In one of my brokerage accounts, I put a few bucks into ProShares UltraShort S&P 500 (SDS).
Luckily most of that account is in silver and gold interests, since the S&P has done nothing but go up since then.
My reasoning for going short? The S&P is forming a rising wedge, which is usually a bearish indicator. Also, I have been waiting with bated breath for the next market downturn. When is this thing going to break? I’m not ready to give up yet. If readers have sound reasons for doing so, I’d like to hear them.
Would Brian Johnson of thestockmentor.com care to weigh in? I could use some expert advice.
See you next time! (When is it going to get hot this summer? Sometime before the next blizzard?)
Quote of the Week:
“The trouble with having an open mind, of course, is that people will insist on coming along and trying to put things in it.”
I nominate myself for the buried news of the week. (”How conveeeenient.”)
After watching the O’Reilly factor for two nights in a row, 09-08-09 and 09-09-09, and listening to what I thought was spin, I decided I had to finally write the guy. Readers, please feel free to copy my idea and try to get this on the air during the e-mails portion of his show (oreilly@foxnews.com).
Here it is:
Dear Mr. O’Reilly,
If Charlie Sheen is a “pinhead” regarding his 9-11 theories and you believe that questioning the U.S. government’s version of 9-11 is enough to disqualify a person from public office, then could you please provide some guidance in crafting O’Reilly approved petitions which seek a redress of grievances?
New York Times columnist and economist Paul Krugman won the Nobel Prize for economics in 2008, primarily for his work in the areas of international trade and economic geography. He recently wrote this interesting article.
He makes a case, with caveats, that three factors saved us from a second depression: 1. government spending in the face of falling revenues 2. rescuing the financial sector 3. the American Recovery and Reinvestment Act (the Obama Stimulus Plan).
Three things initially struck me about the article: 1. Why did Krugman make no mention of the dangers of our budget deficits and national debt? 2. Has Krugman considered the possibility that the rescues and spending could prolong the economic downturn, especially if it leads to killer inflation and/or loss of our AAA credit rating? 3. I’m not as confident as Krugman that we have avoided a second depression, as I’ll cover in my portfolio update at the bottom of this blog.
After digging around on Youtube, I did find this clip of Krugman discussing how much debt he thinks this country can handle. I now have a theory as to why Krugman isn’t too concerned about the issues I raised. Incredibly, I don’t think he’s considering Social Security and Medicare entitlements when estimating the viability of our future debt-to-GDP ratios! Is this possible?
Note that at 2:50 in the video, he makes the statement that “Deficits do matter but we have 5-6 trillion dollars to play with here.” How do we have that kind of money to “play with” when you consider the trillions of entitlement debt?
Can a Nobel prize winning economist really be ignoring tens of trillions of dollars in debt? It seems hard to believe.
Bill Gross founder of Pacific Investment Management Company has a very different view from Krugman, as quoted in this Bloomberg article. Look how much estimated debt-to-GDP ratios change when entitlements are considered.
From Bloomberg: “Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will ‘eventually’ lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to ‘negative’ from ’stable’ amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a ‘point of no return,’ he wrote.”
“The U.S. growth rate ‘requires a government checkbook for years to come,’ Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning ‘the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,’ he wrote.” (Bloomberg)
For an illustration of how important entitlements are when estimating debt-to-GDP ratios, please check out this clip from the Glenn Beck show.
Quote of the Week:
“We’re going to go bankrupt as a nation. Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’ The answer is yes, that’s what I’m telling you.”
~Joe Biden, speaking during an AARP Town Meeting in Alexandra, VA (here’s a link to the video).
Portfolio Update:
I’m not sure we’ve reached the bottom of this downturn. I’m still standing by my prediction of Dow 5,500 or lower.
And don’t worry, I’ll still take credit if there’s a big terrorist attack or H1N1 flu outbreak that helps tank the economy.
I believe we will have another market downturn within weeks or months, so I’m still being very cautious.
For now I’m holding core positions in IShares Silver Trust (SLV) and SPDR Gold Trust (GLD). I’m also trying to trade around the ups and downs of silver and gold.
