Anatomy of a Housing Crisis

A fool despises good counsel, but a wise man takes it to heart.
Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

Freddie and Fannie certainly had a large role to play in the housing crisis and many may claim that they were the main contributors of the housing crisis which eventually resulted in a market meltdown. Before we proceed let’s get some background info on these two chaps.

Some background info on these two companies

They were created by the Federal National Mortgage Association in the 1930’s to help speed up the home ownership process by buying mortgagees from banks. Banks would normally sell a mortgage and then put it on their books, this means that each time they did so, a certain amount of capital was tied up and this limited the number of mortgages they could issue. Now they could simply issue a mortgage and sell it to Freddie or Fannie and as a result banks could issue almost as many mortgages as they could sell.

Although they are private companies, they are government sponsored enterprises established by federal law. As GSE’s they received special privileges, the main one being that if they were threatened with failure, the federal government would come to their rescue. This gave them the best of both worlds; profits are privatised but losses are socialized. This guarantee basically encourages immoral and unconscionable behaviour because there is no downside; the downside becomes the government’s problem, which in turn becomes the tax payer’s problem.

Factors that support the claim that Fannie and Freddie had a role to play in the housing crisis

Freddie and Fannie were prevented from buying mortgages that did not meet down payment and credit requirements by law. As the structure of the mortgage market changes, so did their business model. From 2005 until the onset of the crisis most of the mortgages they purchased did not fall within the convention fixed interest rate with a 20% down payment category instead most of the loans fell within the following categories.

Fannie mae’s loans

• 62% negative amortization
• 84% interest only
• 58% subprime
• 62% required less than 10% down payment.

Freddie Mac's loans

• 72% negative amortization
• 97% interest only
• 67% subprime
• 68% required less than 10% down payment. (source about.com)

This incestuous desire to issue exotic loans and to open the market to subprime borrowers made most of their loan acquisitions extremely toxic and in doing so helped fuel the speculative real estate bubble. This is a very huge topic, and we have only just touched the tip of the iceberg. The information laid out should provide enough food for thought such that if peeks your interest further research on this topic can be conducted at your own leisure.

Now let’s examine if these GSE’s really helped the Public

Freddie Mac lost 50 billion last year but has now come begging to the government for another 31.8 billion and this comes on top of the 13.8 billion Freddie asked for last year. The government has pledged a massive 200 billion line of credit to support this disaster and based on all the talk so far, they would probably offer even more if Freddie ever needed it.

If we weigh the cost to the taxpayer and the so called savings these two mortgage giants provided, one finds that they failed miserably and have really provided no benefit at all. How can this be? The so called benefits from offering lower mortgage rates has been offsetted by the cost of all the money taxpayers have poured into these two companies. . They had access to money at a lower rate than private companies and could in turn pass these savings to the consumer; lenders provided them with lower rates because their survival was guaranteed by the Federal government. Based on the amount of money they have already asked for and the future amounts they will need to continue functioning, it is estimated that by the end of the year they will become net losers. In other words, they would have moved from providing some value to providing none at all.

Lawrence J. White an economist at the New York University (Stern School of business) states that the GSE’s could borrow money 35-40 basis points lower than the private sector. Thus if the standard rate was 6%, they paid only 5.60-5.65%.

At the end of 2008 these two companies had 31 million mortgages on their books, which were worth in excess of 5 trillion (actual figures were roughly in the 5.4-5.6 trillion ranges). Thus borrowers would have saved roughly 10 billion in 2008. According to Daniel Gross over the years, they supposedly produced savings of $100 billion.

Contrast the potential saving of $100 million against the $300 billion plus in financial support the government has pledged and one can immediately see that they have provided no real benefit at all. If they were regular business, they would have gone bankrupt long time ago, but because they are GSE’s the government sees fit to pump billions of dollars into losing cause. It is true they have not used up all the money the government has pledged to them, but at the rate, they are burning this money, it’s only a matter of time before they go through those funds before they start begging for more.

While these two GSE’s did play a role the financial crisis that hit this nation; after all they did provide banks with an incentive by virtually buying any junk that the banks were willing to throw at them.

Wall Street firms (Goldman, JP Morgan, Merrill lynch, etc) and rating agencies also had a big role and may have contributed even more to this housing crisis then Freddie and Fannie. These firms combined subprime mortgages with other mortgages that carried slightly higher ratings and sold them of as Collateralized Default Obligations (CDO).

CDO’s were nothing but a bunch of BB rated mortgages that were bundled up to create a security that carried an AAA rating. The rating agencies (Moody’s, S&P, and Fitch) all played a role in this process by putting their stamp of approval on these toxic products. By putting their stamp of approval on these products these agencies made these toxic products appear to be of investment grade.

