(Taipan Publishing Group) – Gold, small caps and the U.S. dollar have had a stable three-way relationship for the better part of the 2009 rally. Now the three could be parting ways.

Dr. Marc Faber is one of the few market wise men whose thoughts are worth pondering. His monthly “Gloom, Boom & Doom Report” is always a good read. He is an active, Asia-based investor with decades of experience, hundreds of millions under management, and many prescient calls under his belt.

Faber has stated firmly and clearly what he thinks of the U.S. dollar. As you might expect, his opinion is not too flattering.

In the long run, Faber assigns the buck a value of “zero.” In the manner of all fiat currencies, America’s scrip is slowly being turned into toilet paper. The present cast of clowns in Washington seems bound and determined to accelerate this process as Wall Street cheers them on.

But that’s the long term, mind you. In the shorter term – i.e. for at least the next quarter or so – Faber is bullish on the buck. So bullish, in fact, that he is now on record as a buyer of $USD.

“As of today, I will be long in dollars,” Faber told Bloomberg last week. (Perhaps he is buying from my colleague Adam Lass, who professed on Thursday his intent to remain short.)

Continue reading Justice Litle on Taipan Daily.

This American company has gained 777% the old-fashioned way: selling junk in backroom deals.

As regular readers know, I am a Ford man.

Back when I was a kid, you had to make three really important choices. First, you had to pick a political party. Didn’t matter how well you knew the candidates – you picked a party and that’s what you were.

We are talking Democrat or Republican here. Libertarians weren’t much discussed, and backing the Socialists could get your parents blackballed at work. And if you wanted peace around the dinner table, you just went with the same side your folks did.

Second, you had to choose “your” baseball, basketball and football teams. We didn’t have rotisserie leagues back then, so there was no “à la carte.” You picked your guys, and you defended their every move in the schoolyard and on the stoop – with fists if need be.

Prudent Choices

To this day, I still follow the Mets and the Knicks over the Orioles and Wizards. I am making an exception for the Baltimore Ravens, as I now live down the street from their headquarters. Call me a coward, but I am not going to talk up the New York Jets while standing in line at the local donut shop – surrounded by half the Ravens’ defensive line.

“Just not prudent,” as Bush senior used to say.

Finally, you had state your alliance to one of the big three American automakers. American Motors did not count. You had to decide between Ford, Chevy or Mopar power. Didn’t matter if you’d only ridden in the back seat. You picked your allegiance, and from that point on, that’s what you were.

A 777% Payoff

Now, being a Ford man has not blinded me to some of the truly awful cars they have trotted out in their day. I don’t much care if the Escort was the best-selling car in Asia 10 years running – it was no Mustang. And the Aspire? Don’t get me started.

Lately I’ve been talking up the stock, bragging as to how Ford made all the right moves a couple years back, ditched the deadwood, patched up relationships, rededicated themselves to making cars folks wanted, yadda, yadda, yadda. I was especially proud of the fact that Ford didn’t need to beg capital from the Feds, or declare bankruptcy.

And I have been pretty much dead-on in my assessment. Ford shares have climbed more than 777% over the past 10 months.

Not Quite “Self-Made” After All

But I have to confess to a few minor errors in my theory. Yes, they did indeed climb out of their hole in the most magnificent fashion. What’s more, they look to my eye to be a continued buy for some time to come (I’ll tell you why in just a moment).

But Ford is not quite the “hauled ourselves up by our own American bootstraps” story I have been making it out to be. When you dig a little, it appears that they have been getting more than a little help – and some of it did indeed come from Washington and Wall Street, albeit through back channels.

Let me walk you through some of these backroom maneuvers – connect the dots a bit – and I think you’ll see why Ford shares are still a long-term buy.

Follow the Money: Washington to Wall Street…

Let’s start with dot number one: Goldman Sachs (GS:NYSE).

Back during the bad old days of 2008, when we thought the whole world was going to collapse, all of Wall Street’s major players were brought into a meeting room in Washington and told that they were going to take many billions of dollars in TARP bailout funds. Didn’t matter if you were solvent or not – this was an offer you couldn’t refuse.

Now as you know, Goldman came through the crisis looking like pure gold. And in all fairness, GS has already repaid its $10 billion – something to do with not being able to pay out massive bonuses while stuck under the government’s thumb. But somewhere in the midst of this roundelay, they managed to slip some $250 million out the door to acquire a stake in the parent company of mid-tier Chinese automaker Geely.

Wall Street to China…

Geely wants to expand its way out of the pack to become a major international player, in much the same fashion as Indian carmaker Tata has managed to distinguish itself. So they have taken a page out of Tata’s playbook, and are looking to relieve Ford of their ailing Volvo division for some $2.59 billion (Hong Kong dollars).

Is this really wise? For Geely, perhaps not so much. Tata bought Land Rover and Jaguar off Ford just before the whole luxury market tanked, and the $8 billion in debt has been weighing down their books ever since.

But for Ford, it will be a relief and a source of string-free capital just when they want it most… because Ford wants to send the money right back into China. By 2012 or so, they plan to partner with Chongqing Changan Automobile to open a new manufacturing plant to sell directly into the burgeoning Chinese market.

