Delusions & Denials

DELUSION

Those of you who have been following my writings over the past few years are already familiar with my analysis of the steady stream of mis-information and out and out LIES that flow almost daily from the Government, media and Wall Street. All of them are trying to convince the public that we have now entered a new Bull Market and the stimulus packages have worked just as Obama has projected they would. First there was TARP where most of the money has already been repaid. Then came the $870 billion stimulus package that thus far only 25% to 35% has been spent. So why is Congress now talking about a new $300 billion stimulus package and where has all that money gone? Why do we need more stimulus if the economy is booming and companies are making so much money? Not to worry, we are in a new Bull Market and all is right with the world - well maybe not Europe, or China or, or….

REPORTED EARNINGS INCREASES AND GDP GROWTH

Regardless of the validity of the reported numbers, the analysts and economists are still trying to drive forward while still only looking in the rear view mirror.

To back up their call of a new Bull Market, their focus is on the 45% increase in 1st quarter earnings and their projected 60% to 90% increase for the 3rd and 4th quarters, making the stock markets undervalued and a great buy. There is only one problem: 45% and 60% increases over what? The worst earnings year since 1930? Not too hard to beat those numbers, especially following a year where everything was written off but the kitchen sink. That included excess inventories that eventually produce great profits in the following year, since their costs had been written down to zero the previous year. All the right-offs and employee lay-offs also set the stage for tremendous (phony) productivity increases and soaring profits in the following year. Neat trick, aye? Since the market is a discounting mechanism, what will be the percentage increases for 2011's earnings when they will have to be compared to 2010's manipulated high earnings? And lets not forget the HUGE tax increases coming in 2011. Dah, never thought of dat!

DENIALS

With a 10% official figure but really a more realistic 17% - 22% level of unemployment or if you prefer, under-employment, where is all this GDP growth coming from? In 2007, when we only had 4.7% unemployment and easy credit, we could only manage 3% growth. It can't be from the banks or the small business sector, since bank lending along with Money supply has actually been DECREASING as lending to small and medium sized businesses as well as to real estate has virtually dried up.

But bank profits are up tremendously; so where are all these increased profits coming from? Not to worry! By borrowing trillions of dollars from the FED at ¼% and lending the money right back to the Government by buying FHA bonds paying 4%, that require no reserves be kept, so naturally they show big increases in profits. I sure would like to get a piece of that kind of action.

TOXIC ASSETS

By the way, what ever happened to all those Toxic Assets that were on the banks' books? Oh, they no longer count since they do not have to mark to market anymore; they have moved them off their books into another Government approved ENRON type scam. That can't be bad can it, since the Government taught Enron how to do it in the first place and have been getting away with doing it themselves for the last 40 years. Besides, if they could not hide all their bad loan losses, how could they take all those bonuses? Stop being such a "Kill Joy."

FINANCIAL REFORM

After pouring some $5 trillion into FNM and FRE, they are still not fixed and continue to bleed money at a rate of $50 billion per quarter. And the FED will still not produce an audited set of books. Interesting, wouldn't you say? The Congress is in such a rush to pass a financial reform package to save our financial system that they are leaving out fixing FNM and FRE as well as Derivatives. Fantastic - why bother with what caused all the trouble in the first place and still hangs over world markets to the tune of $1.4 quadrillion to this very day. Just to give you an idea of how big the problems really are: Total World GDP is estimated to be $60 trillion, so a measly 5% loss would amount to over 10 times World GDP. No wonder they have to keep all those Toxic "Assets" under wraps and off the books. Stupid me - I always thought FRAUD was a crime.

Hey, why worry? They have kicked the can down the road a ways (how far?) and we are in a new BULL MARKET. Just ask Geithner and Bernanke, they wouldn't lie to us any more than the Government does, would they?

JOBS

Most of the JOBS that the Government tells us were created have been Government jobs and temporary ones at that. They are not real jobs for the simple reason that a real job is one that can pay for itself and turn a profit for their employer. Those are the only real jobs that are sustainable. All the rest are really just transfer payments (Welfare) which just increases our Debt with no means of repayment. Increasing Unemployment Insurance also keeps many of the recipients from looking for work, thus keeping the unemployment rate lower than it really is. Now why didn't I think of that earlier, silly me?

