Commodity Bull Market

Why the Worst Case Conclusions are Already "Priced Into" the Market

noreply@blogger.com (Brett Owens) — Thu, 03 Dec 2009 00:44:00 +0000

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

So enjoy Tom's bet with his boss (who's another great investor BTW). And if you're interested in subscribing to Tom Dyson's premium service, The 12% Letter, we've arranged for readers here to receive a 6-Month Risk-Free Trial (click here to learn more).

***

Porter Stansberry Is My Patsy
By Tom Dyson

On Friday, I made a bet with my boss...

Porter Stansberry is my boss and a good friend. He's one of my favorite investment analysts in the world. An investor who is not reading his monthly newsletter is flying blind in a rainstorm.

But I have a disagreement with him right now. Porter says the United States government is broke. He says there's no way it'll be able to borrow enough money over the next 12 months to cover its obligations. There's going to be an enormous government cash crunch unless it "prints" the money.

By printing this money, the government is forcing our foreign creditors to make an impossible choice: Stay with the dollar and see 50% or more of your intrinsic value wiped out... or abandon the dollar completely and risk a global crisis.

Whatever happens, Porter says, gold soars hundreds of percent, the dollar spirals toward zero, and the price of government debt erodes.

Last week, I bet Porter he's wrong.

Specifically, I bet him the interest rate on the 10-year Treasury note would be below 4% at this time next year. The interest rate on the 10-year Treasury note is the price the United States government must pay to borrow money over 10 years. If the market thinks the government is broke and can't afford its debt, this interest rate will rise. Porter bet it'll rise above 4% in the next 12 months. I bet it will not.

Look at this chart of the dollar in terms of the Swiss franc. The Swiss franc is the most stable paper currency in the world. As you can see, the dollar has been falling against the Swiss franc for more than 40 years. That's Porter's big trend... and it's down.

But notice the long periods where the dollar rises... despite the big trend. There was a huge bull market from 1979 to 1985, for example, and another one from 1995 to 2001.

That's the thing about markets. They never move in straight lines. They overshoot in one direction and then overshoot on the way back. And the funny thing is, just at the moment when they are most stretched in one direction, investors feel the strongest desire to join the crowd.

Take 1979 as an example. It seemed as if the dollar was about to plummet. There were incredibly compelling arguments for selling the dollar and buying hard assets... as there are today. It just wasn't a good time for selling the dollar.

I actually agree with Porter's conclusions. I just think much of the worst-case conclusions have been "priced into" the market. The financial headlines are full of stories about gold and the dollar... billionaire John Paulson buying gold... the great money manager David Einhorn buying gold... India buying gold... Chinese housewives buying gold... Warren Buffett protecting himself against inflation.

It's a popular thing to do nowadays... nothing like in the early stages of the gold bull market in 2002.

The dollar's already been in a bear market for almost 10 years, and Porter's theory has as much traction as it did in 1979. It's an incredibly compelling argument... but my gut tells me if you bet on inflation now, you're walking into an ambush.

Now just isn't the right time to be placing bets on the end of the dollar. It's the easy trade that feels right. Any great trader will tell you the "hard trade" is always the right trade.

Unless you're a short-term trader or you still don't own any gold bullion, I recommend you avoid making any new investments based on inflation or the dollar's destruction. You'll make far more money on this sort of investment when the dollar is nearing the end of a multiyear bull market... like it was in 2000.

Again... this is a matter of timing. I'm still a gold bull. I still think people should keep 5%-10% of their assets in gold, for wealth insurance... for a way to own "real money."

But I'm making the "hard bet" that interest rates will not soar in the next year. I'm making the hard bet that the dollar with strengthen. And I'm not afraid to hold cash. It's going to grow in value over the next year. And I'm going to enjoy collecting more of it from my patsy, Porter Stansberry.

Ed. Note: Tom Dyson is the author of The 12% Letter, one of my top 5 favorite investment newsletters. To sign up for a risk-free trial, click here.

When the Today Show is Talking About Gold's Rise Due to the Weak Dollar...

noreply@blogger.com (Brett Owens) — Wed, 02 Dec 2009 16:49:00 +0000

You know a top just HAS to be near!

I know I've been early on this call - or wrong (same thing) - for a few months now. But this had to take the cake.

There I was, tying the laces on my sneakers, getting ready to walk my dog Banjo on this crisp, cool 34 degree Sacramento morning. And there they were on the Today show, yucking it up about the rising price of gold!

Here's my re-enactment of the conversation:

***

Gal Who Replaced Katie Couric: And gold continues it's rise this morning. How about that for a Holiday gift!

Token CNBC Money Honey: That's right, gold has climbed past $1200 per ounce, and there appears to be no end in sight!

Gal Who Replaced Katie Couric: What's driving gold's rise?

Token CNBC Money Honey: Well it's really being driven by the weak dollar.

Me: Agh!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

***

Look - the dollar is not GOING to crash - it has ALREADY crashed!

To paraphrase Bruce Springsteen - the dollar's been going down, down, down since 2002.

(Source: Barchart.com)

The Today Show/CNBC failed to mention that despite all of the pessimism on the dollar, it has still not dropped below it's 2007 levels. A breach of which, by the way, would cause me to scream Uncle and admit I was wrong.

But when Matt Lauer & Co jump on the rising gold/falling dollar trade, one would have to believe that this trade is pretty well played out. In fact, I see that gold and stocks are retreating since I saw the TV clip. How poetic would it be if gold topped on the exact day of this clip?

Dubai's Meltdown; Liquidity Flows Make the Markets; S&P Fair Value

noreply@blogger.com (Brett Owens) — Sun, 29 Nov 2009 19:59:00 +0000

Dubai's Meltdown

The Thanksgiving holiday is traditionally a very slow time for the markets...not so this year! Dubai rocked the financial world with its announcement to debtors that it needed a bit more time to make good on outstanding debt payments.

Uh oh - here we go again?

Global markets reacted quite violently to the news, throwing up with the vigor of a hungover Wet Wednesday reveler. The real news here is not Dubai in and of itself - a debt bender from a pretty small country can't do that much damage alone to the global financial system. But, if this is a harbinger of more sovereign defaults to come, then now may be the time to beat the Holiday investor crowd and check into the debt rehab clinic!

Is fear back in the markets? It's been a bear market in fear since the March lows - perhaps it's time for fear to bounce back. This week will sure be interesting.

What happens if fear bounces back? We've seen this playbook before, as Mr. Market has already given us a sneak preview...

All Markets are Driven by Liquidity Flows

Friday was a classic fear driven day lately, with the dollar rallying, and everything else dropping. This is the "All The Same Markets" theory we've been following closely for most of 2009, originally popularized by one of our favorite gurus, Robert Prechter.

Most people see that the asset markets are interconnected - it's the old reflation/deflation trade. But, why does the dollar move counter to all of these other markets?

The "flight to safety" explanation is a popular one, and I personally think it's as wrong as it is popular.

The reason the dollar rallies is not because it's perceived a safe currency, but paradoxically because it's the sickest one. The reason is that most of the debt in the world is denominated in US dollars. When that debt goes "poof" - that is, the borrower defaults, and the money that once was there ascends up to money heaven - the supply of money goes down.

When liquidity tightens, this debt can go "poof" in a hurry, as we saw during the last leg down of the stock market. This is highly deflationary. And, because most of this debt is denominated in dollars, the supply of US dollars drops, and the value of each remaining dollar goes up.

But Can't the Fed Print Money and Reflate?

Yes, but there are limits to what the Fed can do, at least in the short term. Even an expert money printer like Ben Bernanke has constraints - he's only human, after all.

When you consider the sum of outstanding credit is somewhere in the neighborhood of $50 to $100 trillion (give or take a trillion or ten), it makes the money the Fed has printed so far (a trillion or two) pale in comparison.

