MarketWatch.com - Pre-Market Indications

Saturday, July 10, 2010

Uncommon Markets to Solve Common Problems

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Our first glimpse of the European Common Market came in the late 1950s in Europe where we lived. The evolution came late in the 1950s in the beginnings of Common Market and the formation of EFTA. That consolidated during the 1960s along with the miracle of Germany’s recovery. In the ensuing years more consolidation took place leading up to the European Union, eventually the end of the Soviet Union, the Maastricht Treaty and the euro. Most people during those years did not realize that this amalgamation was really a reconstruction of the centralization of what was once the Roman Empire.

As we wrote many years ago it was a union doomed to failure. It was an unnatural alliance of tribes that had been in conflict since the beginning of time held in part together by a currency based upon one interest rate that would fit all. The social and political ramifications were enormous. The theory of one-interest rate fits all doomed th e alliance from the very beginning, as it was the vehicle for a major malinvestment of funds. It fostered misallocation throughout the entire union and even worse was accompanied by a creeping loss of sovereignty. This is what can happen when economic, financial and social considerations are harnessed by political stupidity or perhaps opportunism. As we wrote many years ago these efforts were doomed to failure.. It was finance and economy run by politically motivated bureaucrats, most of whom were interested in world government. The result is what we have today â€" a Europe on the edge of failure and breakup. A system that not only wanted to act as a gateway to one-world government, but one that at least for a time would channel the power of Germany. The last barrier for Germany was unification done in a way that cost West Germany a fortune and retarded growth for about ten years.

Now we have a bailout to contend with. Austerity throughout Europe and Engl and in order to find the financial wherewithal to pay the bankers the debt incurred by five-euro zone nations. Debt created by banks out of thin air to now be repaid from the hides of not only the nations in trouble, but by lenders as well from other sovereign states, such as France, Germany and others.

We believe in the long run central European nations will tend to again diversify and revert back to nationalistic tendencies after having been unsuccessful in union and in a currency union. The core states had learned that the overly ambitious and poorly constructed euro had become a dependency trap and the centralization had become a bureaucratic nightmare. Germany had paid a dear price for German reunification of East and West Germany. The one for one exchange of the two marks proved very expensive and addition to the reconstruction of the Eastern zone, which was 20 years behind the West - an example of retarded growth. In addition, the work ethic had be en lost. From the German viewpoint it had to be done. The US, and particularly the British and the French were very happy with the reunification, because they knew it would retard growth for about ten years, and make Germany less assertive and less competitive. After that the euro was a millstone around the neck of the country. Only half of Germans wanted the EU and 68% to this day did not want the euro. In fact, they wouldn’t accept euros printed by other members of the euro zone.

If you remember the French and the Dutch voted down the EU Constitution, and there was no referendum in Germany. The bought and paid for politicians voted in their behalf essentially selling them out. As you know a constitution was illegally shoved down their throats. Without a constitution first and then a monetary union to follow. There was no chance the venture could ever work. The outcome was a 27-nation union run by a 16-nation currency. The collapse of which, as we ment ioned earlier, will bring decentralization and nationalism. This tribalism is perfectly normal, especially with a commonality of religion throughout Western and Central Europe. We must say though religion never kept Europeans from killing each other, as we have seen over and over again. That, of course, has been the work of bankers, which is another story for another time.

As a result of these changes coming about Europe will function in traditional ways and prosper even more than before. The weaker countries, that had been subsidized, will again fall behind. That simply is the way societies work. We believe ultimately all nations will return to tariffs on goods and services, because Europe and the US cannot compete with low cost labor, thus the EU and WTO will probably cease to exist. The leader in such a change could well be England and the US. Such developments could also bring difficult times for Muslims and illegal aliens in England and on the contin ent.

