Saturday, March 3, 2012

Is Gold About to Go Parabolic to $3,495 in June ’13; $10,899 in Sept. ’14 and Top Out at $32,659 on Jan. 16, 2015?

According to recent Elliott Wave theory analyses gold is about to go parabolic reaching $3,495 in June 2013, $6,233 in April 2014, $10,899 in Sept. 2014, $18,712 in December 2014 and culminating in a parabolic peak price of $31,672 on January 16th, 2015!

Well known chartist Nick Laird ( has been following the gold market for at least as long as there’s been an interweb. He has used and talked quite a bit about Elliott Wave Theory, which is a not entirely uncontroversial method of linking investor and broader social psychology to market trends (and sometimes vice versa), often over decades-long periods. Elliott Wave Theory has had some notable successes and failures, and has its fair share of proponents and detractors…The fact is that for better or worse, EWT has very much a firm hold in many investors’ minds, and for that fact alone it is to be discounted out of hand at one’s peril.
Laird, with help from Geoff S, has put together an Elliott Wave theory prediction using ‘The Golden Mean’ & ‘Fibonacci Sequences’ [see chart below] to arrive at the above future prices for gold…He is hopeful that it will serve as ‘a roadmap which gold may take as it climbs to new highs‘.

Click to enlarge chart

Nick’s comments:

The first two uplegs (blue line) generate (through the formulas) the future uplegs (red line) as the price heads to it’s peak at W5(5). The Time, Price and Percentage of each leg up & down are shown on the edge of the chart.

So having left W4(A) behind the next 16 months we are heading up to W4(B). Presumptions are that the blue line (actual gold price) will stay above the red line for the first 1/2 of the next upleg falling to below the red line for the second half of the upleg and rising steeply into the peak of W4(B) as gold likes to do.

Perhaps gold’s final top is W4(D) or W5(1) or higher and perhaps the timing doesn’t play out right but this presumably will be something close to the shape of gold’s rise over the next few years.

Exciting stuff for gold holders. It’s not really for me to comment on whether or not I think this will or won’t happen, as all things are possible,…however, I can, I think, bring myself to point out the obvious. If $32,000 gold in 2015 were to come to pass then it would essentially accompany a devaluation of the dollar so quick, and so hard, that it would make your nose bleed.
The [above] chart is not just a roadmap for price acceleration in gold. It is essentially the road map for the disintegration of an empire, the ruin of the world’s reserve currency, and a time of fear not seen since Europe in the late ‘thirties. For that reason, if no other, then even though I own gold myself and would like to make a bob or two out of it, I hope that Nick is wrong. I hope that he is very, very wrong.

[I’m certainly going to be bookmarking this chart and checking back from time to time. If it works out with reasonable give and take then I think Nick will achieve Guru status within the precious metals internet community!]

Marc Faber: US 'Financial Mess' Will Force Government to Take Your Gold

Economist Marc Faber, publisher of the Gloom, Boom and Doom report, says the government will seize privately held gold, even as he continues to buy physical gold himself.

“I prefer to play the commodity space by owning physical gold,” Faber tells Chiefsworld. “If I were an American, I would store it outside the U.S., because in the U.S., it is not completely unlikely that they will eventually take it away.”

“Like in 1933, gold will be purchased back by the government” because eventually the financial mess will be so bad that gold prices “will go ballistic, and the government will take away something from a minority, and not many people own gold."

“When gold prices shoot up, it will be quite a popular measure to take it away from these rich people,” Faber says. “It’s happened before.”

From May 1, 1933, until 1974, U.S. citizens could no longer hold gold as a protection against paper money, which also lost its gold backing at the same time.

Foreign central banks could continue to exchange the U.S. dollars that came into their possession – known as eurodollars for decades — for gold and did so particularly when the U.S. dollar was devalued and then floated against the gold price in 1971.

Faber says he’s not in a hurry to buy gold, but accumulates gold every month because he believes the gold market is still under a correction.

Faber notes that the Chinese economy is slowing, and says it will slow further and perhaps crash at some point, which is why he is staying out of commodities other than gold.

Meanwhile, Nomura's Bob Janjuah says markets are so rigged by government policies that investing dangers lurk virtually everywhere.

"My personal recommendation is to sit in gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities," Janjuah writes at Zero Hedge.

"Bond and currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears."

Elsewhere, Gold traders are getting more bullish after billionaire hedge-fund manager John Paulson told investors it’s time to buy the metal as protection against inflation caused by government spending.

