June 2006

You know it's a dull week when the dangers of second-hand smoke get top billing on the evening news. On Wall Street the usual 'jitters' set in a day before the Fed was to announce its seventeenth rate hike in two years. To say that investors have been 'jittery' about this implies only that they have been reluctant to push stocks one way or the other for more than a few hours. Yesterday was a case in point ' a day that began with moderate weakness and ended with moderate strength. What it suggests is that the 25-basis-point rate hike that most observers expect is likely to happen, and no surprises. We waxed bullish here earlier in the week about the prospect of a bigger-than-expected boost of 50 basis points. That would have signaled a decisive end to the tightening begun almost exactly two years ago, even if there is reason to suspect that the central bank no longer has absolute control over such things. As we pointed out here yesterday, a global trend toward tightening in Asia and Europe has put pressure on the Fed to support the dollar with higher interest rates. It couldn't happen at a worse time for the U.S., since housing bubbles are starting to deflate around the country even as real wage growth continues to stagnate amidst rising consumer prices. It is a mystery why household consumption should have held up for as long as it has, since higher real rates on property loans should have snuffed America's shopping binge months ago. Clearly we are running on fumes, even if nearly every dismal scientists quoted in the newspapers seems to believe the economy is in danger of 'overheating.' Actually, a Martian invasion poses more of a threat. *** Vancouver Seminar a 'Go' The Hidden

So much for my 'double-bagger' scenario, which had the Fed raising interest rates 50 basis points on Thursday instead of the widely expected 25. That would have flashed a clear signal that the tightening cycle begun two years ago was over, giving Wall Street, with its addiction to loose money, reason to celebrate, even if only briefly. But if things were actually about to play out that way, we should not have expected to see the stock market fall as sharply as it did yesterday. Shares suffered broad losses and the Dow Industrials fell 121 points, wiping out the previous days gains and more. So what might this portend? Much as we should like to think short-term rates are close to peaking, more likely is a scenario that investors would rather not think about ' i.e., that interest rates are going to continue to move higher for the foreseeable future. Global Liquidity Squeeze Some good reasons for this are spelled out in the latest edition of The Privateer, an excellent Australia-based financial newsletter published by William Buckler. He notes in the late June edition that a global liquidity squeeze just begun will force the U.S. to keep raising rates in order to attract the approximately $1 trillion in foreign lending that is required annually to keep the U.S consumption engine chugging along. A major source of such funds is the yen carry trade, which has allowed investors to borrow yen for practically nothing and then to invest the proceeds in U.S. Treasurys. But that game is due to end soon, notes Buckler, because the Bank of Japan has been draining excess reserves at a spectacular rate in order to head off an expansionary cycle of borrowing by consumers at home. In addition, the BOJ is expected to raise short-term rates by 0.25 percent

Merrill Lynch's David Rosenberg thinks it would make sense for the Fed to go for a double-bagger next week, raising administered rates by 50 basis points rather than the expected 25. I'd need three-to-one odds to take his side of the bet, but not because the idea itself sounds implausible. Actually, Rosenberg makes a pretty good case. He thinks it would be a good way for the Fed to clear the air, signaling an end to tightening and setting the stage for�another cycle of easing. He points out that the last three tightening periods have ended with 50-basis-point hikes and that this would be a good time to follow precedent. A 50-point hike is already priced into August debt paper, says Rosenberg, so why not just get it over with? If the central bank delays a final rate hike till August, he argues, it risks tightening at a time when the U.S. economy will be too weak to shrug it off, as it probably could now. Given the economic deceleration that is already occurring in the housing sector, Rosenberg, Merrill's chief North American economist, is probably right. But are the guys at the Fed as smart as he is? Helicopter Ben and his colleagues seem to think the economy is going gangbusters. But that's because they apparently believe all of the phony statistics that they themselves gin up every month. Rosenberg, on the other hand, probably talks to his neighbors and understands, as few economists seem to understand, that the picture of a supposedly strong economy is as phony as a $4 bill. With an imploding housing bubble threatening to trigger a deflation in the U.S., and with some real estate loans now running above 9%, we need a few more rounds of tightening about as much as a guy with a neck wound needs a tourniquet. If

