Commentary for the Week of March 8

We’ve told subscribers to expect the broad averages to drift lower as long as the Cyprus annoyance persists. The Dow did indeed fall yesterday -- by nearly 100 points -- raising the question of when a drift would officially become a rout. Not yet, for sure. Nor could it, in our estimation, unless the affair takes the sort of catastrophic turn that few seem to expect. In the meantime, Wall Street pros must be getting anxious about having Cyprus “fixed” as soon as possible so that they can get back to business-as-usual. Pumping stocks full of hot air is what they do, after all, but as long as the dark clouds of a fifth eurobank bailout are hanging over the markets, the psychological conditions that make their ruse possible will perforce remain unfavorable. If and when Cyprus finally caves to the demands of Germany and Europe’s banking establishment, we’ll probably never know how close to a collapse the global financial system may have come. Suffice it to say, those who will claim that the whole affair never posed a major threat will be dead wrong, although they will be the only ones quoted by the news media as Europe’s ginned-up  “solution” takes root.  In fact, whatever remedy is spun, it will not allay the suspicions of depositors both large and small that what has happened in Cyprus could happen again elsewhere.  Doubts are certain to persist, and to grow, and when policymakers try to mollify the doubters, the unintended effect will be to make the next bank failure even more difficult to manage. For some of us, at least, there is already a sense of foreboding about how the ultimate failure of the Bank of Cyprus will loom large in books about how the financial system came one day to

[The following guest editorial was written by a regular contributor to the Rick’s Picks forum who goes by the handle 'Ragnar'.  His past essays here have generated a tidal response.  RA] Most start-up companies are founded on an idea, unbounded enthusiasm, hard work, and luck.  Without luck or exceptionally deep financial wells, most of them fail. There is a bon vivant spirit within the workplace, like everyone is contributing to the establishment of something great; and everyone participates in the flair and the excitement in the air.  Huge sale-commissions are part of the mix; expert managerial techniques usually are not.  The name of the game is market share, market share, market share for companies based in new fields or on new ideas, particularly in high tech fields. I knew that the housing market was going to fall hard after 2003, and that it should have hit a wall that early, and I told everyone who would listen. But I am not a billionaire like John Paulson.  He found a way to reap billions from this calamity.  I did invest in gold at $300 per ounce but did not find a way to reap billions.  The principal players in the private equity and hedge fund companies (often the same people) have become billionaires in this field of activity, which started burgeoning in the ‘90s.  Of course, anyone at this time in financial history who had the contacts and the chutzpah to borrow, leverage to the hilt, or convince investors (primarily pension, university, and other foundation funds with large amounts of capital) that they were the best choices to handle their funds had odds that highly favored success.  Were many of them brilliant?  Undoubtedly.  Was luck a more important ingredient to their success? To answer that question, let’s ask some more questions. 

Goldman Sachs called the Cyprus bank bailout a big deal, according to someone who posted in the Rick’s Picks chat room yesterday morning. Whether true or not, as far as Wall Street is concerned the bailout and the punitive measures it will bring against depositors barely even merited a yawn.  The Dow Industrials fell a meaningless 62 points yesterday in response to the news. The close was up sharply from overnight lows that equated to a 180-point drop in the blue chip average. We were braced for a 250-point plunge ourselves, but buyers came after index futures so aggressively early Monday morning that it seemed a foregone conclusion that they were treating Cyprus’ banking problems not as a crisis, but as an opportunity to gorge themselves on stocks at temporarily reduced prices. We editorialized yesterday about how the bailout, by slapping a tax of 6% to 10% on depositors, was setting a bad precedent that could send European deposits scurrying for the ostensible safety of U.S. Treasurys and even gold. Both got a small pop, but certainly not enough of one to suggest investors are the least bit spooked. T-Bond futures rallied about three-quarters of a point while Comex April Gold rose $12.  It wasn’t urgent buying that pushed bullion higher, but rather the vague feeling that the crime syndicate that holds gold prices down had simply pulled their offers and were allowing quotes to drift, unmolested, as high as the news was going to take them. Old News Meanwhile, the airwaves were filled with reports critical of Europe’s (i.e., Germany’s) decision to squeeze $7.8 billion from depositors to unlock emergency loans. A Washington Post story, Markets Drop Amid Euro-Crisis Fears over Cyprus Bailout, led Google’s news page for a couple of hours, but it was already yesterday’s news when

