How to Differentiate an Inflation Induced Rally From a Normal Run-of-the-Mill Retracement

Just a retracement?

Or is the bull really back?

Maybe inflation?

Deflation Camp - Anyone Left?

Outside of a few lone voices, the deflation camp sure seems to be getting lonely. This is interesting, because the US markets have only now retraced 60% of their previous losses. An impressive rally, for sure, but still within the 38-62% "Fibonacci range" that is generally expected of retracements.

FWIW, the Great Depression retraced a little over 50% of its initial leg down - so we're ahead of the 1930 rally, but just by a bit.

It DOES feel like this rally has been going on forever - over 13 months old, it's sure been impressive in it's magnitude and duration. BUT, it is important to realize that nothing has been decided - at least yet - regarding whether this is a technical rally off of extremely oversold lows, or a brand new bender driven by trillions of new cash.

Viewed with 5 years of hindsight, the current rally looks a bit more "normal" than when you're living it day-to-day.

(Chart source: Yahoo Finance)

The Early Symptoms of Inflation?

What's tricky, though, is governments around the world ARE printing money as fast as they can. And the first symptoms of inflation typically show up in either asset prices, or commodity prices - or both.

Today, we've got asset prices rallying, with financial stocks leading the way - exactly the first place you'd expect to see this "new money" showing up. A lot of financial commentators I've heard recently - good ones too, not just CNBC talking heads - believe this rally is now being driven by newly printed money.

Personally I think it's too soon to tell - we've retraced 60%, not 100%, after all.

But, if we're trading short term, we...

Gotta Respect the 200-Day Moving Average

And revisiting the S&P chart once again, we are indeed still north of the 200-day moving average. Check out the last five years too - you could have done a lot worse than being long stocks when the S&P is trading above the average, and being short when it's below:

According to the 200-day SMA, you should ignore my calls for an impending decline. Instead, you'd set stops around this mark.

(Chart source: Yahoo finance)

So while I may continue to hoot and holler about the odds of a downturn far outweighing upside potential, to be honest, you should probably ignore me, and just respect your trailing stops!

And for more on the power of respecting the 200-day moving average, check out this excellent article from Steve Sjuggerud in Daily Wealth.

If Everything Tanks, What Would Hold Up?

Judging by the price action across the board last Friday - not too much...

Almost everything is getting kicked in the teeth today.

(Source: BarChart.com)

Crude oil and precious metals got taken to the woodshed along with stocks on Friday - no place to hide there.

One bright spot - actually I should say one dim but not dark spot - are the grains. They haven't rallied much this year to date, so there may not be much downside from here.

Grains, by the way, are still one of my favorite secular plays - I just think it's best to avoid them right now. If the Great Depression is a guide, then grains should lead the way out of the Greater Depression as they did last time around.

Some Deflationary Evidence: Two Revealing Charts of Consumer Credit Trends

Late last week, our good friend and fellow deflationist Carson sent over a link from Mish Shedlock's blog, reporting a sharp annualized decrease in consumer and revolving credit.

I just plotted the Fed's historical data since 1978 (which I chose because there was a single quarter anomaly in 1977 that I didn't feel like dealing with).

First, we see that consumer credit, as of February 2010, is decreasing at an annual rate of 5.5%:

Consumer credit, after trending positive YOY in January, is once again heading south.

Next we look at revolving credit, where the data is even uglier, both in current and historical terms. Revolving credit decreased at an annual rate of 13%:

Will this debt ever be paid off?

The sharp decline in revolving credit, which is defined as credit that does not have a fixed number of payments or payment schedule (think credit cards), would appear to support the debt deflation argument (of Robert Prechter, most notably) that much of the current debt outstanding is going to go unpaid.

So while the government has engaged in quantitative easing to "ease" the issuing of its own debt, it has not yet offered to print up some greenbacks to pay off the debt of American citizens.

Thus far, it appears Americans are still choking on their massive loads of accumulated debt, unwilling to take on more credit, no matter what the Fed does.

It will be interesting to see if the Fed is able to reverse these trends.

Though Maybe We Should Just Short American Stocks Right Now

What's the most damning future indicator for America's near term economic outlook?

How about the latest cover of Newsweek?

Uh oh!

PS: Hat tip to MarketFolly for the tip here.

