Investing In Higher Food Prices Without Taking on Leverage

Posted by Jason Burack on February 14, 2011 · 2 Comments

Don’t Poo Poo Potash and Fertilizer Stocks!

Both Monetary inflation and demand from developing countries will continue to take food prices higher.

There is very little an investor can do about this besides protect themselves and their net worth and standard of living by investing (hedging) in this trend to offset the food price increases we are all going to feel at the grocery store or restaurant.

We can trade down and substitute as much as we can when food prices continue to go higher, if we are willing to sacrifice our standard of living.

But, we all still have to eat and there are growing food shortages on this planet as crop surpluses year over year continue to lessen.

For those of you looking to protect yourselves and your family from increasing food prices and also profit off of this developing trend, the best way, in my opinion, to invest in the higher food prices trend is to invest in Potash/Fertilizer stocks. Here’s why:

For almost every single crop that is planted, whether it is corn, soybeans, wheat, sugar, coffee, cotton, oranges, bananas, etc a required input cost for farmers who plant all of these crops is to replace nutrients in the soil with new potash (potassium (KCL)), nitrate or phosphate fertilizers.
This is because many farmers lack the patience to crop rotate like farming of old to replace nutrients in the soil and because our current agricultural system is based off a system of monoculture.
What this means to investors is that potash/fertilizers are a required input cost for virtually every farmer of any kind of scale.
Farmers from countries ranging from the US to China and Brazil can wait at most up to 2 years before putting down more fertilizers.
China and India are quickly trying to lock in large quantities of 20-30 long term supply contracts. This is partly due to the fact that farmers could run out of phosphate in 2011.
Things could get worse in terms of food prices and food shortages going forward after 2011 as the world population, which according to National Geographic, just crossed 7 billion heads towards 2050s projected number of 9 billion.

In conclusion, the reason investing in a diversified holding of potash stocks (or hopefully one day a Potash producer ETF if one is ever created) makes so much financial sense is that I don’t have to tell you which crop will outperform others and if I pick a specific crop and pick the wrong one, I’d risk missing the food price increase trend or lag badly.

Here’s a video blog I did months ago about the Potash sector:

Until our food and agricultural systems change entirely, and I am all for organic farming, (if it doesn’t involve the slashing and burning of rainforests to make room and I have no idea if it’s even possible for purely organic farming to feed 7 billion people even with the increases in crop yields we currently have compared to 100 yrs ago), I think investing in a diversified holding of Potash stocks are by far the best and safest way to play the increasing food price trend for people who are frustrated with a commodity ETF that doesn’t properly track higher Ag/Soft prices moving higher and for those of us that want to avoid the futures markets because we don’t want to take on debt (margin) to get the leverage to buy one contract.

Here’s some additional articles for you to do more research on the Potash/Fertilizer market in general and also on specific Potash stocks:

I’d much rather bet on more of a sure thing and I think Potash being a required input cost for every farmer is much more of a sure thing than trying to pick out winners among wheat, corn, soybeans or rice.

Let Jim Rogers pick out winners among the crops and just stick with potash stocks instead!

Filed under Articles, Featured · Tagged with Agricultural System, Bananas, Corn Soybeans, Crop Surpluses, Food Price, Food Prices, Food Shortages, futures contracts, Grocery Store, Inflation, Jim Rogers, Monetary Inflation, Monoculture, Nitrate, Nutrients, Oranges, Phosphate Fertilizers, Poo Poo, Potash Fertilizer, Potash Fertilizers, Price Increases, Scale Farmers, Supply Contracts, What This Means

No Rare Earths for You, USA!

Posted by Jason Burack on January 23, 2011 · 1 Comment

Hey USA, China say if you continue to print more US Dollars, there’s no soup, err Rare Earths for You!!!!!

As Chinese President Hu Jintao visits the US this week, and the Wall St Journal just released an Op-Ed about how US politicians should attack him for China’s recent restrictions on REE exports leaving China, it’s important for investors to understand where REEs fit into the global macroeconomic picture and how China is holding all of the cards and how it is wielding its current monopoly on Rare Earths.

Many of you are already aware just how unhealthy the US/China trade relationship is, but this article will try to show where REEs fit into that entire puzzle. Hint: They are more important than the majority thinks, especially as larger scale wind and solar farms are being planned by China and other countries.

Currently, it is my belief that REEs are being used as a political retaliation tool by China as the US continues to intentionally print far too many US Dollars for China’s liking.

It is unstated US Treasury and Federal Reserve policy to intentionally print an excessive amount of US Dollars to try and force China to take off its Dollar Peg. This is resulting in excessive inflation in China as they import the inflation from our money printing due to their Dollar Peg. I have heard that inflation is already over 20% there!

Political and economic leaders in the federal government believe that if China revalues its currency rapidly, it will bring key manufacturing jobs back to the US quickly. This is a dangerous card for the US to be playing as China is our chief creditor and the largest holder of US debt by any foreigner. The US continuing to print money is a very dangerous gamble that they won’t eventually create hyperinflation and that they won’t anger the Chinese to a point where the Chinese refuse to buy any of our US Treasury debt going forward. The Chinese cutting back even a little bit of buying US debt puts the country one step closer to trouble.

I am of the opinion that to counter the money printing, China is trying to send a clear message to Washington that they will hurt some of the US’ best and most profitable companies like Apple, Boeing, GE and others that rely on a steady REE supply.

The Chinese have already used REEs as a political weapon against Japan for retaliation for the “fishing boat incident” back in October.

That unexpected counter by the Chinese has literally sent Japanese conglomerates scrambling all over the globe to countries like Vietnam, India, Brazil, Mongolia and remote parts of Canada in just the last few months to try and secure a safe and reliable REE supplies from outside China. Big money investments and offtake deals with Molycorp and Lynas have already happened.

The question is, why haven’t US companies like the ones I already mentioned along with others followed the prudent steps these Japanese corporations have made to protect themselves from an over-dependence on cheap Chinese supply as they have been getting from China for over 15 years?

I think US REE policy will (again) be incredibly mishandled if we try and strong arm the Chinese into backing off their export quotas. We need to do what many experts on this sector, including the DOE in its recently released Critical Metals Strategy report, states and quickly develop a domestic REE supply here in the US to protect our profitable corporations higher up the value chain that plan on increasing their REE usage as more and more innovations are found in the lab to grow the industry.

I wouldn’t blame the Chinese for completely cutting off the US from any REE supply and more and more evidence is appearing that this could be likely in the not too distant future as the Chinese need all of their own production for many different uses inside China. They still control the industry and it’s not the Chinese fault that US corporations are not being prudent and acting quickly to secure safe supply from outside China.

Filed under Articles, Featured · Tagged with Burack, China Trade Relationship, Chinese President Hu, Chinese President Hu Jintao, Creditor, Dangerous Gamble, Economic Leaders, Federal Reserve Policy, Foreigner, Hu Jintao, Hyperinflation, Inflation In China, Manufacturing Jobs, Money Printing, Political Retaliation, President Hu Jintao, Rare Earths, Rees, Scale Wind, Solar Farms, Us Treasury

2011 Forecast Predictions Podcast

Posted by Jason Burack on January 3, 2011 · 1 Comment

Here’s a 49 minute 2011 podcast we did with our forecasts for this upcoming year. I provide insights into Currencies, Commodities, Real Estate, Stocks and Bond Markets.

Filed under Articles, Featured · Tagged with Bond Markets, Commodities, Currencies, Insights, Podcast, Real Estate, Stocks, Www Youtube, Youtube

The Forgotten, “Barbarous Relic” is No Longer Forgotten

Posted by Jason Burack on September 16, 2010 · 4 Comments

This is an article I wrote for possible publication into a new DC Magazine called I am Modern Magazine. I think it was too controversial for them to publish and their editor never published it, nor had the decency to return any of my messages that they were not going to use the piece… Oh well! Enjoy!

For those of you unfamiliar with the popular description John Maynard Keynes gave to this once popular commodity, I am talking about Gold; the forgotten and also hated metal.

At least this is the case here in the Western world, where Gold is considered by most Americans at the moment nothing more than something nice to make jewelry out of.

Most Americans have no clue what the Gold price currently is (it’s not far away from $1300/oz! and there is a hilarious video about this on You Tube where people could have won a free 1oz Gold coin if they correctly guessed the Gold price on a California beach), or that since the Tech bubble burst in 2000, Gold has rocketed up from around $250/oz to be the best investment of the last decade.

Yet, despite this increase in price, Gold is still not even at its 1980 inflation adjusted high yet (Gold is only at a nominal high. It will have to go to over $2300/oz for it to be above its 1980 inflation adjusted high of $800/oz in today’s dollars).

The idea that physical Gold and Gold stocks are prudent insurance and good investments against financial calamity and panics is still preposterous to many on Main St, USA including most financial advisors.

Even most Wall St people dislike Gold and don’t know what to classify it as.

If you don’t believe me, I dare you to watch CNBC for a few hours a day for about a week straight and you will come to the same conclusion as me: that there is a very large anti-Gold crowd.

A lot of this is because Americans really do not understand the basics of investing, personal finance and money management.

This might be a more modern and forward looking magazine, but I am advocating for Americans to look back to the past, many decades past, and return to the basics of economics, finance and investing.

Before everything became so complicated that people hate it, are bored after 5 minutes of learning, or it gives them a painful migraine.

Generations of past Americans, before the Baby Boomers, were taught the basics and, unfortunately, the generations since have not been taught the same simple and yet effective approach.

That approach starts with a revival of common sense.

First and foremost, Gold is money. Real Money. Not some piece of paper, fiat currency backed by nothing that governments say is money by “fiat” (which is Latin for decree or order).

The problem with fiat money is that governments throughout history have a hard time being responsible and limiting the quantity of it.

Once enough money is printed, money adheres to the laws of supply and demand just like any other commodity, and a flood of money (or helicopter drop in Federal Reserve Chairman “Helicopter” Ben Bernanke’s case) destroys the value of each unit the more that is printed.

