Marko's Take

State Of The Dis-Union (Part 1)

2011-01-26T16:43:00.000-08:00

It's THAT time of the year for us politicos.  Annual report time for America Corp., also referred to more popularly as "The State Of The Union" address, delivered by our President and Chief Executive. George Washington delivered the first one in 1790, Barack Obama just orated the most recent one, Tuesday evening.

If snap opinions poll results were the appropriate guide of success, President Obama hit a grand slam. Reportedly, more than 90% approved of the ideas proposed in the speech and more than 80% said they supported the economic plan laid out http://www.politicsdaily.com/2011/01/26/obamas-centrist-tone-hits-right-note-state-of-the-union-ratin/?icid=main%7Chtmlws-main-n%7Cdl1%7Csec1_lnk3%7C197372.   For a President whose party suffered the most stunning mid-term defeat in history, this has got be one helluva shot in the arm.

If, for some reason, you weren't a part of those majorities, I have VERY bad news for you. According to the President (who, apparently is trained as a psychologist): "Mr. Speaker, Vice President Biden, members of Congress, distinguished guests, and fellow Americans, nearly two years into our recovery from a recession that left our financial system on the verge of collapse, I stand here today confident that America is on a path to a better tomorrow, despite all the nutjobs and lunatics out there whose behavior is, honestly, kind of weirding the rest of us out." (http://www.theonion.com/articles/obama-aside-from-all-the-weirdos-and-freaks-around,18929/).

Maybe if Dr. Obama would prescribe us nutjobs some psycho-tropic drugs, we could see the nearly two year recovery, too!

Did he REALLY say 2 years into our recovery? The same 2 years in which the economy has lost 8 million jobs?

Well, then call me one BIG-TIME lunatic who's "weirding you out"! At least, I have good company.

It seems you could also count the Federal Reserve among the lunatics.  Concluding a 2 day committee meeting, they left interest rates at ZERO and recommended ANOTHER $600 Billion in bond purchases: http://finance.yahoo.com/news/Fed-says-economy-needs-600B-apf-204644297.html?x=0&sec=topStories&pos=main&asset=&ccode=. Only in the last 2 years, have they had to employ a desperate tactic popularly known as "Quantitative Easing", by a Chairman, who has said that money might have to be thrown out of helicopters.  Figuratively, of course.

Perhaps the problem is nothing but semantics. If one could re-define a few of the criteria for a 2 year economic recovery as:

1.  Near 10% unemployment;
2.  A "cash-based" budget deficit running at $1.5 Trillion;
3. Municipalities and States teetering on defaulting on their debts;
4.  Massive "Quantitative Easing";
5. Record bailouts and "Troubled" Asset Purchases; and
5.  Record home foreclosures,

then the economy must be in one helluva nearly two year recovery!

Maybe the time has come for us lunatics to run the asylum!  Remember Candidate Obama? He kept telling us how horrible the economy was when we had 8 million MORE people employed. The budget deficit was half, local governments were still solvent, the Fed wasn't running the presses overtime and more homes were occupied by owners.

Candidate Obama was right!  Unfortunately, President Obama who attempted to enact Candidate Obama's policies, has run out of time to blame George Bush.  The only option is for President Obama to declare victory by altering the definition of victory. Hell, if you set the bar low enough, even "Mini Me" could become an Olympic gold medal pole vaulter!

In Part 2, we will do a thorough "Marko's Take" analysis of the proposals set forth and run them through our proprietary "Take-Meter".

In order to deal with the issue of understanding very confusing phrases such as "nearly two year economic recovery", we have prepared a special Candidate Obama/President Obama Dictionary for those aren't fluent in both.

Marko's Take

It's A Mad, Mad, Mad, Mad Market

2011-01-18T07:29:00.000-08:00

It is the best of times. It is the worst of times.

There are a smattering of data points that suggest that the global financial and economic arenas are slowing making progress toward a legitmate recovery. That doesn't exactly get us to the BEST of times, but by comparison to 2008, it's practically utopia. We don't wake up every day to the news that some major company has gone bankrupt or some huge financial institution has become insolvent.

Unfortunately, the smattering is nothing more than a smattering. The vast, vast majority of data suggests that markets are at a top of significance akin to 2000 or 2007.

Investors are convinced that it's the best of times. When they do, the worst of times immediately follow. Nothing compares to the madness of crowds at market extremes! http://markostake.blogspot.com/2010/12/psychology-of-investing-part-1.html and http://markostake.blogspot.com/2010/12/psychology-of-investing-part-2.html.

According to Barron's weekly survey (http://online.barrons.com/public/page/9_0210-investorsentimentreadings.html), the crowd is as mad as a hatter. Bullishness is at historically extreme low levels. Only 19% of newsletter writers currently identify themselves as bears (http://www.market-harmonics.com/free-charts/sentiment/investors_intelligence.html). Coincidentally, the identical readings were measured at the market peaks of 2000 and 2007.

Americans in general think it's just about the worst of times according to Gallup, with only 19% satisfied http://www.gallup.com/poll/145610/Satisfaction-Remains-Near-Month-Low.aspx. This crowd seems quite sane to me.

The trading behavior of the markets itself are mad. The last two trading days have been outright schizophrenic. According to Yahoo Finance, as the indices were making new multi-year highs, and after a run of 7 straight weeks of advance, an unbelievable 4% of issues traded on Friday made new LOWS! Huh? Would someone pull the DSM-IV off the shelf and sit this market down on the couch? Maybe hand it a Kleenex? Prescribe it a boatload of psycho-tropic drugs?

NOT mad are investors in the commodity and precious metals arena. Despite the massive runup in gold, silver and the companies that mine them in 2010, sentiment is anything BUT extreme. According to Gold sentiment analyst Marc Hulbert, gold "fever" has fallen to very reasonable levels since October, as prices have remained in a trading range http://tradersnarrative.wordpress.com/2011/01/13/gold-sentiment-more-pessimistic-while-price-close-to-highs/. This suggests that healthy skepticism remains and thus that any pause in the action is likely temporary, or that any correction in prices ought to be fairly mild.

In this tale of two markets, investors have two choices: Follow the crowd which is sometimes mad but nearly always wrong, or follow "Marko's Take", which is sometimes right, but nearly always mad.

Marko's Take

Eleven Predictions For 2011 (Part 2)

2010-12-29T21:24:00.000-08:00

After turning in a decent, but not spectacular, C+ performance in 2010 http://markostake.blogspot.com/2010/12/eleven-predictions-for-2011-part-1.html, "Marko's Take" shoots for the blog honor roll in 2011.

2011 is shaping us as the year in which we may experience things that we never could have imagined before. And, in the United States, of all places. In no particular order, here are just a few of the events the world is going to have to deal with:

1. A Global Stock Market Beating.   While our bearish posture was very premature, we continue to believe that the stock markets are making MAJOR historic tops. The Dow Jones Industrial Average ought to drop below 8,000 sometime during the calendar year. For a more thorough recent stock market analysis, click here:
http://markostake.blogspot.com/2010/12/hindenburg-sightings-overtake-elvis.html.

2. Increased Global Militarism. What better way to deal with a crummy global economy than to jump-start spending with a good ole fashioned war? It's that simple. Oh yeah, and let's not forget the ongoing tensions in the Middle East with Iran and nukes and terrorists. North Korea, anyone?  For some of the latest thinking on how War is defined and conducted, click here: http://markostake.blogspot.com/2010/11/world-war-iii-continuesconducting-war.html.

3. Rapid Global Economic Downturn. The tepid worldwide recovery is now running out of gas as the stimulative benefits of all the bailout programs have pretty much been absorbed by the system. The Federal Reserve is out of power and out of bullets. Wanna know why? Here's your answer: http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

4. Short-term Interest Rates Remain Low While Long-term Rates Move Steadily Higher Throughout The Year.   The reason? Increasing signs of simmering inflation leading to hyperinflation throughout the year. More on this topic come.

5. The Precious Metals Markets Will Continue Strong Though The Year. The question is how strong? We continue to maintain our long-held belief that Gold will reach or exceed $5,000 per ounce with Silver heigh-ho-ing its way to at least $250. Any target for year-end would be nothing but a sheer guess. Some recent thoughts and ideas on how to play this bull market can be accessed here: http://markostake.blogspot.com/2010/10/gold-and-precious-metals-miners-set-to.html.

6. Martial Law. Yes, you read that correctly. My reasoning for this is contained in this piece: http://markostake.blogspot.com/2010/09/independence-day-2011-will-not-be.html. While the dark scenario portrayed in that essay has veered a bit, I still stand behind it and hope to death I'm wrong.

7. Civil Disobedience. It didn't happen in the United States this year as I had forecast, but it happened all over Europe in response to budget cutbacks. So, why would someone think it can't happen here?

8. European Sovereign Debt Implodes. The troubled European issuers of sovereign debt will only have bought time through the ill-conceived bailouts and budget austerity programs. By this time next year, everyone will wonder how on Earth anyone with a brain could have possibly bought these bonds yielding anything under 10%.

9. Global Financial Crisis. Whether it starts with a Sovereign Debt Crisis or a currency crisis or the discovery of an entire new layer of bad, overmarket assets in bank balance sheets, the global financial system can hardly withstand an accident, let alone a Chernobyl. If some number of trillions of dollars thrown at our financial system didn't really get us out of the last mess, what weapons do we have left?

10. Dollar's Slide To Second-Tier Status Continues. Just last month, China and Russia decided simultaneously to abandon the USD http://www.dailymail.co.uk/news/article-1332882/China-Russia-abandon-dollar-new-bilateral-trade-agreement.html. In its favor, the Dollar has only a few better alternatives, like this barbaric relic called Gold.  At this time no paper alternative possesses the liquidity and stability to repace the Dollar as a bona-fide reserve currency. Unfortunately, China and Russia's actions means one thing's for certain. A probably Gold-back new reserve currency will be created.

11. Big Bonuses At Government Sachs. So what if you played a key role in wrecking the global economy and financial system?  So what if your clients lost all their money? The reason these guys can get away with anything, you ask? Well, here's your answer: http://markostake.blogspot.com/2010/07/sec-no-match-for-government-sachs.html. But if you really need some additional background, this video explains the nitty gritty: http://www.youtube.com/markostaketv#p/u/0/k-kBRC7yoVc.

2011 kinda feels like a bunjee jump, doesn't it?   Here's to hoping that our elastic straps hold!

Marko's Take

Eleven Predictions For 2011 (Part 1)

2010-12-29T11:53:00.000-08:00

While it's fun to speculate on the future course of very unpredictable world events, it's much less fun to review how one's past forecasts have turned out.

About a year ago, we did a special outlook on 2010 putting forth what we expected to see: http://markostake.blogspot.com/2010/01/10-predictions-for-2010.html.

How'd we do? Well, it depends on how one grades oneself, but let's be brutal, shall we? After all, we've "Taken On" Goverment Sachs, Al Gore, Barney Frank, Barrack Obama, Warren Buffett and many, many more. We've also lit fuses under the collective behinds of virtually every major financial and political figure. Virtually no one came out unscathed.

So, what happens when "Marko's Take" takes on "Marko's Take"?

Predictions that were basically good include the ones about Republicans seizing control of both House and Senate. While they did NOT get the Senate, the prediction of the landslide was made on January 16th, 2010, well before the dissatisfaction with everything Obama took the Democrats for a political car-jacking.

We were skeptical that this country would see Obamacare. That, too was a good call.  That god-awful piece of socialist legislation was not and NEVER will be enacted, although it did pass Congress.

Interest rates remained at very low levels all year. Dead on!

The Dollar is beginning a process of being relegated to second-tier status as China and Russia are now transacting in Gold and alternative currencies.  Touchdown!

The stock market did indeed rise and sharply in 2010, but we can't do "chest bumps" about that one. Many times during the year, citing everything from astronomical phenomena to arcane and rare technical indicators, we became extremely bearish WAY too early. That crow soup we've been eating is starting to get old. Mea Culpa!

"Marko's Take" has maintained an ultimate target of $5000 per ounce for Gold and several hundred dollars per ounce for Silver. Our bullish stance was overall correct, even though I would have thought that $2000 for Gold would be the existing price level today.  Nonetheless, this one goes to us.

Things that didn't happen: Civil disobedience from shortages of staples like food and water, a collapse in Commercial Real Estate led by strip malls, no "Windfall Profits Tax" on oil, the economic recovery did NOT sputter by the 2nd quarter and residential real-estate prices did NOT rise.

Overall grade? How does C+ sound? Not Summa Cum Laude performance, but certainly enough to be at the top of the Delta Tau Chi fraternity in Animal House. No need to be put on "Double-Secret Probation", yet!

Part 2 will present our new 2011 forecast, will 11 new surprising, shocking, scintillating predictions. Same Bat Time, Same Bat Channel.

Marko's Take

High Economics (Part 2)

2010-12-25T07:45:00.000-08:00

If the first economic argument for legalization of marijuana (http://markostake.blogspot.com/2010/12/high-economics-part-1.html) didn't pursuade you, there are many more.

Incarceration for marijuana offenses is fairly small, accounting for less than 1% of the prison population, but it does still keep about 60,000 inmates supported at taxpayer expense. It is believed that the annual cost is on the order of $1.2 billion. That does not include scarce court time, legal resources or police time which is allocated to enforcing an unpopular and needless code of law.

Then there is the medical aspect. Marijuana is now used to treat nausea from chemotherapy, anxiety, pain, glaucoma and insomnia. But is it safe? Remarkably so. Of all the causes of death monitored by the Food and Drug Administration, marijuana comes in DEAD LAST, with NO fatalities (http://www.economicsjunkie.com/annual-drug-related-deaths-in-the-us-marijuana-ranks-last-with-zero/).
Even aspirin, which many doctor recommend be taken daily, accounts for thousands of deaths per year.

But, despite overwhelming societal and economic benefits, Proposition 19 did NOT pass in California. What are the arguments against? The main objections to legalization are focused on the belief that marijuana use is addictive, a "gateway" to more serious drugs and a factor in greater crime. There also exists the fear that once legalized, we'd become a nation of Cheech and Chongs.

The U.S. Drug Enforcement Agency (DEA) has issued this position piece outling the arguments against: http://www.justice.gov/dea/ongoing/legalization.html.

The addiction argument is absurd in light of legal alcohol, cigarettes, soft drinks and prescription drugs, all of which are far more injurious to the user and most importantly, can be FATAL to abusers and second-parties. Caffeine is addictive. And, to some, so is shopping, sex and gambling. So is reading "Marko's Take"!

The crime argument is equally absurd. Marijuana is a sedative. How many stoners pull off a bank heist or hold up a 7-11? And, should marijuana become legal, the price would certainly drop. So, the notion that one has to go rob a gas station for a few joints becomes preposterous.

According to federal statistics, nearly 100 million Americans, or 1/3 or the population, have, at least at one point in their lives, imbibed. Cigarette smokers make up about 25% of the adult population, while drinkers make up more than half. Experience with both prohibition and other countries experimenting with legalization have shown that very few NEW people will become users. And, so what if they do?

Merry Christmas!

Marko's Take

High Economics (Part 1)

2010-12-23T19:35:00.000-08:00

Few national political issues are as clear-cut as the growing movement toward legalization of Marijuana. The reasons for supporting this NOW are numerous and quite financially substantial. With a few more votes and the stroke of a pen, we can take a major step toward trivial matters such as balancing the budget.

According to recent article in Time Magazine, more than 500 prominent economists agree that the legalization case is a no-brainer (http://economics.about.com/od/incometaxestaxcuts/a/legalize_pot.htm).
Odd, that "Marko's Take" was not consulted.

Public sentiment is growing tired of the vestiges of persecution for those involved in minor possession. Recently, a jury in the conservative state of Montana could not be assembled because of the virtually unanimous sense that it was an utter waste of private and public resources (http://billingsgazette.com/news/state-and-regional/montana/article_d6b1aaca-edfc-527f-ad11-f1691fdc6e3b.html).

Marijuana is a massive industry even when compared to other substantial agricultural industries. The largest countries growing, apart from the United States, are clustered in Central and South America (http://edition.cnn.com/2008/WORLD/americas/11/25/paraguay.mexico.marijuana/index.html).

In the United States, California is dominant, with nearly 50% of national production totalling a paltry $12 billion per year (http://www.drugscience.org/Archive/bcr2/domstprod.html). Think citrus is big? According to recent data, the total annual production of Florida's ENTIRE citrus crop is a mere $9 billion (http://www.ehow.com/list_7344390_states-large-amounts-citrus-fruits_.html). California is number 2 in citrus meaning that marijuana is twice as big as this state's citrus industry.

So, let me get this straight. We have a $12 billion industry which is NOT paying taxes, hiring people who are NOT paying taxes and selling a product which has NO sales taxes. And, we have a state budget problem which is forcing cutbacks everywhere. And, one recalls a ballot proposition to legalize that LOST?

So, if I you ever hear someone affected by the state cutbacks complain to you, ask them how they voted on the California referendum to legalize marijuana. If they answer that they voted no, please send them this blog so they'll shut the hell up!

But legalization doesn't just stop with selling the plants for medical or recreation use. The fibre of the cannabis plant, known as hemp, has an amazing variety of uses from clothing, to paper, to biomass, to medical to even jewelry (http://en.wikipedia.org/wiki/Hemp). The estimated size of the domestic market for hemp-based products is on the order of $500 million.

But, the benefits hardly stop there. In the next part, we'll discuss more fully the medical and criminal aspects, either of which, alone, would be enough to warrant its legalization.

Marko's Take

The Educators Are The Ones Needing Education (Part 3)

2010-12-21T09:27:00.000-08:00

You didn't think the multi-part series on financing education would end with an endorsement of school vouchers, did you? There actually exists an even better "Marko's Take" solution.

To get up to speed on the issues of financing public and private education, the prior two blogs can be accessed here: http://markostake.blogspot.com/2010/12/educators-are-ones-needing-education.html.

If we all agree that an educated society is in everyone's best interest, then the only issue is how to finance it. Just a few of the key economic benefits of a better educated populace include higher employability, income, productivity with a much lower crime rate and dependence on the public dole.

We can take this logic much further. If I earn an additional $1 million lifetime dollars as the result of public generosity, than wouldn't it be much FAIRER if I SHARED some of that with the people who financed me as I actually earn it? Of that extra cool mill I just made, why not pay as I go as long as I earn? This can be done through a small income tax surcharge which is earmarked specifically for future students.

This plan would also accomplish eliminating all the dead-beats who borrow and NEVER pay the loans back. According to recent data from the Department of Education, student loan default rates are soaring: http://www.ed.gov/news/press-releases/student-loan-default-rates-increase-0.

The stated default rate is actually believed to be much, much higher than the 7% official rate. Many firms have been set up to keep a defaulting student from officially being characterized as such to protect credit scores and bank balance sheets.

The really sad thing about student defaults is that the majority have the capacity to actually pay the loan back but rationalize non-payment because it's government-guaranteed and little enforcement mechanism exists.

The IRS, I think we'd all agree, is far better at collecting debts than the Department of Education. But, another solution would be to use the present value of loans to offset future Social Security liabilities. The thought here would be to eliminate future public liabilities in exchange for funding some level of education. A higher income earner would certainly have a greater capacity to actually SAVE for retirement!

Now how simple would this be?

For more on the Social Security system, we have two videos which explain the system itself, as well as a "Marko's Take" solution. They can be viewed here: http://www.youtube.com/markostaketv#p/u/3/twFn9XyP2rI and here: http://www.youtube.com/markostaketv#p/u/2/7Rl6XtobFpE.

Marko's Take

The Educators Are The Ones Needing Education (Part 2)

2010-12-19T20:08:00.000-08:00

If the effectiveness of the Public Education system were given a grade, it would surely get an F. The more we spend, the less we get. The evidence? http://markostake.blogspot.com/2010/11/educators-are-ones-needing-education.html.

The most basic question concerns whether the public coffers should be used to fund education at all?   If you think about it, an educated population, like a strong army, is in society's overall interest. There is a direct and positive correlation between level of education and societally beneficial behavior such as higher employability, lower crime rate and out-of-wedlock births.

Economist Milton Friedman first proposed a system of school "vouchers" to make collective spending produce better results.   Under the public school system, students receive a certain value through either cost-less tuition in K-12, or through subsidized tuition in the State University or junior college system.

Friedman argued that a key factor in the poor performance of the education system was lack of competition as reinforced by the tenure system and teacher's unions.   The solution? Let students opting out of public schools use the money allocated to them by the state at ANY school. The result? A flourishing private school industry competing with other private schools for student dollars. Ergo, better performance by the education system.

While the voucher system contains a certain logic, there are numerous detractors.  One argument against vouchers maintains that a large number of private, religious schools would receive public funding and cross the "church vs. state" issue in the Constitution. However, since it is the parents making the choice, it is hard to understand how the State could be imposing religion. In addition, there is also the objection that vouchers take money away from public education.  Well, if you read Part 1 as linked above, one might conclude that taking money away public education might not be such a bad idea.

Other reasons in favor of school vouchers include the elimination of the inherent unfairness in having parents who pay for private schools pay twice: once in taxes for public education they don't use and the other in private school tuition.  In addition, it would allow students of less wealthy parents access to private education, in particular specialty education in fields like music, sports or science.

Voucher systems are far from widespread, but are being employed in parts of 10 states and the District of Columbia. However, the total number of students receiving them remains quite low. Chile has the most advanced voucher system in the world actually employed covering 90% of its students.

Lastly, and perhaps most importantly, public education has been a breeding ground for political correctness and liberal politics. If you want to experience real censorship, just be either a Republican, Libertarian or Conservative in a University level Political Science class.

Marko's Take

Hindenburg Sightings Overtake Elvis Sightings

2010-12-16T00:18:00.000-08:00

Just when we thought we had heard the last of the dreaded, but also much maligned, Hindenburg Omen, comes yet another sighting in Wednesday's trading according to expert Robert McHugh (https://www.technicalindicatorindex.com/Default.asp). In a short email sent out to his mailing list:

"Stocks generated a new confirmed Hindenburg Omen Wednesday, December 15th, an official signal with the second H.O. observation in the past two days. This Omen has appeared before all of the stock market crashes, or panic events, of the past 25 years. All of them. No panic sell-off (greater than 15 percent) occurred over the past 25 years without the presence of a Hindenburg Omen. Another way of looking at it is, without a confirmed Hindenburg Omen, we are pretty safe. But we have an official Hindenburg Omen as of December 15th, 2010, so we are not safe."

A reasonably thorough discussion of the complexities and calculations of the omen were discussed here: http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.

The Nasdaq is now at a 3 year high while the Dow Jones Industrial Average, Standard & Poor's 500 and Russell 2000 are at clear 2 year highs. Yet, over the past 3 trading days, NYSE new 52 week lows have been astounding high. The exact number depends on whether you look at the Wall St. Journal or the Yahoo numbers, but new lows ran 2% to 3% of total issues traded each day. It would be normal to have 1/10th of those levels!

While we're looking at our second favorite zepplin, why not check the solar calendar? According to NASA, a partial solar eclipse occurs on January 4, 2011. The last eclipse, occuring early in the summer was total.

Whether a partial eclipse counts in the scheme of astro-harmonics remains an open question. The connection between solar eclipses, lunar cycles and stock market crashes was discussed more fully here: http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

So, add to that the horrible sentiment picture as described in these recent "Takes": http://markostake.blogspot.com/2010/12/psychology-of-investing-part-2.html, and one could pretty reasonably conclude that a helluva bear market is dead ahead.

As to Gold and the Gold Bugs Index (HUI), it really appears that a retracement to the 200 Day Moving Average (DMA) is upon us. That would be another 10% downside for the metal and about 15% for the precious metal stocks. Silver, if it should correct to its 200 DMA, would have about 30% exposure.

The prospect of a more significant drop in the precious metals sector is extremely remote in light of rapidly building global inflation pressures. This pullback, which ought to be quite violent but short to scare everyone, should be viewed as a terrific buying opportunity.

For now, investors ought to stay as liquid as possible, even though safe places to park money offer no return. Better no return than a sharply negative return.

Marko's Take

The Psychology Of Investing (Part 2)

2010-12-12T11:04:00.000-08:00

As described in Part 1 http://markostake.blogspot.com/2010/12/psychology-of-investing-part-1.html, successful investing is far more than understanding finance and business. If it were that easy, every MBA would be rich. In fact, even experienced professional investors endure breath-taking losses. Many, many hedge fund managers have lost every single penny under management in days because they made very basic mistakes.

Making money requires some degree of timing. While investment legends such as Warren Buffett and Benjamin Graham completely avoid market timing, they would not disagree that there are far better times to enter a position and exit a position than others.

Entering a new position when there is panic is a far better bet than when shoe-shine boys and taxicab drivers are giving stock tips. So, we turn again to different ways to measure investment sentiment.

Statistics from a mutual fund group called Rydex provides an interesting way to gauge how investors are thinking. Rydex has been a pioneer in the creation of inverse funds, that is, funds which produce returns when markets go down. Technicians have created "Rydex Ratios" which measure the employment of assets in long-biased funds versus those in the inverse or "short" funds. In general, the more assets are playing the short side, the more bearish investors are, and the more likely that a bottom is at hand.

A practioner of the Rydex Ratio is Shaeffer's Investment Research http://www.schaeffersresearch.com/. A recent graph of the Rydex Ratio using asset investment in long versus short Standard & Poor's 500 index funds can be accessed by clicking here: http://www.schaeffersresearch.com/streetools/market_tools/rydex_nu.aspx.

Another set of indicators employs options buying and selling statistics. Put options buyers bet on falling prices while call option buyers bet on rising prices. Therefore the "put/call ratio" tracks bearish versus bullish bets and acts as a contrary indicator. These ratios can also be found in Shaeffer's Investment Research by clicking here: http://www.schaeffersresearch.com/streetools/market_tools/cboe_eqpcr.aspx.

Probably the most comprehensive sentiment analyst is a guy named Jason Goepfert who has a newsletter known as Sentiment Trader http://sentimenttrader.com/. I have been a subscriber to this newsletter and it has been quite valuable as a resource. A little more information on Jason can be accessed here: http://wallstcheatsheet.com/knowledge/interview-knowledge/exclusive-sentiment-trader-founder-jason-goepfert-shares-3-keys-to-success.html.

Jason creates a very comprehensive measure of sentiment using a variety of indicators, of which some are the result of his proprietary research. His short-term position, as of December 10th, 2010: "We've been looking for a 2-3 day decline, but stocks aren't accommodating. We'll move back to Neutral if SPY trades above 124.16. If that happens in the first 1/2 hour of regular trading on Friday, then SPY drops back under 123.60, we'll move back to 25% Bearish." Goepfert's intermediate-term position is neutral.

Jason constucts several models of investor emotion. His composite index is constructed using the following indicators: Sentiment surveys, proprietary versions of the positioning of Futures traders, puts/calls, volatility indices, breadth ratios, the "Trading Index" or TRIN, and several un-published indicators.

He also measure the positioning of "smart" to "dumb" money, or those folks who have a tendency to be consistently right versus those consistently wrong. One example of "smart money" would be corporate insiders who are in the best position of knowing how their companies are doing. When corporate insiders buy their own stock, that is about a good of an endorsement of a company's prospects as you can get. Dumb money is your typical retail investor and option speculator, who tend to be wrong far more often than right. Currently, according to his research, smart money is 33% confident in a rally, while dumb money is 79% confident. Fortunately, Marko's Take would agree wholeheartedly with the smart folks.

