Greece/Euro Bailout
Rise of the Machines
Flash Crash Solutions
Milken Global Conference
Outlook
Interest
Rates
Ed Slott’s
Elite Advisor Group
Yesterday European policy makers unveiled a 750 billion euro ($962 billion) rescue package to prevent
the Greek debt crisis from spreading across Europe and causing a Lehman style contagion. This is after
a 110 billion euro bailout package for Greece failed to reassure investors. The $962 billion program is
an “all-in” move by the ECB to save the euro. The ECB plans to use the funds to shore up weak
finances of some countries and buy public and private bonds to ensure the government auctions proceed smoothly and that the
European banks are stabilized. In a way it is really a bailout of European banks that hold much of the
Greek debt. This is very similar to tactics used by the Federal Reserve when they moved in and began purchasing
mortgage bonds to help the investment banks in the United States. We believe that this will be used in
the long run to restructure the Greek debt and, at the same time, protect the European banks that hold the debt.
It should also stabilize the euro. The risk we see is that the Greek contagion will cause a slowdown
in the Greek economy and other southern European countries and thereby, a possible double dip in the European economy.
This could hurt corporate profits around the world and lead to a correction in the stock markets worldwide.
The good news is that it appears to be stabilizing the euro at a lower level, but with the idea the Europeans are going
to stick together and defend the euro. As was pointed out on the MaxOut Savings Show this weekend in an
interview with David Kotok of Cumberland Advisors, and author of Invest in Europe Now!, it is also good news that
the lower euro will help European exporters. The recent almost 14% drop in the euro will give the Europeans
a 14% edge competing against the United States companies. We would be on the lookout for good values in
the European stock markets.
Rise of the Machines
On Thursday of last week the Dow Jones Industrial Average fell
almost 1000 points intraday before climbing back to close down 347 points. All indications are that the
“flash crash’ was not caused by any type of mistake. This was the largest intraday decline
in US history, at one time during the day, wiping out almost $1 trillion in market value. The reasons for
the collapse in the stock market are somewhat complex; here is our take on it. On Thursday, as the market
was selling off due to the European problems, some stocks became disorderly in their trading. The New York
stock exchange halted trading for about ninety seconds for some companies, including MMM and Proctor & Gamble, to maintain
order flow. The trading platforms we all trade through are required to find the best bid and ask for customers.
Other electronic trading exchanges did not halt trading and the orders were routed through to them. The
smaller electronic exchanges could not handle the volume and the bids started to collapse so stocks declined (one in particular
went from 59 to 58, 57, 55, 53, 50, 47, then 40) very quickly. At the same time, computers run by high
frequency traders piled on, so to speak, as they began to generate massive orders using computer programs to trade automatically.
This stock market crash occurred within less than 15 minutes and the worse of it in less than 3 minutes.
I hope that explanation makes sense.
Flash Crash
Solutions
A couple of thoughts; this “flash
crash” was a very serious problem that could have gotten much worse and could have wrecked our financial system.
The SEC should move quickly to solve what we believe is a structure flaw in our trading system in the US for buying
and selling stocks. The NYSE (New York Stock Exchange) should lead the trading. If they
halt trading in a stock, then all other trading in that stock should be halted as well. This is known as
a cross market halt and will allow for a fair and orderly market for all investors. The second problem
is the rise of high frequency trading and other types of computerized trading that now accounts for estimates of as high as
50-70% of stock market volume. High frequency traders use very high powered computers and pay for space
near the exchanges to be first in line on trades by milliseconds to gain an edge on average investors. Some
of these programs can generate over 10,000 orders in a fraction of a second. I will not even try to explain
all the nuances of this type of trading except to say it has clearly gotten out of control, particularly during last Thursday’s
1000 point decline. It is about time that high frequency trading is regulated and the investor public is
protected.
Kick the Can down the Road
The week before last I attended the Milken Institute Global Conference in Los Angeles.
At the conference, we got to listen to a choice of over 100 panels on everything from energy to finance to education.
I met people from all over the world; the attendees and speakers represented groups that managed over 18% of the world’s
wealth. The title of the conference this year should have been “Kick the Can Down the Road”.
