Wednesday, September 30, 2009

Links to Two More (Excellent) Marc Faber Interviews

Here's a good one with Marc Faber and Jim Puplava on the Financial Sense Newshour:

The topic is - surprise, surprise - inflation/deflation. Faber used to be a deflationist - his book Tomorrow's Gold is written in that perspective - and at some point, he found Fed Religion.

I think Faber is fantastic, and I try to listen to everything I can by him. His newsletter is a tad rich for my blood ($700/year) - though I did get my hands on a copy once, and thought it was great.

Faber believes the Fed will be able to inflate because it can, and because it has too. Of note in the context of our inflation/deflation coverage, he believes the potential lynch pin of the argument is the dollar. To have inflation, the dollar must weaken. So if we see a strong dollar, that could be a sign that inflation is not happening.

Another good one, this interview a video, is Faber on Yahoo Tech Ticker. This is classic Faber. In the first part, he lays out a very thorough argument for inflation and possible financial scenarios. Then he drops the hammer in the second part - as he casually transitions into talk of global wars and social instability. They don't call him Dr. Doom for nothing!

(Thanks to our friend and past guest author Jonathan Lederer for forwarding that 2nd link along).

Gold and Silver ETF Investment Options

Looking to buy gold and silver via and ETF or other fund? Here's a solid comprehensive list put together by our friend Matt Badiali. He's even got a couple of platinum and combined precious metal options on there.

If you decide to purchase an ETF, I'd recommend that you view it as more of a short term speculation. You'll hear various stories about the safety - or lack thereof - of your capital in these types of investment vehicles. If you decide to put your money there, it's probably best not to sock it away for 5 or 10 years as a buy and hold type of thing. Probably best to buy bullion and/or mining stocks for that investment horizon.

One thing that Matt wrote did give me pause:

In May 2008, I covered about five gold and precious-metals funds, including one that holds mining stocks.

Since then, the field has exploded with opportunities. Today, at least nine funds track gold through bullion or futures, two track platinum, and four track silver. Another two track a combination of precious metals. Without even getting into mining-stock funds, we have 17 different "one-click" ways to play precious metals.

When ETF vehicles are exploding on the scene for a particular investment class, it's often a classic sign of an overheated market. So keep that in mind!

Tuesday, September 29, 2009

How to Time Gold Stocks Using the BPI

Some interesting trading research and musings by Jeff Clark today, as he describes a method to time the buying and selling of gold stocks.

Clark's found that when the eight-day moving average crosses above the bullish percent index, it's time to buy - and when the converse happens, it's time to sell, or go short. It's a twist on the popular method of timing stocks using the BPI. Clark says a little adjustment is needed for gold stocks, due to their huge volatility.

I personally have become fascinated with these sentiment indexes recently. Over the weekend, I perused the Wall Street Journal, and concluded that at least anecdotally, gold seemed to be a little too popular right now.

Is the dollar a doomed currency? Of course it is. The problem is that everyone knows that right now. And when everyone is on one side of a trade, you know the other is due for a mega rally. Since it's tough to picture a scenario where both the dollar and gold rally, it may be wise to be cautious on gold for now, especially if you believe the buck is due.

Gold's latest assault on $1,000 ran out of steam soon after crossing the goal line -
at least for now.

Saturday, September 26, 2009

Using the Wall Street Journal to Gauge Investor Sentiment

I thought it’d be fun to peruse the Wall Street Journal to see if we could glean some insights into current investor sentiment. Mainstream business publications are famous for (unintentionally) signaling tops and bottoms in markets – but is this really the case, or more of an old wives tale than truth?

I couldn’t think of a better publication to test out than the Wall Street Journal. Those who believe they’re getting an inside scoop by reading the WSJ are amusingly naïve about their “inside source,” which is read by millions of other investors each morning. Even pre-Murdoch, the Journal wasn’t hiding any investment secrets. These days, it has the added bonus of catering to the masses – combined with its wide reach and coverage, what a perfect match!

So please join me, as I flip through the pages (web pages, of course) in this week’s Journal, in an effort to gain an edge – by taking the other side of the trade!

Further Evidence the Dollar Has Bottomed

From the front page of today’s Online Edition, we see a story entitled:

Small Investors, Big Bets on Currencies.

Oh my. The piece begins:

The dollar is zigzagging, falling below the 90 yen mark Friday and testing the depths it plumbed against the euro a year ago. That kind of action is music to the ears of investors such as Ray Firetag.

As most of America slept on a recent Monday night, Mr. Firetag was in front of his computer in Elk Grove, Calif., wagering on the Australian dollar.

For those of you not familiar with Elk Grove, please allow me to fill you in. It’s a (somewhat lower) middle class suburb about 15 minutes south of Sacramento. From 2002 until about 2006, it was regarded as an “up and coming” neighborhood, where many first-time home buyers in the Sacamento flocked to buy homes that were relatively cheap.

Three years or so after the top of the housing bubble, an astounding number of homes in the town sit empty – either officially foreclosed, or unofficially abandoned – while prices languish 40-50% off their highs.

