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Happy Holidays, Existing Home Sales, Revised GDP

Welcome to the 'happy holidays' edition of the RCM blog.

I thought we should begin with a little year end wisdom:

“Life isn't about waiting for the storms to pass. It's about learning to dance in the rain." - Vivian Green

Managing capital during the last two years required the ownership of solid wading boots and a strong hurricane slicker. For those of you still standing I commend you. In fact, feel free to join us while we dance a jig.

In a nod to the time of year and the tendency for factual stories to be laced with pure fiction, I offer you the following two economic anecdotes.

To begin, let's review the housing fable released today. Market participants responded to the details with a cheer, an equity market rally and a strong US$ bid. However, as with most fables, one must read between the lines to grasp the true meaning. In the case below, I have boldfaced the important detail and the moral of the story becomes clear. The "good" news about November was in fact fabricated at the expense of future months...

ECONX Existing Home Sales Rise Again
The Existing Home Sales report for November brought good news on a number of fronts. Specifically, sales increased 7.4% from October to a seasonally adjusted annual rate of 6.54 million units (consensus 6.25 mln); median prices rose slightly to $172,600 from $172,200 in October.

Based on the November sales pace, the supply of unsold homes dipped to 6.5 months from 7.0 months. The surge in home sales was driven by a rush of purchasers aiming to capture the benefit of the first-time homebuyer tax credit that they feared might expire at the end of November.

That benefit was ultimately extended, however, so the National Association of Realtors thinks it is quite possible there will be a "measurable decline" in home sales the next few months before another surge starting in spring...

Low financing rates and relatively low prices, though, continue to provide strong support to the housing recovery. If there is a point of consternation for the stock market, it is the idea that uplifting data like this could force the Fed to raise rates sooner than previously expected. That would be tolerable if there was a concomitant pickup in hiring activity, but absent that, higher rates would be a retardant on the housing recovery since it would reduce affordability...

Separately, there is a residual concern that the encouraging signs in the housing market will ultimately unleash a load of shadow inventory being held by banks and current homeowners, who have been waiting for improved conditions to list the homes for sale. The added supply could keep pressure on prices...

...Below, we have the next chapter in the ongoing saga of economic recovery. Rumplestilskin, a.k.a. the US government, would like to tell the story of economic recovery. Upon the original unrevised GDP release, the US$ rallied due to the "better" than expected number. Today, during a quiet holiday week, the real GPD number reveals a "surprisingly" lower growth rate...

ECONX Q3 GDP- Final +2.2% vs +2.8% consensus, prelim +2.8%

ECONX Q3 Personal Consumption- Final +2.8% vs +2.9% consensus, prelim +2.9%

ECONX A Surprise Revision to Q3 GDP
In surprising fashion, the revision to Q3 GDP was fairly substantial. According to the third estimate from the Bureau of Economic Analysis, GDP grew at a 2.2% annual rate in the third quarter versus 2.8% in the second estimate. A slight downward revision to personal consumption expenditures, which were said to be up 2.8% (versus prior 2.9%) from the preceding period played a part in the downgrade, as PCE contributed just 1.96 percentage points to the change in real GDP versus 2.07 percentage points for the second estimate...

Other gauges that were adjusted to show a lower contribution to the change in real GDP included gross private domestic investment (from 0.91 to 0.54), the change in private inventories (from 0.87 to 0.69), imports (from -2.53 to -2.59), and government spending (from 0.63 to 0.55). Separately, the GDP price index was revised down as well from 0.5% to 0.4%. Core PCE was reported to be up 1.2% quarter-over-quarter versus 1.3% for the second estimate. This inflation gauge won't alter the Fed's assured view on near-term inflation pressures.

...So, will the 2010 economic fable resemble a Grimm fairy tale or an uplifting Christmas story? Only time will tell. I will be traveling over the next two weeks, but if duty calls I will post. Until then, enjoy the rest of 2009 and have a happy and healthy.

The Fed Meeting Fallout, US$ Strength / Smaller than Expected Debt Limit Increase, Shadow Home Inventory on the Rise, State Budget Problems

The Fed chose not to change rates or comments during the Wednesday meeting. While we anticipated this outcome in our Monday post, the market reaction has been anything but expected. In months past the type of Fed commentary exhibited this week led to a lower US$ and inverse strength in commodity and equity markets. This week the results have been anything but ordinary. The US$ gained strength, some commodities have rallied with the US$ (e.g. Oil) but precious metals have suffered. Meanwhile the Treasury markets have rallied and equity markets seem to have stalled.

The Fed's commitment to a lenient stance is not a surprise. The following two stories are just a couple of the driving forces applying pressure to the economy and in turn the Fed...

More homes are poised to hit the market - LA Times
LA Times reports a supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation's housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said. A variety of measures to keep discounted bank-owned properties off the market -- including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford -- has helped increase a backlog of so-called shadow inventory 55% in the year ended Sept. 30, according to a report released Thursday by First American CoreLogic, a Santa Ana-based real estate research firm.

States scramble to close new budget gaps - WSJ
WSJ reports the patches used by states on their ailing budgets just months ago are now failing. Ohio lawmakers were expected late Thursday to vote on a compromise reached with Gov. Ted Strickland to avoid cutting education budgets an average of 10% on Jan. 1. In Arizona, lawmakers met in a special session Thursday -- their fourth on the budget this year -- to grapple with a new deficit. And in New York, Democratic Gov. David Paterson said Sunday he would postpone paying $750 million of state bills to avert a cash crunch. Many states eliminated expected deficits earlier this year with budget cuts, tax increases, short-term borrowing, accounting moves and planned gambling expansions. But despite a slight improvement in the U.S. economy, states are now finding those measures didn't go far enough. Tax collections continue to trail projections in some states, and court rulings and political battles have blocked some gap-filling moves. Plus, some legislatures didn't fully deal with the deficits, leaving the toughest decisions to governors... Only a few states now have cash-flow problems. But if revenues continue to fall below expectations, the list could grow, said Scott Pattison, executive director of the National Association of State Budget Officers.

