A Different Downbeat Economic Measure Heard From

Consumer Metrics Institute (http://www.consumerindexes.com/)

is reporting a steady, drip-drip-drip type of deterioration of the consumer economy, which their methodology indicates leads GDP. See the graph showing the last one-month's trend.

The site is an unconventional one and just might provide a competitive investment advantage to those who pay attention to it.

Its news is disheartening; let's see how correct it is. I am aware of nothing that contradicts its views. Here is a quote from its May 30 commentary:

Since we first reported that our 'trailing quarter' had slipped into contraction on January 15th, we have charted how the current 2010 version of the consumer contraction event compares with prior similar events in 2006 and 2008. The current event is significantly different; while it is not as severe as the 2008 contraction, it has already lasted longer without forming a clearly defined bottom. We know that if the GDP mirrors consumer activities (as at least 70% of it should, net of inventory adjustments), both the 2nd and 3rd quarters of 2010 should be contracting at a level of between 1% and 2%. If this isn't a classic 'W' shaped 'double dip', it is at least the downward glide of a plane with sputtering engines.

Copyright (C) Long Lake LLC 2010

Recessionary Behavior Continuing This Summer

On this traditional start to the summer vacation season, Rasmussen reports that Americans Cut Summer Vacation Plans:

Just 35% of Americans plan to take a summer vacation this year, and most of those vacationers don't plan to spend as much as they have in years past, according to a new Rasmussen Reports national telephone survey.

For the previous two years, 38% of Adults planned to vacation during the summer. But only 34% now say they actually took a summer vacation last year. Sixty-four percent (64%) did not.

In late May 2006, 55% of Americans planned to take a summer vacation.

The report goes on to point to the 18-29 year old group as the most likely to be cutting back on vacations.

Our society is getting a bit too generous towards the elderly as opposed to the producing, and reproducing group. This bodes ill in a variety of ways and supports the Economic Cycle Research Institute's observation that the underlying trend rate of growth of the U. S. economy appears to be continuing its multi-decade decline.

Methinks this fact (if it proves to be a fact) is not priced into stock or house prices.

Copyright (C) Long Lake LLC 2010

NATO Losing in Afghanistan

Dawn.com reports that Taliban capture Afghan district on Pakistan border: official:

Taliban militants captured the administrative headquarters of a remote Afghan district Saturday, officials said, while a suicide bomber blew himself up near a Nato base in Kabul.

Insurgents had surrounded Bargi Matal district in Nuristan province, which borders Pakistan, on Friday and engaged police in a fierce gun battle, Nuristan governor Jamaludin Badr told AFP.

The fate of police officers guarding the administrative compound -- which houses government, police and judicial offices -- was unclear.

“Since the district headquarters is inside the village in a crowded location we had to make a tactical retreat to avoid casualties to civilians” living in nearby houses, he said.

Afghan authorities often use the term “tactical retreat” when Taliban have overrun police forces and captured districts.

An army border police commander in the area, Mohammad Gul Himat, said police responsible for protecting the district had been missing since Friday and it was not clear if they had deserted or been killed or captured. . .

Bargi Matal is the second district in the province to be captured by the Taliban after Kamdesh -- which also shares a border with Pakistan -- fell several months ago following the withdrawal of international forces.

Meanwhile, Afghanistan has equalled a first milestone noted several years ago in Iraq, as reported in US reaches 1,000 death marker in Afghan war.

The Afpak Journal has a timely and readable pair of articles about the downgraded NATO/US expectations for the previously touted NATO takeover of Kandahar city, in Kandahar Through the Taliban's Eyes and Showtime in Kandahar. Here are two quotes from the latter:

If Kandahar is show time, then Marjah has been the dress rehearsal. It is not going well. The Marjah operation has not been successful in rooting out Taliban elements, which continue to terrorize the population and undermine the Afghan government that was supposed to take root in the ineptly named "government in a box" experiment. . .

With the limited timetable of the troop surge coming up quickly, Gen. McChrystal cannot afford another Marjah experience in Kandahar, a more complex and significant stretch of land. Already there appears to be handwringing over the operations; McClatchy reports that "key military operations have been delayed until the fall, efforts to improve local government are having little impact and a Taliban assassination campaign has brought a sense of dread to Kandahar's dusty streets."


We call it the Afpak region; I call it Pak-ghanistan. Increasingly they look to be separate campaigns. In Pakistan, for now the government is bringing overwhelming force into previously autonomous regions with a modicum of local support, touching off mass murders in various cities as well as targeted attacks on officials, schools for girls, etc.; the government reports (without press verification) an unending string of militant deaths. Who knows what's really happening there? But it appears as though there is an internal Pakistani fight or set of fights with the U. S. working hand and glove via drones (at least).

In Afghanistan, there appears to be a continuation of the push against foreigners that has gone on endlessly there, most recently with the successful battle against the USSR that contributed to its demise.

The cost to the U. S. in treasure and people of chasing locals around their own country on behalf of a corrupt Kabul government is difficult to defend. Barack Obama criticized the Bush surge in Iraq even as it met its goals and turned a disaster-in-the-making into, perhaps, a draw. Now his own surge in Afghanistan is a joke, beginning with the Big Lie in Marja and with the attack on Kandahar already reported to be downgraded to a "process".

The president may have noticed that there are big problems at home. Afghanistan, amongst the poorest countries in the entire globe, no longer hosts Messrs. bin Laden and Zawahiri, we are told. It needn't host us, either.

Copyright (C) Long Lake LLC 2010

Doth the Canadians Differentiate Themselves Too Much?

Canada's Financial Post reports that Canada won't fall victim to foreclosure wave, saying:

Canada's housing market is expected to cool off this year and next, but isn't at risk of falling victim to a U.S.-style foreclosure crisis anytime soon, according to a new report by debt-rating firm DBRS Ltd.

True. However, that doesn't mean that Canada won't have similar problems economically, and here the arguments are much less persuasive:

The report also highlights that Canadian households continue to have a particularly high level of debt, something that the DBRS notes is part of an ongoing trend. But it tempers that by adding that household debt is not as worrying as some analysts have suggested.

"We think the measurement of household leverage is subject to a fair amount of interpretation," said Mr. Marriott.

For instance, the debt-to-disposable income shows Canadians are generally more indebted than Americans - however, the report outlines that this doesn't reflect certain differences between the two countries that affect income, such as the fact that the U.S. has lower taxes but that Americans pay more money toward their health-care bills.

One can read on, but you get the point. Canada's lenders have loaded lots of debt onto their citizens, just as American lenders have. Or you can say it the other way, which is that the citizens have gone heavily into debt in both countries.

Under the gold standard, malinvestment related to unproductive borrowing and lending forced reduction in those practices. The alleged cure for the Great Depression was to remove the cop on the beat and get rid of the gold standard. Nowadays the prescribed cure for malinvestment involves more "money" creation, which by its nature in our system necessitates borrowing and lending, given that a dollar bill is a Federal Reserve "note" and therefore technically debt. Though good luck trying to redeem it for something other than coins made of base metal.

In medicine, when a process becomes unstoppable and drains the rest of the organism, one could be describing cancer.

Most of the developed world has a financial disease. Canada is no exception.

Copyright (C) Long Lake LLC 2010

Headline of the Month: Why a Pigeon Is Under Armed Guard in India

Pigeon held in India on suspicion of spying for Pak :

NEW DELHI: Indian police are holding a pigeon under armed guard after it was caught on an alleged spying mission for arch rivals and neighbours Pakistan, media reported on Friday. . .

The pigeon had a ring around its foot and a Pakistani phone number and address stamped on its body in red ink. . .

Officials have directed that no-one should be allowed to visit the pigeon, which police say may have been on a “special mission of spying”.

The bird has been medically examined and was being kept in an air-conditioned room under police guard. . .

This is not a normal part of the world.

Copyright (C) Long Lake LLC 2010

Surprising, Good Contrarian News on Gold

A blogger who runs the interesting Trader's Narrative blog (www.tradersnarrative.com) has opened the veil and revealed a surprising bias against gold and gold investors.
From his piece today, Riding The Gold Bubble To $3,000:

My visceral aversion to gold stems from the same logic as Grantham’s. Unlike the gold bugs, I don’t see gold as having any intrinsic value. Well, like any commodity it has a functional demand for its use in industrial production of electronics, etc. But I don’t feel any emotional pull towards gold as “real money”.

The only way it will go up is if buyers are more aggressive than sellers - just like any other commodity. As Arends explains in his most recent gold article, the price of gold is higher because people are accumulating it. There is no shortage of gold. In fact, for the past 8 years aggregate supply has exceeded demand by a healthy margin.