…And China to Detroit

Follow the dots: Washington to Wall Street… Wall Street to Hong Kong… Hong Kong to Detroit… Detroit back to Shanghai…

A dizzying, twisted path, but in the end, American taxpayers did sort-a-kind-a help Ford out. But at least they did it the honest way – good old-fashioned backroom deals – instead of via socialist handouts and bankruptcy.

Okay, now I am starting to sound like a homer, defending “my” team in the schoolyard. Still, I have to point out (yet again) that Ford is one of the few companies that has come through the crisis with capital intact and a reasonably bright future ahead.

A (Very) Long-Term Buy

Ford currently has some 2% of the Chinese market. Now, we are all expecting that overheated market to sag just a tad. Apparently, Ford sees this sag as a chance to do in China what they did here in the States: acquire market share just when everyone else is overextended.

As for the short term? Heck, I don’t really know. In point of fact, I have already advised readers of my own WaveStrength Options Weekly column to take their Ford call option gains off the table. But long term, it certainly appears that the guys in the corner office in Dearborn have cornered the market on strategic planning.

Follow the Money: Washington to Wall Street…

What I am worried about is what will happen when investors fall off the top of this wall.

“Let me take my chances on the Wall of Death”

– Richard Thompson

An astute observer can easily see how Wall Street and Washington have been trying to push investors toward the latter position. For the past few weeks, we have heard endless examples of lagging corporate profits and failing economic numbers spun as “better than expected” buying signals.

Sometimes the stories are completely contradictory – like when the Fed claims one day that it has to pump out more cash so we can start adding jobs, and the next says not to worry about all that excess cash crashing the dollar, because the lack of new jobs for the foreseeable future will keep inflation under control.

“Well You’re Going Nowhere When You Ride on the Carousel”

The lyrics come from a wonderful song – “Wall of Death” by Richard Thompson, a songwriter and master guitarist out of London’s Notting Hill. Several of Thompson’s lines are more apt descriptions of the current situation than anything I could gin up on my own.

For example, for the past year or so, United Parcel Service (UPS:NYSE) management has sworn up, down and sideways that they would make their annual nut. Didn’t matter how badly they fared with each successive quarter. They would still spin out some yarn as to how the market was stabilizing and the next quarter would be soooo good, the company would up profits in the end.

So far, it has not been working out too well for them… or for the investors who have drank their Kool-Aid. As a result of all this smoke and spin, UPS earnings surprised to the downside by -2.4% last December and by a whopping -7.1% last March. By the time the dust had settled, shares were off their highs by some 57%.

Climbing the Wall – Again

Now, for the past few weeks, UPS shares have been rising again as anxious bulls fling themselves madly at the wall of worry: “Washington and Wall Street keep saying that the situation is stabilizing. What if UPS declares major gains, and I miss the boat?”

The mere thought of getting out of the gate late had buyers in such a tizzy, they drove UPS shares up more than 15% over a few short trading days. And then UPS announced that, once again, they were in the soup. Volume was down 4.6% in the U.S. and 5.5% globally. Revenue was down 17% – far below the levels investors had been led to expect. And profits were down more than 49% quarter over quarter.

One could certainly understand why UPS shares fell like a rock when word of this debacle began to circulate. What is a tad harder to wrap one’s mind around is what happened next…

The End Is Nigh – and This Time We Really Mean It

In an effort to stem the bleeding, Chief Financial Officer Kurt Kuehn claimed: “Declines in both our domestic and international businesses appear to be stabilizing.” Now even Kurt couldn’t just say such a thing with a straight face, so he added a bit as to how volume would remain significantly below last year’s levels.

Not to worry friend Kurt! Despite seeing such promises like that broken month after month, investors jumped back aboard, and drove UPS shares back up to a new multi-month high.

Down 2%, up 2%… all off the same set of really rather miserable facts – heck, all in the same damned 6 ½-hour trading day!

“You Can Go With the Crazy People in the Crooked House”

This isn’t about worrying, folks. One might worry that the economy isn’t growing fast enough. Despite billions in stimulus spending, this economy isn’t growing at all.

One might worry that the central bank’s plans might not be adequate to the task of husbanding our nation’s currency. St. Louis Federal Reserve Bank President James Bullard has publicly warned that the Fed has no such plan in place, and no plan appears to be forthcoming anytime soon.

One might worry that corporate profits aren’t climbing at an adequate rate to support the rise in share prices. Most every report I read indicates down in the very fine print that corporate profits have been falling and will continue to fall like cartoon anvils.

This is not a wall of worry.

This is a wall of death.

Source: The Market Is Climbing a Wall, All Right. But What About Those Spikes on the Other Side?

Washington regularly moves entire cadres off the unemployed list, once they are satisfied that they have no hope of finding employment.

I could reference the latest report from the American Bankers Association, which warns that adding 6 million to the unemployed rolls has driven consumer loan delinquencies to an all-time high. The ABA notes that the number of borrowers behind 30 days or more has risen to 3.22% while the amount of money that is overdue has risen to 3.35%.

The credit card situation is even worse: 4.75% of all accounts are now delinquent, as compared to 4.52% in the previous quarter. And the balances on those delinquent accounts is up 108 basis points to 6.60% of the value of all outstanding bank card debt.

I suppose I could list the seven banks that the FDIC has closed in July. Or all 52 that failed in 2009. Or even the 80 financial institutions that have been shuttered since the crisis began back some 19 months ago.

