Sunday, May 31, 2009

GM bankruptcy tomorrow

In the "It's BFT" ('Bout Friggen' Time) category, GM is expected to file for bankruptcy tomorrow. I predicted their demise 2 years ago, as GM has the awesome track record of losing money 22 out of the last 23 years, incurring debt of more than $82 billion in the process. They have been technically insolvent for years, and bankruptcy was the ONLY option, despite misguided attempts by our government to bail GM out. Billions of dollars down the drain later, our government has finally come to the only conclusion they should have come to months ago. Prior to filing for bankruptcy, thousands have been laid off, dealerships closed, and vendors also going under. An earlier bankruptcy would have not only saved billions of lost taxpayer dollars, but would have reduced the blow of restructuring.

Of course, special interest groups (i.e. the UAW) opposed bankruptcy the whole way. As unpleasant as Chapter 11 is, believe it or not, this is the best thing for GM and US taxpayers. Hopefully, GM's remaining assets will be sold off and the US auto industry can reset and recover in a meaningful way, less burdened by GM's astronomical legacy costs. Capitalism works--we just have to get out of its way and let it sort itself out.

Bond Peddler Geithner

Last week, I anticipated Treasury Secretary Tim Geithner's bond-selling trip (or perhaps more appropriately, begging mission) to China. He will have the unenviable task of trying to convince Chinese leaders that they should continue to buy US Treasury bonds, even while he, Bernanke, Obama et al, continue to trash the dollar. My prediction: one lie begets another lie.

Mr. Geithner will reassure the Chinese leadership that US Treasuries are still safe, and that US leaders are committed to reducing our national debt and curtailing our deficits. Sounds good and well, but actions speak louder than words.

In turn, the Chinese will respectfully nod their heads in agreement, all the while stockpiling their reserves with hard assets like commodities, precious metals, energy, and base metals--in a diversification away from dollar-denominated assets.

Good luck, Tim--you're going to need it.

Golden Cross

I normally form an investment thesis first to get a macro picture, and identify undervalued/overvalued sectors, before drilling down to individual assets or companies for fundamental analysis (company-specific financials, balance sheets, income statements, insider transactions, valuation metrics). I apply subjective analysis (competitive analysis, market potential, financing environment) and will sometimes perform technical analysis (TA) as a criterion for entry or exit points. Many technicians only perform TA--they call themselves chartists or quants. They believe that price, volume and direction determine future prices. I don't agree with their all-or-nothing approach, but I do pilfer some of their analytical tools.

So while I don't entirely rely on TA indicators, I will use them as confirmations to support my other analysis. One particularly useful TA indicator is the Golden Cross, when a shorter-term moving average crosses above a longer-term moving average (e.g., the 50-day moving average crosses above the 200-day moving average). This is normally bullish.

The opposing Death Cross is normally bearish, and accurately predicted last year's market decline (and one of the reasons I was out of the market).

I also track trading volume, both up and down. A big increase in up volume is bullish, as interest is stoked among big institutional buyers. If Fidelity is accumulating shares, that's bullish. If Average Joe Investor is buying odd lots like 55 shares, that's not so bullish (in fact, it's bearish). Likewise, if Fidelity is selling shares in big chunks, it's time to look for the exits, as distribution is taking place. In summary, volume precedes price, both up and down.

So after performing my fundamental and subjective analysis (Chronic Fatigue Syndrome, Swine Flu, clinical trials, timing, etc.), the final piece of my due diligence on HEB was checking the moving averages, among other indicators like volume. Look at the Golden Cross in early May. And look at the subsequent movement in the stock.

This is not a recommendation. Investing is risky and should be approached with caution. Please do your own due diligence.

Wednesday, May 27, 2009

Same ol', same ol'...

With the US Dollar getting trashed, the yield curve is steepening. Easy monetary and fiscal policies have reduced short-term US Treasury bills yields to historically low levels, but with inflation fears ratcheting up, 10-year and 30-year US Treasury bond yields are breaking out on the upside, simultaneously driving down the price of these bonds. We are in a world of hurt, ladies and gentlemen, because the Fed and US Treasury department are losing control in their attempts to manipulate financial markets and "manage" the economy.

I know I sound like a broken record, and my investments have been positioned accordingly for months now, but there are no winners in this game of Russian roulette central bankers worldwide have been playing. In a race to devalue their own respective currencies, governments are running out of options--other than to just print more currency. Commodity prices are rising, but the more accurate statement is that currencies worldwide are being debased--hence, prices are going up.

Net result? Hyperinflation. This is not good for equities, bonds, or real estate, as borrowing costs increase. The silver lining is if you can lock in a low fixed-rate mortgage, so real estate should be fine years from now. With inflation, savers are punished, and debtors rewarded, as they pay back loans with deflated dollars. Your dollar will never be worth more than it is today! I've posted what I've done--people have to make their own decisions. Protect yourselves, but expect higher inflation.

Fed inflation projections

According to Bloomberg:

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.

Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.

