July 2005

With Hurricane Dennis's destructive power all but spent, news concerning Karl Rove's mounting troubles dominated the airwaves yesterday. Notwithstanding the President's expression of confidence in him, Rove will likely be history by August. Of considerably less interest was the turgid price movement on the nation's major bourses. For traders, it was the kind of day that could make glue-sniffing seem like an appealing alternative. I had other things to do myself, like tidying up my desk. I also bid my wife adieu as she left for Steamboat Springs with two college friends for a week of R&R. That means the kids are all mine for the next few days, but we'll be headed up to Steamboat as well come Friday. Meanwhile, it's Wendy's for dinner ' either that or some of my not-yet famous left-handed macaroni. I can type with two fingers of my right hand but am discovering that the efficiency gained has a cost, since it causes my wrist to swell up just enough to make those surgical pins push against the cast. I'm already looking forward to getting the thing removed on August 17, but until then I hope you'll pardon me for keeping my comments brief. Here's an item about anesthesia that popped up in a chat group -- coincidentally, just days after my surgery. It is from the L.A. Times: Post-Surgical Risks 'One study, presented last fall at the American Society of Anesthesiologists annual meeting by Swedish researchers, showed that the duration spent under deep anesthesia is a significant risk factor for predicting death up to two years after surgery. Although the patients in the study were undergoing non-cardiac surgery, most deaths resulted from heart attacks or cancer. 'The other study, published in the journal Anesthesia & Analgesia in January by Duke University researchers, found

The news media were feasting on Hurricane Dennis yesterday, even if it was no longer packing quite the punch of last year's worst storms. In Washington, Karl Rove may have breathed a sigh of relief, since, between the weather and last week's bombings in London, news of his own little scandal seems to have gotten buried. Was Rove responsible for leaking the name of a CIA operative in retaliation for something the agent's husband said that didn't sit well with his boss? We'll probably have to wait until the mayhem elsewhere subsides before we can find out. Meanwhile, credit Dennis's weak second act with what these days passes for a respite in the oil pits. Crude closed under $60, a level which doubtless will be regarded as 'critical' until spot quotes punch a big hole in the $70 'barrier'. All I know is that 91-octane gas cost me $2.39 at the pump yesterday, the highest price I've ever paid. How am I coping? Well, I'm not driving significantly less, but I've found a way to ease the pain: I no longer wait until my gauge reads empty before I refuel. In other news, while stocks were blowing some ostensibly daunting hidden pivots to smithereens yesterday, I was having my stitches taken out and a new cast put on my right arm . There was good news ' that, because the ligament tear I suffered in a ski accident was a relatively clean one, the repair might actually work. I've included a picture of my X-ray so you can judge for yourself. The metal pins look worse than they feel, but the occasional itch is less benign. Five more weeks of this, supposedly, and I'll have my good hand back. By then, I could be typing 35 words a minute with

Thursday's oversold bounce turned into an outright short-squeeze Friday, when stocks rose throughout the session with just one minor correction intraday. Fortunately, there needn't be any confusion or guesswork about what is yet to come, since the thrust brought the Industrial Average to within inches of an important hidden-pivot resistance at 10465.77. The actual hourly high was 10462.26, which means the pivot itself has yet to be tested. For sure, it has the potential to stop what is now the most powerful two-day surge since last October. But if the blue chip average breaks decisively above it, shorts had better run for cover, for that would portend additional upside potential to at least 10756.14 over the near term, handily exceeding late-June's recovery 10656 high. For purposes of determining when the 10465.77 pivot has been decisively breached, let us stipulate that it be exceeded intraday by at least 25 points, or that the index close for two consecutive days above it. Even if this fails to occur and the DJIA is repelled by the pivot, I would infer the implied weakness thereafter would be prelude to another bull charge. (Click on chart to enlarge) Give Us A Break! My friend Alan Newman, editor of Crosscurrents, thinks that any housing bubble as well-advertised as this one is in no imminent danger of bursting. I somewhat agree, although nothing could convince me that the real estate bust can be indefinitely postponed. Alan is more or less in accord, but thinks we should be paying more attention to another bubble ' the one involving the stock market. With his kind permission, I have reprinted his latest (July 6) below: Give us a break! Enough already! Is housing the most well advertised "bubble" in human history or what?! You would think by now that anyone

