There’s nothing like turning on the TV and seeing another rerun. Last week was no different. From ups and downs to completely sideways, the markets once again showed us it’s unclear intentions.
President Obama reassured us that everything was going to be okay; that his administration has saved over 2 million jobs and that a second depression is no longer a possibility. Heck , they even raised the discount rate by 0.25% this week to bring back a “normalization” of lending.
Despite occasional pullbacks, there has been a lot of excitement in the markets as the rally continues to push through new highs. So much that Obama has once again shifted focus from creating new jobs to reviving the almost-dead healthcare reform effort.
As we have mentioned before (see The Hidden Agenda), if Obama’s healthcare reform is officially dead, then we could see the Markets rally some more.
But facts are facts
Although the markets have been rallying, we maintain our opinion that a correction will soon take place.
So while Wall Street is telling everyone that we’re in a protracted bull market and the stocks are looking great, we’re not so sure. And it won’t surprise us one bit if the markets once again, takes a turn for the worst before 2010 is over.
We’re not trying to be bearish or pessimistic about the economy. It’s not about that anymore. It’s about the truth and how to protect ourselves from succumbing to the glitter of green arrows in this current market.
Facts are facts. Right now, there is more trouble hidden beneath the surface of our gains. We want to be sure that our readers know the facts before making any more bets that could do more harm in the near future.
Although we have recently survived one of the worst years in foreclosures, it’s not completely over. Last October, the Feds reported that commercial real estate losses could reach 45% which means that over $1.5 trillion in commercial loans could default. If this happens, it will undoubtedly sink the markets further and cause another chain reaction of market-hammering events.
That’s just on the commercial side. Since February 2009, default and foreclosure rates on option adjustable rate mortgages have passed those of subprime mortgages, which led the initial wave of foreclosures. Option ARMS accounted for $750 billion in mortgages between 2004 and 2007, and they remain at risk, especially because many are not eligible for refinancing.
More than one-third of option ARMS are already in default, and it is expected that 600,000 option ARMS will reset within the next four years. According to Barclays Capital, 81% of the option ARMs originated in 2007 are expected to default, with many ending in foreclosure. Barclays projects that banks will lose $112 billion on option ARMs written from 2005 to 2007.
Its not all bad
There have been some real signs of economic recovery. But much of it has been counterbalanced by big job losses and a slowdown in consumer spending. While the Obama administration says that job losses are slowing down, don’t mistake it for growth. We’re still losing jobs – just not as many. In January, the number of persons unemployed due to job loss was still over 9.3 million!
Even those who argue that the economic recovery is real, need to realise that much of it stemmed from government intervention via loose monetary policy and the spending of hundreds of billions of borrowed money. It’s pretty apparent that the market rally is not only unsustainable, but is due for a correction at some point in the near future.
Lets reiterate some facts from our past newsletters (see The Impressive News Release). The US is paying over $300 billion per year towards interest. Its deficit is predicted to be $1.58 trillion in 2011. By 2019, its interest payment alone will be upwards of $800 billion per year. Scary, isn’t it?
The amount of debt the US is incurring continues to rise at alarming rates and our US debt clock tracking is now up to $12,396,750,000,000 – thats up another $20 billion in two weeks since our last newsletter (see Its Bigger Than Every). Right now, that equates to over $113,000 owed per taxpayer in the US, which most people cannot afford. Something will eventually have to be done to pay that back.
Although we have a strong mindset on what the Obama administration is doing right and what they’re doing wrong, we can’t help but see the underlying factors of what is really going on. But that doesn’t mean you’re about to lose all your money…
Another shot at glory
If the markets correct as we predict, it will give us yet another opportunity to profit from the crash and revival of our markets – just like in March of 2009. In the meantime, we need to protect ourselves by evaluating our portfolios to minimize the impact of any downturn and positioning ourselves with enough cash to buy at the bottoms.
Prime examples of great gains were the Teck Resources and Ivanhoe Mines rally a year ago (see A Lesson in the Making).
Companies in the precious metals sector that are well-financed are a great place to start looking. One of our featured Silver stocks, Silvermex Resources (TSX-V: SMR), has recently closed almost $7 million in financing which has put them in a position to not only advance their projects, but benefit from an economic downturn should one occur in the next 6 months.
As we have seen in the recent market crash, well capitalized mining juniors made substantial strides over its competitors and we are extremely pleased that Silvermex was able to close such a large financing.
Until next week,
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