Curried Wealth Building
Finding an Edge

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May 11, 2009 
Issue 45  -  I'm Out
 
I decided on Friday that I had enough stock market risk for my tastes.  I sold out at about 10:30 A.M.  My TSP requires a sell before 12:00 to sell on a particular day.  Since the stock market continued to rally throughout the day, I got very lucky,  I made roughly 18% in about 40 days.  I'll take it.  There is an old truism that you shouldn't get greedy.  Most of the profit in a market is made not by getting in at the bottom and out at the top, but getting the middle third.  This is the "easy" money.  Most people try to get it "all".  This usually means they get nothing as they usually pick the exact wrong time to sell.  No, I'm going to live by the old Wall Street truism, "sell in May and go away."  Historically, most of the stock market's gains come between October and May.  Making 18% a YEAR is great so I'll take my chips off the table. The market could go higher, and probably will, but you never go broke taking a profit.
 
Other than those reasons, I'm taking my money out because I still believe the economy will look much, much worse come Fall.  The fundamentals, while improving slightly, are still terrible.  Remember that when economic numbers are released, the delta announced is compared to last month.  The deltas have been so bad recently that in comparison, the numbers HAVE TO improve.  An economic indicator just can't go down 30% a shot for very long.  Mathematics just won't allow it. So things WILL improve.  This has been used by the shills on CNBC and the mutual funds to sell this rally.  They are judged based on comparisons to their peers, so the have to jump in also.  Look at this chart for an example:
 
 
As it says in the caption, most of the recent improvement for the consumers in the first quarter was mostly from January.  There was no follow through in February or March.  Our economy must continue to get bigger and bigger to expand and grow.  We can't really grow with savings as our money system is set up only to grow with debt and credit.  Look at this chart from contrary investor:
  
 

 

The home equity ATM is empty.  The amount of cash this was contributing to the economy was staggering and now that is gone.  Savings rates are up and credit available is going down so where is the money going to come from to expand this economy?  It just isn't there.  The government can increase the money supply but that is highly inflationary.  There is just no way the consumer is coming to the rescue this time.  The government has done everything they could to get interest rates lower, and have been successful but unless you have good credit, it is not easy to get a loan.  In fact, it is estimated that refinances have decreased yearly outlays by only $2.5 billion.  That's billion with a b.  How much has the fed thrown at buying mortgage backed securities (basically buying mortgages from the banks)?  $1.35 trillion!  Return on that "investment" isn't too good.

Now it is revealed that there was illegal requirements in the TARP program:

"Government Foisting Illegal Requirements On TARP Repayment

 
 
The government is planning to detail a complete set of guidelines dictating how banks can repay the TARP, the Wall Street Journal is reporting. The requirements, which may be revealed as early as tomorrow, will likely include a requirement that they demonstrate their ability to borrow without taking advantage of a government debt guarantee program.

Here's the Journal's report:

The program, a guarantee of debt issuance offered by the Federal Deposit Insurance Corp., allows firms to borrow money relatively inexpensively. Banks have issued more than $332.5 billion under the program since it began last fall.

Firms will have to show they don't need the FDIC guarantee to issue debt, such as by raising it without the guarantee.

The move signals a potential turning point in the financial crisis, with the some banks beginning to unwind their dependence on the federal government.

The requirement would likely cut right down the dividing line on Wall Street. JP Morgan Chase and Goldman Sachs have already issued debt not backed by the FDIC. Citigroup and Bank of America have not, and both are expected to have trouble doing so.

This is a retreat from the aggressive position staked out by Treasury Secretary Tim Geithner earlier this year. Geithner had said that banks would only be allowed to pay back the TARP after the Treasury assessed the effect on the broader financial system. Now the test seems linked to a bank's individual financial strength.

Nonetheless, the government's new position may violate the law. Earlier this year, Congress included a provision in American Recovery and Reinvestment Act that modified the original securities purchase agreements signed by the first TARP recipients. Those agreements made repayment subject to the approval of banking regulators.

But the ARRA, also known as the stimulus act, included a provision titled "No Impediment To Withdrawal By TARP recipients" that barred impediments to repayment and only said the repayment had to be made "subject to consultation" with banking regulators. The change from "approval" to "consultation" suggests that the government cannot condition the repayment. The Treasury Secretary was specifically required to permit repayment, subject only to consultation

The new requirements would seem to explicitly violate the law, which bars the government from requiring that a  financial institution obtain replacement funds or from imposing to any waiting period

Here's the relevant law (which is Division B, Title VII, Sec. 7001, SEC 111(g) of the American Recovery and Reinvestment Act of 2009):

NO IMPEDIMENT TO WITHDRAWAL BY TARP RECIPIENTS.—Subject to consultation with the appropriate Federal banking agency (as that term is defined in section 3 of the Federal Deposit Insurance Act), if any, the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP to such financial institution, without regard to whether the financial institution has replaced such funds from any other source or to any waiting period, and when such assistance is repaid, the Secretary shall liquidate warrants associated with such assistance at the current market price.

That's about as clear of a statement of anyone could hope for. Far from giving Geithner the authority to reject the TARP payback, it seems to prohibit the Treasury from imposing these new requirements. By seeking to impose the requirements, the Treasury is engaged in almost breathtaking lawlessness."
 
This just buttresses my argument that the banks don't "want" to pay back the money.  I still say this is a ruse to sucker people into buying their stocks while the insiders sell.  Why would they say things like this if things were hunky dory:  (from GATA) 
 

"Early this morning, Ken Lewis of B of A was interviewed on CNBC. He disagreed with government calculations that said B of A needs to raise capital, he then went on to say that they will comply and sell assets and raise capital. He also said that they wanted to pay back the TARP money. I guess I just don't get it, they are under capitalized as judged by regulators using worst case guidelines that have already been exceeded, the bank needs to raise capital and sell assets just to reach this hurdle that clearly is too low, yet Mr. Lewis wants to pay back the TARP money? How? With what? Do they have a stash of tuna fish that we don't know about? And all of this is viewed as bullish by the equity markets?"

 

The huge gains in the banks back up my contention.  This is a pump and dump.  Talk up the banks, which are still in horrible condition and head for the hills.  For me to be totally right, we must see the banks swoon again.  I expect that later this year.  We'll see.  My advice, don't buy a bank stock.
 
 
What am I buying?  Right now I would buy gold, silver or food.  Silver Standard Resources (SSRI) is up to roughly $20 and I bought at about $12.90.  I'm hanging on for now as there is a key technical point of $20.42.  If we could close above that for three straight days, then it would probably be off to the races.  I am still looking at a food ETF, DBA.  This is invested in corn, wheat, sugar and soybeans. I will probably make a move into this within the next couple months.  I'm nervous about energy, as there are numerous rumors on the net about a new energy source which could have a very low price.  Were this to come out ANY energy stock will get crushed. Might be nothing, but I'm not looking at things with risk.  There is no substitute for food, gold or silver, and none will be invented.
 
If this year gets as bad as I think it will, regular stocks will not be where you want to be. Stick with things, and I think you'll be fine.  Coming next week is my plan for disaster.  Steps I think everyone will need to get through the next couple years.  Have a great week!