Taking everything together, virtually any reasonably calculated sentiment measure is suggesting that market confidence is at unsustainable levels. Most measures are within striking distance or exceeding the type of euphoria which characterized the major tops in 2000 and 2007.

As for the Gold market, analyst Mark Hulbert measures sentiment in the precious metals arena. As of November 24, Hulbert's conclusion is that sentiment remains FAR from overheated. His most recent publicly available views are described here: http://www.marketwatch.com/story/contrarian-analysis-of-the-gold-market-2010-11-24.

We remain a bit cautious on Gold near-term, but expect any correction to be sharp and short-lived. It would be preferable for the precious metals complex to get a bit of a shake-out, but these types of parabolic moves often leave investors waiting for corrections which never come.

Marko's Take

The Psychology Of Investing (Part 1)

2010-12-08T06:19:00.000-08:00

Successful investing is about far more than understanding value, balance sheets and quality of management. One also needs to be a pretty good amateur psychologist. Virtually all market tops and bottoms occur at emotional extremes: Bottoms coincide with widespread panic while Tops tend to be associated with some unjustified level of overconfidence or greed.

We continue our very bearish stance on virtually all of the capital markets. We've given dozens of reasons that this so-called "recovery" is unsustainable and, with it, a major, major peak is being formed in the capital markets.

In addition to all the reasons for concern previously discussed, another subset of technical analysis referred to as "sentiment" analysis is clear in its verdict: SELL!

The theory behind sentiment analysis is quite simple, and so logical that Mr. Spock himself would not even raise an eyebrow. Market peaks occur when buying power has become exhausted. This happens because those buyers have become either complacent, overconfident or just plain greedy. Once they've all bought in, who's left to buy?

This level of emotional extreme can be measured quantitatively, so one need not be an empath to get a good fix on things. The most basic form of sentiment reading is the market poll. There are several which have long track records, are consistently applied and easily accessible for historical analysis. The two of note are Investor's Intelligence which polls newsletter writers and the American Association of Individual Investors (AAII) which polls retail investors. Barron's reprints a number of these polls every week http://online.barrons.com/public/page/9_0210-investorsentimentreadings.html.

The AAII poll currently shows 49.7% bulls versus 26.2% bears. These numbers are at major, major top historical readings and suggest any further upside from here can not be ruled out, but must be viewed as quite limited. Investor's Intelligence confirms similar results. The most recent readings are consistent with levels virtually identical to the tops reached in 2007 and 2000, with 55.4% Bulls and 21.8% Bears.

Other sentiment indicators are less precise but, nonetheless meaningful. Just two days ago, Goldman Sachs issued its 12 month projection of 1,450 on the Standard & Poors 500 (SPX) or a gain of 25% from here. This forecast was not directly attributed to "Dear" Abby Joseph Cohen, but suffice it to say that Ms. Cohen is a notorious perma-bull who never met a reason not to recommend stocks even at extremes of overvaluation. She was quite bullish at the upper end of the Nasdaq bubble, issuing bullish forecast after bullish forecast. Somehow, she kept her job.

There is the "Magazine Cover" indicator. Mainstream publications like Business Week, Time and Newsweek are famous for having cover stories about the "Death Of Equities" or the "New Age of Investing" almost exactly at market peaks and bottoms. These publications act as investor polls in and of themselves, merely reflecting what their readers believe.

Another excellent sentiment reading, and probably the best one of all, is the level of market volatility. This one may be best because it's determined through actual trading. Volatility is a statistical measure of the expected degree of variability in stock prices over various subsets of time. It is a key component in options pricing, but very, very useful in understanding exactly where investors sentiments lie.

There are several measure of volatility, but the best one is called the VIX, which is its symbol. At market bottoms, the VIX will have readings of above 50. Literally translated, this means that investors have priced in a range of up or down 50% over the coming year. At the other end, VIX can print under 10%, indicating complete complacency or lack of fear. A 3 year chart of VIX can be accessed by clicking here: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=vix&sid=0&o_symb=vix&freq=2&time=10.

You will note that VIX is currently incredibly low and confirms the very ominous readings mentioned above in the investor sentiment polls.

Think this is all there is to sentiment? Not even close! In Part 2 we'll discuss other very interesting indicators of how investors deploy capital and how it gives us pundits a means of understanding what's in their heads.

All in all, this is still a time to remain very, very cautious and keep levels of cash high.

Marko's Take

The Missile Crisis That Never Ended

2010-11-22T11:56:00.000-08:00

The Presidency of John F. Kennedy, which lasted less than 3 years, was perhaps the most dramatic in history. His election, which at the time, was the closest ever, was marred by allegations of ballot-stuffing from the Chicago political machine. A key election issue was the so-called "Missile Gap" amid the paranoia that existed at the height of the Cold War with the Soviet Union.

A key figure in the entire episode with Cuba and the USSR, was none other than a 13 year old boy, Julio Antonio del Marmol. Last week, we introduced Dr. Marmol and some of his intelligence operations in this piece: http://markostake.blogspot.com/2010/11/world-war-iii-continuesconducting-war.html.

Yes, it does sound far-fetched for a boy not old enough to shave to be an intelligence operative. Send a boy in to do a man's job? If you think about it, who better? Who'd suspect a 13-year old? Not Castro! He gave young Julio, whom he considered a "pet", unfettered access to Cuba's military bases.

Del Marmol's uncle, who had direct contact to U.S. intelligence, recruited him to use his incredible access to gather highly sensitive information. At first, young Julio was tested by being provided with a camera spy pen to take pictures at the military base. This vintage spy equipment still exists, and can be reviewed here: http://www.pimall.com/nais/pivintage/smmovie.html. In case you're wondering, Del Marmol was NOT given a shoe phone. That privilege was saved for Maxwell Smart.

The camera pens used by Del Marmol contained several pictures each and were passed on to his uncle who then, in turn, passed them on to U.S. intelligence. Del Marmol's early work produced what he believes are the first photographs of nuclear weapons brought in from Soviet merchant ships for assembly in Cuba.

As these were reviewed by analysts at the Central Intelligence Agency for authenticity and found to be legitimate, Del Marmol was then shipped boxes of pens to then photograph the surrounding areas, landmarks, road signs, Soviet trucks and everything else needed to fully comprehend the unfolding military threat to the south.

As early as August 1962, the United States officially suspected the Soviets of building missile facilities in Cuba. During that month, its intelligence services gathered information about sightings by ground observers of Russian-built MIG 21 fighters and light bombers. U-2 spyplanes found surface-to-air missile sites at 8 different locations.

On Monday October 15, 1962, the CIA's National Photographic Intelligence Center reviewed the U-2 photographs and identified objects that they interpreted as medium range ballistic missiles. By Friday, October 19, frequent U-2 spy flights showed 4 operational sites.

History reports that an agreement was reached by which the USSR would remove and dismantle Cuban missiles in exchange for a pledge by the United States NOT to invade Cuba plus the removal of American nuclear weapons from Turkey. At this point, Dr. Marmol's information varies dramatically from the history books.

According to Del Marmol, nukes were NEVER actually removed from Cuba. In fact, over the last 5 decades, he contends that Cuba now has built an arsenal of several hundred intermediate-range ballistic missiles (IRBMs) and an atomic submarine fleet.

He further contends that the United States has been well aware of Cuba's and the USSR's deception, but remains mum so as not to admit to the failings of its own intelligence and to prevent the unnecessary alarming of the population.

For public comsumption, Cuba in 2002 signed on to the United Nation's policy of non-nuclear proliferation and issued this press release http://www.un.org/News/Press/docs/2002/gadis3225.doc.htm, calling the United States, the sole nuclear power of the Americas.

So, while the United States and United Nations continue to wring their hands about the nuclear programs of North Korea and Iran, neither of which has the ability to reach the our shores, a silent and fully-armed enemy lies less than 100 miles away with the ability to wipe out our largest cities.

An ongoing standoff has remained in place for nearly 5 decades. Cuba is safe from invasion and while Castro may be certifiably insane, he is NOT suicidal. Instead, the export of Castro's revolution is done through client states in Central and South America.

The threat from Cuba is far greater than just the ability to inflict military damage. Castro's forces are active in regime de-stabilizing activities in key "friendly" countries such as Mexico, Brazil and Argentina. Venezuelan strong-man Hugo Chavez is already a Castro disciple.

How do we know that Del Marmol's information about ongoing Cuban military strength is true? Admittedly, his information is circumstantial, but he points out that the United States has been the sole super military power for years and has left Cuba untouched while acting as policeman all over the world in places such as Bosnia, Sudan, Ethiopia and others despite Cuba's proximity to our shores.

According to Del Marmol, Cuba's plan is to export its revolution to the United States without firing a single bullet. How are they doing this? For one, they are sponsors of militant groups such as "The New Black Panthers". They also have masked operatives who attend illegal immigration rallies in key border states Texas, Arizona, New Mexico and California who intentionally incite violent riots.

It is believed that Cuba is the ringleader of "The Three Continental Union" comprised of entities in Africa, the Americas and Asia.

It's no secret that our way of life is in jeopardy from American-hating countries in the Middle East, the Taliban and North Korea, a patient and quite potent enemy lies barely a stone's throw away.

Marko's Take

The Titanic Syndrome

2010-11-17T19:00:00.000-08:00

It sounds like something a trained psychiatrist would diagnose, but it is yet another arcane and statistical market quirk. This indicator was created by a gentleman named Peter Eliades, who publishes a newsletter called Stockmarket Cycles (http://www.stockmarketcycles.com/).

Eliades has been in the business of technical analysis since 1972, when he began to appear on Los Angeles-based UHF channel 22 as a commentator. Back then, a 14 year old real life Alex P. Keaton would watch him during school breaks from within the Beverly Hills High library. Kind of explains why my social life wasn't exactly brimming in those days.

Eliades predicted that the horrible early 1970's bear market would bottom during the week of December 9-13, 1974 many, many months in advance. It bottomed on December 9th. Publication of Stockmarket Cycles began in July of 1975.

In 1985, the first year he was rated by the independent rating services, Mr. Eliades earned the Timer Digest’s "Timer of the Year" award and placed second in 1986 in a close race which wasn’t decided until the final trading day of the year. In 1989, Mark Hulbert (Hulbert Financial Digest) named Mr. Eliades as the "Most Consistent Mutual fund Switcher" based on Eliades timing signals for the years 1985, 1986, 1987, and 1988. From January 1985 when Hulbert first started rating Stockmarket Cycles, through August 1990, Stockmarket Cycles had the #1 market timing record in the country with a timing gain of 174.3% versus a comparable gain in the Wilshire 5000 Total Return Index of 119%.

In other words, the man is no Abbey Joseph Cohen. Now, before we go on to Eliades' current outlook, it is important to note that he and "Marko's Take" do not exactly mesh at the current time. MT says market meltdown imminent with a sub 8000 low for the Dow Jones Industrial Average by early 2011.

From the latest Stockmarket Cycles update for Tuesday, November 16th:

According to Eliades, "we would say that there is a real chance for a short to intermediate-term decline over the next several weeks but because of significantly higher nominal four-year projections, those projections force us to continue to look for higher prices going into 2011."

While our penchant for tongue-in-cheek hubris suggests that we vote for us, last I checked "Marko's Take" has yet to win a single Timer's Award. Clearly, a conspiracy.

Eliades goes on to describe the Titanic Syndrome:

"Our good friend, Shon Saleh, a great institutional broker at Smith Barney in Century City California, jogged our memory today by asking a question about 52-week highs and lows after a new high is registered in the market. The answer to the question is the Titanic Syndrome, a market indicator devised by Bill Ohama. Bill recognized back in the 1970s and 80s that if the Dow Jones Industrial Average made a new high for the year or had rallied 400 points or more (remember this was back in the 70s and 80s when 400 points was a lot bigger percentage move than it would be today) and that new high was followed within seven trading days by a day which saw more 52-week lows than 52-week highs on the New York Stock Exchange, a Titanic Syndrome signal would be given suggesting a market top of some significance. Well guess what? Today was the seventh trading day after the November 5 new high registered in the Dow and the official number of new highs versus new lows on the New York exchange was 20 new highs and 139 new lows. New lows swamped new highs. On the face of it, a Titanic Syndrome signal was generated."

When employing these indicators which use historical data as a benchmark of their efficacy, it is important to take into account how the nature of markets has changed. Of particular importance has been the enormous growth of bond funds, ETFs and other exotic securities which may affect how the ratios of new highs and new lows relative to issues traded is computed.

Eliades does, in noting the presence of the Titanic Syndrome, expect a potential sharp correction possibly dead ahead. However, he views it as a correction, while we're thinking MAJOR MARKET TOP.

Marko's Take

Hindenburg Re-appears

2010-11-16T14:47:00.000-08:00

A major mystery for me this summer has been the strange levitation of the stock market, despite an endless list of reasons for it to get crushed. Not only does the market have to contend with a shrinking money supply, a failing financial system, crumbling European bailouts and an inept Federal Reserve, but it also seems that the entire galaxy is aligned against it. For more on the Hindenburg Omen, click here: http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.

By now, the market should have begun its catatrophic descent. Why hasn't it? My guess is that all the hot air coming out of politician's yaps, coupled with the aggressive market support employed by the Federal Reserve and Helicopter Ben, has temporarily put a delay on what I still contend is inevitable. The best efforts of the Fed will not work. Here's why: http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

Today's trading witnessed a very Hindenburg-like day. According to Yahoo Finance, there were 136 new highs and 164 new lows among nearly 4,000 issues traded. That would provide the initial trigger for the Hindenburg. As noted in prior pieces, there are a myriad of filters, but honestly, one needs no filter other than a gas mask to see that the "House Of Cards", known as the U.S. Financial System is on the verge of collapse.

But that's not all. Nearly every asset market has gotten incredibly and feverishly over-extended, including precious metals and mining stocks. We have discussed other technical indicators which are also very ominous, and those are discussed here: http://markostake.blogspot.com/2010/09/lets-get-technical.html, and http://markostake.blogspot.com/2010/09/lets-get-technical-part-2.html.

Add to that the rising inflation pressure showing up in prices at WalMart and other retail stores, plus in today's report on the Producer Price Index. Creeping inflation will put a cap on the Fed's ability to perform it's levitation tricks or a full blown hyper-inflation episode will ensue even sooner. It, too, is inevitable, once monetary velocity picks up.

So, what's an investor to do? Go To Cash! The only investments likely to survive this assault will be the very oversold U.S. Dollar and very short-term Treasuries. Yeah, the returns suck, but even 0% is better than losing 20% or more in a fairly short period of time.

Unlike the meltdown of 2008, which, too, was forsaged by a series of Hindenburg Omens, this one will not be an exact repeat. This time, Gold, Silver, Commodities and precious metals mining stocks ought to hold up much better. A correction to their 200 Day Moving Averages would be the most likely scenario, as discussed in this recent "Marko's Take": http://markostake.blogspot.com/2010/10/correct-me-if-im-wrong.html.

Better to wait for another entry point, well below current levels, than to sweat it out in a volatility spike down that may just give you a heart attack. And, the bargains that will become available will be well worth waiting for.

So, how long may stocks go? Obviously, no one knows, but a Dow Jones Industrial Average of between 6,000 and 8,000 would seem to be a logical target occuring early in 2011.

It's going to be a very, very cold winter for most investors. Store lots of blankets!

Marko's Take

The Educators Are The Ones Needing Education (Part 1)

2010-11-07T22:16:00.000-08:00

We live in a world of very constrained and limited resources. But imagine, if you got more resources, even adjusted for inflation year-after-year. Your performance ought to improve, right? Not if you are one of the fine public educators in this country. The more you spend, the more your performance deteriorates. Of course, your job is protected by a hostile teacher's union and tenure. You can't be fired no matter how bad you are at what you do, yet you complain how you're so damn underpaid.

Perhaps the benchmark standard test for scholastic achievement is none other than the Scholastic Aptitude Test (SAT). This exam was designed by educators to be objective and is used in college admissions to differentiate among qualified candidates. It is also used to award scholarships. For those unfamiliar with this test, you can learn more by clicking here: http://en.wikipedia.org/wiki/SAT.

Average national SAT scores by year, Verbal and Math are listed below while in paratheses are inflation-adjusted per capital spending on education according to the U.S. Department of Education http://nces.ed.gov/fastfacts/display.asp?id=66.

1972 530 509  ($4,489) 1986 509 500   ($7,007) 2000 505 514  ($8,923)

1973 523 506                 1987 507 501                   2001 506 514

1974 521 505                 1988 505 501                   2002 504 516

1975 512 498                 1989 504 502                    2003 507 519

1976 509 497                 1990 500 501  ($7,749)   2004 508 518

1977 507 496                 1991 499 500                    2005 508 520

1978 507 494                 1992 500 501                    2006 503 518 ($10,041)

1979 505 493                 1993 500 503                    2007 502 515

1980 502 492                 1994 499 504                    2008 502 515

1981 502 492                 1995 504 506     ($7,796)

1982 504 493  ($5,639)  1996 505 508

1983 503 494                 1997 505 511

1984 504 497                 1998 505 512

1985 509 500                 1999 505 511

As can be easily gleaned from the chart above, per capita spending even after adjustments for inflation has MORE THAN DOUBLED from 1972 to 2006. At the same time Verbal scores have declined from 530 to 503 while Math has edged up from 509 to 518.

Average test scores are also directly correlated to household income. The higher the average household income, the higher the average test scores. So, while there has existed a debate as to the racially biased nature of the test, most of the racial differences are explained by income differences rather than genetics.

The trend toward deteriorating test scores is even true among the Advanced Placement Exams which, if passed, give high school students college credit. The rate of test taking is at all-time high, while at full 41.5%
of tests taken result in a failing grade http://www.usatoday.com/news/education/2010-02-04-1Aapscores04_ST_N.htm.

So, we've identified the extraordinary failure of public education spending. What's the solution? It's known as school vouchers, which we'll explore in part 2 of this series.

Meanwhile, Marko's Take is here to save you each more than the $10K per capita you're being forced to spend. We're still free and more informative than Encyclopedia Brittanica.

Marko's Take

World War III Continues...Conducting War With Information

2010-11-06T15:51:00.000-07:00

We've discussed a new approach to thinking about how modern warfare is conducted. Instead of using traditional armaments such as fighters, nukes and submarines, war is now conducted through use of such diverse means as financial, economic, trade, cyberspace and terrorism http://www.youtube.com/markostaketv#p/u/1/0fPfJNERJSQ.

But that's hardly all. It is now possible to use really high-tech approaches as triggering forces of nature such as earthquakes and weather to create damage to crops or structures or even generate tsunamis. It is possible to use pyschological tactics, known as psy-ops, to instill debilitating emotions to your enemy.  If that doesn't do the trick, then how about inflicting massive environmental damage to your opponent? (http://markostake.blogspot.com/2010/10/world-war-iii-continues.html).

But, the use of information is yet another technique for financing, as opposed to conducting, war. Of course, excellent intelligence and reconnaissance is critical to execution of a battle plan. But information has another use:  surreptiously financing a war, without disclosure to Congress or the American people.
Fortunately, for the first time, Marko's Take will reveal a bona-fide true story of how this medium was actually employed in some of the major foreign operations of the last half century.

We had the privilege of being provided with the opportunity of speaking with Dr. Julio Antonio del Marmol, PhD. Dr. del Marmol has been an incredibly active member of the international intelligence community for nearly half a decade and tells stories that would make Jason Bourne look like a couch potato. He has had no less than 56 separate attempts on his life, and obviously, survived each one. He will be revealing each of these attempts and how he escaped, in an upcoming documentary called "One More Attempt".

Beginning at age 13, del Marmol began trasmitting data about Castro's Cuba from within to the international intelligence community. In 1971, his cover was blown, and he fled his home country to then be recruited for a new assignment: to cooperate with agents against Cuba.

His operations are even more secret than Animal House's "Double Secret Probation". For del Marmol to have been able to conduct his operations, naturally, required very large sums of money. The environment in that time frame was extremely unconducive to any official monetary support. Vietnam was a growingly unpopular boondoggle and the flower generation was making known its message of love and peace. Supporting covert operations would be about as popular as Herman Munster at a House of Mirrors.

So, the entities working with del Marmol began to provide him with the ultimate in insider information: They gave him advance notice of expected increases in prices of certain assets and other tips on important events which had extreme value to an investor or businessman. We're not talking about the an advance copy of the crop reports as in "Trading Places", either.

In 1971, as del Marmol began to build his non-conventional army, he was provided with the strong suggestion that the price of oil was going up. About 6 months later, the Arab Oil Embargo happened, generating tens of millions of dollars.  Subsequently, he was given other "forecasts" such as the breakup of the Bell monopoly which he used to begin a very successful and lucrative business in payphones.

Of course, today, he would have Marko's Take to accurately forecast the future, but the good doctor is now retired and living what looks to be a very productive life.

Del Marmol's role was to provide what he refers to as his "services". Those spanned the gamut, from real spy stuff such as facillitating a regime change. Thankfully, it was not his idea to eliminate Castro with the exploding cigar, but we anxiously await hearing about that one. His other activities included setting up a sting by purchasing large amounts of cocaine from Columbian drug lords in order to expose the connection with Cuba. He also used money, often obtained from other sources, for many benign purposes such as building roads, schools, hospitals, airfields and bridges to instill goodwill among native populations that were suffering from oppression. They also provided badly needed food and medicine.

Del Marmol's forces were involved in some very major operations including Panama, Grenada, Congo and Ethiopia. They were peripherally involved in supporting insurgents in Afghanistan during the Russian occupation. They had some, but limited, involvement in Europe. The end game, in each case was regime change or preservation of a friendly regime under seige. The various administrations in power feared the "domino effect", especially in South and Central America. It was particularly feared that Mexico would become a Cuban satellite and a very hostile enemy with whom we'd would share a very long border.

As del Marmol's scale of operations grew, information alone was not enough to generate sufficient funds. Each tip could only produce so much. Market limitations capped the amount of profit each tidbit could earn. It was important to not score a gain so huge that it attracted attention and perhaps some sort of inquiry by regulators, the IRS or the media.

So, in 1988, it was agreed to by folks at the very top that del Marmol should be able to actually print genuine U.S. Currency. Yes, del Marmol was given a printing press, in effect creating a personal Federal Reserve and Department of Treasury. He had dies, plates, magnetic ink and the special paper used to print currency. Del Marmol's plates included Twenties, Fifties and Hundreds.

In order to make the currency genuine and indistinguishable from the ones produced at the mint, del Marmol engaged in some trial runs, using standard copier paper. With the benefit of multiple attempts, they were able to achieve a pretty accurate reproduction.

The "beta" bills were voluminous and required a virtual 24-7 destruction process. Unfortunately, not all were elinimated.  Del Marmol then made a grave mistake. He gave an employee permission to use some phony currency, but warned against using more than a single $100 bill at a time. If the counterfeits were then discovered, the bearer could always claim that it was found or received in change somewhere.  Del Marmol's employee, apparently no threat to Albert Einstein, decided to go shopping at Nordstrom's with a fistfull of monopoly money.

A blue collar worker with $20,000 in walking CASH?  Needless to say, it drew the attention of the Secret Service and del Marmol was arrested for counterfeiting. Without much detail, the seizure was reported in the Los Angeles Times http://articles.latimes.com/1988-09-27/news/mn-2759_1_santa-ana-man.

At the time it was broken, the story was so significant that it interrupted the 1988 Olympics. Del Marmol was released by executive order after 5 months. Reportedly, the case has been completely wiped clean from all records and remains under Federal Seal. Took a few buckets of white out and some instuction from Russian historians to get the job done.

Cover blown, del Marmol has since retired. Somehow, despite more cardiac moments than the bomb squad, del Marmol is still in incredible condition, looking much younger and fit that his 63 years. He landed in the United States at age 23 knowing little English. Now he speaks with nary an accent. Not once did he have to 'splain anything to me!

Del Marmol is coming forth to advise the American people and the world on the, as of yet, undisclosed truth. Still a patriot with Libertarian leanings, he is using information that he possesses as his OWN form of currency and financing to get the message out, therby assisting the creation of a more transaparent government.

We will begin a series of pieces chronicling del Marmol's amazing life and activities. For the first time, answers to many questions historians have had will be answered in this blog. Wanna know about "Bay of Pigs", the "Cuban Missile Crisis", the Kennedy Assassination, Watergate or even 9-11? Guess what? You're in luck! Marko's Take is on the job, doing it what we set out to do. Bring you the unvarnished truth, bypassing our "watchdogs" (cough, cough) in the lamestream media.

Marko's Take

And Now For Something Completely Different: Negative Bond Yields

2010-10-26T07:13:00.000-07:00

Treasury Inflation Protected Securities, or "TIPs", as they are popularly called, are U.S. Treasury Bonds that have a built-in mechanism to adjust returns for increases in the Consumer Price Index (CPI). For a more detailed explanation on how they work, click here: http://markostake.blogspot.com/2009/12/tips-on-grabbing-higher-yields.html.

Yesterday, the U.S. Treasury sold $10 billion worth of TIPs which had a NEGATIVE cash yield of 55 basis points, or -.55%, with a 50 year maturity. Huh? How can yields be negative? Does that mean that investors are so stupid that they would pay to lend money? No, the adjustment feature as described in the piece linked above, adds to total return. But, if the CPI were to come in at zero, then yes, investors would actually pay Uncle Sam for the privilege of lending him money.

Historically, cash yields on TIPs have tended to be in the positive 1-2% range. Not today!

So, what does this mean? Investors are so worried about inflation eating away at their cash yields, that they will pay handsomely for inflation protection.

What inflation? Latest figures for the CPI have come in at a scant 1.1%. That means that the total expected return for a TIP would be a positve .55% (the 1.1% inflation rate less the .55% negative cash yield). Before you howl, keep in mind that the adjustment feature means that TIPs have the risk of 6 month Treasury Bills, which yield something on the order of .25%. By comparison, a decent deal.

So, other than the fat half-percent yield, why should anyone buy these? Simple, hyper-inflation is not only likely, it is inevitable. Proof? A falling dollar, an accelerating commodities market and most significant of all, the now snorting bull market in precious metals. Oh, and let's not forget that none other than "Helicopter" Ben Bernanke's belief that inflation is TOO LOW!

The only reason we have NOT yet seen the explosion in inflation is something called monetary velocity. For a fuller explanation of this aspect of money supply, click here: http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

For investors, all roads lead to Gold, Silver and precious metals stocks. While it appears that we are in the midst of a sharp correction, this will only be a minor bump on the road to MUCH higher prices. For a review on where we are in the "Mother Of All Bull Markets", click here: http://markostake.blogspot.com/2010/10/correct-me-if-im-wrong.html.

The Federal Reserve, entrusted with controlling inflation, is actually the engine of inflation. For a more thorough explanation of the Fed, as it is known to its friends, check out this video as to how it is supposed to work, versus how it has actually fared: http://www.youtube.com/markostaketv#p/u/5/JiGA8XeZbUo.

With friends like these.....

