"Kip's VRA financial newsletter is a MUST read for every saavy investor in this country. Disregard it at your own peril. His mantra is my mantra. Kip Herriage's newsletter is my financial Bible."

--Wayne Allyn Root
2008 Libertarian Vice Presidential candidate
Author, "The Conscience of a Libertarian"

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Twitter: @kherriage

Tuesday
Jan202009

One Last Chance for an Obama Rally

Tomorrow is an historic day in the U.S. Our first black American President will assume the highest office in the land, and what most believe is the highest office in the world. Obama won the Presidency with a decisive mandate for “change that we can believe in” and beginning tomorrow we will begin to find out if this is for real, or simply more of the tired Washington rhetoric that we have all become accustomed to.

 

Unfortunately, and from what we’ve seen from Obama so far, it looks like more of the same “government is the answer, and an even bigger government will be the savior that we’re really in need of”. Folks, bigger government didn’t work during the Great Depression and it won’t work now. Revisionist history tells us that Roosevelt’s New Deal saved the US economy in the 1930’s, and without it we would not have survived. The truth however, is that Roosevelt’s massive tax and spend programs extended the economic pain and turned what would have been a bad recession into a global economic meltdown lasting over 10 years. The New Deal attempted to violate the rules of a free market system. Any attempt at this is doomed and has no chance of success. Sadly, I believe that Obama and his legion of supporters will find this out the hard way.

 

Bad Debt + Bad Debt = Bankruptcy

 

The ongoing Bank and Wall Street bailouts have no chance at success for just this simple reason. Unless Obama surprises us come tomorrow, we will continue to throw good money after bad, and the end result will be an even more bankrupt US economy than we have today. To turn the economy around, taxes MUST be eliminated for one full year for all businesses and individuals. As I outlined in my 5 Step Plan to turn the economy around and avoid GD 2, ONLY this will re-engage the consumer, and empower small businesses…which provide 75% of our economic growth…and jump start the economy. Otherwise, even the good debts on banks balance sheets currently will become bad debts on their balance sheets within a few short months. In case you were wondering, this is why bank write-offs continue to take place, and amazingly, how they increase in size each and every month. Simply put: good debts become bad debts very quickly in a weak economy. This is why bailouts don’t work…never have and never will. In a free market system, weak businesses must be allowed to fail…this is the natural order of things and it’s why we have bankruptcy laws on the books in the first place. We can never reach a “true” bottom in the stock market until this naturally evolving business process is completed.

 

 

 

As I wrote last week, I look for several major US banks to be nationalized in the coming days and weeks. Anyone that owns a single share in a bank should sell these immediately. They are being aggressively shorted by savvy short sellers and there is zero upside here. Sure, there will be rallies here and there, but all will be met with massive selling. The one thing that would change this would be Obama’s backing of my 5 Step Plan, and if this were to happen we would see the stock market scream higher 100% plus in under 6 months, and our recession/depression would be a thing of the past (or a similar plan to empower consumers and small business).

 

 

MARKET FORECAST

 

As I’ve been commenting, the markets are at crucial technical levels and must reverse higher in a hurry or they will fall decisively beneath the 50 day moving averages. If this happens, we will test the November 21 lows…and in a hurry. We ended up on Thursday and Friday, maybe due to option expiration pressure, and the S&P 500 ended right at 850 which is a key technical level and the 50 day moving average. The NASDAQ also closed right at the key level of 1530, which is the 50-day simple moving average.

 

The international markets are getting hammered, down from 3 to 5% on average, with banking stocks leading the way. Unless Obama pulls out all of the stops, his honeymoon is going to be an incredibly short one.

 

Finally, Precious Metals continue to rank among the best investments for 2009-2010. Massive currency inflation can only end with one outcome…a much weaker dollar and much stronger gold and silver.

 

I wish President Obama great success…and the courage and wisdom that it will take to become a great leader.

Kip Herriage

Editor, VRA

www.vraletter.com

 

Wednesday
Jan142009

5 Step Plan to Prevent GD 2

Trillions are being spent by the US government on bail out after bail out, yet the economy continues to fade away. We’re quickly seeing the excitement from an Obama presidency dissipate, as leading Democrats (from his own party no less) openly question key components of Obama’s $2 trillion economic stimulus program.

 

As I’ve been writing, the key to turning around the economy is reaching a true floor in the housing market and re-engaging the American consumer, whose purchasing power is responsible for over 70% of our GDP. In turn, these changes will reverse rapidly deteriorating corporate profits, which look to drop over 30% from 2008 levels.

