Ben Begs the Chinese to Become Communist

This past Sunday, Fed Chairman Ben Bernanke emerged from his black helicopter, straightened his black tie, pulled down his black sunglasses, nodded for his bodyguards to open his black briefcase and then delivered a speech on world trade. Within the speech, he specifically cited a need for a "rebalancing" of world trade and encouraged China to spend more and the US to save more. This echoed what the United States Treasury (Joe Oxymoron) Secretary Turbo Tax Timmy Geithner (Joe Oxymoron, minus the oxy) said a few weeks ago about rebalancing world trade.

So what were our fearless leaders really saying? It's unlikely Ben Bernanke really cares whether US citizens save more. If that were the case he'd simply raise interest rates to incentivize (Joe, is that a word?) saving. No, he doesn't care. What he's really doing is begging the Chinese to stop exporting so much and start importing more US products for the "greater good" of the global economy. (Jo-seph Stalin) In other words, the United States is asking the Chinese to become more communist? (Joe upside down world, with Chinese up and US down) If we analyze further, however, we realize he doesn't really care about the global economy - he cares about the US of course.

Here's why

If the Chinese export less and the US slows the import flow, then our trade deficit will improve. If the US trade deficit improves, our GPD will go up and we'll escape depression 2.0. The weakening dollar will help achieve these desired trade effects because a weak dollar makes it more expensive to import, and less expensive to export. When we understand what Ben's doing to the US Dollar (Joe Shell game), it's easy to see the true motives behind his remarks.

So what does this mean for Joe? The Chinese have to be upset about our monetary and fiscal policy aimed at destroying the US Dollar. Therefore, Joe decided to hedge against a future Chinese invasion and take up karate lessons. He told JoAnn he's going to learn hand-to-hand COMBAT just in case; and asked JoAnn if she'd like to help him prepare by giving him hand-to-hand CONTACT while they go for a walk. JoAnn simply told him since there may be some angry Chinese out there, and since he hasn't actually taken any hand-to-hand combat lessons yet, that she'd be safer inside.

Weaker Dollar = Weaker US

Weaker Dollar = Weaker US? Are the consequences of a weakening currency all negative? Nope, click here for the glass half full version posted earlier this week. Now we get to be depressed (Joe Prozac) and discuss the negative aspects of a weakening currency. Okay great, is everybody nice and depressed and ready to read on?

Joe was depressed after trying unsuccessfully to convince JoAnn to accept a diamond ring before prices shot up. Things are looking better for Joe since the last post however, unlike the US Dollar. The dollar continues to inflate (Joe home-made hot air balloon) with out much of anything to bring it back down. (Joe wasn't inside)

Disadvantages of a Weak Dollar

Inflation - Everybody knows a weakening currency leads to inflation, which subsequently decreases your purchasing power. This was one of the main causes of our current recession. Inflation starts with investors bidding up commodities as a form of hedging against possible inflation - which ironically further aggravates inflation. Commodities such as oil are building blocks for manufacturing; and commodities such as corn, soybean, and wheat (Joe farmers market) are building blocks of food production. Prices of end products are affected as the increased prices of commodities filter up through the economy. Also, inflation is simply a tax on savers because the value of money decreases.

Treasury Auctions - Think the Chinese will be upset if the rate of inflation surpasses the interest on their treasury purchases? Inflation damages investments of fixed interest debt such as US Treasury notes and bonds. The Chinese and various oil-exporting countries are in a pinch right now. If they stop purchasing our US Treasury notes and bonds the interest rates on current auctions will have to increase to attract buyers. This will in turn drive up interest rates - further damaging our housing market and delay the recovery. If they keep purchasing our worthless debt, they increase their exposure to debt that may not be able to be repaid in full with dollars that are worth anything. If we default these notes, the Chinese will seek restitution Jackie Chan style. At what point do we have to start asking permission from our international creditors whether to sign stimulus legislation? We're slowly being bought by some very dangerous creditors. (Joe, check-N-go)

International Positioning - It's no secret that the US is starting to slip a little bit on the international scene. Once the world economic and military superpower, now we're essentially owned by a handful of third-world nations. What was once inconceivable (Joe, hiding in the attic for five hours) is now starting to be realized because of poor fiscal decisions and a financial collapse which lead to a global recession. What we need to do now, however is protect the dollar. We've already ticked off our creditor nations once because of our crashing economy. It might be wise to avoid doing it again by protecting our dollar.

