Keeping you on the right side of the market

We can be Knowledgeable with other men’s knowledge, but we cannot be wise with other men’s wisdom.  ~Michel de Montaigne

When one looks at 1-3 year charts one can miss the larger picture and mistakenly come to the conclusion that all is well. This is why it is imperative that one look at both the long term and short term charts. We at TI have our own modified version of the Dow Theory which has proved to incredibly accurate and useful to us over the past 11 years. Our version of the theory places most of the emphasis on the Dow utilities. In essence the utilities must lead the way up or down and not languish.

Everything looks pretty fine when one examines 5 year charts of the Dow industrials and Dow transports but things change when one looks at the Dow utilities.

The charts of the Dow industrials and Dow transports both look relatively decent The Dow is roughly 10% away from testing its 5 year highs and the transports are more or less trading at their 5 year high. The picture is considerably different with the Utilities. While everything looks great in the 1-3 year charts, a 5 year chart clearly illustrates that all is not well. The utilities are trading well off their 5 year highs; in fact, they would have to mount a stunning rally to test their 5 year highs. From their current levels they would need to rally a whopping 29% to test their 5 year highs. Instead of leading, the utilities are clearly languishing. The fact that the utilities have not even managed to trade past their Nov-Dec 2008 lows, illustrates how weak they really are.

Conclusion

The utilities are clearly indicating that the long term outlook is rather dire. They have not even managed to trade past their Nov-Dec 2008 lows. Instead of leading the way up it appears that they are languishing. Perhaps their inability to break out suggests that they might actually be leading the way down. Could this be harbinger of what lies in store for the markets in the months to come?

If we look at the following charts they seem to support this view that all may not be well.

The Baltic dry index is a leading economic indicator. One look at this chart and it tells us that the worst is far from over. 3 years ago this index was trading in the 8000 plus ranges and today its trading at roughly 1310. It is off by almost 85%. It has been putting in a series of lower highs after topping out in Dec 2009 and in Feb 20011 it put in a new 52 week low. Should this index be trading at this level if the long term outlook was bright?

The 5 year chart of the VIX illustrates that it is trading at 5 year support and it is only a few points away from testing its lows. A multitude of positive divergence signals have been generated in the long term time frames (usually bearish for the markets). A weekly close above 30 will turn the daily trend bullish, neutralize the weekly down trend and strongly suggest that the VIX has bottomed.

The 5 year chart of the NASDAQ illustrates that is has run into a zone of rather formidable resistance and it appears to have put in a triple top formation. Triple top formations are usually followed with substantial declines. In addition a series of negative divergence signals have been generated; none of the recent new highs were confirmed by any our technical indicators.

Finally, consider this volume which is already extremely low, has dipped even more. Average volume is now roughly 1 billion shares lower than it was just 30-45 days ago. The data from the above charts is rather compelling because it is based on 5 years worth of weekly data. Thus these charts are giving us a good idea of what to expect going forward. The only exception to this is the chart of the BDI; here 3 years worth of daily data was used.

Things are certainly heating up and it will be interesting to see where the markets are trading 3, 6 and 12 months from today. We live in such uncertain times that now more than ever it is imperative that one have some exposure to the precious metals sector (Gold, Palladium and Silver bullion). If you have no position at all then use any decent pull back to open up a small position. If the precious metals sector should experience a strong pull back you become an aggressive buyer. The long term outlook for the precious metals and commodities sector in general remains extremely bright.

Every man is a damn fool for at least five minutes every day; wisdom consists in not exceeding the limit.  ~Elbert Hubbard

Disclaimer

We have positions in Palladium, Silver and Gold bullion.

Mind unemployed is mind un-enjoyed.
Christian Nevell Bovee,1820-1904, American Author, Lawyer

MZM stands for money of Zero maturity. It is a measurement of the total amount of money that is easily accessible for one to use immediately. MZM measures all the money held in hard currency, checking accounts, savings accounts and money market accounts.

