Wednesday, July 27, 2011

Ways To Irritate Your Stock Broker

First of all let's get something straight, there is no such thing as a stock broker anymore.  These days after taking 10 tests that have nothing to do with finance, trading, economics or business you can receive a license to sell securities.  This will be the first of several that are required.

Next you must work for a large broker dealer and you will be doing exactly what you are told as there is absolutely no room for creative thinking.  These people are really administering tranquilizers to your assets putting them in a deep sleep while they shift them around in New York generating fees.

Don't fall for the "Balanced Approach" with a chart of your age and risk tolerance.  Let's take a look at the "Moderate Risk" segment which generally means stock exposure.  Here is a chart of the return produced by the S&P over the past 10 years:
Wow, that is pretty solid.  Good thing we went for the balanced return.  Wonder what the unbalanced returns looked like?

Another great way to toy with your broker, sorry Wealth Adviser, is to ask his opinion about precious metals.  Tell him you have been reading obscure blogs and really think it is a good idea to take some money out of the account and buy precious metals.  He will not go for that, bad idea.  You are in for a lecture after that question.  Maybe he will reluctantly place 3% of your assets in NYSE:GLD.  At that point if you want to blow up the relationship completely tell him that the prospectus for GLD Shares makes several risks very clear including the fact that the bars they hold might not be authentic!

Now he is really irritated.   For the final blow show this chart:
We are currently living in a period of negative returns on real capital.  If you hold cash in a money market fund we will not feel sorry for you when those funds crash.  The danger of the money markets is far larger than the returns offered.

If we must call these people Wealth Advisers should they not be able to advise us on any number of asset classes?  Why is it that they are only able to sell us garbage created by their offices in New York?  In some circles, an adviser has the fiduciary responsibility to give the client the most objective and sound advice possible.  Is that what your adviser is doing?

Tuesday, July 26, 2011

Flawed American Perception

Conversations surrounding the debt ceiling seem to permeate every meaningful American social setting these days.  People press  for an answer with increasing urgency.  These useless dinner table conversations always end with someone saying, "YOU are not providing any solution with your theory."  Our job here is not to offer solutions; we deliver something far more valuable in the form of an accurate assessment of what is going on.  If you objectively listen to these emotionally charged conversations you will begin to see the effects of a society that has not been subject to economic law for 75 years.

Inevitably the small business man feels that he is most qualified to lecture his dinner guests on how the nation should be run.  "Cut the fat, get rid of the handouts, don't raise my taxes" seems to be the standard opinion.  Maybe it is time to tune this character out entirely.  His understanding of economics is going to punish him dearly in the near future.  For now, we should play with his theory as a mental exercise.

Steve, the small business owner, is now president and he is slashing benefits.  45,000,000 people now want to kill him because he just cut their food stamp benefits.  Don't worry about that though, they will eventually thank him.  There are 30,000,000 people unemployed or severely underemployed and unfortunately those receiving benefits will not be happy.  Finally, as of June 2011 there were 21,000,000 people receiving social security benefits that were not over the age of 65.  This is due to disability or any other qualifying reason.  This number is in addition to the 38,500,000 that are receiving benefits legitimately.  Get ready for stories about granny having to eat dog food to survive.  This better happen long before his reelection campaign kicks off.

In 2010 the federal government spent an estimated $3,600,000,000,000 on tax revenues of $2,200,000,000,000.  Social security and safety net programs represent roughly 34% of federal outlays so having successfully enraged an estimated 100,000,000 people Mr. President has not even closed the operating deficit.

Now he has to raise taxes slightly so that everyone is paying something to get this great country turned around.  This is where it gets tricky though because he just sucked more than 10% out of the GDP with the reduction in benefits.  So, local governments are not getting sales tax revenues and businesses are producing less marginal profit.

Next, the ratings agencies become alarmed at the lower level of revenue flowing into the treasury and begin to warn the investment world.  Don't be surprised when the cost to borrow turns marginally higher.  Someone failed to tell Steve that most of the debt issued matures in less than 50 months so refinancing is a real concern.

This sure is overwhelming but don't worry because soon the merchant bankers will come to Camp David on a weekend and give you a great idea.  All we need to do is rally the nation around a cause.  Does this sound familiar?

Gold Standard

Now this is a topic that Steve, our distinguished pest control company president turned leader of the United States, is big on.  You would expect your editor to make some positive statements in this light but you have not been reading this site correctly.

The United States has never been on a gold standard.  In fact, gold standards are a terrible idea.  For many years the dollar was exchangeable in the ratio of $20.67 per ounce.  In 1933 FDR confiscated all gold held by lawful citizens and changed this ratio to $35.00 per ounce.  If this math is difficult for you consider the fact that if you held $10,000 at the time it bought you 484 ounces of gold one day and 286 the next.  Doesn't if feel good to do your part?

