2/07 Kelly Letter Topics
Weekly market review
European crash
Moody's warns
Treasury hits limit
Rising unemployment
Rising dollar
Falling oil et al.
Sovereign debt!
Bankrupt USA
Banks beat Obama
Bond market angst
TARP a failure so far
Supreme Court
Salinger
2010 EDITION
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
Now that the latest US budget has been thoroughly digested by the media, I'm encouraged to see a greater percentage than usual catching on to the nation's stroll down the path to bankruptcy. Maybe we can chalk that up to more people paying attention to finances after watching the ripoff of taxpayers orchestrated by banksters and their wholly-owned politicians.
What's discouraging, however, is that too many people think this is a new path for the US. It isn't. The nation has been walking down this path for decades. Too many people like showing pictures of President Obama on one-trillion-dollar bills and laying blame for the predicament at his feet. It doesn't belong only there.
What people need to know is that it doesn't matter who's president. To grasp that, one need only notice that US policies under both Bush and Obama have been roughly the same. Had McCain won in 2008, I'd be writing this exact same article, except I'd be using the name "McCain" instead of the name "Obama." Democrats would be screaming that, see, they told us McCain was just Bush 2.0. Instead, Republicans are saying that we need to stop the big government being created by Obama and the Democrats. "Stop the tax-and-spend mindset," they say, ignoring that much of our current predicament happened on their watch over the White House.
It doesn't matter who's president because government is owned by special interests, most of which are funded by corporations. That's why we get this breakdown:
Bush: Iraq War for no reason
Obama: Afghanistan war for no reason
Winner: Defense contractors
Bush: No national health care
Obama: No national health care
Winner: Health insurance companies, et al.
Bush: No smart energy policies
Obama: No smart energy policies
Winner: Oil companies
Bush: Bad speeches
Obama: Good speeches
Result: Same in each case
When a political system is run in a way that leaves politicians thinking more about funding than leading, those with the funds will lead. This will never change until we have either a second constitutional convention or an amendment that alters the landscape of campaign finance. The recent Supreme Court decision in Citizens United v. Federal Election Commission, which granted corporations the same rights to free speech that were previously reserved only for persons, shows that corporate control is growing rather than shrinking.
It has been growing for a long time. It was the Clinton administration, after all, that allowed Robert Rubin and Larry Summers to get the 1933 Glass-Steagall Act repealed in 1999, which cleared the way for the housing bubble's now-infamous toxic derivative assets. When those blew up, both the Bush and Obama administrations snapped to attention to spend hundreds of billions of taxpayer dollars to bail out bad banks and car companies. The Obama administration even hired Clinton's bad boy Larry Summers as head of the White House economic team, bathing in bright light how the more things change the more they stay the same. The guy who, under Clinton, lit the fuse for the economy to eventually blow up is now helping to put it back together again under Obama. Why vote?
The New York Times wrote in an editorial last Saturday:
When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come.
By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 -- two weeks before Mr. Obama was inaugurated -- the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion.
About half of today's huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit -- all of which Republicans supported, virtually in lockstep.
The other half of recent deficits is due to the recession and the financial crisis.
Those last two, the recession and the financial crisis, were brought on by the slashing of regulations during the Clinton administration, so we can't get too overjoyed about the budget having been in the black for three years prior to Bush. Every bought-off politician is complicit in the impending bankruptcy.
On that, the Times continued:
Under current policies, federal debt in the United States -- the sum total of annual deficits -- would grow from 53 percent of the size of the economy in 2009 to more than 300 percent by 2050, driven mainly by rapidly rising health care costs and, in part, by the aging of the population. Combined, those two factors exert enormous pressure on the government's biggest spending programs, Medicare and Medicaid, and, to a lesser extent, Social Security. . . .
Unless health care costs are controlled, there is no way to solve the country's long-term deficit and debt problems. . . .
There is no way to get deficits under control until our political leaders are willing to acknowledge difficult truths and make even more difficult political choices. We have heard and seen too little of that from the Democrats lately, and none at all from the Republicans. That is truly a recipe for disaster.
Yes, it is, and we will run head-on into that disaster because our political leaders aren't leaders at all. They're the handmaidens of special interest groups that don't want health care costs to be controlled, or pointless wars to end, or dependency on oil to end, and so on.
