The Week Ahead and LONG TERM INFLATION

As I noted in my last post, this week is going to be critical as to whether we rally out of our recent problem or go back and test the October lows. Everything is down right now. Oil is off about $1.00 or more (note that oil moved higher after the equity markets stopped trading on Friday). The Japanese markets and the U.S. futures are down at the time of this writing. Everyone seems to be talking these markets up and I am not convinced. Admittedly, we saw stronger action last week than I had anticipated. I do believe that we will see some profit taking and I don't expect the S&P to easily run through 920 like some of the talking heads would have you believe. I think we are in an area where the market is expecting bad news, but if we see sustained bad news, it will create a new dynamic. I think the fundamentals are getting worse by the day as world bankers continue to print money. If we start to see inflation before we see employment improve in our country then we could break 5000 on the DOW. I said IF and I don't see it near term, but things are not as rosy as many of the pundits would have you believe.

We have been having the inflation/deflation debate on this site for quite some time and I thought that we would settle it with a Jim Rogers interview that was done recently on Bloomberg. I have attached it to the bottom of this post. Of note, Mr. Rogers says that at NO TIME IN HISTORY HAVE WE HAD ALL CENTRAL BANKS PRINTING SO MUCH MONEY AND HISTORY SHOWS US THAT IT WILL LEAD TO HIGHER PRICES. He talks about how low many of the commodities are and that is even unadjusted for inflation. He used the term forced liquidation several times during the interview (we only have one part posted here). I have said that we are going to see much higher prices because when this all settles out we are going to see that the forced liquidation has caused prices to over correct. The over correction will cause demand to heat up faster than normal---and the rest will be history. Mr. Rogers believes that the dollar rally has been because of so many positions being unwound. He didn't seem to be buying into the "dollar is stronger simply because we are in better shape than everybody else" theory---even though he did say that some of the European countries are in really bad shape. He does say that a lot of other countries are feeling the ramifications of dealing with our companies. So we are having an impact, but it is in a negative way from our companies slowing down---not in a positive way because we are still so superior.

I had planned a longer post, but I will leave it at this---watch the video and you decide!!!!

CONFIDENCE EVERYWHERE

You can't turn on the television without seeing some talking head so happy about the confidence returning. They are saying that this is the classic situation where all bad news has been factored in and regardless of the news markets are going higher. They have been kicking my butt in the SDS that is for sure. When it seems too easy, it usually is, and the long trade looks too easy. Now I won't argue that maybe they will be right over the next couple of days, but I don't think this is going to be the massive rally that everyone is thinking.

I will say that the one thing that gives me concern is something Jim Rogers told me the last time that I spoke with him. I asked him how the markets could be going up (I was short at the time and it was working against me) he said that in an inflationary environment the stocks might go up, but you lose money in real terms if the value of your currency is getting slammed. If that scenario is beginning, then I could be wrong and we could see some huge upside. I don't think we are there yet, but I couldn't fail to mention it.

For a quick trade XTO energy looks good. It just jumped above its 10 week average and so I can stop out if it trades down below $35. Despite what happened today with UNG, I am still bullish on natural gas. Inventories declined more than expected today and UNG was trading up slightly in after-hours trading.

I worked the UTX short today and just decided to go ahead and stop out of that trade. I can't stand shorting a well run company that really has long term potential to bounce back, so I am canceling that call from last night as I stopped out of that trade at a small loss.

I did buy DE today and got out as the stock got weaker for a fair profit. I still like that trade and like DE over the long haul.

Next week is very important. If we don't rally hard on Monday and follow through on Tuesday all of this "perfect confidence" will quickly erode and we will test the October lows again rapidly. I think the government is going to hand some money to the automakers early next week and the market will appreciate that. Who doesn't like a good handout. Can you say SOCIALISM. The market will cheer the move in the short term even though the long term implications are awful. I am sticking with my energy theme and sitting around for more clarity. If this thing starts down again, I plan on getting short in a hurry. I will be on the road tomorrow, so there will be no Saturday post, but we will be back on Sunday with a more clear gameplan for the Monday trade.

Did you see oil today? It got hammered and then rebounded on the comment of an OPEC representative. We have been immune from geopolitical risk since the election. Is that honeymoon already over? I see oil much much higher from here.

WE WILL BE BACK ON SUNDAY!!

Dollar Rally Over??

We have seen strength in the dollar lately and I am wondering if the party is close to being over. As all of the monetary injections work their way through the system, it should weaken the dollar. I am considering selling UUP short. No doubt there has been a flight to quality in dollars, but as other Central Banks work do their share to revive their economies (and we are seeing unprecedented action) it will reduce the need for that flight.

The terrorist attacks in India could have a negative impact on oil prices, but only for the very very short term. History shows that terrorist attacks in oil importing nations has short term downward pressure on oil prices. I am still an oil and natural gas bull for the long term.

We are working on developing a system of trading quality stocks and will post our results here every night. Right now the futures are hanging in ahead of the abbreviated trading session tomorrow. I am surprised that we are still seeing strength. I personally can't see the S&P index getting over 950. If it gets close I will prepare to double down on my shorts. One really interesting play is Chicago Bridge and Iron CBI. This one is still under $10 and has made some good gains in the last few days after being hammered most of the year. I will look to buy it under $10 and stop out at $8.50 Target--Open

John Deere (DE) looks to have put in a bottom at $28.50 and rallied to its present level of just under $36. I like this as one right here with a stop with a close under $28.50. This is a larger range than I usually like to play, but I think the support is strong at that level and this is a good company that has been overdone to the downside. Target--Open

On the short side I like UTX (even though I really like this company) as a short at current levels $47.73 with a stop over $50. Target 41. This one could run into some weakness if the dollar falls.

We are paper trading these picks as we try to develop our system. Remember that we are not registered investment advisers and you should not make any trade/investment without consulting your investment adviser.

