Private Wealth Advisory A Phoenix Capital Research Publication April 28, 2010 AllThatGlittersThebigstoryofthelasttwoweeksistheGoldmancivilfraudcase.Wecannotinterpretthemarketswithoutconsideringtheimplicationsofthissuit.Inplainterms,GoldmanhasbeenchargedwithcivilfraudforsellingvarioussecuritiestoitsclientswithoutdisclosingthatthoseverysecuritiesowedtheirexistencetothefactthatanotherGoldmanclientwantedtobetagainstthem.Goldman,asistobeexpected,hasreiteratednumeroustimesthatitdidnothingwrongandthat“trust”isthecornerstoneofitsbusiness.However,theGoldmanVPinvolvedincreatingthesecuritieshasalreadybeenbarredfromworkintheUK.AndvariousGoldmanemailsrevealthatthefirmwaswellawareofthepoorqualityofthedealsaswellasthefactthatitwouldpocketvastsumsofmoneybybettingagainstthemortgagemarket.Tome,thisentiresituationsmellsofdistraction.TheSEC,FDIC,andotherFederalbodiesrelatedtothefinancialmarketshavedoneeverythingintheirpowertocontainbadnews.SowhywouldtheSECfileachargeofthislevelagainstGoldmanduringmarkethours?Moreimportantly,whyisthiscasesuddenlybeingannouncednowwhenGoldmanhasclearlybeendoingthisandawholelotworseforyears?Finally,whyisthesuitbeingbroughtattheexacttimethatCongressisdebatingafinancialreformbill?Thislastquestion,tome,iskey.Congressiscurrentlydebatingwhatfinancialreform,ifany,toimplement.ItsimplycannotbecoincidencethatGoldmanisinthehotseatattheexactsametimethisishappening.InmyopinionthiswholecasewilllikelyprovetobeacharadetochannelpublicoutragesothattheGovernmentcanappeartobetakingactionagainstWallStreetwhileitpassesabillthataccomplishesNOTHINGofsignificance.Whyisthislikelyafarce?GoldmanisthesecondlargestcorporatepoliticaldonorbehindAT&Tinthelast20years.Alltold,Goldmanemployeesandthefirmhavedonated$31millioninpoliticalcontributions.Andthisincludesourmanof“change”intheWhiteHouse:
Obama’stopdonorsin‘08:
Donor ContributionUniversity of California $1,591,395Goldman Sachs $994,795Harvard $854,747Microsoft $833,617CitiGroup $701,290JP Morgan $695,132
Inapoliticalsysteminwhichlegislativefavoritismispassedoutbasedonpoliticaldonations,thelikelihoodofGoldmanbeinghitwithanythingseriousintheUSisminimal.IalsowanttopointoutthatGoldmanhighlyfavorsDemocratsinitsdonations.AreCongressandObamareallygoingtocrushthefirmgiventhebelownumbers?
Soure:Opensecrets.orgOntopofthis,Goldmanhasformeremployeesand(individualswhoowetheirfortunestothefirm)locatedthroughouttheGovernment.Indeed,Obama’seconomicpolicyteamisrifewithex‐Goldmanites.SoI’mskepticalthattheUSregulatorsintendanythingotherthantheobligatoryfine.Meanwhile,therealstoryisthefinancialreformbill,whichtheRepublicansjustkilledontheHouseFloor.
