Long time

Hi friends.

I have been busy for the last few months with work and school. I am sure that it must be surprising to see how turbulent the market has been over the last few weeks. The market is at a significant turning point as I write this post. With the S&P futures falling 43 points and the dollar/yen falling to 105.65 -2.20 this marks severe market turbulence.

LEH has filed for bankrupty - http://www.cnbc.com/id/26708143

Bank of America has bought Merrill Lynch for over 2X what the company was worth - Merrill bought out for $44


and

AIG, a Dow 30 component says that it needs financing immediately or it will not survive - AIG in credit crunch

We have now reached a point where you need to make a decision. Will you keep believing what they say on CNBC and what the fed says about the economic state or will you start listening to the market now that it is at a roar?

If you want to get updates on the details I suggest reading Mish's blog:

http://globaleconomicanalysis.blogspot.com/

He has been right about this mess for a long time.

The bailout of Merrill Lynch MER by Bank of America (it was a bailout, that will become clear in the next few weeks) is another sign that the financial system was on the brink of collapse today. However, there are too many moving parts and not enough repairmen on hand to keep jumping in and fixing problems. At some point, the machine is going to stall and catch on fire. Just stand clear when that happens.

Retail Sales Fall -0.6%, And That Is The GOOD News

Retail sales fell below the consensus range of 0.2% last month to -0.6%. This was no surprise to me as I continue to expect big box retailers to suffer as the USD continues to fall and consumers spend more of what used to be discretionary income on gasoline and food.

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In the overnight forex market, the yen hit 99.75 yen/1 USD. Some are predicting 95 yen/1 USD, I am not sure where the dollars decline will stop, especially with the fed continuing to inflate faster than a hot air balloon.

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GOLD HITS $999.4/oz and will hit 1100-1200 in the next few months. Gold is set to take on the psychological barrier of $1,000/oz in the next few days. Once it holds that level, it is once again off to the races on the back of the falling USD.

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Indeed, things look grim for the U.S. economy. In terms of the stock market. Things are about to get worse as the next wave of earnings will ALL surely be dissapointing, playing out perfectly, George Soros's theory of reflexivity .

Bull Markets in Gold, Oil, and the Grains are fueled by U.S. inflation.

I started this blog unaware of how quick things could go from relatively ok to a torrent of financial distress. The YEN/USD currently stands at 102.820. 100 YEN/USD is now a certainty. Gold at $1,000/oz is now a certainty. The only questions I have now are where the U.S. stock market will bottom and how long, and also where the dollar will bottom and how long that will take. Today was a wreck in the stock market, but there are many very important underlying factors which are being overlooked, or all together ignored.

Factor #1 :

Sub prime bonds made it into the single digits today a 92% decline as homeowners continue to "walk away" from declining home values:

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Factor #2

The yield on the T-bill continues to plummet. This is putting severe stress on banks holding money in the overnight market. This also is a result of people looking for a safe place to put money in order to weather the current financial storm/tornado/Cat 5 hurricane.

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Factor #3: The US Dollar/Chinese Remnimbi peg is in jeopardy. As if the USD can handle any more blows. The current traders in the Chinese currency markets are saying that the Chinese need to get rid of the peg. The current peg is at 7.8 Chinese Yuan/ 1 USD, but it is currently trading at 7.78. In the grand scheme of things .02 is not very much, but the point that needs to be made here is that the Chinese can not keep it at 7.80. If it trades at 7.78, under significant stress, it could trade lower. Not to mention that the last time the peg moved, the traders had advanced notice. The ultimate effect is increased cost of Chinese goods on an all ready stressed U.S. consumer.

Factor 4: Where is gold going?

You'll have to read what Jim Rogers says to find out.

I will put it this way, only someone who understands bull markets the way Jim Rogers does can make that kind of prediction.

Coffee, Pancakes, and Banking Executives

Early this morning 7:30 AM I went to a local pancake house here in the northern suburbs of Chicago called Walker Brothers. It is located right in the middle of an area where many major corporations are headquartered. Allstate, Baxter, Abbott, and Walgreens to name a few. The place was pretty empty early on a Saturday, but I happened to sit next to a banking executive (50-55 years old and one of the VP's in the company) he was having breakfast with a business contact/friend. The conversation went something like this:

Executive: I've been working for the last 4 months trying to close a several hundred million dollar loan.
Friend: Really?
Executive: Yes and the fed has lowered rates from 5.25% to 3%. The loan ended up closing at a higher interest rate than when we started the loan process, even with the fed lowering rates.
Friend: How did that happen?
Executive: Nothing the fed has done has helped.
Friend: Nothing?
Executive: Nothing they has done has helped, in fact, they have made things worse. Much worse.
Executive: They really screwed everything up. The markets are totally locked up. No one is funding anything except things with very specific goals like student loans. Everyone is scared that what they are going to buy is going to drop in value. This is a giant mess and it will not be solved easily. I do not even know what can be done to fix it right now. The fed funds rate has gone down, but now home lenders are adding on extra percentage points for what they called "risk premiums" . So the money is being lent at 5% plus another 2-3% or more for what is now called a 'risk premium'. This is being added on to anyone with a credit score of about 600 or lower. Over the last 2 years people were able to gain access to money who did not deserve to have loans that large. People also got very rich over making loans to those people and now everyone is paying the price.

I had to leave at that point, but it shows that the end of the story for housing and the economy is anything but nearing and end of this downtrend.

