Monday, July 30, 2007

Shanghai Index Moving Towards Critical Test

This is my third post in two days. I'm rolling out what may be the last post this week as I have alot going on and might not get another chance at updates. I had said earlier this month that I expected the Shanghai Index had a reasonable probability of making another run and that 4400 on the Shanghai Index is a major test. What kind of wishy-washy statement is that? Just as it sounds. If I was a long term investor and had ridden the market up, I wouldn't be selling yet. But, I'd nervously have my finger just above the sell button. That's about it. China is a runaway train and it is a seriously flawed argument put forth by many intelligent people that the Chinese government can stop it without wrecking it. Just as my prior post stated, government officials tried to stop the runaway train in the U.S. in 1929 and they failed as well.

We are knocking on the door of 4400. Are the bulls going to kick the door down? There is a valid argument either way as manias can surely become bigger manias.

There is also a chance of a marginal breakout and failure which is a very common movement in all financial markets as sophisticated traders sweep out the stop positions above prior highs and prior lows. Given China is at a serious inflection point when the global asset markets are teetering is rather interesting.
posted by TimingLogic at 12:58 PM

President Bush's Economic Team Responds To Credit Concerns

"I have every confidence that there will be a revival of activity (economic) in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929

"I believe what what we are seeing is a strong global economy. This is the strongest global economy I've seen in thirty two years. I think this is being driven by strong growth outside of the U.S.....I would say there is less risk in the markets today than there was a few months ago."
- Hank Paulson, U.S. Secretary of the Treasury, July 27, 2007

I'm not typically a big fan of today's financial TV journalism but there are always some moments worth capturing. Dylan Ratigan does a fine job of interviewing the Bush economic team. (Unfortunately the interview is better than the canned responses.) The video comes in pieces and can we watched here. They are titled White House Summit, White House Summit 2 and White House Summit 3 and total about 25 minutes.

What really drew my attention was not the interview or even the content but that the entire economic team has decided through some moment of coincidence to agree to an interview for the first time in nearly eight years. Now, the comment was captured on TV that this interview could not have been calculated because no one knew the market would be down when this interview was booked. Au contraire.

I saw credit markets had a chance of seizing up a few months ago. I don't know how many times I can put "risk", "liquidity" or "credit" in my posts over the last few months. My post on July 10th stated,
"From what I model, we are at a very heightened risk of a credit crunch developing in many economies over the coming months. Actually, I expect there is a reasonable probability for some bizarre events to come to pass in the credit markets as I intimated last year." If I can see it I guarantee you that smart money on Wall Street saw it as well. And, I guarantee you Paulson has been alerted.

What's my point with the rehash? Politicians make themselves available for interview when they have an agenda. This interview wasn't done just because CNBC got lucky or Paulson woke up one day and decided to give a freebie. That's not a bad thing. We want politicians to have an agenda. That is why we hire them as stewards of our national interests.

Frontline, which I generally consider to be consistently excellent TV journalism, ran a show some time ago on the attempt by politicians to control information flow. Hank Paulson used to run Goldman Sachs and I am quite confident he has received calls from his former associates and others in the financial community voicing serious macro concerns and hence the unprecedented show of unity and calm in this interview. The agenda for this interview was surely to impart confidence. The Fed knew there was a bubble in 1929 and I can assure you they know there is a bubble now. What they likely don't know is exactly how to resolve it. Personally, I believe the best they can hope for is that corporate profits remain robust thus adding some stability to asset prices for a period of years as imbalances are worked off. By the way, there is no precedence I am aware of that successfully accomplishing this. That's effectively what the Soviet Union attempted to do. In other words, it may work for a while but in the end unless one is able to control information and markets indefinitely, that will always fail. The inability to ultimately control information was a key reason the Soviet Union failed in my estimation.

I'm sure the Bush economic advisors are all fine men.
But, the question is whether we want government to be transparent and share potentially bad news so that we can make informed decisions as individuals and as a society. Not just about this issue but about all issues. We are demanding more transparency from public companies, isn't it a natural extension to require more transparency from government?

I'm dubious of many replies in this interview because there is clearly some dancing around Dylan's questions with "Newspeak". (Okay, I'm back on George Orwell again.) That tells me they are very concerned. So, is the government's role in a free society to promote confidence or be transparent when they may be mutually exclusive? Understanding that transparency may cause volatility or create a self-fulfilling prophecy or paradox of thrift as I wrote about last year. Or, that attempts at building confidence may ultimately lead to citizens losing significant personal wealth. Of course the more fundamental issue might even be that politicians don't understand the depth of what is going on. I'm quite confident they likely believe this is a point in time issue that can be contained and it is not. That if they can convey confidence to financial markets, there is a chance the storm may pass. It won't because I doubt they understand the depths of or the source of the issues markets now face. Of course, it's an old axiom but those at the top are always the last to understand something significant has changed. That's why Wall Street is always wrong eventually.