PRINTING PRESSES WORKING OVERTIME

I am amazed at the level of bailouts/workouts/handouts/ that we are seeing. I was most amazed this morning when the market seemed to love the latest government injection or what ever you would like to term it. The last thing that we need is more consumer credit. How can anyone think that we are not going to create inflation and most likely raging inflation. Yes we got caught in a downward spiral of prices and yes it has become very evident that the markets are much more scared of DEFLATION than they are INFLATION. But that does not mean that INFLATION is not going to be a problem.

It seems like every pundit in the world is on television declaring that we are out of the woods and THE BOTTOM IS IN. Is the bottom in because we were irrational to the downside, or because we have seen confidence totally restored due to the announcement of the new economic team, or is it because we got such good home price numbers today that we improvement must be on the horizon. My point is simply that I cannot see the justification for this rally lasting very long. I will have to wait on my invitation to appear on one of the major business shows because I believe that we are in for more pain. Every one of the so-called experts that appears on a mainstream media show is asked the question "How much stimulus (or whatever the operative word is) will it take to really be effective?" BIG is always the response. The truth is no one knows. Our country is not patient enough to adequately answer the question. How dare we run the risk of a bankruptcy (once thought to be a part of the normal economic cycle). We are in effect putting the patient to sleep before we ask them where it hurts so we can properly diagnose the problem. This government has thrown money at the problem day in and day out and has no clear direction. How much is enough in terms of the money that we will borrow to fix these problems? Apparently there is no amount too big to consider financing.

Think of the credit crisis in terms of a river levee. As the river rises the top of the levee holds and the land on the other side of the levee remains dry. Water continues to rise, and puts pressure on the levee. A little water leaks through but instead of rising over the levee---it just continues to back up on the opposite side. More water is added but it is still relatively dry on the other side of the levee. At some point enough water backs up and blows through the levee---AND THE OTHER SIDE IS FLOODED. SO IT IS WITH THIS CREDIT CRISIS AND INFLATION. The government is adding more water to the river every minute. GET A BOAT!!!

Last night I mentioned that we must see some return to normalcy before I would believe in the rally. Specifically, I noted that we must have some kind of disconnect between everything (commodities and equities) going up and down at the same time--each and every day. We saw a little disconnect today with natural gas getting hammered while the equities held their own. I remain unimpressed as the credit markets are still not anywhere near to normal and I would much rather see credit for businesses become more readily available than I would give three cheers for the mortgage rates declining. Larry Kudlow is on CNBC cheering everything that he hears---he seems to like Paulsons latest plan and all of the new economic team. One of the key things that Paulson said is that this latest phase of the plan is that it is ESSENTIAL AND IT IS SPECIFICALLY FOR THE CONSUMER. MORE BUMS SPORTING PLASTIC---JUST THE WAY WE GOT INTO THIS MESS!!! AND THE GREATEST PART---PAULSON SAID HE CAN EXPAND IT TO OTHER TYPES OF DEBT----JUST WHAT WE NEED!!

Those of you that believe we are going to see continued deflation might well be getting your terms confused. You may be confusing deflation with simple unemployment. The misery index a combination of the inflation rate and unemployment. Could your deflation ideas wind up being a major spike in the misery index. I would argue that it is. Did anyone see Bloomberg's interview with Mark Faber? Not only did he say buy gold---he said buy the metal and don't trust any ETF. I will admit that his statements were shocking, but I cannot find a weakness in his ideas. Listen to Faber and then make your case for extended deflation. Our comment section will hold all of your ideas---we are waiting.


FLR continues to work well, and I am getting my butt kicked with SDS. I really expect us to turn right around and test the lows so I am hanging on to my SDS. If someone can offer a real reason (other than a normal rally in a bear market) that this market should go up I will certainly consider selling my SDS---but as of now I have not heard one. Feel free to leave it in the comments section.

Remember that Kevin Kerr will be our guest on STOCK SHOTZ on Friday. Videos will be posted on www.stockshotz.tv as well as the blogsite www.stockshotz.blogspot.com
Remember to email your questions to webmaster@stockshotz.tv if you would like for us to ask Kevin a question of yours.

CONFIDENCE RESTORED?

Have we all of the sudden seen a dramatic improvement in confidence? The action over the last 2 days (the best 2 day gain since 1987) would indicate that it has, but lets take a closer look. Even with the rally, we are right back where we were last week--which is essentially at the October 10th lows. The mainstream media is parading around "experts" that are offering varying opinions. One set says that we will meet huge resistance at 850 and will return to the downward pressure. The other set of experts contend that we are in the "bottoming process" and the fact that we are back at the October lows means that we have flushed out or "capitulated" (I have come to hate that term due to its obvious overuse by the mainstream media) and are now headed much higher. I must say that I was surprised that today was so strong. I bought the SDS at 103.49. It traded down below 95 at one point to close at just over $100. In after hours trading it moved down to about $98. I kept asking myself the question, WHAT HAS CHANGED? The only possible answer is confidence in the President-elect's economic team. In my opinion, there is no team, no person, no idea that is going to make this mess better immediately. Yes, I know that the market will turn around before the economy does--but are we there yet? I don't think so.

One thing that still scares me is the connection between oil, the metals, and the market. Would we normally see the market move up on a day when oil moves up almost 10%? When everything moves in tandem, it appears to be driven by a restoration of confidence than a normalization of prices. Confidence (more properly termed an increasing tolerance for risk) can start a rally and cause short covering, but it doesn't mean that things are normalizing. I by no means am saying that the market should go down each time oil prices rise, but I am saying that rapid increases in the price of oil are not healthy for the market and should be seen as such. Yes we need confidence to be restored, but confidence will not prove to be as stable or lasting when it is predicated on political news as it would be if we were seeing actual improving economic conditions.

