Curried Wealth Building
Finding an Edge

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November 13, 2010
Issue 122  -  Denial is Not a River in Egypt
 
The American people are in a state of delusion.  This is shown by the continued success of Starbucks and other overpriced stores.  This excerpt from Contraryinvestor.com is enlightening:
 
As a personal anecdote, we've been involved in institutional money management for well over three decades and what we've seen over the past few years is a growing incidence of financial stress among a number individuals/families.  Not overwhelming in numbers, but a trend growing at the edges we really have not seen before.  We're not talking imminent financial implosion, but rather a look ahead over a half decade to a decade+ whereby we can project out with a pretty darn high degree of confidence a higher than not probability of meaningful financial stress to come that will necessarily involve actions such as selling houses, liquidating assets not normally chosen by individuals for liquidation, etc.  We can project with confidence that these "actions" will not really be choices, but rather mandates to create funds ultimately needed for living expenses.  Our talks with folks facing this set of circumstances are always right between the eyes blunt commentary and analysis.  Hope is a word that simply is not part of the vocabulary.  And the one issue we are seeing again and again causing our forward years concern is the reluctance on the part of a reasonable number of folks to cut back on current spending.  In some cases there simply is no way to cut back without radical changes in current lifestyle.  But for a larger number of individuals/families there is an ability to cut back on current discretionary spending, but not a desire.  Denial?  Call it anything you want, but it's a bit of a new reality for us.  Are we seeing a microcosm of a greater societal issue?  Or are our experiences isolated?  Again, this is a relatively small percentage of folks, but this is the quote unquote higher net worth crowd.  We can only imagine the stress in broader wealth demographic categories.  Is this part of the reason why the retail numbers have shown a bit more strength recently?  We hate to stretch for rationales, especially when citing what seems to be the longer term issue of longevity versus financial where withwall at the personal/family level.
 
People are delaying the work that needs to be done and praying things work out.  Cutting back is just not fashionable and most are not doing it.  They just assume things will get better and it will all work out.  It won't.  There will come to most families a dire decision.  Either work longer or retire in a MUCH reduced standard of living.  There just won't be any other choice for millions of people.  
 
As people spend more and more, the hole gets deeper and deeper.  The piper will be paid.  He always is.  And just what is the "solution" of our fearless leaders to this coming disaster?  Inflation.  Even if that's not what their saying:
 

Bernanke says Fed not trying to spark inflation

By Pedro Nicolaci da Costa

JEKYLL ISLAND, Georgia (Reuters) - The Federal Reserve is trying to help a weak economy with its new $600 billion bond purchase plan, not jump-start inflation, central bank chairman Ben Bernanke said on Saturday.

"We're not in the business of trying to create inflation, our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation, which I think we all agree could also be worrisome," Bernanke said.

He was speaking alongside former top Fed officials Alan Greenspan and Gerald Corrigan at an event commemorating the 100th anniversary of a meeting on Jekyll Island that led to the creation of the U.S. central bank system.

With an economy that is growing at just a 2 percent annualized clip and a jobless rate that remains stagnant at 9.6 percent, the Fed this week decided to provide a fresh, if controversial, push to the anemic recovery.

Bernanke sought to quell controversy about the Fed's unconventional approach to policy, saying asset purchases would work to boost growth in much the same way that pushing down interest rates usually does.

Having already brought rates near zero and bought some $1.7 trillion in government and mortgage bonds during the financial crisis, the Fed last week launched a new easing push that was welcomed in financial markets but is seen as controversial by some economists and politicians.

Opponents argue the policy's risks, which include possible asset bubbles and future inflation, are not worth the benefits.

But Bernanke said the Fed, bound by a dual mandate for low and stable prices and firm employment, has a duty to provide any support for the economy that it can at a time when it appears to be undershooting both of its goals.

"We are committed to our price stability objective. I have rejected any notion that we are going to raise inflation to a supra-normal level," Bernanke said.

"We've had a very significant disinflation since the beginning of the crisis," he said. "We should not be satisfied with a situation where we have both a large amount of slack on the employment side and inflation which is below our generally agreed upon level and seems to be declining over time. That's a signal that more should be done and that was the motivation for the action taken earlier this week."

 
First off, notice where the story comes from, Jekyll Island, GA.  This is where the backstabbing country stealing bankers concocted the Federal Reserve Act.  You know the act that effectively gave the keys to the country to the banks.  Isn't it interesting that that huge lie was done in the same place that Bernanke pulls this whopper out of his hat.  Not trying to inflate????  Please.  What else is $600 billion of extra cash going to do?  It's all about managing expectations and keeping the public bamboozled. 
 
Oh, and China does seem to have the thing we supposedly don't:
 

China inflation rate to exceed 4 pct in 2011: report

SHANGHAI (Reuters) - China's inflation rate will climb above 4 percent next year, with inflationary pressures peaking in the first few months of 2011, the official Xinhua News Agency reported on Saturday, citing a researcher with the country's State Information Center.

"China will face great inflationary pressures next year. The first three months will see the fastest growth in prices," Zhu Baoliang was quoted as saying at a forum in the southern city of Guangzhou.

Consumer price inflation (CPI) hit a 23-month high of 3.6 percent in the year to September and a Reuters poll forecasts inflation in October, due for release on November 11, will hit 4 percent.

Concern about rising inflation prompted China to raise interest rates last month for the first time in nearly three years. The government, which has a target ceiling of 3 percent for 2010, has cautioned that inflationary pressures are growing due to a rise in hot money inflows and escalating food-driven inflation.

Economists, however, are divided as to whether the next rate rise will come before the end of this year.

Official media this week reported the need for China to increase interest rates to curb capital inflows driven by U.S. monetary easing, with the net benefit seen as cooling domestic asset prices.