Marko's Take

Reid His Lips: No Global Depression

2010-10-22T08:53:00.000-07:00

You gotta LOVE them Democrats! Al Gore, for example, not only invented the internet but also concocted the fraud popularly known as "Global Warming". Of course, he has slightly forgotten the facts and chosen to conveniently appeal to voter's emotions http://markostake.blogspot.com/2010/08/very-inconvenient-truth.html. Sorry, Al, but your nose is growing!

Now Harry Reid, soon-to-be outgoing Senator of Nevada is taking credit for single-handedly preventing a Global Depression. Ridiculous? Here is Mr. Reid telling us that: http://www.breitbart.tv/reid-but-for-me-wed-be-in-world-wide-depression/.

Mr. Gore and Mr. Reid brilliantly never allow the facts to get in the way. Mr. Reid's constituents, however, may politely disagree. New data on Las Vegas' economy would tend to cast a wee bit of doubt on his preposterous assertion.

Joblessness in Las Vegas reached a record 15% in September, even as unemployment in Nevada stayed unchanged in the month, according to new numbers from the state Department of Employment, Training & Rehabilitation.

Despite worsening local conditions, the state's jobless rate failed to rise for the first time since January. Unemployment in the Silver State stayed unchanged in September at 14.4% . On top of being the first stabilized state number in 2010, it's only the second time the jobless rate remained steady since the recession's beginning in December 2007.

Las Vegas also happens to be the home of the one of the absolutely worst real estate markets in the nation. Enquiring minds, especially the sagacious readers of "Marko's Take", wonder how Mr. Reid could possibly have had any positive effect on the entire planet, when the rather small town of Las Vegas could be suffering so. Would someone out there in reality-land please send him this blog?

Last I checked, unemployment in Las Vegas and in the entire country for that matter, was well in excess of 20%, especially when the phony stats are adjusted for incidental factors such as folks that have given up looking for a job, because it's practically impossible. All you have to do is subscribe to the wonderful publication known as "ShadowShats" (http://shadowstats.com/) to understand the ongoing fraud known as government economic statistics. Talk about an oxymoron!

Or, if Mr. Reid would consult one of the Democratic Party's best known benefactors, Mr. Warren Buffett, he might come up with a different conclusion http://markostake.blogspot.com/2010/09/open-letter-to-warren-buffett.html. Ironically, I have yet to hear back from Warren on this open letter. Could he be in Margaritaville with his nephew, Jimmy?

Mr. Reid, as the Soup Nazi would say "NO SOUP FOR YOU!"

Marko's Take

Correct Me If I'm Wrong

2010-10-21T10:32:00.000-07:00

The long-awaited, overly-predicted correction in Gold, Silver and mining stocks has now begun. After the smash on Tuesday for 30 bucks in Gold we have what appears to be a continuation pattern with today's further drop of additional drop of another $20. What's a "continuation pattern" you ask? A highly technical term? Nah, it means a top below a top followed by a new low beneath a low. That is the initial condition for establishing a new downtrend.

The correction ought to be sharp but not very deep. Gold's 200 Day Moving Average (DMA), which ought to contain the decline, is now at $1,200, suggesting additional downside of about 10%.

The Gold Bugs Index (HUI) has now dropped back below 500, after reaching a false breakout high of 535. In just a few short days, miners have dropped by nearly 10%. The HUI's 200DMA is above 450, which ought to cap further reactions to another 10%. Therefore, the correction is half over already. Get ready for a terrific entry point!

In recent news, as predicted in this column, China has suspended exports of rare earth metals. For a great play in rare earth metals, we have discussed the merits of Avalon Rare Earth (AVARF) http://markostake.blogspot.com/2010/06/avalon-rare-metals-inc-rare-opportunity.html.

As far as the stock market goes, the surprisingly violent bear market rally that has taken place all summer continues, but ultimately all markets must obey "The Law of Gravity". http://markostake.blogspot.com/2010/10/markets-to-obey-law-of-gravity.html.

The downside leadership in the coming stock market crash will undoubtedly be the financial sector. The Philadelphia Banking Index (BKX) has continually under-performed every market sector and with economic conditions deteriorating, an inevitable banking crisis looms directly ahead. Despite all the efforts of our friends at the Federal Reserve to pump out money, it appears that this privately held group has now been relegated to "toothless tiger" status http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

But what about those great earnings reports? What about the coming Republican take-over of Congress? Won't these matter? No! These are old news and already factored in and discounted. The markets are looking 6 months ahead and, believe me, they DON'T like what they see. Markets anticipate. Once news is understood by the masses, it's WAY too late to matter!

So while that dirigible known as Hindenburg continues to levitate on a cushion of hot air from politicians, it has sprung a whoppin' leak http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html. Of course, the Omen isn't always right, but why take a chance on getting wiped out?

What's an investor to do here? Easy. Hold cash and wait for the correction in commodities, metals and mining stocks. Then, get ready to get rich as the mother of all bull markets shifts into turbo-charged high gear.

Marko's Take

Holding Out For A Hero

2010-10-19T09:55:00.000-07:00

"Where have all the good men gone, and where are all the Gods? Where's the street-wise Hercules to fight the rising odds? Isn't there a white knight upon the finest steed? Every night I toss and I turn and I dream of what I need. I need a Hero..." To listen to this incredible song by Bonnie Tyler, click here: http://s0.ilike.com/play#Bonnie+Tyler:Holding+Out+For+A+Hero:18383:s1032810.8814188.14035666.0.2.130%2Cstd_1eca1f92c1b344c3980b8347d0d8c8f3.

Where have the heroes gone? Why are we saddled with the Barack Obama's, the George Bush's, the Christopher Dodds's, the Nancy Pelosi's, the Al Gore's and the rest of the lying, hypocritical politicians as described in this piece? http://markostake.blogspot.com/2010/08/clowns-to-left-of-me-jokers-to-right.html.

But electing politicians costs money! And, God knows, thanks to some of the wonderful folks mentioned above no one has any.

I've been Holding Out For A Hero, and just in time, we have one! This hero, Gary Earl Johnson is described here: http://markostake.blogspot.com/2010/10/who-is-gary-johnson-part-1.html, and http://markostake.blogspot.com/2010/10/who-is-gary-johnson-part-2.html.

Do you CARE about the world your kids will inherit? Do you CARE about the brave men and women watching their brothers and sisters getting their heads blown off in Afghanistan or other idiotic adventures in the Middle East? Do you CARE about having a planet in which you can walk outside and not get emphezema? Do you have a business and want to see it prosper? Do you want to keep your job? If you're a Hollywood liberal making films don't you care about freedom of speech????

If you're a Hollywood type, you automatically HATE Republicans. Isn't worth taking a moment, to see if there's a real alternative? Read about Gary Johnson, and see if this help open your eyes a little. Your left wing demagogues are doing you NO FAVORS!

Do you want to change the world, but think you can't afford to help? Oh, but you CAN! You are far more powerful than you know!

Can you afford a happy meal at McDonald's? Can you afford a pack of cigarettes? Even if you can't, here's how you can make a huge difference for your kid's future:

My address book contains 2,000 people. Let's say each one of those people knows an average of 500 people. With one degree of separation, that's (2,000 X 500) 1 million people! If each of those people forgoes a happy meal or a pack of cigarettes, that would produce $5million!!!!

Let's make a statement! Let's tell lying, self-serving incompetent politicians to get take a flying LEAP! If you lost your job because of their economical mismanagement, let's turn the table and FIRE THEM! As Colonel Klink would say, DISMISSED! No pension, no health care, no benefits! And,as the Soup Nazi would say, "No Soup For You!" Go out a get real job folks and see what life is like in the greatest country in world! The country you almost ruined!

Please visit Gary's site and do what you can for future generations who don't deserve the mess they will inherit: http://ouramericainitiative.com/. Your grandkids will be most grateful.

Marko's Take

Markets To Obey The Law Of Gravity

2010-10-15T08:10:00.000-07:00

The Universe has been theorized about by many incredibly brilliant cosmologists, such as Carl Sagan, Albert Einstein and Steven Hawking. While certain concepts remain hypothesized and theoretical, one constant is omni-present: The Law of Gravity.

The Law of Gravity determines so many things we observe in the universe such as Newton's Laws of Motion. In fact, planetary alignment also is a little understood factor in determining certain events in the financial markets. For more on how planets affect markets, click here: http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

For the record, despite the fact that we've been calling for a crash for months, I still have NOT abandoned that position. Some of the reasons are articulated here: http://markostake.blogspot.com/2010/10/die-hard-markets.html.

But today, some new very relevant information came to bear. The Philadelphia Banking Index (BKX) has broken down and is asserting downside leadership. Earnings reports from General Electric (GE) today were very disappointing. Bank of America (BA) is under pressure as a result of the under-reserving for loan losses. In fact, of the top 6 volume leaders this morning, 5 are financials and all are getting slammed. Without a vibrant financial sector, the market can NOT advance!

In addition, the stock market appear to have completed a 50% correction of the bloodbath it took in 2008-9. From a high of about 14,000, the Dow Jones Industrial Average (INDU) has now bumped its head at 11,000, a retracement of roughly half of the waterfall it endured all the way down to its low of about 8,000.

If the Dow should have a roughly equivalent slam it could lose another 6,000 points which would take it to a next stop of 5,000. (It dropped from 14K to 8K, now may decline from 11K to 5K).

For the very short-term, we remain cautious on Gold and the precious metals mining sector, although this industry group, and commodities in general, are poised for the long-awaited upside explosion http://markostake.blogspot.com/2010/10/gold-and-precious-metals-miners-set-to.html.

Maximum downside is very limited to probably no more than 10%. Upside potential remains massive and, despite some risk, it's worth keeping positions. We continue to expect an ultimate high for Gold of $5,000 per ounce at the very least. The rules of thumb we can use to project this level, are articulated here: http://markostake.blogspot.com/2009/12/gold-1200-is-it-too-late-to-buy.html.

Happy Investing!

Marko's Take

Who Is Gary Johnson? (Part 2)

2010-10-12T14:04:00.000-07:00

Ok, so his track record as Governor of New Mexico is distinguished. That's all in the past. But, where does he stand on various positions? Do they comport with those already expressed in this column?

From his website http://ouramericainitiative.com/issues/economy.html.:

On The Economy: Among other things, Johnson wants to slash government spending, cut taxes, end the costly adventures in Afghanistan and Iraq, vastly reduce and reform entitlement programs, curb the excesses of the Federal Reserve's involvement in the financial system, end government subsidies, curtail goverment interference and vastly simplify the tax code. (I'd prefer he completely abolish the Federal Reserve. Maybe Gary ought to watch this: http://www.youtube.com/markostaketv#p/u/5/JiGA8XeZbUo.)

On Civil Liberties: "The government should not intervene in the private lives of individual citizens unnecessarily. Personal liberty and freedom from unwarranted governmental control or regulation should allow law abiding individuals to pursue their own desires as long as they are not causing harm to other people." (This extends to anti-marijuana laws, which Johnson adamantly opposes. Johnson does NOT advocate legalizing other drugs. On that particular sub-issue, "Marko's Take" respectfully disagrees.)

On Defense: "The United States should only be involved in just causes and should not engage in or risk military action except when needed to protect it’s specific interests. All defense budgets should be reviewed and balanced the same as any other governmental budget." (Sounds like Teddy Roosevelt to me. Speak softly and carry a big stick.)

On The Constitution: "We believe that the Constitution should be interpreted according to its original meaning. After great deliberation, the Founders clearly based the blueprint for our government on the fundamental idea that there must be strict constraints on Federal power — an idea from which we have strayed much too far. We believe that the proper balance needs to be restored between the different branches of government. This includes the rights of states." (I assume that, in order for this to come to pass, there will have to be a major reform of the megalomaniacal Supreme Court).

On Education: While not specifically addressed on the website, Johnson's actions as Governor indicate that he is a strong proponent of school vouchers in place of our public funding of education. "With regard to school reform, I believe that New Mexico, along with most states in the country, is year after year after year showing just a little bit less when it comes to the results from its schools. I know of no other area in our lives where this phenomenon occurs except in public education. On the other hand, higher education in this country is unquestionably the best in the world, and we should make public education a little bit more like higher education."

"I think you accomplish that through the issuance of vouchers to every single student in the state, bringing competition to public education and allowing children to choose schools much as they choose in higher education today."

Johnson is not a Libertarian idealogue. Many traditional Libertarians believe in virtually no army, and other "ultra" small govenment concepts that place them not too far from anarachists. Johnson is an economic pragmatist. He views every political decision as boiling down to cost/benefit analysis. That's wise.

Marko's Take? Government is NOT inherently bad. But, a Government that creates the wrong incentives, uses its power for self-preservation and restricts the freedoms that the Founding Fathers intended us to have IS a bad Government. However, established properly, a smaller Government will be a MUCH BETTER Government and one that will be a partner, rather than an adversary of the citizenry.

Marko's Take

Who Is Gary Johnson? (Part 1)

2010-10-12T01:21:00.000-07:00

Gary Earl Johnson (born January 1, 1953) is the former Governor of New Mexico, having served 2 terms from 1995 to 2003.  He is well-known for his low-tax libertarian views and as the founder of one of New Mexico's largest construction companies.

Johnson first entrance into politics was his bid for Governor of New Mexico in 1994. He defeated incumbent governor Bruce King by a substantial margin. He sought re-election in 1998, winning by a 10 point margin. In his second term, he focused on educational spending reform, in particular the use of school vouchers. He is also the first high-profile political figure to support decriminalization of marijuana.

As the result of New Mexico's 2 term limit, Johnson retired from politics at the end of his second term. In 2009, he founded the Our America Initiative (http://ouramericainitiative.com/), a 501(c)(4) political advocacy organization. Johnson has also been the subject of media speculation as a possible candidate for President of the United States in the 2012 election.

For his 8 years in office, Johnson was the nation's most frugal governor, by vetoing over 1,000 spending items and cut taxes 14 times. The number of vetoes exceeded the amount in the other 49 states, COMBINED! As a result, when Johnson left office in 2002, New Mexico was only one of 4 states with a balanced budget.

So how is Johnson's track record as Governor?

According to http://www.usgovernmentspending.com/:

In the 8 years during Johnson's tenure, Real New Mexican Gross Domestic Product (GDP) grew from approximately $41.7 billion to nearly $53.7 billion, an increase of 28%. By comparison, in the 8 subsequent years under Bill Richardson, GDP has grown by only 17%.

New Mexican Gross Public Debt rose from $12 billion to $14 billion (16% increase) during Johnson's reign, but has since exploded to $21 billion today (50% more!)
.
Government spending, as a percentage of GDP, rose from 20% to 23% during the Johnson years. It is currently, at 25%.

According to unemployment statistics as provided by (http://www.deptofnumbers.com/unemployment/new-mexico/), Johnson inherited an unemployment rate of approximately 6.5% which fell to about 5.0% at the end of his second term. The jobless rate is 8.5% today. The increase is greater than the national average.

There are certainly ways that one could pick apart the economic statistics by claiming that he presided over the prosperous Clinton years, or through other ways of parsing the data. Needless to say, this could be debated to death and reasonable people could disagree.  Marko's Take? The objectives facts are unequivocally supportive of his expertise as a Chief Executive.

Oh, and one more eensie weensie thing. Johnson has a reputation for being exceedingly honest.  Critic Roger Ebert, no friend of the Republican party by any means, said "I can quite honestly say that at this point there is not a single other Republican candidate I can imagine voting for in 2012. And I may not vote for Johnson either if he runs – but I do think he’s one of those rarest of creatures: an honest politician. And that counts for quite a lot."

Tomorrow, I will give my "Take" on his positions.

Marko's Take

World War III Continues...

2010-10-10T20:49:00.000-07:00

A treatise on military strategy, called "The Art Of War" was written by Sun Tzu in the 6th century B.C. and is still studied today.  The book was so timeless that General Douglas McArthur was believed to have taken inspiration from it. That classic playbook needs to be updated to cover means of waging war that never possibly could have been contemplated.

In "World War III Has Begun", we posited a matrix of varieties of war and how they might be employed in whole, or in part, by any country against any other country. Traditional military war is only a small and shrinking component of warfare in the 21st Century. The video of that piece can be accessed by clicking here: http://www.youtube.com/markostaketv#p/u/1/0fPfJNERJSQ.

But that was just the beginning of what we, as a world, have in store for us. Using some imagination, and a reasonable knowledge of science, physics, economics and finance, one can concoct a variety of ways in which one country can damage another without ever firing a shot.

How about climatological war? By that, I'm not referring to the absurd notion that our globe is warming from cow flatulence and SUVs. To refresh yourself on how preposterous that entire thought process is, click here: http://markostake.blogspot.com/2010/08/very-inconvenient-truth.html.

Rather, imagine what one country could do if it could affect weather in a relatively small area of an enemy. Like what, you ask? Maybe seeding an oncoming storm system with something toxic. Clouds are sometimes seeded by farmers to produce rain in areas of drought. While the efficacy of this practice in affecting local rain patterns is questionable, if clouds were seeded with poison, it could destroy vast areas of crops, and thus disrupt a country's food supply. Because weather systems follow the jet stream, the poisoning could be done in international airspace without triggering a preventative response.

Another high tech plan could be to create what could oxy-moronically be called a "man-made natural disaster". Underground nuclear detonations register as earthquakes. What if an atomic power could set up a nuke near a major fault zone that was overdue for a major earthquake? Afraid you'd be detected?  Well, then one could be set off below the surface of the ocean floor to create a tsumani. Indonesia, 2004 anyone?

Ecological war is waged when one country sabotages another's eco-system. One means of accomplishing this might be to, say blow up a deep-sea drilling rig which might create a massive oil spill. And, of course, have the extra benefit of disrupting oil supply. BP, anyone?

What if a country is not an atomic power? For those, there's the "Flash Crash" attack.   According to a 5 month Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) investigation,  the May 6th Flash Crash was set in motion by a huge sale of S&P 500 futures contracts by a single firm’s computer trading program, which dumped $4.1 billion of the contracts on the market in just 20 minutes, according to “Lone $4.1 Billion Sale Leads to ‘Flash Crash’ in May,” by Graham Bowley of The New York Times; and “How a Trading Algorithm Went Awry,” by Tom Lauricella, Kara Scannel, and Jenny Strassburg of The Wall Street Journal.

This particular computer mistake, however, was unintentional. What if a large financial power, with trading resources in excess of the $4.1 Billion, were to sell futures in all the global stock and bond markets in a giant, systematic securities dump? Even if the damage, as was the case on May 6th, was temporarily limited to a financial "bungee jump", such an occurrence would completely undermine confidence in the integrity of the entire financial system. Another occurrence would only demonstrate the weak link in the inter-connected fabric of the markets. Thus ,the damage would NOT be temporary. Even cash wouldn't be safe. The same approach could be done to various currencies.

If none of the above suffice, a country could create a laboratory-grade pandemic, release it in a country and then quarantine the nation to insulate itself from having it spread back domestically. Concurrently with the creation of the toxin, it could also have a anti-dote prepared to innoculate its own population.  H1N1 virus or the Severe Accute Respiratory Syndrome (SARS), anyone?.

Still not enough?   How about using massive orbiting military lasers to blind a country's population?

Or, the use of sound to affect emotions? A March 23, 1991 news brief titled "High-Tech Psychological Warfare Arrives in the Middle East", describes a PsyOps tactic directed against Iraqi troops in Kuwait during Desert Storm. The maneuver consisted of a system in which subliminal mind-altering technology was carried on standard radiofrequency broadcasts.

Subliminally, a much more powerful technology was at work: a sophisticated electronic system to ‘speak’ directly to the mind of the listener, to alter and entrain his brainwaves, to manipulate his brain’s electroencephalograph i.e. (EEG) patterns and artificially implant negative emotional states-feelings of fear, anxiety, despair and hopelessness.

The possibilities are endless and MUCH harder to defend against. In fact, they return "first strike" capability to a variety of warring nations.

The reality of this is so frightening, that even I wouldn't dare them to "Take Me On".

Marko's Take

Come meet Gary E. Johnson, former governor of New Mexico in a private, intimate setting. For details on the reception, click here: http://www.facebook.com/#!/event.php?eid=167442413269476.

Reforming Gerrymandering (Part 2)

2010-10-06T15:13:00.000-07:00

Unless you're one of the several thousand incumbent politicians who support job retention without actually having to accomplish anything, you realize that the system is broken. If you don't yet understand the patently unethical political practice known as gerrymandering, click here: http://markostake.blogspot.com/2010/10/what-is-gerrymandering-part-1.html.

So, for the rest of us, the system is in desperate need of change. But how best to accomplish that?

In California, 2 ballot measures up for vote in less than a month, deal with this directly, Propositions 20 and 27.

Propostion 20 does 2 important things: (1) Adds the mandate of re-drawing congressional district boundaries to the commission created by Proposition 11 in 2008 and (2) would define a "community of interest" as "a contiguous population which shares common social and economic interests that should be included within a single district for purposes of its effective and fair representation." These shared interests could be such things as urban areas, industrial areas or agricultural areas.

Proposition 27, if approved, would repeal California Proposition 11, which authorized the creation of the California Citizens Redistricting Commission. It would also modify the provision in California law that says that proposed congressional districts can't be subjected to a veto referendum.

Thus, supporters of reform would be advised to vote YES on 20 and NO on 27. If you're one of the 5000 or so incumbents, well then vote the opposite way.

The most commonly advocated electoral reform proposal targeted at gerrymandering is to change the redistricting process. Under these proposals, an independent and presumably objective commission is created specifically for redistricting, rather than having the legislature do it. This is the system used in the United Kingdom, where the independent Boundary Commissions determine the boundaries for constituencies in the House of Commons and regional legislatures, subject to ratification by the body in question (almost always granted without debate). A similar situation exists in Australia where the independant Australian Electoral Commission, and its state based counterparts, determines electoral boundaries for federal, state and local durisdictions.

The problem with a commission is that it is dependent on the individuals selected. Many "independent" commission are about as objective as the O.J. Simpson jury. The appointments are politically based to engineer a certain outcome. Thus, unless the selection process is achieved without bias, an independent commission can lead to the exact same result.

Another approach, and one that appeals to a numbers junkie like me, would be to employ some sort of mathematical formula or other pre-determined methodology. An approach advocated by a group called RangeVoting.org uses a mathematical algorithm. It is described here: http://rangevoting.org/GerryExamples.html. The site also contains maps of current districts to demostrate the incredible shapes that the current system creates. Check out the one that looks like a Halloween mask for a real horror show.

There are a myriad of other objective and unbiased means to drawing districts. In all likelihood, they all have certain benefits and drawbacks, but the differences are, in the grand scale of things, immaterial. The most important thing is consistency. Any approach that is unbiased and consistency applied, will, by definition, end the impact of gerrymandering.

The definitive documentary on Gerrymandering, produced by Bill Mundell, is newly released for theatrical showing. The website for this film can be accessed by clicking here: http://www.gerrymanderingmovie.com/. The commercial can be accessed by clicking here: http://www.youtube.com/watch?v=kX50l9G_QZU.

If you want any of your votes to EVER count, perhaps the most important vote will be the ones you cast on Propositions 20 and 27. If you want to see the bums get thrown out, here's the way to do it.

Marko's Take

Gold And Precious Metals Miners Set To Explode

2010-10-06T08:43:00.000-07:00

There are at least a dozen reasons why both Gold and the precious metals mining companies ought to correct, as outlined in this recent blog: http://markostake.blogspot.com/2010/10/die-hard-markets.html. But, at the end of the day, only market action itself matters, not "Marko's Take". (Gulp!)

In this morning's trading, the Gold Bugs Index (HUI) appears to have decisively broken the 525 zone that we outlined as the trigger point to begin its long awaited parabolic rise. The situation reminds me of late 1999 when the Nasdaq was severely overbought and overvalued and yet doubled in a period of just a couple of months. The difference, in this case, is that the mining sector is NOT OVERVALUED!

The kind of technical indicators discussed only handicap the race. None of them is flawless. It's important, therefore, to issue a mea culpa, accept reality as it is, not as we think it should be.

Given the increasing likelihood of an imminent upside explosion, what should investors do? Fortunately, a whole slew of junior miners are still at incredibly attractive levels. Among them are some favorites that we've written about in the past, such as ECU Silver Mining (ECUXF), Explor Resources (EXS.V), Seabridge Gold (SA), Hecla Mining Company (HL) and Avalon Rare Earth Metals (AVARF). We will update research on these firms, however, their merits can be reviewed by clicking the links, below:

http://markostake.blogspot.com/2010/06/avalon-rare-metals-inc-rare-opportunity.html.
http://markostake.blogspot.com/2010/05/ecu-silver-mining-update-it-keeps.html.
http://markostake.blogspot.com/2010/04/exploring-explor-resources.html.
http://markostake.blogspot.com/2010/03/hecla-mining-at-119-years-old-producing.html.
http://markostake.blogspot.com/2010/03/seabridge-gold-how-to-buy-gold-for.html.

If you wish to do your own research, you may wish to review this piece, which outlines some of the key risk factors to consider in selecting any mining company: http://markostake.blogspot.com/2010/06/some-considerations-for-selecting.html.

In terms of resources, you may wish to review this piece, which outlines all the places that are available to access http://markostake.blogspot.com/2010/09/information-is-more-than-power-its-gold.html.

Honestly, there are times when one prefers to be wrong, and this is one of them.

Time to make a ton of money!

Marko's Take

What Is Gerrymandering? (Part 1)

2010-10-05T17:16:00.000-07:00

Politicians are good at very little that is of use to the American people, but they excel at providing themselves with job security. It's quite amazing if you think about it for a moment. They routinely have approval ratings below Hitler and Mussolini, yet somehow they get themselves re-elected by wide margins.

Where do I sign up for that? Do a job so poor that any employer in the private sector would fire you without severance, yet, not only do you manage to keep your job, vote yourself a pay raise and even provide lavish benefits that no one in the private sector enjoys.

I'll tell you how they get that treatment. They CREATE it! It's an unethical practice known as "gerrymandering", which is the re-drawing of congressional districts in such a fashion as to virtually ensure you'll get re-elected. With advanced polling and census data, they can literally pinpoint friendly voters block by block and even house by house. The demographic data they have includes key factors such as gender, age, race, party and socio-economic status. Each of these groups have tendencies to lean either heavily or slightly to certain parties or candidates.

Knowing that information, politicians can literally go house by house to include as high a proportion of voters likely to side with them. As a result, a gerrymandered district can look like modern art, a chain saw, a hammer, a wrench or even a bowl of chocolate souffle!

What they virtually NEVER look like are grids, or any other symmetrical and logical shape for dividing an area into parts. Imagine if city streets were gerrymandered, instead of being rectangular. And, if the city planners who designed them kept their jobs! Of course, with a gerrymandered street grids, no one could ever find a polling place, but that's another story.

What if you're in a district with lots of alien voters, and your adjacent representatives need to encroach on your territory? Easy! Gerrymandering is effective because of the "wasted vote" effect. The strategy here is to stuff opposition voters into 1 district and give the other party 1 seat and 1 big win. Let's say you have 10 districts in which the voting is all close. Put as many of your other party's voters into 1 district, thereby tipping the odds more in your favor for the other 9!

As a result of this weighting, voter turnout is lowered because of the perceived certainty of incumbent re-election, thereby disenfranchising everyone!

