February 2007

Investors spent Monday walking on eggshells. Do they perhaps think that by acting so meekly they’ll be able to avoid confronting all of the important economic data due out this week? We’ll be better able to judge for ourselves this morning, when figures for existing home sales in January are released. The consensus expects a very mild rise of 0.3%, which is likely to cheer no one. But who knows? Perhaps if the number is awful enough it will stimulate the endorphins of the many who, one surmises, have been praying for Fed stimulus?

Whatever the case, prayerful investors had better be careful not to allow themselves to get over-stimulated, since any bad-new-is-good-news tidings could be reversed on Wednesday, when data for new home sales in January are scheduled to be released. What could be more confusing to investors than a bad-news-is-good-news kinda day followed immediately by a bad-news-is-bad-news kinda day, or even more vexatious, a good-news-is-bad-news kinda day.

Gold Consensus

However Wall Street receives the latest statistical nostrums, we can be reasonably certain it will not cause a panic in the Rick’s Picks chat room. In fact, it sometimes seems as though the room temperature varies inversely with the Street’s, and that, the duller things are on the stock exchanges, the more interesting the chat-room discussion. Concerning Gold, the consensus as of yesterday seemed reasonably confident that higher prices are coming. My own minimum target for the April Comex contract over the near-term is above $700, so check out the Chat page (or Tuesday’s Touts) if you’re interested in further details, since the day’s discussion will remain posted until the next commences.

The chat room continues to evolve in ways I could not have predicted, but one thing is apparent: Hidden Pivot expertise in the room has reached a critical mass. This has produced, if not bold certitude about where this or that stock may be headed, a rough consensus that can help bolster the confidence of novices looking for technical insights. There is also some real expertise when it comes to mining stocks, and a few of those who are in the room regularly appear to follow the industry very closely. But the discussion is often wide-ranging and yesterday included some observations about Martin Armstrong’s cyclical work, which points toward an imminent, and presumably important, stockmarket downturn from these levels. Again, if you’re interested in further details they are still available in the room.

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Wagga Wagga Seminar

Wagga Wagga?!? I just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in the South Pacific, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

When a deflationary collapse finally comes, we shouldn’t expect it to bring a flood of money-making opportunities, since it will not be the dot-com boom in reverse. There will be no instant billionaires unloading insider shares for 10,000 times what they paid for them. Students just out of college will not be jettisoning $60,000 jobs for a shot at ‘real’ money. Rank-and-file tech-firm workers will not be making plans to retire in their thirties to a life of exotic cruises, photo safaris and lucrative consulting jobs. And their spouses will not be tasked with calculating how much kitchen-remodeling $150,000 will buy.

More likely is that it will prove to be the most difficult of times even for financial geniuses, who could find themselves challenged to hold onto a fraction of their current net worth. Will the ’smart money’ shun distressed assets, recalling that even supposed blue-chip properties still had a long way to fall several years after the 1929 Crash?

Some Will Flourish

And yet, we know that among the economic survivors, there are certain to be a few who will not merely prosper but who will flourish. This point was driven home to me on Friday when I took my sons to an antique auto exhibit in San Francisco that contained some of the most jaw-droppingly ostentatious cars ever produced in the U.S.: the Packards, Pierce-Arrows, Marmons, Cords and Cadillacs that continued to roll off U.S. assembly lines even at the nadir of the Great Depression.

The exhibit is owned by the San Francisco Academy of Art and is closed to the public, so we gawked through showroom windows on Van Ness Avenue. Speaking as a car buff, I have never before seen a more magnificent collection of beautifully detailed, lustrously restored, automotive rarities than this one. If Jay Gatsby had been a car collector, the specimens on display here would have filled him with envy.

One cannot help but wonder who could have afforded these rolling salons in the depths of the Great Depression. Still, that there will always be buyers for such luxuries even in the worst of times seems a foregone conclusion. But we can scarcely imagine who those buyers will be, or the financial strategies that will have left their investment portfolios intact, the next time the U.S. economy finds itself in such extreme distress.

