Stock Market Investing, Investment Strategy, Precious Metals Thesis, IMF Sells Gold to India, Conversation with Gary Rosenthal

Stock Market Investing: The equity averages continue to languish, however, as anticipated, the relative strength of precious metals investments soars. The Dow, S&P500 and the NASD all sit at or near their respective lows of the last two weeks while Gold hits a new high for the year at $1,085.65 and Silver crosses $17.

Investment Strategy: We have used the weakness of the last 2 weeks as opportunity and increased our precious metals exposure, focusing on the mining stocks. We used the 50-day moving average and weekly uptrend lines as our areas of accumulation.

As for our market shorts, the inverse ETFs have performed admirably. I would like to note that these trades, by their very nature, are short term oriented with the goal of defending our other positions when deemed necessary. How often we use these positions and the duration of each trade will not be discussed in this blog. Of course, if you are a client of RCM or a partner in the Fortune's Favor Family of Funds, feel free to come behind the curtain at any time, we would be happy to speak with you.

I would like to spend some time today augmenting our precious metals investment thesis. To begin, please review the story below...

IMF Sells Gold to India, First Sale in Nine Years

Nov. 3 (Bloomberg) -- The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” Read More

...The key to this story: 200 metric tons were sold over 10 business days at an average price of $1,045. This sale price was only 2.7% below the recent high!

Now, I invite you to step into our war room and share a conversation I had with the head of our research department. The department head, Gary Rosenthal, a.k.a Dad, has over 43 years of professional Wall St. experience. He has witnessed and profited from all sorts of investment environments and we can safely say not much surprises him. History repeats and for those awake opportunity abounds. So sit back, relax and enjoy the synopsis of this little tete a tete...

BBR: Dad (GSR), what did you think about the IMF Gold sales to India's central bank?

GSR: ...Not surprising; India's purchase is just another example of central banks around the world replacing fiat currency reserves with Gold. China and Russia are two countries that are at the forefront of this trend....

BBR: The IMF still has another 200 metric tons for sale, correct?

GSR: Yes, and I would not be a bit surprised to see China as the taker.

BBR: Dad, I've been writing about our investment strategy with regards to precious metals for quite some time. I have tried to impart the understanding that hyperinflation is a currency event not an economic event. And I've explained that Gold and Silver will be major beneficiaries of US$ weakness. Today, we see Gold marking a new high for the year above $1,085. Do you feel that this investment strategy is reaching a new stage of maturity?

GSR: Son, the simple answer is, yes. In fact, this past week the price action of Gold illustrates a development I have long anticipated. You may recall my comments earlier this year that an inflection point in the Gold price would come when Gold prices rise even as the US$ rallies. Well, the US$ is up about 2.5% in the last 9 trading days and yet Gold reaches another new high today up 3.3% during the same 9 days.

BBR: In light of these developments, are there any changes to our investment strategy you would like to discuss?

GSR: I believe the time is right for us to prepare for the speculative phase of the Gold bull market.

BBR: Can you elaborate on that thought?

GSR: I anticipate an acquisition wave to hit the industry as the rising share values of the larger companies become currencies to takeover the junior companies with successful exploration programs. I have seen this wave hit many times in different industries backed by real assets (real estate, energy, metals) during my life.

It is always cheaper to purchase reserves in the ground during a rising price cycle than to undergo greenfields exploration. The precious metals miners can takes up to 10 years to go from exploration to production, this time cycle can be greatly accelerated through the acquisition route. It takes more than $1 billion and 8 - 10 years to bring on a single million ounce Gold mine.

The last industrial metals bull market culminated with an explosive takeover cycle back in the 1st half of 2008. Don't you remember the BHP Billiton (BHP) for Rio Tinto (RTP) fight? How about the bull market in oil during the late '70s that didn't end before an explosive takeover phase? With global gold production declining this particular asset bull market may be one of the strongest.

The key is to identify a basket of attractive takeover candidates now, place them into the portfolio and wait for the explosive takeover phase to begin. If our research capability is intelligent and we are patient, we are very likely to hit several 5-10 baggers.

