"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: Buy Gold and China. Sell short on pretty much everything else. Kip Herriage's newsletter is my financial Bible."

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

Twitter: @kherriage

Wednesday
Nov122008

Fire Hank Paulson Now

Fire Hank Paulson Now

 

The Wall Street Journal says that the original $700 billion bailout will not be enough (surprise surprise) which makes it likely that Treasury Secretary Hank Paulson will be forced to go back before Congress and ask for still more money. Just amazing. Congress has a chance to do the right thing and stop this before we send the economy into another Depression. Do any of us think that they have the courage to do this? Outside of Ron Paul and a few others it’s doubtful, but maybe we’ll see them actually listen to their constituents this time. But hey, who am I kidding.

I had a great talk with Wayne Allyn Root yesterday, the VP nominee for the Libertarian Party. Along with Presidential Nominee Bob Barr, they received the second highest vote total in history for their Party, which is truly impressive as they were essentially shut out of the process. Why they were not invited into the debates I have no clue (well, that’s not quite true), but my guess is that in four years, when Mr. Root is hopefully at the head of the Libertarian Party, things will be quite a bit different. Many of you reading this will hear Wayne speak at the upcoming WMI Wealth Conference (Nov 21-24) in Marco Island, FL. According to Wayne, things will only get worse as we abandon our capitalist system and embrace socialism, as evidenced by the ongoing nationalization of our banking system and coming auto industry bailout/takeover. Get ready folks…Wayne is going to rock the house!

I just read a spirited piece from Kevin Depew of Minyanville.com. He writes:

So what happens if Congress stops the bailout, even going so far as to refuse to authorize the second half of the original $350 billion? We will probably see a huge drop in financial markets. Stocks will likely plunge 30% or so from present levels. There will be bankruptcies and layoffs. Times will be tough. Very tough.

What if Congress approves still more bailout money? That money will be quickly absorbed by a financial system staggering under the weight of unprecedented levels of debt. We will see a continued decline in the velocity of money and business activity. Stocks may slowly fall 30% or so from present levels. There will be bankruptcies and layoffs. Times will be tough. Very tough.

So, where’s the difference?

The difference is that without more bailouts, within a decade - give or take a few years - we will emerge as a healthier, stronger economy with companies that operate as if they are deeply responsible for their own business decisions. With continued bailouts we will emerge from a lost decade with an economy and society crippled by the cost of bailing out businesses that operated with irresponsibility and a near total disregard for not just taxpayers but for their very own shareholders.

This is it. The last chance to do the right thing.

But you and I already know how this story ends. The right thing will not be done. There will be more bailouts. And then more bailouts. Meanwhile, even as we continue writing checks to failed businesses, once-healthy businesses are facing doom, victimized by zombie companies absorbing dollars that, if freely spent, would be rightly theirs.

For those that may not know, Hank Paulson made all of his hundreds of millions while running Goldman Sachs. That was his job before being anointed as Treasury Secretary; the next brain from Goldman that would save us all. What people should know…what everyone should know… is that Goldman was one of the major players in the creation of most of the derivatives being blamed for our debt implosion and severe recession, namely credit default swaps.

On October 16th, the American News Project published a report on the economic crisis and subprime lending schemes. The report mentioned that many foreclosures were being pursued by Litton Loan Servicing, a company owned by Goldman Sachs. That’s right…Paulson’s Goldman Sachs. Litton is a leader in the field known as subprime servicing, which specializes in the handling of subprime mortgages where the homeowner has fallen behind in payments and is at risk of foreclosure. In other words, they are a type of collection agency for people that are about to be kicked out of their homes. Litton has frequently been accused of engaging in abusive practices, including more than 100 lawsuits in federal court since the beginning of 2004!

In December 2007 Goldman Sachs bought the company for $428million, plus repayment of $916million of outstanding Litton debt. Goldman, which probably didn’t want the world to know of its buyout, never issued even a basic press release. Is Hank Paulson’s delay in really helping struggling homeowners an effort to help Goldman’s Litton operation?

The bigger question is; why aren’t we being told about this relationship and why isn’t there an investigation into this, along with Goldman’s role in the very derivatives that spawned this crisis in the first place?

A couple of weeks ago I wrote that until we had a “Perp Walk”, with these criminals in handcuffs, that there was little chance of confidence being restored. Now that its been reported that Warren Buffet lost $9 billion in the last quarter due to bad derivatives bets on the stock market, along with his poorly timed $5 billion investments into Goldman and GE, maybe he will lead the way in the upcoming criminal investigations, assuming they ever take place. He’s certainly motivated to do so.

Speaking of Buffet, I wonder if he will be writing another “Buy America” piece for the NY Times anytime soon?

