Social Mood Conspiring To Halt Reflation Attempts

It is happening around the world. Populist anger directed toward the financial industry (the creator of inflation) is forcing politicians into uncomfortable positions of austerity just as the politicians congratulate themselves for "saving the world." Social mood, an unstoppable force in both directions, is getting the better of what has almost unquestioningly been referred to as "the recovery."

Paradoxically, there are very few who actually want a recovery. I don't. None of my close friends do. Not if it means another bout of asset speculation, inflation and the degradation of social values that go along with it. As such, few of us are complying with the attempts to reflate. Most are unknowingly putting the kibosh on central bankers by resisting lower interest rates, saving, waiting for lower asset prices, and simplifying their lifestyles.

This is a process - a slow one - so it is not easy to put one's finger on. But where emotions run deepest (politics) we can see the changes clear as day.

Three weeks ago in Japan, the DPJ (Democratic Party of Japan) defeated the LDP (Liberal Democrat Party) handily. It was the first LDP defeat in decades. The DPJ intends to "overthrow the ancient régime locked in old thinking and vested interests, solve the problems at hand, and create a new, flexible, affluent society which values people's individuality and vitality." They claim, "the bureaucracy of the Japanese government size is too large, inefficient, and saturated with cronies and that the Japanese state is too conservative and stiff."

Japanese voters may not know it individually, but collectively they are saying, "we are sick and tired of your attempts to reflate the economy for your own benefit, without regard to the unintended consequences." As such, they voted for a party that promised the ability to make more economic decisions at an individual level, rather than via the central planning bureaucracy.

Whether or not the DPJ acts on any of the above is conjecture. Social mood in Japan is forcing the government into a "strong yen" policy that benefits individual Japanese, rather than large multinational exporters.

Meanwhile, over in Germany a nearly identical shift occurred in their election. The FDP (Free Democrat Party) took a large chunk of votes from the SDP (Social Democrat Party) and will now be the keystone in a coalition with Angela Merkel's CDU. The FDP are best described as "classical liberals" or libertarians. They increased their vote totals by nearly 50% on a platform of reduced economic intervention, lowering the public debt and lower taxes.

Once again, we see voters rejecting the inflationary tendencies of big government. Both the Japanese and Germans dislike their excessive dependence on foreign exports. They both elected governments that disavowed subsidizing exporters at the expense of domestic producers. Political pundits will inevitably paint this as some sort of shift toward "right wing" or "isolationist" tendencies. These are both meaningless terms. Social mood has simply changed. They rejected inflationism.

And yes, this is slowly happening in the US as well as elsewhere to be sure. The Federal Reserve has the lowest approval rating among all US agencies (even lower than the IRS!) The Federal Reserve Transparency Act (better known as the Fed Audit Bill or HR1207) is gaining momentum and is sure to pass in one form or another. Last week, congressman Alan Grayson publicly lynched the Fed's General Counsel Scott Alvarez.

But most revealing is the continued reluctance of the FDIC to tap their credit line with the US Treasury, instead deciding to charge member banks nearly $50 billion in fees. Apparently, getting one's hands on ungodly sums of money is not as easy as it was 6 months ago when news of the government doling out $100 billion for this or that was a near daily occurrence. There are real concerns of a further increase on the government's debt ceiling to be rejected by congress. Populist anger toward the lack of fiscal restraint has put pressure on congressmen and women to think twice before casting a 'yay' vote in favour of anything. Midterm elections are coming up in just over a year. And true fiscal conservatives (ie. Libertarians) like Rand Paul and Peter Schiff are raising big money to fight profligate spending tendencies in Washington.

The three largest economies in the world are slowly experiencing the above mentioned shift. Where inflationary fiscal tendencies of governments have been succeeding, they are now coming under attack. This is in addition to the massive failure that monetary inflation has had since the crisis began. Inflationists continue to believe that both governments and central banks can create inflation at will, while in reality we see that neither can without the complicity of a risk seeking behaviour in banks and individuals.

