October 2006

For once, Teddy Kennedy got it almost right. Referring to the country’s draconian new bankruptcy code, enacted last year under the cynically titled ‘Abuse Prevention and Consumer Protection Act,’ Kennedy called it ‘an attempt by the credit card industry to ’squeeze an extra few dollars a month out of Americans who are down on their luck.’ Kennedy has captured the spirit of the bill, but not its diabolical intent. For in fact, creditors seek not merely to squeeze a few bucks out of the poor schmuck who got in over his head, but to keep squeezing more or less forever, if that’s what it takes to recoup the lion’s share of a delinquent loan. Indeed, the law as revised makes it so difficult for the beleaguered debtor to wipe the slate clean that it would have been more accurate to have called it the Creditor Protection Act.

Ironically, although the bill divided liberals and conservatives, their argument was not over whether the little guy should be protected from predatory lenders, but whether picketers who disrupted abortion clinics should be allowed to escape civil penalties by declaring bankruptcy. Clinton and the Democrats bottled up the legislation for eight years, but it sailed through under Bush, arguably the most pro-Big Business president since Reagan.

Wave of Bankruptcies

In the months before the new law was enacted, and as we might have expected, there was a wave of bankruptcy filings by people trying to get in under the wire. As a result, lenders weathered more than their share of abuse, at least for a while. This was on top of heavy Chapter 7 filings following the dot-com crash a few years earlier. No surprise here. Because it was relatively easy for deadbeats to walk away from their debts, many did.

We wouldn’t argue that reckless borrowers deserve the protection of the courts or a mere slap on the wrist for living wildly beyond their means on borrowed cash. But what about those who borrowed, not for shopping sprees and Caribbean cruises, but to meet monthly bills that continued to pile up? This question is not rhetorical, since its implications are about to be tested by the most severe economic bust since 1973-74. Since the housing boom ended more than a year ago, real estate prices have begun to fall with alarming speed. Suppose they continue to fall, leaving millions or even tens of millions of homeowners underwater on their mortgages? Under the circumstances, many households would likely find themselves in essentially the same financial boat as the deadbeat, unable to meet monthly expenses and unable to borrow.

Torch Mob

This prospect evidently has not occurred to the Wall Street Journal’s blithe op-ed team, which notes that so far, ‘the predicted doom [associated with the bankruptcy bill] has not arrived.’ Is there a dim echo of Prof.. Irving Fisher here? The Journal sees the revised bankruptcy law as a ‘modest reform at best.’ Maybe in good times, it would have been. But we see it as a noose around the neck of a vast number of homeowners. Americans will understand the financially deadly implications of the revised code as recession tightens its grip on the economy in 2007. We predict that the bill eventually will be rescinded and that the American public will call for the heads of those who lobbied hardest for its passage. Perhaps with a torch mob at their door, the Journal’s editors by then will have changed their tune.

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Last Call, San Francisco!

I’m in Vancouver now, teaching the Hidden Pivot Method, but there are still some seats left at the two classes that remain — in San Francisco on November 11-12; and in Sydney, Australia on December 2-3. You can request a registration form and further details by clicking here. Please specify which session you are interested in.

A few words concerning my unwontedly rosy forecast for the Dow Industrials. My prediction that the blue chip average eventually will achieve 13045 was not inspired by any particular thought, nor by events that may have occurred or which could conceivably occur, in the real world. It is in fact a coldly mechanical objective derived from the long-term charts, and in its coldly mechanical way, it implicitly acknowledges the fact that stocks can do just about anything without heed to events in what we should like to call the ‘real’ world. They can tumble into a relentless bear market just when the economy seems to be going gangbusters; they can do essentially nothing for seven years, no matter what the news; or they can soar, as they are doing now, even with a spectacular and potentially depressionary real estate bust glowering on the horizon.

But merely because my long-term charts point to an impending 900-point rally in a handful of Dow stocks does not necessarily mean we should become hand-over-fist buyers at these levels. In fact, we are only ultra-cautious buyers on pullbacks, even as we treat every Hidden Pivot rally target, no matter how minor, as a potential very long-term top — and a shorting opportunity.