My translation: don't listen to government statisticians and economists. Expect massive inflation down the road, not deflation. The technical reason: economists are retrospective, relying too much on lagging indicators, instead of forward-looking data. The "real" reason: it's in the government's best interests to under report inflation data. Pension fund and social security payments with cost-of-living adjustments are linked to the consumer price index (CPI) data. Also, a soaring cpi is unnerving to markets and consumers, driving up interest rates, especially at the long end of the curve (longer expiration bonds). This caps economic growth as the cost of borrowing increases.

As consumers, we know the real story when components of our budget are rising on a regular basis. So what should we do in the face of diminished purchasing power? Precious metals and other commodities, including energy and grains are good hedges against inflation. Aside from the physical commodities, mining companies and commodity exchange traded funds (ETF) are other potential plays. For bond investors, there are Treasury Inflation Protection securities (TIPS), and the TIP ETF.

Disclaimer: Due your own due diligence and consult with your financial advisor. These are not specific recommendations.

Biotech update

All our biotech plays are green, including obesity, swine flu, renal, and various oncological drug companies. This is a relief, but it always concerns me when stocks gap up. I've taken some profits, leaving most shares on the table in case they gap up due to pivotal events. While I am bearish short-term, this bear market rally has some juice behind it as the Fed continues to pump the system with a flood of dollars.

Nominally, investors should do well, but returns will lag in real terms once inflation kicks in. More on that later...

Friday, May 22, 2009

The world's biggest bond salesman

WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner will visit Beijing next month for two days of meetings with top Chinese officials aimed at strengthening the economic relationship between the United States and China, the Treasury Department said on Tuesday.

Geithner is due to meet top Chinese economic policymakers on June 1-2 "to discuss a range of issues of importance to both countries, including strengthening U.S.-China economic ties to promote stable, balanced and sustained economic growth in the two nations," the Treasury Department said in a statement.

The trip is Geithner's first to China since taking office.

Treasury did not specify with whom Geithner would meet, though Geithner's predecessor Henry Paulson repeatedly met Chinese Vice Premier Wen Jiabao and central bank governor Zhou Xiaochuan.

In March, Zhou caused a stir in Washington when he called for a new "super sovereign" reserve currency to replace the U.S. dollar.

Last month, the Geithner Treasury declined to label China a currency manipulator, retreating from tough talk last year when a campaigning Barack Obama said Beijing had kept its currency's exchange rate unfairly low.

Ya think Geithner is going to apologize for his accusations of Chinese government currency manipulation 15 minutes after he was appointed Treasury Secretary? After all, what does he think he and his cohorts at the Fed are doing--playing Monopoly?

Is Gold manipulated?

Let's ask some former central bankers themselves:

Alan Greenspan, at a testimonial at a 1998 House Banking Committee hearing:

Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.

From the Complaint in Howe v. Bank for International Settlements, et al., United States District Court for Massachusetts, No. CV-00-12485-RCL ( The reaction of the Fed and other central banks to the sharp rally in gold prices triggered by announcement of the so-called "Washington Agreement on Gold" in September 1999, as described by Edward A. J. George, Governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, then Chief Executive of Lonmin Plc, a principal shareholder in Ashanti Goldfields Ltd. (paragraph 55):

We looked into the abyss if the gold price rose further . A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.

From Chairman Greenspan's letter to Senator Joseph I. Lieberman, Connecticut, dated January 19, 2000, elaborating upon the foregoing testimony:

This observation simply describes the limited capacity of private parties to influence the gold market by restricting the supply of gold, given the observed willingness of some foreign central banks -- not the Federal Reserve -- to lease gold in response to price increases.

Paul Volcker on the 1970's gold bull market:

Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.

Here's a quote from the economist John Maynard Kaynes (even though I don't agree with Keynesian economics, I agree with this quote):

Markets can be irrational longer than you can remain solvent.

Thursday, May 21, 2009

USDollar debasement

Me thinks printing more dollars debases the dollar, which makes US exporters more competitive against foreign competitors. The other side of the coin is that imported goods are more expensive for US consumers. Welcome to Zimbabwe (okay, I exaggerate--I hope).

Wednesday, May 20, 2009

Dendreon revisited

Adam Feuerstein, an analyst on the, who was previously bearish on DNDN, offers the following bullish analysis on Dendreon:

Interesting tidbit on commercialization prospects:

"Most people are modeling Provenge along the lines of Erbitux now," said Gold, referring to the cancer drug from Eli Lilly(LLY Quote) and Bristol-Myers Squibb(BMY Quote). "I think Erbitux costs around $80,000 a year now. ... I'm not saying that's going to be the Provenge price, but that's what analysts and people on the Street have in their heads when thinking about a Provenge price.

"If you use that assumption and say that the market size is 100,000, men then the total commercial market opportunity for Provenge is $8 billion."

Gold on Provenge in Europe:

"We have only had superficial high-level discussions with the Europeans, so the European regulatory strategy and European commercial plans are things that we're really going to look for a partner to oversee. Dendreon is going to focus on the U.S. market. "

Gold on signing a partnership for Provenge or entertaining acquisition offers for the entire company:

"We are committed to commercializing Provenge ourselves in the U.S. and finding a partner outside the U.S. ... If someone puts an offer on the table for the entire company we have a fiduciary responsibility to consider it, but that's not how we're building the company or how we're planning on building the immunotherapy franchise.