People's attitude toward debt and speculation has changed. As the process intensifies, debt revulsion will accelerate until frugality itself reaches a level of unsustainable extremism. By the time it is widely understood it will be over.


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Technical Update 37.09

Readers should focus on potential changes in market character as cited resistance levels (1075) proved too difficult to capture. However, one must avoid becoming too bearish immediately due to the fairly benign nature of the 3 day selloff to date. The tape certainly 'felt' heavy, with sharp thrusts lower being met with almost no interest from dip buyers. There have been a number of similar selloffs along this most recent July-Sept rally, but 3-5 days and around 4% seems to be all that can be mustered. In order for me to have confidence that we have seen an important peak, the selloff needs to continue and accelerate to the downside early this week. Otherwise the recent market action must be considered as nothing more than an overbought 'exhaling' and temporary in nature.

Here are 3 conditions I am looking for to confirm that a top is in place:

1) Consecutive daily declines exceeding 2.5%. Since March, the S&P 500 has not managed to achieve this (if so, only marginally). Thus, any decline that is not immediately bought can be considered a change in market character.



2) Continued bullishness being displayed by the media. Daneric's Blog has noticed that there has been a change in sentiment in the media over the last week. During previous selloffs of the same magnitude, it was quickly jumped on as a sign of a potential top. The media and most pundits seem far more confident this time around. "Nothing to worry about," they claim. If this attitude continues, the denial-migration-panic cycle can take hold where another 'point of recognition' kicks off the next bear leg down.

3) Weaker market internals than previously experienced since the beginning of March. Among them:

The 10 day moving average on the Put/Call ratio should pop up above 1.00 for the first time in many months. This would point to a sustained period of bearish options bets - often associated with impending market declines.



The 10 day moving average of the Advance/Decline ratio should also make new lows for the March-Sept period. Again, this would signal a change in market character as weakening leadership is often a good signal of market tops.



We have the recipe for a major market top. It is now left to collect the ingredients. And it is my feeling that they must show themselves soon, lest the dip buyers are emboldened and the manic attitude sets in again for an assault on new highs. I will be prepared for either outcome.

I am also intently watching the oil market for signs of further weakness. Oil and commodities in general have proven to be a good indicator of risk appetite. Speculative credit flows and risk appetite are the driver behind all asset markets and commodities are no different. Notice that crude has backtested its trendline from the lows and reversed quite hard. Also notice the massive negative divergence on the RSI.



Last but not least, the dollar index is again working on a potential bottom. I would be among the 3% who count themselves as bullish on the US Dollar. Being in such a minority has proven profitable many times over the years. I am confident it will again. I would want to see the index jump above its 50day EMA - something not achieved since April - before confirming a bottom is in place.



Do note, however, that the various components to the dollar index had some wild divergences from normality. The Pound took a drubbing while the Euro hardly budged. And the Yen logged large gains and is approaching its highs from Dec/Jan. When the currency markets speak, equity and commodity investors/speculators would be wise to pay attention.

Have a great week!


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Bloggin' Ain't Easy!

Regular readers have surely noticed the drop-off in macro related articles on my blog over the last month or so. The reasons for this are numerous. First, I noticed that way too little time was being devoted to what actually makes me money: finding ideas and trading off them. Getting settled into a new apartment always saps more time than one expects, and I've been working on a new website that moves away from the standard blog format to something more multi-function. The word 'blogger' is thrown around fairly recklessly these days (when not used inflammatorily). And it hardly does justice to the wide variety of commenters that make up the 'blogosphere.'