PPS: If you're into contrary investment thinking, I'd HIGHLY recommend The Art of Contrary Thinking by Humphrey B. Neill, which I reviewed here (ironically the same week we interviewed MarketFolly for the blog too!)

Another Bernanke "Guru Moment" - An Instant Classic?

The man who proclaimed the subprime problem was "contained" in March 2007 (after which Jim Grant hilariously quipped "yeah, to planet earth") - is back in the news again with another "guru moment".

The Wall Street Journal reports:

The U.S. economy should continue to recover at a moderate pace this year, but it will take time to restore all the jobs lost during the recession, Federal Reserve Chairman Ben Bernanke said Wednesday.

In his latest assessment of the economy, Mr. Bernanke told a congressional committee the pace of the recovery this year will depend on if consumers spend and companies invest enough to make up for fading government support.

"On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters," the Fed chief said to the Joint Economic Committee.

Any fellow contrarians want to take the "under" on Ben's latest gem?

Jim Rogers Says Get Ready for $2,000 Gold!

Here's the latest Jim Rogers interview on Bloomberg:

http://www.youtube.com/watch?v=c-vd1-Ec2FY

A short bit with another clueless interview, so there's not too much new:

• Still likes commodities for another 5-10 years (based on the secular bull market beginning in 1999)

• Thinks gold will top $2,000 by the end of the decade, thanks to money printing

Jim notoriously sandbags his own trading acumen - always insisting he's "no good" at calling price/timing specifics - yet those who follow him closely know he's often pretty accurate with these calls as well!

You may also like:

• Why Richard Russell is very worried about the bond market

And My Current Positions - Cash, and Pass!

While it's very tempting to take a flyer short position, betting on a near-term decline, I'm going to actually respect the 200-day moving average this time. We'll see how it works out.

Other than some longer term short S&P and long US dollar positions I've got via ETF's, I'm mostly in cash, mostly waiting for the next mega leg down that I think is coming.

In retrospect I should have kept my long positions, and just kept moving up the trailing stops, until they were stopped out. Ah well, investing and trading is a lifelong learning process.

Have a great week in the markets!

Tax Receipts Down, Government Jobs Up...This Won't End Well

Bernanke - man of

the year. Did he earn it? Or

pushing on a string?

Markets Strong Out of the Gates...But How Much Conviction is Left?

The broader indices continued to climb higher in the first week of trading in 2010. But how much buying power is behind these moves?

Moves straight up usually don't end well.

(Source: Barchart.com)

Since the correct in early November, stocks have climbed just about everyday, without much of a blip of a correction. Meanwhile, upward momentum and volume continue to look anemic, indicating that the rally may finally be running out of gas.

But thus far, warnings of a potential turndown have either been early, or wrong. So which is it?

While I am not a huge chartist in terms of reading into patterns (head and shoulders, etc), I do notice that the chart of the S&P above is tracing out an ascending, contracting triangle. These are usually proceeded by sharp moves either up or down. Obviously a move down would appear to be the more likely scenario, so it will be interesting to see what the S&P does over the next couple of weeks.

It very well could continue to move higher, so I am going to hold off on shorting until we see a definite break in the uptrend. The mistake I make in early November was shorting too early, under the (incorrect) assumption that the uptrend HAD been broken.

So we'll chalk that up to a learning experience, and try to be a little more patient on pulling the trigger.

Tax Receipts Continue to Decline

It's hard to get excited about this "economic turnaround" when tax receipts continue to fall across the board. Tax receipts may be the least manipulated of all economic stats, so are worth paying attention to.

Here's a smattering of tax receipt data from around the nation...and little to none of it is positive. For a fun exercise, type "tax receipts" into Google News, and see what comes up!

• Texas sales tax receipts fell 11.6% year over year
• Kansas is projecting a 5.1% drop in tax receipts this year
• Federal revenues dropped 16.6% from 2008 to 2009

It seems that a lot of the "news" about the economy bottoming is nothing more than pundits projecting the bounces in the DOW and the S&P onto Main Street. In reality, that hasn't happen.

The markets have bounced since last March because that's what markets do. They never travel up or down in straight lines. All we've done thus far is mirrored 1930's stock market retracement - nothing more, nothing less.

From a technical standpoint - wake us up when we've surpassed the usual Fibonacci retracement levels.

