Is The Highest Equity Put-To-Call Ratio Since S&P 666 An Indication Of A Market Bottom?

Last Friday, the CBOE Equity Put/Call Ratio reached the highest level in the past two and a half years, higher not only than May 2010 when the market plunged on the first Greek bankruptcy, but higher than March 2009 when the S&P hit 666, and lower only than the second week of January 2009. Additionally, while this one off event may be discounted, the 10 Day Moving Average, as shown on the chart below, has now lifted to levels not seen since February 2009. A quite note by Stone McCarthy captures the conventional wisdom on the topic: "Where a 1-day rise in this indicator alerts us to investors temporarily seeking protection against a market decline, an extreme high by the 10-day smoothing line reveals a more comprehensive sentiment buildup that typically proves to be a more reliable contrary indication of a meaningful bottom being NEAR." Perhaps. However, never in the past has the Put/Call ratio been at such levels even despite the multi-trillion backstop of central banks, and worse still, just two weeks in advance of when the Fed will end its daily stimulus program. The is a saying that being contrarian in the face of conventional wisdom is the only sure way to make money. The problem with that saying is that conventional wisdom is quite often actually correct. Furthermore, last time we checked back in January 2009 Greece and Europe were not about to go Chapter 11, nor was a $900 billion asset purchasing program about to end...

More technical observations from SMRA:

The series of recent new highs by this indicator warns that market participants are still in the process of building protection against downside expectations in price. Therefore, the threat of a more cathartic end to the post-05/02/11 price decline remains real. With the benchmark equity index still locked in a C-wave decline (se chart), risk will continue to favor a better test of the all-important 200-day line at 1262.80, the 2011 low (the 03/16 pivot) of 1249.10, rising trend support from the Mar '09 lows near 1239, and, in a worst-case scenario, a 161.8% extension through 1215 as long as 1311.20 remains resistance.

Are options traders actually correct this time? Next Tuesday, which is when the Greek cabinet vote of confidence takes place, may provide a quick answer.

Europe, America and China Reap The Econmic Crisis That They Sow

Europe, America and China -- The three great players are plunging into simultaneous economic crisis. They all deserve it.

We recently asserted that "There will be blood" in Europe. We also said the results would be fairly spectacular when played out, both in terms of violent currency movements and human spectacle.

Such is quickly coming to pass now. The euro currency is diving -- the U.S. dollar rising -- as these words are being written. On the human side, the following comes from George Mavrogiannis in Athens, Greece, via the BBC:

I just returned back from Syntagma Square and it is like a war there. Our own government is attacking us.

Greece is killing its children. In this revolt there are all types of people from all age ranges and the police keep throwing tear gas which is unacceptable.

I have lost my voice because of the yelling and tear gas. The police are trying to break the protesters and take control of the square but the protesters are not letting them.

They throw anything at the policemen from rocks to pieces of wood.

People have lit fires on the streets near the square using trash cans and papers. You can't cross the area without wearing a wet headscarf.

The atmosphere is really toxic and suffocating.

Up until now the police have arrested 19 protesters and the arrests continue.

There is a fire in Filellinon Street and people cannot pass through.

More and more policemen are coming to the square with bikes and protesters keep throwing things and yelling at them.

We shall not stop until this government listens to our concerns.

George Papandreou, the Greek prime minister, has promised to form a new government as a result of mass protests.

The attempt to jam austerity down the throats of the people is failing. Whispers of "Lehman 2.0" are all over the eurozone now. It is the same beast that has stalked the old continent for years -- only grown stronger over time.

Meanwhile a rift has grown between Germany and the European Central Bank (ECB). Germany wants some sort of debt restructuring for Greece, apparently fed up with the endless "kick the can" games. This greatly upsets the ECB, which wants to continue with the business of "bailouts as usual."

Why is Germany willing to risk systemic default with its aggressive stance? Why are they digging in their heels at such a dangerous time, for what appears to be a small amount in the big scheme of things?

Perhaps because they know the fiasco will never end -- unless someone makes it end.

If a line is not drawn in the sand with Greece, then the same troubles will come up with Portugal. And Ireland. And eventually Spain, or even Italy. On and on.

Unless and until someone says, "Nein. Let this come to a head here and now."

