Private Wealth Advisory A Phoenix Capital Research Publication October 13, 2010 WaitingOnNovember3LastissueInotedthatfinancialmarketshavebeendominatedbythe“inflationtrade”sincemid‐AugustonassumptionsthattheUSFederalReservewillissueamassiveQE2programinthenearfuture.Thistrendcontinuestoday.Infact,ifanythingithasbeenstrengthened.TheFedFOMCminutesfromyesterdayindicatedthatseveralFedmemberswishto“takeactionsoon”whichtraderstooktomeanthatQE2isguaranteedtobeannouncedatthenextFedmeetingonNovember3.

“SeveralmembersnotedthatunlessthepaceofeconomicrecoverystrengthenedorunderlyinginflationmovedbacktowardalevelconsistentwiththeCommittee'smandate,theywouldconsideritappropriatetotakeactionsoon.”

Becauseofthis,USstockshaveenteredanenvironmentinwhichtheyrallyoneverythingwhetheritbegoodnewsorbadnews:goodnewsisseenasindicativethatarecoveryisunderway,whilebadnewsisseenasareasonfortheFedtosupplymore“juice.”ThisattitudewasbestsummatedbyHedgeFundlegendDavidTepperwhotoldCNBC:

"Twothingsaregoingtohappen.Eithertheeconomyisgoingtodowell­andwhatassetswilldowell?Stocks.Bondswon'tdosowell,goldwon'tdosowell.Or,theeconomyisnotgoingtopickupandtheFedisgoingtocomeinwithQE(quantitativeeasing).Thenwhat'sgoingtodowell?Everything.Stocks,bondsinthenearterm,gold."

Tepperhasreturned40%peryearwithhishedgefund,sohe’sgotaheckofatrackrecordandisworthlisteningto.Andhesummatesperfectlytheprevailingattitudeofthefinancialmarkets.Indeed,USstockshavebrokenoutandlookreadytore‐challengetheApril2010highs.ThisismostnotableintheDow:

However,theS&P500isnotfarbehind.

Tobeblunt,stockshaveCOMPLETELYreturnedtotheatmosphereofMarch‐April2010:anatmosphereinwhichstocksareoverbought,overstretched,andyetKEEPrallying.

Asyoucansee,thedailyRSIhasjusttouched“overbought”statusat70.Fromastrictlytechnicalstandpoint,thenextlinesofresistanceare1,180,then1,205ontheS&P500.We’venowgotlayersuponlayersofsupportaswell:

Mostmarketanalystswouldlookatthisset‐upandsaythatwe’reinanewbullmarket.Idonotthinkthatisthecase.Instead,Ithinkthemarketisdiscountingmajorinflationandpossiblyhyperinflation.Indeed,ifstocksareoverboughtandoverextended,theirperformanceisnothingcomparedtothatofGold:

AndofSilver:

Asyoucansee,thetwopreciousmetalshaveeruptedhighersincemid‐August.AsIwritethis,ourbullionholdingsareup23%and37%respectivelysinceMarch2010.ComparethistotheS&P500’sperformanceof1.3%overthesametimeperiod,andit’sclearwhichassetclassistheonetoown.Indeed,pricedinGold,stockshavedonenothingsinceApril.

Thisfinalchartiskeytounderstandingwhat’shappeninginthemarkets.Inplainterms,stocksareNOTcreatingwealth,theyarerallyingbasedonDollardevaluation,Ifyoupricetheminnon‐papercurrency(Gold),theyareLOSINGpurchasingpower.ThisisalsoclearwhenyoucomparetheS&P500’sperformancetothatoftheUSDollaroverthelastfewmonths.

Asyoucansee,wehaveanearperfectinversecorrelationhere,withstocksrallyingastheUSDollarfalls.Withthatinmind,weneedtofocusontheUScurrency,sinceitsdropiswhat’sfuelingthisrampantspeculationinstocksandcommodities.

TheUSDollarisnowoversoldandnearingitsmulti‐yeartrendline.IfweDONOTbouncehere,thenthenextlineofsupportisat74.Afterthat,it’sthe2008low(alsothe20yearlow)of71.Ihavetobeblunthere:iftheUSDollarDOESNOTbouncesoon,ahyper‐inflationaryscenarioisINCREASINGLYlikelyintheUS.Indeedonaweeklybasisabreakdownpast74ontheUSDollarwouldtriggeraMASSIVEHeadandShoulderspatternwhichhasadownsidetargetof40orso(roughly50%lowerthanwheretheUSDollaristoday).Ifthiscollapseweretooccur,youwouldseehyperinflationeruptintheUSsimilartothatofWeimarGermany.PreciousmetalswoulderupthigherandtheUSDollarwouldnolongerbethereservecurrencyoftheworld.