Generally speaking MZM is becoming the more preferred measure of money supply because it provides a better representation of the money readily available for spending and consumption. The first chart illustrates the absolute liquid amount of money in the system.

This chart illustrates just how much money the Federal Reserve has been pumping into the system to stimulate the economy. In contrast, the Feds did not pump much money into the system during the recession of 80’s and perhaps this was a smart move for it enabled the system to heal. They pumped money in the 2001 recession and have gone ballistic during the current great recession.

The above chart shows the year over year rate of change, and interestingly it is declining. Thus even though the Feds left interest rates unchanged it appears, they are stealthily sucking cash out of the system. After growing at an annual rate of roughly 4.5% in 2009, it is now contracting and falling at a rate of 2%.

The era of easy money appears to be coming to an end and perhaps the markets are sensing this: the increased volatility maybe a result of traders reacting to the withdrawal of cash from the system. The chart suggests there is less money for traders (hedge funds, etc) to borrow and if there is less money to borrow it suggests that brokers will soon start charging higher rates.

The market now has to deal with the fact that money could be becoming more expensive to borrow, the economy is stating to sputter, the housing sector is falling apart again, unemployment remains at lofty levels, states are facing huge budget deficits, the potential fall out from the BP oil spill (the derivative part of this could be even worse then Lehman Brothers), etc. Markets hate uncertainty and they certainly have a lot to be uncertain about right now.

Conclusion

No one indicator or tool can predict what the markets will or will not do, however, a confluence of indicators usually provides a very accurate picture in terms of market direction. When we couple MZM with the fact that the Dow has put in 37 new highs on unusually low volume, that in general the Dow sells off on higher volume, housing sector is in still in trouble, unemployment is high, consumer sentiment is dropping, that the majority of the states are experiencing huge budget deficits, etc., the outlook going forward does not look too bright.

We have stated several times over the past few months that the second part of this rally appeared to be suspect and advised traders to use very strong rallies to short the markets. It now appears for all intents and purposes that the Dow might have peaked in April 2010 and that all subsequent rallies will most likely lead to lower highs.

We have stated several times over the past few months that the second part of this rally appeared to be suspect and advised traders to use very strong rallies to short the markets. It now appears for all intents and purposes that the Dow might have peaked in April 2010 and that all subsequent rallies will most likely lead to lower highs.

Traders willing to take on a bit of risk can use strong rallies to open up short positions via put options on some of the big name stocks (JPM, CAT, BAC, WFT, etc.) and or short via ETF’s such as DOG, SSG, SKF, QID, etc. Traders seeking higher leverage can use ETF’s such as FAZ; super leveraged ETF’s should not be held for long periods of time as one can actually lose money on them, even if the market’s trend lower. In order to make money on these funds the markets need to move down rapidly in a short period of time. We will be writing a follow up article on the potential dangers of using super leveraged ETF’s. If used wisely and for short term moves one can still lock in rather large gains using these ETF’s.

Uncertainty and mystery are energies of life. Don’t let them scare you unduly, for they keep boredom at bay and spark creativity.
R. I. Fitzhenry

Disclosure; we have positions in SSG and SKF

If the wind will not serve, take to the oars.
Latin proverb

Yet another strong indication of why the markets are behaving strangely. Perhaps this partially accounts for the fact that the Dow has put in 37 new highs on what if one is polite one will call terrible volume. The SEC is allowing all the big guys to legally rob the small player. One wonders what purpose the SEC serves other than helping crooks perform even better. We are sure that many big banks are using this loophole to rob the average Joe. So banks are allowed to borrow money for almost nothing, then they use this to trade instead of lending it out, and now they can use super fast computers to gain an even bigger advantage over the smaller player. No wonder banks account for roughly 75% of the daily trading volume.

We wonder when the average Joe will stand up and demand real change from the crooks in Washington,  the bankers concubines The SEC is a Joke, they only attempt to do something when it’s too late and even then they drag their feet.

