News that Moves: Market Rally Sustainable?, Tedbits/Jim Rogers, Hedge Funds Turn to Gold & The ETF GLD Fraud

RCM Comments: As I write this, the equity markets are up over 5% and all the bobble heads on TV are trying to call a bottom. For days now, as the "Obama" bear market gained steam there was a rising tide of bottom callers, most of whom point to major oversold reading to justify a rally. While a rally can materialize at any time, the real question is sustainability. I won't begin to speculate on the answer, but I will say that while I agree we had major oversold readings on many indicators we also had surprisingly mixed sentiment readings that are not common at market bottoms. We will certainly need to monitor the situation closely, but I will say that this rally resembles other short covering rallies we have experienced over the last 7 months or so that have only led to new lows. Most often, markets bottom with capitulation or boredom. We have not seen capitulation, and by boredom I mean a reduction in volatility and sideways movement in a tight trading range that lasts for a while. The behavior of the market over the next few days will give us better insight as to the true direction; until then, here are a few thoughts from sources we respect that may help keep everything in perspective.

TedBits: The only reason they (Obama administration) are reducing the deduction for charity for those earning over $250,000 dollars, at a time when we need charity more than in the last 70 years, is so the people relying on charity will have to rely on government.

And...

Two hundred and fifty-two US commercial banks and savings institutions with total assets of $US 159 Billion were termed problem banks at the end of last year by the Federal Deposit Insurance Corp. The FDIC insurance fund has fallen to $US 19 Billion from $US 52 Billion at the end of 2007. It too is broke.

Obama’s Making It Worse - Maria Bartiromo interviewed Jim Rogers, and when she asked, “What do you think of the government’s response to the economic crisis?” he said . . . “Terrible. They’re making it worse. It’s pretty embarrassing for President Obama, who doesn’t seem to have a clue what’s going on - which would make sense from his background.”

Jim classically continued . . . “And he had hired people who are part of the problem. Geithner was head of the New York Fed, which was supposedly in charge of Wall Street and the banks more than anybody else. And as you remember, Summers helped bail out Long Term Capital Management years ago. These are people who think the solution is to save their friends on Wall street rather than to save 300 million Americans...We’re going to have social unrest in much of the world. America won’t be immune."

RCM Comment: I would like to take this opportunity to welcome the crowd to the investment theme of precious metals. Our core belief in this theme over the last three years has helped lead Rosenthal Capital Management's direction of the Fortune's Favor Family of Funds. That direction has resulted in a rather dramatic outperformance vs. the markets and our peers. For those of you who have enjoyed this theme with us I will offer a note of caution: With the crowd comes big upside opportunity but also even bigger volatility. So, as I have written before, "please hold on to the Bar."

Hedge funds turn to gold - FT FT reports Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks. The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital... Other funds looking at gold include Eton Park and TPG-Axon, investors said. Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies. "The size of the Fed's balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed," Mr Einhorn wrote in a recent letter to his investors. "Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself." Mr Einhorn's comments -- and the revelation he is buying gold itself -- are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the FT that he had never been so busy dealing in gold for large investors in his life. (See 8:51 comment)

Bearish big investors catch gold bug - WSJ
WSJ reports large investors, including some who anticipated troubles for the housing and financial sectors, have been buying gold, concerned that moves by governments to shovel money at problem areas could cripple leading currencies. Cos such as Eton Park Capital Management, Greenlight Capital, Hayman Advisors and Paulson & Co. have been ramping up gold exposure in recent months, according to investors in the funds. Blue Ridge Capital and Highfields Capital Management also have been recent buyers, according to public filings about their year-end holdings. Some of these funds have become among the largest holders of gold exchange-traded funds, such as the SPDR Gold Shares ETF (GLD), while also buying gold futures contracts, swaps and even physical bars of the yellow metal. The recent purchases of gold by the hedge-fund investors, some of whom have top records, suggests they are coming to share deep worries about the health of global economies and how ongoing problems are being addressed.

RCM Comment: This story illustrates the crowds' disturbing negligent behavior with regard to gold investments. The crowd is evidencing an utter lack of due diligence when accumulating shares of GLD. In an effort to help my fellow man I will highlight some key issues in the hopes that the information may redirect the lemmings before they run off the cliff:

1) More shares of GLD have been created over the last few months than there has been gold traded on Comex. If GLD is supposed to be backed by physical gold how would this be possible? Answer: It is not possible, so GLD is not truly backed by gold bullion.

2) The GLD prospectus states that there will be no auditor of the fund. This should be a major red flag to all investors. If you have something to hide you don't use an auditor. Now repeat after me...Madoff.

3) Page 12 of the prospectus states that the assets of GLD are commingled and not set aside in a designated account. Hence, if the bank administering GLD should have a problem, for instance be nationalized, then GLD holders become creditors of the bank, not owners of bullion. Repeat after me...counter party risk. Last time I checked, counter party risk was at the very center of the credit crisis.