A maelstrom of misinterpretation dominates the financial media outlets today in regards to last night’s Fed action.

Click here for my audio post on the recent decision by the Fed to increase the discount rate.

After listening to the above post, Gary Rosenthal had the following comments on the Fed move:

1) Federal Reserve banks currently have a record high of $1.14 Trillion of excess reserves on deposit with the Fed. Thus, an increase in the discount rate is meaningless because the banks have no need to borrow and will not be borrowing for a very long time.

2) Therefore, we believe raising the discount rate at this point was merely a ploy to strengthen the US$ in advance of a major Treasury auction next week.

3) Note the anomalous strong behavior of Gold during the last 72hrs in the face of overwhelmingly “bearish” news: IMF announces further Gold sales, Fed increases discount rate and Gold Feb. futures/option expiration next week.

Tags: Fed, gold, IMF, Treasury, US$

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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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The following is from www.zerohedge.com.  This piece is so profound that a reprint is required:

The SEC passes regulation that only STRENGTHENS the case to own Gold

Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote…

…Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

Anyone who sees this regulation and feels safe leaving their money in money market funds needs to have their head examined. The “intent” is to prevent a “run” on money market funds when the next crisis hits. Essentially the passage of that regulation signals the high probability of such a crisis happening.

As alluded to in the post, the rate on 1-month T-bills has gone negative today. Think about what this means. When a big investor is willing to invest short term money and have returned less money than was invested just 30 days ago, it tells us that the investor is more concerned about getting his money back than he is about making money on his money. The investor is essentially paying a small fee to insure that his cash is returned with little loss (30-day T-bills would be considered riskless since the Gov’t can print money to honor the claim). Think about the signal from big investors that is being given here about the perception of systemic risk and the probability of systemic failure. The rate on 30-day bills went negative for quite some time before the collapse of Lehman and AIG.

This phenomenon only strengthens the case that investors should be putting as much as they can into gold and silver as vehicles for protecting and preserving wealth. When you own gold, you are not subjected to, and victimized by, the bad decisions and moral hazards being implemented by our policymakers, many of whom are puppets for the big banks who fund their positions of leadership (see today’s Congressional inquisition of Geithner and Paulson). When you own physical gold in your own possession (or a trusted custodian), your investment does not have any risk of counterparty claim AND you have no Government/SEC restrictions placed on your investment, like the SEC regulation just passed.

I will end with a quote from none other than the king of fiat money, Alan Greenspan, who said on September 9th, 2009: “gold still holds reign over the financial system as the ultimate source of payment.” Keep this in mind when you get your next investment statement from your broker or advisor.

As Gary and I discuss this issue another thought occurs that bares scrutiny.  All are aware of the massive debt load this country sags under.  The Fed has made it clear rates will remain low for an extended period.  However, other methods are required to support the Treasury bond market and effectively keep rates from rising when worldwide ability to support said debt becomes increasingly dubious.  We pose the question:  Are the rule changes on the $3+trillion money market business designed to force conservative money directly into treasuries? Will we see in details of future treasury auctions an increase in the amount purchased by “households” ?

The answers to these questions are unpleasant to ponder and only time will reveal the secrets.  While your mind churns, read the next story and see how it fits into the puzzle.

SEC says more changes for money-market funds – WSJ

WSJ reports money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier. With memories still raw from the 2008 meltdown of Reserve Primary Fund, the SEC released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently. The trade-off: These safeguards also will put pressure on yields that are already near zero. The changes likely will reduce yields by about 0.10 percentage point, said Pete Crane, president of Crane Data. This isn’t good news for money-fund sponsors already suffering from redemptions because of their low rates. Investors pulled about $540 billion out of money-market mutual funds last year, bringing assets to $3.3 trillion, according to Crane.

Tags: Fed, Geithner, gold, money market funds, SEC

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I wrote yesterday: THE FED WILL NOT REDUCE LIQUIDITY AT THIS TIME.

Today, I will reiterate and state: QUANTITATIVE EASING WILL NOT AND CANNOT END AT THIS TIME.

