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5 "Tells" that the Stock Markets Are About to Reverse

Wise Bears Sell US Municipal Bonds And US Treasury Bonds

Interest-Rates / Financial Crash Jan 25, 2008 - 09:00 PM GMT

By: Richard_Gorton

Interest-Rates Best Financial Markets Analysis ArticleI. Today saw a rally came from the Federal Reserve cutting the central bank interest by 0.75%.
My investment motto is: "In a bull market be a bull, and in a bear market be a bear: in a bull market, one buy on dips, and in a bear market, one sells pops and rallies". Special thanks to Stockcharts.com for the free us.eage of charts provided herein; all comments are mine, not theirs, or those of any one else.

I recommend that one buy gold as it is in a bull market going 'sooner or later much, much higher'.


And I recommend that one identify and short sell the worst investment one can find; or, in similar logic, be invested long in the best bear financial instrument one can find.

The basis of today's rally was the action of international traders using the Euro to take Gold higher in response to the Fed's announcement of a whopping 0.75 interest rate cut. It's as Kitco.com's Jon Nadler says: " it was the kindest cut of all (thus far) ".

GLD

The Russell 2000 shares did not participate in today's rally because they do not have a positive alpha foreign currency component, nor do they have have a basic materials dimension; the Russell 2000 stocks are for the most part, US small companies whose fate is highly credit, financial and US currency centric; the related charts date from the October 8th, Citicorp CDO Bust

IWM

IYG

$USD

FXY

FXE

Here is the Yahoo Finance Chart of the Gold/Russell 2000 divergence since the bottom of the first subprime scare back in August 2007.

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II. Bears Sell Rallies : most bears perceive traditional sells.
The FXE to FXY ratio ( FXE:FXY ) popped up in response to the international effort to drive gold higher drive; but this isn't going to last for long!

One could open a currency account and start to sell 'EUR JPY' , as today's jump is only temporary: it's going to be 'forever down', except for a few bumps-up like today; the 5 day Yahoo Finance Chart shows the effect of the Euro being used to drive gold up and over 900, as well as short sell covering.

Here is a chart from ActionForex.com sugggesting that the EUR/JPY is headed lower.

Or even more easily, one could purchase long -- buy EEV at opening tomorrow; as the EUR/JPY action of today really backed this one down; I've covered EEV quite a bit in my blog; and given that I believe the Yen Carry Trades are going be unwound by future EUR/JPY down-ness, one may want to purchase this 200% bear of the emerging markets upon opening; the only bad thing about for me is that it is a dollar denominated asset, and I favor gold denominated assets; so one could I suppose use margin credit from a gold ETF, GLD based account to purchase it; but it's like the chart indicates volatile.

The stock market's rally is seen in VTI ; yet it is a weak rally; it's just a pop in a terrifically bearish stock market; this is likely to be as good as the "the rally" is going to get; one could sell into it immediately; yet the short selling opportunity of a lifetime is found in short selling municipal bonds, closed end municipal bond funds, and the 20 to 30 Year US Treasury ETF, TLT.

Stocks to consider selling include AA, AKAM, BG, BIDU, CME, ESI, GS, JOE, JNS, JST, LSI, LYG, POT, RVI, TTWO; the top three are



ETFs to consider selling include: CH, DEW, ECH, EES, EMG, EWP, EZM, EWZ, FEU, IYG, KBE, ROM, XME; the top three are:



The currency to sell is FXE.

Jody Shenn reported on January 22, 2007 in Bloomberg: Fannie Mae, Freddie May Face $16 Billion Losses, Credit Suisse Says ; and I have to ask: do you think any self respecting and hungry bear is going to let these two get away; you know I don't want to hear any more 'boo hoos' about the one than got away .


The gold stock to gold ratio (GDX GLD) shows that gold stocks rose today; but are in the process of detaching from the price of gold; there is coming soon, a time when they are really going to break loose from gold, greatly rewarding those who are short, as the gold stock's price to earnings ratio is quite high.

Therefore for the Gold ETF, GLD, based investor, I recommend that one start to 'dollar cost average' sells; just a limited few of American Barrick and also, the silver exploration stock SSRI; the company doesn't make any money -- all it does is explore; nothing in production; and it commands a terrifically high price; just a few years ago it was selling at $3 to $4; not the $30 to $40 of today; it's been the gold bugs and speculators darling.


The lollipop hanging man candlestick in the day trader's 200% gold stock ETF HGU.TO, indicates that the days of 'buy and hold' profitable gold stock investing are over.

The best managed and highly touted precious metal mining stock fund USERX shows as having gone bearish engulfing.

The other dynamic that is operating against the gold stocks, is that futures gold stocks, and futures U.S. Treasuries, usually make market turns lower together; and now both have turned lower: it's likely we have arrived at another turn lower in the gold stocks -- a final and decisive turn lower.

