September 7, 2007

Whackey Friday

Where to start on this whacky Friday...

As I write it is approximatels 1:00 P.M central standard time, the Yen is up over 1.5% trading in the 113 range, gold has pushed above the $700 /oz, the DOW is off trading down 180 points, the U.S. dollar index is back below the 80 level which might be the most important thing in the markets going on.

As chaotic as it is, I sit back and smile to myself. It is a glimmer of true capitalism...just a glimmer. All the carry traders continue to get whacked, while gold and the U.S. dollar begin to show their true colors. While I type and scream to the world, "I TOLD YOU SO!!!"

I apologize. Although amazingly stubborn, I am not a self-loving boob, but when you stand on the side of the line that I do, it feels good to be right. Being a doom casting bear takes a lot out of a man. We are constantly reading headlines of, "The bears were wrong again" and today we read, "the bears are back out of their caves."

Anyways, what the heck is going on here? Well recent pay roll figures came out and were very poor indeed.

The funny thing is market irrationality. Just the other day, economic data was rather positive and the headlines read, "The markets sell off due to strong economic data reducing the chance of rate cuts."

Then junk data comes out today, and the market sells off even more sharply. Anyway we look at this, the downward pressure on the markets is great indeed. Any chance for the markets to go down, it seems that they are taking it. While I fully expect the situation regarding coming economic figures as well as the equities market to only get much, much worse.

I understand that some of these posts are spurratic and conver a number of topics. I feel that it is necessary to involve the new readers in some of my thought processes going forward so they understand a little bit more where I am coming from. The other piece of the puzzle is that markets are so intertwined today, that it's hard to discuss one thing without discussing three others. Going forward I will be generalizing less, and sticking more to specific topics. Stay tuned...

Gold Market Update

My favorite yellow metal gold has been performing nicely over the past week. It has pushed passed the ever important resistance of 692.50 and is trading at 694.50. These next couple of days will be pivitol in seeing if the move past 692.50 will be a break out or a fake out. I will definitely be watching this going forward.

So why the recent move in price?

Well the easy answer is that the market is pricing in a downward rate cut in the fed funds rate. This may very well be true, but I have a gut feeling that there is someone behind the scenes pulling the trigger on some large gold sales. It very well might be the likes of a foreign central bank...possibly china, or it might just be attributed to the buying of the hated satanic hedge funds.

The Telegraph had some interesting things to say about the market for U.S. Treasuries. The reason I talk about the treasuries market in the context of a gold post is that as treasuries go so go the U.S. dollar. As the U.S. dollar goes, gold goes inversly.

The other reason is that if foreign banks aren't accumulating treasuries they have to accumulate other investment vehicles. In China, how about a $300 sovereign wealth fund. Then you have euros, yen, and of course gold. The notion of a rate cut is beginning to scare foreign investors away from bonds.

Then you have the trade protectionism against bills that are currently flying around congress with the senators and representatives licking their lips at how they will be preaching "I voted for a strong American economy and resentment towards those Chinese cheaters."

Well, I would like to assume that they know that China has about 20 aces up their sleeves. Regarding their foreign excange reserves, they hold the ultimate playing card in these protectionist discussions.

So back to what the UK Telegraph had to report regarding the bond markets. They said that foreign central banks had cut their holdings of U.S. treasuries by $48 billion with $32 billion of that drop coming in the past 2 weeks.

We can't say who is behind the sales until the treasury releases its TIC numbers in November. Any who, this is reason enough to worry. The swoon of the dollar has been fantastic over the past 2 months, and it's inability to break and hold above its 50 day MA is very bearish, not to mention the fact that it can't even come near its 200 day MA. A rate cut, just might seal the fate of the green back.

Going forward, we can't miss a day in the markets. We are one or two events away from seeing fireworks in the currency, PM, and foreign debt markets. These are definitely interesting times, but we haven't seen a scrath $40+ trillion credit derivatives market gets pulled into the mess.

I am an owner of physical gold/silver as well as PM mining stocks. I recomend that you do that same before its too late...

