» obama » Hedge Fund Blogs From HedgeCo.Net

US$ vs. Gold Prices: A Little Perspective, Obama 2010 Budget, $1.9 Trillion Increase in Debt Ceiling

Posted By Bret Rosenthal, February 3rd, 2010 : Permalink

Perspective: US$ vs. Gold

-US$ tops out on March 2nd, 2009 and declines by 18% at the low on December 1st.

-During the same time period (March 4th – Dec. 3rd) Gold prices rise 34.8%

-From Dec. 1st to Jan. 29th the US$ rallies 6.5% while Gold prices fall 12.28%

-The US$ rally has failed to break above the 200-day moving average and remains in a long-term downtrend.

-The Gold price advanced 30% from Sept. thru Dec. to reach a high of $1,225, has since retraced 50% of that move and has settled around $1,100. This is normal action in the context of an overall uptrend and it is action that would be considered healthy.

Question: What is the fundamental basis for a US$ rally or decline?

Answer: The continuation or cessation of Quantitative Easing/easy credit in all forms.

This is a simple answer to a complex question, you say? Respectfully, I say, “Wrong, the question is not complex.” Traditional financial news outlets would like you to believe the question is complex so you continue to waste time and money in your effort to understand.

For two months the US$ has rallied, not because the economy is recovering or company earnings are improving, but because the possibility of continued Q.E. was in question. All of the participants involved in the events I list below benefited from a stronger US$ and created all sorts of sound bytes during the last two months to champion their cause. The biggest beneficiary of this jawboning — and perhaps most important — was, of course, Ben Bernanke. The US$ had declined 18% and word began to spread that Ben may not be reappointed. So Ben and his cohorts began to talk about tightening policy in all of its forms. I stress the word, talk, as no actions have been taken to reduce liquidity.

List of the events:

The State of the Union address

Ben Bernanke’s Reappointment

The FOMC meeting (for months now the US$ has rallied in front of FOMC events)

The Geithner grilling on Capitol Hill

All of the above happened in the same week, the last in Jan., and one can argue all participants appreciated the US$ appreciation. Coincidence? We think not.

That was then, this is now…

Bearish US$ developments as of Feb. 1:

-2010 Budget released: After parsing the numbers the increase in spending looks real, the “savings” as usual appear dubious. Evidence the insanity below:

The Wall Street Journal reports President Obama will propose on Monday a $3.8 trln budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trln this year, but would push the red ink down to about $700 bln, or 4% of the gross domestic product, by 2013, according to congressional aides. The deficit for the current fiscal year, which ends on Sept. 30, would eclipse last year’s $1.4 trln deficit, in part due to new spending on a proposed jobs package. The president also wants $25 bln for cash-strapped state governments, mainly to offset their funding of the Medicaid health program for the poor. To get the deficit down by the middle of the decade, Mr. Obama will be relying on some cuts that have previously been proposed without success, on cooperation from a wary Congress and on a yet-to-be set up debt commission to suggest politically difficult choices.

Reuters.com reports the White House budget proposal released on Monday assumes the U.S. economy is heading for a six-year run of above-average economic growth with no sign of a worrisome spike in inflation or interest rates. The forecasts underlying President Barack Obama’s budget plan show real gross domestic product rising 2.7 percent this year, which is largely in line with private forecasts. Beginning in 2011, the White House’s projections diverge. It expects six consecutive years of strong growth ranging from 3.2 percent to 4.3 percent — well above what most economists consider the longer-term trend of around 2.6 percent. The last time the economy saw a similar streak of strong growth was in the late 1990s, during the dot-com boom. Obama has said both that expansion and the housing-powered growth in the mid-2000s were bubble-driven, and he wants the next expansion phase to rest on sturdier pillars. If the White House is assuming stronger economic growth, that implies bigger tax revenues and a smaller budget gap. The proposal shows the deficit shrinking to just under 4 percent of GDP by 2014, from an estimated 10.6 percent this year.

-Senate votes 60-39 to increase US debt ceiling by $1.9 trillion – DJ (This vote was delayed in Dec. adding to the US$ rally at that time)

-Personal Consumption and Income Weaken

-Construction Spending Dips in December

I will leave you with the following quote from White House Economic Advisor Romer, “ …strong GDP forecasts included in the budget are based on a history of growth after recessions.”

To recap, the “strong” GDP numbers carried in the budget are the primary source of deficit reduction going forward. Does anyone else see the Lewis Carroll nature of the 2010 budget, or am I just a madhatter? Romer says, “history of growth after recessions.” This assumption would imply we have just experienced a normal recession but we all know that to be untrue. We can all agree a credit crisis of epic proportions led to a real estate collapse that has defied all expectation. These events were not normal or historic, hence the growth of GDP going forward should not be normal either. Previous “normal” recessions were preceded by sharply rising interest rates. “Normal” recoveries were preceded by sharply declining interest rates. According to Romer’s logic the Fed will need to take interest rates substantially below zero to foster a “normal” recovery. Pay close attention to the appearance of President Obama during his next speech and see if he looks like a Cheshire Cat.

Is it any wonder the price of Gold jumped 4.2% in the two days following the budget release?

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

Comments feed (RSS 2.0), comment or trackback from your site.

Looming Defaults and the Effect on Currencies, US$ vs Euro

Posted By Bret Rosenthal, January 19th, 2010 : Permalink

The race to the bottom is on! The only question remaining: Who will blink first?

I am referring to the race to default. As you will see when reading the stories below, the USA and the EU have major cracks in the foundation. Should Greece and/or Portugal default on debt the Euro would suffer accordingly. However, if and when California (or any number of other states in trouble) defaults, the US$ will suffer. Witnessing this Greek tragedy of a race unfold (pun intended) may be interesting if not entertaining, but the winner is in fact inconsequential.

The big picture take away offers the most value for those looking to invest. I can say with abundant clarity, both the USA and EU will need to create prodigious amounts of fiat currency to deal with the ongoing financial chaos. This dramatic increase in the already bloated supply of fiat currencies will lead to an ever increasing demand for a constant and ancient store of value. The store I refer to is of course that ‘barbarous relic’ known as Gold.