The futures market traders are abandoning the U.S Treasury Bond. The Futures market is extinguishing wealth; or perhaps is lacking wealth, or shorting wealth, depending upon one's point of view. The futures market place's exit from US Government bonds today is "the nail in the coffin for the HUI indexed precious metal shares".
$USB Daily

$USB Weekly

$HUI:$USB Daily

$HUI:$USB Weekly

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III. It's Gone Beyond A Primary Bear Market : It's a "bearsome bear market".
I say: "It's a gona continue bearishly on, no matter what Stimulus Deal is provided". Andrew Taylor of the Associated Press reports that under the agreement announced by the White House, Boehner and Pelosi, individual taxpayers would get up to $600 in rebates, working couples $1,200 and those with children an additional $300 per child; and in a key concession to Democrats, 35 million families who make at least $3,000 but don't pay taxes would get $300 rebates.

Patrick Martin reports that The Stimulus is tax abatement: $150 billion, divided between $100 billion in tax rebates for individuals and $50 billion in tax incentives for business. There will be no new government assistance, nor will there be any extension of benefits such as unemployment compensation or heating assistance. Ms. Pelosi makes it clear: "First and foremost, the stimulus package will put money in the hands of hardworking Americans. This is a middle-class initiative to strengthen the middle class and to those who aspire to be in the middle class". In other words, the disabled and the unemployed, will not be receiving Stimulus, and be not be of Stimlating effect.

The Dow Theory chart experts, Doug Noland and Richard Russell, have related its 'a primary bear market'; the Dow Theory charts show 'The 0.75% Rally' has achieved retracement.
IYT


XLI


Trader Tim Knight in his article Bouncing Blog provides this chart of the Nasdaq 100 QQQQ suggesting that retracement for the rally is done or near done.

For historical record, here is today's Stockcharts.com summary of 'The 0.75% Rally'.

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IV. Tremendous divergences and rifts exist : some will be filled; others expanded.
The retail to industrial divergence

The US small company to industrial divergence

The Germanic halve to the Latin halve of European wealth and power divergence : Italy will quickly win the race to the bottom of investment race in Europe.

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V. The 'age of the fiat wealth extinguishment' will see increasing interpersonal and political strife as well as war .
Italy's Prodi threw in the political towel today; photo that of AP Alessandra Tarantino.

Regional agreements, such as the Security and Prosperity Partnership of North America, the SPP , will provide principles of global governance for continents and regions.

The SPP will provide for unified state-corporate governance of the peoples and resources of the North American Continent. Presented below is a photo from the Baylor University web site showing Condoleezza Rice And George Bush as they were greeted by Baylor University's Robert B. Sloan Jr. and members of his staff immediately prior to the announcement of the Security and Prosperity Partnership, the SPP, on March 23, 2005. Mr. Sloan said: "It is an honor for Baylor University to host the leaders of the United States, Canada and Mexico," and he continued: "Here at Baylor, we want to teach our students to serve. Baylor today had the opportunity to serve on behalf of our country and the world, and it is a tremendous privilege for Baylor to host this trilateral meeting."

The Security And Prosperity Partnership will mature, and provide state corporate rule to deal with systemic risks -- systemic failures such as debt guarantor insolvencies, and outbreak of pandemic disease, such as avian influenza as mentioned in the Leader's Joint Statement of March, 31, 2006 in Cancun, Mexico.

Regional responses will emerge, such as that envisioned by Stephen Harper, who spoke at the Economic Club of New York. He called for a ' continental response ' to counter the threat of distant, yet nevertheless, strong economic threats as was commented upon by Keith Jones or World Socialist Web Site.

Regional monetary integration , as envisioned by the think tank, Council on Foreign Relations, will emerge, as proposed by white paper authors: Peter B. Kenen, Adjunct Senior Fellow for International Economics and Ellen Meade, Associate Professor, American University.

Andrew G. Marshall writing in a GlobalResearch.ca article sees North-American monetary integration
specifically the Amero coming .

Frameworks -- Leader's Agreements, not treaties, will define and specify working relationships between nations and peoples. For example, Ken Fireman of Bloomberg reports that the U.S. will ask the Iraqi government for the right to conduct combat operations and detain prisoners and secure legal protections for American troops: an un-named U.S. Defense department official, who spoke on condition of anonymity, said the Framework's provisions will top the list of U.S. demands in talks with Iraqi officials for an accord which will extend beyond the presidency of George W. Bush. U.S. officials say that these demands -- reported by the New York Times yesterday on its Web site -- flow logically from the fact that Iraq is still a combat zone, the defense official said. If U.S. forces operating there didn't have the legal authority to engage in combat and detain prisoners when necessary, there would be little point in their being in Iraq, the official said. Defense Secretary Robert Gates said yesterday he expected that the agreement (the Framework) wouldn't authorize permanent U.S. bases in Iraq or attempt to set force levels for American troops. "The way to think about the framework agreement is an approach to normalizing the relationship between the United States and Iraq", Gates said at a Pentagon news conference. Gates also said the process of negotiating the agreement was in a preliminary phase and that U.S. officials had only just begun to discuss it among themselves.

