The futures were moving timidly higher Monday night, probing blindly for resistance. Since the rally comes off a low that exceeded our 863.00 target yesterday by nearly three points, we can only infer that this is not an episode destined for glory. Even so, it threatened to lift a Hidden Pivot resistance at 873.50, and thence perhaps to set the curtains ablaze overnight. I suggest judging the buyers’ tenacity on the basis of whether minor thrusts on the 5-minute chart are able to pop past two prior peaks without a bend.
From the monthly archives:
January 2009
Citi should have gotten some lift from news that JP Morgan will take Smith Barney off its hands for more than mere peanuts. Instead, the stock has dropped like a brick, shedding nearly 20% of its value yesterday on top of an 8% loss in the previous session. All of the other financial stocks have come down hard as well, but it remains to be seen what has been troubling them. Meanwhile, the 14.79 target given here yesterday for JP Morgan, representing a 40% plunge from current levels, implies that something wicked is brewing.
The futures bounced for $7 from the 821.10 target given here yesterday, but the subsequent relapse to an intraday low at 815.10 is not a healthy sign. Whatever happens in the next 2-3 days, the juiciest buying opportunity I could conceive of — one with relatively little risk — would come into focus if the futures trace out a pattern similar to the one shown in the chart. Which is to say, our entry would come at the midpoint of whatever C-D leg follows the sharply impulsive drop from Friday’s 869.30 high.
We challenged readers to tell us how inflation could possibly occur with asset values, credit and business collapsing around the world. The response has been overwhelming and hugely insightful, and we promise to air your comments in the days and weeks ahead. (So that you don’t miss out on the discussion, click here to receive our free commentary each day by e-mail.) One submission in particular warrants the urgent attention of all, however: a recent essay by Peter Schiff, The Fed’s Bubble Trouble. A fellow gloom-and-doomer with an impressive forecasting record and the guts to tell it like it is, Schiff offers a scenario that is as persuasive as it is frightening. It also holds extremely bullish implications for gold, although we would be wary about holding onto the stuff for too long (see the essay linked below).
Schiff begins by noting that speculators started loading up on Treasury paper a few weeks ago, after the Fed explicitly committed itself to buying as much U.S. debt as it takes to hold interest rates down. For the speculators, this is practically a guarantee of riskless profits, and Schiff is most certainly correct to infer that the day is coming when the speculators will unload their inventory on the Fed with a vengeance. I won’t spoil the suspense for you concerning what is likely to happen next, since Schiff has spelled it out so lucidly in his essay. But suffice it to say, the outcome is hyperinflationary, and it would leave the financial system in smoldering ruins.
Although there do not seem to be any significant holes in Schiff’s thesis, he doesn’t tell us how an investor might protect himself as the financial system whipsaws from deflation to hyperinflation, and then back to deflation. And that is exactly the way we believe things will play out, although Schiff’s scenario goes no further than the hyperinflationary phase. He is also evidently too modest to say that he could not be wrong, so we’ll say it for him: The scenario he has described seems nearly airtight. He has left us an escape route, but judge for yourself whether he did so merely to avoid the implication of hopelessness: “To avoid this nightmare scenario,” he wrote, “the Fed should pull out of the bond market before it’s too late.” Fat chance.
Panic Into Hard Assets
If Schiff is right, there will be a panic like no other before it to convert dollars into hard assets. Gold will probably be the first such asset on every panic-stricken investor’s mind. However, having told you why we think the resulting price spike would be unsustainable (If Gold Hits $5k, Would You Sell?), we are obliged to come up with some alternatives. To that end, we would ask that you take a short survey. Our goal is to find out how readers would react in an all-out financial panic. There are just two questions in the survey, the results of which we promise to share with you. To access the questions any time after 1 a.m. Sunday (EST), click here.
The emphasis of Rick’s Picks will skew heavily toward the inflation/deflation question in the weeks ahead, because it’s crucial that we get it right We don’t expect a repeat of the Weimar hyperinflation of the early 1920s, though. That episode grew out of a period, not of deflation, but of relatively mild inflation from 1915 – 1919; and, reparation payments aside, there was a strong incentive – fear of unemployment — for Germany to inject money directly into the consumer economy.
Home Prices Won’t Soar
We also believe that home prices will not soar even if Schiff’s monetization scenario comes to pass. And there are two variables that make the process, if not the disastrous outcome, somewhat unpredictable: 1) the speed of the political response (i.e., how quickly the government expands its hyperinflationary efforts to encompass not merely the bond markets, but credit default swaps and other derivatives; and, 2) how quickly the earliest beneficiaries of hyperinflation deploy their vaporous cash into real assets.
Also, we’ll need to consider the fact that a perceived hyperinflation would destroy the long end of the yield curve, creating losses for holders of long-term bonds that would more than negate windfall profits on the short end. Under the circumstances, the scramble to shift collapsing currency into hard assets could be over in a matter of days; and then, the inevitable detumescence. The end result could be that neither inflationists nor deflationists would avoid ruin.
