Saturday, March 26, 2011

Joe Friday: "Just the Facts"

It's Friday, and Chris "Just the Facts" Kimble returns for a cameo Dragnet impersonation, this time with a provocative four-pack of technical clues for solving the mystery of the market.

Joe Friday: Something for people to chew on over the weekend. The Euro up against resistance and a rising wedge has formed. The Dollar rallied today, pressing on the top of a falling channel. The VIX created a huge bullish wick. The Nasdaq 100 created a bearish wick up against resistance.

The Bears Are Back - Presenting Part 5 Of The Silver "Thesis"

The bears are back, discussing the usual topics du jour, which in this case is a rather humorous listing of the most recent 99 black swans year to date in 2011, and their impact on silver. Funny stuff.

12 stocks likely to breakout soon

ANDE,Andersons Inc (The)
AON,Aon Corp
DEPO,Depomed Inc
ELOS,Syneron Medical Ltd
MENT,Mentor Graphics Corp
OCZ,Ocz Technology Group
RAX,Rackspace Hosting
RNOW,Rightnow Technologies Inc
SFN,Sfn Group Inc
SGI,Silicon Graphics International
SIMO,Silicon Motion Technology Corp
URI,United Rentals Inc

GARY SHILLING: And Now House Prices Will Drop Another 20%

Last October, when everyone was jubilant about the housing "recovery," Gary Shilling of A. Gary Shilling & Co., predicted that house prices would fall another 20%.

In the five months since, house prices have resumed their decline.

In his most recent research note, Gary sticks by his "20%" decline prediction. We've included a summary and updated charts from his argument below.

(Gary is offering a special discount on his research service for Business Insider readers. To learn more, please visit Gary's web site or call 1-888-346-7444. Please mention Business Insider.)

Housing: Great Expectations vs. Reality

Last spring, many believed that not only was the housing collapse over but that a robust rebound was underway. Investors were crowding into foreclosed house sales and bidding up prices in California, often the bellwether state for new trends.

The tax credit of up to $8,000 for new homebuyers that expired in April spurred buyers and promised to kick-start housing activity nationwide. TheHomeAffordable Modification Program was trumpeted by the Administration to help 3 million to 4 million homeowners with underwater mortgages by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments.

But then a funny—or not so funny—thing happened on the way to housing recovery...

Yes, with mortgage rates so low, houses look "cheap."

Yes, with mortgage rates so low, houses look "cheap."
With low mortgage rates and collapsed house prices, the National Association of Realtors’ Housing Affordability Index has leaped to all-time highs.

But when you don't have a job, old measures of "affordability" no longer apply...

But when you don't have a job, old measures of "affordability" no longer apply...
It’s also become clear that the NAR’s Housing Affordability Index in the earlier post-World War II years is not relevant to today’s conditions. Back then, unemployment rates were usually much lower than now (Chart 7, page 4) and the current threats of layoffs, wage and benefit cuts and being forced into part-time jobs were almost nonexistent. Who ventures into homeownership if he doesn’t know the size of his next paycheck or even if he’ll have one?

Also, with almost a quarter of all homeowners with mortgages under water with their mortgage principals exceeding the value of their houses, many can’t sell their existing abodes even if they wanted to buy other houses.

Unemployment is declining, but job growth has hardly been robust

Unemployment is declining, but job growth has hardly been robust
Mortgages delinquent 30 days, many of which will probably end in foreclosure, have risen lately. They peaked in the first quarter of 2009 at 3.77%, then fell to 3.31% at the end of 2009, but have since risen to 3.51%, according to Tom Lawler.

He goes on to observe that 30-day delinquencies are linked to initial claims for unemployment insurance, which fell last year but subsequently leveled off and are now rising (Chart 15). Also, the delinquencies are rising as weak borrowers with modified loans again miss payments. Fitch Rating believes that 65% to 75% of mortgages modified under HAMP will redefault within 12 months.

And the number of people unemployed per job opening is coming down, but it's still very high

And the number of people unemployed per job opening is coming down, but it's still very high

And those who are unemployed have been unemployed for a very long time

And those who are unemployed have been unemployed for a very long time

True, there are some hopeful signs. The percent of mortgages past due has begun to fall...

True, there are some hopeful signs. The percent of mortgages past due has begun to fall...

And, last spring, thanks to the tax credit, sales of existing homes skyrocketed. Alas, the effect was temporary.

And, last spring, thanks to the tax credit, sales of existing homes skyrocketed. Alas, the effect was temporary.
The revival of home sales early [last] year proved to have less follow- through after the tax credit expired in April than did the previous expiration last November.

Existing home sales subsequently fell to a new low, so the tax credits had only “borrowed” sales from future months with no lasting impact.

And since last year's happy uptick, prices have begun to fall again...

And since last year's happy uptick, prices have begun to fall again...

Most importantly, the number of houses for sale is still abnormally high... and house prices, like everything else, are a function of supply and demand

Most importantly, the number of houses for sale is still abnormally high... and house prices, like everything else, are a function of supply and demand
As we’ve stated repeatedly in many, many past Insights, excess inventories are the mortal enemy ofhouse prices. And those excess inventories are huge.

Notice that, over time, new and existing inventories listed for sale have averaged about 2.5 million. So, we reason, that’s the normal working inventory level and anything over and above 2.5 million is excess.

At the peak of 5 million reached in October 2007, that excess was 2.5 million. It subsequently fell but with the recent jump, the total is 4.0 million, implying excess inventories of 1.5 million.

That’s a lot considering the average annual build of 1.5 million houses. So the inventories over and above normal working levels equals one year's average demand. But wait! There’s more!

As noted earlier, as foreclosures pick up with the ending of the mortgage modification-related moratorium on lender takeovers, “shadow” inventory will become visible as many of those bereaved of their abodes join friends and family.

