Yields have been plummeting. But some of the action is almost certainly due to the Federal Reserve once again buying Treasuries. Since August 19, the Fed has bought $40 billion in government bonds.

But the Fed has no influence over foreign buyers of U.S. Treasuries. And these purchasers have been coming on strong.

Data last week showed that foreigners bought $117 billion in net Treasuries during August. This is the second-highest monthly total of all-time. Just a hair under the record $118 billion purchased by foreigners in November 2009.

Foreign buying of U.S. government debt has been in an uptrend since early 2009. Apparently the death of the dollar isn’t so convincing abroad.

Here’s to help from abroad,

Dave Forest
dforest@piercepoints.com

Copyright 2010 Resource Publishers Inc.

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

At the same time China:

• Puts in place purchasing restrictions
• Permits piracy
• Delays legitimate items from entering the country
• Provides massive direct subsidization of export production in many key industries
• Maintains strict non-tariff barriers to imports

In 2009 U.S. imports from China were worth $296.4 billion. U.S. exports to China equaled $69.5 billion. In the first half of 2010 the U.S. trade gap with China equaled $119.5 billion.

The American Congress is facing a restless, very concerned, and increasingly vocal American public. Lawmakers in both the Senate and House, responding to voters unhappy with high unemployment – 25 million people don’t have a job or are working part time, 6.2 million people have been out of work for longer than 6 months – are blaming China for the loss of US jobs and are pushing for legislation that would expand the government’s power to impose trade sanctions on China.

With midterm elections in November and the Obama Administration vulnerable in the House and Senate there’s the very real possibility that President Obama will pass a law that restricts Chinese exports into the US – Obama did promise to get tough on China over its currency practices in his election campaign and he is now facing bipartisan pressure.

Many economists, and most US manufacturers, estimate China’s currency is undervalued by up to 40 percent. An undervalued yuan means that Chinese products are cheaper for U.S. consumers but American products cost more for Chinese consumers.

Treasury Secretary Timothy Geithner, while not yet endorsing the new legislation, said China must move faster to allow its currency to rise in value against the dollar. Recently China’s central bank did allow (the yuan’s trading range is controlled by the Chinese government) the yuan to rise against the US dollar. But with only just a 1.6 percent rise since June many lawmakers in the US are frustrated.

The US Treasury is required to submit to Congress twice a year  (April and October) a  report Congress can use to identify whether any of the US’s  major trade partners have manipulated their currencies to boost their exports to the US or make U.S. goods more expensive in their markets. Will the US declare China a Currency Manipulator this October?

“We will take China’s actions into account as we prepare the next Foreign Exchange Report (due on Oct. 15) and we are examining the important questions of what mix of tools … might help the Chinese authorities to move more quickly.” US Treasury Secretary Timothy Geithner

If China is designated a currency manipulator it could lead to economic sanctions if the U.S. took a case before the World Trade Organization (WTO) and won.

The Obama administration recently filed two new trade cases against China before the Geneva-based WTO.

“We are concerned that China is breaking its trade commitments to the United States and other WTO partners.” U.S. Trade Representative Ron Kirk

China’s Problems

Capital controls and trade restrictions have been absolutely necessary for China to reach this stage in its economic development. The country’s economic development is largely driven by fixed asset investments (FAI – fixed assets include items such as land and buildings, motor vehicles, and plant and machinery). China’s fixed assets investment reached 14.1 trillion yuan (2.1 trillion U.S. dollars) in the first eight months of 2010.

China is able to invest so much into FAI because, in addition to the inflow of foreign direct investment (FDI equaled 488.7 billion yuan in the first eight months of the year, FDI is a measure of foreign ownership of productive assets, such as factories, mines and land) its citizens have a very high savings rate as a percentage of income. And because of  controls on how and where they can invest that money, Chinese savers have little choice but to invest at home. If China were to lift its capital controls the resulting outward savings flow seeking higher and safer returns overseas would cause China’s economic growth to stall because the largest by far of its two major engines of growth, FAI, would simply run out of money.

Before he was forced onto the Bush/Snow party bandwagon former Federal Reserve Chairman Alan Greenspan said a floating exchange rate and/or ending capital controls could trigger an outward flood of capital to more secure foreign banks (Chinese banks, still to this day, carry a massive amount of bad loans). He went on to say this might destabilize the Chinese economy and drag down world growth.

“Export industries employ so many people, and a drop in exports would mean a rise in unemployment which could cause very serious social unrest. Social stability is Chinese leaders’ top priority, and the way to achieve it is fast economic growth to keep people working.” Xiang Songzuo, deputy head of the International Monetary Institute at Beijing’s Renmin University

The Chinese Communist leaders have to feed, cloth and house untold millions of urban residents and hundreds of millions more rural residents moving to urban areas over the next couple of decades. Their biggest fear is social unrest leading to an overthrow of their communist regime. US lawmakers on the other hand are facing midterm elections and nothing is more important to a politician than getting reelected, jobs are the hot button of these midterms and the Obama Administration is vulnerable.

Japan increased its holdings of US Treasury Bonds by $16.9 billion in June alone. Demand for Treasuries from U.S. investors is increasing at a tremendous pace. Spending and incomes are stagnating and the savings rate hit the highest level in almost 18 years reaching 6.4 percent in June said the Commerce Department on Aug. 3 – the U.S. savings rate has now been higher than 5 percent for 21 straight months.

The bottom line here is China’s buying of US debt might not have the importance it use to.

“Americans are consuming less and saving more. That causes an increase in savings and deposits, which end up being invested in government securities.” Jeffrey Caughron, the chief market analyst in Oklahoma City at Baker Group,

The US could put in place their own capital controls. Washington could also 100 percent shut down the US market to Chinese exports. A major clash would bloody both nations but in the end China would lose the most and the politburo would run an even greater risk of losing its position of power than in a loosening of capital controls.

This dispute over Chinese currency reevaluation is just the harbinger, the tip of the iceburg, of what’s to come in the future US-China relationship. Potential areas of conflict  include:

• Trade disputes
• Conflicts over resources
• Geopolitical disagreements
• Intellectual property rights
• Chinese acquisition of US companies

This is an extremely interesting drama being played out on the world stage between two of the world’s most powerful nations and economies. It’s a powerful story unfolding in real time and it should be on everyone’s radar screen. It certainly is on mine.

Is it on yours?

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in learning more about the important issues of the day and how they affect commodities and the junior resource markets, please come and visit us at www.aheadoftheherd.com.

Membership is free, no credit card or personal information is asked for.