From a fundamental standpoint - wake us up when tax receipts start to turn around...because we know there's only one reason for people to pay more taxes, and that's because they are making more money!

Now as to the ethics of taxation in the first place...we'll leave that libertarian rant for another day.

Evans-Pritchard Sees Japanese Hyperinflation

If you think this column is a ball of sunshine, you'll love Ambrose Evans-Pritchard's take on the 2010 financial markets:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.

As if this wasn't enough, he also sees quantitative easing in Japan as finally getting "over the hump" in terms of deflation, and achieving what so far has been an elusive goal - hyperinflation!

Finally, Evans-Pritchard also pokes some good fun at Europe's economic prospects.

The Worst Trend of Them All

Take a look at this chart of public vs. private sector employment, and tell me this chart isn't the most damning of them all!

This is the type of "breakout", or rather "breakdown", that you short 100 times out of 100.

(Hat tip to friend and fellow Austrian economic believer Carson for sharing this link).

Diversifying Your Life

Earlier this week, our local Casey Research "phyle" met up to discuss our usual cheery topics, including what to do if the US completely melts down.

Doug Casey recommends having your whole self diversified - ie. citizenship in one country, your business in another, real estate in a third, and even some savings in a forth. So, if it really hits the fan in your homeland, you're not completely screwed!

So our group chatted about the logistics of moving savings, including bullion itself, abroad. If you are interested in pursuing these types of options, here's a good interview conducted by the "Sovereign Man" Simon Black about storing gold in Panama.

Gold storage in Panama is a hot item. Banks have long waiting lists for safety deposit boxes, and as I’ve discussed before, many Panamanian banks are even starting to eliminate this service, reducing the available supply of boxes on the market.

Personally if I had meaningful investment capital, I'd probably be inclined to get some bullion stashed in another country...just in case. But as is, I've got most of my hopes, dreams, and prospects tied up in our small time tracking software company.

What it Means to "Turn Japanese" Economically

Stratfor, a "personal CIA" service of sorts, released some engaging forecasts for regions around the world in 2010. Here's Stratfor CEO George Friedman discussing Japan's economic outlook:

I find his take on Japan very interesting. If the US is indeed "turning Japanese" economically, you would expect to see an increased emphasis on full employment, rather than return on capital, for the economy.

While I'm sure our politicians have the same DNA as their Japanese counterparts, I'm not yet convinced that American citizens do. Are the characteristics Friedman identifies cultural? Or, will we see Americans follow in the footsteps of their Eastern counterparts?

The next couple of elections in this country should be VERY interesting, as we'll see how asleep the citizens of this nation really are. I'm not yet sure if the tea parties and "libertarian roots" are the tip of a larger iceberg, or one-off types of events.

Trading Positions - Looking for Dollar Re-Entry

My January S&P puts are going to expire worthless - as mentioned earlier, I jumped into that trade too early.

I am looking for a re-entry point into a long US dollar position, and I'll probably look at picking up some UUP for my equity accounts as well. I think we'll see a further pullback in the dollar here, before it resumes it's march above it's previous highs from 2008-09.

We've got small, but top notch, company in the short-term long dollar trade. First we saw our hero, Jim Rogers, take a short term position in the buck. And earlier this week, Tom Dyson wrote that a major uptrend is just getting started in this hated asset.

The buck, everyone's least favorite asset, quietly bottomed in November.

(Source: Barchart.com)

Another way of playing the dollar rally would be to short currencies primed for a fall, such as the Euro or the Australian dollar. Both have started to turn down sharply.

Have a great week in the markets! Comments are always welcome and very much appreciated.

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.

(Source: Barchart.com)

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.

It's Time to Go Long the Buck

Three weeks ago, we discussed the possibility the the dollar was bottoming and poised for a major rally.

My reasoning was that:

• Sentiment was overwhelmingly negative on the buck. I noticed that even traditional contrarian investment sources appeared to be piling on. When there's nobody left to sell, that's usually a good sign that the bottom is in.

• We still appear to be in a period of debt deflation, which the Federal Reserve is basically helpless in preventing, because we have a credit based system. When credit goes away, it's gone forever. You can't print credit.

• The Japanese Central Bank, despite its best efforts, was ultimately unable to produce inflation since their credit bubble popped in 1990. And if the old joke is that their central bank was so incompetent that it couldn't destroy its own currency, I didn't know why ours would be any different.

