Newsletter - SpecialReport between Past Fed Tightening and Now 8:30:00 AM<p>A reporter asked us about the prospects of the stock market if the Fed raises the Fed Funds rate, since at the time there was a strong possibility of a rise in the rate to around 25 basis points.&nbsp; We explained that, in our opinion, the ending of the ZIRP (Zero Interest Rate Policy) and increase in Fed Funds will be a significant negative for the stock market.Patience 11:00:00 AM<font face="Times New Roman"></font><p align="center" style="margin: 0in 0in 8pt; text-align: center;"><span style="line-height: 107%; font-size: 14pt;"><font face="Calibri">&nbsp;</font></span></p><font face="Times New Roman"></font><p style="margin: 0in 0in 8pt;"><span style="line-height: 107%; font-size: 14pt;"><font face="Calibri">The entireinvestment community was waiting on the edge of their seats for Chairwoman</font></span></p><p style="margin: 0in 0in 8pt;"><span style="line-height: 107%; font-size: 14pt;"></span><span style="line-height: 107%; font-size: 14pt;"><font face="Calibri">Janet Yellen to make an announcement on March 18<sup>th</sup> at 2:00 PM in anews conference.<span style="mso-spacerun: yes;">&nbsp; </span>They were all waitingto see if the word &#8220;patience&#8221; was removed from the Federal Reserve&#8217;sstatement.<span style="mso-spacerun: yes;">&nbsp; </span>And not to disappoint theinvestors Yellen did announce that the word &#8220;patience&#8221; was removed from thestatement (meaning that the Fed would not be eager to raise rates, but would bepatient).<span style="mso-spacerun: yes;">&nbsp; </span>However, that announcement wasfollowed by long explanations about the fact that if the Fed did move to raiserates the rate increases would be very slow. </font></span></p><font face="Times New Roman"></font><p style="margin: 0in 0in 8pt;"><span style="line-height: 107%; font-size: 14pt;"><font face="Calibri">Since theworldwide investment community was anticipating the removal of the word, thestock market was down over 100 points on the DJIA at 2 PM as the announcementwas made.<span style="mso-spacerun: yes;">&nbsp; </span>Virtually every investor(large and small) were &#8220;chomping at the bit&#8221; to sell equities if they detected theremoval of &#8220;patience&#8221;, since that meant to them the &#8220;removal of the punchbowl&#8221;the Fed was supplying to the investment community over the past 6 years.<span style="mso-spacerun: yes;">&nbsp; </span>Those were the years the Fed pumped trillionsof dollars into the U.S.INFLATION vs. DEFLATION 12:00:00 AM<p>Most investors are bewildered by the fact that interest rates on the 10 year U.S. Treasury have been going down year to date from 3% to 2.5% after rising from about 1.6% to 3% last year.Central Banks Are All Increasing Their Balance Sheets 11:00:00 AM<p>We recently received some feedback on our commentary about whether the Central Banks&#8217; behavior is inflationary or deflationary.&nbsp; The following feedback came from a very sharp individual who used to be Director of Research for Moody&#8217;s.New Secular Bull Market or another Fake-Out? 12:00:00 AM<p>The headlines in all the various newspapers tell the same story.&nbsp; Barron's had a cover story this weekend, "STOCK ALERT"!&nbsp; GET READY FOR A RECORD ON THE DOW!&nbsp; This was followed up with their past predictions of Dow 14,165 in October of last year, and they expect a breakthrough of the old record high soon.The Consumer, the Debt, and Competitive Devaluations 12:00:00 AM<p align="center">The Consumer, the Debt, and Competitive Devaluations</p><p>The stock market is continuing to rally and test the two major resistance levels of 2000 and 2007 (1555 and 1575 on the S&amp;P 500).&nbsp; We do not believe the market will be able to break through those levels in any significant way since they were established after two major financial bubbles (dot-com and housing) and peaked after multi-year gains followed by collapses in the market.The Deleveraging of the Two Most Outrageous Financial Manias in History 12:00:00 AM<p>In this Special Report&nbsp; we will attempt to explain why we believe the two major peaks in the S&amp;P 500 of 1555 in 2000, and 1575 in 2007 will not easily be surpassed, as the severe debt burdens built up in the "financial manias" preceding those peaks still must be deleveraged.&nbsp; We expect the latest move up in the S&amp;P 500 from the March 2009 low will not exceed those peaks and will technically form a long-term triple top that will lead to the market declining to valuation levels similar to other secular bear market lows over the past 100 years.Special Deflation Report 12:00:00 AM<p>We have long maintained that a debt bubble followed by a credit crisis leads to a deflationary recession or depression, and a major secular bear market.&nbsp; Nevertheless, a lot of smart analysts who agree with us on the existence of a secular bear market argue that actions taken by the monetary and fiscal authorities lead to severe inflation rather than deflation.Secular Bear Market? 12:30:00 PM<p style="TEXT-ALIGN: center; MARGIN: 0in 0in 10pt" class="MsoNormal" align="center"><span style="LINE-HEIGHT: 115%; FONT-SIZE: 14pt"><?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p><font face="Calibri">&nbsp;</font></o:p></span></p><p style="MARGIN: 0in 0in 10pt" class="MsoNormal"><span style="LINE-HEIGHT: 115%; FONT-SIZE: 14pt"><font face="Calibri">We received a phone call over the weekend from a close friend and someone who reads our comments religiously.<span style="mso-spacerun: yes">&nbsp; </span>He had a question for us.