Commentary for the Week of March 8

We’re too cynical to believe that the mere unmasking of Goldman Sachs & Co. on Friday as a corporate swindler caused U.S. stocks to weaken. Iceland’s ash-spewing volcano is where the real economic threat lies, we’re convinced. Granted, Goldman is the Government’s poster boy for the global banking system’s supposed recovery, and it won’t help appearances that the firm stands accused by the SEC of being, to put it colloquially, a bunch of double-dealing scumbags who would cheat their own clients to make a buck. But who doubted that to begin with?  It is only in the eyes of newspapers, network news anchors and CNBC interviewers that Goldman’s officers are corporate royalty. For the rest of us, meaning the newsletter world, the firm is about as trustworthy as someone who has done hard time for murder or buggery. Goldman has been getting away with the financial equivalent of both for years, although it has always been assumed the company was too well connected to be formally accused of wrongdoing.  While we sincerely applaud the SEC for taking them on (perhaps bidding to make amends for dropping the ball on Bernie Madoff), we’re concerned that the regulators may not know just who they’re messing with. Not that it took Deep Throat to tell them where to look. While the charges brought by the SEC concern Goldman’s sale of some esoteric financial instruments to investors, the crime itself is not difficult to understand. Here’s an account from the Associated Press that manages to divulge the juiciest part of the story in the opening sentence: “The government on Friday accused Wall Street’s most powerful firm of fraud, saying Goldman Sachs & Co. sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on

We must confess that our heart wasn't in it when we suggested here the other day that the stock market's already superheated rally might accelerate rather than flatten with the approach of summer. Such a scenario is of course possible, and it did occur last year. But this time around, with stocks trading nearly 40% higher, it would flout Mother Nature in ways that are most difficult to imagine.  For who could possibly believe that an economy in the throes of a debt deflation could be revived by precipitously borrowing more trillions of dollars against future output, then pumping nearly all of that money into goods and services that are economically questionable at best and purposeless at worst? The strong impression one gets is that Wall Street believes it, since stocks have been in a relentless rise for months. It requires a healthy dose of cycnicism, however, to see what has really been going on.  In fact, the public has abandoned the stock market, leaving the hedge funds and trading desks to run a shell game on the taxpayers’ dime that makes it relatively easy to hog-trade stocks higher and higher on almost no volume. This has been occurring nearly every day for months: index futures waft higher overnight on light short-covering, setting up a second wave of short-covering on the NYSE opening. No Skin in the Game It is tempting to view this action as a wealth-creating perpetual-motion machine even if we know the game cannot continue forever. What is different and dangerous about this bull cycle, however, is that those who have been causing stocks to rise – Goldman Sachs, J.P. Morgan and other Masters of the Universe – have no skin in the game. They have simply been trading amongst themselves, applying relatively small sums of cash to the

Better take a mental snapshot of yesterday’s glorious economic news, since it’s hard to imagine things will get much better. Retail sales for March were up a reported 1.6%, the service sector supposedly is rebounding nicely, and big-ticket items we starting to sell like it was 2006  all over again.  Economists were ecstatic, of course, since the torrent of good news allowed them to upwardly revise their forecasts for 2010 and beyond. Nor were the sunny tidings confined to Main Street. Over on Wall Street, J.P. Morgan weighed in with a 55% gain in profits for the first quarter, amounting to a tidy $3.3 billion.  Much of it came from their trading desk -- and a good thing, too, since we’d have been gravely concerned if their best and brightest had somehow failed to make money betting the “pass” line on a stock market that has been rising on maybe eight days out of ten in recent months. And rise once again the Dow did yesterday, surpassing yet another Hidden Pivot target with effortless aplomb.  We’d been using 11077 as a minimum projection for the Industrial Average for the last several hundred points; yesterday the blue chip average hit 11125, exceeding our mark by 48 points. A companionable target in the E-Mini S&P gave way almost as easily, implying that buyers are not yet finished. Cool Ben With all the hoopla and hubris, leave it to Helicopter Ben to totally keep his cool.  Here we have an economy that is going absolutely bonkers, and the guy insists there is little to fear at the moment from inflation.  This obviously was music to Wall Street’s ears, since it means that no matter how strong the recovery gets, the Fed sees no great urgency about raising the federal funds rate.  We love