Furthermore, if we take the Total Housing Inventory numbers published by the Census Bureau at face value—and Tom Lawler, a very careful housing analyst concludes that it takes more than the faith of a mustard seed to do so—there are a lot ofhousing units that are likely to be listed for sale as owners give up trying to wait out the housing bust.

Recently, my wife told me of a friend who finally listed her house for sale right after Labor Day and got nary a nibble in the following three weeks. Then she was further discouraged when two other similar houses in her neighborhood were listed.

And then there's the "shadow" inventory--including the still-massive number of foreclosures

And then there's the "shadow" inventory--including the still-massive number of foreclosures
The Administration’s HAMP initiative, introduced in April 2009, has been a huge disappointment...

But while mortgage modifications were attempted, lenders and servicers were basically forced by the government to suspend foreclosures. Now, as that program unwinds, foreclosures will again jump (Chart 12). Ironically, foreclosure rates have moderated recently because lenders tightened their standards in mid-2008 when housing and mortgages were in free fall. In 2009, two-thirds of all FHA- guaranteed new loans were to borrowers with credit scores over 660, up from 45% in 2008.

Nevertheless, lenders have been loosening in recent months. In January, Fannie initiated a program that allows first-time homebuyers to put down $1,000 or 1% of the purchase price, whichever is greater. In the first half of this year, credit card companies sent out 84.8 million offers to American subprime borrowers, up from 43.7 million a year earlier. In the second quarter of this year, 8% of new car oans were to borrowers with the lowest rank of credit scores, up from 6.2% in the fourth quarter of 2009.

And bank-owned houses (more future inventory)

And bank-owned houses (more future inventory)
Already, Real Estate Owned by lenders due to foreclosures—perhaps the most hated term among bankers—is climbing (Chart 14). Estimatesare that a major share of the 7 million houses that have delinquent mortgages or are in some stage of foreclosure, as well as those yet to come, will be dumped on the market, adding to the already huge excessive inventory glut. Some 4.5 million loans are now in foreclosure or at least 90 days delinquent.

And the folks who aren't selling because prices are still weak

And the folks who aren't selling because prices are still weak
Between the first quarter of 2006, the peak of house sales, and the second quarter of this year, the number ofhousing units, net of teardowns, conversions to non-housing uses and other removals, rose 5.7 million.

Of that total, 1.1 million were added to the pool of vacant units listed for rent or sale, 2.8 million were occupied by new households and so on down the list. Of the 1.3 million increase in those Held Offthe Market, the 1.1 million rise in the “Other” category is the one of interest. This component has leaped from the earlier norm of about 2.6 million to 3.7 million in the second quarter (Chart 25).

This rapid rise, coinciding with the collapse in housing, suggests strongly that many of these houses are indeed shadow inventory, units withheld in hopes ofhigher prices but highly likely to emerge from the woodwork sooner or later.

If we assume that half the 1.1 million increase since the housing peak in the first quarter o f2006 are shadow inventory, the total excess jumps from 1.5 million to 2 million at present, and is likely to rise further.

So, the question is, how long will it take us to absorb all that excess inventory? Some analysts think 1-2 years. Gary Shilling thinks 4-5 years. Why? First because household formation is still lower than it was during the boom

So, the question is, how long will it take us to absorb all that excess inventory? Some analysts think 1-2 years. Gary Shilling thinks 4-5 years. Why? First because household formation is still lower than it was during the boom
Many believe that household formation and, therefore, demand for either owned or rented housing units is closely linked to population growth. A Beazer Homes official said recently that demographics would normally produce household growth of around 1.5 million a year.

But note that those trendless series are extremely volatile, ranging from a peak of almost 2.3 million at annual rates in the current cycle to less than 500,000 recently. Household formation is similarly volatile, not surprising since a household is defined as one or more people living in a separate dwelling unit and not in jail, college, an institution or an army barracks. So household formation is affected by the lust for house appreciation, income growth, employment prospects, family size, mortgage availability and all the other factors that determine the desirability of owning or renting.

The homeownership rate (percent of households that are homeowners) continues to decline, probably headling back to its long-term average

The homeownership rate (percent of households that are homeowners) continues to decline, probably headling back to its long-term average
Back in the salad days of 10% annual price appreciation, a homeowner and/or investor who put down 5% enjoyed a wonderful 200%returnonhisinvestmentper year, neglecting taxes, interest and maintenance. But that hapless homeowner who bought at the peak lost all of his downpayment six times over as prices fell 30%.

No wonder that the homeowner rate, which spurted from its 64% norm to 69%, is now back to 66.9% in the second quarter and probably on its way back to 64% (Chart 18).

More people are choosing to live with their parents

More people are choosing to live with their parents

As they lose their jobs and houses, many Americans are "doubling up"--moving in with friends and relatives. This further reduces demand for housing.

As they lose their jobs and houses, many Americans are "doubling up"--moving in with friends and relatives. This further reduces demand for housing.
Of course, homeowners thrown out of their abodes by foreclosures can continue to be separate households
by renting houses and apartments, but many of those and other discouraged folks are shrinking
households—and adding to vacant housing units—by doubling up with family and friends.

The Census Bureau reports that in the last two years, multi-family households jumped 11.6% ( Chart 22) while total households rose a mere 0.6%. Those aged 25-34 living with parents—many of them “boomerang kids” who have returned home—increased by 8.4% to 5.5 million. Not surprising, 43% of those were below the poverty line of $11,161 for an individual.

And now everyone knows that house prices CAN actually fall, so they're no longer rushing to get in on the the most amazing investment ever

And now everyone knows that house prices CAN actually fall, so they're no longer rushing to get in on the the most amazing investment ever
Most of all, the NAR’s Housing Affordability Index is largely irrelevant today because in contrast with the earlier post-World War II years, prospective buyers know that house prices can, and do, fall.

