You're right, Dub. I was bothered by the simplistic assumptions, too, but didn't have the energy to get in to it. In particular I noticed this:
3. The body cannot use stored fat as a source of energy to build muscle and would be in a catabolic state when breaking down fat.
Why not? Stored fat is a major energy source for the body. Energy is energy (mostly glocose) no matter what it is being used for. Fat cannot be used as substrate for muscle building--that's amino acids--but the energy for the process comes from wherever the body is getting it's energy at the moment, whether recently-absorbed glucose, or newly released glucose from gluconeogenesis from stored fat.