Of Course the Government wants a Weak US Dollar

It's a stand off with the US Dollar held hostage. Ben Bernanke, the Fed, and US Legislators currently have the US Dollar grasped firmly around the throat with a gun resting against the poor greenback's temples, while China and the rest of our creditors are trying to negotiate a safe and harmless release.

The WSJ reported on Thursday that central banks in Korea, Taiwan, Philippines, Thailand, Indonesia, and Hong Kong have "intervened to slow the dollar's fall against their currencies". Why would they do something crazy like that? Simple, these nations depend on exports, and when the dollar is weak, importing costs more to US Companies. Vice Versa, when the dollar is strong, it becomes easier to import foreign products.

The weaker dollar is very alarming to the rest of the world for other reasons as well. "The Independant", a British news source (here), reported last week that a host of nations met together secretely without the US to discuss how to end the pricing of commodities such as oil in US Dollars. The proposed alternative to the US Dollar is a basket of currencies including commodities such as gold. Absent from the proposed currency basket was the US Dollar, which alarmed domestic currency investors and further intensified the US Dollar decline. So as we can see the US Dollar is in trouble. (Joe Letterman) With this much doubt and uncertainty (Joe weatherman, seven day forecast, especially the seventh day) surrounding the value of the US Dollar, we can cautiously assume this downward trend will continue. (Joe temperatures in the northern hemisphere, Joe real estate values, Joe employment, Joe anything, just pick something and it's probably going down right now)

As we mentioned earlier (here), Ben's monetary plan to escape depression 2.0 is to devalue the US Dollar. Are his devaluation plans working? You bet. (Cha, Joe Palin) The US Dollar hit a new yearly low last week and seems to be firmly entrenched in a downward trend. Below is the one year trend of DXY, the dollar index compared to a basket of foreign currencies.


So this is bad news right? The falling dollar is not good for America? Actually, there are many advantages as well as disadvantages to having a weak currency. Right now, the Fed and Government have incredible incentives to keep the dollar tumbling downward. The rest of this post will outline why this is so.

Advantages of a weaker dollar - as the Fed and Gov see it.

1. Exports are cheaper. Just as imports cost more to pay for foreign goods with a weakened US Dollar, exports become cheaper and exporting companies benefit. Timmy Geithner (Joe Turbo Tax), our current Treasury Secretary, is reportedly okay with a slumping dollar because it "rebalances" our trade deficit. The net trade deficit/surplus is an important component of a nation's GDP, and when a country's exports gain against imports, the final GDP number improves. Since an increase in GDP will most likely signal an end to the recession, It's no wonder that the weaker dollar and resulting increase in exports are considered very important to our current administration and Federal Reserve. Some could argue, however, that the gains in exporting are often offset by the increased costs of importing. (Joe zero-sum game).

2. Inflation leads to increased asset valuations. Indeed, a small amount of inflation is necessary for housing values to increase and to establish consistent economic growth. However, when asset values increase too quickly - as happened this decade - dangerous bubbles result and eventually pop. To deal with the depressed real estate values and their slumping effect on the economy, the Fed has been purchasing hundreds of billions of dollars worth of Mortgage Backed Securities off of banks' balance sheets since early this Spring. These toxic assets are simply bundled home loans whose market values are significantly less than what is owed. Remember, even though the Fed prints US Dollars and has the responsibilty of setting monetary policy, it is not a government-owned bank. Hence, motivation exists to make money through the increase valuations of these assets. (Joe Conflict of Interest)

3. Fixed-Interest Debt becomes Cheaper: Everything from credit cards, home loans, school loans, corporate debt for businesses and treasury bonds on the part of the US Government should become less expensive to pay off - and heaven help us, the US has a lot of debt right now to be paid down. American deleveraging, or the shedding of regular business and household debt, should continue for some time according to many economists. An inflated dollar would help this cause.

Bottom line, the Fed and Gov are not concerned about a falling dollar in the same way our Asian friends are. (Joe, trigger squeezing tighter, dollar starting to sweat, Asians too) The longer term consequences, which will be discussed in the next post, are of lesser concern to the Fed and the current administration because elections create incentives for politicians to be more focused on the short term rather than long. (Joe what have you done for me lately).

