first majestic silver

The Steve Puetz Letter

Part - II

July 7, 1997

Dear Fellow Thinker:

OVERSEAS

A couple of weeks ago, share prices tumbled in Britain. London's FIFSE Index has often been a leading indicator for Wall Street. Usually, the FRSE Index is a few weeks to a month ahead of trend changes on the New York Stock Exchange. So, warnings now sound from London.

Across the English Channel, there's also plenty of turmoil. Bill Buckler keeps a close eye on the overseas economies. In his early June issue of The Privateer, Buckler described the campaign promises of newly elected French President, Lionel Jospin: "First: To create 700,000 jobs with half of these being in addition to the numbers already employed by the French Government. That will increase the payroll costs of the French Government, requiring higher taxes or increasing the already high budget deficit if covered by additional borrowing. Second: To reduce the working week for French workers, from the current 39 hours per week to 35 hours per week, with no loss in pay. Economically, that means that French output will decline by 11 % while wage bills will not change at all. Third: Mr. Jospin wants to cut indirect taxes, lower health contributions paid by employees and lower the French Value Added Tax on basic goods! That will blow out the French Government's current budget deficit even further! ... The French Socialist Party was not asked to explain during the election campaign their claim that a 'New Social Contribution' of 7.9% on all capital would be imposed! Who is to pay this and how? This will cause capital flight out of France. Who in France is going to stand to be fleeced? And who would want to invest in France in the face of this?"

Unemployment has been soaring in France, as it has throughout the rest of Europe. Now, recessionary clouds are gathering in Australia, as Buckler describes: "if anybody out there is still wondering why retail sales have nose-dived, why the economy is slowing down fast, and why manufacturing output is now in recession, here is the political answer. The personal income government tax has increased by 9.2% over the previous year! And please note, this was over a period when average wages climbed by only 3.0%. Is it any wonder that wage earners have pulled back on their spending."

And a little further north, in Thailand, the national currency (the baht) has come under attack. This has caused political turmoil, resulting in the resignation of key government officials. And their once booming stock market has begun to nose-dive. Also in the Far East, Japan remains mired in its post-bubble deflation.

These isolated incidents aren't entirely unrelated. They are symptoms of the spreading international credit-disease that worsens with each passing day. The recent softening economic numbers from the United States indicates that the leading country of the 'international monetary system has also started to show symptoms of the disease. The question is: How much longer will it take for sleepy-eyed investors to sit up and take notice?

SEASONAL TENDENCY

The seasonally weak July-October period is ready to begin. Each vulnerable seasonal-period passes without incident. A few months ago, the market made it past the last-half April period without crashing. But, one of these times, the market won't make it through a "normal correction." Instead, the market will keep going down in a relentless decline that will surely end with a crash.

Stay alert. Once the down-trend gets started, it's likely to progress very rapidly. If you are still in the stock market, there will be little time to get out.

IRRATIONAL EXUBERANCE

All eyes will be on Alan Greenspan and his Federal Reserve Board cohorts as they meet at the FOMC in early July (editor's note: subsequent to the author's writing, the FOMC voted NO CHANGE).

The burning question on the minds of many of the bears is this: If the market was experiencing "Irrational Exuberance" during December 1996, when the Dow Industrials were at 6500, what will Greenspan call Dow 7800? Furthermore, will he do anything about it?

I doubt that he will raise interest rates any further. That's especially true with the economy weakening so rapidly. The stock market is likely to crash on the weight of its own excessive valuation.

TOTAL COLLAPSE

If you ordered Total Collapse, you should have received it by now. If you have not, let me know. I'll try to find out what happened.

I welcome your comments, questions, and critiques regarding Total Collapse. I will respond to as many questions as possible in upcoming letters.

GOLD & SILVER

In the entire monetary complex, the precious metals remain the ignored and unwanted asset group. Yet, from a value perspective, they are the most undervalued major asset. Gold and silver are true bargains at present levels.

During late-May and early-June, the rarest of the precious metals, platinum, exploded nearly $100 per ounce higher in a frenzied short-covering rally. This is a forewarning of what is sure to develop in both gold and silver.

Of the precious metals, silver is the most undervalued. With the current gold-to-silver ratio of 70-to-1, silver has a long way to climb before it gets back to a more normal ratio somewhere between 10-to-I and 16-to-1.

As for gold, speculators hold a huge shortposition. It's set up to have a short squeeze far greater than the one just encountered in the platinum market. It is widely rumored that hedge-funds collectively have amassed a shortposition of roughly 1/4 of a years supply of mined gold -- via sales from gold loans in the physical markets. In the futures market, speculators sold 36,000 contracts short.

To get the precious metals moving higher for good, the key remains the coming collapse in financial assets. Until then, gold and silver seem destined to languish at current bargain levels.

SUMMARY & CONCLUSION

While the economic condition in the United States has been rosy, the financial situation continues to deteriorate rapidly with each passing month. But, dismal finances may finally be affecting the economy.

For five months in a row, flat-out deflation has taken a solid hold on producer prices. Retail sales and housing starts have declined for three months straight. The June swoon in commodity prices further confirms economic trouble.

Financial speculators seem indifferent to these developments. But, for a long time, they have been living in a different world -- a manic world in which they use ever larger sums of borrowed money to push financial assets to levels never before witnessed in the 200-plus year history of the United States. Furthermore, the speculators have recently moved heavily into the riskiest areas possible -- areas such as stock IPOs, junk bonds, and Brady bonds.

Weekly stock-market sentiment-polls such as the American Association of Individual Investors' poll and Market Vane's poll both show near-record bullishness. A composite index of 8 different sentiment polls show the most bulls since I first constructed the index in 1994. These indicators should be used as contrary indicators. That is, they are powerful sell signals -- since high amounts of bullishness almost always coincide with market tops.

Overseas, economic and financial conditions are also in a state of decline. Things are so bad in France that the country has moved to the economic dead-end road of socialism. In Australia, the economy is sliding into recession. And in the Far East, new financial crises are brewing.

Seasonally, the July-October period has often spelled trouble for stocks. So far, the stock market has resisted every possible bearish factor. It just keeps marching onward and upward. But valuations are now so ludicrous, that it seems the prospect of a decline in both the economy and earnings should bring Wall Street back down to earth. A crash to somewhere between 2000 and 3000 on the Dow Industrials would do that.

Whether overexuberance (as indicated by recent sentiment polls) or some other factor trigger the crash, it is sure to happen.

When it does, gold and silver will awaken from their long, deep slumber. The precious metals remain the investment bargains of this generation. Allocate nearly 100% of your investment funds toward gold and silver coins. The rest may be used to sell-short the stock market.

A gold nugget can be worth three to four times the value of the gold it contains because they are so rare.
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