July 2007

When we warned recently that Apple shares might fall to as low as $134 before rallying to a potentially important high near $153, we never imagined the stock would hit both of those numbers in a single day. But it very nearly did yesterday, when stellar earnings drove bears into a short-covering panic in after-hours trading. The stock had spent most of the day struggling to recoup a nearly $9 loss on Tuesday, when it plunged, along with a very weak market, to a low of 134.15. Before the earnings news was released after the close, bulls had been unable to push quotes much higher than $138 on the rebound. But when word hit the tape that the electronics firm’s profits had surged 73% on sensational Mac and iPod sales, DaBoyz let crazed short-covering do its magic. AAPL gyrated wildly in the minutes that followed, feinting first to 143.70, then plunging to 129.00. That was the day’s low as well as the starting point of an even more spectacular rally. An hour later AAPL had touched a high of 151.98 ‘ an 18 percent move in just under 60 minutes..

So much for the patently absurd notion that the stock market prices shares efficiently. This time, its inefficiency seemed almost comical, given that no sentient adult ‘ other than a Wall Street analyst, perhaps — could have been unaware of the red-hot pace of Apple’s hardware sales in the last few months. For our part, we see no contradiction in the stock’s hitting our worst-case and best-case targets in the space of just a few short hours. Oh, and by the way:  The 153.41 upside projection remains valid, and we wouldn’t be surprised to see AAPL make an important top there. It wouldn’t be the first time a stock became a ripe sale on great news.

We keep repeating the mantra that ‘Something Has Changed.’ Exactly what has changed, from a technical standpoint, is discussed below, as well as some reasons why we are quite certain now that the Fed will loosen, and soon. (Sayonara, US$!) Meanwhile, talk about ugly! Bearish as we were at the opening yesterday, the ferocity of the stock market’s decline took us somewhat by surprise. We were looking for a minimum 13-point decline in the S&P futures and said so in a trading recommendation sent out the night before: ‘On a weak close, the futures looked poised for a minimum 13-point fall to 1534.00, although further slippage to another Hidden Pivot support at 1531.75 would be implied if the higher number were to be breached by more than a couple of ticks.‘ Our intention was to bottom-fish at the lower target, but even after adjusting it downward to 1528.50 intraday, we still got socked for a small ($38) loss on a forced exit.

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We had warned of possible trouble in the shares of Apple as well, even though our longer-term outlook was bullish. Here’s the actual Rick’s Picks Tout that was sent out Monday night with the stock trading 143.70, just $1.50 below its recent all-time high: ‘Word that iPhone is vulnerable to hackers seems not to have much slowed the pace of AAPL’s ascent. For the record, our current minimum upside projection is to 153.41, a Hidden Pivot that comes from the monthly chart. However, the midpoint support associated with the target is down at 134.40 and, as always, a pullback to that number could occur at any time.’ As indeed it did — with a vengeance. Apple recorded a low of 134.15 on Tuesday, leaving us a tad less eager to buy aggressively at these levels, as we’d said we would.

We also bailed out of some October 50 Wachovia calls for a very small (i.e., $15 per contract) loss after it, too, exceeded what had looked to be an exceptionally promising Hidden Pivot support. Not everything we looked at in Tuesday’s edition went down, however. Newmont recorded a small gain and still looks likely to achieve a Hidden Pivot rally target provided to subscribers in yesterday’s Touts. And September Wheat spiked to a high that fell just two points shy of the 650^2 target we’d proffered, receding thereafter like the tide at Fundy’s.

