Wellington Letter “THE TURN OF THE TIDE.”

February 8, 2010 Volume 33: No. 3
PHASE II of the GLOBAL CRISIS!
THE STOCK MARKET
END of the 10 MONTH RALLY!
Our SPECIAL BULLETIN of January 21 was headlined: “THE TURN OF THE TIDE.”
We wrote: The tide has turned in favor of the bears. From now on, rallies will be sold and sold short. We repeat our advice of last time, namely be out of all the strong sectors of the prior 10 months, including the precious metals.
This year it will be important to ignore higher earnings as a motivation to plunge into the market. In the above BULLETIN we wrote: Market analysts expect 2010 to see a rise in corporate earnings and sales. They are probably correct. But that will be met by further market weakness. You see, that’s what the stock rise of the prior 10 months was all about. Stocks are already priced for the best news that could possibly develop this year. When all the fund managers are positioned for this “good news,” there is no further money to go in. And that’s when the selling gets serious.
Have you noticed that while last year most of the news was positive, and even negative news items were followed by a positive stock market move. Since mid-January, it’s exactly the opposite: most of the news is bad, and even positive news is greeted bearishly by the markets. This is a very important shift.
When speculators feel comfortable that all the risk is gone because the Fed wouldn’t dare raise rates, speculation goes out of control. In the last cycle, this was called the “Greenspan put.” In 2007 we warned about the perception of low risk which eventually ends with a plunge. It did! Now they could call it the “Bernanke put.” The perception since March is that the Fed would prevent any recurrence of a crisis. The Fed is now trying to change that view.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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THE INTERMEDIATE TERM VIEW:
Sentiment of stock market investors and traders in January was as bullish as you get at important tops. On January 20, the market broke sharply to the downside because of monetary tightening in China. Now you will hear the Wall Street guys in the media talk about “a mild short-term correction” or a “buying opportunity.” They will be surprised when the major indices are suddenly down 20% or more.
In our January 12 ACTION ALERT in our PRIVATE PORTFOLIO service, we wrote:
For all the reasons stated in our ACTION ALERT of January 6 … exit all the remaining positions in our PRIVATE PORTFOLIOS … signals we see in our own trading during the day strongly suggest that the big trading operations have liquidated their long positions over the past several months and are now short.
The evidence suggests that the plug has now been pulled on all the bulls. The precious metals, basic materials, commodities, emerging markets, etc., i.e., all the sectors which have been hyped by Wall Street, are now ready for meaningful declines.
That was just before the January 19 top of the 10-month rally. Is that worth the subscription price?
On January 22, the market decline had been three consecutive days and wiped out the gains in the indices of the prior three months. In our January 22 SMARTE TRADER we wrote:
The bears are overwhelming the bulls in the stock market. The bulls are trying hard to dismiss the decline with comments like “the market deserves a pullback,” or “it just gives us another buying opportunity.” Although anything can happen in the markets, our work suggests that this decline is of much greater importance. Here is why we say that:
Since mid-October, volume of trading has been shrinking while the major indices rose grudgingly. The low volume shows that the bulls had little ammunition left, and those who did, weren’t willing to commit it. Such a configuration means that a demand vacuum has been created and that eventually prices will decline sharply until prices get so low that it finally attracts new buying. And that is more than 5-10% down in our view.
The fact that bullish sentiment the past several months has been near levels seen at bull market tops, such as in 2007, shows that everyone who was inclined to buy was already in the market. Mutual fund cash is at very low levels, indicating that buying is exhausted.
Selling is picking up instead of diminishing. That suggests that this decline is the real thing and will go much lower than the majority expect. First support is in the 1000 area of the S&P 500. That would mean a lot of damage for individual stocks.
On February 2, a two-day rally started. The bulls said it was another buying opportunity. We said in our services that bear market rallies usually last only 2-3 days. Right on target, the plunge recommenced on February 4, with a 300-point decline in the DJI at the low of the day. That’s how technical analysis
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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works. Unfortunately 95% of the guys you see in the media don’t know anything about that type of analysis. That’s good for us.