***

Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell.com, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Early September is very important for the financial markets; especially for the bulls. Numerous elements are in place for a rally to take hold now. The markets have been weak and the bears have been in control. If the bulls cannot make a stand soon, it will be a bad sign for risk assets. The good news for the bulls is several factors, across numerous markets and asset classes, are pointing to a possible rally in risk assets:

• Bearish sentiment is high at the moment. Sentiment, especially as it approaches extremes, can serve as a contrary indicator.
• The Fed has signaled they are willing to print more money if needed. Right, wrong, or indifferent, the markets are anticipating more quantitative easing from the Fed. The Fed’s next meeting is only three weeks away. Markets look forward. A rally in risk assets for a few weeks is not out of the question.
• Currency and interest rate markets are acknowledging the possibility of the Fed cranking up the printing presses. In recent weeks, the U.S. dollar and the 10-Year Treasury have been firmly in the bears’ camp, but they are sitting near logical points of reversal. Recent rallies in the 10-Year Treasury have been showing signs of fatigue, which also points to a possible reversal in interest rates.
• Better than expected manufacturing data from China and better than expected growth in Australia have been reflected in the copper market. Emerging market stocks closed yesterday at a logical point of reversal; this morning’s news from China and Australia could spark a rally.
• Despite weeks of disappointing news on economic progress in the United States, the S&P 500 and Dow have yet to revisit their June lows, which is hard to believe given the recent lack of interest from buyers. When markets do something you do not expect, it is time to pay attention.
• Monday’s sell-off appeared to be a win for the bears, but unlike recent down days for stocks, total market volume contracted relative to the volume during Friday’s Fed-induced and broad-based rally. The S&P 500 and Dow have both held at logical reversal points.

Since a picture is worth a thousand words, we can show most of these concepts on the charts below. When you examine the charts, ask yourself, “Based on the actions in the past from market participants, is it logical for this market to reverse near current levels?” If the answer is yes, then the next thing to look for is some confirmation from the markets, which can come in the form of market breadth (advancing issues vs. declining issues), volume, and whether or not a broad cross section of markets are moving in the same direction (stocks, commodities, interest rates, currencies, etc). This analysis was completed after Tuesday’s close (8/31); so none of Wednesday’s (9/1) gains are reflected.

Below is an “after” and “before” chart showing an area of a possible reversal for the S&P 500.

When markets across different time frames support the possibility of a reversal, the odds of the reversal taking place increase. The charts above cover 2009 and 2010. The chart below goes all the way back to 1992.

Another look at the S&P 500 supports the possibility of a sustainable rally in risk assets

The Dow contains dividend-paying stocks; an area of interest for many investors in the current low-rate, low-growth environment. We, too, are interested in adding some dividend payers to our playbook should risk assets be able to hold near current levels. Industrial stocks appear to have found buyers near an area where three pink lines intersect. Two of the lines are trendlines and the third is a line of possible support. Three is better than one in terms of the probability the lines will be meaningful in the current day.

We hear lots of talk of a bond bubble. Bubbles can last much longer than many expect. Therefore, calling an end to a rally in bonds may be premature relative to long-term time horizons. However, a short-to-intermediate term reversal in bonds seems logical given the extreme bullish sentiment toward bonds and recent activity in the 10-Year Treasury. The yield on the 10-Year Treasury (shown below) has reached a point where reversals have occurred in the past (buyers became less interested). If you examine the daily chart of the 10-Year yield, numerous technical indicators are showing a weakening downtrend for interest rates, which again supports a possible reversal in rates and more conservative bonds.

We mentioned the good economic news from China and Australia that was released this morning. Emerging market stocks appear to be at an advantageous position on the charts to capitalize on the fundamental support. We will look for confirmation from market action over the next few days. No need to guess.

The U.S. dollar continues to perform the ironic role of a “safe haven” currency. As a general rule, when risk is out of favor, the dollar is strong. When risk is in favor, the dollar reverses. The dollar’s position as of Tuesday’s close also supports a good starting point for a sustainable rally(a few weeks or more) in all risk-related asset markets.

Another timeframe on the dollar (weekly chart going back to late 2007) also shows a market in the neighborhood of resistance.

The euro could be eyeing a possible move toward 140; especially if it can find a way above 133.34.

Despite months of worse than expected economic news from around the globe, copper is closer to its 2010 high than its 2010 low. The next few days are important for copper. Like the market for Treasuries, copper’s recent gains have shown signs of fatigue. If copper cannot hold above 337, a move back toward 320 to 325 could be in the cards (or worse). Copper may be an excellent way to monitor all markets for the next few days and weeks. If copper can break to the upside (above 346), the move would lend credibility to any rally attempt in risk assets. If copper fails near 346, especially in a decisive manner, then we would become more skeptical of any bullish move in the risk markets.

Our primary bull/bear model also shows the current market profile aligns well with past markets that more often than not were able to rally from very weak conditions.

The fact that conditions are ripe for the bulls to stage a rally does not mean they will necessarily seize the moment. Our job is to be prepared should more fundamental and technical data surface in support of the “rally in risk” scenario. Friday’s rally was a good first step for possible bullish outcomes over the next few weeks. Another strong day of gains would serve as further confirmation of a possible bullish turn in the short-to-intermediate term. Even if a rally can take hold, incoming data and actions from the Fed (or lack thereof) will most like dictate longer-term outcomes in what continues to be a “prove it to me” market.

After Friday’s impressive gains, we conducted some research looking for possible “rally assets”. Our findings are shown in Monday’s post, Markets Looking for Follow Through to Friday’s Rally.

Chris Ciovacco
Ciovacco Capital Management

Terms of Use. The charts and comments are only the author�s view of market activity and are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the author�s opinion as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

BY JASON SIMPKINS, Managing Editor, Money Morning

Bonds have provided a welcome safe-haven for investors seeking shelter from the financial maelstrom of the past two years. But now many analysts fear bonds have entered bubble territory and pose a rising threat to their holders.

The amount of money flowing into bonds is “probably not sustainable on a consistent basis” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc., told Bloomberg News. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell.”

Bond funds have attracted more investment than stock funds for 31 straight months, which matches the record streak that ran from 1984 – 1987. Bond funds attracted $559 billion in the 30 months through June, according to the Investment Company Institute (ICI). Meanwhile, investors withdrew $209.4 billion from U.S. stock funds and $24.4 billion from funds that buy foreign stocks.

“No one seems to want very risky assets but they still want some kind of yield,” Toby Nangle, the director of asset allocation at Baring Asset Management in London, told Bloomberg. “People generally view corporate debt as not a terribly scary place to be.”

Indeed, while stocks have boomed and busted since 1997, income-oriented investments have climbed steadily, as you can see in this chart of the venerable Vanguard Wellington total return fund (VWELX). The fund kept pace with pure stocks in the stirring run from 1997 to 2000, but then kept on going during the tech bear market of 2000-2002. Bonds were thrashed in the credit bear market of 2008, but have recovered briskly since. In fact, the Vanguard Wellington bond fund has outstripped the Standard & Poor’s 500 Index by six-times since 1997.

But bonds’ exhilarating run-up now has some analysts uttering the dreaded “B” word: Bubble. These analysts say that the surge in bonds is comparable to the technology bubble of 10 years ago.

Indeed, the amount of cash that flowed into bond funds in the two years through June approaches the amount of money that went into stock funds during the dot-com bubble at the start of the decade. Investors poured $480.2 billion into bond funds in the two years through June, compared to the $496.9 billion that went into stock funds in the period from 1999 – 2000.

It’s not just corporate debt that’s raising eyebrows, either. The similarity between the past 10 years’ action in U.S. Treasuries and the tech stock mania that inflated the Standard & Poor’s 500 Index from 1990 to 2005 “should cause anxiety, especially when one considers the high correlation and what it suggests about plausible future trends for bonds,” according to Citigroup Inc. (NYSE: C) strategist Tobias Levkovich.

The coefficient of determination between the two is a whopping 87% according to Citigroup research. The higher that number is, the more closely the two data sets move in lockstep.

