Dr Baltin on the Markets

INFLATION: US Central Bank accused of unleashing an inflation shock that will rock financial markets: Barclays Capital has advised clients to prepare for a worldwide financial storm now that the FED has allowed the inflation genie out of the bottle and let its credibility fall "below zero". There is an inflation shock already underway, which will be very negative for financial assets. US headline inflation could hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a price/wage-spiral. If it hesitates, the bond markets will crash.

RECESSION 2008 Does anyone really still believe we are not in a recession? If you’ve arrived at the conclusion that we have 6 months ago, then you need also realize that the Government numbers simply do not coincide with reality. The problem is that we are in a paradigm shift. Those that are viewed by the public as “experts”, the brokers, analysts, paid economists, agents, mortgage lenders, and pundits are, to a large degree, charlatans. The fact that we now stand with oil at $140 a barrel, the U.S. Dollar tanking, the housing market collapsing and the three domestic American Car companies sitting on the verge of bankruptcy, the consumer is at his wits end and they are telling us that the worst is over and happy days will be here again as soon as Obama takes over.

DEPRESSION 2009–2010 No matter how many soothsayers of high finance proclaim that all is well and no matter how earnestly the President sets to work to repair the damage with massive bailout packages, a major depression is already baked into the cake. The proof of what I am saying is how quickly Congress is cooperating with this (hated) President in passing his stimulative packages, realizing full well the dangers that their expected new, Democrat President will face. What neither Republicans or Democrats realize yet is that “Doing more of what got you into trouble in the first place (printing money) is the Definition of Insanity” We are now in an equivalent period to 1929 with a DEPRESSION lurking just over the horizon.

DISASTER IN THE MAKING Fannie and Freddie have caused Investors to take their eye off the slow-motion disaster engulfing the US bond insurers or "monolines". Together these firms guarantee $170bn of structured credit and $1,000bn of US municipal bonds. MBIA and AMBAC after having already been downgraded: The risk is further downgrades, which could set off a fresh wave of troubles, as the creditworthiness of a great many US financial institutions will be tested in coming months. An economy that runs on credit cannot prosper when credit is being restricted as lending requirements are sharply increased and strictly enforced as the financial institutions attempt to repair their Balance Sheets. Although the DOW is already down 20% from last year’s all time highs, there is still Wall Street propaganda telling us that our financial problems have run their course and all will be well. They refuse to realize that, although companies have written off about $391 billion in bad loans, they are still looking at as much as $1 trillion more before they are done? What about those pesky option ARMs that are starring us directly in the face as well as Credit Card and Car loans? We are quickly approaching the psychological end game. The farce will be up soon because there is simply too much debt floating out there in the market. It just NOT sustainable. The cracks are already being seen in the credit default swap market and derivatives are swimming in a market of multiple $ trillions. It’s time to solidify your assets and make sure that safety is utmost in your mind for the balance of 2008 and beyond. This is the year when the Sh-t hits the Fan. This will happen no matter what the financial engineers say in their Pollyannaish models and projections. Economists, quoted in newspapers, blamed the market’s recent drop—on the rise in oil prices. And still Government will not face the facts as Prlosi blocks a vote to allow drilling as they waste their time investigating oil companies and looking for scapegoats among speculators, while attacking a President who is not running for re-election. Their repeated assertions are absurd. Oil has been going up since 1998, increasing an amazing 13 times in value and yet the Dow Transports have recently made a new all-time high! This is the one index above all others that one would surely agree is the most “sensitive” to oil-price changes. Do we now have to conclude that soaring fuel prices is a boon to transportation? As I have repeatedly stated, the rise in all sorts of financial market prices is due to the speculative orgy of rising “liquidity” by an unfettered expansion of easy credit and unrealistically low interest rates. If you pay people to take risk, they will. You always get what you pay for. The coming top in oil prices and commodities will probably mark the end of the last major financial craze of the past 20 years, which in turn will signal the end of the severely compromised, but not-yet-defeated, easy-credit environment. Recently the Chairman of the FDIC reportedly said that “the credit crisis is in the "seventh inning." The talking-heads, economists and the drive-by media – will keep right on promising investors that "The Worst Is Over!" We started hearing those assurances more than a year ago. But are they any more credible now than they were then? In truth, the worst will be "over" only after we see the BLOOD IN THE STREETS. Go back and read the financial headlines all during the 1929–32 crash.