Allow me a moment of clarification in regards to the word ‘default’. Sources tell me Webster’s is changing the definition of the word default. You know the word to mean:

De-Fault (di-fawlt) -Noun 1. failure to meet financial obligations.

However, in light of the current political environment both in the USA and abroad, the new definition for the word default will be:

De-Fault (di-fawlt) -Noun 1. An instance of coming to the rescue, esp. financially: a government default of a large company.

Because of this change, the word ‘bailout’ will no longer be required and shall be stricken from the lexicon.

Greece and Portugal face ’slow death’ over debt crisis – Telegraph.co.uk

Greece and Portugal are likely to suffer a “slow death”, as higher debt costs cause the economy to “bleed” economic potential, Moody’s credit ratings agency has warned. Moody’s Investors Service said unless the two countries reverse their large current account deficits, wealth generated would increasingly have to be used to pay off rising debt costs as investors demand more to hold Greek and Portuguese bonds. To compensate, the governments would have to keep raising taxes, which in turn could smother investment and drive out wealth creators, Moody’s said. “The risk of a ’sudden death’ is negligible, but the likelihood of a ’slow death’…is high,” the report said. Moody’s warned that the window of time the countries have in which to act “will not be open indefinitely”, adding that Greece would have “significantly less time” than Portugal.

The Fed Meeting Fallout, US$ Strength / Smaller than Expected Debt Limit Increase, Shadow Home Inventory on the Rise, State Budget Problems

Posted By Bret Rosenthal, December 18th, 2009 : Permalink

The Fed chose not to change rates or comments during the Wednesday meeting. While we anticipated this outcome in our Monday post, the market reaction has been anything but expected. In months past the type of Fed commentary exhibited this week led to a lower US$ and inverse strength in commodity and equity markets. This week the results have been anything but ordinary. The US$ gained strength, some commodities have rallied with the US$ (e.g. Oil) but precious metals have suffered. Meanwhile the Treasury markets have rallied and equity markets seem to have stalled.

The Fed’s commitment to a lenient stance is not a surprise. The following two stories are just a couple of the driving forces applying pressure to the economy and in turn the Fed…States scramble to close new budget gaps - WSJ
WSJ reports the patches used by states on their ailing budgets just months ago are now failing. Ohio lawmakers were expected late Thursday to vote on a compromise reached with Gov. Ted Strickland to avoid cutting education budgets an average of 10% on Jan. 1. In Arizona, lawmakers met in a special session Thursday — their fourth on the budget this year — to grapple with a new deficit. And in New York, Democratic Gov. David Paterson said Sunday he would postpone paying $750 million of state bills to avert a cash crunch. Many states eliminated expected deficits earlier this year with budget cuts, tax increases, short-term borrowing, accounting moves and planned gambling expansions. But despite a slight improvement in the U.S. economy, states are now finding those measures didn’t go far enough. Tax collections continue to trail projections in some states, and court rulings and political battles have blocked some gap-filling moves. Plus, some legislatures didn’t fully deal with the deficits, leaving the toughest decisions to governors… Only a few states now have cash-flow problems. But if revenues continue to fall below expectations, the list could grow, said Scott Pattison, executive director of the National Association of State Budget Officers.

…the US$’s strength as well as the strength in the Treasury bond market does however, provide some consternation. Apparently, other factors have overshadowed the Fed meeting this week and driven the direction of markets. Many attribute the strength of the US$ to troubles developing in Europe. The fears of a debt default in Greece have led some to believe the viability of the EU is in question. We believe this fear is unfounded and would instead direct your attention to the following story…

House narrowly passes $290 billion increase in debt limit - WSJ
WSJ reports the House approved a short-term $290 billion extension in the nation’s debt ceiling, delaying a decision until February about a larger increase in the borrowing cap. The vote comes less than a week after House Majority Leader Steny Hoyer (D., Md.) said he intended to seek a $1.8 trillion increase in the ceiling to support federal government borrowing through 2010. A decision was made to seek the more modest increase after it became clear the larger increase may have failed to win support in the Senate. The Senate must still take up the two-month increase, which it is expected to do next week.

…The decision to delay the “larger increase in the borrowing cap” in our opinion added fuel to a short covering rally already underway in the US$. I will note that the vote has only been delayed and will no doubt be passed in the not to distant future.

In short, year-long trends remain in place although severely tested this week. Seasonality would suggest equity market strength during the last two weeks of the year. Volatility as judged by the VIX index has remained subdued during this week’s shenanigans and would add credence to the idea of a resumption in seasonal trends.

More homes are poised to hit the market – LA Times
LA Times reports a supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation’s housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said. A variety of measures to keep discounted bank-owned properties off the market — including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford — has helped increase a backlog of so-called shadow inventory 55% in the year ended Sept. 30, according to a report released Thursday by First American CoreLogic, a Santa Ana-based real estate research firm.

Tags: Fed, foreclosures, housing market, obama, US$, vix, volatility

Comments feed (RSS 2.0), comment or trackback from your site.

Precious Metals: A Minuscule Market, BLS Jobs Report Worthless, Obama Continues to Increase Spending, U.S. Treasury Zero-Rate Auction

Posted By Bret Rosenthal, December 9th, 2009 : Permalink

The volatility of precious metals prices will continue to astound. For those requiring a courage boost, I offer the following information as succor…

The Precious Metals market is minuscule - Matterhorn Asset Management
The graph below shows how small the gold and silver industries and markets are in relation to major US corporations and to total world financial assets. The market capitalisation of the silver industry is only $ 9 billion and of the gold industry $ 200 B whilst Microsoft is valued at $250 B and Exxon 350 B.

Both the silver and gold industries as well as the physical markets are so small that any increase in demand is likely to drive prices very substantially higher.

Zerohedge further exposes the BLS Friday jobs report as a worthless…

Even as the BLS and the administration are trying to cover up the real state of unemployment affairs using assorted semantic gimmicks of just what it means to be unemployed, and as companies provide adjusted EPS numbers, while actual earnings continue to collapse, the true barometer of spending, provided by the Financial Management Service, tax withholdings (net of refunds), continues to paint the truest picture of just what is really happening with both America’s consumer and the corporate world….