(The debt crisis in Greece has been building for a while. Sign up for Taipan Daily to stay up to date on global market changing events with all of my and fellow editor Joseph McBrennan's investment commentary.)

Nor is it just Europe staring into the maw of debt crisis. In the United States, the speed and severity of the housing bust has been confirmed "worse than the Great Depression." Jobless claims remain elevated. Various U.S. economic health indicators, such as the Empire Manufacturing Survey, have come in at disastrously low levels.

The U.S. economic stimulus is being revealed for what it always was -- a mirage.

This leaves legions of bullish investors left holding the bag. Or rather, holding a investment portfolio full of overvalued stocks bought on margin, in a financial market that is potentially 40% overvalued. "What now?" they ask.

"Sell." That is your what now.

Over in China, as we noted earlier this week, riots and protests are picking up. Food inflation and wage demands are becoming an increasingly violent problem for local authorities with their hands full. And the Chinese property market is showing signs of topping.

China's epic boom is now in the same place, roughly speaking, as America's grand boom of the late 1920s. For America, things got so hot that a newish Federal Reserve had to slam on the brakes.

Rates were hiked sharply again and again to quell America's rampant 1920s speculation -- just as the Chinese government is seeking to quell rampant speculation today.

And America was stuffed with surplus cash (trillions worth, inflation and global GDP adjusted) at the time of the '29 crash... just as China is today. The crash happened anyway -- as will China's.

To add insult to injury, the U.S. financial industry is leveraged to both China and Europe in ways both reckless and appalling. In leveraged purchases from equities to commodities, money managers are betting heavily that China's unprecedented boom will continue.

And word is that American banks have sold hundreds of billions worth of CDS (credit default swap) exposure to European banks at inflated prices -- not realizing who the true sucker is in such a transaction.

(Wait, silly me... the sucker is the American taxpayer, not the American banks, because when the proverbial fecal matter hits the proverbial oscillating device, the too-big-to-fail banks will be rescued once again.)

H.L. Mencken once observed that "Democracy is the theory that the common people know what they want -- and deserve to get it, good and hard."

In the West at least, we choose the terrible leaders we have. We put up with their gross lack of honesty, talent and common sense. We let them make horrible decision after horrible decision, at ultimate great cost to all. And those without lifeboats wind up reaping what they sow.

(Those who are prepared, at least, can kick up their feet and laugh a bit. As Karl Kraus observed, "Things are hopeless but not serious." What a delicious farce it all is.)

In closing, it is no great comfort to your editor that events, thus far, are playing out pretty much as expected.

That's because our expectation is for things to get much, much worse...

You’re Not Imagining It — The Gold Miners Are Tanking

Conventional wisdom — backed up by years of observation — states that gold mining shares tend to outperform the underlying metal in good times because they’re “leveraged to the price of gold.” That is, their extraction costs are more-or-less fixed, so when gold rises, most of the increase flows directly a miner’s bottom line, increasing its earnings at a rate that exceeds the metal’s move.

With gold near a record, most miners should put up ridiculous earnings in the year ahead, which should make their shares act like tech circa 1998, right?

Nope. The biggest miners, whose shares populate the GDX gold miner ETF, did outperform gold (represented here by the GLD ETF) during most of its recent epic run, just as you’d expect. But in April the two trends diverged, and lately the divergence has become a chasm. Gold is up 22% in the past 12 months and the big miners are, as a group, virtually unchanged.

This is painful and humbling for investors who bet on gold by loading up on mining shares, only to discover that they were right on the macro but wrong on the implementation. But one person’s pain is another’s opportunity, and the market appears to be offering a whopper here.

Assuming that the long-term relationship between gold and the miners holds — and there’s no reason to think it won’t — then the trend lines will converge at some point in the coming year. This can happen in several ways: They can both fall, but gold more than mining shares. They can both rise, but mining shares can rise more. Or gold can tread water while the miners go up.

Which means there are two ways to play it: Buy the miners and ride them, which will work if gold goes up. Or short gold and buy the miners, in which case you don’t care where gold goes as long as the miner/metal relationship reverts to normal. The first is simpler but only works in a rising gold price scenario. The second is an arbitrage that should work no matter what gold does in the year ahead, though it carries an emotional price, since shorting gold is disturbing on a lot of levels.