Twelve of 22 surveyed by Bloomberg expect prices to gain next week and five were neutral. Paulson & Co. is already the biggest investor in the SPDR Gold Trust, the largest exchange-traded product backed by bullion, with a stake valued at $2.9 billion, a Securities and Exchange Commission filing Feb. 14 showed.

3 Stocks for Dow 15,000 -- and 3 More for Dow 5,000

Give me one stock that would survive if we hit Dow 5,000 and one that would thrive if we hit Dow 15,000.

That was the question we posed to a group of writers two and a half years ago, just as the Dow Jones Industrial Average crossed 10,000 again. This week, after the Dow closed above the 13,000 mark for the first time in four years and hit an all-time high when adjusted for dividends, it's time to check in on those picks.

Rick Munarriz
Dow 15,000: Sirius XM, Dow 5,000: Netflix
Both of my picks did amazingly well, though I'm assuming that's a mixed showing since the market could only wind up higher or lower.

Sirius XM Radio (Nasdaq: SIRI - News) -- my pick for Dow 15,000 -- has soared 260%. The stock's high beta has served the satellite radio service provider well as investors buy consumer-facing companies during this painfully gradual economic recovery. It has only helped that Sirius XM is now a very profitable company oozing buckets of free cash flow.

I still stand by Sirius XM if the Dow does ultimately hit 15,000. The move will indicate that consumer confidence is growing, and that will likely accompany a boost in car sales -- satellite radio's biggest source of subscribers.

Netflix (Nasdaq: NFLX - News) was my selection for surviving a Dow plunge to 5,000. Despite the stock's perilous plunge since peaking this past summer, shares are up 134% since our original roundtable. Netflix proved its recession-resistant ways by appreciating in 2008 and posting heady growth as couch potatoes gravitate toward the DVD and streaming service.

I remain a Netflix investor, but I no longer see it as a safe play for the Dow at 5,000. Netflix is shedding DVD-based subscribers, and its growing streaming business is far more competitive these days. Netflix is no longer the only streaming smorgasbord in town, and less thorough rivals are even cheaper. If I needed a strong growth company that could withstand the financial collapse that would come with the Dow plummeting to 5,000, it would be SodaStream. Making soda at home for out-of-work refreshment seekers seems like both a worthy morale boost and a way to avoid stiff tabs at the grocery store.

Matt Koppenheffer
Dow 15,000: Intuitive Surgical, Dow 5,000: Johnson & Johnson
While the market hasn't exactly hit 15,000, it's produced solid returns of about 25% since our original roundtable. Intuitive Surgical (Nasdaq: ISRG - News) has taken the wind at its back and flown (up almost 100%), while Johnson & Johnson (NYSE: JNJ - News) -- its defensive greatness unneeded -- has meandered along just above breakeven, lagging the rest of the market. Once dividends are factored in, though, its return was closer to 15%.

But what about the next leg ahead toward Dow 5,000 or 15,000? While I tend not to think about my investing in those terms, I don't think there's a pressing need to change my previous picks. If the market does keep charging ahead toward 15,000 -- which also implies that the economy continues to improve -- Intuitive Surgical should continue to do well. Of course, you can probably point randomly at a hot growth stock and see tasty gains -- on average, growthy, non-dividend-paying stocks tend to outperform stodgier dividend payers during bull markets. I would imagine that Rick's picks would do really well under that scenario as well.

And if Mr. Market sees his shadow and retreats? There are few stocks I'd feel safer owning in that scenario than good ole J&J.

Morgan Housel
Dow 15,000: Philip Morris International, Dow 5,000: Coach
After returning more than 80% since I recommended in it in 2009, Philip Morris International (NYSE: PM - News) shares are a little pricey at these levels. I still own the shares, and will for some time, but it'd be hard to recommend buying at current prices. Its current dividend yield of 3.7% is one of the highest you can find among large-cap companies, but it's low compared with what Big Tobacco stocks typically yield. Any reversion to the mean could leave investors disappointed.

Coach is still a great company and riding a bifurcated economy that's producing a growing number of affluent consumers, but it, too, isn't exactly cheap. Both Philip Morris and Coach were great stocks to buy three years ago. Whether they will be great buys over the coming three years is a different story, and one that investors shouldn't be overly confident about.

