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"rogue" dolphins are really interesting..........
http://www.waterexplorer.com/il_dol03.htm
......kind of like myself. LOL!!!
Rogue
Housing Index....looks like a dead cat bounce rally may ensue soon.
There is "overhead resitance" to lean on in any rally and lay out some short sells with defined risk.
I'll have to research a ETF or housing index fund to trade the short side.
Any ideas?
Rogue
OIL or the US dollar???
I continue to like Oil as an investment versus the US dollar.....especially with the prospect of a increase in the "purchasing power" of the Chinese Yuan. The demand for oil from China will continue.
If interest rates in the US get high enough(I don't see that happening...can you envision 10% or higher long rates??...I can't)the exodus out of Oil may begin.
But we have a "Conundrum"....thanks to "Bubbles Greenspan". A "Bubble" economy built on massive credit and the Government would rather lie about inflation rather than "fight" it like ol'Paul Volckler did back in the early 1980's. Too many people could be "wiped out" if the Fed truly wanted to fight inflation.
It's a balancing act and I think the air will be slowly let out of the housing bubble here and rates may rise somewhat. But not enough to truly offset the "ravaging" of purchasing power of the US dollar through inflation.
I still like Oil and Gold as a preservation of capital and wealth. And that is what investing is about.
Rogue
Will China Burst the Bubble?
China's financial engineering and the housing bubble seem like unrelated problems. They're not.
By Robert B. Reich
http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=10081
In the new global economy, almost everything’s connected to everything else. Case in point: China will let its currency rise against the dollar and America’s housing bubble will burst.
Let me explain. The housing bubble has been pumped up by low mortgage rates which have made it easy for lots of people to buy a house. Or two. Other major investments require more capital up front. But with mortgage rates this low, housing has become the major investment for average Americans who haven’t saved much of anything.
Bubbles form when it’s easy to get capital to invest in something, and when investors assume that somebody else will come along after them and pay even more for it. So as long as mortgage interest rates stay low, the housing bubble is likely to grow. It seems that no matter how much a house costs, buyers assume that a future buyer will come along and pay even more -- because that future buyer can get the money just as easily.
But beware this logic. When mortgage rates rise, the psychology will shift. Buyers can no longer assume that future buyers will pay more, because some future buyers won’t be able to. And when the psychology shifts, the bubble bursts.
Here’s where the China connection comes in. A major reason why mortgage rates have stayed low is that there’s a lot of money around. And much of that money has been coming from abroad. China and the rest of Asia have been putting their spare cash into America, in order to prop up the dollar and make it easier for them to export to us.
But that’s about the change. We’ve been pressuring them to let their currency rise, and they’re getting the message. We don’t know yet how much they’ll let it rise. But the writing’s on the wall, in Chinese characters. And other Asian nations are following China’s lead.
You don’t have to be a zen master to see this means less Asian money flowing into the United States. Which in turn means long-term interest rates -- including mortgage rates -- will start to rise. It’s just supply and demand: less money around, and the cost of borrowing goes up.
As a result, the housing bubble bursts. I can’t give you an exact date. It depends how fast China and the rest of Asia unleash their currencies.
Moral of the story, as told to American policymakers who have been pressuring China to revalue: Be careful what you wish for.
Robert B. Reich is co-founder of The American Prospect. A version of this column appeared on Marketplace.
Rogue
Gold....I sold my 2 remaining Dec. 2005 futures today. Made some decent profits off the move after China let the yuan "float".
Gold can now "correct" here(I'm flat..LOL!)....
I'm too much of a "chicken" to short it though. I just feel too strongly about the bull case. And besides.....anyday again we can have some sort of "terrorist attack" in America.
Just waiting to get long again at the right time.....
NO "TERROR ATTACKS" OR ANYTHING FUNNY NOW.....HEAR ME "DUBYA"!!....LOL!
Rogue
CANROYS....I think they still make alot of sense even though they have run up appreciably.
Oil is the new world "reserve currency"......soon gold will move too, but for now OIL is dominating the "hard currency" investors/traders.
I'm looking for the boards best CANROY ideas???
I own a few but probably need more if we have a super spike in oil.
Rogue
A Golden Solution To The China Syndrome? .....
FA, Still long a few futures. Watching to see how the market digests the strike news.....Gold is short-term overbought,but in a "major-bull".
SUPERBULLISH long-term.
I love your "bottom fishing" stock posts....I've gleaned some great trading ideas there.
Keep up the good work!
http://www.forbes.com/investmentnewsletters/2005/07/27/china-gold-lehmann-cz_rl_0727soapbox_inl.html
MIAMI, FLA. - Put yourself in China’s shoes. Your economy is heavily dependent for its economic growth and well being on exports to the United States, long its least-favorite country. It has to accept payment for its exports in U.S. dollars,a currency over which it has no control other than to cause it to depreciate by trading out of the dollars it holds and into another currency. (Note: This is something the U.S. is trying to get China to do to itself by revaluing the yuan.) To add insult to injury, it has accumulated a staggering $700 billion of such dollar reserves and sees no other investment option besides the U.S. Treasury market.
Lock in yields of 12% and higher with Canadian energy royalty trusts. Find out the best names to buy now, from Forbes/Lehmann Income Securities Investor.
Hence, they not only supply cheap goods to this least-favored country, they then lend it back the proceeds of their labor—lending which makes them vulnerable to a freezing of these reserves by the U.S. should serious enough policy differences arise, à la Iran. Welcome, China, to the World Trade Organization, or should I say, "Welcome to the Hotel California."
Fairly recent history offers two examples of countries who have dealt with this problem with mixed success. In the 1970s, when OPEC managed to take control of the oil market and more than double prices, their foreign reserves quickly built up as they had not yet figured out how to spend these vast sums. Their solution was to invest in CDs with large international banks, thereby providing the funds necessary for oil-importing countries to fund their higher oil import bills. This dubious arrangement lead to an international banking crisis, as the debtor nations defaulted nearly causing some major international banks to fail.
The 1980s saw a replay of the reserve problem, only this time the country with the excess reserves was Japan. Their attempt to diversify out of dollars led to an organized spending spree involving the purchase of hotel properties, signature office buildings and golf courses. The problem with this strategy was that it was premised on the notion that property values overseas were cheap in comparison to those in Japan. The flaw in that thinking was that it was the Japanese values that were out of line, not those in the rest of the world. Bottom line, the Japanese overpaid. As for their infatuation with buying and building golf courses around the world, leave this to a psychologist to explain.
.
For the United States, however, this strategy is a serious threat that goes beyond trade rivalry. Let no one kid himself. International trade and capitalism is a form of warfare where domination is the objective. A countrysuch asChina is playing a different game from most WTO members—they are mercantilists. That means they are not interested in creating a level playing field and letting private enterprises compete. They want state involvement to a much greater degree than is practiced in the U.S. This means direct ownership of key enterprises, setting economic priorities, controlling foreign ownership participation, rule-making that favors national enterprises and using commerce to achieve foreign policy ends.
The U.S. has allowed foreign ownership of domestic companies except in cases involving national security. This usually means protecting against foreign control of sensitive technology, defense companies or vital sources of supply. Even excluding these types of companies, China could make major inroads in dominating key industries in this country.
Such dominance by a country that is fundamentally hostile to U.S. interests will not be tolerated by the U.S. government. We already see this with the protests over the CNOOC tender for Unocal, the acquisition of which is, at best, peripheral to U.S. interests. That protest, however, should be a clear signal to China that acquisition of U.S. operating companies is a non-starter that can only lead to further strained relations.
I believe China will eventually find gold as a partial solution to its foreign-exchange problem. While an immediate reaction may be to think this is nonsense, a closer examination may provide some food for thought. Gold was the world reserve standard for centuries until former President Richard Nixon closed the "gold window" on Aug. 15, 1971. What he did, in effect, was end the exchangeability of gold for dollars at the fixed rate of $35 per ounce. In effect, the U.S. stopped being a sponsor of gold under a system whereby it set the price and became the buyer and seller of last resort.
The change was necessitated by the fact that foreign holdings of dollars had gotten well beyond the U.S. reserves for gold. Even a steep rise in the pegged gold price would not have solved the problem for long and would have rewarded Russia and South Africa, two countries not then in favor with Washington. Also, the U.S. stood to gain tremendously from the new world order in which the U.S. dollar became the world’s reserve currency by default. It would be no exaggeration to say that Nixon’s action was one of the keys to America’s subsequent world economic dominance.
When America abandoned gold, no one was inclined to step in and continue the gold standard. And since gold earned no interest, nations around the world began to systematically reduce or eliminate their gold holdings. Time has shown that such gold holdings would, through subsequent appreciation, have served quite well as an alternative to U.S. Treasurys. However, in today’s world of multibillion-dollar reserves, the gold market is too illiquid to serve its former role.
To revive gold’s role as a reserve currency, it again would need a sponsor—a buyer and seller of last resort who dictated the support price. That price could increase each year, per government policy, by a set amount. China, with its $700 billion in reserves has the clout to assume this role. Keep in mind that gold is still a scarce resource that has not kept up in supply with the growth of world economic activity. It is insufficient in quantity to serve as the main world reserve currency unless its price was vastly higher. It could, however, be a close second or third. More importantly, like the De Beers diamond cartel, it can be extremely profitable for its sponsor.
Dominating the gold market would offer a number of benefits to China. It offers a viable alternative to buying more U.S. Treasury debt. It allows them to set the rate of return on their gold investment, much as De Beers sets the price of diamonds. However, their control of prices would be even stronger since a net buyer role is much stronger than the De Beers role as a seller. In fact, once China let its newly assumed role in gold become known, a worldwide gold rush would commence, driving prices well above current levels. China will not be able to take control until well into this initial rush. Over time, other nations would join China in again holding gold as a way to reduce their dollar exposure.
Holding large gold reserves can serve China’s domestic economic policy, as well. China does not want to see its citizens investing abroad. Allowing Chinese citizens to buy gold would help satisfy domestic saving and investment desires while also giving the government a means of regulating the money supply. Gold has a long history with individual Chinese as a way to hide and preserve wealth—a way made no less attractive by the mistrust that is always present with an autocratic central government.
The ultimate attraction of such a policy for China is that it allows them to reduce their vulnerability to the United States. Even more so, it allows them to play a dominant role in international affairs, clearly a high priority with current Chinese leadership.
