Since March 6, 2009, the S&P 500 Index is up over 53%, and the rise has been very steady, with virtually no breaks.

That’s a very impressive rally, and it’s a rally that I have totally missed. I didn’t expect it. (Actually, I don’t recall anyone, on March 6, predicting a 50% increase before the end of September). I didn’t expect it because, usually, it takes about three years into a recovery for the markets to bounce back 50%. And usually a recovery is accompanied by rising employment.

We have had neither a recovery, or rising employment.

So here’s the thing:

Two years ago, when this whole “credit crunch” thing started:

• The Fed funds rate was over 5%; today it’s around zero;
• You could get a 30 year fixed mortgage rate for 6.75%; today, around 5%;
• The Fed’s balance sheet was a mere $850 billion; today, over $2 trillion, and growing fast;
• The fiscal deficit to GDP ratio has gone from 2% to 13%.

Yikes.

But wait, it gets better. The Broad Trade Weighted U.S. Dollar Index, is a measure of the value of the US Dollar relative to other world currencies. The math is quite complicated, as shown by this formula, where the index value at time t is given by this formula:

For those of you who don’t get the formula (which would include me), in simple terms the exchange rates of around 30 currencies, weighted based on each countries’ level of trade with the U.S., are compared to the U.S. dollar, to generate the index.

Now, here’s the thing (in chart form):

According to the Federal Reserve Bank of St. Louis (go to their web site and create your own charts; it’s fun), the TWEXB is around the 103 level, which is exactly where it was at this time last year, and exactly where it was at this time two years ago. (Okay, maybe not exactly, but pretty close: look at the red and green lines in the chart). Isn’t that amazing?

I can see by the glazed over look on your eyes that you have no idea what I’m talking about, so let’s start from the beginning:

Pretend you are Mr. Obama, leader of the free world. You inherit the worst depression in three generations. You need to fix it. So you do what rulers do: You lower interest rates, and you spend tons of stimulus money. And for a short period of time it starts to work. Confidence starts to return. The stock market goes up 50%. Things are looking good.

But here’s the thing: The unemployment rate in the U.S. is almost 10%, as shown in this chart, thanks to Google (is there nothing that Google doesn’t know?):

10% is higher than it’s been in forever. And when you factor in all the people who are working part time, or are under-employed, or who have given up, the numbers are really big. Since WWII the highest unemployment rate is 10.8%, so we are within spitting distance of a disaster.

By disaster, I mean if you are the leader of the free world, and you want to implement an ambitious health care plan, and a climate change plan, and a bunch of other plans, you must win the mid term elections next year. And it’s really hard to win elections with record unemployment, because those unemployed people actually have time to vote. Last year you could blame George W for the mess; that will be much harder to do two years after George Jr. departed, and after two years of stimulus that was supposed to fix the economy.

It’s a disaster, because the last guy who had visions of health care plans dancing in his head, Wild Bill Clinton, got creamed in his first mid term elections, circa 1994, and The Big O doesn’t want that to happen to him.

So, for the two of you who are still with me, let me pull this together for you:

Bad unemployment. Can’t get my party re-elected next year if there is high unemployment.

Tried to fix it with low interest rates and high spending. Didn’t work.

That leaves only one last thing to try:

Kill the dollar. Or, more specifically, devalue the dollar. Just like our old pal FDR did to end the Great Depression when he bumped up the official price of gold from $20.67 per ounce to $35 per ounce, so to will our modern day FDR, a.k.a. BHO, do the same.

(You can do your own research on this one, but there are lots of interesting articles out there, like this one, or this one, or this one, or this one).

Yes, devaluing the dollar is inflationary, and has a lot of other bad consequences, but the one sure “cure” for falling house prices and general deflation is inflation.

Just think about it: if every dollar was instantly worth $2, then the real estate value in the mortgage bank’s portfolios just got twice as valuable. The mortgage values are fixed, so instantly there is equity in their portfolios where before there were huge losses. Beautiful. Plus your house price went up, so you feel good again, and you start spending.

Remember this chart:

The only metric that has remained the same for the last two years is the U.S. dollar. The only thing left to try, since massive spending and reduced interest rates didn’t do it, is to devalue the dollar.

Of course everyone knows it’s coming. China is moving to convert it’s dollars to other currencies, and to hard assets like gold.

So what do you do? How can you protect yourself when the paper you are holding is losing value?