It seems that almost no matter what the problem was, the United States and the rest of the world has simply kicked
the problem down the road rather than moving forcibly to solve the problem. Residential and commercial
real estate were two prime examples. Banks and governments put off foreclosures and defaults in hopes that
things would get better. In both residential and commercial real estate, huge inventories are out there
in the “clouds” hoping things will get better. One of the classic lines I believe came from
Lou Ranieri, one of the founders of the mortgage markets, when he stated, “letting a person live in his house for 18
months without making payments, then paying him $10,000 to leave the house does not seem like good policy!”
At the Conference, Nouriel Roubini pointed out that the Greek bailout would only
work for a short while before the Greek debt needed to be restructured; another case of kicking the can down the road.
Within a week, that “bailout” of Greece had failed as predicted. Greece will eventually
have to restructure their debt in the 20-40% discount range, plus make cuts in spending, to make the country structurally
sound. The Obama stimulus program was another case of kicking the can down the road to help the states
prevent layoffs. At the Conference, a number of the panels covered the huge problems of state and municipal
pensions. Unfunded pension liabilities have been put off for years, and with the decline in tax revenue,
the unfunded pension problems are coming home to roost. As an example, Illinois has unfunded liabilities
of over $54 billion that works out to only a 54% funding of there pensions. California has an almost $60
billion unfunded liability, even though they are 87% funded. New Jersey has a $34 billion under funding
they have to make up and they are only 73% funded. The local and state governments will be the source of
major financial problems over the next 18 months as they struggle with out of control spending and unfunded liabilities that
are resulting in huge amount budget deficits. The good news is that the state of Texas is in much better
shape than most of the country.
Outlook
The real question is whether this is the start of a worldwide contraction.
So far we have had an approximate 8% correction in the Stock markets here recently in the United States.
We expect the correction to continue. At a minimum, we will see a slowdown in the European economy.
Over time, we believe the euro will hold together and the strongest countries will be Germany and France.
We would look for opportunities in those markets. We would be cautious of investing in the UK as
we believe the British have major economic and debt problems that have yet to be worked out. The United
States is poised to gain from Europe’s problems over the near term. Our concern for the United States
is what happens to the economy after the upcoming November elections. Do we get a slowdown?
We believe the odds favor it. In this environment, large cap stocks should do better than the small
cap stocks that have had a large run up from the March 2009 bottom and are poorly positioned for an economic slowdown.
Many large cap companies do business all over the world and will profit from a growing middle class in China, India
and South America. In addition, the large cap companies in general have much stronger balance sheets than
many small cap companies.
Given runaway spending going on in
many countries around the world, sovereign or government debt is rising rapidly. History has taught us
that two to three years after a financial crisis we see national debt defaults. Greece could be the start
of that. Over the medium term, this will be inflationary. We expect the UK, Japan and
the United States to depreciate their currencies as their spending runs out of control. Now we have the
Greek debt crisis and the almost one trillion dollar European bailout; this is very bullish for gold. Gold
has now broken out over $1200 as can be seen from the chart below. We expect silver to move higher as well.
As we have stated, gold and silver are in a long term bull market that has several more years to run.
Weekly Gold Price Chart 
China
continues to try to slow down their rising real estate market. We have seen some estimates that construction
accounts for over 50% of the Chinese economy. We are hearing more stories of brand new empty buildings
in China and yet in some parts of China real estate prices rose 12.8% last month. We believe that this
will end badly and China’s economy will slow down later this year. The key to watch is commodities;
we think the slowdown in China will lead to a fall in commodity prices. China has been stockpiling commodities
from all over the world as a way to get out of the dollar. There has been a large build up of commodity
warehouses in China to store the iron, copper, zinc, cotton, and grains. In addition, we have heard that
they are stockpiling oil for strategic petroleum reserves. If China slows down economically, we could see
a drop in commodity prices. For now, we would avoid China and be cautious of industrial commodities.
Interest Rates
Looking at the charts below of the historical ten year bonds
and the three month treasury bills we can see that United States government interest rates
are at historic lows. Short term rates at 0.16% have nowhere to go but up. Longer term rates are
also near historic lows. With budget deficits projected to be over $800 billion for each of the next ten
years, we do not see how interest rates will remain this low for long. If interest rates
rise, especially on longer term bonds, then bond values will decline. It has been over twenty five years
since we have had a bond bear market. During the 1980s, it was not unusual to have a bond trading at 75
cents on the dollar. We do not believe that most investors have factored in the risks of owning long term
bonds during a period of higher interest rates and/or inflation. To protect yourself from a bond bear market,
we would take a look at bonds generally less that ten years in maturity and, ideally, under 5-7 years. Take
a look at the risks in your bonds due to maturity. For a 401(k) plan, an alternative would be the short
term or limited term bond fund. Many people forget that a preferred stock in many ways is just a long term
bond with little credit protection. Remember, with rates low and in uncertain times, look at short term
and higher quality bonds.
