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As far as asset allocation goes, it is important to continually watch the relationship between the "free" bond market and the Fed controlled short end. The $TNX and the rising inflation expectations it implied caused the Fed to remain firm on its policy. We have now had the predictable decline in rates (remember our target was 4.6% - 4.8% as rates were touching 5.2% and inflation remained the primary headline) but even as oil, housing and gold remain under control, the bond market is getting edgy.
The $TNX is bearing out what I see in industry at the moment; there are a lot of excess dollars chasing assets. First and foremost commercial real estate, but also productive business enterprises. The smarter of the money in this stagnant liquidity pool is seeking to transform itself into something healthy. The dumber money is just playing in the casino (hot stock sectors). The yield curve ($TNX/$IRX ratio) appears to be trying to make a bottom, but we have said that before. At this time it looks like there is a bit of a rounding bottom trying to happen along with longer term (all of 2006) and short term (from August) bullish divergence in play on RSI, MACD and other indicators as well. The implications are critical and must be correctly interpreted in order to allocate investments in alignment with macro trends. If the curve turns up in a sustained manner, it will imply that the Fed is becoming more dovish in relation to the bond market's pricing of debt. Note that this may not mean the Fed is done raising rates, but a rising curve would mean the Fed is falling behind the curve. Ten year rates may have seen their highs (one could envision a double top above 5%), but their relationship with Fed policy very likely hasn't. If that is the case, this is considered a very beneficial environment for gold and perhaps a bit later, commodities and resources. As far as general stocks go, they are having their day in the sun. This cannot be denied. Corporations are generally doing quite well based on the macro events to date. While I don't necessarily expect the stock market to crash any time soon, I do expect it to go back to it's secular under-performance when measured in things of value, like the various resource sectors. For reference, here is the most recent Dow-Gold ratio chart I worked up on the blog yesterday.
ETF symbols relevant to this analysis include SHY, IEF, TLT, GLD and DIA. 10/20/06 - Portfolio Composition Update During the past week, I received industry feedback that implies industrial growth continues unabated despite the headlines. As a result I have diversified a bit from the gold story (gold outperforming nearly everything in an environment of contraction) by selling a couple of relatively richly valued gold stocks (in my case, Goldcorp and Yamana) and 50% of the GLD Gold Bullon Fund (shares bought in the 56's panic) and seeded some funds into copper (Northern Orion) and Oil (US Oil Fund) and also raised cash. To be clear about a few points; a) I consider GG & AUY to be class gold miners, but continue to hold several earlier-staged producers, near-producers and explorers along with major producer Goldfields (as mentioned previously for currency diversification), b) I am by no means taking the growth story hook line and sinker but rather just easing in to a few deeply discounted positions for what may only be counter-trend moves if they come at all, c) as stated previously, I do not tout this service as a stock pick vehicle. I try to find quality companies to use as my proxy for my macroeconomic views and asset allocations but suggest the reader do his or her own due diligence when selecting stocks for favored macro trends. One final note; my belief has not changed with regard to the bond market. I believe it is the single most important area to look for clues as to macro trends. The 10 year should be watched closely here and will tell the Fed whether it is done raising rates or not. The Fed will decide nothing. Current portfolio sporting the usual conservative orientation:
Money Market (4.9% Interest) -- 32.3% Gold, Silver & Copper Miners -- 21.8% Cash Reserve -- 11.5% Short term US Treasury Bond Fund (SHY) -- 8.4% Gold Bullion Fund (GLD) -- 6.1% BEARX Short Fund -- 5.3% Crude Oil Fund (USO) -- 4.1% 200% Inverse Dow Short Fund (DXD) -- 3.2% Uranium Miner -- 2.4% Templeton Dragon Fund (TDF) -- 2.4% Platinum/Palladium Exploration -- 1.4% CBM Gas -- 1.1% Portfolio is +21.87% year-to-date
10/20/06 - "US Stock Futures Gain After Dow Hurdles 12K" Of course they do. Here comes Joe (Public, JQP, the Sheeple, Retail, Bubbleheads.....whatever you want to call them, they are being wooed into da house) right on schedule and boy are they mad that they missed 1000 points of upside and in some cases spent a lot of that upside on the short side. If there is a fabled gang called "da boyz", they sure did have this thing set up well from the get-go. This has not been an easy market environment to simply coast through. My own investment stance; long gold and hedged short the market (figuring in a liquidity-driven environment the market is going nowhere but down when measured in real terms as opposed to USD terms) blew itself up once I bothered to check the Dow-Gold Ratio chart which promptly told me "Pssst, Gary, stocks are in a bear market vs. gold but you are playing around with a technical condition here where they are ripe for rebound vs. the relic in the short term - beware". So I adjusted and did what was needed to survive a most noxious bout of Goldilocks mythology. I hope you did too. Here is a short-term chart showing the current Dow vs. Gold. For the bigger monthly picture, the 10/4 entry below still applies.