 Could it be that the Chinese are more honest about their numbers than us?  Nah, their fudging too, so you know its worse.  Inflation is starting to percolate and once it gets started, there is no easy way to stop it.  Especially when you consider that we can't raise interest rates with our shaky housing market.  Not that we shouldn't, as this shows:
 
Secret Walmart Survey Shows Inflation Already Here

By: John Melloy
Executive Producer, Fast Money

There might not have been a second round of quantitative easing, if Federal Reserve Chairman Ben Bernanke shopped at Walmart.

A new pricing survey of products sold at the world’s largest retailer [WMT 54.13 -0.21 (-0.39%) ] showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate. The "inaugural price survey shows a small, but meaningful increase on an 86-item grocery basket," said Patrick McKeever, MKM Partners analyst, in a note. Most of the items McKeever chose to track were every day items like food and detergent and made by national brands.

 
This is the reality.  Inflation is baked in because Bernanke thinks he has no choice.  Of course it doesn't really matter what he does as our fate is sealed.  No matter how many happy songs or faked statistics are thrown out there.  Just to show you how out of touch things STILL are go the Freddy Mac web site and click on the Myths About Homeownership on the right hand column.  Here are two of their bullets:
 

Myth: You can't buy a home in the U.S. if you're not a citizen.
Fact:If you're a permanent or non-permanent resident alien, you can purchase a home in the U.S. In order to qualify for a loan you typically need to be a permanent resident alien with a valid USCIS card or, a "Green Card" and Social Security number. If you are a temporary resident alien with a valid work permit and Social Security number and have been in the United States continuously for the last 2 years, with steady employment and good
credit history you may also qualify for a loan.

Myth: If you don't have a bank account or credit cards, you can't qualify for a mortgage.
Fact: Having a bank account is always a good idea and helps you
establish credit. However, lenders can approve you for a mortgage even if you don't have a bank account or credit cards. You'll likely need to keep records showing a history of payments you've made for items such as rent, utilities, and car payments.

 
Now keep in mind that Fannie Mae and Freddy Mac now own and buy a large percentage of the residential mortgages while you consider what these "myths" say.  Do you really want the U.S. Government on the hook for loans to non-citizens?  I don't.  How about someone who doesn't even have a bank account?  Is that who should be buying a house??????  Mind boggling.  But it gets worse.  Go back to the Freddie site and click on the "calculators" link right above the Myths link.  Then click on Rent vs. buy.  Another window will open up.  Don't change any of the default data and put in -1 for the "appreciation" input.  If you try this an "error" message appears:
 
Please fix the following errors:
Appreciation rate must be a number between 0.00 and 100.00.
 
After all this housing fallout and chaos, Freddie Mac's calculator won't ALLOW a negative appreciation rate.  Is that nuts?  Maybe this a honest mistake.  What do they have as the definition of "appreciation?"
 
Appreciation rate
 
Appreciation rate is the yearly percentage rate that an asset increases in value. For example, a home that you paid $150,000 three years ago that is almost worth $200,000 today had an average appreciation rate of 10%. After the first year, the home was worth $165,000. After the second year, the home was worth $181,500. And after the third year, the home is worth just a little under $200,000.
 
So just as an "example", we pick 10% appreciation....a year???  Is this 2005 again?  Shouldn't there be some sanity here?  No, sanity isn't allowed in this country anymore, just denial.
 
 
 
Options
 
Since I have listed my positions and some of them are options, I wanted to give some advice for those who choose to buy these lottery tickets.  First, I highly advise against them but if you do delve in them, here the highlights of what I have learned.  (As an aside, if you don't understand what is being written here, you have no business buying these VERY risky instruments.  Please read some books on the subject.)
 
1.  Options are very volatile, if they double in price, sell at least 1/2 of your position.  This will "get your money out."  If they drop 25%, sell all of them.  Don't wait and hope with options.
 
2.  It's always best to buy in the money options.  This means that if the price of the stock doesn't move at all, the options will not be worthless.
 
3.  Buying the nearest expiration date is not advised unless it's a day trade.  I prefer the longest date.
 
4.  If you are buying the options instead of the stock, buy in the money options with an expiration at least 6 months out.
 
5.  Pay real close attention to what you are paying.  The prices of the options can vary wildly.  Remember there are three main values present in the option: (with interest rates so low) time value, intrinsic value, and volatility.
 
   a.  time value is pretty obvious, the longer until expiration, the more value.
   b.  intrinsic value is the amount the option is above the strike (for calls).  If this stock price is below the strike, this is zero.
   c.  volatility value is variable.  If the stock fluctuates wildly, this will be high, if the stock is a real snoozer, this will be low.
 
6.   I prefer options that have lots of volume.  GORO options violate this, but I think the stock outlook makes up for it.
 
7.  If the stock moves against you quickly, it is still better to sell and get something than have them expire worthless.  This is also the best reason to buy in the money options.
 
8.  The best book I've read on options is this one:
 
 
 
 
Positions
 
Goro  (closed at $23.10, down $.07, average price paid, $6.10) 
  
Mexus Gold  (closed .36, up 2 cents, average price paid, $0.20)  The Caleb continues to troll around the Alaskan coast. 
 
GORO June 11, call options, strike $20 (closed at $5.50, down $0.20, average price paid, $5.60)
 
Closed positions in SLW $35 calls for a 45% gain, and SLW $40 calls for a 50% gain)  I sold these due to the large drop.  My first half were sold at 100% gain (see rule #1 above) and the second half at even.)
 
I'll close this week with a video from Great Britain which sets the record straight on government jobs. (thanks to Hugh)  Have a great week!