...the US$'s strength as well as the strength in the Treasury bond market does however, provide some consternation. Apparently, other factors have overshadowed the Fed meeting this week and driven the direction of markets. Many attribute the strength of the US$ to troubles developing in Europe. The fears of a debt default in Greece have led some to believe the viability of the EU is in question. We believe this fear is unfounded and would instead direct your attention to the following story...

House narrowly passes $290 billion increase in debt limit - WSJ
WSJ reports the House approved a short-term $290 billion extension in the nation's debt ceiling, delaying a decision until February about a larger increase in the borrowing cap. The vote comes less than a week after House Majority Leader Steny Hoyer (D., Md.) said he intended to seek a $1.8 trillion increase in the ceiling to support federal government borrowing through 2010. A decision was made to seek the more modest increase after it became clear the larger increase may have failed to win support in the Senate. The Senate must still take up the two-month increase, which it is expected to do next week.

...The decision to delay the "larger increase in the borrowing cap" in our opinion added fuel to a short covering rally already underway in the US$. I will note that the vote has only been delayed and will no doubt be passed in the not to distant future.

In short, year-long trends remain in place although severely tested this week. Seasonality would suggest equity market strength during the last two weeks of the year. Volatility as judged by the VIX index has remained subdued during this week's shenanigans and would add credence to the idea of a resumption in seasonal trends.

Stock Market Investing: Expect Trends to Remain Intact, Investment Strategy: The Fed Meeting Holds the Key,Trader Dan & The Continuous Commodity Index

Trader Dan Comments On This Week’s Action In The Continuous Commodity Index: Courtesy of Jim Sinclaire

...This chart...is significant in telling us the direction that gold prices will take moving forward. For the deflationists to be proven correct, this chart will need to break down technically which would require both a move below the 400 level and a downturn in the rising moving average in which price moves below that average as it trends lower. AS you can clearly see, the moving average is trending higher and prices are above it. This signifies that the inflationists have the upper hand and their assessment is currently the correct one.

Until this chart reverses its positive technicals, those calling for a major top in gold are simply mistaken in their assessment and are attempting to impose their view on the markets rather than reading what the market itself is currently saying. That’s the problem with analysts and even traders who cannot let the market speak to them and get stuck in a losing trade because they refuse to acknowledge that they might be incorrect. In effect, they end up fighting the trend or the tape as we used to say. Continuing Education...

Stock Market Investing: The equity markets have consolidated over the last few weeks in a tight trading range. Meanwhile, the US$ has caught a bid sending Oil and Gold lower. Once again the financial media would like you to believe a major crossroads has been reached. We at RCM would beg to differ. Perhaps a review of reality would help:

1) Over the last several months, the US$ experienced strength during the week or so before the Fed meeting. Said strength rapidly dissolves as Fed comments from the meeting reiterate the need and desire for easy credit. If the US$ strengthens after this week's meeting then perhaps a "crossroads" has been reached. Until then, recent US$ strength appears nothing more than the financial equivalent of a hiccup.

2) Please review the chart and comments above from Trader Dan. Clearly, the commodity markets as a whole have not responded to the "US$ strength" of the last two weeks. One would need to see the up trend in commodity prices challenged before a "crossroads" could be reached.

3) During previous US$ rallies in '09 the equity markets have suffered. Often a sell off of 5 - 10% would occur in the equity markets if the US$ rallied 2 - 3%. This time however, equities have used the US$ rally to consolidate gains in a tight sideways movement. Equity players may be signaling disbelief of US$ strength, the exact opposite of a "crossroad".

Investment Strategy: The Fed meeting this week will be key. Should the Fed choose to change language and appear inclined to reduce liquidity then a crossroads of some kind will in fact be reached. However, until the Fed stance changes expect year long trends to remain intact.

As I have explained above, commodity and equity markets are not foreshadowing a change in Fed stance.

On the other hand, the last two weeks have been replete with Government statistics suggesting economic "strength". The retail sales data "surprised" on the upside and University of Michigan Consumer Sentiment Index rose more than expected. Both announcements led to spirited US$ rallies.

What will the Fed decide? We won't know until the stories hit the wire.

However, we do know rates need to remain low for this country to handle an enormous Federal debt burden. We know the economy, whether recovered or not, is precariously perched and needs liquidity. We know consumer confidence does not equate to consumer spending; income is required for consumption. And we know income will continue to be constrained as debt defaults continue to mount...

The Coming Wave Of Debt Defaults -Sam Rovit and David Sweig - Forbes

The worst is not yet past. Be prepared.

The trouble in the commercial real estate markets is getting ugly, as the precarious situation of Dubai World has made all too clear.
Expect many more unpleasant situations like that one. Speculative-grade debt issuers are bracing for the default rate to hit 12% to 14% by the end of 2009, according to our projections at Bain & Company. The last time the U.S. economy experienced default rates of that magnitude was 28 years ago. Continuing Education...

My parting question: Knowing all that we know, should this week's Fed comments really be a mystery? What possible good could result from the Fed changing its stance at year end? A stance change now would simply not be logical and perhaps that is where the risk lies. Logic and government are often at odds.

Precious Metals: A Minuscule Market, BLS Jobs Report Worthless, Obama Continues to Increase Spending, U.S. Treasury Zero-Rate Auction

The volatility of precious metals prices will continue to astound. For those requiring a courage boost, I offer the following information as succor...

