The median household headed by a person between the ages of 60 and 62 with a 401(k) account has put away less than one-quarter of what is needed to meet their standard-of-living needs in retirement.
Yikes.
Remember, there are 78 million boomers that are going to turn from being net borrowers and spenders towards net creditors and savers.
This is definitely bullish for long-duration bonds, by the way, which is the most detested asset class on the planet right now, confirmed by the latest Merrill Lynch survey of global portfolio managers.
--Tyler Durden [pseudonym], "Rosie on Why Coming Monetary and Fiscal Contraction Means 'Selling in May' May Be Too Late", www.ZeroHedge.com, February 22, 2011.


Dear subscribers,


This is update #1394 for Thursday evening, March 3, 2011.


If you live in or near San Francisco and you would like to get together from April 29 through May 4, please let me know.


Global risk assets rallied, thereby forming additional lower highs in their bearish patterns. The market is shaking out uncommitted short sellers so the fewest number of people will benefit from the worldwide decline. Most emerging markets have been in downtrends for about four months; most commodity shares for several weeks; most U.S. equity indices since February 18, 2011; some commodities for only a few days. There may continue to be a tiny minority of risk assets which continue to set new highs and thereby induce crowding by investors desperate to believe Jim Cramer's claim that "there's always a bull market somewhere". I bought more TLT at 90.52 at the open and 89.99 in the late morning, each using 0.42% of my net worth, since I strongly believe that long-dated U.S. Treasuries will be one of the best investments through 2012. Gold and silver both closed slightly lower for the second consecutive trading day, while the U.S. dollar has become even more disliked. I expect a powerful greenback both in the short run and through 2013 as the U.S. dollar index eventually moves back above 100 for the first time since 2003.


At 8:30 a.m. Eastern Time tomorrow--Friday, March 4, 2011--U.S. employment data will be released. As this is one hour before regular equity trading begins, expect unusually sharp fluctuations in both directions during the minutes immediately afterward. This is often the best time of the month to obtain extreme pre-market prices, but since these moves can be so rapid, you should be sure to place your orders in advance.


At least one other analyst loves long-dated U.S. Treasuries (i.e., TLT):



When silver reached its bubble peak in January 1980, which like most bubble peaks will probably never be reached again in inflation-adjusted terms, there were all kinds of conspiracy theories which found their way into the mainstream media. As silver completes an important intermediate-term peak, although far from true bubble status, the conspiracies are once again running fast and furiously:



The U.S. dollar index rose to a very early morning high of 76.855, and then slid to an early morning bottom of 76.385, its lowest level since November 8, 2010, before ending the day modestly lower near 76.49. Market Vane recently showed that only 7% of traders were bullish toward the U.S. dollar index. In spite of what you hear in the media about its allegedly being on the verge of an "imminent collapse", the U.S. dollar index has been in an important bull market since March 16, 2008, when it had completed an all-time bottom at 70.698. Since then, it has completed the following higher lows: 71.314 on July 15, 2008; 74.170 on November 25, 2009; 75.631 on November 4, 2010; and is probably completing its next higher low this week. True bull markets are constructed from a grinding pattern of numerous higher lows which establish repeatedly improved support over a period of several years or more, not from a sudden euphoric ascent over a period of several months or less (in contrast with silver, copper, crude oil, etc.). On January 10, 2011, the U.S. dollar index climbed to an early morning peak of 81.313, its most elevated level since December 1, 2010. On November 30, 2010, the U.S. dollar index rallied to an early morning peak of 81.444, its most elevated level since September 20, 2010. Relevant past peaks for the U.S. dollar index include 88.708 on June 6, 2010, 89.624 on March 4, 2009, 92.63 on November 16, 2005, 99.49 on August 26, 2003, and 120.99 on July 5, 2001.


