The Rally Continues

While I expect the bear market rally to continue for a short while longer there is no evidence that I can find whatsoever that we have reached a final bottom in this once of a lifetime collapse in equities and the economy. Here’s what you have to remember about bear market rallies; they happen incredibly quickly and the resulting move higher can be 10-20% in just a few days to 3-4 weeks. So, if you don’t get on board quickly you will find yourself buying back into stocks just as the bear market is about to kick back in…and that first move back down is typically a very scary, several hundred point, one day drop that signals the bears are back in charge.

There are two primary reasons for these lightning fast bear market rallies. One: when investors fear that the “train is leaving the station” and that a new bull market could possibly be getting underway, nervous investors jump back in as quickly as possible. It’s that fear of missing the bottom that can bring $100 billion + in liquidity back into the stock market in such a hurry. Two: because we live in the information age these rallies become global much faster than ever before, which means that seemingly great news is happening all over the world, and all at once. This causes a worldwide stampede into equities and before you know it the so-called experts on CNBC, Fox Business, USA Today, the Wall Street Journal, etc., are frothing at the mouth to announce that they were the first to call the bottom and the beginning of a new bull market. We’ve seen them do this on the way down at 13,000….then at 10,500…then at 9000….8000…well, you get the point. They’ve been wrong all the way down and they will be wrong again this time. For once, it would be refreshing for these “gurus” to be called on the carpet for all of the money they have cost investors with their horrendous advice. To date, US investors have lost over $5 trillion in the stock market alone (not counting real estate and business losses), and if they hadn’t listened to their brokers, they certainly wouldn’t be nearly as broke.

VRA subscribers have gains of 200% plus since last September, including more than 25% just this past week. If you're not a subscriber you are missing one of the best trading markets of our lifetime, and I fully expect the opportunities to only get better from here. I'm using double and triple short (and long) index ETF's that allow us to move in and out of the market on trades that last 1-2 weeks. In addition, my gold and silver recommendations have produced gains of 40% in under 4 months.    

At this point the easy money has definitely been made in the financial stocks, and while they may have some room left to run, I would look to sell any remaining financials that you may own once this rally shows signs of fizzling out. Trust me when I tell you that the financials and banking stocks have some very tough roads ahead, and outside of Goldman Sachs and Morgan Stanley, there aren’t many companies in this group I would feel safe owning in the long run. The government, under once thought to be wonder-boy Treasury Secretary Tim Geithner, will be announcing their latest plan to remove toxic assets from the banks book in the next couple of weeks and this could give us a bit of a sustained move higher. However, you can bet that the short sellers, VRA included, will be waiting for this exact moment to short our select financials heavily (and the entire market) once this plan is announced. Remember, “buy the rumor and sell the news”!

Ohhhh…did you catch the downgrade of Buffets Company Berkshire Hathaway this past week? The ratings agencies now rate his debt AA+ versus the AAA rating he had enjoyed for so long. This is the first downgrade, but it certainly won’t be the last. Buffet has huge holdings in (among others) Wells Fargo, American Express, and of course even larger exposure in the insurance industry (Geico, etc)…not to mention his derivatives bets in favor of the stock market going higher. Buffet has lost over half of his (and investors) net worth in about 8 months and years from now we may view the bankruptcy of Berkshire Hathaway as the final bottom in this bear market. Maybe not a likely scenario but based on where his debt is already trading in the CDS market, not all that much of a stretch either.

Kip Herriage

Editor, VRA

Bear Market Rally

As I wrote yesterday morning for VRA subscribers, a bear market rally is upon us and it’s obvious even to the most newbie of investors that this one was highly coordinated at both the government and corporate levels. Yes folks, the fix was in for a stock market rally, which tells you that they are very concerned….beyond that, frightened, about the collapse in the stock market. From Fed Chief Bernanke and FDIC head Sheila Bair’s optimistic comments on the economy, to Senator Barney Frank’s comments on changing short selling rules, to Citigroups CEO Pandit’s forecast that his bank is having its best quarter since the end of 2007, ALL were determined to do their absolute best to move the market higher.

The rally may run for a short while…but barely beyond that. These bear market rallies tend to be short and sweet, but before it’s over we could have an 8-10-% move higher in just a few days. Heck, we were up 6% today alone so it will be interesting to see how far it carries us. We were certainly due for one…the last 70 days have been almost straight down.

Remember, in the 1930’s we had 10 bear market rallies in excess of 20%. This is the exact personality of a bear market.

