Wednesday, December 30, 2009

New Gold - An Interesting Gold Stock

New Gold (NGD) is a Canadian miner of gold, copper, and silver and has properties in Brazil, Mexico, Australia, Canada, and Chile. They are a small cap junior, but unlike the vast majority of future oriented juniors with explosive growth potential, they not only are producing good revenue now, they could be considered a value stock considering their rapid per share growth in everything but eps. The eps is sadly and chronically negative, but you have to suspect the new flood of revenue and cash flow may fix that:

The stock has climbed along with the gold bull since 2002 until 2006, where it was sent back to pre bull levels in the face of a very robust explosion in cash flow and revenue. For this fast growth rate, you must pay a price/sales of 3.1 and a price/cash flow of 18 - very reasonable for any kind of stock, very rare for a small cap gold stock. Why is it such a dog? Well, they are fighting with the Mexican government about environmental problems with their Mexican mine, and only two analysts cover the stock. I'm sure they have other things holding them back. The stock is severely lagging the gold miners and its own financial results. If the clouds clear, this could be a rocket.

Monday, December 28, 2009

Iran Developments

Israel's Defense Minister Ehud Barak has just given an assessment to the Israeli parliament where he said Iran will possess the technology to build a nuclear bomb by early 2010. He said they would surely be building bombs in 2011 if allowed to proceed. About a month ago, he stated that the Iranians had reached a technical breakthrough that would facilitate a quick advance in their nuclear capability. He was probably referring the the nuclear trigger, a technology that even Iran's apologists at the U.N. say has no peaceful use.

Also happening this week - a complete recall of all Israel's diplomatic crew, ambassadors and whatnot, from all over the world to meet in Israel. This is unprecedented and is causing speculation that the Israeli military has made the decision to strike Iran and this meeting is to PR it to the world when it happens.

STRATFOR, meanwhile, published an intelligence report Dec. 21 on the "invasion" by Iranian troops into Iraq to take over an oil field. This sounds alarming and had Larry Kudlow pounding the Kudlow Report desk demanding that Obama declare war immediately. But this oil well thing happens on a regular basis in that area, like a Hatfield and McCoys feud, because the border there is not defined very well and both countries claim the well. An Iranian bunch comes over now and again and puts an Iranian flag on it for a week or so, then they go back home while the Iraqis paint their colors back on it. I think I even read it's a nonproducing well - a silly, benign spat as Middle East spats go.

So why is STRATFOR so concerned with it? To quote their recent article, "what would be fairly trivial at another time and place is not trivial now". They feel it was orchestrated this time, reportedly ordered by Tehran, simply to make a point to the lynch mob assembling against them without triggering a precipitous response. That point is that Iran does not have to let Israel or the U.S. make the first move. Iran is well aware of the goings on in the intel and military community and just wants to rattle the chain of Obama and the other decision makers amidst their orderly deadlines, preparations, and any other American timetable for Iran.

This raises the whole question of who is going to throw the first punch. When you think it through, you realize that the war is going to be a sea war, not an air war. Iran's air force is not a problem for Israel nor is their air defense system (until they get the S-300). With the right bunker busters (they may wait for the MOPs), taking out the nuclear program is the least of the worries. But Iran's navy is another story. They have sophisticated anti-ship missiles and other maritime hardware with which to carry out their only real threat of war-making, and this would be fought on the waters of the Gulf and with the price of oil. They also hold the card of massive incursion into Iraq, which they hinted at with their recent stunt. STRATFOR concludes that the initial strike may not be the air strike out of the blue on the nuclear sites, but a smashup of Iran's navy in the Gulf and their military in or near Iraq. Iran faces a use-it-first-or-lose-it dilemma which may goad them into a pre-emptive strike in the Gulf to pre-empt Israel's pre-emptive air strike. Their take:

"When we look at the three Iranian options, it is clear that the United States would not be able to confine any action against Iran to airstrikes. The United States is extremely good at air campaigns, while it is weak at counterinsurgency. It has massive resources in the region to throw into an air campaign and it can bring more in using carrier strike groups.

But even before hitting Iran’s nuclear facilities, the Americans would have to consider the potential Iranian responses. Washington would have to take three steps. First, Iranian anti-ship missiles and surface vessels — and these vessels could be very small but still able to carry out mine warfare — on the Iranian littoral would have to be destroyed. Second, large formations of Iranian troops along the Iraqi border would have to be attacked, and Iranian assets in Iraq at the very least disrupted. Finally, covert actions against Hezbollah assets — particularly assets outside Lebanon — would have to be neutralized to the extent possible.

This would require massive, coordinated attacks, primarily using airpower and covert forces in a very tight sequence prior to any attack on Iran’s nuclear facilities. Without this, Iran would be in a position to launch the attacks outlined above in response to strikes on its nuclear facilities. Given the nature of the Iranian responses, particularly the mining of the Persian Gulf and Strait of Hormuz, the operations could be carried out quickly and with potentially devastating results to the global economy.

From the Iranian standpoint, Tehran faces a “use-it-or-lose-it” scenario. It cannot wait until the United States initiates hostilities. The worst-case scenario for Iran is waiting for Washington to initiate the conflict."

They will probably go ahead with the gasoline sanctions against Iran, but this really is a precursor of war. It would involve blockading - an act of war in itself. It's doubtful that gasoline starvation would work - too much of a black market would crop up- or that if they did work, it would suddenly make the Iran regime peace-loving. STRATFOR's article states:

"The Iranians signaled last week that they might not choose to be passive if effective sanctions were put in place. Sanctions on gasoline would in fact cripple Iran, so like Japan prior to Pearl Harbor, the option of capitulating to sanctions might be viewed as more risky than a pre-emptive strike. And if sanctions didn’t work, the Iranians would have to assume a military attack is coming next. Since the Iranians wouldn’t know when it would happen, and their retaliatory options might disappear in the first phase of the military operation, they would need to act before such an attack."

It's sort of like telling Barney he can put his bullet in his gun and show off a little in the Middle East right now.

"This report is republished with permission of STRATFOR"

Sunday, December 27, 2009

PZG in a Strong Technical Spot

Paramount Gold and Silver (PZG) is a Canadian gold miner with mines in Canada and Mexico. As with so many gold miners, the monetary fundamentals are quite forgettable. So I'll just point out an interesting technical feature: (click to enlarge)

The stock has had a mind of its own since mid year, slumping in the face of gold's rally and now doing a triple blast off - lifting off from both the 140 and 200 dma as well as breaking a long bull flag channel - all in the face of gold's beat down in December. This is one determined bull flag and could mean a power move up.

Saturday, December 26, 2009

The Quiet Before the BOOM

Dynamic Materials (BOOM) loves to blow up things. They use more than 30,000 lbs of explosives each day. What do they do with all that mayhem? They are the world's leading provider of explosion welded clad metal plates that fuse together dissimilar metals that can't be readily bolted or hand welded. There is a lot of demand for such things as strong carbon steel welded to things like titanium and corrosion suitable metals used in upstream oil and natural gas processing as well as other petrochemical uses, industrial refrigeration, aluminum production, power generation, alternative energy, and shipbuilding. If you think this sounds like a Chinese laundry list of everything that's good in today's growth investing, you'd be right. Dynamic Materials is a global provider with growing involvement in China and the emerging markets in general. There is, of course, a shale natural gas production boom about to happen in North America as well - fertile ground for BOOM's products.

The phenomenon of microfusion was observed as early as World War I, when bullets were fired into armor plates to join dissimilar metals that were not able to be welded by conventional methods. This also was observed in the remnants of bombed-out bridges in World War II.

It doesn't sound like it would work, but DuPont started welding things together like this on purpose by means of carefully designed explosions and offered its Detaclad process in 1959. The idea was to blast away oxide and all contaminants and join metal by force and molecular intermingling instead of heat and melting. Denver based Martin Marietta licensed this method to build jet engine parts with. In 1965, a group bought Martin's explosion cladding business, and now it is Boulder based BOOM.

It has been a fast grower the last 6 years:

The stock has been in the doghouse all year long except for a brief but severe beating down to near zero in February/March - a measly +7% 52 week return. PE for ttm is a modest 19, price/cash flow is 8.0 - pretty cheap for a stock in a sweet spot of emerging market growth that has grown its cash flow at an annualized clip of a whopping 42% the last 6 years. The recession has dented their results as you'd expect with a deep cyclical. But the stock has been hammered out of proportion to this dip and is now way out of whack with basic cash flow from operations, which is still on a robust growth track. Its technical condition is an extreme quieting pattern:

The 50 and 200 dma have accomplished a positive cross and are now both sloping up, suggesting that the stubborn resistance level at $20 will soon go BOOM.