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Mumbai Seminar

Mumbai!? I just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in India, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

We’ve been using a 1469.50 rally target in the mini-S&P — a so-called ‘hula number.’ This is a term that I apply to forecasts about which I am so certain that, if they do not pan out, I have pledged to don a grass skirt and dance the hula in Times Square in the middle of winter. (Look for me in front of the Marriott Marquis if the forecast goes awry.) In this particular instance, the 1469.50 price objective looked like such a lock that, for good measure, I’ve promised to add a cocoanut brassiere to my outfit.

Considering that the S&P futures did nothing last week but screw around, coyly lapping at a ceiling a few measly points below my chiseled-in-concrete price objective, shouldn’t I be getting a little nervous? Well, yes and no. (You didn’t think I’d make such a ridiculous offer without having some fine print to extricate myself, did you?) No, because the fact that a hula number is not quite reached tells us, not that the forecast was wrong, but rather that the trend itself is about to reverse. The purpose of the hula number is to allow subscribers to very confidently get long or short at projected swing points, using stop-losses that risk mere pocket change if we are wrong. If the hula number is not reached, then it becomes a case of nothing ventured, nothing gained.

But if I am not nervous about having to don a grass skirt, I am a little concerned about a bull cycle that has become so constipated that, in an entire week, it couldn’t even deliver a few measly points to get us to the target. My hunch is that this problem will resolve itself either today or early next week, and that the futures will provide the minuscule thrust needed to reach the 1469.50 target. But I am obliged to mention that a failure to do so would turn stochastic indicators on the daily chart menacing, if not to say rancid.

I’ve reproduced a chart above so that you can see how the downward slope of the two most recent stochastic peaks diverges from the upward trajectory of the E-Mini S&P’s most recent price peaks. This is an unmistakably bearish divergence, and if it is not corrected via an upward price thrust by Tuesday or so, the condition will go from a blinking yellow to a flashing red. That would not necessarily cause us to throw in the towel on the 13045 DJIA target that has kept us on the right side of this demonically possessed stock market for so long, but it could presage a painful delay in getting there.

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Wogga Wogga Seminar

Wogga Wogga?!? I just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in the South Pacific, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

Bullion’s explosive move yesterday was attributed to a few factors, including short-covering, but the bottom line is that bullion futures appear primed to blow the supposed $700 barrier to smithereens. That would be nicely in line with our recent forecast, which was given here earlier in the week as follows: ‘There is granite resistance just above, at the confluence of two important Hidden Pivots, 680.60 and 682.00. If the futures jackhammer their way past those numbers, we can confidently infer that they are about to trash the psychologically important $700 barrier with equal aplomb, turning it from resistance into incipient support in mere days.’

No question, a jackhammer effect was what we witnessed. The April Comex contract rocketed $20 off its intraday low, pausing precisely at our 680.60 target for all of 20 minutes before making a final thrust to 686.40 to end the day. The relatively shallow pullback in after-hours trading suggested that bulls were fixing to romp once again, warning bears to think twice before taking a stand at $700.

Reuters take on the rally evinced the kind of cluelessness that can only embolden buyers:

‘U.S. gold futures surged more than 3 percent on Wednesday after a pullback in the previous session, as technical and fund buying, higher oil and geopolitical tensions pushed the precious metal closer to the $700 an ounce psychological mark.’ What a bladder-bag of mush! You’d have to be an old-timer to recall the last time ‘geopolitical tensions’ were cited as a reason for gold’s strength. Indeed, the price of bullion seems to have decoupled from world events in the 1970s. Has that link returned? Whatever the case, bulls should take heart in the fact that Gold’s biggest rally since June has evidently confounded the business-page scribes. Bullion will be pushing $900 an ounce before they figure it out. We don’t know what’s going on either, but if the $700 barrier is chop suey within a week, we can probably infer that something BIG is percolating beneath the gnarly surface of world events.