The reason I bring this up is because our current money or form of the US Dollar, the Federal Reserve Note, is fiat money or only a currency.

It is not real money because it does not properly store its value or purchasing power.

Purchasing power is defined by me as the value of one’s hard work or labor each day that you earned by working, saving and/or investing and what it will buy you in terms of goods and services now or at a later date in the future when you decide to spend the money on something.

Your purchasing power, if you’ve saved any money from the money you’ve earned, is supposed to be safely stored so one does not work each day for free when they expect a fair day’s wages.

Your purchasing power is then normally “stored” in your checking or savings account at a bank.

A loss in purchasing power means the value of your work was not properly saved by whatever you saved, invested or stored that money in (if you didn’t spend it all!).

Since 1913, the US Dollar has lost greater than 95% of its purchasing power!

Does that sound like a great store of value to you?

Gold has been real money in many countries for many thousands of years.

And, after more paper, fiat currencies have gone to the big currency graveyard in the sky (and most paper fiat currencies are up there and many only make it 40 yrs or so before new versions of a currency need to be issued), Gold will just continue to do what it always does because it’s very dependable and safe; it’s boring.

It’s not sexy and chic like owning stock in Apple or another tech company with the hottest gadget on the market now, but stocks can crash and go to zero. Gold won’t.

But, in this environment, dependable and boring are a good thing as volatility in many paper, fiat currencies and the markets of many asset classes are anything but stable.

The best thing Gold does is it acts as real money and a store of value. Nothing else over thousands of years, besides maybe Silver and Real Estate until its most recent bubble, has preserved its purchasing power and stored its value better than Gold has.

Because of its ability to store value and retain purchasing power of someone’s savings, owning physical Gold coins and bars is the ultimate insurance policy.

Gold stocks, which give one leverage to higher Gold prices and also act as a proxy to higher Gold prices, also have similar properties, unless the Gold company is poorly managed.

This is something that many of us were never taught in schools and some of us, some more than others, are currently learning the hard way as their investments continue to lose value.

Once you own physical metal, and store it yourself or have someone else store it in a safe location, it’s outside the financial system and is safe from a crash.

The value of physical Gold might drop in dollar terms, but it will NEVER go to ZERO!

In just the last 6 months alone, the US Dollar and the Swiss Franc have both lost 13% of their value relative to Gold. That would be a 26% devaluation for both currencies in just one year against Gold if this trend were to continue as the worldwide “Race to Debase” for currencies continues.

Governments all over the world, including our own, want a weaker currency because it allows them to pay off their obligations such as Social Security, employee pensions and other benefits, and interest and principle payments on our national debt to our foreign creditors with cheaper money.

A weaker currency also makes exports from the exporting country a lot cheaper and more competitive in world markets.

Selling lots of exports creates a trade surplus and helps boost your GDP, which is supposed to be based mostly off your country’s total production of goods.

This is why China and Japan are adamant about keeping their currencies relatively weak to the US Dollar.

Unfortunately, this is very bad for savers and investors desperate for higher yields on bonds and for higher returns in the form of dividends.

What has been going on for years now in our markets is punishing savers and investors who are trying to do the right thing and not spend all of what they make, pay off all of their bills on time and save up for a rainy day and/or retirement.

Who can blame people for wanting to pay off all of their debts, stop spending and save more of their money now than they have had to in years before?

After what has occurred in world financial markets over the last few years with the subprime crisis, the credit crisis, the real estate bubble and other potential developing asset bubbles and financial panics yet to come that are devastating the US and Western European economies, Wall St & Main St need to rethink modern finance and investing techniques.

As a matter of fact, so do the professors who teach finance and investment management at major universities.

Are the markets really efficient or do they operate mostly on the 2 most basic emotions of human beings, fear and greed, the majority of the time?

Shortcomings were especially exposed in the areas of proper risk management and asset allocation during 2008.

Many longtime professionals dropped the ball and were caught off guard when the housing bubble popped along with the credit crisis that had our entire country “on the brink” of a complete economic collapse.

Yet, there was a small minority of people who were more prepared for what happened and they made out like bandits with exponential profits while everyone else scrambled to keep from drowning in inescapable losses.

Those people used common sense over models and formulas.

Modern asset allocation strategies and modern portfolio theory based only on risk formulas and mathematical models failed.

They failed to account for what author Nicholas “Nassim” Taleb called in his book, the “Black Swan” event.

Taleb uses this analogy to describe the first ever sighting of a Black Swan by scientists when all scientific and historical records assumed all swans to only be white because a Black Swan sighting had never been seen and documented before.

In other words, it is almost impossible for modern financial modeling and risk management with their complicated formulas to properly account for seeing a “Black Swan” when only White Swans have ever been seen before.

Because of the increased intervention in markets, the lack of understanding the absolute basics earlier generations of Americans understood and the lack of common sense many people still have, I think the odds are very high that more Black Swans (asset bubbles popping or exploding like the Tech bubble of 2000 and the credit crisis of 2008) will occur more frequently in the near future.

So how does one account for a “Black Swan” in their investment portfolio?

What is true portfolio insurance? Just how non-correlated are different asset classes like stocks, bonds, commodities, etc and will they really act differently from each other by going up when the other goes down?

After what happened in 2008, I think the answers to these questions need to be discussed at length all over again.

According to economic forecaster Ian Gordon of the LongWave Group, it takes about 2.5-3 generations or about 70 years for people to forget the lessons their past generations had to also learn.

Wall St and Main St both need to relearn lessons from generations past that have long been forgotten or, unfortunately, that I think we have been taught to forget or never learned in the first place.

If my grandfather were still alive today, he’d be ashamed at the financial irresponsibility the America he helped protect during his WWII service has recently shown.

He’d be ashamed that Americans lack enough common sense to save a healthy percentage of their incomes, live below their means, pay off all of their debts and save and invest so they don’t have to work forever to pay off their debts and are able to retire comfortably.

My grandfather also owned quite a bit of Gold as the ultimate insurance policy against financial Armageddon, bad inflation or bad deflation.

Owning some gold is a lesson many of us have forgot or have never been taught in the first place.

We have been taught in modern finance and economic classes that common sense is not king, that we need and can use to protect us complicated economic formulas and mathematical models to predict everything accurately (yeah right!), that we can borrow and spend our way to prosperity at the government, corporate and individual levels and that we don’t have to save and invest to get something we want and that we can have it now on credit and pay for it later.

But, all we really need to be successful in life is to use common sense.

As Americans, except for the last 2-3 yrs, many of us especially in my generation have only grown up during great and prosperous times in our country’s history.

Until recently, my generation had only seen good times.

Past generations of Americans, like the Americans who grew up during the Great Depression of 1929 or the ones who fought for our country in World War II, like my grandfather, learned all of these lessons the hard way and understood very well what it meant to have no debt and to start saving more and to live within your means and save and invest your way through hard work back to prosperity.

Saving and investing is what paved the way for the greatest few decades in American history, when our country became richer than any other country in the world by an order of magnitude when war veterans returned home at the end of WWII.

This is a lesson Americans, for the most part, have completely forgotten.

So why is common sense in personal finance and investing not taught at all really in most modern finance classes??

Why isn’t a Common Sense 101 for personal finance class mandatory at high schools, college and/or business schools?

Why is a proper financial education not offered in schools or anywhere at an affordable price?

Why isn’t a 10%+ asset allocation strategy of physical Gold and some exposure to Gold stocks a requirement in everyone’s investment portfolio as insurance against further financial crises, calamity, chaos, inflation and deflation?

I’d like your thoughts and feedback on this. Please feel free to comment.

Finally, Gold and silver are both still extremely undervalued in my humble opinion at these prices! Especially when we are really only in the eye of the hurricane and have yet to go through perhaps the part of the storm that is much worse than 2008!

Jason Burack is an Investor, Entrepreneur, Financial Historian, Austrian School Economist and Contrarian. He Co-Founded the startup investor education and financial education company Wall St for Main St, LLC to try to help the people of Main St, USA by teaching them the knowledge, skills, research methods and investing and trading ideas of Wall St so they are better prepared to navigate through these difficult financial waters after witnessing the damages caused in 2008. After witnessing the damages first hand, and realizing his lack of a financial education, he set out on a mission, or rather a crusade, so he was properly financially educated and more prepared for whatever else is to come in the future and to help others through these difficult and uncertain times. He has spent the last 2.5 yrs mastering conventional and non-conventional thinking in investing and economics to help himself and his consulting clients achieve great investment returns and ultimately financial freedom. You can reach Jason at his blog at http://www.jasonburack.com . He and his Wall St for Main St Co-Founder, Mo Dawoud, are diligently working on setting up a Wall St for Main St investor education website in the near future that will offer both free content and subscription content for people who want to learn at an affordable price. You can also find Jason’s articles, podcast interviews, video blogs and other related content on the popular investing websites: The Daily Gold, The Financial Tube and The Daily Commodities.

Filed under Articles, Featured · Tagged with Barbarous Relic, Bubble Burst, California Beach, Cnbc, Commodity, Dc Magazine, Decency, Financial Advisors, Financial Calamity, Gold Coin, Gold Price, Gold Stocks, Inflation, John Maynard Keynes, Last Decade, Money Management, Panics, Personal Finance, Physical Gold, Prudent Insurance

Debunking Deflationist Myths & Scare Tactics About Gold

Posted by Jason Burack on June 26, 2010 · 17 Comments

Haven’t you heard?

As I type this, the US and other world economies are supposedly in nothing but increasing deflationary pressures that will not be able to be stopped by any government or central banker no matter how much stimulus or money printing they decide on doing!

At least that’s what many of the talking heads on financial TV are telling us especially within the last month or so. They have been saying this message for awhile now. Here’s an interview from Mike “Mish” Shedlock from October 2009 talking about deflation:

And so begins another inflation vs deflation debate.

