Monday, August 30, 2010

Is The Gold Mega-Bull Starting To Snort?

It may be time to go grab our red capes from the closet and dust them off.  In the pen is an increasingly agitated bull, snorting and pawing at the dirt.  He's been held back by a combination of natural and man made forces.  He ain't happy.

Gold has had every reason to correct sharply.  It appears that we are in the early stages of another deflation scare.  The money supply is shrinking at unprecedented rates and the economy is going into free fall.  These are NOT the best pre-conditions for a rally.  But they are GREAT conditions to fool everyone, and that is how great moves get set in motion.

When any asset or stock ignores what is unequivocally bad news, it virtually always suggests that the information has already been factored into the market.  I believe that's going on now.

The rally in Gold to near its all time highs has occurred very quietly and without much notice.  So has the recent strength in Silver.  The underlying mining stocks appear to be forming healthy base patterns which are ideal for a resumption of the strong advance that still has a very long way to go.

The key obstacle to an advance here is the tremendous liquidity in Gold.  When the really nasty part of the upcoming market meltdown asserts itself, it will inevitably trigger margin calls among the hedge fund community.  They may be FORCED to sell the most liquid assets they have, and Gold would be at the top of that list.

The key levels to watch for an upside move are $1,250 on Gold and 500 on the HUI.  If these are both exceeded, the technical picture goes from neutral, where it sits now, to very bullish.  Given the very small overall market capitalization of the mining sector, even a small re-allocation of investors' portfolios will lead to huge gains.  Remember how those internet stocks were propelled by the combination of small market floats coupled with surging demand?   You ain't seen nothin' yet!

But, I would highly urge that one does wait for the key levels cited above to be penetrated before diving in.  This is a very tricky market which is actively being intervened in.  A false breakout CANNOT BE RULED OUT!

To play this market in the event of the now growing more likely upside breakout, you can't go wrong with physical GOLD.  But, the real profits will be made in junior precious metals mining stocks.  We will update our analyses of which stocks are the most appealing at the appropriate time.

I would, however AVOID the various Gold ETFs, most notably GLD.  These are built on derivatives and there is very credible information floating around that there is not enough bullion to honor scheduled deliveries.  Thus far, this shortage has been met by the issuance of more paper, but the supply of GOLD is falling rapidly from existing mines.  Imagine the move if future delivery obligations can not be met.

I can see the bull's breath steam in the cold air.  Toro, Toro, Toro!

Marko's Take

Friday, August 27, 2010

Economic "Intel"-igence.

Remember about 6 weeks ago, how Intel (INTC) reported blowout earnings, ushering in a great earnings season and convincing investors that the so-called "recovery" was finally gaining steam?  Well, just moments ago, INTC warned on the revenue line.  Not good.

The company says it now expects revenue for the quarter of $10.8 billion to $11.2 billion.  That compares with a previous forecast of $11.2 billion to $12 billion.  Not good.

This is why data points like earnings are so irrelevant when it comes to assessing either the market or the economy.  They're backwards looking and of absolutely NO use. 

The Gross Domestic Product (GDP) estimate for the 2nd quarter was also revised much lower.  Originally, economists had it pegged at 3.5%.  Then, it came in a 2.4%.  Today, it was reported at 1.6%.  Not good.  But, "better than expectations".  Whose?  Not mine!

A common notion is that looking at prior earnings and economic data is like driving a car while looking in the rear-view mirror.  No wonder investors, even sophisticated ones, have so much trouble making money.

The market, with 4 Hindenburg Omens under its belt, and maybe a 5th today, has, in its infinite wisdom, anticipated the economic slowdown.  The reason markets are able to anticipate with such deadly accuracy is that investor liquidity and preference for risk is reflected in stock prices.  When investors are liquid or are interested in taking on risk, stocks go up.  Simultaneously, the same factors are filtering their way through the economy.

That's how the market mechanism works.  Investors express themselves both through economic actions and how they allocate resources.  However, these do not react simultaneously.  Markets are more sensitive.  One can think of the market as the proverbial "canary in the coal mine".  The canary's health indicates the economy's health.  Not that mysterious, now, is it?

Of course, not every market move is significant.  Markets can go up or down for a variety of reasons, including interest rates or the Dollar or problems with sovereign debt.  But, significant market moves, especially when they're at odds with our economic expectations, should NEVER be ignored.

This is how "Intel"-igence works.  As you understand the market's unique language, investing becomes much, much more straightforward.

Marko's Take

Thursday, August 26, 2010

How We'll Know If Hindenburg Omen Is Wrong

Yesterday, a 4th dirigible was seen flying the not-so-friendly skies.  According to Robert McHugh, who seems to be THE expert in the now famous Hindenburg Omen, we need 5 to get a "cluster".  But, let's take a deep breath, reduce our hyperventilation, and examine what signs we might look for that would suggest that this entire exercise is nothing but a blip on the radar screen.

One key factor is time.  The "crash window" is open, but won't stay open for very long.  If the financial markets don't implode pretty soon, then this entire exercise will become, as Dee Dee Myers used to say, "non-operational".  Ms Myers, who had the tremendous misfortune of explaining away Mr. Clinton's ongoing non-truths, had to constantly change stories as new facts came to light.  But, we can discuss that at another time.