Treasuries soared yesterday (Tuesday) with yields on the 30-year and 10-year notes falling to their lows levels in 16 months. The yield on the two-year note approached record low of 0.4547%, reached Aug. 20.

The government yesterday sold $37 billion of two-year securities, drawing a record low yield of 0.498%. The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions.

“In 2000 or late 1999, we saw massive amounts of money going into the equity market at just the wrong time,” Lekovich said in an Aug. 20 radio interview with Bloomberg. “I feel the same way when I look at all the money going into bonds.”

Still, for bonds to go bust, a major shift in investor sentiment is needed and few analysts believe investors’ risk appetite will return anytime soon.

“The technology bubble that popped beginning in 2000, the liquidity crisis that began in 2007 and 2008/2009’s deep recession have provided dramatic illustration over the last 10 years that markets hold risk,” Franklin Resources Inc. (NYSE: BEN) said in a report on its Web site. “With the benefit of hindsight, some investors might have chosen to avoid equities during the last decade. But many investors are turning their backs on equities now – after one of the worst decades the stock market has ever seen.”

And while investors remain skittish about stocks, the U.S. Federal Reserve continues to support the bond market. The Fed will purchase about $18 billion of U.S. debt by the middle of September using proceeds from maturing mortgage bonds. The central bank bought $1.35 billion of Treasuries yesterday, taking its total since beginning the program on Aug. 17 to $7.51 billion.

“Right now, the Federal Reserve is purposefully engineering the rally in bonds to lower mortgage rates and funnel cheap credit to consumers, banks and businesses who want it,” says Money Morning Contributing Editor Jon D. Markman.

“What the consequences will be, and whether this strategy of unprecedented monetary policy support will even work, are questions that will be answered in years to come,” he added. “For now, all we can do is identify these trends and position ourselves to profit from them while they last. That’s why I’ve recommended a selection of bond exchange-traded funds (ETFs). Eventually, though, this latest bubble will burst.”

Indeed, there eventually will come a time when investors regain confidence and return in force to the stock market. But if they wait too long, they risk missing a potential rally.

Jack Ablin, who helps manage $55 billion as chief investment officer at the Chicago-based Harris Private Bank, says institutions are likely to lead a rebound in the stock market ahead of retail investors.

“What will happen is that the market will rally first, and retail investors will eventually jump back in,” he told Bloomberg.

John Sweeney, an executive vice president at Fidelity Investments, cautioned: “Someone who is waiting for stability is likely to miss the upside.”

[Editor's Note: Are you seeking investment protection in the bond market? Have you adjusted your strategy to involve fewer equities and more bonds? Do you think there is a bond bubble forming - similar to the dot-com bubble - that will take some investors by surprise? If you haven't dove into fixed-income securities, then what stocks or other instruments have you included in your portfolio for safety measures?

Send your thoughts, questions and concerns to mailbag@moneymappress.com.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

You cannot have your cake and eat it too! Either circumstances in the economy are getting better and we need to start looking for an exit door or we are still in for a sh-t storm and then no action is necessary! If the Fed sees the economy improving than why leave IR at an “excessively low rate for an extended period.” Inflation subdued by what measures? Pass me what Ben and the gang are smoking. Crude gained by 2.5% today, ideally this is a one day wonder but tomorrow will tell. Talking to some big energy traders today they expect a range from $76-82. We will continue to play options for clients on rallies thinking that we will head back to the lower end of that range.

It sounds like a broken record but we like scaling into longs in Nat gas at these low extremes. What will be the catalyst one client asked today to turn around prices…I do not know but this the short trade feels too crowded!

Indices were sideways to up on most of the session and are still trying to digest the Feds non-action to decide where from here. I’ve thrown in the towel trying to predict a top but some of the cycle analysis that we’ve read of late courtesy of some of our clients predicts going into April it could get ugly.

Sugar made fresh lows, futures traders should have been stopped at a loss when we broke last weeks levels. We are holding off on all new entries until this market bottoms. On a rally if we get one in the coming weeks we will be looking to cut losses on call options for clients.

Let Treasuries rally 1 1/2-3 handles before selling! We will have an interest in 30-yr bonds closer to 120′00 and above 118′00 in 10-yr notes.

Green across the screen in agriculture today with corn up by 1.0%, and wheat and soybeans by 1.60%.Corn is a buy; in options we like July and futures December. We sill think there is a possibility to see a trade close to 38.00 in May soybean oil to exit for clients; we will give it till the end of this week.

Metals caught fire today likely because of the pressure on the dollar and strength in outside markets. April gold, May silver and May copper all gained virtually 2% each. We do not trust the upside and the only way we see it following through is we get a hefty break in the dollar…stay tuned.

That being said the dollar index broke the 2 previous days lows and the trend line that had held since the first week of December. The Euro and Pound should benefit the most as they have been hit the hardest. The Euro could make a stab at 1.3950/1.40 and the Pound at 1.5500; next significant resistance levels.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

This phrase is coined for the college basketball tournament but I think it is an accurate description of what to expect as a trader this month. At its highs today oil was less than $3/barrel from making new highs on the year. Being bearish for the last 1-2 weeks has made our clients NO $ but we still feel a trade to $75/76 is imminent. We are not disputing a trade in summer is likely up to $90 but first a correction. We still favor $5 put spreads.

Natural gas should finish down 3.5-4.0% lower on the week. That is not too bad! Clients have a small long position in April futures and June call spreads and at the moment are all under water. We expect the next 2 weeks to be better to us in energies; that means crude down and natural gas up.

Are you kidding me that we only lost 36,000 jobs and unemployment did not change? The equity market is being propped up by the powers that be and if the free market determined prices we would be at least 10% lower. Clients are down on their June ES puts but will stay the course being they have over 3 months time.

Sugar closed up 2.4%; we suggest being long May and July via options looking for a move back to 26 cents. For the first time in 4 weeks cotton will finish lower; clients are positioned to take advantage of a set back to 75/76 cents in May.

Treasuries were hit hard today and we do think more downside is likely in the coming months but we still feel one will get the opportunity to put on shorts from higher levels. If the recovery is underway which I question and there is more talk of the Fed raising rates traders should re-visit the idea of short Euro-dollars. The charts look like in the next few sessions

Agriculture will trade lower. Aggressive traders could use that to get short while I would prefer getting long from lower levels. USDA report out next Wednesday. Our current positions for clients in Ag include long corn, long soybean meal and short soybean oil.

We have no positions in lean hogs with clients but it appears a double top could be forming around 74 in the April contract; that level acted as stiff resistance in mid-January as well. Live cattle finished about 1 penny higher on the week; clients remain short expecting a trade back near 89 cents in April.

We caution any exposure in gold as we could see a $50 move either way. If lower we would suggest buying the dip. May silver closed at the 100 day moving average today about 15 cents off its highs. We like being long but would prefer to open fresh longs on a set back to $16.50. If we do see a retracement that holds we would think the next leg up would lift prices to near $18.50 mid-summer.

