Ethos – What Will Be The Economic Impact Of The Conflict Between Iran And Israel?

Benjamin Netanyahu,

the Prime Minister of Israel

by Jeffrey Sica on March 5, 2012

Ethos is defined by the distinguishing character, sentiment, moral nature, or guiding belief of a person, group or institution – in simpler terms, it’s the code by which we live by. In the case of most conflicts, the clash between an individual and a societies “ethos” or code has been the cause of much of the turmoil in the world today.
In some cases, it involves politics, religion or some cultural difference causing a great divide which can sometimes be reconciled peacefully and sometimes not. More often than not, it involves a certain level of sacrifice to come to a middle ground in which both parties may not get exactly what they want but realize that it is in their best interest to compromise. It’s what allows societies and individuals to be free.
Unfortunately, some individuals and societies believe their freedom can only be achieved through the annihilation of another society or individual and such has been the case of Iran toward Israel and the reason why no act of diplomacy or economic sanctions against Iran will prevail. Inasmuch as, current President Mahmoud Ahmadinejad has verbalized that their sole intention is to have Israel “wiped off the map” calling them a “fake regime”, as well as by their Supreme Leader, Ali Khamenei, who has been quoted as saying “Iran will back” any nation or group fighting Israel and has called for the destruction of Israel repeatedly.
The fact that this weekend his followers have gained strength in the Parliamentary elections and has undermined Ahmadinejad’s power in Iran will have little to do with what the “ethos” of the political and religious leadership is in Iran, which is the absolute and total destruction of Israel, freely obtaining nuclear weapons and a disdain for the United States. In Iran, it is Khamenei who has influence over Iran’s nuclear program and it will be he who The United States must convince to terminate Iran’s aggressive stance toward Israel and abandon its nuclear program.
Economic Sanctions / DiplomacyThe position taken so far by President Barack Obama was to first negotiate and compromise with Iran, which has thus far failed miserably and recently has consisted of tough talk such as an address given this weekend at the American Israel Public Affairs Committee, in which he affirms, “The U.S. won’t hesitate to use force to stop Iran” but also stated that there is “a chance for diplomacy to work”.
It is evident that no amount of diplomacy will work against Iran, creating the biggest problem which is that as The United States continues to seek diplomacy with Iran, they continue to pursue nuclear ambitions and be an incalculable threat to Israel. The mere fact that “diplomacy” is still an option is baffling considering the threats and aggressive initiatives made against Israel thus far. As far as economic sanctions are concerned, there has rarely been a time when economic sanctions have accomplished much of anything against an aggressive regime. The use of economic sanctions in the case of Iran is troubling since even if they were to work, they would take far too long to influence the regime to change course, allowing them to continue pursuing their nuclear program, thus leaving our closest ally in the Mideast, Israel, under a constant threat.
The time for diplomacy, economic sanctions and tough talk is over. The United States must become outwardly aggressive in its stance toward Iran and protect and fight side by side with Israel when the time comes.
The Importance of IsraelThe policy of compromise with Middle Eastern countries like Iran, who clearly dislike us, in an attempt to get them to like us, has failed miserably. In past decades, threats such as these made against an ally like Israel, would have been met with instant retaliation, especially that any harm be done to Israel and will ultimately lead to compromising our own national security since most nations that seek the destruction of Israel, also seek the destruction of the U.S. as well.
The only policy that will benefit the United States is an absolute, unwavering support of Israel regardless what the cost, since without them, we face an ominous threat of the formation of a more hostile Middle East forever threatening our national security.
The End of IsolationThe economy of the United States has maintained an isolationist attitude when it comes to Iran except in terms of oil prices. Iran being the second largest producing OPEC member has an overwhelming influence on oil prices. The long standing problem with OPEC is that so much of our economy depends on oil that to have an over dependence on them ultimately means that our economy can be controlled by fluctuations, manipulation and disruption of OPEC oil supply. Even a rumor like a Saudi Arabian pipeline blowing up, as was the case on Thursday, could create a spike in Oil prices.
Oil – The Lynchpin of the EconomyAlthough supply vs. demand has often been the driving force behind oil prices, I would no longer consider them to be paramount in what determines the price of oil. I would now consider another factor to be even more important – and that is fear. The recent surge in oil prices did not evolve out of economic expansion and an improving economy with increasing demand or declining supply, it evolved out of fear that war between Israel and the Iran would cause oil prices to surge.
The Barack Obama “tough talk” speech against Iran this Friday actually caused the price of oil to decline at least temporarily. I’m confident that we will see further declines after oil is released from the STRATEGIC OIL RESERVES, however, the “tough talk speeches” and “quick fix solutions” will not achieve the goal of eliminating the threat of higher oil prices derailing an economic recovery. With high oil prices there can be no economic recovery. Although many Americans have become more energy efficient and supply is available, as long as the United States depends on oil from the Middle East, our national security and our economy will always be vulnerable.
The Only Easy Day Was YesterdayOne motto of the United States Navy Seals is “The only Easy day was yesterday“. The importance of understanding this ethos that most Americans share is that there are few things more important in life than freedom. Our enemies know very well that integral to that freedom is economic freedom and any dependence on them for any of our essential economic needs is a direct threat to our freedom. Our enemies also know that any attack or threat against our allies is a threat against the United States and the freedom that many men and women have fought and died for.
It is our military and economic strength which protects us and although we would much prefer peace through compromise, we must embrace as Ronald Reagan said, “peace through strength”. The Navy Seal attitude that “the only easy day was yesterday” should strengthen our resolve to fight harder for the freedom that we cherish, not only for us but for those who come after us. It’s important to embrace the fact that no matter what our temporary economic situation is, as long as we have our freedom, we have everything.

Market Blind Side – What Super Bowl Champions New York Giants Can Teach Us About The Market

