Commentary for the Week of March 8

H.L. Mencken famously wrote that no one ever went broke underestimating the intelligence of the American public.  With kids lining up at Apple stores last week to buy the latest iPhone, mightn't that be a timely cue to short Apple shares for around $700? To us, at least, it seems pretty stupid to pay Apple’s inflated prices when one can get a perfectly good, discounted Android phone from Samsung for half the price. And speaking of Samsung, we think Apple may have darkened its own karma when they sued their Korean competitor over a few trivial patents, extracting  a billion dollar settlement  (and never mind that, on appeal, Apple is seeking yet another $700 million from the same lawsuit). World-beating companies that pride themselves on innovation shouldn’t have to sue the competition for billions of dollars over design features that any Carnegie Mellon or Pratt sophomore would have incorporated in a phone-display schemata. So are we shorting Apple shares?  Quite the contrary, actually. On Friday, even as we advised subscribers to cash out of a winning AAPL bull calendar spread initiated well below current prices, we were attempting to replace it with some Nov 730 -Oct 730 calendar spreads legged on for $8 or less.  The spread would yield terrific odds if Apple shares were to rise by another $30 over the next few months. (Click here for a free trial subscription that will get you real-time notifications.)  Apple looks like a shoe-in to go at least somewhat higher in the days ahead, having finished last week above $700 for the first time. And yes, we are well aware that the company has embarrassed itself by releasing a map application with the new iPhone that totally sucks compared to Google Maps.  Of course, the kids who are lining up to

[The weekly column I freelanced to the Sunday San Francisco Examiner in the late 1990s was as relentlessly bearish as my Rick’s Picks commentaries are today.  However, the essay below, published in 1997, was a notable exception.  Its thesis was that U.S. companies both large and small were perfectly positioned to benefit from the emergence of a global middle class.  Alas, America’s manufacturing sector instead moved offshore even as our multinational banks bulked up massively on steroids. We now know that the world had no need whatsoever for a 'financial superpower'; rather, what it does need, and thrives on, are the tangible goods and real wealth created by such emerging economic superpowers as China, Brazil and India. We can only hope that when the U.S. banks’ inevitable steroid breakdown has run its course, the U.S. will return to making money the old fashioned way. RA] U.S. stocks have been in a scorching, vertical climb for months, confounding the bears and effortlessly vaulting the immediate expectations of the most ardent bulls. What factors might they have overlooked in gauging the market? Could there be forces at work more powerful than the steady earnings growth and low inflation usually cited as key reasons for the longevity of this bull cycle, now well into its seventh year?  I believe so. A more plausible explanation may lie in the relatively recent and rapid emergence of a vast, global middle class, particularly in Asia, Eastern Europe and Latin America. To the extent this trend creates a burgeoning new marketplace for a wide variety of goods and services, U.S. companies stand to benefit the most, since they are indisputably the best in the world at meeting its demands. The point was driven home to me recently by news reports that the Malaysian government, with public and

[What happens when a $2.4 billion casino-hotel fails?  It’s never happened before, but we may find out if Revel, Atlantic City’s spectacular new pleasure palace, continues to take in far less each month than is required to service debt from its mountainous construction costs.  We asked our good friend Mike Schurr for his thoughts on this topic. A Philadelphia real estate developer who summers in downbeach Margate where we grew up, Mike sees big trouble ahead -- not only for Revel’s financial backers, but for Atlantic City itself. RA] I’m not an expert on many topics, but with twenty five years in the real estate business and Jersey Shore vacations that stretch back to my childhood, I know a thing or two about the intersection of these subjects.  First let me begin by saying there are a few places on earth that I love more than Margate, New Jersey. The beach, the smell of the ocean, the ability to bike everywhere and the close proximity to the poker rooms of Atlantic City make this small town a gem of a resort, at least for me. The proximity to Atlantic City, which lies on the same 8-mile-long island, is both a blessing and a curse, but that's a story for another day. For decades, visionaries have touted Atlantic City as America's Playground, with dreams of palatial casinos and resorts attracting the masses from all points north, south and west. I on the other hand view the town as a colossal failure in urban renewal and a notorious center of political graft and corruption. The latest in a series of missteps, one that proves there is no such thing as a deal Wall Street doesn’t like, is the recently opened Revel Resort. Although a book could be written about how not to