Can the Fed inflate eventually? Sure - but probably only after all of this bad debt has been destroyed. This could take a few years, and there will be some wicked asset deflation in the meantime.

(For further reading, check out Terry Coxon's article: When Will Inflation Really Hit Us?)

First Dubai, Then Greece?

Greece is warming up in the on deck circle, as it tests the levels of sovereign debt, writes Ambrose Evans-Pritchard for the Financial Times.

Evans-Pritchard reports that Greece is "disturbingly close to a debt compound spiral," - and the bond vigilantes appear to be circling the wagons.

S&P Fair Value: Lower Than Current Levels

My good friend, regular reader, and private wealth manager Jonathan Lederer put out an excellent quarterly update for his clients last week, in which he analyzed the valuation for the S&P 500.

Jonathan is a very sharp value investor who has the patience and insight to perform excellent valuation analysis on equities. I always benefit greatly from absorbing his research, which is often a great counterbalance to my views.

He's been kind enough to allow me to share his presentation with my readers, which you can view here...I would definitely recommend you spend some time to watch his quarterly update.

Spoiler alert: Jonathan concluded that the market valuations are a bit rich at current levels, which concurs with my thinking and belief that the market risk right now is to the downside.

Positions Update - Still Really Short the S&P, Long the Dollar

And we continue to wait for these trades to go our way...was Dubai the opening shot in the next wave of deflation? The next week should be quite interesting!

Was last week's downtick the bottom for the dollar?

(Source: Barchart.com)

The S&P rallied off it's deep lows on Friday, but still closed down big on the day.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $19,711.95

Cashed out: $20,000.00
Total value: $39,711.95
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

More Signs the Stock Market (and Everything Else) May Finally Be Topping Out

noreply@blogger.com (Brett Owens) — Sun, 22 Nov 2009 21:13:00 +0000

The story of the investing week was the lack of confirmation of the new Dow and S&P highs by the secondary indices. Stock market tops often occur when sectors "peel away" from the up trend one by one, as fewer and fewer asset classes make new highs.

While this is no guarantee of a top, the odds certainly appear to favor a downturn more now than they have at any point since the March lows.

Steve Hochberg of Elliott Wave International was interviewed on the Financial Sense Newshour last Thursday - if you're into technical analysis and indicators, I'd definitely recommend a listen. I read Steve's market updates every Monday, Wednesday, and Friday - this interview will give you a good idea of what he's seeing.

What Markets are Peeling Away?

A lot of the junk that led this bear market bounce is starting to rollover. The poster child may be the banks - for example, the KBW Bank ETF (Ticker: KBE) still sits below its March lows:

Bank stocks rolling over again?

(Chart source: Google Finance)

And what about our favorite leading indicator, the Chinese stock market? Here the bulls may have some hope, as the Shanghai Composite Index looks to be making another run at new 2009 high.

China takes another run at its 2009 highs.

(Source: Yahoo Finance)

The final month of the year should be quite revealing - if the Shanghai Composite does not take out these highs, and instead puts in a "lower high" before turning lower, then it could be "look out below!"

Isn't Gold Signaling That Inflation is Here?

Gold at $1150, ironically, seems to be the "surest one way bet" in the market. I say ironically, because when gold was plunging last year below $800 and even $700, all the news and speculation seemed to be that there was no end to the drop in sight.

Now with gold going up seemingly everyday, there is now a "floor of $1000" below the price of gold, with a host of "fundamental" reasons being cited, such as China instructing its citizens to load up on bullion.

Also the falling dollar is being credited as a reason why gold is destined for $2000 or higher. That may be the case eventually, but for right now, the dollar appears to be bottoming (see chart below). When unrelenting bad news no longer pushes an asset down in price, it's probably set to rally, and that's what we're looking for out of the dollar in the near term.

The most interesting, and potentially damning, thing to me is the fact that, despite gold's spot price sitting over $100 higher from it's previous high in 2008, gold stocks are still below their previous 2008 highs.

Despite all the enthusiasm for gold's prospects, gold stocks have not (yet) taken out their 2008 highs. (Source: Yahoo Finance)

For the record, I do expect gold, and gold stocks, to go higher - eventually. But I think we're in for a huge deflationary wash out before that happens. We shall see, but this popular trade just seems way too obvious, and loved, right now.

Still "All the Same Markets"

It's worth noting that we still haven't seen any markets "decouple". Either everything rallies, and the dollar tanks, or the dollar rallies and everything else tanks. Until further notice, I still believe diversification is a waste of time.

For some background on the "all the same markets" theory, here's a post from earlier in the week.

Positions Update - Really Short the S&P, Long the Dollar

As if I wasn't already massively short the S&P, I also picked up a couple of cheap puts on the S&P at 1050. These puts are slightly profitable, while the futures positions continue to show a loss.

Going forward, I may look to buy more "out of the money" puts on the S&P, as I expect it to be heading to much lower levels.

The dollar still searches for a bottom.

(Source: Barchart.com)

Did the S&P finally put in a top early last week?

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $20,266.95

Cashed out: $20,000.00
Total value: $40,266.95
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Still All The Same Markets - A Picture Worth a Thousand Charts

noreply@blogger.com (Brett Owens) — Thu, 19 Nov 2009 19:36:00 +0000

This shot says it all - the "all the same markets" hypothesis is still in play.

Why bother with diversification when all the markets move in tandem?

(Source: Barchart.com)

Hat tip to Robert Prechter, who I believe was the first to point out the increasing correlation between every asset class, as far back as 2004. He postulated that the markets were being driven by global liquidity flows:

When liquidity is plentiful (2004-2007), all the markets rise together, the dollar drops
When liquidity dries up, the dollar rallies, all markets tank (2008 - early 2009)

Since March, we've seen liquidity increasing, and the dollar dropping - still playing according to script. So I think we have to assume this relationship is still in place, until proven otherwise.

Nothing's Changed - Stocks Topping, Dollar Bottoming

noreply@blogger.com (Brett Owens) — Thu, 19 Nov 2009 16:06:00 +0000

Did the intermediate top in stocks occur earlier this week? We won't know for sure for many months, but it certainly COULD have been.

The rally has been running on fumes for month, yet still moving upwards despite the naysayers (such as myself), as the S&P pushed above the 1100 mark (raise your hand if you expected that when the S&P was bottoming at 667!)

Nevertheless, all good things must come to an end eventually - and while this rally has been an impressive one, it's magnitude has occurred completely within the normal confines of a bear market rally.

A couple of weeks back, we compared the 2009 rally with the 1930 stock market rally, and found a lot of similarities. Of course you can find similarities in anything if you look hard enough, but my point was that whether or not this rally was for real was still "to be determined", as thus far it's done exactly what it was supposed to - make everyone think that it was OK to get back in the waters.

Remember earlier this year when stocks were again "risky"? Not anymore! Every drop is once again a buying opportunity. Which is exactly when things get the most dangerous.

For fellow "armchair stock market technicians", The Daily Reckoning's Eric Fry cited "a very serious negative divergence" pointed out by options expert Jay Shartsis:

"The new Dow highs have not been confirmed by the widely-based Value Line (over 2300 stocks)," Shartsis points out, "and divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead.

"Traders should also note that a head-and-shoulders top is building on the Value Line Index," Shartsis continues, "with the right shoulder top lower than that of the left - an extra bearish element. At the current 2,138, the Value Line is about 4% from a new high and it doesn't look like it is headed back to that level any time soon."

Source: The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

What's the script when stocks turn down? The market gave us a sneak preview last year - it's everything else down too, dollar up!

Now may be an interesting time to pick up some cheap put options on the S&P, especially some of the "black swan" variety, in case this downturn has some umph behind it!

Ed. Note: On Sunday we reviewed Financial Reckoning Day Fallout, the latest book by the authors of The Daily Reckoning.