You should always “short” Elk Grove – always. When their residents are buying homes, you should be selling. When they are trading the Australian dollar in their pajamas, you should probably be backing up the truck to go short!

When small investors are on the front page of the Wall Street Journal trading currencies, you’ve gotta think we’re probably in for a massive rally in the buck.

And Gold is Topping Out

Gold was down this week, settling once again below the $1,000. Thus my search for Gold related stories was initially disappointing, until I came across this great headline:

India’s ETF Investors Make Up for Missing Gold Buyers

Oh boy – this is going to be good!

MUMBAI -- Record prices have forced many of India's traditional gold-jewelry buyers out of the market in recent months, but a new source of demand is on the rise -- investors looking for the safety and convenience of exchange-traded funds backed by gold.

While India continues to be a price-sensitive market, with every rally hitting demand, the rising popularity of ETFs indicates that the Indian market could ...

I can’t read beyond the “…” because I let my WSJ subscription expire a few weeks ago – but that’s OK, it’s really not necessary.

It seems like we’re hearing that India, which traditionally bought gold hand over fist this time of year to, surprising, actually use as jewelry. Now they can no longer afford to buy it – at least for its traditional use.

So they’re speculating on the price instead – and best of all, via ETF’s that take long-only positions!

This is classic stuff! I’m downright giddy right now – I thought of this WSJ concept for a column on my drive to the coffee shop, with no idea that we’d be able to find such fantastic sources.

OK well we can’t just end with two. We need one more to close out strong. We had three wishes…thus far, we’ve used two…we know the dollar is set to rally, and gold is in some trouble.

What’s one more topic we can ask the Swami WSJ to look into its crystal ball and forecast? I got it…

Emerging Markets are Toast

Alright, I am typing “recession” into the search box…let’s see what comes up…OK here we go! Another nice short candidate:

“Emerging” Stock Markets Are Looking Better

The first paragraph says it all:

On the heels of one of the worst years in stock-market history, some experts say investors should shift more money into a surprising area: emerging markets.

Good to know that if you do shift more money into emerging markets, you’ll probably be one of the last investors to the party! This article should sweep in the 11th hour bulls just in time for the rally to die.

On the heels of 50-100% gains in many emerging markets, I can’t see how this could end well for longs. Fortunately we’ve got the WSJ ringing the bell for us here at the top!

When the global markets turn down again, emerging markets are likely to get slaughtered. What great short candidates!

Three Solid Trade Ideas

Well kids, here’s what we’ve learned from reading the Journal this week:
  1. Bet on the buck
  2. Short gold – or at least stay away from it
  3. Short the heck out of emerging markets
We’ll check on these trades in a few months to see how they worked out. In the meantime, can the last dollar bull out the door please turn out the lights!

Checking in on Our Leading Market Indicators

They are on the ropes. Can we get a standing 8-count?

On our August 16th update, we picked out three indicators that have led the markets over the past few years. They were:
  1. China – the poster child of this economic recovery
  2. The Baltic Dry Index – when the global economy is healthy, more stuff gets shipped
  3. Oil – which is still the fuel for the global economy
When we last pulled up the charts on these, they were not looking so hot. All three had turned down. I thought this was probably a bad sign – but added a disclaimer that if they rallied to new highs, I’d be wrong.

You can check out the latest charts by revisiting that post and – here’s a cool feature of the charts – just mouse over them, and use the “hand” to drag them over to today’s date:

If a picture’s worth a thousand words, an interactive one has to be worth a multiple of that. You’ll see that these sick charts have gotten sicker since we last saw these three patients.
Stock market bulls, beware!

Most Popular Posts Last Week

Positions Update - Still Long the Buck

The dollar continues to see strong support at these levels, while sentiment appears to still be quite negative. The dollar's performed pretty well over the past couple of years for a sick, doomed currency!

Reports of the dollar's demise have, until now, been greatly exaggerated.

Open positions:

Thanks for reading!

Current Account Value: $25,239.83

Cashed out: $20,000.00
Total value: $45,119.83
Weekly return: 0.5%
2009 YTD return: -50.3% (Yikes!)

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

Initial trading stake: $2,000

Thursday, September 24, 2009

Who's Buying Oil Today? The Answer May Surprise You

Peak Oil. Sometimes it sounds sooooo 2008.

What's the real story? Is there too much oil out there, or not enough? Seems like it's tough to get a straight answer on this question - or at least an answer that experts agree on.

In this guest piece, Marin Katusa of Casey Research takes a look at the Strategic Oil Reserves of the world's leading energy consumers. I look forward to Marin's work each month as a subscriber of his, so I'm fortunate to be able to share this piece with you here.

I can't say that this will clear up the energy confusion, but I can say that you should always listen to what Marin has to say.

Read on to get an insider's view at what's going on behind the scenes with Strategic Oil Reserves, and how stockpiling, and/or unloading, could affect the price of crude oil going forward...


A Look at Strategic Oil Reserves – Who's Buying Oil?

By Marin Katusa, Senior Editor, Casey’s Energy Opportunities

As the U.S. strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher.

The team at Casey’s Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves.

So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy:

Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every year, and it should become a exporter before it requires a reserve. That leaves six countries to examine.

