I just went long again. Note that PPI showed “surprise” inflation today, CRB rallied 2%. Treasuries have been selling off hard (these are all bullish signals). Finally, look at whole foods today, up 37% - that’s a monster move, what was the news? Basically nothing, their quarter was horrible, sales are down, store traffic is down, the stock was down 75% over the last year, and yet it rises 37% today after an analyst upgrade?? That may or may not be important, but it should tell you a little bit about market psychology and where we are right now…
At this point we are just 70 points away from a brand spankin’ new low on the DOW – the best thing that could happen tomorrow is that we break though to new lows, emboldening the chart fools to sell – that will mark an important short term bottom and the start of a major rally. You couldn’t ask for a better setup.
___________________________Kaplan___________________
U.S. Treasuries continued their sharp retreat. This confirms beyond a shadow of a doubt that the great asset shift of 2009 has begun.
So far, a lot of the money which has left U.S. Treasuries has gone into money-market funds and other safe-haven time deposits instead of into equities. But people will not accept 1% gross returns indefinitely, so most of this money will find its way into the stock market. Many people don’t want to be among the first to buy, so they’ll pile in once we’ve already enjoyed a rebound of 20% or 30%.
Of course, the financial markets will appropriately punish the huge number of poorly-informed investors who decided to “reduce their risk” since October by selling equities when they should have been following corporate insiders and buying them aggressively.
The U.S. dollar also failed to surpass its double top. Both U.S. Treasuries and the U.S. dollar have been a reliable leading tandem of the global financial markets for several decades. Declining interest in these safe-haven assets will soon translate into a huge appetite for higher-risk assets.
While gold-mining shares retreated moderately, numerous funds of energy shares were higher including my personal favorites RSX, KOL, and FCG.
Another rare contrarian comments on the oddity of finding so little company when buying low or selling high:
http://seekingalpha.com/article/121395- ... nvironment
Fantasy versus reality in the residential housing market: When you learn to tell the difference between what is real and what is phony, it becomes quickly apparent that the housing bubble still has a long way to collapse:
http://online.wsj.com/article/SB123448313158279827.html
In the above link, a woman is renting a Seattle waterfront home for $10,000 per month. This house is allegedly worth 15 million dollars.
Let’s think about this for a moment. $10,000 per month is $120,000 per year. That’s equal to just 0.8% of $15 million!
This is about one tenth the average historic annual rental rate of 8%, going back a century or more. So this means that the house is really worth close to $1.5 million, not $15 million.
Once everyone realizes that housing prices are only really worth what they can be rented for, multiplied by an appropriate factor, then either rents have to soar or prices have to plunge.
It’s not rents which will rise. When a property is rented, the agreement between a landlord and a tenant represents the intersection of actual supply with true demand. Rents are reality. Housing prices are fantasy, and will soon have to decline sharply to catch up with rental valuations.
The financial media have no concept of asset interrelationships. This makes it difficult for most investors to understand the critical interactions between different kinds of securities.
For example, there has been a lot of nonsense about how investors are allegedly buying gold and gold mining shares in response to tightening credit conditions and concerns over a worsening global recession.
Nothing could be further from the truth. When the global economy is contracting, precious metals will plummet even more than the broader equity market. As the S&P 500 retreated by half in 2007-2008, GDX (an exchange-traded fund of gold mining shares) plunged more than 72% over an even shorter time span.
The four-month rally in gold and its shares since October 24 is sending exactly the opposite message: the global economy is about to powerfully rebound. Gold is simply serving in its familiar role as a leading indicator of this turnaround.
Beginning on November 20 and 21, 2008, which is about four weeks after gold mining shares began to move higher, energy shares have been forming a bullish pattern of higher lows. Like gold mining shares, they are sending a message that the world is not headed for a deflationary depression, as the media would have you believe, but a highly inflationary period of global growth.
Beginning in the second week of December 2008, high-yield corporate bonds have been confirming the exact same message by rebounding sharply from 75-year lows.
Very few analysts will talk about a highly inflationary period of global growth—especially on a day when the Dow Jones Industrial Average slumped to its lowest point since March 2003. This new Dow low, which was not confirmed by other major equity indices, is a perfect excuse for amateurs to sell in fear while insiders have yet another opportunity to enjoy wonderful bargains.
The media are hell bent on driving with their eyes firmly in the rear-view mirror. They have a great viewpoint on where we’ve been, but not the faintest clue as to where we’re going.
I’ve heard all kinds of commentators give the most convoluted reasons why U.S. Treasuries and other global government bonds have been slumping since December 30, 2008. The simplest and most obvious explanation—that inflation is set to surge sharply higher, and that government bonds are therefore signaling this in advance as they have done for centuries—is dismissed since analysts can’t envision a resurgence of high inflation after about 26 years of low inflation.
If I walk down the street and I see a candy wrapper on the ground, then I assume someone ate a candy bar and discarded the wrapper. I can invent several dozen alternative explanations, but the clearest one is almost surely the truth.
