UNCOMMON COMMON SENSE
For People Who Think
Aubie Baltin CFA, CTA, CFP, PhD.
February 23, 2010
DISCREATION IS THE BETTER PART OF VALORI have been Banging the Drum in these letters about an eminent major economic and stock market crash since early 2007: A time when Barron's Round Table Gurus were predicting the continuation of the Goldilocks Economy and a DOW that would soon hit 36,000. That kind of irrational exuberance was as out of place then as it is now. As a student of economic and market history, I know that societies go through long periods of credit expansion that produce irrational exuberance and culminate in Depression and Financial Disaster. With that kind of perspective and reinforced by a review of the work of Kondratieff, I was and am still convinced that a Bear Market of epic proportions will soon be upon us as the Crash into March of 2009 was only Wave One of the BEAR MARKET. Everything that has unfolded since, discussed ad-mausoleum in my previous letters convinces me that the Dow could well decline to 1,500 or lower even as Gold rises to $6,250 per ounce. My perspectives also lead me to the conclusion that Governments are not capable of making the necessary hard choices; most Fiat Monies, including the US dollar will collapse (over time- 2 to10 years) leaving Gold and Silver as the only real money.
BAILOUT FICTION MAKES EURO LOOK GOLDEN
The terms of Germany's proposed bailout of Greece were sketchy at best, but you can bet that the bailout will not be made with hard cash. Rather, it will be with "financial guarantees" much the same way that the "guarantees" of the U.S. Government have shorn up every Dollar of worthless paper held by American banks. Naturally, they are spinning this fraud exactly the way Bernanke and Geithner have: "As long as it is very clear that any support only comes with very, very stringent conditions attached, it will not affect the moral-hazard question," said Fabian Zuleeg, Chief Economist at the European Policy Centre. Before Mr. Zuleeg came along, we might have thought it was only Mr. Obama's economic spinmeisters who took their audience for imbeciles.
Due To The Recent (And Projected) Economic Upheaval, make sure that YOU are not One Of The Millions Of People Who Will Lose Their Life Savings. Renew your subscription to UNCOMMON COMMON SENSE and Continue to Not Listen To the Mainstream Media and Ignore their Misguided Financial Pollyannaish Advice
STICK WITH AUBIE and NOT Cramer (although he too, after 8 years, has finally recommended a 10% position in Gold).
BETWEEN THE LINES
How did today's "Consumer Revolution" come about? Certainly not due to "increased earnings. It could not have been due to increasing leverage. The reality is that people are paying down their credit cards and keeping their car loans current by not paying their mortgages! The percentage of consumers delinquent on mortgages, but current on credit cards, rose to 6.6% in the third quarter of 2009, up from 6.3% in the previous quarter and 4.9% a year earlier. This trend came to light in the first quarter of 2008 when it was at 4.3%. The reality is people are maintaining their spending by NOT paying their mortgages and living rent free, ever since they have figured out that the Banks will not foreclose. Everyone except the Government and the FED are increasingly realizing that the Banks are lying about their asset quality and in fact are lying about their profitability by marking their "assets" to Make-believe Values. They then ignore their bad loans and refuse to foreclose on defaulted mortgages, as that action would force them to recognize their losses. The logical thing for a consumer who is strapped for money to do, is to stop paying their mortgage, and instead pay their credit cards and live on the money they would have otherwise spent on their mortgage,
This is what always happens when governments interfere with the workings of the free market; it promotes false accounting and bogus financial activities. Sooner rather than later, the people figure out the game and eventually end up making the whole situation worse. All this is "touted" by the mainstream media and Government as "economic improvement" when it is no such thing. The underlying quality of the assets behind those loans continues to deteriorate. The off balance sheet losses continues to grow, eroding the true capital base not only of all banks and lending institutions, but all insurance companies and large pension funds. Eventually, this rot of the foundation will cause an all out collapse of these banking "empires", On top of all that, we have also refused to address the "Derivative Time Bomb" such as the credit-default swap monster that in fact was further empowered by legalizing bogus "mark to model" accounting fictions and allowed insiders to take billions of dollars in bonuses without a word of dissent from our Government.