The United States

Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days' worth of imports, which would make the reserves equivalent to those of Japan and Korea.

The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter.

In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports.

Still, the 108 or so days' reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.

Scenarios that could force a sustained drawdown of reserves:

  • Sustained hyperinflation in the United States due to actions by the Federal Reserve that causes oil-producing countries to look for better markets to sell oil.
  • A prolonged general embargo by OPEC on the United States, forcing America to look to traditional partners such as Canada and Mexico, though they might not have sufficient oil.
  • Another war, potentially in North Korea or Iran, requiring a large amount of oil input from America that it simply does not have.
  • A particularly active hurricane season that knocks out a large amount of production capacity in the Gulf of Mexico, and the United States releases from the SPR to help.


China's strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government-controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.

China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days' consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels.

The government has also announced plans to increase the country's reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret.

In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.

Scenarios that could force a sustained drawdown of reserves in China:

Worldwide embargo on China due to a Chinese invasion of Taiwan.
  • High oil prices force Chinese industries out of business, pressuring the government to keep oil prices low domestically by selling some of the reserves to domestic companies.
  • North Korea asks for oil from China to support military action on the Korean Peninsula, and China ships it to them on the black market.
  • Russia slows or stops its exports as part of the Russian "dominance via energy" strategy, leaving Chinese pipelines trickling and Chinese industries disrupted.

Japan/South Korea

We have placed Japan and South Korea's reserves together, as the two countries have a treaty that allows them to share their strategic reserves.

Resource-poor Japan has one of the world's largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan's island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect.

South Korea is in one of the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels.

Scenarios that could force a drawdown of reserves:
  • Just one at this time, from two possible sources: political instability in the region caused by either the Taiwan or the Korea conundrums disrupts tanker transport, perhaps even forces them to port.


India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008.


Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days' worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency.

So How Much Do the Reserves Matter?

According to the U.S. Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days' worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial.

For illustration's sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time).

Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States' inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country's strategic reserves, the impact is even smaller. Since China's 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil.

Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal.

Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits.

In short, if everything goes according to “plan” by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil.

Marin Katusa is a math prodigy and the chief investment strategist of Casey Research’s Energy Division. At the age of 31, he is one of the youngest self-made multimillionaires in Canada… thanks to an algorithmic system he developed that alerts him when a company with sound fundamentals has become so undervalued that it’s a screaming buy.

For years, Marin has been advising Casey subscribers on the best energy picks, generating extraordinary returns. Learn how you, too, can profit from his “secret system” –
click here to read more.

Read It While You Can - OBAMA! Wants to Shut Down This Blog!

Do you enjoy getting financial tips and news from blogs like ours? Well enjoy it while you can - because if OBAMA! has his way, we're toast!


"I am concerned that if the direction of the news is all blogosphere, all opinions, with no serious fact-checking, no serious attempts to put stories in context, that what you will end up getting is people shouting at each other across the void but not a lot of mutual understanding."

Never fear, dear reader - he's got a plan. The Senate is floating potential bills that will aid the newspaper industry!

Not gonna blog in my house.

Fast Company Magazine put together a nice rebuttal - parodying that long forgotten document, The United States Constitution - penning an "open source" letter to Obama entitled We, The Blogosphere.

OK I have to admit, I'm not worried in the least. First of all, as technology has advanced, it has always liberated the individual. I wouldn't expect government meddling to prevent this - in fact, it may actually accelerate it! Ha!

Plus, our government is quickly losing whatever credibility it has left. The citizenry is pissed. The mass media is missing this story (what else is new) - your average citizen is more fed up with bailouts and totalitarianism than you might think from watching CNN.

In fact, I'll bet we could see some real fireworks when the next leg down in the market comes. If folks are this pissed with the DOW pushing 10K once again, let's see how they react when it drops below 5000. It's not gonna be pretty!

Stay tuned to this blog for more breaking news on these developments.

Anyone actually read this old rag anymore?

Tuesday, September 22, 2009

How I Found Freedom in an Unfree World - by Harry Browne (Book Review)

Do you feel like your head is going to explode when you read, watch, or listen to the news these days? The continuous assault on personal liberty in the good ol' U S of A has, I have to admit, been driving me bonkers. The bailouts, the lack of personal responsibility - really maddening to anyone with a semblance of a libertarian bone in their body.

If you feel similarly, I'd highly recommend you head to your local library and pick up a copy of How I Found Freedom in an Unfree World: A Handbook for Personal Liberty, by the great Harry Browne. All I can say after reading it is: wow, I needed that!

I've become a huge fan of Harry Browne's thinking and works over the past year or so. It started when I stumbled across a fantastic Ebook that his wife put together from his old writings about sales. It's called The Secret of Selling Anything to Anyone - available on his website for like 11 bucks, it's one of the best two books on sales I've ever read (Dale Carnegie's sales bible being the other). Highly recommended reading for anyone, no matter if you're in sales or not.

But back to the book at hand - what I really love about Harry's style is that he doesn't buck the trend. Many libertarians seem to live in a constant state of frustration. Probably because they see the folly of many actions for the "common good" - and they just can't bear to watch. They literally seem to drive themselves insane.