Sunday, December 20, 2009

Solitario - A Stock of Interest

Solitario Exploration & Royalty (XPL) could perhaps be considered an overlooked stepchild among the gold stocks. If you like your juniors above that sub $1 area but with lots of future explosive growth possible, this may be your cup of tea. Unlike the typical junior, they do have current revenue. But most all of their sales still reside in the ground.

A summary of their projects was given by their CEO in an at SA in June 2007 when the stock was valued at around $4. It went to $6 before being smashed by the general market sell off: (click to enlarge)

In the meantime, they have gotten to the point where they will be doing some major drilling projects in their large copper, gold, and silver properties next year. Any positive results could quickly return the stock to where it was in mid '07, when gold was much cheaper. The drilling plans were announced yesterday .

A major rule with the junior gold miners is that they don't really find much more gold in new areas anymore compared to what improved technology is bringing out of the large deposits that have given up their easy gold already. New finds out in the middle of nowhere requiring big infrastructure build is hard to finance and profit from. You want juniors who find new gold in large existing formations where infrastructure has already been paid for. A large gold/silver field in Mexico where XPL joint ventures with Newmont Mining fits that bill.

Technically, the stock looks to be just now regaining consciousness from the '08 party. A resistance level at $2.20 has developed and the 50 & 200 dma have crossed and gotten nicely upsloping and parallel - often a sign that a stock is getting its act together. The gold pullback hasn't phased its approach to the resistance level yet. If it breaks the formation, it may run pretty good.

Another positive is an apparent complete absence of analyst coverage. I can't find any. That's good. Cramer's analyst rule is zero is best, 1 to 4 is OK, much over 5 is sell.

Monday, December 14, 2009

Emerson Radio

Emerson Radio (MSN) was founded in 1915 as Emerson Phonograph when the phonograph was the only electronic gizmo in town (other than the telegraph). Now they make all sorts of marvels and have a subsidiary in China. This is one company that has seen a lot of changes. Radio came along and put Emerson Phonograph into receivership. It was revived as Emerson Radio and Phonograph in 1924. The along came the Great Depression, but they introduced the "peewee" radio in 1932, bursting them out of obscurity. They sold some of the first TVs in 1947. "Phonograph" was finally dropped from their title in 1977. They were the first to make the clock radio and have patented SmartSet, making them so that they automatically reset to the correct date and time after any power interruption. Don't you just hate those flashing "12:00"s ? They seem to have a long history of morphing into success no matter what happens.

The stock is currently in an interesting condition having been beaten senseless by the Great Recession. The eps has indeed suffered, but if you look at the rest of the picture you see this:

Revenue hasn't gone away and cash flow from operations has climbed to all time highs producing a very cheap price/cash flow of 2.6! If the earnings follow the cash upward, the stock could break out nicely. Technically, that appears to be what is happening:

If you like the cup and handle, this is breaking one. I like the behavior over the February/March market event, no price or volume reaction - all the sellers had left. The volume is only very slowly creeping back, certainly no topping type of volume yet, just the start of a stair step climb pattern with the steps punctuated emphatically with volume. And the A/D has just broken a long slow downtrend line and looks pretty strong.

Friday, December 11, 2009

Stump the TA Chump

It looks like the market is playing it's dastardly little game of stump-the-technical-analyst-and-make-him-look-like-an-idiot again. This has been a favorite all year long. Only an idiot would have bought anything in April during an obvious sharp bear rally. Bear markets don't end with a wild rally off a wild sell down - any smart technician knows that. All the oscillators read "suckers rally". But the suckers were right. And in July, the market was obviously rolling over having a lot of trouble clearing the descending 200 dma. I wrote a post here More Bear Signals on July 14 on why any sensible TA man would be short to the hilt at that point with the market's driver turning the wheels south. However, as I pointed out back then, the only thing that's been right all year is the game of follow-the-leader-groups, the leader groups being retail, tech, and the BDI (Baltic Dry Index). They were a lonely group back then calling for a north turn out of the market's funk, and they were right again as they had been in April.

Now we see the market technicals attempting to fool us some more:
Publish Post

Any technical analyst knows the small caps fizzle first in a run, and in early November we were having a major flameout with the Russell. Also we have this:

Here we see some major negative RSI and volume fade. So we should be an idiot and buy if the leader groups are right again. If you check the RLX, QQQQ, and BDI, they are sticking out their tongues at the technical analysts and saying "see you at the finish line, chump".

Friday, December 4, 2009

Oddsmakers Take On Iran

I posted yesterday on the well informed opinion of the intelligence service STRATFOR on war with Iran soon. As summed it up, the opinion is that the odds have recently (over the last 3 months) gone up "exponentially". They did not assign a probability figure to it but said that, while war is not inevitable, it is much more likely while pointing out that Israel seems to have assumed it to be a certainty in their intel planning.

These two entities, STRATFOR and Israeli intelligence, know more than the rest of us. So what do "the rest of us" think? Let's look at for a collection of opinion who've studied it seriously enough to wager money on odds contracts. They bill themselves as "THE Leading Prediction Market" and invite you to "tap into the wisdom of crowds". This wisdom sets a probability for events of interest to occur by a certain date. For example, what would you say are the odds for Mike Huckabee to be the Republican presidential nominee in 2012? The pricing of the current contract you can buy has this chance at 10%. Turning to the markets, there was a running bet all year on the U.S. GDP declining 10% or more off the peak between Q4 2008 and Q4 2009 (inclusive). The wisdom of the crowds had this probability spiking to 50% in late February when the market was spiking toward the floor. It's currently at 0.9%. So this wisdom, as far as the markets are concerned, may be of use as a contrary indicator.

They have had a series of contracts for an Israeli and/or U.S. air strike on Iran over the last few years. I checked out the two covering about a year period for 2008 and 2009 and compared them alongside the sabre rattling out of Israel about an imminent strike. As the charts below show, there is some correlation between this sabre rattling and what the wisdom of the crowds think about a war (click to enlarge)

In both years, mid-year sabre rattling by Israeli officials roughly accompanied a chance of war outbreak spiking to as high as 40%! But then a slide into year end - current quote for a strike by March 31 is 11%.

But, as was the case with the February GDP/market outlook, the smart opinion may be just the inverse of this pattern.

The quieting pattern into year end isn't what you would expect from the saber rattlers if we are building to a blowup. But consider the observation of Andrew Apostolou and other analysts interviewed a few months ago on Israel's willingness to strike Iran.

"... it's unlikely, they say, that Prime Minister Benjamin Netanyahu will reach that conclusion in the coming weeks or months...Israel is locked in a wait-and-see mode, planning to let U.S. diplomacy exhaust itself. Matthew Silver, a historian at Emek Yezreel College in the Galilee, agrees: "Netanyahu figures, "Okay, let Obama talk to the mullahs. It's a preordained failure." That the Israeli prime minister is making loud noises about a possible military strike, Apostolou says, suggests one won't come anytime soon. "If the Israelis really wanted to scare the Americans, they'd say nothing. When the Israelis go really quiet, that's when you have to start worrying. But in the meantime, Israel will continue to match Iran's belligerent signals."

And ran a July 13 article titled "The U.S. Should Worry When Israel Gets Quiet". Well, Israel does seem to have "gone quiet". Lately, their pronouncements have been preferring diplomacy if the military option is even mentioned. And now they say things like what Michael Oren, Israel's ambassador to the U.S. recently said on August 16 - Israel is "far from contemplating" a strike on Iran. That statement reminds me of the kid who denies eating any cake with chocolate smeared all over his face. It's interesting that the quiet zones in the above chart for this year and last coincide with the optimal time window of the year for a strike, September to November, when the prevailing monsoon winds keep the radioactive fallout and dust primarily in Iran and out of neighboring countries. I suspect that they were on the verge of doing the strike last year, but the financial crisis may have aborted it.

The opinion that knows, Israeli officialdom and STRATFOR, indicate the opposite of the slumping odds out to the March 2010 contract shown above. The current contract goes out to June 2010, and its current quote is a little higher at 18%. But all this would imply that the stock market impact would be severe - it doesn't seem to be very highly discounted.

Thursday, December 3, 2009

Is Iran Going To The Woodshed ?

