Lehman failed, Merrill Lynch gone, and AIG needs 40 billion from Fed. That all happened from Friday to Sunday. Dot com companies didn’t even fail that fast. But US financial companies are breaking world records. Well, I only have one word for all these failures: FRAUD.

These US financial companies simply have NOT written down the asset values properly. One moment it’s okay. The next moment, it’s not. And why don’t they write down the values? Because they cannot. If they have done that, they should be effecitvely bankrupt. The leverages that they took were so great that a couple of percentage gone wrong in the reverse direction simply wipe them out. So by postponing the ultimate death, they keep putting out fairy tales, hoping to find more fools (foreign central banks?) to take over the toxic nuclear credit products.

As Warren Buffett have said, that this is the poetic justice for these financial institutions. Of course, Warren Buffett also has a big substantial stake in AIG, which is in a surviving mode. AIG with a market cap of 32.6 billion on Friday now needs 40 billion in cash. Of course, it doesn’t stop Ford and GM with 18 billion market cap to ask from Fed for 50 billion dollar loan either. Well, if Fed bails out Fannie Mae, GM and Ford, AIG, etc., pretty soon we will have a democratic and capitalistic government running every industry in our life. Wow, where would be the difference between communism and capitalism in that case, when private industries cannot fail according to capitalistic market mechanism?

Markets are expected to be down big on Monday. I’m guessing that Federal Reserve may throw another curve ball on Tuesday. So I think markets this week will suffer from tremendous volatility. A really big down wave in stock market is probably going to be imminent. I expect that whatever curveball Federal Reserve puts out there this Tuesday, it is just another opportunity for you to sell into the rallies.

Best luck.

Frugal at 1stMillionAt33.com

Today HUI is up big. HUI seems to have bottomed before gold, which is a good sign. Stocks should lead the physical markets. With gold hitting at 730s, and silver at 10s, this could be as low as it gets. Next week is also Fed meeting week. So it should be positive for the market in the short term.

But the problem with HUI and silver is that both have fallen below 2007 low. That has invalidated the Elliot wave count for wave 2 of 3 for the current down wave, and wave 1 of 3 for the last peak. The only possible count left would be that the last peak is really wave 5 of 1. That means that current down wave in HUI and precious metals in general is part of the big wave 2. Obviously the wave 2 won’t be finished in 6 months. Therefore, it means that HUI/Gold at best will be trading in an extended range for quite some time. I expect the oscillation to last at least until next April of 2009. However, it doesn’t mean that the prices will come back down to this low point either. It may, but it may not. It only means that the prices will probably stay suppressed. In fact, my guess is that the prices should drift higher to maintain above moving averages.

For most conservative investors, you may want to wait until the monthly MACD positive cross-over. The monthly chart of HUI with MACD is here
. Everytime MACD positive cross-over gives a very good buy signals, and it probably won’t come for quite a while.

Is the bull market for HUI/precious metals over? At least for gold, it is clearly not over. However, for HUI, it is quite shaky. Given the energy crunch picture for the coming years and the economic confidence model by Armstrong with a low point in mid-2011, my guess is that this bull market is NOT over. And certainly with gold being the strongest of all the charts, it is definitely still asserting the bullish stance. I would have to take what the gold charts tell me, since everything else simply derives their price from gold.

With all the above said, there is no reason that you can’t take a quick trade in the most extreme oversold conditions in HUI for years (decade actually). Just watch out for a reversal, since range-bound actions is what I expect for going forward.

By the downward momentum of the precious metals market, it looks like HUI will break 2007 low at 284.85 as soon as today (Tuesday). In fact, both XAU and HUI are in the same precarious scenario. Even if it’s not today, it looks like it may break 2007 low before month’s end.

Breaking this low will be significant, since it will more than likely go to the next support at about 250 level. After 250, it could get ugly quite fast. And for sure, it’s going to extend this “correction” for longer periods of time.

I’m not going to make a call on either way. For the PM investors, this “correction” has been the most brutal ever. I don’t know whether this is going to be a correction anymore. The temporary high less than 2 months ago seems to be eons ago.

Best luck.