On February 4 we wrote in our SMARTE TRADER:
Today was the day we were waiting for. As you know, our work shows that this decline is a return to the global financial crisis. We couldn’t have made it any clearer in our services since late December.
Even this week while the market had a two-day rally, we said it would be 2-3 days up, and then a serious decline would commence. Well, today it did. The bulls are now concerned. They had not expected such a powerful plunge. At the low, the DJI was down just about 300 points.
Analysts who use fundamentals invest in the past. But it’s the future that counts. Fundamentals show history. They show what companies did. But stock prices are a function of the willingness of money to flow into or out of stocks. And that depends on many other factors, such as probability of banking crises, debt defaults, and now the potential of sovereign debt defaults. All of these dry up demand for stocks, no matter what the fundamentals are. It changes the supply/demand equation. While supply increases greatly, the demand for stocks shrinks abruptly. Result: plunging stock prices.
During the plunge of February 4, trading volume soared. As it was on a big down-day, that’s very bearish.
Volume on the downside of trades vs. on the upside was an incredible 97.3% of total volume. I can’t remember ever having seen such an overwhelming down volume percentage except for some of the memorable market crashes.
On that day, the ratio of advancing to declining stocks was 1 to 8. That means almost 90% of the stocks declined. Overwhelming! These numbers show that there is a lot of overhanging supply. Any rallies will be short and should be used for short selling.
I spoke at a conference in the Bahamas that week. I warned early that week that it was the last chance to get out of stocks. Those who heeded that advice saved enough money to pay for such conferences the next 100 years. Those who didn’t sell will unfortunately wait “to get out even.” That’s a disastrous policy.
There is only one good way to handle a loss: “SELL.” It’s actually very calming.
In December, we started predicting a strong and longer term surge in the U.S. dollar. That’s happening right now. We can’t say that this is “causing” the bearish reversals of all the former strong markets, but it is what we predicted. The dollar is now the “safe haven” currency, just as in 2008.
As we wrote in our December 21, 2009, issue and the January 5, 2010, issue, all the bullish stories about commodities, emerging markets, international stocks, and currencies will evaporate with a stronger dollar.
Bert Dohmen’s
Wellington LetterTM
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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During the plunge of February 4, gold plunged $50 at the low and closed with a loss of $47. Even if your long-term outlook is bullish, and you are a long-term gold investor, ask yourself if you can hold
onto gold for a potential 32%, or even 50% decline. The latter would mean a decline below $700. I don’t believe it will go that low, but you always have to plan for the worst. You have to know your pain threshold. Even such a decline would not eliminate the-long term bull market because 50% corrections are normal in any bull market, whether stocks, commodities, or other investments.
The price of oil plunged over $8 in three days. As we advised for several weeks, all the hot sectors of last year will now crash. The rally was not based on solid fundamentals, but on speculation. Now it’s time to pay the piper. It gives us great short-selling opportunities.
The sovereign debt crisis started with Dubai last year. We called it the “canary in the mine.” In early January, Greece came in the news and the situation is still worsening. Next are Portugal and Spain. Thereafter, it will be Britain. And that one will spread to all of Europe faster than the swine flu.
Over the weekend, G-7 Finance Ministers met just south of the Arctic Circle in Canada to discuss the crisis in Greece and other urgent topics. Did they resolve the growing debt problems of the ever growing list of European Countries in trouble? Here is what they said:
“We need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track,” Canadian Finance Minister Jim Flaherty. Nothing was said about resolving Greece’s debt problem. Greece’s deficit is currently 12.7% of GDP, far above the ECU’s limit of 3%. Yet, the president of the European central bank says that he is confident that Greece will be able to comply with the ECU limit by 2012. He didn’t say how.
In our view, that would be more magic. Do these people ever worry about “credibility?”
In the meantime, the Greek Prime Minister threatened to cut public service wages. The workers in the customs and tax departments responded by walking off the job.
The false theory of a solid economic recovery will now be shattered as reality returns to the markets. While the pundits will tell you that Greece, Portugal and all the credit problems of Europe are not important, they said the same thing in early 2007 about the subprime mortgage problem. The world is totally interconnected. These problems show that the next crisis may be as serious as the one in 2008, just different. The emerging markets will suffer the most.