Free Market Capitalism

Many folks ask me what my political beliefs are. What I mean is that they ususally ask me what political group I side with. Now my friends and family know the answer to this question, but when asked this question, the individual who has inquired usually is waiting for one of two answers: Democrat or Republican.

Again, for the people close to me, they know that this is like walking on thin ice. The notion of each of these political groups make me vomit. In fact, politics in general tends to make me feel this way.

So when asked my political beliefs, my usual answer to them is that I am a free market capitalist. Sometimes I might refer to myself as a libretarian, but the beliefs of true libretarians often associate themselves with free market capitalists. Believe me dear readers, I'm not talking about the Larry Kudlow's of the world who CLAIM that they are free markets capitalists. And that's exactly what I would like to talk about in this post.

Here is a farse statement that we can often catch on the likes of CNBC of FOX news: Because the U.S. economy is a free market capitalist state, we have created the world's greatest and strongest economy.

This discussion of the U.S. economy often sounds like a discussion about the Titanic minus the final chapter of the story.

I hear all to often that the U.S. and its $11 trillion dollar economy may get rumbled every now and then, but this thing is unsinkable. It's just too big. Like I said, the final chapter hasn't been sung, but I KNOW it's coming.

I've completely disregarded the second statement of the above mentioned statement, but what about the notion of American capitalism.

Bill Bonner once said that in TRUE capitalism, consumers and investors get what they deserve, not what they desire.

For the last 6 years Americans have been getting what they wanted, while Easy Al Greenspan silently shifted one liquidity bubble to another. Ladies and gentlemen, this is not free market. When a 'independent' agency such as the Fed can manipulate markets by changing short term interest rates, we get a situations that couldn't be further from capitalism. This is keeping the U.S. economies head above water...that's all.

The insane amount of subsidies and quotas, and anything else to manipulate the market restricts us from being truly a free market economy. Notice its not called 'manipulated market capitalism.' It's because we have a name for that, and its called socialism.

There's no such thing as a bail out in free market economics, similar to the one that we are seeing enacted in the sub-prime market. If this was true capitalism, we wouldn't need a bail out in the first place.

I really could go on and on regarding this subject, but I truly understand that the philisophical side of economics can be, well...boring. Sometimes something just needs to be said on the subject, but there is one notion that needs to be taken from this...

Free market capitalism is always the path for low unemployment, high GDP growth, technilogical advancement and everything else to progress society along. It is not always the easy answer, or in our case, the politically friendly answer in the short term. But politicians can't think, or don't care beyond their next election. It would be awful easy to put all of the blame on them, but it stems from the ignorance of the American consumer.

September 5, 2007

The DOW Answers our Call

Well, the DOW has answered our question. It is trading down over 170 points as I write this A.M.

The culprit...

Pending home sales fell 12.2% which is the largest drop since the statistic's history. Ouch! I would like to reiterate my belief that the housing market will get much worse before it gets better, and this will drag the economy into recession.

Job growth slowed according two a couple of studies, while lay offs rose. Again, the underlying weakness in the U.S. economy is beginning to rear its ugly head. I expect this to only get worse.

Finanally, as I write, the Yen-Dollar is trading up approxiametly 1% at 115.1. I am very bullish on the yen as the carry trade continues to unwind. I expect this to be a culprit in ripping liquidity going forward.

Where to from here?

In my opinion, as I wrote yesterday, I see the DOW oscillating between its 50 and 200 day MAs. In discussing the DOW a month from now, we have to talk about the Fed, and what they will do.

Now if you ask one of the talking heads on CNBC, they are about 100% positive a rate cut will ensue this September. If you ask me, there is probably over a 50% chance of a rate cut, but I'm not counting my chickens before they hatch.

The Feds achieved their desired goal when they cut the discount rate. This allowed the big investment banks such as Goldman, Bear, Citi, Morgan Stanley, etc. to bring 100's of billions of dollars of morgage backed securities for collateral and get cash.

Now 6 months ago this use to be an OVERNIGHT lending rate. Now its 3 weeks, 60 days, or even 90 days. So what was the Feds goal?

