“The USSR had two newspapers, Pravda and Izvestia.  In the Russian language, “pravda” means truth and “izvestia” means news.  The saying amongst the Russian people put the situation in a nutshell:  “There’s no Pravda in Izvestia and there’s no Izvestia in Pravda”.” – The Privateer

‘You heard it here first’ and ‘Mark my words’ are the hackneyed phrases that come to mind as I begin to type this missive. I will add the oft used ‘I’m going out on a limb’ as I write the following:

The stock markets and commodity markets will not collapse when QE2 ends in June.  In fact, said markets will most likely rally.

So, why am I willing to shimmy out onto a limb that looks ravaged by disease? Because I either enjoy the danger(possible) or in all humility I see something about the entire tree others are choosing to ignore.

One can no more accuse a tree of being deaf and dumb as one can complain about the dropping of leaves on the ground because that is its nature. The same can be said of our Fed chairman, Ben Bernanke, so we can’t blame him for dropping tons of paper on the markets. He is who he is, plain and simple. He wrote dissertations on the benefits of easy money and helicopter drops of cash. So to blame him for executing his plan is futile. And to assume that the end of QE2 in June will usher in a new austere Fed chairman is to believe the proverbial leopard can change.

In fact, the Chairsatan(thank Zero Hedge for that moniker) has already begun speaking of continued accommodation, “…during the Fed Chairman’s first post FOMC meeting press conference ever on April 27, Mr Bernanke did state that the Fed was not going “cold turkey”.  He assured us that the proceeds from “maturing assets” in the Fed’s $US 2.7 TRILLION balance sheet will continue to be deployed in the Treasury debt markets.”- The Privateer.

I propose we dispense with the ridiculous ‘debate’ currently raging within the financial media about what happens at the end of QE2 and when QE3 will begin. Moreover, I would submit to you that by continuing this worthless ‘debate’ we are allowing our collective selves to become susceptible to further Fed prestidigitation.

Here is the set up for Fed Three Card Monty come June: Easy monetary policy must continue, this is a certainty(if you wish to argue this inevitability as well as other obvious laws like gravity and the color blue as relates to the sky then please navigate away from this blog, do a little research and then feel free to rejoin us at the adult table). However, Bernanke understands that a continuous trail of QE3, QE4, etc. will have diminishing returns and will be too easy for traders to follow and fade. The key for the Chairsatan is to create an environment for continued asset appreciation(US$ devaluation) without the easily recognizable QE POMO programs. So while the financial media is looking left debating quantitative easing as we currently know it, the Fed is moving right creating new QE devices to prop up markets.

Stock Market Strategy: Bernanke QE Ends June Stocks Commodities Will Rally

I don’t profess to know what the new QE devices will look like. They could be new ways of increasing the velocity of money as opposed to the amount or we could see new enormous QE programs out of Japan that somehow miraculously find their way into our markets. A mysterious large buyer with an insatiable appetite for US treasuries could emerge from the Caribbean as seen before, ” Purchases of U.S. debt remained relatively healthy from November to December, with buyers such as Japan, the United Kingdom, Brazil and Caribbean banking centers stepping up acquisitions in the final month of 2009.” - WSJ

Whatever the case may be rest assured the Fed’s goal is to have asset prices levitate when QE ‘ends’. The deception will be complete in the weeks following the termination of QE2 when the WSJ et al headlines read, “QE Ends but Markets Continue Higher Lifting Confidence Fed Plan is Working”. I beseech you, don’t play the part of the Times Square Tourist or you to will eventually be separated from your money.

Tags: ben bernanke, Bernanke, Brazil, caribbean, commodities, debt, Japan, POMO, QE, QE2, QE3, stocks, Treasury, WSJ

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Stock Market Strategy: All signs point to a continuation of the current rally. We will continue to use the direction of liquidity and the behavior of the credit markets as our fundamental guides to equity investing.