We can’t change what is going to happen. But at least we can compensate for the loss of value of our homes and assets by making some money on the downside.
Bert Dohmen’s
Wellington LetterTM
THE CHARTIST’S VIEW
The SPY is the ETF for the S&P 500. We like to use it because of the volume numbers. Note that on this chart of the SPY (daily) clearly shows the big decline in volume over the past 10 months while the index and the ETF continued to move higher. Declining volume in a rising market means that a virtual vacuum of buyers is being created. Eventually, prices have to plunge to a level low enough to attract new buying.
And now we have another confirmation of the bearish chart: this month, volume has been rising as the prices declined. That’s a typical bearish pattern.
On October 6, I had sent the S&P 500 charts to Jim Cramer who used them on his show and, as always, gave a very nice introduction to your editor. (Go to www.youtube.com, or Itunes for the recording of the show.) On the chart, I had marked the 1100-1120 level as the most likely target. If that was penetrated, I said the 1200 area would “be like a brick wall.”
Well, the S&P 500 got to 1150, just 30 points above our most likely target. There is a small chance it may rally and exceed that.
SPY (daily) 2-5-2010
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SPY (weekly) 2-5-2010
The chart of the SPY (weekly, in which each bar is one week of trading) below is even more revealing.The important trading channel (2 standard deviations) has been broken to the downside.
Furthermore, the MACD indicator below has crossed over to the downside for a sell signal. On a long term chart, that’s meaningful.
The GOLD chart (daily) shows a big correction to the $1050 area. This could be a support area, at least for the near term. It’s the Fibonacci 50% retracement of the rise since last April. It’s also the level at which the Central Bank of India bought their 200 tons of gold. Therefore, we have two reasons why demand could come in at this level and at least produce a rally.
GOLD (daily)
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However, the next chart of GOLD (weekly) is longer term and shows that the more important low was the crisis low of late 2008. If we measure a 50% retracement from that, we would get a decline to the 960 level. The bottom line is that there should be a bounce right now, but probably is not the low of the correction.
GOLD (weekly)
The US DOLLAR (weekly) made a nice bottom last November and is now rallying. This chart suggests that it has much further to go. However, such moves don’t occur without setbacks. Don’t throw caution to the winds. Of the major currencies, the British Pound, Australian Dollar, and Canadian dollars may be the most vulnerable on the downside right now.
US DOLLAR INDEX
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BOTTOM LINE: the evidence suggests that important turns in the markets have been made by all the formerly hot areas. Over the very short term, there could be a bounce, but that would just be another selling opportunity.
THE INVESTING FABLE of LONG TERM INVESTING
We have written for 32 years that the Wall Street sales talk of the stock market gaining at 10% per year is a falsehood. In our last issue we pointed out that the major indices had no gain at all for the last year. Here is a great chart from our colleague Alan Newman of stock market performance over the long term:
Chart courtesy of CROSSCURRENTS, 3280 Sunrise Hwy. #125, WANTAGH, NY 11793
Going back to 1920, the average gain over any 20-year rolling period is only 5%. That’s more realistic than the 10% annual gains which Wall Street tell you to expect. So, if you want to make 5% per year over the next 20 years, you may want to try a major index. I wouldn’t.
THE ECONOMY
A report from the Federal Reserve of Dallas stated: The financial crisis that began in August 2007 and intensified in the fall of 2008 pushed the global economy into a severe downturn that some have called the Great Recession. World trade collapsed at a pace unseen since the Great Depression of the 1930s.
Our subscribers were forewarned in 2007 of the potential of a global financial meltdown. I described it in the book written that year, PRELUDE TO MELTDOWN. I predicted it would be as bad as in the
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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1930s, and eventually perhaps worse in some areas. Isn’t it amazing that all the economists at the Federal Reserve (over 500 PhDs), none of the regulators, and very few of the smart guys on Wall Street, saw it coming?
At the Global Milken Conference in April 2007, which features over 400 of the top executives of private equity firms, Wall Street firms, Nobel recipients in economists, etc., not one saw it coming. The only words of caution came from Barry Sternlicht, founder of Starwood Hotels, who said: “When the music stops, you better have a chair.”