New York Giants left tackle Dave Diehl

by Jeffrey Sica on February 7, 2012

Orderly SilenceAt the beginning of the 2009 movie “Blind Side”, there is a quote by Leigh Anne Tuohy, played by Sandra Bullock, “There’s a moment of orderly silence before a football play begins, players are frozen and anything is possible. Then, like a traffic accident, stuff begins to collide, from the snap of the ball to the snap of the first bones – closer to 4 seconds than 5.”
Orderly Silence in the MarketsIt’s the orderly silence before systematic chaos breaks out that gives fans that adrenaline rush which football fans crave – the fear and anticipation of the unknown. In markets we are experiencing an element of orderly silence as markets continue to mostly systematically advance.
Although it’s evident that investors are experiencing anxiousness or a “fear of the unknown” like they have rarely experienced before, something like an “orderly silence before chaos breaks out”.
In Leigh Anne Tuohy’s next quote from her narrative, she describes the legendary “blind side” hit on Joe Theisman from Lawrence Taylor when his leg was shattered, ending his career forever. She describes that moment in her narrative as “up until that moment, the play has been defined by what he (the Quarterback) sees – it’s about to be defined by what he doesn’t see”. She goes on to say, “Now y’all would guess more often than not, the highest paid player in an NFL team is the Quarterback, and you’d probably be right. But, what you probably don’t know is that more often than not, the second highest paid player is, thanks to Lawrence Taylor, the left tackle. Because as every housewife knows, the first check you write is for the mortgage, but the second is for the insurance. The left tackle’s job is to protect the Quarterback from what he can’t see coming. To protect his ‘blind side’”.
Driven – The New York Giants Starting Left TackleHis name is Dave Diehl and at 6’5”, 319 pounds and arms covered with tattoos, he is one of the most physically intimidating Offensive Lineman in the NFL with the crucial responsibility of protecting Eli Manning’s blind side. In the incredible Super Bowl win, it was evident that Big Dave did his job and protected Manning’s blind side which contributed to Eli’s brilliant performance and being named Most Valuable Player. This Super Bowl will be most remembered by the spectacular catch of Mario Manningham on the sideline. Most people won’t talk about the brilliance of Dave Diehl doing his job, except of course by Eli Manning who knows that if Dave didn’t do his job, he may not have completed that pass.
ReloadDave Diehl has been training at DeFranco’s Training in Wyckoff, New Jersey, which I wrote about in my blog titled “Reload – what is the ultimate weapon in an insane market”. I was featured in a documentary about DeFranco’s titled “Strong” and have enclosed a clip of Dave’s training. Knowing how Dave trains in the off season, Eli could not have a better prepared, better conditioned, more intense monster like Dave protecting his blind side.
Market VisibilityMarkets today are rallying on what they can see, it’s this market visibility which has characterized the recent rally.
In one of the most incredible Super Bowls ever played, let’s not forget that it was the play of left tackle David Diehl that may not be remembered forever but if he failed to protect Eli Manning’s blind side, the Giants may not be the champions they are today.
Life LessonsAs I told my 14 year old son as he proudly wore Dave Diehl’s Pro Bowl signed jersey to school, Football is a great sport because of the lessons it teaches us about life. Diehl’s outstanding play confirmed what I believe … protect your investments’ blind side and you too could be champions.

Hopelessly Bearish – Relentlessly Unconventional

by Jeffrey Sica on January 30, 2012

What Is The Irrelevance Of Conventional Wisdom In Achieving Investment Results?
The Epic BattleThe most difficult battle an investor must face in their investment career is the battle within them – either accepting and following conventional wisdom or developing a new way of looking at their investment strategies and financial futures. The most important element in this decision is assessing whether their investment strategies have accomplished the results they set out to achieve when they first started investing.

Conventional Wisdom versus Unconventional WisdomThe core characteristic of conventional wisdom is embracing old, often outdated strategies to achieve investment results. In most cases, it’s the “herd mentality” ingrained in our subconscious as being true. It’s what Orwell referred to as “group think” in his novel 1984 which is defined as “a way of thinking that happens when the desire for harmony in a decision-making group overrides a realistic appraisal of alternatives”.
 It is the polar opposite of unconventional wisdom, since unconventional wisdom involves embracing ideas or strategies which are not embraced by the masses. In investment strategy, unconventional wisdom refers to developing new, often unknown strategies which are relevant to market conditions as they are now – not as we wish them to be or how they once were.
 What Are The Cornerstones Of Conventional Wisdom And What Have Been The Results?The biggest “lie” on Wall Street and a primary cornerstone of conventional wisdom – “Buy and Hold”This fundamental idea behind the oversimplified strategy of “buy and hold “ is buying stocks with the intent to hold them for long periods of time – even forever in some cases – consequently dealing with whatever volatility accompanies holding them because if you hold them long enough they will inevitably appreciate.
The founding fathers of the “buy and hold” strategy are market gurus like Jeremy Siegal from the Wharton School of Business at The University of Pennsylvania and “The Oracle of Omaha”, billionaire Warren Buffet among countless others. They developed their strategies based on statistical data which was accurate … then.
These ingrained strategies are no longer effective, as evidenced by the fact that the S&P 500 first closed above 1300 on March 15, 1999 and has taken 13 years to close above 1300 as it did this past week. In the past 13 years, the S&P 500 has declined 50% or more twice and has declined anywhere from 10-30% countless times – so much for “buy and Hold”. As a matter of fact, not even the S&P themselves believe in “buy and hold”.
Since 1999 around 207 stocks were removed from the S&P 500 which included now defunct companies like Lehman Brothers, Bear Sterns, Enron and WorldCom each removed after they suffered massive declines. If S&P believed in “buy and hold”, instead of the 40 percent turnover in its overall company composition, the results would have been significantly worse. If the indexes don’t believe, then why should you?
The Lies of the Beautiful People – Who Is Responsible For Keeping “Buy And Hold” Alive and Well?The big banks and financial institutions like Citigroup (NYSE-C), JP Morgan (NYSE-JPM), Goldman Sachs (NYSE-GS), Morgan Stanley (NYSE-MS) and several others who have the most visible presence in the investment world. They spend exorbitant money on advertising and public relations to guarantee that they portray an image of stability, trust and customer service, thus creating an illusion in which they could convey a doctrine and philosophy that benefits them. The vast majority of these big financial institutions have made extravagant profits in trading, which involves short term investment strategies. They clearly don’t believe in “buy and hold”, yet they stand to benefit if they convince you to believe in “buy and hold” and remain forever bullish.
Why Are Big Banks and Financial Institutions Always Bullish and Why Is Their Core Doctrine “Buy And Hold”?

1. They only profit if clients stay invested. They profit from clients being bullish.
2. They detest holding cash in investment accounts. Unusual being that they are banks. The reason they detest cash in investment accounts and employ representatives in bank branches to convince depositors to invest in investment products is  because they make significantly higher profit margins on investment products then they do on cash.
3. They use their broad based exposure through analysts and corporate officers to convey their real or fabricated bullishness as a way to convince investors to stay invested. Several  spokespeople for big banks and financial institutions are scripted in what they can and can’t say, whether or not they believe it to be true.

 Failing To ConformIn my former life as a Managing Director of a large financial institution, I was given the opportunity to speak on behalf of the company only after I provided the company with a script on what I was going to say. I received a note which detailed what they wanted me to say which was directly opposite to what I wanted to say and believed. Needless to say, I declined the invitation to speak and remained silent and suffered until the great escape. I couldn’t bear putting the needs of an institution before the needs of the clients who worked their whole life to accumulate the money they had invested with us. I have since been liberated and say what I truly believe.
 Conventional Wisdom – Follow the Leader, Even If It Means Going Over A Financial Cliff

1. If an analyst or strategy was successful yesterday, it doesn’t necessarily mean they will be successful in the future, especially if they took significant risks to achieve those returns. An example is hedge fund manager Jon Paulson, who has been one of the top performing hedge fund managers for the past 17 years. In 2011, Paulson’s  advantage plus fund lost 52% after being up 17% the year before. In defense of Paulson, he is a hedge fund manager and anyone who invests with him should realize that there is significantly more risks investing in hedge funds and should stay away from strategies like his if they are unable to accept the severe volatility. The problem is, that  investors fail miserably when they follow the leader, if they ignore the risk and volatility of these investments.
2. The top performing strategies and managers tend to achieve astronomical returns by taking significant risks which could destroy a portfolio in a market collapse.
3. Banks and financial institutions are notorious for touting the strong performance of the investments that “beat the S&P” while concealing  those strategies which perform poorly. Statistically they have been overwhelmingly wrong in aggregate, especially at market tops like that of March 1999 and immediately preceding the market collapse of 2007. It’s no surprise that the vast majority of these so called market gurus are extremely bullish now.
4. Despite banks and financial institutions delivering subpar returns, one thing is evident – they don’t care.

