Thursday, April 14, 2011

Presenting John Paulson's Complete Les Echos Interview In Which He Is Bearish On Housing, Bullish On Gold

Two days ago John Paulson had an extended interview with Les Echos which however received little coverage in the US, supposedly since the interview was in French, and also because it was behind a paywall. Since the interview does provide some incremental perspectives by Paulson, it is useful to recreate it in its entirety. Specifically, Paulson is now far more bearish on US housing, blaming it on Frank-en-Dodd, and he continues to be as bullish as ever on gold. To wit: "Over time, the price of gold will rise in proportion to the creation of paper dollars. In an inflationary environment where the demand for protection increases, the price of gold can rise even further. Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability. Today we face both risks." As for whether or not we will have QE3: Paulson is not the guy to ask. He is as confused as the Fed presidents.

From Les Echos interview with John Paulson

What do you think the impact of the Japanese crisis will be on the economic recovery and global financial markets?

From a human perspective, it is obviously a tragedy. Economically, I do not think the Japanese crisis will have a major impact on overall recovery. Japan accounts for 8% or 9% of the global economy. This disaster could slow the growth of Japan's GDP by 2% this year, according to most estimates. There will be a particularly sharp drop in growth in the first quarter. But growth will resume in Japan next year already because of the reconstruction. Ultimately, this could reduce the overall growth of a quarter point this year, 4.5% to 4%, if one refers to forecasting the International Monetary Fund (IMF). This is not a significant event on the scale of the global economy.

What is the main threat to the strength of U.S. recovery?

To me, the major risk for the U.S. recovery is stagnating housing market. According to the latest figures, house prices are slightly down. Lack of funding limits the scope for private home purchases in the United States. Currently, banks have handcuffs. They can not do anything against borrowers if they default on their loans. The private sector is frozen because of regulatory uncertainty on foreclosures. Banks do not want to grant mortgages because their rights are guaranteed. Today, housing starts are at their lowest level for fifty years! That is why we have a recovery with slow job creation. We are at a lower level than 300,000 new homes a year against a peak of 2 million in 2007 (which had helped create 8 million jobs). Without restarting the housing sector and a minimum of 1 to 1.2 million homes built annually, it's hard to have a real strong recovery.

Have you lowered your expectation of a rebound by 8% to 10% in property prices in 2011?

Yes. When I made this prediction last year was before the reform Dodd-Frank 2010. Since then, banks have virtually halted lending for home financing because of the lack of clarification on the rules. This will be difficult to have a rebound in property prices this year. But with any luck, if banks start to reconnect with mortgages, we could have a real estate recovery in 2012 and 2013.

Does that mean you consider the financial reform of Wall Street as a failure in this regard?

Yes. It could hinder the recovery. It is a text-heavy (2,000 pages!) And poorly thought to be very difficult to implement. This reform precipitated mainly driven by an emotional reaction. The result is that it creates numerous conflicts and uncertainties. As Alan Greenspan, I think it will create market distortions. The European approach based on Basel III is much better and more flexible. The temptation to over-regulate is counter-productive. The financial crisis was linked to the fact that banks had excessive leverage and too many risky assets. The solution is not to try to dictate to banks what they can do or not do, but to require them to strengthen their capital to absorb potential losses and hold less risky assets.

Can we say, however, that Wall Street banks have changed their practices by learning from the crisis?

Absolutely. They have drastically reduced their leverage and have a much more conservative leverage structure.

Do you think the Obama administration has changed its attitude vis-à-vis the business community since the last midterm elections?

Initially, the Obama administration attempted to increase taxes, the traditional Democratic approach. They are doing a step back today to further support the private sector to foster job creation. Barack Obama has changed its policy and granted aggressive tax incentives to boost investment and stimulate growth. The weak point remains the financial reform. With a little hope, there will be changes to eliminate the negative aspects of this reform.