The one-world, new-world order concept could very well be laid to rest unless, of course, the elitists decide to start another world war. One thing is for sure the misallocation of assets would end. No more one-interest rate fits all, and no more subsidies. Banks and sovereigns are also going to find out that the debt owed by these five countries is going to have to be restructured. If it is not lenders are going to realize they face a general default. This is going to become a financial and political reality. Responsible reaction is not a luxury these nations can afford and remember that the lender is 80% responsible for the loan. They crafted the terms and created the loan from nothing. A 70% haircut on debt would be workable, but it would engender lenders taking losses of $1.4 trillion. Sovereigns such as Germany, France and Holland could handle the losses, but lesser countries and banks might not be able too. Then again, they should have thought about that when they made the loans. The blame question also arises due to former actions by regulatory powers that did everything short of forcing banks and insurance companies to buy questionable debt. It shows you how insidious the history of these loans have been. This is why strong centralized control does not work. In some situations they were selling quality paper to buy junk as directed by bureaucrats in Brussels. The result is the reality is all there. The fallen nations cannot pay without a 30 to 50 year depression. That means they won’t be doing much business with the healthier states, which would tend to spread the depression. That means a big meeting is coming, which would and should include the UK and US, and as we forecast months ago, default and devaluation will go forward. Such an arrangement won’t stave off depression, but it will shorten it. The big losers will be lenders, solvent nations and individuals. The latter because their wealth will fall by 2/ 3’s, as their currencies are devalued and they enter structured default. If you are unconvinced just look at the deteriorating pricing of debt reflecting default in Europe. As example is the debt of Greece. It is an established fact. The Greek, euro zone and EU approach has been incremental or the death of 1,000 cuts. If the players were smart they would restructure and cut Greece loose from the euro. No, they are not doing that and what we find is the PM selling off the Greek Islands to Bilderberger friends throughout Europe. The key for Greek survival is no euro and back to a low valued drachma.

This time Northern Europe does not need zero interest rates. It was low interest rates in the PIIGS countries that caused these problems initially. The way for the ECB to remedy that is to raise interest rates, but they can’t do that. The US and the Fed would be all over them. The alternative is to have the ECB allow each nation’s central banks to set thei r own rates. That would work, but power would be taken from the European Central Bank, so they won’t want to do that. As a result the euro will then collapse from within. A breakup of the euro would relieve stronger members of having to buy debt from suspect countries and those funds would be invested in new products, real estate and expansion - things that increase profits and lead to less taxes and more stable government. The longer it takes to remove the 5 PIIGS from the euro zone and get rid of the euro the better off all of Europe will be. In spite of looming unpayable debt the stronger European countries will do very well after a period of adjustment. They will be no longer shackled by political bureaucrats from Brussels.

Markets in Europe will return to their historical tribal roots and live naturally. Most countries will be far more prepared to enter a new free market and be comfortable doing so. This would include decentralization and diversity . Getting rid of the euro and the EU will be the best thing in years that has happened to European countries. Needless to say, this won’t go over very well with the New World Order crowd. They will again have been unsuccessful.

The MBA says refinancing requests jumped 9.2% for the week ended July 2nd the highest level since May of 2009, lifting applications by 6.7%, the most since October 2009. Purchase mortgages fell 2%. For June, purchase applications fell 15% vs. May and 30% vs. April. The fixed rate 30-year mortgage was 4.68%. Refinancing accounted for 78% of applications, the highest in 15 months.

Total mortgage delinquencies rose 2.3%, as the 30-day failures rose 10%. Deterioration ratios increased with 2.5% loans as well.

Richard Russell says: …as I've said a thousand times, Fed Chief Bernanke will absolutely not accept deflation. Even while he's keeping short rates at zero and flooding the system with ov er 2 trillion of new Fed Notes, the "economic poison" of deflation is creeping into the economy. 

What can Bernanke do about it? According to ex-Professor Bernanke, "Deflation is always reversible under a fiat money system." In a speech a few years ago, Ben Bernanke laid out the plan -- "US dollars have value only to the extent that they are strictly limited in supply. But the United States has a technology called a printing press (or today, its electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those good and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." 

Think of it. What Ber nanke is telling us is that the government can create inflation simply by continuing massive quantities of dollars, the euphemistic "quantitative easing." 

And in the event that quantitative easing doesn't create the desired inflation, the Fed has another trick. The Fed can buy all manner of debt including foreign debt and use it as collateral. In other words, Bernanke sees no limit to what he can buy in order to jack up the Fed's balance book. 