Bernanke is caught between a rock and a hard place. He knows full well that raising interest rates by more than 1% will bring down the $700 trillion plus DERIVATIVE house of cards as well as precipitate the biggest CRASH in history, the US TREASURY Bond Market.
The Big Danger is that when the fraud is finally revealed, not even governments will be able to stop it once it begins to topple and it could bring down ours and the world's complete financial system.
Do not be fooled by false prophets. The fact of the matter is that consumers have hit the proverbial wall. Consumer credit loans are "on the brink of not being serviceable" as the percentage of the civilian workforce that is unemployed is closer to being 20% than it is to 9.7%, approaching what it was during the height of the Great Depression.
THE DERIVATIVES TIME BOMB
Back In 2005, when few people even heard of Derivatives, I published a major report warning readers of the Ticking "Derivatives Time Bomb" that was threatening our entire financial system. By 2007, this time bomb began to implode just as predicted, setting off the World's Financial Crisis. Luckily my readers and I were ready; so that in one of the worst market years on record, the UNCOMMON COMMON SENSE letter and our members earned on average 36% on their portfolios while others watched their savings slashed by over 40%.
THE "UNTHINKABLE" DEATH OF THE DOLLAR
As far back as 2002, I began speculating about the possible downfall of the U.S. dollar and I began to recommend getting out of dollars. Then, in early 2007, I warned of the impending end of global dollar dominance. I posed and answered the question, "How will you defend your assets should the unthinkable become reality?" Impossible? Yet two short years later, China and Russia have both called for the dollar to be replaced as the world's reserve currency. Countries throughout Asia and South America have conducted currency swaps to bypass any need for dollars. Now only 8 years later, that 2002 dollar is only worth 58 cents! The only reason that the US dollar still remains as the worlds only Reserve Currency is because there is nothing else big enough to take its place.
DOLLAR STRENGTH: It is really not a sign of strength at all, but rather a sign of EURO weakness as investor's focus on the problems of Greece, Portugal, Spain and Ireland, not to mention most of the countries of Central Europe. Lucky for the US, there is nothing out there today that can replace the US dollar as the world's Reserve Currency.
HAS THE STOCK MARKET MELTDOWN STARTED?
The year 2009 saw Wall Street and the FED push the S&P up 60% off its lows in a contrived, drunken orgy fueled by 0% interest rates, trillions of dollars in bailouts and an untold amount of backroom dealings, all topped off with mis-information and manipulated Fantasy Government Statistics.
But reality always eventually sets in. Not even the fact that 78% of this quarter's (massaged) earnings have beaten expectations can whitewash the lies and deceit (bank earnings, Government deficits, foreclosures, unemployment rate, inflation, derivatives, etc.) that is festering just below the surface of this economy and market. That is why the real professionals have already begun heading for the EXIT, sparking the latest sell-off.
Wall Street tells you it's the beginning of a protracted Bull Market and stocks look great. Don't believe it. Why else is the insider buy/sell ratio at the worst levels it has ever been, if the companies are really making so much money, with even rosier profit projections for the 2nd half of the year? Whatever you do, don't bet your bankroll on it. Look beneath the surface of the so-called recovery and you'll see enough trouble brewing to make the sub-prime market meltdown of 2008 "look good."
That's not just my opinion. That's the conclusion from RealtyTrac, the nation's largest foreclosure tracking firm. Thus far, we have survived the worst years in history for foreclosures, but we may not be so lucky in 2010. One Federal Reserve member just reported that commercial real estate losses could reach 45% this year. That means $1.54 trillion in commercial loans could default, exposing reality, cratering the markets and plunging the economy back into Recession. But there's more. Option Adjustable Rate Mortgages (ARMS) are teetering on the edge of the abyss with $29 billion recasting higher beginning in 2010, followed by another $67 billion by 2011. In fact, Barclays Capital says, "We expect 81% of the option ARMs originated in 2007 to default." Yet those headlines are buried while Wall Street harps on about corporate earnings that "are not as bad as expected", lower job loss numbers and a drop in the unemployment rate to 9.7% (when in reality it's closer to 17%).