By the way, GDP numbers looked great on the surface. In fact, they were far from great. Oh, and Secretary Paulson's remarks about the strongest global economy in thirty two years....Well, might we ask what happened about thirty two years ago when that burst of global growth ended? How about the Nasdaq fell about 70%, the S&P about 50% and we had the worst recession since the Great Depression. In fact, many called it a depression.

posted by TimingLogic at 11:22 AM

Sunday, July 29, 2007

The Asian Century?

I just stopped by Marketwatch to see what the Asian markets were doing and saw this video of Thailand. I think it's important to remember that Asia has had many chances over the decades to prove itself as a place where progressive economic change, democratic change and true capitalist reforms could take hold. To date, that has yet to happen. The closest transformation is Japan. Yet, even today Japan seemingly rejects free markets in many regards by weakening its citizen's wealth in favor of an export driven economy.

I've incessantly ranted about my concerns over China and emerging markets since starting this blog. For those of you who believe the next century is the Asian century, you might want to watch this short video highlighting the economic devastation that still looms over Thailand ten years after their crisis. Was Thailand in 1997-98 the equivalent of China today in terms of economic reform, transparency and capitalism? Without being an expert on the subject, I would say yes. To believe China, in its current form, can achieve what is generally believed is preposterous to me. Now, I hope I'm wrong but the reality is China is far from instituting the reforms necessary to achieve what is expected of it. This video should be a reminder of irrational exuberance and reliance of the China miracle.
posted by TimingLogic at 9:24 PM

Thursday, July 26, 2007

Mutual Fund Managers Have Enormous Appetite For Risk

"Despite recent jitters in global credit markets, institutional investors are fully invested in equities with a strong cyclical bias," said David Bowers, independent consultant to Merrill Lynch.

Finfacts reports Merrill Lynch's survey of mutual fund managers shows they are invested to the hilt in cyclical stocks. And, mutual funds have left themselves with the lowest cash levels in the study's history. Isn't that a bit of cheery news to end the day? This is obviously based on the premise that global growth is unstoppable and the business cycle has been repealed. How else do you explain such disregard for risk so far into this expansion? Group think?

Why should you care? With weak mutual fund flows in the U.S., that means the good boys and girls in mutual fund land need debt-driven M&A, debt-driven private equity deals and debt-driven corporate buy backs for the party to continue. Does it appear the global debt markets are in a happy mood lately? Ever heard of fundamentals? Oh, yea. I remember those.

How about a visual of the last time Wall Street was so bullish. See that blue vertical line on the S&P 500 chart? Right about there was the last time Wall Street was as consensually bullish as this year. And, what were they bullish about? Technology stocks. And what happened? That's right. 80%+ dump in the technology laden Nasdaq. And what are they bullish about now? Cyclicals. And why are they called cyclicals? That's right. Because they go up and down like a yo-yo as do their earnings. And should mutual funds be invested in these stocks? Don't worry. You'll get an opportunity to see first hand if mutual fund managers are correct. Remember that many cyclical asset classes have seen the biggest runs in the last one hundred plus years in this cycle. Or put another way, mean reversion is still a reality of all asset class valuations.

By the way, if you run a mutual fund, I'm for hire. Especially if you are located in California. Enjoy the weekend.

posted by TimingLogic at 9:38 PM

Novellus Guidance Takes A Dive And Stock Responds Up 10%.

I have not liked capex related technology this entire cycle. Not because the companies are poorly run or somehow aren't executing. In fact, I've bullishly highlighted Microsoft, Intel and Dell on here when people were saying these companies were going to zero. Since those posts, each stock is up at least 50%. Without going back and looking at the exact post date, Dell and Microsoft might actually be up close to 80%+. So, has my position changed on these companies? Not one iota. Fundamentals matter. How long does it take for people to realize what is happening?

I've posted bearish comments re semiconductors for over a year even while recognizing their strength a few weeks ago. My trading system gave a buy signal on semi's when the market washed out in August of 2006. Yet, the fundamentals didn't support it. They still don't. The only fundamentals that support semi's going up are the deteriorating fundamentals of other assets including cyclicals. Who'da thunk semiconductors would be a relative value play eight years ago? The recent strength in semiconductors, as I wrote about a few weeks ago, is driven by non correlation and significant under performance which is used by trading strategies of Goldman Sachs and others. That strategy works until it doesn't work. It doesn't work when fundamentals are deteriorating in the non correlated assets. Riding with the herd is beneficial most of the time. But, now the lemmings are back extolling semiconductor and technology stocks again. This for the umteenth time since 1999. We've had rallies. They've all failed. This one will too.

