6-1-09

Surrounded and Out of Bullets

So, did you buy natural gas when I mentioned it a couple of issues back? That's a tidy profit already, with more to come.

Same for the dollar. Last week I told you the US dollar would plunge and there it was.

Likewise with TBT, oil and, well, pretty much everything I've said here. Don't forget though: trailing stops! (see previous issues).

That's how to create real wealth quickly. But you have to act and you often have to be patient.

If only the government was doing so well. In a low-key TV interview, Obama actually said: "We're out of money now." Very reassuring but we'll return to this shortly.

I've said for a while now that this is a rally within a bear market and that ultimately the Dow will go lower than it did back in March. I'm 90% certain of this, but the question is when? I wouldn't be surprised to see it rise back above 10,000 first (see last issue for the technical numbers that would set this move in motion).

But am I just being a pessimist? No, and let me put some substance behind why AND let's not forget that you can PROFIT BY THE MARKET FALLING if you 'short' it on the options market.

You may occasionally hear that the 'Consumer Confidence Index' has risen. This is a survey done on Americans to get a feel for how positive they feel about things moving forward. Perhaps understandably, a rise in the index (since it was last measured) sets off a rally in the stock market. One such rally was recently ignited.

However, this is a CONTRARY indicator! It means the opposite because well, what do the public know? They're just living in the present.

Lowes, the home improvement DIY store recently announced improved sales. Traders jumped on this news as an indication that the housing market is bottoming. As soon as I read this article I thought the opposite: people are fixing up their own property instead of moving. Making do and mending are the hallmarks of a recession. Sure enough, we then see that house prices are falling as fast as they ever have done.

As I've explained here before, company directors have to declare their sales and purchases of stock in their own companies. Clearly, these insiders have privileged information and frankly, if taken in the right context, insider buying and selling is one the very BEST indicators. Insider selling is now at its highest since 2006. What do they know we don't?

Yes, there is a lot of money waiting to be put to work on the sidelines and many money-managers want to catch up and would be afraid to miss a rally. That's why I wouldn't use all my powder on shorting this market yet; no more than an early position. But if another surge up hasn't happened by August, I'd say we would see the fall in the Fall.

The Treasury is surrounded by 'injuns' and running out of bullets. As I said earlier, even president (and part-time car industry analyst) Obama has said: "We are out of money". Actually, this happened long ago it's just that now people are paying attention as things spiral out of control.

So what's a Treasury to do?

What they SHOULD do is what every person has to do: PAY OFF DEBT and repair the balance sheet. This would cause a dollar meltdown and a major depression. It wouldn't be pretty but it would cure the problem.

But, what they WILL do is what they've always done: get people to lend the country even more money by issuing Treasury Bonds (T-Bills).

What happens to T-Bills is CRITICAL to our situation moving forward and trust me, it affects YOU, so it's worth understanding...

T-Bills are subject to the forces of supply and demand just like anything else though. If not enough buyers come to the table, the yield (the interest the Treasury pays on a T-Bill) will rise to attract people in. Vice versa if many buyers come to the table; the yield would fall.

Mortgage rates are set based on the yield of the 10 year expiration T-Bill.

So, if not enough buyers come in (therefore causing the yield to rise), mortgage interest rates go up, right?

And what would that do to the economy and hence the housing market??

So let's put it all together...

The Treasury needs more money to pay for the existing deficit and the new ones Obama is ramping up on top of it.

So, it issues more T-Bills to raise the money. BUT, remember supply and demand? If the supply goes up, what happens to demand? It goes down. That means higher yield on the T-Bill and higher mortgage rates.

And THAT kills any recovery.

Why do you think China has been buying so many T-Bills? So American consumers will keep buying their goods!

But the Treasury has a friend who can help: The Federal Reserve. And this friend has a printing press to make more dollars to buy T-Bills.

What a neat trick!

Ah, expect now, the world is starting to catch on to this Ponzi scheme, China included. Because if you create currency out of thin air, that will devalue the currency itself.

And here's the kicker: if you're devaluing that currency, why would anyone want to buy the T-Bills denominated in that currency??

Like I said, surrounded and out of bullets. The time to refinance is now and load up on cheap money while it's still going. Plus, if inflation kicks in over the next few years as I expect it to, that cheap debt will slowly become worth less and the property price will rise against it.

If you've got maybe 10% in gold, that should hedge the inflationary fire too.

Best regards,

Mark Patricks

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