US$ Decline, T-Bond Prices Decline / Rates Up, CRB Index Down, Precious Metals Higher

By viewing the five charts above, (UUP = US$, TLT = Treasury bonds, CRB = Commodities, GLD = Gold) you have just witnessed a graphical demonstration of the beginning of the stagflation trade. Those of you who read this blog regularly know we have been warning of the inevitable rise of hyper-inflation at a time when a jobless recovery will lead to the obvious quagmire of a stagnant economy. Well, last week's price movement across a broad front foreshadows the deleterious economic environment ahead.

Allow me to fit the puzzle pieces together and create a little illumination:

• UUP = US$ -> The US$ broke down against a basket of currencies last week and in doing so took out major long-term support. The weakening US$ trend has been going on for a while as the Fed continues to print currency out of thin air in an attempt to stimulate the economy. The latest magic trick and perhaps the last straw has been the monetization of treasury debt. The Fed's buying of government debt at a time when the Obama administration continues to inflate the deficit has led to a loss of confidence in the US$ as the reserve currency of the world. This corrosion of confidence and abuse of Fed powers is the leading cause of the hyper-inflation trend. Remember, inflation is a currency event not an economic event.


• TLT = Treasury bonds -> T-bond prices were down last week which of course results in higher yields. This rate creep up is in its infancy. However, if rates continue to rise, eventhough the Fed is supporting the market, this will be a clear indication that inflation fears are beginning to dominate.
  
• CRB = Commodities -> The commodity complex as a whole sold off last week. Basic materials such as energy suffered declines indicating that an economic recovery is not in the offing. I would not typically read too much into any one week but with the US$ off so much last week one would have expected to see the whole commodity complex higher. Instead, we witnessed a bifurcated commodity complex that screams of stagflation; economically sensitive commodities suffered as inflation sensitive commodities rallied.
  
• GLD = Gold -> The key inflation sensitive commodity rallied strong last week as did the price of silver. Tuesday the 1st was perhaps the most telltale day when the inflation sensitive precious metals complex closed higher in the face of a stronger US$.

The developments of last week could be viewed as troubling if you are not prepared. However, if you are a member of the Rosenthal Capital Management family, then you are all smiles this week. You know we are prepared for this development and in fact welcome the trend.

I feel at this time we are compelled to clear up a little misunderstanding. We should give credit where credit is due. Yes, Ben Bernanke has been able to create "shoots" in the economy. We stand corrected and beg for Ben's forgiveness for our ever doubting his ability to create "shoots". We would however, respectfully request he visit his ophthalmologist or perhaps a neurologist to discuss his confusion recognizing colors. The "shoots" that he sees are real but they are GOLDEN not green.

Cerberus Update, Weak Retail Sales, FDIC's Blair Worried About Commercial Loans, Prime Borrowers Becomming a Problem, VMware Company of Interest

Cerberus denies talk of fund defaults - Reuters
Reuters reports Cerberus Capital Management yesterday dismissed market speculation that some of its hedge funds, which have suffered losses and heavy redemptions, are in danger of default. Traders in London and Frankfurt were buzzing with talk that a major hedge fund was headed for default. Much of the talk was directed at Cerberus, a private-equity and hedge-fund firm hit hard by losses at Chrysler and GMAC. "There is absolutely no truth to the speculation," said Tim Price, a Cerberus spokesman.

Where have we heard this type of denial before? Oh yes, I remember, last year with Bear Stearns and Lehman denials to name just a few. We better keep an eye on this story. We learned last year that big hedge fund failures can lead to big problems for the equity markets.

Weak back-to-school sales spell trouble for holidays - WSJ
WSJ reports shoppers are focusing on deals and limiting buying mainly to necessities, based on August sales estimates that herald another tough holiday season for beleaguered retailers. Despite sales tax holidays in several states designed to spur sales, back-to-school spending remains lackluster, according to industry experts.

Retailers' recent efforts to shake customers from deep discounts and spur buying by tightly controlling inventories are fizzling. Now, retailers that traditionally rely on back-to-school sales as an barometer of demand for the remainder of the year face tough choices on stocking and hiring. Customers should find ever slimmer pickings and fewer clerks (this doesn't bode well for those thinking unemployment is close to the peak) as stores hold off on early holiday orders and further trim costs...

We have seen an equity market recovery in the first half of this year based on a return to normalcy in the credit markets. Going forward, a new catalyst will need to develop to push the equity markets higher. One such catalyst could be an economic recovery and in turn better earnings in Q3 and Q4. However, stories like the one above cast a pall over a possible economic recovery and raise the question: Can the equity markets continue to move higher if positive earnings momentum does not materialize?

The following two stories add to the shroud being drawn over any possible recovery in Q3 and Q4...
FDIC's Bair says commercial loans "looming problem" - Reuters.com
Reuters.com reports the chairman of the FDIC said commercial real estate issues will increasingly drive U.S. bank failures. FDIC head Sheila Bair told CNBC Tuesday evening that commercial real estate loans remain a "looming problem" for banks' balance sheets and she expects the area to increasingly be a driver for bank failures during the remainder of this year and 2010.

Bair said she would try to avoid tapping its line of credit with the Treasury Department. "We'd like to try to avoid that," Bair told CNBC in an interview... Bair said the FDIC has not yet decided whether to charge the bank industry more special assessments to replenish the fund. She defended the loss-share agreements that the FDIC has extended to acquirers of failed banks, saying the arrangements have saved the agency billions of dollars over the past two years.

Pace of delinquencies for prime borrowers is accelerating - WSJ.com
WSJ.com reports the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers. Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for subprime loans, according to the Washington-based trade group.

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. I will not engage in the hackneyed approach of other bloggers and give advice about when to buy or sell. 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.

VMW VMware: AmTech reviews Vmworld 2009; sees virtualization approaching acceleration phase (33.75 ) With approximately 12,500 attendees, AmTech was taken aback by the activity level at Vmworld 2009. Throughout the day, firm spoke with numerous contacts and clearly the IT industry remains committed to virtualization. In fact, firm has increased conviction that virtualization is approaching an acceleration phase in its adoption curve. They believe virtualized desktop infrastructure (VDI) will be HUGE. In fact, a VMW executive believes it offers a ~50% reduction in total cost of ownership and that the industry will be 50% virtualized within 5 yrs. Customers want to save money and lessen complexity. Virtualization is the #1 vehicle for CIOs to both save capex/operating expense dollars while easing complexities of the data center. Virtualization penetration of new server shipments is ~15% in CY09...

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.”

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