IwillabstainfromusingthereallanguageIwouldliketoapplytowardswhat’sgoingoninCongress,butsufficetosaythatourelectedofficialsarelookingoutfortheWallStreetOligarchs,NOTordinarycitizens.Theyproclaimtheywishtohelp“MainStreet”inpublic,butinprivatediscussnothingotherthanderivativesandhowit’scriticaltoleavethemalonesothatthe“smartest”guysontheplanet(WallStreetandGoldmaninparticular)cancontinuetoplaythesamegamesthatalmostdestroyedthefinancialsystemin2008.Oneofthekeyitemsintheproposedreformbillwasaclausedemandingthatcompaniesandfinancialinstitutionsputupcollateralonexistingderivativecontracts.Yes,youreadthatcorrectly,large‐scaleinstitutions(includingWarrenBuffett’sBerkshireHathaway)havebeentradingderivativeswithoutputtingupanycollateral.Theyare,essentially,makingun‐backedbetsinthederivativesmarkets.BuffettandothershavebeenlobbyingCongessNOTtopassthisportionofthereform(Buffettwhocalledderivativesweaponsof“financialmassdestruction”owns$63BILLIONinderivatives)becausesuddenlyrequiringcollateralwouldmeantakingahuge“hit.”Remember,theentirefinancialsystemisleveragedbyoutrageousamountscourtesyofunregulatedderivatives.Ifcollateralweresuddenlyrequiredonthesebets,manylargeinstitutions,(includingBuffett’sBerkshire),wouldbeonthehookforbillions,ifnottrillionsofdollars.FortunatelyforthefinancialOligarchs,theRepublicanskilledthebillsonothinghasbeenaccomplishedyet.ThisisthepoliticalprocessintheUS:distractthemasseswithsome“hot”issue(Goldman’sSECsuit),whileperformingtheOligarchs’bidding.IdelvedeepintothisprocessaswellastheUS’sstatusasanOligarchyinthefirstissueofmynewsocio‐economic‐politicalnewsletter,thePhoenixWorldViewsDigestwhichwillbepublishedthisFriday,April29.SomanyofyouoptedtoreceiveacomplimentarysubscriptiontothisnewsletterthatIamsimplygoingtosendittoallofyou.Ihopeyouenjoyit.IfyouDONOTwishtocontinuetoreceivethePhoenixWorldViewsDigestinthefuture,simplydropmealineandI’llremoveyoufromitslist.Myemailisgraham@gainspainscapital.comBacktotheGoldmanfraudcase.AsImentionedearlier,Ibelievethiscasetolargelybeadistraction,“breadandcircus”foranincreasinglyoutragedelectorate.Wemustalwaysrememberthatthisisanelectionyearandvotersareoutforbloodduetotheobscenecronycapitalism/bailouts/fraudoccurringthroughoutCongressandWallStreet.
WhynotchannelallthisangertowardsGoldmanSachsinacasethatresultsinnothingmorethanasizablefineandmaybeafewunderlingsgoingtojail?ItcertainlyallowstheGovernmenttoappeartobecrackingdownonWallStreet(soothingthepopulace’sanger)whilestoppinganyREALreformfromoccurring(insuringcontinuedpoliticaldonationsfromWallStreet).However,evenifthiscaseisintendedtodistract,itwillhaveunintendedconsequences.ManyEuropeancountriesareopeningsuitsorstartinginvestigationsonGoldman’soperations.GoldmanmayowntheUSGovernment,butithasfarlesscloutinEurope.Sotheinvestigationsovertherecouldbetherealdeal.SeveralEuropeanbankshavealreadystoppeddoingbusinesswithGoldman.SpeakingofEurope…AsIwrite,thenotionofaunifiedEuropeisliterallygoingupinsmoke.Greecehasyettoconfirmabailout(fourmonthsintothisridiculouscomedy),SpainandPortugalhavebothbeenslappedwithcreditdowngrades.Theseproblemsarehardlyuniqueasthebelowchartreveals:
Europe,particularlyGreece,shouldbeviewedasa“trialrun”forwhatwilleventuallybehittingtheUS.ThekeyitemstonoteinGreeceare:
1) Obviousissuestakingtimetohitthemarket/people2) “Extendandpretend”withoutdoinganything/affectinganychange3) Civilunrest,politicalfailure,the“blamegame”4) Debtdefault/currencydevaluation
Firstoff,IwanttopointouttheGreeceCrisiswasstaringeveryoneinthefaceforyears.Greece’sdebtdidnotsuddenlybecomeanissueovernight.Asfarbackas2006theGreekdeficitwasoutofcontrol(andthiswasBEFOREweknewthatGreecewasusingderivativeswithGoldmanSachstohideitstruedebtlevels).
SothistellsusrightupfrontthatthosewhoactuallylookintothenumberswerewellawarethatGreecehadproblemsyearsago.Again,theGreeceCrisiswasstaringeveryoneinthefaceforyears.Itdidnotsuddenlyeruptovernight.Secondly,theGreekCrisistellsusthatonceaCrisiserupts,ittakesmonthstoberesolved.Greece’sCrisiswent“mainstream”inDecember/January.HerewearenearingMayandnothinghasyetbeenresolved.AtthispointIcanthinkofatleastfiveorsixtimesthatwe’vehad“rumors”ofabailoutcomingsoon,onlytofindthattheywereallfalse.SoweknowthatevenwhenCrisesgomainstream,thepowersthatbewilldoeverythingtheycantosimply“extendandpretend”withoutresolvinganything.Thisbringsustoournextpoint:theBlameGame.Greecehasnotbeenbailedoutyet.We’veseenalotofposturing,fingerpointing,andrumors,butnoconcreteactionhasbeentakenyet.Thepoliticianshaveblamedfinancialspeculators(asifashort‐sellerisresponsibleforGreecerunningupdeficitsandabsurddebts)andeventheirwould‐besaviors(theGermans).ThiswillhappenintheUStoo,andmostlikelyfinancialspeculatorswillbearthebruntoftheblame.
