June 2008

Oil quotes zigged and stocks zagged yesterday, but the net result was not quite what we would have predicted. With July Crude off a whopping $3.34 on the day, we might have expected the Dow to leap with exuberance, given that investors have been consumed by worry lately about the skyrocketing oil prices. Instead, the Dow finished the day with a modest 69-point gain. What this suggests is that investors don't trust a mere one- or two-day selloff in energy futures. Is it perhaps because, each time this has occurred in the recent past, prices have rebounded to new highs with stunning speed? We have no doubt that a dramatic fall in the price of oil would be bullish for stocks. But judging from yesterday's price action in the latter, the decline would have to be sustained and significant in order to coax wary investors from their bomb shelters. A week during which oil futures have fallen by, say, $20-$25 would probably do the trick. But is this likely? From a Hidden Pivot perspective, despite yesterday's selloff, odds are still with energy bulls at the moment, since July Crude has an outstanding rally target $2.40 above the recent record high at 135.09. Moreover, in off-hours trading Tuesday night the July contract was turning up without having even gotten close to the 126.48 target of a corrective leg. So far, the bullish turn has come from a low of 128.10, implying that yesterday's decline may have exhausted short-term sellers. Duck and Run Our bullish outlook would change, however, if the July NYMEX contract, currently trading around 128.75, were to fall below 123.74 today. Alternatively, a thrust above 129.46 would be warning bears to duck and run. Speaking of bears, a CNBC guest yesterday suggested that oil players with a high tolerance

The Fed has been attempting to stimulate the economy like never before, but will it work? Some economists and pundits say it already has worked and that the U.S. has dodged the bullet of recession. These people are either dolts or publicity-seeking liars, or a combination of both, and we'd suggest tuning out their blather, since there is no factual basis whatsoever for their assertions that the economy has bottomed. And on what do these mountebanks base their optimism -- other, perhaps, than blind faith and/or an overweening desire to appear on television? Merely because no large banks have failed in more than a month is hardly reason to infer that our troubles are over. Far from it. And yet, the huckstering economists who would have us believe they see light at the end of the tunnel apparently have extrapolated their bullish scenarios from a recent uptick in retail sales that was due more to higher gasoline prices than any other factor. By this logic, we should expect the housing market to begin a powerful recovery as soon as gas reaches $5-$6 a gallon. A Trillion Wasted To the contrary, the economic recovery that more than a trillion dollars worth of Fed stimulus and bailouts has yet to engender can occur in one way only: via a resurgence in home prices. Nothing else that we can conceive of is capable of reviving consumer spending, and without plenty of it, the illusion of an economy barely creeping along that some still cling to will soon give way to the grim realities of subsistence. How would we know if and when a recovery is under way? Look no further than the 'For Sale' signs on your neighbors' lawns. Although this is the last place a navel-gazing punditry would think to look, it

We put out some bearish targets a while back, not expecting them to be reached so quickly. Now what? Our original advice called for bottom-fishing in the E-Mini S&Ps, Citigroup and the QQQQs, but we are seldom eager to attempt this when price targets are reached in the final minutes of the day, as occurred yesterday in two of the three vehicles. At the bell, stocks looked like they wanted to keep falling, but this must be weighted against the fact that index futures were actually wafting higher in after-hours trading. Granted, the buying wasn't very strong, and by early evening the futures had eked out only a 2.50-point gain from their intraday lows. But any such buying, no matter how feeble, should serve to remind us that profit-taking by shorts will tend to interrupt even the most devastating selling panics. Will yesterday's near-panic continue into week's end? We may have an answer early in Friday's session, since the E-Mini S&Ps were approaching a Hidden Pivot support that looked well capable of generating a tradable bounce. (See Tuesday's Touts for a detailed trading strategy.) If sellers turn the support into pulp, though, it would be warning buyers to move to the sidelines. The S&Ps have been very predictable lately, even if they've taken their sweet old time getting to their targets. We'd touted a bearish price objective at 1291.25 a while back when the futures were trading about 40 points higher. Because that was a fairly important Hidden Pivot support, we'd expected it to provide more support yesterday than it did. The seven-point bounce that occurred precisely from that number was the best of the day, but when the pivot gave way a little more than an hour later, it was signaling more, and probably considerable, weakness ahead. Fantasyland The

