Good Stock Investing

The Slow Train Wreck Difference

2012-01-27T08:36:00.001-08:00

In two earlier articles (The Market Technicals - Get Back In The Water? and The Fear Roller Coaster - Are We There Yet?) I pointed out some striking similarities between now and mid-2008 - the lull before the annihilation. Here, I'd like to add some more similarity, but then consider a major difference.

Technical formations have predictive power because they resolve themselves up or down at a rate much better than 50%. How useful they are depends on how far away from 50%. The head and shoulders formation, for example has about a 65% success rate for predicting a trend change. One of the formations with the highest success rate is the descending wedge at about 90%. This is a bullish signal where a quieting down trend breaks strongly to the upside. If you apply it to the VIX, the market's fear index, you get another bullish signal (bearish for the stock market).

If you look at what the VIX did during 2008, you see not one, but two descending wedges:

The formation was 2 for 2 over this time with both breaking sharply to the upside. Both ran the VIX briefly below the critical 20 level that typically divides bull from bear markets, but it couldn't stay there for long. And they both dropped the VIX below the 140/200 day ema moving average pair for a short time and induced a negative divergence between them.

So what's the VIX doing now?

Egad ! The very same thing. We're definitely in a descending wedge and it has put us below a VIX 20 and the moving average pair. So are buyers of the present rally chumps being set up for the kill? Is it the end of the world again once this formation breaks?

Well, let's just curb our apocalyptic fervor. The market is way overextended on the upside and a correction is likely not too far away. But there are powerful fundamentals at work that make now much different than 2008. There is the basic and powerful economic cycle that tends to overrun a lot of other concerns. In 2008, it was on the downside. Now it is going the other way, albeit in a very subpar recovery so far.

But maybe more important than that is something that Michelle Caruso Cabrera of CNBC points out about the European banking crisis, which presumably would be the catalyst for another end of the world sell off. She is CNBC's guru on the scene in Europe, and she calls what is happening there now a very slow train wreck version of the very fast and surprising train wreck that hit the US in 2008. And Jim Cramer has said that, even though half-measures being implemented, the kicking of the can down the road, is reviled by us all, it buys time for the banks to collateralize and capitalize and do whatever needs to be done - critical time that they did not have in 2008. What made the sell off of 3 years ago so bad was the prospect of a lockup of the financial system, but now the Germans and others have made it clear that they will print money as needed to prevent that.

A market correction is very likely soon, which will break the wedge on the charts and carry out a repeat of the downturn, but how severe that downturn will be is very uncertain. That will all depend on how well the banks and governments in Europe are using their time to ready themselves for defaults, CDS kick-ins and who knows what. The shape of the upcoming correction will give us a clue as to how severe it will be. As in May of 2008, we now have poked our nose above the 140 day ema, but the turn out of the first VIX wedge back then sent the S&P decisively back below the 140. If a correction now looks to be holding near the 140 nicely, then we may have some clear sailing ahead. It would be a very positive sign for the market.

But if it breaks strongly back below the 140, batten down the hatches. Europe's troubles don't seem to matter lately, investors are fatigued with it. But in the next major correction, they will revisit what they're doing over there, and if they like what they see, we may derail from the 2008 path to apocalypse - the slow train wreck difference. A sell off to a little below the 140 on the Russell would be your 10% bull market correction, so how the next significant downturn behaves around this critical moving average pair is going to be critical. One should be cautious until then.

Safe Haven Confusion And Gold

2012-01-15T11:12:00.000-08:00

Ever since the 2008 credit crisis sent droves of investors diving into safe havens, there has been much disagreement on just what is a safe haven. Real estate has always been a nice alternative to the other markets, but lately it's been the genesis of all our other problems. Bonds have likewise been the alternative to a shaky stock market, but now bonds are a dirty word, being the embodiment of the dirtiest word of all - debt. Then there is gold. But the '08 credit scare smacked it around alongside everything else, except the US dollar.

So is the USD, the traditional safe haven, the one to turn to now? It is the world's dominate reserve currency. And even though "currency" is something of a dirty word now, isn't the USA and its currency the prettiest pig in the pen? There are detractors of the USD who point to things like the Swiss franc because Switzerland has little of the debt issues of the US, Europe, or about any other major currency printer. Currency in general is an attractive safe haven because of its relative stability. If it goes the wrong way, you won't get hurt too badly.

Just perusing the financial headlines lately, I get dizzy following the fingers pointing me to a safe haven: "Is Gold Now The Last Safe Haven Standing?" "Gold Squashed By US Dollar Safe Haven Buying" "Swiss Franc Is Now A Cheaper Safe Haven" "As We Enter 2012, Neither Gold Nor The Swiss Franc Retains A Safe Haven Status" "The Dollar Has Become The Currency Of Last Resort" "US Dollar Losing Safe Haven Status". It makes my head spin.

OK, let's think about this logically. Or would that be our first mistake? Whether it's logical or not, gold has to be considered a currency. While most of gold's demand is jewelry, the thing that moves the price needle in times of investor upheaval is investor demand. Despite Ben Bernanke's denial, gold is money, which is why banks and governments hold it in reserve instead of, say, aluminum. The US dollar index is a measure of the US currency strength relative to a weighted basket of 6 competing major currencies. To be fair, gold should really be included among the dollar's competitors. Instead, the euro is given a whopping 58% weight in the basket. Can you imagine what the dollar chart would look like if you substituted gold for the euro at a 58% weight? It would be one ugly chart indeed over the last 10 years.

If you grant the US dollar the position of safest paper currency in the world over the last 40 years, and I think even the current detractors of the greenback would do that, then what would happen if you compared it one-on-one with gold as an event safe haven? If you were to construct a chart of all the modern stock market scares, defined as those events which ran the market's fear gauge, the VIX, to values over 40, and looked at the US dollar index performance relative to gold over the time frames of the debacles, what would be the safe haven score between the two? This would be strictly a currency comparison - the best of the paper issues versus the metal one. But since currency is usually the most stable of all the other safe havens, even real estate, art collections, or what have you, this would be a track record of the best of the best of the safe havens. Here is what such an ultimate safe haven chart would look like: (click on image to enlarge)

There was no VIX back in 1973, it was invented in the '80s. But if there had been, it almost certainly would have run to well over 40. So I have awarded it an honorary position on my chart of debacles. The '73 bear has only been equaled by the '08 horror.

So this is a Dodge City salon brawl between all the safe haven contenders, and it makes me wonder where the dollar's title of "chief safe haven" comes from. Granted that its -3% average over the 6 stock market dives isn't bad, but wouldn't gold's +39% have to be considered better? You could say that gold is undependable because it goes through bull and bear markets. But 2 of the 6 cases above were during bear markets in gold, and gold still outperformed the dollar.

Investors fairly new to the market may only remember the '08 crisis and how gold was shaded by a nice climb in the dollar. But over the course of this huge decline in stocks, gold actually winds up even - about what the dollar's long-term average is. So gold's worst showing roughly equals the dollar's average.

This anomaly of 2008 may not be easily repeated. This scare event was about a liquidity lock-up and a systemic failure. So gold, being less liquid than dollars to buy a hamburger with, was dissed in favor of dollars. We have a repeat of this banking crisis in Europe now, but this time it is a very slow motion train wreck in lieu of the very fast motion surprise version of '08. Now the banks are collateralizing and capitalizing as we kick the cans down the road to buy time and embark on a print-money-as-needed policy to slow down the train wreck to a case of stagnant economies and who knows what, but maybe not a repeat of the '08 horror. This may return gold to its more typical safe haven behavior as it did in the August 2011 case.

This chart also shows another major consideration. It pits a safe haven that has been outperforming paper currency over 40 years of sound money against a safe haven now frenetically being debased with the printing press. If gold has been the better haven in the past, when we had sound currencies, it certainly should be in the future, when we probably won't. Yet we see an exponential rise in dollar safe haven trading matched only by the exponential rise in the supply of dollars. Compare that with the flat gold production numbers we have in the world today. And the FOREX market cap dwarfs the stock market and even the bond market, with the entire gold industry market cap less than that of Walmart!

Investors diving into the dollar for safety from today's problems is like Dorothy diving into a windmill to escape the approaching tornado. If there is ever a radical reallocation of the flight to safety trade, market cap-wise, it will be like pouring a bucket into a thimble - potentially explosive for gold.

This radical reallocation is foreseen by many analysts, like Simon Black of Sovereign Man:

Dubai, Greece, Latvia, Ireland, Spain, UK, etc. all give investors a lot of reason to worry. Ironically, when things get really bad in the rest of the world, investors rush into the US dollar as the ultimate flight to safety.

I know I don’t have to tell you that this line of reasoning is utter nonsense. Institutional money managers realize it too– the prospect of loaning money to the largest debtor in the history of the world for 30-years at less than 5% is certifiable lunacy.

With a stable currency like we've had for 40 years, the above graphic shows gold to be the superior safe haven. If we get the kind of currency meltdown many predict, we could see a radical improvement in gold's already best-of-the-best safe haven status. As Simon Black goes on to say:

In a flight to safety, institutional money still flows into the dollar. Gold will not truly break out until there is a bifurcation in investors’ mentality regarding safety.
To put it more clearly, when worried investors start piling into gold instead of the US dollar to protect their assets, this is the sign that we are charging towards the top.
For now, it’s not happening yet

The Market's Technicals - Get back In The Water ?

2011-12-23T07:35:00.000-08:00

The current condition is, in a word, seductive. We have drifted back up from the volatile, scary days of August. Europe is taking measures, albeit can-kicking measures. The US recovery is bumping along, albeit a grossly sub-par recovery. If we are to believe the government's figures (a big if) unemployment is going down.

But there are disturbing signs emerging that the main horror show is yet to be. Before I get into the charts, consider this basic fact. We have been in a "recovery" for going on four years now. In this day and age, four years is actually more like the lifespan of an expansion and a bull market. As I pointed out in my last post about the fear roller coaster, there is a striking similarity between the end of the 2003 -2007 four year run and the 2008-2012 version. If we are in a post debt bubble adjustment period, maybe 4-5 years is all the shelf life we should expect from a bull move - like the 1932-1937 five year bull phase.

Now to the charts. And they certainly agree with this notion of an expiration date of a four year run. In the roller coaster piece, I outlined the larger scale fractal nature of the 2003-2007 period and the 2008-2012 approaching period. Now let's zero in on a more detailed technical view of now compared to 2008 (click on image, right click on image then select "view image" then click to magnify)

As you can see, there is an astonishing similarity. This similarity takes on more significance when you consider that it is in response to very similar market dynamics. In 2008, it was the US banks and their ability to function. Now it is the very same thing with the European banks, who throw around about four times the money of the US banks. But then, these banks are so interlinked, that distinction may be muted.

The main technical feature of 2008 was the large head and shoulders top that was put into place, then the intense, VIX spiking selloff coming off the right shoulder of the top. As we technical types like to say "volume tells the truth" and this selling told no lie about the future direction of the '08 market. We had the very same ultra-high volume with the August selling, and it moved us through a critical break of the neckline of the head and shoulders top.

That in and of itself often can be misleading, as in the case of the mid 2010 weakness where everyone was watching the head and shoulders formation there, and we got a break of the neckline and massive shorting, followed by much covering. But this break was not accompanied by the kind of volume increase in the above charts, and it also did not lead to the 140/200 crossover, which doesn't happen that often and most usually has much follow through in a major trend change. We have seen both of these conditions with the 2008 neckline break and the current one.

What we have going now is a critical test of the broken neckline as resistance. This is typical and it took place in 2008 in May through June. It is happening now starting in November. Note how closely the two above charts match in the time frames involved. This means that we are now at the June '08 juncture and we're beginning to walk through the valley of the shadow of death - a time span of about three months. We will either break away from this course soon or complete it.

Until we know which it is, a very defensive portfolio makes sense. This could be a huge overweight in cash, with a core holding of gold that you don't trade, and not much else, except maybe a little VXX, the volatility ETN, which would go ballistic in another '08 style event. Or, it could mean a line-up of mainly very high yielders, the natural gas pipelines, utilities, and such. But keep in mind that these will get hit in another steep selloff - they just recover more quickly and more surely than the other stocks, but they will get hit. A large cash stash waiting to buy these brief low points would be better.

The Fear Roller Coaster - Are We There Yet ?

2011-12-15T11:10:00.000-08:00

I always take with a grain of salt all the chart comparisons showing why something in the markets must happen just because it happened that way before. Most of the time, it seems the macro-economic fundamentals are so different between the two cases that a comparison isn't very predictive.

But there is an element of market truth in George Santayana's general wisdom "Those who cannot remember the past are condemned to repeat it". When similar fundamentals are working on the investor psyche, a repeating market pattern can be as unchanging as human nature.

With that in mind, a stunning fear comparison can be drawn between the human reactions to the events surrounding the mortgage meltdown of 2006 to 2008 and the evolving Euro banking crisis we have before us. Both of these involved the development of a 4 year bull turning back into a larger bear trend. Going into 2007, we had climbed up from the 2003 bottom, but ran into the US mortgage mess. Now, it's been nearly four years since the 2008 bottom (most markets bottomed in '08) and we are again running into a banking mess, only this time it's in Europe. Investors fear banking problems more than anything. It screws up and brings to naught everything else.

Art Cashin's 12/15 CNBC interview expresses this fear well. Cashin mentioned the "roller coaster" ride of the VIX index, the market's main measure of fear. In trying to explain why the VIX has receded below 30, more or less the panic threshold, when we have plenty to panic over, he said that perhaps the VIX was "fatigued". It was suggested that maybe the FXE, the Euro index, would be a better measure of fear now. But "fatigue" sounds suspiciously human in nature, and not something a carefully crafted index would be prone to.

The receding VIX seems nice. It's been suggested that this is a market tell that everything is getting fixed in Europe and that we shouldn't argue with it. Just be thankful and go long. But the Cashin interview pointed out the worry-some problem well. Europe doesn't have the hand-in-glove management of Geihtner and Bernanke in the '08 US banking crisis. They don't have a fire department to put out the flames. They don't even have a fire code. A quick fire hose on any surprise banking problems? "That's not going to happen over there" was Cashin's take. We sometimes think of Europe's problems as a junior version of the US problems by belittling a country's GDP with a comparison to the GDP of Rhode Island or whatever. But the truth is, Europe's total banking assets is four times that of the US. So an equivalent out-of-control blaze over there would be four times as big a mess.

So what's all the complacency about in the VIX ? Well, you could argue it's just human nature. And if it's human nature, it is as predictable as the sun rising in the morning. Let's take a look at a side by side time-line comparison of fear as measured by the VIX over the course of the 2006-2008 roller coaster and the 2010-2012 roller coaster. The major events are noted with the resultant market fear reactions: (click on image, then right click on this image and select "view image", then click on this image to magnify)

Those of us who believe the markets are a fractal beast could point to this in the Exhibit A collection. Except for the artificial interference of QE, the two roller coasters seem to have been built per the same plans. The same plans perhaps have something to do with the same human DNA involved. We panic when at first presented with a frightening problem. The problem doesn't go away, but our fear level must recede. We are not programmed to stay very scared for very long. Our fear gets fixed before the problem does. As humans, we can all relate to that in our non-market psychology as well.

The large fear reactions, the runs to over a 30 VIX, not only occur in the same time sequence in reaction to similar developments over these two banking scares, they form almost identical topping patterns before they recede. And the overall trend as shown by the 140 day moving average (blue line) runs the same course except for the QE 2 period. However, within this QE 2 period, the fear spikes transpire in the same manner - just at a muted amplitude, until the medicine wears off.

Of note is the apparent loathing of fear that sets in after each huge bout of it. The underlying, structural problems are not fixed, but there are always some compelling positives to avert our gaze to. We get "fatigued" by fear as Cashin phrased it. It's purely human. So, is our current relaxing of the VIX a market tell that everything is indeed getting fixed in Europe and that we shouldn't argue with it? Should we just be thankful and go long? Well, in the context of the above comparison, which clearly shows this same exact complacency pattern after a significant market top and just before the harrowing slide of 2008 - I'd say let's call it fatigue, false bravado, foolishness, or anything but the truth.

Speaking of market tops, this fear progression played out in precision timing with the rises and falls of the S&P 500 over these two roller coaster rides. If you do the same side by side time-line comparison as above, you see another matched set:(click on image, then right click on this image and select "view image", then click on this image to magnify)

There were relatively small initial reactions by the market to the approaching crises - the end of the housing boom in 2006 and the end of QE 1 in 2009. These both were turned back to the upside with the very similar head and shoulders turns, then both went into the big tops with very similar head and shoulders turns back into bear markets. The current receding of the VIX below 30 has to be called the complacency before the storm - unless some "bazooka" from the Europeans is strong enough to knock our car off the tracks. A bazooka, firehouse, or some draconian surprise may have to blast us, or - to answer our kid in the back seat - we will be there.

$1764 Update

2011-11-12T08:01:00.000-08:00

Back on September 7, I wrote an article on Jim Sinclair's projections on gold Sinclair's Point Well Taken. He caused quite a stir in gold bug world a month earlier with his August 6 article at his website and an interview with James Turk. This all involved his analysis about the $1764 level in the gold price. As my article explained, back in 2005, Sinclair made a bold prediction about his "angels" or levels of gold's advance where critical resistance is broken. There are several of these, but the one at $524 he viewed as a "swing point" where the rate of gold's climb was to change. This is what happened:

As the moving averages show, he was so right. Gold has been in a steeper climb since the break of the gently rising resistance line shown above in blue. He bases this on the squares method that Jesse Livermore used with stunning success decades ago. Sinclair's father was a business partner of Livermore, who is considered by some the greatest trader of all time.

Anyway, Sinclair is causing a stir because he is now saying the same thing about the $1764 level that he said about $524. When gold shot beyond $600, the common take was that this bubble was about to burst. In his August 6 article, he stated that at the then price of $1650, a top in gold was nowhere in sight. This was before the break to $1930 and the big smackdown that followed. In the August alert, he said:

The key number in the gold market is $1,764. As gold approaches that number you can anticipate furious but very short price reactions ... Dean Harry Schultz said that I should call him when gold trades at $2,400. Stay near your phone my dear friend of more than 45 years, Dean Harry.

So, what has transpired since then?

The date of Sinclair's article is shown by the circle. Gold immediately burst to over $1900 and we began the "furious but short" push backs around this critical swing point - 8 crossings of the $1764 level shown (plus one more since I made this graph). This guy Sinclair is a little freaky. I somehow suspect we're going to get maybe one more knock down to the 140 ema area and maybe a scary break of it before we're through, which would complete a pennant formation forming now. But then again, gold could explode to the noted $2400 level quicker than any of us sensible people think. It's getting into a phase where you may just want to take a seat and hang on.

Generals In Danger ?

2011-10-04T08:45:00.000-07:00

One of the market tells that one should keep an eye on is the behavior of "the generals". These are those stocks that lead to the upside and are very stubborn about joining any bear market collapses. The old wisdom is that a market decline isn't complete until the generals have been taken out and shot.

Well if you take a look at some of the popular generals now, you might say they are being blindfolded and given their last cigarette. Take, for example, Herbalife. This stock has shown astonishing resistance to all the market turmoil, and is still looking very strong. But there are bad problems developing:

The moving average pair of the 140/200 day ema (blue and red lines above) that I like to watch has been holding as support all the way, but now is being breached. I don't mind a brief puncture of these two moving averages, but when it is in the context of the negative RSI divergence and the negative A/D trends shown, it is a bad sign.

Another popular general has been Core Labs. They help oil and gas companies map out reservoirs for the more complicated recoveries that producers must deal with these days. They've been like the Apple of the energy industry - indispensable. The stock has beem immune to all the market dips - until now:

Here we see the same negative RSI divergence over the last few months and the tell tale negative A/D (accumulation/distribution) switch. This general has already taken a bullet.

Speaking of Apple, could even this general be in danger?

Uh oh - maybe so. The A/D is still looking good, but a negative RSI divergence is clearly happening. I tend to think of Apple not as a high flying tech stock, but a utility or a soap and cereal defensive stock. Their products are used by us all like we use soap, cereal, and electricity. But even the defensive recession generals aren't looking so good these days. Take for example Perrigo, the off brand maker of money saving goods that thrives in bad times. The stock has been off limits to the bears:

But we see the same RSI and A/D melt downs developing even with this one. The high flyers are meeting a similar fate. Green Mountain Coffee is unraveling, not to mention Netflix:

The state of the generals is not good. This is the exact same analysis that caused me to get defensive on the general market back in May when I posted Market Changing Stripes ?
Here is the chart of the S&P 500 I posted in that article:

This RSI and A/D pair accurately forecasted the market's decline thereafter.

We're likely to get a bounce soon from an oversold condition. The behavior of that bounce will be critical to determine if we get back to a choppy sideways market or go into a further decline. If the generals don't break out of their weakening pattern in the bounce, the forecast won't be very good.

2012: The Presidents And The Bull/Bear Turns

2011-10-03T14:25:00.000-07:00

Complaining about our presidents in the US of A is maybe second only to baseball as our national pass-time. So allow me to indulge in a rant. I want to take a somewhat spiteful look at the financial market history of our presidents since John Kennedy - an era that I think of as a Comedy of Errors, one of the Bard's great plays. But it isn't so funny. Then we will look at our upcoming election next year in the light of all this.

John Kennedy gave us a free market administration, low taxes and business friendly. He felt that the tax and regulation burden on business was an economy killer. His policies extended the great bull market from the late 1940s to 1966, the post depression recovery. Perhaps his most famous wisdom was "Ask not what your country can do for you. Ask what you can do for your country". This saying has a lot of significance in our present heated debate over what our government should be doing for our mess as opposed to getting over-taxing, over-regulation, and gimmicky, short-term government fixes out of the way so individual businesses can do their thing for our country. It would be a good Tea Party slogan if it were not already taken.

