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MLR - Premarket Pulse February 19, 2013

The general market finished slightly lower on mixed volume as all major indexes held tight despite selling off at various points in the day most likely due to options expiration volatility, which also tends to boost volume. Small caps continue to outperform which is a good sign since they are considered riskier investments, thus is a sign of confidence. The markets continue to baby step higher on average to above-average volume. As the markets continue to "coil" in such a manner the probability of a sharper move higher increases, although we would still consider a short-term correction to be a normal occurrence at this stage of the rally. The fact that the market has refused to sell off is indicative of strength as the list of leading stocks expands.

Wal-Mart Stores (WMT) had a weak earnings report which caused a 2% drop in the stock on triple volume. WMT saw the weakest sales start for the month in seven years due to the payroll tax increase which has affected middle- and lower-end consumers.

Funds from money printing are being used to pay for various government entitlements and other costs which does not help create wealth and thus does not contribute to the future growth of the economy. WMT's earnings announcement shows the population is not spending this printed money but rather attempting to save it for hard times ahead. Meanwhile, the Fed is painted into a corner as they cannot increase taxes AND lower entitlements. The Fed must continue quantitative easing (QE) since tax revenues will not be sufficient to deal with the massive amount of looming debt. The US Government cannot afford to not increase taxes and reduce entitlements, although the "solution" of increasing tax rates ignores the fact that higher tax rates will generally result in lower tax revenues. But higher tax rates and reduced entitlements would potentially cripple the economy, so it still needs to continue printing money since the tax measures will not be enough to reverse the debt tide.

Gold is currently moving into "backwardation" where futures prices are lower than spot prices, indicating tightness in physical supplies despite the prices of paper gold and silver continuing to move lower. As they move lower, the metals are moving towards long-term support levels, and it is possible that central banks such as China will continue to buy physical gold so they can continue to sell the US dollar, so this should put a floor under gold. As well, India has now become a bigger buyer of gold than China. At some point, with the money printing presses continuing to roll in full measure, more pronounced inflation will be a consequence which should ultimately be good for gold and silver.

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