Market Outlook

My recent feature on the steep decline in lending standards drew some illuminating responses. I will reprint several of them this week, starting with the following letter from a man who once worked for World Mortgage, the primary lending arm of Golden West Financial Corp.. Although Golden West still enjoys a stellar reputation, the source quoted in my commentary raised doubts about whether the firm has continued the sound lending practices established under Herb and Marion Sandler, Golden West's co-chairs. The writer has only praise for the Sandlers personally but says the realities of the marketplace may have dictated certain changes in the way the company they run does business: 'I have enjoyed reading your articles on 321Gold.com, and your recent article "Lending Standards Plumb New Depths" caught my attention especially because I used to work for Golden West through their Savings and Loan Association, World Mortgage, in their Atlanta office. It was the best financial education that I every had in my career. What they taught me opened my eyes to the foolishness of the reality lending market. 'World Mortgage had to deal with competition like every other S&L, and even though the Sandlers kept a strict set of standards, there would always be the reality of the marketplace that we had to deal with. During that short time with the company, and in the industry, no-documentation loans were lighting rods for mortgage fraud. I had countless Realtors approach me with offers of shady deals, dual contracts, falsified loan applications, questionable incomes, and the like. The Sandlers gave total veto power to loan officers in the field. Herbert Sandler said that there is no shame in one of his loan officers saying 'no'. Golden West's Pride 'But after reading your article, it seems that their lending guidelines have changed

The U.S. real estate bubble continues to swell like a lava dome, supporting full-blown manias on both coasts and in quite a few cities, suburbs and towns in between. You'd have to live in a place like Muncie, Indiana, or Vernon, Texas, to be unaffected by it all. In Vernon, a town of about 12,000 in the lower panhandle, a mere $50,000 still buys all the house a growing family could need. To put that in perspective, a beach dweller in the Hamptons could trade his or her property for 200 homes in Vernon, with enough left over to buy a few Wichita Falls mansions. Not that anyone from the Hamptons is yearning to relocate to the Texas scrublands. Vernon is a quiet place, one where even big deals are still done on a handshake. But you'd be wrong to infer that it is a relative dearth of wheeler-dealers that has kept prices there from taking off. In fact, the town is where Charles Keating seeded his schemes. Yes, that Vernon Savings & Loan -- where my wife's grandmother kept her savings. SoCal Mania But I digress. For it is not Vernon's affordable housing that we wish to discuss, but rather the vast number of barely affordable homes on inventory just about everywhere else. In Southern California, to take a particularly notorious example, the concept of 'barely affordable' has been stretched to the threshold of the metaphysical. Los Angeles County's frothy market offers dwellings that only 17 percent of buyers can afford at the median price. And it's even worse in Orange County, where the figure is 11 percent. But how, you ask, can real-estate mania be going full-bore in a region where home prices are so very high? Some would answer that it's simply a matter of all-but-insatiable demand meeting temporarily insufficient supply.

Wednesday's on-line Q&A session was quite a bit longer than usual, but it allowed me to field queries in real time from more than a dozen subscribers. Tradable issues that received coverage intraday included the mini-S&P and mini-Nasdaq contracts, as well orange juice futures, General Motors, the Housing Sector Index, Imperial Oil, Clifton Mining, July Wheat, the Health Sector Index, Silver Standard Resources, Panera Bread, July Coffee, Novagold Resources, and Golden Star Resources. A pretty exotic mix, as you can see. One issue that I overlooked was Coeur d'Alene, where we took some profits during the day. You may recall that we bought the stock a few days ago at 2.70, a hidden-pivot support that I'd advertised as a possible swing low. So far, the pivot has held up pretty well, since CDE made a bottom at exactly 2.70 and has since rallied to 3.00. For aficionados of promotional hype, that works out to an annualized gain of�let's see now�3,600% (!!!!!) . I advised some profit-taking at 2.88, then at 2.99, which has left us with a long position half the size of our initial stake, and a cost basis of 2.47. (Click on image to enlarge) I mention all of this because the trade has conformed almost perfectly to our strategic ideal of staking out long positions in a shaky mining sector with little or no risk. My initial stop-loss below the 2.70 bid was 2.59 ' somewhat wider than usual --- but the goal was to initiate a position at a low that had the potential to mark a bottom of at least short-term importance. Of course, despite the earlier profit-taking, there is still risk in the position because we continue to hold CDE shares. But by now we've lowered the position's cost basis sufficiently to cushion ourselves

