The Economy Has The Flu...And So Do I!

The poor, poor economy. It has gotten sick and Papa Fed keeps trying to give it the same old medicine.

While the Fed seems to only have one prescription in it's medical kit, it seems that it has ceased to have the same effectiveness that it once had.

B-squard, Ben Bernanke and his fellow Fed bankers lowered both the Fed Funds and the Discount rate today by 1/4% to 4.25% and 4.75% respectively. The market proceeded to tank, losing 294 points on the day.

What happened? Rate cuts are supposed to prop up the stock market, not drive it down. While I was calling for a 1/4% cut in the rate, most of Wall Street was anticipating...in fact they were already banking on...a 1/2% decrease in rates.

Mind you, I may be a bit harsh on the Fed and rushing to judgement too quickly here since you have to give these rate cuts time to filter through, but who has time to wait nowadays.

Besides, commercial banks like the rate cut as they immediately trimmed their prime lending rates to 7.25%, the lowest rate in 2 years. This is a boon for real estate investors who are looking to either refinance properties, or get financing for new deals.

However, the thing with Wall Street is that they want what they want...AND THEY WANT IT NOW!

Sometimes even Wall Street does not get what it wants.

Unfortunately, this effects the individual investor, unless...the investor gets creative.

While, all of this is effecting many paper assets negatively, it is opening the window further on others.

One of the initial fuels to the real estate boom was the low interest rates in Japan. In the early part of the decade, interest rates on loans in Japan were hovering around 1%...yeah, that is right....1%!!!! Real estate developers from around the world, and the US in particular were going to Japanese banks and borrowing Japanese Yen, converting it to US Dollars and getting involved in the real estate boom. This was called the carry trade. Many of these loans are either ARMs or short-term development loans. Well, many of these loans are now coming due and the US Dollars are going to be sold to purchase Japanese Yen to pay back the loans.

What does this mean to you as an investor?

Well, there are 2 ways that this can be played. Either calls can be bought in the ForEx markets on the Japanese Yen, OR an investor can buy shares in the Japanese Yen Trust ETF (Symbol: FXY) that closed the day at 90.22. The Japanese Yen Trust ETF holds Japanese Yen and trades on the New York Stock Exchange. It is designed to track the performance of the Japanese Yen.

But wait, there is yet another way that you can play the Japanese Yen. The ETF also trades options. Now the options and the futures supply leverage to the trade and are much more volatile than the ETF.

So, there you have it...3 ways to play the selling of US Dollars for Japanese Yen for FUN and PROFITS!

Notes From The Underground:
Dow - 13,432.77 -294.26
Gold - 812.30 +4.00
Silver - 14.72 +0.03
Oil - 89.15 +1.29

SLV - 143.50 -2.12
FXY - 90.22 +0.71

To Your Investing Success,

Patrick

Where To Turn? What To Do?

Now that the Dow seems to be coming back full force, what is an investor to do?

Obviously, the bulls are back and they are running hard!

I like the fact that the market is going back up, but because I treat my investments as a business, I need to look strategically first, before I can take advantage of the opportunities that present themselves.

What was driving the market down?

Well, the declining dollar, rising oil prices due to increased demand, rising commodity prices due to both increased demand and the declining dollar, falling real estate sector due to the credit crunch.

Over the next four days - Monday, Tuesday, Wednesday, and Thursday - I will take a look at each of these reasons and show you why they are still relevant even though the stock market is trying to say that they are not.

The fact of the matter is that the market will be increasingly volatile for some time. We are also in the middle of a great bull market for stocks as baby boomers and the near baby boomers are stuffing as much money as they can into investments to prepare for retirement. The thing is, these same boomers are also looking at asset classes such as real estate and commodities also. So, if you combine the buying power of these individuals with the demand across the world for financial instruments, we are truly in a great era of investing, volatile as it may be.

And that is why you must understand the various asset classes and markets so that you can make money regardless of the direction of the investment, the market cycle, or the level of volatility.