If the Dow Jones Industrial Average (INDU) remains near or above 10,000 through the end of September, at the LATEST, I'd say that it would be time to go back to the lab. 

Key downside levels to watch would be roughly 9,500 on the INDU, 1,025 on the Standard & Poor's 500 (SPX) and 2,100 on the Nasdaq Composite (IXIC).  A break above 10,500 on the INDU, 1,100 on the SPX or 2,300 on the IXIC would suggest that the markets are probably poised to rally more.

As far as Gold goes, a break above $1,250 would suggest that an upside explosion could be at hand.  Contrarily, a penetration below $1,200 would be bearish, short-term, and probably be followed by a sharp, albeit temporary, correction.

Other signs that this whole scenario is incorrect would include rising long-term interest rates or a falling Dollar.  In the instance of a deflationary scare, we should see a strong dollar and strong bond market.  The key industry group to watch is the financial stocks.  They are currently poised to be leaders on the downside.  The markets CANNOT rally without at least a some upside strength in this group.

Do we care about earnings or economic statistics?  NO!  They are backwards looking and have ZERO predictive value.  In fact, any decline is likely to take place against a backdrop of at least decent news.  Like a sleight-of-hand magician, markets are very expert at having investors look up when investors should be looking down.  Look at my pretty assistant!

It's important to note, that as of this writing, not ONE of these possible contra-indicators is in place.  In fact, there is only one piece of evidence that the scenario is not imminent.  The yield curve is steep and positively sloped, meaning that the difference between long-term rates and short-term rates is high.  The reason this is important is that a steep yield curve creates a very profitable lending environment for banks and other financial institutions which borrow short or cheap and lend long or dear.  Since banks aren't lending, this may not be all that signficant.

The slope of the yield curve determines how profitable the financial sector will be prospectively.  And, as noted above, the health of this sector is important to the direction of markets and the entire global financial system.  It also has very high predictive value in assessing the prospects for economic growth. 

Another sign of strength would be felt in the commodities markets outside of the precious metals, which are acting as currency right now.  Keep an eye on oil, food and key industrial metals such as Copper.  Dr. Copper, as it's known, is a better economist than most Nobel Laureates.  Doc Copper has "Marko's Take" in his waiting room.  As of today, all the commodities are either weak and weakening or looking very toppy.

So, keep on an eye on the checklist that might suggest that the dark clouds are nothing more than a short thunderstorm.  The forecast is for torrential rains, but predicting the market is not much more of a precise science than the weather.  Even if it doesn't rain, don't forget your umbrella.

Therefore, unless the conditions for a re-assessment are met, as described above, investors should continue to hold lots of cash, use inverse ETFs for hedging and profits, and wait out the storm.

Marko's Take

Tuesday, August 24, 2010

I See The Bad Moon Arisin'

Last night was a full moon.  A BAD moon.  With the recent solar eclipse window still open, coupled with the full moon, the anticipated crash, should it happen, ought to take place imminently.  A review of the significance of astro-harmonics can be reviewed by clicking here:

Now that earnings season has encouraged investors, it's time for the economic reality to splash cold water in the financial markets' faces.  The news is exceptionally poor.

The Richmond branch of the Federal Reserve’s measure of manufacturing activity for the  mid-Atlantic region plunged by about 30% . The fall was less than economists were predicting, but the decline strongly suggests tha one of the US’s only area of strength has an empty gas tank.

The economy’s weakest sector, housing, got yet more bad news.  Sales of existing homes fell 27.2%  in July, the steepest monthly drop in 15 years and past consensus expectations of a 12%  decline.

The Richmond Fed’s index came in at 11, versus 16 the previous month.  Last week, the Philadelphia branch registered a disappointing index of factory activity that sent markets reeling, as it suggests a potential dip in the August reading of the broader Institute of Supply Management’s index.  The Chicago Fed’s index is due next week.

And this is just the beginning.  In today's trading, it appears that we will have yet another Hindenburg Omen.  This makes at least 3, depending on whose definition of it one ascribes to.  What's a few New Highs and New Lows among friends, anyway?

The equally ominous head and shoulders pattern gives us at least an idea of what might be reasonable to expect here in terms of the next intermediate low.  A good rule of thumb is that once the neckline is broken, the downside target is equal to the decline that immediately preceeded it.

Thus, one could look to these levels for the market to take its next breather:  525 on the Russell 2000, 925 on the Standard & Poors 500, 1900 on the Nasdaq Composite and 8500 on the Dow Jones Industrial Average.  And, these levels, or some approximation thereof, should be reached BEFORE the actual crash occurs, if there is one.

The only safe places to hide capital are Utilities, Oil Companies with a high dividend, Gold (physical), the Dollar and ultra-safe Bonds.  For the aggressive, inverse ETFs such as FAZ and TWM ought to provide at least a good hedge, but also a very risky, but potentially very profitable trade.

I see the Bad Moon Arisin', I see trouble on the way....