Last week Novellus, a dominant semiconductor equipment supplier, reported their backlog for new orders dropped 19% quarter over quarter. That rivals the largest magnitude drop in fundamentals I've ever seen in any business. That includes 2000. This is not a year over year number but quarter over quarter. Their outlook was extremely poor as well yet the stock responded by going up 10% in a day. Then we see Intel up and then down 10% in a few weeks. Now, it's Texas Instruments reporting poor results again.

Is technology bottoming? Are we about to start another semiconductor cycle where companies boom as they did in the late 1990s? There sure is alot of hope out there as nearly everyone on Wall Street now espouses said fact. Hope. That greatest of human emotions. That worst of investing traits. There sure was alot of hope in 2000. How did that help anyone when the Nasdaq fell 85%?
posted by TimingLogic at 9:00 AM

Tuesday, July 24, 2007

It's Official. 11 of 13.

Update: The S&P is within fractions of giving up all of its gains since the massive blow higher on the 12th and 13th as I outlined in the July 14th post below. By the close, we will have given up all of the gains barring a miracle.

Quick Comment About The Speculation This Week

Even though I said the last post was going to have to be a place market while I was traveling, I just had to post this after reading some perma-bull today stating that the move last week was extremely bullish. I thought I'd run a few quick numbers. 10 of the last 12 squirts that we've had similar to the last few days retraced their entire gain within ten days. In addition, that move was one of the thinnest speculative moves in over five years. In other words, the move late last week has a high probability of being gamesmanship for the unsuspecting public. Oh, and for Jim Cramer who was full of giggles. Let's see if this move makes the statistics now 11 of 13 or 10 of 13.

posted by TimingLogic at 2:45 PM

GM To Cut New Pickup Truck Production?

Yesterday the Detroit News reported that GM may cut production of its new pickup truck. That is extremely bad economic news. GM recently launched a newly designed pickup for the first time in years. Even though the reviews have been generally stellar, weak sales and brutal pricing strategies from Dodge, Ford and Toyota paint a potentially dour sign of economic activity in the U.S.

I've talked about the pickup truck economy on here. With so many craftsmen and women, construction workers, entrepreneurs, farmers, etc, relying on pickup trucks for their livelihood, this speaks loads about the state of their businesses or their concern re making a large investment in their business. As an aside, as I wrote about in South America, don't assume American farmers are raking in the cash with grain prices soaring. So too are input costs such as agri-chemicals, fertilizer, fuel and equipment. Those printing money with inflated agriculture prices are the major global agri-firms that make and generally control markets in said products and very large farmers who use sophisticated futures strategies.

At the same time we find GM's bonds cratering on concerns about the economy. Already "junk", GM's bonds dove as much as 3% in a single day this past week. Finally, GM's attempted sale of its transmission unit is running into trouble as underwriters scrap plans to offer $3.5 billion in debt for the deal.

It hasn't been a good week for U.S. auto makers. While all three are making significant operational progress in their turnarounds, the economy is not assisting and likely won't assist any time in the near future. Nor is their generally unfavorable product mix that takes years to rectify. It might be time to put GM and Ford back on "bankruptcy" watch if fundamentals don't improve over the coming months. I have no doubt about the viability of either company long term but the road to long term prosperity will have many potential pitfalls without a strong domestic economy.
posted by TimingLogic at 9:22 AM

Saturday, July 21, 2007

Vinokourov Wins Tour de France Time Trial

I'm still roaming the earth but not in a position to be posting alot this week. Cycling is one of my passions and for avid cyclists there is nothing comparable to the Tour de France. The Tour is a highlight film of life. It's about strategy, teamwork, perseverance, commitment, training and plain old hard work. If nothing else, seeing the beautiful French countryside is amazing. Alexandre Vinokourov, a favorite before the race began, just won a time trial after a serious accident earlier in the Tour. Vinokourov is a rider who has an indomitable will and could win any race by sheer determination. I find that a very attractive trait. I truly believe in the old adage that the genius of success is 1% inspiration and 99% perspiration.

Michael "Chicken Legs" Rasmussen, a former mountain biker, leads the General Classification as well as the King of the Mountain Classification. Once again proving that mountain stage strategy is key to winning this grueling race.

posted by TimingLogic at 2:37 PM

Wednesday, July 18, 2007

Risk. The Housing Market's Weakness Is A Ruse

Today, we have a serious event unfolding. Bear Stearns had two hedge funds implode. Billions of investor dollars just disappeared. Reuters raises a serious question as to whether Wall Street can be trusted on this issue. The answer is obviously no in my estimation. I sound like a parrot with my continued statement of such but Wall Street has disregarded proper risk management for years and there are many other known issues which are a result of improper risk management. The majority of which have nothing to do with real estate. How and when they resolve themselves is simply a matter of time. Yet, to be fair it is not just Wall Street's lack of risk management that is the problem.