Well you have to realize the helicopter Ben doesn't give a flying rip about Joe Schmoe and the house that he is going to lose. All the Fed cares about is these brokerage houses and keeping them afloat.

Essentially, the lowering the discout rate and changing the rules of this type of lending has allowed the Fed to provide the desired liquidity to the market.

So the Fed doesn't need to cut the Fed funds rate to achieve its desired goal. Now, it is under extreme political and public pressure to do just that.

So going forward, we have to watch the jobs data, and even the financial data leading up to the meeting.

The thing that should worry you is that the market has pretty much priced in a 25 basis point rate cut. Look for the equities market to react accordingly to a rate cut.

Now it's really sickening that these idiots desire a rate cut, being that low interest rates were the problem in the first place, but what if these schmucks don't get what they ask for?

I would expect that if the Fed comes out and holds the Fed funds rate steady that we will see equities take a hard hit.

More on how a rate cut will affect the financial markets coming shortly...

Dow Industrial Oulook

One of the most frequently asked questions on CNBC, Bloomberg, and by any other simpleton investor who lacks the common sense that would keep him/her from blowing their life savings.

As I go forward with this blog, I will try and fill in some of the blanks for the new readers.

The first notion that I would like to talk about is that I believe we entered a bear market in general equities, such as the industrials, in 2000. This gets us back to the idea of an equities supercycle.

In a nutshell, a full equities supercycle takes about 33 years to run its route. In that time, half the period is spent in a bear market, and the other half in a bull market.

Let's just get rid of a misnomer before we move on. The 17 years of bear market is not a period of great decline in equities. Instead it is an extended period of sideways trading, during which there are shorter periods of serious declines. The losses are experienced in the form of inflationary decay.

So my interpretation is that we are 7 years into the bear half of the supercycle. I believe that the 10% correction we saw just a few short weeks ago is just the beginning. I expect something of a 40-50% correction to ensue.

Now 10 years from now, I expect the DOW to be trading in the range of 12-14k still. With REAL inflation running at an annual rate of 10+%, the amount of wealth lost will be tremendous for the schmucks who have their money in general equities are playing a dangerous game in my opinion.

Again, if you have any questions regarding this topic, or would like a more in depth explanation, you can do one of two things. The first is go to stockcharts.com or bigcharts.com and look at a chart of the S&P or Russel 2000.

These are much broader indexes than the 30 companies that the DOW encompasses. Look at the double top formed in the S&P at 1526, and if you were throwing darts at a board, you would actually have a negative return over the past 7 years if you have been investing in the S&P, not to mention the inflation that has occurred over that period as well.

Now, for those of you who prefer to discus the first question, the short term outlook on the DOW, let's look at the following chart.


Please refer to the following URL http://stockcharts.com/h-sc/ui to view the chart that the rest of this post will be referring to.

I've already told you what what my fundamental outlook for the general equities market is. I haven't necessarily told you why I feel that way, but that is a something we can get into at a later date.

So looking at this graph we can take a couple of things from this. Let's view this with a couple of possible scenarios.

The DOW has found strong support at its 200 day MA when it nearly erased a 300+ point intraday decline. After initially breaking below its 50 day MA, it has essentially traded in between its 50 and 200 day MAs.

The DOW is obviously at a fairly critical point if we are talking short term move. Let's assume that the DOW breaks above it's 50 day MA. This would be bullish with the DOW finding its next resistance at the 13690 level. If it continues to push past 13700, its next resistance is at the 14k level.

Looking at the technical indicators, the MACD has remains on a buy signal while the DMI is still on a sell signal and has been for some time. This usually indicats a period of sideways trading, but these indicators have a slight lag to them.

Taking another look, the MACD has taking a recent turn upwards, and the DMI almost appears to be on its way to another buy signal. If the DMI triggers, I would look for the DOW to push past 14k.

Let's look at the other side of this picture. Say the DOW fails to break through its 50 day MA. A couple of things could happen at this point. The first is that it could just break through its 200 day MA and head south from there. This scenario seems unlikely in the immediate future.