Investors in General rely heavily on these agencies to determine risk. Thus when investors realized they could achieve superior returns with AAA, AA or A rated mortgages, like idiots they jumped in. We use the word idiots because they could have and should have spent time understanding what was behind this new product. If something is too good to be true, take time to dig for you will find out that it is usually fraught with risk. Large institutions started to jump in and buy these CDO’s left right and centre creating a huge demand for these products; demand soon overwhelmed supply. As the demand rose, it drove the borrowing costs lower and made qualifying for a loan easier and this in turn drove housing prices higher. Mortgage lenders were making huge sums of money and each player wanted to increase its share of the market. Lack of oversight, poor underwritings and outright fraud were all perpetuated as a result of this greed. It will take years for the housing and mortgage sectors to recover as a result of this greed. Investors continued to pour into CDO’s and as the supply grew so did the demand; the only way to bring this vicious cycle to an end was for the real estate and mortgages markets to crash.

Investors were given several warnings that all was not well; towards the end of 2006 home prices peaked. In 2007 home prices stopped rising and finally started to decline. Worse yet default rates start to increase and yet like drug addicts investors kept buying these securities and Wall Street like a drug dealer continued to issue these securitized instruments.

If the blame should be laid on anyone it, the biggest culprits are the banks and rating agencies.

However, we have one final culprit and that culprit is the average Joe, who jumped on the band wagon because he wanted to make a quick buck without taking a risk. Well at least that’s what he thought, for real estate seemed like a sure bet.

Every con has a conman and sucker; for the game to proceed both have to be willing participants. Thus the conmen provided the suckers with what they were looking for. The suckers did not complain as long as they were getting paid. Only when the whole house cards crumbled did they wake up and start to squeal like fat pigs being roasted alive.

The morale of this story is that one should never jump into anything that has attracted mass attention. The masses are always late to the party and usually end up leaving with a massive hangover.

Conclusion

Before one lays blame on another one must look in the mirror and be sure that one did not have a hand to play in the crisis. It takes one to cry, two to tango and 3 to have a party. Individuals wanted to party without having to do any work, and they thought they could do this without taking on any risk. If something appears too good to be true, it generally is.

The government is hell bent on pouring good money into these two completely useless companies, Freddie Mac and Fannie Mae. Ironically the Government finds it very easy to turn down individuals that really need a helping hand; for example, not approving a $250 check for senior citizens. To make matters worse they create money out of thin air to pay for these projects, thereby further devaluing our currency and indirectly imposing a silent tax on the population. This silent tax is otherwise known as inflation.

Meanwhile, taxpayers have pumped more than $125 billion into the failed firms -- and on the hook for many more after the administration promised an unlimited source of funds just before Christmas to backstop their growing losses. "We will do everything necessary to ensure these institutions have the capital they need to meet their commitments," Geithner said in response to tough questions from Rep. Scott Garrett, a New Jersey Republican. Underscoring the need for change, Geithner acknowledged that taxpayers are likely to face "very substantial" losses on the government's takeover of Fannie and Freddie.. Full Story

The best way to protect oneself against inflation is to get into hard assets; hard assets are anything that cannot be mass produced and are in finite supply. Examples are oil, timber, copper, iron, precious metals, etc. The easiest way to protect oneself against the harmful effects of inflation is by purchasing precious metals (Gold and Silver bullion). If one wants to play the ETF game one can open up positions in SLV and GLD.

Once the game is over, the king and the pawn go back in the same box
Italian Proverb

 

Disclosure: we have positions in Gold, and Silver bullion

Other articles of interest

Housing Debacle

Housing Bust

 

Links of interest

Ultimate Futures Timing Service

A Step Back In Time

 

A generation which ignores history has no past and no future.

Robert Heinlein, 1907-1988, American Science Fiction Writer

The info below provides an interesting view of what took place in the 1929-1930 time periods. If one had to take away the dates, one would think that the writers were referring to current events. History clearly repeats itself and the stories posted below quite clearly illustrate this point. Our comments are posted in italics

Events leading up the Crash of 1929

Investors had long borrowed money to buy stocks, but the amount they borrowed and the enthusiasm for borrowing grew rapidly in the late 1920s, as credit became plentiful and the stock market started to boom. Borrowing to buy a stock—an investment representing a share of a corporation—meant putting up “margin.” Margin was like a down payment on the stock purchase, sometimes as little as 10% of the purchase price. Investors didn’t have to pay anything more upfront, unless the stock price fell. The loan would be paid off by the rising value of the stock.

In 1927, brokers borrowed $4 billion, up 33% from the previous year, and they in turn would lend the money to stock buyers. By the end of 1928, brokers’ loans had exploded to $6.4 billion, a 56% increase in one year.

In fact, in 1929, nearly $4 of every $10 banks lent was for stock purchases. Even corporations jumped in on the lending business. John D. Rockefeller’s Standard Oil of New Jersey, Chrysler and General Motors all made millions of dollars in stock loans.

Interesting is it not that many banks reported record profits and most of these profits were made from trading the markets. So instead of lending money banks are now moving more and more into trying to time the markets. Indirectly, this is the same thing that took place in 1929 when 4 out of every 10 dollars banks lent went into the market; the final destination was still the stock market. Sounds like a recipe for trouble.

