November 2007

The dollar's feeble bounce yesterday seemed to be all that was keeping the stock market from falling apart. Even so, the Dow Industrials still managed to reverse a 120-point gain and finish down 55 points on the day. Tech stocks continued to tumble, creating a powerful drag on the averages. And Gold, in the throes of a so-far three-day sell-off, suffered its worst single-session drubbing we can recall when the Comex December contract fell by nearly $40. Fortunately, we had issued a bearish warning last week when Gold futures popped into a Hidden Pivot 'red alert' zone between $846 and $852. A correction looked like a good bet at the time, but it was not possible to predict just how far the pullback might go. (Click on chart to enlarge) That is far more easily done intraday, and so those who spent time in the Rick's Picks chat room yesterday got to reap the benefit of real-time insights and analysis. As it happened, bullion's ugly relapse late in the session was telegraphed by an earlier breach of a Hidden Pivot support just above $800. The chart above, which we published yesterday afternoon in the Intraday Notes section, tells the story. By early Monday evening, further weakness had brought the December contract down to as low as 792.80. However, our analysis suggests that still lower prices are likely overnight. For the precise target, a Hidden Pivot support that you could bottom-fish with a very tight stop-loss, see the Touts section of Tuesday's edition. GOOG Out-Bears Us From a technical perspective, there were no big surprises yesterday ' other, perhaps, than that some former market leaders were even weaker than had been predicted. In Google, for one, we'd called for a 25-point drop, to exactly 639.27, if the stock breached a Hidden

Depending on how deep the recession is a year from now, we could easily wind up with Hillary Clinton as America's first Social Democrat president. With hard times bearing down on us, she'd be able to drop her phony centrist pose and openly embrace FDR, if not yet Karl Marx, as her life's inspiration. How could any Republican hope to beat her if real estate prices have sunk by another 15 percent and unemployment grown by half? Hillary could promise the kind of relief that Republicans would never be comfortable even talking about -- i.e., mortgage forgiveness for the entire middle class; jobless benefits extended till who-knows-when; a $12 minimum wage; free government day-care in the big cities; punitive new taxes on the rich. Etcetera. Of course, America's geopolitical troubles will remain a wild card, and if the situation worsens in Afghanistan, Pakistan, or both, John McCain would instantly become a front-runner. Not that he hasn't been a contender all along ' only that that the news media have conspired to cause us to believe that money alone makes the candidate. Try and tell that to McCain. Although his principled stand on any number of issues evidently has rendered him invisible to a press corps that acknowledges only champions of the status quo, he is still a hero to many, and they are going to turn out in droves to vote for him in the primaries regardless of how much his advance men have spent. Delusional Media If a lack of campaign funds has not killed off McCain, neither has a mountain of cash done much for Obama. Although he has tapped into Oprah's Rolodex to raise more money, even, than Clinton, he is still no closer to getting the Democratic nod than when he announced his candidacy. Could it be

To many of those who attempted to trade yesterday, the yo-yo action may have seemed like a game of 'fetch' with a dog. You toss the ball as far as you can, Fido brings it back to you, panting for more. You fling the ball even harder the next time. Pooch tirelessly retrieves it, then does it again. And again. And again. And so it went yesterday on the New York Stock Exchange. Each toss sailed a little farther, until finally, with two hours remaining in the session, a particularly energetic fling sent the Dow Industrials down 220 points. Would Fido be able to find the ball, much less retrieve it? You needn't have asked. With the clock running out on the game, the dog scampered down the field, picked the ball up in his teeth, then ran an obstacle course back to the source, pausing to sniff anything that moved or had been peed on. Some attributed the stock market's less than miraculous recovery to the usual short-squeeze factors. And of course, there was plenty of that. But there was also Helicopter Ben, who was on Capitol Hill yesterday telling it like it is. Sort of. We can't recall ever seeing stocks tank on a day when a Fed Chairman was testifying before Congress, and yesterday was no exception. Not that Bernanke had much to say. He called the economy 'resilient,' a description that would be hard to refute. It's an understatement, really, considering that consumers appear to be chugging along even though the country is in the midst of the worst real estate downturn since the Great Depression. A Coy Fed Chairman Bernanke allowed himself a pat on the back when he asserted that recent easing by the Fed had put inflation and the risks to growth roughly in