So how does this affect Joe Shareholder? Joe doesn't regularly export anything, and the left side of his balance sheet is blank. He does have debt from his three years at St. Joe's University in Philly, however. Even though inflation should allow him to pay off his fixed-interest debt easier, he is concerned that the negative aspects of inflation will offset the positives. (Joe, stay tuned for the next post) Speaking of fixed-interest, his interest in JoAnn has never wavered and is growing ever-stronger (Joe Six-pack abs). Not to let a good opportunity go to waste, he informed JoAnn that now would be a good time to purchase an engagement ring and book a honeymoon cruise since the weakness in the dollar could lead to inflated prices later. Not only that, but fixed-interest rates at low levels won't last forever. Additionally, it would help the economy if he were to buy her a diamond ring and jewelry stores would be able to feed their families. JoAnn told him thanks for the offer, but she was never into expensive rings anyway, and she would be more than happy with a simple honeymoon - should the right opportunity present itself.

Bi-Czar Breakdown Causes CIT's Downfall

WSJ reported on Wednesday that embattled lender CIT Group offered its bondholders a debt exchange in which soon-to-be maturing debt would be replaced with new CIT asset-backed debt set to expire further down the road. In addition, bondholders would obtain almost all the equity in the firm. Late Thursday CIT management also asked their bondholders to accept a prepackaged reorganization deal in the case CIT decides to file for chapter 11 bankruptcy. CIT Group is a major lender to small and medium sized businesses, one of which is Dunkin Donuts. (Police Chief Joe) Some analysts suggest small businesses will have a difficult time securing credit with new lenders in this difficult economic environment.

So it looks like it could be chapter 11 either way. If the bondholders do not accept the debt exchange they'll likely be forced into chapter 11; and even if they do accept the offer, the deal includes a possibility of bankruptcy anyway. (Joe Donut like either option.....or should we say Dozen like either option)

So why wasn't CIT Group saved by the government? No taxpayer lifeline? Apparently the Bailout Czar didn't feel CIT was too-big-to-fail like so many of its bankster counterparts? Maybe the Bailout Czar didn't feel CIT posed systemic risk? Maybe it's simpler than that. Maybe the Bailout Czar felt pressure from the "Health Czar" or the "Zero Trans Fat Czar" to thin-down America? This might require intervention from the "Law Enforcement Czar" to lobby on CIT's behalf.

But let's back up for a minute. (Joe policeman spots donut shop in rear-view mirror) Where was the "PR Czar" at the time this story was leaked to the public? This kind of information should not be allowed to surface at a time in which the economy is still considered fragile. This breakdown by the "PR Czar" clearly indicates the need for more oversight czars.

Let's dip down into the story a little deeper (Joe donut in milk)

Debt Side:

Where was the "Loan Ratification Czar" when CIT group was offering these loans to small businesses? And why didn't the "Balanced Loan Portfolio Czar" inspect the books to see how diversified they were? Why didn't the "Debt-Roll-Over Czar" intervene with the "Public-Offering Czar" in an effort to raise sufficient cash before these bonds matured?

Asset Side:

After the FASB changed the accounting rules to allow banks to value their assets at whatever price they wanted to, why didn't the "Non-Performing Asset Czar" and the "Mark-to-Market Accounting Removal Czar" get togther and help CIT inflate their assets just like all the other banksters?

In conclusion, CIT Group has fallen victim to not only the US bailout system but they've also fallen victim to the outdated single-tier czar program. (Joe short straw) What we need is more czar oversight in the form of a two or three tiered czar program to help flegling companies like CIT Group stay afloat (Joe, broken off piece of donut in milk) rather than going under. (Joe, broken off piece not floating anymore) If there isn't a new system implemented soon, you'll see a HOLE lot more small businesses get Krispy Kremed.

Public Vs. Private - What we learn from Arctic Exploration

Public vs. Private ownership, which can more effectively spur economic growth? Can Arctic Exploration give us a preview of what is ahead?

2009 has been Bailout-City as the US Government has saved numerous institutions in addition to seizing large stakes in AIG, Citigroup, Fannie, Freddie, and General Motors. The bailout pie has been prepared, sliced, divied up, and dolled out as effortlessly as leaflets in Vegas. Indeed, the Fed and government have gone "all-in" with not only monetary and fiscal policies but also with a new form of policy, that of bailing out anyone with a good lobbyist. Will these bailouts and gov ownership be beneficial or harmful to the US economy? We don't know how the story will end, but we do have something with which to compare - Results of Arctic Exploration - publicly vs. privately funded expeditions. (Joe Arctic Tundra)

In "Public versus Private Initiative in Arctic Exploration: The Effects of Incentives and Organizational Structure", Jonathan M. Karpoff organized a data set of 92 arctic explorations from 1818 to 1909 to study the successes and failures of privately and publicly funded expeditions. The goal was to determine which expeditions provided better results.