While it is not in the U.S. interest to strengthen China’s role in world affairs, it is a better alternative than letting pressures build inside China’s government over a perceived, if not actual, threat to their sovereignty. Also, other solutions to the dollar reserve problem may be dreamed up that prove to be far more dangerous to the current international order. Forecasts are for China’s reserves to grow to $1 trillion dollars by June 2006. Such an accumulation only puts more pressure on the Chinese to find an alternative solution.
Richard Lehmann is editor of Forbes/Lehmann Income Securities Investor. Read more analysis and information from Lehmann, or subscribe to Income Securities Investor.
Rogue
I think we've seen THE TOP in Real Estate speculation!
I've created a personal portfolio page to follow any SHORT SELLING ideas in this area. I'll be looking at charts and trying to pick good low-risk entry points to set shorts.
I'm open to any ideas as to "profit" from LONG LONG LONG awaited "popping" of the real estate bubble.
I think the best news is all behind us FINALLY in this sector. It's all "timing" in these markets.....and it looks like a great time to possibly exploit this. I could go on and on and on about why I think it's finally over with.
RIP real estate bubble!!!!
Of course I could be wrong........but Damn I've been PATIENT all these years!!
We'll see.
Any ideas out there?????
Rogue
Homebuilders stocks.....I think we've seen THE TOP in Real estate speculation.
I've created a personal portfolio page to follow any SHORT SELLING ideas in this area. I'll be looking at charts and trying to pick good low-risk entry points to set shorts.
I'm open to any ideas as to "profit" from LONG LONG LONG awaited "popping" of the real estate bubble.
I think the best news is all behind us FINALLY in this sector. It's all "timing" in these markets.....and it looks like a great time to possibly exploit this. I could go on and on about why I think it's over with.
RIP real estate bubble!!!!
Of course I could be wrong........but Damn I've been PATIENT all these years!!
We'll see.
Any ideas out there?????
Rogue
Forget the UK, Dr Murungaru, start heading east to China
By Dominic Odipo
The epicentre of our world is shifting. It is shifting from the great cities of Europe and North America to the new cities now rising in the People’s Republic of China.
It is shifting from London, Paris, Berlin, New York, Chicago and Washington DC to Shanghai, Beijing, Shenzhen and Nanjing. Events are occurring in China of such great magnitude that they boggle the mind. Like never before in history, the future of the whole world is being wrought by this giant of a country today home to more than one fifth of the entire human race.
From this point of view it makes little sense for Chris Murungaru, the Transport and Communications minister, to weep about being banned from British soil. In the emerging realpolitik and interessenpolitik — the politics of power and material interest — Britain will soon be history. In another 50 years, even the United States may have become history compared to the Middle Kingdom, this continent of a country in which modern civilization first emerged more than 5,000 years ago.
In his pace-setting and mind-boggling book, "China Inc.", American commodities trader and commentator, Ted. C. Fishman, has captured the emerging power of China as vividly and powerfully as no one else has yet been able to. Published only this year, "China Inc." is a fascinating and a must read for anyone trying to understand the world we shall be living in in the rest of the 21st Century. Mr. Ali Mwakwere, our foreign minister, should decree that every Kenyan Foreign Service officer reads this book for it does not matter where in the world you live today, China is at your door-step and your window-sill.
But first, a word about Wal-Mart, the American retail giant which is now the world’s largest company. To the Kenyan mind, Wal-Mart’s size and pace of growth over the last few years is hard to grasp. Like China, Wal-Mart shocks with its mere size. It is bigger than ExxonMobile, General Electric and General Motors and its annual sales now exceed those of its major rivals Target, Sears, Kmart, JCPenney, Safeway and Kroger combined.
Its 2003 sales, at US$260 billion matched the gross domestic product (GDP) of Switzerland, which will soon fall behind. About 14 million people shop in Wal-Mart stores everyday and its workforce of 1.4 million is the world’s largest for a private company.
What is the secret of Wal-Mart’s dizzy success? It the answer were to be reduced to one word, that word would be China. According to Fishman, perhaps up to 85 per cent of all the merchandise sold by Wal-Mart today is made in China. And China produces these goods at such rock-bottom prices and in such volumes that no other country in the world can be able to complete with it. It Wal-Mart were a nation, it would be China’s fifth largest export market, ahead of both Germany and Britain. Here-in lies the power, or the menace, of China. It is producing virtually everything at such low prices, with such quality and is such volumes that virtually no country in the world can compete with it. And it has so many people qualified and willing to work at such low rates that its competitive edge could last forever.
The country is home to about 1.5 billion people, about 1/5 of the entire human race. It has more people than the whole of Western Europe, the United States, Canada, Mexic and the whole of Central America combined. This makes it not only the world’s largest single market but also the world’s largest source of cheap labour. China has already become the world’s largest maker of consumer electronics and today pumps out most TVs, DVD players and mobile phones than any other country.
As Fishman puts it in "China Inc.": "China is ascending even higher still, moving quickly and expertly into biotech and computer manufacturing. No country has ever before made a better run at climbing every step of economic development all at once. No country plays the world economic game better than China. No other country shocks the global economic hierarchy like China."
Fishman continues: "Even a casual glimpse at the news tells us that something large is looming in China. The nation is making parts of Boeing 757s and exploring space with its own domestically built rockets. China has between 100 and 160 cities with populations of 1 million or more (America, by contrast, has 9, while Eastern and Western Europe combined have 36).
"China is buying oil fields internationally and also signing exclusive oil and gas supply deals with Saudi and Russian companies. China is buying the world’s scrap metal, as well as enormous amounts of steel, to fashion into products sold globally."
There are many other startling facts about China. Shanghai, its largest city and now also the biggest in the world, is building highways in the sky which are now the most advanced in the world. The Chinese economy has been growing at roughly 8 per cent per year for the last ten years, about three times the average growth rate of the American economy over the same period. This means that, given its vast potential, it is only a matter of time before China becomes the world’s biggest economy.
China currently consumes about 40 per cent of the world’s cement and 25 per cent of its steel. China’s economy has become so dangerously competitive that within only 20 years it could be able to manufacture everything at rock- bottom prices and thus make or break the economies of every nation on earth.
For Kenya, the implications of all this must be very clear. We need to shift our strategic focus from London, Paris and Washington to Shanghai, Beijing and Shenzhen.
We need to recruit some of our most intelligent young graduates, teach them the major Chinese languages including Mandarin and then send them to China to study this Chinese phenomenon and advise us on how to respond. Like Zimbabwe’s President Robert Mugabe, our leadership needs to focus on China right now or run the risk of being overwhelmed from so far way by an economic juggernaut that is already rolling over the whole world.
* The writer is a freelance journalist and consultant based in Nairobi
Rogue
Ruff....HQSM, I bailed on this one long ago because I didn't like the share dilution too.
I think it does go below .10 and that could be a good re-entry level. Tax loss selling later this year could create great oppurtunities at cheap levels to get long again for the future.
Rogue
Arnie70...what Canroys have you bought? Any specific comments are appreciated.
Rogue
Kozuh....Can you please post your complete list of Canroys? Any brief comments on each company would be great!
I own the 2 Amex listed ones. I'd like to follow them(the Canroys). They are technicaly "overbought" I am sure.....but make sense looking out a few years.
Rogue
Gold....it's pretty overbought and probably is due for a correction. I'm still long 2 Dec. 2005 futures with decent profits....after selling 2 yesterday with nice gains.
I've got my finger on the sell trigger if if feels like its rolling over next week.
It just might.
Rogue
NO....I'm the mighty roguedolphin!!
I've probably been doing the "Cramer" thing for longer than he has. I started dabbling in the markets in 1982.....so after battling and fighting wars in the markets for 23 years(CBOE,CBOT, Chicago Stock Exchange) you get a "feel" for major tops and bottoms and what not.
I think they've just about milked this building boom for everything it's got........it just might be time to "PLAY" the end of the real estate bubble.
Let me at Cramer!!!!!!!
Roguedolphin
I'm thinking of hedging my longs 100% with shorts in the major indexes.
I like my longs going forward(mostly OIL/GAS ,GOLD, Natural Resources, Chinese plays,etc.).....
but if the market gets "nasty" I want to hedge my picks.
My long portfolio should hold up better than the market but just in case I'm thinking of hedging it 100%.
Rogue
DING DING DING!!!!!! I'm ringing the bell here for the end of the building boom after all these years!!!
Fundamentally I believe all the "ducks are lined in a row" to put an end to the LONG LONG LONG building and housing boom.
Technically....look at those classic "bearish divergences" on the housing Index chart. New highs were "unconfirmed" by both RSI and stochastics.
Rogue
GOOG is starting to look tired......
we'll see.
Rogue
That's the most actively traded Gold future...December 2005.
Rogue
FA....sold 2 Dec. 2005 Gold futures today to "bag" some profits. Still long 2 contracts and not sure how I'm going to play it goin forward.
Stay tuned......
Rogue
Today's Analysis: Gasoline: $5 Per Gallon On The Way?
by Dr. Joe Duarte
8/4/2005
URL: http://www.rigzone.com/news/article.asp?a_id=24245
Five dollar per gallon gasoline is on they way. The Energy Information Agency, on 8-3 reported a 2.8% drawdown in gasoline supply, for the latest recording week, as it also reported record oil imports into the U.S. When supply swells, as it has been doing for the last several weeks, albeit at different places along the supply chain, it is usually a negative for the market. But, this market continues to defy logic, as traders continue to factor in shortages of fuel for the winter, as well as the potential effects of what is supposed to be a very deadly hurricane season, that will not be over until November.
Much of the worry now, has shifted to gasoline, and away from distillates, which includes diesel fuel, as well as heating oil. According to Marketwatch.com: ["The gasoline drawdown is devastating and, on top of all the new refinery problems, it sets up [retail] gasoline prices for well over $3 by summer's end," said commodities trader Kevin Kerr, who also edits the Global Resources Trader investment letter, a service of MarketWatch.]
Kerr's ultra scary pronouncements continued. Referring to the current price of unleaded gasoline, Kerr told Marketwach's Myra Saefong: " (The current price) shows the impact the hurricanes and all the refinery outages are having. Coupled with the announcement that MTBE will no longer be used in blending, gasoline is setting up to move to the next level of $4 and $5 a gallon long-term." And "any more new refinery problems or weather disruption will be all it takes to drive the whole complex higher," he said, adding that he thinks $65 for crude oil's front-month contract is now "imminent."]