In addition, I have a position in Agnico Eagle Mines (AEM) and a position in Federated Prudent Global Income Fund (PSAFX).
I’ve taken a horrible hit on my speculative position even though it’s more than doubled since the first of the year. Broadwind Energy (BWEN) manufactures wind turbines and are one of the purest wind plays around. ‘
Shortly after I bought it at around 27 bucks, Jim Kramer said on his Mad Money show, “Broadwind’s going to 40.” It never reached 40 but tanked instead. For a while there I thought that rascal meant 40 cents instead of 40 bucks!
Some of us are old enough to remember the swine flu shots of 1976. If shots are being planned, I hope they do a better job this time. (In ‘76, over two dozen people died from the vaccine and the vaccine turned out to be unnecessary.)
I hope I’m wrong about that, but so far it appears that spewing fiat money isn’t solving our problems.
My position is that this economic crisis was created predominantly by easy money, excess spending and debt. This situation led to a bubble in housing. Trying to re-inflate the bubble with more easy money and excess spending is only going to make our problems worse, leading to a collapse of this house of cards economy and another depression (assuming we’re not already in one).
So what is Obama’s plan? Do more of the same. This seems like a regular pattern with governments: When something doesn’t work, do more of it.
That being said, we may see an Obama bump in the economy, but I don’t think it will last. He does have some tax cuts on the agenda which may actually help a little. But basically, his main plan is to follow Bush’s lead and keep those fake money machines rolling.
My new downside target for the Dow is 5,500 or lower. Does anyone care to make a bet? (Be forewarned; if you’re an optimist, my portfolio has probably done better than yours, going back to about August of ‘07.)
I saw a funny cartoon the other day. It showed our major financial institutions on fire while Ben Bernanke and Henry Paulson tried to put out the fire with fire hoses. The only trouble was, a massive stream of cash was coming out instead of water, feeding the fire. I believe this is an excellent illustration of what is happening.
To avoid making things worse, Obama should be listening to people who saw this crisis coming years ago.
Peter Schiff, former economic adviser to Dr. Ron Paul, was one of those people.
I’ve written in this blog before about Peter Schiff. He wasn’t the only person to see the credit crisis coming, but he was perhaps the most outspoken and well-known. Some supposedly very intelligent people ridiculed Schiff for his views, but he pushed back hard. (Here’s an example, from my previous blog.)
My main purpose in writing this blog is to highlight the fact that, according to Schiff, no one in our government has contacted Schiff for his input on how to get out of this mess! I think that’s nuts, since he was one of the few experts to see this recession coming the way it did!
In the video below, Schiff gives a great summary of why no one listened to him, why we’re in trouble, how to get out of it, and what will happen if we don’t. He also gives some advice on what to do with your money.
The only thing I disagree with him on is the inflation issue. I think we’re in for massive deflation for the foreseeable future.
I don’t think we’ll see really nasty inflation and a collapse of the dollar for many months or even years, but I do agree that it will come. (If I’m wrong about that, I’ll pay for it in my portfolio.)
See you all next time and I hope everyone’s new year is off to a good start!
Money Talks Trader’s Group Update: Tuke and I will be meeting at the Firehouse Brewing Company in Rapid at 3 pm on Saturday, January 17, 2009. Check my last blog to see what I look like. Everyone interested in investing, trading, or the crazy developments in this world is welcome! See you there!
Tuke is an excellent technical trader and has taught me a lot already about trading and reading the charts.
Portfolio Update: My ProShares UltraShort Real Estate ETF (SRS) did very well Wednesday. Then it started up huge early Thursday before dropping like a rock.
I got stopped out Thursday at $65 for a profit of $5.01 per share plus a dividend of .86 and capital gains of $164.40. This comes out to about 15.6% in 26 days. (Profit in my second batch of SRS-which I sold first- was much lower.)
I put in a limit order tonight for another dose of SRS at $56.50. I doubt I’ll get it Friday, but things are really volatile right now so who knows?
Quotes of the Week:
“Reality is a mass hallucination. We gauge what’s real according to what others say. And others, like us, rein in their words, caving in to timidity. Thanks to conformity enforcement and to cowardice, a little power goes a long, long way.”