…On a rolling 12 month basis, individual tax withheld has dropped by nearly 8% YoY, from $1.42 trillion to $1.31 trillion, while company witholdings are down a whalloping 64%, from $274 billion to just under $100 billion! Read More…

Of course, the Obama administration is aware of the true nature of the unemployment problem…

WASHINGTON – President Barack Obama called for a major new burst of federal spending Tuesday, perhaps $150 billion or more, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment. Read More…

Geithner said to be seeking TARP extension until next October -

Bloomberg.com reports Treasury Secretary Timothy Geithner plans to tell Congress that the Obama administration will extend the $700 billion financial-rescue program until next October, according to people familiar with the matter. While the Troubled Asset Relief Program expires on Dec. 31, Geithner can extend it by notifying Congress. A letter notifying Congress of the extension could come as soon as today, said the people, who declined to be identified. Andrew Williams, a Treasury Department spokesman, declined to comment. The TARP, passed in October 2008 to prevent a collapse of the financial system, has drawn criticism from Congressional opponents of taxpayer-funded bailouts of banks including Citigroup Inc. The Obama administration, preparing the ground for an extension, has emphasized that the program may also be used to aid homeowners and small companies.

Both actions above are US$ bearish, precious metals bullish. Add to the mix the recent zero-rate U.S. Treasury auction and you can see why our Gold and Silver investment thesis remains intact…

U.S. Treasury zero-rate auction matches record low
WASHINGTON, Dec 8 (Reuters) – The 0.000 percent high yield on the U.S. Treasury’s four-week bill auction on Tuesday matches the lowest on record for the security, the Treasury’s Bureau of the Public Debt said.

The Treasury’s auction of $29 billion in four-week bills at a strong 5.33 bid-to-cover ratio marks only the fourth time that the security was sold at a zero rate. The other three zero-rate auctions occurred in December 2008, near the height of the financial crisis.

Tags: Geithner, gold, jobs, obama, precious metals, silver, U.S. treasury, US$

Comments feed (RSS 2.0), comment or trackback from your site.

Stock Market Investing: Stay the Course & Ride the Wave, GDP not 3.5%?, Economic Numbers Troublesome, Hyperinflation Rapidly Approaching

Posted By Bret Rosenthal, November 17th, 2009 : Permalink

Stock Market Investing: No change from last week. The technicals didn’t get much better but an overwhelming tsunami of weak economic data helped to drive the US$ lower and drove both hard asset prices and equity prices higher.Read More…

…Meanwhile, even as Brazil implements policy changes to stop its currency from appreciating, the Real advances adding credence to the Economist theory of a Forex crisis approaching …Read More…

Investment Strategy: Ride the wave! This market behavior reminds me of the waters off Jupiter Beach, FL, where I live. Right now I’m looking at a beautiful expanse of ocean as far as the eye can see (don’t hate the player, hate the game) and I see perfect 5ft. rollers washing up on shore. The break is speckled with surfers all the way down to Juno Beach pier where the best are attacking the biggest swells.

The picture seems perfect but the key word from the description above is ATTACKING. I sat through brunch on Sunday next to a local surfer girl. She was around 16 and had everything going for her with the tiny exception of crutches and a rather large bandage on her foot.

While the surf was perfect for humans, it was also an absolute delight for the sharks. Do you see where I’m going with this? When investing in today’s markets you can enjoy the ride but you better remember the sharks are circling.

Time to review the details from last week. Follow the bouncing ball and you will get to the inevitable conclusion that hyperinflation is raging toward us like a Hammerhead that smells blood….

Fed’s Fisher says Q3 US GDP growth probably not quite as robust as originally reported, closer to 2.5% – Reuters

November University of Michigan-prelim 66.0 vs 71.0 consensus, October 70.6

Initial Claims Continue to Fall
Initial claims again beat consensus estimates as claims fell from 514,000 new claims to 502,000 for the week ending Nov. 7. While the drop in claims doesn’t represent a clear turning point, for the second consecutive week claims have fallen below the 520,000 to 550,000 range that it seems to have been stuck at during the previous month. The market is going to take the drop as a sign that the labor sector is beginning to turn around, but we’ve seen a similar decline in claims before when initial claims fell below the 550,000 threshold at the end of September…

The drop in continuing claims was not due to workers finding new jobs, but due to people running out of unemployment benefits. Approximately, 7,000 unemployed workers lost their benefits every day. Congress recently passed an extension of the unemployment benefits that gave all unemployed workers an additional 14 weeks of unemployment insurance payment and an additional six weeks to workers that live in states where the unemployment rate is above 8.5%. Obama signed the extension into law on Nov. 6. The extension will stop the downward trend in continuing claims…

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months. Due to timing of the releases, the data will not show the results of the unemployment extension until the Nov. 25 release. This means that the continuing claims numbers will show a decline in next week’s reported numbers.

…The details above represent “blood in the water” that requires the Fed to remain easy. However, these policies that balloon money supply have fueled the decline in the value of the US$. I have written volumes about this vicious cycle. For the sake of new readers I will repeat the RCM mantra: Hyperinflation is a currency event not an economic event.

I am forever baffled by the ignorance of many financial commentators when asked about inflation. They point to economic troubles and scoff at the very idea of inflation but applaud Fed policy and cheer rapidly inflating asset prices. Do they not see the oxymoron? Or are they simply morons? (OK, true that was trite and a little unfair but it couldn’t be helped.)

Hyperinflation is rapidly spreading worldwide because currencies around the globe are being devalued in an effort to keep up with the Bernanke “helicopter” drops of US$. The world is heading toward a Forex crisis as the Economist article below suggests. Our response to this roller coaster: Please hold on to the (GOLD) bar…

The Economist on Gold and Forex:

Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.

Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

…As you can see, the march toward hyperinflation and perhaps a currency crisis seems inevitable. The best defense: Precious metals, Gold & Silver. A note of caution: Make sure your precious investment is backed by the actual metal. More on that topic next time…

Tags: ben bernanke, Brazil, Dollar, Fed, forex, GDP, gold, hyperinflation, investment strategy, obama, precious metals, silver, stock market investing, US$

Comments feed (RSS 2.0), comment or trackback from your site.

Real Estate Wrap-up and the RIA

Posted By TomPowell, November 6th, 2009 : Permalink

Residential Real Estate

There are dozens of reasons why the residential real estate market bubbled and exploded, causing the ensuing credit crisis and economic strife. The popularity of loans requiring no documentation, the easy access to sub-prime loans and the Federal Reserve’s decision to keep interest rates low all intertwined to fuel the housing crisis. The housing bubble was also inflated by Wall Street’s ability to package and sell mortgages in large pools. Now, after struggling to repair the housing market for more than a year, we are seeing improvements that are unveiling extraordinary investment opportunities in residential real estate.

It appears we have hit the bottom of the housing market trough. Housing prices found some stabilization; although the prices are still close to the lowest they have been all decade. But, the collapse took years to build and expecting a complete turnaround in 2009 is unrealistic. The real promise in housing is in the future. Getting your money into the market now is optimal because of low prices and reasonable mortgage rates. Plus, there will continue to be tax relief with the recent Obama-endorsed home-buyers’ tax credit extension—which is planned to be available for repeat buyers who have lived in their prior residence for at least five years.

The United States should see a gradual increase in home sales throughout 2010, but the residential market will most likely not witness a return to “normalcy” until 2011. According to Steve Bergsman, author of “After the Fall, Opportunities and Strategies for Real Estate Investing in the Coming Decade,” “When a bubble market bursts, left behind is a lot of carnage and it takes about three years for the markets just to get a handle on the mess.”[1]

The three-year anniversary of the housing collapse is fast approaching and a number of high-profile reports have been published this month that suggest the residential housing market is already improving. The Case-Shiller index, which tracks variations in the values of houses in 20 U.S. metropolitan areas, showed an increase of 2.9 percent in the second quarter of 2009. In the first quarter it was down 7.9 percent. Two reports released by the Commerce Department last week suggest that while the overall economy continues on a wobbly path toward recovery, the housing industry is experiencing a number of positive signs. For example, “The supply of new homes was at 7.5 months in September, down from 9.5 months in May.”[2]

While residential inventory appears to be slimming, foreclosure rates continue to mount in multiple areas across the country. With a significant number of Option ARMs set to reset over the next several months, many cities will continue to experience record-setting foreclosure levels. However, foreclosures are increasing in different cities than those affected in the last quarters of 2008. Rates appear to be easing in the cities that were hit hardest by the housing collapse and rising in major metro areas in other states. This suggests that the cities previously overrun with foreclosures have found ways to combat the problem and are gradually making progress.

A continuing stream of foreclosures may keep the residential inventory plump, and prices could remain stable over the next couple quarters. But, as inventory shrinks, so too will the abundance of quality investment opportunities. With the residential real estate market now hovering around the bottom, now is the right time to invest.

Commercial Real Estate: No Reason to Panic

While it appears that we have already witnessed the worst of the residential real-estate collapse, we are preparing for the brunt of the crash in commercial real estate. The commercial real-estate industry has taken the place of residential real estate as the breeding ground for widespread fear. Daily reports suggest the commercial real estate storm will be more severe than the one that struck residential housing. Instead of causing another shipwreck, our economy’s commercial woes may prove to be more of an anchor that puts an imposing drag on our recovery.

The combination of job losses, store closings, rising vacancies and drastic cost-cutting measures puts commercial real estate in a serious bind. However, knowing their mortgages will soon come due or reset, owners and managers of office buildings, shopping centers, hotels and apartment complexes have had ample time to prepare for upcoming obstacles.

Owners of commercial real estate are not backed into a corner. Banks prefer options that keep mortgage payments flowing. Therefore, banks are willing to work with borrowers to find solutions, even though bundled commercial mortgages will add to the difficulty of negotiations. Securing loan payments is not entirely the responsibility of banks or those who hold investments in pools of bundled loans. The owners of commercial buildings originally took on the responsibility and many of them are actively working to find solutions to keep their properties operating. Many property owners will continue to make their payments either because they have adapted their strategies to fit the difficult times, or because they have explored creative ways to bring in extra income. Of course, some number of defaults will be inevitable. Some of those property owners who are unable to acquire loan restructuring or extensions will view a loan default as their best option.

As with the residential real estate debacle, the government is sure to intervene in an attempt to keep our economy from falling into another dark hole. For example, the already-in-place Term Asset-Backed Securities Loan Facility (TALF) supports the issuance of asset-backed securities in order to help small businesses meet their credit needs. The TALF is one of a handful of sluggish government efforts that was created to help provide a crutch for the commercial real-estate industry.

Commercial real estate will continue to tug on recovery efforts, but it is not likely to cause the amount of damage we witnessed during the residential collapse. The time to invest is not when everyone shows interest in an asset. A staple to wise investing has always been buying low and selling high. The commercial real estate market has produced sound investments in the past and will once again flourish. Getting into the market in times of success is more costly, the opportunities are scarcer and the rewards are not as fruitful. The best time to invest is when the masses are fearful, and the masses are easily spooked by commercial real estate right now.

The Benefits of Hiring Professionals

As is the case when taking on any money-making venture, the waters are difficult to navigate alone. We all want to make investments that are conducive to both our current financial situation and our future goals. Investing with a Registered Investment Advisor (RIA) helps eliminate the series of headaches that come with making sound investment decisions.