TLT, a fund of U.S. Treasuries averaging 28 years to maturity, slumped to a mid-afternoon bottom of 89.98, its lowest point since February 22, before closing down 89 cents at 90.06. I bought more TLT numerous times in February-March 2011 near and below 90 dollars per share, on each occasion using 0.42% of my net worth. I have been buying VUSUX almost every day for the past two months, including today's small purchase using 0.07% of my net worth. Both VUSUX (VUSTX < 50k) and FLBAX (FLBIX < 100k) are nearly identical to TLT, except they average about 22 years to maturity instead of 28 years. All subscribers should continue to buy TLT near 90 and below; those who are not U.S. residents will enjoy even greater gains in terms of their home currency as the U.S. dollar rallies strongly against most world currencies over the next two years. On February 28, 2011, TLT climbed to a mid-afternoon peak of 92.52, its highest point since January 25, 2011. On February 10, 2011, TLT retreated to a late morning bottom of 88.14, its lowest point since April 7, 2010. On December 31, 2010, TLT climbed to a mid-afternoon peak of 94.70, its highest level since December 7, 2010. On November 30, 2010, TLT rallied to a pre-market peak of 99.44, its highest point since November 4, 2010. On August 25, 2010, TLT surged to an early morning peak of 109.34, its highest level since January 28, 2009. On April 7, 2010, TLT slumped to an early morning bottom of 87.30, its lowest point since September 20, 2007.


VIX is probably the best-known measure of equity index implied volatility, which is synonymous with investors' fear of an upcoming bear market. VIX slumped to a late afternoon low of 18.25 before closing down 2.10 at 18.60. On March 1, 2011, VIX opened at its intraday bottom of 17.63, its most depressed reading since February 18, 2011. On February 23, 2011, VIX rallied to an early afternoon peak of 23.22, its highest point since November 30, 2010. On February 14, 2011, VIX slid to an early morning bottom of 15.22, its most depressed reading since July 19, 2007. VIX dropping below 16 on an intraday basis demonstrates an astonishingly dangerous level of investor complacency toward the potential of a double-dip recession, and is similar to the VIX levels in 2007-2008 preceding the last severe global equity bear market. On May 21, 2010, VIX soared to an early morning peak of 48.20, its most elevated mark since March 10, 2009.


VXX strategy: As the S&P 500 surprises investors with a double-digit pullback and completes an intermediate-term bottom when the crocuses are in bloom, I plan to progressively sell all of my VXX in anticipation of that bottom, at a price which will be determined by market conditions. As with all of my trading, I always rely on my most reliable signals to decide when to buy and sell, and am never a slave to preconceived price or time targets. Losses on VXX can be used to offset anticipated short-term capital gains throughout calendar year 2011.


The S&P 500 index surged to a late afternoon peak of 1332.28, its highest point since February 22, before closing up 22.53 at 1330.97. The S&P 500 is lagging many of the traditional leading sectors in establishing a major bear market, but it cannot evade its inevitable sad fate. There have been five days of 2.95%+ gains for the S&P 500 since the number of daily 52-week highs on the New York Stock Exchange and the Nasdaq peaked simultaneously on April 26, 2010; such behavior is a defining characteristic of any severe bear market and has never occurred during any bull market. One subscriber kindly researched 1982-1999 and discovered that there were only 20 such up days during this entire 18-year era of prosperity, or just over one per year. Its long-term bear market will remain intact until the S&P 500 ultimately completes a nadir below 500 and possibly below 400 in 2012. The S&P 500 has not been below 500 since March 31, 1995, and it has not been below 400 since October 5, 1992--before Bill Clinton was first elected President of the United States. On February 24, 2011, the S&P 500 slid to a mid-afternoon bottom of 1294.26, its lowest level since February 1, 2011. On February 18, 2011, the S&P 500 climbed to an early afternoon peak of 1344.07, its most elevated point since June 19, 2008. On November 16, 2010, the S&P 500 slumped to a late afternoon bottom of 1173.00, its most depressed level since October 27, 2010. On August 27, 2010, the S&P 500 retreated to a mid-morning bottom of 1039.70, its lowest point since July 7, 2010. On July 1, 2010, the S&P 500 slid to a late morning bottom of 1010.91, its lowest mark since September 4, 2009.