Conventional Wisdom Of Bargain Hunting and Chasing Rallies – The Fear of “Missing OutIt started with widely used yet idiotic catch phrases like “the rising tide lifts all boats”, “the trend is your friend” and “don’t fight the fed”. I’m not sure how these catch phrases became conventional wisdom, yet they have proven to be disastrous in achieving investment results. Chasing rallies could best be characterized by the restlessness investors experience when they see markets rallying and don’t participate, paying no attention to the fact that the vast majority of major declines in the market have been preceded by dramatic rallies. They become like “dogs chasing parked cars”.
Investors who bargain hunt because they think a stock is “cheap” just because its price is lower than it was at a previous time, are destined to see that “cheap stock” get cheaper. The discipline behind value investing involves far more research, than price depreciation and an understanding that many times cheap stocks deserve to be cheap. Investors are slow to react to a market rally ending abruptly – by the way, all rallies end abruptly.
 Journey From A Bear To A Hopeless BearOur investment strategies have been mostly defensive since last year, until the summer, when I became a hopeless bear. It had become apparent to me that the market had become over dependant on government stimulus programs, central bank interventions and bureaucrats in general and as with any addiction, the markets dependence would be difficult, if not impossible, to break.
The central bank failed to stimulate the economy and or the economy didn’t improve. The European debt crisis began to accelerate making it evident that although the market could endure a Greek default through intervention by the European central bank, it could not endure a default in Italy – which is inevitable .The significance of a worldwide banking crisis is evident as distressed nations begin to write down debt. No conventional wisdom will succeed in what is about to happen.
Losing The Battle To Win The War – No SurrenderSome people think being hopelessly bearish means we’ve surrendered or maybe even become complacent, hiding under our desks waiting for the end – we haven’t. We have become relentlessly unconventional.
I’m not diving into the market head first throwing money at a basket of stocks, crossing my fingers and hoping for the best, so I haven’t participated in much of the recent rally as I am willing to give up short gains to protect portfolios. Unconventional wisdom is to protect portfolios first, while conventional wisdom stresses beating the S&P. I will never attempt to beat the S&P in an environment like this, if it means taking on the volatility of the S&P, because volatility never ends well.
Fear Of Commitment – No Emotional AttachmentI have no emotional attachment to any stock I invest in. I selectively buy and will sell quickly if  a stock fails to perform or declines to a specified predetermined price. I invest in anticipation of events with a likelihood of happening and I’m willing to accept a specified amount of volatility. If a position becomes too volatile, I sell it because as I’ve said before, volatility never ends well.
Into ObscurityI have no hesitation in buying obscure, often unloved, ignored stocks if I find value in them. I also will invest in things like natural gas pipelines, precious metals, currencies and real estate, as well as privately held companies. I will often short stocks or currencies as we are currently short the EURO and long the Australian dollar and the Canadian dollar and even commodities; all of which I wouldn’t hesitate to sell in an instant, if something fundamentally changed that could be detrimental to the performance of the stock.

Redefine What It Means To Be A Hopeless BearThe conventional wisdom that being a bear, even a hopeless bear, means investors can’t profit, is entirely false. It’s important to redefine what is most important when it comes to investing in an extremely volatile and dangerous market. While at one time conventional wisdom favored beating the indexes to achieve significant returns despite the risk, it is entirely unconventional to consider portfolio protection as our primary goal – but it is. As far as profiting in this market, I consider the bulls as being the complacent ones, stuck on conventional wisdom and useless strategies while we rigorously pursue unconventional  strategies to protect and profit our clients. Although we may face some criticism for not participating in this recent rally of the S&P for the sake of protecting our clients  and we may even underperform the wildly volatile S&P, one thing is certain, we will remain relentless and forever unconventional.

We Carry On – What Does A Disabled Vietnam Veteran Hero Have To Do With The Year Ahead?

In Bob Wieland's world, obstacles create opportunities

and conquests breed inspiration.

by Jeffrey Sica on December 28, 2011

In Tim McGraw’s song “WE CARRY ON” there is a lyric, “when our lives come undone, we carry on cause there’s promise in the morning sun, we carry on as the dark surrenders to the dawn, we were born to overcome, we carry on”.
The Aftermath Of A Volatile Year And The Challenges AheadAs the market crawls to the finish line of one of the most volatile years in history, investors around the world contemplate the challenges and uncertainties which lie ahead in the year to come. It is questions like:

• What will be the outcome of the European Debt Crisis?
• Will a bank contagion result in bringing the economy to its knees as it did a few short years ago?
• Will our government finally come to an agreement in how to handle our sky rocketing deficit?
• Will the deficit solution involve severe tax increases or excessive cuts in the military which will affect our national security; making us less safe from those enemies who want nothing more than to do us harm?
• Is this unprecedented volatility caused by fear and uncertainty going to end badly, as volatility often does, as investors grow weary of seeing their life savings fluctuate so violently from one day to the next?