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Tahiti Seminar

Tahiti!? I just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in the South Pacific, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

We gave an all-clear signal for April Gold yesterday, only to see the futures reverse direction and go into a kamikaze dive after having touched a bullish tripwire the previous day. The tripwire was in fact a Hidden Pivot rally target at 676.80, and a short-term top there had been predicted when the futures were trading $14 lower. Sure enough, on Valentine’s Day, the April contract came within two ticks of our target, touching $676.60. This gave us reason to expect a pause for a few days, then a bullish lunge toward an even more important Hidden Pivot obstacle — a pair of them, actually, at, respectively, 680.60 and 682.00. We thought this thrust was under way on Monday when the futures popped to 677.80, a dollar above the original target. However, it proved to have been a false alarm when the April futures went into a steep dive yesterday.

So how bad was the damage? To answer that question, we’ve reproduced a chart above that helped us to anticipate the rally to 676.60. I’ve labeled the two prior lows that the current decline would need to surpass in order to create a bearish impulse-leg of daily-chart degree. Specifically, the decline would need to breach the lower of the two lows, 646.60, by at least a single tick. Moreover, this would have to occur without an intervening rally lasting more than a single day.

Bottom line: Yesterday’s selloff fell well shy of creating a significant bearish impulse leg. Also, the fact that it came from within $1 of a projected top is all the more reason to infer that we are witnessing a correction rather than end of the bull cycle that has dominated since October. And even a fall to $630 would not be worrisome as long as there is an intervening rally of at least two days’ duration along the way.

Hidden Pivot Temptress

Speaking of Hidden Pivots, the E-Mini futures have been too coy lately to generate patterns whose outcomes can be confidently predicted the night before. But nailing swing highs and lows in real time intraday has been another matter, and we have been routinely calling trend reversals within a tick or two. Yesterday, for instance, in the mini-S&P, we put up a chart in the Intraday Notes section to explain why a just-touched Hidden Pivot low at 1452.25 would likely mark an important bottom. In fact, the futures rallied 12 points from that number, reaching a high at 1464.00 that was just a single tick from a Hidden Pivot rally target disseminated in the chat room along the way.

The first target in particular was a gem, coming as it did from an ABCD pattern that was as far from intuitive as they come. My hunch is that rules-based patterns that don’t look so pretty are the ones that will continue to generate the most promising trades. Too many chartists are onto ABCD symmetry (aka the ol’ Gartley 1-2-3). But when we can identify ABCD wave forms that are as obscure as yesterday’s, it will tend to give us an edge over conventional chartists. For your perusal, I’ve left in the Intraday Notes section of Rick’s Picks a chart that peels the veil from our little seductress, showing the predictable logic of a down-cycle whose tradable beauty would be lost to most technicians, as it manifestly was to traders who had their pants down around their ankles when the v-shaped bottom occurred.

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Helsinki Seminar

Helsinki!? I just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in Finland, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

Fed easing just ahead? If there were any doubts about it before, they should melt away with this latest piece of bad news from an already staggering real estate sector: ‘Sharp Drop in Housing Starts Adds / To Fear of Wider Economic Impact’. Just how sharp? In fact, construction plummeted in January to the lowest level in almost a decade, according to a Wall Street Journal report published over the weekend. New homes were down 14.3% from December and 37.8% from January 2006 levels.

The Journal is usually quick to add a disclaimer to such disquieting news, and so it did, reminding us that the building slowdown could conceivably reduce the inventory of unsold homes sufficiently to speed a recovery. Even so, the story’s emphasis was on the potential negatives, to wit: ‘The possibility of further deterioration in the sector this year remains a primary risk to economic growth ‘ particularly if it is accompanied by rising loan defaults or a broad tightening of credit standards.’