We’ll be exploring this conundrum in the weeks ahead, so stay tuned!
In quiet trading Sunday night, the futures were bound lower, presumably to a Hidden Pivot support at 866.50. There are other targetable downtrends in play, but a bid at 866.50, stop 865.75 would be the most conservative way to attempt bottom-fishing. I have included a chart that shows the ES at around 8:30 p.m., so that you can judge for yourself whether the opportunity has been compromised.It would take a robust rally to do so, since the point ‘C’ here is 914.75. _______ UPDATE: The futures slid past the 866.50 target, putting in a shaky low at 863.00. This corresponds to the higher ‘A’ in the chart, rather than the one-off ‘A’ that I used. If you plug in 942.75 instead of 939.75, you come up with a downside target at 863.50. This has been noted in the chat room in reference to bottom-fishing at the new target. A three-tick stop-loss would have been applicable, but I have suggested not attempting to enter the trade if you did not catch it the first time. With the financial stocks getting savaged, today’s weakness has the potential to turn into an avalanche.
Friday’s $24 upthrust, encouraging though it may have seemed, failed by a little more than $2 to surpass a key short-term peak at 871.40. If it had succeeded, that would have created a promising new impulse leg on the intraday charts. As it stands, and unless 871.40 is breached, the burden of proof over the near term will remain with the bulls. Specifically, a bearish, 821.10 target will remain in effect, as well as an 846.25 midpoint. A close below that last number, or a decisive move below it intraday, would raise the odds of 821.10 being reached soon. _______ UPDATE: Our target nailed the low of a $34 decline within a dime. Thereafter, the subsequent bounce of (so far) $5 would have allowed a stress-free exit on partial profit-taking, or a generous trailing stop on a single-contract position.
Even with government backing up-the-wazoo and a fat price from Morgan for Smith Barney, Citi has not looked very impressive; nor have any other financial stocks. This seems a clear warning that the strong consensus, even among reputable technicians, calling for a big stock-market rally to begin the new year should be viewed with heavy skepticism. Note in the accompanying chart how JPM closed beneath a well-defined midpoint support at 26.19, implying more weakness all the way down to 14.79. Citi is well above its corresponding midpoint support at 3.12, but that’s only because of the helping hand it has been receiving from a Federal Reserve evidently determined to chop up the bank and dispose of its parts before concern re-erupts over the quality of its assets.
The 85.22 pivot shown in the chart can be bought with a stop-loss as tight as 6 cents, and you could also short near 86.11, the c-d midpoint, with a stop as wide as 20 cents. This is for experienced traders only, and you’ll be on your own if either order fills. Officially, we’ll try to buy two Feb 87 calls (DAVBI) if the stock comes down to touch 85.24. _______ UPDATE: The six-cent stop-loss would have worked, since the Diamonds have bounced sharply off a so-far low this morning of 85.18 — four cents beneath the pivot target. Now, offer one of the calls to close for 3.25, making the order o-c-o (one-cancels-the-other) with a stop-loss on two contracts at 3.10. _______ FURTHER UPDATE: We scratched the trade when the Diamonds resumed their decline after rallying to 85.69. The fact that the rally lasted for only 30 minutes is evidence that still more weakness lies ahead.
Hey, inflationists! If any of you can explain how we’ll recognize the return of inflation, or perhaps the beginnings of a hyperinflation, I’m all ears. Click here and drop me a line, because I’d really like to know. Will hyperinflation steal up on us in the form of a doubling, then quadrupling, then octupling, of the minimum wage? Will homes in my neighborhood that have been sitting on the market since 2007 start to attract bidders waving freshly banded packets of $10,000 bills? Can we expect to shell out $100,000 at some point for a cart full of groceries? Will it cost $500 to ride the subway?
If I hear from anyone whose inflationary logic is both detailed and persuasive, I’ll reprint it here. But let me tell you up front that I’m skeptical — so skeptical, in fact, that I doubt that we would see hyperinflation even if the Federal Government were to pay off the mortgage of each and every American, or declare a one-year moratorium on income taxes. I will explain why in a commentary that is scheduled to go out over the weekend. I also intend to make clear why I believe that only those who possess physical gold are likely to come out ahead — relatively speaking – as deflation crushes all asset values. If you are not a subscriber and want to receive this commentary free via e-mail, click here.
Meanwhile, as promised, here’s a letter I received from an erstwhile gold bug who is no longer certain about bullion’s future. The author is Myron P, a Canadian who like myself was once a floor trader. He writes as follows:
Let’s see if I can get these thoughts across in something less than a thesis.
Overall question: Which way for Gold? I think up, then down hard.
Second question: What does anyone with cash do to protect themselves? Sit tight, don’t run around.
My personal debate — started about 13 years ago, when the US populace was already spending their way into oblivion — was whether we would have Inflation or Deflation.