Shrewd gold-accumulators are well aware of all of the above. As the deflationary and deleveraging forces press on the US economy, the Bernanke Fed is ready to devalue the US dollar in its ("whatever it takes") battle to hold back deflation. 

With these thoughts in mind, I'm thinking of buying more bullion gold in the near future, this in view of the current correction in the gold price. 

Let's boil the whole thing down to three sentences. 

(1) The Fed will not tolerate the growing forces of deflation. 

( 2) To combat the deflationary forces, the Fed will devalue the dollar by printing trillions more of Federal fiat money.

(3) Once it is realized that the Fed is on the path to devalue the dollar, there will be a panic to buy and own gold.

The Baltic Dry Index plunged 4% on Thursday, the 31st straight daily decline.

With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen.

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. Here comes $5 trillion over the next 2-1/2 years.

The above Washington Post story appears to be a ‘plant’. Suspected planters include politicians facing November elections, solons fearing revolution and Street operatives facing poor 2010 performance.

Inventories held by U.S. wholesalers rose for a fifth consecutive month in May, but sales fell for the first time in more than a year.

Wholesale inventories increased 0.5% while sales dropped 0.3%, the Commerce Department said Friday. It was the first decline for sales since March of 2009.

The May sales decline is the latest sign that the economic recovery could be losing momentum as it enters the second half of this year. Weakness in sales could discourage businesses from boosting their orders. That would t ranslate into a slowdown in factory production.

Wal-Mart’s Sam’s Club chain is teaming up with a lender to offer loans of up to $25,000 to its small business members.

The program is one of several moves the retail giant has made to offer bank-like financial services to customers, in part to help them spend. It also comes as the retailer tries to improve profitability at its warehouse-club chain.

The division of Wal-Mart Stores Inc., which is based in Bentonville, Ark., is testing a program with Superior Financial Group, one of 13 federally licensed nonbank lenders, and will offer $5,000 to $25,000 loans to members who qualify. They don’t have to spend the money at Sam’s Club.

Sam’s Club members who apply for a small business loan during the pilot will receive $100 off the ap plication fee, a 20 percent discount, and a discount on interest rates.

Businesses can pay $35 for a membership to Sam’s Club that includes three annual membership cards that allow them to shop at 600 Sam’s Clubs in the United States.

The loan program isn’t Wal-Mart’s first attempt to offer financial products. In 2007 it tried to establish a bank, but dropped the bid after heated debate over whether the world’s largest retailer should be allowed to gain the added financial power of a federally insured bank.

Here's another headwind for a sputtering job market: State and local governments plan many more layoffs to close wide budget gaps.

Up to 400,000 workers could lose jobs in the next year as states, counties and cities grapple with lower revenue and less federal funding, says Mark Zandi, chief economist for Moody's Economy.com.

The development could slow an already lackluster recovery. Friday, the Labor Department said employers cut 125,000 jobs, mostly because 225,000 temporary U.S. Census workers completed their stints. The private sector added 83,000 jobs, fewer then expected, as the jobless rate fell to 9.5% from 9.7%.

Layoffs by state and local governments moderated in June, with 10,000 jobs trimmed. That was down from 85,000 job losses the first five months of the year and about 190,000 since June 2009.

But the pain is likely to worsen. States face a cumulative $140 billion budget gap in fiscal 2011, which began July 1 for most, says the Center on Budget and Policy Priorities.

While general-fund tax revenue is projected to rise 3.7% as the economy rebounds in the coming year, it still will b e 8%, or $53 billion, below fiscal 2008 levels, according to the National Association of State Budget Officers.

Meanwhile, federal aid is shrinking. Money for states from the economic stimulus is expected to fall by $55 billion, says the National Governors Association. And the Senate last week failed to pass a measure to provide states $16 billion for extra Medicaid funding, an initiative that would have extended benefits from last year's stimulus. The House approved $25 billion in enhanced Medicaid funding.