The global meltdown was averted, according to some governmental leaders, at “5 minutes before 12.” The governmental bailouts injected over $5 trillion worldwide. Now they are faced with the consequences of such unprecedented money creation and the governmental mountains of debt.
The Federal budget deficit in FY 2010 is around an incredible $1,600 billion ($1.6 trillion), or about 10% of GDP. About 80% of that deficit is financed by the Federal Reserve buying the U.S. debt. That’s called “monetizing the debt.”
In 2009 Fed head Bernanke was Time’s cover boy as ‘Man of the Year.’ The same year he testified before Congress that “we will not monetize the debt?” Well, now he is monetizing more debt than any Fed chairman in history. This is the debt that no one else wants to finance, whether in the U.S. or abroad. It will get much worse when China shows Washington who’s in a position to call the shots. Washington has been irritating China more and more in recent weeks. We wonder, why?
UNEMPLOYMENT FABLES:
Eventually the recovery will fail because of the lack of job creation. Without jobs, consumer spending cannot grow at a meaningful rate. Why won’t jobs be created? We need 1.5 million new jobs created each year just to accommodate all the new people entering the labor force.
The jobs report on December 4 showed a loss of “only” 11,000 people in November, which sent the stock market soaring. But these are “seasonally adjusted,” deceptive governmental numbers. Using the “household survey” about 584,000 people lost their jobs. That’s quite a difference. We view the latter survey more accurate in a recession.
The Employment Report for December shows that 150,000 people lost their jobs that month vs. the prior estimate of 85,000. Economists were originally expecting no job loss. However, the unemployment rate stayed at 10%. How is that possible? The government declared that 660,000 dropped out of the labor force. These are people who gave up looking for a job. That reduces the labor force, counteracting the job loss for the purpose of the unemployment rate. You see, numbers are never what they seem.
Had the labor force stayed the same size over the past six months, then the unemployment rate would now be 11%. That of course would shock Americans. The truth usually does. But there are more fables.
Bert Dohmen’s
Wellington LetterTM
The latest report on February 5, showed a decline in unemployment to 9.7%. Another piece of magic, because the same report showed a loss in jobs of 20,000 in the “payroll survey.” How is that possible? Again a big decline in the size of the work force. So, the report is actually very negative instead of positive.
The government “birth-death model” arbitrarily adds new jobs to the numbers each month. Last year they may have artificially added as many as 1.7 million jobs to the numbers this way. That makes sense in an expanding economy, but is totally erroneous in a recession because small firms are most probably reducing jobs. Last May the BLS made an adjustment for this error with an 824,000 job downward revision. The Household Survey doesn’t contain this “fudge factor.” In a downturn we consider these numbers more reliable.
Today, February 8, we got the big shocker via the revisions from the BLS. It showed that in December there were 1.4 million more people out of jobs than had previously been reported. Obviously, that got no media attention.
We have used the headline “Smoke and mirrors, deceptions.” And it continues with many of the governmental statistics.
MORE DECEPTION:
We have often pointed out that the official unemployment rate does not count someone as “unemployed” if he has not looked for a job in the last 30 days. Now here is something you may not have known: if he has looked during the past 12 months, than he is included in the “U-6” number, which shows unemployment at over 17%. Here is a chart, courtesy of the excellent www.shadowstats.com.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Here is the shocker: very few people realize the U-6 still doesn’t include people who are discouraged and haven’t looked for a job in over 12 months. This was an “adjustment” made by the president Clinton. If we include those people, than the unemployment rate currently is 21.9%. Shocking!
Charts show that the firing of workers started in December 2007. Our issue that month was headlined “The Recession has Started.” It was right on target. Therefore, this recession is now 25 months old, certainly not the typical recession.
Here is a chart from “www.chartoftheday.com” which compares the payroll numbers with those of previous recessions. It is clear that this is not a normal recession. Jobs are still declining whereas in previous recessions, employment started rising earlier than 25 months of recession.