Clients were advised to take profits on their Yen shorts today as prices have peeled off 3 cents in the last 2 sessions. We advised those still interested in currencies to get short the Loonie. We are looking for a move in the Loonie back under 95 cents. We are operating under the influence that stiff resistance comes in at .9750/.9800.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

Wednesday, March 3, 2010

Just when investors thought it was safe to jump back into the safety of fixed income, along comes another grain of truth to scotch the theory. Recent data proved perhaps a slowing appetite for mortgages as the sagging housing market barely budges, while consumer and investor sentiment has been sidetracked by inclement weather equally responsible for keeping workers at home and in some cases out of work. The crescendo in the Greek situation has also added to risk aversion sending yields lower and creating worries about the arrival of double-dip recession. The improvement in today’s American ISM data was therefore a little bit of a shocker and adds weight to Friday’s key employment report.

Eurodollar futures –Bond futures came under pressure sending the yield on the 10-year note to 3.65% after the composite reading of the non-manufacturing ISM survey came in at a more expansive reading of 53 compared to the marginal expansion witnessed in January at 50.5. A reading above 50 signals expansion and below indicates contraction. The predicted reading for today’s report was 51. Nervousness about the state of the labor market grew following a jump to a three-month high for initial claims last week. Some reckon that this is a backlog owing to weather-related issues. Thursday delivers a fresh look at the same number. Today’s ADP survey of private employers showed another 20,000 pace of losses and does not cover government hires. This precursor to the BLS data this Friday actually bodes well for an improving labor market and now has bond traders caught in the crossfire of what they felt was a deteriorating economy, which has more recently received contradictory data.

Not much change, however, for Eurodollar futures, which are higher at nearer maturities and ever so slightly lower at deferred maturities. As a result the recent curve flattening is turning somewhat with the June10/June11 strip widening back out from 114 to 117 basis points this morning.

Canada’s 90-day BA’s – Money markets are now entering a minor panic phase over the prospects for possible interest rate increases later in the year in Canada. The response to unchanged monetary policy delivered with Tuesday’s monthly statement was unusually bearish for interest rates. However, a far more upbeat view on what the Bank referred to as a vigorous pace of domestic spending and a further recovery in export markets has taken its toll on expectations. In addition the Bank no longer made reference to any slight downside risks to inflation nor output. That fact was made all the more believable by a Q4 GDP report revealing a 5% pace of expansion while the rate inflation is already back to the 2% target.

And while the central bank extended its pledge to maintain cheap money through June, investors are wasting no time discounting the time when the BoC will address an exit strategy for an ultra-low policy setting. Since Friday, the December 2010 three-month BA contract has lost 21 basis point sending up the implied yield to 1.40%. At the start of the month as global recovery looked threatened the yield slumped to 1.16%. The same June10/June11 calendar spread referred to above for Eurodollars has surged from 142 basis points wide earlier in the week to 160 points as traders sell deferred contracts harder. The easy money trade in this environment suddenly becomes the classic curve steepener.

European short futures – Euribor futures have a slightly softer tone in light of the Greek budget that delivers a package of spending and revenue reductions equivalent to 2% of GDP. The ramifications of the entire Greek drama have been felt Eurozone wide not least in terms of exchange rate pressure, but it’s also raised the demand for core government bonds. Today the market welcomed the Greek package by reducing the yield on its government bonds. The 10-year yield fell 18 basis points to 5.96% while the premium that buyers demand over and above German bunds slipped by 20 basis points during the session as investors sniff resolution in the air. If Athens can appease both Berlin and Paris by demonstrating actionable and feasible deficit reduction plans that allows pressure on the Eurozone to subside, there is a far greater possibility that the EU will stand ready to buy new Greek issuance as slugs of maturing bonds turn up over the next several months. March bunds slipped 15 ticks to 124.05 where yields rose to 3.13%.

British interest rate futures – British yields remained unchanged at the long end of the curve as investors wrestled between the potential for a weak incumbent government after a likely May election and recent well received auctions. Short sterling futures are lower in line with euribor but also weakness at maturities into 2011 and beyond. The June10/June11 calendar spread recently traded at 105 basis points but has today reached 120 basis points. While investors were recently burned in trying to nail 2010 as being the year of central bank tightening, it appears that they are taking advantage of recent curve flattening as rationale for trying to predict that 2011 will most certainly see the removal of the punchbowl. If that’s the case then curve steepening is the order of the day of such recent flatness.

Australian rate futures –Bills continued to fall midweek. Asian and Pacific markets remain robust and there is little fresh impetus to draw the crowd to fixed income right now. While the RBA gave the impression in its monetary tightening yesterday that it wouldn’t seek fresh rate increases at each meeting going forward, it has stopped short of declaring balanced risks, which would signal it knows not whether the next move will be higher or lower. In that regards market expectations for more monetary tightening later remain appropriate. Bond yields rose four basis points while yields on bills rose by a similar amount.

Japan – Expectations for a weak capital spending report overnight and the fact that recent government bond auctions have been well received kept the yield on JGBsstatic at 1.32% today.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

by Martin D. Weiss, Ph.D. 03-01-10

Originally Published Here

We have just ended an online video conference to brief investors on major events that could forever change your future.

We made nine new predictions to pinpoint, as accurately as possible, how and when that future is likely to unfold.

We showed how to build — or rebuild — an entire portfolio with a disciplined approach that gives you the specific percentages to put into each major asset class right now — stocks, gold, commodities, bonds, and currencies.

And unlike any of our prior events, we took questions from a live audience.

Here’s the transcript …

Nine Shocking New Predictions for 2010-2012
With Martin Weiss, Richard Mogey and Monty Agarwal
(Edited Transcript)

Martin Weiss: The forecasts we made last year are striking at an accelerating pace, as three new and dangerous crises have raised their heads:

First, the White House has announced federal deficits that are far worse than any prior estimates — $1.6 trillion for 2010 … $1.3 trillion for 2011 … and continuing massive deficits for the entire decade.

This is already sending shock waves of fear throughout the globe. It has prompted Moody’s to issue a stern warning about America’s credit rating. And it’s raising the specter of a global collapse in long-term sovereign debt. In a moment, we’ll take a look at the enormous implications this has for your finances and investments.

Second, global investors are attacking. They’re scanning the globe for the weakest links — the countries with the biggest deficits — and they’re dumping that country’s assets. First, they attacked Greece. Then they attacked Portugal and Spain.

Inevitably, they will also unleash their fury on the one country in the world with the biggest deficits of all: The United States of America. And in a moment, we’ll see how these attacks now threaten every dollar you have saved and invested.

Third, we have an unprecedented crisis of confidence among U.S. taxpayers and investors. For the first time in our lives, millions of U.S. citizens are taking to the streets in protest — openly rebelling against Washington! Millions of Americans are fed up with bungling politicians, bureaucrats, and bankers.

Investors are saying:

“You tricked me once — into buying tech stocks with no earnings; those stocks crashed and cost me a bundle. You tricked me twice — into buying real estate and that cost me even more.

“Now, I’m madder than hell and I will never trust Washington or Wall Street ever again! I must have an objective scientific, unbiased way to protect myself and make money.”

So, the questions we must address now are twofold:

1. How can you know, with confidence, which asset classes offer you the greatest profit potential moving forward?
2. How can you create a bullet-proof portfolio that gives you world-class profit potential no matter what Washington and Wall Street do next?

For the answers, I turn to the Foundation for the Study of Cycles, a nonprofit research think tank, founded 70 years ago in the wake of the Great Depression.