The effect of gerrymandering for incumbents is particularly advantageous, as incumbents are far more likely to be re-elected under conditions of gerrymandering. For example, in 2002, according to political scientists Norman Ornstein and Thomas Mann, only 4 challengers were able to defeat incumbent members of the US Congress, the lowest number in modern American history. Incumbents are likely to be of the majority party orchestrating a gerrymander, and incumbents are usually easily renominated in subsequent elections, including incumbents among the minority.

Gerrymandering also has significant effects on the quality of constituent representation. Because gerrymandering is designed to increase the number of wasted votes among the electorate, the relative representation of particular groups, especially minorities, can be drastically altered from their actual share of the voting population. This effect can significantly prevent a gerrymandered system from achieving proportional and descriptive representation, as the winners of elections are increasingly determined by who is drawing the districts rather than the preferences of the voters.

On the other side of the coin, gerrymandering may be advocated to improve representation within the legislature among groups which make up a relatively small portion of the voter base. By promoting the representation of groups which support the party in power, the incumbent party is able to gain an even stronger death grip on the rule-making bodies.

Reaching for your "barf bag", yet? Gerrymandering has even come to prisons! This occurs when inmates are counted as residents of a particular district. This can be particulary effective in rural areas with a large prison population.

California has two propositions that deal with Gerrymandering, Props 20 and 27. These are key ballots measures for restoring our democracy.

In tomorrow's blog, we will attack the Gerrymandering issue by examing why one should care and the types of reforms being proposed to end this very un-democratic practice.

If you're interested in learning more about this issue, a definitive documentary called "Gerrymandering", produced by Bill Mundell is preparing for theatrical release. The website for the film can be accessed by clicking here: http://www.gerrymanderingmovie.com/. A new trailer for the movie can be accessed by clicking here: http://www.youtube.com/watch?v=kurAB5ridko.

Marko's Take

Die Hard: The Markets

2010-10-04T09:35:00.000-07:00

Like Officer John McClane, they continue to expend all of their nine lives. Is this life number 9?

Without a doubt, my assessment of the state of the markets has got to be called into question. Two relevant issues to address are: (1) Has the Hindeburg Omen, become, as Dee Dee Myers used to say, non-operational?; and, (2) Is the Precious Metals arena about to explode? For more on the Hindenburg Omen, click here http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.

If we do not begin to see a forceful decline commence by the end of this week, it is unlikely to build the kind of downside momentum that would be required to precipitate a crash. That said, as of this writing, I have not budged from the crash prediction one bit. The technical reasons were recently outlined in this piece http://markostake.blogspot.com/2010/09/lets-get-technical-part-2.html.

As far as the Gold and mining stocks sector go, I have some further technical thoughts. For the record, my position is that Gold is forming an intermediate top, before returning to the proximity of its 200 Day Moving Average (DMA), which currently stands at $1175. That makes downside exposure in the vicinity of 10%.

One thing that troubles me about Gold is that it has underperformed the weakness of the U.S. Dollar over the past several months. Since June, the Dollar Index is down 11%, while Gold has risen about 9%. Ideally, we'd like to see the reverse.

More troubling is just how extremely overbought Gold has become. It now has a Relative Strength Index of 83.46.  The piece referred to above explains the use of the RSI and how it's derived.

An examination of the relative strength of precious metals mining companies, as represented by the Gold Bugs Index (HUI) to Gold itself is quite revealing. Ideally, we would desire the stocks to substantially outperform the metal.   Since May, the companies have underperformed, although not substantially. The HUI continues to be unable to materially break out above the 500-525 zone despite daily new highs in Gold. Should the HUI return to its 200 DMA at 446, it would get smacked for 11%. Downside risk is very limited.

Ideally, the HUI ought to also do better than the broad stock market. We can measure this by comparing the performance of the HUI to the Standard & Poors 500 (SPX).  The HUI has gained no ground since November, 2009. This isn't cause to worry long term, but it does tend to suggest that a modest correction is imminent.

Investors should remain cautious but ready to jump in!

Marko's Take

Let's Get Frank About Barney

2010-10-04T03:46:00.000-07:00

And, no, I don't mean the purple dinosaur. I mean Barney Frank (D-MA), the political dinosaur.

According to Wikipedia: "Barney Frank (born March 31, 1940) is the United States House Representative for Massachusetts's 4th congressional district since 1981. He is a member of the Democratic Party. In 1982, he won his first full term, and he has been re-elected ever since by wide margins. In 1987, he became the second openly gay member of the House of Representatives (the first being Gerry Studds) and is one of the most prominent gay politicians in the United States".

But more important is Frank's central involvement with the unraveling of our financial system. Frank became the chairman of the House Financial Services Committee in 2007 after the Democratic Party won a majority in the House. The committee oversees the entire financial services industry, which includes the securities, insurance, banking, and housing industries.

In 2003, the Bush administration recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis in response to growing concerns about Fannie Mae's role in the real estate bubble.

Under the plan, a new agency was to be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The plan was an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac, which together had issued more than $1.5 trillion in outstanding debt, was broken. A report by outside investigators concluded that Freddie Mac manipulated its accounting to mislead investors, and critics said Fannie Mae did not adequately hedge against rising interest rates.

At the time of the proposal, Barney the dinosaur said: “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” Don't you just HATE it when people exaggerate?

Frank, and accomplice Christopher Dodd (D-CT), used their influence over these two financial giants for their own purposes.

In 2008, Freddie gave $20,000 to a Parents and Friends of Lesbians and Gays (PFLAG) event; Fannie Mae gave nearly $19,000 to the same event. Freddie has donated $125,000 and Fannie donated $80,000 to homosexual groups since 2005.) Dodd, welcomed himself to the trough as well, getting preferential treatment from Countrywide on two mortgages totally $7 million. Countrywide was one of the biggest subprime providers.

Barney Frank and Christopher Dodd also received thousands of dollars in contributions from Fannie Mae and Freddie Mac over the years. Dodd has received $133,900 since 1989; Frank received $40,100. (While in the Senate, Barack Obama received $105,849). Here, piggy piggy! Soooeeee!

ACORN, the socialist group that routinely engages in voter fraud, was involved in pushing for risky loans to people with bad credit histories, no jobs and no money for down payments. ACORN pressured banks in Chicago and elsewhere to give risky loans. Obama actually trained ACORN workers when he was a community organizer in Chicago.

After winning overwhelming victories in the last 3 decades, Frank is facing his toughest challenge ever. Some polls show him to be leading by less than 10%. Frank's own polls reveal no threat. Let's hope his ability to forecast the future of the housing and mortgage sector is as finely tuned as his own internal polling data.

Marko's Take

An Open Letter To Charlie Munger

2010-09-28T21:29:00.000-07:00

Dear Mr. Munger:

I read, with interest, your recent interview as it was recapped in Yahoo Finance. I must say that I found it less provocative than that of your partner, Warren Buffett. To refresh yourself, click here: http://markostake.blogspot.com/2010/09/open-letter-to-warren-buffett.html. Nonetheless, I found this statement by you particularly troubling.

"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk."

I guess that makes me and my fellow gold-philes jerks. Mr. Munger, doesn't that also make your partner a jerk, too? According to Silver Monthly: "Beginning in 1997, the Oracle of Omaha (Warren Buffett) saw the value of silver glinting in the dust of depressed prices. From 1997 until 2006, his investment fund-Berkshire Hathaway-accumulated over 37% of the world’s known silver supply-even more than the COMEX! During that time, he was not only an oracle but also the all-time silver bull". Say WHAT? I guess hoarding Gold is bad, while hoarding Silver is good? Please 'splain it to me.

Charlie, my lips are sealed. The last thing I want to see are two octogenerians in a cage match. Leave that to Vince McMahon, would ya?

Mr. Munger, you are a very educated man. Let's take out our notebooks as we review the history of Gold for a second. Gold is the only form of currency that has EVER endured. Surely, you would invest in currencies, wouldn't you? Oh, but then there's the old argument that you can't eat Gold. True enough. I'll bet those stock and bond certificates are particularly tasty. So is real estate. Hell, so is a Hundred Dollar bill with butter and garlic. And a barrel of crude...YUM!

You can eat bread and meat, but the problem is they don't keep very long. They go rotten, dude. Gold has a pretty decent shelf life of a few billion years, give or take an eon. Oh, and have you heard? There is a whole planet of jerks who will ACCEPT Gold as a form of paying for things that we DO eat.

I'm sure you were delighted by the ridiculous decisions to de-emphasize Gold. When the Gold window was closed at Bretton Woods in 1971 and we went totally to paper, boy did our financial system take off! Remember how fun and prosperous the 1970's were?

Now, I'm also confused by this quote from the Charlie Munger book of quotes: "Recognize reality even when you don't like it - especially when you don't like it."

Would I be correct that this particular statement was advice given to others, rather than a credo you live by?

Do I detect a wee bit of hypocrisy, here?

Charlie, the letter contained in the Berkshire Hathaway (BRKA, BRKB) annual report is legendary and read by millions of sycophantic investors everywhere. May I suggest that you at least include "Marko's Take"? After all, shouldn't you recognize reality, even when you don't like it?

Mr. Munger, TAKE ME ON!

Marko's Take

An Open Letter To Warren Buffett

2010-09-24T20:31:00.000-07:00

Dear Mr. Buffett:

I have read about, and listened to, with interest your recent interviews on CNBC and elsewhere. Mr. Buffett, I'm confused. Could you clarify a few things for me?

You are familiar with the recent declaration from the National Bureau Of Economic Research (NBER) that the recession officially ended in June, 2009. You disagree.

In fact you told CNBC that by your own "common sense" definition, the United States is "still in a recession." In the same interview, you said taxpayer anger against President Barack Obama and Congress is counterproductive because policy makers took measures including deficit spending to stimulate the economy. Yet you don't seem to understand why common folks like me are opposed to turning over more than one more cent to the government, which has clearly created the very mess we're supposed to entrust them to fix.

“The truth is we’re running a federal deficit that’s 9% of Gross DomesticProduct (GDP),” Buffett said. “That’s stimulative as all get out. It’s more stimulative than any policy we’ve followed since World War II.”

Always the altruistic one, you even castigated the rich by telling CNBC that you don't buy the argument that raising taxes for them would derail the nation's economic recovery. I think it's fantastic that you are so willing to sacrifice a much larger portion of your earned income. Putting your money where your mouth is. Good show!

Now, correct me if I'm wrong, but you make how many tens of millions? What's that? Could you speak a little louder? Your salary is $100,000? Is that per minute? Per hour? Per YEAR?

Ok, with salary and other bennies it's nearly $200,000. So, wow, you'd be willing to chip in another 10K for the good of your country? Good for you!

But isn't your net worth on the order of $50 Billion? Wouldn't it do the country more good if you supported a tax on wealth? By your own reasoning, I'm surprised you haven't whipped out your check book and written a $10 Billion check to Uncle Sam for the purpose of deficit reduction. But you've given so much to charity, I understand. Strange, but if the U.S. Government is so adept at re-allocating wealth, why would you rely on charities? I'm really confused here.

And, since every taxpayer needs to do their fair share, I assume you give back your Social Security check. If, by your own reasoning, it is incumbent on the rich to help reduce the deficit, here's a great way to start. According to a recent inteview you did with Lou Dobbs, you keep the money. Hey, every penny counts!

Mr. Buffet, you have made your billions by exploiting the capitalist, free market system. A system not hindered by over-regulation and government intervention. Sad, that you don't wish to see others free to take advantage of the same "land of opportunity" that blessed you.

Do, I sense just a wee bit of hypocrisy?

Well, I'm going to try to cut you some slack. If I were 80 and interviewed by a woman as beautiful and intelligent as Becky Quick, I might not be able to contruct a coherent sentence.

Mr. Buffett, this is "Marko's Take". I welcome you to TAKE ME ON!

Marko's Take

Let's Get Technical (Part 2)

2010-09-21T09:00:00.000-07:00

Yesterday, we built a case that the markets, despite a surprisingly strong Septemeber, were doing their best to prove Abe Lincoln right by "fooling most of the people, most of the time". There is much more evidence of that.

Technical analysts often use an indicator called the RSI or (Relative Strength Index). According to Investopedia, the RSI is defined as follows:

"A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = 100 - 100/(1 + RS). RS = Average of x days' up closes / Average of x days' down closes."

"The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued."

To be sure, the RSI is far from perfect, but it has a pretty decent track record of at least measuring the condition of a market that is conducive to either an upside or downside reversal.

At the conclusion of trading yesterday, the Dow Jones Industrial Average (INDU) had an RSI of 66.60, the Nasdaq 100 (NDX) had one of 72.74, the Standard & Poors 500 registered 66.50, Gold came in at 72.50 and the HUI was 55.99 after hitting 68 several days earlier.

A good charting service from which one can review these numbers and other indicators is Stock Charts (http://www.stockcharts.com/).

If you pull these charts up, you can see that most intermediate term rallies crap out with an RSI in the mid-to upper-60's and bottoms hit 35 or below. Markets rarely rally much after crossing 70 on the upside or decline much if they penetrate 30 on the downside.

What makes the market seem so weak is not only the poor price action despite a long string of up days as highlighted in yesterday's piece http://markostake.blogspot.com/2010/09/lets-get-technical.html, but also in looking at how extended, or lack thereof, the market got.

A real lift-off will typically pull an index or stock well above its 200 Day Moving Average (200DMA). Historically, major Gold rallies have peaked in excess of 30% above is 200DMA. The HUI has historically peaked more than 50% above its 200DMA.

The bullion, despite a near-uninterrupted 10 week rally, has failed to get much in excess of 10% above its 200DMA, while the HUI has only gotten 15% above its DMA. One might argue that this means that they have further to go. True enough. But, in light of the various overbought conditions are measured by the RSIs, it would appear that what we are seeing is a series of markets losing momentum.

We continue, therefore, to urge extreme caution. Today's Federal Reserve meeting is a perfect occasion to provide the market with an excuse to begin its trek to lower, perhaps MUCH lower levels.

Once again, while we believe that caution should rule the day even in the precious metals sector, it is highly unlikely that we will see the type of smash that occured in 2008. And, it may even surprise everyone and rally. However, use the guidelines outlined in yesterday's piece before jumping in with both feet.

Marko's Take

Let's Get Technical

2010-09-20T00:50:00.000-07:00

On the surface thus far, September has seemed to be a very normal month. Below the surface, it has been far from it.   Coventional wisdom is aware that, historically, it is the weakest calendar month in terms of average stock market performance and, therefore, there was a decent level of angst about what would happen when traders and portfolio managers returned from their summer vacations in the Hamptons.

The market has been up 9 of the last 11 days.   These extreme strings of near-consecutive days up or down are very often signs of exhaustion. Market tops tend to be rolling like an upside down arc or parabola.  Significant bottoms, on the other hand, are very often V-shaped, characterized by panic selling.

If we put those two observations together we can form an educated opinion as to the technical health of the stock market. In the last 11 days, the Dow Jones Industrial Average has gone up a mere 6% the Standard & Poors 500 has risen 7%, the Russell 2000 8% and the Nasdaq 100 11%.  If the market was firing its thrusters for a huge move up, we ought to have seen gains of about double those just experienced.

A 9 of 11 exhaustive string on the downside could potentially result in drops of 20% or more.

Somewhat disturbing is the behavior of the Gold Bugs Index (HUI), especially in light of the move in Gold itself. The HUI is up only 1% despite a 3% advance in Gold and a 10% gain in Silver. In addition, the Dollar index is down 2%, which should have provided a modest tailwind. This is NOT healthy action. The breakout of Gold above $1,250 was NOT accompanied by a breakout of the HUI above 500. For a true bull market to have begun, the twin conditions of Gold above $1,250 AND 500 on the HUI should have bene met. That a breakout didn't occur was quite surpising. I guess Gold 2K will have to be put on hold.

Therefore, while the likelihood of a MAJOR drop in Gold or the HUI is small, we ought to remain on alert that a correction of some sort has become highly probable. In combination with a waterfall decline in stocks, precious metals are better avoided than ridden-out except with long-term money. More importantly, whatever correction occurs will represent yet another low risk entry point.

The other key reason to argue for extreme caution at this time is the major headwind created by the plunging money supply. The most recent figures and the implications are covered here: (http://markostake.blogspot.com/2010/09/turning-economic-titanic.html).

The deflationary forces are confirmed by the action of the bond market which has made new highs after a nearly 30 year bull market.   In addition, longer rates have come down much more than short-term rates flattening the yield curve. The slope of the yield curve is particularly critical to the financial sector as the bulk of borrowing is done on the short end, while lending tends to be longer term. The spread between the two creates the level of profitability.

So, it continues to make sense to stay liquid. There will be a better time to take risk.

Marko's Take

Turning The Economic Titanic

2010-09-19T20:54:00.000-07:00

For months, we've been reporting on the most ominous number for the economy and investors: the record drop in the nation's money supply as measured by the broad aggregate, M3: (http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html). This one set of data virtually guarantees not only an intensifying downturn in the economy but major problems for both the financial system and the markets.

Recently, however, the first signs of a possible reversal have presented themselves. M2, which is the broadest money measure now formally tracked by the Fed, has begun rising regularly (seasonally-adjusted) on a weekly basis since the 4th of July, at an annualized pace of 7.8%. The impact on M3 has been positive but muted, with year-over-year M3 change down 4.3% as of August.

While this is a positive development, it is at best, a case of "too little", "too late". Even with the recent uptick in M3 growth, it is still in a zone consistent with both vicious economic downturns and stock market waterfalls. It would take, at the very least, a growth rate in the mid-single digits to starting turning the Titanic away from the iceburg. And, like the famous cruise ship, the economy has way too few life boats. And, the largest economy in the world, just like the largest steam liner, is thought to be unsinkable. And, there will be few survivors.

The Fed has pulled out all stops to liquefy the financial system and has had about as much success at turning the ship in time as Captain Edward John Smith. Like Smith, they didn't notice the economic iceburg until it was way too late.

The Fed, the Department of Treasury, and the Obama Administration have re-arranged the economic deck chairs by wasting valuable resources on poorly thought-out bailouts, nationalization of the banking sector and purchasing toxic assets. The bill for all this mismanagement? Who knows? A trillion here, a trillion there, and pretty soon we're talking about REAL money.

The best case scenario, assuming that M3 begins to reverse and grow, is for a solid and nasty 6 month downturn. Once the money supply turns meaningfully positive, it typically takes at least 6 months for the effects to filter through the system. Whatever turn does occur will only take place from MUCH lower levels.

The U.S. economy is like an addict requiring greater and greater doses of monetary (cocaine) injections to keep it going. Fed Chairman Ben Bernanke, like a good drug lord, has a very hooked population who now need pounds, not ounces of crack to stay stimulated. Time to switch to heroine? No, better yet LSD, so we can hallucinate ourselves into believing that "Helicopter" Ben can keep the high going.

In the interim, the beneficiaries of "Helicopter" Ben's economic crack pipe have been the stock market and Gold. Stocks remain absurdly buoyant despite a rapidly deteriorating technical and fundamental situation. Gold just benefits from economic stupidity, plain and simple.

Even if the Fed is successful in reversing M3, the "side effects" of the economic drug policy will be an overdose which ought to lead to hyper-inflation. Pick your poison. Avoid Depression but get hyper-inflation, while Murphy's Law says we'll get both.

How to survive this "do or die" situation? Use Gold as your flotation device.

Marko's Take

A Nation Rich In Poverty

2010-09-16T17:44:00.000-07:00

How does a nation that spends itself into bankruptcy trying to eradicate poverty end up with an explosive demographic: the statistically poor? Easy, it spends itself into bankruptcy, creates incentives to stay poor and thus creates the very opposite result. Happens every time.

Incomes for the typical U.S. household fell slightly last year as substantial government aid and such self-help actions as families doubling up and young adults moving in with their parents muted the impact of the worst recession since the 1930s, the Census Bureau reported this morning.

The nation's poverty rate jumped to 14.3% in 2009, its highest level since 1994, and the 43.6 million Americans in need is the highest number in 51 years of record-keeping.

President Barack Obama said that economic-stimulus spending had kept millions more Americans out of poverty. "Even before the recession hit, middle-class incomes had been stagnant and the number of people living in poverty in America was unacceptably high, and today's numbers make it clear that our work is just beginning," he said in a statement. Uh-huh.

The median household income, the pretax income of households smack at the middle of the middle, fell 0.7% to $49,777 in 2009, down 4.2% from the prerecession year of 2007.

The Office of Management and Budget defines the poverty threshold level as less than $21,954 for a family of 4 in 2009 and $10,956 for an individual. The poverty rate increased for all racial groups except Asians.

The income used to calculate poverty status includes earnings, workman's compensation, unemployment insurance, Social Security, veteran's payments, pensions, interest and dividends, and just about every other source of cash. Non-cash benefits, such as food stamps or subsidized rents, also do not count as income.

Some believe, that the poverty rate, like most statistics produced by the meticulous statisticians in Washington, does not fairly portray the rate. Perhaps the biggest problem is that the official poverty rate doesn’t account for the lion’s share of antipoverty measures such as subsidized housing and the earned income tax credit. It is also believed to overstate inflation. Huh? Doesn't government reporting typically UNDER-state inflation?

Now, if the definition of poverty is on the order of $20,000 per year, and we have a broad unemployment rate of more than 16%, how do we arrive at a poverty rate of 14%? Don't unemployed people make zero?

And, since we have a sea of UNDER-employed and working poor at minimum wage jobs, it's hard not to imagine a truer poverty rate of more like 30%, using our own definition.

But isn't our definition of poverty relative, as opposed to absolute? It is. And, if we compare ourselves to other nations, using our very own definition, we learn some amazing things.

Think China's rich? The second largest economy. Our worst economic foe? Turns out, that their median income is less than one-tenth of ours. ONE-TENTH! How about India? Their median income is less than one-third of China's!

About 20 countries have higher median incomes, but even here, the statistics are misleading. Kingdoms such as Lichtenstein and Monaco are pretty high, as are the populations of many oil producing countries. Among the oil producers, much of the wealth is very, very concentrated in the hands of very few.

As you can judge, the poverty statistics are absurd. If true, more than 80% of the world's population is poor. If poor is relative rather than absolute, how can virtually the whole planet be poor?

The reason is simple. Politicians have a vested interest in proclaiming people poor and then offering government programs to fix it. It doesn't work, but what do results have to do with getting re-elected?

Marko's Take

Gold 2K

2010-09-14T07:46:00.000-07:00

Is on its way! With this morning's definitive breakout above the $1,270 per ounce level combined with Silver's vault above $20 per ounce, we can clearly view the entire precious metals complex as having reached a very low-risk entry point. The Gold Bugs Index (HUI) now needs to confirm this move by decisively breaking 500.

Long suffering Gold-philes now have in their lap what should prove to be one of the greatest opportunities of an investment lifetime, especially in the junior miner sector which has notably lagged the metal. A very reasonable target for Gold itself would be on the order of $2,000 per ounce. If this is realized, the HUI could see a fairly quick doubling to 1000.

The HUI has historically traded at around one-half the metal itself. At our upside "guesstimate" of $2,000, the HUI would be fairly valued at 1000.

The greatest opportunities, however, are among the quiet junior sector. Many of these issues, which we will update over the next several days, are likely to be what Peter Lynch used to call "10 baggers", or perhaps, much, much more.

Of course, you can expect the powers that be to attempt to manage the market lower. This will fail. You can expect the Jon Nadlers of the world to decry to bubble in the metals and the junior miners. They will be wrong. Jon, still looking for $800 per ounce?

Bubbles are NEVER supported by fundamentals. But, we shall see some major earnings delivered by the entire mining sector, and, therefore, we will see some of the most undervalued issues in history.

You can also expect a boom in mergers and acquisitions. Resource rich but cash poor juniors will be bid up quickly. With tiny market capitalizations, it will only take a relatively minor amount of capital re-allocation to exert some tremendous leverage.

The fundamental underpinnings are further supported by prospects for the U.S. Dollar which are rapidly deteriorating after a very sharp bear market rally. Look for the Dollar to plumb new lows. Look for virtually all currencies to lose value against tangibles,

As the financial system goes into to meltdown mode, the precious metals market will also be supported by a crisis bid or "flight to quality". Any sign of military action in the Middle East could cause moves in one day of $100 an ounce or more...OVERNIGHT!

As bullish as the situation is for Gold, the prospects for Silver are even better. Silver is still leagues below its all time high of $50 per ounce, while Gold has is trading well into new-high territory. For Silver to become fairly valued on a relative basis, it would have to double TODAY! If Gold should approach the $2,000 level, Silver ought to reach something on the order of $60 per ounce, a tripling in a few short months.

The fundamental picture gets better. Production in former powerhouses like South Africa is falling rapidly. In fact, we appear to be past "Peak Gold". So, we have the combination of falling supply AND rising demand.

It still gets better. It appears that significant bottlenecks are now appearing in the physical market as the result of huge short positions by commercial players, such as the banks. In fact, the very financial meltdown that is likely to occur will be aided by HUGE mark-to-market losses among those financial institutions that have taken it upon themselves to assist the Federal Reserve in silencing the messenger. Higher precious metals prices tend to act as a thermometer in the mouth of the economic patient. Can't show a fever, now can we?

Unlike Y2K, Gold 2K will NOT be a bust. Get your first class seats for the ride of your life! Your financial survival depends on it.

Marko's Take

Paying Your Fair Share Of Taxes

2010-09-12T18:07:00.000-07:00

George W. Bush, who was perhaps the most profligate Republican spender in history, had one crowning achievement in his presidency. He rolled back the unconstitutionally retroactive tax hike imposed by Bill Clinton. That tax rollback, without action by Congress, will expire this year.

President Obama has recently taken to the campaign trail to decry the unfairness of this proposed lower tax rate, since it is a well known fact that high income earners do NOT pay their fair share. (Sarcasm intentional). On this, he is in complete agreement with Clinton. Presidents Obama and Clinton never let the facts get in the way of pandering to potential voters.

That there is exists a level of inequality in income is not in dispute. But what about fairness?

The distribution of pretax income in the United States today is highly unequal. The most precise studies suggest that the top 10% of households, with average income of about $200,000, received 42% of all pretax money income in the late 1990s. The top 1% of households, averaging $800,000 of income, received 15% of all pretax money income.

Interestingly, the income inequaltiy has risen over the last several decades, which is cited by many as proof of the heartlessness of the rich, the Wall Street generation and indifferent Republicans. Ironically, entitlement spending, designed to address this inequality, has literally exploded at a parabolic rate, yet has had absolutely no impact on inequality, except to make it worse.

So, for the accusation that rich do not pay their fair share to hold water, we would expect that distribution of taxes should be less skewed with a greater burden on the poor, right?

It would seem that data from the U.S. Treasury cast cold water on this claim.

According to recent Treasury figures, the top 0.1% of taxpayers by income pay 17.4% of federal income taxes (earning 9.1% of the income), the top 1% with gross income of $328,049 or more pay 36.9% (earning 19%), the top 5% with gross income of $137,056 or more pay 57.1% (earning 33.4%), and the bottom 50% with gross income of $30,122 or less pay 3.3% (earning 13.4%).

If we examine the wealth distribution rate, the net wealth (not only income but also including real estate, cars, house, stocks, etc) distribution of the United States virtually perfectly coincides with the share of income tax – the top 1% pay 36.9% of federal tax (wealth 32.7%), the top 5% pay 57.1% (wealth 57.2%), top 10% pay 68% (wealth 69.8%), and the bottom 50% pay 3.3% (wealth 2.8%).