Jim Rogers: Gold Will Top $2,000; Bernanke Should Resign; Buy Coffee

noreply@blogger.com (Brett Owens) — Tue, 17 Nov 2009 00:20:00 +0000

Our hero Jim Rogers has been back in the news quite a bit recently - here's his latest thoughts:

He sees gold heading north of $2,000 in the next decade

Ben Bernanke should (still) close the Federal Reserve, then resign

He likes the Japanese Yen best at the moment of the currencies, but wouldn't buy it just now

Even if deflation does win the day in the near term, it does seem like gold is destined for $2,000 before this secular commodity bull market is over. If you're an investor, the best thing to do is probably to continue to accumulate gold, without worrying about the price.

As a trader, though, I'd be very cautious about gold in the short term. I think we're at a key inflection point in the inflation/deflation battle, and personally I'm wary that 2010 will usher in the return of DE-flation in a big way.

Further reading: Terry Coxon on when you can expect inflation to rear its ugly head.

Financial Reckoning Day Fallout: Surviving Today's Global Depression - Book Review

noreply@blogger.com (Brett Owens) — Sun, 15 Nov 2009 21:08:00 +0000

Coast to coast flights are fantastic for getting uninterrupted reading time in, and on my flight back to the West Coast last Monday, I was able to devour Financial Reckoning Day Fallout: Surviving Today's Global Depression, by Bill Bonner and Addison Wiggin.

Bonner and Wiggin are the two top guys at Agora Financial, an extremely successful investment publishing house that is as renowned for their marketing prowess as they are for the high quality of their investment research and newsletters. You may be familiar with many of their free or paid investment products, such as The Daily Reckoning, a free daily e-letter they've published since 1999.

A quick note on Bill Bonner before we get into the book - the more I follow his writings and career, the more I'm in pure awe of the guy. A really, really smart dude...and that's an understatement. Not only is he an astute investor, a stellar writer, but he also founded and built Agora Financial into a publishing powerhouse. A true renaissance man with awesome accomplishments.

Bonner and Wiggin originally wrote Financial Reckoning Day earlier this decade, predicting a long, soft depression for the United States. I've been a reader of The Daily Reckoning since 2004, where they've continued to follow, update, and expand upon their original hypothesis that the US was destined to follow in Japan's economic footsteps with a long, slow, soft depression.

The credit and debt explosion in the middle of this decade drove up one last asset bubble that tested the patience of investors who shared these bearish views. But ultimately their patience has been rewarded, as the authors;: "trade of the decade" - long gold and short stocks - has been right on the money.

Financial Reckoning Day Fallout begins by revisiting the hysteria of the tech bubble, which, as time passes, seems to increase in absurdity for me personally. The authors polk fun at George Gilder, the "messiah" of the of the New Era.

Gilder's articles in Forbes ASAP were not merely hard to read, they were incomprehensible. But never mind. He was a genius...but he had worked himself into such a state of rapture over the possibilities of the Internet that he seemed to have gone a little mad.

One caveat, "I don't do price," Gilder commented. Too bad. Because, as investors would discover later, prices are important. A technology may be spectacular; the company owns it may be a great company; but the stock is only a good investment at the right price.

Lest we be tempted to think of the tech bubble as a unique occurence, the next chapter, entitled Progress, Perfectibility, and the End of History, pays an amusing tribute to other times in history in which men have declared the entire race of humanity to have been perfected, or nearly so.

Francis Fukuyama takes a solid ribbing for his essay, which he published in 1989, entitled "The End of History."

The document was remarkable; for rarely did someone manage to get so much so wrong in such a short essay. Fukuyama saw all of history as a march toward democracy and capitalism. He believed the collapse of communism marked the triumph of both...and hence, history was dead.

If sarcasm, witty humor, and history are your cup of tea, then you'll get a real kick out of this book. Bonner and Wiggin are real students of history, and their true talent is their ability to relate back tales in a very funny, insightful way.

John Law, perhaps the ultimate target for the authors, has a whole chapter devoted to his financial shennanigans. Law, you may recall, is the "financial genius" who is largely credited as the father of paper money. An innovative money printer who would even put Bernanke & Co to shame, his inflationary creation is largely responsible for the Mississippi Scheme and South Sea Bubble manias - amusing accounts of both are contained in this chapter.

Alan Greenspan's career is also traced through, also in farcical fashion. I knew he had libertarian leanings when he began his career, but did not realize the extent to which he was a disciple of Ayn Rand and hard money. It was eye opening to see how much the political world corrupted Greenspan's views - which were reinforced by the seeming success he was having in "guiding" the economy to steady booms and soft landings.

There are a couple of chapters devoted to the comparison of the US with Japan (the parallels of which are downright scary), along with the demographic sledgehammer the US is about to be hit over the head with. Some of Harry Dent's demographic research is cited here.

The book wraps up with one of my favorite chapters, in which the authors introduce the concept of Ought. The idea is that no matter how many numbers you crunch, markets are the ultimate arbiters of morality. Everything that "Ought" to happen usually does, in which financial sinners are published for their transgressions, and fools are ultimately separated from their foolishly invested capital.

Here's an intro to Ought - which made me laugh out loud several times on the plane:

If "Ought" were a person, Ought would not be a bartender or a good-hearted prostitute. Ought is not the kind of word you would want to hang out with on a Saturday night, or relax at home for it would always be reminding you to take out the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but more like a shrewish wife than a willing mistress. For Ought is judgemental - a nag, a scold. Even the sound of it is sharp; it comes up from the throat, like a dagger and heads right for the soft tissue, remembering the location of weak spots and raw nerves for many years.

Ought is neither a good-time girl nor a boom-time companion, but more like I-told-you-so who hands you asprin on Sunday morning, tells you what a fool you were, and warns you what will happen if you keep it up. "You get what you deserve," she reminds you.

Financial Reckoning Day Fallout is different from most investment books in that it will not give you specific investment advice per se - which is exactly what I like best about it. Most investment books that give advice end up being completely wrong - typically more of a contrarian signal than anything - seen any good books about making millions in real estate lately?

I prefer books like this one, which challenge your assumptions, and help develop and shape your thinking. I tend to read very few newly released books in the finance/investing genre, finding most of them to be shallow and full of bad advice. Tried and true investment insights, though, are timeless. And I think this is a book you could pick up 25 years from now, and still get just as much out of.

I'll close by sharing that I find the doom and gloom that Bonner and Wiggin revel in absolutely hysterical. When my wife saw the title of this book, she remarked that it's a wonder I'm not suicidal. I happily showed her a few of the chapter subheads during the flight, my favorite being "How to Relax and Enjoy the End of the World." Really funny stuff.

Marc Faber in the Daily Reckoning

Speaking of The Daily Reckoning, Marc Faber wrote a guest essay in Wednesday's edition entitled When Currencies Crash.

Faber believes the US is dedicated to debasing its currency - which I think everyone agrees upon. The question is - will they be able to successfully do it?

Anyway a good read for Faber fans - I love to read anything he writes.

Is This Rally Finally Losing Steam?

Tom Dyson believes so. I know we've been crying wolf about this for a little while, but there are some real telling signs that could be foreshadowing an end of this rally.

Positions Update - Short the S&P, Long the Dollar

That's our story, and we're sticking to it! I was definitely early on both trades - time will tell if I was merely early, or flat wrong. Reason #78 why trying to time tops/bottoms is a fool's game!

The market is quite overbought, and should open lower this week. How much lower it heads will be interesting to see.

We have many divergences taking place - the "junk", such as bank stocks, have not confirmed these new highs yet. Neither has oil, and neither has China. So for now, we wait.

The dollar still searches for a bottom.

(Source: Barchart.com)

Was last week a countertrend bounce for the S&P, or the start of a rally to new highs?

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $20,012.03

Cashed out: $20,000.00
Total value: $40,012.03
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

No Follow Through Today (Yet) From the S&P

noreply@blogger.com (Brett Owens) — Tue, 10 Nov 2009 16:34:00 +0000

With the DOW pushing to new 2009 highs yesterday, I was looking forward to today to see if the S&P could confirm the DOW's push - which would indicate that this rally is still on.