If there is a second wind that will take gold up to the $3000 level, the catalyst will be crossing the tipping point of a virtuous cycle. That is, price will go up enough to attract new people to buy in the hopes of selling it to the next sucker, I mean buyer, for a higher price. And so on until we have a bona fide bubble on our charts.

Well, regardless of short term trading positions, yours truly was an on and off gold investor ever since 9/11/2001, as it immediately was obvious the Fed and the Feds were going to go easy to pump up the economy for the War on Terror, and the dollar was way too strong against the euro and yen in any case.

Following all the money printing in 2008, belief in ongoing fiscal irresponsibility and corruption became even clearer and the idea took hold in many minds that gold was the only offset to monetary debasement. So I also have no emotional pull toward gold. But I own a lot of it in various forms. That is because gold is a form of money. The IMF and the Federal government say it is. The people of the world say it is. Does Trader's Narrative have an emotional attachment to Federal Reserve notes? I hope not; but he undoubtedly likes having as many of them as he can.

The blogger argues that gold has almost no intrinsic value. What about Federal Reserve notes, that he receives when he sells something of value, such as lumber? What is the value?

When I see a blogger of this quality talk this way, calling a buyer of gold a "sucker", I am reminded that gold investing remains at base a contrarian activity. Reassuring. I was beginning to think gold investing had truly gone mainstream.

Nonetheless, one of the commenters on that blog post wrote as follows:

Again the quite reliable german magazine cover indicator (the well-known “dumb german money” is prone to buy at major tops, and sells at major lows.). Both major investment magazines (Focus Money and Der Aktionaer) are pushing gold aggressively in their recent issue. Der Aktionaer is especially aggressive: “Gold!!!! Last Chance to buy!!!”

Understood the euro could rise 20% against gold and gold could in fact be toppy in euros but be a yawner or rise further against dollars in that scenario, but as was the above commenter, yours truly also remains suspicious that at some point in the next year or two, we will see another fall 2008-type selling panic in all assets including gold. I would not be surprised to see that happen this fall. This would be the traditional time for a stock market bottom: the third quarter of the second year of a new president's term. So I'm more in cash than I have been in many months. Lots of gold vehicles, lots of cash, no long-term Treasuries; Ginnie Maes with short-ish duration; and highly-rated munis. Time will tell.

Copyright (C) Long Lake LLC 2010

Apple's Business Accelerating as Economy Decelerates

In what passes for a sell-off in Apple stock world, AAPL is at a 5 week low in price.
It even briefly thrice dipped below its 50 day smoothed moving average only to bounce above it. Long lines have formed in multiple countries in Europe as well as in Japan to be in on their launch of the iPad.

A sort-of polling entity, Changewave Alliance, of which I am a member, is out today with survey results of its members. It has found an amazing satisfaction level with the iPad.

Fundamentally, the Value Line actual value line is as good a way to look for over- and under-valuation of growth stocks as any I know. For AAPL, the value line is set as 22X "cash flow", which for AAPL is very close to earnings. For calendar year 2010, I am guessing that AAPL with have cash flow of $15/share. Thus to be at its Value Line, it would be at $360. Yet more bullish is the fact that for the last 6 years, it has spent more time above than below this valuation level, despite rapidly rising profitability.

AAPL stock is 25% above its highest 2007 price with triple the earnings.

We are at a point in the economic cycle where discount retailers tend to stop outperforming. My favorites of Dollar Tree, Ross Stores and TJX are great companies, and their stocks remain reasonably valued, but with Wal-Mart struggling, one has to wonder if their margins have anywhere to go but down at this point.

Meanwhile the Economic Cycle Research Institute is out with more gloomy news today:

A measure of future U.S. economic growth fell to a 39-week low in the latest week, pointing to a slowdown in economic growth, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.6 in the week ended May 21, down from a revised 127.2 the previous week, originally reported as 127.3.

That was the lowest level since Aug. 21, 2009, when the index stood at 125.3.

The index's annualized growth rate tumbled to a 47-week low of 5.1 percent from 9.0 percent a week ago. That's the worst level since June 26, 2009, when it stood at 4.6 percent.

"The downturn in WLI growth evident since early 2010 has recently intensified, so it should be no surprise when U.S. economic growth slows noticeably in the months ahead," said Lakshman Achuthan, managing director of ECRI.

Short-term rates are increasingly like to stay around zero for the indefinite future.
While this is ultimately bullish for gold given how our leaders handle economic sluggishness these days, ECRI's forecast is decidely not bullish for any other commodity, and with slowing economic growth likely per ECRI, fears of a new recession and perhaps the actuality may lead to another forced liquidation even of the highest quality assets such as gold at some point.

Right now AAPL may even be outshining gold. Yet the former can be laid low by a downturn in the health of one man, which is not the case for the latter.

To summarize, the list of attrative investments continues to narrow. Whether Treasuries will be on that list as growth slows is uncertain. One suspects so, but who really wants to lend money to the U. S. Gov't at 4% annually for the next 30 years?

Copyright (C) Long Lake LLC 2010

Detailed Gold and Precious Metals Comments

Regardless of short term moves in gold that eerily seem to require demand from India to mark a major bottom (? till hyperinflation or worse panic in developed markets), the bull market remains both intact and the best-supported game in town as far as fundamentals, given the disastrous fundamentals for sovereign debt and underlying economic facts apart from "stimulus".

For people looking to put money into other than physical bullion, the question is what fund to buy, or what stock.

The new hot kid on the block, Eric Sprott's PHYS, is at something above a 10% premium to stated NAV. Gold-Trust, GTU, is at 10%. CEF, the grand-daddy (Central Fund of Canada, holding gold and silver), is a bit below those. The newest of the Central Fund funds is Silver Bullion Trust (SBT_U on the TSE and SVRZF on the Bulletin Board); in Canadian dollars SBT_U is at a 5.7% premium to NAV. Thus, SBT_U may be the best buy available now for people who believe that over time, silver tracks gold, short-term fluctuations notwithstanding.

People who have just a bit of faith in the multinational banks to be incompletely corrupt may want to look at SGOL. This mini version of GLD swears in its prospectus that it uses no derivatives. It is physical gold as best as we can tell. Its sponsor is the same group that has brought physical platinum (PPLT) and palladium (PALL) to the U. S. It trades richer than GLD. I personally have sold all my GLD, which has served me well, and segued to SGOL. There are no options out on the stock.

In the meantime, Rob McEwen of GoldCorp fame is trying to do it again with US Gold (UXG). The stock has an almost impeccable chart on the strength of positive exploration results from its Mexican silver properties. UXG needs to get some good news from its Nevada gold property. I'm betting on Mr. McEwen. Among the large caps, Barrick is OK but none excite me.

Given the analogy of the gold bull to the tech bull of the '90s, investors want the most supercharged vehicles, depending on how much cash they are risking. The more that goes into any vehicle, the more liquidity and safety most people want. For just a while, PHYS was hot--but the recent secondary offering took care of that, and the option to take physical gold from the fund is a negative from a tax standpoint for existing holders. So GTU may be one's best bet over time as PHYS holders may have an unpleasant surprise if others withdraw large amounts of physical gold. Historically, CEF can easily trade at a double digit premium to NAV and has done so even when GTU, run by the same people, has been at a much lower premium. So CEF looks interesting here, trading just above what the underwriters bought their shares at after its very recent secondary offering.

The long-term investor in me began keeping a significant core holding in physical and ETF gold some time ago, except for the obvious intermediate top in early December 2009. The trader in me says that this is an asset that given an apparent change in economic momentum downward could easily face a 2008-style liquidation-- meaning a major even if temporary bear market.

Unfortunately, the more the administration suddenly wants more "stimulus" only a week or two after promising to work on deficit reduction, the greater the core, non-tradeable gold holdings are required to hedge against the obvious worsening financial and economic problems of what was once the greatest economic growth story the world may ever have seen-- the U. S. of the 1800s.

Sic transit gloria.

BP's Mess Could Harm the U. S. Economy Long Term

Just spent some time with a veteran oil services specialist. He is skeptical that "top fill" can work. He also believes that there were at least 7 errors made in the planning and execution of this well in some of the deepest water ever drilled in anywhere in the world, and that had even one of those errors not occurred, the spill would have been averted.

It would appear that as with Three Mile Island and the U. S. nuclear industry, a long-term overreaction that could harm this country is a real possibility.

In the meantime, the VIX is around 30 and under the thesis that surges should be sold, selling opportunities with the VIX much under 25 now make sense.

Gold is quiet overnight and no matter the hyperventilation for and against it, it is both a bit too popular and too reminiscent of NASDAQ 199- (what year is the key question) to sell.

Copyright (C) Long Lake LLC 2010

Government Lies and Investing

Calculated Risk has a nice summary of the CBO's analysis of the "stimulus" bill. Allegedly this has helped us.