More evidence is coming to light suggesting that investors should perhaps form a strategy around a massive strike on Iran coming up soon. I began posting on this emerging threat at my blog back in August - see

Art Cashin's Strange Comments - Aug. 21
Silence May Not Be Golden For Iran - Sept. 3
AWACS Prep In Iran Theatre - Sept. 24
Investing In Trouble - Oct. 3
Reading Between The Lines On Iran - Oct. 28

An Oct. 13 article over at discusses STRATFOR's new analysis. This geopolitical intelligence service is very well respected and is not given to alarmist rumor mongering. In late 2008, when there were many signs that a strike was being readied, an Aug 3 story by Reuters read "U.S. Israel attack on Iran Unlikely: STRATFOR Founder". The main reason was the growing financial crisis, which, as I've mentioned before, may have been the only stay of execution for Iran. But now, the well considered opinion reads "STRATFOR: Odds of War With Iran Spiking". Quoting their write-up:
"A new topic has rocketed to the top of STRATFOR's international concerns: the possibility of a war between the United States and Iran. There has been much discussion of this topic for years now, and STRATFOR has tended to dismiss it; there is a great chasm between remedial uranium enrichment programs and having a deliverable nuclear weapon. But events in the third quarter added credibility to the scenario...
The opening weeks of the fourth quarter will be dominated by 11th-hour negotiations primarily between but not limited to Washington and Tehran to see if war can be avoided. Washington and its allies will seek formal, transparent oversight for the entire Iranian nuclear program, and failing that, sanctions on the Iranian sector that is most vulnerable to foreign pressure: gasoline imports."
But STRATFOR doesn't believe gasoline sanctions have any realistic chance of working even if Russia seriously wanted to cooperate (which is doubtful) because the black market opportunities are too uncontrollable and too lucrative. Russia, Israel, Obama, and everybody knows this. They may go through the motions of more meetings and sanctions talk, but the enrichment deal was probably the last chance for a peaceful resolution.

Two news stories that STRATFOR says were deliberate intelligence leaks are of particular interest:
"Two major leaks occurred this weekend [the weekend of October 2-4] over the Iran matter.

In the first, The New York Times published an article reporting that staff at the International Atomic Energy Agency (IAEA), the U.N. nuclear oversight group, had produced an unreleased report saying that Iran was much more advanced in its nuclear program than the IAEA had thought previously. According to the report, Iran now has all the data needed to design a nuclear weapon...

The second leak occurred in the British daily The Times, which reported that the purpose of Israeli Prime Minister Benjamin Netanyahu's highly publicized secret visit to Moscow on Sept. 7 was to provide the Russians with a list of Russian scientists and engineers working on Iran's nuclear weapons program...

The message was twofold. First, previous assumptions on time frames on Iran are no longer valid, and worst-case assumptions must now be assumed. The Iranians are in fact moving rapidly toward a weapon; have been extremely effective at deceiving U.S. intelligence (read, they deceived the Bush administration, but the Obama administration has figured it out); and therefore, we are moving toward a decisive moment with Iran. Second, this situation is the direct responsibility of Russian nuclear expertise. Whether this expertise came from former employees of the Russian nuclear establishment now looking for work, Russian officials assigned to Iran or unemployed scientists sent to Iran by the Russians is immaterial. The Israelis — and the Obama administration — must hold the Russians responsible for the current state of Iran's weapons program, and by extension, Moscow bears responsibility for any actions that Israel or the United States might take to solve the problem."

This adds a new dimension to the Middle East problem - a strike on Iran may now be tantamount to a strike on Russia. The trip to Russia by Netanyahu with the results of Israel's undercover intel on the Russian scientists' work developing Iran's nuclear bombs for them was probably not a "stop this right now" visit. STRATFOR says the Kremlin keeps very close tabs on the whereabouts and activity of these people, and they know they are doing this. Rather this appears to have been a "the jig is up" visit by the Israeli brass. As the STRATFOR piece phrased it:
"Given that this specific charge has been made — and as of Monday not challenged by Iran or Russia — indicates to us more is going on than an attempt to bluff the Iranians into concessions. Unless the two leaks together are completely bogus, and we doubt that, the United States and Israel are leaking information already well known to the Iranians. They are telling Tehran that its deception campaign has been penetrated, and by extension are telling it that it faces military action — particularly if massive sanctions are impractical because of more Russian obstruction.

As the spy game goes, you intentionally blow your cover when you are sure you're not going to be needing it for awhile. In a section of the analysis they titled "A Question of Timing" STRATFOR reasons:

But there is a mystery here as well. To have any impact, the Russian involvement must have been under way for years. The United States has tried to track rogue nuclear scientists and engineers — anyone who could contribute to nuclear proliferation — since the 1990s. The Israelis must have had their own program on this, too. Both countries, as well as European intelligence services, were focused on Iran's program and the whereabouts of Russian scientists. It is hard to believe that they only just now found out. If we were to guess, we would say Russian involvement has been under way since just after the Orange Revolution in Ukraine [late 2004-early 2005], when the Russians decided that the United States was a direct threat to its national security.

Therefore, the decision suddenly to confront the Russians, and suddenly to leak U.N. reports — much more valuable than U.S. reports, which are easier for the Europeans to ignore — cannot simply be because the United States and Israel just obtained this information. The IAEA, hostile to the United States since the invasion of Iraq and very much under the influence of the Europeans, must have decided to shift its evaluation of Iran. But far more significant is the willingness of the Israelis first to confront the Russians and then leak about Russian involvement, something that obviously compromises Israeli sources and methods. And that means the Israelis no longer consider the preservation of their intelligence operation in Iran (or wherever it was carried out) as of the essence.

Two conclusions can be drawn. First, the Israelis no longer need to add to their knowledge of Russian involvement; they know what they need to know. And second, the Israelis do not expect Iranian development to continue much longer; otherwise, maintaining the intelligence capability would take precedence over anything else.

It follows from this that the use of this intelligence in diplomatic confrontations with Russians and in a British newspaper serves a greater purpose than the integrity of the source system. And that means that the Israelis expect a resolution in the very near future — the only reason they would have blown their penetration of the Russian-Iranian system.

Iran, well aware of all this, is behaving as if someone has just told them "the jig is up". They are frantically digging hundreds of new missile silos, held their big air defense drill, and are blustering to the world now that they are planning to build 10 new nuclear facilities, a behavior a European official recently described as "childish". Perhaps the child has just been made aware that he is in for a severe spanking.

Friday, November 27, 2009

Debt Dominoes, Here We Go ?

The Dubai debt scare focuses our attention to the one big thing that differentiates this recession, stimulus, and resultant rally from the previous cycles - the inordinate mountain of global debt. Despite the U.S. housing bust beginning clear back in 2006, you still have debt writers putting up indoor ski resorts in the middle of the desert. And Dubai isn't the only one still being this silly.
The domino effect, in my opinion, deserves more respect than most pundits and the market is giving it. Despite this view, however, I've been a bull on the market since late March. Back then, I wrote this view in a comment on a Seeking Alpha article by Bespoke Investment Group. The article pointed out a near term overbought condition predicated on the S&P being near a standard deviation above its 50 dma. This tends to occur as a single dot on a chart signaling the top of a bear bounce or as the start of a cluster of dots signaling the start of a big climb (click on link below to see article). My opinion was that it was signaling the start of a big climb, but note the caveat at the end of my comment:

S&P 500 Near Overbought Levels [View article]
It looks like it will be more a case of the multi-month climb like we saw into May '08 (the congested red dots in the middle of the graph). The conflicting technicals of the dangerous, uninvestable gyrations within the downtrend seem to be resolving into a buy signal (the kind VectorVest issued on 4/3/08 until their sell signal issued 6/11/08). If you look at the leading indexes (transports, financials, retailers) they are all just now breaking key resistance areas that would differentiate this rally from the other spastic bear market moves. The RLX retail index has now broken through the well entrenched horizontal line of resistance at 300, The transports and financials are now breaking the down sloping trendline through the highs. These leaders are following the technical steps of China's Shanghai index, which is now trading above a climbing 50 dma after a 50/200 cross (several steps ahead of the SPX).

The real test of these precarious spikes out of decline mode will come next week with the market's reaction to the wretched earnings and guidance that will replace all the nice rally talk. If the market has only mild or no reactions, then it won't be just another two week flying knife bear bounce anymore.

