Tuesday, June 30, 2009

The Extraordinary Evil of Bernie Madoff

06/30/09 London, England Let the punishment fit the crime!

Poor Bernie. The man has been ordered to spend 150 years in the hoosegow. What for? Who did he kill? A century and a half seems a little excessive for a financial crime. You could hold up three liquor stores and rape a whole convent and still not get 150 years. With a little bit of good lawyer-ing, a history of child abuse in the family, and good behavior in the big house, you’d be back on the street in 18 months.

But all the papers seem delighted. “Locked up for Life!” says one of today’s headlines. The judge “threw the book at him,” says another. His victims wanted him to get no mercy. The judge gave him none, imposing the maximum sentence. He is “extraordinarily evil,” said the man on the bench.

Justice has been done. Right?

Here in the building with the gold balls on the roof, we’re not so sure. We stand up for lost causes…die hards…and scalawags. Besides, we’re not convinced that Bernie is extraordinarily evil at all. He seems much more like an ordinary evil to us.

They say he defrauded investors out of $65 billion. The amount is unusual, but the crime is as common as income tax evasion. Who gets 150 years for evading income taxes? Heck, in civilized countries it’s not a crime at all – but a civil misdemeanor, subject to fine and retribution, not punishment.

But didn’t he lie to investors? Well, yes…he exaggerated the returns investors were likely to get from his fund. But if you put every fellow on Wall Street who does that in jail, you wouldn’t have any room for stick-up men and wife beaters.

Isn’t he the biggest financial scammer of all time? Well…he’s the title-holder now. But he has a lot of competition close on his heels. Bernie’s crime was taking money from people under false pretenses…and then being unable to give it back to them. How is that different from the financing activities of the US government?

This year alone, the feds will borrow 50 times as much money as Bernie managed to take in during his whole 20-year career. They can only pay it back by borrowing even more money from more lenders. This is not very different from the typical “Ponzi” scheme, except that it’s the government doing it. Eventually, the suckers are going to lose a lot of money.

And when you balance Bernie’s sins against his virtues, we’re not sure the man doesn’t come out at least as well as many of his accusers. While Bernie was pretending to make his investors rich, the SEC was pretending to protect them from Bernie. In fact, neither were really doing what they claimed. Which is to say, both are guilty of ordinary evil.

As we pointed out yesterday, nothing is as dangerous as good luck. Madoff was not extraordinarily evil; he was just extraordinarily lucky. He was plying his trade when the feds were pumping up the biggest financial bubble in history. No wonder so much hot gas came his way. His luck ran out when the bubble popped. And now a court has found him guilty of fraud and a judge has ordered him locked up for a period equal to roughly the time between the end of the US War Between the States and the resignation of Richard Nixon.

While Bernie is behind bars, the SEC and FED officials are still at large. Both are clearly guilty of dereliction and negligence.

But, what is the point of keeping Madoff in prison? He represents no threat. Rather than pay $30,000 per year to keep him locked up, we suggest that he be forced to do community service work. He should be pressed into service as the next head of the Federal Reserve after Ben Bernanke’s term expires in December. With Madoff in the big office, there would be no longer any illusions about what sort of bank the Fed is running.

Illusions are aplenty. In the popular mind, the slump of ‘07-’09 is coming to an end by Christmas. Practically everyone says so – including Ben Bernanke himself. All the bailouts and stimuli are paying off, they think. Soon, it will be business as usual.

Yesterday, the Dow rose 90 points. Oil rose a bit too – to $71. The 10-year T-note rose too…with a yield falling below 3.5%. And gold held steady at $940. If the markets know what happens next, they’re keeping mum.

But this morning comes news that the Dow is off more than 100 points on news of a consumer confidence pullback. Apparently consumers are getting concerned about the jobs situation and the supposed ‘economic recovery.’

We have already told you, dear reader, why we do not expect business as usual ever again in our lifetimes. From WWII to 2007, the world economy had a single important driver – the US consumer. At the beginning of that period, he consumed because he earned. By the end of it, he earned because he consumed. That is, the more he was willing to borrow and spend, the more the whole world economy seemed to bubble up.

But now, that era is over. As Jeff Immelt, head of GE says, “You’re going to have a world where the US consumer won’t be the main driver.”

Clearly, the US consumer no longer has the positive effect they once did on the US economy…and it’s only going to get worse from here.