What’strulyworrisomeisthattheFedishellbentonenactingtheexactsamepoliciesthathavecreatedtheDollarcollapse(andtherallyinstocks)overthelastfewmonths,namely,additionalPermanentOpenMarketOperations(POMO)rampjobs.Thenamesoundsclever,butitreallyjustconsistsoftheFedbuyingUSdebtfromthelargeprivatebanks,whichinturntaketheFed’smoneyandbuystocks.Indeed,theFedjustannounceditwillbemonetizinganadditional$32billionworthofUSdebtinthenextfewweeks.Theschedulefortheserampjobsisasfollows:

October15: October18: October20: October22: October26: October28: November1: November4: November8:

Inplainterms,theFedisgoingtokeepdoingwhatit’sbeendoing:trashingtheUSDollartopumpstocks.Andit’sgoingtodothistothetuneofsome$10billionperweekoverthenextmonth.

Thus,asridiculousasitsounds,thestocksup/USDollardowntrendofthelasttwomonthsislikelytocontinueintoearlyNovember.I’vegotsomepickswhichwillprofitfromthislaterinthisissue.However,fornowthemainconcerniswhethertheinflationtradereverses(iftheFeddoesNOTannouncealargeQE2program)ornot.Let’sputthisinverysimpleterms.Theentirefinancialmarketsarein“inflationtrade”mode.Indeed,sentimentsurroundingtheUSDollartodayisatRECORDlevelsofbearishness.

CommodityFuturesTradingCommissiondatashowhedgefundsandotherlargespeculatorsaremorebearishonthedollarthanatanytimeinhistory,withbetsonadeclineexceedingthoseonariseby341,683contractsasofOct.5.Thelasttwotimessentimentwasclosetothislevel,inearly2008andlate2009,thedollarrallied.TheDollarIndexsurgedasmuchas24percentinthesecondhalfof2008and19.6percentbetweenNovember2009andJune2010.

http://www.bloomberg.com/news/2010‐10‐11/dollar‐trades‐near‐8‐month‐low‐on‐prospects‐of‐more‐federal‐reserve‐easing.htmlAsinvestors,itiscriticaltobeawareofsentimentandmarketperception.Anytimethemarketsbecomeextremelylopsided,thepotentialforaseverereversalisthere.Rememberbacktothesummerof2008?TheentireworldbelievedtheUSDollarwasdoomed,oilwasat$140perbarrel,andcommoditiesacrosstheboardwereexplodinghigher.Whathappened?Atotalreversal,withtheUSDollarexploding24%higherwhileriskassetscollapsedacrosstheboard.Todaywefindourselvesinmuchthesameposition.TheonlydifferenceisthatwearefurtheralonginthefinancialCrisisandconsequently,theassetprices(withtheexceptionofGold)areatlowerlevels.So,Iremainextremelyconcernedthatwecouldseeasharpreversalintheinflationtrade.ThemostlikelycauseofthiswouldbeiftheFedDIDN’TannounceamassivenewQE2programatitsNovembermeeting.Consideringtheextremesinsentiment,Ithinkthisisadistinctpossibility.TheFedhasnotmadeanyexplicitguaranteeofaction(sayingthatitmayconsideractionsoonisvagueatbest).AndthemarketshaveclearlyalreadydiscountedsomekindoflargeQEeffort(seeGold,Silverandstocks).

Thekeyfordeterminingwhat’stocomeliesintheUSDollar.WeNEEDtoseestrengthhereifthingsaregoingtochange.Onthatnote,weareseeingthebeginningofwhatcouldbebottomingaction:

Asyoucansee,theDollarisshowingpotentialsignsofbottominghere.Itcouldprovetobeanotherfake‐outliketheonethatoccurredinearlySeptember.Keepyoureyesonthecurrency(Icertainlywillbe)overthenextfewweeks.Iwanttostressthenextpart:theUSDollarisTHEMOSTCRITICALinvestmenttowatchgoingforward.IftheUSDollarrallies,stocksandGoldwilldrop(theformeraHECKofalotmorethanthelatter).IfthatoccursIwillsuggestshortingpreciousmetals,commodities,andstockswhilegoinglongtheUSDollar.However,ifweDONOTseeaUSDollarrallyinthenearfuture,thentheinflationtraderemainsintactandsoonerorlaterhyperinflationwillhit.Tobeclear:currentlythemarketsarefollowingan“inflationtrade”trendverystrongly.Iamconcernedthatthistrendcouldreverseinthecomingweeks.However,fornow,Iwanttoplaythistrend.Andtome,thebestmeansofdoingthisisviasomecarefullypickedGoldminingstocks.Onthatnote,IwanttopointoutthatGoldminingstocksasawholelooktohaveofficiallybrokenoutofamassivewedgepattern.