Market Update: Folks….we are going lower….much, much lower. I see little chance that the lows of 7800 on the Dow hold up. SDS is still the play, but keep in mind that it’s very volatile and only for shorter term investors willing to take the risk of a bear market rally. While I doubt that we will have one soon, you never know what the government will do to prop the markets up.

Finally, gold is being hit again, and headed back to $700/ounce and maybe lower. Deflation fears and needed liquidity are the reasons, along with a strong US dollar. Classic flight to safety move. Once the printing presses really get cooking this will change and the next big move higher in precious metals will begin. It may be this month or next, or possibly even next year, but I see no way that gold doesn’t break $1000 on its way to much, much higher prices. The BIG move will come in the miners, specifically the ones that are down as much as 60-80%. It takes courage to buy them now, but I believe the timing is about as good as it will get.

Kip Herriage

Editor, VRA

www.kipherriage

www.vraletter.com

www.wmitoday.com

 

 

 

Monday
Nov102008

Complete Insanity

We bail out AIG, Fannie, Freddie and the banks to save our system from collapse...they are just too big to fail. Now we have to bail out GM, Ford and Chrysler ( I mean Cerebus, the super secretive private equity firm that owns Chrysler) for the same reason. Trust me, it won't end there....and it won't stop with us bailing out just US co's. 

Folks, this is called "throwing good money after bad" and goes against one of the most important rules of successful investing. You just DON'T DO IT!

And...our hard earned money is paying for all of this...tax revenues just being flushed down the drain.

Where's the outrage?? Remember the famous line from the movie "Network"? I'm mad as hell and I'm not going to take it any longer!!     

This is the worst looking stock market and economy I have ever seen. Now, we are making things much, much, worse with the bailouts and trillions of dollars of funny money being printed. And I haven't even mentioned the $50 trillion+ in debt/entitlements owed. 

Our kids and grandkids will stand over our graves and curse our decisions.

Complete Insanity...where does it end?

It ends with the excesses being removed. AIG will get worse...GM and Ford will get worse...the banking system will get worse....housing will get worse. If the powers-that-be don't stop throwing good money after bad they will turn a bad recession... into another depression.  

Kip

www.wmitoday.com

www.vraletter.com

 

Thursday
Nov062008

The Analogy That No One is Talking About

Following the Richard Nixon disgrace of a Presidency, a little known Georgia Govenor became the 39th U.S. President. Out of nowhere, Jimmy Carter came to power in 1976 with a mandate to reform and restore the country's reputation, and hope was seemingly restored.

Flash forward 4 years later. In 1980 the U.S. was in one of the worst recessions in history, interest rates were at 20%, and the economy barely had a heartbeat. Gold had its best bull market in history, hittting $850/ounce, for over a 1000% move higher (My father was smart enough to buy a bank CD that locked in a multi-year interest rate of 12% + but also bought gold right at the top, only to see it drop in price for the next 20 years).          

Obama and Carter were two relative nobodies just 18 months before the election. Both were democrats, both faced a terrible economy, both were untested newcomers. Carter was overwhlemed by the challenges and couldn't leave Washington soon enough. Obama is smart...really smart and he seems to be surrounding himself with smart people.....however...

Guess who one of these "smart people" is? None other than Paul Volcker, Carter's Federal Reserve Chairman. Volcker is on Obama's short list for the same position once again, this time almost 30 years later. Volcker gets great credit for turning the economy around in the 1980's, but he first took interest rates to 20% in order to subdue inflation and strengthen the dollar. Yes...it worked. But for 2+ years it sure didn't feel like it was working. Unemployment was at 11% and the average American felt that they they were experiencing a Depression. At the time, Carter blamed Volcker for his loss to Ronald Regan in 1980.

They say that history repeats, and that those that don't learn from it are destined to make the same mistakes. Is Obama being set up as a patsy for an economic environment similar to Carters? I hope not.

But....if interest rates begin to rise significantly....if the US dollar breaks to new all-time lows...if the economy continues to suffer...and if gold and silver continue to hit new highs....

If it walks like a duck and quacks like a duck, odds are its a duck.     

Kip       

Wednesday
Nov052008

It's The Economy...Stupid

 This now famous line was attributed to George H Bush's mishandling of his re-election bid, when Bill Clinton's victory turned Bush into a one term President. The economy was in the dumps in the year leading up to the election and Bush seemed oblivious to the recession that the country was entering. 

Just a year ago anyone paying attention would have told you that the big election issue in 2008 would be the war in Iraq. Then, Bear Stearns went under in the Spring, and 90% of all mortgage co's followed. Once Lehman filed for bankruptcy in September, and the stock market dropped 40%, "Its the economy....stupid" became the central theme of this election as well.

It's obvious, from Barack Obama's landslide victory, that Obama and the Democratic party are the big winners of the recession of 2008.