The primary news story making the rounds today involves the European bank stress test results. I have included the official results and accompanying statement below for your perusal. If you would rather the cliff notes I will summarize: Completely worthless nonevent.

CBES releases results of the EU Stress Test — 7 banks fail test

The exercise includes a sample of 91 European banks, representing 65% of the European market in terms of total assets, in coordination with 20 national supervisory authorities. It has been conducted over a 2 years horizon, until the end of 2011, under severe assumptions. In total, aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to 566bn € over the years 2010-2010. The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise. The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital support provided until 1 July 2010, which represents 1.2 percentage point of the aggregate Tier 1 ratio. As a result of the adverse scenario after a sovereign shock, 7 banks would see their Tier 1 capital ratios fall below 6%… See release here.

Once again traditional financial news outlets fail to focus on issues that actually move the markets and instead waste time and energy on government sponsored propaganda. The typical word on the street from this story is as follows: ‘Street expected 10-11 banks to fail test and only 7 failed so things are better than expected.’

Enough said about the theater of the absurd a.k.a. European banking stability. Please follow me into the realm of reality as I focus on events that are actually having a tangible impact on the equity markets. Committed RCM blog readers will recall this quote from my July 14th post, “The above chart also suggests a change in trend may be in the offing”. At week’s end, it would appear suggestion has turned into sage advice as the rally that began July 7th makes new highs.

Tangible event number one:

Quantitative Easing round #2 is currently underway. How do we know this you ask? The Fed made no comment in the FOMC minutes release and Ben Bernanke said nothing of note to Congress. So how do we know Q.E.2 has begun? The answer lies in the chart below. As you will see, worldwide liquidity is once again on the upswing. This rise and fall of liquidity has been and should continue to be the single biggest factor determining market direction. Close scrutiny of the graph will reveal the selloff of assets in 2008 was led by liquidity contraction, the rally of 2009 occurred on the heels of liquidity expansion and the first 6 months of 2010 suffered from another reduction of liquidity. However, in the last three weeks worldwide liquidity has expanded progressively, hence a rally in asset prices should not surprise. We can expect further asset gains, equity, commodity or otherwise, as long as this liquidity trend continues….

Tangible event number two:

The credit markets are the first to be effected by the liquidity situation. Our credit guru, Mike Johnson, spotted the positive behavior of the credit markets at the end of June. The liquidity expansion began, credit markets immediately stabilized and true to form equities followed. Another review of MJ’s thinking seems appropriate…  

…intraday credit market volatility continues to decline and this indicates that equity volatility is biased to continue to decline. This is clearly a positive for the broader equity indices.  

One of the reasons we became bullish at the end of June was because of the improvement in bank CDS spreads, the normalizing of GS’ CDX credit curve, improvements in consumer credit losses, and improving CDX IG spreads. COMPARING THE PERFORMANCE OF THE CREDIT MARKETS TO THE EQUITY MARKETS (SPX) would indicate that SPX has the potential to rise to the 1150-1175 range QUICKLY. The steepening of CDX IG credit curve further indicates that this 1150-1175 range is even more likely to be reached relatively soon.

Tags: ben bernanke, CDX index, commodities, Credit, credit markets, equity markets, EU Stress Test, FOMC, liquidity, Q.E.2, Quantitative Easing, stock market strategy

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As usual European news leads the way with a ridiculous ’shoot in the foot’ decision coming out of Germany…

Merkel will announce, on Wednesday, a financial transactions tax, and a ban on naked short selling on 10 of the “most-important” financial institutions in Germany. Ban also applies to CDS and Euro govt bonds. Will remain in place for an indefinite period of time.

…Neighboring countries have not agreed to implement the same tactics.  Best guess, this ludicrous stance from Germany will only lead to confusion and have a negative effect on Bund prices as rates will rise. Moreover, as we learned in 2008, banning short selling in the shares of financial (FIN) institutions does not stop the decline in share value. In fact, as the record from 2008 reflects, said ban only serves to highlight the precarious position of the financial institutions and leads to more selling.