But stocks continued to fall, dropping 12.8% on the following Monday, Oct. 28, and nearly another 12% on Oct. 29, Black Tuesday, one of the worst days ever in the stock market. Over six days, the stock market lost nearly one-third of its value—$25 billion in savings disappeared

The stock market crash was painful, wiping out the life savings of millions of people and leaving some deep in debt. After watching the devastation of such a borrowing binge, federal officials were determined to keep people from overindulging again. They took steps to keep interest rates high and discourage borrowing. So people didn’t borrow—and companies didn’t either. Consumers couldn’t buy houses. Companies didn’t have money to expand. Workers lost their jobs as the businesses shrivelled. The result was a downward economic spiral.

The stock market crash of 1929 was the first clear sign of an economic downturn. But it was the policy aimed at preventing a repeat that sent the nation sliding into the horrific slump that that became the Great Depression.

From the book “Six Days in October: The Stock Market Crash of 1929,” by Karen Blumenthal. © Copyright 2002 Karen Blumenthal

After the Crash

The following stories extracted from the following site news from 1930 blogspot

From June 2-7 1930 Wall Street Journal

Henry Ford says business is getting back to normal and the worst of the economic depression is past.

Brokers and financiers “seem to think the business depression has touched bottom, and the next turn will be for the better.”

Present dull period is giving Wall Street brokers time to improve their prowess at many games, including golf, bridge, checkers, chess, and ping pong.

June 13, 1930 Wall Street Journal

Business is not improving as predicted, which is lowering market sentiment. Business volume is holding fairly steady week-to-week, but prices are lower, which should lead to lower earnings. Wages aren't going down as fast as earnings, but fewer people are employed.

Market has confounded observers by slumping when two weeks ago at least 75% of the Street was predicting a rally.

Strange the market actually has a mind of its own, interesting how 80 years later and very few seem to have understood this simple concept.

June 23 1930 Wall Street Journal

Col. Ayres, VP Cleveland Trust, predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.

Reduction of the rediscount rate to 2 1/2 percent is considered beneficial in several ways. It indicates credit will be easy for some time; should benefit many industries including farming, building, and construction, and make bond issues easier for corporations resulting in lower unemployment.

Stocks continued down, with big declines in the large trading stocks. Bears encouraged by the failure to hold Thursday's rally after good news, and further breaks in the commodity market (wheat, corn, cotton). US Steel hit a new yearly low, followed shortly by Bethlehem Steel, Union Carbide, and American Can. Some rallying on the close on short covering. Volume not very heavy.

August 6, 1930

Market seen as having prepared conditions for good uptrend on both fundamental and technical grounds. A year has passed since start of the downturn, typical lengh of depressions historically. Seasonal factors are favorable. Also, recent dull range-bound trading is typical as "market builds up its technical strength."

Are not many experts already making such comments now?

Market appeared to have been strengthened by past two days of consolidation; bulls encouraged by failure of bear efforts to bring out liquidation; also by increase of $8M in brokers' loans, taken as sign of greater public participation (though a relatively small increase). Retailers strong following news of improving Aug. sales at Woolworth. Major industrials recovered vigorously from recent lows. Amusements, utilities, banks also strong. Volume increased as prices went higher, and “bullish demonstrations” spread. Rails and oils neglected. Market closed on day's highs. Bond market strong; Dow 40 bond average at new 1930 high of 97.29; high grade corp. strong; convertibles more active; govts irregular, little changed.

Market opinion now sharply divided; bears cite repeated failure to break through 241 resistance level, bad farm news, and recent bad business news; bulls point to market resistance to selling (volume drying up on declines), and to strong positive reaction to good news as indicating path of least resistance is upward.

August 16 1930

Stocks staged a sensational late rally attributed to “wild covering movement” by over extended shorts. Pessimism over drought affects on business had induced “perhaps the largest” short interest in history. Bears made some further attempts early, particularly against coppers. News of heavy rains in drought areas caused a short covering movement, at first cautious but turning into a rout in late afternoon. “Spectacular uprushes” in stocks under recent pressure including US Steel, J.I. Case, Vanadium; general market rose aggressively. Bond market dull; corp. and preferreds up, foreign govts. mixed, US govt. steady.

August 25, 1930

Alarmed by shrinking population, France budgets $45M to encourage large families; parents to receive $20 for second child, $30 for each additional.

Bulls encouraged by Pres. Hoover's statement tax cut may be continued, by some favorable business reviews, and by market action on Friday. Some unsettlement in oil group caused by decline in gasoline prices and high inventories in spite of recent reduction; however, weakness was moderate and didn't spread to other sectors. Major industrials and trading favorites strong, some reaching best levels since July peak. Tobaccos, banks and trusts, utilities strong. Bond market in Saturday session quiet but continued higher; most activity was in a few rails and industrials; Dow 40-bond avg. up to new 1930 high of 96.87.

Notice how bonds rallied very strongly much like they did early in 2009 before they suddenly mounted a very strong correction and are still trading significantly of their highs.

Editorial: Some have suggested banning short-selling as aid to business recovery. But recent market swings have not been due to short-selling but to public recognition of reduced earning power; similarly, farmland in Corn Belt has gone down by 2/3 from wartime level, though no one has been selling it short.