Jihad came to the London Underground yesterday, killing 37 people and injuring another 700 but causing only a hiccup on Wall Street. The Dow Industrials ended the day with a 31-point gain after selling off hard in overnight trading when news of the bombing first hit. Perhaps the markets were reassured by Tony Blair's morning TV appearance shortly after a series of explosions brought London's subway system to a halt. Whatever the case, financial markets both here and abroad appeared to steady as the day progressed, with sellers fleeing U.S. markets after around 6 a.m. Leave it to Da Boyz at Midnight Auto to figure out how much lower stocks must be manipulated before the last seller has been taken out. With stock averages climbing, I put out a bulletin intraday asserting that it was a rally made to sell. But I must admit, the bullish finishing stoke in the final hour took me by surprise. I'm still convinced it's a trap, though, mainly because the overnight lows decisively penetrated some hidden-pivot supports I'd flagged for the mini-Dow and mini-S&P. But bulls should take courage from the Nasdaq's failure to confirm. I'd projected a minor-cycle low at 1462.50 for the mini-contract, suggesting bottom-fishing there with a tiny stop-loss. A it happened, the futures turned sharply from 1465.00 shortly before dawn, denying us an opportunity to board at the bottom. However, as the Naz rose we did manage to buy a few more July 36 QQQ puts for 0.05, an overvaluation of about 25% for July near-the-moneys. With six trading days left, however, and the markets merely feigning calm, we won't quibble about the extra penny. 

im Otis, writing for The Optimist, insists that the Fed would never allow deflation to occur. My take is that the debt problem is too big to paper over except by way of a hyperinflation, and that such a strategy would never be attempted in any event, implying as it does the wholesale destruction of the bond markets as well as the downfall of savers and creditors as a class. Jim and I have gone back and forth via e-mail since mid-June, when I explained in this space why deflation is inevitable. I have reprinted my dialogue with Jim below for your interest. For the time being, wrist surgery has made it impractical me to respond to his latest point-by-point at length, so I will leave up to you, dear readers, to furnish your own rebuttals. If you have been a Rick's Picks reader for any length of time, you should be up to the task. Give it your best shot, and I'll reprint your letters in a forthcoming issue. Here is the series of exchanges, starting from near the beginning: Rick A: Deflation is the most powerful force in the financial universe, Jim, and it can only be postponed, not avoided. But that will take lots more borrowing, which itself would depend on an already grossly inflated asset class: housing. The housing market will not collapse as long as the only two alternatives to the dollar, the yen and euro, remain relatively unattractive to the investment world. However, there's a trigger that could cause such a change: plummeting US stocks. 1930s Were Different Jim O: Thanks for your reply. Deflation may well have been the most powerful force in the financial world, but that was back in the 1930s when the quantity of money available was limited to the

With a currently bullish outlook on precious metals and the mining sector, we're particularly eager to hear from subscribers with fresh ideas. Here's one from subscriber Tim Huizenga that came my way during yesterday's real-time Q&A session: 'ASA is a closed end fund that invests in gold mining companies. At present, most of the positions are South African mines, which is a negative. However, shareholders are currently voting on a proxy to allow the fund to invest in more of a diversified manner (currently the fund cannot invest any more than 20% of the portfolio in gold mining companies outside of S. Africa). I bring this fund up for the simple reason it has had a history of trading at a significant discount. It currently is trading at more than a 13% discount from it's published NAV, which is in the bottom half of its discount range this year (-6.9% to -18%). 'I believe we should keep an eye on this one if the gold stocks are about to stage a robust rally. If we can pick-up these shares at a discount, it is like having leverage without having to pay for it or without having to worry about time decay. In its history, it has traded at a premium relative to its NAV - the last being in early 2003. If shareholders approve the proxy (a decision was expected on July 7), this could become even more attractive, although the discount could shrink as well. Let me know what you think.' ASA hit bottom in 1998 but its rally has been stalled for three years. The somewhat discouraging fact is that the peak of the stall -- $48 in November 2003 ' occurred just a tad shy of a 50.50 high made back in early 1996 whose breach would