“Where was the SEC?” asked a sign outside of the courtroom where Bernie Madoff was sentenced.

Good question. And guess what. We have the answer. While Madoff was taking in his billions…and the biggest financial bubble was preparing to explode…the SEC was asking questions – of your editor!

Yes, dear…dear reader. All over the world, responsible authorities are demanding a more muscled approach to financial regulation. “Bernie Madoff’s life sentence should galvanize regulators everywhere,” says today’s TIMES of London editorial, speaking for the majority.

But it was not muscle that kept the SEC off Madoff’s case. At the very moment when a freelance informant was tipping off the SEC about Madoff…the agency’s goons were beating up innocent victims…and grilling innocent publishers:

The New York Times reports:

“The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. [Richard] Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C.

“In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.)

“The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him.

“Mr. Kwak’s life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker – he certainly can’t afford to retire – he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was.

“‘It pretty well wiped me out,’ he said a few days ago. He is extremely bitter.”

The story of our own brush with the SEC will have to wait for another day. It is still subject to a gag order imposed by our own lawyers. The case is still undecided – four years later. We can’t tell the whole story yet…but we can pass along the moral of it now: anyone who believes government regulators will stop investors from losing money to fraudsters is dreaming…

Stay tuned.

The election results were counted up last night. The Kirchners – the husband and wife team that governed Argentina – lost. The winner was the man accused of drug dealing…Francisco Narvaez.

As we remarked above, we’re suckers for underdogs, die hards and scalawags. That is probably one of the reasons we like Argentina; it is all those things and more. It is a measure of the lost cause status of the pampas that news of the election was hard to find. We looked through the TIMES and found no mention of it. The International Herald Tribune did pass along the news – on page 4.

Something went wrong in Argentina. The country was once a rival of the United States of America – with nearly the same income per capita…and about the same prospects. Now, it has less income per person than Chile and exports less beef than its tiny neighbor, Uruguay.

What went wrong?

Well, life is not exactly under our control. We doubt that a group of Argentines ever got together and decided to become a second rate country. Things happen.

And here at The Daily Reckoning we watch…and wonder what will happen next.

Until tomorrow,

Bill Bonner
The Daily Reckoning

CFRN Is On Vacation


We are on Holiday until July 6th, 2009.

Monday's link is above.

Last Thursday is HERE!

Wednesday, June 24, 2009

SFEG Santa Fe Gold Options Pilar Gold Exploration Property



Here we have a junior exploration company, soon to become a junior producing company, having just completed a mill to process ore from their relatively new Summit silver/gold mine. Per prior presses releases and audio interviews on record, SFEG is ‘focused on bringing its Summit mine into production’ virtually to the exclusion of everything else, which stands to reason. Moving into production is crucial for survival of any firm for without selling your end product there is a limited lifespan of any company. Of course you can sell portions of your firm to raise capital, but ultimately too much of that is self defeating. So back to my question: Why? Or to be more specific?...

Why did he option that property?

Frankly I have no idea, so permit me some speculation.

Closer to the finish line. As one can see from past acquisitions by CEO, Pierce Carson, he tends to focus on projects with extensive drilling and/or engineering before he even commits. (Ortiz had 117,000 meters of drilling, a total of over $ 40 million dollars in exploration & development. And that was over 20 years ago, which could easily represent $ 100 million in 2009 dollars). Summit too had extensive work done prior to acquisition. Lordsburg mill was previously a milling site. This is a strategic approach, using existing data and engineering work to establish the resource as opposed to the often lengthy and always risky exploration process, where one can avoid delays and costs of exploration. This tactic alone saves years on the front end of bringing any economically viable ore body to production. Years is money.

Prime target. Well that fits, because the new Pilar Gold Property has had 6000 meters of drilling with one hole qualifying for the mining term: bo•nan•za (n) A rich mine, vein, or pocket of ore. A source of great wealth or prosperity. Woohaa.

Efficiency of time. The mine is a mere 250 mile from their existing Lordsburg mill currently the center of operations, practically speaking. Not a two day drive away, not a continent away or a plane ride away, but a six hour drive. Sounds efficient to me.

Outlay-what outlay? How amazing is it that Pierce secured an option on a gold mine, likely having hundreds of thousands of ounces of gold, that is being controlled by a few thousand dollars? You cannot option much for that kind of money. Would you take your house off the market for three years while the optionor has the ability to sell it anytime and/or rent it out and produce income while you stood by? I certainly would not, but Pierce did it for the shareholders of Santa Fe Gold Corp.