Yesterday's push was quite impressive across the board, but thus far today, we have not yet witnessed any decisive follow through. After 6 consecutive positive days, you'd expect the markets would need a breather at some point.

However, if the S&P turns down again before failing to break it's October highs, that would be a bearish looking "double top".

The S&P is bumping up against strong resistance (again) around 1100.

(Source: Barchart.com)

Boy, Is CNBC Yucking It Up Today!

noreply@blogger.com (Brett Owens) — Mon, 09 Nov 2009 18:08:00 +0000

I'm working from the road today, so I've got the nice benefit of having CNBC on here - man, are they yucking it up today!

With the Dow hitting a new 2009 high, I haven't heard anyone expressing any skepticism - "all the stars are aligned for higher stocks" is something that was just pronounced!

Best part of the day so far, they just paraded out a dollar bull like a sacrificial lamb, asked him when he was going to give up on that losing trade, and then cut to commercial during his response.

Of course I have been wrong for the past few months on this, so you are welcome to ignore my musings as you'd like. Worth noting that even I felt like throwing in the towel on my bearish stance midday today - and you know what happens when the last bear finally capitulates...look out below!

Comparing the 2008-09 Stock Market With the Great Depression's 1st Leg Down

noreply@blogger.com (Brett Owens) — Mon, 09 Nov 2009 00:03:00 +0000

This epic stock market rally has done exactly what it was supposed to do - it's retraced about half of the losses from the previous crash. It's got folks feeling comfortable again - while maybe not outright enthusiastic about things, they now believe the carpet is not going to be pulled out from under them.

That's exactly what buying stocks now is a more dangerous proposition than it has been anytime this year thus far.

So can big rallies, following big crashes, be sustained?

I did a little bit of digging through historical data, to see if there was a case where a severe crash was isolated - that is, it retraced back up, and there was nothing more to it. Typically, crashes occur in three legs down (five "waves" in total, counting two countertrend bounces) - at least this was my belief, which I wanted to double check.

I'm going to compare this market crash/rally with the crash/rally from 1929/1930, and only that, because I was not able to find another market crash, and subsequent rally, as severe as what we've experience over the past year or two (severe being 50%). I wish we had another example to look at, but I wasn't able to find one since 1900 in the US that met this criteria!

The Great Depression's first leg down, and the 2008-09 markets, are in rarified air that meets these stomach churning guidelines:

A ~50% stock market drop
Followed by a ~50% stock market rally

Astute traders and investors, no doubt of which our readers here are, know full well that 50% down, followed by 50% up, does not get you back to break even!

First, let's take a look at the first leg down of the Great Depression, using the Dow Jones Industrial Average (DJIA) as our measuring stick.

Source: StockCharts.com

Date DJIA % Change # Days

09/03/1929 381.17

11/13/1929 198.69 -48% 71

04/17/1930 294.07 +48% 155

You have to love the symmetry of the 1930 rally! 48% down, then 48% up...before turning back down. Eventually the DJIA bottomed in 1932 at 41 - shedding an awesome 80% from the Dow's 1929 high.

Now, let's check out the newly minted Crash of 2008:

Source: StockCharts.com

Date DJIA % Change # Days

10/09/2007 14164

03/10/2009 6547 -54% 518

10/19/2009 10092 +54% 223

Oh the symmetry is fantastic! This time we retraced 54%, after giving up 54% initially - again roughly 50%.

Now, the million dollar question is: "Where to next?"

It's hard to make an argument for stocks continuing their rally from here. They are expensive by all traditional valuation measures, the economic recovery is not robust (maybe even non-existent), and until proven otherwise, this rally has been nothing more than a standard retracement.

The stock market doesn't just drop 50% for no good reason. Something more is usually amiss. Judging from the only recent historical analogy we have to use, caution is still the order of the day!

Positions Update - Even Shorter the S&P

A disappointing week for us dollar bulls/S&P bears. But, after 5 consecutive up days for stocks, we are not yet at new highs - nor are we at new lows for the dollar.

So, until further notice, I am classifying last week as a countertrend bounce, which could reverse as soon as tomorrow.

I did short another S&P contract on this rally - currently underwater on that position - so we shall see if that was a wise move in the weeks to come.

The dollar continues to muddle along - with strong support at 75.
(Source: Barchart.com)

Was last week a countertrend bounce for the S&P, or the start of a rally to new highs?
(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $22,947.03

Cashed out: $20,000.00
Total value: $42,947.03
Weekly return: -11.6%
2009 YTD return: -54.8%

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

A Look Into Record High Trading Volume...And What It Says About Investor Confidence

noreply@blogger.com (Brett Owens) — Fri, 06 Nov 2009 21:30:00 +0000

The following article was adapted from the November 2009 Elliott Wave Financial Forecast and reprinted with permission here.

Steve Hochberg and Pete Kendall produce stellar analysis for Elliott Wave International - two of my favorite guys in the biz - here, they take a look at trading volume, and what it says about investor confidence. Read on, and enjoy!

***

Finance's Euphoria: The Epilogue -- What Record High Dollar Volume of Trading Says About Confidence

November 6, 2009

Until Nov. 11, you can read the rest of this brand-new report for free, during Elliott Wave International's FreeWeek of U.S. forecasts. Learn more about FreeWeek, and download the rest of this report and others for free here.

By Steve Hochberg and Pete Kendall

When Wall Street’s total value of assets rose to a “mind-boggling 36.6 percent of GDP” in late 2006, The Elliott Wave Financial Forecast published a chart of U.S. financial assets literally rising off the page.

The Financial Forecast observed that financial engineers had “found a new object of investor affections—themselves” and asserted that “the financial industry’s position so close to the center of the mania can mean only one thing; it is only a matter of time” before a massive reversal grabbed hold. Financial indexes hit their all-time peak within a matter of weeks, in February. The major stock indexes joined the topping process in October 2007 and in December 2007 the economy followed. Subscribers will recall that one of the most important clues to the unfolding disaster was the level of financial exuberance relative to the fundamental economic performance.

This chart of the value of U.S. trading volume (courtesy of Alan Newman at www.cross-currents.net) reveals that the imbalance is far from corrected.

Incredibly, total dollar trading volume is even higher now than it was in 2007 when the economy was humming along. In June 2008, dollar trading volume also defied an initial thrust lower in stocks and the economy, eliciting this comment from the Financial Forecast:

The chart of dollar trading relative to GDP shows how much more willing investors are to trade shares in companies that operate in an economic environment that is anemic compared to that of the mid-1960s. A basic implication of the Wave Principle is that the public will always show up at the end of a rally, just in time to get clobbered. This chart shows that it is happening in a big, big way now because the market is at the precipice of the biggest decline in a long, long time.

Total dollar volume continues to rise despite further fundamental financial deterioration. Yes, GDP experienced a one-quarter, clunker-aided uptick of 3.5 percent in the third quarter. But the economy is in far worse shape than it was when we made the above statement. In fact, its recent performance on top of the decades-long economic underperformance (which is discussed extensively in Chapter 1 and Appendix E of the new edition of Robert Prechter's Conquer the Crash) means that industrial production just experienced its worst decade since 1930-1939. Total manufacturing employment slipped to 11.7 million people, its lowest level since May 1941 when it was 33 percent of all jobs. According to Bianco Research, manufacturing now accounts for only about 9 percent of the workforce. Finance anchors the economy now, which makes it far more susceptible to non-rational dynamics.

As Prechter and Parker explain in “The Financial/Economic Dichotomy” (May 2007, Journal of Behavioral Finance), a financial system is not bound by the laws of supply and demand in the same way that an industrial economy is. In finance, confidence and fear rule decisions. “In the financial context,” say Prechter and Parker, “knowing what you think is not enough; you have to try to guess what everyone else will think.”

