6-8-09

Mischief of the Big Banks

Welcome back! Things are getting interesting out there and profit opportunities are making themselves clearer...

Take a read of previous newsletters the last few weeks here. I've been explaining how the market itself is telling us what is going on by means of technical analysis. The key lies now in whether the Dow TRANSPORTS index can better its recent high of 3422- last Friday it was 60 points below that. If it can close above this number, the bull market will move higher. If not, its back to the March lows.

Now, the longer it takes for this to happen, the less significant this signal will be. It's been over 2 weeks now and it hasn't happened.

IMPORTANT: if the market is set to go down from this signal, you should be excited not disappointed!!

As I keep explaining here (I hope you're getting the message by now), your financial destiny doesn't have to be dependent on the stock market going UP. You can make money by 'shorting' the market. You would simply ask your options broker to sell the 'diamonds' (DIA).

So let's continue to watch, but if we don't see this confirmation by the Dow transports this week (rising above 3404), I'd say this bull run was over.

At this website you can watch the level of the Dow Transports: http://money.cnn.com/data/markets/dowtrans

Another theme I've been explaining is how not a lot has fundamentally changed since the crisis began. Nothing except sentiment.

Recent unemployment numbers were cheered by the market because they simply weren't rising as fast as before, but they were still rising! What the media doesn't explain is that the percentage of unemployed ROSE more than expected to 9.4%. That is the highest it has been since 1983.o

The media need the party to continue- their sponsors require it.

Throughout winter, while the whole world was dumping commodities, I begged readers to start buying oil, wheat, gold and silver. If you'd have done so, you'd be sitting on massive profits by now. I think it's time to take some profits of the table or at least set a very strict 'get out' order with your broker if it drops to a certain level from here to protect those profits.

Earlier this year I explained how government bonds were in a nonsensical bubble and to 'short' these bonds by means of buying something called 'TBT' through your broker. This has gone from $45 to $58.

Here's the bigger picture and what's really been behind this stock market rally of late...

The banks are desperate to pay back the government TARP money because if they don't, the government will control their paychecks and fat bonuses. It's that simple.

So how's a cash-strapped bank supposed to do that?

Simple. By selling their own stock. How can they achieve this? By driving the market higher and their own stock higher with some creative accounting.

Once again, we have the mischief of the big banks to thank for this chicanery and their buddies in the Federal Reserve (the Federal Reserve is a private entity that was originally formed by the very banks that it is bailing out).

Transparency my ass. The banks are hiding a trillion dollar mess right now and soon it will show.

Fred Schwed, author of 'Where are the Customers' Yachts?':

 "One can't say that figures lie. But figures, as used in financial arrangements, seem to have the bad habit of expressing a small part of the truth forcibly, and neglecting the other part, as do some people we know."

This is the essence of what caused this financial crisis and they're still at it now, causing another heartbreak in our very near future.

According to Bloomberg:

"At the end of 2008, for example, off-balance sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings."

Off Balance Sheet basically means hidden. Just like the government quantitative easy really means printing money.

But, the lawmakers can't be seen to screw up again so the rumor is that the new rule would force these banks to recognize only around $1 trillion of the 5.2 trillion. These rules come into effect in the first quarter of 2010 that's IF the big banks persuade the government not to do so (and that is what I believe will happen because the banks still control America). Regardless, banks are still badly undercapitalized and the smoke and mirrors will fade away to reveal the truth ultimately- once they've repaid TARP they can let the stock sink.

Banks are the heart of the economy and therefore the stock market. This only adds to my thesis that this is a bear market rally.

So how to profit by this?

Well, I've noticed something very interesting with the ticker code: FAZ. This is Direxion Daily Financial Bear 3x Shares. This is a fund that shorts bank stocks by three times. Basically, if major bank stocks fall, this fund benefits by a multiple of 3.

At the height of the financial crisis, this fund was trading at over $100 and it's now trading at just over $4!

Even if this returned to just half the level as last October, you would multiply your investment by 10. And at $4 with the world singing about 'green shoots', I feel a lot of the bad news and more in already priced into this fund- the price literally flat-lined in April and has stayed there ever since.

Best regards,

Mark Patricks

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