I'm thinking a buyout offer of $300 a share seems reasonable. :-)

Even though myself and several of my friends and family bought DNDN in the single digits, I'm already regretting selling some shares at $25.

This is not a recommendation. Do your own diligence. Investing in equities are inherently risky, especially the volatile biotech sector. Good luck to all.

Tuesday, May 19, 2009

Gold in backwardation again

Watching the tape on Bloomberg, I noticed gold went into backwardation again--the condition where the near-term futures contract price is lower than the spot price. This is a rare anomaly, as spot prices are usually lower than future delivery prices, a condition called contango. The reason why futures prices are normally higher is due to the storage, insuring and security costs of holding physical inventory.

When the spot price is higher, that means inventory is tight, and sellers need to scramble to find inventory for buyers who demand delivery. I went into detail on the probable causes of backwardation last year, usually revolving around the artificial suppression of the price of precious metals by commercial banking shorts. It's in the best interests of the big money centers, central banks, and sovereign funds worldwide to manipulate the price of gold down, as soaring gold prices are a sign of economic distress and lack of confidence in our financial systems. Capitalism is based on the aggregate trust of the population, and when that trust is shattered, well, you've seen examples of it recently and in generations past.

The problem with backwardation is that demand for physical delivery eventually exposes the artificial naked short selling of gold and silver. Normally, when futures contracts expire, settlement is via cash, and the other contracts are rolled over to the next month. However, when the seller doesn't have inventory (hence, "naked"), and combined with the buyer demanding delivery instead of cash, the seller has to find physical bullion wherever he can get it. And with physical inventory tight, the seller must pay a premium to buy the bullion for delivery to the counterparty of the futures contract (the original buyer). When enough buyers demand physical delivery, then the short manipulation gets exposed, and the roof gets blown off the top of the house. It's similar to the Bear Stearns and Lehman blow ups, when they took on too many positions on the CDS derivative trade--once the gig was up when home borrowers defaulted, all those contracts imploded, as did their balance sheets.

The street price of gold and silver carries a premium over the futures contracts on the COMEX. Once that becomes common knowledge, the gap will narrow, and there will be a run on demand for gold and silver. That's what happened in the 70's when we experienced inflation, as there was a general distrust of our government's deficit spending.

Gold bugs will declare this time it will be much worse, as the Fed continues to borrow and print trillions of dollars. I've read predictions of gold prices between $1,500 to $10,000 over the next 5 years. I believe gold will peak around $2,500 an ounce over the next 5 years, as that is equivalent in today's dollars what the 1980 peak of $850 was.

What's even more intriguing is how undervalued silver is at $14 an ounce. Based one some metrics, including the gold/silver ratio, silver should be at least $60. It's a hybrid metal--it serves as a store of value like gold, but it also is a base metal used for industrial purposes. It is also used in jewelry like gold. And with base metal mines being shut down due to last year's meltdown in demand, silver inventories are very tight. Physical gold bullion has recently carried a premium of 3 - 15% over the spot price, but silver's premium has been as high as 80%! If that isn't a clear indicator that COMEX silver prices are being manipulated, I don't know what is.

Silver has also recently broken out above resistance at $14. Next stop looks to be $17.50, before the shorts try to hammer it back down. Long-term, the shorts are going to lose their shirts once the floodgates are open. The silver COMEX market is manipulated even more than the gold exchange, because it is much smaller. And because silver tends to trade in tandem with gold, manipulating silver is a cheaper proposition.

Big hedge funds are stockpiling gold ETF positions and snapping up gold mining shares, even as retail demand plummets due to higher prices. The net effect is that gold holdings are being transferred from weak hands (retail jewelry users in India) to strong hands (big institutional funds) intent on hedging themselves against imminent hyperinflation.

With commodity prices across the board climbing (energy, precious metals, base metals, crops, grain), the markets are trying to tell us something, even while the government still harps about deflation, and relying on fraudulent consumer price index data. Government economists are busy looking in the rearview mirror, intent on declaring deflation is our worst enemy, while our economy is speeding towards a huge, concrete wall of hyperinflation.

Money management

Money management to me is positioning your assets so they are poised to appreciate, but having enough liquidity to pounce when opportunities arise. You need bullets in your rifle to hunt your prey.

When markets rise and my asset values do accordingly, I get increasingly nervous. I am nervous by nature when it comes to finances, and I also have a bargain-shopping mentality. Perhaps that's why I don't mind it when markets drop--they represent buying opportunities. That's just my personality make-up.

The current rally in equities and commodities is a head fake to me, but strong enough to appreciate 40% so far from March lows, and irrational enough to extend another 20% potentially. So even though I believe this is a short-covering rally wrapped inside a secular bear market, I won't be shorting it--I won't get in the way and will let it run its course.

