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CyclePro U.S. Stock Market Outlook
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The current U.S. stock market appears to be following a similar path as was previously witnessed by U.S. investors in 1929 and 1987, and more recently by investors in the Japan Nikkei in 1990, Hong Kong in 1997, and many others. These were the most famous world stock market "crashes" of the century. We have already witnessed crashes in internet and high-tech industries during 2000, will 2001 also be added to this prestigious list for a "Crash" in the United States? Will the global economy crash too?
(Thursday 10/16/2003 AM): Ok, so I go out of town for a few weeks and what happens? The gold market has a minor hick-up. But by the e-mails that were waiting in my in-box one would have thought that gold prices crashed and the global economy was suddenly booming again.
I wish it were true about the economy, but unfortunately it is not. First of all, gold prices did not crash. Sure there was as minor pullback, and by "minor" I mean that the long term outlook has not been altered at all... not even a tiny bit. And second, the global economy is still up to its eyeballs playing yes-man to the USA.
China is fulfilling its realization that the next major world war will be a financial one and not necessarily one fought by conventional weaponry. China continues to set itself up as the next major finanical center of the world by keeping its currency tied to the US Dollar. China's financial strength grows daily. As the US trade imbalance and domestic budget woes worsen, the Dollar weakens and thus so does the Chinese Renminbi (Yuan). As long as China benefits they will continue pegging the Renminbi (YUan) to the Dollar. There will come a time when the Chinese believe the Dollar has fallen far enough and then, and only then will they adjust the peg. This is also a rather long-term endeavor -- in the end, China may win.
Between now and then, a lot of drama will unfold. The US will plead with China to revalue the Renminbi. At first, such as our latest visit to China, will be little more than play-acting to apease domestic lobbyists. Soon the pleas will turn serious. Ultimately, the pleas will become vicious. China has the US by the shorthairs while the Bush administration appears to be clueless... no, I correct that, the Bush administration "is" clueless (thanks to former president Clinton, now we know what the definition of "is" is).
As for gold, the following daily chart shows what happened. I drew in the pink and lightgreen lines to show that the selloffs were down to prior peak levels from July and August. True Elliott does not allow wave 4's to cross over wave 1's, but that only applies when a market is freely traded -- since gold is often manipulated I will allow a few points. Any more new lows and my primary count will have to be altered. The only level that I believe must not be broken is the Dec'03 futures July 15-17 tripple low of $342.50 -- however, the Jun'02 high of $341 should provide ample longer-term support. If the 50-day moving average (blue) crosses below the 200-day (red), then it would signal a much larger corrective period or worse. The 50-day line was barely nudged by the $13 selloff on 10/3. In the big picture, gold's bull market has not yet turned.
Click chart to enlarge.
The weekly chart shows that the 50 day (10 week) moving average has been above the 200 day (40 week) line since May, 2001. Since then, each of the major sell-off's were supported by the 200 day line. Right now, the 200 day line is just above $355 and rising. If this current rout of selling continues further, the 200 day line should be monitored for support again.
Click chart to enlarge.
The Silver chart shows a much deeper selloff than gold. Silver is currently setting just above its 200 day moving average at $4.76. Silver has not been bounded by its moving average line like gold has.
Gold is a more monetary metal than industrial while silver is more industrial than monetary, yet investors often times view silver as the "poor man's gold". Similarly, gold stocks are used by many investors as a proxy for physical gold because owning and storing physical gold is too awkward for most investors, where gold stocks can be easily traded with just a few simple mouse clicks or strokes on the keyboard in their online broker accounts.
The HUI chart (index of mostly unhedged gold stocks) is similar to the gold chart except that the HUI has had much larger gains than gold. HUI closed friday at 197.57 while the 50 day average line is at 191 and the 200 day line is way down at 152.
The 800 gold stock list has been updated for prices on 10/10/03 and shows the net change since 9/20/03.
Seasonal Gold chart shows that it is common for prices to rise to the beginning of October followed by declining prices for the rest of the month. The last 15 years seasonality shows the final months prices are normally flat. However, most of those years were in a bear market. The last 3 years (2000-2002) show that the the October weakness may last through mid-November, but then prices firm and finished higher by year end. All personal bullishness aside, I do not see any significant reasons why this pattern cannot continue for the current year. Seasonal charts are a smoothed out, generic depiction of how gold trades seasonally, but it should never be used for detailed trading. To see what I mean, take a look at a chart that shows the details of all years 1975-2003 overlayed on top of each other. While many years may have exhibited a pattern similar to the October-December one discussed above, each of the component years took very different paths to get there.
Click chart to enlarge.
Gold/Silver Ratio Cycle is a weekly chart that is the calculated division of silver into gold. Ie: how many ounces of silver does it take to buy one ounce of gold? The green line is the same sprad ratio but detrended. A repetative cycle is clearly visible. The cycle top periods range from 18 to 26 weeks (126 to 182 days) with an average of about 21 weeks (149 days) and the cycle low periods range from 16 to 26 weeks (112 to 182 days) with an average also about 21 weeks (149 days). This cycle period has changed through history, however, since 1998 the cycle periodicity has been very regular. The most recent cycle high was 6/6/03 and low was 8/1/03 (not exact dates because the chart is a weekly chart), which projects the next high to occur between 10/10/03 and 12/5/03 and the subsequent low between 11/21/03 and 1/30/04. If the earlier of each range plays out, then this cycle analysis fits right along with the seasonal discussion, above.
Click chart to enlarge.
U.S. Bonds chart has been updated from the charts I posted on 8/28/03 shows that the similarity with the 1928-32 chart may be progressing -- this has a potentially very severe ramification. If the current mild sell-off in Bonds continues such that it trades significantly below 102'15 before breaking the intermediate high of 121'22, then I believe it adds greater weight to the likelihood of a repeat of the 1928-32 chart, al beit the timing and magnitudes may be different, the pattern may nonetheless play out with a bond crash coming within the next several years. It is still too early to call for a crash or even that Bonds are truely following the 1928-32 chart. What is important now is to monitor the Bond chart to see if the crash pattern continues. When bond prices fall, their yield (interest rate) rises. Even if the Fed continues to hold official interest rates low, lower bond prices (higher yields) may twart the Feds desires by artificially raising interest rates.
Click chart to enlarge.
In stocks the best overall chart to view is the RUT (Russell 2000). The RUT demonstrates that the rally this year has been extremely strong, largely fueled by the Fed's massive monetary expansion policy. The RSI and stochastics indicators show that the chart has been in "overbought" territory since May-June. The last time the RUT was in a similar situation was when the market peaked in 2000. The 50 day moving average seems to be holding support so this needs to be monitored.
The Wilshire 5000 index is also good to watch because it represents the market capitalization value of the market. The recent RSI peak out above 70 was the highest level since even before the market peak in 2000.
The RSI and stochastics indicators on both charts are suggesting that both indexes are overbought, but neither indicator is any good at telling when the subsequent downturn will occur. But from a statistical anomoly point of view, both chart RSI's are above 50% for a longer duration than during the market peak in 2000. And, both chart stochastics also show the current time duration is much longer than in 2000. Both charts show a slight RSI divergence with the price chart, so the breakdown may already be in progress.
During the 1990's there were several times when the Fed added to the money supply (more than their usual excess) which indirectly fueled stock prices higher. However, the current Fed fuel has been the longest continuous run in the past decade and stocks are displaying the effect. Unfortunately, the Dollar is being negatively impacted by the Fed's policies and at some point the Fed will be forced to discontinue pumping the stock rally to keep the Dollar from falling further.
Bradley Siderograph has been updated:
Click chart to enlarge.
(Thursday 9/25/2003 AM): The stock market is about to open up in a few minutes but the metals markets are already trading. Gold has broken through its prior December futures high of $391, trading overnight as high as $393.70 and currently at $391.70 as I write this update. Stop-runs should be expected if another rally can be made into the $393 area because most stops are set up for the day-session and not the Access (after hours) session. Silver is also at fresh highs trading to $5.395 overnight and currently at $5.345.
Now that we have broken the old high barrier the real test will be to see if this is sustainable. If the rest of this week gold can stay consistently above $391 then we may be able to start using $391 as a new support level. I am cautious at this point because of current bullish sentiment readings. As I have stated before, high sentiment can stay high during a bull market (just look at stocks during the 1990's). We are getting very close to an area where lower-level impulsive Elliott Waves should be ending and a one or two week consolidation should begin -- eventually, and quite likely before year-end, Gold should go well above $400.
Still without my charting programs the following will have to suffice -- this chart is the COMEX December Gold futures contract:
The color-coded waves show the current count as I see it. The large blue waves is the predominant structure of which we are currently within the large blue wave 3. Within that wave will be 5 smaller waves (labeled here as the black "1" inside a red circle in extreme upper right). You can see that this black wave has a ways to go yet while the smaller waves are continuing to play out. The lowest level, pink wave 5, is the one that may soon end, followed by the consolidation phase of the red wave 4. The pink wave 4 low and the green wave 3 high both ended at $385 so that is my support level for this red wave 4. None of this is enough to get too concerned about, even for the short-term. For clarification purposes, when the black "1" wave ends, there will be another pull-back for black wave 2 (then followed by waves 3, 4, and 5), but all of this is still within the context of larger blue wave "3" which is in a strong impulsive move up.
Longer term, if black wave 1 reaches $420 area, then we should expect black wave 2 to pull back as far as $375-380 area. Black wave 3 could then reach an area just shy of $500 and black wave 5 could easily break above $500. Timing-wise that could occur by mid-2004.
Much longer term, once the black series completes, it also completes blue wave 3. This would normally be followed by a pull back for blue wave 4 and then a final push higher for blue wave 5. Now this is the really cool part -- when that wave completes, it is only a wave "1" of a much higher level that began in March, 2003 (not labeled on the chart) and all of that is within a really big wave 3 of an even bigger structure that began in October, 2002 (not labeld on the chart). So if you are following me on this description, the bull market in gold is still quite young, just breaking away from an infant crawling and just beginning to walk. Very soon, this little tike will be running around, reaching and grabbing at price levels that few can fathom right now.
Take it all in context of your investment objectives. Long term, core investments need to stay invested for the long haul. Medium term investments should wait for the major swings. Short term (speculative) investments may need to be ready for a few swings coming up soon.
(Sunday 9/21/2003 PM): As I am writing this Sunday evening, Sydney and Hong Kong markets are already trading and gold is up from Friday's New York close. The December COMEX futures contract traded as high as $391 on 2/5/03 so that is our next target, and our next resistance level. Breaking above that level should spark some fireworks because there are probably a large number of buy-stops set either by short sellers wishing to limit their losses, or by momentum traders that recognize an upside breakout means a higher likelihood of substantially higher prices. The "fireworks" comes from running these stops.
The COMEX (NYMEX) Access session tonight has been trading December gold futures as high as $388.60, that's just $2.40 below the previous contract high.
800 Gold Stocks: I added more stocks to my big list, mostly from Canada and Australia. The list now contains over 800 individual stock symbols. All of the bad symbols have been removed. This new file has also been enhanced to include the following information about each stock: Symbol, Stock Name, Last Trade Price, Last Trade Date, 1-Day Price Change -Net and -Percent, 1-Day Volume, 3-Month Average Volume, 1-Day Trading Range (Low-High), Market Capitalization, 52-Week Trading Range (Low-High), Percent Up From Years Lowest Price, and Percent Down From Years Highest Price. This information is all available from the Yahoo! website.
The latest Excel file can be downloaded from this link: Gold_Stock_List.
Please note that the prices in this file are relative to the currency for the exchange in which the stock is traded. Thus, V (Vancouver) and TO (Toronto) are in Canadian Dollars while AX (Australia) is in Aussie Dollars -- everything else is USD. Some stocks trade in multiple exchanges so do not get confused if the prices are different, the difference is the currency exchange rate.
Trading Strategy: Before this gold market really starts to move, I am adding a few more of the lower priced "junior" miners. I consider these to be "perpetual call options" on gold. All of my previous "juniors" have already advanced in price. So now I am willing to delve into some stocks that have not yet participated, or perhaps their participation has been minor. This exercise for me is the reason behind why I compiled the large list of mining stocks. If you are considering some of the lower priced stocks for your own portfolio, please use extreme caution. Some of the stocks like Goldspring (see my earlier commentary on Goldspring) have been caught up in trading scams where internet chatrooms and e-mail spam have been promoting false financial and/or soil sample data, thus prompting unsuspecting lemmings (stupid people that buy without researching) to buy the stock while forcing the price higher. Goldspring went from a 52-week low of 1 cent to a high of $1.25 -- it is now around 32 cents.
There are several ways to play the lower priced stocks. One is to invest in warrants for companies that are already well established. Warrants are like call options but with longer term expiration dates. Another way is to find companies that actually own mines or provide mining equipment. There are a lot of stocks that say in their prospectus that they are an exploration or active mining company, yet do not own or lease any significant properties. Due diligence is paramount.
Some brokers charge a higher commission for stocks under $1. While checking around the various discounters, I found that Scottrade had the lowest rates at $12, but stocks under $1 are charged an extra 1/2% of the gross market value. For example, to buy 5000 shares of a 25 cent stock, the gross value is $1,250, so the commission is 12 + 6.25 = 18.25 (Total cost $1,268.25). But if you spent the same amount on a $1 stock (1,250 shares), the commission is only $12 (total cost is $1,262.00).
If you are buying Canadian stocks through a U.S. broker there may be floor brokerage fees or premiums added on for odd-lot trades. Using Scottrade again as an example, Canadian stocks under $10 are charged 1 cent per share and stocks over $10 are charged 1 1/2 cent per share. Odd-Lots traded on the Vancouver exchange can be charged up to 5 cents per share -- trading lot granularity is defined as follows: 1 to 10 cents minimum trading lot is 1000 shares, 11 cents to $1 the lot is 500 shares, and anything over $1 is 100 shares.
The purpose of these latest purchases is merely for speculative trading since these are normally not considered investment quality. If you are looking for high quality stocks then you only need to look at companies with high market capitalizations, high trading volume, no (or very low) hedging programs, and good management teams.
One of my criteria is to only look at stocks that have a 3-month average daily volume of 100,000 shares or more. While this is a low volume, there are 100's of stocks that have much lower volumes -- I will stay away from these because without trading volume (ie: liquidity) exiting a position can be either difficult or costly. Even 100,000 share stocks will be a challenge. You may want to establish a more conservative threshold if this is a concern for you.
Along with liquidity, check the most recent date that the stock last traded. This list contains over 170 stocks that have not traded within the past week (531 stocks were actually traded on Friday). If a stock does not have a 3 Month Average Volume then they are either brand new stocks or they do not trade often enough to have frequent daily volumes -- I will stay away from these too.
Finally, do not put all of your cash into one stock. Diversification is highly recommended. I have personally experienced a good example of this since my old favorite, DROOY - Durban Deep, lost my favor last year when I sold off 80% of my holdings because the management started making (my opinion) bad decisions, the CEO got caught up in some questionable activity, and the S. African Rand appreciated against the US Dollar. As a result, DROOY stock has been a very poor performer. I replaced my DROOY with NEM - Newmont Mining and GG - Goldcorp and these have performed much better over this period. The 20% of DROOY that I continue to hold has done very little to help my portfolio, in fact a few parcels are actually at losses. So I am pleased that I had planned a diversified portfolio, not only from different companies, but from different quality tiers.
Everyone seems to be expecting gold prices to correct. Prices will certainly correct, but the question is whether it will be sooner or later and from what price level. I read this weekend that there are 60% bulls and 20% bears. This cannot be very accurate since COMEX futures has about the highest Commercial short position for the year. Of course there are fewer Commericals (who have deeper pockets) than individual stock investors (who have a higher number but smaller portfolios). As gold prices approach $391 (December futures), there will be more and more resistance to breaking through to higher prices. So we are at a critical juncture. I admit that I am a long-term bull, so bullish that no one can convince me otherwise right now. That does not mean that I cannot accept brief pullbacks and normal (whatever is "normal" for gold) market volatility, because pullbacks and corrections can and do occur, we have seen several of varying magnitude since June, 2002.
The current bull market in gold and gold stocks is really still just an infant. It has only been crawling so far and is slowly learning to walk upright. Soon, gold will be like a 2 year old bouncing around the room, seemingly out of control and into everything. When comparing charts from recent history you will not get a very good comparison for indicators such as relative strength (RSI)or stochastics. These are both suggesting that gold may be overbought and needing a correction. But the past 20+ years gold has been in a bear market where RSI and stochastics registered oversold while prices drifted even lower. In the gold bear market, only overbought readings were of value to short-term traders. Now that we are in a very long term bull market, RSI and stochastics are likely to signal overbought while prices continue to run even higher. Only oversold signals will be valuable and reliable enough for short-term trading.
Too many people are looking for a single or small set of indicators that they expect to work for all situation, all of the time. If it were that easy, everyone would be doing it and everyone would be super rich.
The rules have not changed, only the interpretation relative to the trend of the chart.
My personal investment and trading strategy continues to be "accumulation" and "buy-and-hold". I reserve a portion of my portfolio for short and medium term trading. My core portfolio was largely established in 2001-2002 and I have been slowing adding to it ever since. For physical metals, my weighted average cost is still under $310 for gold bullion and $4.85 for silver -- and those figures include all premiums and commission fees. The silver even includes a few bars that I have held since the 1980's when the Hunt Brother's caused prices to run up to $50/oz -- I was a young and adventurous lad back then and paid over $20/oz! It was an early lesson that I still remember quite well.
(Tuesday 9/9/2003 PM): The gold breakout has been confirmed. The December 2003 futures contract closed today at $383.70. The prior intra-day high was $391.00 on 5 February 2003 while the prior closing high was $382.70 on 4 February 2003. So the new 7 year closing high only beat the former contract high by 1 dollar, but that is all it takes. This simply means that prices should continue moving higher. The old breakout band is now solid support, so $370 should hold for awhile. It also means that the huge short position in gold futures and derivatives are now at risk of significant losses. With this new contract high, every single short December futures contract is at a loss... there are zero short traders that have any unrealized paper profits at all! It also means that brokers may soon (if not already) begin contacting the shorts for margin calls -- the resolution of which means that a futures must be bought to net-out a short contract, thus the new long further adds to upward price pressure. This also means that option writers who sold call options are also at risk if their strike prices are in- or near-the-money. The easiest way to net-out a sold call option that is in-the-money is to simply buy it back (but at a substantially higher price!) the alternative is to buy the underlying futures contract, which also adds to upward price pressure. OTC derivatives are a substantially larger market for gold trading, but there are no statistics available to track them. Using the COMEX futures as a proxy, there are likely many gold shorts whose portfolios are in deep doo-doo right now. Futher, I am sure that many COMEX shorts set buy stops near the old highs, so as stops get hit it causes futures to be bought, and that adds to upward price pressure which moves up to more stops, and this creates a mini domino run until the near clusters of stops are all taken out. The longer a prior high remains unbroken, the larger the number of stops are clustered just above the old price. The fact that this event was a closing high is also significant in that it forces mutual funds and hedge funds that trade gold, to reassess their portfolios before trading resumes the next morning.
(Sunday 9/7/2003 PM): Just when I thought I could relax while browsing various internet news, articles, and chat discussions on economy, gold, and stock markets, I came across the following article link on the GATA Messages groupsite that I just had to post to CyclePro Outlook without delay. This is a speech by Hon. Rob Paul (TX) House of Representatives titled "Paper Money and Tyranny". While the weight of the importance of this article cannot be underscored as presented to the members of Congress, readers will find that the information provided is a teriffic explanation of the problems we face from Fed economic policies. Much of Ron Paul's condemnation of the Federal Reserve System precisely discusses many of the arguements that CyclePro has been making for several years.
Ron Paul gave an earlier speech titled "Bring Back Honest Money" (introducing the Honest Money Act) which many of you will find equally interesting. My personal take on Ron Paul's concerns is that these speeches are only the very beginning of a disciplined step-by-step march toward arguing for the dismantling of the current U.S. Federal Reserve System.