The market seemed to be excited today over the Citigroup bailout. Lets analyze that--one of the largest players in our financial system was in such poor shape they had to have a government bailout---and that it good news? Never mind the inflation that will come from all of the government bailouts. For those of you that believe in the deflation argument, did you not see that when money flows (like it has the last couple of trading days) it will flow back into commodities. I will say again that there was much forced selling and there is a lot of smart money on the sidelines. Oil and natural gas may be out of favor right now, but it won't last for long. And by the way, you won't have deflation when commodities prices are rising. INFLATION IS ON THE WAY!!!

I am happy with my Fluor (FLR) and while it may pull back over the short run, I see it headed much higher. Another favorite of mine is Sanofi (SNY). To talk about bad timing, I originally bought this one at $47. I think they have an awesome pipeline of medications and vaccines. They are paying a good dividend and should be somewhat insulated from any further economic weakness.

At the risk of sounding like a broken record, one of the best inflation plays is Freeport (FCX). This is a well-run company and they should benefit as the price of gold rises. I believe that we are getting close to a bottom in copper as well and again this company will be a major benefactor of rising prices.

At the time of this writing, the futures are holding up fairly well--but as we have seen lately things can change quickly.

THIS WEEK: IS IT REALLY IMPORTANT?

Normally I would not put a lot of emphasis on this holiday week, but these are not normal times. I think the first couple of days are of utmost importance. Volatility is guaranteed and it would be nice to see a follow through on Friday's rally.

If you listen to the mainstream media you will hear thoughts ranging from this is the beginning of a time much worse than the GREAT DEPRESSION to This is the greatest buying opportunity in the history of the markets. We are going to bring you the interviews in the near future and try to learn from each and every one of our guests. On Friday, we will interview Mr. Kevin Kerr of Kerr Trading International. Kevin has been on the show before and has a great handle on the commodities markets. We are looking forward to getting his perspectives on the D-word Deflation. If you have a question for Kevin, email us at webmaster@stockshotz.tv and we will consider your questions as a part of the show. Our goal is to become better traders by listening to each other so send us your questions.

I just read an article where Russia plans to build a nuclear reactor for Venezuela. If we weren't in this "grace period" awaiting the Obama administration this would have been huge news that would have most certainly impacted oil prices to the upside. Just another reason that I can't lose my bias that oil and natural gas will be good long term investments.

We are seeing headlines now that the government is working to inject capital into troubled Citigroup (C). The news doesn't seem to be spooking the futures very much. Tomorrow afternoon we will get President-Elect Obama's announcement of his economic team. It will be interesting to see how the markets respond to that announcement.

I am seeing so many questions from people out there that are trying to pick the stock that will benefit from the new Presidential administration. Many are asking about the solar sector. I think the economy and jobs creation will take precedent over subsidies to the solar sector. My favorite stock for the year is Fluor (FLR) Yes I know that I have been talking about this one for quite some time. I believe that these guys are going to benefit from the need to invest in infrastructure. They have been down lately on the back of the negative news in the oil and gas industry. Infrastructure investment could well become a priority of many nations. We have already seen China's commitment (which they are already talking about increasing), and I would not be surprised to see many more nations follow suit. FLR is poised to benefit from this activity and are trading at what I consider to be very cheap valuations. I believe that this stock could trade $100 in 2009. Read my disclaimer and do your own research.

If you have someone you would like to hear us interview---send us an email at webmaster@stockshotz.tv We are ready to resume our regular interview schedule.

STAY TUNED

Where is the Smart Money??

We have recently been focusing on the rapid downward spiral in prices and have had some very good discussion. In my quest to find out what many of the best in the business think about the deflation/inflation argument I have found one common denominator. THE BEST IN THE BUSINESS ARE BEING PATIENT. AND MANY OF THEM ARE BEING PATIENT FROM THE SIDELINES. I am always willing to analyze my own thoughts and seek to find out where I am wrong. I am beginning to believe that I discounted one major part of the de-leveraging process. When we talk about de-leveraging the mainstream media makes it sound like hedge funds sell after redemptions come in and they are "panic selling" and the market action appears to support that. Further analyzing the situation we must remember that many hedge fund managers are brilliant individuals and good business people. Have the good ones raised much more cash than necessary to weather this storm? Were they content to sit on cash while the economic crisis unraveled? The great ones raised cash and are smart enough to know that this market is being driven by panic and fear. They have the capital and the patience to find really great entry points. If you know you have the capital to stay in the game you don't find yourself fighting emotions. We all know that the worst trade/investment you can make are the ones where you are emotional as opposed to rational.

My best advice? Utilize this time of turmoil to roll up your sleeves and do your own research. Ryan Krueger, whom I consider to be one of the best in the business recently wrote in an article that "RESEARCH AND HOMEWORK MIGHT START MATTERING AGAIN"
Words of wisdom that give me a guide to what I should be doing. What does a 500 point move that seemed to be based on the announcement of that the future Treasury Secretary tell you? That keeping your money safe while doing your research and waiting for a little more clarity is a pretty good idea.

DELEVERAGING OR DEFLATION??

So many people are confusing deleveraging with deflation. Lets go back to Jim Rogers fundamental discussion on oil. He simplified the equation by saying that we obviously have growing demand for oil over time and we haven't discovered "major" new field in the last 30 years. So I ask the question, is demand for oil falling this rapidly or are falling prices the function of hedge funds selling? Many investors are selling anything they can get their hands on to raise capital. Now I don't doubt that oil may have gotten overdone to the upside, but markets tend to overrun.

Ask yourself another very simple question. Do we have to have oil to operate our economy? Yes we do and this economy will get going again. We have overrun to the downside and will see the demand story emerge very soon. Think about this in terms of "percentage chances". As oil prices fall, consumers will either do more driving or they will have more disposable income to buy goods. How do goods move around the country? It takes OIL. I know that is a ridiculously simple example, but it will materialize quicker than most believe.