I've been expecting a good climb through the middle of the year '09, although I thought there would be a very sharp panic stricken VIX 80 dive to preceed it, which didn't happen. Major moves down such as we've had since '08 usually end that way. I'll take any kind of good move up I can get; but I suspect that toward the end of the year, it'll be ugly again. There are too many debt dominoes yet to fall.
Apr 03 20:26 pm |Rating: +2 0 |

We certainly have had the good climb since April 3 when I wrote that. I hope I'm wrong about the debt domino ugliness at year end, but it's hard to stop a domino field from proceding once the first one has been tipped. I've backed off to neutral on the market mainly because of how the small caps are behaving vs the big caps (see my Nov. 16 post) but Iran and now Dubai are problems as well. The leader groups that have faithfully called the market's direction all year (RLX, BDI) would have maybe a couple month's of mild consolidation and then more upside. But those dang dominoes! When a fool's ski resort in a desert in Dubai can hammer down your shoe maker's stock headquartered in Des Moines - well, that's dominoes for you.

Wednesday, November 18, 2009

Ag Boom Is Igniting

When anyone asks Jim Rogers for his best advice nowadays, he says "become a farmer". He is busy buying up farming operations all over the globe. It is the farmer, he says, that will be driving the Maseratis of the future, not the growers of creative debt instruments on Wall Street.

It is part of a seismic shift in valuing real assets over paper as is the case with commodities in general. But with food, there is much more too it than that. There is a food shortage developing that may wind up being more severe than say oil supply. A rapidly upgrading and very large BRIC population is placing a strain on global food production. They estimate total food production will have to rise by 70% over the next 40 years. That means $44 billion/year will have to be spent on Agriculture to produce that growth rate vs only $7.9 billion/year now.

This food shortage problem began to show itself in 2007 running crop prices and fertilizer stocks to the moon - and then back to earth with the whacking of the Great Recession. These investments have pretty much remained whacked this year, lagging about everything else, but they are reigniting. They have the potential to be some of the more explosive climbers available very soon, especially considering the historic droughts afflicting the chief food growing regions of the world right now. It is looking like global food production could be down 20% or more because of this pinch.

The food shortage is compounded with the currency debasement problems around the world. Nations will probably want to exchange devaluing paper bills more urgently for edible hard assets than for inedible ones.

Food crop shortage is also compounded with the oil shortage because fuel crops such as sugar (60% of the world's ethanol) compete with meal crops. Inflation adjusted, crops have severely lagged other commodities as this historical chart shows: (click to enlarge)

Using the heights achieved during the previous commodity bull market as an inflation adjusted reference, you can see that crops have of lot catching up to do. Be a farmer!

Monday, November 16, 2009

Talking Phase May Be Over With Iran

As discussed in some of my previous posts on Iran here at my blog, the diplomatic talking efforts to resolve the nuclear facilities issue with Iran seem to have come to an end. DEBKAfile has just published a report this evening on top U.S. and Israeli intelligence and defense officers meeting in Israel. They said:

Our intelligence sources report that frequent Middle East visits by high-ranking American intelligence teams are rare occurrences. Worthy of note is they are immersed in a second round of talks with their Israeli colleagues in the first half of November, in between two other related events: the joint US-Israel Juniper Cobra 10 ballistic defense exercise which ended last Tuesday and the publication of the much-awaited UN nuclear watchdog's next report due out Monday, Nov. 16. This report should lay out the findings of the IAEA inspectors at Iran's uranium enrichment plant near Qom

Those findings reportedly will say that the plant was designed "especially" for nuclear weapon enrichment levels and was a military installation.

sources say that the US-Israel intelligence conferences ongoing at present are the final touches to the process the Obama administration has instituted of strategic give-and-take with Israel ahead of a possible outbreak of war with Iran. The alignment has been going forward on four levels:

1. Communications between the White House and the Israeli prime minister's office, which are handled at the Washington end by Dep. National Security Adviser Tom Donilon, who enjoys ready access to the president.

2. An open line to defense secretary Robert Gates which defense minister Ehud Barak set up when he visited the Pentagon last week.

3. Direct interchanges between the two army chiefs, Chairman of the Joint Chiefs of Staff Adm. Mike Mullen and IDF Chief of Staff Lt. Gen. Gaby Ashkenazi.

4. Frequent conferences between US and Israeli intelligence heads.

Political, military and intelligence integration between the US and Israel on this comprehensive scale has been practically unknown in recent years. It serves the dual purpose of a demonstration of close American-Israel military cooperation while at the same time safeguarding the Obama administration against Israeli surprise moves in relation to Iran.

Sunday, Nov. 15, President Obama and Russian president Dmitry Medvedev said in Singapore that time was running out for diplomacy to resolve the crisis over Iran's nuclear program. Medvedev added that if discussions failed to yield results, "other means" could be used.

Tehran delivered its comeback the same day: Iranian president Mahmoud Ahmadinejad declared grandiloquently: "Iran is a great world power whose strength is unlimited and on whom no other state would dare impose sanctions," while parliament speaker Ali Larijani blasted America whom he accused of backing the Saudi bombardments killing Muslims (Shiites in Yemen). Obama is worse than George Bush, said Larijani: "His promise to change US policy toward Tehran amounts to nothing." He flatly rejected the latest Western proposal to resolve questions about Iran's nuclear program (overseas processing of enriched uranium) as "unimportant" and "irrational".

Sounds like the Iranians are through talking too. In another DEBKA piece, they say "the Iranians are frenziedly digging hundreds of new missile launch silos" to prepare for Israel. Of the two intelligence sources, DEBKAfile and STRATFOR, I trust STRATFOR more. But this agrees with what STRATFOR said in that they believe Joe Biden's policy speeches in Europe about 3 weeks ago signalled "A Change In American Plans On Iran" as I posted about here on November 9. STRATFOR believes "...this means the United States must choose between an Iranian bomb or employing the military option."

The Russell 2000 - A Nagging Problem For The Rally

Besides the Nasdaq Transportation Index (TRANQ) woefully short of confirming the broad market's nice climb on the year, the rally has the recent action of the Russell 2000 as a fly in the ointment. These two indexes are important. The TRANQ is the transports with almost no rails, which is what you want to look at for Dow Theory confirmation of developments in the broad market. The rails have become very levered to commodities, and thus to currency debasement and the China story. So they really tend to distort domestic economic health in a way Charles Dow did not intend. If you look at the difference this makes in the transport indexes, you see it is significant. The Russell 2000 is important because it is more broad based, having 2000 stocks instead of just 500 or 30. And perhaps more significant, it is made up of small caps, which tend to make major turns ahead of the larger cap stocks. In fact, if you had just been watching the action of the Russell as your only canary in the coal mine, you would have been tipped off as to just when to get out in 2000 and in 2007.

Let's look at what the charts telegraphed back then: (click to enlarge charts)

Here the Russell refused to return to the early March high as did the rest of the market:

And in 2007, the Russell put in an early top, a double top this time:

This was well ahead of the S&P 500 topping action:

What is the Russell doing now?

So the canary has keeled over again. This would lead one to be very suspicious of the new high being put in place by the other indexes:

We again have the negative RSI divergence not to mention a sharp weakening of the volume on this latest run by the S&P 500.

However, the canary could turn out to be a false prophet of doom this time, predicting only a mild downtrend or consolidation if we continue to faithfully follow the key leader groups as has been the case all year - despite the technicals. The RLX large cap retail index is still very healthy as is the QQQQ large cap technology index - albeit this could now be just by virtue of them being large cap. The Baltic Dry Index has been tracing out the moves of the S&P about 3 months in advance this year, and it foreshadows about 4 months of a mild retracing, then back up again. So how much of a major turn the Russell is telegraphing now, if any, may be trumped by the market's dogged determination to follow these key leader groups. If all the leader groups, including the BDI, start to keel over, it may be time to get very defensive. If, for example, the BDI, now near a previous 52 week high, were to start to form a double top, that would be bad.

Friday, November 13, 2009

Aurizon Mines - A Value Investor's Gold Stock

If you like to have good monetary valuation backing up all your stock selections, you have a tough time buying gold stocks. They dance to a different tune. I like to buy stocks in the context of their historical valuations, but with any mining stock, the pricing is determined as much by what they have in the ground (not producing any cash flow yet) as by about any other measure. That and how much they are spending to find and extract their product is about all the market cares about. You can go with just the mature, big cap producers to seek good value. But you typically run into cases like Agnico-Eagle Mines (AEM). This has been a favorite gold miner of Jim Cramer, the ultimate fundamentalist, but have you looked at its valuation lately? It sports a price/cash flow of 149, a PE of 157 and - well I could go on. Suffice it to say its valuation stinks. But it will climb along with the price of gold anyway - much to the annoyance of all us value investors.