A lot of property owners aren't selling properties these days because they won't accept prices offered in the current market as 'fair'. By fair they usually mean equal to or higher than their purchase price. They'd rather just sit on their property until they can break even.

Yet this phenomenon has caused some property observers, such as ourselves, to wonder whether these reluctant sellers we re distorting the true, lower, value of properties across the U.S.. If they were forced to 'mark to market', then their properties would all show price declines.

Well some people are learning the bad news, even without selling:

But Dan Berwitz, a sales representative for a computer company who paid $204,000 for a unit in the Monteverde in 2007, has mixed feelings about the deal. He is pleased that the sale will bring financial stability to his building, but he isn't happy that the bulk-sale buyer plans to sell the units far below what he paid, in some cases as low as $100,000. "But unfortunately, right now, there's nothing we can do," he said.

Condo Developer LLC, a Delaware-based company, in late spring closed on the $25.9 million auction sale of 165 units in the Vue at Lake Eola, a 375-unit luxury condo complex in Orlando, Fla., that had been operating under bankruptcy protecti on. The Vue, which has floor-to-ceiling windows, 20-foot ceilings and a rooftop terrace, cost $340 per square foot to build, but this latest purchase price works out to about $126 a square foot.

Note the above is even way below construction cost.

The new owners plan to sell the condos, one at a time, at a price of about $225 a square foot, at a profit of about $75 a square foot, when factoring in carrying costs including maintenance and real-estate taxes.

Bulk sales such as these will help establish a bottom for the market, especially if buyers discover that they can earn profits re-selling them. The sad news is that this bottom may be far lower than many current owners realize.

San Jose has budget troubles and is considering selling assets to help balance the budget. Mercury News reports San Jose considering plan to sell water system.

San Jose officials are considering leasing or selling the city's water system. Mayor Chuck Reed says the idea could help balance the budget. A sale could bring in $50 million or moreâ€"but also higher water bill for some residents.

One potential buyer is the private San Jose Water Co., which supplies 1 million people in San Jose and neighboring communities. The company's president sent the mayor a letter of interest in April but noted a sale would mean increasing some water billsâ€"possibly by 29 percent.

A sale also would require a public vote.

San Jose's Structural Problems

San Jose needs to fix structural problems first because one-time fixes will not address the root cause of its budget woes: union wages and pension benefits.

I suggest San Jose outsource its entire police and fire departments to cut costs. If that does not work, then bankruptcy seems like a fine option.

A JPMorgan employee named Kevin Dillon filed a "whistleblower" lawsuit against the bank last Thursday, says the Greenwich Times.

Now all sorts of claims about what happened to him while he was working at the Greenwich JPM office are coming out of the woodwork.

The most significant of Dillon's claims, of course, is that JPMorgan mistreated him after he whistleblew on Highland Capital, a hedge fund.

He says that treatment and compensation towards him chaged significantly after he sent an email to senior bank managers saying that JPM was "failing to fol low basic accounting protocol in handling some of Highland's expense accounts."

But one of Dillon's stranger claims is that his supervisor bragged about his massive gun collection and how he could f$&* up anyone who messed with him.

From the lawsuit, provided as an example of "alarming behavior":

The wide array of guns he possessed and described to (Dillon) the violent acts he would commit if anybody crossed him or his family.

We think it's more alarming that someone bragging about their toys freaked Dillon out so much. It's a strange mind that jumps from "this guy is telling me about his sick guns" to "clearly he's theatening me and saying that if I bring up this hedge fund one more time..."

Highland Capital thinks this guy is a weirdo too.

"Highland Capital Management is not a defendant in the case and unfortunately, appears to be a pawn in a law suit by a disgruntled JP Morgan employee against JP Morgan," they told Greenwich Times.

According to United Arab Emirates Ambassador to the U.S. Yousef al-Otaiba, efforts to prevent Iran from going nuclear by use of military force are better than that country actually going nuclear.