Let's get real. I've generally defended the American consumer on here and other blogs time and again. When the consumer experiences heightened risk or unknowns, they have no choice other than to quit spending. The consumer's world is immediately self-correcting. Even with the availability of credit. Actually, the availability of credit creates a potential for financial slavery as many of our founding fathers wrote about centuries ago but that is not a topic for this blog. There is no historical precedence of the consumer bringing down the economy. The consumer doesn't have the wherewithal to create significant imbalances in the economy. As I've said, housing is bad and will get worse but it is a symptom of the problem.
posted by TimingLogic at 11:09 AM

Saturday, July 14, 2007

Quick Comment About The Speculation This Week

Even though I said the last post was going to have to be a place market while I was traveling, I just had to post this after reading some perma-bull today stating that the move last week was extremely bullish. I thought I'd run a few quick numbers. 10 of the last 12 squirts that we've had similar to the last few days retraced their entire gain within ten days. In addition, that move was one of the thinnest speculative moves in over five years. In other words, the move late last week has a high probability of being gamesmanship for the unsuspecting public. Oh, and for Jim Cramer who was full of giggles. Let's see if this move makes the statistics now 11 of 13 or 10 of 13.
posted by TimingLogic at 12:25 PM

Friday, July 13, 2007

Friday The 13th. The Bulls Are On Fire And So Is The S&P 500!

This will be the last post for a while due to travel. Yesterday was a gift from the gods. It was indeed an amazing day. Everything went up. But, that's typical of this cycle. All assets up in sympathy and down in sympathy on corrections. I took the opportunity to sell into strength. A huge amount of that move was driven by massive speculation in a few stocks such as the 6% Intel move to fill a gap I talked about a few weeks ago in the semiconductor post. Teva, a large part of the Nasdaq 100, filled a gap as well. Some parts of the market leading energy sector actually went down yesterday. Another part of the energy complex completed a run yesterday that I believe portends energy weakness developing. Remember, when I posted my gold-copper pairs trade, the underlying commodities quickly returned thirty-ish percent in a few months even though the stock trade I discussed was circumvented by a takeover of Phelps Dodge. My oil and gold post this week is not a guessing game. It's a high probability event based on quantitative models and much more than what I post on here. In other words, my opinions are based on what is happening rather than what I want to happen. What I want to happen is the economy to continue positively for everyone worldwide. I haven't done so badly in energy markets. I wrote repeatedly that I disliked Valero at its mid 2006 high and said it was one of my favorite stocks as long as markets kept going up when it dropped to around $50. Now, it's up 60-ish% since then and I dislike it again.

Below is a chart to ponder on Friday the 13th. It is a linear channel or best fits mathematical channel of the S&P 500. Simple enough. Amazingly, nearly four of the last five years have been spent within a few percentage points of the blue channel line or the mid-line of this bull run. Only six brief times in five years have we actually reached the outer red channel lines. Once was the start of this bull market in October of 2002. Another time is now. That is incredibly abnormal for any market.

The rhythms of many global markets and many commodity markets are starting to synchronize around key dates and price levels. May through October of 2007 present tremendous risk for all global markets. You may think it insane to type this when we just had one of the largest single day gains in history (not in percentage terms) but I've seen things happen I didn't think possible since May. Things not seen in decades and in some cases a century of time. The speculative fervor is at an incredibly high level right now. Markets always punish over speculation: Amaranth, tech stocks, home builders, mortgage-based financial instruments, Crocs, Chinese equities, the Indian business process outsourcing market, etc. It doesn't always mean the end of the world and these events may actually develop constructively over the long term but ...........

Bear markets in this type of environment can start very swiftly with little time to react. We've seen a few warm ups including the amazingly swift falls in May of 2006 and March of 2007. May of 2006 seems so long ago and the market seems to have been up an amazing amount with nearly continual calls of new highs from the cheerleaders. Yet, the S&P is up only 15% in that thirteen month stretch. That's actually better than I would have expected but it's not exactly 1999. In other words, about average for this cycle. That's about one percent per month. We've averaged about twelve S&P points a month since this bull market started and yesterday we were up three times that. One day. Nearly three months return in one day. That is an annualized rate of what? 5,000%?