CONTRARIANISM

History has often shown that the best time to invest in something is when everyone else hates it. The Best Time to Short is when everyone is SUPER BULLISH as is now the case. But the true art of contrarianism doesn't mean blindly doing the opposite just to be different. In fact, it means your research has to be better than usual in order to confirm your alternative point of view. Besides it is often most difficult to determine what the opposite is.

JAPAN

The recently newly elected Democratic Party of Japan has just produced the first about face, political change in 47 years by promising to slash bureaucracy and government spending, cut taxes and look to more domestic sources for its economic growth. That includes pledging more support for Japanese small and mid-size businesses

and promoting better Asian trade relations in an effort to help Japanese manufacturers.

This new Government's turn away from Socialism and back to Free Market Capitalism seems to be working. The current account surplus recently hit a two year high of $27.2 billion. Has everything already been accomplished? Not by a long shot. But for the first time in over 100 years, a country has done an about face and is heading away from ever increasing governmental control, uncontrolled debt creation and spending (Socialism) towards Decentralized Decision Making and More Freedom. (Capitalism) With the positive winds of change now at their backs, the positive results will be rapid and outstanding. This new government approach also bodes well for Japanese small-cap stocks. Once the "follow the leader" world wide market sell-off is complete, I will be looking to invest in Japan; especially small cap stocks (DFJ is a Japan small cap ETF) in an improving economy with a strong currency.

Japanese small cap stocks are some of the cheapest in the world right now...

  • They're trading at a historically low average price-to-book ratio of 0.86 - a 60% discount to the S&P 500.
  • On a price-to-sales ratio basis, they're trading at a 67% discount to the S&P 500.
  • Even more compelling, you can find more of Buffett (Ben Graham's) favorite - net-net stocks - in Japan than any other country in the world. That's companies trading below their liquidation values. Net-net stocks returned over 50%, while the Nikkei crashed and then stagnated for 20 years.

FOLLOW THE LEADER

For 20 years, the USA emulated the insane actions of Japan and refused to learn from Japan's 20 years of stagnation. Perhaps after the USA gets a new President and Government in 2012, it will be just the right time for us to re-learn the benefits of Free Market Capitalism.

THE WORLD

The Black Swan That Pricked Americas Bull Market Bubble: The Euro is crumbling and so are their stock markets and American stocks are following suit. Even the high-flying, perennial source of optimism - the Chinese stock market - is officially in a Bear Market, which it entered as prices recently dropped 23.3% below the November 2009 high. The unexpected headwinds have shocked investors back to such an extent that they're resorting to the flight instinct into cash and U.S. Treasuries. "Who would have thunk that would happen?" I guess they figured that Gold (the only real money) and the other precious metals were too small a market for them to be able to park all their cash in a hurry.

HOW NOW DOW

CRASH OR NO CRASH?

A Crash is defined as being a decline of 15% or more. So officially we just had a crash and I believe that after a bounce, this crash is far from over. So be careful not to get trapped by any rally, no matter how dramatic it may seem to be in the short run.

As I have often stated: Markets do not move in straight lines. There are always dramatic suck-in reversals. Wednesday's decline generated lower closing lows, even below the Flash Crash closing lows of May 6th or the lows of May 7th. This is deteriorating action, not bottoming action.

Warning: Stocks are very likely in a catastrophic "DOWN" Elliott Wave (I of 3) or (1 of C) "DOWN". This is a very dangerous market. Last Thursday's internals were some of the worst that I have ever seen. I admit that I missed the February to April 2010 rally, and everybody is now happy that I did as I then recommended buying Contra ETF'S into the 150 point rally days. I may have left some money on the table from Aug until May by not going long during that rally, but it enabled me to keep a clear head and all my research was screaming that a major decline was in our near future. As a result, I was able to resist the mainstream financial press' and central planner's propaganda that "all was well with the world". I can't help it I am a natural born Contrarian.

