Aug 31, 2010

Markets went nowhere on no volume — until 3:59pm when massive S&P index orders came in. Assured that the markets closed the month above Dow 10000 and (almost) S&P 1050. Nothing but a prop job. This was the lightest volume August in 12 years.

Short-term: 1 green, 2 yellow, 1 red – support levels here – but will it bounce?
Intermediate-term: 3 yellow, 1 red – downtrend continuing
Stock targets: 40% swimming, 15% neutral, 45% sinking

Market continues to deteriorate – and diverge. Manipulators will likely keep it from falling for at least the rest of this week — but not much upside. Again, don’t bother with the game until next week.

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Aug 30, 2010

Markets gave up much of Fridays gain on very low volume

Short-term: 3 yellow, 1 red – downtrend continuing
Intermediate-term: 4 yellow – downtrend continuing
Stock targets: 43% swimming, 16% sinking, 41% sinking

Divergences are becoming pretty clear – many stocks still OK, many sinking. Not personally inclined to do anything until next week.

Rev the Engines Helicopter Ben

The market was completely run today by the reaction to Ben Bernanke’s speech at Jackson Hole. No surprise since “the market” is now a completely rigged game run by computers. But this does provide a reason to go into the speech and the reaction in more detail.

First the market’s reaction. Everything went up by virtually identical %. Hardly the sign of any times-of-yore parsing of sentences about winners and losers. Everyone and everything will apparently win. More accurately, those who run the markets and own the country using leverage were reassured today that the Fed has their back and will not allow any change and will pump in whatever liquidity is needed. So the few remaining shorts covered (see chart) – and the market then slowly drifted up as sellers disappeared. Don’t fight the Fed. However, the bounce today did not even get any end-of-day volume. There are no buyers sitting on the sidelines here. The trend will remain down.

The speech itself:
1. The Fed could not point to a single specific part of the private sector that has a good chance of picking up the rest of the economy or being the next bubble. Which probably means there isn’t one — and the economy is in for at least one more year of recession or no growth. In that environment, the only things worth owning are a)things which provide income or b)things which aren’t in the US or c)things which are in bottleneck/shortage. And the latter are really rare (and don’t include equities of companies who issue options – even if they do sell something in bottleneck).

2. If the Fed is forced to fight deflation by monetizing debt, it will only be doing so at lower levels because currently the risks of doing that are perceived as outweighing the benefits. IOW – what the Fed actually did was guarantee an upside for T-bonds – not an upside for stocks or the economy. Therefore if cash/liquidity is needed before the economy turns around, the only options are a)cash in the mattress or b)T-bills/bonds.

3. If the Fed fails in fighting that deflation by monetizing debt, the result will be hyperinflation. Not inflation. Hyperinflation – the destruction of a currency by destroying its ability to function as a medium of exchange. In that event, the only things to own are a)food/staples; b)physical energy source (maybe); c)possession of shelter; d)a black market medium of exchange; and e)a black market means of ensuring that you retain possession of the previous four. All else will be worthless. Odds of this are still low – but not negligible. Be prepared for it – and hope it doesn’t happen is the best advice.

4. If an actual economic recovery happens; then the problem the Fed will face is how to withdraw liquidity. This would be the problem that the US faced in the 1970’s (stagflation). But this time round, the “solution” is much easier — ANY increase in interest rates will immediately kill the housing market and thus choke any economic recovery. The result is that there will be no economic growth – no “potential bottlenecks/shortages if the economy rebounds a bit”. Other countries – particularly emerging markets – may face this scenario – but not the US/Europe/Japan.

Aug 26, 2010

Markets fell on low volume. Dow below 10000, SP near 1040, could mean a little technical support here.

Short-term: 4 yellow – downtrend continuing
Intermediate-term: 2 yellow, 2 red – downtrend continuing
Stock targets: 51% green, 18% neutral, 31% red – deterioration continuing

International ETF’s

International markets are generally performing better than the US in this pullback over the last few weeks. Still, most markets are pulling back together – and will likely continue to do so until something stops the “risk-off” trade. BRF is doing its own thing for now. HAO and EWL look OK for a nibble if we’re close to that “risk back on” point.

