November 2006

Wall Street took a hawkish speech by Helicopter Ben in stride Tuesday as stocks turned in a mixed performance on signs that inflation evidently is still a concern at the Fed. It's hard to understand why the bankers should be so worried, given that home prices on Tuesday recorded their biggest drop since the government began tracking the statistic 38 years ago. Although sales of previously owned homes were up moderately, the national median home price plunged 3.5% to $221,000 from a year ago. That comes on top of price declines of 2.2% in September and 1.7% in August. Does that sound inflationary to you? Considering that pumped-up real estate has been the main growth engine of the U.S. economy for nearly five years, Bernanke & Co. should by now be frantic to find ways to re-energize the housing boom. Instead, in a speech that must have come from the cold depths of his obsidian heart, the Fed chairman dissed the working man, whose paltry wage gains in recent months supposedly are to blame for driving up the core rate of inflation. Should workers perhaps voluntarily return a portion of their paychecks to employers in order to goose 'productivity,' the Federal Reserve's favorite statistic. If productivity growth is so good for the economy, as economist, wonks and journalists seem to believe, then why hasn't it boosted the working man's real wages in more than a generation.? In fact, paychecks have not grown at all when discounted for inflation, and without the miracle of cheap, fabulous manufactured goods from China, the steady decline in Joe Sixpack's standard of living would seem egregious. Austrian economists such as Kurt Richeb�cher, whose work has been featured here many times, attach no special importance to the concept of productivity growth. They are wont to say

Admit it: Yesterday felt right as rain. The Dow Industrials opened down nearly a hundred points and looked like hell all day. It was almost like being in love. We've waited many months for the stock market to register at least a dim recognition of the disaster taking shape in the U.S economy, and Monday's effort may have provided a good start. Now, if sellers can just string together a few more such emetic events this week and next, pounding share values down to the point of rationality, we might even become buyers. Mind you, this wouldn't be bargain hunting, just playing for an oversold bounce; for, like Bob Prechter, we see the blue chip average eventually trading below 1000. By that time, we'll also be reading about squatters occupying Aspen's toniest ski chalets, burning books and furniture just to keep warm, and even the noobs on CNBC will be talking about deflation as though they understand it. If there was anything to mar yesterday's anti-exuberance on Wall Street, it was this disturbing picture of D.R. Horton shares: (Click on charts to enlarge) Now, we're well aware that there are some untethered bozos out there, a former Fed chairman unfortunately among them, who have declaimed an end to the housing bust. Their optimism is understandable, since, as in politics, the only way for an economist to scale the professional ladder is by telling people what they want to hear. But to see evidence that there are investors dumb enough to actually believe these lies is indeed disturbing. But what else are we to make Horton's price action yesterday? The stock began the morning with a tip-of-the hat to reality, plunging two percent in the opening minutes. But then look at what happened: Smack in the middle of its next crowd-pleasing

Pretty sneaky for the world to frag the dollar the other day, when U.S. markets would surely have preferred to loll about in a traditional Friday-after-Thanksgiving stupor. So what's next for the greenback? A Christmas-Eve gang-bang, perhaps? In any event, we should always pay close attention when the dollar is getting savaged, since the sums involved are probably sufficient on a bad day to topple the global financial system from its already wobbly pins.. Was there any evidence of such jeopardy on Friday? Not that I could discern, at least not from a coldly mechanical reading of the charts. Below is a long-term picture of the Dollar Index, which settled on Friday at 83.38. Although this slightly breached a 'midpoint' Hidden Pivot at 83.52, implying at least somewhat lower prices, the worst-case scenario over the next four to six weeks would call for a drop to no lower than 79.74. Thereafter, we would probably be looking for a strong rebound. Now, you don't have to be a technical analyst to see that holding above 80 is absolutely crucial to perceptions of the dollar's health. It has crossed that threshold only once, in 1992, and not by much. If the support were to be decisively breached any time soon you could kiss the U.S. economy goodbye, since it would create an impossible dilemma for the Fed. At that point, the central bank would be forced to defend the dollar with sharply higher interest rates, since foreigners might otherwise be inclined to take their surplus capital elsewhere. And what a financial catastrophe that would be! Realize that the current account deficit has been growing recently at an annualized rate of $874 billion, requiring external financing of more than $3 billion per day. Deflation Juggernaut But the problem with raising rates is that