Who wants to buy an expensive asset with a big mortgage that may be worth much less shortly? And the financial leverage created by a mortgage magnifies the risk tremendously. Someone who buys a house with 5% down sees their equity wiped out if the price falls only 5%. So the fall in house prices and mortgage rates, which have driven up the NAR’s measure of affordability, have been offset by stronger forces.

So, too, will any future increases in the affordability index in all likelihood. The Fed may embark on further purchases of mortgage securities, which could reduce mortgage rates further, but the central bank will probably only act in response to additional economic weakness that will discourage homebuyers. The further declines in house prices we foresee will make them cheaper, but also convinces prospective owners that they are even worse investments.

The rebound in house prices is also suspect and may have peaked out (see chart above). Furthermore, both the previous decline and subsequent reversal probably overstate reality. Earlier, the many sales of foreclosed houses or by distressed homeowners tended to be lower-priced houses and, therefore, depressed average prices. The recent swoon in Los Angeles house prices compared with the early 1990s drop suggests this is true. Conversely, the recent rebound may be overstating reality since, as our good friend and great housing analyst Tom Lawler has noted, the homebuyer tax credit may have induced some to pay up to beat the deadline and to favor higher priced “traditional” house sales over “distressed” homes.

Tom also points out that the Case- Shiller price index for July, which showed increases in 13 of the 20 metro areas (not seasonally adjusted), was based on transactions from April to June and, therefore, included tax credit- related settlements in May and June. Also, seasonally-adjusted data reveals declines in 16 of 20 metro areas and a small 0.1% fall from June to July. Another Home Value Index compiled by Zillow reports that prices nationwide fell in July from June, the 49th consecutive monthly fall. That puts them down 24% from the May-June 2006 peak, similar to the 28% drop in the Case-Shiller index.

On a positive note, housing starts are still at a startlingly low level, which means less new inventory to absorb

On a positive note, housing starts are still at a startlingly low level, which means less new inventory to absorb

THE BOTTOM LINE: Gary Shilling thinks house prices probably have another 20% to fall

THE BOTTOM LINE: Gary Shilling thinks house prices probably have another 20% to fall
This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%.

This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890 ( Chart 26).

We are strong believers in reversions to the mean, especially when it has held for over a century and through so many huge changes in the economy in those years—two world wars and the 1930s Depression, the leap in government regulation and involvement in the economy, the economic transformation from an agricultural base to manufacturing and then to services, the post- World War II population shift from cities to suburbs, the western and southern transfer of population and economic strength, the movement from renting to homeownership and the accompanying spreading of mortgage financing, etc.

Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline (Chart 26), but fall below in the meanwhile. Just as they way overshot the trend on the way up, they may do so on the way down, as is often the case in cycles. Furthermore, another big house price decline will spike delinquencies and foreclosures leading to more REO sales by lenders,whichwillfurtherdepress prices. Our analysis indicates that a further 20% drop in prices will push the number of homeowners who are under water from 23% to 40%, resulting in more strategic defaults, more REO, etc.

Even prices in New York City have resumed their fall!

Even prices in New York City have resumed their fall!

If house prices DO fall another 20%, a lot more homeowner equity will be wiped out. And that's not good news for banks. Or the economy. Or, for that matter, future house prices.

If house prices DO fall another 20%, a lot more homeowner equity will be wiped out. And that's not good news for banks. Or the economy. Or, for that matter, future house prices.
At that point, the remaining home equity of those with mortgages would be wiped out on average (Chart 27. That, in turn, would impair already-depressed consumer confidence and their willingness and ability to spend, to say nothing of residential construction.

In California, epicenter ofthe housing boom-bust, construction jobs dropped 43% from June 2006 to June of this year, compared to a 28% decline nationwide, and the unemployment rate in the Golden State jumped to 12.3% in June, far above the 9.5% rate nationally.

Leading Market Indicators and Tipping Points

As a financial markets trader I can only make money by successfully predicting the future to some degree. Therefore I am more interested in market analysis and less interested in market commentary. I am more interested in leading indicators and less interested in coincident and lagging indicators. I am more interested in tipping points and less interested in known issues. I understand that all data flow and newsflow is by necessity after-the-event, but I can focus on flow that has historically consistently correlated with future market performance.

So, I'll not dwell on coincident and lagging indicators in this article, which would include:

1. GDP
2. Personal Income
3. Retail Sales
4. Employment
5. CPI
6. Industrial Production

And I'll move straight on to leading indicators:

7. Conference Board leading indicators composite - positive and strong:


8. ECRI leading indicators composite - possible negative divergence in the weekly leading index but no divergence in the weekly leading index growth rate:

Source both : Shortsideoflong blogspot

9. OECD leading indicators - this data looks out to around July time and there are concerns only for China, India and the PIIGS. Japan, Germany, US and Russia are particularly strong:

Source: OECD

10. Money Supply - growth is positive and strong, whilst the money multiplier which is weak and weakening. This means the banks aren't lending. However, if the ratio was over 1 then the strong money supply growth would likely translate into major inflation. A watch item:

Source: St Louis Fed

11. Stock Market returns - the bull trend remains in place and is therefore forecasting positive

12. Manufacturing data - particularly strong

13. Consumer sentiment/expectations - weak of late

14. Yield curve probability of recession - very low likelihood of imminent recession

15. Ciovacco Bull Market Sustainability Index - positive from 2 months to 1 year out

16. Bloomberg Financial Conditions Index - moved back into positive territory

In summary, leading indicators are overall positive and strong, both in the US and globally, but with the following concerns or watch items: potential ECRI divergence, M1 multiplier, US consumer sentiment/expectations, China and India.