Although Comex Gold missed a bullish trigger point by a hair the other day and has since sold off by about 2% , we expect the loss to be easily recouped, and gold quotes to be bounding sharply higher, by no later than next mid-week. Readers may recall that we recently projected a surge in June Gold to at least $1245 once $1171.80 was exceeded. A thorough explanation of the proprietary method we used to forecast this outcome, as well as details concerning the upcoming Hidden Pivot Webinar,  can be accessed by clicking here.  Suffice it to say, on Monday, gold futures tiptoed to within an inch of our threshold, peaking at 1170.70.  A further rally of $1.20 would have done the trick, but it was not to be; instead, the futures retreated without having exceeded the resistance peak shown in the chart below. The resistance is what we refer to as a “look-to-the-left” peak. It is just obscure enough that not all chartists and traders, even diligent ones, will tend to notice it.  But we most surely do, since, according to the Hidden Pivot Method, each discrete upthrust must surpass at least two prior peaks to re-energize the bull trend.  When a rally narrowly fails to do this, we usually infer that buyers are a bit timid. In this case, however, although the rally appears to have chickened out just shy of the “look-to-the-left” peak at 1171.80, it did so after having surpassed no fewer than four other resistance peaks. We’ve labeled them in the chart above and note that the peaks #3 and #4 are “external” highs whose breach implies more buying power than the breach of “internal” peaks #1 and #2. What to Look For… In this context, we should think of gold’s recent rally from 1086.10

With the Dow Average trading above 11000 -- a dubious benchmark that has been achieved on the thinnest trading volume imaginable -- it’s a good time to remind ourselves that the start of Armageddon, never more than dirty bomb or missile away, may be closer than usual these days. Or are we perhaps overreacting to news stories concerning the latest nuclear developments in Iran?  Here’s a timely summary from Debka.com:  “In addition to developing a ‘third generation’ centrifuge for speeding up uranium enrichment, Iran is close to activating its Bushehr nuclear reactor and completing its Arak heavy water plant - both providing easy access to weapons-grade plutonium for smaller, lighter and more easily deliverable nuclear warheads. Plentiful new uranium deposits have also been discovered in central Iran.”  If Europe was a powder-keg in the summer of 1914, the Middle East is sitting on enough explosives in 2010 to knock the Earth off its axis. Iran’s rapid progress in developing a bomb will not be news to President Obama, whose response has been to push for more – thought not necessarily tougher -- sanctions. Those who favor this so-far fruitless approach should read Steve Stecklow’s recent story in the Wall Street Journal concerning the U.N.’s supposed campaign to freeze Iranian bank assets. Turns out that a total of $43 million has been frozen in the U.S. to date -- equivalent to about a quarter of what Iran earns on oil revenue in a single day.  So much for the West’s ability to rein in a rogue state by, so to speak, repossessing its furniture. Throwing in the Towel For his part, Israeli Prime Minster Netanyahu appears to have thrown in the towel on sanctions, boycotting a U.S.-sponsored summit on nuclear terror that opened yesterday in Washington.  That Netanyahu may have given

“Sell in May, and go away?”  Any trader who plans to employ that time-honored strategy should take good look at the chart below before dumping his or her portfolio on schedule  in a few weeks. Notice that investors who exited the stock market right on time last year, at the end of April, would have missed a 12% rally that saw the Dow rise from 8168 to 9172 by Halloween, the traditional time to jump back in.  The adage that tells us to “Sell in May…” is based on the fact that, historically speaking, stocks in markets around the world have made their best gains during the period November through April; moreover, those gains would have been reduced substantially by holding from mid-spring to mid-autumn. While that is certainly true based on our own experience, some statisticians have demonstrated that the effect is negligible if, when considering the performance of stocks since 1982, you strip out the two crucial years 1987 and 1998. Whether you believe the statistics or not, memories of last summer’s powerful rally should still be fresh enough to dampen the ardor of sellers who think summer doldrums and seasonality are likely to turn the months ahead into a snooze. Summer or not, we are living in interesting times, and there is nothing to suggest that hot weather is going to slow the pace of interesting news of the kind Wall Street seems to thrive on these days. Blowoff In Progress So what are the odds that stocks will show the same kind of anomalous strength this summer and fall that they showed last year?  It’s hard to say exactly, but our gut feeling is that, far from being ready to collapse, U.S. stocks  are in a blowoff phase that is likely to steepen over the next