This statement may appear to be rather bold in light of the noise emanating from traditional news outlets and the occasional Fed comment.  However, a review of the facts support the notion an end to Q.E. would be catastrophic for the economy and therefore unlikely to occur under the present administration.  I would also like to add, 2010 is an important mid-term election year. This fact would lay credence to the idea of further stimulus in 2010 not a reduction.

In order to support my thesis I have included three stories from a varying array of sources. The first story, brilliantly styled by Zero Hedge, highlights a voting member of the Fed. The second, reveals the dire situation of the real estate market as told by the Mortgage Bankers Association. And the third story, quotes the respected Bill Gross of Pimco. Bill explains, in plain English, the conundrum of Q.E..

Enjoy…

Bullard Acknowledges Asset Bubble, Yet Fed Policy Will Remain Unchanged As Change Would Destroy Banks. By Zero Hedge

…Ah, the fabled “extended period” clause. Well, thanks to Bullard’s clarification, we now know that this determination defines not an interest rate duration ambiguity, but rather one of the Q.E. program itself. The latter, in turn, is inextricably linked to the $1.1 trillion in excess reserves. So long as that massive overhang exists, and continues growing, any hopes for an end to Q.E., let alone rate increases, are a deluded myth. And all that posturing about extracting excess liquidity and adjusting the liability side of the Fed’s balance sheet, well, we’ll believe it when we see it. Until then, we, and judging by the dollar’s response to this speech, the broader market as well, fully expect another several hundred billion in tack-on MBS and, who knows, maybe even Treasury purchases by the Fed. The dollar carry trade is back, just as it seemed that Japan may regain the dubious distinction of being the supreme annihilator of one’s own currency. Sorry Japan, Ben is the man. READ MORE…

US mortgage originations seen plummeting – MBA

WASHINGTON, Jan 12 (Reuters) – U.S. residential mortgage originations will plunge 40 percent this year to the lowest level in a decade as home refinancing demand sinks with rising mortgage rates, the industry’s main trade group said. Lenders will underwrite $1.28 trillion in home loans this year, down from $2.11 trillion in 2009, the Mortgage Bankers Association said in its annual forecast on Tuesday. That would be the lowest since $1.14 trillion in 2000. The forecast was downgraded from December, when the MBA predicted originations would fall about 24 percent.  READ MORE…

Pimco’s Bill Gross on Fed Q.E. Conundrum:

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds.

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: Fed, mortgage, mortgage bankers association, Q.E., Quantitative Easing

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That’s it! I’ve had it! Enough!

Let’s dispense with the absurd, ludicrous, vacuous debate about “imminent” Fed tightening.  The financial airwaves and print are full of this idiotic expectation that the Fed will reduce liquidity soon.  Allow me to be clear: THE FED WILL NOT REDUCE LIQUIDITY AT THIS TIME.

The Fed cannot reduce liquidity because the economic environment is tenuous at best and tragic at worst.  If you don’t want to take my word for this assessment, reading the FOMC minutes from December would be a good start to your education.  You will note that the private session comments from the Fed do not correlate with the public Fed statements made during the same period.  Perhaps this misdirection by the Fed is the cause of all the financial media drivel about possible Fed tightening. Whatever the case, I’ve listed four stories below that should, along with the FOMC’s own emissions,  put to rest the useless notion of Fed tightening.

Stock Market Investing: Expect Q4 earnings, released over the next few weeks, to be lackluster (Alcoa’s announcement today is the first example of disappointment). Subdued EPS results along with continued employment, consumer credit and real estate woes will succeed in limiting the Fed’s ability to change policy. This sad realization will send the US$ lower, commodity prices higher and perhaps extend the equity market rally for a bit longer.

Maintain a close watch on the Treasury market. The recent selloff in bonds/increase in rates has been problematic as mortgage rates have climbed. It would be in the best interest of government for a little volatility and weakness to hit the equity markets and drive the fear trade into treasuries effectively bringing down rates.