Building value. Currently SFEG hold the rights to two industrial mineral properties each worth millions in their own rights, the Ortiz deposit, a world class size (one million ounces of gold or more), the Summit silver/gold mine, the recently purchased Lordsburg mill site with brand new mill, as well as numerous claims nearby the mill site. The option on Pilar Gold (known historically to contain have produced 2,960,000 ounces of gold in the past), means the area has produced over two and a half BILLION dollars in gold in the past. Is it a stretch to believe that there is only 5% on the Pilar property? ( $ 133,000,000. value with $900 gold). Each of the current properties has values of tens of millions of dollars to possibly hundreds of millions of dollars of value as they now sit. Developed, they could be worth multiples of those figures. So now we have yet one more property to add millions of dollars of value to the asst base. Value is the root word of valuable.

More to come. Lastly Pierce has reiterated numerous times that he has dozens (yes plural) of potential acquisition targets. I think he will apply the same strategic process as we have thus far seen to any of these potential future acquisitions. Do I smell profits?

Sentiment : Strong Buy

Ron B.

Monday, June 22, 2009

Prosperity for God's People - Monday June 22, 2009


Consumers are Thinking Smaller
by Bill Bonner
Paris, France

There are two major schools of thought on the bailout:

The first of which believe that the banks are still in trouble and need to be nationalized. (Roubini, Krugman)

The second school of thought thinks that the banks are still in trouble, but that a public/private partnership can recapitalize them as they work their way out of the hole. (Geithner, Gross)

As usual, we play hooky. Here at The Daily Reckoning, we're not in either school.

In our view, the banks are in trouble because they lent too much money to too many people who couldn't pay it back. They should take the verdict of the market...and hang.

Hey...won't this cause a depression?

Ah...here is where we really part company with our fellow bipeds. We in a minority...such a small minority that all its adherents put together could probably fit into an elevator. Because we believe that a depression is just what America needs...and what it's going to get regardless of what the meddlers do. In fact, we think they will turn an ordinary depression into a great one. Or maybe even a "greater depression," as our old friend Doug Casey puts it.

Stocks barely moved on Friday. The Dow lost 15 points. Oil lost $1.76. Gold and the dollar moved little - the former up, the latter down.

California demonstrates what has to happen in an honest slump. They're preparing for "deep cuts" in school budgets, say the papers. Naturally, the education lobby is howling. But most of the money spent on 'education' is wasted anyway. Cutting back might even help kids learn something.

Consumers are cutting back too. That's probably the most important new trend to come with the post-Bubble era. Consumers are thinking small...smaller houses, smaller utility bills, smaller cars, smaller debts, smaller retirements.

That's a change that's likely to stick. They've seen where thinking big got them. Now, small is beautiful.

Sunday, June 21, 2009

One Door Closes / He Opens Another...

Revelations 3:8

When God leads you to the edge of the cliff, trust Him fully and let go, only 1 of 2 things will happen - either He'll catch you when you fall, or He'll teach you how to fly!


Friday, June 19, 2009

Prosperity for God's People - Friday June 19, 2009


This Time its Different*
by John Mauldin
June 19, 2009

In this issue:
This Time It's Different*
Peter Bernstein, R.I.P.
Welcome to the New Normal
The Three Amigos
Credit Spreads - Bullish or Bearish?
ISM - Is Less Bad That Good?
Contain Your Enthusiasm
London, The Baltics, and Rome

I have often written that the four most dangerous words in the investment world are "This Time It's Different." If memory serves me, I have written several e-letters disparaging various personages who have uttered those very words, and gone one to confirm later that it wasn't different. It almost never is. And yet - and yet! - I am going to make the case over the next few weeks that it really is different this time, with only a lonely asterisk as a caveat. What prompts my probable foolishness to tempt the investing gods is the rather large amount of bad analysis based on unreasonable (dare I say lazy or surface?) readings of statistics that is coming from the mainstream investment media and investment types with their built-in bias for bullish analysis. Normally, gentle reader, your humble analyst is a paragon of moderate sensibilities, but I have been pushed over a mental edge and need to restore balance. I anticipate that this topic will take several weeks, as trying to cover it all in one sitting would exhaust us both. It should be fun. But first...

Peter Bernstein, R.I.P.