On a separate note, our adult index clearly indicated the decline of morality as we know it and the “I will do anything for the money syndrome gaining traction” years in advance. The adult index has been in a steep uptrend for several years now. Expect this situation to worsen with the progress of time, until a point is reached where the masses finally take a stand and demand change instead of just asking for it

Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading.

The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers. That lets these traders shave pennies per share from trades, which when multiplied by thousands of trades can earn the firms big profits. Critics call the practice the modern day equivalent of looking at share prices listed in tomorrow’s newspaper stock tables today.

"It is a rigged game," Sal Arnuk, co-founder of brokerage firm Themis Trading, said Wednesday at a Securities and Exchange Commission roundtable discussion in Washington, D.C., referring to the trading activity, which some call "latency arbitrage."

While legal, the practice pushes the envelope of what is fair, critics say, and raises questions about the advantages some fast-moving traders are gaining in the market. The SEC roundtable convened executives from trading centers and firms across Wall Street as the agency continues to probe high-frequency trading and the growth of dark pools, trading venues where trades take place away from the main exchanges. Full story

.

We do not quit playing because we grow old, we grow old because we quit playing.
Oliver Wendell Holme

Advice is what we ask for when we already know the answer but wish we didn’t
Erica Jong

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever. "It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015. Full story

Well, we can’t say we did not warn everyone; for a long time now we have been stating that this recovery is all smoke and mirrors. Worse yet we proved that the Dow has not put in one single new high in the past 52 weeks in our article titled Dow’s new highs, all lies. When priced in other commodities such as Gold, the Dow is in a clear down trend.

We also stated that the housing recovery was all humbug and unemployment levels would remain at lofty levels for years to come. High unemployment coupled with a terrible housing market is cause for concern. The housing market index dived 17 points indicating that the small uptick was mainly due to the $8000 tax credit which has now expired.

The housing market index dived to 17 in June from 22 in May, the NAHB reported.

All three components of the index fell in June, and home builders were more discouraged in all four regions of the country. "The recovery in home building will be slow due to the elevated level of unemployment, tight credit conditions, high rates of homeowner and rental vacancy rates and the high level of homes available for sale," wrote Gary Bigg, an economist for Bank of America Merrill Lynch. The index was lower than the 21 that was expected by economists surveyed by MarketWatch, and was the lowest since it hit 15 in March. The five-point drop was the most since November 2008. full story

If one combines the above factors with a rapidly contracting M3 money supply, well we have the perfect recipe for a disaster. Double dip recession is not what these chaps should be worrying about; the term they should be thinking of is depression. 

Traders can consider using very strong rallies to open up positions in SKF, and SRS or short the following stocks (one could also purchase put options) BZH, LEN, DHI, etc.

Where do we people go if not towards the perfection of our own illusion?
Sorin Cerin,philosopher

Disclosure: we have no positions in the stated investments

So there we have it; this great programme that was supposed to bring relief to thousands of homeowners has turned out to be a curse in disguise. Individuals had to wait months to find out if they would qualify for the programme. While waiting, they continued to make payments only to find out that in the end they did not qualify. Isn’t this just lovely? You have one foot in the grave and the government instead of offering a helping hand hands you a shovel and tells you to start digging. Avoid the housing sector, and if you are aggressive consider shorting stocks such as BZH and LEN; use strong rallies to open up new positions.

The government’s mortgage-modification program has left some struggling homeowners worse off than they were before.

The Treasury reported Monday that nearly one in four homeowners who were offered lower payments under the Obama administration’s 15-month-old effort have been weeded out of the program. Many people were removed from the trials because they failed to make payments, didn’t provide all the financial documents needed to qualify or were found to be ineligible.

Homeowners are first offered trial modifications under the program, which provides incentive payments to loan servicers, investors and the homeowners. If borrowers make the payments and satisfy other criteria, those trials are made permanent, ensuring a cut in payments for five years.

