March 2005

A subscriber took me to task in an e-mail yesterday for scaling back my coverage of precious metal shares in the last few months. In retrospect, with gold in the dispiriting throes of a bear cycle that began in November, my response is to ask, What more might I have said? I am as bullish as ever on gold's long-term prospects, but I cannot bring myself to be a cheerleader each day for precious metals when there is insufficient technical evidence to support the short- and intermediate-term bullish case. Nor can I track more than a relative handful of mining stocks in the labor-intensive way that I've tracked Bema, Kinross, Newmont, Canyon and a few others. In these stocks, to avoid the bull traps that have decimated the ranks of gold bugs since 2003, we've waited patiently to buy at hidden-pivot bottoms; taken partial profits on subsequent rallies; avoided buying on pullbacks that were to persist; and bailed out of specific stocks when they went against us, even while we planned to reacquire those stocks at still lower prices ' usually hidden-pivot targets. This has not only saved us from losses, it has allowed us to make money on long positions as mining stocks have fallen. That's a pretty good trick, as I'm sure you'll agree, but it's not possible to do it with the scores of gold stocks that I've tracked cumulatively over time. However, by using certain of those stocks as proxies ' usually, the stocks you suggest during our weekly Q&A sessions ' I hope to provide the kind of information that will be helpful to those of you trying to manage gold portfolios through good times and bad. Moreover, to do that job effectively, I have completely tuned out all of the other bullion-touting gurus, even

I'd provided a strategy for Monday that would have temporarily flattened our short position in the S&Ps, but only if the futures had dipped slightly on the opening. Instead, they rose moderately, presumably because the dollar was up and crude down in Sunday overnight trading. Both obviously have been weighing on investors' angst-ridden minds lately -- oil prices the moreso now that petrol prices are approaching the $2.50 threshold in certain regions of the country. Not a month ago, with gas selling for around $1.80, I read a prediction that the price of a gallon of regular might get as high as $2.16 by this summer. The 'experts' who forecast pump prices have compiled a track record so dismal that even the local weathermen seems oracular in comparison. They must be in cahoots with the EPA guys who calculate the sticker mileage that appears on the windows of all new cars. My Lexus SUV is rated at 28 on the highway, but the highway they're talking about must have the slope of a ski trail. Actually, the EPA does all of its driving on a dynamometer, a fact that accounts for most of the difference between real-world mileage and EPA mileage. But I digress. The important thing to consider when the stock market opens for business on Tuesday is that the bearish S&P targets that I gave yesterday are unchanged, Monday's punk rally having failed to generate a new set of hidden-pivot coordinates. Please note that the lower of the two targets, 1159.25 (basis the E-mini), is just a tad beneath January's bottom. You don't need to be a hidden-pivot expert to recognize in the chart below just how important that support is.

It is a matter of record that America's economic recovery over the last four years has been little more than a statistical hoax. Although real GDP supposedly has grown by 10.4 percent over that time, economist Kurt Richebacher calculates that gains would be no higher than 4 percent if honest numbers were used. Instead, the government's spinmeisters continue to grossly understate the rate of inflation while using hedonic adjustments to turbo-charge reported gains in productivity. Dr. Richebacher says that such duplicity has been taking place on a breathtaking scale, causing, for instance, a 9.4 percent rise in business spending on computers over the last four years to become a hedonically enhanced 113.4 percent. Each of us knows, through personal experience and anecdote, that the cost of living is rising much faster than the government would have us believe, and that good jobs are as hard to come by as they are to keep. But if the average American is working harder than ever merely to stay afloat, it is not clear how such feeble economic growth as we've experienced in recent years will enable said worker to extricate himself from a financial pillory, much less improve his lot. Flaccid Market This fact has not been lost on investors, as the stock market's flaccid performance over the last five quarters attests. But investors have not been the only casualty of diminished expectations, as witness the death spiral of the VIX shown in the chart below. Clearly, it is becoming increasingly difficult for traders and hedgers ' the nimblest players in the investment world ' to eke out a living. And if these intrepid souls can no longer cut it, what hope is there for the rest of us? (Click on image to enlarge) There are undoubtedly traders who would sacrifice their

