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Excerpted from the December 20th edition of Notes From the Rabbit Hole (NFTRH64)

So, what is it this time? A still-soft Fed, permitted by market-set interest rates to maintain inflationary policy despite a manufactured economic recovery? Op/Ex? Silly (holiday) season? The hopes and dreams of millions, invested in the venerable Dow and S&P amid signs of extreme excess in low quality bonds and waning leadership in important markets (China, US Banking)? Whatever it is, as I begin NFTRH64 once again on a Friday afternoon [12/18], hope is yet to even think about giving up.

We continue to deal with the grind of what I believe is a topping process. Now a process can go on longer than we may find convenient. Bear in mind that the broad market performed a good 1.5 year topping process into the climax of Q4, 2008. The longer the process takes to play out, the greater the odds are that the eventual downside will not be a healthy 'B' type corrective leg before another upward leg of a cyclical bull market. But we will keep that lessening possibility in play for now.

The media is completing a transition from 24/7 doom and gloom to talking of 'the' recovery and more and more investment professionals discuss 'the' bull market in their analysis, as if there is no longer any question. Nor do many mainstream investment professionals tend to care why there might be a bull market in nominal stock prices (which is an ongoing bear market as measured in the real monetary anchor, gold), so long as the public buys their products.

I will not pretend to be unbiased, glossing over the fact that I am disgusted at watching hope and denial ply their trade each week in the financial markets. I am biased because I care about the why (inflation) just as I was disgusted watching people fall for the opposite scam last year, as long term treasury instruments - the very instruments of the debt-born recovery - were pitched as the only hope for survival (in a deflation) at a time when the government just happened to need its bonds benefiting from a high demand environment.

Disgust and bias are fine; I am human. But that is different from letting such feelings get in the way of the job at hand. And the job at hand is to preserve capital and/or increase capital no matter the hand that is dealt. The job is to be patient and beat the bastards at their own game.

The herd is slowly aligning and gathering at the opposite end of last year's dynamic. Investment professionals speak of "the bull market", the Investors Intelligence newsletter writers are all-in and the majority's assumptions are becoming ripe for disappointment.


NFTRH64 went on for 15-plus pages that, as happens often now that we are in the twilight of Hope '09, pretty much wrote themselves as it looked at the status of the NAAIM Investment Managers and Wall Street Strategists - consistent contrary indicators - joining the already over-bullish newsletter writers in the Investors Intelligence data.

#64 again looked at the technicals of the most critical leading/confirming market (no, it is not the Transports), which maintains an ongoing bearish divergence to the broad market rally that currently carries ever-more unhealthy investors toward a would-be Full Hubris '10. Other leading sentiment indicators, China's market, commodities and an extensive review of the gold sector - and its coming opportunities - are also included.

2010 promises to be full of opportunity; both to increase capital and to preserve the gains made during this year which was after all, a gift from macro inflators in high places. There has rarely been such an opportunity to clearly define the herd and get contrary to it.

Good luck in 2010.


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