I caught a glimpse of CNBC’s Fast Money the other day when Karen Finerman said she liked the ProShares UltraShort Real Estate ETF (SRS) under $60.
I checked the chart and thought it looked too cheap to make any sense when compared to the recent price action of the Dow Jones U.S. Real Estate Index (DJUSRE).
I scaled in with one purchase at $59.99 and another at $56.90. (It closed on Friday, 01-02-08, at $53.23.)
The Scottrade chart for SRS showed that this ETF is near 52 week lows.
The Scottrade chart for the DJUSRE shows that the index is recovering from 52 week lows.
Since SRS attempts to track the inverse performance of the DJUSRE index and is leveraged times two, I was perplexed to see these charts. If SRS is near 52 week lows, shouldn’t we see the DJUSRE index close to 52 week highs instead of lows?
Check this Yahoo Finance chart comparing SRS vs. DJUSRE, and you’ll see that SRS has dropped to it lowest point in two years while the DJUSRE is mildly recovering from its lowest point in two years.
You’ll also notice that the 52 week high of SRS in November of ‘08 is wildly out of proportion to two times the inverse performance of the DJUSRE index, then drops outrageously and out of proportion in late November and December.
What’s going on here?
My best guess is that we live in a historic time of economic upheaval and that volatility is what we should expect at this point. I would like to hear what our readers have to say.
As most of you are aware, the crash in home prices precipitated the crash in financials and led to our current economic meltdown. I don’t think the pain is over in real estate, so that’s why I got into SRS. The only trouble is, we could see a significant rally before a further decline in real estate and the financials. With the wild gesticulations of SRS, I could really get burned before I get some good profits!
I guess part of the reason I wrote this blog is because I feel like my rear is hanging out in the breeze a bit. When I don’t understand price action, I question whether or not I should be in that stock.
Do any of our readers have input on this issue?
Quote of the Week: “The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos.”~H.L. Mencken
Buried News of the Week
DTCC Eliminates Stock Certificates with SEC Approval!
I just about fell out of my chair today when I opened my Scottrade account, clicked on the link that said, “Attention Customers who Request Stock Certificates” and read the following!
“Attention Customers who Request Stock Certificates
Effective Jan. 2, Scottrade is no longer offering physical stock certificates. This change has been made in response to an initiative by DTCC (The Depository Trust & Clearing Company) to eliminate physical certificates.
DTCC will discontinue the issuance of physical certificates for most securities on Jan. 9, and the remaining stocks will only be available in certificate form until July 2009. This is an SEC-approved, industry-wide change that will affect all investors regardless of the brokerage firm issuing the certificates.
After July 2009, the availability of physical stock certificates will be dependant upon the discretion of the issuing company, which may make them available exclusively through their Transfer Agent. For more information, you will need to contact the Transfer Agent directly.
What this means for you: Scottrade will continue to accept physical certificates for the deposit or sale of stock, but you will not be able to receive a physical certificate. If you primarily trade online and do not normally request the issuance of a physical stock certificate, you will not be affected by this change.
First, the good news. I got out of UltraShort Financials Proshares (SKF) on 07-11-08 at $172.42. This handed me a profit of almost 60% in about six weeks. That’s better than I’ve ever done in any one stock.
On the other hand, everything else in my portfolio has just been getting hammered.
I got back into SKF on 07-18-08 at $136.96 and it closed Friday at $118.81. OUCH! Hopefully this one will turn around for me but if it does, this will be bad news for the financial sector.
I don’t have huge holdings in gold and silver, but I picked up more IShares Silver Trust (SLV) and SPDR Gold Trust (GLD) on Thursday for $14.15 and $79.69 respectively. I thought that gold would find good support at $800 and that silver would also find support. Oops. SLV closed Friday at $12.70 and GLD closed at $77.63.
Is anyone else just getting killed in commodities?
How much longer will this free fall last?
Disclosure: Aaron owns shares of Agnico-Eagle Mines (AEM), Broadwind Energy (BWEN), IShares Silver Trust (SLV), SPDR Gold Trust (GLD), Merck (MRK), Prudent Global Income Fund (PSAFX), and UltraShort Financials ProShares (SKF),