But what about Dow 15,000? I think it's a reasonable number to consider. The S&P 500 (a better index) currently trades at about 13 times earnings. If earnings grow at some sensible level, say 5% a year, Dow 15,000 is a realistic target within the next two or three years. That isn't a forecast -- anything can happen -- but it's more plausible than some think.

Chart of the Day - Whole Foods Market (WFM)

The "Chart of the Day" is Whole Foods Market (WFM), which showed up on Thursday's Barchart "All Time High" list. Whole Foods on Thursday edged to a new all-time high of $82.44 and closed up 1.77%. TrendSpotter has been Long since Jan 4 at $71.49. Whole Foods was last featured on "Chart of the Day" when the stock on Feb 8 closed at $77.93. In recent news on the stock, Whole Foods on Feb 8 reported Q1 EPS of 65 cents, above the consensus of 65 cents. RBC Capital on Feb 1 reiterated its Outperform rating on Whole Foods and raised its target on the stock to $85 from $74. Whole Foods, with a market cap of $14 billion, is the largest purveyor of natural foods in the world.


Americans Will Need “Black Markets” To Survive

As Americans, we live in two worlds; the world of mainstream fantasy, and the world of day-to-day reality right outside our front doors. One disappears the moment we shut off our television. The other, does not…

When dealing with the economy, it is the foundation blocks that remain when the proverbial house of cards flutters away in the wind, and these basic roots are what we should be most concerned about. While much of what we see in terms of economic news is awash in a sticky gray cloud of disinformation and uneducated opinion, there are still certain constants that we can always rely on to give us a sense of our general financial environment. Two of these constants are supply and demand. Central banks like the private Federal Reserve may have the ability to flood markets with fiat liquidity to skew indexes and stocks, and our government certainly has the ability to interpret employment numbers in such a way as to paint the rosiest picture possible, but ultimately, these entities cannot artificially manipulate the public into a state of demand when they are, for all intents and purposes, dead broke.

In contrast, the establishment does have the ability to make specific demands or necessities illegal to possess, and can even attempt to restrict their supply. Though, in most cases this leads not to the control they seek, but a sudden and sharp loss of regulation through the growth of covert trade. The people need what the people need, and no government, no matter how titanic, can stop them from getting these commodities when demand is strong enough. (more)

World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade

A World Bank report to be released next week warns of an economic crisis in China unless state-run firms are scaled back. The Wall Street Journal discusses the report in New Push for Reform in China

An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation’s leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.

“China 2030,” a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China’s most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

The report warns that China’s growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the “middle-income trap.” A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.

China’s Difficult Transition From an Unsustainable Growth Model

Peak oil, a housing bubble, bad debts and over-reliance on investments with no genuine economic feasibility guarantee China’s current boom is not sustainable. China bulls are in for a ride awakening when various bubbles pop.

As for recommendations, the report proposes a sharp increase in the dividends that state companies pay their owner (the government) in order to boost revenue and pay for new social programs.

Does China need to increase competition, break apart, and privatize the state-owned monopolies?
Or should China simply increase the dividends?

I vote for the former as does Michael Pettis at China Financial Markets.

Via email, Pettis says:

The report is good as far as it goes, but it doesn’t go far enough. Of course increasing SOE dividends to the government for use in social programs will transfer wealth from the state sector to the household sector, but if the total profitability of the SOE sector is less than one-fifth to one-eighth of the direct and indirect subsidies transferred from the household sector, as I have argued many times, then even 100% dividends is not enough to slow the transfer significantly, and remember the transfers have to be reversed, not merely slowed. This proposal falls in the better-than-nothing category, but just.

What we really need are much more dramatic transfers, for example wholesale selling of assets, with the money used either to clean up bad loans or delivered directly to households. According to the article, however, “neither the World Bank nor the DRC proposed privatizing the state-owned firms, figuring that was politically unacceptable.”

This is the problem. The best solution for China, economically, seems to be off limits because it will be politically difficult. In that case the second best solution, a gradual build-up of government debt as growth slows for many years, is the most likely outcome.

And how much will growth slow? The World Bank report apparently doesn’t say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years.

That’s better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.

And by the way when it does, metal prices should fall sharply. Copper prices have done reasonably well in the past few months as Chinese buyers have restocked, as we suggested might happen to our clients last fall. With the recent easing we may see more strength in copper over the next month or so, but I have little doubt that within two or three years copper prices are going to be a whole lot lower than they are today. Chinese investment demand simply cannot hold up much longer.

