THE INTERNATIONAL FORECASTER 17, AUGUST, 2002 (#3)
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman Vol. 6- No. 8-3 (54pgs.)
Phone & Fax: 941 639 4756
NEW: E-mail: bif4653@comcast.net
US MARKETS
Starting in 1999, as the report by Commerce’s Bureau of Economic Analysis makes clear, before-tax business profits were overstated by a factor of 10%. As the presidential election drew closer, that discrepancy skyrocketed to nearly 30%.
In just the first six months of the year, stockbroker complaints are up 10% over last year with 3,700 filings. Over 11,000 will have filed complaints by year-end. In the first six months $72 million has been awarded investors versus $97 million in all of 2001. The win rate for investors increased to 57% from 53% in 2001.
The US situation regarding Iraq is very fluid, hence very difficult to report on. We’ve mentioned the many call-ups of guard units and disengaged personnel. We have recently been informed of attempted call-ups of special forces specialists who have been out of the military as long as 10 years, being asked to join the effort. US military concentrations are already in Northern and Southern Iraq, as disinformation and division fill the ether. Our special forces have been training Kurds since last March. Turkish Special Forces have moved into Tuhkman in the south of Iraq. US bases extend from Jordan to Georgia to Turkey. In early August the Iraqi air command and control center at al-Nukhaib in the desert between Iraq and Saudi Arabia was destroyed by British bombers and US fighters using new precision-guided bombs capable of locating and destroying fiber optic systems. Then Turkish commandos took Bamerni Airport in northern Iraq. This opens up the facility for American and Turkish transports to deliver men and equipment. There are now 5,000 Turkish troops and air force inside Iraq. This isolates two oil fields, which the US can now defend to make sure they are not destroyed. It is difficult to predict the Iraqi military response. Some say they’ll bunker in Damascus and make US troops fight street-to-street, house-to-house. Others see a missile or bomber attack on Israel using warheads loaded with radioactive, chemical or biological materials or a missile-terrorist strike to destroy Saudi oil fields. No one knows which way Saddam will move and how powerful his forces really are or where they will strike. They could coordinate an attack on Israel from the east with a Syrian-Hizbollah strike from the north. There is no question now there will be war. It’s just a question of when.
1,450 New York City Board of Education employees were arrested last year or 1% of the 137,000-member workforce. Crimes included were 398 for possession/sale of narcotics, 348 for assault, 181 for robbery/theft and 30 for sexual abuse. Arrests jumped 18% since 1998.
Alarm bells are starting to ring over the creditworthiness of life insurers as the extent of their exposure to many troubled companies becomes clear. In recent weeks their bonds have drifted wider than those of banks, indicating investors are demanding a bigger premium in return for increased flexibility. AM Best, which rates insurance companies, has been closely watching to see which companies are exposed to troubled companies, especially those rated below investment grade. Best has recently downgraded Allmerica Financial and American Equity Investment Life Insurance. Insurers have already lost $23 billion on WorldCom, Dynegy and Qwest. Those with the largest exposure include AIG, Met Life, Aegon USA and Prudential Financial. Moody’s and S&P have downgraded the industry from stable to negative. They are worried about increased losses on credit instruments, lower value on equity holdings, increased requirements for certain death benefit guarantees and growth in fixed annuity products. What will they do if the Dow hits 4500? We expect like others the insurance industry is in for a rough ride.
Sir Alan Greenspan told the Congress’ Joint Economic Committee that there is no housing bubble. That’s from Sir Alan’s lips to God’s ears. We have news for Lord Greenspan; he’s either incompetent or a liar. Besides London where can you pay $400,000 for a $200,000 home? Today 10% of all US homes are worth over $1 million.
America’s homes today are worth just $3 trillion less than the still greatly overvalued US stock market. For this opportunity, Americans spend 42% of their annual income. This puts the average family just a few paychecks away from bankruptcy and default. The accelerated growth in housing values began in 1994 and this fiction is still with us. A creature of the misuse of Fannie Mae and Freddie Mac, which control 80% of the mortgage market, 97% of their assets are derivative borne and the majority of their derivatives are written by only six banks. This financial legerdemain has the housing market 150% over what it would have been without their intercession. It is our estimate that overall homes are worth half of what they are selling for. That, of course, is graduated downward in value; a $200,000 home being overvalued by 20-25% and multimillion homes by 50-70%. Even worse Fannie Mae’s bonded debt is over 10 times greater than any corporation in America. Once housing collapses so will Fannie Mae and Freddie Mac. Thus the world financial system will collapse. Housing prices and low interest rates are being used to support consumer spending and the economy and that cannot go on indefinitely.