On the other hand the idea of making money while being short gold — in the middle of a global currency meltdown — has a certain contrarian appeal.

One final thought: If the big miners are underperforming because of fears that they can’t replace the reserves they’re consuming, then we’re in for a buyout binge as they use their rising cash flow to gobble up the juniors with the most accessible reserves. So the small-cap miners will end up being the best part of this market.

3 BULL MARKETS TO INVEST IN NOW

With all the recent bear market chatter it is important to keep in mind that not everything in this world is perfectly correlated. Rob Lutts, CIO of Cabot Money Management was on Yahoo to discuss where investors can find secular bull markets now. Lutts says investors should focus on emerging markets, internet technology and precious metals.

Stock Market Tapped Out?

Pandora shares make spectacular plunge below IPO ... It didn't take long before Pandora went from music to investors' ears to the stock market's version of fingernails on a blackboard. The money-losing online music service became the latest initial public offering to "break," or fall below its offering price. The stock closed its second day of trading at $13.26, undercutting its $16 offering price, so even the privileged investors who bought into the IPO now have losses — if they didn't sell in time. – USA Today

Dominant Social Theme: It is not a trend. Stocks are a good buy and always have been.

Free-Market Analysis: The Pandora IPO came out higher than expected and then went up on the open until it was US$10 more than the initial US$16 offering. The excitement was tremendous. Bloomberg TV literally covered the price action of Pandora every 15 minutes or so for the entire day. The entire episode represented a kind of sub dominant social theme: "Stock trading is back, baby, and the action is hot!"

The Pandora IPO may have provided us with the last gasp of activity in what may soon be a prolonged bear market. The results of QE2 are fading and without more monetary inflation the US stock market is probably doomed to collapse like a gradually deflating paper bag, which is inevitable anayway BECAUSE of all of the monetary inflation to begin with. It is just a matter of WHEN the music stops, that's all.

Granted, the price action for Pandora was feverish but the desperation with which Bloomberg focused on this relatively tiny stock was even moreso. Constant interviews on the NYSE trading floor, confabs between anchors on the Bloomberg set, phone and video interviews with analysts – all created a picture of significant interest. What it also signaled, inadvertently, was that the health of stock trading in the US is questionable to say the least.

In fact, Pandora is now trading under its IPO by a significant margin; the over-enthusiasm directed at this under-reported enterprise is symptomatic of the problems that the NYSE and stocks in general are facing in the early part of the 21st century. The NYSE has merged several times lately, with the most recent merger with German-based Deutsche Boerse that will create a huge, world-spanning conglomerate

But size does not create interest. Europeans generally do not trade stocks with the gusto of American investors and thus as big as modern exchanges get, the amount of mom and pop investors involved is likely lessening, overall. In the United States it is surely true that interest in stock trading likely peaked in the late 1990s with an explosion of interest in day trading and a plethora of mainstream media available to explain different "opportunities."

The efforts of the powers-that-be to reignite stock trading have sputtered in the 2000s after an obvious uptick in mainstream interest in the markets before the financial crisis of 2007. Ever since, US markets in particular have struggled. The "quantitative easings" of the past two years have certainly boosted share prices, but now with this final easing fading, so is the American stock market, which is a kind of bellwether for markets around the world.

As the US stock market fades once again, the hype surrounding the stock market picks up. The Pandora example is a good one. Pandora is a software facility that lets the user customize his or her playlist over time, so that the music being played increasingly conforms to the exact taste of the listener.

Pandora's gross revenue was about US$140 million this past year and losses were only US$1.2 million. But it received the cherished single symbol, "P" on the Big Board and there were, apparently, high hopes that Pandora could turn around investor sentiment.

The USA Today article (excerpted above) gives us some of the context for what happened with the Pandora IPO. It seems to be a fairly predictable story. Thirty-one of this year's 73 offerings have broken below their IPO prices and 41 are trading below their first-day closing prices. IPOs are increasingly breaking below their offering prices for three reasons: Broad market woes; Lofty valuations and hype; and heightened sensitivity to risk.

