Stock Market Investing: Market action continues to revolve around the fallout from Friday’s employment data. Equity markets consolidate and precious metals take a breather. Yes, I wrote ‘take a breather’. Allow me to state unequivocally, we believe a dubious government supplied employment number lacks the power to end a Gold and Silver generational bull market. If you feel otherwise, please do us all a favor and sell your precious metals holdings. In fact, if you would like to borrow and sell short that would be even better.

All healthy bull markets experience shakeouts. Often, these shakeouts can be violent, but they tend to be short lived. These shakeouts result in the expelling of weak holders and suckering in of short sellers. These same players will again be buyers at higher prices.

Investment Strategy: Maintain previous positions and look to add on weakness where appropriate.

TrimTab’s explains Friday’s employment numbers:

TrimTabs employment analysis, which uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, estimated that the U.S. economy shed 255,000 jobs in November. This past month’s results were an improvement of only 10.2% from the 284,000 jobs lost in October.

Meanwhile, the Bureau of Labor Statistics (BLS) reported that the U.S. economy lost an astonishingly better than expected 11,000 jobs in November. In addition, the BLS revised their September and October results down a whopping 203,000 jobs, resulting in a 45% improvement over their preliminary results.

Something is not right in Kansas! Either the BLS results are wrong, our results are in error, or the truth lies somewhere in the middle.

We believe the BLS is grossly underestimating current job losses due to their flawed survey methodology. Those flaws include rigid seasonal adjustments, a mysterious birth/death adjustment, and the fact that only 40% to 60% of the BLS survey is complete by the time of the first release and subject to revision.

Seasonal adjustments are particularly problematic around the holiday season due to the large number of temporary holiday-related jobs added to payrolls in October and November which then disappear in January. In the past two months, the BLS seasonal adjustments subtracted 2.4 million jobs from the results. In January, when the seasonal adjustments are the largest of the year, the BLS will add anywhere from 2.0 to 2.3 million jobs. In our opinion, trying to glean monthly job losses numbering in the tens of thousands or even in the hundreds of thousands are lost in the enormous size of the seasonal adjustments.

In November, the BLS revised their September and October job losses down a surprising 44.5%, or 203,000 jobs. In the twelve months ending in October, the BLS revised their job loss estimates up or down by a staggering 679,000 jobs, or 13.0%. Until this past month, these revisions brought the BLS’ revised estimates to within a couple percent of TrimTabs’ original estimates. The large divergence between the two results begs the question of what is causing the difference. While we don’t have an answer today, we will be poring over the data in an attempt to answer that question.

Tags: employment report, gold, investment strategy, precious metals, silver, stock market investing

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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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Stock Market Investing: The equity averages continue to languish, however, as anticipated, the relative strength of precious metals investments soars. The Dow, S&P500 and the NASD all sit at or near their respective lows of the last two weeks while Gold hits a new high for the year at $1,085.65 and Silver crosses $17.

I would like to spend some time today augmenting our precious metals investment thesis. To begin, please review the story below…

IMF Sells Gold to India, First Sale in Nine Years

Nov. 3 (Bloomberg) — The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” Read More

…The key to this story: 200 metric tons were sold over 10 business days at an average price of $1,045. This sale price was only 2.7% below the recent high!

The key is to identify a basket of attractive takeover candidates now, place them into the portfolio and wait for the explosive takeover phase to begin. If our research capability is intelligent and we are patient, we are very likely to hit several 5-10 baggers.

Tags: China, gold, hyperinflation, india, investment strategy, precious metals, silver, stock market investing, US$

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Gold breaks out to a new high up 2.4%, Silver up 4.36%, the equity markets are up over 1.5%, and the U.S.$ is down another .66%. The inflation trade is alive and well.

I would like to begin with a quick comment on Nouriel. I have reprinted the essence of his most recent comments for your perusal:

Nouriel Roubini appears on CNBC discussing his weekend comments about stocks rising “too much, too soon”
Says there are several reasons the recovery is going to be anemic: 1) the labor market is just awful; 2) the consumer is shopped out, saving more and consuming less; 3) there is a glut of capacity; 4) the financial system is damaged with limited credit growth; 5) fiscal stimulus will become a drag by next year; and finally, overspending countries like the U.S. are spending less while spending in oversaving countries is not picking up.