[The following appears in Rick's Picks for the first time, although it ran in The Daily Reckoning earlier this week.] As indebtedness in its many insidious forms mounts globally toward an epochal climax, prudence begs the question of why lenders are still frantic to put even more unearned dollars in our sweaty little hands. Zero percent auto loans are everywhere; mortgage money remains easy to come by, even after a 150-basis-point tightening of administered rates; and anyone who is not deceased or in prison can borrow for 3% or less by writing a check on a revolving charge account. Why are lenders making it so painless for us to get in even deeper over our heads? Don't they know that it can only end badly for borrowers and creditors alike? The simple answer is that their greed long ago exceeded their good sense. Since it costs big banks and retailers almost nothing to raise funds for consumer loans, and because the alchemy of securitized debt has created a practically unlimited supply of lendable dollars, why not just go for it? And so they have, with the laudable goal of gaining market share, but with a relentless zeal that in recent years has savaged the moral and ethical boundaries of lending. And yet, in a legalistic sense, lenders appear to be acting rationally if not prudently, owing to certain provisions in a bankruptcy bill that recently was enacted into law after an eight-year struggle in Congress. I followed the bill avidly each step of the way, since it represents the one instance in my adult life where I've been on the same side of the political fence as the likes of Bill Clinton, Ted Kennedy and Charles Schumer, all of whom opposed the measure vehemently. Not surprisingly, the bankruptcy overhaul has the

With GM taking an historically unprecedented beating today, the following came across my desk: "I understand that GM cut a bunch of numbers this morning, so its shares are 'leading the market lower'. My understanding of the firm (I have no positions in it) is that it's a zombie. The finance arm carries the burden of paying for the enormous pension/health care/featherbedding boners long-ago managements gave away to the auto workers' union. The only interesting question about the firm is WHEN not IF it'll try to punt its liabilities onto the taxpayers. "So, the stock is a down a bunch today because, shock of shocks, GM's business is crumbling exactly along the well-publicized lines that've been covered in the press for a couple of decades. Is there some mechanism that accounts for this seeming re discounting of known news? Is it just the teeter-totter of cap structure arbs, where folks keep the (weakening/widening) bonds 'in line' with the stock?" Voodoo Financing Zombie is the right word, since only the voodoo magic of creative financing can make GM appear viable as a going concern over the long run. We should all be mystified by the fact that a company offering zero percent financing to so many buyers is supposedly making all of its profits from consumer loans. But that's another story for another day, one that I'm sure will be written. For now, though, even with the massive shrinkage of the firm's capitalization today, we need to recognize that GM shares are not going to zero in a month, or a week, or a year, or even in five years. To paraphrase Adam Smith: There's a lot of ruin in a nation's biggest manufacturer. How much ruin lies just ahead for the stock? My best-case target for the next 5-7 months

Hard to tell what was driving stocks yesterday: anthrax, higher oil prices, unfavorable lunar influences, rising bond yields -- take your pick. It may have been a combination of all of them, but if so, the net effect wasn't very dramatic. The Dow was off a piddling 59 points, in line with other indexes that eased lower from around midsession. We were tempted to cover part of our short position in the E-mini S&P earlier in the day, but the mini's lazy drift even in rally mode convinced us to stick with our bearish bet. The intraday high missed our stop by a couple of points before the futures dropped back 15 points. Because I'll be away for the next five days, I've provided in today's Inside Edition a trailing-stop strategy that can be implemented if the decline gets serious. So far, though, the selling has been tepid ' so tepid, in fact, that even the most modest of my downside targets has yet to be hit. The nearest lies at 1195.00, basis the E-mini S&P, and it would have been a logical place to cover at least a part of our short, had it been hit during yesterday's session. Since it wasn't, though ' the actual low was 1197.25 ' we'll let things ride for now. Let me add that 1195.00 looks like a very reliable hidden pivot support for those of you who are inclined to bottom-fish with micro-tight stops. Please note, however, that if the support is breached by more than two or three ticks, the next stop would 1189.75. A third pivot at 1185.75 is my worst-case number for the next day or two, assuming no avalanche lies in the offing. Like the other two pivots, it can be bottom-fished with the tightest stop-loss you can

