This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Thursday, January 21, 2010

Elections, Economy, and Ever-Expanding Leverage

This week we've seen an excellent example of a common saying in financial market: "Buy the rumor, sell the news." I'm referring, of course, to the senate election of Republican Scott Brown in Massachusetts on Tuesday.

Popular opinion, prior to the election results coming in, was that the financial markets would experience a rally if Brown was victorious, because of his conservative stance on health care and fiscal spending. Instead, quite the opposite occurred.

Instead, the market staged a rally on Election Day as investors speculated that Brown would come out on top. Once the results were in, however, the market took a dive on Wednesday, led by commodities and raw goods.

Despite this recent pullback, things are beginning to look up. On Wednesday housing numbers were released for December, while hinted that the recovery in real estate would continue. While housing starts declined for December, the number of permits increased, which suggests a coming change of circumstance.

Home builders do still face obstacles, particularly with regard to pricing. Many are having difficulty selling recently-completed homes because they can't compete with the prices of existing housing already on the market, including foreclosures.

This fact, though unfortunate for builders, reveals an important fact that investors need to note. It tells us that currently many homes on the market are selling below their replacement cost, a condition which, while beneficial for buyers, is not sustainable for any extended period of time.

This circumstance can be corrected one of two ways: either housing prices begin to rise, or replacement costs fall. While the former is certainly more likely than the later, one development in the markets may contribute to falling replacement costs.

As noted previously, and in previous blogs, the prices of commodities have lately been falling across the board. While certainly not the only cause for this development, the Chinese government has undoubtedly played a role the recent decline in prices.

The Chinese government, in recent weeks, has been ‘encouraging' Chinese banks scale back lending, for fear that they are creating asset bubbles, particularly in commodities. Reports lately have attributed this rise in prices to prospects of future economic growth, but recent government actions seem to suggest otherwise, and that speculation may have played a role.

Unlike the Chinese, who appear to be students of history, intent on not repeating past mistakes, US bankers seem to be back to many of their old tricks. Recently released information indicates that many banks have, in recent months, been ramping up many of the lending practices that contributed to the financial crisis.

While credit is finally beginning to loosen for many well-capitalized companies and individuals, it has been flowing for months to financial firms including hedge funds and traders. This has allowed traders and hedge funds to trade on margin and establish massively leveraged positions. Should the market take a second dive, the ensuing deleveraging could easily take stocks back to lows set in March of 2009.

Monday, January 18, 2010

Autos Help Drive Economy, Can’t Carry Whole Load

Our topic for this week is one of surprise, but particularly pleasant surprise. The auto sector, a regular in the headlines during this past financial crisis and ensuing recession, appears to have turned a corner and now seems poised for a recovery.

Recently released numbers for December auto sales reflect not only an increase over preceding months, but also an improvement over the previous December (2008).

Of course, after last year, there was little room for auto sales to fall any further. Sales for 2008 were so low that they didn’t even keep up with the scrap rate for cars, which was quickened by the government’s Cash for Clunkers program.

Now, thanks to cost-cutting measures taken by car companies since the crisis began, they’re now sitting on large amounts of cash, which they have been committing to new projects, including the opening of new plants and calling back workers.

What’s more, auto companies are now spending their well-guarded cash in much smarter ways. Auto companies are now slimming down their product lines to emphasize only popular models.

Incredibly, after all these months of languishing, to the point of requiring government aide, auto companies are already discussing repayment of bailout funds and even reissuing shares of stock to the public. General Motors has discussed such a reissue to occur later this year, while Chrysler is looking to the beginning of 2011.

Despite this pleasing bit of news, the fact remains that GM, Ford, and Chrysler are not going to save the US economy on their own. After all, the real workhorse of the American economy remains, even during these troubling economic times, small business.

At President Obama’s banking summit last month, JP Morgan CEO Jamie Dimon reportedly interrupted Obama to inform him that banks haven’t been lending because there has been little demand for loans by qualified individuals and small businesses (Gasparino, New York Post).

The reason for this lack of demand for loans among small businesses is due mostly to the lack of encouraging policies coming out of Washington. Between taxes and the rising costs of healthcare and energy (re: cap and trade), companies have been extremely hesitant to take on debt obligations.

This debt-aversion is not just common among small start-ups or, conversely, corporate giants. In fact, it is pervading the American, nay the global economy. The world over, the race to deleverage is quickly gaining momentum.

Monday, January 11, 2010

The Biggest Heist in History

In 1987, when Alan Greenspan began his tenure as Federal Reserve Chairman under President Reagan, each American's share of the national debt was approximately $8,500. Now, 22 years, trillions of dollars, and four presidents later, the national debt per capita has ballooned to nearly five times its previous sum, now totaling about $40,000 per American.

This effectively means that since 1987, American taxpayers have been robbed of what has now amounted to trillions of dollars, making it the largest heist in recorded history. Since 1987 the funds of hard-working Americans have been embezzled by a select few by several means, their money distributed to the likes of Chrysler, GM, AIG, Goldman Sachs, and countless corporate executives.

Keep in mind, of course, that this new total excludes the obligations that may arise from bailout legislation passed during 2008 and 2009, as these bailouts, for the most part, gave the Treasury and the Federal Reserve permission to spend outrageous sums.

These agencies have, in turn, guaranteed a wide range of distressed securities, including mortgage-backed securities that contributed largely to the recently-deceased bubble in housing. However, since the government has not yet had to make good on any of these guarantees, their capital commitments are not reflected in national debt figures.

