first majestic silver

Three Card Monty

July 12, 2010

We're at a critical point in the equity market right now - risk remains extremely high as a major Bear Market is just around the corner. We are at the mid-range of the Bollinger Bands, having just finished 5 days correcting the prior drop from the top band to the bottom one. The question is: Does this rally continue on to reach the top Bollinger Band or does the market break down Monday?

The corrective rally this past week started precisely after closing right on the bottom Bollinger Band and has retraced a most common Elliott Wave 61.8 % of the decline from June 21st through July 1st. The decline was almost 1,000 points in the Industrials and 120 points in the S&P 500 and took nearly10 trading days. Thus the corrective rally over the past 5 days can now be counted as Wave 2. Is this retrenchment complete is now the key question. My Stochastic readings suggest a decline is coming early next week. If that decline drops below the July 1st/2nd lows, then I would be convinced that Wave 3 down and a resumption of the Bear Market has started. My main bearish confirmation indicator is volume, which lends weight to the evidence that a primary down-trend has started in earnest.

But as long as the Plunge Protection Team remains in play there are no sure things, so that makes risk management your top priority. Maintaining a trailing 10% stop has not only locked in some nice profit but you all should now be mostly in cash and ready for the next plunge.


I have been warning for quite some time now against playing the Wall Street game of "Beating Earnings Expectations". The trend this earnings season, like the 1st quarter, is that companies are able to beat earnings estimates through clever bookkeeping, but mostly by using comparisons against last year's horrific earnings (the worst since the 30's). What are we going to do for an encore when next year's earnings come up against much tougher earnings comparisons?

We can get a glimpse at the truth of the situation by examining Revenue Growth, which is sorely lacking. Wall Street can delude the people for a quarter or two, but eventually Top Line revenues will have to start growing or the charade will become obvious to everyone. Gross Revenue is a trend to watch since it's one of the best indicators to use for predicting the future. I have always concentrated my emphasis on the numbers that cannot be fudged or manipulated, so that even when analyzing individual companies, I always put more emphasis on sales per share rather than the P/E. to spot a company that is undervalued. No matter how profitable or exciting a business is, its stock is going to have a very difficult time bucking the primary trend of the broader market since 80% of the direction of an individual stock is attributable to the direction of the market itself.


Consumer credit (car loans, credit cards, etc.) shrunk by a massive $9.1 billion in May on top of a $14.9 billion decline in April. That May slump was FOUR TIMES as large as the economists were expecting.

The ISM non-manufacturing index also slumped to 53.8 in June from 55.4 in May. That suggests the service sector is following the manufacturing sector off a cliff.

Plus, a key gauge of global shipping, the Baltic Dry Index, just dropped another 4%, the 31st day in a row. We haven't seen this kind of decline since 2001 and it serves as even more confirmation that the world economy and global trading activity have also rolled over.


The time has arrived to brace yourself for a massive stock decline and a powerful double-dip recession come DEPRESSION.


Bernanke claims that he needs another injection of Phony Money as US recovery falters. He now wants to more than double the Fed balance sheet from $2.2 trillion to $5 trillion, after almost tripling it from 2008 to 2010. Facing this year's 9% decline in the monetary base, the "alleged" economic recovery, measured by Consumer Sentiment, Cost of Living, Employment, Foreclosures, GDP, Home Sales, Manufacturing, and Tax Revenues etc. is rolling over again. (I have been warning you that this would happen for over 6 months.)


The following are the most recently reported and projected twelve-month trailing (TMT) earnings, quarterly earnings, and price/earnings ratios (P/Es) according to Standard and Poors. (

HISTORICALLY (the last 100 years), a P/E of 15 with a yield of less than 3% has always been a sign of an overvalued market and signals a TOP is at hand.

There is no magic formula to getting rich. Success can only be achieved through proper and rigorous research and analysis: Examining the lessons of history and by ignoring the "noise" coming out of Government, the Media and Wall Street.


The DJIA was down 16% since its April peak, close to the 20% threshold that signals a Bear Market. The S&P500 has given back 38% of the entire Bull Market off the March low of last year. Yet, even though investor sentiment has turned more pessimistic, it has held up surprisingly well in the face of the market decline, the steady stream of negative U.S. economic reports, and the continuation of troubling news from Europe and Asia. Last week's poll of the American Association of Individual Investors, only showed a rise in investors who are bearish to 42%, still well below the 50% to 60% bearish levels that must be reached before a signal for meaningful bottoms is given.


