Foreword: Today's Tedbits will have a short piece from me and a guest essay from our occasional contributor Garrett Jones. I will be attending the Chicago Gold Conference, and last weekend I met with some up and coming new trading talent which I find and manage for my clients, so my schedule has not permitted me to do the regular newsletter. I am sure you will enjoy Garrett's Work. Next week we will cover how the US is driving a stake through the hearts of its most productive citizens and now over 60% of Taxpayers pay virtually NO taxes, except the "bank" tax, which of course is the stealth tax you pay when financial authorities print money while your money sits in the bank. LOL.
The US has turned a corner from a nation primarily of hard working wealth generating producers to a nation of "Something for nothings", the middle class is on the edge of reverting to an underclass as the government has inflated their earnings away, slowly impoverishing them as non productive government spending priorities (reelection giveaways) eat at the value of their dollars purchasing power through the printing press. Implementing laws, taxes, and regulations that choke off future growth prospects, and generally dumbed down the population so as to deceive them with illusory rhetoric and instill in them the entitlement mentalities rampant in the developed world.
In This Issue
Blast off, tsunami of cash hitting the street, aka Repatriation
Special Quick Alert on Stocks
Blast Off, tsunami of cash hitting the street aka Repatriation!
It is very clear that something is afoot. And I will tell you what it is? It is a dash out of cash. As I outlined in the last Tedbits the world is awash in money and credit, there is no shortage of fuel to power the economies of the world or the markets. The rest of the world is booming, even if the US is nearing the end of the rope. Now with this recent rally it is fairly clear that we are entering a major new leg up in stock markets worldwide. When the S&P 500 makes a new high above the 2000 highs it turns the whole period since that top into a great big corrective/consolidation pattern in terms of time and price that projects the US stock market up over 50% from present levels.
This most recent rally in the S&P 500 also turns last May/July pullback into a great big cup and saucer technical formation with the Feb. pullback being the handle, thus turning that formation into a consolidation and basis for the next move higher. The S&P has been up 17 out of 19 days, which has happened only five times since 1940: now, January 1987, December 1970, September 1954, and July 1943 (thank you Peter Eliades of www.stockmarketcycles.com for this info). All suffered brief pullbacks after they occurred, but never signaled a significant immediate top (see additional commentary below from Garret). This move is confirmed by most if not all the internals in the market. The shorts are being crushed, record short interest in the Russell 2000 signals further strength as they are forced to cover.
These patterns are also clear in natural resources, commodities and precious metals. It really doesn't matter where I look the patterns are bullish, with the exception of fixed income markets internationally. They appear to have entered bear markets. As I outlined in a Tedbits several weeks ago titled "the bomb, er Bond market" (see Tedbits archives at www.TraderView.com), the Federal Reserve will let the US bond market melt down over its dead body. And I don't yet see any dead bodies in New York or Washington DC. But yield spreads between foreign bonds and US bonds are on the move, providing further impetus to dollar flight.
When we reviewed the dollar in the last edition we outlined the critical point the dollar is now at, a 40 plus year low which really must hold to prevent far bigger problems from unfolding in related asset classes. And that the Central Banks of the world could be expected to square off against private holders of dollars. The Jury is out on the dollar. Private holders that have decided to flee while the value of their dollars is still relatively intact, i.e. "the herd", versus Central banks which wish to preserve the value of their largest reserve holdings. These battles can be seen daily in the FX markets. In the gold market selling is brisk by the central banks of Europe, but it hardly budges on the downside, as dollar holders gobble up this choice morsel. The dollar has not yet broken down since the last missive, but oh it is so close. At tonight's close the dollar is at 81.25 and the low that must hold is in the 80.14-80.48, any move below that level will unleash unbelievable amounts of outright sales, hedges and accelerated dollar selling. Compounding the problem for the defenders of the dollar is the constant rise in overseas interest rates while US rates are projected as flat to down, creating a constant push for big overseas holders of dollars to seek higher risk free yield in other sovereign currencies.
Conversely these levels in the dollar are part of the inspiration we see in the stock and commodities buying spree we are seeing now. US assets are cheap in the world of melting dollars. So instead of selling dollars the holders are now buying assets, stocks, real-estate, precious metals, and commodities, you name it, they are on a buying spree. The reason the dollar is not rising as foreigners buy US assets which are cheap in foreign currency terms, is because they don't need to convert their domestic script into dollars, they "ALREADY HAVE THEM". And the party has just begun!
