Resource Stock Update - V15 #9.1 - Markets (time to sell), Gold, TLM - May. 27, 2009

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                                Level Set - Time to Sell

Feedback

I want to thank everyone that provided some feed back on the newsletter since I have made some
changes in the past several months that I thought were necessary in this current market environment.

I was very happy to hear that many of you have seen substantial gains and recoveries in portfolios
from the lows last year, up to 300% in some instances. But there is still more work to be done!

The only real problem that stood out was a failure to act. Some readers have not made changes to
their portfolio that I think is required going forward. I know it can be tough to act and sell
stocks for losses. But at times you have to make changes, hoping for a recovery is not an investment
strategy. In late November and December of last year, I suggested selling over 20 stocks, and
probably 15 or so of these were at substantial losses. But in some instances it is a necessary evil
to raise cash and then invest the proceeds into better stocks and sectors. I have never made such a
move before, selling so many stocks at one time.

And it has proven to work well, with new picks and buys doing extremely well!

Some of you have not made any changes or trades at all and have been on the sidelines. All
portfolios have seen a recovery of some sort, and if changes have not been made, now is
probably a good time, maybe the last chance for quite a while as you read below.

Perhaps some readers did not have any of the 20 or so suggested stocks to sell to raise the cash to
buy others, but I think it is still necessary to make changes. Perhaps you have been holding some of
the better stocks and no changes were required, so that is fine.

Everyone's portfolio is different and you have to manage accordingly.

I am suggesting to get out of illiquid juniors that can be difficult to sell and difficult to use
stop losses in a down market. Because there is going to be more down markets. I will update the
Selection List shortly, raising stop losses, adding more stop loss points and selling more stocks.

I will send an update on this. But if you don't see your stock on the Selection List, it is because
it was one of the 20 or so that were sold last year, and you might want to consider selling now,
because it is probably higher in price.

There was an excellent article in the latest Investor's Digest by Danielle Park that emphasize my
point, following are some quotes. At the top of the article "Most Investors are now intent on
recovering the money they lost in the bubble, but this pursuit must be realistic, and if could take
years"

The article talks about the psychological damage, the anxiety, post-traumatic-stress and that
investors and professionals alike are now engrossed in the meaning of life, re-thinking careers
etc., instead of objectively hunting for attractive investments. It goes on talking about all the
bad feelings investors have. It is quite normal and I do not blame anyone with those feelings. Most
investors want to get their losses back.

"A desire to make back one's losses is understandable. But investing with this motivation is
inherently dangerous - more likely to compound, rather than recoup, losses. There is desperation in
this thinking. Desperation is the arch enemy of reasoned and objective investment policy."

"The first step is to acknowledge past mistakes, the behavior and strategies that took one down the
wrong path.

Those who are now hoping for a quick reinflation of consumer spending and prices to bubble-levels
are sorely missing the lessons of history."

******************* Required Changes

I guess one could say that everyone went down the wrong path, as practically everyone lost
substantial amounts last year. So from that we know, we all have to make changes.

Some changes I have made and suggested is moving out of the illiquid juniors with small volume. They are near impossible to sell in a bad down turn. We need to be in stocks that we can use stop losses
with.

I have a lot fewer stocks on the list, and there will be fewer still - but easier to manage

We will also need to be invested in hedges at times, Prudent Bear Fund, ETFs that appreciate in a
down market. So far I have suggested UDN and SDS as we have already traded out of a couple others.

Many of you commented that trading more frequent and taking profits quicker was a big plus. I plan
to continue this, but I must caution that we cannot get use to this, because a lot of this was
taking advantage of a very good bear market rally!

At times we will have to wait patiently for opportunities to arise, rather than making risky bets
for the sake of using our cash. At one point in 2008, I only made one buy suggestion over a course
of 5 months, but now that we have a better handle on expected market behavior, I plan to use ETFs
more so in these slow periods.

                ******************* Where to now? ***********************

For months, since September last year and into the New Year, I harped that there would be a bear
market rally and it would be very substantial, but just a bear rally, not a new bull market. This
rally is where and how we could recoup a lot of losses. We have now done that and we should not let
greed and hope get the best of us. We need to preserve our current gains!

The Investor Digest article said it would take many years and even decades for most investors to
recoup losses and that is probably true and realistic for most using market averages and funds.
However, as you know my goal is to do much better and so far so good.

