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

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

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

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 16^th, 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

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