Market Update:  2009-02-11

The XAU Gold & Silver Mining index is back to resistance again today and attempting to get above it, with a 7% rally this morning.  Gold is getting interesting, as this battle with resistance will likely be very volatile.  The gold ETF that I own and recommend accumulating is GDX.  But as with anything, don’t dare buy it all at once….just nibble over time.  Gold mining is very, very volatile.  Since the XAU bottomed a few months back, it has already doubled, with lots of big swings during that time.

In the meantime, crude oil was moving the opposite direction of gold this morning so I picked up a little more USO at $26.50. This is my third purchase of USO in the past three weeks. I expect that the actual commodity will bottom in $20-35 range, but my best guess is that the bottom will be in the upper half of that range. Oil has already been as low as $34 a month or so ago, and has fallen back to $37 today after rallying back to $48 just two weeks ago.  Once again, oil is very volatile right now as it is searching for a bottom.  In my opinion, oil under $40/barrel is a great deal longer term (i.e. 2-10 years).

Banks are looking shakier by the day. Even so-called socialist Obama is scared to seize Band of Amercia (BAC) and Citigroup (C). I think anything less than a full-fledged FDIC takeover of some of these clearly insolvent, big banks won’t work. Bottom line is, just like the Bush administration, no one really knows what the heck is going on in the U.S. financial system and what needs to be done to help stabilize it. Americans apparently have it stuck in their heads that nationalization of banks is a socialist move and bad for our country. But what they don’t realize is that the “free market” that America so claims to be about has failed our financial system.  The free market is not fixing or willing to fix this serious problem. 

Tax-evading Treasury Secretary Geithner’s talk about a public-private buying scheme for “toxic” assets is a joke.  Pretty soon all assets on the banks books will be “toxic” because not even the rich guys on Wall Street are going to have any jobs left to pay their jumbo mortgages and fancy car loans. If private citizens and corporations wanted to buy bank loans, they would already be doing it. That is the problem.  No one other than the government is able or willing to take on these banks’ assets.  And the U.S. government (both parties) is tip-toeing around the issue and pretending as though they can fix the problem by avoiding the nationalization of these insolvent banks.

As always, people don’t want to admit when they are wrong.  Americans can’t stand the fact of admitting that our banks were run down the hole by a bunch of greedy, “free-market-loving” free wheelers.  And now apparently we are just going to sit back and watch the country fall apart rather than to back up our banking sector with the full faith and credit of Washington. It the taxpayers are going to take on the risky assets of these banks, we should own the banks.  We should not continue to pour money down a bottomless “John Thain $1400” trash bin.

It is like everyone knows the patient is dying and in intense pain, but they don’t want to give the patient morphine because that is an opiate and opium is a drug. Drug use is bad, so you shouldn’t use drugs even if someone is screaming in pain.  Give me a break!

If we don't underpin our financial sector with the full faith and credit of the United States government, America really does risk reliving the 1930s. Job losses could soar and everyone will suffer. If you don't believe that, then read up on what happened between 1928 and 1934 to the unemployment rate (it went from just over 4% to 25% in just a few short years!).

Since “supposedly” the government can’t do anything right, my suggestion is this:  Why don’t we just go ahead and sell the U.S. Army to Bank of America and let Ken Lewis direct the war against the terrorists in Afghanistan. Let’s sell the U.S. Department of Transportation to General Motors and let Rick Wagoner decide how many roads your town requires and whether or not a road leading from your home to your job is really necessary. And let’s sell the U.S. Department of Education to Sirius XM Radio and let Mel Karmazin ensure your kids get a free K-12 education. 

Let’s face it, if the U.S. government is not capable of doing anything right, except when it comes to mismanaging America, why don’t we just go ahead and sell off all government-run agencies and use the proceeds to pay off our national debt. If we would just let the banks run the military to protect us, allow GM to pave our roads, and Sirius XM Radio to educate our children, America’s problems would be solved. After all, the private sector is so much better at doing things right.

What a joke!  Wake up America, before it is too late!

We will know more about how spinning off all government-run programs will end up working out later.  Until then, Happy Investing!

Gregory Guest