by Addison Wiggin & Ian Mathias

• Bond market blasts warning: The correction is coming
• Bill Bonner on selling your stocks… and when to consider buying them back
• Government admits the obvious: Bailing out AIG was a mistake, except for Goldman Sachs
• Dan Amoss reveals what will soon be “the riskiest” sector to own
• Plus, suspicious readers unite! The 5’s inbox filled with tips on hiding gold

  While the stock market continues its “recovery rally,” there’s something strange going on in the bland world of bonds. Check it out:

True, there’s hardly a difference to the everyday investor between a 0.3% and a 0.04% yield. After fees and inflation, you’ll end up losing money either way.

But it’s worth noting that short-term Treasuries are at their highest demand since it hit the fan this time last year. In fact, the Treasury auctioned off $31 billion in 6-month bills yesterday at 0.14%, the lowest level ever. Ditto with their auction of 2-year notes later in the day.

In other words, the majority of the market can’t find anything better to do with cash than stuff it away at a near-negative yield for a few months… not the best sign for stocks. With the holiday lull and tax-selling season right around the corner, it’s hard to blame them.

  The weird part is that there’s a rush into stocks and bonds at the same time. While the 6-month and 2-year securities were auctioned at record lows yesterday, the S&P 500 advanced over 1.4%. Kudos to Bloomberg for putting this together:

“For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.

“That’s when the Standard & Poor’s 500 Index climbed 25% even as bill rates tumbled to 0.05%, from 0.45%. In 1939, stocks began a three-year, 34% decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.”

Heh, do we detect some sarcasm?

  “Be aware that a correction may be due, but as long as stocks and gold continue to make new highs every week, the momentum is strong,” our resource trader Alan Knuckman notes. “Earnings do not begin again until after the first of the year, with Alcoa Jan. 12, so that catalyst for rallies may be done for the next month and a half. Watch for crude and silver to make new yearly highs as confirmation that we are still humming along.”

  “Whatever else may be going on, there's a real bull market in gold,” Bill Bonner reminds us, with a longer-term perspective. “It's a bull market that began 10 years ago. If you'd bought stocks then, you'd have about what you have now... less inflation. If you'd bought gold... you have about four times what you had then.

“Today, a quick glance at a chart shows gold looking a little toppy. Expect a correction. But remember, this is a bull market. In a bull market, you buy the dips.

“Stocks, meanwhile, are in a bear market. In a bear market, you sell the rallies. This looks like a good time to sell -- if you haven't done so already.

“And once you're out of stocks, stay out until the bear market is over... probably at around 3,000-5,000 on the Dow. When the price of gold equals the price of the Dow, it will be time to switch.”

  Gold rose as high as $1,173 an ounce yesterday, yet another record high. The spot price is backing off a bit as we write, along with stocks.

  The latest word on American GDP is leading the stock decline today. Third-quarter economic growth was weaker than originally reported, the Commerce Department reluctantly announced today. Their revision was embarrassingly large -- from their initial projection last month of 3.5% growth to today’s guess of 2.8%. That revision -- 0.7 percentage points -- was the size of the entire reported contraction for the second quarter.

  Interestingly, the market doesn’t seem to care at all about the recent string of better-than-expected housing reports. Here’s the quick and dirty:

• Existing home sales soared 10.1% in October, the National Association of Realtors beamed yesterday. While this headline number blew expectations out of the water, the details were a bit more disconcerting… distressed properties made up 30% of the monthly sales and the median sales price fell 7% year over year, to $173,100. While immeasurable, sales also got a big boost from the new homebuyer tax credit, which was expected to expire soon
• National home prices are not decaying at such a rapid pace as earlier this year, the folks at S&P added today. The S&P/Case-Shiller home price index for September registered a 8-9% decline year over year… still a fall in home prices, we hasten to add, but not as horrendous as the 19% HPI crash in the first quarter. National average home prices, according to their measure, are still back to fall 2003 levels.

As we hinted before, no amount of headline massaging could turn either report into a buying opportunity. XHB, the homebuilders ETF, fell yesterday and is in the red again today.

  Last, brace yourselves for a shocking report from the U.S government: After months of research and we don’t even want to know how much money, an independent investigator has concluded that the government wasted a ton of money bailing out AIG.

You don’t say!

