February 2008

Can you see the sky from where you are sitting? If not, go outside and look directly above you. Are there any $100 bills wafting your way? We didn't think so. So much for the theory that 'Helicopter Ben' would shower America with printing press money if something ever went seriously wrong with the economy. And no one could doubt right now that the economy is indeed in serious trouble -- so serious, apparently, that even the optimists are starting to admit that they see no end to falling real estate prices, one of our bigger problems. So the question naturally arises, why is the Fed letting this happen? Haven't we always been told that the central bank would never, ever let the economy collapse ' that it would pull out all the stops to prevent it? Well, the fact is, the Fed has been pulling out all of the stops ' most recently yesterday, when its chairman admitted that no policy other than more easing is being contemplated in an effort to reverse the country's steepening plunge into recession. My Neighbor's House But if the Fed's efforts are supposed to be preventing this, they have not noticeably helped my next-door neighbor Jim, who just lowered the asking price on the home he listed for sale less than a month ago. If that is the best that Helicopter Ben can do for Jim -- and for the neighborhood, with its excellent schools, lush golf courses, fabulous shopping, and easy access to good highways -- then how many other homes on the market right now are sinking in value even faster? Like the inflationists, we have never doubted the Fed would attempt everything in its power to prevent a financial disaster like the one that is currently unfolding. Where we long ago

Traders have a saying -- 'Opportunity moves to size' -- and we may get to see it play out in the form of a dramatic showdown in the gold market if the IMF receives a go-ahead from the U.S. to sell 400 tonnes of bullion from its inventory. The prospect surfaced yesterday when it was revealed that the Treasury Department apparently has been lobbying Congress to approve the sale, proposed last May by the IMF to cover a widening income shortfall. At a current price of around $939 an ounce, the auction would raise a little more than $12 billion. That may sound like a lot of money, but in comparison to, say, the quarterly losses that any number of large banks have reported recently, it would be barely enough to shore up the books of even one of them for more than a few months. But those 400 metric tons of gold would look microscopically small in comparison to pent-up demand for bullion from the very largest buyers, most particularly sovereign governments that hold sizable dollar reserves and who presumably are eager to hedge them against further erosion in value. Billions vs. Trillions As a practical matter, there has not been enough gold for sale to mitigate the kind of exposure we are talking about, since the foreign-currency reserves held by China, Japan and Europe alone total near $3 trillion. But even that number could prove to be small in comparison to the demand for gold from individual investors, most of whom are undoubtedly more nervous about the erosion of paper money's worth than the nations that print it. So with such huge potential demand, why on earth did investors dump gold yesterday, causing it to fall $16 in mere minutes when word of Treasury's support for an IMF

The most violent short-squeeze we've witnessed in more than a week transformed a despairing stock market on Friday into the proverbial lipsticked pig. But don't expect the little oinker to fly much higher when stocks start to trade again on Monday. The rally occurred with such unexpected swiftness, and so late in the day, that even the Wall Street Journal's market wrap-up lagged well behind the excitement and its apparent cause. A half hour after the NYSE closed, and nearly an hour after the blitzkrieg rally began, the Journal's Peter McKay was still reporting that 'Wary Mood Pressures Stocks.' In fact, it was the un-wariest mood imaginable that had turned stocks blithely higher, prompted by a 'report' that there were 'hopes' for a bailout of bond insurer Ambac Financial Group. We put those words in quotes because, an hour after the NYSE closed, it was still unclear where the news had come from. Columnist McKay referred in his lead to 'hopes for a bailout,' and to 'word of a possible deal to bail out the troubled bond insurer' in the next sentence, but he made no further mention of the story/rumor or its source. Thimble-Riggers Even so, there can be little doubt that the story was put into play by some of the most capable arse bandits on the Street, timed as it was to hit in the final half-hour of the trading week. The fact that it could not be sourced immediately, even by The Wall Street Journal, further suggested that the story was a plant -- and a spectacularly effective one at that. To put the reaction in perspective, if you had bought ten S&P futures contracts at 3:20 p.m. (EST), just before the rally took off, you would have made about $75,000 in a little less than thirty minutes. Not that we