The signals in Gold have been mixed, to say the least, but there have been some subtle hints lately that the correction begun nearly six weeks ago may have run its course. Earlier in the week I'd said that a print above 595.10, basis the Comex August contract, would be mildly encouraging. The Auggies did indeed surpass that number, topping at 598.30 in the wee hours yesterday. However, they have since receded with the tide -- to 582.40, a low recorded around 4 p.m. Thursday. At this point we can only speculate on Gold's demeanor from day to day, observing the way in which the August contract interacts with minor hidden pivots off the 5- and 15-minute charts to gauge trend strength. The nearest such telltale is a hidden-pivot support at 579.00, and it should be monitored closely by anyone who trades or follows gold during the night session. An easy breach of that number would imply that a new, minor cycle of weakness may be starting ' one that would presumably dominate for at least the next day or two. The pivot is tradable with the usual, very-tight stop-loss, and I've provided instructions for doing so in Friday's Touts. *** A Subscriber Cashes Out I would strongly encourage new Rick's Picks subscribers to participate in the Q&A sessions we hold every Wednesday morning. This is a highly personalized, real-time service that few other stock-market advisories offer, and it is clearly paying off for some of the 'regulars' who have been with us for a while. Here's a recent item that I hope will inspire you to give the forum a try: 06/22/2006 12:11:33 September Mini-Euro (E7) (1.2635) During yesterday's Q&A session, I recommended shorting the mini-euro at 1.2755, a hidden pivot. That turned out to be the exact high,

I made a nasty crack here yesterday about Charles Schwab & Co. that should be qualified, since the firm is a very good one that does more things right than most firms, and not just those in the brokerage business. I have elaborated below, in the context of a response to a recent subscriber's note. He wrote me as follows, under the subject header, A Subscription a Long Time in the Making: 'I first came across a column in the San Francisco Chronicle where at least seven years ago you wrote that prolonged lassitude in the markets often preceded precipitous declines. My wife and I had no money then but began to take notice of your subsequent columns. Early May of this year we noted your pivot point for gold at 710. We watched gold blow by to 730, then drop to 710, only to rise to 720 and drop back to 710. May 15, we sold most of our warrants in Agnico-Eagle at $18 bought at $3 two years ago and took $52k off the table. Gold's 'Inside Battle' 'We then watched with great interest gold's next pivot point at 599. Watched gold sink to 540 then recover to 570 and then yesterday read a Comex pit trader's inside view on what's happening (you probably read it), an anomalous, one-time event out of character with the past market moves, an inside battle between gold longs and central bank commercial shorts (see A Remarkable Development in the Gold Market). 'We just subscribed to [Dr. Kurt] Richebacher's [monthly] letter and in January he had recommended shorting financials. We were looking at leaps on Goldman, Citi, etc. (if they even exist) when this morning we read your comment, '..as though we were some schmuck with a Schwab options account etc.' 'We just

Except for the weatherman, guys who make a living predicting things can't be entirely comfortable predicting that 'not much is going to happen for a while.' An extended forecast of 'partly sunny and mild' may go down easy with TV viewers, but just try telling a bunch of traders and investors that the stock market is about to turn tediously uneventful for the entire summer. What evidence do we have? The very idea of a do-nothing summer seems implausible to me, given that the real estate bubble has already popped, and with it any chance that the consumer economy can continue to waft along on Fed vapors and home equity loans (currently around 9 percent!). (Click on chart to enlarge) But putting aside such logic, there is the chart above, of the Dow Industrials, to consider. No question, the selloff from early May's highs has been a nasty one ' nasty enough that it will have put the fear of recession into many otherwise complacent investors' heads. Moreover, considering that it follows a dramatic yield curve inversion in February, it would be almost freakish if we were not seeing the first stage of a bear market that is likely to last many months, if not years. But what troubles me about this interpretation is the unmistakable reticence of the Dow's most recent down-leg. Steep as it was, you can see that it stopped just shy of breaching a very important low at 10661 recorded back in January. In the parlance of the hidden-pivoteer, this is an impulse leg that simply lacks guts. If it were otherwise, sellers would have hammered down stocks those last few inches, exceeding the January 20 low. The fact that they did not indicates to me that the bear is too weak to pick a serious

