Meanwhile, once again, we see that America's richest and most well-advised elite are not following the advice being given to the sheeple. On Wednesday, December 1, the "Wall Street Journal" pointed out that during the month of November, the ratio of sales totaled more than $6 billion, while purchases totaled just $130 million. That amounts to more than $46 of sales for every dollar of purchases. That was the highest ratio of sales to purchases by the captains of American industry since August 2000, when the equity bear market-which still remains very much intact-had just gotten started.

Based on this information, George Muzea, the president of Muzea Insider Consulting Services, has turned bearish on the equity market. In the Journal he was quoted as saying, "Clearly from an insiders perspective, risks have increased, and I would say that there's probably a greater number of companies that are going to disappoint than the Street is anticipating."

That and other fundamental macro and micro economic factors lead your editor to believe 2005 will be a significant down year for stocks. As such, we will continue to short the market in our Model Portfolio, by way of the Prudent Bear Fund (BEARX).

Housing Bubble as Key to the Kondratieff Winter?

Thankfully, there are a handful of honest mainstream analysts and economists who do not allow their jobs to get in the way of an honest appraisal of reality. Stephen Roach, chief economist at Morgan Stanley, is certainly one such admirable man. In his latest missive on Friday, December 3, he spoke of the enormous and growing danger of the housing bubble in the United States, and concluded his essay with the following paragraph.

"Ironically, there have been a number of positive developments that have fallen into place recently -- an orderly depreciation in the dollar, sharply declining oil prices, and grounds for encouragement on the prospects for a soft landing in China. But America's imbalances have taken a turn for the worse, and the housing bubble could well be the final straw. Income-short consumers are playing this bubble for all it's worth -- enjoying the psychological benefits of the so-called wealth effect and utilizing the technology of refinancing and second mortgages to extract purchasing power from this over-valued asset. Unfortunately, these trends have led to the virtual elimination of US saving -- triggering a classic current-account-adjustment dynamic with attendant risks to the dollar and interest rates. That makes the downside of this bubble potentially far worse than that of the equity bubble. That would be an especially worrisome development for the US economy, since household real estate holdings of some $14 trillion currently are almost double the aggregate size of equity portfolios.

"While it has only been four and a half years since the bursting of the equity bubble, memories have already dimmed of that extraordinary speculative excess. Yet in retrospect, that may have only been the warm-up for the main event. Bubbles have a way of feeding on each other -- ultimately compounding the problem and leading to an even more treacherous shakeout. That's certainly the lesson from Japan and could well be the case in the United States. America's housing bubble is now in the danger zone. So is its saving rate, current account deficit, and overhang of consumer indebtedness. It's been a US-centric world for so long, that everyone takes it for granted. Yet global rebalancing poses challenges for all major countries in the world. Saving-short America will not be spared -- especially if it must now come to grips with the biggest asset bubble of them all." (housing)

Remember my interview with Marshall Auerback in our November monthly issue, when we discussed this matter of a tipping point from inflation to deflation? Marshall suggested that the bursting of the housing bubble, and, to a lesser extent, the next deflation of the stock market would likely be the keys to the economy's tipping over to deflation. Note on the chart on the left (From "Up and Down Wall Street" in Barrons (12/6/04) the extremely high percentage (about 36%) of total mortgages that are variable rate levels to which variable rate mortgages have climbed. Also note the manic rise in house prices that that is getting close to the comparison in the late 1970's. Note how quickly the index fell back. Although the index never went negative during those tough year, thousands of people lost their homes and it impacted the overall economy very negatively.

With many markets now pushing up toward key resistance levels (equities, various currencies) and the dollar facing a key support level at $0.80, and with the long bond seemingly ready to collapse, Roger Wiegand believes next week could be a very exciting week. In other words, we could break through some very key market values. Nothing in my view would be more devastating for the American economy and our equity markets than a crashing bond market. We are betting against the dollar, U.S. equities, and U.S. denominated debt instruments, and betting in favor of gold and gold investments, because we believe the laws of economics have not been repealed and that all manner of manipulation by our policy makers will ultimately be overcome by the truthful natural laws of the marketplace. As we near the end of 2004, I get the sense that we are getting very near the tipping point in which Ian Gordon's Kondratieff winter thesis will gain a huge amount of credibility and support, well beyond that of this letter and Ian's immediate following.

The Gold Bull Market Rolls On

With just three days of trading so far in December 2004, the average gold price for this month is $452.35. The 20-month average is $394.86, and the 40-month average is $353.21. Thus this powerful secular bull market in gold lives on. With the monthly average moving so far above the longer-term moving averages noted above, we would not be surprised or dismayed if gold were to suffer through some corrections here. But from a longer-term perspective, I would not let that bother me.

TRADER ROG'S CORNER

Gold Stocks. When to Hold? When to Sell?

Optimizing returns and minimizing risk is what every investor should try to accomplish. As I undertake the task of reviewing some 65 gold stocks currently in our Model Portfolio, I would like to bring to your attention a relatively normal pattern for the share price of successful exploration stocks that may help us in our efforts to optimize our investment results. As a new discovery is being made, investors are drawn into the stock as long as drill results continue to be announced. At some point, the parameters of the deposit come into a general fuzzy focus, as do some of the basic project issues, such as metallurgy, recovery process, environmental issues, and other factors that may affect the economics of a project. Although the focus may be a bit fuzzy, sufficient information is available to tell the market that it is time to take some profits. At this point in time, from a shorter-term perspective (2 to 3 years is short term in the mining industry), early investors who bought the stock before the discovery or early in the period the discovery was being made, choose to exit the stock and put their capital to work elsewhere.

From a risk perspective, this also makes good sense. Why? Because after a discovery is made, although a fuzzy picture of a project's profitability emerges, a great many uncertainties remain as the company begins the long hard task of carrying out bankable feasibility studies. Some of the more obvious issues that need to be resolved are highly detailed metallurgical and recovery details, detailed mine engineering plans, costly and time-consuming environmental studies, especially burdensome in environmentally rabid political areas, and, on an ongoing basis, costly and time-consuming permitting, not to mention costly and time-consuming paperwork for securities industry regulators. Then when all that is resolved, a company needs to seek financing, and banks frequently require that prior studies be reconfirmed by their own mine and metallurgical engineers. Believe me, as a former bank officer, I know how arduous the task of putting a mine into production is. It is tough as nails, and in an increasingly dictatorial United States, it isn't getting any easier. Nor is it getting easier overseas. I understand that Newmont's personnel are facing jail time and criminal charges for an environmental accident that happened in Indonesia.

In other words, what I am saying is that after a deposit is discovered, and until and even after it is put into production, a considerable level of risk exists. Yet the upside potential at this point in time is pretty much the same for an advanced stage "B" progress junior gold stock, as it is for senior "A" progress companies, like Newmont Mining, Agnico Eagle, GoldCorp, or any other senior mining firm you may care to name. In the chart above I drew three lines to reflect the upside potential for a company based on various gold prices. Once a discovery is made, you can anticipate a rise in the value of the stock (in time) as a result of the higher gold price. But you can get the same benefit from a solid producer with far less project risk than you have with a junior after that company begins its move toward production.

December 5, 2003

Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com