Thursday, October 29, 2009

Your Tax Dollars at Work

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.

Sunday, October 25, 2009

Three Sanity Checks at this Key Inflation-Deflation Inflection Point

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:
  1. Inflation will occur when the banks start lending again.
  2. 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.)
  3. 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).


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:
  1. Increase the money supply
  2. The new money goes into stocks first, increasing stock prices
  3. Then economic activity increases (a false boom)
  4. 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

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

Thursday, October 22, 2009

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

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.

Wednesday, October 21, 2009

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

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?

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:

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

Funny stuff as always from The Onion:


Stalker Financial Expert Offers Recession Tips Just For Woman He Follows

Tuesday, October 20, 2009

The Best Investment for Riding the Green Energy Bubble


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

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:

Sunday, October 18, 2009

Inflation Investing - A Historical Perspective on What To Do

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.

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

Thursday, October 15, 2009

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

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!

UK Department Store to Sell Gold Bars "Over the Counter" - Oh My

This gold bull market is starting to get a little overheated...

The Telegraph reports that famed UK luxury department store Harrods, starting today, will be able to purchase the "ultimate luxury accessory" - gold bars.

Chris Hall, head of Harrods Gold Bullion, said: "The financial environment has kindled a new demand for physical gold among private investors in Britain. For many people this is a new and unfamiliar asset class that demands absolute trust. Until now London has had no well-recognised name serving this market."

So they've actually appointed a head of gold bullion? What's next - gold ATM machines?

Hat tip to our friend and frequent guest author David Galland for posting this link in his excellent daily Casey Research newsletter.

Wednesday, October 14, 2009

Runaway Inflation in...Chicken Wings?

The New York Times reports that chicken wing prices are - pardon me - flying high!

Reason being, restaurants have cut back on their orders for higher priced chicken breasts in favor of wings, which are more perceived as a "cheap luxury", according to the article.

Higher demand, coupled with falling supply...you know what that means - higher prices!

In the interest of full disclosure, I must reveal that I actually have wing royalty in my blood - Drew Cerza, the Buffalo Wing King, and founder of the Buffalo Wing Festival (pictured next to Bobby Flay above), is my uncle. I have not yet connected with Uncle Drew for the inside story on the price boom in chicken wings - but when I do, you'll be the first to know, dear reader!

Perhaps its time for us to look into a futures exchange for wings...imagine what'll happen when the Chinese have their first bite! They're already crazy for KFC...imagine what a real wing with some Frank's red hot sauce dripping off it will do...mmmmm...

Hat tip to my buddy, wine expert, and honorary Buffalonian Doug for sending this piece along.

Colorado Minimum Wage Set to - Drop?

According to the Associated Press, Colorado will become the first state to reduce its minimum wage due to a "falling cost of living."

Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.

But because Colorado's provision allows wage declines, the minimum wage will drop because of a falling consumer price index. It will be the first decrease in any state since the federal minimum wage law was passed in 1938.

Sure sounds like DE-flation to me!

Hat tip to my good friend Super Joe for finding this on The Drudge Report (a great site btw).

Monday, October 12, 2009

Robert Prechter Shares Why Fundamental Analysis is for Losers

OK, maybe a bit of a sensationalist headline, I'll admit :)

I used to be a fundamental only kind of guy, leaving the technicals and chart reading to the spooks and mystics...only to become a wannabe chart reader myself :)

In truth, I see great value in both types of analysis, so I don't want to downplay either side. Fundamentals are good for telling you what you should be looking at...and technicals can help with the timing of your move. You can buy something that's fundamentally cheap - but if it gets even cheaper, and you lose money, then your fundamental analysis didn't really help you!

On the flip side, playing the technicals only can also be a dangerous game of musical chairs. To Prechter's credit, he does a fine job of combining technicals with investor sentiment, which I think is a real secret weapon of his in finding turning points in markets.

Without further adieu - please enjoy this Robert Prechter interview on technical analysis, and, of course, the wave principle!