500 Gold Stocks: I added 38 more Canadian gold stocks to our Excel file: 500_Golds.XLS
(Saturday 9/6/2003 PM): Oops! In yesterdays CyclePro Outlook I had intended to provide a download file of an Excel spreadsheet containing over 500 U.S. and Canadian stocks and mutual funds that specialize in gold, silver, and other precious metals. I accidently left it out, so here it is...
To access this file using MS Internet Explorer, simply right-click the link and select "Save Target As" to save it to your hard drive. Netscape users will have to follow another process for downloading the file.
The file contains 764 separate stock symbols, but some companies have several symbols. Usually when there are multiple symbols for the same comnpany, one is for a Canadian exchange and the other is for a U.S. exchange. Quite often, the U.S. symbol for a Canadian company is very thinly traded -- if you want to invest in one of these companies, I suggest you try to make your purchase via the Canadian exchanges (if your brokerage can handle it) rather than attempting to trade using illiquid U.S. symbols. Sometimes a company has warrants which have a separate symbol. Some of the symbols were found in lists from other websites, but apparently the symbol no longer works, or perhaps the symbol only works on special stock quote websites -- I still included all symbols for this situation. For many of the very small companies, please review yesterday's commentary on "Hype, Spam, and Penny Stocks".
For each entry I have designated whether the stock is: a possible bad symbol, infrequently traded, thinly traded, tradeable, or a mutual fund. This designation is not intended to be a recommendation or a do or don't list -- you still need to perform your own research. The infrequently traded or thinly traded stocks are probably very high risk. Despite a rising gold price, some of these tiny companies may not survive. Whether you are investing or speculating, please choose your stocks wisely.
I attempted to put together as complete of a list as possible. However I have overlooked a large number of stocks that only trade in S. America, S. Africa, or Australia. While the bulk of the CylePro Outlook readers are from the U.S., there are a surprising number of readers in other parts of the world. If anyone has other companies to add to my list, please put it together in a similar format as mine and e-mail it to me (without viruses please!).
(Friday 9/5/2003 PM):
The Gold/Silver Breakout Looks Firm: Last weeks technical price chart breakout for both gold & silver looks like it is holding, and holding quite well indeed. A new support-testing pullback occured right after the U.S. Labor Day holiday which brought gold down to $369 area silver to $4.95 area. THis was right in line with our expectations for was used to be the upper boundary of teh contracting wedge or triangle chart pattern. Later this week prices recovered and are now pushing resistance in an attempt to move even higher. Since support held all week, it bodes well for longer-term strength.
Bullish sentiment is high in precious metals, but this should be expected during the early stages of a decade-long bull market. While in times where prices are meandering in a trading range or even falling, then a high bullish reading becomes contrarian and a usefull indicator of a topping situation. But in a bonifide bull market, the old rules get re-written. Actually, it is not that "this time is different" so much as that this bull market is just like prior bull markets in almost all commodities... bear markets resemble other bear markets and bull markets resemble other bull markets. We are in a gold & silver bull market. As a result, slow learners are still looking at recent-high bullish sentiment as contrarian. But these bullish reading are not too extreme for a bull market. At least not yet. For now, the current bullish sentiment readings are more confirmational rather than contrarian. I am expecting a much higher bullish sentiment level before this little rally takes a significant pause.
For the traders that had been believing that bullish sentiment was too high have stayed away from gold and gold stocks. This is in itself, bullish, because prices have held support and moved higher without these traders participating. This leaves room for them to get off the fence and jump back into gold and stocks. This should propel prices higher yet.
Hype, Spam, and Penny Stocks: Before buying into low priced gold stocks, please read the following article from the Motley Fool website.
Exerpt: "...if there was an insufficient supply of suckers out there, these promoters wouldn't make a dime. But rest assured they did much, much better than their "clients" ... What's the lesson? Isn't it obvious? Taking big risks with your investment dollars is just that -- high risk. I'll go one step further: Those who buy shares based on random spam emails aren't investors; they aren't even speculators. They're marks..."
Hype, Spam, and Penny Stocks
A Clarification on GoldSpring
CyclePro Note: Goldspring (GSPG.OB) is mentioned in the article as a likely scam stock, or at least it appears that it is being manipulated as a scam.
September-October, the Worst Investment Months of the Year: Which brings up the following quote from Mark Twain:
October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.
A Falling Dollar Means Higher Sticker Prices for Most Commodities: But a higher price does not necessarily mean a higher value. Any commodity that trades internationally and is priced in U.S. dollars will react to the coming financial distress as will gold. We have already discussed how gold will react -- our forecast still calls for gold above $2000/oz with a very brief spike near $3000 sometime between now and 2012. A similar reaction should be expected for other commodities as well. Crude Oil fits this scenario since crude is actually a currency in itself. While crude oil is not used as a store of value like gold & silver, it is used to trade goods between countries. Crude oil is consumed and cannot be reconstituted like gold and silver can. But the similarity comes upfront from the financial aspect of the commodites. Being an international currency, crude's price reacts indirectly with the fluctuations of the dollar. With all else unchanged, a drop in the dollar is reflected as an increase in the international price of crude. OPEC will attempt to increase production to hold the price down, but at some point they will reach their full physical limit. China manufacturing and India services may be exporting deflation to the U.S. but the U.S. will be indirectly exporting inflation to all other countries via higher energy prices. Everyone uses energy and most energy is generated either directly or indirectly from crude oil. If American crude consumption continues as with recent past, and the dollar continues to slide, the international price of crude will work its way higher -- $40 crude is an unavoidable certainty. Triple-digit crude on a short-term price spike is a possibility sometime over the next 8-10 years. What! $100 crude? CyclePro has finally gone crazy -- lock him up and throw away the key!
Somewhere around $40 crude, American fascination with behemouth SUVs will wane. At $50 crude SUV sales will stop cold and newspaper want ads will become overrun with SUV's for sale. At $60+ crude, SUV's will sit in the backyards rotting and rusting. Hybrid cars will be the only vehicles to to achieve increased sales. The ordeal of switching out from guzzling SUV's to more efficient hybrid and alternate fuel cars is at least a 5-8 year process. The quicker crude prices rise, the more hasty the incentive to become more energy efficient. As an early indicator, when Cadillac and Porsche start offering hybrid vehicles, it will signal that crude oil prices are peaking. Prior to that all of the common manufacturers will already be geared up for efficient vehicles.
For those of you that are wondering what that means for heating oil and gasoline prices, it translates to a national average of about $6-7 per gallon -- some locales might reach $10. As crude prices rise substantially, auto demand will cut back to leave more crude available for infrastructure-related needs. But this means there will be less refining, thus lower inventories of heating oil and gasoline. This means if crude rises about 2x from current prices then heating oil and gasoline should rise by 3x, and if on a severe price spike crude rises by 3x then refined products should increase by 5x.
Airlines and electricity generators will be hard hit by these high crude prices. In the crude oil refining process jet fuel competes with gasoline. Natural gas will rise in sympathy because there will be conversions to take advantage of its lower price and availability. Lower quality (ie: high sulphur) crude oil will be "allowed" to be used because its price will be substantially lower than low sulphur crude. Environmentalists will fight tooth and nail to try to reduce the added air pollution caused by the lower quality crude. Homeowners will become desparate with home heating & cooling costs.
Since energy is used directly or indirectly by every business and household, no one will escape the cripling effects of higher crude prices. Airline, transportation, and postal and delivery companies will have to raise prices because of their direct impact from higher crude prices. Glass manufacturers, metal smelters, and bread bakers will also be directly impacted by higher prices. Households will be impacted because generated electricity must rise. Auto manufacturers will have to cut or halt some production lines because demand will not be sufficient. Auto parts manufacturers on the other hand, will see higher sales - even with higher prices - as auto owners seek ways to make their existing cars run longer and more efficiently.
The CyclePro Basic Ultra-Long-Term Investment Strategy: (1) Buy gold and gold stocks now. (2) Hold them until prices exceed $2000 (or $3000 if you are lucky enough to catch it). (3) When gold peaks will generally be when interest rates are at their peak -- buy long-term quality high interest bearing bonds and good quality dividend paying stocks.
If 12-15 years is in your outlook for retirement, then you will want to position yourself to swap a large portion of your gold portfolio for income generating vehicles. By the time gold reaches $2000, most dividend paying stocks will be low priced and have a very high yield. Quality corporate and government bond yields will also be quite high... a diversified portfolio is always best: tax-free muni's, treasuries, and corporates. The prices for these bonds will be quite low, so subsequent price appreciation should be a nice side benefit. During this timeframe, many of todays mutual funds will no longer exist. But there should still be some around that will offer a decent monthly dividend payout for retirement income.
If you are younger and are not planning to retire, then instead of trading your gold for high interest and dividends, your best plan should be to buy high quality stocks and reinvest the dividends.
The old mantra still holds: "buy for the long haul". For now that means buy and hold gold & silver. Later that will mean interest and dividends for retirees and quality stocks for everyone else. This will be the time when you can dust off the good old investment strategy books and follow the sage advice for real investment. When this time comes, the next great bull market will begin and last for another dozen or so years... enjoy the ride, that will be when your generation will get the chance to ride the wild stock market bull.
Most generation investors only get an opportunity for one really great bull market in some kind of commodity. The currently retiring generation experienced the greatest equity bull market in the history of modern finance. Today's young investors will be treated to multiple spectacular bulls: gold now and equities later. I am one of the younger of the baby boomers (age 45) so my classic retirement is at least 15 or more years away. This gold bull market will likely be the last one that my generation will have an opportunity to participate in. After retirement, further speculation will be unacceptable since conservative income-genertion will be the recommended advice.
For those of you who are about my same age, you probably already have in mind what total portfolio goal value you want to have by retirement so you can have a life free of financial uncertainty. (Wouldn't that be nice?) It used to be that a portfolio value of $1 million was necessary to maintain a fairly high standard of living. But that was back when interest rates were higher and $1 million could generate taxable income of $50,000 to $100,000 per year. Many people believe they can live quite well on those incomes. Unfortunately current interest rates are so low that $1 million can only generate $20,000 - $30,000 per year. Thus, many of you are already planning for a much higher portfolio value. A very good friend of mine (who passed away several years ago) once told me that he was very fortunate because the stock bull market enabled him to retire with about $2 million. There are 2 very sad aspects about this: (1) he did not live long enough to enjoy it and (2) he did not sell much of it at the market highs so his portoflio has since lost a substantial portion of its rich value. Because of my outlook for inflation and interest rates over the next dozen years or so, whatever your current plan is for your retirement portfolio value, you should try to plan to double it. This is because the purchasing power of tomorrows dollars will be considerable less than todays dollars -- thus you will need to have many more dollars in retirement than what you currently think you need to make up for the difference in buying power.
(Thursday 8/28/2003 PM):
Alan Newman's Who's Carrying The Can? (8/20/03) attempts to explain the bank derivative risk situation. For this subject, Mr. Newman does an excellent job. However, there are a few points that I would like to either clarify or to discuss further. Please read his article at the link above.
The most recently available Comptroller of the Currency - Bank Derivatives Report (Q1-2003) shows the total notional value of all bank-held derivatives is $61.4 trillion, of which interest rate contracts were $53.4 trillion (we'll get back to this figure later when we discuss the recent bond sell-off).
A quick explanation of what notional value means - if you have a customer that wants to hedge their long crude oil portfolio with a short $1 million swap contract (a type of financial derivative instrument) with you, and you find another party that is willing to offset your exposure with a long $1 million swap contract with similar terms. By having the two contracts completely offsetting each other, your risk is substantially reduced - but it never goes to zero. If the first party's swap ends up in the money and you have to pay them $1 million, then your offsetting swap with the second party must pay you $1 million... so your net out of pocket is $0. You make your money on the deal by charging a "service fee" to your customer. The notional value is $1 million contract with the first party plus $1 million contract from the second party - thus, $2 million is the total notional value.
Even though the two swap positions were 100% offsetting with each other does not mean that the risk is also zero - quite the contrary, zero risk means that both parties have perfect credit ratings and the likelihood of either one of them defaulting would also have to be zero. But reality has been perfectly demonstrated by the collapse of Enron. At one time, Enron's credit rating was probably about as high as any U.S. corporation could get (yet we now know that they defaulted on $billions of contracts). No company is completely immune from default.
In this example, assume that the second party defaulted on their payment to you. You still must pay the first party the $1 million as specified in the swap contract you arranged with them... you simply have to take cash out of your bank account to pay the first party.
Now let's say that the second company was Enron and the amount of your total contract exposure with them was $1 billion instead of $1 million. And, assume that your company does not have enough cash to pay $1 billion to the other parties... you will most likely go bankrupt and also default on those payments. If that happens, this can cascade through several layers of defaulting companies. This is often referred to as systemic risk when one default forces another default which forces another and so on... like dominoes falling.
Derivatives have been a terrific invention for financial risk management, when used properly. But derivatives only work when all participating parties remain financially solvent to honor their contractual obligations. If only one key link in the chain breaks (ie: defaults) it could mean disaster for all downstream contract holders. This is what happened when LTCM (Long-Term Capital Management) defaulted following massive speculative losses -- they ended up getting a Fed-arranged bailout from their affected counterparties to keep the entire chain from collapsing.
Mr. Newman made the comment that Citicorp and JPMorgan-Chase "...were not impacted significantly by their exposures to Enron (and Worldcom)..." and then went on to say "...We are undoubtedly lucky indeed, that the giant banks escaped a severe impact..."
How can companies like Citicorp and JPM take losses in the dozens of $billions and it not significantly affect their balance sheet? The answer may never be proven, but if the Federal Reserve simply engineered a quiet bailout we would never know. Certainly, these guys are "too big to fail". The Fed prints so much money every day that a few extra $billion here and there easily gets lost in the noise. The Federal Reserve has never been audited. Whatever paper trail that may exist will never be exposed to the public.
Oh sure, that sounds like conspiracy talk. But there is more...
When the U.S. Bond market took a sharp downturn last month, this drop was a historically significant event. The inverse of bond prices are interest rates. So, when the price of a bond goes down, the interest rate yield on that bond goes up. The significance of that sell-off was that holders of interest rate derivatives potentially had a sudden change in the mark-to-market value of their portfolios -- some gained, others lost. It is the losers that most concern me.
As I mentioned above, U.S. banks hold credit-equivalent exposure of $53.4 trillion in interest rate derivatives. The notional value is about $41 trillion. This suggests that $12 trillion is counterparty credit exposure.
Of the $41 trillion notional: JPMorgan-Chase has $22 trillion, Bank of America $8 trillion, Citibank $7 trillion, Wachovia and Bank One $1 trillion each and HSBC and Wells Fargo for another $1/2 trillion each with the other 481 U.S banks collectively holding the remaining $1 trillion.
Assuming the same notional value - to total - ratio applies to the counterparty credit exposure: JPM has exposure of $6.5 trillion, BoA $2.2 trillion, Citibank $2 trillion, Wachovia $380 billion, Bank One $260 billion, HSBC and Wells Fargo $135 billion each and the remaining 481 banks combined $390 billion.
The bond sell-off, and the inverse interest rate yield rally, certainly impacted some of these interest rate sensitive derivatives. Aftershocks should start to show up in a few months. But if the Federal Reserve is helping to support solvency, then like I said earlier, we may never know how bad it was.
As a side bit, the Bank Derivative Report also mentioned that total derivatives during Q1, 2003 grew by $5.3 trillion. Of that amount of increase, interest rate derivatives accounted for $5.1 trillion! That means nearly 10% increase in notional value in one quarter. At this rate of growth interest rate derivatives will reach $100 trillion by 2005! (Click the link to see my growth projection chart.)
Think about those numbers for a moment... the total U.S. GDP is about $10 trillion per year -- World GDP is about $40 trillion. Interest rate derivatives are growing at a rate of $23.5 trillion per year, that's about $2 trillion per month or $64 billion per day or $45 million per minute! Another way to look at it is a growth rate of $70,000 per U.S. resident per year. At this rate of growth, the notional value of Bank interest rate derivatives will reach $1,000 trillion by 2015! (In case you are wondering what this number is called, it is $1 quadrillion - which is 1 followed by 15 zeroes - also called a "billiard" in the UK.)
Wow, and I thought the stock market was in a bubble until 2000... the bank derivatives market is in a bubble and has stocks beat in notional value by many orders of magnitude. Oooh... I don't even want to think about what this will mean if/when this bubble bursts (since ALL financial bubbles eventually burst).
How can U.S. Banks justify the creation of $53.4 trillion in interest-rate derivative contracts when Official U.S. Reserve Assets are only $81 billion, the U.S. Treasury borrows $100 billion per quarter, the total U.S. debt is just under $7 trillion...? The answer is churning and hedging on top of hedging. It is extremely uncommon to unwind or remove a derivative contract. Instead, traders opt to create new contracts that attempt to "net out" the original contracts. This means that the pile of derivatives just continues to grow -- as short-term contracts mature they are replaced by longer-term contracts.
This is sheer madness. This rate of growth is unsustainable. When will it end? W.D.Gann said that just when you think a commodity price has moved well beyond extreme... it becomes even more extreme. How much is too much? I thought it was too much when I published my first article on JPMorgan's massive derivative positions in 1998 -- U.S. Bank derivatives have grown two-fold since then! This is a derivative nightmare that will be impossible to unwind gracefully.
In all honesty, a huge pile of notional value derivatives is not always a bad thing. But it is an extremely rare situation where all trading parties are in a vacuum where a huge pile of inter-party derivatives net out to a very manageable amount. As an example, when JPMorgan and Chase Manhattan banks merged, one would have thought that since they were among the largest U.S. Banks trading derivatives that contracts between themselves would have netted out along with the merger. Historical data from the U.S. Comptroller of the Currency suggests that very little of their notional totals actually netted out. So what has evolved over time is an ever-growing blackhole of derivative contracts where each trading entity monitors their counterparty derivative netting and credit risk. Since derivatives are unregulated (Alan Greenspan opposes their regulation), trading organizations do not have to adhere to any set standard. They do not have to report them (other than U.S.Banks to the Comptroller of the Currency). Futures are a form of derivative, but they have a standard format and must be reported to the CFTC. A corporation that trades in over-the-counter derivatives never needs to disclose their positions or risk factors in a stockholder report. Within the energy trading companies, no one knew how much exposure each one had with Enron. No one knew how much derivative exposure the U.S. Banks had with Enron. Certainly, if stockholders of companies like El Paso, Calpine, Mirant, Dynegy, Williams Brothers, and others knew what their trading exposure was to each other, stock prices would fluctuate with greater volatility as intra-company risk factors change -- this is why trading companies do not disclose notional value or exposure information!
U.S. Financial Accounting Standard Rule 133 (January, 2001) seeks more hedging transparency by requiring all derivatives to be recorded on the balance sheet at fair market value. However we have seen via Enron, that fair market value can be whatever the company wants it to be.
While looking at my derivative trend chart above, one might comment that I am guilty of simply extrapolating an existing trend even though there is no guarantee that this trend will continue. In defense of this critique, we are not talking about Congressman trying to decide how to handle a budget surplus, or how they'll handle projected surpluses in Social Security (all of which have been proved to be severely false assumptions on their part). This derivative trend is entirely different, because this trend cannot be changed! I believe the trend can be altered, but it cannot be removed -- it would be too painful. Many of the derivative positions are long-term, ie: beyond 5 years. Even if all derivate trading stopped and we simply wait for them to run out, traders would be exposing themselves to tremendous risk. Therefore, they would want to continue hedging while short-term instruments mature. You see, derivative trading is actually a perpetual engine that feeds upon itself to generate new trades. Unproductive trades are never removed, they are simply piled onto with new trades. As a result every day slices off one more day of each maturing derivative contract which exposes new risk opportunities -- new trades must be added to reduce this newly exposed risk. The derivative pile can only grow larger and larger, there is no way to reduce it... only through regulation can the rate of growth be slowed (and regulation is not likely as long as Alan Greenspan is running the Fed).