<span style="mso-spacerun: yes">&nbsp; </span>He wanted to know if we were still in the secular bear market camp or have we thrown in the towel since the economic news has gotten much better and virtually every index is either at or close to new 52 week highs or are fairly close to all time highs. He explained that it looked to him that the European risk has moderated, the China "collapse" has evaporated, the jobs and housing problems of the U.S."Special Report" Debt Induced Secular Bear Market-Deleveraging Continues 3:30:00 PM<p style="MARGIN: 0in 0in 10pt" class="MsoNormal"><span style="LINE-HEIGHT: 115%; FONT-SIZE: 16pt"><font face="Calibri">The U.S. used unusual methods in handling the bursting of the "Financial Mania" of the late 1990s, the one called the "Dot-Com" bubble.<span style="mso-spacerun: yes">&nbsp; </span>Instead of letting the free markets dictate just how low the prices of stocks and other assets would wind up after the bursting of the bubble, the "powers that be" intervened.Stock Market Volatility since 1994 4:28:00 PM<P>The attached chart shows the volatility of the U.S. stock market from 1994 to present (see attachment -credit to MarketSmith).Why We Believe we are in a Secular Bear Market 12:00:00 AM<p>Looking back at the long history of the U.S. stock market it is clear that there are long periods when the trend is distinctly up or down.Comstock’s Macro Viewpoint 12:00:00 AM<P style="MARGIN: 0in 0in 10pt" class=MsoNormal><FONT face=Calibri>Our hearts go out to the people of Japan and we wish them well in the trying period ahead. </FONT></P><P style="MARGIN: 0in 0in 10pt" class=MsoNormal><FONT face=Calibri><SPAN style="mso-spacerun: yes">&nbsp;</SPAN>We want to make it clear from the outset that this article was written before the Japanese crisis started.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>We continue to believe that stock market remains in a secular downtrend that began in early 2000.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>In the late 1990s we were convinced that when the financial mania reached its peak, we would enter a secular (long-term) deflationary decline in the stock market (see attachment).<SPAN style="mso-spacerun: yes">&nbsp;&nbsp; </SPAN>The main reason for this view was the outright insanity of the dot-com bubble along with highly excessive valuations, extreme debt levels and the potential vulnerability of the housing market.Is America Following the Same Path as Japan? 6:00:00 PM<P style="TEXT-ALIGN: center; LINE-HEIGHT: normal; MARGIN: 0in 0in 10pt" class=MsoNormal align=center><SPAN style="COLOR: black; FONT-SIZE: 13.5pt; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: Calibri"><?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p><FONT face=Calibri>&nbsp;</FONT></o:p></SPAN></P><P style="LINE-HEIGHT: normal; MARGIN: 0in 0in 10pt" class=MsoNormal><SPAN style="COLOR: black; FONT-SIZE: 13.5pt; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: Calibri"><FONT face=Calibri>Ever since the U.S. financial crisis in 2008 there have been many comparisons to Japan and their "lost decade."<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>Most comparisons mark the start of each financial crisis as the end of 1989 for Japan and 2007 for the U.S.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>We believe each deserves some clarification: Not only does the lost decade need to be pluralized, but the U.S.Debt is Still the Major Problem and Deflation is the Painful Solution 12:00:00 AM<P>We understand that we have discussed the debt problem in this country for what seems to be forever, but we can't stop talking about it now that the debt is clearly the catalyst for the latest stock market downturn.&nbsp; Debt is discussed by the pundits on financial TV also, but in almost every case the discussion revolves around government deficits relative to GDP or government debt relative to GDP.The Cycle of Deflation 12:00:00 AM<P>We have been strong believers in the deflation theme since we have been writing these reports beginning in early 2000 (and even before).&nbsp; We are attaching a chart depicting the "Cycle of Deflation" which you should print out and refer to as you read this comment.The Total Debt Relative to GDP Trumps Everything Else 12:00:00 AM<P>Barron's magazine printed the first part of its annual Roundtable discussion of 2010 this past week.&nbsp; We noticed that many of the participants were very concerned about the debt (mostly government debt while we think total debt is a much more useful metric).Debt Dynamics Will Hold Back Economy 12:00:00 AM<P><FONT size=3>We believe that U.S. government and private debt levels will diverge over the next four or five years as the authorities attempt to use government debt to replace the private debt that is almost certain to decline substantially.“FUMBLE--ITIS” 12:00:00 AM<P><FONT size=4>With the latest 60% gain in stocks since the March low there has been an almost universal feeling that, "the worst is over for stocks and the economy, and now there is clear sailing ahead".&nbsp; We, however, are looking at the dilemma of the U.S.Deleveraging the U.S. Economy 12:00:00 AM<P>We are in the process of deleveraging the most leveraged economy in history.&nbsp; Many investors look at this deleveraging as a positive for the United States.Green Shoots---Flowers or Weeds 2:00:00 PM<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><FONT face="Times New Roman"><FONT size=4>We seem to have a plethora of "green shoots" that we can all point to that indicate greener pastures for the economy and the stock market and we sincerely hope that they turn into the flowers everyone expects.