Markets ready to move up?

My thoughts on the market: Given that it appears the Germans are being more cooperative in helping, I see the markets moving up to start the week.

Equedia Weekly Ivan lo

My thoughts on the market: Given that it appears the Germans are being more cooperative in helping, I see the markets moving up to start the week.

While a new aid package for Greece would hold off the threat of a Greek debt default in the short term, it wouldn't address the bigger challenge facing Europe: the likelihood that Greece won't be able to repay all of its debt, and the difficulty of cutting Greece's debt burden without sparking capital flight from other struggling countries around the Euro zone's fringes.

But the market is not looking that far ahead, so watch for a move upward if we get more news of a bailout.

The only real way out of the European mess is to cut the Gorgon's knot through federalization, as the United States did many years ago. New America, anyone?

Despite what's going on in the emerging markets and in Europe, we have our own challenges in North America driven by labour and the housing markets which will take quite some time to work off.

Having said that, the environment in the US, with the prospects of low interest rates and slow growth over the next several years, actually creates very interesting investment opportunities in the companies that will benefit from this type of environment.

Large cap dividend paying stocks and companies with global exposure are great defensive equity plays in this market.

We already know the US government is going to spend more money, with or without QE3. They have already recklessly spent billiions of dollars. Last week was another example of stupid spending when the US' inspector general for Social Security, Patrick O'Carroll Jr., revealed to us that the Social Security Administration made $6.5 billion in overpayments to people not entitled to get them in 2009, including $4 billion under a program for the very poor. In all, about 10 percent of the payments made by the agency's Supplemental Security Income program were improper.

$6.5 billion dollars given away for nothing. Good luck getting that back. Heck, good luck getting back the trillion dollars spent on stimulus in the last few years.

The New Breed of Destruction

Not long ago, buying Chinese stocks, or any stocks with the word Sino in it, was a great way to benefit from the world's hottest emerging market. But in the last few weeks, all of that has taken a turn for the worst.

Chinese companies listed on the world's most prominent exchanges have tumbled this month after a recent accusation by Muddy Waters' Carson Block stating that Canadian-listed Sino-Forest (TSX: TRE) is involved in fraud by overstating both its sales and assets.

If you missed these recent evenFollowing the report by Muddy Waters, international bond markets have shut out many Chinese issuers. But this isn't the first time it has happened.

In the past year, a string of foreign-listed Chinese companies have been accused of fraud, accounting discrepancies or other corporate governance failings. In the US, the shares of at least 20 Chinese companies have been suspended or kicked off New York stock exchanges in the past year following auditor resignations or accounting problems.

But does that mean we should run for the front door?

While accounting discrepancies and mistakes are found all over the world, everyone has their eyes set on the biggest emerging market of them all: China.

When you're that big, you're setting yourself up for a big target.

In the matter of Sino-Forest, I think short seller Muddy waters used it to their advantage to make a boat load of money. We still don't know if any of the accusations are true. If it turns out to be false, you can bet we'll see Sino-Forest shares surge and big time lawsuits in the coming months.

Think about it. Just a few short months ago, Sino-Forest was worth over $6.3 billion in market cap. At the time of this writing, it's worth only $783 million losing nearly $5.5 billion in shareholder value.

Muddy Waters prime objective is selling stock short. By taking advantage of the markets' nervousness surrounding Chinese companies, it released a negative report on Sino-Forest allowing them and their cohorts to short sell millions of dollars worth of stock and thus making millions of dollars off the losses from investors in the company.

Before the report was released, it was distributed to hedge funds around the world, so that more short sellers would join the party causing the stock to fall dramatically in share price.

Keep in mind that I am just assuming how much Muddy Waters and those involved are making from the short selling of Sino-Forest. It could be thousands. It could be millions. Heck, it could even be billions.

What I do know is that close to $5.5 billion worth of investors' wealth was lost from one single report created by a firm with no real history of accuracy. A report created by notorious short seller Muddy Waters. Who is Carson Block anyway? Who is Muddy Waters?

I think that while Muddy Waters is doing research on these Chinese companies, somebody should do some research on them. The company has no listed address, and no real history. Carson Block, the man behind Muddy Waters, says that they don't list an address because of death threats that he has received. ts, the report caused a major ripple effect to worldwide Chinese companies causing shares of these This is what I found on Muddy Water's website in their "About Us" section:

"Muddy Waters Research sees through appearances to a Chinese company's true worth. Our research director, Carson Block, is an entrepreneur who's practiced law and pioneered an industry in China. Our team members are likewise veterans of China's business trenches who similarly understand how business is really conducted in China. Through their successes and struggles, they've developed the knowledge and contacts to navigate China's muddy waters.

Muddy Waters Research is available to work with institutional investors on an engagement basis."

So who are the directors? Who is Carson Block? What background does he have in research? None of this is listed on their website.

Last year, a researcher with Muddy Waters told management at Orient Paper, Inc. (AMEX: ONP), the first Chinese company targeted by the short seller back in 2010, that he would write a research report for them in return for US$300,000. Apparently, Orient Paper declined the offer and two months later, Muddy Waters issued their initial report calling the company a fraud. Carson Block denies these allegations.

The report said, "We are confident that [Orient Paper] is a fraud. Its purpose is to raise and misappropriate tens of millions of dollars." On the front page of the report was a disclaimer that Muddy Waters had shorted the stock.