But supply numbers tell a different story. According to Marektwatch: "Crude inventories climbed by 200,000 barrels to total 318 million barrels last week, according to the Energy Department, ending a four-week decline. They're now 7.7% above the year-ago level."
Indeed, crude imports are coming in at record pace: ["The third-highest [crude] import total ever of 10.95-million barrels [per day] suggests that talk about storm-induced interruptions in Mexican supply was just that," said Tom Kloza, chief oil analyst at the Oil Price Information Service."
The Refinery Issue
So what's the problem? As we've been saying for years, and as we noted in "Successful Energy Sector Investing," it's all about refinery capacity, and the bottleneck created by those limits, as well as the ever present perception that Iran and Iraq are going to be a major and escalating problem in the future, especially with a change in the Saudi power structure after the death of King Fahd.
According to the Wall Street Journal, though, refinery problems are not likely to go away. Instead of new refineries, "domestic refiners are investing in equipment that can process cheaper crude and overhauling their plants to meet clean-fuel mandates. That lack of new capacity could keep upward pressure on prices for gasoline, heating oil, jet fuel and other petroleum-based products."
Indeed, there is a list of reasons usually thrown around for the lack of new refineries being built. "U.S. refiners – are spending a total of $8 billion to bring their plants into compliance with the latest rules requiring reduced levels of sulfur in diesel beginning in 2006, says John Felmy, chief economist at the American Petroleum Institute. In all, Mr. Felmy says, the nation's refiners will spend about $25 billion from 2002 to 2012 to meet new low-sulfur gasoline and diesel standards. No new refinery has been built in the U.S. in nearly 30 years; capacity gains typically come from extensions to current facilities. In the U.S., many refiners remain reluctant to undertake major new projects for a variety of reasons, including public resistance, expected returns on investment and environmental regulations. Exxon Mobil Corp., for instance, warns against significantly expanding refining capacity for fear of a price collapse."
Conclusion
This is a demand market. Demand markets in commodities are like momentum markets in stocks. They always go on much longer than anyone expects them to. They seem as if they will never end. And when they finally crash, it takes several months for anyone to acknowledge that a bear market is under way.
If it sounds familiar, think back to December 1999, when the Internet stocks led the technology sector into the blowoff of a lifetime, only to crash and burn three months later.
At that time, nearly 100% of all investors bought into the notion that technology stock prices would rise forever, no matter what.
That's what we hear in the oil markets now. Peak oil is here. There are no refineries. China's economy is unstoppable. And gasoline is going to double in price with the next hurricane.
To be sure, many of those arguments, especially peak oil are worth noting, and indeed have some merit, at least partially, and when applied in the proper context.
But, just because all the oil that can be produced is being used up today, it doesn't mean that it will be the same way tomorrow.
At some point, supply is the major factor that affects prices. Unless, supply is truly about to run out, the usual supply-demand scenario will eventually play out. When it does, oil prices will fall.. For a long time, and to levels that no one is expecting them to.
As traders, though, we trade with the trend.
Oil Market Summary And Outlook: $60-62 Tight Trading Range
Oil futures were trading above $61 in the September contract overnight. Prices failed at new intraday records on 8-3, as buyers ran out of steam.
Rising crude supplies were not bullish enough to overcome a drop in gasoline inventories, leading some to call for $5 per gallon prices under the right circumstances.
Peak oil is gathering steam now as a hot topic. The Wall Street Journal is holding blog sessions on the subject. We found that interesting, given our frequent discussion on the Financial Sense News Hour with Jim Puplava radio show about peak oil. Puplava is a devout subscriber to the notion. We are less enthusiastic, but are not discounting it either, mostly adhering to the notion that the easy oil has been found and that oil prices are not likely to hit $11 anytime soon, with $40 being the new bottom in prices, at least in the next down leg, whenever that is.
Oil and oil service stocks again moved up with oil prices on 8-2, setting marginal new all time highs, but pulling back on 8-3.
Exxon can't get above $60, which makes us wonder how much conviction the bulls have on this market at this point.
We'll say it again. Nothing is etched in stone in the oil markets, especially during the mega bull market of all time, which is still unfolding. But, the action lately has been less than inspiring for the bulls. In other words, it's always possible that we've seen the top, at least on a short term basis. Our very long-term opinion on oil has not changed. We are still in a very long-term bull market in oil, until proven otherwise. The long-term line in the sand, for us, remains $40 per barrel.
The Philadelphia Oil Service Index (OSX) made all time highs on 8-2, but may be pressed to hold onto the lofty levels reached.
The Amex Oil Index (XOI) is testing the 950 area, after an all time high on 8-2.
In the Rigzone Store:
Successful Energy Sector Investing: Every Investor's Complete Guide
Dr. Duarte's book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.
Rogue
Are US companies to Bretton Woods 2 ...
Created: Aug 03 2005
What gold was to Bretton Woods 1?
http://www.rgemonitor.com/blog/setser/93653/
In the post war Bretton Woods system, the dollar was - at least in principle - fully convertible into gold at a fixed rate. In practice, after a certain point in the mid 1960s, the world's central banks held more dollars in reserves than the US held gold. The system was only sustainable so long as the world's central banks were willing to keep on adding to their dollar reserves with the full knowledge that not all of them could convert all their dollars to gold.
France was unwilling to go along with this deal - it did not like financing the United States "exorbitant privilege." Ironically, one of France's big complains was that the world's willingness to hold dollars at an inflated price let US companies buy up too much of Europe on the "cheap" ...
Germany (and Japan, I think) initially held onto their dollars even as France slowly shifted into gold. I think the deal for a while was that France could not convert its existing dollars into gold, but any incremental growth its reserves could be switched into gold. Eventually, the pressure got to be too great, the US suspended the convertibility of dollars into gold and the postwar Bretton Woods system of fixed exchange rates unraveled. For the full story, read this - and maybe this too.
Yesterday, it became 100% clear that the dollar is not freely convertible into US companies. That should have been obvious to those accumulating huge dollar claims on the US. The US was never going to let China convert its surplus dollars into control over US companies. But should have been obvious is not quite the same as 100% crystal clear.
The sustainability of the current Bretton Woods 2 system therefore hinges on the willingness of a set of countries to continue to accumulate "inconvertible" dollar claims on the US. Dollars that can be invested in Treasuries, agencies, mortgage backed securities or even high quality corporate debt. But those Treasuries and agencies cannot be traded for US companies.
That is the deal.
(more follows)
And so long as the countries providing the most financing to the US are not close friends and allies that is not likely to change. Right now, three of the biggest financiers of the US are China, Russia and Saudi Arabia. None are friends of freedom. None completely share US values. And the state plays a far bigger role in the economies (and particularly the financial systems) of each of these three countries than in say France.
That in a sense is the core irony of Bretton Woods two circa 2005. Setting Japan aside, the countries with the biggest current account surpluses and fastest growing reserves are not allies or democracies (Russia is perhaps more of a democracy but it is not an ally, Saudi Arabia is an ally of sorts but not a democracy). That helps to make the system sustainable in some ways. No elected representative will hold China's central bankers -- and their masters on the State Council -- accountable for the massive, leveraged and ultimately losing bet they are now making on the dollar. But in other ways, it hurts. China is not the UK. CNOOC is not BP. Or even Total.
CNOOC's bid was not just doomed by the loud noises coming from a Republican controlled Congress. As both the Wall Street Journal and the New York Times note, the Bush Administration did not exactly go to bat for CNOOC. It never told the Republicans in Congress to cool it. The congressman from Chevron - Richard Pombo - never got called to Dick Cheney's woodshed. The Bush Administration got the outcome it wanted: Chevron got Unocal, and CFIUS (The Committee on Foreign Investment in the US) did not have to make a formal ruling.
That said, CNOOC's claim that it is just another commercial oil company rings rather hollow. CNOOC may be more commercial than PetroChina and SinoPec. Its management may be more professional. And unlike PetroChina and SinoPec, it has not done deals with Iran and Sudan. That makes it a better partner for US firms leery of potential US sanctions against firms that do business with firms that do business with rogue states. But the simple reality is that no firm that gets dollar financing from its state owned parent (read the central bank, it holds the "state's" dollars) on as favorable terms as CNOOC is operating completely on its own.
Moreover, so long as the ultimate owner of CNOOC is sitting on what will soon be the world's largest cash stash, the commercial risk of extending it credit is close to nil. The close links between China's state, state-owned banks and state owned firms are a real issue. Chinese firms on the prowl - unlike the firms in other emerging economies - potentially have better access to dollar financing than even US firms ...
That is only one reason why the issues that CNOOC's bid raised will not go away. China's reserves were growing by over $20 billion a month (taking into account valuation effects) even before it adopted a messy compromise of an exchange rate regime that sure looks like an open invitation for further speculation. That's one Unocal a month.
At the end of 2005, China's cash horde - including reserves transferred to China's state banks - will be close to $950 billion. And that cash horde will - barring major shifts in China's exchange rate regime - be growing by $300 billion a year. Indeed, China's reserves could grow faster than that. The pace of China's reserve accumulation has gone up every year since 2002 - China's 2005 reserve accumulation will be almost twice its 2003 accumulation.
Those betting on the continuation of the Bretton Woods system are betting that by the end of 2008, China will be willing to hold something like $1850 billion of reserves, mostly in inconvertible dollars. And that the US will be willing to let China hold that large a claim on the US. China's dollar holdings (assuming a 65/35 reserve split) would by then be approaching 10% of US GDP, and 50% of China's GDP.
That may be a good bet. But it is no slam dunk.
They are betting that Fred Bergsten is wrong, and that there won't be "a serious economic clash" between the US and China this fall. Or that the clash won't derail China's willingness to keep adding to its reserves.
And don't even ask about the size of China's exports if 30% y/y growth continues til 2008, or even if China's export growth slows to just 20% ...
A viable international monetary system has to be politically as well as economically sustainable.
And just to be clear, if I were in Beijing sitting on China's State Council, assessing the world as it is rather than the world as I would like it to be, I would make that assumption that my euro reserves are just as inconvertible as my dollar reserves. If Danone is not for sale, neither is Total.
Rogue
PTN.....Female "Viagra"??? This could be a huge home-run for those that like some risk.
http://finance.yahoo.com/q/ta?s=PTN&t=2y&l=off&z=m&q=b&p=&a=ss&c=
Rogue
China.....how much will the Chinese currency appreciate against the US dollar? That could severely shorten the 20 year period as to when their economy is "larger" than ours.