 

The following is my plan to reverse this economic deterioration on a dime. Once implemented, this plan will turn the economy around in less than one year. I’m talking about a reversal from what economists are predicting will be a negative 5% GDP to a positive GDP in under 12 months. Sound too good to be true?

It’s not…read on...

 

 

5 Step Plan to Prevent Great Depression 2

Step One:

Eliminate all Federal taxes for 1 year (both personal and business)

This first step is far and away the most important, and will result in an immediate explosion of true economic growth. Yes, this will result in approximately $2 trillion less in government tax receipts, but isn’t this about the same size as Obama’s proposed stimulus package, which would also result in tax liabilities that our children and grandchildren would be on the hook for, and for decades to come?

 

With my program, 100% of the $2 trillion stimulus would work its way into the economy….immediately. Remember, with government sponsored stimulus programs, 30 cents of every dollar is lost in administrative costs, fraud, beauracratic red tape, etc. There’s no better way to get the consumer spending, and business hiring, than direct and immediate tax cuts. Remember, we lost our manufacturing economy long ago, and it was replaced by a consumer based economy. Therefore, in order to turn the economy around we must see the return of the American consumer. The velocity of money, which has been essentially non existent, would return overnight and the deflationary fears of the FED and monetary economists would very quickly become a thing of the past.

 

In addition, the Federal government should mandate that all 50 states do the same with sales taxes in their individual states. The increased spending by consumers would quickly shore up housing and retail spending, restoring the American consumers place in our troubled economy. Bankrupt states such as California and New York would soon be talking about the economic miracle that they are witnessing right before their eyes, and the tent cities that are springing up throughout the country would vanish.

 

The $2 trillion in Federal tax savings, along with the tax savings in all 50 states, would go directly to our bank accounts and the result would be a near overnight return to prosperity across the country. When foreign governments saw the incredible turnaround happening here they would launch similar initiatives, and any fears of Great Depression 2 would be a distant memory.

 

Step Two:

Cut the Federal Governments Budget by 25%

 

Make these changes effective immediately, and across the board. This mandate will send a strong message that Government is indeed serious about reducing our exploding national debt. We’ve been in this recession for well over a year and have yet to see ANY reduction in the size of government. Including entitlements, total debt is now over $70 trillion and unless we address this problem immediately taxes will have to rise to 70% on all Americans within 10-15 years. Lets get started now. The message that the Federal government will send with these budget cuts will trickle down to states and to individual families.

 

 

Step Three:

Place the US dollar back on the Gold Standard

Nixon removed what was left of the gold standard in 1971, and the result has been massive inflation and debasing of our currency. A country cannot thrive with a weak currency…end of story. In my plan we would begin a 20 year incremental policy to back each dollar by 20% in gold (1% per year). This move would force the government to turn off the printing presses for the US dollar. Simply put, we would not be able to print what we do not have in gold reserves. Thus, the government would be forced to be balance their budget, just as each business and family must. No Weimar, Germany here! 

 

Step Four:

Radical Overhaul of Lobbying and Special Interest Groups

Insider dealings and conflicts of interest will ultimately destroy the US, just as they did the Roman Empire…and as they are currently doing with Wall Street.

Our system is imploding from within, and we must restore honesty and transparency.

 

 

Step Five:

Eliminate the Vast Majority of Financial Derivatives

Eliminate the ability to create or to use derivatives instruments in the financial industry…those that do not directly add to the well being and health of a particular industry or commodity. Derivatives make a lot of sense for a farmer that is hedging against a bad crop season, but they make no sense when used by financial institutions that are using them to increase their leverage and their investment returns by 2% per year, while placing the entire financial system as we know it at risk.

 

 

 

This 5 Step Plan will restore economic security and reverse the risk of another Depression that WILL happen unless we enact systemic change. Remember, if our leaders in Washington really believed that Obama’s $1 trillion jobs program would create 4 million new jobs, then we could simply throw $2 trillion into the program to create 8 million new jobs. Or, why not $3 trillion to create 12 million new jobs? Folks, these government sponsored job programs simply do not work as advertised, and are used simply to increase the size and power of Washington and its power brokers.

 

Bigger government is not the answer...Government created jobs are not the answer…Trillions in taxpayer funded bailouts are not the answer. The business model of the entire financial system is broken. And the pain is only going to get worse.

 

The answer lies within each and every one of us. Entrepreneurs operating in a free enterprise system are what made this country great and this economic program will empower them to make it great once again.

