Commentary for the Week of March 8

Europe was putting the finishing touches on yet another bailout for Greece over the weekend, even as new scrutiny fell upon the growing problems of Spain and Portugal. Under the latest rescue package, the IMF and 15 nations – presumably including Spain and Portugal – will pony up $133 billion to keep Greece from defaulting. Will that be enough?  Although it more than doubles the amount of an emergency credit line extended to Greece less than two weeks ago, some observers think it could take as much as $700 billion to avoid bankruptcy.  One thing’s for sure:  For the average worker, the austerity measures imposed on Greece by this rescue package seem as harsh as chemotherapy. “We find ourselves before the most savage, unprovoked and unjust attack,” said the head of the nation’s civil service union after seeing an outline of the cuts. Unfortunately, there are no guarantees that even severe belt-tightening will work. “There is a very real possibility that at the end of two or three years, Greece will still have an unsustainable debt and will have to restructure because it will have a deep, deep recession in the meantime,” noted a Berkeley economic professor quoted by Bloomberg.  Considering that riots started breaking out in Greece when relatively mild austerity measures were being talked about a couple of months ago, it seems plausible that the country could be in for a long, hot summer. 17,000 Swimming Pools Ironically, there is supposedly enough wealth in Greece to have headed off the crisis in the first place -- wealth generated by a shadow economy representing 20 to 30 percent of the nation’s GDP. Alas, tax evaders may be costing the country as much as $30 billion a year, according to estimates. In a wealthy Athens suburb, according to the New

Hi-ho, Silver, awaaaay!  We told subscribers to look for a 25-cent rally in the May Comex contract, but by day’s end it had surpassed our wildest expectations, closing with a 43-cent gain on the day.  Here’s the forecast as it went out to subscribers the night before: “The futures looked poised for a 25-cent pop, based on a Hidden Pivot target at 18.370.  First, however, they’ll need to get past…[a Hidden Pivot resistance] at 18.210 that lies just beneath yesterday’s spike top. My gut feeling is that once the [resistance] is out of the way, the move through the spike top, which lies at 18.235, will be a piece of cake.” If you want to see what a piece of cake looks like, check out the chart above. After blowing past Wednesday’s high as the morning began, the May futures needed barely and hour’s rest to take out an equally daunting peak recorded on Tuesday. And as if that weren’t impressive enough, the May contract was holding onto most of the gains in after-hours trading.  Note in the chart that as of around 6:30 p.m. EDT, the correction of Thursday’s surge had yet to come down, even, to the level of this week’s previous high. What to Look For All of this bodes well for Silver’s performance in the weeks ahead, and if the rally goes just a little further today, exceeding the 18.900 high recorded in early January, we’d infer that buyer will have little trouble punching through the 2008 high at 19.823. Moreover, and to be precise, a breakout above last year’s high would all but clinch a move to at least 20.21, or to 21.53 if any higher. For our part, we’ll be looking for ways to get aboard with as little risk as possible as Silver

We’ve featured both bullish and bearish headlines here in recent weeks, so it’s time to clarify the outlook lest readers become confused. In brief, we are looking for an approximately 1400-point rally in the Dow Industrials this summer, but we’re prepared to turn bearish if a change in stock market’s technical condition warrants it (see chart below).  So far, we’re giving the bulls the benefit of the doubt based on a purely mechanical reading of the charts. But we also believe that Europe’s financial crisis is starting to spin out of control, much as America’s banking crisis did when Lehman Brothers went under. In Europe there is fear now, and even rioting in Greece, because no bailout measure tried so far has put deep anxieties to rest. Panic seems unavoidable at some point, and it could come in a day, a week, or a month, but probably sooner rather than later. Regarding our bullish call on the stock market, let us say up front that it goes sharply against our instincts and every shred of logic that we possess. Permabears do not come easily to the notion that stocks could rally so powerfully amidst a patently fraudulent economic recovery – a recovery that has touched almost no one we know and which, even at a very low level, cannot conceivably be sustained. Even so, putting our opinions and instincts aside, we’ve learned to simply trust the charts whenever there are doubts. Goldman Resists Tide This we have done, at least for the moment. As the week began, our technical runes told us it might not be a bad time to venture out on the limb with an especially bullish prediction. Thus, the headline “So Bullish on Stocks That We Feel Guilty”.  The commentary went on to explain why we were