Over the weekend, Fannie Mae and Freddie Mac are “rescued”. I think the deal is simply keeping a zombie to walk dead for a couple more years. When the net worth of the GSEs is effectively negative billions of dollars, any more money poured into it simply goes into a bottomless blackhole.

How much losses are there for GSEs? At 5 trillions of mortgages, assuming an average loss of just 10%, that is 500 billion dollar losses in total. With the latest rescue, GSEs will continue to expand their portfolio by $20 billion dollar a month for the next 16 months until the end of 2009. That’s about another 320 billion dollar in new mortgage-back securities purchase. If the government plan on rescuing other banks, it could be buying 320 billion dollar of toxic loans from weak banks. Treasury will also add up to $100 billion dollar for each GSE, whenever the net worth goes negative. Of course, now that the government has taken over the GSE, such definition is probably not visible to the markets. Both of the GSEs have gone as far as classifying mortgages that have gone deliquent for up to 2 years as still “good” mortgage, without writing ANY losses, and still want to hold them to “maturity”. Well, don’t they know that those mortgages are already pre-mature and should have been foreclosured.

Given the current slow adjustment in the California housing prices, I think there are just too many such mortgages that haven’t been written down by banks. As they as they have not started on the foreclosure proceeding, I guess banks technically can still call these mortgages just delinquent.

The GSEs will be winding down after 2009, and shrink their portfolio by 10% every year. So I assume that the housing market may appear stablize for the next year. Don’t fall for it however. The bigger housing price adjustment has not started yet, and it should start in mid-2009 all the way to 2011. I think by that time, financial and real estate industries will truly be in shambles.

I seirously doubt that GSEs could be unwind at 10% reduction rate starting 2010. At the current state, the federal government will be effectively taking over a 5 trillion dollar mortgage industry. Now if the fed does a good job, and earn some money thru this venture, from whom do they earn their money? It’s the homeowners/taxpayers. If they end up losing billions of dollars which is the most likely scenario, who will be paying for the losses? It’s taxpayers again. How about just writing a big check to everyone, instead of operating these 5 trillion dollar mortgages for years? That seems to be much easier in my opinion.

According to market contrarian Mark Hulbert, the next sector leaders will not come from financial nor energy sector, but possibly from consumer staples, industrials, and basic materials. I certainly agree to Hulbert’s thesis that the previous market leader will NOT be the market leader for the next rise in the stock markets. That is always the case. However, valuation and sentiments must agree also. Therefore, I can only subscribe to half of Hulbert’s statement: the next leaders will not come from financial sector, but energy sector is probably not out.

On valuation basis, energy sector as a whole is THE VALUE PLAY still. Most energy stocks are still trading at P/E ratio between 8 to 14. That’s REALLY LOW. They are not trading higher only because the forward projection of energy prices by Wallstreet are low. Examing the headline sentiments, you find the headlines picking the bottoms of the financial sectors all the way down, while the news of declaring the death in energy and commodity sector in general comes out right away after the recent collapse in the prices. When you try to pick a bottom, you are bullish. That is the sign of a bear market. More than likely, the particular sector will need to take some time and form a multi-month, if not multi-year base.

In fact, if you look at Hulbert’s list of next leaders: consumer staples, industrials, and basic materials, it’s kind of hard to imagine how energy sector will have a mediocre performance. Rise in consumer staples means pricing power or lower manufacturing cost. Since basic materials probably won’t do bad either, it will probably be pricing power along with general inflation in basic materials. Industrials sectors are mostly at the backbone of infrastrutures and equipment makers. A boom in industrial sector probably means a high demand in the basic materials, requiring more equipments for production. If you put the three pieces of puzzles together, it probably means more inflation, and less growth in tech sectors. Due to these demands presented by previous scenario, it is hard to imagine that energy sector will be lackluster, especially given a current low valuation.

I think going forward, you’re likely to have persistent mild to high inflation, decreasing discretionary income, and lowering living standards. Putting financials along side with energy sector is probably not a good bet. After all, the most recent and biggest bubble that burst was in real estate which was tied to financial credit availability more than anything else. For that reason, I think consumer discretionary, real estate, and financial sectors are more likely to under-perform than anything. For an ETF investor, one can easily “tune out” those components by shorting those percentages out on a time-averaging basis. That should be an easy way to beat out S&P 500 index.

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