Unfortunately, Kennedy's VP didn't have his partner's key wisdom very near to his heart. Lyndon Johnson was probably best known for his Great Society programs, which were an over-done version of some of Kennedy's initiatives to help the poor. Under Johnson, they became big government helping hands in a War On Poverty, as if it were government's job to regulate economic status of individuals. Some of these things survive to this day, like Medicare, and are favorably viewed. But many were bureaucratic boondoggles - and all began to be a tax problem. By the time LBJ left office in 1968, the great secular bear market of 1966-1982 had begun. You can't blame that whole bear market on one president, but an age of asking what your country can do for you had begun.

Then came Nixon. A normal paper/hard asset cycle turn had begun away from paper investment and to hard assets (commodities). The turn away from the 20 year stock bull market to the 16 year commodity bull market that began in 1966 was perhaps triggered, or at least abetted, by the bad business policy that came after John Kennedy. Economy friendly government seems to have died with JFK's murder in 1963. The commodity bull market had inflation running at around 4% in Nixon's time. His reaction? - wage and price controls. Was he a student of the Soviet Union? This socialist intervention was a dismal failure. It was a government engineered fix to a government engineered problem. Sound familiar? The economy truly went into the ravine under his socialist guidance. And he took us off the gold standard in 1971 for good measure. This was to facilitate the government's "helping" hands and loosen up its wrist for the dollar's printing press to follow. By the time Nixon left office in 1974, the S&P 500 had lost about 50%. He was bounced out of office for lying before he could do any more damage.

Then came Ford and Carter in what I consider an ironic twist in our comedy of errors. Ford served just a partial term. But because of the Arab oil embargo of 1973 and the rude shock it gave to America about its dependence on foreign oil, Nixon and Gerald Ford tried to get some meaningful domestic energy measures enacted. Ford wanted some 20 CTL (coal-to-liquids) plants built in America as a first measure to fuel our cars from our bountiful supply of coal. He was clean coal before clean coal was cool. He was the first president to take on Peak Oil, but he made no headway in Congress - all the plants were voted down. I'm not sure how much he understood about Peak Oil, little was understood back then. Nixon, Ford, and Carter may have just wanted freedom from Arab strife, but they all were both very serious about starting the long process of oil independence for America. Carter, called the energy situation "the moral equivalent to war" and even had solar panels put on the White House!

Sadly, Carter was a damper on the economy. His forte was, and is to this day, international peace negotiation. He put together the Camp David Accords easing Mid-East problems for quite awhile. But on the economy, he seemed to want to continue the post Kennedy legacy of bigger government, bigger taxes, and more departments (he added two right off the bat) and was the first bail-out president when he bailed out Chrysler in 1979. Before Obama-care, there was "Carter-care", a government-run health-care system that went nowhere in Congress. He created the massive Superfund to clean up chemicals in the ground wherever they could be found. If there was a problem with the economy, government could fix it.

Then came the Reagan Revolution. And it was just that - a very fundamental change in government, the first real change since Kennedy died. Whereas LBJ declared war on poverty, Reagan declared war on big government. Many presidents worth of government helping hands had the Reagan campaign's "misery index" at such an unbearable high that he was swept into office in one of the most one-sided elections in history. Reagan declared war on big government and was the first real business friendly president in 20 years. And the markets picked up on it, sending us roaring into a secular bull market in stocks and paper assets in general in 1982 finally ending the dismal flat Dow which had remained locked at 1000 and below since 1966, falling far behind a painfully high inflation rate.

But here's the ironic twist part. There is perhaps one big global problem that is as threatening to the world economy as it is immune to free market solution, and that is Peak Oil. I won't go into all the physics, you can see my other posts on that, but suffice it to say that successful politicians seem to have a stupid gene that blocks the understanding of Peak Oil. The crux of the problem is that the move away from the high net energy of hydrocarbon fuels to the problematic net energy of non-hydrocarbon fuels is going to take more time than the adjustment mechanism time frame of the free markets. Here is one of the very few cases where we are in dire need of a government that understands the approaching storm and is willing to override the free markets and get us ready. That's what Nixon, Ford, and Carter, the presidents forming the bulk the economic "misery parade" of the 1966 to 1982 bear, actually started to do. But Reagan, in all his economic genius and popularity, trashed all their initiatives in this direction. How ironic. It would be funny if we were reading it in a play instead of having to live through it. Reagan felt that if energy shortage was a problem, the markets would figure it out.

Well, that's true, but they will figure it out too late in the case of oil. He reversed Ford and Carter's energy measures and had the solar panels ripped off of the White House. The Middle East settled down, thanks in some measure to Carter, the Saudi fields came online, the price of oil got very cheap, and we all went back to sleep over the supply of oil. This was right about when starting a serious switchover could have had us all free of the problem by now instead of paying $100 plus for each barrel of oil and facing a 20 year solution that we now don't have time for.

About the only person that understood Peak Oil in Carter's day was M.K. Hubbert. He was the only one correctly predicting oil supply in the oil industry. If this were not a comedy of errors, Hubbert would have been cast as Reagan's chief energy adviser, and we would have not 20, but 120 or 400 CTL plants humming by now giving us gasoline from our own coal. Natural gas would be switched from electricity generation to cars and trucks, sugar ethanol (not the worthless corn variety) would be a major import, more nuclear plants and wind farms would be working for electricity - something like the Pickens Plan of today, only already giving us $2.00 a gallon fill-ups paid to American business, not to OPEC. Now there's an economic stimulus for you with no printed money and lots of good paying US jobs.

The Reagan-Bush chain of presidencies, when you think about it, was 5 terms covering 3 men and 20 years. They all pretty much sought to continue the Reagan Revolution. The Clinton terms in the middle wound up being free market and business friendly, not to mention budget balancing. Clinton, either by the mandate of the mid-term elections or by a change of philosophy, or both, put together a pretty fair economic team.

But in the biggest error of the entire comedy, we had growing alongside the epic economic expansion the greatest mountain of debt of all time. All 4 men occupying the White House from 1981 to 2008 turned a blind eye to this fifth column as "market stuff" that they didn't need to worry about - like Peak Oil. And in 2008, the Reagan Revolution was drowned in a tide of falling debt dominoes and $100 oil. And it didn't matter that we had a business friendly president. A new tyrant had taken over the bull/bear cycle and the 1982-2000 secular bull was killed not by over-interventionist presidential policy, but by the two things the government should have been all over and wasn't- the financial weapons of mass destruction and Peak Oil. The Great Recession that essentially continues into the 2012 election was the result.

Now we have Obama. We have clearly gone back to the post-Kennedy and pre-Reagan world. A secular bear market in stocks and all paper assets began in 2001 along with a new bull market in commodities. We now have the "lost decade" of no gain in the Dow like the flat 1966 to 1982 era. Obama is responding to these problems with the socialism of Nixon, the Peak Oil stupidity of Reagan, and the government helping hands of LBJ and Carter. His energy "policy" is to ban all hydrocarbons immediately - anything with high enough net energy to get us safely to a post carbon world. He is the embodiment of all the preceding error in our chain of fools all rolled up into one.

I don't vote in elections anymore. As you might guess, I am neither a registered Democrat or Republican. They both make me sick. The last man I supported and voted for was Ross Perot in 1992, the independent lunatic that put all the charts up explaining why the country was going to be bankrupt in 20 years. Let's see - next year is 2012. Perot ran in 1992. Subtracting the former from the latter gives 20 years, and the big election issue we have already boiling is all about how the country is bankrupt. We were right! Unelectable, but right.

I'll end my rant here and now consider the market significance of all this. A conventional wisdom is forming that has a Kennedy/Reagan president winning in 2012, either the Republican nominee or perhaps a Democratic nominee other than Obama. This is seen as resulting in the kind of stock market boom we saw beginning in 1982. A lot of people are pinning their economic and bull market hopes on another Reagan Revolution. But consider that the start of our present bear market, whether you say that was 2001 or 2007, was in a Reagan/Bush chain. The point to consider is this: the era of the power of the president over our financial cycles has ended. Getting it back may involve more radical upheaval than a US president can muster. We would have to have a Reagan Revolution in every major country in the world, but even that would not solve the massive delevering cycle and global debt resolution problems we now must endure. This problem did not exist in 1982.

According to our Treasury Secretary Tim Gheitner, a market destroying debt problem doesn't exist now. In his recent interview with Jim Cramer, he was asked if a 2008 catastrophe could happen in Europe. He said "not a chance". A couple days later in his meetings with European officials, he said they have "catastrophic risk". Now let me get this straight - there is no chance of this catastrophic risk. Uh, Tim, the word "risk" means that there is a "chance". This is from the same man that said a few months back that there is "no chance" of an S&P downgrade of US debt.

We are at the top of the mountain of debt and the Peak Oil curve. Our economic growth must have an expanding energy supply, and economic growth is the only way our elected leaders have for dealing with debt. It's been a mind numbing mantra for decades (perhaps more from the Republican side) - more debt, more growth - and we can grow our way out of anything. Being stuck at the top of both the debt mountain and the Peak Oil roller coaster rides is not a comfortable feeling. No amount of sound fiscal or monetary policy can drive an expansion if an affordable, expanding energy supply isn't there to fuel it. We've never been here before, and the old presidential cycle turns may not apply anymore.

If you are thinking about getting more aggressive as we get a clearer picture of the next president over the next few months, I would advise caution. The present strategy of cash-flow rich, high dividend payers, gold, and defensive soap and cereal holdings may be better. Some of my favorite high yielders are Kinder Morgan KMP at 7%, Telular WRLS at 7%, Collectors Universe CLCT at 9%, and Terra Nitrogen TNH at 16% (when I bought it). A big rally will probably occur if a business savvy candidate appears to be headed into office. But this may be a huge rally you will want to fade. Actual structural economic revolution will be much harder to come by this time around. Not impossible, but way more difficult.

Sinclair's Point Well Taken

2011-09-07T20:14:00.000-07:00

As I pointed out in my post "Gold Technical Update", before gold got to this $1800 level, Jim Sinclair had been predicting a major "swing point" for the gold bull market when it got to $1764 by his exotic squares math, which I don't really understand. But he tends to get it right, and he was saying that gold would encounter a more intense price action at this level. This was to involve some severe push-back, a pitched battle - one of the biggest in the whole bull climb- before a more powerful up phase takes over.

Well, what has transpired?

His silly prediction, based on nothing but math, seems to be happening as usual. When gold jumped the predictable channel it has been in for 3 years at about $1700, it went right to work on the swing point. It doesn't seem to want to spend much time either above or below $1764 nowadays. And the trading has intensified to a less tranquil pattern. If this is to be one of the big battles, we should expect a few more dips below $1764, more prime buying points for new positions.

The Crisis In Leadership

2011-08-23T10:03:00.000-07:00

No, I'm not referring to the clowns on vacation from our congress. We have an astonishing lack of leadership when they're in town, too. I guess they're all tuckered out. Screwing up the world like they have done is hard work.

My title refers to the market leadership. The leader groups that have been signalling the future direction of the market for the last 3 years, the retailers (RLX), technology (QQQ), the consumer discretionary stocks (XLY), and the transports (TRANQ) have a conflict going right now. One says new bear market. Two say bull correction. And one is undecided. They've typically been in agreement up until now. Let's look first at the one screaming new bear:

This would be the Dow Theory important transports. They have broken down from any semblance of a continuing bull and are leading the charge down. The same can be said of the important financials. It's hard to have a bull market without the financials participating. Doug Kass, who called the March '09 bottom to a tee, is now saying the banks have bottomed. Jim Cramer says the group is still toxic.

If you look at the retailers, supposedly the sore point of the recovery, you see this:

A trend line from the March '09 bottom appears to be intact. But if you look at all the consumer discretionary stocks, you see a breakdown more like the transports:

The accumulation trend is beginning to break but holding, but the price action has already broken. As for technology:

This looks just like the retailers - a brief puncture of the 140/200 day ema moving average pair but on a bull trend support line.

This sets up a battle between these stock groups. Either the groups that are barely clinging to bull mode will be pulled down into what the transports are doing or the transports will be pulled back up into confirmation. Stay tuned.

Silver Technical Update

2011-08-21T19:32:00.000-07:00

If you hate to chase anything at an all time high, and don't we all, then you don't really like buying much gold right now. But maybe we can cheat and buy gold's rocket ride via silver. This bifurcated metal constantly has to decide whether to follow its industrial use self and follow the stock market or to follow its monetary metal self and follow gold. The monetary self usually wins out over the long haul as is evidenced by the R squared for gold/silver being around 0.95 long term. So any straying of silver behind gold is a good buy-the-massacre move. Buy-the-massacre is so much better than chasing.

The massacre in silver has it nearly 20% down from its high now, right at the 20% decline bear market classification. But it will very likely slingshot to par with gold. This is after all a monetary crisis we are in.

The silver/gold ratio chart looks like this now: (click on charts to enlarge)

Silver is just now emerging from an RSI turn point where it begins outclimbing gold. Even if it stays bound in the horizontal channel it's in, it will match the climb in gold for awhile. You can't complain about that.

The price chart looks like this:

The consolidation of last year looks to be repeating and is probably ending now. The channel appears to be thoroughly broken. If we get a post consolidation climb like last time, we are at a prime buy point.

Gold Technical Update

2011-08-10T18:10:00.000-07:00

Gold may be breaking into the next phase of its bull market. Jim Sinclair's math has a long history of correctly predicting gold, not just in this bull market but in the 1970s bull market. He is now saying that the $1764 level is a swing point into a steeper climb similar to $524 was in late 2005.

Then, as now, gold was faithfully obeying the 140/200 ema moving average pair (red and blue lines) as support and the trend line shown as resistance. Then a break of this resistance occurred with a move to $524, a test of old resistance as support, and a huge new move into the next bull phase. As a weird coincidence from an entirely independent means of analysis, David Nichols' monthly fractal forecast is currently putting gold into a 64 day growth cycle into early October that he says will be the strongest yet in the entire bull market. That's 64 trading days (closer to 3 months calender). For those of us who simply like to study lines of support and resistance, it is also obvious that a change has occurred:

This chart is very similar to the 2005 chart above with the $524 swing point, but with the new $1764 swing point. It shows a pretty stable 3 year phase of gold's bull where a persistent line of resistance turns all the rallies into declines. There was a brief breach at the end of the strong 2009 four month cyclical move. The current breach is occurring at the beginning of this typical August to November strong period. This all implies a big bust of the 3 year channel.

I have outlined my disagreements with David Nichols' fractal analysis in other articles. My only problem back in 2010 was with his 64 month fractal or about a 5 year time limit on the high growth part of the overall bull market for gold, which he reckoned was to turn to bear market in February, 2011. I argued that this parabolic bull fractal pattern had other variations longer in duration that would go well beyond February, 2011, and that the current gold bull seemed to be an example of these. Well, February has come and gone, and I think it's safe to say there was no arrival of a bear market. But I can find little fault with Nichols' month-to-month range fractals - they have been stunningly accurate over the years. Jim Sinclair's call about $1764, David Nichols' call for the strongest 3 month move up yet, and the above simple support/resistance map all agree - gold is entering a new phase, and it ain't a bear market.

The cold calculating methods above also agree with a phase change in psychology that I believe has occurred over the last 3 years. This involves the basic question "What is money?" Well, it's that green and gray stuff passed around or it's electronic equivalent you may say. But is it? Is it really? That's what we used to think back in 2007. Is that what they're thinking over in Europe today? You can see this sea change in a 3 year chart covering the last two mega market crashes:

Here we have the gold stock index / S&P 500 ratio charted from mid 2008 to now. It drops when the gold stocks are under-performing the broad market and vice versa. As you can see, there is a vast difference between then and now. Why? There is a fundamental change in view going on as to what is money.

I have posted a discussion of this rapidly changing view with some interesting testimony by Ben Bernanke last month before Congress over at seekingalpha.com - just put my name in their search bar. The post is "Gold's New Phase And The Coming Revolution". It should be up in a day or two if it's not there yet.

What The Debt Fools Are Up Against

2011-07-28T17:45:00.000-07:00

As the ineptitude of our elected representatives continues to amaze regarding the debt issue, I think it's interesting to keep in mind what they are dealing with - the history of their own ineptitude. Its the bogus political "process" (the nicest word I could think of) that has created the nearly unsolvable problem they are working on. When you look back at history, you can see the political spats that accompanied each leg up in the debt parabola that is at a blow-off stage now:

This history shows how the recklessness of the 20s put us into the Depression in 1929 followed by a huge ramp-up in debt over the next 5 years. This reached an unworkable level and had to come back down out of necessity, but the recklessness and the debt that ensued went up out of political "process". The citizenry of that time saw no sense in doing the debt this way, but they had to watch helplessly as their elected representatives did it anyway.

Good sense prevailed for decades as the painful lessons of the '30s were practiced. Then we became entangled in the Cold War with the Soviet Union, and the political process was reckless budget balancing to out-arm and bankrupt the USSR. Then came the defeat of the USSR, but instead of the gigantic budget peace dividend that should have followed, we ran up against another enemy of the state - the banksters. They went on a creative binge of debt instrument "financial weapons of mass destruction" as Buffet calls them, and over the '90s they were the political process of choice. Standing in their way was not conducive to a political career.

If you gauge a time frame to a debt resolution to be similar to what happened from 1930 to the mid '30s after the start of the bear market, you see on the chart above that, if a secular bear market started in 2000, we should have had some kind of debt climb reversal around 2005, like the mid '30s. But perhaps because the fed has become more adept at funny money, things went on as usual.

But now another debt induced recession has resulted in another bear market, and five years from it takes us to about 2012 for some kind of dismantling of the debt mountain. That's what the fools in Washington are beginning to grapple with now and what will be dealt with in the 2012 elections.

The Hot Money In Silver

2011-07-16T08:13:00.000-07:00

Silver, the hot headed more volatile twin of gold, recently did one of those stunning runs to the upside, briefly hitting $47, crushing the shorts and dumbfounding all those who sold an overbought condition at the base of the spike. This was a significant departure from gold, which did no such thing. Now since we have an R squared between silver and gold that very typically runs around 0.9 or higher, meaning that the two correlate extremely closely, we must ask ourselves just what the heck was going on here.

Silver's behavior has caused many, including Jim Cramer, to be negative on silver but positive on gold, because, as Cramer recently remarked on his show, silver still has too much hot money in it. He flatly stated to stay away because "silver is going to $28". Hot (overleveraged) money was certainly the nitro that fueled the one month spike to $47 before the margin rules were tightened. But what is the case now?

Silver is doing what markets do to an overbought condition - a correction. And corrections very typically follow the classic ABC pattern where an initial sharp pounding is followed by a pause consolidation and then the final sharp decline to a bottom. We have had "A", are now in "B", and are awaiting a "C" which would indeed take the price to about $28. This would be enhanced by the market's general jittery feel about the debt default situation in the US and Greece and its effect on all things economy sensitive, as silver is.

That plausible scenario, however, is looking less and less likely. Lets look at a side by side comparison between gold and silver:

First, we see gold went onto a consolidation trading range in April. Now lets look at silver:

Here we see that silver did essentially the same thing except for the hot money spike that lasted for a month, shown in orange above. If you take away that aberration, you have silver following what gold is doing very closely - compare the charts. The ABC correction of the hot money warp seems to be fading into the tight correlation with gold - and gold is clearly breaking out of the consolidation to the upside. The ABC correction would have silver going far below the 140 day ema (blue line above) which would bring into question the whole silver bull market. That is looking less likely now, and a more sustained advance is probably coming. I hate hot money as much as Cramer or anybody, but silver's harmful hot money seems to be mostly laundered out at this point.

Editorial Note

2011-06-18T16:22:00.000-07:00

A note for those following my blog. SeekingAlpha.com recently started a Premium Article feature for their contributors. This allows a contributor to publish some of their articles on their site as exclusives (with a little compensation and the proviso that they not publish them anywhere else on the web). I've been publishing several of my articles this way, which means I can't post them here at my blog. So all my articles that don't get posted here can be read at seekingalpha.com - just type in my name, Bruce Pile, on their search bar to bring them up in an index that appears on the right labelled "Latest Articles".

Is America On The Revolution Contagion Hit List ?

2011-05-30T06:54:00.000-07:00

One by one they are being mowed down. First it was the Tunisia uprising, and Ben Ali, regime chief since 1987, flees the country. Then swiftly following is the Egyptian revolution, and Hosni Mubarak, regime head thug for 30 years, flees the country. Now quickly coming to a boil are two more head thugs and their long lived, stable empires - Muammar Qaddafi in Libya, in power since he tangled with Reagan, and Bashar al-Assad in Syria, who together with his father has ruled for 40 years. What the heck is happening? These multi-decade power brokers are being dismantled in a matter of months.

It could be a good bit Iran stirring up malcontent for its own geopolitical advantage as many claim. But they have to have a big groundwork of simmering malcontent to begin with. What is all this malcontent and why is it detonating so easily now? I think a lot of it has to do simply with two things - the food shortage and the tech revolution. How so? Well the basic problem with all these people is that they live under the iron boot of freedom repression and forced poverty. They have been for many years, but now the developing food crisis is touching off violence and the smartphone revolution, which I've been predicting since 2009, is greatly facilitating it. The typical revolutionary in these countries has been described as having "a rock in one hand and a cell phone in the other". The thugs can censor the news and lie all they want, but the average Joe in all these places can now learn and organize via phone, and they aren't taking whatever the thugs are giving out anymore.

So what does all this have to do with a similar revolution here in America? Aren't we richer than that and with a better government? Well, I don't know. We may be experiencing the same thing only at a much higher level of comfort. Instead of Ben Ali's regime running things, we have had Ben Bernanke's regime running things for decades. If you include his "fathers" going all the way back to the 1913 founding of the Fed, these thugs have had their way for a hundred years. And what is the result? - big banks too big to fail (or be prosecuted for crimes against the average Joe). Times are still not too good for main street, but excellent for Wall Street. Our fed induced debt burden is now poised to drown our middle class, and our middle class is grabbing a rock in one hand and a smartphone in the other.

Like the fleeing thugs the global Tea Partiers are targeting, the central banker/economy planner elite of the US :

a) say to the other countries, you need us for stability. It would be chaos without us

b) rule by brute military force

c) have a fast growing share of their country's wealth in the hands of a privileged few - oil revenue in Saudi Arabia, financial weapons of mass destruction in the US

The Tea Party revolution in the last election seems to have said the time for this is up. Real government spending cutters were elected. Wisconsin's state senators fleeing the state over the budget battle feels a little like Mubarak fleeing Egypt.