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>However, we have to look at things as realistically as we can, and have in the past, when we were concerned about the dot com mania in the late 1990s and when we were concerned about the housing bubble from 2003 through 2007.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>The only thing that made sense to us over the past 13 years was the start of the secular bear market for a couple of years starting in 2000 and the financial unwinding starting in 2008.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>It would suit us just fine to be wrong about this thinking, but we also must express our analysis as we see it.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN></FONT></FONT></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p><FONT face="Times New Roman" size=4>&nbsp;</FONT></o:p></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><FONT face="Times New Roman" size=4>We went on a corporate, consumer and government binge that took our debt levels to the highest in all of history at about 370% of GDP.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>As most of you know we have been concerned for many years that the unwinding of this debt will take our country into a deflationary spiral that will not end until a significant amount of the private debt is wiped out-- either through defaults or being retired.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>We also do not expect the green shoots to produce the flowers that most envision until the secular bear market in stocks declines to the valuation levels of past bear market troughs.</FONT></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><o:p><FONT face="Times New Roman" size=4>&nbsp;</FONT></o:p></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><FONT face="Times New Roman"><FONT size=4>Warren Buffet was interviewed on CNBC yesterday and stated that, "this market is not expensive but is not as cheap as it was in 1974".<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>We don't disagree that this market is not as cheap as 1974, but would add that this market is also not as cheap as it was in 1933, 1937-38, 1941-42, 1949-51, 1980-82, 1987, and 1991. You can determine relative valuations by clicking on "Limbo, Limbo" (using NDR charts) on our home page to determine when the market was more or less expensive using the metrics of your choice.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>The one thing that is incontrovertible is that the market was much cheaper at the trough of every secular bear market.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>And in most instances we never got close to the bargain areas that were reached at the end of each secular bear market.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN></FONT></FONT></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><o:p><FONT face="Times New Roman" size=4>&nbsp;</FONT></o:p></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><FONT face="Times New Roman"><FONT size=4>After these two bubbles bursting and the financial breakdown that caused a global meltdown, you would think the stock market will trade at the bargain levels of past major bear markets before this mess is resolved.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN></FONT></FONT></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><o:p><FONT face="Times New Roman" size=4>&nbsp;</FONT></o:p></P><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><FONT face="Times New Roman" size=4>We also believe we will experience a final bear market capitulation of equity mutual fund liquidations that will drive us to these low valuations.Substituting Debt for Savings and Productive Investment 12:00:00 AM<P>By now it must be clear to everyone that the U.S. economy is dependent upon DEBT, and we believe we have reached the debt limit!!&nbsp; It took the resurgence of the stock market bubble in 2003, just a few years after the late 1990s bubble, coupled with the housing bubble to get the private sector to feel wealthy or comfortable enough to generate the enormous debt relative to GDP that finally froze up the credit markets.Putting It All Together 12:00:00 AM<P>We had been selling our research for many years before the year 2000, but after writing about the financial mania of the late 1990s, we felt that we were saying the same thing in every research report we wrote. "The savings rate was collapsing, debt was rising at an unprecedented rate (at every level), and the stock market rose to alarming valuation levels that could not possibly be sustained."&nbsp; Attached, we show a Ned Davis chart depicting the debt to GDP relationship over the past 6 decades, which shows why we were so concerned.How To Get Out Of This Mess 12:00:00 AM<P><BR>In this report we will attempt to explain what needs to take place in order to resolve the mess in&nbsp;which we find ourselves&nbsp;due to over consumption, excess debt, and the government trying to micro manage.&nbsp; We believe the Fed and Government were the main cause of the dual bubbles (stock market and housing) by attempting to stop the perceived deflation in 2001."How We Got Into This Mess!" 12:00:00 AM<P>&nbsp;</P><P>This Special Report will deal with the possibility that the market move of the past five years was not the bull market that everyone else believes, but instead a very strong counter-trend move in a secular bear market.&nbsp; As everyone now knows, there was a truly unbelievable financial mania in the late 1990s that produced a severe bear market and a mild recession.