Private Wealth Advisory A Phoenix Capital Research Publication April 6, 2011 WhatHappensAfterQE2?Asnotedpreviously,theS&P500brokeoutofitsbearishrisingwedgepatterninmid‐March.Theensuingselloffwasbothviolentandrapid.Andtheonlythingthatkeptthemarketsafloatwasaconcentratedeffortandinterventionfromtheworld’scentralbanks.Asaresultofthis,theS&P500hasexplodedhigher,fueledbymassiveliquidity:

OnthepartoftheFederalReserve,youcanseejusthow“allout”theFedhasgoneinitsattemptstopropthingsupintheUSmonetarybasewhichhasgonepositivelyverticalsofarin2011.

Whatyou’relookingathereisnearly$500billioninliquidityhittingthefinancialsysteminthelastthreemonths.Bearinmind,thisisONTOPofthe$100billiontheFed’sputtingintothesystemonamonthlybasisviaQE2.Toprovidesomecontexttothis,considerthatduringQE1,theFedwasputtingroughly$50billionintothesystem(largemoneypumpsinbold):

Week FedActionMarch172010 +$25billionMarch112010 +$2billionMarch42010 ‐$5billionFebruary252010 +$8billionFebruary182010 +$21billionFebruary112010 +$7billionFebruary42010 +2billionJanuary282010 ‐$4billionJanuary212010 ‐$39billionJanuary142010 +$56billionJanuary72010 +$1billionDecember312009 ‐$1billionDecember282009 +$35millionDecember172009 +$49billionDecember102009 ‐$17billionDecember32009 ‐$2billionNovember272009 ‐$2billion

November192009 +$73billionNovember122009 ‐$30billionNovember52009 +$3billionOctober292009 ‐$39billionOctober222009 +$8billionOctober152009 +$54billionOctober82009 ‐$3billionOctober12009 ‐$17billionSeptember242009 +$18billionSeptember172009 +$51billionSeptember102009 +$4billionSeptember32009 +$8billionAugust272009 +$14billionAugust202009 +$46billionAugust132009 +$25billionAugust62009 ‐$11billionJuly302009 ‐$38billionJuly232009 ‐$33billionJuly162009 +$80billion

AfterQE1ended,theFed’smonthlyliquiditypumpsfelltoroughly$30billionorless.

Week FedActionJuly82010 +$1billionJuly12010 ‐$13billionJune242010 +$175millionJune172010 +$12billionJune102010 ‐$4billionJune32010 +$2billionMay272010 ‐$16billionMay202010 +$14billionMay132010 +$10billionMay62010 ‐$4billionApril292010 ‐$1billionApril152010 +$31billionApril82010 +$420millionApril12010 ‐$6billion

That’swhenthishappened:

Soit’snotsurprisingtheFedfreakedoutandstartedQEliteinAugust.

ThiskeptthingschuggingalonguntilQE2wasannouncedinNovemberatwhichpointtheFedbeganputting$100billionintothemarket.Despitethis,thefinancialsystemcrumbledinMarch:

TheONLYthingthatkeptthemarketafloatwasacoordinatedeffortonthepartoftheG7:thefirstin10years.Normally,whenaninvestmentbreaksabearishrisingwedgepatternyouseeacollapsetothebaseofthepattern.Inthecaseofthisrecentcollapse,theS&P500shouldhavefallento1100orso.

However,thecoordinatedG7interventionstoppedthisfromoccurringandcreatedasharprallyinstocks.

ThiswholesituationisquitereminiscentoftheonethatoccurredinOctober2009.Atthattimewehadabearishrisingwedgepatternbroken,buttheFedsteppedinwithamassiveliquiditypumpandthecollapsewashalted.