The world of media is rapidly changing. Even over the last two years, I have seen the concept of blogs change rapidly - from purely opinion driven reports to multi-author news sites that report everything and anything related to the field of interest. Other than the odd late night glance at Bloomberg, I receive none of my information from mainstream media outlets. I have a team of people whose judgement I trust (found via trial and error), and their articles are sent directly to my Google Reader feed. I trust these people far more to filter the good information from the bad than I do anyone writing for major media outlets. For example, on Friday evenings if I want to know how many banks have failed, I can rely on both Rolfe Winkler and Calculated Risk to provide me with the details - faster and more efficiently than anyone else.

Every blog has its own style. Some attempt to report everything making a buzz on that day. Felix Salmon will apologize for missing a story. I prefer to avoid such practices, first because I don't think most of what happens is relevant to many people (based on my contrarian position on causality), and second because it can be incredibly time consuming to do so. I prefer to focus on the price action, human behaviour and inflationary vs. deflationary forces. Yet repeatedly focusing on the same issues can at times feel redundant.

I used to post more ideological attacks on Keynesians, Monetarists, central bankers, etc. That too becomes redundant and even when trying to have discussions with prominent economists, the conversations eventually turn into mudslinging and childish accusations.

So it turns out that my own personal style is to be far more limited in the quantity of posts, but by focusing on the issues that I feel are most relevant I can ensure that the quality remains high. The likely result is that I turn my weekend Technical Updates into more comprehensive articles focusing on macro and sentiment issues in addition to some technical analysis.

So for those of you looking for more daily commentary, I invite you to frequent the "Recommended Reading" tab on the right hand side of my page. The articles posted there are handpicked by myself as I scan through about 150-200 articles and blogs per day (Google Reader even keeps track of how much I read). This is a time consuming exercise, but I do it anyway. So for those who don't have the time to do this themselves, let me do it for you. Some days there will be 10 new posts, others only a few. I have a new application that is bigger and gives a summary of each post. I'll have that up in conjunction with the new site (ETA December).

I just thought I would keep my readers posted with what is going on and what to expect in the future. As always, I thank my regular readers for their comments and continued support. This blog has been a work in progress and a great learning tool.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Technical Update 36.09

Another week of gains on fairly decent volume is continuing the push into the upper boundary of resistance cited in my May 10th technical update. I noted S&P 1075 as a potential level of resistance as it marked the "point of recognition" back in September of '08. 1075 was a very obvious level of support at the time as it marked a number of long-term moving averages and trendlines. The S&P closed the previous week around 1100 and gapped lower the following Monday to about 1060. Price has only returned to fill that gap now, a year later. I find that gap fills are particularly useful targets when used in conjunction with the Elliott Wave rule of price returning to the wave (4) of 3 of a lower degree - which has already been achieved on the S&P, while the Dow appears to be satisfying both targets at the moment. If price were to reverse from these levels, I would have more conviction that the Elliott Wave consensus of a Primary Wave 2 is the correct marking for this rally - which would be disastrous for stocks over the next 2 years.

Today, I will show 3 separate time frames of the S&P, as I think it is important that readers see how using the separate intervals can also increase one's conviction if they are to all align nicely in forming a hypothesis. The first chart below is of the daily. One can see that the 200 day moving average (green line) may not prove useful in terms of forming a price target. Price often slices through this line. However, it can prove useful if used another way. One can calculate the distance from the moving average and use that as an oscillator. The further away from the line, the more "pull" it should exert on bringing price back within its grasp. Back in March, we were at historic distances from this line. Today, we stand 20% above the line. (note: I typically use exponential moving averages, but for the purposes of this indicator, I've used the simple MA).



Next chart is of the weekly timeframe. In using moving averages, it is important to note that certain averages tend to be more "in play" than others. If price has often reacted from a certain average in the past, it is more likely to do so in the future. If an average acts as support in an uptrend, it will likely act as resistance on an ensuing downtrend. Such is the case with the 100 week EMA. Going back nearly a decade, we can see numerous instances of fairly major intermediate tops or bottoms occurring from this line. See the pink line below. We have returned to that line as of 1075. If it acts as resistance here again, I would have high confidence that a major top was in.