First, it was reported that retail sales fell in May, then consumer confidence showed an unexpected drop in June, and to top it off Durable Goods Orders and the ISM Manufacturing Index also showed declines. And then when the ADP report proved to be a disappointment and so did the BLS Jobs Report, even the most bullish economists have now changed their expectations to admit that economic growth will slow in the second half of the year and have raised concerns that we might be in for a W bottom (double dip) rather than the previously expected V bottom.

The word DEPRESSION is not yet on anyone's lips except mine. My most dire warnings were based on the expected collapse of the housing industry once the rebates to home-buyers expired. Also global economic problems seem to only be in their beginning stages, as their effects have not yet reached our shores, while the U.S. economy is now slowing faster than anyone had expected.


What is keeping investors' hopes alive now is the expectation that second quarter earnings reports, due to begin in earnest next week, will be impressive and provide support for the market. DON"T GET TRAPPED by the coming flood of B.S. from Wall Street and corporations who have become experts at keeping their estimates and guidance low enough so that they are not huge hurdles; the comparisons will be easy since they will be comparisons to the second quarter of 2009, which was just about at the trough of the 1st stage of the Recession come Depression.

If we look back at the last two earnings reporting seasons, there is cause for concern. The January/February correction began mid-January when the impressive earnings reports for the fourth quarter of last year began coming out. The stocks of many of the companies reporting the best sales and earnings gains actually ran into the most selling and profit-taking. Similarly, the current market correction began in mid-April just as the first quarter earnings reports began coming out. Once again, even though the reports were positive and for the most part exceeded Wall Street's estimates, the market rolled over into this latest even more serious correction. And again many of the companies with the most positive reports ran into the heaviest selling and profit-taking (Apple, Google, Intel, etc.) As the second quarter earnings reports begin and it's even more obvious that the economy is slowing, it's possible that the top for earnings growth has arrived.

While the market was short-term oversold, did the 5 day short-term rally correct the over-soldness and will it dash any hopes for a summer rally? I recommend shorting into spurts following larger than expected earnings. Meanwhile, I will be initiating new shorts starting Monday or Tuesday (always using stops).


Leveraged ETF'S have only been existence since 2006. To begin with, let us make sure we all understand how they work:

Exchange traded funds are constructed to mirror the movement of some underlying index. If the index rises 5%, the ETF tracking it is supposed to rise 5% (before expenses). An inverse ETF simply moves in the opposite direction of the index its tracking. So if the index rises 5%, the inverse ETF should drop 5%. Apply leverage however, and the movements are magnified. So if the ETF uses three times leverage and the index falls 5%, the ETF should rise 15%. Simple enough in theory: Too bad the reality doesn't exactly measure up.


Exhibit A: On one day, the Russell 1000 Financial Services Index fell by 5.9%.

A long ETF using three times leverage should have dropped by 17.7% (minus 5.9% multiplied by 3 = minus 17.7%). But it didn't. It plummeted by 25.6%.

An inverse ETF using three times leverage should have been up 17.7%. But it sank by 13.4%. Talk about not getting what you paid for.

Pick any period and you will most likely be able to find similarly confounding results and the worst offenders will always be the ETFs using three times leverage. The question is: Why? I NEED NOT REMIND YOU ABOUT HOW MUCH WE LOST ON SRS EVEN THOUGH WE WERE DEAD RIGHT ON THE DIRECTION OF REAL ESTATE.

Two Fatal Flaws of Leveraged ETF'S: Their benefits are sometimes completely nullified by two fatal flaws in the set up…

Daily Rebalancing: Leveraged ETF"S do not actually buy individual stocks. Instead, they invest in derivatives. And these derivatives require daily rebalancing in order to match the rise or fall in the index. Otherwise, the leverage ratio for the ETF will be off-kilter. As a result, leveraged ETFs can only be counted on to perform as promised for a single day.

Compounding Hurts: Especially when it comes to leveraged ETF'S, compounding can often work against us.