Sept. Housing Data, PPI, Russia and China Talk of Replacing the US$ on energy Trade, UK Real Estate Heats Up

More economic numbers out this morning that suggest a continuation of the status quo.
The Fed can point to the PPI numbers and pretend there is no inflation...
September Core PPI Y/Y +1.8% vs +2.0% consensus, prior +2.3%
September PPI Y/Y -4.8% vs -4.3% consensus

...So rates can remain low to help the listless housing market...
September Housing Starts 590K vs 610K consensus, prior revised to 587K from 598K
September Building Permits 573K vs 595K consensus, prior revised to 580K from 579K

Somehow, all this data results in a U.S.$ rally, T-bond advance (rate decline) and an equity market sell off. I would expect this counter trend move to be short lived. In fact, there have been some developments regarding the U.S.$ that should concern any U.S. $ optimist.

Last week, Russia and China conducted meetings to begin settling trade between the two countries using their own currency. The trade will involve the energy markets. This development brings to mind recent denials we highlighted in the October 5th post out of the middle east that a similar plan is in the works. I believe the appropriate axiom begins, "Where there's smoke...."

BEIJING, October 14 (RIA Novosti) - Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis."Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said. MORE...

A possible accelerant about to be poured onto the pile of burning U.S.$s may have a UK label. The real estate market in the UK appears to be heating up. Prices for both residential and commercial properties in London are hitting records. If this recovery turns into a trend that moves across the channel to the rest of Western Europe then Ben and Pinocchio could have a real problem.

The U.S. $ carry trade will gain steam if a European economic recovery/inflation outpaces the U.S. and leads to rate increases much like in Austraila (see Oct. 7th post). A lagging real estate market here in the U.S. will make it difficult for Ben to raise rates. Meanwhile, Pinocchio (Geithner) will continue to express the desire for a strong $ as his nose grows...

London Agents ‘Sold Out’ as Home Asking Prices Jump to Record Oct. 19 (Bloomberg) -- London home sellers raised asking prices to a record high this month and led gains across the U.K. as the shortage of properties for sale intensified, Rightmove Plc said. MORE...

UK property undergoes dramatic recovery - FT
FT reports the UK commercial property market delivered the highest monthly price growth for more than three years in September, capping a remarkable comeback for a sector that looked to have been wiped out only a matter of months ago. Investors are now chasing commercial property and some are complaining that the market has become too hot again. The switch in sentiment has been tangible as investors look to take advantage of a slump that wiped off about 45% from prices from the peak in 2007 by the beginning of the summer. The recovery has been building since, with IPD, the benchmark index, rising 1.1% for September, the highest since June 2006.

Hawkish Fed Comments From Warsh, Bullard, Plosser Why? Terrible Economic Numbers, Chicago PMI, MBA Mortgage Applications

U.S.$ weakness of late has spurred a cacophony of comments around the world for a new reserve currency. Now the Fed is attempting to fight back. Over the last few days a number of Fed governors have made hawkish statements to bolster the U.S.$ (the fact that these comments were offered before, during and after the G20 summit is not a coincidence).....

Fed's Warsh says Fed may need to roll back policies sooner - DJ

Fed's Warsh says last few months show continued improvement in economic performance - Reuters

Fed's Bullard says Fed should consider rules governing quantitative easing policies with rates near zero - Reuters

Fed's Plosser says policy shift may need to be aggressive - Reuters.com
Reuters.com reports the Federal Reserve will have to act quickly, and "perhaps aggressively" when the time comes to pull back its extraordinary support for markets in order to avoid stoking inflation, the president of the Federal Reserve Bank of Philadelphia said.

"The Fed will need courage," Charles Plosser said in remarks prepared for delivery at Lafayette College in Easton, Pennsylvania. "I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels."

The Federal Reserve cut interest rates to near zero percent last December and put in place an unprecedented array of emergency support programs as it battled the deepest recession since the Great Depression. That has worried some market participants that inflation will result. "Just as the Fed has taken aggressive steps in flooding the financial markets with liquidity during this crisis to reduce the possibility of a second Great Depression, it will also have to take the necessary steps to prevent a second Great Inflation," Plosser said. "We recognize the costs that significantly higher inflation and the ensuing loss of credibility will impose on the economy if we fail to act promptly, and perhaps aggressively, when the time comes to do so," he said.

...However, economic reality still suggests the need for aggressive stimulus.....