I'm a real tightwad when it comes to buying puts and calls, since the odds are so heavily stacked against retail option players that one cannot afford to give up even a dime of edge when entering or exiting a position. That said, it is becoming increasingly obvious that put options are no longer available in quantity at bargain prices, if at all, and that we may have to pay up to get short. (Click on image to enlarge) Our experience was telling yesterday in Citi, a particularly enticing short because it has so very far to fall. I'd recommended buying some Citi September 45 puts, noting that it might not be easy to get filled at our price. Here is what I wrote: 'Citi is not at or even near a hidden-pivot rally target, but we'll try to short it anyway, since the risk of missing the stock's inevitable collapse is high relative to the danger of getting squeezed for a measly point or two by its cagey handlers. For today, bid 0.60 for ten Sep 45 puts (CUI), contingent on the stock trading 48.25 or lower. Please note that these are not the kind of puts that are given away; they are more like collectibles, acquired only by traders who are patient enough to keep bidding for them every day, all day long. How Bargains Happen 'When would they come in for sale? Quite often, the process begins when puts of another series -- one that trades more frequently and in greater quantity -- come in for sale at a great price, prompting the market makers to buy them in size. They would need to hedge this purchase in some way, and that's where our 0.60 bid might come in handy. To the extent they are aware of our bid

Friday proved to be a triple-witching dud, the broad averages having shown no pluck at all following their whoopee cushion rally a day earlier. Still, by next Wednesday it could look like a one-day pause in a short-squeeze that has yet to play out. Fortunately, even without much price movement we were able able to make some position adjustments that have pared risk in some of the stocks we hold. For starters we sold for 26.92 half of the Goldcorp shares we'd acquired for 26.04, reducing our a cost basis to 25.16 for what remains. When I issued the sell recommendation intraday via the bulletin launcher, I advised you not to look back: 'The stock looks like it could move higher, possibly even reaching the target before the session ends, but we are selling some shares at this level nonetheless, because, as the old saying goes, no one ever went broke taking a profit.'     As it happened, Goldcorp was getting second wind, staging for a push to an intraday high of 27.38, where it settled at the close. The rally is encouraging, for sure, but Goldcorp will still need to push up to at least 28.73 by early next week to create a minor impulse leg robust enpugh to sustain the stock's nascent, bullish momentum.   Smooth JetBlue Flight   We also took some partial profits in JetBlue, which we'd held with a costs basis of 8.64. After selling another hundred shares of it yesterday 10 cents below the intraday high, the cost basis for the round lot we still own is 5.40. JBLU ended the week at 11.58 after peaking intraday at 11.98. We also had a few short offers out -- in the Mini-Dow, Beazer Homes and the Mini-S&P. All of these vehicles head-faked on the opening to within

Another bear-squeeze like yesterday's and some key stocks will be back up to levels worth shorting. Citigroup, for one. It soared like a condor yesterday, powered by bears who evidently stayed one day too long at the party. Here's what the day's action looked like 30 minute before the close: (Click on chart to enlarge) The gap on the opening was pretty standard stuff, but it became a sustainable gap later in the session when Helicopter Ben said something in public that evidently could not be construed as hawkish on interest rates. Small wonder, then, that the smoke-and-mirrors sector of the economy, led by Citi shares, waxed exuberant as the day wore on. You may recall that we were looking to short Citigroup shares a couple of weeks ago when it climbed above $50. Anyone who has laid out Citi stock above that price in the last six years would have found it difficult to lose money. Nor do we expect to. Actually, I'm not concerned so much about getting short-squeezed above $50 as I am about missing a winning trade because the stock never got to $50. Recall that the last time around, we were fixated on shorting a hidden-pivot target at 52.00 when Citi sputtered out well below it, at 50.41. A Flying Pig But no one ever said it would be easy to short a flying pig like this one. Typically, the most enticing shorts make their tops either with parabolic spikes that are all but unshortable; or by way of a wedge formation that tortures and mutilates bears who have piled on too early. In Citi's case, it is a wedge that has been forming, and it is being made more menacing by swoons such as the one we've witnessed this week. However, no matter what the stock does we