Many of you who don’t want to learn everything there is to know about macroeconomics to understand what is really going on in the world right now are probably wondering is there an investment that will do well in inflation and/or deflation so you don’t have to be an expert economist to protect yourself and make an investment decision and get on with the rest of your lives?

First off, this is the best explanation summary I have read recently of what’s happening.

John Williams of ShadowStats even agrees (about short term deflationary pressures) as far as M3 goes, but is M3 even a valid measurement of the money supply and therefore of monetary inflation? My Austrian Economist friends would disagree with him here about M3 being a valid indicator of the true total money supply, but The M3 Money Supply figures John Williams has recreated do show M3 dropping!

All of this I just mentioned about deflation will be a moot point if Ben Bernanke and other heads of central banks, including the IMF and Bank of International Settlements (BIS) aka the Central Banker’s Bank decide to step on the gas pedal and add more gasoline to the fire via more stimulus!

The Italian Keynesians in Italy are even upset with Germany for its “deflation policies.”

Despite declining M3 figures, ShadowStats’ Consumer Price Index (CPI) calculations also show inflation in consumer goods and services as measured by rising prices running at around a 6% clip.

James Turk, author of the book Dollar Collapse, Founder of the precious metals storage company GoldMoney, and a consultant for GATA thinks that hyperinflation is still by far the most likely outcome in his latest analysis.

What do these mixed signals mean? What’s the truth? Can I protect myself from inflation and deflation at the same time? (The short answer is Yes, you can.)

I even wrote an article awhile ago about commodities and commodity stocks telling you how commodities and their producers offered you inflation protection and also emerging market growth in case there is no real inflation.

Commodities are really the only asset class still in a long term, secular bull market and as an investor looking to protect and grow your wealth long term, I believe you need to be invested in this powerful long term trend.

I have already written a previous and very detailed article on Silver, which I think is perhaps the best long term investment one can make. Wall St for Main St Co-Founder, Mo Dawoud, of Mo Money Blog also has an article about Silver.

But, today I wanted to talk more about Silver’s more popular big brother, Gold.

See Gold has a secret power that most people don’t even know about! Besides doing well in inflation, Gold also does well as a deflationary hedge!

Surprised huh? I will start my case for how and why gold does well during a deflationary environment later in the article.

So what’s really happening in our economy right now? What should you believe? Which experts should you trust? How can you protect your portfolio in case of inflation or deflation or both? Are we going to have bad inflation, bad deflation or will it be some sort of weird, hybrid mix that will hurt and destroy everyone (some more than others)?

These are the types of things Mo Dawoud and I think about everyday at Wall St for Main St.

Despite the evidence I have shown you of conflicting inflationary and deflationary pressures happening worldwide (I could show you a lot more conflicting evidence still but let’s keep this article relatively short) and no real clear winner in the near term, in an “I told you so” trumpeting fashion, deflationists like Bob Prechter of Elliot Wave International and Harry S. Dent are coming back out of the woodwork to pat themselves on the back for being right about their long term, “Deflationary Death Spiral” predictions.

What’s funny is deflation is really not a death spiral at all. We were just taught it was in Economics 101 by our Keynesian teachers and professors.

In fact, deflation is the cure for all of the inflation that’s been going on in our economy and monetary system for many decades. Deflation is something the markets badly want as a cure for our extreme debt problems.

The problem with deflation is central bankers and governments want to do everything they can to prevent it.

The truth about deflation is economics and business students have been brainwashed for decades that higher prices are a good thing! Higher (rising) prices are in fact inflationary if they are rampant in our economy.

Saying higher prices, loss of purchasing power in our money and therefore inflation is a good thing is a complete and total lie engineered by Keynes and his economic disciples, like Paul Krugman, who have written your school’s economic textbooks to justify government’s hidden agenda!

Higher prices are only good for higher taxes and for specific corporations. They have ZERO benefit for everyone! Higher prices do not produce higher wages. Increasing production and efficiencies, lowering costs and adding more useful skills produce higher wages.

If a business tries to raise prices too high, a competitor will come in and compete and threaten to steal market share or worse, bankrupt the company.

When the free market system is functioning properly due to innovation, proper competition and other gains in efficiency, prices should actually be falling on all goods and services while the quality of goods and services increases.

Capitalism or the free market system was founded on the belief of “Creative Destruction.”

To give you an example of how the free market works properly to benefit consumers, this is why a $600 50″ Flat Screen LCD TV of today is cheaper and of higher quality than a $5,000 30″ Flat Screen Plasma TV was of say about 7 years ago. This is how a market is supposed to behave.

We still have some markets correctly behaving in this manner but not nearly as many as there should be. This is 100% due to government interference in specific markets, like healthcare to name just one, and also large corporations deciding it is in their best interest to pay to lobby Congress and get tax breaks, tax rebates and subsidies instead of investing that capital in more useful things like innovation, research and development and other things that would have a long term benefit to society and to the company.

Many corporations have now sacrificed long term gains for short term profits. Malinvestment, corruption, inefficiencies and overbearing regulations are suffocating many markets and are preventing proper competition.

Competition and the threat of extinction produces innovation and better technology, lower prices and higher quality in all goods and services.

The problem is governments don’t like deflation even if that’s what the market says we all need to have happen. Actually, ‘don’t like’ is not strong enough. They hate deflation and will do everything in their power, legal or illegal, to fight it!

This often means changing the rules of money.

Why? Because government’s interest and the interests of specific corporate special interests completely conflict with the interests of its citizens.

The interests of government and its citizens, for the most part, are no longer aligned, which is sad, but that’s the truth about what has become reality now. Government is now a separate entity much like a corporation is a separate entity.

Many governments are still spending frivolously and have not tightened their belts like the rest of us are being forced to do in our personal lives and in our businesses.

This is the brainwashing I am talking about. You have been led to believe that there is nothing wrong with higher prices on the goods and services you need and want. I am telling you the opposite is true.

Why does the government hate deflation and lower prices?

Because it lowers their tax revenues, it gives private citizens back their purchasing power (makes money more valuable to hold and save and invest) in their money and it lowers asset prices and other other consumer prices for goods and services we need and want.

Deflation does not allow governments to use inflation as a tax to steal our purchasing power (inflation is 100% pure government policy and is really nothing but an invisible, hidden government tax) and it lowers the taxes they collect on normal things like wages, property tax, etc.

This is one of the major reasons why there is so much effort by the Fed and Federal Government to try to re-inflate the housing bubble and to create inflation.

It’s in the government’s interests to create inflation (not too much inflation at once or too many people will wake up and realize and also dump the paper, fiat currency).

The bottom line is modern governments and central bankers have not allowed deflation to occur without first trying to interfere heavily in a country’s economy and markets and to first create inflation.

History is strewn with countless examples of interventionist policy by governments where the free market was not allowed to heal itself and purge itself of the bad investments and misuse of capital.

There is some revisionist history out there in textbooks that says FDR saved the US from a deflationary death spiral during the Great Depression of 1929 because his predecessor, President Herbert Hoover, who was supposedly a proponent of the free market stood by and did nothing.

Unfortunately, this is another lie we have all been taught and you will have to unlearn.

The truth is FDR just continued what Hoover started. Hoover was an interventionist also. He was anything but a “free market” guy. History book writers who wrote the textbooks we used in school all needed a goat to make FDR look like a hero and so the “truth” about Hoover was twisted to make FDR look great and Hoover look like an evil and uncaring Capitalist pig.

The last non-interventionist President that allowed a pure deflation and did not interfere in markets was President Warren Harding during the Great Depression of 1920. This is a video of a 50 minute speech Austrian Economist, Author, and Economic Historian Thomas Woods gave on the subject:

Harding refused to interfere in the markets and he ran on an “allow deflation” platform. In fact, Harding even cut government spending in half!

While the first year of that depression was very hard, and I believe unemployment numbers were higher for that first year than in 1929, the US was out of a depression and recovering in only 18 months!

Normally, a hyperinflation occurs followed by a deflation to wipe out the mess completely and so the system (our economy) can hit the reset button.

This is a very painful process, but we cannot avoid taking any pain and I am 100% sure we are going to have to take our “medicine” aka the cure eventually. That cure involves letting bad debts and bad loans and other toxic things like Mortgage Backed Securities go to their intrinsic value of zero or close to it.

Besides congratulating themselves, these deflationists also ALWAYS have one last word of advice.

They tell you to immediately sell your gold and gold stocks! This is it they say. The top in gold is in and they are fully sure of it.

There’s just one problem! They’ve been calling a top in gold for years! How many years have these deflationists been calling a top in gold?

Well, Bob Prechter has been calling a top in gold and silver every slight increase for the last 15 yrs or so! If you followed his advice and shorted gold and silver each time, you might be bankrupt.

Here’s a link to the best summary available on the Internet of Bob Prechter’s track record of forecasts. He and his Elliot Wave followers have been a lot more correct in the short and medium term with their predictions than in their long term predictions. In fact, CXO Advisory Group, the company who compiled the statistics and summary of Prechter’s forecasts gave Prechter a Guru Accuracy Rating of only 26%.

I would not be listening to Prechter for long term investment advice. In my opinion, he’s a very good technical trader. That’s it.

When asked what to buy with the money from selling your gold and gold stocks, Bob Prechter recommends short term US Treasuries as the best option.

That’s funny to recommend you buy debt in a debt crisis don’t you think?

Wouldn’t certain types of cash (non G7 “Westernized” currencies) be better and safer than US Treasury debt? Dent has the same recommendations as Prechter.

A Better Solution

Ok, so why the conflicting evidence of inflation and deflation? Is it even possible to have both inflation and deflation at the same time?

The answer is ‘Yes’ and according to Dan Amerman, this has actually occurred many times throughout history!

Dan Amerman is a former longtime, and now reformed (he saw the error of his ways) investment banker who has switched from helping Wall St design weapons of mass destruction (financial derivatives) to quitting that industry about a decade ago so he could focus on helping out the people of Main St from losing everything they have to Wall St and the government.

