The Market Navigator

Vol. 4.03
May 07, 2010

The Dodo Bird’s Flight to Safety

Good morning folks,

The Flight to Safety

The Dodo Bird was a flightless bird that became extinct in the 17th century directly
because of man’s actions. If man had understood that by protecting the habitat of this
huge bird it would likely still be around in the 21st century, then actions may have been
taken to do just that UNLESS there was a motive large enough to disregard the bird’s
future. Since the dodo’s sternum was insufficient to support flight, it of course could not
fly to safety away from man. Less than 100 years after it was discovered by man in 1581
in Mauritius there was less than 10% of the initial population remaining and by 1610 it
was extinct.

I last wrote about the EU crisis in February and the world has certainly woken up to the
depth of this crisis. Thursday marked the largest ever single day decline in the American
stock markets and subsequent rebound with a similar reaction on most other markets
including currencies between 2:30pm and 3:30pm EST. It was a remarkable series of
events triggered in part by a single data entry error for the sale of 16 million shares of
Procter & Gamble. The entry went in as a sale of 16 billion shares and P&G stock
dropped instantly from $60 to 39 triggering millions in losses and the subsequent sales of
most other stocks in a mass exodus of the markets. The error was discovered but it was
too late. With the world fretting over sovereign debt, any good excuse was all it was
going to take to crash the markets. The flight to safety had begun.

Is there safety anywhere?

With all faith based currencies, the only support is the will of the people to hold on to the
currency. We are witnessing that fewer and fewer people want to hold Euros. We are also
witnessing that few people want to own stocks of any kind when trouble is brewing and
thus the wild Thursday event. But what about the U.S. dollar? Yesterday it rose 4 cents
relative to the Canadian dollar in less than an hour, then it dropped back 2 cents as gold
spiked to over $1200. The sequence here is very important and clearly demonstrates what
is happening.

Investors of all types of non-cash holdings were selling into U.S. dollars or converting
their foreign holdings into U.S. dollars. Once those transactions were completed, many of
those investors used their newly acquired dollars to buy gold. Gold is the ultimate
destination in the flight safety and in reality is the only safe destination. When the flight
to safety AWAY from U.S dollars begins in earnest, the price of gold could go to
unimaginable heights. Best to get a small taste now before the U.S. dollar goes the way of
the Dodo bird.

The EU has promised to bail out Greece to the tune of 112 billon Euros but with a lot of
conditions attached. The Greeks are rioting over the sudden destitution they all feel and
there is really nothing their government can do about. Having lived beyond their means
for decades, the time has come for the current generations to pay the piper. We shouldn’t
feel sorry for them either. The situation has been well understood by the bureaucrats for
years, but they refused to acknowledge that they had an addiction to easy money. The
public unions extorted 16 months pay each year; bonuses for showing up to work on time
and countless other nearly unbelievable pay schemes that helped to bring about their
financial collapse. This enormous amount of funding from their Euro partners will
devalue the common currency but it will also set precedent. When Portugal, Ireland, Italy
and Spain (the rest of the P.I.G.S) are faced with similar situations, can Germany
honestly say no? This is a big part of why the EU, in my opinion, is destined to fail.

In Friday’s Gartman Letter, a highly respected publication, Dennis Gartman states that
Thursday’s event is likely an event that we will never again see in our lifetime. I agreed
with him on everything else – gold is the safest place to be; Canadian nat-gas funds look
good short term; the Brits are in quandary over their election – but I definitely don’t agree
that the Dow down 1000 pts is a once in a lifetime event. In fact, I would not be surprised
if it happened again in the very NEAR TERM. The amount of risk that is built into the
derivative market is exponentially greater than the hedges that are in place and the
globalization of that risk makes it impossible to contain it.

• The European market represents greater than 20% of China’s exports. A

significant tightening in Europe will negatively affect China and subsequently the
materials market including of course base metals and the related Canadian junior
mining industry.
• The American mortgage industry is approaching the 3 year term since the housing
bubble burst and millions flocked to renew their mortgages. Those mortgages will
start coming due in September and just a ¼ point rise in interest rates could create
a new tidal waves in foreclosures as homeowners are cash poor. They’ll have to
sell out of their 401k’s to be able to keep their houses.
• Americans are learning how to save and the ‘less is more’ trend is growing. This
coupled with the America’s new health care bill and the inevitable rise in taxes to
cover the costs will mean fewer dollars to spend. This could kill even more of the
retail industry which is already reeling from the collapse in housing. Gartman
recommends shorting the teenage clothing industry and it makes perfect sense.
 • The BP oil disaster in the Gulf should have created a spike in oil prices, but the
European meltdown has caused a concern over demand. Look for the spike in
prices to come in if/when the Greek situation settles down.
• The investigation into market manipulation by Goldman Sachs and other
investment banks in the precious metals markets will create additional distrust in
the markets.
• Unfunded liabilities already make the U.S. technically bankrupt. Without a
government willing to cancel these liabilities, in less than 10 years, the American
financial future will likely include real bankruptcy or near hyperinflation.

These are just a few issues that spell trouble but there are dozens and dozens more.
Everything is connected and the appetite for risk is declining rapidly.

Predictions:

Near Term:
1. High volatility in the currency markets with a wild swings in the US dollar as
investors seek safety.
2. The Euro will continue to fall although most of the decline is already done. (This
could change rapidly if another country gets in trouble)
3. Gold will stay above $1150 and could spike to $1250.
4. Silver, the most manipulated of the metals, could spike up significantly. I’m
going long on primary silver miners AND buying physical silver.

Long Term (I define long as 6 months or more)

1. Long the Canadian dollar.
2. Long on gold – I believe we’ll see gold at $3500 by 2017
3. Long on silver – silver is significantly undervalued and triple digit silver is a
likely possibility.
4. Long on American medical industry – junior companies with FDA/AMA
approvals have huge growth opportunities under the new health bill.

Last issue I spoke about the Mexican mining industry and how the courts hold the future
of Mexican mining in the balance with an obscure case. They have recently upheld a
previous decision at the appeals court and a final claim by the rogue company has been
filed. The claim will fail as it has no merit and when it does, foreign miners in Mexico
will all breathe a collective sigh of relief. When the appeal was upheld, Bandera Gold
doubled in price over the following week and it cold easily double again when the final
claim is thrown out. It’s nice to see that when something should happen it actually does.

Til next time, happy investing

Shaun Larocque
The Market Navigator

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Disclaimer: This letter/article is not intended to meet your specific individual investment needs and it is not tailored to
your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or
otherwise -- investment advice. This letter/article reflects the personal views and opinions of Shaun Larocque and that
is all it purports to be. This newsletter in no way is an offer to sell securities and is not endorsed by any of the
companies that are discussed in the content. The author may own shares in companies that are discussed.