It’s difficult to find inspiration heading into the next year with some of the highest levels of unemployment we’ve seen in decades combined with high levels of poverty. What will happen to those most in need who are not able to help themselves or those that rely on a government that has recklessly spent tax payer money and seems to be in a perpetual stalemate as to what to do about it?
Waiting For A Hero To Emerge From The AshesWe keep hearing, “be optimistic, markets tend to do well in election years”. As if some politician has the answers and he or she will bring this country back to prosperity, people will find jobs and we will see the end of poverty. We will accomplish this while strengthening our military and taking care of those who willingly sacrifice their lives to protect us and the freedom we cherish.
As our politicians continue to try to destroy each other for the sake of protecting their political futures instead of sacrificing themselves for the sake of the hard working Americans who are struggling, it’s difficult to believe that a hero will emerge.
When It Seems Like All Hope Is Lost … A Hero EmergesIf this were a Hollywood movie, the ideal time for a hero to emerge is when it seems that all hope is lost. One day, while sitting at my desk working endless hours after a year of facing the challenges and obstacles which the world economy has created, trying to help the business owners I represent face what seems like insurmountable challenges in the year ahead and the uncertainty retirees face after years of working hard for those few golden years of retirement — my hero emerged. In movies, I always like the idea of an unlikely hero and my unlikely hero was double amputee Vietnam Veteran war hero, Bob Wieland.
He Lost His Legs But He Didn’t Lose His HeartBob lost both legs in Vietnam when he stepped on a landmine while trying to save a fellow soldier. He was declared dead and put in a body bag alongside all of those brave heroes who gave their lives fighting for our freedom. It was an orderly who saw him moving in the body bag … he lost his legs but didn’t lose his heart and has been grateful to live life to its fullest ever since.
Upon returning home, Bob dedicated his life to motivating and inspiring people. Bob walked across America on his hands and arms in three years, he’s a four time world record holder in the bench press (competing against people who have legs) with a best lift of 507 lbs., he has completed the New York, Los Angeles and Marine Corp marathon and is the only double amputee to complete the grueling Ironman Triathlon in Kona, Hawaii as well as being the strength coach for the Green Bay Packers.
His list of accomplishments since returning home from Vietnam is endless. His disability inspired him to inspire others. The greatest accomplishment being that for each and every achievement, Bob has donated all of the proceeds from generous individuals who have sponsored him to the poor, the hungry and the disheartened who he’s met on his incredible journeys. Bob’s message is always “I lost my legs but I didn’t lose my heart”.
Inspiration When So Many Are So Uninspired – Dream Ride 3Bob and I spoke several times about his latest challenge, Dream Ride 3, where Bob will be riding coast to coast from his Dream Center in Los Angeles to Washington, DC, in an effort to set the world record as the first 65 year old (or older), to ride across America on a three wheeled hand cycle.
Bob will do this to help America reach out to fellow citizens by supporting our heroes: peace officers, firefighters, wounded veterans and youth who all deserve a hand up, as well as those in need due to our challenging economic times. In our conversation, Bob told me that his heart breaks for those in need and it’s his life mission to do what he can to help, motivate and inspire them.
Those Who May Have Legs But Have Lost HeartIn our conversation, we spoke of the many disheartened youth who see no hope or inspiration in their lives. Bob heard about my involvement as Chairmen of the Executive Council of Daytop NJ, an adolescent drug treatment center with 75 inpatient kids who are trying to turn their lives around after suffering the devastating effects of drug addiction.
I mentioned that there has been nothing more painful than to stand at the graveside of a teenager that lost his or her life to a drug overdose or suicide because they couldn’t see a future for themselves, and how much they needed inspiration from a man like him. I told him that our slogan at Daytop NJ is “every kid deserves a chance”.
He was in full agreement. I told Bob I would tell everyone I knew about him because the world needs more men and women like him.
The E-mail That Changed My LifeA few days after our conversation, I received an email from Bob that stated he would be donating half of the proceeds from his Dream ride 3 to Daytop New Jersey in an effort to help fulfill our mission “that any kid that needs help getting off drugs will never be turned away”.
This reminded me of another lyric in “we carry on” – “It’s the family that grieves for a lost loved one, it’s the soldier who won’t leave till the job is done, it’s the addict trying to turn his life around, it’s picking yourself off the ground when you’ve been knocked down”. At age 65 Bob is “the soldier who won’t leave until the job is done”. His generosity will never be forgotten.
Dawn Of A New Day – A Year To Stop Looking For Heroes In The Wrong PlacesAs most of the world looked for heroes in the government, the central banks and politicians in general, what they actually ended up with was little inspiration, confusion and empty promises. I believe that there are well intentioned politicians who desire to make a difference in the world but they are elected to be servants of the people they represent and rarely become heroes.
The ultimate price a hero must pay is to give up themselves or their life for others. It’s a price that few men or women are willing to pay. The real heroes are people like Bob Wieland and all of those men and women who put their lives on the line for the sake of protecting this great country and its citizens.
It is kids who made poor choices in their youth but decided to do whatever it takes to turn their life around and help others to do the same. It’s the disabled who overcome great obstacles and accomplish great things while always helping others; they are the true heroes.
It’s those who never forget the poor, the sick and all of those who can’t help themselves that are the heroes. Let’s look to them instead – for it is because of them that this nation is great.
Born To OvercomeAs we begin 2012 it’s almost a guarantee that we will see tremendous chaos, not only here, but all over the world. The one characteristic of every hero is that they are all “born to overcome”.
This remarkable trait of a hero is within us all in that we are “born to overcome” whatever it is that has held us back in life. Let 2012 be a year we find the hero within ourselves, and to quote Bob Wieland, “it’s always too soon to quit” instead it’s time to carry on.

Reload – What Is The “Ultimate Weapon” In An Insane Market?

by Jeffrey Sica on December 11, 2011

In Wyckoff New Jersey there is a Physical Training center for elite athletes called “DeFranco’s”, owned and operated by legendary hard-core physical trainer, Joe Defranco. “DeFranco’s”, established in 2003 is a mecca for some of the best athletes in the world, which includes over 50 NFL players, Olympic athletes from all over the globe, as well as superstars from the wildly popular sport of mixed martial arts. DeFranco pioneered the warehouse-type training center devoid of juice bars, showers and even air conditioning in which elite athletes “train to failure” for the sole purpose of the love of training and the possibility of becoming a champion in their chosen sports. His hard–core warehouse gym has been named one of the top ten gyms in America by Men’s Health  Magazine and featured on such networks as ESPN, The NFL network and Spike TV. I had the opportunity to be featured in a documentary about Defranco’s in a movie called “Strong“. His standards could best be summarized by his goal for the athletes he trains, which is prominently displayed on the home page of his website “turn your body into a weapon”.
Having known Joe for ten years, he adheres to a philosophy that if an athlete is to become the best in his sport, he must not only be strong, fast and have tremendous endurance but he or she must be “a perfect weapon” – they must have a relentless desire to become the best and to never give up. He considers “mental toughness” and “unwavering discipline” to be the two most important characteristics of a champion. He often uses the quote that there are only two pains in life, “the pain of discipline and the pain of regret”.
In many ways investing has numerous similarities to DeFranco’s philosophy, especially when it comes to discipline and mental toughness. It is these principles which will lead an investor to invest with discipline and therefore eliminate the “regrets” that virtually every investor encounters during their lifetime. It is these two qualities which separate great investors from mediocre investors and it’s these two qualities that I consider the ‘ULTIMATE WEAPON”.
As the year draws to a close, investors all over the world are most likely feeling that they are in the fourth quarter of a brutal game, playing injured and hoping that they could endure to the end and maybe walk away with a victory. They probably feel as if they are in the last round of a mixed martial arts championship fight – battered, bruised and bleeding with barely enough strength to keep their arms up as their opponent tries to land the last “fatal punch or kick to the head”. Like the athlete in the “ironman” competition trying to finish the last event when exhaustion has made them delusional, feeling as if their losing control of their physical bodies, with only their “will” to help them cross the finish line.
As of today, the S&P 500 is virtually unchanged year to date. Investors who have stayed invested in stock have experienced unprecedented volatility. From the end of May to early October, they have seen a plunge of nearly 20% and a surge in the last few weeks which erased much of the plunge and left their portfolios virtually unchanged from this time last year or in some case lower, even much lower. In other words, it’s been an insane ride to end up just where you started.
It is market volatility like this which is like the aforementioned mixed martial arts fighter who stumbles into the final round fearful of that “final” lethal round house kick or punch to the body that would break a rib, feeling defenseless and afraid that not only will they lose the fight but they will lose everything they’ve worked their whole life for – which is to become a champion in the sport they love.
It is this same type of “fear” that characterizes the “mood of the market” today and is the reason for these high levels of volatility and the reason that volatile markets never end well. It’s the “fear of the unknown”, the one event, whether it be the complete and absolute failure to contain the European Debt crisis, the failure of our government to get our out-of-control deficit under control or perhaps the high probability of a worldwide banking crisis which could send this market “to the canvass” – in some cases destroying the portfolios that investors sacrificed their whole lives to build.
Although we (at Sica Wealth Management), have not achieved “mind blowing” double digit returns for our investors this year, we “did not” participate in much of the market volatility. We “did not” see our portfolios plunge 20% over the summer, nor did we participate in the market surge of the past few weeks. In other words, we are not battered, bloodied and bruised because we reduced our 15% stock position at the beginning of the summer to virtually zero in stock by summer’s end, not out of complacency but out of discipline. It is the “discipline” to know that there are too many “unknowns” and too much volatility to “trust” this markets ability to recover overnight. A successful investor knows that the “ultimate discipline” is to not chase rallies based on virtually nothing or listen to the “so called” experts who work for banks or financial institutions, whose survival depends on the market going up. I used to call them market cheerleaders, until my daughter Nina became a cheerleader and realized that it was offensive to cheerleaders to compare them to big banks and financial institutions – so, I will have to figure out another name to call them.
In the immortal words of Greenbay Packers coach Vince Lombardi, “fatigue makes cowards of us all”. We are in a market that is fatigued – to not participate in this volatility is to not become fatigued. We are not fatigued and by no means cowards. Joe DeFranco says that, “the most important factor in an athlete’s success is what they do in the off season”. It is not a time to be lying on the beach on a tropical island but to get disciplined, work like you’ve never worked before, study your opponents and mentally develop strategies to defeat them, especially by studying their flaws and inconsistencies. The market should always be viewed as “the opponent” with many flaws and inconsistencies which can be “taken advantage of” at the right time. Study it relentlessly and never make yourself vulnerable to it when its volatility is overpowering you. As Joe DeFranco trains athletes to turn their bodies into weapons, investors should strive to turn their investment strategies into weapons and be mentally tough enough to never give up.
In recent weeks some people have been critical of our not participating in this recent market surge – my response is – we are simply Re-loading.