However, this would appear to be about the most bogus of a series of bogus gov't analyses. How anyone can try to separate the ARRA effects on the economy from all the Fed and Federal machinations is difficult to see. In addition, not all GDP is the same. Productivity enhancements are one things, repaving functional roads another.

The crowding out phenomenon of Federal spending replacing private spending is another unmeasurable effect. When ARRA was passed, the prediction was for a peak unemployment rate of 7.0%. Is it not possible, or more than possible, that businesspeople saw the government lurch back to the interventionist, tax-raising policies of Hoover and FDR and held back on investing just as they did all through the '30s?

The U. S. Government is almost "all in" with the real economy. Total debt to revenue is very large. Unpayable private debts and obligations, and mismarking of assets are going to have to be reconciled, the sooner the better. But don't hold your breath.

It is likely that more and more we will see bank-like multinationals such as Apple and Microsoft be able to issue debt at rates equal to or better than AAA sovereigns, with common stocks offering greater yields than 2-5 year Treasuries.

Meanwhile the WSJ is out with an article saying that gold is $5000 per ounce from a bubble valuation, just as India is finding gold too expensive to import and as Abu Dhabi is pictured as rolling out a gold-dispensing ATM and gold funds such as CEF and PHYS are buying more and more physical metal-- which appears easy enough to acquire. Gold may be just a bit too popular here, but chart-followers will be buying it. With growth rolling over, the jewelry-related demand for gold will be harmed.

No easy choices in a world increasingly suffering from too much financialization.

Copyright (C) Long Lake LLC 2010

Explaining Some of Mr. Markit's Moves

A free website at Markit allows one to track pricing on commercial mortgage-backed securities. Click HERE for the link. At the site, I use the AA securities, priced in the 30's to 50s, as they are the most volatile. After a huge sun-up, they have weakened a fair amount recently. The stocks of super-regional and other banks track this CMBX set of indices very closely. The huge runs in STI, FITB and many others correlate closely with these readings, as do the recent markdowns in their prices.

As with so much else in this economy, the flood of Federal and Fed "money" has had only partial and often transitory effects. It has been illogical and anti-free market and has served primarily to reward the undeserving and foster speculation.

At a certain point, this relationship will break down. For now it's interesting.

Copyright (C) Long Lake LLC 2010

Gold Fundamentals Weakening

The world's largest gold-importing country is India, which has been finding prices too high lately. Thus suggests that the recent new high in gold is best treated as a double top, with early December's price peak the first top. From Jewellers in India look to home as global markets struggle:

VICENZA, Italy (Reuters) - Jewellers in India are pinning hopes for demand in 2010 on the domestic market as international destinations struggle, but extraordinary price volatility is limiting sales, even in auspicious periods.

India, the world's biggest market for the precious metal, had made successful forays into target markets for mid-priced jewellery, but wholesalers exhibiting at Vicenza's international jewellery trade show said uncertainty across financial markets was also mirrored in export activity.

"For the moment, all the markets are slowing down, except for India. Europe is slowing down, the U.S. is not out of the woods yet," said Pradeep Kumar Godha, chairman and managing director of Shantivijay Jewels ltd, in Mumbai. . .

Hemant Shah, director of Hammer Group, a major jewellery wholesaler and core Council member of India's state-backed Gem and Jewellery Export Promotion Council, said that the uncertainty had turned attention back to Asia. . .

He said clients were reporting a disappointing outcome from Askhay Tritiya, a religious occasion where demand usually jumps because it is considered an auspicious time to buy jewellery and coins.

"Although it is deeply entrenched in religion, this year demand fell by about 60 percent, according to clients I speak with," he said.

Gold is suddenly looking challenged. Not many knowledgeable traders are going to want to fight India; and with China's stock market in a bear and property perhaps already moving down there, demand for jewelry will not soar there either. And if yesterday's post on ECRI's apparent change of view is correct and if ECRI is correct, there is lots of slowdown in growth or outright recession coming.

Sometimes cash has its uses.

Copyright (C) Long Lake LLC 2010

Bloomberg Announces that Inflation is Dead After Ten Year Treasury Yields Have Fallen 80 Basis Points in Almost No Time

Uh oh. Bloomberg.com has caught on to the drop in Treasury yields in the catchily titled article Strippers Declare Inflation Dead in Zero-Coupon Bond Revival.

Investment banks increased the securities -- created by separating the interest and principal payments of a bond and selling them at a discount -- by 4.4 percent to $179.4 billion from December through April, according to Treasury Department data. It’s the first time that the market expanded for five straight months since 2006.

The best time to buy straw hats is when summer is already leaving. This train has left the station. Price increases may be low. The idea that "inflation" is "dead" is idiotic. More than that, it is impossible. Deadness is a permanent condition precluding life. Not only are price increases still present, they only left briefly, at the bottom of a horrible economic downturn.

The powers that be globally are fighting an anti-deflation fight. Just as 30+ years ago it was reasonable to bet that Volcker would win his anti-inflation fight, it is reasonable that the Fed will get its wish.

Copyright (C) Long Lake LLC 2010

ECRI Much More Bearish

The Economic Cycle Institute may be quite the market mover. Yesterday on its website, it announced that Thursday it described to its paying subscribers that it had decided thusly:

U.S. Indexes Point to Change in Cyclical Direction.

Here is what it told the public Friday:

With a number of market-moving indicators surprising on the upside in recent weeks, fears of a double-dip recession had largely been put to rest. But, the recent turmoil in the Eurozone has sparked fears of a fresh financial crisis with increased “spillover” potential. ECRI’s latest study, using an array of objective and reliable leading indexes, assesses the outlook for the U.S. economy in that context. Its conclusions offer important insights into the vulnerability of the U.S. economy at a point when cyclical forces are about to shift gears.

The regular weekly news release (every Friday) was clear about the trend:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slumped to 127.3 for the week ended May 14 from 132.0 the previous week.

That was the lowest level since Sept. 11, 2009, when it stood at 127.0.

The index's annualized growth rate fell to a 43-week low of 9.0 percent from 12.2 percent a week ago. That's the lowest level since July 17, 2009, when it stood at 8 percent.

"With WLI growth sinking further to a 43-week low, U.S. economic growth is set to start easing in fairly short order," said Lakshman Achuthan, managing director of ECRI.

ECRI has changed its tone (and tune) markedly. Only 2 weeks earlier, its Friday news release had the title Little Risk Of Renewed Recession This Year and said:

A measure of future U.S. economic growth rose to a more than two-year high in the latest week, bolstering expectations that the recovery is intact, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 134.7 for the week ended April 30 from from 133.6 the prior week, originally reported as 133.7.

That was the highest level since Jan 18, 2008, when it stood at 135.0.

The index's annualized growth rate rose to a four-week high of 12.7 percent from 12.3 percent a week ago, originally reported as 12.4 percent.

"With the forward-looking WLI rising to its best reading since January 2008, there is little risk of renewed recession this year," said Lakshman Achuthan, managing director of ECRI.

While the LEI was also released Thursday and was down a small amount, the Conference Board was upbeat and its language would not have triggered a sell-off:

“We were surprised how strong the increase was in March,” said Ken Goldstein, an economist at The Conference Board. “We only lost a tenth of a point [in April]. It’s a fairly strong signal that this recovery is developing further and will continue through spring and summer.”

In late August 2008, ECRI quickly switched from saying that the U. S. was in a mild recession to predicting ominous deterioration. The stock market started moving downwards from that point onward, falling over 10% in the month before the Lehman/AIG mess.

It would appear that when ECRI speaks, big money listens.

The odds have increased that the stock market has entered the post-recession phase in which rallies should be sold and that so long as the Treasury market remains the default safety play, Treasury sell-offs can be bought. Whether this safety play will continue through another recession rather than a decelerating expansion is unclear.

Copyright (C) Long Lake LLC 2010

Flight to Treasuries Like Dancing with the Tallest Midget

As the stock market moves toward fair value, breakdowns are occurring amongst the financials that are not especially money-center banks. For example, UMBF and NTRS (Northern Trust) are mid- to large-sized regional banks. Both stocks were breaking out on the upside and very recently had major reversals. We can understand weakness in JPM and GS given action on financial regulation, but the sense here is that something more is at play.

It is the same old story. There is too much financial manipulation and too little real innovation. This extends to the definition of what an "earning" is to ignoring asset values in valuing stocks that have volatile and unpredictable earnings.

Making matters worse is that the U. S. dollar, for all the many imbalances and profligacies, remains the currency of the one military superpower and thus is the tallest midget right now amongst fiat currencies.

However, it just looks as though there is not a lot of underlying vigor in the U. S. economy, unlike the 1950s when amazing salary growth rates were seen.