Let's avert our eyes from the stock market today so that we might consider instead the heartwarming saga of Marc Gold, a childhood friend of mine whose good works have attracted the attention, most recently, of the San Francisco Chronicle and radio station WBEZ in Chicago. Marc is the founder of the 100 Friends Project, and his goal is to give away as much money as possible to the needy in Asia. Since the inception of '100 Friends' more than a decade ago, Marc has practiced philanthropy at its simplest, raising relatively small sums from a growing list of donors, then distributing the money on a case-by-case basis to needy clients in the villages of Nepal and Sir Lanka, and in the urban slums of India, Thailand and Afghanistan, among other countries. It was in the Himalayas where Marc had the epiphany that put him on his present course. He had met a woman there, Tsering Gyatso, who suffered from a chronic ear infection so severe that it could have been fatal. For less than the price of a cup of coffee at Starbuck's, he bought her antibiotics that literally changed her life. Another $30 provided her with a hearing aid, allowing Tsering to return to work. 'I thought, wow, this philanthropy stuff is great!' says Marc. 'She felt good again, and I felt really good too.' My lifelong friendship with Marc stretches back to the 1950s, when we were campers together at Camp by the Sea in Atlantic City. I am proud to call him my friend, and I would do anything I can to support his charitable efforts. If you would like more information about the 100 Friends Project, or if you simply want to make a donation, please click here to be taken to his Web site.

With rumors swirling on Monday concerning supposed Saudi bullion purchases, Rick's Picks subscribers tuned to the chat room wanted to know only, 'Where's gold going next?' The item that had stoked the rumor mill, extracted by a chat-room regular from one of the gold sites, was as follows: 'The markets have been moving upwards to some extent on the basis that Saudis and other wealthy Middle Eastern investors and sheiks have been moving money out of their own countries and their stock markets into US and European markets for safety. It is also alleged that they are accumulating vast amounts of physical gold for storage in London, Switzerland, and other parts of Europe.' No kidding! I should probably have someone on my staff check out this 'news' right away! And while I'm at it, I'll see what I can dig up concerning the tonnes of bullion supposedly missing from Ft. Knox. And reports that Judge Crater and Amelia Earhart were spotted together on the Jersey Turnpike. All Het Up Now, why anyone would get all het up about the immediate outlook for gold is beyond me. Look at the chart below, and you can see for yourself that there's not a whole lot going on: (Click on chart to enlarge) Here's what I wrote in the chat room, an attempt to douse gold fever with dispassionate analysis: I honestly don't understand how their could be a question right now about whether Gold is "bullish" or "bearish." If you want an answer -- a tradable one, even -- then simply look at Gold's charts. As we can see above, the daily chart is more or less neutral, suggesting that perhaps selling option straddles on bullion may be the way to go. Would you prefer to get long? Fine. Just go to

You had to marvel at the muted, insidious perfection of yesterday's expiration-day dirge ' a jazz funeral of sorts for near-the-money November puts and calls. Rick's Picks subscribers needed just a small rally in IBM to make our November 95 calls pay off at 4-to-1, but the stock's canny handlers would have none of it. Big Blue shares instead contrived to flatline for nearly the entire day, with most of the snooze-fest occurring within a 25-cent band and virtually all of it a dollar below the strike price we had bet would get blown to smithereens. (Click on image to enlarge) Traders are wont to ascribe such deathly price action as we saw yesterday to a perfidious, all-seeing 'They,' a cabal of malefactors who limo home to Rye and Short Hills each day, chortling over their success at having maneuvered yet one more expiration day to their certain advantage. But there really is no Mr. Market, only ourselves, to blame. To paraphrase Pogo's famous response to Porky, '�we have met the enemy and he is us.' Indeed, a coma-inducing expiration day like the one that just occurred tells us only that most traders must have been expecting the opposite ' that is, either a violent short-squeeze or a collapse commensurate with the scary, ongoing implosion of the U.S. economy. We had bet it both ways, straddling IBM calls with some January QQQ puts. The latter may come in handy, as I've already mentioned here, and you don't have to be a wild-eyed speculator to believe that a portfolio these days should not be without at least a small inventory of put options on a stock or index that could conceivably fall apart someday. A Day of Reckoning It seems all but certain not only that this will occur, but that