If you want a token value stock in your gold line up, take a look at Aurizon Mines (AZK) from Canada. They have no geopolitical issues having all their operations in North America. The price/revenue is a palatable 4.6 and the price/cash flow is a nice 10.7 and, if you like historical value, it has this history: (click to enlarge)

The price seems pretty well correlated with their financial results over the years and leaves a huge catch up move to be had even if gold were to hang around $800-$1000. The PE has shrunk to a reasonable level (for a gold stock). The stock price has been relatively stagnant this year. As the volume chart shows, investor interest has increased since '06 - everything has raced ahead of the stock price since '06. If the gold price goes into a big climb from here, this stock could have a nice move coming.

Monday, November 9, 2009

A Change In American Plans On Iran?

As a post script to my Nov. 5 post on the web bot Oct. 26 tipping point date, there is another interesting development that fits with a turn around this date from peace to war with Iran. STRATFOR, the "shadow CIA" as Barron's calls it, published some intelligence on this exact date, Oct. 26, discussing vice-president Joe Biden's trip the previous week to several European countries. Biden made a critical departure from the cooperative moves with Russia being done up till now. The Obama administration had been going about revamping the missile defense shield in Europe in an attempt to gain Russia's help in trading sanctions on Iran, especially the ban on imported gasoline. Russia would have to be the major helper there. STRATFOR thinks the bombastic, unfriendly tone toward Russia in Biden's speeches tips off a change in the U.S. plans about negotiation with Iran versus the other options. It was a carefully vetted speech, not Biden's personal musings. In their words:

The American decision to threaten Russia might simply have been a last-ditch attempt to force Tehran's hand now that conciliation seems to have failed. It isn't likely to work, because for the time being Russia has the upper hand in the former Soviet Union, and the Americans and their allies -- motivated as they may be -- do not have the best cards to play.

The other explanation might be that the White House wanted to let Iran know that the Americans don't need Russia to deal with Iran. The threats to Russia might infuriate it, but the Kremlin is unlikely to feel much in the form of clear and present dangers. On the other hand, blasting the Russians the way Biden did might force the Iranians to reconsider their hand. After all, if the Americans are no longer thinking of the Russians as part of the solution, this indicates that the Americans are about to give up on diplomacy and sanctions. And that means the United States must choose between accepting an Iranian bomb or employing the military option.

So if the military option comes about, October 25, 26 may wind up being the turn point into that per the web bot's computations.

Sunday, November 8, 2009

Oil vs Gold Shock Absorbers

Personally, I like air shocks the best, but we're not talking about pickup trucks here. Every long-term portfolio needs to have good shock absorbers. Shocks can come out of the blue and are difficult to develop hedges for. But some shocks are foreseeable, you just don't know the timing for them. Such an item is the current situation in the Middle East. As I have been noting in my posts, we're going through a danger period with Israel and Iran the next 2 months or so where there is a greatly higher chance of an Israeli strike. The further we go into 2010 with no strike, the more likely a deterrence strategy is going to be implemented.

Doing a pre-emptive bombing on Iran's nuclear plants poses many serious problems for Israel. Radioactivity from the aftermath could drift over the densely populated areas next to Iran and kill millions causing severe geopolitical and public relations problems for the Israelis for many years into the future. Recent polls, even in Israel, reveal that a majority think that even if Iran gets nuclear weapons, they won't use them. A strike would likely snuff out the fledgling global recovery we have worked so hard to get going making Israel public enemy #1, even though polls show most Americans would back an Israeli strike. That opinion could change as the complications of a strike wore on. On the other hand, if Israel were to allow Iran to build some nuclear weapons, they could simply wait for their first attempt to use them and respond, probably with some whole-hearted U.S. help, and pulverize Iran into oblivion with all the world cheering them on and designating not only Iran, but all of Israel's enemies as public enemy #1. But there is no telling how many cities and lives they may have to give up in the process.

I think pre-emption is the more likely of the two, but how do you design an investment portfolio until we know how this all plays out? All cash isn't a bad option, but for, say a mutual fund where you need to maintain an exposure to the markets, you need shock absorbers. Although the touchy situation with Iran has been well know by the markets for years, they have become a little desensitized to it with repeated cries of wolf. You hear or read little about it on CNBC or the other financial media, even though it perhaps is the most powerful market moving thing that should be being analyzed right now.

To take a stab at such analysis, let's take the 9/11 attacks as our sample shock inducer. These attacks had a lot shock value. It was the first time in history the U.S. suffered a military attack on its soil. The stock market had to be closed down for days. The next Sunday, churches were filled. We didn't know precisely what countries were to blame, but we knew there was gonna be trouble in the Middle East. The two big things that come to mind to guard against such shocks are oil and gold, in that order. So load the boat with oil stocks? No. Why? Look at the reaction: (click to enlarge)

Oil stocks tend to follow strong market moves too much, even though the oil price did go through a spike (that quickly normalized). It was a much different reaction with the gold stocks:

Gold and gold stocks reacted strongly in the opposite direction. Both these reactions were short lived before gold and oil returned to the bull, bear, or sideways markets they were doing before the attacks. We can thank our lucky stars if market reactions to an Iran strike are so brief.

Friday, November 6, 2009

Dueling Parabolas

The fractal long range forecast for gold is basically a parabola. A long while back, before gold was anywhere near $1000, David Nichols of the Fractal Gold Report drew this result of his fractal analysis for gold's future: (click to enlarge)

I have added the note about the resistance level we have just now broken smack dab centered on the parabola drawn when gold was at $734.50 an oz. This analysis is from pure geometry and physics, which know nothing of idiots in Washington or fools on Wall Street. But they have their parabola too!

I suppose a lot of the debt increase of the 80s can be blamed on Reagan's cold war deficits. But we won the cold war, and in peace-time, debt could have come back to sensible levels. Instead, a new war developed. We were invaded by an army of wiz kids on Wall Street creating and slicing and dicing mortgage debt, and peddling and juggling it to no end. They started their parabola in the early 90s. Gold started its parabola 10 years later in retaliation. Gee, I wonder if the two parabolas could be related?

Thursday, November 5, 2009

Is Web Bot for October 25 a Hit or a Miss?

The October 25 "tipping point" date of the web bots (see my post here Web Bot Weirdness) has come and gone and no real obvious tipping - yet. So is this going to go down as one of their misses? Well, I wouldn't be so hasty to give it a final grade just yet. When they first started picking up strong vibes on this in the internet linguistics in spring of this year, they were about equally divided on whether it would be an Israel/Iran war or trouble with the dollar, not that these two issues would be unrelated. Lately, they have been leaning more toward banking/dollar as what is being tipped into trouble.

There has been some tipping on both issues as the dollar has been weakening and becoming a real concern as a holding by many nations. But perhaps a more dramatic tipping has transpired on the Iran issue. October 25 could be seen as a turn point from peace to war. It was on this date that the inspection of Iran's new nuclear facility took place, and it seems to be more a military facility than a peaceful one. And October 23 was the Friday deadline Iran was to give their answer at the Vienna talks on handing over their uranium stockpile for peaceful processing in France and Russia. Iran has essentially said "no" to a peaceful resolution, giving a late answer the next week that would allow them to hand over their LEU in stages so they could continue working on their bombs. This is a nonstarter at Vienna. It could be that we are tipping into war, which would make for more trouble with the markets and the dollar. From George Noory's radio show Coast To Coast on July 21 summarizing Clif High's work:
- When Israel bombs Iran (also around end Oct early Nov), they will use a nuclear-tipped bunker buster that will hit something unforeseen underground. As a result, a radioactive cloud will form that will pollute and sicken Southeast Asia. This will cause much of the world to turn against Israel.

- The “Death of the Dollar” will be a continuing trend, with a hyper inflationary period in 2010, and banking crises/confidence losses that will begin in August 2009 and escalate by November 2009.

Since the big "no" answer from Iran at the talks, the quiet on the subject has become deafening. Makes me worry.

Wednesday, November 4, 2009

Gold Fractal Update

A lot of predictions are being thrown out these days as gold surges and garners attention going above the $1000 mark. It seems like about half (well maybe 1/3) say it has run too much - short it. The rest are timidly stepping onto the train. It can be confusing listening to the arguments for and against gold because most of them make good sense. Shorters say gold is getting crowded. Longs say it's not too crowded. Have you seen any popular magazines lately with gold and silver cover stories?