You know the answer: buy gold. The government can’t print gold. They can’t devalue gold. Or silver. Or uranium. Or any other hard asset.

Of course 2009 is not 1932. We don’t have fixed exchange rates, and we aren’t on the gold standard. The government can’t simply change the exchange rate. But devaluing the dollar can be done in many other ways, and it will, because it’s the last thing to try.

Last week I said:

A pullback to below $1,000 would not be surprising. Even a pullback to $950 would not shock me. So my plan this week? I will place some stink bids below where we are trading now, and continue buying on big drops. Then, two weeks from now, on up days I will do what I did this month: selling calls, out of the money, on my positions. I will continue to pocket premiums until we get through the expected market weakness in October and November, in anticipation of better things ahead in 2010.

Well, not surprisingly, gold pulled back this week. And I started nibbling to increase my gold stock holdings. And I plan to continue buying in what will presumably be a weak October and November.

The train has left the station. The dollar must be devalued, and gold must therefore increase. I don’t know the exact timing, but I’m willing to be patient and wait for the inevitable.

Thanks for following my rambling explanation of my cloudy crystal ball. See you next week.

My profits have been limited by two factors:

First, I am carrying a lot of cash. Currently my portfolio is 28% in cash, and I have carried over 50% cash at various points over the last few months. In risky markets cash is king, so my gains may be muted by holding cash, but obviously my losses are also reduced by holding cash.

Second, I continue to bet against the general market, which during the month of March was the wrong bet.

A quick peek at a one month chart for the Dow shows what appears to be a raging bull market. From the bottom on March 9 of around 6,547 to the peak on March 26 of 7,924 the Dow advanced 1,377 points, or 21%. Most commentators define a 20% increase as a bull market, so obviously me holding puts and shorts was the wrong move.

I anticipated a bounce, but not a 21% bounce, so in hindsight I should have either stayed on the sidelines, or played for a bounce.

Are we really in a new bull market?

I dunno, whadda you think?

Stepping back from a one month chart and looking at a three year chart makes the March rally look a lot like a dead cat bounce, a bear market rally, not the start of a new bull market. We need the Dow to break 10,000 before we can start thinking about a new bull, and a close over 12,000 is needed to confirm that, and I just don’t see it.

I realize that the stock market is a leading indicator, but I see no fundamentals that yet indicate the economy is improving. Yes, house sales may be increasing, but they are mostly foreclosure sales, which is not a good sign. Personal bankruptcy rates continue to soar. Unemployment rates are increasing. Until those real indicators begin to stabilize and turn around, I don’t see a new bull market.

Call me stubborn, but I will stick with my shorts.

And my gold.

Obviously gold has had a double or triple top, and the uptrend will not be confirmed until we are decisively above the $1,000 level, but does anyone doubt it will happen? The gold chart looks a lot better than the Dow chart, and with the massive confiscation of wealth being transferred from the average American to the banker class (sorry, I mean “stimulus”), inflation will be booming later this year, and so will gold.

My best performers to date have been my silver plays.

PAA.TO – Pan American Silver Corp. is looking good, although a 5 month chart shows we are hitting some resistance:

The RSI is looking toppy, so if we don’t have some follow through gains on Monday I will probably take some profits, but not sell all of my holdings, and place more stink bids and try again.

My stink bids on SLW.TO – Silver Wheaton Corp. never did get filled, and it’s been very strong lately, so some profit taking there may also be in order.

A final thought: Mutual fund investors receive a statement from their fund every three months. The big crash of October and November, 2008 was mitigated by a slight bounce in December, so their December 2008 quarter end statements were not as bad as they would have been if they were issued at the bottom. January and February were bad months, but a rally in March means that their March, 2009 statements also will not be as bad as possible. It’s almost as if these rallies are being engineered in advance of quarter ends to keep the average, semi-sophisticated investor in the market.

But that’s just a thought.

My plan continues as stated previously. I will skim profits as they appear, meaning this week I will probably lighten up on some of my gold and silver holdings. I will continue to add to my RSW – Rydex Inverse 2X S&P ETF position on up days, since I believe a further testing of the lows is inevitable. The RSI on the Dow is higher than it’s been in a year, which I don’t believe is sustainable. The talking heads on TV will tell us we have turned the corner; I just shut off the TV (it helps me do my workout in peace).  A three week rally will not fool me into believing good times are here.

