Hope on a Rope
The chart shows that a major trend has ended in no uncertain fashion for the broad US stock market as the market just dangles there at the end of the rope that has thus far been known as 2008. Sure, we are expecting a counter trend rally that will serve to catch as many people off side as possible in the market's usual cruel way. But the fine bull market (in nominal USD terms) that took off in early 2003 has broken trend and this will not be easily restored. Still, with the amazing level of fear generated in the relatively short time since the first impulse down kicked off in August of 2007, we cannot discount a rally of significant proportions. A successful retest of the January, 2008 low or new lows with a spike in fear indicators along with bullish divergence by our usual indicators would set the stage for a nice trade. Bear markets can be a great time to be a trader - as opposed to investor. As a side note, I will again call your attention to our performance in the SINLetter stock contest. With the right picks, a hold strategy can work in any market. In this case technical analysis was used for all picks - bottom feeding a gold stock (GSS) and palladium miner (PAL) and top calling (short) an over-hyped internet consumer stock (AMZN) but fundamental views also came into play with the gold stock and the internet stock. I got lucky with the hysterical upward breakout in palladium that has driven PAL to a 132% gain. ;-) But again, that's what TA is for; it improves the odds on your 'luck'.
For my part, I am primarily an investor in a bullish sector - continuing to add quality gold miners on the buying opportunities. I also hold, as usual, short term US Treasury vehicles for relatively safe liquidity. A couple nicely beaten down uranium stocks have been added recently and I have been successfully trading market ETF's and stocks such as FTEK and SIMG, mentioned previously in this letter and/or on the Chart of the Week. But again, look at the chart above. The market has changed and if you are not prepared to watch it closely, you should be mitigating risk because any rally that comes is likely to face the hang man sooner or later. Hope will only float so long. As for gold and silver, they are over bought, no question. But not so for the majority of their miners. I will not go further into this sector in this letter because nothing has changed. I will continue accumulating during corrections. The fundamentals remain intact for reasons already covered repeatedly and I expect our targets of 560 for HUI and 230 for XAU to be hit at some point in the not too distant future. This would be in the face of near endless hysterics that I hear personally - from some pretty smart people - that deflation is here.
Think it's just the US, with its bloated, stinking credit markets melting down that is in trouble? Not so. The British, French and Japanese markets have also lost trend. The German DAX is attempting to hang in there (no pun intended) but is destined to join its compatriots. The Chinese market is a different animal, falling hard from its bubble highs in the initial leg down but holding trend. In fact, the Hang Seng looks like it could be a buy at the trend line from 2003. As with the US markets, there is room in many global markets for a rally to test the breakdowns.
Back in the USA it is clear that the majority are still steeped in convention and are being spoon fed - like babies in a high chair - the standard fare served up by the major media, both in finance and politics. Our guy, Ron Paul is all but buried alive and it looks like we will get a good dose of Feelgooditis with our likely election of Barack Obama. I have been a Ron Paul supporter because he is an economist and of the Austrian school at that. But I am hopeful that Barack's 'change', if he is indeed elected will embody something of substance and value. I believe he could be a fine choice for president from an inspirational standpoint, but we will need to get the economics nailed down here (see post script below). Thus far however, he has not said anything to make me think he is any more astute on sound monetary and economic policy than his competitors, save Paul. As the more astute financial commentators have noted, we are likely to get more of the same 'easy' policies and short term fixes that got us into this ever-expanding macro mess in the first place. Wash, rinse, repeat as it seems I end up writing in nearly every commentary. My personal belief, which played a big role in the formation of the website in 2004, is that economics is at the root of all social and political machination. If we screw economics up how can we expect to get anything right? No matter who wins in 2008, he or she looks dead set on enabling more of the same feel-good poison that got us where we are today.
A final note; the major media are doing a fine job of telling us how bad things are - although I'd ask where the hell they were for the many years that it took for unhealthy yet readily obvious (to those willing to look) components of this ill-fated Ponzinomic construct to be built. But is it really that bad? Is it all darkness and Armageddon financially speaking? To the guilty funny munny that gamed this thing to the hilt it certainly seems to be and to the horror of the average American who bothers to open his or her eyes (late though it is), this funny munny included supposedly respectable mutual funds, pension funds, investment banks and other fine institutions. There are yet layers of non-productive financial engineers left to be destroyed going forward and I have no doubt they will be, either systematically or in a final burst of liquidation in the wake of a macro 'accident'. But while the media is switching back to scapegoat mode - focusing on cartoon-like negatives as is their charter - there remain many highly productive and resourceful ventures on the economic landscape. I expect capital -so well enabled by the Fed - to beat a hasty bee line toward this productive capability. US manufacturing is not nearly dead. Nor of course is technology. Going forward it will be important to discriminate in the way one invests and in the way one lives one's life. I would hope biiwii.com can focus on some of the positives now that the negatives we have harped upon so often are front and center and scaring the daylights out of the public. The world ain't ending. It's just that if you were a naughty player in naughty games it sure feels that way.
Post Script: In keeping with the theme that things are not all negative and all is not lost, here is a link to a heroic man; the US General Accounting Office's David M. Walker. Much as Ron Paul has been a lonely voice in congress holding Greenspan's and Bernanke's feet to the fire over topics his peers barely seem to comprehend, there has been David Walker heading the GAO and issuing sane advice and commentary all the while. In fact, Mr. Walker was yet another inspiration for biiwii.com. He has announced early departure (see the PDF file announcement at the top of the page) from the GAO in part because "As Comptroller General of the United States and head of the GAO there are real limitations on what I can do and say" and "My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country..." Even as the cartoon-like Republican vs. Democrat (as opposed to real conservative vs. real liberal) public debate rages on, there are serious and respectable people doing their part to reverse this mess. The country seems prepared for change and people like Mr. Walker can help ensure that the change will have some real economic direction by lending their voices to the debate.