Wednesday, September 23, 2009

Emotions are at extremes

I posted this post - So, its all getting very interesting... on Sept 2nd. I have to admit I was looking for an inflation or hyper inflation trade to develop. I expected that this would happen - but my expectations were milder in relation to stocks and the dollar than has actually occurred so far. What is ironic is that silver had a strong inflationary reaction but gold is floundering...I would like to see a higher move here in gold and think that if a wave 3 of 5 move down, gaps the dollar down tomorrow or sometime over the next few days...that could set the stage for a pronounced pop in the metal and the markets. However, that pop could likely be accompanied by a reversal the markets and in the dollar in fairly short order.

The Market

Take a look at the markets today. They struggled, overlapping their way up after a small gap up. Problem is the dollar had a huge gap down. Equities are suffering from exhaustion IMO. Also, people keep referring to mututal funds and investor's large commitments to the markets as bullish. Additionally, everywhere you go you hear that there is a large amount of money on the sidelines. Well, lets take a look at that. Mutual funds are required to hold a certain percentage of assets (I believe 2.5%) in cash. Additionally, they need to cover their fees and operating expenses. Most of these funds are now tracking with less than 3.9% cash reserve. This essentially leaves these funds broke. So, when they need to sell - my question is who will be there to buy?

The Transports

Take a look at this very good chart from Mathew Fraily at - Bullish Percent for transports are at all-time highs if this chart is correct. And additionally to that, ships are sitting in harbor empty for months, Baltic Dry Index prices have sunk tremendously and china's factories are continuing to cutback output and workers. Did you know that 75% of shipyard deliveries (new ships that have been built and ready for delivery) are being defaulted and are then sold in the distreed market. Shippers are unable, or unwilling to come up with the cash to pay the final payments (usually the largest) when the ship is complete. This is not just happening in western economies...chinese shipbuilders are getting killed.

Marc Faber

Another fascinating event, is the truly amateurish presentation by Marc Faber. I really feel that his presentation was almost laughable. Essentially, and I never thought I would say this about Henry Bloget, Bloget looked a lot more clear minded than Faber. When asked about why the inflation of the 70's and bad performance of stocks during that time, Faber answered that "if you bought mining stocks and oil stocks you did well" ...and "if you bought the low in 1974 you made a lot of money"...and "there was a lot of volatility"...Please forgive my ignorance, but those do not seem like answers to the question that Bloget asked and more importantly they are only anecdotal attributes to an over all market.

Another piece of information that Faber seems totally oblivious to is that you can not have global liquidity expansion when the only people receiving credit are failing banking institutions. Expanding liquidity requires that money is flowing through the entire system - not just a small part of it. Additionally, expanding liquidity which implies the creation of more currency though fractional reserve practices - requires loans to be issued and decreasing bankruptcies. We have increasing bankruptcies, credit lines being pulled or reduced and limited availability of new credit - unless you are government, failing bank or institution or a government guaranteed ponzi scheme like the FDIC, Salliemae, Fannie Mae, Federal Home Loan etc.

How can you base a forcast on this market on anecdotal attributes of another market that ironically has little in common thematically with this one? In any case, Faber sees the dollar collapsing and made the most atrocious recommendations I could imagine. Talk about jumping from the frying pan into the fire. He is recommending that inflation or hyperinflation will effect the US and its currency, driving up stocks and commodities, while it will have little or substantially less impact on currencies like the Euro. The irony is that he Euro is not a stable currency and will be and is being dramatically undermined by the instability of its members and their ability to maintain its backing. Faber, is one terrific reason to start looking down for inflation assets and up for the dollar in my opinion. Really that was a hair-brained interview. He should be embarrassed.

Somebody responded to my post about it, that upon seeing the piece he thought Faber had to be setting himself up to be long the dollar...but was advertising the opposite case. Somebody else responded that Faber has been more correct than EWI or Precther. I would like to see some documentation of even Prechter's pronouncement to be short was early - and he said as much...he has a high probability of being right. I am keenly aware that the dollar trade by Prechter was early and the calls to start shorting equities were early...but Prechter , made a reasonable case, limits and has at least has a reasonably high probability assumption and chart analysis to base those trades recommendations on. I am sorry but Faber is prognosticating with tea leaves...where is his stop? And what was his best trade - certainly not calling the top to the day on the SP500 and capturing 800+ points. Atleast, EWI gives you limits in their update analysis. I agree that they are quick to label pattern with the most bearish potential when other labeling would likely be more probable. This is why danerics work is so good...he made several of the big calls that EWI was overly bearish on...Gold rally, Dollar ED...but he too has ben challanged by the never ending ED of the equity markets. But to be realistic, I would prefer to have these situations than hair-brained recommendations like Peter Schiff and Marc Faber seem comfortable in making. Marc really surprised me.

Oh, but I get it now, the market can rally infinitely on a falling dollar and the inflation that that creates.

General Rediculousness...

Check out this link (I have seen quite a few others like it but its too late to find them now) - as far as sentiment is concerned this is getting a little extreme:

Gold should reach $15,000 oz Mike Maloney

and Warren Buffett does not know why he's buying stocks, but he's buying them anyway because he knows their intrinsic value. But he seems woefully unable to understand the intrinsic value of cash....which would have way outperformed his portfolio for the last 8 years...though he suggests the worst investment you could have made of over the last 8 years was treasuries or cash. He maintains that going forward also. Buffett own's too many stocks that's why he manipulating facts related to the best uses for peoples money. If you had a 50 billion dollar risk staring you in the face in the form of naked put options you wrote against various indexes - you would most likely be talking up stocks too. see: Buffett - buying stocks because of intrinsic value?

In a post discussing the dollar and Danerics (Daneric's Elliott WavesED pattern...I was clear that wave 5 for the dollar looked to short as EWI had labelled it and that the preferable pattern to trade would be the ED. This pattern now is starting to look more proportional to a wave 5 in relationship to wave 1.

For additional reading please view: Derivatives...what the heck were they for?The EURO - starting a trip to oblivion, More dollar what-if discussion, The Dollar - biggest short squeeze EverWarren Buffett - a bull-market manifestationAll we need is a hit to theoretical money

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