David Braunstein

Weekly Recap: Is the U.S. Going Bankrupt?

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Weekly Recap: Is the U.S. Going Bankrupt?

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Not a Sucker's Rally - It's a New Bull Market

Since most of the cash still remains on the sidelines, the liquidity driving up the market argument falls flat. The market has been driven by a lack of liquidity and program trading. Lack of buyers will soon (in the next few weeks) begin to drive the market down slowly and not in a straight line over the next several months. Cash at zero is the best investment right now. Cash in a safe at home is even better.


On Oct 21 04:19 AM Faisal Humayun wrote:

> When you give billions to Dollars to major market participants and
> keep interest rates at near zero levels then a rally in the markets
> or for that matter many other asset classes is very likely...
>
> But one needs to see how much the Dow goes up in nominal terms and
> real terms...So the market rally is also associated with a sharp
> fall in the Dollar...
>
> Not always market rally is good news...The real economy is just too
> weak to absorb all the excess liquidity...Thus, the excess liquidity
> is getting absorbed by equities, commodities and other asset classes....

Best Available Risk Reward Proposition

I really don't buy the inflation theory. Even with the stimulus, the CPI is running a deflation of 2.2%. What happens as stimulus is withdrawn? How do you reconcile declining real estate prices with inflation? I agree that there is risk in long-term bonds as the economy may come back one day, but that day is not soon. In the meantime, I would be looking to buy long term bonds after the Fed stops its quantitative easing program. Then we will see the true rate of deflation surface.

Look at Earnings in Context Before Betting on Equities

Rakesh,

I don't believe the transfer of wealth from emerging countries to developed ones is on the verge of abruptly ending. Perhaps over time this thesis makes sense, but it will likely be a gradual process. Look at the China/U.S. relationship. China has effectively pegged its currency to the U.S. Dollar and other exporting countries are desparately trying to reflate the U.S. Dollar to help their exports.

Over time, I beleive in the next 30 to 40 years, power will transfer to the 3rd world countries as the United States baby boomers shift out of their peak spending years.

As far as the markets go, I agree, it's artifically propped up by stimulus. If the stimulus abruptly ends, it will cause a collapse of world markets and commodity markets. If stimulus continues too long, we will see bubbles in all the markets again followed by inevitable crashes.

The new generation has never lived through a prolonged bear market. They have learned that you get rewarded to take on too much risk. I beleive we are close to the breaking point where too much risk is being taken and the prolonged consequences of running huge deficits will emerge.

I am 100% in mutual funds with a vast majority of their holding are in U.S. Treasuries. I made 8% on my money during 2008 when others lost their shirt by heding my long positions using bear funds. I currently do not use the bear funds because I perceive that counter-party risks could interfere with their correct functioning during a crisis. This is similar to the 100% margin rules that were implemented on S&P 500 Index futures on October 19, 1987. Shorting futures didn't work on that day.

I do not expect a crash, but a slow drawn out bear market that should begin between now and the end of 2011. Patience is the order of the day!

BofA Headed Back Below $10?

Rakesh,

I have a question for you. I have been afraid to use ProFunds ultra bear or any other ETF/bear fund because I was convinced that the counter-party risk was too great. As you know the counter-parties are mostly the major banking and financial institutions. Do you think I am being too cautious? My second question concerns the price of oil. I have been thinking the price of oil should be around $30 to $35 per barrel. It appears I missed the reflation trade altogether. Or have I? Looking forward to your answers.

Why Stocks Scare Me Now

Good article. Playing with accounting rules is playing with investor confidence in the long run. Good analysts see the bad loans on the banks books and likely did not recommend bad banks. Therefore, if smart money likely did not buy them. Maybe you are right, could it be the Fed? Interesting idea.

If the Recession Is Over, What Now, Ben?

I strongly disagree with you Mr. Hui. Our experience with Japan shows that you can have zero interest rates and deflation at the same time as the currency falls. Much has been written about the cash for clunkers giving the economy an artifical lift. Bernanke indicated he will stop buying treasuries and agencies by the end of October. Manufacturing usually peaks in August to September leaving the next six months highly dependent on consumer spending. With high unemployment and low bonuses (except for the bankers who received TARP money of course), my bet is that consumer spending over the next six months will be weak. We now have high inventories of raw materials and finished goods going into a weak consumer period. Sounds like the perfect recipe for a downturn in commodities and the stock market while the dollar stays weak.