The dollar depreciated about 90%(lost almost all it's purchasing power)against the Jap Yen in the 70's and 80's. THAT put their economy on the map. Remember when travel to Japan was cheap and goods were cheap just like in China now??? They "then" became famous for more than just their GODZILLA movies.....and if you want to tour Japan, take a "wheelbarrow" full of US dollars with you right now!!
The situation with China will be more upsetting than Japan ever was to our debt based "bubble" economy going forward.
Rogue
oildesk.....Gold stocks. I am currently quietly accumalating a couple of very low priced juniors trading in the pennies. I'm hoping to have several hundred thousand shares of these.
They are not really moving now or drawing "attention" to
themselves. But I believe they will all be trading above $1 when gold really starts moving next year. Huge profit potential in that area. When my "boat is loaded" I will divulge my gold specs.
I'm long several Dec. 2005 gold futures right now. I own NXG(one of my pick 6)..... GG, and NEM in the majors.
There are some very good stock pickers on this board that may have better ideas than I do in gold......that's why I'm long gold futures. I don't want to be right about gold and pick the wrong gold stocks.
Gold will be a real "zip-code" changer for those who understand the HUGE economic "sea-change" ahead and act on it NOW before the crowd "gets it".
Rogue
And the real kicker or "icing on the cake" is that those damn Koran reading "terrorists" are sitting on HUGE reserves of Oil!!
Go get 'em "Dubbyuu"!!!!!!
Rogue
MRothaus....the statement is NOT faulty, and if you knew the full extant of the problem it would "bother" you more.
China's economy is set for EXPLOSIVE growth on "currency adjustment" alone. If the Chinese currency "appreciates" as much as I think it will....and our US dollar "depreciates" as much as I believe it will....
....THEN.....
It won't be long until the Chinese economy is larger than our's!!!!!!!!!! Maybe 5 or 6 years??? Take a guess.
I'm taking the long-term "investment" view here.
I agree with Dalio in the article fairly much.
I'm currently long Gold and bullish long-term on Oil. Decent Chinese equities should do well also.
Of course a future "WAR" down the road with China would change everything.....LOL!!(maybe that's "Our" "EXIT" plan anyway.)
Rogue
Bipolar Disorder
Interview with Ray Dalio, Chief Investment Officer, Bridgewater Associates
By SANDRA WARD
WHEN YOU MANAGE NEARLY $120 billion in institutional assets and your hedge fund provides consistent returns of about 15%, after fees, on average, every year for nearly 16 years running, who wouldn't want to hear your views on the economy? Dalio, founder of Westport, Conn.-based Bridgewater Associates, has built an organization renowned for its penetrating analysis of world markets and its ability to seize investment opportunities among different asset classes, particularly the credit and currency markets. Clients gain access to Bridgewater's latest thinking on global markets through the firm's Daily Observations newsletter. We thought you might like to get the scoop straight from the horse's mouth.
Barron's: What's your outlook for inflation?
Dalio: I think inflation is gradually trending higher. It won't emerge as a threat probably until late 2006. World economies are late in the economic cycle, and there are not the same excesses there used to be. The dollar will go down a lot and commodity prices will go up a lot. There is a structural surplus of labor and there's disinflation from labor and manufactured goods and productivity, but commodity inflation will offset that. The rate at which this will occur will be gradual at first, and as we get later into 2006 we'll have run out of slack and there will be more of a depreciation in the value of the dollar and more appreciation in commodity prices and the Fed will lag that move. Real rates will be relatively low.
You're not concerned the Fed tightens too much?
No, I don't believe they will tighten too much. Rates will continue to rise and the Fed will continue to tighten, but their moves will lag the forces of positive economic growth, a declining dollar and rising commodity prices. The Fed is looking at general inflation, and that will rise slowly. The economy is growing at a moderate pace, and so any tightening will be comparatively slow and modest. The balance- of-payments issue is a major issue, but it is not going to be a major problem this year. This year will be the first attempt to remedy the problem, but what is going to happen is our balance-of-payments position is going to worsen a lot. In 2005, 2006 and 2007 we are going to see our current-account deficit go from 5½% to 6½% to 7½% of gross domestic product. Our need for foreign capital is going to continue to grow at the same time that China's desire to buy our bonds -- and Japan's to some extent, as well -- will diminish. China's desire to have an independent monetary policy will be a driving factor. But there is a bipolarity in the world: The mature industrialized countries are in relative stagnation, and the big reason the U.S. is growing faster than most of other countries is because we are being lent capital. We are substantially dependent on foreign lending.
To put that in perspective, we import about 65% more than we export. Then there are the emerging countries. These countries, with their economic booms, are running current-account surpluses and are net lenders to the developed world. This is a very, very healthy set of circumstances. Emerging countries are using their capital to pay down their debts, and they are buying the U.S. Treasury bonds to hold their own currencies back. There is a very favorable structural shift in wealth to developing nations. We are very, very bullish on emerging countries, particularly Asian emerging countries and their currencies. Fundamentally, though, you have to ask yourself whether the ties between us and the emerging countries that are buying our bonds will last. It doesn't make sense. The balance-of-payment situation reminds me very much of the Bretton Woods breakup in 1971.
When we came off the gold standard?
Yes. What we had then was a fixed-exchange-rate system. Japan then was very similar to what China is now in terms of per-capita incomes and growth rate. Japan was emerging from a post-World War II economy that was dilapidated. Japan and Germany acquired very large surpluses. They believed the U.S. dollar was a credible exchange rate and they needed stability from that, and so we borrowed and overconsumed until the price of the exchange rate was out of line. They had to buy lots and lots of bonds, and when you buy bonds, you have to print money to do that. So Japan and Germany had to stimulate their economies and then they wanted to slow their economies, just like China today.
China has an overheating economy, and because of its fixed exchange rate, it has to produce more money supply. For a country like China to tie its monetary policy to a country like the U.S. doesn't make any sense. One is growing at a 9% real rate, the other is growing at 3%, if it's lucky.
But aren't we beginning to see signs the Chinese want to wean themselves from that system?
Yes. You are seeing signs of the crack. What they want to do is keep everything calm and orderly, just like Japan in the early 'Seventies. There'll be some minor adjustment at first, but the minor adjustment won't change anything. Let's say they revalue their currency by 5%, or even 10%. That won't structurally change anything. U.S. per capita income is about 30 times what it is in China. But by 2006, China will revalue more aggressively. That makes the dollar situation very bearish. I don't think the dollar can rally much beyond this point because so much of the buying of dollars is to prevent it from going down. If the dollar goes up, the central banks are going to buy fewer dollars, and whatever demand exists to help push the dollar up will be offset by fewer dollars being purchased. The only way the dollar can sustain a major move is if there were true demand for dollars, free-market demand to buy dollar-dominated assets.
Are you short the dollar?
We are long the yen against the dollar, and we are particularly long emerging-market currencies against the dollar. But we are short the euro against the dollar.
When did you start shorting the euro?
Last December because of Europe's economic stagnation. We have built up the position since. When you look at the dollar, the yen and the euro, it's an ugly contest. They're all pretty ugly. What we are long against the dollar are either commodity exporters such as the Australian dollar or emerging-market currencies. I like emerging-market currencies because their central banks have been artificially holding their currencies back. In a normal cycle in emerging markets, there's a bust, then they maintain an easy monetary policy, and then they have accelerated growth. That is very good for equities, and their equity markets at those stages of the cycle tend to do very well. But they artificially hold their currency down, because they are afraid that if the currency were to appreciate, they would lose their competitive position. They build up big reserves.
Once they are past a certain part of the cycle, these countries typically buy fewer foreign bonds and let their currencies appreciate. Now, increasingly, emerging-market countries are going to let their currencies appreciate. It is very similar to my Bretton Woods comparison: Germany and Japan had big balance-of-payments surpluses, but it was France that first broke ranks with the United States. The French basically said, "Give us the gold instead of checks for gold." Now Korea, in particular, but other Asian countries as well, are beginning to change their reserve mix away from dollars.
What are they turning to?
They're buying more euros and more gold. Gold is going to play a much bigger role. Only 2% of Chinese reserves are in gold. There is a saying that gold is the only asset you can have that isn't someone else's liability.
What's your view on oil?
In late 2006, I think you could see oil over $100. Whenever we've had oil shocks, it's because we've reached capacity, and we are at capacity in refining and extraction. When we look at each country's projections of oil consumption, we find we're consuming at a rate faster than it can be produced.
Yet the industry itself doesn't seem overly concerned, and there's not been any rush to reinvest in the business.
It is very interesting to me because forward oil prices are higher than they've ever been. Usually in an oil shock, spot prices rise and you could almost understand oil companies' not making any investments because the forward prices don't support the spot price. Yet now the forwards have risen materially. I don't understand the industry's behavior, but I think it is part of the cycle.
When a major bull market that goes on for many years starts to reverse, in the initial stages of the turn everybody is looking for the bull market to come back. As with tech stocks. As with gold. Then it goes so much the opposite way that everybody gives up on the story. No one holds any inventories and everybody, in a sense, is short or forward-hedged. That creates the ingredients for the market to move the other way.
These moves now, whether it is gold or oil or commodities, are probably somewhere between 60% and 70% done in general. This is a pause. It is also the time when sentiment changes and readjusts. Then the question is, What is the supply-demand picture going forward? In order to be bearish on commodities, you'd have to be bearish on growth in those countries that are consuming the commodities.The question for commodities is really a consumption question, and we have to assume that the machine doing all the consuming will be forced to slow down. In China's case, I don't believe they are going to slow down. China is overheating and there's the risk of more overheating. As I said before, I think you are going to see very strong commodity prices and disinflationary pressures from labor and manufactured goods causing a gradual upturn in inflation until the world is in its next recession, and that doesn't seem to be a prospect for 2005. It is not much of a risk until late 2006.
With the flattening of the yield curve, a lot of people have been concerned about a recession.
I'm not worried about it. I don't think there has been enough of a tightening through the existing rate structure to cause a recession. The magnitude of interest-rate changes that would be required to cause the economy to slow is about a 4¼% fed-funds rate and about 5½% on the 10-year bond.
How do productivity and employment growth factor into your outlook?