No one wanted to believe us, but prices are falling. The combination of a weak and slowing economy and brutal worldwide competition is making the US economy look like a bargain basement just as we predicted. 30% of categories measured by the CPI fell in June from a year earlier. The index was up year-to-year but only a paltry 1%, obviously the results of increases in services. The economy hasn’t seen a decline since 1955 and the last sustained decline was in the early 1930’s. Clothing prices fell 2.7% from a year earlier due to imports from slave labor factories in China and Bangladesh. PC prices fell 28.9% and wine 0.2%. We may be the only publication predicting deflation and depression. Don’t worry though; the other 99.9% of the experts will catch up in a year or two. Increases came at hospitals 7.8%, cigarettes 8.8%, and wine at restaurants 7.8%, ice cream 7.1%, vehicle and insurance 7.0%.
Treasury Secretary Paul O’Neill is the next designated point man on the economy. Sir Alan Greenspan is taking too much heat. The central banks and the Bush administration don’t know what to do to stop the oncoming depression. We have just had major failures in Argentina, Uruguay and Brazil with a promise of $31.5 billion in aid, but nothing for Argentina. US banks will get their $27 billion back, but European banks are hung out for $82 billion. This does not count US corporate investment of $55 billion in Brazil. Debt in those three countries is over $600 billion. Latin America on its own could take down the entire financial system.
Opposition to an Iraq war builds by the day in Europe and in the US. Even elitist Brent Snowcroft, Bush Senior’s National Security Advisor thinks we shouldn’t go into Iraq. Rep. Dick Armey says, “I don’t believe that America will justifiably make an unprovoked attack on another nation. It is not consistent with what we have been as a nation or of what we should be as a nation.”
Our President, Napoleon Bush spoke about the economy on national TV, as did Sir Alan Greenspan; the result was a 240-point drop in the Dow. They obviously get little respect, but do they really deserve any? Every time Napoleon or Lord Greenspan is going to speak we precede these events by shorting the market. Thus far it has been a foolproof system. Incidentally, this dynamic duo was also responsible for bond prices soaring and the new benchmark 10-year Treasury yield dropping from 4.21% to 4.09%. Is this panic or is this panic?
Ford’s 7.25% 2011 bonds saw spreads widen 35 bases points to a record 420 over treasuries. The spread widened 95 bases points this week and is up 240 bases points since late May. GM’s spread is 304 over Treasuries up 40 points this week and 200 since May.
The latest monstrous act by Napoleon Bush is to have certain individuals whom our leader or other high-level members have designated as terrorists, to be subjected to summary executions by either Fatherland Security Operatives, US Intelligence Operatives, and in some cases US military personnel. The presidential directive applies to both US and foreign citizens outside and within US territory. Now we have an official murder incorporated.
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STATISTICS
Over the last three weeks US corporations bought back $49 billion worth of their shares. The reason is they want their share prices to hold up. CNBC’S talking heads over and over told us they were buying out of patriotism. They must think we are stupid. Navistar will lay off 400 workers at its Chatham, Ontario plant. They produce 19% of US heavy trucks. US Airways Group has sought bankruptcy. Dynegy won’t pay dividends on Class A & B common shares for the third quarter and it doesn’t foresee reinstatement of the dividend soon. The NYSE will delist Conseco. May Department Stores report second quarter sales were off 4.9%. On 8/13/02 the Treasury sold $26 billion in four-week bills, of which $6 billion was fresh cash. On 8/13/02 Freddie Mac sold $5 billion in three-year preference notes. American Airlines will overhaul its hub system and eliminate 7,000 jobs. US Airlines lost $4 billion in the first six months of the year. Sales at chain stores fell during the first retail week of August off 0.5% after an only 0.1% rise the previous week. Moody’s reports corporate borrowers defaulted on $42.6 billion in bonds during the second quarter, double first quarter defaults. IBM will cut 14,600 jobs in computer services. 30-year fixed mortgages just hit 6.18%. On 8/13/02 the 10-year Treasury note went to its lowest yield in 39 years to 4.08% with the 30-year at 4.97%. Due to zero financing auto sales for June and July were up 4.2%. Without auto sales, however, retail sales in June would have only been up 0.5% and in July 0.2%. Agere is to cut 4,000 jobs.
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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
We predicted South Africa would become a quagmire for gold and platinum share investors and that unfortunately is becoming a reality. “We have no intention of going into South Africa,” Pierre Lassonde, president of Newmont Mining, declared. He said the country had become a high risk for investors because of worries that the government might nationalize some of its mines. Invest there at your own peril. The Congress has said blacks that were discriminated against during the apartheid regime should control all mining industry assets within 10 years.
Investors are you listening? We warned you what the Marxist government was up to months ago.
DeBeers first half profit was off 59% due to loss of income from Anglo American. Debt fell to $2.1 billion from $3.2 billion and diamond stocks fell to $1.9 billion from $2.5 billion in June 2001.