First Solar Sell-Off Is Overdone

FSLR is going down because the price of oil is going to fall to $30 or below by year-end and stay below $50 for an extended time. You see when you have $148 oil, lots of production comes on stream that doesn't turn off soon. A few years of cheap oil will kill the solar stocks.

Is It a Stock Market Rally or a Dollar Devaluation?

I don't know about stock prices, but certainly there is a strong inverse correlation between the US dollar and oil prices. Technically, the US dollar is at an inflection point. Odds favor a decline and a test of the 2008 lows when oil prices rose to $148 per barrel. Don't you think oil prices north of $100 would slam the brakes on economic growth?

U.S. Economy: Now Comes the Hard Part

I very muched liked your thesis that stated the private sector has succumed to dependence of the Federal Government as opposed to private spending. I wonder about small and intermediate sized business who have to rely on the private sector. How can they compete? Government dependence is a drug. Once addicted, its hard to wean off. My problem with your article is the happy ending. It's great to say you're a value investor and congratulations on having a few good months of performance. However, as you pointed out the earnings power of companies cannot expand much more if any without revenue growth. Unless the Government is going to continue to increase spending and crowd out even more of the private sector, revenue growth will not come. What's the value of the S&P 500 Index assuming operating earnings of $50 per share with no growth prospects for the next ten years? Arguably a 10 multiple would be fair. OK, some are placing earnings at $75. OK, then we are looking at a fair value of the S&P 500 Index of 500 to 750.

The fly in the oitment is monetary stimulous. As the Fed prints money and the money goes into financial institutions with Capital Markets, money magic happens. Some of the billions go into stock and bonds. Others go to fund traders and investment banking types that get even more government business bailing out the municipal bond market by helping states like California finance their huge spening programs. I can see the large banks with brokerage arms staying alive a little longer.

I liked your comments about the population and oil. With less cheap oil available, our country cannot grow. As our population ages, consumption will decline along with total incomes. This would have happened without the financial crisis. With the financial crisis, there are many investors who sold thier investments at the bottom last March and then recently reintered the market in late August only to be likely to lose what little they have left.

Dow Target 6,617, October 25, 2009: Here Is Why

I liked your article. I read the above comments, too. One comment about the economy being different and the conclusion that the market will have a different result may not be all that important. The market is more influenced by mass psycology than any other factor. That is why your article and the one I wrote in June simply must be taken seriously. If you haven't read my article, you will enjoy it: seekingalpha.com/artic...

Five Reasons the Market Could Crash This Fall

Dead wrong! Wall street firms and banks are the guarantors of derivatives contracts. They back those contracts by the financial insitution's credit rating. It is the customers of those brokerages and banks who are taking positions. It is a logical statement to say that all the customers of the financial institutions play a zero sum game, however, it is very posssible for one or more financial institutions to fail without another financial institution gaining anything.


On Aug 04 12:10 PM contracontrarian wrote:

> "If Wall Street did put $50 trillion at risk… and 10% of that money
> goes bad (quite a low estimate given defaults on regulated securities)
> that means $5 trillion in losses: an amount equal to HALF of the
> total US stock market."
>
> Any one particular Wall Street firm can lose everything they have
> or even more,but other Wall Street firms would earn the same amount
> at the same time,as they are on both sides of those derivative positions.
> Alltogether "Wall Street" can not lose money on their derivatives...

Five Reasons the Market Could Crash This Fall

I couldn't agree with you more. Great insights. Anyone long equities here is playing a game of Russian roulette. I'm amazed that computerized trading could be responsible for a 48% increase in this market without speculators coming back in. To me it reminds me of the market in 1997 to 1999 before the tech crash. A market driven by momentum investors. During that time growth stocks were king and value stocks trash. I often wonder if this market will be like that one given the tremendous amount of government stimulus in the economy. I don't disagree with your brilliant analysis, I just wonder if the crash will come this fall or the fall of 2011? Howver, no matter how you look at it, it looks to be a fool's rally and investors will likely be better off over the next several months holding high quality bonds or cash.

1929 All Over Again?

Good article. I especially liked the lack of convergence of reported and operating earnings. In case any of you readers missed my article comparing the current market to 1929:
seekingalpha.com/artic...
Maybe PE's have less to do with the stock market than crowd psycology. Maybe the pattern established in 1929 to 1932 repeating may be more likely than you think.