The average Joe American does not want point (a) above as our economic plan. Point (a) was cleverly illustrated by Peter Schiff's story about Consumer Island. He tells the tale of a shipwreck leaving a group of some Asians, Brazilians, and an American on an island. To survive they had to divide up the jobs. One Asian was given the job of fishing. Another was given the job of hunting in the middle of the island. And the Brazilian was given the job of gathering the fire wood. The American was given the job of eating. So they all had jobs and at the end of the day, they all gathered around and the American would eat. But he would save enough for the others so that they could repeat the next day.

China and many others may just boot the American off the island if we don't soon stop chasing capitalism and the entrepreneurial spirit out from our borders with government-knows-best economy-by-committee Five Year Plans. We are becoming the global village idiots, not just of energy policy, but of every other kind of policy. And this is a prime mover in the bull market in gold and silver. Gold's price is a judgment on the soundness of the reserve currency and the government example being set by it.

I was struck by what Donald Trump said to Piers Morgan recently on his CNN show. I'm not a fan of Trump or his possible run for the presidency. But in discussing his international dealings, Trump pointed out a key problem that he says he, or somebody, needs to fix. Referring to the nations around the world, he kept repeating "they don't respect us".

"A wise and frugal government which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government."

These words could well have been said by anyone on Consumer Island or any Tea Party revolutionary. But they were said by Thomas Jefferson.

Market Changing Stripes ?

2011-05-15T11:25:00.000-07:00

I've generally been pretty bullish on the market since April of '09 with only some neutral danger periods now and then giving me pause. The leader groups I follow, retail (RLX), Baltic Dry Index ($BDI) before the ship overbuild problem, tech, etc. have been indicating continued upside with only typical bull pullbacks. But now its technical behavior is giving me plenty of pause. The leader groups continue to behave well - outperforming and wanting to drag up the rest of the averages. But here is what I'm getting worried about.

If you look at what happens at major moves up and before major moves down, you see this

This was the last half of 2007 and we know what followed. Other bull runs display these divergences toward the end. This divergence trend analysis works better on broad averages than individual stocks, but it is typical behavior there as well:

Here we see Headwaters' recent behavior. Its nice climb from mid last year telegraphed its end with divergence.

What's happening now with the S&P 500 ?

Egad ! It's starting to act badly. I'm not saying a radical decline must follow, but maybe some cooling. Another tell tale marker of a turn is what the "cereals and soaps" do. When they suddenly start turning up and being a standout group, problems with economic growth are being felt by the market. This certainly was the case in late 2007, and guess what, they are becoming a conspicuous group now. Examine the charts for '07 and the current charts for HRL, UN, GIS, K, PG, KFT.

Another nagging problem is market sentiment. It's been too high, which didn't bother me when a horrific selloff was being feared back in February, but the mild 7% correction back then didn't work off much of that exuberance. But now we have these technicals turning. According to the numbers tracked by a blog that specializes in this, the Nasdaq sentiment is at a 5 year high right now. I don't know what fundamentals would be turning the market - angst over the end of QE, trying to raise interest rates with a mountain of debt that we already can't service. I don't know. But the charts have thought it all through, and they know more than I do.

And then there is the monster earthquake coming in a week or two that will split the US down the middle. A small point but I thought I'd mention it. It seems like Mother Nature is throwing a hissy fit of quakes all over the world the last few years. But are they really increasing? And is Mother Nature being helped? (click to enlarge images)

This chart shows that what has really been increasing is the people being killed by quakes - not so much the raw number of them occurring. So if the number of quakes is only rising modestly, why, since about 2003, have they suddenly become so destructive and deadly, as if they started seeking out the heavily populated areas with an evil mind of their own? Well, conspiracy theorists have long held an answer to that - HAARP. The High Frequency Active Auroral Research Program was one of those Star Wars defense plans in the Reagan years that were a big political debate issue. They were pretty much all voted down except for HAARP.

They went ahead with this and construction began in 1993. It is a joint project with the US Navy and the US Air Force, with patents based on Tesla in both high frequency and ELF technology.
The ELF part (extreme low frequency) is of particular interest to the conspiracy claims that, not only do the original patents and technical write-ups suggest this technology will be used to control weather, it will also be used in tomography to probe deep into the earth the way normal frequency transmission can not (your car radio blanks out when you go through a tunnel). The stated intent for ELF are things like mapping underground munitions, bunkered nuclear sites, etc. But many claim that HAARP is being weaponized not only for weather control, but as a tectonic weapon - inducing earthquakes.

Nicola Tesla, the "father of modern electricity" whose patents HAARP is based on, once built what was called an "earthquake machine" in his New York lab, disturbing the neighborhood and bringing the police to investigate. He once had to hammer the machine off to stop a quake he induced. This was a tiny 6 pound machine based on resonant frequencies that could be attached to a building and, with the right frequency dialed in, once induced a quake in a steel skeleton being erected, so that the steel workers at the top came scrambling down thinking an earthquake was in progress.

This was all around 1898, and the hub-bub over such a thing as an earthquake machine has gone away - until now. With the dramatic rise in mass-killer earthquakes since 2004, it's being noted that the massive antenna array buildout in HAARP's Gakona, Alaska facility, by far the most powerful of its kind, coincides closely with the rise of these killer quakes. The facility was completed in 2007. There is some correlation between strong magnetic field disturbances on HAARP's instrumentation on their website and major quakes if you survey activity in the 3 days previous to the quakes (about a 1 in 9 chance occurrence as near as I can figure). Earthquakes induce magnetic disturbances, which is why animals can sense them days in advance. But man-made looking signals, that only started showing up since about 2004, have a hoard of paranoid types blaming HAARP for inducing killer quakes with ELF resonant frequencies the way Tesla did with his crude 6 pound mechanical resonant version.

There are several different geopolitical takes on who may be doing this and why, but they agree on the people involved being heavily into the occult. I am not an expert on occult numerology, but a basic tenet is that there are what they call the "master numbers" - they are 11, 22, and 33- and they believe strongly in planning major events around these numbers.

The conspiracy nut jobs aren't the only ones leery of HAARP. Exonews recently had a story "European Parliament Issues Warnings On HAARP". The European leaders wanted to have more information on what they were doing with this research, concerned about its impact on weather and other things. This parliament action was taken in 1998, the article rehashes their concerns today.

The US Geological Survey's site usgs.gov has a long list of what they call "Historic Earthquakes" basically meaning the most destructive ones. If you refine this list to just the big killers - those with over 20,000 dead, you wind up with a list of five - all five occurring in 2004 and later. Of those five, three occurred on either the 11th or 12th. You can easily figure the math probability of that happening by random chance, 1 in 25.

Added to these happenings not likely by chance is what is happening with the weather lately. Supposedly the bread and butter of HAARP, other than incinerating incoming missiles, is weather control. Radar watchers claim they can spot unusual weather events days in advance by watching for "HAARP rings". These are near perfect, unnatural looking circles; and a huge rash of them popped up clustered in the New Madrid fault system in late April. I was stopped in my tracks the other day when I saw a CNN weather map showing the total rainfall amounts the past month or so. The very high amounts formed a near perfect map of the fault system. The map below shows flood warning counties as of May 6 with the insert showing the damage zones for the New Madrid:

The two satellite photos show the fault zone a year ago (top) and on this May 6 (bottom). Why has it rained so much over just the fault zone? I didn't think there should be any connection between rain and quakes until I checked. If they dam rivers, they often get small quakes. But probably the main attraction for the alleged disaster makers with all the focused rain is soil liquefaction. When the soil is wet, earthquake damage is vastly increased. Shaking wet soil causes it to go mushy. This quake feature happens a lot, but Japan and others lately have suffered severe bouts of it.

I've seen Agri science studies for rice-growing in eastern Arkansas where they gauged optimal "soak time" for the soil in this area of the fault (to get surface applied fertilizer entrained). They found it to be "at least 3 weeks". That suggests maybe an optimal liquefaction window of late May or early June. Conspiracy theorists point out that FEMA has a history of running drills for disasters just ahead of when they actually happen - when they are at the height of readiness. The idea is ever more dependence on the federal government with each disaster. They impose laws to deal with them, but don't take them back once the disaster is over. NLE 2011 is a massive FEMA exercise for a major New Madrid quake scheduled for May 16-21, about the same time frame for maximum liquefaction damage (and at a 22 number - May 22).

How much weight an investor should give to this quake threat depends on how much tin foil you wear in your hat I suppose (these guys claim a lot of things that don't happen). But I've gotten a lot more defensive with my portfolio strategy for a variety of reasons - very high cash. If you want a stock that typically benefits from the increasing earthquake disasters, whether by plot or by nature, take a look at Taylor Devices TAYD. This very small company in New York makes the products that allow buildings to absorb ground movement with little damage - basically gigantic shock absorbers. They routinely retrofit large buildings with these things easily and economically. I don't see what's so easy about cutting off a building at its foundation, jacking it up, and bolting on these things - but they do it all the time! And they have been doing a good business with it:

It's not grossly undervalued, or heavily insider owned (only 6%) but a stable, successful business. Quake protection is all they do, and they are about the only ones who live or die by this one product line. ITT and Kayden are the only publicly traded competition listed by Yahoo Finance, and with them this product is a small side line. TAYD tends to jump instantly in response to major, destructive quakes:

But, of course, if a major quake destruction would hurt the market enough, TAYD might initially react more like it did in late '08 (down like everything). If the New Madrid were to become more active, it would suddenly place a huge area of buildings in the midwest, that were built with little thought about earthquakes, into the market for some quake retrofitting.

Is Gold Now The Last Safe Haven Standing ?

2011-03-22T10:41:00.000-07:00

Gold usually must compete with other choices for safe haven money. Bonds, real estate, and the world's reserve currency, the US dollar are the chief rivals. Real estate has become a troubled no man's land for investors. Bonds have been very popular, but now many people, using the term "bond bubble", are turning on them, including none other than Bill Gross, the biggest bond fund manager in the country. He has now become an outspoken critic of the federal deficits and the Fed's loose money policies. In a gurufocus.com piece, he states:

"...nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the
Fed doesn’t?"

Gross is still bullish on some corporate bonds and foreign bonds, or any bond not denominated in the USD. But aren't even the best corporate bonds denominated in the dollar? And what about the dollar as safe haven? Why should we worry? It has been weakened by an oversupply, but don't investors still flock to this safe haven in stock market downturns? Well, no actually! Take a look at how the dollar behaved over many of the recent stock market sell-offs, then compare these to what it's doing in our present correction:

There seems to be a quandary over the safe haven flight nowadays. Money doesn't want the dollar anymore, as the above chart clearly shows, and bonds - well they are fast becoming a pariah. Cash is beginning to severely under-perform real inflation. It seems all the alternatives to a 1% return on cash are coming to suffer a malady know as "counterparty risk". Whether the counterparties are named Madoff, Ponzi, or Bernanke, the markets are getting into a mood where they want to have nothing to do with them.

The word "counterparty" was once one of those fine print words you didn't concern yourself with much unless you were an attorney. Now they are becoming investor enemy #1. Is the counterparty over? They have a really poor track record versus gold, and this is coming to be a front and center focus among investors:

This is just the casualty rate the last hundred years. Over the last 5000 years, this would be a much busier chart. Will our foolhardy counterparties of today fare any better ? I have my doubts. They seem to be much more talented fools with computers to help them.

When George Soros made his famous comment about gold being "the ultimate bubble" in January last year at the World Economic Forum in Davos, Switzerland, it was not in a derogatory sense as was commonly thought. He was essentially referring to gold as the last safe haven standing after the housing bubble, the bond bubble, and all the other bubbles have been decimated by our modern day counterparties. He meant "ultimate" as in "last in a series". "Gold is the only actual bull market currently" he told Reuters but stressed that it won't last forever. While it's true that he has described gold as "not safe", this must be taken in the context that, in his words, "this is a period of great uncertainty, so nothing is very safe".

Gold's Four Month Habit

2011-03-20T16:10:00.000-07:00

Gold is a very fractal animal for whatever reasons, and its inscrutable repetitious habits can be taken advantage of. As investors, ours is not to reason why; ours is to profiteer off whatever we can as long as it's legal. With that proverb in mind, let's look at an odd habit gold has - the four month phases.

David Nichols emphasizes in his work that gold tends to make its moves in well defined time frames. In a February 27, 2009 article he wrote for kitco.com he describes one of those:

Although most of my work on market fractal patterns is concerned with the patterns and structures in price movement, there is also a clear time component to this amazing growth pattern in gold. Gold has been moving in 4 month units, with the hyper-growth phases -- and also the big recent correction -- consisting of 2 of these units, or 8 months.

This was clear in gold's behavior up to that date, and it certainly has been clear in its behavior since: (click to enlarge charts)

Here we see the pattern of a four or 8 month climb always followed by a four month consolidation. There are pullbacks to a nice, smoothly climbing, parallel set of 140 and 200 day EMA curves, which are the ideal buy points like clockwork. We just experienced one of these going into February. And the RSI dips to near 30 every time along with these trips to the 140, my favorite bull/bear reference. It's strange that we are just off all time highs, yet the RSI is moving around the 50 mark. The last time this happened was August 2009, and a powerful climb soon followed.

This all coincides with another time frame habit of another very related animal - the US dollar. It has an often noted 3 year cycle where approximately every 3 years it sharply dives to a new low. An excellent article on this is the one by Toby Conner in the 2/28/11 Financial Sense. The last new low was April/July 2008, and the really bad behavior of the dollar lately lends credence to Conner's projection of a dollar collapse to below the 2008 low of 70 - a sharp move from the 76 we're at now:

There seems to be a quandary over the safe-haven flight at this correction. Money doesn't want the dollar, as the above chart clearly shows, and bonds - well they are fast becoming a pariah. Cash is beginning to severely under-perform real inflation. That leaves gold and silver as the last safe-haven standing. So the 3 year habit of the dollar animal is matching up perfectly with the 4 month habit of the gold beast. How do these dumb animals know ahead of time what we shrewd humans are thinking?

Ours is not to reason why. If these creatures of habit live on, we are due for a major new profiteering gold climb starting in April.

One More Canary

2011-02-06T11:05:00.000-08:00

The leader groups in the market have been telegraphing the turns in the S&P 500 pretty well the last few years, and recently they have all held hands and sung a new song. I've written an article all about this What Tunes Are The Market Canaries Singing These Days ? over at Seeking Alpha, but since it's an exclusive to them, I can't post it here. I was remiss, however, in not pointing out one of the biggest, baddest canaries of them all, which I will do here.

This bad ass canary is the tracking of the cash levels of mutual funds. It is a contrary indicator because it depends on funds being the market, and if they are all in, the supply of dry powder for further upside gets pretty low. And for the last 40 years, that's about the way it has played out:

This history clearly shows the market was crusin' for a brusin' any time the cash level got down anywhere near 4%. This happened in 1972 in front of the '73/'74 beating, in early 2000 in front of the '00/'01/'02 beating, and in 2007 just in front of the '08/'09 beating. Well, Mister Market may want to brace for another assault and battery, because we are at around 3.5% now.

It should be noted that economic cycles are also very important, and each of these dips to below 4% happened in front of recessions. The only dip that didn't was the one in 1976, and the market's decline wasn't very bad after this cash level drop to around 4.5%. We currently are in an economic recovery cycle, so if we can avoid another recession, a market drop may not be so terrible.

Nichols' Last Stand ?

2011-02-03T10:45:00.000-08:00

The 64 month parabolic gold fractal as espoused by David Nichols in The Fractal Gold Report is entering a do-or-die zone the next couple weeks or so. As you know if you've been reading my posts, Nichols has been using fractal analysis to call the moves of gold to a high level of accuracy for years now. He says these moves are all within the context of a large scale parabolic growth fractal - the 64 month pattern that repeatedly shows up in big bull markets. This fractal must end in a parabola ending blow-off spike to around $2000 - and then the big collapse. The sprout point of this he reckons as September 2005, which agrees strongly with the silver chart; and the end of it is January 2011. Given that plus or minus a month is his tolerance for the pattern, and that other big scale cycles would have a flip occurring in gold from bullish to bearish by Feb 18, the finish line for the 64 month drama is just in a couple of weeks.

Well, where is the drama ? There is no drama ! Nichols first expressed puzzlement many weeks ago over gold's "delayed launch" and now must have a huge collapse immediately to mark the end of this 64 month growth fractal. Gold clearly isn't in any kind of 1979 style parabola ending mode. And it appears to be finishing up a pretty normal and orderly correction from overbought to oversold - as if it were tooling along somewhere in the middle of a bull market. No blow-off spike to a top and thus no big collapse. What's going on here ? How could a guy who has been getting the intermediate term moves in gold so right for so long be so wrong on the big overall pattern ?

Well, as I've been suggesting for awhile now, I think it is a matter of scale. My fractal posts basically say Nichols is right about the overall fractal pattern gold is in, but he may have the wrong scale of it in mind. As fractals are wont to do, they proliferate the same thing in all different scales. And gold may well be in the larger scale version of the 64 month iteration that Nichols has been focused on. I've given several examples from history of this bull fractal in my previous posts - it happens. And it seems to be happening with gold, as it did in gold's previous bull market of the 70s.

But Nichols has not recanted his 64 month doctrine - that apostate, that hard-necked heathen. As I've mentioned before, he used to be a true believer, saying in 07 and 08 that the commodity bull in general and gold in particular is the anti-fiat way to invest and has many years to run. Then he went astray with this January 2011 thing. He may have to come back into the fold, however, in two weeks. He more or less has drawn that line in the sand himself. From his February 1 Report on gold's action:

I have been pointing to a retracement up into the $1,355 to $1,365 zone to give us a clearer picture of this pattern, and the "tails" on the daily candles are starting to stack up just under this zone.

This seems like a set-up for an intraday foray up into the $1,355 - $1,365 zone that cannot hold into the close, leaving a long "tail" on the daily candle. This would not be a bullish development, as it would satisfy the requirement for a 38.2% retracement of the drop, but leave gold with a weak price pattern. If I had to guess, this is how I think it will develop right here.

The other alternative is a strong rally higher that holds up in this $1,355 to $1,365 zone through the close. But in my opinion it is going to take a close solidly over $1,365 to warrant taking baby steps back onto the bullish side.

He seems to be saying, "OK, if gold climbs back up over $1365 and doesn't do any February dive to oblivion, I was wrong about the 64 months". We'll take him back wholeheartedly into the flock of gold bulls.

Bull Fork vs Bear Fork Comparison For Fractal Gold

2011-01-15T16:15:00.000-08:00

The correction in gold this past week has gold fans trying to gauge its significance. About a month ago I posted on gold's big fractal fork in the road, and this correction is occurring right in the middle of the fork. So let's look at this fork. The two directions gold may take are a bearish path if we are in the 64 month bull market fractal (which ends this month, January 2011), and a bullish path if we are instead in a bigger scale of this fractal and are actually going into the mellow part of the 2nd parabola climb of this fractal. As I pointed out in my fractal fork post, the best way to discern which big fractal pattern we are in is the duration of the downtrend separator of the twin parabolas that make up the structure of this fractal. In gold's case, this downtrend is a little ambiguous as to whether it's the 1 year or less version that accompanies the 64 month fractal or the bigger 2 year or thereabout version that accompanies the larger scale overall pattern that seems to typically run around a 9 year length (plus or minus a year or so). To wit:

Here we see the inards of the larger scale bull-case pattern with the ultimately higher end price for gold with the 1 3/4 year separator. This would suggest a present pullback to about $1280 to a gently curving support area. This also is suggested by some technical analysis I ran across having nothing to do with fractals. Now for the bear fork possibility:

If you interpret the downtrend separator as this sharper, shorter version, it points to the 64 month as being the fractal we are in. The puzzlement with this is why haven't we seen the parabola ending manic spike in gold ? Well, if you subscribe to the popular train of thought that the big money bankers are to blame for suppressing the price of gold and silver to prevent panic over the dollar's problems, you would have to suspect that they were wary of what gold was starting to do late last year and perhaps did a total snuff-out of this spike. This is how the bankers think - Paul Volcker is on record as saying that one of the big mistakes made in the '70s was that they did not "manage" the price of gold better. This would leave us with just the collapse at the end of the 64 month fractal.

Which is the case should become apparent in a couple months or so. Just comparing the other examples of these various fractals, you see that in the shorter 64 month scale, the mid-course downtrend ends and the 2nd parabola starts usually right at around the 3 year mark. In the larger fractal, this usually occurs around 4-5 years. In our present gold bull, the 2nd parabola is starting at the 4 year mark. Even with the shorter downtrend, this puts it at over 3 1/2 years. And the 2nd parabolas tend to begin by overlapping the latter stages of the downtrend consolidations - this produces a disjointed curve in the shorter fractal version. These things, along with the bigger fundamental picture I discussed in the fractal fork post, seem to suggest that it's the bigger fractal that is in play.

But I am giving the smaller version possibility plenty of respect for now. Over the past week, I have done a serious re-weighting, taking a boatload of fat profits in gold to the sidelines for now. This would be prudent even if we are in the mellow early stages of a big 2nd parabola, where we will have typical overbought/oversold phases.

And it gives me an excuse to put more weighting into some good looking emerging sectors I've been lusting for - like agriculture. Some serious price action may be starting there as this food shortage article warns. It's a little melodramatic, but there have been a lot of trustworthy indicators pointing to some agri drama coming soon.

Natural Gas: The 100 Year Bridge

2011-01-09T12:37:00.000-08:00

Google "bridge fuel" and you will see a long list of discussions about natural gas being our bridge fuel to the future. I was using this term about nat gas years ago before it became something of a buzz phrase. Unfortunately, it's not creating the buzz it deserves - yet. Just what do they mean with this "bridge" talk anyway? Well, if you want a literal picture of "the bridge" here it is:

Here we see the cumulative global production charts for crude oil and natural gas up until the early 2000s with the Hubbert calculation for peak and decline. If you add NGL (natural gas liquids) to the natural gas curve, the green line actually forms a pretty even double hump with the oil curve - about 25 years apart. Historically, gas has been a Cinderella byproduct of oil production, but as the geometry of the above chart shows, it is now becoming the belle of the ball as conventional crude passes peak.