The WORST problem is one of LIQUIDITY or the lack thereof, which often completely distorts the way they should behave. Consider an index that drops by 10% on Day 1, then rises by 10% on Day 2. If you started with $100, the index would be at $90 after Day 1 and $99 after Day 2. Total return: minus 1%.

Now let's take a look at what happens with an ETF that seeks double the return of the index (i.e. uses two-times leverage). Again, we'll assume a starting value of $100…

Day 1: The ETF would be down 20% to $80.

Day 2: The value of the ETF would rise by 20% to reach an ending value of $96.

If we ratchet up the leverage to three times and extend the holding period, it magnifies the negative impact of compounding. Toss in some market volatility and a lack of liquidity and this tracking gets even worse.


I have not been using them long enough to come up with a definitive answer, but it seems to me like buying Puts on long leveraged ETF'S, since volatility gives them the proclivity to shrink in value anyway, OR Perhaps buying put options on Long Leveraged ETF"S should work to our advantage. Paper trade them and see for yourself.


The propaganda against Gold is unending, despite its obvious success. Its recent drop from a new all time high down to $1184 amounts to a measly 6.4%, not enough to get excited about especially given the fact that the drop was engineered by the Bullion Banks in their on going effort to do the Government's bidding of holding down the price of Gold. They were successful for 20 years (1980-2000) but have since given back all their easy profits and are now sitting on about a $ ½ trillion in losses.

Some fool hardy analysts actually claim that Gold has not kept pace with inflation. The fact that Gold has been the # 1 performing asset for the last 10 years does not seem to matter to them. They must not understand its 400+% gains in the last decade. Gold will continue to not only be the best, but the only truly safe haven and will continue to outperform all assets for the foreseeable future, since their trading activity is so deeply intertwined with the currencies and Sovereign Debt.

After two decades as net sellers of Gold, foreign central banks have become net buyers. In addition, more than half of the Central Bank officials surveyed by UBS didn't think the dollar would be the world's reserve in 2025. Among the predicted replacements were Asian currencies and the Euro, but - by far - the favorite was Gold. It seems to me only natural that after a century of war, inflation and ever increasing Socialism, the next hundred years will belong to those people who hold the timeless values of hard money and fiscal prudence. Unfortunately, our policymakers are not among those people.

Individual Gold stocks are lagging Gold, which is a very interesting phenomenon. Usually commodity stocks go up exponentially to commodity prices, since the profit margin goes up exponentially. For example, Gold producers average cost right now net out to around $400/oz. In 2007, the Gold price was $600 (you could only make a little bit of money). In 2008 at $800, you made a little bit more. Now it's at $1,200 and every Gold producer is making some serious money. Surprisingly, the market has not fully taken this fact into account, but rest assured it soon will. Either Gold has to come down significantly or Gold shares will go up significantly. Imbalances are always corrected. One of these days, people will look at it and say, "Wow, what a great run on Gold stocks." Will you be among those looking a gift horse in the mouth? Traditionally, Gold stocks are weak in June, July and August, so you need not chase rallies, but I would want to load up as much as I can on Gold stocks into any weakness. So research your lists and put orders in on your favorites at prices that you would like to pay. Buy what you can and then complete your buying into the breakout to new highs.

The Euro rebound was hardly the reason for the price of the yellow metal to drop from an inter day high of $1,265/oz to an inter day low of $1185/oz for a 6.45% drop in less than a week. The drop was exacerbated by the bullion banks using the COMEX Gold futures to manipulate the price of Gold lower. With weak GDP growth, high unemployment, high national debt and high budget deficits, the future of the Euro is in doubt. Investors who are worried about this scenario will continue to do the prudent thing and diversify some of their assets into Gold.

Governments all over the world are debasing money at a rapid rate and that has always led to higher prices for real assets. Competitive currency devaluations have not yet begun. As long as western countries have huge sovereign debt to finance, the currency markets will continue to be volatile and we can expect to see further deterioration in the value of the major currencies. This will continue to drive the price of Gold higher and we will look back at this latest sell-off as nothing more than a short term correction exacerbated by the bullion banks, in particular JP Morgan.