He also wrote the textbook many central bankers still use, so it would be slighting him to call him anything other than an expert at what he does.

He has a free Turning Inflation Into Wealth Mini-Course on his website that you can sign up for that he sends to you periodically through email updates.

I’d recommend you sign up for his course as he can help you increase your Financial IQ exponentially for free if you are willing to spend the time reading and learning!

After that brief introduction to Amerman, for those of you unfamiliar with him, now back to my regularly scheduled argument.

Deflationists say we cannot have both inflation and deflation at the same time. Dan Amerman counters that this is the Santa Claus Theory of Deflation that is so prevalently taught in classrooms by economics professors in academia.

For deflationists, this is what they’ve been taught in the economics classrooms by mostly Keynesian Economist schoolteachers and professors who teach central planning, tout higher prices as a good thing, and lots of other Keynesian nonsense and General Theory dribble.

This theory of deflation is theory and jargon and only exists in a vacuum where the US economy is not affected by other global factors and pressures!

In my humble opinion as well as Dan Amerman’s opinion, it can and will destroy your net worth if you adhere to it religiously and bet most or all of your investment and/or retirement money on it.

In fact, according to Dan Amerman, pure deflation where asset values AND prices/monetary supply both deflate at the same time has never occurred in modern history in the way and the historical examples the deflationists claim it has!

Amerman cites deflationists 2 main examples and successfully counters their arguments:

I and many other experts not believers in Keynesian macroeconomics beg to differ.

They say deflation, which is a decrease in money and credit, is so powerful that there cannot be any way for central bankers and governments to continue to inflate/devalue/debase the Dollar and other paper currencies. I beg to differ.

As a last resort, the Fed and other central bankers can ALWAYS devalue the US dollar against gold by going into the open market and purchasing gold.

When you do that you are essentially shorting your own currency to make it weaker.

Now, admittedly, the US economy is facing some short term deflationary pressures, but the US economy and our stock markets are not inside a vacuum because of globalization and there is not deflationary pressures worldwide. In fact, China has increasing inflationary pressures!

Also, Helicopter Ben Bernanke and the other Keynesians at the Fed as well as President Obama and others in Congress are seeing the same thing and it’s time for another round or three or five of large Stimulus and Job bills!

Another $80 billion Stimulus bill is in Congress already and more will surely come.

There are nowhere near the amount of signs outside of the developed world that deflation is a risk. Inflation is still, by far, the main concern in emerging markets and will continue to be the main concern worldwide for years to come as all world governments continue to print money, Austerity Measures or no austerity measures.

Ok well now let’s move onto the conclusion and something the deflationists really have ZERO credible explanation for happening, the curious case of Homestake Mining.

Citing this example will win you an argument against deflationists of why gold does well during deflation every time!

The Curious Case of Homestake Mining and How it Disproves Everything Most Deflationists Think About Gold’s Behavior During Deflation

I have debated deflationists often about inflation vs deflation and about gold. All deflationists HATE gold and think it is a very poor investment in deflation.

The most popular answers always are, “you can’t eat gold,” “if the world is ending gold will be useless,” “if things ever come to that government is going to confiscate all of your gold and we are going to laugh at you, give you nothing for it and we are going to tell you ‘I told you so’,” “you will not be able to defend your gold,” “water, food, guns, ammo and plant seeds will be more valuable.”

They then say how gold will collapse during a deflation and the price will fall by more than half. There’s just one problem.

History says otherwise!

The truth is they haven’t done their homework.

Almost none of the deflationists I have talked to, and I have debated dozens, have studied Homestake Mining and what happened to the company during the Great Depression of 1929. The deflationist camp cannot explain it away so they simply try and dodge the “Homestake” golden bullet/ace.

For those of you unfamiliar, Homestake Mining was the only major gold mining company listed on the NYSE during the Great Depression of 1929.

When deflation occurred and FDR took over for President Hoover, one of the first things he did was try to seize/confiscate all privately owned Gold.

Government agents were stationed outside banks and people were told to hand in all of their gold in exchange for a $20/oz price. Similar attempts were made with silver.

FDR then revalued gold to $35/oz against the US Dollar effectively devaluing the US Dollar against Gold by over 40%!!!!

The gold was then melted down into bars and a secure storage facility was built at Fort Knox.

After the confiscation, the bankers and people at the Fed knew the gold confiscation and dollar devaluation was coming ahead of time and they acted on this inside information and they managed to buy gold bullion and also shares of Homestake Mining knowing the confiscation of gold would make it a more scarce and desired commodity.

Confiscating gold will also create a Black Market for gold as people will have an even larger demand for it because of its scarcity.

What ensued after FDR’s confiscation of gold was shares of Homestake Mining reacted as a direct proxy for gold. Shares in Homestake Mining took off like a rocket despite deflation (it wasn’t real deflation as Amerman explains because government wouldn’t allow it).

Here are some more articles on Homestake Mining and Gold’s Secret Deflationary Powers proving my point:

The Bottom Line:

So you now know Gold’s secret power. That besides doing well in inflationary times, during deflationary times gold and gold mining stocks also do well. This is why people need to own both physical silver and gold and also mining stocks as a diversified precious metals portfolio in case of confiscation.

Gold will outperform silver during deflation and Silver will outperform Gold during Inflation. Even if gold is confiscated, other proxies for gold will shoot up in price like Homestake Mining did in 1929!

In conclusion, based on my own research into this matter, whether there is inflation or deflation or both, you will be a lot more protected in physical gold and gold mining shares than you will be in US Treasuries or in a lot of the conventional paper, fiat currencies that are still erroneously considered safe havens.

Moving some cash into foreign currencies outside of US Dollars, British Pounds, Japanese Yen and the Euro is probably also a good idea as well.

What’s happening now in the markets and our economy is exactly what gold was designed to protect against.

Gold is currently being revalued by the markets as money.

It is insurance and protection against financial calamity and chaos.

The deflationists have not properly studied history concerning gold and their arguments have no credible explanation for why Homestake Mining took off like a rocket.

Every deflationist I have talked to has dodged the Homestake Mining argument in fact.

I’d much rather be holding physical gold and gold stocks than holding US Dollars and US Treasuries.

Do you own due diligence into this, but I am of the opinion, that if you as an investor don’t have exposure to physical gold and silver or gold and silver mining stocks, you have not done enough research into this matter.

Governments and central bankers are going to continue to do everything they can to continue to debase, devalue and inflate these paper, fiat currencies and you need to protect yourself from this by diversifying in precious metals.

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Should I Invest In, Bet Against or Trade BP??

Posted by Jason Burack on June 13, 2010 · 14 Comments

Should I buy shares of BP? Should I buy out of the money puts on BP betting it will go bankrupt, be bought out for pennies on the dollar by another big oil company like Exxon Mobil, Shell, Chevron, Conoco Phillips, PetroBras or one of the 3 giant Chinese Oil companies like Petro China, CNOOC or Sinopec?

Or, will BP need a bailout from the UK government? Can the UK government even afford a bailout? What do you think about BP’s stock and what else is going on right now in the Gulf and how it affects the entire deep water offshore drilling industry?

I’ve been asked my opinion on these questions or others like it a number of times over the last week or so online and whether or not BP is a good investment, or if its a good candidate to bet on a continued slide towards ZERO so I thought I would address everyone’s questions here on my blog and give you all my opinion of the situation as I currently see it.

Astute Investor and Trader, Barry Ritholtz, just released a similar breakdown for his readers about BP and I agree with a lot of what he says. I will try to extrapolate further and go into even greater detail for my analysis.

The problem, based on my own research into this tragedy and my opinion of the matter, is that right now BP is being anything but honest (are they really this incompetent and inept or have they been intentionally misleading all of us for as long as possible to keep the real truth from getting out?).

Because of a lot of political spin and much “mis-information,” it is tough to tell what the facts really are based on conflicting media, government reports. Despite the research I am about to share with you, I still believe we are all just speculating to a certain extent.

With that being said, we can definitely help try and put the odds of success in our favor by trying to intelligently speculate based on the odds of certain situations and scenarios playing out.

By doing some further in depth research and analysis, I can help you make a more informed investment or trading decision based on some fundamental analysis, some technical analysis and some intelligent analysis of the risk/reward equation based on my opinion of the facts. Then, you can decide what to do based on the likelihood of this scenario or that scenario. Here’s some TA of the BP stock chart courtesy of Wall St for Main St Co-Founder and creator of the Mo Money Blog, Mo Dawoud:

Investing and trading is about calculating probabilities because you analyze what you think are the facts and you try and make the best informed decision you can. Sometimes the best decisions don’t workout as planned and sometimes they do. That’s not just investing, that’s life!

But, if we concentrate on the process and developing great research habits and a step-by-step guide to how we look at a potential investment rather than just the results of “picking winners” and doing a great job of research I am confident we can put the odds in our favor of winning more than we lose.

So philosophy aside, let me lay out the facts in the situation down in the Gulf, as I currently know them that are supposedly accurate up to the minute I started writing this article at 11:23PM on a Thurs, June 10th 2010.

As of now, a bet on BP, up or down, is definitely speculative in my humble opinion and anything but easy money! Buying shares of BP would certainly not be an investment at this point as safety of principle is anything but certain. Here’s why:

For starters, let’s try and decide on what the facts are. 11 people are dead. BP, Transocean (RIG), Halliburton, Cameron International and Anadarko Petroleum were all involved in either owning, operating, managing or running the deep water rig before it blew up.

When this many companies are involved, you can bet courts will assign blame comparatively in a civil lawsuit. This is US Tort law 101. We are looking at negligence charges and perhaps even gross negligence charges (at least I think so) which mean potentially substantive amounts of punitive damages could be awarded by a jury.The US military might also need to get involved and if nothing else works, including relief wells, the last option a few months from now is a “nuclear option.”There is also speculation by some scientists that the Gulf of Mexico could turn into a Dead Sea of sorts where it is not possible to sustain any kind of ocean/marine life. That would not only be disastrous for the Gulf States, it would also be disastrous for the entire United States!

