"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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Journal Archive
Twitter: @kherriage

Thursday
Dec042008

UNINTENDED CONSEQUENCES

One of the best trades possible is shorting the market whenever Hank Paulson and Ben Bernanke make TV appearances. So, it should be no surprise that the market dropped 670 points (8%) on Monday as BOTH decided to grace us with their presence. The markets message is clear; more government interference is NOT what we need. Yesterday we got news that the government is looking at artificially reducing interest rates on mortgages to spur a housing rebound. While this might appear to be good news on the surface, the unintended consequences of these kinds of moves is almost always a short term fix while dramatically increasing our long term problems. We got into this mess because easy credit made it possible for anyone that could fog a mirror to get a 500k home loan. Corrections like the one we are going through now “right the wrongs” and restore balance to a system that is out of whack. In the 1930’s, a recession turned into a depression because of government meddling, and it’s beginning to look like déjà vu all over again. History repeats folks… 

I continue to think a market rally into January is possible, as the Christmas period is seasonally positive one, but there are so many potential shoes to drop that it’s very difficult to recommend many long term positions. On Monday, the National Bureau of Economic Research (NBER) said its Business Cycle Dating Committee determined that the United States entered a recession in December 2007…please tell us something that we don’t already know! Folks, the economic downturn is accelerating and corporate earnings will be hit much more severely than most Wall Street analysts are even close to getting right.

The bottom line is that it will get worse before it gets better. I continue to look for an earnings bottom in the market in 12 months minimum, and will be making as accurate a judgment as is possible about when the down-cycle has bottomed. And, if you wait for the NBER to tell you the recession is over, you will have missed 50% of the upside move. We will not be making that mistake.

I’m putting together a new recommendation for VRA Subscribers in the energy space and will have it out soon. Oil is down $100 barrel from its highs and is due for a big move higher. The supply/demand issue in oil has not changed, and because oil is priced in US dollars the move higher will be accelerated once the bear market in the dollar returns.

Until then,

Kip Herriage Editor, VRA

www.vraletter.com

www.kipherriage.com

 

Tuesday
Nov252008

Not Like The 1930's?

Since my latest update (GD 2), I've had several readers comment that it was "too depressing" and asked if things can really get that bad again. Well, for one thing, you've got to remember that the numbers we are getting from the government now cannot be trusted. For example, according to the government, inflation is just 3.5%.These of course are phony numbers because both food and energy were removed from the calculation a few years ago. Adding these two "must haves" back to the formula gives us annual inflation of over 10%. This is what a greatly devalued dollar does to your purchasing power. And, trusting the government for an accurate accounting on just about anything is becoming increasingly difficult.

Now, this is where it gets REALLY interesting. The following chart comes from Shadowstats.com.

The unemployment rate is currently 6.5%, according to U-3 government figures. The broadest U-6 measure, which includes discouraged and marginally attached workers, is 11.8%. If you're still discouraged and jobless after 1 year, the government ignores you in its calculation. How convenient. If these workerswere to be included, the unemployment rate is currently 16%! When someone tells you our current situation isn’t close to the Great Depression because unemployment was 25% in the 30s, keep this chart in mind. We've lost 1.2 million jobs in 10 months. The U-3 rate will reach 9% by late 2009. That would be another 3.6 million job losses. These are the kind of numbers that could lead to social unrest. Our social services system and food banks will be pushed to the breaking point.

 

Yesterday, Bloomberg reported that the total tab for theFED/Treasury bailout is $7 trillion. They have also sued the FED to find out where all of this money has gone. In the event you didnt know this, Paulson and Bernanke will not disclose where the majority of the money is being spent.

Bernanke in talking to the House Financial Services Committee:

"Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting. We think that's counterproductive."

Amazing isn't it. Our money is being thrown away and we aren't even allowed to see who is getting.

Finally, did you see that both AIG and Citi, both having been bailed out with our tax dollars, are still going to spend over $400 million on naming rights for sports stadiums??

You seriously cannot make this ---- up.

Market Update:

A Thanksgiving week rally may be in the cards, but since Paulson is speaking on TV again, a collapse could start with the very first word out of his mouth. Why this person still has a job I have not a clue. Just remember him as one of the primary reasons that our kids and grandkids will be paying taxes in the 60% range. 

Kip    

 

 

Friday
Nov212008

GD 2

Great Depression 2

I'm writing this from the beautiful Marco Island, Florida,
as we prepare for the 7th WMI m2 Wealth Conference. Outside
its gorgeous, but inside...watching the stock market...is
a totally different environment.