The Purposes of Arctic Exploration:

• Navigate the Northwest Passage
• Discover the North Pole
• Discover the lost (publicly funded) John Franklin Expedition of 1845
  

The Rewards:

• Cash Prizes
• Lecture Fees
• Larger budgets/funding for future expeditions
• Book Sales

The Risks:

• Loss of funding/budget shrinkage
• Fewer rewards
• Sickness
• Death from accidents, exposure, scurvy, or starvation

Because the goals, prospective rewards, and penalties were similar for both privately and publicly funded expeditions, Karpoff argues it is possible (and fair) to compare the two subsets. Karpoff summarized: "I find that compared to private expeditions, government sponsored expeditions tended to be large and well funded. By most measures, however, the government expeditions fared poorly. They made fewer major discoveries, introduced fewer technological innovations, were subject to higher rates of scurvy, lost more ships, and had more explorers die."

Quantitative Proof:

Failures

Death of Crew Members per voyage:

Public - 5.9, Private - .9

Loss of Ships per voyage:

Public - .53, Private - .24

Scurvy Presense for voyages > 1 yr:

Public -47%, Private - 13%

Successes:

Navigate Northwest Passage... Private

Discover North Pole... Private

Discover fate of Franklin Expedition... Private

So why did privately funded expeditions fare so much better than publicy funded counterparts? Karpoff suggested publicly funded expeditions suffered from :

1. Poorly motivated and prepared leaders.
2. Separation of initiation and implementation functions of executive leadership (aka, too many Chief Joes and not enough Indian Joes).
3. Slowness to exploit new information (Joey come lately) about clothing, diet, shelter, modes of Arctic travel, organizational structure and optimal party size. (Joe two's company but three's a crowd)

What can Joe Shareholder learn from this study by Markoff? While there's no guarantee that AIG, Fannie, Freddie, GM, and Citigroup will suffer the same fate as these expeditions funded by governments, there is reason to suggest the same bureaucracies that burdened public expeditions will also curtail government owned businesses. Companies that lean on taxpayer assistance (Joe blind man on guard rail) face completely different incentive levels as well as muted risks and rewards. Hence, Joe's sentiment on government-owned stocks is bearish (Polar Bearish....that is.....) because of the possibility of getting frost-bitten by sliding stocks (Joe dogsled.....pulled by publicy funded dogs.....with scurvy).

If anyone wishes to read the entire document, just email marketarty@gmail.com and we'll send it off. Send this to all friends, enemies, family, associates and let's spread the private word publicly!

History of Joe and JoAnn - How they met - Part 1 of 2

Joe Shareholder was in his third year at St. Joe’s University near Philadelphia when he scored a summer internship at Lehman Brothers in New York. His job was to follow technical trading patterns and trade based on daily fluctuations. He traded all day long, but closed all positions by the end of the day. He was trained by a rookie trader named JoAnn who excelled at the position.

JoAnn grew up in a small community called Joetown in Morgan County, Ohio. She graduated from the University of Ohio State with a finance degree and accepted a job offer from Lehman Brothers shortly thereafter. Before Lehman Brothers fell on hard times and declared bankruptcy in the summer of 2008, JoAnn saw the writing on the wall (Joe Clairvoyancy) and sent her resume to various financial/investment companies in the area. She soon received an offer from “The-Company-Who-Shall-Not-Be-Disclosed”, who happened to be one of the premier investment banks in New York City. At first she thought this was a perfect fit, but later discovered some disturbing things about “The-Company-Who-Shall-Not-Be-Disclosed”.

First of all, she felt like TCWSNBD manipulated commodity markets. She found it ironic that they’d issue press release statements upgrading certain commodities and stocks immediately after establishing strong positions in them. (Joe conflict of interest) Take crude oil for example. Each time TCWSNBD announced crude oil futures would rise to X amount, it eventually did - largely because oil was bid up by investors rather than actual commodity users. (Joe Smoke and his twin brother John Mirrors) This padded the pockets of execs at TCWSNBD, but hurt the average Joe’s filling up their cars and trucks with fuel. (Joe Cruel Oil, not Crude)

Her distaste for TCWSNBD was exacerbated when AIG needed taxpayer support after the stock market crashed in Sept/Oct 2008. Mega-insurer AIG owed TCWSNBD considerable amounts of money when stocks tumbled because of credit default swaps gone sour. Credit default swaps are basically insurance securities protecting an investment in case stocks fail. (Joe high stakes poker) Instead of demanding payment through asset liquidation (Joe face the music), or even simply share in the losses of AIG (Joe - at least turn an ear to the music) she felt TCWSNBD used strong-arm tactics with the gov to bailout AIG so they’d get the full amount owed. Indeed, after AIG received the bailout funds under the guise of “too big to fail”, a good chunk of change was funneled directly to TCWSNBD as well as many other CWSHND either.