On a magnificent fall day, over lunch at Sam's in Tiburon, I spent as pleasant an afternoon as I can recall, reminiscing with my old partner in crime-solving, Kyle Rimdahl, and his helper Dorothy Jansizian. In the early 1990s, we worked together for the late Hal Lipset, the celebrated San Francisco private eye. Kyle took over the operational side of the business when Hal died some years ago, and Dorothy, a human archive, stayed on to assist Kyle. Hal's files stretched back to the 1940s, and Dorothy, who began working for Lipset Service in 1971, has a nearly photographic recall of every case logged over the last 35 years. Far from crime-solving, Kyle and I spent many hours doing surveillance work that was more Laurel-and-Hardy than Sherlock-and-Watson. Much of the time, sitting in a car for hours on end, our chief concern was not so much uncovering evidence of moral turpitude as it was figuring out how to take a pee without blowing our cover. One time, we were hired by a surgeon to tail his wife, whom he suspected of having an affair. We lost her when she drove into a Chinatown garage, only to learn later that she had decided to surprise him by showing up at his office to take him to lunch. The surgeon evidently slipped away from the table for long enough to call our boss and, in a panic, request that he call off his sleuths, whose services were costing him $150 an hour. Gay Bath-House The gay bath-house surveillance was probably low ebb, and you don't want to know the details. We did this ongoing job for the health department, which for reasons that became clear to me at the start, could not find anyone in its own ranks to take the assignment.

Our IBM Nov 95 calls looked brain-dead when I left for breakfast at a Berkeley eatery yesterday morning. What a difference 90 minutes can make! The stock had begun the morning on weakness, trading 40 cents beneath the previous day's close, and the options -- at one point more than $3 out of the money and with just a few days left on them -- were comatose, offered at 0.05 with no bids in sight. On returning from pancakes and eggs at the Sunny Side Caf�, I'd expected to find stocks mired in ugliness, but imagine my delight and surprise at discovering the blue chip index up nearly 90 points. The Nov 95 IBM calls had barely budged, but so what. With three days remaining for them to push into-the-money, and the stock sitting less than $2 below the strike price, I'd much rather be long this option than short it. (Click on table to enlarge) The November 95 calls ended the day on an 'arranged' sale at 0.07, even though my Black-Scholes model had them worth twice that. But you don't need a model to tell you that they represent a greater risk for the short-seller at this point than for the buyer who would be on the other side of the trade. The most the short seller could possibly make would be $7 apiece; but if Big Blue were to pop to, say, $96 between now and Friday ' hardly inconceivable, given the way the stock has surged on some recent days -- he would be out $93 apiece for them. Which side of that bet do you want to take? Now, that doesn't mean you should rush out and buy fifty Nov 95 calls this morning, since they still figure to be no better than a very

With the Consumer Price Index for October due out this Thursday, every investor and economist in bozo-dom is anxiously awaiting the latest shot-to-be-heard-'round-the-world. How utterly ridiculous that we should continue to obsess each month over whether the price of a dozen eggs, or a gallon of gas, has risen by a few pennies when there is a $10 Trillion deflationary juggernaut bearing down on us in the housing sector! Years ago, in the 1990s, when this silly obsession over an alleged 'threat' of inflation reached a cyclical crescendo, then-Fed Governor Lyle Gramley asserted very publicly that the Fed was almost certain to tighten -- if not at its next meeting, then at the one to follow. I asserted otherwise in this newsletter, and I will do so again now. Let me say it loud and clear: Listen up, you simple idiots: There is about as much chance of the Fed moving back into tightening mode right now as there is of a Martian invasion. Surely the eggheads and think-tank geniuses who are always fretting in public over the prospect of credit tightening must see what has been going on in the residential real estate market? Just last month it was reported that the average value of a home in the U.S. had declined by 9.7%. What this means ' explicitly ' is that every home 'owner' in America with a mortgage is now shouldering an effective real-interest-rate burden of more than 15 percent. Oh, sure, the eggheads will argue, what does the average mortgage debtor know about real, as opposed to nominal, interest rates? Not much, I would admit ' at least not in the academic sense. But you can be certain Joe Sixpack senses that the wealth effect he felt when home values were wafting blithely higher as recently