Category: Invest with Alex

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Why Rating Agencies Are Worthless

Bloomberg Writes:  Gross Says Investors Shouldn’t Trust Moody’s on U.S. AAA Rating

 

I dream of the day when this happens in the US Senate. Why should Koreans have all the fun
I dream of the day when this happens in the US Senate. Why should Koreans have all the fun

Investors shouldn’t trust the opinion of Moody’s Investors Service on the U.S.’s Aaa rating and should rely instead on the company’s competitors, according to Pacific Investment Management Co. founder Bill Gross.

Moody’s and the U.S. Treasury are one “happy family,” Gross, manager of the world’s biggest bond fund, said today in a post on Twitter. “Trust S&P, Fitch & Egan Jones” for credit ratings, he wrote. Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, said Gross was referring to Moody’s stance on the U.S. debt limit and potential for a government shutdown.

Standard & Poor’s cut the U.S. rating to AA+ from AAA in August 2011, a move that reflected the impasse over raising the debt limit as well as the government’s lack of a plan to rein in its debt load.

Read The Rest Of The Article

I don’t know about you, but I wouldn’t Trust Moody’s with watching my dead grandmother. I am not trying to be boastful, but you could have seen 2007-2009 meltdown coming from 10 miles away. I am not sure why an organization such as Moody’s with hundreds of financial analysts on stuff across multiple industries couldn’t see it coming. As you remember they have downgraded companies after the fact. Well, late enough for most investors to lose a lot of their money.

Actually, I do know. It’s called the “conflict of interest”. Bill Gross is absolutely correct. Basically Moody’s and the US Government are now a one entity scratching each other’s back. Should you care? Not really, but I do want you to be aware of the fact. Next time they either upgrade or downgrade something, view it with some skepticism at best. Know that they do not work for you, but large financial interests who’s objective might be counter to yours.  Either way, you should always do your own research and not depend on somebody else’s opinion.

On a related note, there is a parade of Senators and Congressman running around on TV. They are yelling and screaming that if the debt ceiling is not raised, the US Government will shut down and that will lead to a Great Depression. Something along those lines.  Do me a favor and tune them out. The stock market could care less and so should you. They will pass it and everything will be fine. 

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Chinese Government Cooking Books. No, Really???

Bloomberg Writes: China Beige Book Shows Slowdown, Opposite Official Data

 china economic growth investwithalex

China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige Book President Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter — no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

Read The Rest Of The Article

Continuing our China watch, I want you to read the two paragraphs above very carefully.  I have been saying all along that Chinese miracle growth story is anything but true. Yes,  I would be the first to admit that China has a bright future and a potential. However, as of right now, that is all it is.

Before China can reach that potential and overtake the US Economy it will have to go through significant economic imbalances, bad loans, capital misallocation and property bubbles that Chinese government has baked into the system in return for seemingly amazing Economic growth.  Yet, everything has its cost.

The Chinese government can cook its books all it wants, but sooner or later the reality will catch up to it. With China’s real economic growth slowing down significantly (as per report above), structural issues coming home to roost and global economic slowdown just around the corner,  the moment of reckoning might be close at hand. 

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Top Investors All Agree. The Stock Market Is About To Collapse

Business Week Writes:  Investors are buying high, yet again.

investors are stupid investwithalex

Sell low, buy high. Wash, rinse, repeat.

Investors have indulged that predilection time and again—most recently piling into the stock market just ahead of collapses in 2008 and 2001. Now it seems as if everyone again wants in big, even as the Standard & Poor’s 500-stock index has rallied 150 percent from its lows, corporate profits and cash hoards are at records, and the Federal Reserve has expanded its balance sheet to nearly $4 trillion. Equity funds drew $26 billion in the week ended September 18, breaking the previous record set six years ago, according to EPFR Global, which tracks investor flows. Domestic stock funds notably took in just under $17 billion of that total.

