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Stock Market Investing: Warning Signs, Credit Risk Increases, Precious Metals Investment Thesis Redux

Stock Market Investing: The warning signs are multiplying. Blood is in the water and the sharks are circling so beware. US$ weakness still keeps the equity markets aloft but the technical picture grows more ominous. Meanwhile, precious metals continue to outperform:
COMEX Metals Closing Prices : Gold ended the day higher by $6.50 to $1148.40, silver gained 3 cents to $18.485.
Gold closes the week at a new high and adds strength to our thesis that precious metals offer the best life raft in this dangerous ocean. A little more on this thesis later…

Warning signs:

The major averages continue to make new highs on weak volume and experience sell offs on rising volume. We have witnessed this disturbing behavior for three months now and eventually it will overwhelm the market.

The major averages are making new highs but non confirmations abound. The small and mid cap indices have not reached new highs and the all important transportation index also lags behind.

Over the last year or so a phenomenal correlation between credit spreads and the equity markets has developed. Credit market health or lack there of has consistently been a leading indicator for the overall direction of the stock market. Long before the collapse of the stock market last fall, the credit markets were in disarray and signaling trouble for stocks. This correlation even foretold the equity rally that began in March of this year as credit spreads narrowed aggressively during all the government support in Jan. and Feb.. As credits have continued to improved, equity has flourished.

Obviously we must monitor the credit markets closely. We have not seen anything recently from the credit space that would suggest trouble ahead. However, we received this message from one of our sources earlier today:

CDR Counterparty Risk Index @ Midday Nov 20, 2009
By Dave Klein
The CRI continues to deteriorate today as eleven members trade wider (more risky) and only one (HSBC) trades tighter. All index members trade with greater risk now than a week ago. Bank of America is the worst performer on the week, widening by over ten percent.

So, credit was a little shaky this week which resulted in the equity markets attempting a new high and failing. This type of behavior along with numerous technical concerns compels us to defend the portfolio.

More evidence to support our Precious Metals investment thesis:

Peter Bernholz (Economics Prof, Basel) studied the world’s 12 most important periods of hyperinflation & discovered the tipping point occurs when deficits amounted to 40% of the expenditures. For the USA, we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41. 7% of the $3.6 trillion in expenses.”

Meanwhile, the tide of evidence against an economic recovery rises…

WASHINGTON – A rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, adding to concerns about the strength of the economic recovery. Driven by rising unemployment, such loans accounted for nearly 33 percent of new foreclosures last quarter. That compares with just 21 percent a year ago, when high-risk subprime loans made during the housing boom were the main reason for default. Read More…

…and so the Fed and Treasury must continue to follow their playbook and add liquidity…

Ben Bernanke and the US Treasury are going to revalue gold against the dollar. The mechanism is the US dollar carry trade, not a confiscation of gold. Joe Public doesn’t have any gold, he sold his 2 carat ring to the pawnshop months ago. Read More…

…Which leads us to the following discussion about Gold….

David Rosenberg (former chief economist at Merrill Lynch)..Buying physical gold may soon become impossible:
90% of the world’s gold supply has already been mined. We all have a good idea as to how much gold is above ground, and we know how much there is below ground and the marginal cost of pulling the yellow metal out, says David Rosenberg of Gluskin Sheff.

“There is an estimated 165,000 tons of gold above ground, and around 20,000 tons in reserves below. So, nearly 90% of the world’s gold supply has been mined and equates to roughly $4.5 trillion.

To put that in perspective, the total amount of US$’s in circulation globally is estimated at $8 trillion, and the total size of the global money supply is around $30 trillion. The size of the world stock market is around $40 trillion. At last count, the total size of the global bond market was north of $80 trillion. The total world derivatives market has been estimated at about $800 trillion, face or nominal value.”

The impending financial “seizure” will trigger a global buying panic cum flight-to-safety goldnami of uncontrolled proportions. Buying physical gold may soon become impossible. We again ask: have U got enough?

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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