What's happened in the last few weeks?

Pulling up the chart, the dollar appears to be forming a bottom. The 77 mark has held:

Is the buck bottoming?

(Source: Barchart.com)

The equity and commodity markets look toppy. Investor sentiment is overwhelmingly bullish. The AAII index, a very reliable contrarian indicator, is at levels not seen since November 2007.

Furthermore, China, the posterchild of this rally, has turned down - the Shanghai Index rolled over a few weeks ago...along with several key commodities. Gold is yet to break $1,000 decisively, despite the widespread belief that the Fed has successfully created inflation.

Add it all up, and we've got some very bearish pieces staring us in the face. And if we do see another massive deflationary wave down...is there any reason to believe it will behave differently than the last?

I don't think so. So I'm taking some cues from the markets, and positioning myself in the only asset that held up and even rallied the last time around - the US dollar.

Take Note When Bears are Bullish

One of our astute readers took me to task when I said Robert Prechter was not a perma-bear. In fact, this reader made a very good case, pulling up some old doomsday calls of Prechter's that look silly in hindsight.

We had a good back and forth debate - I accepted his points, but added that Prechter has called this rally to a tee, which was a bullish call.

Ultimately our reader summed it up perfectly:

Funny thing is he has called 2 rallies well 1980s bull market and this most recent rally.

He gets in trouble once he goes bearish (which he has been 18 of the last 20 years). Had he gotten away from this stupid (dow 400, great depression II) perma outlook of his, he would be much better. Then again, maybe its this permabearishness that somehow, someway gives him the ability to call rallies.

Maybe the real take away - the lesson of the last 20 years, is heed his calls of rally, ignore his calls of doom. Imagine how well we would have done!!! ;

A hilarious, and very insightful conclusion! We should especially take heed when the bearish types turn bullish!

I suppose the counterpoint would also be a wise one - be wary when perma-bulls turn bearish!

Positions Update

Still holding cotton - barely - and now we're taking a flyer on the buck.

It's tough to sell cotton here - and also tough to get excited about it. In a healthy global economy, cotton's fundamentals would appear to justify higher prices right now. The fact that we don't have them gives me pause that something is amiss - perhaps cotton is telling us that things may not be so fine and dandy.

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Current Account Value: $23,891.64

Cashed out: $20,000.00
Total value: $43,891.64
Weekly return: -2.0%
2009 YTD return: -53.0% (Yikes)

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

Initial trading stake: $2,000

More Government Meddling in the Commodity Markets

The Wall Street Journal reports that the Commodity Futures Trading Commission is considering introducing position limits for "all commodities of finite supply."

Uhhh...wouldn't that just be all commodities?

Anyway, let's get a quote from CFTC Chairman Gary Gensler:

"My firm belief is that we must aggressively use all existing authorities to ensure market integrity."

Sounds like more government meddling in markets to me...like when Los Federales decided to "crack down on short sellers" when the equity markets were tanking. I've read that Gensler is being pressed on by a Senate subcommittee that wants to wipe out "evil commodity speculation."

What will this mean for commodity traders? One inside source I trust believes that tighter position limits could cause commodity prices to tumble severely...at least in the short term.

So be very, very careful out there, fellow trader. Follow your stops, and let's keep an eye on this developing story.

Looking for a down to early weekly wrap of the commodity markets? Sign up for our free weekly series This Week in Commodities!

Why Trend Following is Your Only Hope for Investment Survival

Buy and hold. Stocks for the long run. Diversify. These investment mantras were gospel during the great bull market of the 80s and 90s.

Drinking this Kool-Aid will get you slaughtered today.

There is no freaking way I would "buy and hold" anything right now. Too dangerous. Buy and hold hasn't worked over the past ten years, and it's unlikely to work for the next ten. We're in a secular bear market, and these things take time...usually 15 to 20 years...to run their course.

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View the full INDEX:.SPX-E chart at Wikinvest

Buying and holding the S&P was a crappy trade over the last 10 years.

No doubt, we are in uncharted financial waters right now. Anyone who says they 100% know what's going to happen next is lying, or dilusional.

We've got historic deleveraging taking place, as unprecedented debt levels are slowly paid down. In the meantime, we've got the US government, among others, running the printing presses at full steam, and tossing boatloads of money down rat holes like Government Motors and socialized medicine.