We recently raised our forecast for the Dow Industrials to 14969, a target derived from Hidden Pivot Analysis that lies 10% above Friday’s close.  We note that it would take but a 4.2% leap from current levels to eclipse October 2007’s all-time high of 14198. Make no mistake, we are not bullish on the economy.  Far from it. Because the recently announced QE3 stimulus will do little or nothing to create jobs or strengthen America’s competitive position in the global economy, it can only end badly for investors. For better or worse, few of them actually remain, since the markets these days are too volatile to accommodate investing the old-fashioned way, with buy-and-hold strategies.  As a result, the action has come to be dominated almost entirely by technical traders whose edge lies in exploiting fleeting price discrepancies for instantaneous gain rather than in harnessing value for the long-term. They control vast sums of money, with leverage that is absolutely certain to lurch violently into reverse someday, causing the global financial system to implode. In the meantime, with last week’s announcement that the Fed will attempt yet another round of monetary stimulus via open-ended purchases of mortgage debt and Treasury paper, traders had little choice but to shift still more money from yield-less bonds into soaring shares.  We’ve characterized the stock market’s steep rise of late as a bull trap. By this, we mean to imply that the profits traders are currently reaping by staying in stocks are destined to vanish in a trice. Some would argue that it is impossible for stocks to collapse at a time when monetary easing has never been more promiscuous.  While this may be true for the moment, at least in theory, in practice the good times on Wall Street could end overnight. Recall that

Interesting times, for sure – and by no means accursed for those with the wisdom to have bought silver or gold before yesterday. Both took flight on word that Helicopter Ben has promised to do whatever it takes to bring U.S. unemployment down to more reasonable levels. If Americans knew what it will ultimately cost them to have the Fed target unemployment rather than the money supply, they’d be having second thoughts about this latest phase of Bernanke’s bold experiment.  Because trillions of dollars worth of stimulus have failed thus far to keep unemployment merely from rising, we can scarcely imagine how many trillions more it might take to actually push unemployment down. But for now, at least, because Bernanke has deigned to re-imagine QE3 with no limits, investors can be fearless about exposure to bullion. Too bad it took the ECB’s Draghi to show him the way. Recall that Draghi one-upped his colleagues a while back with a pledge to hold Spain’s borrowing costs down come hell or high water. We’re not sure which is more ambitious: ensuring the steady flow of cheap credit to Spain, with its 25% unemployment and a middle-class scramble to move savings out of the country; or creating jobs in the U.S., where restoring the illusion of prosperity will be possible only if home values can be goosed into another parabola. Damn the Torpedoes Whatever happens, some Rick’s Picks subscribers were in great spirits following Bernanke’s damn-the-torpedoes foray into uncharted waters.  “I was long [the gold miner’s ETF] last night, and this was the biggest single trade of my life,” noted one chat-room denizen.  “It was just plain unbelievable!”  Another spoke for those who have patiently waited for gold and silver mining stocks to spring to life:  “Today's action has helped me recoup a

[Our good  friend Doug Behnfield, easily the smartest financial advisor we know, thinks it’s possible the Fed will do nothing today even though the whole world is expecting QE3. America’s economic problems have grown considerably since Operation Twist was implemented, says Doug, and the Fed may be reluctant to risk revealing to the world that it has no more bullets. In the guest essay below, he explains why it may be better for the central bank to do little or nothing this time, especially with the stock market so strong, than to be perceived as powerless when the economy fails to respond to yet another dose of monetary voodoo. RA ] Much has been written about The Wonderful Wizard of Oz by L. Frank Baum as an allegory for monetary policy.  At the time it was written in the late 1890s, the country had been ravaged by deflation and William Jennings Bryan was running for President on a platform that, among other things, advocated “free silver” or bimetallism as a method of stimulating economic growth. Back then there was no Federal Reserve and we were on the gold standard. The Treasury could increase the amount of official silver coinage as a powerful and unconventional way to juice the money supply. How quaint.  According to the scholarly literary criticism, Dorothy represents the "America-honest everyman" , the Kingdom of Oz is Washington D.C. and the Wizard is the President. Dorothy must travel the Yellow Brick Road, signifying gold and have an audience with the Wiz who supposedly has the power to get her back to Kansas. Deflation was hardest on the farmers in the late 1900s. In the book, the slippers she snags from the Wicked Witch of the East in Munchkin Land are silver (they were replaced with ruby ones for

