Please Don't Shoot the Messenger

TORTURE

Can the Government Save Us? Trading this market, is like torture, while not quite as bad as water boarding, it has been akin to that well known Chinese water torture. Everything is range-bound and down while being ultra news sensitive. So much of the market's direction depends on how the banking mess is handled. The longer the banks languish under the burden of toxic debt, the longer the credit crunch and market uncertainty will last. Every time the market attempts to rally, Obama makes a speech and the market goes down 500 points. I am afraid that this Chinese water torture will continue until the government finally comes to the realization that re-capitalizing banks, while attempting to support real estate prices, is actually working at cross purposes. It won't solve the problem and it will just extend the torture. Have the Japanese and our own S&L situations not taught us anything? Getting the illiquid toxic assets off of the bank's balance sheets is the only workable solution. Then and only then can the banks come up with audited statements and go about raising private and public capital for themselves, while getting back to their business of making loans. They don't need the incompetents in Washington grandstanding and trying to dictate how the banks should be run through their constant congressional hearings. Trying to force the banks to give 30 year, 4% mortgages to people who have defaulted on their mortgages is the real reason why the banks got into trouble in the first place. It's time to wake up and smell the roses.

The Cure for Recession is a Recession: A Recession is the easier and safer way in both the long and short run, to correct all the imbalances that have crept into the system over the last 25 years. Unless they are allowed to self-correct, Recession will turn into Depression!

CURRENCY DEVALUATION

In the not to distant future, this country will undergo a massive devaluation of its currency as it attempts to print its way out of the Economic Recession. In the long term, it is a doomed policy, but that doesn't mean we should blind ourselves to it. Politicians do stupid, expedient things for themselves all the time, that impact the markets and shutting our eyes to it because we don't agree with it just doesn't make sense. The government may not learn from history, but I (we) do and history is speaking loud and clear.

This all goes back to Alan Greenspan. If he had kept rates steady in 1998 instead of lowering them, he would have spared us two asset bubble crashes, the tech wreck of 2000 and the housing meltdown of 2007/08. But he let his rock star status go to his head and he forgot that his job was to make the hard decisions. You take a little pain now and avoid a whole lot more pain later. History will not be kind to Mr. Greenspan's legacy.

Mr. Bernanke made the same mistake as Mr. Greenspan did. He started and rightly so, raising interest rates from 1% to 5.25%, but then as the economy started to slow, he chickened out. Had he stayed the course, we would had a mild recession and we would not have had the massive real estate bubble.

I have some doubt as to whether or not our country will weather this storm and many of our fellow countrymen will experience gut wrenching economic hardships before it's over. For a lot of Americans, the much vaunted stimulus package will not arrive in time and what is worse, it won't work. Pork is pork no matter what you call it. True Stimulus is investment that ends up paying for itself. If it does not pay for itself, it becomes a huge burden in both the short and long run as it takes resources from wealth producers in the short run and must be paid for in the long run, resulting in higher interest rates and inflation.

Pursuing our current strategy is the exactly the same as the consumer who keeps applying for more and more credit cards so they can keep kiting and swapping their checks and debt from card to card. Eventually the debt has got to be paid. There are only three ways to manage the debt: Take on ever increasing debt (this is our current strategy), or spend less and borrow less and/or earn more without spending or borrowing more. That's it, there is no magic bullet ... it's not rocket science.

As the Government's attempts to sell ever increasing amounts of Treasury Bills and Bonds, they begin to compete with the economy's borrowing requirements and as the foreign demand for all this increasing debt shrinks, the Fed will be forced to print money to buy the bonds to make sure the Treasury auction does not fail. The result is higher Interest rates and rising inflation as the debt gets monetized and the "out of thin air" money floods into the economy. A more sensible approach to getting the economy growing again would be to lower employment costs and encourage private investment. This can be done by first instituting an accelerated depreciation, 100% write-off for the next 5 years in conjunction with a cut in the corporate INCOME TAX rate to 20%. Twenty percent of something will end up collecting a lot more revenue than 35% of nothing, which is what will happen to corporate profits if we end up in Depression or even just stay in Recession. The same is true for Capital Gains Taxes. If the market does not recover, how much Capital Gains will there be on which to pay the higher tax rates? Small businesses employ two thirds of the American workforce and create two thirds of all new jobs. This kind of innovative tax policy, in conjunction with stopping all the anti-business rhetoric, would bring about the kind of business confidence that would start a new round of real investment and wealth creation. Incentivize American ingenuity and then get out of the way. After all, the "next big thing" is out there and I would bet my last dollar that it will be an American who comes up with it. One thing for sure, it won't be that bunch of lawyers in Congress picking and choosing who get what grants on the basis of politics that will succeed in picking any real winners.