I have even read that there is now an underwater volcano! Another leak from BP’s cracking of the well bore has sprung another giant plume 5-7 miles away that is releasing 120,000 or more barrels/day of oil at a 2nd leak from the same drilled well! So let’s try to figure out what’s fact and what’s fiction…

Here’s a 7 part documentary on You Tube for you to watch called Blood of The Earth- The Gulf Spill. It summarizes things fairly nicely:

Here’s video commentary from some other Peak Oil and Energy experts:

There is also what seems like a daily debate about the amount of oil estimated to be leaking out from underneath the ocean floor. In fact, estimates have just been revised upwards again!

The estimates of amount of oil being leaked by the spill has gone from 1,000 barrels/day to 5,000 barrels/day in the past month and I believe we are now over 20,000 barrels/day officially on the mainstream media and from BP.

The problem, based on my own independent research, is that those estimates are in fact low and the real amount might be 120,000 barrels/day or more and it has been spilling that amount from day one! What a lie!

Those are some rather large discrepancies if you ask me and it’s obvious someone is intentionally lying. From most technical expert’s opinions who have spoken to people involved and other industry experts, the overwhelming if not all of the blame rests on BP’s shoulders!

At least that’s what I am hearing from energy experts like Matt Simmons, Byron King and others. Here’s a long collection of articles and videos I have compiled for you over weeks of researching this. Note in the videos and articles the expert’s opinions of this accident, what caused it, who’s at fault, how we can stop the oil spill and if BP and the other companies involved will go bankrupt:

The way I see things, most of the uncertainty is based on the amount of lawsuits and amount of legal liability BP is going to face. Will there be a limit on the amount of damages victims can ask for? How much punitive damages can be awarded by a jury to the victims in a civil suit?

These are the most important questions that I believe one needs to know the answers to or at least have a very good idea of the answers to them before you risk any money, up or down, concerning BP.

Your interpretation of US Tort law and how liable and (grossly) negligent a jury will find BP will need to be factored into any investing or trading decision if you want to be as thorough as possible and go for the bigtime investment or trading gains!

Here’s my breakdown of the large lawsuits and other legal liabilities, fines, etc BP is facing from major parties (more will be added as we go and the longer this spill goes):

All of the Gulf fisherman who no longer have viable occupations in the area and will need to be retrained or helped to be relocated. This industry was the 2nd largest fishing and seafood industry in the US behind Alaska and it was estimated to bring in over $2 billion a yr in revenue! That’s a lot of money to just magically disappear!
The tourism industry for the Gulf who’s beaches are now ruined and are unsafe for swimming, etc making it extremely unlikely that they get any tourists down there until things are cleaned up A LOT. You are looking at years worth of damage to that industry!
Environmentalists- You will see every environmental group in the US coming out of the woodwork to sue BP! These groups and their shark lawyers smell blood in the water and want to take one of Big Oil’s oldest to task! This is a chance for these guys to make up for the less than desired results they got in the Exxon Valdez spill up in Alaska over a decade ago.
Home Owners- This spill will make it exponentially tougher to sell homes down in the Gulf area as the warm Gulf waters was one of the main attractions of owning a place down there.
State Governments- Attorney Generals from the Gulf States will sue on behalf of the state for cleanup feeds and perhaps also lost tax revenues from business BP caused to cease. With many activities in the Gulf no longer possible, that is a tremendous amount of tax revenue those states were counting on.
The Environmental Protection Agency (EPA)- I believe the EPA is also allowed to sue and/or fine BP a humongous amount of money to pay for the cleanup
Shipping Vessel Companies- The BP spill could make it close to impossible for shipping vessels carrying important commodity cargoes like natural gas, crops, etc to go through those waters. A group of shippers could join together to sue BP if this spill restricts, limits or stops them from conducting business

Now, after naming a good amount of the possible victims (some are real victims who have had their lives devastated, some are suing mostly on moral and environmental grounds and some are really just legal opportunists looking to make some quick and easy money in a settlement outside of court) in this hypothetical case against BP, let’s get into a very quick lesson on some US Tort law.

Some of you might be aware that I spent one semester in law school. I got my lone A in Torts and I also took a Civil Procedure class (that class was my first law school final and I didn’t do as well as in torts but I knew the material!).

First off, it is going to be VERY tough for BP to get a fair trial anywhere in the US with an unbiased jury! Everyone has seen the images on TV of animals covered in tar and thick oil either dead or struggling to hang on! These lawsuits will be filed in either state court (in any of the Gulf states affected) or US Federal District Court.

BP would prefer these lawsuits are moved to the US Federal District Court system as once the cases are moved there, BP can ask a judge to move the cases outside the Gulf area to another US Federal District Court location in a state outside of the Gulf region to get a fairer trial. Will this happen? What are the odds of BP getting a preferential move?

Honestly, it depends on the judge who is hearing their argument to move the case. So this would be another important unknown variable it is currently tough to account for.

But, the bottom line is it will be nearly impossible for BP to get a fair trial from an unbiased jury that has not seen any of the “carnage” and devastation on the news on TV or read about it. People might not know or care to know all of the details but everyone has seen the pictures of animals suffering for survival and covered in oil and tar and being killed by harmful dispersants.

This bias will be very widespread against BP across the entire US from coast to coast in my humble opinion. Because of this, BP is already behind the proverbial 8 ball before it ever steps into a court room, $1,000+/ an hr attorney or not! Add in the fact that BP is considered a foreign multinational corporation and that’s 2 strikes. The court of public opinion is not in BP’s favor and that will probably never change.

BP is going to be a dirty 2 letter word here in the US for the rest of my life.

Now let’s do some fundamental analysis analyzing BP’s balance sheet to determine what kind of a hit the company can afford to take and still keep itself from going bankrupt, needing to issue many millions more shares to dilute its shareholders to raise cash to pay for the cleanup and lawsuit damages and how many assets BP will need to divest itself of to stay in business long term.

Obviously these are just my opinions, but I want to be as thorough as possible for everyone and show you how a professional investor thinks and analyzes all of these variables. My answers will all be conditional because variables, such as amount awarded for punitive damages by a jury, can vary very significantly.

First, let’s analyze BP’s balance sheet. To analyze a Balance Sheet, you need to know the Accountant’s Equation.

The Accountant’s Equation for Balance Sheets is:

ASSETS – LIABILITIES = OWNER’S OR SHAREHOLDER’S EQUITY OR ASSETS= LIABILITIES+ OWNER’S OR SHAREHOLDER’S EQUITY

You can shorthand these as A= L+O or A-L=O

As of their most recent Q1 2010 10K filings, BP has Total Assets of $240 billion, Total Liabilities of $136 billion and Shareholder’s Equity of $104 billion. These numbers must add up according to the accounting equation I just mentioned above. So 240= 136+104 or 240-136=104.

These estimates are supposed to be conservative, but as Lehman Brothers, Enron and many other banks have proven recently, companies can and do often heavily overvalue/overstate their assets and understate their liabilities to try and cheat people and keep the share price up. For the sake of keeping this article from getting unbelievably long and from reading through a full annual report, we will take BP’s word about these estimates and do some analysis of them.

Another important figure is BP’s stated Cash and Cash Equivalents position on its Balance Sheet of about $8.34 billion dollars as of the end of 2009. This cash position is probably even lower today as BP was not getting large production out of its wells and has many, heavy CAPEX (capital expenditures) ahead of it.

This seems like a giant amount of cash, until we start guesstimating at how much money BP will have to pay out in fines, cleanup fees and lawsuits.

My estimation is for BP to have to pay many, many, many billion in total fees, liabilities, etc. Let’s put it this way. The Exxon Valdez spill, which occurred over a decade ago and was under 1/10th the size of the current BP spill in Alaska with limited inhabitants cost Exxon about $7 billion in today’s dollars adjusted for inflation after decades of lawsuits, appeals and settlements.

What do you think a spill magnitudes greater and still ongoing perhaps for months or years will cost BP?

I don’t think it is unreasonable at all for BP to have to pay $70-150 billion easily in fines, cleanup fees and lawsuit settlements.

There is a lot of argument from the talking heads on the mainstream financial media about whether BP should cut its dividend? I think BP should but the CEO and their Board of Directors is refusing at least right now even though that would be the smart and prudent thing to do for the long term future of the company! Wouldn’t you want to preserve cash if you knew you had a lot of highly unpredictable and possibly very large bills coming due in the near term future?

Why are they refusing? Because the executives of BP don’t want to get fired, voted off the BOD, etc even though the odds are very high of that happening anyways. BP’s higher ups also know if they get rid of the dividend or cut the dividend, people will start dumping the stock even faster than they are now!

Ok, back to the analysis of BP’s balance sheet. BP obviously has assets. That’s not the problem.

The problem is BP’s shareholder’s equity, the amount of debt they have used to fund growth (mostly earnings growth), profitability and to replace lost production and lost reserves due to depletion.

BP’s Debt:Equity ratio is one of the worst of any of the major oil companies especially when BP is not able to increase its reserves or its production. Here’s a table of some calculations and a breakdown I did of “Big Oil’s” balance sheets and showing you a comparison of the other companies’ Debt:Equity ratios relative to BP’s:

What this comparison table tells me is that, in my humble opinion, relative to many of its peers, BP management is bad at correctly deciding if and when to take on debt and where and when to invest its capital!

I would also be willing to bet BP’s ROA, ROE and ROIC are poor relative to the other Oil Majors as well. BP and also Shell, who has a somewhat lower Debt:Equity ratio than BP, are in my opinion “treading water” as they are forced to take on heavy debts to try and grow earnings in the face of declining production and declining oil reserves.

This is not the way to successfully grow a healthy company. A healthy company should be able to grow from its own free cash flow as that cash from operating profits is reinvested back into the business to grow organically or is used smartly for acquisitions. Oil is a very cash intensive business, but BP seems to be misusing its cash and also taking on heavier and heavier debt levels to try and produce better earnings.