We're in the final years of the 40-year and 60-year cycles. As these cycles enter their respective "hard down" phases, it tends to create a drag against the stock market when there isn't a strong counteracting force to create the necessary momentum for stocks. Fear can be the market's best friend in a Bull Market, but in a Bear Market fear tends to feed on itself. That's why it will be of paramount importance to monitor how the market reacts to any increase in headline fear after the market's current technical rally is complete. If internal momentum doesn't show any meaningful improvement should the market move higher, it could create a problem not unlike the August-September period of 1998, or even 2008, where fear feeds upon fear as the market grows internally weaker.


Just look at the declining volume into rallies and the increasing volume into sell-offs. If that is not a Bear Market indicator, I don't know one that is better. Both the Dollar and Gold have "become a bet against stability amid uncertainty from Europe's sovereign-debt crisis, doubts on Asian growth and fears of a double-dip U.S. Recession."

Many analysts and financial advisors emphasized that Treasury investors would do well if deflation is imminent, but with interest rates as low as they already are, I will be betting against that type of advice. On the other hand, Gold investors stand to benefit from either deflation or inflation. Stick with Gold and Silver (stay with Aubie).


Both China and Europe have higher priorities than being America's fall guy. Led by a more self assured Germany, the European states are choosing not to throw themselves on to our funeral pyre of increasing debt and monetary creation but to wisely clean house and reduce spending. Although Geithner has announced China's acquiescence to a 3% revaluation of the Yuan, nothing has happened yet. Besides, does anyone really believe that this will do any good?

Let's examine the evidence: The Yen increased in value from over 300 to the Dollar to below 100; The Canadian Dollar increased in value from a low of $0.60 to almost parity and the Euro increased from $0.85 to over $1.30. In all cases, exports and its resulting increase in the trade deficit to the USA continued to expand by over 50% during those same periods of time. I have been warning you for a long time that there is NO ONE in either the Administration or the Media who understands the first thing about economics, Nobel Prize winners or not.

The entrenched economists will continue to harp for more of the same non-remedies that have failed to avert systemic tribulation. Keynesian abuses have pushed the nation into an untenable policy corner, as bankers with economists at their side press harder for what has always failed to work!!

The Obama Administration like the Bush Administration before it, does not comprehend that liberal money creation actually destroys capital, damages businesses, and reduces real income. The US political leaders and banking leaders have not yet learned the lesson of Natural Economic Law in over 75 years. Tragically, the banking and political leaders are caught in a bind, fashioned from their own ignorance's and outright self deceptions.

As we all should know by now, when it comes to the capital markets, conventional advice is eventually deadly. It identifies trends too late and fails to warn when risk increases exponentially. However, most people would rather feel good for the moment than be a contrarian.

Look at the capital markets today and the trends are clear. With global growth likely to remain low to stagnant for quite some time, stocks and commodities will not help your portfolio. Because of manipulated interest rates, Treasury Bonds are performing well, but the threat of severe inflation and sovereign bankruptcy looms and so is the biggest Bond Bubble bust in History. Precious metals are the only winner, yet the "Herd" doesn't see it that way. To them, the Bull Market in precious metals isn't even a Bull Market - it is an aberration. It is a mistake: And yet It is as near a certainty as there can be, that precious metals will outperform. Why? This is what happens in a major credit contraction. There is a run for real money. It doesn't matter if there is hyperinflation or deflation. Since the crisis began, we've had strengthening deflationary forces. Gold has advanced to a new all time high and even higher against most currencies. Quality Gold stocks have surged to all time highs. Silver has outperformed nearly everything except Gold.


When people are frightened, they reach out to anyone who offers security or a saleable chance of restoring pre-crisis status quo stability - a person or administration that represents a chance to return things to the way they were. What was once unacceptable, even deplorable, is suddenly seen to be an option. The messenger of the solution is seen to be some sort of hero or messiah. This was precisely what led to the ascent of Adolf Hitler and many other now hated villains of history. They offered hope through new policy initiatives when no one else did. They are now villains because their solutions turned out to be horribly wrong. Even though they were wrong headed ideas, if they were expedient they were latched onto by a desperate public. Are we fast approaching such a period over the next two years in America, Can we still change the inevitable or is it too late since we may be already there?

July 12, 2010



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Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

Palm Beach Gardens FL. 33418

[email protected]


One other thing that sets "Uncommon Common Sense" apart from all the others is that when you call the above number, you get me at no extra charge. (Please do not abuse this privilege since there is only one of me).

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 not a registered investment advisor.

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