As soon as ex-General Electric CEO Jack Welch fired off a tweet questioning today’s just released “unbelievable jobs numbers,” the media went into a frenzy talking about how “conservatives” were launching conspiracy theories. Well, that’s handy for the media and the Obama campaign, but it’s not just “conservatives” who are confused by a full 0.3% drop in unemployment when only 114k jobs were created.

…. read more HERE

“The most powerful force in the universe is compound interest” – Albert Einstein

Not any more…” – Ben Bernanke

Einstein was a genius known for his simple elegant expressions of complex natural laws. Indeed, what is simpler than E=MC²? While it may be urban legend that Professor Einstein was reputed to have said that compound interest was the “eighth wonder of the world and the most powerful force in the universe”, the point is well taken.
“Compound interest is the eighth wonder of the world.

He who understands it, earns it … He who doesn’t … pays it” – Albert Einstein

Einstein’s observations were perfectly accurate back then as he noticed that the universe was expanding. Because growth is a natural phenomenon, the human race, in general, and any man, in particular, can take advantage of natural law by putting off consumption today and investing in the future. This is the force behind compound interest. A seed of corn not eaten but planted will multiply into a thousand seeds at the future harvest; an acorn nurtured and planted can produce a mighty oak; an olive grove cultivated now may take 40 years to mature but it will take care of future generations. Thus, the moral of the story is always the same: Save today, invest for the future, and reap fabulous rewards. If you can invest at 7.2% for ten years, your wealth will double!

The mathematics of finance should be incredibly simple and elegant to watch in motion, but they’re not, thanks to the efforts of the Federal Reserve.

Einstein came to America during a time of great turmoil in Germany and Europe. Germany was turning into a National Socialist Party with a dictator and command economy. In a command economy, interest can be fixed by the government at zero or even negative, and savings accounts can be stolen and used to fund the wishes of the state. The river of investment that runs forward creating capital can be forced by state-created inflation to run in reverse, destroying capital. In other words, seed corn rots if it’s not eaten, and investment dries up because saving is for suckers.

Ah, welcome to 2012 America. The Fed has decreed interest rates at zero for four years, and promised to keep them there for at least another two. The Fed is still printing money out of thin air as well as buying long term treasuries. By locking the yield of the 10-year Treasury at 1.6%, it’s well below the rate at which staples like food, energy, utilities, transportation, education, and health care, are rising in cost.

Today, and as far as the eye can see, real inflation is well above interest rates. Instead of savers being rewarded they are being taxed, mugged, and systematically destroyed by continued low interest rates with no return on capital as the Fed tries to get people to spend and not save to stimulate the economy. Where capitalism in our country as Einstein knew it used to flourish, we’re now a land dedicated to eating its seed corn, and encouraging people not to waste their time planting acorns for the future.

Is it any surprise that pension funds that assume they will earn an 8% return are all headed to insolvency? It is now a simple mathematical fact that with spending encouraged and savings taxed and given a negative return, only the superrich can set aside sufficient resources to take care of themselves as they age. The average American is destined to be a ward of the state.

Einstein understood physics and natural law. He knew that if interest rates are set at zero and well below the rate of inflation, capitalism would die. Trying to run an economy without real interest rates is like trying to run the universe without gravity. It doesn’t work.

Whenever I fly or take public transportation and hear the government announcement “if you see something, say something”, it reminds me of Einstein because he came to America to honor and support our capitalistic system, and would have stood up to Ben Bernanke today by insisting he stop printing, before the train of capitalism crashes.

Richard Benson, SFGroup, is a widely published author on securitization and specialty finance, and a sought after speaker at financing conferences on raising equity for mid-market companies. 

Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980’s and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton. 

Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach. 

The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with the FINRA/SIPC as a Broker/Dealer. 

Previous Articles by Richard Benson

Spanish Banks Need US$76.3 billion and France Proposes Extreme Measures

As a welcome reprieve from the doom and gloom of the macro economy, KeyStone analyst Aaron Dunn spoke on BNN (Business News Network) early today. The short but sweet interview included a brief overview of his investment strategy,current view on the markets and three current picks. For those that did not get a chance to tune in, the video archive can be seen at http://watch.bnn.ca/#clip772334.

The Toronto Stock Exchange’s S&P/TSX composite index ended the week down just 0.5%.