They blamed naked short selling recently for the damage caused to bank stocks and so they eliminated this practice. Time will tell if this ban on naked short selling was really a factor or not; we suspect that it simply delayed the inevitable. Weak banks are going to fail and should be allowed to be taken over or sink and not given extended life lines only to cause more damage down the line.

Sept 11

Market considered stronger technically from recent period of consolidation, move upward on higher volume; declines of June and early August are seen as having shaken out weak hands, as indicated by shrinkage in brokers' loans. Recent economic news has also been encouraging, including steel production, retail and mail order sales. Roger Babson's switch to bullish stance has also attracted attention. All indications point to good sized gains in stocks in the near future, though third-quarter earnings reports in a few weeks may change the trend.

An out-of-work broker asked a friend who owned a circus for work. His friend said the circus gorilla had recently died, and if the broker wanted to get into the gorilla's skin, swing around, growl, and amuse the children, he could have the job. Things went well until one day the rope the “gorilla” was swinging on snapped and catapulted him into the lion’s cage. The lion let out a roar, which the “gorilla” answered with a timid yelp. The lion roared louder, and the “gorilla” lost his nerve and started screaming for help. The lion came closer and whispered “Shut up, you damned fool, you're not the only broker out of a job.”

Sept 13

Current consensus is that “there will be a good advance shortly followed by a set-back before the end of the year”, when disappointing Q3 reports appear. However, when “predictions ... are so nearly unanimous,” market action may be contrary to the general opinion.

Conclusion

All the quotes posted under the section titled “after the crash” were obtained from this site. For more info click here

One can clearly see the similarities between what took place 80 years ago and what is transpiring right now. Once individuals are used to fast money they keep coming back for more and the only thing that can slow them down is a massive dose of pain. The dotcom melt down of 2000 only briefly stopped investors, a few years later they jumped into real estate and created another bubble and now they are trying their hands at stocks once again.

Banks are supposed to generate most of their money from loans; however the major banks are actually taking on larger amounts of risks by using the stock market to beef up their gains. In many cases the trading dept is producing up to 50% of the banks revenues. They are now using the money the government lent them to take on even more risks.

MR Durant was one of the richest men in Wall Street before the 1929 crash; he controlled over 4 billion dollars (4 billion dollars that time was an incredible amount of money, probably in the order of 1 trillion plus dollars in today’s money). After the crash he was left with just $250.

There are some differences or so called differences between what is occurring now and what took place last time

Last time round the Fed's immediately cut back on lending and drove up interest rates. This time round they have aggressively lowered rates and provided huge amounts of liquidity to the markets. The difference however is that in 1929 we were not a debtor nation, but now we owe money and continue to require huge infusions on a daily basis. Overseas investors are simply not going to keep lending money at such low rates. The fed is going to be forced to raise rates sooner or later and once they start raising them, they will have to do so rather aggressively to satisfy foreign investors. When you owe money you are no longer in charge, you answer to someone else; only the illusion of being in charge is left, the real power lies in the hands of those that provide the funding.

Second problem now; is that the private and government debt combined is over 400% of our GDP. They mask this fact by only quoting the government debt and private debt separately but combined these debts are now at unsustainable levels.

Third problem; the commercial real estate sector is threatening to fall apart.

Thus while many will claim that the situation is completely different, the main problem that caused the plunge last time is the very same problem that could be unleashed in the not very distant future. What was this problem? Inflation; in 1929 the effects were felt immediately because the Feds aggressively raised rates. This time there is going to be delayed effect because the Feds lowered rates but they are pumping so much money into the market that it would be almost impossible to avoid some form of run away inflation in the future that could very well spiral into hyperinflation.

Finally we were a strong manufacturing nation back then, now all we seem to be producing is boat loads of paper and debt accounts for over 70% of our GDP; this is an unsustainable trend. In order for this scenario to work, individuals must be willing to take on more and more debt (basically borrow forever) but with banks cutting bank on lending and home values falling in the toilet, the consumer has only one option, cut down debt or burn. The average consumer in the USA has no savings and has only started to save recently not because they wanted to but because they were forced to. Consumer credit dropped almost 22 billion last month, that’s the equivalent of a 10% decline on an annual basis and we suspect those numbers will rise. If consumers are cutting their debt levels, increasing their savings, then how is an economy that is based on debt going to recover. This is why we stated that the change in the spending patterns of the American consumer is going to affect every single nation; no other country purchases as much as America does and there is no immediate replacement. In the long run Asia can and will replace America but not within the next 3-6 years.

A 1 hour documentary on the build up to the 1929 crash and it’s after effects.

http://www.economicpopulist.org/?q=content/friday-movie-night-great-crash-1929-plus-1930s-fdr

 

Not to know what has been transacted in former times is to be always a child. If no use is made of the labors of past ages, the world must remain always in the infancy of knowledge.

Marcus T. Cicero, c. 106-43 BC, Great Roman Orator, Politician

Ultimate futures timing system

Tactical Investor

The Engineering of a Financial Crisis

Nothing is more common on earth than to deceive and be deceived.
Johann G. Seume, 1763-1810, German Theologist.