The Echo of Eternity – Decisions Made Involving the European Debt Crisis with Eternal Consequences

by Jeffrey Sica on October 17, 2011

In a quote from the movie “GLADIATOR”, the main character, a Roman General named Maximus played by Russell Crowe, while addressing his troops before going to war, boldly said “Brothers, what we do in life echoes in eternity”.

As the G20 met this past weekend in Paris to “once again” come up with a plan to solve the European Debt crisis, it’s almost certain they didn’t begin the meeting with any words even remotely close to these, although perhaps they should, since the decisions they make will in fact “echo in eternity”. Not because of the acceleration of the recession in Europe only exasperated by “severe austerity measures”, nor by the “banking collapse” that could result from a wrong decision or even “tax payer” involvement by bailing out failing banks and sovereign entities which was clearly opposed by both German Chancellor Merkel and Chairmen Sarkozy but now seems to be an accepted part of the solution. Although these issues are clearly serious, it is the final resolution, whenever that comes, which will “echo in eternity” for a few reasons.
First, there has rarely been a governmental debacle equivalent to the size and scope of what the European Union has become. It has evolved to its present situation “by treaty” – weaker countries are to be supported by stronger countries, which is why Germany and France have become central in the negotiations. They are ultimately the guarantors of the weaker countries and therefore have much to lose if any of those countries fail. This is most likely why Jean–Claude Trichet the retiring president of the IMF, in his last G20 meeting suggested rewriting the treaties to ultimately let France and Germany “off the hook” as guarantors.
The Greek crisis which began almost two years ago will most certainly end in a Greek default. This due to the fact that any attempt to restructure Greek debt or recapitalize financial institutions will lead to “tax payer” involvement and other severe austerity measures that weaker countries like Greece will not be able to meet, leaving no choice but to “officially default”.  “Officially” because Greece has already defaulted, considering they have only been able to meet their debt obligations through write downs from private investors and bailouts from the European Central Bank and the International monetary fund. Any novice economist knows that if debt is written down, it is in default.

If a treaty such as the treaties which established the European Union is changed through governmental intervention, no treaty in Europe will ever be regarded as valid, nor taken seriously. The European Union will fail and nothing will emerge to replace it. If treaties are rewritten due to the economic mismanagement of sovereign entities and financial institutions then “treaties” will be worthless. Ironclad treaties have been the nucleus that has stabilized the world economy for decades. In the future, the rewriting of treaties will “make future treaties irrelevant” and will echo in eternity, making individuals trust their government even less than they already do.

SECOND – THE INVOLVEMENT OF THE EUROPEAN CENTRAL BANK, THE INTERANTIONAL MONETARY FUND AND THE CENTRAL BANK OF THE UNITED STATES
In 2008, the United States made popular the concept of the Central Bank bailing out failing financial institutions with tax payer dollars and using printed money to attempt to stimulate the economy with the excuse that “if they don’t, things will get much worse”. Much of what was discussed in the G20 meeting in Paris, echoed that same sentiment which ultimately results in tax payers being responsible for the irresponsible decisions of others, always using the excuse which politicians and central bankers have grown very fond of which is, “if we don’t do this, things will get worse”. We were told by politicians and central bankers that although our economy has not improved and our financial institutions have become even bigger and a greater threat to our economy and our deficit is at a historic high, we would have been in “another GREAT DEPRESSION” had we not acted as we did.

The world equity market has become addicted to government stimulus programs and bailouts when even a whisper of a QE3 type program or a ECB, IMF or the latest soon to be debacle, THE EUROPEAN FINANCIAL STABILITY FACILITY, is discussed in the G20 as a way to backstop failing European banks. It’s hard to imagine an economically prosperous world economy which focuses virtually all of its attention on Government based bailout programs. The world economy being fully and completely directed by government at the expense of the tax payer will ultimately “echo in eternity”, as optimism fades for a free and thriving market.

THIRD – BANKS REGULATED BY 20 INTERANTIONAL GOVERNMENTS
In the G20 meeting this past weekend, a group of 20 governments were considering naming 50 banks as “highly cited”, meaning potentially dangerous to the global economy should they fail. Among these banks are banks like JP Morgan Chase (NYSE:JPM) and Bank America Corp (NYSE:BAC). This initiative will involve foreign governments establishing regulatory standards applicable to all banks. As much as government regulators failed in preventing the collapse of financial institutions in 2008, especially the two biggest failures being Fannie Mae and Freddie Mac, a global banking system regulated by 20 governments has no potential for success, making it inevitable that there will be more failing banks in the future.
There has never been a period in history when 20 governments have agreed on anything, much less something as important as the global banking system. Establishing an internationally government controlled banking system as opposed to a  domestically regulated banking system in which failing banks are “left to fail” and responsible banks are allowed to succeed will “Echo in Eternity”, especially since an internationally regulated banking system will involve international “tax payer bailouts” – should those regulators fail, which they most certainly will.