Harry is different. He developed an interesting philosophy for seeing the world exactly how it is - and maneuvering himself accordingly. I believe he referred to it as direct action vs. indirect action.

Harry Browne basically says "screw it." I'm gonna do my thing, whether you like it or not. Because at the end of the day, as a human being, I'm driven by self interest - everyone is - and I'm not embarassed to admit it.

The book is highly readable, and has some real funny parts. In one section Harry poo poo's the notion that future US citizens will be in lockdown government control, a la 1984. Because frankly, the government isn't smart enough to control everyone - he quips that maybe they will put a camera in every room, but odds are that the camera won't work!

He also has a lot of personal advice - some that may come across as a bit over the top (like don't get married because it's an affront to your personal freedom). But he's got a lot of practical advice for dealing with everyday life.

This book really gets to the heart of the frustration that a lot of people have, I think. Most people feel a sense of guilt about who they should be. Thus, they don't follow their passions, they endure crappy family relationships, and live overall passionless, aimless lives.

If you are libertarian minded in any way, this book is a great, fun, quick read. And if you've felt really frustrated over the past 12-18 months amidst the bailouts, increasing creep of the government, and the rise of Amerika, this is a great read to get your Zen about you.

Monday, September 21, 2009

Robert Prechter's Trading Tips - Guru Reveals His Secrets

Trading is tough - really tough. When you're making money, it feels like the easiest thing in the world. It's a great feeling - almost intoxicating, really. Like you're printing money from nothing!

Then, inevitably, you get cocky. And you lever up. And sooner or later, a trade goes against you...or two, or three. And you lose a lot of money. And it sucks!

Take it from a guy who has gotten pounded during the end of last year and the first half of this year - I've taken some knocks the hard way.

Bob Prechter, who is featured below in this guest article, is someone I recently started tracking. I've been drawn to the zen-like nature in which he's able to look at the markets. I reached the conclusion that a lot of my mistakes could have been presented, had I kept a more level head about me.

See, many of the trades I got into were "less loved" when I found them. Sugar at 8-cents back in 2004. Gold below $700 in 2007. It's all obvious in hindsight, but those really were "easy money" trades - buying an asset that was still relatively unloved, and watching the market warm up to it.

I got burned when I stayed too long at the dance. Buying gold at $1,000 today, when everyone is talking about it, and loving it, is perhaps not the wisest move.

So back to Prechter - that's what I've learned - the importance of being grounded, and of carefully weighing popular sentiment. Because even if fundamentals are good - if EVERYONE knows they are good, then you're really screwed on the long side, because it's all factored into price.

So here are five trading tips and a brief interview with Prechter, along with a link for a free trading eBook at the end of the article.


Robert Prechter's Five Tips for How To Trade Successfully
September 21, 2009

By Elliott Wave International

Take it from the person who won the United States Trading Championship with profits of more than 440% in 1984 – there are five things that every successful trader needs to know how to do:

  1. Have a method to trade.
  2. Have the discipline to follow your method.
  3. Get real trading experience, instead of only trading on paper.
  4. Have the mental fortitude to accept the fact that losses are part of the game.
  5. Have the mental fortitude to accept huge gains.
Bonus tip: Find a mentor.

That trader who won the championship in a record-breaking fashion is Robert Prechter, the founder and president of Elliott Wave International. Once you think you've mastered his 5 tips for how to trade successfully, then the best thing to do is to find a mentor. In this excerpt from the book, Prechter's Perspective, Bob Prechter discusses how sitting at the elbow of a professional trader can make all the difference in learning the trade of trading.


Free 47-page eBook: How to Spot Trading Opportunities

Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.


(The following Q&A is excerpted from Prechter's Perspective, revised 2004.)

Question: Has any specific trading experience decreased your trading success?

Bob Prechter: Yes. My first trade in 1973 was wildly successful, and I was hardly wrong in my first six years at it. Then I had a big trading loss in 1979, and that taught me more than the wins. The best way to develop an optimal state of mind for trading is to fail a few times first and understand why it happened. When you start, you're better off speculating with small amounts of real money. Using larger amounts of money will bankrupt you early, which, while an excellent lesson, is rather painful. If you want to be a trader, it is good to start young. Then when you lose your first two bundles, you can gain some wisdom and rebound.

Q.: It sounds painful. Is there any way at least to reduce the hard knocks?

Bob Prechter: There is one shortcut to obtaining experience, and that is to find a mentor.

Q.: Did you have a mentor?

Bob Prechter: In 1979, I sat with a professional trader for about a year. The most important thing he taught me was to keep trades small relative to your capital. It reduces the emotional factor.

Q.: How would one select a mentor?

Bob Prechter: The best way to select one is to find a person who is doing exactly what you would like to do for a living, then get to know him well enough to ask if he will tutor you or at least let you watch while he works. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. Listen to him. Sit down with him, if possible, for six months. Watch what he does. More important, watch what he doesn't do. Finding a guy who knows what he is doing is the best lesson you could ever have. You will undoubtedly find that he is very friendly as well, since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled, matured by the experience of trading. He will usually welcome the opportunity to tell you what he knows.