Let's now turn to Known Issues and Tipping points, and, again, I'll not dwell on the former but focus on the latter:

In relation to point 17, the charts below reveal the threat to stocks that oil over $105 and rising may represent. This is also reflected in research by Bespoke, revealing the negative historical impact on stocks of a period of strongly rising oil prices.

Source: PFS Group

In summary, the oil price represents the biggest current threat to stock market performance and the economy, with watch items of global inflation, the US dollar and Chinese leading indicators.

John Hampson

Pan American Silver: Last Bargain in Silver Mining Sector : PAAS

The silver sector's momentum has taken on a life of its own now, and almost is in a mini-parabolic move higher. A parabolic move is when the rate of change higher begins to accelerate rapidly. It then starts to go higher so much faster that the uptrend becomes unstable and leads to an eventual crash.

We don’t believe this is the final move higher for silver, and it is not the end of its bull market; however, you have to tread much more carefully in this kind of market. We really hoped this wouldn’t have happened so fast, but greed and human nature are hard to change. We saw this coming as the March option expiration was arriving, as that is when there is maximum pressure on those who are short silver. We'll have to wait to see what happens with physical silver and the silver miners, but in the meantime there is one stock in the sector that still offers value that we are overweighting at 20% of our silver model portfolio.

The stock that used to be a leader in the sector and was considered a blue chip but suffered recently fundamentally so it has been left behind during the monster rally in the silver mining sector. Pan American Silver (PAAS) is one of the largest primary silver producers, deriving about 66% of revenue from silver and 13% from gold.

It is one of the most diversified silver miners, with mines in Mexico, Peru, Bolivia and Argentina. Pan America has had a history of consistent reserve and production growth for 15 years until this year. About one month ago, it announced its production would fall from 24.3 million ounces in 2010 of silver this year to 23-24 million for 2011, due to reduced percentages derived per ton of ore. That combined with the fact that some new projects have run into some roadblocks and a weak earnings report, and the stock sold off about 5%. It then surged higher along with all silver stocks, but fell back again and is now 11.7% off its 52-week high of $42.33.

We like to use enterprise value divided by revenue as our main valuation criteria. In this case, we estimate PAAS will gross about $840 million in 2011 revenue. With an enterprise value (market cap + net debt - cash) of $3.7 billion, the stock trades at about 4.4 times revenue. We think the stock's fair value right now should be valued at 5.0 times revenue or 13.5% higher at $42.50. With $330 million in cash in excess of its debt, PAAS has the cash necessary to keep investing in its future projects to grow.

The reason for this discount in the stock price is its lack of growth in the next couple of years in annual silver production. However, with the price of silver rising so strongly, we think the revenue and earnings gains alone will be enough to drive the stock higher over the next 12-18 months. We estimate PAAS will earn about $2.30 in 2011, so the stock is trading at 16.3 times this year’s earnings, a slight premium to the market's average 15 price to earnings ratio. We think its earnings will soar to $2.80 in 2012, which means it is trading at 13.4 times 2012 earnings or just an average market multiple -- an average market multiple for a company whose rising price of silver will drive much higher percentage gains in profits.

There is one huge difference, though, with Pan American Silver than the other stocks in the sector: You pay an average enterprise value and price to earnings valuation for a very good large, geographically diverse silver producer. However, you also get a very large potential future project for free. It recently purchased for $585 million the La Navidad project in Argentina. This is a very large new discovery and the economics of it would make it very, very profitable. This project is projected to be able to produce 19.5 million ounces of silver annually versus current production of 24 million ounces, so it could increase its production 81% in the next three to five years.

There is one big problem with the project, though: It is slated to be an open-pit mine; currently, in this province, open-pit mining's not legal. Pan American claims it thinks the government will write a new mining bill allowing it to go forward. We agree that the project will go forward, but that kind of uncertainty is the main reason the potential value of this future growth is not built into the price of the stock.

Over the next three to five years, if this project went forward, it could be enough to drive the stock price 30-50% higher for long-term investors. However, if it was denied, it could knock the price of the stock down temporarily as it would demonstrate PAAS threw away a large chunk of shareholder value pursuing an impossible project. Since you’re not paying that much for the potential of the project already built into the current stock price, we like the potential reward versus risk in this situation.

The bottom line is, in the silver mining sector -- where it has become much more difficult to find value -- Pan American Silver’s valuation trades at about a 14% discount to our estimate of its current operations. Then it has a very large future project that, if it goes as planned, could add about 40% in value to the stock over the next three to five years.

When you combine the current discount and the future potential, Pan American Silver is the last bargain in the silver mining sector. At the end of 2010, it was reported that George Soros had taken a very small position in Pan American Silver. We suspect he added to his position this quarter, and we think investors are attracted by the big future potential at a reasonable price, along with the developing strength of silver prices.

Disclosure: I am long PAAS.

10 Commandments for Frugal Living

Jeffrey Strain

Frugality often gets a bad rap. Many people misunderstand frugality and assume that it's nothing more than being "cheap" when, in reality, frugality is making sure that you get the most from the money and resources you have, even if they are limited.

For those who are just beginning to embrace frugality as a part of their lifestyle, here are 10 frugal commandments to live by.

10. Thou shalt not buy things you don't need.
To get the most from the money that you have, it's essential to have a basic understanding of the difference between wants and needs. Chances are that a lot of things that you assume are needs are only wants you have disguised as needs in order to justify purchasing them.

Basic needs are food (including water), shelter and clothing plus the essentials needed to work so that you can provide those basics. That means that the TV (and virtually every other gadget in your house) is a want and not a need. Having the willpower to buy only those things that you really need (being frugal doesn't mean being stingy, but it does mean that any wants you do have are specifically saved and budgeted for as opposed to impulse purchases) is essential to getting the most out of frugality.