With stocks falling harder than usual yesterday, schadenfreude was running high in the Rick's Picks chat room. The word means 'malicious or smug pleasure taken in somebody else's misfortune,' and at times the chat room's patented brand of schadenfreude felt positively jovial. Considering who's misfortune was giving room-regulars such an unaccustomed frisson, it's a wonder anyone could stop wisecracking long enough to get off a short. (Click on image to enlarge) Fortunately, we had begun the day holding some at-the-money Diamond puts purchased a day earlier. They turned into solid winners well before the final bell, more than doubling in value to 3.65 from 1.73. Evidently feeling cockier than usual, some chat room denizens announced they were adding to put positions on the way down. For a rare change, no one who bought a put yesterday would have gotten punished for it. It was that kind of day. Steep Markdowns So what do we make of the stock market's dispiriting performance? It could be attributed to any of a dozen major worries, although by the final bell it must have seemed to beleaguered investors as though each and every one of those worries had contributed to the day's steep markdowns. Even so, no one was talking about the elephant in the room. Which elephant? Why, of course, the collapsing dollar, which is rapidly overtaking the subprime mess as America's #1 economic problem ' make that, the world's #1 economic problem. Who stands to lose, and how much, as a consequence of the dollar's historical plunge? For one, there's China, which currently holds $1.43 trillion dollars in reserves, mostly in the form of U.S. Treasurys or cash. Then there's Japan, at $923 billion, followed by Taiwan ($263 billion), South Korea ($257 billion), and Russia ($400 billion). Oops. Almost forgot the biggest

You don't need to be a chartist to feel the weight the Dow Industrials have imposed on bulls of late. Imagine that the enhanced, red price bar is a surfer intent on paddling over the gathering swells. They are so high, however, that he would not be able to even see the top of the first, let alone the scary crests mounting behind it. Again, thinking visually, try to imagine the kind of energy it would take for the surfer to power over these towering breakers. Let yourself feel the crushing force they project to the right and downward. This is akin to the resistance stocks would have to overcome to achieve new recovery highs. Our sense of things, visually speaking, is that the tidal crests of July and mid-October will prove too formidable to surmount. More to the point, and given the great unlikelihood of felicitous news about the economy these days, we doubt the Industrial Average can push above even such modest peaks as we find on the hourly chart, let alone the daunting heights of the 'daily.' Accordingly, we have been a scale buyer of November Diamond puts even though there are no Hidden Pivot rally targets to buttress this strategy. Our more or less careless accumulation of put options at this time actualizes our strong gut feeling that there is very little buying power left ' not even enough to trigger an old-fashioned, short-covering panic. Yesterday, for instance, a perfunctory short-squeeze in the final hour left the Diamonds somewhat shy of a 136.76 target that had been broached in the chat room. The intraday high was 136.62, and although the implied 0.14-point differential may not sound like much, it was enough to suggest that bears are in no great hurry to thrown in the towel. Nor

The Dow Industrials rallied to finish a hundred points off their lows yesterday, suggesting Wall Street half-believes Citigroup and Merrill Lynch are the only financial players in the too-big-to-fail category with daunting problems. After the close, The Wall Street Journal reported that 'the markets wobbled amid continued investor concern over the financial sector.' We take a more pessimistic view, though, and see any weekday on which the Dow Average has failed to shed at least 300 points as one more day that investors have remained in denial. So how big, in dollars, is the problem that stock-market investors have contrived to ignore? A lot bigger, for sure, than the $11 billion -- and counting -- write-off Citigroup has said it will take. In fact, residential real estate is a $23 trillion item on household balance sheets, and 59 percent of the loans made by American banks are for housing. Citigroup may turn out to have been the biggest risk-taker in this market, you can bet there are many hundreds of other banks, at least, that have played the same game at a lower level. So far, two of the most highly regarded executives in America have been sacked -- Citigroup's Charles Prince, and Merrill's Stan O'Neal. In days of yore, their very public castrations (albeit, in Prince's case, with a rumored "severance" package perhaps sufficuent to assuage the woes, even, of the eunuch) might have kicked off short-covering rallies and a flurry of articles about how new leadership is going to put the companies back on track.  These days, though, if Merrill and Citi were to get religion by turning prudent, they would be dead ducks in the business world. You see, there are no Horatio Algers in the board room these days. In banking, as in baseball, the only way to compete at the highest levels, apparently, is to use steroids. OPM's Last