Free 47-page eBook: How to Spot Trading Opportunities
Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more 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.

Dollar Up, Everything Else Down - Here We Go Again?

I saw a familiar sight on the charts today - green for the dollar, and red for just about everything else. This was a very common sight last fall and winter.

This currency picture, courtesy of, used to be an all-to-familiar one.

Then when the famous "March 6" lows held, and spring sprung, we saw just the opposite happen - the dollar went down, while stocks and commodities all partied like it was 1999.

Are we really out of the woods? When we see days like today, it reinforces my skepticism. Although stocks were barely off, look at how the currency and commodity markets reacted. Look at oil - which really took it on the chin!

The stock market sneezed, while oil caught a cold.

If oil and China were rip roaring to fresh highs, I might feel a little better about the fate of US equities. But the non-confirmation being displayed by both is a bit disconcerting...especially as both rolled over first during the last downturn.

Further reading: Why commodity and shipping weakness could be foreboding signs for stocks.

Sunday, September 20, 2009

So Long, Cotton...I'm Just Too Wary of Deflation

I have to admit - I think the Great Deleveraging permanently seared my psyche. I haven't been the same since.

It's for the best. Until you live, and invest, through an event like that, I don't think you can appreciate the awesomeness of the destruction. A history book just doesn't do it justice.

When it came time to roll my cotton position last Friday, I reflected on whether or not I wanted to keep the position. That's one nice thing about trading futures - when it's time to roll, you have a check point of sorts that forces you to reflect, even if for only a second.

My plan with cotton has been to hold as long as it stays above it's lower resistance points (which is has...but just barely), and sell if I was fortunate enough to see it hit its upper resistance.

Well, I got lucky and cotton broke $0.62 - and with some serious resistance here, I was happy to sell my position.

Cotton has been doing the range trading thing.

Why not wait for a potential breakout? After all, cotton has traded north of 90 cents in the past two years - perhaps a decisive break above 63 could send it on a moonshot?

Perhaps. But like I mentioned before, I'm still gunshy. I fear that the deflation monster is still lurking in the shadows. Last time I stayed stubbornly long - big mistake. I hope that next time, I can at least make a new set of mistakes, rather than repeating the same old ones!

Remember what happened last time deflation took hold of the markets - it took hold of all of them. All assets traded together - correlation went to 1. So much for doesn't really help to have your eggs in a few different baskets when ALL of the baskets hit the ground, and ALL of the eggs crack in half!

I guess I can't see why things would be different if we see another wave of deleveraging. The dollar would rally. Treasuries may as well. And everything else would get slammed.

At the very least, I think we're due for a correction in most assets. Optimism is quite high on, well, just about everything. Gold is everyone's darling, stocks are in the midst of a rally for the ages, and the Fed is being heralded as the saviors of the financial universe.

I'm just not completely sold on this story, at least just yet.

So, for the meantime, I'll be mostly in cash. And that means even a commodity with favorable fundamentals - such as cotton - is something I'll be casting a skeptical eye on at these prices.

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Positions Update - Still Like the Buck

We bid cotton a farewell, at least for now. My favorite trade is still the US dollar - I think it's due for a massive rally, at least in the short to medium term, if for no other reason than the fact that absolute everyone is bearish on the buck.

I outlined my hypothesis for going long the buck a few weeks ago, and I don't think the story has changed. Sentiment still appears to be overwhelmingly negative, and I am still not (yet) a believer in the inflation story.

If the facts appear to change - or, more importantly, if the chart proves me wrong - I'll definitely reevaluate this position.

The dollar still sits well above its 2007 lows - at least for now.

Open positions:

Thanks for reading!

Current Account Value: $25,119.83

Cashed out: $20,000.00
Total value: $45,119.83
Weekly return: 6.6%
2009 YTD return: -50.6% (Yikes!)

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

Initial trading stake: $2,000

Thursday, September 17, 2009

Jurgens Bauer on Sugar's Outlook

One of my favorite commodity analysts to track is Jurgens Bauer, especially for his thoughts on the softs. I used to frequently post links to his columns when, I think, he wrote for, or was at least syndicated through them.

He's since moved on, and I was happy to see his name popup as the featured interview over at Hard Assets Investor. It's an 8-minute interview - one that's well worth watching if your keen on commodities, particularly if you're following sugar and cotton.

Jurgens is a throwback - he just LOOKS like a guy who grew up in the trading pits - that just adds to his aura. He did allow that sugar could go to $0.30...or even $0.40...since we are in a supply deficit. He views key upper resistance as $0.23 or so (which we've seen).

Sugar me sweet! Does sugar have another push up?

Doug Casey on Investing Opportunities in Cattle

What's the cheapest commodity on the board right now? It's probably a toss up between cattle and natural gas. Both are beyond beaten down; both are at near historic lows; both are just cheap.

That doesn't mean they can't get cheaper. But if you're looking to make some big bucks in commodities, it's usually wise to find something really cheap to buy (which is safer than finding something expensive to short, since your downside is limited).

Doug Casey's been on the cattle beat for a while - so long, in fact, that he started his own herd! Though I doubt most readers have the means (or energy) to take steps like that, I found his insights on cattle very interesting. Here's a guy who's bearish on nearly when he turns bullish on something, it must be for a good reason.