“We misread how bad the economy was.” – Vice President Joe Biden

It would not be difficult at all to go on like this at great length.

My desk is awash in such depressing reports. I am literally drowning in ugly economic statistics. Even the spinmeisters in Washington are conceding that its “green sprouts” are shriveling up. Turns out, the situation is considerably more dire than anyone predicted, and the stimulus is not working.

Of course, Washington’s solution is to borrow even more, spend even more, regulate even more, and keep interest rates at zero for the foreseeable future, because in the end, it’s the only trick they know.

But all that generalized economic pain and degradation is not what I wanted to bring to your attention today. Rather, I wanted to point out a specific news item I have found, buried on page six as it were, that has the hairs on the back of my neck standing on end.

Bad Medicine Indeed

Remember all those awful mortgage-backed securities that were blamed for laying Wall Street low in the first place? The toxic assets that the TARP fund was supposed to buy up, except that no one could figure out how to price them or break them up, so they are still rotting away in Wall Street’s dank basement?

Guys in New York got fired for inventing them, right? Heck, guys in Asia got shot for buying them! And it seems like no one can figure out what to do about these ugly tar babies.

As the evil genius in the old serials used to say: “Maybe yes – and maybe no.”

This brings us neatly to our friends at Morgan Stanley (MS:NYSE), who are in a bit of a pickle. They would dearly like to go back to the good old days of million-dollar bonuses. In order to do that, they have to ditch their Washington nannies by paying off some $10 billion in TARP loans.

The Fly in Their Pudding

Problem is, this massive payout would cause them to come up short for the third quarter in a row, to the tune of some -32 cents a share. (Or maybe even -50 cents a share: depends on whom you ask). And then there’s all those “shriveled brown shoots” of economic overhang.

Investors want to know how the heck the bright boys at MS are gonna fill a hole like that. And if they don’t get a good answer but soon, they are going to cut MS shares in half.

But these folks are America’s best and brightest, right? So they have come up with a really cool solution. They are going to pedal off $130 million in collateralized debt obligations or “CDOs.”

Sorry about that. Let me give you a moment to wipe up the coffee you just spit out your nose.

Didn’t Kill Us the First Time, So Why Not Try It Again?

Here are the details on the scam (courtesy of a trio of investigative reporters at Bloomberg). The bonds were the result of some sort of squirrelly deal between Goldman Sachs (GS:NYSE) and a private New York outfit called Greywolf Capital Management.

As is, the horrid things were worth zilch. That is, after all, why the world’s biggest institutions have taken $1.47 trillion in write-downs and losses on CDOs and their ilk.

But with a cut here, a snip there and a little paint, and Shazam! Now you’ve got $87.1 million in AAA-grade bonds and $42.9 million in bonds Moody’s has labeled “Baa2,” a polite Wall Street euphemism for “toilet paper.”

What! You say you don’t have any faith in this magical transformation? Don’t feel bad. Neither does anyone else.

You Can’t Fix Stupid, But You Can Sell It Short

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Here is your Technical Chart for Morgan Stanley (MS:NYSE), showing the breakdown signal as traders began to head for the exits. It generously posits support at $22.63 and $20.26. A rebound off either of these levels could still be construed as bullish in the long term.

However, should this short-term drop build some real strength, a genuine fall from grace could see MS shares hit $16.12 with relative ease. And I should like to point out that a 37% drop like that could power select put options up to 191% gains.

Source: How to Dine in High Style on Shriveled Brown Sprouts

You probably saw innumerable stories as to how the World Health Organization was warning first that this might be an epidemic, and then, that it was indeed a pandemic.

But most all of those deaths were overseas. And we’ve all read dire headlines like this before: “Ebola Hot Zone Breakout… Vietnamese Bird Flu Flies Around World… SARS in Singapore… Invulnerable strains of Staphylococcus on Gym Mats… Incurable TB on Airplanes…”

In the end, nothing ever seems to come from it all, except a lot of expensive grants, decades-long studies, and indecipherable papers claiming to statistically prove that next time around we are screwed.

The “Next Time” Is Now

It’s so easy to get numb to it. Unfortunately, I have to tell you that the “next time” really is here. And while I can’t tell you if this is genuinely a plague, I can assure you that we are looking at something of considerably greater impact than a mere bad cold.

Right now, it’s summer in England. The average daytime high is 80°. Most summers, pallid Londoners worry more about sunburn than influenza, which usually sequesters itself to the cold soggy days of winter.

But not this summer. This time, it’s different….

Spreading Like a Plague

In this year of the Swine Flu Pandemic, the rate of illness in London has quadrupled. Proven H1N1 cases have hit 1,794. But those are simply the incidents that have been forensically established.

The Royal College of General Practitioners has just reported that the incidence of “flu-like symptoms” (the euphemism for “it’s swine flu, but we can’t prove it because we have run out of test kits) has now risen to 80 of out of every 1,000 citizens in the city.

To give you a sense of scale, of just how fast this disease is spreading, last week, the figure was 20 out of every 1,000. Heck, last winter during the peak of the regular flu season it was only 60 cases out of 1,000.