While awaiting answers, some borrowers keep making payments, exhausting their savings in what may be a futile effort to save their homes. They also incur fees from the banks and delay taking action that might give them a fresh start in a more affordable home.

Some borrowers had unrealistic expectations about loan-relief programs, which were never designed to prevent all foreclosures. Another big problem is that banks often take six to 12 months to determine whether applicants are eligible.

"I had to learn the hard way and deplete my savings doing it," said Mia Parry, a manager at a mortgage brokerage in Scottsdale, Ariz., who has spent nearly two years seeking a loan modification. She now wishes she had put her home on the market.

Most struggling borrowers do benefit from seeking help, said Aaron Horvath, a senior vice president at Springboard Inc., a nonprofit counseling service based in Riverside, Calif.

Some win modifications, cutting monthly payments by hundreds of dollars. Others who ultimately can’t get modifications at least are allowed to stay in their homes for months, making either no payments or reduced payments.

But "if you’re draining your savings" in a vain effort to hang onto a home, he said, you may end up worse off. Full story

Disclosure

We have no positions in the stated investments

Watch out for emergencies. They are your big chance.
Fritz Reiner

While everyone is focusing on the so called obvious factors, they have missed the most important factor; the real reason behind the crisis. The crisis started in Greece and the top EU members knew they were going to bail out Greece and potentially any other member that needed help, but they pretended that they would not. One of the obvious reasons for the bailout was not to protect Greece, but to save the bond holders; most of the bond holders are foreigners. That’s the same reason the banks were bailed out in the US, to protect the large shareholders; it’s all a game of smoke and mirrors.

Our hypothesis is that the main reason that the Euro crisis was allowed to evolve was to deflate the Euro. Note that we have stated many times in the past that we have now entered into the competitive currency devaluation era, where the theme is or will soon be “devalue or die”. Or maybe we should add “devalue or die trying to”, for nations are going to do whatever it takes to keep their products competitive in the global market. We recently spoke of this phenomenon in two separate articles Currency-devaluation-a-race-to-the-bottom and the devalue or die era is picking up steam

Germany was knocked out of the top place and replaced by China as the world’s largest exporter and that must have hurt. Thus by allowing the crisis to progress, the EU could, in fact, devalue the Euro without actually issuing new currency. And then when things started to look really bad, they could pretend to help by approving a huge package, but this package would now devalue the euro even more. Thus with one stone they killed two birds in the sense that it produced double the effect. If they had approved a bailout package immediately, the euro would not have shed as much as it did. In a matter of months the Euro dropped almost 24%; in the currency markets, this is considered to be a very large move.

Another factor to consider is that no government wants to pay its debt in a stronger currency; governments borrow money so that they can pay it back with cheaper currency.

Thus while one currency might appear to be appreciating against another; the truth is that they are all falling down, some faster than others. Take a look at some long term commodity charts, and you will notice that most of them are in up trends, regardless of which currency they are priced. For example, a 3 year chart of gold priced in any currency shows that it’s in an uptrend. The race to the bottom has picked up in intensity. We would not be surprised now if some sort of crisis hits Asia soon; this would complete the circle perfectly. A position in precious metals is recommended; view this as a hedge/insurance against another potential crisis; if you have no position wait for a pull back before deploying new money.

Crises refine life. In them you discover what you are.
Allan K. Chalmers

Disclosure:

We have positions in Gold, Silver and Palladium

The number of homeowners who missed at least one mortgage payment surged to a record in the first quarter of the year, a sign that the foreclosure crisis is far from over.

More than 10 percent of homeowners had missed at least one mortgage payment in the January-March period, the Mortgage Bankers Association said Wednesday. That number was up from 9.5 percent in the fourth quarter of last year and 9.1 percent a year earlier.

