Monday, November 26, 2007

A Lesson On Gold Bubbles From My Friend Steve

I am sitting on my veranda in Dominca having just read Doug Noland's latest article concerning the late great Alan Greenspan and his gratuitously self serving remarks about the state of the US and world economies. My view of Dominca and the Caribbean is asstunningly beautiful as Noland's indictment of Greenspan's policies is stunningly accurate. See: "No Regrets ".

This letter, however, is not about Mr. Greenspan. It is about gold and whether or not gold is in a continuing bull market or if in fact it has reached the bubble stage . My friend Michael has been after me to write a letter for his new blog but I have been reluctant to do so for two reasons. First because when one reduces one thoughts to writing one is much more likely to believe and defend those written thoughts long after they have been proven worthless. Second because there are truly great minds such as Bob Hoye , Jim Sinclair , Doug Noland, Mike Shedlock , and Adam Hamilton who have been writing brilliant analysis for years. Anything I may have to say is most likely my reflection on some of the thoughts of these truly original thinkers. In any event I do not believe we are in a gold bubble for the reasons that follow.

There is a difference between a bull market and a bubble. Gold has been in a bull market since at least 2001. Volatility is increasing but is not near the extremes of late 1979 and 1980. In the mid 1970s my largest stock holding was Hecla Mining. I bought it at an average price of around $5 a share. It moved in a relatively small range until late 1979 when it started moving steadily up. I sold half at around $11 and shortly thereafter I sold the balance at around $19. My sales were in November and December of 1979. In early 1980 Hecla (HL) hit $55 a share.

Gold was bouncing around with moves of $50 and more in a day not uncommon. Gold peaked at a closing daily price of about $850. The actual inter day high in the nearby futures was, close to $887.50. Clearly the volatility in precious metals and their shares was much greater in late 1979 and early 1980 than it is now. I would label 1980 as a time of a precious metals bubble. The present volatility in precious metals, while increasing, does not qualify as bubble type volatility to me. I expect that when we get to a bubble phase in gold we will begin to see "Tech Wreck" style volatility in gold and gold shares with gold trading in daily swings of $100 and more.

The second primary reason I believe gold is not yet in a bubble phase is price. Gold hit $848 in the nearby futures contract recently which caused some talk about gold possibly topping out at its old closing high of $850. Clearly there is some technical resistance in this area. The present price of gold near $850, however, does not account for inflation. In inflation adjusted terms gold would need to be in the $2,000 per ounce range to match the 1980 price of of $850.

Not only is gold far from its all time high in real inflation adjusted terms, but the potential demand for gold worldwide is significantly greater than in the 1980s. The increase in the populations and relative wealth of the emerging economies of China and India alone are huge real sources of demand for gold that were not present in 1980. Sovereign wealth funds are another enormous source of buying power not only for precious metals but also for the mines that hold them.

Volatility and price are telling me that gold is in a continuing bull market and not yet in a bubble. It is my opinion that gold has a real potential to exceed its inflation adjusted peak of $2,000 per ounce in the next few years. Volatility will certainly increase with price, so at times the down moves will be as violent or even more violent than the up moves. We may certainly enter a bubble phase in gold within the next few years, the propensity of our economy to blow bubbles has been well documented over the last decade. If fear in world politics and world market sets in Gold is certainly a likely target for the next round of fear generated bubble blowing.

If you wish to keep track daily of what is happening in gold I highly recommend Jim Sinclair's website. I have followed his writings on gold since the mid 1970s and there is no one that I know of who has more experience and insight about the price of gold. Jim Sinclair has accurately called the present gold bull market from its beginning but his excellent advice extends far beyond the gold market.



(Click for a larger image of this beautiful view)

Thanks Steve

I have been begging my friend Steve to write an article for my blog since I started it. I am extremely excited to be able to post his article on my blog. I first met Steve in late 2006, and he was bullish on gold to say the least. I owe more than 90% of my knowledge of trading and technical analysis to Steve, and I am extremely proud to call him a good friend.

