Fingers of Instability, Part X

In This Issue - 4 Fingers
Meltdowns
The Taxman Cometh, Middle Class Attacks
Stocks
Inflation and GDP

  Introduction

The markets are rocking: precious metals, commodities, raw materials,
energy, interest rates, foreign currencies, the dollar and more are
providing opportunities, up and down to the prepared investor. The tsunami
of money and credit creation required to underpin the asset-backed
economies of the G7 has provided opportunities as far as the eye can see.
And the massive sterilization of this same money printing by the
emerging world is stoking runaway inflation to surface in every area of the
globe and signaling the unfolding "Crack up Boom" (see Tedbits archives
at www.TraderView.com).

Helicopter Ben is confronting you with a conundrum: Leave your money
safe in the bank and let him and the G7 Central Banks, Public Servants
and treasuries nibble at it with their printing presses at night, or
get invested? When he lowers interest rates he transfers the money you
should be getting in your savings accounts and fixed income investments
to the Money Center and Investment Banks to rescue them from their
horrendous losses. They borrow it from depositors at increasingly low rates
as the Fed rescues the economy (what a crock) through interest rate
reductions and lend it to you through their credit card operations at 20%
to 30% interest rates. The Federal Reserve has been completely
compromised by the Congress, US treasury and Hank Paulson.

Independent Central bank? NOT.

Obscene? Yes! Immoral? Yes!

The "roach motels" derivative markets are underpinned only by the
 opaque accounting fictions the regulators and central banks are intent on
 preserving. Merrill Lynch and UBS began to come clean on "balance
sheet" bombshells that remain hidden within the financial systems of the G7.
The majority of the losses still remain undisclosed. Losses which are
masked by "Tier three" accounting fictions in hopes that the markets
will recover their confidence in the "over-the -ounter" products and
allow them to be moved onto "someone else's" balance sheets.

A gigantic game of hot potatoes has begun. The dollar itself is
becoming a hot potato. The destruction of its place as the RESERVE currency
of the world has been accelerated to a breakneck pace by the US
treasury and Federal Reserve. The poster child for the: "Problems are
Contained" are the major stock indexes around the world. A headline illusion to
create a sense of "well being" for the uninformed masses. But the
internals of those same markets are breaking down badly. The money that's
being printed is moving many markets and those moves are just in their
infancy. The dollar has suffered a major breakdown, many are looking for
a countertrend rally, but any rallies are quickly capped by dollar
holders trying to jump out. Are you benefiting from these opportunities?

We are going to do a few quick "fingers of instability" on a variety
of issues which will continue to impact your portfolios. They are only
opportunities for the prepared portfolios and pitfalls for those
portfolios which are not. Which side of this divide is your portfolio
positioned on?

  Meltdowns

The CDO markets continued to deteriorate in crash-like manner as
every rung of the ratings ladder from AAA on down continued to be marked
down by the Credit Ratings Agencies: Moody's, S&P and Fitch. Whereas the
big banks and investment houses can hide behind tier three and pray for
a market recovery, the investing community cannot. Pension funds,
institutions and money market funds, have fiduciary investment covenants
which direct them to sell securities which are below certain ratings
levels. Once an investment falls into the lower rungs on the investment
scales they are bound by their own investing rules to divest the assets.

10's of billions of dollars of securities have been downgraded since
 the beginning of October and this will require that they be sold in a
 timely manner. Once those securities hit the markets we will know their
true value, and it won't be pretty. The super SIV will quickly become
an exercise in wishful thinking as their "high quality" paper becomes
junk in the maelstrom of liquidation which increases every time a
security is downgraded. The super SIV's whole reason for being was to prevent
fire sales and price discovery. Some of the Triple AAA CDO's fell to 57
cents - aka Junk territory. More and more is slated to become so.
Every sub index of elements (AAA, AA, A etc.) of the structured products
has crashed since October 1. The carnage of losses is staggering!
Bond insurers Radian, Ambac and MBIA shares' are in freefall, not
only from the projected losses from their insurance of CDO's and
structured products, but state and municipal finances in the US are in freefall
as well. Many Muni bond holders face BIG problems in the coming year.
 What will you do if a state or municipality goes bust and the insurance
 company guaranteeing their bonds does also? The real estate boom
inflated their tax incomes and now is deflating them. I live in Chicago and
they are angling to raise taxes 1 billion dollars, and it is no
different in any other city or state in America. Soon you can add Europe to the
list as the real estate BUBBLE is in a precarious position around the
globe.

Foreign inflows into US corporate bonds have ground to a halt, and
that is over 50 billion dollars a month of foreign investment that has
stopped. Mortgage bond indexes have suffered 30% falls since the end of
the quarter in September. It is clear that the US Federal Reserve plans
on doing a Greenspan and push short-term rates to very low levels to
allow the banks to borrow from their depositors at very low rates and
lend it out long to fix their balance sheets. As usual, the little guy is
sacrificed on the altar of saving Wall Street and the Money Center
banks from their poor investment decisions. Instead of saving the main
street economy with their actions, they are hurting it as inflation is
running away....