Instead, I pulled some profits off the table, leaving the majority in play for more profits--in case I am wrong on an impending correction. The higher the market goes, the more I'll pull off the table. Just like I will average in (buy) while the market tumbles, I will average out (sell) when it rises. I'll never be 100% invested, and I'll never be 0% invested. You don't want to get caught 100% long when the market tanks, but you don't want to completely miss a huge rally either. Meanwhile, I also am writing covered calls to generate income while I stay in the market. This will limit my upside if called away, but I'd still be up triple digits on my entry points and I keep the options premiums no matter what. Not bad. If the market corrects as I expect it to, I have some dry powder to go bottom-fishing.

In a raging bull market, your best returns result from being fully invested. But in a declining market, being 100% long leaves you no recourse but to sell into that declining market. Liquidity is king in those instances. So I will never be fully invested, no matter how bullish I am. And I am certainly not bullish today--at least not on equities.

Commodities--that's another story. With the dollar continuing to be flogged in the FOREX, the energy sector, metals, and soft commodities have all soared. This plays right into my thesis of the Fed reflating the economy with dollars in order to stave off another Great Depression. I think Bernanke will be successful by his criteria, but looking around the corner, this monetary explosion will result in inflation--the commodities markets are telling us that--all we have to do is listen to them. By the way, an exploding money supply is also why I believe equities may have more room to run north, but structurally, our economy is so broken I can't see a sustainable rally in equities.

I will stay mostly long my core inflation holdings: gold and silver mining shares, oil companies, natural gas drillers and pipelines, and commodities. The only equities I'm long on are specialized biotech companies which fluctuate somewhat independently of economic cycles, as they are pivotal event-driven, based on FDA approval. I use the qualifier "somewhat independently" because the financing environment is still very difficult, and markets have a low tolerance for risk. Unless the road to FDA approval is paved with certainty, microcap biotech companies have to be resourceful in order to fund their clinical trials. So far, the biotech companies I have invested in have shown promise, and some have even paid off financially already. A year from now, hopefully all of them will be in the green.

Until then, I stand firmly grounded in my thesis that paper money is becoming increasingly cheap, and owning hard assets will be the best hedge against debased currencies worldwide, including the US Dollar.

Swine flu (H1N1) redux

WHO map of H1N1 virus incidents:

Monday, May 18, 2009

Is the swine flu scare over?

Apparently not, as the World Health Organization (WHO) is contemplating raising the pandemic alert from phase 5 to phase 6, the highest level. The Influenza A(H1N1) virus is rapidly spreading throughout multiple countries, and is now mutating to the point where there is human-to-human transmission. Roche's Tamiflu and GSK's Relenza are stockpiled in the US, but Tamiflu is potentially ineffective against new mutations, and Relenza may only be marginally effective in combating the virus.

Hence, I invested in another clinical company which has developed a vaccine which has been proven effective in Phase III and Phase II trials in Japan and the US, respectively. They already have existing contracts with government agencies, and negotiations are underway to roll out doses for hospital use and for stockpiling. Unfortunately, this swine flu pandemic is not going away any time soon.

Biotechs getting some run

With health conference season in full swing, biotechs are showing green on a daily basis. In between rubber chicken luncheons, CEO's are pitching their companies on the next game-changing treatment for various human ills through endless PowerPoint presentations. Many will fail to live up to their promise, but a few will actually make it through the FDA approval--estimates are 1 in 5 succeed.

The DNDN effect is providing even biotech penny stocks new life, as no one wants to miss out on the next blockbuster. Some companies have also had impressive price appreciation, including VNDA, who received a surprise FDA approval, despite a rejection last year. Partnership and buyout rumors are floating around these conferences, with big pharmas looking to replenish their drug portfolios, as their pipelines dry up due to patent expiration. This effect is driving up premiums for clinical-stage, microcap biotech companies, whose share prices were decimated by the credit crunch and financial crisis last year.

Let's hope the overall market doesn't take away the punch bowl.

Saturday, May 16, 2009

Warning: non-graphic violence, central banks, and reality

Watch and LISTEN to the following video clip on a challenge fight between a Brazilian jujitsu instructor and a hapkido instructor.

This is not an endorsement of one martial over another. Admittedly, I am biased as Rorion Gracie was my first instructor, and his brother Royce, promoted me as I gained in skill level. Rorion is notable, as he single-handedly imported the now-popular mixed martial arts (MMA) industry from Brazil to the US in the 80's, before creating the Ultimate Fighting Championships (UFC) in 1993, now a multi-billion dollar industry. Of course, Royce, his younger brother, is famous for being a multi-UFC champion.

If you listened to the audio, you'll note that Rorion's narrative gives a brief background on how ground fighting strategies were often overlooked in most martial arts, rendering them useless in a real street fight. All those years of fancy strikes and kicks, while beautiful to spectate, were proven ineffective in 95% of street altercations, according to empirical data by law enforcement agencies. That's why the Gracie clan developed their ground-fighting techniques 100 years ago in Brazil, modifying traditional Japanese jujitsu. Their martial art was fact-based, even though it diverged from other traditional martial arts which had become diluted over the years, emphasizing the sport aspect more than the self-defense or combat aspect. They didn't need police data or market research--they developed Brazilian jujitsu in real-time, making evolutionary and incremental improvements along the way in scientific fashion.

