This has led many to rely on credit to survive and maintain their "deserved" lifestyle.  That seems to be fading away too:
 

Americans’ credit scores at new lows

FICO: One in four consumers now a poor risk for lender

by EILEEN AJ CONNELLY
 
 

NEW YORK — The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

  1. Credit crunch

    Our cartoonists take a wry look a our addiction to spending what we don't have.

"I don't get paid for loan applications, I get paid for closings," said Ritch Workman, a Melbourne, Fla., mortgage broker. "I have plenty of business, but I'm struggling to stay open."

FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.

More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual's score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.

On the positive side, the number of consumers who have a top score of 800 or above has increased in recent years. At least in part, this reflects that more individuals have cut spending and paid down debt in response to the recession. Their ranks now stand at 17.9 percent, which is notably above the historical average of 13 percent, though down from 18.7 percent in April 2008 before the market meltdown.--

 
 
So people have saved virtually nothing for retirement, pension funds are falling further behind, the general publics credit ratings are falling, and now the government, which is probably being relied on by many of these people as the final back stop, is being downgraded?
 

US debt downgraded . . . by China rating agency

By KAJA WHITEHOUSE

Last Updated:

12:45 AM, July 14, 2010

Posted:

12:45 AM, July 14, 2010

China's leading credit agency is revolting against the historically stellar credit rating for the US, saying Uncle Sam's heavy debt load makes it a bigger credit risk than China.  Dagong Global Credit Rating Co., which previously only rated bonds, issued its first set of sovereign debt ratings this week, putting a revolutionary spin on the creditworthiness of 50 nations, including China, Egypt and Germany.

Relying on a "brand new system" that penalizes countries for high levels of indebtedness, and which seeks to correct the perceived biases of its Western competitors, Dagong granted higher marks to an overpopulated, communist China than to the US, France, Britain, South Korea and Japan.

According to Dagong, which says it's a private, independent company, China deserves a double-A- plus rating with a "stable" outlook, compared to the double-A rating with a "negative" outlook bestowed on the US.

The outlook differs greatly from that of the only other ratings agencies that judge country creditworthiness: Moody's, Fitch and Standard & Poor's have all branded the US with the highest possible rating, triple-A. China's highest rating by those agencies, by contrast, is a negative double-A rating from Fitch. The ratings revolt comes as the US financial outlook grows increasingly murky and the reputations of the "Big Three" ratings agencies remain tarnished for having failed to foresee the credit crisis.

Nonetheless, investors say they're unlikely to start relying on Dagong's analysis when it comes to assessing the future of the US or any other economy.  "I don't think anyone cares," said one hedge fund executive, saying any data out of China is viewed as "sketchy at best."

 

This is admittedly a biased source, but don't think for a second that the downgrade isn't deserved.  We are in big mess.  In spite of that ALL, I moved some retirement money back into the general market.  Why in the world would I do that? 
 
Remember, the best quality of a good investor is flexibility and not staying tied to a static world view.  Remain open to all outcomes and move accordingly.  With that in mind, this story caught my eye:
 

Commentary: Market timers became more bearish in wake of last week's rally

By Mark Hulbert, MarketWatch

ANNANDALE, Va. (MarketWatch) -- Last week the stock market had its best week in a year.

And yet you'd never know it by reviewing investment advisors' outlooks: At the end of the week they were collectively no more bullish than they were at the beginning.

Their skepticism in the face of the rally is a bullish omen, according to contrarian analysis.

If last week's 500-point rise in the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/ delayed (DJIA 10,367, +3.70, +0.04%) were a mere bear market rally, according to contrarians, investors and advisers most likely would have reacted to it by jumping on the bullish bandwagon. As contrarians are fond of saying, bear markets like to descend a slope of hope.

But that's not what we saw.

Consider the average recommended equity exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). As of the close on Friday, July 2, this average stood at minus 1.8% -- which meant that these short-term market timers on average were completely out of any long positions and allocating 1.8% of their equity portfolios to going short.

