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The Morning Line

Why You Shouldn’t Bet on Inflation

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Does this chart look bearishThe Wall Street Journal put on a full-court press of inflation blather yesterday, shilling the Fed and a mainstream consensus that higher prices for everything loom in our future. Here’s one of the headlines from Wednesday’s edition: ‘Yes, Central Banks Can Create Inflation. Just Ask Argentina”.  And here’s the headline I would offer in response: ‘No, Central Banks Cannot Create Inflation. Just Ask Europe and Japan’. The other headline, atop a column by one Ken Brown, read as follows: ‘No One Believes It, but Inflation Is a Pretty Good Bet’.  In response, I offer the chart above. If inflation were coming, the long-term bond would reflect it with a bearish chart (bond yields correlate inversely with price). Does the chart look bearish?  Not hardly.  Even to someone who knows nothing about charts, T-bond futures look like they are headed to the moon.

Huge Potential for Bond Bulls

I’ve been predicting for years that interest rates on 30-year U.S. Bonds, currently around 2.70%, are headed to 1.64% or lower. If so, the futures contract shown in the chart is bound most immediately for 186^15. This implies that anyone betting on inflation, as Mr. Brown has suggested, is going to get killed.  Betting on deflation, on other hand, offers some of the juiciest odds that can be found in the investment world. If interest rates were to fall below 2% as I’ve been predicting, the capital gains potential of T-Bonds is enormous — on the order of 20% or more per year if the drop occurs over the next 18-24 months.

Here’s another headline from yesterday’s Journal: ‘Fed Signals No Rush to Raise Rates’. Now there’s an understatement.  The Journal embarrasses itself when it implies that a rate hike is still possible. When the Fed tried to pretend it could walk the walk a couple of months ago, raising administered rates by a token 25 basis points, it set off a panic in global markets that could conceivably have snowballed into a crash like the one in 2007-08. We’re that close. Under the circumstances, talk of a rate hike is about the stupidest thing I’ve ever heard.

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$ESM16 – June E-Mini S&P (Last:2066.50)

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$DJIA – Dow Industrial Average (Last:17830)

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Glimmer of hope for bearsThursday’s exhilarating plunge has given bears a ray of hope in the form of a minor impulse leg on the daily chart. I’ve labeled it in red, but it will be bucking the larger and more significant uptrend labeled in green. We should know by next mid-week or so whether the selloff is going to get legs, since, if this becomes likely, the evidence will come in the form of a downtrending ABC pattern that exceeds its D target. We’ll keep out fingers crossed, since the only way for the economic world to return to something like normalcy will be for the Dow to shed 10,000 points and bring everyone, not just investors, back to earth. From a purely technical standpoint, however, and strictly speaking, the pattern shown is so far looks like just another correction in a bull market that has been running loco for more than seven years.

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$+HDGE – Equity Bear ETF (Last:10.35)

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$GCM16 – June Gold (Last:1287.00)

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$AAPL – Apple Computer (Last:93.59)

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Wall Street reacted with typical coolAt the end of 2015, Apple was the most valuable company in the world. With Tuesday’s after-hours plunge, however, it may have slipped to third, behind Google and Exxon (which, ironically, just lost its triple-A credit rating). Apple reported its first drop in sales since 2003.  In the same quarter last year, revenues were $58 billion, or $2.33 per share. This time, the company had revenues of $50 billion, or $1.90 per share. The news has caused AAPL shares to plummet 8.5% so far this evening, from 104.30 to a shaky-looking low at 95.51. If you didn’t see it coming, here’s a Rick’s Picks ‘tout’ emailed to subscribers last October that did:

A Drexel Hill analyst’s prediction that AAPL, currently trading for around $110, will hit $200 a share sent me to the long-term charts to see who’s crazy, me or them. Drexel believes iPhone sales in China will ultimately boost sales very significantly. I’m not so sure myself, but I’ve been bearish on the stock for other reasons that have continued to accumulate, to wit: 1) Incredibly, with the release of iPhone6, Apple has once again failed to address its embarrassing battery problem, still the elephant in the room; 2) it won’t be long before Xiaomi sells a phone for $60 that can do everything the $600 iPhone does; 3) Apple’s insane profit margins, driven by [click to continue…]

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$NUGT – Gold Miners 3X Bull (Last:99.90)

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$DUST – 3x Gold Miner Bear (Last:1.89)

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$CLM16 – June Crude (Last:45.86)

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$GOOGL – Alphabet Inc. (Last:732.45)

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$AMZN – Amazon (Last:603.28)

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+JNK – High-Yield Bond ETF (Last:35.25)

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$TSLA – Tesla Motors (Last:250.02)

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TSLA's climactic rallyThat should be it for Tesla, at least for a while. Notice that the spike high of last week’s parabolic short-squeeze failed not only to reach the 270.68 Hidden Pivot target, but also to surpass the watershed high at 271.57 recorded back in September. Although it would have taken but another $2.24 of upside to get the job done, the shortfall, although small, tells us that buyers simply weren’t up to it. That’s not to say they won’t try again, but my guess is that it will take at least a few weeks of consolidation, if not significantly longer, to muster the required gusto. That would correspond to a period of unwonted caution on Wall Street following the well-hyped introduction of Tesla’s Model 3.  The $35,000 electric sedan, with a 215-mile range, has the potential to shake up the auto industry. But with the stock having nearly doubled since early February, the company will need a couple of quarters of very strong sales to justify the wild, distributive run-up in the price of its shares.

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$+TLT – Lehman Bond ETF (Last:128.72)

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We'll attempt to augmentI’m tracking 100 shares with a cost basis of 114.32 that reflects profits taken a while back on three quarters of the original position. The theoretical gain at these levels amounts to more than $1800, but we are shooting for significantly more than that and may augment the position if a juicy opportunity like the one that got us aboard in the first place should arise. TLT’s thrust past p=132.58 on Thursday (see inset) is encouraging, to say the least, since it opens up a path to 135.26 over the near term, and thence to 137.94. Traders can use p or p2 to get long ‘mechanically’, provided you understand the rules governing this type of trade. This is the kind of rally that is tailor-made for the ‘mechanical’ buy. ______ UPDATE (April 19, 8:36 p.m. ET): Let’s test the water with a bottom-fishing bid for 400 shares at 129.66. Use a 129.59 stop-loss. The relevant pattern is shown in the chart, a new one. _______ UPDATE (April 22, 2:25 a.m.): The downdraft of the last two days triggered the bid, then the stop, generating a theoretical loss of 0.28.  Imputing it to our tracking position of 100 shares effectively raises our cost basis to 114.60.

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