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.

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...

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.

Top 5 October Investment Strategy Posts

For your convience, going forward we will be compiling a "most popular blog post" for the previous month as chosen by the readers. The recap post will consist of direct links to the fan favorties for a quick review of the month's commentaries. Enjoy the read...

#1 Gold Hits New High, U.S.$ Approaches New Low, Nouriel Roubini Rants, Geithner and Lamont Looking Similar, Saudi Central Bank Denies Replacement $

#2 Inflation, Hyperinflation, Stagflation and the Investment Strategy to Benefit, Richard Russell, Fed's Lacker, Credit Tightens, Banks Sift Reserves

#3 Investment Strategy Turns More Cautious, Existing Home Sales, Record Auctions This Week, Galleon Grief

#4 Investment Strategy: Batten Down The Hatches, Quantitative Easing to Slow, Consumer Confidence Suffers, CNBC Viewership Plunge

#5 US$ Carry Trade Intensifies, Pound Sterling Advances on BoE Comments, Fed's Yellen's Comments Add to US$ Decline, Mortgage Apps.Decline

Investment Strategy, Equity Market Trouble, "Positive" GDP, Norway Increases Rates

Stock Market Investing: The equity averages are down another 2.5+% today capping off an awful week during which time the uptrends from March and the 50day moving averages have been violated. The price action should not come as a shock but instead as a reminder of the tightrope the Fed must walk in order to keep this economic house of cards from collapsing.

The Fed's quagmire: Use quantitative easing and other liquidity producing programs to save the U.S. economy from a depression while at the same time avoid turning the US$ into the North American equivalent of the Argentine Peso. (This method of saving the economy is a pet project of Ben Bernanke and the culmination of his years in academia, G-d help us. Never in history has the debasement of a currency led to a true and sustainable economic recovery. But I digress.)

So, in order to continue the debasement shell game, the Fed must occasionally make it look as if US$ strength is important. What better time to feign support than at the completion of a $300 billion Q.E. program and in the midst of positive GDP excitement. I have been writing for weeks that when we begin to read about "good" economic numbers we must take action to protect the portfolio. Well, this week was replete with "positive" numbers, so the US$ rallies and asset prices suffer.

Investment Strategy: Remain long a core position of precious metal investments and use inverse ETFs to benefit from market weakness. We expect precious metal investments to outperform on a relative basis and would view any weakness as opportunity. I will note: today the spot price for Gold is down only .15% as I write this; the epitome of relative out performance.

You may wish to know why I place quotes around words like, good and positive, when discussing the recent spat of economic numbers. Well, the answer is simple: when we and our respected colleagues parse the numbers warning signs are uncovered. Please review the following two accounts of the "exciting" GDP data so you can better understand our concerns...

Briefing: Q3 GDP Goes Positive!

As expected, GDP growth in Q3 went positive for the first time in four quarters. GDP performed better than expected as output grew by 3.5% quarter-over-quarter annualized compared with the consensus expectation of 3.2%. Demand was strong across all sectors of the economy as consumption increased 3.4%, gross private domestic investment increased 11.5%, exports increased 14.7%, imports increased 16.4%, and government expenditures rose 2.3%. With all sectors seemingly humming along in Q3, final sales of domestic product jumped 2.5% compared with an increase of only 0.7% in Q2...

Unfortunately, a more detailed look at where economic growth occurred makes it difficult to pronounce a full sustainable recovery is on its way. Government assistance played an extremely large role in producing the positive GDP result. For example, the Cash for Clunkers stimulus package boosted motor vehicle sales and contributed 1.47 percentage points out of the 2.36 percentage points that personal consumption added to GDP. Further, the first-time homebuyers tax break has benefited not only the construction firms, who have ended their decline in manufacturing new homes, but also realtors through increased income/fees. The jump in realtor expenses accounted for a full third of the increase in the residential investment component...

Inventories provided positive growth to GDP for the first time since Q3 2008. However, the data is a little misleading. GDP is measured as a rate of change between quarters. Inventories actually declined by $46.3 billion in Q3. However, the drop in Q2 was so severe that the rate of change was actually positive $29.4 billion. We expect inventories to continue to improve over the next year and provide a strong bonus to GDP.

GDP is...Better Than Expected?: The Market Ticker

You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care - are increasing. MORE...

Meanwhile, Norway becomes the second country behind Australia to increase interest rates. The heat is being turned up on the carry trade and the Fed. This development out of Europe places further pressure on the Fed to reduce Q.E....

Norway's central bank hiked rates by a quarter-point to 1.5%, the first interest rate increase in Europe since the global financial crisis bit a year ago. It signaled more tightening to come as the economy recovers. Higher crude prices have helped oil-rich Norway. Commodity-rich Australia hiked rates earlier in Oct. The U.S., U.K. and euro zone are unlikely to hike rates soon.

