Why You Should Short America Right Now - A Classic Contrarian Signal

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!)

Investors Haven't Been This Bullish Since January - Uh Oh

Another up day for equities, and investors appear to be feeling pretty good about things. According to the S&P 500 Bullish Percent Index, investors haven't felt this upbeat about things since January:

Investors have been feeling on the up and up of late.

Chart courtesy of StockCharts.com

Unfortunately investor bullishness is a classic contrarian indicator - as evidenced by the recent S&P's performance - a near spitting image of the bullish index!

And what a coincidence - their rising mood has mirrored stocks!

Chart courtesy of StockCharts.com

This would indicate that a near-term pullback in the markets is likely. The breadth and depth of which could determine whether or not this bear market bounce is finally licked.

Bob Prechter: How to Act Contrary to "Market Herding"

Here's a great guest piece by Robert Prechter, author of what is currently my favorite investment newsletter, the Elliott Wave Theorist. Bob talks about a subject that's probably as near and dear to your heart as it is mine - market herding.

And if you want to read more, at the end of this piece there's an offer from Prechter that'll allow you to check out the entire issue of The Elliott Wave Theorist.

***

Robert Prechter on Herding and Markets' "Irony and Paradox"

To anyone new to socionomics, the stock market is saturated with paradox.

February 18, 2010

By Editorial Staff

The following is an excerpt from a classic issue of Robert Prechter's Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the rest of the 10-page issue free.

Market Herding

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do. Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.

Irony and Paradox

To anyone not versed in socionomics, everything the stock market does is saturated with paradox.

• When T-bills sported double-digit interest rates in 1979-1984, investors saw no reason to abandon their T-bills for stocks; when T-bill rates were low in the 2000s, investors saw no reason to put up with the “low yield” of T-bills and sought capital gains in stocks. The first period was the greatest stock-buying opportunity in two generations, and the second period was the greatest stock-selling opportunity ever.

• When long-term bonds yielded 15 percent in 1981, investors were afraid of Treasury bonds even though they were about to embark on the greatest bull market ever; in December 2008, when the Fed pledged to buy T-bonds, rising prices appeared so strongly guaranteed that the Daily Sentiment Index indicated a record 99 percent bulls, just before prices started to fall.

• When oil was $10.35 a barrel in 1998, no one made a case that the world was running out of black gold; but when it was 7-8 times more expensive, some three dozen books came out arguing that global oil production had peaked, a theme that convinced investors to begin buying oil futures…about a year before the price collapsed 78 percent.

• In the second half of the 1990s, the idea that stocks would always be the best investment “in the long run” became popular just as a long period of superior returns was coming to an ignoble end. A new study... shows that as of today the S&P has underperformed safe, boring Treasury bonds for the past 40 years, since 1969.

• Just when nearly everyone -- including world-famous investors -- finally panicked and conceded in February-March 2009 that the financial and economic worlds were in dire shape, the market turned around and shot upward in its fastest rally in 76 years.

And so on. The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward. Socionomists recognize that social mood is primary and has consequences in social action, so we never have to wrestle with paradox. This orientation does not mean that we are always right. It means only that we are not doomed to be chronically wrong.

To succeed in the market, you must learn initially to embrace irony and paradox, at least as humans are unconsciously wired to interpret things. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense...

***

Read the rest of this classic Elliott Wave Theorist issue now, free! You’ll get 10 pages of Bob Prechter's unique insights on:

• Why Finance and Macroeconomics Are Not Subsets of Economics
• How Correct Are Economists Who Forecast Macroeconomic Trends?
• The “Beat the Market” Fallacy
• Stock-Picking Geniuses or Just a Bull Market?
• Index Funds and Diversification
• Market Confidence vs. Certainty
• Observations on Corporate Earnings
• Why Being a Bear Doesn't Equal "Doom & Gloom"
• More

Visit Elliott Wave International to download your free 10-page issue.

A Random Walk Down - China's Bubble? Oh Burton!

Burton Malkiel, author of A Random Walk Down Wall Street - because of course we all know that stock prices are subject to completely random movements - is starting a hedge fund to "go long China."