My best long term assessment of the current situation is hard down with a final bottom sometime between 2012 and 2016. Between now and then we should see markets get steadily worse, with gut wrenching high volatility swings. REMEMBER Markets do NOT move in a straight line. The Government refuses to learn from the past: Every time we got our selves into the kind of trouble we were in now, whether it was Kennedy, Reagan, Clinton or Bush, although they all cut interest rates (rates were never down to anywhere near zero), it was massive tax cuts, privatization and reduced regulations that turned the economy around. G. W. Bush, after the melt-down of 9/11, created 20 million jobs between 2003 and December 2007. Not because of falling interest rates, but because of massive tax cuts that are about to be reversed come January 2011. Can we survive the next 2 ½ years of vilifying capitalism while promoting ever increasing socialism?

The technical charts and patterns are warning that a complete economic and financial collapse is approaching the point of NO RETURN. The charts forecast stock markets collapsing, not bottoming, until sometime between 2012 through 2016.

As of the end of this week, we just completed a 1,250 point Wave 1 of I initial sell-off and are now in the process of completing a most likely 38% highly volatile Wave 2 correction, which could take the DJIA back up to the 10,500 area. A powerful decline should then follow. We are in a Bear Market with catastrophic potential. Third legs down will usually be at least 1.62 times the length of Wave 1 (1,250) or 2,025 points. It is possible that I am jumping the gun as there is still a possibility of one more new high. That is why it is so important to use stops. However, most surprises will likely be to the downside: So guide yourself accordingly.

NOTE: If 10%-20% trailing stops were employed as advised, then you have banked some nice profits, are sitting in cash and waiting patiently for our next SHORTING opportunity.

GOLD AND SHRINKING MONEY SUPPLY

You all know the bullish reasons why Gold should be $5,000 by now, yet somehow in the face of the trillions of dollars of Fiat money being printed and poured into the financial systems all over the world, Gold's rise leaves something to be desired (but not to me). The reasons are actually quite simple: The money supplies are shrinking: But how could that be with the printing presses running full blast?

The reasons are two fold:

  • De-leveraging: In spite of all the money Governments can create; it pales in comparison to all the money the public has. De-leveraging is taking place by the public in an effort to protect themselves in the face of steady, wrong headed Government policies that are being instituted in their headlong dash into more and more Socialism. Savings have crept up as high as 7% of GDP (up from a low of -1%). If borrowing shrinks, the money supply shrinks.
  • The multiplier effect: I have explained on numerous occasions how the banking system can create money "out of thin air" by way of the multiplier ($1 of a new deposit turns into $10). Well the multiplier, like all leverage (margin), is a two bladed sword. For every $1 of loans that default, the banking system must shrink their loans outstanding (Money Supply) by $10. The world's banking systems have suffered trillions upon trillions of dollars of defaulted loans (mortgages as well as both corporate and personal loan defaults). For every dollar of bad debt, they must shrink the money supply by $10, so the money supply is shrinking even in the face of all the printing that is going on. Eventually they will run out of defaulting bad loans. But the Governments will not stop printing money in their misguided belief that only they can save the economy and that spending is required to create jobs. So it's just a matter of time as the world sinks into an INFLATIONARY DEPRESSION and one currency after another crumbles. The only real money, GOLD, will first rise and then overshoot its true level of $5,000 plus, plus.

WHAT TO DO NOW

BUY GOLD, SILVER and WEAR DIAMONDS (3 carats or larger of gem grade). If you insist, you can also diversify into Platinum and Palladium. But for me, I prefer Gold. STICK WITH AUBIE (LOL) - BUY WEAKNESS.

SPECIFIC BUY OR SELL RECOMMENDATIONS AS WELL AS TRADING STRATEGIES ARE RESERVED FOR SUBSCRIBERS

 

GOOD LUCK AND GOD BLESS

 

Market action from March 2007 to March 2009 highlights quite succinctly why projecting the Consequences of today's Government actions into the future is so important for your overall investment success. During the last five years, I have demonstrated how to incorporate projected consequences of government actions and contrarianism into your investing by pinpointing the best contrarian investments that can both protect you and make you money during times of adversity. If you're serious about investing, you don't want to miss out on the information revealed by UNCOMMON COMMON SENSE.

 

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
aubiebat@yahoo.com
561-840-9767
The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins