The latest Spectrem Millionaire Investor Index was released on Wednesday. It confirms the gloomy mood of investors. The index is based on interviews with a subset out of 250 high wealth families. After 3 months of growing confidence the index fell 18 points to -20. Its largest fall since it was started 5 years ago. A range of -11 to -30 is “mildly bearish”. This reverses a record 17 point advance seen in May. This shows just how volatile market sentiment is right now. As for their biggest fears, they were split between the economy and the political climate (27% of the vote each).

“Millionaires ended the first half of 2009 with a substantial decline in investment optimism, ending a run of three-consecutive monthly advances that began in March. The broader affluent population also saw optimism fall. With the economy and the political climate ranking as top concerns, the nation’s wealthiest investors appear to be reassessing their springtime optimism as we move into the summer months,” said George H. Walper, Jr., President of Spectrem Group in their Press Release.

This survey echoes what I have been saying about mixed messages in the market. Investors hate uncertainty. The recent strong performance in the equity markets looks like yet another bear market rally. Having lost a substantial amount of their wealth during 2008 the rich are now being more cautious.

I expect a shift of funds back into conservative assets such as cash, gold and fixed income in the second half of the year.

If you are interested learning how to better manage your money with the Family Office, please reply toinfo@contrarianprofits.com

Take two days off and look what happens… the recession has bottomed.

At least that’s what “they” would have you believe. While we locked ourselves in our bimonthly editorial meeting the last two days, we missed some new “the worst is over” calls. Here’s the rundown:
“The pace of economic contraction is slowing,” declared the Federal Open Market Committee yesterday after emerging from a two-day meeting of their own. Even though Mr. Bernanke and his brood say, “economic activity is likely to remain weak for a time,” the vibe from the FOMC statement was decidedly rosy.

Of course, inflation “will remained subdued for some time” and the group will leave rates near zero “for an extended period.” Same old story at the Federal Reserve. The rest of the Fed announcements were nonevents… new age lending programs and quantitative easing will neither increase nor decrease before their next meeting in August.
Despite all the data out this week — new and existing home sales, GDP, jobless claims — only one has given the Street a jolt: durable goods.

Orders for items meant to last a few years increased 1.8% from April to May, smashing Wall Street’s expected 0.4% growth. Never mind that orders in the first five months of 2009 are down 27% compared to 2008… May’s number is another green shoot! Hooray!

“I get figures on 70-odd businesses, a lot of them daily,” said Warren Buffett yesterday. “Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still under way and it looks to me like it will be under way for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true…

“I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”
Speaking of Buffett, his annual charity lunch auction is proving to be an annual sign of the times. Last year, the oversized $2.1 million winning bid for a lunch with Buffett came from a Chinese fund manager — three times the previous year’s winning bid. This year, with only one day remaining, bids for the eBay auction are up to “just” $350,000.
The U.S. economy didn’t contract quite as much as reported in the first quarter, the Commerce Department announced today, adding to the optimistic mood. The government arm finalized first-quarter GDP numbers today. Their initial report detected a 6.1% contraction. The first revision was a 5.7% fall, and now Commerce claims the economy shrank just 5.5% in the first quarter of the year.
The OECD has drastically revised its growth expectations for the U.S.

“Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year,” said Jorgen Elmeskov, the OECD’s acting chief economist. The group now forecasts a 2.8% U.S. economic contraction in 2009 and 0.9% growth in 2010 — a huge revision from their most recent call of a 4% decline this year and zero growth in 2010.
As far as the stock market goes, we timed our two-day break well… since Monday’s swift sell-off, major indexes have gone nowhere. Despite all the data and the latest FOMC meeting, the Dow sank 0.2% Tuesday and 0.3% yesterday… yawn… stretch.
“This sideways trade for the last few weeks is typical of summer markets,” writes our commodities trader Alan Knuckman, “even in an anything but a typical year for investors. Everyone is so conditioned for strong moves in either direction it has left many unable to handle an undefined trend.

“The stall has disappointed many market watchers — with some calling for a new downturn. Over my years I have found it better to follow the trend without trying to catch the turn. Don’t be too proud to miss some of it. Most of the money is made in the middle of a trend, and that’s where we’ll stay here at Resource Trader Alert.

“Volume seems light and something is needed to spark movement after the large bull run. The S&P 500 channel — with lows last week at the 899 level (as a support level) and highs at 925-plus — is an area to watch closely for future clues. At the same time, Treasury bond futures weekly highs at 117 and lows at 114 have held traders in check. The breakout for either asset class will light the way down the future path for the markets.

“For now, let’s wait and see what trend develops. Have some wine, and let the market sort things out.”