Nothing on the earth - solar, wind, batteries, ethanols, or algea - is going to come anywhere near matching the massive scale that natural gas is already providing in the years immediately ahead. This situation alone should cause nat gas to be the #1 alternative fuel consideration. In other countries, it is. But in America, congress and our president are going out of their way to ignore it in their drive to make the USA the global village idiot of energy policy.

I want to look at something that has happened to the bridge above. The chart was made before the advent of shale fracing and the huge reserve increases made from the Marcellus, Haynesville, Fayetteville, Barnett and other shale plays. As a result of this recent development, the 25 year bridge has become what many are calling a 100 year bridge provided to us by natural gas before we have to scale up a fossil fuel replacement team. These plays in North America are only a small part of this reserve addition. Schlumberger and other American drilling giants have developed the drilling method, so it is being put into use here first. But there are many shale areas around the world awaiting development. So globally, it looks as if we may have a big safe bridge ahead of us to develop alternative energy on.

This outlook, however, may wind up being a dangerous illusion. Natural gas drilling and recovery is subject to the same math that oil obeys with regard to net energy discussed in my post Oil: Beyond The Barrel And Over The Cliff. Making a producing horizontal well with intense water fracturing, separation and recovery is a very energy intense way of getting gas energy online compared to the way we used to do it. Even with the old fashioned drilling, we are running up against this EROI wall about now :

This net energy study was done by Jon Friese, a software engineer in Minneapolis as part of his volunteer work with Twin Cities Energy Transition Group. He used Canadian data because they provide much better well data than our energy policy challenged US counterpart does, but by indirect comparison measures, he thinks pretty much the same thing is going on with drilling on the US side of the border. If you consider the "cliff" location to be the 3 to 4 zone of the EROI ratio as shown in my post, this drilling picture has us rushing there in just a few short years. Obviously, we need such a study for the shale drilling, but considering that it is more energy intensive than what is shown, the chart would likely look just as scary.

We have exponential problems we are coming up against long before we reach the end of the 100 year bridge:

Here I graphed what the number of rigs would have to look like on top of the gas production per rig chart as it follows a fitted straight line per past data collected by Baker-Hughes. Just to keep production flat, you have an exponential curve develop as per rig production declines. We will have to come up with new technology and operations that jar us away from this geology induced straight line descent, or we will be forced to punch holes in rock like crazy to meet energy demand. Will shale drilling do that for us?

Despite the vast reserve additions being booked for our natural gas supply, there are real causes for doubt as to whether we will actually see all this energy feasibly produced. Over at the energybulletin.net and the oildrum.com Arthur Bermin has an article Shale gas: Abundance or mirage: Why the Marcellus Shale will disappoint expectations where he makes this bearish statement on the nat gas companies:

Shale gas plays in the United States are commercial failures and shareholders in public exploration and production (E&P) companies are the losers. This conclusion falls out of a detailed evaluation of shale-dominated company financial statements and individual well decline curve analyses. Operators have maintained the illusion of success through production and reserve growth subsidized by debt with a corresponding destruction of shareholder equity. Many believe that the high initial rates and cumulative production of shale plays prove their success. What they miss is that production decline rates are so high that, without continuous drilling, overall production would plummet. There is no doubt that the shale gas resource is very large. The concern is that much of it is non-commercial even at price levels that are considerably higher than they are today.

He states that profitability is hard to come by at sub $5 gas, and he is not alone in saying this. An attendee of the Biophysical Economics 2nd International Conference wrote on his blog, greenerminds.com about a study of the Barnett Shale made by Bryan Sell comparing a conventional field to the shale field:

Recent studies have shown only 28% of these wells have been profitable, and Sell showed costs per foot drilled in the Barnett at $150, three times conventional well costs. Shale plays also tend to be much deeper than conventional wells, driving up per-well cost. The Marcellus and Haynesville plays are more difficult and deeper than Barnett, and cost per foot drilled is double or more what it is for Barnett.

Sell also had some net energy numbers to report on Barnett:

The EROI went from 84:1 in 2000 to 38:1 in 2007, and overall volume per well had also dropped to half over the same period. This trend suggests another halving in 7 years, a 10% decline rate. Despite initial positive EROI, Barnett will show lower EROI than the conventional PA play in about 10 years time.

If that's the case for all the shales, their EROI chart will look like the one above for conventional gas in just 10 years after they reach the stage of maturity that Barnett is at now - rushing to the edge of the net energy cliff.

Many analysts, including Jim Cramer, have pegged natural gas stocks as a next big thing. But they could be up against a pickle with spending a fortune for oil and other energy input costs to extract a product that is residing at near breakeven pricing with plenty of it on the market already. They may be in a chronic situation where they can mothball capacity to raise the gas price, put a small wave of it on the market until price declines force them back into mothballing again. There is plenty of gas there, but the energy and production costs may be an ongoing dilemma for decades.

I am a great fan of the Pickens Plan for natural gas energy independence for America. And I think natural gas is our best bridge fuel for getting us to the post carbon world. But the bridge may be shorter and shakier for us gas fans than we think.

Gold Is At A Big Fractal Fork In The Road

2010-12-22T09:32:00.000-08:00

If you follow the new science of fractal analysis, you may be aware of the 64 month bull market fractal that I wrote an article on awhile back. David Nichols and others have been developing this method for years, and Nichols has identified this 5 1/3 year (64 month) parabolic growth pattern as being very prevalent in historic parabolic climbs. He is developing a method for general market analysis, but is focused on gold and silver right now as gold has been proceeding along a parabolic fractal climb since a fractal sprout point in September 2005.

Nichols has been calling the moves of gold on a monthly scale with amazing accuracy. His day to day projections are more hit or miss, but on the month to month range, his analysis is astonishing. For example, in his 2/25/08 report, he had been saying buy gold under $900. "The plan is to now to hold on to these long positions as gold climbs to the major target of $1010 over the coming weeks." He fine tunes his prediction: "There's a good chance it will overshoot the $1010 area and extend quickly up to $1040. But it may not survive for long over $1000 ... there is the potential for a multi-month top to develop after this push." So what happened ?

Whatever this guy's smoking, I want some. Nichols does pure chart analysis, but he is well aware of gold's basic fundamentals. In a September, 2007 statement, he says, "The most important investment theme for the next 10 years will continue to be the frenzy for tangible, hard assets ... and the best market to take advantage of this monumental trend is gold."

So here is where a fork in the fractal road is developing. Those of us who see a continuation of the currency/demand induced commodity bull market for years may have trouble digesting the 64 month bull market fractal that Nichols has recently posited as beginning with the parabolic sprout in September 2005 and abruptly ending in February 2011. It's enough to give a fiat money hater indigestion. In my article linked above on the 64 month bull fractal, I point out the amazing prevalence of this fractal - it's everywhere. And gold is showing all the signs of following this pattern. So do the world's debt and currency problems all go away over the next two months ? Does the commodity bull cycle suddenly end now ? Has Nichols changed his mind about the investment theme for the next 10 years ? In 2008, he stated "this bull market in gold should last for many more years." His 64 month gold fractal seems to contradict this.

As I show in my article, there are examples of this 64 month parabolic fractal not ending a bull climb, but it presents some serious problems to the basic bull case for both gold and silver. Let's consider the basic phases of the gold climb, or any large scale parabolic climb. It is often described as three phases. Phase one is where the sellers have mostly had enough of the bear, and supply/demand slowly exert an upward bias, but there is little investor interest. Phase two is where professional investors slowly begin an allocation change back to normal levels, putting gold into a stable climb for years. Phase three is when the professionals have built an allocation level to around 5% to 10%, but the retail investor has yet to embark on the mania. Jim Rogers likes to ask his audiences how many are gold holders and at what allocation, and he is amazed at how few of these pros are holders to any extent. Early this year, the fund allocation level was estimated at around 0.4%. Jim Cramer reckons the pro ownership level now at still less than 1%, and he says that is way too low. The phase two pro accumulation is a slow process, as opposed to phase three. There was an interesting article over at The Daily Gold back on March 7 titled "Gold Is Not Going Parabolic Yet" where they note we're not even through phase two yet and even phase three takes time to build: "As the Nasdaq bubble proved, the seeds for a popular speculative mania are not sown overnight (or even in a few months). It literally takes years to prepare the soil of popular psychology for a mania." This phasing process, which is a steady acceleration into the parabolic top, does not fit well with the 64 month fractal and the gold parabola suddenly ending in February, 2011.

Another misfit in the puzzle is silver. In my article "Is Silver Money" I point out that every time in history where gold essentially becomes a currency, silver becomes valued, not per its industrial supply/demand, but at its abundance ratio with gold 16:1. If it goes there in this gold move, that implies a rise in silver to $150 if gold goes to $2500. Silver moves in parabolas even more so than gold, and you would think it would achieve this kind of price at the parabola's end. But the 64 month parabola constraint forces a rise from the $20s to $100 or more in just two months. That's asking a lot - even from silver. Silver's industrial supply/demand condition, by the way, has reached a truly historic point where the above ground stocks have been depleted to essentially zero compared to its run in the late 70s. Since then, a computer/electronics revolution has happened, placing immense demand on use of silver as the world's best electrical conductor. The artificial suppression by big money interests on the silver price has resulted in a long, long climb in the offing, more of a parabola than can be reasonably fitted into the 64 month fractal.

So what right does this fractal stuff have to upset the applecart of sound fundamental considerations ? Maybe we should just forget all about this fractal hocus pocus. Well, not so fast. Nichols seems to have only recently stumbled upon the 64 month thing. But just maybe there are other scales of this same fractal out there that we should be thinking about.

First, you have to consider the basic structure of this fractal. It is composed of two parabolas separated by a distinct downtrend phase about midway. For examples, look at the currency parabola of 1920s Germany and the stock market of Denmark in the 90s: (click on charts to enlarge)

The shapes of the components vary, but the structure keeps recurring with the downtrend in the middle being a year or less with the overall time within a couple months or so of the 64 months. This is by far the most common scale of this fractal. But it does seem to occur in other sizes. There is a 3 year version. As examples of this, look at Homestake Mining, the premier gold miner of the '30s, and the Brazilian inflation of the early '90s:

These fractals do the same thing in different scales. That's what fractals do. They are all different with the only common denominator being that all the main components are sized proportional to the overall size of the fractal. The 3 year mid-course downtrends are small, less than a year, and barely noticable; but they're there and much more clearly seen in the amplified versions of this fractal.

Could it be that there is a much larger scale of this same fractal that gold may actually be following in lieu of the common 64 month size ? Does such a thing exist ? It very well may. Look at these examples: the Thailand stock market of the late '80s and early '90s

The large size seems to cluster around about a 9 year length with everything scaled up including the variance on how long it runs and the duration of the downtrend in the middle, which runs around 2 to 3 years. The next example is the stock market of Turkey

This 9 year iteration has the mid-course downtrend run a whopping 3 1/2 years. This is also an example of a parabolic rise not meaning an end to a bull market as is commonly thought. The Turkish market could hardly be considered busted when the parabola was over. The next king-size example is the Australian dollar

Given that the downtrend size in the middle ran a little over 2 years, you get the impression it wanted to run to more like the 9 year length before being interrupted by the end of the world in late '08. A less pronounced version of this large size fractal was the Dow in the '50s

Big and gentle, this occurrence was not followed by a collapse, but by the big flat Dow of 1966 to 1982. A more typical large size was the Swiss stock market of the '90s

There is one other pertinent example of the large version of this fractal, and that was gold in the '70s. It featured a two year downtrend in the middle in 1975 and 1976. The length of this downtrend is about the most reliable predictor of which scale fractal is being carried out. The distressed buy and holders of gold during those two years would like to have known this basic fact back then. Well, we here in 2009ville know. This time around, the mid course downtrend gauge has been completed as of a little more than a year ago, and it was nearly two years, suggesting that it is indeed the large scale fractal we are in, replicating the previous gold bull

An 8 or 9 year scale of the fractal would make all the previously discussed pieces of the puzzle fit a lot better. It would allow silver to more reasonably return to an inflation adjusted peak commensurate with what it did in the late '70s

Here we see the larger scale mid-course downtrend size even more clearly to be the 2-3 year type, tightly correlated with the larger fractal.

So, should we fractal followers dismiss the 64 month parabola in our current gold market ? The investment implication of a blow-off parabolic top ending at 64 months is a hold of gold and silver going into January, and a serious round of profit taking after that. Then, if you are really bold, you could short gold coming hard off the end of the parabola. But this could be really dangerous because gold could sharply rebound at any time into a renewed bull market as the examples above illustrate. The implications of the larger size fractal are that we are in the early stages of the 2nd parabola, where you probably just want to take positions in the good miners and not try to be too cute timing around the shorter term moves in the gold price.

But what if you're not sure, and we are at a gigantic fractal fork in the road ? Well, it may be wise to closely monitor the technical condition of gold these next two months, and fade the sector if there is any serious breakdown beginning. Any such move should advertise itself in the appropriate technicals. But there couldn't be the end-of-parabola collapse if there is no end-of-parabola blow-off topping action. And, well, we are getting long in the tooth for such action to begin here at the end of December. The price action now in gold is quite orderly. Nichols is now referring to "the delayed launch" of the parabola ending frenzy per his current 64 month outlook. The technicals tend to favor the larger 9 year type pattern developing right now, but there is the very important fact that the 64 month is by far the most prevalent and seemingly most forceful version of the fractal. So maybe we should give it the benefit of the doubt until proven otherwise. It will be an interesting show to watch the next few weeks.

Is The Era Of The Fed Closing ?

2010-12-09T19:14:00.000-08:00

The recovery from the recession is showing some bright spots such as retail activity and corporate earnings. The big bug-a-boo still is employment. It continues to carve out a record weak post-recession return to normal.

What's the problem ? With our high-powered fed, now more high-powered than ever, you would think we could snuff out a nagging problem like this. But maybe that's just the problem. Our fed has been busy snuffing out problems for so long that it has created a problem that can't be snuffed out - the mountain of debt left over from all the snuffing.

If you compare these two charts, you can see the sharply growing employment lag back to normal in each recession recovery from 1980 onward in chronological order with the sharply growing debt level. Hmmm - I wonder if there could be a relationship there.

We hear a lot about all the fed's largess going to repair the mortgage ravaged balance sheets of banks, making them hesitant to lend. But the mortgage ravaging was the left-over of the fed's previous snuffing project. I guess these lenders' repair of the balance sheets gets to be a bigger job each time.

For all the trouble the fed's debt creation causes, we are getting less and less bang for the debt dollar as the decades roll by:

This chart shows the diminishing positive effect of each debt dollar on GDP growth since 1954. Marc Faber likes to show this and project "zero hour" - when piling on new debt gets us nowhere. A straight line fit through the data hits zero at 2015. A curve fit (red line) gets there even sooner. This out-of-control debt dynamic is nothing new here in modern America. A fascinating article over at zerohedge.com points out the math of debt creation vs the math of economic growth (very simple math) and how previous civilizations have dealt with it. We may be approaching such a point now.

Last November's election was, at its core, a debt revolution. The Tea Party this time is a revolt not against England's meddling with our colonies, but against another foreign entity meddling with our freedoms - the government in general and the Federal Reserve System in particular. I always used to think Jim Rogers' call for abolishing the fed to be a little extreme. Now I see a poll out just today with the stunning title "More Than Half Of Americans Want The Fed Reined In Or Abolished". Many are wondering how much of the good economic numbers is fed-snuffing. They look at employment as being the one thing perhaps not so easily juiced by the fed.

We needed the fed to bail the too-big-to fail entities in 2008. But runaway corporate 'government' with no federal regulation was why we needed this extreme action in the first place. All they did was encourage the mortgage bubble and abolish the Glass-Steagall safeguard that emerged from the last fiasco of the 1930s. One thing is certain, debt and the fed both are not viewed the same way anymore. Most Americans don't want too-big-to-fail anymore and they don't want too-big-to-bail either. The Fed model has run into the ditch, and we may not be too excited about pulling it back onto the road.

EROEI Adjusted Hubbert's Peak

2010-12-03T20:15:00.000-08:00

As we again are coming up against the problems of peaking oil production, which may be coming off the end-of-the-world hold of two years ago, we should be studying the works of M. King Hubbert. Hubbert, a geophysicist, used empirical math to quantify the actual behavior of oil fields as opposed to all the geophysical theory that was his industry standard. His predictions differed from the industry, and this earned him the undying derision of his colleagues and indifference from the rest of the world. But his projections have been transpiring in history very close to his time-tables.

What his global model for conventional crude production did not account for was the radical decline in net energy as peak is passing and what happens after that. Net energy was not a concern back in the 1950s, when he did his work. But knowing what we know now about EROEI (which isn't near enough) we could perhaps take the liberty of estimating a net energy adjustment to his basic global curve. It would look something like this: (click on graph to enlarge)

The first chart is the basic effect of net energy on the peaking curve. As you can see, it is a nonissue for the many, many years coming up to the peak. But as peak is passed, it fast becomes a really big deal. That's what we, particularly in America, are going to be gradually waking up to in the coming years. And I'm afraid it will be a little too late. We may be dealing with chronic 3 digit oil pricing before we learn to deal with EROEI.

As the time frames above show, we could be going into a net energy collapse (to the Z* point on the graph) long before actual oil production declines very much.

This makes the net energy numbers on all our nonconventional crude additions that we are tossing on top of the total liquids curve very critical. It will decide where the narrow blue curve in the graph above runs, either with low EROEI and close to the red dashed line, or with high EROEI and close to the fat blue line of the total liquids production. The science of EROEI has come on to the stage and it will either be the villain or the hero. Our Congress is doing all they can do make it be the villain.

OK, Gold Correction Back On

2010-11-17T08:25:00.000-08:00

Gold correction for November NOT aborted. To proceed per original fractal forecast. That forecast was for gold to have a weak spell up to around late November. Then a power climb to year end. It seems that silver wants to lead this upcoming charge, it has been much more extended on the upside lately. The gold/silver ratio is charging lower (see my previous posts) and silver, the higher beta of the twins, is so far being more muted on the downside in this pullback. The switch-over from silver under-performing gold to a sharp out-performance that began about a month and a half ago seems to be on course. This is the typical case for gold's mega moves - a severe catch-up climb for silver.

Gold Correction Aborted

2010-11-06T12:15:00.000-07:00

I wrote a piece back on October 18 about gaming the next gold correction anticipating a minor one for two or three weeks at least. Sure enough, the very next day, a correction started. It seemed to be advancing properly up until the "B" part of your standard abc corrective pattern that gold has been following up until now. But then it started behaving most improperly.

As the chart shows, as we started down from the "B", the market seems to have said,"OK, forget the rest of this correction. Let's get on with it." I suspected that maybe this pull back wasn't going to make much headway going into the sea of green building on the money flow chart. There is a big difference in buying pressure between now and July, when gold did its last "proper" correction. There was, however, much higher selling volume than buying volume as in a continuing correction. But the intensifying buying pressure seems to be snuffing out the effects of these profit takers.

This looks like an intensifying climb where the pull backs will be hard to figure.

Is Silver Money ?

2010-11-01T19:52:00.000-07:00

Gold is a metal that is garnering some attention these days as the "alternative currency" while the world seems bent on debasing all other currency. Historically, that has been gold's main utility, whether you show it off as a necklace or put it in a bank - it has been money down through the ages. But what about silver? We haven't made coins out of it for decades. It's commonly referred to as "the poor man's gold" and gold's ugly cousin and other derogatory phrases. And since the age of electronics has set in, 90% of it is used for such inglorious things as connections in our gizmos, which wind up at the bottom of our landfills.

It wasn't always like this for silver. The Greeks honored silver 2500 years ago by making it into coins, and, in fact for the next 2400 years, silver was the main means of exchange in daily commerce. Gold was used mainly just for big international trade or money actions between banks. As Milton Friedman once noted. "The major monetary metal in history is silver, not gold". It was 30 pieces of silver that betrayed Christ. If you look at the Bible or any old writings where the monetary metal pair is mentioned, it is typically "silver and gold" - not as we say today "gold and silver". It was today's ugly cousin who was the belle of the ball back then.

Is there any reason why silver, or gold, was viewed as money? Well, both metals are very rare. There are the so called "rare earth" elements, but they are actually quite abundant compared to gold and silver - just not as abundant as the base metals. So the monetary pair was given the status of the basis of exchange and the value ratio between them was set at around 15 - the gold/silver ratio (GSR). This ratio has become the subject of a lot of investor interest in our time as we try to value precious metals. There is geologic reason for the GSR being around 15 -17. Silver is 17 times more abundant in the earth's crust than gold on a parts per million basis.

The first few congressional coinage acts in America specifically set the gold/silver ratio at various numbers around 15. And even the Greeks set their ratios in the low teens. Governments have gone back and forth between silver and gold or both (bimetallism) as to what they set official money supply by. It turned out to be a complicated mess with both metals legal tender. When one metal price rose above the other, coins were melted down. But all money, especially the silver backed common exchange pieces, remained metal backed.

Then during the Civil War, Lincoln issued Greenbacks without metal backing to temporarily finance the war effort - our first paper money and our first adventure into fiat money. This instigated the "free silver" movement where the vast new silver finds in and around Nevada were argued as sound money expansion of the money supply. "16 to 1" became a hot political slogan of "the silver ticket". We endured this bimetallism approach to money with various coinage acts of Congress for most of our history. It was just from 1900 to 1971 that we were on an official gold standard. In the US of the late 1800s the rural farming population with a lot of debt and nagging deflation wanted bimetallism, a big debate of the day and the big issue in the 1896 presidential election.