The final scene in the movie GLADIATOR did not end with Maximus riding victoriously into Rome as a triumphant General. It ended with his death as a hero, while avenging the death of his family. We should remember that it is not our government or our economic situation which decides our future but it is “what we do in life echoes in eternity”.

Empire Of Dirt – “Let Them Fail” Why Failing Banks Should Fail

by Jeffrey Sica on September 5, 2011

On September 3, 2011 Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and 17 other banks were sued in federal court by the Federal Housing Finance Agency on behalf of Fannie Mae and Freddie Mac in an attempt to recover $196 billion dollars. At the core of this massive lawsuit is the FHFA accusing said banks of misleading Fannie Mae and Freddy Mac about the soundness of the mortgages underlying the securities. In other words, they are accusing the biggest banks in the country of lying to the United States Government.

 THE CREDIBILITY OF THE FHFAThe FHFA, the regulator and conservator of Fannie Mae and Freddie Mac, lost almost all credibility when Fannie Mae and Freddie Mac imploded in 2008. They were largely responsible for causing one of the worst financial crisis’ in our nation’s history. Fannie and Freddie are still in receivership today and will be for years to come. The FHFA lost credibility because they took the word of banks who claimed that subprime mortgages were safe, supported by the fact that all the ratings agencies had given these securities the coveted AAA rating.

In another legal action against these same banks they have been accused of  paying off the ratings agencies for these AAA ratings. How can a regulator who has the responsibility to protect consumers and investors be trusted when they have allowed themselves to be so misguided as to put our nation’s economic stability at such peril?

Why Has the FHFA decided to file this lawsuit years after their catastrophic mistake in 2008?First, after giving failing financial institutions over 1 trillion dollars through programs like TARP in which the U.S. Government assumed responsibility for the bad debts and made them a liability of the tax payer, they have come to the realization that the economy hasn’t improved at all as a result. They are recognizing that “banks survived and the rest of the economy is still suffering”.

Secondly, it has become evident in recent months, due to the onset of the European debt crisis, that the interdependence of U.S. and European banks is way beyond what they initially believed. A condition has evolved in which European banks have leveraged their portfolios off of bad debt from sovereign entities and our banks in turn have leveraged our debt off of those same entities. The likely result will be a contagion which we do not have the wherewithal to contain. In other words, the FHFA and the federal government are realizing that the “too big to fail” policy may have to extend to banks all over the world due to this interdependence.

This scenario of including foreign banks in the too big to fail model is impossible because it would accelerate our already out of control deficit, initiate American austerity with drastically higher taxes, unemployment and a plunging Gross Domestic Product. The end result will severely damage every aspect of the economy; especially the consumer, with consumer confidence being at a twenty year low. This decline would be catastrophic since the consumer is responsible for 70% of the Gross Domestic Product.

WHY HAS THE DISDAIN FOR BANKS ACCELERATED RECENTLY?The original sin was committed when banks like Citigroup (NYSE:C) hid their exposure to subprime mortgages on their balance sheets as short term debt. After this contemptible act of deceit, they received billions of dollars of tax payer bailout money and the government took all their bad debt on its balance sheet creating a future liability when a percentage of this debt defaults. The banks blamed their problems on a bad economy and the fact that individuals couldn’t afford to pay their mortgages. The lie in this statement is that despite the economic downturn, it was banks using these loans to create leverage and issue new loans which created the catastrophe. Banks continue to blame consumers and have failed to take responsibility for their reckless behavior.

THE ULTIMATE LIE TO JUSTIFY THE HEALTH OF THE BANKING INDUSTRY – “HIGH CASH RESERVES”Yes, in fact banks do have high levels of cash reserves. The truth is they have high cash reserves because the tax payers supplied it through government funded bailouts. These high cash reserves were “intended” to be used for making loans to qualified borrowers like small businesses. However, qualified small business have gone out of business because their bank loans have been pulled; statistics show that we have not seen any decrease in the number of small businesses going out of business since 2008. High cash reserves give the illusion of health when, in fact, banks are only concerned with self preservation and feeding themselves from their reserves.

WHAT DID THEY DO WITH OUR MONEY?Banks used tax payer dollars given to them through government bailouts to sure up their balance sheets and have not contributed 1 penny to helping small businesses get on their feet and start hiring again. They have, however, contributed to our incredibly high unemployment rates since small businesses will not hire if they can’t borrow to grow.


“LET THEM FAIL” – WHY TOO BIG TO FAIL MUST ENDIt must end because it can no longer be contained within the borders of the United States. We have become a global economy with an interdependent banking system. The end result of our first bank bailout established bigger banking institutions. Another bank bailout would undoubtedly establish even bigger multinational financial institutions with an even greater future liability and taxpayerliability with potential austerity measures that could collapse economies on a global scale. As the International Monetary fund has recently discussed the use of a program which creates liquidity by printed money (like we did in our two failed quantitative easing programs (with a third on the way, although they won’t call it quantitative easing)) as a means to fund a bank bailout will unleash inflation like we have never seen in history. Inflation combined with low levels of growth resulting through austerity measures will create stagflation which is a far worse condition than a double-dip recession.

THE END RESULT OF BANK FAILURESIf banks fail it will create severe consequences to the consumer and investors alike, as well as severely hinder an economic recovery. However, allowing banks to fail will end the policy of rewarding banks for acting in a reckless, irresponsible manner with the money they have been entrusted with. It will also end the future burden on the tax payer who should never be penalized for the bad behavior of others.
It will re-establish the concepts of capitalism which have made our economy great; namely –  free enterprise means that businesses succeed and fail every day in a free market. In the seeds of failure are the seeds of success and many great industries have risen from failure. We can eagerly anticipate a new banking system to emerge in which fiscal responsibility, accountability and thrift once again become the cornerstones of the banking industry. It is only through a free market in which individual can succeed or fail on their own merit that we will once again gain the economic freedom we desire.