When the next trend emerges, will you know what to do? Have Alan be your guide, here… at Resource Trader Alert.

(For a closer look into the psyche of our resource trader, be sure to check out today’s P.S.)
Commodities have succumbed to selling pressure. Since peaking at $987 in late May, gold has been in a state of steady decline. It found a temporary bottom early this week at $919 an ounce and has since inched back up to $935.

Oil fell from a recent high of $72 a barrel to as low as $66 this week. While the front-month contract has recovered to about $68 this morning, we detect a dark cloud forming over the sector.
“Oil had a strong climb,” reports Byron King, “and pushed up over $70 per barrel just a few weeks ago. Then oil met with market resistance. So the price of oil retreated into the current $60 range. Could oil go lower? Yes, at least in the short term. Oil could drop back into the $50s, despite its traditional strength during the summer driving season. You might see gasoline prices pull back 10-20 cents per gallon, which will make that trip to the gas station a buck or two cheaper.

“A pullback like that in oil prices will take the steam out of recent stock market gains for oil producers and oil services. So if you want to take any oil profits, now is probably a good time.

“No, this is not a sell recommendation for the oil sector, or any company in the energy side of the Outstanding Investments portfolio. What I’m saying is that we might have a pullback in an otherwise long-term, generally rising trend for energy. Thus, if you are of a trading mind, then take your recent energy gains now. Book some profit, and hold onto the cash for later buying opportunities. Otherwise, don’t be shocked if the energy stocks take a summer swoon.

“Longer term? Oil is headed upward in price. That’s just plain baked into the cake. Half of the world’s daily oil use is now going to developing countries. And by definition, developing countries are… developing. They are using more and more oil, or how else do you think they are developing? So even if oil use in the developed world just stays flat, that oil will still find a market.”

Outstanding Investments remains one of the greatest values of our industry. If you’re not a subscriber, get with the program,here.
The U.S. housing market is back to underperforming expectations. We saw the latest existing home sales and new home sales numbers this week — both failed to meet the Street’s forecast.

The National Association of Realtors reported 2.4% growth in existing home sales Tuesday, to an annual rate of 4.7 million. The stock market — no longer satisfied with meager housing growth — wanted a rate of 4.9 million and suffered a small sell-off.

Even though sales managed to increase in back-to-back months for the first time since 2005, existing home prices are still plummeting, distressed sales are still booming and the market is still saturated with a 9.6-month supply of homes… a positive sign that the free market still works, but hardly reason to call a bottom.
And new home sales are still slipping into the abyss.Sales of new houses fell another 0.6%, to a 342,000 annual rate, the Commerce Department said yesterday. That’s down 32.8% from last year — we hasten to add, a time when the housing market was already in the dumps. Making matters worse, Wall Street analysts were calling for a 2% rise in new home sales. And like existing home sales, the price of new homes is still falling (down another 3%, to $221,600), and inventory is still at a lofty 10-month supply.

Check out this chart of new versus existing home sales. Both have historically moved in near lock step, with the exception of last two years. If this trend is destined for a “regression to the mean,” we wouldn’t be surprised to see new home sales level out and existing sales take a turn for the worse.

The dollar’s still stuck in a range. The dollar index took a quick trip below the infamous 80 score yesterday after the FOMC’s announcement, but has since climbed back up to 80.6… not far from where it’s been for the last two weeks.
Today’s “take it for what it’s worth” dollar quote, from IMF chief economist Olivier Blanchard:

“For the U.S., it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar.” Hmm…
“I’m a raving fan of The 5, but come on,” writes a reader, referring to Monday’s issue, “couldn’t you muster a better defense of capitalism to the latest apologist?

“It is not capitalism that allowed derivatives and excessive debt levels. It is the distortion of a fractional reserve fiat currency system that is a statist addition to it that did. In a free market with a gold standard, every security bought must be funded with actual value, rather than leverage levels being allowed to explode. It is the printing press, credit creation and the statist monetary system, and not capitalism, that is the source of this crisis.”

The 5: Heh, well, there you have it.

P.S. We feel obligated to share this photo with you, if only to legitimize Addison’s recent iPhone purchase. During our marathon editorial meeting yesterday at 14 West, the fire alarm sounded. The whole building cleared out to a nearby park. Most were content with a break… we’d been vetting our ideas nonstop for the last few hours, and the alarm was a welcome excuse to relax, grab some coffee, have a smoke, etc.

Not for Alan Knuckman, editor of Resource Trader Alert. We didn’t ask how many trades he managed to fire off during the 10-minute alarm, but it was quite clear that he was in the zone. You can take the man out of Chicago… but don’t expect him to stop trading:

Curbside commodity options, fueled by Big Gulp

P.P.S. Did you learn from 2008? If so, you’re actively seeking ways to hedge your portfolio from another market fall. We’ve gathered our favorite strategies for playing the next bear market here, in our latest special report.

Source: Bernanke’s Forecast, Buffett’s Green Shoots, Can’t Miss Data, Taking Oil Profits and More!

Good day… And a Happy Friday to one and all! The end of what seemed to be a very long week… The last weekend in June, can you believe that? Next week, we’ll be getting ready for the 4th of July celebrations! WOW!

Well… What a volatile week it has been in the currencies! Up, down, all around, and settling back to levels that we saw before the Fed’s FOMC meeting earlier this week. Suddenly, investors are looking for yield again… Looks like they are “Desperately Seeking (not Susan) Yield! And why not? The Fed, and the Bank of Canada (BOC) have come out and said that there will be no interest rate hikes until we’ve turned quite a few pages on the 2010 calendar.

So, with investors clamoring for yield, the dollar gets taken to the woodshed… As I said earlier this week, one of these probes above 1.40, need to take hold of the figure and build on it, otherwise we’re doomed to remain in the 1.35-1.40 range, and range trading is for the birds! Talk about counting flowers on the wall, and watching paint dry! UGH!

I was shocked yesterday to see but a few emails asking me more about the SDR’s story that I talked about… Men, women, boys and girls, all… This is important stuff! Don’t take it lightly! There’s a movement underway that could end up costing you dearly, if you do not take the diversification steps…

I think it is important to know that the BRIC countries (Brazil, Russia, India, and China) are serious about replacing the dollar with a “global currency” i.e. the IMF’s SDR’s… And… That the BRIC’s want more power on the World’s stage… And why not? These countries currently have almost 3 Trillion in foreign reserves… And… A very large piece of the world’s population… (Thanks for that fodder, Kevin!)

OH! And guess who was banging the drum for a “super-sovereign” currency overnight? China, that’s who! So… They’re Baaaaaaaaccccckkkkk! OK… This was the People’s Bank of China (the Central Bank), that made this statement, along with a call for the IMF to manage part of member’s foreign exchange reserves… Hmmm… OK, I just said that China wants more power on the world stage, and here they are saying that their puppet will be the IMF! OK, I took some liberty with that, but it’s the way I see it!

OK… Back to what’s going on in the currencies today… Hmmm… The dollar is getting taken to the woodshed to end the week, that’s what’s happening! And the currency leading the pack with regards to performance VS the dollar, drum roll please…. The Brazilian real… A 3 day “winning streak” has the real back to levels it saw before the Brazilian Central Bank (BCB) cut rates about 10 days ago…

The way I see it, and long time readers know this will be interesting in the least, is that investors want to invest in the BRIC countries, but there’s very little liquidity there in each of those currencies, along with very little yield, except… In Brazil… Liquidity isn’t what the majors enjoy, in fact it’s still traded on what’s called a “non-deliverable forward”, which means it can only settle in dollars, with no deliverability, but… It’s traded easier and less costly than the other BRIC’s and… It has the highest interest rate available… So… You can see why investors are buying reals…

Having said that though… You must know about the volatility… Look at what happened this week… On Monday, we started the week with the real at 1.9750, only to see it rocket to 2.0326 in one day’s trading, a near 3% move / loss in one day! Then we saw it rally back to 1.9795 the next day, and after 3 days of gains the real sits at 1.9420 this morning, thus generating a “gain” for the week! And… The other thing, is that Brazil is considered an Emerging Market… And long time readers have learned over the years that when one Emerging Market gets slammed, they all get taken to the woodshed… So… Be careful out there!

A high yield currency that far removed from the early days of trading like Brazil, but offers yield, is the New Zealand dollar / kiwi… And kiwi has been held back, although still posting a gain VS the dollar, overnight as 1st QTR GDP printed at a negative -1%, thus marking the 5th consecutive quarter of negative growth in New Zealand…

I’m probably out there on the big fat limb (to hold me up, of course!) by myself on this one, but… I personally believe that both the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) have seen the lows in their interest rates, and no further rate cuts will come from these respective Central Banks. I know, that last week, we were all hyped up about future rate hikes from the RBA in 2010, and we probably got a little ahead of ourselves with that thought… I’m probably ahead of the curve on the “end of rate cuts” talk… But that’s where I like to be!

So… When the world’s investors are looking for yield, they don’t have to go to Brazil, or India… They can go to the old reliables… Australia and New Zealand, with a reduced fear of further rate cuts… At least that’s they way I see it! And yes, I could be wrong…

And how about Gold and Silver this week? What a week on Mr. Toad’s Wild Ride for precious metals… The main thing though is that they are finishing the week with a rally, and Gold which was trading at $922 on Monday, is $944.85!

And how about that grilling that Big Ben Bernanke received yesterday by legislators over the Fed’s conduct in the Bank of America (BOA) takeover of Merrill Lynch… You may recall that BOA’s CEO, Ken Lewis said he was “bullied” into taking over Merrill and not disclosing to his shareholder all of Merrill’s losses that were on the books… Big Ben denies that he participated in any bullying… (doesn’t that lead to Paulson then? Did Big Ben just throw Paulson under the bus?)… Any way… Big Ben did little to convince the legislators that the Fed didn’t keep their hands out of the cookie jar… And that, my friends, may be the foot in the door that we’ve been looking for… Maybe, just maybe, because you never know, but with the legislators having questions about the Fed and Big Ben, they probably aren’t in any mood to hand over the regulatory powers that the President wants to give them…

And… My old fave Central Banker, NOT! Big Al Greenspan was back in the news last night… I’m trying to figure out how he and I got on the same side of the ship… But, here was Big Al, my nemesis for years, talking about inflation being a concern… Let’s listen in to Big Al… Alan Greenspan, former chairman of the Federal Reserve, said the threat of inflation needs to be confronted because it poses a threat to economic recovery. “Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge,” Greenspan said. “If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012.”

Of course, I think inflation will be showing its ugly face next year, not 3 years from now!

And on the data front… The Weekly Initial Jobless Claims “surprised” economists by moving back up, after falling last week… 627,000 unemployed Americans filed for unemployment claims last week… No “green shoots” here! In fact… We need to see if we can use these so-called Green Shoots that the President and Big Ben keep talking about, for ethanol… They’ve got to be good for something! HAHAHAHAHAHAHAHA! I must say that a reader gave me that line!

And here’s Warren Buffett on Green Shoots… “I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”

And… Then… There was this… A good story to end the week and head to the Big Finish with…

Barclays Capital Inc. (Barclays) the world’s third largest currency trader, have lowered their one-year forecast for the dollar, saying foreign investors will reduce their purchases of U.S. assets… Barclays referred to the dollar’s status as “safe-haven paradise lost”, due to the ballooning fiscal deficit and the printing of money by the Central Bank… Barclays believes that the euro will be trading at 1.50 in a year…

Hmmm… Nothing new there for Pfennig readers, but, I always find it to be good to see others with their BIG research departments, no divisions, yeah, divisions, that’s bigger than a department! Wait, get back on track, here Chuck! Yes, the Big research divisions, that finally come around to what little old me has been saying for months now… Oh! And that “little old me” has just got to crack up any one that knows me, and have seen me lately!

And one more thing… Oil is back to $71 this morning, as there has been more problems in Nigeria… Let’s hope these problems go away!

Currencies today 6/26/09: A$ .8055, kiwi .6450, C$ .8710, euro 1.4085, sterling 1.6490, Swiss .9210, rand 7.9680, krone 6.4250, SEK 7.8125, forint 196.20, zloty 3.1975, koruna 18.50, yen 95.40, sing 1.4540, HKD 7.75, INR 48.21, China 6.8338, pesos 13.18, BRL 1.9420, dollar index 79.86, Oil $71.07, 10-year 3.55%, Silver $14.25, and Gold… $945.65

That’s it for today… Well… Today marks the 2-year anniversary of the surgery that removed my cancer ridden femur, and replaced it with a prosthetic. Quite an ordeal, but… Here I am! Rock you like a hurricane! Oops, sorry, got carried away there! I’m so happy that’s behind me now! Well… Michael Jackson has died at 50 years old… When I think of Michael Jackson, I just remember my two oldest kids, playing that Thriller album over and over again. The heat wave over us continues, but is expected to back off next week… My little buddy, Alex, turns 14 on Sunday. WOW! We began a tradition when he was quite young, of the two of us going to breakfast on his birthday. Two years ago, when I was in the hospital, my darling daughter, Dawn, brought Alex to the hospital with breakfast, so we could continue the tradition. I hope I can continue celebrating with him for many years to come. So… Happy Birthday Alex! Real long time readers might recall when Alex was 3, and would sit on my lap as I wrote the Pfennig from home, and every once in awhile the text would look like this… 9087lkndy7, and I would say, “sorry, Alex is helping me again”… Alex has already made me aware that he can get his drivers permit next year… YIKES! OK, time to head off into the sunrise… (not sunset, as I’m writing at daybreak, HAHAHAHA) The currencies are having a Fantastico Friday, so why don’t we joining them?