The Precious Metals market is minuscule - Matterhorn Asset Management
The graph below shows how small the gold and silver industries and markets are in relation to major US corporations and to total world financial assets. The market capitalisation of the silver industry is only $ 9 billion and of the gold industry $ 200 B whilst Microsoft is valued at $250 B and Exxon 350 B.

Both the silver and gold industries as well as the physical markets are so small that any increase in demand is likely to drive prices very substantially higher.

Zerohedge further exposes the BLS Friday jobs report as worthless...

Even as the BLS and the administration are trying to cover up the real state of unemployment affairs using assorted semantic gimmicks of just what it means to be unemployed, and as companies provide adjusted EPS numbers, while actual earnings continue to collapse, the true barometer of spending, provided by the Financial Management Service, tax withholdings (net of refunds), continues to paint the truest picture of just what is really happening with both America's consumer and the corporate world....

...On a rolling 12 month basis, individual tax withheld has dropped by nearly 8% YoY, from $1.42 trillion to $1.31 trillion, while company witholdings are down a whalloping 64%, from $274 billion to just under $100 billion! Read More...

Of course, the Obama administration is aware of the true nature of the unemployment problem...

WASHINGTON – President Barack Obama called for a major new burst of federal spending Tuesday, perhaps $150 billion or more, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment. Read More...

Geithner said to be seeking TARP extension until next October -

Bloomberg.com reports Treasury Secretary Timothy Geithner plans to tell Congress that the Obama administration will extend the $700 billion financial-rescue program until next October, according to people familiar with the matter. While the Troubled Asset Relief Program expires on Dec. 31, Geithner can extend it by notifying Congress. A letter notifying Congress of the extension could come as soon as today, said the people, who declined to be identified. Andrew Williams, a Treasury Department spokesman, declined to comment. The TARP, passed in October 2008 to prevent a collapse of the financial system, has drawn criticism from Congressional opponents of taxpayer-funded bailouts of banks including Citigroup Inc. The Obama administration, preparing the ground for an extension, has emphasized that the program may also be used to aid homeowners and small companies.

Both actions above are US$ bearish, precious metals bullish. Add to the mix the recent zero-rate U.S. Treasury auction and you can see why our Gold and Silver investment thesis remains intact...

U.S. Treasury zero-rate auction matches record low
WASHINGTON, Dec 8 (Reuters) - The 0.000 percent high yield on the U.S. Treasury's four-week bill auction on Tuesday matches the lowest on record for the security, the Treasury's Bureau of the Public Debt said.

The Treasury's auction of $29 billion in four-week bills at a strong 5.33 bid-to-cover ratio marks only the fourth time that the security was sold at a zero rate. The other three zero-rate auctions occurred in December 2008, near the height of the financial crisis.

Stock Market Investing: Fallout From Employment Data

Stock Market Investing: Market action continues to revolve around the fallout from Friday's employment data. Equity markets consolidate and precious metals take a breather. Yes, I wrote 'take a breather'. Allow me to state unequivocally, we believe a dubious government supplied employment number lacks the power to end a Gold and Silver generational bull market. If you feel otherwise, please do us all a favor and sell your precious metals holdings. In fact, if you would like to borrow and sell short that would be even better.

All healthy bull markets experience shakeouts. Often, these shakeouts can be violent, but they tend to be short lived. These shakeouts result in the expelling of weak holders and suckering in of short sellers. These same players will again be buyers at higher prices.

Investment Strategy: Maintain previous positions and look to add on weakness where appropriate.

TrimTab's explains Friday's employment numbers:

TrimTabs employment analysis, which uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, estimated that the U.S. economy shed 255,000 jobs in November. This past month’s results were an improvement of only 10.2% from the 284,000 jobs lost in October.

Meanwhile, the Bureau of Labor Statistics (BLS) reported that the U.S. economy lost an astonishingly better than expected 11,000 jobs in November. In addition, the BLS revised their September and October results down a whopping 203,000 jobs, resulting in a 45% improvement over their preliminary results.

Something is not right in Kansas! Either the BLS results are wrong, our results are in error, or the truth lies somewhere in the middle.

We believe the BLS is grossly underestimating current job losses due to their flawed survey methodology. Those flaws include rigid seasonal adjustments, a mysterious birth/death adjustment, and the fact that only 40% to 60% of the BLS survey is complete by the time of the first release and subject to revision.

Seasonal adjustments are particularly problematic around the holiday season due to the large number of temporary holiday-related jobs added to payrolls in October and November which then disappear in January. In the past two months, the BLS seasonal adjustments subtracted 2.4 million jobs from the results. In January, when the seasonal adjustments are the largest of the year, the BLS will add anywhere from 2.0 to 2.3 million jobs. In our opinion, trying to glean monthly job losses numbering in the tens of thousands or even in the hundreds of thousands are lost in the enormous size of the seasonal adjustments.

In November, the BLS revised their September and October job losses down a surprising 44.5%, or 203,000 jobs. In the twelve months ending in October, the BLS revised their job loss estimates up or down by a staggering 679,000 jobs, or 13.0%. Until this past month, these revisions brought the BLS’ revised estimates to within a couple percent of TrimTabs’ original estimates. The large divergence between the two results begs the question of what is causing the difference. While we don’t have an answer today, we will be poring over the data in an attempt to answer that question.

Stock Market Investing: The Dubai Implications, Investment Strategy: Generational Move Unfolding For Gold and Silver Prices

NEW YORK (CNNMoney.com) -- The news that the sovereign wealth fund of Dubai requested a postponement of billions of dollars of debt this week could pose a big problem for U.S. banks...