GDX, a fund of primarily large-cap gold mining shares, slid to an early afternoon bottom of 59.19, its lowest point since February 28, before closing down 92 cents at 59.87. In spite of or because of all the hoopla in this sector, GDX is about the same as it had been four months ago--and not far above where it also was in early December 2009 and in early November 2007. The attempted upside breakout in the fourth quarter of 2010 was blatantly false and is transitioning to a severe one- to two-year bear market, since gold mining shares are continuing to dramatically underperform their median historic gains relative to gold bullion. The normal historic ratio is a 2.5% increase for GDX for each 1% rise in GLD. From its intraday low of 15.83 on October 24, 2008 through its intraday high of 47.45 on September 8, 2009, GDX soared 199.75%. GLD climbed from 69.07 to 98.65 over the same period of time, which is an increase of 42.83%, and therefore yields a ratio of more than 4.66:1. From its intraday low of 46.80 on July 28, 2010 to its early morning high of 64.62 on December 7, 2010, GDX gained 38.08%, whereas GLD rose from 113.08 to 139.54 which is a rise of 23.40%. The recent ratio is therefore 1.63:1. Similar underperformance by gold mining shares from early November 2007 through the middle of March 2008 preceded the 72.1% plunge for GDX from the peak on March 14, 2008 through the open on October 24, 2008. On March 2, 2011, GDX climbed to an early morning peak of 61.25, its highest level since January 3, 2011. On January 25, 2011, GDX slid to a late morning bottom of 52.46, its lowest level since September 10, 2010. On December 7, 2010, GDX rallied to an early morning zenith of 64.62, a new all-time high. On July 28, 2010, GDX retreated to an early morning bottom of 46.80, its lowest point since May 21, 2010. GDX continues to dramatically underperform both gold and silver bullion. Since its intraday high of November 7, 2007, gold bullion has gained 68.1%, while GDX is up 11.2%. This profoundly negative divergence between gold mining shares and gold bullion is sending a strong signal that the global economy will experience falling inflation and possibly actual deflation over the next year or two, even as many are forecasting rising inflation.


On March 2, 2011, April 2011 gold futures rallied to a late morning all-time high of 1441.00 per troy ounce. Also on March 2, 2011, May 2011 silver futures achieved a late morning peak of 34.975 U.S. dollars per troy ounce, the highest level for silver since March 7, 1980--nearly 31 years ago. On October 14, 2010, National Public Radio's Morning Edition announced excitedly that they had made their first-ever purchase of physical gold. Their previous "investment" lost half its value by the time they sold it. On November 9, 2010, when gold reached an intraday high of 1424.30 per troy ounce which was barely surpassed by its early December zenith, Charles Osgood discussed the price of gold in one of his morning radio clips. These particular media outfits might mention the gold price once every few years. The nonfinancial media always call major turning points better than anyone including myself. Do not chase this phony baloney rally, as a one- to two-year bear market is virtually certain. Notice that even with substantial gains for both gold and silver bullion in recent months, and enough hype to sink the Titanic a second time, GDX has periodically ventured below its March 14, 2008 high of 56.87 and recently challenged its December 2, 2009 high of 55.40. Limited upside for gold mining shares reliably signifies similarly limited upside for general equity indices. A flood of bullish e-mails from subscribers regarding this sector, combined with intense insider selling during the late autumn of 2010, along with intense media and analysts' bullishness, encouraged me to sell short SLV (silver bullion) in September 2010 through March 2011 between 19.18 and 34.00, with many points in between. So far, the highest point in the cycle for SLV was its March 2, 2011 late morning zenith of 34.18. I have additional short-sale orders for SLV near 35.00 and higher, including the pre-market and after-hours sessions since extremes are often achieved at that time. If you have trouble borrowing it, contact your broker by telephone and request several hundred shares.


TLT is an exchange-traded fund of U.S. Treasuries averaging 28 years to maturity; VUSUX is a similar open-end fund of U.S. Treasuries averaging 22 years to maturity. I have numerous purchase orders for TLT from roughly 89.50 per share all the way down, each for approximately 0.42% of my net worth. I have been buying TLT between 88.49 and 92.99 from December 2010 through March 2011, as well as a moderate quantity of VUSUX in a separate account which has no access to exchange-traded funds. TLT has periodically yielded more than 4.4% annualized in recent weeks and will provide additional gains if you are a non-U.S. resident as the U.S. dollar continues to rally versus your home currency. I have been establishing numerous short positions since that is where significant profits will be made over the next year or two as we experience the worst global equity bear market since the Great Depression. I have orders to sell short more QQQQ (Nasdaq 100 Trust) near 59.00 and above, and to sell short more SLV (silver bullion) near 35.00 and above. With most brokers, short-sale orders are only good for the day (including extended hours if you wish), since otherwise they would have to go through the hassle of borrowing the shares every single day for weeks or months. The more that any risk asset has increased from its recent lows, the more attractive it is for selling short. During an era of stagnation, a bear market tends to have the most severe impact on what had been the strongest-performing securities during the prior bull market. All of the above prices may be modified, perhaps several times, as necessary to adjust to changing market conditions; I will attempt to indicate any such changes through future updates. I don't plan to put more than a few percent into any volatile position as a general rule, although assets at extremes may justify a higher weighting. Each individual short sale will be for approximately 0.13% to 0.33% of my net worth. If you cannot afford to create so many ladders of orders, then it is better to have a few ladders each containing many orders, than many ladders each containing a few orders. The worst possible scenario is if you cannot extend your ladder as the price continues to move adversely, since that defeats the whole purpose of using a ladder. Keep in mind that if you sell short, your broker may require you to repurchase your shares at any time; if that happens, then the best strategy is to replace those short positions with an equal-dollar amount of similar short positions to maintain a consistent total exposure.


Today's main topic is "Return of Sherlock Holmes".


I had just begun to relax in my favorite chair following yet another fine repast by our landlady and housekeeper Mrs. Hudson, when my fellow housemate Sherlock Holmes decided to interrupt my reverie. "Well, my dear doctor, it has been some time since we conversed upon the nature of the financial markets. Life passes so quickly, that it seems like just yesterday when we had the Panic of 1873--the first time I appreciated that my contrarian brother Mycroft had a real talent for making money. A lot has certainly happened since then, Watson."


"That is an understatement. More than a century has passed, and quite an eventful one it was."


"No question about that, Watson, and for a few years I wasn't even sure we would survive with the Blitz and the other horrors of that era. Fortunately, we are both still here, and now as your Zen Buddhist friend is always urging us, we should focus our concentration on the present. Have you had an opportunity to peruse the papers and magazines recently?"


"Indeed I have, Holmes, and I must say that it seems like every week the price of something or other is suddenly surging to about twice what it had been the last time I checked. Of course Mrs. Hudson does most of the buying around here, but looking at her invoices it is clear that something must be happening in the world. Strange developments especially seem to be prevalent in many of our former colonies."


"Precisely, old chap. A fine fellow who had gone 'Down Under' stopped by the other day, and you wouldn't believe the stories he was telling me about the housing market in Australia. Apparently you can obtain a mortgage in which you pay only interest, without any repayment of principal. I would have immediately distrusted his tale as a joke or his way of teasing me as he used to do when we were young, but his earnestness convinced me that it must be the truth. One of these days we simply have to connect to the internet, Watson; we can pretend that time hasn't changed in decades, but we're getting more and more isolated from what seems to make up the world these days. This phonograph player from 1900 still works fine, but it might not be a bad idea to get a DVD player also. Even the stalwarts down at the club are starting to call us old-fashioned."


"Perhaps you are right, Holmes. I have often believed that having a horse and carriage is ever so elegant, and it has enabled us to obtain some high-paying clients who are impressed with our refusal to get around London in those tiny motorized contraptions. However, we must modernize when necessary, and I do remember that when you bought your phonograph it was considered to be the height of fin de siècle fashion. Do you think we'll be using Twitter and all the other marvels we only hear about when Mrs. Hudson's grandniece comes to visit?"


