Wednesday, November 4, 2009

From Jonathan Auerbach of Auerbach Grayson, another interesting report from the field: Last June, a NY Times financial section headline stated 'DESPITE DEVALUATION FEAR, LATVIA STANDS BY CURRENCY'.  This was followed by dire predictions that Latvia, probably hit harder by the ongoing economic morass than any country in the EU, would devalue and thereby begin a domino toppling that would bring down Swedish banks (who were heavily loaned in the Baltics) and thereafter spread through Europe like a virus. In fact at the time the SKR and the Swedish banks (Swedbank had a short-term market price drop of almost 40%) were all under pressure. We decided to organize a quick visit to the Baltics and see first-hand if Latvian devaluation was indeed an option. Alex Doncov and I with several clients met for a week with the likes of the Latvian and Lithuanian Central Banks and Finance Ministries as well as with the Minister of Finance of Estonia. Our conclusion, which we sent to you in early July, stated unequivocally that, based on our many first-hand local meetings it, was clear that Latvia would not devalue, and we thus made a strong case for clients to buy what were clearly cheap Swedish financial institutions (not to mention a couple of Baltic names). Are you with me so far? Ok, let's fast forward to last Friday, when we hosted a lunch here in NY for Karlis Bauze, Head of Monetary Policy, Bank of Latvia. We like to have interesting people for our ad hoc lunches and typically have 9-10 acceptances. Well, 25 people came to hear Karlis. Interestingly enough, he started his talk by asking. 'How many of you think we shall still devalue?  At least 1/3 of the audience raised their hands. Karlis then embarked on a well documented (I

We shouldn't fail to notice that Gold rampaged $30 higher yesterday while the Dollar Index was rising as well.  This is the commodity world's man-bites-dog story of the week (month?), as far as I'm concerned, and it suggests that something is spooking shorts.  Tonight's unusually shallow retracement of the rally further reinforces this idea, and so I'd suggest starting the day with an open mind and no upper limit if bullion quotes should take flight once again.

We already know that Google at its very feistiest is not capable of taking Goldman's place as a market leader. However, when the web-search purveyor is moving higher, it does lend some buoyancy to the broad averages, and when this effect is sustained for a few days, it can cause short-squeeze forces to build. With that in mind, I'll note that GOOG's so far impotent rally would become meaningful to the short-term outlook if the stock can muster the modest push to 539.60 needed to create a bullish impulse leg on the intraday charts.

Te Dow so far has avoided falling the last 23 points to a 9656 correction target.  That's not bullish per se, but it would become so if the blue chip average creates a bullish impulse leg on the hourly chart without first kissing the target. That would happen on a 9859 print, so set an alert on your charts to warn of a possible reversal.

The ease with which yesterday's thrust took on some recent peaks on the intraday charts suggests buyers will be  back again today. The rally has already popped above a key midpoint resistance at 17.250, but Silver is still lagging gold, and the futures will need to close above that midpoint to show they can reach its 'D' sibling, 18.375.

When the bell brought a temporary end to yesterday's navel-gazing silliness, the futures appear to be headed up to 1048.25, a very modest objective that we can use for the moment as a minimum rally target. It would take an additional six ticks of upside, however, to surpass Monday's high and refresh the bullish trend on the intraday charts.  Alternatively, if the futures continue lower, a 1016.25 target mentioned here earlier would be the number to watch.

Gold did everything we might have asked of it yesterday, finally topping precisely at a 1087.00 target. This minor Hidden Pivot was identified and vetted during an impromptu webinar held for chat-roomers in the late morning.  After the close of the day session, the December futures poked up to 1088.50 in the early evening, giving way to a pullback that has been encouragingly shallow so far. My minimum upside target is still 1111.90 over the near term, with 1134.00, a familiar friend, beckoning above it. Night owls attempting to get aboard should focus on 'D' retracement targets that occur on the 3-minute chart. (Please note that there is also implied resistance at 1091.10, a target that comes from the two-minute chart andwhich uses yesterday's vertical thrust from 1060.20 as an impulse leg.  This Hidden Pivot will get vaporized if the rapacious enthusiasm behind yesterday's rally persists.)

Although we wish Warren Buffet well on his railroad bet, we think he may be premature. Buffett tendered a $100 offer Tuesday for the 77 percent of Burlington Northern Santa Fe that he doesn’t already own, paying a 30% premium over the most recent share price.  He was quoted as saying it was an “all-in wager on the economic future of the United States,” but we’d guess he still holds quite a bit of capital in reserve. That is notwithstanding the fact that his net worth has probably been bludgeoned as badly by deflation as any other billionaire's. We assume this is so because 1) it is inconceivable to us that he was short the real estate market in 2007; and, 2) legendary bargain hunter that he is, we nonetheless doubt that he would have viewed gold as a “value investment” when it was bottoming below $300 some years ago. That kind of thinking does not exactly come naturally to the permabull. Nor would the Sage of Omaha likely have read Bob Prechter’s prescient “At the Crest of the Tidal Wave” to jolt his amazing brain into thinking so far out-of-the-box.   That said, we should make clear that we LOVE incurable optimists like Buffet, since absolutely nothing would get built if everyone were as certain as we are that the U.S. economy is quietly slipping into a Second Great Depression. What a grim world this would be if Prechter’s book had lingered near the top of the best-seller list for a few years. By now, sixty million Americans would be hunkering down in the rental units for which they had traded their homes, not spending a dime on frills and planning to cut back still more as we head into the holidays.  If Time magazine and CNBC headlined the same kind of stories