MeanwhiletheGreecepopulaceiseruptingintofull‐blownriots.AbombwentoffattheJPMorganofficeinAthens.AllofthiswilloccuronanevenbiggerscalewhentheseissueshittheUS’sshores.TheendresultherewillbesameasinGreece:ultimatelydefault.Youcanbailoutanissueforatimeandplay“extendandpretend”butultimatelyyoucannotsolveadebtproblemwithmoredebt.Theonlyrealsolutionisdefault(hyperinflationisalsopossiblebutlesslikelyifhistoryisaguide).ThisiswhyI’vebeentellingeveryonetopreparewellinadvanceforwhatistocome.IrealizeIamquiteearlyonallofthis.IttookmorethanthreeyearsforGreek’sobviousdebtissuestohitthemainstream.IhavenoideahowlongitwillbebeforesimilarCriseshittheUS’sshores(ifnotforQEitlikelywouldhavealreadyhappened).Regardless,atsomepointtheseissueswillhittheUS.Whentheydo,we’llgothrougheverythingGreeceisgoingthrough.Theultimateresultwilllikelybedefault.However,untilthen,theFedandothercentralbankerswillattempttoinflateourissuesaway.Whichwillleadtoinflationtakinghold.Indeed,italreadyis.
‘SuperEasy’BOEPolicyMayEndtoCurbInflationTheU.K.’sinflationratejumpedto3.4percentinMarch,exceedingthegovernment’s3percentlimit,stokedbyhigherenergycostsandtheweaknessofthepound.BankofEnglandofficialspledgedtomonitorpriceexpectationscloselybecausetheinflationoutlookisasourceofconcerntosomeofthem,accordingtotheminutesoftheirApril8meeting.Fasterinflation“isstartingtoruboffonconsumerandmarketexpectations,”Kounis,anAmsterdambasedeconomistwhoisaformerU.K.Treasuryofficial,saidinatelephoneinterview.“Thismonetarypolicystancethat’ssuper,supereasyisinappropriate.Theywillhavetotakesomeofthataccommodationaway.”http://preview.bloomberg.com/news/20100426/poundclimbsasrisinghousepricesshoweconomicrecoveryistakinghold.htmlWholesalepricesriseinMarchasfoodcostsjumpWholesalepricesrosemorethanexpectedlastmonthasfoodpricessurgedbythemostin26years.Butexcludingfoodandenergy,priceswerenearlyflat.http://finance.yahoo.com/news/Wholesalepricesriseinapf299827519.html?x=0&.v=4
IndiaFoodInflationQuickens;RainsMayCoolPricesIndia’sfoodinflationacceleratedaheadofareporttomorrowthatmayshowmonsoonrainsthisyearwillbesufficienttocoolfarmprices.Anindexmeasuringwholesalepricesofagricultureproductsincludinglentils,riceandvegetablescompiledbythecommerceministryrose17.65percentintheweekendedApril10fromayearearlier.Itgained17.22percentthepreviousweek,accordingtoastatementinNewDelhitoday.http://www.bloomberg.com/apps/news?pid=20601091&sid=aYoP6GDD.F8I
Inflationaryfearsaregrippingthemarkets.Onthatnote,Goldhasbrokenoutofitstradingrangeofthelastfourmonths:
Thisisastrongsignaltobuy.IfGoldremainsabove$1,150,we’relikelygoingtoseeare‐testoftheDecemberhighs.Moreover,Goldisnowraisingitsheadasthetopcurrencyoftheworld,rallyingtonewhighswhenpricedinEuros:
JapaneseYen:
AndSwissFrancs:
Indeed,GoldisevenbeginningtobreakoutagainstthecommodityheavycurrenciessuchastheCanadianDollar:
AndtheAustralianDollar:
Moreimportantly,Goldisshowingsignsofdecouplingfromitsformer“anti‐Dollar”hedgestatus:afactmadeclearbybothGoldtheDollarrallyingTOGETHER.
IfyoudonotalreadyhaveexposuretoGold,getsomenow.WehaveofficiallybeentrackingthepreciousmetalinourportfoliosinceMarch17.Todaywe’reexaminingtheGoldminingsectoringreaterdetail.
