Short Term Gain Long Term Pain

How can any Economist, Analyst or other type of seer or prognosticator completely ignore Government actions and policy changes, including the consequences both intended and unintended, of Fiscal and Tax policy and still expect to be creditable? While no one can know for sure what the "unintended" consequences of Government actions will definitely be, any analyst worth his salt should at the very least make a serious attempt to discern what some of those unintended consequences might be and not just rely on the hope and false promises of Government projections.

As most of my long term readers are aware, every analysis I make has a serious focus on Government actions as to how and what their influences will have on the economy the stock markets in general and on specific, industries and companies in particular. The political gamesmanship has started early and this time around their consequences, both intended and unintended, will be more severe and longer lasting than ever in our history.STAY TUNED!

DEJA VU, ALL OVER AGAIN

In the 1930's, the Government burned crops and poured milk into the gutters in an idiotic attempt to prop up prices. They confused cause and effect by mistakenly believing that falling prices caused depressions. Today, we are bulldozing homes in an attempt to prop up home prices by reducing the overhang supply of empty homes. Destroying real assets did not work in the 30's and it won't work now. How is it possible to become richer by destroying assets? Will we ever learn?

Patterns of investor psychology are not new. In fact, they repeat themselves on a very regular basis. Consider this quote from Richard Russell, "Psychology during bear market rallies seems to follow a fairly consistent pattern. During secondary reactions [upward] in bear markets, it is a fairly uniform experience for traders and market experts to become "OVERLY Bullish". Those words are as true today as they were 60, 80 or 100 years ago. Sentiment is rarely ever a perfect timing indicator because things always go further in both directions than people ever expect them to go. Nevertheless, they are very useful warnings, so I am sticking with my assessment that now is not a good time to be long the market even though I think that it is probable for the markets to rally into May or even June. In case you missed them, I gave my rationale in more than a few of my recent missives (check my archives).

Please note that "not a good time to be long" is not the same as a "good time to be short". However, the longer the "Bullish Sentiment Stampede" lasts and the more extreme the numbers become, the better the odds of a major top and the sharper and more sever the eventual washout. Finally, if you missed the rally and are thinking of getting in now, I have a one word suggestion: "Don't". A further 5% or even 10 % rally against a 30% to 50% selloff is not worth the risk especially when there are such good alternative investments, like Gold and Silver that offer much better potential rewards and much better risk reward ratios.

SENTIMENT IS NOT THE BEST TIMING INDICATOR

In March 2009, the markets found a bottom from the financial panic of 2008 after reaching all time low bullish sentiment readings. The collapse was of historic proportions, with only the Great Depression of 1929-32 being larger.

Now more than two years of steady rally without a significant correction, the S&P 500 is still down almost 10% from its nominal high in 2007. In inflation-adjusted terms, it is down over 30% from the highs it made in 2000. By that measure, things are actually much worse than they appear. The TSX Composite, thanks to its commodity base, has fared much better; down only 7% from its nominal 2007 high and down only 14% from its real high, also in 2007. But then again, the Loony has appreciated almost 25% against the US Dollar.

Investors should count their blessings. The Japanese Nikkei made its nominal high back in early 1990 and today it is still down 74% beneath its high in real terms. There are some who are comparing the current North American markets with Japan's 21-year nightmare. Could it happen here? The answer is an emphatic YES: And It becomes more and more probable, the more we continue to pursue the exact same Socialist policies (zero interest rates and massive Government deficit spending) that they have and continue to pursue today. The Natural Laws of Economics don't change just because we ignore them or worse, don't realize what they are or how they work.

AN OFTEN OVERLOOKED LEADING INDICATOR

One chart that has caught my eye recently is the Dow Jones Utilities Index. Utility stocks like bonds normally rise when interest rates fall, as investors can get better yields from safe utility stocks than they can get from CDs or T-bills. Similarly, when interest rates rise, utility stocks fall. But this time it really is different. The Dow Jones Utility Index, which consists of the biggest American utilities were trading at 210 in early 2008. As the Recession hit, the government cut interest rates to record lows and the Federal Funds Rate now rests at zero. Normally, the utility stocks should have rallied sharply. But the opposite has happened. The utility stocks have collapsed from 210 in early 2008 to 155 today-a drop of 26%. What does this tell us?

If I look at stocks as a leading indicator, the pathetic performance of the utility index tells me that investors believe that the Government attempt to keep interest rates near zero (by the Fed buying Treasuries via QE2) is doomed to fail and reverse in a big way. Could 15% plus Treasuries be on our horizon? It has happened before (1980) and the action of the utility stocks certainly makes it seem so.