Lastly, we will look at the monthly chart. One can see how the RSI on this chart was at historic oversold readings. It has now recovered to the midpoint, which typically serves as resistance in a secular bear market as it does support in a secular bull. However, so long as it resides under 60, we can say that the bear lives on - which could give it considerable upside should it choose to drag on for another 2 months or so. Additionally, notice how the current level has acted as support and resistance numerous times over the past 12 years. 1075 appears to be somewhat of a bear market pivot if the bear is looked at to have begun at the 2000 top.



That's all for now!


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

The Bear That Cried Wolf

Bears are getting frustrated. They've been told for months now that "the market appears overbought" and that "technical resistance overhead will prove too tough for a continuation." Only to see price slice through these levels like a hot knife through butter, forcing them to cover their shorts.

I admit to being among the above. Thankfully, I have refrained from making overly bearish bets without the confirmation I need and being disciplined with stop losses. I have also eased the pain by taking some fliers on momentum stocks verging on breakouts. I've heard a number of stories from bears who haven't been so lucky.

The scenario reminds me of the August to October period of '07. Those who had been screaming about the housing bubble and subprime mortgages were proven correct in a mini panic with the market dropping from 1555 to 1370 between mid July and mid August. But the Federal Reserve began cutting interest rates and this was enough to convince nearly everyone that the worst was behind them. The market wound higher over the next two months on extremely light volume - even surpassing its July highs. Divergences were plain to see. Financials were lagging badly. Overall breadth and volume were weak. But most brushed this aside - "mere growing pains," they said.

I hear the same comments today from those who were very cautious in spring and skeptical in the summer. Autumn has come and they are bullish. I notice that my trading account is sporting its largest net long position in a long time - so I am no different. Many other commentators are falling over themselves to make the most bullish short term projections. 1100, 1200, 1350 by year-end. Even the bears, myself included, refuse to suggest that it is impossible. If a 50% rally was possible on very little fundamental improvement, what's another 20 or 30%? I hear "fundamentals don't matter in a market dominated by machine traders." Those who proposed that people "buy low and sell high" are suggesting they again "buy high and sell higher."

The driver behind it all, as I have maintained all along is mood and risk appetite. "Performance anxiety" is a term that explains the phenomenon well for money managers. If they want to be sitting at their desk in January, they better damn well make sure they buy. Anything.

Jeff Cooper of Minyanville writes today:

I just got off the phone from one of the smartest hedge fund managers I know (who went out on his own after a stint with one of the legends in the industry).

Jeff: "What are the folks you respect saying here?"

Hedgie: "Everyone of them who are smart enough to be long are qualifying their position by saying, 'We're long but there is nothing fundamentally that justifies it'"

Jeff: "In other words, they all feel they are skating on thin ice, but it's recreational and they all feel they'll be smart enough to be off the ice if it cracks?"

Hedgie: "Last time I checked, when ice just cracks, there is no warning."

I had thought that the rally would end on a whimper; slowly rolling over and accelerating thereafter. But the unrelenting bullishness of Wall Street is setting up for an epic failure. It is a game of musical chairs. Only instead of dancing to music, Wall Street is having a bonfire with the chairs, dancing naked around it and chanting to the theme song from Mad Money.

There will be no sitting.


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Technical Update 35.09

Another week of gains for major market averages goes by on low volume as buyers of near-term volatility are punished. With some major divergences in the currency and bond markets, many are left scratching their heads, wondering which way is up. The overnight futures markets are down significantly Sunday night, setting up for a potential heavy week of trading. Triple witching occurs this coming Friday - a quarterly occurrence that typically brings larger than average moves in the days prior.