The free silver rebels wanted both metals as money supply, the more ounces the better - a kind of early easy money policy, but all metal backed. It's been rumored that this debate was reflected in L. Frank Baum's "Wizard of Oz" originally published in 1900. The yellow brick road (gold) was originally traversed with Dorothy's silver slippers, later changed to ruby red. The "Oz" is thought to be a reference "ounce". But bimetallism, with all its complications, faded to a Congressionally mandated gold standard in 1900. Money supply was, however, expanded per the cries of the silver supporters with the issue of silver certificates backed by silver from 1878 to 1964 to circulate alongside the gold backed notes. But a movement away from the historical "silver as money" paradigm had begun. This really started us on a road past Dorothy's scarecrow of loose money that has strayed away from pure metal money to disruptive bouts with other types of money. Not long after the gold standard decree of 1900, we had currency mayhem. The Panic of 1907 resulted in the creation of the Fed in 1913 and, well, the rest is history :

This long-view chart shows what has happened to the gold/silver ratio since those days. It's basically been a story of the alternating periods in history where either paper was viewed as money or metals and hard assets in general were viewed as money. Wars, for whatever reasons, seem to bring the money view back to monetary metal and wind up putting the GSR back at 15. But disenchantment with paper bubbles sure seem to do the trick every time as the chart shows in the aftermath of 1929 and 1999. When we got away from making coins out of silver in the 1960s, we also ended the silver redemption of our bills that had "silver certificate" printed on them. Currency mayhem soon followed. It seemed like inflation was an unstoppable force ending the world as we knew it in 1980.

During the last portion of the great gold bull market of the 1970s, when metal again came to be viewed as money, there was a swift return to 16 to 1 on the chart. Silver has the tendency to lag the big moves in gold, then do a very swift catch-up move. This seems to be playing out now with our current gold market:

The red line is the gold/silver ratio, and it amazingly heads straight to the ancient 16 to 1 as the investor view is turned up to maximum "metal as money". If this happens yet again, it would put silver at $125 if gold were to go to $2000. That is a 400% gain on silver as compared to a 50% gain in gold. Fine tuning the gold/silver view even further, we see a sharp technical break in just the last month:

This indicates that the silver explosion over the latter portions of big moves in gold is starting.

But could we really drive silver to such outdated monetary levels? Consider that only 10% of the stuff goes to the investment market, and we are off any gold or silver standard now. Well, that was the case in 1980 and it didn't keep "16 to 1" from rearing its barbaric head. If you are wondering if we really equate silver with money nowadays, you need not look any further than an R-squared analysis between gold and silver prices of the last few years. Gold is clearly the money metal, and silver, despite having vastly different practical use fundamentals than gold, trades in near lockstep with gold with R-squared values around 0.96 (1.00 is a perfect correlation). Gold doesn't correlate this way with copper, sugar, or anything. Adrian Douglas has an excellent article at silverseek.com where he plots silver and gold prices from the last 6 years. He derives an equation just from the plots with the gold price as input and the silver price calculated solely from the gold price. He then plots a "synthetic" silver price (from the equation) and overlays this with the actual price chart for silver - the two graphs are nearly identical. He concludes that big money interests determine both the gold price and silver price. They view both as money nowadays.

Is silver money? History seems to say it was and is and will be the most basic money. We may be missing a passage in the Bible that reads, "Thou shalt be smitten with great calamity as thy path strays far from 16 to 1". In a world where all currencies are being debased, questioned, and abandoned, what if I told you there was a money that has been present and stable since the beginning of wealth, and that will give you 8 times the gain of gold as people flock to it? Silver may be just that.

China's Drag On The Market

2010-10-20T14:59:00.000-07:00

I keep hearing and reading about how the market's outlook would be so much better without those darn Chinese. Yesterday you read that China sparked a sell off with their raise of interest rates. I've heard that the Chinese economy can't do well without the US consumer doing well, and we all know the US consumer of yester-year isn't coming back soon. As China goes, so goes the world, and the Shanghai has been in a sustained downtrend for over a year, being far in the red YTD. Well, take a peek at what's happening now.

William O'Neil, founder of IBD and a pretty sharp technical analyst, would look at this chart and have a cup and handle bottom reach off the screen and slap him. The handle is a little too long, but it's breaking, which would suggest that China's market is resuming a climb . China is moving to prevent bubbles. They are not stupid like our US leadership, so, yes, they are raising rates. And they are distancing themselves from not only US fiscal policy, but the US consumer as well, becoming a trading partner to the world.

Their stock market has spent most of this year below the critical 140 day ema (blue line) but has now regained the territory above it and turned its slope back to positive. China does indeed tend to be a harbinger for the rest of the world. Note that the bear decline for the Shanghai ended in October 2008. So the cup and handle breakage would predict a continued climb for global stocks. Other harbingers, like the QQQQ and the US transports are well above their April highs and point in the same direction for the broad market. China a drag on the market? Well, maybe not right now.

Gaming The Next Gold Correction

2010-10-17T12:29:00.000-07:00

Gold has had a good run lately, and that begs the question, "When is the next correction and should I try to sell and buy back around it?" It's pretty easy to know when a correction is nearing. If you believe in the fractal voodoo, a one month correction is due to start around the end of October. It is of the type after a 64 day cycle that occurred in July this year, not the big four month type that started last December. So why not be clever and dance around it?

Well, if you had been clever enough to dance adroitly around the last two corrections, both the big one and the small one, this is how you would have done in all that tracks the price of gold (click on charts to enlarge):

It would have been worthwhile, putting you 7.7% and 5.5% ahead of a continuous hold. But when you try to apply this cleverness to individual gold stocks, this is the very typical result:

The cleverness backfires and instead of you gaming the corrections, Mister Market games you. And that's if you had timed both corrections to near perfection. In real life, that ain't likely. This doesn't happen with every stock, but it is the very typical case with the very small stocks (LODE, TRE, GBG, GRZ are some other examples). This is because the small miners have their stocks moved much more by their own individual property stories than by the short term fluctuations in the price of gold. It is a much bigger deal to them if a property is making good strides ahead than if gold goes $100 higher or lower. The big mature miners with a huge portfolio of producing properties see their stocks move much more in unison with the price of gold and silver. Trying to game corrections makes much more sense with them. But with the smaller miners, it becomes much more a roll of the dice.

As for a portfolio management strategy for gold corrections, it may make sense to raise cash with the gold and silver ETFs and large miners if you're attempting to trade as opposed to indiscriminate selling. When you are holding a quality junior miner, you are holding a development story that will jump the price of the stock at the most inconvenient of times for you as a trader.

Maybe The Best Gold Stock You Never Heard Of

2010-10-11T20:05:00.000-07:00

I've always held a deep respect for the thorough discounting efficiency of the stock market. In fact, my main analysis method depends heavily on it. So I tend to sneer at the "undiscovered gem" approach - "Oh, the market has discovered it, fool, and it knows more about it than you do" is my reaction. So, it is with a sense of uneasiness that I present to you an undiscovered gem.

Sante Fe Gold SFEG seems to be such a gem. It most certainly is undiscovered. Even amongst the small juniors, it is about the most unheard of, stealth gold stock priced above $1 I have ever run across. About the only people grabbing at it are the insiders, and they really like it. At an IH (insider held) factor of 35%, it is the 3rd most heavily insider held gold stock I have found (behind GORO and BVN) among the 60 or so I track that trade on US exchanges. And it's all officers who own, not funds or other companies, and some of the heavy handed buying has been just in the last year or so.

About the only hoopla one finds is some write-ups at investor village wherein they explain:

And how did all this come to be? Essentially it has been borne out of an extremely conservative management style intent upon under-promising and over-delivering, that with little fanfare has been quietly and methodically acquiring additional properties at every opportunity, that not only hold great value already, they also hold additional superb upside discovery potential and at the same time sought to downplay expectations with initial extremely conservative projections based on $650 - $850 Gold prices along with conservative output projections and the prospect of better than expected grades, that might actually have a much better than expected impact, not only on the initial Gold and Silver output projections, but also on the bottom line due to what might be larger cost savings, along with a multiple increase in production, that has basically set the stage for an unexpectedly large increase in revenues, that a short time ago, did not even seem remotely possible even to us: And so now it appears as if the impending prospects of all this has certainly vindicated our judgment and decision to select SFEG as our preferred means of investing in Gold and Silver, with perhaps among the most upside leverage and potential for the coming year and early in this decade as we attempt explain further and offer some background as to how we came to this decision quite some time ago.

And because we've had experience of this before, when we were able to identify extremely undervalued positions in both mining and other issues that were able to gain exponentially from similar, albeit much lower multiplier effects that still turned out to be very successful investments. With our track record of identifying ahead of time and capturing much of half a dozen up to 100 fold mega-winners this past decade We honestly have not seen a better, clearer or more easy to project so well ahead of time situation than Santa Fe Gold and re-iterate: Very few times in life are you ever likely to be faced with the prospect of being able to gain from a multiplier effect that you can see so clearly ahead of you especially any financial or investment multiplier because as you continue to evaluate Santa Fe's prospects

The average cash cost of production in the industry is about $580/oz for gold. I've seen figures of around $250 and $300-$400 projected for Sante Fe. It's been tabulated that M&A pricing metrics, as shown by the recent Andean Resources buyout, puts SFEG's current $1 stock at $36 by the same reserve oz valuation.

In support of all this, 26 institutions considered Santa Fe to be a compelling enough investment proposition at $1.30 per share earlier this year and SFEG reached a high of $1.74. Therefore, since the fundamentals of the company are already substantially better today than they were then, with increasingly strong revenue growth forthcoming, Santa Fe would appear to be a rare and uncommonly undervalued and opportunistic anomaly in the current marketplace, in particular when compared with its peers.

And with an additional 65 institutions or so that have either met with management personally, or by phone conferences and are now monitoring Santa Fe in expectation of an AMEX listing before too long, as Santa Fe continues to execute and potentially over-deliver, a real buying stampede in this issue could ensue, especially as important resistance numbers are taken out on the upside and most importantly, once new 52 week highs are reached and beyond new all time highs. And in addition to all of this, the company has already stockpiled more than a year's worth of production, presumably with all the intent to compress more than two years production into one and ultimately, ramp up in multiples of 400 tons per day sooner than anticipated, thus affording them a head start towards increasing to 1,000 tpd plus and very significant revenue growth.

Sometimes it takes the marketplace time to factor in all of the information at hand and much of what is written above may not yet have been assimilated by all investors, but a few are beginning to get the memo and increasing numbers could begin to realize just how truly undervalued Santa Fe really is that at some point could create a rush on the stock and a bottleneck situation where demand for stock would overwhelm supply

I've read a lot of complaining about the company's public relations efforts (or lack thereof). But they may be trying to fix this starting with an investor conference call this Friday. All of Sante Fe's operations are in the Southwest US and do not involve any geopolitical problems (unless Obama nationalizes the mining industry). Technically, the stock looks pretty interesting:

It has made much higher levels since mid '08, which is more than you can say for almost all the miners - a nice sustained uptrend that correlates well with the gold moves. It looks to be organizing for another sling shot move up with the current gold move:

The Next Megatrend

2010-10-05T17:17:00.000-07:00

I have found that investing is most easily done by identifying megatrends and working mostly within that area of the market with individual stock analysis. Studies have found that half of a stock's movement is a function of what its sector is doing. So if you're right about the major sector trends, you take positions in the best stocks and let them ride and trade only for very good reasons - "be right and sit tight" as the saying goes.

Gold is the megatrend right now. But all megatrends end. So what's after gold? If you're an investor who attempts to correctly switch horses when they die, you need to be thinking ahead and preparing to mount the next horse when the one you're charging ahead on is shot out from under you.

Before we consider what could possibly emerge as a megatrend after gold, let's first think about the shooting of the gold horse. I suppose the first thing that comes to mind when thinking about the end of something as hot as gold is your classic blowoff top followed by a catastrophic collapse that goes on for many years. This is what is thought of as coming after a parabolic rise. Isn't that what the Nasdaq of the 90s did and gold in 1980? Well, I would direct your attention to my previous article "The 64 Month Bull Market Fractal" to point out that the parabolas sometimes end that way, but can end with a jarring disconnect from the parabola followed by continued high range pricing and new highs - just without the nice smooth parabola. There is a current article over at Kitco by Chris Blasi suggesting that the macro economic conditions are so different now from 1980 that it almost dictates a different outcome in this gold bull market:

Not a 70's gold bull replay.

True, gold's last bull run gave way to 20 years of price erosion, ratcheting down to the lowly exchange rate of $255 per ounce. Regardless, the US and global economic landscape of 2010 is vastly different than that of 1980. Today's exponential growth of sovereign debt is straining confidence in faith based currencies, particularly one which holds the mantle of world's reserve currency. This current debt differentiator, in conjunction with a myriad of other issues inhibiting US economic growth, is substantial enough to reasonably assure investors of a strikingly different course and conclusion to this gold bull.

Take a look at the US debt chart in this article and visibly compare 1980 to now - a vastly different condition as to its rapid healing prospects. So the shooting of our gold horse may actually be more of a moderate hobbling - but something to avoid nonetheless.

So what about a new megatrend to watch for? How about oil? When oil was passing $80 a barrel two years ago, it was about the only game in town and funds were loading the boat with it. All the oil bears were crying "speculative bubble", and when the financial collapse came in '08, it was just that - everything was a collapsing bubble then. Now oil is passing $80 a barrel again, and oil and the energy stocks are underperforming just about everything. They are the dog of the day now. You certainly can't blame the pricing on a frothy frenzy this time.

I think the price of oil may surprise and confound what I call "the barrel counters" - the energy planners who by and large are blind to the net energy crisis brewing in the world. They don't understand the profound decline in net usable energy coming from the industry. If you tabulate a real net usable energy curve, which used to be about one and the same with the raw barrel count, you get this disturbing picture (click to enlarge):

A sharp divergence between net energy and official barrel count began to emerge in 2005 - about the time the price of oil started going crazy. The Great Recession has perhaps camouflaged the real usable energy supply shortage since 2008. But now we have a recovering global economy matched against a steepening divergence between usable energy and barrel count - a double whammy that could bring three digit pricing back before we think. Crude alternatives are stepping in to fill the gap, but probably not fast enough. Oil has been a dog. But I have a hunch this dog will have his day.

The 64 Month Bull Market Fractal

2010-09-28T05:55:00.000-07:00

I don't know how familiar you may be with the emerging science of fractal market analysis, but there is an element of it that has a direct bearing on gold right now. To briefly overview fractals, they have found that stocks and indexes have a strong tendency to move in repeating chart patterns at various scales (self-similar, they call it). So a stock may consistently produce say a 2 year pattern which is also evident at a 2 month time frame. Sounds silly, I know. The theory is that there are well known fractal growth patterns in nature, crystals growing under a microscope and about any basic growth in nature; and these are abundant with self-similar, geometric, repeating patterns. They've known about these nature patterns for many decades, but only recently has anyone thought that financial markets may grow by these fractal patterns too. When they investigated, they found that the unchanging human nature did indeed infuse fractals into the trading charts.

David Nichols, a pioneer in this investigation, finds that there is a 64 month parabolic fractal signature that seems to show up at about every major bull market. The duration varies a couple months or so, but the pattern is a "sprouting" of a parabola, a bullish change in previously sleepy trading, followed by parabolic growth into a violent top about 64 months later. As an example, he points to Toll Brothers as a proxy for the housing bubble (click to enlarge charts):

The months are marked 1 through 65 for the parabolic progression. The Japanese Nikkei bubble of the '80s did the same thing:

I won't flood this piece with the other charts, but the same thing shows up in the Dow of the 1920s, the Nasdaq of the 1990s, and other bull markets. It also shows up in the more notable bull crazes of individual stocks. For example, Intuitive Surgical ISRG was such a craze:

Here the "sprout" of the parabola was a subtle change in trend from sideways or down to up.

Then there was Hansen Natural HANS, remember that hot potato?

Like the Nasdaq chart, the gain was so dramatic, you have to magnify the start point area to see the "sprout" point:

So what does all this have to do with gold today?

Nichols reckons the change in behavior "sprout" point as September 2005, although gold was already in an uptrend by then, but a very weak one. Since this chart was done, we have pretty much been following the fractal.

The end of this gold parabola is early 2011. This brings up some difficult questions. If the gold bull market is to end in 5 months, does that mean the entire commodities bull also dies in 5 months? It's hard to imagine a commodities bull without gold being a part of it. Do all the world's debt and currency problems go away in the next 5 months? That would be nice, but I somehow doubt that will happen. The hard assets/paper assets cycle runs about 12 to 18 years; our present commodity cycle is barely 9 years old with much more paper difficulty lying ahead:

So how can it be that the 64 month gold fractal is happening now, ending in 2011 and disrupting the cycle?

I'm not a fractal expert, but it strikes me that the parabola is just a part of a bull market, and it can occur either in the middle or at the end. In the case of the Nasdaq and the Nikkei, it occurred at the end. In another case that Nichols points out, the recent oil bubble, you have to seriously doubt that the bull market is over. There definitely was the parabola:

The parabola is clearly history. Does this mean that oil will never be over $100 again? It has already gone back to over $80 during a recession and its aftermath. At some point in a recovering global economy, demand will begin outpacing supply as it was starting to do 4 years ago.

If you examine the Intuitive Surgical and Hansen Natural charts above, you see that once the parabola phase was over, pricing remained high - even making new highs. I suspect that this will be the case with both gold and oil.

Cancel Breakout Alert

2010-09-19T13:44:00.000-07:00

Continental Minerals is being acquired by Jinchuan Group it was announced Friday. There shouldn't be much more rise in the stock as it is near the present buyout price (I hadn't seen the announcement yet on Friday when I did the previous post). An agreement has been signed, it looks like a done deal.

Breakout Alert

2010-09-15T15:10:00.000-07:00

Continental Minerals (KMKCF) is a junior Canadian gold/copper/silver miner that mines in China. From what I read, they have a promising property there with well over 4 million oz. of gold and 11 million oz. of silver. The stock seems to be doing a promising breakout (click to enlarge):

Since the big gold rally late last year, in which KMKCF participated nicely, the stock has been idling in a megaphone formation. After a false breakout in April to about $2.50, it may have completed this formation today with a real breakout with some building volume. I like the moving average geometry and the heavy 24% insider interest. If it doesn't do a breakout now, it probably will soon if gold keeps working its way higher.

Quantifying The Insider Edge

2010-09-12T16:15:00.000-07:00

As a follow-on to the importance of insider ownership level in considering gold stocks discussed in my previous post, I'll present a little number crunching here. I looked at a bigger sample size of gold stocks than just the 10 listed before with their big out-performance of the HUI to get a better handle on the relation, if any, between insider ownership level, size of company, and stock performance. I tossed out the ultra-microcaps less than $50 million or trading for less than 50 cents. I also tossed out the slower moving majors, with insider percentages typically not much effected by insider buying. I took a sampling of 51 such gold mining stocks from my gold list that trade on US exchanges with SEC standards of reporting. I sliced and diced this group into 3 market cap sizes and plotted their 1 year stock performance vs level of insider interest. Here is the result:

There is much less sensitivity to company size than I was expecting to find. The middleweights move about as fast as the featherweights. There is also little sensitivity to price range. I was expecting to find that as you go down the price range, the heavily insider owned stocks would curve sharply up in gain - down to the trash threshold, which is around $2 for stocks in general, but seems to be more around $1 for gold stocks. When I did a cluster chart for this, however, I got essentially random clutter.

The one big sensitivity that reaches off the page and slaps me in the face is what happens as you go below 2% insider interest level - a huge booby trap for performance. The individual stock performances vary widely, but this is an extremely poor averaging group - to be avoided like the plague. The large size group doesn't fall off as bad as the other two, but their size could be masking decent insider interest in many cases without having the needle moved much in percent. But the smaller companies, where any serious insider interest moves the needle off zero, are poison at these small numbers.

I have three chronic pains in my gold stock line-up in my fund, I call them the three stooges, and when I checked what their number was, sure enough all three stooges were toting less than 2%. That may be the last straw for them.

The Problem With Gold Stocks

2010-09-05T17:06:00.000-07:00

I like to analyze stocks by looking at a company's long-term financial results - cash flow, revenue, and what not, and looking at the interplay of these things with stock price. But I have found this approach to be all but useless in picking gold stocks. The performance of gold miners has nothing to do with their current financials other than simply having enough capital to pursue their projects. You see valuation ratios all over the map during their big climbs, much more so than with any other type of stock. They defy about any monetary type of analysis that may work reasonably well on stocks in general.

So how do you analyze the miners other than projecting the price of gold? Well, you have to resort to leaning on the expert opinion from the people who know more about gold mining than you ever will. These people can be book writers, commentators, newsletter writers, or Ralph, your barber. But all these people suffer from one or both of two key shortcomings (1) they are not geologists and (2) they are not officers of the mining company. It stands to reason that these are the people who know at least as much as the most informed newsletter writer, and probably more. I wouldn't think the company's officers surrender all the key information they possess to anyone on the outside.

So how does the average Joe Investor glean guidance from these people in the know ? First, you can get a feel for how good a management is by just looking at their stock performance over the course of the gold bull market so far. If the stock persistently shows little correlation to a rising gold price over the years, you have to wonder about the market's judgment on the management's ability. If the stock is to take advantage of a future rise in gold's price, it means this company's leaders are going to have to suddenly find a lot of new gold or change their management stripes. The odds are against both. I ran across a thoughtful piece in the archives at kitco.com "Industry Overview: Gold Mining & Exploration" by Derrick Irwin CFA that discusses this dilemma of gold stock analysis. His take:

We believe the most important factor to consider when evaluating an exploration company is the quality of management. In analyzing mining companies, we evaluate managements' experience in the exploration industry, and their track record for discovering gold deposits in the past. This is particularly relevant in regards to the geology team members, who will need to make important decisions regarding where to look for gold anomalies and how to proceed with drilling. On the management side, can the team attract continued investment to fund ongoing exploration activities?