Personal Observations

Retail sales in March missed analyst expectations "by a long shot", as the U.S. Commerce Department reported that sales at U.S. retailers increased only 0.4% in March-a nine-month low. Consumers are pulling back on spending. Why wouldn't they? Fuel costs are killing their budgets and real estate prices are depressed and getting worse, long-term interest rates are rising, banking charges of all sorts are sky rocketing (thanks to Dodd Frank), the media coverage of "out of control," Government spending and rising debt is becoming more intense. Thus, the only things good that have been rising are the manipulated stock markets, oil, commodities and precious metals. Take away Government Stimulus, and the stock market will dive like a helium balloon shot full of holes.

The great majority of American consumers are living on a paycheck to paycheck shoe-string budget with 45 million+ relying on Government handouts. Any dip in the economic recovery will kill consumer demand. The Government knows this and this is why the Government thinks it needs to keep spending, why it needs to increase the maximum amount of money it can legally borrow (now at $14.29 trillion), why it can't reduce Government Stimulus, and why it can't raise short-term interest rates. They don't seem to understand that the only thing that they are doing is supporting the big banks and their favorite friends in big business (like GE) and doing absolutely nothing for the people or for Main Street.

Stagflation-that's the real wild card right now! No one really knows exactly how all this massive Government interference in the economy will play itself out. My opinion, based on what the precious metals are telling me, is that stagflation is already here and has become a serious problem, but is thus far being masked by the phony statistics released by Government. If you think that the March retail sales were surprisingly weak; "you ain't seen nothin yet" - wait until $4 and $5 per gallon gas hit the consumer's wallets. Look what is already happening to Walmart's sales.

"The Real Threats to the Economy are numerous: Retail sales are falling, the producer price index is increasing and squeezing profits, house prices are still falling-and worst of all, real UNEMPLOYMENT is increasing and no one is talking about inflation. The Fed Governors are still talking about deflation-they've got it all wrong. Maybe because they don't seem to know what the difference is between inflation, deflation and stagflation.

QE2 has added over 250 points to the S&P based on where it closed the year.... QE1 and QE2 have failed to stimulate the real economy "as is always the case" pushing up financial asset prices instead, again creating bubbles as cheap money always induces speculation.

The larger the stimulus, the lower the interest rates, the larger the speculation. Most American families own a home, but few Americans own a meaningful amount of stocks outside of their pension plans and IRA's. Bernanke's solution seems to rest on the US public buying into another round of bubble blowing and on the idea of "trickledown" economics emanating from a rising stock market. GEE WIZ, I always thought that the LEFT did not believe in "trickledown" economics.

It is looking more and more likely that QE3 will be both unavoidable and a grave policy mistake, resulting in the inevitable very hard landing. The reason I think it (QE3) is unavoidable is because I also expect a significant slowdown in global growth, driven by an Emerging Markets slowdown, brought on by their successive interest rate increases and tightening of banking regulations. All of which will bring on a severe slowdown if not an end to the global super-cycle in manufacturing, which is now vastly in over capacity mode; especially given the inevitable buying slowdown from the near bankrupt USA and Europe. Then the only 'simulative' policy option that Bernanke and Obama can think of will be QE3 as both seem fixated with stimulus at any cost. Full Speed Ahead, Damned the Torpedoes.

The basic case against QE2 is that while it pushes stock and commodities prices up, it provides very little if any relief for rest of the economy. In other words, Bernanke like Greenspan before him is just blowing bubbles instead of addressing the economy's fundamental problems. Ever increasing Government interference in the economy (Socialism) along with their general negative attitudes towards free markets and big business, while only providing lip service to small business, will almost certainly result in certain death to our economy as more and more of our American companies move ever increasing amounts of their operations offshore. And if we are not careful, they will also move their head offices to more business friendly locales. Such as would you believer China. Is it any wonder that so much of our manufacturing has and is continuing to be outsourced?

Getting companies and individuals to repatriate their money by some short term, one time tax gimmick is nothing more than a political pipe dream.

The QEs has been the most controversial policy in the Fed's history, and for good reason. The policy is seen as a direct intervention into the free markets. Bernanke denies this, but at the same time, he boasts that QE2 has raised stock prices and strengthened the recovery. So, which is it -- either the Fed is meddling in the markets or it is not? Also, Bernanke continues to say that the economy is close to a "self sustaining recovery." If that's true, then why are interest rates still below the rate of inflation, and why has the Fed announced that it will not end QE2 on schedule (at the end of June), but will continue to recycle funds from maturing bonds into the purchase of more financial assets?

