Posted On: 2006-12-20Length: 30:58
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Well, hello everybody, we are ready to rock and roll here on our Wednesday edition of the Vigilant Investor daily, this is your host Johannes Ernharth and it's Wednesday, December 20th the final full day of fall. Hard to believe that tomorrow will be the first day of winter although for a lot of people across the country, clearly not too hard for them to believe and a storm ravaged the North West of the United States and so forth and we're definitely feeling it although it's been a little bit, we got some warm weather out here in the Pittsburgh area where we're broadcasting from, but you know, naturally we're always hoping for a little bit of snow around the Christmas holiday, but we'll see if that happens or not. But, anyway, this is Johannes Ernharth again, you're listening to Vigilant Investor live daily and we'll hey welcome to the show. You need to be, if you're not already checking into vigilantinvestor.com it is our daily journal that is updated to help people connect the dots of just all the crazy things going on out there in the economic environment, market environment that are just not being connected together by the general media. You hear a little comment here, a little comment there on Bloomberg or a little bit on CNBC, but few people are putting the dots together the way we are here at Vigilant Investor, and we think it's going to be very, very prudent for folks to come together and start thinking outside the box as we go forward. Lots of problems, lots of things that we've talked about day here, lots of things you write about day to day. And of course our weekly show, we open up the conversation to anybody who wants to join on in generally, and that's going to be on Friday at 3:20, this is our first Friday show reminder to all, no show tonight at 9 PM, the Wednesday shows are no more. So, definitely, definitely, definitely just don't tune in, you're not going to find [...] come to Talk Shoe of course, there's lots of great things and what I mean by Talk Shoe is if you're downloading the Podcasts and listening to it later via a service such as iTunes, which is a great way to listen to us on a daily basis, on a weekly basis, automatically downloads every time you turn on your iTunes software, you just beam us on over to your iPod, or whatever the heck else you use for your Mp3 player and get your daily, weekly doses. But, in any event, talkshoe.com is a live sort of environment where you can have a, you know, you can just do a show, you can listen to it if you want, you can also text chat by downloading your free text chat software that integrates, you can see everybody else who is listening that is deciding to text chat and of course there is also the ability to call on in with your phone, with Skype, with whatever you want to do, cell phone, free calls across the country these days, we get people calling in from all around the world every now and then, and Talk Shoe definitely gets a lot of that in some of the shows, but and you can just participate. So, in any event, Stephan Ernharth, co-host, I see that you're with us today, how are you doing today? Well, see if I can bring him back up here, for some reason he was muted, and I'm going to try to un-mute him -Stephan are you there? I can hear you a little bit, but I can't quite hear you all the way...Terrible connection today Stephan, I'm not sure what's going on.
Stephan: Can you hear me?
Now I can hear you, much better.
Stephan: Yeah, okay, I just, I hadn't stared talking yet, how's that?
It's dramatically better when you talk, it's funny how it improves your connection, although we're getting a little bit of feedback in the background when I'm talking with your connection for some reason ...
Stephan: Well, what I'll do is I'll call back without the earpiece.