...Bove said the underlying problem is that there is a lot of uncertainty floating around. For example, there's little information available about counterparty derivatives, guarantees that transfer default risk from lenders to other financial institutions. And it's unknown how much of Dubai World's debt guarantee is held by U.S. banks. Read More...

Stock Market Investing: The above story along with many others have filled the airwaves and blogosphere over the last 4 days. I will refrain from adding my voice to the din. Moreover, endeavoring to postulate on the repercussions seems to me a fool's errand. The sheer plethora of moving parts and back room deals makes a supposition worthless.

I will, however, offer some insight to a more pressing question: How will this event effect the US$, the equity markets and the price of Gold?

An avid reader of this blog will find the answer both simple and familiar. Bad news on the global economic front equates to good news for the U.S. equity markets and the price of precious metals, Gold and Silver.

Investment Strategy: The legend for deciphering this market environment:

Neg.Eco.News = Con't.Q.E.; (Q.E. = Quantitative Easing; catchall for liquidity creation)

Con't.Q.E. = Con't.US$.Dval.; (US$. Dval = US$ devaluation)

Con't. US$.Dval = Exponential Gold and Silver price increases + higher US equity prices

This legend, in all likelihood, will remain in force until major policy changes occur within the White House, U.S. Treasury and Fed. Never in history has the systematic devaluation of a currency led to sustained economic recovery and long-term growth. However, without fail, said devaluation leads to inflation, often hyperinflation, and a flight out of the currency into hard assets. The move unfolding in the price of Gold and Silver will be for most unimaginable, but for the few, the proud, the aware, it will be a move of a lifetime.

Happy Turkey Day, White House Evaluates Growth Measures, How Geithner Got His Nickname

I'd like to say on behalf of the entire staff here at RCM, Happy Turkey Day.

Speaking of turkeys, I'd like to offer some food for thought on this holiday of epicurean indulgence.

You will find at the top of the menu, an appetizer prepared by the White House. As usual, this chef offers up fare that looks good upon presentation but falls short on execution. I find today's offering has subtle hints of desperation and longing that are overwhelmed buy strong tones of oxymoronic balderdash....

White House says evaluating "sensible and reasonable" measures to spur US growth - Reuters

As a main course, we are, in fact, serving turkey. This particular turkey you will know by another name, Pinocchio. A few have wondered why I anointed Tim Geithner, Pinocchio. Some have even questioned my motives. To the simple son, I say read the following account of Pinocchio's behavior and learn. To the wicked son, I will continue on this biblical vein and say, "With all thy getting, get understanding."....

A brutal report issued Monday by a government watchdog holds Timothy Geithner -- then the head of the Federal Reserve Bank of New York and now the nation's Treasury Secretary -- responsible for overpayments that put billions of extra tax dollars in the coffers of major Wall Street firms, most notably Goldman Sachs. Read More...

Stock Market Investing: Warning Signs, Credit Risk Increases, Precious Metals Investment Thesis Redux

Stock Market Investing: The warning signs are multiplying. Blood is in the water and the sharks are circling so beware. US$ weakness still keeps the equity markets aloft but the technical picture grows more ominous. Meanwhile, precious metals continue to outperform:
COMEX Metals Closing Prices : Gold ended the day higher by $6.50 to $1148.40, silver gained 3 cents to $18.485. Gold closes the week at a new high and adds strength to our thesis that precious metals offer the best life raft in this dangerous ocean. A little more on this thesis later...

Warning signs:

The major averages continue to make new highs on weak volume and experience sell offs on rising volume. We have witnessed this disturbing behavior for three months now and eventually it will overwhelm the market.

The major averages are making new highs but non confirmations abound. The small and mid cap indices have not reached new highs and the all important transportation index also lags behind.

Over the last year or so a phenomenal correlation between credit spreads and the equity markets has developed. Credit market health or lack there of has consistently been a leading indicator for the overall direction of the stock market. Long before the collapse of the stock market last fall, the credit markets were in disarray and signaling trouble for stocks. This correlation even foretold the equity rally that began in March of this year as credit spreads narrowed aggressively during all the government support in Jan. and Feb.. As credits have continued to improved, equity has flourished.

Obviously we must monitor the credit markets closely. We have not seen anything recently from the credit space that would suggest trouble ahead. However, we received this message from one of our sources earlier today:

CDR Counterparty Risk Index @ Midday Nov 20, 2009
By Dave Klein
The CRI continues to deteriorate today as eleven members trade wider (more risky) and only one (HSBC) trades tighter. All index members trade with greater risk now than a week ago. Bank of America is the worst performer on the week, widening by over ten percent.
So, credit was a little shaky this week which resulted in the equity markets attempting a new high and failing. This type of behavior along with numerous technical concerns compels us to defend the portfolio.

More evidence to support our Precious Metals investment thesis:

Peter Bernholz (Economics Prof, Basel) studied the world’s 12 most important periods of hyperinflation & discovered the tipping point occurs when deficits amounted to 40% of the expenditures. For the USA, we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41. 7% of the $3.6 trillion in expenses."

Meanwhile, the tide of evidence against an economic recovery rises...

WASHINGTON - A rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, adding to concerns about the strength of the economic recovery. Driven by rising unemployment, such loans accounted for nearly 33 percent of new foreclosures last quarter. That compares with just 21 percent a year ago, when high-risk subprime loans made during the housing boom were the main reason for default. Read More...

...and so the Fed and Treasury must continue to follow their playbook and add liquidity...

Ben Bernanke and the US Treasury are going to revalue gold against the dollar. The mechanism is the US dollar carry trade, not a confiscation of gold. Joe Public doesn't have any gold, he sold his 2 carat ring to the pawnshop months ago. Read More...