Fed Will Ease, But�

What does it all mean? For one, that the days of complacency on Wall Street are over. To warn that that day had arrived, we used the headline ‘Something Has Changed’ atop two essays that appeared here in the last six weeks With yesterday’s routing of the bulls, evidence grows even stronger that the market is in the process of making ‘ or perhaps already has made ‘ a very important top. We note that, from a Hidden Pivot perspective, it has been years since we’ve seen pullbacks in the broad indexes correct all the way to their ‘D’ targets, much less exceed them as occurred yesterday. Typically, bull markets produce rallies that reach their minor- and major-cycle targets, while corrections make it only halfway to theirs. This dynamic now appears to have reversed; for, not only have the S&Ps over-corrected this time, they did so after having failed recently by four points to reach a 1569.25 rally target that had looked to us as certain as the daily setting of the sun.

Now, any bullish bets we make will be tied to extremely tight stop-losses, much as they were yesterday (and have been, as a rule). For it seems, finally, to be dawning on investors that the mortgage-securities debacle could threaten more than a mere handful of profligate lenders; moreover, that before it has run its course, things are likely to get worse ‘ perhaps much worse ‘ before they get better.

Countrywide Delinquencies

News yesterday that 24% of Countrywide’s subprime loans are delinquent and that, even worse, payments on 4.6 % of their prime loans are late, clearly shocked Wall Street, but it should not have shocked anyone who has been following this newsletter regularly. Nor will we be the least bit surprised when the Fed starts to ease again — and soon, as it absolutely must. This will provide a boost to stocks when it happens, but don’t expect the bounce to go very far. We have grave doubts that in an economy already hyper-saturated with debt, any attempted stimulus can succeed at turning back the deflationary juggernaut that has begun to bear down on debtors with irresistible force.

Is anyone else creeped out by the fact that financial stocks have failed to get in gear with the supposed bull market? We experienced this ominous divergence first-hand yesterday bottom-fishing in the shares of Wachovia [NYSE symbol: WB]. For the last couple of weeks, we’ve been expecting WB to fall to exactly 49.11, a Hidden Pivot support. However, a short squeeze intervened, testing our patience as it pushed the stock to 53.02 on July 13. We’ve been waiting ever since to get long at our price and were finally able to do so yesterday. However, Wachovia looked so dismal as to make us wonder whether we should be more careful about what we wish for.

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Actually, for Wachovia shareholders, the day didn’t start out too badly. In the opening minutes of the session, WB gapped to a high at 50.44 that was 46 cents above Friday’s settlement price. But the rally quickly faded, and the stock fell hard after DaBoyz finished raping those who had gotten long at the opening bell using market orders. For anyone who mistook the early action for real strength, the day could have been a disaster. By the final bell the stock had fallen $1.68 below the intraday peak and a whopping $3.74 below the equally spurious peak created by last Friday’s gap-up opening.

Wachovia: Trouble Ahead?

Mind you, Wachovia is not among those companies whose Q2 numbers have disappointed the Street; in fact, profits reported on Friday were up by 24 percent. But forward-looking investors noticed not the scintillating performance of months past, but the problems likely to attend Wachovia’s recently expanded mortgage portfolio as the housing market has continued to weaken. Similarly, the shares of Citi, no slouch in the lending department, disappointed yesterday, even though it too had reported stellar Q2 numbers on Friday.

At a time when the Dow Industrials have been moving to new record highs almost weekly, spurred by the manic performance of just one or two stocks on a given day (Merck was Monday’s excuse for a rally), the pronounced weakness of financial-sector bellwethers counts as just one divergence among many. Advance/Declines and New Highs topped last winter, utilities peaked in June, and two-thirds of NYSE stocks are trading below their 50-day moving averages.

Quite similar statistics must surely have obtained during the summer of 1929.

No sooner do we get done trash-talking Google than we hear they may be jockeying to take over the country’s (the world’s?!) cell phone business. If such an ambitious coup sounds implausible, click here for a persuasive prospectus from one Don Reisinger, writing for C-Net news. All they’ve got to do, says Reisinger, is win the FCC’s upcoming auction of 700MHz wireless spectrum ‘ as how can they not? — and the takeover will be as easy as shooting fish in a barrel.