Okay, good enough. Well, what I'm just going to do is run down through the finance, and we'll wait for Stephan to get back online. And, but just to do our usual market recap, not a whole lot is really happening in the markets this week, the Dow, S&P and Nasdaq all down just a touch today, but not really. Anything to note, the Dow down about six points, S&P down one point and the Nasdaq just under 2 points and that takes the Dow to 12, 465, the S&P 500 to 1,423 and the Nasdaq Composite to 2,427. And you know, still not too far off of their year highs and you know it's not a bad thing to be, they traded up higher than they have of course closed, closing high is of course where people tend to consider the high watermark but if we were going to go with the trading high percentage wise they're down, Dow is down about 65 basis points, and what we mean by 65 basis points for you laymen out there is that's 65 one hundredths of a percent. We get that question a lot, we use that basis point talk in the industry, but not a lot of people outside of the industry really talk about it. But, S&P 500 56 basis points down from the [56...point 56] down from the year high, and that will be the trading high of course and the Nasdaq down about 1.7 percent from its trading high. Moving on down to the VIX, the CBOE volatility index, which we like to talk about, it dropped a little bit today, it's trading at 10.28 and it has been trading down into the 9's earlier this year as a real low, and again we're still trading in, you know, in terms of lack of concern about volatility the VIX is an indicator of that when it trades low, it tells you that people are not too terribly concerned, at least your trading community is not terribly concerned about volatility because the CBOE VIX is a way that you can insure against volatility. And when it's trading cheaply its telling people are not that concerned about it. And it is trading in its you know, 95th to 99th percentile of cheapness. So That combined with other things that we've been talking about the past week, tells us that, boy there's a lot of stuff that, just a general lack of concern out there. We also talked about earlier this week, we posted up at vigilantinvestor.com a summary of a survey that Bloomberg published a couple days ago which shows that the 12 largest Wall Street firms all are in agreement that the S&P 500 will be up next year. Their top analysts have all put out their prognostications for 2007 and they say by the end of the year next year, the S&P will be up, they all vary, but generally they're all pretty bullish. And that would be you know, again it's sort of unusual for them to all be in consensus. Last time they were that was in 2001 and compound that with all these other issues we talk about day to day, we look at, you know boy it's really been a long while since we've had a solid 10 percent correction in the equity markets and that's usually something that happens at least once every four years and we're pushing away beyond that. So, tells us that there are reasons to be concerned just purely from a statistical standpoint, and not to mention things like the sliding real estate and so forth. A couple other things to cover relative to closing markets today, the dollar was trading up just a touch, not a whole lot, still trading at about 83.53 today at its close, and that's just up a few points, it was trading at I think it opened at 83.42, so just a little bit stronger, not as high as it was earlier in the week when it was trading at 84. But, yeah you know, the dollar is something we like to monitor because as the dollar grows weaker, as foreign nations begin to eventually divest themselves from the U.S. dollar which is something that we see as being inevitable, if only because of the deficit and so forth that we've talked about boy, at nauseam for regular listeners I'm sure, but it's crucial as the dollar gets weaker against other currencies it's a signal that the other nations are beginning to get concerned about the U.S. debt situation, the U.S. consumer situation and, you know, just what's happening here, the recession starts sinking in deeper than people expect. I think a lot of people would be surprised in the U.S. but maybe not globally. And we of course also look at some of the other indicators that we think are going to be more meaningful for gauging what's really happening with your dollar. We look at things like crude oil, natural gas, precious metals like gold and today, what did they do? Well, gold was down just a touch about 2.58, 2 dollars, fifty-eight, so it's trading at 619 at close, 619.90 actually. Crude oil 63.72 a barrel, that's up about 26 cents and natural gas was down about 31 cents, to 67.69. And you know, things just don't go straight up, but the dollar is definitely adjusting to those and always remember when prices in commodities, natural gases, energy, precious metals are going up, really what's happening is the price is not going up so much as the dollar is losing value verses those things. The dollar is losing it's purchasing power. And, one last thing, currency to currency we can't say this enough, it doesn't give you a whole lot of a great indicator. Currency to currency is important but don't forget, just like the Federal Reserve is always inflating, creating new dollar after new