We all know that markets aren't supposed to move in a straight line. When they appear to you must look for an extenuating circumstance. That circumstance in the case of oil is the dollar rally. The dollar and oil have been feeding off of each other since the late spring. What happens when this dollar rally ends? How can you believe that the dollar can continue its run in the face of all of this government borrowing? Jim Rogers was concerned about the Federal Reserve destroying the value of the dollar back when the only bailout was Bear Stearns. Many so called "pundits" are patting themselves on the back bragging about how they have been right on the money with their deflation call. They have been patting themselves because they have seen the greatest deleveraging in the history of the world. Will any of you out there argue that our economy---from hedge funds to consumers and their credit cards-- was not abusing leverage? If you would like to make that argument, please post a comment.

I don't want to touch any new stocks here. I sold some stocks today. I said last night that we didn't need to see a 400-500 point down day on the DOW today. We didn't see the slam down---just the slow bleed. I think we could see 6500 on the DOW before the end of the year. I do believe that 450 on the S&P is also possible. We are almost certain to have some form of a suckers rally soon, but it won't be a very big one. We could rally tomorrow as some shorts cover their positions and go party the weekend with the money they made. When it seems too easy---and the short side has been easy---it is likely to change even if only for a short period.

I still like UNG. Yes I know I am down in that trade, but I think natural gas is the poster child for getting smacked during the deleveraging. I also like gold for a longer term play. Gold may be headed down if the deleveraging keeps getting mistaken for deflation over the short term. GOLD IS A LONG TERM PLAY.

Most people don't want to hear that the pain for our markets is just beginning. Someone make a comment and let me know what positives you can see---I don't see them. The good news is that we have ETF's which will make it easier to profit once inflation begins. GOLD OIL NATURAL GAS.

Lows Lows and More Lows

If you listen to the MAINSTREAM MEDIA you will hear the scariest deflationary stories imaginable. Many are talking about another 1000 points down on the DOW in the next few trading days. If that happens I will be licking my chops and buying. There is nothing good in the markets and these deflationary headlines are going to continue for a while and a lot of money will be lost as the DE transforms into IN FLATION.

Commercial Real Estate is getting hammered. People have lost so much money in their 401K's that they are keeping their jobs and delaying retirement. Things are so bad I think I need to quit typing and cry a little. This is where the smart make their money. It takes some guts and a lot of brain power, but lets look at why we are melting down. First, this dumbass that we have been calling Treasury Secretary is a quitter. The guy just says "I think I have done enough and I will save some of the money for the next administration" Honestly, President-Elect Obama is taking office with a mandate and will be able craft his economic policy without Hank leaving him some of the TARP money. When I tell my grandkids about my trading life, I will have to temper the adjectives that I use for Paulson. Liar, Quitter, and Piss-Poor Communicator seem to describe his actions thus far. This guy has provided a leadership vacuum for our country and will suffer for it.

We have so many regular Joe investors scared to invest in anything. They go to work come home and listen to someone like Jeff Macke tell them that the down action is just beginning. Consider Joe's money to be on the sideline for quite sometime. Also is there any fool out there who isn't going to sell and take a loss this year? Nope--more selling.

Deflation scares the markets more than anything and that is all you could hear today. It may last for another couple of months, but our way of life is not going away and we will see this economy grow again soon. I take comfort in the fact that I saw Dennis "Direction Changer" Gartman on CNBC's Fast Money tonight saying that the gold bugs have had a lot of factors go their way, yet gold has not rallied. He then says "I will let someone smarter than me trade gold here" JUST ABOUT THAT TIME CNBC SCROLLS ACROSS THE BOTTOM THAT GARTMAN OWNS GOLD. Who was right? Is he out or does he own gold? I don't care because I have no respect for what he says on television. No doubt Gartman is one of the best in the business, but do the great ones really show their hands? If Gartman really was playing deflation would he have talked about it? You decide.

Until the fundamentals take over---and thanks to Paulson that won't be possible until the new administration takes over---we will be in a technical driven market. The worst thing in my mind is if we are down 300-400 points tomorrow---if that happens we are in real trouble? Why, if we don't slam down and capitulate this thing could just continue to bleed slowly for quite a while.

What do we do tomorrow? Sit on the sidelines? It will be volatile for sure.

I will post my interview with Michael Panzner author Financial Armageddon. It was a great interview. He does make some interesting points about deflation--especially in the short term. Listen as he told me months ago that gold was a good investment, but he thought you could buy it lower. THIS INTERVIEW IS FROM SEVERAL MONTHS AGO!!

Inflation, Deflation, MAINSTREAM MEDIA LIES and More!

I keep getting comments from people arguing that we are in deflationary times and there is no threat of inflation. Inflation often gives many market participants a headfake and then chews them up and spits them out. Remember rising prices are the effect of inflation as declining prices are the effect of deflation. Can there be a disconnect between the time that inflation begins and the time that we see the effects? Absolutely! Those in the deflationary camp are going to get hammered by the timing disconnect. For those that argue debt is deflationary---I would ask this simple question "How can the United States Government Debt possibly be DEFLATIONARY when we are pumping it into the economy?

Now I understand that the numbers that came out today all point to deflation---but it is a headfake. This is simply a case of a timing disconnect between the massive government liquidity injections and the money actually being circulated in the economy. Pardon my silly example but this is like going to the bank to borrow money for a nice meal when you are extremely hungry. The banker hands you the money and you head to your favorite restaurant. You sit down and order your food you wait and wait for the server to bring your food. Just because are at the restaurant, have ordered the meal, and have the money to pay for it DOES NOT MEAN YOUR STOMACH IS FULL. You are waiting for that effect.

Prices are falling right now because the credit markets are frozen. The economy is slowing because we have not yet felt the "effect" of the massive, unprecedented government injections. Some are even arguing that taxing the wealthy will solve the problem because it will balance the budget. SO WRONG. It may hammer the stock market because it will take away from those who tend to save and invest and give to those who will spend every last dime. I ask you---what will that scenario do to the economy? OVER HEAT IT. It might look brilliant in the short-term, but we will pay the piper when inflation takes over. Our economy is not geared to deter inflation. Massive rate hikes will not be popular!! It would be easier to not let inflation begin, but friends that is NOT THE PATH WE ARE ON!!!