More than 4.6 percent of homeowners were in foreclosure, also a record. But that number, which is not adjusted for seasonal factors, was up only slightly from the end of last year.

Stocks slid Wednesday as investors looked past a rising euro and focused on the U.S. economy, including the rising number of foreclosures. The Dow Jones industrial average fell more than 100 points in early trading. Jay Brinkmann, the trade group’s chief economist, said the foreclosure crisis appears to have stabilized. Seasonal adjustments may be exaggerating the change from the previous quarter, he added.

"I don’t see signs now that it’s getting worse, but it’s going to take a while," he said. "A bad situation that’s not getting worse is still bad." Full Story

Another validation of what we have been stating all along. The current housing recovery is all smoke and mirrors. Numbers are being twisted to make it look like the housing sector has put in a bottom, when, in fact it has not. Unemployment is still very high and without a job no one is going to go out and buy a house; worse yet, it is still hard to get approved for a mortgage. Our advice is to avoid the housing sector, unless you get a very very good deal and or are buying farmland. In the years to come high food prices will make farmland a very valuable commodity.

Poverty is the parent of revolution and crime.
Aristotle, BC 384-322, Greek Philosopher

The rich are getting richer, the poor are getting poorer and the middle class is getting screwed. Daniel Hoffman states that the underclass (undeserving poor) now makes up 10% of the US population Full Story This is shocking considering that the US is supposed to be a first world country. If so many people are hurting why are we fighting wars we cannot afford, policing the world and donating money to nations who do not deserve it.

The following data suggests that the situation is only going to get worse. This is by no means a comprehensive list.

Unemployment:

The unemployment rate is officially 9.9%, but everyone knows this figure is just huge fat lie. The true rate is probably in the 18%-20% ranges. Some parts of the country have rates in excess of 25%

The foreclosure factor:

Home sales might be improving, but most of the improvements are a direct result of the 8,000 credit the government offered first time home buyers. In 2009 roughly 3 million homes were foreclosed and www.Realtytrac.com states that the number could increase by as much as 3.5 million in 2010. If we add in strategic foreclosures, the picture will probably look a lot worse.

According to Reuters roughly 40 million Americans are on food stamps

Nearly 40 million Americans received food stamps — the latest in an ever-higher string of record enrolment that dates from December 2008 and the U.S. recession, according to a government update. Full Story

The dept of Agriculture states that 1 in 8 Americans may not be able to eat without government assistance. Let this figure sink in, we are not talking about some third world country, we are talking about the US. This is a clear sign that things are a lot worse than they are being made to look. The undeserving poor could grow in leaps and bounds if the economy suddenly hits a road bump. Europe is already in the midst of a second recession.

According to the most recent census, about 35 million Americans live in poverty

Let’s also consider the fact that some jobs are never coming back. We covered this recently in the following article High unemployment levels here to stay.

Dollar tree, Wal-Mart, Sam’s club and other large warehouse clubs are all booming; a sign that individuals are looking for bargains. Bargain hunting is usually a sign that all is not well.

Catherine Rampell provides additional information on this topic

In December 2008, 22.9 percent of the unemployed had been out of work for at least 27 weeks. A year later, that portion rose to 39.8 percent. That translates to having about 4 percent of the total civilian work force categorized as long-term unemployed.

Here’s a look at how many weeks the average jobless person has been jobless for:

Source: Bureau of Labor Statistics

The average person who was unemployed in December had been out of work for 29.1 weeks. By contrast, when the recession began two years earlier, the average unemployed person had been out of work for 16.5 weeks. Full Story

Conclusion

The underclass or the undeserving poor are growing as a group and many of those that are being pushed into this group are individuals who formerly belonged to the middle class. Given that unemployment is going to remain high for years to come, it appears that this trend will continue for sometime. In many cases this could have been avoided if these individuals had chosen to live 1-2 standards below their means and put the money they saved into good investments. For example, high dividend yielding stocks or invested some of this money in bullion, high quality technology, commodities based stocks, etc. Instead many of these individuals lived a lifestyle that was several levels above what they could afford and now sadly they are paying the price for their lack of foresight. However, it would be wrong to lump everyone into this category. If we are hit with another recession, then the outlook could deteriorate significantly.

