Posted On: 2006-12-18
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Hello, this is Johannes Ernharth and you're tuning in to the Monday December 18th rendition of the Vigilant Investor live daily, I gather, is what we usually call it, Vigilant Investor daily. So here we are, another day another interesting kind of interesting day in the markets I suppose it was up a little bit earlier today all the markets were and they all finished down marginally, hardly down at all. The Dow finished down at about four and a quarter points at 12, 441, the S&P down 4.61 at 1, 422 and the Nasdaq was 2, 163 down probably the most eight tenths of a percent, almost nine tenths of a percent to 2, 435. Now, compared to how we were trading earlier in the year, the highest trading point, the high water mark during the year, not necessarily a close we're down about not a whole lot, a percent and a little under a percent and a half for the Nasdaq, three quarters of a percent for the Dow Jones and the S&P about six tenths of a percent. So all and all you know, year from the percentage of the year low the Dow's up 17 percent, S&P is up 16 percent and the Nasdaq is up 21 percent from the lowest point [...] the year. Now, putting that all into perspective of course, year to date we all know that the Dow Jones was hitting new records, S&P was hitting 6 year highs and so forth. Again we remind all of our listeners adjust that for inflation. Those are not real returns, those are what are called a nominal return. We adjust them for measly old CPI, consumer price index the Dow Jones still needs to go to 13,800 or so in order to hit a real adjusted, inflation adjusted high. So, keep in mind that the Dow Jones in 2000 only purchases about half as much oil as it did back then today, it only purchases about half as much gold, half as much silver, half as much copper. So in other words when you start adjusting the Dow Jones Industrial in the stock market in the United States to other things outside of just inflation, performance is even worse. Now, that is of course, we mention that because we think that the broader trend here in the United States is one where the dollar is going to continue to weaken. And moving on we always take a look at the dollar, the USDX to see where that has finished up and today it didn't change a whole lot, was all said and done a pretty much a flat day, was up earlier, was down a little bit later and I think it just finished up just a touch, the high was trading above 84 today, it closed at 83.99 so just below 84, which tells you that, you know there are some people who still believe there is some strength in the dollar to be had, and the dollar even though it is conceivably going to be weakened by inflationary pressures and so forth, it's not going to happen any time soon, and it would appear that the Thanksgiving, post Thanksgiving Friday there, where the dollar dropped dramatically on the USDX was more of a thinly traded market day type of an event then, a natural, permanent slide, or the beginning of the slide for the dollar, which a lot of people still suspect is going to be happening. Meanwhile we also take a look at oil, oil closed today at about 62 dollars and 21 cents a barrel, and gold which we always look at finished down low 615.70 cents so, gold has been coming down a good bit from its high a few weeks back; it's been trading all over the place anywhere from, well this year heck, it was up around 720 dollars an ounce, down as low as 580 or so in that ball park, and just a few weeks ago, trading up around 640. So, still seeing volatility in the commodities market, as we always suspect , especially the precious metals, which is pretty much run of the mill. Now of course we monitor hard assets relative to the dollar because you cannot print oil, gold, natural gas, crude oil, all these things our of thin air, whereas you can do that with dollars and dollars can basically lose their purchasing power over time. And always remember when the price of these things goes up its not that they're getting more expensive, it's that the dollar is losing its value. It's a little bit of a you know, semantics, but I think it's important stuff to be paying attention to. Moving onward, one of the things I want to talk about on today's show in the remaining 10 minutes or so is the volatility issue, and we always look at the VIX, which is a volatility index. And the VIX is basically a way to trade expectations of volatility in the market. So by looking at the VIX we can get an idea of where traders generally are feeling the volatility is going to be going forward. And volatility was up about 5 and a half percent today closing at 10.60, the VIX was, and that's up 12.89 percent from its low earlier in the year. And earlier in the year, it was actually down around trading at 9.4, 9.46 or so I think it was or 9.64, I may have it backwards. The bottom line is that volatility on the VIX is at record lows. And we take a look at a document circulating earlier among some colleagues and I thought I'd just point this out that the sentiment indicators are about as optimistic as they have been in even exceeding the 2000 tech bubble environment. So, we look at investor intelligence which is one of those indexes that measures the trader sentiment, a lot of brokers on Wall Street and into the 96th percentile or bullishness on a 10 year data sample, that's pretty high. Market vein bullish