Along with the 12K headlines, the Dow is accompanied by short-term out-performance by gold along with bearish divergence in strength and momentum vs. gold. But before euphoric gold bugs get too frothed up, they should realize that the short-term channel has not been broken although the rebound in this ratio has satisfied the minimum retracement we were looking for. But as I always say, that headline-grabbing entity known as "the Dow" or "the stock market" is like a helium balloon carrying the hopes, dreams and embedded assumptions of millions ever higher.....until it doesn't. Since the nominal market (and this goes for most global markets as well) is denominated in debased fiat currency, the nominal short side is risky business at best. This is what call call inflation at work. As you may have seen on the blog yesterday, despite the Philly Fed, I am gaining a picture in my other professional life of a ramping industrial sector (and by extension commercial real estate) in the US and global economies even as the headlines go to the sagging housing market and economic slowdown . Excess money (residual liquidity) appears to be scared and looking for a productive home. I plan to expand on this going forward but for now the words of a friend from a couple years ago: "Gary, if US manufacturing were a stock, it would be deeply oversold." That has stuck with me. I sense a sea-change at work here and would hope that due to my position in the real economy, I can fine tune the picture and come to reasonably understand it. For now, we'll leave it at that and simply say have a great weekend! Symbols relevant to this analysis are DIA and GLD. 10/19/06 - The Grind Continues Keeping with the theme of confusion, which definitely applies to me (wish I were fortune teller), I took a few short-term profits on some gold stocks yesterday rather than risk a decline to that "C" leg I still hold open as possible on the HUI (250-260). I also lightened up some adds I had made to the GLD fund in the 56's. I still hold an ample "core" as always and plan to add back positions before too long. I added to the USO Crude Oil fund, and per recent blog posts sold the palladium miner (SWC, +17%) and a little copper stock (WRN.TO, +18%) and rotated into a more established copper miner (NTO), which has pulled back to perceived support. I write this because I am still unsure of the near-term trends and as I have written all along, when you have done the hard work required to be in position to receive profits, it pays to take some of them! I always operate with an eye toward re-investing in a living, breathing portfolio however. Hence the buying back into copper (NTO) after selling the more speculative WRN after an 18% launch in three days. The copper and oil positions provide some exposure to the global growth story, if it is indeed to continue. There is no recommendation here as I simply own exposure to the commodities as a hedge to the global growth story (and after large declines, which I like!). Where I am confused (but working each day to understand) is in the stock market's daily grind upward and in my daily life as the owner of a company that is a tiny link in the chain of the US manufacturing economy. Business could not be better for us at the moment, although there are annoyances like supplier cost increases (lagging indicator of inflation) in the system. Contrary to what the always-bearish writers imply, I refuse to blame FrankeMarket's relentless march higher on any of the standard excuses (Bush, Paulson, Bernanke remote control.....Da Boyz in the futures pit, etc.). Also, the market does not have the feel of being fueled simply by short covering. The rally has sustained too well for that to be the lone driver. I simply believe that it is forecasting that the world is not going to end economically any time soon. But......I also believe, as I have since this website was formed, that the source of this activity is the lingering effects of Mr. Greenspan's panic move on the liquidity spigot and that pure, bald faced inflation policy has now been enhanced by the myriad investment and trading vehicles, black boxes and mini-manias that have become a standard part of the financial world's landscape. These games create and play carry trades wherever they can find them and keep the worthless Dollars, Euros and Yen moving......into financial assets. Interestingly, two of those benefiting asset classes appear to be US manufacturing firms and commercial real estate based on my own personal experience. This is why I have written about risk vs. reward (see 10/5/06 entry); as the potential rewards increase, so does the risk in a financial system hopped up and levered to the max with debt and the assumption that the music will never stop. I always manage risk. It is as simple as that. Hence, I don't care if gold goes back to $300, there will always be a place for it in my portfolio. I have never cared for gambling. It is not fun for me. Making and preserving capital is huge fun for me.