When the smart money wants to distribute to others, they appeal to the animal senses by making the greedy feel left behind. Let's back up and remind ourselves this market has also had one of the lowest returns per unit of time of any in the last one hundred years. That statistic may not mean anything to you but it should because it is a sign of impending trouble. Profits at record levels, a global expansion the likes of which the world has never seen and the rate of returns are near the lowest in one hundred years of bull markets in the S&P? What? We are now at a level when those who held through the three year bear market are back to neutral in the S&P. It's really about 38% of where the 2000 S&P was in dollar terms. Ah, I can breathe. I'm back to where I was in 2000. Life is good. It's also one of the longest periods without a ten percent correction since the stock market inception on May 17, 1792 under the buttonwood tree on Wall Street. Enjoy Friday the 13th and your weekend.

posted by TimingLogic at 10:14 AM

Thursday, July 12, 2007

I'm Living In The World Of Oz

First, I have to preface this post is regarding journalism and financial reality not personalities. I like Jim Cramer. He has a great wit. I'm on the fence re his positive impact on the public but but I'll give him some benefit. But, his investing acumen is highly lacking in my estimation. He's jacks or better if the market is going up. I still can't believe he ran a hedge fund. Of course, I'm not sure how much he was actually responsible for other than raising money and throwing darts at tech which would have made anyone with alot of money a whole lot more money in the 1990s. In other words, the biggest bull market in history does not equate with investing genius. Benjamin Graham, as an example, was an investing genius.

Last night I was flicking through the TV channels to hear VMWare is the next Google according to Jim Cramer. And, EMC is a great buy. I typically refrain from calling specific people out but this is absolutely absurd. It seems CNBC has returned to the paparazzi ways which cost it so much during the bear market. Sound bites and entertainment rule the day. These people are neither what I consider journalists nor financially savvy. What has happened to journalistic capability in the major news forums? Everywhere I look there are focus groups and consultants trying to mold news into a feel good experience for ratings and ad revenue. News for news sake is over in all but a few of the great news institutions. I believe that's why the internet and blogs have become so popular. One can get more serious, detailed and honest journalism from many bloggers than the major news outlets. CNBC spouts a ten second cheerleading party but a source not controlled by ad revenue or media executives on the net might tell you why that isn't necessarily so.

So? Is EMC a "buy buy buy"? VMWare the next Google? EMC is valued significantly higher than the S&P was in either the 2000 or 1929 bubble. Capital equipment spending is awful (just ask IBM in their last earnings statement), the stock is the most overbought in eight years and Cramer tells me earnings estimates are too low. Then he tells his audience a twenty year old technology is going to be the next Google. Psst Jim, virtualization, VMWare's technology, has been around since the dinosaurs. And, Microsoft is coming out with their own version that will be a tough competitor. Especially if free as many other vendor's virtualization products already are. You may have just heard about it but we already know how much you know about technology. This same person said Sun Micro was his single best idea in 2000 right before it promptly fell 95%. (A friend of mine and a mighty Trojan is a very successful executive in the financial community. He still has Cramer's report detailing his bullishness on Sun, Oracle and other tech stocks in 2000 hanging on his wall. A reminder of Wall Street insanity.)

Below is a chart of EMC and its largest global competitor, Network Appliance. If fundamentals are driving EMC whose stock, in blue, is up 100+% in a year then why is NetApps, a dominant player with excellent products and management, in red, flat over the same time frame? It's because Cramer's locust-like momentum buddies are jamming the stock for personal gain. Nothing wrong with that as long as you know what you are dealing with. I guess EMC's business is good enough to add $22 billion in market cap to the price of the stock over the last year. This company is a legacy business with slow growth and about $11 billion in annual sales. There is no fundamental reason for this price action unless someone is buying the company for $50 billion.

If you are a trader, capable of riding momentum and know how to manage a position, maybe you can play this game. That's a big maybe. But, TV viewers are investing their hard earned savings and this is going to end badly when the locusts have finished pushing.

It's pretty amazing when a friend asks me if I own stock in Crocs and he proudly tells me he bought it because Cramer recommended it. The price to book value on Crocs is 18, the price to cash flow is 50 and cash flow is headed in the wrong direction. You can already buy Crocs knockoffs for 80% less and people who have them tell me there is little difference. It's a plastic shoe for God's sake not the cure for cancer. It's valuation is higher than 99% of all publicly traded companies. This is the next Sun Micro or Travelzoo stock and has a reasonable probability of heading much further south if not zero.