consensus on S&P 500 is in the 97th percentile of bullishness, the VIX of course which we talk about pretty much on a daily basis here is in the 99.9th percentile, it's just trading just above its record low, telling us that people just aren't worried about any volatility. The Rydex Mutual Fund, excuse me, money market fund weighting the dollar bull, is in the 93rd percentile, equity fund cash levels are in the 91st percentile meaning that most of your funds are out there heavily invested in equities verses stocks. IPO's are in their 65th percentile and growing, they've had a record week, or not a record week but a heavy duty past week and a half, two weeks with just a tremendous number of IPO's getting issued compared to where they've been recently, secondary offerings are in their 87th percentile. The New York Stock Exchange insider trading in its 99th percentile, insiders are basically heavily selling, it's important to know. When insiders don't want their stock, something could be up, it's not an indicator entirely on its own, but when you begin looking at all sorts of other issues that start [...] us that when insiders start trading heavily that tells us that, well everybody else may be confident in the face of things, maybe insiders know something that others don't know, and they're unloading their stock. The S&P futures in the speculative positions are in 99.7th percentile, in other words people are very, very confident that the S&P 500 is going to be strong and call option complacency is in the 84th percentile, meaning that call options usually we have protecting risk and people are basically showing that, you know 84th percentile, you know, pretty high in terms of indifference. So, all that said, our environment today may look like it's going up, we're not seeing a whole lot of volatility compared to usual in the equity markets and so forth. But, we're at record levels across the board relative, or very high levels telling us that perhaps that people are a little too confident. It's usually when people get too confident that they stop looking under the rocks, that they ought to be looking under and consequently things break, it's just the way things work. So, moving onward, other news headlines for today, the homebuilders sentiment of course flipped again in December, that U.S. current account gap widening to a record 225.6 billion, and that's our trade deficit and we remind you anybody who is out there trying to fight that trade deficit and needs to know that the trade deficit is merely an expression of something seriously gone wrong in the U.S. meaning people are having a hard time affording things in the U.S. so they have to go abroad to buy them. And we're not for the trade deficit, allowing the inflationary creation of the Federal Reserve, all that extra money supply and credit that would be sloshing around in the U.S. to vent off shore, we'd be seeing situations much worse than we have in a long time. Now based on, back to the homebuilders sentiment index. Now the homebuilder is a trade association index that basically gives you an indicator of where homebuilders feel things are going to be going in the future. And the index actually fell 1 point to 32, but it did hold above its 15 year low point of 30 reached in September, and lower mortgage rates and cheaper new home prices buoyed some demand according to the group. Now data, they're telling us that data from the past few months is fairly reassuring that builders have seen the worst, but we point out that it's one of the situations where how much credit can you rely on to expand an economy at 50 year low interest rates, and we are entirely as a nation in the United States dependent on super low interest rates, generation low interest rates, and so long as foreigners who keep accumulating that debt are willing to accumulate that debt, well heck that's a good thing, but what happens if they change their sentiment and decide to charge more in interest rates as they begin to back off their appreciation of accumulating more and more dollar assets, denominated, dollar asset denominated debt. Big question. Well, we posted up on Saturday an update about why these foreigners may finally decide, you know what, no [...] enough is enough. And we thing that if it's not this year, it could be next year or the following year and that is because the U.S. Treasury released, actually the Federal Government released its financials for the 2006 fiscal year which ended September 30th. Now, we take a look at that, the official deficit just as a reminder last year, for 2005 was 315 billion and good news you'd think, because with the official number this year dropping down to 260 billion. So, hey hey, hurrah, Republican Congress and our good old President Bush has managed to shrink the deficit by you know a lot of billions, right? Well don't be so quick, as we always point out at Vigilant Investor you need to take a look at the fine print. And thankfully some Congressmen back in the 70's decided that it made sense for the U.S. government not to do that bologna accounting that they do always the time but actually do what's considered to be business type accounting and integrating that into a financial report on an annual basis, and that began early 2000. And now we have what's called near gap accounting with net present value accounting combined, and that's a huge improvement because we really get to see the financial