Next week I will discuss the possible duration of this US$ rally as well as the Fed's ability to remain hawkish. Until then chew on this...

A government big enough to give you everything you want, is strong enough to take everything you have. –Gerald Ford

Inflation, Hyperinflation, Stagflation and the Investment Strategy to Benefit, Richard Russell, Fed's Lacker, Credit Tightens, Banks Sift Reserves

Welcome back, today we will continue our discussion about the inflation/hyperinflation/ stagflation trade. In my last post I illustrated how the important news stories of last week clearly unveiled the footprint of the inflation trade. You may recall that I ended with the familiar refrain: "Inflation (particularly hyperinflation) is a currency event, not an economic event."

Therefore, the investment strategy required to profit in this environment is one that begins with the close monitoring of the U.S.$ and ends with the investment in assets that appreciate in value when the U.S.$ suffers.

What is the number one asset we expect to benefit from this developing trend? I will pause here and allow long time readers, clients of RCM, and partners of the Fortune's Favor Family of Funds the chance to shout in unison...GOLD! And as Ed McMahon used to say, "Yes, you are correct!"

With the above investment strategy in mind, I would like to continue our journey following the footprints with a recent word from a respected investment professional. One who has vast experience and in a succinct manner uses his success through the years to impart some valuable wisdom...

The Sage, Richard Russell: "...What happens next is that the cheap dollar is dumped on the market in huge quantities. When any currency or any item is created in massive quantities, that item must fall in value. And the dollar is falling. Ah, Professor Bernanke, what do you do now? To make a currency more attractive, you raise the rates that it pays. But raise the Fed Funds and you squeeze that already gasping US economy. Also, when you raise rates you raise the cost of carrying the gigantic US debt. Total public and private debt in the US is around $57 trillion. A one percent rise in interest rates would drain $500 billion each year out of the US economy...."

Well said! So what are the Fed members saying this week? Is there a will to raise rates...?

Fed's Lacker says he doesn't: "think we should tighten policy today"; willing to go along with purchasing full amount of long-term securities purchases for now...Seeing rise in losses from commercial real estate lending, likely to continue for a while...

No, there is no will to raise rates and to make matters worse the bulk of the commercial real estate tragedy has yet to unfold. In fact, the tentacles of the commercial real estate problem are winding around the neck of small businesses. Without small and midsize businesses recovering, unemployment will continue to get worse further impeding the Fed's ability to raise rates...

Credit tightens for small businesses - NY Times reports many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth, even as the country tentatively rises from its recessionary depths.

Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board. The enduring credit squeeze appears to reflect an aversion to risk among lenders confronting great uncertainty about the economy rather than any lingering effects of the panic that gripped financial markets last fall, after the collapse of the investment banking giant Lehman Brothers. Bankers worry about the extent of losses on credit card businesses as high unemployment sends cardholders into trouble.

They are also reckoning with anticipated failures in commercial real estate. Until the scope of these losses is known, many lenders are inclined to hang on to their dollars rather than risk them on loans to businesses in a weak economy, say economists and financial industry executives.

These developments are all U.S.$ bearish. Central bankers around the world see the writing on the wall and are moving towards the exits...

Dollar reaches breaking point as banks shift reserves - Bloomberg.com Bloomberg.com reports central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63% of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That's the highest percentage in any quarter with more than an $80 billion increase... The diversification signals that the currency won't rebound anytime soon after losing 10.3% on a trade-weighted basis the past six months, the biggest drop since 1991.

Meanwhile, the price of Gold has advanced roughly 22% since the beginning of the year. Our hedge fund, Fortune's Favor Precious Metals, has exceeded the performance of gold year to date. You can review our investment philosophy as well as the quarterly and annual returns on our website: http://www.rosenthalcapital.com/.

I have received many questions recently about the sustainability of the precious metals move higher. As Gold took out the $1,000 level a menagerie of analysts and letter writers wrote of the impending doom of the Gold rally. As Gold moves above $1,050, I hear countless tales of certain failure, of commercial shorts winning the day. I LOVE THIS TALK! This type of bearishness is typical of continued momentum higher.

To sum up, I will simply reprint the headline from a recent Barron's story: Gold Is Still a Lousy Investment By Dave Kansas. Need I say more?

Until next time, chew on this:

"It is not because things are difficult that we do not dare; it is because we do not dare that they are difficult." Seneca, philosopher

Gold Hits New High, U.S.$ Approaches New Low, Nouriel Roubini Rants, Geithner and Lamont Looking Similiar, Saudi Central Bank Denies Replacement $

Gold breaks out to a new high up 2.4%, Silver up 4.36%, the equity markets are up over 1.5%, and the U.S.$ is down another .66%. The inflation trade is alive and well.