September Chicago PMI 46.1 vs 52.0 consensus, August 50.0

ECONX Chicago PMI Halts Expansion - Briefing.com
The expansion in the manufacturing sector hit a major speed bump as the Chicago PMI declined 3.9 points to 46.1 in September, well below the consensus expectation of 52.0. The drop below 50 signals a contraction in manufacturing. A negative feedback loop seems to have reentered the manufacturing sector...

The drop in PMI was mostly due to a severe cutback in both new orders and order backlogs as new orders declined 6.2 points to 46.3 and order backlogs declined 9.1 points to 36.7. It seems that manufacturers had bought into the economic recovery scenario and decided to ramp up production in August. At the same time as production revved up, the contraction in new orders had ended and most firms expected growth to continue into the future. The increased production was used to work off the backlog along with the new orders that arrived. Unfortunately, at the same time as production ramped up, consumer demand in September seems to have stalled and along with it the recovery effort. Wholesalers and retailers did not need any new goods and orders dropped precipitously. Production in September tumbled.

As long as consumer demand continues to stumble, the recovery effort cannot be sustained. Instead of multiple months of expansion, we may see these PMI indices becoming highly volatile as production meets a fluctuating order schedule.

There was one positive sign from the data. While inventories are still contracting, the rate of contraction slowed. Eventually inventory levels will shrink enough to force manufacturers into production just to restock the shelves. Unfortunately, the consumer will dictate when this will happen. Other components of the index showed problems in manufacturing including: The prices firms paid expanded for the second consecutive month as the index rose to 51.3 from 50.0. The contraction in employment held steady as the index increased only 0.1 to 38.8. Supplier deliveries reentered a contraction phase as the index declined to 49.3 from 54.6.

MBA Mortgage Applications -2.8% vs +12.8% Prior

...And the struggle between reality & the desire to support the U.S.$ has the Fed speaking out of both sides of it's mouth....

Fed's Lockhart says worst is likely ahead for commercial real estate - DJ
Says return to robust bank lending unlikely in near term

...The take away? We must not let the short-term strength in the U.S.$ alter our investment strategy. This strength was purely cosmetic and created for the G20 summit. The stagflation trade is alive and well (Please see the Sept. 7th post for details). This trade will gain strength as poor economic numbers continue to evolve during a time when prices manufacturers pay for goods continues to increase (see the red text above).

The asset of choice for this environment is Gold. We don't know all the answers but we are eminently comfortable owning gold. Gold is the only international monetary asset with globally declining supply and rising demand. How smart do you have to be to join us?

Companies of Interest

(Please click on the link above to review previous EPS/Company posts)

Periodically I will post the EPS news or other relevant coverage of companies we find interesting. This is not a recommendation to purchase or sell the shares. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.

Of course, if you are an investor in any of the Fortune's Favor Family of Funds or a client of RCM our door is always open. Feel free to call or email questions at any time for further information.

C Citigroup: China wants Citigroup to expand - WSJ (4.70 )
WSJ reports a top banking regulator in China said Citigroup's local operations "absolutely" should expand in the country, suggesting the U.S. government's big stake in the bank isn't troubling Chinese regulators. Citigroup's China unit was "very prudent and careful" amid the global financial crisis and now should be "expanding, absolutely,"

Yan Qingmin, director of the Shanghai branch of the China Banking Regulatory Commission and one of the top regulators for foreign banks in the country, told The Wall Street Journal in an interview. Showing an unusual willingness by a regulator to comment on an individual company, Mr. Yan offered a glimpse into how China views the recent overhaul of the U.S. financial system and said Citigroup should take advantage of growth in the Chinese economy and expand in the world's most populous nation. He signaled a view that despite the shock of seeing an "aircraft carrier" of the U.S. financial industry fall into the government's arms, Washington's support for Citigroup was the correct decision and that the result has done little to alter how Chinese policy makers regard the financial-services giant.

U.S. Debt-Ceiling Fight Looms, UN Demands New Global Currency, China Trade War

I'm not hearing much about this story in the news yet but I suspect the debt-ceiling will become center stage in the weeks ahead. At risk is the fate of the US$ trend. In the unlikely event that congress somehow puts its proverbial foot down and refuses to increase the debt ceiling then no doubt this would stem the slide of the greenback. However, I suspect the third paragraph holds the tastiest morsel of information. In order to avoid looking weak on fiscal responsibility right before an election Congress will pass all that is required now to increase the debt ceiling and in turn add to the US$ weakness. Stay tuned, this could get interesting....