...Which leads us to the following discussion about Gold....

David Rosenberg (former chief economist at Merrill Lynch)..Buying physical gold may soon become impossible:
90% of the world’s gold supply has already been mined. We all have a good idea as to how much gold is above ground, and we know how much there is below ground and the marginal cost of pulling the yellow metal out, says David Rosenberg of Gluskin Sheff.

“There is an estimated 165,000 tons of gold above ground, and around 20,000 tons in reserves below. So, nearly 90% of the world’s gold supply has been mined and equates to roughly $4.5 trillion.

To put that in perspective, the total amount of US$’s in circulation globally is estimated at $8 trillion, and the total size of the global money supply is around $30 trillion. The size of the world stock market is around $40 trillion. At last count, the total size of the global bond market was north of $80 trillion. The total world derivatives market has been estimated at about $800 trillion, face or nominal value.”

The impending financial “seizure” will trigger a global buying panic cum flight-to-safety goldnami of uncontrolled proportions. Buying physical gold may soon become impossible. We again ask: have U got enough?

Housing Starts Crater, Economy Woes Tie Fed Hands, GLD Warnings, Paulson & Touradji Make Bold Gold Statements

Mid-week and the economic numbers continue to disappoint. However, equity investors should take heart and view the chart above. This is a monthly chart illustrating the direction of the US$ and the inverse relationship with the S&P500. The chart dates back to 2000, but you can see the correlation has become more intense in the last 12 months.

So, as long as this correlation holds, remember bad economic data equals good equity market performance due to continued Fed accommodation that leads to a weaker US$...

Fed's Bullard says possible Fed won't hike rates until 2012

Housing Starts Crater
The talk that housing starts were stabilizing hit a snag in October as new housing starts plummeted 10.6% to 529,000 units from 592,000. The consensus forecasted an increase in starts to 600,000...Single family starts fell 6.8% to 476,000 and is at its lowest level since May. Multi-family starts fell a whopping 34.5% as only 53,000 new units were started. Multi-family starts have never been this low since the index was created in 1959

I mentioned Monday, "Make sure your precious investment is backed by the actual metal." Below you will find an excerpt from the Gold ETF (GLD) prospectus. This same language can be found in the Silver ETF (SLV) prospectus. Take heed of these warnings. I fear in a world that has become numb to a long list of possible side effects to the drugs taken, you may view this prospectus in the same light. Don't make that mistake! These are very real warnings that could effect your financial health. Why even take the risk, when there are so many quality alternatives? Please, feel free to log onto our website http://www.rosenthalcapital.com/ for a complete discussion of said alternatives...

Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss. Read More...

...Meanwhile, the best in the business are coming our way. To Touradji and Paulson I will say, from all of us at RCM, welcome to our world!

Paulson & Co. to launch new gold fund January 1; Paulson to personally invest about $250 mln in new gold fund - Reuters

Touradji Capital Management LP, the New York hedge-fund firm that oversees about $2.7 billion, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest gold producer, while selling shares in SPDR Gold Trust, the largest exchange-traded fund backed by bullion. Read More...

Stock Market Investing: Stay the Course & Ride the Wave, GDP not 3.5%?, Economic Numbers Troublesome, Hyperinflation Rapidly Approaching

Stock Market Investing: No change from last week. The technicals didn't get much better but an overwhelming tsunami of weak economic data helped to drive the US$ lower and drove both hard asset prices and equity prices higher.

Investment Strategy: Ride the wave! This market behavior reminds me of the waters off Jupiter Beach, FL, where I live. Right now I'm looking at a beautiful expanse of ocean as far as the eye can see (don't hate the player, hate the game) and I see perfect 5ft. rollers washing up on shore. The break is speckled with surfers all the way down to Juno Beach pier where the best are attacking the biggest swells.

The picture seems perfect but the key word from the description above is ATTACKING. I sat through brunch on Sunday next to a local surfer girl. She was around 16 and had everything going for her with the tiny exception of crutches and a rather large bandage on her foot.

While the surf was perfect for humans, it was also an absolute delight for the sharks. Do you see where I'm going with this? When investing in today's markets you can enjoy the ride but you better remember the sharks are circling.

Time to review the details from last week. Follow the bouncing ball and you will get to the inevitable conclusion that hyperinflation is raging toward us like a Hammerhead that smells blood....

Fed's Fisher says Q3 US GDP growth probably not quite as robust as originally reported, closer to 2.5% - Reuters

November University of Michigan-prelim 66.0 vs 71.0 consensus, October 70.6

Initial Claims Continue to Fall
Initial claims again beat consensus estimates as claims fell from 514,000 new claims to 502,000 for the week ending Nov. 7. While the drop in claims doesn't represent a clear turning point, for the second consecutive week claims have fallen below the 520,000 to 550,000 range that it seems to have been stuck at during the previous month. The market is going to take the drop as a sign that the labor sector is beginning to turn around, but we've seen a similar decline in claims before when initial claims fell below the 550,000 threshold at the end of September...

The drop in continuing claims was not due to workers finding new jobs, but due to people running out of unemployment benefits. Approximately, 7,000 unemployed workers lost their benefits every day. Congress recently passed an extension of the unemployment benefits that gave all unemployed workers an additional 14 weeks of unemployment insurance payment and an additional six weeks to workers that live in states where the unemployment rate is above 8.5%. Obama signed the extension into law on Nov. 6. The extension will stop the downward trend in continuing claims...

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months. Due to timing of the releases, the data will not show the results of the unemployment extension until the Nov. 25 release. This means that the continuing claims numbers will show a decline in next week's reported numbers.