Marko's Take

Friday, August 20, 2010

Fasten Your Seat Belts

The entire financial and business world has now learned the two most important words:  Hindenburg Omen (HO).  We have written about this indicator extensively, with trading floors, chat rooms and even the mainstream press doing articles.  Until now, the confirmation of the indicator has been in dispute.  That will now change.

In today's trading, which is also a triple witching day, the confirmation is now a done deal.  Ironically, this is quite possibly the last time this indicator will be useful or viable.  However, if you choose to ignore it, well then be prepared to take a major hit to your financial fortunes.

Prominent wall street analysts such as Joseph Battapaglia, have derided this indicator.  Of course, Mr. Battapaglia is well know for beating the internet drum all the way to the top and then to the bottom of the crash in technology stocks.  With all due respect Joe, haven't you learned your lesson?

Mr. Battapaglia is hardly alone in his disgust.  In fact, the major brokerage houses rarely, if ever issue sell recommendations.  Abby Joseph Cohen, a perma-bull if there ever was one, never met a stock or market she didn't like.  Never has thought that any financial asset was overvalued.  Dear Abby, perhaps you should write an advice column?  Naw, it's been done.  Never mind!

Now that the HO has made the Wall Street Journal, CNBC, The Drudge Report, Huffington Post and Wikipedia, it will become too well known to be useful ever again.  That's how technical analysis works.  The minute everyone knows is the very moment that no one can benefit. 

For investors, the key here is survival.  Safety can be found in very few places:  Gold, the Greenback, high quality bonds, high quality utilities and oil companies.  But, it would be far more prudent to let this impending waterfall decline fully express itself.  There ought to FAR better entry points.

In the case of Gold, for example, consider the likelihood that the mega hedge funds are probably being hit with margin calls and will need to sell the only liquid assets they have.  Thus, it is imperative that position sizes be kept fairly small, temporarily. 

In addition, most people are long a variety of financial assets such as real estate and employment.  These, too, will affected.  If you're so inclined, a strategy of hedging your balance sheet is advisable.  My personal preference is to place some portion of your portfolio in inverse ETFs such as FAZ and TWM.  But, be aware that these are NOT for the feint of heart and will subject you to wild swings and increasing volatility.

Investors need to consider the emotional impact of watching their net asset values bounce around like a pinball machine.  No point in subjecting yourself to what is sure to be a tremendous amount of angst.

Marko's Take

Thursday, August 19, 2010

The Great Bond Bubble?

Pimco's Bill Gross, no stranger to the bond market, has opined that there is a bubble indeed.  And, for good reason.  Treasury yields are at generational lows.  And, the bull market in bonds has lasted for about a decade.  So, how much lower could bond yields possibly go?

Bonds carry two types of risk.  One is the risk of default.  Two, is what is known as "duration" risk, or the impact on principal from changes in prevailing interest rates.  Duration is the more significant since, given the very low rate structure, any rise in rates will result in capital losses which will not be offset by the yield.

The longer the maturity, the greater the duration.  For example, if one holds a 30 year maturity, even a 1% rise in rates will produce a double-digit loss.

The default risk is not insignificant, but it is fairly low since the Federal Reserve (FED) can simply print money, if necessary to ensure that maturities are honored.

So, the ingredients of a bubble are certainly present and, in fact, Gross may be correct.  However, "Marko's Take" believes that for the intermediate term, bond yields will head lower still. 

Bond yields are driven by several factors.  Inflation, supply and demand and probability of default are the most critical.  Currently, given the now approaching "Second Dip", inflation is not likely to accelerate.  In fact, we are more than likely in the early phases of a new DE-flation scare. 

If we look to the last two decades in Japan, we can speculate as how low interest rates can go.  The "Land Of The Rising Sun" now has become "The Land Of The Falling Yields".  Tokyo has been mired in a depression since its own stock market and real estate bubbles popped simultaneously in 1990. 

Naturally, at some point, as the national debt is monetized through liberal use of the printing press, we can expect a re-emergence of inflationary pressures.  That will happen in the not-so-terribly distant future.  When it does, Gross will be correct, but it may not occur for months or years.

Bond investors have nothing but poor choices.  If one invests in short-term bonds to avoid the duration risk, the yields are extremely low, especially on an after-tax basis.  The 2 year note is at a fat 0.48%.  If one reaches for yield by purchasing longer maturities, one faces substantial principal risk.  Thus, allocating a good portion of one's portfolio to fixed income is not particularly attractive.

A better choice for fixed return would be higher grade utility stocks.  They have generally paid good dividend yields which grow over time.  Their risk is low since utilities are regulated monopolies whose product is necessary, unless, of course, you wish to have no light, no heat, no gas and no electricity.  A second group of high dividend paying companies are oil stocks.  Wanna try living without transportation?

In the current environment, attractive investment opportunities are few and far between.  We continue to recommend holding a portion of assets in GOLD while staying liquid in anticipation of a MUCH better buying opportunity.

Marko's Take

Tuesday, August 17, 2010

Showdown In The Middle East?