When the Bankers Get Worried About the Flu…

H1N1 is spreading like, well, like a forest fire, really. And this is still just the beginning. The World Bank now reports (that’s right: the World Bank is getting involved now – an important clue we will come back to) that it expects transmission to accelerate over the next few weeks as the flu season commences in South America. And as the Bank calculates global impact, it is now factoring in a doubling of influenza mortality rates.

In its Pandemic assessment, the WHO reported that H1N1 has penetrated over 100 countries. But what you probably really want to know is what’s going on right here at home (for those of you in the States).

Here in the U.S., official H1N1 cases have surpassed the 1 million mark, with 127 official deaths. These are once again forensically proven cases – the actual figure may be substantially higher. The median age of those fatalities is 37.

And once again, this is all taking place during influenza’s weakest moment, when ambient temperatures and humidity make it difficult for airborne droplets of the virus to persist. Come winter’s dry, cold air, the rate of transmission is expected to increase tenfold.

How You Can Prepare…

This is not some tale out of history or the plot from some overheated medical novel. These facts are not conjecture or supposition.

This is happening, right here, right now. And there is little or nothing we can do to stop it.

On a personal level, you can tend any nagging health issues now, so as to be in good health prior to infection. Seventy-five percent of recorded fatalities have occurred when the victim has some underlying condition like obesity, pregnancy, asthma, diabetes or immune system problems.

You can do your best to avoid contact with obviously sick people. And to be blunt, you can stay home if and when you get sick, so the rest of us stand a better chance of getting through all this.

… And How You Can Profit.

On an investing level, I draw you back to the World Bank’s concerns. The Bank has just approved “fast-track” status of $500 million to help countries finance emergency operations to prevent and control outbreaks. This is on top of an existing $500 million credit line set up in January 2006 to minimize the threat posed to people by the highly pathogenic avian influenza virus H5N1.

And here in the States, the CDC is planning a massive immunization campaign that could include as many as 600 million doses of the H1N1 vaccine. There are five manufacturers of flu vaccine currently serving the U.S. market. Of the bunch, only GlaxoSmithKline (GSK:NYSE) also produces the post-infection anti-viral treatment Relenza.

GSK shares have already risen some 28% since last March. Come this winter, I anticipate that GSK will rise from its current price of $34.88 to just below $50. Select call options could be expected to rise as much as 236% over the same period.

And, as I have mentioned more than once over the past few months, that will pay for a lot of chicken soup and Tylenol.

Source: The Hot Zone Is Here

Anyone who has ever flown on most any commercial airline is familiar with this scenario: Your plane is supposed to depart in the next few minutes. The big board says the flight is on time. The lady behind the counter is all smiles.

But you haven’t actually boarded or anything. In fact, as you squint out the window, you can see that there is no plane available to board, a fact that the oblivious clerk seems unable or unwilling to acknowledge.

Thirty minutes after your takeoff slot has come and gone, the ubiquitous screens that decorate the departure lounge’s walls suddenly blur, flicker and light up with the announcement that some flights may be delayed… by 10 minutes.

Airlines Crash and Burn

I’ve always wondered: Is this just wishful thinking? “Maybe pixies will make a plane appear!” Or more probably, “Maybe if we say nothing, no one will complain.”

When does arrogance and stupidity become plain and simple fraud?

This unwillingness to admit to the obvious appears to be endemic to the entire air biz. Note the recent behavior of aircraft manufacturer Boeing (BA: NYSE).

Let’s be frank – things really stink these days for the airlines. Bookings are way off, and fuel costs are rising again. As a group, shares are off some 59% over the past 12 months. I have a report on my desk noting that various U.S. and international airlines are looking to mothball some 2,302 planes this year.

Does Boeing care? Does it even deign to notice?

Naaah!

Delays? What Delays? Of Course We’ll Board on Time!

For months now, management has stood firm on previous forecasts for 2009 profits, despite Boeing’s commercial division receiving as many current “contract deferments” as there are fresh future sales. FedEx alone is talking about canceling between 15 and 30 planes. On the military side of the house, the Pentagon is canceling the LMT/BA F-22 Raptor program (at roughly $137.5 million per plane) and cutting off a good chunk of BA’s missile biz.

Faced with (as CEO Jim McNerney put it back in April) “economic times that are more difficult than many of us have ever seen,” BA dramatically hauled back on production, halving Q1 profits along the away. They have completely abandoned even the pretense of a prediction regarding 2010.

And yet they still insist the original projections for 2009 are intact. “Your flight is still on time – honest!” And you know what the most amazing part of it all is? Investors believed every word of it… for a while anyway.

Dreamliner Nightmare

In fact, it wasn’t until BA’s much ballyhooed 787 “Dreamliner” failed to fly in time for the annual Paris Air Show that folks began to wonder about the company’s veracity.

BA’s plane-of-the-future was already about two years behind schedule when top exec Scott Carson stood at the Paris podium on June 16 and promised – Scout’s honor – that the beast would see its maiden flight June 30. Over the course of that two-year delay, BA’s share price lost some 70%.

Now to be fair, that loss parallels the general demise of the American – and global – stock market. But word of the Dreamliner’s launch had managed to prop things up a bit, with BA shares recovering 82% between March and early June.

Failure to Launch

Problem is, Scott Carson’s performance in Paris was BA’s fifth such promise. And just one short week later, BA engineers have revealed that the plane’s ultra-light hybrid plastic/metal wing attachment points would require substantial modifications. They are calling this a minor problem to be expected in the development of a new plane.