While I agree with his thoughts on the economy, I feel we should avoid placing any weight behind his stock market call for three reasons:

1. The media loves to cheer Nouriel for his historic bear call on the markets last year. But you see, that’s the problem, the call is history. Now, every time the markets fall for a week or two the media trouts out Roubini for another “Dr. Doom” market call. What they don’t tell you is that he has felt the same way all year and yet the market has rallied. Point being, how helpful has his market opinion been this year?
   
2. I fear Roubini may join a long list of pundits who get it right once and make a career out of the call but they don’t help your investment career going forward. Anyone remember Elaine Garzarelli? She called the 1987 crash right and nothing else since. Or, how about Ralph Acampora and Abby Cohen? They called the bull market right at the turn of the century and had every financial network scrambling for a sound bite right at the top. Where are they now? The markets collapsed and they missed the call so Ralph loses his job and Abby gets shuffled. You see, inherent in every right market call are the seeds for failure on the next call. Successful tools that help during one market environment may not necessarily help when the environment changes and the hubris that inevitably infiltrates the minds of these “correct” pundits clouds their ability to spot the change. It is only human nature and happens to the best of us. I’m simply saying beware.
   
3. The driving force behind the equity market rally may, in fact, be something other than the economic turn around and if so then Roubini’s call will be based on the wrong issues. As I have stated many times over the last few months, we believe this market rally is building momentum because of the inflation trade (please see the Sept. 7th post for details). Roubini’s call for economic trouble plays right into our inflation trade theory and is the impetus for higher, not lower, equity prices. Those of you who are subscribers to this blog know the familiar refrain: Inflation is a currency event not an economic event. The more negative economic numbers come out, the longer easy credit will flow, the more the Fed will monetize U.S. debt and the U.S. $ will continue to weaken. This progression leads to an ever increasing exodus out of the U.S.$ into hard assets and equities that benefit from inflation or have a growth rate much greater than inflation.

Since, inflation is a currency event not an economic event, it behooves us to keep our collective eyes on the greenback. By closely monitoring the developments involving the U.S.$ we may glean some valuable insight into the direction of both the commodity and equity markets….

UUP U.S. Dollar loses ground to Euro - WSJ WSJ reports the 16-nation euro rose Monday against the U.S. dollar despite attempts over the weekend to boost the strength of the American currency. The euro bought $1.4648 in morning European trading, up from $1.4588 late Friday in New York. The British pound rose to $1.6010 from $1.5919 in New York, while the dollar rose slightly to purchase 89.77 Japanese yen from 89.63 late Friday.

The dollar weakness came even after finance ministers from the Group of Seven wealthy nations talked up the currency amid fears it could fall farther and disrupt the global economy. U.S. Treasury Secretary Timothy Geithner and France’s Christine Lagarde stressed the need for a strong dollar. Mr. Geithner said it’s “very important for the U.S. that we continue to have a strong dollar,” while Ms. Lagarde said “we need to have a strong dollar .. volatility is not welcome.”

…When world leaders assemble to talk about supporting a currency and the currency breaks down anyway often an inflection point is rapidly approaching. During the collapse of the British Pound in 1992, British central bankers repeatedly stressed the desire for a strong currency much like “Pinocchio”, I mean Geithner, has over these many months.

Norman Lamont was the British “Pinocchio” from 1990 -93. He famously announced he would borrow $15 billion to defend Sterling right before the ultimate devaluation of the currency. At the time George Soros was short $11 billion worth of the Pound sterling and pocketed a cool $1 billion on the day of the devaluation. I only wonder what Geithner will say right before the ultimate fall? (Click for Soros‘ opinion on the U.S.$ today)

I love the smell of fresh denial in the morning….

