"Saepe Mendosus, Nunquam Dubius" The "Often Wrong But Seldom in Doubt" School of Economics and Government

WILL THEY EVER LEARN?

Former Fed Chairman Greenspan says Congress should let the Bush-era tax cuts expire in order to help trim the mushrooming budget deficit. I guess all his experience and education has NOT YET taught him that the only realistic way to cut Government Deficits is by way of GDP GROWTH. And that any 1 or even 2 year extension will do more harm than good as no businessman would ever take any action based on a tax policy that expires in less than 2 years. Does that answer your questions as to why businesses are sitting on their cash instead of investing? UNCERTAINTY BREEDS INACTION. For your information, in 1929 corporations were also sitting on record amounts of cash on their balance sheet.

The Philly Fed July Index of Manufacturing Activity fell to 5.1 and the New York Fed's Empire State Index of Manufacturing Activity plunged to 5.08 from June's reading of 19.57. This economy is not getting better it's getting worse, just as I warned you it would. Not because I have a crystal ball, but because it is just the natural result of the phony numbers generated in the 1st quarter by borrowing sales and other numbers (like inventory) from the future and then comparing to the worst recessionary year in since 1930.

Meanwhile, the Government has been relentlessly trying every trick in the book as well as pumping $100's of billions into the stock market in their attempt to fool the public into believing that their $870 billion nonsensical Stimulus (welfare) Package is working and creating jobs. Do the continuous extensions of unemployment benefits not tell us what the TRUE unemployment picture really is?

Even the Fed's own Beige Book has now put off any real recovery for another 5 to 6 years. As long as the policies of the USA, Europe, China and Japan continue on with out change, recovery will only become possible after a complete collapse, forcing, after 100 years, a change in direction away from Socialism and back towards Capitalism, which is the only solution that can possibly save us.

Meanwhile, the Government has been doing everything they can think of to paper over the ever expanding cracks by juicing up the US Dollar and the Stock Markets, including making every attempt to drive down the price of GOLD. However, all manipulations will fail as they must eventually come up against REALITY and God's Natural Laws of Economics.

TRADING THE MARKETS

If you have trading experience and have actually studied the data, you should know that Rising Volatility and Declining Volume on rallies are always associated with Bear Markets Rallies. Bull Markets are always accompanied by Rising Volume and steadily Increasing Prices.

For nearly 100 years, there was a standard rule for gauging long term Entry and Exit points in the Stock Market. If the DJIA Dividend Yield fell to 3%; sell and don't come back until it was over 6%. This simple Rule of Thumb worked wonderfully until Doctor Greenspan became Wall Street's Keynesian Master Bubble Maker in 1987. What ever happened to his belief in the GOLD STANDARD that he held up until he became Chairman? At the top of the 2000 Bull Market, the DJIA was only yielding 1.32%, not that anyone but me and a few others cared or even noticed. It's a scary thought, but at the March 2009 Bottom, the DJIA Dividend Yield had only increased to 4.6%, and now it's back below 3%. Dividends matter, especially during Bear Markets. When Capital Gains and decent Bond Yields become Distant Memories, the only logical reason for investors to buy stocks is to get higher and safer dividend yields than can be had from Treasuries because below the surface, there is nothing positive going on.

FINREG:

THE FRANK - DODD, SCREW AMERICA, BILL EXAMINED

Without blinking an eye the Administration did more yesterday to guarantee the next financial crisis than FDR did with his New Deal. With the single stroke of a pen, President Barack Obama set in motion 243 new formal rule-making bodies and 11 different federal agencies. Each of the 243 new bodies will create employment for hundreds of banking lobbyists as they try to shape what the final laws will actually look like. And when the rules are finally written, thousands of lawyers will bill millions of hours as the richest incumbent financial firms that caused the last crisis figure out how to manipulate the new system.

Yesterday, the Washington law firm, Jones Day snapped up the Securities and Exchange Commission head enforcement division lawyer, and J.P. Morgan Chase assigned more than 100 teams to examine the legislation. By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more and more campaign contributions, as they will try and succeed in intervening in the regulatory process to influence the regulators. Nothing is settled.

It's a gold mine for Lawyers, Lobbyists and members of Congress.

So if the banks, lawyers, lobbyists and Congress were the big winners, who are the losers? Small banks, entrepreneurs and of course, you the Taxpayer.

Smaller community banks who were not part of the subprime (mortgage) meltdown do not have the same resources that the Goldman Sachs of this world do to hire armies of lawyers and lobbyists to shape and comply with new regulations. The cost of compliance will eat up a much larger share of the smaller bank revenue and profits.

PERMANENT BAILOUT AUTHORITY

Then there is what the Dodd-Frank Bill does not do: It does nothing to stop future Government bailouts. Instead, it makes the TARP bailout system permanent. The Bill's "orderly liquidation" process empowers regulators to seize any firm they deem a threat to our financial system and liquidate them. These powers are not subject to judicial review and do nothing to ensure that the firms' creditors won't receive 100% of their irresponsibly lent money back in future taxpayer funded bailouts. Even though the lack of a broadly accepted process for closing down large financial institutions helped lead to the massive bailouts of 2008 and 2009, this liquidation process is even more problematic. Such governmental discretion to seize private property is unconstitutional but who knows what the courts will eventually rule, given the kind of ideologues that are being appointed to the courts.