I somehow think that keeping the wings on is a tad more than minor.

And now investors are (finally!) noticing that there are no planes loading – indeed, not even any planes at the gate. BA shares are off 20% since word of the 787 debacle began to break, including a 6% single day loss last Tuesday. And there is every technical indication that this downside trend is just getting started. I anticipate BA hitting the low $30s, if not high $20s shortly.

Source: Boeing’s Flight Delayed – or Canceled?

This period fascinates me, because you can make a strong argument it saw the birth of modern financial practice.

It also foreshadowed the inevitable end of reliable currency.

At one point in this struggle, Spain and France had a stranglehold on the source of all “wealth” as it was then known: the gold and silver mines of Central and South America. At the time, this was thought of as an unbeatable advantage.

It didn’t matter if England and Holland’s respective economies were more vibrant and productive than those of Spain and France. If England and Holland could not mint coins, they would go “broke,” and would have to sue for peace.

Unintended Consequences

Strangely enough, this effort yielded the exact opposite result. When they came up shy of specie, businessmen in England resorted to letters of credit backed by literal reserves – stashes of family gold and silver plate and flatware held in jewelers’ vaults. In Holland, they did it one better, creating a robust market in tradable futures contracts.

Now it gets really interesting: The British Crown discovered that it could pay men to sink Spain’s galleons of gold at sea. Once sunk, this golden wealth was gone for good. But if, in turn, Spain or France sank a ship carrying a letter of credit, it could simply be rewritten and mailed again.

Thus we see the birth of modern faith-based currency.

Bad Money Chases Out Good

Still, these letters of credit were a complex tool primarily available only to the very wealthy. And so the shortage of decent coins led to all sorts of mischief, particularly clipping, wherein valuable metal was shaved off the edges of official gold and silver coins, and out-and-out counterfeiting, wherein miscreants ginned up thousands of remarkably accurate dross-metal copies of the Crown’s official gold and silver coinage.

There is an adage in the investing biz that stems from this period: “Bad money always chases out good.” With so much counterfeit coinage in circulation, wise folks would invariably hoard good gold and silver whenever they came across it, and spend dubious coins as fast as they could.

Now everyone knows that debasement of currency is a prerogative the Crown reserves for itself. Then as now, when the central government says a coin or bill is worth thus and such, they desperately need folks to accept that as the gospel truth. This tacit acceptance allows the central government to fund its activities by periodically reducing the actual value of available currencies.

Busted

By 1695, it had got to the point where Birmingham’s metal shops were out-producing London’s mint. So the Crown called upon the Smartest Man in England, Isaac Newton, to take over both official coin production and the prosecution of counterfeiters across the land.

As might be expected from such a magnificent logical thinker, Newton was superlative at both tasks. In fact, many credit him with inventing the modern prosecutorial attack, wherein genuine verifiable evidence (as against mere accusation, rumor and hearsay) was successfully brought to bear against the criminal establishment.

By the time he was done, he had once again secured his monarch’s God-given right to make as few or as many “sovereigns” as he could viably foist on the populace.

Not That They’ll Ever Stop Trying

What brings all of this to mind today are two current news items. The first is the capture by Italian police of two Japanese gentlemen attempting to carry what appeared to be $134 billion in U.S. Treasury notes into Switzerland.

This episode has sent the global financial establishment into dyspeptic fits. Many suspected the U.S. Treasury of cutting an unannounced side deal with Japan in an attempt to surreptitiously fund our skyrocketing debt.

The Italian Carabinieri were desperately hoping this was true, as they would then qualify for a 40% bounty. And trust me when I tell you that $53.6 billion would go a long way toward closing Italy’s own budget shortfall.

The U.S. Treasury, of course, denies that it would ever do such a thing. And now word is circulating that the bonds are merely “Mafia counterfeits.” If so, this might be the grandest abrogation in history of the State’s coining prerogative.

The Biggest Counterfeiting Operation – EVER…

This leads us to the other item on my desk right now: Not to outdone by any punks with printing presses, the U.S. Treasury has decided to trump the counterfeiters by setting a new record in “official” sales.

Last Thursday, the same folks who denied knowing a thing about $134 billion in a Japanese Suitcase announced that they would be selling $104 billion in Treasury bonds over the next week. This breaks the $101 billion record set the last week in April and matched in early May.

And even these sales are mere bagatelles compared with the $2 trillion in new debt Washington intends to flog onto the open market. There is, of course the usual catch. As with any such sudden flood, this incredible oversupply has ostensible buyers casting a jaundiced eye on U.S. Treasuries.

… And Its Inevitable Result

Thus we see the Crown, er, I mean Washington forced to raise the rate of return on each and every promissory note if they are going to move them. This only serves to increase the very debts we are trying to finance.

In the end, either we will have to promise the moon, and in the process raise rates so high they quash the very rebound we are trying to stimulate, or the Federal Reserve will be forced to monetize this debt by buying up excess bonds with freshly printed dollars.

If currency debasement is the royal prerogative, than the current crew in Washington must thinks of themselves as Emperors of the grandest sort.