This story really is too good to be true. Chinese stocks quietly topped last August.

Burton is timing the random walk into a downtrend perfectly.

Usually we see ultimate contrarian indicators like this near a top, but mostly still on the way up - this is a special treat to get one while we're on the way down. Especially as the Shanghai Composite moves below it's 200-day moving average.

Awesome.

Hat tip to Porter Stansberry for writing about this in the S&A Digest

We're Officially Screwed - Fidelity.com Doing Stories on End of Financial Crisis

Speaking of contrarian investment indicators, they don't get much better than this.

Fidelity.com posted a listing in a prominent public relations newsletter today:

Summary: Buying stocks again?
Name: Chris Taylor (Fidelity.com)
Category: Business and Finance
Email: query-100@helpareporter.com
Media Outlet: Fidelity.com
Deadline: 07:00 PM EST - 20 January
Query: Looking for investors who are shifting some of their cash holdings back into stocks and bonds, now that the financial crisis has ebbed.

That last line says it all. Get ready for the next shoe to drop, baby!

Lowest Levels of Bearishness in 22 Years Indicate Downturn May Be Imminent

Regular readers know that I'm a big fan of Bob Prechter's investment analysis. One of my favorite aspects of his work is the use of sentiment indicators as a market timing mechanism - that is, when everyone is bearish, you should be greedy, and when everyone is bullish, you should run for the hills.

In this guest piece, Prechter's colleague Nico Isaac analyzes current investor sentiment...read on, and think about whether you should hop on the investment train leaving the station, or run for the hills!

***

New Year: New Economic Boom? Why 2010 Should Be One to Remember
January 19, 2010

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

By Nico Isaac

In the realm of market psychology, there's a big difference between optimism and extreme optimism. The first is seeing the glass half full. The second is seeing the glass half full deep in the heart of a bone-dry desert. In finance, it's what we call "Buying the Dip" mentality -- when all outcomes, even losses, are cause for celebration.

We are there now.

To wit: With a new year upon us, the mainstream has already come up with a fresh tagline to define the next 360-or so days. It even rhymes: The Bull Runs Again In 2010. This projection is in no way "in spite of" the fact that the U.S. stock market just finished its first decade of negative returns since the Great Depression; it's because of that fact.

See, according to the mainstream experts, this "Lost Decade" of abysmal stock performance (in which the Dow ended 9% in the red, the S&P 500 - 24%, and the NASDAQ Composite - 44%) is the very foundation on which a new bull market will apparently be born. One economic scholar recently coined the phenomenon the "Slingshot Effect" -- the more severe the downturn, the faster the recovery. (Associated Press)

Adding to the upbeat chorus are these recent news items:

"The horrible decade has wiped out all the excesses of the previous two decades and put us back on track for more normal returns." (USA Today) -- AND -- "It may be the best of all possible worlds." (Business News)

Back in the late 1990s, when the "unstoppable" NASDAQ began to experience regular days of double-digit drops, it was "Buy-the-Dip." Now, it's "buy the entire lost decade." And, as the Dec.31, 2009 Elliott Wave Financial Forecast Short Term Update reveals -- current sentiment readings "continue to show that stock market bears have packed up and moved to Florida for the winter."

The Dec. 31 Short Term Update also reveals two mind-blowing charts of the S&P 500 versus Investor Intelligence Advisors Survey Percentage of Bears -- AND, the S&P 500 versus the percentage of "Fully Committed" bullish advisors since 2000. The current reading is the lowest bearish percentage in 22 years.

Take one look at the evidence, and you'll see that a defining pattern emerges: Low levels of bearishness have consistently coincided with one kind of market move. Combine this picture with the other measures of investor sentiment like momentum, volume and Elliott wave structure, and the evidence tilts overwhelmingly in favor of an unforgettable year.

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Ed. note: I am both a subscriber and affiliate of Elliott Wave International, and highly recommend their work.