Simply put, if you don't need it, don't buy it, no matter how good the price.

9. Thou shalt only buy when you have the money.
One of the basic premises of frugality is having the money to pay for the things that you buy. By budgeting and saving for those things that you want and paying for them with cash rather than using credit, you ensure you aren't paying far more than you should be for the products and services that you buy.

8. Thou shalt purchase by value, not price.
One of the biggest misconceptions about being frugal is that those who are frugal only purchase things that are cheap or the very lowest price. The truth is that those who are frugal always try to buy the best value taking into account other factors such as the life expectancy and additional upkeep costs that come into play beyond retail price. This often means looking at the long term cost of an item rather than just the initial purchase price.

7. Thou shalt be patient.
Those who embrace frugality rarely have the latest and greatest gadgets that have just hit the market. Instead, those who are frugal wait for the early adopters to embrace the technology until the point at which the price falls to a reasonable level as the gadget makes its way to the masses.

Those who are frugal are usually a generation or two behind on the latest gadgets, but they still perform the functions that need to be done and they get them for a fraction of the price.

6. Thou shalt buy used.
A basic tenet of frugality is to get the best value from what you purchase, and this often means purchasing products used. Those who are frugal are more than happy to let someone else pay full retail price and absorb the premium pricing for products that are depreciating assets (think of the difference in price between a brand new car and a two-year-old vehicle, as an example).

Used products are often a fraction of the price of the new models and in many instances perform the needed task just as well.

5. Thou shalt look for alternatives before buying.
If you need something, automatically going out and buying it is not an approach that a true frugal person would take. Instead, before spending any hard-earned money on something that may only be used a few times, consider alternatives.

Is it possible to borrow it from a friend, a neighbor or a place such as the library? Would renting it be less expensive in the long run? Do you have something else already on hand that can be used to perform the same task? Buying is only one of many options when it comes to getting things you may need.

4. Thou shalt ignore the Joneses.
Part of living a frugal life is understanding that life isn't a competition over who has the most stuff. It's important to concentrate on your and your family's needs, and not what others are spending their money on. Just because your neighbors bought it doesn't mean that you need to go out and buy something on par or better.

3. Thou shalt not pay full retail price.
When you are going to make a purchase, you should never pay full retail price for it. There are a number of ways to avoid paying full retail such as using coupons, finding discounts, waiting for sales and negotiating a lower price. With a bit of preparation and forethought, there is never a reason to pay full retail price for anything you purchase.

2. Thou shalt not waste.
One thing that those who are frugal hate is waste. While this obviously includes the waste of money, it also goes beyond money to such areas a wasted resources and wasted time. Efficiency is a frugal person's friend, and those who are frugal tend to follow the green mantra of reduce, repurpose, reuse and recycle for the things that they do possess.

1. Thou shalt do things yourself.
When something needs to be done, the first choice to perform the task should be yourself rather than hiring someone else to do it. Frugal people tend to be do-it-yourself experts and do not pay others to do things that they can easily do by themselves. When they don't know how to do something, they research it to see if it is something that they can do with the proper instructions or something sufficiently complicated that it's best to let an expert handle.

While it may take some practice at first, getting these 10 frugal commandments down will make your savings account look a lot healthier in the new year.

Why the Fed's QE2 "money-printing" may never stop

So back in September 2008—in the throes of the Global Financial Crisis—the Federal Reserve under its chairman, Ben Bernanke, unleashed what was then known as “Quantitative Easing”.

Sure: It’s fine when they do it to Saddam—
it’s another thing when they do it to you.
They basically printed money out of thin air—about $1.25 trillion—and used it to purchase the so-called “toxic assets” from all the banks up and down Wall Street which were about to keel over dead. The reason they were about to keel over dead was because the “toxic assets”—mortgage backed securities and so on—were worth fractions of their nominal value. Very small fractions. All these banks were broke, because of their bad bets on these toxic assets. So in order to keep them from going broke—and thereby wrecking the world economy—the Fed payed 100 cents on the dollar for this crap.

In other words, the Fed saved Wall Street by printing money, and then giving it to them in exchange for bad paper.

Time passes, we move on.

Then, in November 2010, the Federal Reserve—still under Ben Bernanke—unleashed what is colloquially known as QE-2: The Fed announced that it would purchase $600 billion worth of Treasury bonds over the next eight months.

The rationale was so as to stimulate lending. But really, it was so that the Federal government wouldn’t go broke. The Federal government deficit for fiscal year 2011 is $1.6 trillion—the national debt is beyond 100% of GDP, at about $14 trillion. The Federal government issues Treasury bonds in order to fund this deficit. Ergo, by way of QE-2, the Federal Reserve bought roughly 40% of the Federal government deficit for FY 2011. Add on other Treasury bond purchases by the Fed via QE-lite (the reinvestment of the excedents of the toxic assets on the Fed’s books), and the Federal Reserve is buying up half the deficit of the Federal government, as I discussed here in some detail.

In other words, the Fed saved Washington by printing up money, and then giving it to them in exchange for—well, not bad paper, but at least questionable paper.

So! . . . let’s see now . . . Fed money printing—check! Saving someone’s bacon (even though they shoulda known better)—check! Taking on dodgy paper—check!

Did it in 2008 for Wall Street, then did it again in 2010 for Washington.

But the key difference between these two events is, the banks didn’t have any more toxic assets, once they sold them all to the Fed.

But the Federal government will still have more Treasury bonds it will have to sell, once the Federal Reserve ends QE-2 this coming June.

The fiscal year 2012 deficit will be on an order of 10% of GDP—roughly $1.5 trillion. And 2013 and 2014? Around the same range.