The so-called framework agreement would replace the current legal authorization for U.S. forces in Iraq, which is a United Nations Security Council resolution that expires later this year. U.S. and Iraqi leaders jointly declared on Nov. 26, 2007 their intention to conclude a permanent agreement, and set forth broad principles for its provisions. Among those is a U.S. commitment to protect Iraq from external and internal threats to its security. Some Democratic lawmakers and presidential candidates have objected that such an agreement may burden the next U.S. leader with unwanted commitments. They have demanded that any agreement be submitted to Congress for approval. "Where have we ever entered an agreement to defend a foreign country from external and internal attack that was not a treaty", requiring congressional approval, said Representative William Delahunt, a Massachusetts Democrat, at a House Foreign Affairs subcommittee hearing yesterday on the issue. "This could very well implicate our military forces in a full-blown civil war in Iraq", said Delahunt. "If a commitment of this magnitude does not rise to the level of treaty, then it is difficult to imagine what could". Gates said that while there was "a strong commitment inside the administration to consult very closely with the Congress" on the agreement, "without any idea of what the form of an agreement is going to be right now, I think it's premature to talk about congressional agreement or executive agreement".

At the hearing, Ken Katzman, an analyst for the Congressional Research Service, said some U.S. demands for the agreement may meet Iraqi resistance. In particular, he said some Iraqi observers have said the Iraqis may seek limits on the U.S. ability to conduct air strikes and on the types of American aircraft that could be stationed in Iraq. U.S. officials would probably resist such demands, he said.
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VI. Wise Bears Sell Municipal Bonds And US Treasuries as the greatest bear market is yet to unfold.

Like Alf Field writing in Kitco.com, Into The Abyss , I believe that gold will rise in value, eventually significantly higher, while fiat assets of stocks and bonds decline in value.

The 'up and coming bear market is in Government Bonds'; and the US is at the epicenter of that bear market; those who recognize this bear market, and sell into it at its infancy will be rewarded beyond belief.

At the first of the year, I suggested that one short sell a number of ETFs, a list and their performance can be found here .

The financial rewards that are coming to those who short sell the municipal bonds, closed end municipal bond funds, as well as the long out U.S. Government Treasury Bond ETF, TLT , is most definitely beyond what can be expected from stocks, like the ones I have been suggesting one short sell.

Short selling municipal bonds, and closed end municipal bond funds represents low risk and great reward: It's always best to short at a market top like the one in closed end municipal bond funds -- the last thing a short seller wants is a short sell coming back up on oneself: the likelihood of VGM, and its peers going higher is about nill. When one gives thought to the downward potential of municipal bonds, that has come with the downgrade by Fitch of AMBAC on Friday January 18, 2007 as reported by Stephen Bernard and Leslie Wines of the Associated Press, one can see the reward is great.

That announcement is the 'nail in the coffin' for the eventual default of debt guarantors AMBAC and MBIA.

Government bonds have traditionally, and especially over the last seven months, been a 'lifeboat of safety', from the sinking ships of stocks and real estate.

But inflation as well as the yield curve are seen rising; these are terrifically destructive to municipal bonds; the traditional lifeboats of financial safety have sprung leaks and are about to be capsized.


I recommend that one buy the gold ETF, GLD, and use margin credit to sell the municipal bond ETFs, and the closed end municipal bond fund VGM, and its peers EIM, BKK, CXE and PZC; and that one start to gradually 'dollar cost average' in sells of the 20 to 30 year US Treasury ETF, TLT .

Here are the charts for the closed end municipal bond funds VGM, EIM, BKK, CXE and PZC;
and their comparative performance is found by clicking here .





One needs to be careful with shorting, when one has margin credit based upon gold, as gold is a commodity, and is subject to drops down as well as great moves up like today; gold could easily fall to $840 and even $820 before going onward and upward.

World wealth is in the process of being extinguished; there are a number of extinguishers at work. The primary extinguishers are the steepening yield curve, surging inflation, bursting of the real estate bubble, deflating CDOs, diminishing corporate earnings, failure of municipal guarantors AMBAC and MBIA, a spent out and indebted consumer, decreased demand for durable goods, lessened demand for new housing, shrinking bank loan activity, less business credit generated, and helicopter drops of money by the Federal Reserve Chief onto and into the banks to preserve their solvency, and which now only serves to deflate stocks, raise the Yen and the Euro, deflate the US dollar, and inflate gold.

Currencies in addition to stocks and bonds are being extinguished as well: for example the EUR/JPY is going to take the Euro, FXE, and the Yen, FXY, into a mutually embracing downward death spiral together.

Yet gold will endure; and will be part of the basis of currencies used by the soon coming regional alliances and governments.

For those with investment wealth, I recommend that one start now to 'dollar cost average' buys of gold at BullionVault.com or other Internet tradable vaults outside of the U.S.

Gold, GLD , and a limited amount of reasonable, and wise short selling, is now the sole and sustainable means of garnering and preserving wealth.

Here's the clear, cogent and convincing evidence for short selling the municipal bonds, the closed end municipal bond funds and the 20 to 30 year ETF TLT. I suggest that every one take a look at, and download the candlestick action in the US Government Bond ETFs SHY, IEF, and TLT before opening; and then print them out; and hand them out, and post them on their dart board; because they are of awesome historical note; you know, the kind of thing one looks back at years from now and says: "I sure am glad I shorted VGM and TLT , they were the short selling opportunity of a lifetime".





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