***

Q&A With Robert Prechter: Why Technical Analysis Beats Out Fundamental Analysis

October 12, 2009

By Elliott Wave International

As the major stock markets turned down in late 2007 and then started to rally in March 2009, many people who believed in fundamental analysis have begun to question its validity.

Famed technical analyst and Elliott wave expert Robert Prechter has long called for the bear market we are now in the midst of. (He views the rally of 2009 to be a bear-market rally not the beginning of a new bull market.) But over the years, his methods of technical analysis have been criticized. Here are his most succinct arguments as to why wave analysis outdoes competing forms of analysis.

Learn the Wave Principle and Other Forms of Technical Analysis. Elliott Wave International has just released The Ultimate Technical Analysis Handbook. This FREE 50-page ebook is dedicated solely to teaching reformed fundamentals followers to incorporate technical analysis into their own investing decisions. Learn more and download your free copy here.

*****

Excerpted from Prechter's Perspective, re-issued 2004

Question: Suppose everyone agreed, "The Wave Principle is not always right, but it really is the answer"?

Robert Prechter: Well, let me begin my answer with a quote from a national financial magazine dated October 1977. "Over the last few years, the Wave Principle has gathered too much of a following and, therefore, it has less value today. Almost invariably, you can write off a technique when it gets too much of a following." How does this statement look in light of the decade that followed it? "Elliott" had one of its greatest successes. Like the Energizer Bunny, it keeps going and going. And I believe its next success will be its biggest ever. The Principle itself is undoubtedly on an upward spiral of acceptance: three steps forward and two steps back.

Now let's suppose that a large number of educated people accepted the Wave Principle, which is not an impossible idea for, say, a thousand years from now. There would still be room for differences of opinion on the market and the future. And there are countless other factors. Even people who practice the craft don't necessarily take action when they get a signal. Unconscious doubt and worry often foil people's actions. Very few traders have the emotional strength to turn even good analysis into profits.

Q: The Wave Principle is intrinsically contrarian. Does it have some built-in defense against becoming the consensus?

RP: I think so. The Wave Principle is a description of natural human behavior. This is what human beings are; this is part of their nature -- how they behave. In order for markets to continue to go through these stages, a part of human nature must be to believe that such theories of mass psychology are incapable of being true -- that is, something not worth examining. They must be primed to accept bullish arguments at tops and bearish arguments at bottoms. That means they have to be ever open to bogus theories of market behavior. How else will they create the patterns that fear, greed and hope produce?

Q: How big is the pool of analysts who rely on the Wave Principle?

RP: I think there are quite a few people who are proficient in applying Elliott to past and present markets, say, perhaps 1% of all technical analysts, which is a pretty good number of people, I suppose. A lot of those are my subscribers, and they learned it through studying the Theorist. However, as far as the number of people proficient at applying the Wave Principle for forecasting market turns, which is significantly more difficult than applying it in real time, I think there are very few.

Q: This has been the basis of some criticism. To quote one critic, "relying on arcane methods does have one advantage. Interpreting the linear squiggles is left in the hands of the major heir to Elliott's work." How do you respond to those who contend that the complexity of the theory is a cover that allows you to retain the Wave Principle as your personal theory?

RP: With regard to any supposed self-serving secrecy, not only did I co-author a book on how to apply the Wave Principle, as well as reprint Elliott's writings against protest from practitioners, but also I continually go into great -- some might say excruciating -- detail in each issue of The Elliott Wave Theorist explaining exactly what I think the market has done and will do, and why I think it. If there is any market letter that has educated potential competitors, it is mine. The reason is that the study of markets is more important to me than exclusivity, secrecy or power.

Q: Another common approach critics take when they try to dismiss Elliott as bunk is to refer to you as a mystic or a numerologist.

