Commentary for the Week of March 8

iPads flew off the shelves over the weekend, at least for a while, but most stores reportedly still had a few of the devices left after the initial buying panic subsided on Sunday. Although there’s been plenty of speculation that the device will be a paradigm-changer for users, the question of which paradigm it will change remained murky at press time. Just about any new device in the computer family is going to shift the game away from Microsoft in some small way, at least, since the Redmond-based software monolith hasn’t brought anything exciting to the marketplace since it introduced the Office suite in 1989.  Apple hasn’t exactly been standing still in the meantime, and the company looks like a good bet to surpass Microsoft in market capitalization sometime this year or early next.  Actually, there’s no reason why this couldn’t happen in mere days if investors were to suddenly grasp how Steve Jobs & Company has already eaten Microsoft’s lunch going out to 2015 and beyond. Remember when Microsoft was planning to dominate our living rooms with a “smart” home entertainment center that would have made going out on Saturday night unnecessary?  There were predictions that all of us would eventually pay the company a royalty for just about anything that made us feel good. Instead, they produced Windows 7 – a pretty decent operating system by most accounts, but not something you’d find at the top of the hedonist’s shopping list. Microsoft’s Last Chance Microsoft has been marking time for so long, accumulating cash it has no idea how to use, that it has forgotten how to innovate.  Our suggestion would be to team up with Sony, another company that has lost its way, to deliver the ultimate killer software that we all know is coming anyway.  We

What does Fibonacci analysis predict for Comex gold over the coming year?  We recently heard from a skillful practitioner of the dark arts, “Mestre Socrates,” who sees $1490 an ounce by around next May. But there’s a chance the path will not be smooth, he cautions, since prices could first dip as low as $1012 – more than $100 beneath current levels.  That would represent a great buying opportunity, however, according to Socrates – a place where bulls could back up the truck.  How confident is he?  Socrates notes that gold’s long-term price movements have been precisely foreseeable on the basis of Fibonacci sequences that have traced out cup-and-handle formations.  “Gold appears to have a predictable trading pattern of a new high, a slam down to the previous Fib level, reworking back to the previous high, a dull six-month ‘handle formation’ period, and then a two or three-month rally to a new Fib level. This has given workable projections for the comex gold price years in advance.” Socrates studied Fib numbers a decade ago with Larry Pesavento, a well-known technical analyst. “One of Larry’s ‘big ideas,’ ” he notes, “was the particular significance of the 0.786 level, which marked the transition from a simple retracement to a primary bull trend. Furthermore, once breached, a price could take out the 1.00 level and go straight to 1.272. The last major hurdle was to break through the 1.618 level and then ‘the sky was the limit.’ This applied to any financial instrument.” No Mere Oscillation So how does it apply to gold?  Socrates provided a detailed account of bullion’s ups and downs from 2003 forward, noting breakouts and cup-and-handle patterns that played out over periods as long as 18 months.  To bring the forecast up to date, the recent move down from

(Editor’s note: Is economic recovery slowly emerging? And is there perhaps a benign side to the alarming expansion of the nanny state under President Obama? Readers aggressively rejected both of these ideas in responding to yesterday’s essay by “Donniemac.” Following are the comments of Chris T., whose thoughts mirror our own, especially where they pertain to the steepening decline in America’s standard of living.) I could not be as sanguine as [Donniemac]. We always read about all this being caused by the general profligacy of an entire generation. To some extent of course that is true. However, what is the backdrop to all of that? A few generations of Americans grew up in a generally sound economic environment, where the norm was that the next generation would do as well or better than their forebears. It is this situation that finally went under about 40 years ago, as demonstrated by the real median-wage “growth” ever since. In order to cope with this development, meaning finding a way to keep that “normal” alive, Americans adopted coping mechanisms. First was the double-earner family, but when that failed to suffice, it was credit, credit, credit. Those that benefit(ted) from this were happy to oblige. Both changes had their costs, and they were not only financial. The loss of a stay-at-home parent (usually the Mom) had many non-economic costs as well. (To those women who chose to work instead of mother, this was not a loss; but many had no choice but to work). Coping Mechanism Now, of course, even the credit coping mechanism has failed, so that at some point the bitter realization of having to do with less than our parents had will have to sink in. This should have happened long ago, of course, but paradigm shifts of this nature are

(Editor’s note: We wrote here yesterday that mortgage forgiveness would crater the housing market to much greater depths, with homes ultimately falling 70% from their peak values.  The following response, from “Donniemac,” was one of the more interesting posts in the Rick’s Picks forum. He sees signs of a recovery, but also the death of the America Dream for many chastened borrowers.) Loan balances are either paid by the bank or the lendee. Therefore, the someone who is going to “pay” for the housing bust is the banking industry. And, eventually, the taxpayer probably will be called upon to prop up the banks -- maybe through very liberal tax write offs of bad debt or through another round of bailouts, who knows? What the collective “we” need to have happen is to have the current economic growth be real. I know that doom-and-gloom attitudes seem to be the norm, but from my view, a return to a functioning economy is slowly becoming a fact. But there will be a large number of citizens who will have their lifestyles drastically altered -- in particular, early boomers who are, say, 55 or older and who did not create any savings to speak of. I know, as my wife and I have a family full of them. And some of them are running scared. But I am off-topic. As the economy starts to gain some momentum, the pain of deflating the housing bubble can be eased, hopefully enough to not put economic activity back into a tailspin. The big unknown, IMHO, is how are the masses going to react to not being able to satisfy their consumer itch at the flick of a piece of plastic? For sure, the extension of unsecured credit, or credit lines secured by home equity, is going to

Although Bank of America has won praise from the news media for offering to reduce the mortgages of tens of thousands of underwater homeowners, Rick’s Picks readers were less kind in their assessment of the new relief program. One reader who posted in the forum saw it as an act of desperation – B of A’s only hope of keeping foreclosed assets from being liquidated at street value. “[The bank is] leveraged so highly that they have no choice but to write down twenty percent rather than take one in the teeth,” wrote Mark L.  We ourselves had called mortgage modification the most consumer-oriented idea to come out of the banking sector since the real estate crash began in 2007. We hadn’t intended to sound so kind, since, no matter what kind of rescues are tried, we still expect real estate prices to fall by a further 35 percent before deflation has run its course in perhaps five to seven years. We also think that by bailing out homeowners directly, the banks have inadvertently made the underlying fallacy of mortgage relief transparent – so much so that even such as Paul Krugman, the aggressively obtuse economics writer at the New York Times, is likely to recognize the plan’s fatal flaw before too long. Krugman and his colleagues have come only halfway in describing the problem, noting the moral dilemma of rescuing homeowners who bit off more than they could chew with the tax dollars of those who were prudent enough to stay out of trouble. What the pundits have failed to point out, however, is that the prudent will pay an even bigger price when their homes drop in value by tens of thousands of dollars overnight after their “rescued” neighbors’ homes have been marked down by lenders. $250k Markdown