Kip Herriage

Editor, VRA

www.vraletter.com

www.kipherriage.com

 

Monday
Jan122009

Reality Check

 On Friday, the December unemployment numbers were released and the official stats showed us losing another 524,000 jobs with unemployment reaching 7.2%. The total losses make 2008 the worst year since 1945, when the US was coming out of WWII.

The "real" unemployment number, which includes the under-employed and those that have stopped looking for work, now stands at 13.2%. Remember, in the last 11 recessions, 76% of unemployment occured in the second half of the recession. I continue to forecast that the official unemployment figures will reach 12% before we have a turn in the economy.

Having shared all of this negative news, the stock market continues to hold its 50 day moving average, and as long as it can do that, the short term trend remains higher. In the gold market, the rebalancing that I wrote about last week is underway, with gold taking a small hit but nothing like what some of the analsyts had predicted. Yesterday, Merrill Lynch came out and said that their high net worth clients are aggressively buying gold (for some reason this surprised them), and they reiterated their forcast that gold would hit new highs by June 1.

Here's my forecast. Once gold breaks $900/ounce we will see an explosive move higher, hitting new highs (past $1030) in less than 1 week. At some point in 2009 gold will trade at $1500, with the really big moves coming in the 2010-2012 time frame. The same percentage moves will happen in silver as well, and in fact the supply/demand situation in silver could dictate an even larger move than in gold. Remember, we have at least 3-5 years left in this precious metals bull market, and that may turn out to be 10-15 years. I'm talking about the mother of all bull markets here, so make sure you are positioned.

Finally, after watching President elect Obama's economic speach yesterday, for the first time I got the feeling that the bloom is starting to come off of his rose. His economic recovery package will absolutely get our tax dollars into the economy, but there are lots of questions as to whether his plan is the best way to accomplish that. IT IS NOT.

The patient (US economy) is in the hospital with severe head trauma and the healing process needs to take place naturally...and over an extended period of time. Overmedicating the patient, or performing too many operations, not only slows the recovery process but increases the risks to the patients life. Our debt to GDP ratio is already at a record high, and 60-70 percent of it is owned by foreigners. Once they realize that hyperinflation is on the way, they will either start to sell their US denominated debt (and fiat currency), or at least cease to buy more of it. Either way, interest rates are headed higher as bond prices go the other way.

When the decline in bonds begin, it will take the stock market with it, which is when we will go back down and test the lows from Septmember. And yes, we will be positioned to profit greatly from it.

Kip Herriage

Editor, VRA

 www.kipherriage.com  www.vraletter.com

 

 

Tuesday
Jan062009

Why This May Be the Perfect Entry Point for Buying Gold

As the article below spells out, gold has dropped about $40/ounce recently due to annual commodity index rebalancing. This pullback may represent the best opportunity to buy gold for the remainder of the year.

 

Interestingly, our gold stocks continue to rise sharply in price, even in the face of the decline in the commodity itself. This has not happened in at least a year and I view this as a very bullish indicator.

 

 

Any further pullback should be used to initiate or add to your holdings in precious metals stocks, or in the commodity itself.

 

Kip Herriage

Editor, VRA

 

www.kipherriage.com

www.vraletter.com

 

 

 

The major commodity indices rebalance their respective asset weightings once a year (or occasionally more) - and with that comes a mass dose of buying and selling. The 2009 rebalancing is expected to start sometime this week.

Luckily, JP Morgan has produced its best guess of how the 2009 reweightings of the DJ AIGCI and the S&P GSCI indices will impact the market.

The weightings for both indices are released ahead of time, but begin to kick in the first few working days of the new year. In the case of the DJ-AIGCI - which JP Morgan estimates has $25bn in funds tracking it - the new weightings come into force during the roll period that begins January 9th. The S&P GSCI index weightings kick-in after its January roll which commences January 8th. JP Morgan estimates about $50 bn of investment into that index.

As the DJ weighting multipliers account for changes in US dollar-denominated values there is generally more potential for large changes there than in the GSCI, whose weightings are set in terms of ounces/tonnes (on the basis of liquidity and are weighted by their respective world production quantities).

Accordingly, JP Morgan see the most significant change coming in the DJ-AIGCI rebalance. Here the market weight of crude oil is expected to increase from 9.6 per cent to 13.8 per cent, gold from 10.8 per cent to 7.9 per cent, copper (COMEX) from 4.5 per cent to 7.3 per cent, live cattle from 6.4 per cent to 4.3 per cent and sugar from 4.7 per cent to 3.0 per cent. Meanwhile, S&P GSCI crude oil weight will go from 32 per cent to 33.8 per cent. Their analysis:

In financial terms, we expect the rebalancing to have the greatest impact in gold, COMEX copper, crude oil, gold, and live cattle. We estimate that the rebalancing of the two indices is expected to result in $877 million of selling in gold, $699 million of buying in COMEX copper, $528 million of selling in live cattle, and $523 million of buying in crude oil.