(Authors note; looking for assistance in creating portfolio diversification that can survive and thrive in what I am outlining? In fingers of instability? If so contact me through www.TraderView.com. Subscriptions to this newsletter are also free at this address; send it to a friend, Thank you)
Dollar holders are clearly souring on the idea of buying more US debt issues, so now they have set their sites on newer, greener pastures (see the bomb, er bond market in the archives at www.Traderview.com). Pastures without barriers from the US government, ALA Dubai Ports world, Unocal, and if Hillary gets her wish the US fixed income markets. The problem with the dollar is there is just too many of them. Trillions and trillions of them. They dwarf the float of foreign currencies so that is not a viable destination, and foreign central banks and governments would not cooperate in this. And even if they did it would just exacerbate the problem of their already holding too many dollars, as they would be forced to "sterilize" the influx by printing their own currencies to exchange with the dollar holder on the bid. To prevent further appreciation of their currencies against the dollar that is already plumbing for new lows against most currencies. It would appear by looking at the exploding dollar balances held by central banks in India, Russia, China and Asia, that this sterilization process is under way as dollar holders in those countries exchange them for domestic currencies. This would explain last week's exploding balances (For more on this, see Tedbit "US Dollar on the Edge of a Knife, Capital Flight emerging." in our last issue dated April 20, 2007)
If foreigners buy stocks, real estate, natural resources, precious metals and commodity's, no consultation is necessary with the Mandarins of Washington DC. So that is the emerging primary destinations at this time. If the US government won't let them buy entire companies, they will buy them one share at a time. This is a form of repatriation, i.e. getting paid. If the US authorities try to block purchases using dollars in one place they will just redirect to another destination where their grasp does not reach. It's like squeezing a bowl of Jell-O, it just escapes to another place through your fingers, leaving virtually nothing in your hand when it finally closes.
This is the same problem the US has with campaign funding, they can regulate it one way and it will just find another way to get into the politicians pockets. The money seeking power is jell-O like as well. The influence for sale, power over others and the money at stake is so enormous that it will ALWAYS find its way to its intended goal of reaching the politician, and corrupting them. Why else would anybody spend $6 to 10 million dollars or more to get a job that pays $160 to 200 thousand dollars. They always retire rich for the influence they sell with a wink and a nod. Look no further than Bill Clinton, a poor boy from Arkansas who now is worth 10"s of millions of dollars and directs charitable trusts of hundreds of millions of dollars, which he gets paid from. Those donors got favors from him when he was in power and then made the donations to his favorite charitable trust, HIMSELF. The dollar holders are just detouring around CFIUS and Washington DC in this manner.
I asked my readers last week to please show me a currency that was weak against the dollar, and lo and behold someone sent me one. Guess which one? The Zimbabwe dollar. So the US government is viewed a little better than that of Robert Mugabe, he who turned Zimbabwe from the jewel of Africa into its worst destination. Just as the government is busily trying to do in the United States. Hi esteem indeed.
This process of repatriation has just begun as the hot potatoes known as dollars flows from one holder to the next, where this game of musical chairs ends is unknown at this time. But it is set to continue, and the new participants will slowly be joining the game as they see the smart money leading the way, and people like the ones that read this newsletter joining the fray. While the great majority of citizens of the world sit in ignorant bliss of what's going on, working hard to make ends meet and feed their families. The bag holders so to speak, they will be left holding the empty bag, victims of their poor educations and their blind faith in chosen elected leaders.
Special Quick alert on Stocks by Garrett Jones
Convergence, an energy point and exuberance ...
the Fed, funny money and parabolic advances ...
and, an interesting observation
About a week ago I wrote an Alert where I summarized that "the stock market has made a very impressive advance and seems to fend off negativity without effort." I then concluded with "Rather than being comforting, this is somewhat alarming as it is a very similar type of emotional market as 1987. That market rallied for 11 months prior to its crash. Next month, the current market will have rallied for 11 months. So, the message is to be very aware that a hard correction will be overdue at that time - if we haven't already had it. In the meantime, this market is making new highs and looks like it has further to go." The prior Alert was written April 17 (sent out on the 18th) when the DJIA closed at 12,773. At the close yesterday, one week after the prior Alert was sent, the DJIA closed at 13,089 - a move of 2.5%.