As I stated before, my goal and what I believe is required is two years of 100% gains to get back to
where we were at the beginning of 2008. That is a tall order and I cannot guarantee it can be done
in 2 years, but we are already up about 86% for 2009, the average gain on the Selection List as of
May 25th. And the 14 new picks since Nov. 2008 have done much better with an average gain of
over 140%. Perhaps we can do better than that this year if we preserve these gains and go back into
the market in the next down turn.

With that in mind, I want to go into at least 30% cash and as high as 50% cash over the next week
or so. If you have been selling and taking profits in many of my suggestions, you may already have a
good cash level, but keep going. The remaining 50% I will stay in precious metals, some in the
Millennium Index and hedges and ETFs.

I believe we could see good performance in precious metals and related stocks in the next down turn.
We will not have the same massive deleveraging we seen in 2008 that hurt the precious metal stocks.
However, we will use stop losses to protect gains on these stocks and we may end up selling or
buying more. We will just have to adjust with the market as we go ahead.

I expect that sometime between now and the next several months, the markets will retest the March
2009 and/or Nov. 2008 lows and quite likely fall through them.

S&P 500 chart

On the S&P 500 chart our timing to buy the SDS (short) ETF was pretty good, but it is unclear at
this time if we have seen the ultimate high in this bear rally, whether we go sideways for a while,
make a new bear rally high or the current correction continues.

If we see the S&P fall below 880, the low of last week which would be a lower low, that would be a
strong signal that the correction will go a lot farther, but still could be some time or another
rally before we eventually test the bear market lows. And a move above 935, a higher high could be a
strong signal that the bear rally has a bit more steam left. It would still need to breach 950 to
convincingly take out the January high. Also note the resistance of the 200 day moving average has
come down to this lower 900 area as I predicted it would by the time the market got here.

Again the 200 day average was a strong resistance level in the 2000 - 2003 bear move, and I expect
it will be so once again,

Next, I want to explain what I see and why I see this as just a bear rally that is near exhaustion

Why this is just a bear rally and new lows ahead

The rally in US markets has been led by the same sectors that lead the bear market decline. It is
never the same sectors that lead a new bull market, but always the same ones lead a bear market
rally.

The best performing stocks were the ones with the lowest quality ratings and with the largest short
interest. In many cases just short covering rallies that I pointed out with our one stock, Coeur -
CDE that I have sold.

The technicals, as I pointed out in my May 6th update around 900 on the S&P and at the 200 day
moving average have been reached.

http://www.playstocks.net/RSUV1583May62009Oil.asp

I see no signs what so ever of an improving economy and market. All I have seen is silly talk of
'green shoots' and a stock recovery based on 'hope' exactly as I was expecting. We have just seen
more of the usual, manipulation or what I like to call 'management of the economic data' and
government intervention that is now rampant in the bond/treasury, stock and gold markets.

As Richard Russell put it

"The reaction of the central banks to rising gold -- Keep it down, knock it down, flood it with
shorts, talk it down, manipulate it down, scare it down by announcing coming large sales of gold.
The outstanding features of the market today were a sinking dollar, fading bonds, and the persistent
rise in gold. It's interesting that as gold rises daily, there's surprisingly little attention
directed at its impressive action." - Richard Russell, 22 May 2009

Witness last week's Commitment of Traders report [for positions held at the end of trading on
Tuesday, May 19th). In gold, the U.S. bullion banks went short against all comers...adding another
11,885 contracts to their short position. They were then net short 18.3 million ounces of gold...and
there was likely further shorts added, probably added substantially in the days after the Tuesday
cut-off for this COT report. From what I have seen this is probably the worst COT report for gold
since before the commodities 'intervention' that began after the July 2008 long weekend

There is no doubt the Fed and their agents are scrambling in real panic mode to try and hold the US$
and treasuries up and keep the bear market rally alive, but all these markets are at scary levels.

Last Friday, May 23 (Bloomberg) -- Treasuries fell, with the 10-year note posting its biggest weekly
loss since June 2008, as the U.S. prepared to resume debt sales after a two-week pause. Yields on
10-year notes climbed above 3.4 percent for the first time since November as investors also raised
concern about the possibility that record supply of Treasuries to pay for a mounting budget deficit
may jeopardize the U.S.’s AAA credit rating.

Interest rates keep rising against the Fed's wishes. You may remember I talked about the steepness
in the yield curve in my March Outlook, The spread then was about 3.5%, we have now moved even
steeper with a spread up to 4.25%. The bond market is signaling problems and inflation.
I have been watching bonds closely for the last few years. We have not had a bear market in bonds in
almost 30 years. The bond market is much larger than the stock market and a bear market in bonds
will wreak a lot of damage. So far in 2009, bonds on average are down over 20%. It certainly looks to me
that a bear market in bonds is just around the corner.