YES WE CAN!

Our new President-elect delivered one of the most passionate and compelling acceptance speaches in history early Wednesday morning, and the whole world celebrated with him. I cannot remember seeing a sight quite like the global party that his victory brought on, but its clear that the theme of his speach, "Yes we can", resonated with hundreds of millions everywhere. Whether or not his Presidency lives up to the hype (and I truly hope that it does), this is a moment in time that we will not soon forget.

I am an optimist, and like most of you I'm sure, wish our first African American President great success. Unfortunately, I fear that Obama may regret running for the highest office in our land when it becomes clear to him just how bad of shape our economy is in. The just resleased jobless claims and bankruptcy numbers indicate that this recession is just getting started, and that its going to be a doozy. Because our economy is consumer driven, there is simply not a lot that can be done until the debt cycle that we are going through completely unwinds. Did anyone really believe that the banks would take that 700 billion and start lending again?? As Donald Trump said on CNBC, "lending has completely dried up, and not even the largest of co's can get the financing that they need to grow their business. If Fortune 500 co's cannot get funding, then there's no way that the average person is going to get any of this money...tax payers money that was promised to us!".

Here's the major problem facing us for the next 12 months plus. We live in a debt based society that uses borrowed money as it's engine of growth. Without freshly issued debt, our economy MUST contract and it must do so until the excesses are purged from the system.

This is why I continue to believe that this recession will be the worst of our lifetime. The major driver of our economy is on life support and stocks by any long term valuation measures are still expensive. At this point all the government can do is make things worse. Seriously, when is the last time you can remember the government taking action and making great decisions? Maybe Obama will be different...but we're talking months before anything he can act on would begin having an affect.

If this sounds really depressing, just remember that it doesn't have to. The opportunities to prosper, even now, are as great if not greater than they have ever been (especially if you are an entrepreneur). This is why a recession serves such a major purpose. It gives us an opportunity to buy "real assets" at bargain basement prices so that when the economy begins to prosper once again, everything that we bought low...we can eventually sell high.

MARKET UPDATE

The stock market lived up to "buy the rumor sell the news", as the euphoria from the election faded. Reality is sinking in, and any rallys will be short lived. On Friday we will get the latest employment numbers, and they will be as ugly as anything we can imagine. Let me make this point as clearly as I can: If you are long this market...if you believe that the stock market is headed higher...you are going to have a very tough wake-up call in the coming months.

If you are more of an active investor, you can continue to buy SDS when the market gets overbought on these sharp bear market rallys. Besides gold and silver stocks, which will be huge winners over the next several years, everything looks expensive here.

Yes we can....as long as we're prepared for what's coming.

Kip

www.wmitoday.com

www.vraletter.com

       

Tuesday
Nov042008

President Obama

At the risk of some personal embarrassment, I'll be shocked if Obama loses today. Every poll that I respect has him winning in a landslide, so it looks like we will have a democrat in the office for at least the next 4 years. In my opinion, this is not so much a vote for Obama as it is a vote against the presidency of W.. Obama has also run what may be the best campaign in history. How many of us, just 8-10 months ago, thought he would beat Hillary??

For those that might be concerned about having a democrat in the highest office, think back to Bill Clinton's 8 years. Love him or hate him, the stock market and the economy were very strong...we even ran a budget surplus for the first time in over 20+ years. History shows that the stock market actually fairs better under a democratic President than a republican one, which is a real surprise to most people. Robert Rubin, who gets most of the credit for Clinton's pro-business and economic policies...along with balancing of the budget...is Obama's top economic advisor. Rubin is fiercely opposed to high taxes, so don't assume that a vote for Obama is a vote for higher taxes on business and the wealthy.  

This is not an endorsement of either candidate, just the facts. I will say that its too bad that Ron Paul left the libertarian party to run as a republican, but don't forget about our good friend and VP of the lib. party, Wayne Allyn Root, who will be providing a keynote address at WMI's Wealth Conference Nov 21-24.

(Time Magazine article: http://www.time.com/time/politics/article/0,8599,1856139,00.html)

Whatever you do, exercise your right to vote today!

MARKET UPDATE:

The bear market rally continues, and hit my first target of 9500 at the open today. There is still room for it to move higher, but at this point NOTHING is telling me that this is the birth of a new bull market. Economic recessions that begin as the result of debt and credit issues last far longer than any other, and once the Obama euphoria wears off, I believe that the next move in the stock market will be lower, and likely by a great deal. Way too many market gurus are calling this a market bottom, and investors are still fully invested and holding on to their 401k equity positions. This is simply not how bear markets end, and in my educated view, this one will be no different.

There will be excellent bargains to be had when the bottom is finally reached, but I continue to believe that we will see 7000 on the Dow Jones before this is all over.

Kip