Hiring a RIA has a number of benefits. For instance, a RIA can take on the following responsibilities:

Provide objective investment and financial advice
Set achievable financial and personal goals
Take into account all of the factors that influence your current financial situation (your assets, liabilities, income, insurance, taxes, etc.) and provide a comprehensive analysis of where improvements can be made. Also, this helps to guide your investment plans and retirement goals
Provide consistent investment consultation based on your fluctuating savings, investment selections and asset allocation

Before hiring a RIA, you should also be able to answer the following questions:

What services do you need? Can your potential RIA deliver these services or are there any limitations on what they can deliver?
What experience does the RIA have in dealing with investors in your situation?
Has the RIA ever been disciplined by a government regulator for unethical behavior?
What services are you paying for and how much do those services cost?
How does the RIA plan on getting paid and are you comfortable with this payment method?
RIAs are required to register with either the SEC or their state securities agency, depending on their size. It is imperative to ask for proof of their registration

There are a number of professionals who can provide guidance for your investment strategies. Hiring a RIA can help to take the frustration out of the investment process and help you avoid many of the common roadblocks. The true value of a RIA is their ability to thoroughly understand your overall financial goals and provide professional investment advice that is consistent with those goals.

All My Best,

Thomas J. Powell

[1] Bergsman, Steve. After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade. Wiley, 2009.

[2] See http://online.wsj.com/article/SB125673286433612857.html?mod=WSJ_hps_sections_realestate

Tags: banks, Case-Schiller, commercial real estate, Credit, economics, economy, ELP Capital, Federal Reserve, Finance, financial, Financial Future, foreclosures, homebuyer tax credit, invest, loans, normalcy, obama, Real estate, real estate assets, registered investment advisor, residential real estate, Retirement, ria, Standing In The Rain, The Powell Perspective, Thomas J. Powell

Comments feed (RSS 2.0), comment or trackback from your site.

Investment Strategy Turns More Cautious, Existing Home Sales, Record Auctions This Week, Galleon Grief

Posted By Bret Rosenthal, October 26th, 2009 : Permalink

Stock Market Investing:

The Equity markets were down across the board Friday as the week ended. Last week was a week of churning and distribution, two actions I hate to see during a market advance as they often mark the end of a rally. To make matters worse the churning has occurred at key areas of resistance on all three major averages; 10,000 on the DOW, 2200 on NASD and 1100 on the S&P 500. Investment Strategy: Turning more cautiousSo, with this negative week still fresh on the mind, it seems appropriate to evoke the immortal words of Andy Grove, “Only the paranoid survive” and discuss three possible developments that could derail the bull.

Development One: Economic numbers that suggest recovery begin to outpace negative economic news. This leads to the perception — or possibly, the reality — that the Fed will reverse its stance on easy credit.

If you are a new reader I strongly advise the perusal of past post before you begin your protest. Those of you who are familiar with my work will know the well documented relationship between bad economic numbers, easy credit, weak US$ and strong equity markets. As long as the Fed remains committed to easy credit in all its forms the bull market can continue.

However, I have witnessed a disturbing trend over the last few weeks. Good news on the economy leads to selling. This suggests to me a real fear pervades the markets with regard to the continuation of easy credit. The equity markets are trading at these lofty levels because of liquidity not reality and if the Fed controlled gravy train of easy credit stops then trouble will ensue. When the gravy stops dog will eat dog. What the distribution of the last few weeks may be telling us is that the big dogs are smelling trouble and are preparing.

Today’s trading offers a perfect illustration of Development One. First, good earnings numbers out of Microsoft & Amazon were not able to move the markets higher. Instead the excitement was used by the big players to distribute their holding. Second, the following “good” economic report hit the news wires this morning, but the equity markets sold off almost immediately after the release:

Existing Home Sales Exceed Expectations
Existing home sales jumped 9.2% to 5.57 million units in September. The increase followed an unexpected decline (-2.9%) of sales in August. The consensus was expecting sales to rise by a much more modest 5.1% to 5.35 million units.

Beyond the headline sales numbers, there was another good piece of news from the data release. Distressed properties, which accounted for almost 50% of sales throughout the spring and summer, have declined significantly to only 29%. Sales of non-distressed homes make it more likely that consumers will start looking at more expensive properties as homeowners move up the pricing ladder. The increase in sales helped push the total available supply down to 7.8 months.

We obviously don’t have the answer to these questions. However, this very real possibility must be respected. There has always been a high correlation between long rates and the equity markets. I can think of no better example than the crash of 1987. For four months the bond market was collapsing (rates rising) before the equity markets infamously followed.

Of course, in ‘87 bonds sold off because the Fed was tightening. If, however, bonds sell off even in the face of Fed easy credit policies then I hate to see the ensuing equity market response.

Record Auctions Announced…euro 1.5001…yen 91.5060 (3.411% -07/32)
Treasury will sell a record batch of bonds next week with $44B 2-yrs Tuesday, $41B 5-yrs Wednesday and $31B 7-yrs Thursday. The record levels show an increase of $1B on the 2-and-5s, and $2B on the 7-yrs. There will also be $7B reopened 5-yr TIPS going off Monday along with $29B 3-mos and $30B 6-mos. The market may get some relief as the news is over, but the high end of expectations had been for closer to $115B versus the $116B announced, so any relief may be brief.

Development Three: The high profile SEC take down of Galleon may cause a ripple effect leading to hedge fund unwinds.

Galleon had over $3 billion and now according to DJ-Galleon winding down all hedge funds.

Last year we all witnessed what happens when hedge funds are forced to unwind. Many of the big funds are often involved in the same trades and one unwind leads to another. There will be many denials along the way but the equity markets will speak the truth.

I will also respectfully submit to you, the readers, that the derivatives crisis is far from over. The individuals that created the credit crisis are still running the show. If you believe this statement is incorrect or feel President Obama promised you change so his cabinet must be full of new thinkers, I suggest you view the PBS Frontline documentary entitled The Warning .

The Warning brings to mind two obvious questions:

1- What will cause the next derivatives crisis? Could it be the take down of a major hedge fund that ignites the next collapse?

2- Why isn’t Brooksley Born a major member of the Obama administration? If he was truly an agent for change wouldn’t she be a must in the cabinet?

Development Two: A funding crisis unfolds.
Will the US$ decline in value to a point where long rates must increase aggressively for our government to continue funding its debt? How long will China and others tolerate the ruse of quantitative easing before demanding higher rates?