MUNI BONDS - SAFETY PLAY OR SAFETY TRAP

The historic plunge in real estate values, which is by no means over, has resulted in a drastic decrease in state revenues. To make matters worse, the states have also suffered from the plunge in the stock and commodity markets that decimated all their employee pension funds (obligations that the states did not have back in the 1930's). If all that is not enough, they also have a tremendous shortfall in sales tax revenue due to the increases in unemployment and what's more, a resumption by the overall public in increased savings. In the last quarter alone, the American savings rate jumped from -1% to over +4%.

DANGER: Even though most city and state government debt is still being considered along with Treasuries as being safe, how safe can they really be if the monocline companies that insure most Muni's are on the verge of bankruptcy? Don't be confused by their popularity; the same people who buy Muni's are the ones who invested with Madoff. I am not trying to imply anything nor is there a connection except that most Muni investors pay about the same attention to their Muni's as they did to their Madoff investments. The majority of the frauds and mistakes are always discovered at major turning points. We are coming to the end of history's largest 25 year Bull Market in Bonds. Do Not Take Anything For Granted.

This time around the wealthy as well as the super wealthy are being hit like never before. Not only are their real estate and stock portfolios being decimated, but their dividends are being cut and/or completely eliminated. If all that is not enough, they are some are being caught up in one giant Ponzi scheme after another and to top it off, now the government is out to get them as well. The only investments that have not crumbled are their Treasuries and Muni Bonds. Up until now, the rollover of their bond investments were taken for granted, but that is about to come to an end as the ever increasing demand for cash by all levels of government and businesses hits the proverbial brick wall. We are still only in Recession, but once the Depression hits (sometime before the end of 2009 or early 2010 at the latest) the Muni default rate will end up exceeding the 30% default rate of the 1930's. WATCH OUT!

SOCIALISM vs. CAPITALISM

With the whole western world and especially the USA now moving quickly towards Socialism the government printing presses are working 24/7 in order to help print enough money to keep up with all the spending; while the opposite is about to take place in Israel. The victory of Benjamin Netanyahu will usher in an era of tax cuts and less government intervention in the daily lives of its citizens, allowing the free market to work as it should.

We are actually about to witness a real life "Battle of Economic Philosophies." Keep in mind that the US entered Economic Armageddon a full year before Israel did, so first in first out may apply but I really don't think it will. Either way, we may get a real feel of which economic system works better. According to a Bloomberg report, "There will be a certain amount of deterioration before we can turn around the economy's direction," Netanyahu said February 23rd at a meeting of Likud lawmakers. "We face an economic crisis that we haven't seen in many, many years." Netanyahu, 59, has vowed to lower Israeli taxes just as he did as Finance Minister some 20 years ago. During the campaign, he also promised to liberalize the real-estate market, saying that the Israel Land Administration's near-monopoly inflates housing costs.

As a betting man, I would take the Netanyahu tax cutting and privatization plan hands down over tax hikes and nationalization of banks and industry. Netanyahu has always maintained that tiny Israel, despite not having any natural resources to speak of, would become one of the world's richest nations, and everyone scoffed. Now if tax cuts boost economic activity, Israel will truly turn into be a 'light unto the nations" as God always meant it to be.

Sadly, George Soros thinks our current crisis signals the end of the free market model. Trying to allocate resources better than the free markets is an impossible task and one that has never yet been accomplished, country or entity, large or small but Obama seems to think he can do it. Ironically, the only capital market participants that are being helped are the short-term traders. Over the last month, the Obama Administration, every time he makes a speech, has created several of the easiest "Buy the rumor; sell the news" trades in a very long time and there are more to come.