Enjoy Doug's guest piece!

Doug Casey on Cattle

(Interviewed by Louis James, International Speculator)

L: Doug, we talk a lot about metals and energy, but you’ve also made money in agriculture, as have our subscribers who got in early on corn and potash. In the February 2008 issue of the International Speculator, you made the case for speculating on rising cattle prices. Would you explain your rationale for that and give us an update?

Doug: Sure. There is such a thing as a cattle cycle, and right now, all over the world, cattle are in liquidation. Farmers and ranchers just can’t make any money on cattle. Nobody has made any money on cattle in North America or Europe for years, and it’s especially serious now. So worldwide, cattle herds are being slaughtered, and that’s depressing the prices.

The interesting thing is that even as prices are being depressed by all the selling, counter-intuitively, cattle herds are collapsing. That means the number of cattle and the price of cattle are going down at the same time. That obviously can’t go on forever; at some point, the relative number of cattle is going to be quite small, and prices are going to explode upwards. Why? Because people in China, the rest of the Orient, and across the developing world are going to want more beef -- in addition to the traditional consumers. And the numbers of cattle are going to be very low.

I think that cattle is an excellent place to be.

L: If it’s not a traditional part of their diet, why would such people want more beef?

Doug: As you are becoming wealthier, you want better-quality food. Beef is generally at the top of the food chain.

Why is that? It takes about two pounds of grain to produce a pound of chicken meat; four pounds of grain to get a pound of pork; seven pounds for a pound of beef. So from a production point of view, beef has always been, and I guess will always be, the most expensive type of meat to eat.

L: Of common meat animals. Some unusual meats are a little more expensive…

Doug: Yes, of common meats. Bald eagle drumsticks are much more expensive [laughs]. But beef is traditionally the rich man’s food. Crisis notwithstanding, a lot of people around the world are getting wealthier, particularly in China. India is not far behind, but there is a cultural issue with beef and Hindus, of course. I think we have a rare opportunity right now to buy low, while beef herds are collapsing.

That’s exactly what I’ve done with a number of friends; we’ve bought a lot of land in Argentina and are raising cattle.

L: It’s basically a bet on rising global affluence as the underlying trend.

Doug: To a degree. But it’s more a bet on significantly lower supply combined with steady demand. In real terms, cattle prices are at about 40-year lows. As bad as the global economy has been, one might think they could have gone even lower -- the economy does affect them -- but they’re very low. In fact, the worst day I ever had trading commodities personally was back in 1987, when I thought that cattle were quite cheap. And you remember that day in 1987 when the stock market fell out of bed like five hundred points or something like that.

L: Black Friday.

Doug: Yes, Black Friday. And I was personally one of the largest players in the cattle market at that point. I was short puts and long contracts, of both feeder cattle and live cattle. It was a horrible day, because the day after the market collapsed, the cattle market collapsed. Everybody figured: “Oh my god, it’s a depression, nobody is going to be able to afford beef, so we better sell.” It was a nightmare for me [laughs]. So, you’re quite right; cattle are a play on prosperity.

So why, if I believe we’re sliding into the Greater Depression, am I long cattle? Because you’ve got to be a buyer when everybody else is a seller, and everyone else is a seller right now, because no one can make any money on cattle. That’s number one. Number two is that, despite the fact the world is going into a depression, the world population will continue growing, and the countries in the Orient are going to do relatively much better than countries in the West, so I’m willing to bet on rising beef consumption. Number three, real cattle prices are at generational lows.

But I’m not speculating in cattle; I’m investing in cattle. I’m not doing anything with them in the futures market.

L: There’s no leverage on what you’re doing; you are actually buying cattle.

Doug: Yes. I’m buying land in northwest Argentina, which to me is the most attractive part of that country – and the country itself is very attractive indeed. We’ve bought a number of large, dormant farms where we clear the land, fence it, put in wells, and plant in grasses the cows like. We bought Braford females – heifers – and they calf every year. We now have about fifteen hundred cows. Every year we get about twelve hundred new babies, and then the babies have babies. We sell the male calves for current income, to finance the clearing and fencing of more land and putting in more wells. And we let the heifers grow and reproduce. It’s a form of compound interest. Plus, the land is worth considerably more after we improve it -- a big bonus.

And since our cattle are all grass-fed, and we own the land for cash, and the Gauchos earn roughly two hundred and fifty dollars a month, we don’t have much in the way of costs.

I’m a big fan of grass-fed beef. Most cattle spend the best part of their adult lives in feed lots. They’re packed chock-a-block next to each other (moving burns calories and takes off weight). They’re fed things cows don’t naturally eat. And they’re pumped full of growth hormones and antibiotics. The end product is okay for a mass market that wants cheap beef, but it isn’t what I want.

L: Is your reason for doing this in Argentina because the market is there (Argentines love to eat beef)? Or is it because land and labor are cheap, and it’s such a good place to be in the business? Why Argentina?

Doug: I picked Argentina because out of the hundred and seventy-five countries I’ve been to, the fact of the matter is: I just like Argentina more than any other place I can think of.