Tags: 2nd stimulus, DOW, earnings, economy, equity markets, Fed, galleon, investment strategy, nasd, Not Categorized, obama, sp500, stock market investing, treasury market, US$

Comments feed (RSS 2.0), comment or trackback from your site.

Take Advantage of the Future by Investing Now

Posted By TomPowell, October 23rd, 2009 : Permalink

Investors at all levels have been tempted to stash their savings away in what they view as safe places: federally-insured banks, gold, their mattresses. But, as retirement creeps closer, or for some of you, continues on, it is difficult to protect the value of what you have. It is even more difficult to take what you have and get it to work for you. However, difficult does not mean impossible. There are tremendous opportunities in this economic climate and these opportunities can do wonders for your future.

There is no direct financial path to retirement safety, but putting some basic concepts to work can give your investment portfolio a boost and start you in the right direction. A 60-year-old investor needs to plan for at least 30 years of financial security, so investing in the short-term is not sufficient. Planning for the long-term comes with one major obstacle: inflation. Shoving your cash into a large, everything-proof safe will ensure that the cash is always available, but inflation is resistant to safes and will still eat away at your value. Inflation adds to the puzzle of retirement planning, but keeping a stash of conservative investments can help save your portfolio from being deteriorated by inflation.

Investors do not have to fear that most conservative money-market funds or bonds issued by the federal government will lose their money. But, these are short-term protection strategies. The returns offered by these investments are likely not enough to stave off inflation. If the cost of living significantly rises, you are going to want your savings to do the same. Many investors are turning to TIPS (Treasury Inflation Protected Securities) for peace of mind. TIPS can be very helpful in side stepping inflation woes, but in a low-inflation environment, your returns will be lower than many other fixed-income securities. So, do not go overboard with TIPS.

Your best weapon is diversification. Having a diverse mix of investments is a great strategy for both conservative and more risk-adverse investors. Diversification will always be your best hedge against inflation. Setting up a brief meeting with a registered investment adviser will help you to build a diverse portfolio that meets your needs. Playing it too safe now is not something you want to try and correct years after retirement. Running out of money later in life is something you can, and should, protect against now. And, again, this economic climate is filled with long-term investment opportunities.

Living Vicariously Through Predictions

Despite grim news reported for September that housing starts came in lower than expected, they rose from August rates. The tendency to be disappointed when expectations are not fulfilled adds to the bad news already being forced on us during these difficult times. When a report from the Commerce Department was released in Washington earlier this week, newspapers jumped at the chance to report that the glass was half empty. All predictions aside, housing starts still showed improvement.

According to The Wall Street Journal, “The rise in housing starts came in at 0.5 percent, climbing to a seasonally adjusted 590,000 annual rate compared to the prior month.”[1] Housing starts improved, but major media outlets pumped out headlines such as “Bummer for Housing Starts” (Forbes) and “Housing Starts Miss Expectations” (CNNMoney.com). The media ignored projections made by 76 economists in a Bloomberg survey. Their estimates predicted that housing starts would rise somewhere between a rate of 582,000 to 630,000. But, their estimates were made at a time when the August rate was thought to be 598,000. When a correction to the August figures brought the number down to 587,000, the predictions had already been made. If the numbers the economists were using were off by 11,000, then you could assume most of them would have lowered their expectations by the same amount. This would have made the average of the 76 predictions stand at 595,000; which is very close to the recently reported 590,000 figure.

The point of all of this is that our economy still showed a humble sign of improvement. With the amount of slack still present in the housing industry, it is a small feat to break ground on any amount of new homes. Looking through rose-colored lenses will not do us any good, we need to be realistic. In that same vein, hammering out pessimistic stories when they are not realistic will only bring down the confidence upon which our markets rely. A group of surveyed economists who were making predictions based on false numbers should not have a drastic impact on our economic situation. As Charles Mackay wrote in his well-noted “Extraordinary Popular Delusions and the Madness of Crowds” in 1841: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Negativity spreads quickly. We have enough to go mad over without becoming disappointed when a group of “experts” do not have their predictions come true. I think the real worry here should be in our experts’ ability to make accurate predictions. Instead of “Bummer for Housing Starts” how about “Experts off Again” or “The Facts the Experts Couldn’t See Coming”?

Oh! I Didn’t See You There, Small Businesses

Small-business advocates have criticized the White House for not giving more attention to small businesses. But, on Wednesday the Obama Administration announced that it would use funds leftover from the $700 billion bailout package to aid small businesses. Discussion of the new program came in response to dissatisfaction with the initial wave of bailouts that aimed at helping large financial firms and neglected small businesses. Many policy makers have argued for months that the $700 billion stimulus was only used to balance the books of large banks.

The new plan, which is still nameless, will aim to increase lending at small, community-based banks. As was the case when individual states were dealt federal funds, the banks will be required to submit somewhat-detailed plans outlining how they plan on using the money. Since the new program will aim to get funds into the hands of small business owners, the banks’ plans will need to detail how they will play a part in this.

After a number of meetings with community banks that will be scheduled through the end of the year, officials hope to determine the amount of capital that will be distributed. The funds are only to be available to small institutions with less than $1 billion in assets.

In his announcement in Washington on Wednesday, President Obama said he was prepared to “shift the government bailout efforts from larger banks to smaller banks because small business owners still have too little access to credit.”[2] Officials behind the new program hope that increasing credit to smaller institutions will energize job growth, which is something that has been reported on relentlessly, but has received little government attention.

Although the exact amount of the remainder of the stimulus funds is unknown, federal officials agree it is enough to support this new initiative. Having the funds already available and not having to wait on them to be raised will help get the program off the ground. The life of many small businesses could depend on the government’s ability to act quickly. Taking months to consult community bankers may delay the program and inhibit small businesses from acquiring much-needed capital. Small businesses have been ignored thus far and, through innovation and flexibility, they have been able to survive.

Thomas J. Powell

[1] See http://online.wsj.com/article/BT-CO-20091020-709265.html

[2] See http://www.reuters.com/article/governmentFilingsNews/idUSWAT01385420091021

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals.