After writing my commentary above, the following article was posted by Reuters (8/25/03): Echoes of LTCM in recent U.S. swaps market storm.
Before I finish this section on intererst rate derivatives, I thought it would be timely as a reminder of what happened to the U.S. Bond market in the 1930's, as follows:
The bond market reached an all-time peak several years before the stock market peaked. Similar to our 1990's, stock prices appreciated so quickly that investors moved out of safer bonds into high-flying, speculative stocks. Once the stock market crashed in 1929, U.S. Bonds took over the role as the investment of choice in a flight to quality. This continued until late-1930. The chart shows what happened when the depression-era financial crisis gripped major banks and forced massive failures. Bonds very quickly lost favor and were dumped enmasse.
An interesting bit of investor history trivia, perhaps. But when reviewing the current U.S. Bond chart, please note the eerie and seemingly coincidental similarities:
Please note the unsuccessful recovery rally following the stock market peaks. Both eras show a clear 3-wave structure of which the A and C waves are nearly the same length. This was followed by a secondary peak and then a subsequent, and sharp, nasty sell-off. Another recovery occured, but at an even lower level. And then, the crash unfolded.
Our current bond environment is still trying to shakeout and recover from last months abrupt sell-off. So to follow the same 1930's path, the current U.S. Bond chart should rally for several months, but to a lower peak level, and then begin to weaken again. Compare the two charts and draw your own conclusions for what may happen next.
In this environment with bonds, interest rates, and derivatives, the ONLY long-term investment that makes any sense at all is physical GOLD!
Unfortunately, my computer was hit by a nasty virus and the only way to get it running again was to reload the operating system. As a result, I lost all of my registry information, ie: all of the preferences, locks, keys, and passwords to my charting programs. Therefore, all of tonights charts are either older ones or generated from internet sources.
Gold was trading within a huge contracting triangle, or wedge. We had been bouncing against the upper boundary but did not break through until yesterday. We have now had a breakout! This means that the upper boundary line should now be support. Let's give this a few more days to demonstrate whether it can hold -- there has been far too much manipulation to react too quickly in events like this. Gold bugs are all a little gun shy. Once a breakout is confirmed, the minimum move is usually the height of the triangle, or about $60 in this case. Thus, an upside breakout should expect $420. If for some reason this breakout does not hold, a downside breakout may go to the low $300's.
To demonstrate how this is supposed to work, this first chart is the gold stock Bema Gold Corp. (BGO) which I created in June (honest, I really tried to post an update!). The wedge drawn on the chart clearly shows a similar pattern where prices moved between the boundaries for a whole year. Too bad I did not post this chart when I was working on it... the second chart graphically explains why it was a good call. BGO immediately and impulsively broke above the upper boundary and proceeded to advance from $1.05 to its recent high of $2.30 -- more than double in about 2 months! The nice thing about this particular contracting wedge pattern, is the risk of being wrong is extremely limited. In the case of BGO, the chart was created when the price was $1.05 while the upper boundary was about $1.10 and the lower boundary about $1.00. Thus, the plan was supposed to be to buy it right away and set a stop-loss at 99 cents. If the price dropped to below $1.00 you would get stopped out and your loss would be limited to about 6 cents.
In the case of the gold chart above, the upper wedge boundary is about $368-370 and the lower boundary about $350-352. A similar strategy could be set up such that a stop-loss be placed below the lower wedge (since I eye-balled the lines they are not very accurate in the chart, use a conservative lower price for the stop-loss). If you are wanting to buy gold stocks, use the gold chart as a proxy and use its stop-loss as a mental stop-loss for the gold stocks.
As I write this, gold reached as high as $375.40 yesterday and is currently about $371, which is right on the upper wedge line. To show that this is a true breakout, this line should hold support the rest of this week and continue Monday (9/1/03) on international trading (Labor Day in U.S. is a trading holiday) and Tuesday in U.S. trading. Silver is no slouch... it has also had a breakout, but within a smaller but much tighter wedge... or coil. Silver's intra-day high yesterday was $5.18 and is currently trading around $5.11. My interpretation of the wedge breakout is a forecast for silver above $5.50, probably before the end of this year.
Are gold stock prices getting ahead of the physical metal prices? One way to determine that is to create a ratio chart (thanks B.Ladone for the StockCharts example):
This is simply the price of HUI index (Gold BUGS Index - unhedged gold stocks) divided by the price of gold. When HUI and gold both move up with similar percentage moves, the ratio should remain flat. When the chart moves higher, it means HUI has a richer premium than gold... lower and HUI is discounted to gold. The chart above clearly shows that HUI is currently very richly valued. This should be expected when bullishness permeates through investors. Most investors do not want to own the physical metal (they don't know how or they are too worried to own it outright), so gold stocks become a suitable proxy. In the 1930's Homestake Mining was a proxy for gold because at that time it was illegal for U.S. residents to hold physical gold. Not incidently, Homestake's price moved from a low in 1924 to a high in 1939 which returned 1350% in stock price appreciation, plus from 1929 to 1935 paid out dividends of $128 per share! It is well known that most gold stocks will participate in a gold bull market rally because marginal producers become profitable, and already-profitable producers become even more profitable. In a sense, golds stocks are a derivative of gold prices. Gold stocks are easier to trade than futures contracts or the physical metal. Therefore, it should be expected that the HUI (as well as individual gold stocks) should exhibit more volatility than gold itself. As for being too extended, I am leaning more to the side that a consolidation may be coming, but I doubt it will last much longer than golds own consolidation after the breakout hoopla subsides. If gold breaks out well above the upper wedge boundary, the HUI and gold stocks should soar even higher. However, if gold breaks below the lower boundary, HUI and gold stocks could plummet.
I believe that the proxy-factor of gold stocks will allow the HUI-to-gold ratio to remain in an upward slope. A more vertical slope means the HUI has a higher premium and a lower slope to flat means HUI is being discounted to gold.
Notice how the HUI:Gold spread had a wedge pattern of its own. After the breakout, a pullback in July only got down to the upper wegde boundary line, which demonstrates that it was the next support level.
An Elliott Wave Prespectives: Alf Field wrote a nice artice at 321 Gold website: "Elliott Wave and the Gold Price". Mr. Field displays his wave outlook and projection for the completion of the first major wave up. CyclePro agrees with his assessment of the minor wave 1 up to $382 in February, 2003, but for the subsequent wave 2 we have a difference of opinion. From my earlier forecast commentary, I said that I thought a 2 month correction (for minor wave 2) was too short for wave 1 which was 23 months. I had categorized this shorter wave 2 as my alternate count. For my preferred count, I was expecting a more complicated wave 2 structure where the move down from $382 to $320 was wave "A" followed by an anticipated complicated "B" rally, then later followed by another sell-off for "C" that took the price down to the low $300's. What I think we are seeing in the chart now is my "B" wave being played out in a 5 wave structure (labeled a-b-c-d-e) to complete "B". Until gold prices move substantially above the previous wave 1 high this scenario remains viable. In this scenario, my subsequent outlook for wave "C" is good support at $318-320 area with $305 area as the most likely maximum pullback.
Whether my primary or alternate count is playing out, we only need to watch the current action. An upside breakout means my alternate count is most likely correct and we are in a minor wave 3 within a major wave 1. This should be an impressive rally relative to where prices have been lately.
Since gold stocks have been steadily advancing through the year is actually a sign of healthy accumulation. Particularly since Newmont (NEM) has been especially strong. This signals that not only is it being accumulated by small investors, but mutual funds are also starting to accumulate. Having gold stocks move up quicker than the spot gold price is not necessarily bad. Rather it is an indication that investors prefer using the stock as a proxy instead of the physical metal. In fact, many mutual funds that want to have exposure in gold are restricted from physical gold or futures, therefore the only other choice is to own stock in gold companies. Newmont's stock price has outpaced Barrick (ABX), and with good reason. Last year Barrick had a market capitalization of $12 billion while Newmont was only $10 billion. At todays stock prices, Newmont is now $14.1 billion compared to Barrick's $10.8 billion. Why the huge change in market valuation? Simple, it is all the result of the markets perception of the impact of hedging. Newmont has almost no hedging (after working very hard to reduce their prior hedge positions) while Barrick is perhaps the most hedged of all large-cap gold stocks. As this gold bull market progresses, Barricks hedging progam will be seen by investors as a significant detriment and will therefore continue to discount it heavily. Clearly, the market will continue to favor unhedged stocks.
Several of the gold stocks boast P/E ratios above 35. At first glance this is probably a rather high P/E. But it is important to keep in mind that as gold prices move higher, earnings will also increase, as well as the stock price. Therefore, a high P/E is certainly worth noting, but not necessarily cause for alarm. The P/E ratios should stay relatively range-bound as gold prices move higher. If P/E's move substantially higher, then it would certainly be of interest to consider scaling back on the high P/E's in favor of selected lower P/E stocks.
Current P/E's: ABX 57, NEM 47, GSS (Golden Star Resources) 36, GG (Gold Corp) 35, WHT (Wheaton River) 25, DROOY (Durban Roodeport Deep) 12, GOLD (Rangold) 9.
Since Barrick's P/E is quite high relative to the rest of the non-hedgers, this should put even more price restraint on it. A lot of investors have been buying Barrick stock simply because of its industry exposure to "gold" without regard to its hedging program -- investors and analysts are not doing their homework and blind investors are simply following blind analysts. If Newmont's P/E was the same as Barrick's, Newmont's market capitalization would be $17.5 billion compared to Barrick's current $11 billion. It will not be long before the market capitalization of Newmont will be double that of Barrick!
In fact, Anglogold (AU) which current has a market capitalization of $8.4 billion and Goldfields (GFI) market capitalization of $6.4 billion when priced with the same P/E as Barrick would be $12.9 billion and $18.5 billion, respectively... Barrick would move from the #2 gold company in the world to #4 with Placer Dome's (PDG) adjusted market capitalization of $8.6 billion not far behind!
U.S. Dollar vs Euro: The dollar had had a nice upward correction over the past 3 months. The daily chart shows a 3 wave pattern (A-B-C) from the June 13 low of 91.23. The A wave completed in mid-July and the B wave late-July. From there it appears to be laying out a 5 part "C" wave such that if A=C projects to about 101.30. Already it looks like the C wave is nearing completion since 3 of the 5 internal waves are likely completed and the 4th wave is in progress. A final minor 5th wave should rally to take the U.S. Dollar above par, possibly to 101 area. From there I anticipate the Dollar will resume its downward slide. If the fall is as quick as the April-May, 2003 sell-off then we could see new lows before the end of the year. This would be good news for gold bugs -- bad news for just about everyone else.
The Euro appears to be taking the inverse path and is likely to signal a resumption in its track to the US Dollar after it rallies in its minor 4th wave, then falls in its minor 5th wave to complete its final C wave. A simliar A=C scenario suggests a likely target below 107.50.
For Euro to Dollar ratios: USD/Euro target is the 0.92 area and Euro/USD is the 1.075 area.
Because of their inter-relationships, all 4 chart scenarios should reach their targets at about the same time.
Bradley Siderograph: Because of a virus attack I am having to reconstruct my entire PC desktop, including my charting software. Therefore I am unable to regenerate an updated Siderograph chart. The chart posted last time will have to do until I can get my software running again.
I am not sure how long it will take to get my Tradestation functional again... after 2 hour+ sessions waiting on hold on Omega Research support line, I am not optimistic about a quick fix. My other charting software is in similar situation. The virus attack disabled a portion of my operating system for which the only repair was to reinstall the operating system. Unfortunately, this overlayed my registery information, and that affects every piece of software that I had installed and configured. Because the virus also modified my registry, a backup copy would not have been safe. In the mean time, I will try to use internet charts where necessary. Other charting that needs special handling, such as the Siderograph, will have to wait until my software is fully functional again.
The virus got into my PC through a pop-up advertisement, which automatically downloaded and executed software on my PC. My Norton Antivirus software did not detect it because Norton had not set up an update for it yet. To try to keep this from happening again, I have modified my internet settings to prompt me for download, active-X, and Java scripts -- it is a bit of a hassle clicking through the prompt boxes, but at least this way I can choose when I need to allow active-x's and when to disable them. By default, I always restrict them and if the page I want needs them, then I refresh the page and allow them to run. What caught me off guard with my virus was that an automatic pop-up window came up which contained a Java script that caused the damage - it was not an e-mail attachment as so make viruses seem to use like a trojan horse.
Computer Viruses: One of my major complaints about Norton, McAfee, and the other virus scanners is that they will only detect a virus after they have already found one and registered it in their update database. If you get a new virus before their update is available, your anti-virus software will not detect it. This severe hole is actually an engineered feature for Norton and McAfee. While they hope they can detect and register new viruses as they become known, there will always be a time window where user PC's will be vulnerable to attack from new viruses. This could be avoided. Norton and McAfee have the capability of informing you when you have the "potential" for a virus, but unless they can identify the patterns or signature of it, they will not tell you about it. They do this because they make their money from update subscriptions. If they simple told you that you have a possible virus without identifying it, many people would not think it necessary to keep buying the updates -- after all, who cares what the virus's name is, all we want is to remove it. Norton and McAfee see it differently, they are willing to risk letting you get a virus attack so they can retain their cash flow.
I am hopeful that eventually Norton and McAfee will be party to a class action lawsuit for intentially designing their software to allow this flaw. People who create viruses know about these holes and design their virus scripts to change and mutate as they propogate from PC to PC. Therefore it is impossible for Norton and McAfee to keep up -- a minor design change would save many PC owners from having to suffer through new viruses as they pop up. In my opinion, not providing a feature to detect unidentified viruses is not simply negligence, it is willful and intentional.
Fit to Hit the Shan: There have been a lot of buzz lately about how consumer spending has been much more robust than originally anticipated. However, it is important to keep in mind that there are a lot of hyper-incentives to entice consumers into spending now and paying later. For example, in the Houston area I see daily reminders that furniture, auto, appliance, video & entertainment, and computer retailers are offering "no payments for 1 year" or "0% interest" or "cash rebates" or some combination thereof. These incentives are simply causing the consumption statistics to report better than expected data now, while failing to report that down the road consumers are likely to be taped out, having already bought their appliances. As I am writing this commentary, Dell and Gateway are advertising their lower-priced PC's - Dell's model is $499, after mail-in rebate, along with no payments and 0% interest until October - note: Dell no longer offers "free shipping" so this simply means to me that Dell still has several more options available in case they need to provide more incentives to goose their sales numbers (but at the expense of earnings). I expect the Christmas buying season will become brutally competitive among PC makers.
Of course the White House and Fed are hoping that consumers will continue to spend even after the current incentive periods have expired.
The single Worst Trading Strategy: I have said it before and I will probably say it again many more times... "hope is a very poor investment strategy". Use technical or fundamental analysis, but never rely on "hope" to protect or grow your investments. Over the course of this current bear market, Richard Russell is correct when he says "...the winner will be the investor who loses the least..."
Battle of Deflation vs Inflation: I think the two sides are finally coming to a merger by settling on "Stagflation" which, as I interpret it, means that prices will remain under pressure or fall (like deflation) while at the same time, the purchasing value of the Dollar will be eroded (like inflation). Thus, we are about to witness first hand the worst of both worlds. Consumables, particularly those manufactured abroad (ie: China) are likely to continue a downward price trend. Services from aborad (ie: India) are likely to continue putting pressure on service-related salaries. Sure, you'll be able to buy that new DVD player cheaper next week, but you may not have a job, and if you still have any Dollars in savings they will have less purchasing power.
Rising Stockmarket vs Money Supply Inflation: There are 2 angles to this quandry: one, the Fed is increasing the money supply and while holding down interest rate in an attempt to twart off deflation. This increase in money supply without a corresponding growth in GDP translates to inflation. As we have seen in the past, whenever bullish concensus is high and money supply dollars are plentiful, a lot of those dollars find their way directed toward the stock and speculative markets. This is certainly part of Greenspan's plan -- a rising stock market creates the impression that the economy is improving, thus boosting invester esteem and confidence. But the other side of this equation is that a stock market is priced in whatever the prevailing currency is valued at. Thus, if the currency is inflated, more dollars pour into stocks to achieve similar valuation than prior to inflation. This automatically raises the indices even though the Dollar is worth slightly less. You may recall that my 200-year stock market chart is adjusted for inflation. While the DJIA may show 9300 on the ticker today, once inflation is adjusted, the value of the DJIA (relative to past years) may be less. For bullish stock investors, you have to ask yourself whether the real gains in the stock indices are sufficient to justify your investment there -- or, are you simply satified that the numbers grow higher without concern that the value of that gain may be superflous. It is kind of like in the 1980's when I recieved my cost of living increase to adjust my salary for inflation -- even though the higher numbers initially made me feel better, the purchasing strength of the extra dollars served little better than the former income a year earlier.
Investors don't seem to care, they will continue to buy stocks with whatever their perception is of todays value for their Dollar. This is why gold will automatically go up as the Dollar depreciates, but it also explains why the stock market can also rally. Not too long ago when inflation was flat, the stock market and gold prices were an inverse relationship -- one goes up the other goes down. Now that Greenspan (and Bush's spending programs) are artificially creating inflation, stocks can go up along side of a rising gold price. Eventually this trend will break down as investors realize the true value of the Dollar. At that point a disconnection occurs with gold continuing to rise while stocks move down.
California Recall & Voter (Ir)Responsibility: What a mess. It is too bad that Americans are so complacent about politics within our democracy that most do not even understand what they are asking for. It's is like the saying: "...you had better be careful what you ask for because you might just get it..." In the case of the Governor recall, the reason that so many are rallying behind a recall election is simply because they are pissed off and Davis merely happens to be the scapegoat. I am not trying to protect Davis, but he inherited much of the budget problems -- similar to Bush inheriting the bear market. What really gripes me is that so many Americans are willing to voice their opinion verbally, while failing to follow through at election time. For example, the 2000 Presidental election had barely 50% voter participation -- where were the other 50%? Think about it, only 50% of eligible voters actually voted, and only 50% of them voted for Bush. That means only 25% of the electorate actually cast a vote for George W. Bush, 25% voted for Gore, and the other 50% simply did not care enough to vote. And to make matters even worse, Bush did not even win the popular vote. Soon after I moved to Houston, there was a vote on term limits for city Mayor. This is the ultimate in voter neglect -- they're too complacent to vote, so they create a system whereby Mayors are forced to step down after their terms are up. Why can't voters simply do their democratic duty and simply vote for another canidate if they don't like the current one? Of course Murphy's Law came into play in Houston when they finally got a fairly decent Mayor, but when his term was up there was no way to extend it - he was out. This created a void that had to be filled, while unfortunately, only significantly weaker candidates were on the ballot. California's situation is related in that nearly all of the 135 registered candidates are too weak to hold the Governors job. But Californians are upset over the budget shortfall (even though a substantial shortfall was already in place when Davis took office), so Davis simply happens to be the scapegoat of choice. If the recall plays out, then I fear that the replacement will be no better qualified and probably much worse than Davis. California's citizens have created a huge quagmire or specialty laws that limit taxation from many different angles. Whether the Governorship is held by Davis or a recall-replacement, the task of reducing the budget deficit will be extremely difficult, so much so that it will prove to be impossible to get much accomplished in the remainder of the term.
George W. Bush should be worried. What is happening in California is not unlike what is happening at the Federal level. The big difference is that Bush can use Alan Greenspan to print more dollars to buy the things he wants... California can only issue more bonds. Both situations have severe ramifications for our current and future generations.