PROSPERITY is and has always been more than just about economic conditions, IT IS ABOUT A STATE OF MIND. The foundation of the Big Bull Market was laid down by Ronald Reagan and was a lot more than just the climax of one cycle and beginning of a new business cycles. As a matter of fact, Reagan’s Presidency began by creating a recession in order to curb the massive inflationary and economic dislocations created by the Keynesians (Nixon, Ford and Carter) and the country’s complete lack of confidence highlighted by Carter’s inaction to 445 days of our Embassy hostages in Iran. Now, after eight years of Media and Government anti-war and anti-business haranguing, we have finally passed the highs of the cycle in American mass thinking and mass emotion. It now seems that after barely a few months of stock market sell-off after reaching an all time high and a minimal 0.5% increase in unemployment to 5.5% (as compared to an average 6.1% unemployment rate during the Clinton years), there is hardly a man or woman in the country whose attitude toward life in general has not been affected by the sudden and brutal shattering of hope. . With the Big Bull Market gone and prosperity a faint memory, Americans now find themselves living in an altered world, calling for downward adjustments to their standards of living (new ideas, new habits of thought, and a new order of values, all involving personal sacrifices, coupled with a general lack of hope and a fear of the future). What the country desperately needs is a leader that can re-ignite the CAN DO attitude that only Americans can muster and what makes AMERICA unstoppable. Unfortunately, I see no such leader on the horizon.

UNCOMMON COMMON SENSE covers a lot of markets, but we never sugarcoat anything for anyone. Whether prices trend up or trend down, I describe the opportunities and risks along the way. The trend's direction does not define successful investing for me, – anticipating that direction does. I didn't just suddenly recognize the crisis: I have been talking about “IT” when virtually no one else was talking about it. I spelled “IT” out in detail and what the reaction would be beforehand in letter after letter. And there's more DESTRUCTION to come, because the "worst" is NOT "over." My job is to keep my subscribers on the right side making money and protecting their assets, so I invite you to subscribe right now to the information source for independent-minded thinking investors who can appreciate getting tomorrow's news today.

Has the time come TO EMBRACE Socialism?

Will we find the answer in the June 2nd issue of Time magazine, which is staffed by socialist ideologues who display little or no evidence of ever having studied economics at all. The second paragraph of "How the Next Presient Should Fix the U.S. Economy," by Justin Fox, explains the real problem as Time sees it:

Americans enjoy too much economic freedom. The natural solution therefore, is to strip them of their freedom with higher taxes, more regulations, and greater regimentation of their lives. The cause of all of today's economic problems, says Time, is of course Ronald Reagan, who supposedly cut taxes, went about "slashing regulation," and preached "the gospel that individual Americans were better suited to make economic decisions than bureaucrats in Washington were." Where on earth did Americans ever get such a crazy idea? But there is hope, says Time. "There are signs that … America's 25-year love affair with tax cuts and deregulation" is ending. One reason for this is that the federal budget is "way out of balance." According to Time, the fact that the Bush administration has been even more spendthrift (on domestic spending as well as military) than the notorious Johnson administration, and has accumulated huge budget deficits, is evidence that Americans have too much freedom and too much money in their pockets. They need to be taxed more severely in the name of budgetary "balance." Not one word is devoted to the idea of Government cutting spending of any kind by even a single dollar, let alone abolishing entire Government bureaucracies .

Then there are "soaring energy prices," caused by increased worldwide energy demand, coupled with sluggish supply growth that has been blocked by environmental regulation. This would include the regulations that prohibit oil exploration in 85–90 percent of the Outer-continental Shelf off the Atlantic and Pacific coasts, as well as in most of Alaska. Even though regulation has caused this problem, the "solution," according to Time, is more regulation of the energy industry.

A third reason for "hope" that Americans will give up their economic freedom is the housing crisis, which again was caused primarily by the Fed-generated boom-and-bust cycle, with a little help from the Government's thirty-year policy of forcing banks to make bad loans to non-creditworthy borrowers under the Community Reinvestment Act. Time wants to blame it all on the free market and makes no mention at all, of the role of monetary policy in generating the housing-market crisis. They also make no mention of the Government completely gutting the Securities Act of 1933-34.