We've had bids in below the market for the mini-Dow futures and the E-mini S&P, but two days of waiting has yet to see either order filled. These are not lows of any great consequence, just minor-cycle bottoms that in theory, at least, should yield low-risk entry points for some well-leveraged bottom-fishing. We're already short the S&Ps and have been looking for an opportunity to cover a part of the position. That would allow us to raise the cost basis for what remains, and to relax if the futures should rally against us for a short while. (Click on image to enlarge) Yesterday, though, both vehicles were having such difficulty falling the last few points to their respective targets that one might infer they want to go higher. On the other hand, the rally in shares looked pretty feeble considering that crude oil prices eased while the dollar index and bonds rose. With no compelling technical evidence to guide us, we'll call it a push and start with a clean slate today. We'll also lower the stop-loss on our short S&P position, since there's no point in putting a potential 30-point gain at risk just because things went so nicely in our favor for the first five days.

We added to our short position in the S&Ps on Friday's close, breaking a personal rule which holds that one should never stake out a new position minutes ahead of a weekend. But the temptation to augment our 'don't' bet proved irresistible, what with so many troubled-world bellwethers acting�troubled. Gold was staging for an assault on $450, bond yields were rising, bank stocks were getting pummeled, and crude oil prices were once again on the rise. It'll be quite a challenge for TV's talking heads to spin all of this bullishly over the weekend, so we shouldn't be too surprised if the glum mood that prevailed on Friday lingers into the new week. The weakness in bonds in particular is starting to weigh on investors, and even though 30-year Treasury futures have yet to reach the critical, bearish threshold I flagged here last week, they'll be in lousy shape to resist its pull come Monday. Not that that would catch every bond-watcher unawares. For one, fellow ex-New Jerseyan Burt R. appears to have caught the recent upturn in yields just right: 'Thanks for you excellent call on the long bond,' he writes. 'I used your hidden pivot to nail the low on mortgage interest rates. The 30 year fixed is up one half percent since I refinanced. I'll be watching your future recommendations to see if I can do it again at an even lower rate.' Re-Fi Boom,. R.I.P. I just re-fied myself, Burt, in order to get a recalcitrant ARM under control. But my guess is that you and I will not be refinancing again for a long, long time. In the first place, to cool speculation, the Fed is rumored to be intent on preventing yet another re-fi cycle from gestating. As we know, the central bankers have

With bonds up and oil down, Wall Street breathed a small sigh of relief yesterday, sending the Dow Industrials moderately higher in an otherwise eventless session. Despite the rally, we still feel pretty good about our short in the S&P. There are two good reasons for this: first, we initiated the position at an unbeatable price, 1229.50; and second, Monday's price peak in the Dow at 10984 generated some of the ugliest stochastic readings since December's top. Check out the chart. Each series of price tops since late 2004 has generated correspondingly lower stochastic peaks on the daily chart. This suggests that, as the Dow was making higher highs, sellers were becoming more aggressive, buyers more timid. (Click on chart to enlarge) Sometimes it is quiet distribution that puts a top on a rally, but the distribution evident in the chart is of a less subtle variety, more closely akin to an anaconda making its way across 42nd Street. A serendipitous pullback in oil over the next few days could make it easier for the smart money to slither a little closer to the exits, but they shouldn't count on this factor to endure for long. As you may be aware, we've already projected a rally in crude to at least 59.72, basis April. But oil quotes would only have to firm slightly to touch off a new wave of fear on the Street. Anyone who loads up on stocks at these levels is probably laundering money. We'll relax and enjoy the spectacle for a day or two, keeping an eye on our short-S&P position in case folly should erupt into hysteria.