Productivity growth has been following a typical cyclical path but at a significantly higher level. Payroll employment is following a path similar to its historical cycles, but it is much lower. That is a structural difference that is good for businesses and bad for employees.
CHART
But shouldn't productivity growth slow and hiring pick up?
The causes of that productivity growth are going to be with us a while. In the bubble years, corporations invested a lot in plant and equipment. It is paying off. Secondly, there's a surplus of world labor.
There are three basic things that make up an economy: labor, natural resources and capital. There's been a vast increase in the supply of labor. The pricing of labor in China is holding down the pricing of labor in the United States. The world's supply of labor quadrupled with China coming into the market. It's had a big, big effect. The relatively cheap cost of labor helps productivity. Productivity comes partially from investing in plant and equipment but partially from keeping labor cheap. Those two factors are secular changes. That's why profit growth has been stronger, not because top-line revenue growth has been better; profit margins have been better because of lower labor costs.
Are the high profit margins sustainable? Or will they revert to the mean?
Nothing necessarily reverts to the mean. They may not increase, but they are not likely to decrease because we have this world supply of labor and world supply of equipment. And the complexion of workers is changing. Do you know that 44% of all corporate profits in the United States comes from the financial sector -- people who are shuffling money around? Only 10% comes from those who manufacture things. We are living in a two-tiered economy, and you are on one side of it. You write for Barron's. You are in the financial community. There is that economy. Then there is the person on the assembly line.
In this business cycle, real GDP growth will follow the average; interest rates will follow the average; productivity will follow the average, but move up a notch; employment will follow the average but fall a notch. The main reason for that is: China and India and other emerging countries are changing the balance of supply-demand in labor. They are also changing supply and demand for capital through their foreign exchange interventions.
They add all the surplus of labor and they consume all the commodities, so that means a lot of demand for commodities at the same time there is a lot of surplus of labor.
Another important secular change is the amount of U.S. debt. Because we have a lot of debt, smaller increases in interest rates will shut off the economy more quickly. Debt-service payments are what drive the economy. Individuals don't care about how much debt they have, and the interest rate itself really doesn't matter.
What matters is the monthly payment on the debt. That is true for businesses, too. Because we have much more debt in the economy, it requires less of a rise in interest rates in order to shut off the expansion.
Bond yields bottomed in May of 2003 at 3.38%, and we are going to have an interest-rate increase that will be less than what we are used to -- something like 2¼% -- to cause a cyclical peak in the bond yield at around 5½% to 5¾%.
You've talked about your currency bets, but where else are there opportunities?
We have big spread positions: Essentially, we are long European bonds and Japanese bonds even though interest rates are very low. Against that, we have short positions in U.K. 10-year gilts and U.S. Treasury bonds.
In other words, I don't like U.S. bonds compared with European or Japanese bonds.
I'm long inflation-indexed bonds in relation to nominal bonds. We are long commodities. Oil is my favorite, but I also favor gold and copper.
Commodities will peak when they tighten monetary policy. A lot of people think the recessions after oil shocks in the past were caused by high oil prices. They weren't. They were caused by the tight monetary policies that the central banks employed to fight inflation.
If you examine the amount of oil consumption and how much money was actually taken out of pocket as a percentage of disposable income, it was very small -- amounts equivalent to .8% of disposable income.
We are not used to the fact you can have big commodity moves without having big inflation. I'm a big commodity bull, but I'm not a super inflation bull because I believe that the surplus of labor and productivity changes will negate most of the price rise in commodities.
What about equities?
I'm slightly long equities.
More so in one part of the world versus another?
I'm particularly long Australian and Canadian equities.
Countries benefiting from a commodity boom.
Right. I'm still long small amounts of European equities. In the U.S., I'm very slightly short against very small long positions. The way we look at a position is to look at an outright spread. So I like foreign markets relative to the U.S. market.
That gives me a little bit of a short position, just because I like the others better. We're slightly positive on almost all the equity markets with the biggest equity exposure in Australia.
On a totally different subject, let me add here that there is a revolution going on in how money is being managed. There's going to be a shift away from traditional investing, and traditional investing favors equities most. There are going to be major net flows away from equity markets over the next number of years. Money will go to bonds to some extent and to nontraditional investments, but it will be at the expense of equities.
Thanks, Ray.
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"Do you know that 44% of all corporate profits in the United States comes from the financial sector -- people who are shuffling money around? Only 10% comes from those who manufacture things."
Wow. I wonder what this statistic is for other countries, and what is the historical curve in the USA and elsewhere.
Laurent
Posted by: guerby / July 31, 2005 03:25 PM
Great post, thanks.
BTW, the link to the article is not working
Posted by: Ray / July 31, 2005 06:46 PM
Excellent article!
A: “Fundamentally, though, you have to ask yourself whether the ties between us and the emerging countries that are buying our bonds will last. It doesn't make sense.” So true.
B: “Another important secular change is the amount of U.S. debt. Because we have a lot of debt, smaller increases in interest rates will shut off the economy more quickly.” Already the ratio of interest payments to personal income is at an all time high. A substantial rise in interest rates will cause this ratio to soar.
Note that A and B are reinforcing. This is a very unstable situation.
Posted by: touche / July 31, 2005 11:24 PM
Rogue
Len....there is some sort of "agenda" going on here. Just look deeply into the 9/11 tragedy in New York and the recent London bombings.
Here's a good site for some DD on those issues....
http://www.infowars.com/
My fear is that we ARE heading into an "Orwellian" Police State by design.....and there are some who would view that as "Utopia".
I've often thought that the final staw would be a qoute/unqoute "terrorist" nuclear attack on Washington DC with and/or a financial collapse of our economy/currency.
I could get really "deep and esoteric" here.... but if an "emergency" government ever "rises out of the ashes of destruction" in Phoenix, Arizona.....I wouldn't be the least bit surprised.
As it's a long-term plan in this struggle for a "New World Order".
You might also want to familiarize yourself a little with the very intensive research done by William Cooper on the "Mysterie's". He was "assassinated" shortly after 9/11.
http://www.hourofthetime.com/ .....his old site.
Rogue
Gold....I wouldn't be surprised to see over $500 by the end of the year.
I'm currently long 4 Gold Dec. 2005 futures. I'm planning on adding as I have profits("pyramidding").
This run I see in Gold could rival the Oil move from $27 per barrel to $62 per barrel that we have just seen in the last 1 1/2-2 years.
Rogue
Oil... The life blood... "The Prize"
Richard Russell
Dow Theory Letters
Aug 2, 2005
http://www.321energy.com/editorials/russell/russell080205.html
Extracted from the July 29, 2005 edition of Richard's Remarks
July 29, 2005 -What are the two most important questions of the day, the week, the month and the year? The two are -- the price of oil, and the interest rate on the bellwether 10 year T-note.
The life blood of the world economy today is oil. Oil is "The Prize." Yesterday I showed a daily chart of oil, and the daily chart showed a potential "head-and-shoulders" top, but I emphasize the word "potential." A top is not a top until it proves itself by breaking down.
Today I am showing a point & figure chart of oil, and here the boundaries are clear and decisive. On the P&F chart below oil most recently gave a bullish signal in July. That month saw oil rise to the 62 box. Next came a corrective row of 0s down to the 57 box. Most recently, oil has climbed back to the 60 box. It will take a rise to the 63 box to reconfirm the bullish trend of oil. For a bearish reversal, oil would have to decline to the 55 box.
This is what is so interesting -- the upside target or "count" for oil is now 83.
Gasoline is selling for anywhere from 2.60 to 3.00 here in San Diego. But that hasn't stopped the endless miles of cars on our freeways. Traffic in La Jolla is the worst I've ever seen it. Cars, SUVs, hot sports cars, trucks, they're everywhere. If gas over 2.60 has put the brakes on driving, I haven't seen any evidence of it here in San Diego.
But, I wonder, what if the P&F target comes to pass? What if oil goes over 70, then over 75, then over 80, and the price of gas rises to 3.75, 4.00 or even higher? Will that put a clamp on the US economy as millions of car people decide that they have to "cut back somewhere in their spending?"
I honestly don't have the answer, but it's a thought that's on my mind. Therefore, we'll keep our eye on "the prize," which is oil.
There are a number of puzzling things about the oil picture. One is the varied performances of the oil companies. Some are doing great, going to new highs -- APA, SUN. MRO, BR. But the biggies like XOM, RD, CVX, are lagging. What's with the biggies? Are they running out of reserves? Are their reserves in politically dangerous areas? It's really a puzzle. Oil at a record high and Exxon and Chevron lagging?
lots more follows for subscribers...
Richard Russell
Dow Theory Letters
©Copyright 2005 Dow Theory Letters, Inc.
Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
He offers a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $250, tax deductible if ordered through your business).
Rogue
EGY....there is a nice daily chart uptrend line that has not been violated yet.
Unless we close below $4.25 in the next few days I think we may still see new swing highs to at least $5.25 or so. Just my gut feeling here after the recent "profit-taking".
Still holding long until $4.25 is violated right here or the "uptrend" line is violated going forward in the future.
Rogue
Gold...I'm currently long a few futures contracts from about $425.
"Just in case" we don't get the selloff to $400 or below....I wanted some exposure.
I'm planning on adding contracts if the price goes my way(up at the moment!)...if anything and I'm wrong I hope to "scratch" the trade.
It's going to be a "long campaign" to the upside in Gold the next few years IMHO.
Rogue
21st Century Gold Rush
(How High Can Gold And Silver Stocks Go?)
Aubie Baltin CFA, NFA, Phd.
Back in the late 1970's, the lineups to buy gold were reminiscent of people waiting to buy Stanley Cup Hockey tickets at the Montreal Forum. They stood in their jeans, ski jackets, bulky sweaters, construction boots and business suits and coats. They ranged in age from their early teens to their late 90's; Waiting for hours on end, to buy Gold. The analysts and economists cited a litany of reasons to explain the new gold rush. Gold prices, a barometer of political and economic fears as well as finally hit a record $850 an ounce on January 3, 1980. But in reality, the only important factor was simply that prices were skyrocketing. Anybody who was in was making money, not as much as they claimed but making money nevertheless and everyone else was afraid of being left behind. Gold was selling for $250 when 1979 began. Later, amazed at the sudden surge above $700, gold devotees began to think $1,000 + some even thought $5000 or even $10,000 was possible. The rocketing prices even startled the experts and frighten the analysts who had forecast a precious metals boom. Newspaper reports and articles on gold and silver in late 1979 and early 1980 were all front page stuff. Articles such; "Industrial users worried about prices," "Silver soares even faster than gold", "Canadian traders say silver's popular", "Gold stocks look even better," "Ottawa won't announce timing of gold sale," were everywhere. Although we are probably years away from any newspaper articles of this sort, I expect that by the end of this decade there will be similar news stories around the world.