Tags: alternative investments, bailout, Bloomberg, ELP Capital, Finance, gold, hedge, housing starts, Inflation, Investing, investments, mattress, obama, powell perspective, Real estate, Retirement, small businesses, Thomas J. Powell, TIPS

Comments feed (RSS 2.0), comment or trackback from your site.

The Delicate Balance Between Government Financial Reform and Unintended Consequences

Posted By Dave Reynolds, October 13th, 2009 : Permalink

In last Saturday’s edition of the New York Times, Joe Nocera wrote an interesting piece outlining some of the major obstacles currently facing the House Financial Services Committee. The agency, which considers measures ranging from the banking industry to economic issues to insurance, is responsible for drafting a new financial reform package on behalf of the Obama Administration. At the heart of such a proposal lies the creation of a new Consumer Financial Protection Agency (CFPA), one which would regulate mortgages, credit cards, debit cards, installment loans and other financial products issued by financial institutions.

On the surface, such an agency would serve as a boon for US consumers. For example, the agency could potentially reign in on some of the banking industry’s most questionable practices, such charging consumers egregiously high overdraft fees when they overspend on their debit cards. In the past, banks were more apt to simply reject purchases by consumers who overspent with their debit cards. Now, banks reap billions of dollars annually off such charges. Other proposed regulations range from forcing brokers to spend more time explaining mortgage products to consumers to curtailing unannounced hikes in credit card fees.

Why is such legislation justified? Well, after the near-collapse of our financial system in the past year, it has grown abundantly clear that the financial services industry must change its practices. After all, we, the taxpayers opened our wallets for the Troubled Asset Relief Program to the tune of $700 billion. A message must be sent, loud and clear, that the risky, irresponsible practices of the past are not to be repeated. Part of the government’s role as chief rescuer is to hold these institutions accountable for their actions by 1). collecting on their TARP loans to the banks, while 2.) instituting new regulations preventing the risk of moral hazard. However, these two responsibilities are not one and the same…

As an example, take Citigroup and Bank of America. Citigroup received $50 billion in TARP funds last year, in addition to receiving $306 billion in US Government guarantees on troubled assets. Likewise, Bank of America received $45 billion in TARP funds, to go along with $118 billion in troubled asset guarantees. The two, amongst the largest consumer banks in the world, are hugely indebted to the US Government. Yet to the surprise of few, neither has repaid a cent of TARP money to date.

If the new House Financial Services Committee places more stringent controls on the banks, such as limiting overdraft fees, these banks could miss out on billions of dollars in revenues. Placing caps or limits on credit card interest rate hikes could have the same effect. This lost revenue, while protecting consumers (mainly, the minority with the weakest credit histories), would effectively hurt the US taxpayer, and further dampen the chances that the US Government fully collects on its loans to the banks.

Coupled with this, many of the more traditional revenue streams for these banks earlier in the decade have since dried up. For example, with the housing industry’s continued struggles, banks cannot rely upon the heavy fees previously generated through the bundling and selling of mortgage-backed investment products. Likewise, after being caught with over-levered balance sheets over the past few years, banks have considerably cut back lending to businesses and consumers. Instead, many are shoring up their balance sheets to meet appropriate reserve levels.

So, what does this proposed legislation ultimately mean for the big banks, consumers, and taxpayers? For the banks, such rules will force them to abandon formerly profitable practices and seek out new revenue streams. This could be accomplished through several means. First, they could sell company assets, as Citi did by selling Phibro, its profitable energy trading (albeit, controversial) business, just last weekend. However, the selling of assets is not a sustainable activity over the long run. Rather, the banks are much more likely to cut costs (lay off workers, close branches) or hike up consumer fees in other areas (think higher ATM fees and account charge hikes).

For consumers, the new CFPA will look out for their interests, serving as a watchdog for banking practices it finds unscrupulous, irresponsible, or even predatory. That’s great, especially for the 10% of consumers with the poorest credit histories-those largely responsible for paying hightened fees for services like debit card overdrafts. However, in forcing the banks to abandon practices it finds unacceptable, the agency indirectly forces these banks to seek revenues in other areas. For example, by protecting the consumer who overdraws on her debit card account each month, the agency’s actions could simply force the banks to raise standard fees on all customer ATM withdrawals. In other words, in return for protecting the interests of a minority of consumers, legislation could simply force banks to raise fees for ALL customers.

Lastly, we have the taxpayer. Ultimately, you benefit when the banks repay their TARP funds. As such, you need the banks to continue to increase revenues, grow, and flourish. However, from the taxpayer’s point of view, the CFPA could inhibit this from occurring. By placing more controls on the industry and limiting its ability to generate the necessary income, the agency could serve as an obstacle to these banks’ attempts at recovery.

When it was launched last October, the Troubled Asset Relief Program was widely lauded as a means of preventing additional bank failures. Thus far, few can argue that the program has positively affected the financial landscape and reassured investors. However, while it appears necessary for agencies such as the CFPA to prevent future abuses by ramping up regulations, those same regulations will undoubtedly inhibit some banks’ abilities to repay TARP funds.

For the Obama team, encouraging a more traditional, “bread and butter” model for the big banks is necessary to appease the needs of an industry, consumers, and his taxpaying constituents alike. Yet, as you can see, introducing new regulations is a sensitive issue which can produce a variety of consequences to multiple parties. Perhaps above all else, he must promote a sustainable industry model which ensures the banks’ ability to repay TARP funds without resorting to the same sort of wreckless behavior which brought about this crisis in the first place. After all, as novelist George Santanaya once wrote, “Those who cannot learn from history are doomed to repeat it.”

Tags: Add new tag, Bank of America, banks, brokers, citigroup, Consumer Financial Protection Agency, debit cards, financial products, George Santanaya, House Financial Services Committee, industry, New York Times, obama, overdraft fees, Phibro, regulations, TARP, taxpayer, Troubled Asset Relief Program, US Government

Comments feed (RSS 2.0), comment or trackback from your site.