RP: A mystic believe in things for which there is no evidence, only desire. I do not consider myself to be a mystic at all. My approach is objective. The empirical basis of Elliott's discovery speaks to that fact. So do the results of the trading competition [Editor's note: Bob Prechter won the Trading Championship in options in 1984 with a stunning 444% gain. The next closest competitor showed an 84% gain.] Not once during any month since the independent rating services have been following market timers has a timer using a numerological approach such as "Gann" analysis ever placed in the top 10 rankings. Just as would be expected, such methods don't work!

The true mystics are those who believe, for instance, that current economic performance is a basis upon which to predict stock market prices. There is no evidence for it. They just feel comfortable with the idea, so they espouse it.

Q: So you say that the challenge to validity is on the other side?

RP: You're darn right, it is. I am no longer at the point where I feel that I have to justify the objectivity of the Wave Principle. I think the results have done that. Technical analysis is entirely rational and has proved itself. If someone goes back and looks at the record of Elliott wave writers over the decades, he will find a track record of forecasting success that is well beyond a random result of chance. If you can do that, the ball is in the other guy's court. It's up to him to show that this is luck or something. What's more, the only challenge to a theory is a better theory, and I haven't seen a contender yet.

Q: You don't feel that you have been effectively challenged by any fundamental approaches?

RP: I think there's a place for fundamental analysis of individual companies, but I am firmly convinced that you can make a very rational argument showing that fundamental analysis applied to overall market timing is like reading the entrails of goats. In fact, I presented such a critique in The Wave Principle of Human Social Behavior. If you think my ideas as presented here are controversial, just read Chapter 19 of that book.

***

Learn the Wave Principle and Other Forms of Technical Analysis. Elliott Wave International has just released The Ultimate Technical Analysis Handbook. This FREE 50-page ebook is dedicated solely to teaching reformed fundamentals followers to incorporate technical analysis into their own investing decisions. Learn more and download your free copy here.

Ed. Note: 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.

Scary Chart of US Consumer Credit...Yikes!

To say that consumer credit is contracting in the United States may be a bit of an understatement!

Can you spot the trend in consumer credit?

Contracting credit is the crux of Robert Prechter's deflationary thesis - something we've been discussing at length in this space.

How about another haiku to summarize?

Credit's going poof
As gold rockets through the roof
Did I miss something?

This chart
was originally published in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Sunday, October 11, 2009

More Gold Hysteria; The Dollar's Latest Eulogy; The Easiest (Worst) Short Idea on the Planet?

Gold Featured on...Saturday Night Live!?

The latest sign that the gold market may be a little overheated right now...Saturday Night Live's Weekend Update featured investment analysis from Scrooge McDuck!



Shout out and thanks to my good buddy Super Joe for sending this one along!


New Reports of the Dollar's Demise: Greatly Exaggerated?

From London's The Independent comes the latest report of the dollar's impending implosion - in an article fittingly titled The Demise of the Dollar.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

I've read a few publications jumping all over this story today - the sky is falling, the dollar is doomed!

Have to say I'm skeptical. Governments are the ultimate investment herd! This is another great cue that the dollar has indeed put in a major bottom.

The dollar is showing some resiliency around the 76 mark. Time will tell if this latest "demise of the dollar" story is as ill timed as many from recent history.


Non-Confirming Charts

If you're a trend follower, you love to see something making an all-time high, like gold is today. All bets are off, as who knows how high it will go! Just go long and hang on.

And while I do respect and try to follow trends, the reason I'm not jumping on the gold bandwagon right now is that it seems quite crowded. I could be wrong - it could be like tech stocks in 1998, where the fun was just getting started.

But it seems strange that gold is making new highs all by itself. Check out oil, which is still below its highs for the year:

Crude oil can't break $75 decisively.
(Source: Barchart.com)

Perhaps this is an indictment on the global economy. You know investors are taking a defensive stance when they favor an asset in gold that doesn't really do anything, over the black goo that powers the global economy.

Also of note, silver has not yet confirmed gold's record highs. Silver still sits solidly below its 2008 highs - not to mention it's all-time high in the $50 range.

Silver still hasn't broken its 2008 highs.
(Source: Barchart.com)

But the thing that puzzles me the most - so much so that I wrote a haiku about it on Friday - is the long bond.