DeBeers’ profit margins have slipped to 10% from 15%. Its fortunes are tied to a US economic recovery, which we don’t believe will occur. The company controls two-thirds of the $50 billion annual market for diamond jewelry and its slipping control of the world diamond market will continue to hamper the bottom line. They now are going to pay for treatment of AIDS patients, none of whom will survive. That will cost the company plenty. Worse yet, as we predicted, the black Marxist government wants 51% control of all mining operations in the country within 10 years. The game is over. Sell DeBeers and all other South African mining stocks. There are too many other viable alternatives.
The US mint sold 48,000 gold Eagles in July or 60,500 ounces up 20.6% from a year earlier.
After our experiences in Africa we are surprised it took eight years for the socialist/tribalist/marxist government to begin confiscation of South Africa’s most productive industries. South Africa’s main problem is that it is a third world country with a wage base that is too high to compete with the rest of the third world. White flight over the past several years is turning into a flood that will only get worse. Local Africans simply don’t have the education and intellectual base to compete in the first world. A year ago the government came to the realization that all the wealth accumulated by the white governments since the early 1600s had been squandered over seven short years. They then realized the easy way out was to semi-nationalize industry, the most profitable industry, mining. We predicted it some time ago and unfortunately it is happening. The apartheid collapse was caused in part by the political machinations of the very mining groups now being penalized, particularly Anglo American. We wrote an article in 1975 for de Bleed, a Johannesburg daily newspaper entitled, “Harry Oppenheimer the Cross South Africa has to bear”, after having lunch with Oppenheimer and others at the Chamber of Mines. Needless to say, we left in a hurry as the government began an investigation of the article. We could see that Harry Oppenheimer, the South Africa Foundation, their CFR, and other major mining companies and banking and insurance companies were selling South Africa down the river. Unfortunately, as it turned out we were right. After the Soweto riots in 1976 we stopped recommending South African shares and moved into the North American mines. We missed the lush dividends but knew right well that it was only a matter of time before what had been an idyllic society was about to be unraveled. The mining sector is the country’s largest taxpayer, its biggest exporter internationally, and its most competitive industry. Its ownership is white as is its management and that stops black empowerment. The black Africans realize they cannot effectively run these companies, so as a compromise to themselves they’ll allow white ownership to retain half their interest and in this way black management won’t destroy their operations. This way they can also demand many more lower managerial jobs for blacks. As you know there is now a quota system for blacks in jobs as there is in the US. This has caused many businesses to close down or not expand. We know of numerous foreign firms who wanted to set up office there, but decided not to when told of how many totally unqualified Africans they would have to hire, including the new local director. A black government in South Africa is a recipe for ultimate economic, social and financial disaster. Just look at every other black run country in Africa. As long as black Africans demand a free ride stability can’t last. Every white African knows this and the country is simply living on borrowed time. The black Africans will never be able to run South Africa because they have no capital base and lack the skills to do so. The first step was the removal of the right to land and minimal reserves previously held in perpetuity by the mining houses. This is painful for mining management but even more so for shareholders. In fact a good part of the large gains in mining shares over the past three years was the flight from the depreciating rand, which fell from 5 to 13 to the dollar due to government ineptitude. The new charter calls for the transfer of ownership of at least 51% of the mining industry assets to historically disadvantaged South Africans over the next ten years. We’ve heard this logic in the US since the 1950s and our quota system has cost our economy and culture heavily. This is simply confiscation of private assets. We do not hear a peep from the world media in opposition. That is because the elitists control the world media and they have decided that they will give these assets to a black African government that will in turn squander them. Who cares about the shareholders, obviously no one? The mine managements on one hand say this is terrible, yet on the other hand they tell shareholders everything will be just fine. Well it won’t be fine. You are being lied to and it is only a matter of time when the cost of removing precious metals and stones from South Africa will go sky high. The whole mindset will be changed. The black African will mismanage and work less because he now owns part of the mines. You have to live with these people to understand the mindset you are dealing with. You can’t view it from afar and if you do you will pay a stiff price for your inattention. This vast transfer of assets is insane and stupid, but dear shareholders, this is reality. South Africa will not get any further investment and will quickly economically and financially deteriorate just as they have already socially deteriorated. There will be no further reasonable debate. The golden goose has been slaughtered. Those of you who own South African shares should sell them as soon as possible and switch to safe North American unhedged mining companies, such as *Agnico Eagle (AEM-NYSE) and *Goldcorp (GG-NYSE). If you don’t you will be very unhappy. After 42 years in this industry we know what we are talking about. From here on out the situation can only get worse. This move has really little to do with black empowerment. It has everything to do with grand theft. Its game over.
