Thoughts on Markets

Sunday, June 22, 2008

Very Dangerous Times in Financial Markets

Above is a two year graph of the DJI. Think of the potential losses over the two year period. Of course, if one had great timing and bought low and sold high over the period, the result would be different. However, I doubt that many folks have been gifted to the extent that they could consistently buy low and sell high. At times, we may have been able to buy near the low and sell near the high. If so, we could have profited.

Perhaps, in place of stocks, we held on to the dollar. The dollar, like other currencies in the world today is unbacked paper "money." The U. S. Mint has already replaced the gold and silver coins of yesteryear. There is now discussion about replacing the penny as the metal content of the penny is worth more than the penny. Therefore, the losses in holding the dollar are likely greater than the losses in stocks. This is the way of FIAT (government created and controlled) currency. It always depreciates over time.

Now look at the last graph for two years of gold prices. Silver, gold, and platinum have proven to be holding steady value in comparison to both the DJI and the dollar. Historically, silver and gold have been money for centuries. They were recognized as real money during biblical times. Land and other property were sold for specific weights of gold and silver. Thus, they were the preferred money. In the time of Christ's incarnation and life on earth, there were coins of "shekel" and other weights of gold and silver used as money. In the American Colonies the Spanish Doubloon (either silver or gold) was widely recognized and treasured a real money.

Those of you who have been reading these posts for some time know these facts. I did not want to be repetitious, but thought it important to present them once again with the benefit of graphs. What I see in these is a time of great danger in the general market.

Under DOW Theory, the Dow Jones Transportations must confirm the drop in the Dow Jones Industrials (DJI) for there to be a vicious rout of the market. The Transportations have stayed above their low and have yet to confirm the downward move of the DJI. However, the DJI closed at 1182.60 on Friday and does not look to do much better tomorrow.

This is a time for great caution in the general market! Should the DJI continue to drop precipitously again tomorrow, it could go much, much lower. Of course, there would be more intervention into the market by the Fed and the President's Plunge Protection Team. That, too, would be a disaster only postponing a significant correction.

There is a possibility that a major correction in the DJI could spill over into even the natural resource stocks, including those in our mining stocks. With a serious downward move, investors would be bailing out and/or responding to margin calls. Thus, they would be selling all stocks to salvage some cash or answer margin calls.

By this time, we should be in precious metals and mining stocks with some cash on hand to take advantage of buying opportunities.

I urge you to carefully sell losing positions in the general market and use close stop losses to preserve profits on winners. I feel that it is not a time to be a buyer until we see what the market is really telling us. In other words, I believe we must batten down the hatches for a real hard blow.

It is important to realize that we are likely to take some losses on mining stocks should the storm be severe.

In the background is the terrible state of the financial industry, including banks. All the fixes of the system have been only band aids on severe wounds. None have solved the problems and more will be surfacing as time marches onward. One can assess the financial industry by following the action of these ETFs >> IAI (Bankers' Dealers), PIB (Banking), XLF (Financials), and others. The solvency of financial institutions is critically low and is having a profound impact upon the industry.

Looming over all of this is the possibility of an attack on Iran. That could come from Israel or America. Iran has challenged both by removing their dollar deposits in Europe and exchanging most of them for gold and Euros and the threat of pricing their oil in Euros. When Iraq did that, we got bogged down in Mid-East War. The rumors are out there now, but we should pray they are only rumors and not actual plans for attack.

We must always remember that our God is Sovereign in all the affairs of man. Nothing happens which is not in concert with His will and the wonderful plan for His people. All things work together for the good of those who fear Him! Let us get on our knees before Him and ask for His mercy in this delicate situation.

Best to each of you and yours, Doug


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