I have focused on gold and silver stocks to see were they might be going in the next 3-5 years, by going back in time to the 1970's and to see what happened back then when gold first hit $500 then $600 then $700 and finally $850. I started my research by going to the library to look at newspapers from the 1970's, and WOW did I find some amazing things!! The Library that I went to had the Financial Post newspapers on microfilm all the way back to 1972, the very beginning of the last gold and silver Bull market. There were very few articles when gold moved from $31 in1972 to $200 by 1976, and hardly anybody noticed when Gold dropped back down to $100 in late 1976. The plethora of stories didn't even begin to get published until late 1978-79 and they didn't hit the front page until December 1979 into January of 1980 the final blow off top. The stock tables that I found was absolutely amazing.. In 1975 most gold and silver stocks were trading at under $2 and a lot were penny stocks under $0.50. Even with gold up 600% from the 1971 low of $32 to the 1975 top of $200 most gold and silver shares did little to make anyone wake up and take notice. I worked for Dominic & Dominic at the time and the President was one of the Biggest Gold Bulls who became famous for going to Japan to sell them Gold. I held a few seminars in an attempt to push Gold stocks as well as Bullion getting an order was like pulling teeth. It was not until gold retraced the first big sell-off back above $200 did the gold and silver stocks start there historic bull market that would end at un-imaginable prices.
Some examples were: Lion Mines - 1975 price $0.07 / 1980 price $380 YES that's right it's not a misprint you could of bought 10,000 shares of lion mines in 1975 for around $700 dollars and if you held on for the whole 5 years January 1980 you could have netted a total profit of around $3,799,300. Not bad hey!!!!! A few others were Bankeno - 1975 price $1.25 / 1980 price $430. Wharf Resources - 1975 price $0.40 / 1980 price $560. Steep Rock - 1975 price $.93 / 1980 price $440 Mineral Resources - 1975 price $.60 / 1980 price $415 . Azure Resources - 1975 price $0.05 / 1980 price $109.
No question about it, that was one of the biggest financial opportunities in history. I don't know of any other time in history, not even the dot.com bubble where in only a 5 year time span you could have turned so little money into so much wealth. "You only need to make one good investment decisions in your whole life to be super successful". I believe we are now at that same juncture as we were in 1976-78, but only this time the fundamentals are even better for gold and silver than they were back then. The similarities between the 1970s and today are uncanny. See if you can find a copy of James Dines prophetic classic "The Invisible Crash" known then as the "Gold Bugs Bible". The book is basically a documentary case study of the stock and gold markets of the 1960's to mid 1970's. The things that Mr. Dines wrote about back then could have easily been written last week or talked about on MSNBC yesterday. Here are a few quotesA full-fledged panic away from paper money could start at any moment". Or how about this nice quote. "When people see gold and silver standing alone amidst the economic ruins, they will realize that we gloom and doomers were actually right". "Hopefully, eternal optimists will pay more heed to warnings the next time around". or "Too much paper has been printed in the past, and will have to be wiped out no matter what." "People say gold is useless. Not true. It is demonstrating its function right now for all to see. Gold is the ballast for the monetary printing press and gold will relentlessly punish all offenders" The list of timeless quotes goes on and on but I will leave you with one last quote that is very relevant to today's problems in the U.S dollar and the so called economic rebound. "It beginning to dawn on some people that to defend the dollar and avert a dollar crisis, U.S interest rates will have to go up; or money will be transferred from the U.S to England, Europe, Australia Japan or Canada to take advantage of higher interest rates and stronger currency, . However, if interest rates go up sharply it will choke off our recovering economy. What a dilemma!" The similarities between now and then are simply uncanny. All of these quotes tell the real story of why gold (and silver) were so important throughout history and that history always repeats it's self. These quotes are the real fundamental cornerstone of why gold is in a bull market today and why the current rally in the general equity markets is only a bear market rally based on 45 year low interest rates, (that can't last), several tax cuts and the FED flooding the world with fiat dollars!!.
Now that the Fed is being forced to raises interest rates, to save the dollar among other reasons; the stock markets, bond markets, housing markets and credit markets and finally the oil market will, shortly implode once their respective breaking point are reached. For your own information I recommend you read "The Dollar Crisis" By Richard Duncan. If you want to know why gold and silver will explode in value you must have the information in this book. Here is one example "Balance of payments deficits of an unprecedented magnitude have resulted in credit induced economic over heating on a global scale. The foundations for sustainable economic growth will not be restored until this flaw is corrected and the U.S. trade deficit ceases to flood the world with U.S. dollar liquidity. The only way to stop the coming decline in the U.S. dollar is for the FED to raise interest rates. But if they raise rates they will cause a simultaneous crash in multiple markets (stock, bond, housing, credit). Only gold and silver and the companies that take it out of the earth will prosper in this environment, no matter what the FED does. Greenspan has painted himself into a corner that I believe he will not be able to get out of. Investing in gold and silver shares and the physical metal now and holding them for the next 3-5 years could be the only major financial decision you may ever have to make in your entire life. No need to trade in and out. Just buy a basket of gold and silver stocks now or on any temporary sell-offs and wait until you see headlines in the newspapers similar to the one that I opened this essay with. Or scale into any precious metals mutual fund. Remember, when that front page story which ran in January 1980, most gold and silver stocks were trading over $50 per share and lots were trading over $100 -$200 some even as high as $500 per share when only a few years earlier you could have bought the same stocks quietly for under $1. As of now I don't know of even one gold or silver stock that is anywhere close to trading at over $100 per share.
I know it's hard for most people to think that gold and silver will surpass their old January 1980 highs of $850 for gold and $56+ for silver, but that is what a 20+ year generational bear market will do to a whole new age of investors who have grown up with falling real assets (gold, silver and commodities) and rising paper assets (stocks and bonds). When the tide of human emotion swings and paper assets really start to fall hard the lust and fervor for real assets will be unbelievable. The Dot.com bubble will look like small potatoes compared to some of the up coming gains in the first gold and silver bull market of the 21st century.
But unlike the Dot.com bubble that was based on easy financing, unrealistic dreams of profits aggressive accounting and pure greed, the coming explosion in gold and silver stocks will be all about supply and demand and a object FEAR to protect one's savings from paper destruction combined with GREED to get in on a sure thing. When the entire world wants a piece of the gold and silver bull market there will only be a relatively very limited supply of shares, so they will have to be bid them up to unthinkable levels.
TOTAL EQUITY OF ALL GOLD STOCKS combined is less that the total equity of IBM. It is estimated that their are over $2 Trillion in hedge Funds alone (not counting Leverage). Can you imagine what happens if suddenly they wake up and begin a rush to Gold.. The gold and silver stock sector is very small compared to the bond and stock markets and it won't take much buying to push these stocks into the stratosphere. I am sure that most of you have friends that can't name even one Gold stock; But I'm also sure that in 3-5 years they will be touting you about the latest hot gold new issue out of Vancouver, even though they don't know where Vancouver is.. That will be the first major sign that the top is near.
I firmly believe that the opportunity in gold and silver and the companies that mine them may be presenting a once in a lifetime opportunity, where even a modest investment today could change your financial destiny.
NEAR-TERM OUTLOOK
Plain and simple; Gold Shares usually lead Gold Bullion both up and down. Check out their respective Charts. Gold Shares look to me like they have already bottomed and have begun the first leg of the next stage of the ongoing Bull Market. While Bullion is still in its consolidation phase, it's nearing completion of what in my opinion, using Elliott Wave analysis, is a declining a,b,c,d,e, wave (4) triangle. My best guess is that the low (if it has not already been made) will be in the $410 to $420 area, You can wait for a confirmed low in Bullion if it will make you feel more comfortable, as long as you are prepared to pay 20% to 50% more for your favorite gold stocks, once Gold Bullion breaks out to new recovery highs. It takes guts to stand alone against the crowd, but that's what you have to do if you want to buy low. Who among you can really expect to do better than to get in within 5%- 7% of the beginning of the next major move? However since we are still very early into the biggest GOLD BULL MARKET to come in history and if sleeping better is more important to you, than wait for Bullion's conformation of its resumed bull market and then buy. BUT do not let buying the stocks at new breakout highs stop you. Just treat them like Investors Business Daily has been treating new breakout highs for the last ten years.
THE TRIGGER
We can never know until after the fact what triggered the recession/depression. Is it possible that the idiot Schumer goaded China into cutting off its nose to spite its face, and begin the process of the collapse of both the US $ and the worlds economy?
Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
aubiebat@yahoo.com
561-840-9767
22 July 2005
Rogue
21st Century Gold Rush
(How High Can Gold And Silver Stocks Go?)
Aubie Baltin CFA, NFA, Phd.
Back in the late 1970's, the lineups to buy gold were reminiscent of people waiting to buy Stanley Cup Hockey tickets at the Montreal Forum. They stood in their jeans, ski jackets, bulky sweaters, construction boots and business suits and coats. They ranged in age from their early teens to their late 90's; Waiting for hours on end, to buy Gold. The analysts and economists cited a litany of reasons to explain the new gold rush. Gold prices, a barometer of political and economic fears as well as finally hit a record $850 an ounce on January 3, 1980. But in reality, the only important factor was simply that prices were skyrocketing. Anybody who was in was making money, not as much as they claimed but making money nevertheless and everyone else was afraid of being left behind. Gold was selling for $250 when 1979 began. Later, amazed at the sudden surge above $700, gold devotees began to think $1,000 + some even thought $5000 or even $10,000 was possible. The rocketing prices even startled the experts and frighten the analysts who had forecast a precious metals boom. Newspaper reports and articles on gold and silver in late 1979 and early 1980 were all front page stuff. Articles such; "Industrial users worried about prices," "Silver soares even faster than gold", "Canadian traders say silver's popular", "Gold stocks look even better," "Ottawa won't announce timing of gold sale," were everywhere. Although we are probably years away from any newspaper articles of this sort, I expect that by the end of this decade there will be similar news stories around the world.