As if the world and the United States didn't have enough holes in their collective dams to plug, here comes yet another leak.  Based on a recent interview with John Bolton, who has served as an interim ambassador to the United Nations from August 2005 to December 2006, action against Tehran must be taken within days, or risk a nuclear enemy in the resource rich Middle East.

Israel has days to launch a military strike against Iran's Bushehr nuclear facility and stop Tehran from acquiring a functioning atomic plant, Bolton said.

Iran is to bring online its first nuclear power reactor, built with Russia's help, on August 21, when a shipment of nuclear fuel will be loaded into the plant's core.  Russia, voted for the sanctions, yet has assisted Iran in bringing this facility on line.  What does Russia care?  They are one of a small group of countries whose oil supplies are growing.  No Peak Oil for them.

At that point, Bolton warned,  it will be too late for Israel to launch a military strike against the facility because any attack would spread radiation and affect Iranian civilians.

"Once that uranium, once those fuel rods are very close to the reactor, certainly once they're in the reactor, attacking it means a release of radiation, no question about it," Bolton told Fox Business Network.

Absent an Israeli strike, Bolton said, "Iran will achieve something that no other opponent of Israel, no other enemy of the United States in the Middle East really has and that is a functioning nuclear reactor."

The UN Security Council hit Tehran with a fourth set of sanctions on June 9 over its nuclear programme, and the United States and European Union followed up with tougher punitive measures targeting Iran's banking and energy sectors.

Bolton doubts that any military action is forthcoming, however.  In fact, despite his warning, he believes the window of action may have already closed.

The significance of this to investors is multi-fold.  In the first place, any military action would undoubtedly cause a major disruption in Middle East oil and a closure of the Gulf of Oman shipping lanes.  That would have grave consequences on the world economy and the financial markets.

Secondly, the other impact would be a heightened crisis bid in Gold.  One can only imagine the resultant spike in the price of Gold.  We could see a move of $100 per ounce in minutes or even more. 

A deflationary scare might suddenly turn into an inflationary scare.

For the record, one must believe that the odds of such a dramatic occurrence is pretty low.  The world is already engaged in numerous military conflicts and resources are quite constrained for more military spending.  But, it does alter the investment calculus.  One would be well-advised to maintain some positions in assets that benefit from crises.  GOLD.

Marko's Take

Sunday, August 15, 2010

Hindenburg Omen All Over The Financial Press

Once a very arcane and unknown indicator, the Hindenburg Omen (HO) has now hit the big time.  We've written several pieces about it.  But, it's time to make a few corrections.  Mea Culpa.

Stories have now appeared in the Wall St. Journal, Huffington Post, Wikipedia, the Drudge Report and even CNBC.  A good deal of information presented about HO is incorrect, including some presented in Marko's Take.

Unfortunately, the lack of understanding has led to many rumors and innuendos, which is NOT an Italian suppository!  Many readers have pointed out some of our incorrect conclusions, so let's take some time to review the evidence.

The Omen, named after the famous German airship in 1937 that crashed in Lakehurst, N.J., is a technical indicator that foreshadows, not just a bear market, but a stock market crash.  Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.

Mr. Miekka came up with the Omen in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week New Highs and Lows and the moving averages of the New York Stock Exchange.  He said the HO's name was coined by a fellow market technician, Kennedy Gammage, when they found out the name "Titanic" already had been taken.

The confluence of data used by the Omen was officially tripped this week.  There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total.  Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.

The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn.  Market analysts said only about 25% of Omen appearances have led to stock market declines that can be considered crashes.

Even the experts, however, aren't in agreement.  Robert McHugh believes that we have had one HO, which occurred on August 12th.  He maintains that the HO is NOT confirmed.  And, from McHugh's work, the trigger is 2.2% New Highs and New Lows, not the 2.5% that Miekka believes.

According to McHugh, the odds of a crash following an HO are 30%.  However, no crash has occurred without the presence of an HO.  Thus, a crash requires a confirmed HO, while an HO does NOT guarantee a crash.  According to McHugh, there have been 27 confirmed HO's and 8 market crashes.

McHugh writes that with the Federal Reserve (FED) pumping liquidity into the financial system, the market will have a source of buoyancy.  I'd like to suggest to Mr. McHugh that he obtain a subscription to Shadow Stats, and, of course, Marko's Take.

According to John Williams, M3 is declining at an historic rate.  In fact, akin to that experienced during the Great Depression.  For more on the powerlessness of the FED, click here:

In addition, McHugh should review the work of Steven Puetz.  According to Puetz, the planetary alignment is ideal for a crash to occur.  For a review of Puetz' findings, click here:

Another expert in astro-harmonics is noted analyst Arch Crawford.  Arch has been awarded many "market timer of the year" awards and he sees a crash coming.

But, there are other reasons to determine that a major decline is not far off.  For one, the ominous Head and Shoulders chart pattern.  The same pattern that existed just prior to the market collapse of 2008-09.

Regardless of the trajectory of the market, the one thing we must be aware of is that the odds of upside from here are extraordinarily low.  The odds of a meltdown are pretty damn high.  I wouldn't be standing on the train tracks with a loud "toot toot" getting closer every second.