"I am quite certain of it, Watson--quite certain indeed. Perhaps we could employ her services to enable us to join the twenty-first century."


"You can't be serious, Holmes--she's only eighteen. Could she really be competent to take charge of the situation and handle the myriad of details which are required?"


"She appears to be far more intelligent and creative than you may realize, and also surprisingly resourceful. I might remind you, Watson, about the person who saved your life in the Afghan campaign. If I remember correctly, he was only sixteen years of age when he carried your unconscious body to safety behind the British lines."


"No question about that, Holmes; he had lied about his age when he enlisted, and I shall always be grateful to him although there is no way to repay him for his kindness. I believe that you were similarly assisted by one of the Baker Street Irregulars when Moriarty was dangerously close a few years ago."


"Your statement is accurate, Watson. A twelve-year-old boy noticed Moriarty with his pistol just a moment before it might have been fatal to me, and he was able to cleverly block my antagonist who underestimated the young fellow. So, besides the phenomenon of rising prices, have you noticed anything else about the markets these days?"


"The fellows down at the club two years ago were constantly talking about what they might have to do to cut back on their spending, and I recall that a few of them even stopped coming to the club for several months. Recently, however, they're all back and up to their old ways, and they seem to have returned to their grand plans of former years."


"That's it, Watson. Frugality suddenly arrived, and it has left nearly as suddenly. Mark that down, Watson, as I believe this is an important theme. After everyone was concerned two years ago, no one seems worried these days. Even Mrs. Hudson asked me if I could recommend a speculation on the Exchange, which shocked me until she told me that more than a few of her friends have recently participated in such ventures--and have been making money. Even greater gains than myself, Watson, in percentage terms of course--can you imagine?"


"Wasn't that also the case in 2000 and 2007, Holmes? Almost every week you told me about a few of your associates who had really struck it big, until they almost all ended up getting wiped out a year or two later."


"Indeed, Watson, there's something about human nature which Mycroft first explained to me, in which most of us keep making the same mistakes over and over again because we don't know how to learn from them. I have spent many hours at the library perusing their historical information, and have discovered that the equity bourses in most of the world have been declining for about four months. It is only here in the U.K., also in the United States, and in a few other places where prices are still close to their highest levels since the first half of 2008."


"What do you conclude from that?"


"You may recall, Watson, that before U.K. and U.S. equities began to rally in the first half of March 2009, we had nearly all emerging-market equities and commodity shares beginning their respective bull markets in October and November 2008. I haven't yet determined why this leading relationship exists, but it appears to be quite compelling. I have also noticed other patterns, such as the fact that China is consistently one of the first countries in the world to begin either a bull market or a bear market."


"And why would that be? Didn't you visit that vast country several years ago?"


"Certainly I did, Watson, and it was an experience I will never forget. However, recent developments have me alarmed, as there are apparently some parts of Beijing and Shanghai in which real-estate prices are not too different from what you would find here in London."


"Surely that's impossible, Holmes. Aren't wages there perhaps one tenth of what they are here?"


"My line of thinking exactly. If prices for houses are that far out of line with reality, then we can be certain what will happen next. I know you are familiar with our old song-writing companion Charles Mackay, who wrote that book about financial bubbles before either of us was even born. We were fortunate to spend a fine evening with him just before he passed away. A more educated and refined gentleman I have rarely seen, plus he sang those wonderful songs of his."


"I can still hear 'Cheer, Boys, Cheer' in my mind--what a memorable tune. He never realized that his 'Extraordinary Popular Delusions' would become far better known than his lyrics and music."


"What interesting tricks Providence has in store for us. None of us can know for what we may be remembered, if at all. Perhaps my reputation as a beekeeper will survive my detective prowess."


"For myself, Holmes, I will be satisfied to be your biographer and your somewhat less brilliant verbal sparring partner."