Miller Tabak on Payroll Figures:

Beyond Friday’s lackluster headline payroll figures, the “real” unemployment rate (or U6) rose to 17.3% and the average hourly work week remained near record lows at 33.2. In addition, the average duration of unemployment rose to 29.1 weeks as the ranks of the long-term (or “permanently”) unemployed continue to swell. Furthermore, the household survey showed a decline of 589,000 employed persons to the lowest level since 2003, according to Miller Tabak.

In sum, fewer people are working, more Americans are dropping out of the labor pool and those who are working are working fewer hours: Average hourly earnings up just 2.2% vs. a year ago in December, lowest rate since 2004 and vs. an average gain of 3.3% over the prior decade, according to Miller Tabak.

“Net-net, we are not in your typical WWII recovery and major headwinds still remain,” writes Miller Tabak equity strategist Peter Boockvar.

Consumer Credit in U.S. Drops Record $17.5 Billion

By Vincent Del Giudice

Jan. 8 (Bloomberg) — Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.

“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.” READ MORE…

America slides deeper into depression as Wall Street revels: December was the worst month for US unemployment since the Great Recession began. By Ambrose Evans-Pritchard

…The Fed’s own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc….

… This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73. READ MORE…

Delinquency rate rises for mortgages – WSJ

WSJ reports more than 6% of commercial-mortgage borrowers in the U.S. have fallen behind in their payments, a sign of potential troubles ahead as nearly $40 billion of commercial-mortgage-backed bonds come due this year. The percentage of loans 30 days or more delinquent rose to 6.07% in December from 5.65% a month earlier, according to data provider Trepp. That is the highest delinquency rate since the advent of commercial-mortgage-backed securities.

By year end, delinquency rates on loans for hotels, shopping malls and other commercial properties could rise to between 9% and 14%, according to Jefferies analysts, as high unemployment levels and a depressed housing market inhibit consumer spending. As retailers, hoteliers, restaurateurs and other businesses find it difficult to keep up with their rent payments or to meet rent increases written into their leases, their landlords will find it just as hard to keep up with their mortgages. “As cash flow declines materialize … loans that are current will face pressure,” said Aaron Bryson, an analyst with Barclays Capital.

Follow up on our China post…

China overtakes US as world’s largest auto market – AFP

AFP reports China’s auto sales surged past those in the United States in 2009 to make the Asian nation the world’s biggest car market, industry data showed, but analysts warned sales would slow this year. The China Association of Automobile Manufacturers said more than 13.64 million units were sold last year, marking an increase of 46.15% from the 9.4 million units sold in 2008, Xinhua news agency reported. Auto output for 2009 increased 48.3% to 13.79 million units, Xinhua said. Calls to CAAM to confirm the figures went unanswered… Analysts welcomed the news, but warned that China car sales could hit the brakes this year. “We are still optimistic about the outlook for this year but it will be quite difficult to achieve the growth rates of 2009,” John Zeng, a Shanghai-based analyst at IHS Global Insight, told AFP. “This year will see a high single-digits growth rate of nine to 10 percent.”

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: ben bernanke, China, consumer credit, earnings, employment, Fed, stock market investing, unemployment, US$

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Welcome to 2010!   Now that the holidays are over and last minute Tim Geithner vandalism complete, actual real economic statistics should begin to bleed out.   First up, pending home sales… 

ECONX Pending Home Sales M/M -16.0% vs -2.0% consensus, prior +3.9%

…Now there is a real figure and one that should surprise no one reading this blog on a regular basis. Moreover, this number was not surprising to the Fed as evidenced by the 2:00pm release of the December Fed meeting minutes:

AP: Some on FOMC said wind-down of MBS may hurt housing

DJ: Fed officials still concerned about weak labor market

AP: FOMC members said more stimulus ‘might become desirable
 

While I’m not surprised by the sales figures I do find the Fed comments a bit suspect. Correct me if I’m wrong, but during the month of December wasn’t the Fed preparing mechanisms to drain liquidity? I recall something about reverse repos being applauded on CNBS (Denninger).  Meanwhile, behind closed doors the Fed is discussing the need for more stimulus! Do you think all those recent US$ bulls are feeling like suckers yet?