Thursday, November 22, 2007

Protect Your Capital

Indicators, as noted by Ira Epstein are showing that there is a very strong chance of a sharp drop ahead in the Dow Jones Industrial Average and the Nasdaq. This man is rarely wrong when determining if stochastics are embedding. He called the oil rally, gold rally, and the falling dollar. Listen to the man on short term trading. I would also like to note the the dollar continues to fall sharply against the yen and euro.




Wednesday, November 21, 2007

Mozillo's Top Ten List

Mozillo has some explaining to do. It looks like Schumer is on his case now with a list of questions. Pay particular attention to numbers 6, 7, and 8 as I expect those particular ones to bury him.

Sen. Schumer then asks Mozilo ten questions. Here they are (the last two appear to be based on actual comments the CEO made to the Senator:

1) What percentage of Countrywide's subprime mortgages came from independent mortgage brokers?

2) Does Countrywide pay independent mortgage brokers more for loans with prepayment penalties? Did it ever do so?

3) How many buybacks did Countrywide do in 2006? What was the value?

4) What percentage of Countrywide's subprime mortgages were refinancings vs. purchases in each year from 2000-06? Please include data from your retail branches as well as your independent mortgage brokers.

5) How much business in piggyback loans did Countrywide do in 2006?

6) "Inside the Countrywide Lending Spree," by Gretchen Morgenson, that appeared in the New York Times on August 26th, stated that a C-minus rated borrower with a 500 credit score could get a $500,000 mortgage from Countrywide. Does Countrywide provide, or has Countrywide ever provided, mortgages on terms similar to this report?

7) The same article stated that Countrywide would lend to borrowers who had been 90 days late on a current mortgage twice in the past 12 months. Does Countrywide lend, or has it ever lent, to such borrowers?

8) That same article also stated that Countrywide had profit margins as high as 15% on some subprime products. Does this article accurately report Countrywide margins for any existing or past products?

9) Please provide the documentation you discussed to support your claim that Countrywide makes the same amount of money on FHA loans as on other types of loans.

10) Please provide the documentation you discussed to support your claim that Countrywide had received accounting advice for not giving independent mortgage brokers 1099 forms.

Remember when he was on CNBC talking about CFC's long term value to shareholders??? If you don't remember , check out the video below. Here is a transcript of the interview on Aug 24th.


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Here is a link: to the CFC stock chart

What a bargain, thanks Angelo.

Sell The Rallies

Sell The Rallies

The short rallies in the INDU and the SPX are still being sold at every resistance. The market is having serious issues retaking the 13,000 mark even with the dollar falling more and more every day. The last time we were under 13,000 it lasted 3 trading days. This is a bear market.

I would like the stock market to go up just as much as every body else, but this is the time to listen to the market and protect your capital. Get short, buy puts, buy gold, yen, and the euro. All of the currencies are overdue for a consolidation before another downside move, but I am now convinced that the dollar will fall to 100 yen in the next 6-12 months.








The dollar is now at a 2 year low against the Yen.


Wheat is up the limit today to 800 cents per bushel, and soybeans are down 2.5 cents at 1084.5 cents per bushel. These numbers are not deflationary, especially with gold staying near $800/0z.

I expect gold to rally into the end of the year on concerns about the dollar, a weakening U.S. economy, and the fact that many large purchasers of gold will be taking delivery of the physical gold. I expect this to cause short covering in gold going into the DEC contract expiration on December 27th.

Protect your capital!!!!

and

Have a Happy Thanksgiving

Tuesday, November 20, 2007

Embrace the Horror

Shock youtube financial guru Jefferson Krull. Persistently tells his viewers to embrace the horror. It seemed to work pretty well for him in early 2000 when he purchased massive amounts of puts on high flying Nasdaq stocks and made millions of dollars.