Folks,as much as it hurts to write this...as much as I
absolutely hate to write this...I believe that the odds are
70/30 that we are headed into another Depression. And
theres not a whole lot that can be done about it, at least
not with a weak, lame duck President in office for two more
months, along with Treasury Secretary Paulson, who should
have been fired long ago. There's plenty of blame to go
around, and I have yet to see much that has impressed me
from Obama's early appointments. There's no official
economic indicator or definition that says we are headed
into another Depression, but its obvious to anyone watching
that things are about to get a whole lot worse. The stock
market is a leading indicator,and this massive move down is
telling us all that we need to know. As I've been saying,
people are basically in denial because the economy has yet
to really get hit. When this begins to happen...when the
majority see their way of life change radically...maybe we
will finally see the talking heads on CNBC and Fox Business

News wake-up and smell the coffee. Anyone besides me
getting tired of hearing that we have a"bottom in place"??
We are a long, long way from a bottom in the market, maybe
1-2 years away. This is the reality and what you should all
prepare for.

The stock market dropped to an 11 year low today, and every
index has now broken down to new lows. As I wrote in my
last update, The Next Leg down would be quick and painful,
and now that we have no real support on the charts, the
declines will likely pick up speed from here. Sure, there
will be some bear market rallies, likely even starting
today. I would expect the bears to take a break for a
couple of days at least, which could give us a small break
from the declines, but in the end it won't matter...the Dow
is going to drop to at least 6000-6500 and could even see
4000-5000 before a final bottom is in place.

Here's why: Next year the earnings on the S&P 500 will drop
to at least $60 (some believe that we may even have just
$50). Using a price to earnings (P/E) multiple of 10 for
2009 forward earnings, which might even prove to be too
high, this means that the S&P 500 will have to drop to at
least 600. This equates the Dow dropping to at least 6000.
And remember, this might be too rosy of an earnings scenario.

But huge stock market drops will not be the worst of it.
Social unrest will be next as the economy weakens
substantially, and unemployment hits 10%+. When states,
local governments, municipalities and schools run out of
money to provide for our "welfare state", a bear market in
stocks will be just about the last thing many are worried
about. I will be writing more about social unrest and what
it means for all of us in future updates, but for now make
sure your personal financial house is in order. Keep your
debts low, control your spending, and do whatever you
believe that you should to prepare for an economy that will
take at least 2-3 years to recover.

I look forward to seeing many of you at the Conference, as
we learn about strategies that will not only help us
survive but to prosper greatly in the coming years. A bull
market in the economy and in stocks will return, and when
it does we will have lots of dry powder to buy real assets
at incredibly cheap prices.

Kip Herriage
Editor, VRA
www.kipherriage.com

Tuesday
Nov182008

The Next Leg Down

 

Last Thursday I called for a bear market rally when the Dow was down over 300 points. A huge rally began within 30 minutes and we closed up 550 points for the day. An 850 point move in less than 3 hours….amazing. These kinds of moves used to take several days or even weeks to happen, and now they happen on a regular basis at the blink of an eye. This is not an indication of a healthy market, and when you add to this the fact that the same thing is happening in the currency and credit markets, it all adds up to an environment that NO ONE has ever witnessed before.

 

For the last two trading days I have expected the bear market rally to continue, and there were signs that the market wanted to go higher. Each day we opened with losses of 150 points or more on the Dow and then we fought our way back to positive territory (yesterday it actually went 50 points positive), but the gains just couldn’t hold. This is not a good sign folks…this market just cannot put together a solid 3-4 day rally.

 

Last Thursday all of the major market indices hit the October lows and then rallied sharply, which is exactly what you want to see in a successful test of the lows. Here’s the problem; we cannot maintain ANY positive momentum and investors are beginning to sense what’s about to happen….that here we go again feeling.

 

 

The Next Leg Down

There are two key data points: 7800 on the Dow and 840 on the S&P 500. In the coming days if we break decisively through these levels, look for the stock market to quickly drop another 10% or more. As much as I believe that the components for a bear market rally may still be in place, time is quickly running out. These brutal last hour collapses are also telling us that there is zero confidence in the stock market. All it will take now is one more 200 point down day, with a brutal close, and the next leg down will be underway. It’s beginning to look like this may be the most likely scenario. Obviously, if we break through the lows the place to be for short term investors is SDS, the ETF that moves higher as the S&P 500 drops in value (times 2). However, if we hold at these support levels, the bear market rally still has a chance.