 

The Inherent Trouble With Too Much Stimulus:During the course of 2009, the Obama administration rolled out a series of ‘initiatives’, under the banner of ’stimulus’, in the hope of restarting the economy.  I will refrain from typing a cathartic diatribe labeling the ’stimulus’ effort as misguided, futile and infantile. Better save that for a different post when I’m feeling a little more politically randy. Moreover, I’m loath to distract you from a more pressing issue: Can a pile of stimulus actually lead to long term economic health?

I sincerely wish a hearty debate could ensue. I challenge anyone in cyberspace to give me actual proof of an economic recovery at anytime throughout history that resulted from a ’stimulus’ package.  Wait! Don’t get too excited. There is a catch. I’m not interested in reading about a stimulus package built on sound ideas like tax cutting and fiscal responsibility. No, if you accept the challenge your example must sight a ’stimulus’ package built on the solid foundation of massive budget deficits and currency debasement. 
                                          

While I’m waiting for a brave soul to respond, I’d like to return to the topic of awful pending home sales.  The reason for the decline was really quite elemantary.  Government incentives draw forward sales into earlier months and when the incentives end, sales drop. Without  job creation and income expansion, incentives can only do so much; eventually the well of able buyers runs dry. Moreover, constant government creation of gimmick stimulus leads to dangerous buyer learned behavior: Stop buying until the next stimulant is announced. 

Perhaps the best way to understand the dangers of gimmick stimulus is to use an analogy. Allow me to take the idea of stimulus and apply it to the easily understood realm of Starbucks. We can all agree, the first cup of coffee in the morning gives some of us a much-needed jolt of the stimulus caffiene. We feel more awake and ready to go. What happens after the 3rd or, maybe, 4th cup? Yes, we have some more energy, but we start to feel a little jittery. Add a couple more cups of stimulant and we begin to feel downright sick and are completely unproductive. This is a perfect example of the oft cited law of deminishing returns.  The unchecked use of any stimulus will lead to a decrease in productivity and usually health problems. I submit to you, the same principals hold true in economics. 

 

  

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: Fed, home sales, Stimulus, timothy geithner

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…the US$’s strength as well as the strength in the Treasury bond market does however, provide some consternation. Apparently, other factors have overshadowed the Fed meeting this week and driven the direction of markets. Many attribute the strength of the US$ to troubles developing in Europe. The fears of a debt default in Greece have led some to believe the viability of the EU is in question. We believe this fear is unfounded and would instead direct your attention to the following story…

House narrowly passes $290 billion increase in debt limit - WSJ
WSJ reports the House approved a short-term $290 billion extension in the nation’s debt ceiling, delaying a decision until February about a larger increase in the borrowing cap. The vote comes less than a week after House Majority Leader Steny Hoyer (D., Md.) said he intended to seek a $1.8 trillion increase in the ceiling to support federal government borrowing through 2010. A decision was made to seek the more modest increase after it became clear the larger increase may have failed to win support in the Senate. The Senate must still take up the two-month increase, which it is expected to do next week.

…The decision to delay the “larger increase in the borrowing cap” in our opinion added fuel to a short covering rally already underway in the US$. I will note that the vote has only been delayed and will no doubt be passed in the not to distant future.

In short, year-long trends remain in place although severely tested this week. Seasonality would suggest equity market strength during the last two weeks of the year. Volatility as judged by the VIX index has remained subdued during this week’s shenanigans and would add credence to the idea of a resumption in seasonal trends.

More homes are poised to hit the market – LA Times
LA Times reports a supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation’s housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said. A variety of measures to keep discounted bank-owned properties off the market — including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford — has helped increase a backlog of so-called shadow inventory 55% in the year ended Sept. 30, according to a report released Thursday by First American CoreLogic, a Santa Ana-based real estate research firm.

