RF's Financial News

RF's Financial News

Sunday, October 24, 2010

This week in Barrons - 10-24-10

This Week in Barons – 10–24-10:

We are Human Beings – non Human Doings:
"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights." -Alan Greenspan Just as Alan Greenspan knew what happens when you let the worlds "improvers" take over the money supply, Ben Bernanke also knows. Greenspan wrote an entire ‘white paper’ on the virtues of gold, and knew all along that loose monetary policies would cause great disruptions. But we are all human beings – not human ‘doings’ – and as such, we tend to do a lot of things that seem to run contrary to our core beliefs.

Scientist Stanley Millgrave, did a series of experiments after WWII, concentrating on human behavior and some of his findings were so outrageous that they were banned from public view. In one experiment, Dr. Millgrave took some very ordinary people (one group) and some actors (second group), and placed the actors in a glass booth. In this game - the Ordinary people, were to ask the people in the glass booth a question. If the ‘actors’ answered the question wrong, the ‘ordinary people’ had to hit a button that would "shock" the person behind the glass (the actor). Naturally, the ‘ordinary people’ didn't know there were ‘actors’ inside the booth – nor did they know that there really weren't any shocks being delivered, but upon a wrong answer and subsequent shock - the actors would plead, scream, writhe in agony, and beg them to stop. The astounding thing to all who witnessed the experiment was this: No matter how hard the actors screamed, pleaded and begged - the question givers did NOT stop. They succumbed to the "authority" that gave them the right to hurt these people if they gave the wrong answer. Millgrave repeated the experiment all around the world, to find the same result everywhere. Once in "power" the people used the power – and it was not uncommon to have it corrupt their morality. So Alan Greenspan and Ben Bernanke’s behavior is totally predictable. They are being told to make things pretty no matter the pain, anguish, and outcome – and like those Millgrave experiments, they’re doing exactly as they were told.

The important part about studying mob psychology, is trying to determine where they are going, and how long they'll stay. The idea of contrarian investing is that what ever way the masses are going, your best bet is to go the other way, because invariably they'll be proven to be chasing a mirage – well fair warning – last week was the first week in the last 23 where money flowed INTO ‘mutual funds’ – which could mean – that it’s really time for a ‘rug pull’ – time to leave the market for a bit.

Finally – this week Mr. Bernanke told us that inflation is virtually non-existent. I’m wondering (outside of housing) which inflation Mr. Bernanke doesn’t see:
- Corn prices are dramatically higher this year resulting in higher food costs across the world,
- Rising textbook prices have inspired University Bookstore and Tech Bookstore to search for new ways of lowering students' financial burden,
- Disney hiked adult admission prices 3.8%,
- Airfares are up 17%,
- A 30 pack of Bud-Lite is up 3.9%,
- Movies up 5.5%, Gasoline up 8.5%, Chicken up 13%, Beef up 14%,
- Used car prices jumped 8.5% in September from a year earlier, and
- The price of a 31-item basket from Wal-Mart rose 2.7% in September – and Wal-Mart prices have jumped 5% since the start of the year and have been at their highest levels in the 21 months

The Market:
This past week – what we saw was when the Fed was involved in POMO and large interventions – there was a big ‘up’ day – when it wasn’t – surprise – flat to big down day! Now, we all know, at "some" point, despite the Fed, despite the elections, the market is going to a “rug pull”. It's what it does. It lures people in and then dashes them on the rocks of desperation. Last week, we saw the first "inflows" of money into mutual funds in over 23 weeks – so John Q. Public can't take it any more - he sees the market moving up and up and up and he's scared to death the train is leaving the station without him. When the public starts showing up, you can bet a rug pull is not far behind.

One of the big theories is that the FED is keeping the market up for the elections. So, if that thinking prevails - they will have to keep the market "up" again for another couple weeks. I do not usually act on what I feel they're about to do, I let them do it first and then react. This is why we've been leaning long. But that doesn't mean I throw caution to the wind. We have been using smaller positions and less of them. Right now we’re in MDT which was up two dollars a share for us in a week, JCI which was up over a buck and our latest pick up, CBOE was up over half a buck for us.

The bottom line is that once again, the stars are aligned for a pull down, starting within the week. I don't know if it will happen, or if the Federal Reserve will step in and save the day again. In the past, they've tossed off the gloves and gotten their hands dirty, pushing us up despite the technicals. They very well might do it again, but understand the rubber band is very stretched and when it snaps back it will be violent.

Let’s review our holdings:
GDXJ – a basket of gold miners
GG – IAG – NG – AAU – individual gold miners
GLD – PHYS – pegged to the price of Gold itself
SLW – SSRI – silver miners and indexes
AUY – specific miner – heading into earnings season
VXX – volatility index (for the long haul)
CBOE at 24.02
JCI at 33.00
MDT at 34.05

Consider snapping up some NGD (New Gold) as it’s run over the 6.90 target we had on it. For a trade - I also like IBM over 140.5, CTXS over 60, and UYM over 40.5.

I’m still looking at the miners – because with the recent run up in the metals – their earnings could be a real up-side surprise – look at: ABX over 48, and NEM over 65.

We’re still in and out (mostly out these days) of TZA, DXD and SDOW on a daily basis (these are ETF’s that allow you to invest directly in the market going ‘down’ – for those that do not like to ‘short’).

If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a 4 months or so ago now:

Remember the Blog:
Until next week – be safe.

R.F. Culbertson

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