Here Comes The Shift!!!

Hang on to your hats folks. If the fed does not intervene, the market is set to crash from the open. Dow futures are down over -500 points and S&P 500 futures are down over -64 points. Professional traders are in a full out panic. I am expecting a torrent of stop losses and sell orders to hit the open of the market if the fed does not cut a full point. Expect computer systems at the exchanges to choke on the volume and lock up. Think about how panicky you get when your home computer crashes. Now imagine the panic when the computers at the exchanges crash when the DJIA is down -500 points. This is ugly.

A Golden 2008

I hope that all of you had a happy holiday and a great New Years. I have returned from a long vacation, and I couldn't be happier to see gold at all time highs with SPG and DDR still sinking.

Gold and gold stocks are on fire. As I stated in earlier posts, I expected gold to rally into the end of the year because of multiple factors. Steve also gave everyone a lesson in gold bubbles. The lesson to be learned is that gold is not anywhere near finished in this run. The metal based at the $800/oz level for almost a month and is now screaming higher.

$1,000/oz will occur within the next year. Expect it to make headlines in most newspapers and major news networks. How many average joes on the street know that gold is at record highs right now??? Just wait until the American public hop on the gold wagon. That will be the time to think about selling. The American public are just as good as everyone else at hopping on to bubbles as they burst. The Nasdaq and housing are good recent examples. I am expecting gold to be added to that list.

Gold stocks are just breaking their 52 week highs. Now is the time to add to positions in gold stocks. ABX, GG, and AEM are on fire.

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Yesterday as the market tanked -2% these stocks were ringing in the new year with 5-10% gains. I expect these stocks to have a great 2008. Yearly gains of 100% from these levels are not out of the question. Especially if gold breaks the $1000/oz mark.

A Lesson On Gold Bubbles From My Friend Steve

I am sitting on my veranda in Dominca having just read Doug Noland's latest article concerning the late great Alan Greenspan and his gratuitously self serving remarks about the state of the US and world economies. My view of Dominca and the Caribbean is asstunningly beautiful as Noland's indictment of Greenspan's policies is stunningly accurate. See: "No Regrets ".

This letter, however, is not about Mr. Greenspan. It is about gold and whether or not gold is in a continuing bull market or if in fact it has reached the bubble stage . My friend Michael has been after me to write a letter for his new blog but I have been reluctant to do so for two reasons. First because when one reduces one thoughts to writing one is much more likely to believe and defend those written thoughts long after they have been proven worthless. Second because there are truly great minds such as Bob Hoye , Jim Sinclair , Doug Noland, Mike Shedlock , and Adam Hamilton who have been writing brilliant analysis for years. Anything I may have to say is most likely my reflection on some of the thoughts of these truly original thinkers. In any event I do not believe we are in a gold bubble for the reasons that follow.

There is a difference between a bull market and a bubble. Gold has been in a bull market since at least 2001. Volatility is increasing but is not near the extremes of late 1979 and 1980. In the mid 1970s my largest stock holding was Hecla Mining. I bought it at an average price of around $5 a share. It moved in a relatively small range until late 1979 when it started moving steadily up. I sold half at around $11 and shortly thereafter I sold the balance at around $19. My sales were in November and December of 1979. In early 1980 Hecla (HL) hit $55 a share.

Gold was bouncing around with moves of $50 and more in a day not uncommon. Gold peaked at a closing daily price of about $850. The actual inter day high in the nearby futures was, close to $887.50. Clearly the volatility in precious metals and their shares was much greater in late 1979 and early 1980 than it is now. I would label 1980 as a time of a precious metals bubble. The present volatility in precious metals, while increasing, does not qualify as bubble type volatility to me. I expect that when we get to a bubble phase in gold we will begin to see "Tech Wreck" style volatility in gold and gold shares with gold trading in daily swings of $100 and more.

The second primary reason I believe gold is not yet in a bubble phase is price. Gold hit $848 in the nearby futures contract recently which caused some talk about gold possibly topping out at its old closing high of $850. Clearly there is some technical resistance in this area. The present price of gold near $850, however, does not account for inflation. In inflation adjusted terms gold would need to be in the $2,000 per ounce range to match the 1980 price of of $850.

Not only is gold far from its all time high in real inflation adjusted terms, but the potential demand for gold worldwide is significantly greater than in the 1980s. The increase in the populations and relative wealth of the emerging economies of China and India alone are huge real sources of demand for gold that were not present in 1980. Sovereign wealth funds are another enormous source of buying power not only for precious metals but also for the mines that hold them.

Volatility and price are telling me that gold is in a continuing bull market and not yet in a bubble. It is my opinion that gold has a real potential to exceed its inflation adjusted peak of $2,000 per ounce in the next few years. Volatility will certainly increase with price, so at times the down moves will be as violent or even more violent than the up moves. We may certainly enter a bubble phase in gold within the next few years, the propensity of our economy to blow bubbles has been well documented over the last decade. If fear in world politics and world market sets in Gold is certainly a likely target for the next round of fear generated bubble blowing.

If you wish to keep track daily of what is happening in gold I highly recommend Jim Sinclair's website. I have followed his writings on gold since the mid 1970s and there is no one that I know of who has more experience and insight about the price of gold. Jim Sinclair has accurately called the present gold bull market from its beginning but his excellent advice extends far beyond the gold market.

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