 The Taxman Cometh, Middle Class Attacks

The mother of all tax hikes is front and center in the United States.
Lawmakers on both sides of the isle can't be content with what they
steal from their citizens on a nightly basis with their printing presses.
Pointing at hedge fund managers in New York and calling them" THE
RICH" they turn around and sock it to every small business man in the US,
taxes are set to skyrocket on people earning $150,000 or more, while the
largest Corporations in the US are going to get a tax cut. Why the Big
corporations? Why of course it's because they are big campaign donors.
Most people don't understand that Big business doesn't pay taxes,
their customers do. It's passed right through to the customers and reduced
wages for the employees.

People earning over $150,000 a year face the expiration of the Bush
tax cuts so their tax bill will increase from 34% to 39% and then
Congress wants to add an additional 4 to 5% surtax to cover the AMT
(Alternative Minimum Tax) repeal. 44% tax rates on small business men and THE
RICH, who earn over 150,000 dollars a year. Before they are finished, the
definition of the rich will be as it is in FRANCE where anyone earning
more than $48,000 euros is RICH. MISERY spread widely is the
definition of FAIR by the public servants. Of course that is true as all the
productive people and entrepreneurs left the country YEARS AGO!

This is supposedly to FIX the Alternative Minimum tax, a tax
monstrosity created in the late 1960's to catch several hundred people who paid
no taxes by cleverly (but legally) using the tax code, has now
descended onto tens of millions of people. THIS IS THE CONTINUAL REDEFINITION
OF THE RICH, as your public servants eat more and more of your income
 for the "something for nothing" constituents. These people have been
moved into the definition of the rich as the value of their paychecks has
risen nominally. In purchasing power terms, the dollars they make have
imploded and have been inflated by the G7 printing presses. Nobody
creates more jobs than small business in America, unfortunately they don't
have armies of lobbyists to grease the halls of congress with MONEY for
their REELECTION campaigns. So they are easy pickings for
congressional tax and spending vultures and don't have the money to BUY protection
from CONGRESS.

Every State and municipal government is frantically searching for
 income to plug gaping holes in their funding, further driving stakes into
 the hearts of consumers and small business. These fraudsters expanded
their budgets by gargantuan proportions during the feeding frenzy of the
now dead real estate boom/bubble. Those income streams have now
virtually stopped in their tracks and they are like whales on a beach after
the water has receded. Of course, none of them even considers CUTTING
SPENDING.

Once these tax hikes take effect expect every one of the businesses
in America to FIRE an employee and transfer the income to the
government: Federal, State, and Municipal. Is this a recipe for growth and wealth
creation? NO.

  Stocks

Stocks are near their highs, but more than 50% of the gains in the
 NASDAQ are from 3 STOCKS: Apple, Google and Research in Motion, in the
S&P 500 more than 50% of the stocks are below their 200-day moving
averages.....

More and more investors are fleeing to the perceived safety of
Technology and multinational big caps, the Russell 2000 is a laggard. The
absurd CNBS er CNBC position that stocks can't go down or it is a disaster
is absurd. It is only a disaster for WALL STREET and Washington as
they won't be able to fleece you as much through inflation and taxes. It
is painful to watch the spin of 3rd quarter earnings which are down
about 1 % year over year. But stocks are up 20-30%! What's wrong with this
picture?

Looking at 3rd quarter earnings, Goldman Sachs held 72 billion
 dollars of tier 3 assets (mark to myth) but somehow had no losses
from them. John Mauldin reports of one series of CDO's from Goldman that it worthless (Hank Paulson must have guided them through this
minefield).

Transportation companies such as Federal Express, UPS, railroads and
industrial giants such Caterpillar and Cummins are talking about substantial
slowing of business and inventories. At the same time the stock analysts
are predicting 10% growth in 4th quarter profits. Most Corporate and
GDP profit growth is an illusion as inflation is far higher than
acknowledged by the government and investment banks and brokers.

Profits are beating expectations, which were revised down right up to
the last day of the 3rd quarter, creating an illusion for investors of
health and expanding business. CNBS er CNBC NEVER gives you the real
number, pro forma went the way of the dodo bird in 2000-2202, it's now
resurrected in the new term: now it's always EX-ITEMS, aka "the bad
stuff", which does impact earnings - but they present the fiction of them
which is not reflective of the true earnings. CNBC America is a
wholly-owned subsidiary of their advertisers, aka WALL STREET! It is SHAMELESS
and OBSCENE.