FED balance sheet at $4 Trillion is downright scary.  This is how market tops are set.

And with such timing: U.S. shares hit record highs on Wednesday, the last day of EPFR’s reporting period, after the Fed said it would hold off from tapering its bond purchases. The market is up 20 percent this year and has jumped by a third just since last summer, having gone without a correction since 2011. The tech-laden Nasdaq is up 25 percent in 2013, visiting highs unseen since the starry-eyed turn of the century.

In a show of “you buy/we sell,” companies are racing to go public (Chrysler, anyone?). At least 200 firms are gearing to have their IPOs this year, the most since 2007. Meanwhile, in the interest of full and fair disclosure, buyout shops might want to rebrand as sellout shops, so eager have they been to cash out.

If history teaches us anything, this is a clear indication that the market is close to a top. Insiders realize that the market is overpriced and are trying to cash out.

Similarly, some legendary pros say they are in no rush to join the recent buying stampede. “Stocks were very cheap five years ago, ridiculously cheap,” Warren Buffett last week said. “That’s been corrected . . . . We’re having a hard time finding things to buy.”

I confirm this. Everything is too expensive. I cannot find anything to buy outside of a few special situations (here and there) and technically driven plays.

“Right now,” remarked Carl Icahn, “the market is giving you a false picture. The market tells you that you are doing well, but I don’t think a lot of companies are doing that well. They are taking advantage of very low interest rates. So, obviously, you don’t have to be a financial genius to understand if I can borrow at 3 percent or 4 percent and buy assets maybe my own stock that is yielding 9 percent, 10 percent, or 11 percent, I am going to make a lot of money. In one sense or another that is what is going on . . . I do think at [the market’s price-to-earnings ratio] of 17 that you have to be pretty well hedged.”

Bingo Mr. Icahn. That is exactly what is going on. Everyone is playing this stupid carry trade financial shell game. As of right now the music is still playing, the question is….when will it stop. I assure you there won’t be enough chairs. 

 “If you tell me quantitative easing is going to be removed over nine or 12 months,”said Stanley Druckenmiller, “that’s a big deal because it’s my belief that QE has subsidized all asset prices. And you remove that subsidization, the market will go down . . . The minute you have this phony buying stop, [stocks] can go down on no volume and just reprice immediately.”

Exactly. The only thing that is keeping this markets up, artificially I might add, in an insane amount of credit infusion through QE and low interest rates.  When it stops, most asset classes WILL collapse.  The only thing I would disagree with is the fact that the FED has control. The FED has only “perceived” control and the market might take that away at any moment.

In the meantime, keep your eyes on the tidy sum of $1.4 trillion. That’s how much investors have crammed into bond funds between the January 2009 and May 2013, according to Bank of America Merrill Lynch. In the just the past four months, however, they have unwound $173 billion from that mega-trade—an enormous redemption but still just a sliver of $1.4 trillion.

How much of that unwind makes its way to equities, especially when the Fed’s taper starts in earnest? For the market—loved once again, after so long—it’s a question that could trump all others.

At least for now, the paper shuffling game continues. However, be careful here. We are at the 12th inning of the bull run that has started in March of 2009. The bear market should resume soon. 

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US Home Prices Surge 12.5%. Put Your Helmets On.

AP Writes: US home prices rise 12.4 pct., most in 7½ years

 Housing Bubble Stage 2

WASHINGTON (AP) — U.S. home prices rose 12.4 percent in July compared with a year ago, the most since February 2006. An increase in sales on a limited supply of available homes drove the gains.

The Standard &Poor’s/Case-Shiller 20-city home price index reported Tuesday improved from June, when it rose 12.1 percent from a year ago. And all 20 cities posted gains in July from the previous month and compared with a year ago.

Stan Humphries, chief economist for real estate data provider Zillow, said home price should continue to rise but at a slower pace. Mortgage rates have increased more than a full percentage point since May. And more homes are being built. That should ease supply constraints that have inflated prices in some markets.