Sowhat’snext?ItalldependsonQE3.QE2isscheduledtoendintwomonthstime:June2011.It’sextremelydifficulttogaugewhetherQE3willbeannouncedthenornot.ThereasonIsaythisisbecauseFedofficialsareengagedina“toQE3ornottoQE3”debateinpublicwithvariousmemberssuggestingthatweneedQE3whileotherssaythatweshouldnotonlyNOTannouncedQE3butshouldendQE2now.HerearejustafewinstancesofwhatI’mtalkingabout:

December42010:Perhapsmoreimportantly,CBSreportedthatBernankedidnotruleoutthepossibilityofmoreassetpurchases,meaningathirdroundofquantitativeeasing(QE3)ispossible

Feb92011:Askedaboutwhetherathirdroundofquantitativeeasing,orQE3,wouldbenecessary,AtlantaFedPresidentDennisLockharttoldreporters:"ItdependsentirelyonthestateoftheeconomyandifItakemybasecaseforecastwhichcontinuesthemoderaterateofgrowththrough2011andfor2012,I'mnotsureitwillbenecessary."Feb242011:FederalReserveBankofStLouisPresident,JamesBullard,alludedtothepossibilityofathirdroundofquantitativeeasing(QE3)inaspeechtodayattheBowlingGreenAreaChamberofCommerce.

March72011:Ifoilpricescontinuetoclimb,itcouldforcetheFederalReservetomakeanewroundofassetpurchases,accordingtoAtlantaFedPresidentDennisLockhart.

Thesearejustahandful.Longer‐term,IamcertainthatcurrentFedChairmanBenBernankewillbeforcedtoresignandtheFedwillbedismantledwithinfiveyears.However,inthenear‐term,themarket’sentirestabilityhingesonwhetherornotQE3isannounced.Onthatnote,IamabsolutelycertainthatQE3WILLbeannouncedbarringoneitem:politicalpressure.TheFedHAStoengageinmoreQE3ifitdoesn’twanttheentiremarkettocollapse.GiventhebreakdowninEurope,theIMPLOSIONintheMiddleEast,andtheongoingnucleardisasterinJapan,theremovalofFedliquiditywouldkickoffaMASSIVEsystemicCrisis.Remember,wehadafull‐scalemarketbreakdownwhenQE1endedandthatwasbecauseofGreece:acountrywithaGDPof$329billion.RemovingliquidityfromthemarketswhenJapan,thefourthlargesteconomyintheworld(ifyoucountEuropeasoneeconomy),thelargestOilexportingregionintheworld(theMiddleEast),and

SpainandPortugalareallbreakingdownwouldleadtoanabsolutemarketDISASTER.TheFedwillnotriskthis.BesidesitHAStokeeptheliquiditygoingifit’stocontinuesupportingtheTBTFbanksintheUS.Remember,99%ofwhattheFed’sdoneinthelasttwoyearshasbeenaimedatsupportingthelarge,TooBigToFail(TBTF)WallStreetbanks.Thereasonsforthisare:

1) TheFedisinfactCONTROLLEDbythesebanksviathePrimaryDealernetwork

2) Fedleadersareallfront‐menforWallStreetRegarding#1,whentheFederalReservewascreatedintheearly20thcentury,themendesigneditdidsotohidetherealpoweroftheFed.Thosemenwere:

1) NelsonAldrich,SenatorofRhodeIslandandRepublican“whip,”ChairmanoftheNationalMonetaryCommissionbusinessassociateofJPMorganandfather‐in‐lawtoJohnD.Rockefeller,Jr.

2) AbrahamAndrew,AssistantSecretaryoftheTreasury.3) FrankVanderlip,PresidentofNationalCityBankofNewYork,themost

powerfulUSbankatthetime,representingWilliamRockefellerandtheinternationalinvestmenthouseofKuhn,Loeb,&Co.

4) HenryDavidson,SeniorPartnerattheJPMorganCompany.5) CharlesNorton,PresidentofJPMorgan’sFirstNationalBankofNewYork.6) BenjaminStrong,headofJPMorgan’sBankersTrustCompany.7) PaulWarburg,partnerofKuhn,Loeb,&Co,arepresentativeoftheRothschild

bankingdynastyinEnglandandFrance,andbrothertoMaxWarburgwhowasheadoftheWarburgbankingconsortiuminGermanyandtheNetherlands.

