Posted On: 2006-12-15
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Hello, this is Johannes Ernharth and you've tuned in to Vigilant Investor for our Friday, December 15th episode of Vigilant Investor daily. Next week at this time we will be wrapping up our hour long show, which is going to be starting up, it will be replacing our Wednesday evening show that has been Wednesdays 9 PM that is no longer going to be going on, so tune in next Friday for 3:20 'till about 4:30 or so for our full hour long show where we'll expand on the usual format. And otherwise let's move right on in to today's daily updates and so forth. And I want to welcome, I see what is that, Bud Long and I also see Brown Ales, both are visiting us today in our chat environment here at talkshoe.com but if you want to get through to us and ever listen on in, come on in to vigilantinvestor.com where you can click on through to the Talk Shoe account or go directly to talkshoe.com where you can find the Vigilant Investor show listed underneath the business shows. And there you can also subscribe via iTunes, you can subscribe to all different ways for our Podcast, because after our live show is done, within an hour, hour and a half or so a recording starts coming available. So, you can always download us for your daily commute or what have you, and pop us onto your iPod and have all sorts of fun. But, in any event, moving onward into today's events, a quick wrap up for the week, taking a look at the markets today it looks as if we hit another new high today, the market was up, Dow Jones Industrial 28.76, 28 points, almost 29 points up to 12, 445, twelve thousand four hundred and forty-five. It's up from its year low, about 17 percent. So it looks like the Dow is going to go pretty strongly into the end of the year, but of course we remind everybody with the Dow Jones Industrial, the S&P 500 and the Nasdaq, any new highs that we're hitting, at least at the moment, everybody's ringing bells of on msnbc.com, but the Dow Jones Industrial, you just simply adjust it for inflation and we have not hit a new high compared to the old highs back in 2000. For the Dow Jones to hit a real new high, as opposed to a nominal new high, need to have the Dow Jones Industrial close to about 13, 780 I believe is the number give or take a few points there, don't hold me hard and fast to that. But the bottom line is we're still well over a 1000 points below where we need to be for an actual record high, once we adjust for the nagging problem of inflation. And just as a reminder to everybody about inflation, we talked about it on yesterday's show that the U.S. mint has made it illegal for anybody to melt down pennies and nickels, or export them from the United States in large quantities largely because the consecutive years of ongoing inflation of the money supply, they keep printing more and more dollars, well you keep doing that kind of thing and eventually the content of the penny and the content of the nickel is actually worth more than the actual designated purchasing power of the currency. And in fact, just as a reminder to what we said yesterday, the nickel is now worth, I think it is 6 dollars, or excuse me, not 6 dollars, that would be extraordinary, it's worth about 6.99 cents out on the open market if you were to melt it down, and the penny is about, I think it's 1.12 cents, yes exactly and we had a post on this yesterday, if you want to send that around to people, U.S. money worth less than what it's printed on. It's definitely the direction that we've been going in the U.S. and of course, it's not the first time that you'll probably see a change in terms of metal content. It wouldn't surprise me if prices continue to rise because who wants to be paying more for the actual manufacturing of a coin that supposedly purchases less and moreover, it could conceivable get to the point where a nickel, you're looking at what, close to a 25, 30 percent profit if you melt down a nickel and use the content. Now, of course you've got a lot of work involved in melting nickels in order to get something of value, but, you know, if you have enough nickel coins, you could do that and of course that's why they've placed the capital controls, oh oh, is this the advent of capital controls, we'll have to see, but they have placed controls on nickels, and pennies and if you export more than a hundred dollars worth through the mail, shipping wise you'd better have a darned good reason, you need to have a license to do that, if you don't, it is illegal to do more than 100 dollars per shipping and you're not allowed to travel, if you're a traveler, you can't hop on a plane with more than 5 dollars in change of nickels and pennies. Very, very interesting. But going back to the markets. These are the interesting things you learn at vigilantinvestor.com you probably don't hear elsewhere. The S&P 500 up a measly 1.6 today, not bad, I mean it's up, it's closing at 1,427 and if we look at the Nasdaq Composite, up 3.35 to close at 2,457. A more interesting number I think today is the VIX, which we always take a look at, that's the CBOE volatility index and the last trade that I was watching earlier today at around 4 o'clock, now this is continuing the trade into the after hours, it would appear, no, no, no actually it closed up, let me double check here, my monitor screen is refreshing as we speak, and as of 3:47, okay the number I was looking at earlier, it closed at 10.05, but today it's actually up eight tenths of a percent. Earlier today it was trading at 9.64, which is a pretty darn low range, and when you're trading, that actually broke the record earlier this year, just a few weeks back, prior to the big drop in the Dow Jones Industrial just after Thanksgiving, but it's telling us that boy, people really aren't all that