Our Troops in Iraq: I really feel for our troops, they have an extremely tough assignment. It was announced this week that there have been more U.S. servicemen killed in Iraq since Bush declared victory than during the war itself. I fear the situation is brewing -- what I believe we are seeing is the beginning of a multi-year or even multi-decade World War. Our troops are working in extremely difficult climate. The daytime temperatures are stiffling (causing some deaths due to heat exhaustion). In groups of 4 or more, the men have to eat, sleep, and basically survive within the confinded space in and around their humvee or tank. Where did you think they slept - a Holiday Inn? Think about what it is like for several guys to share the seats of their humvee trying to sleep, in extreme heat, without air conditioning, awful tasting water, sand blowing everywhere including their food, and the possibility of transferring out is simply not an option. And, they do this day in and day out. It is one thing for enlisted men to have to go through this ordeal, even though I am sure it is much more than they had bargained for. But a lot of the troops are National Guardsmen who had previously committed to one weekend per month, not an extended assignment in a hell zone. Apparently new recruits are continuing to sign up (probably not aware of the brutal conditions they will be forced into -- and I doubt the marketing hype discloses it either). Most of the advertising glitz focuses on the servicemen (and women) of yesteryear where your service entitled you to a college education and free time was spent in fun and exciting events. A rude awakening is certainly in store for the new recruits. War is never pretty, but this one is downright ugly.
I wish them the best.
(Sunday 4/20/2003 PM): The Bradley Siderograph has continued to demonstrate a remarkable and uncanny forecasting ability. With only a few very short-term inversions, the pattern is quite similar to the S&P 500 since January, 2002. Historically, the Siderograph has shown these remarkable spurts of brilliance, separated by periods of frequent inversions. While I have no idea when the next inversion will take place, or how long it will last, the fact that the Siderograph has gone for so long with amazing correlation makes me cautious that a major inversion could occur any time.
Click Left or Right chart to enlarge.
These charts are in separate left & right halves to make it easier for some readers to print the chart.
For traders who like to use the Siderograph for their own trading, a common strategy is to place stops at key turning point price levels. For example, the most recent major, perfect turning point occured on March 13, 2003 -- the actual S&P 500 low was on March 12 -- if prices fall below the March 12 low, then the Siderograph suggests that green inversion line should follow the market for awhile. The current blue Siderograph line shows a rather sharp rally from the April 11 intermediate turning point low, through late June, 2003 with hardly a blip of suggestion of any turns in between. If there are no significant inversions then the Siderograph suggests a bullish period. However, if an inversion occurs then the green line suggests a bearish period through late June, 2003. A move below the April 11 intermediate turn (actual S&P 500 low was April 10) suggests an early warning that an inversion may be occuring and a move below the major March 12 low should be considered a confirmation.
To demonstrate the intraday correlations, the following chart is the 60 minute S&P 500 index from September, 2002:
Click chart to enlarge.
The stair-stepping of the Siderograph line occurs because while the Siderograph is running 24 hours a day, 7 days a week, the S&P 500 is only trading 6 1/2 hours a day. The charting program only displays the Siderograph during trading hours and the start of the next trading session causes the Sideograph line to jump to its new level for that day causing the stair step pattern.
It is most important to remember that the price levels of the Siderograph are much less reliable than the turning points. Turns seems to be most associated when the Siderograph line changes direction. Other than the past 16 months where the S&P500 and Siderograph were locked in near-perfect harmony, the Siderograph line usually does not do so well in forecasting bull or bear campaigns
For those of you that like to tinker with charting data, the following link is an ASCII data file containing the actual Siderograph values (using Donald A. Bradley's original formula). The file contains only a date and a value field separated by a comma. The data covers May, 2001 through July, 2003. I will try to make new updates for this data file available when I update the Siderograph charts on CyclePro. Please do not ask me for more data than what is in the file. If I discover that someone is using this data and selling either the data or charts using the data I will discontinue providing it.
Get out of debt! I have been practicing my own preaching having completed my own financial restructuring such that now I am completely free of all debt... including home mortgage, cars, and everything else. I now pay most of my bills either through an electronic check-writing service or via my credit card that accumulates frequent flyer miles for the dollars I spend... I pay the balance every month so I never pay interest. I also have my check service pay a set amount to my credit card each month (whether I use the card or not... but I use it too much already) so I never risk the chance of being charged with a late-payment penalty. When using your credit card to build flyer miles, you sometimes have to be creative. For example some companies will not automatically bill to a credit card, but if you call their customer service department you can usually charge it. Income tax payments may be made through credit cards, but unfortunately the few services that provide this for the IRS charge too much for a service fee. While I could easily get several extra round-trip domestic tickets per year by paying my income taxes on my card, the extra service fees would effectively cost almost twice as much as buying the tickets directly -- so it is not worth it.
Hurrah for CyclePro! During Q1 2003 this CyclePro Outlook website accumulated its half-millionth hit. When CyclePro was updating regularly each week, the number of hits got as high as 3,000 per day. Now that the updates are infrequent, we are still getting about 200 hits per day... yeah I know... it's the same 100 people checking it twice a day looking for an update! Well I truely wish I could update more often. As it is, I find myself constantly looking for material and I write partial commentaries almost each week. But by the time I feel ready to post them, they're old news. It took awhile, but I finally recognized that I can no longer write about short-term events when I can only update infrequently... I need to stay more long-term focused.
Buying silver bullion - Warning! I do not mean to alarm anyone because the likelihood of this happening to you was quite remote. But the photograph below was taken of a 100 oz silver bar that was cut in half to show how thieves can remove silver content without it being easily detected. As you can see, holes were bored into the bar and replaced with lead. Since silver and lead are very similar on the scientific element tables, the weight and feel of these tainted bars are indetectable. Weight and specific-gravity tests are not sufficient for those of us in the non-scientific world. There are several things you can do to detect the drill-outs: (1) hold the bar between your thumb and first finger at a corner and then rap the bar like you would a tuning fork. The bars containing lead will have more of a thud sound than a nice ringing that you get from a pure bar of silver. (2) Most bar manufacturers make their bars with slightly more than 100 oz -- if you use a small (1/8" or less) drill bit into the top-center of the bar and drill down only 1/4 inch. If there are lead bore holes, then you should see the drill crumbs turn dark as it cuts the lead. Personally, I am reluctant to do this because I fear that the bars would not be as re-sellable... however, several of the major precious metals dealers that I work with in Houston have assured me that a tiny drill hole only 1/4" deep in the center does not affect the resaleability of the bars. The dealers have assured me that the slightly extra silver in each bar is sufficient to keep the bar at its 100 oz weight.
During the 1980's silver bubble when prices went above $50 per oz and one 100 oz bar was worth $5000, apparently thieves were willing to risk getting caught for their monetary reward in performing the drill-outs. As far as I can find, the only bars that were affected were 100 oz Englehard with a serial number that started with P or C. I have not contacted Englehard directly for verification, but apparently all known conterfeits have been removed from the market. However, everyone should be cautious that there may still be a few circulating around that have not yet been detected. Until recently, 100 oz silver bars were not being fabricated, thus all 100 oz bars being traded were leftovers from the 1980s era. Now, Englehard and Johnson & Matthey are fabricating new 100 oz bars. The Englehard bars are almost identical to the old bars. The new Johnson & Matthey bars are poured with rounded sides and corners, so it will be much more difficult to modify by thieves. Thank you to Houston Precious Metals owner John Hendlemeyer for providing the sample of the conterfeit bar for my photograph.
If you are planning to buy a large quantity of 100 oz silver bars and they are of the variety in the photo, then I recommend that you randomly select a few bars and ask your dealer to perform the drill test for you.
Silver bullion takes up a lot more physical space than gold bullion. If you have limited vault space available and you want to hold some silver, then I recommend 100 oz bars. They are uniform size, stack easily, and the weight is manageable. 50 oz bars are good too, but they are not freely traded as the 100 oz bars. Also available are bulk bags of 90% U.S. silver coins. These were minted prior to 1964 for dimes, quarters, and half dollars. From 1965 to present, the coins are sandwiched with various alloys, none of which contains any silver (although 1965 coins hold a small amount, about 40%, but overall too bulky to consider for investment purposes). The 90% silver bags are normally sold in bags of $500 or $1000 face value. This means a $1000 bag contains either 2000 half-dollars, 4000 quarters, or 10,000 dimes. $1000 of face value for any of these coins contains about 722 oz of silver. The size of these coins was specifically designed to maintain a "monetary value" of $1.28/oz of silver but this was back in the days when the U.S. government openly maintained a market price of less than $1.28/oz. When spot silver prices moved above $1.28, people tended to hoard the coins and melt them down to get more value. Since 1964, the U.S. government no longer tries to maintain any specific price for silver since there is no longer any monetary value in our circulated coins. If you have sufficient storage space available, then 90% silver coins is the best silver value -- currently $1000 bags sell for around $3400 per bag with about $100 extra premium for half dollars. 100 oz bars normally will carry a slightly higher premium above spot silver prices, but 100 oz bars are much easier to store. The one additional side benefit to the coins is that if you ever get desperate enough, you can still spend the coins because they will still work in vending machines and are accepted by merchants. Silver bars, however, will normally be traded with dealers, but silver bars are the most liquid and almost anyone world-wide will accept standard silver bars.
One of the methods that less-reputable dealers use in dealing with 90% silver bags is to use more of the older coins. For example with quarters, the vast majority of the coins will be Washington-head (1932-present) coins, but you might get a few of the older Standing Liberty (1916-1930) or Barber (1892-1916) coins. These quarters are so old, that they are usually worn down to the point that the minting date is no longer visible. If these coins had a mint date, they would likely have collector value, so if they are in your bag chances are that they have no collector value. These well-worn coins contain much less silver than less-worn coins. When you buy bagged coins, take a random scan to make sure that you do not have a large quantity of these older coins, although a few dozen per bag is considered normal... while it may sound as though the older coins might be worth more for collectors, without a mint date they are essentially worth no more than their silver content, and it does not matter if the coin was originally minted in 1964 or 1864.
Click each image to enlarge.
Until silver prices move substantially higher, I do not anticipate that thieves will have any incentive to counterfeit silver bars. But if/when prices move much higher, please be cautious of each new silver bullion purchase.
Silver/Gold Bullion Strategy As a Silver/Gold bull, my long term plan is to keep silver and gold bullion in storage vaults for at least another 5-8 years, possibly longer. But during this time it is possible to gain additional value (and compound your investment) by trading when the price ratios are to your advantage. For example, right now gold is about $325 and silver $4.50. The gold/silver ratio is 72.2 which means it now takes 72 oz of silver to purchase one oz of gold. Over time, the price ratio between gold and silver changes and oscillates. When the gold/silver ratio moves higher sell gold and buy silver -- when the ratio moves lower, buy gold and sell silver. The idea is to always keep silver or gold (or both), you simply move the bulk of your holding from one metal to the other, but always holding something. This way, if/when price moves much higher, both metals will participate. As we saw during the 2002 gold mini-bubble, gold tends to move first, but silver will soon follow. Silver should be thought of as the "poor man's gold". Right now, the ratio favors buying silver. One important caveat for this strategy, when trading one metal for the other make sure the dealers premium costs or commisions make the whole trade worthwhile.
For example: assume gold is at $325 and there is a $5 premium to buy a Krugerand coin and no premium when selling -- thus, buying costs $330 and selling you would only get $325. For silver assume $4.50/oz with a $0.30 premium for 100 oz bars to buy and zero premium to sell. Thus, it costs $330 to buy 1 oz of gold or 68 3/4 oz silver. Let's say you have a choice of buying 7 - 100 oz bars of silver for $3360 (7 x 100 x 4.80) or buying 10 oz of gold for $3300 (10 x 330). If spot gold prices rise to $400 and silver to $8 the ratio is 50... perhaps you believe it is a good time to switch to gold, so you sell 7 bars for $5600 (7 x 100 x 8, no premium) and buy 14 oz of gold for $5670 (14 x 405). For the extra $70 that transaction cost, you now have 4 more onces of gold than you would have had if you originally bought gold instead of silver. Going to the next step, if prices continue higher to $600 gold and $10 silver and you believe it is time to switch back to silver, then selling 14 oz of gold for $8400 (14 x 600, no premium) you could buy 8 - 100 oz bars for $8240 (8 x 100 x 10.30). You would gain an extra 100 oz bar plus pocket $160 in cash (with which to buy more silver, of course). As gold and silver prices rally and retrace, the gold/silver ratio also changes. When you get to a point where switching from one metal to the other gains additional ounces, then consider taking advantage of the opportunity. The most important thing to remember is to always stay in one metal or the other, don't try to time the whole market because you might miss out if/when prices surge again. In a strict buy-and-hold strategy, gold and silver do not return any dividends or interest, only the potential for price appreciation. Thus, gold and silver are simply a store of value. The strategy I have outlined keeps you in the market at all times (so you still get the benefit of "store of value"), yet you can compound your investment along the way as the market provides the opportunities.
The following chart posted in January, shows the historical ratio of gold to silver:
Click chart to enlarge.
While this chart clearly shows the major ratio waves from the teens to about 100 and back again, these are 22 to 25 year moves. These waves are not what my strategy above is talking about. You can see by the chart that my forecast is anticipating that silver will outperform gold over the next dozen years. But within each wave are smaller waves. These waves are the ones that my strategy is intended. For example, in 1990 the ratio was about 100, early 2000 it was about 55, now it is 72. Anyone who bought silver in 1990 and held it until 2000, switched to gold and then waited to switch back to silver gain right now would have increased their silver holdings by a factor of 1.33 times. (In january, 1990 silver was $5.25 and gold was $420, ratio 80, January, 2000 silver $5.35, gold $290, now silver 4.50, gold $325 -- assuming no premium to buy or sell, 80 oz silver in 1990 is now coumpounded into 106 oz, a 33% increase in physical quantity and about $57 gain in total value. In comparison, if you had bought 1 oz gold in 1990 and held it you would have lost $95 in market value with today's price ($420 - $325). If you had bought 80 oz of silver in 1990 and held it without compounding it you would have lost $60 in market value ($5.25 - 4.50). So you can see that even during times when the commodity prices are falling, a compounding strategy can not only help retain original value, but it can also help return more (or lose less). Since the examples above were during a bear market in precious metals, imagine how much better the returns could be during a bull market. So even if my CyclePro forecast is completely wrong and prices resume dropping again, this strategy could help hold current value.
Another twist to this strategy is to trade in and out of specific gold or silver investments as dealer premiums change. For example, right now U.S. Eagle gold coins have a premium much higher than Krugerands... so I am preferring Krugerands right now. If the premiums converge closer to parity, then I may switch my Krugerands for U.S. Eagles. Foreign gold bullion coins have selling reporting requirements that U.S. Eagles do not have... for example if you sell 25 oz or more of Krugerands at one time, the dealer is supposed to notify the IRS of your sale, but selling only 24 oz does not require reporting. Another example is the Australian Lunar Series coins. If these end up being sought after by collectors, then their premiums may increase. Already some of the prior year coins have secondary market premiums of over $100/oz above spot gold. In this case, if/when premiums increase by these levels, then selling the high premium bullion coin for low-premium coins will help compound your bullion inventory.
By the way, if you are currently holding gold instead of silver, I am not necessarily advocating that you sell your gold and buy silver right now. Personally, I am accumulating both gold and silver. Actually I am buying almost equal dollar values of each at the moment, primarily because the ratio is more benefitial to buying silver right now. But I still want to hold gold too. When the ratio opportunity returns, I intend on swapping a portion of my silver for gold, and back again ... but throughout the next dozen years (perhaps) I will always hold some gold and I will always hold some silver.
Gold & Silver Outlook From the April, 2001 lows, I count 5 waves up to the February, 2003 peak. This top occured much later than I had originally expected... but then, I did not expect the 5th wave to extend in a mini-blowoff. In my January update, I mislabeled it and thought the rally was part of a wave 3 of some kind, but I did not consider an extended 5th wave. Now that the subsequent pullback has been as deep as it has, hindsight & 20/20 we know know the 5 waves up are complete. From that top I believe we are still in the progress of a large wave 2 (in 3 waves: a-b-c), of which we are still working on the completion of wave "a". I know that may be disappointing to some gold bugs, but I think the current rally will stall out within the next few trading sessions (with a potential of breaking above 330 but probably not high enough to fill the gap remaining from April 1-2 which needs 334.60 to fill the gap). Then perhaps before the end of the 1st week of May we should see gold below the April 7 low of 320.10. A rough guess of 308 is possible for that low. If/when that occurs, wave "a" should be complete and wave "b" should begin. Wave "b" should be a 3 wave structure that should go up to and slightly above the top of the chart gap (347) left over from March 12-13, 2003. Wave "b" may not complete until mid-June. Once "b" is complete then wave "c" should begin that should take prices below the low of wave "a". It is too early to project that low price, but roughly I'd guess slightly below 290 around the first week of September, 2003.
Since the rally from April, 2001 lows to February, 2003 top was 21 months, I doubt that a wave 2 will complete in only 2 months, which is only 10% of the time of wave 1. Normal wave 2's are generally more than 30% of wave 1's time.
If any of this scenario plays out, then all of that will complete the larger wave 2. Unfortunately this means that $400 by the end of the year may not happen. I know gold bugs will not want to read that scenario, but fear not, because once wave 2 completes, wave 3 begins and wave 3 will be the one that gold bugs will salivate over.
If this scenario is wrong and wave 2 is already completed (which is an alternate count), then we should see prices ratchet higher and higher over the next few months... closing the gap from April 1-2 and then the gap from March 12-13. If that happens (and I would give it about a 1 in 4 chance) then we could reach $400 by year end. For now, we need to monitor the April 1-2 chart gap and the April 7 low of 320.10 because these will be the magnets that should draw prices one way or the other for the next few weeks.
Now, just to keep everything in perspective, that wave 3 will be impressive, but that is not the wave 3 that could take gold prices into the quad-digit area. I suspect that this wave 3 will be limited to perhaps $600/oz. The bigger, more spectacular event is most likely several years away. Keep in mind that for now, we are tracking a 5 wave structure from the low in April, 2001, of which, only wave 1 and a portion of wave 2 have completed so far. We still need to complete waves 2, 3, 4, and 5. Ok, once all of this is complete, then in a much larger picture, all of this is only wave I of an even larger structure. After wave II completes then wave III will be the big one... the one that should take gold prices above the previous all time highs. And if our economy really stinks as we move into the next decade, a possible wave V could blow-off where gold prices may approach our long term, super-bullish target of $3000/oz.
Did I really say "next decade"? When reading articles from websites devoted to gold/silver or fiat currencies, you need to remember that the authors have, and will continue to have, perpetual opinions about where gold prices are going, or where the Dollar is going. If you read them too frequently you may convince yourself that they might be right. Most of what they say is likely true. But almost all of them are talking their book -- meaning that many of them are bullish on gold simply because they are long gold... or they are bearish on the Dollar because they are short the Dollar. Without a time perspective you get the impression that $3000 gold or Dollar at 50 is imminent. The reality is that no one knows for sure if or when any of it will happen. But I believe that the best timeframe for these events to occur is still many years from now. I read a lot of the bullish gold websites and I really have to say that I agree with almost all of their main reasons, but it is the timing element that I have to keep one foot in reality. As long as George W. Bush continues to spend, spend, and spend some more, and the Federal Reserve continues to accomodate him, it is only a matter of time before the Dollar becomes trash to the global community -- and we'll be getting close to that point soon. This is just basic economics. Since gold is priced in Dollars (an inverse relationship), when the Dollar decreases relative to foreign currencies, the price of gold will rise... this is just basic mathematics.