Hard to Hold: Why investors should avoid an “out of control” market

Legendary film icon Marilyn Monroe once said “I’m selfish, impatient and a little insecure. I make mistakes, I am out of control and at times hard to handle, but if you can’t handle me at my worst then you sure as hell don’t deserve me at my best“. These words have been applied to the life of who many consider one of the most intriguing and beautiful actresses to ever grace the silver screen and can also be applied to the expected reaction of investors who find the recent market to be “hard to handle” and “out of control”. It will become evident that a volatile market is truly a market at “its worst” and investors and traders will surely, over time, not be able to “handle it”. They will most likely abandon the market, (maybe all at once), leaving investors once again “alone” with
their losses.
My prediction of a “15-20% decline in the equity market this summer”, which I made in my Forbes blog on May 23, 2011 entitled “Cheating Gravity: Is the market rebound over?” and again in my blog posted on June 21, 2011 entitled “Unraveling: The economic recovery that wasn’t and how to invest through the declines ahead”, came true on Tuesday, August 10, 2011.
The market decline happened just days after myMarch/April prediction of “an SP downgrade of our nation’s debt by the middle of the summer to AA+” came true on August 5, 2011. I had predicted the downgrade in
my blog of March 28, 2011, entitled “Post interlude: How To invest During the Curtain Call of the Market Rebound” and again in my blog posted on April 26, 2011 “It’s a long way from wrong to right”. Both predictions were made in assorted international financial publications and various television appearances which confirm the accuracy of the predictions.
Within days if not hours of the market reaching my target decline of 15%, we witnessed one of the most volatile weeks in the history of the equity market – the end result being a 1.7% percent loss in the S&P 500 by week’s end, leaving many unanswered questions in the minds of investors.
WHAT IS CAUSING THE VOLATILITY?This week the Dow swung more than 400 points 4 days in a row with extremely high volume especially during the “dog days of summer”. This roller coaster of “hard to handle” mood swings is being created by mostly “institutional high frequency trading” which is also referred to as “algorithmic trading” or programmed trading. This is when institutions and traders buy or sell large blocks of stock by using computer programs which rely on algorithms, making decisions based on aspects such as timing, price, or quantity of the order. In most cases, “the computer speaks and the traders listen”.
It has been estimated that 50% or more of all trading volume in the U.S. stock exchange is caused by “high frequency” or algorithmic trading. On a usually low volume trading day in August it’s possible that the trading volume exceeded 50%, especially with many “everyday” investors on vacation. The “flash crash” of May 6, 2010 has been blamed on high frequency/algorithmic trading by the Securities and Exchange Commission, a frightening day in which we saw the DOW fall 1,000 points in minutes.
WHY HIGH FREQUENCY/ALGORITHMIC TRADING CAN LEAD INVESTORS TO MAKE IRRATIONAL DECISIONS.High frequency trading has been a profitable business to the individuals and institutions who utilize these strategies and they can be an effective tool to use as a means of diversifying a portfolio in combination with other Macro strategies. However, large institutions that use this type of strategy with the ability to “move” large blocks of stock and produce big swings in the price of the stock can create an “illusion” as to what the value of the stock is.
High frequency/algorithmic traders have no concern for fundamentals, geopolitical issues or economic issues. To quote one top high frequency trader “I pride myself on being entirely market neutral, no matter what’s going on in the market”. In other words, “the computer talks and he listens”.
Most high frequency/algorithmic traders start the day in cash and end in cash with the discipline to not become “emotionally attached to any stock”. As a stock moves up (or down) the high frequency trader will quickly take profits sometimes in seconds always with the goal of going to cash at the end of the day. If the “everyday investor” views this price appreciation as a fundamental improvement in the stock after being indoctrinated by the biggest lie on wall street “buy and hold”, they will be stuck holding a sometimes artificially inflated stock overnight which could be affected by such factors as foreign markets, earnings or warnings often released after the bell and have no opportunity to sell. These investors are often left to “hold “an artificially inflated stock for days, months or even a lifetime because they reacted to an artificial price move.
WHY DECLINING MARKETS BENEFIT HIGH FREQUENCY/ALGORITHMIC TRADERS AND HURT REGULAR INVESTORS.In declining markets high frequency/velocity traders have the ability to short (bet against) the market while most everyday (buy and hold) investors rarely have the ability to short and rarely have the trading speed to compete with institutions as they close out their trades. As institutions move large blocks of stock, smaller sell orders are often “boxed out” and if they try to sell, they rarely get the price they intended to get.
A short position can get destroyed as big institutional orders often take precedence over other orders. Again investors are left holding stock “feeling like the sucker in the room” because they believed the price appreciation illusion created by the institutional high frequency traders. It is for this reason that I anticipate another flash crash before 2012, which could destroy investors in an instant if they aren’t properly prepared.
WHAT IS THE REALITY – A CASE FOR BEARISHNESS?1.     EUROPE IS ON THE VERGE OF COLLAPSE – The Italian economy will collapse starting with the banking system. Spain will be soon to follow, sometime by the end of 2011. The European Central bank has no ability to handle a collapse of this magnitude and the contagion will spread to the American banking system.
2.     WE NEVER LEFT THE RECESSION AND THE FEDERAL RESERVE IS OUT OF OPTIONS TO STIMULATE THE ECONOMY (ALTHOUGH THEY WILL TRY) – This due to Bernanke’s statement that he would keep interest rates low until 2013. This statement and assignment of a timeline for keeping interest rates low will create two major problems:

• First, it forces Bernanke to “get creative” and invent some way to keep interest rates low without having investors believe this is another failed government stimulus program.
• Second, whatever this stimulus program will be called, it will ultimately add liquidity and usher in stagflation; we will see commodity prices surge once again, an artificial equity market rally and artificially high bond prices and
  low yields. For a central bank whose strategy to stimulate the economy is best described by a quote from Will Rogers – “if stupidity got us into this mess than stupidity can get us out”.

3.    THE MARKET IS OVERLY VOLATILE AS DETERMINED BY THE VOLATILITY INDEX OR VIX – The VIX traded at levels not seen since the collapse of the financial markets in 2008, which indicates a high level of fear. High VIX readings causes me to become more bearish despite market swings, due to one fact – “fear becomes more prevalent in market downturns than a desire to profit in up markets”. If a market should sell off radically which I would define as 400 points or more, fear and panic can take over and we run the risk of another “flash crash” or market crash. If the market advances 400 points, investors will be much quicker to take profits with the acknowledgement of the risk of adverse circumstances evolving in the future. This due to the many negatives the market faces, as well as the
acknowledgement that high frequency/algorithm traders are inflating stocks and will be quick to sell when their computer models tell them to.
HOW TO INVEST IN THE DECLINES AHEAD

1. CONTINUE TO BUY GOLD through ETFS like SGOL. Although the CME has increased margin requirements as an attempt to slow the appreciation of gold investments to curb what they call “speculation” or what we call investment. It’s evident that the government considers the appreciation of gold an insult to their
   destruction of the dollar so they chose to step in and slow down the inevitable. Individuals have lost confidence in our currency and governmental manipulation of currencies around the world and this has increased the psychological value of gold. I see appreciation of 20-25 % in gold prices by the end of the year; this 4000 year old metal will prevail as a symbol of stability and with continued increase in demand with low supply, gold has never looked better.
2. BUY INVERSE ETFs like SH (proshares short SP 500) and EFZ (proshares short MSCI) which will benefit from declines in the MSCI or foreign markets.
3. BEGIN TO ACCUMULATE SHARES OF COMMODITY BASED ETFs – as the Federal Reserve moves closer to initiating its next stimulus plan. Among my recommendations are:

• ETNs like JJG (ipath Dow Jones grain total return sub index)
• JJC (ipath dow Jones)
• UBS copper total return sub index
• And virtually any other commodity with high demand/low supply, as the
  central bank will certainly inflate them once again.
• I would buy OIL and any ETF/ETN linked to oil prices

In the end, life for Norma Jean Mortenson (Marilyn Monroe’s real name) was tragic. She was raised in an orphanage, married and divorced three times and died alone at the age of 36. I can’t compare what’s going on in the economy with this tragic, turbulent life except to say that we could all use one of her simple quotes to help us persevere in the days ahead – “We should all start to live before we get old. Fear is stupid. So are regrets”.