Basically, the massive deficit and debt problem is and will overwhelm the bond market, it is only a matter of when, not if!!!!!!

It will be interesting to see if the bond market rallies and by how much when we get the next down
move in the stock market. If bonds go down with stocks, things will get real messy!

If most debt instruments (bonds) decline, financial firms’ balance sheets will deteriorate severely
and lower bond prices will lead to major derivative problems.  The CDS outstanding are about $60
trillion and how much is naked or uncollateralized we just don't know. The manipulation of bond
markets by the Fed has come home to roost as the Treasury/Fed have been monetizing Treasuries,
Agencies and toxic garbage hand over fist. This has not gone unnoticed by foreign buyers who are
essential to keep the debt market afloat. Foreigners also know that TARP recipients are again
running wild in the markets using taxpayer funds to speculate.

This week could be critical for bonds as we will see large scale auctions by the U.S. government.
The treasury will auction longer term notes of $40 billion May 26, $35 billion May 27, and $26
billion May 28. They will also sell $61 billion in three-month and six-month bills on May 26.

And now to the management of economic numbers. The April employment report that some of the main
stream were calling another green shoot, what a joke! And a prime example or purposely or
unwillingness to delve into details.

In the latest government report from the BLS, Bureau of Labor Statistics, we are told the
birth/death model added 226,000 jobs. This is a government estimate of what small business is doing?
Supposedly construction added 38,000 jobs; hospitality, which are laying off like mad, added 76,000
and professional services added 65,000.

Maybe they should be called the BS instead of the BLS!

This is the third largest B/D job creation in history! And in the worst recession in history. This
is a joke and to think they actually believe they are fooling people just shows how far and
desperate the government fraud and manipulation is going!

One analyst, Alan Abelson notes that the US government hired 72,000 [temporary] census takers. David
Rosenberg notes that without the census jobs and excess B/D jobs, the NFP would have lost nearly
670,000 jobs.

The B/D model fabricated 226,000 jobs, which is ludicrous. Government created 66,000 jobs. The
long-term unemployed jumped to a record as did ‘forced’ part-time workers. Yet most of the Street
and media herald the April employment report as a sign of economic stability or budding growth, you
know a 'green shoot'.

In the first quarter, the German economy fell by 14%, Japan by 15%, Mexico by 21%, and England was
down almost 8%. Chinese exports are down 41%, Japanese exports down 38%, and Germany's down by 32%.

These types of numbers you just don't bounce back from, it takes a long time to repair the damage
and build a base to grow from.

Lets look at the most recent examples of  'hope of a recovery'

Markets had a strong rally yesterday, Tuesday - apparently because of better consumer confidence
numbers and a not so bad Housing Report

The latest S&P/Case-Shiller U.S. National Home Price Index, which revealed that home prices fell
 by 19.1% in the first quarter – the most in 21 years.

"We see no evidence that a recovery in home prices has begun," said David Blitzer, chairman of the
index committee for Standard & Poor's, which compiles the Case-Shiller index.

And what a surprise, this index is at odds with government data?

The continued declines in the Case-Shiller index are at odds with a similar price index published by
the Federal Housing Finance Agency, which has increased the past two months. "We can cheer all the
data under the sun but until prices stabilize, I imagine that no sustainable gain in the pace of
sales will be seen," wrote Dan Greenhaus, equity strategist for Miller Tabak & Co. With inventories
still very high, "downward pressure on home prices should continue for the foreseeable future."

With prices still falling at a rapid pace, millions of homeowners are finding themselves owing more
on their house than it is worth. They cannot sell for what they owe, and they cannot refinance their
loan. They cannot borrow against their home to finance their consumption.

Seventeen of 20 cities saw prices fall in March. I seem the same deterioration continuing that has
been going on for the last 1 to 2 years.

And also out yesterday, according to the Conference Board, an index of U.S. consumer confidence rose
by more than expected in May, registering its biggest month-over-month surge in more than six years.

A reading on U.S. consumer confidence jumped to 54.9 in May from an upwardly revised 40.8 in April
as expectations for jobs improved, according to the Conference Board. The gain is the fourth-largest
in the 32-year history of the survey, and the index is at its highest level in eight months.
Economists were expecting the index to hit 43.

"Expectations are that business conditions, the labor market and incomes will improve in the coming
months," said Lynn Franco, director of the Conference Board's Consumer Research Center. "While
confidence is still weak by historical standards, as far as consumers are concerned, the worst is
now behind us."