There is a totally dispassionate way of analyzing gold that doesn't try to figure what bank may be selling or what government may want to buy or what the human psyche is on moving money into it. There is pure technical analysis that does all of that of course, but then there is the new dispassionate way - fractal analysis.

David Nichols is a pioneer in this developing science and has been incredibly accurate in calling the movement of gold. For an overview of fractal analysis, read the July 5 post here at my blog Is Gold at a Fractal Moment? where I summarize his call that early July would see a major turn begin out of the consolidation since March '08 and into the next hypergrowth phase. Look at a chart and see if that isn't exactly when the present run began.

There are many things Nichols uses to form a projection, one of them being the fractal dimension. This is a measure of energy level. Fractal theory says that anything fractal moves in repeating patterns with an ebb and flow of energy. An energy dimension can be computed that shows where a move is. The current (as of Oct 28) fractal dimension of gold is:

Here we see the big picture (monthly chart) for gold's fractal dimensioning including the 1 1/2 year consolidation since last March, whose end was called to the week. The 30 and 55 levels for the fractal dimension are important because they indicate when a significant move begins full of energy (55) and when a move is nearing exhaustion (30). The big move up in late '05 through May '06 began with around a 58 as did the big climb starting late in '07. As you can see, our current climb starts at 63 and is only beginning on a monthly basis.

Wednesday, October 28, 2009

Reading Between The Lines On Iran

Iran has thumbed its nose at the deadline last Friday for its answer at the Vienna talks to facilitate Iran handing over 80% of its uranium to Russia and France for peaceful processing. They are thought to be working on a new proposal whereby they get to keep about a ton of the LEU, just enough to continue their bomb making work. They will present this brainstorm tomorrow.

If you look between the lines of the published comments of European and American foreign ministers and generals, people who know a lot more than they can explicitly say, you can do a little informal intelligence gathering. An article out today on European angst over Iran's usual stalling tactics quotes some of the FM comments as "Iran cannot play and play and play with us" and "dialogue cannot last forever". They seem to have had a vision of a scheduled light at the end of the "talk" tunnel. The French foreign minister said "Iran is wasting time because now is the time for talking. One day it will be too late."

As for more formal intelligence gathering, nobody does it better than Stratfor. From their latest Iran report out today (Israel, U.S.: Negotiating Iran With Russia)

An Iranian state television report from Oct. 26 caveated that Iran would be demanding significant amendments to the proposal. Those amendments are unlikely to satisfy the P-5+1 negotiating team, and so the negotiations will continue -- or so Iran hopes.

Iran may be taking note of a critical meeting occurring in Moscow Oct. 28 between U.S. National Security Adviser James Jones and Russian Security Council Chief (and former Federal Security Service head) Nikolai Patrushev and Foreign Minister Sergei Lavrov. Patrushev is believed to have extended the invitation to Jones in the past week, and STRATFOR sources in the Kremlin have indicated that in this meeting, Lavrov will be trying to get a better read on U.S. intentions regarding Iran.

Before heading to Moscow, Jones said Oct. 27 that the United States will respond if the negotiations with Iran fail to produce concrete results. He reiterated that Iran "now needs to follow through on its commitments" and that "nothing is off the table" in terms of U.S. options in dealing with Iran. While maintaining an expected level of ambiguity, Jones is clearly signaling that the U.S. administration is prepared to take a tougher stance on Iran and will not allow this diplomatic phase to continue indefinitely -- a pledge that Obama recently made to Israel.

Israel, meanwhile, is keeping quiet, but is also busy laying the groundwork for more decisive action against Iran.

As for the published lines from the quiet Israelis to read between, well there are very few. But there is the considered view of Middle East experts, as noted in my previous posts, that "when the Israelis go really quiet, that's when you have to start worrying" (about a military strike, that is). The empty space being published seems to have a lot to say.

Friday, October 23, 2009

Iran Update

Today has been given to Iran for a decision deadline on the nuclear fuel enrichment deal being worked on in Vienna. An initial response by Iranian officials is a "no", but a final answer has not been rendered. This could sharply dial up the risk of the military option being used very soon, especially considering what's going on with the S-300s. In a news release just today, Tehran On The Brink Of Procurring S-300 Missiles , the deal is back on for Russia to ship the deadly anti-aircraft missile system to Iran to deploy around all its nuclear sites. Russia had agreed to stop the deal given the delicate nature of negotiation attempts. Currently, it would be relatively routine for Israel, even if acting alone, to successfully bomb Iran's facilities. How effective that bombing would be is another question. But the S-300s, if deployed, would mean serious damage to the Israeli air force if and when they were to do a strike.

The talks, as Israel claims, may be just stalling and deal making (and breaking) to give Iran both its nuclear bomb program and the S-300s to guard it with. Our optimistic impulse is to cheer the initiative being worked on now. It sounds good. It would have Iran hand over 75% of its low enriched uranium to Russia and France for higher enrichment and processing to a form suitable only for power plant or medical use but not for bomb making, then sold back to Iran. There would be no need for Iran's enrichment program with its possible bomb threat. But as the above news release says,
..., this apparent breakthrough may come at a grave price if in exchange for its “flexibility” Iran finally gets the S-300’s from Moscow. Washington is currently praising Tehran for finally responding to Barack Obama’s outstretched hand and will not be in a strong position to do or say much if Moscow rewards Tehran with S-300’s.

Together with the Tor M1 and the older super long-range S-200 (provided by Russia in 1994) and the S-300 missiles Iran could build a solid multilayer anti-aircraft defense shield that could defend its nuclear facilities against a possible U.S. or Israeli air attack and inflict serious damage on any attacking force. Without the S-300’s Iran does not have any credible air defenses and its nuclear facilities are vulnerable to such attacks (Interfax, October 21). The possible price for showing “flexibility” to get the S-300’s by sending 1.2 tons of low-enriched uranium abroad may not be as significant as it seems. In 2008, Russia shipped to Iran some 82 tons of low-enriched uranium as nuclear fuel for the Bushehr nuclear power reactor and it is stored under the protection of an IAEA seal (RIA-Novosti, February 25). Iran could dip into that source to easily replace the uranium it may agree to send to Russia under the IAEA draft deal as soon as its nuclear facilities are protected by a credible air defense system from a devastating outside attack. The over-enthusiastic Obama administration might face a nasty surprise.
The nasty surprise may come from the Israelis. In my September 3 post "Silence May Not Be Golden For Iran" I said:
consider the observation of Andrew Apostolou and other analysts interviewed a few months ago on Israel's willingness to strike Iran.

"But it's unlikely, they say, that Prime Minister Benjamin Netanyahu will reach that conclusion in the coming weeks or months...Israel is locked in a wait-and-see mode, planning to let U.S. diplomacy exhaust itself. Matthew Silver, a historian at Emek Yezreel College in the Galilee, agrees: "Netanyahu figures, "Okay, let Obama talk to the mullahs. It's a preordained failure." That the Israeli prime minister is making loud noises about a possible military strike, Apostolou says, suggests one won't come anytime soon. "If the Israelis really wanted to scare the Americans, they'd say nothing. When the Israelis go really quiet, that's when you have to start worrying.
As my chart shows in that post, the Israelis have gone quiet since he said that. So much so that you see it noted in headlines and in stories on Iran lately. In a NY Times piece out today "Draft Iran Deal Has Israel Worried" we have:

Thus far, officially Israel largely remained mum on the talks in Vienna and Geneva.

The only reaction from an Israeli government official so far came from Defence Minister Ehud Barak, who late Thursday criticised the International Atomic Energy Agency (IAEA) proposal as insufficient.

'The agreement, if it is signed, will postpone uranium enrichment in Iran by about one year. But if the enrichment is not halted, then the only end result is that Iran will have received legitimacy to enrich uranium on its soil,' Barak told a conference in Jerusalem.

'Therefore, a halt of enrichment in Iran ... coupled with immediate harsh sanctions free of any illusions and with eyes wide open' was needed, and without 'all parties taking any option off the table under any conditions', said the Israeli defence minister.

"Iran should know" they emphasized "that all options are on the table". Iran has been reported as vowing to continue enrichment even if they send the uranium to Russia. This does not sound like a peaceful resolution of the situation coming up. Russia processing Iran's bomb material just sounds too much like the fox guarding the hen house to begin with. If they decide to go ahead with the S-300 missiles, they would be delivered immediately. I get the impression the Israelis may not wait around until Iran gets a boat load of the new missiles ready to shred their planes before they do the air strikes.

Thursday, October 22, 2009

Is VIX 20 Important?