We do know one thing: When everyone is thinking the same, the opposite will happen.

Right now, record high dollar volume of trading shows that confidence, at least on this basis, has reached a new historic extreme.

***

Read the rest of the 10-page November 2009 Elliott Wave Financial Forecast now, when you signup for Elliott Wave International's FreeWeek of U.S. forecasts. FreeWeek ends Nov. 11, so please act now to get an enormous wealth of current market analysis and forecasts -- for free. Learn more about FreeWeek, and download the rest of this report and others for free here.

Steve Hochberg and Pete Kendall are co-editors of the Elliott Wave Financial Forecast.

Why Nouriel Roubini Thinks Commodities Will Correct, and Dollar Will Rally...Eventually

noreply@blogger.com (Brett Owens) — Fri, 06 Nov 2009 21:18:00 +0000

Nouriel Roubini thinks that commodities and equities have gotten ahead of their fundamentals - now pricing in a "V-shaped" recovery, which Roubini thinks is unlikely (I agree).

Here's an interview with Roubini conducted by our friend Lara Crigger at Hard Assets Investor.

Well, in my view, commodity prices have increased since the beginning of the year too much, too fast, when compared to the improvement in economic fundamentals. Some of that increase is justified. But if the global economy were to have a more anemic, subpar recovery—if instead of a V-shaped recovery, there's going to be a U-shaped recovery—then I actually think demand for commodities would be weak compared to supply, and there could be a correction in commodity prices in 2010.

Take oil prices: They have gone up from $30/barrel to over $80, at a time when demand is back to 2005 levels, and oil inventory is at all-time highs. Part of the increase is justified by fundamentals. But part of it is essentially this wall of liquidity chasing assets, and the effect of carry trade on the U.S. dollar, driving further higher these commodity prices.

So these nonfundamental factors can push oil and commodity prices higher, especially if there's going to be an increase in expected inflation. But the fundamentals of supply and demand actually suggest that, from now on, oil and other commodity prices should be lower, rather than higher.

Also Roubini was also on CNBC, where he described the reversal of the dollar carry trade that he is anticipating at some point in the future. The results are similar to the "All the same markets" theory that Robert Prechter coined, in which the dollar will rally and all other asset markets will tank.

Here's the CNBC interview, which runs about 8 minutes:

Inflaton Isn't Here Yet - Here's When You Can Expect It

noreply@blogger.com (Brett Owens) — Fri, 06 Nov 2009 01:46:00 +0000

A couple of Sundays ago, I spent the morning reviewing the best inflation and deflation arguments and articles that I'd read since the financial world began falling apart. The inflation perspective that I enjoyed the most was that of Terry Coxon, editor of The Casey Report.

Below is one of Terry's recent pieces, which takes a look at the timing of a potential wave of inflation. I was fortunate that the Casey folks granted me permission to reprint the piece below.

Enjoy Terry's guest piece, as he explores what we can expect from inflation over the next few months and years.

***

When Will Inflation Really Hit Us?

By Terry Coxon, Editor, The Casey Report

Most of us are gathered at the station, watching for the Inflation Express to come rumbling in. But we've been waiting for a while now. Just when should we expect the big locomotive to arrive and start pushing the prices of most things uphill?

We’d all like to know the exact date, of course, but no one can know for sure. Not even a careful reading of the Mayan calendar will help. What we can do is estimate a time range for price inflation to show up, and that alone should have some important implications for investment decisions.

Why It’s Expected

The reason for expecting price inflation is the recent, rapid growth in the money supply and the deficit-driven likelihood that more such growth is coming.

As of July, the M1 money supply (currency held by the public plus checking deposits) had grown 17.5% in a year's time. That's not just unusually rapid, it's extraordinarily rapid. Since 1959, M1 has grown more rapidly in only one other 12-month period – and that was the one ending last June, when the M1 money supply jumped 18.4%. Even in the inflation-plagued 1970s, growth in M1 never exceeded 10% in any 12 months.

Dropping large chunks of newly created money into the economy leads to price inflation, because the recipients are likely to find themselves overprovisioned with cash. As they try to unload the excess, they bid up the prices of the things they buy, whether it be stocks, shoes, gasoline, silver coins, or granola. The sellers of those things then find themselves cash rich and start doing some buying of their own, and so the wave of excess money and the bidding it inspires propagate through the economy.

The process isn't instantaneous. It takes time. Just as each player in the economy has a sense of how much of his wealth he wants to hold in the form of money, everyone will move at his own speed to make adjustments when his actual cash holdings seem to be off target.

And the process can seem to stall, especially when fear is growing. When people are worried or otherwise feel a heightened sense of uncertainty, they will gladly hold on to abnormally large amounts of cash – for a while. But when fear abates, as it will when the economy begins to recover from the recession, that temporary demand for extra cash will also fade, and the hot-potato process of trying to pare down cash balances will emerge to do its inflationary work.

But when?

The speed at which the public tries to unload excess cash and the timing of the effects have actually been measured, in the work of the late Milton Friedman and his monetarist colleagues.

The method was indirect and roundabout, and so the results, unsurprisingly, were nothing as precise as nailing down the value of a physical constant.

What the monetarists (or the first of them to be equipped with computers) found was that when the growth rate of the money supply rises:

The initial effect is on the prices of bonds and stocks, an effect that comes within a few months.

The peak effect on the growth rate of economic activity comes about 18 to 30 months after the pick-up in the growth rate of the money supply.

The peak effect on the rate of consumer price inflation comes about 12 to 18 months after that, which is to say it comes 30 to 48 months after the peak growth rate in the money supply.

As Friedman famously put it, the lags in the effects of changes in monetary policy are "long and variable." He might have said, "It's a big, wide blur, but we're sure we've seen it."

And even that picture exaggerates the precision that's available to us. The emergence of money substitutes, such as NOW accounts and money market funds, has added its own muddiness to the picture of how growth in the money supply translates into growth in the level of consumer prices. It is only because the recent episode of monetary expansion has been so extreme that we can look to the results just listed for an indication of what's to come.

If you apply the findings of the monetarists to the present situation, here's what you get. The peak growth rate in the money supply occurred last December, so based on the general monetarist schedule:

Some of the effect on stocks and bonds should already have been felt.

The peak effect on economic activity should come between the middle of 2010 and the middle of 2011.

The peak effect on consumer price inflation should come between the middle of 2011 and the end of 2012.

A More Particular Schedule

This time around, should we expect things to move more rapidly or more slowly than average? My bet is on slow, which would push the peak inflation rate out toward the end of 2012. One reason for slow is that the government's rescue packages are delaying the process. Rescuing banks that are choking on bad loans postpones the day of reckoning for both the banks and the loan customers. It retards the pace of foreclosure sales (whether of real estate or other collateral) and puts the deleveraging that has been going on since last fall into slow motion. A wilting of the recent stock market rally would confirm this.

Investment Implications

The big plus about the Mayan calendar is that, right or wrong, it is very definite about things. Human civilization will come to an end, I'm told, on Dec. 21, 2012 – not on the 20th and not on the 22nd. There was no room for monetarists in those step-sided pyramids, but there still are few what-to-do implications from the monetarist findings.

When you hear would-be opinion leaders cite the current absence of rising prices at the supermarket as proof that all the new money isn't a source of inflation, don't believe them. It is much too early for the inflation bomb to be going off, even though the powder has been packed and the fuse has been lit.

If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues.

For at least the next year, the simple, fire-and-forget strategy is 50-50 gold and cash – gold for what looks to be inevitable but on its own schedule, cash to be ready for the bargains that may show up while we're waiting for the inevitable to arrive.

The editors of The Casey Report keep their ears to the ground, listening for the first rumblings of the inflation stampede coming in. But you can bet on rising inflation – and interest rates – right now and be way ahead of the investing herd. To learn more about investing in this all but inevitable trend, click here.