Now is the time to embrace the horror of the coming real estate price collapse in the commercial property sector. It seems like the media is starting to catch on. A lead article today read:

"US commercial property sales down in October"

Here is a short excerpt:

U.S. office building sales fell 70 percent in October from a year earlier, yet another sign the credit crunch that began in the U.S. housing market has spread to the commercial real estate market, Real Capital Analytics said on Tuesday.
You can read the whole article here: Commercial Property Sales October

I am embracing the horror by purchasing long term puts in SPG, DDR, and LEN.

I really like the SPG puts because the stock still has huge potential for downside trading at close to $90/share.

It should also be noted that commercial real estate bond spreads are widening even further.

Here are charts of the worst rated bond BB and the highest rated AAA bond in order to show that the garbage has been spread across all ratings.



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These spreads are so huge that it begs the question:

How much are these things really worth???

The truth is that NOBODY KNOWS!


Jim Cramer pointed out one way that people can find out. You can watch the video here:



Monday, November 19, 2007

Pulte Home Put Buying Bonanza

50,000 January PHM 30 Strike puts purchased

In a transaction worth $90 million dollars, 50,000 puts on PHM were purchased. I would say that the odds of PHM surviving are slim to none with this kind of options activity. Charts of the transaction and of PHM stock are posted below. Click on the charts for sharper images.




It's An Ugly Market Ahead

The 300 point rally from last week is now completely erased as credit losses mount at Citigroup. Citigroup's total write off is now approaching $26 billion dollars. Or roughly half of the United States monthly trade deficit.


The real story today is about the homebuilders. The XHB has now broken through the most recent low. Expect to see some of the builders going out of business in the next 2-3 months. This time is different than last time housing was in a slowdown. Even if interest rates drop to 1% again, no one will be able to get access to easy money. The homebuilders are in a death spiral.




Many are in an every day struggle to stay alive.

Do not believe the talking heads on CNBC. This is not going to end for a few years. If you have an option account. I suggest long term puts on commercial real estate and the home builders listed in the above article. Otherwise, do not go bottom fishing in a market where the fish will bite back.

Sunday, November 18, 2007

The Final Countdown

On Friday, FedEx (FDX) came out and said:

"it cut its profit forecast for a second time because of rising fuel costs and weak freight demand. The shares fell the most in 16 months"
How important are shipping data? Very important especially with the shopping season coming up and retailers all ready gearing up. The time before thanksgiving is when the most merchandise is moved into stores for sale by the consumer. Less merchandise shipped means less merchandise will be purchased.

This means that the recession is here. Recession is not an evil word. They happen every seven years in the U.S. It just seems like everyone here has problems remembering what things were like 7 years ago. As I recall, the stock market crashed, the fed let the money spigot flow, and things got better. Wash, rinse, repeat as necessary.

Here are some charts:

The consumer discretionary chart is important because it lists the goods which people purchase with their disposable income. I think that it is a great measure of the health of the American consumer. After all, what else does America really do besides consume these days?



It should be noted that when Greenspan was fed chairman, he called the CEO's of the shipping companies such as FedEx and UPS twice per month in order to gauge economic activity. It's too bad that he forgot to turn off the spigot at the end of his tenure. I guess that people are forgetful in their old age.



The final countdown has now passed for the U.S. economy. It is ironic that the Euro is still soaring against the dollar and the band "Europe" wrote the song "The final countdown" over 20 years ago. At least for me, it now makes sense what they were counting down to.

Monday, November 12, 2007

Welcome back to relative P/E valuations.

Something I regularly track are the P/E valuations on major indexes. They were doing just great until huge firms started missing numbers. Now they are extremely over inflated. The P/E in the DJIA more than doubled (from 18 to 46) as many companies lost tons (in the literal sense) of money this last quarter.


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The 30 components in the DJIA provide a sample for what might happen to the Nasdaq.

Slaughtered as the Nascrash and Efade Financial get marked to market.

The high fliers of the Nasdaq got hit hard today. This was how one of my trading pages looked today.