Conventional wisdom in other martial arts (propagated by Hollywood and Chinese films) was that you could quickly end a fight with a strategically placed strike or a kick, assuming the defendant was even skilled, athletic, and flexible enough to execute the technique. Scientific data suggests otherwise--most street altercations start with a clench, and end on the ground, with the stronger opponent usually on top. So if you are weaker, lighter, and unathletic, you better know how to protect yourself on the ground, underneath your assailant. There are no style points in self-defense--the only criterion is survival--or not.

Why do I post this analogy? Let's connect the dots. If you read the previous blog post on infamous quotes, it will give you perspective and context on why our government and central bankers are choosing wrong-headed fiscal and monetary policies. Consensus economic theory among economists, legislators and bankers is that central banks can control economic cycles, mitigating or avoiding altogether booms and busts in the process. Central bank intervention--the thinking goes--can dampen the peaks and valleys. However, history shows that is about as far from the truth as one can get. It would benefit economists to do their homework a little better. Conspiracy theorists claim government economists DO know better, but since re-election is of primary importance, bailouts are more politically pragmatic.

Greenspan's easy money policies created a massive speculative bubble in technology stocks. When that bubble burst, fearing a deep recession, Greenspan artificially lowered interest rates to 1%, attenuating the recession, or so he thought. However, all he did was create another asset bubble--in this case, real estate and mortgages. We all know how that ended up.

Bernanke, with the help of Geithner and encouragement of Obama, Pelosi et al, is pursuing the same policies as Greenspan's--only exponentially larger. Indeed, it is ironic past critics of Greenspan are the same ones who are hailing Bernanke's tactics today (and they ARE tactics, unless you classify demolishing a country's currency and sovereignty a strategy), which are basically Greenspan's policies on steroids.

That Hapkido instructor was expert in his art, and I'm sure was a good instructor. But his widespread ignorance of the benefits of ground fighting put him at a huge disadvantage in a real fight, as he found out the hard way. On the ground, he ended up a fish out of water. By contrast, on the ground, Rorion Gracie thrived, and it was in his best interest to take it there. After all, who in their right mind would go toe-to-toe with Mike Tyson, attempting to exchange punches? Your only chance, in that particular case, is to execute a double leg take-down and pray you don't get knocked out in the process.

Likewise, despite endless academic and industry experience, most of our economists and bankers have pursued a popular, yet flawed economic model--see Keynes' quote on stock market crashes. Central bank intervention creates plenty of opportunities for distortions, corruption, and unintended consequences in our financial systems, to the detriment of our economy. For example, saving "too-big-to-fail banks" damages the balance sheets of smaller, healthy banks and tax-paying citizens. That is not a recipe for a successful recovery.

Like many popular martial arts, it looks good, but when the rubber meets the road, does central bank manipulation really work? In that video, Rorion actually gave that hapkido instructor 3 chances to prove himself and his art. Despite being defeated 3 times handily, he refused to believe what was becoming obvious to everyone there--that years of training had gone down the drain. Not to say hapkido is useless--quite the contrary, hapkido can be very effective against most people. But the glaring fact remained that it was in the best interests for him (and his students) that he had better learn ground grappling techniques in order to really establish himself an expert on self-defense. He had rejected other combat strategies for years--to his detriment, pursuing with tunnel vision an incomplete model. In the dojo, he was granted 3 chances. Out on the streets, a defender gets one and only one chance. How many of his students perished due to false confidence in their fighting skills? It's outright dangerous for a 12 year old black belt to believe he can punch his way out of danger against an attacker twice his or her size. I'd go further and say it's fraudulent for martial arts schools to propagate that line of thinking. Personally, I've seen many challenge matches where our blue belt fighters won against master black belts from other martial arts, including tae kwon do, hapkido, wrestling and karate. Attaining belts is one thing; learning true self-defense is another.

The problem isn't just adoption of Keynesian Economics by our leaders--it's the outright rejection and even lack of acknowledgment of other economic theories, like the Austrian School, which preaches fiscal and monetary responsibility. How many chances do this Administration, legislative body, and central bankers have? Who knows, but given the direction our leaders are taking us, and at this frantic pace, America's status as the world's pre-eminent economic power is in jeopardy. Similar to that hapkido instructor, our elected and unelected government leaders will need a large dose of reality to set in before we can turn this supertanker of our economy around.

Friday, May 15, 2009

(In)Famous quotes

Should we still trust our elected and non-elected government officials? Or Wall Street? Here's a who's who of respected economists from a previous era (see list below). The parallels to today's constant pumping by CNBC are stunning and haunting, considering there is a consensus among government economists--and a foregone conclusion that Obama is pursuing Keynesian Economics policies. I may be in the extreme minority on this, but our country is headed down the wrong path towards recovery. When I hear "the worst is over" or "this time it's different", I'm running for the exits. To quote a former Los Angeles morning DJ, "Sorry--too hip, gotta go".

Will we be able to avert another Great Depression? Perhaps, but the unintended consequences of our government's exploding balance sheet will come back to haunt us for years--if not decades, to come.

And the last quote is particularly stunning considering FDR confiscated private US citizens' gold holdings two days after taking office in 1933. How do we know this? It's called Ft. Knox.