Small wonder that Congress' approval ratings are wallowing down around 14 percent these days. They could go even lower, too, by the time the World's Greatest Deliberative Body's latest Foreclosure Rescue Plan plays out. Have you heard about it? This legislative barf-bag is already attracting its share of flies, and it's not even law yet. Everyone wants a piece, and the Congressional Black Caucus of course thinks that it doesn't do enough to address the needs of African Americans. (For a complete list of all others whose needs may not have been adequately addressed, please consult the national phone directory on the Internet.) But, get this, some allegedly Conservative "Blue Dog" Democrats have the chutzpah to ask who's going to pay for it. Not to worry, since it will only be providing a measly $300 billion to the FHA, which would channel the money to "distressed" homeowners. Too bad taxpayers were not given the option of betting it all on the spin of a Big Six wheel. At least that would have given them a sporting chance of seeing a return on their money. The shaping of this legislative turd has been duly reported on the news pages of the Wall Street Journal, but you have to read Tuesday's lead story to get a bracing whiff of it. What it will provide, first of all, are the kind of mortgage loans that led to the "subprime mess" in the first place -- which is to say, loans to homebuyers who cannot come up with a downpayment. The private sector is no longer making such loans, and the FHA itself has told its benefactors on Capitol Hill that it no longer wants to make them either. Of course, that didn't prevent the bill from sailing through Congress. As Thomas Sowell once said,

Yesterday we offered yet another installment of our running dialogue with iTulip founder Eric Janszen concerning whether hyperinflation or deflation is more likely to destroy the U.S economy. We hesitate to call it a debate because we've never thought those in the inflationist camp have a leg to stand on. We'll believe hyperinflation is possible when the appraised value of homes in our neighborhood hit the billion dollar mark and wages rise commensurately. Below is the concluding portion of our most recent back-and-forth with Eric. He begins with the fantastic notion that the 'adjustments' taking place in the economy right now are likely to continue for years. We strongly disagree and see a cataclysm ahead. Eric: This will go on and on for years and years as living standards decline. Inflation is easier for people to adjust to than you'd think, certainly easier than 25% unemployment and no money around to buy anything as was the policy choice in the 1930s as wealth holders pressured the State to stick to the gold standard which tied the Fed's hands to create inflation. As soon as the US went off the gold standard in 1933 and gold was re-priced, an instantaneous spike in inflation from -10% (deflation) to +15% (inflation) resulted. And that after thousands of banks failed and the banking system had basically cratered. Those who hold fast to the theory that we are going to see commodity and wage price deflation as an outcome of this credit bubble don't seem to understand this part of the history of the last US credit bubble. A Bubble Like No Other Rick: History, like statistics, is more often than not a damnable lie, and it is a brazen intellectual lie to suggest that there has ever been a credit bubble even remotely like

Over the weekend, I posted a link to a Chicago Tribune article with a deflationary subtext about how Americans have been cutting back on lattes and sundry other small pleasures. I copied a few pen-pals on this, including Mish Shedlock, Jas Jain, Bob Bronson and iTulip founder Eric Janszen, the only inflationist in the group. In the e-mail donnybrook that followed, Eric exhausted Mish's patience with his standard schpiel, so in tag-team fashion, I took over for Mish. Immediately below, for your interest, are salient excerpts from the exchange I had with Eric. Please note that the dialogue is not entirely sequential, since all of my comments followed Eric's last e-mail. I have posed some questions below that he therefore has not had a chance to answer. Nor will I provide him with the opportunity to do so in this space, since my debates with Eric have a way of running on forever. I have given myself the last word -- I hope without having edited Eric too punitively. I have also generously embedded links wherever Eric sought to buttress his argument with previously published material. The discussion begins with my rebuke to his notion that Japanese gold bugs fared poorly during Japan's long deflationary wallow. Gold in Japan Rick: Better you should ask how the yen performed relative to all other classes of yen assets. Answer: Just fine. Gold in fact has always done relatively well as an investable during deflationary times. Still, as a hard-core deflationist, I have my doubts that the POG will get to Sinclair�s promised land above $5000 oz. Eric: The yen performed well because the yen is not a reserve currency, the Japanese experienced a hyperinflation after the war, so protecting the yen was more important than preventing deflation. In contrast, the Fed is