The ambassador made the assertion earlier this week during a conversation with Jeffrey Goldberg of The Atlantic at the 2010 Aspen Ideas Festival, a world leadership conference based in Colorado. Though Goldberg notes the candid interview sparked a flurry of comments once it was published in full on his blog, he believes al-Otaiba's straightforward position on the Iran nuclear program is the status quo for many Arab states. The idea of a group of Persian Shi'ites having possession of a nuclear bomb frightens Arab leaders like nothing else, and most will gladly endorse foreign intervention.

Asked if he wanted the U.S. to stop the Iranian nuclear program by force, al-Otaiba said, "Absolutely, absolutely. I think we are at risk of an Iranian nuclear program far more than you are at risk." The threat posed to his country, he added, was even more extreme due to simple geography: "I am suggesting that I think out of every country in the region, the U.A.E. is the most vulnerable to Iran ... so yes, it's very much in our interest that Iran does not gain nuclear technology."

If the U.S. were to choose not to intervene, the ambassador believed many Middle Eastern countries would opt to form an allegiance with Iran, purely for security measures. At present, the U.A.E. is considered one of America's key allies in the Arab world.

"There are many countries in the region who, if they lack the assurance the U.S. is willing to confront Iran, they will start running for cover towards Iran," he said. "Small, rich, vulnerable countries in the region do not want to be the ones who stick their finger in the big bully's eye, if nobody's going to come to their support."

The national apartment vacancy rate stood at 7.8% at the end of June, according to Reis Inc., a New York real-estate research firm. That was down from the 8% vacancy rate during the first quarter, which was the highest vacancy rate in 30 years.

Rents gained by 0.7% during the seasonally strong April-to-June period, the biggest quarterly gain in two years.

This is still near the record vacancy rate set last quarter. This decline fits with the recent survey from the NMHC that showed lower apartment vacancies.

Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at a near record 10.6% in Q1 2010.

By cutting rates to near zero, the Federal Reserve helped forestall economic collapse. Yet with the recovery flagging, some worry that super-loose monetary policy may actually turn the Fed into an agent of deflation…

Ronald McKinnon, a Stanford University economics professor, argues that near-zero rates gum up the interbank market, which crimps lending growth. He reasons that bigger banks aren't lending to smaller ones because the derisory yield on offer doesn't compensate them for lending to potentially risky counterparties. That is a particular problem, he says, because many small b usinesses borrow through lines of credit. Banks won't extend these unless they know they can tap the interbank market at a later date. The amount of inter-bank loans outstanding was about $160 billion at the end of May, down 60% in a year, according to Fed data.

A Federal Reserve fully attuned to the easy money demands of the Democrats and megabanks clearly has no plan to lift interest rates from their near-zero level. The rationale is: "Why should we?... let's examine the assumption that the Fed is financing an economic recovery. In fact, it is mostly financing a massive expansion of a federal government that's borrowing an unprecedented $1.5 trillion annually. Easy money keeps the government's interest cost on this pile of IOUs low. The recovery comes second, and last week's dismal job growth indicated that it is increasingly feeble.

Super-low interest rates also ensure that the big banks, fated to be wards of the government if the new financial reform becomes law, will have generous margins between their borrowing costs and lending revenues. This will enable them to further pad their balance sheets…

One of the most articulate critics has been Jeremy Grantham, chief executive of GMO, a Boston-based asset management company. In a recent speech he complained that under the Fed's near-zero interest rate policy, low returns on savings are forcing retirees to take greater risks to try to gain a better income.

Mr. Grantham wrote in his latest quarterly newsletter, issued during the spring market rally, that Fed Chairman Ben "Bernanke is begging us to speculate, and is being mean only to conservative investors like pensioners, who cannot make a penny on their cash. Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if brain dead."

Yves Smith and Rob Parenteau in a NY Times op-ed: Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product â€" a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.

The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new eq uipment or expand geographically, an enterprise has to spend money â€" on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.

Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.

A prime reason for corporation cash hoarding is a bleak view of future prospects.

All State just increased our homeowners’ policy by 26.7% (no claims). Home prices are in decline; replacement and repair costs are down due to surplus construction workers and supplies.

 

Our agent says they are being hammered by policyholders complaining that their home values are down but their premium s are up. The underwriters tell the agents replacement & repair costs are higher.

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