I have focused on gold and silver stocks to see were they might be going in the next 3-5 years, by going back in time to the 1970's and to see what happened back then when gold first hit $500 then $600 then $700 and finally $850. I started my research by going to the library to look at newspapers from the 1970's, and WOW did I find some amazing things!! The Library that I went to had the Financial Post newspapers on microfilm all the way back to 1972, the very beginning of the last gold and silver Bull market. There were very few articles when gold moved from $31 in1972 to $200 by 1976, and hardly anybody noticed when Gold dropped back down to $100 in late 1976. The plethora of stories didn't even begin to get published until late 1978-79 and they didn't hit the front page until December 1979 into January of 1980 the final blow off top. The stock tables that I found was absolutely amazing.. In 1975 most gold and silver stocks were trading at under $2 and a lot were penny stocks under $0.50. Even with gold up 600% from the 1971 low of $32 to the 1975 top of $200 most gold and silver shares did little to make anyone wake up and take notice. I worked for Dominic & Dominic at the time and the President was one of the Biggest Gold Bulls who became famous for going to Japan to sell them Gold. I held a few seminars in an attempt to push Gold stocks as well as Bullion getting an order was like pulling teeth. It was not until gold retraced the first big sell-off back above $200 did the gold and silver stocks start there historic bull market that would end at un-imaginable prices.
Some examples were: Lion Mines - 1975 price $0.07 / 1980 price $380 YES that's right it's not a misprint you could of bought 10,000 shares of lion mines in 1975 for around $700 dollars and if you held on for the whole 5 years January 1980 you could have netted a total profit of around $3,799,300. Not bad hey!!!!! A few others were Bankeno - 1975 price $1.25 / 1980 price $430. Wharf Resources - 1975 price $0.40 / 1980 price $560. Steep Rock - 1975 price $.93 / 1980 price $440 Mineral Resources - 1975 price $.60 / 1980 price $415 . Azure Resources - 1975 price $0.05 / 1980 price $109.
No question about it, that was one of the biggest financial opportunities in history. I don't know of any other time in history, not even the dot.com bubble where in only a 5 year time span you could have turned so little money into so much wealth. "You only need to make one good investment decisions in your whole life to be super successful". I believe we are now at that same juncture as we were in 1976-78, but only this time the fundamentals are even better for gold and silver than they were back then. The similarities between the 1970s and today are uncanny. See if you can find a copy of James Dines prophetic classic "The Invisible Crash" known then as the "Gold Bugs Bible". The book is basically a documentary case study of the stock and gold markets of the 1960's to mid 1970's. The things that Mr. Dines wrote about back then could have easily been written last week or talked about on MSNBC yesterday. Here are a few quotesA full-fledged panic away from paper money could start at any moment". Or how about this nice quote. "When people see gold and silver standing alone amidst the economic ruins, they will realize that we gloom and doomers were actually right". "Hopefully, eternal optimists will pay more heed to warnings the next time around". or "Too much paper has been printed in the past, and will have to be wiped out no matter what." "People say gold is useless. Not true. It is demonstrating its function right now for all to see. Gold is the ballast for the monetary printing press and gold will relentlessly punish all offenders" The list of timeless quotes goes on and on but I will leave you with one last quote that is very relevant to today's problems in the U.S dollar and the so called economic rebound. "It beginning to dawn on some people that to defend the dollar and avert a dollar crisis, U.S interest rates will have to go up; or money will be transferred from the U.S to England, Europe, Australia Japan or Canada to take advantage of higher interest rates and stronger currency, . However, if interest rates go up sharply it will choke off our recovering economy. What a dilemma!" The similarities between now and then are simply uncanny. All of these quotes tell the real story of why gold (and silver) were so important throughout history and that history always repeats it's self. These quotes are the real fundamental cornerstone of why gold is in a bull market today and why the current rally in the general equity markets is only a bear market rally based on 45 year low interest rates, (that can't last), several tax cuts and the FED flooding the world with fiat dollars!!.
Now that the Fed is being forced to raises interest rates, to save the dollar among other reasons; the stock markets, bond markets, housing markets and credit markets and finally the oil market will, shortly implode once their respective breaking point are reached. For your own information I recommend you read "The Dollar Crisis" By Richard Duncan. If you want to know why gold and silver will explode in value you must have the information in this book. Here is one example "Balance of payments deficits of an unprecedented magnitude have resulted in credit induced economic over heating on a global scale. The foundations for sustainable economic growth will not be restored until this flaw is corrected and the U.S. trade deficit ceases to flood the world with U.S. dollar liquidity. The only way to stop the coming decline in the U.S. dollar is for the FED to raise interest rates. But if they raise rates they will cause a simultaneous crash in multiple markets (stock, bond, housing, credit). Only gold and silver and the companies that take it out of the earth will prosper in this environment, no matter what the FED does. Greenspan has painted himself into a corner that I believe he will not be able to get out of. Investing in gold and silver shares and the physical metal now and holding them for the next 3-5 years could be the only major financial decision you may ever have to make in your entire life. No need to trade in and out. Just buy a basket of gold and silver stocks now or on any temporary sell-offs and wait until you see headlines in the newspapers similar to the one that I opened this essay with. Or scale into any precious metals mutual fund. Remember, when that front page story which ran in January 1980, most gold and silver stocks were trading over $50 per share and lots were trading over $100 -$200 some even as high as $500 per share when only a few years earlier you could have bought the same stocks quietly for under $1. As of now I don't know of even one gold or silver stock that is anywhere close to trading at over $100 per share.
I know it's hard for most people to think that gold and silver will surpass their old January 1980 highs of $850 for gold and $56+ for silver, but that is what a 20+ year generational bear market will do to a whole new age of investors who have grown up with falling real assets (gold, silver and commodities) and rising paper assets (stocks and bonds). When the tide of human emotion swings and paper assets really start to fall hard the lust and fervor for real assets will be unbelievable. The Dot.com bubble will look like small potatoes compared to some of the up coming gains in the first gold and silver bull market of the 21st century.
But unlike the Dot.com bubble that was based on easy financing, unrealistic dreams of profits aggressive accounting and pure greed, the coming explosion in gold and silver stocks will be all about supply and demand and a object FEAR to protect one's savings from paper destruction combined with GREED to get in on a sure thing. When the entire world wants a piece of the gold and silver bull market there will only be a relatively very limited supply of shares, so they will have to be bid them up to unthinkable levels.
TOTAL EQUITY OF ALL GOLD STOCKS combined is less that the total equity of IBM. It is estimated that their are over $2 Trillion in hedge Funds alone (not counting Leverage). Can you imagine what happens if suddenly they wake up and begin a rush to Gold.. The gold and silver stock sector is very small compared to the bond and stock markets and it won't take much buying to push these stocks into the stratosphere. I am sure that most of you have friends that can't name even one Gold stock; But I'm also sure that in 3-5 years they will be touting you about the latest hot gold new issue out of Vancouver, even though they don't know where Vancouver is.. That will be the first major sign that the top is near.
I firmly believe that the opportunity in gold and silver and the companies that mine them may be presenting a once in a lifetime opportunity, where even a modest investment today could change your financial destiny.
NEAR-TERM OUTLOOK
Plain and simple; Gold Shares usually lead Gold Bullion both up and down. Check out their respective Charts. Gold Shares look to me like they have already bottomed and have begun the first leg of the next stage of the ongoing Bull Market. While Bullion is still in its consolidation phase, it's nearing completion of what in my opinion, using Elliott Wave analysis, is a declining a,b,c,d,e, wave (4) triangle. My best guess is that the low (if it has not already been made) will be in the $410 to $420 area, You can wait for a confirmed low in Bullion if it will make you feel more comfortable, as long as you are prepared to pay 20% to 50% more for your favorite gold stocks, once Gold Bullion breaks out to new recovery highs. It takes guts to stand alone against the crowd, but that's what you have to do if you want to buy low. Who among you can really expect to do better than to get in within 5%- 7% of the beginning of the next major move? However since we are still very early into the biggest GOLD BULL MARKET to come in history and if sleeping better is more important to you, than wait for Bullion's conformation of its resumed bull market and then buy. BUT do not let buying the stocks at new breakout highs stop you. Just treat them like Investors Business Daily has been treating new breakout highs for the last ten years.
THE TRIGGER
We can never know until after the fact what triggered the recession/depression. Is it possible that the idiot Schumer goaded China into cutting off its nose to spite its face, and begin the process of the collapse of both the US $ and the worlds economy?
Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
aubiebat@yahoo.com
561-840-9767
22 July 2005
Rogue
A cautionary tale and a 'classic script'
http://www.marketwatch.com/news/story.asp?guid=%7B31421FEE%2DFE61%2D4E57%2D93D4%2DF2C8EF9FFC12%7D&am...
By Peter Brimelow, MarketWatch
Last Update: 6:53 AM ET Aug. 1, 2005
NEW YORK (MarketWatch) -- The dollar finished out last week weak -- and, despite this year's bounce, at least one respected service is still predicting a dollar disaster.
I've been thinking about this because of China's revaluation of the yuan. Things seem to have quieted down, just as John Dessauer predicted in his Dessauer's Investor's World. (See my July 25 column.)
In his most recent comments, Dessauer doesn't comment at all about exchange rates -- not unusual for him, despite his letter's international orientation -- and, in his blithely bullish way, has gone back celebrating earnings results and deriding worries about a U.S. housing bubble.
A be-on-alert view on the greenback comes from the respected Bridgewater Daily Observations, an institutional service put out by Connecticut-based money managers Bridgewater Associates.
Bridgewater emphasizes that "this is a regime change, not just an exchange-rate change."
It argues that "due to the Chinese peg, Asian monetary policy has basically been locked into a dollar system. No Asian country wants to lose competitiveness to China."
China's official removal of the dollar-peg system in favor of a basket of currencies "means that the Asian dollar-based monetary system is about to collapse," Bridgewater warns.
Bridgewater makes a powerful analogy to the international economic situation in the late 1960s and the early 1970s -- fascinating to me because the resulting disruption, and the discrediting of a conventional wisdom that was at least as entrenched as today's free-market triumphalism, spelled a spectacular boost to the investment-letter industry.
Japan, Bridgewater says, played the role back then that China fills today:
"The circumstances were similar -- i.e. a) real per-capita incomes in Japan were very low relative to the U.S. (60%); b) the trade balance/ current account growth rates and investment/ savings were huge, and (c) the Japanese were trying to hold the exchange rate the same via huge bond purchases.