A HISTORY LESSON

When looking into the past, be careful that you don't get caught up in the politically correct misinterpretation by concentrating on the economic truths of the era that you are examining, as they speak much clearer than the emotionally politically correct noise. When it comes to the stock market, I have often pointed out to you that when looking at the charts, you must pick the appropriate time frames to which you want to compare today's charts to. In all of my past missives, while others were wont to choose 2003, 1992 or 1987 and even a few eventually chose 1973/74, I have always maintained that the times were most similar to the late 1920's. Today more than ever, I am convinced that we are in a pattern similar to 1929 -1932 and I am still looking for that last 1930 type suck-in rally that trapped everyone, including all the bears, into thinking that the 50% sell-off in 1929 constituted the whole of the Bear Market. Don't be fooled! Any coming rally will be similar to the 1930's rally and not mark the end of today's Bear - the crash of 1932 still lies dead ahead.

After a weekend of watching the Government's Brainy Master Planners at work and listening to the likes of Barney Frank, Chris Dodd et al spout their wisdom and assure us that the American people have been taken care of and that 4 million jobs will be created (or saved, how do we measure that), I have no way of knowing if all that was intentional deceit or just out and out stupidity. Every program on the Liberal wish list was thrown into the budget but as far as I was concerned, that was the last nail in the coffin confirming my Depression analysis.

The policy mistakes, combined with all the negative Obama politicking (doesn't he realize that he has already won the election), made it impossible for a rally to get any traction. Even a 90% up day could not get one day of upside follow through.

THE BUDGET

Can you imagine that with only a month in office, the projected deficit is already $1.75 trillion on a $3.75 trillion budget? I can't even fathom what it will really end up being once the Congress gets through with all its supplemental spending bills and additional bailouts that we don't know about yet; combined with what I am sure will be a tremendous shortfall in revenue (tax receipts). All I can think of is, "Stay Bearish and Buy Gold."

TECHNICALLY SPEAKING

Within the last few weeks, we have had a DOW THEORY long term SELL confirmation. To top that off, last week we had the 20 month moving average cross below the 40 month moving average giving us a most reliable of all, long term confirming SELL signals, not seen since 2004 buy signal. The icing on the cake came this weekend when Warren Buffett confirmed that he too thought that the biggest bubble of all, the Treasury Bond Bubble, was over-ripe and will soon be headed for a major disaster along with the economy.

STOP LOSS ORDERS

I hope that you have all learned the most valuable of all lessons: USING THE OPEN ORDER STOP LOSS. Although I have been over-estimating Obama's political skills, and have been wrong in expecting a fast short covering 1500 to 3000 point rally for the last month or so; But because I used stop losses in conjunction with Strangles and one winning pick, IBM, I still managed to end up in the Black with all my cash and expanded Gold positions in tact.

ELLIOTT WAVE THEORY

Getting back to the technical picture, the consensus among Elliott Wave analysts is that the Market topped out in 2000 and is now in Wave C of WAVE (IV) with a downside target of 6000. I, on the other hand, was in some disagreement with the consensus but rather than confuse the issue, I went along with it since the short term projections were all most identical (both very Bearish) and not worth arguing about it at that time. However, I am now much more Bearish on the American Economy, its Stock Markets as well as the World Economy and its stock markets including China. So I think it may be appropriate for me to outline my readings of the DOW JONES for your perusal. In general, my readings call for a longer, stronger and more persistent Bear Market.

In general, I believe that the market topped out in 2007 at 14,400, not in 2000 as most Elliott proponents believe. We are now in Wave 5 of Wave A of WAVE {IV} with a projected bottom for Wave 5 of A being in the 4000 to 5000 area. Wave B up that follows will be a 3800 to 7000 point rally lasting as long as 1 to 1.5 years. It will then be followed by that devastating Wave C crash similar to the 1932 crash whereby the DOW will lose 90%+ of its value and go down to between 400 to 1400. You can call this my alternate count, which you may think is so similar that it's not worth arguing about. I agree, maybe it's not, but the main difference is that the coming contraction will be a lot longer and stronger than the 1930's. The viability of the USA is at risk and the stage will be set for WWIII. That is the main reason why I am bringing my count up at this time. We are not just talking about money. We are talking about our whole way of life. If WWIII ends up being a nuclear war, we may be talking about the viability of our planet.

HOW NOW DOW?