The idiocy of Merkel’s decision is mind numbing and only proves the current German administration has no understanding of how markets work. I haven’t the time nor the inclination to explain all to these neophytes but I will offer this simple insight: Short-sellers are natural buyers on the way down. They are short term position takers and as stocks drop they buy to cover. Preventing this behavior will obviously result in more erratic price movement.

Well done Merkel, you have succeeded in highlighting the weakest FINs and during a time of extreme volatility, you have accomplished the single worst feat: You have reduced liquidity!  For your actions, we award you with this ‘Larry Summers’ medal of honor.

I find the next news story much more disturbing. The passing of the Volcker rule would add to the cacophony of voices attacking the financial sector. In my last post I wrote, “Make no mistake, as the volume of negative news and behavior towards the FINs grows louder the equity markets will suffer.” The Volcker rule will act like a bullhorn. A quick glance at the price charts of leading FIN stocks will confirm that many in the group have already taken out the lows set during the 1000 point Dow sell off on May 6th. As expected the rest of the market is following….

FT Says Volcker Rule, Given Up For Dead, Is Likely To Pass

As the FT notes, “the political mood is such that a straight vote on derivatives would be close and the Volcker Rule would be likely to pass.” Should the Volcker Rule pass, this will be the beginning of the end for the current casino capitalism system that has gripped Wall Street. And don’t be surprised to see a 10% drop in the market as a last ditch self defense mechanism by the primary dealers.

Read More…

…The final story helps explain the particular negative action today.  Almost all markets are selling off today in unison; Dow, S&P, NASD, NYSE, Transports, Utilities, Commodities etc.. We saw this type of indiscriminant selling during 2008 and it was usually a sign of the carry trade unwinding and margin calls being met. Hard to tell what the markets will do from here. Sometimes this type of selling across the board helps set up at least a temporary bottom. Of course, this action could also lead to a repeat of May 6th or worse….

Carry Bloodbath Resumes With Full Blown Liquidations Imminent

After earlier we saw the decimation of the European currency, it is now Asia’s turn where an impressive bloodbath is now raging. The AUDUSD is in freefall, having moved a massive 300 pips from yesterday’s high to today’s low. At under 50 pips from 0.855, the AUDUSD will likely breach 0.85 at which point the destruction at carry desks will become an epidemic, and full liquidations will soon ensue, coupled with billion dollar margin calls, forcing global asset liquidations at bulge brackets. With the carry collapse pervasive, don’t look to futures to stage any miraculous Fed-inspired ramps tonight: Germany may have well called the Fed’s bluff.

Read More…

Tags: carry trade, CDS, commodities, euro, European, financial, Germany, volatility, volcker, Volcker Rule

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Is it a bear or a windmill we’re stalking?

You may find yourself asking that question as the equity markets drift higher seemingly oblivious to a myriad of negative news.  Classic commentary such as “the market climbs a wall of worry” or “the trend is your friend” are being bandied about with increased regularity.  Of course, these sayings are useless when the bottom falls out of the market but for now they appear reassuring as they add to the overwhelming feeling of complacency pervading the equity markets.

In the interest of  remaining open-minded and having a strong desire to avoid Don Quixote’s fate, I will offer the following analysis that could buttress a case for continued equity price support. 