Does News Drive the Markets? A Closer Look at This Old Wive's Tale

noreply@blogger.com (Brett Owens) — Mon, 02 Nov 2009 00:06:00 +0000

With the markets at a potential inflection point (an inflection point down, in my humble opinion), I thought it'd be fun and instructive to revisit a topic we've noodled on a bit lately.

Does News Actually Drive the Financial Markets?

It's common knowledge that increasing earnings drive stock prices - with the only caveat being that there's no evidence of this being true. A couple of weeks ago, we posted a short guest article that challenged this assumption, making the case that stock prices actually drive earnings, not the other way around.

Since I'm becoming more and more sympathetic to this outlook of the markets driving the news, I thought it'd be a fun exercise to take a closer look at this hypothesis.

To be as objective as possible, I conducted a few searches using the Google News search function, so that we could count up the number of stories that contained my search phrase. First up...

Bear Market Rally

Stories about the bear market rally have tapered off - it's a new bull market!
(Source: Google News)

How ironic that the number of news stories about a "Bear Market Rally" peaked in March...the month the rally was just beginning! Being a somewhat disparaging term, I find it fitting that the use of this phrase in news headlines has dissipated as the markets have rallied.

I'd imagine the reason is this rally no longer viewed as a mere bear market rally, but a new bull market! Probably just in time for the markets to turn down once again.

The grand prize goes to the Financial Post, for their March 5th article Talk of a 'bear market rally' may be premature. It sure was - by about 24 hours!

Bond Vigilantes

Why do interest rates rise and fall? It's a complex question - one that appears to be too complex for the news headlines to adequately explain!

In June, the return of the "bond vigilantes" was a popular reason for soaring yields on long dated US government bonds. The bond markets were pissed, and ready to raise hell about soaring government deficits.

The only problem about investing based on the "news" that the bond vigilantes had returned, ready to drive up yields further, is that your timing would have been exactly wrong.

Yields topped along with this news, and both have quietly rode off into the sunset since.

2009 news about the "Bond Vigilantes" peaked in June.
(Source: Google News)

Right along with yields
(Source: Yahoo Finance)

Dollar Reserve Currency

Here's one near and dear to my heart - the overblown reporting of the dollar's reserve currency status being in imminent danger. You'll notice there was a low, steady hum of stories - up until March of this year, when the dollar topped out (for the time being).

News of the dollar's demise really picked up AFTER it started to decline.
Source: Google News

Since then, the dollar has been declining, and stories of the dollar being replaced as the world's reserve currency have been all over the financial media. My favorite was a recent story in London's Independent entitled The Demise of the Dollar, which may have coincided with a significant bottom in the dollar index, which has rallied steadily since!

Bottom line: Using the news to trade is a losing proposition...you'd be much better off using the charts to predict the news. The financial news media is a fantastic example of groupthink at it's best, or worst, depending on your perspective.

You can always count on financial news stories to break after the market has already tipped it's hand!

The Start of a Larger Decline?

Many of the technical indicators I follow appear to be signaling a shift is taking place in the markets, in which the dollar will once again reign supreme, and everything else should roll over. In other words, an instant replay of the last bit of deleveraging, though probably worse.

To get the "average investor" sentiment after Friday's big decline, I pulled up one of our favorite contrarian indicators, the Wall Street Journal, to see what they were recommending. It's said that bull markets often climb a "wall of worry", so my thinking was that if they displayed a "run for the hills" sentiment, that may indicate that this is just a correction on the way up.

Much to my delight (because I'm short the markets, as you see below), the article I pulled up from the front page expressed optimism that this pullback represents a nice buying opportunity.

Even some of the optimists think it would make sense for stocks to fall as much as 10% before they resume their gains.

The bullish tone and level of confidence being exhibited by investors is truly awe inspiring, given that most investors lost 40% of their porfolios in the previous crash. That says to me that this bear market rally has completed it's mission, and we should prepare for the next leg down.

Positions Update - Long the Buck, and Now Short the S&P

At last - a positive week for the dollar! And no coincidence that, meanwhile, stocks got slaughtered. A sign of things to come? I think so!

On Thursday, I shorted the S&P, thus far successfully. I think over the coming months, you may be able to short just about anything and do pretty well. Long the dollar, short everything else - that's my recommendation until further notice.

The dollar - gearing up for another megarally?
(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $25,969.68

Cashed out: $20,000.00
Total value: $45,969.68
Weekly return: 8.8%
2009 YTD return: -48.9%

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

Your Tax Dollars at Work

noreply@blogger.com (Brett Owens) — Thu, 29 Oct 2009 23:58:00 +0000

A priceless shot from our faithful House of Representatives:

Keep working hard guys!

I would actually rather see them playing solitaire, checking ESPN.com, and adding Facebook friends, rather than "working". Give that dog a bone - or a game of solitaire - anything to keep them from passing more dumbass laws and regulations!

Hat tip to our friends at Casey Research, who published this shot in their Daily Dispatch today.

Three Sanity Checks at this Key Inflation-Deflation Inflection Point

noreply@blogger.com (Brett Owens) — Sun, 25 Oct 2009 16:49:00 +0000

I think we're at a key inflection point in the financial markets at this juncture. The direction that things head next could decide the winner, at least for the next few years, of the inflation vs. deflation battle.

So I spent the morning revisiting and rereading many of my favorite arguments from both sides of the debate, and came up with three key metrics for us to revisit.

First, let me lay a little groundwork and list my preexisting assumptions:

My timeframe is defined as the next 3 years. After that, we may well see hyperinflation and/or a true crash in the dollar - but for the sake of this argument, I want to look at the next 3 years only (reason being, if you misplay the next 3 years, you could be toast anyway!)

I accept the Fed's ability to "print" money.

I also believe that inflation is preferable to the government, and given the choice between inflation and deflation, they will inflate (or at least attempt to) every time. Also, massive government deficits certainly make inflation all the more tempting.

When revisiting my favorite arguments for both sides, I noticed that three central themes were the focus of much of the debate:

Inflation will occur when the banks start lending again.
The demand for money, or prevailing social mood, will determine if consumers trade in their cash for anything (leading to inflation), or if they hoard their cash to pay down debt (leading to debt deflation.)
Stock prices will reflect a goosing of the money supply.

Checkpoint 1: Inflation requires an increase in bank lending

Thanks to the wonders of our fractional reserve banking system, where banks are only required to have a fraction of the money they lend out, bank lending has a tremendous multiplier effect on the money supply. During times of expanding credit (2002 - 2007 most recently), this effect was felt in full force, as loose credit led to a bubble in nearly all asset markets.

Since the credit crisis began, banks have significantly curtailed their lending. While the Federal government has boosted the balance sheets of the big banks, there has not been a proportionate growth in loans (see chart below).

Source: The Daily Reckoning

Herein lies the rub - bank lending has not picked up, at least yet. Check out the graph below, courtesy of the St. Louis Fed:

Conclusion: As long as bank lending continues to decline, it's difficult to make an argument for inflation. However, if and when this chart begins ticking up once again, that will be a strong indicator that inflation may be on the way.

Checkpoint 2: The demand for money and prevailing social mood

From World War II until 2007, the world was a place of expanding credit. This growth was driven by consumer demand for credit, which was particularly strong in the US. That is the key point - that the growth was driven by from the demand side, which in turn, resulted in increasing supply.

While many blame Alan Greenspan for creating a housing bubble this decade with artificially low interest rates, it's important to consider the role that consumers played in that spectacle. Greenspan was only giving the populace what it wanted - more credit. He may have spiked the punch bowl, but only at the insistence of the drunken party goers!

Today, with mortgage rates still near historic lows, we have no housing bubble any longer. In fact, we have a plummeting housing market. Why?

Because there's no demand for credit. Consumers are choking on debt - they are screaming "No Mas!"

Can the Fed inflate the asset markets one more time? They are trying like hell, but they'll only be successful if the social mood in the United States permits it.

