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Prelude to Stocks Disaster and Gold Opportunities

By Roger Wiegand             Printer Friendly Version
March 30, 2006

www.tradertracks.com

“Nothing is either bad or good, only thinking makes it so.” –William Shakespeare

Wall Street has its cheerleaders working overtime in conjunction with CNBC to keep stock indexes propped up and pumped encouraging investors to “stay fully invested indefinitely.” While we heartily agree with buy and hold for certain types of investing ideas, now is not the time to be in the way of a majority stock selling freight train.

The main problem with our investor majority is they do not have a sound plan for entry, exit, attaining goals and securing those goals. What is the point of the entire exercise if invested cash never leaves the stocks? We just finished a new book written by a 30-year futures trader which had some excellent common sense ideas. His primary theory is a written response to computer accelerated markets in which he recommends “taking consistent and smaller bites of profit” from an on-going business. This gentleman is in business to trade to earn a living. He is a professional and does nothing else. When someone has earned a very good living in a very tough business for that long, its time for us to listen and consider.

Momentum Creates More Momentum

His dominant theme was that “more often than not, markets with either a long or short momentum will in most cases continue that momentum much longer than we expect. He proved the point by back-testing ten year segments for different stocks and commodity futures. Famous stock trader Jesse Livermore said the same thing. Most of us, including me are constantly working to locate superior entry and exit price points, when in most cases we could just buy the market and follow the continuity letting the trade have room to play itself out. Livermore had shown and proved, prices can achieve much higher levels than we ever expect.

If we say price is too high and can go no further, often this is simply not the case. Going the other way in a selling mode, stock prices are limited as when we hit zero the game is over. However our trader referenced in his book, and we strongly agree, there are points in time when you must take profits or you will lose them.

Using today’s gold market as a shining example (pun intended). I could provide several technical reasons why gold should be 503 today when it is closer to 570. Our top two favorite gold and silver stocks not only technically should have sold but should be at least 15-30% less in value. They have not sold, but merely traded sideways for awhile and now are going higher. Our readers are wondering if I have lost my marbles while watching all of this as they are being anxious to jump on the next precious metals rally. I am now getting daily e-mails asking if “I am sure we should be waiting on the sidelines.” Nothing is for sure but we have to deal with what markets provide and be ready for rapid pivot reversals in either direction.

Gold’s March 2006 Directional Signal

At this point, we remain close to the June gold futures top of $574. If this resistance is broken on the upside, then we will be persuaded the trending move was sideways not down and that gold is at the inception of the larger rally for 2006 which should continue to the winter holidays. If those June gold futures slide under a $540 closing and hold, we should expect additional selling to $526 and then perhaps the $503-$509 range.

To describe my methods I would say we are about 80% technical and 20% fundamental. In our view, both must work together for mutual advantage in determining optimum market answers. For now, gold charts are showing mild signs of strain and selling (weekly charts) as gold futures prices continue to hold a higher range mostly trading sideways. The HUI, XAU and GDM stock index charts are more pronounced in their saying to sell. With this as a back drop it my job to determine probabilities and provide answers for each one of them.

At certain points on charts we can safely say price will only do two things. For now, gold can easily do all three including buy, sell or go sideways. We are constantly watching not only most all the precious metals futures and stock prices, but their relationships with currencies, bonds, and other major markets which provide correlation if you know what to look for and can compare them.

I follow a small group of five market analysts, which in my view are among the best in their field not only from experience but from proven success. I carefully listen to all of them and monitor their efforts but in the end, I personally decide where things are headed and what I’m going to do to protect and advance our readers and clients. All of us have our own evaluative ways, many of them being proprietary and never discussed or offered to others. In the end, in this business, it is best to decide yourself, make your own market moves and be personally responsible for them. We have watched in amazement while thousands of investors who lost a pile in the 2000 Nasdaq debacle sued their brokers because they lost money. To this we say grow up! When you buy a stock there is a risk. Your broker is charged with the execution of trades not the outcome.