The creation of the Bretton Woods System allowed the dollar to reign supreme as the worlds currency denominator.  At any time $35 of these stable dollars could be exchanged for an ounce of gold.  This gave the world certainty that trade could grow around this stable medium of exchange.  It only took about 15 years for the natural tendency of human beings wanting just a little more to kick in.  Why not spend just a bit more so that we can have what we deserve?  Well, people were paying attention.  International traders would gather up these excess dollars and bring them back to the United States and rightfully exchange them for gold.  After World War II the victorious United States had over 22,000 tons of gold which is 15% of the total supply.  Now they claim to have 8,000 tons but will not allow an audit.

In August of 1971 we abolished this exchange policy and currency began to float freely.  We are approaching the 40th anniversary of this event.  Is it not ironic that we face these issues today?  If we had stuck to the exchange rate we would be far wealthier as a nation but personal gain always overpowers man's instincts.  Politicians are too tempted to secure their slice.  In fact, they are at times totally blind to the facts.  Financiers know this and play to these weaknesses.

Don't think for a second that there is not tremendous pressure on our elected leaders to raise this debt ceiling. The primary dealers that own the Federal Reserve system have an interest in this happening.  If they can increase the amount of debt issued their profits rise accordingly.  Every treasury auction flows through the privately owned primary dealer system.


Readers will not like this solution but we need to take that debt ceiling as high as possible.  This standard of living that American's are used to is not going to last and we need to take what we can get as long as we can. The currency will eventually be devalued to deal with this problem.  Austerity will only make that happen sooner.  Hear us clearly, this is not a situation that can be turned around like a small business.  Any thought along those lines is stupid, ignorant and doomed for the slaughterhouse.

Unfortunately what we are saying will happen.  This is international finance in its most true form.  Economic law will rule.  American's who have worked for years doing what they are told will lose all of their wealth.  401k stock accounts managed by Wall Street, savings account, life insurance policies, annuities and any dollar denominated asset held will be reduced to their intrinsic value which is that of the paper they are printed on.  Good news is paper prices are rising too.

Part III Gold Rush!

Commentary on this site is provided at no charge to readers.  We only hope to encourage you to think for yourself and consider economics as you watch the world spin.  If you end up grasping the concept that markets are tidal we have achieved success.  The ebb and flow of markets is tradable.

Currently we are in a spectacularly simple gold bull market with much upside in front of us. has commissioned a III part series on gold.  They wish to offer their readers an idea of what gold is and how to own it.

Part III of this series covers exploration companies.  Please visit their site several times and forward the article  link to everyone you know.  Future work on this site is dependent on the success of these types of projects.

Sunday, July 24, 2011

Rare Earth Mile Marker

It has become clear to us that readers remember only the last thing that they were exposed to.  There is a natural human instinct that places heavier weightings on immediate information.  This explains the phenomenon of  using media to control mass perception.

This site has attempted to cover the rare earth element bull market with objectivity and foresight.  We offer an archive and search tools for readers who wish to go back and study our past statements.  We have long said that we were looking for mile markers on the bull market journey.  One such marker was passed on Wednesday July 20th.

Seagate Technology NYSE:STX reported earnings for the quarter and fiscal year end.  The numbers were acceptable and beat on some lines.  With annual sales of roughly $11,000,000,000 in the computer hard drive business why would the executives take a significant chunk of time on the call to discuss rare earth elements?  Well, when there is one raw component that is having a 200bps impact on operating margins it needs to be addressed.

Neodymium is used in two parts of the hard disk manufacturing process.  Simply put, this process can be compared to the permanent magnet business previously discussed on this site.  Here is a chart of the price rise that Seagate's suppliers are dealing with:

We estimate that Seagate would use roughly 800tn of Neodymium Oxide per year.  This is only a six month chart of the price rise.  While CEO Steve Luczo expects this to be a "temporary" issue, he did have this to say on the company's conference call:

".....Seagate has historically been able to absorb these cost increases and insulate our customers. However, the recent dramatic increase in the cost of rare earth elements, combined with a pre-existing upward trend for a broad base of other commodities, far exceeds our ability to find offsetting cost reductions. While we are exploring opportunities to reduce the content of certain rare earth elements that are used in the manufacture of hard disk drive components, we will be discussing with our customers, passing through what we hope are temporary surcharges related to upstream earth-based commodities."

Where will Seagate find a solution for this "temporary" problem?  The reason we are eager to hear their answer to that question is that every windmill that green power freaks demand we build also requires over 600lbs of Neodymium.  How about the stylish and enviro-conscious Toyota Prius?  Where will the 70lbs needed for each one of those come from?

Maybe the United States Congress will issue a decree that China play fair with their supplies of these elements.  Once they are done steering the country away from bankruptcy by taking more loans they can deal with this issue.  After all, we have been conditioned to look toward government for the solution to all of our problems.