Greece’s financial problems took a dramatic turn for the worse yesterday, causing stocks and bonds around the world to plummet on news that Greek bonds had been downgraded to junk by Standard & Poor’s. The rating agency’s decision was particularly unsettling for investors because just last week a $60 billion emergency credit line was extended to Greece by the IMF, Germany and other European nations. But what may have spooked the markets even more was S&P’s downgrade of Portuguese debt to A- from A+.  This suggests not only that euro-contagion is spreading, but also that any large sums of money pledged to ameliorate Greece’s crisis are no longer capable of calming the markets. Unfortunately, perceptions are everything at the moment, and it seems most doubtful that more talk, more promises and yet more loan guarantees will arrest the spread of fear.  Will the uneasiness eventually come to engulf several other nations thought to be on the financial ropes, notably Spain, Italy and Ireland? This seems a foregone conclusion, since there is no remedy possible that would address, let alone fix, their respective financial problems at a fundamental level. Indeed, for the central banks, the fatal paradox is that if any nation were to get truly serious about tackling its debt problems, the result would be an economically fatal debt deflation. Under the circumstances, it’s no wonder that our political leaders have bought into the lie that untold new sums of fiscal borrowing can reverse a debt deflation. In point of fact, untold sums of new borrowing have yet to cause even a blip in the home prices that were the explicit target of Fed stimulus. Weimar Memories No such remedies are likely to be attempted in Europe, since they would be subject to a German veto. To say that the

We’re so bullish on the stock market right now that we can barely look ourself in the mirror. Having hated the Mother of All Bear Rallies since it began nearly fourteen months ago, we’ve tried to make our peace with it by projecting higher prices the whole way up; by trading from the long side whenever a fat opportunity presented itself; and – this is the fun part – by shorting every upthrust that kissed a promising short-term target. Check the Rick’s Picks archive if you don’t think this works.  It’s fun, as we said, even though it would be nice if just once the pullback following a rally lasted for longer than a measly day or two. Hope springs eternal, though, and that’s why we’d been looking forward to a potentially important top in the E-Mini S&Ps just a few points above yesterday’s 1216.75 high.  On further inspection, however, although our target remains shortable, we determined that the odds of the broad averages taking a flying dive into hell after hitting this target seem remote. There are good technical reasons for this, some relating directly to the E-Mini S&P’s longer-term charts. But one need only look at Goldman’s daily chart to see where the problem lies. Recall that just ten days ago, when the firm was accused by the SEC of flim-flamming investors, the stock went into a freefall, shedding 31 points that day.  That represented about a sixth of Goldman’s total capitalization, and it must have scared hell out of anyone on the wrong side of the move. It would also put a lot of weight on the stock market as a whole if it continues. A Goldman Shakedown? But when you apply Hidden Pivot analysis, the move looks like it was just a fake-out – a ruse by

We’ve become used to jobless economic recoveries, since, more than anything else, it is the downsizing of payrolls that has caused corporate profits to rebound from recessionary troughs. In theory, this is part of the “creative destruction” that helps the economy get lean and mean: Workers who have lost their jobs migrate to stronger companies, many learning new job skills to meet the demands of emerging businesses. This time around, however, so many key sectors have downsized, especially finance, retail and real estate, that there are not nearly enough emerging growth sectors to take up the slack. Which sectors of the economy seem likely to grow the most over the next 5-10 years? Unfortunately, signs point to health care above all, since, if Obamacare takes root, that’s where the lion’s share of new federal spending will be going. We say “unfortunately,” because investors chasing all those new Obamacare dollars will tend to misallocate capital so that it finds its way into what promises to be the most expensive and wasteful boondoggle ever undertaken by Big Government. You can be sure that many companies are preparing for a boom in healthcare and that they will shift their resources into related businesses when the time is right. And just as every corporate Tom, Dick and Harry eventually found its way into some aspect of banking or finance during the boom in real estate and securitized debt, companies with no connection to or knowledge of health care will find pathways into its most promising areas of growth. Doctors Stampede to Retire We should like to think that the growth will occur in places that are crucial to the actual health of the population. An example of this would be the training of, say, 5,000 new physicians to practice general medicine, and providing incentives