This show will not be on the air at some point in the future. And, if Murdoch buys the Wall Street Journal, CNBC might not be on the air either. Bloomberg and a Wall Street Journal Channel will crowd out CNBC's paparazzi journalism. This isn't news. It's entertainment. It speaks of sellout journalism and ratings games to draw in viewership and associated ad revenue. History repeats itself and it was just a handful of years ago these facts came to pass and CNBC was teetering on the brink. A fast buck at the expense of creating long term value. Bloomberg would never have these game shows on their network.

If you get your financial advise from CNBC, good luck. Just like in 2000, you'll need it. I'm so disappointed that the weighty responsibility of investment and finance apparently isn't taken more seriously. Think I'm alone? Hardly. CNBC gets little respect from those who know better. Alan Abelson, a god of journalistic integrity and financial acumen has been very critical of CNBC as cited in the Columbia article. Columbia's school of journalism, a great institution, had this to say re CNBC in 2003. Not only has Wall Street not learned its lesson but neither has CNBC.
posted by TimingLogic at 11:15 AM

Tuesday, July 10, 2007

What are Oil & Gold Stocks Telling Us?

XOI Oil Index and Newmont Mining ratio

I'm back for a short while. I'll be traveling alot over the next few weeks so postings might be sparse through the end of the month. I just have to see how much time I have. There is surely no lack of topics. So much so that there have been many topics over the last year that I'd like to write about but haven't actually done so.

One can't help but notice some stark anomalies developing in the gold and oil markets. Typically, gold and oil run within a reasonable band that can be used as a simple entry indicator for those riding a bull market in both as we are experiencing this cycle. From gold's low in 2000, we've seen a relatively large move of about $450 per ounce from trough to peak. Gold's meteoric rise in the middle of 2006 was a typical blow off. That shouldn't be surprising as there have been many times where assets blew significantly higher without underlying events attributable to the move. As we all know, markets are far from rational at times. Just a few years ago it was housing and a few years before that it was technology stocks. Did the world change significantly to see the Nasdaq jump nearly 100% in 1999? Well, obviously it didn't because the Nasdaq gave back all of that 100% and more. But how many people in the financial community were telling you it was different at the time? Nearly every single one. And this time?

There are many factors which make gold appealing to many in this cycle, not the least of which is risk. As I've said before, gold is not just an inflation hedge, it is a deflation hedge, a hedge against overvalued equities, a hedge against a falling currency, a hedge against economic imbalances, etc. It's also followed by alot of speculators and conspiracists. Maybe they will be right this time. One can't be wrong forever. If so, I'll soon be living on the streets and so might you. The risks in the system may not materialize but those ignoring the warning signs of elevated gold will most likely pay a financial price of some sorts before it's over. Amazingly, most people don't understand this simple fact. Living day to day isn't such a bad idea. In the long run, we're all dead.

You might have noticed gold and oil have disconnected since the latter half of 2006. More importantly, the equities associated with the respective commodities have totally disconnected. While gold has levitated near cycle highs, large producers such as Newmont, have cratered over the last year. Newmont was down from $62 to $38 before the bounce late last week. That means you have either lost money or are near break even in the stock if you have bought it over the last five years. That said, there is strong support going back over a decade for Newmont in the $35 to $38 range. Recently Newmont announced they were removing their hedges which capped their profits. A potentially bullish sign for the stock but taken alone that data point is rather meaningless. Alot of gold bugs have been calling for gold and gold stocks to resume their rally for quite some time now. So far that ain't happening.

Conversely, many oil stocks hit new highs yet oil has not confirmed a new high over the last year. That's not too alarming for oil bulls yet because stocks typically lead underlying commodity action. Oil has recently broken above resistance and is moving in on the old highs. This oil rally has been weaker comparatively that the initial assault on $80. Typically, that means a second attempt at a new high will fail. We'll just have to see how events unfold as there has been an unstoppable amount of capital in this cycle. If oil fails at or just above the old price highs, the energy complex will likely fail technically on a false breakout. Ultimately, that will happen whenever the speculation runs out of energy so to speak. Because indeed we are witnessing massive speculation. Even the oil companies have complained to Congress that hedge funds are distorting the oil futures market. I'm not going to start rattling off historical data points but the yammering from Wall Street types who know nothing of oil or the supply of carbon based energy sounds exactly as it has in decades past. Many oil company executives including the CEO of Exxon have repeatedly said there is absolutely no problem getting an adequate supply of oil. Of course, I knew that. I fill up at the gasoline pump quite regularly. Owning oil as a comparatively cheap asset with economic demand hence intrinsic value might be appealing for many but oil is not near $80 because Nigeria is unstable or China's demand.