Sadly, Peter Bernstein passed away at 90 years young on June 5. One of the great honors and privileges of my life has been getting to know Peter and his lovely wife, Barbara. Introduced at a small dinner five years ago, I have been privileged to share many dinners and meetings with him in the years since, soaking up his wisdom. Only a month ago, he made a presentation (by satellite) to Rob Arnott's annual conference and was at the top of his intellectual game. His writing of late has been some of his best. Peter cofounded the Journal of Portfolio Management and truly was the dean of investment analysts.

He wrote 10 books (five after the age of 75!). I am often asked what books I would recommend for insight into the economic world. At the very top of my list has always been Against the Gods: the Remarkable Story of Risk. If you have not read it, then get it and put it on top of your summer list. Capital Ideas is also brilliant. The Power of Gold is a must-read. You can get all three in a set at Amazon (http://www.amazon.com/Peter-Bernstein-Classics-Boxed-Set/dp/0471736252/ref=sr_1_2?ie=UTF8&s=books&qid=1245445710&sr=1-2).

Jason Zweig wrote a very moving obituary in the Journal and reminded me of a few quotes I've heard from Peter. "'What we like to consider as our wealth has a far more evanescent and transitory character than most of us are ready to admit.' He urged investors to regard their gains as a kind of loan that the lender - the financial market - could yank back at any time without any notice.

"Asked in 2004 to name the most important lesson he had to unlearn, he said, 'That I knew what the future held, that you can figure this thing out. I've become increasingly humble about it over time and comfortable with that. You have to understand that being wrong is part of the investment process.'"

Peter and I chatted several times during the last year, and he continued to tell me that those who thought we were in for a typical recovery were probably going to be wrong. In private conversations he was very worried about the world, and added much wisdom to those of us privileged to sit at his feet.

Isaac Newton once said, "If I have seen further it is only by standing on the shoulders of giants." In the world of investment wisdom, there is no shoulder higher than that of Peter Bernstein. Rest in gentle peace, my friend. You will be greatly missed.

This Time It's Different*

Ben Bernanke's career will be analyzed and written about for many years. But the one thing that has caused me the most pain is his bringing of the term "green shoots" into the investment lexicon. These may be the two most overused and annoying words of my investment career. Every possible sign of a recovery is anointed with the phrase.

Of late, there has been a tendency for analysts to see numbers or statistics that are "less bad" and interpret them as signs that we are in recovery or at least almost there. They glance back at previous recoveries and say, "Doesn't this look like the last time? When such and such happens it means that recovery is on the way. We should therefore buy stocks" (or whatever).

That we are condemned to read such musings is part of the investment landscape. But that does not mean we shouldn't take the time to look at what the writer of those words is actually looking at. All too often of late, I find these people grasping at straws or failing to understand the data.

My premise for uttering the heresy "This Time It's Different*" is that the fundamental nature of the economic landscape has so changed that comparisons with post-WWII recoveries is at best problematical and at worst misleading.

As we will see next week, we are on a track that looks far more like the Great Depression than the recessions of our lifetimes. To expect a normal recovery cycle, whether it is corporate profits or lending or consumer spending or capital investment or (pick a category) is just not reasonable. This is a period that is fundamentally, in so many ways, different. And the recovery (and there will be one!) will also be of a different warp and woof throughout the entire world economy.

Let me see if I can summarize my thinking before we get into the reasoning behind it.

First, we are at the end of a huge cycle of increasing private debt that ended in an overleveraged society. The process of reducing debt and unwinding leverage is going to take a rather long time. It will not be the typical one or two years and then things get back to an ever-higher normal. We are, using a phrase coined by my friend Mohammed El Erian at PIMCO, on our way to a new normal. We are hitting a massive reset button on our economic world, taking us to some new and lower level of consumer spending, leverage, etc. No one knows what the new level will be, although admittedly we are closer to it than we were a year ago.

At this new normal, we will not need as many malls or factories or stores or new-car plants or car dealerships or any number of other things to satisfy the new normal of consumer desires. As an example, and jumping ahead to a statistic for one minute, capacity utilization is now approaching 65%. Anything under 80% is anemic. Does anyone really think that businesses (in general) are going to invest more money in expanding capacity, in the face of the lowest level of production relative to potential since the 1930s?


