Commentary for the Week of March 8

Gotta love those inflationists!  We enjoy getting in their faces now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991.  That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead. All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.   And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air.  Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold.  We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’

British Petroleum’s shares have shed 40 percent of their value in the last six weeks, falling from $61 to a low yesterday of $36, but if sellers keep up the pace for just a few more days, the company could be trading at salvage prices by next week. Despairing news from the Gulf of Mexico over the holiday weekend set up the avalanche of selling that buried BP stock when it began to trade Tuesday morning.  Last Friday, the world had been transfixed by live images from the seabed that showed oil continuing to gush out-of-control from the broken well despite BP’s efforts to plug it with a “top kill.” We now know that that mud sealant that was injected into the drill hole didn’t build up the necessary pressure to resist the gusher because the wellbore itself was ruptured.  For all the good it did, the 1.2 million gallons of mud forced into the wellbore by a 30,000-horsepower piston might as well have been discharged directly into the sea. British Petroleum is facing criminal and civil charges as a result of the disaster, and it’s possible the company will not even be around in a year or two other than to pay claims.  Although the world will undoubtedly get along just fine if that happens, the loss of Louisiana’s wetlands and the catastrophic damage to the Gulf ecosystem will not be so easy to bear. An estimated 20 million gallons of crude have poured into the Gulf so far, but that number could go much higher if the leakage continues until August, when it is expected that a second and third well will be operating to take the pressure off the existing well. Alaska, 21 Years Later In the meantime, environmental reports from Louisiana have been heartbreaking. The slick has

Quite the hottie, isn’t she?  That’s “Rita Wilson” pictured below, and we didn’t think twice about adding her as a Facebook friend when she sent us a request a while back. We figured we’d find out later who she was, but we were wrong. She doesn’t answer e-mail queries, and Googling the name brings up only the actress Rita Wilson who is married to Tom Hanks.  This Rita Wilson’s Facebook biography says she lives in San Francisco. Because we lived there ourselves for more than 20 years, we thought that maybe there was a connection through some mutual friend or acquaintance.  Alas, as far as we’ve been able to determine, Rita Wilson doesn’t exist in the flesh.  Rather, she appears to have been concocted by some PR firm tasked with hyping the shares of publicly traded companies. This wasn’t so obvious to us at first, since Rita’s long list of Facebook friends comprises actual people from all over the world – people with eclectic interests and quirky things to say.  There’s Claire Louise Hay, for one, who wonders why her fish have been going haywire:  “Why [do] my barb fish have such a life-defeating reaction to stress? When startled, they leap out of the water, usually hitting the lid, but sometimes hitting the kitchen surface or the floor. It’s a wonder they’re not extinct.”  This is not the kind of stuff you can make up, even if Rita Wilson is. Rita’s Corporate ‘Likes’ As the weeks went by, however, the ever-expanding list of “Likes and Interests” linked from Rita’s Facebook page began to look more and more like the client list of a public relations firm. Many of the companies are based in China, mainly in energy and resource-related businesses, but there are also some American firms, including Dreamworks and

We may all be breathing a sigh of relief by the time you read this, but it remained uncertain at press time whether British Petroleum’s efforts to plug a massive oil leak in the Gulf of Mexico would succeed. Earlier in the day, the company began pumping a heavy fluid called “mud” into the damaged well, but the process was temporarily halted because the high-powered flow of oil and gas from the well was causing too much of the mud to escape.  BP said such delays had been expected but that they hoped to resume the sealing operation by late tonight.  The effort came amidst reports that oil has been gushing from the well at a rate much greater than what BP had first estimated. The company originally said that about 5,000 barrels of oil were escaping per day, but the latest estimates suggest that the true number is somewhere between 12,000 and 19,000 barrels. Converted into gallons, that implies that as much as 760,000 gallons of oil per day are flowing into the Gulf. Last week, we linked at Rick’s Picks a very scary article from rense.com that said the “top kill” procedure being used to plug the well was the world’s last hope to get the disaster under control.  The author, who sounded like he knew a thing or two about drilling platforms, explained that abrasive material contained in the gushing oil could eventually widen the well-hole so that virtually unlimited quantities of oil and explosive methane would be released into the water and atmosphere. We would strongly suggest that you read the article to understand what is at stake if BP’s effort fails. The only alternative at that point would be to drill an additional well to relieve the pressure.  This procedure is already under way, but