ThisisaconfirmationofGold’sbreakouttonewhighs.AnditindicatesthattheGoldminingsectorisprimedforgreatergainsinthenearfuture.However,ratherthanplayingtheentiresector,I’dfocusonahandfulofspecificminers.OneGoldminingstockIwanttoplayatthistimeisIamgold(IAG).ThecompanyisagoldminerandproducerwithpropertiesinWestAfricaandNorth&SouthAmerica.Itjustbecameprofitablein2009(profitsareunusualforaminer)producingjustunderonemillionouncesofGold.TodaythecompanyhasaP/Eof54.AsofMarch312010,thecompanyhadroughly$200millionincash.Evenbetter,it’ssittingon100,000ouncesofbullionworthroughlyanother$100million.Withamarketcapof$6.5billion,IAGistradingat21timesitscashandbullionstashonhand:notabadvaluationatall.Moreover,thecompanyhas14millionouncesinreserves.Bestofall,itschartlooksprimedforabreakout.

Asyoucansee,IAGhasformedamassivetrianglepattern.Weenteredthispatternfrombelow,sothebreakoutshouldbetotheupside.Theinitialtargetforabreakoutisatleast$26,ifnot$28.Actiontotake:BuyIamgold(IAG)andusea15%stoploss.Iviewthisasashort‐terminvestmentontheinflationtradewhilewewaitfortheUSDollartomakeupitsmind.SofarIAGhaslaggedthegoldrally,soit’sgotsomecatchinguptodo.AnotherGoldminingstockIlikeisSeabridgeGold(SA).SAisanunhedgedNorthAmerican‐basedpreciousmetalsdiscoverycompany.Itdoesnotactivelyengageinproduction.Ratheritexploresforgold,assessestheeconomicviabilityofaprojectandtheneithercollaborateswithapartnertominethepropertyORsimplysellstheassetoff.

Thecompanyhasroughly15millionouncesofprovenGoldwithanadditional55millionouncesininferredandindicatedreserves.Thecompany’skeypropertyisitsKSMpropertyinBritishColumbia,Canada,sopoliticalriskisminimal.SA’sstockjustbouncedoffofsupporttoo:

SimilartoIAG,SAisformingsomethingofatrianglepattern.Wejusthadabounceoffsupportat$28andlooktobereadytobreakouttoatleast$34ifnothigher.Actiontotake:BuySeabridgeGold(SA)andusea15%stoploss.Toreiterate,bothofthesepositionsaremeanttoprofitfromtheongoinginflationtradewhichistheprimarytrendofthemarketstoday.However,theriskofareversalinthistrendispresentandgrowingbytheweek.SoweneedtopayattentiontotheUSDollarforhintsofwhat’stocome.Thisconcludesthisweek’sissueofPrivateWealthAdvisory.We’realittleshorterthanusualthistimearoundbecausethesametrendsremaininplaceasatthelast

timeIwrotetoyou.IfanythingchangesIwillissueareal‐timealert,butfornow,theinflationtraderemainsintact.Theissueisdeterminingifareversalwilloccur.However,inthemeantime,ourbullionportfoliohasprofitedbeautifullyfromtheinflationtrade.Anduntilthingschange,ournewminingstockswilldothesame.GoodInvesting!GrahamSummersOpenPositionsandOnDeckTradesIf You HAVE To Own Stocks Portfolio

Company Symbol Buy Date Buy/Short Price

Current Price Gain/ Loss*

Coke KO 3/30/10 $55.00 $59.94 11% Budweiser BUD 3/30/10 $50.45 $63.70 27% Johnson & Johnson JNJ 3/30/10 $65.20 $63.58 -1% Wal-Mart WMT 3/30/10 $54.64 $53.82 -2% Exxon Mobil XOM 3/30/10 $66.98 $65.04 -2%

Average 6.67%

S&P 500 0.77%

• gains include dividends.

If You HAVE To Own Stocks WATCHLIST

Company Symbol McDonald’s MCD

Enterprise Products Partners EPD

Bullion Portfolio (OPEN BUYS NOW) Company Symbol Buy Date Buy Price Current Price Gain/

Loss Gold bullion N/A 3/17/10 $1,120 $1,372.00 23% Silver bullion N/A 3/17/10 $17.50 $24.03 37% Iamgold IAG 10/13/10 $18.20 NEW BUY! Seabridge Gold SA 10/13/10 $30.32 NEW BUY!

RECENTLY CLOSED TRADES Investment Symbol Bought at

11:50 AM Buy Price Current Price Gain/

Loss India Fund (SHORT) IFN 9/15/10 $35.62 $37.84 -6.23% Peru ETF (SHORT) EPU 9/15/10 $39.42 $44.45 -12.76%