Few would challenge the assertion that Google has the competency and self-assurance to pull it off. But even more compelling, writes Reisinger, ‘is the nature of the relationship between Google and telecommunications companies. Not only do they basically hate each other, they sit on directly opposite sides in the debate for Net neutrality. Simply put, I think Google would love to significantly damage these companies.’

Has Gordon Gekko returned from the 1980s wearing sandals, a Gap Tshirt and cargo pants?  For all we know, Google co-founder Sergey Brin eats guys like Gekko for breakfast. But he’s not known for such toughness, and if Google has the jugular instinct, it has been nicely camouflaged by the calliope of colors in the company’s logo, as well as by the ‘Who, us?’ demurrals when asked whether some of their Web-based applications have specifically targeted Microsoft’s Office suite.

Reisinger’s provocative think-piece came too late on Friday to save GOOG from the 50-point thrashing it received after the company reported earnings that fell every so slightly shy of the Street’s perversely all-important expectations. However, by day’s end, the stock had recouped more than 20 points of it.  That will likely suffice to have scared the bejeezus out of shorts, and to coax forth some panic buying by them when GOOG starts trading on Monday morning. Our 567.78 rally target — $9 above the all-time high — still stands.

We Had Gold’s Number

Speaking of price targets, the Rick’s Picks chat room was a good place to be on Friday, since the discussion was filled with them. One in particular, a 687.30 Hidden Pivot in Comex August Gold, worked out especially well for longs and short alike. It was announced when we first entered the chat room about an hour into the session. Gold had traded no higher than $683 when the following was posted: ['Good morning.] 687.30 is coming as a short term top in August Gold.’ In fact, as the chart below shows, the August futures topped with a spike to 687.60 a short while later. We had it in mind to get short there but were pleasantly surprised when an enterprising subscriber let it be known that he had bought Gold futures when the rally target was first aired. He posted as follows: ‘Nice call on gold, Rick. I went long one contract at 683.3. Set a stop at 682.2 and a sell limit at 686.6 (should have put in your 687.4) but I tried to be disciplined and risk one dollar for every three dollars of potential profit. It worked. Thanks.‘

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Some subscribers may also have enjoyed a pleasant ride in August Crude, where a 76.15 rally target had been predicted a couple of days earlier. Here is the recommendation exactly as it appeared in the Touts section of Rick’s Picks: ‘Crude didn’t pull back nearly enough to fill our stingy bid, so we ended the day empty handed. However, since the 76.15 rally target given earlier remains valid, we are still planning on shorting it with a very tight (i.e., 5-cent) stop-loss.‘ In fact, the August contract topped at exactly 76.13 on Friday, two cents shy of the target, before falling nearly a dollar to a 75.16 low.

Would that every recommendation proffered on Friday had been as successful. The spoiler was a bottom-fishing foray we recommended intraday in the E-mini S&P. Looking for the session’s best bounce on a day when ugliness prevailed, we stepped in to buy at a Hidden Pivot support at 1542.25, stop 1540.75. Alas, even though this stop was wider than those we typically use in this vehicle, it was not quite wide enough. The futures bounced six points from a low at 1539.25, only to find a more durable bottom a while later at 1537.25. It wasn’t that Hidden Pivots didn’t work so much as our having missed an ‘obvious’ pattern that worked even better. We’ve included a chart that shows this pattern in Monday’s Touts. See if you don’t agree.

We gave up trying to pick the Mother of All Tops when the Dow Industrial Average blew past a major target of ours at 13045 last April. As early as 2004, one could have seen this bullish explosion coming when the blue chip index tripped a major ‘buy’ signal of ours at exactly 10542. The predicted 2,500-point rally seemed pretty farfetched at the time, especially considering that the engine of the U.S. economy, real estate inflation, was beginning to leak air by 2005. In retrospect, Colorado-based quant Bob Bronson appears to have been the only forecaster around who was able to describe the nascent trend statistically. As early as two years ago, he was practically shouting it from the rooftops, joined by our friend Jas Jain, a provocateur and steadfast deflationist whose trenchant real estate reports ‘from the front’ ‘ i.e., California — circulate widely on the Web.