L: Even Thailand?

Doug: Well, it’s perverse. Thailand is exactly the antipodes of the globe; it’s as far from Argentina as you can get geographically, and it’s about as far as you can get from Argentina culturally as well. They are just opposite and antithetical in so many ways. But the fact of the matter is, those are my two favorite places on the planet.

L: But Argentina edges Thailand out…

Doug: It does. That’s because I like the wide-open spaces. I like the estancias [ranches]. I like the barbeques. And in Thailand, as much as I like it, the fact is that as a Westerner, you are never going to be a part of Thai society. Forget about it. No matter how many Thai friends you have and so forth, you’re still always going to be an outsider. But that’s not true in Argentina, because it’s the most European country in the world. It’s more European than Europe at this point, quite frankly. And, completely unlike Thailand, it’s a country of immigrants. So, especially as my Spanish improves, I can actually become part of the society. Entirely apart from the fact that the upper classes, and the kids, all speak excellent English.

On the other hand, in Thailand maybe there’s an advantage to not being part of the society, because… you really don’t exist. You are like what Chinese would call a Quai Loh – a foreign ghost or foreign devil. You are not an element to officialdom; you’re a permanent tourist. It’s a double-edged sword; it depends on what you like.

L: If you’re an anarchist, why would you want to be part of society?

Doug: Well, I’m a fairly social anarchist. We like society as well as anyone -- we just don’t like the state. I just want to be left alone by the authorities. An anarchist can feel pretty mellow in Thailand because of the foreign-ghost effect. And pretty good in Argentina for different reasons – it’s full of Spanish-speaking Italians who don’t like to do what they’re told.

We got into the cattle business as a consequence of wanting to buy estancias, because the land prices were so low. They were just begging. The country is so pretty, and the society is just so nice, I wanted to become a part of it. When you have this land, you have to do something with it.

In addition to buying a beef cattle herd with some friends, I personally bought a dairy farm -- but, again, with no cattle. I bought the dairy herd from another farmer – a wealthy guy – who wanted to get rid of it. This was during the soybean and corn boom of eighteen months ago. He had a hundred and thirty Holstein dairy cows, and he told his farm manager: “Get rid of these things. They are a rounding error on my balance sheet, and the ground they are taking we can use to plant soybeans and corn.” So I bought them at an excellent price.

In fact, the deal I cut with the guy, because dairy herds were also already in liquidation then, was this: he said, “Alright, you take the cows in exchange for one year’s milk production from them.”

So, the cows graze on land – that doesn’t cost me anything. And my Gauchos, they were just sitting around, and I had to find something for them to do. So now they can milk the cows, and I just gave him a year’s milk production.

L: So, in addition to the beef play, is there a dairy play? I’ve heard that not only beef cows are in liquidation, but milk cows are being turned into hamburgers. That should create a supply crunch, and there should be money to be made in the dairy business. Is that right?

Doug: That’s totally true. Dairy prices have fallen about fifty percent in the last couple of years.

L: But are dairy prices really falling? It doesn’t seem that milk is any cheaper in the supermarket…

Doug: They must be, because the milk prices the farmers receive most places in the world are down fifty percent.

Going back to what you said earlier, one of the reasons I thought that Argentina would be the best place to do this, is because of the stupid fascist government down there. They try to control everything, including the price of beef. All your input costs are very low, partially because it’s a depressed economy, and partially because of price controls. Land and labor are extremely cheap. But when you sell beef, you don't sell it at the world market price in Argentina. And when you sell milk, you don’t sell it at the world market price in Argentina either. So, I’m looking for significant profit from the fact they are now controlling the prices. But that will come to an end.

Want to hear something unbelievable? It’s possible Argentina will soon become a net beef importer. One reason is the drought in Buenos Aires province, which is exacerbating the already extraordinary liquidation of herds. But more important by far are the price controls. Between the drought, the boom in grain prices, and the controls -- meant to artificially depress beef prices to bribe poor voters -- Argentina is creating a beef shortage for itself. It’s like creating a sand shortage in the Sahara. Reality alone will bring the controls to an end.

Also, I have a feeling that we may see a shift to the right when the next elections come up in 2011. Two of the leading candidates to replace Christina [Argentine President Christina Kirchner] are both free-market-oriented guys. I don’t mean radically free market, but pretty free market. Either could turn the place around, however, much the way Roger Douglas turned New Zealand around in the mid-eighties. And if that happens, Argentina could boom and blossom, and the value of my land and cattle would jump just from the releasing of controls. Joining the real world market could result in a double overnight.

L: So, there’s a political speculation as well.

Doug: Yes. The best speculations always capitalize on a politically caused distortion. My dairy herd, within the next couple years, will be up to three hundred cows, which is the maximum capacity of my milkery or tambo [the word “tambo” comes from the Inca language, and in Argentina it’s a synonym for dairy farming]. And eventually, we should get our beef herd up to ten or twelve thousand head.

And of course, when we are up to twelve thousand head, we’ll have ten thousand head that we can sell into the market every year. This would be a significant income stream.

I think it’s a good time to get into the business, and Argentina is the right country, because of the price controls.