President Obama and Clinton love to talk about tax cuts for the middle class. If the bottom half of income earners contribute a paltry 3.3% to the total taxes received, how on Earth could they get their taxes cut? You can only cut taxes to those who actually PAY tax. Sure, it makes for a great campaign speech to those who don't know any better such as our friends in the media, but it just doesn't hold up under any scrutiny.

In a democratic society where the majority rules, what better way to buy votes than to virtually exclude half the population from taxes? Soak the rich rhetoric plays well to the liberal media, but makes no economic sense whatsoever.

I do agree with Presidents Obama and Clinton on one thing. The rich SHOULD pay their fair share. If someone would send each of them a link to this piece, I have NO DOUBT that they will acknowledge the error of their ways and immediately cut taxes for the high-income segment of the population! (Sarcasm intentional).

Marko's Take

Surviving The Mad Max World

2010-09-09T07:46:00.000-07:00

If you buy the notion that life as we know it, is very likely to become life as we KNEW it, you must be wondering how on Earth this can be survived. The good news? It can. The question is how?

In the "Mad Max" world that is rapidly unfolding, the key will be to survive until the new order replaces the decaying elements of our soon-to-be terminated empire.

The U.S. Dollar, will at some point, be relegated to toilet paper. For now, it remains relatively strong, but not absolutely strong. If its value as both a store of value and medium of transactions ends, are there any good subsitutes? I suggest 2. One is Gold and Silver, the most historically useful mediums of exchange. No matter what transpires, precious metals will be around for the duration.

Gold, now trading near all-time highs of $1,250 per ounce, is beyond the reach of most folks. But Silver, still well below its all-time high of $50 per ounce, is currently trading at under $20 per ounce. Most people can afford to have some around. If you're in a position to accumulate more, by all means do so. A great way is to purchase coinage from the pre-1965 era, when coins were minted with a 90% silver content.

Even pennies and nickels should be kept. At current prices, each are worth about twice their face value. Ultimately, the mint will discontinue them for that reason. Save your change!

Another alternative form of currency is cigarettes. Used in prisons, cigarettes will also be valuable, even if you're not a smoker. And, as Uncle Sam looks to raise revenue, taxes of ciggies will undoubtedly go up. So, a good time to purchase a few cartons would be today.

Protect your access to food and water. This can be done by purchasing a good supply of canned foods and dried foods such as beef jerky and de-hydrated fruit. Or, if you have the ability, grow some. Many foods can be grown on a balcony. If you live in a region not conducive to growing, then by all means, go the dried route. The 99 cent stores (NYSE: NDN) are a great and inexpensive source of canned and dried food.

Water is still virtually free, but may not be so for long. Even if you get it from the tap, it can still be filtered using a relatively inexpensive store bought tap purifier. Keep as much of a supply as you can. Or, if you live in an area with heavy rainfall, collect that. Last I checked, the guvmint has not taxed rain or snow.

Access to energy is pretty much out-of-reach for most people. Ideally, one could have solar panels, which have gotten much cheaper in just the last few years. But, they are still expensive and require a pretty hefty capital outlay. A decent substitute would be a back-up generator for home use, but that does nothing for you if you need to drive somewhere. In that case, tele-commuting or the ability to work from home may help defray this cost. Again, not everyone has this option, but many do.

For heat, there's always wood. If you have a fireplace, that would keep the energy use lower, and reduce your need for expensive heating fuel. If you don't have a fireplace, there do exist some relatively affordable indoor fireplaces at most home improvement stores. Your landlord may not like it, but it beats having more vacancies.

If indeed, we enter an age of civil unrest, protecting one's self will also be paramount. Few people will have the foresight to anticipate the coming shortages. Once they materialize, the desperation to feed families may just drive hungry people into the streets. Survival of the fittest. Personal protection should be at the top of your list.

A great option for personal protection is a guard dog. The shelters are literally brimming with dogs that would be suitable and trainable for that purpose. You can both do society a favor by giving these magnificent creatures a home and protect yourself at the same time. Another alternative is to purchase a firearm. If you do, please get the requisite training. Guns, in the hands of those who're not trained, are dangerous.

From an investment standpoint, even if you have absolutely NO wherewithall, there are still steps that you could take. For example, consider the impact of a deteriorating currency. That suggests that any liabilities you have such as a mortgage should eventually be fixed. Yes, we maintain that rates ought to stay low for a while, but as hyper-inflation ensues, rates will ultimately have to go much higher. Paying your debt back in depreciating dollars will protect you.

On the other side of the coin, don't allow any cash flow you receive to be fixed. Let whatever income you have to be, as much as possible, indexed to inflation.

If the seige comes to pass, how long will it last? Tough one. I'd say 6 months at a minimum. Ideally, you should have a disaster preparedness mentality that assumes a pretty long period.

Above all, don't let anyone tell you that taking some or all of these steps is crazy. If none of this happens, well, no loss. You can eat the food and drink the water and burn the wood. The guard dog will make a terrific companion. But, what IF this comes to pass? Once it does, taking these steps will be too late, and the cost of doing so will go WAY up. So, why not get started now?

Be a Boy or Girl Scout. Be prepared.

Marko's Take

Independence Day, 2011 Will Not Be.....

2010-09-07T10:09:00.000-07:00

Before reading this very dark forecast, you may wish to review a piece I wrote called "12 Steps Of An Empire" by clicking here: http://markostake.blogspot.com/2010/06/12-steps-of-empire.html. What follows is step 12, which we are now in.

The date: July 4, 2011. It is the worst of the times. There is no best of times. Instead of enjoying hot dogs and burgers at the beach with family and loved ones, we're all at home watching PTV (Propaganda TV). The parade that no one attends is full of tanks, hummers and military personnel.

As Monk would say, "Here's what happened":

The fall election season saw continuing deterioration in the economy, the markets and the fortunes of the Democratic Party. The Republicans, perhaps accidentally, did NOT seize defeat from the jaws of victory as was their typical modus operendi. They grabbed undeniable control of Congress with a clear mandate to reverse the country's slide into destructive socialism.

Secretary of State Hillary Clinton, ever the opportunist, and still supported by bitter, older angry women everywhere, announced her resignation from the Cabinet and, simultaneously, her intention to run for President in 2012.

The Clinton investigative smear machine, held back in the 2008 election, now goes into full gear. They realize that Obama has now lost much of his base, including the lame-stream media, and engage in finding out about our President's very mysterious and checkered past. The Republican majority and Mrs. Clinton, on this matter, are the most unlikely allies. They find out the same thing: Mr. Obama is not qualified to be President, under the United States Constitution, by virtue of his place of birth, Kenya.

But, there's so much more. New information reveals that Mr. Obama has been in contact with foreign enterprises that are clearly enemies of America. The call for his head intensifies.

The President is impeached and the Supreme Court reviews the information. It appears virtually certain that Mr. Obama will become the first President ever removed from office. He has one option left and he exercises it: Martial Law.

By declaring a National State of Emergency on Economic and Domestic grounds, he suspends all civil rights and nullifies the power of the Supreme Court. A military state with National Guard, paramilitary units and roving gangs now assumes power. To control the population which is growing frightened, impoverished and restless, food, water and fuel are rationed. Concentration camps, first used to intern the Japanese after World War II, are re-opened to place the new troublemakers in confinement. Racial tensions heat as many believe the persecution of our President is racially motivated and a new Civil War erupts. You don't know who's on your side and who's against you.

So on July 4th, 2011, we see no rocket's red glare and no bombs bursting in air. This is no longer the land of the free, but it remains the home of the brave.

Marko's Take

Information Is More Than Power, It's Gold

2010-09-05T14:49:00.000-07:00

Now that it appears that we have finally begun the long-awaited mega-bull run in Gold and mining stocks, it's a great time to revisit the best sources of information to make investment decisions.

Quality information comes in many forms. Some cost money,such as newsletters. Some are free, such as websites, chat forums and the media.

In terms of newsletters, I've subscribed to or have been familiar with at least a dozen. In fact, many months ago, I wrote a piece on 7 of them which can be reviewed by clicking here: http://markostake.blogspot.com/2010/01/looking-for-great-gold-newsletter.html.

In general, the opinions I expressed then I would maintain now, but I'd like to elaborate with some qualitative comments. For the purposes of full disclosure, I currently subscribe to two newsletters: LeMetropole Cafe (http://www.lemetropolecafe.com/) and Clive Maund (http://www.clivemaund.com/). Each is different and serves a different audience. Each does so, in my opinion, excellently.

Le Metropole is by far the very best value out there. It is written daily, and full of invaluable information. Head guru Bill Murphy is not only among the most knowledgeable and best connected people out there in Gold land, but his organization, GATA (http://www.gata.org/), is on the front lines of protecting investors from the shady back-room operators who routinely intervene in what should be free markets. I could write an entire essay on his efforts alone, but history will undoubtedly judge him as the most potent force in this market today.

Clive Maund writes a newsletter that is primarily technically oriented. While his technical analysis is often scorned by Gold's perma-bulls, who hate it when he gets bearish, he has, in my experience stayed intellectually honest and has been very willing to acknowledge his bad calls. Hey, even Marko's Take blows it!

Clive Maund also gives specific buy and sell recommendations and timing, which for most investors is what they need to make money. Unless you understand things like On Balance Volume and Candlestick charting, Clive's newsletter should be part of your information set.

In addition to these subscriber newsletters, there are a myriad of fine blogs out there. Of particular note are Jesse's Cafe Americain (http://jessescrossroadscafe.blogspot.com/) and Harvey Organ's The Daily Gold (http://harveyorgan.blogspot.com/). Other must reading includes Jim Sinclair's MineSet (http://jsmineset.com/) and a great site called Gold Tent: Poster's Paradise (http://goldtent.net/wp_gold/).

Sinclair is a legend in the Gold community and it amazes me that his site is still free. In Gold Tent, you'll find a large number of well-informed traders and investors with whom you can exchange ideas and thoughts in a mutually supportive environment. Unlike some other chat rooms, the decorum is kept very civil and participants politely exchange information rather than insults with whom they may not entirely agree.

In terms of Gold-Oriented web sites, the three that come to mind are Kitco (http://www.kitco.com/), 321Gold (http://www.321gold.com/) and GoldSeek (http://www.goldseek.com/). They serve as excellent clearinghouses of information and feature various news reports and newsletter writers.

The only information that investors should be truly wary of are the various reports of the major brokerage houses and credit rating agencies such as those that are issued by our friends at firms like Government Sachs (GS), Moody's and Standard & Poors. Study after study has shown that these firms are so full of conflicts of interest that the information they spread is anything but credible. You can be pretty-well assured that these reports are used to propagandize the firms' narrow self interests and NOT to provide a service to investors.

The other sites mentioned above have NO conflicts of interests and only prosper based on the quality of the information they provide. The major brokerage and credit firms, on the other hand, make money whether they're right or wrong.

As Labor Day weekend ends, the traditional summer vacation is over and markets will begin to get more active and, in all likelihood, we have a very interesting fall ahead of us. You know where we stand: stock market meltdown is uncomfortably likely and gold market meltup is dead ahead.

Before making any major investment decisions, consider all the sources of information that you have. The next several weeks are likely to be historically significant, and a chance to make a lot or lose a lot. Never underestimate the value of information. Toward that end, thanks for reading.

Marko's Take

In

The War On Social Wars

2010-09-01T13:06:00.000-07:00

This country has a proud tradition of fighting social wars in an effort to achieve a more fair and just society. We have launched wars on drugs, illiteracy and poverty to name a few. The problem? We are as good at fighting social war as the French are at military wars. Oui monsieur, "I surrender"!

In order to fight a good social war, one needs politicians who are more than anxious to throw good money after bad to pander to their constituents and of course, get re-elected. Create entitlements, so everyone can join in the "free lunch". Who's paying, by the way? Oh yeah, the rich! You know, the top 2% of income earners who create all the jobs and pay 52% of taxes? The people that don't pay their fair share. Yep, those guys!

The War on Poverty was declared by Lyndon Johnson, who was as effective in Vietnam as he was right here at home. Remember the belief that we could have both "Guns" and "Butter"? Turns out we paid for both, but still ended losing BOTH wars! And, we ushered in a horrible period of inflation to boot.

This led Gerald Ford to declare War on Inflation, another war that was lost until Paul Volcker became Federal Reserve Chairman.

The War on Drugs has been just as successful. It's been so successful, in fact, that California is about to pass a proposition legalizing marijuana. Of course, we're in a military war in Afghanistan to protect Big-Pharma's supply of opium. Thank God the marijuana war was lost. With the Reefer State in deep budgetary hell, we need the commerce from the largest agricultural crop to help mend the yawning deficit.

The War on Drugs should have taken a cue from Prohibition. Banning alcohol during a Depression? That war led to the rise of organized crime and bootleggers. So now, we have wars on the mafia. And, our track record, I'm proud to say, remains perfect!

The War on Illiteracy has been another stunning success. Seen the latest English SAT scores? They keep falling like a rock. But, we now have some new Cabinets like Department of Education to ensure that our population is indoctrinated with liberal propaganda on our campuses. Success!

If you add up the total cost of these social wars, including the entitlement spending they created, you can see that these wars are the reason we have a parabolic budget deficit. Let's call the troops home, shall we?

The only war we COULD win would be the War On Social Wars! Let's declare peace on problems the government can't possibly solve. Let's have faith in the American people to address their problems if left alone by BIG BROTHER. Let's declare victory over useless, baseless government intervention.

This is a war we can win. Fire photon torpedoes...full spread!

Marko's Take

Shale Oil Not The Answer

2010-09-01T08:48:00.000-07:00

This morning on CNBC, the Chief Executive Officer of Continental Resources (CLR), Harold Hamm, gave an overview of what he considers to be the answer to America's energy deficit: Oil Shale.

Mr. Hamm was billed as the richest oil man in America, so he ought to know what he's talking about, don't ya think? I think someone needs to send him the "Marko's Take" pieces on "Peak Oil", which discuss in detail exactly why oil shale is NOT the answer and NOT even close.

CLR is a major operator in what is known as the Williston Basin, a large fossil fuel deposit stretching from Canada into North Dakota and Montana. Increased oil production is driving a healthy state economy, one of the only healthy states in the Union.

The Bakken Oil Shale Formation is believed to contain a whopping 3.65 billion recoverable barrels of oil. Not bad, but hardly the answer. Even if it could be accessed immediately at NO cost, it would last for 40 days of world oil consumption. Yes, 40 days.

However, shale oil is notoriously expensive to access. It is energy intensive, meaning that it requires substantial energy just to produce the energy. So for every barrel accessed, it requires more than half a barrel in energy. Thus, the 40 day supply shrinks to 20 days or less.

In addition, shale oil requires great quantities of water. And, it is accessed through very environmentally unfriendly strip mining. Have you every seen a shale oil project? It would make the Sierra Club get out cannons, normally reserved for Japanese whaling boats, and launch them at the oil men.

Shale oil, on the other hand, is quite light, meaning that it has abundant quantities of the more valuable oil products such as jet fuel and gasoline. On the other, other hand, it is full of various minerals and metals, which are very expensive and energy consuming to refine. Our refinery system would need to be dramatically upgraded if shale oil ever became a great source of energy. Don't worry. It won't!

The large U.S. Oil Companies have passed on shale projects for the most part. I know, they want to keep oil out of our hands so they can enslave us. But, aren't they interested in making money? Don't you think that if there was money to be made, they'd be there in force? Yet, none of them show anything but a casual and passing interest.

The majors prefer to pursue the "cheap" offshore oil in the Gulf of Mexico which must be accessed by drilling many miles down into the Continental Shelf. And, incurring the wrath of environmental groups. And, incurring the wrath of Congress. And, the public. Seriously, if shale were so promising, why would they pursue deep drilling, with all its expense and risk, when a cheap domestic source were available?

There are a plethora of articles which suggest that the U.S. and World are literally swimming in oil. That is just not so. Fossil fuels are being depleted are very rapid rates, and every major oil producer, with the exception of Russia and Brazil have entered their own "Peak Oil" situation, and production is now falling off a cliff. That includes the United States, Venezuela, Mexico, the North Sea and most of the Middle East. Only Iran and Iraq have healthy reserves. Wonder why we decided to invade Iraq? Wonder why we are so against Iran's nuclear capabilties? I would think it's obvious.

In fact, our presence in Afghanistan is not only about Opium, but about natural resources. Don't think for a second that we haven't mapped all the resources in that country. If it had nothing, trust me, our troops would have left long ago.

For investors, opportunities in oil are fraught with multiple risks. Most importantly, is the likelihood of a "Windfall Profits Tax", which was a failure in the 1970's and would be just as big a failure if enacted today.
However, the major oil companies have very fat dividends and are among the only safe plays in the stock market today.

Don't yourself be fooled by the un-justifiable hype in Shale Oil.

Marko's Take

Is The Gold Mega-Bull Starting To Snort?

2010-08-30T08:07:00.000-07:00

It may be time to go grab our red capes from the closet and dust them off. In the pen is an increasingly agitated bull, snorting and pawing at the dirt. He's been held back by a combination of natural and man made forces. He ain't happy.

Gold has had every reason to correct sharply. It appears that we are in the early stages of another deflation scare. The money supply is shrinking at unprecedented rates and the economy is going into free fall. These are NOT the best pre-conditions for a rally. But they are GREAT conditions to fool everyone, and that is how great moves get set in motion.

When any asset or stock ignores what is unequivocally bad news, it virtually always suggests that the information has already been factored into the market. I believe that's going on now.

The rally in Gold to near its all time highs has occurred very quietly and without much notice. So has the recent strength in Silver. The underlying mining stocks appear to be forming healthy base patterns which are ideal for a resumption of the strong advance that still has a very long way to go.

The key obstacle to an advance here is the tremendous liquidity in Gold. When the really nasty part of the upcoming market meltdown asserts itself, it will inevitably trigger margin calls among the hedge fund community. They may be FORCED to sell the most liquid assets they have, and Gold would be at the top of that list.

The key levels to watch for an upside move are $1,250 on Gold and 500 on the HUI. If these are both exceeded, the technical picture goes from neutral, where it sits now, to very bullish. Given the very small overall market capitalization of the mining sector, even a small re-allocation of investors' portfolios will lead to huge gains. Remember how those internet stocks were propelled by the combination of small market floats coupled with surging demand? You ain't seen nothin' yet!

But, I would highly urge that one does wait for the key levels cited above to be penetrated before diving in. This is a very tricky market which is actively being intervened in. A false breakout CANNOT BE RULED OUT!

To play this market in the event of the now growing more likely upside breakout, you can't go wrong with physical GOLD. But, the real profits will be made in junior precious metals mining stocks. We will update our analyses of which stocks are the most appealing at the appropriate time.

I would, however AVOID the various Gold ETFs, most notably GLD. These are built on derivatives and there is very credible information floating around that there is not enough bullion to honor scheduled deliveries. Thus far, this shortage has been met by the issuance of more paper, but the supply of GOLD is falling rapidly from existing mines. Imagine the move if future delivery obligations can not be met.

I can see the bull's breath steam in the cold air. Toro, Toro, Toro!

Marko's Take

Economic "Intel"-igence.

2010-08-27T07:53:00.000-07:00

Remember about 6 weeks ago, how Intel (INTC) reported blowout earnings, ushering in a great earnings season and convincing investors that the so-called "recovery" was finally gaining steam? Well, just moments ago, INTC warned on the revenue line. Not good.

The company says it now expects revenue for the quarter of $10.8 billion to $11.2 billion. That compares with a previous forecast of $11.2 billion to $12 billion. Not good.

This is why data points like earnings are so irrelevant when it comes to assessing either the market or the economy. They're backwards looking and of absolutely NO use.

The Gross Domestic Product (GDP) estimate for the 2nd quarter was also revised much lower. Originally, economists had it pegged at 3.5%. Then, it came in a 2.4%. Today, it was reported at 1.6%. Not good. But, "better than expectations". Whose? Not mine!

A common notion is that looking at prior earnings and economic data is like driving a car while looking in the rear-view mirror. No wonder investors, even sophisticated ones, have so much trouble making money.

The market, with 4 Hindenburg Omens under its belt, and maybe a 5th today, has, in its infinite wisdom, anticipated the economic slowdown. The reason markets are able to anticipate with such deadly accuracy is that investor liquidity and preference for risk is reflected in stock prices. When investors are liquid or are interested in taking on risk, stocks go up. Simultaneously, the same factors are filtering their way through the economy.

That's how the market mechanism works. Investors express themselves both through economic actions and how they allocate resources. However, these do not react simultaneously. Markets are more sensitive. One can think of the market as the proverbial "canary in the coal mine". The canary's health indicates the economy's health. Not that mysterious, now, is it?

Of course, not every market move is significant. Markets can go up or down for a variety of reasons, including interest rates or the Dollar or problems with sovereign debt. But, significant market moves, especially when they're at odds with our economic expectations, should NEVER be ignored.

This is how "Intel"-igence works. As you understand the market's unique language, investing becomes much, much more straightforward.

Marko's Take

How We'll Know If Hindenburg Omen Is Wrong

2010-08-26T07:05:00.000-07:00

Yesterday, a 4th dirigible was seen flying the not-so-friendly skies. According to Robert McHugh, who seems to be THE expert in the now famous Hindenburg Omen, we need 5 to get a "cluster". But, let's take a deep breath, reduce our hyperventilation, and examine what signs we might look for that would suggest that this entire exercise is nothing but a blip on the radar screen.

One key factor is time. The "crash window" is open, but won't stay open for very long. If the financial markets don't implode pretty soon, then this entire exercise will become, as Dee Dee Myers used to say, "non-operational". Ms Myers, who had the tremendous misfortune of explaining away Mr. Clinton's ongoing non-truths, had to constantly change stories as new facts came to light. But, we can discuss that at another time.

If the Dow Jones Industrial Average (INDU) remains near or above 10,000 through the end of September, at the LATEST, I'd say that it would be time to go back to the lab.

Key downside levels to watch would be roughly 9,500 on the INDU, 1,025 on the Standard & Poor's 500 (SPX) and 2,100 on the Nasdaq Composite (IXIC). A break above 10,500 on the INDU, 1,100 on the SPX or 2,300 on the IXIC would suggest that the markets are probably poised to rally more.

As far as Gold goes, a break above $1,250 would suggest that an upside explosion could be at hand. Contrarily, a penetration below $1,200 would be bearish, short-term, and probably be followed by a sharp, albeit temporary, correction.

Other signs that this whole scenario is incorrect would include rising long-term interest rates or a falling Dollar. In the instance of a deflationary scare, we should see a strong dollar and strong bond market. The key industry group to watch is the financial stocks. They are currently poised to be leaders on the downside. The markets CANNOT rally without at least a some upside strength in this group.

Do we care about earnings or economic statistics? NO! They are backwards looking and have ZERO predictive value. In fact, any decline is likely to take place against a backdrop of at least decent news. Like a sleight-of-hand magician, markets are very expert at having investors look up when investors should be looking down. Look at my pretty assistant!

It's important to note, that as of this writing, not ONE of these possible contra-indicators is in place. In fact, there is only one piece of evidence that the scenario is not imminent. The yield curve is steep and positively sloped, meaning that the difference between long-term rates and short-term rates is high. The reason this is important is that a steep yield curve creates a very profitable lending environment for banks and other financial institutions which borrow short or cheap and lend long or dear. Since banks aren't lending, this may not be all that signficant.

The slope of the yield curve determines how profitable the financial sector will be prospectively. And, as noted above, the health of this sector is important to the direction of markets and the entire global financial system. It also has very high predictive value in assessing the prospects for economic growth.

Another sign of strength would be felt in the commodities markets outside of the precious metals, which are acting as currency right now. Keep an eye on oil, food and key industrial metals such as Copper. Dr. Copper, as it's known, is a better economist than most Nobel Laureates. Doc Copper has "Marko's Take" in his waiting room. As of today, all the commodities are either weak and weakening or looking very toppy.

So, keep on an eye on the checklist that might suggest that the dark clouds are nothing more than a short thunderstorm. The forecast is for torrential rains, but predicting the market is not much more of a precise science than the weather. Even if it doesn't rain, don't forget your umbrella.

Therefore, unless the conditions for a re-assessment are met, as described above, investors should continue to hold lots of cash, use inverse ETFs for hedging and profits, and wait out the storm.

Marko's Take

I See The Bad Moon Arisin'

2010-08-24T08:47:00.000-07:00

Last night was a full moon. A BAD moon. With the recent solar eclipse window still open, coupled with the full moon, the anticipated crash, should it happen, ought to take place imminently. A review of the significance of astro-harmonics can be reviewed by clicking here: http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

Now that earnings season has encouraged investors, it's time for the economic reality to splash cold water in the financial markets' faces. The news is exceptionally poor.

The Richmond branch of the Federal Reserve’s measure of manufacturing activity for the mid-Atlantic region plunged by about 30% . The fall was less than economists were predicting, but the decline strongly suggests tha one of the US’s only area of strength has an empty gas tank.

The economy’s weakest sector, housing, got yet more bad news. Sales of existing homes fell 27.2% in July, the steepest monthly drop in 15 years and past consensus expectations of a 12% decline.

The Richmond Fed’s index came in at 11, versus 16 the previous month. Last week, the Philadelphia branch registered a disappointing index of factory activity that sent markets reeling, as it suggests a potential dip in the August reading of the broader Institute of Supply Management’s index. The Chicago Fed’s index is due next week.

And this is just the beginning. In today's trading, it appears that we will have yet another Hindenburg Omen. This makes at least 3, depending on whose definition of it one ascribes to. What's a few New Highs and New Lows among friends, anyway?

The equally ominous head and shoulders pattern gives us at least an idea of what might be reasonable to expect here in terms of the next intermediate low. A good rule of thumb is that once the neckline is broken, the downside target is equal to the decline that immediately preceeded it.

Thus, one could look to these levels for the market to take its next breather: 525 on the Russell 2000, 925 on the Standard & Poors 500, 1900 on the Nasdaq Composite and 8500 on the Dow Jones Industrial Average. And, these levels, or some approximation thereof, should be reached BEFORE the actual crash occurs, if there is one.

The only safe places to hide capital are Utilities, Oil Companies with a high dividend, Gold (physical), the Dollar and ultra-safe Bonds. For the aggressive, inverse ETFs such as FAZ and TWM ought to provide at least a good hedge, but also a very risky, but potentially very profitable trade.

I see the Bad Moon Arisin', I see trouble on the way....

Marko's Take

Fasten Your Seat Belts

2010-08-20T07:44:00.000-07:00

The entire financial and business world has now learned the two most important words: Hindenburg Omen (HO). We have written about this indicator extensively, with trading floors, chat rooms and even the mainstream press doing articles. Until now, the confirmation of the indicator has been in dispute. That will now change.

In today's trading, which is also a triple witching day, the confirmation is now a done deal. Ironically, this is quite possibly the last time this indicator will be useful or viable. However, if you choose to ignore it, well then be prepared to take a major hit to your financial fortunes.

Prominent wall street analysts such as Joseph Battapaglia, have derided this indicator. Of course, Mr. Battapaglia is well know for beating the internet drum all the way to the top and then to the bottom of the crash in technology stocks. With all due respect Joe, haven't you learned your lesson?