“This ongoing moderation is good for the market overall,” Humphries said.

Home prices soared 27.5 percent in Las Vegas from a year earlier, the largest gain. San Francisco’s 24.8 percent jump was the second largest and the biggest yearly return for that city since March 2001.

Read The Rest Of The Article Here

We have already discussed the following multiple times, but I would like to concentrate your attention on something.

  • U.S. home prices rose 12.4% percent in July compared with a year ago, the most since February 2006.
  • Home prices soared 27.5% in Las Vegas and 24.8% in San Francisco from a year earlier.

While most people might see this as a positive, this is way out of line from any reasonable financial metric.  If there were fundamental reasons for such an increase…..things such as housing shortage, rising incomes, tight job market, inflation, falling interest rates, etc….. I would be the first to tell you that real estate market has started a bull run. However, the reality is the exact opposite. There is no housing shortage, median incomes are falling, unemployment is high and interest rates are up 100% over the last 12 months.

So, what gives?

Basically, if this doesn’t scream “Housing Bubble” is back in full force to you, nothing else will.  To begin with, real estate should never be viewed as an investment, unless that is your occupation. It should be a viewed as a place to live.  Second, the numbers above are nothing more than a secondary speculation bubble in real estate that will soon pop as well. There is no doubt about it. It is just a matter of time.

I have already indicated that you should watch Las Vegas Real Estate if you want to time it perfectly.  Otherwise, be very careful here. The real estate market will blow up sooner or later and the next stage of the decline will be much deeper. No doubt about it. 

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Apple. Buy, Sell or Hold

Apple Inc.(NASDAQ:AAPL) gapped up close to $27 at the opening bell on Monday to close +$23.23 (+4.97%) higher for the day.  The jump was due to a better than expected iPhone 5S and iPhone 5C opening weekend sales. Over 9 million units were sold since the September 20th release date and according to numerous reports the demand for the new devices have exceeded initial supply. In comparison, last year Apple was able to sell only 5 million iPhone5 units in the first 3 days on the market.  With the Apple Inc stock up close to 9% in just 5 trading days, does it make it a buy, sell or hold?

gold iphone investwithalex

While the initial sales estimate are impressive to say the least, they must be put in perspective as in comparison to the last years release of iPhone5. For instance, current release was synchronized with foreign markets release. Most importantly, iPhone 5S and iPhone 5C were made available over the weekend in China. In the past Apple Inc has released iPhones in China 2-3 weeks after the initial US release date. Plus, since Apple Inc is not breaking down sales number by phone there is still a lot of confusion if the consumers are gravitating towards the iPhone 5S or the cheaper iPhone 5C version. Understanding this little data point could give an important insight into consumers mindset and predict the near term future of the smart phone market.

Still, either way you look at it, Apple’s initial iPhone sales numbers were incredible. Given the sales surge over the weekend Apple Inc filled an 8-K form with the Securities and Exchange Commission today stating that they expect its next quarter’s sales to come in at the high end of the estimated $34 to $37 Billion made in July. Further, the company estimated that the gross margins will be at the higher end of the previously provided range of 36% to 37%. These record breaking numbers are sure to put an exclamation mark on what has been a record breaking fiscal year for Apple Inc, ending on September 30th, 2013.

While Apple Inc is surging forward, its old rival BlackBerry Ltd (NASDAQ: BBBY) announced that it has received an offer to be acquired by Fairfax Financial Holdings Ltd at $9.00 a share. Once a smart phone market leader BlackBerry is now a shell of its former glory days. The company has failed miserably to maintain its innovation lead against both Apple and Samsung (OTCMRKTS: SSNLF) since the first iPhone introduction back in 2007.

When you think Apple Inc standing couldn’t get any better, it actually does. Since release of its iOS 7, over 200 million users switched to the latest operating system. As part of the upgrade Apple Inc has introduced a new product called iTunes Radio, which now has over 11Million users.  That spelled disaster for the stock price of Pandora Media Inc (NYSE: P) whose stock declined by more than 10% since Apple’s iTunes Radio introduction.