Treasury gets ready for debt-ceiling fight - WSJ
WSJ reports the Obama administration, concerned about the possibility of a big political fight over the national debt, is looking at how it can continue funding the government in the event that Congress hinders its ability to borrow money.

Treasury Department officials are examining tools employed by previous administrations, including disinvesting government retirement funds and suspending interest payments to federal accounts, according to people familiar with the matter. They are also looking at what to do in the unlikely event of a govt shutdown.

At issue is the debt ceiling, a dollar limit controlled by Congress that dictates how much the U.S. can borrow. Treasury Secretary Timothy Geithner told the Senate in a letter last month that the $12.1 trillion ceiling could be hit as early as mid-October, and said it needs to be increased so the U.S. can continue funding operations and making debt payments. Mr. Geithner didn't indicate the increase he was seeking. With the U.S. borrowing about $30 billion a week, some economists say the Treasury will need an increase of as much as $1.5 trillion if it wants to avoid another request before the 2010 midterm elections. The U.S. could default on its debt if Congress doesn't raise the debt ceiling, but it is a remote scenario.

...Meanwhile, as the players in the US rearrange the chairs, the rest of the world wants to rewrite the playbook...

UN wants new global currency to replace dollar - Daily Telegraph Daily Telegraph reports the dollar should be replaced with a global currency, the United Nations has said, proposing the biggest overhaul of the world's monetary system since the Second World War.

In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises. It added that the present system, under which the dollar acts as the world's reserve currency , should be subject to a wholesale reconsideration. Although a number of countries, including China and Russia, have suggested replacing the dollar as the world's reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion.

In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving. The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment

I'd like to take a moment and pose a question before you read the next story.

Here is the set up: Let's say your name is Otto and you are the president of a country with a huge deficit and a currency going the way of the wampum. And, let us further assume that the trading partner holding the biggest amount of said debt and wampum is, oh I don't know... China.

Now the question: Should you start a trade war with China at a time when your country is most vulnerable? Would that be smart? Would it be diplomatic? Or, in the immortal words of Jaime Lee Curtis, would it be STUPID? (Extra credit to those who can name the movie)

China strikes back on trade - WSJ
The Wall Street Journal reports China indicated Sunday it would restrict U.S. imports of chicken and auto products after Washington's move to slap punitive sanctions on Chinese tire imports, raising tensions in a trade dispute ahead of two planned meetings between the countries' leaders.

Citing a jump in Chinese imports, the Obama administration said Friday it would impose stiff tariffs on Chinese-made tires for the next three years, invoking a section of trade law that China agreed to as a condition for its joining the WTO in 2001. The move essentially would cut off the source of nearly 17% of all tires sold in the U.S. last year and hit cost-conscious consumers particularly hard, as retailers will have to find alternative sources for the lower-end tires that make up much of what China sends to the U.S.

Beijing responded quickly. Sunday, its Ministry of Commerce said it was starting antidumping procedures against U.S. exporters into China of chicken and auto products. It said it had received complaints from local producers that the U.S. products were being dumped in China at below-market prices. The ministry denied that the move, which could lead to sanctions, was protectionist. "China has consistently opposed trade protectionism, and the country's actions since the financial crisis have reflected this stance," the ministry said on its Web site. "China is willing to continue to act in accordance with countries around the world to push forward the world's economic recovery."

The announcement didn't specify the timing or the exact kinds of goods involved. An official with the U.S. Trade Representative's office Sunday defended the trade decision and warned that Washington would be "inquiring closely" over the next several days as to the basis for China's response.

Gold Takes Out $1000/oz, China Alarmed by US$ Printing, CIC Looks To US Real Estate, FHA: Another Taxpayer Assault?

Gold changes hands above $1000/ounce this week as China continues to sound the alarm regarding US$ weakness...

China alarmed by US money printing - Daily Telegraph Daily Telegraph reports

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing". "We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como. "If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than -- $2 trillion, the world's largest. "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

I devoted Monday's post to the rise of the inflation trade. Well, I thought I'd throw another log on the proverbial fire with the story below. The Chinese realize they are in possession of a bunch of rapidly depreciating paper and they are in the process of plowing said paper into any hard asset they can find. This process is, of course, the very definition of inflation.