  Inflation and GDP

Does anyone believe inflation is not a problem? In today's 3rd
quarter the CORE personal consumption inflation rate was 1.9%. Signaling to
the cognoscenti that the fed can ease with no danger of inflation. GDP
clocked in at 3.9% above most estimates, capital investment was up 7.9%
and consumer consumption was up over 3 % (can you say higher food and
energy costs? Its not real growth). Richard Russell
(www.dowtheoryletters.com) reports:

As I said, the nation's faith in the Fed is amazing. It's even more
amazing in view of the fact that our President (I'm referring to George
Bush) is receiving the lowest approval rating of any president in
history. The only thing lower is the current approval rating of today's
pathetic Congress.
And yet, we continue to take the government BS statistics on
inflation seriously. The latest Economist magazine puts the year-over-year
dollar index of "all items" up 16.7%. They put the price of food up 31.6%
year-over-years. So our government tells us that "core inflation" is
running below 1%. And people take these figures seriously.

The GDP report clocked in at 3.9%, but if you subtract real inflation
as reported by Richard Russell is it really higher? MasterCard just
reported blowout earnings; I guess if you can't earn the money you can
just borrow it? Of course it is only at 20 to 25% interest. Can you say
legally sanctioned indentured servitude? And of course with the new
bankruptcy laws there is no escape for these borrowers from these loan
sharks. These loan sharks, also known as the "Investment and Money center"
BANKING industry, owns the US congress and the Federal Reserve: "lock,
stock and barrel".

In conclusion, my good friend Clyde Harrison sums up the situation
quite well: 
"The fed cut short rates � of a percent 6 weeks ago, the ten
year bond is down 6/100's of 1 percent so no help for the mortgage
market, the dollar is down 3 %, gold is up 7%, crude is up 12%,  so Goldman
 Sachs, Bear Stearns, Citigroup and Merrill were helped, the public was
 hurt".

"The dollar dropping by 3% means prices will soon be higher at
Wall Mart, and gasoline will be higher the next time you fill up"
additionally, he said "Its good to have friends in high places". 
Clyde is an  Oracle of the obvious. They cut interest rates � % percent today, gold
will move, crude will move, the dollar will move, and many other
markets will move. These are opportunities, have you captured them? Have you
devised a plan to capture them or will your portfolio be the victim of
them? Do the homework necessary to thrive! Diversify properly,
long-only strategies can be hazardous to your portfolio. You need
diversification which can prosper regardless of market direction.

Bonds are bombs as the printing press relentlessly assaults them.
Guaranteed certificates of confiscation as they were in 1980. Who is
propping up this illusion? Why would anyone by a US treasury issue when they
pay 3-5% and inflation is running over 6%, at least. Is this the price
you have to pay for the SAFETY of a government bond? Safety is an
oxymoron as the supposedly ultra-reliable borrower is also the serial money
printer.

One of my customers who operates shopping malls in Florida and
Wisconsin says the tenants are struggling (late on rents and worse, no pay);
things are not well in the land of the consumer-based economy of the
US. So the new Congress says: let's raise taxes, increase government
spending and waste, and destroy job-creating small businesses and call it
"fairness" for the little guy. This is the formula that the Congress is
running on and has been implementing since last November's "throw the
bums out" vote. Look no further than Michigan to see the results; it is
absolutely failing in every respect to wealth creation and business.

Unemployment is the highest in the country and jobs are scarce. That is
the ghost of Christmas future for the US of A. In Europe, entrepreneurs
are public enemies except in the Celtic tiger of Ireland and the new EU
15. This is also the destination of the US where Corporatism is front
and center as the corporations and banking industries finance the
reelections of the public serpents, er servants. And in exchange for
their support, the public servants bury the middle classes and emerging
entrepreneurial competitors in the small business communities. Look no
further than the proposed Tax Reform to see this in action.

The G7 central banks and political community are firmly in the grasp
of big corporations, banks, politicians and their "something for
nothing" constituents. To the detriment of the broad electorates who are
dumbed down and led like sheep to the fleecing arenas. Housing is not going
to be fixed by lowering rates, and the homeowners will not be saved
either. This is only a rescue of WALL STREET and the BIG banks. I
applauded when Hank Paulson was named Treasury Secretary, after the amiable
dunces before him. Well, as H. L. Mencken said: I have gotten it good and
hard as what I wished for is turning into a "monster" of government
manipulation and corporatism run riot over the economy. Every time I see
him on the TV screen I shake my head as I "think" I see the horns of
the devil rising out of his forehead. LOL. The president's working group
on markets, also known as the Plunge Protection Team, has recently had
another Goldman alumni and hedge fund manager named as leader.

They are picking the pockets of savers across America and transferring
it to New York, New York. Markets are now very, very political
playgrounds!

Why did the Fed lower rates so it won't DISSAPOINT the markets? The
Markets are supposed to do whatever they do, not be supported by the
Fed. I thought their mandate was full employment and controlling
inflation. The absurdity of the Fed preemptively addressing problems BEFORE they
are real shows what ACADEMIC economists can do; it's all theory and
has no basis in reality! Paulson has sold Bernanke a story and he has
bought it HOOK, LINE and SINKER. Turn them into opportunities for yourself
regardless of the way the markets go!