(Last time we heard from “Cameroni,” his downbeat economic forecast for Canada drew a deluge of responses in the forum, both pro and con. Things have only gotten worse since, he says, and Canada has now edged perilously close to the deflationary abyss that threatens to engulf so many other countries. Below is Cam’s up-to-date assessment of Canada at-the-brink. RA) Several weeks ago I wrote a letter that was published on Rick’s Pick’s under the headline “Canada Won’t Escape Drag of a Slumping U.S.” Since that time there has been a torrent of media analysis of Canada’s housing bubble from both within this country and from U.S. media. There has been a surprising and candid response by the Chief Economists of TD Canada Trust and the CIBC, two of Canada’s large banks. Who knew that Rick’s site was that influential? There is clearly a keen interest in the U.S. about the state of the Canadian economy, and until now few have questioned how we Canadians have achieved so much, so fast and turned in such an impressive economic performance, particularly as it occurred during a major global downturn. These additional remarks will hopefully shed some light on those questions and, while written for a Canadian audience, will likely resonate with our Southern neighbors who have already seen this story play out in their own backyard. Within days of the publication of my letter to Bob Tor, a Rick’s Pick’s contributor, U.S. bondholders of Canadian bank debt began demanding a risk premium as it became clear that a housing bubble was indeed forming in this country. The big four Banks here in Canada have now responded by twice raising mortgage lending rates over the past three weeks in order to cool the real estate market. The Governor of the Bank of

We raised the possibility here yesterday that Goldman’s legal woes would drag on for years, ultimately threatening the uber-bank’s very survival. It’s not hard to imagine that all who have invested in Goldman deals that went sour will smell blood and join in the attack. It’s just the excuse many city and county treasurers will be looking for as their own financial problems multiply.  For its part, Goldman has offered a pretty feeble defense. For instance, the firm’s CEO, Lloyd Blankfein, is claiming that Goldman can hardly be guilty of fraud if the firm itself lost $90 million investing in the toxic mortgage portfolio assembled by John Paulson. Blankfein would like us to believe that the portfolio was a two-way bet, even though Paulson had designed it specifically to fail so that he could make leveraged bets against it. However, there were reports that Goldman did not take a $90 million stake because it liked the investment, but because the firm was unable to unload the last piece of it on outside investors. Will anyone be shocked when it’s discovered that the $90 million was hedged five-to-one by an offsetting “don’t pass” bet similar to Paulson’s? We’re no fans of Goldman Sachs & Co., but the excuses it has trotted out to help with damage control have been so pathetic that it makes us cringe. To the beleaguered Mr. Blankfein, we offer some fresh excuses, courtesy of a post in the Rick’s Picks forum by “TKO,” who wrote as follows: “I can envision the hordes of recently excessed corporate lawyers, out of work immigration counselors, class action jurists—ambulance chasers of every stripe and persuasion lining up for the carrion. However, Goldman has plenty of defenses. There’s the Salesman’s Defense: caveat emptor -- they were offering this crap to ‘investment professionals’

Now we learn that the SEC split 3-2 over whether to go after Goldman Sachs in court. Supposedly, the regulatory agency prefers unanimous votes when bringing enforcement actions against the firms it regulates. Why the exception this time?  The Wall Street Journal made it sound like it was simply partisan politics that carried the day – i.e., the SEC’s two Republicans voted against suing Goldman for civil fraud, but the three Democrats prevailed. That is superficially what happened, and it is as much of the story as the SEC is willing to divulge right now. But it’s bound to leave many observers, particularly Obama-ites in Congress who are out to pillory the bankers, with the impression that the two Republicans were merely looking out for their fat-cat buddies on Wall Street. This thought occurred to us as well, so we’d have to concede it is at least possible. But might there have been another reason why the Republicans backed away from bringing formal charges against Goldman?  We think there is and that it goes to the heart of the corruption in which the world’s largest banks have inextricably trapped themselves. For if you assert in a of court law that Goldman defrauded its customers, you have implicated every bank in the big leagues. Enabled by their respective central banks to create loans from thin air, every one of them – even banks run by otherwise spotless Swiss Burghers -- have played the same Ponzi game as Goldman.  Now, regardless of whether the charges brought against Goldman are civil or criminal, they will open the door to an endless flood of litigation with the potential to bring down the entire banking system.  From this point forward, Goldman will be fair game for every aggrieved city, county, state, sovereign fund and class