I must admit that I am somewhat at a loss. I have been trying to pick the beginning of a corrective 1500 to 3000 point rally for the past 6 weeks or so. Though we have held our own and even made a few dollars, it makes me uncomfortable. So what is the cardinal rule? "When in doubt stay put." So I am staying put for now. You can continue with the one strategy that has been working, you can buy some Strangles or Straddles. But for me, I am staying in cash and looking to buy some High Paying Dividend stocks by putting open order buys on NAT at $22, ERF at $13 and I will let you know when I find any others that I like.

SUGGESTED TRADES: I know that I am being foolish since the only thing that I have to go on is how deeply oversold the markets are, but that could just as easily be a sign that the Market is about to crash. I am putting a sort of Strangle on, by buying the 3 X Small cap ETF; 100 TNA mar $12.5 call (tnacv) at $1.00 while going short IBM which is sitting right on both the 50 and 10 day moving averages, by buying the IBM 100 mar 85 put (ibmoq) at $1.50 (You could do a strangle on IBM just as well: Buy the Mar 90 Call and buy the Mar 85 Put for $4.00.)

I am buying the TNA call because we could get a tremendous move should we get the rally that I have been expecting because of the 3X leverage. I don't want to take a chance on an individual stock because of the potential of a bad news announcement on any stock.

GOLD

Again, unlike most analysts I urge you to go to my archives and reread my past letters since they all contain valuable lessons. If followed, they mean the difference between profit and loss. Take my recent calls on Gold as an example: Back a few months ago, when Gold looked like it was on the verge of breaking down and most analysts, including a great many Gold Bugs, had turned Bearish and were dumping stocks as if Gold was going out of style, I stood front center and called for a bottom in Gold in the $675 - $725 buy target. I also told you to load up on the Juniors, some of which like NXG at $.50 were selling at 1X cash flow. Among the Mid Caps and Seniors that I recommended in my letters were AEM KGC IAG FNV.TO that all tripled and if you bought the DGP instead of GLD, you almost doubled your money. On a shorter term basis, on February 1st as Gold approached $1000, I advised you that the Bullish consensus was getting frothy at 99%. I SUGGESTED SELLING OPTIONS ON ALL YOUR POSITIONS INCLUDING GLD, but not to sell out as the downside was limited. The one thing that you don't want to let happen is to get out right at the top and discover that the sell-off was not large enough to allow you to get back in. Don't forget that there is still another 8 years minimum left in this GOLDEN BULL and my target is $6,250.

SUGGESTED TRADES: My downside targets for GLD is $85-$90, for NXG it is $1.00 - $1.10, for AEM it is $45, for EGO it is $7.00 & for RGLD it is $33 - $36.

The worse the economy gets, the stronger the case for Gold becomes. I did not just pick my $6000+ target for Gold out of the blue. I chose it in conjunction with Elliott Wave, the Historical 16, 18, or 20 year cycles as well as my call for Recession 2008/Depression 2009-10 way back in 2007. Reread my article on the Kondratieff Winter. I do not make just day to day analysis. Everything I do involves short, intermediate and long term history plus my constant study and evaluation of Human Nature. Whatever you do, don't become penny wise and pound foolish and not renew your subscription because you may think that it's OK to read it for free 2 weeks later on gold-eagle, you would have missed all the important calls on Gold over the last 6 months. The next few years will be the most trying times in our country's history. Do you really want to go it alone?

NOW IS NOT THE TIME TO IGNORE POLITICS, NOW IS THE TIME TO GET INVOLVED. You and your family's life may be at stake and I for one do not want to leave my fate in the hands of those idiots in Congress (I am referring to both parties.) By 2010, we must throw the bums out and get some new blood.

WAKE UP: If Congress' approval rating is only 10% or 1/3 of what President Bush's was, why are we re-electing them? Because they bring home the pork? In order to do that they have to make deals with all the rest of the pork carriers to the detriment of our country. They are all dishonest!

GOD HELPS THOSE THAT HELP THEMSELVES

Since most of my loyal followers have been making money for the last 6 years but especially during the last two years; while most investors have lost between 28% at best and 68% at worst, don't you think you owe it to your friends to introduce them to UNCOMMON COMMON SENSE? And don't forget to renew and/or extend your subscription.

The one-year subscription is a reasonable $259 and a two-year subscription is a modest $449.

Existing Subscribers can still extend their subscriptions at their original rates. It is my way of saying thank you for your loyalty and helping me get this letter off the ground.

 

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