InitiallySenatorAldrichproposedsomethingquitesimilartotheBankofEngland,inwhichtherewouldbeonesinglelargebank.However,theRockefellerinterests(whohadampleexperiencewiththeUSpopulace’sreactiontomonopolies)thoughtthiswouldbetoomuchforAmericanstostomach.Instead,theyproposedthecreationof12regionalbankslargelytomaintaintheillusionthattheFedwouldbeaunion,notasinglecentralbank.ThisiswheretheexpertiseofPaulWarburg,whohadthemostexperiencewithEuropean‐stylecentralbankingcartels,camein.Warburgproposedcreatingabankingstructurethatwouldbemoreconservativeatfirstsothatthegeneralpublicwouldbemorewillingtoacceptit,thenstrippingawaytheconservativepropsoncethesystemwasinplace.

Forinstance,WarburgproposedtheFederalReserveBoardofGovernors,agroupofsemi‐electedofficialswhowouldmeetanddecideFedpolicyoninterestratesandthelike.ThiscreatedtheillusionthattheFedwouldresembleanormalbankingcorporationwithaboardofdirectors.However,inpointoffacttheFedBoardwasameanstokeepallthekeydecisionmakingcentralizedatonebankinWashingtonDC(closetoNewYorkwheretheBankOligarchswereheadquartered).Warburgalsocameupwiththename“FederalReserve”whichevokedthesensethattheorganizationwasalignedwiththeGovernmentandwassecure.Hisviewwasthatthewords“central”and“bank”mustbeavoidedatallcosts.However,themostdaringandprovocativeofallWarburg’sproposalswasthattheFedwouldtakeovertheissuanceofALLmoneyintheUS.ForthefirsttimeinUShistory,moneywouldbeproducedbyprivatelyheldbanks(theFed’sprimarydealernetwork),NOTtheUSGovernment.Fromthenon,USFederalReservenoteswouldbelegaltenderforsettlingalldebtspublicorprivate.Thus,ifsomeonewasowedmoneyandrefusedtoacceptFederalReserveNotes(Dollars)aspayment,heorshecouldgotojail.TheDollarevensaysthisinthetopleftcornerofitsface.So…theREALpoweroftheFedliesinitsprimarydealernetwork,NOTstoogeslikeBenBernanke.Ifyou’reunfamiliarwiththePrimaryDealers,thesearethe18banksatthetopoftheUSprivatebankingsystem.They’reinchargeofhandlingUSTreasuryDebtauctionsandassuchtheyhaveunprecedentedaccesstoUSdebtbothintermsofpricingandmonetarycontrol.ThePrimaryDealersare:

1. BankofAmerica2. BarclaysCapitalInc.3. BNPParibasSecuritiesCorp.4. CantorFitzgerald&Co.5. CitigroupGlobalMarketsInc.6. CreditSuisseSecurities(USA)LLC7. DaiwaSecuritiesAmericaInc.8. DeutscheBankSecuritiesInc.9. Goldman,Sachs&Co.10. HSBCSecurities(USA)Inc.11. J.P.MorganSecuritiesInc.12. Jefferies&CompanyInc.13. MizuhoSecuritiesUSAInc.14. MorganStanley&Co.Incorporated15. NomuraSecuritiesInternationalInc.

16. RBCCapitalMarkets17. RBSSecuritiesInc.18. UBSSecuritiesLLC.

OfthisgroupfourbanksinparticularreceiveunprecedentedfavoritismoftheUSFederalReserve.Theyare:

1. JPMorgan2. BankofAmerica3. Citibank4. GoldmanSachs

You’llnotethatthesearethefirmsdeemed“TooBigToFail.”TheFednotonlyinsuredthattheydidn’tgounderduring2008,butinfactallowedthesefirmstoINCREASEtheircontroloftheUSfinancialsystem.ConsiderthatJPMorgantookoverBearStears.BankofAmericatookoverCountryWideFinancialandMerrillLynch.CitibankandBankofAmericaweretheonlytwobankstohavetheirliabilitiesdirectlybackedbytheFed($280billionforCitiand$180billionforBofA).Thenthere’sGoldmanSachswhichwasmadewholefromallAIGliabilities,received$13billionindirectfundingfromtheFed,andwassupportedwhileALLofitsinvestmentbankcompetitorseitherwentunderorwereconsumedbyotherentities,grantingGoldmanavirtualmonopolyovertheinvestmentbankingbusiness(thefirmsthatweremergedwithlargerfirmsalllaidofflargeportionsoftheiremployeesandcloseddownwholesegmentsoftheirbusiness).MypointwithallofthisisthatweNEEDtoignorewhattheFedsaysandinsteadfocusonwhatitdoes.Andinthelasttwoyears,theFedhasdoneeverythingitcantosupportthesefourfirms.IndeedQE’s1,2,andthecoming3arenothingbutanattempttofunnelTRILLIONSintothesefirms(andtheotherprimarydealers).ThereasonstheFedisengaginginQEratherthansimplydishingoutthefundsare:

1. PoliticaloutragewouldbeEXTREMEiftheFedjustgavethemoneyaway2. TheFedneedstosupportthosefirmswiththelargestderivativeexposure

Thereasonthatthe2008debaclehappenedwasverysimple.Thederivativesmarket,thelargest,mostleveragedmarketintheworld.Today,thenotionalvalueofthederivativessittingonUSbanks’sbalancesheetsisintheballparkof$234TRILLION.That‘s16timesUSGDPandmorethanfourtimesWORLDGDP.

Ofthis$234trillion,95%iscontrolledbyjustfourbanks.Thosefourbanksandtheirderivativesexposure(in$TRILLIONS)arechartedbelow:

Theabovepicturesummatestwothings:

1) WhoREALLYcontrolstheUSfinancialsystem2) WhyQE3,4,etcareguaranteed

TheFedHAStocontinuepumpingmoneyintothesystemtosupportthesefirms’gargantuanderivativeexposure.Failingtodosowouldmeanadisasteronthescaleoffourtofivetimesthatof2008.Remember2008wascausedbythecreditdefaultswapmarketwhichwas$50‐60trillioninsize.Theinterest‐ratederivatemarketis$200+TRILLIONinsize.SoIamcertainQE3willbecoming.Ifitdoesn’tcomeinJunewe’llgethintsofituntilit’sfinallyannounced.TheFedcannotandwillnotstopthemoneyprinting.Bernankewillbeforcedtoresignlongbeforehetakesthepaperweightofftheprintbutton.Whichbringsmetoournextseriesofinflationhedges.OilhasbecomeVERYattractiveasaninvestmentforseveralreasons:

Politicalinstabilityinprimaryoilproducingnations Misallocationofoilrevenuesinotheroilexportingnations(Mexico,

Venezuela,Peru,Iran,etc.),whichwillresultinoilexportsbeingcutdramaticallyinthenextfiveyears.

InvestorsseekinganinflationhedgeThetechnicalpictureforoilissimilarlybullish.Wejusttookoutveryimportantlong‐termresistanceat$100.Moreimportantly,webrokeabovethislevel,thenfelltotestitandbouncedindicatingformerresistanceisnowsupport.

Thestageissetforatleast$120oilifnot$130inthenear‐future.AndifcivilunrestexpandsintoSaudiArabia(itwill),oilcouldgoto$200perbarrelinaflash.WiththatinmindI’maddingafewnewinflationhedgestoourinflationportfolio.ThefirstisplainoldoilwithalittlejuiceintheformoftheUltrabullishOilETF(UCO).UCOismeanttoreturn2XtheperformanceofOil.SoifOilrallies10%itshouldrally20%.AssuchitgivesexposuretoOilwithalittleextrajuice.Actiontotake:BuytheUltrabullishOilETF(UCO).Elsewhereinthemarkets,thelargeoilproducersareCompany Symbol P/E P/B Dividend

Exxon XOM 13 3 2.1%Conoco COP 10 1.7 2.9%Chevron CVX 11 2 2.7%OfthebunchIlikeConocothebest.It’sthecheapestandoffersthelargestdividend.It’salsothetopperformer:Conocoisred,Exxonisblue,andChevronisgreen.