Gold CAN Still Go Down; Trading Against Jim Rogers and Richard Russell; Worst Case Scenarios Already "Priced In"

So Gold CAN Still Go Down, After All

Last week was shaping up to be another banner one for gold, as the old relic kept on climbing, day after day...that is, until it stopped.

Gold's one-way rise experienced a sharp setback on Friday, dropping nearly $50 on the day, and over $60 in intraday measures.

Friday was the biggest down day for gold in some time.

(Source: Barchart.com)

Perhaps related, perhaps not, The Financial Times reported on Wednesday that China is wary of the danger of a gold "bubble" (hat tip to my good friend and regular reader Super Joe for sending this link along).

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

China's ever-increasing interest has spawned the popular gold bull theory that the Chinese have established a "$1,000 floor" price for the metal. In other words, with the Chinese buying up more gold on the dips, one needn't worry about the possibility of gold ever dipping down to triple-digit territory ever again.

The only problem with theories like this is that, however sound they may appear, they are usually wrong. The market takes great delight in squashing "absolute" myths and theories, and I suspect this one will be no different.

But - you may interject - with the government printing money like it's going out of style, won't that result in rising price inflation, and rising gold prices? It sure may - I just suspect that it will take longer than most investors anticipate, thanks to the massive amounts of credit that will be written off in the coming years, resulting in some wicked near-term debt deflation.

Trading Against Our Hero, Jim Rogers

Anytime you find yourself on the other side of the trade from Jim Rogers, you probably want to seriously reconsider your position.

That's where we find ourselves now, though, with Rogers continuing to reiterate his distaste for the dollar. To be honest, I don't like the dollar fundamentally either, but believe that paradoxically, it's due to rise in the near term because of its inherent flaws.

In other words, I agree with everything Rogers says, except for his timing. We'll see who's right - I wouldn't blame you one bit for siding with Rogers - but I'm sticking to my guns on this one...at least for now.

And...Richard Russell, While We're At It

The Great Richard Russell believes that gold is going to move higher, no matter what happens, according to The Daily Crux.

Question -- What would it mean if Industrials and Transports broke out to joint new highs?

Answer -- I think it would mean that the Bernanke Fed was beginning to win the war against deflation, and assets were once more beginning to inflate. In that case, gold should move higher.

Question -- What would it mean if this advance topped out, and the bear market was taking over again?

Answer -- I think it would mean that the Fed had lost its battle against inflation. If that was the case, I believe the Fed would spend even more, there would be even more stimulus programs and interest rates would remain at zero "for the duration." In that case, gold should move higher.

(Source: The Daily Crux)

Well I hate to trade against Russell too - a true legend. But, the dollar bull/gold bear camp is so deserted, that I guess it just comes with the territory that our favorite investors will be on the other side of the trade...because there are so few on our side!

Why Worst Case Scenarios are Already "Priced Into" These Markets

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

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

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

Nothing's changed here - still waiting for the dollar to bottom, and the S&P to top. It's been a maddening wait.

We think the dollar is the lynchpin to the whole equation, and that a dollar bottoming should roughly coincide with a top in the other markets. Friday was an encouraging sign, as the dollar rallied sharply. Has it finally put in a low? We shall see!

The dollar rallied sharply on Friday to end the week - did this mark the start of a mega-rally?

(Source: Barchart.com)

Though this rally appears to be running on fumes, it's still running...at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $17,217.50

Cashed out: $20,000.00
Total value: $37,217.50
2009 Returns: Ugh, too depressing to calculate right now...

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

Initial trading stake: $2,000

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

You know a top just HAS to be near!

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

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

Here's my re-enactment of the conversation:

***

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

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

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

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

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

***

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

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

(Source: Barchart.com)

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

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

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.

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

• Colorado's minimum wage is set to - drop?

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

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

Positions Update - Still Long the Buck

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

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

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

Oops - you want to be short charts like these!

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $24,309.83

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

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

Initial trading stake: $2,000.00

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!

http://www.nbc.com/saturday-night-live/video/clips/update-scrooge-mcduck/1165594/

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

• An insightful interview with Fourth Turning co-author Neil Howe

• Hedge Fund manager ditches Wall Street to pursue his true passion: Tequilia!