How serious will the Feds and the states get about having sound finances, and on what time frame? The fickle finger of global markets points in ways non-Masters of the Universe cannot fathom. Will a high-interest rate crisis force prudence? Might this occur much sooner than anticipated?

Long-term U. S. government bonds have credit risk that is not priced into the bonds, and have immense inflation risk. If there is little price increase seen these days, it is simply because the economy in earlier times, under a gold standard, would be experiencing price decreases. These decreases would do what they did in 1921-2, and allow a sound recovery. Instead we have a European-style mixed economy, with free markets in discount retailers (though with many of their customers' incomes derived from transfer payments) but unfree markets in finance, autos and of course housing. No matter what Bush-haters and defenders of the Community Reinvestment Act may say, a real form of socialism has come to America in many key industries. No one quite voted for it other than in healthcare, but here it is. And it came as soon as the Democrats gained control of Congress in the last session and is now here with a vengeance. The next step is One World-ism, typified by the amazing administration attacks on the Arizona immigration enforcement law and the even more amazing approval of the Mexican President attacking this law during his recent visit to D. C.

Get ready for Eurosclerosis in America.

In my field of medicine, let's see how worsening working conditions for doctors play out in terms of early retirements. Quality care for all with fewer doctors. And so inevitably there will be rationing of basic access to a physician. This is another form of inflation with price increase: decreased quality. It's like paying full price for Brand X, when the real brand is actually superior. Yet government bean counters will say there is no inflation because Brand X does the same thing as Real Brand.

So in medicine they may well go Soviet-style and ramp up physician extenders: nurse practitioners and the like.

Short term, however, there is just too much talk of an imminent stock market crash. In the overfinancialized world of the U. S. and its investment opportunities, it's not clear that stocks are any more overvalued than other vehicles. A cyclical economic recovery losing steam is not the same as a recession. Thus I don't find the short side interesting either. Financial assets simply remain in a secular bear market. I am hearing glimmerings that commodities such as platinum are seeing commercial buying after their big setbacks, so maybe commodities are nearly finished being beaten up. With central banks easy as pie and large countries getting ready to import deflation from the austerity being imposed on Greece, Ireland and other countries, I am wary of those who claim that we are in the endgame of an overfinancialized system. As always, this is a time that high-quality assets are the best bets for most investors.

Sadly, the long U. S. government bond is no longer such an asset. Probably it's better than a junky NASDAQ stock, but AAA? Nuts to that. It's just another trading vehicle with a coupon. The yield on the 10-year bond has plummeted a massive amount in a very short time. Those wanting to play the bond from the long side will likely have better entry points soon. And if not, so it goes.

Copyright (C) Long Lake LLC 2010

What Is Going on Politically at the New York Times?

Are we back to the Clinton-scourging Times?

First, they break the story that Connecticut AG and lib fave Richard Blumenthal lied about serving in Viet Nam rather than during the war. Now they are referring to mre experts in attacking their big fave Mr. Barack Obama himself in Scientists Fault Response of Government to Oil Spill in Gulf:

Tensions between the Obama administration and the scientific community over the gulf oil spill are escalating, with prominent oceanographers accusing the government of failing to conduct an adequate scientific analysis of the damage and of allowing BP to obscure the spill’s true scope.

Putting the Obama name rather than no name or that of a lower-level person in the first paragraph does not happen accidentally at the lead story on the Web version of the Times. Is someone at the newspaper of record responding to polls? Will someone at the Times decry the libs and the president taking the simple name "Tea Party" and turning it into the Tea-Bag Party and then from the unobjectionable tea bag, which I use to create a hot beverage now and then and for which I and hundreds of millions or even billions of people use only for that purpose, tarring members of this party with a fetishistic/pornographic use of said implement? Will the poobahs attack Woody Allen for supporting a dictatorship of the One?

Strange things may be happening as more and more Americans fall out of enchantment with the unknown they voted into power in the strange environment of the fall of 2008.

Copyright (C) Long Lake LLC 2010

Is Gold Too High?

Jon Nadler of Kitco is saying that the price of gold is too high. Authorities he cites as agreeing with him include Barclays and Societe Generale. Of course, those firms sure got the zero-return decade for stocks correct, as they were correct that housing-related securites were smart bets a few years ago. Right?

In any case, he states that cash mining costs are around $500/ounce. Given the time, money and risk involved in developing a mine and looking at gross margins on consumer products of over 90% (and over 95+% on drugs and software), $800 sounds puny if after all the effort, it costs $500 to pull an ounce of gold out of the ground.

Since 1920, when the price of gold was $20/ounce, the investment yield on gold has been 4.5% annually. Given that gold was also at $20/ounce in the 1800s, a price of $1200 today shows that gold has appreciated at a slow rate compared to most other financial assets.

Gold is up at a faster rate than many agricultural commodities that have benefited from scientific discoveries. If you want to walk down memory lane, please compare today's prices to those from the depths of the Depression. A 12-room Italian villa cost $17,000 and a room at the Waldorf-Astoria was $5-10 per night.

The price of gold in Federal Reserve notes is subject to all the free market and manipulated forces that currently exist.

A growing number of people look at gold as an alternative form of money, and thus ask the question: what is the value of a Federal Reserve note per ounce of fine gold?

One would think that the U. S. Government, supposedly the largest single owner of gold in the world, would be happy for its cache to be appreciating against all other currencies just as FRNs also appreciate against almost all other fiat currencies. Unlike the early 1980s, it is hard to see any important political reason to substantially suppress the gold price.

Re today's activity, it was palladium that was truly knocked for a loop. Speculators and profit-takers took it down. So it goes. Palladium's long-term chart has none of the strength of gold's.

As a financial asset, one that costs money to store and pays no dividend, if gold tracks the Dow approximately 1:1 or the S&P 500 approximately 10:1, holders of stocks will beat gold if historical trends hold. Given that gold dropped in the post-Lehman panic to about $700, perhaps Mr. Nadler will be correct. I suspect however that the goal is stealth (or not so stealthy) monetization of various governmental deficits. Time will tell.

In the 1982-2000 stock market bull, the single most memorable day was the 1987 crash day. People also remember the crash surrounding LTCM/Russian default. It was only at the crazy peak that we started seeing insane discontinuous moves upward in the NASDAQ averages. In other words, dramatic downmoves in an asset that has been in a steady uptrend often are simply buying opportunities. If gold or any asset starts getting really exciting in its upmoves, watch out. The past 9 years have seen gold break out to new highs and then meander around in a general uptrend. Why should matters be different now? But until there is political will to deal with U. S. and U. K. etc. public finances and realistic short-term interest rates, why should not every saver has some of his/her nest egg in the form of wealth with the longest track record?

Copyright (C) Long Lake LLC 2010

Treasuries Rally

The accompanying chart of the 30 year T-bond shows a rapid collapse in yields concomitant with the collapse of the euro. The current implied yield per Bloomberg based on Asian trading is 4.21%. The yield a mere 6 weeks ago was over 4.8%: quite a drop.

There is first support/resistance at 4% even, seen in summer/fall 2008 and then fall 2009. (Click on chart to enlarge.)

Despite the make-believe nature of Federal finances, I am long various zero-coupon Treasuries based primarily on the ongoing structural bull market in Treasuries of all securities and would look to be a seller of the longest maturies if rates approach 4%.

The selling in certain stocks is looking just a bit panicky. Jim Rogers is fessing up that the collapse in the euro has taken him by surprise. He doesn't admit to being wrong often. He must have company.

In the meantime, the Gallup polling is showing its best hiring/not-hiring result in over 1 1/2 years at +10. This is still a level not consistent with a declining unemployment rate, however, given ongoing population growth and the ongoing disappearance of companies that no longer get sampled. The trend is OK, though, and while many stocks have horrible 2-year and longer-term charts, others such as several highlighted here over the past months and year remain in record territory, above their 2007/8 highs, have simply corrected overbought conditions from 1-2 months ago, and are looking fundamentally and technically ready for a bounce.

Companies that do little or no business in Europe may be best amongst these.

Copyright (C) Long Lake LLC 2010

The Taliban and Gold

From the Afpak Journal:

Three months after the coalition's last major offensive, in Marjah, a district in Afghanistan's southern Helmand province, farmers have fled a resurgent Taliban, whose campaign of violence is halting the delivery of economic aid and reconstruction (NYT, WSJ). Carlotta Gall reports on a number of instances of Taliban intimidation in Marjah, where militants forced an old man to eat his aid registration papers in a "Mafia-style warning" to others not to accept government help (NYT). U.S. officials say the situation in Marjah is "mixed" and caution that "it takes a bit of time" (WSJ).