CONSUMER CREDIT STILL PLUNGING:
The unemployment scene is dismal enough. But now look at the consequences, namely on the credit front. We have been saying for many months that the two most negative factors are not being addressed by Washington, namely jobs and credit contraction.
On January 8 we got the consumer credit number for November. Horrors! Consumer credit in the U.S. dropped a record $17.5 billion in November. Economists had expected a decline of $5 billion. The chart below shows that a new low in credit (monthly) was just made. There is no sign of recovery. As you know, our oft proven theory says that there can be no economic recovery without credit growth.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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The fact is that during any recovery 97% of jobs are created by small businesses, depending on how you define “small.” But these are exactly the ones who will be punished the most by the health care bill and the tax hikes. Where is the so-called “stimulus” from the government going? To a few huge firms. But these are the firms which normally create none or only few new jobs.
Remember the optimistic retail sales numbers we heard for December? This caused a nice rally in many of the stocks of retailers. However, on January 14, a new number was released. Bloomberg reported: “Sales at U.S. retailers unexpectedly fell in December…”
GDP, MORE SMOKE & MIRRORS:
We got the estimate for 4th quarter GDP growth: up a blazing 5.7%. The President said it’s the strongest growth in over three decades. Of course, he has no idea how it’s calculated. Looking deeper, we see that 3.4% came from inventory accumulation. It comes to mind that inventories grow when firms expect a big surge in orders, and if orders did not materialize as expected, and the stuff sits in the warehouse.
Another factor boosting the “real” GDP number is the GDP deflator, a measure of inflation. It grew only at a 0.6% rate vs. expectations for 1.4%. This number is subtracted from nominal GDP to give the headline “real” GDP. As a result, it made headline GDP look higher. Eliminating these two factors would give a more reasonable GDP growth of 2.5%.
But the story doesn’t end there. Now comes the biggest factor you have to understand: the headline number is ‘quarter over quarter’ growth, and then is annualized and compounded as if it is going to continue for a year. Therefore, you can actually have negative GDP growth, but have it show up as a
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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positive headline number. The actual number, year-over-year growth, is much different. Look at this chart, courtesy of www.briefing.com. It shows that GDP is still in the red.
Personal Consumption might be a better indicator of the state of the economy. Here is a chart, courtesy of www.briefing.com
The little “fish hook” at the bottom suggests that the current, alleged economic growth may only be a “dead cat bounce” rather than a recovery.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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BOTTOMLINE: most statistics coming from the government are at minimum wrong, at worse fudged and deceptive. The job numbers are phony and don’t tell the story. The entire “recovery” thesis is being perpetuated to make Americans feel more positive, in the hopes of stimulating consumer demand. But “feelings” and “hope” don’t cause a sustainable recovery. Intelligent action however can. But these are unfortunately missing.
HOMELOAN DEFAULTS:
If you look at a chart of mortgage loan defaults, current and future defaults, the top of the mountain comes in 2011. The subprime default peak is behind us. Of subprime mortgages created in 2006-2007, about 62% have defaulted. That must be a record!
The “option ARMS” default peak is still ahead. Of the mortgages securitized in 2006-2007, so far about 48% have defaulted. Imagine, almost 1 out of 2.
We believe that the economy will have a “double-dip” recession. The vast majority of CEOs are “cautious” in the media. If they had any justification for being positive, they would be ebullient in front of the cameras. As it is, the best they can say is that things “appear to be stabilizing.”
The CEO of JP Morgan said on January 15 when they announced earnings, that he was unwilling to raise the bank’s dividend yet, due to the potential for a double-dip recession. Upon further questioning, the CEO put it even more bluntly, “We don’t know when the recovery is.”
HOME MORTGAGE MODIFICATIONS:
The government’s HAMP program to modify mortgages for people who can’t pay is a dismal failure. The goal was to modify 4 million mortgages. So far, 66,465 first mortgages have been modified as of December 31.
Another big problem is second mortgages. They are defaulting and there is no program in place to modify those. Banks are on the hook.
The four largest US banks alone are estimated to hold more than $400 billion of “home equity loans” which work like second mortgages. One analyst says that if banks were forced to write them down to their actual value, the banks would be insolvent. Therefore, don’t fall in love with bank stocks.