Will Apple Inc eat Pandora’s lunch as well? It certainly looks like that. With over 11 Million listeners in just a few days, direct to consumer infrastructure (iPhone/iPad/iPod and iTunes) and top of the line brand name, I believe Apple’s entrance spells serious trouble for Pandora Media’s future.

Given this overwhelmingly positive fundamental picture Apple’s stock still trades well below its all time high of around $700 set exactly a year ago. What does this all mean? Fundamentally speaking and given its growth rate Apple Inc stock is not that expensive. At the same time investors might be a little bit confused in regards to just how much longer Apple Inc can maintain its growth rates and leadership position.

Technical picture represents a much more exciting opportunity. Apple Inc stock has been stuck in what can be described as a trading range between $390-550 for close to 9 months. Now there are signs that the stock has bottomed and is ready to go up again. We are approaching an important point here. If the stock breaks above $500 over the next few weeks, it might be a good idea to start building a long position. Should the stock break above $550, it would be a technical confirmation that the bull market in Apple Inc stock has resumed.

At the same time, Monday’s gap from $470 up to $490 must be closed before any full on bull move can resume. As such and given overwhelming positive news for the Apple Inc I would anticipate a short term pullback before resumption of the possible bull move.

Recommendation:  Hold If Own. If not, wait for either Bullish or Bearish confirmation. 

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Federal Reserve Pledges More Stupidity

The Washington Post Writes: Federal Reserve considers explicit pledge: Low rates if inflation stays down

bernanke meme

The Federal Reserve is leaning toward an explicit commitment to keep interest rates at rock-bottom levels, as long as inflation remains low.

The pledge would be an attempt to strengthen assurance that the central bank will not tap the brakes on the recovery until it is certain that the momentum can be sustained. The Fed already has vowed not to raise rates — a move that would slow economic growth — at least until the unemployment rate falls to 6.5 percent or inflation rises above 2.5 percent.

Read The Rest Of The Article Here

There are a couple of things in this article that drive me up the wall.

  • We are not in an inflationary environment,  we are in a deflationary environment. The only reason you we are seeing inflation in certain parts of the economy is due to the FED printing a massive amounts of money ($85 Billion/monthly) and dumping it into the financial system by keeping interest rates artificially low. If that wasn’t happening we would already see clear signs of deflation.
  • The FED is punishing savers and true economic growth by keeping interest rates too low for far too long. All while developing significant economic imbalances that will have to be deflated at a later date.  The situation is made worse by creating an environment where only people with access to cheap financing benefit. At the same time the US poverty rate is at all time high or close to 50 Million people. 
  • The article assumes that the FED is in complete control of interest rates. At least for now everyone believes that. Yet, nothing could be further from the truth. While the FED can influence the rates, it cannot control it. The market controls the rates. 

This in return presents a trading opportunity for those who think otherwise. Eventually the interest rates will move independent of the FED and destroy the whole scheme in the process.

When will it happen?

Actually, it might be already happening as interest rates already up 100% over the last 12 months. Is the FED finally losing control? I hope so. In the long run it would be great for the US Economy. 

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Real Estate Watch, September 24, 2013

Reuters Writes: Citigroup to cut 1,000 mortgage jobs, mostly in Las Vegas

real estate cracks

(Reuters) – Citigroup Inc (NYS:C) said it is eliminating about 1,000 jobs in its U.S. home mortgage business, making it the latest bank to lay off staff as higher interest rates cut into demand for new loans and refinancing.

The bank is cutting about 8 percent of the 13,000 jobs in its mortgage division, with most of the cuts – about 760 – taking place in Las Vegas.

With mortgage rates having risen to their highest in two years, applications to refinance home loans plunged in early September to their lowest in nearly four years.