Here’s my bottom line: S&P 500 earnings will only be about $45 for 2009, and not much better in 2010…..consumers buying power is just gone and that was the primary driver for our bull market. Add to this, US unemployment figures are headed to 10% plus (just this year) and everyone has been forced to become a saver than a spender….good news for us in the long term, but it doesn’t bode well for corporate profits this year or next. Add to that we have a President and Congress that seem hell-bent on repeating the same mistakes from the 30’s and you’ve got a bear market that ultimately winds up at Dow 6000 and most likely 5000. And, it may not stop there if the global banking situation implodes, as it appears that it might.

My best guess at this point is that this rally could last for 1 to 2 weeks, but the flow of negative news is going to be so heavy that it may not even last that long.

Kip Herriage

Editor, VRA

The Reality of it All

One by one, U.S. and global leaders are lining up to talk up their respective schemes to end this once in a lifetime economic collapse. Collectively they are putting on a unified road show to ensure us pawns that the trillions upon trillions being spent on massive, never-before-seen global bailouts will in fact work, and will save us from the oncoming freight train that is the Second Great Depression.

Listen and listen carefully folks; don’t believe a single thing they are saying. Let me put it this way; if their lips are moving, we are being lied to.

Here’s the truth of the matter. One by one our largest and once most respected mega- companies are becoming insolvent, and there is absolutely nothing that can be done to stop the process. The debt levels and derivatives held against this debt are just too overwhelming. In a period of unmatched deleveraging, where bank financing is nearly impossible to obtain, corporate America, the entire corporate world (outside of China), and individual funding is simply unattainable. Remember when Circuit City had to liquidate because a buyer could not be found and additional financing was impossible, causing 30,000 employees to lose their jobs essentially overnight? Now, extend that same process to thousands of companies worldwide and you get an idea of how ugly things are about to become. AIG, Lehman, Countrywide, Merrill Lynch, Citi, Bank of America, and Bear Stearns (just to name a few) have either completely imploded or are in the process of completing the implosion process. Worldwide we’re talking about $30 trillion in wealth that’s been destroyed in less than 12 months. Incredulous to even fathom isn’t it? And next up are GE, which has seen it’s market value drop from $500 billion in late 2007 to just $60 billion today. GE is literally days away from becoming a penny stock, and another of our latest zombie mega-companies. MGM, which has seen their share price drop from over $100 in October 2007 to just $2 today, now faces bankruptcy and a possible liquidation as well.

Over the next 12-24 months this sordid story will repeat itself over and over again. The money to fund our bankrupt system and lifestyle is gone and won’t return for years. Sure, our fearless (and powerless) leaders will continue to intervene and attempt to stop the bleeding, with trillions of tax dollars that our kids and grandkids will be on the hook for. But just like the 1930’s their efforts will fail, and beyond failing, will indebt a generation for decades to come. All the while the sheeple will continue to fall in line, lockstep…all the way down. Make no mistake about it, this is the path we are headed down.

Massive Opportunity Awaits!

Yes, in spite of all of this enormous negativity, the opportunity for those that have the courage and wisdom to act now is greater than ever. Start your own business, live beneath your means, make smart decisions with your money and your lifestyle, and above all else, abandon the lemming mentality that continues to enslave those that follow the crowd. Make the decision today to become the “smart money”. More wealth was created coming out of the Great Depression than existed before it began…there’s no reason that this cannot be your future. I highly encourage everyone reading this to attend the upcoming Wealth Masters m2 Wealth Conference, March 22-25 in Lake Tahoe, NV. The cutting edge ideas that you will learn from these world class experts will empower you to change your life forever.

I look forward to seeing you there.

Kip Herriage

Editor, VRA

Band Aids and Hope

Unfortunately, this is all that’s holding our fragile economy and financial system together as we enter this most important week of trading. The band aids are the fiscal stimulus programs and government (see taxpayer) funded bailouts of the banking and financial industries. Trillions of our hard-earned tax dollars are being dumped into the economy in an attempt to re-inflate the markets, and it’s clear to anyone even remotely paying attention that this approach is failing miserably. Students of history know how big of a mistake the New Deal was in the 1930’s, and for some bizarre reason the powers that be are not only repeating the exact same mistakes, but they are doing so in the same order. Some would say that the government has no choice…that at this stage of the game they simply have to throw trillions at the problem to stave off another depression. Really? Then why aren’t we seeing even a basic turn-around in the stock market or in the economy? The truth is that the government’s actions are reckless, reactionary and just plain dangerous. If they continue with their present course of action they will send us over a cliff that will take a decade or more to recover from.