The Dow continues to put in new highs but our 3 moving averages of new highs are trading well off the highs they put in last year. The 20 day moving average (current reading = 640) of new highs would have to surge past the 2500 mark to have a chance of putting in a new high. Based on this week’s readings it would have to surge 400% from its current reading. It is very strange and disturbing that a market that appears to be strong is actually not as strong as it appears to be when one examines its internal structure.

V readings (our proprietary indicator that measures market volatility) have surged to yet another new high, we are now striking distance from hitting the 1600 mark. We cannot remember the last time when V readings put in 4 back to back new highs. In fact it appears that the surge (over 5.6%) in the past 4 weeks has set a new 4 week record.

Given the fact that the Dow has now put in a stunning 29 new highs and the volume has not once touched the 6.8 billion mark leads us to believe that some form of extreme manipulation is taking place. It is statistically impossible for a market to put in so many new highs on such low volume without something being amiss.

If one examines the history of the Dow (we have more than 100 years of history there), one will find that at any given point in time, the Dow trended higher on higher volume especially if it was putting in a series of new highs.

Before we proceed, we would like to list a few very important quotes.

“The budget should be balanced, the treasury should be refilled and the public debt should be reduced. The arrogance of Public officialdom should be tempered and controlled. And the assistance to foreign Lands should be curtailed, lest we become bankrupt.” CICERO, 63 B.C.

Thomas Jefferson the 3^rd president of the United States made the following quotes and did his level best to curtail the power of banks

“The Truth is that we can never satisfy their (bankers) appetite for money”

“Banks of issue were more dangerous to the liberties of the people than standing armies and the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale”

The power to issue money should be taken from the banks and restored to congress and the people”

President Jackson made the following statement in his farewell address “the banks of the United states waged war upon the people”

"It is one of the serious evils of our present system of banking that it enables one class of society - and that by no means a numerous one - by its control over the currency, to act injuriously upon the interests of all the others and to exercise more than its just proportion of influence in political affairs."

President Jackson killed the banks and restored the power to create money to congress. In his farewell speech (1837) he very clearly and openly stated the consequences that could befall a nation if the banks were allowed to take over? To read the full excerpt of President Jackson's farewell address click here

It is no secret that central bankers under the guise of trying to provide financial stability have been plundering every nation and manipulating the system to their benefit and to the detriment of the majority. However, things have now gone out of control. The following two facts should help provide support for this hypothesis.

The top 6 American banks have assets that are equal to 63% of U.S. GDP; let that figure sink in. Imagine that 6 banks have assets that are equal to 63% of the world’s largest economy. Effectively they can manipulate any system. If one were to treat these banks as a nation they would be in the top 5 nations of the world. Power corrupts and absolute power corrupts absolutely. These banks will seek to gain even more control and will stop and nothing, unless their legs are chopped off.

The Top 6 banks are engaged in over 80% of all over the counter derivative trades.

Were not banks created to lend money and help business grow? So why are they using this money to trade the markets. When you combine these two pieces of data, it’s all but obvious that the banks have a free role to do as they see fit courtesy of the Feds. The Feds are providing these banks with virtually free money and instead of lending this money out, they are simply pumping into the markets, setting them up for another monumental correction. The function of a bank is to lend money, not to trade; new laws should be introduced striping banks of their status if they earn more from trading then from their traditional business operations. Better yet they should be banned from trading the financial markets.

One could go even as far as stating the financial crisis was engineered to help create a few super powerful banks. It appears that this is the case for the banks have not lost any power, but instead we have fewer players with triple the amount of power.

These facts could help explain why the markets have simply continued to rise on vapour thin volume and why the precious metal's sector (Gold, Silver, Palladium, etc.) has refused to mount a strong correction in the face of a stronger dollar. Precious metals are the ultimate stores of wealth for they provide a hedge against the inflationary tactics central bankers employ to defraud the masses of their hard earned wealth via the silent killer tax otherwise known as inflation.

The Dow has put in 29 new highs and not once has the volume surged above the 6.8 billion mark. Take, for example, the latest high (Monday April 5th) volume was only 4.26 billion shares, half of what it was last year when the markets were rallying strongly between the months of March and July.

So why push the markets you ask when they have already made a ton of money? That’s where power, greed and arrogance come to play. Remember the quotes we listed above. Why would they stop if they can push it to the limits, destroy the psyche of traders and set up what appears to be a perfect trap. What do we mean by a perfect trap?

There are billions of dollars in the bond markets and while long term rates are slowly rising they do not even come close to the potential gains many have locked in the past 1 year. Imagine if bond players were pushed to abandon the bond markets, how much money would flow into the equity markets. Once this occurred the bankers could start to bail out for the billions pouring from the bonds markets would sustain their selling into rallies. Once out they could then start to build up massive short positions and eventually trigger a monstrous correction/crash. This would in turn trigger a rush into the bond markets as traders looked for a safe place to park their money and so the vicious cycle would continue.

Read the book “The coming battle by Lorraine Walter”. It is over 100 years old, and it explains how every recession, depression is actually engineered in advance. This is not hearsay it actually provides quotes showing how the bankers have done this in the past. You can purchase this book from our Book Store or by just performing a simple search on Google.

