Gold up trend likely for next few months.

The speculative element to golds surge is reflected in the 138% increase attained by speculative net longs in gold futures to a 9-month high of 155,306 contracts (see above chart). Speculative longs as a percentage of total open interest reached 52%, the highest since July, suggesting further upside remains ahead. Interestingly, the record high in golds net speculative longs was reached in December 2007, three months before the metal hit its all time highs. The 3-month lag between golds net longs and multi-year highs also took place in 2006. Thus, even if speculative net longs regain record territory above 200K contracts, prices may have at least 2-3 months of upward momentum. The prospects for $1,200-1,300 gold by end of Q3 remain underpinned by a set of cogent fundamental variables involving currencies, interest rates and the global economy. Meanwhile, even as the divergence between gold and oil begins to fade, any oil-friendly dynamics are seen positive for gold's luster.

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China Investment Watch List

• China Aerospace International Holding , H-Share OTC:CAIF
• Jiangxi Hongdu Aviation Industry , 600316,A-Shares.
• Jiangnan Heavy Industry Co, 600072,a-Shares.Aircarft carrier.
• China Life Insurance Co.Ltd ,HKG 2628, NYSE LFC.
• Aluminum Corp of China Ltd , NYSE ACH
• Focus Media Holding Ltd, NASDAQ FMCN
• PetroChina NYSE PTR.
• China Railway Erju Co, 600528 A-shares,List in HK.
• Ctrip.con NASDAQ CTRP
• COFCO International HKG 0506
  
• Oriental Food Holding Singapore
• Nanning Sugar MFG SHE000911 A-shares
• American Dairy Inc NYSE ADY
• Chaoda Modern Agriculture Ltd HKG 0682 H-shares
  
• Pine Agritech Ltd Singapore
• China Medicl Tech NASDAQ CMED

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The Oldest, Most Trusted Technician in the World Is Telling You to Sell Now

The oldest, most trusted technician in the world is telling you to sell now.Recession? Depression? Nascent recovery? Market bottom? Dead cat bounce?

Bad News and Worse

I could point out the worst GDP reading in a quarter century (except I think I already have several times over the past few weeks). I could read you chapter and verse on current unemployment (7.2% according to the government, already cresting 12% according to some more “inclusive” calculations).

I could quote no less a luminary than British Prime Minister Gordon Brown, who confessed in the House of Commons that we are truly mired in a great depression akin to the 1930s. (The apparatchiks at #10 Downing Street are desperately trying to retract the statement, but I’m afraid that this particular cat is out of the bag, through the door, and out of sight down the street already.)

Or I could simply go back to Charles Dow’s tenet 4: “The Transports must confirm the Industrials.”

The Facts of the Matter

If you look at the Dow Jones Industrial Average for the past few days, you can’t help but see the fact that last Monday’s low of 7867.37 beat the previous low of 7909.03 set on Jan. 23.

If you look to the Dow Transports’ chart you can see consecutive lower lows of 2926.66 on Jan. 27 and 2865.58 on Feb. 2.

The Only Sane Solution (and a Sure Shot at Triple-Digit Gains)

The trend is already in place. The counter-reaction is ending. The next leg down has been signaled and confirmed. The only protective tactic that makes any sense is to buy puts against both the Industrials and Transports similar to the ones I have asked WaveStrength Options Weekly (WOW) readers to purchase.

Today's Taipan Daily

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ProShares Ultra-Short 20+ Treasury Fund (TBT)

The central banks/governments around the entire world are fighting the credit crisis with everything and the kitchen sink. Some of the efforts will take hold, encouraging a bit of risk taking activity. That means money will come out of treasuries and go somewhere... whether it's A-grade debt, foreign bonds, emerging bonds, preferred debt, convertible debt. In other words, the money does not have to flow into stocks for the ProShares Ultra-Short 20+ Treasury Fund (TBT) to thrive; it just has to leave U.S. treasuries... and I believe that it will.

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Geithner, China, and the Specter of Technical Insolvency

Even including the TARP 1 injection of capital of $230 billion into the banking system and the further $200 billion of capital injected by private investors and sovereign wealth funds since the start of the crisis, the overall banking system would still be borderline insolvent.Moreover, in order to restore the capital of the banking system to the previous level of $1.4 trillion (a level close to the 8% capital requirement of Basel II) an additional $1.4 trillion of private and public/government capital would have to be injected in the banking system to restore safe credit growth. If a reform of the regime of regulation of banking institutions were to argue that banks and broker dealers need more than the Basel II 8% criteria to operate safely even more than $1.4 trillion of new capital will have to be injected in the banking system.Thus, even the release of TARP 2 (another $350 billion) and its use to recapitalize banks only would not be sufficient to restore the capital of banks and broker dealers to internationally accepted capital ratios. A TARP 3 and 4 of up to $1.05 trillion (assuming generously that all of TARP 2 goes to banks and broker dealers) may be needed to restore capital ratios to adequate levels.

