January 2008

We've always maintained that debt deflation would provide few opportunities to get rich and that, moreover, it is likely to challenge even financial geniuses to hold onto a fraction of their current net worth. Indeed, the housing collapse that is now sucking the U.S. economy into a deflationary black hole is not going to work like the dot-com boom in reverse, nor will pessimists who are willing to put their money where their mouths are make untold billions as the U.S. economy collapses. Now, one might think that any such precipitous change in the economy would produce at least a few big winners who had the guts to bet heavily against the consensus. While this will always be true to an extent, it is unlikely that those betting the 'don't pass' line this time around will get anything like the spectacular odds that were available in the days when corporate insiders and their investment bankers could buy vast quantities of dot-com start-up shares for mere pennies. We had a high school chum who did this, and the 600,000 shares he held in the company he'd helped start got bid up to $116 apiece at the height of the boom, in 2000. Such stories were all too common before the tech bubble burst, but we can see in retrospect that it was the kind of boom that might not recur in five lifetimes. No Longer a Short And that is why we should assume that hedge fund manager John Paulson will prove to be a rare exception by having made an estimated $3-$4 billion for himself betting on a drop in housing values. His story was recounted in a front-page article yesterday in the Wall Street Journal. The headline said he earned this sum betting big on a drop in housing

Here's an unpopular point of view that surfaced yesterday in the Rick's Picks chat room: 'Gold is at the top of a parallel trend channel started from the rally off the 1999 low. The sentiment index is at 95% bulls. The handful of times where the sentiment index has pushed this high over the past decade have all resulted in a market correction, sometimes a sharp one. The fact that even the financial media is saying $1000/oz gold is a no-brainer makes my contrarian bone ache even more. Good luck out there, I'll wait for the pull back.' (Click on chart to enlarge) Now, there's no denying that $1,000 gold has become something of a no-brainer among us professional bloviators. But does that mean we should back away from it in anticipation of a punitive correction? We think not, and here's why. For starters, over the last month or so, Comex Gold contracts have been blowing past major and minor Hidden Pivots as though they were chopped liver. Yesterday, for instance, there were two nasty-looking ones at, respectively, 902.10 and 909.00 that should have stopped bulls cold. Instead, when the dust settled, all-but-insatiable buyers had dispensed with both of these obstacles before New York traders even got out of bed. No Warning Yet We'd gone on record earlier with a prediction that the Comex February contract would be on its way to at least 973.90 if it closed above 909.00 for two consecutive days. We'll stick with that forecast. Although the futures failed to achieve our benchmark yesterday after pushing as high as 915.90 overnight, we were still impressed with the ease with which the lesser pivot at 902.10 was demolished. Bullish sentiment aside, we have no trepidation whatsoever about going with the flow, since, the moment Gold turns weak,

In the chart below, it's plain to see that DaBoyz lacked the guts yesterday to promote an all-out short squeeze. The S&Ps may have rallied 40 points from their intraday lows, but look at how the top of the rally failed to take out any meaningful highs to the left of it. In Hidden Pivot terms, there is no bullish impulse leg here to get excited about, only little stuff that would be useful merely for scalping. (Click on chart to enlarge) And yet, there was ample evidence that those who earn their living manipulating stocks ended the day with every intention of building on yesterday's momentum, which could only have come about as a result of delusional thinking and short-covering. To heighten the effect, there was a terrific dog-and-pony show that had BofA buying Countrywide. This deal is obviously being pushed hard behind-the-scenes by the Fed, and it makes sense, since rumors that the latter firm is seriously on the ropes needed to be squelched as quickly as possible. What better way to accomplish this than to promote as Countrywide's suitor the bank that has been mentioned least in connection with 'the subprime mess'? We think BofA eventually will go down in flames like all the other financial biggies, but we'd have to concede that it is likely to outlive Citi and a few others that might just as easily have been volunteered by the Fed to drink deeply from Countrywide's poisonous well. We'd surmised as much from promotional mailings received over the years from the money centers. BofA has always seemed less aggressive than most -- surely less aggressive than Citi -- in promoting revolving loans in particular. Perhaps that's why BofA shares have fallen 'only' 30% from their highs while Citigroup's have shed fully half of their value. (Click