According to the article: "While investors were willing to look past companies' problems a month ago, macroeconomic concerns are prompting them to take a closer look and demand lower prices now. If the stock market continues to slide, expect IPO prices to fall further and more companies to shelve plans to go public, says Darren Fabric of IPOX Schuster. 'Risk has come back into the market," he says. IPO 'prices will come down.'"

The US stock market's general malaise is already stimulating calls for a QE3. Bank analyst Dive Bove has been promoting the idea that banks should release the approximately US$1.3 trillion in reserves that they have not yet lent out. It is unclear how this might be accomplished.

Ben Bernanke, meanwhile, has indicated that a QE3 is probably not going to any time soon. According to hedge fund manager David Tepper, Bernanke might change course if the equity environment turns seriously ugly. "If the S&P500 falls 200 points ... that would be more than enough to get the Fed's attention, at which point, the oil price might be back in the $80 range with gasoline prices barreling back toward $3 a gallon and Ben Bernanke will have adequate cover in the renewed concern over deflation."

The larger issue is the one we are interested in. The power elite relies on fear-based promotions to create a constant cash flow. They create memes like global warming and then market them through an intricate process that involves think tanks, white papers, mainstream media and eventually NGOs and domestic and global legislation.

As the "problem" is marketed, the elites begin to create solutions, well funded private companies that appear to be brainchildren of alert entrepreneurs. In some cases they are; in other cases, the elites may have, initially, a direct hand in the creation of the companies; they are certainly involved in the venture capital funds and hedge funds that provide funding to these start ups.

Eventually, these companies are directed toward stock exchanges and the initial, elite partners cash out. The cash-outs is then directed toward markets where it can be swapped for more substantial assets like real estate and gold. The real estate may be held or exploited; the gold is stored in countries like Switzerland using elaborate off-the-books accounting methods. Many such banks work directly for the elites; their other businesses are just for "show." This seems to be how it works.

This methodology is well beyond the understanding of most people, unfortunately. The scale at which it operates is almost inconceivable. It involves recognizing that most companies and most exchanges are to some degree under the active control of the Anglosphere elites. One can likely confirm it, however, by tracking the ownership of the Fortune 500 and supervising bodies such as the EU, World Bank, etc.

At the top, the names often turn up in several places. There is a good deal of interchangeability among global institutions, top universities and business schools, legal firms, corporate boards and even top politicians. These individuals are not the final controllers, of course. They are intermediaries.

It is also true that securities exchanges are consolidating at a rapid rate. This is another evident plan for globalization, in which all securities instruments are eventually to be traded on only a few worldwide exchange. The profits that can be made from a single exchanges with multiple instruments are astronomical, especially if one controls the regulatory authorities that are supposedly providing oversight.

These plans along with the elite's wider efforts at globalization are in our view threatened by the rise of the Internet, which has exposed much of what is taking place now. When it comes to the stock market, America was a prized example of how to involve individual investors in the larger elite-controlled casino, but now due to the financial crisis and subsequent Internet Reformation (as we have taken to calling it) investors around the world and especially in America have begun to turn away from investing, especially equity investing.

The sovereign debt crisis may do the same thing for bonds that the financial crisis has done for stocks; sour people on paper holdings. This is a direct threat to the profitability of elite investment strategies. If the larger masses do not believe in "investing" and its outcomes, then the ability of the elites to extract wealth from the masses via the inevitable business cycle upturns and downturns is compromised. This is taking place now and it is a fundamental threat to elite control and the money-making paradigm they have come to rely on.

Conclusion: The stock market's linkage to Fed stimulation is more obvious than ever these days. But with the entire dollar-reserve system gradually collapsing, stock markets around the world are increasingly in disarray. A collapse of American markets will have a significant impact. Whether Bernanke attempts a QE3 at this point seems almost irrelevant. Numbers one and two haven't worked. So why should number three?

What is CDS or credit-default swaps (Video)

Simply stated a credit-default swap, or CDS, is a way for the owner of an asset like a bond to buy an insurance policy to protect themselves in the event the issuer of that bond defaults.

But, because the CDS market is unregulated, there is $60 trillion of so in these instruments that are not only purchased by actual owners of the debt, but by speculators betting that the issuing entity will indeed go out of business.