Area ETF Mo % v Local v US$ Alpha Beta Score Rating
Intl SmCap VSS/SCHC -2.4% Near Oversold Near Oversold 2% 1.19 81 Wait
Div Emg Mkt EEM -3.1% Near Oversold Near Oversold 3% 1.33 81 Wait
Emrg SmCap EWX 1.1% Near Oversold Near Oversold 7% 1.12 42 Wait
BRIC LgCap EEB -2.9% Near Oversold Near Oversold 4% 1.35 81 Wait
Devlpd Asia EPP -3.0% Near Oversold Near Oversold 1% 1.37 81 Wait
Japan EWJ -2.5% Poor Oversold -4% .64 67 Yen better
Japan SmCap DFJ -3.5% Poor OK -4% .54 0 Avoid
China SmCap HAO -0.1% OK OK 5% 1.19 82 OK to Nibble
Eurozone EZU -7.7% Near Oversold Near Oversold -7% 1.51 67 Wait
Germany EWG -6.6% OK OK -4% 1.27 41 Wait
France EWQ -7.1% Near Oversold Near Oversold -7% 1.51 67 Wait
Switzerland EWL 0.3% Near Oversold OK 0 1.05 82 OK to Nibble
UK EWU -3.4% Near Oversold Near Oversold -2% 1.20 81 Wait
Canada EWC -2.9% OK OK 1% 1.15 13 Wait
Mexico EWW -5.2% Near Oversold Near Oversold 4% 1.24 27 Wait
Brazil SmCap BRF 4.6% OK OK 13% 1.39 84 OK to nibble

Aug 25, 2010

Markets started down ugly but then hit minor support (Dow 10,000 and SP 1040) and drifted up the rest of the day. Should have looked for and seen that support level here – but it won’t last. That support – and yet more divergence (re the green lights below) – is the source of the bounce. Repeat – it won’t last. The market is really deteriorating underneath the indexes.

Short-term: 1 green, 1 yellow, 2 red – tending yellow/red
Intermediate-term: 1 green, 1 yellow, 2 red – tending yellow/red
Stock targets: 53% swimming, 19% neutral, 28% sinking

Looking at support/resistance levels. We now have resistance right above us (SP 1075) — much less the resistance (SP1125) that shut down the Jul/Aug runup. Below us, support at SP 1040, SP 1010, SP 980, SP 900 (could hold this one), and a whole bunch of support between SP 800 and SP 900. The various support levels between 900 and current levels is really quite weak. Could get a whoosh down thru to there after Labor Day and into Oct. Wouldn’t surprise me if 900 – 1100 becomes a trading range for up to a year. Anything below 900 and there is gonna be some big external news crisis that drives the market – likely sovereign defaults (plural). 900 prices in realism but no crises.

Aug 24, 2010

Markets dropped on low volume. First real sign of increased selling. Short if aggressive. For me, I just prefer to watch with cash.

Short-term: 2 yellow, 2 red – tending red
Intermediate-term: 2 yellow, 2 red – tending yellow/red
Stock targets: 58% swimming, 19% neutral, 23% sinking

News today was surprise!shock! at atrocious existing home sale numbers. Freaking stupid morons. The “economists” who create this “consensus of expectations” about what the number will be are the same morons who are providing advice about what the govt should do. Of course they are wrong. DOH! They have been wrong about every single thing over the last few years. A broken clock is far more accurate.

Aug 23, 2010

Markets opened up and drifted down on low volume. This pullback has been much more about a lack of late-summer buyers than an increase in aggressive sellers. No reason to see anything different until Labor Day. That’s the first real day of interest now — barring some obvious external news event.

Short-term: 4 yellow – tending yellow/red
Intermediate-term: 2 yellow, 2 red – tending yellow/red
Stock targets: 60% swimming, 20% neutral, 20% sinking

History Geek Time

OK. I like history and charts/numbers — and sometimes the two show something quite interesting.

Here is the — inflation-adjusted, total return (price + reinvested dividends) chart overlay for two time periods — post-1929 and post-2000

The same chart without an inflation adjustment

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous. So the old bamboozles tend to persist as the new bamboozles rise. — Carl Sagan

There is no question that inflation is one of the best bamboozles. It was Keynes who observed —
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

And, surely, the entire “inflation-adjusting” process is one that can conceal/distort as much as it reveals. But even using government-created inflation data, what is revealed is the massive deterioration of our economy and the transfers (via inflation) of wealth that have occurred since the stock market bubbletop of 2000. Not 2008. 2000. Ten years. And even at this point, Keynes is probably right that only 300 people in the US actually understand what is happening to them. For the rest, merely an inchoate anger that something is badly wrong

Where Keynes is clearly either wrong or evil is that our government has been following totally Keynesian policies during that entire time. Monetary policy was for all practical purpose near-zero for most of the time. Bush and Republican Congresses spent money like drunken sailors trying to goose the economy. And Bush/Obama and Democrat congresses have spent money like drunken sailors trying to goose the economy. And we are still now in just as bad shape in real terms as we were in the Great Depression. None of it has fixed the problem. Nor has any real honest serious open public discussion of the problem even occurred yet. Just like Japan, we have already had a lost decade. We just haven’t known it.

That is the real “value” of inflation to those who benefit from it. It – combined with a bit of social welfare around the edges to dull the senses of those who should be angry as hell and a lot of divide-and-conquer to ensure that no real agenda/discussion is allowed – is more effective than opium. A population that should, IMO, be hanging the bastards from the trees by now is instead generally simply continuing to play our acceptable role in the divide-and-conquer game. Pretending that if we elect a slightly different group of bastards that the game will change in our favor. And once that no longer works, then presumably a war will be started so that we can be riled up to go out and smote some them. Divide-and-conquer on a grander scale. That is ultimately what worked in the 1929-1945 timeframe. Pearl Harbor. We did not “solve” the underlying problems then. We just floundered until a war presented the right circumstances/conditions for the problem to be coincidentally solved.