10/17/06 - Gold, Silver & Copper As mentioned recently, I have not been writing about gold personally and presenting articles about gold in the News & Analysis section of the website because I am a gold bug. I am doing so because this is an asset class and sector that has been presenting ongoing buying opportunities. As you know, I have been taking advantage of those opportunities on down days, buying the sector from uncertain, uncommitted or downright scared holders. In today's emotional and turbulent markets, it seems many frown upon an old fashioned concept like "buy low and sell high", but I plan to stick to that crazy notion. First and foremost in our value analysis is the Dow-Gold Ratio chart (see 10/4/06 entry below). This is self-explanatory; stocks simply became over-sold in their secular bear trend vs. gold. That condition is being corrected. When we look past the hyperbole of the Dow headlines and talk of the end of the bull market in the barbarous relic (now that the Fed has inflation under control - wink wink) we simply see a re-setting of the ratio, nothing more and nothing less. It pays to use technical analysis to help moderate emotion when trying to make sense of market trends and cycles. Without further delay, I would like to present some relevant charts of gold, silver and copper, which benefit from different economic climates: Gold- Economic contraction, inflation (inflation is not only possible, but probable in a contraction since inflation is the increase of money supply) and by extension, the outright questioning of paper money backed by nothing but debt. Silver- More levered toward global economic growth, inflation, sometimes thought of as money - with historical record to back it up. Copper- A base metal critical to the global economic growth story.
In these charts we see conflicting signs for the liquidity-driven growth economy and by extension, the stock market. Gold and silver appear set up in similar fashion although gold has resistance that corresponds with a symmetrical triangle breakout whereas silver's comes well below such a breakout. Both metals sport some nice short-term bullish divergence, but gold's picture overall looks more bullish. A look at copper shows an ongoing consolidation with a nice spike up yesterday, although no breakout. If FrankenMarket's advance is real, expect confirmation by copper, a global growth linchpin. Finally we have the Gold-Copper Ratio. Here we see gold has broken down below the double bottom, which if it holds would imply that global growth is to continue beyond the near-term. However, note the bullish divergence in gold vs. copper. It is common for breakdowns in an index or ratio chart to be reversed within a few days (head fake), so this will need confirmation in terms of time. Summary: To these eyes (and I try to remain impartial) the metals offer conflicting signals as to the direction of economic growth (or lack thereof). Taking into account the stock market's over-extended status (not to mention the bearish VIX & VXN), gold's proximity to a significant breakout and copper's trend line way down near 280, one might at least strongly consider the possibility of some bearish surprises ahead for markets and commodities dependant on economic growth. Yes, I did buy the US Oil Fund (USO) per the 10/13/06 Letter entry, but the energies have already been hit hard as though there is going to be an economic slowdown issue and that purchase may only be for a swing trade. Gold miners may be a different story if confirmation of the above charts' signals proves bullish for gold. That is my favored scenario. If copper and to a lesser extent silver dominate in the near term, then the opposite is likely to occur; continued economic expansion, where gold and its miners are likely to underperform. ETF's and stocks relevant to the above include GLD, SLV, CEF, GG, SSRI, USO and PD, which interestingly has failed to attain new highs with the stock market. 10/14/06 - Actively Managed Portfolio Composition As mentioned previously, I plan to update the portfolio's composition when it materially changes. Since the last update (see September archive at left), it has. It still contains a bias toward the conservative, however. Gold positions have been increased by buying on down days and though I was a commodity bear at CRB 350, that is not the case now that my target of 290 was nearly hit. Technically, the potential for at least a strong counter trend rally is set up although I am not convinced this is the beginning of the next secular leg up, especially for commodities. Precious metals may or may not be another matter.