Marko's Take

On Sunday, August 22nd, a most Un-ominous event will be taking place.  The California Wildlife Center will be sponsoring it's annual fundraiser called "The Wild Brunch: Fawntasia".  For more information on purchasing tickets or donating, please click here:

Thursday, August 12, 2010

Hindenburg Omen: 3rd Time's The Charm

Recently, we've been covering a most off-the-run indicator called the Hindenburg Omen (HO).  For some background, click here  For the indicator to be confirmed, it must occur in clusters within an approximate 5 or 6 week window.  Number 3 just occurred in this morning's trading.

The news gets worse.  Last evening, Cisco Systems' (CSCO) John Chambers, always the optimist, gave a somewhat pessimisstic outlook for the economy on the conference call following the release of Cisco's earnings.

Revenue for the latest quarter fell short of analyst expectations at Cisco Systems Inc., and Chambers said customers were expecting a slowdown in the economic recovery.  Chambers goes on "In terms of the economy, it's mixed signals. ... The majority of my customers believe the economy is going to continue just going slowly going up, but very slowly. Not what they would have said even just three to four months ago in terms of their expectations."

For Chambers, this is tantamount to calling for a Double-Dip Hyperinflationary Depression.  He must be a closet reader of "Marko's Take". 

So, while corporate earnings for the 2nd quarter came in at pretty decent levels, they are irrelevant.  What's important is the outlook, which is mixed at best. 

What's also mixed is the situation with Gold and precious metals stocks.  On the one hand, Gold is holding up remarkably well and should continue to do so.  Even in the oncoming deflationary freight train, Gold may continue to get a major crisis bid as it did at times in the meltdown of 2008-2009.  On the other hand, it is a very liquid and salable asset.  If hedge funds and other investors get margin calls, it is the easiest way to raise liquidity.  Ultimately, as hyper-inflation rules the day, Gold will absolutely sky-rocket.

I continue to be short-term neutral on the precious metals sector.  There ought to be a better entry point, but that is far from guaranteed.  If missiles fly in the Middle East, Gold could jump by $100 per ounce overnight.  If the stock market meltsdown, as we expect, Gold could fall by $100 per ounce overnight.  It could do both on consecutive days.  I would still recommend maintaining some position, just in case, but would be cautious about betting the farm...yet.

The best play, in my mind continues to be certain inverse ETFs.  These are highly volatile, not for the feint of heart, but a great way to hedge, at the very least.  Again, I would NOT recommend betting the farm on these, either.

If you don't like inverse ETFs, fine.  Stay in cash, and be thankful you have some.  Lot's of folks are about to  be wiped out.  Please don't let yourself be one of them.

Stay tuned.
Marko's Take

On Sunday, August 22nd, the California Wildlife Center will have it's annual fundraiser called "The Wild Brunch:  Fawntasia".  If you're in the Southern California area, and wish to come down and support this fabulous cause, tickets can be purchased by clicking here:

Wednesday, August 11, 2010

Unusual Uncertainty Meets QE2

Ya gotta love them boys at the Federal Reserve (FED).  Alan Greenspan gave us asset bubbles while warning about "irrational exuberance".  Now, "Helicopter Ben" Bernanke gives us "unusual uncertainty" and "quantitative easing" (QE).

If you missed your class on QE, here's a crash course.  It refers to a series of extraordinary measures that the FED is prepared to undertake to stimulate the economy.  Bernanke earned his nickname by saying that the FED was prepared to throw money out of helicopters if that's what it took.

If the FED has been trying to inject liquidity into the system, they've done one helluva lousy job.  The broadest measures of money supply, known as M2 and M3, are plunging at record rates.  In fact, they are at Great Depression levels of reduction.  Bernanke is an academic and a student of the Great Depression.  Specifically, his interest has been to attempt to understand what went wrong.  So, the helicopter plan was borne out of this knowledge, although clearly he was being figurative and not literal.

The dropping money supply, however, is probably not entirely Bernanke or the FED's fault.  An uncontrollable variable, called "velocity", is providing a stiff headwind against the FED's efforts. Velocity is a measure of  the rate at which money circulates.  If everyone were to put their savings under the mattress, for example, velocity would be zero.  On the other hand, if folks were to be engaging in a lot of transactions and borrowing to finance growth, velocity would be high. 

Velocity is hard to control, since it's the result of trillions of personal decisions.  It is a function of consumer and business confidence.  Low confidence equals high risk aversion and no willingness to expand, therefore, low velocity. 

It is believed that the FED will monetize its mortgage portfolio and use the proceeds to purchase long term U.S. Treasury Bonds.  That will do absolutely NOTHING to increase velocity.  In fact, interest rates are at generational lows already, and may go lower if the economic downturn intensifies as we expect.  Japan, a decent analog, has sub 1% long term rates. 

Using FED funds to purchase Treasury Bonds is nothing more than a monetization of the U.S. budget deficit, now running at $1.5 trillion per year.

