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February 17, 2009

Reviving The Patient
by Captain Hook

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 3rd, 2009.

Five trillion dollars, that's what it's going to cost for the good / bad bank and ballooning stimulus plans. Now that's serious money, not too mention serious inflation by strict definition in the sense money supply has been rising, but prices have not. And it's also a great deal of intervention to thwart what appears to be worsening economic problems; problems that continue to worsen despite all the prior interventions. This is of course what socialists do however; they just keep going back to the trough for more until they kill the patient. The socio-political backdrop has turned into a real zoo in this regard, where even Orwell, with his brilliant foresight, if asked way back when, would have likely had difficult imagining such a mess.

That's why the stock market keeps going down, because investors know more pork belly measures will not work, making this the worst January on record. In this regard you have to wonder just what the politicians and bureaucrats are thinking about in ramming increasingly grandiose theft schemes down people's throats like this? Obviously however, they will just keep doing it until they can't get away with it anymore. To be specific, what they are doing is wasting stimulus money on completely non-regenerative endeavors at the behest to interested constituents and parties, leaving little left over for proposed infrastructure projects that by themselves, promise little in sustainable spin-offs anyway.

So you see, even if Obama had followed through with his election promises, what's happening is the doctor is attempting to revive a dead patient. This is of course important to understand. The patient, being the larger economy and its monetary system, is dead. And no matter what the bankers and bureaucracy do to revive it, even if they adopted constructive policy at this time, nothing will help. Nothing will help because the health of the economy and monetary system depend expanding credit, where all new money must be borrowed into existence. This was the deal made on Jekyll Island all those years ago, where a group of unscrupulous bankers were granted monopoly control of US currency issuance, with the rest being history.

Under the present system, historically, when the consumer needed support so that more could eventually be borrowed in further enriching the banking elite, politicians were employed to provide stimulus to get the economy rolling again through fiscal policy, which worked well up until present times. Now however, the US consumer is saturated with too much debt set against a hollowed out economy, an economy which in itself was hollowed out via globalization to extend the larger cycle, which extended the life of the system / patient for the banking elite. New populations have been enslaved in the Western model debt trap in buying into the American dream of higher living standards, washing machines, etc.

Is this why the January Effect was a 'no show' this year, suggestive stocks will have a very bad year if last month's performance is any indication. And the January Effect wasn't the only no show. The historical patterns are beginning to diverge, where more losses in February would break previous similarities entirely. As discussed previously, because this market is very mature, with a great deal of its participants educated on the historical pattern similarities, history may not repeat any further due to altered betting practices of speculators. In terms of present distributions in US index open interest ratios (updated here) as an indication of what to expect, although the SPX and OEX contract series have softened in their bearish dispositions considerably, with the increase the SPY series and the QQQQ, anything is possible in my opinion. More on this below.

Perhaps the balance will be lost in favor of a bearish outcome with the dramatic reductions in short sellers however, nobody can know for sure. From my perspective I know one thing for sure, my boldness factor with respect to playing the post crash bounce has been reduced considerably, primarily due to the relatively rapid pace process is taking hold of the meltdown. And that's the right word to be using here in my opinion as well - meltdown - especially if the money supply measures attached here roll over for real. If this were to occur, which is a possibility because don't forget, the patient (credit growth) is dead, then an economic unwinding process could be quite rapid indeed, possibly involving bank holidays and revolution as early as this year if Gerald Celente is correct.

In looking back in history, which as you know is something we like to do in searching for modern day comparables, scary as it may be, we can in fact find precedent for an accelerated crash directly ahead, with examples found in Grand Super-Cycle Degree events. And the funny thing about possibilities here is because nobody takes this risk seriously, where with exception of a few like Gerald Celente, most remain complacent in this respect, such an outcome does I fact become a possibility. In terms of the other global manias that unwound in a straight down crash with no reprieves we have the Tulip Bulb Mania, South Sea Bubble, and in modern times, the Nikki, which crashed some 70 % in just a few years.

And then there's the tech wreck of the Nasdaq Bubble as well, which as you know from our work on the subject was very similar to the Nikki experience, down some 80 % over the exact same period. (See attached above.) The fact modern day crashes of high degree have taken two-year intervals is of course understandable given the size and complexity of the markets involved, not to mention interventions, with both of these examples still working their way to ultimate bottoms many years after onset. Of course for many at this point the question arises, 'how can you be so sure you are correct in this assertion?' There are many variables out there, including a panic out of the dollar ($) that could support asset prices for longer than the bears can perhaps contemplate.

While this might be true, as you know from last week's analysis involving the $, we do not subscribe to the view it's dead, or at least set to fall, which as you may know, has proven correct thus far as equities and credit continue to contract. In this respect it should be noted that margin debt continues to fall, but is still a long way from a bottom if Figure 4 in the attached has any predictive value. What's more, and in answering the above question with respect to 'certainty' about future outcomes, in my opinion if the $ were about to be devalued, not only would the deleveraging process need be further along in process, using our observations regarding present margin debt conditions as our exemplar for simplicities sake; but also, you would not have the charts pointing towards further substantial losses in commodities moving forward, which just so happens to the case if you know where to look.

Where does one look for confirmation in this regard? The answer to this question is hinged in relative performance, with the best place to look in this case being the ratio between the Dow and Toronto Stock Exchange (TSE), the latter being the premier commodities related stock market in the world. And the former is still rated the safest measure of stocks in the world. So, when one puts the two together, theoretically, you have a high fidelity measure of relative performance between safe stocks and volatile commodities, with health in the latter more dependent on growing credit than the former, again, in theory. As mentioned just last week (see Figure 4) in this regard, where again, we are bringing this back into focus because process is unfolding rapidly, one should note we are now at a juncture where the indicated 'testing process' on the below could be completed at anytime, meaning the risk of re-acceleration in deleveraging and falling commodity prices is back to high. (See Figure 1)

Figure 1

Do I think this will necessarily happen right away? As you will see further down the page, I do think we could still see one more dull rally into a post crash March / April topping window, but nothing can be guaranteed of course. And as mentioned above, even if this were to occur, the risk associated with playing this bounce has become untenable, with day after day more bearish technical developments opening the possibility of re-acceleration to the downside for equities. In remaining on topic, it should be noted this includes the Dow closing below 8,000 yesterday, with support at November's lows of 7,552 critical from a Dow Theory perspective. Furthermore, and in relation to the above analysis, it should be noted if this were to occur, Canadian resource stocks would likely fall harder, with the TSE being 'an accident waiting to happen' from a 'crash signature' perspective. (See Figure 2)

Figure 2

Please note we have updated the figures to present because they have reached the 'test' objectives already. This means the stock market has already reached the 'accident waiting to happen' point.

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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