Special Inspector General Neil Barofsky, the man tasked with policing the TARP, released a report last week that focused on the transactions between the New York Fed, led by Tim Geithner, and AIG’s counterparties. As was evident to, ummm… everyone, Barofsky concluded that the Fed blew it by not demanding any concessions from the major holders of AIG credit default swaps -- like Hank Paulson’s alma mater, Goldman Sachs. The N.Y. Fed paid out these contracts in full even though they would have been worth far less had Mr. Geithner not stepped in and bailed out AIG. That cost the American taxpayer “tens of billions of dollars,” the report finds.

“Geithner’s already tattered reputation took a major blow with his investigation,” Dan Amoss notes. “He does not come out looking so good. I wouldn’t be surprised if President Obama replaced Geithner in 2010, given the mounting evidence that he was handing out taxpayer money and guarantees willy-nilly during the 2008 AIG panic.

“With more information about the performance of loans and mortgages in the coming months, the market’s attention could easily shift back to the capital adequacy of the U.S. banking system. And with waning political support for government subsidies, bank executives may have to start taking their lumps the old-fashioned way: raise as much dilutive equity capital as necessary to absorb credit losses. Bank shareholders and bondholders -- not taxpayers -- should be responsible for their own lending follies.

“Bank stocks are among the riskiest stocks to own.”

  “You should not cause so much anxiety among us tree lovers,” a reader writes referring to our comment yesterday on the rapidly expanding money supply. “Dollar bills are made from linen and cotton. Pine trees are safe! Hmmm… maybe we should all be buying cotton futures?”

The 5: We’ve certainly heard worse ideas… Jim Rogers has been hollering “Buy cotton!” for years.

  “Thieves are smart these days and you need to outsmart them if you want to keep your gold,” reads an article from goldwhy.com. Last week, you asked us if there was a way to hide your reserves without being easily detected. As paranoid as this is, we’ll play along:

“Assume that thieves have metal detectors. They will leverage these metal detectors to find your gold stash. The solution: Hide your gold in a place that would already set off a metal detector. For example, perhaps you could store your coins in the kitchen drawer near your metal silverware but hidden under a towel or taped against the top of the drawer. The thief would not see your coin and would assume the silverware set off the detector. Or hide your gold in the middle of your can of pocket change. Thieves are not likely to sort through your change jar and are looking for higher-ticket items.”

  “There is an old trick,” a reader adds, “consisting in burying bottle caps everywhere in your back garden, thus rendering metal detection useless.”

  “There are commercially available ground-penetrating radars,” the last reader writes. “These are used for finding such things as sewer or gas pipelines or land mines underground. Your gold burier would have a problem if anyone were seriously looking for his gold. A GPR might be able to pick up a kilo or so of gold at 10 meters in depth. He should consider burying his gold under a lake bottom or in a swamp, which would degrade the capability of the radar. GPRs are fairly commonly used for construction or by utilities and are not that expensive to rent. Uh, could you give me the approximate location of your gold bug friend?”

The 5: Heh… the day you find yourself hiding gold in the bottom of a swamp, burying decoy bottle caps in your backyard and strategically sprinkling gold coins in change jars around the house, you may want to step back and take in a little perspective. There will be bigger things to worry about -- either the grim reality that would actually warrant this behavior or the crippling paranoia that has overtaken your sense of reason.

On the other hand, there are some matters you should be worried about now… like the IRS’ ability to tax your gold holdings, or whether that wealth is best stored in investment-grade coins, rare coins or ETFs. Those are some of the issues we’ll be addressing in an upcoming webinar with First Federal Coin Corp’s Nick Bruyer. You can sign up for it here, and if you have any questions for him, this is the last call. Don’t forget – it’s all free of charge.

Be well,

Ian Mathias
The 5 Min. Forecast

P.S. “I just spent $750 subscribing to Resource Trader Alert,” a reader bemoaned to our customer service squad yesterday, “and now I’m thinking about joining the Reserve… please tell me I didn’t just throw away 750 bucks.”

Heck, no. In fact, you're asking the No. 1 question we get concerning the Agora Financial Reserve, our most high-end advisory service (and, frankly, our best deal). The answer is: Much -- in some cases all -- of the money you have spent on Agora Financial publications can be credited toward your Reserve membership. But there’s no one-size-fits-all solution to these credits, so the best way to find out how much you could save is to call our colleague John Wilkinson at 866-361-7662. Best time to catch him is during Baltimore business hours... that's 9-5 EST time.