The action on Wall Street is starting to remind us of Harlem Globetrotters shtick. Yesterday’s comic show conjured up Meadowlark Lemon at the free-throw line:  He pumps once, he pumps twice, then he sends the ball arcing toward the basket. Half-a-dozen guys leap for the rim, only to see the ball, which has been tethered to Meadowlark’s finger by an elastic cord, snap back into his hand. Something like that occurred yesterday on the NYSE, where stocks opened on a vaulting arc, only to be hauled back down to earth in mid-flight. Although the Dow had been up about 135 points in the early going, by day’s end it was trading off 70 points. The bullish segment of this raucous little burlesque appears to have been inspired by some tarted-up data that reflected supposed strength in the housing market. Yeah, sure. As for the selloff and eventual 220-point reversal, there was no obvious reason for it.  Our take is that the elaborate hoax that has cajoled stocks higher since March 2009 has grown too tiresome to fool even some of the people some of the time. There is still Kudlow on the buy side, of course, and perhaps a handful of solvent bears covering shorts whenever “good” news threatens to trigger a squeeze. But that’s about it, and whatever newsworthy excuse might arise on a given day to goose and goad the fearful and the clueless into acquiring shares, the effect is growing more and more muted each day, a diminuendo for the hubris of the late, great Financial Age. August Gold Target We should note that bullion yesterday reflected none of the ambiguities that have caused stocks to trace out conniptions each day on their respective charts. Comex August Gold tacked $30 onto the previous day’s lows, and the futures

Now wasn’t that refreshing!  The Dow did a nearly 300-point dipsy-doodle yesterday, providing comic relief for millions of investors who might otherwise have spent the day fretting over the oil spill and North Korea’s quasi-declaration of war.  Earlier in the day, before NYSE stocks staged an epic recovery from abysmal lows, both of these developing news stories were cited by pundits as reasons why the broad averages had plummeted on the opening bell. How silly of us to think that Wall Street might actually have been concerned about Kim Jong-il’s next move, or about the mounting catastrophe that threatens to destroy the Gulf of Mexico’s ecosystem and shore-based economy, if not the economy of the entire U.S. Perhaps when globs of tar start washing up in the Hamptons, and the livelihoods of fisherman from Maine to Galveston are threatened, perhaps then stock-market speculators will act for once like they have a stake in the real world. In the meantime, it’s hard to tell which is more threatening:  a nuclear-armed, certified whack-job spoiling for a fight with his neighbor to the south, or an oil gusher that could turn most of America’s coastline hostile to humans and deadly to waterfowl and marine life.  We supposed we’d rather take our chances with Kim Jong-Il, since there’s always the remote possibility he’ll wind up like Mussolini and those lovely Ceausescus. But the oil-spill story seems to be getting worse by the hour, and it has the potential to replace “American Idol” as bozo-dom’s number one obsession if British Petroleum’s attempt to plug the leak with a “top kill” fails.  Failure was evidently a risk, since the oil may be gushing too hard for the tactic to work, according to some engineers. There were also rumors that the sea bed had collapsed and that

