Paper Airplane Time

May 31, 2012 Investors bail from stock mutual funds (again): Chris Mayer on how we’ve been here before, and why it’s no reason to give up on stocks altogether
A trio of disappointments: jobs, GDP, Midwest business activity
Hopscotching the world: One of Asia’s wealthiest men spots a bigger trend than China’s “hard landing”… while Jeffrey Tucker waxes on the vibrancy of Brazil
Gluing the neighbor’s locks to keep the neighborhood nice… Readers unload on fellow readers who insist they “paid in” to Social Security… a special notice for readers of Addison’s Apogee Advisory… and more!
Gosh, could it be the Facebook effect?

Investors yanked $7.02 billion out of stock mutual funds last week, according to the Investment Company Institute. That’s the most since the first week of 2012.

Domestic stock funds account for nearly all of the outflow; that category has seen net outflows for 14 straight weeks.

The total withdrawn so far this year: $45 billion, which puts us on a pace to easily exceed the $85 billion total for all of last year. But then, this is nothing new. “People have been yanking a lot of money out of the market,” Chris Mayer points out, “something like $1.4 trillion since 2007.”

“Some people will use these outflows,” Chris adds, “to say the market can’t or won’t rise. I think that’s a lot of baloney.”

Chris points to new research from the Leuthold Group. “A new market high could potentially occur with no help at all from the public,” writes Leuthold’s Doug Ramsey.

After all, the S&P more than doubled from its March 2009 low, even as the outflows proceeded apace.

There is precedent for this: the bear market of the 1970s.

You want to talk about “weak volume” and “no public participation” in today’s market? Old-timers like technician Ralph Acampora will regale you with tales of traders flying paper airplanes on the New York Stock Exchange floor in the ’70s — so little trading there was to do.

Within the 1966-82 bear, there was a stretch from 1974-80 when the broad market rose 120%. Small caps did even better.

And within that six-year span, there was a vicious shakeout. “The sharp market declines of mid-2010 and mid-2011,” Leuthold’s Ramsey writes, “have probably served the same purpose as the 1976-77 decline — flushing out retail investors just as they were finally preparing to tiptoe back in.”

“It’s an interesting observation,” says Chris. “Stocks, as a class, then, perhaps are getting a bad rap.”

“People remember the headline-grabbing stories — and usually they are the stocks that blew up. Meanwhile, there are many stocks that just keep plodding along.”

“There are enough companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time.”

Chris shares some of his favorites right here.

Meanwhile, the “headline-grabbing stories” bring little joy today.

As we write, U.S. stocks are reversing big losses early in the day on “news” that the International Monetary Fund will spend out of an empty pocket to fill the black hole known as Bankia. That’s a giant and busted Spanish bank cobbled together from a bunch of smaller and busted Spanish banks 18 months ago.

No, the eurozone is no closer to being fixed now than it was a few hours ago… but the S&P has managed to recover 1,300.

(Facebook, meanwhile, could sink below $27 before day’s end. Heh.)

Tomorrow’s market action will be “data-driven”, with the Labor Department’s monthly jobs report issued before the open and the ISM manufacturing survey after.

In a preview of the jobs report, we have the following numbers this morning:

Private-sector jobs: up 133,000 this month, according to the payroll firm ADP. Manufacturing jobs, however, turned in a second straight month of decline
Small-business jobs: up 40,000 in May according to Intuit… but that’s fewer than April’s 60,000. Hours have been cut, too
First-time unemployment claims: up 10,000 last week, to 383,000. That breaks several weeks of stagnant numbers… and in the wrong direction
All of those numbers were worse than the vaunted “expert consensus.”

For further evidence of a U.S. slowdown, we have the Commerce Department’s latest guess on first-quarter GDP.

The initial guess a month ago came in at an annualized 2.2%. This morning, it’s 1.9%.

To complete the trifecta of disappointments, the “Chicago PMI” number, reflecting business activity in the City of Big Shoulders and its environs, came in way below expectations.

At 52.7, it’s still above the 50 dividing line between expansion and contraction. But here too the Street was counting on something much better. The figure is now the lowest since September 2009.

Gold is holding steady after recovering lost ground yesterday. The spot price is currently $1,561.

Silver, however, is still stuck below $28, at $27.79.

Hot money is again flowing into the dollar and Treasuries today. The dollar index just crested 83; the yield on a 10-year T-note is down to… drumroll, please… a record 1.58%.

One of Asia’s wealthiest businessmen isn’t giving up on Chinese real estate yet.