Mr. Battapaglia is hardly alone in his disgust. In fact, the major brokerage houses rarely, if ever issue sell recommendations. Abby Joseph Cohen, a perma-bull if there ever was one, never met a stock or market she didn't like. Never has thought that any financial asset was overvalued. Dear Abby, perhaps you should write an advice column? Naw, it's been done. Never mind!

Now that the HO has made the Wall Street Journal, CNBC, The Drudge Report, Huffington Post and Wikipedia, it will become too well known to be useful ever again. That's how technical analysis works. The minute everyone knows is the very moment that no one can benefit.

For investors, the key here is survival. Safety can be found in very few places: Gold, the Greenback, high quality bonds, high quality utilities and oil companies. But, it would be far more prudent to let this impending waterfall decline fully express itself. There ought to FAR better entry points.

In the case of Gold, for example, consider the likelihood that the mega hedge funds are probably being hit with margin calls and will need to sell the only liquid assets they have. Thus, it is imperative that position sizes be kept fairly small, temporarily.

In addition, most people are long a variety of financial assets such as real estate and employment. These, too, will affected. If you're so inclined, a strategy of hedging your balance sheet is advisable. My personal preference is to place some portion of your portfolio in inverse ETFs such as FAZ and TWM. But, be aware that these are NOT for the feint of heart and will subject you to wild swings and increasing volatility.

Investors need to consider the emotional impact of watching their net asset values bounce around like a pinball machine. No point in subjecting yourself to what is sure to be a tremendous amount of angst.

Marko's Take

The Great Bond Bubble?

2010-08-19T07:25:00.000-07:00

Pimco's Bill Gross, no stranger to the bond market, has opined that there is a bubble indeed. And, for good reason. Treasury yields are at generational lows. And, the bull market in bonds has lasted for about a decade. So, how much lower could bond yields possibly go?

Bonds carry two types of risk. One is the risk of default. Two, is what is known as "duration" risk, or the impact on principal from changes in prevailing interest rates. Duration is the more significant since, given the very low rate structure, any rise in rates will result in capital losses which will not be offset by the yield.

The longer the maturity, the greater the duration. For example, if one holds a 30 year maturity, even a 1% rise in rates will produce a double-digit loss.

The default risk is not insignificant, but it is fairly low since the Federal Reserve (FED) can simply print money, if necessary to ensure that maturities are honored.

So, the ingredients of a bubble are certainly present and, in fact, Gross may be correct. However, "Marko's Take" believes that for the intermediate term, bond yields will head lower still.

Bond yields are driven by several factors. Inflation, supply and demand and probability of default are the most critical. Currently, given the now approaching "Second Dip", inflation is not likely to accelerate. In fact, we are more than likely in the early phases of a new DE-flation scare.

If we look to the last two decades in Japan, we can speculate as how low interest rates can go. The "Land Of The Rising Sun" now has become "The Land Of The Falling Yields". Tokyo has been mired in a depression since its own stock market and real estate bubbles popped simultaneously in 1990.

Naturally, at some point, as the national debt is monetized through liberal use of the printing press, we can expect a re-emergence of inflationary pressures. That will happen in the not-so-terribly distant future. When it does, Gross will be correct, but it may not occur for months or years.

Bond investors have nothing but poor choices. If one invests in short-term bonds to avoid the duration risk, the yields are extremely low, especially on an after-tax basis. The 2 year note is at a fat 0.48%. If one reaches for yield by purchasing longer maturities, one faces substantial principal risk. Thus, allocating a good portion of one's portfolio to fixed income is not particularly attractive.

A better choice for fixed return would be higher grade utility stocks. They have generally paid good dividend yields which grow over time. Their risk is low since utilities are regulated monopolies whose product is necessary, unless, of course, you wish to have no light, no heat, no gas and no electricity. A second group of high dividend paying companies are oil stocks. Wanna try living without transportation?

In the current environment, attractive investment opportunities are few and far between. We continue to recommend holding a portion of assets in GOLD while staying liquid in anticipation of a MUCH better buying opportunity.

Marko's Take

Showdown In The Middle East?

2010-08-17T08:00:00.000-07:00

As if the world and the United States didn't have enough holes in their collective dams to plug, here comes yet another leak. Based on a recent interview with John Bolton, who has served as an interim ambassador to the United Nations from August 2005 to December 2006, action against Tehran must be taken within days, or risk a nuclear enemy in the resource rich Middle East.

Israel has days to launch a military strike against Iran's Bushehr nuclear facility and stop Tehran from acquiring a functioning atomic plant, Bolton said.

Iran is to bring online its first nuclear power reactor, built with Russia's help, on August 21, when a shipment of nuclear fuel will be loaded into the plant's core. Russia, voted for the sanctions, yet has assisted Iran in bringing this facility on line. What does Russia care? They are one of a small group of countries whose oil supplies are growing. No Peak Oil for them.

At that point, Bolton warned, it will be too late for Israel to launch a military strike against the facility because any attack would spread radiation and affect Iranian civilians.

"Once that uranium, once those fuel rods are very close to the reactor, certainly once they're in the reactor, attacking it means a release of radiation, no question about it," Bolton told Fox Business Network.

Absent an Israeli strike, Bolton said, "Iran will achieve something that no other opponent of Israel, no other enemy of the United States in the Middle East really has and that is a functioning nuclear reactor."

The UN Security Council hit Tehran with a fourth set of sanctions on June 9 over its nuclear programme, and the United States and European Union followed up with tougher punitive measures targeting Iran's banking and energy sectors.

Bolton doubts that any military action is forthcoming, however. In fact, despite his warning, he believes the window of action may have already closed.

The significance of this to investors is multi-fold. In the first place, any military action would undoubtedly cause a major disruption in Middle East oil and a closure of the Gulf of Oman shipping lanes. That would have grave consequences on the world economy and the financial markets.

Secondly, the other impact would be a heightened crisis bid in Gold. One can only imagine the resultant spike in the price of Gold. We could see a move of $100 per ounce in minutes or even more.

A deflationary scare might suddenly turn into an inflationary scare.

For the record, one must believe that the odds of such a dramatic occurrence is pretty low. The world is already engaged in numerous military conflicts and resources are quite constrained for more military spending. But, it does alter the investment calculus. One would be well-advised to maintain some positions in assets that benefit from crises. GOLD.

Marko's Take

Hindenburg Omen All Over The Financial Press

2010-08-15T08:45:00.000-07:00

Once a very arcane and unknown indicator, the Hindenburg Omen (HO) has now hit the big time. We've written several pieces about it. But, it's time to make a few corrections. Mea Culpa.

Stories have now appeared in the Wall St. Journal, Huffington Post, Wikipedia, the Drudge Report and even CNBC. A good deal of information presented about HO is incorrect, including some presented in Marko's Take.

Unfortunately, the lack of understanding has led to many rumors and innuendos, which is NOT an Italian suppository! Many readers have pointed out some of our incorrect conclusions, so let's take some time to review the evidence.

The Omen, named after the famous German airship in 1937 that crashed in Lakehurst, N.J., is a technical indicator that foreshadows, not just a bear market, but a stock market crash. Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.

Mr. Miekka came up with the Omen in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week New Highs and Lows and the moving averages of the New York Stock Exchange. He said the HO's name was coined by a fellow market technician, Kennedy Gammage, when they found out the name "Titanic" already had been taken.

The confluence of data used by the Omen was officially tripped this week. There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total. Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.

The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock market declines that can be considered crashes.

Even the experts, however, aren't in agreement. Robert McHugh believes that we have had one HO, which occurred on August 12th. He maintains that the HO is NOT confirmed. And, from McHugh's work, the trigger is 2.2% New Highs and New Lows, not the 2.5% that Miekka believes.

According to McHugh, the odds of a crash following an HO are 30%. However, no crash has occurred without the presence of an HO. Thus, a crash requires a confirmed HO, while an HO does NOT guarantee a crash. According to McHugh, there have been 27 confirmed HO's and 8 market crashes.

McHugh writes that with the Federal Reserve (FED) pumping liquidity into the financial system, the market will have a source of buoyancy. I'd like to suggest to Mr. McHugh that he obtain a subscription to Shadow Stats, and, of course, Marko's Take.

According to John Williams, M3 is declining at an historic rate. In fact, akin to that experienced during the Great Depression. For more on the powerlessness of the FED, click here: http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

In addition, McHugh should review the work of Steven Puetz. According to Puetz, the planetary alignment is ideal for a crash to occur. For a review of Puetz' findings, click here: http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

Another expert in astro-harmonics is noted analyst Arch Crawford. Arch has been awarded many "market timer of the year" awards and he sees a crash coming.

But, there are other reasons to determine that a major decline is not far off. For one, the ominous Head and Shoulders chart pattern. The same pattern that existed just prior to the market collapse of 2008-09.

Regardless of the trajectory of the market, the one thing we must be aware of is that the odds of upside from here are extraordinarily low. The odds of a meltdown are pretty damn high. I wouldn't be standing on the train tracks with a loud "toot toot" getting closer every second.

Marko's Take

On Sunday, August 22nd, a most Un-ominous event will be taking place. The California Wildlife Center will be sponsoring it's annual fundraiser called "The Wild Brunch: Fawntasia". For more information on purchasing tickets or donating, please click here: http://cwcthewildbrunch12.eventbrite.com/.

Hindenburg Omen: 3rd Time's The Charm

2010-08-12T07:40:00.000-07:00

Recently, we've been covering a most off-the-run indicator called the Hindenburg Omen (HO). For some background, click here http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html. For the indicator to be confirmed, it must occur in clusters within an approximate 5 or 6 week window. Number 3 just occurred in this morning's trading.

The news gets worse. Last evening, Cisco Systems' (CSCO) John Chambers, always the optimist, gave a somewhat pessimisstic outlook for the economy on the conference call following the release of Cisco's earnings.

Revenue for the latest quarter fell short of analyst expectations at Cisco Systems Inc., and Chambers said customers were expecting a slowdown in the economic recovery. Chambers goes on "In terms of the economy, it's mixed signals. ... The majority of my customers believe the economy is going to continue just going slowly going up, but very slowly. Not what they would have said even just three to four months ago in terms of their expectations."

For Chambers, this is tantamount to calling for a Double-Dip Hyperinflationary Depression. He must be a closet reader of "Marko's Take".

So, while corporate earnings for the 2nd quarter came in at pretty decent levels, they are irrelevant. What's important is the outlook, which is mixed at best.

What's also mixed is the situation with Gold and precious metals stocks. On the one hand, Gold is holding up remarkably well and should continue to do so. Even in the oncoming deflationary freight train, Gold may continue to get a major crisis bid as it did at times in the meltdown of 2008-2009. On the other hand, it is a very liquid and salable asset. If hedge funds and other investors get margin calls, it is the easiest way to raise liquidity. Ultimately, as hyper-inflation rules the day, Gold will absolutely sky-rocket.

I continue to be short-term neutral on the precious metals sector. There ought to be a better entry point, but that is far from guaranteed. If missiles fly in the Middle East, Gold could jump by $100 per ounce overnight. If the stock market meltsdown, as we expect, Gold could fall by $100 per ounce overnight. It could do both on consecutive days. I would still recommend maintaining some position, just in case, but would be cautious about betting the farm...yet.

The best play, in my mind continues to be certain inverse ETFs. These are highly volatile, not for the feint of heart, but a great way to hedge, at the very least. Again, I would NOT recommend betting the farm on these, either.

If you don't like inverse ETFs, fine. Stay in cash, and be thankful you have some. Lot's of folks are about to be wiped out. Please don't let yourself be one of them.

Stay tuned.
Marko's Take

On Sunday, August 22nd, the California Wildlife Center will have it's annual fundraiser called "The Wild Brunch: Fawntasia". If you're in the Southern California area, and wish to come down and support this fabulous cause, tickets can be purchased by clicking here: http://cwcthewildbrunch12.eventbrite.com/.

Unusual Uncertainty Meets QE2

2010-08-11T02:56:00.000-07:00

Ya gotta love them boys at the Federal Reserve (FED). Alan Greenspan gave us asset bubbles while warning about "irrational exuberance". Now, "Helicopter Ben" Bernanke gives us "unusual uncertainty" and "quantitative easing" (QE).

If you missed your class on QE, here's a crash course. It refers to a series of extraordinary measures that the FED is prepared to undertake to stimulate the economy. Bernanke earned his nickname by saying that the FED was prepared to throw money out of helicopters if that's what it took.

If the FED has been trying to inject liquidity into the system, they've done one helluva lousy job. The broadest measures of money supply, known as M2 and M3, are plunging at record rates. In fact, they are at Great Depression levels of reduction. Bernanke is an academic and a student of the Great Depression. Specifically, his interest has been to attempt to understand what went wrong. So, the helicopter plan was borne out of this knowledge, although clearly he was being figurative and not literal.

The dropping money supply, however, is probably not entirely Bernanke or the FED's fault. An uncontrollable variable, called "velocity", is providing a stiff headwind against the FED's efforts. Velocity is a measure of the rate at which money circulates. If everyone were to put their savings under the mattress, for example, velocity would be zero. On the other hand, if folks were to be engaging in a lot of transactions and borrowing to finance growth, velocity would be high.

Velocity is hard to control, since it's the result of trillions of personal decisions. It is a function of consumer and business confidence. Low confidence equals high risk aversion and no willingness to expand, therefore, low velocity.

It is believed that the FED will monetize its mortgage portfolio and use the proceeds to purchase long term U.S. Treasury Bonds. That will do absolutely NOTHING to increase velocity. In fact, interest rates are at generational lows already, and may go lower if the economic downturn intensifies as we expect. Japan, a decent analog, has sub 1% long term rates.

Using FED funds to purchase Treasury Bonds is nothing more than a monetization of the U.S. budget deficit, now running at $1.5 trillion per year.

Unfortunately, the FED is powerless. Yes, you read that right. The FED is virtually powerless. They can't reduce rates which are already near zero. Any policy moves like changing reserve requirements or Open Market Operations will have absolutely no effect in the current business climate. To be effective, the budget needs to be brought under control, jobs need to be created and confidence needs to be restored. However, none of those can happen as long as the FED is powerless to stimulate the economy. The very definition of a vicious cycle if I ever heard one.

We are facing an impending economic death sentence. The only remaining question is whether we die by lethal injection, electrocution or hanging.

Marko's Take

On Sunday August 22nd, I would like to invite any Southern California readers to join me for an event sponored by the California Wildlife Center, called "The "Wild Brunch: Fawntasia". For more information on this organization and to purchase tickets for the event, click here http://cwcthewildbrunch12.eventbrite.com/.

Peak Oil Loses Matt Simmons

2010-08-09T08:45:00.000-07:00

Matt Simmons, the chief advocate of Peak Oil, died of an apparent heart attack last night. The original theory was developed by M. Hubbert King. Has the theory held up?

For some background on Peak Oil, it can be reviewed by clicking this recent piece: http://markostake.blogspot.com/2010/05/peak-oil-update.html.

Recent statistics from the International Energy Agency (IEA) bear out Hubbert's predictions. Growth in worldwide oil demand has slowed but continues to grow. Currently, the planet uses approximately 86 million barrels per day (mbd). This is projected to grow to 88 mbd by late 2011. Of course, an intensifying downturn in the global economy is likely to ensure that this forecast will not be met.

Peak Oil, however, refers to the production side. It anticipates a growing shortage as existing oil fields commence an inevitable and accelerating decline, while the alternatives are still very slow in being developed. According to the IEA, world production averaged 86.6 mbd in 2008 and fell to 85 mbd in 2009. It has rebounded in 2010, but has fallen in the 2nd quarter.

OPEC, which produces just less than 40% of global supply, averaged 28.9 mbd in June, down by 65 kbd from May. A lull in OPEC crude capacity expansion is expected between now and year-end 2011. Non-OPEC supply is expected to rise by a modest 0.4 mbd in 2011 to 52.8 mbd, following a 0.8 mbd growth in 2010. Increases from Brazil, global biofuels, Azerbaijan, Colombia, Ghana and Oman are expected to offset declines from Mexico and the North Sea during 2011.

The imminent "Double Dip" will undoubtedly have a major bearing on future production, especially if prices decline to possibly much lower levels in the intermediate term.

Peak Oil is significant for a variety of reasons. For one, it undoubtedly was a major factor in the invasion of Iraq. It has a bearing on future potential military actions against Iran. Was there a connection to British Petroleum and the infamous oil spill and U.S. policy on offshore drilling? They don't call it "Black Gold" for nothing.

Another "Windfall Profits Tax" seems a virtual certainty in light of the out-of-control budget deficit. Our roads are paid for by Gasoline taxes. Virtually every industry is affected by oil prices. The automobile industry, the transportation industry, the mining industry and the military are all affected by oil. So is foreign policy. Global Warming? Cap and Trade? Yeah, I'd say "Peak Oil" is important.

Unfortunately, profiting from a knowledge of "Peak Oil" is most difficult. The chief beneficiaries, shareholders of ExxonMobil, Chevron, British Petroleum and Conoco-Phillips will not be allowed to enjoy the profits which are politically unpopular. So, the only way to invest is in alternatives, or to own royalty trusts whose cash flows rise and fall with oil prices. That is, assuming they will be exempted from future legislation.

The most viable response for the average American is conservation. If one can afford a hybrid or install solar panels, great. But, most people can't. All most of us can do is turn down our thermostats and burn wood in the fireplace. I hope I never see another line at the gasoline pump again. But, unfortunately, I suspect that vestige of the 1970's will return.

Marko's Take

Clowns To The Left Of Me, Jokers To The Right

2010-08-06T21:22:00.000-07:00

Recently, a rather sizable number of high profile mega-billionaires announced an intention to donate most of their net worths to charity. Very commendable. Or was it?

More than 30 U.S billionaires have pledged to give at least half of their fortunes to charity as part of a campaign spearheaded by Warren Buffett, the investor, and Bill Gates, the Microsoft founder.

The list of those signing up, posted on The Giving Pledge’s website, includes such notables as Michael Bloomberg, New York’s mayor, Ted Turner, the media mogul, Barry Diller, the chief executive of IAC, and David Rockefeller.

The financial sector is well represented, with former Citigroup chairman Sandy Weill and his wife Joan, David Rubenstein, the co-founder of the Carlyle Group, Pete Peterson, the co-founder of the Blackstone Group, Ron Perelman, the investor, and Julian Robertson, the hedge fund manager, on the list.

Ok, so what could my beef with this, oh so generous act, possibly be? Well, many of these folks are politically active and have tended to be supporters of higher taxes and bigger government. Mr. Buffett supported Hillary Clinton in 2008. Moderate Republican Michael Bloomberg is viewed as a possible future Presidential candidate. George Soros and Ted Turner are ardent Democrats.

Now, if they love Uncle Sam so much, why don't they pledge their assets to help lower the budget deficit? After all, charities and the Federal Government are BOTH involved in wealth distribution. So, why would they prefer a PRIVATE solution? Mr. Buffett just LOVES higher taxes for everyone but himself. So does Mr. Soros.

But the rich do gooders have so many ways to entertain us. Take John Kerry, married to the heiress of the Heinz ketchup fortune. Massachusetts Senator John Kerry is docking his family's new $7 million yacht in neighboring Rhode Island, allowing him to avoid paying roughly $500,000 in taxes to the cash-strapped Bay State.

If the "Isabel" were kept at the 2004 Democratic presidential nominee's summer vacation home on Nantucket, or in Boston Harbor near his city residence, he would be liable for $437,500 in one-time sales tax. He would also have to pay $70,000 in annual excise taxes. Now that Mr. Kerry has been exposed, he has had to cough up the half million.

And, what rundown of political hypocrisy would be complete without mentioning Al Gore. Mr. Global Warming. For more on how idiotic this theory is, click here: http://markostake.blogspot.com/2010/08/very-inconvenient-truth.html.

Since "An Inconvenient Truth" won an academy award, we can assume that he lives a completely green lifestyle, correct? Uh, not exactly.

The average household in America consumes 10,656 kilowatt-hours (kWh) per year, according to the Department of Energy. In 2006, Gore devoured nearly 221,000 kWh, more than 20 times the national average!

Last August alone, Gore burned through 22,619 kWh, or more than twice the electricity in one month than an average American family uses in an entire year. As a result of his energy consumption, Gore’s average monthly electric bill topped $1,359.

Since the release of his documentary, Gore’s energy consumption has increased from an average of 16,200 kWh per month in 2005, to 18,400 kWh per month in 2006.

Gore’s extravagant energy use does not stop at his electric bill. Natural gas bills for Gore’s mansion and guest house averaged $1,080 per month last year. Very convenient, indeed, Mr. Gore.

How about House Ways And Means chairman Charles Rangel being caught for evading income taxes? And, of course Treasury Secretary Timothy Geithner have tax evasion issues of his own?

Sarah Palin, while governor of Alaska, passed a windfall profits tax. Hello????

Now, before we depart without recognizing more of our friends on the Republican side of the aisle, let's compliment the "family values" of folks like Newt Gingrich and Tom Delay, and lots of others. Yeah, hypocrisy is very bi-partisan.

Here I am, stuck in the middle with you.

Marko's Take

Another Hindenburg Omen

2010-08-06T09:10:00.000-07:00

The horrible jobs report just released this morning showed what we've been saying all along. There is NO recovery. Interesting that economic adviser Christine Romer announced her resignation last night. Could she be a regular reader of "Marko's Take"? Could she have known that the jobs report was going to be so damn bad?

More important to investors is the very, very likely occurrence of another Hindenburg Omen in today's trading. For more information on the significance of this, click here: http://markostake.blogspot.com/2010/07/hindenburg-omen-foretells-coming-market.html.

Another relevant item is the calendar. The 3 major NYSE crashes occurred within a 6 week window of the equinox, which is typically September 22. That would suggest that after August 10th, the market will be within this time frame. Tuesday is August 10th. It may occur anytime thereafter. Crashes also occur WELL below the level of the preceeding market peak. In general, the largest down days in history followed a rapid drop of 20-25% off the peak. If history repeats, the coming crash should commence from BELOW Dow 9000!

If one goes back just to the crashes in the NYSE, we had the meltdowns of 2008, 1987 and 1929 as examples. All were late summer, early fall events. Don't ask me why. I'm still trying to understand what solar eclipses and full moons have to do with anything financial.

During the lead-in period to a crash, the market experiences what technicians refer to as "90%" days. These refer to a preponderance of trading volume to either advancing or declining issues. During the sizzling advance of the last 3 weeks, we experienced several of these days. And, during the decline that just preceeded it, we had a number of 90% downside days. This schizophrenia is what the Hindenburg Omen measures: an emotional dis-jointedness that is conducive to a sudden shift from euphoria to panic.

A key question for investors is what they should do now. If, as I believe, we are in another deflation scare, the only safe places are likely to be ultra-high quality bonds, and probably the U.S. Dollar.

What about Gold? In the near term, it's hard to be definitive. On the one hand, it will undoubtedly benefit from a "flight-to-safety" bid. On the other hand, the temporary deflation scare will put pressure on all hard assets. Under just about any forseeable scenario, Gold ought to hold up better than virtually any other asset. However, there MAY be a better entry point. I'd prefer to wait and see on this one.

In the intermediate to longer term, Gold remains in a very powerful bull market. With the inevitability of the introduction of "Quantitative Easing 2", and more stimulus spending in the offing, the seeds of hyper-inflation are being sown. Once we succeed in completely debasing the currency, where can investors protect their wealth except by owning Gold? In addition, the long underperforming junior miners should finally see those magnificent parabolic advances that have been long anticipated. Again, there should be better entry points.

This is no time to put your head in the sand.

Marko's Take

Arranging Deck Chairs On The Titanic

2010-08-04T08:11:00.000-07:00

It never ceases to amazes me how investors, who are in the business of pricing reality, can completely ignore the obvious. This became especially true during the internet bubble, as anything with a dot com on the end suddenly became worth billions. Remember K-Tel? Dr. Koop? I think you get the picture.

The same phenomenon is taking place today. While economic statistics continue to demonstrate a rapidly deteriorating economy, investors are all too willing to ignore everything and extrapolate a very unrealistic view into the valuation of equities.

The second quarter Gross Domestic Product (GDP) figures are a perfect case in point. The headline number of 2.4% was already signficantly below estimates made just weeks earlier. And, if we examine the data more closely, it is apparent that the quarter was even weaker than the estimate would suggest.

Inventories have had a major impact on growth over the past few quarters, and the change was estimated to have added more than one percentage point to the 2.4% annual rate of GDP growth reported by the Commerce Department Friday. But factory-order data for June shows that the estimate used to calculate the preliminary number was way off.

The report noted a 1.7% drop in nondurable goods inventories in June following a 2.5% drop in May. The Commerce Department had assumed a 0.5% rise for last month.

According to Shadow Stats, GDP revisions back to first-quarter 2007 confirmed that the economic downturn was more severe than previously reported. Rising inventories and slowing growth have set the stage for renewed quarterly GDP contraction in third-quarter 2010.

The upside revision to first-quarter 2010 growth from 2.74% to 3.73% was also largely the result of inventory growth, which accounted for 71% of the first-quarter’s total gain. Revised real growth was 1.09% for first-quarter final sales, or GDP net of inventory changes. Inventory gains also accounted for 44% of the 2.39% total growth in the second-quarter, with real final sales growth of 1.34%.

Even price inflation quietly was much worse than expected. The GDP implicit price deflator showed an annualized pace of inflation in second-quarter 2010 of 1.83%, up from a revised 1.05% in the first-quarter.
In an unusual divergence, annualized inflation for the Consumer Price Index in the second-quarter was a contraction of 0.72% versus a positive 1.53% in the first-quarter. The higher the inflation rate used in deflating the GDP, the weaker the inflation-adjusted number and vice versa.

While most economic data is backwards looking and has little to no predictive value, it's clear that the "recovery" has been nothing but a phantom. And, with money supply figures contracting at unprecedented rates, the economy and stock market are destined to follow.

Marko's Take

A Very Inconvenient Truth

2010-08-01T22:41:00.000-07:00

Al Gore sure did lay out a compelling case. Glaciers are receeding, ocean levels are rising and rainforests are disappearing. All those SUV's we selfish Americans drive, putting tons of carbon monoxide and carbon dioxide into our, oh so fragile, atmosphere. We've put holes in the ozone layer and now we're all at risk for skin cancer. So, the solution is to shut down the economy and go back to an agrarian life. Oh wait, we can't do that, either. Livestock flatulence is also a huge danger. My, oh my.

Mr. Gore obviously lost a step since his invention of the internet. We can only expect so much from this humble Tennessee man, whose bid for the Presidency was stolen by George Bush. Never mind that all those disenfranchised Florida voters couldn't tell the difference between GORE and NADER. And only Republicans cheat at elections and voter registration. Just ask Acorn. But I digress.

The fact is that the global average temperature (GAT) has risen for the last 140 years. From 1920 to 1940, average global temperature increased by about 0.4 degrees. From 1940 to 1980, it declined. From 1980 to 2000, it advanced by approximately 0.6 degrees. Are you seeing the problem here? GAT rose before there was a huge industrial base and autos. Then it declined as the country went to war and became heavily industrialized and during the period in which the automobile became a consumer staple. Then it rose again, but only AFTER 1980.