But there is perhaps a more direct way of tapping the knowledge and confidence of the management of a public mining company - insider buying and ownership level. They are putting their money where their knowledge is when they make these publicly available transactions. When these people place their personal money with an individual company in an arena where individual stock performance is very shaky, it means something. Irwin's opinion:

In our view, significant insider ownership is one of the most promising indicators of a healthy exploration company. Management is close to the exploration process and clearly understands how encouraging exploration results actually are, or what the status of agreements with vendors and development partners actually is. We also view management participation in follow-on offerings as a sign of continued faith in the prospects of an exploration company. We do not look at a "threshold" level of management ownership, but we do place higher value on larger ownership percentages. Also, we look for depth of ownership among management - does the whole board and management team hold significant shares, or are the shares concentrated in the hands of a founder or one large owner? A strong board and management team with significant share ownership is one of the most positive signs that an exploration company is healthy, in our view.

With that in mind, I surveyed the miners that report insider activity (in the US anyway) and found some that currently have unusually high levels of insider held shares. Here is the top tier:

AZC Augusta Resource Corp 20%
NSU Nevsun Resources Ltd. 20%
XPL Solitario Exploration & Royalty Corp 15%
MDW Midway Gold Corp 11%
TLR Timberline Resources Corp 22%
PZG Paramount Gold & Silver Corp 34%
UXG US Gold 25%
GORO Gold Resource Corp 49%
NG NovaGold Resources Inc 32%
ANV Allied Nevada Gold 35%
RBY Rubicon Mineral Corp 21%

Midway Gold is the laggard of this group with 11%, but a whopping 64% of that insider ownership level has come about just over the last two years - a lot of recent insider buying.

How is this strong insider interest line up playing out over the past year ? Well, if you take the top 10, leaving off the low 11% of Midway, a lot of which is recent buying; and figure this portfolio's performance, you get +65% vs about +19% for the HUI gold stock index since this time last year.

The problem with gold stocks is you can't depend on our trusty valuation ratios, cash flow curves, or other normally useful parameters. Gold stock value is not about money put on past statements, its all about pulling future ore from their properties. You have to analyze the price of gold with all its complexity and danger. But most importantly, you must look inside the minds of the people who run the companies.

Are Smartphones A New Recession Play ?

2010-09-04T09:06:00.000-07:00

By past investment norms, you wouldn't think an expensive electronic gadget would be considered a secular growth investment to fall back on in a weak economic time. But expensive electronic gadgets have insidiously wound their way into the fabric of our daily lives since past recessions. The coup de grace to the old view of gadgets has to be the smartphone. We have come to depend on these just like our bar of soap in the shower. Companies like Apple have become the new Procter and Gambles, only faster growing.

Along with this changing view of secular growth, Wall Street is coming to the morning after realization that delevering down from the debt binge is going to be a chronic condition afflicting the investing world for some time to come. "Derivatives" used to be thought of as a good and sophisticated thing. Now, when CNBC's in-house rock band thinks up a name for themselves, they come up with "The Derivatives". It reminds me of that episode of the old Dick Van Dyke Show from the mid '60s, when bands first started naming themselves after the most unsettling, disgusting thing they could think of. Rob was second guessing the naming of a band, wondering why they hadn't called themselves "The Festering Sores".

Derivatives and their aftermath are going to be a festering sore for us for a long time to come, unfortunately. So whatever the good secular growth investments are, that's what we want. Smartphones and gold are two that come to mind among defensive, but fast growers. CBS news.com ran a smartphone article last week calling them "seemingly recession proof" and running into the problem of not being able to get enough chips from a chip industry underestimating Jim Cramer's "smartphone tsunami". Cramer seems to be right about what he said well over a year ago - that everyone was underestimating it. He felt so strongly about it that he made up a whole separate stock market, a smartphone index, on August 11, 2009 to show off it's market beating performance. I thought it was a neat idea, because I agreed with him that the market was underestimating it. But upon perusing through the tech stocks, I found some that I felt should be in any such index that he didn't include. So I jotted down a list and called it the "supplemental" index.

So is this index beating the market over a year later? Well, let's see. If you had invested $10,000 in each name, here's how they would have done (as of Sept 2):

Original Index
+ 5694.68 STAR (merged)
- 5777.46 PALM (merged)
+ 1228.08 CIEN
+ 2096.77 TLAB
+ 3956.40 ADCT (merged)
- 3148.23 TKLC
- 2230.68 CTV
- 1211.65 QCOM
+ 2255.40 BRCM
+ 2849.55 NETL
+ 1784.10 XLNX
+ 5247.34 SWKS
+ 833.32 RFMD
- 1200.00 ONNN
+ 1057.65 CY
- 3725.90 TSRA
+11487.36 SNDK
- 377.36 CSCO
+ 176.24 GOOG
- 3869.73 RIMM
+ 5394.40 AAPL
_________
+22520.28 on $210,000 +10.7% vs +8.6% f0r S&P 500

My Supplemental Index
+ 1481.48 WRLS
- 769.20 NTE
+18003.60 ARMH
- 20.00 CHA
- 370.37 SYNA
+ 357.15 CHU
+ 1842.87 LLTC
+ 7459.27 OVTI
+ 16367.93 AKAM
+ 5999.64 CREE
- 2000.00 ERTS
- 833.30 STX
__________
+47519.07 on $120,000 +39.6% vs +8.6% for S&P 500

Combining the two lists together, we get +21.2% - a serious outclimbing of the market, but taking a back seat to gold's +31.8% over that period. Let the bad times roll!

Simulations Plus Is Worth Watching

2010-09-01T11:44:00.000-07:00

There aren't many stocks outside the gold universe that reside on my "A" list, but this is one of them. Stocks in general seem to be in a condition where they get jerked around by the latest fret or relief rally over global finances. Finding those that are dancing to their own music these days is tough. Simulations Plus (SLP) is a tiny company that seems to be doing just that. They in a good area of the market, "para-pharma". They assist drug companies with research programs, so they aren't that economy dependent. And the healthcare overhaul uncertainty storm has blown over. It's technical condition presents a plethoria of positives:

In addition to a nice looking cup and handle bottom, long since completed, it has been working on a resistance level at around $2. Earlier this year, this resistance was broken then successfully tested as support. This seems to be one of those stocks that likes to sneak up on investors and clobber them with a big climb after they've left the building. The chart shows the big moves up only after volume has gotten very quiet. It is at such a stage right now. It's trading close to a parallel 140/200 ema that has established a smooth uptrend. The stock was totally oblivious to the nasty tumble in February and the dive after April.

Fundamentally, eps has been in a steady climb since '05 with only a mild interruption in '09 (up over 100% in 5 years), and the ttm eps is up from '07 while the stock has been smashed from $8 to less than $2. Debt is zero, current ratio over 9, and the insiders love it, carrying a whopping 47% of the shares.

It's no gold stock, and it's not smartphone, but maybe the next best thing.

Another Iran Worry

2010-08-15T14:47:00.001-07:00

This week, we investors must pass through another one of those heightened geopolitical risk windows over the Iran/Israel stand-off. I've posted on some of these. Russian is delivering the fuel to operate the Bushehr nuclear plant August 21. Speculation is that an Israeli strike will be done before the plants are filled with the fuel that will make a radioactive mess if bombed. This may kill millions in heavily populated neighbor regions. Israel hit the other two nuclear plant threats, the Iraqi plant in '81 and the Syrian plant in '07, before they were supplied with fuel. So we are in a danger zone. Late 2009 was such a zone when the Obama initiated enrichment offer was put together - then rejected by Iran. Israel now seems to be waiting, perhaps on the MOP bunker busters from Boeing, said last year to be ready by July, 2010. Or perhaps they are waiting on American efforts at disrupting Iran from within. There is a large article out this weekend in The Atlantic titled The Point of No Return. The informed opinion presented here leans toward more forbearance (more waiting) by Israel over the coming months.

But, based on my conversations with Israeli decision-makers, this period of forbearance, in which Netanyahu waits to see if the West’s nonmilitary methods can stop Iran, will come to an end this December. Robert Gates, the American defense secretary, said in June at a meeting of NATO defense ministers that most intelligence estimates predict that Iran is one to three years away from building a nuclear weapon. “In Israel, we heard this as nine months from June—in other words, March of 2011,” one Israeli policy maker told me. “If we assume that nothing changes in these estimates, this means that we will have to begin thinking about our next step beginning at the turn of the year.”

You would think, as John Bolton does, that Isarel is constrained to make their military move before any plant fueling. But the radiation mess is just one of many messes being weighed into the calculus. So we may not be very well served with this week's fueling schedule as a military schedule.

What is more likely, then, is that one day next spring, the Israeli national-security adviser, Uzi Arad, and the Israeli defense minister, Ehud Barak, will simultaneously telephone their counterparts at the White House and the Pentagon, to inform them that their prime minister, Benjamin Netanyahu, has just ordered roughly one hundred F-15Es, F-16Is, F-16Cs, and other aircraft of the Israeli air force to fly east toward Iran—possibly by crossing Saudi Arabia, possibly by threading the border between Syria and Turkey, and possibly by traveling directly through Iraq’s airspace, though it is crowded with American aircraft.

Regardless of when the strike happens, the conscientious investor has to try to anticipate the market implications. You could stay totally out of all markets until a military option is taken. That would have kept you out of the Cold War market from 1957 to 1989. Or you can study what past Middle East blow ups did, and weight portfolios accordingly. If you look at the two most recent Middle East blow ups, Saddam's invasion of Kuwait in August of 1990 and Bush's announcement that we were going to invade Iraq, believed to be chock full of bio and chemical weapons in late 2002, you see that the two beneficiaries are oil and gold. In the 1990 blow up: (click to enlarge charts)

And in the 2002 blow up:

These two time frames were during a bear market in commodities (1990) and a beginning bull market (2002). The geopolitical events caused just a brief detour by gold and oil from the paths they were taking, demonstrating the power of macro-economic trends over geopolitical events. Of course Iran/Israel may be a macro-economic trend changer if it were to occur.

It's worth noting that oil stocks didn't do much over these past shocks, but gold stocks typically did about whatever gold did. So of the four good "shock" investments that come to mind - gold, oil, gold stocks, and oil stocks - we've had 3 up and one down over past shocks.

SinoCoking Stirring Again?

2010-07-31T17:07:00.000-07:00

China's SinoCoking (SCOK) is an adventurous stock having been shot up to $2000 and change during the year 2000 period, when anything with a good story and no money went to the moon. Since then, the stock has crashed to about $12 during the 2002 bear, shot up to over $200 in the ensuing recovery, then slowly wilted back down to $12, where it more or less hibernated during the market bottoming of 2009. To wit: (click to enlarge)

It seems to have been a tortuous exodus after 2004 with very strong handed ownership left by the time of the 2008 fiasco. Now the stock appears to be getting noticed by new buyers. During the huge surge to $200 plus of the early 2000s, the PE ranged between 50 and 100. Now with the stock in the teens and dead as a hammer, the PE is like 3 - but its cheapness is gaining some attention. The insiders like it with a 43% ownership level. Back on June 4, TheStreet.com ran a piece titled "Two Undervalued China Coal Stocks" where they featured SinoCoking and Yanzhou Coal Mining (YZC). Unlike Yanzhou, they do primarily steel making coal and chemical processing coal. The stock appeared to be breaking into another of its gargantuan climbs, but the big China Swoon of 2010 threw a flood of cold water on this move. But, as Jim Cramer said this week, the malaise over China may be lifting soon. With big growth stories, you buy the massacres. This probably qualifies as one. It's doing some nice technical things right now:

Transports Winning The 140 Day Tug-Of-War

2010-07-31T17:05:00.000-07:00

Back on July 1, I wrote a post I called "A Ray Of Sunshine". It looked at what seemed to me like some Dow Theory nonconfirmation of the technical breakdown of the Dow. Let's look at what I wrote back then:

A ray of sunshine on an otherwise dreadful market outlook is the condition of the transports and a key tech leader index. These rays really stand out in all the gloom. The debt dominoes appear to be catching up with the rally from 2009. But before we bury the recovery, lets look at something important that is refusing to go along with the gloom so far.

If you put any faith in Dow Theory (and you should) you want to pay attention to what the transports are doing because for a move to be confirmed in the broad market, it must be replicated in the transports. Quite typically, a change in trend without transport confirmation turns out to be bogus. This has been a reliable indicator since the days when the rails were the main transport. In our day, rails have become much less significant, but recently have taken on the role of a reflection of the commodities market. Coal, and about anything you pulverize and haul, move much cheaper in quantity by rail than by smaller truck units getting 5 mpg in traffic. That's a major reason Warren Buffett is buying up railroads. If you look at how the rails are doing in this bad market (check CSX, CNI, KSU) you see they are still in bull climb mode despite the whacking commodities are taking. To isolate the transports as a reflection of purely economic activity apart from the global commodities market, I like to look at the Nasdaq transports because they are virtually devoid of rails:

Here you see pretty much the same thing as the rails show - they both are not confirming the change in trend seen in the S&P 500. The transports are proceeding on an upsloping 200 dma and may have put in a reversal stick on that trend line today. The retail RLX index has been leading the correction down and also has the look of a reversal day being put in at the bottom of a trading channel.

Now to fast forward to the present, we could place a line in the sand as the 140 day exponential moving average (the 200 simple is shown above). The 140 is a good divider of major bull and bear moves if you allow a month or so for transient crossings. In late June, the broad market and the transports seemed to be locked in a tug-of-war with one on bear ground and one on bull ground. Now if we take a peek at the tussle we see this:

The transports have only briefly punctured the 140 for less than a month at a time, and look like they want to drag the broad market, with the bears kicking and screaming, back to the bull market for now:

A lot has been made of the Baltic Dry Index's sharp dive over the last couple months, and this transport index is a reliable leading indicator. But, as Cramer pointed out this week, this index is being distorted by an unusual ship overbuild situation causing shipping rates to decline (see my March 9 post here "Baltic Index On Leave Of Absence?") The other transports, including container shipping, are doing well but are more of a coincident indicator reflecting smaller lead times in economic activity. So we will just have to monitor these transports and take the longer range BDI forecast with a grain of salt for now. The ship thing just doesn't seem to be a plane and train thing.

Levering Gold's Climb

2010-07-17T09:13:00.000-07:00

Gold stocks are a good way to take advantage of a climb in gold because they historically outclimb the metal by a factor of 2 or better. And the stocks tend to run in 4 year cycles of under/outperformance of the metal. They are just now finishing up about a four year under cycle. But there is an alternative. It's the PowerShares DB Gold Double Long ETN (DGP). This is not an ETF, it's an exchange traded note (ETN) and is a debt instrument. This has a big tax advantage as it isn't hit with the 28% longterm collectible rate as ETFs are - only the 15% rate as a stock would be. The recent performance of DGP vs the popular gold ETFs:

This is over a 2X outclimbing of the metal with the same tax treatment as stocks.

Gold's Value Chart ?

2010-07-05T11:06:00.000-07:00

A common complaint about investing in gold is that you can't gauge any real value or use for it. As Warren Buffet said - they pay men to dig it up, then they put it back into a hole and pay men to stand around and guard it (paraphrasing). If you look at a stock, you can see its net income and dividend payout and, as a telling chart in one of John Bogle's books on mutual funds shows, this is a very good gauge of its rightful value. The chart goes back over the last 120 years or so and plots the sum of the constituent companies' eps and dividend vs the major stock index. The two curves form a DNA-like spiral and wind up at virtually the same destination after over 100 years of market turbulence ! Oh, would it be that we had such a gauge for the value of gold.

But wait a minute. Maybe we do. If you look at gold as having the purpose of being an alternative currency, you can compare the government printed monetary base with the government backing of that paper with gold. This is something that you can chart historically just as in the above chart for stocks. If you do, you see the following from an array of fascinating graphs at dollardaze.org

Here we see something like the DNA spiral for stocks around eps + dividend payout. Only the spiral seems to be around the confidence level in government printed money. There was a loss of faith in government in the 30s and gold wound up climbing to and overshooting the 100% backing level. There was a loss in confidence in the dollar in the late 70s, and gold again went to and beyond 100% backing. Now we are having a humdinger of a currency confidence crisis, and gold is extremely cheap on this value gauge - not even starting its trek to the other end of the range.

A Ray Of Sunshine

2010-07-01T17:28:00.000-07:00

A ray of sunshine on an otherwise dreadful market outlook is the condition of the transports and a key tech leader index. These rays really stand out in all the gloom. The debt dominos appear to be catching up with the rally from 2009. But before we bury the recovery, lets look at something important that is refusing to go along with the gloom so far.

If you put any faith in Dow Theory (and you should) you want to pay attention to what the transports are doing because for a move to be confirmed in the broad market, it must be replicated in the transports. Quite typically, a change in trend without transport confirmation turns out to be bogus. This has been a reliable indicator since the days when the rails were the main transport. In our day, rails have become much less significant, but recently have taken on the role of a reflection of the commodities market. Coal, and about anything you pulverise and haul, move much cheaper in quantity by rail than by smaller truck units getting 5 mpg in traffic. That's a major reason Warren Buffett is buying up railroads. If you look at how the rails are doing in this bad market (check CSX, CNI, KSU) you see they are still in bull climb mode despite the whacking commodites are taking. To isolate the transports as a reflection of purely economic activity apart from the global commodities market, I like to look at the Nasdaq transports because they are virtually devoid of rails:

Here you see pretty much the same thing as the rails show - they both are not confirming the change in trend seen in the S&P 500. The transports are proceeding on an upsloping 200 dma and may have put in a reversal stick on that trend line today. The retail RLX index has been leading the correction down and also has the look of a reversal day being put in at the bottom of a trading channel.

The leader groups, however, are mixed in their lead/lag condition. A nice one that is still leading is the semiconductor group:

The SOX also looks a little stubborn in going along with the Dow. These are the groups to watch. If they confirm the change in trend of the broad indexes, the market is on to its next phase.

The Russell Indicator Is Looking Weak

2010-07-01T17:27:00.000-07:00

Back on May 9, I wrote a post on a technical thing to watch about corrections. The point was that in all good corrections, the small cap Russell tends to lead the charge from the bottom of the pullback. I showed charts of this from corrections in bull climbs and also from the cases where the Russell lagged in bottoming - with a bear phase following for the broad market. Well in our present pullback, the Russell is not leading a charge from a bottom. It is not lagging and it's in better shape than the S&P 500, staying mostly above its 140 day ema and not turning the 140 and 200 to a negative slope. But that's about all you can say for it. The Baltic Dry Index, even with the ship overbuild problem it is having, had been in a nonconfirmation mode on China's Shanghai bear behavior, if you want to consider the Baltic as a Transport Index for China and you pay any attention to Dow Theory. But now it has taken a nasty sharp turn down. The RLX U.S. retail index has been a leader group in the climb from the recession bottom, but now it is actually leading the S&P to the downside ! Tech and the small caps are still wanting to lead slightly to the upside. The leaders are going to have to get their act back together soon to continue a market recovery. They look like the three stooges, seriously disjointed for now.

How's That Smartphone Revolution Doing ?

2010-06-20T10:45:00.000-07:00

About a year ago, Jim Cramer was going all bonkers about the great smartphone tsunami headed our way, warning investors not to miss the giant wave. He was saying at the time that the mobile internet was going to be bigger to us than the chip was to the computer and what the internet was to the computer. Well, the smartphone revolution is proceeding. But is that making for an equal or better story in the related stocks? Cramer is pretty tech savvy and picking the good tech stocks was one of his strong points as a fund manager. So when he instituted his Smartphone Index on 8/12/09, I was interested. He picked out 20 names, and I puzzled over why he didn't include some. So I made up my "supplemental" smartphone index. Here's how they've done:

Cramer List of Top 20

TLAB + 3.7%
ADCT -10.3%
CIEN +18.2%
TKLC -13.9%
CTV - 5.3%
QCOM -22.9%
BRCM +34.0%
NETL +49.2%
XLNX +24.0%
SWKS +53.3%
RFMD -11.1%
ONNN - 7.3%
CY +0.7%
TSRA -28.4%
SNDK +185.5%
CSCO + 8.3%
GOOG +8.9%
RIMM -15.0%
PALM -57.8%
AAPL +61.8%
_____________
average= +13.8%

My Supplemental List

WRLS +15.2%
NTE -17.9%
ARMH +115.3%
CHA - 1.5%
SYNA +6.0%
CHU -10.6%
OVTI +73%
AKAM +137.5%
CREE +104.0%
ERTS -21.9%
STX +24.8%
LLTC +13.2%
____________
average= 27.5%

The Russell 2000 is up 16.8% over this same time and the QQQQ is up 18.7%, outclimbing the Cramer Index. I guess my +27.5% means I'm roughly twice as smart as Cramer. Now if I just had half his energy and charm.

My selections, given that I'm a tech idiot, were based more on cash flow history, valuation, and technical condition. This may infer that much of the smartphone technical particulars story may already be baked into the cake. It's hard to beat the market to the punch.

Gold's Support Level

2010-06-12T19:36:00.000-07:00

Gold is, in some ways, behaving like it should if it were down at a major support level. GLD is in a distribution phase, the bullish percent index is at the low end of the range, and gold is on a back burner in the financial media's programming lineup. But gold is not in any big dip right now. In fact, it's right at it's all time high ! This would not be right if gold's proper bull market support level were the typical straight line. But, geometrically, it's entirely proper if the applicable support level is a curve:

The bull market since '01 is turning parabolic according to many gold bugs, and the recent support level behavior tends to support that thesis:

At each of the three major resistance levels over the last several years, gold finds itself near the all time high, but not exactly the hot item as resistance merges with a parabolic support level. We're right about at that juncture now as the parabola steepens.

Fractal analysis doesn't look at trendlines, just fractal dimensions, energy levels, and self-similar patterns. So it is a somewhat independent means of analysis. It's interesting that the fractal forecast last July called for a major surge to the upside (which happened) and is now calling for another such surge.

What Is The Commodities Slump Telling Us ?

2010-06-03T10:20:00.000-07:00

Commodities, if you haven't noticed, have broken down into a terrible slump, now far below the CRB's 140 day ema. This is rightly interpreted to signal a recession dead ahead most of the time. Add to this the pronounced slump in the ECRI's leading indicators, and you would have to say we're cycling into another recession. The ECRI slump was the subject of an article at SA on May 28 by Michael Shedlock. It shows an ominous 1 year dive in what usually precedes a recession.