Unfortunately, the FED is powerless.  Yes, you read that right.  The FED is virtually powerless.  They can't reduce rates which are already near zero.  Any policy moves like changing reserve requirements or Open Market Operations will have absolutely no effect in the current business climate.  To be effective, the budget needs to be brought under control, jobs need to be created and confidence needs to be restored.  However, none of those can happen as long as the FED is powerless to stimulate the economy.  The very definition of a vicious cycle if I ever heard one. 

We are facing an impending economic death sentence.  The only remaining question is whether we die by lethal injection, electrocution or hanging.

Marko's Take

On Sunday August 22nd, I would like to invite any Southern California readers to join me for an event sponored by the California Wildlife Center, called "The "Wild Brunch:  Fawntasia".  For more information on this organization and to purchase tickets for the event, click here

Monday, August 9, 2010

Peak Oil Loses Matt Simmons

Matt Simmons, the chief advocate of Peak Oil, died of an apparent heart attack last night.  The original theory was developed by M. Hubbert King.   Has the theory held up?

For some background on Peak Oil, it can be reviewed by clicking this recent piece:

Recent statistics from the International Energy Agency (IEA) bear out Hubbert's predictions.  Growth in worldwide oil demand has slowed but continues to grow.  Currently, the planet uses approximately 86 million barrels per day (mbd).  This is projected to grow to 88 mbd by late 2011.  Of course, an intensifying downturn in the global economy is likely to ensure that this forecast will not be met.

Peak Oil, however, refers to the production side.  It anticipates a growing shortage as existing oil fields commence an inevitable and accelerating decline, while the alternatives are still very slow in being developed.  According to the IEA, world production averaged 86.6 mbd in 2008 and fell to 85 mbd in 2009.  It has rebounded in 2010, but has fallen in the 2nd quarter.

OPEC, which produces just less than 40% of global supply, averaged 28.9 mbd in June, down by 65 kbd from May.  A lull in OPEC crude capacity expansion is expected between now and year-end 2011.  Non-OPEC supply is expected to rise by a modest 0.4 mbd in 2011 to 52.8 mbd, following a 0.8 mbd growth in 2010.  Increases from Brazil, global biofuels, Azerbaijan, Colombia, Ghana and Oman are expected to offset declines from Mexico and the North Sea during 2011.

The imminent "Double Dip" will undoubtedly have a major bearing on future production, especially if prices decline to possibly much lower levels in the intermediate term.

Peak Oil is significant for a variety of reasons.  For one, it undoubtedly was a major factor in the invasion of Iraq.  It has a bearing on future potential military actions against Iran.  Was there a connection to British Petroleum and the infamous oil spill and U.S. policy on offshore drilling?  They don't call it "Black Gold" for nothing.

Another "Windfall Profits Tax" seems a virtual certainty in light of the out-of-control budget deficit.  Our roads are paid for by Gasoline taxes.  Virtually every industry is affected by oil prices.  The automobile industry, the transportation industry, the mining industry and the military are all affected by oil.  So is foreign policy.  Global Warming?  Cap and Trade? Yeah, I'd say "Peak Oil" is important.

Unfortunately, profiting from a knowledge of "Peak Oil" is most difficult.  The chief beneficiaries, shareholders of ExxonMobil, Chevron, British Petroleum and Conoco-Phillips will not be allowed to enjoy the profits which are politically unpopular.  So, the only way to invest is in alternatives, or to own royalty trusts whose cash flows rise and fall with oil prices.  That is, assuming they will be exempted from future legislation.

The most viable response for the average American is conservation.  If one can afford a hybrid or install solar panels, great.  But, most people can't.  All most of us can do is turn down our thermostats and burn wood in the fireplace.  I hope I never see another line at the gasoline pump again.  But, unfortunately, I suspect that vestige of the 1970's will return.

Marko's Take

Friday, August 6, 2010

Clowns To The Left Of Me, Jokers To The Right

Recently, a rather sizable number of high profile mega-billionaires announced an intention to donate most of their net worths to charity.  Very commendable.  Or was it?

More than 30 U.S billionaires have pledged to give at least half of their fortunes to charity as part of a campaign spearheaded by Warren Buffett, the investor, and Bill Gates, the Microsoft founder.

The list of those signing up, posted on The Giving Pledge’s website, includes such notables as Michael Bloomberg, New York’s mayor, Ted Turner, the media mogul, Barry Diller, the chief executive of IAC, and David Rockefeller.

The financial sector is well represented, with former Citigroup chairman Sandy Weill and his wife Joan, David Rubenstein, the co-founder of the Carlyle Group, Pete Peterson, the co-founder of the Blackstone Group, Ron Perelman, the investor, and Julian Robertson, the hedge fund manager, on the list.

Ok, so what could my beef with this, oh so generous act, possibly be?  Well, many of these folks are politically active and have tended to be supporters of higher taxes and bigger government.  Mr. Buffett supported Hillary Clinton in 2008.  Moderate Republican Michael Bloomberg is viewed as a possible future Presidential candidate.  George Soros and Ted Turner are ardent Democrats.