GoldMinersastrackedbytheGoldMinerETF(GDX)remaininalong‐termbull‐market.Indeed,thesharpcorrectionthesectorpostedinDecember2009bouncedstronglyoffof$40:thelevelthatactedasoverheadresistanceformostof2006‐2007(seebottomredlinebelow).
TheissuenowisifGoldMiner’scanbreakouttonewhighs(signalingthatthenextmajorlegupinthesectorisabouttobegin),oriftheyarerejectedat$50:alineofpreviousoverheadresistance.Idonotliketheset‐uphereintermsofatrade:GDXcouldjustaseasilyfallbacktotestitsformersupport($40)asitcouldbreaktonewhighs.Sowe’renottradingthisETFjustyet.However,iFGDXbreaksabove$50andstaysthere,IwillbeissuingabuyasitindicatesthenextlegupinGoldiskickingoffinamajorway.However,fornowwe’renottradingthisjustyet.ThesamegoesfortheJuniorGoldMinersETF(GDXJ).UnlikeGDX,whichiscomprisedofminersofallsizeincludingmajors,GDXJisanETFcomprisedsolelyofGoldjuniorminingcompanies(smallcaps).Assuch,investinginGDXJisabitlikebuyingGoldonsteroids:everymovethepreciousmetalmakesisexaggeratedforGDXJ.
Currently,GDXJistradinginaclearup‐channelalongwithGold.AndjustlikeGDX,GDXJiscominguponitsrecentoverheadresistance.Abreakaboveherewouldsignalabreakouttonewhighs.However,GDXJcouldjustaseasilyfalltore‐testitslowersupportat$25.
Again,we’renotmakingamovehereyet.Butadecisivebreakabove$28.50wouldbea“buy”signalthatwe’reinforgreatergains.
Intermsofspecificminers,onecompanyI’minterestedinisSeabridgeGold(SA).SAisanunhedgedNorthAmerican‐basedpreciousmetalsdiscoverycompany.Itdoesnotactivelyengageinproduction.Ratheritexploresforgold,assessestheeconomicviabilityofaprojectandtheneithercollaborateswithapartnertominethepropertyORsimplysellstheassetoff.Thecompanyhasroughly15millionouncesofprovenGoldwithanadditional55millionouncesininferredandindicatedreserves.Thecompany’skeypropertyisitsKSMpropertyinBritishColumbia,Canada,sopoliticalriskisminimal.SA’ssharepricelooksreadytobreakouttoo:
Asyoucansee,SAhasbeentradingwithinalargerangeforoverayear.We’renowreachingatimewhenSAwilleitherbreaktonewhighs(over$32.50)orwillretreatbacktoitssupportline($20).AsisthecasewithGDXandGDXJ,watchSAclosely.Ifitbreaksout,I’llissueaspecialalertsayingit’stimetobuy.IAMGOLD(IAG)alsointerestsme.ThecompanyisagoldminerandproducerwithpropertiesinWestAfricaandNorth&SouthAmerica.Itjustbecameprofitablein2009(profitsareunusualforaminer)producingjustunderonemillionouncesofGold.TodaythecompanyhasaP/Eof54.AsofMarch312010,thecompanyhadroughly$200millionincash.Evenbetter,it’ssittingon100,000ouncesofbullionworthroughlyanother$100million.Witha
marketcapof$6.5billion,IAGistradingat21timesitscashandbullionstashonhand:notabadvaluationatall.Moreover,thecompanyhas14millionouncesinreserves.IAG’schartislookingprimedforabreakoutaswell:
ThestoryhereismuchthesameaswithGDX,GDXJandSA:achannelthatlooksreadyforabreak‐outtotheupside.It’stooearlytomakeamovehere,sojustsittightonthisoneaswell.GeneralMarketOverviewElsewhereinthemarkets,theS&P500hasenteredintosomethingofatradingrangebetween1,220and1,190.Itissimplyastoundingthatstockscontinuetoholdupwhileentirecountriesgobust.InthelasttwoweeksaloneGreece,Portugal,andSpainhaveallbeendowngraded.Andyet,stocksrefusetobreakbelow1,190ontheS&P500.
However,thereisoneitemofnote.YesterdaywasaMAJORdownday:adayinwhich95%ofstocksfell.Indeed,haditnotbeenforsomedeeppocketsintervening,weverylikelywouldhavehadamini‐Crash(adeclineof4‐6%).