If we assume that gold is rallying on inflationary fears and money printing - fine, I can accept that as a plausible explanation. But then why are interest rates on long dated government not skyrocketing? Why are rates on the 30-year not barreling towards double digits?

For the past two plus years, the most obvious short in the investing world has been long dated US government debt. In fact, this short has been such a "sure thing" that it couldn't have worked out any worse for investors who put on this trade - myself included! Though I can't feel too bad when even the great Jim Rogers got burned as well.

Bottom line: If gold is rallying on inflationary fears, then why are interest rates not following suit? Someone please enlighten me!

The most obvious short on the planet...only problem is that it's not going down!
(Source: Barchart.com)


Some More Good Reading

Positions Update - Still Long the Buck

And still waiting to see where the next move will be. With sentiment so low I'm guessing it'll be up.

The appears to be the lynch pin to the markets, so it will be interesting to see, if it does rally, what the other markets do. My guess is that they'll tank in unison. We may find out soon!

Reports of the dollar's demise have, until now, been greatly exaggerated.
(Source: Barchart.com)

Open positions:


Thanks for reading!

Current Account Value: $24,789.83

Cashed out: $20,000.00
Total value: $44,789.83
Weekly return: -2.7%
2009 YTD return: -51.2% (Yikes!)

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

Initial trading stake: $2,000.00

Friday, October 09, 2009

Wednesday, October 07, 2009

An Insightful Interview With Fourth Turning Co-Author Neil Howe

We've been discussing market and societal cycles in great detail this year, as we try to uncover clues as to how this current mess is going to continue to unfold. History may not always repeat, but to quote Mark Twain, it certainly rhymes.

Nothing like a little history reading to shed some light...earlier this year I became fascinated with The Fourth Turning, a fantastic book about societal cycles in America (check out my recent review and summary here). It was a topic that even came up at our 4th of July BBQ!

Thus I was quite excited when David Galland interviewed Neil Howe, co-author of The Fourth Turning, in a recent installment of The Casey Report (one of the my fav pubs).

I'm fortunate to be able to present part of that interview here. It was really cool for me to see Howe's latest opinion and take on where we are at in terms of "Turnings"...hope you enjoy!

***

Into the Fourth Turning

A Casey Research interview with Neil Howe, co-author of The Fourth Turning

The Fourth Turning is an amazingly prescient book Neil Howe wrote with the late William Strauss in 1997. The work, which describes generational archetypes and the cyclical patterns created by these archetypes, has been an eye-opener to anyone able to entertain the notion that history may repeat itself. At the time the book was published, the Boston Globe stated, “If Howe and Strauss are right, they will take their place among the great American prophets.” Read this visionary interview published in The Casey Report, and see for yourself.

DAVID GALLAND: Could you provide us a quick introduction to generational research?

NEIL HOWE: We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one. You know, that after Generation X comes Generation Y. They might further expect Generation Y to be like Gen X on steroids – even more willing to take risk and with even more edginess in the culture. Yet the Millennial Generation that followed Gen X is not like that at all. In fact, no generation is like the generation that immediately precedes it.

Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.

So this is a necessary process, a process that is particularly important in modern nontraditional societies, where generations are free to transform institutions according to their own styles and proclivities.

In our research we have found that, in modern societies, four basic types of generations tend to recur in the same order.

DAVID: The four generational archetypes. Can you provide a sketch of each for those of our readers unfamiliar with your work?

HOWE: Absolutely.

The first is what we call the Hero archetype. Hero generations are usually protectively raised as kids. They come of age at a time of emergency or Crisis and become known as young adults for helping society resolve the Crisis, hopefully successfully. Once the Crisis is resolved, they become institutionally powerful in midlife and remain focused on outer-world challenges and solutions. In their old age, they are greeted by a spiritual Awakening, a cultural upheaval fired by the young. This is the typical life story of a Hero generation.