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I named the above page "Short Candidates". The ironic part is that I gave it that name over 5 months ago. In the market, timing is everything.

For the Nasdaq it looks like the 200 DMA is going to come into play. There is no mercy in this market. I'll repeat that: THERE IS NO MERCY IN THIS MARKET.


(Click for sharper image)

As for the DJIA, the early morning rally was faded into oblivion. We are now under 13,000 on the DJIA, a level I pointed out last Monday that we could get under in the near future. That was over 600 points ago. This is really scary stuff and smacks of a serious bear market. Stocks are being sold at resistance over and over again.


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I guess it becomes hard to trade and sustain current market levels when your broker is going bankrupt. The sad part is that Etrade had a solid business built on a great product and satisfied customers. Then they make very stupid decisions and imploded a wonderful business. All to make a couple percent above the prime lending rate by purchasing securities no one understood until it was too late.


(Click for larger image)

Gold was down huge today, I am going to stick my neck out and say that gold is just correcting and that it is in a bull market. I expect it to be higher than $850/oz by the end of January. I was purchasing a 1/3 position in long term gold producer calls today. Gold is back above 800 as I type.

Sunday, November 11, 2007

Monday Monday Monday

For investors, Monday is setting up to be one of the scariest days on record. The yen carry trade completely unwound on Friday and the market had a steep sell off before the close. Going from almost unchanged to down 1.7% on the DJIA and 1.4% on the SPY in less than half an hour. The big picture is that we are still 500 points above the august low of 12,500.


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The current recession we are in is starting to drag down tech. On fears that the consumer spending is all ready getting hit.


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Note that support at the 50 DMA failed very fast, I expect that the 200 DMA will be tested.

The numbers retailers showed on Friday confirmed that this is the case. Consumer spending has dropped. With chain same store sales coming in at 0%. When factoring in inflation, growth is now negative. One of my friends who works at a large retail chain confirmed that same store sales estimates were reduced by 50% this week.

Consumer sentiment came in at levels not seen since 2005 after Katrina hit. Coming in a full 2.6 points below the consensus range.



I think that it is now clear that the economy can not take the effects of a declining housing market and high oil prices at the same time. Many people are wondering what is going on with Ben Bernanke saying that:
"he expects a raft of economic troubles will cause business growth to slow and as a lackluster forecast from Cisco Systems Inc. made investors wary of technology stocks. The major indexes each lost more than 1 percent, with the tech-heavy Nasdaq giving up more than 3 percent"
Many people are wondering why Bernanke did not say this sooner. Did not he know what was really going on???? Of course he knew, but imagine the market reaction if he came out when the DJIA was at 14200, and said that recession potential is increasing or all ready here. He would have been blamed for the subsequent market fallout.

He obviously took notes from Greenspan, who never publicly said that anything was wrong with the market, but was not bashful to say so behind closed doors. The participants in these meetings never thought that the information would be made public, but the freedom of information act changed that. Minutes from past meetings were released and the public read what they were saying behind closed doors.

From the March 21, 2000 FOMC meeting minutes (the top of the tech bubble)

"The members noted that equity prices generally had posted further gains during the intermeeting period, but in their view the large increases of recent years were not likely to be repeated, and an absence of such gains would have a restraining effect on consumer expenditures over time."
Why did not Greenspan warn the public at the time? Because he would have been blamed for popping the dot com bubble. Just like Bernanke would be blamed now if he really said what is on his mind.

Your job is to focus on the longer term picture. Monday will just be another day in market lore when you look back on it. It has the potential to be horrendous, I think that there is still opportunity out there to switch into gold stocks, foreign stocks, and Japenese yen. It is not too late to jump off the current bubble while it is bursting.