There are different kinds of investors in different kinds of securities. You’ll rarely see an amateur investor bragging to his friends about his latest U.S. Treasury purchase—even during the fourth-quarter 2008 bubble. Government bonds are bought and sold mostly by pension funds and other major institutions, rather than by individuals. Trading in this sector therefore tends to be dominated by wealthy investors who are usually several weeks ahead of the general public.
The same is true of the U.S. dollar. While currency trading has become somewhat better known among the public, it is still primarily the realm of well-heeled multinational corporations.
High-yield corporate bonds also are not widely held or traded by most people, or discussed often in the media. There was incredible hype when these bonds collapsed in the autumn of 2008—and almost zero coverage of their impressive recovery this winter.
Gold mining shares have a sort of cult following, but the public tends to be relatively ignorant of them also.
Therefore, when you see U.S. Treasuries plummeting, and the U.S. dollar struggling to set a new three-year high, while gold mining shares have more than doubled in slightly less than four months, and high-yield corporate bonds have rebounded significantly from their lows, then the combined message of all of these actions is that the global economy is preparing for a recovery.
The key word here is “preparing”. The financial markets usually lead the real economy by about six to nine months. Therefore, when you hear stories about how this or that segment of Main Street continues to deteriorate, this has already been fully anticipated by the 2008 collapse and has zero relevance to the future of the financial markets.
Asset valuations are therefore telling you today what is going to happen in the summer and autumn of 2009.
The lagging behavior of equities is common behavior—and very fortunate behavior if you are a contrarian.
Let’s go back to the summer of 2008—exactly six months ago (August 19, 2008)--and see what was happening at that time.
U.S. Treasuries had been rallying for several weeks. The U.S. dollar had been surging higher for several weeks. Gold mining shares had been slumping badly for five months, while energy shares had recently joined in with a sharp pullback of their own. In every way, it was a nearly perfect inverse image of what we have today.
Did anyone in the media in August 2008 therefore conclude that the global economy was setting up for a major contraction (besides a tiny minority, of course)?
They did not—at least 98% of them did not--because the stock market was generally strong over the same period of time. The media made the same mistake six months ago that they are making now: they concluded that since the stock market was rallying, it would continue to move higher.
The biggest mistake most amateur investors make is to project the recent past into the indefinite future.
If they media had even the faintest idea of how various assets correlate with each other, then they would have understood last August that the one-two punch of rising U.S. Treasuries and a rising U.S. dollar, combined with slumping gold mining shares, could have only one implication: a significant pullback in the stock market and in commodities. Since we had experienced so many bubbles in 2007-2008, this pullback was likely to be noticeably more severe than usual—as of course it proved to be last autumn.
All of this, of course, was detailed rather meticulously if you review my daily updates from last summer and early autumn. Some other analysts, too, deserve credit for making similarly accurate observations. This hardly required any great skill—simply recognizing that patterns which had proven reliable for centuries would continue to be valid.
Since we have had virtually an exact reversal in asset behavior today as compared with a half year ago, the outcome over the next several months will be the exact opposite of what we experienced after August 2008: enormously higher equity prices over the next half year; sharply rising commodities; surging commodity-share valuations; a new all-time low for the U.S. dollar index; plummeting government bonds worldwide; soaring global inflation; surprising growth in all regions; and an end to recessions throughout the “real” economy on a worldwide basis before the end of 2009.
Almost everyone recognizes patterns in the weather. If it suddenly gets sharply colder in February in the Northern Hemisphere, no one concludes that we won’t have summer, or that there will be even more snow in July and August.
Although the financial markets are not quite as reliable as seasonal weather patterns, a proven sequence of events which has resulted in the same pattern of future behavior on a hundred occasions in the past few centuries will likely exhibit the exact same behavior pattern this year, and next year, and the year after, and so on.
It is no coincidence, either, that commodity shares have been consistently outperforming the broader market. Whenever this has happened in past decades, it has signaled that inflation will be an even more significant factor than growth in the “real” economy six to nine months in the future.
Most amateur investors act with blinders. Chart slaves make the same mistake: they look at a chart of something like the S&P 500 in isolation and conclude that this or that is going to occur, without studying the overall picture.
To stick with the automobile analogy, that’s better than driving with your eyes firmly in the rear-view mirror—but if you only look in the front windshield and ignore your mirrors entirely, then that is still a dangerous way to move through heavy traffic.
Just as an intelligent driver has to be fully aware of nearby drivers to be maximally safe, you have to be knowledgeable of the interrelationships between various financial assets to form an accurate viewpoint of what is going to happen in the future.
There are times when the future of the financial markets is relatively fuzzy, and times when it is crystal clear. When it is fuzzy, it is usually best not to act. This happens when different assets are sending conflicting signals, as is sometimes the case.
Today, however, there is essentially no ambiguity. The message of the great asset shift of 2009 could hardly be clearer. Those assets which always tell you loudly and most clearly what is going to happen are currently shouting at the top of their lungs. While the vast majority of investors are acting as though they are deaf, heed these cries and purchase the most compelling equity funds now before they enjoy their strongest short-term rise in several decades.
Take care.