Of course, the U.S. economy needs a tightening of credit standards about as much as a lung-cancer patient needs a year’s supply of Pall Malls. Helicopter Ben evidently agrees or he would not have touched off a mini-stampede on Wall Street last week with some unwontedly dovish comments on inflation. But don’t expect the Fed Chairman to elaborate on why inflation appears to be moderating, since just a tad more ‘moderating’ of real estate prices than we’ve already experienced could push the U.S. economy into the deflationary maw it has been skirting since the tech-stock crash six years ago.

Psychological Blow

Even if Captain Whirlybird never again uses the word ‘deflation’ in public, he surely understands that a credit implosion would prove far more lethal than whatever inflationary red herring he can conjure up to take everyone’s minds off our real problems. Easing is coming, and soon. When it does, we should not allow ourselves to get so caught up in CNBC happy-talk that we’ll be unable to judge for ourselves whether it is working ‘ which is to say, boosting asset values so that we can once again borrow wantonly against the equity in our homes.

Whether another round of Fed easing will suffice to kick housing-mania back into high gear seems dubious, given that the real estate boom has already suffered its worst psychological blow in a generation. In any event, it will take nothing less than a full-blown re-fi frenzy to move the economy, since it is now requiring upwards of $8 of fresh credit to generate a single dollar’s worth of GDP growth. I predict that administered rates will be down to 3.5 percent by summer, but don’t be surprised if housing prices ‘ and the stock market ‘ have barely budged.

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Helsinki Seminar

Helsinki!? I just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in Finland, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

Urban homes prices fell across the U.S. in the fourth quarter, according to the National Association of Realtors. No surprise there, given the glut of supply and the growing feeling among buyers that waiting might bring even better deals come spring. This seems logical, since would-be sellers who gave up are apt to try again, flooding the market with re-listings.

The shocker in the Realtors’ report was that among cities where real estate prices rose, my hometown, Atlantic City, topped the list with a 26 percent gain. Twenty-six percent! When I left for California in 1978, the first casino had just opened and the faded Queen of Resorts looked like it was on its way to becoming Camden with casinos. And so it did, as anyone who has visited the town would attest. With all those new billions of dollars flowing through Resorts International, Bally’s, Golden Nugget et al., just enough of it trickled onto Atlantic City’s streets to make the city the ugliest, most unredeemably trashed-out cesspool-of-a-resort in the history of urban redevelopment.

Politics and Prison

Am I being a bit harsh? Well, you’d have to have grown up there to know just how far the town fell after it supposedly hit bottom as a result of a failed urban renewal project in the 1970s. The city had razed 80 acres of mostly big old houses built in the 1930s and 1940s, but when it came time to replace them with bigger and better amenities, the lead developer got cold feet and walked; then others followed. The city couldn’t sue the builders because it had negotiated contracts that were full of holes. After that, a few mayors and councilmen went to prison, an Atlantic City tradition. By the time the casinos got rolling in 1978, they were able to run roughshod, since there was no political leadership in Atlantic City to negotiate with them.

And that’s why the town, even with a dozen casinos, is such a dump. I grew up on the other end of the 7.8-mile island ‘ ‘Downbeach’ ‘ in Margate, which was to Atlantic City what West Caldwell is to Newark. Margate continued to prosper when the casinos came along, and even the somewhat run-down neighborhood where summer rentals thrived grew less seedy over the years. But I can’t imagine which homes in Atlantic City might have helped to produce a 26% price gain in the last year. It’s certainly more appreciation than I’ve had in my home since moving to the Denver area in 1999.

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Beijing Seminar

Moscow? Just wanted to see if you were paying attention. In fact, I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, though not in Beijing, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending a Florida class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

Finally, there’s a way to literally bet against the house in the event of a real estate collapse. A California firm is offering cash on the barrel head for up to 15% of the value of your home in exchange for a 52.5% share of any capital appreciation when you sell it. We at Rick’s Picks have inferred that the intention of the company, San Francisco-base Real Estate Equity Exchange Inc, or ‘Rex,’ as it is known, is not to insure homeowners against deflation, since Rex would never make such an offer if it thought real estate prices were about to fall.