When we warned of an imminent 320-point fall in the Dow Sunday night, we admonished subscribers not to share a related S&P target with their friends, lest the publicity 'queer' the prediction. We needn't have worried. Yesterday the S&P futures completed their multi-day plunge, falling to within a quarter of a point of our 1385.25 target; then they trampolined 30 points higher, closing just off the intraday peak. We had reiterated our faith in the target the night before with the following trade recommendation: 'The 1385.25 target given here earlier remains not only valid, but compelling as a place to trade speculatively for a strong bounce. Use a 1383.75 stop-loss initially, switching to a 2.00-point trailing stop if 1394.00 is hit on the rebound. Reasonable upside objective: 1401.50.' The 1.25-point stop-loss proved more than sufficient for getting long at the low of the selloff, and anyone following our advice exactly would have been filled on his or her bid, since the actual low occurred a single tick beneath it. In the meantime, Comex Gold was moving with equally precise deference to some key numbers we'd flagged. (See chart above.) The bad news is that the February contract played footsies briefly with The Beast, plunging to within a single tick of a threshold where trouble was bound to begin. Here's what we wrote in Tuesday's 'Tout' for Comex Gold: 'Yes, I know, I've been promising you at least 902.10 over the near term. But there is no getting around a lesser impediment at 896.90 that will have to be reckoned with first. Hidden Pivot aficionados will recognize its authority in the chart below: single-bar price points, sinuous symmetry and an all-but-indomitable trajectory. Since the futures topped yesterday at 894.40, we could infer that an additional $2.50 of upside is due us.

Now that's more like it: Gold way up, stocks way down! Felt right as rain, didn't it? And to make things even sweeter, we had both sides of the trade nailed, naked-shorting Diamond January 130 calls on Monday's close (as announced in the Rick's Picks chat room in real time), then jumping on Comex Gold futures that same night, just before they really took off. Here's the advice that went out Monday night with February Gold futures trading around $860: 'We'd back up the truck to buy a print down at 851.90, a compelling Hidden Pivot support, but the futures are not likely to be so accommodating. In fact, they've been building a bullish flag for a presumptive run-up to 902.10 -- a target first broached here a while back -- giving up precious little ground in the process. It will be risky to try and call the breakout from a consolidation pattern that has now gone on for several days, but my hunch is that a print at 869.10 would do the trick. It looks like it would be subtle enough to allow one to get aboard with a buy-stop and not have to fear the kind of whiplash likely to follow the inevitable push above 871.80.' As for what ensued, all went pretty much according to plan -- right down to the un-buyable surge that kicked in when the futures first encountered open sky above 871.80. Here's a chart that show it all: (Click on chart to enlarge) Several subscribers who caught the rally stopped by the chat room Tuesday morning with the good news, and they were able to climb on board for another ride when Gold got second wind later in the morning. The final pushing hit an intraday high at 884.00, a down payment on

Call it a failure of the imagination, but we're hard-pressed to believe that any sane investor would be buying shares these days. Sure, there are always going to be a few ultraviolet-sunny, Kudlowesque optimists capable of deluding themselves into believing that a real estate collapse, hundred-dollar oil, a recessionary surge in unemployment, rampant consumer inflation, terminally diseased bond markets, a precipitous slowdown in manufacturing, and predictions of minuscule or even negative GDP growth for the next few quarters don't really matter. But how many of those guys could there be? Even with CNBC's A-Team imparting a stridently bullish spin to some ginned-up numbers from the Commerce Department, and news of bin Laden's capture on the tape, they're probably wouldn't be enough bulls to buy a piddling 50-point rally in the Dow. No, what rallies we've seen can be attributed almost 100% to short-covering, with a smattering of buying from patriotic Americans and shady types acting on hot tips. But real bulls investing in America's future? You've got to be kidding. Watching yesterday's ups and down on Wall Street, we initially thought the rallies seemed too subdued to have been caused by short-covering. But the spirited, nit-witty frisson in the final minutes of the session (see chart below) convinced us that that's what was going on. The gap-up opening should have alerted us to the nervousness of shorts, since it occurred on vaporous volume and lasted all of 20 minutes. A 140-point sell-off followed, but it dried up after running into support from a key low made in late November. The rest of the day was spent in the throes of tedium, with the Dow plying a 100-point range, then finishing with bears doing what they do best: ignoring all the bad news to fixate on how viciously the market might rally