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So what of it, now that the Indoos have hit 14000 for the first time? We must confess that we were unable to imagine stocks would ‘go vertical,’ gaining more than 2,000 points in the last year alone, as the housing sector sank into its worst funk since the Great Depression? We were too busy making dire predictions to take the rally seriously, even if Hidden Pivot analysis had afforded us little wiggle room for doubt.

Our Worst Nightmares

And now, the odd thing is that some of our most dire pronouncements appear well on their way to being fulfilled. The most immediate of them, and potentially the most devastating to the consumer economy, is the tightening of the screws on debtors. We wrote here a long time ago that, at some point, a ‘low’ 6% mortgage would become a crushing burden to most homeowners. We are nearly there. Consider the homeowner who has a 6.5% mortgage on a $350,000 property with little or no equity. If the home decreases in value by, say, 3% – which, incidentally, has already occurred in about 70 percent of the country’s regional markets ‘ then the homeowner is carrying an effective real-rate burden of 9.5% — far higher, on average, than most hedge funds are making on their money these days. Now, any nut-job with a PhD in economics will say ‘Rubbish! That’s just theory. The homeowner knows nothing of real, versus nominal, interest rates.’ Well, the homeowner might not know the difference between real and nominal rates, but if his home has dropped in value even slightly, as opposed to rising as it has been for the last umpteen years, he can sure as heck feel that difference asphyxiating his zeal for spending.

That is where we are now: Waiting for consumer spending to collapse as homeowners begin to save with a vengeance. This is in no way avoidable, nor would a Dow rally to 15,000, or 20,000. change that fact. Keep that in mind as the shills on CNBC continue to find excuses for the stock market’s pathological disregard for reality. How high could the Dow go now? Don’t quote us, but the Hidden Pivot runes say that 17,331 is possible. Possible, we say — not likely.

It took the XAU Gold & Silver Index four months to reach a Hidden Pivot resistance at 152.98 and only two hours to demolish it. How bullish is that? Very. We generally try to tone down our precious metals forecasts, since bullion’s rallies over the last year-and-a-half have done little but disappoint. Indeed, for all but the most patient gold bugs, there have been too many false signals, almost, to endure. But we think yesterday’s thrust could prove to be the start of something big, for two reasons. First, as we noted above, it swept aside in mere hours a Hidden Pivot obstacle that we might have expected to hold back the tide for at least 2-3 weeks. And second, as you can see in the chart below, the rally created a robustly bullish impulse leg on the weekly chart, surpassing three prior peaks in a single bound.

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This is no small feat, technically speaking, and it has set the stage for a potentially much larger move to as high as 210.92, roughly 37 percent above these levels. If the price of physical gold were to keep pace, that would imply a push to as high as $921, and to around $18 for silver. The $921 target, a Hidden Pivot, lies within $14 of the $907 target broached here yesterday. We estimated that it had an approximately 40 percent chance of being reached within the next 4-5 months, but I’m going to raise the odds to 50 percent and allot more time ‘ six to eight months instead of the five to seven months originally estimated.

What could cause bullion to break out after 18 months of tedious consolidation? We really don’t know. But if it is predictive of a commensurate rally in oil prices to around $102, it’s not going to be pretty for the U.S. economy or the global geopolitical scene. Whatever the case, we will be monitoring Gold’s (and oil’s) technical signs very closely, assessing the rally one bullish Hidden Pivot target at a time. We’ve provided two such targets in the Touts section of Rick’s Picks, and although the pattern we’ve used to identify these targets is not intuitively obvious, we are confident things will play out as predicted.