shape of the United States as it stands, we try to apply more businesslike accounting principles on what is really a non businesslike operation, we all know that, at least we should. And, in any event going back to our number last year, 315 billion grows to 680 billion or so when we add gap accounting and when we add net present value of future obligations, and what we mean by that, those are things like Social Security, those are things like Medicare and Medicaid, things that if you were a business you couldn't pretend that they didn't exist and simply you know remove them from your balance sheet entirely. We add those back onto the U.S. government report, we get a number that is closer to 3.5 trillion as opposed to 315 billion for 2005. Well, this year again official deficit that you hear the politicians crowing about, at least the Republicans and George Bush will be 260 billion or thereabouts, whereas the real deficit, the real shortfall experience will begin considering how much we're not funding in advance for the boomers retiring, the boomers Social Security, the boomers Medicare, Medicaid and all the other free lunch promises out there that every politician is addicted to offering you, me, your brother, your sister and everybody else, well that number climbs from 3.5 trillion to 4.6 trillion. And you can read that number yourself, did through the treasury report, it's there or visit our good friend, John Williams down at shadowstats.com, where you can learn a lot more about how the government is fudging it's numbers and how it tries to sweep a lot of less attractive numbers, the things that will really get you to worry under the rug either through manipulation of existing statistics that we use like CPI and GDP, and of course the official deficit, which, boy if I was a business and I had a 10 million dollar loan I might go to jail if I didn't account for it on my accounting sheet, and just let it accrue for, say it's due in 10 years and I let that 10 million dollars obligation that I have to pay all of the sudden spring up 10 years later and somebody bought my business, it would be kind of fraudulent right? Not if you're the U.S. government, not if you're a Congressman you can sell all sorts of free lunches and pretend like they don't exist on the balance sheet until well, let it blow up on somebody else's watch, or somebody else's kid's watch, and let them hold the bag. Well, getting back to my point about our interest rates in this country and how we're ver dependent on foreigners continuing to buy our interest rate, our generational low interest rate debt, in other words, they're getting paid very low for what they're lending. Well, once they start looking at these U.S. treasuries, which are guaranteed by the full faded credit of the U.S. taxpayer and they begin looking at all the obligations that are there, that are insurmountable, that the Federal Reserve itself has found to be insurmountable in its own studies, well I'd expect interest rates to start climbing up a little bit and furthermore, if the Federal Reserve is correct in its report by Lawrence Kotlikoff a few months back, which its study title was Is the U.S. Going Bankrupt, I believe [...] memory here a little bit, but he says that all benefits must be cut by two thirds, or taxed doubled immediately, both of those things immediately in order for us to remain financially solvent as a country. Well, if that's the case I wouldn't expect politicians to be trying to run on either of those things any time soon, taxpayers cannot afford another dime of taxes at this point and they're certainly not going to tolerate it at the voting booth. Meanwhile your ARP types certainly will fillet any Congressperson or Senator who shows up and says, I'm going to cut your Social Security, your Medicaid, Medicare and so forth. So as such, just like all democracies that get what they want, they get it good and hard and they are getting their cake and they're wanting to have it too, and it's a free lunch concept, and it's going to come back to bite us the buttocks. So, all that said, I'm going to wrap up today's show, Vigilant Investor live, this is Johannes Ernharth, make sure to tune in tomorrow at 4:15 or so, we were a little bit late today, and I do apologize for being a touch after our ordinary time, but do tune on in live if you can and we usually have people lingering around, oftentimes where we have some questions happening afterwards and we remind all of our regular listeners that our show this week, our hour long show, the Vigilant Investor live is not going to be on Wednesday evening, we're not doing it Wednesday evenings anymore, we're now at Fridays at 3:20 PM. So, tune on in, you can find out more information at vigilantinvestor.com and talkshoe.com and you can participate at talkshoe.com, you can dial on in, ask questions, you can chat using the Talk Shoe chat service, very nice. But in any even, we're going to call the show a wrap, this is Johannes Ernharth, vigilantinvestor.com and as always, none of what we're talking about should be construed as investment advice, nothing that we're saying should be construed as an offer or any sort of thing regarding securities or anything. Just go talk to your own professionals, don't listen to us for your personal financial advice in investing and so forth. We'll talk to you soon, 'till next week, or actually 'till tomorrow 4:15, this is Johannes Ernharth.