On May 24th, I wrote:

Ideally, the current rally would last 6 months or longer and do its best job of convincing as many people that the worst is over. Even thought it may sound like that has already occurred, judging by the cheerleading in the MSM, the prevailing opinion is that the recovery, when it arrives later this year, will be weak. I expect a vast majority of the media darlings like Roubini, Krugman, Greenspan and Bernanke to give official claims of an "all clear" as a signal that the bear market is set to resume. Call me a cynic>.
The 6 month rally has occurred and the optimistic tone from many prominent figures is easily noticeable. The OECD recently announced that the global recession is over. Tonight, president Obama will make a victory speech on the economic recovery. And Ben Bernanke, along with a chorus of other economists, is busy congratulating himself in "saving the world." Go figure.

I continue to monitor the relentless bullishness of Wall Street in contrast with the sticky pessimism of Main Street. And while it could be claimed in the early months of the rally that the former should lead the latter, doubts will start to percolate after 6 months and only marginal improvement in the general economy. Any precipitous decline in the stock market runs the risk of quickly accelerating to the downside as the "here we go again" mentality causes a run for the exits. I see this potential when reading between the lines of market pundits and analysts interviewed on TV. They are almost always focused on the possible next 10 or 20%. All of their prognostications are dependent on "fundamental economic improvement." As soon as any early signs of this not happening are sensed, their valuation models will completely disintegrate - panic will result.

The move from early August has been very weak. The RSI continues to diverge as do most other momentum indicators. Increased caution is warranted.



While the Dow Industrials and Transports have confirmed each other's recent higher highs, the Dow Utilities have refrained from a similar indulgence. Utilities are a key sector in my opinion due to their extremely high levels of debt. The ability to refinance (or lack thereof) may be a factor in its recent underperformance.



The market for US Treasuries has been very strong of late, even amid regular auctions (increasing supply). Demand, however, appears insatiable as prices march higher sending yields lower. The long bond usually moves in negative correlation with the equity market. While they can always trade on their own courses for a time, the sheer amount of capital required to sop up the extra supply in both equities and bonds will likely result in only one winner. At some point in the future, I can see longer dated treasuries become more of a "risk asset." But I don't think we are there yet.



The recent movements in the Japanese Yen should have readers very concerned. Could the new Japanese government be pondering a liquidationist mantra? I admit to having no edge on the Japanese endgame. Clearly, they are 20 years ahead of the west in the collapse of their debt bubble. But I am sure the Japanese carry trade is alive and well. And I would not be quick to dismiss the possibility of enormous liquidations of foreign assets by Japanese investment banks and hedge funds. Below is the Yen in comparison to the Euro. This has proven to be a quite useful measure of risk appetite.



Have a great week!

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Of Resistance And Reactions

Markets look like they want to extend. Albeit in a very fractured manner and on very low volume. I had expected quite an expansion in volume this week. It hasn't arrived.

Many bearish commentators are looking for a 'catalyst' in order to get stocks moving lower again. This is backward. There are catalysts every day. Yesterday's consumer credit numbers were terrible (good for consumers, but bad for a credit based economy.) International capital requirement standards have been making the rounds as well - in conjunction with IASB and FASB accounting changes for banks. Trade tensions have been heating up between China and western nations.

The difference between these 'catalysts' and the ones being talked about by "the bears" is nothing more than market reaction. A catalyst is only catalytic if the market reacts to it. Otherwise it is ignored. Hence it is not the catalysts we need to be watching for. Only the reactions.

Nobody in their right mind would even attempt to justify weighting a 10,000 person difference in weekly unemployment claims higher on a scale of importance than a $20 Billion dollar drop in monthly consumer credit figures. But if the market is higher after the release of such information, you can bet your bottom dollar that the financial news media will credit the former as cause for the rally.