Now, if they love Uncle Sam so much, why don't they pledge their assets to help lower the budget deficit?  After all, charities and the Federal Government are BOTH involved in wealth distribution.   So, why would they prefer a PRIVATE solution?  Mr. Buffett just LOVES higher taxes for everyone but himself.  So does Mr. Soros.

But the rich do gooders have so many ways to entertain us.  Take John Kerry, married to the heiress of the Heinz ketchup fortune.  Massachusetts Senator John Kerry is docking his family's new $7 million yacht in neighboring Rhode Island, allowing him to avoid paying roughly $500,000 in taxes to the cash-strapped Bay State.

If the "Isabel" were kept at the 2004 Democratic presidential nominee's summer vacation home on Nantucket, or in Boston Harbor near his city residence, he would be liable for $437,500 in one-time sales tax.  He would also have to pay $70,000 in annual excise taxes.  Now that Mr. Kerry has been exposed, he has had to cough up the half million.

And, what rundown of political hypocrisy would be complete without mentioning Al Gore.  Mr. Global Warming.  For more on how idiotic this theory is, click here:

Since "An Inconvenient Truth" won an academy award, we can assume that he lives a completely green lifestyle, correct?  Uh, not exactly. 

The average household in America consumes 10,656 kilowatt-hours (kWh) per year, according to the Department of Energy.  In 2006, Gore devoured nearly 221,000 kWh, more than 20 times the national average!

Last August alone, Gore burned through 22,619 kWh, or more than twice the electricity in one month than an average American family uses in an entire year. As a result of his energy consumption, Gore’s average monthly electric bill topped $1,359.

Since the release of his documentary, Gore’s energy consumption has increased from an average of 16,200 kWh per month in 2005, to 18,400 kWh per month in 2006.

Gore’s extravagant energy use does not stop at his electric bill.  Natural gas bills for Gore’s mansion and guest house averaged $1,080 per month last year.  Very convenient, indeed, Mr. Gore.

How about House Ways And Means chairman Charles Rangel being caught for evading income taxes?  And, of course Treasury Secretary Timothy Geithner have tax evasion issues of his own?

Sarah Palin, while governor of Alaska, passed a windfall profits tax.  Hello????

Now, before we depart without recognizing more of our friends on the Republican side of the aisle, let's compliment the "family values" of folks like Newt Gingrich and Tom Delay, and lots of others.  Yeah, hypocrisy is very bi-partisan.

Here I am, stuck in the middle with you.

Marko's Take

Another Hindenburg Omen

The horrible jobs report just released this morning showed what we've been saying all along.  There is NO recovery.  Interesting that economic adviser Christine Romer announced her resignation last night.  Could she be a regular reader of "Marko's Take"?  Could she have known that the jobs report was going to be so damn bad?

More important to investors is the very, very likely occurrence of another Hindenburg Omen in today's trading.  For more information on the significance of this, click here:

Another relevant item is the calendar.  The 3 major NYSE crashes occurred within a 6 week window of the equinox, which is typically September 22.  That would suggest that after August 10th, the market will be within this time frame.  Tuesday is August 10th.  It may occur anytime thereafter.  Crashes also occur WELL below the level of the preceeding market peak.  In general, the largest down days in history followed a rapid drop of 20-25% off the peak.  If history repeats, the coming crash should commence from BELOW Dow 9000! 

If one goes back just to the crashes in the NYSE, we had the meltdowns of 2008, 1987 and 1929 as examples.  All were late summer, early fall events.  Don't ask me why.  I'm still trying to understand what solar eclipses and full moons have to do with anything financial.

During the lead-in period to a crash, the market experiences what technicians refer to as "90%" days.  These refer to a preponderance of trading volume to either advancing or declining issues.  During the sizzling advance of the last 3 weeks, we experienced several of these days.  And, during the decline that just preceeded it, we had a number of 90% downside days.  This schizophrenia is what the Hindenburg Omen measures:  an emotional dis-jointedness that is conducive to a sudden shift from euphoria to panic.

A key question for investors is what they should do now.  If, as I believe, we are in another deflation scare, the only safe places are likely to be ultra-high quality bonds, and probably the U.S. Dollar. 

What about Gold?  In the near term, it's hard to be definitive.  On the one hand, it will undoubtedly benefit from a "flight-to-safety" bid.  On the other hand, the temporary deflation scare will put pressure on all hard assets.  Under just about any forseeable scenario, Gold ought to hold up better than virtually any other asset.  However, there MAY be a better entry point.  I'd prefer to wait and see on this one.

In the intermediate to longer term, Gold remains in a very powerful bull market.  With the inevitability of the introduction of "Quantitative Easing 2", and more stimulus spending in the offing, the seeds of hyper-inflation are being sown.  Once we succeed in completely debasing the currency, where can investors protect their wealth except by owning Gold?  In addition, the long underperforming junior miners should finally see those magnificent parabolic advances that have been long anticipated.  Again, there should be better entry points.

This is no time to put your head in the sand. 

Marko's Take

Wednesday, August 4, 2010

Arranging Deck Chairs On The Titanic

It never ceases to amazes me how investors, who are in the business of pricing reality, can completely ignore the obvious.  This became especially true during the internet bubble, as anything with a dot com on the end suddenly became worth billions.  Remember K-Tel?  Dr. Koop?  I think you get the picture.