I will continue to buy gold and silver on weakness, in preparation for what I expect to be a very profitable summer and fall.

Those are my somewhat abbreviated thoughts this week; feel free to post thoughts you opinion on the Buy High Sell Higher Forum; see you next week.

Not good. Here is a chart of the DOW since 1997:

On May 30, 1997 the DOW closed at 7,331. On February 20, 2009, the Dow closed at 7,366. That means that over the space of 4,284 days, or almost 12 years, the Dow has basically remained unchanged. No movement. No gains. No profit. I guess we will have to stop making fun of Japan’s lost decade, since we are now experiencing our own lost decade, which may well be our LQC, or Lost Quarter Century by the time this is done.

How can this be? How is it possible that we have shown no progress, made no profit, for twelve years, with no redemption in sight? Why do we have no insight?

We have no-one to blame but ourselves.

I now present the first ever installment of Story Time with JDH.

Story #1

Four years ago we renovated our basement, and I finally got my big screen TV. Really big. A projector mounted on the ceiling projected the image on the screen that’s about eight feet across. Very cool. (There is never anything on TV so I never watch it, but that’s not the point. It’s big).

About six months ago we noticed an annoying blue smear appearing, and it grew over time. A call to the guys who sold it to us said yes, the something-or-other was going, and it’s not worth fixing. They would sell us a new and improved projector for about what we paid for the last one. My wife couldn’t believe that a fancy TV can only last four years before needing to be replaced.

And that, my friends, is one of the things wrong with this world. We build products as cheaply as possible, because we only care about price, not quality or value. Our society is disposable.

Story #2, and #3, and #4, and #5

I can tell the same story again, except this time the thing that broke was a washing machine, or a dryer, or fridge, or stove, or car, or whatever. It’s all the same.

I have never, in this blog, revealed what I actually do for a living. I prefer to remain “JDH”, the guy with initials, but no name. But here’s a hint: I work with people in financial trouble. I spend my days working with people who have more debt than they can handle.

Story #6

This week I met with Tom and his wife Jane. Tom and Jane are not their real names. They are not even real people. But, their story, with very minor editing, is completely real, and it is a story I hear at least ten times per week.

Tom and Jane had good jobs, so they bought a house in 2004 for $200,000. They had no savings, but they were able to qualify for a “no money down” mortgage. They had access to credit, so they used their credit cards and lines of credit to furnish their new home, and to take a nice vacation.

By 2006 they had accumulated $40,000 in credit card debt. But, not to worry, the housing market was great, and their house was now worth $300,000, and interest rates were low, so they were able to add $50,000 to their mortgage, pay off all of their credit card debts, and even have an extra $10,000 for the down payment on two new cars, that they leased, and to take another nice vacation.

By 2008 they had accumulated another $40,000 in credit card debt. They had bought more furniture, had nice clothes, frequently ate out, and took nice vacations. Realizing they were paying a lot in interest, they phoned up their bank manager and asked to refinance their house, just like they had done in 2006.

Unfortunately, by the end of 2008 their $300,000 house was now only worth $270,000, so it was impossible to borrow against the house.

Then Tom, who was working in an auto parts factory, was laid off. Jane was still working, but her hours were reduced, so her income had dropped as well. They began to fall behind on their monthly credit card payments, so the credit card companies began charging late fees, over limit fees, and they raised their interest rates, putting Tom and Jane even farther behind.

They came in to see me for advice. I told them they should give up their two leased cars, and walk away from the house, since there was no equity in it anyway. “We can’t lose our cars and our house”, they said, “because we worked hard for those things and we don’t want to lose them!”

I am a compassionate person. I have both sympathy and empathy for people in financial distress. It always pains me to have to tell them that no, you didn’t really “work hard” for those things. You borrowed money to buy those things that you could not otherwise afford, and now it’s time to pay the piper.

And that, my friends, is what’s wrong with this world. We don’t work for things anymore. We borrow to consume.

Last week I mentioned my now departed mother. Today, a story about my father.

Story #7

There were four children in my family growing up. There was me, the oldest, and of course my siblings JEH, CRH, and SEH. (Weird that my parents gave us initials and not names, eh?). My father was a school teacher; my mother was a “stay at home Mom.” We had one TV set in the house. We didn’t get a colour TV until just before the Reagan presidency. (I may be exaggerating, but not by much). Not that it really mattered, since we were not allowed to watch TV during the week, and my brother and I had to go to bed after the first period of the hockey game on Saturday night, but I digress.