Social mood is at euphoric highs if one were solely focused on the financial world. But pessimism abounds on Main Street. This can be seen in presidential approval ratings, assessments of the current job market, and consumer confidence. Bulls will point to this as fuel for a continuation rally, as they claim these retail investors are "underinvested" in equities. Such claims are, of course, way off base. They are made simply by looking at historical participation rates, noticing that they are below the upward trend of the past 30 years and suggesting they must move higher. This does not take into account that perhaps retail investors are not buying stocks because they've decided their rate of saving has been way too low for over a decade. Perhaps they've decided that paying over 10% of their incomes for debt servicing costs is too much for them, and they'd rather pay back the debt than attempt to outpace it with gains in the stock market. Perhaps these retail investors see the growing federal debt and sensing a higher future rate of taxation, they are setting aside cash for such an inevitability.

Optimism may reign on Wall Street, but I don't think Main Street will play "catch up" anytime soon - as most analysts are expecting. But I would warn readers not to underestimate the potential of Wall Street euphoria to continue even longer than most would rationally expect. Remember back to the late 90s. Most respected market analysts had correctly identified the Nasdaq bubble as such in the lead up to the Asian Financial Crisis. The Naz managed to double from those levels. China did the same between the spring and autumn of '07. Most of those who were correct about the '07 US market top were also those who had called the entire advance from '03 "illegitimate." It took them 4 years to be proven correct. How many would have told you that there was even the slightest possibility of a multi-year rally if asked in early '03?

That said, this market looks toppy, sloppy and choppy. A perfect recipe for a top - or a failed retest of resistance leading to new highs. Is the mood ready to shift on Wall St?

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise." -- F. Scott Fitzgerald



Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Technical Update 34.09

I hope everyone is refreshed from their long-weekends. The coming week is likely to be one of high importance in determining if the recent peak at 1039 was in fact a lasting market top or just a speed bump.

Last week, I outlined that "the probabilities have materially shifted in favour of a lasting market top." Tuesday's market action provided further confirmation to this, registering a 90% down day. The remainder of the week was characterized by very low volume, declining volatility and moderately higher prices, achieving a 50% retracement of the down move. I am skeptical of the legitimacy of the move as it was on such low volume going into a holiday. However, price is the final arbiter.

In Elliott terms, this looks to be a 2nd wave of some degree, which means that it can retrace all the way back to the high - but no further. Any push past the August 28th high would be very bullish and suggestive of a price target in the 1100 area. But since market action is likely to be of very high volume from Tuesday onward, any push higher that proves it can hold will be enough to turn me more bullish for a trade.

Below is an hourly chart of the last month for the S&P 500. The horizontal lines are common fibonacci retracement levels for wave 2 moves.



98 NYSE issues managed to make new 52week highs on Friday. Along with a fairly solid closing TICKS reading and strong breadth, this throws a bit of a wrench in the plans for a bear raid.



The big story of the week was the sharp move higher in gold, busting out of a triangle pattern and challenging the $1000 mark once again. Readers will find it interesting that gold managed to do this both with higher US Treasury prices and without much of a move in the US Dollar. The internet is filled with theories as to "why" this is happening and "what gold knows" that other asset classes apparently don't. I think Dennis Gartman put it best in an interview I saw with him last week sometime, when he said (paraphrased) 'Gold isn't moving in reaction to anything. It's just moving. It is a market unto itself and right now it looks like it wants to go higher.' That is a simplicity I can agree with.



The aforementioned US Dollar Index appears to have failed in its breakout attempt and looks destined to make new YTD lows before putting in a bottom. This is obviously important to the direction of equities, so it bears keeping in mind.



That's all for now.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Reader Mailbag: Why Such A Focus?

Reader TH asks a very relevant question with regards to the focus of my attention over the past year or so.

Paraphrased, TH wanted to know why I spend so much time deliberating over the potential forces of inflation and deflation rather than focusing my attention of some of the more prospective new technologies and investment opportunities of the future. He contends that there are opportunities to make money in any market environment and wonders if my time would be better spent searching for those, as opposed to trying to "predict the future actions of madmen."