The foundation of the system has been permanently rocked, and stability, or even just the illusion of it, won't be back anytime soon.

With the Fed's printing press (an irresitable force of hyperinflation) battling massive deleveraging (an immovable deflationary object), the crux of any investment thesis today starts with "inflation, or deflation?"

There's no shortage of arguments on both sides, many made by folks much smarter than I. For awhile, I was reading them until my head spun...first I'd read a very well thought out argument on why hyperinflation will win out...then I'd read a perfect counterargument for the deflation case.

So I thought - what the heck can a guy like me do, if these smart dudes can't reach the same conclusion themselves?

Then it hit me - trend following.

If gold and commodities go up - get in those vehicles, because the market is screaming "inflation"! Gold at $1100 could go much, much higher...real, real fast.

On the other hand, gold still has not decisively broken through $1000. It could very well retest it's lows below $700. So if it breaks down below, say, $900 - that's the market telling us that inflation is not in the cards...at least not yet.

Early this week, gold stocks hit a 3-week low...so I sold all of them. And I'll stay out until they once again "break out" to the upside. That's the only way I can see to play these insane markets - buy the breakouts, and follow your stops. It's OK to have a hypothesis, but don't wed yourself to it. If the market says you're wrong...then you probably are!

My friend Brian Hunt (editor-in-chief of The Daily Crux, an excellent investment website) made a great point to me on Friday about investing in China. Nobody knows what's going to happen in China. Some think it's a trainwreck waiting to happen. Others think China will be just fine, still the growth story of the 21st century.

So what's an investor to do? Watch the price of copper, he says. As long as copper's doing fine, that means China's doing fine. Let Dr. Copper show you the way.

To facilitate my trend following strategy, I've pared my investment assets down significantly. I used to own 40-50+ different stocks, a few currencies, a few commodities...if something looked good in one of my many newsletters, I bought it!

Then I learned during the Great Deleveraging of '08 that diversification does not prevent bad things from happening. Overnight, the correlation of almost all assets went to 1, and everything dropped 40% in a matter of 6 months!

Because I believe the inflation/deflation question is the only important one, I only need a few asset classes to play it. That makes trend following much, much easier for an armchair investor like myself - get into positions and back out quickly - no problem.

Remember the market is the judge and jury combined, the final arbiter of your investment decisions. So let's listen to what it's telling us in the turbulent years ahead...after all, the trend is our friend! And this friend may be our only lifeline to investment survival right now.

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How Herbert Hoover Put the "Great" in Great Depression
2. Richard Russell: We're Nearing Gold's Mania Stage
3. Marc Faber on American Economic Policy
4. Jim Rogers' favorite country (surprise: not China!)
5. Chinese students laugh Tim Geithner out of town

Positions Update

Last week in this spot, I mused:

"Nice week but I have to admit – I’m starting to get quite cautious that some of these trends have played out"

It looks like the caution I expressed last week was warranted...commodities got hit hard across the board this week.

I exited all positions on Monday morning, after seeing the rough start to the week - that was enough to chase me out of all positions. On Thursday, I did reinitiate an Australian dollar position, after reading how the Reserve Bank of Australia was working very hard to keep their currency down in the month of May.

Current Account Value: $31,483.93

Cashed out: $20,000.00

Total value: $51,483.93

Weekly return: -6.8%

2009 YTD return: -38.0%

Prior year's results:

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Is it (Gasp) Time to Short Gold? This Week in Commodities

Daily Crux Editor Brian Hunt reports that bullish sentiment for gold in investment newsletters is very high - "near extreme levels that marked the previous three tops in gold."

When everyone is bullish, that's trouble for longs...at least in the short term.

Need another data point? How about an insurance company hopping on the gold bandwagon!

The Crux also reports:

Northwestern Mutual, the third-largest U.S. life insurer by 2008 sales, bought gold for the first time in the company's 152-year history.

Gold is already down over $20 since these reports came out. Perhaps the old addage "sell in May and go away" should now be heeded. Short term traders may want to stay on the sidelines gold winds up for another run at the elusive $1,000 this fall...when it is seasonally stronger.

Gold keeps bumping its head on the $1,000 ceiling.