This is a warning sign that current and prospective BP investors and traders need to monitor.

BP management needs to take on lots of debt and when they take on debt, they are unable to produce or return a dollar of equity for shareholders for every dollar of debt they take on.

Exxon Mobil just made a very major acquisition, XTO Energy, which is an unconventional oil and gas producer here in the US. They are not wasting as much money as BP is out drilling holes miles below sea level to look for a needle in the haystack elephant oil fields, cutting corners to save money and not caring about industry wide safety standards. Exxon’s recent acquisition should be immediately accretive to its balance sheet or if not immediately, very shortly and will produce earnings and a handsome ROIC.

BP management seems to be using its capital differently and a lot more poorly!

Conoco Phillips had similar problems to BP as they took on way, way too much debt the last few years and their management has been working very hard to clean up its balance sheet.You cannot say the same thing about BP’s management!

That $8.34 billion cash position BP has might look like enough now, but that’s before every lawyer and offended party has gone after them and there are a lot of offended parties!

Any way you look at things, I think BP management will be forced to cleanup its Balance Sheet. I think some assets will have to be sold no matter what.

The total fallout from all of this mess only has to be $104 million or greater for shareholder’s equity to get wiped out completely! Once shareholder’s equity is wiped out, to prevent bankruptcy, the balance sheet will have to be restored somehow and all 3 major options are not good ones. If/when that happens, BP is left with very few options to protect itself from going bankrupt.

It can:

Sell off some or many of its assets to raise cash to shore up shareholder’s equity
Issue millions or billions more shares and dilute their existing shareholders
Go to the bond market and ask for some loans (corporate bonds)

All 3 options I just mentioned will not be desired by long term shareholders of BP. Option 3 means BP takes on a lot more debt and will not have the cash producing assets to be able to easily service those debts.

It’s one thing to buy cash producing assets with debt. That’s considered good debt. But, taking on debt to pay off litigation, fines and lawsuit judgments will not put cash back into BP’s “pockets” so that’s not good debt. That’s bad debt because BP is not using the cash from the loans (bonds) to buy assets (good debt).

Option 2 is heavily dilutive and shareholders, in general, HATE dilution by management for really anything! Think Citibank which has around the same market cap as it did when it was a $40/share stock but now it has many, many, many millions more shares out in circulation as it did beforehand years ago. It’s one thing to dilute your shareholders to buy an asset and another to dilute your shareholders in a resort to stave off what could be inevitable bankruptcy anyways.

Option 1 is the least dilutive and also the least painful. But, that option assumes BP can get full value for selling its assets. Competing companies are like sharks who smell blood in the water when they see a fire sale. What if BP sold many of its assets off and only received pennies on the dollar for them? Would that upset you as a shareholder? I know I’d be upset.

Because of all of these scenarios, and the legal noose about to be fitted upon BP’s neck, I’m of the opinion to stay away from buying BP stock for anything other than a short term trade on the long side until more of the upcoming bad news is actually priced into BP’s stock.

BP is not longer an investment. It’s purely a speculative stock because of the uncertainty! In fact, there are much better odds of making money buying out of the money puts on BP as hopefully you can see all of the humongous uncertainties and potential for more losses and bad news coming out of the Gulf.

With that being said, BP would look a lot more attractive as a long term investment and a lot more of a bargain if a lot of the uncertainties I mentioned throughout this article are clearer and a ton of bad news was priced into the stock.

BP’s market cap, or market capitalization or the value the market is giving the company is currently about $106.35 Billion.That’s an overvalued market cap or value the market is giving BP for the risks and uncertainties the company faces in the present and future!

Based on my analysis of BP’s Balance Sheet and the potential for large lawsuit and cleanup judgments, BP is looking at many billions in losses in for a very long time into the future.

If you are looking to invest in BP, now is not the time!

The Bottom Line:

*UPDATE* 6/17/2010- BP’s BOD has correctly decided to cut/postpone their dividend for at least a year (I called this last week) and will begin to sell assets to setup the $20 billion account Obama and Pay Czar Kenneth Feinberg will be requiring them to setup for victims of the Gulf spill.

In conclusion, based on my research, my fundamental analysis of BP’s balance sheet and their potentially enormous legal liabilites they are going to be facing for many decades in the cleanup, I am of the opinion that BP is NOT a good investment at its current stock price!

I still don’t think this $20 billion Obama has asked BP to set aside in a trust is enough to cover much of the expenses.

However, my opinion about investing in BP changes if the stock prices drops below $20 into the $10-15/share range.

I do not see BP shares going lower than that as another Big Oil company will probably buy them. There’s no doubt about it BP has assets. The odds are just good that BP will have to sell some of those assets to pay back the victims and cleanup.

BP could be a trade to the upside based on rising oil prices and peak oil, but the risk is not worth the reward and my investment money will be staying as far as possible away from BP!

If the market reprices BP’s stock even more significantly and more of the lawsuit risk and bad news gets priced into BP’s stock and the shares fall another 50% or more and BP starts being more honest, BP shares look a lot more attractive

But, my opinion of the facts that I have presented to you in articles from other experts and from video documentaries on You Tube is that BP and the White House has been covering up the magnitude of the problems with the size of the spill, the mishandling of the cleanup, using toxic dispersant that they say is not toxic and improper clean up procedures, etc.

My guess is that as of now BP has a 25% shot at bankruptcy (in the next 2-3 yrs) depending on if/when they can stop the oil from spilling (I have lowered the odds of bankruptcy from my original post as BP has cut the dividend and will start to sell assets to raise cash). This will be a moot point if they cannot stop the oil from spilling.

BP has also brought in drill ships and oil tankers that can help more in soaking up and containing the oil.

The longer this continues, the more likely it is BP will need a bailout from the UK government (UK is bankrupt so money might be printed/funneled backdoor from the US Federal Reserve to the Bank of England and then onto BP) or it starts selling off a lot of its assets. The asset selling will most likely have to happen anyways UNLESS the US and/or UK taxpayer is put on the hook for ALL or most of BP’s legal cleanup and lawsuit judgments.

This scenario would be another bailout of a “Too Big To Fail” where the losses were socialized and the profits were privatized. Can you imagine the revolt throughout the US if it was found out the US government bailed out BP after they ruined the Gulf of Mexico?

I don’t want to even think about that any further than after typing this! That’s how bad things would be! I also wouldn’t want to be a politician from either party in DC if a scenario like this happened.

The bottom line, in my humble opinion, is that BP is the proverbial dividend/value trap and a falling knife that actually should start accelerating even further downwards shortly. I predict good odds of much further downside for the stock based on my fundamental analysis and Mo predicts good odds based on his Technical Analysis.

BP is a good shorting candidate if you are a daring trader although I think the smarter and safer way to play it that way to the downside would be to but cheaper out of the money puts that give you time to let this play out and let the market revalue the company significantly downward. I’d be looking at the Jan 2011 puts or further out.

Be willing to pay a few hundred bucks more per option contract to give yourself significantly more time to let this play out. The odds are good that those relief wells will not completely contain the spill.

The market is going to punish BP further. BP management deserves to pay a high price for the excessive risks they took. It’s one thing to be able to reach the oil and another to pull it out of the ground safely.

It’s a question for me of when and not if BP’s stock gets hammered even more. I don’t see BP surviving this disaster as the same company, if it survives at all. My guess is it will need some sort of bailout regardless. That means more money will need to be printed and the US taxpayer could endup bearing the largest burden again!

If BP is also found guilty by a civil suit jury of gross negligence, you can also throw the idea of comparative damages (for the most part out the window). The tortuous offender who commits gross negligence is almost always found to be 100% liable for an accident where there would have normally been more evenly split comparative damage blame assigned and payouts assigned.

The bottom line is if you want to buy BP shares, the best thing you can do is sit and wait and let things play out further and let more and more bad news get priced into the stock! That’s what I would do if I wanted to buy shares. Mutual funds that are dividend stocks only will also start dumping their millions of shares now that BP has officially cut or suspended its dividend for at least a year.

Filed under Articles, Featured · Tagged with Address, Astute Investor, Bailout, Bankrupt, Bankruptcy, Barry Ritholtz, Bet, Betting, Blog, Bp, Buy Shares, Buying Shares, Calculating Probabilities, Chevron, Chinese Oil, Civil Suit, Cnooc, Conoco, Conoco Phillips, Deep Water, Easy Money, Extent, Exxon, Exxon Mobil, Fundamental Analysis, Government Reports, Gulf, Gulf Coast, Gulf of Mexico, Halliburton, Intelligent Analysis, Invest, Investment, Jury Award, Lawsuits, Legal Liability, Likelihood, Money, Odds, Offshore Drilling Industry, Oil Companies, Oil Company, Pennies On The Dollar, Petro China, Petrobras, Principle, Punitive Damages, Real Truth, Risk Reward, Scenarios, Sinopec, Spill, Starters, Stock, Tragedy, Uk Government, Uncertainty

Previewing The Great Manipulation Debate

Posted by Jason Burack on May 13, 2010 · 2 Comments

Hello everyone.

Today, I am going to preview the much anticipated debate coming up this weekend on Jim Paplava’s Financial Sense Newshour between the Gold Anti-Trust Action Committee (GATA) and Jeffrey Christian of CPM Group.

This much anticipated debate concerns whether or not there’s manipulation in the gold and silver markets. Jeffrey Christian says, ‘no’ and GATA says ‘Yes.’

Many of you who know me know my stance on the matter.

I personally think the facts are overwhelming! Especially considering the most recent events of a whistleblower, Andrew Maguire, giving an exclusive interview to King World News specifically about how, when and why the manipulation occurs.

Also, in the last week, JP Morgan is now being investigated by the Department of Justice’s Ant-Trust Division for criminal charges in its alleged silver market manipulation.