One of the major reasons Japan was never able to reignite another bubble after 1989 is that the mood of consumers permanently shifted. The demand for money increased - consumers wanted to hoard it. They did not want to speculate, or trade it in for assets.

Did the social mood of the US permanently change in 2007?

One tea leaf worth paying attention to is the demographics card. By 2007, the US had some noteworthy demographic parallels with Japan of 1989 (ie. we're getting old). Though we are not "as screwed" as Japan in terms of demographics, thanks to immigration and somewhat higher birth rates, we've peaked demographically as a country, at least until further notice.

Conclusion: Demand for money, and social mood, are admittedly challenging to measure in an objective manner. There may have been a permanent shift in 2007 - if so, the Fed may find that, like Japan, it's "pushing on a string" in terms of trying to change consumer behavior and attitudes towards debt.

Checkpoint 3: Monetary goosing will show up in stocks, especially financials, first

According to Milton Friedman, the script for inflation roughly goes like this:
Increase the money supply
The new money goes into stocks first, increasing stock prices
Then economic activity increases (a false boom)
Then the Consumer Price Index (CPI) rises
Sure appears like the script is playing out to a tee. With regards to stocks, we've seen that financial stocks have been the strongest performers, which you'd probably expect in an inflationary boomlet.

But - this market rally has, thus far, only qualified itself as a stellar bear market bounce. We are still in typical retracement territory. Bounces usually retrace roughly half of their losses - often even more. The 2009 bounce is currently eerily similar to the 1930 bounce in terms of magnitude.

Conclusion: The jury is still out on what has actually driven this stock market rally. We could be at an important inflection point. If the market continues to head higher, the case that it's being driven by inflation will strengthen. If it makes new highs, that would probably seal it.

On the flip side, if the market turns down from here, then all we saw this summer and autumn was a classic bear market bounce.

Bottom Line: The coming months will be very interesting, and hopefully quite insightful, in terms of illuminating which side is winning the inflation/deflation battle. It's too close to call just yet in my opinion, as both scripts have been fulfilled thus far. But we could be near a fork in the road!

Some More Good Reading
An insightful look at whether or not earnings really drive stock prices.
Marc Faber's inflation paradox thesis.
Jim Rogers' latest outlook on commodities, investing, the economy
China's non-confirmation of crude's new high
Christina Romer: Contrarian indicator extraordinaire?
Comedy - The Onion: Financial tips from a stalker

Positions Update - Still Long the Buck

It looks like the broader markets may, at last, be rolling over. Which should be bullish for the buck.

The dollar - gearing up for another megarally?
(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $23,859.83

Cashed out: $20,000.00
Total value: $43,859.83
Weekly return: -1.9%
2009 YTD return: -53%

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

Do Earnings REALLY Drive Stock Prices? The Answer May Surprise You

noreply@blogger.com (Brett Owens) — Fri, 23 Oct 2009 02:25:00 +0000

Growing earnings lead to increasing stock prices. Of course.

Or do they?

The folks over at Elliott Wave International say this is an old wives tale - and I have to admit, they make a compelling, interesting case.

Read on, for an eye opening challenge of this basic assumption!

***

Earnings: Is That REALLY What's Driving The DJIA Higher?
The idea of earnings driving the broad stock market is a myth.
October 23, 2009

By Vadim Pokhlebkin

It's corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
Stocks Open Down on J&J Earnings (Washington Post)
European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)

With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you'd better have proof. Robert Prechter, EWI's founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

***

Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”

What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

***

And in 2004, EWI's monthly Elliott Wave Financial Forecast added this chart and comment:

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

So if earnings don't drive the stock market's broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors' mood -- or social mood -- changes before "the fundamentals" reflect that change, which is why trying to predict the markets by following the earnings reports and other "fundamentals" will often leave you puzzled. The chart above makes that clear.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now! You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here.

--------------------------------------------------------------------------------

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Crude Oil Breaks Out, But Still a Big Fat Non-Confirmation - Where's China?

noreply@blogger.com (Brett Owens) — Thu, 22 Oct 2009 00:19:00 +0000

Crude oil has broken through the $80 mark once again - trading as high as $82 - before settling back in after hours trading due to "concerns about the US economic recovery." Not even joking about that one.

Crude's on the loose!

(Source: Barchart.com)

Meanwhile the Chinese equity markets - the poster child of the global economic recovery - continue to languish, unable to decide if they have the energy to break through to new highs, or merely are destined to break down once again:

China's rolling? Not so fast, my friend!

(Source: Yahoo Finance)

A few weeks ago, I pointed out these charts as major non-confirmations of the US indices recent highs. Though crude has broken through, I'm going to stick with the hypothesis as long as China languishes.

After thinking about it - crude rallied well into the summer of 2008, while the equity markets were breaking down. Crude was a lagging indicator then, so it's possible that it'll be the last to roll over this time around.

China, though, was among the first to roll over last time. And it looks like it may be doing the same once again.

If China is turning down, look out below - it could be a long way down.

Depression Averted Folks - Christina Romer Says So - Oh Boy, Contrarian Indicator?

noreply@blogger.com (Brett Owens) — Thu, 22 Oct 2009 00:02:00 +0000

Move along everyone, no depression to see here - so says Christina Romer, the White House's chief economic adviser. Yes, the same adviser that recommended massive debasement of the US dollar to get us out of this mess.

Christina Romer, chair of the Council of Economic Advisers, said Tuesday evening the main difference between last year's economic crisis and the Great Depression was that the federal government took decisive action to shore up financial institutions and stimulate the economy. (Source: CNNMoney.com)

Can't help but think that this strikes me as a premature victory celebration of sorts. I don't really see anything getting better fundamentally. And this massive stock market rally has just now matched the 1930 rally. Remember, rallies like this don't happen in bull markets.

In fact, around this time in 1930, we were also treated to similar declarations of economic victory:

"The worst is over without a doubt." - James Davis, Secretary of Labor
"The Depression is over." - Herbert Hoover

Further reading:

Is 2009 a repeat of 1930? Why Depressions May Rhyme
Newspaper headlines from 1930 that will remind you of headlines today.

The Onion: Financial Tips for Women in a Recession (From a Stalker)

noreply@blogger.com (Brett Owens) — Thu, 22 Oct 2009 00:00:00 +0000

Funny stuff as always from The Onion:

Stalker Financial Expert Offers Recession Tips Just For Woman He Follows

The Best Investment for Riding the Green Energy Bubble

noreply@blogger.com (Brett Owens) — Wed, 21 Oct 2009 00:14:00 +0000

Green, green, green. We need to be green this, and green that. With the government this focused on green energy, I'm becoming more and more convinced that this whole green energy thing is turning into a giant circus. When was the last time the government was ahead of any trend, after all?

Although government may be "the ultimate herd" - buying high, selling low, and coming to the party in the 9th inning - there is one source of energy that is, actually, economically viable.

Guest author, and mathematician/poker extraordinaire Marin Katusa, digs into the whole green energy movement/farce here, separating the hype from the smart money in the energy sector.

***

Black Gold... Green Oil

By Marin Katusa, Chief Investment Strategist, Casey’s Energy Report

This summer, there's been a flurry of new green announcements from the world's major oil firms. ExxonMobil, Chevron, Valero, Statoil, Marathon, and Sunoco have all thrown their hats into the green ring.

According to an article published September 19, 2009, in Newsweek:

***

The list [of Big Oil investors] goes on. And this time it's the real deal. It's not just that these projects involve bigger money... it's that companies are actually beginning to think about alternatives not just as a tool for greenwashing (throw up a few solar panels here, sponsor a conference on wind energy there) but as real businesses that might turn real profits – or at least help make fossil-fuel production more profitable. The catalyst is that governments are moving to force industry to cut carbon emissions, creating a new "long-term regulatory reality" that favors alternative energy, says PFC Energy Chairman J. Robinson West. Meanwhile, President Obama's green-stimulus efforts and China's massive investment in alternatives have created a serious market for green technologies.