Source: Desperately Seeking Yield

Generally, we like it like that. It makes us feel special. Instead of pulling up our knee socks and getting out our pompoms along with the mainstream media hacks, we remain ever sceptical about tales of recovery… of so-called “green shoots”… and, above all, of Washington’s empty promises and various boondoggles.

But once in a while, it’s nice to know you have friends… that people far smarter than you share the same opinions as you do.

So it was with much delight that we opened up the latest King Report from honorary underground investor Bill King – a Wall Street veteran of 30 years.

King, an analyst with M Ramsey King Securities, Inc, understands something we hold as a central tenet here at Notes: the inside world of Wall Street is far different that what is disseminated to the masses.

So how does King view the “green shoots” recovery and the recent rally in stocks? Well, some points will be familiar to Notes faithful. King says that:

1. “Green shoots” are just another Bernanke equivocation and Street yearning
2. “Insider” banks have fleeced patsies for necessary capital
3. The dollar, bonds and commodities keep checking the Fed across the big game board. And in order to avoid being checkmated, the Fed has been forced to sacrifice stocks
4. The current “second derivative” rally, which is the latest permabull/Street shill euphemism for “dead cat bounce,” is occurring on very poor technicals. As we pointed out yesterday, volume is contracting, which is contrary to the start of any bull market. And leadership is by the misfits, which is never good.

But King also brings a lot of new insider intelligence to the table. And, boy is he suspicious of the “green shoots”/V-shaped recovery story being churned out by the mainstream media.

King points out that the Prince of Darkness himself, Goldman Sachs boss Lloyd Blankfein, recently stated that this is not a recovery, that the recession will be “long and protracted” and that any recovery would be “shallow.”

As we’ve noted on numerous occasions, Blankfein is the insider’s insider – he certainly has the ear of Treasury Secretary Geithner and former Goldman alumnus Larry Summers, President Obama’s chief economic advisor.

What really caught our eye, however, was King’s assertion that the “deflation trade is back in vogue.” Short term, this means stocks and commodities should fall and bonds and the dollar should rally.

As we said before, the Fed can’t afford to let long-term bond yields to rise too much: this trend, if were it to continue, would push up mortgage rates and kill off even the remotest possibility of a housing market recovery. And with 30-year bond yields pushing 4% yields, it was clear that something had to give.

The problem for the Fed is that massive budget deficits mean a massive increase in supply of Treasurys and the threat of higher yields. And this puts further pressure on the Fed to monetize the debt by buying back bonds. As King puts it:

Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward… leading to a serious problem down the road.

The Fed, dear reader, is boxed in. If it doesn’t step in to monetize the debt (by buying bonds from the Treasury with freshly printed dollars) the excess of supply over demand in the US Treasury markets will push up yields… and therefore borrowing costs across the entire economy.

If it decides to monetize the debt, it will push up inflation expectations (the more money in the system the higher the likelihood that this will translate into higher inflation rates) – and yields will rise anyway.

The only real solution would be for Congress and the Obama administration to lower federal spending – and as this has a snowball’s chance in Hell of happening. Team Obama is on a spending binge that makes a recently dumped Valley Girl armed with her daddy’s platinum card look thrifty.

We’re sticking to our script – deflation now, (hyper)inflation later. There is simply too much pressure on the US economy to give the authorities – who are largely responsible for the current mess in the first place – room to wriggle.

Of course, the big market movements will happen on the back of the Fed’s upcoming (at the time of writing) policy decision today.

We note with interest that the Dow has risen by an average of 2.5% on each of the past four Fed decision days. Three of those four rallies were followed by sharp declines that erased the gains.

This should speak volumes to those of you who still think we have a free market.

This is important. Because investors who fail to grasp the government’s role in the market will sooner or later get seriously burnt. None of us live – or invest – in a vacuum. So the question is: how much do macroeconomic conditions determine the reward you earn from your efforts?

According to crisis investor James Dale Davidson, macro conditions determine more than you think. In the upcoming issue of James’s investment research service, Crisis Strategy Alert, he hones in on the implications of America’s ballooning unfunded liabilities – and what this means for your financial future.

James’s message is simple: get out now while you still can.

Clearly, US politicians were thinking ahead when they established the peculiar system of taxation that made income taxable by citizenship rather than residence. If the US taxed as almost every other country does, by domicile, the airports and ports would be crowded with people heading for the exits.Even so, I still think there may be a strong argument for getting out. Unless you are convinced that the fiscal and monetary framework, the tax regime and the prospect of monetary disruption are almost completely irrelevant to your prospect of success, you have to recognize that the United States faces dire straits in the years to come. Weimer Republic, the sequel, is almost a best case scenario.