Over at Zero Hedge, they are past masters at timing the funding needs of the Federal government. But we don’t need to go into the monthly figures of POMO purchases and Treasury auctions and all the rest of it. All due respect to Tyler and his wonderful team at ZH, all that is merely the mechanics of Federal Reserve monetization.

What we should look at is the simple, macro question: If the Fed ends QE-2 in June as they have said they will, who will take up the slack? Who will purchase between $75 and $100 billion worth of Treasury bonds at yields of 3.5% for the 10-year?

Is there someone?


The answer is, No one will take up the slack.

Who, Japan? They’ve got some well-known troubles of their own—they’re all about selling Treasuries and buying up yens, both now and for the foreseeable future.

The Chinese? They’ve been quietly exiting Treasuries for a couple of years now, and going into every commodity known to man.

Europe? Are you serious—Europe? Please don’t make me laugh that hard—it hurts.

The fact is, there is no one outside the United States that I can think of who would willingly buy Treasury bonds—not to the tune of +$75 billion a month.

Therefore, if no one outside the United States would willingly give money to Washington to fund the deficit, then someone inside the U.S. will have to step up.

The obvious-obvious-obvious solution to this mess is for the Federal government to stop spending its way to oblivion—but does anyone realistically see this happening?

Therefore, as Spock always sez, if you eliminate the impossible, whatever remains, however improbable, must be the truth.

If foreign sources of funding will not cover the Federal government’s deficit after June 2011, and Washington will definitely not cut spending in any sort of realistic sense, then there really are only two—and only two—possibilities:
• The indefinite continuation of QE by the Federal Reserve.
• Or the requisitioning of private retirement accounts and pension funds.
Don’t dismiss the second possibility out of hand—think it over.

What pool of money is just sitting there, not doing much, while being legally barred from its owners? What pool of money is easily accessed, yet is large enough to fund the deficit?

The retirement accounts of the American people: Both individual private accounts, and pension funds.

After all, the total for all pension monies is roughly 100% of GDP (this includes Social Security). And the Federal government has already raided the “Social Security lock box”—that box is stuffed with Treasury IOU’s.

So the Federal government might well turn to the private sector for cash. The Federal government might conceivably claim that ongoing funding needs require that every single 401(k) and IRA divest from its portfolio of stocks and bonds, and be fully invested in Treasuries.

This could be accomplished very easily, from a practical standpoint—just inform banks, and have them turn over to the Federal government all your mutual funds and stocks you agonized over, and get long-term Treasury bonds of nominal equal value in exchange.

401(k)’s and IRA’s would be the first ones the Federal government would go after—for the obvious reason that union pension funds have the union’s political muscle. But individuals? They have no political machine. So they’re screwed.

Anyway, the language used for this maneuver by the Treasury department would make it difficult for a lot of (unaffected) people to get upset over the situation: The Treasury department wouldn’t call this process “retirement account confiscation”. They’d call it something innocuous, like “retirement asset swap”—or better yet, throw in some patriotic bullshit (indeed, the last refuge of the scoundrel) and call it “Americ-Aide Asset Swap”—or even better: Call it “Help America Retirement Treasury Bond Program”—otherwise known as HART-bonds. (Awww!!! Probably maudlin enough to get Geithner an appearance on fucking Oprah.)

There might be short-term political damage, but like losing your virginity or carrying out state-sponsored torture programs, it would be the necessary start for a slide that will never end. After this first “retirement asset swap” carried out on the 401(k)’s and IRA’s, the Treasury department would start doing more of this to ever-bigger pension funds, until eventually all retirement assets would be converted into Treasury bonds.

Hey, they did it in Argentina. And as Yves Smith always sez, America has become Argentina, but with nukes.

Now, this is one possibility, of the only two which I can see.

The other possibility, of course, is that the Federal Reserve will not end Quantitative Easing-2 come June. The Fed will extend the deficit monetization indefinitely. The Fed will be under the mistaken impression that this will somehow save the U.S. economy. (The best metaphor I’ve been able to come up with for this situation is, the Federal government is like a junkie who’s already OD’ed—and the Federal Reserve is trying to “save” him by shooting him up with even more heroin.)

So between these two possibilities—confiscating retirement accounts and forcing some sort of Treasury bond asset swap, or an endless continuation of QE—which is easier?

Obviously QE-three.

Therefore, that’s what I think is going to happen: QE money-printing as far as the eye can see.

Well, look on the bright side: At least you’ll get to keep your ever-shrinking retirement nest egg. Bully for you!

If you’re interested, you can find my recorded presentation “Hyperinflation In America” here. I discuss in detail what I would do, if and when the dollar crashes—or the Fed and Geithner get desperate.

Why Stock Exchanges Are Such Hot Properties

Martin Hutchinson writes: Stock exchange mergers are all the rage these days.

The NYSE Euronext Group (NYSE: NYX) and Deutsche Boerse AG are attempting to merge and the London Stock Exchange Group PLC and TMX Group Inc. are also getting together.

The deals are the latest in a consolidation cycle among exchange operators that has accelerated over the past decade. In 2010, Singapore Exchange Ltd. (PINK: SPXCY) agreed to an $8.3 billion takeover of Australia's ASX Ltd (PINK: ASXF) to create Asia's fourth-largest stock exchange. And IntercontinentalExchange Inc. (NYSE: ICE) purchased the Britain-based Climate Exchange PLC (PINK: CXCHY) that same year for $597 million.

So I would not be at all surprised to see other bourses follow up with stock exchange mergers of their own.

CME Group Inc. (Nasdaq: CME) and Nasdaq OMX Group Inc. (Nasdaq: NDAQ) still haven't ruled out a potential counteroffer for NYSE. And some analysts speculate that the Nasdaq could be the first U.S. stock exchange to tie-up with an Asian partner.