But if you step back and look at a bigger view, you see another interpretation:

This multi-recession chart is also shown in the article (with the notes in black added) and shows a typical breaking of the "speed limit" coming out of a bad recession and then a moderation to a more steady speed going into the expansion cycle. The ominous 1 year dip would appear to be this moderation phase in the cycling.

You see something similar in the just released Journal of Commerce JOCSINDS indicator in the 1 year time frame. But if you click "chart the performance" for this recovery speed measure, and click on the 5 year view, you see pretty much the same moderation pattern as in the ECRI chart above.

So why are commodities looking so bad? A moderating, stable recovery should be just fine for them. Well, you may not have to look any further than the US dollar chart to explain this. Commodities and the dollar are strongly correlated inversely. There has been something of an aberrant, monster rally in the USD in the face of the European debt turmoil. It's aberrant because the USD has all the same problems as the euro. What happens when the dollar rally fizzles? For now, the rally has correlated to a big dent in what would be a normal, strong recovery in commodities: (click on charts to enlarge)

Since the turn point at the start of the year, we've had a 17% rally in the USD and a 12% drop in the CRB. The two are not unrelated. Gold usually moves with commodities inverse to the dollar, but gold is climbing. And gold is coming to be viewed as an alternative currency. What's happening with commodities is mostly a currency thing, not an economic cycle thing. China's Shanghai index is in much the same predicament as the CRB. It has, to a large extent, been caught up in the slump of the euro because Europe is China's biggest export customer.

The currency thing is, of course, a debt thing; and that's a downer. So if you attach any predictive significance to current commodity performance, you would have to say it's forecasting debt domino problems, not problems from the normal economic cycles. The leading market groups such as the RLX, the Baltic Dry Shipping Index, the QQQQ, etc. all still seem to be positive. But the debt can they have successfully kicked down the road is another story and will continue to be a threat to derail all normal economic cycling until they pick up the can and fix it.

Sugar - The Uncrowded Trade

2010-05-23T07:40:00.000-07:00

If you like commodities over stocks, but are put off by the crowded and high profile nature of gold (as I am) take a look at the current condition of sugar. I began looking at sugar last July and found it was more explosive than most commodities, so to safely buy, it should be only after massacres down to the low end of its historic range. I wrote a post Sugar Price Explosion? back on August 8, when it was trading around 17. Since then, sugar did about a 35% climb over the next 5 months. Now it has come back down. So was that the explosion or is there more sugar bull to come? (click to enlarge charts)

The above chart (click to enlarge) shows the long-term history of sugar with its climbs in the vicinities of major recessions. It was just breaking out of its major trading channel when I posted this chart back on August 8. Since then (dashed line) it has done a repeat of the recession runs of the past, but is the bull market over now already? Jim Rogers doesn't think so. In fact, he favors sugar over gold.

"God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now than in other things...I think I am going to make more money in agriculture than I make in precious metals."

Rogers doesn't fret with small fry, short term volatility. His discipline on gold?

"If it goes down, I'll buy some more, and if it goes up, I'll buy some more. I periodically buy some gold. I don't have a method to it. I just buy it."

This brings to mind a saying of Louis Rukeyser - traders drive Chevies, investors drive Cadillacs. Rogers is mindful of basic, big view facts like China's middle class changing their diet and projected to grow by about 300 million the next five years. That's the entire population of the United States. And many other nations are going through the same changes. But short term crop fluctuations can send prices down in a hurry. Government estimates in Thailand, second biggest exporter of sugar, were projecting sugar to fall to around 14 cents back before the drop, but they didn't see it going much below 14, which is the production cost in Brazil, the largest producer. And in today's businessweek.com we have an article Sugar Slump May End On Restocking, Ethanol Demand where it's stated:

Sugar isn’t likely to trade below the “watermark” of 13 cents in the next three to five years, even as volatility increases, Fred Zeller, the managing director of sugar-beet growers group SZVG, said in an interview in New York. Sugar reached 13 cents on May 7, the lowest level since April 2009.

If you look at the SGG chart, the ETN that follows sugar, it may indeed be putting in a bottom near 14 cents (about 42 on the ETN):

There is a clear break of the 20 day ma which had been defining the decline. And it's doing this in the face of about every other commodity on earth getting hammered. Rogers sees not just a brief spike in sugar, but a huge multi-year rise. "I am certainly expecting sugar to go much higher during the course of the bull market over the next several years." (Money Morning, 8/25/09, Six Ways to Profit From Guru Jim Rogers' Prediction That Sugar is Sweeter Than Gold) If he is right, the run to 30 cents was just a foreshock and this is a dip worth buying.

Rogers doesn't think there is enough productive capacity among farmers to keep up with basic food demand growth. Inventories are at multi-decade lows. Any weather problems cause big price problems. And sugar, much more than any crop, competes with energy demand in the face of a declining conventional crude capacity. Brazil devotes fully 50% of their sugar crop to ethanol, another fast ramping demand growth story as the densely populated emerging world motorizes. So far, sugar ethanol is the only nonfossil auto fuel with anywhere near the same net energy as natural gas and oil. It's really the only thing that is effectively replacing gasoline and diesel on an energy balance basis - vastly more effective than deepwater drilling, tar sands, corn ethanol, biodiesel, or electric (considering that most electricity comes from burning mined coal). Sugar ethanol cuts greenhouse emissions far more than any available auto fuel, and it already commands 60% of the global ethanol market. If you look at a graph of where all the people are that produce sugar but don't use much fuel versus where all the gas guzzling people live who don't farm, you see something interesting:

This bubble chart was produced by Stuart Staniford of theoildrum.com, and with sugarcane ethanol the best crude replacement, it has possible peak oil implications. The big sugar producers are the big blue blobs of population who use little energy for themselves and are at one end of the inverse curve. The big users of energy, who only know how to put sugar in their coffee, are grouped at the other end. One can envision a happy export situation for all concerned developing in the future.

Yet you don't hear much about sugar. It was briefly popular with the funds last year as it rose to a 28 year high, but they have dumped it this year with a surprise crop surge. It is remarkably uncrowded right now. If the threat of fund darlings hitting a bout of forced redemption selling in market turbulence gives you the Willies, sugar is about as far from a darling now as it gets. The Agri run of 2007 has gone cold. Was that the first shock of a food shortage earthquake? When asked for his best investment advice these days, Jim Rogers says, "Become a farmer".

Is China Ending The Global Rally ?

2010-05-18T11:13:00.000-07:00

The Shanghai Index is doing a frightening crash if you haven't noticed - down some 21% from its high last year. It has dived way below its 140 day ema, a good divider of bull and bear markets.
China has taken measures to cool down it's economy and make it a sustainable growth, but isn't this a good problem to have? Why is their market acting as if a huge, unavoidable recession is beginning when they've just tapped the brakes on a really good economy?

The China dive is probably one and the same with the euro dive. China lives and dies by its exports, and guess who is China's biggest trading partner. It's Europe. If you compare the charts of the euro and the Shanghai, you see that the decline in the euro began in December and soon began overwhelming China's stocks: (click to enlarge)

China stocks seem more worried about the European consumer than their own consumers. The market is vexed about this and not actual planned economic activity. You can see this by taking a look at China's version of the Dow Theory with the Baltic Dry index for shipping being their transports:

Th Baltic, like the Shanghai, is a leading index doing things at least a couple months ahead of the S&P 500. It put in a bottom in December ahead of the March '09 bottom. It did a big pullback in March ahead of the big July pullback. And it did another big pullback ending in October ahead of the one that ended in late January. So now the Shanghai is falling off a cliff. Egad, is this what's next for us? But the Baltic, in Dow Theory fashion, is not confirming this move by the Shanghai. Both have been tracing out a big cup and handle bottom pattern, but the Baltic doesn't speculate and is immune to the stock market's speculation. The BDI seems to be going through the typical cup and handle major cycle bottom with a break of the handle to the upside next. And it should be kept in mind that this index is now understating the bull case because of the over-build of ships coming online from the roaring commodities business of about 3 years ago (3 year build/lag time) otherwise, the handle may not have been as drawn out as it is.

In addition to China's tendency to follow the euro, this market could just be completing the common correction maneuver whereby the fundamentalists are ejected from the bull's back with something like the euro and the technicians are kicked off by a brief breakage of a widely followed TA condition. A large consolidation triangle in the Shanghai has been broken to the downside busting below the recent lows from the last correction. Markets are really dastardly that way. You can see an article on this over at safehaven. A similar thing happened back in the July correction bottom when everyone was horrified by the breakdown of the apparent head and shoulders top in the S&P.

Of all the key leader groups for the broad market, the Shanghai is the only one doing a technical breakdown, and this could be mainly a currency gyration, not the best thing to base stock cycles on. And the move it is making is not being confirmed by the Baltic. If you look at the technology leader group, you have a moving average condition typical of an ongoing bull market:

You don't see the breakdown below the 140 ema but a correction to this critical curve that looks to be bouncing around a bottom as it did in July and February, only with better A/D strength and a stronger economic recovery going. The 200/140 ma divergence shows no sign of breakdown in the RUT, RLX and other groups that have been leading since the middle of last year.

Sentiment is really sour right now as at all market bottoms. If you sample the comments at Seeking Alpha, they are as rabidly bearish as at about any bottom. And the CNBC opinions are at the extreme other end of the spectrum from the unbridled optimism before the correction. Just days before the correction began, Jim Cramer was crowing about the clear expressway to Dow 12000 and making fun of the "nattering nabobs of negativity". Now he's bitching about the "building skepticism". And an article I saw at safehaven shows that the big fund managers are at a max point of distribution and you dare not go against them. But wait a minute. Aren't these the same fund managers of whom over 70% don't outperform the S&P 500? Why would you want to do what they're doing? They were at about this same stage of distribution at the Feb 4 bottom.

Until more leader groups do a technical breakdown (and they may) you probably have to give the devious bull the benefit of the doubt.

Gold In An Open Field ?

2010-05-12T18:37:00.000-07:00

Ignoring the seismic shift in the sentiment and fundamental view of gold wrought by the recent euro mess for a minute, let's look at just the technical juncture gold finds itself at.

By conventional technicals, you have the small gold stocks, which typically are the best barometer of major trend changes, doing a fairly important formation break this week: (click to enlarge)

Megaphone formations typically break energetically when they break, and the four month correction in gold from December has put the small miners in a megaphone. Another overall market correction, as in January, was looking to run the mining stocks back down into the gyrating middle of the formation, but the strong move now underway may bust both the rising wedge within the megaphone and the megaphone's resistance level at the top. The volume would certainly indicate this.

By unconventional technicals (fractal analysis) you have gold now emerging from a four month corrective cycle (gold does everything in four and eight month stretches) and is nearing the end of a 64 month cycle. And the energy levels involved in fractal study have gold beating the last tackler just now. As David Nichols, chief diviner of gold's fractals said in his May 7 report:

The important thing to know right now is gold is now in the final 8 months of this pattern, and this is when amazing strength should start to show, as the global flow of speculative capital pours into the pattern.
There is almost nothing left now to keep gold from breaking into the clear. $1,192 and $1,210 are the last important energy levels prior to lift-off.

A Technical Point On This Correction

2010-05-09T15:44:00.000-07:00

All eyes will be on how and where the markets will rebound over the next few days and weeks. One critical thing to keep an eye on is the relative performance between the big and the small, the S&P 500 and the Russell 2000. The small are more volatile and normally decline more vigorously in a bull market correction and climb back faster to new highs. But the small also seem to pick up on major trend changes a little sooner than the big. So the small began misbehaving in mid 2007 before the Dow and the whole market went sour. If you look at what the Russell did over that time relative to the S&P coming out of the late July correction, you see that the small stocks were tardy about climbing off the correction's bottom. First, let's look at the big: (click to enlarge)

Now, let's look at the small:

The same thing happened as we entered the 2001 bear market There, we had a March/April correction (top for tech) in 2000. First, look at the big stocks:

Now compare with the small stock behavior:

The small stock averages seem to know something the big stock averages don't. Small companies are generally more sensitive to major economic turns, and discount such information better (if you're an efficient market theorist as I am).

So one primary thing I'll be watching coming out of our present correction is how the Russell bounces back compared to the Dow and S&P. If the Russell leads, staying mostly above its 140 ema, the bull climb is probably still on. If the Russell seriously lags, it's a rally you may want to sell into.

Where Is Gold On The Bubble Map ?

2010-05-01T12:50:00.000-07:00

Gold had a good week, so now the gold bulls must endure a new round "bubble" cries from the gold bears. Anything that has a good week, month, or year must endure this. In the short term, they could be right. But to say that something like the current gold bull market is a historic bubble at the bursting point requires more analysis than short-term overbought technicals or an uneasy feeling that it's gone too far too fast and is too crowded. Why not just filter out the short-term noise and compare it side-by-side to the other historic bubbles? If you do this simple exercise with perhaps the three most well known historic bubbles of the modern age, you see this: (click to view)

Long-term bull markets usually end in a parabolic rise. So this chart basically divides these bull markets into the relatively flat 8 to 12 year pre-parabolic phase and the 2 to 6 year parabolic rise. As the chart clearly shows, the current gold market is nowhere near the end phase of a historic bubble. In fact, it looks to be just now be getting cranked up for that.

I left off from the chart some comparisons that may not apply. For instance, oil up to $147 in 2008 is sometimes referred to as a historic bull/bust cycle. But the credit/great recession gyrations in oil and most commodities, including gold, may wind up being just a severe, but brief interruption of these bull markets. The three charted are historic bulls that have been certified dead for years. I don't think we can declare oil dead just yet.

Now it's true that some respectable investors have described the current gold market with the word "bubble", including the Chinese officials in charge of diversifying China's bank holdings and George Soros, who commented at the recent World Economic Forum in Davos that gold was "the ultimate bubble". But China has to be suspected of talking down the price of gold so they can add more. And George Soros was talking about gold as being the end result of a chain of bubbles when he said it was the ultimate bubble. The bubbles of 2000, loose money, housing, more loose money, etc. ultimately lay the bubble forces at gold's door. So if gold is to be the ultimate historic bubble, it has a long way to go from here.

Beyond The Barrel - And Over The Cliff ?

2010-04-22T17:19:00.000-07:00

Tonight, CNBC premiers "Beyond the Barrel - the Race to Fuel the Future". This is a look at the alternatives to the crude oil bursting forth from the ground that has spoiled us for decades with cheap, abundant energy. One thing that will probably be missing in the discussion is the major issue EROEI. What is EROEI? How do you pronounce it? Well, I don't concern myself with pronouncing it, but I do get vexed by how much attention is being paid to it.

EROEI is simply Energy Returned On Energy Invested. It was not even a word back when Jed Clampett could start a bubblin' crude when he was out shootin' for some food. But as we started drilling deeper to recover oil, people like Cleveland and Hall began tabulating estimates on how much of our energy supply was being used to find, drill, and use our new energy finds. They come up with about a 100 figure for oil of the 1930s (1 barrel of oil burned to get 100 new barrels online). This had dropped to around 30 by the 1970s as so much of the easy to find oil in the world's elephant fields in naturally pressurized reservoirs has already been exploited. EROEI for oil and natural gas now is running around 8 - 11 depending on locale.

That is a huge drop from the 100 EROEI of the 1930s, but as it turns out in the math of net energy, it's not that big a deal. What is a big deal is what happens as this EROEI number goes from around 8 to below 4. (click on chart to view charts)

This chart, constructed by Dr. Euan Mearns, an editor at theoilddrum.com, plots net energy as a percent from 100 down to zero over EROEI's range from very high down to one, where it is taking a barrel of recovered energy to obtain a barrel of new energy (no net energy to use). As you can see, we're in fine shape as long as EROEI keeps north of 8, but we fall and we can't get up as we go over the cliff as EROEI goes to 4 and below. This is an exponentially increasing problem as we try to replace peaking crude production with things like corn ethanol, which is a worthless solution. As this oil replacement scale shows

corn ethanol, at an estimated EROEI of 1.3, must be produced at a rate of over 20 barrels for each barrel of oil it replaces energy-wise! Many biodiesel, solar, and electric EROEI estimates aren't much better.

You see a lot of barrel count estimates of future oil production as we deal with peak oil, but as we go over the top of the conventional oil production peak (the evidence suggests we already have) the flood of "alternative" liquids such as tar sand oil, deepwater, etc. are severely challenged to come close to matching crude's EROEI. This makes a big difference in how much net energy is actually being delivered to society despite the raw barrel count. This makes a good EROEI estimate of any new alternative fuel critically important - its most important feature. But nobody is paying any attention as we approach the net energy cliff.

If you were to do an adjusted production curve to get an estimate of a "net energy curve" based on best current estimates on EROEI of the various nonconventional oil liquids going into the barrel count of official oil supply, you get a much different curve than the official projections (which all our energy planning is based on)

The two curves are for the more traditional base production decline rate estimate of 4.5% annually and for the newer estimates suggesting this to be around 7% - so a kind of best and worst case range is shown. The EROEI issue becomes acute as we go past about 2011 unless something radical is done about the low EROEI oil replacement theme that is now so entrenched in Congress, which seems dedicated to any alternative energy in direct inverse relation to its usefulness in actually replacing oil. They dote on corn ethanol because of a powerful corn lobby. They slight lightly lobbied natural gas in favor of the black lung clean coal coalition. They reward anything that will take decades to scale up as an oil replacement and ignore the one viable thing that's already at the scale and the EROEI needed - natural gas.

Obviously, replacing oil is going to have to be a team effort from many things - renewable ethanols, solar, wind, and the best currently available bridge to all those future fuels - natural gas. But we're going to have to pay a lot more attention to the EROEI science of all these team members, or we're not even going to make the playoffs.

Tags: OIL, energy, peak oil, alternative energy

MFRI At Possible Buy Point

2010-04-15T11:49:00.001-07:00

MFRI Inc. makes and designs piping systems globally. This is a deep cyclical that hasn't deep cycled yet - at least not the up part of the cycle.

The cash flow and earnings per share certainly look to be catching the recovery, but the stock has been left in its pristine, freshly annihilated condition. Now you can have it at a price / cash flow of a silly 1.5 and at a PE of 5. The history of the stock price has been a stronger correlation with earnings than cash flow, but by either consideration, the stock looks cheap. Technically, it looks to be breaking out: (click to enlarge)

A negative is the RSI parked at an overbought 70, and the A/D isn't very impressive, but a powerful breakout move could keep the RSI between 50 and 70 or over for awhile.

Kimber Resources At Technical Break Point

2010-04-11T20:18:00.000-07:00

Kimber Resources (KBX) is a Canada based gold and silver junior miner with developing property in Mexico. It has no monetary fundamentals yet, so technical analysis becomes more important - and Kimber is a chart reader's delight (click to enlarge)

As with so many gold stocks (and technology stocks) the refusal to follow the herd down into the end of the world stampede in March '09 was a dead give away to their imminent and vast outperformance. Just looking at this chart, you had no hint that the market was doing anything in February and March. This quiet base broke violently as gold's climb from July progressed - then the gold correction. A prolonged bull flag pattern ensued with big buying volume and a nice accumulation bias. This flag correction appears to be ending with some nice upside being suggested.

Squeeze Time For Gold

2010-04-02T10:01:00.000-07:00

Gold's four month correction, a patience testing ordeal for the gold bulls, is now at a pivotal point as I illustrated in my post of a few days back. This is deduced from conventional technical analysis, but what about the fractal analysis that has been calling gold's major turns like a square dance? (click to enlarge)

If one were to note the major technical features of gold now, you would draw a major resistance level at $1130 and a secondary resistance at $1145. A big inverse head and shoulders bottom to the correction also presents itself complete with a candlestick reversal at the head. The 140 ema and 200 ema are shown; the 140 is a good divider of bull and bear markets. If you see anything take up residence below its 140 for more than a couple of months - well that's not so good and its time to rethink its bull market. Gold has been bouncing off of a very smooth, rising 140 since last July, when the current climb began, and it bounced again Feb. 4 and last week without any distortion of these moving averages - like a small rubber ball bouncing off a massive brick wall. So it looks like a major up move coming by conventional technical analysis.

Well, the fractal analysis says the same thing! Back on Feb. 23, David Nichols, a leading fractal gold analyst, had this to say:

"I have been expecting gold to struggle to get through the significant $1,128 energy level, and sure enough, it’s struggling. But it is following a typically bullish path that indicates the breakthrough should arrive shortly. I often discuss how it takes 3 or 4 attempts to get through a big energy level like $1,128, which is why I mentioned this ahead of time as being likely at $1,128, as this is such a prevalent pattern in market fractal patterns."

If you look at where Feb 23 was on the resistance level in the above chart, you see that it was about in the middle, so he was right about a major struggle ensuing at that level. And back on Mar. 2 he was right about that secondary resistance at $1145:

"The good news about finally overcoming a stubborn level like $1,128 is the breakout is often very strong and linear. But in this case there is another potentially troublesome energy level overhead around $1,145, but after so much testing and probing of $1,128, I’m thinking now that $1,145 will not be so difficult, and should only briefly impede further upside progress."

We are now at $1127, and this trip to the fractal energy barrier looks good for final breakage.

The New Oil And Gas Industry

2010-03-30T08:05:00.000-07:00

When enterprising companies first started installing wells in the ground to retrieve oil, they had to deal with the natural gas that was part of the oil find. It was combustible and a source of energy, but it was regarded as a nuisance to get out of the way in the oil recovery process. As the decades of the fossil energy age rolled on, natural gas was given much more respect and attention and capital was deployed to capture and pipe it to end users as a clean burning alternative to oil and coal. But it was always considered one business - oil 'n gas. So much so that there evolved a pricing guide among investors to gauge the over or under valuation of the oil or gas price. This guide was simply that under stable conditions, oil should be about 6 times gas. For many decades that has been a pretty good guide, but it no longer applies - since about 2006. So what happened in 2006? Two mega developments - peak oil and hydro-fracing in gas bearing shale.