Tags: Fed, foreclosures, housing market, obama, US$, vix, volatility

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NEW YORK (CNNMoney.com) — The news that the sovereign wealth fund of Dubai requested a postponement of billions of dollars of debt this week could pose a big problem for U.S. banks…

…Bove said the underlying problem is that there is a lot of uncertainty floating around. For example, there’s little information available about counterparty derivatives, guarantees that transfer default risk from lenders to other financial institutions. And it’s unknown how much of Dubai World’s debt guarantee is held by U.S. banks. Read More…

Stock Market Investing: The above story along with many others have filled the airwaves and blogosphere over the last 4 days. I will refrain from adding my voice to the din. Moreover, endeavoring to postulate on the repercussions seems to me a fool’s errand. The sheer plethora of moving parts and back room deals makes a supposition worthless.

I will, however, offer some insight to a more pressing question: How will this event effect the US$, the equity markets and the price of Gold?

An avid reader of this blog will find the answer both simple and familiar. Bad news on the global economic front equates to good news for the U.S. equity markets and the price of precious metals, Gold and Silver.

Investment Strategy: The legend for deciphering this market environment:

Neg.Eco.News = Con’t.Q.E.; (Q.E. = Quantitative Easing; catchall for liquidity creation)

Con’t.Q.E. = Con’t.US$.Dval.; (US$. Dval = US$ devaluation)

Con’t. US$.Dval = Exponential Gold and Silver price increases + higher US equity prices

This legend, in all likelihood, will remain in force until major policy changes occur within the White House, U.S. Treasury and Fed. Never in history has the systematic devaluation of a currency led to sustained economic recovery and long-term growth. However, without fail, said devaluation leads to inflation, often hyperinflation, and a flight out of the currency into hard assets. The move unfolding in the price of Gold and Silver will be for most unimaginable, but for the few, the proud, the aware, it will be a move of a lifetime.

Tags: Dubai, Fed, gold, hyperinflation, Inflation, investment strategy, precious metals, Quantitative Easing, silver, stock market investing, U.S. treasury, US$, white house

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Mid-week and the economic numbers continue to disappoint. However, equity investors should take heart and view the chart above. This is a monthly chart illustrating the direction of the US$ and the inverse relationship with the S&P500. The chart dates back to 2000, but you can see the correlation has become more intense in the last 12 months.

So, as long as this correlation holds, remember bad economic data equals good equity market performance due to continued Fed accommodation that leads to a weaker US$…

Fed’s Bullard says possible Fed won’t hike rates until 2012

Housing Starts Crater
The talk that housing starts were stabilizing hit a snag in October as new housing starts plummeted 10.6% to 529,000 units from 592,000. The consensus forecasted an increase in starts to 600,000…Single family starts fell 6.8% to 476,000 and is at its lowest level since May. Multi-family starts fell a whopping 34.5% as only 53,000 new units were started. Multi-family starts have never been this low since the index was created in 1959

Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss. Read More…

I mentioned Monday, “Make sure your precious investment is backed by the actual metal.” Below you will find an excerpt from the Gold ETF (GLD) prospectus. This same language can be found in the Silver ETF (SLV) prospectus. Take heed of these warnings. I fear in a world that has become numb to a long list of possible side effects to the drugs taken, you may view this prospectus in the same light. Don’t make that mistake! These are very real warning that could effect your financial health. Why even take the risk, when there are so many quality alternatives? Please, feel free to log onto our website http://www.rosenthalcapital.com/ for a complete discussion of said alternatives…
…Meanwhile, the best in the business are coming our way. To Touradji and Paulson I will say, from all of us at RCM, welcome to our world!