As of the close on Friday, July 9, one week later, with the Dow 512 points higher, the HSNSI stood at minus 6.5%, or some five percentage points lower.

In other words, the average short-term market timer reacted to this 512-point rally by becoming even more short the market than he was before the rally started.

That shows that there is an extraordinary amount of skepticism out there towards the rally. Far from the prevailing mood being a slope of hope, it is instead a wall of worry -- the very kind of wall that a bull market likes to climb.

Further confirmation of this wall of worry came earlier this week. Though Monday's rally was modest -- just 18 points for the Dow -- it still was a rally, with the market overcoming weakness early in the session. And, yet, the HSNSI for the day dropped by more than six percentage points, and now stands at minus 12.7%.

In fact, the HSNSI now is lower than at any time since March 2009, when the 2007-2009 bear market came to an end.

Which is really quite amazing: The stock market may be 10% below its late April high, but it remains some 50% higher than where it stood at the bear market low in March 2009.

Why, then, is the advisers' mood just as dark today as then?

Don't answer this question by reciting all the things that are legitimate causes for worry right now. There were just as many things to worry about in March 2009, if not more.

Of course, the strong wall of worry that exists right now doesn't guarantee that the market will continue to rally. But the wall does mean that the sentiment winds in coming sessions will be blowing in the direction of higher prices.

 
This is a striking story as people became MORE bearish as prices rose.  This is VERY bullish.  If most people are bearish, it stands to reason that the market won't go down.  This is simple contrarian stuff.  I believe until the sentiment moves bullish, the path of least resistance is higher.  Don't argue that the U.S. is poor shape because the market can go higher in the short term no matter what is happening.  I will be looking to exit before the fall.
 
Gold Stuff
 
This is just an adjunct to my standard strategy of gold and silver.  I found two interesting charts that throw more water on the gold "bubble" talk.  They are both from Gata:
 
 
 
These two charts should completely blow away any anxiety over owning gold because it's too high.  Look at the percentage of world assets that gold represents.  Less than 1% today!  Does that sound like a lot for the only "true" money?  Not to me.  The bottom chart shows software stocks compared to gold.  Notice what a true bubble looks like in 2000 for software stocks.  Gold is just NOT in a bubble and anyone who says so is badly misinformed or lying for some agenda.  In fact, this chart shows gold is UNDERvalued.  You must own it.
 
As you know from reading here, my biggest holding is Gold Resource Corp. (GORO) This past week they announced that they were moving from the over-the-counter bulletin board, to the American Stock Exchange.  This will make the potential pool of buyers of this stock much, much wider.  There are some mutual funds who cannot buy OTC stocks and there are some individuals who won't touch them either.  Once the transition occurs, I expect the volume to pick up which will help liquidity.  There was also an interview published with a Hochschild.  This is the same Hochschild which now owns about 30% of GORO.  Here is an excerpt:
 

An interview with Eduardo Hochschild  from the web site Living in Peru


2009 has been quite dynamic with respect to your acquisitions in mining. You have increased your participation in Lake Shore Gold Corp (Canada) as well as Gold Resources Corporation (USA). Will your long term goal be to control both to gain more power in Latin America?

Gold Resources has a mine in Mexico, called El Aguila (in Oaxaca). It is extremely promising. We increased our stake to 27%.

Are you planning to acquire 50% or more of the shares?
Yes, definitely. We have already talked with them (a group of geologists) and they want to rely on us for production. They want to continue exploring and we will focus solely on production.
This was published in a Peruvian publication in Spanish.  What this means to us as shareholders is that we have a "floor" on the stock.  If they intend to take us out, they will be buying on any dips of the stock price.  This could greatly reduce the volatility of the stock.  This interview was published in January and looking at the chart of the stock price, shows that all down drafts of the stock price have been short lived.  Just one more reason to own GORO.  As always, this is NOT investment advice, just what I believe, please do your own due diligence.  You must learn to make your own investment decisions. 
 
I'll close this week with one of the best videos I've ever found.  If you think you're lucky, you've got nothing on these people.  Have a great week!