We peruse the Wall Street Journal’s stock-market round-up each day not to find out why stocks may have risen or fallen, but to determine what factors are conventionally thought to have caused such price movements to occur.  This is an important concern for forecasters, since, even if one attempts to get a read on the market using purely technical means, it still helps to understand what is on the diseased brains of the coprolagniacs whose job it is to manipulate shares to the certain benefit each day of Goldman Sachs, J.P. Morgan and other officially sanctioned predators of the securities world. The very difficult task of explaining the stock market’s behavior to readers of the Journal falls most often to columnist Peter McKay, and we don’t envy him his job.  Because he works for one the most important and prestigious financial publications in the world, it simply won’t do for him to say, as we might (and often do), that stocks rose or fell the previous day for no good reason at all – or at least, for no reason remotely related to reality. We think celestial factors play a far bigger role in this than mainstream pundits will ever be permitted to acknowledge, and that a gypsy fortune teller is therefore better equipped than the highest-paid analyst on Wall Street to tell us why the broad averages are likely to go either up or down. So why did shares dive in the final hour of yesterday’s session after screwing the pooch for most of the day?  McKay cited two reasons: fears related to Europe’s credit crisis, and to the tighter rules soon to be imposed on Wall Street. With all due respect to McKay, this simply won’t wash.  As we all know, investors fear nothing so much as the

Colorado ski properties are enjoying a dead-cat bounce, although readers of a recent article in the Denver Post might infer there is something more to it than that.  The article noted that in Eagle County, which includes tony Vail, residential transactions were up 190% year-over-year for the first quarter.  That represents 276 properties changing hands, compared with 145 during the same period a year ago. However, as the article acknowledged, the surge was from very depressed levels, and it still fell 27 percent shy of the total for 2008 and 58 percent shy of the figure for 2007.  Nowhere was there any mention of price trends or rental costs. If these factors had been taken into account, it would have made clear that valuations will have to fall much further before ski homes and condos could conceivably experience a sustainable bounce. We recently sat down with a Vail property owner who worked the numbers for us. He said that even after collapsing from a peak price of $1.3 million to around $800,000, a two-bedroom luxury condo in Vail is still a lousy investment. Assuming the unit is rented 130 nights at $350 per night – a fairly optimistic assumption, according to our source – annual gross income would be $45,500. Half of that would go to the leasing agent, leaving $22,750. Subtracting a further $15,000 for taxes, maintenance and homeowner association fees would leave $7,750.  Then there are mortgage costs of about $30,000 per year. This is based on a 6.5% loan on 60% of the property’s value.  You should add a 6% opportunity cost, or  $19,200, on the 40% not financed, since that’s what you could earn – without all the hassles – in a closed-end muni-bond fund. Thus, the investor who scooped up a $1.3 million property for

Funny how the “accident” that sent the Dow plummeting a thousand points a couple of weeks ago has morphed into the real thing. The blue chip average fell 376 points  yesterday, and we’re predicting it will fall a further 470 points, to exactly 9592, before buyers get decent traction.  Easy come, easy go, as they say. The initial selloff was originally attributed to a clerical error.  If this turns out to be true, Wall Street may yet produce a scapegoat for the bear market disaster that is yet to unfold. Something like this happened when epidemiologists traced AIDS back to patient zero, a French Canadian flight attendant named Gaetan Dugas. He died young, evidently before a torch mob could find him, but you can bet the Wall Street clerk is already living under an alias, assuming he ever existed.  The charts offer an indictment that does not distinguish between a clerical error and a real panic. Let the stock and futures exchanges bust all of the trades they want and say it never happened. The swoon will always be there in graphic form, a synecdoche for these interesting times.  In the meantime, they have provided us with ABC price points that make predicting the future, at least for the moment, a piece of cake.  Be sure to remind us in a week if that 9592 target doesn’t pan out. We’ll be out on the ledge, entertaining a crowd. With the stock market in avalanche mode yesterday, some Rick’s Picks subscribers seemed to despair that Gold might continue to fall in sympathy.  Bullion has been hit pretty hard this week, to be sure, and it was taking yet another pounding Thursday night as we went to press.  But we doubt that sellers can keep it up, lacking as they do a