CIC looks to pile cash into U.S. real estate - WSJ
The Wall Street Journal reports China's $300 bln sovereign-wealth fund is eyeing big investments in distressed U.S. real estate, according to people familiar with the matter. To finance some of the deals, China may rely on the U.S. government.

In recent weeks, officials from China Investment Corp. have held talks with U.S. private-equity fund managers, including BlackRock (BLK), Invesco Ltd. (IVZ) and Lone Star Funds, about potential investments in beaten-down property assets, namely mortgage securities backed by office buildings, hotels, strip malls and other commercial property. CIC also is considering buying ownership interests in buildings, according to the people with knowledge of the matter.


In addition, CIC is weighing investing through one of the U.S. government's bailout programs, the Treasury's Public-Private Investment Program, known as PPIP. The program is designed to rid banks of toxic mortgage securities by enticing investors to buy these assets with financing from the U.S. government. Representatives for CIC, BlackRock, Invesco and Lone Star declined to comment.

Here we go again...

Concerns are mounting FHA may need taxpayer assistance - WSJ
WSJ reports as it tried to help shore up the ailing housing market during the past year, the Federal Housing Administration increased its exposure, particularly to mortgages in high-cost states that have also seen some of the sharpest price declines.

Now concerns are mounting that the agency -- and the U.S. taxpayer -- may have to pay the price. The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default Officials worry that the resulting losses will help push the FHA's reserves below the level required by Congress. The value of those reserves will be revealed in the agency's annual review due Sept. 30. If they have fallen below the minimum, that could prompt a new round of questions about the role government should play in stabilizing the housing market.

David Stevens, the FHA's new commissioner, said on Friday that the agency will continue to support the housing market and isn't in danger of needing a taxpayer bailout. But some housing analysts warn that, if home prices decline much further, the agency would require taxpayer assistance for the first time in its 75-year history.

Swedish Riksbank Takes Unprecedented Step, FOMC Minutes, Gold Bullish

This story is a must read and read carefully. The unprecedented actions of the Swedish Riksbank may be the precursor to a whole new phase of the quantitative easing shell game. And make no mistake about it, a true shell game is going on with the worlds fiat money supply.

The central bankers are moving ever greater amounts of consistently devaluing currencies from one hat to another in an attempt to get the public or should I say, the sucker, to spend money it doesn't have. Of course, hustlers don't work alone. A partner usually jumps in first and throws money around to get everyone excited, or perhaps stimulated is the more appropriate word. Can you guess who the partner is in this scenario? Leave your guess by posting a comment at the end of this post.

I'm reading through the minutes of the latest FOMC meeting as I write this missive. The FOMC again is reiterating the need to keep interest rates low for the foreseeable future. If we fit this FOMC fact together with the recent comments out of China's central bank confirming their decision not to touch interest rates or lending standards for at least the next six months a puzzle begins to take shape. The puzzle is a picture depicting the fear of an economic slowdown dramatically out weighing any concerns about inflation. And if we now add the story below to the puzzle a crystallization of the image appears.

The picture I have just described is overwhelmingly Gold bullish. I trust you will not dismiss the $25 gold advance today as coincidence.

Bankers watch as Sweden goes negative
By Andrew Ward in Stockholm and David Oakley in London

For a world first, the announcement came with remarkably little fanfare.
But last month, the Swedish Riksbank entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits.

Even at the deepest point of Japan’s financial crisis, the country’s central bank shied away from such a measure, which is designed to encourage commercial banks to boost lending. But, as they contemplate their exit strategies after the extraordinary measures of the past two years, central bankers will be monitoring the Swedish experiment closely.

Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK.

Hoarding is exactly what happened in Japan earlier this decade when the Bank of Japan implemented quantitative easing between 2001 and 2006. Japanese banks refused to lend, in spite of central bank stimulus, because of fears over the dire state of the economy.