The report said the conclusion was not based on an analysis of Orient Paper's books, but by talking to its customers, contacting suppliers of assets comparable to what Orient Paper said it had bought, having "experts" analyze photos of the company's production equipment, and drawing conclusions from a visit to the Orient Paper factory in January 2010. companies to tumble

Equedia - talks oil and markets for the weeks ahead...

We live in a world where value no longer exists. Be it a diamond ring or a 10,000 sq ft mansion, nothing tangible in today's existence is worth anything.

When you can create as much value as you want out of thin air, you create an economy full of false hope. There's a reason why worldwide food prices are higher. There's a reason why you're paying more at the pump. While each scenario has its own implications, they all end up back at the printing press.

That leads us to what has been happening in the markets: light volume, whether we move to the upside or downside - in particular, the Canadian markets.

This past week, the markets were once again down with low volume - down for the sixth straight week. The buyers have taken an early vacation, leaving panicked sellers without anyone to sell into and thus forcing many stocks - particularly the juniors - down further. Bid support has disappeared.

Despite being down for the sixth straight week, we' re down less than 7% with no major technical support levels broken. The markets look oversold and I think we're moving closer to the bargain entry points I've been looking for. Sooner or later, the stink bids I told you to put in a few weeks ago (see Age of America Over?) will be filled giving you some great bargains to ride out until year end.

While there will be bargains, that also means the overall markets may still have further downward pressure. Especially when Federal Reserve Chairman Bernanke looks so defeated.

Last week I said, "With all of the money spent through all of the US' loose fiscal policies, nothing has changed." On Tuesday, Bernanke reiterated those statements causing the markets to fall even further down south.

In his Tuesday speech, he said that seven months after the central bank began a historic round of monetary stimulus, growth in the broader economy has been disappointing. But with the amount of money printed and no real results, Big Ben has planned to stay on course, ending stimulus on schedule this month and keeping monetary policy steady for the immediate future.

Bernanke has finally admitted what we already know. The recovery has fallen short of the central bank's expectations by a number of different measures. Six out of ten leading indicators are bad and the other four appears to be getting worse: Unemployment is high, and anyone who has found work must accept lower wages than they previously earned. Home prices are falling at a newly accelerating rate (see The Greatest War in History), making homeowners more vulnerable to default and foreclosure. Manufacturing is down and oil is trading at levels reminiscent of 2008, when months of record-high fuel prices helped drag the economy into recession (combine that with OPEC's recent objection of raising supply.) All obvious points that I have mentioned in previous letters.

The central bank's ability to boost the economy, or its willingness to attempt to do so, has reached a limit. Or has it? Was the amount of money being spent really used to bolster the economy or was it used to bolster the wallets of the Fed by lending as much money as possible to the world's most powerful nation?

Bernanke has made it clear that there will be no QE3...yet. But before we make any judgements, let's not forget that after QE1, he hinted there wouldn't be a need for QE2.

The truth is, the next QE, be called QE3 or something completely different, will eventually happen. But before it does, America will need to feel the pain. Without pain, there will be no political will.

Canadian Housing Market

I am calling for a Canadian Housing bubble. While the markets have slowly climbed, especially in Western Canada, it has all been false hopes provided by foreign investors.

Sellers are beginning to feel the pressure of trying to sell at peak prices. Homes being listed now are taking months to sell, as opposed to days. New homebuyers are being forced into other markets. The peak is here.

Within the next 3-5 years, I am calling for up to a 25% dip in the Canadian real estate market.

Leading indicators are already telling the story. Building permits posted an unexpected 21% decline in April. The value of building permits issued in Canada in April unexpectedly plummeted 21.1 percent from March on weakness in the powerful province of Ontario. The month-on-month fall was the largest since the 23.7% drop recorded in January 2006.

Its not just Ontario experiencing a fall in both residential and non-residential real estate.

The total value of permits fell in seven provinces with Ontario - which accounted for over a third of all permits issued in April - posting by far the largest decline of 41.9 percent. Compared with April 2010, total building permits declined 19.7 percent, with residential permits down 7.8 percent and non-residential permits down 35.2 percent across Canada.

While these are just short term statistics, I believe we're about to see a decline in housing prices sooner than later.

Gold and Gold Stocks

My sentiment towards gold has not changed. When you look at the broader picture of the US and the world economies, the flight to safety and wealth preservation remains a top priority. Gold will climb higher - 'nuff said.

The biggest emphasis I want to make is the disconnect between gold and gold stocks. While gold has performed incredibly well, gold equities have underperformed. But sooner or later, as I have mentioned time and time again, it will change. When it does, we're going to see some spectacular gains in gold stocks (and other silver stocks, as well) - including the more speculative issues - as they play catch up.

Patience is a virtue. When you invest in gold equities in this market, you need both risk tolerance and patience. There is a reason we invest in gold equities and there is a reason why we invest in gold. When we trade our money for gold, we're trying to preserve wealth. When we put our money into gold equities, we're looking for higher returns knowing we're taking a higher risk.

The market swings in gold equities can be big, as we have already witnessed. Don't be suckered in by selling at the bottom and trying to play catch up when the market turns. I haven't sold any of my gold and silver stocks recently (the last time I sold was the week right before the correction - see Age of America Over?) because I strongly believe that the equity side of precious metals will turn and my patience will be rewarded with some phenomenal gains.

Despite the markets looking grim and uncertain, there are bright spots ahead - if you believe as I do.

Until next week,

Ivan Lo

Equedia Weekly