The other option is that it could again find support at its 200 day MA. At this point I would expect the DOW to coninue to bounce back and forth between its 50 and 200 day MA while pulling the averages closer and closer together.

Once the MA converge, this usually signifies a strong price move coming. The problem is when the MAs converge, it is often difficult to predict which way, up or down, the price will jump. At this point we would have to reasses the situation from a fundamental stand point, but with the vast amount of option ARMs resetting this fall and winter, I would expect that the DOW doesn't have much life left in it.

So what should we look for?

Well, it is very common that in a bear market in equities, there is usually one final wild move up in price. Was the run to 14k that move? It's hard to say, but I really wouldn't be surprised to see another jump.

I would be watching tomorrow's pending home sales statistic as well as the jobless claims and productivity numbers that are set to come out later this week.

Watch the yen exchange rates. The carry trade is one of, if not the most vital indicators of market volatility.

September happens to be a seasonally bearish month for equitites. We'll have to keep that in mind.

So essentially I have said nothing. You probably think that I have strattled the fence and that I haven't done anything close to throwing my neck out there.

Although it is difficult to judge, here's what I see in the coming months for the DOW. Unles the DOW surpasses 14k by the end of Oct., I find it highly unlikely that it will in the next 5 years.

A driving force in the equities markets is obviously the credit turmoil which I expect to get much worse going forward. This thing is a ticking time bomb, and some great ways to protect yourself are with inverse ETFs and my favorite yellow metal GOLD!

Ready to Rumble

Old readers and new readers alike:

I am back and very excited to start blogging on economics, market analysis, investments, and even the occasional political blurb. I have missed sharing my thoughts with you guys, but some readers have kept in touch with me through my "Bull on Commodities Portfolio Updates." We made some very decent returns amidst a volatile market. But going forward we must be more keen then ever with our resource investments as they have proven to be quite the roller coaster ride.

I would just like to give a quick bit of info about myself for those readers who are new to the website. I am a student at the University of Minnesota double majoring in Economics and Statistics.

That's the logistical part...also the part that doesn't matter. On the other hand, I am a commodities bull government doubting college student who thinks college economics and his professors are academic boobs.

I have an extensive knowledge of the markets for commodities, energy, currencies, foreign debt, bonds, and housing.

I spent the summer doing exactly what I do on this website for a fantastic company-Agora Financial. Some of their other editors that I worked with include Bill Bonner, Addison Wiggins, Kevin Kerr, Dan Denning, and may other unbelievably intelligent and talented individuals in the world of finance.

I had a number of pieces published in the Whiskey and Gunpowder and Penny Sleuth newsletters, which both have a readership of over 100,000 people. I have been hired on to write for them on commodities investments, as well as other tid-bits during the school year. I will post links to my publications shortly.

Just scratching the surface, the main reasons for my bullish stance on commodities are the extensive amount of monetary inflation in the world, our current timing in the commodities/equities supercycles, and the growth in demand from emerging markets.

I will be going into greater detail into all of these notions, as well as other areas of interest going forward.

The last item I would like to discuss in this post is the Bull on Commodities Portfolio. That is my actual portfolio. Every trade I make I post on the website. I don't have one strict method of investments. I invest in each stock and ETF differently. The only consistency I carry is the notion of ripping profits without prejudice. I use a variety of technical and fundamental analysis to achieve this.

I have come a long ways in a short period of time, but I am always learning and adding tools to make me a better analyst and investor. That is the part of the world of finance that amazes me so much. Even after you've been an investor for 40 years, there is always something else to learn.

In closing, I have recently changed my residence. Because of this, I will not have internet at my new house until this Friday. I will continue to watch the markets and post my findings. I absolutely look forward to not only making money, but getting to know some of you along the way. As my current readers know, I strongly encourage you to send me questions or comments whenever you have them. My personal email address is njfinancial@gmail.com. Otherwise feel free to post in the comment section of the website, but please keep it tasteful. You can save your more angry posts for my personal email. Thanks again for reading.

Happy investing,

Nick Jones