Tuesday, May 19, 2009

Caught Up in a Sucker's Rally?


With the S&P now a third higher than it was just 60 days ago, many have turned into stock market cheerleaders, doing jumping jacks and shouting the “irrefutable” news that a new bull market has just been born.

Well…you might want to just hold your horses.

The mere fact that the market is up after so many months of gloomy news is not exactly proof of an economic upswing. It is, in fact, so symptomatic of a recession/depression that the phenomenon has its own name:

The bear market or sucker’s rally.

“The granddaddy of all bear markets, 1929 -1932, had six false alarms with an average gain of percent. And Japan's ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then,” wrote reporter Spencer Jakob in the Financial Times.

“An authority on bear market bottoms, Russell Napier of CLSA, sees a 1974-1976 scenario unfolding followed by an even worse slump. In Anatomy of the Bear, he scanned media coverage around the bottoms of 1921, 1932, 1949 and 1982 and does not see the apathy that characterized those turning points.

“For the great bear market bottoms, you need a society-wide revulsion with equities,’ he said. ‘It just doesn't smell like the big one yet.”

Another sign? Stocks also become very cheap before major bull markets begin. Yet the 2000 bubble never fully deflated and even the recent low did not breach 11 times.



FIRST: I agree with this well-reasoned analysis. We will not see a new bull market for several years, but we will see several fake-outs, as we always do during such bear markets. Sometimes my success is measured not by the money you subscribers make, but by the money you didn’t lose. This is one of those times.

Avoid the Dow Jones Industrials, growth mutual funds and most stocks. They will wander around the bottom and drift lower for many years to come. Over the next three years, the big money will be made by a small minority who are willing to go against the Wall Street grain.

SECOND, if you are a true contrarian, you will ignore the stock market, except for a few industry groups, which I have already discussed and will discuss in future newsletters, and you must concentrate on preserving your capital, assuming the dollar will continue to lose value as it has been in slow motion over a hundred years. This will turn into an eventual price explosion in inflation hedges. Invest in bullion, particularly the hold-it-in-your-hands kind. Hide them in a safe place.

Forensic Examination of the Gold Carry Trade Is There A Supply Deficit?

by Rob Kirby | May 13, 2009

If you ask the World Gold Council or their “official numbers keeper” - GFMS – they’ll say there is no persistent gold supply deficit. If you ask the folks at GATA – they’ll claim there is an annual 1,000 – 1,500 tonne gold supply deficit.

So who’s telling the truth?

What’s interesting to note in this regard – the World Gold Council and GFMS haven’t always shared the same view regarding gold supply / demand aggregates. Empirically their positions, at times, have been ambiguously at odds with each other and have lacked continuity. Here’s how GATA consultant Frank Veneroso explained the disparity back in 2005;

“As I explained in the Gold Book, gold demand had been understated for years by GFMS, the ‘official’ keeper of the global gold statistics, as has been the flow of official sector gold. Official stocks were falling faster than the GFMS data would suggest. I presented abundant statistical information to make that case. We believe that the trend in the official data since then simply flies in the face of obvious facts and this discredits it further.

People ask us where we think supply and demand are now. Our standard response is that we don’t know, because the data available to us has become ever less reliable. In the old days, the World Gold Council produced a data series on gold demand for most (but not all) of the world. It was based on extensive survey data and it had no reason to be biased. It clearly showed a stronger trend in the growth of gold demand (excluding Western investment) than did the GFMS supply/demand statistics. For us it was an anchor that allowed us to see a growing error in the GFMS data (see the Gold Book). (more)

Hot in recession: Cheaper wine, chocolate, Spam

WASHINGTON – It's not all doom and gloom in the U.S. economy. Some products are bucking the recession and flying off store shelves.

Sales of chocolate and running shoes are up. Wine drinkers haven't stopped sipping; they just seem to be choosing cheaper vintages.

Gold coins are selling like hot cakes. So are gardening seeds. Tanning products are piling up in shopping carts; maybe more people are finding color in a bottle than from sun-worshipping on a faraway beach.

Strong sales of Spam, Dinty Moore stew and chili helped Hormel Foods Corp. post a 6 percent increase in first quarter sales in its grocery products unit.

Consumers have trimmed household budgets and postponed buying cars, major appliances and other big-ticket items. Yet they still are willing to shell out for small indulgences and goods that make life more comfortable at home, where they are spending more time.

Recession shoppers also are drawn to items that make them feel safe, both personally and financially. (more)

Jim Rogers: Food prices will skyrocket

Getty Images

Renowned investor Jim Rogers (pictured left) says that the rally in stocks and the dollar will soon end, thanks to the Federal Reserve's massive easing policy. "I'm not buying shares anywhere," he tells Bloomberg TV. "I'm not selling short yet. But...if it keeps going like this, I'll have to start selling short eventually. I don't see the stock market as a great place to be in the next two to three years, maybe even the next decade." As for the dollar, "we're going to have a currency crisis probably this fall or the fall of 2010," Rogers says. "It's been building up for a long time. We've had a huge rally in the dollar, an artificial rally. ... The U.S. dollar is a very flawed currency." Bonds also are overvalued, he says. And where does Rogers see investment opportunities? Commodities, as he has argued for months. "The only place I know where the fundamentals are getting better is raw materials," he explains. "We're going to have serious food shortages. ... Prices are going to go through the roof." Whether the economy rebounds or not, "commodities are going to lead it," Rogers says.

Dominant Social Theme: All falling apart?

Free-Market Analysis: We've noticed how Jim Rogers seems to have raised his profile recently, and the only reason we can come up with is that he wants the world to notice what he's investing in. But in providing so much information, he is also muddying the free-market message and leading investors to conclusions about which they might wish to be skeptical. (more)

House-Price Drops Leave More Underwater

Monday, May 18, 2009

The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration's efforts to stabilize the housing market.

The increase in the number of such "underwater" borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

For instance, fewer will qualify to take advantage of a key component of the Obama administration's plan to stabilize the housing market. Under the plan, announced in February, as many as five million homeowners whose loans are owned or guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac can refinance their mortgages, but only if the mortgage loan is a maximum of 105% of the home's value. (more)