When the economy was “good” and there was little incidence of company’s defaulting, banks sold and took in the premiums with what seemed to be very limited risk. Limited risk because the chance that the company or country issuing the debt would go under was somewhat remote.

The banks would therefore take in premiums and for the most part not have to pay out “claims” on the defaulted paper that they had insured through CDS. Premiums, as the chart below the video shows, are commensurate to the perceived risk that the debt issuer may actually default.

The financial crisis of course proved this idea of low risk of default to be wrong. Now with companies andcountry’s like Greece potentially facing the fate of default, the CDS sellers are once again facing huge exposure. This exposure to CDS has crippled many financial institutions.

CDS explained and a chart of country or sovereign debt with the current cost to insure

Without getting into the technical aspects of CDS, the chart shows the exorbitant cost to insure the debt of Greece because it is considered to be extremely close to a default.

On the other hand, the cost to insure U.S. treasury bonds is about 1/38 the cost of Greece sovereign debt. The more perceived risk, the higher cost to insure

Are We Running Out of Silver?

Silver has been on fire over the last three years — substantially outperforming its spotlight-grabbing cousin, gold.

Because we believe this bull run is far from over, we advise investors to always maintain exposure to the precious metals markets. Even if you haven’t yet participated in the run-up of both gold and silver, I’m glad you’re ready to take a look at the investment potential of silver.

The question every investor faces in a bull market is: Do I buy now, anticipating prices will continue higher — and chance getting clobbered if a correction arrives? Or do I wait for a pullback and possibly miss out on big gains? There’s risk either way.

Our goal in this report is to suggest various ways you can invest in silver, while underscoring the importance of patience and discipline. Investors must remain patient to avoid chasing silver, overpaying, and draining their cash. Instead, we recommend that you use temporary price declines to steadily accumulate the best silver stocks and your preferred form of bullion.

Looking back after this bull market has finally run its course, we think gold and silver will have amply rewarded those who bought smart, had meaningful exposure, and stayed the course.

Silver: The Lay of the Land

There is ample data on the silver market to consider, but there are two specific issues regarding supply and demand that are critical to understand.

The first is industrial use. Demand from a number of industries that use silver has been flat or falling. Household demand for silver like cutlery, flatware, and candlesticks hasn’t risen in ten years. Jewelry fabrication is up but a blip. With the shift to digital photography and image storing, use in photographic film processing continues to fall. And yet, total demand from industrial users keeps climbing.

So what’s driving industrial demand?

Since 1999, consumption in electronics has increased 120%. Silver use in solar panels began in 2000, and usage is up 640% since. Silver was first used in biocides (antibacterial agents) in 2002 and, while a small percentage of total silver use, it has grown six-fold.

The point is that not only are the number of uses for silver growing, the demand within each of those applications is rising as well. This is important to keep in mind because, traditionally, the industrial component of silver tends to keep the price soft in a poor economy – and Doug Casey is convinced we’re on the cusp of the Greater Depression.

However, these increasing sources of demand are now more likely to keep a floor under the price in the future. In fact, the Silver Institute forecasts that total industrial use of silver will rise by 36% over the next five years, to 666 million troy ounces/year. That’s a lot of silver, meaning this portion of demand, which is roughly 60% of all fabrication, isn’t letting up anytime soon.

The second issue is mine supply. Silver mine production has been increasing over the past decade, largely due to rising prices, allowing companies to ramp up production and bring more metal to the market. In fact, global mine production is up 33% since 1999. Meanwhile, total demand, as you’ll see in the chart below, is also rising.

Mine Production Can’t Keep Up with Demand

So what’s the concern?

In spite of miners digging up more and more silver, production alone can’t meet global demand, and the gap has to be filled by scrap silver coming to market.

And there’s a catch with scrap. While scrap metal comprises about 20% of silver’s total supply, many of these new applications are difficult to reclaim. Some applications contain such small amounts that they’re uneconomic to recapture, such as many biocidal and nanotechnology applications. With others it’ll be a long wait. Solar panels, for example, have a 20- to 30-year life. Still others are waiting on more effective recovery programs; more than half of all silver in cell phones, TVs, computers and other electronics, for instance, still ends up in landfills.

In other words, a growing portion of the silver that’s consumed won’t be returning to the market anytime soon.