Wednesday, November 7, 2007

Gold closes at record high, but lows are the story of the day

There is something that is difficult for most people (including myself) to grasp. Especially with the market bleeding red . The difficult concept is that when something goes down in the market, something else goes up. The reason that the stock market was down so much today had very little to do with housing and with the investigation of Washington Mutual. That mess does not have the power to drop the U.S. stock market over 350 points in one session. The stock futures are still ticking lower as I type.

The reason that the stock market fell so much today was because of China. They hold 1.3 Trillion U.S. dollars and they announced publicly today for the first time that they will sell dollars in order to diversify assets.

When the announcement was made, the euro gained a penny on the dollar in less than 4 minutes. In the world of currency trading, that is a monster move. It continued to rise throughout the session and put in what I think is an intermediate top. This is what caused the market to fall today. The declining dollar. Here is the usd/euro chart:




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The Japanese yen also had a similar move, but it has a more important relationship to the action of the stock market. The yen now determines if the U.S. market is up or down. And the dollar continues to move lower against it as I write this. If you thought today was bad, tomorrow could be worse if the yen breaches the 111.5 level and stays down there for any considerable period of time (30 minutes or longer).



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I know how bearish this sounds, but when looking at the bigger picture. It becomes clear that the August lows will be tested, and that some of the larger banks are at risk of suffering serious financial hardships.



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You can still make money by putting your money in the right places. I know I sound like a broken record, but Jim Rogers has given investors many options to make money in this type of environment. The Japanese yen can be purchased through the FXY.

Now, take a deep breath, calm down, and watch the video




Monday, November 5, 2007

What the market knows.

I have found that market participants close to wall street tend to receive market information which no one should even have access to. Case and point: Everyone knew that Chuck Prince was going to be fired on Sunday the 4th of November, three days prior to it occurring.

So when I see a company falling as fast as Ambec Financial (ABK). It makes me wonder what everyone knows that we do not, and what the CEO is not telling us. Especially after THIS
article.

Here is a video of Robert Genader (The Ambec CEO) defending Ambec while his company's stock and the general stock market were in free fall.








Chart of Ambec Financial (ABK)



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Markets and Balancing Rocks

This is currently the US stock market




Today seemed like a very panicky day in the market, but it was not. The two charts below illustrate that the market tested support and resistance throughout the day.

1 Month S&P Emini Chart



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6 Month S&P Emini Chart



I have added support levels
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These charts are the 1 month, and 6 month S&P 500 December futures . Futures markets, are some of the most highly liquid markets in the world. What concerns me is that the market was quickly sold off at resistance, and it looks like it is now in balancing rock mode. If it gets just the right push, we could be going right back below 13,000 on the DJIA in short order. In my opinion there are a few safe places to put your money right now, and few of them involve the U.S. stock market.

I think that the number one single thing to buy for the long term is: The Jim Rogers Commodity Trakrs. This index was created by Jim Rogers. Jim Rogers stores a large chunk of his money in this index. He also holds various foreign currencies like the Chinese yuan, Japanese yen, and Swiss franc . I think that the best way to make money is to follow what a billionaire does. Unless they buy an airline, that is a sign that a billionaire will soon become a millionaire.

I will post later about how I plan to make money in the coming days/weeks/months. Three words: commercial real estate

Sunday, November 4, 2007

Jim Rogers On Kudlow

Jim Rogers talked about all of the most important issues affecting world economics and how to profit from it Friday on Kudlow. One word: Commodities.

How high does Jim Rogers think oil will go within 10 years? You'll have to watch and find out.

If you do not know who Jim Rogers is. He started a hedge fund with George Soros in the late 1960's. The goal of the fund was to make $500,000 each and retire after ten years. They ended up topping that goal by a few dollars and making $10 billion dollars.



Saturday, November 3, 2007

Is The Chinese Renminbi (Yuan) /Dollar Peg In Jeopardy?

Bloomberg is reporting that Hong Kong currency traders are betting that the Renminbi/dollar peg will be reevaluted.