concerned about volatility in the market when it's that cheap, we're below 13 year lows, and you know, 9.80 I think was the last, 9.84 is where it last closed and that was a 13 year low and we were trading below that today, before today's market close. So, hey is there nothing to worry about? Well, we talk about that every day at vigilantinvestor.com, so read up there and also tune in to some of our past episodes, but clearly we think that that's indicating that the markets are just far too complacent. Meanwhile the dollar is gaining in strength and that come off of some early weeks trade reports we're told. The dollar was trading below 83 and when we're talking about the dollar, we're talking about the USDX, which is against a currency basket of 5 major currencies and that's the euro, the yen and so forth, up 84, up to 84 and it's up about three tenths of a percent, four tenths of a percent today and the 52 week high for the dollar was trading at about 91.47 just to put that in perspective and the 52 week low, which happened on the 5th of this month was 82.24. So, the dollar seen a little bit of volatility gaining a little strength off of that dip on the day after Thanksgiving, which sent shudders through the marketplace on a very thinly traded day. A lot of people who have been dollar bears have been warning that the trade deficits, the debt amounts in the U.S., the consumer situation where the average person is not doing a whole heck of a lot of savings, they're in negative savings territory, and about 5 million other reasons why the dollar is going to suffer some serious problems, it'll be interesting to see what happens. But, moving onto other news. One other thing I do want to take a look at stat wise is when we talk about the markets close and let's just do a quick look at oil, and it's my understanding that oil did close today, 63.43. So that is up a bit, and everybody that is telling us that oil is going to drop back down into the 30's and nothing to worry about and, dollar, or excuse me the gold, or gold? I'm shifting around here, oil is staying fairly stubborn and the oil is up. And we had that brief down turn there in the off season for automobile usage of oil products, gasoline and so forth. And oil demand was down a little bit, reserves are supposedly up in the United States with oil and yet this commodity stays stubbornly above 60 dollars a barrel and it is not surprising from our perspective given what has happened with the dollars in the U.S. coming out of the Federal Reserve, a lot of new dollars printed over the last decade, and those dollars are trying to find a home and some of them are finding them in assets that can't be printed out of thin air. And in fact they're trying to find homes in assets that may be slowly getting depleted over time. And we definitely are hearing more and more news about the light, sweet crude, kind of a, you know, it's hard to find that stuff these days and they're finding definitely new oil reserves here and there, but the easy low hanging fruit seems to be disappearing and of course light, sweet crude is the easiest stuff to work with in terms of getting it to market in a refined format. So, moving onward, other news. Treasuries pair their biggest gain in three months on the Fed outlook. Basically we're expecting, the Fed is really been wavering over whether or not we should be seeing whether inflation is really under control or not and of course the market has been wondering, you know is it going to be, should we expect given the slow down that's been indicated in housing, should we be expecting a Fed rate cut, and it'll be interesting to see what happens there. But the bottom line is Fed, as we always say is between a rock and a hard place, we definitely see some inflation in some areas even though there's CPI figures come out showing that core inflation were basically unchanged and things seemed to be under control. But then we still keep pointing to the fact that CPI is largely understated, you can look that up in our Vigilant Investor site for why we believe that, there's a lot of good resources out there, but today's CPI is calculated not the way it was 30 years ago and it's probably not for the better because it largely understates real inflation and real prices going up at a much faster pace than CPI indicates. And of course that helps our politicians and it helps, well politicians, they get to claim that the economy is always doing better than it really is, and beyond that they also get to pare back in their social security payments, without actually having to tell the AARP that they've done a big cut. But if we went back to the old way of calculating Social Security payments on CPI using the old CPI from back in the 1970's, you'd be looking at Social Security payments anywhere from 40 to 70 percent higher than they are today depending on whose numbers you use and what have you. So, conservatively 40 percent of a cut on your Social Security payments, AARP members you can thank you can thank your local Congressman for slipping that on by without you even having a chance to vote on it. Not that Social Security, Medicare, Medicaid and everything else that we've been promised from our government is not a train wreck waiting to happen anyway. But, on that note I should say that today is the 15th and if all has gone according to plan, I actually haven't had a chance, I've been kind of crazy today to review the news wires, but today we should have been getting the report coming out from the U.S. government on the official situation with the U.S. Treasury. What is the deficit officially supposed to be, what are the, what's the balance sheet look like and so forth. And we like that they publish that of course, it's crucial stuff to take a look at. But, in their fine print they do publish also numbers that