This Foundation was sponsored by the head of the Smithsonian Institute, by the chairman of the Carnegie Institution, by the founder of the National Bureau of Economic Research, and by the founder of Fidelity Investments. Former President Hoover and former Vice President Charles Gates Dawes also supported the Foundation.

Since 1940, the Foundation for the Study of Cycles has studied the recurring patterns of history — cycles.

Since 1950, it has identified cycles that predicted — well ahead of time — nearly all major market turns in stocks, bonds, and commodities.

And since 1971, when the gold standard and fixed exchange rates ended, it has done the same for foreign currencies and gold.

Joining us today is Richard Mogey, Research Director of the Foundation.

Richard, you are the Research Director of the Foundation and have been with them for many years.

Richard Mogey: Twenty-two years!

Our research is based on the simple fundamental principle that all of nature — and most of history — is driven by regular cyclical patterns.

Martin: But identifying those cycles is not so simple.

Richard: No. We have sorted through historic data going back 5,000 years, and we have put together data series on most major markets going back at least 300 years.

Martin: And back in the 1960s, long before Microsoft and PCs, you used Fortran programs on mainframe computers to find the most critical cycles for each major market — all of which you’ve published, starting a half century ago.

Richard: Yes. And you asked me recently how accurate the Foundation’s cycles have been in forecasting stocks, gold, etc.

Martin: But to answer that question, you didn’t have to recreate hypothetical scenarios or engage in 20/20 hindsight.

Richard: No. I just went back to the archives of our printed publications. They were all published in real time. I have them right here.

Martin: Great. So what’s your answer?

Richard: The Foundation’s cycles have accurately identified nearly every major shift in market direction … in every one of these asset classes … in advance … since 1971.

Martin: We’ll look at those in a moment. But right now, let’s focus on the main questions readers are asking on our blogs: What are the major market turns ahead? And how can investors build a sturdy portfolio designed to convert those market turns into wealth?

Richard: I will answer the first question. But I am a scientist — not an investment analyst. So I’m not the right person to answer the second question.

Martin: Which is why I’ve also invited Monty Agarwal to join us. Monty has run three global hedge funds, and he has done so without a single losing year. He has just written a book on what the hedge funds have done wrong — and what they must do to get it right.

Monty Agarwal: Martin, the key is to buy the right market research. And of all the Doubting Thomases in the world, I am probably one of the most skeptical. I always conduct my own personal due diligence before I buy anything. You’ve asked me to analyze the Foundation’s research, and I’ve done so with great interest.

The Foundation’s accuracy rate is far superior to any other approach I’ve ever seen. Its work is not perfect, of course. There are a few misses. But the Foundation’s cycles pinpointed, well ahead of time, the onset of the giant bull market that began in 1980.

Martin: You’re talking about the stock market.

Monty: Yes. The Foundation predicted the timing of the Crash of ‘87. It predicted the timing of the bear market of 2000-2002. It predicted the market’s rise through 2007. And it nailed the top of the market prior to the big plunge in 2008 …

Richard: which, by the way, was a market call we published in Barron’s online.

Martin: Is this the Barron’s article where you called the big plunge in 2008?

Richard: Yes.

Monty: Not many people caught that decline, let alone to the month.

Plus, in March of 2009, the Foundation’s cycle work anticipated an intermediate rally.

Prediction #1
Starting this year, most U.S. stocks are
likely to fall in a zigzag pattern for
nearly three long years!

Richard: And now, we have a new signal. Most U.S. stocks are likely to go down. And they are likely to fall — in a zigzag pattern — for nearly three long years.

Monty: In the past, almost every recession and bear market in this country delivered solid values to investors. We saw price-earnings ratios (P/Es) in single digits. We saw great stocks selling for five or six times earnings. But this time, the government was so panicked, it never let that happen. And now P/Es are already back up again to grossly overvalued levels.

Richard, you’re talking about giant swings. For a long-term buy-and-hold strategy, those swings are a disaster. But with a more flexible strategy, they can generate giant profit opportunities — in both directions.

Martin: Can you be more specific?

Monty: Go back 10 years and assume you had been following the Foundation’s cycle research before 2000. You could have sidestepped the Tech Wreck that destroyed so much wealth. Plus, you could have pulled out a 37 percent profit from that decline. Then, if you followed its research in 2003, you could have moved back into the S&P and come out with a 146 percent gain from 2003 to 2009.

Martin: What about more recent years?

Monty: Same pattern. If you had used its research published before 2008, instead of the wipe-out losses that most investors suffered, my data indicates you could have made a 37 percent profit. And in 2009, based on the Foundation’s call for an intermediate rally, you could have made another 42 percent profit.

Martin: And going forward?

Monty: Do not expect a similar pattern.

Martin: Why not?

Richard: Because if our cycle work is even halfway right, conditions will change, and investors could make as much — or more — money in other asset classes.

Martin: Instead of stocks?

Richard: Gold! Never before in the history of civilization have we seen a world power like the United States with its finances in such disarray as they are now.

Martin: We’ve seen world powers rise and fall — from Rome to Spain to Britain. And we’ve seen them incur big debts after their decline.

Richard: Yes, but now we have a country that is both the dominant world power and the world’s largest debtor at the same time. This is a massive force that could propel the price of gold.

Martin: When and how far?

Prediction #2
Gold will skyrocket far higher than
$2,000 per ounce by the end of 2011.

Richard: By the third or fourth quarter of 2011, the price of gold should be far higher than $2,000 per ounce.

Martin: Why is this so shocking?

Richard: Because it’s going to happen in the midst of a sinking stock market and economy.

Monty: I don’t think that should come as such a surprise, either. In the last few years, despite two big stock market declines and despite the worst recession since the Great Depression, gold quadrupled in value.

No one knows for sure what the future will bring. But I would take the Foundation’s gold forecast very seriously.

Its cycle work predicted the great bull market in gold of the 1970s.

It predicted gold’s downturn starting in the 1980s.

And it would have got you back into gold in 2001 … urging you to hold on ever since.

Richard: This has been — and should continue to be — one of the greatest profit opportunities of all time.

Martin: We have a question on this that’s very relevant …

Audience: My name is Elizabeth and I am from Fort Lauderdale. My question is: Much has been talked about gold, but what is your opinion on investing in silver?

Richard: In terms of timing, it never ceases to amaze us how closely all precious metals track gold — not only silver, but also platinum and palladium. The differences are strictly an issue of how far each metal rises or falls. Between now and 2012, there will be periods when silver and other metals do better than gold. But when all is said and done, you will find that gold is, by far, the single best performer because of its value as a hedge against the dollar.

Martin: What’s behind this cycle in gold?

Richard: It parallels the cycles in the U.S. dollar. And for the dollar — or for proxies of the dollar — we have cyclical data going all the way back to 1680.

Martin: Before the dollar even existed!

Monty: I have scrutinized the Foundation’s dollar research just as closely as its stock market research.

Its cycles predicted the dollar’s plunge from 1971 to 1980 … the dollar’s surge peaking in 1985 … the dollar’s decline bottoming in 1992 … the dollar’s rally through 2001 … and then, the big plunge since.

Richard: And now, the dominant cycle in the dollar is forecasting the next major move.

Prediction #3
The U.S. Dollar Index will begin to sink in 2010

and will not hit bottom until early 2012.

Richard: A major, new dollar decline, beginning in the third quarter of 2010 and ending in early 2012.