“What rough beast, its hour come round at last, Slouches towards Bethlehem to be born? With the Dow Industrials trading at record heights last week, Wall Street and its news-media shills boldly ratcheted up the hubris to levels unseen since the dot-com bubble popped exactly 13 years ago.  All news is good news these days, it would seem -- especially fraudulent employment data spun to suggest that boom times are about to return to the U.S.  As far as we’re concerned, however, the real news is in Cyprus, where the latest eurobank bailout perfectly describes the sort of seemingly minor trouble that could cause the global financial system to implode overnight.  Will Cyprus’ banking problems prove to be the black swan that author Nassim Taleb famously described?  Unfortunately, for reasons Taleb took pains to explain, we won’t know the answer until it’s too late.  But it’s hardly inconceivable that this measly €13 billion bailout could trigger a sequence of events with global implications. On the surface, it’s hard to see what could be even remotely troubling about the sight of nervous depositors queueing outside the Bank of Cyprus. As far as investors in the U.S. are concerned, the depositors might as well be Yap Islanders trying to exchange paper receipts for stone money. Trouble is, Cyprus is a major haven for the untold loot of Russian tycoons. And while it’s one thing for Cypriot riff-raff to get skittish about the safety of their nest eggs, the Russian oligarchs are another matter. Were a whiff of fear to hit their sensitive nostrils, deposits they’ve stashed all over Europe would scurry for safety elsewhere, presumably into U.S. Treasury paper and – wouldn’t this be a novel turn of events? – gold. Jeopardy for Depositors They have good reason to be skittish, since

Price-rigging and deceptive advertising are so prevalent among broadband carriers that getting a good deal can pose quite a challenge -- not only for the unschooled customer, but for the kind of shoppers who read Consumer Reports each month from cover to cover.  I know this because I recently compared carrier deals when my monthly Comcast bill threatened to hit $300. This exorbitant sum is in addition to the $400 I pay Verizon for family wireless service, and another $400 for real-time stock-market data. My Comcast package includes nothing fancy – just two phone lines, 30mb speeds and a modest package of TV shows, movies and HBO.  I’m not a big TV-watcher, to put it mildly, and if I could pay what the service is actually worth to me, I’d send them a check every month for $14.95. Try explaining that to the kids.  For another hundred bucks, you get 800 channels, but after you’ve gone through the movie inventory once, you’ll be in a re-run hell so repetitious that even The Godfather, Parts I and II start to seem stale. My goal of cutting the $290 bill in half seemed do-able because Comcast itself was promoting a $90 package geared to home-based businesses.  The salesman I spoke with said that with a modest downgrade of my TV fare, the new package would cost me around $140.  Great, I thought.   How wrong I was. For starters, I was about to commit the capital crime of eliminating channels that my wife watches. Even worse, after I’d done so, she learned about it when she switched on the TV and got a test pattern.  I argued that I was saving nearly $160 a month, but her expert witnesses worked up a set of numbers that proved, with taxes and fees included, I’d

Few exchange-traded investments have visited more pain on shareholders in recent years than bullion stocks.  Even now, amidst a spectacular surge in the broad averages, gold and silver mining shares have done little better than languish, making the pain even more acute for long-term precious-metal bulls.  Is it time to bail out of them? We think not, even though it looks like two popular mining vehicles, GDX and GDXJ, may have further to fall before they hit bottom. We’ll explain in a moment, but you can also click here to access a recent interview on the subject that we did with Al Korelin of the Korelin Economic Report.  So how much more damage should we expect?  GDX, an exchange traded fund (ETF) that tracks a broad portfolio of mining stocks big and small, has already fallen 47% since September 2012, from a high of $67 to a recent low of $35.57. We think it will shed another 15% of its value, dropping to exactly $30.34, before hitting bottom.  As for GDXJ, which measures a basket of junior mining issues, it looks primed for a washout to $13.15, representing a 12% decline from the recent bear-market low at $14.95 and a 70% fall from 2010’s summit at $44.86. If our expectations are borne out, we think the selloff will be worth enduring for two reasons: 1) the respective targets, “Hidden Pivots” identified with our proprietary  technical tools, look like back-up-the-truck buying opportunities, and 2) if a bear-market low is indeed nigh, the initial leap from Mindanao depths is going to be breathtaking -- so powerful that any further losses suffered between now and then are going to be recouped in mere days. In the meantime, long-term investors may simply want to visualize better times ahead as they prepare to weather what