The primary Social Security deficit has already kicked in. Already, less money is being taken in through payroll taxes than is being paid out to retirees. The forecast that the Trust Fund will be depleted in 2016 counts accrued “interest” owed by the Treasury to the Social Security account. This is a noble fiction, much like borrowing money from your left trouser pocket, placing it in your right pocket, and promising to pay interest to your left pocket on the money you proceed to spend.

Equally, almost $90 trillion of the unfunded entitlement debt is owed for medical entitlements to retirees. It is far from obvious that hyperinflation would obliterate these obligations, rather than raising them to a higher nominal value.

The real issue facing the US economy is that it is being bankrupt by the accumulation of social costs. In almost every field, costs in the US have hypertrophied – largely, I believe, as a negative consequence of long-term US stability.

James’s views are not for the fainthearted. And the recommendations in each monthly issue of Crisis Strategy Alert are nothing if not unconventional.

But if you’re interested in learning about profitable alternatives to the status quo and you want to make money from the continuing economic collapse, James’s investment research and macro reports are exactly what you’re looking for.

To take a 60-day risk-free trial of Crisis Strategy Alert, simply click here.

We see red on our Google Finance screen. And nasty little minus signs. The Dow closed down -1.25% yesterday. The S&P 500 fared worse. It ended the day down -1.27%. The yield on 10-year T-bonds dropped too, signaling increased demand for safer havens than the notoriously capricious stock market.

What’s there to doubt? We were under the impression here at our Notes bunker that the global economy was awash with “green shoots.” Investors have been piling into junk stocks since March. US equity markets are up 37% in just under four months. Why stop now?

The bulls’ answer is that the recent flagging in stocks is a necessary “consolidation” – a “breather” on the way to the moon. But concern is growing that the rally may not have the staying power the green shoots brigade has been touting.

Here at Notes we’ll be watching closely as the end of the month – and this quarter – draws to a close. This is when companies often put out profit warnings. We’ll also be keeping a beady eye on those 200-day moving averages. If the Dow and the S&P 500 break below these magic lines there could be trouble.

Underground investor Karim Rahemtulla, investment director of the Smart Profits Report has been warning investors about overheating stocks for the past couple of months.

He’s also been warning investors not to get suckered by the short sell. According to Karim, if you’re not careful this can lead to a nightmare scenario: the short squeeze.

You short an asset that you’re convinced is about to decline, but it turns the tables on you and rises instead. You’re now on the hook to buy the shares at a higher price than you borrowed them – and you’re on the wrong end of a short squeeze.A short squeeze puts short sellers in a losing position, faced with the prospect of unlimited losses as the asset rises. The more people who went short, the more severe the reaction will be.

In a panic, they all pile into the stock at the same time, trying to buy back the shares to cover their trades and get out of them. This is known as short covering – and the buying demand, coupled with the lack of sellers drives the price up even more, thus adding to your unlimited losses.

For example, let’s say you shorted 1,000 shares of Boeing (NYSE: BA) at $35 where it was three months ago. That would have given you $35,000. But you’d still have to replace those shares eventually because you only borrowed them.

But Boeing has performed very well over the past three months and is trading around $50 today, so if you hadn’t covered your shares till now, you’re forced to buy them back for $50,000 – a loss of $15,000. And the more the stock rises, the more you lose on your original investment.

Bill Bonner reckons the rally is a head fake – just like the ‘recovery’ of 1931. Readers with even a passing knowledge of history will know that the Great Crash of 1929 was just the beginning of the Great Depression.

The rise in stocks in 1931 was nothing more than a cruel joke, a bull trap that lured hungry investors back into stocks only to drag them down to a new bottom on July 8 1932. This was the day the Dow finally bottomed out at a puny 41 points – a mere tenth of its September 1929 high.

Of course, Team Obama is now in charge. And student of the Great Depression Ben Bernanke is heading up the Fed. What can go wrong? More than you think, says underground investor Rick Ackerman, a veteran market maker on the floor of the Pacific Market Exchange (hat tip the Daily Reckoning)…

Bailing out the economy and the banking system has been such a brazenly corrupt, mendacious and, ultimately, doomed enterprise that one could almost forget for a moment how very clever the perpetrators are. If we needed proof that these guys are the slickest behind-the-scenes spin-doctors around, consider the following two headlines that ran on successive days atop the Wall Street Journal’s front page. “Rate Rise Clouds Recovery” was the grim news that greeted us last Thursday, on day one. The article described how, despite the Federal Reserve’s explicit strategy of buying as much Treasury paper as it takes to hold market rates down, particularly in the mortgage sector, rates are rising anyway, and steeply. In fact, 30-year fixeds climbed to 5.79% from 5.00% just two weeks earlier, suggesting that market demand for mortgage paper is drying up despite the Fed’s strategy of direct monetization of Treasury debt (a.k.a. “quantitative easing”).