Monty: Currencies are not a beauty contest. They’re an ugly contest. And among many ugly currencies, the dollar usually wins the prize — as the ugliest.

Richard: The real decline in the dollar — and all currencies — will show up more clearly in the doubling of the value of gold we just talked about. Measured against gold, the dollar’s purchasing power will fall by half or more, depending, of course, on the intensity of the global selling that hits the greenback.

Martin: What about oil and other commodities?

Prediction #4
Most commodities will not

make new, all-time highs!

Richard: Oil will not return to its all-time highs. Unlike gold, it is driven less by currency disasters and more by consumer or industrial demand. And we simply do not see high demand being sustained through this period.

Martin: So it would be a mistake to overinvest in commodities right now.

Monty: I agree.

Martin: Most commodities won’t surge because …

Prediction #5
The U.S. economy will suffer a severe
double-dip recession in 2011!

Richard: Because the U.S. economy will sink into another recession.

Martin: Similar to the recession of 2009?

Richard: Probably worse!

Martin: Again, the timing question: When?

Richard: Not right away. Our cyclical data on GDP and on consumption points to a material improvement in the U.S. economy through the first two quarters of 2010.

But starting in the second half of 2010, GDP growth will start to sink fast and we could see negative growth by the beginning of 2011. The worst period for the economy will hit in the fourth quarter of 2012.

Monty: You don’t have to look very far to see the reasons: You have unemployment holding at extremely high levels. You have scarce capital, with lending to households and corporations drying up. You have consumers, businesses, and now even governments strapped for cash.

Martin: That’s an understatement! Look at what’s happening in Greece, Spain, Portugal, and even the UK — and that was despite all the stimulus and bailouts …

Monty: No! Because of all the money they’ve spent on bailouts!

Martin: Right.

Monty: Remember. These are no longer just private banks or automakers going under. They are entire countries!

Martin: Plus, you don’t have to connect many dots to see the consequences of a recession. Right now, the Obama administration says the 2010 federal deficit will be $1.6 TRILLION. Care to guess what the government forecast was for this same deficit back in 2008?

Monty: A lot less, I presume.

Martin: Mike Larson looked back at the forecast made by the Congressional Budget Office (CBO) just two years ago, in 2008. The CBO predicted that the U.S. deficit for this year — for 2010 — would be $249 billion. Now, it’s coming in at $1.6 TRILLION, or over six times more than they forecast.

Monty: They didn’t expect the deep recession that struck in 2009.

Martin: Much like they’re not expecting a double-dip recession to strike next year! My point is that, just like their forecast was dead wrong for this year, it could be dead wrong again in coming years.

Prediction #6
The U.S. budget deficit will
surpass $2 trillion in 2012!

Look at 2012! For that year, the Obama administration is making some aggressively optimistic assumptions for the U.S. economy and forecasting a deficit of $828 billion. Instead, with the economy sinking, it could be over $2 TRILLION!

Monty: Some people may think these huge blunders merely reflect the government’s forecasting errors. But it’s much more than that. Politicians know they’re rigging the numbers. And they’re swearing on a stack of Bibles that it’s an honest estimate.

Prediction #7
Bond prices will plunge because of
out-of-control deficits and a sinking dollar!

No matter what, the big risk is that global investors will sell U.S. dollars wholesale. And they can’t sell them in a vacuum.

Along with the dollars, they also have to sell the assets where they’re holding the dollars — especially long-term Treasury bonds. So you could see a massive plunge in bond prices.

Martin: Translate that into bond yields.

Monty: You’ll see a major spike upward in yields. That could give investors a huge buying opportunity to lock in those higher yields for years to come — provided, of course, price inflation does not run rampant and the U.S. government is still a safe bet at that time.

Richard: The U.S. government — and, indeed, America — faces a great historic test: A test of our power — and our willpower — as a nation.

Martin: Please explain what you mean by that with respect to cycles.

Prediction #8
2012 will be the year of maximum

peak tension in society!

Richard: The great test for our country — an Armageddon of sorts — will come in the year of maximum turmoil in the financial markets, the time of peak tension in society: 2012.

Martin: I assume this has nothing to do with the movie by that name, based on ancient forecasts.

Richard: Of course not! We’ve had 2012 pegged as the year of the “Perfect Storm” since 2002.

Martin: What’s the basis of the perfect storm?

Richard: A convergence of cycles! We have the dollar cycle, stock market cycles, consumption cycles, and GDP cycles all bottoming in this same approximate time frame — between late 2011 and late 2012. Plus, 2012 is also smack dab in the middle of a sweeping transition already under way in our longest term and probably most important cycle of all.

Martin: Which is?

Richard: The 500-year geopolitical cycle. We’ve mapped it all the way back to 670 BC. It is a broad, far-reaching shift in power, wealth, and money — from East to West, or, as is the case now, from West to East.

Martin: We’ve talked about that before.

Prediction #9
2012 will bring a massive wealth shift

to new ones that are created!

Richard: Yes, but I want to add that we’re not only talking about a power shift from West to East. We’re also talking about a major wealth shift from old fortunes that are destroyed to new ones that are created … from countries, companies, and families that were dominant for many decades to new ones that replace them on the other side of this massive upheaval!

Martin: Provided they are well prepared ahead of time.

Monty: And provided they use reliable signals with prudent risk control. No matter what you invest in or how you invest, the real possibility of losses is something you always have to be aware of.

Martin: Yes! On our blog, though, many readers tell us they make decisions largely based on gut, which implies not only analysis, but also intuition — and emotion. They admit that, more often than not, that’s their basis for deciding how much to invest in each asset class and when.

What would be your standard allocation to those five asset classes, based on your analysis of the Foundation’s work?

Step 1
Diversify Across All FIVE Asset Classes

Step number one is to diversify across all FIVE asset classes — stocks, precious metals, other natural resources, bonds, and currencies.

Martin: Years ago, it would have been virtually impossible for the average investor to do that. You’d need a lot of money or you’d have to take a lot of risk — with futures, in the currency markets.

Monty: Today, all five of these asset classes are readily available to average investors through hundreds of exchange traded funds — ETFs.

Martin: And, of course, you can also choose from thousands of mutual funds, tens of thousands of individual stocks, hundreds of thousands of bonds.

Monty: Yes. But this step alone — diversification — puts you heads and shoulders above investors stuck in stocks or bonds alone.

Audience: The subject is diversification. The more I hear that, the more it bothers me. Because that tells me that if I am investing in, say, five different major areas, I will probably have four losses and only one win.

Monty: Let me address that by telling you how Wall Street works. Wall Street touts diversification as if it were a panacea. But their notion of diversification is spreading your money among several different U.S. stock sectors. That’s not going to work because nearly all stocks are linked in some way. In a truly diversified portfolio, stocks are just ONE of five asset classes.

Martin: Plus, Wall Street still seems to assume we’re back in the 20th Century when bull markets were long in duration and bear markets were short. That’s not the case today.

Step 2
Take Advantage of DOWN Markets!

Monty: That’s the key to step number two. In today’s era, especially as we head toward 2012, if you want to make money, you must not rely exclusively on up markets. You must also take advantage of down markets.

Martin: That also used to be very hard for the average investor to do. You had to sell short.