The Inflation Trade, Alcoa EPS, Obama’s New Stimulus Plan, Australia’s Interest Rate Increase, Commercial Real Estate Woes

Posted By Bret Rosenthal, October 13th, 2009 : Permalink

Today we are going to follow the footprints of the hyper-inflation/stagflation trade that I have been writing so much about. By simply understanding the impact of the important news stories and avoiding the noise of the traditional media outlets, tracking our quarry will be relatively easy. AA Alcoa beats by $0.13, beats on revs (14.20 +0.31)
Reports Q3 (Sep) earnings of $0.04 per share, excluding restructuring and non-recurring items, $0.13 better than the First Call consensus of ($0.09); revenues fell 33.8% year/year to $4.62 bln vs the $4.55 bln consensus. Sequentially, revenues were helped by an increase in realized prices for primary aluminum to $1,972 per metric ton from $1,667 per metric ton in the second quarter, as well as stabilization in the end markets. Co reports cash sustainability are exceeding targets. “In the second half of 2009, there are signs that key markets the Company operates in are stabilizing. Due to low inventories at distributors and rising shipments, regional premiums are improving and global aluminum consumption is expected to increase 11% in the second half of 2009.” (Stock is halted.)

Footprint number one: Alcoa has a much better than expected earnings number. However, the key takeaway here is not that a 33.8% decline y0y was better than analysts thought. The gem in this story is that Alcoa beat expectations because of rising prices. Revenues beat expectations because the price of the commodity is rising. We call this little phenomenon INFLATION.

Footprint number two: The administration recognizes the economic recovery is in trouble and is preparing another stimulus package. So, we have rising commodity prices and no economic recovery. This combination is called STAGFLATION.

Oct. 6 (Bloomberg) — President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label. Read More

Footprint number three: The commodity based economy of Australia heats up and its central bank raises rates. This morsel of a development will have a significant impact on the value of the U.S.$ going forward. The Australian announcement obviously strengthens our case for higher commodity prices and in turn inflation, but the real important consequence of the move will be its influence on the carry trade. The currency of choice for the carry traders of the world is now the U.S.$.

In years past the Japanese Yen was the whipping boy of the currency carry trade as traders sold Yen and bought U.S. treasuries or other assets to benefit from the spread in interest rates. Now, with interest rates held down by the Fed, carry traders can sell U.S. dollars and invest in, for instance, Australian government debt and profit on the interest rate spread. This trade also benefits as the Aussi $ goes up in value versus the U.S.$. As you can see, this behavior begins to feed on itself. The more U.S.$ sold and Aussi bonds bought with Aussi $s the faster the value of one currency goes down while the other goes up adding to the profits of the trade. The result is a progressively weakening U.S.$ leading to a nasty little thing called HYPER-INFLATION.

SYDNEY (Reuters) – Australia’s central bank raised its key cash rate by 25 basis points to 3.25 percent on Tuesday and heralded more to come, saying it was safe to row-back on stimulus now that the worst danger for the economy had passed. The Australian dollar jumped to a 14-month high and interbank futures slid as investors rushed to price in at least one more hike by Christmas, and rates above 4 percent in a year. Read More

Why don’t the powers that be do something to prevent the tsunami of U.S.$ selling you ask? Well, their hands are tied as the story below illustrates. With commercial real estate teetering on the brink, an increase in interest rates is out of the question. You can forget all the verbal attempts the Fed and Treasury secretary Pinocchio (Geithner) make to support the greenback.
Fed frets about commercial real estate - WSJ
The Wall Street Journal reports banks in the U.S. “are slow” to take losses on their commercial real-estate loans being battered by slumping property values and rental payments, according to a Federal Reserve presentation to banking regulators last month. The remarks suggest that banking regulators are girding for a rerun of the housing-related losses now slamming thousands of banks that failed to set aside enough capital during the boom to cushion themselves when the bubble burst.

“Banks will be slow to recognize the severity of the loss — just as they were in residential,” according to the Fed presentation, which was reviewed by The Wall Street Journal. A Fed official confirmed the authenticity of the document, prepared by an Atlanta Fed real-estate expert who is part of the central bank’s Rapid Response program to spread information about emerging problem areas to federal and state banking examiners throughout the U.S. I

In another sign that many U.S. financial institutions are inadequately protected against potential losses on commercial real-estate loans, banks with heavy exposure to such loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans, according to an analysis of regulatory filings by The Wall Street Journal. That is a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007. The Journal’s analysis includes more than 800 banks that reported having more half of their loans tied up in commercial real-estate, ranging from apartments to office buildings to warehouses.
Tune in next time for a discussion on the best way for an investment portfolio to benefit from the scenario discussed above….

Tags: alcoa, australia's central bank, commercial real estate, Fed, Geithner, hyperinflation, Inflation, obama, stagflation, Stimulus, US$

Comments feed (RSS 2.0), comment or trackback from your site.

HedgeCo.Net

Hedge Fund Blogroll

US$ vs. Gold Prices: A Little Perspective, Obama 2010 Budget, $1.9 Trillion Increase in Debt Ceiling

Perspective: US$ vs. Gold

Looming Defaults and the Effect on Currencies, US$ vs Euro

The Fed Meeting Fallout, US$ Strength / Smaller than Expected Debt Limit Increase, Shadow Home Inventory on the Rise, State Budget Problems

Precious Metals: A Minuscule Market, BLS Jobs Report Worthless, Obama Continues to Increase Spending, U.S. Treasury Zero-Rate Auction

Stock Market Investing: Stay the Course & Ride the Wave, GDP not 3.5%?, Economic Numbers Troublesome, Hyperinflation Rapidly Approaching

Real Estate Wrap-up and the RIA

Investment Strategy Turns More Cautious, Existing Home Sales, Record Auctions This Week, Galleon Grief

Take Advantage of the Future by Investing Now

The Delicate Balance Between Government Financial Reform and Unintended Consequences

The Inflation Trade, Alcoa EPS, Obama’s New Stimulus Plan, Australia’s Interest Rate Increase, Commercial Real Estate Woes

Investors

Hedge Fund Managers

My Account

Information / Support

Related Websites