Monday
Jan052009

CRIMINAL CONFLICTS OF INTEREST

For the last 20 years plus I’ve been amazed by the vast conflicts of interest that exist on Wall Street and in the financial industry. My first wake-up call was watching my first investment firm implode because of its own internal conflicts and mismanagement of an IPO of a mortgage derivatives fund, brought to us by our new hot shot MBA CEO out of some Ivy League school. That one particular investment brought down a 100 year old firm, and lost our investors at least $50 million (this was when $50 million was a lot of money). The firm was blindsided by the upside potential of this mortgage related, derivatives based, algorithmic program that they felt was hedged in every way possible, and would earn the firm millions in fees over the years.

 

It was not…and in less than 9 months it brought the entire firm down. No one went to jail and no one was forced to take responsibility. Incredible.

 

About five years later I watched two of my company’s red hot IPO’s file for bankruptcy, both within a year. Again, well over a hundred million lost to investors, yet no one was forced to pay the price. Nauseating.

 

In 1995 or so I read an article in the NY Times about Merrill Lynch and their research department. The article (which was buried on page 15b I think) spelled out that of the 700 or so stocks that Merrill’s analysts followed, each had a rating of Buy, Sell or Hold. You would think that the ratings would be evenly distributed, say with 300 Buy ratings, 200 Sell ratings, and 200 Hold Ratings….this would represent a somewhat balanced and fair ratings system. But, as the Times piece spelled out, Merrill’s analysts had sell ratings on just a handful of these companies that their research department followed. If you’re asking “how could that possibly be the case?”… here’s how: each of these companies also paid (or had the potential to pay) Merrill Lynch significant and very lucrative “finders fees” or commissions on future investment banking business, and Merrill’s higher ups that oversaw the revenue side of the business knew that a “sell rating” would be the kiss of death to ever earning those huge fees that are the lifeblood of Wall Street.

 

Finally, years later, Wall Street was investigated for this fraudulent practice and forced to pay over $1 billion in fines…an amount that was supposed to be true penance for their admitted wrongdoing. The truth however was something else. That $1 billion fine worked out to less than 3 days of profits for the firms involved!

 

Of course we all know about Enron, WorldCom and the various dot-coms that were nothing more than one big shell game. And we know about the $500 million bailout of hundreds upon hundreds of criminal savings and loans that became the Resolution Trust Corp from the 1980’s. Our modern day, trillion dollar bailout of the banking industry and of Wall Street is happening right before our eyes. Just follow the money that’s being doled out under the TARP Program and you’ll know who caused it by watching who saves the day (hint, they are one in the same).

 

Now, we have the biggest Ponzi Scheme ever supposedly in investment gurus Bernard Madoff’s $50 billion scam. The SEC investigated Madoffs firm 8 times over 16 years, yet could find only minor record keeping violations….say what? Any novice in investments or bookkeeping could have spotted this scheme from a mile away, and in fact many reported him to the SEC over a 10-15 year period. Yet incredibly, the SEC failed to once take action. Now, over 8000 investors in Madoffs fund have likely lost everything they invested. $50 billion gone in the blink of an eye…

When will these CRIMINAL CONFLICTS OF INTEREST stop?? When will someone in our country’s leadership have the courage and decency to do the right thing and completely restructure the Pyramid Scheme that is Wall Street??

 

And, let’s not stop there. While we’re on the subject of Ponzi Schemes, let’s do something about the one that really is the biggest Ponzi Scheme ever; Social Security, or Social Insecurity if we were to call it by its real name. This boondoggle of an entitlement program is bankrupt, as all of the money in it has been “borrowed” by the Federal government to pay for other programs. In 2020, if not sooner, our taxes will have to be raised to 70% just to fund these bankrupt entitlement programs, including Social Security, Medicare and Medicaid.

 

This is the sad, depressing future that we’re leaving our kids and grandkids. President Obama, if you truly do represent “Change that we can all believe in”, do the right thing and put an end to ALL of these criminal conspiracies, once and for all. Unless someone does it, and soon, we won’t have a country to call home for very much longer.

 

Kip Herriage

Editor, VRA

 

www.vraletter.com

www.kipherriage.com