Monty: Not anymore! In every one of the five asset classes, ETFs are readily available whether you want to profit from rising prices or falling prices. You never sell stocks or commodities short. Your goal is strictly to buy them low and sell them high, like any ordinary stock.

Step 3
Diversify Dynamically!

Step number three is to diversify dynamically. Don’t just keep a fixed amount of money in every asset class all the time. Sometimes, you’ll want a lot more; sometimes, a lot less.

For example, if the Foundation’s signals say gold is going to greatly outperform stocks and bonds, you may need to double the percentage of the portfolio in gold. Or let’s say we see a major decline coming in long-term bonds. You’ll probably want to clear out of long-term bonds entirely.

Step 4
Periodically Rebalance Your Portfolio!

The next step is to periodically rebalance the portfolio. Hypothetically, let’s say you go ahead and double the gold allocation from 10 to 20 percent. Then, let’s say gold itself doubles in value. You could find yourself with 40 percent of your portfolio value in gold.

Martin: That’s a good problem to have.

Monty: Yes, but you still have to DO something about it! You can’t sit back passively while a major market move — up or down — upsets the balance in your portfolio. That’s where periodic rebalancing comes into play. You sell on strength and you buy on weakness. But you do so intelligently. Not based on a whim.

Step 5
Risk Protection

Step five is risk protection.

Martin: Don’t you get a good measure of risk protection with the broad diversification across the five asset classes and with the portfolio rebalancing?

Monty: You do. But for an additional layer of risk protection, you also need stop-loss mechanisms. If you’re wrong about a particular stock, bond, or ETF, you have to set a clear limit on how far you’re willing to be wrong. If it surpasses that limit, you need to get out right away.

Plus, let me say one more very important thing: I respond promptly to major market turn signals. And I don’t shift just small amounts of funds. Gradual, incremental shifting is the right thing to do in a conservative, slow-moving model portfolio. But that’s not what I do, especially when I have clear, strong signals like these we’re getting from the Foundation. When I get a major signal, I move, and I do so very quickly.

Martin: Assume you used the Foundation’s signals and your five steps for building a portfolio. Please share with us now what the results could have been.

Monty: Let’s say you started at the beginning of 2000 with $100,000.

The black line on this chart shows the results you would have achieved simply by buying and holding the S&P. Result: You would have lost $14,000.

Martin: And that’s despite tying up your money for 10 years, despite all of Washington’s efforts to save the economy.

Monty: Correct. Now, assume you took this one step further. You blindly invested 20 percent in each of the five asset classes we’ve been talking about. No intelligence. No change. That step alone could have transformed a 14 percent loss into a 61 percent gain.

Martin: The red line in the chart.

Monty: Right. But it’s the green line that I want you to focus on. It shows what happens when we add the intelligence from the Foundation and the simple steps I just talked about. In this scenario, instead of a 14 percent loss, you could have seen a 111 percent gain. While investors in the S&P 500 were losing $14,000, you could have made $111,000.

Martin: That’s past. What about the future?

Monty: What happens in the next 10 years will inevitably be different from what happened in the last 10 years. That’s all the more reason you must not lock yourself into a blind, fixed allocation that cannot adjust to changing conditions.

Martin: Please also show us your analysis going back further in time, including all kinds of market conditions.

Monty: Sure. Overall, since 1971, our approach could have multiplied your money more than 25 times over — enough to turn $100,000 into more than $2.5 million. That’s four times better than the S&P 500.

Moreover, since 1992, we’re talking about 18 consecutive winning years, in a wide range of conditions — in inflation and deflation, in bear markets and bull markets, during economic booms and busts. All with no debt! No options. No leveraging.

Martin: Don’t you like leverage?

Monty: I do in other circumstances. But in this program, I assume none whatsoever. If you can achieve relatively rapid and consistent growth without leverage, why be greedy?

Martin: What would be the standard amounts you would allocate to each asset class?

Monty: I would allocate 30 percent of the money to the asset class “stocks,” with a very substantial allocation to inverse ETFs to profit from a decline in stocks.

Martin: What about bonds?

Monty: 10 percent, mostly short term.

Martin: Gold?

Monty: 15 percent.

Martin: Energy and other commodities?

Monty: Also 15 percent — but carefully selecting the commodities most likely to benefit from growth in major emerging markets.

Martin: What else?

Monty: The last asset class is currencies. That’s very important and has a very clear long-term trend. I’d bet against the dollar with 30 percent of my money — but not in the euro or any country with oversized deficits.

Bear in mind that some major new forces are now ready to hit markets. So these allocations may change pretty significantly when I release them.

Audience: With the declining value in the dollar, what are the best currencies to invest in?

Monty: The currencies I would pick are the currencies that benefit from the growth in the emerging markets. For example, I like the Aussie dollar and the Canadian dollar.

Audience: I understand that the Foundation has a great track record and an impressive history. My question is: Why haven’t we heard of you before?

Richard: For 60-plus years, we have been studying cycles without any marketing. We are terrible at marketing. But I think we are great scientists.

Martin: Thank you, Richard. And thank you, our viewers, for joining, and have a great day!

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Weekly Market Digest

February 26, 2010

Headline GDP not in sync with real GDP

Here is the headline statement about the GDP revision. Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.9 percent in the fourth quarter of 2009 (that is, from the third quarter to the fourth quarter) according to the “second” estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 2.2 percent.

Further down the page in the same report, here is the summary entitled, “2009 GDP”

Real GDP decreased 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4 percent in 2008.

The decrease in real GDP in 2009 primarily reflected negative contributions from nonresidential fixed investment, exports, private inventory investment, residential fixed investment, and personal consumption expenditures (PCE), that were partly offset by a positive contribution from federal government spending.  Imports, which are a subtraction in the calculation of GDP, decreased.

The downturn in real GDP primarily reflected downturns in nonresidential fixed investment and in exports and a larger decrease in private inventory investment that were partly offset by a larger decrease in imports and a smaller decrease in residential fixed investment.

The difference is that the headline statement takes quarterly statistics and reports them as annualized numbers.  That is why you must read the entire report, including the fine print to get the real (in their own words) truth of the matter.

The stock “rally” meets resistance.

– Stocks have held up remarkably well, considering the spate of bad news recently. Unemployment claims have gone up unexpectedly. Consumer Confidence has crashed to lows seen a year ago.   The present situation index is at its lowest in 27 years. Existing home sales dropped 7.2% last month. What holds the market up, you ask?  Cycles suggest a turn is coming.  The bad news may just have to reach a critical mass.

Treasury Bonds rally on bad news.

– Treasuries headed for a weekly gain as the threat of ratings cuts for Greece fueled demand for the safety of U.S. debt. A rally pushed the 10-year note yield to a two-week low as an unexpected rise in first-time jobless insurance claims reported yesterday indicated the labor market is still struggling to recover. Sales of existing homes unexpectedly fell last month, while consumer spending rose less than forecast in the fourth quarter, reports showed today.

Gold is stuck in a trading range.

– Gold rose for a second straight day, heading for a monthly gain, on speculation that concern over Greece’s debt will increase demand for the precious metal as an alternative to holding currency. Traders are still looking up for gold, thinking that investors will be looking towards gold as a safe haven. The chart does not agree.

The Nikkei is on a roller coaster.