...The details above represent "blood in the water" that requires the Fed to remain easy. However, these policies that balloon money supply have fueled the decline in the value of the US$. I have written volumes about this vicious cycle. For the sake of new readers I will repeat the RCM mantra: Hyperinflation is a currency event not an economic event.

I am forever baffled by the ignorance of many financial commentators when asked about inflation. They point to economic troubles and scoff at the very idea of inflation but applaud Fed policy and cheer rapidly inflating asset prices. Do they not see the oxymoron? Or are they simply morons? (OK, true that was trite and a little unfair but it couldn't be helped.)

Hyperinflation is rapidly spreading worldwide because currencies around the globe are being devalued in an effort to keep up with the Bernanke "helicopter" drops of US$. The world is heading toward a Forex crisis as the Economist article below suggests. Our response to this roller coaster: Please hold on to the (GOLD) bar...

The Economist on Gold and Forex:

Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets. Read More...

...Meanwhile, even as Brazil implements policy changes to stop its currency from appreciating, the Real advances adding credence to the Economist theory of a Forex crisis approaching ...

Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year. Read More...

...As you can see, the march toward hyperinflation and perhaps a currency crisis seems inevitable. The best defense: Precious metals, Gold & Silver. A note of caution: Make sure your precious investment is backed by the actual metal. More on that topic next time...

Comic Relief: Tim 'Pinocchio' Geithner & The Heaviest Element Known to Science (Gv)

Every now and then we need a little comic relief from the news cycle of this mad, mad world.

I can always count on my favorite government official, Pinocchio, for an eminently laughable comment. If we are lucky, he will make a ludicrous statement on the world stage where we can actually see his nose grow while he is speaking; evidence the following...

SINGAPORE (Reuters) - U.S. Treasury Secretary Timothy Geithner offered fresh reassurances to Asian nations that the Obama administration was committed to a strong dollar and to actions aimed at bolstering its value. Read More...

...The following major development from the world of science dovetails nicely with Pinocchio's behavior. Read, enjoy and have a good weekend...

Heaviest Element Yet Known to Science: (Gv)
Lawrence Livermore Laboratories has discovered the heaviest element yet known to science.
The new element, Governmentium (Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312.

These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons.

Since Governmentium has no electrons, it is inert; however, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete.

Governmentium has a normal half-life of 2 – 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium’s mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes.

This characteristic of morons promotion leads some scientists to believe that Governmentium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass.

When catalyzed with money, Governmentium becomes Administratium, an element that radiates just as much energy as Governmentium since it has half as many peons but twice as many morons.

- Compliments of CIGA JB Slear

Investment Philosophy, The Mystery Buyer, Trouble Brewing for Munis, NYS Going Broke, SAC Capital Under the Gun

Every morning my father and I begin the trading session with a review of our investment strategy. We point out pros and cons and attempt to poke holes in theory. We perform this ritual every day, without fail, for the simple reason that when investing in the stock market those who stand still get steam rolled.

Success can have the nasty side effect of creating arrogance and arrogance has no place in the realm of portfolio management. Our hardest (but perhaps most important) job is to spot flaws in our own thinking and react without passion or prejudice.

At the same time, having the courage of one's convictions is the yin to the yang of this self flagellation. You must build an investment strategy over time and have the patience to wait and not be tired of waiting. If you can keep your head when all about you are losing theirs...then "Yours is the Earth and everything that's in it,/And - which is more - you'll be" a successful portfolio manager, my son! Little did Kipling know he was describing auspicious stock market investing.

"IF" you have had enough of philosophy let's get down to business. I have been writing about the rather disturbing trend of low volume rallies and high volume sell-offs in the equity markets. On Oct. 28th I highlighted this negative trend. In this morning's meeting Gary directed my attention to the following story that offers amazing insight into this volume conundrum. As you will see, market manipulation is clearly present. Don't be alarmed by that weird sensation you will feel when you finish reading; it's just your skin crawling, the sensation fades...

WHO IS THE MYSTERY BUYER? By The Pragmatic Capitalist

I don’t know if any characteristic of this massive 6 month rally has been more apparent than the huge futures run-ups we’ve seen at random points during the trading day. Without news, the S&P 500 futures get gunned on huge volume and surge higher. I’ve seen it at least every other day for 6 months. It tends to occur on low volume days such as the one we’re currently experiencing. As you can see in the chart below, the futures are getting gunned on massive volume without any coinciding volume in SPY. This means an institution is jamming the futures higher knowing that they can drive the market higher on no volume. Effectively, they can take out every asking price with a large enough order and immediately create a 0.25% bump in the market in no time. If you’ve been wondering why we’ve seen huge surges on low volume days and conviction high volume selling on down days this explains much of it.

To View Charts discussed above CLICK HERE

So, who is the mystery buyer? We think the answer lies on the 9th floor at 33 Liberty Street.

...The key takeaway from the knowledge revealed above is not to become angry. Fighting against the machine is futile. Instead, the key is to understand the house of cards we are living in and react appropriately when the wind begins to blow.

So far, the weather seems fair with only a slight breeze. However, we hear thunder rumbling in the distance and the winds can pickup quickly. The following are a few stories that show up on our radar and give us pause...

Famed short seller says dump munis - Barron's
James Chanos, the famed short seller who was among the first to foresee the collapse of Enron, recently sounded the alarm on the municipal-bond market -- in the hallowed halls of the New York Historical Society, no less. The "cracking of state and local municipalities is coming," he predicted at a recent meeting attended by Barron's staffer Susan Witty, adding that he wouldn't touch munis. In a subsequent telephone interview with this columnist, Chanos said, "State and local municipal finance are a mess and going to get worse." It's not just the recession, which has reduced tax receipts. Rather, he says the poor economy "is masking real problems in municipal cost structures." The big problem, he says, is "the platinum-plated health-care and retirement benefits" given to state and local workers. "It's all coming home to roost" as boomers start to retire. California faces a $60 billion deficit, and the politicians there believe that in "a worst-case scenario, the federal government will bail them out," says Chanos. "If the feds do bail them out, as I believe they will," the state's bonds will likely lose their federal tax exemption, he adds.