Indeed, for the exchanges themselves, there appear unlimited possibilities of expansion, mostly in the derivatives market.

But the sad truth is that the only thing individual investors are likely to get out of all of this activity is a sneaky increase in fees.

The Business of Being a Bourse
The main driver behind exchange mergers is the dream of global dominance. The NYSE controls Euronext, which itself is an agglomeration of several Paris-based European stock exchanges (including the old Paris Stock Exchange). So a Deutsche Boerse-NYSE tie-up would give the merged exchange dominance in all major global markets except Asia. (Admittedly that exception is a very important one, since the volume of initial public offerings (IPOs) on Chinese stock exchanges in 2010 exceeded that in the United States.)

However, since regulators have forced derivatives trading increasingly onto exchanges, and since the volume of derivatives outstanding is a large multiple of world gross domestic product (GDP), the revenues available from achieving dominance in the global derivatives markets are very substantial - even if the fees charged are only a minuscule portion of each individual trade.

The other new business that has made global stock exchanges attractive assets is that of computerized "high-frequency trading." Here, computers located within feet of the central exchange use complex mathematical algorithms and their early knowledge of the order flow to make infinitesimal profits, but millions of times a day.

As I have written previously, this is an entirely parasitic business, since it involves trading on insider information, knowing the flow of orders before the general market, and taking advantage of this knowledge. As with many Wall Street scams, the lobbyists were able to ensure that no significant control of this business made it into last year's Dodd-Frank Wall Street Reform and Consumer Protection Act.

As high-frequency trading makes up an ever-larger proportion of the order flow, the market's price-discovery mechanism becomes ever more corrupted - and exchanges become ever richer. Thus market share in this business is highly attractive, leading to mergers.

Implications for Investors
Needless to say, the merged exchanges have almost no interest in business from you and me. When I sold $5,000 worth of shares recently, the exchange charged me 7 cents. Multiply that by the 40-50 trades I do a year, and you're still only talking about $3.00 or so. Multiply that figure by all the individual investors in the United States (except for a few trading-obsessed semi-professionals, most of whom have lost their shirts in the last few years) and you're still not talking about enough to pay a lot of bonuses or build a business strategy.

In other words, we are mere hangers-on, meaning we're of very little interest to the managers of the merging exchanges.

You can see this from the lack of benefits previous mergers have brought us. You would have thought that the merger of the NYSE and Euronext in 2007 would have enabled us to trade French stocks as easily as U.S. stocks, but far from it. Except for those few French companies that have gone to the expense of creating and issuing American Depository Receipts (ADRs), and complying with the Sarbanes-Oxley regulations, it is just as difficult now to trade French shares as it has always been in the past.

Similarly, the Deutsche Boerse merger won't give us access to any extra German shares - a pity since Germany is currently the developed world's best growth market. A few brokers are now starting to offer investors the ability to trade on a limited number of foreign exchanges, but that's still by no means universal, and exchange mergers won't affect it much.

One major reason why we cannot trade easily on foreign exchanges is that the Securities and Exchange Commission (SEC) has not cleared most foreign shares to be sold to U.S. residents. To some extent I can see the SEC's point. For some reason - I must have accidentally been polite to someone - I got on a list whereby every dodgy broker in the United States feels entitled to call me up and try to sell me rubbish. Obviously, they wouldn't be doing this if there weren't people who have succumbed to their badgering and bought the rubbish they were selling. So allowing such salesmen to operate globally would merely increase the number of scams sold to U.S. investors.

However, if the SEC wants to protect us it would do better to go after the crooked brokers. Those of us who make our own investment decisions, and probably use a discount broker to execute trades simply to avoid the full service broker's bad advice, should be entitled to venture beyond these shores.

These days, information about global stocks is readily available, over the Internet or better still through Money Morning and Money Map Press, which unlike the dodgy brokers, are trying to build our wealth, not just our trading volume. We the intelligent and well-informed should not be held back by the failings of the gullible.

The Bottom Line: Stock exchange mergers will do nothing to help us invest internationally. The biggest likely change for us is that, if one of the behemoths establishes a global monopoly or near monopoly, trading fees will go up. You can count on it!

The Economist - March 26, 2011

The Economist - March 26, 2011
PDF | 117 pages | 60.34 Mb | English

The Economist is a global weekly magazine written for those who share an uncommon interest in being well and broadly informed. Each issue explores the close links between domestic and international issues, business, politics, finance, current affairs, science, technology and the arts.

read more here

Oil Will Be Gone in 50 Years: HSBC

There could be less than 49 years of oil supplies left, even if demand were to remain flat according to HSBC’s senior global economist Karen Ward.

"Energy resources are scarce," Ward said in a research note. "Even if demand doesn’t increase, there could be as little as 49 years of oil left."

"Gas is less of a constraint, but transporting it and using it to meet transport demand is a major issue," she said. "Coal is the most abundant with 176 years left, but this is the worst carbon culprit."

If supplies were not constrained, the world would see a 110 percent jump in demand by 2050, equivalent to 190 million barrels a day, to fuel growth in the emerging world, Ward said.

But unless someone finds major new reserves this will not be possible and other sources of energy will need to be found.

"Energy security – defined in this instance as domestic energy production per head of population – will be an increasing concern," she said. "Diversifying to natural gas to ease the pressure on the oil market won’t overcome it since its supply is as geographically dense as oil."

Ward said she believes the most "energy insecure" regions are Europe, Latin America and India and predicts Europe in particular will find its energy situation getting worse.

"Europe is the big loser with many countries falling down or out of the league table of economic size," she said. "They could be losing their influence on the world stage just at the time when they are most vulnerable."

No Fast Cars

The threat of global warming is not going away and its impact will be most keenly felt in the developing world, HSBC said.