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

Using the Wall Street Journal to Gauge Investor Sentiment

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

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

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

Further Evidence the Dollar Has Bottomed

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

Small Investors, Big Bets on Currencies.

Oh my. The piece begins:

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

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

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

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

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

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

And Gold is Topping Out

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

India’s ETF Investors Make Up for Missing Gold Buyers

Oh boy – this is going to be good!

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

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

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

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

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

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

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

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

Emerging Markets are Toast

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

“Emerging” Stock Markets Are Looking Better

The first paragraph says it all:

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

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

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

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

Three Solid Trade Ideas

Well kids, here’s what we’ve learned from reading the Journal this week:

1. Bet on the buck
2. Short gold – or at least stay away from it
3. Short the heck out of emerging markets

We’ll check on these trades in a few months to see how they worked out. In the meantime, can the last dollar bull out the door please turn out the lights!

Checking in on Our Leading Market Indicators

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

On our August 16th update, we picked out three indicators that have led the markets over the past few years. They were:

1. China – the poster child of this economic recovery
2. The Baltic Dry Index – when the global economy is healthy, more stuff gets shipped
3. Oil – which is still the fuel for the global economy

When we last pulled up the charts on these, they were not looking so hot. All three had turned down. I thought this was probably a bad sign – but added a disclaimer that if they rallied to new highs, I’d be wrong.

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

http://commoditybullmarket.blogspot.com/2009/08/why-commodityshipping-weakness-could.html

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

Most Popular Posts Last Week

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Positions Update - Still Long the Buck

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

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

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $25,239.83

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

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

Initial trading stake: $2,000

Are you bullish or bearish on the US dollar?

We're going to have a little fun and conduct a short experiment - let us know, are you bullish or bearish on the US dollar?

Click here to take our poll

I'd like to see if we can gauge popular sentiment, to see if this provides us with an indicator of sorts - be it leading, or contrary!

If you need a time frame, let's say short term - over the next 2-3 months, do you expect the dollar to be trading higher or lower?

Results will be published, so check back later this week!

BBQ, Beer, and Contrarian Investment Indicators

Welcome back from the long weekend - I hope you had a great 4th celebration. Even us folks who are not so keen on the Federal Government can appreciate many of the founding values of our country...despite how frustrated it is when Constitution seems to be a forgotten document...in a world where "whatever it takes" is Uncle Sam's new mantra!

After a great weekend of beer, BBQ, and socializing, I thought it'd be interesting to reflect on some data points I gathered from folks...to discern the social mood and outlook from the people I spoke with. Of course this is a completely ad hoc sample...the qualification being that these folks either had a beer with me, or served me a beer, over the last two days!

I hope these anecdotes will be entertaining, and perhaps even a bit insightful, as we engage in the challenging, humbling exercise of trying to figure out where the world is heading...so that we can invest accordingly.

If you have any anecdotal stories, I'd love to hear them - drop a comment below, and let's see what we come up with!

The Hot Bartender Who Disapproves of Money Printing

Regular readers know that we've been on a deflationist kick over the last couple of weeks - simply due to the contrarian appeal of it all. Since the collapse hit, I've believed that inflation - more specifically hyperinflation - would be the end result, mostly because the government can print as much money as it wants.

Honestly, though, what the hell do I know? The common sense consequence of money printing is price inflation...but what if common wisdom is incorrect here (as it often is!)

Anyway this Friday evening, some friends and I were at a new bar (with a fantastic happy hour, and an even better bartender, "Shelley" (stage name to protect the innocent :) ) - very good looking, and quite patron friendly).

Shelley's a very nice girl who you'd initially surmise to be a "knee jerk liberal". Lives in Northern California...into raw foods and organic farms...all that good stuff.

We got into a conversation about some boondoggle going on a few blocks away at the State Capitol (Sacramento), and I figured I'd toss a pseudo-libertarian comment into the fray, see if we kick start anything interesting.

Me: The only way to fund that idiotic program would be to print up the money.

Shelley: Ha, yeah, and then comes hyperinflation.