Safe Haven | Geithner, China, and the Specter of Technical Insolvency

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Banks of America

Investors who have been pining for a chance to buy into the beleaguered banking sector may have a bit longer to wait. Just this past Friday holders of Bank of America's (NYSE: BAC) stock were greeted with the reporting of the company's first quarterly loss ($1.79 billion) since 1991. To make matters worse, the company cut its quarterly dividend from $.32 to $.01. The loss prompted a new rescue package totaling $138 billion, which comes on the heels of the recent round of government injected capital of $25 billion last year.

That level of distress has forced the shares of the largest U.S. bank by assets down 74% in the last 6 months. But it's not just BofA that has been suffering lately; the Financial Select Sector SPDR (NYSE: XLF) has nearly 2/3 of its value in that same time period.

So why have financials suffered so much in the past year and is now a good time to jump in? After all, with losses like those it's hard to imagine how the sector wouldn't offer a good opportunity, even if just from a contrarian's perspective. But there are three factors that belie the inclination to pony up new cash at this time.

First, investors must understand that Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), et al could all be named "Bank of America," as they have become de facto wards of the state. Government investment in the financial sector goes hand in hand with government control. That means lending practices, dividend payouts and compensation packages will now be highly influenced by the government. Unless you view the post office or DMV as models of efficiency, this wouldn't seem the best path back to corporate health.

Second, since there appears to be no imminent end to their write downs, many of these banks will likely need to raise yet more capital from the government in the future. More capital injections mean more dilution to the existing shareholders.

And finally, investors must realize that before these financial companies can begin to return profits to their investors, the government must get paid back first.

It is not until the housing market bottoms and the unemployment rate plateaus that the economy can begin to stabilize. That would help place a floor under banks' assets and put an end to their seemingly endless parade of write downs. Only then can investors accurately access the value of banking shares. Until then it is advisable to avoid trying to catch the proverbial falling dagger.

Safe Haven | Banks of America

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Something’s Happening Here (With The Price of Oil)

As you read this, huge supertankers filled with oil are moored off the coast of Scotland and the Gulf of Mexico. The question is why... and what it could mean for oil-related profit opportunities in 2009.

Something’s Happening Here...

Something very strange is going on with the price of oil. Not just in terms of straight-up price, but in regard to the huge discrepancy between the near-month and far-month futures contracts.

As I write, the going price for near-month West Texas Intermediate crude is $36.51 per barrel. The December 2009 contract, on the other hand, is trading at $55.13.

That is a monster spread. We’re talking a difference of more than $18 a barrel between spot crude – the stuff you can buy in the cash market – and crude slated for delivery at the end of this year.

The technical name for this situation is contango. That’s what they call it when a forward-month commodity contract is trading at a higher price than the near month. (You don’t really need to know this right now, but the opposite of contango, when near-term prices are higher than the back months, is backwardation.)

The reason this is strange is because of the massive profit opportunity embedded in the crude market.

Assuming you had the means, you could go out right now and sell millions of dollars worth of December crude contracts at $55 dollars a barrel... buy the equivalent amount in the cash market for $37 a barrel or less... and then just wait until it’s time to deliver the oil (and lock in your $18 profit).

The only hitch in the deal is finding a place to store the stuff. If you were to buy crude on the cheap now, you would have to take delivery and store it until late November (or whatever month your delivery date rolls in, when you close the trade and take your locked-in profit).

.........................

Today's Taipan Daily

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Bank Functionally Bankrupt

The banks, that is.

XLF (the financial sector spyder) yesterday, down 16.5%.  That's impressive, but what's even more impressive is the loss in some of the components, to wit:

BAC, down 28.9%
Citigroup, down 20%
Goldman Sachs, down 18.9%
JP Morgan, down 20.7%
Morgan Stanley, down 15.9%
State Street, down 59% (!)
Wells Fargo, down 23.8%

Those are one day losses folks.  In one day anywhere from twenty percent to more than half of these firms was wiped out.  If you hold their stock, I hope you're prepared for what you see when you look online at your account.

Why did this happen?

Quite simply the market calls all bets.

Paulson, just last week, gave an interview in which he defended the TARP and said that they had "stabilized the financial system."

The market said in response:

Let me make this very clear - the market is saying very loudly that the common stocks of these firms are going to zero. They are all functionally bankrupt, right here, right now, with their current capital structure, and have been for months.


That's the market's pronouncement as of yesterday - and as you can probably surmise I agree with it, given that I've been calling for cramdowns of the debt structure in these firms as the proper means to resolve the excessive bad debt problem for more than a year. Such a move would inherently destroy all value in the common and preferred stock (at the same time it resolves the firm's - and the nation's - bad debt.)

The Market Ticker

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The Muddle Through Middle

Now, we come to the third scenario and -- no surprise to long-time readers -- the one I think is most likely. I think that after we climb out of recession, we Muddle Through for an extended period of time. Follow my reasoning, and remember that I am often wrong but seldom in doubt! And please allow me some room to speculate. I can guarantee that I have some (or most) of the particulars wrong. But I think I have the general direction we are heading in.