Thisshouldbeseenasawarningofwhatcanhappenwhenthemarketcomesunhinged.Investorsandtradersaroundtheworldhavebeenconditionedtoignore
badnews.GreeceandthesituationinEuropetodayshouldbeviewedasthe“LehmanBrothers”eventforsovereigndebtCrisis.Thingsaregoingtostartgettinguglyinamajorwaynottoofarinthefuture.Indeed,theemergingmarketsarealreadyshowingsignsoftrouble.TheChinaETFhasnotonlyalreadytopped,itisnowbreakingdownwithavengeancecuttingthroughbothits50‐andits200‐DMAs.
NotethatFXIhasfailedtobestitsNovemberhigh.Also,IwanttopointoutthatFXIhasrecentlybrokenbelowits50‐DMA.Ifitfailstoreclaimthislevel,wearelikelyseeingthebeginningofsomethingserioushere.Iamwatchingthisclosely.Ifweriseto“kiss”the50DMAandthenrolloverbelow$40,it’sthestartofsomethinggreateranditwillbetimetogoshort.I’llsuggestplayingthiswiththeUltraShortChinaETF(FXP).However,rightnowit’stoosoontobuy.ThesamegoesforBrazil:
Asyoucansee,theBrazilETFhasbrokenbelowits50‐DMA.Iexpectwe’llseeabounceheretore‐testthe50‐DMA.Ifandthisisacritical“IF,”theBrazilETFfailstoreclaimthe50‐DMA,thenthisisthebeginningofamuchmoreseriouscorrection(liketheoneinJanuary).Again,thissituationwarrantsclosewatching.ItwegetaseriousbreakdownI’llsuggestplayingthistrendwiththeUltraShortBrazilETF(BZQ).However,rightnowit’stoosoontotradehere.Thisconcludesthisweek’sissue.Whileweremainlargelyonthesidelinesitlooksasthoughwearefinallygoingtogetsomeclarityfromthemarkets.TheemergingmarketsinparticularshouldbewatchedverycloselyastheyhaveleadtheirUScounterparts.SoabreakdowntherewouldsuggesttroublefortheS&P500.Meanwhile,Goldisbreakingout.WehavefournewGoldminingplaysondeckwaitingforconfirmed“buy”signalstohit.I’llsendoutanalertforallofthesewhenit’stimetobuy.Thesamegoesforwhenit’stimetosellanyofourOnDeckshorts(WFC,DSW)includingtheUltrashortplaysonChinaandBrazil(FXPandBZQ),whenit’stime.Barringanynewdevelopmentsyou’llnexthearfrommeonWednesdayMay12.Butdon’tforgettocheckyourinboxonFridayforthefirstissueofPhoenixWorldViewsDigest!GoodInvesting!GrahamSummers
If You HAVE To Own Stocks Portfolio Company Symbol Buy Date Buy/Short
Price Current Price Gain/
Loss Coke KO 3/30/10 $55.00 $53.36 -3% Budweiser BUD 3/30/10 $50.45 $47.08 -7% Johnson & Johnson JNJ 3/30/10 $65.20 $64.62 -1% Wal-Mart WMT 3/30/10 $54.64 $54.64 -4% Exxon Mobil XOM 3/30/10 $66.98 $68.61 3% Stocks Come Unhinged Portfolio
Company Symbol Buy Date Buy/Short Price
Current Price Gain/ Loss
DSW (SHORT) DSW N/A N/A NOT YET Wells Fargo (SHORT)
WFC N/A N/A NOT YET
UltraShort China FXP N/A N/A NOT YET UltraShort Brazil BZQ N/A N/A NOT YET Bullion Portfolio Company Symbol Buy Date Buy Price Current Price Gain/
Loss Gold bullion N/A 3/17/10 $1,120 $1,165 4% Silver bullion N/A 3/17/10 $17.50 $18.11 3% Gold Miner’s ETF GDX N/A N/A NOT YET Junior Miner’s ETF GDXJ N/A N/A NOT YET Seabridge Gold SA N/A N/A NOT YET IAMGOLD IAG N/A N/A NOT YET Coming Crisis Portfolio: Positions We Will Buy When the Next Crisis Hits Investment Symbol Reasons to buy when the Crisis hits UltraShort Emerging Markets ETF
EEV Sovereign debt default, end of liquidity rally, capital withdrawals on flight to safety
UltraShort Russell 2000 TWM The WORST index in the US, comprised of junk and unprofitable companies
UltraShort Real Estate SRS Second wave of mortgage rate resets, continued increase in defaults in housing,
UltraShort Materials SMN Economic Depression UltraShort Financial SKF Derivative exposure, systemic insolvency
