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The Shell Game

Last year, our Federal government did some things to "save" our economy and our country. Some of them were legal, some not so much. I'm not going to get into that. What I will get into is how to keep you in the green and out of the red. If you are a trader -- and by that I mean a gambler who deals exclusively in securities -- then this column is irrelevant, since traders make their money on the psychology of the market and not on asset values.

Investors, people who put money into the stock market to earn a return on that investment, need to be extremely careful.

First and foremost, investors must understand that government bailouts continue and will continue for some time. For those who didn't notice, Government Motors is now in the process of bailing out American Axel ($200M to date with more to come). The $81B bailout of GM and Chrysler is more than both companies were worth at their peak value. Since we own less than 60% of GM and virtually none of Chrysler, these two automotive dogs would have to grow to over 300% of their best years in sales before we could sell off the stock and recoup our money; not gonna happen. Clearly, taxpayers will see little of this money as they will never again generate sufficient revenue to pay even a significant portion of this bailout back. Additionally, it is almost certain that the bailout of the Auto Unions will continue: $15B was earmarked for the Auto Union pension funds in the infamous House Bill 3200. AIG owes the American tax payer $182.5B; we think. Basically, to pay us off, AIG would have to generate earnings similar to its peak earnings in 2006 for 15 straight years and pay every cent to the taxpayer: this would not include interest. At 5% interest, AIG would have to pay out all its earnings (2006 levels) for over 20 straight years. Again, ain't gonna happen! Most people are clear that the $182.5B bailout of AIG is gone, but most people are unaware that the Federal Reserve Bank -- which is accountable to no one -- is still in the process of buying $1.25Tr of Mortgage Backed Securities (the toxic debt that nearly took down the world's financial systems) for us. Yes, that's right, we'll own it.

So, you ask, what's that got to do with me? Well, plenty. First of all, the federal government is now a market player: the Fed prints the money and the Treasury manages the purchases. Like it or not, an organization that can print money at will can easily have a major impact on markets, and investors will get steamrolled. Think that's crazy? We, the people, own 60% of GM, so who do you think owns a chunk of American Axel? That's right, you and me! The purchase of a chunk of American Axel is a bailout, pure and simple.

The Federal Reserve Bank is accountable to no one. Congress can ask them what they're doing, but there's no way to verify the truth. Does that frighten you? It should. If you've looked up in the sky recently you might have rubbed your eyes and looked again. You weren't mistaken, those were pigs flying: Barney Frank and Ron Paul are co-sponsoring a bill to legislate audits of the Fed. How much fear do you think it takes to get those two guys to agree on something?

Still, you ask, what does this all mean? Well, the easiest way to look at this is to think about Katrina and the levees. Now imagine a backhoe digging into the levee on its left side to fill in a hole on its right side. Now imagine that this activity is being blocked from your view and that you live behind the levee. The mayor tells you that everything is just fine and they are fixing the problem. We might feel safe for now, but eventually that levee will be gone and we'll be under water. Problem is, we don't know when the levee will finally give, only that it will. This is what's going on right now: just like a shell game, the pea hasn't disappeared its just under another shell and it will show up again. The administration is merely prolonging the inevitable.

The solution for investors is simple: stay out of the US market until it is clear that this crisis has truly played its course. Simply put, that means jobs and unemployment on a sustainable path to less than 5%. Right now, the administration is simply playing a shell game: how is it posible that a company with $182.5B in debt (AIG) and negative earnings is worth nearly $5B? The only way that could be is if our government forgives that debt leaving us holding the empty bag again.

Put your money in the market that is changing from centrally planned to free market, not the market that is changing from free market to centrally planned. Etrade offers trading in Hong Kong where you can buy equities from mainland China. Do your homework and ride the wave: it'll be years before the US market is safe for investors.

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