Let's gather for the Chinese New Year and tell stories around the bank campfire

              Imagine there is a tinder and wood filled "log cabin style" campfire that has been constructed, but not lit. Lets call it the bank campfire.   Let's call the firewood "derivatives" and "investment products for the public"   Every minute that goes by without the fire being lit, the stack keeps getting bigger.   But the common people in camp need warmth (economic freedom) so they start to light personal campfires (Ukraine, Thailand, turkey etc.)  The sparks of this unrest are floating dangerously close to the bank campfire. The US fed bank was the assigned fire tender.  The somewhat shady Chinese central bank also has water buckets, but they are leaving in a few hours for a weeklong New Year holiday....

 
      The firewood represents derivatives: complex instruments known as repo loans, gold lease arrangments, interest rate swaps, and mortgage backed securities.  The fuelwood  for the fire also comes in the form of fancy investment products, high frequency trading and other flammable items.

 

To illustrate the fire danger, let's look at a forecaster of consumption: "The Baltic Dry Index"   THe BDI averages the rate international supertankers (ships) are receiving for "dry goods cargo" (Goods that fit in a shipping container).  When the rate goes down, that means demand for space and is slowing down.  Here is a chart of recent BDI rate since 2011.  Note the recent fall.

 

  Since cashflow payments are the drivers of profit in the bank campfire, it is a Growth Driven system, that requires growth of the fuel wood pile in order to avoid defaults and collapse.  It is an inflation based system that is predesigned to fail.  When it fails, bailouts allow the rich to get richer and wipe out the independent guy. 

Unrest and currency collapse overseas, The CIA, and the US DOLLAR

Instability creates dollar demand, and keeps the value high, in the wake of increase in the dollar supply.

The U.S financial interest lies in creating demand for new dollars, so they can keep producing them to pay their debts.  During currency collapses: Serbia in 1992 and  Argentina in 2001 for example,  citizens of those countries turn to paying in dollars instead of their own currency, because it is widely available and more stable.  In times of crisis, most black market trades are done in dollars.  Anyone who has travelled overseas to a 2nd or 3rd world country knows the dollar is preferred for trade and savings by street hawkers.   The same goes for a collapsing developed economy like Argentina, Ukraine, or Serbia.   Taken together, dozens of unstable 1st 2nd and 3rd world economies have a massive demand for dollars and dollar trade which may equal the demand for USD by economic activity within our borders.    When wars and country bankruptcies happen, not only does the dollar gain new users, then US COMPANIES come in WITH dollars in hand, and as the dust settles, BUY UP ALL THE PRODUCTIVE ASSETS IN THOSE COUNTRIES: factories, farmland, heavy equipment, WITH DOLLARS.  Thereby robbing the people of their capacity to restore their own capitalist economy.  

Anecdotal travel experiences confirm consumer is not spending and local government is getting dumber

good thing I shorted the market on tuesday. There are things that I'm seeing on my travels that may help myself and others to get a sense of the consumer and real estate markets -  first person experiences I am having with Americans:

  When I was in Michigan trimming trees after the ice storm, I was surprised that MOST of the suburban homeowners of half acre, 2000 sq ft homes with trees can't afford the cost of a simple "hazard reduction" tree trimming job.  IN FACT, the travelling ragtag tree trimmer crews who came to Lansing to work in the affluent suburbs seem better off financially than the homeowners!  If one studies it, the tree guys had short and long term income potential, by virtue of a productive, gainful employment skill whereas the Lansing residents seemed to have financial anxiety and depression.  Something is wrong with the local economy when upper middle class homeowners cannot afford $700 to cut down a dangerous tree that may fall during the next thunderstorm on their house.

Another telling anomaly I discovered in Lansing, Michigan was that the the towns of greater metro area were publishing debris pickup dates for residents to place branches on the curb for recycling, and the towns were sending the organic debris to the landfill!  Tree branch chips are the most valuable and cheapest, most proliferate natural compost for any gardener.   They are also a great source of renewable, stored energy.  And, as I found out, there was a 100 million dollar wood chip/natural gas power plant project developed by the power company and the city of Lansing, which had recently gone into service. It was the pride of the papers.   I called towns to ask why, when chips can be used at the power plant, or easily sold as composting mulch to farmers or landscapers, were the chips being landfilled.  The answer was that the wood chip power plant was overwhelmed with material and that neither the dump or city procurement offices had the appropriate leasable land to store the chips until spring, so they were being landfilled.  It sounded to me like an inside job!

Health insurance companies are in chaos

I have spoken with people who work at large health insurance companies, which are mostly located in my metropolitan area.  The conversation goes like this.
     "How is the Affordable Care Act affecting your business?  
   And teh stock answer is: "It's causing chaotic reorganization (eyeroll)"

      Now imagine a world of software programs, billing specialists and call centers having to recode half the software and retrain every employees according to 10,000 pages of rules.  And then having the rules change each week, by executive order.  I suspect there is  a massive loss of productivity and increased labor costs for retraining.