And speaking of taxpayer-funded bailouts, the Bill does nothing to address Fannie Mae and Freddie Mac whose activities were primarily instrumental for the financial crisis in the first place and to this day still bleed $50 billion a quarter.

Washington looks increasingly like a public-works jobs program for lawyers and lobbyists, a "profit center for professionals who are in business for themselves."

The Dodd-Frank Bill is the perfect extension of Washington. Instead of encouraging the U.S. economy to invest in engineers, technology, new products and new businesses, it requires firms to invest in lawyers and lobbyists just to stay alive. It will do nothing to help create new wealth or new net jobs, but will transfer more wealth to lobbying and law firms in Washington, D.C. In addition, it will definitely encourage firms to move their Headquarters and expansion plans OFFSHORE - Did I hear the word Outsourcing?

TRUSTING THE SAME REGULATORS THAT FAILED LAST TIME

The legislation establishes a new 10-member Financial Stability Oversight Council composed of regulators that would be responsible for monitoring and addressing system-wide risks to the financial system. This Council would also have nearly unlimited powers to draft financial firms into the regulatory system and even force them to sell off or close pieces of themselves. Unfortunately, it is extremely difficult to detect systemic risk before a crisis has occurred, and the Council would serve mainly as a group to blame for failing at their impossible assigned task. On the other hand, its huge powers are much more likely to destabilize the financial system by stifling innovative products while failing to detect dangers posed by existing ones.

New Innovation Killing Regulations: The Bill also creates a new Bureau of Consumer Financial Protection with broad powers to regulate the financial products and services that can be offered to consumers. The new agency would nominally be part of the Federal Reserve System, but it would have extraordinary autonomy. This autonomy would impede the efforts of existing regulators to ensure the safety and soundness of financial firms, as rules imposed by the new agency would conflict with that goal. For most consumers, this would make credit more expensive and harder to get.

MICROMANAGING THE MARKET

The Conference Committee also added a form of the "Volcker rule" that would largely prohibit any bank or other institution with FDIC-insured deposits from undertaking proprietary trading or from owning or sponsoring hedge funds or private equity funds. While the legislation does reject the near-total ban on such investments, the difference between legitimate and traditional activities and those the Volcker rule seeks to ban would be difficult, if not impossible, to determine. Attempting to do so would require an intrusive, expensive regulatory compliance system that, by its nature, would micromanage day-to-day activities.

FANNIE AND FREDDIE ARE STILLBORN

Despite much rhetoric about ending bailouts, the Bill does nothing to address Fannie Mae and Freddie Mac, two of the largest recipients of federal bailout money. These two government-sponsored enterprises, now in federal receivership, almost single handedly fueled the housing bubble. When it popped, taxpayers found themselves on the hook for between $2- $5 trillion in government money. The failure to address their future is a serious error and shows just how hollow are claims that this agreement will prevent future crises.

These are just some of the more obvious flaws in the Bill. There is no doubt that all these added costs will be passed onto consumers in the form of higher bank, ATM and credit card fees and put a strain on lending at the worst possible time for our economy. The Dodd-Frank Bill will force banks to either take on more risk to recoup earnings diminished by this Bill or behave far too conservatively in order to stay out of the clutches of the regulators.

In the wake of the latest batch of "double-dip" chatter, the market's attention is shifting back to the Federal Reserve. Investors are asking a simple question:

What will the Fed do if the economy goes into recession again?

These guys have already done just about everything they can ... pulled every trick out of their hats ... and bailed out and backstopped virtually the entire financial system! But, all of that free money did was help boost another bubble in ASSET prices, it hasn't done a heck of a lot for the "real" economy. Unemployment remains stubbornly high and getting worse. Housing continues to slump. Investment is anemic and overall confidence is lacking. To put it mildly, the Fed is just pushing on a string - and more pushing isn't going to do a darn bit of good for those living in the real world!

The last time Treasuries were this high (low interest rates) was during the depths of the 2008-2009 Collapse. The world bond markets are twice the size of the world stock markets and bond investors are typically more sophisticated than stock investors. So to see Treasuries failing to confirm the stock market rally by remaining elevated (falling interest rates) is a major warning sign of Depression.

The questions every investor should be asking him or herself today are:

  • Have central bankers' policies really solved the issues that took down the financial system in 2008?
  • Do I have faith that Ben Bernanke is in control and can manage the Sovereign Debt Crisis not if, but when it comes to the US?
  • Do I truly believe that now is a great time to invest in stocks?

HOW NOW DOW

Golden Cross vs Death Cross
Quite a number of death crosses ( the 50-day moving average cutting the 200-day moving average from above) are still in play and only a golden cross - the 50 day cutting the 200 from underneath - can negate the bearish signals sent by all those Death Crosses.