Crude oil at $100 a barrel? Someone wanted to know whether we were joking when we broached the possibility yesterday in the Rick’s Picks chat room. From a Hidden Pivot standpoint, prospects over the next few months are not quite that scary, since the highest target I can predict right now with any confidence is a ‘mere’ 88.68. Significantly higher projections are of course possible, but we prefer to forecast stocks and commodities one target at a time. This helps us anchor our predictions firmly in conservative technical logic, as opposed to simply fabricating pie-in-the-sky numbers that some of our subscribers might be pleased to hear. On that basis, incidentally, Gold has a 40% shot at $907 per ounce over the next 4-5 months, or even $959; however, using Hidden Pivots, there is no empirical basis for asserting that $2,000 gold, or even $1,000 gold, is likely.

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Not so, $100 oil. In fact ‘ again, from a Hidden Pivot perspective ‘ a rally to at least $88.68 would become an odds-on bet were the August contract to close above 69.61 for two consecutive bars on the monthly chart. The futures have already fulfilled half of that requirement, recording a June close of 70.68. Now, with just a dozen trading days remaining in July, and August Crude currently trading around $74, it appears fairly likely that our criterion will be met.

In the meantime, no matter how high oil goes we can trade it from the long or the short side as opportunity dictates. Counterintuitive as this may sound, it’s a lot tougher to pick risk-averse entry points for getting long than short. That’s simply because ‘everyone’ knows oil is headed higher, and ‘everyone’ therefore would rather be long than short. Oil’s role in preventing ‘everyone’ from getting rich simply by employing a buy-and-hold strategy is to take nasty evasive maneuvers that are so wildly unpredictable as to make a ride on a Brahma bull seem like a snooze on an overstuffed couch in comparison.

Why We Shorted Oil

And so, not wanting to put more than mere pocket change at risk yesterday, that’s why we recommended shorting August crude at 75.03 with a stop-loss as tight as 3-4 cents. As it happened, this micro stop-loss would have been sufficient to hold the position, since the futures spiked to 75.05, just two cents above our number, before staging a 29-cent selloff. One had to be nimble to turn a profit, though, since the pullback lasted for only 35 minutes. There was a payoff besides cash, since the subsequent breach of the targeted resistance provided us with solid evidence that the rally is likely to continue, notwithstanding the $2 dive that occurred after yesterday’s high was in. (Note: Check out Wednesday’s Touts if you’re looking for a way to get long overnight or Wednesday morning that risks relative pocket change in theory.)

So why are oil quotes so buoyant? Some say energy prices are anticipating war in the Middle East. That’s always a possibility, and it could erupt as unexpectedly as the battle between Israel and Hezbollah last summer. If so, the direct involvement of either Syria or Iran that was lacking last year would easily push crude quotes to levels that would make us nostalgic for the $70 barrel. It would also goose gasoline prices to some threshold above $4 that is bound to test motorists’ ability so far to simply shrug off higher and higher prices.

I was away from my office and the Rick’s Picks chat room Monday, returning from a weekend with a college buddy, Peter Ricciardelli, who lives in Telluride. The loop that I drove took in some of the most scenic vistas in the Rockies. On Saturday morning, I had dropped my son off for a week of kayaking on the Green River in Utah. We arrived at his rendezvous point a little early, and I mistook a rugged-looking bunch of smokejumpers for kayakers. They had come to Grand Junction, Colorado, from Utah but were being redeployed to Washington State, where, they said, some bad fires had recently erupted.

After depositing my son with his river group I headed south to Telluride, pulling into town just as the sun’s last, brilliant rays were setting the peaks ablaze. The next morning, Peter and I went aloft in his single-engine Cessna, taking in the scenery from around 17,000 feet. The view from this height is quite different from the one we see from commercial jetliners, which typically fly at more than twice that altitude. Our 45-minute tour overflew the Silverton-Durango train line, a narrow-gauge railroad built in the 1880s to haul ore from the San Juan Mountains. It’s one of the top tourist attractions in Southwestern Colorado, and although my wife once worked as a guide for tours that came through that area, we’ve yet to take a family ride aboard the coal-powered Silverton-Durango train.