I would like to begin with a quick comment on Nouriel. I have reprinted the essence of his most recent comments for your perusal:

Nouriel Roubini appears on CNBC discussing his weekend comments about stocks rising "too much, too soon"
Says there are several reasons the recovery is going to be anemic: 1) the labor market is just awful; 2) the consumer is shopped out, saving more and consuming less; 3) there is a glut of capacity; 4) the financial system is damaged with limited credit growth; 5) fiscal stimulus will become a drag by next year; and finally, overspending countries like the U.S. are spending less while spending in oversaving countries is not picking up.

While I agree with his thoughts on the economy, I feel we should avoid placing any weight behind his stock market call for three reasons:

1. The media loves to cheer Nouriel for his historic bear call on the markets last year. But you see, that's the problem, the call is history. Now, every time the markets fall for a week or two the media trouts out Roubini for another "Dr. Doom" market call. What they don't tell you is that he has felt the same way all year and yet the market has rallied. Point being, how helpful has his market opinion been this year?
   
2. I fear Roubini may join a long list of pundits who get it right once and make a career out of the call but they don't help your investment career going forward. Anyone remember Elaine Garzarelli? She called the 1987 crash right and nothing else since. Or, how about Ralph Acampora and Abby Cohen? They called the bull market right at the turn of the century and had every financial network scrambling for a sound bite right at the top. Where are they now? The markets collapsed and they missed the call so Ralph loses his job and Abby gets shuffled. You see, inherent in every right market call are the seeds for failure on the next call. Successful tools that help during one market environment may not necessarily help when the environment changes and the hubris that inevitably infiltrates the minds of these "correct" pundits clouds their ability to spot the change. It is only human nature and happens to the best of us. I'm simply saying beware.
   
3. The driving force behind the equity market rally may, in fact, be something other than the economic turn around and if so then Roubini's call will be based on the wrong issues. As I have stated many times over the last few months, we believe this market rally is building momentum because of the inflation trade (please see the Sept. 7th post for details). Roubini's call for economic trouble plays right into our inflation trade theory and is the impetus for higher, not lower, equity prices. Those of you who are subscribers to this blog know the familiar refrain: Inflation is a currency event not an economic event. The more negative economic numbers come out, the longer easy credit will flow, the more the Fed will monetize U.S. debt and the U.S. $ will continue to weaken. This progression leads to an ever increasing exodus out of the U.S.$ into hard assets and equities that benefit from inflation or have a growth rate much greater than inflation.

Since, inflation is a currency event not an economic event, it behooves us to keep our collective eyes on the greenback. By closely monitoring the developments involving the U.S.$ we may glean some valuable insight into the direction of both the commodity and equity markets....

UUP U.S. Dollar loses ground to Euro - WSJ WSJ reports the 16-nation euro rose Monday against the U.S. dollar despite attempts over the weekend to boost the strength of the American currency. The euro bought $1.4648 in morning European trading, up from $1.4588 late Friday in New York. The British pound rose to $1.6010 from $1.5919 in New York, while the dollar rose slightly to purchase 89.77 Japanese yen from 89.63 late Friday.

The dollar weakness came even after finance ministers from the Group of Seven wealthy nations talked up the currency amid fears it could fall farther and disrupt the global economy. U.S. Treasury Secretary Timothy Geithner and France's Christine Lagarde stressed the need for a strong dollar. Mr. Geithner said it's "very important for the U.S. that we continue to have a strong dollar," while Ms. Lagarde said "we need to have a strong dollar .. volatility is not welcome."

...When world leaders assemble to talk about supporting a currency and the currency breaks down anyway often an inflection point is rapidly approaching. During the collapse of the British Pound in 1992, British central bankers repeatedly stressed the desire for a strong currency much like "Pinocchio", I mean Geithner, has over these many months.

Norman Lamont was the British "Pinocchio" from 1990 -93. He famously announced he would borrow $15 billion to defend Sterling right before the ultimate devaluation of the currency. At the time George Soros was short $11 billion worth of the Pound sterling and pocketed a cool $1 billion on the day of the devaluation. I only wonder what Geithner will say right before the ultimate fall? (Click for Soros' opinion on the U.S.$ today)

I love the smell of fresh denial in the morning....

Saudi central bank says report on replacing dollar is wrong - Reuters Reuters reports newspaper report that Gulf Arab states are in secret talks to replace the U.S. dollar in the trading of oil is wrong, Saudi Arabia's central bank chief said on Tuesday. Asked by reporters about the story in Britain's The Independent, Muhammad al-Jasser said: "Absolutely incorrect." Asked whether Saudi Arabia was in such talks, he replied: "Absolutely not." The Independent quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.