Source: Stealing the Crown’s Prerogative

It’s commonly held that when Frederick Remington cavilled to William Randolph Hearst that conditions in Cuba were not bad enough to warrant hostilities, Hearst told Remington to shut up and draw: “You furnish the pictures and I’ll furnish the war.”

The truth is, as always, somewhat more complex. Yes, a good tale of death and destruction will hold the public’s interest for a while. But it has to be something they can easily wrap their minds around. And it has to go somewhere if it’s going to have legs.

Just Because It’s Boring…

An example: For a week or so, the H1N1 Virus – a.k.a. Swine Flu – was the talk of the town. Old folks in Asia and Europe were dying, elementary schools in NYC were closing, men in white isolation suits were rushing about doing things that looked important, and the international authorities were bandying about scary words like “Level 5 Epidemic.”

All that hubbub got our attention but good – for a minute or two anyway.

But then it turned out that all we were talking about was yet another iteration of the flu. No piles of corpses on wagons. No quarantine posters on front doors warning off visitors and salesmen. Heck, all some people got were bad chest colds.

And those doctors: Who can really understand all the gobbledygook about reservoirs, global transmission paths and such? “What kind of plague is this?” people wondered. “Ah fergeddaboudit. I just wanna hear about ex-Chrysler dealers burning cars they can’t sell.”

… Doesn’t Mean It’s Going Away!

Now just because a subject isn’t holding the public’s interest at the moment doesn’t mean that it isn’t important. In fact, while the public at large may be “over” Swine Flu right now, there is every indication that it will reclaim center stage come this winter.

Just last week, the World Health Organization’s Director General, Margaret Chan, announced that H1N1 had attained official “Pandemic Status,” warning that the virus was spreading quickly around the globe, with some 30,000 reported cases in 74 countries.

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The authorities now tell us that this was simply H1N1’s initial wave, the first round of what might very well be a long, bruising fight. Now that it is entrenched worldwide, H1N1 is simply waiting for winter in the northern hemisphere to unload its real roundhouse punch.

And this will not be “a mere head cold.” Nor will it strike mostly the old, young, sick or poor. The WHO now reports 144 H1N1 deaths, with most of those fatalities striking adults between the ages of 30 and 50 – the prime productive figures in most economies.

Not the Plague, but Not a Mere Head Cold Either

Now please understand that I am not, repeat NOT, suggesting that this will be some kind of return of the Black Plague or such. You do not need to buy a ranch in Montana and secure it with barbed wire or anything that extreme.

What I am saying is whether we like it or not, whether we ignore it now or not, swine flu IS coming, and it WILL have an impact.

It’s that old “wisdom gap” again. Once again, we know everything we need to, but most folks are simply not paying but so much attention.

How to Cash In on the Wisdom Gap

As I have said many times in the past, wisdom gaps are the source of virtually all really good investment gains. And this time around is no different.

Back in April, we advised WaveStrength Options Weekly readers to buy call options against the British drug company GlaxoSmithKline PLC (GSK:NYSE).

GSK already manufactures the anti-viral drug Relenza, an effective post-infective treatment for H1N1, as well as most of the other flu viruses expected to attack the northern hemisphere come November. It is also one of the prime contractors developing an H1N1-specific antiviral vaccine, which should be available to doctors, hospitals and clinics by late fall.

Short-Term Gains…

The options we advised saw gains of as much as 109% last Friday when the WHO announced H1N1’s upgrade to pandemic status. But this is only the beginning of the mid-term ramp up for this well-placed drug maker.

As I sit to write, the GSK January 2011 35 Call Option contract can be purchased for $550. By mid-winter, when the flu is actually here and can no longer be ignored, GSK shares could be expected to match their 2008 highs at $59.98. That rise would push the sell price on these calls to $1,692, for gains in excess of 300%.

Now that ought to pay for your tissues and cough syrup this winter – and then some.

But all this is mere short-term speculation – a hedge against the potential impact flu will have this year. And while GSK is certainly a major soldier in this year’s battle, it is also a field general of sorts in the war to come.

… And a Long-Term Plan

GSK is forming a joint venture with China’s Shenzhen Neptunus Interlong Bio-Technique Co. to develop and manufacture influenza vaccines for China, Hong Kong and Macau, including vaccines for seasonal, pre-pandemic and pandemic influenza.

GSK will take a 40% stake in the joint venture and will contribute cash and assets equivalent to 21 million British pounds. Shenzhen Neptunus will take a 60% stake in the joint venture and will contribute cash and assets equivalent to 31 million British pounds. While it may take a couple of years for these vaccines to hit the market, the venture could assure GSK’s position at the table for decades to come.

Keep in mind that GSK was a $76 stock as recently as 1999. Forward planning like this could easily see a simple investment in GSK shares double in value over the next 12 to 24 months.

Source: The Invisible Plague

The con was supposedly brought to the colonies by a Dr. Bennett, who was infamous for his ability to hide a pea amongst three walnut shells. Jefferson Randolph Smith – a.k.a. “Soapy Smith” – set up mobs of shell men throughout the Midwest and Alaska before he was caught out and shot in Juneau in 1898.

Today we are once again seeing the rise of this classic fiddle. I am not talking of impossible games of Three-Card Monte played on dark side streets off Times Square or such. Rather, I am speaking of the grand swindle that is being foisted on us concerning oil prices.

