Going Long Iraq?
Going Long Iraq?
Tuesday, November 8th, 2005
Baltimore, MD * Jackson, WY * Missoula, MT
In this Issue...
* Going Long Iraq?
* Silver ETF on the Rocks
Quote of the Day
"A rock pile ceases to be a rock pile the moment a single man
contemplates it, bearing within him the image of a cathedral."
- Antoine de Saint-Exupery, Poet
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Dear Wealth Daily Reader,
[Editor's Note: In tomorrow's WD, we'll talk specifically about the
French riots, and what it means to world markets. You don't want to miss
this one.]
Let me introduce you to Mike Stathis.
I first met Mike when he shot me an email telling me he was long the
Dinar, Iraq's currency. This was a few month ago.
That was the first I heard anybody recommend in any way, long or short,
the Dinar. That was enough to prompt a phone call.
After a few minutes listening to Mike and his opinions regarding the
markets, I knew I had to land him to write for Wealth Daily. I did.
Mike writes a letter that's circulated among Wall Street traders and
fund managers. So he knows his stuff.
Prior to launching his letter in 2003 (where his Balanced Portfolio has
gained 150% since that time), Mike worked on Wall Street. He was with
Bear Stearns, where he devoted his efforts towards institutional asset
and risk management, security analysis, and merchant banking.
He is also considered an expert in healthcare investing and holds an
M.S. from the University of Pennsylvania in physical biological
chemistry and biophysics and has taken numerous courses in medicine,
physiology, immunology, molecular and cellular biology.
His latest book, The New Iraqi Dinar Investment Guide, is schedule for
release this December.
In a 3-part series for Wealth Daily, Mike will outline the current state
of the market, how we got here, and where it is headed.
- Brian Hicks
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_____
It's not too late to get with it
By Mike Stathis
We've all seen the painful results of the Internet bubble. Many of us
have experienced it personally.
I won't recount them here for fear of rubbing salt in wounds that still
haven't healed.
But I do want talk about what I see coming ahead, because I think the
results will be similar to that of the Internet bubble: There's another
market disaster coming and this time it might destroy all of the
markets.
First, I want to briefly take you through the series of events since the
Internet bubble and explain to you where we are today and what to expect
in the future of the markets.
A Series of Unfortunate Events
When the Internet Bubble burst in the spring of 2000, investors were
still unaware of the disasters ahead.
At that time, the NASDAQ slowly deflated from its high of 5000
eventually down to a low of about 1200 over the next two years. And
unfortunately, many investors rode the market all of the way down, not
knowing what to do, waiting and hoping for a rebound. And I was there,
right in the middle of it all as a successful asset manager in Wall
Street's best trading firm.
The whole situation disgusted me to the point that ultimately caused me
to leave the industry.
It was only when many stocks were at multiyear lows did Wall Street
start issuing sell signals. But it was too little too late.
Do you remember JDSU, NT, SUNW, RMBS, RHAT, BRCD, INFO, CIEN, NXLK? The
list goes on. All were disasters.
But it wasn't all bad in 2000, as the Dow and S&P 500 continued to do
well. But soon, the controversial presidential elections of 2000 caused
these markets to drift downward and most people felt they would recover
once a clear winner was named.
Wrong.
The markets continued their weakness in 2001, and when 9-11 occurred,
all the markets crashed. Despite a reasonable rebound a few weeks later,
the economic data continued to get worse.
Then came an avalanche of corporate accounting scandals-Enron, WorldCom,
Tyco, Halliburton, America Online, and a host of Internet and
telecommunications companies once esteemed by research reports from Wall
Street's top analysts.
The chickens had come home to roost.
By this time, investors finally had it, and the markets plunged to new
lows. For traders, this was a sign that a technical bounce was due. It
did.
All of these events caused the Fed to issue a series of rate cuts that
brought short-term rates down to 40-year lows. And soon, long-term rates
followed and were too at multi-decade lows.
After the market lows in late 2003, the economy appeared to show signs
of improvement, with strong consumer spending and GDP in 2004. The only
problem was that consumers were fueling the economy by increasing their
debt, using their houses as virtual ATMs. And this dangerous behavior
still continues today.
Low mortgage rates are fueling a real estate boom that has been enhanced
by loose restrictions on credit. Meanwhile, home equity loans continue
to be as much in vogue as the iPod.
Throughout this time, the Fed has applauded the economic "recovery."
It's a joke wrapped in a Seinfeld plot.
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_____
Fiction: The Economy is Improving
The fact is that consumer spending has occurred on borrowed money from
home equity loans and record levels of consumer debt. In 2005 alone,
Freddie Mac has estimated that Americans will turn $204 billion of
inflated real estate into cash by taking out additional home equity
loans.
Meanwhile, corporate earnings have not been good overall, and corporate
spending has been frozen for nearly five years now.
Remember in the spring of 2005 when earnings were "great"? Why didn't
the market go back up? The fact is that corporations have been focusing
on cost-cutting and that has been the main force that has improved the
bottom line.
Record consumer bankruptcies continued to rise and peaked in the summer
of 2004. As well, record foreclosures have continued and have helped to
fuel the real estate bubble.
And while these levels have tapered off, they are still extremely high
and not far off from their peak.