As opposed to what is happening in Pakistan, what is going on in Afghanistan by the "coalition" appears to be more farce than reality. The whole assault on the "city" of Marja was a fraud and at most was nothing more than a bald-faced attempt to seize control of the local poppy trade. There is no military value in Marja. It was a publicity stunt for the Obama surge from the now-president who as candidate Obama could not recognize a successful surge in Iraq when it was staring him in the face.

It is a sad commentary on our times that it is the currency of this stumbling American "superpower" to which the world is turning due to perceived greater weaknesses elsewhere. But this is temporary. The portents for the near-term suggest to me that in the facedown between the golden gnomes of Zurich and the poobahs at the New York Fed and the U. S. Treasury, it will for a while be the gnomes by acclamation. Not rooting for it, just going with the currents.

Copyright (C) Long Lake LLC 2010

Trader's World, Trader's Market

The trading range for stocks and other commodities a la 1994 that some strategists have foreseen looks to be occurring. In the absence of a new recession starting this year, a major bear is unlikely, but from the exalted stock market peaks of not long ago, a 20% decline from peak to trough such as were seen in Jimmy Carter's first couple of years would be quite reasonable. Some large companies' stocks such as Nokia and Goldman Sachs are in major confirmed downtrends; others such as AAPL and ISRG have barely been touched. So it goes.

In the metals, the more precious they are, the less they are down today. Gold is barely off; silver is down 2+%, platinum 3+% and palladium 5+%. And the Shanghai general index was down 5+%.

In this over-financialized world where the traders at GS and their bosses don't really care about the success of their own company's stock but rather about their bonus, this is just what they ordered. Lots of debt, lots of financial product, lots of roiling of the markets creating opportunities for revenues; lots of sound and fury, but to the detriment of society at large.

Does any trader who is bidding up the price of long Treasury bonds really wish to hold a 30-yield U. S. Treasury in his own personal account for 30 years? To ask the question is to answer it. If there is one in a hundred, that would be a lot in my opinion. But no matter. China is tightening and may now be in the early stages of a real estate collapse. So much for a strong yuan.

We are seeing the natural evolution of a world with too many promises. These promises include contracted debt as well as social promises including unwritten promises such as are inherent in Medicare and Social Security. There are too many imbalances for comfort.

This is why many of us believe that we are in a secular bear market for stocks and probably low quality assets such as have large run-ups the past year. Traders are, strangely, thinking long-term and for now going with quality.

Copyright (C) Long Lake LLC 2010

Lack of a Budget Process Good for Gold, Bad for Us

In a bull market for an asset, the news flow tends to reinforce the theme. Unfortunately, the latest news out of Congress is that is too afraid of giving Republicans a soundbite or two in the upcoming campaign season to actually produce a coherent budget plan. To wit, from Democrats Unlikely to Pass Budget in Face of Spiraling Deficits:

Democrats will likely skip the annual task of writing a budget for the U.S. government this year amid lawmakers’ unwillingness to endorse a plan sure to include huge deficits. . .

The past failures by Congress to pass a budget occurred under either Republican or divided control of Congress, and coincided with election years.

“You have the problem, always, of people not wanting to cast difficult votes in an election year,” said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat.

“It isn’t the vote people fear, it’s the television ad” by a lawmaker’s election opponent on budget issues, said Steve Bell, former Republican staff director of the Senate Budget Committee. “Given the discontent of the electorate,” Democrats “know how powerful and damaging such ads can be,” he said.

Perhaps in this case it's the knowledge that at least some polling shows that most voters actually want a smaller government that taxes and spends less and that majorities favor repeal of Obamacare. In other words, the majority in Congress was elected because of a perception of Republican corruption and fiscal profligacy. Yet the country got more of the same.

So there will be spending that the majority party wants to hide from. Presumably this is because of large deficits with no intention to ever actually pay the debt. The current best case plans are to roll it over without inflating it away. The argument is made by the Glabraith/Krugman crowd that deficits don't matter, only an "output gap" matters. They care not if there is an output gap in things that were oversupplied, such as homes and autos, due to uncreative Ponzi financing?

The real output gap is honesty out of Washington policymakers.

And so a Western world adrift, short of straight talk from the leaders to a populace that wants it, sees old money move more and more to the oldest money. This trend occurred in the 1970s and took Volcker, Reagan and Thatcher--all with major policy changes and popular support--to reverse the trend toward hard money and back toward paper money. At the peak of gold's mania, its price equaled that of the Dow Jones. If that were to occur again, and the Dow were to stay even, gold's price, which is up 5 times in 9 years, would be up closer to another 10 times from here. Early stage bubble? Could be. Bubble peak? No. Bull market peak as opposed to bubble peak? Sure, could be, who knows?

Just saying. Per old Isaac, something about bodies in motion tending to stay in motion unless stopped by frictional or other forces . . .

The bull market in gold is really a loss of confidence in "paper money bugs". Do you have confidence in Gentle Ben, the European Central Bank, Barack Obama, Britain's divided government, and other Euro-pols? Japan with its endless money-printing?

If you do, go for the fiat stuff. More and more people continue to realize how wrong these guys (and some gals) have been, and are hedging their bets. Right now it's a trickle. The math is such that if most people accept that their money is being trashed for the benefit of bankers, they will realize that the standard allocation from gold-friendly investment advisers of 3-5% of assets is useless. This is why gold retains huge dollar price upside given the way the world is -- or is not-- functioning these days.

Copyright (C) Long Lake LLC 2010

ECRI Rings a Bell

From the Economic Cycle Research Institute:

WLI Growth Falls to 40-Week Low
May 14, 2010

(Reuters) - A measure of future U.S. economic growth fell to a four-week low in the latest week while its annualized growth rate hit a 40-week low, indicating a slowdown in the recovery in the coming months, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 132.0 in the week ended May 7, from 134.7 the previous week.

The latest figure is the lowest level since April 9, when it stood at 131.3.

The index's annualized growth rate fell to 12.2 percent, from 12.7 percent, its lowest level since July 31, 2009, when it stood at 11.2 percent.

"With WLI growth falling to a 40-week low, the pace of improvement in the overall economy is set to slacken in the months ahead," said Lakshman Achuthan, managing director of ECRI.

As has been pointed out interminably in this blog, economic reality is what it is. Rising stock prices mean little. The above press release says it all. Stocks are falling because the second derivative of growth in the economy has already occurred, it would appear, and not at a very high level. Now we are looking at decreased exports to Europe as the euro collapses; worries about oil production and damage from the Gulf oil spill, and the like.

Most important to the leading indicators is the drop in the 10 year Treasury yield. As the economy grows, the case for ZIRP recedes. Most of the leading economic indicators are interest-rate related. Whoops! The classic pattern after a recession is for a decline in the rate of growth of the economy as the growth continues in a decelerating fashion. Think lift-off of a rocket ship from Cape Canaveral. It's a two-way market now. But it is NOT a new recession--though if oil prices skyrocket related to the spill, all bets are off.

Copyright (C) Long Lake LLC 2010

Not Greeks Yet

Last night's post on the financial stocks perhaps breaking down is looking prescient today. JPM is about 4% away from taking out its February low just under $38. Its 150 day simple moving average turned down in late April, and its 50 day sma turned down yesterday. Its recent highest volume day was on April 16, on a 2 point down following achieving its high for the last few months. BofA is also looking weak, as Citi suddenly is as well.

These stock selloffs are increasingly occurring the days economic reports "exceeding expectations" are released. Classic major tops in stock prices occur during strong economies that are topping due to Fed easing.
Perhaps simply ceasing buying mortgage-backed securities is today's equivalent of rate easing?

More simply, yours truly believes that securities prices eventually seek their own level, and that is what is happening. Stock prices are historically overvalued. The only way they look cheap to reasonable is in the setting of zero short term interest rates, which themselves can only occur--circularly-- in the setting of severe economic weakness. Something is out of equilibrium.

Treasury prices have risen sharply, and no one I know believes that yields "deserve" to be as low as they are. But said yields are dropping. Patient holders of zero-coupon Treasuries such as yours truly-- who made large profits on some by selling at the peak in prices (low in yields) in December 2008 but held some and has opportunistically bought and traded others given that 4% is better than zero in a money market fund or T-bill, may be having the last laugh.

Go figure, but the long-term bull market in Treasuries remains in force on the charts. Politicians and businessmen lie, but the charts show the accumulated buying and selling pressures. All the rest is verbiage.
Treasuries are NOT in confirmed short-term or intermediate-term bull trends, but sentiment figures and chart patterns look similar to that for the USD as judged by the DXY last year as it started its ascent.