Here's a compilation by Colin Seymour:

1. "We will not have any more crashes in our time."
- John Maynard Keynes in 1927

2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

"There will be no interruption of our permanent prosperity."
- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
- Calvin Coolidge December 4, 1928

4. "There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"This crash is not going to have much effect on business."
- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."
- Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
- R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

"Buying of sound, seasoned issues now will not be regretted"
- E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
- R. W. McNeal, financial analyst in October 1929

7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."
- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

"Hysteria has now disappeared from Wall Street."
- The Times of London, November 2, 1929

"The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
- Business Week, November 2, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929

8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
- HES, November 10, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."
- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect."
- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

"I am convinced that through these measures we have reestablished confidence."
- Herbert Hoover, December 1929

"[1930 will be] a splendid employment year."
- U.S. Dept. of Labor, New Year's Forecast, December 1929

10. "For the immediate future, at least, the outlook (stocks) is bright."
- Irving Fisher, Ph.D. in Economics, in early 1930

11. "...there are indications that the severest phase of the recession is over..."
- Harvard Economic Society (HES) Jan 18, 1930

12. "There is nothing in the situation to be disturbed about."
- Secretary of the Treasury Andrew Mellon, Feb 1930

13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

"... the outlook continues favorable..."
- HES Mar 29, 1930

14. "... the outlook is favorable..."
- HES Apr 19, 1930

15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
- Herbert Hoover, President of the United States, May 1, 1930

" May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
- HES May 17, 1930

"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
- HES June 28, 1930

17. "... the present depression has about spent its force..."
- HES, Aug 30, 1930

18. "We are now near the end of the declining phase of the depression."
- HES Nov 15, 1930

19. "Stabilization at [present] levels is clearly possible."
- HES Oct 31, 1931

20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."
- President F.D. Roosevelt, 1933

Colin J. Seymour, June 2001

Form 4 and Insider transactions

Right before tuning out to watch a video after dinner last night, I noticed a thread on a message board. Sure enough, 6 insiders (Director level) of this biotech company acquired massive shares during the trading day. I immediately made plans to buy more shares in the morning, after catching it at a previous low earlier in the week.

Shares leaped up in pre-market trading, and I placed a perfect limit order that got filled early morning at the intraday low, before rising even more this a.m. as I post.

One can detect company insider buying and selling by perusing Form 4 on the SEC website. Company insiders have the best knowledge and perspective on the prospects of their company. That's why they must register with the SEC when they buy or sell shares, as they possess privileged knowledge. As investors, we can sometimes take advantage of this transparency. When they buy en masse, it pays to sit up and take notice. Insiders aren't perfect traders--they can mistime markets too, but when they buy, it denotes confidence in their companies--especially when they buy in the open market.

Company insiders may have many reasons for selling--exercising of expiring stock options, funding college tuition, purchasing homes, periodic diversification into other assets, etc. Insider selling in and of itself doesn't necessarily red-flag an impending top of share prices. But heavy insider buying or selling at least warrants attention and further due diligence. That's why I bought more this morning, and why I am glad I bought earlier in the week:

Do your own due diligence as investing carries risk. This is not a recommendation.

Disclosure: I am long ARNA shares and selling covered calls.

Thursday, May 14, 2009

Credit Default derivatives to be traded on an exchange

Well, my hypothetical swath at being US Treasury Secretary for a day a few months ago perhaps bore fruit (okay, I'm kidding). I posited that since pricing of credit default swaps (CDS) was so opaque, perhaps an exchange could be created where trading of those derivative instruments could be transparent, liquid, and regulated.

The US Treasury is now pursuing this strategy, which is huge considering it's a $700 trillion market. I explained at length this market in previous blogs last year, so I won't go into the details again, but this action will only make trading these vehicles more transparent, and spreads will narrow. Regulatory control will confirm margin amounts and counterparties can make good on their contracts.

These credit derivatives insure against default of corporate America. The CDS market for collateralized mortgage obligations (CMO) is another animal, as the mispricing of insuring home mortgages against default is still being played out.

Shares of the Chicago Mercantile Exchange Group have been soaring as they take on the trading of these credit derivatives.

Wednesday, May 13, 2009


I posted this on my Facebook profile on a normal whim:

Gregory Nguyen S & P 500 at 920 and Dow Jones Industrials look tired--a pullback could be coming. Time to step aside and lock in some profits. Due your own due diligence. Good luck to all.
May 7 at 10:02am · Comment · Like

Look at the date and S & P 500 level: I called the top almost to a tee. Thank God I was right. I forgot Facebook is different than the finance message boards. Because had I been wrong, I would have received a lot of hate mail. Facebook is pretty much an open kimono, so lesson learned. Be careful what you post because others DO read your ramblings.

For example, here's a response I got today: "I love reading your updates and not understanding one word of them."

At least SOMEONE is reading my ramblings. :-)

Where are all those trillions of dollars going to?

The Fed and Inspector General certainly don't know.

US to lose its AAA rating?