It’salsojustabouttobreakabovelong‐termresistance:

Let’sgetonboardbeforethishappens.Oncewetakeout$80,we’relikelygoingtonewhighs.Actiontotake:BuyConoco­Phillips(COP)AnotherinflationinvestmentI’minterestedinisPretiumResources(PVG.TO).ThefirstthingyouneedtoknowaboutPVGisthatitisheadedupbyRobertQuartermain,theformerCEOofSilverStandard.HetookSilverStandardfromajuniorexplorationcompanytothesilverfirmwithprovenandprobablereservesof203millionounceswithanother900MILLIONouncesinindicatedresources.Themanisliterallyalegendintheminingspace.Inlate2010,PVGboughttheSnowfieldProjectandBrucejackProjectinBritishColumbiafromSilverStandard(thelatterretainsownershipof42%ofPretium).ThecombinedmeasuredandindicatedresourcesfortheseprojectsmakePretiumtheownerofthethirdlargestgolddepositinNorthAmerica.Indeed,resourcesincreasedawhopping130%lastyearalone(likeIsaidQuartermainisalegend).Thecompanyisperforminganaggressivedrillingcampaignthisyearandwillannouncedrevisedresourcesby4Q11.Lookingatitsresultssofar(aswellasthetrackrecordofthefolksrunningthecompany),there’spotentialforaMAJORfindhere.Andwe’llbeonboardforit.Actiontotake:BuyPretiumResources(PVG.TO).IMPORTANTNOTE:PVGisanearlystageexplorationcompany(it’snotyetproducing)soDONOTloaduponthisstock.Asmallinvestmentwilldo.AGAINKEEPTHISPOSITIONSMALL.Onafinalnote,thestoryremainsthesamewithourCrisisTrades.Ihavestatedrepeatedlytokeepthesepositionssmallastheyareakindof“PortfolioInsurance”shouldthemarketcrateragain.Wearecurrentlysittingonsignificantpaperlossesinallofthesepositions.ThisisthetimethatrequiresthegreatestinvestordisciplineasitisVERYtemptingtogetfedupandclosethesepositionsout.

However,thelikelihoodofanother2008eventgrowsbytheday.I’vealwaysbelievedthat2008wasawarmupfortheREALcrisis.ThatCrisisiswhenworldGovernmentsgobust(ratherthanjustprivatebanks).Allofthesepositionscouldpotentiallypayoutsmallfortuneswhenthishappens.AnditWILLhappen.Butwaitingforitisthehardpart.ButIamcertainthatyou,likeI,arewatchingthenewsandrealizehowdirethesituationisbecomingintheworld.Thesepositionsareahedgeagainstallofthis.Andremember,thesmartmoneyispreparingforthistoo.BillGross,CarlIcahn,andotherguyswhomadebillionsfrominvestingarealltakingstepstoprepareforwhat’scoming.Theseguysdidn’tgetrichbybeingwrong.Thisconcludesthisweek’sissueofPrivateWealthAdvisory.Barringanynewdevelopments,you’llnexthearfrommeonApril20.Untilthen…GoodInvesting!GrahamSummersPORTFOLIOREVIEWOPENPOSITIONSInflationPortfolio(OPENBUYSNOW)Company Symbol BuyDate BuyPrice Current

PriceGain/Loss

Goldbullion N/A 3/17/10 $1,120 $1,460.00

30%

Silverbullion N/A 3/17/10 $17.50 $39.66 127%VistaGold VGZ 12/15/10 $2.55 $3.92 54%NovusEnergy NVS.V 12/15/10 $1.01 $1.14 13%CentaminMining CEE.TO 2/23/11 $1.95 $2.28 17%AndersonEnergy AXL.TO 2/23/11 $1.19 $1.18 ‐1%TimberWest TWF‐UN.TO 2/23/11 $4.63 $5.44 17%BullishOilETF UCO 4/7/11 $60.85 NEW! BUY!ConocoPhillips COP 4/7/11 $80.40 NEW BUY!PretiumResources PVG.TO 4/7/11 $10.00 NEW BUY!

Average 37%S&P500 14%

Coming Crisis Portfolio (Bought at 11/16/10 at 11:46AM) Investment Symbol BuyDate Buy

PriceCurrentPrice

Gain/Loss

UltraShortBrazil BZQ 11/16/10 $17.74 $13.75 ‐22%UltraShortEmerg.Mkts EEV 11/16/10 $36.57 $27.79 ‐24%UltraShortRussell2000 TWM 11/16/10 $63.48 $41.06 ‐35%UltraShortRealEstate SRS 11/16/10 $20.94 $15.64 ‐25%UltraShortMaterials SMN 11/16/10 $25.49 $16.14 ‐37%UltraShortFinancials SKF 11/16/10 $74.68 $55.82 ‐25%