Money Market (4.9% Interest) -- 32.5% Gold & Silver Miners (w/ Significant Copper Exposure) -- 24.9% Gold Bullion Fund (GLD) -- 12.3% Short term US Treasury Bond Fund (SHY) -- 8.4% BEARX Short Fund -- 5.3% Cash Reserve -- 4.3% Un-named Speculation -- 3.9% Crude Oil Fund (USO) -- 2.8% Uranium Miner -- 2.4% Palladium Miner -- 2% CBM Gas -- 1.2%
Portfolio is +20.97% year-to-date
With the CRB Index having nearly touched our long-standing target of 290, the stock market on a tear (contrary to popular Sept. / Oct. lore) and signs of global manufacturing strength gleaned through this writer's industry "channel checks", I think it is time to begin nibbling at the resource sectors, for at least a counter-trend cycle. Since my inclination is to buy low and sell high later (a novel approach, I know), and given that if the stock market is projecting something real as opposed to a Wall St. "wink wink" bonus season push, commodities will play a central role. They have been beaten senseless yet remain vital to global growth. I like that! As such and as mentioned on the blog, I recently added palladium miner Stillwater Mining (SWC) per this post. I also own uranium miner SXR Uranium One (SXR.TO) and 2 days ago added the US Oil Fund (USO), an ETF that follows the price of crude, per the technical setup on the following chart; short-term trying to double bottom with bullish RSI & MACD divergence.
As always when I take a position on a portfolio building block such as this, I am not expecting immediate results and would happily tuck the shares away as a portfolio diversifyer if need be. You buy from distraught holders who may have taken the previous cycle's myths a little too much to heart. You buy low. Others may wish to chase the broad market momo and indeed I may trade it a little bit, but for a longer term portfolio building block or technical and cyclical potential set-up, the beaten down resource sectors look interesting. 10/12/06 - Confused? Me too! In case you have not visited the blog, I want to quickly note a couple posts here. In them you will see a fellow who is working through conflicting signals in trying to make sense of the current macro. Post 1 is about a conversation I just had with a machine tool dealer implying global manufacturing is booming and post 2 revolves around a release from Reuters on decelerating manufacturing expectations in the US. Make of them what you will, but on a quick churn through my gut, I can definitely say I have a level of confusion or put a better way, uncertainty about current macro events. More to come, you can be sure of that, because our investments should accurately reflect our interpretations of macroeconomic and market realities. 10/12/06 - Quick Chart Checkup
1) Although downtrend line and heavy resistance in the Dow-Gold ratio (monthly chart) are within spitting distance, the relative strength in stocks continues unabated. This tells us not to expect a reversal of recent fortunes overnight. It also tells us that stocks are not likely to roll over and dramatically under-perform gold in the near to intermediate term. 2) The Gold-Oil ratio (monthly) is a different story, where the barbarous relic looks short-term bullish and relatively strong. This trend, if it continues, would help the bottom lines of gold miners, who are as energy dependant as a business can get. 3) The bond herd has received its wakeup call over the last several sessions in the form of the Fed's jawbone. 10 year yields have broken the recent downtrend, but the ratio between long and short rates is critical to asset allocation. The yield spread (daily) sits at resistance while continuing to bullishly diverge. 4) We never tire of presenting this little warning chart; the VIX (weekly). One by one the bears are capitulating as FrankenMarket staggers higher, while at the same time the VIX' status is unchanged; double bottom in '05 and a falling wedge down to support. It pays to remember that this game is about risk vs. reward and not trying to capture the last 5%. Smart money buys major bottoms from scared retail and at tops the opposite happens. Do you think stocks offer a good risk/reward profile now, regardless of whether or not they have higher to go in the near term? Relevant symbols to the above are DIA, GLD, SHY and IEF. 10/10/06 - SOX Update We have been using the Semi's as a leading indicator for technology and by extension, the broad market. A look at the SOX chart shows it has long since meandered across the uptrend line and currently resides in a consolidation pattern that at this point looks more bullish than anything; downward sloping after sharp rally.