Mining Stocks Over the past few years I have discussed several mining companies that I like. There are many good companies. But I need to keep a short list of my favories. Last year I reduced my exposure to DROOY. Although my timing could have been better, over all it was a good choice -- I replaced about 80% of my DROOY holdings with equal portions of NEM and GG. NEM is still in progress to eliminate their hedges, most of which were gotten through acquisition of other mining companies. GG is still doing well and I will be accumulating more over the next 6 months (assuming my forecase above holds out). I have also added 2 more stocks to my list: RGLD and WHT. RGLD (Royal Gold) was caught up in a nasty Barron's article several months ago and the stock sold off substantially. But the management and company are sound, I consider the Barron's sell-off to be an opportunity so started buying in the low $13's. WHT (Wheaton River) is considered a junior mining company. I like the management and the projects they're involved in and started buying in the low 80 cent area. I am accumulating RGLD and WHT on pull-backs. In the 3-tier quality structure I have discussed in the past, NEM and HMY are in my top tier, RGLD and GG are in my middle tier, and GSS, DROOY, and WHT are in my lower tier. I remain a believer that a good diversified portfolio should contain a selection of stocks from each tier. You'll have to decide how mush diversification and/or risk works best for your portfolio. All I can tell you about my choices is that I have not lost any sleep over these companies.
SUV Sales Have Peaked With the recent introduction of the Hummer "H2", clearly the irrational desire to drive intimidating road vehicles has reached its zenith. While the original Hummer vehicles were built with strength and ruggedness, the new H2 is built on the same frame as a Chevy Suburban. I guess if you need to cut the sticker price by 40% you need to get into bed with a domestic auto manufacturer like GM to build a cheaper frame. Even the exterior is made of flimsy sheet metal. This signals the extreme that car buyers will go to own a veneer vehicle for "the look", but not the balls, and pay a substantial premium to boot. While the SUV is the modern equivalent of the stationwagen of a prior auto era, the grotesque sizes have gone way beyond their apparent functionality. After all, how many SUV owners do you know that have actually driven their vehicles "off-road"? And, jumping across the median in a traffic jam does not count. While some families have bought SUV's for their practical stationwagen-like, family friendly, accomodations, others have bought them simply because they are a larger vehicle commanding an intimidating presence on the roadway. I used to own an Isuzu Trooper II which was one of the original SUV's, long before SUV became a fad. The original Trooper's were built to accomodate emmissions laws for passenger vehicles. But due to a technicality in the emmissions laws, "utility vehicles" are exempt from having to meet these requirements. The original intent was that SUVs were recreational vehicles that were used primarily for occassional, off-road use -- not as the daily family passenger car replacement. Therefore, nearly all modern SUV's fail to meet the emmission standards required for passenger vehicles. I have always believed that it was this extra emmissions pollution that helped push Houston into the #1 spot for Most Polluted U.S. City and Houston has held that title since stealing it away from L.A. four years ago. Even Isuzu has joined the fray and no longer includes the emmissions control equipment on their new SUV's.
Last year I donated my Trooper to charity. I am looking into the new hybrid cars, but I think I will wait for a future generation of vehicles. I find it interesting that hybrid cars are actually being manufactered now. In the 1970's energy crisis when hybrids were first discussed, nothing was done at that time because (here goes my conspiracy theory stuff again) the auto manufactures and oil companies lobbied successfully to thwart that movement. Now, however, we no longer have a true domestic automobile company -- everyone is merged or in agreement with foreign auto companies. As a result, foreign attitudes are creeping in and forcing change to begin designing and manufacturing energy efficient and hybrid cars. Of course, SUVs are completely outside of the "efficiency" discussion. I am quite amazed as to how many manufactures got into the SUV frenzy. Nearly every auto company builds an SUV -- even Porsche came out with their Cayenne model... did I miss the Bentley SUV? The accomodation of some of these upper-tier SUV are really quite awesome.
I recall that at the peak of the 1970's "crisis", 5-6 year old Cadillac's were being dumped by so many owners that you could buy one for under $1000. In several years, I suspect we'll see a similar fate for the bulk of today's SUVs.
Speaking of Troopers, just today while driving along one of Houston's many freeways, I spotted no less than 6 patrol troopers writing citations for speeding vehicles. I have written about this in the past as a signal and confirmation that the housing bubble has burst. While I may (although rarely) see one lone trooper patrolling around the city freeways, today was the most I have seen at one time for nearly 5 years! If this is a new shift in an accelleration of trooper activity for Houston, then it suggests to me that Houston home prices are already beginning to fall and as such, property tax collections are dropping. The quickest way to replenish dry coffers is to begin writing traffic citations again. Over the years of the booming stock and housing markets, people were feeling wealthier and stronger, and a small part of that new feeling was reflected in driving habits, which include speeding. Because there have not been any significant number of troopers out over at least the past 5 years, Houstonians have gotten accustomed to driving fast -- usually 10-15 miles over the posted limits are common, or perhaps I should say, considered the acceptable nominal speed. (Does this sound like your city too?) If anyone drives less than that, they are usually greeted by honking and gestures of waving, but with only one finger. Habits are hard to break... and I think the Houston Police Department (HPD), county, and state troopers, are counting on Houstonian speeding habits as a way to generate revenue to replace income lost during the boom years. Of course traffic control is necessary for a city, but when the number of written citations grows substantially, it really becomes nothing more than another form of tax collection... yep, a speeding tax. At least now that we are in the new Internet Age, we'll probably be able to take care of payments, fees, and/or Defensive Driving classes over our DSL lines.
I Support Our Troops in whatever situation they are sent. Their butts are on the line and when things go wrong, they pay for it with their lives. I applaude our military troops for their engagements in Afghanistan and Iraq. My only significant complaint with the military is with their campaign in Afghanistan -- with all of our apparent and wonderful high-technology, how was it that we could not keep better tabs on Osama Bin Laden and allowed him to escape? And, why is our technology so futile when it somes to finding him? And in Iraq, why did our commanders think they could march into Baghdad and not provide any policing is beyond my understanding -- the looting has caused far more damage than many of the bombs, and now the news is out that precious antiquities and artifacts have been stolen from the palaces and museums. But it is too bad that there has to be such a night and day difference between my support for the President and our soldier troops in this recent invasion in Iraq. Don't misunderstand, I think Saddam Hussein was an evil man who needed to be removed from power. But what I am most upset about is the process by which our President has gone about it. Never before in the history of the United States has a man so blatantly thumbed his nose at the Constitution, the United Nations, and the U.S Bill of Rights. I believe by invading Afghanistan and Iraq, President Bush has officially started World War III (or WW-IV if you count the cold war as III). At least when the U.S. (George Bush, senior) ousted Manuel Noriega from Panama, there was evidence of his involvement with drug trafficking, money laundering and racketeering. [Was the Noriega evidence conclusive? Does it matter? Like father, like son?] Our weak Congress authorized the President to use force to disarm Iraqi weapons of mass destruction (WMD), but nowhere in that authorization was there anything that said the President was authorized to declare war! And, certainly there was nothing mentioned about authorizing preemption. I guess this what we should expect when the President, Senate, and House are all in the same political party because apparently while they are aware of these horrendous breeches, they are willing to turn their backs and ignore it. I am sure that some groups will have a field day once the dust settles, to challenge Bush's antics with the U.S. Supreme Court. It has been said that "...it is the man of intelligence that can work within the system to defuse tension and arrange cooperation among parties. It is the weak man that strikes out with force..." Preemption to me sounds like the actions of a weak man. We have established a new precident, now other countries that convince themselves of justification, can also side-step the U.N. and preemptively strike any other sovern country.
I think former Texas Governor Ann Richards had both George's in mind when she gave her opening speech at the 1988 Democratic Convention when she said "... Poor George, He can't help it - he was born with a silver foot in his mouth..." I think everything about Bush's recent maneuvers can be summed up in his many-a-true-word-spoken-in-jest comments made while awaiting the outcome from the Electoral College (12/18/2000) when he said "...I told all four that there were going to be some times where we don't agree with each other. But that's OK. If this were a dictatorship, it'd be a heck of a lot easier, just so long as I'm the dictator..." Oh, how prophetically pathetic!
Why am I being so down on SUVs and bashing Bush? I think the two situations are related. In the 1990's a vast numbers of investor portfolios had shown substantial appreciation... and that made them feel wealthier. As a result, many people felt more superior and that was reflected in the homes they upgraded to, the cars they bought, the style of their driving, and they way they acted when travelling to other countries. SUVs were an outlet for many people to demonstrate their "superiority" and arrogance, and their agressive driving style was a reinforcement of their new-found top-of-the-world feeling. While the traffic ettiquit in Houston was anything but friendly, the past few years has seen a remarkable increase in rude driving maneuvers... and yes, most of this rudeness has been from SUV drivers. As for travel to foreign countries, I had done my share of foreign travel over the past dozen years or so and I am quite shocked by the rude and arrogant behavior of fellow Americans while in these countries. This is indeed a real shame because so many of the native people I met in the countries I visited really admired the U.S., not only for the money we brought to their countries through trade and tourism, but because the U.S. was looked upon and admired as a model of success.
On to the economy... I wrote several years ago that it really did not matter who the next president would be. The die of the economy was already cast. George W. Bush has made few attempts to correct our economic malady. Instead, his proposals are likely to ensure a deeper and more lingering down-turn. I admit that I had been expecting a multi-year recession and we are already several years into it. Originally I had hoped for 5-8 years (from the 2000 stock market peak), but I am constantly bombarded with so much economic fodder that suggests I was too optimistic. I eventually shifted my outlook to 8-10 years, but 12-14 seems more likely. U.S. government spending is max'ed out. In June, 2002, Congress authorized the government debt limits to be increased to $6.4 Trillion (and CBS News article)-- since then we have again reached the limit. And, Bush now wants Congress to add another $60 billion for the war with Iraq, and that is on top of what was spent in Afghanistan, and does not even hint at what additional sums Bush will need if/when he move to the next country on his "Axis of Evil" list. Fed Governor Bernanke has openly discussed how the U.S. can easily print its way out of deflation. While I knew our economy was going to be struggling for awhile, I never expected the Federal Reserve and our President would be so disrespectful of similar historical situations that our future would become so littered with so many economic land mines. It seems everything that is happening right now is forcing subsequent inflationary pressures to build. The 1990's stock market bubble was huge and took many years before it finally burst. Robert Prechter began preaching about its peak in 1995 and Alan Greenspan voiced of "Irrational Exuberance" in 1996... yet to took another 3-4 years to finally pop. All of the government spending, and all of the electronically-created new dollars it takes to accomodate this spending, is setting up for another bubble burst. Even though we are already at extreme levels, there is nothing that says that we cannot go to even more extreme. This is why I am so long-term bullish on gold and silver.
This coincident article just came out tonight from the Ludwig von Mises Institute: Salvation by Printing Press.
There is a lot of discussion around the internet about how fiat currencies never last and ultimately need to be replaced. Historically, a gold-backed currency was the traditional replacement. The U.S. Dollar is a true fiat currency since there is literally nothing behind it other than perception and faith. The internet buzz makes it sound as though the collapse of the Dollar is imminent. While I do believe that the Dollar will eventually fail, I do not believe that it will occur any time soon. This is not a major reason why I want to own gold... but I admit that if I am wrong and a Dollar failure occurs soon, then I will be somewhat comforted knowing that at least part of my wealth is protected. If I had to gauge how much effect this has on my portfolio, I'd say that of all my current gold and silver holdings, perhaps 5% is for protection from the Dollar collapse and the remaining 95% is for the firestorm of inflation that will envelope us sometime within the next dozen years -- just in time for many Baby-Boomer retirees.
Several weeks ago, John Mauldin distributed his weekly commentary which discussed the existence of the PPT (or Plunge Protection Team). I have always respected and admired Mr. Mauldin's comments in regard to the economic outlook. While we have never completely agreed, we are at least on the same mindset. So I was quite disapointed to read about his rationale as to why the PPT does not exist. All I can say is that I certainly do not agree with his comments, and I am sorry that he fell for a Wall Street shill's opinion hook, line, and sinker.
Wall Street is a game. It is a game whereby all participants try to make a buck. But to make a buck you have to find ways to take that buck from some schmuck who was obviously too dumb to hold on to his cash. But we never look at the other side of making a buck because nearly all transactions are anonymous. Therefore, for many investors, the concept of creating wealth through investing is seen more as magic than a zero-sum game of balanced winners and losers (this is another reason why many investors hate short-sellers... they obviously do not understand the "game" of Wall Street). Mr. Mauldin quoted Art Cashin as though Cashin is an expert on all things on Wall Street. Mr. Cashin's nose is too close to the pavement of Wall Street to recognize activities such as what a PPT-like group would be doing. Even if Mr. Cashin knew something about PPT activities, it would not be in is career interests to disclose them.
What started all of the controversy over the existence of a PPT was an op-ed article in the Wall Street Journal (of which I obtained a microfische copy from my local Library). In this article, former Federal Reserve Governor Robert Heller wrote about how the futures market could be used to thwart a significant stock market crash.
In 1987 intervention was done using futures on the Major Market Index. In October, 1997 it was done using S&P 500 futures contracts. Robert Rubin was a former President of Trading at Goldman-Sachs -- he brilliantly orchestrated manipulation in many markets, including October, 1997's stocks, the LTCM collapse, and others. My first 2 examples have some evidence left behind like trails in the sand. It would take a significant lawsuit to force the SEC to reveal information surrounding these events, evidence that I believe would prove without doubt about the PPT existence. Since 1997, the PPT activities have become much more sophisticated and evidence has progressively become more and more dilluted and difficult to peg. I have to say that now, I cannot tell if or when the PPT is involved in any major market intervention. John Maudin kept arguing that if the Federal Reserve was the owner of the PPT trading account, then we would see evidence in the finances of the U.S. government somewhere. But as I have discussed before, the trading for the PPT is not the Federal Reserve, nor is it the U.S. Treasury. I believe that all of the PPT handiwork is being performed by a select handful of Wall Street brokerages. Of course the PPT is the maestro to organize intervention activities, but the brokerages are the ones I believe actually making the trades. Only the SEC knows the whole story... any they're not going to reveal any information. Here is the basic strategy: The members of the President's Working Group on Financial Markets (ie: the PPT) meets regularly to discuss sell-off situations and during specific market events. For example, I am quite sure that in October, 1997 when the NYSE had halted trading, the PPT members were in a buzz about where and how to proceed. But not all intervention needs to be performed using futures contracts... in 1997 it appeared to be a queer coincidence that within several minutes of each other nearly 20 blue-chip companies announced stock buy-back programs. And these announcements came precisely when bids for S&P futures jumped ahead of ask prices by nearly $35 per contract. That was a $17,500 premium per contract! Any Wall Street arbitrageur worth his salt would have jumped at that opportunity to spread the futures market Vs the stock cash market (ie: a basket of stocks representing the S&P 500 index) and pocket the spoils. This is exactly the response that the PPT was hoping for. Because once the cash market started rising, and companies announced their support by buying back their own stock (although few actually did), and interviews with investors on the Street said they remained quite optimistic, the general market rebounded with a spectacular rally.
Beware of the Shifting Paradigms As we are progressing through time, experiencing history as it unfolds, we are witnessing many great paradigm shifts. Because of the terrorist attacks on the World Trade Center on 9/11 our security will never be the same. Already the Patriot Act has been enacted. Even though it has an expiration date for October, 2005, you can be assured that this expiration date will either be removed or through compromise, significant portions of the Partiot Act will remain in force. This will move us another step closer to an Orwelian end.
The internet is proving to be a terrific resource, far greater in magnitude than many had ever expected. One of casualties of peoples interest in this expansive resource is the slow death of our public libraries. Personally, I used to spend a good deal of time at the local library. But with the advent of the internet, the last time I went to a library was to research the Robert Heller article in the Wall Street Journal (see link above) and that was over 3 years ago. Prior to that I was already cutting back on my library visits. Libraries that survive will be a dramatically different place 5-10 years from now.
Another internet casualty will be full service travel agencies. Most major airlines have dramatically scaled back or completely dropped all commissions for travel agents. It is so much easier to book your travel by yourself via the internet. How many times have you checked out a quote from the internet, then called your regular travel agent and asked them: why is your price higher than the internet? or, I can get that 6:00 flight through the internet, why can't you get it for me? or, (If you like to get an aisle seat near the front of the plane) why can I set this up myself via the internet and you cannot? The only survivor will be the boutique-style agency that puts together package vacations, honeymoons, group charters, and conventions.
One paradigm shift that has not accured yet, but is destined to, is the migration from film cameras over to digital. This is something that many thought would have happend already. Even Kodak was afraid of losing out. So everyone made the mad dash over to digital. While film photography is still moderately popular, as prices of digital equipment come down, the migration will intensify. As an example, last December I was scuba diving in Belize. I brought a film camera with about 8 rolls of film. Another diver brought his digital camera with an underwater waterproof case, and a laptop computer. I took my usual photos, but unfortunately I could not review them until after I returned to Houston. The other diver was able to load his photos on to his laptop at the end of each day, providing a slide show for our diver audience, and decide which to keep, delete, or edit on the spot. Even underwater he could review specific shots and decide whether to take them again until it was just right. Certainly professional photographers will resist going to digital. But eventually, film photography will recede into the hobbyist realm, just like buggy whips, and 8-track tapes.
Click each image to enlarge.
Final Comments: Keep an eye on the VIX index (CBOE Options Volatility). The VIX is currently entering into a range (contrarian indicator) that should soon (if not already) signal that another intermediate downturn may occur fairly soon. But keep in mind that last year at this time the VIX was around 20... certainly if the VIX goes down to 20-22 area I will be positioning myself for a major downturn. Right now I am simply watchful.
The S&P 500 and Nasdaq charts both look like they want to move higher for another month or so (so the VIX above, may continue dropping into super-complacent zone -- into the lower 20's). From the 10/10/02 low I think we are tracing out a 3 wave counter-trend rally, of which the "a" wave completed 12/2/02 and the "b" wave completed 3/12/03. Thus, we are in progress with wave "c" which should move above the 12/2/02 wave "a" high. I think we are about 1/2 way through wave "c" now. Strong S&P500 resistance in mid-930's. To make sure we're on track, monitor chart lows from 3/12/03 on the downside and chart high on 12/2/02 on the upside. Once this little rally is over, the subsequent sell-off may be rather intense. At this same time we should also monitor the Dollar to follow stocks and gold inversely to the Dollar.
(Monday 1/20/2003 PM): A Whole Lotta Charts Tonight... Starting out is an update for my chart that displays the big picture better than any other I have ever seen. Since we know now that the 1990's mantra of "this time is different" was clearly wrong, because the after-effects of the so called "Nasdaq Crash" has got so many investors crying about how stupid they were for believing in a hyped-up dream of riches. The word "stupid" is perhaps too harsh, rather investors in the late 1990's were simply part of a herd of lemming investors -- I think "passively naive" is a better word to describe it. Naive, because people invested based solely upon chatroom chatter and CNBC carnival hype -- and passively, because too few investors made an effort to do their own investment homework. My chart shows the past 200+ years of the Dow Jones Industrial Average as adjusted for inflation. The booms and busts are clearly visible. Unfortunately, we are still busting and it is likely this will continue for quite some time. The amount of bullishness among investors, plus President Bush's and Alan Greenspan's machinations for stimulating our economy, all but guarantee that the decent to the bear market bottom will be slow and tedious.
Click chart to enlarge.
Let's disect this chart to try to get a better understanding of where we have been, and where we are likely to go. The next two charts are extracts from the 200+ year chart, however the scale has been converted from a log chart back to the standard scale -- thus, the trend channel lines appear as exponential lines. The top chart is the segment from 1885 to 1936. This chart shows how the tops in 1900 and 1906 were briefly along the upper channel line followed by very quick moves to the center line. In 1915-1916 we had a sharp rally that fizzled out and the DJIA eventually traded down to the lower channel line in 1920. This was the beginning of one of the greatest bull markets in U.S. history which rallied almost unwaivered until its peak in 1929, above the upper channel line.
Click chart to enlarge.
The 1929 stock market crash shows here as an almost vertical drop, but was actually over a 3 year span, down to the lower channel line in 1932.