Currency traders are betting in the forward exchange rate market that the Hong Kong Monetary Authority will abandon its currency's 24-year peg to the U.S. dollar as overseas investment floods into the city.
In the forward currency market, an investor can buy Hong Kong dollars now for delivery in 12 months at HK$7.7106 per U.S. dollar, above the HK$7.75 top of the Hong Kong Monetary Authority's permitted trading range. The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday, twice as much as two previous interventions since Oct. 23.

It has become costlier to place bets on the peg ending. Volatility implied by U.S. dollar-Hong Kong dollar options expiring in six months rose to a 10-month high of 1.25 percent, according to prices from Tullett Prebon Plc. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.

``What the forward market is telling you is that the pressure is not going to go away anytime soon,'' said Russell Jones, global head of foreign exchange and fixed-income research at RBC Capital markets in London, who believes the link will remain. ``The monetary authority is going to have to keep intervening to maintain the peg.''

I view this as a clear warning sign that the dam has signs of bursting in this market. The recent financial turmoil here in the U.S. is starting to create a high level of distrust between investors and dollar denominated assets. Especially within the investment banking sector. People from other countries are starting to ask how they can own dollar denominated assets when the underlying asset is declining and the currency is declining.

The US Dollar index is the calculated using the exchange rate against 6 other major currencies:

Weighting of each currency in the index:




Chart of the US Dollar Index:





(Click for a sharper image)

I would not be surprised to see the Renminbi added to the list on the USD index in the coming years.


Down Goes Citi!!! Down Goes Citi!!!


When a stock like Citigroup declines 20% in a month, I think that it is a call for serious concern. It has now become obvious that they have been hiding their losses. Today they announced a $6-$10 billion dollar write off.
Citigroup faces a write-down in the range of $6 billion to $10 billion, mainly because of exposure to subprime mortgages and collateralized debt obligations, CNBC has learned.

The size of Citi's write-off is still being debated, though a source told CNBC that Citi's board is pressing company finance executives to clarify the issue. The firm's audit committee is also scheduled to meet Sunday, in advance of the emergency board meeting.
Chart of Citigroup:



(Click for larger image)

Citigroup currently has a market cap of $182.69 billion. If they write down $8 billion dollars of losses (middle range of $6-10 billion). On Monday, 4.2% of the company will vanish into thin air.

Friday, November 2, 2007

Looks like the juice has been made

Banking shares never recovered on the last rally.



It looks like the brief squeeze was used to sell and to short at higher levels.




The dollar is falling almost .01 against the euro, and gold made another new high at 810.60. I expect gold to open higher next week and continue upward. I think that the fed will not step in again soon to help out the struggling banks. I am also expecting the market to rally on hopes that the fed will do something over the weekend. It seems like investors are deeply worried about banks like Citigroup and Merrill Lynch.

Rumors are flying that Citigroup may cut its dividend, or even worse that it is potentially insolvent. The company stopped all lending in California on October 31st.

There are claims that Merrill Lynch attempted to hide assets by selling them to hedge funds with an agreement to purchase them back at a later date for a set price. Not only is this unethical, but I am sure that the government will be looking into this. The pressure from the street to beat estimates is tremendous, but lying, cheating, and stealing to get there is much worse than just taking the loss. Now is a good time to remind you about how great of a place America is. Where else can someone tank the company stock, hide liabilities, make unethical decisions, get fired, and leave with $130 million dollars?

Yes, America is a great place.

Watch out for the Squeeze


A lot of stocks look oversold to me at this point. I wouldn't be a buyer just yet, but I would cover my shorts if I was short.

Thursday, November 1, 2007

Subprime Zombies




Yesterday was Halloween, but the zombies are still out and about today in the market. Sub prime zombies feed on rate cuts. If they do not get at least 50 bps at a time the zombies come out and feast on companies like ABK, MTG, PMI, RDN, etc. It looks like they are done feasting for today, but I am sure that they will get hungry again in the next few days/weeks/months. Mortgage resets tend to add to their hunger as well.





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