Much ado has been made lately about the market's fear index, the VIX, arriving at 20 - as low as it's been since the start of the credit debacle and way down from the end-of-the-world 80 it was at just a year ago. But it's just another round number like Dow 10000, so should we care? Well, yes. If you look at how fear has traversed this market, you see something significant: (click to enlarge charts)

The 20 level has served as a ceiling for improving emotions all during this debt-induced mess. In fact, you can look at a VIX chart covering the entire debt balloon era that got under way in the late 80s, and see the significance of this 20 level:

It is a line in the sand dividing the nice, stable bull move years, shown in green, and the nasty, gyrating topping actions and bear move years, shown in red. At the left, we had the '90 recession, then a quick and painless trip back into the green. As the debt balloon grew, we ran into the savings and loan crisis of the 90s and the dot-bomb top and bear market and a much bigger sea of red. But we got back to the nice green for a little while. Then, the next debt complication, the housing bust, sends us hurdling back into the red. Now we are back at the dividing line. Are we going to emerge back into the calm green seas or see a spreading sea of red? There is a pattern in the progression of fear as our debt level goes parabolic - the fear spikes go higher and the seas of red grow bigger. Unless we can now break and hold the sub-20 territory and defeat this progressing pattern, we may be at a very dangerous turn point in the stock market.

There is a confluence of projections from very independent means of analysis (fundamental, technical, sentiment, fractal, web bot) that all agree on this impending turn point condition. From technical analysis, we have a rising wedge formation:

This is a strong bearish formation and is the inverse of a falling wedge that can be seen in this year's VIX chart above.

And from Planet Yelnick, an Elliott Wave site, we have:
By far the most interesting discussion in the STU was around the banking index, which shows a fairly clear top. This would be huge as the bank stocks have been like the Nifty Fifty, or in this case the High Five: a small number of stocks = a major part of the rise. This sort of situation is bearish: a bull market runs up on a broadening base while a bear rally runs out of steam on a narrowing base. Their sudden weakness presages more than a drop in the Dow; it signals a return of the credit crisis.
A return of the credit crisis? Egad! Back into the sea of red we go. Loans are, in fact, hard to get. Farmers can't get loans, which is making things difficult for companies like Deere. This could aggravate food shortages and prices. But this could be the least of our problems if we don't see the bankers starting to help main street more.

The popular bears' argument about the huge debt overhang and dollar problem is well known. But did you know that two of the biggest table thumpers for a glorious new bull climb have recently moved to the edge of the bears' camp on this issue? On CNBC's Mad Money, Jim Cramer was confronted with a viewer's question asking him if the parabolic debt explosion worried him. His instant, impassioned response was yes, it worries him and, unless it is immediately dealt with successfully, it will cause a new bear market within 18 months. And Larry Kudlow has recently started to proclaim that he is a "short term" bull but he sees the dollar debasement changing things out about 3 months. That's probably the two head cheerleaders for team Dow going over to the other side, only disagreeing on when. I don't feel cheered.

Is there any hope? Yes. We can do what Ross Perot tried to explain to the American people back in 1992 in his presidential campaign. If we had reformed our government the way his Reform Party tried to, we would be living in a much different world today. It would have been relatively painless back then at the left end of the VIX chart above. But now it is a scary time indeed.

Saturday, October 17, 2009

The Market's Psychological Map

We are at an interesting point on the map of our feelings on the economy and markets. Stock market sentiment is not all that giddy with the rally still not getting that much respect. Fund managers have been holding their nose and dipping their buckets into the stream because their benchmarks are leaving them looking like fools. Buying just because everyone else is tends to happen closer to an abrupt end to a move than to a surprise beginning.

It is the consumer's sentiment that I want to take a look at:

This chart tabulates, not the raw sentiment numbers, but preceding 6 month change in sentiment over the years. As you can see, we are now at a fast 6 month rate of improvement not seen for 15 years. And the only other two times in the past 20 years this was seen was a big turn point in sentiment back down.

An interesting comparison can be seen comparing our current recession to the previous one. The fast run-up to the turn level happens at the end of the recession, as you might expect. But then you had a debt hangover induced stock market and sentiment dive to the mid-to-late 2002 market lows after we had celebrated the end of the recession. We're seeing the same pattern played out with the latest recession, which most are saying ended mid year. We have ballooned our debt to way higher, more unstable levels since the 2002 episode. If the pattern repeats, we are at a point where we soon have a psychology turn and some kind of debt hangover induced stock market trouble. This could be commercial real estate loans, a dollar debacle. It could be a variety of things.

I have been a market bull since April despite many bear signals, some of which I've summarized here while concluding that I favor turns north from consolidations (based mostly on technicals). But now the technicals are starting to suggest a turn back down. Those who follow fibonacci curves point to the typical 50% retracement level that happens after big moves. That comes to 1100-1200 on the S&P 500. The ETF Profit Strategy Newsletter called the start of the rally with a March 2 alert for a move by the Dow to the 9000-10000 area. They are now seeing a big move down. Doug Kass started going long in February a few weeks early and called the tippy top bottom of the crazy gyrations on TV within a week of the event. He has been going short for weeks and is now at his highest net short position since February. I am going from bull to neutral until we sneak past this twilight zone.

If we are to have some debt overhang induced market trouble, our emotional state would suggest it may start soon. The consumer confidence survey level is over that unstable 70 mark:

If we are considering our emotional state, we may want to take a read on what the web bots are seeing. A misconception about bots is that they predict big events on particular dates. But with the markets, the software actually reads feeling changes and, I suppose, puts together some kind of centroid of all it reads for a time approximation. George Ure and Clif High are the "two guys in a hole in the woods in Oregon" creating what they call "The Web Bot Project". In commenting on the bots' recent prediction about October 25 (see my previous post "Web Bot Weirdness") George Ure says this at his site
"What is October 25th? The way the data reads, we are less likely to see a single event driving things (although that's possible) so much as we are expecting an emotional tipping point. So, for example, the kinds of news events that might feature the beginnings of a showdown between 'the people' on the one hand versus 'the banksters' on the other. The forces have been building there..."

It will be interesting to see how our feelings might change going into November. If the seers who have been calling things to a tee lately are right again, we are all going to get a little cranky. Even Larry Kudlow, the irrepressible CNBC optimist and bull, has lately started sounding more like Peter Schiff, lashing out at those who are debasing the dollar and drowning our prosperity in a sea of debt and federal meddling. Lynch the banksters!

Is Headwaters Emerging From The Cellar?

If you want to be in a dangerous market with a dangerous stock, take a look at Headwaters (HW). This company was a good looking prospect back when oil began its relentless climb in '04 and '05. They have proprietary technology for CTL (coal-to-liquids) that converts coal to gasoline. In North America, we have an abundance of coal, so CTL is a serious alternative energy. But, unfortunately, it's not an alternative to CO2. Depending on what study you look at, CTL greenhouse gas emission is about a wash relative to crude refined gasoline. And burning coal instead of chemically converting it puts out about double the amount of CO2.

So it's an alternative energy with problems and needs government help. In response to this, Headwaters didn't like being dependent on that government help for a single product and diversified into home building products such as stone and trim materials, and also a coal combustion byproduct cement. Well, catastrophe happened to all of that as the government help expired and housing went bust. The stock has been smashed down to single digits and they currently sport a negative $14 per share earnings on a $5 stock. So buy now? Well, a turn may be forming. The price/cash flow is a very cheap 2, their bottom line has actually turned positive as of the June quarter, and the chart is telling me a serious turn wants to happen: (click to enlarge)

This stock has not done much of a recovery bounce still being down over 30% on the year. But it has just broken back above its 200 dma and a 50/200 cross has just formed. It's also breaking the classic pennant formation with convincing volume on more than just a one day spike. On the negative side, it's way too noisy and will probably follow any market weakness that's ahead. But it could do a quick 20% or more before a weak market overwhelms it.

There are two main crude oil alternatives to carry America across the bridge to a post-fossil future - natural gas and clean coal. I've been writing about the dire need for a massive switch to nat gas for years now including a post here "The Bridge Is Out". It does my heart good to see people like Richard Kinder of Kinder Morgan Energy Partners (KMP) and Jim Cramer of Mad Money along with a growing lobby in Washington starting to beat the drums for nat gas to compete with what Cramer calls the Black Lung Coalition for the big coal companies.