“Li Ka-shing Stays Long on Mainland Property,” reads the headline by Dee Woo, a contributor to the fledgling Chinese edition of The Daily Reckoning, and republished at 文å*¦Ã¥ŸŽ – Ã¥?³Ã¦—¶Ã¦»šÃ¥Š¨Ã¦–°Ã©—», 本地新é—», çƒ*点论å?›, Ã¥?šÃ¥®¢ – wenxuecity.com — a site read by many affluent Chinese. (You can read a poor English translation at this link.)

At age 83, Li — known in Hong Kong as “Superman” — has an estimated net worth of $25 billion. And despite the talk of a “hard landing” in mainland China, Li is moving full speed ahead with property development there.

The reason? The Chinese central bank is cranking out unlimited quantities of yuan to keep pace with the Fed’s unlimited quantities of dollars. Real estate, in contrast, still has a limited supply… and Li is playing for the long haul.

“Brazil is a marvelous and massive country,” writes Jeffrey Tucker, continuing a quick hopscotch around the world. He’s back from a recent trip speaking to the Instituto Ludwig von Mises Brasil.

It’s a place “where private wealth thrives without embarrassment, where well-protected and healthy familial dynasties form the infrastructure of social and economic life, where technology is popular and beloved by everyone, where the police leave you alone and where Americans can feel right at home.” “My most-surprising findings in Brazil, aside from the amazing fruits that I didn’t know existed because the U.S. government doesn’t think I need them, were the young American kids who have moved here to find economic opportunity. This I had not expected, but now fully understand.”

“The world is changing fast. Freedom in America is slipping away so quickly that we are already seeing a wave of young people leaving in search of new opportunities, just as people from around the world once came to America to live the dream.”

Back in the States, people find themselves resorting to teenage pranks just to keep their neighborhoods from going to hell.

Last fall, someone moved into a vacant foreclosure house in the high-end Palmer Woods section of Detroit. Ordinarily, this would be good news. Unfortunately, he didn’t buy the six-bedroom Tudor revival; he was a squatter.

“Neighbors took matters into their own hands,” says a post at the Consumerist site. “First they got the utility company to cut off gas and electric service to the house.”

Didn’t work. Enter the teenage pranks. “One neighbor spent an entire day placing large rocks in the property’s driveway. Another thought that putting glue in the locks would do the trick.”

In the end, the only thing that worked was the filing of 11 felony counts against the squatter. He stands accused of filing false paperwork claiming ownership of three Detroit properties.

The real estate broker trying to unload the joint says the inside of the house is in fine shape and he expects a bidding war once the house goes up for sale.

Good luck with that: There are 10 vacant homes, says The Detroit News, in a neighborhood of about 300.

“I just got my first $1,600 Social Security check last week,” writes a reader stirring the pot in reply to yesterday’s mailbag. “I am 64 and expect to live to, say, 88. So I am anticipating 24 years x 12 months x $1,600 = $460,800 in government checks.”

“I was self-employed for 40 years and thus earned and put in all of the taxes myself toward Social Security and Medicare. Most of your Social Security crybabies probably only put in half their own payments and had their bosses pay in the other half for them. I believe I paid in around $120,000. Can any of your email complainers that say ‘I am not receiving a government handout, I paid into the system, it hurts my feelings when you speak meanly about me’ do any frigging math?”

“OK, so my first $120k I get back will be my own money I paid in. So ask your ‘feelings hurt crybabies’ where does the rest of my, and their, extra money windfall come from?”

“They neglect to mention they are probably going to receive three times more dinero than they, and their employers, paid in — from their government. ‘Not receiving government handouts?’ My arse.”

“How in the hell can such a badly designed system ever be sustainable?”

“I never got unemployment or any other benefit from any governmental agency, federal, state or local,” writes another.

“Now at age 72, I get Social Security, which represents only a small percentage of the total amount which my employers and I paid into the Social Security fund over the more than 50 years I worked. I did get about $150 per month from the government for serving in the U.S. Army in the U.S. and Korea.”

“I did not sign up for Part B Medicare coverage at age 65 so I now pay about $150 per month for Part B plus about $16 per month for Part D. All in all, considering all the money paid into Social Security and Medicare, my return on investment is the worst of all the investments I ever made except one I made in a company that subsequently went bankrupt.”

“I just pray the Social Security Administration doesn’t do the same. If my Social Security and Medicare benefits are a drain on the U.S. economy, just give me back the money I paid for these benefits and we’ll call it even. By the way, I am still paying into Social Security and Medicare as I write this email.”