June Gold has broken down once again with Friday's breach of a hidden-pivot support at 417.70. Earlier in the week the futures took a weak bounce off that number that lasted for a few days, but now that it has been violated a test of round-number support at $400 seems likely. Bullion's weakness was corroborated by corresponding strength in the Dollar Index, which punched through a hidden-pivot resistance at 86.33 that had contained the greenback for a few days. The mini-euro, meanwhile, finally succumbed to gravity after holding for several days significantly above the 1.2462 downside target I'd projected a little more than a week ago. As gold and the dollar went their separate ways, the euro synchronized, giving up 0.84 points to end the day at 1.2564. Its weakness was attributed to the apparently growing likelihood that the French will reject the EU constitution when they vote at month's end. Whether the dollar, euro and gold will continue to move synchronously is anybody's guess, but if they do, their respective trends should be expected to end at hidden pivots of comparable degree. This implies an impending swing-low in June gold at exactly 401.90 that occurs more or less simultaneous with one in the June mini-euro at 1.2462. I can discern no corresponding rally target for the dollar, but suffice it to say, the Dollar Index has broken out of the channel that was shown in the chart accompanying last Wednesday's commentary, titled 'The Dollar Doesn't Know It Should Be Falling'. As a final note, I'll mention that we took a speculative position in the shares of Coeur d'Alene on Friday, notwithstanding my bearishness on the precious-metal complex over the near- to intermediate term. We'd been waiting for CDE to fall to a promising hidden-pivot support at 2.69, and on

The stock market was at its nutty, kinky, entertaining, devil-may-care best yesterday as shares in the home builders exploded higher on word that the Fed intends to keep raising administered rates. "The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run,' said Donald Kohn, an obvious stiff who sits on the central bank's board of governors.  With the Dow up over a hundred points, Treasury yields falling and oil quotes in a state of collapse, it was one of those magical mornings when the illusion that the Federal Reserve is in control of the economy temporarily overwhelmed more acute perceptions that, in reality, the central bank is tending a credit bubble that has continued to swell unabated, like a Yellowstone lava dome. (Click on image to par-ty!) So why, some observers may be wondering, did the shares of home builders leap for joy on the news? One can only surmise that a few too many bears had become fixated on the lava dome rather than the sunny illusion, and that this caused them to short the likes of Toll Brothers, Beazer Homes and Horton to significant excess. Although the gap-up opening in these stocks on Wednesday may not have afforded bears a perfect opportunity to cover their short positions, it sure as heck provided them with the inspiration to do so, and quickly. Credit Crunch Begun? With the broad averages climbing sharply in the first half of the session, it was obvious that the wet sponge thrown by Dr. Kohn was insufficient to quell bulls' ardor for shares. But neither did the added dousing provided by news that the Fed has started telling banks to tighten their lending practices. If this is a red flag that

Both gold and the dollar reached hidden-pivot targets yesterday that deserve our close attention. I'd advertised a 417.70 downside objective last week for Comex June Gold and an 86.33 rally target for the Dollar Index. Both objectives were very nearly met on Monday, with the Dollar Index topping at 86.39 and June gold bottoming at 418.20. I usually like to see my targets reached very precisely, but in this case, because the two vehicles have been approaching potentially important swing points more or less in-synch, we can allow a few ticks' leeway. Under the circumstances, yesterday's price action could prove to be an important turning point for both vehicles. I don't mean to imply that you should mortgage the farm at these levels to make a bullish bet on gold or a bearish one on the dollar. In fact, I still have my doubts that bullion will end its six-month wallow before it has shaken out bulls with a feint below $400. Opinions aside, though, from a hidden-pivot perspective this is the best opportunity gold has had to turn around since late March, when it approached a similarly important hidden-pivot support that subsequently gave way. This time, to be mechanically objective in assessing the significance of any rally that unfolds, we should set the bar at 432.60 for the June contract, since a print at that price would create a bullish impulse on the daily chart. I should also mention that the euro has so far failed to make a low corresponding to the Dollar Index rally target already reached. It would have been nice if all three vehicles 'the dollar, gold and the euro ' were perfectly in synch, but two out of three isn't bad. In fact, the euro's recalcitrance could prove to be especially bullish for gold