Would the DOJ involved in an investigation that the CFTC was supposed to handle on its own if things werne’t this serious?? Why would the DOJ leapfrog the CFTC (CFTC is going to file possible civil charges as well) if there was not serious evidence of wrongdoing and market manipulation?

Thanks to Ted Butler and GATA, and the other whistleblowers this overhwelming evidence is finally being brought to the mainstream and to light. I cannot wait to hear this debate on Sat! And, hopefully, I cannot wait for Jeffrey Christian to get the verbal beatdown he deserves in the debate from GATA!

I am not a fan of Jeffrey Christian. He is a former longtime employee of Goldman Sachs and I believe he is being less than honest in his expert “opinion” of the gold and silver markets. This is especially the case when he says it’s no big deal for it to take months to get delivery of your physical silver (it’s a default because COMEX and the LBMA claim to have plenty of silver ready for immediate delivery in good bar form) and he also says his banker and investment banker friends would never take the risks of going short that much metal. Hello subprime exposure and credit default swaps on mortgage backed securities??

Please come back after the debate and leave some comments below this thread on your thoughts of how the debate turns out and if you agree or disagree with GATA’s claims.

I look forward to reading what others have to say on this important matter. Without transparency and honesty, we can’t and don’t have free markets!

Filed under Articles, Featured · Tagged with Action Committee, Andrew Maguire, Beatdown, Cftc, Civil Charges, Comex, Cpm Group, Credit Default Swaps, Criminal Charges, Debate, Debate Concerns, Financial Sense Newshour, Gata, gold, Gold And Silver, Goldman Sachs, Hello Everyone, Investment Banker, Jeffrey Christian, jim paplava, Jp Morgan, Longtime Employee, Manipulation, Market Manipulation, Mortgage Backed Securities, silver, Silver Market, Silver Markets, Ted Butler, Trust Division, Whistleblower, Whistleblowers

Problems with the Dollar Index and Why It’s Misleading

Posted by Jason Burack on May 11, 2010 · 6 Comments

“If you only watch the “dollar index,” there is no way you can know how sick the dollar really is.” -Louis Navellier

Many of you have heard on TV that the US dollar is considered the “best house in a bad neighborhood.” That phrase has been thrown around a lot by many people recently. I have even thrown it around on occasion.

The phrase might be relatively true when comparing the dollar to other bad paper, fiat currencies like the British Pound, The Euro and the Japanese Yen.

But, that’s only considering when one compares the dollar against most of the components in the current makeup of the Dollar Index. The fact of the matter is that the Dollar, along with many others currencies worldwide are being competitively debased! Michael Maloney of GoldSilver.com has called it the “race to debase.”

For a long time, really since the Bretton-Woods agreement at the end of WWII, the US Dollar has been considered king of all of the currencies. And, the dollar was “King Dollar” until President Nixon closed the Gold Window against Congresses’ wishes in 1971 and declared “We’re all Keynesians now.”

Prior to that there was a legitimate reason to call the dollar king. It was backed by gold and also by silver (silver certificate exchanges were stopped in the 1960s).

After the dollar’s link to gold and silver was broken, the dollar became like every other paper, fiat currency and there was nothing special about it.

Some, like CNBC’s Larry Kudlow, still refer to the dollar as “King Dollar” but I obviously disagree or I wouldn’t be writing this article.

The perception is that the US Dollar is still considered a safe haven for investors. I beg to differ, because a safe haven has to also be a store of value and the dollar is clearly not.

Look at a graph of the dollar’s loss in purchasing power since the Federal Reserve was created in 1913. This chart is kind of old and the dollar has dropped even more in value, but hopefully you will still get the point I am trying to make by sharing this chart.

But, I’ll admit that the perception is definitely still out there among investors that the dollar is still a safe haven and for now, perception might still be reality. It’s just not the truth. It’s a facade, an illusion, a mirage!

Do you really want to bet a lot of your long term financial future on a mirage??

People like Treasury Secretary Timothy “I don’t gotta pay my income taxes for a decade and won’t get in trouble” Geithner also states in public how they favor a strong dollar policy which couldn’t be further from the truth! You will often hear Ben Bernanke say the same thing.

But, it’s impossible to pay back your debts in cheaper dollars and also defend the dollar and keep it a strong currency!

Here’s videos of Jim Rogers and Robert Kiyosaki talking about the Dollar:

The problem, in my humble opinion, is that the Dollar Index itself has MASSIVE problems and inefficiencies that need to be addressed so a more accurate measure or picture of the US Dollar’s current weakness relative to other world currencies can be shown instead of the fake strength the US Dollar is now showing over the Euro because of fears of Greece and other PIIGS (Portugal Italy Ireland Greece Spain) in the EU’s potential contagion situation.

The US Dollar being the best house in a bad neighborhood is certainly NOT true when you compare the US Dollar’s historical gains (or losses) against other currencies of creditor nations and/or with lots of natural resources like the Australian Dollar, Canadian Dollar, New Zealand Dollar, Brazilian Real, and the other Asian Tigers (besides Japan).

In fact, the US Dollar has been getting its a$$ kicked by the currencies I just mentioned in the previous paragraph for awhile now!

For those of you unfamiliar with the U.S. Dollar Index, let’s try to summarize what it is and what is accomplishes.

Here’s a very good article on this same subject by a friend of mine:

Deconstructing the USDX: Putting Dollar Decline Into Perspective

One of the biggest problems with the Dollar Index and why it’s no longer an accurate measure of the Dollar’s strength or weakness is that it does not take into consideration the fact that we have a much larger global economy now than the one we did when the Dollar Index was first created.

Since it’s inception, the Dollar Index has only undergone some component changes when the Euro was introduced.

If you carefully review the components of the current Dollar Index, and the weighting competing currencies are given, you will see that the US Dollar is still competing really only with the old G7 countries.

Because of this, the US Dollar still has the illusion of being a “safe haven” currency during times of crisis. It’s all a game of perception…. for now!

However, when enough people finally discover the truth about the dollar and discover that they can get better safe haven protection in gold, silver, other currencies and other commodities, the confidence game will be up and people will start dumping dollars!

When people from outside the US and inside the US start dumping dollars, the game will be over.

In the meantime, the Dollar Index is only a good barometer of the Dollar’s “Health” relative to Japan, UK and the EU. It’s a very poor gauge of the Dollar’s health versus other foreign currencies not included in the Dollar Index. Until they revamp the Dollar Index, add in more components and re-weight it, it’s not going to accurately tell you very much of the Dollar’s relative strength versus ALL world currencies!

Especially when the Dollar has lost more than 50% of its value against currencies like the Canadian Dollar, Australian Dollar and the other Asian Tigers (Thailand, Singapore, Indonesia, etc) over the last decade or so.

So, in conclusion, beware of the Dollar Index. It does not tell you as much as you probably think it does. If they make changes to it and revamp it so it shows a more global perspective, then the Dollar Index will not be as misleading as it is currently setup to be.

If you know who the creators of the Dollar Index are, email them and see if they will change the components. Otherwise, it will remain very misleading.

Filed under Articles, Featured · Tagged with Accurate Measure, Asian Tigers, Australian Doll, Australian Dollar, Bad Neighborhood, Bretton Woods Agreement, British Pound, Canadian Dollar, Cnbc, Congresses, Contagion, Creditor Nations, Currencies, Dollar Decline, Dollar Index, Dollar Policy, Dollar Strength, End Of Wwii, Euro, Facade, Fact Of The Matter, Federal Reserve, Fiat, Fiat Currencies, Fiat Currency, G7, Global Economy, Gold And Silver, Greece, Income Taxes, Inefficiencies, Ireland, Italy, Japan, Japanese Yen, Jim Rogers, Keynesians, King Dollar, Larry Kudlow, Legitimate Reason, Louis Navellier, Makeup, Massive Problems, Michael Maloney, New Zealand Dollar, Paragraph, Phrase, PIIGS, Portugal, President Nixon, Purchasing Power, Robert Kiyosaki, Safe Haven, Silver Certificate, Spain, Strong Dollar, Treasury Secretary, Us Dollar, US Dollar Index, Usdx, World Currencies, Www Youtube

Review of Michael Moore’s Capitalism: A Love Story

Posted by Jason Burack on May 7, 2010 · 4 Comments

After weeks of procrastination, I finally got around to watching Michael Moore’s latest documentary, Capitalism: A Love Story. And I gotta say I think he misnamed his film.

He probably should have named the documentary Socialism: A Love Story!

The film starts off showing Moore’s childhood and family life growing up in Flint, Michigan. Moore recalls having a very happy 1950s style childhood where his family went on a bunch of vacations, his father had full job security, paid vacations, was home early most of the time, and other nice perks workers used to have like a guaranteed pension (defined benefit) after he retired, etc.

Moore’s father worked in the auto industry and life was very good. Moore’s dad was in a union and the union was fantastic and provided everything for its members in terms of additional benefits and other perks on top of a nice middle class salary.

Women could stay at home and raise a family. 2 incomes were not needed to be middle class. Moore reminisces about this 1950s euphoric utopia and how he wishes life in the US could return to those same times now before he shows what has happened to Flint, Michigan and the auto industry today.

He then flashes to present day Flint, Michigan where just about all of the auto factories have been closed and their buildings torn down along with the rest of the area’s industrial base starting in the 1970s.

I don’t know how many of you are familiar with Michael Moore and his left wing liberal political views, but after the first 5 minutes or so of the documentary, they become very evident.

He immediately begins bashing Capitalism, basically calling it the devil and the root of all evils and how it has single handedly ruined the United States and then he begins to praise Democracy, Socialism and Unionism (is it even possible to love all 3?) and from this point onward, his film’s “message” is very clear about the changes he thinks should take place in the United States for the rest of the entire movie.

He blames Capitalism’s failures in our present day economy entirely on the Banks and other big corporations, like GM (Government Motors) and puts minimal (if any) blame on Congress, the regulators and other government agencies and the American citizens who also participated in the problems our country is now going through economically.