Taking this topic aside, the U.S. has the technology to be energy independent today. How the market refines that technology or yet to be discovered energy technologies and packages it for mass consumption remains to be seen. As I've written before, America is awash in oil. The last time we had this much excess supply? Oil was $15 a barrel. Traders arguing that gasoline refinery capacity being tight have lost a sense of reality. That might technically be accurate but when was the last time you were rationed gasoline? If we were rationed gasoline, I might be willing to say gasoline at this level is driven more by fundamentals. But, the last time we had rationing was over thirty years ago. With such a glut of oil building, eventually Wall Street will run out of any rationale to bid up oil. Yet, as I wrote last year, I don't expect oil to have a very significant correction until oil traders and hedge funds have successfully killed the global economy. They will. They have a perfect record at historically accomplishing said fact. They are lulling everyone into a stupor with the subliminal messages of how resilient the consumer is. Oil traders making millions or billions don't have a clue what the consumer is feeling. Not that I fault anyone for making a living. If you can make billions trading oil, that's eventually good for me in some obtuse way. A little timely hint: Crude oil builds and gasoline consumption are each heading in the wrong direction for the energy bulls. Both have broken with long term patterns. Expected draw downs in crude over the summer driving season are not materializing but in fact are still building and gasoline consumption is down year over year. These data points had better reverse quickly or this is another ominous sign that the economy is failing and energy assets will fail in sympathy.

One must understand the dynamics underlying these two commodities to get some idea of what is driving their price action. I really haven't read anyone's thesis that I believe accurately reflects the macro factors at work. So, without blathering on as to why, I believe gold is a proxy for credit and oil is a proxy for Merrill, Goldman, Morgan Stanley and their hedge fund compatriot's ability to create liquidity. Don't assume re my statement of credit. I didn't say too much credit nor did I say too little credit. Think about it. You'll figure it out. Anyhow, credit contractions lead liquidity contractions. From what I model, we are at a very heightened risk of a credit crunch developing in many economies over the coming months. Actually, I expect there is a reasonable probability for some bizarre events to come to pass in the credit markets as I intimated last year. Maybe I'll post more on that another day. By the way, any statements on this topic have no relevance in China. I don't really pay alot of attention to the data in China because it's all massaged by the Ministry of Propaganda before release anyway. Don't think I'm kidding either. The data is likely much worse than reported. In a society where transparency and freedoms are generally muzzled, you can be assured the Politburo doesn't want to appear as dolts for policy incompetence hence massaged data. China appears to be a runaway train and no one has control of the economy. I suspect the government in China is going to have to really get serious before the music stops. To date, they aren't even close to being serious and that will mean the ultimate mess is simply getting larger. So, based on the lack of effective policy, I expect the Shanghai Index has a reasonable probability of going higher regardless of the recent single day corrections of 3-5% and the official communist manifesto of pricking the bubble. 4400 is a key level to watch in Shanghai. A break above 4400 could send the index soaring again.

The chart above is a ratio chart of the oil index to Newmont mining's stock. It's not difficult to see that oil stocks have significantly left Newmont and other gold stocks in the dust. Big money is in oil not gold. Oil equities, oil futures, oil, oil, oil. This divergence is simply not sustainable. If you are a stock market bull or an oil bull, you had better heed the warning signs. With gold stocks and energy stocks disconnected, one of two things must happen in some variation. Gold assets must strengthen comparatively or energy assets must fall or both. Must? Yes, because it is the will of the market gods. Now there may be fits and starts along the way or it might happen suddenly. But, it will happen.

How this actually unfolds is likely a gauge of where central bankers stand against the unbalanced forces at work in the world's financial markets. If you haven't figured it out by now, the central bankers in Europe, Japan and the U.S. are not fighting inflation per se. They are trying to moderate the massive imbalances financial institutions are creating with incredibly lax risk management practices. Forget about the lip service given to inflation, financial institutions are causing the inflation. It's your friendly financial institutions that central bankers are attempting to reign in. Don't ever doubt the central bankers will be successful. They most certainly will. "Don't fight the Fed". Does that seemingly distant quote still ring a bell? Oh, yea I remember that quote. That was before the new world economy kicked in. It's so passe'. It really is different this time. Uh huh.

Ten year Newmont Mining chart
posted by TimingLogic at 9:11 AM

Sunday, July 08, 2007

Apple's Amazing 1984 Ad

Most advertising is less than appealing material. We all respond to different ad messages but this may be the best TV ad ever. To me the appeal is one of being a contrarian, being anti-establishment, the freedom of individualism and free thought. You can thank Steve Jobs for running the ad when other senior management didn't have the moxie and backed away. Here's a Wikipedia link to the Apple ad creation and intended message.