 

The Weight Holding Us Down

 

No surprise here, it’s the economy. We’re buried with record amounts of debt at every level; government (Federal and state), corporate and individual. Levels of debt that would be nearly impossible to pay off in a good economy. In a bad one….and this is some kind of seriously bad economy…it’s almost a mathematical impossibility that we will never pay these debts off. There is now serious talk about the US losing its AAA credit rating. Obviously this has never happened and would be a terminal blow to our economy. And once the downgrades start…when you already have mountains of debt… they rarely stop at just one.

 

Former Goldman Sachs (GS) chairman John Whitehead just made some very interesting comments. He believes the economy faces a slump deeper than the Great Depression, a growing deficit that threatens the credit of the United States itself, and the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.

 

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead warned the country's financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans. "I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds will no longer be the triple-A credit that they've always been. There are at least ten trillion dollar problems, facing the United States, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.”

 

Now, the mayors of Atlanta, Phoenix and Philly each asked for $50 billion from the TARP Program. I kid you not…”mayors” are asking for money from this secretive bailout fund. It’s become surreal…and we’re really just getting started.

 

Now we’re seeing why saving money really matters. When you spend $1.05 for every $1 you make, there is no financial margin for misfortune. And the pain hasn’t begun to kick in yet. Unemployment is only at 6.5%...we haven’t really seen layoffs start to kick in like they will in the next 3-6-9 months. This is when things start to get really ugly. Housing prices will drop even more rapidly, causing another wave of foreclosures and bankruptcies, not to mention additional rounds of derivatives blow-ups in banks and financial services co’s. The pattern will continue to repeat itself…over and over until we reach a real bottom in the economy. Once we reach 10% unemployment in the US and parts of Canada (and it won’t be any better in Europe), a harsh and stark reality will set in for tens of millions.

 

The culprit is that our economy is 70% consumer driven. Buying stuff that we don’t really want or need. Now that the economy is in trouble we are being forced to become savers, which is more bad news for the economy. In order for our system to work, we have to keep buying crap! Somehow I don’t think the Greatest Generation would be proud of what we’ve created. They brought us through the Great Depression and World War II. Then they built the world’s strongest economy based on manufacturing, which produced real jobs, real wealth and a strong middle class.

 

Now, the best we baby-boomers can do is bailout GM, Ford (F) and Chrysler (C)…and a bunch of banks….from their terrible business decisions. Government bailouts (taxpayer bailouts!!) are going to turn a bad recession into the Great Depression 2. Good money after bad is never a good idea, and in this case it is the worst thing they could be doing with OUR money. Yet, all of this TARP money is being spent in complete secrecy! When you have a lack of transparency, you cannot have a bull market….end of story. The reason? No one trusts our decision makers and we know instinctively that there are several more shoes to drop.

 

The sad reality is that our McMansion generation pretty much deserves the negative economy we have coming our way. This recession/depression will force us to rethink the way we make decisions and plan our futures. That is a very good thing long term…we just have a long ways to go before this is over.

 

 

 

Kip Herriage

Editor, VRA

www.kipherriage.com

 

 

Thursday
Nov132008

And….That’s a Bear Market Rally

And….That’s a Bear Market Rally

For those that are brave enough to trade this market, hopefully you’ve been using the advice I’ve provided with both SDS and SSO on my newsletter at www.vraletter.com. When I put out the update “What to Buy for a Bear Market Rally” at about 11 AM the market was down 300 points and began to rally. With the close in the Dow at up 550 points we saw an 850 point move higher in less than 4 hours. Talk about an insanely crazy market! But as I’ve been saying, this is exactly how bear market rallies look.

Once we hit the 840 level on the S&P 500 that seemed to have given us a final washout, and when the buyers jumped in, we went straight up from there. Then fear of getting left behind started, and we just kept going higher from there. We finished the day at the highs on very big volume, which is a great sign.

Technically, this has the makings of a good bottom. We had the big intraday swing right at the key support level. We washed out the weak hands on the dip, and then flew higher on good volume. We are going to hear talk now about a possible double bottom, but don’t buy it. Once the buying tires out we will go back own again as people realize that things really aren’t getting any better.

Keep in mind that days like today are about short term trading rather than long term investing. As I’ve been saying it’s important to remember that these frantic rallies occur only during bear markets.

Look for the move higher to continue…for a while at least…which means that the stocks I gave you are going even higher. Especially SSO. Look, I don’t like this erratic market anymore than you do, but we have to take what it’s giving us. This is simply not a buy and hold market, but that doesn’t mean that we can’t make good money in it.

Kip

www.kipherriage.com