No mention of the NINJAs (No Income No Job No Asset) “homeowners” who lied to get home loans, or any of the other myriad of Americans who also cheated the system were mentioned. Only greedy corporations were blamed for this current mess!

He does as much as is humanly possible in the 2hrs of this film to make Capitalism look like the main bad guy and he spends the entire film crafting an argument for why America should abandon Capitalism immediately!

Moore begins his crusade by trying to talk to GM’s CEO in Detroit without an appointment, going to a handful of evicted American homeowners and shows their stories of how the banks suckered them and how they lost everything and then cruising up and down Wall St in New York City.

But, not once does Moore ask any of these families how they got into financial calamity, what did they spend the refinancing home loan money on, did they read the contract before they signed it or anything important like that??

Those tough, journalist questions were ignored (probably intentionally would be my guess) so he could spin his story to make the corporations and the banks look like the only bad guys.

Moore also does a good job of making Congress look like helpless victims to stopping the big banks and other corporations from getting what they want politically and economically. Only a few politicians, such as Senator Chris Dodd, were vilified and trust me there’s a lot more corrupt career politicians from BOTH parties that deserve to be removed from Congress for the role they played in this economic Armageddon!

The problem is it ALWAYS takes 2 to Tango! I’m not saying it’s all anyone’s fault, but your house is NOT an ATM that you can tap for cash for this doodad or that toy or trinket or that trip whenever you want. People blame the banks and credit card companies for all of their problems when they didn’t do enough homework on the loan agreement or even bother reading whatever the heck they were signing, even though some of these loans were for a lot of money.

Here’s the facts: Michael Moore has no clue what free market capitalism really is or he would have realized the United States has not had free market capitalism for a VERY long time! What we have now is a mixed-model economy mostly run by the central planners out of Washington, DC with the rouse of free markets still with out stock markets and other capital markets. Government interference is rampant in EVERY market! Housing, commodities, bonds, stocks, etc.

For a great primer on what Capitalism truly is, please listen to this interview of Steve Forbes of Forbes Magazine where he talks about his new book, How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today’s Economy.

Does Michael Moore acknowledge any of this? NOPE! He’s ignorant and does not understand what free markets truly mean. First, That means NO bailouts! Capitalism also involves failure. Michael Moore wants everyone to succeed and be happy. That’s not possible in a Capitalist society. For a certain number of people to succeed, others have to fail. The system works when the Capitalists are honest, helpful and their goods or services enrich other’s lives somehow.

Michael Moore wouldn’t have even had a video camera to record his movie on without Capitalism and without the profit incentive system!

Technology would not be advanced. Look at the history of the Soviets and ask them if any technology other than military/defense technology advanced at the levels of the United States? Capitalism increases everyone’s quality of life, makes quality goods more affordable and advances new technologies we never would have dreamed of!

In conclusion, I believe it’s worth watching Michael Moore’s documentary once, but be very careful how much of it you believe as truth/gospel. This man is a Social(ist) Democrat and is ignorant of the truth as well as misinformed of the facts.

I give this move a C rating as a junior movie critic because it has some enlightening facts in it, such as the Citi Bank memo talking about how this country is now a plutocracy and a nation of ‘haves’ and ‘have nots,’ but otherwise it’s factually way off base.

Moore does not understand that this country is not Capitalist anymore. This country has been one of Mercantilism, Corporatism, Fascism, Crony Capitalism, Hidden Socialism and Plutocracy for decades now.

Filed under Articles, Featured · Tagged with 1950s, 1970s, American Citizens, Auto Industry, Capitalism, Childhood And Family, Corporations, Dad, Democracy, Documentary Film, Evils, Factories, Family Vacations, First 5 Minutes, Flint Michigan, Gm, Incomes, Job Security, Liberal Political Views, Love Story, Members, Michael Moore, Middle Class, Procrastination, Recalls, S Industrial, Salary, Socialism, union, unionism, Utopia

The Beginning of the End of America’s Financial Empire: How The Death of Conservative Accounting and a Lack of Financial Honesty and Transparency are Destroying Confidence in our Capital Markets

Posted by Jason Burack on April 29, 2010 · 5 Comments

Like the British financial empire immediately before it and many empires throughout history (Rome also comes to mind), America’s financial empire is crumbling from many places and on many different levels!

What we have here people is a crime scene still in progress that there is not a proper solution to or at least not a solution currently being implemented.

In other words, very little is being done about it and a good argument can definitely be made that a cover up is taking place to keep this confidence game (shell game) going!

This problem is not only here in the US with our federal government and our companies, but other countries like Italy, Greece and many others are also cheating on their accounting! So are many US states and other local governments in fact! It’s all one big confidence game!

Not only is government regulation not doing anything to solve these problems of corporations lying using creating/aggressive accounting, but the government itself is ALSO using the same type of creative accounting to hide as much of the truth as it can!

Some of you know more about this than others, so my goal in writing this is to give all of you a general picture of how and when the destruction of our most important foundations began, give you some details into all of this that my more advanced readers might have possibly overlooked as well as give you some investing ideas and options for asset classes and types of stocks where you can protect yourself from ever investing in companies that have “financial irregularities” aka “fantasy accounting” in companies like Enron, Worldcom, Lehman Brothers, Bear Sterns, the current big US bank stocks and others.

Are you ready for today’s lesson on trying to sort through this accounting BS from both the public and private sectors?

First off, let me state that, for the record, based on my own independent research, I am of the opinion that both the U.S. Federal Government, the states and other municipalities AND many publicly traded corporations here in the US are using “creative” accounting or “financial engineering” and are cheating on their financial statements.

This means they are not using conservative accounting and taking charges (losses or writedowns) on assets that they should be. Charges result in losses and that means a drop in the stock price and most corporate executives have compensation packages somehow tied to the stock price. There is an incentive for them to cheat!

This type of “fantasy accounting” is used by financial “wizards” (we won’t call them criminals because they are innocent until proven guilty).

Let’s outline some ways a company can cheat. They can:

Extremely overvalue the assets on balance sheets (Lehman got caught lying and extremely overvaluing the assets on its balance sheet and was shorted to death for doing this)
Book profits that may or may not ever exist long into the future (watch the documentary about Enron called The Smartest Guys in the Room and you will know what I am talking about)
Move toxic “assets” off of the balance sheets and into separate dummy corporations and tiny, controlled LLCs that the company still controls. (Enron also did this and the largest US banks were doing this until recently when Congress changed the law)

One of the ways you can protect yourself is by learning how to correctly read all 3 major Financial Statements a company releases Quarterly and Yearly (Balance Sheet, Income Statement and Statement of Cash Flows) as well as reading all the notes underneath the statements.

Some astute investors only like to read the notes because they believe that’s where all of the bad stuff is hidden by the company’s financial engineers. Having the ability to dissect those financial statements will help you out a lot as an investor!

This is a tremendous problem for ALL financial markets in the US because it undermines confidence in the markets and investing in the stocks of publicly traded companies as well as US Treasury debt when the US government is lying about its budget deficits, its unfunded liabilities, etc.

For those of you unaware, this is an important month for accounting rules changing. As many of you investors, traders and practicing CPAs know, this is the one year anniversary of the month when the FASB changed the accounting laws. Here’s another explanation of the rule changes the FASB made about one year ago and a few hard hitting articles from ZeroHedge and others on the subject if you want to go further in depth on what has transpired in the last year:

So, the question becomes what’s the best way to still invest in stocks and to protect yourself, your net worth and your investment portfolio from all of this bad accounting?

With very few exceptions, DIVIDENDS DON’T LIE!

Here’s a few links to videos and interviews explaining dividends, the whole concept about how “dividends don’t lie” and how a dividend is the best sign/indicator of the financial strength of a large company:

A Good Summary Video about Dividends and Dividend Investing

A Radio Interview of author Kelley Wright who wrote, Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market

A company that is really profitable and NOT FAKING it through accounting gimmickry has lots of free cash flow. That’s extra free cash that they can either return to shareholders in the form of dividends or re-invest back into the company to pay for growth (funding growth projects organically or through acquisitions). The large companies that have lots of free cash flow often pay dividends and normally try and raise the amount of dividend they pay yearly. This is a good sign of financial strength.

If these companies weren’t as profitable as they say and didn’t have the free cash flow, they couldn’t afford to pay their shareholders a dividend because the company would need the cash to prevent itself from going out of business.

Because of this dividend litmus test, buying the bonds of strong dividend paying companies with a good dividend history is a good idea if you want to diversify out of stocks. Check the dividend record of a company before you buy the bonds. That’s a better indicator of the company’s financial strength in my humble opinion than an S&P or Moody’s credit rating on the company.

The Treasuries of more responsible countries, like Australia, which have already started raising interest rates way ahead of everyone else are a good investment outside of normal stocks and corporate bonds.

In conclusion, to protect yourself from bad accounting look for

Provable earnings/profits in the form of free cash flow and payable dividends of companies with a track record for paying their dividend
Corporate bonds from these same companies
Treasury bills from more responsible countries who are RAISING interest rates substantially now while all of the irresponsible central bankers around the world are lowering them!

Filed under Articles, Featured · Tagged with 7g, Accounting, accounting scandal, Advanced Readers, Asset Classes, Attempts, Balance Sheets, Bank Stocks, Bear Sterns, Beginning Of The End, Book Profits, British Empire, Capital Markets, central bankers, Confidence Game, Corporate Bonds, Coverup, Crime Scene, Current, Dividends, Dividends Don't Lie, Dummy Corporations, Enron, Fantasy, Fantasy Accounting, Fasb, Financial Empire, Financial Engineering, Financial Irregularities, Financial Wizards, Foundations, Government Regulation, History America, History Rome, Investors, Italy Greece, Lehman Brothers, Llcs, Local Governments, Mark to Fantasy, Market Time, Practicing Cpas, Proper Solution, Public And Private Sectors, Shell Game, Smartest Guys In The Room, Time Of Death, Us Bank, Worldcom, Www Youtube, Year Anniversary

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