Many people, mostly bankers, would undoubtedly argue that the US government as a whole is to blame for this mounting debt, and it is true that the government's outrageous spending has indeed contributed. However, the true blame for our debt burden lies with the men who determined how to finance such spending.

Photos: AP, MSNBC

Ultimately, such blame rests with four men; four fake, fraudulent, fictitious, finagling financiers: Alan "Greeny" Greenspan, Ben "Baby Face" Bernanke, Henry "Hammered Hank" Paulson, and Tim "Gee-Whiz" Geitner.

Through bailouts, corruption, and simple loose money policies, these four banker-barons have fleeced American taxpayers in more ways than one. First and foremost, they have ballooned our national debt by enabling the governments exorbitant spending. Through their trickery, previously assumed to be banking-magic, they have heaved upon future generations the burden of unnecessary debt.

Moreover, thanks to their bubble-blowing monetary policies, these highfalutin pencil-pushers have depressed interest rates, thereby preventing Americans from earning a reasonable rate of return on their hard-earned savings.

Let's not forget that these men, in their most daring act to date, embezzled funds from American taxpayers for the sole purpose of aiding their banker-buddies on Wall Street. Through their accounting wizardry, they relieved many of their former colleagues of debt piled high from years of CDS Swaps and NINJA loans, only to rest that burden squarely on the shoulders of each and every American man, woman, and child.

One of our four crooks even went so far as to leave a paper trail revealing his complete awareness of how indefensibly he was acting, and felt the need to protect himself. In bailout legislation proposed in 2008 Treasury officials, including Paulson, penciled in a brief section giving themselves permission to operate without threat of review by an US court, thereby relieving themselves of any threat of liability or criminal prosecution (Text of Draft Proposal for Bailout Plan, New York Times).

In 1838, banking magnate Mayer Amschel Rothschild proclaimed "Let me issue and control a nation's money and I care not who writes the laws." The Rothschild's, of course, know better than anyone the powers inherent in the control of currency.

Many men, often from lower stations in life, have been hanged in this country within the last century, for stealing far less than the larceny these four filchers have committed against American taxpayers (Double Hanging in 1938, The Monitor-Herald, Calhoun City, Mississippi).

Of course, this terrible crime should come as little surprise. Our country's fathers foresaw actions like those taken by the Filching Four. In fact, Section 19 of the Coinage Act of April 2, 1792 specifically outlawed the debasing of US currency.

The punishment, it was decreed, for such a traitorous act, should be no less than death. This penalty, with its startling barbarity and beautiful simplicity, most certainly fits the crime perpetrated against the American people since 1987.

Monday, January 4, 2010

Outlook for the Dawning Age

The past couple weeks have seen very little activity in the market, with trading volume slowing to a crawl. This is not unusual given the time of year, for several reasons, all of which have caused the market to remain level, more or less.

While many traders and money managers have been spending time with their family for the holidays, none of those who remain active want to “rock the boat” by causing any big market swings. Most have completed their window dressing trades, and there has been very little profit taking going on. While we may see more profit taking after the first of the year, the market has so far been unaffected.

As we discussed last week, this week marks the end of an era. With the end of 2009, we come to the close of the worst recorded decade for stocks in history. This is certainly a discouraging thought, but fear ye not, for the worst decade in history for stocks is not at all likely to be followed by the second worst decade. Put another way, the next ten years probably won’t be anywhere near as a bad as the last.

Think back to the 1970s, which were an absolutely terrible period for the financial world. However, after bottoming in 1980, stocks went on went on have a fantastic decade, thanks mostly to tremendous recovery and growth in US manufacturing.

This time around, as the decade comes to a close, we’ve already made a substantial bottom, and staged a historically unprecedented rally. In some ways, we may be ahead of the curve. The argument now is where we go from here.

Forecasts range from this rally continuing back to old highs and beyond, to the other end of the spectrum where the likes of Eric Sprott, a Toronto-based Canadian hedge fund manager, and a very smart guy, saying the S&P 500 will break through its lows set early this year. That would mean more than a 30% decline from stocks’ current levels.

Our prediction, for what it’s worth, lies somewhere between these two polar opposites. We believe, and have stated repeatedly, that the market is well overdue for a correction. Whenever this correction does come, and rest assured that it will come, it will take commodities and stocks down while boosting the dollar. Further, the more time passes before the correction, the more violent it will be.

Note that we’re calling for a correction, not a bear market. In our view, loose money policies from Washington have allowed a surprising amount of borrowed money to build up in a few trades, particularly in gold. We think a correction is absolutely necessary to wipe out some of that debt and encourage sustainable price growth.

After this correction, we believe the market will trade within a range for an extended period of time, possibly as long as two years. As we wrote last week, there will undoubtedly be money to be made in this consolidation, but only by seasoned, active traders and money managers who do their homework.

As the market consolidates and builds a base of support, the economy will begin to recover, at which point inflation will rear its ugly head as the new money created by the Fed during bailout programs begins to circulate. This means that commodities will probably lead the breakout towards the end of the market’s consolidation, with stocks to follow as real economic growth resumes.

To some our outlook may seem bleak, but be assured that we are not fatalists. Things may not be great at present, and we will certainly face tough times again in the future, but the world isn’t coming to an end.

One of our favorite sayings around the office is “this too shall pass,” and it has proven true time and time again as we see that everything cycles, especially the markets. Investors need to focus on weathering each passing storm without getting discouraged.