If this continues to happen in other economies, central bankers may be left with little choice but to follow the Swedish example. John Wraith, head of sterling rates product development at RBC Capital Markets, says: “The success of the UK’s quantitative easing experiment hinges a lot on whether the banks will use the extra money they are getting for lending to individuals and businesses. “If there is no sign of this over the next few months, then the Bank of England might consider a negative interest rate. In essence, it is a fine on banks that refuse to lend.”

READ MORE...

Courtesy of Obama 'Change' is a Baffling Word, Bernanke Reappointment, "Cure Rate" on Mortgages Plunging, Central Bankers Call for Continued Stimulus

The American people are receiving a true education from our president regarding the various uses of the baffling word that is 'Change'.

First, during Obama's campaign for presidency, we were led to believe that change meant 'out with the old, in with the new'. Old representing all that was bad and new all that was good.

Then, after obtaining the presidency Obama has been kind enough to illustrate the use of the word change as in 'the more things change the more they stay the same.' This use of the word change can be evidenced by the Bernanke story below as well as countless examples of cronyism and kotowing to lobbyists by the Obama administration. Simply look up stories connecting Obama to ACORN if you desire evidence. Both of these egregious endeavors were objects of ridicule by Obama during his campaign and, might I remind you, reasons to vote for the caped crusader as he promised to eradicate the evils of Washington.

And that brings me to the next use of the word 'change'. If anyone actually believed that Obama was going to change Washington then I respectfully request you review the phrase, 'A leopard can't change its spots.''

Obama to reappoint Bernanke as Fed chief - WSJ
The Wall Street Journal reports President Obama will announce the nomination of Ben Bernanke to a second term as Federal Reserve chairman on Tuesday, opting for continuity in U.S. economic policy despite criticism in Congress of the low-key central banker's frantic efforts to rescue the financial system. Mr. Obama's decision had become a subject of growing speculation and uncertainty in financial markets and in Washington policy circles. The president called the Fed chairman to the Oval Office this past Wednesday to offer him another four-year term. Mr. Bernanke then flew off to Wyoming where he gave a defense of his controversial policies at the Fed's annual meetings in Jackson Hole.

In recent weeks I have read countless stories about the end of the recession and the beginning of monetary tightening. I have witnessed innumerable reports on TV regarding the inevitable strength coming in the US$ because of the wonderful turnaround unfolding across world economies. And yet, the US$ value sits barely above the year low. Why the disconnect you might ask? Well, read the next three stories. These stories represent the reality of the situation and illustrate the desire of central banks around the world to continue the course of currency devaluation to stimulate nascent/non-existent growth.

Fewer catching up on lapsed mortgages - WSJ
WSJ reports homeowners who fall behind on their mortgage payments have become much less likely to catch up again, a new study shows. The report from Fitch Ratings focuses on a plunge in the "cure rate" for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren't bundled into securities.

The cure rate is the portion of delinquent loans that return to current payment status each month. Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%.

"The cure rates have really collapsed," said Roelof Slump, a managing director at Fitch. Because borrowers are less willing or able to catch up on payments, foreclosures are likely to remain a big problem. Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1.

Central bankers stress not rushing for exits - Reuters.com
Reuters.com reports if there was one message from central bankers gathered at this mountain retreat this weekend it was this: Don't expect us to raise interest rates any time soon. A series of speakers at the Kansas City Federal Reserve Bank's annual conference, which drew the monetary policy elite from around the world, heralded the global economy's apparent push out of its deep recession. But they noted that economies were recovering only with extraordinary stimulus from governments and central banks, and said it was too soon to talk of a self-sustaining recovery.

"I am a little a bit uneasy when I see that, because we have some green shoots here and there, we are already saying, 'Well, after all, we are close to back to normal,'" European Central Bank President Jean-Claude Trichet said on Friday. "We have an enormous amount of work to do." As ECB Governing Council member Ewald Nowotny told Reuters, there seems to be a consensus among central banks to make sure they do not withdraw their stimulus too soon. "What we see now is that to a large part this is still a recovery sponsored by public measures," he said. In the words of Harvard University professor Kenneth Rogoff: "They don't want to go back into what we just got out of."

China to keep policy loose as economy faces new woes - Reuters.com
Reuters.com reports China will maintain its stimulative policy stance because the economy, far from being on solid footing, is facing fresh difficulties, Premier Wen Jiabao said. In a downbeat statement on the government's website following a trip to the eastern province of Zhejiang, known as a hotbed of private enterprise, Wen said Beijing would ensure a sustainable flow of credit and a "reasonably sufficient" provision of liquidity to support growth.