The thought of America losing its AAA rating is, well...unthinkable. And I felt un-American for thinking it--after all, we are the greatest economic power of all-time. But as I've posted in the past, the fundamentals for Uncle Sam's financials are in the dumper. Republicans and Democrats are equally to blame--idealogical and partisan differences are irrelevant, as all our elected officials and the Fed share the blame.

David Walker, the former Comptroller General, resigned his top government accounting post because he did not agree with his own government's fiscal and monetary policies. In other words, he couldn't sleep at night, so he quit. Now that he is in the private sector, he can speak the truth. If this doesn't scare you, you're incapable of fear.

Tuesday, May 12, 2009

Uh-oh, silver is breaking out...

Silver just plowed thru resistance at $13, and sits just below $14.50, another resistance level. Next resistance levels appear to be $16.50 and $20. I'm a big believer of silver leading gold upward, as the COMEX silver market is manipulated even more by the commercial shorts than the gold market, as capital requirements are smaller and hence, easier to manipulate. And with base metal mines being shut down due to demand destruction lately, silver production has summarily plummeted.

Once silver is sprung from its artificial suppression, gold will surely follow, as the inflation hounds will be unleashed. As long as silver holds above support levels at $11, we won't see silver in the single digits again. With the USDollar losing ground against even weak currencies like the Mexican peso, and US Treasury bonds looking increasingly vulnerable, inflation hedges like precious metals become more attractive as safe havens.

My long positions in ABX, GDX, FRG, and SLW are all surging. I will be looking to add more longs on any pullback. I am leaning towards more speculative plays to increase leverage for upside potential.

After taking some profits in oil, I anticipate a pullback in that sector as well, where I will add an offshore driller to maximize upside potential.

While this is good for reflation portfolios, it can't be good for the long-term recovery of the economy, as there will be upward pressure on interest rates. The Fed is desperately trying to suppress interest rates lower, so that the housing sector can recover. The Fed will be in the uncomfortable position of trying to induce economic recovery by keeping rates low, but when the explosive money supply starts flowing into the economy, they will be pressured to raise interest rates to dampen inflation. There is no free lunch with debt monetization.

Thursday, May 7, 2009

Reflation play intact

Oil, natural gas, commodities, copper, and 30-year T-bond yields are all up big, so I took some profits off the table. Long-term treasury bonds are looking really shaky, so the TBT trade was profitable. I'm hoping we get a correction--even if it means I lose some money, because if we don't, whatever recovery we hope to have will be toast. Having said that, most of the reflation trade is still in play, despite any looming correction, as the long-term trend is high inflation--despite the government's efforts to downplay it. If there's only one thing to learn from this financial crisis, it's not to trust central bankers. The last 2 years should have cleared any doubts.

The Chinese are shunning T-bonds as I predicted, and opting for gold, base metals, energy and commodities as they rebuild their domestic and export economy. Expect the yield curve to steepen long-term, as it has since December.

The S & P 500 at 920 and Dow Jones Industrials look heavy here, after a big 30% run up. The fundamentals of our economy are still terrible--rising consumer debt defaults, rising jumbo loan mortgage foreclosures, rising commercial real estate defaults, and toxic assets being shoved under the rug with sketchy accounting. A steep yield curve will help banks earning operating profits with widened net interest margins, but the big money centers still are left holding the bag of toxic assets in their basement. I re-entered puts in a certain for-profit educator, and I think all the indices will correct here. This bear market rally has been powerful, but the market's only function is to take down as many suckers as possible. Too many retail investors are just now joining the bandwagon, and I suspect the majority of the move is now behind us. Let's hope the coming correction isn't a whopper.

I'm not a good trader, altho I'm gettng better at valuation, so please do your own due diligence, and good luck to all.

Wednesday, May 6, 2009

Must read from Bill Gross

If Warren Buffett of Berkshire Hathaway is king of equities, surely Bill Gross of PIMCO is the king of bonds.

Natural Gas and Contrarian investing

Remember when I bought natural gas a couple weeks ago--mainly because NO ONE liked that sector, even the CEO's of natural gas companies, who should be the industry's biggest cheerleaders?

Well, guess what--natural gas company shares have exploded, up over 30% in certain cases. My mutual fund purchase is up 25%, and ATN has more than doubled, a triple-digit bagger.

Logic? The world is awash with natural gas supply, due to demand destruction from a worldwide economic downturn. Natural gas prices surely must decline further, right?

Well, the reason that conventional logic doesn't work as an investment thesis is because markets are not always rational, and when they are rational, they tend to become over-extended and distorted.

But let's examine this scenario further before we declare the madness of markets. If the cost of producing natural gas is $4.00 per British thermal unit, and the market price is $3.50, companies will eventually shut down natural gas wells, in order to suspend losses with each delivery. They have done exactly that, as there are now 45% fewer wells. Shutting them down is easier than starting then up again. More on that later.

With capacity reduced, prices eventually will stabilize and rise, as demand recovers and absorbs excess inventory. As prices rise above production cost, natural gas companies will look to dig new wells to increase their profit margins. However, that's not so easy. Starting up a well takes a lot longer than shutting one down--hence a time lag before bringing capacity on-line. With supply no longer able to keep up with increasing demand, prices rise further. That's the typical supply/demand cycle, and astute, but courageous investors need to account for. Perhaps I'm not so crazy after all. The economic laws of supply and demand do work, but not always in the timeframe most investors anticipate.