Still not convinced? How about the Martian Polar Ice Caps. Both Earth's and Mars' ice caps are shrinking! I don't know about you, but I have yet to drive an SUV on Mars. Didn't see any sheep up there, either.

This suggests that the warming is not only natural but astronomical in nature. All it takes is for our solar system to enter a place in the Galaxy when there exists less space dust to reflect the heat and sunlight back. We had an ice age once, remember? Our planet does NOT have constant temperatures. Temperature change is not only natural, but part of the cycle of life.

So, why the hysteria? Hmmm, could it have something to do with money? Nah. Not our angelic environmenal friends, who certainly do NOT have an agenda. And, of course, the press has no agenda. Shoving idiotic legislation like cap and trade down our throats is a boon to all of our trading partners. So, as you can see, the "global warming" lemmings might just have some conflicts of interest here.

Even if global warming were completely scientifically supportable and could be shown to result from fossil fuels and pollution, has anyone asked why a warmer planet is bad? For every loser, there is a winner. If your climate is cold, a few degrees warmer would be welcome. Some plants and crops will do better. Some won't. Some animals will fare better, some won't. Some industries will benefit, some won't. Some real estate will benefit. Some won't.

The only beneficiaries of global warming are the hysterical doom-sayers who have aligned themselves with this preposterous cause. The rest of us are expected to give up our SUVs and lose our jobs. Sounds like a terrific deal to me. All this makes me hot under the collar.

Marko's Take

California Faces Issuing IOUs Again

2010-07-29T08:47:00.000-07:00

California, and its largest city, Los Angeles, continue to be embroiled in a political deadlock. Yesterday, Governor Arnold Schwarzenegger released a new executive order requiring state workers to take 3 unpaid days off per month starting in August. State workers were furloughed a total of 46 days when Schwarzenegger issued a similar order in February 2009, which translated to a pay cut of about 14%.

California faces a $19 billion deficit for the fiscal year that began July 1, and Schwarzenegger is demanding pension, tax and spending reforms in the new budget. He said that if the Legislature doesn't give him a budget that meets his expectations, he won't sign it.

It's unclear how long the latest round of furloughs could last, as Schwarzenegger and lawmakers enter the 5th week of the new fiscal year without a balanced budget. Earlier this week, the governor hinted that he might not sign a budget before he leaves office next January unless it includes pension, tax and spending reforms.

State Controller John Chiang has warned that he will start issuing IOUs in August or September if the budget stalemate drags on in the Legislature. Chiang said the cash-saving measure is necessary because the state is projected to run out of cash in October. While thus far IOUs have been honored at face value, it is increasingly likely that recipients may ultimately have to take a substantial discount, if the budget crisis isn't resolved. In the 19th century, when several states had to issues notes, holders lost about half face.

Los Angeles, like many other cities, is struggling with a budget crisis of its own. The situation is so grave that city officials have been involved in tense negotiations with the Department of Water and Power (DWP) over the transfer of funds into the city treasury.

On Tuesday, executives with the DWP issued a sharply worded defense of their decision to withhold $73.5 million from city coffers in the middle of a recent fight over electricity rates, saying they did so to protect the utility's credit rating and its customers.

After a lengthy standoff between the council and DWP over proposed rate increases, City Controller Wendy Greuel reviewed the utility's records and concluded that, contrary to its claim, the utility could have made the promised transfer to the cash-strapped city budget without first being granted the increase. Official with the DWP, in turn, accused Greuel of making misleading statements.

Unlike investor-owned power companies that pay regular dividends to stockholders, the DWP transfers more than $200 million each year to the city's general fund, which pays for police, fire and other basic services. This year, that transfer was broken into two installments — $147 million followed later by $73.5 million.

With so many states, cities and counties in financial trouble, it would seem inevitable that some will be forced to default. It's highly unlikely that California, which has the 8th largest economy in the world, on a stand-alone basis, would be allowed to go under. However, cities have fewer options to plug their budget gaps. If even one major city becomes unable to meet their debt obligations, the spillover into the investor community will be most severe.

And, if cities begin to default with police and fire support becoming extremely understaffed, can civil disobedience be far behind?

Marko's Take

Economic Recovery Anything But Durable

2010-07-28T07:54:00.000-07:00

While investors are drinking the Obama Administration's Kool-Aid and popping champagne corks over the slew of optimistic earnings reports and guidance, the economy continues to quietly deteriorate. This morning we were treated to another disappointment: durable goods. Add to that the ongoing weakness in real estate and sub-par retail sales and it's hard to understand the unbridled optimism that has suddenly gripped the markets.

Not that economic statistics are a good barometer of future market prices. Like earnings, they are backward looking and generally have ZERO predictive value. Markets typically turn well before the economy and corporate earnings. So, what's my beef?

The main problem with these economic data is that they are occurring in the middle of a so called "recovery" and one that began more than a year ago. At this stage, we should be seeing growth in employment, sales, economic output and an increase in taking on credit. None of those are happening.

Durable Goods came in well below expectations. The always wrong consensus had them rising about a percent. They declined by a percent.

Housing starts peaked in the 2005-2006 period at above 2 million units. From there, they dropped to about 500,000 at the bottom of the financial meltdown of 2008-2009. Since then, they have merely bounced around the lows. No material recovery in more than a year. We have not experienced the current low levels in decades.

June real retail sales rose at a 3.7% year-to-year pace, down from May’s revised 4.8% and from the first quarter's growth rate of 6.6%.

According to ShadowStats, adjusted for inflation, retail sales in May and June fell at an annualized pace of 7.6%. Compared to the peak in 2008, retail sales are still down 10%. If that pattern continues into the current quarter, a contraction in real third-quarter 2010 GDP would be a good bet.

What makes the economic sluggishness so worrisome is that it comes after the orgy-like expenditures and bailouts from the Obama Administration and near-zero interest rates. The Federal Reserve is pretty much out of bullets. The Obama Administration is out of bullets. Can you imagine how difficult economic conditions might become now that all the stimulative measures have already filtered through?

On Friday, the first estimate of Gross Domestic Product will be reported. Consensus estimates are for a 3.5% advance. That number would seem way too optimistic and sets up the market for a major surprise.

Don't get me wrong. Rising corporate earnings are great. They prove that corporate America can make the necessary adjustments to cope with the very harsh economic conditions. A victory for capitalism. But, if we are about to enter the "second-dip", tomorrow's earnings will come under renewed pressure. So, using this one data point in the absence of context will prove quite misleading and cause investors to make poor decisions.

Marko's Take

String Theory

2010-07-27T07:49:00.000-07:00

While in many ways the capital markets resemble what academics refer to as a "random walk", there is a hidden structure to how they work. The majority of investors believe that earnings are what's important. They are eventually, but NOT in the short-term. Valuation only provides us with guidelines, but says virtually nothing about timing. As they say, "Timing Is Everything".

The markets have now rallied for 14 of the last 16 days. Statistically, that's virtually impossible. In, addition, The Dow Jones Industrial Average (Dow) has had triple-digit gains 3 days in a row. That's unprecedented.

Strings of up and down days are followed by very few analysts. Not too long ago, I studied market strings. Here's what I found:

A streak of 7 days up or more is exceedingly rare. In fact, virtually every occurrence marked either a significant market top or bottom. These strings suggest exhaustive moves. Terminal moves. Moves subject to sharp and violent reversals. The same goes for strings such as 11 of 13 days or 9 or 10 days. They feel good, but they do NOT indicate market health.

The 2008-2009 market meltdown witnessed 8 down days in a row. This marked the the final panic lows. Now, we have an even more extreme string up. The waterfall decline we've been anticipating is all set up.

Markets make major turns at extremes of investor sentiment. Once everyone has bought in, and all the short-sellers have been forced to run for cover, who's left to buy? NO ONE! That's what makes the current string so dangerous. Everyone is bought in. Everyone thinks earnings will carry stock prices higher. The analysts warning you about coming problems have been temporary discredited.

The largest percentage moves up occur in bear market rallies. Virtually all of the 10 largest percentage moves up occurred either during the Great Depression or during the meltdown of 2008-2009. They're a sign of emotional extremes, NOT of market health.

Bull markets progress gradually. The bull's job is to make sure that as few people as possible ride the wave up. It's never easy. Any major move will have intermittent market smashes designed to scare the hell out of anyone. They are there to make you question your convictions. Bear market rallies are designed to keep you bullish, to keep you from selling and to make sure you hold your stock all they way to the bottom.

Thus, while it's tempting to conclude that this recent move up is indicative that "all's well", nothing could be further from the truth. All the extra-ordinary fundamental problems still exist. They are far from being solved.

So, if you're cautious but looking at the recent sharp move as indicative of a recovery, think again. The same type of sharp upward corrections have NEVER been indicative of a good buying opportunity. They don't now.

Remember, the key to this right now is SURVIVAL.

Marko's Take

Obama Fires Another CEO

2010-07-26T09:13:00.000-07:00

News reports of British Petroleum's (BP) CEO Tony Hayward being fired circulated the newswires over the weekend. As of this writing, BP has not yet made it official.

I've been wondering under what authority our President believes he has this power or moral authority.

Hayward is the latest in a pretty high level list of CEO's and executives to cross the increasingly authoritative Obama Administration. If Hayward is truly out, he joins General Motors's (GM) Rick Waggoner and Lehman Brothers' Richard Fuld. Fuld was not technically fired, but Lehman was allowed to go bankrupt, which eliminated Fuld's existance.

Of course, our president has spared EVERYONE at his pet firm, Goldman Sachs (GS), aka "Government Sachs". So what if they were central to the ruination of the global economy? They admitted no wrongdoing. Why jump to conclusions?

Let's not forget the "shotgun wedding" of Bank of America and Merrill Lynch. Was Kenneth Lewis pressured to acquire Merrill? Nah! Lewis clearly WANTED to overpay.

Don't get me wrong. All of these executives had a lot to answer for. However, these matters were best addressed by the companies' respective board of directors and shareholders, not by presidential dictum.

My question concerns exactly what gives our President either legal authority, moral authority or the basic qualifications to be making these uni-lateral decisions.

President Obama has NEVER held a private sector job. President Obama despises capitalism. President Obama has NEVER run a company, nor created a single job except at government expense. What makes him qualified to stuff his political views down corporate America's throat?

It's easy to demonize these companies. NO company in the America exists to benefit either consumers or environmentals or regulators. Their mission is to benefit shareholders. The interest of shareholders may be at odds with a political agenda. If you want social responsibility, better you turn to the many 501c3s.

If we extrapolate, we can conclude that NO CEO has any job security. If you run a company involved in tobacco, alcohol, fast foods, munitions, gaming, pharmaceuticals, finance, banking, or just about anything else, you are at grave risk. If you kowtow to Obama, your shareholders will be upset. If you protect your shareholders, Obama will be upset. Sounds like a pretty bad recipe to me.

Of course, if you're a racist, like Sherry Sherrod, you get an apology. Last Wednesday, White House Press Secretary Robert Gibbs apologized to Shirley Sherrod, fired the day before from her job as Georgia Director of Rural Development for the Department of Agriculture. Ms. Sherrod's blatantly racist comments would have gotten virtually anyone else run out of town. Trust our President. He can separate right and wrong.

You get Obamacare whether you want it or not. Never mind that he exempted Congress and himself from the legislation that was touted as so good for America. Oh, and you're not paying enough in taxes. Just because your small business is the only driver of the economy. Pay more in taxes and let Uncle Sam spend the money that they believe was never yours in the first place. Only by their good graces do they allow you to keep any of it. Be grateful.

The press told us that Richard Nixon was an imperial president. I don't recall Nixon firing CEO's. Nor Reagan, nor Kennedy, nor Johnson, nor Ford, nor Carter nor Clinton nor either Bush. In fact, has ANY CEO being fired by a sitting president? Isn't the private sector supposed to be PRIVATE?

Obama has a legal background. Has he read the Constiution?

Marko's Take

Has The Crash Sequence Begun?

2010-07-21T08:28:00.000-07:00

All the necessary conditions are in place. After Tuesday's trading, both the Dow Jones Industrial Average ( DJIA) and the Standard & Poor's 500 (SPX) had posted gains in 10 of the last 11 trading days. Such strings are very, very rare. They indicate panic. In this case, all the short-sellers who had gotten aggressive, have been sent running for cover.

Market sentiment, which had gotten quite bearish, is now pretty bullish especially on the back of a slew of earnings reports which have deluded investors into believing that the economic "recovery" is gaining momentum. It isn't. Apple is not enough to save the economy.

Earnings are backward looking. They have absolutely NO predictive value. In fact, market bubbles peak when the news is great. Market bottoms occur when the sky is falling. In 1929, economists believed that the market had achieved a new plateau. They were wrong. In 2000, investment analysts talked about a new investment paradigm of valuation not mattering. They were wrong. All those hot internet stocks went bankrupt by the dozens.

The important thing to note is that it is not too late to protect your remaining assets. Down 50%? Fine. You want to lose another 50%?

The most important goal for any investor here should be survival. There will be other times to participate in stocks and other investments. There will be lower risk entry points. Better that you preserve your liquid assets to enter when everyone else has been wiped out.

If you're new to this column, you may wish to read two recent pieces on why the current situation is so damn dangerous: http://markostake.blogspot.com/2010/07/8-more-reasons-to-avoid-stocks.html and http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

You can also profit from the coming market meltdown, but be aware that short-selling and the use of inverse ETFs is very treacherous and not for the feint of heart or risk-averse. I do, however, recommend at least a small position as a hedge to offset losses in your other assets.

Should you load up on Gold here or precious metals mining stocks? Probably not yet, even though Gold may perform well in a crisis situation. If we're in the middle of another deflation scare, they are unlikely to be unscathed. That said, Gold will probably be the best asset to hold value even in the worst scenario. However, as investors seek liquidity to meet margin calls or redemptions, they will be forced to sell the most liquid assets. Be patient. There will be a much better time to load the truck.

It's also time to review all your assets and exposures. Very few will escape the imminent market meltdown.
The only assets likely to perform here are very safe bonds. In a deflation scare, interest rates are likely to either stay very low or go even lower. The deservedly much-maligned U.S. Dollar ought to continue to see "flight-to-safety" interest.

If I'm right about what's coming down the pike, life as we know it will turn into life as we KNEW it.

Marko's Take

SEC No Match For Government Sachs

2010-07-15T23:11:00.000-07:00

Now let me get this straight. Goldman Sachs (GS), aka "Government Sachs", has just received the largest penalty ever imposed on a financial firm. Yes, a whopping $550 million.

Relative to Goldman's 2009 net income of roughly $12 billion, this represents less than 5%, or about two weeks worth of earnings. In the case of British Petroleum (BP), they were arm-twisted into establishing a $20 billion escrow fund, or about 15 MONTHS of 2009 income. BP's escrow fund is to compensate victims.

For Goldman's victims, they were assessed $300 million, payable to 2 European Banks. Forgive me, weren't there a whole lot of other victims? So, BP is paying about 70 times that of GS. Seems reasonable to me.

BP's market capitalization has fallen by about half from peak to trough, a wipe-out on the order of $100 billion. BP's shareholders are the public. Goldman's market capitalization is down only 20%. It's shareholders are very largely Government Sachs alumni in senior policymaking positions. And, of course, management.

Are you beginning to see the problem here?

BP may still have stiff penalties imposed on it. The investigation is far from over.

Ok, so one company's alleged negligence led to economic disaster and the other's to ecological disaster? Is one that many times worse than the other?

Could the difference have anything to do with the rather sizable number of GS alumni in the government? Lloyd Blankfein walks away unscathed. Tony Hayward is driven out of Dodge.

Goldman's settlement permits it to walk away, while admitting virtually NO wrongdoing. Do you think that BP will be so lucky?

One can assume that investigators and senior officials of the SEC knew what they were doing. After all, why would they EVER want to bring down their future bosses?

Goldman officials praised the settlement. Yes, you read that correctly. Goldman officials praised the settlement! Doesn't that, in and of itself, say something? Do you think for one minute that the remaining BP officials will be thinking what a great deal they got?

But, Goldman had another huge reason to celebrate: the passage of the financial reform bill. Not only are Goldman's business interests protected, but the bill establishes new regulatory bodies. A full employment act for Government Sachs at government expense!

Marko's Take

The RIB Countries

2010-07-15T09:23:00.000-07:00

The elite nations were nicknamed BRIC (Brazil, Russia, India and China). The very un-elite nations are referred to as PIGS (Portugal, Ireland, Greece and Spain). I propose a change to the membership of the elite.

China is in danger of losing its exalted status. Blasphemy? Not at all. The reasons for this have been discussed in these very pages http://markostake.blogspot.com/2010/03/non-bull-in-china-shop.html.

While the Chinese economy grew at 10.3% in the second quarter over the year before, this was significantly less than the 11.9% realized in the first quarter.  Beijing has undertaken efforts to cool down its economy, which shows signs of inflation and a property bubble. Recent measures enacted include increased required down payments and extreme restrictions on buying additional properties.

Although the slowdown was expected, other recently-released figures indicate that the economy could be cooling more quickly than forecast. Industrial production, which grew by 13.7% in June relative to the prior year, was much lower than May's 16.5% annualized increase.

The World Bank also cites factors such as a declining labor force due to China's demographics and lower increases in total factor productivity as reasons to expect China's growth rate to slow. It expects potential annual growth to be about 8.4% between 2010 and 2015, down from 9.6% from 1995 to 2009. From 2016 to 2020 the rate could fall further to 7% on average.  If the property bubble should burst and get ugly, this will undoubtedly reduce growth prospects even more.

India, on the other hand, does NOT have the same demographic issues plaguing China, which has taken steps to limit its birth rate. Long-term growth requires a pyramidal population structure.

India has not been growing as fast as China, but its growth may be more sustainable and healthy. The Indian economy grew by 8.6% last quarter.   It is not believed to be in danger of over-heating.

Brazil and Russia are among the very few countries with increasing oil reserves and output, a very critical asset during a time of "Peak Oil" and a growing possibility of military conflict in the Middle East.

Therefore, I'd like to propose that the elite nations now become known as RIB (Russia, India and Brazil).

The Chinese miracle may very well be coming to a pre-mature ending. The Shanghai Composite is looking very unhealthy.

Marko's Take

Bullion or Mining Stocks?

2010-07-12T08:54:00.000-07:00

All of us Gold Bugs wonder how best to allocate resources. It's no secret that mining stocks have proved to be a MAJOR disappointment for several years.

Over the last two years, the table below demonstrates how poorly mining stocks have performed relative to the metal itself. The HUI Gold Bugs Index,is the key benchmark for publicly traded Gold and Silver miners.

Time Frame                  HUI Peak                     Gold Peak
March, 2008                   515                               $1,025
December, 2009             510                               $1.225
June, 2010                      500                               $1,250

As is clear, mining stocks have failed to keep pace with the metal itself in a very major way.

The basic argument for investing in mining companies, as opposed to bullion, is that they have leverage relative to the metal. This has not been the case in recent years. In fact, despite accelerating earnings, they've performed rather dismally.

Gold, in my opinion, is, for the time being, the better bet. Its use as an alternative currency during a period of extreme worldwide monetary debasement is proving far more valuable. Mining stocks are still equities and subject to the extremely bearish winds now in motion for the stock market. There will be better opportunities to re-enter.

If we are entering another deflation scare, it's important to be aware that even the metal itself may be subject to some temporary pressure. There will probably be a better entry point for the metal itself, although, at this time, its chart still looks VERY constructive.

Federal Reserve chairman Ben Bernanke is a student of the Great Depression and is very aware of the relationships between money supply growth, economic activity and asset performance. Undoubtedly, as this new market smash fully expresses itself, the FED will be forced to undertake even more drastic measures to re-liquify the economy than it already has. Bernanke earned the nickname "Helicopter Ben" for proclaiming, on numerous occasions, that he would be prepared to drop money out of helicopters if that's what it took to get money circulating again. He may have to make good on that one.

In its desperation, the FED wil probably over shoot and, in so doing, sow the seeds of hyper-inflation. Then, all the ingredients for Gold to achieve vastly higher levels will be in place.

This is one of the reasons that successful investing is so damn tough.  You can be completely correct in a forecast and STILL lose money. All of us precious metals mining stock investors have stood back, watched the bullion advance and have been totally unable to cash in.

Extreme caution continues to be warranted here.

Marko's Take

8 More Reasons To Avoid Stocks

2010-07-08T23:40:00.000-07:00

After 2 days of scaring the wits out of anyone, including me, I thought that I'd review some of the additional possible trigger events for a stock market collapse that do NOT include eclipses or full moons.

Not in any particular order, these are all potential dangers for the stock market meltdown that I've written about over the past couple of days.

1. Military conflict in the Middle East

Without re-iterating why this situation is so dangerous, you can read some of the latest developments here http://markostake.blogspot.com/2010/06/showdown-with-iran-looms-closer.html.

2. Either a major default or a complete disintegration of the Euro-Zone.

For some recent information, try this piece on the countries' out-of-control budget deficits http://markostake.blogspot.com/2010/05/euro-zone-budget-deficits-go-parabolic.html.

3. A key state, county, or city default.

For more information, you can read the lastest here http://markostake.blogspot.com/2010/07/50-states-50-budget-nightmares.html.

4. Or, the inability of the United States, as a whole, to pay its debts.

For more information on this mess: http://markostake.blogspot.com/2010/05/us-budget-deficit-continues-to-spiral.html.

5. A trade war with China.

Read about it here http://markostake.blogspot.com/2010/06/us-sino-trade-frictions-intensify.html.

6. An inevitable and growing shortage of oil.

Yes, "Peak Oil" is not a myth. Don't believe me? Read this: http://markostake.blogspot.com/2010/05/peak-oil-update.html.

7. Intensifying problems in our financial system, most notably, the banking sector. http://markostake.blogspot.com/2010/05/banking-sector-problems-accelerate.html. Obama's most ill-advised new financial reform bill will only make things worse! http://markostake.blogspot.com/2010/06/obamas-latest-folly-financial-reform.html.

8. The commercial real estate sector (not to mention residential).

You can read about that here http://markostake.blogspot.com/2010/04/commercial-real-estate-losses-next-shoe.html.

If you've read this far, let me leave one more for you to ponder: The American Empire is on its last legs. This is a long one, but well worth reading to put everything above in historical context. http://markostake.blogspot.com/2010/06/12-steps-of-empire.html.

Now a truism that a lot of folks hold onto, is the notion that it's darkest before the dawn. Trust me, we will soon know dark!

Marko's Take

Hindenburg Omen Confirmed... Or, Was It?

2010-07-07T21:49:00.000-07:00

The Hindenburg Omen (HO) was described in yesterday's blog. For more on how it works, click here http://markostake.blogspot.com/2010/07/hindenburg-omen-foretells-coming-market.html.

For the HO to be confirmed, it must happen at least twice in a 36-day window. Did we get confirmation today? Well, that's a tough one.  According to Yahoo Finance, there were 102 new highs and 85 new lows out of 3,946 issues traded. That means that the new highs test was met, but the new lows test came in at 2.155% of issues traded. The trigger criteria calls for 2.2%. Are we supposed to round up?

But, the HO is not nearly the only reason to fear a market meltdown. There are a whole slew of others. Some are out there, some are not.

A man named Steve Puetz (pronounced "pits") is a student of stock market crashes. He has concluded that solar eclipses combined with full moons were somehow connected to the timing of market crashes. He does NOT suggest that full moons close to solar eclipses cause market crashes. But, his research does demonstrate that a full moon occurring close to a solar eclipse, in particular, seems to affect investor psychology in such a way as to transform investor emotions into panic.

His research found that 8 of the greatest market crashes in history fell within a time period of 6 days before, to 3 days after, a full moon that occurred within 6 weeks of a solar eclipse. Yes, you read that right!

Could this be random? Statistically, he found that for all 8 crashes to accidentally fall within the required intervals would be less than one chance in 127,000.

It's important to understand that EVERY solar eclipse must, by definition, occur within six weeks of a full moon, which occurs every 4 weeks. The combination does NOT mean a waterfall decline will ensue, but it does suggest a timing window, should one occur.

Now, here's where things get verrrrry interesting, as Arte Johnson would say. In the year 2010, there are only 2 solar eclipses: One occurred in January, and the only other one will occur on July 11! The next full moon occurs on July 26th, with one to follow on August 24th.  So, if we combine the research of Robert McHugh with that of Steve Puetz, this would suggest that a crash could occur at anytime!

Don't buy that one? I don't blame you. But, there is a lot more.

Dow Theory holds that when the Industrials make a new low confirmed by a new low in either the Transportations or the Utilities, a new bear market has been indicated. This signal has been given. Dow Theory does NOT predict crashes, just suggests that the primary direction of the market is down.

Let's not forget the horrific plunge in the nation's money supply.  According to adjusted numbers crunched by John Williams of ShadowStats, inflation-adjusted M3 is declining at an annualized rate of 5.9%, the steepest since the Great Depression. This drop reflects sharply reduced lending by financial institutions and foresages extreme problems in the banking sector.

According to Williams, whenever real annual M3 growth has turned negative, the economy has followed. Every time real M3 has contracted, the economy has fallen into recession shortly thereafter, or, as in the case of the 1973 to 1975 recession, where the M3 contraction took place after the recession had started, the existing downturn has intensified. Double dip, anyone?

Ignore this at your market peril.

Marko's Take

Hindenburg Omen Foretells Coming Market Meltdown

2010-07-06T21:40:00.000-07:00

Investors use a variety of data points to assess the likely future course of the market. Some are WAY out there, such as astrology, sunspots and cycles of the moon. Others are more traditional like charts, sentiment ratios and overbought/oversold indicators. Rarely do these types of indicators, which are followed by many, provide much value added. Most academic studies conclude that the market is a "random walk", meaning that, over the long-term, beating the market is deemed impossible.

For an indicator to even have a chance at being valuable, it must remain somewhat unknown, or understood by very few people. If it were widely followed, then investors would act on it and it would cease to remain useful. That's the basis of the "efficient market hypothesis".

One very valuable and arcane indicator goes by the name of "The Hindenburg Omen" (HO).

What, exactly, is a Hindenburg Omen? It occurs when several technical factors that indicate certain underlying conditions of the New York Stock Exchange (NYSE) are present simultaneously. The HO has been present before all of the stock market crashes and/or panics of the past 25 years. No significant sell-off, during this period, has occurred without the presence of a Hindenburg Omen.

A Hindenburg Omen is triggered when the daily number of NYSE new 52 Week highs and the daily number of new 52 week lows both exceed 2.2% of all issues traded.   In Tuesday's trading, BOTH new highs and new lows met that criteria.

A brilliant newsletter writer named Robert McHugh, has done a tremendous amount of analysis on this indicator and used statistical analysis to perfect its signals. According to McHugh, the traditional trigger, to be truly indicative, has several more filters. These filters include a rising 10-week moving average and negative market breadth, as measured by an index called the McClellan Oscillator. Both criteria are present today.

Even with these additional filters, the HO has still failed on occasion. McHugh has developed 2 additonal filters to make the signal deadly accurate. Condition 4 requires that new 52 week NYSE highs cannot be more than twice new 52 week lows. However. it is acceptable for new 52 week lows to be more than double the highs.   This was met today.

McHugh's research has determined that there have been 2 incidences where the first 3 conditions existed, but new highs were more than double new lows, and no market decline resulted.