JoAnn eventually decided she’d had enough big city banking so she quit her job and returned to Joetown. Upon hearing this news Joe randomly decided he’d pull the plug and move there as well. When JoAnn asked why he also wanted to move there, Joe simply replied he’d always wanted to live there one day and said the town was very “attractive”. Joe soon invited JoAnn to the annual city Joe-Down, which is a hoedown to anyone not familiar with Morgan County. She accepted and they had a great time dancing to the country music with good ‘ol country folk. (Joe, facing the music and JoAnn at the same time).

Natural Gas ETF, the natural way to Double your Cash by Feb

Okay it’s about time we got to the fun stuff right? Anybody out there want to make a little money? (Joe Oracle of Joetown, OH) If you follow Joe’s advice, you’ll see how it’s very possible to make loads of money investing in this fund. In fact, it could very easily double by Christmas time, or at least by February. (Joe, "already got that month marked on the calendar")

Anyway, back to business.
Natural Gas - Right now the price of natural gas is trading at a seven year low due to the weak economy and enormously large inventory. This is great news for everybody except natural gas suppliers, as heating bills this winter should be quite a bit lower than last. (Joe Nest Egg) Investors have also likely turned a keen eye toward natural gas futures as it has dropped steadily over the last couple of months from about $12/MMbtu to under $3 now. Because actual commodity trading can be complex and difficult for the average investor, a better option in Joe’s opinion is to buy shares of a fund already invested in natural gas. Here at JoeShareholder, we have the perfect fund for all your natural gas needs - UNG. UNG is an ETF (exchange traded fund) which Joe Shareholder has been watching closely ever since it crossed under $20/share from its high of around $63 in July of last year. Now that it’s hovering around $10, Joe simply couldn't stand it any longer, and plunged in. (Joe the Plumber) Granted, commodities were all over-priced in July, but after a sharp drop initially at the beginning of this year, most commodities have rebounded somewhat. Not natural gas, however - it’s still dropping. Below are three reasons why Joe believes this ETF should do quite well over the next several months.

Home heating during the winter:

Typically natural gas follows the same patterns of overstorage during the summer to undersupply during the winter. The reason is simple, people heat their homes and businesses with natural gas. Here’s a supply graph representing the last four years.

As you can see the supply starts dropping in September/October and usually starts to rise again in about February. Since we’re just barely into September, a good strategy might be to wait a few weeks, watch inventory levels released each Wednesday, and buy sometime in late September. (Joe, I hope this isn't the only "investment" I'm buying in late September)

Hedge against inflation:

As we mentioned in the last post, the Fed accidentally lost the keys to the printing press after locking the door with the machines running full tilt. Not only that, but Congress has been active signing bills they don’t read and spending money we don’t have. (Joe, if it’s too thick to read, sign it, and if it’s not yours, spend it) These factors have contributed to a significantly weaker dollar, which signals that investors are very nervous about a possible bout with hyper-inflation down the road. One of the best ways to beat inflation, or at least temper the storm, is to invest in commodities. Although any commodity would be a good investment should the dollar crash, right now natural gas seems to have the best upward potential. (Joe July in Phoenix)

Money has to go somewhere:

Right now the stock market is overvalued according to many analysts. The aggregate price/earnings ratio for the S&P 500 is currently about four times higher than the historical average. (1) Also, insiders - who represent corporate executives as well as large fund managers - are selling more than buying at an astounding ratio of about 30 to 1! (2) (Joe roadside vendor in Tijuana, Mexico) Although not an exact science, usually when insiders sell at this magnitude it represents market peaks. If indeed the stock market begins to drop, money will likely flow into other markets, one of which will likely include commodities because of the pressure on the dollar.

Conclusion

Although Joe considers natural gas his competition for keeping JoAnn warm during the cold winter months, he also understands the need for natural gas as well as the need to hedge against inflation. At around $10/share, it’s just too inviting. (Joe Telepathic Communication) Also, September is the month the leaves start falling, so it's a great time to rake in profits. (Joe no pun intended) If you feel the same way as Joe, send this link to any friends who might benefit from doubling their money by Feb. Click here to see what others are also saying about natural gas.

Joe Disclaimer:

All equities carry inherent risks, invest at your own.