The 2nd chart shows a similar situation where the 1966 stock market peak was near the upper channel line when in moved down to test the center line in 1970. Eventually, the lower channel was tested, and in high-inflationary 1982 it moved below to the secondary lower channel line. The only other time this has happened was in 1813 (see first chart). While some analysts claim the recent bull market began in 1974, this chart clearly demonstrates that using the buying power of the dollar as the guage, 1982 was the undeniable bear market low. From here stocks moved upward where 1987's peak was only the centerline, the subsequent "crash" was so tiny that it is easily overlooked on the first chart. The rally from 1995 to 2000 was relentless in its reach ever higher, above the upper channel line. This continued well above the upper channel to near the secondary upper channel line. Actually, I must admit that the secondary upper channel line is arbitrarily drawn because the only other time stocks moved significantly above the primary upper channel line was in 1929. BY comparison on an inflation-adjusted basis, it appears that 1929's peak was higher than 2000's peak. The comparison between 1929 and 2000 is worthy of more detail -- the following chart overlays the 1929 peak with the 2000 peak.
Click chart to enlarge.
The following chart updates the Siderograph with the current S&P 500 data. The blue line is the primary Siderograph line. The green line is merely the inverted or mirror immage of the blue line. Donald Bradley's basic idea is that the stock market should follow either the blue line or the green line since it can abitrarily switch between them. This switching is called an "inversion". While the shape of the curves often times do seem to track the stock index, the points at which the Siderograph changes direction are quite uncanny in how often they pick the precise turning date for the index. Usually as accurate as 1 or 2 days either way.
The October low, November high, and late-December low were very close hits. Even the shape of the blue line from September to now appears to be tracking very closely. If this tracking continues, then the Siderograph is suggesting that the stock market indexes will likely continue lower until mid-March. Breaking below the December low or rallying above the January high should offer a clue whether we will be tracking with the blue line or the inverted green line. Please be aware the inversions can occur at any time -- I personally, do not know when these inversions will occur.
Click chart to enlarge.
The next chart is an update from one posted earlier on CyclePro Outlook. It was this chart that allowed me to determine the end of the gold bear market. I posted an update on April 3, 2001 where I said about gold: "...Finally, something I can begin to get bullish about!" The actual low was on April 2, 2001 when the futures traded intra-day at $257 and closed the day at $257.80. Since the 1977 low we have seen 3 complete patterns of 3 years rally followed by 5 years sell-off. The target low date was originally calculated to be mid-March, so the actual low was late by only a few weeks.
The next projected 3 year high is between January, 2004 and August, 2004 with April-May, 2004 as the most likely timeframe.
Click chart to enlarge.
The next chart shows a timing analysis of the ratio of the DJIA divided by the price of gold. We can see there have been 3 distinct peaks formed when the DJIA was at its maximas: 1929 at 18, 1966 at 27, and 2001 at 41. Each of the ratio lows occured when the price of gold was close to the DJIA value. The lowest low as charted, was 1.2 in 1980 and the highest low was 2.7 in 1942. The 1933 low was 1.6. This means that in 1980 the value of the DJIA index was only 1.2 times the price of gold.
This chart suggests that not only is it likely that the ratio will again approach near parity, but that the most likely timeframe for this to occur is between 2013 and 2018. This is a strong indication that our bear market in stocks (and bull market in gold!) is likely to last for a very long time.
Click chart to enlarge.
The next chart overlays the DJIA/gold ratio plus the inflation-adjusted price of gold. The peaks and valleys of one graph is almost inverse of the other graph. From an inflation-adjusted basis, the price of gold peaks has traditionally been slowly rising from $311 in 1840's, $342 in 1890's, and $357 in 1930's. The trajectory of that progression is just over $400 for today. A similar projection from the lows from 1920 and 1970 suggest another low around $200 -- however, prior to 1973 gold prices were regulated and fixed by the government so it is doubtful that either the $200 low or the $400 high are suitable targets.
I think a more realistic target is the DJIA/GOld ratio reaching perhaps 2 to 1 sometime in the next dozen years. That means for example DJIA 6000, Gold $3000... or Gold $1000, DJIA $2000. Either way, this ratio does not portend well for the DJIA.
Click chart to enlarge.
The following is the historical ratio (or spread) of the price of gold divided by the price of silver. At the peaks, gold is strongest and at the valleys, silver is strongest. The highs have been around 100 and the lows range from 11 to 17. The lowest-low was only 9, an anomoly caused by the 1970's Hunt Brother's scandal to try to corner the silver market.
The lows from 1872, 1920, and 1968 are all 47-48 years apart. If we can progress this out, it suggests the next low (silver strongest) around 2016. Another way to project the next low is in the last 2 peaks, the rallys lasted 22 1/2 years and the previous valley occured 25 1/2 years later. From the 1991 peak (gold strongest), 25 1/2 years projects to 2016 as the next likely low.
Click chart to enlarge.
The next chart shows silver in the same way as we showed gold above, the ratio of DJIA divided by the price of silver, and the inflation-adjusted price of silver. The last two most significant valleys (silver strongest) occured when the ratio was 42-48. If the next low is perhaps below 100, then it would mean for example: DJIA 6000, silver $60, DJIA 2000, silver $20.
Much of the older historical data for tonights charts were obtained from Nick Laird at his Sharefin website.
Click chart to enlarge.
For long-term and position traders, keep focused on the "big picture" as the charts above basically suggest.
The current CFTC Commitment of Traders report data (ending 1/14/2003) shows the commercial category reducing their shorts by almost 7000 contracts and also reducing their longs by 2500 contracts at a time when Gold was trading between 351 and 356. The large traders increased their shorts by 2300. The small traders increased their shorts by 3300 and added 1800 more longs. It looks to me like the commercials were covering their shorts (because almost all of these contracts were losers) at a rate that kept up with the traders adding to their shorts. By not overdoing the short covering, the market stayed in a flat trading range. Total open interest reduced slightly (about 600 contracts) so everything seems to be fairly tame right now and the commercials are not panicing or at least they are not in a hurry to cover more of their shorts than the large and small traders are willing to take. If this is the commercial strategy, to unwind their shorts slowly, then we should continue to see a mostly sideways trading range with continuously reducing open interest. Is this the beginning of the distribution-accumulation process as the commercials turn net long? It is way too early to draw that conclusion - the commercials are still net short by 105,000 contracts so it will take a long time to completely unwind. The rally on thursday 1/16/03, was quite strong as it formed an $8 trading range closing near the highs for the day. Friday stayed within the upper half of that range. I am expecting the next CFTC report to show even more commercial short reduction as I think a portion of thursday's rally was the commercials jumping in to cover on the news coming out of Iraq. As of fridays close, the only winning shorts were the very few lucky enough to have shorted near thursdays or fridays intra-day highs -- which is at most a gain of $2 -- every other short contract is a big fat loser. I think the chart patterns are condusive to a period of redistribution as commercials and traders jocky for position for the next big wave.
Another aspect to monitor is when the commercials roll into the next most liquid contract month. The total open interest does not change much but the open interest for February will decrease while April will increase. I suspect the commercials will take advantage of this situation to finese into a roll plus a reduction of their shorts. If gold is rally-prone during this event, then I would expect the Feb-April calendar spread to narrow as Feb is bought and April is sold. At friday's close, the Feb-April spread was $1 so I think we may see this spread invert when the commercials begin their roll into April contracts.
The gold chart relative strength and stochastics are in "overbought" territory. However, I caution that "overbought" is not a very accurate indicator during a bull market. I like using relative strength and stochastics, but I only rely on them for "oversold" in a bull market or overbought in a bear market. What happens too often is during a bull market rally, the indicators swing to overbought early and stay there for the duration of the stronger waves. In general, anyone relying on the overbought signal when it first occurs will likely exit the rally too early and miss perhaps the best part of the rally. I prefer instead to use trailing stops with plenty of room to accomodate recent volatility swings.
The gold stocks have not been participating nearly as much as we had been used to given that spot gold prices have rallied a lot over the past few months. There are several explanations. One is that the gold stocks have already absorbed a lot of premium, and since gold stocks are largely traded by small traders and spot gold is traded by the big boys, they are not willing to ever-extend that premium until valuations catch up. Gold stocks have been volatile and traders have been beaten back at many of the previous hard resistance levels. As spot gold inches higher, small traders are apprehensive about adding to their positions if they percieve gold prices cratering soon. It's the classic "wall of worry". As for me, I view many of the medium and smaller gold mining company stocks as "long-term options" where their only expiration is either bankruptcy or a merger. Beyond that, gold stocks offer the easiest entry for higher leverage than buying physical gold, but that leverage comes at a cost, which is amplified volatility.
(Tuesday 1/7/2003 PM): I hope all of you have had pleasant holdays and look forward to the new year. History is happening all around us, it should get even more interesting as we move forward.
President Bush's proposal to eliminate Federal income taxes on cash dividends will have a very profound impact on the stock market. Richard Russell has been touting a "compounding" investment strategy for a couple of years, which includes reinvesting stock cash dividends. Unfortunately, the current interest rate environment is not condusive to higher dididend yields any time soon. I suspect that any hi-tech company that begins paying a dividend will start out with 2% yield or less.
One of the big changes will likely be how company stock options or bonuses are paid out. Now that there is more investor and auditor scrutiny over these payouts, cash dividends may be a way to keep the cash rolling in for corporate executives. Today, Dell and Oracle both announced that thay will "consider" whether to begin paying a cash dividend. Here are a few examples of how top execs may benefit:
If Dell were to begin paying a dividend of $.56 ($.14 per quarter) the yield would be about 2% at their current stock price of $28.65. Since Michael Dell owns 296,316,000 shares, he would benefit with a $165,936,960 tax-free dividend "bonus" each year, plus it would be an incentive for him to hold his stock rather than selling it.
Microsoft's Bill Gates, at $.28 dividend per quarter ($1.12 per year, about 2% yield at current price of $55.80) would recieve a tax-free "bonus" of $685,158,880 per year on his 611,749,000 shares.
Even though the initial yield is likely to be 2% or less, that does not mean the yield will not change. If the stock market goes anywhere near where I am forecasting, Dell, Microsoft, and others will eventually yield in the double-digits (assuming of course that they do not cut their dividend too).
There is an argument that initial yields might actually be better than 2%. Money markets are currently yielding about 1/2%, tax-free minicipal bonds yield about 3%, treasury bonds about 5%, and utility stocks about 5-8%. A higher stock dividend yield that is competative with alternative, similar risk, investments (tax-free return or effective return after taxes) will help to support a stocks price, relative to their industry sector.
Richard Russell points out that one of the best thing about dividends is that there can be no phoney accounting. When you receive a dividend, it is real, spendable cash -- nothing phoney about that.
Another benefit is once a company begins to issue dividends and their stock appears to fare better than competitors in the same industry sector, then they too will attempt to pay a dividend. While companies should retain some cash for future research & development, investors need to get back into sound investment strategies and greater-fool techniques can only survive in a bubble. Now that we are no longer blowing stock bubbles, dividends will be a more sober strategy.
Gold, Gold Stocks
Since the first of December 2002, the price trajectory on the chart has been at a much higher slope than previous rallies. This is "Wave 3" stuff. But wave 3 of what degree?
In the CFTC's Commitment of Traders report, as of 31 December 2002, Silver's commercial category is net-short 60,000 contracts (300 million ounces, 9375 tons) and gold commercial's are net-short 104,000 contracts (10.4 million ounces, 325 tons), not including options. The current open interest suggests that just over 60% of these contracts are for February delivery and 11% are for June, 2003. As the clock ticks forward in time as we approach contract expiration, many of these contracts will be rolled into the next most active month. Right now, roughly 62,000 net-short gold contracts (195 tons) are for February, 2003 contract month.
At last weeks high gold price, every single short gold contract was a loser. The notional values were $1.4 billion for silver and $3.6 billion for gold. As of 1/7/03 the total number of eligible ounces of gold for Comex delivery was only 344,000 ounces. Silver has 46 million ounces eligible for delivery. If you consider that only 5-10% of the contracts traded ever go to actual delivery, then perhaps only 5000-10,000 contracts of gold will be delivered. That means there are perhaps twice as many gold contracts likely to be called for delivery than are currently available to deliver with warehouse stocks.
If the warehouse stocks of gold does not change significantly between now and February, 2003 delivery, and if more than 3400 contracts of gold are taken to physical delivery, then the shorts are in deep doo-doo. There are only a few options available: buy physical gold from the spot market at prevailing prices, lease it (but pay it back later), reclassify inventory to make it eligible for delivery, or declare bankruptcy. Let's say a worst case scenario is that 10,000 contracts are called for delivery in February (1 million oz, 31 tons) and only 344,000 are available at the Comex... "Someone" will have to find 20 tons of gold. That much gold will cause spot prices to rise. 20 Tons is worth approximately $230 million.
That's not a very pretty picture. But please keep in mind that the futures exchange markets account for perhaps only 1/10th of the trading activity in the OTC markets. In the OTC, most contracts are settled in cash and since there is usually very little physical delivery involved, every OTC contract must be settled. In the futures exchange every contract is closed out, if not in physical delivery then the unrealized gain/loss is applied to the traders margin account (and is then turned into a "realized" gain/loss). Leading into the contract expiration timeframe, if the traders unrealized losses are excessive, the futures exchange will require the traders broker to issue a margin call and the trader will be required to post additional cash.
A rather low-accuracy, but highly illumunating tool is to track the week-to-week changes in account values between the various COT categories. To do this I created a spreadsheet of the historical COT information. Beginning in March, 2001 when Gold reached it's lowest weekly closing price, I tracked the performance of each category as follows: the weekly net change in longs times the net change in gold price minus the net change in shorts times the net change in gold price. This is acummulated from a starting account of $0 when the lowest price was made in March, 2001 through the most recent COT report data (12/31/2002). It shows that the Commercial category has a mark-to-market loss of $5.4 million, the Large Speculator as a gain of $3.9 million, and the Small Speculator a gain of $1.5 million.
Quite often, traders say that the Commercial category is usually right. To demonstrate this statement I have assembled the following charts using the historical COT data from 1986 through present:
Click chart to enlarge.
The top chart is the weekly closing price of gold.Chart 2 is the Commercial category - the top section (blue) is the percent of total open interest for the net long/short position - the bottom section is the actual net long (+) or net short (-) position. Chart 3 is the same chart but for the Large Speculator category. The labels match the same positions on each chart.
In the Commercial chart, there have been 4 times when their net short position was at an extreme level. This is verified by both the blue and red sections. The current Commercial net short position is the second most extreme in the COT history. In the Gold chart, the first 2 times (A & B) were almost immediately followed by lower prices. Point "C" was followed by lower prices, but only after a few weeks delay.
In the Large Speculator chart, there have been 5 times when their net long position was at an extreme level, 4 of which coincide with Commercial extreme net shorts.
Point "D" is happening right now... are lower prices coming soon?
Another short-term worry is that December, 2002 was the best performing month since September 1999 when Goldman-Sachs was caught short in a rising market. Any time there is an extreme of any kind, someone is a big winner and some else is a big loser... the losers tend to close out their positions and the winners tend to take profits. One possibility is that the number of winners selling to take profits might cancel out the number of losers buying to close out their positions. When this happens, the total open interest goes down, but the longs are still long and the shorts are still short. If the Commercials are caught short again, then a 1999 style of spectacular short-covering rally may be seen. In 5-8 years when gold prices are above $2000 we can look back and this timeframe and wonder why we were ever so concerned.
The open interest on Comex Gold is still increasing, so it is not signalling a significant downturn yet. As for extremes, the current total open interest is 206,914 which is 27th on the list of highest weekly readings. As long as open interest is increasing, and volume is increasing, prices will continue to rise. Watch the open interest on individual contract months. As we approach closer to February, 2003 the OI will begin to drop while April, 2003 starts to rise -- this is the Commercial traders rolling from one contract month to the next. When prices fall, volume falls, and particularly if OI falls, then that usually means prices are headed lower.
The following are a few interesting articles:
What is the point of the XAU & HUI?". This article trys to explain that the HUI index really is not a very respresentative index for unheadged stocks. They have created their own index using only pure unhedged stocks which, of course, outperforms the HUI. But if you look at the performance differences, the message is really not that one unhedged index is better than another, the message needs to be that unhedged not only outperforms hedged stocks, but the performance difference is highly significant. But I must admit that I agree that the XAU is a worthless index when used by the mainstream media when trying to assess how mining stocks are performing. Even Robert Perchter's Elliott Wave International is still clinging to XAU for its analysis, but I think that is more because they are strongly bearish on gold and the XAU's underperformance enhances their disposition. Anyway, while I agree that the HUI index is not perfect, I am not too concerned since it still clearly demonstrates the striking differences between unhedged and hedged.
2002's best gold & silver stocks. This article alsocompiles a nice list of mining stocks. If you are looking for a list of companies to research for your own investing, take a look at this list, it is about as complete as any I have found.
Taxes, Inflation, and Retirement
President Bush's Tax Stimulus package is long-term inflationary. Almost none of the provisions will help anyone short-term, it is all earmarked for the duration of the next 10 years. Too bad his plan was not retroactive for the 2002 taxes, then it would indeed have a more immediate impact, particularly once refunds begin to be received -- or for self-employed folks who may not have to pay in as much in their quarterly estimates (ie: 2002 Q4 estimates are due by January 15 and 2003 Q1 tax extimates are due by April 15). If the economy continues to slow down, there will be higher unemployment, which equates to less tax generation. Since the tax cuts mean less tax revenue for the government, and there was no announcement that there would be any significant curtailments in defense spending or war preparations, so the money will have to come from somewhere... the digital printing press is Greenspan's solution. The less taxes are collected and the more the government spends then the more money needs to created from thin air... this is inflationary. Gold will do well in this environment.
To add to Bush's tax proposal, the following are the opening remarks by Alan Greenspan in a speech at the Economic Club of New York last month:
"Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And in the four decades after that, prices quintupled ... Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over-issuance of money. As recently as a decade ago, central bankers, havingwitnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."
Sometimes Greenspan will come right out any say something important, but usually he says things with hidden meanings. It is almost a riddle to try to figure out what he is really saying. Sometimes the most obvious is not necessarily the intended message.
For example, several years ago I had a conversation with a very good friend who has since passed away. In that conversation he disclosed to me that he thought to maintain a decent standard of living after retirement, you had to have at least $2 million from which to earn a solid interest income. If you are used to an annual income of $100,000 then 5% yield on $2 million is about right. But it got me think thinking back then and again as I recall the moment, if interest rates drop like they have recently then to maintain the same income level you really need to have much more of a base. If you were using only short-term money market or T-bills with current yields of barely 1% then you'd have to have almost $10 million stashed away. Otherwise you would only be recieving $20,000 per year instead of your comfortable $100,000.
Greenspan essentially said that since we are not on the gold standard any more, we should expect that the Federal Reserve will continue to inflate the Dollar just as they have in the past. Over the next 20 years, he says we should expect at least enough inflation that prices will double (perhaps more). This means that a 45 year old expecting to retire in 20 years with the anticipation of being able to find and lock into a solid 5% interest bearing security, in order to maintain the equivalent of $100,000 per year income, the base of the securities must also double. Therefore, by 2023 the retirement bound should try to have $4 million in savings to earn a 5% yield of $200,000 per year, but which has the buying power of $100,000 in today's dollars.
Click chart to enlarge.
But we really need to carry that thought a step further. Medical technology has advanced enough that human life expectancy has increased, and we should expect that to continue to expand as we move on. By 2023 average life expectancy may be 90 years or more... some say closer to 100. Whatever it is, the problem will continue to be what Greenspan says to expect in our future when he said "...in ... 2 decades ... prices ... nearly doubled ... and the four decades after that, prices quintupled..." I read this as saying in 60 years prices increased 10 fold. So he says were on an exponential curve and the doubling rate is happening sooner and sooner. Therefore I really underestimated how much cash someone will need for retirement -- let's look at 20 years and 40 years out. The chart above shows exactly what Greenspan was saying (I used PPI in the chart instead of CPI and reset 1933 to zero). I will leave it as an exercise for each of you to determine where to begin in the inflation line to measure out 20 and 40 years to see how much of an effect inflation will have on your retirement savings.