To be clear, I am not an Obama supporter. However, nor was I a McCain supporter. Under either man -- indeed, under any person in the current political apparatus -- the results would be roughly the same because those directing the funding will control the outcome. What they want is not usually what citizens want. Therefore, US government under any figurehead will generate results that most citizens don't want. In this case, financial disaster.
A new party won't help, either, I'm afraid. Take the growing Tea Party movement. The name is right in the sense that the original Boston Tea Party used active resistance against existing government to make a point. They threw the tea into Boston Harbor. We need similar active resistance against government to change anything. Instead, the current Tea Party offers as its new version of leadership...Sarah Palin. Huh?
About the nascent Tea Party, Canada's National Postwrote earlier today:
The Tea Partiers face the same challenge faced by all populist protest movements: Crafting policies is far harder than simply venting against the status quo. Once they have driven the subject of their discontent from office, or forced him to retreat (say, from health-care reform), they typically descend into petty in-fighting or are co-opted by an established political party.
As their Tennessee convention showed, once one gets passed the Tea Partiers' common interest in spoiling "Obamacare" and stopping the expansion of the US federal government, the movement is not exactly brimming with sophisticated policy ideas. Its rank-and-file is a colorful but quarrelsome hodgepodge of fundamentalist Christians, antitax activists, anti-immigration cranks, protectionists, mixed in with more mainstream conservative Republicans.
The Obama blame game will continue because he's the current figurehead, but keep your eye on the bigger problem at work. Smart people know that it doesn't matter who wins elections anymore, and that what's needed is a revamping of Washington politics.
That will not happen within the current system because the people in charge don't want the system to change. Therefore, we need a constitutional convention. We won't get one, so prepare for disaster.
As I see it, the recipe for a double-dip recession is a simple one.
The supposed recovery, which we've doubted every step of the way, has happened on government stimulus and bail-outs distributed by bought-off politicians to their private sector cronies. Those politicians refuse to raise taxes for fear of losing their jobs. That leaves the game vulnerable to a bond market upheaval that sends interest rates higher and stops the hands of government money-throwers.
Said money-throwers would have no choice but to cut spending and raise taxes, precisely at the worst possible time to do so. The move could bring the second half of the recession. That's why any ripple in bond markets, but especially in sovereign bond markets, gets stock investors bent out of shape.
What's more, the same forces that contributed to the collapse of 2008 are working hard to cause and benefit from the next collapse. How? By buying credit-default swaps (CDS), which are insurance against a bond going bust, when they don't even own the bond in the first place. That's called "naked" buying. Naked buyers of CDS want to own only the insurance policy against a bond going bust, and collect when it does. Well, what happens when people want to buy the same thing? Its price rises.
Last week, the price of CDS on bonds out of Greece et al. rose like mad. The price of the cost to insure against default is used as a measure of the safety of the underlying bond and, by extension, the bond issuer. If the cost of insuring against Greece defaulting goes through the roof, we assume that Greece is in trouble. Few inspect the cause for the insurance price spike. That's how enough institutions buying the CDS can drive up the prices, cause fear around the bond issuer, lead to downgrades of its debt, and start the cascade that fulfills the prophecy of having bought the insurance against default.
It happened in 2008, and it's happening again. Watch carefully.
Two weeks ago, I reported on President Obama's announcing his sudden desire to reform banks after Republican Scott Brown won the Massachusetts Senate seat formerly occupied by Ted Kennedy. I wrote that "after a year of following the traditional Washington way of bending over backwards to hand taxpayer money to financial firms, he was ready to put an end to risky bank activities like proprietary trading."
I went on:
While the market reacted in a way that predicted crashing bank profits ahead, history suggests that banks will win this scuffle. With the help of Robert Rubin and Larry Summers, they succeeded in getting the 1933 Glass-Steagall Act repealed in 1999, a measure that cleared the way for the housing bubble's now-infamous toxic derivative assets. If banks could whittle away a protection that had held for almost seven decades, why not block a too-little-too-late regulatory gesture that involves terms most citizens don't even understand?
Keep an eye on this issue, but do not be surprised when big bank money decides the outcome. . . . Nobody is more vulnerable to big money buy-offs than members of Congress, so all factors suggest banks will not be reined in.