The same phenomenon is taking place today.  While economic statistics continue to demonstrate a rapidly deteriorating economy, investors are all too willing to ignore everything and extrapolate a very unrealistic view into the valuation of equities.

The second quarter Gross Domestic Product (GDP) figures are a perfect case in point.  The headline number of 2.4% was already signficantly below estimates made just weeks earlier.  And, if we examine the data more closely, it is apparent that the quarter was even weaker than the estimate would suggest.

Inventories have had a major impact on growth over the past few quarters, and the change was estimated to have added more than one percentage point to the 2.4% annual rate of GDP growth reported by the Commerce Department Friday.  But factory-order data for June shows that the estimate used to calculate the preliminary number was way off.

The report noted a 1.7% drop in nondurable goods inventories in June following a 2.5% drop in May.  The Commerce Department had assumed a 0.5% rise for last month.

According to Shadow Stats, GDP revisions back to first-quarter 2007 confirmed that the economic downturn was more severe than previously reported.   Rising inventories and slowing growth  have set the stage for renewed quarterly GDP contraction in third-quarter 2010.

The upside revision to first-quarter 2010 growth from 2.74% to 3.73% was also largely the result of inventory growth, which accounted for 71% of the first-quarter’s total gain.  Revised real growth was 1.09% for first-quarter final sales, or GDP net of inventory changes.  Inventory gains also accounted for 44% of the 2.39% total growth in the second-quarter, with real final sales growth of 1.34%.

Even price inflation quietly was much worse than expected.  The GDP implicit price deflator showed an annualized pace of inflation in second-quarter 2010 of 1.83%, up from a revised 1.05% in the first-quarter.
 In an unusual divergence, annualized inflation for the Consumer Price Index in the second-quarter was a contraction of 0.72% versus a positive 1.53% in the first-quarter.  The higher the inflation rate used in deflating the GDP, the weaker the inflation-adjusted number and vice versa.

While most economic data is backwards looking and has little to no predictive value, it's clear that the "recovery" has been nothing but a phantom.  And, with money supply figures contracting at unprecedented rates, the economy and stock market are destined to follow.

Marko's Take

Sunday, August 1, 2010

A Very Inconvenient Truth

Al Gore sure did lay out a compelling case.  Glaciers are receeding, ocean levels are rising and rainforests are disappearing.  All those SUV's we selfish Americans drive, putting tons of carbon monoxide and carbon dioxide into our, oh so fragile, atmosphere.  We've put holes in the ozone layer and now we're all at risk for skin cancer.  So, the solution is to shut down the economy and go back to an agrarian life.  Oh wait, we can't do that, either.  Livestock flatulence is also a huge danger.  My, oh my.

Mr. Gore obviously lost a step since his invention of the internet.  We can only expect so much from this humble Tennessee man, whose bid for the Presidency was stolen by George Bush.  Never mind that all those disenfranchised Florida voters couldn't tell the difference between GORE and NADER.  And only Republicans cheat at elections and voter registration.  Just ask Acorn.  But I digress.

The fact is that the global average temperature (GAT) has risen for the last 140 years.  From 1920 to 1940, average global temperature increased by about 0.4 degrees.  From 1940 to 1980, it declined.  From 1980 to 2000, it advanced by approximately 0.6 degrees.  Are you seeing the problem here?  GAT rose before there was a huge industrial base and autos.  Then it declined as the country went to war and became heavily industrialized and during the period in which the automobile became a consumer staple.  Then it rose again, but only AFTER 1980. 

Still not convinced?  How about the Martian Polar Ice Caps.  Both Earth's and Mars' ice caps are shrinking!  I don't know about you, but I have yet to drive an SUV on Mars.  Didn't see any sheep up there, either.

This suggests that the warming is not only natural but astronomical in nature.  All it takes is for our solar system to enter a place in the Galaxy when there exists less space dust to reflect the heat and sunlight back.  We had an ice age once, remember?  Our planet does NOT have constant temperatures.  Temperature change is not only natural, but part of the cycle of life.

So, why the hysteria?  Hmmm, could it have something to do with money?  Nah.  Not our angelic environmenal friends, who certainly do NOT have an agenda.  And, of course, the press has no agenda.  Shoving idiotic legislation like cap and trade down our throats is a boon to all of our trading partners.  So, as you can see, the "global warming" lemmings might just have some conflicts of interest here.

Even if global warming were completely scientifically supportable and could be shown to result from fossil fuels and pollution, has anyone asked why a warmer planet is bad?  For every loser, there is a winner.  If your climate is cold, a few degrees warmer would be welcome.  Some plants and crops will do better.  Some won't.  Some animals will fare better, some won't.  Some industries will benefit, some won't.  Some real estate will benefit.  Some won't.

The only beneficiaries of global warming are the hysterical doom-sayers who have aligned themselves with this preposterous cause.  The rest of us are expected to give up our SUVs and lose our jobs.  Sounds like a terrific deal to me.  All this makes me hot under the collar.

Marko's Take