One example of the Hero archetype is the G.I. Generation, the soldiers of World War II, who became an institutional powerhouse after the war and then in old age confronted the young hippies and protesters of the 1960s. Going back in American history, we have seen many other Hero archetypes, for example the generation of Thomas Jefferson, and James Madison, and President Monroe. These were the heroes of the American Revolution, who in old age were greeted by the second Great Awakening and a new youth generation of fiery Prophets.

After the Hero archetype comes the Artist archetype. Artist generations have a very different location in history -- they are the children of the Crisis. For Hero generations, child protection rises from first cohort to last. By the time Artists come along, child protection reaches suffocating levels. Artists come of age as young adults during the post-Crisis era, when conformity seems like the best path to success, and they tend to be collectively risk averse. Artists see themselves as providing the expertise and refinement that can both improve and adorn the enormous new institutional innovations that have been forged during the Crisis. They typically experience a cultural Awakening in midlife, and their lives speed up as the culture transforms.

A great example of the Artist archetype is the so-called “Silent” Generation, the post World War II young adults who married early and moved into gleaming new suburbs in the 1950s, went through their midlife crises in the ‘70s and ‘80s, and are today the very affluent, active seniors retiring into gated lifestyle communities.

The third archetype is what we call a Prophet archetype. The most recent example of this archetype is the Baby Boom Generation. Prophet generations grow up as children during a period of post-Crisis affluence and come of age during a period of cultural upheaval. They become moralistic and values-obsessed midlife leaders and parents, and as they enter old age, they steer the country into the next great outer-world social or political Crisis. Boomers, for example, grew up during the Postwar American High, came of age during the Consciousness Revolution of the 1960s and ‘70s, and are now entering old age.

Finally there is what we call a Nomad archetype. Nomads are typically raised as children during Awakenings, the great cultural upheavals of our history. Whereas the Prophet archetype is indulgently raised as children, the Nomad archetype is underprotected and completely exposed as children. They learn early that they can’t trust basic institutions to look out for their best interests and come of age as free agents whose watchword is individualism. They are the great realists and pragmatists in our nation's history.

The most recent example of the Nomad archetype is Generation X. This generation grew up during the social turmoil of the 1960s and ‘70s and are now beginning to enter midlife. They are the ones that know how to get things done on the ground. They are the stay-at-home dads and security moms trying to give their kids more of a childhood than they themselves had. Their burden is that they tend not to trust large institutions and do not have a strong connection to public life. They forge their identity and value system by “going it alone” and staying off the radar screen of government. It could be very interesting to see the rest of the life story of this generation, particularly as they take over leadership positions.

DAVID: Could you tell us the general age ranges of these archetypes now?

HOWE: One Hero generation that is alive today is the G.I. Generation, born between 1901 and 1924. They came of age with the New Deal, World War II, and the Great Depression. They are today in their mid-80s and beyond, and their influence is waning.

Today’s other example of a Hero archetype is the Millennial Generation, born from 1982 to about 2003 or 2004. These are today's young people, who are just beginning to be well known to most Americans. They fill K-12 schools, colleges, graduate schools, and have recently begun entering the workplace. We associate them with dramatic improvements in youth behaviors, which are often underreported by the media. Since Millennials have come along, we’ve seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920.

DAVID: Then following the Hero, we have the Artist, right?

HOWE: Yes. As I mentioned earlier, one example of that archetype is the Silent Generation, born between 1925 and 1942. This generation was too young to remember anything about America before the Great Crash of 1929, and too young to be of fighting age during World War II.

That 1925 birth year is filled with people like William F. Buckley and Bobby Kennedy, first-wave Silent who just missed World War II. Many of them were actually in the camps in California waiting for the invasion of Japan when they heard that the war was over. Part of their generational experience is that sense of just barely missing something big. Surveys show that this generation does not like to call themselves “senior citizens.” They did not fight in World War II. They did not build the A bomb. They are more like “senior partners.” Unlike G.I.s, they are flexible elders, focused on the needs of others. Many of them are highly engaged in the family activities of their children and grandchildren. In politics, they are today’s elder advisors, not powerhouse leaders.