The savings rate has shot up from zero to 6% in just a very short time. It used to be 12%. It would not be all that unusual historically for savings to go to 9% or more in a few years. That means that consumer spending will drop by 9%. Since consumer spending was 70% of GDP, that new lower level will become our new normal. And of course, due to population growth and hopefully increasing incomes, consumer spending will once again grow from whatever that new normal will be. But it is going to take some time for spending to reach the level of our productive capacity of a few years ago. We are going to have to shutter a few factories and businesses.

David Rosenberg, now with Gluskin Sheff, offers us this insight:

"What really struck us in the employment report of a few weeks ago was the fact that the only segment of the population that is gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions. This is epic." [See chart below.]

"Moreover, the number of 55 year olds and up who have two jobs or more has risen 1.1% in the last year, the only age cohort to have managed to gain any multiple jobs at all. Remarkable. These folks have seen their wealth get destroyed by two bubble-busts less than seven years apart ... the Nasdaq nest egg back in 2001 and the 5,000 square foot McMansion in 2007. Both bubbles ended in tears ... and so close together."

As we will see, the housing market is going to take at least two more years to truly recover. Looking at one month's data that shows housing starts up a few thousand as a sign of recovery in the housing market is, well, silly. Housing starts are anemic and the inventory of unsold homes is still at all-time highs (a ten-month supply) with more and more homes coming onto the market through foreclosure.

The multiple causes of the recession are not subject to a quick fix. Offering to pay someone $4,500 to trade in an old car for a new one is a rather pathetic way to try and jump-start consumer spending and the auto industry. Is it not enough that we will "invest" $50 billion in GM, while shrinking the company to a size where it will be difficult for profits to ever pay back that investment? We have to add insult to injury and borrow more money to buy cars. Care to wager whether GM will need more money within five years? (And by the way, I love my GM (Cadillac) car, and will likely buy another one at some point, so I wish them well.)

The "stimulus plan" was ill-conceived and not very stimulative. But the combination of the Fed and Treasury and massive monetary infusions has pulled us back from the brink of Armageddon. But we are not out of the woods yet. There is much heavy lifting to be done on the way to the land of the new normal.

Welcome to the New Normal

Secondly, my premise is that the recovery is going to take longer and be much less robust than any recovery since WWII. With unemployment likely to go over 10%, and with our new normal world not needing as much production of so many things, unemployment is going to stay stubbornly higher for longer than in any previous recovery. We are going to look next week at a very sobering report from the San Francisco Fed that suggests we may be for a longer than usual jobless recovery.

Thirdly, all this is going to affect corporate profits, especially for companies that depend on consumer spending. Those investors who expect corporate profits to rebound in 2010 are likely to be disappointed. (For the record, if you go to the S&P web site, analysts are projecting anywhere from a 40% to a 60% rebound in earnings for 2010 for the S&P 500. I would willingly take the "under" on that bet if I could find any takers.) I think whatever profit recovery that is built into the market at today's prices is generous. It is going to be tough to get much of a return from traditional buy-and-hold equity index investing for some time.

Fourthly, this is a global problem and primarily one in the "developed" world. I think we will find that much of Europe will be in a worse state of affairs than the US. If there are bright spots in the developed world, I tend to think they will be Canada and Australia/New Zealand. The opportunities are more likely to be in emerging markets, after they adjust to the new normal.

What this all means is that we as investors, entrepreneurs, managers, employees, and consumers need to adjust our expectations. For those of us in the US, this is complicated significantly in that we really have no idea what new level of government spending and taxation we will be faced with in 2010 and beyond. For one of the few times in my life, what the government does is likely to have a huge impact on the economy, as there is the potential for a significant shift in the very fundamental nature of government involvement in the economy. It is difficult to see what the new normal will be.

In Continental Europe, your new normal is going to be further complicated by an eroding banking crisis that is likely to put a real crimp in any recovery. China and Asia must adjust to lower US consumer spending. They have built too many factories to supply what seemed like an inexhaustible US consumer. They have to find new internal markets or face their own new normal.

All that being said, at some point, perhaps as early as the third quarter, we could see a positive number for GDP, although I think it will be later. Part of the reason that we will see some positive numbers is that year-over-year comparisons are going to get easier to make. Last summer, when inflation was close to 5% and I was writing that deflation was the real danger, oil was rising from $40 to $160 and food prices were going through the roof. Now oil is back to $70 and so we get lower year-over-year inflation numbers. Over the last two years the price of oil/energy is up, but we measure inflation on a yearly basis.