In the next issue we will discuss the mountain of mortgage results and defaults which are still ahead. In fact, the peak will come in 2011.
The GEITHNER Flip-flop:
On December 2, in a speech in front of the Senate Agriculture Committee, Treasury Secretary Tim Geithner said that $US 700 billion TARP bailout program for big banks would end. “Nothing would
make me happier,” said Mr Geithner.
Bert Dohmen’s
Wellington LetterTM
One week later, Mr Geithner sent a letter to Congressional leaders stating that the Obama administration had decided to EXTEND the TARP program until October 2010. The TARP had been scheduled to end on December 31, 2009. Did he see something bad coming down the road, or did his boss have other uses for the several hundred billion still unused in this slush fund? We will find out soon.
INTERNATIONAL MARKETS
ASIAN MARKETS: WORST WEEK IN 11 MONTHS
On January 23, the market plunge of three days had given the Asian Pacific Index the biggest drop in 11 months. The fears are that China and India are tightening monetary policy. Indeed, that’s what they are doing. Some of the big losers:
Aluminum Corp. of China Ltd., the country’s largest producer of the metal, plunge 9.1%.
Rio Tinto Group, the world’s third-largest mining company, lost 7.2%.
Nomura Holdings Inc., Japan’s biggest investment bank, lost 8.8%.
Nissan Motor Co. declined 6.4%.
Japan has a new Finance Minister, Naoto Kan. On January 8, his first day in office, he indicated that he would like the yen to weaken and would not be against intervening to make it happen. This is a 180-degree shift in policy from his predecessor. The yen has already dropped 9% since the 14-year high reached in November.
This may have some interesting consequences. Remember the popular “yen carry trade” with which the big trading operations made fortunes until 2008? It involved borrowing yen at close to zero percent interest, converting them to dollars, and investing them in US T-bonds yielding perhaps 5% or 6%. That provided a great “positive carry,” i.e., the difference between the interest cost and the interest received. But it also provided a great profit as the yen weakened.
Now that a rising yen will be fought by governmental policy, this trade may become more attractive again than the dollar carry trade. That would take downward pressure off the dollar, allowing it to rise.
CHINA: THE BUBBLE WILL BURST
In our view, China has over stimulated its economy, and it will be a huge problem in the future. In late 2008, it pumped $586 billion in to the financial system to counter the global financial crisis. In 2009, the stimulus along with governmentally sponsored bank lending was a huge $1.3 trillion according to some estimates. The result was astonishing GDP growth.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Many astute observers ask why did the stimulus in China work, and why isn’t it “stimulating” in the West? One difference is the size of the economy. China is about 25% the size of the U.S. economy. China’s stimulus in 2008 and 2009 is like $8 trillion would be in the U.S.
But there is another significant difference: China’s government and its people don’t have the huge debt pyramid. This debt pyramid is crumbling in the West, which is highly deflationary. That’s why banks aren’t lending and the central banks have encountered their ultimate nightmare, namely the “Liquidity Trap.” That prevents inflation from rising.
In China, the stimulus is causing damaging dislocation of resources and incredible speculation. That is ultimately very inflationary. It will trigger an ever-increasing tightening of monetary policy. That never works until the economy finally tumbles into recession. And then the U.S.’s largest lender will get out of the U.S. support business.
PREPARING FOR A PLUNGE:
On January 8, China changed the rules for the stock market: it will now allow “short selling,” margin buying, and stock index futures. This is a very important change.
The first thing that should happen is arbitrage opportunities: sell short the overvalued stocks in Shanghai and buy the ones trading in Hong Kong. The Shanghai index is selling at about 34 times earnings, the most expensive in Asia, while Hong Kong, where many of the same stocks trade, is selling at a discount of around 40%.
This means that Shanghai should decline. But will Hong Kong stocks rise? Not in our view. When selling waves hit, they will envelope all these stocks. Hong Kong may just sink at a lower rate.