We never owned a new car. The family station wagons (a type of car popular before the minivan was invented) were always bought used. We were not poor, and my father always paid cash. No leases. No car loans.

We lived in the same house from the time I was seven years old until I moved out on my own. My parents bought the house because it was in a small town on the outskirts of Toronto. It was the best house they could afford, but it was not more than they could afford. Eventually all of us moved out. In 2000 my mother died, and in 2007 my father sold the big old house, at the peak of the real estate market, and bought a smaller house, again on the outskirts of town. As a result of the “downsizing” may father had a nice chunk of cash.

In the fall of 2007, a few weeks after he had moved into the new house, I got an e-mail from my father telling me he had bought two new cars. I was stunned. Between the ages of 16 and 70 my father had never owned a new car, and now he had bought two of them? I immediately called him and asked him what he had bought. He had bought a pick up truck, to haul gardening supplies, and a car big enough to transport his grandchildren when needed. He bought a 2004 Ford and a 2004 Highlander.

“I thought you bought two new cars”, I said to my Dad. “I did”, he said. “But Dad, it’s 2007, and the cars you bought were made in 2004. That’s not new.” “Yes, they are practically new” he replied.

And that, my friends, is the difference between people born between 1960 and 1990, my generation, and people like my Dad, born during our last “Lost Decade” between the crash of 1929 and the end of the War in 1945. To my Dad, a three year old car is a brand new car.

I lease my cars on three year leases. I turn them in after three years and get a new one. To me, a three year old car is obsolete.

See the difference? I think a three year old car is obsolete, and my Dad thinks it’s brand new!

My Dad is retired and living comfortably, with no debt. My peers all have fancy cars and fancy houses, but we all have car loans, car leases, and mortgages we can’t afford.

Why has the Dow not moved in 12 years? Because we have not created any wealth in the last 12 years. We have borrowed to consume, but we have not saved any money, we have not created any wealth.

The sub-prime mortgage mess in the U.S. was created by people with inadequate income buying houses they couldn’t afford. The government is now discussing a “mortgage bailout” to help pay the mortgages of people who should never have gotten the house in the first place.

Have the bankers created any new real products in the last twelve years? Is the banking system more efficient? No, they have just given mortgages to people who should not have mortgages, and for that they received fat bonuses, and billions in bailout money.

Have the Detroit automakers created any truly new cars in the last twelve years? Do we have super-fuel efficient cars, or real hybrid cars? Do we have cars that run on alternative energy? Are cars significantly safer and cheaper than they were twelve years ago? Well, Detroit created the SUV and the massive pick up truck, exactly what we didn’t need last year when oil hit $140 per barrel. Their reward for their incompetence? Billions in bailout dollars, and millions more in bonuses for the executives, even as tens of thousands of factory workers lose their jobs, their health benefits, and their pensions.

As we all know, the First Law of Thermodynamics states that energy can neither be created or destroyed.

JDH’s first law of Money-Dynamics states that wealth can be created by work, or destroyed by waste and incompetence, but it can’t be created by borrowing or fancy bookkeeping.

Alas, we are guilty of fancy bookkeeping.

We believe that borrowing to buy a house, two cars, four high definition TV sets, three vacations a year and a meal at a different restaurant every night means we are wealthy. We are not. We are just in debt.

Marketers can create the Perennially Changing Perennial, but it’s not; it’s just the same flower we bought last year, dressed up in a fancy package with a higher price tag. Buying more stuff, on credit, does not make us wealthy. Ultimately, it makes us poor.

The Solution

What is the solution for Tom and Jane, who can’t afford to pay for their house, cars and credit cards? They have to clean house. Unfortunately selling their house and cars won’t solve their problem, because they don’t own their house or cars; they only rent them from the bank. The laws are different in many parts of the United States, where it is possible to walk away from a house and owe nothing. In Canada, that’s not the case. If you walk away from your house, the mortgage holder will pursue you for the shortfall, and the solution for a record number of Canadians is quite simple, and quite final:

Bankruptcy

If your income is drastically reduced, and if you owe more than you can ever repay, bankruptcy may be your only option. According to the Toronto Star:

Consumer bankruptcies led the rise, spiking by 50.1 per cent year over year to 7,821 people, one of the biggest year-over-year jumps in history, according to some observers. “I can’t remember an increase like that. That’s kind of blown it off the charts, frankly,” said Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc. “I would have said maybe a 25 to 30 per cent increase based on our call volumes. But 50 per cent? That’s stunning.”