Yes we will have falling prices in the short term---IT WON'T LAST!!!

Allow me to shift gears and bash the mainstream media. This morning on CNBC the question arose as to whether or not the Plunge Protection Team had intervened to buy some form of S&P index to support the market. Steve Leisman (don't care if I misspelled his name) said that those kind of theories were for the "conspiracy theorists" in the blogosphere. Now I don't believe that the PPT bought any index vehicle, but I do believe that they have been supporting the dollar. They need spiraling prices to keep up the fear of recession or potentially even depression right now. Remember, the more fear we have in the markets right now--the more the flight to quality will push up the price of treasuries at the auctions. The higher the price---the lower the effective interest rate.

DON'T BE FOOLED. YOU WILL FEEL THE "EFFECTS" OF INFLATION

MORE ON STOCKS IN A LATER POST

Inflation or Deflation? YOU DECIDE!

I have been making the case for inflation and have gotten some very good arguments for deflation. I am not changing my stance---we are headed for inflation. The argument for deflation starts with the thought that the money supply is decreasing. How can the money supply be decreasing with a government that has decided to be the ultimate backstop? The money may be stalled at the current time, but be rest assured that all of this government money will make it through the system eventually. For those expecting it to show up immediately---it just won't work that way. That is why this situation is going to catch many by surprise.

The strong dollar argument always surfaces in the deflation camp---again a very short term phenomenon. Fortunately we have been in a short but meaningful cycle of the strengthening dollar pushing down the price of oil. I ask one simple question. Can the dollar stay strong over the next 2 years given the rate at which the government has been printing money? No it can't! Can oil prices decline if the dollar starts to decline? No! So we can interpret that we are most certainly headed for a weaker dollar and rising commodity prices.

Finally there are those that will argue that we have lost so much money with the recent declines in the stock market. Again based on what is about to happen in Washington, this decline will be short lived in terms of what we see with money supply. Those that take the tax hit will save and invest less and their money will be given to the lower income brackets who will spend it. Remember tax and spend always seems to work over the short run because it will kick start the economy. It will help to reduce unemployment as new dollars in effect are not saved but are spent. I don't buy the argument that the credit card defaults are going to cause deflation. This society is addicted to credit and most people will spend again as soon as they get a little room on their credit line.

Granted it may take 2 years for my scenario to develop , but it most certainly will!!

I do believe that we may test the lows tomorrow. I can't find any compelling reason to buy stocks. Given my inflation thesis, I think XTO is a gift under $30 and it may drop below it tomorrow. FLR is a gift right here. I think everyone selling this stock below $40 is just plain stupid. Not only are these guys blowing out earnings and revenue estimates---they should benefit from the incoming administration. UNG may well drop again tomorrow and will be another gift if you are willing to hold it for a while. If we drop below 7950 on the Dow tomorrow it could be on of the worst days in years--and years. If we bounce we could see a very nice rally---but if we don't expect bloodshed. I am watching and waiting and have no plans to commit much new capital. If we drop below the October lows I will play the SDS and DXD with tight stops. Those are the short ETF's on the S&P and the DOW.

INFLATION IS ON THE WAY!!!

Critical Week Upcoming

We are hearing both the "bottoming process" camp and the "nowhere near the bottom" camp state their case this weekend. Many are encouraged that we bounced so hard off of 7950 on the down on Thursday. Others are looking at the fact that we couldn't hold gains on Friday as a sign that we will retest the lows and likely break through them. We will most likely find out who is right this week and I hope the bulls are. Nevertheless, I have done more research and feel that my inflation call is on target.

I have received many emailed opinions as to why my inflation call is wrong---so let me further detail my thoughts. Now many in the deflation camp have said that wealth has disappeared as investors have lost wealth in the markets and that will not only mitigate inflation, but cause deflation. Those same individuals further argue that as companies default on loans you have the same deflationary effect. Now here is my issue, the government has stepped up to fill this gaps with all of the taxpayer money. So while we will have the deflationary effect we are currently seeing----it will be short-lived. The government printing presses are running at full speed and even though they haven't kept up with declining wealth on a daily basis, they will catch up and cause hyperinflation.

For those of you that have heard our interviews with John Williams you have heard him talk about the government's plunge protection team---which is charged with the task of making sure that our markets don't collapse. Has the plunge protection team strengthened the dollar? Have they forced down the price of oil? If they have, then you better enjoy it while it lasts, because it will be short in duration. How can we add all of this money into the economy without it causing inflation? As we tax the rich and give credits to the lower income earning individuals, this will further compound the immediate problem. Why? Because much of the money that will be coming out of the pockets of the higher earners was going into savings or into the stock market. The money that is going to the lower income individuals will be spent. Real dollars out of savings and into the economy----spells inflation in my book.

Some have argued that we are going into debt and that borrowed funds will only be inflationary if other countries quit buying our debt. Their argument further centers around the fact that the government is borrowing funds at record low interest rates as investors seek the safest investments they can find. I argue that it doesn't matter where the money is coming from or how low the rates are, it is going into the economy. That is exactly why I have argued that deficits are not bad for the economy in the short run. These deficits are going to get the economy humming again---with the cost being inflation.

So are there any other factors that we should be taking a look at right now? I think so. Are you aware that many baby boomers are being forced to take distributions out of their 401k accounts? Forced selling at unfavorable prices. We must think about this phenomenon as we go forward. The very group that has been helping the market over the past 10 years by making regular contributions that wind up holding stocks either directly or through mutual funds. So now as we tax the higher earners in the economy we further punish the markets. All of these factors are why I am using patience as natural gas has declined. I don't mean to be boring when I constantly talk about oil, natural gas, and gold. If you like stocks its FLR,XTO, FCX. Will I change my tune anytime soon? I will for the short and medium term investments when we get some clarity. But I keep drilling the inflation story for the long term because I believe that it is almost certain.

If you have an argument for deflation, please post it in the comment section. We will be happy to discuss it.