You’ve got to hand it to the arse bandits who make their living manipulating Apple shares each and every day. This week, they demonstrated yet again that they reign supreme in the hierarchy of quasi-criminals who populate Wall Street.  For months, they’ve been goosing the stock repeatedly with short-squeeze rallies fueled by The Coming of iPhone5.  Such shenanigans are to be expected in AAPL in particular because institutional traders, like that famed bank robber of yore, Willie Sutton, have gone where the money is, gaming the shares of the world’s largest company.  With iPhone5’s high-profile introduction slated for this morning, how have Apple shares behaved?  In a word, diabolically. On Monday, the rubes who bought the opening with market orders got crushed in a classic bull trap.  The stock gapped up to $683 in the first moments of the session, but it was steeply downhill from there.  By day’s end, Apple had fallen to $662, a 3% plunge; then, still lower on Tuesday, to a prospective bear-trap low of $656. With the stock feinting toward hell, we should keep in mind not only that Apple Inc. is expected to sell as many as 53 million iPhones in the fourth quarter, and perhaps 266 million more in 2013, but that each and every device is priced to fully exploit Apple’s unique cachet  among younger buyers in particular.  For Apple, it’s like being able to sell Manolo Blahnik shoes or Vuitton handbags at ridiculous prices -- but to buyers of many ages and both sexes, not just women.  As a result, Apple’s margins are by far the best in the business, iPhone5 is destined to be a monster hit, and the stock itself has become all but impervious to pessimism. So what was it doing yesterday trading for $656, down $27 in

Stocks looked somewhat subdued at week’s end, but this was to be expected, given the downbeat economic news.  Turns out the U.S. economy generated a paltry 96,000 new jobs in August while unemployment fell to 8.1% for the worst possible reason.  In fact, the number fell because so many who are jobless have given up looking for work. The fact that the Dow Industrials managed to hold onto Thursday’s 250-point gain despite this suggests that bull traders will be out in force Monday morning, attempting to leverage the brazen falsehoods that were trumpeted from the podium in Charlotte. Obama has been able to tell sensational lies about the performance of the U.S. economy simply because a left-tilting press is doing its loyal and desperate best to get him re-elected.  Americans are not fooled, though, and that is why we expect the incumbent to get trounced in November, notwithstanding Gallup polls and other damned statistical lies to the contrary. We’ve tuned all of it out and will take the odds. As far as we’re concerned, the polls are either flat-out wrong or misleading, and campaign coverage that would have us believe Romney and Obama are running neck-in-neck is delusional.  Romney is a weak candidate, to be sure, but he is running against a man who has not earned anyone’s trust, let alone four more years in office. Even liberals and progressives are saying that, by the way.  We were surprised to hear it last week from an old friend, a self-described Progressive who has never spoken a kind word about a Republican in the six decades we’ve known him. America’s Shame Ordinarily, we would rate it a plus for the markets that a president who views America’s past with shame, and whose obsessive political goal is to make us pay the

[In addition to being a Grammy nominated record producer, jazz buff and popular L.A. radio host, our friend Alan Geik, whose thought have been featured here before, holds a masters degree from the London School of Economics and has taught economics in London colleges. In the essay below he explains why the European Union and its central bank will survive the current crisis even if some members are forced to withdraw.  The ship will not be allowed to sink, says Alan, simply because there are too many bureaucrats dependent on the EU for cushy jobs and fat pensions. They will do whatever it takes to hold onto their sinecures, ensuring that the EU itself endures. RA] The countless extra-territorial entities created since the introduction of the euro are now totally reliant on the common currency’s continued existence.  Whenever huge budgets are put on the table and there is little regulation or oversight, there is the inevitable rise of aggressive bureaucracies whose aim is to insure a long stay at the funding trough. So it is in Euroland. This may bring to mind another international agency, the United Nations. However the United Nations, surely one more maze of national and self-interest, pales in relation to the euro-stoked organizations. This is quite remarkable given that the UN has had more than a fifty-year head start perfecting bureaucracy-building; but more about that later. The public face of the Euro Crisis is the entrenched technocrats and foreign ministers hurriedly convening meetings, summits, press conferences and private discussions throughout European capitals. They often imply a high-minded reason for the survival of the euro: a movement toward a unified Europe, a Europe free of boundaries and discord that marked the past several hundred years. However, their more immediate need is to insure a constant inflow of