But the SOX did break the uptrend line and that was an early warning about the current rally. A nice scenario would be the SOX failing at resistance (red) and the broken trend line in the low 460's and dropping all the way back to the 415 area for a test of the lows, leading the broad market lower for a much needed correction in the process. That would be a buying opportunity depending on the economic and liquidity backdrops at the time. But if the SOX strengthens from here, recall one of our original targets was over 500 off of an inverted head & shoulders bottom (head below 390, right shoulder at 430, left shoulder not shown on this chart and neckline around 450). Unfortunately, we do not control the markets, we merely take our clues from them and adjust risk vs. reward along the way. The SOX is one of those indices that provides early clues and should be watched closely. A tradable proxy for the SOX is the Semiconductor Holders ETF (SMH). 10/9/06 - Interest Rate Assumptions The stock market is obviously trying its best to spin Goldilocks into something tangible and enduring. The hot sectors of the recent past, namely energy, precious metals, general commodities and housing, have been taken down hard (and right on cue I might add) in the face of Fed tightening, which has supported the US Dollar, which in turn was absolutely vital. But among the debris, there stands "Dow all-time highs!!!" which I have been giving weight to as a possibility all along, although it was not a part of the "script" for this to happen concurrent with major commodity corrections. The script called for nearly all markets to decline pretty much in unison, except for the bond market, which would make a strong pretense toward bullishness, thus alleviating "fears" of inflation and laying the groundwork for continued inflationary policy. But a funny thing happened along the way to a well choreographed "deflation scare"; the stock market, carrying the hopes, dreams and assumptions of millions, has carried on higher. Some gold bugs may feel the Fed has them in its gun sights and its evil henchmen, "da boyz" are carrying out the decimation of "honest money" so it will not shine the light of truth on the monetary games where credit creation runs amok and indeed becomes the economy. But I think there is something much less dramatic at play here; a mini-bubble is being inflated in the stock market that we may call a safe haven or refuge bubble. In a global casino, the participants are not aware of exit signs, they only see the next "play". Risk management is all but bred out of them. The slots have run cold? A small cluster of highly visible patrons migrate over to the black jack table. The herd eventually takes note and you know the result. The stock market is the black jack table. Now, enough with the metaphor. This is more serious than finding the next hot game. Philly Fed chief Charles Plosser's views on inflation were noted on the blog last week as were my remarks about same. To this point, I have discounted Fed officials as merely playing their respective roles in the "deflation scare" script; jaw boning inflation while having every intention to ease policy, which would have the ultimate effect of you guessed it, inflation. But with the stock market, jobs/wages and even commercial real estate still in expansionary mode, it is apparent that market casino patrons are trying to hide out in still-hot games. Fed heads like Mr. Plosser see them and want them figuratively executed so that the Fed may finally stand down. Last week the bond market made a strong, impulsive move toward higher rates, challenging the assumptions of the bond herd with a hard slap in the face. Ten year yields are near resistance and have not broken the recent downtrend, but this bears watching, as does the ratio of long rates to 3 mo. T-Bills (yield spread) which is also trying to turn up amid bullish divergence.