Housing construction was once about 5% of GDP. Obviously, the collapse of housing construction has had a rather negative impact on recent GDP numbers. But housing is probably close to, if not at, a bottom. Even if it dropped by another 20%, it would have far less of an impact on GDP at the much-reduced level where it is now.

It is similar with inventories. They can only drop so much, and eventually they get to the new normal and stop being a drag on the statistical GDP. We are not in an unrelenting death spiral. There is a bottom. It is like a person jumping out of an airplane. They fall rather rapidly until the parachute opens, and as they get closer to the ground they manipulate the chute to further slow the descent. But until they reach the ground, they are still falling. That is the case today. The economy is still falling, but the parachute has opened. We are going to reach the bottom at some point. We will find that new normal. We just need to adjust our activities and plans around that new destination.

I truly believe we get back to 3% GDP growth and 4% unemployment at some point in the future, but it is going to be more than a few years, especially if taxes are raised as much as is talked about in some circles. But just as in the late '70s, when the outlook was not very bright, things will change for the better. When asked back then where the new jobs would come from, the correct answer was "I don't know, but they will come."

It is the same today. There are whole new technologies and industries that are going to be created in the next decade. Entrepreneurs will respond with new innovations and businesses. Jobs that are not now on the horizon will spring up.

As a society, we are having to work through the excesses of a lifestyle that was propped up by ever-increasing debt and an out-of-control consumerism. That will happen in the fullness of time. But it WILL take time, and we need to adjust our expectations to account for that.

Over the next few weeks, I am going to drill down into the data to show why recovery will take longer and to help you withstand what will be an onslaught of out-of-control bullishness over data that is simply less bad. Let's start with a few easy targets.

The Three Amigos

In 2001, I wrote about what I called the Three Amigos that I watched to give us an indication of the direction of the economy. They were capacity utilization, high-yield bonds, and the (now-renamed) ISM numbers. Watching the direction they go gives us a good idea where the economy is headed. I have not written about them for years (as a trio), so let's revisit our old friends. We saw above that capacity utilization is still in a cliff dive. For there to be an actual recovery, we need to see capacity utilization start to climb back up. That is not currently a very positive indicator.

Credit Spreads - Bullish or Bearish?

A number of commentators have been effusive about how credit spreads have "come back in." And indeed, junk-bond yields have fallen. That is a good thing. Look at the graph below (courtesy of Tony Boehk).


Note that yields have simply come down to levels associated with recessions, and not with actual recovery. What happened last year is that junk-bond yields priced in Armageddon. Now they simply price in a recession and slow recovery. Could they improve more? Certainly. But the easy lifting is done. The direction is right. Let's see how they do the next few months. If those yields keep falling, that would be a very positive sign.

ISM - Is Less Bad That Good?

The Institute for Supply Management released their data for May, and again, commentators were enthusiastic about the increase in the manufacturing index. Green shoots and other signs and wonders were all over the media.

The ISM is a survey of manufacturers about how their businesses are doing. They are surveyed on ten criteria, like new orders, employment, inventories, backlog of orders, etc. (for the full report, you can go to http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942).

From these responses the ISM creates an index. An index number above 50 means that the manufacturing sector is growing, and below 50 means it is shrinking. At the web site above, you can get quite a bit of detail. It is quite true that we have come back from what was the lowest overall index number in 30 years. But we are simply back to the level that was the low in the previous two recessions. The ISM number is "less bad" and that is a good thing, but it is still a bad number. Yes, it is headed in the right direction. Let's look at the actual chart.


Of course, as businesses adjust to the new normal, whatever that level is, year-over-year comparisons will start to be positive. Simplistically, if a business makes 500 widgets a month and sales fall to 300, they will likely report falling production and rising inventories. Over time, inventories will finally settle out as management adjusts, and at some point inventories and production will (hopefully) start to rise. This gets reported as positive. The actual numbers may be down from the peak, but the direction of the company is once again on a positive slope.

When you look at the actual numbers comprising the release, the manufacturing part of the US economy is still contracting. Is it less bad than a few quarters ago? Yes, but it is still bad. The recent number is only slightly higher than the average for the last 12 months. We need this number to be above 50 to talk about an actual recovery in the here and now, as opposed to the future.

Contain Your Enthusiasm

Shipping containers moving into US ports rose by 2% in April, from March. That was cause for celebration in some circles. Buried way down, if mentioned at all, was the fact that compared to a year ago shipping is down 22%. And year-over-year comparisons have been worse for 22 months in a row. At some point, you get to a bottom. We find the new normal. But if the new normal is down 20%, that is a different-looking economy.