But get this: On day two, as if to reassure us that [the] Treasury’s borrowing is well under control despite the fact that the opposite is true, the spinmeisters co-opted the Journal’s front page with this well-timed policy leak: “Fed to Keep Lid on Bond Buys.” Are we actually being asked to believe that, absent the acceleration of direct purchases of Treasury paper by the central bank, demand from other sources will suffice to keep rates from rising further?

 1) Home prices and sales are seasonally strong in April, May and June due to tax refunds and the spring selling season.

2) A temporary reduction in the inventory of foreclosed homes. Team Obama’s Homeowner Affordability and Stabilization Plan has stemmed the tide of foreclosures. But even if it is hugely successful, Tilson and Tongue estimate that it might only save 20% of homeowners who would otherwise lose their homes.

Not only is the US housing still unstable, it is also setting up for three more waves of mortgages meltdown. According to Tongue and Tilson, the first wave of the mortgage crisis happened in late 2006, when speculators began to default on mortgages and borrowers began to commit (or became the victim of) fraud. The second wave happened in early 2007 when borrowers began to default due to mortgage resets. 

Despite the severity of these two waves of default, Tongue and Tilson reckon losses are “mostly ahead of us.” This is how they describe the next three waves of mortgage defaults: 

Wave #3: Prime loans (most of which are owned or guaranteed by the GSEs) defaulting due to job loss and home price declines (i.e., underwater homeowners). Timing: started to surge in early 2008 to the present.         

Wave #4: Jumbo prime, second lien and HELOCs (most of which are on banks’ books) defaulting due to job loss and home price declines/ underwater homeowners. Timing: started to surge in early 2008 to the present.         

Wave #5: Losses among loans outside of the housing sector, the largest of which will be in the $3.5 trillion area of commercial real estate. Timing: started to surge in early 2008 to the present. 

Tilson and Tongue are hedge fund managers with “skin in the game,” and they have no interest in promoting Washington’s green shoots agenda – two reasons why we listen when they speak.

They also correctly predicted in early 2008 that the housing crisis would get so bad that it would require large-scale federal government intervention – a call precious few in Washington or the mainstream press got right. 

In summary, Tilson and Tongue say we are only “in the middle innings of an enormous wave of defaults, foreclosures and auctions.”  

If they’re right, it means more pain ahead for banks and the muting of green shoots optimism as waves three, four and five of the housing crash impact the wider economy.

James emailed Notes with his thoughts on gold and stocks yesterday. We think he’s bang on the money with his forecast.

I had expected a sucker’s rally into May. In the last two epic credit cycle deleveraging events – in 1873 and 1929 – both experienced a reflex rally after the autumn crash that lasted through the 20th month after the peak, which is to say, through May. If you check the calendar, we could be following the same pattern.
The question, of course, is whether we continue to follow past patterns, or whether the massive intervention (quantitative easing) orchestrated by the US and British governments will break the pattern.

Here I assume that if the intervention proves successful it will trigger a lot of inflation in a hurry. Once ignited, it would seem likely to stay with us (rather than merely push gold to a spike only to then peter out to the $700 region). On the other hand, if the intervention proves futile, as I expect, this should be equally or more bullish for gold, which has always rallied in real terms in post-bubble contractions.

My guess is that we’re pretty close to seeing whether “this time is different.” Both silver and gold are overbought, and I think they are likely to correct over the next few weeks. I also suspect that the stock market in general is going to disappoint as well. All the CNBC types who are now pounding the drums over the green shoots are soon going to be back on their hands and knees with magnifying glasses.

If the pattern holds, after a near-term pullback in stocks and metals, stocks will head south for a long dormant period, and gold and gold stocks will experience epic rallies that will last longer than Gordon Brown’s government and Obama’s popularity.

I see the market here as behaving as if it were motivated to cause the maximum possible losses for both bulls and bears. It rotates from convincing investors that their world is unraveling to reassuring them that nothing has changed. Then it turns around and saws the legs off of everyone who takes its most recent lesson to heart. You can’t safely hold long or stay short.

History may be ultimately unknowable. But research convinces me that a pattern recurs in post-bubble contractions. Time and again, gold has been the asset of choice. I can only project that it will be more so than ever this time, as history’s greatest deleveraging unfolds.

Follow this link to learn more about Crisis Strategy Alert

Investors believe they’ve seen enough evidence that the U.S. economy may be bottoming out to ignite one of the strongest stock-market rallies in years. After closing at a 12-year low on March 9, the Standard & Poor’s 500 Index has soared 32%. The  Dow Jones Industrial Average has zoomed more than 27%, and the tech-laden Nasdaq Composite Index has rocketed 34%.