aren't off and quoted very frequently by our Congressmen and our Presidents and so forth, and that is the near gap numbers, that's generally accepted accounting principles, and the net present value of future obligation figures. Those are tucked way down in the footnotes, they had a couple years where they actually talked about them high up in the page, but now they're in the footnotes. And that's the byproduct, thankfully of a couple of Congressmen back in the 70's deciding that, you know maybe the U.S. government ought to have a little bit of an accounting attitude like you're average business does. And it's not to say that you're Enrons of the world or anything to emulate, but rather you know, what most law abiding people would consider to be general accepted accounting principles. And they did that, and just to put it in perspective, those numbers started coming out in 2000, but for 2005 the official deficit was 315 billion dollars, a very large number, but you, boy you hear your politicians talk about that and that's the one they're always quoting and earlier this year you heard Bush crowing just prior to the election about how the deficit is down to about 280 billion and boy, we're really making great headway and we're fixing the deficit. But, what they don't talk about are the near gap numbers and near gap, they call it near gap because they can't provide real gap accounting, that's GAAP because you got the CIA, the NSA, and the Department of Defense and all sorts of secret stuff. So, who knows how much money is here or there. All that said, near gap, the number goes from 315 official deficit to 680 billion, around that ballpark. And then when we consider net present value of future obligations and those would be things like Medicare and Medicaid and all these things that we are making a lot of payments yet today compared to what we're going to be making in 10, 15, and 20 years as our population, the baby boomers get into the meat of drawing down on those free lunch promises, we'll we add those all into the mix and you're net present value of those future obligations is about 3.5 trillion is when you add it all in together, our total deficit is 3.5 trillion. Now, what does that number mean? Well, consider if a business has a 10 million dollar loan out and it's due in 10 years, well you can't pretend on your balance sheet that you don't have a 10 million dollar loan for 10 years and then have it appear in year 10. It's kind of fraudulent to do that if someone's coming in to value your business you got to show, well, look we've got this 10 million dollar loan that's going to be due in 10 years and we're prorating each year, we've got to put some of it on our balance sheet as a liability and each year that liability grows until finally in year 10, it's a full 10 million dollars and of course you offset that liability with any cash you're setting aside to pay that down. Well, the U.S. government decided back under Lyndon Baines Johnson to simply remove Social Security, Medicare, Medicaid off the balance sheet and isn't that sweet, helps them balance the budget. Put it back on the balance sheet, 315 billion climbs to 3.5 trillion. So when next time you hear you politicians talking about well, we're going to grow ourselves out of this deficit, or you know if we just tax the rich a little bit more we'll solve this deficit problem. 3.5 trillion dollars you need to tax, if you taxed all personal income in the United States, you would not have 3.5 trillion dollars, okay? That's how ludicrous that number is. And of course you know, we're looking forward to getting the new numbers and Bush is going to be crowing about the deficit having declined, and that will be largely because of the byproduct of a lot of repatriated earnings from abroad from multinational corporations that for a lot of years kept those earnings abroad rather than bringing them back into the United States to be taxed. Well, in 2006 a lot of them used a new tax break to repatriate those earnings and those taxes were generated and that helped balance the budget a little big better this year, but that's a one time affair. And in the end, let's not forget that we still have to do the gap accounting, and the net present value accounting, because those numbers are just growing, we definitely didn't set much money aside to Social Security recipients and Medicare and so forth. I remind everybody you can go to our site and take a look at a report hat we published about, it was done by the Federal Reserve back of St. Louis actually by Lawrence Kotlikoff and just the name of the report was, Is the U.S. Going Bankrupt? And in that report Kotlikoff concludes, yes it is going bankrupt absent a two-thirds cut in spending or an immediate double of taxation. Or was it both? Maybe it was a combination of the two, I'll have to review that again. But either case, I mean come on are the politicians really going to handle that, are politicians really going to tell us they're going to double you taxes, they're going to cut two thirds of your budget? I wouldn't bank on it. And with that said, I'm basically outlying for you the dollars bears, one of the dollar bears core arguments on why you should expect a lot of inflation coming out of the U.S. dollar, why you should expect the dollar to begin dropping verses not just other currencies but against hard assets, things that can't be printed out of thin air and again, the important thing to understand, we were talking about that dollar index earlier in the day, the USDX which is again a basket of five other currencies and very popular currencies, it must be remembered when you are dealing with currency to currency we're printing money and so are the Europeans, they're printing more euros, the Japanese are printing more yen, so to get a real read out on inflation