My heart skipped about four beats...best bartender ever.

Now I thought it was very interesting she didn't say merely "inflation", but "hyperinflation." Pretty impressive financial acumen - and also another hyperinflation data point.

We'll keep our ears open for deflation talk from bartenders...right now it's 1-0 in favor of IN-flation.

Renting: The New Buying

Markets don't bottom when everyone is looking for the bottom. They bottom when there is a

final capituation in which the market basically vomits all over itself.

When nobody wants to talk about stocks, that's when you want to back up the truck.

The housing market has been in free fall for about 4 years now, and I've been intrigued to watch the shift in social mood.

Back in 2004, I recall riding the MUNI in San Francisco, and overhearing a conversation between two other riders about how "housing never went down". The common mantra in the Bay Area at the time was that even if housing goes down in some locations, it never goes down in the Bay Area, because there's such limited supply.

Bay Area home prices are now down over 50% from the peak.

The first year or two of the downturn, we heard a lot of the "now is a great time to buy" bad advice. Home buyers were trying to catch the bottom of the market before it went back up again. In reality, all they caught was a falling knife.

Yesterday we hosted a 4th of July BBQ in our backyard (of our rental). I recall when we moved into it nearly 3 years ago, and we had people over, often the first question was around when we would buy our own place.

This year, I noticed a lot of the shine seems to have come off home ownership. When I mentioned that we rented the place and didn't own it, the feedback around renting was more positive than I remember. Several of my friends who are home owners even said they wouldn't mind being renters themselves.

Not necessarily a bottom in the real estate market, but maybe we're getting closer.

As an aside - real estate is often a terrible investment during a depression. The first thing folks do when they hit hard times is they bunk up together, cutting their own housing costs, and sending a lot of supply on the market.

During the salad days of the 80's and 90's, you had people really "spreading out" across the country. Times were good, money was flush - hey let's go grab our own place.

Today in 2009 - maybe not so bad to stay with family. If unemployment continues to worsen, this could be a wild card in the real estate market that I don't hear many people talking about...another potential monkey wrench in a recovery. Why buy two homes when one cozy place will suffice?

So it seems like we are starting to see a bit of a shift in the social mood about renting and home ownership, but we may have a ways to go.

How Long Do Turnings Last?

For the past month or two, one of my favorite discussion topics has been The Fourth Turning - the book/concept that society goes through cycles. And every 80 years in the US, a crisis hits - The Revolutionary War, the Civil War, the Great Depression/WWII, and potentially the mess we're in now.

I'll tell you, this has been a real hit at weddings and cocktail hours - people think I'm nuts when I say "Hey, we're in the 4th Turning...get used to it, we're screwed!"

Again yesterday, I had a few friends who I had previously floated this "odd ball" idea to come up to me and start asking me about these societal cycles! How long did you say Turnings last? Are we almost out of this one?

To me it seems like people are beginning to resign themselves to the fact that this is a depression, not a recession, and that things are going to be bad for awhile.

This is very important because the stock market could have a hard time maintaining these levels when folks start to accept the cold, hard reality that the recent "green shoots" rally was built on optimism that just isn't materializing.

And we may have gotten a taste of this at the end of last week, with the disappointing unemployment numbers. Maybe "less bad" is no longer a good thing.

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 3 Most Popular Posts...

1. Is Deflation "So 2008"? Hyperinflation Trade Looking Crowded
2. Why Silver and Gold "in the Ground" is Seriousy Undervalued Right Now
3. Marc Faber: You Don't Want to be in Cash
   

Positions Update

No trades this week...I'm watching the trailing stops on each position (A$ and sugar), and will sell on a 15-day low.

Honestly I don't know whether the A$ is correcting or out of gas - so I'll let the market tell me.

If you're looking at either of these trades, I personally wouldn't initiate a position here...I'd wait for a breakout to a new high to confirm that the trend is still UP!

Current Account Value: $30,499.46

Cashed out: $20,000.00

Total value: $50,499.46

Weekly return:

2009 YTD return: -38.0% (I like to think it takes skill to lose this much money in 6-months :) )

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00