Yes, I would say an increase in personal bankruptcies of 50% is “stunning”, and is “blowing it off the charts.” You think that may be one reason why the stock markets are making new lows?

If you are a country, built on credit, with no wealth created in 12 years, there is only one solution.

Bankruptcy

Now yes, I realize a country can’t technically file bankruptcy. But a country can devalue their currency and renege on their existing debts by printing more money. And that, alas, is what is happening.

It’s simple math. Long term you can’t continue to borrow more than you can repay. At some point real wealth must be created, and if it isn’t, economic calamity is the result.

The point, dear readers, of this long winded, disjointed, pedantic dissertation on this cold and windy Saturday morning is this: we created these problems over a long period of time, and they will not be solved quickly.

In Canada, if a person declares bankruptcy, in most cases the process ends in nine months. Their credit report is negatively impacted for seven years, but after nine months their debts are gone, and they can get back to living. Continuing to borrow money at ever increasing interest rates only serves to delay the inevitable result.

The world economies should have taken their medicine, allowed the defaults to happen. Instead, governments are injecting “stimulus”, and are propping up failed enterprises, which is akin to borrowing from a loan shark. They have not solved any problems; they are only delaying the inevitable result. If we had let the failures happen in 2008, by 2010, after a very difficult 2009, we would be on the road to recovery.

As it stands now, 2009 will be worse than 2008, and 2010 may well be even worse.

Which is why the price of gold is on a run. It is becoming obvious that the fiat currency system is dying, so we have no choice but to put what little wealth we have into vehicles that are no someone else’s liabilities. And that’s gold.

I predicted that gold would be $1,200 per ounce by March 31, 2009. Given that fell to almost $800 about 35 days ago, and is now around $1,000, $1,200 is possible by the end of March. Very possible. However, I suspect my prediction will be wrong.

I know believe that, with everyone predicting that gold will go to moon, we will probably see a pullback. The $1,000 level was significant resistance a year ago, and I suspect that will prove to be the case again this time around. The RSI and MACD levels are looking over extended, and a $200 run in one month is probably not sustainable. I will therefore continue to maintain my small gold stock position, and remain with the rest of my portfolio in cash, in anticipation of better buying opportunities over the next few weeks.

World governments have committed to spending trillions of dollars in pork (I mean “stimulus”). They don’t want to see the U.S. dollar crash, and gold to soar, before their plans have at least a few weeks to work, so I assume they will keep a lid on gold, for now, just as a cook keeps a lid on a boiling pot. (Until, of course, the pot boils over).

I must of course point out that I have been completely wrong up to this point. I have been reducing my gold holdings all the way up over the last two months, when I should have been buying.

On January 31 I gave you all a list of my stink bids on gold and silver stocks; as of today, I have not been filled on any of them, so they remain as follows:

ABX.TO – Barrick Gold Corp. at $39

AEM.TO – Agnico-Eagle Mines Ltd. at $59

K.TO – Kinross Gold Corp. at $20

G.TO – Goldcorp Inc. at $33

SLW.TO – Silver Wheaton Corp. at $6 and

SSO.TO – Silver Standard Resources, Inc. at $22

The only caveat to the above numbers is that I may start to dabble at slightly higher numbers.

For example, I have my K.TO – Kinross Gold Corp. stink bid place at $20. That looks like a reasonable retracement point to me, but I may attempt to pick up a few shares at $22, to go with the shares I already own, as insurance against a quick spike in gold. More specifically, if I want to ultimately own 1,000 shares of Kinross, and I currently own 200, I may buy another 200 at $22, and then fill in the remaining 60% of my position on down days with my stink bids.

Or not. I have a gut feeling that the $1,000 level will prove to be significant resistance, and my stink bids may well get filled in the near future.

Cash is not a bad thing in these volatile times, and patience is a virtue, so I will sit and wait a bit longer.

And where is the Dow going? I predicted 8,000 by March 31, 2009. Looks like we already blew through that level.

My best guess now is that the Dow will retest the 1987 levels around the 2,000 level, which makes sense, since that will probably happen around the time gold hits $2,000, for a nice symmetrical 1 to 1 ratio.

