September 2008

With the publication of the first-place essay below, by John McIntyre, we conclude our competition on the theme 'What Will Save America?' As grim as the outlook is for the U.S. and global economies over the next five to ten years, we cannot afford as a nation to wallow in despair. McIntyre is as pessimistic as we are looking ahead just a few years, and like us, he sees no way to avoid a deflationary depression. But he also sees in this period of economic darkness an opportunity for transformational changes in the way Americans live and work. The path back to prosperity lies in finding and exploiting a new energy paradigm that will solve the world's fuel problems, he says. His essay is among the most optimistic that we received, but it is also realistic about the difficulties we will face as a nation as we attempt to compete in the radically changed world that emerges from the deep, protracted slump that lies ahead. Here's McIntyre: Time for America to Rediscover Herself: Awakening Ingenuity and Our Pioneer Spirit'. The simplest way to understand the root of the problem the United States is now facing is to cite a well-known and stunning statistical fact. America constitutes five percent of the world's population and consumes twenty percent of the world's natural resources. The simple fact is that this is not sustainable. Any person with an elementary school mathematics education could understand this. The problem is that the current model of American capitalism requires this input of resources not only be maintained but be increased continually. (Click in photo to enlarge) For the past thirty years, the American economy has exploited cheap labor in developing countries such as China in order to increase productivity and export most of the effects of inflation. Now

Yesterday's dip brought the futures to within $1 of a very important Hidden Pivot support at 738.80, but if it's breached by more than $3 intraday, or if the futures close beneath it for two consecutive days, that would be warning of more downside to at least 628.00. For all we can tell at this point, the 738.80 low recorded yesterday could be Gold's worst moment for the next fifty years. But we'll need to start seeing some bullish impulse legs on the lesser charts to ease our suspicion that the worst may not in fact be past. For today, that would imply a thrust exceeding 763.10, a tiny but nonetheless significant "external" peak shown on the accompanying chart. (Note: The pivot at 731.60 can still be bottom-fished with a stop-loss as tight as 730.90.)

A print today exceeding 11.100 is equivalent to the one I've cited in Gold as a bullish trigger point. Alternatively, a Hidden Pivot at 8.340 that has already surfaced in the chat room must be viewed as a serious prospect, since the 11.235 midpoint with which it is associated was trashed earlier this week. More immediately, if the futures have not exceeded 11.035 to the upside first, they face jeopardy over the near term to as low as 10.020.

The short I advised from 1253.75 after the close is holding up nicely as of midnight, having logged a 7-point decline from that high. I'd suggest using a two-peak stop-loss on the 5-minute chart, which at the moment would imply exiting at 1251.50. The stop should trail lower as new peaks are created on the way down tonight, but you should bail out now for a $300 profit per contract if you cannot monitor this trade closely. The shallow pullback so far will lend itself to any short-squeeze plans DaScumballs might be cooking up for the opening. _______ UPDATE: The short is still viable as of 10 minutes after the opening, since there were no impulsive thrusts on the 5-minute chart overnight. If you hold multilots, I'd suggest covering at least half the position here, near 1235.50, for a profit of about $900 per contract. If you hold just one contract, use a two-peak stop-loss on the two-minute chart.

I'm not privy to any rumors concerning Merrill Lynch, but the stock has certainly been acting like there are some juicy stories out there. From a Hidden Pivot perspective, it looks as though the stock will fall to at least 13.36, or 31%, but there's a possibility the bloodletting could extend all the way to 6.61 if the higher target does not evince much support.

Should the Government simply have allowed FannieFreddie to die? That's the free-market, libertarian point of view, and it was expressed most persuasively in the latest monograph from the Mises Institute, How to Avoid Another Depression. Some might argue that avoiding a depression was exactly what Paulson did when he announced on Friday that the U.S. had seized control of the two mortgage giants. News stories out over the weekend said that he had no choice ' that foreign investors were threatening to cut and run if he didn't do something. We heard a similar argument yesterday when we sat in on a conference call between editors and promotional writers of a company that publishes a slew of financial newsletters. 'We wouldn't even be having this call if the government hadn't arranged a bailout,' one of the editors opined. 'In fact, we might not even have jobs, the banks might be closed, and the phones might not be working.' Pretty serious stuff, but there's no denying that the fallout from a laissez-faire approach could have brought an abrupt halt to business in the U.S., as well as stunning changes in the daily routine of millions of Americans. Op-Ed Ignorance The trouble is, only a moron or someone writing op-ed in The Wall Street Journal could believe the 'rescue' is going to solve anything. Fannie and Freddie are going down, make no mistake, and whatever crisis was coming has merely been postponed. It could also be argued that by stage-managing the demise of the two lenders, the government has all but ensured that their eventual collapse will take more victims with it than if the GSEs had been taken off life support. As Mises author Mark Thornton notes, a U.S. takeover of FannieFreddie 'does not help troubled homeowners or prospective buyers. It

For a minimum downside target, we've been using a 738.80 target that comes from the weekly chart. However, for purposes of bottom-fishing into week's end, and to obtain the kind of precision we need to do it with relatively little risk, I'll suggest using the 731.60 target shown in the chart (inset). The pattern will also afford us a second such opportunity -- at 745.00, the target of A2. The lower number can be bid with a 730.90 stop, but I'll leave risk-management details of the second to you. Alternatively, the first encouraging sign of a turnaround would come on a print at 768.70.

There are two Hidden Pivot supports on the daily chart where we might attempt to bottom-fish today. The first lies at 10.530, the second at 10.240. The latter would be the more conservative bet, but whichever you decide to use, I'd risk a stop-loss initially no wider than 3-4 ticks. Both targets come from the 5-minute chart and use yesterday's high, 11.670, as point 'A'.

Yesterday's miserable excuse for "action" did nothing to alter my forecast of weakness to at least 1195.00, and a tradable swing low at that price, over the near term. We would adjust our bearish thinking, if not the target itself, on a print today exceeding 1254.50. (There's a midpoint resistance as well at 1253.00, so a rally that even slightly surpasses the higher number would deserve our attention.) _______ UPDATE: In after-hours trading, today's bull hoax has so far slithered its way up to -- surprise, surprise -- 1253.75, three ticks from the midpoint noted above. Night owls can short here with a 1254.75 stop, but please note that this trade is riskier than usual because of the panicky bubbliness of the final hour.