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January 2, 2011
Issue 129  - Predictions
 
 
 
 
It's time once again for my yearly look ahead.  First a look at last year's predictions. 
 
Wrong Predictions
Stock Market, Dollar, Economy
 
Correct Predictions
 
Job Market, interest rates, housing, gold and silver, food, government corruption
 
6 out of 9 isn't so bad.  Hey, my crystal ball was in the shop.  The most important of the predictions was gold and silver up and they were, in a big way.  Gold Resources also had a huge year up over 160%.  Yeah, I'll "settle" for that again this year.
 
 
 
Let's see what the 'ole coffee grounds say for next year....
 
Economy
 
I see the economy having a pretty good first half of the year and then the trouble should begin again.  Our mounting debt should come more into play and weigh on things.  This will mean a slog through year with not much overall growth.  The GDP numbers should be good in the first 6 months because of all the QE and congressional pork being spent.  Here are the factors summarized beautifully by Brian Pretti at www.contraryinvestor.com:
 

From late August until mid December, we know that additional money printed by the Fed totals approximately $200 billion (POMO + QE).  We can expect another roughly $500 billion in new Fed sponsored money creation over the next six months.  As you know, since late summer the stock market has been in a virtually uninterrupted rise, gaining close to 20% since the Fed restarted its money printing exercises and making up all of the price ground lost since the Fed first stopped printing money in April of last year.

Additionally, the Administration, Congress and the Senate formally blessed the extensions of the Bush tax cuts in late December.  Inside the final bill were over 2,000 spending “earmarks” that on a net basis add roughly $350 billion in new stimulus funds (that will be borrowed).  The $350 billion in new spending is equivalent to a little over 2% of existing US GDP.  So looking at new government spending and Fed money printing collectively, we’re talking about another close $1 trillion in additional funds heading toward the US economy and financial system directly in front of us.  Additionally, we have some odds and ends funding coming in 2011 from the original 2009 stimulus package.  Without question this will have a discernable and positive impact on reported US GDP, just as did the first stimulus package and quantitative easing program.  As such, over the next six months at least, look for healthy corporate profit reports, real GDP growth in the 3%+ range, and a very modest pickup in employment as well as capital spending by corporations.  All short term positives.  Expect it because it’s coming.
 
Prediction for the Economy:  Good in the first half of the year and then fading.
 
Job Market
 
Everything in the markets is driven my appearances and perceptions.  These don't necessarily match reality.  As the government spin meisters warp things, they are often not the same thing.  You may have seen that unemployment claims dropped below 400,000 for the first time since 2008.  Was that a good thing?  (from GATA) 

Was The Jobless Claims Number Good? Don't Get Too Excited...

Of course, the seasonally adjusted headline number over which every talking moron in the financial media is doing an end zone dance over looks great.  But here's the golden truth, direct from the Dept of Labor press release:  The advance number of actual initial claims under state programs, unadjusted, totaled 521,834 in the week ending Dec. 25, an increase of 24,879 from the previous week.

So there you have it.  Just more Government and financial media Orwellian/Randian garbage.  The fact of the matter is that our economy is starting to fall of a cliff again.
 
 
So the claims went up, but the headline number is shown being down?   This is what I'm talking about.  Everything is perception.  Change things around a little and terrible looks good.  Employment will get a little better this year, but not much.  This will be caused by all the new money creation.  Expect unemployment to stay close to where it is.
 
Interest Rates
 
Interest rates have moved up rapidly in the last two months.  This is probably due to the massive printing of money.  Interest rates have recently pulled back just a tad.  Wonder why....
 