The fact that nations like Russia and Venezuela are pushing out big oil companies also gives CEOs an incentive to consider green alternatives. So does the fact that oil companies are among the world's biggest energy users, and will ultimately need to offset emissions. "I believe the large integrated oil firms will eventually become major players – perhaps even the dominant players – in alternative energy," says Don Paul, a former Chevron executive who now runs the University of Southern California's Energy Institute.

Big Oil is taking a closer look at how [renewable energy]might be used to increase efficiency internally, or to free up increasingly profitable fossil fuels, like natural gas, for commercial sale. When you consider that the top 15 oil and gas companies have a market capitalization of $1.9 trillion, it's clear that these firms themselves have the potential to be major renewable customers.

Oil companies are also taking a harder look at how to make their own business models work in the alternative sector. Companies like Chevron are capitalizing on geological expertise to build large geothermal businesses.

Big Oil is going to be an increasingly important investor in alternative energy. Venture-capital money has dried up. But with oil at $70 a barrel, the internal venture arms of the major oil firms are increasing the amount and percentage of investment going to alternatives. Historically, when Big Oil spends a dollar on research, it will spend many hundreds more to bring a product to market. If the new projects coming online this summer are any indicator, alternatives may soon be awash in black gold.

***

U.S. government subsidies into renewable energy are forming a green bubble. One that's steadily inflating. But the catch is, only one alternative energy is currently economically viable before subsidies... and that's geothermal.

That would explain the interest Big Business has in the sector.

Another member of the oil community, Statoil, has formed StatoilHydro, to focus on advanced geothermal development.

Google.org — the charitable wing of the search engine giant — has become the largest funder of enhanced geothermal research in the country, outspending the U.S. government.

Alcoa, the world's largest producer of aluminum, is actively participating in the geothermal Iceland Deep Drilling Project (IDDP).

And then there's the mining industry.

Lihir Gold has already used geothermal resources to build a power plant, which today provides green electricity for the company’s mining operation in Papua New Guinea.

BHP Billiton is currently investigating the potential for using geothermal heat in the Olympic Dam region of Southern Australia.

The smart money likes geothermal.

Investing in the growing green bubble could earn you very handsome returns, if you know which companies to choose. Marin Katusa, Casey’s energy strategist, does. Every single one of his 22 latest picks has been a winner, with gains from 44% to 860% – that’s a 100% success rate. To find out how you can profit from winner #23, click here.

Jim Rogers Interview - His Latest Thoughts on Commodities, Treasuries, and the Economy

noreply@blogger.com (Brett Owens) — Tue, 20 Oct 2009 23:14:00 +0000

Our friends at Hard Assets Investor just conducted an interview with our commodities hero, Jim Rogers.

Some quick hits from the interview:

He's still long sugar - but wouldn't buy more right now
Rogers is still bullish on oil over the next decade
He continues to like China
Not short Treasuries yet, but hopes to short them in the next year or two

Again here's the full interview transcript - a short two-pager, over at Hard Assets Investor.

More recent commentary from Jim Rogers:

Inflation Investing - A Historical Perspective on What To Do

noreply@blogger.com (Brett Owens) — Mon, 19 Oct 2009 00:38:00 +0000

On Friday I was having a discussion with my friend about inflation, speculating about what may happen to stock prices if inflation were to take hold. Both of us are big fans of Marc Faber, so we were discussing the scenario that Faber has been predicting - that if cash is about to become trash thanks to government money printing, you want to get into tangible assets, including stocks, to protect yourself.

But what really happens to stock prices during inflationary times? You could slice and dice the discussion many different ways from an academic perspective...but the more I thought about it, the more interested I became in digging out historical examples.

Then I remembered that Faber himself had a great chapter in his book Tomorrow's Gold that is entitled The Economics of Inflation.

So, I reread the chapter today.

The Paradox of Inflation

Faber discovered that stock markets of countries that are experiencing very high rates of inflation can become very undervalued in real terms, creating tremendous buying opportunities for the astute and courageous investor.

The reason, Faber says, is that currency depreciation, due to "massive capital flight", overcompensates for domestic inflation, creating stock market values that are truly outstanding. When inflation subsides from extreme levels, equities can realize substantial gains in real terms.

Everyone knows the common playbook for investing through inflation is to buy metals and short bonds. But according to the data Faber presents, it can also be a great time to buy stocks for cheap.

And the higher the rate of inflation, or the worse the hyperinflationary scenario, the greater the buying opportunity generally is. Faber takes a look at examples from Argentina 1977-1987, Germany from 1919-1923, Latin America in the 1980s, and Russia after the fall of communism. And all four examples revealed tremendous buying opportunities for stocks - especially if you bought during the height of the inflation.

Interestingly Faber also cites the opposite case - that countries with low rates of inflation tend to have richly valued equity markets. Such as Japan in the late 1980s, or the Western world in the late 1990s. Goldilocks is not so kind to buy and hold investors.

Overall these findings seem to jive with the old investing adage that you should buy when there's "blood in the streets" - and conversely be cautious when the sun is shining.

I'd like to add that Germany's hyperinflation is often blamed for the rise of Hitler and, ultimately, World War II. However Faber says that hyperinflation in Germany actually ended in 1923, with the institution of a new currency. Thereafter, Germany boomed for the rest of the decade, and was quite prosperous up until the depression.

I think history shows that governments can put the breaks on inflation real quick, if they have the stomach and motivation to do so. Germany did it in 1923. Paul Volcker slayed the inflation dragon in the early 1980's.

So it appears that purchasing stocks today in anticipation of inflation or hyperinflation may not yet be the right move. While stock prices would increase in nominal terms, they may become undervalued in real terms - at which point you'd want to be a buyer.

Intel - More Big Results, But Stock Sells Off After

On Tuesday, Intel announced good earnings and an upbeat outlook for the second straight quarter. Initially, the stock popped - only to trade lower for the remainder of the week. INTC currently sits below where it was at when it announced earnings.

INTC popped higher after its earnings report, but the rally stalled.

(Source: Barchart.com)

Perhaps all of this good news was already priced into Intel's stock price? If that's the case, I'd imagine there are many stocks that you could say the same thing about.

Some More Good Reading

Guru Robert Prechter shares why he believes fundamental analysis is always trumped by technical analysis.

A scary chart of US consumer credit, which continues to nosedive.

Colorado's minimum wage is set to - drop?

Chinese indices have not yet confirmed the new highs in US equities

Finally, you can now buy physical gold bars in a famed UK department store.

Positions Update - Still Long the Buck

Well I was either early or wrong on the dollar call, and as far as trading goes, that's basically the same thing!

This is why calling a bottom before it's actually put in is indeed a fool's game. And I fell into the trap yet again.

Although I still like this trade, I should have waited for an uptrend. As is, I'll continue to hold the position, and wait for the break up that we're anticipating.

Oops - you want to be short charts like these!

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $24,309.83

Cashed out: $20,000.00
Total value: $44,309.83
Weekly return: -1.9%
2009 YTD return: -52.2% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

The Most Important Chart in the World...In My Humble Opinion

noreply@blogger.com (Brett Owens) — Fri, 16 Oct 2009 00:23:00 +0000

Is the Chinese stock market. Gold is hitting record highs, oil is breaking through to yearly highs, the DOW and S&P are hitting recent highs - but the Shanghai Composite languishes...

China: Taking a breather, or rolling over?

Source: Yahoo Finance

Do Chinese investors know something we don't?

You may recall that Chinese markets turned down before all others last time around. So, the lack of confirmation, at least thus far, from China gives me pause for now.

Does anyone know who Mr. Market is in China? Mr. Wong, perhaps? He's the boss right now...and the boss is sucking wind. Somebody grab Mr. Wong another cigarette!