There is another important clue: the year before the Japan stock market top in 1990, the government had just given in to pressure from Wall Street, via Washington, to make similar changes. We wrote that we suspected that Wall Street saw some juicy short selling opportunities coming up in Japan because the market was so overvalued. All that was needed was a change in monetary policy to tightening and the speculative bubble in Japan would burst. And that’s what happened. Wall Street cashed in during the crash in Japan, as did our subscribers. It should be no different this time.
BOTTOMLINE: the government is now starting to withdraw or reduce the lending in order to slow the rapidly rising surpluses in real estate, steel, cement, and other commodities. Until now, the government has probably been operating on the theory that a global economic recovery will absorb the excesses. When the recovery doesn’t occur, they will have to make some painful decisions. We expect the deterioration to start in or around May. But the stock market always leads by at least six months. Remember, the Shanghai market made its top last summer.
The most important reason for tightening credit is the danger of high inflation down the road. And that is a serious problem.
The China growth story has been so incredible, but we haven’t heard anyone mention that perhaps their low taxes are partially responsible. China has no property tax, no capital gains tax, no dividend tax, no
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estate tax. Small businesses don’t report actual income. In other words, China is more capitalistic than the US and the West.
If Washington were serious in promoting an economic recovery in the U.S., they would immediately have across-the-board tax cuts on small businesses and investors in the U.S. Instead, they are raising taxes. These policies assure that there will be no recovery.
KUWAIT:
The global crisis has hit the oil-rich country of Kuwait. On January 6 Bloomberg News reported: Kuwait’s parliament approved a bill that would force the government to buy all 6.7 billion dinars ($23.3 billion) of consumer loans, write off the interest and reschedule the payments.
The problem is that huge consumer loan defaults are burdening the banking system. This is a country where a part of the oil revenues are distributed amongst the population. Not everyone agrees with this bailout. Jassim al-Saadoun, head of Al-Shall Economic Consultants in Kuwait, was quoted by Bloomberg: “You are rewarding careless financial behavior, depleting limited resources and distributing it to people just to consume. It’s a bad moral message.”
We ask: what will happen to these oil countries when the price of oil sinks below $40 per barrel? Severe pain!
POTPOURRI
THE END OF THE “TEA PARTY” MOVEMENT?
This was a great movement, sending a message to Washington that “we are sick and tired of your lies and deceptions, and we won’t take it anymore.”
But now we are seeing the first signs that the movement is being hijacked by people with different motives. We will now see “for profit” tea party events run by less-than-reputable people that will discredit the whole movement. They will enrich themselves, while at the same time using all the important phrases regarding “freedom, small government, independence, etc.,” and “we all have to fight together, just give us your money so we can accomplish that.” The resulting scams will turn people off. That will be the end of the movement.
The people who go to the tea parties are genuine Americans who want to preserve our precious democracy and the Constitution. But their idealism will be used by the typical scamsters, the same ones who prey on widows and the retired.
My suggestion: don’t attend any “tea party” for which there is a fee more than $50 to defray expenses. And don’t attend any where the speakers get more than a nominal fee.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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A LACK OF VISION:
Did you watch the first day of the inquisition of the CEOs of he top financial firms? The purpose is to find out what caused the financial crisis. What a waste of time and money! But it’s not their money, it’s yours and mine.
All they should do is go to Amazon.com and order some of the recent books on the subject. There are some excellent ones, from Charles Gasparino or Andrew Sorkin. Oh, I forgot, members of Congress don’t read. And it certainly wouldn’t get them any TV time.
Did you hear the CEO of JP Morgan answer that the banks financial risk “models” for the mortgage derivates did not have any provision “for a decline in real estate prices?” These are the people who make millions of dollars in salaries. All they had to do is read our WELLINGTON LETTER in 2007, or a few other analysts, and they would have seen the projections for home prices. In these pages we predicted that housing prices would go back to the levels of 2002-2003. That suggested a 50-60% decline. IT HAPPENED!
Was it a guess? No. History shows that when bubbles burst, prices first go back to the point where the bubble started, and later even lower.