Roughly 800 of the jobs being eliminated are in sales, underwriting and fulfillment and reflect reduced demand for loans. Another 200 jobs are being cut because the company has less work to do on defaults because of higher house prices and fewer delinquencies, a person familiar with the matter said.

The 100% increase in interest rates over the last 12 month is having its effect.  We are beginning to see cracks in the real estate market develop all over the place. Citigroup eliminating about 1,000 jobs in its mortgage division is a clear sign of that.

So, is the plunge in September loan applications for refinancing an indication that the real estate market has topped and is starting to roll over?

It’s too soon to tell at this stage.  Plus, the real estate market is highly local. As I have mentioned before there is no doubt that the real estate market will go down hard. However, the timing of any such decline is a little bit more complicated. There are too many crosscurrents in the market to identify the exact top for the Nationwide market. 

However, if you are involved in transactional real estate, right now would be a good time to start unwinding all of your position. 

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The United States Of Europe

Bloomberg Writes: The U.S. Economy Is Turning European

United States Of Europe Investwithalex

The U.S. economy is getting as bad as Europe at bouncing back from recessions and generating jobs, and a decrease in societal trust may be a big factor, according to a research paper presented today at the Brookings Institution.

The paper is called “Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence,” and it’s by Olivier Coibion of the University of Texas at Austin and Yuriy Gorodnichenko and Dmitri Koustas of the University of California at Berkeley.

Amerisclerosis is the economic version of atherosclerosis, also known as hardening of the arteries—a disease that contributes to heart attacks and strokes. In the 1980s, economists coined the term Eurosclerosis to describe Europe’s malfunctioning jobs market. The U.S. is going the same direction, the authors say.

Read The Full Article Here

Amerisclerosis.  Seriously??? Is that the best US Economist can come up with?

I am not sure why so many smart people find it so difficult to understand our current economic environment and/or lack of economic growth/improvement. It is as easy as 1-2-3.

1. We exist in an artificial Credit Finance Economy:  Meaning that whatever recovery we have seen was financed not by real money, but “out of thin air” printed money to sustain the US Economy and to prevent a collapse/recession. The velocity of that money is slowing down now and the US Economy will soon roll over into a recession.

2. Robotics and Outsourcing: Brace yourself over the next 10-20 years. Whatever jobs robots can do or that can be outsourced  will disappear over that time frame. Nothing can be done about it. With real unemployment/underemployment already as high as 15-20% in the US, it doesn’t bode well for the overall economy.

3. Structural Problems: There are so many that I will just mention a few. Attempted currency debasement, healthcare, artificially low interest rates, unemployment, housing bubble, cost of education, car sales bubble, etc….  Of course most of these can be directly tied to issue #1 above.

Until these 3 issues are dealt with, the US Economy is not going anywhere. The only way to deal with it is to stop insane fiscal policies by the FED and the Federal Government and let the US Economy go through a severe recession and defaults.

Unfortunately, no one in the US Government has the balls to do just that as they all practice their can kicking ability. Since that is the case I would expect the US Economy to slowly decline over the next decade to further deteriorate the American standard of living.

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What Are You Smoking Mr.Buffett?

Bloomberg Writes: Buffett Calls Fed History’s Greatest Hedge Fund

buffett what are you smoking investwithalex

Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

 

“The Fed is the greatest hedge fund in history,” Buffett told students yesterday at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said. “And that wasn’t the case a few years back.”

The central bank has been buying $85 billion of bonds a month to help the U.S. recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S. Bernanke and other Fed policy makers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy.

The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

The Fed “is under no pressure, none whatsoever to have to deleverage,” Buffett said. “So it can pick its time, and if you have somebody wise there — and I think Bernanke is wise, and I certainly expect his successor to be — it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.”

Read The Rest Of The Article Here.

 

This article is a must read for everyone. If it doesn’t illustrate to you that our credit finance depended US Economy is nothing more than a huge FRAUD, nothing will.