Capping off the week was the return of Spain to the spotlight with an independent audit indicating that the nation`s troubled banks would need US$76.3 billion to recapitalize in the face of potential financial shocks. Although the figure is staggering, it is still well below the US$128.8 billion of potential bailout money that the Spanish government negotiated with the other euro zone members in June. The issue with Spanish banks, which is a potential issue with all banks, is the quality of assets that they hold. Since 2008, these banks of been hanging onto mortgages that are dangling on the cliff of default. The recapitalization money is intended to shore up the bank`s financial position in the event that many of these assets do indeed fall into the abyss. 

In another piece of odd news, France`s Socialist President, Francois Hollande’s, issued his 2013 budget with a proposal to increase taxes on income over $1.0 million Euros to whopping 75%. Hollande`s called it a `fighting budget` but one must wonder if such extreme measures will only serve to further weaken the nation`s economy by starving it of investment. The reactions were understandably strong and we are certain that France`s wealthy are preparing their foreign residency plans as we speak with the tax heaven of Monaco (which borders France) top on the list.

9 Steps to Uncovering Explosive Small-Cap Stocks

Below are the 9 simple steps we follow in order to find, research, and analyze small-cap stocks that could put big gains in your portfolio;

Step 1: Growth Trends: Identify growth trends and market sectors positioned for rapid growth in the years to come. Be they sector specific such as energy (oil & gas), gold & precious metals, technology, healthcare, etc. or geographic such as China, India, Brazil, North America, Europe, etc.

Step 2: Old Fashioned Real Research: Actually read over the financial statements and MD&A’s of more than 7,000 publicly traded companies to find relatively unknown, high growth small to mid-cap stocks that display GARP and are positioned to grow.

Step 3: Financial Performance – The Fundamentals are Key: Review and evaluate key metrics in the company’s financial statements to understand historical financial performance. Strong fundamentals within an individual company can often lead us to growth trends within an industry.

Step 4: The Business Matters: Understand the business and industry of the potential investment, including products, services, and management’s ability to run the business.

Step 5: Quality Management: After reviewing the company’s financial statements and reading their MD&A, if the company meets our fundamental GARP based criteria, we find it important to interview key management to understand their strategy and clarify their outlook going forward.

Step 6: Earnings Quality: Look for red flags that indicate anything from cyclicality, financial manipulation or even fraud to avoid investing in these types of situations.

Step 7: Growth Outlook: Develop an understanding of expectations for growth to make valid valuation comparisons.

Step 8: Peer Comparisons: If they are available, we find it instructive to compare relative valuations of companies within the same specific business or industry to provide more “apples to apples” type information on how the market values similar companies or at least those within its industry segment.

Step 9: The Investment Decision: Factoring in all of the relevant information above, and paying particularly close attention to current market valuations, we determine whether or not the investment is a good BUY. If it is, we issue a full report to our clients with the corresponding BUY action and within what price range we find it attractive.

KeyStone’s Latest Reports Section

9/20/2012
JUNIOR LIGHT OIL PRODUCER WITH SOLID CASH FLOW & PRODUCTION GROWTH, LOW VALUATIONS & SOLID BALANCE SHEET, HIGH RISK-HIGH REWARD POTENTIAL IN UNLOVED REGION – SPEC BUY RATING

9/13/2012
CASH RICH COMMUNICATIONS SOFTWARE COMPANY POSTS SOLID Q3 2012, ORGANIC GROWTH REMAINS CHALLENGING, EXPECT ACQUISITION INTEGRATION RELATED ITEMS TO AFFECT NEAR-TERM BUT TO PROVIDE GROWTH IN 2013 – MAINTAIN RATINGS

9/5/2012
UNIQUE INVESTMENT CO WITH PORTFOLIO OF ESTABLISHED BUSINESSES POST SOLID Q2 2012 – COMPANY ON TRACK TO GENERATE STRONG GROWTH IN 2012 AND MAKES $9.9 MILLION ACQUISITION OF KENDALL SUPPLY SUBSEQUENT TO Q2

9/5/2012
CASH RICH JUNIOR COPPER PRODUCER WITH OVER 50% OF MARKET CAP IN CASH, NO DEBT, SOLID CASH FLOW, AND ATTRACTIVE LONG-TERM LOW COST PROJECT IN PIPELINE – INITIATING COVERAGE: BUY (FOCUS BUY)