Am I crazy? Have I spent too much time with people in financial distress, which has made me too cynical?

Maybe.

But for now I will hold cash, continue to dabble with some put options on the S&P 500, and look to increase my gold holdings on any pullback in the gold price.

I have talked enough. Now it’s your turn to comment on the Forum. Thanks for reading, and see you next week.

Friday February 13, 2009 proved to be a lucky day for me as finally, after many years, a true high speed internet service was installed at my house. I live in the country, and we don’t have cable or telephone DSL service, so for the past four years I have relied on satellite internet which is expensive, slower than DSL, and comes complete with a latency problem that means I couldn’t use a VOIP phone. On Friday a new wireless radio-based service was installed, and at the moment I’m getting download speeds of over 7,000 kbps (which won’t last, since there will be a limiter on it next week, to leave some bandwidth for my neighbours). Needless to say, I couldn’t be happier. It was a really cool Valentine’s Day present.

Speaking of Valentine’s Day, I am very fortunate to be married to a woman who thinks Valentine’s Day is largely a silly holiday, designed mainly to separate men from their money, buying silly stuff for their wives/girlfriends that they don’t really want. We take a more practical approach: I start the day as I start every day: I make my wife a fresh pot of coffee. I’m a morning person and not much of a coffee drinker. She’s not a morning person and is addicted to the stuff, so my daily gift to her is that I make the pot of coffee. Happy Valentine’s Day. Of course I will also select a nice red this evening, probably a Chianti.

And yes, we have now been married for 13 years, so 13 is proving to be a lucky number indeed.

(For those who are interested, 13 is considered unlucky because, according to Wikipedia, in numerology, the number twelve is considered the number of completeness, as reflected in the twelve months of the year, twelve signs of the zodiac, twelve hours of the clock, twelve tribes of Israel, twelve Apostles of Jesus, twelve gods of Olympus, etc., whereas the number thirteen was considered irregular, transgressing this completeness. But I digress).

Will 13 be lucky for the markets? The Dow made it’s low on Thursday November 20, 2008 at 7,552. 13 weeks later, on Thursday February 12, 2009, the Dow closed at 7,932, a gain over those 13 weeks of 5%. The optimists would say a bottom is in. A pessimist would tell you that’s still a drop of 43% from the 14,000 level reached in October, 2007.

Last week I gave you a list of headlines showing all of the bad things happening in the economy. This week I could give a similar list, but the most important news item is probably that the Senate has now passed yet another stimulus bill. On Friday the 13th. Great.

I firmly believe that government’s can’t create jobs. All they can do is tax the current generation, or borrow from future generations, and a multi-trillion dollar deficit this year will certainly qualify as borrowing from future generations. That may give a tiny little bump to the economy at some point in the next year, but it kills the economy longer term.

Which is probably why the gold chart appears to show a break out from the down trend line. Interestingly, silver does not yet show the same break out.

So, am I buying gold? Not quite yet. Over the last 13 weeks or so gold has had a run from $700 to $950; that’s a big move, and I expect some consolidation before the move resumes. (Actually, gold bottomed in October, then retested and held that bottom 13 weeks ago in November, so the gold bottom is looking more solid that the bottom in the general stock market).

On January 31 I gave you all a list of my stink bids on gold and silver stocks; as of today, I have not been filled on any of them, so they remain as follows:

Here are my current stink bids, all in Canadian dollars, and all subject to change:

ABX.TO – Barrick Gold Corp. at $39

AEM.TO – Agnico-Eagle Mines Ltd. at $59

K.TO – Kinross Gold Corp. at $20

G.TO – Goldcorp Inc. at $33

SLW.TO – Silver Wheaton Corp. at $6 and

SSO.TO – Silver Standard Resources, Inc. at $22

I will be patient. I will sit in cash until the market comes to me. I will not chase it. A further down turn in the general markets, which is very likely, is also very likely to bring all stocks down with it, including the gold and silver stocks. So I will not chase it. I have some small core holdings in the above stocks, which is my protection against an upside break out. For the rest, I will wait.

And I will continue to wait, even it I have to wait another 13 weeks.

Monday is a holiday in the U.S. (President’s Day) and in Ontario (Family Day) so all major stock markets will be closed; we shall see how the world develops over the long weekend, and we will probably be in for some pent up fun on Tuesday.