Let's you and I wake up this morning and break some mirrors, just to show the Karma who's boss, okay? We'll lean ladders against our houses and exercise beneath them at hourly intervals. And keep salt shakers at our desks to freshen the luck o' the devil. And spray-paint our cats black, just to screw with our neighbors' heads. And then, we'll place our bets. But first the bad news: When the opening bell sounds Friday morning, the most promising bet we could make will be the 'Don't Pass' line in gold. Yesterday's defenestration of bullion and mining shares caused certain vehicles that we track to transform what might have been a exhilarating turnaround day into a bloody rout. Specifically, the HUI 'Gold Bugs Index' exceeded an important hidden pivot 172.69 by 1.15 points, and June Comex gold exceeded an analogous downside target at 421.40 by 60 cents. That might not sound like much, but in hidden-pivote-ese it amounts to wholesale carnage. (Click on image for good luck) The fact that neither hidden-pivot support evinced even the slightest presence of strong hands implies that bullion quotes are almost certainly fated to continue lower. The good news is that June Gold will have another chance to turn around not terribly far below Thursday's bottom. In fact, the prospect looks sufficiently promising that I've provided a strategy in today's Rick's Picks designed to help you try bottom-fishing next week with a stop-loss of less than a single point. The pivot is about as confidence-inspiring as they get, and so has the potential to provide us with a rare trading opportunity in a favorite vehicle. The support looks like it will work very precisely, meaning that any over- or undershoot should amount to no more than two or three ticks, tops. But keep in mind

A week ago gold looked as though it needed just a little more weakness to set the stage for a potentially powerful rally. At the time, I specifically identified a promising hidden-pivot support in the Gold Bugs Index (HUI), and said it would have to be touched before bullion took off. The pivot lies at 172.69, but what we got instead was a so-far pathetic bounce from 175.32. This is not a healthy sign. Although it would be bullish as all get-out if this uptrend appeared capable of surpassing the 203.69 high recorded on April 1, the rally instead looks like it's about to roll over without having exceeded a single prior peak on the daily chart. Bottom line, if a buying opportunity still awaits, we will have to be patient to take advantage of it. Gold may eke out a little more upside in the meantime, but if so it won't be a rally we should trust. In any event, let's keep an eye on a hidden-pivot resistance at 186.94, since that's where the trend is likely to fizzle if it's going to. I'll also stipulate that a two-day close above it would portend additional upside to at least 192.24 (a hidden pivot). I'd be tempted to try shorting there, albeit with a very tight stop. The rally could end at that price, but even if not, it represents a swing-trade opportunity that we could ill afford to miss in a market as turgid as this one.

I've been doing my best to avoid raising your expectations for gold, since technical signs have not looked too promising for the last couple of months. Most recently, we focused on some Comex charts to tell us whether the intermediate-term trend might be changing from bearish to bullish. The drum-roll number was 441.20, basis the July contract, and although the futures came within $2 of that price last week, they have since receded by nearly $10, dashing our hopes for the umpteenth time. But this latest bout of weakness may be just what bullion needed to recharge for a sustained move above the $451 peak recorded on March 11. The bullish scenario looks more compelling in the chart of the HUI, and that is why I have reproduced it below instead of a Comex chart. I've labeled an AB impulse leg and a CD follow-through leg that has a 'D' target just a couple of points beneath last Thursday's 175.32 bottom. To be precise, the hidden-pivot target lies at 172.69, slightly less than 3 percent away. My hunch is that the current correction in gold will not end before that number is reached. However, that could be within a matter of days, so we should be prepared to attempt some bottom-fishing in some of the mining stocks tracked in Rick's Picks. As has been our practice in recent months, any bids will be tied to very tight stop-losses. This is because, if the 172.69 pivot works at all, it is likely to work very exactly. If so, there is no reason to risk more than small change as we speculate against the trend. Detailed strategies for doing so will be provided this week in the Current Touts section of the newsletter.