New Trading Rule, Banks Buying Gold, Market Forecasts, SEC Targets Shorts and More!

by Addison Wiggin & Ian Mathias

  • New year, new paradigm… one commodity’s emerging trend for 2009
  • Chris Mayer follows an interesting trend among worldly central banks
  • SEC mulls new short selling rules… Dan Amoss on how it could affect your trading
  • Stocks sag for second day… Soros, Parenteau say bear market rally nearing conclusion
  • GM is definitely screwed… unveils partnership with Segway, designs scooter for two
  • “You’ve made it,” a reader declares… his photographic proof of our success, below


  Crude oil traded down this morning along with stocks… thus, a new trend emerges in 2009:

In 2008, the oil trade was all about the demise of the dollar and the threat of global energy scarcity. Whether that was a legit trade or not (we think it was and will be again soon), you can’t deny crude left stocks in the dust for most of last year.

This year, oil is no longer following the ’08 paradigm. Crude has become a “reflation” trade; anytime the world seems less doomed, up ticks the price of black goo… right alongside the Dow. Expect the trend to continue until further notice.

A barrel of crude goes for $49 today.

  Eurostat this morning announced the European economy contracted 1.6% in the last quarter of 2008 — its most sluggish effort since 1995, when records began. Major indexes in Europe are headed for a 1% decline for the day.

  Australian and Japanese central banks announced their respective rate policy adjustments this morning. Japan kept is main lending rate at an impressively low 0.1%. If you’ve been wondering if stimulus spending and low, low interest can reflate an economy hellbent on rescuing its banking system… look no further than Nippon.

Australia bumped its rate down to 3%.

  “Many central banks are boosting their gold holdings,” adds Chris Mayer. “The Russians are no fools. They’ve nearly doubled their exposure to gold since the end of 2008. Russia’s gold holdings now make up 4% of its foreign reserves, compared with only 2.2% at the beginning of the year.

“Smaller central banks are also being crafty. Ecuador’s gold holdings have more than doubled since the start of the year — to 54.7 tons, from only 26.3 tons. Gold now represents 32% of that country’s reserves. Even Venezuela is buying gold. Gold now makes up 36% of its reserves, compared with only 23% in 2009.

“Perhaps central bankers see more clearly than most what the effect of all their money creation will be. In recent months, we’ve seen a truly unprecedented boom in bank reserves. Bank reserves drive money creation.

“More money means money buys less — and the gold price should rise.”

  Gold’s spot price found support yesterday morning around $865. It’s managed to keep sellers at bay since, and goes for $880 an ounce as we write.

  The U.S. Defense Secretary Robert Gates unveiled a $534 billion annual budget for the Pentagon yesterday. The media is abuzz with all the programs Gates’ cut from the 2010 fiscal year… from experimental Navy warships to a new presidential helicopter to unmanned combat tech.

Call us crazy, but we can’t help but notice the latest budget for the Pentagon is 4% higher than the 2009 allocation. There’s that whole credit crisis going on, you know, worst fiasco since the Great Depression… maybe time to scale back our never-ending mission to police the world? Oh excuse us, “spread democracy.”

“Every defense dollar,” said Gates, “spent to overensure against a remote or diminishing risk — or in effect to run up the score in a capability where the United States is already dominant — is a dollar not available to take care of our people.”

Amen, Mr. Secretary… so what’s with the half-a-trillion-dollar tab?

  The SEC is currently mulling new rules each designed to make short selling harder. Here’s the gist of the three made public:

  • The infamous uptick rule… regulators are considering reinstating a rule that requires a stock to be bid up before a short seller can sell the stock down
  • Two of the proposed new rules would build what the SEC calls “circuit breakers.” Essentially, short selling could be halted on any stock that falls a certain percentage in a certain amount of time. Or as one proposal suggests, after falling a certain amount, a stock would have to pass a bid test — meaning someone would have to buy a large portion of shares — before short sellers could continue their evil “bear raids.”

“The SEC is making progress on efforts that should maintain the reputation of honest short selling,” writes our resident short side analyst, Dan Amoss. “Hopefully, it will dispel the myths and conspiracy theories about short selling — myths promoted by people like Dick Fuld, former CEO of Lehman Bros. Fuld was busy attacking short sellers while he was overstating the value of the toxic assets on Lehman’s balance sheet by hundreds of billions of dollars. ‘Naked short selling’ and ‘bear raids’ are the most popular excuses for executive incompetence.

“The uptick rule will probably be reinstated, and that’s not necessarily a bad thing for short sellers. The uptick rule will probably increase transaction costs, but most short sellers have never relied on rapid-fire selling as part of their trading strategy; most are patient and wait for their short thesis to play out over months and years.”

Dan’s Strategic Short Report readers had a payday of a lifetime when they shorted Lehman Brothers in 2008. When the dust settled, SSR readers pocketed 462% gains on the play… in just 4 months. Dan’s analysis is as sharp as ever this year, already brining in gains of 344% and 63%  over the past 6 months. If you’d like his advice, definitely check out Strategic Short Report.

  Stock investors took profits yesterday (or was it those damn short sellers!?!). Early yesterday, rock star analyst Mike Mayo issued “sell” ratings that helped take the Dow down almost 150 points. But irrational optimism refused to die and stocks ended the day with small losses… major indexes fell less than 1%.