Here's Hillary on the stump, with some egregious dissembling that we could not let pass unremarked: "Of all the people running for president, I've been the most vetted, the most investigated, and -- my goodness -- the most innocent, it turns out," she said to applause. My goodness, what a shameless liar! Does she think everyone has forgotten about Filegate, or the cattle trade? Good gosh, the woman practically out-does her famously dishonest husband. The commodity trade may have gone uninvestigated, and she may not have been charged with wrongdoing, but that hardly means she was innocent ' not unless we put quotes around 'innocent' the way we would if we were referring to O.J. Simpson. Granted, Hillary was not suspected of murder, merely of taking a bribe via $100,000 worth of profits she allegedly earned on some cattle-future trades. But even if O.J. had merely punched Ron Goldman in the nose rather than slit his throat, we doubt he would have had the chutzpah to run for high office rather than spend the rest of his days as he has, seeking out golf partners. Luckier Than Martha In the end, Hillary succeeded in quashing the bribery charge, and one can only surmise that her friends in high places were more influential than Martha Stewart's friends in high places. But she had help from a credulous media that was either too stupid or too lazy to investigate the facts of the case, which it must be admitted were somewhat obscured by the arcana of commodity trading. But if the mainstream press failed to do its job, the many incriminating details were brought to light by, among others, commodity trader Victor Niederhoffer, whose investigative piece in National Review left little wiggle room for exculpation. Niederhoffer deftly traced her paper trail, concluding that her

We flatly asserted here a while back that the madrassa-educated Obama didn't have a prayer, but perhaps we shouldn't have written him off so easily. For in fact, a prayer is what he does have ' millions of them, it would seem, each emanating from the heart of some voter who passionately believes Obama represents America's best hope of regaining its moral stature in the eyes of the world. Whether or not a 'nice' guy can accomplish this is open to debate, but the important thing is that his supporters actually believe it, and that they see him, therefore, as a potentially powerful force for radical change. Ironically, Hillary Clinton is the true candidate for radical change, notwithstanding the fact that she has campaigned, with Oscar-caliber disingenuousness, as a centrist and a moderate. Make no mistake, with America about to slip into bottomless recession, a victorious Hillary could conceivably become the new FDR, rebuilding the welfarist state one acronym at a time, starting with Health and Human Services (HHS). Socialized Healthcare Not that we'd fight that one tooth and nail. Our household medical bills have been spiraling out of control just like everyone else's, and we see no possibility of relief by sticking with the status quo. But regardless of which Democrat gets elected President ' and that's what we foresee happening ' the political pressure to socialize medical care in this country has grown well nigh irresistible. In this area of policy, Obama and Clinton would probably be interchangeable. But it seems most unlikely that the two would talk to our enemies in the same way. Indeed, if it is tough talk that is needed to bring them around, the nation would probably be better served by Dr. Phil as President than by Obama, who gives the impression of being

Three topics are provoking quite a bit of discussion these days among the pundits: 1) the odds of recession; 2) the supposed inflation/deflation conundrum, and 3) likely moves by the Fed in the months ahead. As far as we're concerned these are all non-issues, and debating them is just navel-gazing. To dispense with the first, the recession has already begun; it is perhaps only government statisticians and CNBC commentators who cannot sense it viscerally, as the rest of us already do. Talk to someone who works in retail if you'd rather not take our word for it. And keep in mind when you do that consumption accounts for more than two-thirds of this country's GDP. Concerning whether it is inflation or deflation that is more likely to do us in, that's like asking, as an asteroid hurtles toward Earth, whether it will be the asteroid that wipes us out or some microbe that lives on the asteroid. On this matter, you should consult your realtor if there are any doubts, since he or she is probably close enough to deflation's ground zero to be praying for a little of the opposite. It's just simple math. How much inflation do you think the Fed can promote with real estate prices collapsing and a $510 Trillion derivatives bubble about to do the same? Your realtor will know this intuitively, since, as we implied above, he or she has been living on the very cusp of deflation. Black Swan, or Turkey? As for what the Fed may or may not be about to do, there was a cockamamie theory floating around on the Internet yesterday that the 'black swan' event that would surprise us all, triggering a stock-market collapse, would be a move by the Fed to raise rates. Yeah, sure. That's about