TH raises some very good points here. Indeed, there are many new technologies that I am very positive on. Nanotech would probably be at the forefront of this. There are unlimited applications for a technology that literally allows one to rearrange the building blocks of life (molecules) to conform to one's needs. This is not a new concept. But the underlying technologies have become much cheaper than the two previous speculative booms that the sector enjoyed (and then suffered through) in 2000 and 2004. Very much like the concept of the computer was posed decades before it became a useful tool, in time nanotech will gradually begin to make waves on our lives and economy. The companies that are able to be at the forefront of this will likely become some of the better investments of the next few decades.

Additionally, I still believe there are advancements to come in communications and networking. The recent introduction of "smart phones" is probably the most notable manifestation of this. Network speeds and accessibility are enjoying exponential growth. With it, they are redefining what people are able to do "away from the office." Often seen as a gimmick for text messaging friends and other social networking time-wasters, the open source nature of these things are enabling people to do away with numerous other burdensome tools and making us more productive in the process.

Another area that I see new and exciting growth opportunities are in so-called "new media." I am already invested heavily in this industry - via this blog. I don't think anyone can honestly say what the next medium will be for the transmission of news media, entertainment, or advertising. But it is apparent that it will be far more customizable and "on demand" than previous versions. There will be little bubbles along the way - for the life of me, I can't figure out what draws people to Twitter. And yes, I'm aware of the irony that blogging is itself a potential bubble.

So back to the original question from my reader TH. Why don't I spend more time talking about this kind of stuff?

The short answer is because even though I want to be invested in these technologies, I firmly believe I can do so at a fraction of the price in 2-5 years down the road. And this belief is best conveyed with an understanding of our current deflationary situation. If it were inflation that I saw in the near or intermediate future, I wouldn't care much for valuations or balance sheets. I would be buying assets on margin in expectation of their imminent explosive growth.

As I began my research into financial markets, the first area of interest for me was in understanding the history of markets. I suppose it would have been easier if I became enamored with the impressive growth of homebuilding stocks, but that seemed all too short term and frivolous to me. I was after the big picture. The more I began to research this, the more it became clear to me that successful investing rarely had much to do with picking stocks. Rather, it had more to do with making the right decisions in asset allocation once every 10-20 years. That's all that seemed to matter.

Think about it this way. Among those who were entering midlife in the late 60's/early 70's, how many managed to fully benefit by buying real estate and commodities with borrowed money at a low fixed rate of interest? And later on in the 70's how many had the acumen to sell those assets and buy stocks? And in 1999, at the height of the tech bubble, who in their right mind would sell everything and buy government bonds - and hold them for a decade?

The answer to all those questions is "not many." However, anyone who did make even one of those decisions was likely made very wealthy for the remainder of their lives. Any further decisions would have been irrelevant to their overall financial standing. For anyone else, the likely outcome was breaking even at best, bankruptcy at worst. Even those that managed to pick the best stocks through the 70's lost out to inflation. Those that held real estate into the early 80's were eventually forced to refinance debt at interest rates of 20%.

It is my contention that the environment for owning companies is poor, as it has been for 10 years. I could attempt to pick the best among the industries that I mentioned above. If I happen to be wrong - or early - I lose. Take Juniper Networks (JNPR) as an example. I like this company. They provide networking solutions for many of the new technologies I talked about above. They don't have as much risk as the underlying technologies because they simply service the needs of other companies. But they are trading at 22x their forward projected earnings and pay no dividend. Twenty two times! Of course those projected earnings could be affected by exogenous risk factors that have nothing to do with the company itself. How can I buy this with a 10 year horizon if I think there is a realistic possibility of it dropping 60%? I encounter the same conundrum in nearly every business that I feel has good growth prospects.

So we come back to the question at hand. Inflation or deflation. If it's inflation, I hold my nose and buy 'em. If it's deflation, I remain patient and wait for that 60% correction or more - yes even from these levels. It is a binary outcome. Hence, the focus of my blog and my attention is in determining this outcome.

Managing this will prove to be the single most important determinant of the future financial health of myself and my readers.




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