Commentary for the Week of March 8

We searched in vain for news yesterday that might have explained the nearly 300-point drop in the Dow Industrials.  Granted, there were reports of dramatic weakness in home prices and a downward revision in Goldman’s GDP forecast for Q2, to 3% from an earlier 3.5%. But that stuff is old hat, at least in a newsletter world that has always viewed the recovery story as an unpersuasive hoax. And what’s the big deal anyway about a 4.2% drop in home prices when it seems entirely likely they will fall by a further 50% before the crisis ends?  To expect a better outcome is folly when residential real estate has already fallen 35% despite a multi-trillion dollar “stimulus” by the central bank. As for the GDP figure that supposedly knocked investors for a loop, the numbers were never even remotely credible to begin with, extrapolated as they undoubtedly were from the same murky sources that the Labor Department uses to understate unemployment each month by more than half. Why worry about economic reports that nearly everyone except the editors of the Wall Street Journal and the New York Times know are completely made-up?  It beats us. Nor can we fathom why the supposed termination of QE2 later this month keeps surfacing in the mainstream media as a source of angst.  Does anyone actually believe the government will not continue to monetize Treasury debt as though there will be no tomorrow? The Federal Reserve has become Treasury’s biggest “buyer” by far and will soon surpass China and Japan combined in that category. Does that sound like a good time to go cold turkey?  That’s what we thought -- and we’ll lay odds on it. Meanwhile, although some have argued that QE2 has been a bust, who besides Obama, Bernanke and a few

When I got socked with a 25% increase in health insurance premiums last January, I’d assumed that that would be it for the year. In the past, like clockwork, there has been a staggering rate hike effective on New Year’s Day, but no more increases for the next twelve months. Not this year, apparently.  On Friday, I received a notice of yet another 20% rate hike, and it left me wondering whether my premiums will have doubled by the time 2012 rolls around. Like all such health insurance notices since the passage of Obamacare, this one attributed the increase to new rules and to healthcare costs that continue to spin out-of-control: “Your new premium appears at the top of this letter and reflects a combination of recent changes required by Health Care Reform,”  read the notice.  Specifically, there were two reasons given for the increase: 1) the birthday of a policyholder; or, 2)  an increase in claim levels by policyholders in my state, Colorado. This the very same “reform” that the new Republican majority in Congress swore it would kill and which the Wall Street Journal labeled the “Worst Bill Ever”.  No argument here. Unfortunately, for an execrable piece of legislation that a majority of voters despise, and upon whose egregious flaws Republicans trained their heavy artillery during last fall's campaign, it is doing quite a bit of damage without having been even 20% implemented. It were as though the Fed had announced a trillion dollar stimulus package: the mere anticipation is all that’s needed to set off a defensive panic by all who are exposed to the dollar.  In this case, the insurers will have exposure on the claims side that had previously been neutralized by their ability to peg rates to individual risk. No longer, though. One-size-fits-all policies

Our end-of-world date came a few days later than preacher Harold Camping’s, but it looks like we were both wrong.  Unlike Camping, we were not so much concerned with the wrath of God -- which, one fervently hopes, has been amply vented by the spectacular irruption of natural disasters visited upon the planet and humankind lately. Rather, our chief worry concerned the potential top that we saw forming in the 10-Year T-Note.  Not exactly the Rapture, let alone Judgment Day, but perhaps troublesome enough to set the world’s financial system on course for its own day of reckoning. For if prices for Treasury paper are indeed topping, and yields therefore bottoming, then scores of millions of debtors are about to be squeezed to the brink of insolvency. Perhaps we needn’t have worried. Yesterday, the June 10-Year T-Note futures finally hit the 123^21 rally target we’d proffered weeks ago by way of a Rick’s Picks trading “tout.” Then, in apparent defiance of natural law and the black artfulness of our proprietary Hidden Pivot analysis, they continued higher.  Not much higher, to be sure, but higher enuf to suggest that the preference of buyers for “safety” over risk is unlikely to abate over the near term. Bailing Out of Short Well in advance of this by-now fabulous surge in Ten-Year paper, we’d told subscribers to get short at the projected top, but with a very tight stop-loss of five ticks.  We reiterated this cautionary note in the chat room yesterday after a phone conversation we had with our friend Doug B, an occasional contributor to this site. Doug mentioned that the good folks who brought us QE1 and QE2 were contemplating something a little different for QE3 – i.e., a 1950s- style targeting of rates on the 10-Year Note. Presumably, this would