Sad State of Political Acceptability

The report makes feeble recommendations to ensure the proposals are “politically correct”. This is a bad practice for three reasons.

  1. You only damage your own credibility
  2. You presume perhaps incorrectly what is politically acceptable
  3. You plant false hope that incorrect solutions will work, when it’s clear they will not

It would be far better list the alternatives and the limitations of those alternatives, then provide an honest assessment rather than assume something cannot be done. Unfortunately, telling people what they want and expect to hear is the sad state of political pandering everywhere.

Mike “Mish” Shedlock

MUST READ: What Really Happened This Week in Gold and Silver

from Across the Street:

Hard to believe, but CNBC and the World’s chartologists missed a very important point: In the last three days JP Morgan’s house account has taken possession of 3 times more physical silver than it did in all of 2011 (626 contracts, or 3.1 million t oz.) bringing their 2012 total to 1,058. The last time the Morgue took delivery of this much silver was September, 2010 at around $20.55 (it’s almost like they knew QE2 was coming – more on that later).

On Tuesday, when silver shot up more than 4%, the CMEgroup initially issued blank trading reports, as in “!!!! NO DATA !!!!”, but eventually published this:

Read More @

Pricing Opportunity Immediately Ahead for Corn

By Scott Harms, Archer Financial Services

The corn market has rallied nearly $.60 since making a low in mid-January. That break saw a low in spot corn prices below $6.00, following the negatively construed January USDA Production and December 1st stocks report. Since that time, corn has rallied on the back of declining crop prospects in South America and solid near term demand. The rally has been made easier by tight farmer holding of last year's crop that left end users scrambling for cash supplies that resulted in a basis rally not usually seen this time of the year. The question facing producers is; "How long can this last?" The answer may be 7-14 more days.

I have long held a spring objective for May corn futures at $6.80-$7.20 and although a rally toward the bottom of this range cannot yet be ruled out, we are simply running out of time. The current stocks to use ratio in corn is almost identical to last year at this time. Meanwhile, May corn was trading nearly $.80 higher a year ago than it is in 2012. There a few factors that may be responsible for the discount to prices of just a year ago. Last year the market was aggressively reaching for a price level in which to slow down the amount of corn used to produce ethanol. Similar price rationing has taken place over the last several weeks. However, due in part to the elimination of the blender's tax credit from 2011, as well as historically high ethanol stocks, ethanol industry profit margins are squarely in the red. This week's ethanol data revealed a weekly reduction of some 23,000 BPD, the lowest level since October 2011. There is more rationing that needs to take place, but this week's decline may be an indication that ethanol producers are slowing production to stretch the supply of any corn hedged below $6.00 on the break last year and again in January.

Another reason for lower prices this year is reduced fund participation. A year ago the non-commercial trader held long positions in excess of 325,000 contracts. This year those same traders have a total position under 120,000 contracts. Yet another reason for the discount to last year's price levels is the drag that new crop corn values are having on the market. The worst kept secret in the marketplace is that 94 million planted acres of corn and a 164 trend line yield will result in a doubling of expected carryout stocks and prices potentially $1.00-$1.50 below current levels. While these assumptions are a long way from reality, they will continue to keep a lid on prices, as we approach the March 30th acreage and stocks report.

I expect the corn market to stall out near current price levels. Whether we are able to reach the May Corn objective of $6.80 may rely on early month fund buying, a bullish USDA Supply and Demand Report, or a soybean rally toward $13.75 that drags corn along for the ride. In any event, I believe that over the next 7-14 days producers should look to advance sales for both old and new crop corn. The trade around the March 9th USDA Report may provide the best hedging opportunity until adverse weather affects the market. A year ago prices were pummeled in early March by the Japanese tsunami. Yet it was a market that was already overdue for a correction. Prices dropped sharply into the middle of the month before retracing half of that break, leading up to the stocks and acreage report. The corn market was saved last spring by a very bullish stocks report. I expect a retracement of the recent gains leading up to the March 30th Stocks and Acreage Report. The last three stocks reports lead to limit down trades in the corn market. The skepticism and grumbling has grown over that time. As a producer, you can reduce the impact of the March 30th Stocks and Acreage Report by being proactive with your marketing early this month.