What do you think of the criticisms of quantitative easing implemented by the Fed to stimulate the economy?

Do not forget that we have experienced the worst recession since the Great Depression. This necessitated the use of unconventional means to avoid economic collapse. In this sense, the monetary stimulus and fiscal stimulus provided by the government have been very useful to help get the economy get back on track. The problem is that the quantitative recovery is not without consequences and creates the potential for inflation. Currently we have no inflation because we still have overcapacity. But the risk exists. It is undeniable that this monetary expansion is equivalent to running the printing press. It remains to be seen whether the Fed will reduce the recovery before it becomes inflationary.

Who will refinance U.S. since China and Pimco now seem reluctant to buy Treasury bills?

There are serious uncertainties about the exit strategy of the Fed. I'd be very surprised if there was a third round of QE. While many economists believe that the U.S. debt remains at a manageable level, sooner or later it will reach a threshold that will be a problem. Today, our federal debt is still at a relatively reasonable (around 65% of GDP), but if we add the local debt of the States and local governments are approaching the level of 100% of GDP which begins to be close to that of Greece or Portugal. It is a very serious potential problem. The U.S. does not have the ability of unlimited borrowings.

Do you think the dollar could lose its status as the term "safe haven", even if it remains the dominant currency today?

It's a possibility. But we must look at the currencies in relative terms. The UK is committed in the same way that the United States in terms of monetary stimulus. The euro has its own problems. In these times of uncertainty for paper based currency, I feel more secure in holding gold. Given the risks of inflation in three to five years and the volatility of the euro, gold offers good protection against the paper currencies devaluation and even the possibility of generating a return on fixed investment. In addition to our investment funds in gold which represents only 3% of our assets under management, we created a class of shares for our other strategies denominated in gold. And about 40% of our investors have chosen this option. We were the first fund to launch this voluntary investment class one month after the launch of the first round of quantitative easing by the Fed in March 2009.

Do you think the gold price has still not reached a plateau?

Indeed. Over time, the price of gold will rise in proportion to the creation of paper dollars. In an inflationary environment where the demand for protection increases, the price of gold can rise even further. Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability. Today we face both risks.

How do you explain the accusations of destabilization of the euro you been in the fall of 2009 when your fund has been cited in a survey by the Department of Justice?

It was a total misunderstanding. First, we were not present at the so-called "lunch ideas," where we discussed the euro. Above all, we're not a macro fund and we take no position on the currency. The European Directive on hedge funds has undoubtedly helped to clarify our strategy and our position through a better dialogue with European authorities. On the crisis of the euro, I think it is limited to Greece, Ireland and Portugal and I am quite optimistic about the stabilization plan implemented.

How do you respond to critics on the excessive size of hedge funds?

Actually, I see no reason to worry about our size or our excessive influence. Although we are the third largest hedge fund with $ 36 billion in assets, we are 100 times smaller than BlackRock, which manages $ 3,000 billion. We are very small in terms of asset management. Our specialty is to invest in the event arbitrage. In recent years, our main goal has been to help companies avoid bankruptcy or emerge from bankruptcy, or to help them repay their debts to recapitalize. In total, we invested over 20 billion dollars over the past two years to help companies restructure, both in Europe and the United States, and emerge stronger from the recession.

Market Commentary: Stall at Key Moving Averages

It wasn't surprising to see buyers step in at key 20-day and 50-day moving averages. Although light volume reflected a truer lack of buyer enthusiasm.

The S&P finished on an indecisive doji, backed by a MACD 'sell' trigger.



The Nasdaq rebounded a little, having ducked below its 50-day MA yesterday it was able to close above it today.


While the Russell 2000 dipped down to its 50-day MA at the low of the day before recovering by the close



While the Dow also pegged its 20-day MA with a doji and MACD 'sell' trigger of its own.



