Gold and Dollar Going Into Decouple Phase ?

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

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 ?

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

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 ?

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

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

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"