The Decline and Fall of the Roman Denarius

by Chris Horlacher
The Dollar Vigilante

History repeats itself, so the scholars say. But according to Mark Twain it just rhymes. Literary quips and hair-splitting aside, I've found that one of the most valuable things anyone can do to advance their knowledge and understanding of the world is the study of history. Now I'm not talking about the kind of history you get in grade school and university, where all you're told to do is rote-memorization of people, dates and events. To get any value whatsoever out of studying history, you have to be able to discern cause and effect. What causes civilizations to grow to greatness, and what causes them to collapse?

There are few collapsed civilizations that have been studied in quite the depth as the Roman Empire. Many theories have been offered, some with more merit than others. Ludwig von Mises argued that Rome was eroded from within and that economics played a huge part in it. This is too big of a story for me to cover in a single article, so I will focus on one of the most important aspects; the currency.

For hundreds of years, the Romans were on a bimetallic standard, not unlike the currency system of the early United States. There was a gold coin, the aureus, which was popularized by Julius Caesar. There was also a silver coin known as the denarius, which was what most Romans used in their day to day transactions. It was on a solid gold and silver standard that Rome ascended to the height of its development and power.

One of the greatest enemies of mankind is hubris, and the Roman Empire was certainly not immune to this. The phrase "bread and circuses" refers to the massive welfare spending that occurred in Rome during the height of its power. With the treasury filled with gold, spendthrift politicians quickly used the money to buy influence, votes and curry favour with neighbouring states.

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." – Cicero, 55 BC

When Julius Caesar first began minting large quantities of the aureus it was 8 grams of pure gold. By the second century it had declined to 6.5 grams and at the beginning of the fourth century it was replaced by the 4.5 gram solidus. The purity of the coin itself was never debased, but the ever decreasing weight was a sure sign that government spending had been outpacing revenues for centuries.

All of this however, pales in comparison with the devaluation of the denarius. The denarius was the backbone of the Roman economy. Citizens earning their income in gold were a rarity given that a day's wage for an average labourer at the time is estimated at a single denarius. Thus it also became the target of severe abuse by the Roman authorities.

The denarius began as a 4.5 gram silver coin and had stayed that way for centuries under the Roman Republic. After Rome became an empire, things began to turn sour for the denarius and, by extension, the Roman economy. Base metals, such as copper were blended in with the silver and so even though the coin itself weighed the same, the amount of silver in it became less and less with each successive emperor. Throughout the first century the denarius contained over 90% silver but by the end of the second century the silver content had fallen to less than 70%. A century later there was less than 5% silver in the coin and by 350 AD it was all but worthless, having an exchange rate of 4,600,000 to a gold solidus (or nearly 9 million to the original aureus).

The economic chaos the hyperinflation of the denarius had on Roman society was very real. The population of Rome reached a peak of about 1 million inhabitants during the first century BC and maintained that level until nearly the end of the second century. At this point it began to slowly decline throughout the third century and precipitously throughout the fourth. By the fifth century, only about 50 thousand people remained.

Now compare the collapse in value of the denarius to some modern-day currencies and see if you notice any similarities:

Further reading in to the events that unfolded in Rome (links below) will reveal that as the denarius was debased, Rome became an economic basket case. Desperate times called for desperate legislation as the fabric of society was slowly torn apart by inflation. I urge my fellow readers to gain a firm grasp of these events because they will be instructive as to what we can expect for the future. The destruction of the Denarius is only one example of currency debasement, of which there are hundreds. Romans that held on to their gold coins fared well in the hyperinflation and if history is any guide, they will serve us well in the coming years.

The Stock Market Is Still 33-44% Overvalued

Note from dshort: The next quarterly Flow of Funds report, on which the Q Ratio is base, will be released at noon on March 8th. I'll update this commentary later that afternoon. The data below is current through the end of January. Since the underlying Fed data is so stale and the new release so close, I'm skipping my usual end-of-month extrapolation.

The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It's a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly.

The first chart shows Q Ratio from 1900 to the present. I've calculated the ratio since the latest Fed data (through 2011 Q3) based on a subjective process of extrapolating the Z.1 data itself and factoring in the monthly averages of daily closes for the Vanguard Total Market ETF (VTI). Note: The Q4 data won't be released by the Fed until March 8th.

Interpreting the Ratio

The data since 1945 is a simple calculation using data from the Federal Reserve Z.1 Statistical Release, section B.102, Balance Sheet and Reconciliation Tables for Nonfinancial Corporate Business. Specifically it is the ratio of Line 35 (Market Value) divided by Line 32 (Replacement Cost). It might seem logical that fair value would be a 1:1 ratio. But that has not historically been the case. The explanation, according to Smithers & Co. (more about them later) is that "the replacement cost of company assets is overstated. This is because the long-term real return on corporate equity, according to the published data, is only 4.8%, while the long-term real return to investors is around 6.0%. Over the long-term and in equilibrium, the two must be the same."