dollar after new dollar, those foreign central banks are doing the same thing as well, And of course we noted yesterday that the purchasing price, the PPI index, which is the wholesale producer price index indicator of inflation was up 2 percent, its most, its biggest jump in 30 years. And of course it had a huge decline of 1.6 percent in a prior month but it tells us that inflation is of course not [...] to number one, but number two, again it defied the consensus expectations, and wrapping up generally with respect to the markets, we think that the consensus expectations, if you have been monitoring the news over the past 6, 8 weeks, [...] a lot of consensus expectations getting blown out of the water. So, moving things forward, one thing that doesn't surprise me a whole heck of a lot is the news that Wall Street bonuses have hit a record 23.9 billion dollars this year. This is a report that has been circulating out on Reuters today, and that's 24 billion dollars, I mean basically you have not a bad thing and of course if you're really close to the movement of money and the expanding money supply situation where our M3 number is boy, climbing over 10 percent a year, you'd better darn well expect that the people who were in those M3, the more esoteric money supply components that make up M3, when that money supply is expanding, well, of course your bonuses are going to expand. And people need to keep that in mind that even though CPI and PPI seem to be fairly well under control, don't forget about the M's, M1, M2, M3 and MZM, of course M3, the Federal Reserve inexplicably back in November of 2004, was it 2004, no I guess it was 2005 because it happened this year, November 2005 decided that they were no longer going to publish M3 because it was just too much of a hassle to put together and yeah, boy, nobody ever pays attention to them anyway, so they're just going to cut it out. And this is of course and organization that thrives, it's very existence is all about printing money out of thin air as if they couldn't cover a measly one million dollars to continue calculating M3 for everybody. But, the M's used to be important, it's just basically an indicator of money supply, but M3 while on one hand, you maybe looking at well, they said they weren't going to publish anymore and as of February they stopped publishing it this year, but there are other people out there who have continued to calculate it. There were no real secrets behind what some of the components of M3 were, and low and behold, we now know that M3 just climbed above, the most recent numbers, 10 percent. And that tells us that you know, clearly, money supply is not contracting to the degree that they seem to be saying when it comes to the tough talk on inflation around the Federal Reserve and so forth. Of course when they stopped doing M3, well let's see, back in early 2005 M3 was growing at about, well it was less than 5 percent year over year, and by the time they stopped calculating it earlier this year it was growing into about 8 percent year over year and of course now it's continued to make its way up with actually a pretty big jump in the past two months from 9 percent to a full 10 percent, over 10 percent. And simultaneously, the other M's just to put this in perspective and I know that this gets maybe a little bit esoteric for folks out there, M2, which is a little less elaborate has been generally flat for most of 2005, hovering between 4, 5 percent up and down a little bit here and there, while M1, which tends to be a little more cash oriented type of money supply has actually declined a good bit year over year to the point where it actually was [...] a little bit. Now MZM which we think is the ultimate final payment type of a measurement of currency, which it gets very important, not so much now in the type of cycle that we're in, where M3 is expanding and able to more or less be treated as it was a final payment, people trading these high finance papers out there, out in the marketplace, can really, you know, claim up and drive up the prices of a lot of goods. But in the end when everything all starts coming undone, if it does, MZM is what's going to be the final payment type of currency and that's actually been, was shrinking for a while and now it's begin to pick up a little bit again. So, it gets kind of esoteric, but we focus in on money supply today because boy who the heck is talking about money supply, you go back to the early 80's everybody used to hub around the money supply reports as if that was going to be the real indicator, what's happening in the economy and of course that's because we were in a hyperinflationary environment in the 70's and early 80's and there was a focus on that of course. Prices going through the roof so much that people really wanted to know what the heck the Fed was up to these days, and who cares about it. CPI is under control. What, me, worry? To quote a famous Mad Magazine cartoon character, or I should say, not even a cartoon character, he's more or less the spokesman of Mad Magazine for those people who know Alfred E. Newman, one of my favorites. Moving on, okay. A couple other headlines out there that I think are worth discussing today, natural gas sold off a little bit. There has been a decent increase in mortgage applications, excuse