Here’s a Wall Street Journal headline to brighten your day:  Freshly Flush, the Consumer Is Back.  A little premature, wouldn’t you say?  Are you feeling flush?  That’s what we thought. Of course, this kind of hubris is always going to go down a lot easier with the Dow Industrial Average trading at all-time highs, as it currently is. But isn’t this the way major tops are supposed to feel – i.e., with a bullish drumbeat from the news media so shrill and persistent that we skeptics are about to bleed from the ears? We’ll give the Journal credit, though, for showing a little more restraint than “Easy Al” Greenspan did when, stumping for home equity loans, he repeatedly described inflated real estate values as “wealth.”  The Journal avoided repeating this egregious falsehood by noting with a touch of reserve that Americans are “feeling” wealthier because of rising home values and share prices. No matter that stocks are being kept buoyant by an unprecedented tide of easy money, or that the rise in home prices has been slight, or that the dead-cat bounce in real estate is occurring because cheap loans for poorly qualified buyers have been resurrected with a vengeance by GSEs whose swagger has unsurprisingly returned.  And it hasn’t exactly hurt our collective “feelings” of wealth that the Federal Reserve has been warehousing virtual mountains of shoddy paper for U.S. banks. The pretense that the U.S. banking system is somehow healthy at a time when the central bank itself is swollen to the bursting point with toxic debt is the folly of this age. Stupid and crazy as the idea is, it got a big boost yesterday with the announcement that 17 of America’s 18 largest banks had passed a “stress test” conducted by the Federal Reserve. This ceremonial

One of Rick’s Picks’ specialties is introducing relative novices to seemingly sophisticated option strategies that work. If you don’t think you’re capable of doing “butterfly spreads” in an $800 stock like Google, click here for a free seven-day pass that will allow you to talk to some Rick’s Picks subscribers, including some options rookies, who have done it.  We can tell you right now, however, that multi-sided positions such as butterflies, verticals and calendars have a far better chance of succeeding than simply buying puts or calls, as retail customers are wont to do. Here’s the straight skinny: In the forty or so years we’ve been trading options, we’ve yet to come across anyone who has made money consistently by buying options on a bullish or bearish hunch.  Because options are so knowledgeably priced, that’s akin to betting against the house. And any bettor who thinks he’s smarter than his bookie is bound to come out a loser. The way around it is to always sell puts or calls against options you have bought. That is what we did about five weeks ago in Google when the stock was trading for around $750. Specifically, we told subscribers to buy the March 840-850-860 butterfly spread four times for 0.20 ($20). This implied shorting two 850 calls while simultaneously buying an 840 and an 860. Our total risk, including commissions, was about $100.  Although we are perennially bearish on the stock market, that doesn’t mean we always bet against it. Most of the time, we prefer to take long and short positions at the same time. In this case our bullish play in Google was balanced by a put calendar spread in the Diamonds that gives us cheap leverage if the market falls between now and June. Certainly not impossible. Our counterplay

A recent news story confirms that paper-shuffling is still by far the highest-paying job in America. A Jumbo Payday for Deal Titans was last week’s big story from the smoke-and-mirrors aerie of high-finance. Nine men -- there were no women in the group -- at private equity firms including Apollo Global Management, Blackstone Group, KKR and Carlyle Group will bank more than $1 billion in dividends and compensation for deals they put together in 2012. This may come as good news to, for one, realtors struggling to unload $20 million mansions in Aspen, Bal Harbour and New York City, but economists will find little reason to celebrate. For in fact, all nine of these billionaires combined did not add even a single widget to the nation’s  economic output.  Their relatively modest contribution was to have realized “value” for their own shareholders, chiefly in the form of rising stock prices. The Nine are regarded as Wall Street’s very best and brightest, for sure. But it remains to be seen whether their exalted reputations will survive the next bear market.  For in the investment world, as we know, genius is a rising stock market. And this bull has had plenty of help from a desperately reckless Federal Reserve. It would be no exaggeration to say that the Fed's brand of loosening has made it much easier for the likes of Henry Kravis, Leon Black and Stephen Schwarzman to raise $10 billion for a buyout than for a small-businessman to get a $20,000 loan. Leaving ‘Sage’ in the Dust It’s striking that The Nine have racked up such stellar numbers at a time when the Sage of Omaha himself supposedly has been struggling to find companies worth buying.  Counting the 50% stake he is about to take in H.J. Heinz, Buffett has done