The 5th condition for a Hindenburg Omen to be completely valid is that there must be more than one signal within a 36-day period. McHugh found 8 instances over the past 25 years where there was just one isolated Hindenburg Omen signal over a 36-day period. In 7 of the 8, no sharp declines followed. Most HO's occur in swarms.

But, before we totally follow McHugh off a cliff, be aware that he is also a disciple of Elliot Wave Analysis, a completely useless notion of market movement.

McHugh also projects that the market is ultimately going to trade to near zero. Perhaps he's read too many books on 2012!

Tuesday was HO number 1, so a warning flag has been raised. It is nowhere near a foregone conclusion that a market plunge is imminent. However, there were other very bad technical signs in Tuesday's trading.

The Russell 2000, a very broad measure of small capitalization stocks, completed an "outside day reversal". These occur when a stock or index trades above the high of the previous day, reverses and then closes lower than the prior day's low. These are far from inflammable, as Archie Bunker might say, but tend to be correlated with more movement in the direction of the close. Since the Russell closed down, we can logically expect more downside imminently, although we don't know how much further the short-term momentum will carry.

The timing of a decline following an HO can begin the day after or as long as 4 months after the signal. In the current situation, the confirming signal may occur at a lower level. In fact, market crashes NEVER start from a top. They generally occur at least 20% lower than the top. In 1987, for example, the Dow Jones Industrial Average peaked at 2,700 and change. The crash began with the index a full 20% lower than its peak. The same can be said for the market crash that occurred during the Great Depression.

So, assuming we've raised your level of concern, what should an investor do with this information? At the very least, HEDGE! Take a position in a security that can gain if the rest of your portfolio declines. This can be accomplished by purchasing some aggressive inverse ETFs. My personal favorite is FAZ, a 3x negative play on the financial sector. If you want to hedge using the Russell 2000, an ETF with the symbol TWM will give you a great play on any downside.

FAZ, which currently trades around $18 per share, traded at $2,000 per share in late 2008! It has that much leverage. So, employing one of these, assuming the market melts down, can result in huge gains! Same goes for TWM. There are inverse, leveraged ETFs covering nearly every industry and every index.

This is no time for investors to put their heads in the sand. While the most dire prediction may not come to fruition, ignore this signal at your own investment peril.

Marko's Take

Subsequent to this piece, more information on the HO has emerged. For an update on this indicator, please click this correction: http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.

The State Budget Electoral College

2010-07-05T22:51:00.000-07:00

With elections coming up, Republicans and Democrats are fighting to control Congress. In my mind, the voters reaction to the new hardships imposed by state austerity programs will direct the election. Interestingly, the most problematic states are the largest, with the most electoral votes.

California with 55 and New York with 31 lead the pack of basket cases. Interestingly, both states are very left-leaning and Democrats have FAR more to lose. Voters could easily turn on the liberal legislatures and make wholesale changes to party affiliation. Other very troubled states include Illinois with 21, Michigan with 17, New Jersey with 15, North Carolina with 15 and Pennsylvania with 23. Together these 7 states represent a total of 167 electoral votes or 60% of the total needed to win, 270.

Eight U.S. states, including Illinois, California, Pennsylvania and New Jersey, face credit downgrades because of budget stalemates. A 9th, New York, has been without one since its year started April 1. Credit downgrades increase borrowing costs and makes the budget deficits worse.

All are gripped by political deadlocks over how to resolve a massive collapse in tax revenue that included a $67 billion decline in the 12 months ended June 30, 2009, according to the Census Bureau. The Nelson A. Rockefeller Institute of Government called that the biggest on record.

California, the lowest-rated state by Standard & Poor's at A-, was warned on June 8 that its $69 billion of debt outstanding might be cut unless the dogfight between Governor Arnold Schwarzenegger and the legislature over an $18.6 billion 2011 budget shortfall isn't solved.

Illinois, the5th-most populous state, had its credit rating lowered twice this month, on June 11 by Fitch Ratings to A from A+ and by Moody's on June 4 to A1 from Aa3.

Other states involved in budget fights include Louisiana, Massachusetts, Delaware and North Carolina, according to data compiled by Bloomberg News.

Five of the states choose governors this November: California, Pennsylvania, Illinois, Massachusetts and New York.

New Jersey Democrats are wrestling with Republican Governor Chris Christie over his proposed $29.3 billion budget. He proposes to balance it with $820 million in school-aid cuts and reductions in property-tax rebates. An extension of an income-tax surcharge on millionaires passed by the legislature on May 20 was vetoed by the governor minutes afterward.

So, it appears that more local issues are going to be the pivoting factor in deciding the election. On this basis, the Republicans, if they can hone their message of fiscal discipline, might be able to gain stronger footholds in Blue States. That is, if the voters can be persuaded that George W. Bush's profligacy was merely an aberration.

Marko's Take

50 States, 50 Budget Nightmares

2010-07-01T08:41:00.000-07:00

It never ceases to amaze me as to just how all-encompassing the financial meltdown is. Virtually all of Europe is clinging on by a financial thread. China is wrestling with a property bubble and the slowdown in the economies of its export partners. The United States is running a $1.5 trillion budget deficit. The cracks in the financial dam don't stop there. They extend to all 50 states, and nearly all cities and counties.

The easy places to trim spending have been exhausted long ago, forcing states to resort to very non-traditional measures such as selling ads on automobile licence plates, taxing sugary soda and borrowing from pensions. Education was previously thought to be untouchable, but is now being gone after aggressively, including mass layoffs of teachers, administration support and vital school programs.

Of the 50 states, only Vermont, must balance its budget annually. The combination of cuts, tax hikes and accounting tricks have become familiar in state legislatures as the one-two punch of recession and housing downturn have dramatically reduced tax revenue for several years now.

For 2009 to 2012, states have faced nearly $300 billion in budget deficits, according to figures from the National Association of State Budget Officers.

Last year, politically heated budget fights forced 9 states to miss their deadlines and begin the fiscal year without an agreement. According to the National Conference of State Legislatures, 28 states have agreed to budgets this year and 16 had passed biennial budgets last year. Eight states, including California, have extended their sessions or held special meetings to negotiate budgets.

New York, whose fiscal year began on April 1, is the only state yet to have missed passing a budget on time. California, which had to resort to paying its bills with IOUs during last year, is expected to miss this week’s deadline.

The budget problems continue way down to the city level. Los Angeles is thought to be in danger of default and has resorted to closing city services several days per month. Los Angeles Unified School District has endured extremely steep cuts to bring the budget in balance. The desperation to balance the budget has led the city to use the Department Of Water And Power surplus to cover itself.

Most troubling to local governments is the combination of declining property taxes from the bursting of the real estate bubble combined with lower taxes from increased unemployment. In fact, the unemployment is a double-whammy since this triggers more spending for unemployment and other mandated programs.

Only 15 of the 49 largest cities in the U.S. saw year-over-year declines in their unemployment rates in May, according to new Labor Department data, while the unadjusted national rate, at 9.3%, was 0.2 percentage points above its year-ago level.

Across the country, jobless rates were higher in May than a year earlier in 222 of the 372 metropolitan areas, lower in 141 areas, and unchanged in 9. The Labor Department doesn’t seasonally adjust its data on city-level unemployment, making month-to-month comparisons difficult. Adjusted for seasonal factors, the U.S. unemployment rate was 9.7% in May.

Unfortunately, the situation has turned into the most troublesome vicious cycle. The more local governments are forced to cut back drastically, the more that the unemployment situation worsens, the more that pressure is maintained on home prices and the more that revenues to coffers are constrained. Then, more budget cuts, more unemployment...

Marko's Take

Gold Or Precious Metals Stocks?

2010-06-30T08:05:00.000-07:00

Recently, I proudly and confidently proclaimed that GOLD was ready to head for $2,000. As Bill Clinton's former press secretary, Dee Dee Myers, used to saying when Billy was caught lying, that forecast is "no longer operational".

An interesting dynamic has put itself into motion. As GOLD continues to hover near its highs, the equity market is rapidly falling apart. Precious metals mining companies are battling a tug-of-war between higher metals prices versus a vastly more difficult environment for equities.

This sets up a very difficult question: how does one play the market volatility? Carefully.

During the financial meltdown of 2008-09, GOLD held up pretty well, gaining a "flight to safety" bid. Despite the very good action in GOLD, however, mining stocks got blasted for losses of up to 90%. Any one of a number of events could trigger an explosion in the metal: war in Iran, a breakdown of the Euro-Zone, more quantitative easing or more problems in the financial system. This list is hardly exhaustive.

The above notwithstanding, many signs have emerged that another DEFLATION scare is imminent. The money supply is plunging at un-precedented rates. DEFLATION. Bond yields have broken to new multi-generational lows. DEFLATION. Bank loans and credit are contracting at historic rates. DEFLATION. The dollar, despite all the government spending and low interest rates keeps rallying. DEFLATION.

The "Gold Bugs" index, also known as the HUI, has been carving out an ascending wedge pattern. These are normally, but not always, bearish. The HUI has also approached the 500 level on several occasions, and can't seem to break through. A material violation of either 475 on the downside or 500 on the upside would provide a pretty good indication of what to do.

It's possible that GOLD itself could rally while precious metals stocks could decline. So, for now, the best bet is the metal itself. I would be VERY cautious about the equities at this juncture. I tend to think there will be a better buying opportunity down the road.

As to the metal, I would use $1,225 as a stop level. If it breaks below, chances are that we will see some decent downside and there will be a much better entry point. For now, the amber light is flashing.
Warning Will Robinson!

So, what to do here? If you're going to stick with your portfolio of miners, I would at least add a hedge to insulate against equity pressure. Personally, I like the inverse ETFs FAZ, SKF and TWM. There are plenty of others you can use. I would NOT recommend purchasing a GOLD inverse ETF. What's the point of being both long AND short?

As investors, it is ever so important to not get wedded to a particular point of view or to stay either perma-bull or perma-bear. The easiest way to lose money in the world is to be stubborn and insist that your pre-conceived notions must be correct. Minimize your losses and wait until a better opportunity presents itself.

Marko's Take

Chewing Tobacco

2010-06-28T06:29:00.000-07:00

The tobacco industry is, by far, the most maligned in the United States. The animosity to the industry, however, is quite understandable. Tobacco companies produce a very harmful and addictive product. The industry is fraught with false advertising and reputedly very shady tactics.

So, tobacco is the only industry characterized by harmful products and often questionable business practices, right? Sure, unless you want to include spirits distillers, automobile manufacturers, oil companies, drug companies, fast food companies and many restaurants, aircraft maufacturers, nuclear utilities, processed food companies, consumer products companies, mobile phone manufactuers and most of the rest of the Fortune 500!

Despite the product risks, most industries are accepted because the products or services are consumed by so many. We drive cars, but lots of people die in car accidents. We drink wine and vodka despite the risk of liver damage and cardiovascular disease. We live on Prozac and Xanax, which are sometimes fatal, because they help keep us sane. We love our cell phones despite the brain damage. Get the picture?

Economically, each of these industries producing harmful products has huge benefits. They employ millions of people, they pay lots of taxes. Most of their products are sought-after world wide because alternatives are relatively few in many cases.

The economics are not really controversial, however. In the case of tobacco. it really gets down to the very emotional health issue. Anyone with half a brain understands the numerous health problems caused by chronic tobacco use. About 20% of the United States adult population choose to smoke. So, what I wonder is:  why does lung cancer trigger more contempt than liver damage or brain damage or death by airplane crash?

The tobacco industry has repeatedly shot itself in the foot over the years. Critics have unearthed irrefutable evidence of some extremely nefarious business practices. They market to teenagers, suppress studies that implicate them, employ an army of lobbyists to garner favorable political treatment, ignore health to enhance the likelihood of long term use of their product and are constantly being litigated against.  Them, and just about every other industry!

Doesn't tobacco kill? Yes, it most certainly does. But, so do nuclear reactors, oil rigs, car crashes and Big Macs. Hmm, I'm still missing the difference.   How is tobacco different?

Oh yes, it kills OTHERS! It has spill-over effects on non-smokers via second hand smoke. Cars kill other people than the driver. So does burning fossil fuels. So do alcoholics. What's the difference, again?

The fact that tobacco kills, is actually a double-edged sword. Yes, the deaths are unfortunate and unnecessary. But, shortening life spans has some major societal and economic benefits. Longer life spans are placing major weight on Social Security and other entitlement programs which disproportionately benefit the elderly. So, the health risks borne by tobacco smokers actually transfers wealth to non-tobacco smokers. When looked at this way, non-smokers certainly should understand how they benefit from smokers.  Thus, the big picture is not as clear cut as they may have believed.

The tobacco industry is actually operating at some major disadvantages via the rest of corporate America. For example, what industry is forced to run ads which tell people NOT to use its product? Only one other as far I can tell: utilities.

An additonal high-profile source of negative publicity is the endless lawsuits. Unfortunately, the tobacco industry is a virtual full-employment act for attorneys. The industry is continually sued by smokers for the adverse health risks they knowingly chose to ignore. In addition, some people are quite comfortable arguing that the cigarettes lit themselves and jumped into their mouths.   The same folks who sue because their McDonalds coffee was too hot! What's the difference?

The mind-set that life should be without risks has been encouraged by politicians for years. We want no recessions, so we interevene in the economy. We can't stand health risks, so we pass unnecessary legislation to "protect" us against the consequences of our own well-informed choices. You can't have that Double-Cheeseburger... it's BAD for you.

If you're a non-smoker, just remember the following: every person that lights up reduces YOUR tax burden and is less likely to draw scarce financial retirement resources. Chew on it, and see what you think.

Marko's Take

Obama's Latest Folly: Financial Reform

2010-06-25T08:04:00.000-07:00

It simply amazes me that politicians believe that any problem can be fixed by more regulation. Uncle Sam is right in the middle of the Federal National Mortgage Corporation (Fannie Mae, or FNM) and Federal Home Loan Mortgage Corporation (Freddie Mac, or FRE) fiascos. Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA), both beneficiaries of lavish campaign contributions, made sure that these two entities could operate in the most favorable possible business environment, that is, before their help led to the two firms' demise.

Then, of course, we have the cushy relationship between Goldman Sachs, aka "Government Sachs" (GS), and the entire Obama Administration. Gotta be something in it for them!

The Securities and Exchange Corporation (SEC) completely ignored warnings about Bernie Madoff. So now that we've established the government's expertise at regulating various aspects of investing, the answer is to regulate MORE??

Let's not forget the Federal Reserve (Fed). Keeping interest rates way too low and for too long directly led to the twin asset bubbles: real estate and tech stocks. The solution? Keep interest rates even lower and for longer! See the logic?

The Financial Reform Bill was passed this morning. The Obama Administration pushed hard for this legislation to "protect the consumers" that it has, thus far, been completely unable to do. This is how governments think: create a problem, then justify even more intervention to solve the very problem they created. Think we have too much debt? Issue MORE of it! Regulations failing to do their job? Create more bureaucracy and more regulations! Simple.

Major provisions of the bill include:

New regulatory authority for federal officials to seize and break up large troubled financial firms without taxpayer bail-outs in cases where the firm's collapse could destabilize the financial system. U.S. Department of Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.

The establishing of a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Let me guess. Members of the council will be alumni of Government Sachs?

The so called "Volcker Rule" would curb propriety trading by the largest financial firms, though banks could make small investments in hedge and private-equity funds. Of course, we should all expect "Government Sachs" to be exempted. If they can't insider trade ahead of their clients, how are they going to make money? Lend? Nahhh!

Derivatives would be subject to comprehensive regulation, especially in the over-the-counter market, including the trading of the products and the companies that sell them. However, the riskiest derivative trading operations would have to be spun-off into affiliates.

A new Consumer Financial Protection Bureau within the Federal Reserve will be created, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new entity will be staffed by alumni of "Government Sachs". (Sarcasm intentional!)

The bill would also provide for a complete "sham" overview of the Fed, by mandating a one-time audit of all of the Fed's emergency lending programs from the financial crisis. The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions - activity the Fed currently doesn't disclose. I'm holding my breath. (Sarcasm intentional!)

The legislation would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Since former capital requirements were set by Uncle Sam, naturally the new standards are likely to be just as effective. (Sarcasm intentional!)

Larger banks would be subject to a special assessment to raise up to $19 billion to offset the cost of the bill. The fee would apply to financial institutions with more than $50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high-risk paying more than safer ones.

Let's not forget the credit-rating agencies! The bill would establish a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter. It would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get. Never mind that no one actually CARES what the Standard & Poor's and Moody's think. We MUST regulate them!

What will be the effect of this bill? Simple! Whatever the bill was designed to accomplish, expect the opposite. We can expect less systemic liquidity, a renewed credit crunch and either a obscenely profitable banking sector, or one that goes out of business! The good news? More employment, power and bonuses for all our friends at "Government Sachs"!

Marko's Take

Fund Of Hedge Funds Becoming Obsolete

2010-06-24T07:45:00.000-07:00

We've written before about some of the issues with Hedge Funds that are less than desirable for prospective investors, especially the fee structure which creates an element of moral hazard. Even more egregious are the "Funds of Hedge Funds" (FOFs), which charge an additional layer of fees for the "value-added" of selecting individual funds and combining them into a basket.

FOFs were designed to accomplish several objectives that an individual investor might not have the resources to achieve on his or her own. They pride themselves as "experts" on each individual fund by performing extensive due diligence and detailed statistical analysis of their return profiles. In addition, they create better diversification by placing 10 or more funds in a pool. Investors are also given access to funds that have closed to new investment, except through the fund baskets.

Great concept in theory, but like so many others, often fails miserably in practice.

FOFs, for their services, usually charge both an additional management fee and often take a modest performance fee. The hedge fund norm is a 2% management fee combined with a 20% performance fee. The FOF often adds another 1% and 10%, respectively, brining the total to a very steep 3% and 30% of profits. This fee structure, in a world of single digit returns, makes the entire FOF concept ensure that investors will achieve sub-standard returns.

In addition, despite the claims of great due diligence, so many FOFs have been caught in manager wipe-outs. Industry fixtures Tremont and Ivy Asset Management, two firms that were former clients, both got trapped by Bernie Madoff. In fact, every hedge fund manager meltdown, beginning with Askin Management in 1994, Long-Term Capital Management in 1998 and then the slaughter in 2008-09 has exposed the weaknesses of the FOF industry.

The bloom is off the rose. In year-end 2007, FOFs represented a massive 43% of assets. Currently, it is down to 34% and shrinking. FOFs have a growing list of detractors.

David Swensen, the long-time manager of Yale University’s endowment, recently slammed FOFs, claiming among other things, they “are a cancer on the institutional investor world”.

Although Mr Swensen has a well-renowned track record, his group isn't the only one to have added value over the past couple of decades. In fact, as a substitute for equity investments over the past 10 years, the Hedge Fund Research (HFR) FOF Index has performed remarkably well, returning 5.4% a year versus a return of minus 1.4% for the S&P 500, with a volatility of 6.2% versus 15.1% for large cap equities.

Nevertheless, the very public failures have stuck a knife in FOFs. According to a recent report by HFR, FOFs are liquidating much faster than they're being created.

Hedge fund liquidations rose in the first quarter of 2010 with 240 funds closing during the period, according to the HFR Market Microstructure Industry Report recently released. Liquidations were disproportionately skewed towards FOFs, with 102 closing in the quarter. This marks the 7th consecutive quarter in which FOF liquidations have exceeded new launches.

Fee pressure is finally making itself present in the industry. Average incentive fees declined by 8 basis points to 19.12% in the 1st quarter of 2010, the steepest drop since the 2nd quarter of 2008, although average management fees were unchanged at 1.58%. Variance between the best and worst deciles of performance narrowed in the less volatile period, with the top decile of all hedge funds returning an average of 15.2%, while the bottom decile lost an average of 8.6%.

“Both investors and fund managers are continuing to exhibit a heightened sensitivity to leverage and risk, even with the benefit of the performance recovery from 2009,” said Ken Heinz, President of HFR. “Managers are employing lower levels of leverage in response to higher realized asset volatility and higher costs of obtaining leverage, as well as investor preference for a less volatile return profile.”

Caveat emptor. What this all should tell you is that if the people who spend every day talking to hedge funds, analysing their returns and statistically measuring how much value they add can be fooled, so can you. Another reason to avoid this entire industry.

Marko's Take

New British Petroleum Bond Issue Very Interesting

2010-06-23T08:55:00.000-07:00

After being strongly "encouraged" by the Obama Administration to pledge $20 billion into an escrow fund, British Petroleum (BP) is now looking to raise new capital through an upcoming bond issue. The debt is expected to yield 8-9%. BP should be happy, Tony Soprano charges 2 points a week.

BP has rapidly descended to the 2nd company "America loves to hate". And yes, the 1st, "Government Sachs" is participating in the underwriting.
The obvious question is how well the proposed yield compensates investors for BP's very uncertain credit risk and future liabilities. The less obvious answer is that it does.

One need not do a comprehensive analysis to determine the attractiveness of these bonds.

Despite a loss of 50% of its market capitalization in 2 short months, BP is still worth nearly $100 billion.  The current value already takes into account expected liabilities from the oil spill. There are no more than a handful of companies in the world with market capitalizations of that magnitude.

BP's total debt at the end of the 1st quarter of 2010 stood at $32 billion, giving it a very comfortable debt/market cap ratio of about 0.35. The company's leverage is consistent with an investment grade borrower.

The company earned $16 billion in 2009 with much lower oil prices, and another $6 billion in the 1st quarter from operations.  The recently enacted dividend cut provides another $2 billion in cash flow. At the current earnings rate, the total debt issue is less than annualized earnings. BP's price/earnings ratio is now less than 5.

But what about the future unknown liability from shareholder lawsuits?   Tobacco companies have faced them for decades, but none have defaulted.  Remember 20% plus yields on Phillip Morris (MO)?

Drug companies have faced them for years, but none have defaulted. The auto companies DID default, but not from litigation. Instead, it was from poor operations and mounting pension and health care liabilities.

In the 1970's, Texaco, then rated Triple A, filed Chapter 11 to restructure onerous pipeline contracts. No one lost any money.

At 8-9%, BP's bonds would yield more than approximately 40% of the entire junk bond universe, and more than troubled sovereign credits Portugal, Ireland and Spain. Only Greek debt is higher.

Highly charged incidents like oil spills tend to swing investor sentiment to un-justifiable extremes. Those who can ignore the market noise from all the hand-wringing stand to make great profits.

Marko's Take

Some Considerations For Selecting Junior Miners

2010-06-22T08:15:00.000-07:00

Now that the investment clarion has been sounded, investors may wish to do their own homework for evaluating candidates for investment. Among the several dozen decent publicly traded companies how does one decide which ones to invest in?

While not an exhaustive list, here are some things every investor ought to keep in mind. Follow these rules, and your chances of getting in trouble will be greatly diminished.

Ask and answer the following questions:

1. Where Are The Operations Located?

In my opinion, the biggest risk currently is geo-political. Some countries are dependent on their mining industries and are not terribly interested in having foreign interests, i.e. us, coming in and pillage their resources for our own profit. The risk is nationalization.

A recent case is that of Crystallex International Corporation (KRY), whose mining interests were nationalized by Venezuela. KRY stock sold for more than $4 per share as recently as 2007, before losing a mind-numbing 98% of value to hit 10 cents per share. It has recovered somewhat to trade at $0.45 today.

Personally, I prefer to stick to North American companies which operate in some combination of Canada, the United States and Mexico. I tend to avoid companies with the bulk of their operations in Africa, whose countries tend to be perpetually unstable and subject to ethnic conflicts and new governments. It's impossible to predict which country in what continent will be unsafe, so I stick to where I believe the business environment will not be subject to change without warning.

2. What Aspect Of Mining Is The Company Involved With?

The junior mining sector is basically divided into explorers, developers and producers. The explorers are like oil wildcatters. They can have the greatest gains and the most severe losses. Some junior explorers to consider are U.S. Gold Corporation (UXG), Explor Resources Inc. (EXSFF) and Vista Gold Corporation (VGZ).

Most explorers wish to develop their projects, but some don't. Vista Gold successfully developed its Nevada-based operations to form Allied Nevada Gold Corp. (ANV), which was later spun-off to shareholders at a tremendous profit.

The key risk to an explorer is that its projects turn out to be not viable economically. NovaGold Resources, Inc. (NG), which has a 50% interest in the Galore Creek project, had to suspend development in late 2007 as cost estimates proved way too low. The stock lost 99% of its value from more than $20 per share to about 25 cents in one year.

3. Is The Company Profitable?

The only companies that can report profits are producers. Some geo-politically safe producers include Aurizon Mines Ltd. (AZK), New Gold Inc. (NGD), ECU Silver Mining Company (ECUXF) and Hecla Mining Company (HL). Each of these is profitable and getting more so, based on recent financial reporting.

Given the very favorable mining economics prevailing today, the list above is far from extensive.

4. Is There An Asset Play?

Some companies are primarily an asset play. They hold already drilled and largely delineated projects. Probably the best asset play out there is Seabridge Gold (SA), which boasts more than 60 million ounces of economically viable Gold, in addition to a slew of other minerals such as Copper.

Producers can also be terrific asset plays. ECU is not only currently producing and profitable, it also boasts what is now the 4th largest resource base of Silver, at a fraction of the market capitalization of high-quality giants such as Silver Wheaton Corp. (SLW) and Pan American Silver Corp. (PAAS).

5. Does The Company Have Sufficient Financial Resources?

Miners who are not generating cash flow are dependent on the capital markets. The financial meltdown of 2008-2009 placed these companies under extreme financial duress. Developing, drilling and exploring is capital-intensive and requires regular infusions.

It's important to note both how much liquid resources a company has and its offsetting debt obligations. If too much debt is coming due and the financial markets are frozen, the company may have to raise additional funds at extremely bad terms. Companies with limited financial resources got particularly bludgeoned in the 2008-2009 meltdown.

6. Is This Company Likely To Acquire Or Be Acquired?

Undoubtedly, as the mining industry starts to boom, there will be a slew of mergers and acquisitions. Any company making an acquisition will typically do a "stock-for-stock" transaction, which will dilute the acquiror while paying a premium to the acquiree.

This is why I tend to avoid the larger companies. To remain competitive, it's more cost-effective to acquire in-ground assets than to go through a long and expensive exploration, drilling and development process. Existing projects have far less risk.

The companies most likely to acquire are primarily the majors such as Newmont Mining Corporation (NEM), Barrick Gold Corp. (ABX), Yamana Gold Inc. (AUY) and Goldcorp. Inc. (GG). Even higher-quality intermediate producers such as IAMGold Corporation (IAG) or Eldorado Gold Corp. (EGO) can be expected to join the acquisition race.

If you hold a company that gets acquired, you receive an instant windfall. While you may be disappointed that the ride to much higher prices has been cut short, you can easily re-deploy the gains you just received in another junior.

Naturally, this is just a brief checklist of the items to look into prior to making a sizable investment. There are many more items to consider such as quality of management and liquidity of the stock. And, a technical review of the stock would also be a very important criteria.

Great fortunes can be made in the next several months for investors who can make good decisions as to the horses they choose to get them to the finish line. Most important is to avoid the big loss. Another obvious factor to incorporate is good diversification. For those investors who are not comfortable with making these choices, an excellent vehicle which includes 40 juniors and intermediates, is the Exchange-Traded Fund GDXJ.

Marko's Take