“I get a Veteran’s disability pension and soon I’ll be getting Social Security payments. In addition I have a very small computer consulting business that doesn’t earn enough money to pay taxes, but it keeps me supplied with computer equipment and software, which is my hobby/occupation.”

“The VA pension isn’t enough to live on in Southern California, nor would Social Security or my business be. All combined, I just scrape by, and I even was able to earn enough from my business to subscribe to the Equity Reserve, and later on, by selling some gold and silver and a small loan to open a brokerage account, to do some meager investing. (The loan has since been paid back.)”

“While I am partially living on the dole, I have no illusions about where the money comes from. As you and many others have pointed out, the money comes NOT from some fund, but from general revenue. The taxes I paid ‘into the system’ were merely another TAX that went into the same general fund.”

“I also realize that the days of my or anyone receiving these ‘benefits’ (aka stolen money) are numbered not in decades, but in months or even days. So in answer, I’m getting mine while I still can. I am steadily buying precious metals and other valuable goods in preparation for the coming currency collapse.”

“I make no excuses for my ‘larceny, nor do I apologize for it. What others may call entitlements (I paid into it, or I’m poor, etc.) are, in fact, financed by the many taxes, fees and other extortions and the borrowing, which in effect results in the devaluation of the dollar which is ipso facto just another tax of the most insidious sort.”

“It is somewhat sad to realize,” writes our final correspondent, “that there are some who read The 5 Min. Forecast who actually think that they are ‘collecting what is due’ when no such contract exists between the government and you as a payer into the Social Security system.”

“The Social Security Administration owes you nothing regardless of how long or how much you have paid into the system. There are no guarantees you will receive or are entitled to anything. To stress the point, please refer your readers to the Supreme Court case of Flemming v. Nestor in 1960.”

“In its ruling, the Court established the principle that entitlement to Social Security benefits is not contractual right.”

“Also note that Congress can change the law anytime it wants. If anyone thinks that Congress cannot reduce what you think you should get as a ‘government benefit’ or make you pay more into the system, they should think again.”

“While in my 40s, I would have completely agreed with the writer who said he’d be a millionaire if he did not have to pay into the system, I am now nearly 56, and when I finally start receiving ‘what is due,’ I promise to suck as much of those government benefits as they will allow me to until the system collapses.”

The 5: The Social Security Administration was also refreshingly blunt in the “annual statements” it used to send out. “Your estimated benefits are based on current law,” it said in fine print. “Congress has made changes to the law in the past and can do so at any time.”

Cheers,

Dave Gonigam
The 5 Min. Forecast

Martin Weiss: You Are Being Forewarned ? Again ? About an Imminent Financial Megashock!

[You are being forwarned – again – that Europe and the U.S. are now on a collision course with a second Lehman-type megashock….A snowball of events -*bank runs spreading across Europe -*are*bringing us a few steps closer. What [can we expect]*next? Let me explain. Words: 1795

So says*Martin D. Weiss, Ph.D. (www.moneyandmarkets.com) in edited (marginally) excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity � see Editor�s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Weiss goes on to say, and I quote:

This is not the first time we’ve warned you about an imminent financial megashock.
In our Money and Markets of December 3, 2007, we [forewarned you] specifically naming Lehman Brothers as the next major firm to collapse on Wall Street. (See “Dangerously Close to a Money Panic.”)
In our Money and Markets of March 17, 2008, precisely 182 days before its failure, we [again forewarned you]*naming Lehman, making it abundantly clear that it could be the trigger of a financial meltdown. (See “Closer to a Financial Meltdown.”)
Now, starting with last week’s edition, we are [fore]warning you of ANOTHER Lehman-type megashock.
A new telltale sign bank runs, the final nail in the coffin of any modern economy are spreading among the PIIGS countries of Europe � and possibly beyond.
In Greece it’s already a tsunami � a desperate effort by millions of citizens to get their money out of danger before Greece is forced to leave the euro zone.
In Spain, it’s quickly turning into a flood, as individuals and businesses � with $1.25 trillion in total bank deposits � wonder if their country will be the next to leave the union.
In Portugal, Ireland, Italy or even France, banks are vulnerable to similar outflows and, once the stampede strikes more than two or three major countries, you could see bank runs all across Europe.
[Does all of the above] sound familiar? It should, because last year we witnessed a very similar contagion when investors stampeded from the bonds of the weakest European countries. Much like today, the first to be attacked was Greece, the weakest link in the chain. Then, Spain, Portugal, Italy and even France got hit hard. Soon, nearly all of Europe was infected, prompting its central bankers to suddenly break their solemn vows of monetary piety and print more than $1 trillion worth of new euros but now, despite all those efforts, they’re facing a new contagion of a second kind � by bank depositors.