Given
the present economic outlook and market levels, international blue chips are the place to be. We would
be looking closely at Europe to see what blue chip values pop up with the declines in European stock markets.
We would continue to maintain higher than normal levels of cash in these very uncertain markets as a buffer against
a decline and for buying power when values appear, as they inevitably will.
Ed Slott’s Elite IRA Advisor Group
A large portion of the assets that we manage are brought in through IRA rollovers.
Along those lines, I just got back from the Ed Slott Elite IRA Advisor Program in Chicago. Ed Slott
is one of the foremost experts in the country on IRA and IRA rollovers. As an Elite IRA Advisor, we undergo quite a bit of
training to understand IRAs and Rollovers and their many nuances. If you have a question about your IRA
or IRA rollover, please let us know and we will be able to help you out.
If you need some help with investing in Europe, take a look at David Kotok’s new book Invest in Europe
Now! as a good primer. We would like to thank David Kotok for appearing on the MaxOut Savings Show
this past weekend. We would also like to thank Michael Lewis for appearing the week before. You can catch
our interviews with David Kotok regarding his book Invest in Europe Now! and Michael Lewis, regarding
his book The Big Short, at the MaxOut Savings website www.maxoutsavings.com by clicking on the “Previous Broadcasts” tab on the home page and selecting
the corresponding link.
Retiring soon?
Now is the time to set up an appointment with MaxOut Savings Advisors, LLC. At MaxOut Savings Advisors,
LLC, we work every day managing investors’ IRA, Rollover, Brokerage, and Trust accounts. If you need
help or would like MaxOut Savings Advisors, LLC to manage your accounts, I would be happy to meet with you. Email
us at ted@maxoutsavings.com or call us at 713-627-0400.
Do you have an account at Fidelity?
Do you
already have an account at Fidelity Investments? The MaxOut Savings Advisors Team can actively manage the
assets for you at Fidelity. We will make the investment decisions for you and you can monitor your account
from Fidelity’s website. We use the same value based investment strategies we talk about on the MaxOut
Savings Show every weekend. In most cases, you can sign a simple form to add us as the advisor to your
account and we can use your same Fidelity account number.
Considering an IRA Rollover?
If you are retiring soon or considering an IRA rollover, let the MaxOut Savings Advisors Team handle
your IRA rollover. We can help you take advantage of the NUA tax break if you have low cost basis company
stock in your plan. We will sit down with you and go over your financial situation and needs and come up
with a plan. We will show you how we actively manage accounts using our value analysis strategy to grow
your investments and reduce risk.
MaxOut Savings Advisors: Actively Managing Risk
In
these volatile times, investing your retirement funds can be difficult and time consuming. Is your advisor
looking at risk and actively managing your retirement account? Hiring the MaxOut Savings Advisors Team
to manage your money or IRA rollover is a great first step toward a successful retirement. MaxOut Savings
Advisors, LLC is an SEC registered, fee-only investment advisor based in Houston, Texas. Ted Geoca has
over twenty year’s of investment experience managing clients’ retirement assets. We invest
in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty
years. We look at risk as well as return to actively manage your investments through today’s
changing markets. We use Fidelity Investments as the custodian for our clients’ assets.
If you would like MaxOut Savings Advisors, LLC to manage your retirement investments using our value methodology, I
would be happy to meet with you. To schedule an appointment please give us a call at (713) 627-0400 or
email me at ted@maxoutsavings.com.
Remember Save Aggressively and Invest Conservatively!
Ted K Geoca
Doug Saam Kellan
Caldwell
President
MaxOut Savings Advisors, LLC
Houston, Texas
ted@maxoutsavings.com
713-627-0400
www.maxoutsavings.comRemember to catch:
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MaxOut Savings Show with Ted Geoca on Saturday at 11:00am
on KNTH 1070AM!
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herein is believed to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC may
or may not have positions mentioned herein. MaxOut Savings is a Registered Investment Advisor registered with the SEC. You
should always make investment decisions based on your own financial situation.
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