Russell’s Observation

Headline highs aside, is it really a bull market? As Richard Russell once taught us, the fact that the stock market is making new all-time highs does not necessarily qualify it as a true bull. In his latest newsletter, Bob Prechter recalls Russell’s prescience on this point 33 years ago: ‘I can recall reading Richard Russell’s Dow Theory Letters in 1973, and he correctly said that the new highs in the Dow and S&P were part of a bear market. To many people this claim did not make sense, but he was correct. It was a corrective pattern under Elliott, other averages (like the NASDAQ and S&P today) were lagging, the real value of the indexes was not a new high, and the worst of the bear was yet to come.’

Just so. Prechter closes his letter with a statement that has caused me to rethink my own role as a forecaster who has predicted significantly higher stock prices: ‘At this point it would be dangerous to suggest the Dow will go up another 8 percent in case some people were to take it as a reason to buy,’ writes Prechter. ‘The responsible thing to do in this psychological environment has been, and still is, to recognize every possible juncture that could signal a top�’

I completely agree. And I would add that anyone who believes that the already fatal drop in home prices is leading the economy toward a soft landing is too stupid to argue with. The stock market and the entire economic system are so very close to unraveling that we should offer up a grateful prayer for each new uneventful day on Wall Street.

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Last Call, San Francisco!

I’ll be in Vancouver this weekend teaching the Hidden Pivot Method, but there are still some seats left at the two classes that remain — in San Francisco on November 11-12; and in Sydney, Australia on December 2-3. You can request a registration form and further details by clicking here. Please specify which session you are interested in.

It was morning in America yesterday on word that mortgage applications had risen 0.5 percent in the latest week. Investors lost little time bidding up the shares of some beleaguered homebuilders that we’ll always be thrilled to short at fat prices. And we did — in the chat room, taking a few bucks out of a shallow sell-off in D.R. Horton before having second thoughts. The stock had rallied off a weak opening and looked vulnerable, but by day’s end its strength had shown some staying power, and the stock ultimately gave back only about 20% of the earlier gains. This suggests that the short-squeeze on homebuilders may still have a ways to go.

(Click on image to enlarge)

The heart-warming rise in mortgage activity other than defaults can be ascribed to falling mortgage rates. (This is an election year, remember.) We have our doubts that it can last, or that the Fed will succeed in manipulating real estate borrowing to new and untold heights, but we don’t doubt that the easing in mortgage rates can continue for at least a couple of months after the November 7 election.

A Mixed Picture

There was other housing news yesterday, and taken together it yielded a mixed picture with a mildly bullish bias. Existing home sales fell for the sixth straight month, but the level of unsold homes also receded by 2.4%. This implies a backlog of about 7.3 months’ worth of houses, so if a sign has been sitting on your lawn for a while, don’t expect to be swarmed by bidders any time soon. And while 30-year mortgage rates were down to 6.40 in September from 6.52 in August, they are still a far cry from the 5.77% ‘giveaway’ rate that prevailed in September 2005.

Although the news overall was nothing to celebrate, neither was it so bad as to weigh heavily on a Dow Average that appears bound for at least 13000. We probably won’t be able to stop ourselves from shorting the likes of Beazer and Horton the whole way up, but if we can make a small profit doing so even we are wrong, as was the case yesterday. then where’s the harm?

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Free Hidden Pivot Calculator

I’ll be in Vancouver this weekend teaching the Hidden Pivot Method, but there are still some seats left at the two classes that remain — in San Francisco on November 11-12; and in Sydney, Australia on December 2-3. You can request a registration form and further details by clicking here. Please specify which session you are interested in.

We’ve been monitoring Gold’s vital signs very closely lately, since that may be the only way an investor could hope to jump back in without fear of getting maimed. Although my intermediate-term forecast calls for a potentially important low at $513, we remain open to the possibility that the turn could occur from higher levels. Right around here, perhaps? Maybe.

If so, according to the Hidden Pivot Method, the subtlest corroborating sign we could detect would manifest itself first on the lesser intraday charts such as the one show below. In theory, if a significant bullish trend is about to develop, it will be telegraphed by a growing failure of corrective patterns in all time frames to reach their downside targets.

(Click on chart to enlarge)

For instance, in the chart we see that December Gold bounced yesterday from within a single tick of a ‘midpoint’ Hidden Pivot target at 583.10. This is a tentatively bullish sign, and for all we knew at the close on Monday, it could prove to be the lowest print we’ll see in Gold for the next ten years. But we probably won’t have to wait very long to find out, since any slippage below the midpoint Hidden Pivot at 583.10 would strongly imply that its fully-extended, ’sibling’ target at 560.30 eventually will be reached. It is exactly this type of analysis that is featured every day on the inside pages of Rick’s Picks and which underlies the real-time trading strategies aired in the chat room.