$29 Billion 7 Year Auction Closes At 2.83%, Indirects Take Down Massive 64.2%

Submitted by Tyler Durden 12/29/2010 13:08 -0500

Today's $29 billion 7 year auction closed at 2.83%, 2.86 Bid To Cover. Unlike yesterday's 5 Year, the WI action is inverted, with the yield dropping immediately following the bond issuance to under 2.79%. What is stunning is that the Indirect Bidders took down 64.2% of the auction, which while we don't have the historical record currently, i likely on the highest in recent history. The massive indirect participation meant Primary Dealers were left with just 31.2% of the take down. In other words, as we have been claiming for about 3 months now, the volatility from stocks, which are now an inert "asset" class melting up regardless of newsflow, fundamentals, or technicals, has moved entirely to bonds and currencies. Since nobody is left trading stocks, the daytraders are increasingly forced to trade vol in such traditionally stable products as govvies. At this rate of central planning, we expect the VIX to plunge to single digits soon, as the MOVE index explodes sooner or later.

 
It is widely thought that the indirect treasury purchases are by the Fed.  This would explain why the bonds were bought by indirects as the Fed couldn't buy directly without setting off a large problem.  As long as the Fed has the wherewithal to buy things, I expect the markets to cooperate.  Of course this will end.  In fact, I believe that the Fed may have shifted their strategy on interest rates to their gold strategy, controlled ascent.  Just let interest rates rise slowly.  They have also done this with gas prices.  Prediction, interest rates higher. 
 
Stock market
 
 
 
This chart shows the average performance of the market in the 2nd and 3rd years of presidential cycles.  2011 is the 3rd year.  As you can see, this is usually a great year.  In fact, it is by FAR the best performing year of the 4.  The theory is that the first two years of a term is where the "hard" work is done, ie. budget cuts, etc...., then the 3rd year is the start of preparations to get reelected.  How do you do that?  Spend.......spend....spend.  The 4th year is usually a gridlock year as the election battles ensue. 
 
I'm going to bet that we have more spending this year.  I'm also betting on QE3.  This will positively affect the market.  I just switched into the stock market in my 401k.  1/3 small cap, 1/3 large cap, and 1/3 international.  I believe we have a pretty high probability of a crash in the second half of the year so I'll be looking to move out with any signs of problems.  Why do I think a crash is coming?

TrimTabs: “No Amount Of QE Will Be Able To Keep The Current Stock Market Bubble From Bursting"

Tyler Durden
Zero Hedge
Jan 2, 2011

It was the night before Christmas Eve, and CNBC trucked out TrimTabs’ Charles Biderman to a de minimis audience, knowing full well that a man with his understanding of money flows would very likely repeat his statement from last year, that there is no real, valid explanation for the inexorable move in stocks higher, as equity money flows in 2010 were decidedly negative, and any explanation of the upward melt up would need to account for Fed intervention (and no-volume HFT offer-lifting feedback loops but that is a story for another day). A year after the first scandalous report was published, TrimTabs is sticking with its story: “If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else.  We believe that place is the Fed. By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.” And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: “…stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support.  Then even more QE will be needed, and stock prices could keep rising for a while.  In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.” Ergo our call earlier that Bernanke has at best +/- 150 days to assuage the market’s fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don’t need no stinking QE…). Therefore the best Bernanke can hope for is to buy some additional time. At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demand someone finally bring Paul Volcker out of the fridge.

 
Trim Tabs is an investment research firm and they keep close watch on the market and what is driving the movement.  They have concluded that the market is running on money printing.  Once that ends, and probably even before, look out below.  The private investor has withdrawn money from the market for many months in a row.  The market is totally run by the high frequency trader robots and the Fed.  I think after about 6 months, the trouble starts.  Prediction....stock market up for the first 6 months of 2011.
 
 
Housing
 
 
The house shown above is in Poland.  It kind of reminds of the housing market in the U.S.  Kind of crooked, kind of manipulated, and not what it would appear.  Housing prices have come up somewhat in certain areas but that isn't the real story.  The real story is the shadow inventory.  These are housing units owned by the banks and not placed on the market.  Currently there are 2.1 MILLION of these.  I believe these are being released in a controlled method to help the market stay somewhat flat.  If all of these units were placed on the market, the prices would collapse.  This should continue for at least 3 more years.  What does that mean?  Flat (+/- 5%) housing prices in 2011.    
 