Hope. Obama’s best selling book was based on it, yet all we hear from the changeling now is fear and doom. What happened to the optimist that won a land slide election on “change that we can all believe in”? Granted, he’s only been in office a couple of months and while it’s true that he inherited much of this mess, his administrations actions are making things much, much worse. We are buried in debt to the point of being beyond bankrupt….over $60 trillion according to the non-partisan Congressional Budget Office (CBO)…yet his remedy for our systemic debt issue is….you guessed it…more debt! His nearly $4 trillion budget proposal is beyond belief and if allowed to pass will likely be the final nail in this economies coffin.

Remember what got us into this recession that’s quickly becoming a depression? Everyone…the federal government, corporate America, state governments, and individuals…spent like a drunken sailor for close to two decades. At every level we became addicted to living beyond our means, and now it’s time to pay the price. Simply put, it’s time to finish the deleveraging process that started after the Lehman bankruptcy just this past September. And guess what? The good news is that’s exactly what everyone is doing, and at the same time. We’re cutting back on spending, reducing debt and increasing saving. Everyone except for the US government of course, whose spending continues to grow like the party will never stop. Everyone else is cutting back big time. California, New York, Michigan, and 30 other states are slashing their budgets to head off an economic implosion. Corporate America is laying people off at the fastest pace in over 60 years, and we’ll see the worst unemployment number since the 1940’s when the data is released this Friday. The estimates are for 750,000 layoffs in February alone, bringing the total to over well over 4 million in just the last 6 months. Finally, consumers have begun to curtail their spending in a contraction that’s one for the record books. Consumer spending has dropped faster than a lead balloon….I guess that’s what tends to happen when you fear for your job, you have no money saved, and you can’t keep borrowing money the equity in your home, aka our personal ATM’s that have been the primary driver for the US (and global) economy over the last 8 years.

Now for the bad news: The rapid fall off in consumer spending will only hit our consumer based economy that much harder. This is how a classic deleveraging process takes place, and it must be allowed to run its course. These phony government stimulus programs only deepen the fall and slow the recovery.

Buffet Bankruptcy?

Maybe you’ll look back and remember that you heard it here first. If the stock market drops another 50% from current prices, Warren Buffet’s holding company Berkshire Hathaway will likely be insolvent. This is due to Buffets incredibly poor decision to enter the derivatives markets by selling short naked puts over the last two years; this after warning about them in his 2002 letter calling them “weapons of mass financial destruction”. His ill-timed decision to bet on a continuing bull market through the use of derivatives added to his portfolio’s losses, which now total over $40 billion in just the last year. Buffet’s 2009 letter to shareholders was released on Friday and in it he said he was “certain the economy would be in shambles for 2009," and that “2010 would not be much better". He also cautioned there could be "unwelcome aftereffects of the massive stimulus and bailout," such as inflation. He contended the "investment world has gone from underpricing risk to overpricing it," which he said is reflected by investor appetite for Treasury bonds. Future historians will comment on the Internet bubble of the 1990s and the housing bubble of the early 2000s, he said, but "the U.S. Treasury-bond bubble of late 2008 may be regarded as almost equally extraordinary." Just another reason that VRA loves gold and silver!

The Crucial Week Ahead

With the Dow teetering at just over 7000 and with the market reaching 12 year lows, it’s very likely that the next explosive move lower lies just ahead. European banks are reaching the point of no return, Citi and Bank of America are much closer to being nationalized than anyone in the government will admit, and as many as 1000 US banks are a year or less away from becoming insolvent. Add to this the turmoil at AIG, GM, Chrysler, Ford, the insurance industry, and the commercial real estate market, and it’s clearer than ever that the dominoes have begun to fall.

 What we need now is a complete "capitulation" in the stock market. We need a day (preferably a Monday) where the stock market opens down 10% on bad news. This is what typically happens before a massive bear market rally, or possibly even a bear market bottom. One key factor that is preventing a sharp, panicky selling of shares is the piecemeal nature of government attempts to rescue banks and the economy. What we're getting instead is Chinese water torture, and no massive cleanout. Governments and central banks are watching the markets and giving investors small glimmers of hope, not enough to take markets higher, but enough to prevent a huge sell-off. For capitulation to happen markets will have to be hit by a big, negative news event, and for the rebound to be sustainable, the overall environment would have to improve.