With the household savings rate at an all-time low of 0%, consumer debt
at an all-time high, record Federal and trade deficits, a prolonged
military conflict in Iraq, a weak dollar, record energy prices, a state
and corporate pensions under funded, social security a mess, and a
healthcare crisis that keeps getting worse, how can anyone claim our
economy is even getting better?
In fact, with record energy prices expected to get even higher, interest
rates climbing due to the Fed's wasted efforts to push inflation down,
we are on the edge once again and I expect things to get worse over the
next few years.
I know, you're grabbing for the bottle of Prozac, right?
Take two.
Fact: Wall Street is on Their Side, Not Yours
Ladies and gentlemen, unfortunately, the bad times are not over.
As a matter of fact, I believe the market is going to get much worse.
But don't expect Wall Street or the Fed to alert you until it is too
late, because they have their own hidden agendas.
Quite simply, the task of Wall Street is to generate business. And
during my experience working for Wall Street's best firms, I have found
the vast majority of analysts to be not only useless, but dangerous.
Understand this. Even though we are in bear market, you still hear every
talking head on CNBC singing the praises of a renewed bull market.
Ahem, the NASDAQ sits at 2178, roughly 56% below its March 2000 highs.
But let me say this: A year from now, we might be wishing for 2178. as I
think the real estate bubble is about to take the markets lower.
The Fed: A Team Player for Wall Street
When it comes to the Fed Chairman, his loyalty lies with the U.S.
government, which means his goal is to help the economy remain strong.
And when the economy is weak, he will downplay the problems in order to
preserve the economic engine-consumer confidence and spending.
You see, because consumer spending makes up over 70% of all economic
activity in the U.S., it is important for consumers to remain confident
in the economy and to continue to spend.
That is precisely why the Fed cut short-term rates to almost nothing and
allowed the consumer finance industry to ease credit restrictions for
home equity loans and mortgages.
Greenspan realized that consumers wouldn't have the cash to keep the
economy afloat unless he let them borrow it for close to nothing. What
has essentially occurred is that consumers have been fueling the small
gains in the economic recovery with borrowed money.
And now that interest rates will soon reach the historic mean of around
5%, (in order to combat the inflation caused by high energy prices) the
real estate bubble is ready to burst. And when that happens it is going
to devastate the markets.
When interest rates are low, property values increase because the total
price required for a residence declines due to lower financing costs. In
contrast, when rates head north, property values decline since the total
financing cost is higher.
This wouldn't be much of an issue if people were buying homes for
residential use, but estimates are that over 25% of all home purchases
in 2004 were by investors.
Normally, real estate is a great hedge against inflation, but not when
real estate has been purchased at inflated prices.
We clearly have a major problem at hand.
Next week I'll tell you how there's simply no wiggle room in the market
for a mistake. If the real estate bubble bursts. if energy prices go
higher. your retirement money could get wiped-out in a nanosecond.
Sincerely,
Mike Stathis
Managing Director, Apex Venture Advisors
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_____
Lamp Posts an Indicator of a Bull Market?
If you need proof of the commodities bull market, you need look no
further than the crooks in Baltimore City.
Baltimore City police reported that several light posts that line
neighborhood streets have been sawed down, then stolen across northern
parts of Baltimore. That's right, stolen light posts.
City officials said last week that more than 130 light posts have been
stolen in the past 6 weeks.
At first Baltimore City police were baffled why anyone would steal the
thirty-foot light posts from area streets.
But when police arrested a man with a light post sticking six foot out
of the back of his station wagon this weekend, they found out.
The pole-robbing desperados were stealing the heavy light posts to scrap
them later.
One light post, made entirely of aluminum, can be scrapped for $150. A
hundred and thirty light posts at $150 a pop equals close to $20K. Not
bad for 6 weeks of work.
Regardless of the crime, you got to love the fact that even criminals,
usually poorly educated, are taking notice of rising commodities prices
I'd love to think that burglars check aluminum future prices frequently
and waited until prices reached a level that made stealing the light
post worthwhile.
What's next? Stealing high school kids to get oil out of their faces?
Silver ETF on the Rocks
A nonprofit lobby group has asked the SEC to deny a silver ETF currently
in registration from Barclays Global Investors.
The Silver Users Association says they want to keep an orderly silver
market and a silver ETF would create a price squeeze in the metal
because the fund would have to buy a large amount of silver to back the
fund's shares prior to the launch.
When Barclays first filed its silver ETF in June many analysts expected
a speedy approval process because the fund was structured similarly to
the pair of existing gold ETFs: StreetTracks Gold Trust and iShares
Comex Gold Trust also managed by Barclays.
Both gold ETFs hold about $3.4 billion in assets between them. They
allow investors to buy shares that represent a tenth of an ounce of gold
held in a vault.
These funds are seen as a convenient, low-cost way for investors to
sidestep the costs of buying and storing bullion.
The SUA says that it is concerned that a silver ETF would increase the
silver market's volatility and drive up prices.
The silver mining companies don't want a silver ETF because it may
create less demand for their stock. Investors would rather have a pure
play on the metal rather than buying mining companies, which are subject
to all sorts of problems.
On the other hand a silver ETF would benefit mining companies if demand
surges for the metal and pushes prices, and profits, higher.
But the real beneficiaries to a silver ETF are the investors.
- Luke Burgess
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posted by Victor Lloyd Smith @ 9:35 AM
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