MARGINS and MARGIN CALLS

If there is one sure way to tell that the Fed has managed to create and nurture a speculative-led Bubble in the equity markets, you need look no further than what is happening to investor-based leverage investments-- debit balances in margin accounts skyrocketed $20.7 billion in February alone. Only two other times in the past have we seen leverage rise so much so fast and both times it was during a bubble phase - such as during the tech bubble of the late 1990s and the credit bubble just a short four years ago." WILL WE EVER LEARN?

When interest rates are below the inflation rate as they are now, Borrowers Win Savers Lose! So investors who are being well paid to speculate, start borrowing tons of money to buy stocks and Bonds, Ever hear of the carry trade, that nobody is talking about? setting the stage for the inevitable "big crash" that cannot be too far off. A sudden 10% to 15% rapid decline in stock prices quickly turns into a full-blown crash as margin calls and liquidation notices send investors racing for cover and debt deflation dynamics drives the economy back into either a Double Dip or a Full Blown Depression. You will soon see how much worse Triggered trading Halts makes the selloffs.

While there are plenty of Sentiment and Technical reasons why the stock markets are due to correct, the end of QE2 adds a massive high-profile fundamental reason that few prudent traders should risk ignoring.

Unlike other commodities that have skyrocketed and crashed, the climb in Gold up until the last few days has been very orderly. It is the only commodity whose long-term trend line is long and has remained unbroken for 10 years.

It is always possible that Gold could take a substantial hit, just as it did in 2006 and 2008, and still keep its long-term trend line intact. But I do not think there is much danger of that. Why, because; #1 Gold's fundamentals keep on improving by leaps and bounds as many countries and the USA in particular keep on creating money out of thin air and unabashedly are relying on debasing their currency in order to ease paying their Debt. #2 Gold and Silver Stocks are deeply undervalued. Just wait and see what their earnings reports will look like come the end of their 1st quarter. The Government's only solution seems to be currency debasement.

National Debt is going to soar in 10 years from today's $14.3 trillion to $23-$26 trillion at the very least, if either Obama's or Ryan's plans are enacted. That is currency debasement on a scale never seen before in the US. However, it is not just the US. The UK is a financial basket case and in Europe, there is a sovereign debt crisis. While in China, credit is expanding at 20%-30% year over year. Indeed, China is printing money faster than the US is. Thus, the idea that the Yuan is undervalued is questionable to say the least. So, why shouldn't Gold be rising? If anything, the surprise should be how orderly the rise has been thus far given the massive currency debasement everywhere you look.

This bull market is a bit different than the 1970s bull market that was reflective of a high inflation rate. The current bull market is mainly fueled by combination of increased demand for commodities and luxuries from rapidly expanding China, India, South East Asia and South America and by the steady debasement of the US Dollar. The beleaguered greenback keeps trying to find a place to make a stand, but only seems to find places to fall. Already this year, the Dollar Index has dropped 7.5% - wiping out all of the S&P 500's gains for the year to date. Another 5% drop would take the Dollar Index to a new all-time low. Little wonder that investors are flocking to Gold, Silver and every other asset that seems a plausible alternative to Dollars. Even fine art is catching a bid...but there too it looks like it may have found too much of a bid.

OIL

While Obama, Hillary, McCain and the rest of the Western Media are rejoicing about the democracy that is springing up all over the Middle East and North Africa, Oil knows better. When Iran, through their Moslem Brotherhood proxy, take over within the next 6 months to a year and even if Saudi Arabia is still standing but completely surrounded, with America having pulled out and given up its bases in Iraq, Bahrain and Kuwait, we will be lucky to only see $250 oil. And what is our Government's Energy Policy? Why, blame the oil companies of course, so you can increase their taxes while maintaining a moratorium on drilling at home. This will drive the oil companies to move their assets offshore - just what we need. Send our rigs to Brazil and Russia and then lend them the money to pay for the rigs.

The trouble with a little bit of inflation is that it has a way of suddenly becoming a lot of inflation. In a sense, although inflation is always a monetary phenomenon, it's also a psychological and an economic phenomenon as well.

HOW NOW DOW

Bernanke, in his infinite wisdom, is making the same mistake he did in 2008. In his Keynesian effort to print prosperity, all he will have succeeded in doing is spiking inflation and collapsing the economy again along with our currency.