Paulson & Co. to launch new gold fund January 1; Paulson to personally invest about $250 mln in new gold fund - Reuters

Touradji Capital Management LP, the New York hedge-fund firm that oversees about $2.7 billion, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest gold producer, while selling shares in SPDR Gold Trust, the largest exchange-traded fund backed by bullion. Read More…

Tags: economy, Fed, gold, housing market, precious metals, silver, US$

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Stock Market Investing: No change from last week. The technicals didn’t get much better but an overwhelming tsunami of weak economic data helped to drive the US$ lower and drove both hard asset prices and equity prices higher.Read More…

…Meanwhile, even as Brazil implements policy changes to stop its currency from appreciating, the Real advances adding credence to the Economist theory of a Forex crisis approaching …Read More…

Investment Strategy: Ride the wave! This market behavior reminds me of the waters off Jupiter Beach, FL, where I live. Right now I’m looking at a beautiful expanse of ocean as far as the eye can see (don’t hate the player, hate the game) and I see perfect 5ft. rollers washing up on shore. The break is speckled with surfers all the way down to Juno Beach pier where the best are attacking the biggest swells.

The picture seems perfect but the key word from the description above is ATTACKING. I sat through brunch on Sunday next to a local surfer girl. She was around 16 and had everything going for her with the tiny exception of crutches and a rather large bandage on her foot.

While the surf was perfect for humans, it was also an absolute delight for the sharks. Do you see where I’m going with this? When investing in today’s markets you can enjoy the ride but you better remember the sharks are circling.

Time to review the details from last week. Follow the bouncing ball and you will get to the inevitable conclusion that hyperinflation is raging toward us like a Hammerhead that smells blood….

Fed’s Fisher says Q3 US GDP growth probably not quite as robust as originally reported, closer to 2.5% – Reuters

November University of Michigan-prelim 66.0 vs 71.0 consensus, October 70.6

Initial Claims Continue to Fall
Initial claims again beat consensus estimates as claims fell from 514,000 new claims to 502,000 for the week ending Nov. 7. While the drop in claims doesn’t represent a clear turning point, for the second consecutive week claims have fallen below the 520,000 to 550,000 range that it seems to have been stuck at during the previous month. The market is going to take the drop as a sign that the labor sector is beginning to turn around, but we’ve seen a similar decline in claims before when initial claims fell below the 550,000 threshold at the end of September…

The drop in continuing claims was not due to workers finding new jobs, but due to people running out of unemployment benefits. Approximately, 7,000 unemployed workers lost their benefits every day. Congress recently passed an extension of the unemployment benefits that gave all unemployed workers an additional 14 weeks of unemployment insurance payment and an additional six weeks to workers that live in states where the unemployment rate is above 8.5%. Obama signed the extension into law on Nov. 6. The extension will stop the downward trend in continuing claims…

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months. Due to timing of the releases, the data will not show the results of the unemployment extension until the Nov. 25 release. This means that the continuing claims numbers will show a decline in next week’s reported numbers.

…The details above represent “blood in the water” that requires the Fed to remain easy. However, these policies that balloon money supply have fueled the decline in the value of the US$. I have written volumes about this vicious cycle. For the sake of new readers I will repeat the RCM mantra: Hyperinflation is a currency event not an economic event.

I am forever baffled by the ignorance of many financial commentators when asked about inflation. They point to economic troubles and scoff at the very idea of inflation but applaud Fed policy and cheer rapidly inflating asset prices. Do they not see the oxymoron? Or are they simply morons? (OK, true that was trite and a little unfair but it couldn’t be helped.)

Hyperinflation is rapidly spreading worldwide because currencies around the globe are being devalued in an effort to keep up with the Bernanke “helicopter” drops of US$. The world is heading toward a Forex crisis as the Economist article below suggests. Our response to this roller coaster: Please hold on to the (GOLD) bar…

The Economist on Gold and Forex:

Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.

Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

…As you can see, the march toward hyperinflation and perhaps a currency crisis seems inevitable. The best defense: Precious metals, Gold & Silver. A note of caution: Make sure your precious investment is backed by the actual metal. More on that topic next time…

Tags: ben bernanke, Brazil, Dollar, Fed, forex, GDP, gold, hyperinflation, investment strategy, obama, precious metals, silver, stock market investing, US$

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