9/4/2012
HIGH GROWTH JUNIOR-OIL PRODUCER POSTS CHALLENGING Q2 2012 FINANCIALS, PRODUCTION STRONG BUT UNEXPECTED LOWER REALIZED PRICE FOR OIL SOLD IN CONNECTION WITH UNDER LIFT (OIL PRODUCED/DELIVERED BUT NOT PAID) POSITION PROMPTS NEAR-TERM DOWNGRADE

8/24/2012
HOUSEHOLD RETAILER CONTINUES ITS TURNAROUND, OUTPERFORMING PEERS IN Q2, RE-INSTATES DIVIDEND AND MID-TERM OUTLOOK IS TO OUTPERFORM IN TOUGH MARKET

About KeyStone

“By ‘uncertain’knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever.”

-John Maynard Keynes, The General Theory of Employment, 1937

“… there are known knowns; there are things we know that we know. There are known unknowns; that is to say there are things that, we now know we don’t know. But there are also unknown unknowns– there are things we do not know we don’t know.”

-Donald Rumsfeld, Secretary of Defense, 2002

“There are four types of men:

1. One who knows and knows that he knows… His horse of wisdom will reach the skies. 
2. One who knows, but doesn’t know that he knows… He is fast asleep, so you should wake him up! 
3. One who doesn’t know, but knows that he doesn’t know… His limping mule will eventually get him home. 
4. One who doesn’t know and doesn’t know that he doesn’t know… He will be eternally lost in his hopeless oblivion!”

-Ibn Yami, 13^th-century Persian–Tajikpoet

For the past 80 years, we have created ever more sophisticated models of risk in the economic and investment worlds. With each new tool we create to measure risk, we seem to think we have somehow gained more control over our future. Paradoxically, we appear to believe that the more we understand risk, the more we can somehow control our exposure to it. The more we build elaborate models and see correlations between events and the performance of our investments and the economy, the more confident we become.

And if by some ill fortune we encounter a period of lengthy stability in our models and portfolio performance, we are likely to imbibe a cocktail of collective hubris: we actually think we understand some things in a quantifiable way. We thereupon seek to take on more risk at precisely the time when additional risk is the most disastrous. This week we explore the difference between risk and uncertainty. Perhaps we can even tie all this into our understanding of secular bull and bear markets.

Commodities, Central Banks, Currencies, Russia

by Jim Rogers via video HERE

Obsessing on Risk, Ignoring Uncertainty

by John Mauldin Outside the Box

Investors in the stock market, especially professionals, are obsessed with risk, your humble analyst included. We try to measure risk in any number of ways, looking for an edge to improve our returns. Not only do we try to determine probable outcomes, we also look for the “fat tail” events, those things that can happen which are low in probability but will have a large impact on our returns.

I have found that it was the surprises that were not in my model that were the true drivers of portfolio performance. We like it when surprises produce a positive result, and we often find a way to congratulate ourselves for our wise choices. No one in 1982 thought that price-to-earnings ratios would rise by five times in the next 18 years. Yet that simple driver accounted for 60% of the last bull market (20% was inflation and only 20% was actual increased earnings). And while a few people began to invest in technology in the early ’80s, many of those early technology stocks ended up being disasters. (Remember Wang? Osborne? Sorry, I know, you were trying to forget.)

“In 1910 the British journalist Norman Angell published a book called ‘The Great Illusion’. Its thesis was that the integration of the European economy, and by implication the global economy too, had become so all-embracing and irreversible that future wars were all but impossible. The book perfectly captured the zeitgeist of its time and fast became a best seller.

“In some respects, the early 20th century was a period much like our own – one of previously unparalleled global trade and exchange between nations. Human beings appeared largely to have outgrown their propensity to mass slaughter, and everyone could look forward to to a world of ever increasing prosperity. War, Angell compellingly argued, was economically harmful to all, victors and defeated alike. Self interest alone could be expected to prevent it happening again.” (Jeremy Warner writing in The London Telegraph)

On the eve of World War I, bond markets throughout Europe were not pricing in a conflict. Everyone “knew” there would not be a war. It was all bluff and bluster. And then the world got a surprise. Archduke Ferdinand was assassinated and armies began to march. And while no one expects a war today in Europe, there are certainly plenty of tensions.