The presence of the 20-day and 50-day MAs offered buyers an opening which they kind-of half took, based on the doji candlesticks displayed across the different market charts. However, the indecision doesn't appear to be enough to halt the momentum of bears. Bulls will likely have another crack at it in the morning, but if momentum fails after the first hour then a lower close is the more likely outcome.

McAlvany Weekly Commentary

Don’t Mistake Revolution in the Middle East for Democracy: An Interview With Don McAlvany

A Look At This Week’s Show:
-Food price inflation may have started the engine in the middle-east, but Iran and the Muslim Brotherhood are driving the car.
-Egypt and Libya are just minor steps toward the true goal to overthrow the Saudi Royal Family.
-Asia and Russia will take advantage of diminishing U.S. hegemony in the middle east.

Chart: Is Gold in a Bubble?

BOB PRECHTER WARNS: Investors, Futures Traders, Mutual Funds, Hedge Funds And Economists Are All At Record Bullishness

The notoriously bearish market guru Bob Prechter makes one unassailable point in his latest newsletter (via Mish).

Bullishness is getting extreme:

Individual investors (AAII poll)—most bullish in six years

Newsletter advisors (I.I. poll 20-week average)—most bullish in seven years

Futures traders ( poll)—most bullish in four years

Mutual fund managers (% cash)—most bullish ever

Hedge fund managers (BoAML survey)—most bullish ever

Economists (news-org polls)—unanimously bullish

Top global strategists (three national year-ahead panels)—unanimously bullish

Even most 'bears' on the economy are bullish on stocks because of inflation!"

While bullishness is good, extreme bullishness suggests the formation of a bubble. Prechter insists we're in the rally phase of a secular bear market, and the next step is a major crash.

Inflation Actually Near 10% Using Older Measure

After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Shoppers in crosswalk
Getty Images

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site,

“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”

Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.

Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up the much higher CPI figures from him and Williams.

Beyond the money

“Given Walmart’s [WMT 53.63 0.11 (+0.21%) ] sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline,” said Newman.

To be sure, the BLS argues that the changes it has made over the last three decades more accurately reflect a true change in the cost of living. For example, in response to its hedonic adjustments, the BLS web site states, “to measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change.

Still, going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation. Maybe Fisher stumbled across The voting member did, after all, mention Volcker in the same speech.

“The need to break the back of that (budgetary debt) spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s,” said Fisher on April 8th. “As a result of his steadfast determination to press on with exorcising inflation, Mr. Volcker is today among the most respected living Americans and widely considered an exemplar for public servants worldwide.”

Case Shiller 100 Year Chart (2011 Update)

In 2006, just as the Housing market was peaking, the NYT ran this graphic of the 100-year Case Shiller chart. It showed how radically overvalued Housing had become.

Two years later, TBP reader Steve Barry updated that graphic, including the projected Home Price mean reversion. (See versions for 2008, 2009 and 2010).

Its time to update this for 2011. Note the 2009 tax credit wiggle

Higher Rare Earths Prices On The Way

After exploding through the $100,000-per-ton level for the first time in February, prices for rare earths metals are poised to keep rising as Chinese producers move to meet stricter environmental regulations by an Aug. 1 deadline. China, which controls 95% of the export market for the 17 elements used in tablets, laptops, hybrid cars and military devices, is also the world's largest polluter and has been looking to reduce some of that pollution by imposing tighter standards on rare earths producers.

News of more price increases is a positive for the Rare Earths Stocks Index, which is up fractionally today. The Index has jumped 40% in the past month and about 13% in the past week.

Chinese mining companies that don't submit applications or fail to pass inspections could be subject to harsh punishment, including delays in having new projects approved or having their IPOs pushed back, according to China Daily. An unidentified industry executive said at least 60% of the country's rare earths producers could not currently meet the new standards, China Daily reported.

A JPMorgan report released on Monday said rare earths prices continue to soar as China cracks down on illegal miners. In February, rare earths exports rose to $109,036 per ton.