The only thing I have seen that will help once you get to retirement or near retirement, and that is U.S. "TIPS" which are inflation-adjusted bonds. If I am understanding these correctly, the interest rate will be automatically adjusted by the official government inflation figures, so the idea is that the spending power of the interest dollars you receive one year will have the same spending power as in subsequent years. It sounds great assuming the government statistics are reliable.
What to do until you get to or near retirement age? My solution is to invest in gold which is the only consistent, history-proven store of value. Based upon what Greenspan said in his speech, (excluding trading bubbles and panics) the price of gold should at least double in 20 years to over $700 and ten-fold in 60 years to more than $3500.
Like I have said before in CyclePro Outlook, inflation is really little more than a stealth tax. It is the only perfect tax that has ever existed. No IRS agent is necessary to collect the tax... the Federal Reserve merely cranks out a few more Dollars, increasing the inflation rate, and voila! your purchasing power has been reduced. It's almost magic!
DJIA and Inflation
The DJIA can actually go higher during inflation because today the index is priced in today's dollars. In 20 years the DJIA will be valued in the Dollars of 20 years from now. If those Dollars are worth 1/2 of todays Dollars, then assuming the fundmental value of the DJIA stays flat for 20 years, then the DJIA index would show a double to 17,000 and to 85,000 in 60 years.
(Thursday 10/31/2002 AM): I am trying to get out another update but my PC was severely disabled by a nasty computer virus and it will be awhile before I am able to update my charts, etc.
However, a recent event has occured that demands my immediate attention. My investment in HGMCY, DROOY, and GSS are all exposed to the political risk of South Africa. One reader warned be about this risk several months ago -- he was right, so I was trying to research alternative gold stocks that diversified this risk more globally. I have not completed that research yet. But the recent development in South Africa concerning the government charter requiring all mines to have partial ownership by black South Africans -- while I think this is an important development, I think it will take time to determine how it will effect the stock prices, if any. Either way, exposure to S.A. needs to be reduced.
At the same time, my outlook bubble burst this past weekend when I discovered that DROOY is now hedging again (lightly, but hedging nonetheless) and they are planning to develop the deepest gold mine in the world (up to 5000 feet deep). These two events at DROOY have devistated my outlook on this stock. Therefore, I have swapped 80% of my DROOY out in exchange for Gold Corp (GG - Canada) and Newmont Mining (NEM). This reduction in DROOY has effectively reduced my S.A. exposure, but my holdings in GSS and HGMCY are currently unchanged.
I wanted to get this out while it is still fresh and I will attempt to get a regular CyclePro Outlook update within the next week or two. The following are a few very brief comments:
If the FED lowers interest rates again, as they have been hinting at for the past few days, the effect of that cut will be mostly ineffective. While riding into work this morning on the radio a local Toyota dealership was advertising that you can now buy a new Toyota for $0 downpayment, 0% interest, no payments until 2004, and also get up to $5000 off on the price (suggested retail price) of the car. If Greenspan lowers rates, this Toyota offer cannot go any lower on their rate, all they can do is offer more and more price discount or factory rebates. At some point, they may almost have to give their cars away.
Speaking of cars, an interesting tidbit on gold-inflation history... I can recall in 1966 a brand new Volkswagen Beetle was advertised as $1995. In 1966 the price of gold was fixed at $35/oz... that means the Bug cost about 57 oz of gold. Recently, a friend bought a new Beetle for $18,500 when the price of gold was about $325. The new Bug... about 57 oz of gold. Even with all of the changes in technology and features, a Volkswagen Beetle costs the same today as it did 36 years ago -- thus, a dramatic demonstration on the long-term effect of inflation.
My point here is not necessarily to demonstrate inflations devistating effects over time -- although that is a significant point -- what I also want to demonstrate is that gold is not necessarily a commodity of speculation, rather it is a store of value. The gold that I am accumulating today should be able to purchase the same quatities of goods in 5-8 years as it can purchase today. I cannot say that about the U.S. Dollar, in fact the increases in money supply over the past several years virtually guarantees that once the current bout of deflation subsides, the backside of this will likely be roaring inflation. I believe it is unavoidable. Therefore holding gold is a way to store todays purchasing value for future use. Holding gold stocks is speculative, holding physical gold is simply parking your cash for later. In a nutshell, that's my long-term gold strategy.
Since the FED's fiat Dollar is designed to be inflated over time, holders of the Dollar should view the effects of inflation as a form of taxation. The Federal Reserve is not a government organization, it is a completely separate corporation that simply provides a service for the U.S. government. Roughly, the relationship between the FED and U.S. is similar to Fannie Mae and Freddie Mack. While the "inflation tax" is not a direct reduction in your savings account, the purchasing power of the Dollars is reduced in an indirect or stealth fashion. It is the only form of taxation that can occur when no one can avoid paying the tax... as long as you hold Dollars, over time you will be paying the tax. The IRS could only dream that their taxes could be so efficiently collected.
In the 1770's the colonial states violently protested against England with their cry of "...No taxation without representation...". In regard to the FED's "inflation tax" policy, I think the time has come once again to revolt, but this time against the FED. Personally, I would like to see the FED be forced back to a gold standard of some kind, annual audits of their books (they have never been audited), full disclosure and accountability of their market interventions, and open election of key officer positions. If none of this can be achieved, then The U.S. Congress should disband the FED and take back the task of managing the Dollar the way our founding fathers had intended.
(Monday 8/21/2002 PM): It has been over 3 months since my previous update. A lot has happened in the stockand financial markets, but nothing particularly noteworthy with respect to theoutlook for the current bear market. As I see it, everything is still progressing --lower lows and lower highs. The sharp rallies recently have been very impressive, butonly for their point gains, and not much else. These types of sharp rallies areactually quite common during prolonged secular bear markets.
Leading up to the July 23 low, every time the markets went lower, media pundantsdeclared that the bottom was in "...well, this time it is really in... I waswrong before, but now I know I am right... this is it, I know it is! ... Ourover-sold indicators are off the charts!..."
You have all certainly heard thesesorry excuses and claims of bottom-calling. Of course, the bear market is not overyet... actually it has only begun and recently had a chance to build up a nice headof steam. Retracements are always necessary, no matter what direction the majormarket is moving. So even though we are in a secular bear market,the current rally (if it lasts much longer) will only end upbeing a brief opportunity for consolidation before driving loweragain.
To be honest, I no longer care what is happening from day to day. I do not subscribeto any newspapers or newsletters. I turn on CNBC while getting ready for work in themorning, but only to monitor the overnight DJIA futures and European gold prices -- Ikeep the volume down so I do not have to listen to the monotonous drivel that thecommentators spew out. Please do not misunderstand my bias against CNBC, some ofthese guys (and gals) are really quite intelligent, but their day-to-day focus is aforest and trees problem. While trying to come up with reasons why yesterdays stockmarket action happened the way it did, no one is looking at the big picture.What CNBC really needs is a chart that plots the previous 3-4 years plus thenext 8-10 years and then a big red arrow that says "You are here!"
Of course no one can create an accurate chart projecting the next 8-10 years. Well,except for my 200-Year Inflation-Adjusted DJIA chart (below). I have updated it withcurrent price data. As you can see, the past 10 months barely registers on the chart.To further demonstrate how trivial the current rally is in the bigger scheme ofthings, look how tiny and insignificant the 1987 crash was when compared to the whole1982-2000 bull market.
Click chart to enlarge.
Dynegy (DYN) stock price plummeted since our previous commentary on the stock. Dynegyand Enron were very similar in the structure of their trading books. Many energycompanies went out of their way to attempt to emmulate how Enron structured theirtrades. Every company that made significant Enron-like trades has seen their stockprice crash because of SEC investigations. Of course most of the carnage has beenlimited to the energy companies. Houston is the "Energy Trading Capital" soit is only logical that the downturn in energy companies has (and certain willcontinue to) affect the local financial economy of Houston.
Dynegy has announced that unless it can firm up necessary financing, they will beforced to declare bankruptcy. As I had noted in my previous commentary, the dominoesare lined up, all it takes is a shock event to make the dominoes fall.
However, as we have seen first hand, once a major participating trading companybegins to falter which affects their ability to pay for their trades, andcredit-rating cuts force them to cough up more money for trade collateral, they endup getting caught in a death spiral that carries them deeper and deeper towardbankruptcy. Enron was an excellent example of this. Dynegy is on the verge... rumorscontinue that Dynegy is very near Chapter 11. What is probably holding Dynegytogether for the moment is the major ownwership in the company by Chevron-Texaco(CVX). Dynegy performs all of the wholesale and retailmarketing of Chevron's natual gas. In the event that Chevronever decides to find another trading company to markettheir gas, I am afraid that Dynegy would be veryunlikely to survive. Remember that Chevron loaned Dynegy$1.5 billion toward the purchase of Northern Pipelinefrom Enron. Last month Warren Buffet bought thatsame asset for about $920 million (plus a major debtbalance). While I have nothing to back this up, it is my personal suspicion that Chevronwas instrumental in helping Mr. Buffet purchasethat property as a way to help recover even afraction of their $1.5 billion investment/loan. Ifthis is true, then all of the cash proceeds willgo directly to Chevron and DYN will not be able to useany of the cash for short-term expenses. We willhave to monitor this story as it progresses.
What Wall Street has not yet fully assessed, is that energy companies were not theonly industry sector that participated in highly-leveraged derivatives. As long asall of the trading counterparties of these companies remain solvent and are able tocontinue paying for their trade obligations, without default, the companies were ableto maintain the appearance of strength. Once a death spiral begins, it is nearlyimpossible to stop.
Certainly the energy company dominoes have been lined up and their falling has beenclearly visible to the even the casual investor/observer. Imagine every industrysector that routinely engages in derivative trading, for whatever reason (hedging,speculation, etc). Beyond the energy industry, there is also agriculture, livestock,banking, mining, and so on. Each of these industries routinely use leveragedderivatives in their day-to-day business. Each of these industries is vulnerable.Please do not be too complacent to think that the greed that pricked the Enronbubble was an isolated event... rather, it will eventually be shownthat abuses of derivatives is widespread and global.
Another industry that is highly dependent upon derivative trading is the bankingsector. Here, JPMorgan-Chase and Citigroup are the two largest. I have beencommenting on these two companies for nearly 4 years. CyclePro was the first to breakthe story about JPMorgan and the other big banks and their excessively over-leveragedderivative books. Even recently, JPMorgan-Chase has total notional derivatives ontheir books near 50:1 to their assets. I shudder at the thought of what effect itwould have on the U.S. and World economies if a bank like JPMorgan-Chase and otherbanks would ever fall into a similar death-spiral like we havewitnessed in the energy sector. In most trading shops, a 2% loss of their total derivative portfolio is considered to be normal. For JPMorgan, a 2% loss is equivalent to their assets...
While no government group stepped into help support Enron when it was nearing bankruptcy, I am quiteconvinced that a similar situation with JPMorgan-Chase, the Fed andU.S. Treasury would do all they can to intervene. Understand that"intervention" of this magnitude means the printing ofDollars to pay for the JPMorgan-Chase losses would be hyper-inflationary. The 2002-Q1report from the U.S. Treasury -Comptroller of the Currency, showsJPMorgan-Chase's current notionalderivatives to be in excess of $23trillion. All U.S. banks (thattrade derivatives) combined is astaggering $46 trillion. Bycomparison, the annual U.S. GrossDomestic Product (GDP) is about $10trillion, and World GDP is about$40 trillion. Total global notional derivative value is widely thought to be well in excess of $100 trillion.
Now that we know how easily and quickly a company can fall into a derivative trading,equity downgrade, death sprial, it boggles the mind how one company could be allowedto amass such an incredible trading book as that of JPMorgan-Chase. The onlyexplanations I can come up with are: greed, complacency, and irresponsibility.
After buying Banker's Trust and inheriting their derivative book plus their own derivative portfolio, Germany's Deutschebank is in a similar vulnerableposition as our U.S. banks.
The stock market was a visible bubble that many investors rode (without recognizingit as a bubble). Yet, the JPMorgan-Chase derivative bubble has been allowed to grow,unabated, unquestioned, and apparently without concern. Is the U.S. Senate BankingCommittee at all concerned? If a death-spiral begins, the finger-pointing andpolitical C.Y.A. will be a major drain ofCongressional energy. Just like Harvey Pitt (Chairman of the SEC) was largelyresponsible for the stock market bubble, now he is trying to do his own C.Y.A. by makingit look like he was too understaffed to monitor activitiessuch as Enron, Worldcom, Adelphia, etc. Even the wholedebate about expensing Employee stock options was somethingMr. Pitt has always known about, yet completely ignored. TheSEC was created to be proactive in defusing these events,but under Mr. Pitt, the SEC is playing catch up and havingto rationalize their incompetence. Even the arrogance of Mr.Pitt is clear when two weeks ago he asked Congress to approve a raise in salary forhimself... no one else at the SEC, only himself.
Harvey Pitt needs to be removed from his SEC post, his demonstrated incompetence should not be allowed to continue. Investors expected the SEC to protect their interests, yet Mr. Pitt ignored them.
I think the best way to defuse the JPMorgan-Chase dervative timebomb is for Congressto step in and force JPM to systematically unwind the vast majority of theirderivative trading book. And, if that happens, then there should be a blanketlimitation on how much derivatives a company or bank can trade. While energy and bankingare two sectors I have focused on, all business sectors that heavily rely uponderivative trading should be candidates for further investigation. Because derivativetrading information is usually not available to the public or even investors in thecompany stock, I am making some broad guesses as examples. The agriculture sector, I am guessing thatCargill and Archer Daniels Midland (ADM) would be two examples for trading in agriculture derivatives such as soybeans, corn, etc. In precious metals BarrickGold (ABX) is a clear example.
But other industries may also bevulnerable, ie: Fannie Mae and Freddie Mac. Even GMAC (a subsidiaryof GM) may be at risk because of their DiTech.com division (you've seen the commercials on TV)? If/when the housing bubble bursts, allof these companies will be significantly affected.
For those of you that monitor the Bradley Siderograph, I have updated the long-termchart below. The traditional Siderograph indicator line goes through September,2003.
Click chart to enlarge.
Gold, Gold Stocks, and Golden Opportunity
Gold stocks had a very nice rally up until June this year. Since then, they have beenforming a necessary retracement and consolidation. Using the Gold futurescontinuation chart, the wave count that I prefer is wave 1 up from April, 2001 toMay, 2001. Then wave 2 is a large flat (slightly irregular) 3-wave ending with thelows in November, 2001. From there wave 3 rallied to the recent highs in June, 2002.The fibonacci expansion from wave 1 to wave 3 was within a few dollars of perfect(1:1.618). Since June, we have been retracing within a wave 4 with the lows on 8/1/02very close to a 50% retracement of wave 3. And when waves 1 and 3are combined, wave 4 is close to the 38.2% retracement. Wave 5 mayhave begun on 8/1/02 and should carry spot gold above $340. Thebest time for this next top is as early as late-October, but earlyDecember may be more likely.
Be sure to monitor gold futures during the last week of September. This is theanniversary of the spectacular short-covering rally sparked by Goldman-Sachs inSeptember, 1999. Since this will be the quarterly close, if any major shorting playeris required to square their positions for stockholder reports, then buying to covertheir shorts will occur precisely that this time... particularly if gold prices areabove $330. Of course everyone already knows how important the end of the quarters are, so the battle will be between those that must keep prices low to protect their trading book and those who believe the price of gold should be higher, much higher.
Once the 5 waves up are completed, these waves combined, form only Wave 1 of a much, much larger wave structure. At this level, a Wave 2 retracement will play out, but... Wave 3 is the wave that we'll all be waiting for since it will have the capacity, momentum, participation, and "fear" that will likely carry prices much higher.
I am quite convinced that ownership is gold is imperative for my own portfolio... you'll have to decide if you think it is right for your own. A diversified combination of physical gold and silver bullion, and unhedged gold stocks is my plan (which I am continuing to accomodate each month in my budget).
For Silver the chart patterns are not as clear. I can see two counts that areprobably equally likely. The first pattern is the whole rally from $4 in November,2001 through June 4, 2002 is a completed wave 1. The retracement since then is aclear 3 waves for wave 2 and is likely already completed. The entire wave 2retracement is a perfect 62%... and within wave 2, the C wave is 1.618:1 of the Awave. Therefore, if wave 2 has completed then the next major move will be higher forwave 3 with an initial target of around $6.35.
The second most likely silver pattern shows wave 1 as completing on July 23, 2002 with adouble-top at around $5.15. From there we have only seen a 5-wave decline. I aminterpreting this to be the A wave within a larger wave 2. Again, this last wave hasretraced a perfect 62% of wave 1, so if this is only the first of 3 waves to comprisea larger wave 2, then the C wave may have to retest last weeks lows. That is probablya few weeks from now.
In gold stocks, the chart for the XAU does not exhibit as much bullishness. Since theXAU contains a broad collection of (mostly hedged) metals companies, it is not a pure play forfinancially sensitive gold. The HUI (Unhedged AMEX Gold BUGS) stock index is a muchbetter index to follow because the component stocks are mostly gold companies andthey are not actively hedging their production. This leaves them more exposed tobenefit from the anticipated rally in gold.
The chart for HUI begins in November, 2000 around 35 and the first rally to 80comprises wave 1. Wave 2 was a long sideways consolidation that ended in November,2002 at around 60. This was less than 50% retracement, but the sideways patternabsorbed a lot of what would have been a more normal retracement low. Therefore, wave3 rallied to 155 on June 4, 2002 which is a 200% increase over the length of wave 1.The retracement off of this high was been as low as 93 on July 23, 2002 which is a65% retracement of only wave 3, and a 55% retracement when waves 1 and 3 arecombined. It appears that this retracement has completed for wave 4.Therefore, wave 5 should already be in progress with a nominal targetof around 165.
Both gold bullion and gold stocks are poised for another rally leg that should carryfor the next several months toward the end of the year. When this rally completes,gold and stocks will have completed 5 significant waves up... this will be thecompletion of a larger "WAVE 1". This leaves the door open for an eventualWAVE 3 rally that should begin simetime later next year. During this WAVE 3, the HUIindex should see highs above 300 and spot gold should (very conservatively) rally above $440. The morespeculative the rally becomes, and the more momentum players participate, then boththe HUI and spot gold have the potential of going much higher.
I am not making any specific recommendations for gold stocks, however the (3)companies that I am personally invested are Harmony (HGMCY), Durban Deep (DROOY), andGolden Star (GSS). These represent the spectrum of risk that I am willing to take.Harmony being the strongest and highest quality, Golden Star the riskiest and lowestquality, and Durban Deep in the middle. And if you include the physical gold bullion, it is the least risk of them all. I expect all (4) investments to do well.Assuming spot gold rallies as described above, Golden Star will outperform the othertwo, and Durban Deep should outperform Harmony. I keep this combination in my portfolioto diversify my risk. Also, I cannot hold all physical bullion because the storage requirements are too burdonsome... after all, gold does not pay dividends or interest, but gold stocks can and in the case of DROOY, soon will.
My favorite of these gold stocks is DROOY. They have completely eliminated theirhedge program so they will participate directly as gold prices rise. In addition,they have announced that they will begin paying a dividend. Dividends are thatlong-forgotten archaic concept whereby a company pays to stockholders a portion oftheir profits. What is important about dividends is that they are paid using realcash, and not the artifical earnings that have been used by many companies,particularly in the high-tech sectors.
During the history of the stock market crash in 1929 through Great Depression, HomestakeMining stock issued dividends. The stock price of Homestake rose from around $80 in1929 to around $495 in 1935, plus the cash dividends amounted to $128 during thattimespan. You can read more about this in the article GOLD STOCKS AND THE GREAT CRASH OF 1929 REVISITED.