Conclusion: While I have speculated on the possibility of a new stock bubble, considering the trepidation of certain Fed members along with herds of convention-minded bond investors fully buying in to the slowing economy (and by extension, inflation) story, along with "Dow all-time high!" headlines that may be at least moderating the public's bearishness on the stock market, and considering the technical setup of the precious metals and commodity universe, I would not be surprised to see a reversal over the coming weeks of assumption-based market trends that have held sway since mid-summer. Also note the charts of the VIX and VXN we have presented over recent weeks; they are not bullish. I do not discount a new stock bubble, but have remained firm that a correction of some substantial degree is needed first, during which Goldilocks is caught red handed with the baby bear's porridge, the yield spread bottoms and turns up, gold ends a multi-month (and healthy) correction and the stock market gives back recent gains as we find out that embedded and systemic inflation is not so easily eradicated. Relevent ETF symbols to this commentary are GLD, USO, DIA, SPY and QQQQ, along with bond funds TLT, IEF and SHY. Good luck whether your bias is long, short or sidelines. 10/6/06 - VIX Daily & Weekly I began working at 5:30 this morning on today's entry; a look at George Linday's 3 Peaks and a Domed House. The result of 2 hours of work was the whole thing getting thrown in the virtual trash can when ultimately I could not correlate the Domed House to today's Dow. In its place, and given the amping up of stock bubble chatter, I present a couple pictures of the VIX in real time. I will let you draw your own conclusions as to what this may mean in the near term.
To make money as a trader or investor on a consistent basis, through ever-changing cycles and market environments, it is critical that we develop the ability to step outside the noise of the moment and gain big picture perspective. Boy is there a lot of noise at this moment! My main areas of interest, the gold/precious metals, commodities and the broad stock market are all at varying points in their risk/reward profiles. Since this Letter is designed as an ongoing, real time chronicle of markets, I will not post an extensive in-depth analysis of the current state of these three investment areas. Rather, I will summarize where I think each one is amidst the noise of the moment. Gold/Precious Metals: We are searching for a bottom and as difficult as it feels for an investor to buy while being negatively reinforced through painful correction activity, those who wisely avoided chasing rallies and kept cash for buying on hard down days, will eventually be rewarded for their foresight with out-performance gains. I cannot say for sure whether yesterday, which felt like it included some capitulation activity in the sector (would-be Gold bugs or "inflation trade bulls" getting out at all costs) is the ultimate bottom for this correction. But buying in the depths of such days (I added Goldcorp and a couple smaller miners near the lows) should ultimately prove worth the risk involved. The correction is now nearly 5 months old and yesterday got within spitting distance of my target near 260 on the HUI. Note that I do not "go all in" but rather I am slowly accumulating and plan to have cash on hand in the event of Huey 260 and XAU 115. With the gold indices this close to our targets and the "Goldiocks scenario" becoming somewhat mature in the investing public's consciousness, I believe it is time to be looking for real value. Risk/Reward Profile: Excellent in near, intermediate and long term. Commodities: I believe commodity markets may be setting up for at least a major bounce. For reference, see a chart of the CRB, which yesterday dipped to a new low below 293 (near our long-standing target of 290) before reversing upward to close above the previous day's close. Being one of those who discriminates between gold and general commodities, and given the current monetary backdrop and technical evidence in the bond market and economy, I cannot go long term bullish on commodities at this time. At the least, if the once and future "Helicopter Ben" fulfills his destiny and finds a way to inflate to beat the band, gold should be out ahead of silver as well as the general commodity pack. In other words, there would be time to accumulate commodities for the longer term based on signals that the "monetary metal" gives. Risk/Reward Profile: Good near term, neutral intermediate term and good in the long term. Stock Market: What can I say? I own a grand total of ZERO bull stocks at this time. Herds of momo's, savvy traders, naive traders and heartfelt investors can ride this train. As I spotted this rally (beginning with the SOX downtrend break in August) and proceeded to absolutely NOT take advantage of it, the theme was that the market seemed to be running out of short-term bearish fuel to the downside. To be specific, the one indicator that "creeped me out" was the public bearishness and distrust of the market. Now, I do not count that as a major fundamental underpinning by any means, but FrankenMarket has spun a slowing economy and incorporated the public's bearishness, the shorts' gall (and attendant short-covering), the now prominent Goldilocks story, the old "wall of worry" chestnut, the election / manipulation hysteria and any other noisy idea it could get its hands on and rampaged higher. You don't argue with this type of activity. Many tried in 1999 and did not have the staying power to reach the ultimate peak and ride the whole mess to shorts' heaven. As a side note, the idea of "Dow 12K, 13K, heck why not 30K?" that I have noted over the last two years is bullish for stock prices, but that is about all it is bullish for. Either the broad market is the last holdout for bullish hope/denial/desperation and is about to follow the deflationist script into collapse or it is a harbinger of liquidity to come from the massive bond market and Bernanke's Fed telling us to look over here while warming up the choppers over there. Risk/Reward Profile: Near term highly unfavorable, intermediate neutral and long term undetermined/uncommitted.