Most rare earths names are up on the news, but Molycorp (NYSE: MCP - News), the largest U.S.-based rare earths miner, and Rare Element Resources (AMEX: REE - News) are both down about 1%. Lynas Corporation (Pink Sheets: LYSCF - News) is up 1% and Market Vectors Rare Earth/Strategic Metals ETF(NYSE: REMX - News), the rare earths ETF, is flat, while Neo Material Technol (Pink Sheets: NEMFF -News) is leading the Index with a 4% pop.

5 High-Beta Stocks To Consider: AA, C, CLF, EXPE, F

In conjunction with stock valuation ratios like the price-to-earnings ratio and the price-to-earnings-growth ratio, a stock's beta can help investors build a diversified portfolio. Beta is a measure of a stock's volatility, and adding low-beta stocks to a portfolio can a be a great way to provide diversification.

Benchmarking Beta
Using the S&P 500 as a benchmark for beta, investors can determine how a stock may perform in relation to a broad index. If a stock has a beta of 1, it is expected to move up and down in tandem with the benchmark. A stock with a beta of 1.10 is expected to rise or fall 10% more than the benchmark. Conversely, a stock with a beta of 0.80 would be expected to move up or down only 80% as much as the benchmark. In short, the higher the beta, the higher the stock's volatility.

And, by using beta to measure volatility, you can better choose securities that meet your criteria for risk. Investors who are very risk averse should put their money into investments with low betas such as blue chip stocks and Treasury bills. Those who are willing to take on more risk may want to invest in stocks with higher betas.
Here's a list of five high-beta stocks from the S&P 500 Index:



Market Cap (Billions)

Alcoa (NYSE:AA)



Citigroup Inc.(NYSE:C)



Cliffs Natural Resources(NYSE:CLF)



Ford Inc.(NYSE:F)



Expedia Inc.(Nasdaq:EXPE)



Potential Bearish "Key Reversal" Down in Crude Oil

crude_oil_May2011.gifMay crude oil futures on the New York Mercantile Exchange on Monday hit a fresh two-plus year high of $113.46 a barrel. Prices then reversed course to close sharply lower, near the daily low and produce a technically bearish "outside day" down on the daily bar chart, whereby the daily high is higher and daily low is lower than the previous session's trading range, with a lower close. Tuesday morning there has been strong follow-through selling pressure that has the crude oil market poised to produce a more significantly bearish "key reversal" down on the daily bar chart. A key reversal down in a market occurs when a new for-the-move high in price is made and then prices promptly reverse and produce an outside day down. The key reversal is then confirmed the next trading session by follow-through selling pressure. Confirmation of a bearish key reversal down with a lower close in May crude oil futures prices on Tuesday would be one early technical clue that a market top is in place.

The crude oil market bulls can correctly argue that May futures prices are still in a 7.5-month-old uptrend on the daily bar chart. It would take a move in May crude oil futures prices below the last "reaction low" on the daily chart, which is located at $102.70, to negate the aforementioned uptrend and to provide a more powerful signal that a market top is in place. Stay tuned! Jim Wyckoff

Four Stocks To Keep An Eye On

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Banner Corporation (NASDAQ:BANR) - As many traders could see, today's rise on increased volume amongst many other bullish indicators could push the stock substantially higher than where it is trading now which is around its base levels. As you could see, the stock has several favorable technical factors suggesting that it could breakout to new levels and could test its 52-week high which often attracts additional traders on the buyside, putting upward pressure on shares. The technical chart shows the stock has been doing well since the beginning of this year since the 50 day moving average went on top over 200 day moving average. In addition, the accumulation /distribution indicator is showing strong accumulation since it bottomed in November 2010, which is also a strong bullish sign. It’s a future sign that the price will rise because it’s a leading indicator. That means the indicators gives a buy or sell signal before the actual price movement occurs. Short interest on BANR as of Mar 31, also decreased 29.8% to 445,900 shares from 635,800 indicating that bears are covering their positions. Plus, the decline over the last few days occurred on lower volume and the stock is firming above the major support of $2.28. BANR has now the opportunity to start new rally as %K line is back above %D line. The near-term outlook is bullish and a close above its 50-dma would confirm this view. I continue to have a favorable longer-term view of the company and I believe the stock should provide steady, above-market returns over the long run. BANR just need more interest to get volume as the technicals are calling for a run. Keep watching the stock this week since I expect more volume over the next couple of days.