The US Dollar is declining at a rate not seen since 1992. In 1992, the US Dollar had reached an ALL-TIME LOW, that has since been trumped by today's US Dollar. The Loonie (Canadian Dollar) has reached par with the US Dollar and surpassed it in value. C$1 now buys $1.05 US. This is a level not seen since the early 1960s. The Australian Dollar is at a 23 year high and is about to reach par to the greenback. Virtually every foreign currency that you look at is at or near and all-time high for the dollar.

What is causing this devaluation of the dollar is the near continual pumping of money since 9/11 by the Fed and the US Treasury. The Fed, under the direction of Yoda (Alan Greenspan) and B-Squared (Ben Bernanke) has defined as its mission to keep the economy out of recession - NO MATTER WHAT! Even if this causes inflation (which we will discuss when we talk about commodities) and even if it makes our assets more attractive to foreign corporate and sovereign funds.

There have been two separate benefits to stock investors because of inflation.

One, US assets have become more attractive and cheaper to buy for foreign corporations and sovereign funds. (As an aside, sovereign funds are surplus currency assets held by foreign governments) Just look at the recent purchase of Commerce Bank by the RBC Bank of Canada, the purchase of 20% of the NASDAQ by the Government of Abu Dhabi, and 4.9% investment into Citigroup by Abu Dhabi. Many of these foreign corporations are taking aim at financial assets here in the US.

For more on sovereign funds, go to my post from today on the Real Estate Lifestyle Public Forum (www.realestatelifestyle.com).

Second, US based companies that do a great deal of business abroad. Exporters and multinationals are able to sell more goods abroad due to the fact that foreign currencies can purchase more dollars, thus our goods are cheaper to buy. Look to big multinationals like Altria that are able to derive 1/3 to 2/3 of there business outside of the US.

Now, the big downside to the devaluation of the US Dollar is the rumbles around the world that oil and commodities may begin to be purchased in foreign currencies like the Euro. The US Dollar is THE standard currency for all commodity transactions worldwide. They are priced in dollars, they are sold for dollars, they are bought for dollars. Once these transactions can be decoupled from the dollar, why would foreign countries need to hold so many dollars in reserves? Sure, to buy US assets, but the purchase of US assets are not their primary use. China has the largest sovereign fund in the world, somewhere between $400 billion and $1 trillion. China has no interest in buying US companies directly. In fact, they are helping there own corporations grow and purchase foreign assets. If nations do not have to hold so many dollars, they will dump them on the open market AND then the value of the dollar will truely plummet.

What to do then?

In addition to what you would normally hold in US stocks, an investor should also be holding a near equivalent amount of quality foreign stock holdings. Many of them actually trade on US stock exchanges like the New York Stock Exchange (NYSE) and the Nasdaq.

Until tomorrow.

Notes From The Underground:
Dow - 13,374.40 +2.68
Gold - 785.90 +3.10
Silver - 14.10 +0.14
Oil - $87.83 -0.88

To Your Investing Success,

Patrick

Happy! Happy! Joy! Joy!

Happy, Happy, Joy, Joy!

Happy, Happy.......uh, why did the music stop?

Early next year, this is what may happen once individual investors and consumers realize that they have been duped by B-squared, Ben Bernanke.

He and his colleagues at the Fed Reserve have been speaking out and making comments suggesting a further rate cut. This has led to mass buying of stocks across the board. Now, realize that most of the smart money had been buying under the radar before these guys decided to pipe up (usually at the insistence of the guys at places like Goldman Sachs, Lehman Brothers, etc. the guys who are the primary advisors to big, smart money).

Now that the "news" is unofficially out that the Fed has all but decided to cut interest rates, everyone else is in a feeding frenzy to buy, buy, buy. Where do you think the supply of shares is coming from? I won't answer that; I will let you come to your own conclusion.

What will happen come next year, consumers and individual investors will realize that the latest round of rate cuts will further erode the buying power of the dollar (inflation) and gas, gold, and everything else will renew it's march up in price.

How far down will the price of oil and gold "correct? Well, some of the analysts that I know are calling for oil to drop to $70 and gold to "retest" $650. I SAY THAT THEY ARE WRONG!

Why?