Dollar
 
 
The dollar went up this past year, one of my wrong predictions.  Not very much, but it did go up.  This year may be different.  The reason the dollar rose was the problems in Europe.  The dollar was seen as "less bad".  The thing to remember is every currency is now paper.  Nothing backs any of these currencies.  They are only worth what everyone AGREES they are worth.  The day people figure this out, is a day you don't want to own too many dollars.  It will be ugly.  I don't think the dollar will collapse this year but my prediction is ....dollar down.
 
 
 Government Intrusion 
 
Our government seems to be on a one way road to total control of our lives.  There is the mandated healthcare where we now have businesses refraining from growing just to keep under the 50 person healthcare cap.  If you have 50 or more employees, then you MUST follow all the rules of the new healthcare laws.  This is having the unintended consequence of slowing growth.  (Wow, who would've thought government programs could have unintended consequences)  Then we have the TSA assaults at airports on toddlers.  These infringements grow daily.
 
Did you know that Massachusetts REQUIRES that day cares brush children's teeth after lunch?  The state even supplies the toothpaste.
 
 
In Louisiana, they require monks become licensed as funeral parlor operators just to sell their hand crafted coffins.  This is beyond ludicrous and stifles growth and makes us far less competitive in the world.  I'll make an easy prediction that intrusions are up in 2011.  Here's a video with more examples:
 
 
 
 
 
Energy
 
First a chart:
 
 
This chart is the price of oil versus production.  Notice the production has been pretty stable since 2004.  That is strange when you look at the world population which went up about 8% since 2004.  Also, world GDP is up from about $51 trillion to $62 trillion, which is over 20% up.  Yet, oil production is flat?  I believe this is because the peak oil argument is correct.  That doesn't mean we will run out of oil.  Just that oil production is very unlikely to rise significantly.  If oil production didn't rise with 8% more people and 20% more output, I don't think it can.  The price of oil has been going up recently and the chart above gives me no reason to thing that will change.  Prediction, oil up in 2011.
 
Gold and Silver
 
 
 
As long as I see ads and stores offering cash (you know, worthless cash) for gold, I will continue to hold mine.  Gold has been up 10 straight years!   And the best part?  Hardly anyone has bought any!  How many people do you know that have gold?  Yes, this is tremendous bull market and what kind of articles do you see?
 
Bloomberg:  The Dark Side of the Gold Boom
 
This was a week long series!  Better stay away, huh?  Let's hope people stay away awhile longer so we can buy more cheaply.  There is NO WAY gold is in a bubble with this type of coverage. 
 
Then we have silver which I believe could have an incredible breakout year.  There is a reason....silver is in less supply then gold:
 
 
I predict that sometime in the next few years that silver will make anyone holding a decent portion of it in their personal POSSESSION, very wealthy.  Gold will continue to rise but silver is going to be a moon shot.
GORO
 
 
That is one beautiful chart!  Congratulations to all GORO holders, it was a great year.  GORO just announced their 6th dividend of 3 cents bringing their 2010 total to 18 cents.  There are so many possible catalysts this year that I feel another up year is on the way.  While I don't think we'll beat the 160% from 2010, we may come close.  As the price rises, the possible future returns go down, but I don't believe we are priced for what is going to happen this year, including:
 
coverage by Jeffries,
43-101 report
drill results
underground ore being processed
rise in dividend
extention of the two veins
new discoveries
 
I expect this to be a great year for GORO.
 
Mexus US GoldMexus Gold also had a great year although it finished far below it's high.  This year they should start mining in Mexico and start the official pulling of cable from the waters of Alaska.  They have basically done what they said they were going to do, when they planned with a little lag.  I believe this is an honestly run business that has a decent chance of really taking off.  They just released some new pictures at their site.  Look at the cable salvage tab and you'll see more pictures of the trial cable pulling run including a shot of the owner with a pile of 7 foot pieces on deck. I predict that Mexus will be at least 50% higher come January 2012.  
 
 
The bottom line is 2011 should be another up year for silver, gold and their stocks.  Make sure you have some.  I close this week with a video  of one guy playing both parts of a Vivaldi duet with a violin and cello.  He taped one and then filmed the second.  Have a great week!