I then said "We should have a correction beginning very soon. The only safe way to play this is to buy dips. Stepping into this market in the middle of an advance is foolish on a risk to reward basis. I believe the volatility is likely to increase over the next month. Playing the very late stages of a move is very risky. I believe a very good shorting opportunity is approaching where positions can be taken in early May if things continue as they are. This should set up an excellent buying opportunity once the decline is complete. Oddly, we may have a similar situation to the one we had one year ago in May. It should be interesting to observe." So far, this seems to be playing out. Since this is a Quick Alert, I have two charts that I believe are meaningful. The first deals with the current market while the second looks down the road a couple of weeks. By the way, people who make predictions in this type of market probably need to get more rest - I am merely making some observations based on a few decades of experience (and I probably do need more rest).
This chart really captures my attention. It shows five sets of price channels all differentiated by color. Price channels define a range of price movement over a given period of time. Trend lines are valid when you have the most prices meeting a given line. A price channel is formed by drawing a parallel line to an established trend line. The dashed blue line comes off the October 2002 bear market low. The solid blue line begins at the test of the October 2002 low in March of 2003. The teal colored trend line begins with the October 2005 low and connects to the recent July low in 2006 that initiated this current rally. It is paralleled off the February 2004 peak (ending the first dynamic thrust of this current bull market). The upper red price channel is drawn off the two peaks just prior to the aforementioned July 2006 low. It is paralleled off the recent March 2007 low. This brings us to the most current price channel which begins with the July 2006 low to March 2007 trend line. This trend line is paralleled off the line defining the greatest number of highs in this advance. The beauty of this chart is that all of the upper price channel lines converge at basically the same point on this long term chart.
What does this imply? I look at it as defining what I call an energy point - a price range that, for whatever reason, prices are drawn to. Once that price is reached, for lack of a better analogy, the pent up energy can be relieved. In this case, it is merely a likely point for a reversal or correction. I believe it is very important to point out that 17 of the last 19 days have been up (see Special Note at the end of this Alert) and that the Advance/Decline line is at a new high. What does this mean? It means that advances almost never end with that type of strength. Generally, they will end their dynamic advance with a modest correction and then come back and most likely set higher highs with a lesser amount of buying pressure to create that final high. That sets up a divergence and opens the door for a much more meaningful correction.
In my prior Alert I mentioned that I had a convergence of price targets in the mid May time period. That is when I would expect this second high (assuming things play out in the manner I have stated). I was looking at my charts last night and discovered something quite interesting. It is, in fact, the basis for this Alert. First of all, note that the chart is broken down into three price channels that define the price action.
of this entire bull market advance. The first advance into early 2004 is at a fairly steep angle of ascent. The next channel still has a nice advance, but at a much more modest degree. The current advance is back at a robust angle of price appreciation. Here is what I find interesting -- the current channel is at the exact degree of advance of the initial price channel. In fact, the channel lines for the initial and most recent advance are interchangeable. I find that rather remarkable - but it doesn't end there. The first channel from the blue arrow to the red arrow is 52 weeks i.e. 52 weekly bars. The next channel measured from top to top consists of 104 weekly bars (from red arrow to red arrow) - exactly twice as long as the first channel. This final segment has the exact angle of ascent as the first segment and is in its 50th week. What does this mean? It may prove to mean absolutely nothing, but what it does do is get my attention. Why? Because I am looking for a mid May top and this falls precisely into that time period.
Please be aware that this market is in what can be defined as a parabolic rise. Parabolic rises take price levels to a point where they appear almost vertical on a chart. This translates to the maximum degree of bullishness that a market can provide as prices cannot advance at a higher rate than vertical. Common sense will tell you that such a time is probably not the smartest time to mortgage the house completely and put it all into short term call options in the stock market. This is so critical I just had to add one more chart:
This shows "parabolic" in its true light. I could have used the NASDAQ for an example, but I don't like to make people ill early in the morning (I began writing this at 5:00AM). This shows the remarkable parabolic advance culminating with the market top in 2000. Please note the correction that follows. The correction that followed the ultra robust NASDAQ 100 advance after 2000 was 83.5% from high to low.
The yellow line represents the current parabolic. Please be aware that it may have a long way to go. I am expecting a top in early 2008, so after a decent correction soon, I would expect to see higher highs ultimately. Please note that almost all arithmetic charts that rise over a period of time have a tendency to appear parabolic. Parabolic charts just get my attention as they have defined many classic tops throughout history (as in 2000). The yellow arc is certainly not a classic parabolic.