Counter Trend Rally?

Today is the kind of day that you would make you think we have found the bottom and have many brighter days ahead. I really enjoyed seeing the action today and will admit that we didn't see much selling into close. Several of my stocks closed on the highs of the day. There are several reasons that I am not overly excited tonight. First, we have seen big swings to the upside and have not gotten the follow through. If it does not hold tomorrow and Monday, we could be right back testing the October lows.

I appreciate the comments/emails that we received on last nights post. I have said over and over that the best way to stay on top of this game is to listen to what others are thinking. We got several interesting comments on Market Guru and one was saying that we are really in an deflationary mode. I don't disagree that we might see some deflation in the short run, but do you honestly think that we will see sustained inflation with gas at Pre Hurricane Katrina levels. I would like to think that many of us have changed our spending habits, but it is just not the case. As soon as we can get more credit, we will be right back out there buying items that we cannot afford. Isn't that what started this mess? Did we really learn our lesson? I don't think so. When you get November oil/gasoline consumption numbers, I'll almost guarantee that they will be on the rise.

Another reason that I am not jumping for joy is that we are not getting any leadership from the financial stocks. I believe that a major part of our rebound will be restoration of confidence in the financial stocks. Everyone knows that the integrity of our financial system is an absolute must for our economy to go forward. In this downturn, we stayed at the top of the heap in terms of the world economies because we have a strong developed financial system. The recent world actions proved that even in its darkest hour, our financial system is the most trustworthy in the world.I can't wait until January because I think with every passing day Paulson is hurting our position as he plays bait switch lie and bailout the buddies. I thought he would be on of the greatest in history when he was appointed. I WAS WRONG!!!

I am looking at a possible short on Chattem CHTT. I think the multiple on this one is overdone. It is good company, no doubt--but it enjoyed a better than average multiple. They are a consumer products company and have gotten a better than average multiple during the recent weakness in the economy. With its current multiple around 20, I don't see the growth supporting that multiple. My target this one is around 62.

For those of you that have argued that we are seeing deflation as opposed to inflation I ask you this question--Can the dollar stay strong given the level of debt we are taking on in this country? Especially with Hank the Liar trying to revive credit card debt. What happens if the dollar falls? Does oil go up?

I still like Fluor FLR even though I think you might have to be patient with it. I am planning on this one being a 4 bagger for me. XTO is still on my favorite list.

I am not rushing to make any new trades tomorrow. I want to see follow through, but am not confident enough to commit any new capital.

PAULSON LIED!!!

I am absolutely sick of politicians sacrificing our future. Hank "Liar" Paulson came out today and said that we wouldn't use the 700 Billion to buy the troubled mortgages, rather we would buy credit card debt to get those markets unfrozen. When we got the bailout Hammerin Hank was telling us that we had days to unfreeze the credit markets and bring LIBOR down. Now with LIBOR well under control and the markets not responding he wants to buy CREDIT CARD DEBT. What happened to that sense of urgency? Days? Wasn't the whole idea to ultimately help the housing market? Now good ole Hank wants to give the American Consumer more access to MORE CREDIT CARD DEBT---JUST WHAT WE NEED. The American system has been the greatest in the world because we WERE TRUSTWORTHY. We have lost that precious trust. We are becoming socialist by the day and the is going to be terrible for our markets. I believe that we will test 7800 on the Dow tomorrow. If it holds, that is good---but if it does not then we are headed to 7500 and on to 7000.

THIS GOVERNMENT IS OUT OF CONTROL!!!!! WRITE YOUR CONGRESSPERSON AND TELL THEM THAT YOU DON'T WANT YOUR FUTURE MORTGAGED!!!!

So do I think any investments are worth making at this point. Yes I do and you may buy them cheaper. I still like oil, gold, and natural gas.

CONSIDER THIS----These markets are so irrational. It seems that everything that correlated in the past in no longer correlated. I have never been a conspiracy theorist, but I do have a theory on the price of oil. Looking at what we do know--we know that stimulus plans, bailouts, and dovish monetary policy all lead to inflation. The government is borrowing money like nobody's business. During one of my interviews with Mr. Peter Schiff he said that the government might have to inflate their way out of debt. Excellent point. Is the government using its power and money (with Investment Banker Paulson at the helm) to prop up the dollar? Now we know that if they prop up the dollar while simultaneously scaring the U.S. Consumer, then wouldn't they get their borrowed funds at a much cheaper rate? There is so much demand at these government auctions (because there is a flight to safety) that the interest rates that the government will wind up paying are TREMENDOUSLY LOW. Was this in the initial plan? Get the rates lower with fear and then attempt to control the inflation on the back end? Lower rates---less inflation necessary to inflate your way out of the debt. So if that is what the government is doing what is the end game and how will that impact oil prices? When the government gets through borrowing---and it might be a while since we are planning to help pay for all of the dumb labor contracts that Detroit has had for the past several decades---they will want the deflation spiral to stop and stop rapidly. That is when we will see the dollar begin to decline---AND THEN THE DEATH SPIRAL OF RAPIDLY RISING OIL PRICES BEGINS AS WELL. Remember what was happening in June of this year. Dollar down because oil up and oil up more because dollar down? That sounds silly, but it was that bad a mere 4-5 months ago. This time oil will hit $200 and even more. Natural Gas will spike as will gold. Again, I am the last on to jump on the "conspiracy" bandwagon, but let me know why you think my ideas are far fetched.

Another thought behind my conspiracy theory is the point at which we see oil demand destruction/rebound. Now we really didn't see much demand destruction until oil got over $105 per barrel. Why at $70 didn't we begin to see a rebound in demand? Is there a $35 dollar disconnect between the point where demand begins to erode and where it begins to rebound. Don't give me the unemployment answer because the U.S economy is still 93% EMPLOYED. Why the disconnect? Is it consumer confidence? If it is what happens when that begins to return? Inflation will heat up much faster than most expect. With confidence rising, I would argue that we would not see demand destruction until we hit the $110 level. BY THEN IT WILL BE TOO LATE. With oil at these levels, companies are not going to allocate every available dollar to increased production and it will take them longer to ramp up those expenditure than it did to cut them back. We need oil back over $80 so we don't see so much of the planned production coming off line.