L: For people who don’t want to go to Argentina or fear that the price controls may never be lifted, what other countries would you recommend? Obviously you wouldn’t want to do this in the U.S. Where would you go, if not to Argentina?

Doug: The U.S. and Canada are huge beef producers, but they’re not ideal environments. For one thing, they have long, cold winters, especially in the plains states and Alberta. Cold takes weight off animals, so you have to feed them more. And the winter pretty much precludes their eating grass, so you’re feeding them hay or silage -- very expensive.

Surprising to most people is that the largest beef-producing state in the U.S. is Florida. The winters are perfect -- but the summers are way too hot, and heat is also the enemy of beef. Plus, the pasture is generally very poor. Beef cattle can live on Florida grass, but horses, for instance, absolutely cannot. And the insects are a problem in a lot of places. Where we are in Argentina, the climate is ideal year-round, the grass is good, and insects aren’t a problem.

I’d be willing to look at Brazil or Bolivia. Paraguay is very interesting, actually, in a lot of ways. The problem with Paraguay is that there are no transportation facilities there, besides trucks. It’s one of the best places in the world for growing everything from cattle to corn to soybeans, but the transportation for shipping the stuff out is very problematical.

And if you want to get even stranger than that, I would go to the eastern provinces of Bolivia, the so-called Media Luna. Bolivia is really at least two different countries that are sociologically, demographically, and geographically as different as night and day. I think there is an excellent chance that Bolivia is going to split up in the future into at least two countries. The Santa Cruz/Media Luna area, which is the agricultural lowland, is also an excellent, politics-based speculation. The land in the Media Luna is very cheap and it’s really beautiful, albeit in the middle of nowhere. Let the Quechua and Aymara [the languages and the people who speak them in the Bolivian highlands], which Morales [Bolivian President Evo Morales] belongs to, in the dry highlands have that area.

I like Brazil, too, but it has done so well in recent years, it’s not particularly cheap anymore. So I’d rather go for places that are cheap, where I can see a possible explosive upside as opposed to a place that’s nice like Brazil, but where the market recognizes that it’s nice, and that’s already reflected in the prices.

L: Are there places you might go outside of Latin America? Europe is as controlled as the U.S., but some governments might decide to support some agriculture. Say, Denmark suddenly decided it’s going to subsidize the dairy business, would you consider going there?

Doug: Well, dairy is the biggest form of agriculture in Denmark; and since it’s Europe, I presume it’s already heavily subsidized. But I don’t know of any such opportunities there right now. Western Europe is high cost, high regulation, high tax. And too far north to be very productive. I’d forget it. Eastern Europe is a possibility. Land is still relatively cheap in Serbia.

L: Yes, and they have a flat tax structure and free trade with Russia – so you’d have access to the whole Russian market.

Doug: Yes. Ukraine and Romania might also be interesting, since the Eastern European property market has collapsed. But the problem with farming operations is that you’ve got to supervise them. There is a saying in Spanish: El ojo del amo engorda el ganado.

L: “The eye of the master fattens the cattle.”

Doug: Yes. The fact is, if you are not there, and you don’t have people who are really reliable…

L: I get it – as you said, you like living in Argentina. So you’d have to like living in Serbia or the Ukraine for it to make sense to get into the cattle business there.

Doug: Right. That goes for Argentina too [Laughs]. So that’s the problem with investing in farming, on a first-hand basis; you’ve got to be on the spot several times a year, and you’ve got to have some degree of confidence in the guys on the ground running the operation.

But I think it’s a good thing to do if you have an inclination, have the capital, and want to spend time there.

L: And for the people who don’t want to buy a ranch, is there an ETF in cows? Or is there an easier, less laborious way to invest that you can recommend?

Doug: Yes, there are a couple of relevant ETFs – at least one for cows. There are futures in all the agricultural products. But that’s a day-to-day kind of thing that requires its own due diligence and effort.

L: If you grow your own herd, you don’t have to be right on the timing, you just have to be long when the time is right?

Doug: That’s right. When you are actually growing the cattle, you just have to be right on the trend, as opposed to picking the right day when you are speculating. All things considered, I think the countries in South America are the most interesting, for all kinds of reasons. But part of that is my taste.

The key is this: if you’re going to buy real estate abroad anyway, for the kinds of reasons we discussed in our conversation on currency controls, or others, you should pick land in a place you enjoy being. And if you’re going to do that, you might as well put the land to work – with cattle and dairy herds being an obvious way to do that. For me, this adds up to a working estancia in Argentina.

For others… it’ll be wherever the stars align for them.

L: Got it. You know, I do like Serbia… and Belarus… I wonder…

Doug: Have fun.

Doug Casey is the chairman of Casey Research and co-editor of Casey’s flagship publication, The Casey Report. One of Doug’s favorite sayings is that the Chinese word for “crisis” consists of two symbols – one means danger, the other opportunity.

And that’s what Doug and his team are best at: with an unfailing instinct for emerging trends and budding opportunities, they consistently have been making double- and triple-digit gains for their subscribers. Right now, one of their favorite plays is betting on an economic development that is all but inevitable… Click here to read more.

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