Saudi central bank says report on replacing dollar is wrong - Reuters Reuters reports newspaper report that Gulf Arab states are in secret talks to replace the U.S. dollar in the trading of oil is wrong, Saudi Arabia’s central bank chief said on Tuesday. Asked by reporters about the story in Britain’s The Independent, Muhammad al-Jasser said: “Absolutely incorrect.” Asked whether Saudi Arabia was in such talks, he replied: “Absolutely not.” The Independent quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.

Tags: euro, gold, Inflation, nouriel roubini, Saudi central bank, silver, soros, U.S. Dollar, US$

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The equity market rally has gained steam over the last few weeks not because of the much discussed possible economic recovery but because of the falling US$. As the US$ sinks to new lows cash in short term instruments is forced to seek refuge. Gold and silver are obvious choices for shelter, but these markets are tiny compared to the amount of US$ looking for cover and so the entire equity market structure is enjoying the massive flow of funds.

In fact, the market capitalization of the entire precious metals mining group is only about $225 billion compared to over $3 trillion in U.S. money markets. Can you see why we have made precious metals and the mining companies a major focus of the Fortune’s Favor Family of Funds?

But I digress, an increase in foreclosures will force the Fed to continue the easy credit solution. Monetization of U.S. treasuries will continue, world demand for a new reserve currency will get even louder and as a result the US$ will continue to decline in value forcing cash into assets that will outstrip the ever increasing inflation. “Here endeth the lesson.” (Another movie quote! “Somebody stop me!” I did it again!?!? The Jaime Lee Curtis quote from Wednesday’s post was courtesy of the movie A Fish Called Wanda.)

“Option” mortgages to explode, officials warn - Reuters.com
Reuters.com reports the federal government and states are girding themselves for the next foreclosure crisis in the country’s housing downturn: payment option adjustable rate mortgages that are beginning to reset. “Payment option ARMs are about to explode,” Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama’s administration to discuss ways to combat mortgage scams. “That’s the next round of potential foreclosures in our country,” he said… Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they “threaten a much greater hit to the consumer than the subprimes,” Goddard said, referring to the mortgages often extended to less credit-worthy borrowers that fed the first wave of the financial crisis… The mortgages tend to be “jumbo,” or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

Does the following story mean the U.S. Treasury is in effect stealing the premiums asset managers have paid for money market insurance? I would welcome any thoughts on this matter.

U.S. Treasury to keep $1.2 billion money fund premiums - Reuters.com
Reuters.com reports the U.S. federal government will keep about $1.2 billion in payments collected to backstop money market funds even after its insurance program ends on Friday, a U.S. Treasury official said. The money “will stay with the Treasury,” the official told Reuters on Thursday, speaking on condition of anonymity because the decision has not been officially announced. The payments, from asset managers, were essentially insurance premiums used to fund guarantees the Treasury put in place a year ago to prop up the $3.5 trillion money market fund industry.

Is the development in the story below the coup de gras for Goldman Sachs? Last year the broker was forced to become a bank to gain access to Fed handouts. Now it seems there is an attack building on the very core of Goldman’s earning power.

Volcker calls for restricting banks’ risk, trading activity – WSJ
WSJ reports former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.

Mr. Volcker, who currently is chairman of the White House’s Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client’s behalf instead of making bets with their own money through internal units that often act like hedge funds. “Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking,” he said in a speech to the Association for Corporate Growth in Los Angeles.

Will the discussion about a new reserve currency continue to pick up steam? If so, the recent slide in the US$ could become a little steeper and in turn the Gold rally above $1,000 a little more secure.

September 30th:

“Sept. 30th is the fiscal year end for the U.S. Treasury. It is also the date when ALL banks across the globe must become Basel II and Basel III compliant.” Bill H. GATA The rules state banks that are not compliant will be restricted from trading with compliant banks. Due to the massive “off balance sheet” derivative exposure that U.S. banks have Basel III compliance will be problematic. Will this development create renewed weakness in the US banking system? We will need to monitor credit spreads closely in the coming weeks for clues of any Basel impact.

Tags: basel, g20, gold, obama, option arms, precious metals, silver, subprime, US Treasury, US$, volcker

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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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