There is a new generation of the Artist archetype just now beginning to arrive. They started being born, we think, around 2004 or 2005. We did a contest on our website to choose a name for this new generation, and the winner was Homeland Generation, reflecting the fact that they are being incredibly well protected. So we are tentatively calling them the Homelanders.

This generation will have no memory of anything before the financial meltdown of 2008 and the events that are about to unfold in America. If our research is correct, this generation’s childhood will be a time of urgency and rapid historical change. Unlike the Millennials, who will remember childhood during the good times of 1980s and ‘90s, the Homelanders will recall their childhood as a time of national crisis.

So, those are the two examples today of the Hero archetype, and two examples of the Artist archetype.

DAVID: What about the Prophet and the Nomad generations?

HOWE: There is only one Prophet archetype generation alive today: the Boomer Generation. We define them as being born between 1943 and 1960. Those born in 1943 would have been part of the free-speech movement at Berkeley in 1964, the first fiery class whose peers include Bill Bradley, Newt Gingrich, and Oliver North. The last cohorts of this generation came of age with President Carter in the Iran Hostage Crisis.

For the Nomad archetype, we again have only one example alive today, and that is Generation X. We define Gen Xers as being born between 1961 and 1981. Actually, there may be a few members of the earlier Nomad generation still around – those of the Lost Generation born from 1883 to 1900, but today they would be around 110. This was the generation that grew up during the third Great Awakening, the doughboys who went through World War I. They were the generation that put the “roar” into the “Roaring ‘20s” – the rum runners, barnstormers, and entrepreneurs of that period. They were big risk-takers.

DAVID: Is the Millennial Generation the next group up in terms of controlling or being a powerful force in society?

HOWE: It depends what you mean by a powerful force in society.

DAVID: Who is going to be in the driver's seat?

HOWE: Let me put it this way. The generation that is about to be in the driver's seat in terms of leadership is Generation X, the group born 1961 to 1981. In fact, we now have our first Gen-X President, Barack Obama, who was born in 1961 and who is in every way a Gen Xer, despite being born at the very early edge of his generation. His fragmented family upbringing, with his father leaving while he was young and his mother moving all over the world, is typical of the Gen X life story. A telling anecdote from his biography is that, when he arrived at Columbia University, he spent his first night in New York sleeping in an alley because no one had arranged to have an apartment open for him.

His life story has a “dazed and confused” aspect. He made his own way against a background of adult neglect and lack of structure. It’s interesting that he is the first leader in America to call himself “post-Boomer.” As a matter of fact, he talks regularly about how he intends to put an end to everything dysfunctional about Boomer politics: the polarization, the culture wars, the scorched-earth rhetoric, the identity politics, all of that. I understand a lot of people do not believe he can actually do this, but it’s interesting that this is the rhetoric he chooses. That rhetoric is one reason why the vast majority of Millennials voted for him.

Obama is the opening wedge of Gen Xers who will assume very high leadership posts. They are not yet the senior generals in control of the military, but they are taking over the reins of government and, of course, the top spots in American businesses.

Ed. Note: If you want to know what Neil Howe foresees for the U.S. economy, future investment opportunities, and American society in general, sign up here to read the rest of this 17-page, FREE Special Report - Click Here.

New Reports of the Dollar's Demise: Greatly Exaggerated?

From London's The Independent comes the latest report of the dollar's impending implosion - in an article fittingly titled The Demise of the Dollar.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

I've read a few publications jumping all over this story today - the sky is falling, the dollar is doomed!

Have to say I'm skeptical. Governments are the ultimate investment herd! This is another great cue that the dollar has indeed put in a major bottom.

The dollar is showing some resiliency around the 76 mark. Time will tell if this latest "demise of the dollar" story is as ill timed as many from recent history.

You wouldn't know it from reading the news headlines...the sickest currency on planet Earth is still comfortably above its 2007 lows.

(Source: Barchart.com)

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