I think nat gas is the better choice because it is much cleaner and is the best weapon we have to immediately cut way down on all pollutants including CO2. Whether you believe CO2 is a real problem or a political hoax, the fact is any oil replacement that's a CO2 problem is not going to get implemented. Thus we have the huge carbon capture problem with any coal solution. Headwaters is tackling this problem by forming a joint venture with the University of Utah in carbon capture. If they ever come up with a clever way of dealing with CO2 (other than parking it in underground caverns), CTL could become a rocket ride for all American stocks involved. They use CO2 in secondary oil field recovery and in CBM recovery. But maybe they could start using it to make soda pop for the martians and shoot it into space or something. Rentech (RTK) in America and Sasol (SSL) in South Africa are two other CTL stocks. Sasol has been powering about half their country's planes with coal derived fuel for years now without carbon capture, but that probably could not happen in America.

Wednesday, October 14, 2009

Web Bot Weirdness

I try not to pay much attention to perma doomer analysis because they tend to keep you out of the market all the time if you take everything they say seriously. The web bots are such analysis. Critics say they constantly predict bad things so that every time something bad happens, they are right like a stopped clock. I won't debate the merits of web bots here. You can check Wikipedia's write up on it if you're not familiar with web bots. Suffice it to say that they are specific enough in their predictions and have enough hits vs misses to lead one to suspect that there is something to the methodology.

They seem to do better at predicting the financial markets and related human psychology storms (their original intent) than earthquakes and natural disasters. Last summer, they were predicting a transition period for September 22 to 27 into a turning point around October 7 into a financial market crash. In an article "Web Bot Report Foresees October 7 Turning Point" posted September 8, 2008 summarizing a September 2 radio show, we have this:
The Web Bots see September 22-27, 2008 as precursor dates to the main turning point date of October 7, 2008. Closely watch events during September 22-27, 2008 for hints as to what to expect on October 7, 2008.

Cliff said whenever "it" happens, and whatever "it" turns out to be, "it" will be a date in history you remember like 9/11, we will remember 10/7.

The Web Bots foresee that October 7, 2008 to February 19, 2009 will be filled with emotional intensity, and the length of the release period will be extraordinary. The Web Bots have never picked up any event lasting this long. In comparison, 9/11 length lasted about 10 days. This event will be four months of high emotion.

The Web Bots foresee consumer society collapsing by mid November 2008.
As we know now, this is precisely what happened. We don't remember the 7th specifically like 9/11, but we remember the early October crash in general and the "emotional intensity" and crazy VIX fear index running to unprecedented highs that was a psychological event of four months that ran through February to the March 6 market low. This psychology left its trace in the market: (click to enlarge)

The precursor week ended a good looking rally in the mid and small caps that had been leading the market, and after October 6, the market was toast as we were on the edge of the precipice of systemic breakdown.

This same article also predicted an earthquake that did not happen, but they got the psychology/market part right to a tee. The web bots are now predicting a strong happening centered around the October 25, 26 time frame. I have seen this as being Israel striking Iran and also as a global banking and financial market crisis with a dollar collapse that runs from November '09 to November '10. After the detailed and correct bot prediction of last year, this gives me pause in continuing to be aggressively long anything but gold, silver, oil, and military holdings - and perhaps better than anything, cash. I am gradually collecting profits on my high beta climbers. Gold, oil, and some of the homeland security stocks are climbing as good or better than the rest of the market right now anyway. However, if we have a repeat of last October, this event could cause fund redemptions and a brief hit being dished out to gold along with everything else.

Given the other evidence I've posted on here about Israel, It looks like the bots could be seeing a war breaking out causing turmoil in the markets. As I pointed out in an earlier post, Middle East experts believe we should worry when the Israelis go really quiet with their attack talk, and they have as I charted in the post. I've noticed article after article with titles like "Israel dialing down tone" "Israel mum" etc. It would be wise to be defensive over the next 2 months or so. Doug Kass, who called the March bottom perfectly and was getting long a few weeks ahead of that bottom, began going short a few weeks ago and is now reportedly at his highest net short position since February.

Sunday, October 11, 2009

Gold Stocks - The Sector To Overweight

Have you ever looked at a chart like the one below and wondered what was I thinking when this item was at the lower left corner? (click to enlarge)

I guess one should have placed all eggs in the basket of a manipulated commodity that doesn't even go by the sound fundamentals of valuation. If you would have done such a dangerous thing, you would have been richly rewarded.

Was the above portfolio the risky juniors miners and penny stocks? No. This portfolio is an equal weighting of the 16 gold stocks that are the bulk of my buy list: AEM, AU, AUY, ABX, BVN, CDE, EGO, FCX, GG, GSS, GFI, HMY, HL, IAG, KGC, LIHR, NEM, NG, PAAS, RGLD, SSRI, SLW. As the chart suggests, this group is just now coming out of a lull off a long term support trend-line if you discount the aberration of the credit crunch of late 2008 and early 2009. Considering that gold is at an all time high now, these mid to large size gold stocks look poised for a strong catch up move to catch gold, which is itself breaking out through its one year resistance level.

The strong out-performance of gold stocks over the past 10 years is a trend that is very likely to continue if not strengthen. The debt pressure on currencies in general and the USD in particular isn't going to go away anytime soon. It is about the only sector that will probably climb no matter what the economy does or what Israel and Iran do. Whether the S&P 500 continues a good climb or is derailed by geopolitical or currency problems, the gold sector should continue to out-perform it.

VSEC a Stock of Interest

VSE Corp. will likely benefit from either a military confrontation soon between Iran and Israel or from an ensuing regional arms race if Iran is allowed to become a nuclear menace. They stand to be an up stock in a down market if war breaks out. This is how the stock behaved at the last Middle East war:

It was resilient in the 9/11 sell off and soon began reacting to the impending Iraq war. They offer "brains-of-the-operation" support such as electronic warfare software support. If there is no war, we will enter into what Hillary Clinton has phrased in a recent speech as a "defense umbrella" relationship with allies in the region, offering missile systems and American know how. This is what the recent revamping of American missile strategy in the area is all about. VSE already sells into this market. They revamp old U.S. warships for use in foreign navies.

This is a gem of a stock even with no hot or cold war help. Price/sales is 0.2 and price/cash flow from operations is 7.3 running a current PE around 10. This is good valuation for what Morningstar terms "aggressive growth" in their "stock type" classes. Looking at their results over the last 10 years, I would term it "kick ass". Obama's defense cutback promises have probably placed the stock on sale. But, like most political promises, this one may have to be severely compromised.

Wednesday, October 7, 2009

Russian Enrichment Plan For Iran a 2006 Redux

The Geneva talks on Iran's nuclear program has produced an idea that has everyone buzzing. This would have Iran hand over about all of its uranium to Russia and maybe France and some other nuclear nations in the region. The idea is that these plants could do an enrichment to a form useful only as nuclear fuel or isotopes for medical treatment. Then the uranium is to be handed back to Iran for peaceful use. This would do away with the need for Iran to do their own enrichment if, as they claim, they only want peaceful use of uranium.

This is not a new idea. It was proposed by Russia when Iran restarted their Natanz plant in early 2006. And Obama isn't the first president to consider the idea as a January 26, 2006 article Bush Backs Russia Plan For Iran explains. Back then, Bush wanted it, Putin wanted it, Iran wanted talks about it. That's sort of where we're at now. The result was Iran did not hand over their uranium, kept developing their program, and nearly got hit with a military strike later that year. Wary of Iran's strong history of stalling tactics, lying about their intentions, and the shrinking window of bomb making preemption, Obama and U.S. officials have been stressing the urgency for Iran coming clean. I've read that the informal deadline for this is December. This happens to agree with certain military preparations including the frantically stepped up production of the MOP originally scheduled to be available in about 3 years but recently moved up to December of this year. MOP (Massive Ordnance Penetrator) is a vastly improved bunker buster bomb being created after congress did not approve nuclear bunker busters. According to the article:
In early July 2009, the Defense Department told a Congressional committee that the MOP was the "weapon of choice" for an “urgent operational need” enunciated by both the U.S. Pacific Command, tasked with North Korea, and the Central Command, tasked with Iran. In doing so, the Pentagon accelerated the program by three years.
The urgency is further demonstrated by the bypassing of a further testing phase:
In describing the accelerated program, Lt. Gen. Mark Shackelford, who heads weapons acquisition for the Air Force was quoted as saying, “These are purchases beyond just those needed to test the capability," adding, "In other words, build a small inventory.”

The talks in the 2009 version of this "let-other-countries-enrich-your-fuel" overture are scheduled for October 19 in Vienna (it was February 2 in Vienna in 2006). Let's hope they come up with a workable solution.