This quote came from good friend Dennis Gartman:

"'Stuff' moves by air when it is needed swiftly, but we can compare year-on-year data to get an idea of the relative weakness or strength of the economy. At the moment, the data is still very, very weak. According to the data reported out by the International Air Transport Association, after having touched just barely under $60 billion in '07 and '08, this year the IATA 'guesstimates' that only $40-$42 billion will move into the US.

"We are effectively back to the levels of '00-'04 and we are well below anything since '05. Having reached its worst year-on-year comparison back in December of last year when there was 23% air-transported cargo moving into the US from abroad, these yearly comparisons have remained about 20% lower since. Inventories of 'goods' on the nation's shelves remain high, and so long as that is true then we are going to see horrid, recessionary year-on-year comparisons in this very timely data."

Dennis also looked at rail shipments: "Since the start of this year this year, when the year-on year comparison was a relatively tepid -8%, the trend has been steadily 'from the upper left to the lower right' on the charts. By March, the year-on-year comparisons were averaging -15%. By April, -22%; by May -25%; and now, after a week or two of June, they are -26%. This is not a trend to be tampered with; this is a trend of some very real severity, and for now we fear that it is a trend rather firmly intact. Thankfully, it looks back, not forward; but if the past is prologue to the future, the future still looks rather bleak.

"Finally, there is a glimmering of hope on the rail horizon, and that is that the June figures, as they are compiled, are showing some signs of life. According to the AAR, 'freight traffic on US railroads during the week ended June 13 continued to show signs of gradual improvement ... [as] rail car loadings and intermodal were up from the previous week with carloads at their highest level in 10 weeks.'"

Welcome to the new normal. It is a quite distinctively different world than that of 2006. Global trade is off 10% and there is outright deflation in many places. We will have lots of data to look at over the next few weeks as we explore the new normal, but that is enough for today.

Oh, I almost forgot. The asterisk on "This Time It's Different*"? Human nature hasn't changed. We are still driven by fear and greed. The business cycle has not been repealed. Free-market capitalism will get us back (with a few new rules of engagement). What's different will be the nature of this recovery. All the other eternal truths will remain.

London, The Baltics, and Rome

I leave for London in mid-July and will co-host CNBC Squawkbox from 7-9 AM on Friday, July 17. Then the plan was to go to Eastern Europe. Things have changed, and now I am thinking of doing a tour through the Baltics, starting with Finland, then going down through the three Baltic nations, maybe a side trip to St. Petersburg, and then end up in Rome for a few days. That should be a fun vacation. We will see how much I can really pack in! But I do love to go to new places and meet new friends.

It is Father's Day weekend and all seven kids are in. The house is full. Tomorrow night we all go to see the new grandchild. Brunch on Sunday. The US Open at the Black. This weekend just can't hardly get any better. I may do my part to help the economy and go get the new Apple iPhone. My youngest son's phone broke, and my excuse is that I can give him mine and the new one then only "really" costs me $100. Consumer spending is not dead yet, to judge from the lines. But technology is a necessity, I keep telling myself.

Have a great weekend. I hope you enjoy yours as much as I am going to enjoy mine.

Your still missing his own dad analyst,

John Mauldin

Copyright 2009 John Mauldin. All Rights Reserved

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Prosperity for God's People - Thursday June 18, 2009


Prosperity for God's People - Wednesday June 17, 2009


Prosperity for God's People - Tuesday June 16, 2009


Prosperity for God's People - Monday June 15, 2009


Friday, June 12, 2009

SFEG / Santa Fe Gold Corp Intrinsic Value Increases Again


Santa Fe Gold Updates Progress at Summit Silver-Gold Mine, Expects Milling to Begin in Q3 2009
Business Wire(Mon, Jun 8)

ALBUQUERQUE, N.M.--(BUSINESS WIRE)--Santa Fe Gold Corp (OTCBB: SFEG - News), a U.S.-based mining and exploration enterprise focused on gold, silver, copper and industrial minerals, today provided an update of progress at its Summit silver-gold mine in southwestern New Mexico. Construction of the Lordsburg processing plant has been completed and the company expects milling of ore to begin in the third quarter of 2009. The company anticipates selling a high-value gold-silver flotation concentrate to area copper smelters. At the Summit mine, development is progressing satisfactorily and a stockpile of ore has been trucked to the Lordsburg plant site.