me, decrease, yeah, last week, let's see the high yield risk is beginning to start looking a lot riskier and that's because boy for so long, so much money was sloshing around out there and continues to slosh around out there. What that ends up doing is you increase the money supply, people are desperate for risk, or excuse me, desperate for return, and all that money supply over the last 5 years has been driven into the U.S. Treasury market and that's suppressed yields, suppressed the rate of return, suppressed the U.S. consumer, what the U.S. government has to pay in interest, because all that money's been readily saying, hey we'll by U.S. debt at 30 year lows and as that, that's been always traditionally considered to be the risk free rate of return. So what that's done is it has pulled down with it the riskier rates of return because people who are desperate for getting as investors a higher rate of return start looking to other areas to try to boost that. And ordinarily, when you have really low 30 year treasury bond, really low 10 year bond, what have you, when rates are below average, tells you that the environment perhaps is less risky to be investing in and that gets sort of bleeds into the other areas of the markets relative to risk. And of course we were talking about VIX earlier, the longer something goes without breaking it seems as if more people come to believe that things will never break and ironically for better or worse the exact opposite tends to be true. In other words people get cockier and cockier and they start taking on more and more risk and that's largely what we've seen over the last 5 years is that people have grown largely indifferent to some of the higher yield bond risk. Well, that appears to be shifting a little bit and the volatility has been very low but it's beginning to pick up a little bit, and we'll have to see how that plays out though. And that's one of the things that is, the world comes to terms with the gigantic gargantuan federal deficit the United States has, which is clocking in at 4.6 trillion this year, not the 260 billion they're talking about, but really 4.6 trillion, when we include all the future payments that are going to be due and if you started funding for them, I mean any legitimate business out there would say, hey how the heck are we going to come up with all this money for you know, Social Security, Medicare, Medicaid, which is going to be ballooning in a few year from now when all these retirees, all these baby boomers start coming to retire. What then, where are we going to find that money? Well in the political world we just say, hey, punt, let the future generation get screwed, let some other politician have it blow up under their watch, as long as I get reelected today, I'm going to keep promising more and more. That's the way it works in the U.S., that's the way it works in a democracy that's slowly is becoming less and less one routed and liberty and freedom and free market property rights and so forth. And it's more routed towards looting parasitic capitalism. And that's I know, flamboyant sort of talk there, but maybe even a little inflammatory, maybe that's what I meant to begin with. But, hey think about it. These days elections in the United States and around the world in democracies are largely about who is going to get money from whom and ship it to whom, and then which laws, regulations are going to be passed that are going to protect some industries at the expense of others. I know that's very jaded sounding but, the United States we scratch our heads and wonder why so many jobs are leaving and why we can't find work for manufacturing and why is it so expensive and we have to keep driving up this minimum wage, are people going to starve, and then we do that and then more jobs leave and then the cycle keeps going around and around and around. Well, that's why. Anyway, I get off on tangents sometimes and especially with the holidays coming near I'm a little bit looser maybe than usual because I'm in good spirits, and well live with it, enjoy. Hope you're having fun. Elsewhere, U.S. housing market of course has been sliding badly, now they had a little bit of a pick up there where the real estate people who were building homes, the homebuilders have said, hey, we've had a big increase in housing starts, all that kind of stuff, which is good news, nice pick up. But on the flip side, future applications for starts have been declining, so in other words, the pipeline grows thinner, they had a few starts for right now but, in terms of agreements for future ones ah ah. Not a whole lot going on there and meanwhile, all these people who have grown themselves into mortgages and leveraged themselves up into, especially in communities where the house prices kept growing and growing and growing at such a pace their incomes could not enable them to afford where they were living. Well, suddenly the lending standards got easier and easier and easier because the last thing you need is an angry community out there, angry voters and so forth. Of course, when we say it's leaner and leaner and leaner really what's happening is that the quasi governmental organizations out there that are buying up all these mortgages that banks and mortgage brokers put together are saying you know what, we're not so