10/4/06 - Dow/Gold Ratio, etc.
I do not want to beat a dead horse and in fact, when gold was pressing the 700's and the Dow was well contained in its ongoing bear market (in inflation-adjusted terms), I was noticeably quiet with regard to a pro-gold or anti-stock stance. So, all the writing about the gold sector lately is simply a manifestation of my perception of opportunity on the horizon.
As stated at the top of this page, the plan is for this letter to go subscription. But the markets have provided an opportunity in this regard as well. This is the reader's opportunity to watch a letter writer, in real time, working through one of the most challenging and exciting market and macroeconomic phases in his career. My portfolio still well-outperforms all major markets to this day (2006 YTD), but what good is that if my macro "assumptions" are not correct? "What have ya done for me lately?" might ask the reader. Good point! So I have decided to delay the launch of paid access until my main assumptions, my main beliefs and fundamental ideas are proven right. I love a challenge and for weeks now the markets, not necessarily unexpectedly, are moving against my core principles. If proven wrong and debt paper reigns supreme, I will likely take down this Letter, make adjustments as needed and keep the Biiwii website moving forward - free of charge. If I am proven right in my assumptions and fundamentals, you shall hear about it!
Anybody can make money and look smart when things are going their way. We are currently in a multi-month process of hunkering down in a deep cave of corrective activity to our investment stance. When we come out of the cave and again see the sunlight, I expect my patience to be rewarded. And I expect you will have had a good chance to evaluate this letter as it moves through the toughest of market environments. Let's see what the future holds. In the meantime, here is a monthly view of what I consider a crucial chart, the Dow-Gold Ratio. Stocks bullish in real terms? Nope, not yet.
10/3/06 - Quick Snapshot of a Few Markets
We used the SOX index as a leading indicator for the current rally in stocks and see no reason not to use it when looking for signs of reversal. CRB approaches our initial target near 290. The dollar remains firm and continues to "hang around" but has very strong resistance in the low 90's. Gold, meanwhile, is apparently intact and deciding whether to break up or down. Do not discount a shake-out move below 550 as real bull markets tend to shake off the fleas before moving higher.
10/2/06 - New Stock Market Bubble?
The new stock bubble theory is picking up steam. Here is an article by the Contrary Investor that is open to the possibility. In fact, the last paragraph sounds like it could have been written by this writer:
"Again,
this discussion is not about fortune telling as it applies to the
financial markets. It's about being aware of and accepting of historical
seasonal tendencies and longer term equity market cycles that may indeed
have meaning for what lies directly in front of us. It's about
maintaining balance and flexibility."
Here in the US, we are a "feel-good" nation not used to wallowing in the depths of the problems experienced routinely by much of the rest of the world. This has allowed the US to continue clinging to its debt for consumption raison d'ętre even as the consumer's supposed last liquidity umbilical cord is cut (housing ATM). Wouldn't a brand spanking new bubble in equities work wonders as scared, abundant and hot money panics into yet another asset class? This has become all about momentum and getting to the next hot play before the herd thunders in. It is why I call this a casino. It is advised to take care of real financial preparations and real life before you speculate in this circus. Then remain grounded and aware of all possibilities.