Still, confidence has "a long way to go" before hitting "normal" levels, wrote Ellen Beeson Zentner,
senior U.S. macroeconomist with the Bank of Tokyo-Mitsubishi UFJ, in a research note. During
recessions, confidence has averaged 76.3, rising to 85.9 during recoveries, and 99.8 during
expansions, according to the research note.

This is an excellent example of the 'hope of recovery'.

While the government management of data and the media spin can maybe fool consumes into hope of a
recovery, they actually see in the real world that prices are rising - no deflation. Consumers
expect inflation at a rate north of 5%, even though government numbers have been showing price
deflation; that disconnect should eventually undermine confidence.

The problem with the index improvement - it is reflecting more hope than reality.

                                       The reality

S&P 500 earnings chart

This chart has seen a lot of circulation and illustrates that 12-month, as-reported S&P 500 earnings
have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported
for Q1 2009), making this by far the largest decline on record (the data goes back to 1936). In
fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the
first 12-month period during which S&P 500 earnings are negative.”

I have seen charts and commentary around that the P/E ratio on the S&P is at record highs.

With 97% of 1st qtr. 2009 reported, it looks like we will have an earnings number around $7, lets
use $7.20 This works out to a trailing 12 month number of $6.54 and the S&P yesterday closed just
over 910 for a trailing P/E of 139, and certainly in record territory.

If we ignore the -23.25 in the last qtr. of 2008 we have $29.79 and a P/E of 30.5, extremely high.

No doubt the market is pricing in a recovery in earnings. As I have stated many times, the estimates are always way too optimistic. Regardless if we use these optimistic numbers.

Citigroup Inc. raised its earnings estimate by 10% for the S&P 500 next year, the bank said Thursday
in a note to clients. The bank reiterated a $51 operating earnings per share for 2009, and beefed-up
its guidance for 2010 from $54 to $56, and believes it will jump 14% to $64 in 2011 The calculations
assume a financial sector profit level similar to the mid 1990s.

A pretty foolish assumption, in my books!

The S&P website shows best estimates around $53 for 2009. So if we even assume what is probably too
optimistic numbers of around $53 for 2009 and 2010, we have a current p/e ratio of over 17.

And as I talked about before in my March outlook, the market is still trading around a p/e ratio it
has for the last several years (16 - 17), but in recessions and bear markets we always see bottoms
at much lower p/e ratios. Again, I am expecting earnings closer to $40 than $50.

In other words, it appears the market is already pricing in the best case scenario and projections.

Too much hope and no reality!!!

                                                        Gold

We have seen a good rally in gold and gold stocks. I have moved all the stop/loss levels up on our
gold stocks. More detail on that soon.

               GLD Chart

I am going to use this chart of GLD, the gold ETF that reflects the NY gold price by 1/10th (one
tenth of an ounce of gold). There is a couple of points to be made in this god price rally. As I
mentioned above, the gold shorts have piled into the market and are no doubt defending the $950
area, the March high. A move convincingly above $950 to $965 or so would be very bullish and a
signal of a move to test the all time highs just over $1,000. But I also see in the last few days a
candle stick formation, a 'evening doji star' We seen the strong move up last Friday and then on
Monday a gap higher with a doji cross (indecision). Then on Tuesday a gap lower. This is also a
indication of a short term top, so we can expect some kind of pull back and how far that goes will
be key, if this rally is to continue into the summer.

For this rally to continue, we do not want this correction to see a lower low, meaning a drop below
$900, ideally a pull back no farther than just below $920, or what looks like another possibility,
is the correction is already over and this week we go to new highs above $950, but would still have
to breach $965 in the coming weeks.

If the market breaks higher in the next few days then it would mean the Doji Star was a false
topping signal, so next few days will be critical in the short term

Millennium Index

I mentioned I wanted to sell some stocks in the Millennium index that were no longer paying
dividends.

Hence I am selling Talisman, TLM for that reason and also because it is coming up to a resistance
level on the chart.

Talisman    TSX:TLM                           Recent Price $C18.03
Entry Price $17.80                         Opinion - sell over $18

The stock has seen a lot of favorable coverage and a good rally, and as you know I think the market
rally is exhausting and Talisman has reached the first major resistance level on the chart, where it
was last July/August before the deleverage and commodity crash

I rated the stock as one of the best buys in the index in December when it was around $11 and did
have it rated as a buy, but with the good move up in the stock, time to sell. My feeling is we can
buy back later at a cheaper price

http://www.stockhouse.com/comp_info.asp?symbol=TLM&table=LIST

(c) Copyright 2009, Struther's Resource Stock Report

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