LIES, LIES, LIES and VIDEOTAPES:
One top Congressman (D) said on CNBC this month that their priority for 2010 is “creating new jobs and fiscal discipline.” Applying our proven analysis over 30 years, we know that they will do exactly the opposite: no new jobs will be created and they will continue to spend like a bunch of drunken Congressmen (out of respect for sailors, we have modified this phrase, because they spend their own money.)
These people lie whenever they open their mouths. The head of the Congress, “Botox Nancy,” said when they passed the health bill: “There has never been a more open process for any legislation,” in history. Considering that all the wheeling, dealing, bribing, and coercing took place behind locked doors, where no Republican was admitted, this was the greatest display of violation of the Constitution we have ever seen. But lying is a way of life for these people. Fortunately, Americans can see it all on youtube.com.
Considering that only 36% of Americans support the health bill, you wonder what happened to the “representation” part of their job description. They are shoving this bill down our throats for their own personal gain, i.e., power. And most members don’t even read the bills, and the bill was written by a far-left outfit, called the APOLLO ALLIANCE. (Look it up on google.com).
Where in the Constitution does the Congress have the right to force every American to purchase health insurance? If this is Constitutional, then why can’t the Congress force everyone to buy a new car? Just imagine the economic stimulus!
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Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]
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Judge Napolitano said on national TV recently that we should pray each night: “Protect us from our government, which is out of control.”
THE GEITHNER HEARING:
You may have seen the hearing by a Congressional committee of Treasury Secretary Geithner and Hank Paulson re the AIG bailout. Now the backdoor deals are being questioned by our politicians. In the pages of this publication, we have been writing about this looting of the US Treasury since the day of the bailout of AIG in September 2008. Did the media question it at that time? No. In the hearing, one member of Congress called it the biggest heist in history.
We often hear the leftists blame capitalism for the financial crisis. Actually, the blame falls squarely on corruption in government, which allowed the enormous credit bubbles to form. And after the bubbles burst, hundreds of billions of taxpayer money was channeled to those who were well connected. AIG is an example. When it could no longer honor the CDS (credit default swaps) it had sold, it was negotiating settlement with the buyers at less than 100%.
(Go to www.bloomberg.com for some excellent articles on this. Just search “AIG and Geithner.”) Here is part of it:
Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps. The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking.
AIG made more than $27 billion in payments without identifying the securities tied to the swaps or listing the value of individual purchases by each bank, details the Fed wanted to keep out, according to the March 12 email from AIG’s Shannon (general counsel).
This is not capitalism, but just plain theft by public officials.
On January 9, the Wall Street Journal carried an interview with the Hank Greenberg, the ousted former head of AIG who had built it into one of the largest insurance firms in the world over 30 years. Interestingly, he asks some of the same questions as Congressman Issa. It’s a “must read.” Here is the link: https://www.wsj.com/articles/SB10001424052748704130904574644693895033518
FREEDOM WATCH
Just before Christmas, when people were not watching, your president signed a new law, giving an international organization (INTERPOL) full power over every American. It has been given full immunity, putting it above the FBI, CIA, and other law enforcement agencies. The Constitution is now totally shredded, burned, and obsolete.
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Here is how the website www.patriot.com describes it:
What does this mean? It means that we have an international police force authorized to act within the United States that is no longer subject to 4th Amendment Search and Seizure. INTERPOL, an international criminal police organization, is now poised to reside above the United States Constitution – in a place of sanctity beyond our FBI, CIA, DIA, and all other criminal investigatory domestic organizations. President Obama has just placed our Constitutional rights under international law.
Interestingly, this important item received no publicity. For details, go to this link: . You will be shocked.
By the way, few people may know the history of INTERPOL. Just look it up: www.wikipedia.com.
THE HEALTH CARE PLAN:
It’s more ominous than you can believe. This plan is not just “socialism,” but prepares us for communism. Go to this link: http://www.youtube.com/watch?v=HcBaSP31Be8
Don’t make the mistake of thinking that the health care bill is dead. It will be passed! And it has little to do with health care, but everything to do with power over Americans.
INTERESTING VIEWPOINT
The President’s Chief of Staff said last week when asked about the First Amendment to the Constitution: “I think it’s way overrated.” These are the people who took an oath to uphold our Constitution.
Greetings,
Bert Dohmen
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