Unraveling the Economic Recovery That Wasn’t and How to Invest Through the Declines Ahead

Jeffrey Sica predicts a 15-20% correction by the end of summer.


In a quote by Winston Churchill, “We must beware of trying to build a society in which nobody counts for anything except a politician or an official; a society where enterprise gains no reward and thrift, no privilege.”

Stocks have declined for 6 straight weeks with the S&P now down 7% since April. In  my  Forbes blog post dated April 9^th, “Post Interlude how to Invest During the Curtain Call of the Market Rebound”, I stated  we are, in fact, experiencing the  “curtain call” of the market rebound. The market has continued to decline since, with each and every decline becoming more severe, along with some rallies, but overall, a very ugly picture.

My outlook has become increasingly bearish since my February 28^th Forbes blog post entitled “The Law of Unintended Consequences”, where I looked at what our central bank’s easy money policy had created. This policy has been inflating everything from commodities to stocks and bonds while having very little impact on the overall health of the U.S. economy. However, we reached our maximum level of bearishness, lowering equity exposure to around 10-15% with incredibly high levels of cash following the release  of the May 14^th Fed minutes from the April meeting. While not going into full detail, the overriding cause of negativity was that it became clear that our central bank “had taken ownership of the stock market”. Due to their track record of “ownership” of our economy, which has shown virtually no improvement since “QE2”, the markets, inflated by the “easy money” policy, would begin to deflate. At that point, I predicted a 15-20% correction by the end of the summer.

Last week, Ben Bernanke made it clear that QE2 was scheduled to end on time in June. As a result, the bond market responded surprisingly well and rallied with ten year yields declining to a low of 2.9% for two reasons;

1.)    Europe is a colossal mess. Despite severe deficit trouble, Tim Geitner’s threat that “the U.S. will begin to default on its obligations if the debt ceiling isn’t raised by August 2^nd” and further stating that “default could cause a crisis more severe than the one we just came out of”, made U. S. treasury bonds look temporarily attractive, when compared to the alternatives — which shows the desperate economic conditions outside the U.S.
2.)    Investors just do not believe that the economic stimulus program will end in June. Despite statements to the contrary and reflecting back to the Fed meeting in April, the Fed stated that it will “Do what it has to do to stimulate the economy if we experience slowdown”. It is clear that investors are hoping and counting on a QE3 type bail out to save the day.
As QE2 ends, debate of the debt ceiling begins which will undoubtedly show Washington at its worst (perhaps not quite as bad as what Democratic Congressman Anthony Weiner showed us this week), but bad none the less. Republicans and Democrats are so far apart on solving this debt crisis that any agreement will be insufficient in accomplishing the goal of “fiscal responsibility”. As Churchill said, they have become the “all that counts” and free enterprise has taken a back seat. Those businesses or individuals “who have acted with responsibility and thrift are receiving no reward”, are becoming disheartened.

In contemplating the months ahead, I continue to predict a 15-20% correction in the U.S. equity market by the end of the summer and recommend no more than 15% exposure to equities, with no desire to buy and hold. I have decreased or abandoned most prior stock valuation instruments such as cash flow analysis, price earnings ratios and technical, as well as fundamental analysis. This due to the fact that much of the earnings booked last quarter were due to low borrowing costs which cannot and will not last forever. Companies like Johnson and Johnson (NYSE:JNJ) and Google (NASDAQ:GOOG) which are borrowing long term for 1-3% and converting that borrowed money to revenue is just a short term fix if economic conditions don’t improve dramatically.

Thus far we have been seeing deteriorating economic conditions for the consumer as evidenced by the over 9.1 % unemployment rate, manufacturing, GDP and most recently, the revelation by Robert Schiller (housing market guru), who said that he would not be shocked if he sees home prices decline another 10-25%. Borrowing costs will increase, as any attempt by the central bank to keep rates lower will be met with resistance and QE3 (which will keep borrowing costs low) will not be readily accepted as evidenced by the refusal of House republicans to raise the debt ceiling. Therefore, we will continue to add to our treasury short positions through NYSE:TBT, NYSE:TBZ, and NYSE:TBX.

The more effective strategy is the supply /demand theory which is much more oriented toward the purchase of raw materials, where supply is low and demand is high. We are also utilizing analytics involved in demographics, like weather, currency and supply, base metals, precious metals (NASDAQ:PALL), corn, copper, grain, other agriculturals and oil, as well as initiating sales when these supply/demand numbers shift and prices decline. However, supply and demand analysis is complicated, given that these ratios could shift instantly. Therefore, we are using various stop-losses, expert sources and somewhat unconventional methods of analyzing supply and or demand.

Certain raw materials like grains (NYSE:JJG ) have a somewhat fixed level of supply and no attempt to increase that supply, such as fertilizer improvements through companies like Monsanto (NYSE:MON) have been developed to meet that supply. Utilizing weather experts and direct import/export data is one of our means of deciding which commodities to buy, hold or sell. However, the market is extremely volatile, so we may often be quick to sell.

We continue to be buyers of oil, despite rumors of Saudi Arabia increasing output, we see a substantial upside. Although we may not see the $200 per barrel originally predicted, due to the slowing European economy, which should increase the value of the dollar, we feel confident that prices will continue to rise. Relying on the Saudis and the other OPEC countries to keep oil price low through output increases is something that will not last for very long. High oil prices not only benefit their economy and enhance their stronghold on world economy, but the remainder of the OPEC countries as well. The 10 million barrels a day that the Saudis will supposedly release starting next month will be insufficient to keeping oil prices low.
China’s potential economic slowdown caused by several interest rate increases, will reduce demand, but only slightly since their economic stimulus packages of 2009 (which was far more extensive than ours) will do little to curb demand. The only significant decline in the demand for oil and other commodities will come from Europe as we begin to see the European banking system implode due to exorbitant leverage and the ineptness of the European Central Bank and the IMF to solve the crisis. German banks, which are the biggest European Union lenders, will suffer the most through the defaults and bailouts, causing a depression in Germany like few have seen in their history. German Chancellor, Angela Merkel has consistently opposed the terms of the Greek bailout (Germany being the biggest lender to Greece), because she is well aware of the domino effect which could begin after they fully agree to terms — making them the guarantor of several irresponsible countries with virtually no ability to pay them back.  The European debt crisis will also be an added factor in the global declines we will see this summer and could lead to a revision of our downward projection of our 15-20% by summer’s end.

To quote Alexander Hamilton, “It’s not tyranny we desire; it’s a just, limited Federal government.” President Obama may refer to our recent economic setbacks as “bumps in the road” and Ben Bernanke may promise us that “in just a little while” things will turn around. Tim Geitner may threaten Armageddon if we don’t do what he says, but in the end we should realize that, to quote Ronald Reagan “Government tends not to solve problems, only to rearrange them”, and any reliance on government policy for investment returns may offer only temporary solutions. To quote King Solomon “money can grow wings and fly away”. As Churchill said, it is free enterprise and thrift that will save society, and in our case, our economy. Vigilance through discipline will allow us to profit in these difficult times.