There was no answer at the time, and truly, I feel there isn’t a clear path even today
It’s the same road: The end result would/will be determined by which fork in the road the government would choose at the last moment. Would the government force the population pay off those debts, thereby stifling the economy for a decade, or simply devalue money to make it easier to erase those fun-time debts ?
Gold felt good and safe back then ( 1996-97). But didn’t it go down the whole time I was on the floor? Down to, eventually…what? $250?
Banks Tapped Out
That was yesterday, this is today.
Today, well, we’ve got no money – reminds me of that old Burger King commercial “Where’s the Beef ?” Jaw-bone all you want, there’s just no visible money. People don’t have any, companies don’t have any, even the banks don’t have any liquid stuff to throw around. And that is something I’ve never seen. During my business life, perhaps they wouldn’t give it to you, but the banks always had the money. Even in the 1980s crisis the majors seemed healthier than they are at this moment.
This is how today’s world looks to me: the American masses, up to their necks in mortgage and other debt; house values under water; their nominal owners about to start losing their jobs in growing numbers. Retirees are fully invested in mutual funds for the yield, but fully 40 percent of that wealth has evaporated. We will not likely see them doing any significant new investing for the foreseeable future, so great have their losses been.
Crushing Rates to Zero
As for Big Money, the banks are tottering and can only run to T-Bills for safety, thereby crushing short rates down to zero. I’ll predict that if this continues for some time, the zero rate will slowly start extending outward, with a flattening yield curve.
And finally, the Doomsayers, rushing into Gold and other commodities as a safe-haven.
And here is the main point of my thoughts: We will all be affected, and we will all eventually get to the same place: cash poor.
The masses, young and retired alike, have been devastated and are immobilized. The government, already holding a vast amount of mortgages, might institute a national relief program, providing artificially low mortgage rates on the condition that you forfeit the low rate if you sell your home. There might be a few benefits to this type of program, but I digress. Either way, it is only relief, not a cure for these sadly positioned people
A Severe Trim
If banks are compelled to lend, one day interest rates will pop up to a more normal level.
Name any level you wish, but if rates going out five and ten years have been compressed to nothing, and then “street” rates pop, zero rate bonds obviously will cause the holders severe pain; and the big money, in trying to find safe-haven, will also get a severe trim.
Then we have those smart doomsayers who ran for cover into gold, oil, and whatever.
Can they get through this crisis unscathed? Forget conspiracy stuff and manipulation theories for a moment. Just simply, look at the overall picture. Everyone is hurt, money and wealth has evaporated. Do you really feel that doomsayers, sitting on Gold, will be the lone winners? Will this be allowed either by the “powers that be,” or simply “Nature’s forces.” (Pick which power makes you feel better.)
It’s easy to see where most commodities have gone, except for Gold. Hovering as if weightless, seems to be what one would expect given the status of Gold. But for how long ? My guess is that fear will drive the price of Gold high. I have no idea how high, nor for how long — but high, as fear feeds upon itself.
All Will Be Cash-Poor
Then, when the willing money has invested, the big question arises: What good is gold when Cash is King? ( And, oh yes, I truly believe in the historic nature of Gold; but let’s look at a bigger picture for a minute.) I believe that as interest in Gold then deflates, this group will also join the party – becoming cash/wealth-poor. And with that happening, all significant groups have been equally affected and balance will painfully be restored.
So, where to hide at this moment? Sometimes doing absolutely nothing is the best policy. It happens to be the least liked action today, and as traders we have seen that before, and know what it often means. Governments have finally started to support the banks and at least here in Canada, they have the appearance of strength and stability, and actually give some rate of return higher than zero. Sometimes just standing still is the best defense.
Cash is King today. And until and unless the governments start literally handing bucketsful of the stuff directly into common folks’ hands, Cash should remain King �’ and will remain scarce. That being the case, for how long can Gold play out its endgame before it comes down, and hard?
Reader Envisions A Banking Thaw
by Rick Ackerman on January 13, 2009 4:52 am GMT
A couple more years of deflation, then a hyperinflationary tsunami? That’s the scenario envisioned by a reader from South Africa, Eelco Lodewijks, in response to yesterday’s commentary, “Calling All Inflationists.” We asked readers to explain how inflation could occur with asset values, credit and business collapsing around the world. Hundred of you wrote back, and we are still sorting the replies. Lodewijks’ e-mail was among the first to arrive, and it contains some interesting ideas that seem quite plausible to us. (If you don’t want to miss out on the discussion, click here to receive our free commentary each day by e-mail.)
If there is a weakness in his thesis, it is the notion that the banks, whose TARP-fattened reserves are currently sitting in Treasurys, will crank up loans in two or three years as the business climate starts to thaw. We would ask, simply, loans on what collateral? Housing has been spent for that purpose, and we can’t imagine any asset class that could takes its place.
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