An Uncertain Spain

The Spanish government announced this week a rather severe austerity budget. They promise they will hold their budget deficits to 6.3% while slashing spending almost 9% and raising taxes. And of course there will be no wage increases for government workers. They also assume that growth will only fall to -0.5% in the face of that austerity, which most observers think is woefully optimistic.

Even though the ECB has committed to buying Spanish bonds, they have made it clear that they will do so only as long as Spain is committed to bringing its deficit under control.

“European Central Bank Executive Board member Joerg Asmussen said on Friday that he would only support purchasing the bonds of struggling euro zone countries if pressure on them to reform their economies remained high. ‘Only under strict conditionality and only if there is continued pressure to reform,’ Asmussen said of the bond purchase plan announced by ECB President Mario Draghi earlier this month.”(Reuters)

And if things were not already difficult enough for Spanish Prime Minister Rajoy, one of my favorite regions of Spain, Catalonia, which includes the beautiful city of Barcelona, is seriously talking about seceding from Spain. As much as 20% of the population (1.5 million) turned out for a march supporting independence last week.

Prime Minister Rajoy met with Catalonia’s president and flatly rejected any autonomy or more money. Catalonians are not happy that they send a great deal of money to Madrid, which goes to other regions as they deal with their own crises. So much for “all for one and one for all.”

The situation is complicated by the fact that the Basque region of Spain has been given a great deal of autonomy in its budget. If Spain were to compromise and give Catalonia the same deal, it would cost the Spanish government a great deal of money and enlarge the already gaping hole in their budget.

“Separately, the parliament of Spain’s most economically important region, Catalonia, approved holding a referendum on independence. Ms Saenz de Santamaria threw down the gauntlet to Spain’s most economically important region, arguing that Madrid could use a constitutional measure to block any attempt at a separatist vote. ‘Not only do instruments exist to prevent [a referendum], there is a government here that is willing to use them,’ she said.” (The Financial Times)

Casually browsing news on the Catalonian crisis, I came across an article on previous referenda concerning independence, held on a city-by-city basis in Catalonia. Independence was favored in nearly all cities by margins of 90% or more. This was rather surprising to me, as I am not certain I could get 90% of my neighbors to agree on the time of day.

In addition to the Basque and Catalonian regions, there are two other northern Spanish regions that send net revenues further south. If you give Catalonia budgetary autonomy, let alone political autonomy, then what do you do for the other two?

Which brings up the uncertainty in the entire euro project. It is one thing to create a common market in which goods and services can freely trade. It is another to impose monetary and fiscal authority on a sovereign nation. If economic tensions within the regions of Spain begin to move voters to push for independence from central control, how much more inclined will voters in the various eurozone nations be to do so?

Germany is just now entering a recession that has the real potential to get much worse. If Germany is asked to write checks and send them to other countries when they are in the midst of their own financial crisis, how will that play in Bavaria?

The only thing I can be certain about regarding Europe is that Europe is an uncertain mess. But the markets go on treating all these pressures as if they were not real. And, indeed, perhaps the mess will all get sorted out.

It is my belief that we focus on risk because it is something that we can model. The economics profession has physics envy. Economists like to think of themselves as scientists, but I must say that I am not convinced. Economics has a great deal to teach us, but it cannot tell us much about certainty. It can’t even help us all that much to avoid risk.

I fear we don’t pay enough attention to uncertainty because we cannot reduce it to an equation. How did you price in the risk of Catalonia succeeding from Spain, even two months ago? The answer is that no one did.

The US market seems to be focused on the “fiscal cliff” that will inevitably create a recession unless Congress does something. The fact that doing nothing will clearly create a recession gives me some confidence that even Congress will figure out a way to avoid doing nothing. What has not been priced in is what Congress will do about the deficit. Depending on what they do, what we get will be hugely positive or negative. But we remain totally uncertain as to what they will actually do. And so for years we have ignored the looming train wreck that is unfunded liabilities.

It is the fact that the results of inaction on the deficit are uncertain that allows Congress to keep postponing the inevitable.

“About these matters there is no scientific basis on which to form any calculable probability whatever.”

We live in most uncertain times.