NOTE: Bailing out Greece is like bailing out Chrysler, nothing has changed. Besides, what does Greece have to do with the USA to justify a 200 point last hour rally?
HOW NOW DOW?
Stocks have completed the topping out process that I have been looking for going on 6 months; that should lead to a multi-week, month decline that will drop the averages by about 10%. This very same type of action is happening not only in the US markets, but the same patterns have formed in Canada's TSX, England's FTSE, the German DAX, Australia and all the southeast Asian nations including China and Japan. In the short run, we have already broken down below the support lines of the rising Bearish wedge formations that have permeated all markets. Minor Wave 1 down has been completed and we are now completing Wave 2. It's possible we may need one or two more up days to complete Wave 2 before a devastating Wave 3 of 1 downside thrust resumes.
World economies as well as Stock and Bond markets are now more inter-dependent than they have ever been in the past. The massive Bearish patterns showing up across the globe all at the same time is one of the main reasons for believing that the sell-off that we are in is the very early stages and could go as low as 1500 on the DOW and take anywhere from 2 to 6 years to complete.
However, the degree of Government and Central Bank manipulation has never existed to the extent it does now, not only here in the US, but throughout the world. The numbers that come out of Governments, from the unemployment rate to the inflation rate to GDP growth and everything in between can no longer be trusted. So the question remains - why is the market not yet crashing? Well I have already mentioned the degree of manipulation which is obvious if you have been watching the markets; daily 100-300 point swing with daily 100 rallies in the last ½ hour into the close. When, if ever, is the last time you have ever seen this type of action occur on absolutely zero news?
We also know that there is no such thing as a sure thing. What that means in plain English is that it is still possible to have one more market POP which would create a Bull Trap to end all Bull Traps. So, for self preservation purposes and/or just prudent trading practices, maintain your stops (10%) on all positions at all times. He, who fights and runs away, gets to fight another day. You can increase the size of your short positions and contra ETF'S on a breakdown to new lows (below 9,900).
I have been right on about this multi-year Bull Market in Gold, Silver and their securities since 2001 and my emphasis has always been on Bullion: Most mining equities, both large and small, have not kept up with the price increases in precious metals, which is highly unusual. Increasing Bullion prices creates expanding profit margins which are supposed to result in leveraged moves to price gains as not only profits are increased, but so are the lives of the mines as the value and size of their reserves are increased and lower grades become profitable. However, a confidence breaking combination of rising production and energy costs, a liquidity crisis, and panic-driven equity liquidation, combined with huge negative press, resulted in a mining sector that has greatly underperformed the price of Gold over the past five years. Since its inception in mid-2006, the Gold Miners ETF (NYSE: GDX) has declined by approximately 15%, while the physical Gold ETF (NYSE: GLD) appreciated some 60%. Irrational imbalances of this nature give lie to the "efficient market theory" and provide opportunity for the observant to ferret out these golden opportunities. Perhaps you can now understand why I have been so partial to Gold Bullion and have only recently started recommending stocks. Perhaps the time to shift some emphasis to stocks has arrived?
STOCKS TO BUY NOW
Goldcorp (NYSE: GG), Yamana Gold (NYSE: AUY) Agnico Eagle Mines (NYSE: AEM) - are all undervalued - I am also partial to IAMGOLD (NYSE: IAG). These four in addition to buying selections from the list of Juniors I gave out two weeks ago.
GOOD LUCK AND GOD BLESS
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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. All Information and data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities. I am no longer a registered investment advisor.
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