Market Trends and Summary

I sent out this email to friends this morning. It took so long to write that I decided to post it here, too! The charts mentioned are the same ones I posted earlier today on this blog.

I am sending this email to a few select friends who may be curious about what I do for a living and what I see as the major trends at this moment. Most of you have been curious about my trading at some point. Don’t expect me to send this again – it takes too long to write!

I don’t suggest buying/selling anything based upon these charts or this email. This is just what I’m doing as of this moment. I could be wrong! There are other factors and considerations in my trading, also. My trading changes day by day, but these trends appear solid for now. Enjoy reading my musings, if you’re so inclined!

This week, the credit ratings of UK and Japan were both downgraded by Moody’s and S&P, and the U.S.’ credit rating is expected to eventually be downgraded also. This is potentially cataclysmic! Just the threat of this possibility is sending shock waves through the world of finance!

Check out the attached charts (see attachments)! Just remember that red means down and green means up (as if it weren’t obvious)! The squiggly lines in the lower panel are volume indicators. I like them because they tend to change direction BEFORE prices do. That’s the closest thing I have to a crystal ball! J

Here are the major trends under way at this moment:

• Plunging Dollar – all major currencies are rising against the Dollar. This should be a concern to everyone because it will cause the price of EVERYTHING to rise. It will cost more $$ to buy the same stuff!

• Inflation – Gold rising rapidly, Crude oil has nearly doubled in 4 months, commodities skyrocketing (see the soybean chart – best bull market this year)

• Debt deflation – treasuries plunging, interest rates rising very rapidly now, accelerating day by day. The price of treasuries just broke through support. This will increase the deficit as the interest costs rise. It will also make debt HARDER to repay for EVERYONE! Ironically, it will INCREASE the likelihood of the U.S. losing its credit rating as increased costs and deficits rise concurrently. GET OUT OF DEBT! It is going to become much more painful to pay it in the future!

• Opinion: Longer Term, I expect to see unemployment accelerate FASTER as cities, counties, and States are forced to begin cutting jobs due to declining tax revenue.. This is likely to happen this Fall when property taxes are due and the foreclosure market begins to weigh on home prices even more. CA will be faced with this almost immediately – they are in a true crisis NOW. By the way – foreclosures will INCREASE again in 2010 and 2011 as even more mortgages reset just as unemployment reaches 10%!

• More Opinion: I would also not be surprised eventually (perhaps next year) to begin seeing pension funds, including HUGE ones for public employees, unable to meet their promises of paying retiree benefits. This will be precipitated by collapsing muni bond markets as cities and counties can no longer pay their bonds. Watch for municipal bankruptcies to increase late 2009 and early 2010. California’s current budget crisis is an early sign of this emerging trend. If this happens, it will send earthquakes throughout the global financial markets. The pensions funds are backed by Federal insurance (somewhat like FDIC for bank deposits), but with the Federal government already borrowing 50% of the federal budget, the debt load will be too much to be able to borrow even more to bail out the pension funds. We saw an early sign of this coming trend this week when Illinois public employee pensions sued in the Chrysler bankruptcy (THESE are the guys Obama complained about when he whined that Chrysler bondholders weren’t willing to capitulate in his plan to transfer most Chrysler assets to his union constituencies? Now, public employees, including school employees, are going to eventually take the hit.) Pension funds are the single largest pool of private wealth in the world. They dwarf even hedge funds, China’s reserves, and sovereign wealth funds many times over! There is no way the Fed government can borrow enough to back them up!

• Still more opinion: Within 3-5 years, I expect Social Security and Medicare to implode. Recently, the CBO announced that the SS surplus has declined 95% in the just past 12 months! They’re broke! We are very close to the tipping point with these two programs. The income tax would have to increase 85% -- almost double – just to fund these two programs for current benefits to continue. This is impossible!

I’ve included charts of these immediate accelerating trends (bullets 1-3 above)(read the file names on the charts). These will all hurt the American people -- perhaps badly. Most Americans are clueless that inflation is CAUSED by government. Higher prices are only the manifestation of it. Congress and the Fed get away with it because the people don’t realize that it is caused by THEIR government policies. This morning, Fed Governor Plosser warned of rising inflation ahead because of their policies. HE knows where inflation comes from! Instead, the people will blame the oil cos, grocery stores, manufacturers, etc. for higher prices. The politicians will too, despite that THEIR policies caused the whole mess! They might even impose price control a la Hugo Chavez, but this will cause shortages and make things even worse. Fact: The U.S. government’s entire fiscal and monetary policies right now can be summed in ONE WORD: INFLATION! They are doing it intentionally! But they don’t want the people to know this!

One note: Fuel prices, especially oil, will rise strongly in the future. The Cap and Trade tax, (was just approved last night by the Energy Committee in Congress), Obama’s policy of shutting down domestic fuel production, and declining global supplies will cause the cost of energy to skyrocket. This is terrible policy for our economy and our future! Bountiful City has told us that utility rates will at least DOUBLE because of the Cap and Trade tax alone! We will almost certainly see severe shortages of gasoline and other fuels in the future within the next few years. This is going to be excruciating not only for our pocketbooks, but also for the broader economy. It will even cut FOOD production (yes, FOOD), since agriculture uses oil for both fuel and fertilizer (fertilizer is made from oil and nat gas). Food production will decline and the cost to produce it will increase as fuel availability declines. If the fuel shortages are severe, food prices will skyrocket as farm production plummets.

Here is where I am as of today (this changes day by day, of course). These are my current positions:

• Long GOLD

• Long Soybeans

• Short Eurodollar (NOT Forex) (this one is just beginning) (I just reversed from being long). I consider this to be somewhat of a sentiment index. As sentiment declines, so will the Eurodollar futures, which mirrors LIBOR.

• Long Crude Oil (if the stock market tanks, chances are good that crude will also)

• Short natural gas (this one is close to support. I will liquidate soon. Continued economic weakness in industrial sector is destroying nat gas demand.)

• Long all currencies against the Dollar (long Euro, Yen, Pound, but especially the Australian and Canadian Dollars, which are called the “commodity” currencies)

• Short US treasuries (the Fed is buying to try to suppress interest rates, but it’s NOT working. The bond vigilantes are beating the Fed at this game!)

• Short the US Dollar (I hate to say it, but we’re shooting ourselves in the foot by devaluing our own currency)

• Stocks – only day trade. No long-term position. I expect stocks to collapse again sometime this summer or early fall. Even now, stocks are showing signs of a head and shoulder reversal. Stocks are currently in consolidation. This is NOT the time to buy! This smart money has already exited stocks following the Spring rally. This rally is OVER! Without a fresh breakout to the upside, the risk is to the downside. Remember the saying, “sell in May, and go away!”? It’s true!

Steve