Enjoy the holiday. We need it. See you next week.

U.S. Jobless Rate Soared in January and Payrolls Kept Plunging

IMF Says Advanced Economies Already in Depression

Senate to Vote on $780 Billion (or more) Stimulus Bill

Federal Deficit Could Hit $3 Tril In ’09 On Stimulus, Bank Bailouts

Toyota losses mount; Italy readies auto aid

British Airways books £127-million loss

Weyerhaeuser loss balloons to $1.21-billion

It’s not just the media that has scary stories. Even the U.S. Treasury Department, on it’s own website, has this to say:

Price pressures are receding rapidly. Headline inflation already has collapsed toward zero due in large part to the steep declines in commodity costs. More notably, core inflation also is cooling quickly amid the slump in demand and rising unemployment and remains close to the Federal Reserve’s comfort range for this series. Moreover, the speed at which businesses are cutting headcount and reducing compensation is raising the risk of deflation. Given elevated debt levels, such an outcome would be extremely problematic for the financial sector and real economy.

Those outsized funding needs reflect the dismal outlook for economic growth and Congress and the Administration’s efforts to bolster the economy through policy action. Tax receipts are declining at a brisk pace given the climb in unemployment, reduced wealth and slowing corporate profits. Receipts were down by nearly 10% in the first three months of the new fiscal year and the pace of decline appears to have accelerated in January. Individual nonwithheld tax receipts in the month plunged by almost 15% versus a year ago. Meanwhile, outlays are surging at a breakneck pace as automatic stabilizers (unemployment compensation, food stamps, etc.) kick in and the government puts in place programs to try and stabilize the financial sector.

The deterioration in the budget outlook, combined with expenditures associated with the TARP, potential FDIC guarantees, and expected additional stimulus spending have increased private forecasts for total funding needs of the U.S. government for fiscal year 2009 to approximately $2 trillion. This is likely to stress the existing auction schedule and consequently warrants tangible adjustments to that schedule.

Yikes. If the government is admitting that the budget deficit will be $2 trillion, you know it will probably be $3 trillion by the time all is said and done (which is why I included a link to Investor’s Business Daily above, in their article Federal Deficit Could Hit $3 Tril In ’09 On Stimulus, Bank Bailouts ).

So, let me summarize what you have just read: the economy is in really, really bad shape. In the Bloomberg unemployment link above, “the jobless rate rose to 7.6 percent from 7.2 percent in December, the Labor Department reported yesterday in Washington. Payrolls fell by 598,000, the biggest monthly drop since December 1974.”

The biggest monthly drop since December 1974. That’s big. A $3 trillion budget deficit is also very big. A depression is big, now that even the mainstream media is admitting it. The headlines don’t get much worse than this.

So, here’s one more headline for you: Dow closes Friday up 217 points (up 2.7%). Huh? The world is ending, and the Dow is up? What’s up with that?

Well, first, “up” is a relative term. Yes, a Point & Figure Chart shows a Double Top Breakout on February 6, 2009:

But, the long term downtrend is not even close to being violated, until we get above 9,250.

A more traditional line chart shows a similar story. For the last month I have talked about an “Obama Bump”. It would appear that the markets anticipate the passage of the stimulus bill this week, and that’s why the market is rallying. The November lows are holding, so a continued rally will not surprise any of us.

But, let’s be clear. A rally to 9,000 on the Dow is a bear market rally. It doesn’t change the long term picture. The economy is in horrible shape, and it’s getting worse. A trillion dollars in more government spending will not create any jobs. All it will do is raise interest costs and raise taxes in the future, which simply means jobs switch from the private sector to the government payroll. Since in the long run government is less efficient, that reduces jobs.

So, my game plan is to expect a brief rally in February, followed by a continued march downward in March, no pun intended.

Long term, gold will shine. Last week I talked about an Obama Bump, and I placed my stink bids to increase my holdings on my favourite gold stocks. None of them got filled, since gold stocks were up this week.

That’s fine, I’m not going to chase anything. I’m still largely in cash. The market may rally a few hundred points, and I may miss it. So be it. I don’t want to get caught up in the euphoria that all is well when the pork bill passes. I’ll stay on the sidelines, renew my stink bids, and buy when the time is right.

That’s it for today. Stay the course, and thanks as always for your comments on the Forum.