Guilty as Charged
Research for Online Investors

by John Dalt

4/25/11

Who should the Justice Department investigate?  The president wants to know who is causing high gasoline prices.  President Obama told a rally in Reno, Nevada, “We are going to make sure that no one is taking advantage of the American people for their own short-term gain.”  I wonder, Do I need to go to Washington and grovel for trading, just to make “short term” gains? Will you go with me?

Is it now illegal to make money quickly?  Jill Schlesinger, editor at large for CBS/MoneyWatch told American Public Media that speculation is not illegal, but the Commodities Futures Trading Commission (CFTC) could curb speculation by changing the margin requirements.  This is what they did when the Hunt Brothers made their big silver play in 1979 – 1980.  Change the rules of the game, in the middle of the game.

To those who live in ivory towers…that have never risked a dollar…that have never made a payroll;  government intervention is what has caused the problem, not speculators!  The Interior Department just started issuing deep water drilling permits.  This was only after a court order and a threat of contempt charge by a federal judge.

The best cure for high prices is high prices, or more supply.  Don’t we all realize, this is what the present administration wants?  Obama told us during his campaign that his regulations would increase the costs of energy.  Higher energy costs make alternative energy competitive.  Millions of consumers are not going to buy electric cars at $30 to $40 grand a pop if gas only costs two bucks a gallon.

If we take him at his word, energy prices must be higher.  This will destroy demand when consumers either quit driving or buy expensive energy efficient vehicles because they can calculate a saving.  We will make a capital investment, if it saves us energy costs over the life of the vehicle.

Like most government interventions, raising margin requirements, would just take the small guy out of the trade.  The government doesn’t want Joe Public making money off these markets.  The only traders with deep enough pockets to play would be the big financial institutions and energy companies.

Will the Justice Department report back to the American people what really caused high gas prices?  Will they indict the Federal Reserve for increasing the money supply?  Does the government spending twice as much money as they collect in taxes have any casual relationship to higher gas prices?  Could high energy prices be just another manufactured crisis that allows the government to grow their tentacles?

In an unguarded moment, I think the President told us all we needed to know.  It is wrong to make money off of energy (when it threatens his popularity).  We can expect the rhetoric to heat up this week when ExxonMobil (XOM) reports earnings.

I came across a commentary by John Hussman.  Mr. Hussman runs Hussman Funds and is a former Economics Professor at the University of Michigan.  His commentary on the Federal Reserve is somewhat technical.  If you have the time to read it, he really takes QE2 apart, and goes through all the dangers.  He points out the difficulty the Fed has in raising interest rates.  We often talk about “taking away the punchbowl.”  Hussman makes a good argument it is more difficult than many would believe.  One problem is the losses the Federal Reserve will record on their balance sheet.  I will try to do his points justice, but I encourage you to read his full report.

Hussman refers to present interest rates as “unstable” as they are balancing money supply against GDP.  The Fed is currently leveraged 50 to 1 on their balance sheet.  Their average maturity is six years, so a 35 basis point increase in interest rates would wipe out their balance sheet.  Hussman points out that the Federal Reserve made an accounting change in March.  There is a new line on their balance sheet to handle any such occasion; it is called “Negative Liability to the Treasury.”

The Federal Budget does not have a budget line for the Federal Reserve.

Gold and silver hit new highs this morning.  Our SwingTrader subscribers entered a trade on silver this morning.  We are up 15% so far.  This follows a 35% winner last week.  We are not day-traders; we will sell when the profits are too much to pass up.  Precious metals could be in for a wild ride this week, if the Bernank surprises the markets with a bullish stance on the dollar.  Little chance.  One interesting side-note on silver, the SLV etf has a designation as “HTB”, or Hard To Borrow from Schwab.

This means some big players are shorting it…hard.  The AGQ etf (double long silver) has the same designation.  Who would be short silver when it is going higher every day?  Wise traders would not try to short a top any more than they would try to catch a falling knife. Unless they knew something others didn't know.  SLV traded its average volume in the first 45 minutes this morning.  AGQ has traded over $2 billion dollars in shares today.

There is a big move coming in precious metals.  Either the smartest guys in the room are trading on inside information, or there is about to be a short squeeze of biblical proportions.

Quote:
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense... that gold and economic freedom are inseparable."--Alan Greenspan

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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