I don't doubt that tomorrow will be an awful day for the energy complex and I think you can buy it cheaper in the coming weeks. BUT INFLATION IS COMING. YOU HEARD IT FROM THE CREW AT STOCK SHOTZ FIRST. DON'T WORRY ABOUT THIS SHORT TERM DEFLATION.

INFLATION IS ON THE WAY.

LEARNING FROM A LEGEND

For those of you that are new to our site, the post directly below this one contains our interview with Legendary investor Jim Rogers. I posted the interview because I have been reviewing what he said and how I can profit from it. Having listened to Jim for years on television shows such as the Fox Business block, I know that he develops his thesis and is patient. He was pounding the table to short Fannie Mae a couple of years before the stock really started to rapidly decline.

I listened to the interview again and he is very clear that the government bailouts will cause inflation. He is also clear that over the long term more demand for oil will be coming online than will supply. I questioned him about some of the speculation that oil would return to $70 and while he didn't seem to think that it would happen, he didn't rule it out and looked at it as an opportunity if it did materialize. So what do I do with my money here? I have bought natural gas (which hammered me today) and am looking to pick my spot with oil. I think it may get a little cheaper, but I will be buying some soon even if it doesn't. I was discussing the short term "deflation" that we are seeing with a fellow trader. We both agreed that this is a short-term phenomenon---but just what is short-term? A quarter? A year? 18 months? Regardless of the exact timing we believe that we must rely on what we know and we know that the bailouts/rate cuts and much more are going to contribute to inflation over the long term.

For the short run, we don't have a lot of geopolitical risk, nor do we have a big currency risk, so I don't expect to see a huge run---especially given the fact that we didn't get a boost from the Chinese stimulus plan. I know that I can't call the exact bottom, but I do feel that we are going up over the long term and am trying to construct a list of indicators that will help me see when the real run starts.

I believe that we will see some of the agriculture plays begin to deliver. One of my favorites is Compass Mineral (CMP). It is a very well run company that has been able to pass through price increases virtually anytime they have desired.

I do like the coal etf KOL. I saw some headline that was talking about the decline in energy consumption in China. It was relatively minor and again we have had some short term confidence crises all over the world. When analyzing whether or not KOL is a good play I ask 2 questions. Is worldwide demand for electricity going to substantially decrease? Have we found a truly economical alternative for coal that can be implemented in a short period of time? If the answer to both of these questions is no (and it is in my mind), then KOL looks attractive as we pull out of this deflationary period.

If you are new to our site, please subscribe to our RSS feed. The more subscribers we get, the more interviews we will do. Our subscriptions hit an all time high this week, so thanks for all of your support.

Jim Rogers Called It!!!

Back in the spring we talked to Mr. Jim Rogers on several occasions and he knew what was coming. He was short the investment banks and was getting out of the U.S. Markets. I am posting the May interview again and we will have discussion on the site as to what we can learn from this and how we can use perspectives to help us to navigate the next 6 months. And we hope to get Jim back on the show soon.

THANK YOU CHINA!!!!

China announced a $580+ billion dollar bailout today. This has the futures moving up as are the Asian markets. Why will a Chinese bailout work better than the domestic ones we have seen? It is simple. China has been running surpluses and needs the infrastructure part of their bailout anyway. I was very pleased to see their plan, especially in light of the fact that I have been positioning my portfolio believing that the global growth story was not over. I am very pleased with FLR and expect that it could hit $100 in the next 12 months. I know that is an aggressive call, but the company is still delivering records with each quarter and if the global growth picks up--they should really move up rapidly.

Another favorite of mine XTO Energy (XTO) is poised to benefit from the Chinese Plan. Oil jumped to $64 in the current overseas session. I heard Karen Finerman of Fast Money suggest that the USO (the oil exchange traded fund) be used as a hedge if you wanted to play certain commodities stocks. Specifically she was discussing someone's bullish call on U.S Steel (X) and suggested that you hedge that play with a short on USO. I think we will see oil be used as a hedge---I have even suggested that it is a better hedge against inflation than is gold. If the dollar starts to weaken, we will most certainly see oil move up and these that are on the short side are going to get caught. My guess is that many of the momentum players have been jumping in to short oil, and the rally off of this stimulus could take us back over $80.

Upcoming Interviews

We will be interviewing Walter "John" Williams of shadowstats.com John has been one of our most popular guests and will give his perspectives on the long-term outlook for inflation. I am very anxious to hear what John thinks the impact of all of these government bailouts will be on inflation over the next few years.

We are also so fortunate to have Hitha Prabhakar coming back to our show. She has a great handle on what is going on in retail. When she was on our show a couple of months ago, her calls were right on the money. I am anxious to see what she has to say about the upcoming Christmas Shopping Season.

We are spending the weekend looking for "pairs" trades that fit our model and should have more posts tonight.

THE CRASH IS COMING!!!!!

We are printing money right and left and now we are going to bailout the auto industry. We are throwing our future away and are turning our head to the prospect of inflation. I can't believe that we are destroying our dollar as we are. I have worked my portfolio over and am adding to natural gas and the companies in that space. My FLR reported blowout earnings and record backlog for the quarter and the stock is up a measly 9% in the after hours. Global demand for a company like FLR has not fallen as most would have you believe. Oil and Gas are coming back and inflation is going to go wild. Gold at these levels is so cheap if you have a long term horizon. Read my post from last night for my projections for gold.

I have been buying XTO energy and it has hurt me over the past few days. I think it is going to be a big winner. I am considering buying more and I do not usually believe in dollar cost averaging. This company fits the perfect profile a winner in my long term view of what is going to happen with our economy and the global economy.