How Dangerous Are Bank Runs?

Bank runs are far more infectious, and dangerous, than investor stampedes they spill out onto the streets and onto the airwaves and*invoke frightening flashbacks to the Great Depression and they immediately threaten the entire banking system.

According to the New York Times, “the havoc that a stampede might cause to the Continent’s financial system would greatly complicate efforts by European Union officials to fashion a longer-term plan to ease the debt crisis and revive Europe’s economy, because authorities would have to cope with the staggering added costs of shoring up banks and a*bank run can happen very quickly.”
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Just as I explained here last week, the Times points out that it “was a similar liquidity crisis on Wall Street in September 2008 � which started with nervous investors pulling money from troubled institutions, then quickly from healthier ones � that set off the financial crisis.”

I repeat: It was just last Monday that I showed you how Europe and the U.S. are now on a collision course with a second Lehman-type megashock and here we are today, only seven days later, with the snowball of events bringing us a few steps closer.

Will This Time Be Worse Than 2008?

Politicians and investors all over the world are now trying to prepare for the inevitable consequences. What they don’t seem to realize is that the next major megashock could be more severe than the Lehman Brothers failure.

Never forget the key differences between then and now:
In 2008, it was strictly individual financial institutions that were on the edge of collapse. Today, entire nations are on the brink.
In 2008, the U.S. federal deficit of the prior fiscal year was $161 billion. Today, it’s $1.327 trillion, or 8.2 times larger.
In 2008, most of the megabanks at the epicenter of the crisis were in the United States. Today, although some U.S. megabanks are still taking excessive risk, it’s primarily the far LARGER European banks that are in the most trouble. In fact the weak European banks are so large, their total assets are greater than the total assets of ALL U.S. commercial banks combined.
In 2008, governments had not yet deployed their “big gun” cures for the debt crisis. So they still had the firing power to squelch the crisis with a series of unprecedented rescues. Today, we have seen the rapidly diminishing returns � or outright failure � of nearly every possible stimulus plan, bailout deal or austerity measures known to man.
In 2008, governments encountered little public resistance to major new policy initiatives. Today, millions of citizens are rebelling at the polls � or on the streets � in France, Greece, Portugal, Spain, Italy, and even Germany.
Most important, until late 2008, central banks restricted their role to traditional manipulation of interest rates. Now, however, four of the most powerful central banks in the world (the Fed, ECB, BOE and BOJ) have departed radically from tradition and embarked on the greatest wave of money printing in the history of mankind.
What REALLY Happened During -*and After the Lehman Collapse?

Over a single weekend in mid-September 2008, the Fed chairman, the Treasury secretary, and other high officials huddled at the New York Fed’s offices in downtown Manhattan to sseriously considered bailing out Lehman, but they ran into two hurdles:
Lehman’s assets were too sick � so diseased, in fact, even the federal government didn’t want to touch them with a 10-foot pole. Nor were there any private buyers remotely interested in a shotgun marriage.
Foreshadowing the public rebellion that would later bust onto the scene in the Tea Party movement, there was a new sentiment on Wall Street that was previously unheard of: a*small, but vocal, minority was getting sick and tired of bailouts. “Let them fail,” they said. “Teach those bastards a lesson!” was the new rallying cry.
For the Fed chairman and Treasury secretary, it was the long-dreaded day of reckoning. It was the fateful moment in history that demanded a life-or-death decision regarding one of the biggest financial institutions in the world � bigger than General Motors, Ford, and Chrysler put together. Should they save it? Or should they let it fail? Their decision: make a break with the past let Lehman fail.

As in the prior Bear Stearns failure, America’s largest banking conglomerate (JPMorgan Chase) promptly appeared on the scene and swooped up the outstanding trades and, as with Bear Stearns, the Fed acted as a backstop. Lehman’s demise was unique, however,*because it was thrown into bankruptcy and put on the chopping block for liquidation.