"The flip side of this is that the U.S. is moving toward a balance-of-payment crisis that is quite similar in its dynamic (although the imbalances are now greater in degree) to the dollar/debt crisis of the early '70s. ... While this process has been, so far, playing out in slow motion, the dollar crisis is unfolding entirely according to the classic script of a pegged currency falling apart."
One consequence, according to Bridgewater: "substantial adjustments" in U.S. bond yields that "have been held artificially low by the direct influence of central-bank bond purchases and the indirect effect of the China peg on U.S. economic conditions."
Bridgewater also points out that in the 1970s, U.S. debtors tended to retreat to gold.
Bottom line: "Even a moderation in [foreign] demand for U.S. assets would lead to a major second wave of weakness in the dollar. Outright selling of U.S. assets (which would force the U.S. to massively cut consumption) could be devastating.
"We believe the odds of a dollar/U.S. debt crisis in the next 12 months are elevated (say 50%)."
It puzzles me that so few commentators seem aware of Bridgewater's type of analysis, not just on Wall Street but even among investment letters. An arguable exception: the really hard-core gold bugs who remember the 1970s, like Dow Theory Letters' Richard Russell
On Friday, Russell said: "The U.S. is losing control of its money. The control is gradually and subtly switching to our creditors, the Chinese and the Asians. The direction of the yuan in terms of dollars or dollars in terms of yuan may be the 'next big thing.' "
Because the downside is huge, any risk of the dollar becoming undermined is worth noting.
Indeed, Growth Stock Outlook's Charles Allmon said again last week that he thinks price of gold and the Dow Industrials ($DJ: news, chart, profile) could cross again -- say, in the 2,500 range.
I know, I know -- but it looked improbable before the 1970s currency crisis, too.
Rogue
Late-Stage Bull Markets - Overvaluation, Divergence and Speculation
http://www.hussman.net/wmc/wmc050801.htm
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Before the arrival of computers, it was not uncommon for people to dedicate a life's work to indexing every word of important texts, in order to help future scholars search for particular words and phrases. One of these efforts, an index of Byron's literary works, was started in 1940. Twenty five years later, the author conceded that his life's work “may well be considered the last” of these hand-made efforts, which by then could be created by a computer in a few days*. Still, the scholar noted that “the pleasure of working with Byron's poetry would have been lost on a machine.”
That benefit of working with things day-to-day applies to a lot of pursuits, including investing. My college job in the early 80's was maintaining price and volume charts by hand, which can now be done in nanoseconds. If you stare at market data for a good part of each day, after about twenty five years, you get a feel for what seems valid and what, for lack of a better phrase, “feels funny.” In his latest book, Blink, Malcolm Gladwell quotes the son of famed hedge fund investor George Soros as saying “My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, at least half of this is bull. I mean, you know, the reason he changes his position on the market or whatever is because his back starts killing him. He literally goes into a spasm, and it's this early warning sign.”
In recent weeks, one of the things that has constantly “felt funny” has been the disconnect between the NYSE advance-decline line, which has advanced persistently, and my subjective impression of market action from watching the behavior of individual stocks and industry groups day-by-day. Thankfully, my back doesn't start killing me when this happens. It's just that the A-D line has been looking strange, even “foreign” to me. Since I'm not a big fan of “analysis by feeling,” I've been asking myself whether there's objective evidence behind my discomfort with the cheery disposition of the A-D line. For reference, here's a chart (the NYSE advance-decline line is the running total of advancing issues minus declining issues each day on the New York Stock Exchange). Thanks to Bill Hester for his assistance preparing the data and graphics in this update.
The clear “look” of this chart is that the market is “in synch” and that there is no evidence of internal turbulence. Now, in late-stage bull markets, we tend to observe two events. One is a loss of what I call uniformity – breadth (on various measures such as the advance-decline line) typically “rolls over” and starts to diverge from the action of the major indices. The second is that we tend to observe what's called a “speculative blowoff,” as investors become increasingly impatient with anything but fast money.
Last week, it struck me that these two events might be occurring here, despite the “look” of the NYSE advance-decline line. Though my day-to-day observation of individual stocks gives me the impression that market internals are, in fact, divergent and sloppy, maybe the A-D line is masking that somehow. Maybe the strong advance-decline line isn't a picture of uniformity at all, but is being driven higher because investors and institutions are chasing performance in speculative stocks. Maybe the behavior of the A-D line has gotten mixed up with a small-cap “blowoff.”
How could you tell? You could explicitly separate the breadth of the largest stocks from the breadth of smaller ones. That insight is owed to Richard Russell, who in the late 90's devised a “big money breadth index” consisting only of the largest 10 stocks of the market, in order to focus on the behavior of the market's most dominant stocks during the bubble.
In the present case, we can look at the largest 30 stocks in the S&P 500, the 30 stocks in the Dow Industrials (only some which overlap the S&P 500 group), and the largest 30 stocks in the small-cap Russell 2000 index. If in fact, the market is “in synch,” we should observe the same basic uptrend in each of these groups that we observe for the NYSE advance-decline line as a whole. Instead, we observe nothing of the sort.
Rather than uniform strength, we've been observing persistent distribution in large capitalization stocks ever since December 2004. Large capitalization breadth has glaringly failed to confirm the recent advance. In effect, the apparent strength in market breadth is little more than a speculative chase after small-cap momentum. No matter that small caps are overextended – this is where the “fast money” wants to be.
In short, we're observing precisely the combination of overvaluation, internal divergence and momentum-based speculation that is the hallmark of late-stage bull markets.
During the late 90's, the market's final speculative frenzy focused on a narrow group of large-cap tech stocks, which boosted indices such as the S&P 500 and Nasdaq, even as small-cap stocks languished and the NYSE advance-decline line slipped lower. During the present cycle, in contrast, investors are focusing their speculation on a large number of small-cap stocks because that's where the momentum has been, which actually helps the NYSE advance-decline line to appear strong despite clear internal turbulence.
Worse, when you restrict your attention to small caps alone, the behavior of investors looks almost cartoonish. It's not just any small caps that investors want. It's the ones that belong to the specific indices that are performing well. In other words, investors (and most probably mutual fund managers) seem to be literally buying their stocks off of a shopping list, the most preferable being the components of the Russell 2000 index.
How can you tell? Take a look at the smallest 30 stocks in the S&P 500, versus the largest 30 stocks in the Russell 2000. These stocks, as it happens, have very similar market capitalizations, but even their market action is profoundly divergent.
Going back to the NYSE advance-decline line, we can perform the same analysis, but restrict our choice of stocks to those that are listed on the NYSE (since many of the largest stocks in the Russell 2000 index are traded on the Nasdaq). Even with a different list of stocks, nothing changes in the analysis. For example, the chart below is similar to the previous one, but presents the advance-decline lines of the smallest 30 stocks in the S&P 500 (NYSE only) versus the largest 30 stocks in the Russell 2000 (NYSE only). Again, these stocks have very similar market capitalizations, but nowhere near the same behavior in terms of breadth.
In short, despite the apparent serenity of the NYSE advance-decline line, the market is already exhibiting the sort of internal turbulence and speculative characteristics that are hallmarks of late-stage bull markets. That's not to make any pointed forecast that stocks will or must turn down any time soon. Rather, the point is to emphasize that there are emerging signs of distribution in market action that investors shouldn't ignore.
As I've frequently noted, the refusal to follow indicators blindly is the difference between analysis and superstition. The objective is always to understand reality, and investors shouldn't rely on any particular indicator without a firm understanding of why it should be useful and the mechanism behind it. In my view, it is superstition to believe that all is well in the market because NYSE breadth is strong here.
At least my back feels OK.
Market Climate
As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and relatively neutral market action. The divergences noted above are certainly important, and with the major indices overbought, investors shouldn't rule out the possibility of market losses here. Still, it's typical to see even more internal deterioration prior to an extended decline in the major indices. As noted in the July 18th comment, there is currently a “skew” to the probable distribution of market returns: the most likely event in terms of sheer probability is for the market to hold up a while longer, continuing to achieve marginal new highs, but that probability is offset by a small but “above-normal” potential for serious damage, leaving the overall expected return/risk tradeoff unsatisfactory. While the precise exposure of the Strategic Growth Fund to market fluctuations changes based on day to day opportunities, the Fund maintains a significant, though presently slightly less than full hedge, against the impact of market fluctuations here.
If investors don't keep valuations, skew, and other factors in mind, it may be relatively easy to get sucked in by the continual talk of “4-year highs,” while forgetting that the annualized total return on the S&P 500 over those 4 years has been just 2%, and that the index still shows a negative return over 5 years. Suffice it to say that I don't find the talk of 4-year highs, economic sweet spots, and “great earnings” overly compelling.
In bonds, the Market Climate remains characterized by unfavorable valuations and slightly unfavorable market action. Credit spreads have stabilized somewhat, which is actually a slight negative for Treasuries, and yields have entered a choppy sideways trend that takes away some of the self-reinforcing downward pressure on bond yields from “duration gap ” trades. Essentially, as bond yields decline, mortgage refinancings tend to increase, which shortens the duration of assets held by lenders such like Fannie Mae and banks more generally. In order to replace that duration, these lenders buy long-dated Treasuries, which exacerbates the upward pressure on bond prices and the downward pressure on yields. With the enormous overhang of mortgage debt, that sort of action has become much more common, which creates sporadic volatility in bond yields.
Unfortunately, unless one believes that very nimble forecasts are possible in the bond market (I don't), the prospect of this sort of volatility does little for the average return that one can expect from fixed income investments. So the result is a less satisfactory return/risk profile. For now, the Strategic Total Return Fund maintains a relatively short duration of just under 2.5 years, mostly in inflation protected Treasuries, with about 20% of assets in precious metals shares.
Rogue
NXG.....Northgate Minerals chart looking better long-term. A push through some minor resistance today on the upside. The "trade" should be to buy this one on the dips.
Trading at $1.25 currently....I see $2.50 by yearend as gold stocks get "hot" again with the rising price of gold.
Rogue
Great site to explore for "alternative" viewpoints. You can also listen to some great radio broadcasts and preview some "shocking" documentarys.
http://www.infowars.com/
How much longer will these views be considered "alternative"????
The "Truth" is out there......
Rogue