currency to currency doesn't always give you the most accurate read. So, all that said, very, very, very, very interesting stuff to be considering as we go forward. And especially into the new year, now we're starting to get into the doldrums of the holidays here, so things start getting a little bit quiet, but again I can't stress enough, if things get quiet the volatility index is raising a warning there I think people need to keep that in mind. And one other thing is that I'm seeing in the news today is that sub prime mortgages, you're starting to see some downgrades there on some of the bonds. Sub prime mortgage bonds basically are the ones given to people who were in the least good financial shape if you will, and one of the most defining aspects of our current housing bubble compared to prior housing bubbles or prior big housing run ups is definingly different than the previous ones, is the lack of restraint in lending this time through. Not only are we looking at some of the lowest mortgage rates in 50 years, in a generation, but we're looking at the leanest lending standards. We're talking about loans where people didn't have to prove that they actually were earning the income that they listed on their application and they didn't have to prove that they were even living in the residence or planning to live in the residence. All these things were basically just taken on faith and faith alone, didn't even have to put money down on these things so you know, with that in mind, sub prime mortgages became all the vogue in a lot of areas as well because, yeah you live in L.A. and the average home price is 350 thousand dollars, tell me the average person can actually afford that. So sub primes became encouraged because otherwise the average person can't fit into a home. And that is on top of the adjustable rate mortgages that are somewhat of a sucker's mortgage where you get a nice rate for a year or three years or five years and then that sucker springs up at you and you better darn well hope you're in good financial condition to re-fi, or you're looking at a triple payment, and then of course if that's not a problem as well, then knock yourself out. But you better hope that you're able to afford the ramifications. And now we also, we also posted up earlier in the week an article on those flexible payment type mortgages where you have the option of paying both your income and principle, which is like a you know, conventional 30 year mortgage, which is standard. Or you can just do the interest only, which is a form of a new mortgage as well, or you can even pay minimum that's below that, where you're actually accruing more debt as you go along because you're rolling interest back into your mortgage and you're going to have to pay that into the future. And of course that creates lots of problems for people who are on the fringe. So, sub prime mortgage to bond downgrades may increase and that's according to Fitch. In the meantime foreclosure rates are continuing to rise and they're building now in Orange County, earlier in the week it was in Georgia, all over the place, this stuff is just going to continue gaining momentum. So next time you hear, is it David Lereah, I think David is his first name, from the National Association of Realtors crowing about how this is the bottom of the housing bubble or the bottom of the housing break, and we've hit the bottom and starting buying in, buying in, remember the, all the information coming in from Wall Street on bubble vision on MSNBC and all the magazines saying, you know when the markets started breaking down in 2000, the technology market and every time you flipped on the TV there was always somebody saying, don't worry we've hit the bottom, we've hit the bottom and they were saying that every week for two years until finally it hit the bottom. But at that point, do you really believe that they knew when it was going to hit the bottom at that point? Take David Lareah for what he is, he represents the National Association of Realtors, and it's very unlikely that he's going to be kept on staff if he starts bad mouthing real estate. So, go to our blog, we have links to a lot of other good resources there at vigilantinvestor.com and you can get the inside skinny on what's happening foreclosure wise, we were talking about it yesterday, but you know, our good friends out in San Diego are experiencing a free fall in real estate prices, I think 6.7 percent in homes and 11 percent drop year over year in condos. That's not a good environment. So, well we've crossed over our 15 minute mark and we're into the 20 minute point at this stage and I'm going to wrap up for the week. All that said, take care for the weekend and we will be in touch next week, Monday 4:15 or thereabouts, if we're a little bit late please bear with us, but we do definitely come on most days. And otherwise if you can't make any of the days during the week, make sure you subscribe to us via iTunes and download us on your iPod or other mp3 device, you can do that through talkshoe.com. And I also want to make it clear, on our Friday show we do open up the lines a lot more and I didn't see anybody typing in any questions, we will address typed in questions and we can open up the show if we have callers to call in to ask questions as well or add their own comments, their own experience, because we get some good comments on our web site about different things happening around the country every now and then. So be part of it live, and especially on our open Fridays, so until then, have a great weekend and take care. This is Johannes Ernharth, Vigilant Investor, we'll see you Monday. Oh last, point don't take anything that I'm saying as investment advice, nothing I am saying should be construed as an investment recommendation. Take care, have a good weekend.