Consumers may not think so either, but with home prices across the U.S, already having declined 10 percent in the last year, it might look like a decent gamble, especially to that undeniably broad swath of Americans who are ‘asset rich but cash poor.’ From Rex’s point of view, it’s a straightforward way to earn 3.5% of the gains for every 1% it pays homeowners for the option.

Not So Crazy

It’s not as crazy as it sounds, since the deal would allow consumers to tap the equity in their homes without incurring any debt or payment obligations. There would be no taxes on the cash received, and property owners would have up to 50 years to sell, according to Investment News, a weekly newspaper for financial advisers that reported this story in its February 12 edition.

Naturally, Rex’s competitors in the reverse mortgage business were quick to diss the product, suggesting consumers would never go for it. ‘The biggest downside is the 50% capital gains for a measly 15% of the house,’ said Scott Hanson, co-owner of a reverse-mortgage firm headquartered in Southern California. Hanson might be right if the Rex product were designed merely to allow consumers to extract cash from the equity in their properties. But Rex would also be sharing in the homeowner’s downside risk, and that fact will give its product a kicker that reverse-mortgage firms cannot match. Fees charged by both firms are comparable: Rex would assess a service charge of $15,000 when a house is sold, while reverse mortgages typically generate an origination fee of about $17,000.

Rex’s Deep Pockets

Rex’s biggest shareholder is American International Group, no slouch when it comes to handicapping asset risk. According to Investment News, ‘The company has agreed to provide capital to homeowners through a hedge fund it set up, Odin Investment Management LLC of San Francisco. AIG also is the largest participant in that fund.’

My prediction is that this product will prove to be so popular that Rex and its backers will close the door to new business within 18 months. Assuming the venture is moderately successful and Rex strikes a deal with, say, 50,000 homeowners living in dwellings with an average value of $500,000, the firm and its partners would be on the hook for $3.75 billion should real estate prices merely stagnate.

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Boca Raton Seminar

I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, among other places, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending the class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.

Some analyst at Merrill got excited yesterday about GM’s dubious plan to revive SUV giveaways, and, lo, the Dow Industrial Average takes a hundred-point leap. But as the Nasdaq chart below makes clear, even speculators who bought yesterday’s rally didn’t have their hearts in it. More like their cojones, which got caught in the ringer when Da Boyz decided to short-squeeze a stock market that had grown quite oversold. With the (economically insignificant) news kicker that Alcoa might be a takeover target, the point-shavers lost no time leveraging tepid news into a manic buying spree in the opening minutes. The Dow Industrials were up 60 points before anyone could blink, and it appeared doubtful by day’s end that shorts had been able to cover much.

(Click on chart to enlarge)

Perhaps they’ll get another chance today, since, as mentioned above, there were clear signs that the rally lacked heart. Notice in the chart how the day’s high fell a penny shy of the previous day’s visually arresting peak at 44.01. According to the “look-to-the-left” rule that I teach at the Hidden Pivot seminar, any rally leg worthy of our respect and attention will, with its final gasp and just for good measure, take out one last peak to the left of it. By that reckoning, yesterday morning’s short-squeeze was a dismal failure — a distribution ploy that we would be wise to watch from the sidelines.

Even so, phony rallies like yesterday’s have a way of turning into the real thing if shorts find themselves seriously on the ropes. We should therefore be on our guard this morning for signs of another nasty squeeze, albeit one that does not begin with a gap-up leap like yesterday’s. A soft opening that appears to slowly gain momentum in the first 20-25 minutes would fit the bill, since it would allow the arse bandits to suck up whatever stock has come in for sale overnight before they goose prayerful  pessimists and the unwary.

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Boca Raton Seminar

I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, among other places, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending the class. The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.