March 2008

We don't want to be the orange blossom in the punch bowl, but it's time to acknowledge that sentiment figures look too bearish at the moment for the stock market to collapse. Bearish gurus have outnumbered bullish gurus for twelve straight weeks in the Investors Intelligence survey, and the figures have been growing steadily more extreme with each passing week. The latest survey had 43.6% of advisors bearish and 31% bullish. The last time we saw numbers like that was in 1998, at the beginning of the tech-stock boom. Couple that with the fact that it's an election year, and you have two good reasons not to bet the ranch right now that the stock market is about to fall apart. (Click on photo to enlarge) Not that a 3000-point swan dive by the Dow wouldn't feel right as rain as far as we're concerned, especially since the Fed has just unconvincingly extended moral hazard to blanket the earth. We wish them all possible success, but the idea of swapping the Treasurys in the Fed's portfolio for a mountain of subprime garbage presently held by the biggies of the banking world smacks of desperation. Toss in a real estate collapse and the rapidly steepening recession, and who wouldn't think stocks are headed for disaster. But paradoxically, the lopsided bearish consensus is the most bullish thing the stock market has going for it right now. And although our fellow gurus are not necessarily wrong most of the time, when too many of us line up on the same side of the market, as is presently the case, the record shows that we become a reliable contrary indicator at major turning points. Ganging Up on Gold Rick's Picks is probably more bearish than most, since it is not mere recession that we have

Sometimes we feel blessed not to possess a crystal ball, since, if we'd asked the wrong question of it a year ago, the correct answer might have led us seriously astray:  'At what price will Citigroup be trading a year from now, oh wise and powerful Oracle?' Some may recall that the stock hit an all-time high of $57 at the beginning of 2007. But if a crystal ball had told us it would touch $20 before this year was even three months old, we'd have assumed the world was about to end. After all, we're not talking about just any bank. Citi's corporate roots go back to 1812, and the bank grew to be the largest in America before the new century began. Citi was the first bank to surpass $1 billion in assets and by 1929 was the largest commercial bank in the world. As recently as last September, Forbes ranked Citi as the largest company in the world, with total assets at the time of $2.4 trillion, supporting a global staff of 332,000 and 200 million customers. But look at it now: How the might have fallen! Citi's capitalization has in fact been shrinking so rapidly of late that the firm probably no longer ranks even among the top 25 banks. And although Citi shares fell a further 5.8 percent yesterday, it's possible that still more-punitive days lie ahead, since there has been so sign yet of climactic selling. Rick's Picks has been projecting a big bounce from exactly 16.80, but the stock's oil-patch backers from Dubai and Saudi Arabia will not likely be comforted by that prospect; nor will they be averaging down, since that would push their equity stake above the 5% threshold that triggers intense regulatory scrutiny. Citigroup unfortunately is not alone among banks

We had staked out a short position in Citigroup on Thursday's close, selling March 20 calls naked for almost two bucks apiece, but the stock, aided by short covering, swam against the tide on Friday and finished with a mere 17-cent loss. So much for Friday Follies. By tradition, the stock market is supposed to act a little crazier than usual on Fridays, but all we saw was the same old teeter-totter action between nervous bears and complacent bulls. The bulls lost in the end ' the Dow finished off 147 points ' but it could have been worse, since the blue chip average was down as much as 220 points with just an hour remaining in the session. A report that non-farm payrolls had fallen by 63,000 workers didn't help, especially since an unchanged picture had been expected, but there have been days when such news might have caused stocks to go into a tailspin. The fact that investors took the report more or less in stride suggests they may be coming inured to talk of recession. Unlike TV pundits, news anchors and economists who continue to speculate on whether recession is imminent, just about everyone else seems to understand that we've been in one for months. Looking on the bright side, albeit superficially, we would hazard a prediction that inflation won't be much of a problem eight to ten months from now. The bad news is that it will be because deflation has taken its place. We recently had an exchange of e-mails with hardcore inflationist Eric Janszen of iTulip.com, who sees this as most unlikely. Eric believes stagflation lies ahead, but we have already explained why that would be a relative fairy-tale scenario compared with the full-blown wage-price-asset deflation that is coming. Another point of disagreement concerns

The catch-phrase 'subprime mess' is giving way to a new financial buzzword: 'counterparty risk.' Although we've yet to hear Katie, Brian or Bob use the term on the evening news, it's been surfacing with increasing frequency in print, and it got a real workout yesterday when it was needed to explain why two financial giants that had not even been rumored as troubled suddenly turned up on gurneys in the emergency ward. Both had failed to meet large margin calls, but the real worry is that if the two companies ' Carlyle Capital and Thornburg Mortgage -- are forced to liquidate assets, the selling could trigger a price spiral that would put pressure on other lenders' portfolios. That's what 'counterparty risk' implies above all ' that when a firm gets in trouble, it can set off a chain reaction. These days, so many financial firms operate with such enormous leverage that neither the extent nor even the specific nature of counterparty risk across the banking system is knowable. As such, it seems highly plausible that even a relatively small company that gets on the ropes could take some much larger firms down with it. The distressing saga of yet two more firms gone dangerously far out on a limb is not exactly the kind of news to which Fed chairman Ben Bernanke needed to awaken. He'd spent the earlier part of the week encouraging bankers to write down their mortgage portfolios, effectively letting shareholders take the hit rather than delinquent homeowners. The pundits saw this as a radical departure for Helicopter Ben -- the sort of stealth populism you might expect from Hillary or Obama, but not from the man whose main job is safeguarding the banking system and its precious capital. Augean Stables We must confess that we are