Instead of relying on hackneyed phases and static commentary let’s focus on the building strength of the inflation trade.  Yesterday, the FOMC minutes were released with the following headlines… 

FOMC Minutes Released: Fed says economic activity expanded at a moderate pace in early 2010, inflation is likely to be subdued for some time

Fed Minutes say if economic outlook worsened or trend inflation declined further, “extended period” of low rates could last “quite some time” – Reuters

Read complete FOMC Minutes  

 The Fed clearly feels inflation is of no concern. Apparently, all FOMC members with the exception of Hoenig are unwilling or unable to read commodity price charts.  Several key raw materials are experiencing impressive price appreciation as seen in the following charts…

Copper:

Crude Oil:

Platinum:

Palladium:

If this commodity price surge continues then conceivably equity prices could continue to grind higher as often happens at the beginning of an inflationary period.  You may notice, I did not include a Gold or Silver price chart in the above group.  As you will see below, Gold and Silver prices have yet to hit a new high and will need to do so for the inflation trade theory to be legitimate.  

Gold:

Silver:

Tags: bear market, commodities, copper, crude, equity markets, Fed, FOMC, gold, Inflation, OIL, palladium, platinum, silver

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The equity and commodity markets get rocked as Sovereign debt woes resurface.

The burning question: Will the dramatic widening of credit spreads in Sovereign debt, beginning to resemble the CDS collapse of 2008 in the private sector, lead to a revisit of a 2008 type credit crisis and all the fallout associated with it?…

Greece, Portugal woes intensify – WSJ The Wall Street Journal reports the cost of insuring the debt of euro-zone members with large budget deficits against default rose Thursday, dashing hopes that the European Commission’s qualified endorsement of Greece’s budget plan would calm investor fears. Greece, Portugal and Spain were in focus, with their five-year sovereign credit default spreads moving sharply wider. Greece’s five-year sovereign credit default swap spreads were recently at 4.14%, compared with Wednesday’s closing level of 3.97%, according to to CMA DataVision. Portugal’s five-year sovereign CDS spreads were at 2.09 basis points—their widest level ever—after closing Wednesday at 1.96%. Spain’s sovereign CDS spreads widened to 0.12 percentage point to 1.64%. The moves followed news Wednesday that the European Commission had put Greece under more pressure to cut its deficit; that the Portuguese government sold only EUR 300 million of treasury bills at an auction, compared with an indicative offer of EUR 500 millon; and that the Spanish government had raised its budget deficit forecasts for 2010 through 2012. Spanish and Portuguese stock markets fell sharply for the second consecutive day, with banks leading decliners on sovereign debt worries.

…The jury is still out on the above question but market participants are voting today.  As usual, voting like this is detrimental to long term investment decision making.  I would suggest all take a step back relax and reassess after the smoke of today’s battlefield clears. In the meantime, tomorrow’s employment report may shed some light on the absurdity or validity of  today’s flight into the US$. I stress the word, may, because government released employment numbers are notoriously manipulated.  For those who wish to debate this manipulation issue and wish to cast aspersions about conspiracy theorists please view the following story…

Explaining The Government’s 1.8 Million Job Overestimation In Pictures

Last October the BLS announced it would revise historical payrolls lower by 824,000 on February 5 (this Friday’s NFP release). While this number will not impact the actual January NFP report (a loss of nearly one million jobs in a month would probably even take out the persistent SPY algo that has been hugging the bid for the past 10 months), it will be prorated across all months in the 2008-2009 reporting period. The reason for this adjustment has to do with a huge glitch in the birth-death model, which is exactly the same problem that the rating agencies faced when housing prices plummeted: the birth/death model assumes, in the long-run, jobs are created, not destroyed. Any period of excess volatility in the stock market therefore translates into major prior downward revisions to already disclosed payrolls. And while we know what the current revision will be, the scarier prospect is that the next historical adjustment, due out in early 2011, will be even larger, at least 990,000. This means that the government has overrepresented running payroll data by over 1.8 million jobs over the past 20 months. Read More…

Today, world equity markets suffer, the “risk” trade is reduced and scared investors run into treasuries and the US$.  Meanwhile, the underlying fundamentals of the US$ continue to deteriorate….

Zerohedge: It’s Official: Congress Passes Debt Ceiling 231-195; All Republicans, 20 Democrats Vote Against Raise.  Congress Democrats have just signed off on the US hitting 100% debt/GDP.  About 140% if one adds GSE liabilities which also should be on the budget.