Many of you are completely amazed at how this market can make new highs while there is so much news that cannot be rated as anything other than "bad". I won't even list examples as I have done this many times in the past and the list is getting far too long. I would like to point out that Mr. Bernanke is a student of the Great Depression. He is well aware that keeping funds tight caused that depression. Due to this awareness, Mr. Bernanke has no intention of keeping money tight - as we have all been able to see. Uh, correction ... that isn't entirely true - we really haven't been able to "see" it because the Federal Reserve stopped publishing M3 numbers. Here is something from the Federal Reserve Bank of New York: In March 2006, the Federal Reserve Board of Governors ceased publication of the M3 monetary aggregate. M3 did not appear to convey any additional information about economic activity that was not already embodied in M2. Consequently, the Board judged that the costs of collecting the data and publishing M3 outweigh the benefits.
Apparently, the Federal Reserve has hired some "creative" writers. Basically, my view is that the Fed chose to say the above as it sounds much better than "Hey, let's face it ... we're between a rock (Iraq?) and a hard place; we have no choice but to flood the market with mass quantities of dollars and hope that somehow it will buy us some time to figure out what to do next." Just imagine how high this market can go if your dollar becomes totally worthless.
Special Note: My good friend and partner, Peter Eliades (www.stockmarketcycles.com and Stockmarket Cycles Management, Inc.), called me to report that the Associated Press (AP) reported this morning that the Dow Jones Industrials were up 18 out of the last 20 days - this information was carried on the front page of many newspapers across the country. In reality, the DJIA was "only" up 17 out of the past 19 days. IF we are up today, it will be 18 out of the last 20 days and that will be the first time in history that has occurred for the Dow Jones Industrials.
I am a real nit picker about these things as I had counted the days just last night as I was thinking about writing this Alert. Peter, bless his heart, is even more of a nit picker than I am - he went all the way back to 1928 to confirm that if the DJIA closes higher today, it will be a first. Peter quickly adds that he assumes it will be the first time in history as he "only" went back to January of 1928 as opposed to the Dow's inception in 1897. Now, here's where Peter earns his stripes as a champion nit picker. He went back and checked the S&P and found that it HAD been up 18 out of 20 days! It happened on both September 28th and 29th of 1954 - which, by the way, means it has also been up 19 out of 21 days. He notes that the '18 out of 20 days' happened again on July 8th and 11th of 1955. Now, here's the fun part: It happened for 4 consecutive trading days, July 3, 5, 6, and 8 -- in guess what year? 1929
Is there any significance that 47 trading days later, the Dow reached one of its most important tops, if not its most important top, in history? You tell me.
What I can tell you is that between July 3, the first of the 18 out of 20 up sequences, and September 3, the ultimate high in the Dow, the Dow advanced 11.5% and the S&P was up 12.9%. See how much fun you can have being a nit picker ......... by the way, Peter likes to refer to it as data mining. Technically, I guess he's a data miner ... but he'll always be a nit picker to me.
Thought provoking commentary and technical analysis by Garrett Jones, Garrett can be reached at firstname.lastname@example.org
In Closing, the world is a funny place. Broad social trends, politics and markets make it go. Learn to see the tea leaves and invest accordingly. We have no power over what is unfolding as individuals. Only the power to see what is unfolding, unfurl your sails and go for the ride. Do so in your own portfolio. Make no mistake, this is not doom and gloom, it is reality. This is the NO SPIN zone. See it and thrive, avoid seeing it and be victim of it. I am a natural optimist and very hopeful for the future. The opportunities now are as enormous now as ever seen in history, as are the pitfalls. Get on the right side of the ledger. If you wish assistance in this give me a call, visit the website www.Traderview.com and fill out a request to be contacted, or send me a note at tyandros@TraderView.com. Thank you for reading Tedbit's, subscriptions are free, if you enjoyed it send to a friend. Next weeks Tedbit's will be on another subject near and dear to my heart: the something for nothing mentality, an insidious character flaw which permeates the developed economies and insures their ultimate destruction. Once that destruction takes place the political stage will be set to change the developed world back into springtime and growth once again. Just like the seasons in nature: spring, summer, fall and winter. Economies, business models and countries go through these cycles as well. The goldilocks hypothesis and political belief that you can repeal these cycles is a false belief. Thank you for reading Tedbit's. See you next time!
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