Rally, But Sell the News

February 4, 2009

MARKET UPDATE

This will be a quick but important update. The Obama administration, along with our new Treasury Secretary, will be announcing their financial bailout and fiscal stimulus program early next week…likely on Monday or Tuesday.

In light of this, look for the market to trade higher in the short term. 

Longer term, absolutely nothing has changed…we are going lower, and most likely to new lows and then quite a bit more. Until the structural problems in our system are allowed to correct (massive debt going through its “natural” deleveraging process) all the bail-outs in the world will not work.

Other points of interest:

· 46 states will have a combined shortfall of over $400 billion this year, and as with most trends, the financial calamity in California will continue to work its way East.

· Record pension bankruptcies are happening now, and 50% - 60% are underwater with little chance of recovering.

· The next wave of bad debt: Alt A mortgages, corporate refinancing, commercial mortgages, and massive US and international debt issuance, will continue to pressure US Treasuries, prompting much higher interest rates here and abroad. Almost no one is expecting interest rates to rise dramatically, and when this begins, the powers that be will have few options. This is when precious metals will really skyrocket.

· The good bank/bad bank plan will fail. Banks that have run their business like a business should be allowed to survive on their own…the others should go into bankruptcy or receivership. Otherwise, we will become Japan (and worse) of the last 20 years.

Having said all of this, even during the Great Depression, there were big bear market rallies that last several months as investors believed the worst was over. Once those rallies failed, the market proceeded to hit new low after new low. Look for a very similar situation in our markets.

Kip Herriage

Editor, VRA