Health-care costs began spiraling out of control as soon as government became involved in the post–World War II era, especially with the advent of Medicare and Medicaid. Health care and health insurance are arguably the most heavily regulated industries in America; decades of cost-increasing regulations have been the main cause of the "health care crisis" that the Socialist ideologues at Time are so worried about. Government control of health-care markets is the problem, therefore the obvious "solution" is even more Government control of health-care markets, says Time.

Time's Justin Fox presents a tired, old laundry list of failed socialistic interventions. These include:

• Protectionism
• More income "redistribution" (a.k.a., legal theft) via the tax system (i.e., "heavy taxes on the rich") More pork-barrel "infrastructure" spending — and higher taxes to pay for it and an additional round of tax increases "to close the budget gap" (which of course tax increases never do)
• Yet another round of tax increases on oil, gas, and natural gas to "steer" consumers away from these items More tax increases still in the elimination of the mortgage-interest deduction which "costs the government about $80 billion a year"
• And, of course, socialized medicine, the tax increases for which would entirely swamp all of the previously mentioned tax increases. (Time promises to explain how to "make universal health care work" in a separate article. I can't wait.)

What Time's "fix" involves is essentially the Sweden-ization of America, where the average working family would be handing over 65–70 percent of its earnings to Government bureaucrats with regulation-induced price increases eating up perhaps another ten percentage points. This all needs to be done at the very beginning of the next administration, moreover for "putting off change won't be an option much longer." It is a perfect recipe for impoverishing America.

NOTE: CARBON CREDITS is simply a back door excuse to raise taxes in the name of saving the planet. Just like the FICA tax increases of the 80’s that were supposed to permanently fix Social Security, was in reality just a back door scheme to increase Income Taxes and Government Spending.

As far back as Nov 2007, I forecast an end of the Bull Market in stocks, beginning sometime between January 2008 to the end of May at the latest. However, even I didn't expect things would get as bad as they have this quickly. The S&P 500 has fallen nearly 20% since the highs. All told, stocks posted their worst June performance since the Great Depression. Yet most pundits seemed shocked by this and are still in DENIAL despite the fact they admit that we are in the worst financial crisis since the Great Depression.

HOWEVER THIS TIME AROUND AMERICA IS IN THE WORST FINANCIAL SHAPE IN ITS HISTORY

Leading the pack downward, as expected, were Financials and Real Estate. The Financial ETF (IYF) fell an incredible 18% in just the last few weeks led by Lehman Brothers (LEH) and Citigroup (C). Ironically, these were the first to pronounce the worst was over back in March as they each were forced to raise capital and one by one their stocks fell to new lows, lower than the prices at which they raised their new money. What’s truly incredible is that as recently as early May, they were issuing buy recommendations until Late June when Goldman Sachs finally admitted to being “clearly wrong” and Barron’s has admitted it was dead wrong to advise buying AIG (AIG) in February. As far as I can remember, Wall Street has NEVER admitted to being wrong. Therefore I expect big problems in the not to distant future. Most of their 1st Q profits in the sector came from over the counter derivatives—non-regulated investments— and primarily fuzzy accounting which involved under reporting debt, write-downs or moving rapidly depreciating assets to Level 3 to get them away from market valuations. Given the self-deprecating admissions from Wall Street analysts, it's clear the market has caught on that the worst was definitely not over in March. It's not over now either. The primary revenue streams for financial firms like lending, M&A, and debt issuance— have just about dried up and so I expect 2nd, 3rd and 4th Q results will not be pretty. Leave catching the falling knife trick to others.

EMERGING MARKET WEALTH

The emerging markets are essentially gaining at the expense of the western economies who have chosen, in their drives to buy votes, to consume and not save. Thanks again to John Maynard Keynes influence in controlling both political parties through the almost complete control of our institutions of higher education, especially their Sociology Departments. In effect we have been convinced that consumption, including the eating of our seed corn (Investment capital), is the road to prosperity rather than by Savings and Investment being the pathway too a better future. After 20 years of negative savings, we have consumed all our seed corn and in order to continue our wasteful spending, we have amassed a huge indebtedness to foreigners which is starting to wreak havoc on our currency, which in turn is one of the main reasons the price of oil and other commodities are in such a steep rise. But the fact that the U.S. and Europe combined comprises only 25% of Chinese exports is proof positive that decoupling is, in fact, in process and why energy and copper prices and don’t forget GOLD are continuing to rise, even as the U.S. and Europe are in recession! However, the metals and agricultural stocks are in only a cyclical correction and not part of the bigger and much more dangerous structural bear market. “The Piper must always eventually be paid.” “Each according to his need not according to his deeds” has proven to be a very popular and long lasting slogan. But that’s all it is, a slogan that history has proven over the last 100 years does not work. Hopefully it will not take more than 4 years to re-learn that lesson.