Is stagflation taking hold? In our dreams, maybe, since its impact would be relatively benign in comparison to the economically lethal debt deflation now spreading from financial assets and real estate into the consumer economy. The Wall Street Journal, among others, seems to think that a combination of recession and persistent inflation is about to bring back the stagflation dirge of the 1970s. And while the following headline on yesterday's lead story in the Journal may have gotten the facts right, it entirely missed the implication of those facts for the not-so-distant future: 'Fears of Stagflation Return/As Price Increases Gain Pace.' That's true enough, at least for now. But our own theory, first broached here more than two years ago, is that the price increases we normally associate with inflation would eventually become deflationary. After all, how can the price of goods and services continue to soar if incomes are not rising commensurately? For tens of millions of Americans whose wages have barely budged in real terms, a rise in the price of gasoline means that they will have to consume less of somethng else. Nor is real estate inflation compensating any longer for the shortfall. In fact, property values are falling, and this can only further constrain consumer prices from rising in the future. Big-Ticket Items That doesn't mean that grocery store items that we cannot do without will necessarily fall in price, at least not right away. But the big-ticket items such as loaded SUVs, vacations and kitchen remodels certainly will, since demand for all of them, and for many other luxury items, is about to dry up as the country slips into deep recession or worse. We should also point out that in the 1970s, even with the oil embargo, gas rationing and high inflation taking their

Whenever bullion swoons $20 or more, as it did yesterday for the umpteenth time, we need to remind ourselves that it's only a game, one who's sole purpose is to keep gold bulls from making easy money on the most one-sided bet since Secratariat practically lapped the field in the '73 Derby. Who on earth could possibly think gold is a sale here? (other than Kudlow, of course. Some may recall that, years ago, he went on record in the Wall Street Journal with an op-ed piece purporting to explain why $300 was the 'correct' equilibrium price for bullion.) Anyone eager to unload gold at these levels -- or even more stupidly, to short it -- must necessarily believe that currencies are about to strengthen. Besides Kudlow, how many such fools could there be? In reality, any investor or sovereign government with significant exposure to fiat money is poised to hit the panic button. China, India, Russia, the Caliphate ' indeed, the entire world ' appear to be diving into hard assets with abandon, even if the assets are mere corn on the stalk. The Alchemists And yet, when Comex bullion contracts sell off hard for an hour or two, doubt metastasizes even among the hard-money faithful. Gurus who have been wildly bullish on metals since the 1980s start warning of a nasty correction, one that supposedly is long overdue. Conspiracy buffs curse the satanic lords of the House of Goldman. And the Alchemists lick their chops in anticipation of a Golden Age of Hoarding. But we see no evidence that gold is about to accommodate laggards with a prolonged selloff. Comex futures have been routinely hitting their rally targets, and we have every confidence that they will continue to do so, racking up yet one more conquest today or

What would it take to bring the price of oil down to $75 barrel? How about the completion of a bearish chart pattern such as the one imagined in the chart below? We can just hear Brian Williams on the evening news six months from now, introducing technical analysis to the masses: 'The price of crude oil fell sharply again today, hitting $75 a barrel ' the lowest it's been in nearly a year. Experts attributed the drop to the completion of a bearish head-and-shoulders pattern and predicted that if it breaks the neckline, prices could fall to as low as $68 over the next seven to ten days.' We're joking, of course. Even so, we thought it might be useful to visualize a bearish price scenario that is likely to be far from the minds of the news anchors and pundits in the days and weeks ahead. Admittedly, if you take away the imaginary red bars on the chart and focus on the actual price surge represented by the blue bars, it's hard to believe oil prices are going anywhere but up from here. Even by our own technical runes, a thrust over the next 3-4 weeks to as high as $116 cannot be ruled out, especially if quotes settle above a 'Hidden Pivot' resistance at $101. Global Downturn However, it's also possible this headline-grabbing rally is the blow-off that will cap oil's price for a long time to come. Fortunately, we won't have to speculate on whether an important top is at hand, since the power and resiliency of the rally will be manifest on the intraday charts. Specifically, if significantly higher prices are coming, we should see bullish Hidden Pivot patterns reach or exceed their rally targets on the hourly chart while corrective patterns fail to do the same. Hidden