It’s Not Under That Nut…

If you peruse the newswires, you will see numerous reports that claim to explain why crude oil has hit $70 a barrel, and where it is headed next. And while they are all replete with supposed “facts,” not a one of them actually gets anywhere near the truth. Rather they attempt to draw your attention as far away as possible from the real issues facing us today.

“Oil is up,” the headlines shout, “because the recession is ending.” A peculiar claim, because most productivity reports note that the numbers are still falling, albeit ever so much more slowly than they have been.

Other analysts state that the tepid recovery will actually be the death of oil. They figure that oil prices are actually following some kind of logical demand curve.

Friends, I will tell you right now, that the pea is not under that shell.

… Or This One Either!

Then there are the analysts who claim that oil prices have nothing whatsoever to do with demand. Rather, this whole rise has been the result of manipulated supply. Oil is actually up because OPEC has reduced output. Not only that, but gasoline is up because no one wants to build new refineries in California.

Don’t even bother lifting that shell, Champ. The pea’s not gonna be there either.

OPEC’s reported numbers almost never match this most contentious of cartels’ members’ actual output. Someone always cheats and sells into the grey market. I am told that the real production variance from peak to trough is maybe 5% at best.

Floating Futures (Literally!)

And then there is the most peculiar fold I’ve heard in recent days. It seems that at oil’s very bottom a few months back, speculators loaded up a fleet of some 33 supertankers and sailed them about aimlessly waiting for better prices.

Now some seven of those tankers are reputedly heading for port looking to unload their $33 crude at the current $70. Talk about taking future hedging literally!

And just to put even more backspin on the ball, I have a report on my desk right now claiming that there is enough oil in those tankers to substantially reduce oil futures by and of themselves.

Shills, I say. Shills one and all.

Where the Pea Really Was the Whole Time

So long as you focus on logical issues like supply and demand, you will never find the pea, folks. Because the price of oil has almost nothing to do with anything going on at Middle East pump-heads or American Refineries.

All of that action is mere distraction – the waving of hands while disguised shills pick your pockets clean. This whole con pivots entirely around the actions of those few grey men in back rooms in Washington, DC, who spend their days seeing to the astounding proliferation of U.S. dollars.

Here is a chart showing crude oil futures’ 74% decline in 2008 and its 76% recovery in 2009.

View Larger Image Here

Nothing new here to see. As I mentioned earlier, most every wire service and cable news talking head has been regaling you for days as to how oil rushed from $50 to $70.

It’s All About the Benjamins

But here is a chart of U.S. dollar futures during the same stretch. Note the increase in value of each individual dollar as Wall Street massive holdings are devalued via the whole mark-to-market debacle.

View Larger Image Here

Now note how the dollar falls as Washington attempts to re-inflate Wall Street’s bubble with billions of fresh new dollars. Glance back up at the chart for oil, and you will see our con artist’s little hidden pea. See how oil’s collapse and return does not coincide with any real change in demand? I mean sure, demand fell a bit… but 75%? I think not. Nor does it match any real change in output. Again, that factor may have varied a whopping 5%. Or not.

Rather, oil prices walk in perfect reverse tandem with the dollar. And we all know what Washington is doing with dollars these days.

View Larger Image Here

Not everyone is fooled by the sly subterfuge of supply and demand. There are plenty of insiders who know exactly how the con works.

When you read that Goldman’s Arjun Murti is calling for oil to increase another 18%-20% this summer and fall… Or that Black Rock Energy and Resources (the most accurate mutual fund on record when it comes to oil profits) is calling for crude to climb 30% over the next few years… you have to know that they are watching the proliferation of dollars more than any other indicator.

They know where the pea is, and how to profit off it.

And now so do you.

The Great Oil Price Shell Game

Unfortunately, you eventually have to open the sack full of angry cats to find out how it all comes out. And then there’s that part about going to jail (or hell) because you put cats in a burlap sack.

Not that I would ever do something like that. This is really just one of those mental exercises. But I do watch economists a lot. I guess someone has to.

The One Real Question

The big argument this week: “The V-shaped bottom” versus “The Second Valley.” I guess we should open the sack a bit and see who’s winning.

Adherents to the former believe that we have seen the worst that fate (or rather our own stupidity and credulity) can dole out. They connect the dots thusly:

1. Real estate crashed,
2. The banks crashed,
3. The market crashed,
4. We had a recession.

The Beginning of the End

Now they believe that the recession is drawing to an end. They know this because real estate is selling again (albeit at dramatically lower prices), the banks are being taken over by Washington, and American corporations are hemorrhaging just a tad less cash this quarter than they did in the last quarter of 2008 (or in the first quarter of 2008… or maybe the fourth quarter of 2007… whatever. It doesn’t really matter which, so long as the comparison makes the situation look less dire).

It’s kind of like the line from the old blues song: “I’ve been down in the gutter so long, the curb looks like up to me.” To these sunny-minded optimists, “a little less bad” is the new “good.”

They have even found a way to describe the bankruptcy of two-thirds of the American auto industry as “a good thing.” It’s all about “certainty,” you see. When we were only pretty damn sure GM and Chrysler were bankrupt, that was “uncertainty.” And everyone knows uncertainty spooks Wall Street.