Well, we are having this rally in stocks due to rate cuts. Rate cuts are inflationary. Inflation also means that the Fed must pump up liquidity. This means that the printing presses must continue running. Gold, silver, and oil are inflation hedges.

The #1 job, as the Fed sees it, is to prevent the economy from going into a recession. We may or may not already be in one. Recessions are tough to say that you are in it. They are usually declared once they are half over. But of course, depending on what you do, and what your outlook on life is, you may be in a perpetual recession (I know that is nobody that is reading this, otherwise you wouldn't be reading this). There can be no inflationary slowdown while all of this is going on. The Fed only cares about keeping back inflation. Wall Street is appeased because it gets short term profits from all of the activity.

But here is the rub, if you inflate too much, too fast, a recession will become a self-fulfilling prophecy. Consumers will say enough and stop buying in the amounts that they are buying.

Remember, salaries are not keeping up with the REAL inflation rate (not what the government tells us) AND credit is tightening for consumers. This will cause a slow down in consumption of non-necessity items. This could take us to recession.

Credit for investment purposes (real estate and cash flowing businesses) is still readily available because banks are in the business of loaning out money, after all.

And for stock market investors, I would not be making bets on the general market, but this volatility will lend itself to many, many special situations.

Stay tuned because I will have a very special offer for all of you in time for you to start your portfolios off right in the New Year.

Notes From the Underground:
Dow: 13,390.25 +78.52
Oil: 89.50 -1.51
Gold: 783.60 -12.30
Silver: 13.93 -0.35

To Your Investing Success,

Patrick

I'm Confused...

What is the Fed doing?

The markets got hammered all of the past 2 weeks and on Monday. Today and yesterday the markets went gang busters on the way up!

Several factors are at play to explain the sharp upswings that we are experiencing. One being the mini-correction on the price of oil that may or may not continue. I know that one of my colleagues that is looking for a correction all the way back to $70/barrel before bouncing back. He may get help in that prediction from OPEC which is starting to discuss increasing production. Increased production equals lower prices. I feel that a correction is due, but the days of cheap oil are over. If not now, the next bounce from the price of oil WILL get the price up and over $100/barrel.

Another factor are the sovereign funds (surplus funds of a country used for investment) and foreign corporate investors are actively looking to purchase assets here in the U.S. Just look at Royal Bank of Canada's buy out of Commerce Bank and the recently 4.9% stake that the government of Abu Dhabi has purchased in Citigroup.

But the big reason is the Fed. Fed Vice Chairman (B-squareds right hand man) Donald Kohn was speaking in front of the Council on Foreign Relations that the recent financial volatility has reversed the improvement seen by the markets in recent weeks and could eventually squeeze credit for individuals and businesses and that "the tight financial conditions of the banks may merit offsetting policy from the central bank."

In English what he just said was that the down swing of the market in recent weeks offset the improvements that the markets made from the February drop AND that the tighter policies that the banks are putting on loans may require that the Fed lower rates.

Basically, the Fed is more interested in propping up the financial markets (particularly the stock market) and preventing a recession than in keeping the consumer from racking up higher debt loads and from rising inflation.

This is nutso thinking!!!!!!!!!

Now, while it is each individual's personal responsibility to stay out of bad debt, it is absolutely ludicrous to purposely inflate the price of goods in order to prevent recession.

Why? You might ask.

Because by triggering inflation through the printing of money (which essentially is what the Fed is doing by lowering rates) the Fed may cause a short-term spike in the prices of financial assets such as stocks, in the long run it will cause an even greater recession than if it would have just let the recession happen!!!!

Besides, isn't the loosening of the reigns of the printing presses and of credit what got this country in the condition it is in right now!?!?!?!

You know the whole "credit crunch" "mortgage mess" thingy!

Laissez faire (let the economy run its course) is a thing of the past both literally and rhetorically...Oh, those were the days.

The micromanaging of the Fed is going to make things worse not better. And even though it is now Ben Bernanke at the reigns...it will be Alan Greenspan's lasting legacy.

Notes from the Underground:
Dow - 13,212.47 +254.03
Gold - 802.50 -11.50
Silver - 14.40 -0.16
Oil - 92.04 -2.38

To Your Investing Success,

Patrick