Long time

Hi friends.

I have been busy for the last few months with work and school. I am sure that it must be surprising to see how turbulent the market has been over the last few weeks. The market is at a significant turning point as I write this post. With the S&P futures falling 43 points and the dollar/yen falling to 105.65 -2.20 this marks severe market turbulence.

LEH has filed for bankrupty - http://www.cnbc.com/id/26708143

Bank of America has bought Merrill Lynch for over 2X what the company was worth - Merrill bought out for $44


and

AIG, a Dow 30 component says that it needs financing immediately or it will not survive - AIG in credit crunch

We have now reached a point where you need to make a decision. Will you keep believing what they say on CNBC and what the fed says about the economic state or will you start listening to the market now that it is at a roar?

If you want to get updates on the details I suggest reading Mish's blog:

http://globaleconomicanalysis.blogspot.com/

He has been right about this mess for a long time.

The bailout of Merrill Lynch MER by Bank of America (it was a bailout, that will become clear in the next few weeks) is another sign that the financial system was on the brink of collapse today. However, there are too many moving parts and not enough repairmen on hand to keep jumping in and fixing problems. At some point, the machine is going to stall and catch on fire. Just stand clear when that happens.

Retail Sales Fall -0.6%, And That Is The GOOD News

Retail sales fell below the consensus range of 0.2% last month to -0.6%. This was no surprise to me as I continue to expect big box retailers to suffer as the USD continues to fall and consumers spend more of what used to be discretionary income on gasoline and food.

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In the overnight forex market, the yen hit 99.75 yen/1 USD. Some are predicting 95 yen/1 USD, I am not sure where the dollars decline will stop, especially with the fed continuing to inflate faster than a hot air balloon.

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GOLD HITS $999.4/oz and will hit 1100-1200 in the next few months. Gold is set to take on the psychological barrier of $1,000/oz in the next few days. Once it holds that level, it is once again off to the races on the back of the falling USD.

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Indeed, things look grim for the U.S. economy. In terms of the stock market. Things are about to get worse as the next wave of earnings will ALL surely be dissapointing, playing out perfectly, George Soros's theory of reflexivity .

Bull Markets in Gold, Oil, and the Grains are fueled by U.S. inflation.

I started this blog unaware of how quick things could go from relatively ok to a torrent of financial distress. The YEN/USD currently stands at 102.820. 100 YEN/USD is now a certainty. Gold at $1,000/oz is now a certainty. The only questions I have now are where the U.S. stock market will bottom and how long, and also where the dollar will bottom and how long that will take. Today was a wreck in the stock market, but there are many very important underlying factors which are being overlooked, or all together ignored.

Factor #1 :

Sub prime bonds made it into the single digits today a 92% decline as homeowners continue to "walk away" from declining home values:

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Factor #2

The yield on the T-bill continues to plummet. This is putting severe stress on banks holding money in the overnight market. This also is a result of people looking for a safe place to put money in order to weather the current financial storm/tornado/Cat 5 hurricane.

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Factor #3: The US Dollar/Chinese Remnimbi peg is in jeopardy. As if the USD can handle any more blows. The current traders in the Chinese currency markets are saying that the Chinese need to get rid of the peg. The current peg is at 7.8 Chinese Yuan/ 1 USD, but it is currently trading at 7.78. In the grand scheme of things .02 is not very much, but the point that needs to be made here is that the Chinese can not keep it at 7.80. If it trades at 7.78, under significant stress, it could trade lower. Not to mention that the last time the peg moved, the traders had advanced notice. The ultimate effect is increased cost of Chinese goods on an all ready stressed U.S. consumer.

Factor 4: Where is gold going?

You'll have to read what Jim Rogers says to find out.

I will put it this way, only someone who understands bull markets the way Jim Rogers does can make that kind of prediction.

Coffee, Pancakes, and Banking Executives

Early this morning 7:30 AM I went to a local pancake house here in the northern suburbs of Chicago called Walker Brothers. It is located right in the middle of an area where many major corporations are headquartered. Allstate, Baxter, Abbott, and Walgreens to name a few. The place was pretty empty early on a Saturday, but I happened to sit next to a banking executive (50-55 years old and one of the VP's in the company) he was having breakfast with a business contact/friend. The conversation went something like this:

Executive: I've been working for the last 4 months trying to close a several hundred million dollar loan.
Friend: Really?
Executive: Yes and the fed has lowered rates from 5.25% to 3%. The loan ended up closing at a higher interest rate than when we started the loan process, even with the fed lowering rates.
Friend: How did that happen?
Executive: Nothing the fed has done has helped.
Friend: Nothing?
Executive: Nothing they has done has helped, in fact, they have made things worse. Much worse.
Executive: They really screwed everything up. The markets are totally locked up. No one is funding anything except things with very specific goals like student loans. Everyone is scared that what they are going to buy is going to drop in value. This is a giant mess and it will not be solved easily. I do not even know what can be done to fix it right now. The fed funds rate has gone down, but now home lenders are adding on extra percentage points for what they called "risk premiums" . So the money is being lent at 5% plus another 2-3% or more for what is now called a 'risk premium'. This is being added on to anyone with a credit score of about 600 or lower. Over the last 2 years people were able to gain access to money who did not deserve to have loans that large. People also got very rich over making loans to those people and now everyone is paying the price.

I had to leave at that point, but it shows that the end of the story for housing and the economy is anything but nearing and end of this downtrend.

Here Comes The Shift!!!

Hang on to your hats folks. If the fed does not intervene, the market is set to crash from the open. Dow futures are down over -500 points and S&P 500 futures are down over -64 points. Professional traders are in a full out panic. I am expecting a torrent of stop losses and sell orders to hit the open of the market if the fed does not cut a full point. Expect computer systems at the exchanges to choke on the volume and lock up. Think about how panicky you get when your home computer crashes. Now imagine the panic when the computers at the exchanges crash when the DJIA is down -500 points. This is ugly.

A Golden 2008

I hope that all of you had a happy holiday and a great New Years. I have returned from a long vacation, and I couldn't be happier to see gold at all time highs with SPG and DDR still sinking.

Gold and gold stocks are on fire. As I stated in earlier posts, I expected gold to rally into the end of the year because of multiple factors. Steve also gave everyone a lesson in gold bubbles. The lesson to be learned is that gold is not anywhere near finished in this run. The metal based at the $800/oz level for almost a month and is now screaming higher.

$1,000/oz will occur within the next year. Expect it to make headlines in most newspapers and major news networks. How many average joes on the street know that gold is at record highs right now??? Just wait until the American public hop on the gold wagon. That will be the time to think about selling. The American public are just as good as everyone else at hopping on to bubbles as they burst. The Nasdaq and housing are good recent examples. I am expecting gold to be added to that list.

Gold stocks are just breaking their 52 week highs. Now is the time to add to positions in gold stocks. ABX, GG, and AEM are on fire.

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Yesterday as the market tanked -2% these stocks were ringing in the new year with 5-10% gains. I expect these stocks to have a great 2008. Yearly gains of 100% from these levels are not out of the question. Especially if gold breaks the $1000/oz mark.

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.

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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.

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.

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

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:

One Bank Has Got To Go

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.

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.

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.

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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.

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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.

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.

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

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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