I crack comments about Orwell's book "1984", the basis for the Apple ad. That's because I believe "1984" is one of the greatest science fiction writings ever. As an aside, one of the Amazon book reviewers, J.A.H., wrote a very though provoking comment regarding "1984" that I'm going to repost below. While I don't subscribe to this as a prophecy, it's quite worthwhile to remember no matter where you live this has already happened. The book was supposedly written as a poke at totalitarianism and the Soviet Union. Enjoy the ad!

Fiction or Prophecy?
Winston Smith, member of the Outer Party, a small, petty cog in the great machination of "Big Brother", tries to step out from the shadow of his life in George Orwell's now masterpiece, "1984". Written over 50 years ago, this book was to serve several purposes, one being a warning to the present that a future like this, however fantastic and unbelievable, could be in the making should we allow for it to happen.

Winston leads the dull life of a worker, not encouraged to think, or dream, or feel for himself. His whole life must be driven to support the Party, which promulgates an apparent non-entity Big Brother as the supreme one. Winston early on shows the spark of individuality that the Party so wants to extinguish; by daring to write a journal on his own, he seals his fate early in the story. Soon he meets Julia, another worker, who charms and dares him even further to encourage having an affair. Together they make a lethal pair, and some lethal decisions, which leads to the great climax in the Ministry of Love.

What lies in the story is an amazing prophecy of government gone mad. The Party believes in creating present truths by writing and rewriting the past on its whim. The Party understands in order to control the people, it must control the language, thereby, creating "Newspeak". The Party makes people simply vanish, eradicating them from existence. The Party realizes the people who follow are merely plebians in society, and therefore, should be encouraged to not think for themselves. In fact, the Party is able to directly lie to the people, using "doublethink", where they say one thing but mean the other.

How much of Orwell's nightmare is something that can be true today? Do we have a government out of control, one that manipulates information for its own benefit, to justify war, ensure fear and terror reigns over the country; one that illegally detains people without trial, right to counsel, or even being charged with a crime; one that wants to extensively monitor our personal phone calls, e-mails, the books we check out of the library, the things we buy in stores. The dots are there to connect them; the challenge is, will you dare to do it, like Winston Smith dared?

I believe 1984 is ultimately a hopeful book. Orwell wants to challenge humanity, that during times of crisis, we are able to rise up and change things, so the fateful prophecy so nobly and horrifyingly espoused in 1984 , will only stay between the covers of the book. The choice is up to us.

posted by TimingLogic at 6:41 PM

Tuesday, July 03, 2007

Independence Day

I am out this week so there will be no other posts. Tomorrow is Independence Day for those of us who live in America. Yet, there are those who still live under the yoke of tyranny. Those who live in a constant state of fear for their lives and the lives of their loved ones. This week we should hope for the freedom of all humankind. Freedom for those in China who still live under the yoke of communism, freedom for those in so much of Africa who have lived under the yoke of colonialism and brutal dictatorships and freedom for those everywhere that live in fear of their government.

One must never forget that freedom is not an achieved state but a never ending struggle against those who would be king if the circumstances permitted. Humankind must always remain vigilant in its efforts to maintain freedoms and further the freedoms of our fellow men and women, be it the Civil Rights Movement in America or the mass genocide in Darfur.

I'd like to share a few quotes from many of the great leaders who played a role in the founding of America. It's quite ironic how concerns over two hundred years ago remain very relevant in today's world. Even within America itself. Their messages can be heard throughout history as one thing never changes; the yoke of tyranny and man's desire to dominate his brother.

Overgrown military establishments are, under any form of government, inauspicious to and hostile to liberty.
--George Washington
Any society that would give up a little liberty for a little security will deserve neither and lose both.
--Benjamin Franklin
A bill of rights is what the people are entitled to against every government
--Thomas Jefferson
If tyranny and oppression come to this land, it will be in the guise of fighting a foreign enemy.
--James Madison
We are right to take alarm at the first experiment upon our liberties.
--James Madison
When people fear the government, there is tyranny. When government fears the people, there is liberty.
--Thomas Jefferson
Experience hath shown that even under the best forms of government those entrusted with power, in time, and by slow operations, perverted it into tyranny
--Thomas Jefferson
If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.
--Thomas Jefferson
In republics, the great danger is that the majority may not sufficiently respect the rights of the minority.
--James Madison
It behooves every man who values liberty of conscience for himself, to resist invasions of it in the case of others: or their case may, by change of circumstances, become his own.
--Thomas Jefferson
Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one.
--Thomas Paine
It is truth that the loss of liberties at home is to be charged to the provisions against danger, real or pretended, from abroad.
--James Madison
To establish any mode to abolish war, however advantageous it might be to Nations, would be to take from such Government the most lucrative of its branches.
--Thomas Paine
posted by TimingLogic at 8:56 AM