Although there are many other gold stocks, you need to perform your own due diligencein determining which, if any, you want to put into your portfolio. Some of thesestocks are quite volatile with very wide intra-day and weekly price swings. Whetheror not gold prices make their greatest ascent in 2002, 2003, 2005, 2008, or 2013 (ie:2, 3, 5, 8, 13 years after stock market top in 2000 - yes these are Fibonaccisequence numbers) my strategy is hold these for the longer-term. By long term, I mean"buy and hold", but for the duration of the stock bear market. This meansthat a percentage of my portfolio is my core holdings and will not be solduntil the gold price blow-off occurs. Another percentage of the portfolio istradeable with a several year outlook... and anything else is short-termoriented. It is with the short-term portion that I will attempt to trade themonthly price swings.
Please select your stocks wisely. Many of the stocks are very thinly traded. If/whengold prices begin to rise substantially, these stocks will find their liquidity asmany previous long-term holder's will begin to sell into the rally, thus making moreshares available. But until gold prices start to rise, these stocks will retain theirilliquidity price risk. If the normal intra-day spread between the bid and ask ismore than a few percentage points, then reconsider whether that stock is worthy ofyour consideration. The lower prices of many of these second- and third-tier goldstocks makes them seem more like long term options or warrants than actualstocks.
For the (3) stocks I discussed above, I am expecting the next major wave up to reachlow $30's for HGMCY, near $10 for DROOY, and above $4 for GSS. Other gold stocksshould have similar stellar results. Going forward, I expect several more goldcompanies to merge. These mergers will further reduce the available supply of stockfloat. In some ways these mergers will be good for the industry, but as I havealready found out with my prior investment in Homestake Mining, the merging companymy not be one that I want to own, such as Barrick (ABX) which has been a majorhedger.
That's all for now... Good luck always.
(Monday 4/29/2002 PM): The following is my CyclePro forecasting motto:
If my forecast comes even close to being correct, then I want to be prepared to protect my investments and assets and perhaps even to benefit with some speculative appreciation. However, it would be really bad style to be correct in my forecast while sitting completely on the sidelines, unprepared. I would still rather make my preparations now and accept my losses if I am wrong, than to do nothing and risk everything.
The downside for precious metals is probably rather limited. Some say gold may get down to the $200 area... well if the most I stand to lose is 1/3 while stocks have the potential of losing much more, then I feel that I can justify taking the risk. But I must trust my own analysis - I have learned over the years that I can trust no one that does not do their own in-depth analysis - so my money is where my analysis is. I seriously do not expect to see gold trading much below $280 in the near future. So again, I believe the downside is rather limited.
One year ago on April 3, 2001, while discussing Gold, Cyclepro made the comment... "Finally, something I can begin to get bullish about!" In May, 2001 the recommendation was to begin buying unhedged gold stocks and gold bullion. A list of stocks that comprise the BUGS index (Basket of Unhedged Gold Stocks, symbol HUI) was provided. The following comment was also made last year by CyclePro, "...A comparison if daily charts between the XAU and HUI indexes over the past month easily demonstrates that the HUI (unhedged gold) will outperform XAU (mixed metals, hedged/unhedged) if Gold prices rally strongly..." -- the following is a performance update:
|Stock Name (Symbol)||5/28/01||4/26/02||%Gain/Loss|
|Agnico-Eagle Mines Ltd. (AEM)||8.09||14.90||84.2%|
|ASA Ltd. (ASA)||19.21||34.80||81.2%|
|Glamis Gold, Ltd. (GLG)||2.75||6.45||134.5%|
|Hecla Mining Co. (HL)||1.23||3.09||151.2%|
|Bema Gold Corp. (BGO)||0.30||0.92||206.7%|
|Homestake Mining Co. (HM) (Merged with ABX)||6.50||8.62||32.6%|
|Coeur d'Alene Mines Corp. (CDE)||1.36||1.34||-1.5%|
|Kinross Gold Corp. (KGC)||0.84||1.85||120.2%|
|Echo Bay Mines Ltd. (ECO)||0.92||0.85||-7.6%|
|Newmont Mining Corp. (NEM)||20.71||30.08||45.2%|
|Freeport-McMoRan Copper & Gold, Inc. (FCX)||15.98||18.09||13.2%|
|Durban Roodepoort Deep (DROOY)||1.14||4.64||307.0%|
|XAU Gold & Silver Index||58.12||77.50||33.3%|
|HUI Unhedged Gold & Silver Index||65.91||112.50||70.7%|
|US Global World Gold Fund (UNWPX)||5.00||9.17||83.4%|
|Harmony Gold (HGMCY)||5.10||15.00||194.1%|
|Barrick Gold (ABX)||16.53||20.39||23.4%|
|Nasdaq Composite (COMP)||2149||1664||-22.6%|
The stocks in bold print are the ones that I suggested had the most potential. The Unhedged Gold & Silver Index (HUI) easily outperformed the standard XAU index by more than double. I could not find historical prices for Freeport-McMoRan Preferred stock and Battle Mountain Gold, so I excluded them from this list.
Homestake Mining (HM) was bought-out by Barrick Gold (ABX), but even buying Homestake and holding it until the merger was completed returned over 32%. Although Barrick is an (oversubscribed) hedged gold producer, it has managed to gain 23%. Last year, I did not recommend owning Barrick.
The star performers in the list were Durban Roodepoort Deep (DROOY) at 307% and Bema Gold Corp at 206.7%. Both of these stocks were wallowing around in the penny stock circles. I did not buy any Bema because I did not like the information I found in my research. However, I did buy DROOY originally for $.97 and then some more last July at $.82 (which is now a whopping 465% gain). Recently, Dow Theorist marketletter writer Richard Russell added DROOY to his recommend list when the stock was hovering around $4. A few of the things I liked about DROOY was that the management supported GATA (Gold Anti-Trust Action Committee) and also that the management recognized the right time to begin agressively reducing their own hedging programs. Obviously, a very wise move which is reflected in the appreciation of their stock price. Harmony Gold stock and US Global World Gold Fund were others that I subsequently added to my personal list as I discussed them in many of my e-mail conversations with readers.
While it is nice to reflect back over the past years gains, please keep in mind that the bull market in Gold is still a tiny infant. Price volatility is still quite small. The spot price of Gold has only increased about 10% yet some gold stock prices have doubled, tripled, or more. This is what happens when the Gold price is higher than producer's break-even cost -- every $1 increase in the price of Gold goes directly to these company's bottom line. This means gold producer stock prices will continue to magnify future appreciation in gold prices for awhile yet. Companies that are still heavily hedged for the down-side will continue to lose profits as gold prices rally.
If you are concerned about owning gold stocks during a major financial disruption, then I urge you to read Gold Stocks and the Great Crash Of 1929 Revisited. Homestake Mining stock price rose from $80 in 1929 to $495 in 1935, and in addition, paid out $128 in dividends!
I have heard a lot of discussion lately about how over-bought gold and silver stocks and spot bullion are. What is key to remember is that "over-bought" is an excellent indicator during a bear market and "over-sold" is an excellent indicator in a bull market. But never try to trade using over-bought during a bull market because the euphoria of the market will simply extend and become even more over-bought. This is how bull markets are created.
I found a nice collection of article links at the BullionFund.com website. Many of these articles are quite good. However, many of the authors have been wildly bullish on gold since 1998 -- a little sobering perhaps. (One of the articles was written by yours truely, in the Derivatives section).
In a much longer timeframe, my preference is still to own physical bullion gold and silver rather than collector coins, certificates, or other paper derivative products. My long-term plan remains to accumulate a portion of gold stocks plus physical bullion. Collector coins will lose their premiums if/when the price of gold begins to rise substantially since the intrinsic gold value of the coin will rise and overwhelm the premium -- at some point, investors will prize the coins more for their gold content and less for their collectible rarity. But owning some collector coins in your portfolio may not be too bad since they can be thought of as a minor hedge in case we're wrong about our outlook for gold. If prices do not skyrocket over the next 8-10 years, then collector coins may retain some of their premiums. If you believe in future deflation for the U.S. economy then again, collector coins will lose their premiums. Some promoters are suggesting to own pre-1933 U.S. gold collector coins, but if you check in to their motivations you will discover that they are brokers or merchants for rare collector coins, therefore they are biased into wanting to sell you their coin inventory.
The following charts are long-term views of Silver relative to Gold, the DJIA, and adjusted for inflation:
The inflation-adjusted price of silver stayed in a narrow range from 1920 to the late 1960's, between $3-6. This is roughly were we are right now, near the historical 200-year lows. During the time when silver was used for U.S. currency, the U.S government actively controlled the market price of silver to keep it from rising above the monetary value of the coins. Most U.S. coins during this timeframe contained about 90% silver. There are about 5 1/2 quarters (25 cent pieces) to one ounce of silver. The monetized value of silver was about $1.29 per ounce (remember, the chart above is inflation-adjusted with 2001 dollars). Therefore, whenever the market price of silver rose above $1.29, people wanted to melt down their coins to redeem them as silver... to thwart that activity, the government actively sold portions of their huge silver stockpile to reduce the market price of silver. In the mid-1960's U.S. coins were phased out of silver in favor of cheaper materials, such as zinc. It was at this time that market prices of silver were allowed to trade more freely... that is until the Hunt Brothers attempted to corner the silver market.
Click chart to enlarge.
Click chart to enlarge.
The almost uniform peak-to-peak and bottom-to-bottom time spans are 47-48 years. The lows tend to occur around the ratio high-teens and the peaks around 100. We are currently mid-way at about 67. The pattern of this chart is suggesting that silver is progressively showing greater strength than gold and this may last for perhaps another 15 years. Since this is a "spread" chart, both gold and silver are expected to rise, but because of changes in the ratio between the two commodities, silver should outperform gold. In simple terms, if gold prices double, then silver prices may possibly triple.
Houston's Dynegy (DYN) was always an Enron wannabe. Even before the huge Enron collapse, Dynegy and Enron battled like mismatched sibling brothers, although they detested each other. Dynegy traded almost everything that Enron traded even though big brother Enron had a substantially larger piece of the market. When Enron was on the verge of declaring bankruptcy, Dynegy entered into discussing the possibility of a merger -- not necessarily because of any significant business decision (although there were some prized pipeline assets) but more for the victorious bragging rights. Last week, Dynegy's stock price was hit with a substantial dose of an Enron-like series of analyst downgrades losing 1/2 of its value in only 3 trading sessions. Not only has the stock price dropped, but so has the value of Dynegy employee 401K's. Who is the auditing firm representing Dynegy? ... you guessed it, Arthur Anderson... If Arthur Anderson ignored various practices at Enron, perhaps they did the same at Dynegy. I am not saying that Dynegy is about to crash like Enron did, but the parallels are too similar to ignore. Which begs me ask a few pointed questions... with so many companies dropping Arther Anderson as auditor, why is Dynegy retaining them?
Just when you thought one chapter in American corporate finance history was about to close, another begins...
P.S. My in-box got too full of junk e-mails and I have not been able to receive any for the past month so many of you probably have not been able to get through. I will be cleaning this up shortly as I wade through all of the garbage e-mails. Also, the Cyclepro Outlook page is getting too big for some readers with slow modems, so I have removed about a years worth of material. You should still be able to access the older material through the archive links.
Good luck always.
(Monday 3/13/2002 PM): It has been almost 3 months since my last posted update. With what little time I have had I tried on several occassions to develop some material to post, but before I had a chance to complete them, market dynamics changed, and my material rotted while sitting on my hard drive. Tonight I am attempting to make this update, knowing that there is a lot more I would like to add, but I thought an update that at least addresses the highlights would be better than not posting at all. At least this way you know that I am still around.
My focus, however, must remain more long-term oriented.
Just a few quick jabs before I get into tonight's charts...
The headlines for Enronitis may be fading but the waves of earnings restatement have just barely begun. This process will likely last a very long time until corporations come clean.
This Business Week article "The Pension Bomb discusses how companies have been using excess funds in company pensions as earnings reported to investors. This was great during the bull market when the companies stock and the pension investments generated above-target returns. The stocks PE ratio benefited by these additional earnings. But now that pension programs are not generating these earnings, or may even be below-target, earnings comparisons with prior years will be very difficult to beat.
Arthur Anderson is on the ropes (horray!) as they are losing clients left and right, laying off employees, and certainly destroying the partner shares. It seems Anderson is now looking for a white knight to merge so they can declare bankruptcy and gracefully liquidate.
It seems as though the 9/11 event is fading from memory. I think this is a sour reflection of our society. Our nation suffered through a catastrophic event, many lives were impacted directly and indirectly, yet 6 months later people seem to view the event more as if it was a Hollywood movie and less for the seriousness that it was. While terrorism is a very real threat, President Bush seems to be using it as an opportunity to prove that he is not the wimp that the media said of his father. I believe that Saddam Hussein needs to be removed from power, but is now really the time to wage war against Iraq? I think Bush is quickly getting the reputation like that of the schoolyard bully that starts fights just for the sake of a fight. But if I remember my college psychology class, there is usually a ulterior agenda that bullys try to keep hidden... I wonder what Bush is trying to hide? I hope I am wrong because we may be entering a very dark era that may be highly condemned by historians.
Greenspan says the recession is probably over and signs of recovery abound. The money supply spigot is still open wide. Many foreign investors are hoarding dollars at every opportunity since it is seen internationally as a stable plateau. Eventually all of these excess dollars will have to come back for redemption. When they do, the inflated dollar will drop faster than Enron's stock price... well maybe not THAT fast, but it will be quick.
In the research department, I am still quite bullish on gold and silver. Actually, I would really like the prices to drop for several months... so I can buy more at lower prices! This is a very long-term strategy for me as the charts below will emphasize.
The first chart is similar to the 1800-2100 inflation-adjusted DJIA chart I posted last fall. This chart is "detrended" -- which means I removed the basic upward slope out of the chart so the oscillations between the channel lines are easier to see as the chart moves sideways. The move from the upper band to the lower one will take a long time. I was originally estimating 5-8 years, but I am leaning much more heavily on the likelihood that it will be closer to perhaps 15 years (from the year 2000 stock market high). Previous penetrations of the upper band that took a long time up also took a long time to drop, quick run ups were followed by quick drops. Our current rally is about the same height as 1929 if you take into account that we started from a lower level, in 1982. In 1929, the dollar was backed by gold, so reckless distribution of money supply by the Federal Reserve was not possible. Nowadays, the dollar is a fiat currency, not backed by anything more than the faith and perception of its value, so the Federal Reserve is free to print as many dollars as it deems necessary to buy its way out of a recession. Will this work... sure, for the short-term, but all of those dollars will eventually come around to be spent... this will be reflected in outraeous inflation.
The heavy red line on the right of the chart is a composite of the 4 previous inflation-adjusted bear market centered moving averages. While the height of this line merely reflects the same height as the previous cycles, our current down-slope will probably length before it is complete. This is probably the best quick estimate showing the time and price relationship of the coming bear market. Yes Virginia, there really is a bear market, and ours has only just begun. Greenspan's recovery will only be a temporary respite once we get the opportunity to review this timeframe in hindsight.
Click chart to enlarge.
The next chart below is the DJIA - GOLD ratio. Other websites have been showing or discussing a similar pattern, mine attempts to try to use the information as a forecast. Over the past 100 years, the ratio has oscillated between extremes from a ratio of abour 1.5:1 to the monthly peaks shown: 18.1, 27.8 and 41.2. The history of this relationship only reveals 3 significant events: 2 completed and the current one.
Click chart to enlarge.
From the 1905 low to the 1929 peak, it took about 302 months, or about 25 years. The rally from 1942 low to 1966 high took 281 months, or about 23 1/2 years. And, the rally from 1980 to 2001 took 253 months, or about 21 years.
The reversal from 1929 to 1942 was only 150 months (12 1/2 years) and 1966 to 1980 was 170 months (14 years).
The relationships between the rise and the drop each time was very close, and sometimes a perfect Fibonacci relationship. At the top of the chart the green set of arrows shows the timing of the rises and drops relative to a cycle from trough to trough. Note that the first two series were 452 and 451 months. In the first complete cycle, 2/3 of the time was spent rising while only 1/3 was in the drop. The second series was a perfect Fibonacci, 62% rising and 38% dropping. If this relationship continues, then using the 253 month rise at 62%, we might expect the next low to occur in 253 * .38 = 156 months, or 13 years -- that works out to about 2014.
The orange arrows at the very top of the chart show the cycles from peak to peak. From the first peak to the second it took 437 months and the second to the third was 424 months. While these did not work out to be exact Fibonacci's, they did oscillate around it. If the next peak is another, perhaps 430 months away, then 38% of that is 163 months to the next low. That is about 13 1/2 years which suggests 2014-2015.
If the next low makes it all the way back down to the average ratio of 1.5, then that would suggest something like DJIA 3000, Gold $2000.
Clearly, the suggestion from the DJIA-Gold ratio chart is that over the next 13+ years, gold and precious metals should significantly out-perform the stock market.
Last January, I was beginning to turn bullish on Gold and I suggested several "unhedged" gold mining stocks. As many headlines have already announced, gold stocks have already outperformed all other market sectors.
For the next set of charts for a mid-term outlook, Gold prices have been following a steady 3 year rally, 5 year bear market cycle, 3 complete times, since mid-1970's -- this is significant since this is really the only time that gold prices have been allowed to float in real market supply/demand. Therefore, a complete cycle, from trough to trough, is 8 years. (Please note the Fibonacci's here). Because of government price fixing (ie: manipulation) it is difficult to see this pattern further back. I saw a similar chart on one of the stock market chat sites in February, 2001. At that time it was pointed out that the 5 year low was expected in April, 2001. The actual closing low was April 2, 2001.
Click chart to enlarge.
The average cycle is up +3.1 years and down -5.1 years with the duration 8.2 years. The following are the actual details:
The other point of interest in this chart is the comprison between the actual price of gold over the past 26+ years and the same chart as adjusted for inflation. As you can see, the 1980 price spike as restated in 2001 dollars was really $1331. If gold prices rally sharply enough, the target to shoot for is not $850, but much higher! Sometime between now and 2015 I am expecting gold prices to exceed $2000 per ounce.
Much of the data used in these charts was jointly developed with Nick Laird at ShareFin/Sharelynx. He has so many charts posted on his sight, I betcha can't look at them all in one sitting.
I am not sure how substantial the rumor is that the U.S. may be thinking about confiscating bullion gold from its citizens like it did in the 1930's, but if you want to own physical gold and do not want anyone to know you have it (ie: no paper trail), then I suggest you give the folks a call at Certified Mint. CMI is a family-run business that specializes in precious metals. Owner Bill Haynes often writes articles on the economy and gold, you may have already seen some of his work. What I like about the way they sell their metal is once the shipment has been received by the buyer, the buyer's name is detached from the sales slip, so there is no longer a record of how much you bought... only that you are on their newsletter mailing list.
One of the comments Bill made recently on his weekly internet commentary (February 15, 2002) caught my eye. The commentary claims that "...so much silver has been drawn from inventories that there is actually less aboveground silver in existence than there is gold...". The World Gold Council estimates there are about 4.3 billion ounces of gold while the estimate from CPM Group for silver is only 1.1 billion ounces!
I wish I had more time, but this will have to be it for tonight. I have much more I'd like to cover, but that will have to wait for another time... maybe in a couple of months.
Click Left or Right chart to enlarge.
For more information on the Bradley Siderograph, read this CyclePro article "Validating the Siderograph".
All prior CyclePro Outlook comments may be found at the following links:
If you do not understand any of the terms or methods described above, then you probably should not be speculating in highly leveraged derivatives, such as stock index options. If you plan on trading with options, you will be required to read and understand Characteristics and Risks of Standardized Options from the Chicago Board Options Exchange (CBOE).