THE BEST STRATEGY FOR NOW

Start scaling into your Short positions in FAZ, BGZ, TZA & ERY

"We are at a very critical juncture"

Although the bulls seem to be in the driver's seat now, they are unable to decisively cross over the 200 day goal line (MA). If they don't score big soon, then the bears will take over. This "Tug of War" will go on until one of the sides wins and is able to answer the $1 trillion question - double dip or no double dip.

BLACK POOLS, SPEED TRADING, PROGRAM TRADING

The manipulation (200 to 300 point swings every 2nd day over the last few months) make the Black Pools and the Bear Raids of the 20's and 30's look like child's play compared to today. All that plus 24 hour trading across multiple exchanges and trading platform, makes it almost impossible to get precise technical readings, especially when using Elliott Wave. What closing prices are to be used? Nevertheless, by focusing on the big picture, we can still get a good handle on what is going on beneath the surface.

In eight weeks, stocks lost back what it took six months or more (going all the way back to February) to gain. We are currently completing Wave 2 of a larger Wave I of C (or Wave III). Either way, I think there could still be one more minute rally left for stocks to finish consolidating the decline that began April 26th. That last rally leg should be completed by as early as Monday or by the end of the week at the latest. It should then be followed by a dramatic selloff (down 20% to 35%). In summation, we could have another week or so of stock price manipulations before being ready to fall off the precipice that we are now on.

STOP LOSS ORDERS

The last few months should have convinced you once and for all as to the value of ALWAYS using stop loss orders. So whatever your trading strategy is for this coming week (scaling into new shorts or waiting for the Break Down before taking new short positions), Stop Loss orders must be part of your trading strategy. Or you can take initial small positions and short more as the Market approaches 10,700. Take you losses if the market breaks substantially above 10,700.

GOLD

With $2.4 trillion in foreign reserves, China has more reserves than the International Monetary Fund (IMF). So far, the People's Bank of China is facing huge currency losses and with just over 1,000 tons of Gold, China has been buying more Gold in order to hedge itself against the inevitable depreciating Dollar and Euro. However, China has much too many Dollars and Euros and not enough Gold - but that is changing. BUY GOLD.

Gold's recent drop correlates strongly to the Euro rally of the last few weeks. Did the ECU really fix anything or did they, like the FED, just temporarily paper over a problem? Prior to the Euro taking off, Gold was beginning to bounce off support at $1240 setting up an explosive breakout. Then, the Euro took off and investors who got caught on the wrong side of the trade were forced to liquidate positions, which put selling pressure on Gold. The fact that Gold is now trading relative to the Euro, rather than the Dollar, is yet another sign that the market and its core relationships are breaking apart. Look at this latest weakness in Gold as what it really is: A chance to buy insurance (Gold) at cheaper rates. Though I can't say for certain that the PM stocks have bottomed just yet, in this minor down cycle, I have the utmost confidence that this correction will be the final one before the start of a momentous move to the upside. If you don't own Gold yet, it's not too late. In fact, any excuse you have now for not buying Gold will seem shallow and meaningless when the Dollar begins tanking along with its buying power and your standard of living.

A HISTORY LESSON

At Gold's bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price) was 41.2. It now stands at 7.9: When Gold peaked in January 1980, the Dow/Gold ratio reached "one," meaning they were both selling for about the same price. To hit that same ratio today, Gold will have to go higher and the Dow simultaneously lower. The continuously improving fundamental reasons Gold will rise are far from over, while a second leg down in the broader markets seems almost like a lock at this point in time.

The cost for being defensive is only the opportunity cost of being wrong, while if my scenarios are right, then my defensive actions will be the difference between being wiped out and doing not only OK, but maybe even very well.

SILVER

Recently, there was a new Silver fund which was established June 30, 2010 under the laws of the Province of Ontario, Canada. It is the Sprott Physical Silver Trust. According to the prospectus, the Trust was created to invest and hold all of its assets in physical Silver bullion, and will not speculate with regard to short-term changes in Silver prices. The units may be bought and sold on the NYSE, ARCA and the TSX like any other exchange-listed securities. It seems obvious that the new Sprott Silver Trust is going to take even more physical Silver off the market which, in turn, should put ever increasing upward pressure on Silver prices.

CENTRAL FUND OF CANADA

It is a closed end fund that I have been recommending to you for over 5 years now. It invests 66 2/3% of its money in Gold Bullion and 33 1/3% in Silver bullion. It too trades on the NYSE and TSX, but is a Canadian Company that keeps all of its assets in Canadian Banks, not subject to any potential confiscation of American's PM assets.

During the last parabolic phase for Silver in 1979/80, Silver went from a low of $5.90 on January 2nd, 1979 to trade above $50.00 per ounce in January 1980 for an increase of more than 700% in just over one year. Such a percentage increase from the current price for Silver would represent a future parabolic top price of $126.00.

Generally, the rule of thumb is that Gold offers relative stability and Silver offers greater volatility. Therefore, the amount of additional risk an investor is willing to take should determine the Gold/Silver ratio in his/her portfolio.

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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
uncommon@aubiebaltin.com
561-840-9767
One cubic foot of gold weighs more than half a ton (1,306 pounds).

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