(Source: Barchart.com)

Dollar Rally Overdue

The dollar is a bit oversold as of late, and appears to be due for a short term pop. This may have begun last week. How long and far this will go is anyone's guess - but I'd imagine it won't last for too long.

The long term trend of the US dollar is unmistakeably down. Check out the chart below for a little perspective - since 2002, it's been a fairly orderly march downwards for the dollar:

The long-term trend of the dollar is still down.

(Source: Barchart.com)

Sure puts the recent dollar rally in perspective, doesn't it?

With fundamentals worse than ever, it's hard to picture the dollar mounting a sustained offensive.

The Fourth Turning...Am I Insightful, or a Complete Dumbass?

My review and discussion of The Fourth Turning last weekend has sparked quite the discussion over at Seeking Alpha. Some folks enjoyed the review, while others think I need my head examined! Let us know what you think!

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In Case You Missed It...This Week's 5 Most Popular Posts...

1. The Fourth Turning...Into the Greater Depression? (Also published by Seeking Alpha)
2. Doug Casey: Foundations of Crisis
3. Chinese students laugh Tim Geithner out of town
4. How do gold stocks perform in deflationary depressions?
5. How geography drives the global economy
   

Positions Update

This week would have worked out fine for me, had it not been for...not just one...but TWO ill-fated attempts at pyramidding my Aussie dollar position.

Monday I added another position after the A$ began the morning strong. All looked good, until that evening, when I made the cardinal sin of checking the Asian markets! I panicked and sold the position.

Then later in the week, Australia reported strong GDP numbers (maybe not too strong, but certainly much "less bad" than much of the rest of the developed word). The A$ cleared $0.82, and seemed destined for $0.85!

So what happened? Profit taking and a rally in the US dollar! I had to cover and the A$ continued to drop, settling slightly down on the week.

Moral of the story - I had no business adding to this position, because I don't have enough dry powder to comfortably take it on. "Sell to the sleeping point" is the old maxim, and I can sleep comfortably with one long position in the A$.

To mollify my inner need to pyramid, I did pick up another mini beans contract :)

Current open positions:

Current Account Value: $32,534.24

Cashed out: $20,000.00
Total value: $52,534.24
Weekly return: -5.3%
2009 YTD return: -36.0% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Free Commodity Webcast From US Global Investors

Here's a fantastic - and free - webcast, courtesy of Frank Holmes and the team at US Global Investors, entitled Commodities: Reasons to Be a Bull When Everyone's a Bear.  It was originally recorded on April 21st.

It runs almost an hour, and is definitely worth a watch if you are a serious commodities investor.  These guys really know their commodes.  Some notes I took of the most interesting/surprising points I heard:

• It usually takes 6-9 months for new money injected into the system to find its way into commodities...this is starting to happen already, and they expect a big 2nd half for commodities

• Nice profile of China starting around minute 25...they think the Chinese economy is ready to rock and roll here

• And China's now a net importer of coal once again

Cotton Futures Hit 2009 Low - Weekly Commodities Review

Cotton Futures Hit 2009 Low

Cotton futures slumped to a 2009 low on bearish supply/demand news. Cotton's projected world stocks-to-use ratio hit their highest mark since 2004-2005.

We were stopped out of our position at $0.45, and this one hurt - I hate the idea of selling cotton at these prices - BUT, we always have to respect our stops, no matter how strong the desire to get some of these losses back.


Cotton has been dropping about $0.01 after going "limit down" $0.03 earlier in the week.

Next support for cotton appears to be at $0.41 - we'll continue to watch cotton and see if it retests it's old lows.

Looks like cotton may continue to circle the bowl until demand is able to stage some sort of recovery. I still believe we'll see $1 cotton sooner rather than later, as soon as these stimulus packages begin to take hold. All of this newly printed money will be looking for a home.


Coffee's Rocky Week

Coffee did not fare much better this week. We are holding on to our position right now, with a stop around the 113 mark.


We discussed coffee's long term supply/demand situation last week. We'll soon see if our timing on this trade was appropriate.


Gold Stocks Starting to Catch Some Air

The rally in gold, and gold stocks, continues to look very strong.

Gold set a 100-day high on February 12th at 954.0, and closed Friday at 942.2. While the barbaric relic may be due for a pullback, the chart undoubtedly goes from the "lower left to the upper right", as Dennis Gartman is fond of saying.