For those of you that have sent emails asking if I have changed my mind as not long ago I was saying that our way of life was not going to cease to exist---Yes in certain areas I have changed my mind over the past few days. We are going to see bigger government and that is going to lead to inflation. If inflation gets going on the global scale how are we going to fight it with our economy in its current state. So one might ask how I think that global inflation can get moving without the U.S. economy rebounding first. The answer is that we are discounting the growth of underdeveloped nations. The average Chinese worker saves 35 cents of every dollar that they earned as compared to the 2 cents of every dollar saved by the U.S. worker. The Chinese are still developing their country to get clean water to their citizens. They must have cleaner air and they must have it now. While we can pull back our spending in tough times and not take as many vacations and buy as many big screen televisions etc---their economy is going to keep chugging along as they continue to purchase the basics to build their economy. They won't cut out nearly as many luxuries as they never had them. Hence, oil, steel, copper, gas and more are going to be in demand. Sound likes all of the ingredients for inflation to me.

In summary, I am only buying stocks that are either energy or metal related. I will have a longer analysis later.

DOW 5000

If we get policy out of some of the rhetoric that we have heard in the last 24 hours we are going to see DOW 5000. I have been studying what is going on in China for quite some time and must admit that I have been wrong on their markets as I really believed that their markets would bounce back much faster. China is going through the normal market gyrations that you would expect to see with financial markets that are really still in the infant stage. Yes they are going to be susceptible to the U.S. markets---but what about the economy behind those markets? The economy over there is still going to grow. Now there government has huge surpluses and our goverment is running a huge defecit. Let me say this--DEFECITS IN AND OF THEMSELVES ARE NOT NECESSARILY BAD. No that was not a typo. A defecit that is financed with cheap money is not bad. The problem comes in when the cost of credit gets higher. So practically I see that our defecits to this point have not been all that bad, but if we get into a longer recession and possibly a depression---and the defecits widen during that time frame and they most certainly will under the Democrats. Do I have a point? Yes, if China doesn't continue to fund our debt at cheap levels, then our markets are in trouble. If we move toward Socialism then we can't continue to generate low interest rates that we currently enjoy on our debt.

So in summary after those ramblings, here is my thesis. We are going to see our cost of credit go up over the next 24 months. China is going to continue to consume goods and their financial markets are going to continue to develop and become better and safer investments. Less money pouring into the U.S. safe haven government bonds--even higher cost of credit for the U.S. government. Higher taxes slow down the small businesses and government needs more money to stimulate the economy. All the while China and India continue to consume. Inflation goes crazy. Gold will surpass $1100 per ounce by July 2009 and $2500 by January of 2011. The Dow will test 8400 again by the end of this year and will test 7700 during the first quarter of 2009. Deleveraging has given every one the false idea that inflation is totally at bay. Trust me this will be a short term phenonmenon and inflation will be back on the radar screen and will cause interest rate hikes before the end of 2009. The dollar will begin to weaken and the dreaded economy killer (Oil) will begin to ramp up again. I believe that we will see oil prices back to $125 by June of 2009. I believe that some time during 2010 we will see oil touch $200 per barrel and natural gas at $15/mcf. If this wheel begins to spin it will cause the DOW to go into a massive downward spiral like a slow moving cancer that just eats away at the core organs before you know what has hit you.

Tax and spend has never---and I challenge anyone to find proof that I am wrong---tax and spend has NEVER EVER made an economy more EFFICIENT. It hasn't, it won't, and it never will. Will a stimulus package help retail numbers for a period of time? Yes. Will it last? No. Families need to get more efficient with their personal spending and the government can't make families more efficient without creating jobs that last.

I will play the energy and gold plays and the heck with everything else.

STAY SAFE AND CONSERVE CAPITAL.

How to Trade the Vote?

I like the infrastructure plays and obviously my favorite is FLR. Other than that I am looking to potentially get short. I think Wall Street is headed for more regulation and I think that will be negative in the long run. Not to mention that this rally has been pretty sharp and volume was not that great. I am cautious with regard to some of my dividend paying favorites until we see how any new tax policies are going to impact those stocks. I am considering selling my domestic tobacco dividend generator MO. It is almost a given that we are going to see higher tobacco taxes to fund the Children's Health Insurance Program. Fundamentally and ethically I have no problem with those higher taxes---but it may very well impact MO to the downside.

I like gold,oil,and natural gas.

More later.

The next 10%

Is the next 10% up or down? I believe that we are going to see some stabilization and upward movement between now and the end of the year. I do however see some terrible things on the horizon if we keep this stimulus talk up. Both the Republicans and the Democrats have gotten this thing wrong. I said before the bailout--and I stand by it--that we had to have the banking/credit bailout to save our banking system. We don't need some timeout for people that aren't paying their mortgages. We have to quit trying to mitigate the recession. We needed to stop the collapse of our financial system and we have done that. We need to quit with the bailout/stimulus/handout/socialism NOW!!! We are going to create rampant inflation and now I am looking at GOLD. I think the fear premium is coming out of gold and I want to get in before the correct inflation premium is priced in. I prefer to play gold through FCX which is not a pure play. The pure play is GLD and I am looking at that one as well.

Where most people that correctly called the downward move in the economy ultimately got their plays wrong was that they assumed that the dollar would be destroyed. They missed on that call and we are seeing major strength in the dollar. So how do you play the socialism movement? With inflation hedges. The dollar is still positioned such that as the U.S. economy gets hit---it will SLAM other economies and markets. I think this phenomenon will continue for quite some time so I am turning my attention to playing the inflation that will most certainly arrive.

Will dividend stocks take a hit if the Democrats take office? Will increasing the dividend tax hurt those stocks in the short term? We are seeing some awesome yields paid on some traditionally strong stocks such as WRI and DRE? If there were not potential tax implications on the horizon, I would be buying those stocks right now. I am going to be researching this issue this weekend because I believe that commercial real estate will rebound in this country because the consumer is still out there shopping.

We have a couple of interviews that will be posted soon! STAY TUNED