As a contrarian, you want a consensus to develop--because it's usually a confirmation that the consensus is wrong when it comes to pricing reversals. It's cyclical. The rule of thumb is when there is a 60/40 ratio, follow the trend--the "trend is your friend" is an appropriate slogan. But when the consensus is overwhelming--perhaps 90/10, you better look for the exits, as the overwhelming majority is almost always wrong.

With natural gas, the selling pressure has been so intense since mid-2008, that the number of sellers has been exhausted--the market ran out of sellers. Prices had to bottom. I follow several indicators to monitor investor sentiment, but it's easier said than done. When your social instincts are to chase the latest fad, it's difficult to go against that same crowd, especially when they are well-regarded. But when it comes to predicting inflection points, it's a prerequisite for investing success.

Sunday, May 3, 2009

Warren Buffett at Berkshire Hathaway's shareholder meeting

Thanks to my friend Dick Comber for finding this gem:

Warren Buffett's good news for gold

Alec Hogg reports from Omaha on a developing scenario ripe for another bullion boom
Author: Alec Hogg*
Posted: Sunday , 03 May 2009


In the 44 years he's been building a reputation as the world's savviest investor, Warren Buffett has rarely offered any good news on gold. Until now.

The two key messages he delivered to 35,000 shareholders at Berkshire Hathaway's AGM in Omaha over the weekend were inflation is coming back; and the US Dollar is headed lower. Both predictions, if fulfilled, are powerfully positive for gold.

Buffett, who has delivered compounded returns exceeding 20% a year to shareholders for more than four decades, did not mention gold by name. But that will matter little to the yellow metal's continuously growing group of supporters. They are sure to interpret this as further evidence that gold's best days lie ahead.

After dabbling in precious metals in the 1960s, Buffett ignored them until a well publicized (but poor) trade in silver between mid-1997 and early 1998. The decision to accumulate 130m ounces was based on factors specific to silver's supply and demand at the time.

Once he'd closed out the position, Buffett jokingly describing it as "the perfect trade - except that we bought too early and sold too late." Since then he has publicly and consistently shunned precious metals, mainly because he prefers assets which generate dividends.

Despite his gloomy forecasts for inflation, Buffett hasn't exactly signed up to gold-supporting groups like GATA. Rather, he suggested to Berkshire shareholders their best protection was "invest in yourself; and as a second option, buy stock in a well run company."

Buffett explained that in the wake of the global financial sector meltdown, State officials have been forced to take the world into uncharted territory. Nobody knows the exact impact of unprecedented bailout and stimulation packages.

But he is convinced of one definite consequence: "You can bet on inflation." History suggests that higher inflation is an important trigger for a rise in the gold price.

During Saturday's six hour question and answer marathon, Buffett (78) and Berkshire Hathaway's vice chairman Charlie Munger (85) once again belied their advanced years through sharp wit and focused minds. They also referred often to their view that the US Dollar is headed south - another bull factor for gold.

Buffett believes US Government Bonds are one of the poorest choices for investors today, especially non-Americans. As he put it: "Anybody who holds (US) Dollar obligations from outside this country is going to get back less in purchasing power in future."

In his view the US is following policies that are bound to have inflationary consequences. Heading these is the heavy borrowing from, especially, the Chinese to fund the bailout and stimulus packages.

Says Buffett: "It's wrong for politicians and others to keep saying they're using (US) taxpayers money. My taxes haven't gone up and neither have yours. What we are doing is borrowing from the rest of the world and building up Government debt. The classic way of reducing the impact and cost of foreign debt is by reducing the value of the dollars you're going to repay them with."

He added: "The people who are really going to pay (for the bailouts) are those who are buying fixed interest (US) Government bonds that will be worth less when they redeem them. The AIG bonuses," he quipped, "were actually paid by the Chinese."

While warning that shareholders should expect to see "plenty of inflation", Buffett said there was no need to despair: "The best protection against inflation is your own earning power. If you are the best at what you do, you will get your share of the national pie no matter what inflation does. The second best protection is owning a wonderful business that does not need capital. With these guidelines, I'd say invest in yourself. It's always been the best investment you could make." -

* Alec Hogg is Mineweb's editor in chief. This is his fourth successive "pilgrimage" to the Berkshire Hathaway annual general meeting.

Saturday, May 2, 2009

Melanoma Monday

My former girlfriend is a 10-year survivor of melanoma, so this Monday will have a special place in my heart. MelaFind is not only a worthy investment, but it is a life saver. It detects melanoma (both positive and negative readings) better than the best dermatologists in the world.

In fact, her dermatologist assured her that her mole was benign, but upon her exit, he noticed she was uneasy with the prognosis. He ordered a biopsy so "she could sleep at night." The biopsy revealed stage 2/stage 3 melanoma, and she was scheduled for surgery the next day. As the CEO of Electro Optical Science was quoted, "With melanoma, the paranoid survive".

A big shout out to Lisa C on her 10-year anniversary! And may you have many more 10-year anniversaries.