Secular bear markets always compress P/E ratios over time. We have (non inflation adjusted) record earnings, yet the market isn't willing to pay the same price for those earnings as it did in 2007. Even though reported earnings have almost doubled from the 2000 top, the market is still priced lower. What we are witnessing is the economics of a secular bear market in action; slowly but surly reducing valuations as it takes into account a shrinking unit of measure (the US Dollar). Actually not only are we seeing valuations fall, but we are also seeing earnings and GDP artificially inflated by currency debasement. The market isn't fooled. That's why it's not willing to pay up for those phony earnings.

My maximum potential upside targets are:

DJII 13,250; S&P500 1,410; NDX 2,500.

A TIME FOR PATIENCE and REFLECTION

Most markets including the Trannies and Industrials are in Grand Super Cycle Giant Megaphone topping out formations, which are the perfect formation for a GRAND BULL MARKET TRAP. The most I can see is another 5% to 8% advance. But given what I know about INVESTOR mentality (that they cannot turnaround their thinking on a dime), trying to capture another 5% while risking 30% to 50% is just not prudent investing and just NOT worth it. The markets, having exceeded their highs, now give the impression that it is clear sailing ahead. This is exactly the way it is supposed to happen as the Deaf, Dumb and Blind Lemmings cannot see the cliff directly ahead. That's why its called a TRAP.

What is coming is exactly what you pay me for: To not only warn you what lies ahead, but more importantly give you enough time to sit back and think so you can make intelligent non-emotional decisions.

GOLD

While a period of correction and consolidation has been expected by everyone except me since December, now that my end of the year 2010 targets of $1,250 to $1,500 Gold and $50 Silver have been reached, it is now possible that Gold and particularly Silver may be overbought in the short term. However, absolutely nothing has changed with regard to the primary fundamentals driving the Gold and Silver markets. Contrary to non-evidence based assertions that the recent price gains were purely due to "speculation", recent rises are largely due to supply and demand fundamentals from both private individuals and Central Bank buying. Price increases are directly due to increased and robust physical demand for the precious metals due to inflation concerns, concerns about the debasement of the Dollar, the Euro and paper currencies, sovereign debt as well as geopolitical concerns that are looming ever larger in importance.

The recent buying and the taking delivery of $1 Billion in Bullion by a Texas State Pension Fund is just the first of many to come. Institutions with a total pool of $100 Trillion in assets, have less than 0.3% invested in Precious Metals: If only 5% eventually get allocated to Gold that represents $5 trillion in new buying. 10% is $10 trillion and we still have mutual funds and insurance companies whose funds are similarly invested.

My 2005 GOLD projection of $6,250 by 2017 still stands and if anything, I am more comfortable with my projection than ever.

SILVER

The Chinese and others want out of dollars and they will continue aggressively purchasing both Gold and Silver in order to diversify. They don't care whether Silver is $50, $60 or even a $100; they will just continue accumulating. The Chinese have until lately been patient buyers, accumulating on weakness, but you can bet that their relentless purchases of physical Silver will eventually push the price well over $100 an ounce. They are flexing their muscles and warning Geithner that they will not take the USA's debasement of its currency and their losses on their US Dollar Bonds lightly.

More and more, major investors are beginning to recognize that the greenback is losing its status as the world's most favored safe haven currency as well as its Reserve Currency Status and they have absolutely zero faith in Washington to solve our nation's mounting fiscal and foreign political woes. So stop worrying about any potential corrections, since they will only amount to EXCELLENT BUYING OPPORTUNITIES. Buy some Puts to protect your profits and or sell OPTIONS against your long positions; if you can't sleep at night and can't stand prosperity, but whatever you do, DO NOT SELL YOUR CORE POSITIONS. Corrections to a Bull Market, is like breathing. You must Breathe if you want to continue to live. Bull markets must correct. They are a blessing to the prepared.

GOOD LUCK AND GOD BLESS

I have spent my entire 45 year career trying to identifying major trends in the markets and helping my self and others to profit from them. These are trends that will be happening in the near future; trends that most analysts and investors notice only after they have already been well established and we have made the majority of the easy money. In my newsletter, "UNCOMMON COMMON SENSE", once I uncover potential changes to the major trends, I then present specific, actionable recommendations that will help you profit even during the worst of times and long before they become obvious.

We are coming into the most trying times in our nation's history. Is now the time you want to be going it alone?

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
[email protected]
561-840-9767