“We are pleased to report that we now see our way clear to the start-up of milling operations,” said Dr. Pierce Carson, President and CEO. “Unfortunately, we have experienced a delay in obtaining a permit necessary for construction of the tailings dam, which must be constructed before milling can begin. However, on the basis of recent discussions with the regulatory agency involved, we anticipate shortly receiving the go-ahead for construction of the dam and estimate construction will require 30 to 45 days. We then will be in a position to commence processing and shake down of the mill. Following initial processing, ramp-up of mill throughput is planned to occur over a period of several months in conjunction with increased output from the Summit mine. We have initiated discussions with smelters concerning the purchase of our concentrate.

“We also are discussing with the smelters the near-term purchase of our high-silica ore for use as flux material, a necessary component in the smelting process. Processing of our ore for smelter flux would involve simple crushing and screening and direct shipping to the smelters, with no milling required. We would be paid for the contained precious metals. The ore we already have stockpiled is potentially suitable for smelter flux, and sale of this material would offer the advantage of generating revenue relatively quickly. Longer term, flux sales would provide us with an alternative product for payment of contained precious metals. Such sales also would have the effect of freeing up milling capacity, which would allow processing of additional ore from the Summit mine or from other sources, consistent with our strategy of increasing production and maximizing revenues from the Lordsburg milling operation. Although we are optimistic that flux contracts can be arranged, at this time we can provide no assurances.”

At the Summit mine, a 12’ x 12’ decline ramp intersected the predicted ore body in February 2009. Since then, the company has proceeded to drive two development headings in the ore zone structure, one an incline to the southeast planned to intersect old workings and to serve as a secondary escape and a source of additional ventilation, and the other a decline to the northwest towards additional ore bodies identified in previous drilling. Both of these headings are expected to achieve their immediate objectives in July 2009. Assays of the ore body show variable silver and gold values, with occasional very high grades encountered. Assay results averaged are consistent with the reserve grades previously calculated for the Summit deposit (10.28 oz/ton silver and 0.143 oz/ton gold). Ore grade material is segregated at the mine and trucked to the Lordsburg mill site. Mining operations are proceeding on the basis of two 10-hour shifts five days a week. The company employs 14 people at the Summit mine and 16 people at the Lordsburg mill site.

At full production, the planned mining rate at Summit is 400 tons per day, or 120,000 tons per year. After trucking to the Lordsburg mill site, the ore will be crushed and milled to produce a high grade saleable flotation concentrate anticipated to contain on the order of 1,000 ounces of silver and 12 ounces of gold per ton. At current silver and gold prices, the mine’s revenues over a ten-year mine life are estimated to exceed 200 million, and pre-tax net income is estimated to approximate $135 million. The company has in excess of $40 million in tax loss carry-forwards to shelter income tax otherwise payable.

Looking forward, Carson said the cash flow generated from Summit will be important in funding the company’s future growth, including further expansion of the resources at Summit and at the Lordsburg mining district, development of the Ortiz gold project and acquisition of other precious and base metal projects.

About Santa Fe Gold Corp:

Santa Fe Gold Corp (OTCBB: SFEG - News) is a U.S.-based mining and exploration enterprise focused on acquiring and developing gold, silver, copper and industrial mineral properties. The company owns the Summit silver-gold mine and Banner mill, and patented claims over the historic Lordsburg mining district, in southwestern New Mexico; mineral lease rights to the Ortiz gold property in north-central New Mexico, believed to contain two million ounces of gold; the Black Canyon mica mine and processing facility near Phoenix, Arizona; and a large resource of micaceous iron oxide (MIO) in western Arizona. Santa Fe Gold intends to build a portfolio of high-quality, diversified mineral assets with an emphasis on precious metals. To learn more about the company, visit www.santafegoldcorp.com.

Wednesday, June 03, 2009

Concert For New Hope Orphanage

If you can't come.............. just send Ca$h!

The Orphanage website is down because the official CFRN "smart guy" is officially MIA. However, my good friend Mike jumped right in and pulled it all together for us here -


You know Mike, he's the singer, songwriter behind "Everybody's Happy" the official CFRN theme song for 4+ years now. Amen?

To all of you (ok, both of you) who support the Orphanage each month...THANK YOU!

As for the rest of you...