The average (arithmetic mean) Q Ratio is about 0.71. In the chart below I've adjusted the Q Ratio to an arithmetic mean of 1 (i.e., divided the ratio data points by the average). This gives a more intuitive sense to the numbers. For example, the all-time Q Ratio high at the peak of the Tech Bubble was 1.82 — which suggests that the market price was 157% above the historic average of replacement cost. The all-time lows in 1921, 1932 and 1982 were around 0.30, which is about 57% below replacement cost. That's quite a range.

Another Means to an End

Smithers & Co., an investment firm in London, incorporates the Q Ratio in their analysis. In fact, CEO Andrew Smithers and economist Stephen Wright of the University of London coauthored a book on the Q Ratio, Valuing Wall Street. They prefer the geometric mean for standardizing the ratio, which has the effect of weighting the numbers toward the mean. The chart below is adjusted to the geometric mean, which, based on the same data as the two charts above, is 0.65. This analysis makes the Tech Bubble an even more dramatic outlier at 179% above the (geometric) mean.

Extrapolating Q

Unfortunately, the Q Ratio isn't a very timely metric. The Flow of Funds data is over two months old when it's released, and three months will pass before the next release. To address this problem, I've been experimenting with estimates for the more recent months based on a combination of changes in the VTI (the Vanguard Total Market ETF) price (a surrogate for line 35) and an extrapolation of the Flow of Funds data itself (a surrogate for line 32).

The Message of Q: Overvalued

Because of the sharp market decline in Q3 (e.g., VTI dropped 13.2% in Q3), the numerator in the Q ratio dropped significantly enough to reduce the Q valuation level from a high overvaluation level to a lower level of overvaluation than we've seen in the last few quarters: 15% above the arithmetic mean and 25% above the geometric mean. Now, at the end of January 2012 the broad market is up about 18%, which means our estimate of the Q ratio moves higher. My estimate would put the ratio about 33% above its arithmetic mean and 44% above its geometric mean. Of course periods of over- and under-valuation can last for many years at a time, so the Q Ratio is not a useful indicator for short-term investment timelines. This metric is more appropriate for formulating expectations for long-term market performance. As we can see in the next chart, the current level of Q has been associated with several market tops in history — the Tech Bubble being the notable exception.

For a quick look at the two components of the Q Ratio calculation, market value and replacement cost, here is an overlay of the two since the inception of quarterly Flow of Funds updates in 1952. There is an obvious similarity between market value and a broad market index, such as the S&P 500 or VTI. Price is the more volatile of the two, but this component can be easily extrapolated for the months following the latest Fed data. Unfortunately the less volatile replacement cost is not readily estimated from coincident indicators.

I added the regressions through the two data series as an afterthought. They perhaps help to illustrate the secular trend toward higher valuations.

Please see the companion article Market Valuation Indicators that features overlays of the Q Ratio, the P/E10 and the regression to trend in US Stocks since 1900. There we can see the extent to which these three indicators corroborate one another.

MU Chart is Lighting Up MU flashed four buy signals, completed a breakaway gap

Micron Technology (NASDAQ:MU) – This company makes semiconductor devices, primarily DRAM, Nandi Flash memory, and other products for mobile computing products. Credit Suisse analysts have an “outperform” on the stock, emphasizing MU’s continued execution of its strategy to diversify and upgrade its product line. Their 12-month target for MU is $12.

On Feb. 27, the stock jumped nearly 8% following the bankruptcy of a key rival. Technically MU has had high accumulation since the beginning of the year, executed a golden cross (long-term buy signal), and recently flashed a stochastic buy signal.

MU was included in the Top Stocks to Buy for March because of positive technical signals including a breakaway gap on Feb. 27.

Since then, several more positive signals have flashed, including a “buy” from its MACD and Parabolic indicator*, all of which confirm the likelihood of MU reaching our technical trading target of $12.

*The Parabolic Time/Price indicator’s purpose is to allow for movement at the early stages of a trade but uses very tight stop-loss points as the trade develops. It is used by many very short-term and day traders, but is often an early signal of a developing major move.

Trade of the Day – Micron Technology (NASDAQ:MU)
Click to Enlarge