It's already going that way. On Tuesday, Senate Banking Committee Chairman Christopher Dodd criticized the Obama administration for complicating the effort to overhaul financial-market rules, and said the late addition of a new idea for limiting risky behavior had threatened the process.
He said the announcement of the so-called Volcker Rule "seemed to many to be transparently political," as in Obama was trying to appeal to voters upset with Wall Street right after his party lost the Massachusetts Senate seat.
Senator Richard Shelby said Obama had "air-dropped" his new idea into the deliberations on fixing the financial system. Other Senators made similarly resistive comments.
Former Federal Reserve Chairman Paul Volcker, after whom Obama's new proposal is named, told the committee in testimony last week, "I tell you sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."
We've been cautious for a while now, selling into strength and adjusting hedge sizes. It's been far from perfect, believe me, because some of what we sold we should have held longer into the rally, and we bought our hedges too early. We netted out positive, but would have done better if not for those crimps on profit.
Our caution may finally be paying off, though. Brand new subscriber Kent in Connecticut sent the following note earlier today:
I am a new member, joining your web site last weekend, and I am halfway through reading your little book that I ordered from Amazon.
Just wanted to thank you for your recommendation to buy a hedge with BGZ and to change the entry price from $17 to $18. Today, [with the market losing 3.1%] that hedge is covering my butt, and reducing some of the stress a day like this could cause.
That one call paid for my yearly subscription to your web site ten times. I hope to enjoy similar success as I adopt a few other of your ideas in the weeks and months to come.
And I hope to provide Kent with similarly useful calls down the line. By the way, the part of last Sunday's note that led Ken to buy BGZ at $18 was this:
With the market's continued drop last week, our limit order to double down on our BGZ hedge at $17 in Tier 3 did not fill. It closed the week at $18.88, a full 10% away from our target price. It would take a move on the S&P 500 back to 1110 or so to see that fill, and I doubt it'll go that much higher on a relief bounce. It might go to 1095, though, so let's adjust our order from $17 to $18:
Double down on Direxion Russell 1000 -3x (BGZ) at $18
A modest relief bounce would see that fill, and put us in position to make a few more moves before a drive lower takes hold in a new downward-sloping channel.
The S&P 500 peaked at 1105 on Tuesday, and BGZ bottomed that same day at $17.22. It was good to adjust the order upward. BGZ closed today at $19.23.
I spoke with hosts Nancy and Lisa on "Success Express" from 7:20 to 7:40 p.m. ET. We discussed why most people feel intimidated by the stock market, how to make 3% quarterly growth consistently regardless of the market environment, and why the US market is still in great danger because the government followed Japan's flawed playbook for dealing with bad banks -- even though every US Treasury secretary flew to Tokyo for the past 20 years to tell the Japanese government that it shouldn't have made private banking debt disasters public.
When the US encountered its own private banking debt disasters, what did it do? Made them public. Way to go! Now, maybe America can enjoy a two-decade up-again-down-again recession just like Japan has experienced following its stock market bubble burst. The Japanese bubble burst in 1989, and the recession it caused still hasn't ended.
Nancy and Lisa were gracious hosts, and I hope to join them again in the future.
Fiscal 2011 Budget: $3,800,000,000,000 Fiscal 2011 Deficit: $1,300,000,000,000 Savings achieved by "tough choices": $20,000,000,000 Share of budget those savings represent: 0.5%
From a January 30 post titled Tough Choices by White House Communications Director Daniel Pfeiffer:
In the 2011 Budget we will release on Monday we terminated or reduced programs that weren't working well or duplicated efforts, some in areas that are important to the President and to the Administration.
Last year, President Obama sought to end or reduce 121 programs for a one-year savings of approximately $17 billion of which $11.5 billion was from discretionary savings. Congress approved cuts that produced a net discretionary savings of $6.8 billion, nearly 60 percent of the discretionary cuts proposed. . . . This year, we are proposing more than 120 terminations, reductions, and savings for approximately $20 billion in savings this year.
For perspective, cutting a $3.8 trillion budget by 0.5% is the equivalent of a household that spends $2,500 per month making "tough choices" that add up to $13 saved.