Yesterday’s rally in the broad averages presented a dilemma for us, since we’ve been short the E-Mini S&P futures from 1358.25 and had a paper profit of $2800 per contract at the intraday low.  Even more problematical was that we fully expected the futures to reverse direction from within a hair of that low, and to do so sharply enough to warrant initiating a long position there.  Earlier in the week, with the futures trading around 1315, we had advised subscribers to look for a bottom at exactly 1303.25, and to bid there with an extremely tight stop-loss, at 1302.50. Lo, the futures fell in the wee hours Wednesday morning to 1302.25, stopping us out for a minuscule loss before they turned and ran 20 points higher into day’s end. Should we have covered the short position, since we’d anticipated the reversal? Ordinarily, the answer would be “yes,” since we adhere obsessively to a risk management strategy that holds risk:reward constant at 1:3 in each and every trade, from entry till exit. In this case, however, we had resolved to let the position run until such time as it produced a theoretical gain of at least $5000 per contract. We are sticking to that plan for now, come hell or high water – swinging for the fences, as it were, even if it means giving up the $2800 of theoretical profit that we had within our grasp at yesterday’s lows. Anticipating yesterday’s run-up, we had sought to “protect” our short position in the E-Mini futures by doing a trade “against-the-box.”  To make this strategy easier, we suggested buying, not E-Mini futures against those we are already short, but call options on QQQ. Specifically, we recommended buying June 56 QQQ calls if the underlying vehicle came down to a Hidden Pivot

Bullion futures could still have one last relapse before the correction from early May’s record peak has run its course, but odds of this occurring are diminishing by the day. We told subscribers Monday night that Comex June Gold would be out of the danger zone if it closed above 1528.70 yesterday. In the actual event, the futures got as high as 1529.00 – three ticks above our minimum target – but they were unable to sustain altitude and dropped back $9 before getting second wind. Bulls seized the advantage by recouping about half of the loss as the session drew to a close. Looking just ahead, if the June contract rallies on Wednesday and is sitting above 1528.70 at the final bell, we’d rate it an odds-on bet to continue rising over the near-term to at least 1594.90.  That would represent a rally of a little more than 4%, and we would expect that it would take about 6-8 days to play out.  As of Tuesday night, chances of this occurring looked good, since the June futures were in a pattern projecting to 1536.30 over the very near-term. That’s a “Hidden Pivot resistance,’ and although we’ll be looking for a pullback precisely from that number, a moderate retrenchment could leave the futures holding above the 1528.70 threshold noted above. We have inferred that Gold would be pulling Silver along with it, since the latter needs to rally from a current 36.560 to 44.000 to trip the same go-ahead signal as Gold. Both Gold and Silver have been moving very precisely to our targets in recent weeks. The May 2 peak in June Gold at 1577 fell just $4 shy of a longstanding target we’d been using at 1581, and subsequent retracements in both Silver and Gold futures came down

[ Doug Graham, a frequent contributor to Rick’s Picks, finds striking similarities between the U.S. economy today and that of 1980s Japan just before the bottom dropped out. Can we change the big picture in time to prevent an economic collapse? Not likely, says Doug, who saw clouds gathering over Tokyo a generation ago, when he worked for a Japanese firm as a sales liaison to Compaq Computer in Houston. RA] In the late 80’s I often visited Japan for work with the IC companies.  It was an amazing time.  They appeared rich and powerful.  Their dominance was awesome, and with a little extrapolation it was obvious they would soon rule the world.  They seemed unstoppable. It was 1987 and I was employed by a Japanese IC maker and responsible for sales to Compaq Computer in Houston, Texas. For a twenty-something, it was a thrilling job.  I was taking classes in Japanese.  I'd visit Japan every few months.  Two things jumped out at me regarding Compaq’s use of technology.  Of course, they built computers, and computers were productivity machines, so they made sure that every Compaq employee had one and used it to its extreme.  It made sense, since they could consume their own product and create their own productivity at cost.  Second, e-mail.  In 1988, Compaq was (internally) communicating like crazy electronically. 1988.   Most companies weren’t and this was a great advantage.  They ate their own cooking. Juxtapose that with Tokyo:  In nearly every department, on every story of our humongous Tokyo building:  two rows of ten desks, butted up against each other.  At the end of the row was one computer (they were extremely proud that they’d made it) which all twenty employees would share.  Internal communication was in person or by phone or fax.  Inefficiency by design. 