Treasuries just might be a fine trading vehicle. And who knows-- one can imagine a Republican victory in November leading to the same sort of fiscal prudence that it (allegedly) led to with a similar game-changing victory in 1994. Gridlock and all that. Stranger things have happened. A decade ago not-quite-idiots were bemoaning the upcoming shortage of Treasuries! That was a problem easily cured!!! A decade from now, could the same "problem" loom? I'm with you, I don't think so, but the fact that we all agree proves that that belief is to a significant extent "in" the market. So I'm watching the market action. Stocks go down, Treasury prices rally. So whether or not one was in a frat or sorority in college, we're not Greece. At least not yet.

Copyright (C) Long Lake LLC 2010

Banks Finally in an Ursine Mode?

Don't look now, but JPM has joined GS in a technically weak chart configuration. Both stocks are below their 50-200 day moving averages; JPM's moving averages are flat and GS's are all pointing downward in a perfect configuration as the euro has, with the shorter term smas having the lowest values.

Super-regionals such as WFC (if one can call that giant a super-regional) and many others that are not the major broker-dealers have better chart patterns, but it is the giants that rule the roost. Weakness in their stocks led the rest of the market by a year or more in 2006 onward. Might it be happening again?

Copyright (C) Long Lake LLC 2010

Ignore the DXY

For anyone who thinks the "DXY" or dollar/euro or dollar/yen relationship defines whether the dollar is "strong" or "weak", please look at the chart. Basically the dollar has been g0ing more or less nowhere the past few months in the real world in which it is exchanged for the currencies of its trading partners.

Compared to the stock market's gyrations and the 9 year bull market in gold vs. the USD (and all other currencies), the trade-weighted dollar is a rock of stability!

Copyright (C) Long Lake LLC 2010

More Evidence that Stocks Are Ahead of the Real Economy

The ABC News Consumer Comfort Index continues to be abysmal at -49. Gallup.com shows little rebound in consumer spending and hiring; they are off their lows but not much. A newer firm, Consumer Metrics Institute, finds evidence of a mini-double dip (not a true recession). Nouriel Roubini is just beginning to rebound and some leveraged bear market securities recently underwent reverse splits, indicating to contrarians that the bull is tired.

The bull market is in debt-based solutions to problems of too much debt.

Not only are people not talking about their killing in precious metals at cocktail parties, the Rydex Investor Class of its mutual fund investing in precious metals, RYPMX, actually lost assets today, and its asset level of about $143 MM is near its low level of the past year. So I do not believe the public is fully engaged in gold investing, indicating that the technical target of $1350 for gold's next stop is do-able. Will another $100+ surge in the price of gold suck in the public? If that happens, let's see.

Given the lack of volume in stocks on the upmoves and rising volume on the downside, yours truly worries that last Thursday's discontinuous price action in stocks could be a harbinger of things to come before anyone thinks, just as the rising but small number of "fails" in auction rate securities in 2007 presaged the complete shutdown of that market in early 2008. Who knows, but with the S&P 500 yielding at most 2%, with 6% a tradional yield at market bottoms, who needs stocks?

Meanwhile, the simple moving average of silver for the past 40 weeks (200 days) has set an all time high in nominal dollars (for the past 30 years or so, ignoring the post-Hunt brothers craziness). The 150 day and 50 day smas have a ways to go, but for now, silver has passed an important hurdle. Its spot price is below its 2008 high, but when a long term moving average hits a high, it means that the asset has spent more time near its high than previously. China may already be in a post-bubble collapse (or it may not be) and commodities may be in for a big fall thereby, but silver is one step closer to joining gold in a breakout. Speculators should be aware that silver has the potential to collapse in price in a rout far more than most people think is likely to happen to gold.

All in all, prices are rising given that some of the excess credit "money" has been converted to transactional economic activity. Whether much of this activity represents productive use to create more growth is a very open question. Keynesians appear to believe that consumption for its own sake is to be celebrated. I beg to differ.

Methinks gold and perhaps silver have a long way to go before the public is sucked into a precious metals bubble. Of course, policy-makers could surprise on the free market side. But the Sun could rise in the west as well.

Copyright (C) Long Lake LLC 2010

Roubini Emerges and Fingers ZIRP

I found this on Credit Writedowns today: "Roubini: Cheap Money is Creating the Next Asset Bubble".

If and when the good Doctor Roubini is everywhere as he was the winter of 2009, the next bottom will be in.

Yes, and it looks as though the finalists are shaping up to be U. S. Treasuries vs. gold. Semifinalists include silver on the gold side of the draw, which will ultimately lose to gold though it may surge as it did in the Hunt brothers time, and stocks on the fiat money side of the draw with Treasuries.

As intimated here numberless times, gold is relatively unloved. Louise Yamada has been bullish on gold for years. Her short-term target is $1350/ounce. I believe that many months ago, Barry Ritholtz tabbed that same price as his (then intermediate-term) target. $1350 would be a 10% or so move up from the December high.

We are now seeing Irish protesters getting violent due to the bank bailouts.

It is past time for providers of capital to take their hits. This includes debt to equity swaps of bond holders in bank holding companies. Pensioners and labor cannot get squeezed forever. Too many promises have been made to too many interests. The owners of bank bonds and retirees are on opposite sides of the same boat. Neither interest is bad. But the real economy is struggling to keep all promises. The chaotic, inflationary result is what we see, a gold price that appears to be like an inner tube under water. It wants to reach its proper level.

We may find out in the fullness of time that the proper price for gold all along is $35/ounce, or some larger number, and all this upmove is manipulated, just as the NASDAQ was worth much closer to 500 than the 5000 in hit early in 2000. But for now, unlike the frenzied NASDAQ peak, the country is not rocking to the beat of a rising gold price, and the ratios of gold to other financial instruments such as stocks and Treasury rates is historically average.

Thus if gold is entering a bubble, it has plenty of potential on the upside. Just please don't think that any financial asset is forever unless one is thinking in terms of multiple lifetimes.

It is believed here that it is not too late to buy or add to positions in gold.

Please note that Econblogreview is not an investment adviser and is expressing this blogger's individual views, and that yours truly is "long" various gold and silver instruments.

Copyright (C) Long Lake LLC 2010

China's Growling Bear and the Gold Standard

The Chinese stock market has led the U. S. market up and down the last few years. It is now in a bear market, with the main Shanghai index at 2647, down over 20% from last year's peak. Click HERE for a 5-year chart.
The index bottomed half a year before the U. S. index bottomed and topped out late last summer, and since then has put in a series of lower highs and lower lows.

A couple of weeks ago, a news item crossed that the largest property company in China reported sharply lower earnings. It just may be that China's real estate market has in fact entered its downturn. In that scenario, those who are waiting for the bubble to burst may be like the geniuses at our Fed, Congress and administration in 2007-8 who saw no end to housing-led prosperity.

In fact the new trend is more more expatriation from the U. S.

In this country, the mood amongst much of the cognoscenti and in the public is sour. Last year I reported that pro-Obama sentiment amongst anti-Bush, left-of-center financial bloggers I followed had sharply waned, when they saw that there was a Bush-Obama continuity re favoritism toward Big Finance. Now we read that Goldman Sachs went 63 for 63 in profitable trading days in Q1. Great quarter, guys!

New faces in the White House, similar Big Finance-friendly policies.

Money drives and is driven by policy. The trend toward truly unsound money accelerated in this country with the guns and butter policies of LBJ, who was merely implementing JFK's policies, the two most disastrous of which may have been: first, ignoring de Gaulle's warning not to get entangled militarily in Viet Nam, and second, letting government employees engage in collective bargaining.

In any case, the French called our bluff, Nixon took the U. S. fully off the gold standard, and now we see that the fiat emperor has no clothes. One current example is the comment by some commentator in Britain about the bank bailout (no, it's not a bailout of Greece) plan that the IMF "money" is more "solid" than the European commitment.

It's all funny "money". It's not "solid" at all. In theory it is possible for a wise, prudent country to run a system of fiat money. After all, the gold standard had its problems. But it's looking better than the alternatives day by day.

Copyright (C) Long Lake LLC 2010

Gold and the European Bank Bailout

Of course Greece per se is not getting "bailed out". It is the lenders to Greece that are going to be made whole, for now. The mechanism is more debt creation and more leverage. It is a hair of the dog strategy that is fundamentally bullish for gold.

Gold's 50-day moving average is now decisively above its Jan. 21 high, and the shape of the curve is now concave upward; then it was convex and pointing down. The 150 day and longer moving averages never stopped moving up. Gold remains the only major asset for which the technicals and fundamentals (such as gold has any fundamentals) remain bullishly configured. Trying to pick the top of any asset in such condition is impossible. Think NASDAQ 199-. Why not a top at 3000? We're near 2000 a decade later. So 3000 was lunatic. But we went 2000 points and one year later. Meanwhile gold measured against the Dow or housing prices is barely in a bull market at all.