"We must clearly see that the foundations of the recovery are not stable, not solidified and not balanced. We cannot be blindly optimistic," Wen was cited as saying. "Therefore, we must maintain continuity and consistency in macroeconomic policies, and maintaining stable and quite fast economic growth remains our top priority. This means we cannot afford the slightest relaxation or wavering." China still faced great pressure from the slowdown in demand for exports, Wen said, adding that it was difficult to boost domestic demand in the short term to fill in the gap -- despite the boost from the government's 4 trillion yuan ($585 billion) stimulus package.

This is a public service message to the Obama administration:

Please review the following story closely. You will see a pristine example of how the real world reacts to tax increases. The evidence clearly illustrates that jobs are lost in the country where taxes are increased. Please have the good sense to avoid the evil temptations of tax hikes in the midst of a jobless economic recovery effort. This has been a word from your sponsors, you know, the voters.

New UK tax sends hedge funds fleeing - WSJ
WSJ reports a stream of hedge-fund managers and other financial-services professionals are quitting the U.K., following plans to raise top personal tax rates to 51%. Lawyers estimate hedge funds managing close to $15 billion have moved to Switzerland in the past year, with more possibly to come. David Butler, founder of professional-services co Kinetic Partners, said his company had advised 23 hedge funds on leaving the U.K. in the 15 months to April. An additional 15 are close to quitting the U.K., he said.

"In the past, managers would say they'd move some operations or dip their toe in the water," Mr. Butler said. "Now that's changed." Hedge fund Amplitude Capital took its $735 million in assets under management to Switzerland at the start of this year. In May, Odey Asset Management threatened to move. All the hedge funds that have left the U.K. for Switzerland are concerned about tighter European Union regulations, as well as a new top rate of income tax announced by the U.K. government. Starting next April, individuals in the U.K. who earn more than 150,000 pounds, or about $247,000, a year will pay tax at 51%, including national insurance. They will also be taxed heavily on pension payments.

Stalled Stimulus Deters Investment, Subprime Woe Resurfaces, China Attacks US$ Dominance

- If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed. –Mark Twain

RCM Comment: The story below illustrates what happens all too often when government oversteps its mandate and attempts to manipulate the private sector. For those of you who approve of big government read this story very closely. Please understand that I respect your ideals and I'm willing to believe as left wing, big government believers you are only trying to promote equality (those who use big government for their own gain e.g. ACORN, I will not waste time addressing). However, reality must trump blind altruism.

Yes, we need to reduce our dependence on foreign oil, but let's do it in a way that promotes private sector innovation not government handouts. If, for example, significant tax breaks were directed at the renewable energy issue the wheels of innovation would already be moving. Private sector innovation has always been the key weapon in the economic arsenal of the USA.

I'm sorry did I just write something? I must have been dreaming. Tax breaks would help everyone equally and this would never do for those controlling Washington. Government handouts, in the form of "stimulus", can be directed at special interest groups and those who donate to political campaigns. Did you really believe Obama's campaign promise to rid Washington of lobbyists and special interests? If, so then you must go directly to jail without passing Go or collecting $200. Your punishment for naivete: stay in jail until the Community Chest gets around to authorizing a "get out of jail free" card. This authorization should take about as long as it takes for the stimulus package to actually stimulate. My advice: bring a good book. Something written by Thomas Sowell perhaps such as "The Housing Boom and Bust".

Stalled stimulus programs deter investments in renewable energy - WSJ
WSJ reports the U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment. New incentive programs haven't yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government. "It artificially slowed the recovery," Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan.

Reality vs. "Green Shoot" Redux...Combine this story with the commercial real estate story from the 7/8 post and you get a good idea of the real headwinds facing economic recovery.

Subprime resurfaces as housing-market woe - WSJ
WSJ reports the U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell. While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy. "While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

RCM Comment: I continue to run these stories about the US$ because you must appreciate that change is coming and you need to protect your assets accordingly. Should you need help devising a plan may I suggest you visit our website. I will also entertain any and all questions as promptly as possible whether they are received via blog comments, email or phone.