No Surprises

I arrived home early Monday evening, having failed by precious minutes to beat the Denver rush hour. The markets appear to have done little in my absence. We were looking to get short in a few select vehicles, but only Google among them made it to its rally target. This implies the broad averages will soon be in bullish gear again and moving higher, since Google is as good a proxy as we could have for the lunatic mentality that has been driving stocks into thinner and thinner air. Google need only have exceeded a Hidden Pivot at 555.76 by a few pennies to show its pluck, but the stock obliterated that resistance on its way to an intraday high at 558.58. The $3 overshoot all but clinched a thrust to a new Hidden Pivot that I’ve identified in today’s Touts. Since the new target has been a while in coming, we might expect a tradable correction when the stock gets there. However, it’s still too early to determine how much the August near-the-money puts will be selling for at that time, so we’ll hold off on detailed instructions for now.

Gold also disappointed when the August Comex contract popped a few ticks above a midpoint Hidden Pivot in the early going, only to succumb to gravity just as quickly. The move above the midpoint resistance was bullish, but I’d stipulated that the futures would need to close above it to signal an imminent thrust to our next target, a moderately ambitious one. However, despite yesterday’s weakness the futures remain in good position to make their move. Indeed, the target will remain viable as long as 660.30 is not breached to the downside.

In the column I wrote years ago for the San Francisco Examiner, I once conjured up ‘Monsters from the Id,’ a reference to the 1950s sci-fi classic Forbidden Planet. The film, based on Shakespeare’s Tempest, delved into the mysterious downfall of Krell civilization on the planet Altair 4. The Krell had reached the very pinnacle of technology with the creation of a reactor that could materialize their every need. Craving a magnum of 1961 Lynch Bages to wash down that steak au poivre? No problem. Just picture a bottle of the stuff sitting on your dinner table, and ‘ presto ‘ there it was.

We’ve learned to do a trick like that here on Earth, and it has enabled us to create trillions of credit dollars out of thin air. Need $26 billion to buy an international hotel chain? No problem — your investment banker can summon it for you electronically with the speed of a genie. Lusting after that luxurious office building on Park Avenue? Check your bank account ‘ a $500 million stake will be deposited within the hour. To say that the financial alchemists have mastered this game would be an understatement. In fact, they materialized nearly a trillion-and-a-half dollars for private equity deals and LBOs in the last twelve months alone.

Some big lenders, TIAA-CREF among them, are growing skittish, and even Moody’s has begun to sour on the orgy of funny-money buyouts. But given the irresistible incentives to consummate a deal, any deal, it’s clear that nothing short of a financial crash is likely to slow the mania down. Think about it. If you could buy the Hilton hotel chain for little more than it would cost to have a dozen lawyers gin up the paperwork, wouldn’t you jump on it? That’s what the Blackstone Group has done, using OPM to buy the Hilton chain for $26 billion ‘ a 40% premium over the pre-deal share price. Controlling the company has its perks, too, since Hilton’s new directors can now vote themselves a special dividend to cover their out-of-pocket costs for the acquisition. The bankers collect their fees; the lenders get to book, then securitize, gargantuan receivables; Friends of Blackstone get VIP suites and a free massages whenever they stay at a Hilton, and everyone’s happy. Right?

And so were the Krell ‘ until, that is, they started getting ripped limp from limb by some unknown force while they slept. Turns out this race of super-evolved geniuses had failed to consider their own primitive subconscious ‘ the vestigial, monstrous ‘id’ of their dreams ‘ in designing a machine capable of transforming mere thoughts into real things. In the end, there were no survivors. They were murdered while they slept, never knowing what hit them.

Monsters from the Id. Is the same fate about to overtake Wall Street’s alchemists?