The more speculative precious metal is silver. We shall see on that one.

However, investing or hedging in gold is not easy. The gold fund "PHYS, the Sprott Physical Gold Trust, burst on the scene just a few months ago and is now at a 20% premium to NAV. Such is the anxiety over whether the GLD fund actually has possession of all its gold.

Relative to PHYS, the now smaller but better established fund Gold-Trust ("GTU") is at a mere 10% premium to NAV.

Neither of the above funds can be easily (or at all) sold short and have no linked options. So they are to buy and hold, or trade.

Back to silver. This site has mentioned Silver Bullion Trust several times. Very recently it sold at a discount to its silver. The price has now markedly outperformed the metal and is at about a 7% premium to NAV. There is probably a few percent more outperformance in this fund based on current bull market premia for GTU, the associated Central Fund of Canada ("CEF"), and PHYS, but investors and speculators are now buying silver with SBT.U (Toronto, and associated bulletin board SVRZF in the U. S.), not undervaluation any more.

As far as traditional stocks go, they don't really count anymore.

Copyright (C) Long Lake LLC 2010

Something Wrong Here

Having been a bit behind on the news due to limited to no Internet or TV access, I just learned of the following Michael Bloomberg quote (from "The Taliban in My Inbox" by Bill Roggio):

“If I had to guess 25 cents, this would be exactly that, somebody who’s homegrown, maybe a mentally deranged person or someone with a political agenda that doesn’t like the health care bill or something, it could be anything,” Bloomberg told CBS News.

How on earth could the mayor of New York City not think that jihadists were the likely suspects? Instead he implicitly blamed Tea Partiers and Republicans.

This is the financial man who was installed as mayor during the period of great financial crimes and who, for unknown reasons, was allowed to have an unprecedented third mayoral term. And he's so with it that despite all the actual and aborted plots by jihadists on New York since 1993, he muses that a disgruntled anti-Obamacare nut might have been the perpetrator.

On which group is the U. S. raining missiles upon from drone aircraft? Who is NATO fighting in Afghanistan? Well, duh, maybe they are striking back.

This striking back is apparently common in terrorism circles. The story is that the attack in Oklahoma City by Timothy McVeigh's group occurred one year after the Branch Davidian disaster near Waco. Where are the violent deaths from Obamacare that would motivate an anti-Obamacare person or group to attempt mass murder?

As in a mystery story, sometimes small details such as this Bloomberg statement are telling.

After all the lies of commission and omission the past few years regarding the financial scandal and then the Big Lie about the "city" of Marja in Afghanistan (just why was that primitive group of rural villages invaded other than to show that the "surge" was "working"?), is it really possible that the mayor of New York City really thought first about opposition to Obamacare rather than those the U. S. continues to kill overseas and who have been busily trying to attack us, sometimes successfully, for years?

In the words of Robert Zimmerman aka Bob Dylan:

There's something going on and you don't know what it is, do you, Mr. Jones?

Whatever it is, it's bad sh-t.

Copyright (C) Long Lake LLC 2010

Wishing the Times Were NOT So Interesting

The non-permabears I follow who were bearish in 2008 and perhaps 2007 and bullish for most or all of the up-move in stocks, are growling again. This blog has been growling as well for at least 2 weeks and has pointed out for months that stocks are fundamentally overvalued at almost record levels by two different measures, "q" and cyclically-adjusted P/E. Now that systemic contagion occurred with the famous meltdown last week, yours truly simply does not want to be in the U. S. equity markets. ETFs that own gold and foreign currencies are OK still, though some of them hit air pockets in the sell-off as well.

Charts tell the tale. The move up from the 2009 low was lengthy but the angle of the ascent was much weaker than the angle of the descent. If stocks were undervalued, they would laugh at Greek debt problems.

Given our wildly over-financialized economy, falling stocks will have an adverse feedback effect on the real economy. This is what happens when the powers that be try to revive "animal spirits" by printing money.

The problems we have with financial and monetary policy are worse than the excessive debt loads carried at all levels of society. They include lies such as those to Social Security recipients that it's your money, you paid in, you earned it, etc., disguising the pay-as-you-go nature of the scheme. We now have another lie in Obamacare, which passed due to almost certainly fraudulent assumptions such as that the Congressionally-mandated major cuts in Medicare physician reimbursement will finally occur and the pseudo-fraudulent tactic of providing years of tax increases before the costs really kick in.

Most of the country sees through the charade but can do nothing The time for real financial reform was a year ago, when Big Finance was on its knees. Instead Obama focused on remaking the U. S. health care system years from now. What a genius! Let the fire smolder while getting architectural plans for a major extension to the house. Helping Big Finance get on its feet was an essential part of the strategy that guaranteed that real reform would not occur.

The current Greek tragedy is small beer compared to what could come in the New World. Short-term, though, stocks are oversold. But they are too high. Treasuries may be over-bought. But there is no reported net inflation. Thus yields may arguable be too high. Interesting times, to say the least.

Copyright (C) Long Lake LLC 2010

Change is in the Air

Yesterday's stock market chart can be viewed as a fractal (a sort of microcosm for those not familiar with the term) for the stock market chart of the last few years. Big drop, partial recovery, downward trend. What caused the air pocket is of little interest at Econblogreview. Facts are stubborn things. 10% off one day, why not 20% or 30% off the next? And then why not a 70% overnight devaluation of the dollar, a la Argentina? Against what, you ask? Against gold; that is how the reserve currency can devalue.

No charts for a few more days due to limited Internet access due to travel.

According to "q" as interpreted by Andrew Smithers and various measures of the "CAPE" (cyclically-adjusted price/earnings ratio), stock averages should drop about 33% simply to get to fair value. To get to a mere 25% undervaluation implies a 50% off sale.

The chart structures tell you much, more more valid information than whatever you see in the WSJ or NYT. By the time the MSM tells you why stocks have fallen, they have largely finished doing so.

There has been precautionary selling on the Stock Exchange . . .

To be long a lot of conventional stocks here is problematic. All sorts of good arguments exist as to why they may be undervalued. Selling ROST now, 7 points off the high, is crazy given that Greek riots have nothing to do with sales of packaway out of fashion pants at deep discounts. Yet a butterfly's wings may theoretically affect the weather in faraway places . . . even if the mind cannot comprehend it.

Right now eyes are pointed to disarray in Euroland. Yet there is an underlying rot and disarray Stateside. Liquidity has been poorly rewarded the past year plus. The times they may be a'changing.

Copyright (C) Long Lake LLC 2010

Turbulent Tuesday Followed by TURBULENT Thursday

Beyond all the attention paid to the meltdown in the stock market today, what I am focusing on was the rally in the silver and platinum complex metal down, joining gold.
That they rallied to close up when stocks closed down big-time is impressive.

SLV's 200 day sma is 16.53; its 2008 high was 16.61 in August. Before that one has to go back probably to 1980 for such prices. Should silver hold up for another week or two, it will then have achieved what gold achieved last year. As for gold, no surprise in the melt-up. What this blog has consistently said is proving out. Gold stocks such as GG, NEM and ABX underperformed the metal. Gold mining stocks move more with the general stock market than with the metal. I exited my ABX with a modest profit. Am getting elemental here. Meanwhile, gold ETFs people really trust, such as the Canadian ones such as GTU and PHYS, traded strongly all day. No "fat fingers" depressing those prices.

Meanwhile, Treasuries followed their long period of hate with immense moves up in price, fueled by short-covering and whatever reasons one wants to provide.

As this is written, Asian stock markets are down 1-3%. In the real world, Gallup's ongoing polling is not showing a lot of employment growth and it shows absolutely no pick-up in consumer spending. This is consistent with my personal limited sample size. I'm not raising my sights above Dollar Tree, Ross Stores or TJX. Because of European exposure, MCD is a bit suspect, though simply as an income play it can be held given declining Treasury yields.

This blog has been warning for some time that the only financial assets one should own were those one was willing to hold during difficult times. That advice continues. There is much more downside potential in the markets, including new lows in the stock averages.

Copyright (C) Long Lake LLC 2010

Turbulence is Here

The chart pattern on the TLT, a proxy for the long Treasury, looks marvelous. The angle of the ascent is much greater than the gentle slope of the downtrend, which on the descent from the high in price in December 2008 (low in yield) was much sharper.
Given that the Asian markets are collapsing and that risk assets such as silver and platinum are down while gold is up, it is easier and easier to look at the analogy of the dollar breakout against the Euro against general skepticism and project a counter-trend bull market in Treasuries.