The upbeat earnings reports issued by retailers yesterday would have seemed inscrutable, had we not been buying merchandise ourselves hand-over-fist during the month of March. Our non-cash household purchases were all made on a single Master Card, and, for sure, the latest monthly bill was a whopper. It included a spring ski vacation, a set of Michelins, a porcelain crown and subscription tickets for next year’s season at the Denver Theatre Center.  But who could have imagined that millions of Americans would join us in shopping up a storm?  Our excuse is that the guru business has been good. Great, actually. But we have many friends who have been struggling through the Great Recession, and even the ones who have managed to keep their heads above water have succeeded in part by cutting back on household spending. So how to explain the impressive results turned in not only by high-end sellers such as Nordstrom’s, but by mid-level department stores like Kohl’s?  Sales there rose 22.5 percent for stores open at least a year, and Nordstrom’s led its group with a 16.8 percent jump. Its competitors did strong business as well: Saks reported same-store gains of 12.7%, and both Neiman Marcus and Bergdorf’s were up 9.2%. Women’s clothing, shoes, handbags and jewelry were the most popular items. A Pleasant Surprise This is hard to square with first-hand impressions gleaned at the local mall. The place usually feels pretty empty except on weekends, and the aisle traffic at Nordstrom’s, the shopping facility’s largest tenant, nearly always seems sparse. Still, it comes as a pleasant surprise that Nordstrom’s numbers have improved. It is one of the very few retailers that still does business the old-fashioned way, putting knowledgeable salespeople on the floor, selling high-quality goods, and standing behind everything they sell 100%. News

Having spent more than a month in limbo, gold now lies just inches from triggering a potentially explosive rally. Before yesterday’s sharp surge, disappointment in the form of leaden price action had dogged bulls since early March, when Comex futures failed by a hair to surpass an important prior peak after trending higher for five days. A Formula 1 racer might as well have blown a head gasket a hundred yards from the checkered flag. According to our proprietary Hidden Pivot forecasting method, a healthy rally re-energizes itself by surpassing two prior peaks with each new thrust.  So far in 2010, however, gold has conspicuously failed to do this on its daily charts. Now, however, the June Comex contract has a chance to blow past no fewer than four prior peaks without taking a breather, and to develop enough thrust in the process to all but clinch a test of last December’s all-time high at 1230.00. To be sure, we have detected no underlying weakness in bullion, even if it has been reluctant to pop to the next level. If it were otherwise, pullbacks would have reached their Hidden Pivot targets.  Instead, selling has dried up well short of the targets, and the subsequent rebounds have been relatively strong. The recurrence of this pattern in recent months has bullish implications, and they are corroborated by anecdotal evidence suggesting that physical gold has been difficult to buy in quantity whenever prices have dipped below $1100. What to Look For Now to specifics. The chart above shows that June Gold has risen without correcting since March 30, when it bottomed at 1102.40. With yesterday’s push to 1154.20, the rally has surpassed two peaks, but it need rise only a further 17.70 to exceed two more. That would create a powerful impulse leg

Even if the U.S. economy has hit bottom – a prospect that we view as extremely unlikely -- there is almost no chance the recovery will restore the nation to economic health. No one understands this better than the Baby Boomers, vast numbers of whom have seen their retirement plans go up in smoke because of the wealth-destroying effects of the Great Recession. Tens of millions of Baby Boomers are parents as well, and they are just starting to come to grips with the possibility that their children will experience a declining standard of living in the decades ahead.  As recently as three years ago, before the banking system and housing market collapsed, few would have believed America could fall so far, so fast. Now, with public, corporate and private debt hanging over us that has grown far too large to redeem, only a fool in denial could fail to see the dark shadow that has fallen over the economy. Even so, the illusion of prosperity seems likely to persist, especially with the stock market’s relentless rally, now entering its 14th month, to distract and disconnect us from the real economic world.  A comment posted in the Rick’s Picks forum yesterday by “EdwardO” [click here to visit his blog] trenchantly describes the folly of it all: “The cognitive dissonance about the land is now both pervasive and immense. The number of unemployed, underemployed, and otherwise financially and economically imperiled has ratcheted up over the last few years, and though the economic deterioration that began in earnest in early 2008 seems to have, at least by some modestly credible measures, abated somewhat in the last few months, the new normal, such as it is, is distinctly less healthy, less favorable to most, than it was. “And yet, despite the immutable facts