Even with gold rallying, gold stocks are following, but somewhat reluctantly. The Gamco Gold fund, where my wife's entire 401K resides, has doubled off its October lows, but is still about 30% below its highs from last spring.

I recently read that last spring's valuation on gold stocks really had $1100 or $1200 priced into them, which may explain why we're not back to that point, even with gold rallying to where it is.

It's also possible that gold stocks are a fantastic bargain right now, and are poised to start doing moonshots when gold takes off. Chris Mayer, my favorite Agora analyst, expects gold stocks to make all-time highs in 2009, partly thanks to lower input costs that will fuel (no pun intended) record earnings.

For more information on gold and gold stocks, I'd recommend checking out some of the articles written by Casey Research and Big Gold editors on our blog, such as this one.

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	363 1/2	($562.50)
01/20/09	Long	1	MAR 09	Corn	397 1/2	363 1/2	($1,700.00)
02/06/09	Long	1	MAY 09	Coffee 'C'	121.95	114.75	($2,700.00)
Net Profit/Loss On Open Positions							($4,962.50)

Account Balances

Current Cash Balance	$36,354.04
Open Trade Equity	($4,962.50)
Total Equity	$31,391.54
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$31,391.54

---------------------------------------------
Cashed out: $20,000.00
Total value: $51,391.54
Weekly return: -17.1% :(
2009 YTD return: -38.2% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Coffee Perking Up? - Weekly Commodities Review

Coffee Perking Up?

Long-time readers know that we've been quite bullish on coffee for some time in this space. So on Friday, when I received an email from my commodity broker, Robert, about possibly initiating a coffee position, I was extremely intrigued.

We wrote this article about coffee for Seeking Alpha last August.

Long-term fundamentals are very favorable for long positions. The world continues to increasingly caffeinate itself with coffee, driven by - you guessed it - China and the rest of East Asia. A small but growing coffee market continues to gain ground on tea, the traditional caffeinated drink of choice.

On the supply side, most of the world's coffee comes from Brazil. So coffee supplies are heavily dependent on the quality of the Brazilian harvest, for better or for worse.

Coffee fundamentals are set up for us to see a super spike over the next 5 years. I firmly believe we'll see $2+ coffee at some point. And coffee has not yet had a major run up, like many of the other agricultural commodities - so it's certainly due.

As you can see from the long-term chart, coffee has been in a bull market since 2001 - due to many of the reasons we've discussed above:


Here are the near term factors that may spur an upcoming coffee rally:

• Coffee demand in China is projected to continue to grow 20% annually, despite the current recession/depression

• Coffee consumption has a tendency to increase during recessions - consumption in coffee shops takes a hit, but people brew more at home
  

• The International Coffee Organization said earlier this month the 2009-10 crop could see a 5-million 60-kilogram bag shortfall in world supplies - note: coffee harvests have off-years every other year
  

More bullish/bearish factors for coffee:
http://www.insidefutures.com/article/94842/Foods%20and%20Softs%20Outlook%20for%20February%206,%202009.html

In summary, expect demand to stay strong, and let's keep an eye on the supply picture for potential shortages. Anyone in Brazil care to share a weather report with us?


Stopped Out of Soybeans - Corn Flat

We were stopped out of our two mini-soybeans positions mid-week. Beans rallied to finish the week, as did corn and wheat.

I like the double-bottom formed by corn this week. Had our stop in at 350 and it held.

Looking at this chart - wow, if this isn't a classic Fibonacci Retracement - gaining back 50-62.5% of the previous move down. If anyone knows how to identify the bottom in real-time, let us know!

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	377	$112.50
01/20/09	Long	1	MAR 09	Corn	397 1/2	377	($1,025.00)
12/31/08	Long	1	MAR 09	Cotton	48.52	49.80	$640.00
02/06/09	Long	1	MAY 09	Coffee 'C'	121.95	121.50	($168.75)
Net Profit/Loss On Open Positions							($441.25)

Account Balances

Current Cash Balance	$38,296.35
Open Trade Equity	($441.25)
Total Equity	$37,855.10
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$37,855.10

---------------------------------------------
Cashed out: $20,000.00
Total value: $57,855.10
Weekly return: -2.5%
2009 YTD return: -25.5% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.