During the years from 1995 to 2001 the U.S. Dollar went straight up, moving from 80 to 120 against a basket of foreign currencies. That put pressure on gold because gold is denominated in Dollars throughout the world, and gold dropped from $417 to $252. Silver is considered “poor man’s gold”, so it also declined, from $6.15 to $4.00 during the same period. It is now trading near $5, and it appears poised to move higher as the Dollar gives back some of its gain.
The probable explanation for the strength of the Dollar is that the U.S. stock markets were surging to unsustainable record highs and investors all over the world wanted a piece of the action. To buy U.S. stocks they first had to convert their own currencies into U.S. dollars to pay for their U.S. stock purchases. That helped to push the U.S. stock markets upward, but now that a lot of excesses are being drawn out of the stock market, both U.S. and foreign investors are dumping stocks and putting their capital into other investments. For a foreigner that means they must convert the Dollars they receive for stock sales back into their own currencies to repatriate their capital. This depresses Dollars and boosts the values of the other currencies, making it more attractive for them to purchase gold and silver, helping to boost their prices.
The U.S. stock market could continue to be soft as additional accounting scandals come to light and as many investors lose faith in the integrity of U.S. business. There is also a potential for decline as P/E ratios, which ran to as much as 38 xs on the Dow, continue their decline from their current 24x to a more normal level under 20x, possibly 15 xs. That continuing pressure on the stock market should keep pressure on the Dollar, helping to support gold and silver prices. In the meantime, investors could ignore the gyrations going on in the stock market and focus only on the economy, which may be improving in spite of a declining stock market.
If investors view the economy and stocks as two separate entities, with the economy improving by itself while ignoring whatever gyrations the stock market goes through, it is probable that silver will appreciate because of its characteristics as an industrial metal. Silver usage is particularly strong in the electronics industry, which has been hit especially hard in this mini-recession, but is showing signs of improvement. This could give silver two reasons to appreciate in price: 1.) A declining U.S. stock market keeping pressure on the Dollar and encouraging investment in precious metals, and 2.) an improving economy increasing consumption of silver for industrial use.
On the other hand, if the stock market stays weak, it would slow the economy, meaning a reduction in spending by consumers. Two industries most heavily hit would be auto sales and home building, both large users of Copper. Because only one-fourth of silver production comes directly from primary silver mining and the other three-fourths comes as a derivative of copper, lead, gold and zinc mining, any slowdown in consumption of those basic metals and cutbacks in mining would automatically reduce silver production. If we see and extended slowdown in economic conditions we could see a swing away from paper assets (the stock market) to hard assets (precious metals).
The stage has been set for a possible sharp rise in silver prices by a substantial reduction in silver supplies in COMEX warehouses. A decade ago there were 275,000,000 troy ounces stored there, but today it is only about 100,000,000. Silver prices could move higher either way the economy goes: 1.) Any sudden improvement in economic conditions indicating a potential increase in demand for silver for industrial use; or 2.) Any further deterioration in the stock market indicating a potential increase in demand for “flight-to-safety” assets.
2001 was another year in which the silver supply was less than demand, by a total of 16.8 million ounces, most of which was made up by government sales, with China being the largest seller. China is thought to be nearly out of government supplies, so it should now require higher silver prices to entice silver away from hoarders.
There are many ways in which to approach investment opportunities in the Silver market. One avenue is thru the leverage and risk management on option on futures contracts. The following may be worth consideration:
1. March silver prices are presently at 464.00. One may wish to simply buy outright calls which limit the risk to the premium paid and has the potential for unlimited profits. Traders could consider buying the March 2003 silver calls with a strike price of 550 for 5.5 cents or $275.00 each.
2. One may also wish to consider the December 2003 silver 600 calls for 8 cents or $400.00 each.
3. Another alternative worthy of consideration would be the implementation of a spread thru the use of options to lower the market movement needed to recoup ones costs from the premium. One may consider the March silver 500call to buy and simultaneously sell the March silver 550 calls paying the difference would equate to your risk. The March 500 calls are presently 14.5 cents or $725.00 while the 550 call is 8 cents or $400.00. The difference in premium is $325.00, which is your risk excluding comm. &fees. The potential gain is the difference in the strike prices minus the premium, which in this example would be $2175.00. The market needs to move to 506.5 by option expiration to break even.
If you wish to learn more on silver and or trading strategies please Visit David Morgan‚s web site at www.silver-investor.com. You may also reserve your order for his extreme silver leverage report by visiting his web site, emailing him at silverguru22@hotmail.com or phone the Toll Free number at 877-610-9962
Lastly, those that wish to can write to:
Stone Investment Group
21307 Buckeye Lake Lane
Colbert, WA 99005
Disclaimer: This publication is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or sell or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Man Financial Inc. or any of its officers, directors, employees, affiliates or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. All investments are subject to risk, which should be considered prior to making any investment decisions. Privacy policy available upon request.
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