Paterson: NYS Will Be Broke Before Christmas Delivers Scary News To Legislature, Says Only Way To Fix Problem Is To Have Immediate Cuts To Education, Hospitals

...He said if the Legislature doesn't cut the budget now the state could run out of money by next month. "We're going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations," Paterson said.

...On Oct. 26th I mentioned three developments that could become a problem for the equity markets. Development Three was about hedge fund unwinds that could possibly add instability to the markets as they did in Q4 2008. At the moment, this development is just a rumble, but as the probe widens and further mistrust of the hedge fund industry mounts trouble could ensue...

Hedge-fund giant surfaces in trading probe - WSJ
WSJ reports the widening investigation of insider trading on Wall Street is expected to examine transactions at Steven A. Cohen's SAC Capital Advisors, one of America's largest and most successful hedge funds, according to people familiar with the matter....

Stock Market Investing: Technical/Fundamental Battle, Investment Strategy: Ride the Gravy Train, FOMC Policy, Consumer Credit, Busi. Bankruptcy

Stock Market Investing: A battle between investment disciplines has developed over the last 3 weeks. As discussed in the Oct. 28th post, numerous warning signs of a technical nature are flashing. However, last week's news headlines were replete with US$ bearish/equity market bullish fundamental data. Which discipline will ultimately prevail, technical or fundamental? The answer is unclear, for now we remain bullish with a healthy dose of skepticism.

Investment Strategy: Never fight the trend. If the equity markets want to advance we will gladly participate and enjoy the ride. Stay focused on the areas of the market that have the strongest fundamentals for moving higher; namely the commodity space as this rally is pure and simple a vote against the US$. Remain over-weighted in the precious metals. The relative out-performance of this group was significant during the last market sell off which was, I will humbly remind you, anticipated by RCM.

Now, I would like to take you on a journey through some of the key events of last week. My intention is to reduce the noise generated from traditional news outlets and focus your attention on the important issues driving the markets. You will see how these issues have led to the resumption of the US$ breakdown and the mirror image breakout of the equity markets.

We will begin with some excerpts from the FOMC meeting on Nov. 4th. There was an expectation that the Fed may change wording to appear more US$ supportive. In the prior two weeks, the simple possibility of a discussion about an exit strategy for the current liquidity glut was used as an excuse by traders to bolster the US$. However, as you will read below, the Fed has no intention of changing the policy at this time...

ECONX Summary of FOMC policy statement; maintain the target range for the federal funds rate at 0 to 1/4 percent
...Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. (Is this a boldfaced lie? Surely the Fed knows inflation is a currency event, so why pretend there is no inflation when the US$ is collapsing in value? Simple: the scenario is called "between a rock and a hard place." If the Fed admits inflation is a problem then easy liquidity policies are more difficult to maintain.)

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trln of agency mortgage-backed securities and about $175 bln of agency debt...(Logic suggests rates must remain low while the Fed is buying said debt.) In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010....

...And so the US$ began to lose its bid the minute this story broke on Wednesday last week. In response, the price of Gold rallied and the precious metals mining companies ended the week at new highs on major volume. Interestingly, this group has seen a lot of volume accumulation during a time when the rest of the equity markets are seeing volume selling and/or low volume rallies. This is one sure reason for the strong relative price out-performance the group has enjoyed.

Why does the Fed have no intention of changing policy? Because the economy is in trouble, plain and simple...

September Consumer Credit -$14.8 bln vs -$10.0 bln consensus, prior revised to -$9.9 bln from -$12.0 bln

As expected, consumer credit fell for the eighth consecutive month. Credit declined $14.8 billion in September, far worse than the consensus forecast of -$10.0 billion. The consumer credit decline for August was revised up to -$9.9 billion from -$12.0 billion. The reason for the decline in consumer credit has not changed. Consumers continue to believe they too highly leveraged and are working to repay their debts.

At the same time, banks are worried about possible loan defaults, and in return, they have tightened lending conditions and pulled available credit from even the most credit worthy borrowers.

...Without the consumer there will not be a sustained economic recovery. Furthermore, the state of small business in America would suggest consumer credit is not likely to see a recovery any time soon...

Business bankruptcy filings increased 7% in October - WSJ reports business bankruptcy filings jumped in October, reversing two consecutive months of declining commercial filings and indicating that bankruptcies could continue to rise as the economy struggles to stabilize.

Last month, 7,771 businesses filed for bankruptcy protection, compared to 7,271 that sought shelter from creditors in September, according to new data from Automated Access to Court Electronic Records, or AACER. After two months of decline, the 7% rise in commercial filings shows that businesses are still struggling to access financing and are facing weak demand for their products....
...Add to business bankruptcy problems the number of banks going bankrupt themselves and you get a morbid U.S. economic picture demanding Fed leniency...
Nine U.S. banks seized in largest one-day haul - Reuters.com reports U.S. authorities seized nine failed banks, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation's banking industry are being crippled by bad loans.

Five more banks fail - 120 for the year - CNN Money.com CNN Money.com reports five banks failed late Friday, bringing the 2009 tally to 120. The biggest to fall was United Commercial Bank of San Francisco, which had 63 U.S. branches as well as operations in Hong Kong and Shanghai. The bank held deposits totaling $7.5 billion.