– Japanese stocks rose, driving the Nikkei 225 Stock Average to a third weekly advance, as carmakers and retailers climbed following government reports on factory output and sales. The Nikkei 225 Stock Average rose 0.2 percent to 10,126.03 at the close in Tokyo, and added 24.07 points this week, or less than 0.1 percent. It appears that the Nikkei may be rolling over from here.

China still appear to be advancing.

– China’s stocks fell for the first time in three days, trimming a monthly advance, as commodity companies declined after raw-material prices dropped yesterday. Automakers advanced on earnings prospects. The Shanghai Composite Index dropped 8.68, or 0.3 percent, to 3,051.94 at the close. The gauge added 2.1 percent this month as easing inflation delayed prospects for higher interest rates. China’s markets were shut last week for Lunar New Year holidays.

The U.S. Dollar is looking more attractive to investors.

The dollar fell against the euro and the yen as German lawmakers said aid to Greece may come through a state-owned lender and sales of U.S. existing homes unexpectedly declined last month.

The talk of financial aid to Greece may be put into more concrete action, but no promises were made yet.  The euro was oversold, so they got the bounce on anticipated good news for Greece.

Freddie Mac loses $7.8 billion, warns of foreclosure wave

– Freddie Mac lost almost $26 billion last year, ominous news for taxpayers, who are footing the bill to rescue the mortgage finance company and its sibling, Fannie Mae. In the final three months of last year, Freddie Mac posted a loss of $7.8 billion, or $2.39 a share. Freddie Mac, which has lost almost $80 billion since the housing crisis started in 2007, is bracing for more pain. The McLean, Va., company said a record 4 percent of its borrowers are at least three months behind on their payments and facing foreclosure.

Gasoline prices are still jumping.

The Energy Information Agency weekly report suggests, “Jumping nearly a nickel to hit $2.66 per gallon, the U.S. average price for regular gasoline rose for the first time since January 11. The price was $0.75 above last year at this time. The averages on the East Coast and in the Rocky Mountains each increased about two cents to $2.66 per gallon and $2.62 per gallon, respectively. In the Midwest, the average price surged over ten cents to $2.61 per gallon.”

Massive snowstorm not affecting Natural Gas prices.

The Energy Information Agency’s Natural Gas Weekly Update reports, “Natural gas spot prices fell across the board, possibly as a result of relatively warm weather in much of the United States over the weekend, although temperatures dropped somewhat after the weekend.

Despite a massive snowstorm headed toward the Northeast, prices failed to post an overall increase over the week.”

Retaliation Against Germany Escalates: Airbrushed Venus Statue Flipping Off Greeks?

Have we just crossed the historic Rubicon when a photoshopped classical statue is about to lead to a collapse in a monetary and customs union, and possibly something a tad more serious? Also, is the KFW bailout rumor too little too late? It appears the Greeks are two minutes away from saying “take you bailout and shove it.” The reason: The Focus cover which shows a status of Venus de Milo flipping off the Greeks, who were characterized as the “cheats of the eurozone.”

Thoughts from Art Cashin

As just indicated, some testy words from Greek politicians sharply heightened fears that a rescue package might fail. The resultant plunge in the Euro combined with a surprise jump in jobless claims to send stock futures sharply lower as the New York opening loomed.

While the reaction was undeniable, the headline it was based upon was somewhat flawed. It turned out that the EU did not make the statement as the buzz assumed. But that realization came only after the rally was a full throttle. The market was abuzz with all kinds of rumors yesterday to egg the rally on.

Traders alert: The Practical Investor is currently offering the daily Inner Circle Newsletter to new subscribers.  Contact us at tpi@thepracticalinvestor.com or click on “Contact us” at www.thepracticalinvestor.com for a free sample newsletter and subscription information.

Our Investment Advisor Registration is on the Web.

We are in the process of updating our website at www.thepracticalinvestor.com to have more information on our services.  Log on and click on Advisor Registration to get more details.

If you are a client or wish to become one, please make an appointment to discuss our investment strategies by calling Connie or Tony at (517) 699-1554, ext 10 or 11.  Or e-mail us at tpi@thepracticalinvestor.com.

Regards,

Anthony M. Cherniawski, Manager

Disclaimer:  It is not possible to invest directly into any index.

P.O. Box 129 Holt, MI  48842 (517) 699-1554 Fax: (517) 699-1558

Email: tpi@thepracticalinvestor.com www.thepracticalinvestor.com

The use of web-linked articles is meant to be informational in nature.  It is not intended as an endorsement of their content and does not necessarily reflect the opinion of Anthony M. Cherniawski or The Practical Investor, LLC.

Wednesday February 25, 2010

Global yield curves are marginally flatter at the end of a week that delivered fresh economic worries around the world, compounded by fresh signs of smoke in Europe where investors responded to threats of a Greek downgrade. Long yields are firmer in price while short-dated futures contracts are lower by a similar amount. The net effect confirms the response towards flatter yields seen during the week. Interest rate expectations continue to focus on near-zero rates for an extended period.

Eurodollar futures – It’s hard to determine what reaction interest rate markets should have to Friday’s GDP report. The expected upwards revision to fourth quarter growth was in-line with expectations at 5.9% and higher than the preliminary 5.7% reading. The improvement stemmed from a sharp reduction in the pace of inventory declines as businesses realized that stocks were already mean and lean. Final demand data was actually revised lower and portrays a slightly more docile consumer than at first blush. So we have a blistering headline rebound weighed upon by lackluster consumer spending. More recent data has also raised eyebrows as fresh weakness is apparent in the housing market where data for construction and transactions are both pointing to another tepid spring for realtors and builders.

Existing home sales in the U.S. fell 7.2% in January bringing the annualized pace to the lowest reading in seven months. Meanwhile a University of Michigan consumer sentiment reading for February declined at the margin pretty much in line with market expectations. All of today’s data gives cause for bonds to keep a positive tone sending yields lower. Meanwhile the weaker consumer confidence data and lacking conviction in the housing market was enough to swing Eurodollars from minor intraday losses to gains. March treasury note futures are eight ticks higher at 118-25 to yield 3.62%. The December Eurodollar contract is trading at an implied 0.81% yield.

European short futures – German bunds are pushing intraday heights heading into the final hours of European trading. The March contract is up 14 ticks at 124.44 and is challenging the 124.52 peak of February 2 as investors worry about weekend prospects for negative weekend developments on the Greek story.

British interest rate futures – British growth was also revised higher earlier today with the fourth quarter expansion lifted to 0.3% from 0.1%. But a downward revision to the third quarter data meant a large final quarter contraction of 3.3% compared to the 3.2% announced last month, which offset today’s better data. March gilts are ending the session just about unchanged at 115.75 while short sterling futures are about two ticks weaker in price.

Australian rate futures – Aussie bills also dipped just slightly ahead of next week’s RBA meeting at which dealers’ expectations over an interest rate increases are evenly split. Firm data from Japan overnight indicates ongoing Asian market recovery.

Canada’s 90-day BA’s –Canadian bill futures are unchanged to higher along the strip with government bond prices once again on the rise as yields fall as the yield curve continues to flatten.

Japan –A recovery for stocks domestically and firm retail sales data helped confidence return a little to Japanese markets. Eyes continue to remain fixed on the Toyota recall. Today’s strong reading for industrial production showed a gain for January of 2.6% blowing away a 1.1% forecast but was not enough to change 10-year note yields standing at 1.30%.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.