I do wish I were one of the one-in-a-million. Sometimes I think I am. And no doubt I understand economics (without being tied to supporting the existing structures that create this problem) better than the vast vast majority of people. But I know I’m not one of the one-in-a-million. This stuff stretches me to my limits – and it is beyond those limits where understanding lies.

Enough.

Rare Earth Elements

Rare earths are a group of not-generally actually “rare” elements that comprise (generally) one of the lines from the periodic table – here in the middle shade of blue:

These elements are increasingly of strategic importance. They are used to make high-tech magnets, catalysts, high-tech ceramics, superconductors/lasers, etc. Like almost everything else it touches, the US government has completely clusterf@#ked itself and us. It created all the financial structures that ensured that “dirty” businesses like manufacturing and mining would leave the US — in the thought that the US would advance into the post-industrial age and thrive in a world where our economy depends on us buying and selling real estate to each other while we export interest-rate derivatives and credit-default swaps to the rest of the world. So much for that idea of economic progress.

Now, the rest of the world depends entirely on China for mining the stuff — and the Pentagon thus depends entirely on China to supply its contractors with the high-tech material that is used to make the high-tech weaponry with which the US government can attempt to contain emerging global power threats — like China. China has now figured this out — and is now restricting the exports of these materials. The US government is still stuck on stupid but will, at some point, either learn or it will deserve to die. In the meantime, there are a couple of legitimate investment opportunities and a few dozen mining scams that have emerged.

The best opportunity IMO is a Canadian/Chinese producer of the high-tech “stuff” made out of rare earths. Their Chinese branch (Magnequench) is a formerly-American defense contractor and is THE major producer of stuff like high-tech magnets and such. Being Chinese-located now, they will have access to the raw ores and they already have the purchasing contracts from the major Japanese/American/European companies who put the components into end-use things. It is highly unlikely that China will restrict the exports of those products (for now at least) since that would almost be tantamount to a declaration of hostilities on the rest of the world. The company is NeoMaterial (NEM on the Toronto exchange – C$4 — and NEMMF on the pinks). It trades at a P/B=2; P/S=2: P/E=13; P/CF=18; market cap of $500 million — which is OK compared to the last 10 years. For them, however, the game going forward is completely different. They now have near-monopoly ability to set prices for their products for the next few years. And more significantly, if the share price does remain at these levels, then the Chinese will buy the whole company and keep the monopoly (and the embedded technology to turn ores into usable stuff) for themselves. The company seems to understand this and is buying back shares at levels that are only a bit below the current price. There are a huge number of catalysts for this company over the next couple of years unless the US government remains totally brain-dead beyond belief (which though unlikely is honestly an increasingly real possibility).

On the ore/mining side, the big new shiny IPO is Molycorp (MCP – $15). They own the mine (Mountain Pass) which used to be the main global supplier of rare earth ores until it was shuttered in 2002 because of low prices. They have just gone public and are currently owned by the usual crop of sharks and bailout/welfare squids. The current market cap is $1.2 billion – assets composed mostly of cash from the IPO and the old mine. Very different from most IPO’s, operating insiders bought part of the IPO. The cash they raised is almost – but not quite – the amount they’ll need to open the mine by late-2012. But guaranteed, until then the institutional squids/sharks will be flogging this stock like a recalcitrant donkey in order to try to get another bubble going here so they can sell into it. Whew – enough of the confusing metaphors. At any rate, there are a lot of catalysts here. Plus, they have signed a technology transfer agreement with NeoMaterials (in exchange for ore guarantees) so that they won’t get stuck with claims to a big pile of uneconomic dirt if rare earth mines open up all over the world in the next few years.

Most of the other rare earth companies – and there are lots of them that have staked a claim to big piles of ore and been hawking their penny stocks for the last few years for the impending “rare earths scarcity” – are basically huge risks now. One in Australia is probably OK since it is actually opening a mine in late-2011. The overall market simply is not anywhere near big enough to support new mines everywhere. I suspect that the story/hype will be big enough to keep many of them going “Vancouver-style” – but not for me.

I like these stocks in the order presented. NeoMaterials is the better buy here — in large part because it does have a liquidity premium attached and is more complicated to purchase from the US. Molycorp will likely be the better trading vehicle – and be the recipient of far more hype – but will also have the downside volatility and be overvalued. In truth, it is hard for me to know what that overvalued point is. The entire global market for rare earth ores was about $1.5 billion last year. Hard to know how much prices will rise in the next two years before new supply comes in and kills the high prices. But it seems to me that at current prices, Molycorp is already pricing in a near doubling of them. NeoMaterials just seems better positioned — at least until it gets bought out.