Some other factors to consider

The PPT (Plunge protection team has openly acknowledged its existence after hiding in the shadows for decades). This article provides some info on this topic. Full Story

The Fed is using every bogus excuse in the book to maintain low interest rates; the primary beneficiaries of this move are the big banks. They borrow the money for next to nothing (the average Joe cannot take advantage of this lovely feature) and then use this money to trade.

Our smart money indicator has remained in the neutral zone for months now. It sensed something was wrong and just moved into the neutral zone as it has refused to issue a sell signal.

Volume has always been important for it indicates market participation. Volume is shockingly thin and if it occurred once, or twice we could ignore it, but one cannot ignore the fact that the Dow has put in 29 new highs on sub standard volume; statistically, it is impossible to state that something is not amiss. Perhaps this is why our smart money indicator refused to issue a sell signal. This indicator has always astounded us for its ability to keep one on the right side of the markets. It moved into neutral territory and has remained there for several months. This was the very same indicator that issued an extremely strong buy signal in Feb of 2009 after remaining in the sidelines of an extended period of time.

The Baltic Dry index another leading economy indicator is well of its Nov 2009 highs; another indication that something is wrong.

If the Dow trades within or above the 10,999- 11050 ranges for more than 3 days in a row or closes above 11100 on a weekly basis, it could potentially trade all the way to 11,800.

Conclusion

There are many signs that all is not well.

Additional factors that also support the extreme market manipulation theory

1) In March 2009, there were less than 6 sectors with a positive score; today every single sector (roughly 200) has a positive score and only 1 sector has a negative score. Even when the markets were crashing; there were at least 5 sectors that had a positive score, but today even the worst junk has moved up significantly, and we only have on sector with a negative score. This shows you how extreme the current environment is; even the worst Junk has rallied significantly from its March 2009 lows and yet not much has improved since March.

2) Another very strong reason to keep the markets up is due to politics. The incumbent party does not want to lose its majority stake and a badly performing stock market on top of a terrible job market will be the fastest way to lose the top dog position. And as we all know by now most politicians are willing to sell their souls and those of others if they can for a price.

3) Our special futures to equity indicator have moved even more in favour of the futures market. The current score is 67 for futures and 33 for the equity's markets. This is a risk to reward indicator, and it is now stating that the futures markets (which are very high risk markets) offer a better risk to reward ratio than the equity's markets. Generally, when it is in favour of the futures markets the difference has been very small, usually 1-4 points. This is the first time in decades where the point differential has moved past 15. This gives you an idea of the potential long term risk associated with the equity's markets now.

As we stated before power corrupts and absolute power corrupts absolutely. A few large banks now control almost everything (at least it where it matters the most for example the supply of money) and can at their whims generate another massive selling wave. In times such as these where inflation is on the rise, a massive currency crisis is just waiting to occur, and financial markets are racing to the extreme zones, the best way hedge/protection is to have a position in precious metals (Gold, Silver, etc.). Gold has stood the test of time, can one say the same for any paper currency. Let’s not forget that the US has declared bankruptcy twice before. Those who forget history are doomed to repeat the very same mistakes again.

We will end with two quotes from the ‘The coming battle” by Lorraine Walter

“The greatest financial mistake of my life was in what I had to do with the passage of the present national bank act. It ought to be repelled; but before it can be done there will be such a contest between the banks on one side and the people on the other as has never been witnessed in this country”. Salmon P. Chase.

“fifty men in these United States have it within their power, by reason of the wealth which they control, to come together within twenty-four hours and arrive at an understanding by which every wheel of trade and commerce may be stopped from revolving, every avenue of trade blocked, and every electric key struck dumb. Those fifty mean can paralyze the whole country, for they control the circulation of currency and can create a panic whenever they will”. Chauncey M. Depew.

 

Ultimate futures Timing System

Tactical Investor

Perfectionism, the Art of Losing

I don't like these cold, precise, perfect people who, in order not to speak wrong,
never speak at all, and in order not to do wrong, never do anything.

Henry Ward Beecher 1813-1887, American Preacher, Orator, Writer

 

According to the low of paradoxes one never gets what one desperately chases or needs; one only gets it by seeking it. Desperation blinds the mind from being able to function optimally and therefore failure is all but guaranteed. Everyone enters the markets thinking they are going to win yet only 10% or so win in the long run; despite knowing these statistics there is never a shortage of new entrants.

Trying to win 100% of the time is another sure fire way to make sure that you lose almost all the time. Perfectionists usually have some deep rooted psychological fear which probably has to deal with some form of rejection earlier on in their lives. They try to compensate for this lacking (usually this is not real but just a false perception) by going overboard and trying to be perfect in every thing they do.

It is a given fact that long term traders by far win more often then short term traders; the reason is simple they are relaxed they have more time to analyse their moves, have patience and generally are much more disciplined then their counter part short term traders.