I expect Q4 to be supremely interesting and I also expect my portfolio to become more interesting, asset and hopefully performance-wise than it was in Q3, where surviving Goldilocks became my main priority. I will update the portfolio's composition as it materially changes. Good luck to all as we enter the witching season with contrarians getting contrary themselves, myths and stories being cemented and perceptions in flux.
At this point, the market looks ready to at least take a breather. At most, the VIX will break up from the wedge and reign havoc down on complacent bulls. But where would that impulse come from? At this time, I would have to conclude that absent any fundamentally earth shaking news, this is a market that wants to go higher as seemingly silly as that sounds.
Relevant ETF symbols include SPY, DIA and QQQQ for tracking and participating in the US stock market's fortunes, whether long or short. 10/1/06 - Manipulation? Michael Nystrom of BullNotBull, a straight shooter whom I consider a virtual friend has just written a short piece called Manipulation. In it he shows the cover that Newsweek readers (Oct. 2nd issue) in Europe, Asia and Latin America saw titled "Losing Afghanistan" with a picture of a determined looking, Talibanesque man toting an RPG launcher while readers in the US are treated to a cover on the same date detailing Annie Leibovitz' "Life in Pictures". Huh? He then goes on to extrapolate these synergistic keeping up of "appearances" to the decline in the price of oil and the steady march upward of FrankenMarket (check out that video on the front page of this website - if you can't laugh at this stuff you very well may cry) in the run-up to the elections. I am torn. On the one hand the charts are intact and things seem to be making sense as long as these hope and denial driven rising wedges resolve to the downside and provide a good lesson to greedy, lazy bulls that it just ain't that easy. On the other hand I see the herds driving the bond market higher on the conventional wisdom that the economy, driven by a real estate meltdown in the making, will decelerate markedly and contain inflation (we call this crack pipe thinking, don't we?). At the same time if the S&P drops 5 points it seems that some entity feels a desperate need to swoop in and buy with both hands. What a bargain! My scope here is to get the markets right. It is not to worry about manipulation (yes, I think it exists) because as I have written for years, I believe the whole mess is devoid of intrinsic value in an age where the debt for consumption ethic dwarfs the stodgy idea that productivity actually matters. So the question for me remains "how long can this entire game keep up appearances?", not whether it is valid or not. If indeed the markets are keeping up appearances, the average American may not even be falling for it. My aunt, a successful business person who is not known for harboring the alternative economic views of this writer is downright freaked out about two things; the Dow's approach of all-time highs at this time when it "should" be going down and something Bob Woodward wrote implying that things are coming apart at the seams, from what I gathered in talking to her. I am bothered by the dropping of M3 statistics from the public record and often I think things like "how are these guys getting the juice into FrankenMarket without gold and commodities knowing about it?" but then I look at my Dow-Gold ratio chart and see that stocks have been absolutely bludgeoned for years when measured in gold during their supposed bull market (in nominal dollars) and were due for a relief rally. I see Goldilocks and a lot of business as usual on Wall St. I also see a bearish public, which truthfully gave me the creeps and kept me far away from any major short stance. Since the day (a much more innocent day of my youth) I and a couple friends allowed ourselves to be scammed by some two-bit boiler room operation (hello Ida, may you...) I have realized that what we call "Wall St." includes some pretty unsavory characters. What I only began to realize in the last few years is the depth to which the entire financial services industry is compromised by a combination of overly conventional thinking, ignorance and in some cases, misdirected priorities. I see a lot more stupidity and laziness than pure evil, but in the final analysis none of those is a good prescription for people who want to maximize their capital as safely and sensibly as possible. So yes, Biiwii being Biiwii, we allow for the likelihood that manip is present and accounted for. We also see the massive, plodding financial services industry and the huge and frenetic hedge fund universe out there gaming. "Hey batter batter, he's no batter.............SWING BATTER!!". Everybody's in the game and truth be told, I am beyond worrying about whether the game is rigged; it is. I am here to use the game to my advantage while it exists. Manipulation or no. Have a swell weekend.
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