[You were forewarned of that collapse ] exactly 182 days earlier, when we warned that it could be the financial earthquake that would change the world and it was. Until that day, nearly everyone assumed that giant firms like Lehman were “too big to fail,” that the government would always step in to save them but that myth was shattered on September 15, 2008, when the U.S. government decided to abandon its long tradition of largesse and let Lehman go under -and that had major negative repercussuins:]
A major U.S. money market fund, the Reserve Primary Fund, immediately suffered a direct hit in its portfolio from exposure to Lehman securities, pushing its share value below $1 � an unprecedented event that spread panic in the entire industry.
Money funds, mutual funds and other institutions refused to buy the short-term IOUs (commercial paper) that thousands of companies rely on for ready cash.
All over the world, investors recoiled in horror, abandoning short-term credit markets � the lifeblood of the global financial system.
Bank lending froze.
Borrowing costs went through the roof.
Corporate bonds tanked.
The entire world seemed like it was coming unglued.
“I guess we goofed!” were, in essence, the words of admission heard at the Fed and Treasury. “Now, instead of just a bailout for Lehman, what we’re really going to need is the Mother of All Bailouts � for the entire financial system.” The U.S. government promptly complied, delivering precisely what they asked for:
a $700-billion Troubled Asset Relief Program (TARP), rushed through Congress and signed into law by President Bush in record time and, in addition, loaned, invested, or committed
$300 billion to nationalize the world’s two largest mortgage companies, Fannie Mae and Freddie Mac,
over $42 billion for the Big Three auto manufacturers,
$29 billion for Bear Stearns,
$150 billion for AIG, and $350 billion for Citigroup,
$300 billion for the Federal Housing Administration Rescue Bill to refinance bad mortgages,
$87 billion to pay back JPMorgan Chase for bad Lehman Brothers trades,
$200 billion in loans to banks under the Federal Reserve’s Term Auction Facility (TAF),
$50 billion to support short-term corporate IOUs held by money market mutual funds,
$500 billion to rescue various credit markets,
$620 billion for foreign central banks,
trillions more to guarantee the Federal Deposit Insurance Corporation’s (FDIC’s) new, expanded bank deposit insurance coverage from $100,000 to $250,000,
plus trillions more in bailouts and for other sweeping guarantees.
Governments of the UK and the European Union followed a similar pattern and everywhere, both inside and outside of government, apologists for these mega-rescues argued that it was “the lesser of the evils,” the only way to save the world from an even direr fate.

They were wrong, and we told them so on September 25, 2008 when Safe Money Report editor Mike Larson and I submitted a white paper to the U.S. Congress specifically documenting why the government bailouts would ultimately transform the debt crisis into a sovereign debt crisis. In effect, we argued, “Sure, governments can bail out big banks, brokers and insurers but when the next crisis strikes, who will bail out the governments?”…

Yes, with trillions in bailouts since the 2008 debt crisis, the governments of the U.S. and Europe were able to calm the waters and restore credit markets but no government anywhere can create wealth and prosperity with worthless paper, and no government can repeal the laws of gravity or change the laws of thermodynamics.

Summary

When investors sell bad government bonds, the value of those bonds must plunge, making it next to impossible for those governments to borrow. When savers run to safety, money must flood from the weakest banks to the strongest, making it impossible for the weak banks to survive. That’s what is happening now, and what will continue to happen in the weeks ahead, until (and unless) the authorities unleash a new wave of money printing that makes previous waves look puny by comparison.

Stand by for our team’s specific instructions on how to protect yourself and profit.

Good luck and God bless!

Martin

*http://www.moneyandmarkets.com/bank-…ext-49763**(To access the above article please copy the URL and paste it into your browser.)
Editor�s Note: The above article may have been edited ([ ]), abridged (�), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article�s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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*

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Tom Fitzpatrick: Stocks to Go Down 27%, Bonds to Go Up to Extreme Levels, Gold to Remain Firm

A top analyst at Citibank has told King World News that global stock markets are set to plunge 27%. Fitzpatrick…the panic will move global bond markets to extreme levels, but gold will remain firm.

So says*Tom Fitzpatrick*in edited excerpts from an interview with King World News as provided by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!). This paragraph must be included in its entirety in any re-posting to avoid copyright infringement.

Specifically Fitzpatrick said, in part [you can read the full article here, complete with enlightening charts]:

“We think that, short-term,*the S&P 500 and the DJIA*will head down to their 200 day moving averages in a similar fashion to what we saw last year which would be*1277 and 12,000 respectively [Go here to see*his chart].

Comparing the market environment with that of ’73 to ’77….when we had a similar deterioration in housing, in the economy as well as in the U.S.*dollar, gold and the oil price shocks, and*sensing that we may have already put in the peak here, the suggestion is that the next down-move would be in the region of 27%. This could be a very quick move, in as little as four or five months.” [Go here to see his chart.]
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