concerned about risk as much as we were a few years ago, again this is that risk fame. But, you know a couple of years ago, boy, they used to have some pretty tough lending standards, had to put 20 percent down, you had to have income at a certain ratio relative to your monthly payment etc.. etc.. etc...that's all gone out the window these days and pretty much anybody with a pulse can get a loan for a mortgage as long as you have not committed mortgage fraud or gone bankrupt more that you know X number of times in the past so many years. And well, bring it all around, the New York Times today is hosting up an article that says study predicts foreclosures for 1 in 5 sub prime loans. And at that rate about 1.1 million home owners who took out sub prime loans in the last 2 years will lose their houses in the next few years, and the foreclosure will cost those homeowners an estimated about 74.6 billion dollars, primarily in the equity that they have in their homes. But you know, again I don't want to keep going back to poor old Casey Serin out there from iamfacingforeclosure.com who actually has his own show here, at least he did on talkshoe.com. We interviewed him here a month ago and yeah, 24 year old getting 2.2 million in 8 properties across 4 states and none of the mortgage brokers bothered to check if that was actually his income. Nobody bothered to see if he was actually going to be a resident in the homes that he was saying he was in. Nobody bothered to see if you know, if he was fudging on his applications. I guess Casey will go to jail and the mortgage brokers can just say, hey, he lied. But, back in the old days they used to actually check that stuff. Not anymore. So, not only to you worry about these sub prime mortgages but I think you really need to worry about the housing market in general especially on the more speculative side. And I read a study not too long ago which said, [...] in 2005 of all mortgages originated, 26 percent I believe it was were investment properties, and an additional 14 were vacation properties. And the reason that number is important is because we keep being told by a lot of people who are pros, saying hey don't worry about the mortgages, don't worry about the housing market too much we've already bought them, because you know people don't have to move out of their homes. You know, who is going to just sell their home because it dropped by 6.7 percent as houses all did year over year in November in San Diego, or their condos by 11.2 percent I think the number was in San Diego. Who is just going to jump out of their home? Well, the reality is 40 percent of those homes that were mortgaged last year were not primary residences, they were second residences, vacation homes and investment properties. Some of those people will have been Casey Serins who lied on their mortgage applications and may be heading for jail, but that's neither here nor there. The bottom line is that a lot of people will be tight on their mortgages and be facing foreclosure like Casey, if they got in over their heads and areas like Michigan and Ohio where the houses didn't support taking on all those mortgages, have already seen a lot of foreclosures and are much worse off than some of the areas that are just beginning to decline now. But my guess is that those real estate seminars and I still hear them advertise here around Pittsburgh how to get rich making you know, money in real estate, I know that they were being aired in L.A., San Diego, Miami and other places where the mortgages were, or the housing market was going through the roof. And now that those houses are starting to drop just give the clock a little more time to tick here, those adjustable rate mortgages that a lot of people use to finance those homes are going to start resetting, the quick profits were not there as they expected, that already happened in Michigan and Ohio, and now that the reversal is happening in those other areas, expect it to show up. And unlike previous mortgage environments this is not such a stable base beneath all this hubbaloo that drove the prices up. But, moving on and we're going to wrap up here fairly soon because we are running a little bit longer than our usual 15 minutes. Let's see what else do we have, excuse me. Just a lot of other articles that I've come across out there, Forbes has an article, The Mortgage Bust Goes On, the Wall Street Journal has another one, Housing Industry May Slow Despite Rebound in Starts, well we talked about that already. And prices are going up to build a home by the way because the contents of a home you can't just manufacture out of thin air like you can credit. So the prices are going to go up even if your home might not be worth more tomorrow, the cost of the ingredients are just going to go up, and that's just sort of a natural thing. So building a home may not help you out so much. Meanwhile retailers, another article out there, the Wall Street Journal is talking about, Hefty Discounting of Flat Panel TVs is Pinching Retailers, not surprising there. Again you know one of the hallmarks of any great inflationary expansion, even when it gets vented into, excuse me one second here...ah, little drink of water there, get that frog out of my throat but, again as I was saying, any great inflation, one of the hallmarks is that it