Intro to Dumb Money vs Smart Money

 Smart money is people who either have direct insider information (legal or otherwise), or can make a market turn in their favor through  big money movements and purchases.
       For example:  JP Morgan who owns massive commodity warehouses and makes large market moving trades on the commodity markets is a  smart money force. 
  Congresspeople, who insider-trade their own committee decisions before announcing them to the public is also a smart money action (legal). 
Saudi sovereign wealth funds and Saudi Princes who get guarantees from the FED and  rich warrants to loan to American banks in a crisis are smart money.
 Ted Turner with millions of acres of ranch and mining land is smart money. 
   The rest of us retail investors don't have the connections or the advisors to be smart money and we must play catch up to ride the coattails of smart money actions.  We should consider ourselves to be dumb money, lest we develop hubris and don't foresee government interventions in our trades. 
        The big advantage of being dumb money is that our investments are agile and anonymous.  A billion dollar sale of banking stock raises eyebrows and takes a few days to transact, but a $600 option purchase is immediate and silent.  What I do is try to find underground news affecting stocks and commodities,  survey my market gurus regarding the asset in question, and analyzie price and volume data for patterns.  Then we make a trade that may be WITH smart money, rather than with CNBC Cramer watching, "dumb money" retail investors.    There is no way around it:  Mutual Funds, retirement account managers are dumb money and underground, inside information media is smart money.    Smart money doens't have a dollar denomitated retirement account.  They have a silver mine, a farm, a 100 condo development, a stripmall and a ranch, an oil well, just to be diversified for retirement.  NOTHING is in stocks long term for them.  It is a cycle of accumulation of stocks when dumb money is fearful and distribution of stock when dumb money turns confident.  And we have crested the bell curve from accumulation to distribution zones.     I will explore more about this "smart money distribution dome" in a later post.

Healthcare.gov has a debilitating security issue that made me think about Options ideas for healthcare individual insurers

   Healthcare.gov is very easy to hack, credit card payments in jeopardy

It turns out that the personal and possibly health history information of those who signed up online at healthcare.gov, is retrievable by hackers in less than 5 minutes of hacking.  This video plays a government IT security expert's testimony to congress on this point.  This is terrible news for the planned credit card online payment rollout next month.
     On the heels of the Target disaster, people who were going to pay for their insurance with a debit or credit card will be afraid to be exposed.  Target affected something around 70 million card users, which is at least a third of all people with a debit or credit card, considering the total US population is around 350 million.
      It's likely in the next few days the Executive branch (OBAMA) will realize this and delay online payments.   Included in the statistics of currently enrolled people are people who enrolled but haven't paid their premium and were planning to do so by debit/credit card.  When those people fail to pay, the plan cancels, removing them from the overall statistic.   Enrollment numbers therefore are inflated in a way that the mass media and analysts of publicly traded insurance companies don't yet take into account.  This is bad news for the beneficiaries of ACA, the large health insurers.
     Another reason portending decline of health insurance companies is their dependance on a 75% stoploss bailout provision of the Affordable Care Act.  It states that the federal government will reimburse 75% of losses after the first 8% loss when payouts to doctors and hospitals exceeds revenue from premiums.   At this point, the health insurers are guiding earnings and internally speaking about the bailout provision as a very lucky and necessary thing, because they know the ACA is failing.  The executives at UNH and AET for instance, know that payouts will exceed revenue based on enrollment numbers and demographics being at least the WORST CASE SCENARIO that they originally would have projected.  With a bailout, we cross into the realm of politics rather than law!
    Congressional law can be chagned by new congressional law, and the American taxpayer will soon realize that they are bailing out politically unpopular Obamacare by bailing out the health insurance companies. 
    "Health insurers are evil large corporations that need to be controlled" was one of the main battle cries to get Obamacare passed.  Of course, it was supported by evil health insurers too because assured guaranteed profit to them.  Now we have the political sentiment of "large corporations are evil" which will never go away, as a foundation of the democratic voting bloc.  And we have an unpopular healthcare law that is alienating many middle class democrat voters who are losing their insurance personally, or can see the flawed economic model finally.  And the result is there is not enough political will to undertake a health insurance bailout.  The 24 hour news cycle will be all over this issue, and when the bailout provision is rejected, expect public health insurance stocks head down very sharply.
      I will be giving you, the subscriber "peer around the corner" news on trends that haven't yet been taken into consideration by the markets.   I regularly interact online with dozens of "guru" blogs to try to connect the dots of likely black swan events for stocks and commodities.    I speak with people in different metropolitan economic zones of the United States and travel the country in person to bring my perspective to view market trends invisible to provincial New York and Chicago traders.

The 

-Andrew James