Comex Gold blew past $800 with such winning ease on Friday that perhaps it's not too early to start thinking of the supposed barrier as support rather than resistance. We wouldn't want any cockiness on our part to jinx the next thrust, to an expected $907, but gold bugs have reason to be optimistic that this threshold will soon be reached for the first time in history. (Click on chart to enlarge) From a technical standpoint, a rally to at least 907.30 became an odds-on bet when the Comex December contract pushed past 768.90 in mid-October. We had written as follows, with Gold trading in the mid-$700s: '[768.90 is our minimum objective] for the next two weeks, but an even more important target at 907.30 would come into play if it is easily breached.' As it happened, the Decembers pushed decisively past 768.90 a mere week after first encountering it. From a Hidden Pivot perspective, this not only clinched the push to at least 907.30, it also hinted that that number will be reached relatively quickly. Of course, Friday's dramatic leap will have done little to dispel the notion that $900 is going to be a piece of cake. Path to $10,000? Now, among gold bugs there are some bull's bulls for whom $900 is just a weight station on the way to $10,000. Regardless, we prefer to take the rallies one leg at time, since there is always the chance, at any point along the way, that bullion will correct with a viciousness capable of turning all but the die-hards into doubters. Besides, there are benefits to trading around a core long position, provided you can nail the swing highs and lows fairly precisely. In that regard, Friday's close above a Hidden Pivot resistance at 804.70 all but guarantees

Reality won a rare round on U.S. stock exchanges yesterday, but permabears should ponder the chart below before whooping it up too deliriously. Notice that on a day in which the Dow Industrials fell by a whopping 362 points, the QQQs were down less than a point, settling a hair lower than Wednesday's bottom. In order to generate a true distress signal, creating a bearish impulse leg of daily-chart degree, the QQQs would need to plummet beneath 51.33 by Monday! Of course, more-dramatic things have happened on the nation's bourses (even if you'd have to be an old-timer to remember when), and a decline of that magnitude could occur at any time. Today, even. There's also the chance that over time the S&P Index and the Dow Industrials will drag the tech-heavy Nasdaq indices lower instead of Google, Apple and Research in Motion dragging the entire universe of U.S. stocks higher, as they have been. But as long as those three stocks have the potential to delude Kudlow and the imbeciles who heed him into thinking three tech stocks will somehow get us through a 1930s-style real estate crash, we need to carefully manage the risk of our short positions, choosing the right vehicles and taking partial profits at every decent opportunity. A logical first step will be to favor the Diamonds over the QQQs henceforth as our bearish vehicle-of-choice. For if we are to truly enjoy days like yesterday, and to gloat over the money we have made when most investors were getting creamed, we might as well pick the index that will give us the best ride for our buck. Unfortunately, we held stolid November 54 puts on the QQQs at yesterday's opening, and although they had increased in value by two-thirds by day's end, we'd have gotten

The Fed eased yesterday while admonishing investors not to expect any more. Yeah, sure. Like a spoiled kid, Wall Street has learned that it can get whatever it wants from the central bank by whining, sulking, and feigning pain. Wanna bet that by this time next month, traders will have priced in a near-certain rate cut, forcing the Fed's hand just as they did yesterday? But what can Bernanke & Co do? Rule #1 in Parenting for Dummies is to absolutely mean it when you say 'No!' If you tell a kid, 'There's no way I am going to let you sleep over Billy's house this weekend!' and then let him sleep over Billy's anyway, the kid will own you. And each time a parent lets a 'no' mutate into a 'yes,' he will reduce the potency of all future 'nos' by some appreciable fraction. Before you know it the kid won't even bother asking any more, so certain will he be that you can't stop him from doing whatever it is he wants to do. Of course, the kid you can punish whenever he breaks a rule. But the Fed, being all carrot and no stick at this moment in history, cannot. And what is more, the carrot will only get bigger as the housing disaster metastasizes. Assuming real estate values continue to deflate, and housing inventory to grow, the Fed is about as likely to turn hawkish as Atlantic City is to crack down on prostitution. The very worst the Fed can do is threaten not to loosen at the next meeting of the Open Market Committee. Try that on your kid some time: 'If you don't stop squirming and shut up, you're not going to get an increase in your allowance next week.' So Wall Street needn't worry at