dislocates wealth. And it gets going in directions it never would go. And I always point out that in the United States we have one heck of a gigantic inflationary problem, were it not for our trade deficit, global trade enabling us to vent off all that excess money supply, now for a lot of years it has built, expanded areas like China, but 15 years ago had just little few shacks around and some cities now are bustling metropolises 15 years later. All that money has gone over there, it has created billions and billions and tens and hundreds of billions of investment, and it has brought back really cheap goods, like flat panes and so forth, TVs. But in the end as the inflation starts breaking down after the corrosion of this really starts taking route and all the dislocations start coming to reality, [...] you know what, we really didn't need all those flat panel TVs number one, and number two a lot of those were financed through home equity extraction with the credit expanding system. And now that spigot is getting turned off. So low and behold, all these people, all these entrepreneurs that thought flat panels were going to keep going, you know, the sky was the limit with flat panel TVs, well, now you're seeing retailers stuck with them, and having to discount them. Part of the problem is that all these entrepreneurial decisions were made in directions they should not have been and that's potentially a problem in the long run, especially when you compound it times you know the power of 10 or 100 or whatever you want to do in a broad based economy. Now, let's see what else do I have out there, we're talking about flat panel TVs. I did come across an article, and I just want to make sure that I have the correct companies, Circuit City is posting losses, okay. That tells you that the you know there's issues there. Already we talked earlier this month about how Wal Mart is experiencing problems and its coming in for 13 year lows in terms of its estimates of earnings and that is an indicator that a lot of the people in the middle income, low income environment are getting tight because Wal Mart is the retailer for the world and you hear a lot of distractive talk about, hey Wal Mart made some bad decisions trying to diversify into other you know markets, trying to go out to [...] a little bit, but I think that's just a distraction, I think that's missing the point that is really focused in on us having I think now really a two tiered economy unlike we've had in a long time, which means the poor people, the lower income folks, those on the margins of middle income and so forth are experiencing recessionary environment. A lot of jobs have been leaving, the new jobs that are created don't pay as well and we're seeing of course year over year incomes down when you include basic income and you combine benefits and so forth as well. Just ticked up a little bit recently but not a whole lot. And definitely not keeping folks heads above water relative to just the measly CPI inflationary indicator, and of course that indicator pretty much is garbage. Not total garbage, but I mean they've been monkeying with that number for so many years now that it really is not a very good indicator of inflation. They played too many tricks with it, it's good for political purposes it enables them to balance Social Security or at least decrease your Social Security payments without you actually realizing it. They don't have to face the AARP when they mysteriously tweak down CPI and suddenly CPI, well inflations gone, we don't ever have to worry about it again, right? So, go fill up your tank of gas and come back to me. And tell me what's really going on. Well, I think on that note, we've had a fun day today and why don't we just start wrapping things up if you want to in the future, tune in, give us a call, ask questions, usually we hang around after the show, and do that, people come on and text chat and ask questions and so forth. So, feel free to do that always, our number if you do decide to call on in is always going to be (724) 444 - 7444, our talkcast id. is 982 and if you have registered at talkshoe.com you will have your own PIN number, we always provide one for you if you happen to be a caller that just is going to do it once and just check things out and you can use 222-333-4444. So, well, holiday is coming, I believe we will talk with you tomorrow, 4:15. Of course don't forget our hour-long show, not starting at 4:15 but 3:20 PM that's Eastern Time, New York Time if you happen to be abroad. And during our hour long show, come on in and make sure you're part of the discussion, this is when we want to open things up, we can talk amongst ourselves an awful lot here and love to have people asking questions, throwing in their own 2 cents and get as detailed or as superficial as you want to be. And even if you just want to badmouth politicians or complain about other things, hey, we're here for you, for that. So, anyway, this is Johannes Ernharth, you are listening to Vigilant Investor daily and as always, nothing that we discuss on this show should be construed to be an offer to sell any kind of investment, nor should be construed to be investment advice. Always consult with a professional before you do anything. And other than that, vigilantinvestor.com, visit us daily. Take care.