We are not concerned with the very poor. They are unthinkable, and only to be approached by the statistician or the poet.
Edward M. Forster, 1879-1970, British Novelist, Essayist

From top to bottom of the ladder, greed is aroused without knowing where to find ultimate foothold. Nothing can calm it, since its goal is far beyond all it can attain. Reality seems valueless by comparison with the dreams of fevered imaginations; reality is therefore abandoned.
Emile Durkheim,1858-1917, French Sociologist

Let’s do some simple math.

There are roughly 910 million shares of apple in existence and the entire company has a valuation of 231 billion dollars.

To put things into perspective let’s examine the valuation of the following companies.

All the above companies put together would still have a valuation lower than that of AAPL. Roughly, they would have a combined valued of 214 billion. If one had to choose between buying AAPL and all the above companies, the wise choice would be to dump AAPL and jump into the above companies, especially since we are in the midst of a commodity bull. With left over change, you could purchase HL, KGC, RGLD, and you still would have some money left over.

Some other facts to consider

BHP is the largest mining company in the world and yet its valuation is well below that of AAPL, as of Monday it has a valuation of 182 billion shares.

You would be able to buy all the following Gold mining companies and still have a huge amount of change left.

• Barrick Gold $40 billion
• Goldcorp $29.478 billion
• Kinross Gold $13.50 billion
• Agnico-Eagle Mines Limited 9.84 billion
• Eldorado Gold Corporation $7.95 billion
• Yamana Gold Inc. $8.17 billion
• IAMGOLD Corporation $6.87 billion
• Red Back Mining Inc $5.80 billion
• Osisko Mining Corp. $2.86 billion
• Centerra Gold $3.03 billion

What would you do given the choice; buy apple or purchase a stake in some of the top commodities based companies in the world.

All pain is either severe or slight, if slight, it is easily endured; if severe, it will without doubt be brief.
Marcus T. Cicero,c. 106-43 BC, Great Roman Orator, Politician

As the saying goes, a picture speaks a thousand words and the charts below quite clearly illustrates that the Dow has not put in a single new high in the past 3 years.

When the Dow is priced in Gold all we get is a long term down trend line. This clearly illustrates how the masses are being fooled into believing that these illusory highs are real highs.

When the Dow is priced in Canadian dollars, we also get a similar picture though not as striking as when it’s priced in Gold.

When priced in Australian dollars the picture is almost as striking as when it’s priced in Gold. These charts clearly illustrate the sinister nature of inflation; your wealth is literally being stolen right in front of your eyes.

Conclusion

Inflation the silent killer tax is being used to fleece the masses; you work hard for your money, you pay taxes and instead of getting a pat on your back you get a kick in the cahones. Welcome to the real world. The way to protect oneself from this insidious disease is to stay one step ahead of the central bankers. Precious metals are one way to hedge oneself, but they are not the only way and not always the best option. For example, from the mid 1990’s to 1999 the dot.com era was a good way to stay ahead of the inflation game, and then from 1998 to roughly 2006, real estate was a good bet, and so on. Given the rate at which new money is being created and the fact that many nations are reaching the point of no return in terms of paying back their debt, it would be extremely wise to have a position in precious metals (Gold, Silver, etc). In fact, having a position in any commodity is a good idea for the current commodity bull still has a long way to go before a long term top is put in.

You know the world is going crazy when the best rapper is a white guy, the best golfer is a black guy, the tallest guy in the NBA is Chinese, the Swiss hold the Americas Cup, France is accusing the U.S. of arrogance, Germany doesn’t want to go to war, and the three most powerful men in America are named Bush, Dick, and Colon.
Chris Rock Comedian