Two of this year's most powerful stock-market rallies have occurred on rumors that bond-insurer Ambac Financial Group was about to be bailed out. But isn't it a little late to be talking about rescuing a company whose stock has shed 95 percent of its value since July? Ambac's chart (below) suggests that it should be given a decent burial, not the heart-liver-lung transplant needed just to get it crawling again. And to what end? The goal all along, of course, has been to preserve Ambac's surreal, triple-A credit rating. But does this look like the chart of a company that deserves to be categorized with the bluest of blue chips? Of course, that was never the point; it was only the legal veneer of creditworthiness that had to be preserved at all costs. That's because Ambac's ostensibly flawless credit is what has allowed institutions that hold bonds insured by the firm to carry them as though they were as good as gold. Not any more, though. The firm's announcement yesterday of a $1.5 billion stock offering laid an egg, sending ABK shares down $2.32, or nearly 22%. A classic example of 'buy the rumor, sell the news.' (Click on chart to enlarge) Nazi propagandist Joseph Goebbels famously said that if you tell a lie big enough and keep repeating it, people eventually will come to believe it. If the steep and relentless decline of Ambac shares is any indication, though, the tactic doesn't seem to be working. But even if no one actually believed that Ambac's triple-A rating could be 'preserved,' the charade has served to distract us from a lie so outrageous that even Goebbels would have been challenged to make it fly. That lie would have us believe that the financial system is fundamentally sound, as policymakers continue

With the following advice that went out to subscribers Monday night, we managed to side-step gold's $32 plunge yesterday: 'Since a history-making push to $1,000 seems like a foregone conclusion, let's look for things that could go wrong so that we are not caught napping if the action over the next few days doesn't follow the script. Most immediately, it must be acknowledged that the futures have failed so far to achieve a Hidden Pivot target at 992.80 whose provenance, as the accompanying chart (see below) shows, could not be clearer. Monday's high at 991.90 missed the target by less than a point, and although that may not seem like much, it is nonetheless a tad shy of our minimum expectation. A weak thrust today is all it would take to complete the move, but keep in mind that if the futures were to fall first to 980.10, creating a bearish impulse leg on the hourly chart, that would turn us cautious for the near-term (i.e., 1-3 days). Regardless, the two rally targets given here yesterday -- 1047.60 and 1057.20 -- will remain valid in theory unless 888.40 is exceeded to the downside.' (Click on charts to enlarge) In retrospect, it would appear bulls had grown too comfortable with the seeming inevitability of a push up to $1000. With all of them already on board for the ride, who was left yesterday to buy the Comex futures up to their historic destination. No one, apparently, and that's probably why they dove, taking with them any trader who was not on a hair-trigger alert. You can see how steep the fall was in the chart below. But why, I asked in the chat room? Came the following response -- probably as good an explanation as we're going to find: '[The dollar]

With gold stealing up on the $1,000 mark, it's silver bulls who are just coming to the party. Better late than never, we say. Silver would be trading for around $54 an ounce right now if it were keeping pace with gold the way it did in the early 1980s. In fact, you can still buy all the pure silver you want for around $20/ounce -- a relative bargain. That's about where we got on board when 'Ag' was rampaging toward $48/ounce during the 1970s bull market in precious metals. We bought two bags of 'junk' silver from 'Trader Sam' Frudakis, whose San Francisco coin shop sits like a vault in the heart of the Mission District. Coins are a great way to go if you find that you are constantly getting in and out of precious metal stocks as they nervously ascend to who-knows-how-high. Once the coins are socked away in your safe-deposit box, you're not as likely to part with them as you would shares. They're not so easy to lug around, since each bag contains a little more than 44 pounds worth of pre-1965 dimes, quarters and halves with a face value of $1,000. (Click on image to enlarge) It's hard to believe there was a time when Americans actually paid for things like chewing gum, soap and cigarettes with coins that were 90% pure silver. But we did, and few even thought to hoard these coins when their pot-metal replacements first started to circulate in the mid-1960s. You'd have to be an old-timer to remember the ringing sound coins used to make when you dropped them on a hard surface. Now they just go 'thunk,' since they are mostly zinc. Even the slugs that thieves once used in parking meters and vending machines were classier than

With the economy going to hell in a hand basket, you might think it would be easy to make a bundle shorting the shares of some stock that's getting there fast. We thought this ourselves about MGM Mirage, a savvy casino operator that has bet the ranch on boom times in Las Vegas ' and not just boom times now, but more or less forever. But the chart below shows why, even when one is wagering on a sure thing, the path to easy profits can be strewn with banana peels, ball bearings and dog poop. We encountered all three attempting to short MGM with put options in early November. The stock had just slipped below $90 after hitting an all-time high near $110 a couple of weeks earlier, and we were eager to get on board before it really started to fall apart. The trading idea came to us during a four-night stay at the Borgata last summer, when we were in town for a reunion of Atlantic City High School's Class of 1967. The place was impressive, to say the least, but that was its problem. There were more night clubs and super-pricey restaurants in the hotel than had existed in all of Atlantic City when the first casino opened there 30 years ago. If the economy were to nosedive, a prospect that we viewed even last summer as a certainty, whence would come the customers to fill Borgata's endless rows of gaming tables, the Spa Taccore, and no fewer than 13 'destination' restaurants where $100 won't even cover the tip, much less the tab? 30-Somethings And there was something else that caught our eye: It was mostly 30-Somethings who had packed the place. Everywhere you looked, they were queuing to cough up C-notes as though it were