Market Opinion

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.


I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

comment via Karl Denniger:

Oh boy.

Look folks, the risks involved here are real.

Rick Santelli was just on CNBC pointing out that there have been no answers forthcoming on the MF Global mess. There are reports that several people who you would never expect to have gotten caught in something like this did, including Gerald Celente.

The reason they got caught is the same reason I would have gotten caught if I had been clearing through MF Global: Despite being around the markets since well before the 2000 crash and having successfully negotiated that and the 2008 mess everyone has believed, right up until MF blew up, that customer funds were in fact segregated and thus this risk would never occur.

Simply put everyone has now discovered that this assumption is wrong.

Nothing that has come out of the CME, the SEC or Washington DC that has restored my confidence that MF Global is, in fact, a one-off situation. In point of fact The Fed is now requiring margin on certain repo transactions where they never did before, implying that there may well be additional snakes in the grass and additional unrecognized and intentionally hidden risks of this sort.

Read Ann’s entire missive. Yes, it’s highly partisan, but given what has just happened and Obama’s continued insistence that “no crimes were committed” (yet no grand juries have been convened to investigate, so how would he know?) it is entirely justified.

Folks, we must insist that the rule of law be brought back into the forefront. We mustdo this particularly with credit instruments and other OTC derivatives and that has to happen right now. In addition all off-balance sheet BS must be ended immediately.

I have, since 2007, advocated that all credit instruments be forced onto an exchange and that cash margin be required on all underwater positions, marked nightly, without exception or offset. This has been “pooh-poohed” as impractical due to bespoke contracts and other considerations.

Now it turns that I was in fact right – there were additional “snakes” in the grass that were cheating. First we had ENRON, then Bear and Lehman and now this.

Here’s reality folks: We either fix this problem and do it now or you had better pray that Europe doesn’t detonate, because if it does you’re going to see the very thing that everyone was talking about back in 2008 happen on a global scale, it’s a hundred times the size that Lehman was, and we will not be immune to it here in the United States — in fact we’ll damn near be the “center of the sun!”

There is the potential for an imminent cascade failure on these contracts just as there was in 2008; it has not gone away, it has not been attenuated, it has in fact grown in size since 08 and if we do not act to put a stop to it and the risk becomes realized it will be too late.

S&P Likely Headed Toward 1280-1300 As Excitement Grows Over A European Bailout – But It May Still Be A ‘Dead-Cat’ Bounce.


German Chancellor Angela Merkel said that a European Union summit in five days will mark an “important step,” though not the final one in solving the euro-area sovereign debt crisis. “These sovereign debts have built up over decades, so they won’t be ended with one summit,” Merkel told reporters in Berlin late today. While European officials recognize their responsibility to stop the crisis, “this will require tough, long-term work.” The comments marked the second time in two days that Merkel sought to lower expectations that the European crisis-fighting effort would climax at the Oct. 23 meeting in Brussels, as international officials are advocating.

These comments have tempered the post-market climate a bit yesterday, but the fact the market reversed on increasing volume says to me that the ‘powers that be’ (the PPT and others) are hell bent to get this market higher, if only temporarily. A reasonable short-term target for the S&P 500 now appears to 1280, the Dow Industrials to 11,950, the Total Stock Market Index ETF (VTI) to 69.00 and the TSX to 12,400. Beyond those levels, a more serious upside advance could unfold, but I suspect once we get to those levels a decent short-term top could be formed. Basically, I do not wish to fight ‘seasonality’ in the market at this time, despite some evidence that we have possibly entered a bear market. We also have strong political forces at work ahead of next year’s U.S. Presidential election. For that reason (plus the fact yesterday was a potential ‘Turnaround Tuesday’) and despite my ‘SELL’ signal from yesterday, I took profits in the SH, DOG and short IYT yesterday morning into weakness. My thinking is that we can hit those upside targets if not from current levels, perhaps after another pullback. I will likely once again switch to a NEUTRAL signal and trade accordingly long and short. Coming into today, we’re in cash.


I remain a nervous bull (short-term) because of the manipulation in the markets and some short-term negative technical patterns. That said, we could still see a rally into the 1700s (or high 1700s) in the gold whether or not we later test or break the lows. Any significant weakness, however, should be used to buy the physical metal.


I remain NEUTRAL on the bond market, but I suspect we’re going to see another rally as the after the current rally runs its course.




About Mark Leibovit
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What is the problem behind the Markets?

The answer is Debt began to implode in 2008. As you can see on this first chart below, debt has been growing constantly since the 1930’s, it got into a parabolic rise in the 1990’s and 2000’s and all these new dollars in terms of IOU’s are what supported the Real Estate Blowoff of ’06, the Tech Bubble ’00,  and the Stock Boom in general to ’07.



That Debt/Credit supply reversed in 2008, had a slight bounce during market/economic recovery from 08′. But this trend is exhausted, and the first reversal in the trend in 80 years argues strongly that a big drop in Debt/Credit is occurring and our future is a Deflationary Depression of epic proportions.

What is the major component of the Debit/Credit line above? Mortgages . You can see in the chart below that Mortages actually peaked in 2005, a year before the Real Estate market peaked in the USA. You can also see below that the number of mortgages fell to a new low last year in 2010 when an Economic recovery was supposed to be in motion.


Complacency at an all time low as measured by Junk Bonds precedes an imminent collapse. Junk bonds actually made a new all time high price in April of 2011, taking out the optimism of the high’s in 2005. A new decline has begun, more debt liquidation on the horizon and these trash bonds are about to emulate Greek Bonds.


The Dow Jones Industrials rose 330 points (2.97 %) and the NASDAQ (up 87, 3.5%) and the S&P 500 (up 39, 3.41%) followed suit. S&P small caps were up 4.16%! Perhaps more important the Philadelphia Bank index appreciated 5.26% on the day

Click here to read more…

Last week we brought to your attention a world-class emerging shale play happening in Argentina’s Neuquén Basin.

The potential here for unconventional oil & gas development is enormous by any measure. A number of companies are well positioned to grow and prosper, including a few junior companies with significant land holdings.

In part 2 of our story below, my colleague and guest writer Michel Maassad of BeatingTheIndex.comshares his unique insights on those juniors… in what he calls “an opportunity of a lifetime.”

– Keith

P.S.  Neither Michel nor I own shares in any of the securities covered below.