We are in a serious recession. We have to allow time for both the housing market and the credit markets to heal. This will take at least two years. I think we have permanently seared the psyche of the American consumer. Consumer spending is likely to drop at least 6-7% over the next two years, and maybe more. The combination of all three bubbles (consumer spending, credit, and housing), which were made possible by increasing leverage and poor lending standards, is by definition deflationary. (I know, I keep repeating, but most readers do not really get the rather disturbing implications.)

The US government in general and the Fed in particular will react to the problem. Most of the government stimulus, other than that used to reliquefy the banking system, build useful infrastructure, and encourage small business to expand, will be wasted or have little short-term effect. The Fed (and central banks around the world), on the other hand, do have the potential to succeed with a "shock and awe" type of stimulus program.

Pension plans, endowments, insurance companies, and individual investors who are counting on 8% long-term compound returns from their stock portfolios are as likely to be disappointed in the next five years as they were in the last ten. The environment I am describing is one of compressing price to earnings ratios, much like the period from 1974 to 1982.

This environment is going to force the creation of new investment programs and products based on income generation. And that is one of the forces that will bring about a real recovery in the middle of the next decade. Investment capital will be made available to businesses that can generate low double-digit or high single-digit returns, as well as new technologies with the promise to deliver new paths to profits.

The second major force will be the arrival of new waves of technological change. We will see a biotech revolution beyond our current comprehension. It has the real potential for solving a great deal of the Medicare entitlement program problems. For instance, it is likely we will have a real cure for Alzheimer's within five years. Since that is as much as 7% of US medical costs, that can create a real cost reduction. The same for heart disease, obesity, cancer, and a host of other medical conditions that will start to be dealt with by a new generation of therapies. That is going to create a new, very real bull market in biotech.

I expect to see a new generation of wireless broadband that powers whole new industries. And it will not just be green tech, but entirely new forms of energy generation that drive the cost of energy down and, combined with other new technologies, make electric cars practical. And along about the end of the decade, the nanotech world begins to really get into gear.

And just as the tightly wound, low P/E ratios of the early '80s gave way to a spring-loaded major bull market as new technologies became the driver for a whole new set of public companies, we could (and should!) see a repeat of that performance. There is a new bull market in our future.

The problem is getting from where we are today to that next dawn. The definition of insanity is to keep repeating what you have done in the past and expect a different result. We are in a long-term secular bear market. P/E ratios are going to decline over time to low double digits. Hoping that stocks somehow rebound to new highs and that the economy is going to go back to what we saw in 1982-1999 or 2003-2006 is not a strategy. You need to be proactive and take charge of your portfolio, looking for absolute-return types of investments for the next 4-5 years. Simply using a traditional 60-40 split of stocks and bonds is not going to get you to retirement nirvana. It will lead to retirement hell.

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Is America Broke Part II -- The Debt God

* Federal Reserve Notes circulate as the currency
* The currency is secured by Treasury Bonds
* Fractional Reserves are money required to be held by the bank
* The reserve requirements go from zero, to 3%, to 10% * Federal Reserve notes (cash) are the main reserve deposit
* The U.S. Treasury has an account at the Fed
* The Fed holds U.S. government securities in its accounts
* The Fed conducts open market operation by buying or selling Treasury securities Where the Money Comes FromTrillions of dollars are on deposit around the world. I remember as a kid that a million dollars was a big deal. Today, billions of dollars are tossed around without the blink of any eye. Trillions are now the topic de jour.

 Where does all this money come from?

There are a couple of parts to the answer.The process begins with the Treasury Department creating a bond, which is now done electronically. Treasury bonds are debt obligations of the Federal government to repay a loan, which includes both the principle amount of the loan and the interest on the loan.

The Treasury sells bonds to the public and other buyers - Japan and China being the largest players, accounting for over 40% of our debt issue. The bonds not purchased by these buyers are deposited by the Treasury with the Federal Reserve. When the Fed accepts the bonds from the Treasury, it lists the bonds on its books as an asset.

The Fed assumes the government will make good on its promise to pay back the loan. This is based on the belief that the government's power to tax the people is sufficient collateral.Because the Fed now has an assetthat it didn't have before receiving the Treasury bond, the Fed can create a liability that is offset by its new asset. The liability that the Fed creates is a Federal Reserve check. It gives the Treasury the check in payment or in exchange for the Treasury Bonds.

The Fed loans the government money by purchasing Treasury Bonds.However, where did the Fed get the money to have deposited on account to cover this check, especially if one goes back to the beginning of the Federal Reserve and the creation of the first Federal Reserve Notes?Also, recall that Federal Reserve Notes are secured by Treasury Bonds - bonds that the Fed buys with the same Federal Reserve Notes the bonds secure. It sounds a bit circuitous to say the least.

The money was created by the very act of the Fed offering the Treasury a loan, and the Treasury accepting the loan. The Federal Reserve's check is endorsed by the Treasury and is deposited in one of the government's accounts. The government can then use the deposits to write checks against, to pay for government expenses.

Safe Haven | Is America Broke Part II -- The Debt God

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