WHERE TO NOW?

I think that I should re-emphasize the fact that the stock market peaks well before the economy does: Most of us are aware or should be that the stock market is a leading indicator of the economy, but that point keeps getting lost on Wall Street and the media, perhaps because they all seem to be focusing in the rear view mirror. Ever since the market peaked last fall, the media has presented a parade of economists arguing that the economy was still on a sound footing. I remember seeing a headline "fear versus fundamentals" back in January which was repeated again just this past week on CNBC. The implication being that the market was falling on "fear" instead of "fundamentals". With the stock market having had the worst June’s since 1929, we're now starting to get confirmation that the economy is indeed in bad shape. It's a little late, but it’s not too late to protect yourself. That's why I study the market and ignore all of the media, economists, and Wall Street talking heads and/or actually use them as contrary indicators.

We just got a new intraday low for the Bear Market from October 2007's all-time of 14,143 We got large price moves of up, down up on Wednesday and Thursday, There is the possibility that wave {a} of 2 up topped intraday Wednesday, that wave {b} down completed Thursday intraday, with wave {c} up starting Thursday afternoon, a 3-3-5 flat correction for wave 2. Not very impressive so far if that is occurring. Once wave2 completes, a dramatic decline should follow. There is an alternate possibility that the action this week is a small degree wave four with a sharp decline on its way sooner rather than later,.

A Bullish scenario: We are at a short term crossroads, The last time we had oversold readings like we have now was August 20/07, and that led to a 1,000 point, rally into October 2007's all-time high. While I normally would call for a strong rally here, terrible declines can occur from these levels. Since we are now in a Bear Market. The last time we had such readings was April 16th, and the Industrials have fell 1,500. and we caught 1,100 point of the decline, and so I remains on a sell.

BEAR MARKET READINGS AND INDICATORS

A bullish take on the stock market would be that (1) market indicators are extremely oversold, (2) there is a triple bottom setup on the S&P 100 Index, and (3) sentiment polls show a high degree of bearishness. While I agree that those conditions exist, we are in a Bear Market and therefore we must compare them to Bear Market numbers and not to the past 20 years of Bull Markets since these conditions can easily transition into a crash. The reason, as I have said many times before, is that bullish setups don't always work so well in Bear Markets and an oversold market can very quickly become significantly more oversold. We are in a Bear Market and it is suicide to try to take positions anticipating the next rally merely on the sole evidence that the market is very oversold. In actual fact, conditions are such that a sharp decline could materialize at any moment. A decent tradable rally will not take place until we see a lot more FEAR and Capitulation Selling! It may be too late except for the very nimble to go short here. Wait for a sharp sell-off on heavy volume before attempting to BUY for what may be a tradeable rally. USE close stops or buy options. That Rally, when it comes, WILL NOT MARK THE END OF THE BEAR.

NOTE: One Idea for the speculative inclined would a straddle or a strangle (out of the money puts and calls)

GOLD

What more can I say at this point; the US $ is going down and could crash at any moment BUY GOLD. Or if you want more leverage, you can buy the DGP which is double Gold (like an option without an expiry date) OR if you want still more leverage, the GLD now has options. You can buy Gold futures and or options BUT what ever you do protect yourself against a crashing $. You all know that I am buying Gold Coins for cash every chance I get and I don’t worry what the price is on that day.

The Juniors are at record lows, If you own them, it’s time to double down; if you don’t, you can start accumulating your favorites. Or buy the ones that I have previously listed: Or you can stick with a leveraged Gold position, they will not go up without GOLD going up. The same holds true for SILVER . For those that are interested URANIUM stocks are starting to show some life of late but just barely.

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GOOD LUCK AND GOD BLESS

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Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

Palm Beach Gardens FL. 33418

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