In a March 15 interview on the CBS show, “60 Minutes,” U.S. Federal Reserve Chairman Ben S. Bernanke said the United States escaped a repeat of the 1930s Great Depression. The economic downturn would hit bottom this year, with an actual recovery starting in 2010.

“And I think as those green shoots begin to appear in different markets, and as some confidence begins to come back, that will begin the positive dynamic that brings our economy back,” Bernanke told viewers.

But now those “different markets” appear to be sending some troubling signals.

Green Shoots Yield to Red Ink

Last week, Mexico reported that its economy contracted at an annualized rate of 21.5% in the first quarter. The report followed equally dismal reports from Japan, Germany and the United States. Japan – the world’s second largest economy – said its gross domestic product (GDP) contracted at a 15.2% clip, its worst performance since 1955. Germany’s economy shrank at a 14.4% annualized pace, its worst showing since 1970.

In fact, Europe as a whole stumbled in the first quarter, as economic activity in the 16-nation Eurozone fell the most in 13 years. The Eurozone’s economy contracted by 2.5% in the three months that ended March 31.

At home, the U.S. economy contracted by a 6.3% annual rate, with the U.S. Federal Reserve predicting “a gradual recovery” that starts in the second half of this year.

If uncertainty continues to be the watchword, how should investors position themselves?

Staying on the sideline may appear safe, but it’s actually been proven through research to be a risky strategy. For instance, after looking at S&P 500 returns between 1993 and 2007, Davis Advisors Funds found that investors who remained invested and didn’t try and “time” the market ended up being much better off than investors who moved in and out of the market – often missing strong days in the market, as a result, says Wellcap Partners Managing Partner Alan Schram.

Investors who remained invested received an average annualized return of 10.5%. But investors who missed just the best 30 trading days over this stretch saw that return drop all the way down to 2.2%. And the more strong days an investor missed, the worse the returns got, Schram says.

Here’s a summary of the results of that study, looking at the investor’s action and the average annual returns that resulted:

• Stayed the course: 10.5%.
• Missed the 10 best days: 7.1%.
• Missed the 30 best days: 2.2%.
• Missed the best 60 days: (-3.2%).
• Missed the best 90 days: (-7.4%).

Nevertheless, there’s still about $8 trillion sitting on the sidelines – enough to create a sustainable market really should the “green shoots” grow into a full-fledged recovery.

Are Income Stocks the Antidote in a Sick Economy?

OK, so it pays to stay invested – but invested in what? And what if the hoped-for recovery ends up getting blunted? After all, those “green shoots” could easily wither on the vine.

According to Money Morning Contributing Editor Martin Hutchinson, seeking out stocks with high – but sustainable – dividend yields is the perfect strategy for an imperfect market.

Stocks with high-dividend yields are one part of a two-element investing strategy that Hutchinson says can create “permanent wealth” for investors who are willing to follow it through. Gold is the other key part.

Income From Dividends: One Pathway to Permanent Wealth

Dividend payouts are a way that a company’s leadership can signal its confidence in the future, Hutchinson says. A company has to have profits and – just as important – cash flow to finance the quarterly payouts, so a company that is maintaining a high yield is basically letting its investors know that it’s upbeat about its future.

Management is “basically saying to you that we’ll be able to keep paying this going forward,” which is a bullish sign, Hutchinson says.

Income is a key component of any investment strategy.

“Dividends create wealth in two ways. First, they provide cash flow that you can either use for living expenses or to reinvest: That means there’s no more having to sell shares, often at a depressed price, to meet your monthly bills, or to finance a vacation or home remodeling,” Hutchinson says. “Second, if you buy shares with high dividend yields, there’s a good chance that the market will eventually notice the superior [dividend] payouts, and revalue the shares so that their dividend yield is back down around the market’s average. For a dividend yield to go down in this manner, the stock price has to go up. Once that happens, you have received dividends and capital gains.”

While dividends provide income stability, gold provides a hedge against the inflationary pressures that are virtually certain to emanate from the massive amounts of money that the federal bailout and stimulus plans are injecting into the U.S. economy.

The recent surge in the prices of both gold and oil are proof that the markets expect inflation to escalate.

“Gold and gold-based investment – such as gold-mining companies – are an important part of a permanent-wealth-investment strategy because of gold’s historic function as a store of value that is impervious to inflation. At the moment, when inflation is low but there is a big danger of it rising, gold investments are an essential protection for permanent wealth investors,” Hutchinson says.

Source: As Key Global Markets Stumble, Gold and Dividend Stocks May Keep Investors on Course