We need to see an event that would shock everybody -- a big U.S. bank failure, or a country in Europe going broke. Then we might finally have a sharp sell-off that’s triggered by an event, followed by a huge turnaround as people reversed their short positions and bought into the rally.

I firmly believe that we are weeks, if not days away, from one of the most explosive moves ever in gold and silver. Not only do they represent calm in a sea of fear but they continue to be the only true currency on the planet. Imagine gold at $3000/ounce and then decide how much you want to buy.

Final Note:

The market has figured out that the government is simply trying to stall the speed of the collapse, and I strongly recommend that you use any move higher to sell stocks that you don’t want to own. I’m as sure that the Dow is headed to 5000 as I was when it was at 9000 and I said it was headed to 7000. Long term this is where we are going and I’m afraid that it may not stop there given the governments masochistic behavior.

It’s almost like they want it to happen…but that couldn’t be true, could it?

Kip Herriage

Editor, VRA

Can We Trust These People?

Day after day we hear from one elected/appointed official after another, each telling us that things are under control because they have a “plan”. Mostly it sounds to me like they have a “plan for a plan”, and that in fact, they have little to no experience in actually running a business, having to make payroll, or in anything that would remotely resemble “real world experience”.

With Fed Chairman Bernanke telling us today that “the US should begin to come out of the recession in late 2009”, and with Obama’s fireside chat for the nation tonight where I have no doubt that he will offer all kinds of interesting predictions, I thought it would be a good time to go back over the last couple of years and explore the words of wisdom from the leaders of the free world.

April 5, 2007: "The damage from the subprime market has been largely contained." Federal Reserve Chairman Ben Bernanke

April 20, 2007: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."
US Treasury Secretary Henry Paulson

February 21, 2007: "I'm waking up less at night than I was [over the slowdown in housing]. So far, there's been remarkably little effect [from housing] on the rest of the economy." San Francisco Fed President Janet Yellen

March 28, 2007: "At this juncture...the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." Former Federal Reserve Chairman Alan Greenspan

April 20, 2007: "We do see some stabilization of demand in the housing market ... there is some indication that the market could be bottoming out."
Federal Reserve Governor Frederic Mishkin

 I recommend that everyone print this off, and refer to it the next time you are even tempted to believe what these clowns are telling us. There is little doubt in my mind that we have the most serious lack of leadership in US history, and based on the fact that I’ve yet to see much of a hint of strong leadership from a single global head (outside of China and Canada maybe) during this crisis, the international situation is no better off.

Slowly but surely we are repeating just about every single mistake from the Great Depression. The one difference is that our banking system has not been allowed to fail, and this one issue could prevent a complete meltdown of the economy. However, just because we may not reach 25% unemployment during this Depression, it will still feel like the 1930’s to most.

Market Update

As I wrote yesterday, don’t be surprised to see the stock market move higher in the short term. Nothing moves in a straight line, and the current oversold levels have set us up for a decent bear market rally. At the same time however the global financial risks are as high as they have ever been.

Sure, global governments (see taxpayers) can spend tens of trillions to bail out all of the banks, brokerage firms, and insurance companies. But after this the question will become “who is going to bail out all of the governments?”

My biggest concern….one that actually causes me to lose sleep (and I usually sleep like a baby)…is that we run the very real risk of a global systemic financial meltdown. What might this look like? It would likely begin with an overnight financial collapse of a single country; say Latvia, Estonia, Ireland or Spain…one countries failure to make good on their bank settlements with another country or countries. Essentially a bankrupt country that refuses to make good on their financial commitments to others. This would set off a tidal wave of currency and debt implosion, and the collapse in derivatives contracts tied to same would cause fear and panic on a level that no one alive today has witnessed. Global stock markets would drop 20% overnight which would lead to a 1500 point drop in the US at the open. If this were to happen we would have “bank holidays” throughout the world, just as in the 1930’s. Bank holidays…the term sure sounds pleasant enough….unless of course you want your money and can’t get to it. You can imagine the social unrest that would occur if this were to become reality. On the plus side, gold would hit $10,000/ounce and silver would reach $150/ounce.

I only give a 15-20% chance of a global systemic meltdown actually taking place, but it’s that same 15-20% that should motivate you to take the necessary precautions….just in case. Make sure that you have cash on hand…make sure that you have gold and silver coinage…and make sure that you have a game plan in place to act on the extraordinary opportunities that would abound shortly thereafter.

Kip Herriage

Editor, VRA