Because stocks and commodities sometimes fluctuate for reasons too complex to speculate on let alone predict, we often look to our charts to tell us what diligent guesswork and informed reasoning cannot. At the moment, our attention is riveted on the 10-year Treasury Note, which has been flirting with a major rally target, and by implication, a potentially very important low in lending rates. If so, the implied shift in Treasury paper from bull market to bear is one that we cannot afford to take lightly, since nothing would hasten the country’s descent into economic depression as certainly as the ratcheting up, even slightly, of key lending rates.  Try to imagine the impact of this on, for one, a residential real estate market that has already shed a third of its value since the beginning of the Great Collapse several years ago.  Commercial real estate would be in fatal jeopardy as well, since the accounting tricks that have been used to mask its true condition rival in deviousness even those the Federal government has used to conceal the fact of America’s bankruptcy. We have been predicting here for years that home values would ultimately decline by 70 percent and that the collapse in vacation properties would be even worse, hitting 90 percent.  However, given the unprecedented weakness of these markets in the face of a failed multi-trillion dollar monetary stimulus and a dead-cat bounce in the stock market that has taken more than two years to play out, one shudders to think about how quickly the final phase of the collapse would unfold were the flimsy support of artificially suppressed interest rates to be removed. Watching Dollar Closely We first glimpsed the gathering storm in T-Notes during one of the impromptu webinars that we conduct from time to time during

[Crude oil is just one of many things the world is running out of, says our friend Tom McCafferty, a frequent contributor to Rick’s Picks, in the guest commentary below. Never one to pass up an opportunity, Tom, author of Options Demystified and numerous other books on trading, suggests using puts and calls to manage short-term risks while investing for the long haul in “real entities that produce real products.” RA] We are all familiar with all the hullabaloo in recent years over Peak Oil.  Dozens of books and websites devoted an enormous about of space to scaring the pants off of us. In a few years, we would be all be sitting in a dark, cold room without access to “Dancing with the Stars”.  Man …that will be a bummer. Before you get your blood pressure back under control, I’m here to tell you the Peak Oil is just the beginning. The World is facing more peaks that it can handle in the next few decades. For example: •  Peak Water:  The World does not have enough water for crops or the increasing population.  Every wonder why China was so aggressive to control sleepy little Tibet?  Guess where the origins of the five great Chinese rivers are located?  Or why it is importing so many tons of soybeans?  When thinking about food importation, think of it as just a substitute for importing water.  China is not alone.  In India, the Green Revolution is now a disaster. •  Peak Population:  How many people can the World sustain?  I’m afraid we are going to find out the hard way.  More specifically, how many senior citizens can it take care of … think of our Social Security system and then think of countries like Russia or Italy that have an even more

[Have Gold and Silver seen their lows for this correction? Were encouraged to think so, for two reasons. First, downtrends in both Comex June Gold and July Silver reversed on Tuesday from precisely where they should have if the long-term uptrend is to be judged healthy. Second, our astute friend and mining stock consultant Chuck Cohen, who turned cautious on bullion just before the correction began, thinks the selling may have run its course.  In the guest commentary below, he explains why. RA] Like Freddy Krueger, it's back. The infallible New York Times contrary indicator has returned for another testing. If you remember last August at the market bottom, amidst the palpable gloom on Wall Street, the Times was moved to interview superbear Bob Prechter on the dire market situation, not coincidentally within a week of the bottom. At the time, I mentioned the Times contrarian indicator in a lengthy essay published at LeMetropole Café, 22 Things to Look for When Gold Finally Makes Its Top. For some amazing coincidence, since the Times rarely takes sides at the markets, when it does it is usually right on the money -- on the wrong side. Lo, last Sunday, one of the Times' savvy financial reporters wrote about the seemingly endless gold bubble and the danger of getting caught in it. Read it and see what I mean. In particular, note the clear logic that gold has had a major correction of 4% after doubling from its bottom in 2008. The size of the correction is definitely proof that what goes up must always come down -- except for the thousands of positive articles the Times put out on housing through the mania several years ago. If the Times barometer continues to hold, we should be ready for something very special for