"Really, Watson, don't underestimate yourself. I can instantly recall numerous occasions when you supplied exactly the clues I needed to resolve the most difficult cases, even if you were not always fully aware of their implications. Say, what do you think of United States Treasury Bonds?"


"You can purchase them with various maturity dates, isn't that correct?"


"That is not only correct, but the key to the situation. On January 28, 2011, the spread between the 30-year and 2-year U.S. Treasuries reached 4.04% for the first time ever--even going back to when we were much younger men. I believe this is providing an unusual opportunity for those who are willing and able to take advantage of the situation."


"Isn't the United States government borrowing massive amounts of money, Holmes? And isn't the U.S. dollar likely to be supplanted as the world's premier reserve currency?"


"My dear Watson, I deduce that you have been reading the Financial Times, the New York Times, and the Wall Street Journal far too seriously. Remember my advice to laugh several times at each of the articles in those esteemed publications, since once you begin to believe their conclusions and to follow them you will end up unable to afford even to live in these modest rooms. Of course the United States has its problems, but in a time of global economic contraction the U.S. dollar has always been the world's guaranteed safe-haven currency after it supplanted our own British pound in that role during our youth. Long-dated U.S. Treasuries are just above their lowest prices since the summer of 2007, and are therefore a great bargain especially as the U.S. dollar is likely to be one of the world's strongest currencies during the next two years."


"What about gold and silver, Holmes? They seem to keep going up, but I remember you told me years ago to track GDX, and that seems to be forming a bearish pattern of lower highs. I also notice there is consistent insider selling in the metals and energy sectors, while the people you call 'amateurs' have been piling into the riskiest assets in recent months. Is that still valid?"


"Absolutely, Watson. I see you have remembered our lessons well. My friends at the club are always puzzled by Mycroft and myself since we have been aggressively buying precious metals and their shares whenever they are selling 'to meet capital requirements', and then we are selling a couple of years later whenever they are most eagerly buying. One fellow there has exquisitely bad timing, Watson, and so whenever I'm unsure about the financial markets I speak with him for as much time as he'll allow me. I always resolve any doubts by doing the exact opposite of whatever he insists must be true. I would tell you his name, but then whenever all of us meet in the future you would recall this discussion and it would show on your honest countenance, which might not be a good idea."


"Does doing the opposite of this fellow prove to be consistently successful, Holmes?"


"Invariably, Watson, he is ahead in the short run. Sometimes for a few days; other times, for a few weeks; usually, for a few months. Sooner or later, though, his approach will always fail--without exception. He instinctively captures the popular mood of the crowd whenever it is becoming most intense, and is initially profitable whenever any extreme is becoming more extreme. Whenever the asset regresses toward the mean and beyond, he sits by hopelessly until he can't stand the pressure of mounting losses, and ends up closing out his positions shortly before they would have begun a meaningful reversal."


"In that case, Holmes, how can he continue to prosper?"


"A family trust fund, Watson--one of the privileges of some of those in the upper class. Fortunately for him, he is only permitted to draw a very small percentage of the principal each month, since if he were permitted to obtain his inheritance in a lump sum he would be a pauper within a few years. I secretly arranged with his financial custodian to ensure that this situation doesn't change, and I even pay a modest sum--call it a bribe if you must, Watson--to accomplish this objective. Of course I arranged it for my selfish purposes, but I could not think of any more effective way to achieve this end, and I sincerely believe it is in his own best interest that I do so."


"In that case, Holmes, you must surely never tell me his name, since I would be unable to hide the emotions on my face whenever I see him. Can you figure out a method for more accurately timing your trading, so that you are making money within a week or two instead of several months or so?"


"Ah, Watson, maybe there is some magical formula which I have not yet discovered for accomplishing what you have suggested, although I believe it may remain as mythical as Ponce de Leon's fountain of youth. Perhaps one day you will succeed in helping me to refine my methods, as you have done so often in other aspects of our lives. I am quite sure that I can hear the ever-louder knocking on our front door, and since Mrs. Hudson has retired for the evening, I will answer it myself. Will you accompany me, Watson?"


"As always, dear chap."


Take care.


--Steve