Key oil producing and/or middle eastern countries spend disproportionate amounts of household income on food

via Agicapita

— Here’s something they won’t tell you at your local brokerage office or in the “How to Beat the Market” books.  All investing and speculation is basically an exercise in attempting to beat time. 

“Russell, what are you talking about?” 

Just what I said — when you try to pick the winning stock or when you try to sell out near the top of a bull market or when you try in-and-out trading, you may not realize it but what you’re doing is trying to beat time. 

Time is the single most valuable asset you can ever have in your investment arsenal. The problem is that none of us has enough of it.  

But let’s indulge in a bit of fantasy. Let’s say you have 200 years to live, 200 years in which to invest. Here’s what you could do. You could buy $20,000 worth of municipal bonds yielding say 5.5%. 

At 5.5% money doubles in 13 years. So here’s your plan — each time your money doubles you add another $10.000. So at the end of 13 years you have $40,000 plus the $10,000 you’ve added, meaning that at the end of 13 years you’d have $50,000.

At the end of the next 13 years you have $100,000, you add $10,000 and then you’d have $110,000. You reinvest it all in 5.5% munis and at the end of the next 13 years you’d have $220,000 and you add $10,000 making it $230,000. 

At the end of the next 13 years you’d have $460,000 and you add $10,000 making it $470,000. 

In 200 years there are 15.3 doubles. You do the math. By the end of the 200th year you wouldn’t know what to do with all your money. It would be coming out of your ears. And all with minimum risk. 

So with enough time, you would be rich —  guaranteed.  You wouldn’t have to waste any time picking the right stock or the right group or the right mutual fund. You would just compound your way to riches, using your greatest asset — time.

There’s only one problem, In the real world you’re not going to live 200 years. But if you start young enough or if you start your kids early, you or they might have anywhere from 30 to 60 years of time ahead of you.

Because most people have run out of time, they spend endless hours and nervous energy trying to beat time, which, by the way, is really what investing is all about. Pick a stock that advances from 3 to 100 and if you’ve put enough money in that stock you’ll have beaten time. Or join a company that gives you a million options and your option moves up from 3 to 25 and again you’ve beaten time. 

How about this real example of beating time  — John Walter joined AT&T, but after nine short months he was out of a job. The complaint was that Walter “lacked intellectual leadership.”  Walter got $26 million for that little stint in a severance package. That’s what you call really beating time. Of course, a few of us might have another word for it  — and for AT&T.

Ed Note: Below are two of the most widely read articles published by Dow Theory Letters over the past 40 years. Request for these pieces have been received from dozens of organizations. Click on the titles to read the articles.

“Rich Man, Poor Man (The Power of Compounding)“

“The Perfect Business“

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Letters are published and mailed every three weeks. We offer a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics –plus Russell’s widely-followed comments and observations and stock market philosophy.

In 1989 Russell took over Julian Snyder’s well-known advisory service, “International Moneyline”, a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron’s, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.

A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12^th Air Force during World War II.

One of the favorite features of the Letter is Russell’s daily Primary Trend Index (PTI), which is a proprietary index which has been included in the Letters since 1971. The PTI has been an amazingly accurate and useful guide to the trend of the market, and it often actually differs with Russell’s opinions. But Russell always defers to his PTI. Says Russell, “The PTI is a lot smarter than I am. It’s a great ego-deflator, as far as I’m concerned, and I’ve learned never to fight it.”

IMPORTANT: As an added plus for subscribers, the latest Primary Trend Index (PTI) figure for the day will be posted on our web site — posting will take place a few hours after the close of the market. Also included will be Russell’s comments and observations on the day’s action along with critical market data. Each subscriber will be issued a private user name and password for entrance to the members area of the website.

Investors Intelligence is the organization that monitors almost ALL market letters and then releases their widely-followed “percentage of bullish or bearish advisory services.” This is what Investors Intelligence says about Richard Russell’s Dow Theory Letters: “Richard Russell is by far the most interesting writer of all the services we get.” Feb. 19, 1999.

Below are two of the most widely read articles published by Dow Theory Letters over the past 40 years. Request for these pieces have been received from dozens of organizations. Click on the titles to read the articles.

“Rich Man, Poor Man (The Power of Compounding)“

“The Perfect Business“