“Our own sense,” writes Rob Parenteau, “is that we are coming to the end of the ‘less bad is good’ rally in equities and investors will next need to see policy fixes show swift and favorable results. The reality of punk Q1 earnings announcements, plus the feedback effects of an alarming increase in the unemployment rate (which could easily be north of 9% before midyear) on credit defaults and the housing market, are both likely to sink in during the weeks ahead.

“The global economy is in the midst of a deep restructuring, and confusing the end of a free fall phase, with an actual economic recovery likely to prove an expensive mistake for investors chasing the recent equity rally.”

We agree with Rob. And that string of “punk Q1 earnings” he mentioned unofficially begins after the closing bell today, when Alcoa drops its latest numbers. We’ll keep an eye on the numbers from the metals giant — and the wave of big-cap earnings that will follow over the next few weeks. Stay tuned.

  “It’s a bear market rally,” George Soros told Bloomberg today. Leave it to the odd Hungarian billionaire to state the obvious: “It’s a bear market rally because we have not yet turned the economy around… This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

So where is Soros — one of the world’s most successful investors — putting his billions? “I think Brazil actually,” says the thickly bespectacled one, “together with China, will be among the recovering countries. The outlook for Brazil is better than for most other countries.”

  Stocks opened down this morning. Traders are still jittery from yesterday’s sell-off, and the prospect of the coming earnings season is dark, at best. The Dow opened down about 140 points.

  The dollar is perking up as stocks fall. The dollar index gained a full point yesterday and is up another half a point this morning. It scores 85.2 as we write.

  So is this how people will wait out the “worst downturn since the Great Depression”?

72,744 people packed into Houston’s Reliant Stadium over the weekend to witness this year’s WrestleMania. That headcount brought in almost $7 million in revenue for the World Wrestling Entertainment Inc., its highest-grossing live event of all time. Attendance at the four-hour spectacle was the third highest in the stadium’s history, ousting even the 2004 Super Bowl.

In case you were wondering, the highest head count ever at the Texas stadium was a livestock and rodeo last month. No. 2 was a concert by Hannah Montana.

And here’s how GM is planning to get out of the worst crisis in its history:

Like a rickshaw, but expensive…

Behold the PUMA, the fruit of a partnership announced today between GM and Segway. The two-wheeled wonder will be available by 2012. Future buyers can look forward to top speeds around 35 mph and a maximum range of 35 miles on a single change, perfect for those confined to high-traffic areas… so long as it’s not raining… or cold… or really hot… or icy… and you don’t have to carry anything.

And talk about sex appeal!

We’re told the above is just a prototype and the final model will be notably different… hope there is plenty of space left on the drawing board.

  “Tell me you’re kidding,” a reader writes responding to our worry over the future of state pensions.

“Do you honestly believe the feds are going to let public workers’ pension programs (or Social Security) go under? If it even looks likely, they’ll grab your private funds, and in the interest of ‘fairness’ use the money to shore them up. An idea, I might add, suggested in an Op-Ed article in the WSJ by Joe Califano, head of the old HHS, back under Jimmy Carter (who these days looks good).”

The 5: Uh, no. We expected the depletion in pension funds to begin. But as you are, we’re sure the Feds will do anything they can to keep their promises flowing.

  “I am compelled to write and endorse home schooling,” writes another, agreeing with a slightly less rational plea from yesterday. 


“I have a bachelor’s in computer science, and got a ‘quick’ master’s in teaching 10 years later, thinking I’d go into public schools and change the world. I taught computers at private schools for 10 years before burning out. Currently, I substitute teach once in a while at a local high school.

“The amount of time wasted in a day on things other than education is mind-boggling. Condense the day to education only, and maybe two hours are spent learning. Depending on the teacher for whom I am substituting, I sometimes ask the students how they would change school if they could. It confuses them greatly. With all the on-demand videos and resources on the Internet, there’s no excuse for a parent to be afraid of home schooling. The all-important ‘socialization’ comes from other home-schooled children, sports, dance, etc.”

  “Congratulations, you have made it!” our last reader writes. He was nice enough to include this photo as proof:


“There are pirate copies of your movie I.O.U.S.A. on sale here in Thailand (for US$3). Actually, it’s an honor to be pirated, because usually they make copies only of normal, mainstream movies. There are hardly any documentaries, foreign movies, etc. But I did see Fahrenheit 9/11 and An Inconvenient Truth… I guess your movie is in good company.”

The 5: Just in time, the PBS Home Video version of I.O.U.S.A. is being released today.

Addison Wiggin

The 5 Min. Forecast

P.S. We’ll be taking a break from The 5 for the next few days. Agora Financial’s editors are converging on our Baltimore headquarters for a rousing editorial meeting. Wednesday and Thursday, we’ll gather at 14 West and refine our latest ideas, forecasts and investment themes. The market is closed on Friday, too, so…. so are we.

Enjoy the rest of your week… we’ll chat again on Monday.

P.P.S. One of the most important projects we’re discussing is the foundation of the Richebacher Society. We’ll follow up with some detail this afternoon.



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