Meanwhile, the S&) 500 volatility index (VIX) is nearly at 25, a level which a simple review of the long-term VIX chart suggests is average for turbulent periods. Much above 25 presents the intrepid stock picker a tradeable entry point.

The evils of too much debt and too much financial complexity are making themselves obvious. Gold continues to shine, dully, in this sort of environment.

Postings continue light due to travel and will resume normally in a week or less.

Copyright (C) Long Lake LLC 2010

Tuesday Morning Update: Correction Time?

Posting is light due to travel and only intermittent Internet access.

As noted this past weekend and at various times recently, the stock market is fundamentally too rich, sentiment has gotten extreme in various issues, and today's action is a bit of a watershed IMO. Better than expected IMS manufacturing numbers plus a big sell-off. This smells a bit like the opposite of a year ago, when the stock market began ignoring bad news.

Gold and Treasuries remain in established long-term bull markets. Stocks such as MCD and DLTR have initiated new bull markets. This is where I am focusing my investment attention. Real estate: fuggedabout it though you have to live somewhere.

Copyright (C) Long Lake LLC 2010

Larry Kudlow Gets It Right: Monetary Policy Over Easy Needs to Come Off the Griddle

King Dollar claptrap aside, I actually just found a Larry Kudlow article which I like! Will wonders never cease:
Obamacon Doves vs. Hard-Money Heartland Hawks. Here's a nice thought:

My own view is that we need a dose of what I call cowboy monetarism. By that, I mean the Fed should surprise Wall Street traders with unexpected policy restraint in order to keep them from taking excessive risks in their financial dealings. Like the cowboys of the Old West, who would act in their own defense at a moment's notice, the Fed should not be afraid to pull the trigger on some small restraining moves now to prevent new financial bubbles and an outbreak of inflation down the road.

Not that cowboys are/were really unpredictable, but the thought is good. The old (younger) Greenspan of the 1990's really shook them up with large interest rate moves down and up following the 1990 recession. Gentle Ben can do it again.

Copyright (C) Long Lake LLC 2010

Bloomberg News Appears to Show Mayor Bloomberg Disagreeing With His Own Police Department About the Bomb in Times Square

Bloomberg.com reports that New Yorkers Avert ‘Deadly Event’; Police Disarm Bomb:

May 2 (Bloomberg) -- New York police disarmed a bomb in a sport utility vehicle parked in Times Square, averting a potential attack near the heart of the city’s theater district on a Saturday evening.

“We are very lucky that we avoided what could have been a very deadly event,” New York Mayor Michael Bloomberg told reporters . . ."

Later in the article, however, we find:

Bomb squad technicians used a robotic dismantler to take apart a crude explosive device that included propane tanks, Deputy Police Commissioner Paul Browne, the department’s chief spokesman, said in a telephone interview earlier.

Parts of the heavily trafficked area were evacuated at about 6:35 p.m. There were no injuries and the bomb appeared to be unable to explode, Browne said. . . .

And then Mayor Bloomberg appears to argue with Mr. Browne:

“It certainly could have exploded and have a decent amount of impact,” Bloomberg said.

You would think that Bloomberg News would at least take care to get its story straight this time. Talk about the decline of standards . . .

Copyright (C) Long Lake LLC 2010

Small Business: Bad But Less Bad

Discover Small Business Watch reports on April polling:

April results show a surge in the number of small business owners who say economic conditions for their own businesses are getting better: 30 percent of them say the climate will get better in the next six months, compared to only 20 percent who answered that way in March. Of the remaining respondents; 48 percent say the climate is getting worse, but that number is down from 53 percent in March.

When asked about their intentions to invest in their businesses, 23 percent say they would increase spending, up from 18 percent in March, while 43 percent still plan to decrease spending, which is down from 52 percent in March; 31 percent say they will make no changes.

Small business owners who say the current economy is good or excellent was 13 percent in April, up from 7 percent in March and the highest it has been in 20 months; 29 percent rate the economy as fair, and 57 percent think it's poor.

The outlook for the direction of the economy improved: 31 percent say it is getting better, up from 22 percent in March; while 52 percent say it's getting worse, down from 58 percent the prior month; and 14 percent aren't sure.

The trend is your friend. Small business is following big business. Money printing plus cyclical factors are working, for now.

The implications for stock prices are more mixed, given extreme valuations by several fundamental measures.

Copyright (C) Long Lake LLC 2010

Pak-Ghanistan: Time to Leave Them to Their Own Devices

In Throwing acid on human rights, the Afpak Journal shows why the U. S. has no dog in the internal Pakistani fight:

In the summer of 2008, five women were buried alive in Baluchistan because they wanted to choose their own husbands. A few days after the news broke, the issue was raised in the lower house of Pakistan's parliament: Senator Israrullah Zehri defended the ghastly act, saying it was part of "tribal traditions." A few months after his statement, Zehri was made a federal minister.

In Daily Brief: Pakistan considers North Waziristan ops , the Afpak Journal makes it crystal clear that Pakistan is merely a mercenary for the U. S. in its internal war:

The U.S. is making moves to transfer $600 million to Pakistan as reimbursement for its military operations against militants in the country's northwest (AFP).

And what good does all this action do? From the article immediately above:

The BBC adds to reporting that targeting killings in the scenic Swat Valley hint that Taliban militants are returning after last year's Pakistani military operations there (BBC).

The U. S. is widely hated in Pak-ghanistan. We are spending money we don't have to interfere with their internal affairs. If we confined ourselves to killing a few al Qaeda, that would be one thing. What we are doing is quite something else.

And BTW is Barack Obama a war criminal for authorizing the CIA to kill Pakistani nationals with whom the U. S. is not at war? Simply because they oppose their own government? Consider Legal questions raised over CIA drone strikes:

The CIA strikes are "a clear violation of international law," said Mary Ellen O'Connell, law professor at the University of Notre Dame Law School, who added that going after terrorists should be a law enforcement activity.

She said the rest of the world does not recognize American authority to carry out attacks in Yemen and Pakistan, countries where the U.S. is not involved in direct armed conflict.

CIA officers who operate the drones could be arrested and charged with murder in other countries, O'Connell warned, likening it to having the Mexican police or military bomb hotels in Arizona in order to target drug lords who may be hiding there.

You've got to know when to hold 'em and when to fold 'em.

Message to Obama: The U. S. remains in a domestic crisis. War + weak economy = stagflation. Save money.
Prioritize. Remember your Nobel Peace Prize. Justify it just a little. Storm troopers in Quincy, Illinois guarding you from Tea Party grannies is more than enough militarism. Some wars are just not worth it. Afghanistan looks to be one such war. You said you're planning to bring the troops home in a year. Fuggedabout it. It's 5-10 years or no way (see Britain/Malayan insurgency). Cut your losses or level with the American people.

Out now.

Copyright (C) Long Lake LLC 2010

Heigh-Ho, Silver? Up and Away?

If silver prices remain roughly unchanged, the 200 day moving average for silver prices will hit at least a 30 year high in about two weeks. If this happens, silver will then match gold's performance. Measured as the GLD ETF, gold's 200 day sma peaked in August 2008 at 88.30. It broke through that peak 1 year later, in August 2009 with GLD at $92.34. If one eliminates the late fall spike in GLD over $119 as an over-exuberant breakout, short-covering phenomenon, the increase in gold's price has been steady and almost inexorable.

What is interesting is that silver has been outperforming gold, reminiscent of 1978-80. A good review of that period and related periods is found at the Silver Institute's website; click HERE for link.

Currently, Zealllc.com is featuring detailed arguments from one and two weeks ago that make the case that if one is positively inclined toward gold, one should be more so toward silver.

Excluding a few frenzied days in which the Hunt brothers pushed the silver market to a squeeze situation over 30 years ago, the trading high for that time was about $25.

If spot gold were at $1200, a common gold:silver ratio of 50:1 would give a silver target of $24/ounce.

To my knowledge, the silver ETF with the most upside is Silver Bullion Trust, run by the same folks who got the precious metals ETF concept going decades ago with the Central Fund of Canada (CEF) and who also run Gold-Trust (GTU). SBT_U (Toronto) can be purchased OTC in the U. S. as SVRZF. It trades at a slight discount to net asset value, in contrast to the implied high premium it carries in CEF. Thus there is the possibility that separate from any increase in the spot price of silver, this ETF may have a significant price rise in the order of 5-10%.

Who knows, but my sense is that silver has had enough sharp plunges the past several years, and such a prolonged bear market, that a sharp and sustained breakout to new highs above $21 (roughly its 2008 high) up to perhaps the $24-25 range would be completely surprising but quite typical of this volatile asset.

Given that silver has some superior qualities to gold as transactional hard money, the good news for silver owners is that it can be forever (tarnishing notwithstanding).

Copyright (C) Long Lake LLC 2010