We are going to list 6 of our 13 investment rules below:

Tactical Investor Investment Approach

   1.       Divide your money into 10-15 lots. When you add additional funds to your account, divide the new money by 10 or 15 or create a brand new lot. In other words if you currently have 10 lots (lets assume each lot is 500 dollars) and you add an additional 500 dollars to your portfolio; divide the 500 by 10-15 and spread the money equally into each lot or create a brand new lot.

   2.       Each holding should have the same amount of money assigned to it. Never invest more in any one recommendation; this way if anything should go wrong you won't be blown out of the water. Most investors tend to lose not because of bad choices but because they are found to be lacking in the area of money management. The fastest way to lose is to spread your money unevenly.

   3.       Never dedicate more than 10% of your entire portfolio to options investing. Of this 10% never invest more than 2-3% per position. If you are options professional you could dedicate up to 20% of your portfolio to options (but do not invest more than 2-3% of this 20% per option play)

   4.       Remember that no one can win all the time. The market operates in cycles. Some quarters it is very easy to make money and some quarters are  a struggle just to stay alive. Do not fight these cycles; the market always goes through these phases. What you have to do is recognize them and act more conservatively during these very volatile and nerve racking times.

   5.       Have a goal, 20%, 30% etc; when your entire portfolio has hit your mark, consider taking a break or better yet risk only some of your profits. Just because you are paying for a service or services does not mean you need to try to squeeze the maximum out of it. If you hit your targets earlier consider it as surprise bonus and take time to enjoy the other simple things in life.

   6.       Try not to let your emotions influence the way you trade. There is no room for emotions when it comes to investing. Emotional traders almost always end up getting buried before their time.

Some more random thoughts on becoming a better investor

The long term Investor looks for a trend and buys early in the trend; he/she then rides the trend till it ends. You can get more information on this topic by clicking here. Let’s deal with the topic of Trading vs. investing. Short term traders look for  rapid gains, they prefer to extract the maximum profit they can from a stock, option, future etc. At least that's the concept behind trading, unfortunately most traders end up losing more than they win, and even when they do win, they usually end up making less than the long term investor.

A few traders do extremely well, these chaps fall into the 2%-5% category of overall players. Their gains are huge, but for the rest of the players loss is all they can hope to look forward too. The investor on the other hand, looks for a new trend and usually tries to get in right at the beginning of the trend. If he/she is more aggressive they try to get in when that particular market is putting in a bottom and has been trending sideways for sometime, indicating that the worst is behind.

Another error that is often made is to confuse long term investing with the rather falsely promoted policy of buy and hold. Long term investing is getting in early and selling when the trend is over. A classic example was the Internet mania of the 1990's. The time to buy was in 1995 and 1996 and the time to sell was late 1999 and early 2000, when many of the Internet stocks started violating their main up trend lines. Those that bought the buy and hold lie, ended up poorer then when they opened their initial positions in these stocks.

 

To be clever enough to get all the money, one must be stupid enough to want it.

Gilbert K. Chesterton 1874-1936, British Author

 

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Interest rates and Bonds

Long term rates have been slowly creeping up and bonds have been pulling back. We believe that an intermediate trend reversal is close at hand. Bonds are expected to mount a rally that could last a couple of months after which they are expected to resume their downward trends. Long term traders can use this potential surge in bonds too slowly ease into additional TBT positions; risk takers can purchase long term call options in TBT.

In the short to intermediate time frames, bonds could rally as high as 120 and possibly spike to the 122 ranges. Feb 2, 2010.

We still have daily and weekly sell signals, in effect. The first sign of a trend change would be a daily buy signal and the ability of bonds to trade past 118 for 4 days in a row. If bonds can trade above 118 for 4 days in a row, it will signal that they are ready to test the 122-124 ranges. If we get a weekly buy signal it would result in much higher prices and bonds could trade as high as 128 before pulling back. Even though the current pattern is suggesting that bonds could rally for several months in a row, this pattern will only be complete if it is confirmed with a weekly buy signal.

Right now we would advise long term players not to open up any new short positions via TBT and to actually consider taking some profits with the intention of redeploying this money later when bonds trade to the above suggested targets.

We will warn everyone via updates or interim updates when a new daily and weekly buy signal is generated.

Long term our outlook for the bond market is extremely negative but in the short to intermediate time frames bonds are expected to rally. The strength of the rally will depend on the signals generated (daily, weekly, etc.)

 

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Slavery and the mass mindset

 

Slavery in the true sense never disappeared, it has just changed. The chains have been replaced with cubicles and the only difference is that you now hold the keys to your own prison and you gladly, and willing incarcerate yourself.

The masters controlled the land in the old days and the people that worked the land, today they control skyscrapers and the people that work in them. What has changed? They have just sugar coated the deal. They provided individuals with the illusion that they were free, i.e. no longer tied to the masters who owned the land. Notice how many individuals gladly and proudly speak of working for a company for 20 plus years. The average person starts to work (we won’t count odd jobs that one might do while one is a teenager or while one is attending college) roughly at say 21-23 years of age, and they work until roughly 65 years. Thus roughly the average person works for 42 years, in this time the average vacation is roughly 1 ½ month, so in 42 years you get 63 months of vacation, which works out to roughly 5.25 years of time to do sit down and relax. Is this really freedom? One has just given the most valuable years of one’s life to have enough so that one can live a so called comfortable life in the worst years of one’s life. They called retirement the golden age, but it should be called the Bronze Age, for one has just given up gold in exchange for bronze. So is there any solution; yes there is, all one has to do is look for one.