Here is how the FRAUD works.

  1. Mr. Bernanke sits in his comfortable leather chair at the FED, pushes a computer button on his keyboard and BOOM, about $85 Billion (yes, billion) appear out of thin air. That happens every month.
  2. Mr. Bernanke then pushes another button on the keyboard and buys $85 Billion worth of US Treasury. Every month. (AKA. Lending to the US Government)
  3. The US Government then proceeds to pay interest on such “out of thin air” money and that goes to the FED.
  4. The FED then turns around and pays the interest money back to the US Government. Net of fees of course(which I don’t even want to go in here).

Does anyone know how I can get into this free money business?

Keep in mind that most if not all financial institutions (including banks) in the US are currently making money off of this scheme.

So, what’s the problem?

Well, all of this happens on the money that never actually existed in the first place. We can talk about structural problems that this action leads to, such as currency debasement and inflation, but for our purpose lets concentrate on something else.

This does, in fact, make the FED the largest hedge fund in the world. Excuse me, not a hedge fund, but a Ponzi Scheme (since they are creating money out of thin air). Usually this goes uninterrupted until and unless the confidence goes away. At that point, the Ponzi Scheme collapses within a very short period of time.   

As of the right now the FED has an substantial amount of confidence from both domestic and international investors. Will that continue? Probably, until one day it doesn’t. When will that day come? No one knows, but when it does the whole thing will collapse within a short period of time. No doubt about it.

The only problem is, instead of these fraudsters playing with just your retirement account, these guys play with the entire US Economy. When it goes…and it will….everything will collapse.

And they put Bernie Madoff and Martha Steward in jail? These guys are not even on the same planet when it comes to defrauding the American people.

So, is Mr. Buffett smoking something and doesn’t see this? Of course he sees and fully understands the stated above. However, he owns/runs a huge conglomerate that depends on growth and stability of the overall US Economy. For him to say anything else but what he said would be foolish. But not for me. 

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German People, You Have Chosen Poorly

Bloomberg Writes: Merkel Records Biggest Victory Since Kohl’s Reunification Vote

euro-investwithalex

Angela Merkel won an overwhelming endorsement from German voters, putting the country’s first female chancellor on course for the biggest election tally since Helmut Kohl’s post-reunification victory of 1990.  Merkel’s Christian Democratic bloc took 41.8 percent to 25.6 percent for the Social Democratsof Peer Steinbrueck in yesterday’s election, projections on ZDF television showed at 12:02 a.m. in Berlin. That leaves her short of a majority and needing a coalition partner to govern Europe’s biggest economy.

 “This is a super result,” Merkel, who is now set to become the fourth chancellor since the war to win a third term, told supporters at her party’s headquarters in Berlin. “To the voters, I promise that we will handle it responsibly and with care. We will do everything we can in the next four years to ensure that they’re once again successful years for Germany.”

Read The Rest Of The Article Here

 

In one of my previous posts Germany Should Leave The European Union. Like Now  I have argued that German people have a wonderful opportunity to shift the direction of their country towards economic prosperity.   Unfortunately that did not happen on September 22nd as Merkel and her party won re-election.  While seemingly unimportant, this decision will have severe consequences on the overall global economy.

Germany is an economic powerhouse and is the only thing that’s keeping “fiscal mental hospital” that is European Union together. I strongly believe that without Germany, European Union has no chance for a very long survival.  German people had a wonderful opportunity to set their country on the path to eventually leave the EU by voting for AfD, but they let it slip away.

So, what now?

Unfortunately, for Germany nothing will change going forward. Germany will continue to support Greece, Italy, Spain and the rest of the freeloaders for the foreseeable future at the expense of the German people. That will put a significant drag on the overall German economy and any chance of loosening up the shackles that could have set Germany on the path to economic prosperity they haven’t seen before.

In summary, more of the same as fiscal insanity that is EU continues uninterrupted.

 

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