China attacks dollar's dominance - Financial Times
Financial Times reports China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world's biggest economies. Dai Bingguo, Chinese state counselor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialized nations -- including US President Barack Obama -- in L'Aquila. The remarks, in front of Mr Obama, caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery.

Gordon Brown, Britain's prime minister, said he did not remember Mr Dai making the remarks. But he said the focus should be on moving the world out of recession. "We don't want to give the impression that big change is around the corner and the present arrangements will be destabilized," said Mr Brown. (In other words, Gordon would rather lie about the situation than give an honest impression.)

"We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system," said Mr Dai, according to the Chinese foreign ministry. While he did not name the dollar, Mr Dai was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates among leading currencies.

China Calls for Dollar Displacement, China Begins to Settle Trades in Renminbi, India Questions US$, Increase in Stimulus Spending?

News That Moves Markets

Good morning readers, this is your Monday wake up call. The US$ is under attack and the budget deficit will continue to expand like the blackhole it is regardless of congressional protestations surrounding fiscal discipline.

Instead of wasting time arguing about the inevitable and fearing the fallout let's position the portfolio to benefit: Short US Treasuries (Long TBT) as the spending increases make it impossible to keep rates under control. Short US$ (Long UDN) as the talk of a new settlement currency turns into reality, and long precious metals as currency devaluation drives asset prices higher. Repeat after me: inflation is a currency event not an economic event.

Timing the entry and exit points will continue to be the toughest part of the above investment approach. As always we will be fighting the government and the spinmeisters every step of the way. This manipulation onslaught can cause pain over a short period of time, but doing the right thing is never easy. While most of the investment community was drowning last year we at Rosenthal Capital Management defended principal and made money precisely because we understood these dynamics and were using the correct road map.

Please understand that the long term investment themes described above and illustrated below must be respected if you want your portfolio to survive.

China officials call for displacing dollar, in time - Reuters
Reuters reports the financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday. The push for fundamental, if gradual, reform of the international financial system comes just before the Group of Eight summit in Italy, where China's willingness to question the dollar's role could fuel debate. The Special Drawing Right, a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank. "It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," Li was cited as saying in Financial News, a newspaper published by the central bank.


China begins pilot program to settle trade in Renminbi - NY Times
NY Times reports China has officially opened a pilot program to allow companies to settle imports and exports in renminbi in selected regions, marking a major step toward eventually internationalizing the Chinese currency. Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts on Monday to be the first to settle business deals in the Chinese currency. Executives said the move would save costs and avoid exchange rate risks. Bank of China and Bank of Communications were the first lenders to clear transactions in renminbi, considered a lucrative business given China's expanding economy and huge presence in international trade. Hong Kong also kicked off the long-awaited yuan settlement program on Monday. HSBC said it completed its first renminbi trade settlement with Shanghai and its first cross-border credit transaction.


India open to discussing dollar's status as reserve - Reuters
Reuters reports India is willing to discuss proposals to replace the U.S. dollar as the global reserve currency, Foreign Secretary Shivshankar Menon said on Monday. "This would be one of the ideas which is on the table. There have been ideas expressed and we are ready to discuss all of them," Menon told reporters when asked if India would consider replacing the dollar.


Calls grow to increase stimulus spending - WSJ
WSJ reports Vice President Joe Biden said the Obama administration "misread how bad the economy was" and didn't foresee unemployment levels nearing double digits, in comments likely to intensify calls for the administration to do more to counter job losses... White House economists are discussing whether a second round of stimulus is needed, but a decision isn't expected until at least the fall. "We remain focused on putting thousands of Americans back to work" through implementation of the February stimulus act, an administration official said Sunday. "Any discussion of a second stimulus is premature at this point." That timetable isn't fast enough for some economists, who say quick action is necessary to avoid a protracted period of joblessness. "A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful," said Phillip Swagel, a professor at Georgetown University's McDonough School of Business. So far, though, politicians of both parties are showing little eagerness to tackle another stimulus bill. Republicans have attacked the current stimulus package as wasteful and ineffective, labeling it as government bloat at a time of record deficits. As the GOP seeks to reclaim the mantle of fiscal discipline, many are loath to support another round of government spending. Many Democrats, too, said they're disappointed with the recovery program so far but, for now at least, are resisting calls for a second package.