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Free Hidden Pivot Calculator

I’ll be in Vancouver this weekend teaching the Hidden Pivot Method, but there are still some places left at the two that remain — in San Francisco on November 11-12; and in Sydney, Australia on December 2-3. You can request a registration form and further details by clicking here. Please specify which session you are interested in. If you act now, there is still a chance to claim a free Hidden-Pivot calculator and one of our snazzy Rick’s Picks combed-cotton polo shirts in your choice of colors.

Gold at $900 an ounce in 2007? That’s what one well-known forecaster predicted at the Committee for Monetary Research and Education’s annual fall dinner on Thursday in New York City, and he made a pretty persuasive case. Paul Van Eeden’s argument was all the more compelling because it was crafted strictly by-the-numbers. My own forecast has been calling for a correction to as low as $513 before bullion prices are likely to move significantly higher. Although my scenario would turn bullish if December Gold were to close decisively above $603 for at least a few days, I’ve maintained a somewhat gloomy bias since May, partly out of caution. After all, why continue to sink with precious-metal assets when it’s so easy to buy back in at the first sign of a turnaround? This we have done routinely in such stocks as Newmont and Goldcorp, losing only small change when several rally attempts in mining shares failed to develop thrust.

In his presentation, one of the best that I can recall on the subject of gold, Van Eeden compared gold inflation to dollar inflation, measuring the growth in the quantity of each to extrapolate a long-term trendline. The resulting graph left no room for doubt that a close long-term relationship exists and that, if it continues to hold, Gold would need to rise to just under $900 over the next year or so to keep things in line. Van Eeden’s analysis becomes even more persuasive to the extent it correctly predicted the May top in gold. At $740 an ounce, he says, bullion quotes had been driven too high by yen carry-traders who got caught with their pants down when the Bank of Japan announced it would tighten. To unwind by selling dollars would have been disastrous, since the carry traders would have been pushing the spread against themselves. Instead, they bought gold and base metals to hedge their dollar exposure, pushing metals to unsustainable heights.

Could Van Eeden be wrong about a big rally in gold even though his analysis is sound? Possibly. It would require the dollar to strengthen or at least remain stable, a scenario that goes against a consensus that believes the balance of trade impacts the relative value of the dollar. My take is that the dollar is no longer affected by trade flows, but rather by financial speculative demand. To the extent this is so, the 35 percent drop in the dollar that Van Eeden expects might not happen any time soon, even if our burgeoning trade deficit would seem to demand it. Indeed, as long as the dollar remains (by far) the currency of choice for leveraged speculation in paper assets, there is little reason to expect its collapse.

I’ve stayed on in New York City in order to attend the fall dinner of the CMRE ‘ the Committee for Monetary Research and Education. Newmont Mining’s president, Pierre Lassonde, is a featured speaker tonight, and I will duly report on his comments in Monday’s edition. Others on the program include Weeden’s Charles Maxwell, financial columnist Martin Mayer, guru Paul Van Eeden, and Bob Hoye, whose thoughts have been featured here many times. As you will already know, Bob and I share a hard-core deflationist perspective, as well as the minority viewpoint that falling asset values could cause an intrinsically worthless dollar to strengthen in the years ahead.

I was a dinner speaker myself at a CMRE event years ago, nearly as bearish then as I am now. This was during the allegedly ‘mild’ 1990-91 recession. I was concerned at that time that the sum of state and local public debt would scuttle the economy, much as a rogue wave mounts to catastrophic effect when two big swells come together. The late Ed Hart, the grey eminence at CNBC back then, before the kids took over, saw merit in my argument and invited me to speak before the CMRE. I was paired against a notable bull of that time, David Ranson, president of H.C. Wainright Economics. We did not debate, but rather presented our respective points of view. I say that he was a notable bull because he was willing to go out on a limb with a very bullish forecast at a time when recession had cast a dark shadow on Wall Street, as well as on popular perceptions of the economy.