Short sellers on the New York Stock Exchange set a new record in the first half of June, amassing a total position of 17.6 billion shares. If that sounds impressive or even especially bearish, don't be fooled. In theory, at least, every one of those shares could have been shorted by traders and investors who are quite bullish on stocks. Actually, most short positions are initiated not by bears, but by institutions and floor traders seeking to extract profits from essentially riskless hedge positions. Two hedges commonly used are 'conversions' and 'reverse conversions.' Let's take a 'reversal' in Google as an example. With the stock currently trading $548 per share, you could lock in the three-sided reversal by shorting 100 shares of stock, shorting a September 550 put for $40 and buying a September 550 call for $39. If you work the numbers, you'll see that no matter what price Google is trading on September 19, when the options expire, your nominal loss on the position would be $100. Let's assume the stock is trading for exactly as much then as it is now, $548. You would have no gain or loss on the stock, but the put that you'd shorted for $40 (i.e., $4,000) would be worth $2 (i.e., $200), since the option would be $2 in-the-money. Your net gain from the sale of the short put would therefore be $3,800. But the call for which you had paid $39 (i.e., $3,900) would be worthless, so you would have lost that entire amount. Your net loss on the three-sided position, then, would be $100. If you were to work the numbers with Google trading for, say, $485 come September 19, you'd find that your net loss would still be $100. So why would anyone want to use such a

We don't have any easy answers, but we're hoping to hear from readers with ideas about how to return the U.S. economy to health. The person who submits the best essay on the topic What Will Save America will receive not only a scholarship to the Hidden Pivot seminar, but also unlimited access to post-graduate tutorial sessions held each week during market hours. The value of this package is $1,150, and just two days into the competition we've received no fewer than four submissions, including one today that argues that Americans need, more than anything else, to get serious about diet and exercise. Essays should be 750 words or less and must be received at this e-mail address by no later than July 15. For details about the Hidden Pivot seminar and comments from those who have taken it, click here. Our own idea about how to save America is to become a global leader in energy. A solution that works for the whole world would be a triumph for Yankee know-how on a par with the invention of the automobile assembly line. To stimulate thought on this topic and others, we will be presenting occasional guest commentaries by people with backgrounds in science and engineering. Economists need not apply. In the meantime, we welcome any contributions at the e-mail address linked above. We'll print the best of them once the competition has concluded next month.

With residential building in a state of near-collapse, we tend to think that the construction business in general is depressed. While this largely true, there are evidently some niches within the industry that are doing quite well. This point was driven home yesterday in the Rick's Picks chat room by a commercial builder and subscriber, John D., who occasionally drops in during trading hours. He bore news that Ainsworth, the largest wood panel supplier in America, was on the ropes because of the depressed housing market. Bondholders have taken over the company's day-to-day operations at the request of the family that has owned and operated Ainsworth. John's firm has been feeling the pressure of recession as well. Profits are down and margins are tight ' 'just like on Wall Street' -- and three large projects in which the company was involved have been put on hold due either to the lack of a tenant or of financing. Even so, he notes, there is construction business to be had if you can provide certain specialized services. Such as? In the case of John's firm, the services include retrofitting structures so that they can use solar energy. 'We are trying to hook up with solar companies to provide engineering and roof structure reinforcement for buildings,' he notes. 'It is a wide open market. Costco is going solar on many of its existing buildings, and structure reinforcement is an emerging market.' John says that many big-box retailers besides Costco are 'going solar,' and that this has driven him to try and market his firm's services nationally. But such projects take considerable know-how. Most existing structures cannot handle the additional loads that solar panels add, John explains, and the engineering is not simple. 'A good engineer can save big bucks on the reinforcement of