U.S. markets were closed Monday, but global action in some of the E-Mini futures contracts suggests that a significant number of traders may have spent the holiday weekend sniffing glue. How else to explain the 17-point rally that seized the E-Mini S&P (see chart below) in off-hours trading Sunday night and early Monday morning? That's equivalent to about 130 Dow points, and Tuesday's opening could pump even more hot air into the buying binge if the short-squeeze driving electronic markets takes hold of the NYSE and Nasdaq. This egregious disconnect from reality is bound to seem even crazier to anyone who caught up on Wall Street Journals over the weekend. I spent the holiday skiing in Vail with a friend from New Jersey and his daughter, but I also imbibed the contents of a pile of newspapers that had accumulated to a disconcerting height, as newspapers often do. Two stories in particular left me feeling less than ebullient about the stock market. One concerned what Ahead of the Tape columnist Scott Patterson referred to as the housing sector's 'negative equity problem.' Patterson's belated epiphany is a good six months behind unmistakable manifestations of the problem itself, but his analysis at least puts the Journal on record as understanding the crux of the problem: 'Amid the hand-wringing about complicated credit turmoil lately,' he wrote, 'the economy's fate still hangs largely on something simple and understandable: the value of your home' Alas, No Panic Just so. But how long will it take now for the Journal's editors to glimpse the speeding locomotive at the end of the tunnel? Will it be another six months before they acknowledge on the op-ed page that the mere easing of administered interest rates has not transformed the most dismal housing market since the Great Depression into the widely hoped-for buying

Keen to short the shares of Citigroup, as well as those of the casino operators and certain other publicly traded companies hurtling toward certain disaster, we've patiently awaited the powerful short-squeeze that would finish off recalcitrant bears who survived January's 1,100-point Dow rally. But is it possible that all of the squeezing has already been done, and that the last breath of bearish buying power has been wrung from the market? This glum prospect occurred to us yesterday when the Industrial Average failed, for the second time in as many weeks, to convert a promising rally into something more than a one-day wonder. By our runes, the Indoos should have had little trouble reaching a Hidden Pivot target at 12704, since it lay a mere 150 points above the previous day's settlement price. What we saw instead was a feeble opening with barely any short-covering, and then a six-hour selling dirge that wiped out Wednesday's substantial gains. A similar trend failure occurred in late January, when a 1,000-point rally in the Dow over several days begot a relatively lame follow-through that barely went half as far. (Click on chart to enlarge) So what gives? From a Hidden Pivot standpoint, it's no trick determining exactly when we should turn bullish. All it would take is an uncorrected rally past the two labeled peaks shown in the chart. A 358-point thrust would have sufficed from Wednesday's high, but after yesterday's relapse the minimum requirement is now 560 points. Eager as we are to lay out tightly stopped shorts at such heights, we are beginning to doubt the buying power remains to take stocks there. Only Bears Are Buying Of course, when we talk about buying power, we don't mean bullish buying, but rather panicky short-covering. For, that is the only buying being

As if preparing for a spectacular suicide, stocks once again rampaged higher, blithely ignoring yet one more glaring sign that the financial system is falling apart. The Dow settled up 179 points on the day, seemingly oblivious to a distress flare fired into the sky by Citigroup. The beleaguered banking giant told the Associated Press that about $6 billion of mostly municipal debt auctions for which it had been the lead underwriter had failed the previous day. This came on top of a half-dozen other similar offerings in the auction-rate securities market that had failed prior to Tuesday. Auction-rate securities (ARS), a $250 billion market, serve effectively as a money-market vehicles for corporations, pension funds and other institutional investors. The actual securities ' long-term bonds and preferred stocks whose interest rates are reset at short intervals ' have long been treated as cash equivalents. However, the resets are typically at 7, 28, 35 or 49 days, and a precipitous price decline between adjustments can create very significant losses for corporate investors. Bristol-Myers Squibb, for one, took a $250 million charge earlier this month on auction-rate securities in which it had invested $811 million. Other ARS losers named in a recent Merrill Lynch report included 3M, Foundry Networks and Texas Instruments. However, thousands of companies use auction rate securities, so the problems that have shown up so far could be just the tip of the iceberg. The Psychotic Three If such developments were weighing heavily on the financial sector yesterday, they had little apparent impact on the broad averages. The psychotics in particular ' Apple, Google and Research In Motion ' all soared, with gains, respectively, of 3.5 percent, 3 percent, and 5.5 percent. Even the financial stocks managed to eke out small gains by day's end. Citigroup, for one, closed up 8