I was so smug back then as to think Mr. Ranson had it all wrong ‘ that there was no way the economy would work its way out of such a seemingly deep hole. But it did, of course, perhaps more spectacularly than even he may have anticipated. The lesson I took away from my turn at the CMRE dais was that the stock market has a way of humbling, or even humiliating, forecasters who would profess certitude. It is therefore with an open mind that I will be listening to tonight’s speakers, the better to give you the benefit of their insider knowledge and exceptionally well-informed points of view.

I’m not sure whether it was sent in jest, but I got a ’say it-ain’t-so-Joe’ note from a friend yesterday bearing the following subject header: Ackerman, Last Bear, Capitulates? The answer depends on whether you’ve been following my forecast for the stock market, which has been very bullish, at least for the near-to-intermediate term; or my forecast for the economy, which is about as bearish as predictions get. But capitulate? Hardly. Rather, I expect the economy to tank once the stock market has had its last fling, as it seems to be doing now. My forecast calls for a thousand-point rally in the Dow that should take at least 10-12 weeks to complete. The precise target is 13045, and it is derived from the chart below.

This chart had been staring me in the face for too long to ignore its bullish implications. I did so anyway, at least for a while, because the economy seemed like it was ready to implode. While this is indeed occurring, driven by a deteriorating real estate sector that is already too weakened to jump-start America’s decade-long shopping binge, the mood of recession has not yet taken root. Nor can it as long as a handful of stocks are causing the Dow to make headline highs on a regular basis. This will cease at some point, we can be certain, but we should not make the error of thinking it must do so just because the reality of a housing bust and incipient recession are bearing down on us with irresistible force. It is quite clear that neither factor is significant in comparison to the powerful short-squeeze that continues to push the Dow average, if not much else, to new record highs. The squeeze is occurring because ‘everyone’ thought the stock market was ripe for an October bust. Under the circumstances, who is left to sell?

The ‘core’ producer price index rose an ostensibly whopping 0.6 percent in September, but only an economic nincompoop could be truly concerned about it. We prefer simply to re-add it to the list of red herrings currently distracting investors from reality. We should also note that it is one of the most abysmally stupid popular myths to have survived the late, great asset boom. With that boom now starting to dry up as quickly as dew on a rattler’s tail, inflation is the last thing we should be worried about. Rather, it is the rough beast of deflation, slouching in the middle distance, that is properly our biggest economic concern. Our only economic concern, to put things in proper relief.

The U.S. and world economies have been running on credit, as we all know, and it would take only a hair’s-breadth of slippage in the value of the underlying collateral to cause this flimsy, metaphysical edifice to implode. We are there now, as most property owners in the U.S. will already have surmised, and the dire epiphany of deflation can be no more than perhaps a year off, if that much.

The moment of realization will be less shocking if we come to it understanding that the ‘inflation’ the pundits would have us worry about is by definition the puny kind that occurs at the consumer level, and it is a function of a global economy that produces at most $55 trillion worth of goods and services in a year. That may sound like a lot of money, but it is just small change in comparison to a financial economy that supports global play in speculative vehicles with a notional value well above $300 trillion. If you view that sum as the un-’actualized’ potential of deflation, it is then, and only then, that you begin to understand how insignificant are the price increases we experience in our day-to-day lives. Forget about the rising CPI; the true dragon is deflation, and it is about to bear down on us with millennial force

Stocks marked time on Monday, allowing the purveyors of tired wisdom to rev up the silly notion that the avalanche of economic data due out this week will have some significance on the performance of shares over the near-term. We would argue otherwise — that the Dow is in the throes of a thousand-point rally come hell or high water and that, furthermore, corporate earnings, no matter how bad, will not derail this prediction. We have strong evidence of this already, since investors evidently had little difficulty last week shrugging off disappointment earnings from industrial bellwether Alcoa.

And neither has the bloodletting in housing sector had much of an impact, notwithstanding its crucial importance to the overall economy. Pulte, Ryland and KB Homes all took hits, but so what? What do they have to do with the mania that has been driving a handful of Dow stocks higher despite a darkening economic picture? Who needs a Plunge Protection Team when it’s so easy for Wall Street’s institutional biggies to stir up bull-market headlines merely by goosing ten stocks? To suggest that ‘weak earnings’ could turn this bullish tide is like arguing that a toot from a Tennypenny whistle could stop a cattle stampede. Stocks are going much higher, and don’t you believe that earnings, or even the state of the economy, has anything to do with it