A couple of weeks ago, we warned the "equity markets are trading at these lofty levels because of liquidity not reality and if the Fed-controlled gravy train of easy credit stops, then trouble will ensue." Well, when you combine recent Fed comments with terrible economic data the result is a gravy train of liquidity that continues to roll and keep equity markets buoyant.

Meanwhile, in this Greek tragedy we are watching unfold, the reciprocal of stronger equity markets is a weak currency. The US$ declines as economic numbers worsen and to add insult to very serious injury, the carry traders are having a field day. I warned "The U.S. $ carry trade will gain steam if European economic recovery/inflation outpaces the U.S. and leads to rate increases". It seems with every passing week this prophecy gains momentum and the US$ value declines...

Australia raises rates for second straight month - NY Times reports Australia's central bank on Tuesday raised its benchmark interest rate for the second month in a row, as widely expected, and suggested a gradual withdrawal of stimulus measures amid mounting evidence that the Australian economy is rapidly picking up speed. The increase in its key cash rate, by a quarter-percentage point to 3.5%, makes Australia the only country in the world to have ventured two successive rate increases this year.

Inflationary pressure returns as UK PPI rises - DJ reports U.K. input producer prices rose unexpectedly in October, suggesting that inflationary pressures could be building after remaining muted over the past year, official data released Friday showed. Prices paid by factories for raw materials rose to a 16-month high of 2.6% on the month in October compared with a 0.2% fall in September. On the year input prices rose 0.1%, that was the first annual increase since February, and compares with a steep 6.2% year-on-year decline in September, the Office for National Statistics said. The gains came as a surprise. Economists, on average, were expecting a 0.5% fall on the month and a 6.5% year-on-year drop.

Stock Market Investing, Investment Strategy, Precious Metals Thesis, IMF Sells Gold to India, Conversation with Gary Rosenthal

Stock Market Investing: The equity averages continue to languish, however, as anticipated, the relative strength of precious metals investments soars. The Dow, S&P500 and the NASD all sit at or near their respective lows of the last two weeks while Gold hits a new high for the year at $1,085.65 and Silver crosses $17.

Investment Strategy: We have used the weakness of the last 2 weeks as opportunity and increased our precious metals exposure, focusing on the mining stocks. We used the 50-day moving average and weekly uptrend lines as our areas of accumulation.

As for our market shorts, the inverse ETFs have performed admirably. I would like to note that these trades, by their very nature, are short term oriented with the goal of defending our other positions when deemed necessary. How often we use these positions and the duration of each trade will not be discussed in this blog. Of course, if you are a client of RCM or a partner in the Fortune's Favor Family of Funds, feel free to come behind the curtain at any time, we would be happy to speak with you.

I would like to spend some time today augmenting our precious metals investment thesis. To begin, please review the story below...

IMF Sells Gold to India, First Sale in Nine Years

Nov. 3 (Bloomberg) -- The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” Read More

...The key to this story: 200 metric tons were sold over 10 business days at an average price of $1,045. This sale price was only 2.7% below the recent high!

Now, I invite you to step into our war room and share a conversation I had with the head of our research department. The department head, Gary Rosenthal, a.k.a Dad, has over 43 years of professional Wall St. experience. He has witnessed and profited from all sorts of investment environments and we can safely say not much surprises him. History repeats and for those awake opportunity abounds. So sit back, relax and enjoy the synopsis of this little tete a tete...

BBR: Dad (GSR), what did you think about the IMF Gold sales to India's central bank?

GSR: ...Not surprising; India's purchase is just another example of central banks around the world replacing fiat currency reserves with Gold. China and Russia are two countries that are at the forefront of this trend....

BBR: The IMF still has another 200 metric tons for sale, correct?

GSR: Yes, and I would not be a bit surprised to see China as the taker.

BBR: Dad, I've been writing about our investment strategy with regards to precious metals for quite some time. I have tried to impart the understanding that hyperinflation is a currency event not an economic event. And I've explained that Gold and Silver will be major beneficiaries of US$ weakness. Today, we see Gold marking a new high for the year above $1,085. Do you feel that this investment strategy is reaching a new stage of maturity?

GSR: Son, the simple answer is, yes. In fact, this past week the price action of Gold illustrates a development I have long anticipated. You may recall my comments earlier this year that an inflection point in the Gold price would come when Gold prices rise even as the US$ rallies. Well, the US$ is up about 2.5% in the last 9 trading days and yet Gold reaches another new high today up 3.3% during the same 9 days.

BBR: In light of these developments, are there any changes to our investment strategy you would like to discuss?

GSR: I believe the time is right for us to prepare for the speculative phase of the Gold bull market.

BBR: Can you elaborate on that thought?

GSR: I anticipate an acquisition wave to hit the industry as the rising share values of the larger companies become currencies to takeover the junior companies with successful exploration programs. I have seen this wave hit many times in different industries backed by real assets (real estate, energy, metals) during my life.

It is always cheaper to purchase reserves in the ground during a rising price cycle than to undergo greenfields exploration. The precious metals miners can takes up to 10 years to go from exploration to production, this time cycle can be greatly accelerated through the acquisition route. It takes more than $1 billion and 8 - 10 years to bring on a single million ounce Gold mine.

The last industrial metals bull market culminated with an explosive takeover cycle back in the 1st half of 2008. Don't you remember the BHP Billiton (BHP) for Rio Tinto (RTP) fight? How about the bull market in oil during the late '70s that didn't end before an explosive takeover phase? With global gold production declining this particular asset bull market may be one of the strongest.

The key is to identify a basket of attractive takeover candidates now, place them into the portfolio and wait for the explosive takeover phase to begin. If our research capability is intelligent and we are patient, we are very likely to hit several 5-10 baggers.