Initial Claims 480K vs 455K consensus, prior revised to 472K from 470K

Continuing Claims rise to 4.602 mln from 4.600 mln

NY Fed’s Dudley says “nothing is on automatic pilot” when asked about ending MBS purchases in March, according to AP – Reuters (The expected end of Q.E. in March has been a major factor in the strong US$ theory since Dec.. Now we see, at the 1st sign of trouble, S&P500 down 3%+ today, the Fed begins to backtrack – surprise, surprise.)

Tags: CDS, commodities, credit markets, credit spreads, employment report, equity markets, Fed, Greece, initial jobless claims, sovereign debt

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G.O.P. takes Massachusetts Senate seat – NY Times

NY Times reports Scott Brown, a little-known Republican state senator, rode to an extraordinary upset Tuesday night when he was elected to fill the Senate seat that was long held by Edward M. Kennedy in the overwhelmingly Democratic state of Massachusetts. By a decisive margin, Mr. Brown defeated Martha Coakley, the state’s attorney general, who had been considered a prohibitive favorite to win just over a month ago after she easily won the Democratic primary. With all precincts counted, Mr. Brown had 52% of the vote to Ms. Coakley’s 47%. “Tonight the independent voice of Massachusetts has spoken,” Mr. Brown told his cheering supporters in a victory speech, standing in front of a backdrop that said “The People’s Seat.” The election left Democrats in Congress scrambling to salvage a bill overhauling the nation’s health care system, which the late Mr. Kennedy had called “the cause of my life.” Mr. Brown has vowed to oppose the bill, and once he takes office the Democrats will no longer control the 60 votes in the Senate needed to overcome filibusters. There were immediate signs that the bill had become imperiled. House members indicated they would not quickly pass the bill the Senate approved last month.

There is hope! Can the American people bring balance back to our capital as well as some much need accountability? Yes, we can! Yes, we can! Yes, we can!

I’m not suggesting Brown is the embodiment of all that is good, but I am saying this is a wakeup call for the political machine that has been grinding the American dream assunder.  A dream that was never built on handouts and entitlements but instead on entrepreneurial spirit, individual freedom and hard work.

Ok, enough of the patriotism. How will this news affect the investment world? I expect the immediate reaction will be a fiscal responsibility trade. The US$ will rally and Treasury bonds will catch a bid as yields go lower. Meanwhile, commodity prices will suffer as will equity prices. However, this trade will not last long. The economic situation is not improving despite all the financial media cheerleading of the last few months. The reaction to Q4 earnings has been disappointing, as we predicted. Companies have been unable to hide the fact that organic growth is nonexistent. Add to this disappointing earnings picture the Brown victory in Massachusetts and you get a recipe for another stimulus package before the November elections.  Hence, the idea of fiscal responsibility is a pipedream.    

If one would care to argue the economic picture is becoming brighter I offer Exhibit A:

Housing Starts Plummet

Housing starts continued their up one month, down the next trend as starts fell 4.0% from 580,000 in November to 557,000 in December. The consensus expected starts to fall only 8,000 to 572,000…The drop in starts was completely attributed to a lack of single-family construction. Single-family home starts fell 6.9% from 490,000 in November to 456,000. It seems builders are well aware of the pitfalls of starting new construction given that the latest increases in existing and new home sales were propped up by government support. Since new homes constructed today would not come onto the market until after the government stimulus expires, it makes sense that builders would hold off on beginning new single-family homes until they are sure demand has stabilized….

The housing starts number is volatile, you say. Things can still get better, you dream. Not without more government stimulus, I reply. And I offer Exhibit B as another nail in the coffin of a housing recovery:

FHA to Lift Mortgage Insurance Fees – WSJ

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever.