"The ‘solution’ requires greater energy efficiency and a switch in the mix of energy as well as using ‘carbon capture’ technology to limit the damage of fossil fuel use," Ward said.

"We have become terribly complacent in the way in which we use energy," she added. "The lowest hanging fruit is in the transport sector. Smaller, more efficient cars will get you from A to B, just not as quickly."

As the Japanese authorities work around the clock to avoid a nuclear disaster there is a risk that nuclear power generation will see investment cut back at a time when it was expected to play a far bigger role.

"If Fukushima results in a two-decade freeze on plans, as we saw following the Chernobyl disaster in 1986, then renewable energy will have to play an even larger role, or efficiency improvements would have to accelerate further," Ward said. "A reduced role for nuclear energy would make meeting carbon limits even more challenging."

"Government foresight on a scale not seen for 40 years will be needed to chart the route for the next 40 – at a time when the public sector in the OECD has perhaps the least capacity in decades to make strategic investments in new infrastructure."

Stocks in U.S. Rise on Earnings; Portuguese Bonds Fall, Aussie Strengthens

U.S. stocks gained, extending a weekly rally, as Oracle Corp. (ORCL)’s profit forecast topped analysts’ estimates and economic growth was revised higher. Portugal bonds fell after S&P downgraded the debt, while Australia’s currency touched a record versus the dollar as commodities rose.

The S&P 500 climbed 0.3 percent to 1,313.8 at 4 p.m. in New York. The MSCI All-Country World Index of stocks in 45 nations rose for a seventh day, its longest streak November. Portugal’s 10-year bond yield jumped to a euro-era record. Australia’s dollar strengthened as much as 0.8 percent to $1.0294, while the euro weakened against 11 of 16 major peers. Ten-year Treasury yields climbed 3 basis points to 3.44 percent.

The S&P 500 has rebounded 4.5 percent from its 2011 low last week as concern eased that the global economy would be hurt by Japan’s worst earthquake on record and uprisings in the Middle East and northern Africa. The benchmark measure of U.S. stock options had its biggest seven-day drop 2008 as demand for protection against further declines subsided.

“Despite the global macro uncertainties, company fundamentals are leading investors to bid the market higher,” said Eric Teal, chief investment officer at First Citizens Bancshares Inc. in Raleigh, North Carolina, which manages $5.2 billion. Oracle’s forecast “is a good signal for the technology sector, and so we think there will be ongoing strength in earnings for those companies.”

S&P 500, VIX

The S&P 500 advanced for the third day and extended its weekly gain to 2.7 percent. The Chicago Board Options Exchange Volatility Index, also known as the VIX, has tumbled 39 percent since March 16.

Stock also gained today after the Commerce Department said the economy grew 3.1 percent in the fourth quarter. The revised increase in gross domestic product compares with a 2.8 percent estimate issued last month, the figures showed.

Stocks maintained gains after the Thomson Reuters/ University of Michigan final index of consumer sentiment decreased to 67.5 from 77.5 in February. The preliminary estimate issued earlier this month was 68.2. The median forecast economists surveyed by Bloomberg News projected a reading of 68.

The MSCI Asia Pacific Index advanced 0.8 percent and the MSCI Emerging Markets Index climbed 0.8 percent. The Stoxx Europe 600 Index rose 0.1 percent and gained 3.1 percent since March 18, its biggest weekly rally in six months.

Oracle Rallies

Oracle, the world’s biggest supplier of database software, rallied 1.6 percent after saying earnings will increase amid a boom in demand. Accenture Plc (ACN), the second-largest technology- consulting company, jumped 4.5 percent after predicting better- than-estimated sales. SAP AG, the world’s largest maker of business-management software, advanced 1.9 percent. Infosys Technologies Ltd., India’s second-largest software-services provider, climbed 5.3 percent, the most since July 2009.

Ten-year Portuguese bond yields surged as much as 14 basis points to 7.80 percent after S&P joined Fitch Ratings in cutting the nation’s creditworthiness as European Union leaders met to discuss ways to resolve the region’s debt crisis.

Portugal’s two-year yields rose 37 basis points to 7.07 percent and jumped 73 basis points this week, while the extra yield investors demand to hold the 10-year debt versus benchmark German bunds rose 9 basis points today to 451 basis points.

Default Swaps

The cost to protect U.S. corporate bonds from default was little changed as economic growth outweighed the downgrade of Portugal’s debt. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose half a basis point to a mid-price of 95.04 basis points, according to index administrator Markit Group Ltd.

Default swaps on Tokyo Electric Power Co. increased 82 basis points to 352 after Japan’s nuclear regulator said one reactor core at the quake-damaged Fukushima Dai-Ichi power plant may be cracked and leaking radiation.

Australia’s dollar rallied against 14 of 16 major peers, gaining at least 1.3 percent versus the Norwegian, Swedish and Swiss currencies. Natural gas, cattle, hogs and sugar climbed at least 1.5 percent to lead gains in commodities in the Thomson Reuters/Jefferies CRB index, which rose for an eight straight day in its longest rally since November.

New Zealand’s dollar climbed 0.5 percent versus the U.S. currency after central bank Governor Alan Bollard said the nation’s economy will get a boost from earthquake reconstruction next year.

The franc depreciated 0.6 percent against the euro, and 1.3 percent versus the dollar. The Swiss central bank said that while borrowing costs can’t remain near zero over the coming years, the inflation outlook hasn’t changed “significantly” since the previous quarterly assessment in December.

Oil edged lower in New York as crude failed to breach technical resistance at its 30-month high. Crude for May delivery fell 20 cents to settle at $105.40 a barrel on the New York Mercantile Exchange. Prices have risen 3.5 percent since March 18, the first weekly advance in three. Oil is up 31 percent in the past year.