In order to break free from the physical and mental prison one needs to see one’s predicament and only in seeing can one formulate a plan. It’s for this reason why most will never break free, why the mass mindset will always dominate, and why the same old tricks and scams work again and again. Ask yourself this question. Do you really think the top individuals are that stupid? Why is it, they never seem to learn from history, why is it that governments for some strange reason keep making the same mistake again and again? The truth is that they are not stupid; in a nefarious manner of speaking, they are in fact brilliant. They know that the masses forget, they learn nothing and that through the use of greed and fear they can achieve anything. It’s for this reason we will always have booms and super busts. Every cycle is engineered in advance.

This is a very long and deep topic, so we are only just scratching the surface but to bring about change all it takes is a desire to want the change. Thus if this topic has stirred enough interest, it has served its purpose for finding a solution is the easy part.

As for what one can do personally. As we stated before, if one can identify the problem one is more than half way at finding a solution. If you see the game for what it is then you are no longer a slave for you can formulate a way to break free. That is why one should never retire; retirement should be viewed as getting away from what you had to do, to now doing what you love to do. A retired mind is a dead mind.

Mass Psychology 101

 

It’s an old phenomenon but one that has only been brought to light recently. It is something that is encoded in all beings, we tend to feel comfortable doing things together. One can even see this in other animals, a flock of birds a herd of beasts, a shoal of fish, etc they all seem to follow a leader.

Mass Psychology is the study of group behaviour; the mass mindset draws comfort from the fact that everything is okay because the majority support this view point. In other words, an investor feels comfortable enough to buy technology stocks because it appears that everyone thinks that high tech is the way to go.

The way to profit from this phenomenon is to do something that is contrary to our upbringing and most of our cultures and that is to resist the herd mentality and try to be a leader. In any crowd, or group behaviour situation, the ones that lead are the ones that draw all the benefits, while the ones that follow blindly are the ones that take all the risks. This is very clearly illustrated in the stock market. Let's take the internet era of the 1990’s.

Investor who took the time to analyse what was going on, could see that the internet would revolutionize the way information was transmitted; the consumer would finally move from the passenger seat to the drivers' seat. They also noted with great interest that the public at that time was against or completely ignoring this sector; this is a key facet of mass psychology. They took positions in these stocks as early as 1994 to early 1995, with the majority taking stakes in 1996, the masses only began to awaken to this phenomenon in mid to late 1998, by 1999, there was a feeding frenzy as everyone simply piled in.

The leaders were alarmed at this behaviour, as they should have been, since this frenzy was not sustainable. Knowing that the end was near, they started to sell towards the end of 1999 and move their assets into cash and bonds, while the feeding frenzy continued. In March 2000 the markets started to correct and by the end of the year the main up trend line was violated and the market was ready to crash. By 2002 the market had lost more than 70% of its value and many of the masses who had momentarily tasted wealth were reduced to a state of poverty that they could not have envisioned a few months back.

1) The leaders represent less than 2% of the population yet take in more than 90% of the profits. Getting to this stage is not easy as it involves changing ones ingrained modes of.

2) You have to learn that whenever something is popular the end is very near.

3) That the time to take a position or start something new is when it is viewed with extreme negativity and disdain.

4) You have to learn how to fight the fear of selling out to fast after taking a position, remember it won’t just go up., most likely it could even go down a bit more or move sideways for months or even a year. The one area you can draw comfort from is this, the longer the sideways action the more powerful the upward move will be when it finally transpires.

5) Keep extra money to take additional positions.

6) In all likelihood you will have a 50-100% retrenchment in the first stage of the bull market, meaning that your shares could double only to fall back to the original value you purchased them at. This is usually known as the shakeout stage, whereby the weak hands are forced out of their positions and end up selling at rock bottom prices. Hold and the rewards are extremely huge.

7) When the investment suddenly becomes topopular be on guard and perform simple trend analysis on all your holdings, once the super main up trend. Wait patiently for the next opportunity to show up, there is always another opportunity.

This is meant to be a brief introduction into the very esoteric but highly rewarding field of Mass psychology, to do an in depth analysis would take months. When one combines Mass psychology with Technical analysis you truly have a very potent weapon that can be used very effectively to position oneself in the right investments and consistently be on the right side of the market.

The term contrarian investing was most likely derived from the study of mass psychology as it basically means taking a position that is completely at odds with the masses.

With that in mind, mass psychology has once more provided a new opportunity in the financial markets for the astute individual willing to take an early position and wait. Sectors that are going to explode even further in the years to come are the precious metal's sector, the energy sector, agriculture, etc.; virtually anything tied to commodities will do well in the years to come.

It would be wise to have a position in several of the key stocks in each sub sector of the commodity's markets. A starting point would be to establish a position in Gold and Silver bullion.

 

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