This move by the FHA will have the effect of rising rates for FHA borrowers (those most in need of a loan with the worst credit) resulting in a further reduction of demand. With the end of government incentives and the effective increase in mortgage rates is it any wonder housing starts are plummeting?

Rosenthal Capital Management runs the Fortune’s Favorite Family of Funds, including Fortune’s Favor I, Fortune’s Favor Precious Metals and Fortune’s Favor Offshore. For more information visit www.rosenthalcapital.com

Tags: commodities, earnings, economy, FHA, G.O.P., housing, housing starts, Investment, Massachusetts, mortgage, Stimulus, treasury bonds, US$

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              Inflation concerns have been on economists’ minds since the Fed started passing drastic measures to combat our country’s troubled economy. Now, as the worst of the storm appears to be behind us, the concerns about the repercussions of our government’s monetary actions are under the microscope. The Fed’s commitment to keep the interest rate near zero for the next year has fueled speculation that other central banks will raise interest rates first—which would make other currencies more attractive than the dollar. Australia’s decision last week to raise interest rates already hurt the dollar and suggested that resource-based economies might recover quicker, and be more attractive to investors, than the United States. 

 The V-Shaped Climb 

              As manufacturing gains its footing, the stock market strengthens, housing inventories fall and retail spending returns; our economy will continue traveling up the V. However, government provides the stability in many market rebounds.  Once government funds are pulled back, the likelihood of dropping back into a recession could increase.

              Until spending is once again a consumer behavior, instead of a government one, the underlying economic problems will remain—threatening to pull us into another deep recession. In order for consumers to spend again, they are going to need to be convinced that their hours will not be cut, their jobs will not be lost and their wages will not be dropped. Of course, before they can be convinced of any of this, the unemployed will have to be reintroduced into the workforce. 

              We will continue wrestling with high unemployment numbers until business owners are confident that their products and services are once again in demand. Currently, businesses are getting by with nearly-depleted inventories. But, as consumer demand rises, business owners will beef up inventories; which will produce the need for more employees in the manufacturing industry. Business owners are scraping by with the bare-minimum number of employees. Larger inventories require new employees to sell, stock, ship and manage the products. 

              So, as consumer demand slowly returns, so too will new jobs. As we crawl out of this recession, a number of positive signs fuel consumer demand. As home prices continue to rise, homeowners will no longer be underwater and their confidence will get a boost. As the stock market continues to climb, so too will investors’ confidence. Major markets are all interrelated. Signs of growth in one market have the ability to positively impact another. The process is slow and filled with pockets of discomfort, but the climb has begun and the journey is forecasted to be slow and steady. Being patient and taking the right steps now will help our economy avoid falling down the second trap in the dreaded W-shaped recovery.  

Protecting Your Wimpy Dollar, Not Fearing it 

              Fearing inflation is a reactive investor’s behavior. This group of investors waits until something drastic happens in the marketplace that demands they respond. Active investors prefer to take more proactive measures to prepare for unappealing market conditions, such as inflation. Wise investors salt the slugs of inflation long before they have the chance to take over their gardens and devalue their investments.

              First, let us be clear that our country still may be on track to side step a nasty bout of hyper-inflation; which could cause a gallon of milk to cost a truckload of fifties. Our policy makers have to make the right decisions as we trudge through this recovery. To recognize the silver lining, an economy needs to have ultra-low unemployment levels and rising wages to effectively foster a period of hyper-inflation—both of which we are lacking at the moment. Unemployment is flirting with the 10-percent mark and real average hourly wages fell from December, when they were at their recent high point, to August at a seasonally-adjusted 1.5 percent.[1]

              Some may consider worries about inflation to be premature, but there are countless signs suggesting that the dollar will continue to considerably weaken over the next couple of years. The most concerning: Our government has borrowed hundreds of billions of dollars in efforts to hold up our banking system and this has added to our country’s already-enormous debt responsibilities. Having far too much money and too few goods is the root cause of inflation. Therefore, the biggest worry is that our government will continue to print money to pay for its extraordinary debt. Even if some experts are arguing that inflation concerns are premature, there are proactive actions an investor can take to protect his or her investments.