Certain Losses

But now we are absolutely sure that bond and stockholders will lose billions of dollars, and that plants and dealerships across the country will close, destroying hundreds of thousands of jobs and evaporating even more billions in increasingly rare tax revenues.

Well, now we definitely have “certainty,” although perhaps not clarity.

And the conclusion the “V-Shaped Bottom” types draw from all this? Spring 2009 was the grand bottom. Now anyone who doesn’t buy shares indiscriminately will miss out on the chance of a lifetime.

The Ugly Truth

The “Second Valley” types are a hair less optimistic. As they see things, the victim of our little train wreck has stopped bleeding so much mainly because the patient is running out of blood. And all that is in that transfusion bag is plasma – a thin substitute for Type O.

Second Valleyers see the facts as somewhat more complex, and a good bit more disturbing. Here’s how they line up the dominoes:

1. For the better part of a decade, Washington pumped trillions of new dollars into the system. (Actually they have been doing that for several decades, but that is a different day’s rant.)
2. This made the market price for all sorts of things – stocks, real estate, oil, food, electricity and of course gold – go up. Not the value of any of these things, mind you. Just the number of dollars you might have to give up to get a unit of most anything.
3. Unfortunately, wages simply could not keep pace with this inflation without destroying Wall Street’s ostensible profits. Thus we see folks borrowing more and more, to buy fewer things worth even less.
4. Eventually folks began defaulting on those loans, be they credit cards, car loans or mortgages, beginning of course with the most vulnerable low-income types, with their “NINJA” loans (”No Income, No Job or Assets,” for those of you who missed out on this particular bit of accounting fraud) and such. For a while the middle class could act smug, but inevitably most all of the country proved to be somewhat over-extended.
5. Now we see the bubbles pop: Down comes real estate, down comes the banks, down comes Wall Street (whose delicate dollar-inflated profits were doomed after all), down comes oil and steel and pork bellies, the whole nine yards as it were.
6. And finally, to solve all this, in essence to re-inflate Wall Street’s bubbles, Washington proposes to pump trillions more fresh dollars into the system.

Highway Robbery

Second Valleyers tend to see that last item as a bit of a problem.

Okay, that’s an understatement.

Actually, they see it as a nigh-treasonous act of currency debasement, in essence, a secret tax on most every citizen who managed through common sense to avoid pouring their wealth down the toilet during this debacle. In the end, they warn that this sort of irresponsible pandering will lead to the collapse of the American economy.

Propping Up Zombies

What’s more, Washington’s dollars are propping up bad institutions that most probably ought to be allowed to fly or die on their own. Just look to the troubles Great Britain, Japan and South Korea had for decades when they refused to allow financial Darwinism to take its natural course.

But these are long-term issues, and the Second Valley theorem warns of far more immediate problems. It notes that more Washington dollars do not actually solve any of the endemic troubles that laid us low back in 2007.

In fact, it may even make many of them much, much worse.

Caught Between a Rock…

All those proliferating dollars are once again creating artificial new highs in all sorts of commodities. Cotton, copper, steel, and most especially oil are all hitting six-month highs.

Where once those same economists (you know, the ones we tied up in the burlap sack?) argued as to whether oil could beat $50 a barrel this year, now they are falling all over themselves to be the first to call for $70 oil next month.

The plain and simple immediate result? American business has yet to show a genuine recovery. Sales are still god-awful slow, and margins are stretched so thin as to be invisible. And now raw material costs are shooting up ahead of the curve.

… And a Hard Place

American families are caught in the same vise. Just as they figure “Maybe, just maybe we’ll pull through this,” their gas costs and food costs and who-knows-what-else costs are starting to climb right back toward the tipping point that put us all in the soup in the first place.

No wonder spending is down and savings are up. It’s the first rational act we’ve seen in over a decade.

The net result: next quarter’s profits are going to really stink. Probably worse than the previous quarter, and possible worse than most any quarter they try to find to make things look prettier.

Tipping Into the Second Valley

And when word gets out about it, you can just bet that stocks (at least the most vulnerable ones) will take it on the chin again too. Thus the sobriquet “Second Valley,” wherein both the economy and the stock market do a quick three-month gut check.

Now I must confess that I do believe in most all of the tenets of the Second Valley Theorem. But I am also a bit of a realist.

I don’t really know for a fact that the Dow will reach all the way back to 6,469 again. Perhaps it will just grind along around these levels for a month or three. I am even willing to concede that more than a few stocks will actually shine during this episode. However, I believe that they will be the exceptions rather than the rule.

Use the Pinch to Squeeze Gains out of Transports

And I certainly believe that certain companies are exceptionally exposed to downside during this period. For example, I asked my WaveStrength Options Weekly readers to purchase put contracts on FedEx (FDX:NYSE) last Tuesday, because the freight company is exposed on two fronts.

A slowdown this summer will reduce outright sales, while spiking oil will raise FDX’s chief costs – gas for local vans, diesel for long-haul rigs, and kerosene for jets – to untenable levels. We are looking forward to short- to mid-term gains of 44%-79% off this play.

I advise you to do something similar. Both FDX and UPS (UPS:NYSE) look like good short candidates right now. And if you are unwilling to short a company or speculate on downside with put contracts, at the very least, please purge any transports you may have picked up over the last few months.

Source: The Truth Behind the Second Valley Theorem