First, oil and gas are peaking at two considerably different time frames globally. (click to enlarge charts)

This was never a big deal in the past because both production curves advanced in unison. But now in 2010 (check the above chart) we are going into the "criss-cross" where oil is fast becoming a lot more dear than the gas. This chart actually understates the case because gas production produces NGL (natural gas liquids) that condense out of the gas processing and are added to the official "oil" supply numbers, about 8 million barrels a day worth of our 85 million barrel a day habit. This fat portion of our oil is actually natural gas production energy. The above chart illustrates why natural gas is often referred to as the "bridge fuel" we need - a bridge of about 25 years between the oil peak and the gas peak to safely get us across to the nonfossil fuels of the future, like sugar and cellulosic ethanol, scaled up to what we need. Oil companies that used to discard gas like a candy wrapper to pump their oil finds are now making moves to develope gas as the main attraction, because they are beginning to realize that natural gas is becoming at least as primary a fuel of the future as crude.

To greatly aggravate this disparity between oil and gas supplied energy, technology breakthroughs in gas drilling are now making it possible to recover vast amounts of gas entrained in shale rock that have always been known to the industry but deemed unrecoverable. North America is blessed with a Saudi-like supply of this stuff, and it is why the above mentioned bridge could be lengthened beyond 25 years and it is why the price of natural gas is about the only thing going down these days:

Inside the golden box, the 6 to 1 pricing guide held pretty well. When the ratio got out of whack, you could pick which one was more typically priced and expect the other one to soon come into line. But now you have to think outside the box, horrible pun intended. The current ratio is over 20, and I don't think it will be near 6 anytime soon.

All this explains why it is so tragic and insane to slight cheap domestic natural gas drilling in favor of expensive and highly toxic and geopolitically suicidal oil imports and greenhouse gas challenged domestic coal. "Clean coal", according to Jim Cramer, is an oxymoron invented by the black lung coalition lobbyists. Making coal anywhere near as clean as nat gas already is will nearly bankrupt the country - just what we need now:

It should be noted that about all the alternatives to natural gas, except sugar ethanol and maybe some future cellulosic forms, suffer from a big net energy problem. It takes about as much energy from oil to make it as it replaces - no solution to a vanishing oil supply.

The current U.S. Congress has a bias against natural gas, but other nations around the world aren't so dumb and run a large portion of their fleets on natural gas. They pay much less per gallon equivalent. Boone Pickens points out that 7 gallons of diesel is the energy equal of one MCF - current price is $3.00 a gallon of diesel times 7, or $21 vs about $5 an MCF of gas. But you have to put up with your engine oil staying clear as the day you put it in and your engine lasting much longer.

Gold at Pivotal Point

2010-03-24T09:46:00.000-07:00

In its correction since December, gold now sits at a crossroads between bull and bear. As I pointed out in my post on gold a few days back, the fractal analysis has gold nearing the end of a typical 4 month phase (down since December) and at the turn point into a new cycle (up into a fast climb to over $2000 into early 2011. Technically, we see gold perched atop the critical 140 day ema that is one of the best ways of dividing bull and bear markets: (click to enlarge charts)

Here we see gold's RSI entering regular buy zones just below 40 with those points correlating very well with the 140 ema support level. We are smack on one of those right now. We will either dive through it, perhaps linked to a new leg up in the dollar, and go toward the bottom of the correction's megaphone , or we will turn and break the formation with a swift move up. This megaphone breakage would also be a break of a fractal energy level stronghold of $1128 - the shoulder level of the head and shoulder top shown. The odds would seem to favor a hold of the 140 ema, which would also be a completion of the larger scale inverse head and shoulders bottom to the correction. But who knows. Until this situation resolves itself, new positions in gold may be a little dicey. Gold does not have to dance to the tune of the USD, but to the extent that it does, it is linked to a possible turn there too as this article on China over at safehaven discusses.

The Shoe Bull

2010-03-23T16:33:00.001-07:00

As Jim Cramer alerted us to on Mad Money yesterday, there is a bull market in shoes right now. As usual, he zeroed in on "best in class" which he deems as Nike. I like bull markets but I don't like high profile, so I'll offer two shoe names that Cramer would frown on - Rocky Brands RCKY and Crocs CROX. Well I guess Crocs was high profile awhile back, but Rocky is quite obscure.

RCKY makes a lot of cowboy boots - very expensive ones. That's one thing that you'd think would be getting absolutely killed in this retail environment - completely needless spending by the average Joe. But just look at this chart: (click to enlarge charts)

These people know how to survive, and the stock price is showing the first twitches of emerging from the coma investors have put it in. It was dead as a hammer across the big market event of March '09 - about all the weak hands gone. I remember this one catching my eye back when it was around a comatose $4 over the course of the July market sell-off last year, but I never got around to buying it. The short term technicals currently look good:

There is a resistance level at $9.5 that will soon break if it follows the lead of CROX and NKE. CROX has been working on a similar formation:

I wrote up a buy case for CROX back on January 16 and it now looks ready to move above $8.

Gold's Technical Condition

2010-03-19T10:04:00.000-07:00

Gold has been in the doldrums since early December, and anti-inflationists are pounding the table for gold's demise. Inflation may or may not be a problem anytime soon, but to me that's not the question. Gold climbs correlate with a lack of fiscal integrity regardless of whether this winds up causing inflation or any other particular problem.

Gold's technical condition (including its fractal condition) tells you more about its direction than trying to figuring out inflation, deflation, or conflagration. Going outside the charts, we see an abundance of fiscal angst being highlighted by the ongoing bailouts, including the one for our dysfunctional healthcare system that many believe will be a fiscal nightmare. But just staying with the charts, we see some interesting things: (click to enlarge)
Here we see a clear downsloping megaphone formation for the HUI index of gold stocks formed over the four months of the correction since December. These formations tend to break violently when they finally break (either up or down) out of the boundaries. You could think of a megaphone as announcing that a big move is coming up. The gold stocks have cooled enough to put a slightly negative slope in the 140 and 200 day exponential moving averages. But as we approach a possible exit point from the megaphone, the moving averages have regained the parallel and positive slope they've been in for months, signaling that the gyrations inside the formation may be about done with. Also, a clear oversold condition has been registered in the RSI and a new RSI cycle seems to have taken hold.

Looking at the gold price chart, we see a more subdued megaphone:

The moving averages look sturdy despite the long correction, suggesting a very powerful trend and a strong climb once the correction ends.

The fractal students of gold have been very accurate on gold's direction in recent years. They project late March as a major turn date, just as they did prior to last July (the beginning of the big climb into December). They point out that gold has moved up and down in 4 month units - either single 4 month units in one direction or a mild 4 month move followed by another more severe 4 month move in the same direction. It's interesting that our present down move hits its four month mark in early April, just when the above technicals are suggesting a new move coming, and in the aftermath of the upcoming congressional actions on healthcare. Storm-chasers beware - it could be a perfect storm gathering for gold.

The rest of the market has had to deal with all these known problems as well as the fiscal dominoes abroad out of Dubai, Greece, and every other place the debt roaches are hiding; but it has somehow chosen to ignore all that. So we could have the 2004 condition of gold and the S&P 500 both moving up (although '04 was a little flat and boring). Of the two, I would say gold has the best and by far the safest performance outlook.

Baltic Index On Leave Of Absence ?

2010-03-10T15:05:00.000-08:00

The Baltic Dry Index is usually a good first sign of future stock market direction, and I pay attention to it. But there is now a disturbance in the force that makes it so reliable as recent stories in the WSJ and CNBC have pointed out. Three years ago, when the BRIC ports were insatiable, a frenzied boat building spree got under way. Now the recession has cooled that appetite and the 3 year lead time for getting boats in the water has a gross over supply messing with the rates that the BDI goes by - making the index overly bearish looking.

As I wrote in the previous post on market leader groups, the BDI is currently the bearish one. So if you discount its effectiveness until the boat situation normalizes, that leaves a much more bullish picture of rotating leader groups in a stabilizing bull market. As Cramer opined on his show today, the financials were the most severe climbers in the bottom gyrations of a year ago, but have lagged over the last few months, letting retail and other things steal the show for awhile. But after a very bearish island reversal that fell back below resistance back in October, the XLF is threatening to bust that resistance and be the star again: (click to enlarge)

Market Leaders Mixed On Future Direction

2010-02-26T12:04:00.000-08:00

Early this month, the market's leader groups that have been faithfully leading the broad market to higher ground for a year now looked as if they were having a change of heart and were leading a charge to the downside. Since then they have partially straightened up and are partially flying right again. I say partially because, of the three groups I pay attention to (retail, tech, and the Baltic Dry Index), one is strongly bullish, one is neutral, and one is worrisome.

First let's look at the broad market, the SPX (click to enlarge charts)

The leader that's bullish is retail and consumer discretionary spending as the first chart below shows. In this stage of lousy housing, lousy employment, and a lousy consumer, this would be about the last area you'd suspect of being a general leading a charge upward. Go figure. But this group has been right about the market's direction for a year. In addition to the consumer's leadership, the SPX has nice, positive divergence in the two key moving averages, the 140 and 200 ema, and the price action is staying nicely above both throughout the pull backs - a very good sign.

The bullish leader of the three is retail and consumer discretionary (RLX and XLY)

Here we see the index way ahead of the SPX in coming out of the recent downdraft even to the point of being at a new high and currently overbought on the RSI ! The market somehow doesn't seem think the U.S. consumer is all that crippled. A nice, smooth positive divergence in the 140/200 is ongoing.

Second, look at the tech stocks.

This group is neutral with the SPX to maybe slightly lagging considering the money flow condition, which is cooling. This all paints a picture of maybe some leadership rotation in a more sideways market - a point that Jim Cramer has alluded to.

But the third index is a little more worrisome, the Baltic Dry Index.

Here we see a much different look with the 140/200 ema. Even more worrisome is the fact that this one is the early warning system for all the others. It had better get back above a climbing 140 ema soon. Both the BDI and the Shanghai Index are all about China, but the Chinese stock index doesn't look this bad with the price action staying above its 140 ema. If you check out the $DJSH, you see a moving average picture more similar to the SPX albeit lagging behind it a little. Maybe all that is a little over-reaction by everyone in response to China's recent move in the direction of putting the brakes on their economy. But in the bigger picture, this is a good problem to have.

ARM Holdings Surfing The Smartphone Tsunami

2010-02-10T09:49:00.000-08:00

ARM Holdings (ARMH) is a UK based chip designer that is parlaying its licensing and royalty talents into the smartphone revolution. They are not a high profile stock like AAPL, QCOM, RIMM, or GOOG; and were snubbed by Cramer's Smart Phone Index initiated 8/12/09. But ARMH has out performed all of these names and the index since last June, up 53% since I wrote a post about them and the smartphone hurricane on July 1 (click to enlarge)

In response to a viewer question, Jim Cramer has apologized for not having ARMH in his index, saying it should have been included. Back then, the valuation was a pain and had to be overlooked for a value investor to love the stock. After the climb since then it is even more of a pain: price/sales 8.0, price/cash flow 27, PE 70 - ouch! ARMH's eps is pretty flat over the last 10 years and, obviously, a lot of the tsunami future has been pumped into the stock price now. How much more can it take? If one had bought some back in June, one might want to take some off the table. But this stock is probably a buy on any sell-off that might send it to better valuations.

Bears on the stock point out that royalty rates are tending to come down as everyone buys a smartphone and more pricing pressure is induced. But this is countered by Morningstar's analysis that "as demand for outsourced chip designing grows, we expect this capable chip intellectual property (IP) designer to expand its footprint in more markets..." (other than the mobile market). But this strays from the tsunami. The commoditization of the smartphone may have some hard-to-predict investing consequences even as the tsunami itself advances - much like the internet revolution has left most publicly traded plays behind in its dust over the last 15 years. Here, an investor has to respect the technical condition of the related stocks and recognize when a good trend is breaking down or gearing up.

Will Rising Interest Rates Kill The Gold Bull ?

2010-01-30T08:14:00.000-08:00

The whole flap this past week over possibly replacing loose money Ben Bernanke with a dollar defender like Paul Volcker makes one wonder just what will happen to gold when the interest rate handle is eventually cranked. There are two possible investor reactions: "Oh my, they're going to defend the dollar, I'd better sell my gold" or "Oh my, there's an inflation threat, I'd better buy some gold". Most of the commentary I've been seeing tends to be of the first type - if they start to defend the dollar, gold will go down.

What happened as the previous gold bull came to its end in the 1970s? Well, if you chart the two, the USD vs the prime rate over the end game for gold's bull market back then, you see this:

Clearly investors seemed to be thinking more along the lines of choice #2 above - rates and gold responding in unison to an inflation threat. The interest rate climb, which took place over nearly 10 years, ignited gold from $35 to $850. The dollar eventually did a huge climb to match the interest rate climb, but this was many years behind the rate climb - beginning in 1980 and peaking in 1985.

In our current situation, we have not even begun to raise rates, which suggests an even more powerful climb ahead for gold than we have seen thus far.

Gold and Dollar Going Into Decouple Phase ?

2010-01-20T10:08:00.000-08:00

Gold bulls are fretting what looks like a dollar rally with legs that could go on for months. And of course everybody knows that if the dollar goes up, gold must go down, right? Well not so fast. That is the usual correlation, but what if I told you that it was possible for the dollar and gold to both be in a bull move for a year's time? Impossible? Well, it has happened twice in the last 10 years:

This spans from Dec. 2000 to Feb. 2002 and both gold and the dollar were climbing. And again in 2005:

Both these curves seem to be happy and sad over the same things. We may be entering into another such phase. In the above 2005 case, the U.S. was raising interest rates (raising the dollar) and China was reworking their currency and wanting to buy gold. Now, interest rates have no where to go but up, and China, India, and many other big money interests are wanting to be buyers of gold again. There have been some articles popping up about a gold/dollar decoupling the last couple months like one at The Firecracker Report - Gold Decoupling From the Dollar and Emerging as the New Flight to Safety Trade where a progression is given over the last few months to a decoupling. In table form it looks like this:

Nov 4 -54%
Oct -71%
Sept -80%
Aug -86%
July -92%

The percent figures are the chart correlations, negative meaning inverse correlation - the more normal case for gold and the dollar. Over the last decade (Jan '99 to May '08) the gold/dollar correlation has averaged -84%. Over the April to Dec '05 period shown above, the correlation got up to as high as a +66%. From the table's tabulation of the last five months, we seem to be trending into another of those positive correlation periods - perhaps due to the same reasons as the '05 case - bias toward higher interest rates and BRIC nations and central banks wanting to buy gold.

China Valves Opening Up

2010-01-16T12:23:00.000-08:00

If you like small, inexpensive China stocks that haven't run very much yet, consider China Valves (CVVT) (click to enlarge)

They do just what the name implies, make all kinds of valves for China. These are piping system, industrial valves and the infrastructure growth in China has lots of uses for them. They specialize in valves and are the leading supplier. But their stock is obscure and has been "de-flyspecing" the last six months. That's a highly technical term meaning to emerge from a very thinly traded volume and price pattern that looks like fly specs on a graph. It's often a sign that a stock is being discovered. CVVT is starting to gain some attention and trading volume having an eps growth rate of 40% and a PE of just 10. I've read some negative things on the emerging markets complaining about the overly high bull to bear sentiment polling - as high as past market peaks. But under-the-radar small stocks like this may not follow the overall market. CVVT isn't all that overheated and looks like it wants to blast through the resistance at around $10 - up 11% on unprecedented volume against friday's triple-digit loss for the Dow. That's a pretty forceful resistance break. It's hard to dig up data on this stock, but from what I can find, the cash flow per share, after a dip in the Great Recession, looks ready to race ahead, outpacing the revenue growth - an extremely healthy sign.

CROX Turning into a BRIC ?

2010-01-16T11:15:00.000-08:00

Crocs (CROX) gained fame as a flimsy fad stock a couple years ago when its stock zoomed to $75 because of the popularity of its comfortable shoes. It was one of the more spectacular victims of the consumer led decline. But the rumors of the death of the consumer were greatly exaggerated. All this has landed the stock in an interesting spot if you like the small retailers now (which I don't):

If you ignore the craziness of '07 and the overdone consumer death of '08, you may have a stock that just wants to migrate back to things like cash flow and stuff. It has a reasonable price / cash flow valuation of 12.8 - currently negative annual eps, but quarterly eps has turned strongly positive. Price / revenue is 0.9 thanks to the '08 hammering.

The possible migration back up was given a shot in the arm this week with the news of the company's dramatic expansion plans in India where they first entered with a joint venture in 2007. They are growing their exclusive outlet store count from 11 to 25 this year and their presence in general retail stores from 250 to 350 locations. The stock's technical picture is positive: (click to enlarge charts)

It has come a long way back up from near zero, but now that it probably isn't going to zero, it could be a brisk growth stock becoming more levered to the "I" in BRIC growth. It has tended to be a megaphone channel former in its climb so far. Breaks of these formations tend to be brisk. The 140 dma is a good divider of large scale bull and bear moves. CROX has gotten past a 140/200 crossover and successfully tested it twice now. There remains a large dose of investor skepticism - the float is 9% shorted. This one really moves when it moves with a churn on its low float of a whopping .049 (anything over .012 makes for fast movers). You probably should wait until it breaks the formation for a decent entry point.

Manitowoc Breaking Out

2010-01-08T18:06:00.000-08:00

Manitowoc (MTW) was a darling of the BRIC driven pre-Lehman days, supplying construction cranes all over the globe with 51% of sales overseas. They also make food preparation equipment, but 81% of sales are crane sales and service. The credit crisis knocked the stuffing out of this very credit dependent stock - no credit, no construction - no good economy, no consumer discretionary spending, which hurts the hotel/restaurant market for MTW's food gear. The market was especially brutal on this stock, but if you plot out their cash flow from operations, you see that maybe the brutality was overdone: (click to enlarge charts)

The stock has been put back to where it was in 2002 before anyone even knew what a BRIC was for Pete's sake. Current eps was indeed brutalized, standing (or lying) at a pathetic-$7. But cash flow and revenue have held up well making for a price/cash flow of 4.8 and price/revenue of 0.4 - a lot of bounce back potential. Technically, this looks to be beginning:

The stock has been gyrating in a dance of death below about $12 since the financial crisis began. But now it has produced a nice 100/200 dma crossover, gotten both moving averages parallel and sloping up, come back in to successfully test the 100, formed a fairly well defined resistance level, and has just now broken it with some nice volume and buying pressure. It looks to be done fooling around now. This one's a little dangerous though compared to say a gold stock. It is heavily dependent on an uninterrupted economic recovery. Any kind of trouble, and this one gets clobbered.

Chaos Theory Predicting Pop ?

2010-01-08T14:41:00.000-08:00

Chaos theory seems to be agreeing with what the leader groups are suggesting for the direction of the stock market. As I've posted on often, these groups have consistently been calling the next moves, and if you look at the QQQQ tech chart now, it is telling you which way is next. And if you look at the chief of the tribe, Apple, and apply a little chaos theory, you see this: (click to enlarge charts)

AAPL has broken the funk of the last couple months to the upside. The red chart below the price chart is the FDI (Fractal Dimension Index) which is a measure of energy buildup as a market cycles between periods of high and low chaos. Energy is expended as a strong linear trend transpires. A high FDI doesn't tell which direction the move is going to be, just how much energy has built up for it. (Apologies for not having the up to date FDI - I borrowed this read from Matt Trivisonno. I'm working on an FDI for my computer, need to work out some programming)

The direction of AAPL, this critical leader stock, is I think pretty clear, so what does chaos theory say about how energetic the following move in the broad market may be?

Wham bam o' lam! This is an extremely high reading for the FDI, but this is just a daily chart. But still it suggests at least a short term pop. This strangely enough agrees with what the Dow has been doing for the last year - closely following a fundamental recovery. You can debate the artificial stimulus sugar buzz approach, and what is real or not and how it will end. The chart below refers to the PPT (Plunge Protection Team). But the fact is a "V" recovery is proceeding and the market is shadowing it:

Here, perhaps the two things the stock market cares about the most, employment and housing, are superimposed on the Dow. Two things are immediately obvious. First, the market is doing a "V" that closely matches the economic figures. Second, the market is now sharply lagging the "V" suggesting an upside run. The above chart is from an article by Gary Dorsch over at Safehaven titled "Commodity Super Cycle" Ready to Rumble in 2010. He shows several other "V" s besides the set of figures shown above, and this all suggests a move up in stocks, which the magic of chaos has already figured out.

New Gold - An Interesting Gold Stock

2009-12-30T17:15:00.000-08:00

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.

Iran Developments

2009-12-28T20:56:00.000-08:00

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"

PZG in a Strong Technical Spot

2009-12-27T19:30:00.000-08:00

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.

The Quiet Before the BOOM

2009-12-26T20:37:00.000-08:00

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.

Solitario - A Stock of Interest

2009-12-20T18:32:00.000-08:00

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.

Emerson Radio

2009-12-14T17:20:00.000-08:00

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.

Stump the TA Chump

2009-12-11T12:34:00.000-08:00

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".

Oddsmakers Take On Iran

2009-12-04T20:28:00.000-08:00

I posted yesterday on the well informed opinion of the intelligence service STRATFOR on war with Iran soon. As investorsinsight.com 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 intrade.com 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 theatlantic.com 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.

Is Iran Going To The Woodshed ?

2009-12-03T16:56:00.000-08:00

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 investorsinsight.com 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.

Debt Dominoes, Here We Go ?

2009-11-27T07:29:00.000-08:00

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.

Ag Boom Is Igniting

2009-11-18T07:37:00.000-08:00

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!

Talking Phase May Be Over With Iran

2009-11-16T18:33:00.000-08:00

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

2009-11-16T11:40:00.000-08:00

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.

Aurizon Mines - A Value Investor's Gold Stock

2009-11-13T09:41:00.000-08:00

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.

A Change In American Plans On Iran?

2009-11-09T06:50:00.000-08:00

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.

Oil vs Gold Shock Absorbers

2009-11-08T07:21:00.000-08:00

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.

Dueling Parabolas

2009-11-06T18:48:00.000-08:00

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?

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

2009-11-05T07:34:00.000-08:00

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.

Gold Fractal Update

2009-11-04T18:10:00.000-08:00

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.

Reading Between The Lines On Iran

2009-10-28T19:09:00.000-07:00

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.