Thoughts - As Nero Fiddles:
"This is where it gets tricky, because policymakers realize that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms." - Bill Gross of Pimco (the worlds largest bond trader).
At one point – fundamentals ruled our investment decisions – however recently it’s anything but. Let me ask you – How do you know that the earnings you're being told are even remotely right? With insiders still selling at a ratio of 30 sells to 1 buy, if earnings were really as good as they tell us each quarter, wouldn't they be investing in their own companies? In our world – ‘lately’ – the market is there to confound, confuse and take the most amount of money from the most amount of people, at any one time. Figuring out which way the market would have to go to achieve that goal is indeed the direction the market will go.
The Economic Cycle Institute is saying that we are “poised at the brink of the strongest economic recover in a generation.” Let’s examine this: (a) Despite the first time homeowner credit, new home sales took a step backward in September, showing a much lower-than-expected annual rate of 402,000 in a report that includes a steep downward revision to prior months. The year-on-year rate also took a step backward. So, we're giving people tens of thousands to buy homes, with interest rates at levels not seen since the 60's and we’re still moving downward = "strongest economic recovery". Factually the purchase index fell 5.2 percent in the Oct. 23 week while the refinance index dropped 16.2 percent. (b) Capmark is one of the largest U.S. commercial real estate finance companies, with more than $10 billion in originations, filed for bankruptcy this week. (c ) GMAC the former lending arm of General Motors is in talks with the Treasury Department for a third injection of taxpayer aid – yet another sign of “strongest economic recovery.” Maybe the third time’s the charm? (d) Maybe it’s the $54 Billion dollars in ‘gold shorts’ that are being held by large institutions – do you really think that they have the ‘gold on hand’ to cover these shorts – really? (e) Maybe it’s the state coffers – except 48 out of 50 states are in serious deficit and some (California included) are technically insolvent.
A lot of you are asking me about gold and it's next move. We all saw gold go up to 1060 and get repelled. My thinking is this: if you're looking at gold, or the miners as day to day plays, you're in the wrong sector. Many were the times during the last 9 years when my gold holdings were under-water. But then almost like magic, they'd move higher and higher again. This is NO different. When the dollar rises gold will take a hit. When Russia says that it’s going to sell gold – it will take a hit. And when 4 banks are short $54 Billion in gold that they can not possibly ‘cover’, gold will take a hit. But you’re not in gold to buy at 1,000 and sell at 1,050 – you’re in gold because the dollar is going to ‘heck’ in a handbasket. At some point the dollar index won't be in the 70's as it is now, it'll be in the 40's – and gold will potentially be 3,000 at that point. The very same thing with the miners. When gold goes to $3,000 – miners will (because of leverage) see gains that will even make Google blush. Could gold come down to 1,000 or 950 – sure – and I would just buy more. Until I see the Fed stop printing money, monetizing debt, until our country can balance it's books our currency isn’t worth the paper that it’s printed on. Gold is the answer to depreciating currencies, fiat dollars, and bankers gone wild. So buy on the dips and don’t sweat the pullbacks. To mine one single ounce of gold, hundreds of tons of earth must be dug, ground, and separated. Men in nasty places sweat to exhaustion. Huge mechanical earthmovers are bought and employed. On the other hand a tree is cut down, $700 in lumber and turned into pulp and then into paper. Bernanke prints the number 100 on each of these pieces of paper, and within an hour 1 Billion dollars has been produced. Which one do you think is a better “store of value?”
Let’s not confuse an economic recovery with what Bill Gross said: “a push to support asset prices” because asset prices are deemed to BE the economy. The market is supported by a ‘printing press’ and could they pump so many billions into the market that we actually see this market defy gravity and continue much higher? Unfortunately, yes. Friday we failed 9800 on the DOW and 1050 on the S&P, and I believe that this is the "big pulldown" and we've got another 5% or more to go. If we get up and over 9800/10150 and we can hold that for a couple days, chances are good we're going to go back up. But put in two or more days under that level and I suspect we'll be visiting 9400/1000 soon. We went to cash last Tuesday/Wednesday because we saw some "funky" looking things brewing on the horizon. Since then we've peeled off 390 points from the Intra day highs. Sure we could have gone short, but with the Fed injecting money at will, it's pretty dangerous. We were willing to just sit tight and go fishing. So far, sitting on our hands in the safety of cash has been a winning strategy.
We lost 9800 at the close – and therefore I’m going to scale by my market exposure from 60% to 40%. In the meantime, like most of the last week, I'm sitting on my hands until something solid develops (other than gold or silver!)
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Until next week – be safe.