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Looking at the technical chart of Advanced Micro Devices, Inc. (NYSE:AMD) the stock price is clearly in short-term downtrend. There are no signs of a recovery yet. Hold your long position with a stop loss at $8.12 (closing day basis).

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Accompanied with good volumes, Silgan Holdings Inc. (NASDAQ:SLGN) marked an all-time high in the last trading session. With this, the daily momentum indicator has reached overbought levels and I believe that a near-term correction is likely to happen.

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GigaMedia Limited (NASDAQ:GIGM) - In the last trading session, the stock broke through the flag pattern. This means there is more upside. I think this is quite likely.

Other stocks to watch :

Cell Therapeutics, Inc. (NASDAQ:CTIC) needs to hold 38 cents on the downside or things could get very ugly. On the upside, the stock has resistance located betwen 40 and 41 cents.

Shares of Motorola Mobility Holdings Inc (NYSE:MMI) continue to hold the recent $22.96 low. I would continue to be a buyer of MMI below $23.50. This stock is due for a rally back into the $26's.

Shares of Ciena Corporation (NASDAQ:CIEN) continue to inch higher. The stock really doesn't have any resistance until $27-$27.41.

Stocks edge higher on better economic data

Stock indexes gave up early losses and edged higher Wednesday after the Federal Reserve reported encouraging news on the economy. Manufacturing, consumer spending and corporate hiring increased in all 12 regions surveyed by the central bank.

Hans Olsen, chief investment officer at J.P. Morgan Private Wealth Management, said it was a good sign that the Fed's regional economic report showed that more people were quitting their jobs.

"That only happens if people are starting to feel more confident about their job prospects," Olsen said.

The Standard & Poor's 500 index rose 0.25 point, or less than 0.1 percent, to 1,314.41. The Dow Jones industrial average rose 7.41, or 0.1 percent, to 12,270.99. The Nasdaq composite gained 16.73, or 0.6 percent, to 2,761.52.

Financial stocks fell broadly after the chief executive of JPMorgan Chase said the bank's losses from mortgages will continue.

JPMorgan Chase & Co., the first big bank to release first-quarter earnings, reported net income that beat expectations. The company's investment banking and credit card businesses did well, but its mortgage business remained weak. Chief executive Jamie Dimon said JPMorgan and other banks will likely pay more fees and penalties after investigations into foreclosure proceedings in all 50 states are finished.

JPMorgan lost 0.8 percent, Bank of America Corp. fell 1.5 percent and Wells Fargo & Co. lost 2.3 percent.

Stocks had risen in early trading after the government reported that retail sales rose 0.4 percent overall in March, though much of the gain was due to higher gas prices. It was the ninth straight month of increases.

President Obama outlined a proposal to cut the nation's budget deficit by reducing spending on defense and the growth of Medicare spending, while raising taxes on high-earning Americans and cutting many tax loopholes.

Silgan Holdings Inc., a consumer packaging maker, jumped 19 percent after announcing that it had agreed to buy rival Graham Packaging Co. in a cash-and-stock deal valued at $1.28 billion. Graham jumped 33 percent.

iRobot Corp., the maker of the Roomba vacuum cleaning robot, jumped 13 percent after saying it had signed a $230 million contract with the U.S. Navy to develop small robotic vehicles.

Rising and falling shares were roughly even on the New York Stock Exchange. Consolidated volume came to 3.9 billion shares.