              Some assets rise in value during times of inflation and having a dose of them in your investment portfolio can do wonders for its performance. The following are widely-considered to be the best performers:  

·      Real estate: Traditionally, investors have used real estate as a hedge against the spontaneous performance of portfolios that are overloaded with stocks and bonds. Real-estate assets can also act as a hedge against inflation. Plus, today’s affordable prices and availability have real estate looking extremely appealing as an investment opportunity.

·      Commodities: Inflation causes the price of materials to rise. So, why not hold interest in the materials themselves? Investing in commodities through exchange-traded funds can help small investors avoid the many drawbacks that come with investing in commodities (like deciding where to store 1,000 barrels of oil).

·      Gold: With our currency no longer anchored to gold, it can lose value—and often does. The magic with gold is that it often moves opposite the value of the U.S. dollar.

·      TIPS: Treasury Inflation-Protected Securities are similar to other Treasury securities in that they are long-term IOUs that pay a fixed rate of interest until they mature. But, with TIPS, the government adjusts the payments up or down each month according to inflation levels.  

All My Best, 

Thomas J. Powell 

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals.

[1] See http://www.bls.gov/news.release/realer.nr0.htm

Tags: 10 percent, central banks, commodities, consumer spending, credit streams, Dollar, gold, hedge, hyper-inflation, Inflation, inventories, IOUs, Real estate, Recovery, TIPS, tips for hedging inflation, trade deficit, unemployment, weak dollar, wise investors

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• UUP = US$ -> The US$ broke down against a basket of currencies last week and in doing so took out major long-term support. The weakening US$ trend has been going on for a while as the Fed continues to print currency out of thin air in an attempt to stimulate the economy. The latest magic trick and perhaps the last straw has been the monetization of treasury debt. The Fed’s buying of government debt at a time when the Obama administration continues to inflate the deficit has led to a loss of confidence in the US$ as the reserve currency of the world. This corrosion of confidence and abuse of Fed powers is the leading cause of the hyper-inflation trend. Remember, inflation is a currency event not an economic event.
  
• TLT = Treasury bonds -> T-bond prices were down last week which of course results in higher yields. This rate creep up is in its infancy. However, if rates continue to rise, eventhough the Fed is supporting the market, this will be a clear indication that inflation fears are beginning to dominate.
  
• CRB = Commodities -> The commodity complex as a whole sold off last week. Basic materials such as energy suffered declines indicating that an economic recovery is not in the offing. I would not typically read too much into any one week but with the US$ off so much last week one would have expected to see the whole commodity complex higher. Instead, we witnessed a bifurcated commodity complex that screams of stagflation; economically sensitive commodities suffered as inflation sensitive commodities rallied.
  
• GLD = Gold -> The key inflation sensitive commodity rallied strong last week as did the price of silver. Tuesday the 1st was perhaps the most telltale day when the inflation sensitive precious metals complex closed higher in the face of a stronger US$.

The developments of last week could be viewed as troubling if you are not prepared. However, if you are a member of the Rosenthal Capital Management family, then you are all smiles this week. You know we are prepared for this development and in fact welcome the trend.

I feel at this time we are compelled to clear up a little misunderstanding. We should give credit where credit is due. Yes, Ben Bernanke has been able to create “shoots” in the economy. We stand corrected and beg for Ben’s forgiveness for our ever doubting his ability to create “shoots”. We would however, respectfully request he visit his ophthalmologist or perhaps a neurologist to discuss his confusion recognizing colors. The “shoots” that he sees are real but they are GOLDEN not green.

Tags: ben bernanke, commodities, crb, Fed, gold, green shoots, interest rates, precious metals, silver, T-bonds, US Treasury, US$

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