Difference between Investing and Trading

People say stock buying, even buy and hold is “investing.” It is not investing as in almost all cases it is trading. If you purchase a house and live in it for 45 years, that is investing in a house. If you buy a stock index fund and allow the fund managers to manage the account that is trading. Those stocks are bought and sold within the fund at the discretion of the managers who are charged with performing the work. If they make a bundle, hooray for you. If they lose it all, in my view you have no right to sue them as you took the risk and should have done so with your eyes wide open. Excluding outright chicanery, your bet on those stock funds is no different than a bet at Las Vegas. This premise even includes the top blue chip best of the best. Consider the North Carolina municipal retirement fund that is hundreds of millions underwater on GM stock today. The public at large believes all stocks must go up and traders-investors in a fund have a god-given right to profits no matter what. In our opinion, these people are in for a very rude shock. Any stock can crash and vaporize. Count the survivors from 1929. I can only think of one and that is GE. There are a few more but very few.

How do we know when to buy and when to get out?

If you are a mainstream mutual fund manager the road is getting really rocky. Should you have an open mind and prefer commodities and precious metals, your path is four lanes wide and smooth as glass. Recently, we said “Fundamentalists invest on market relevant factors.” With market news and noise bombarding us “relevant factors” are difficult to sort from the flak. Old Bill Shakespeare said, “Nothing is either bad or good, only thinking makes it so.” Using that framework, the markets are merely shifting gears. If you were in the old Dow-Nasdaq camp its time to pick up your stuff and move to better territory. The Dow-Nasdaq group was a very nice place to be for a long time, but now the other side is much better. For traders who prefer stocks only and choose to stay away from pure commodities and their futures, buy the stocks that reflect the commodities values in a rally. Before we head into specifics, let’s try to review some ironclad fundamentals many refuse to acknowledge.

Real Relevant Factors

“You can observe a lot by watching. We made too many wrong mistakes.”-Yogi Berra

The following points are my opinions and I stand ready to argue about them all day. You may disagree with me, but try to keep an open mind and carefully review this market fundamentals list. Also, think about the implications of these market viewpoints.

(1) Government news and policy is either wrong, damaging or both. Smart traders most always go opposite the news. M-3 measurement of cash is now unpublished. Why is this? We think to simply hide the scary numbers. 2. Oil is not plentiful and prices are going higher. Supply is not going down. Usage is going up. (3) Iraq was all about oil. Iran and Syria are next on the oil hit list. Syria is a walk-over, but Iran is formidable. (4) The US Dollar is going down in the long term, up in the short term. (5) Interest rates are mildly up in the short term and then are flat to down. (6) We have both inflation and deflation right now. Confusion reigns as observers do not know which one has the power. Answer-They both do for today. Either we get an inflationary blow-off followed by deflation or we get deflation. The end game is depression. Is the world ending? No it is not. It’s just getting a bit nasty for a few years until this big mess goes through its historical cycle then life goes on.

(7) Swiss Francs and Canadian Dollars are going up. The Euro is going up then down, and then disappears. (8) Gold and silver are going up. (9) Inflationary daily life will become much tougher. (10) All government from the lowest to the highest will not belt tighten like us little folks. They will grab for more and take more. (11) If the grabbing becomes too pushy, consumers will push back. (12) Crime will sky rocket as will unemployment. (13) Cash becomes king while debt a millstone on your neck. Then, gold and silver will become the king of kings. 14) Paper of all kinds, notes, mortgages, loans, etc. become worthless or worth less. (15) Today’s events are like the 1930’s. The Nasdaq implosion was identical to 1929. Today, we are preparing for the next wave of selling after a bear market bounce. We will get at least two more head fake bear market rallies in the race to the bottom for mainstream stocks. Next will resemble 1937 in market action which was negative.

(16) Professional stock market people are dumping securities with both hands into each buying rally. (17) The Sheeple are encouraged to buy the dips so the pros can use the rallies to sell out. (18) Overpaid CEO’s are selling stock with both hands and running with the money. Many then retire for “family and personal reasons.” (19) Even small accounts can make big winnings if you are on the right side of the trade. (20) Loose lips sink ships. Don’t sink your ship. Act poor and live comfortably.

(21) GM has lost over $10 billion for 2005. Their cash flow is a negative $3 billion and they lost $8 billion net excluding accounting problems. Their annual healthcare expenditure equaled the net loss of $8 billion. WSJ reports they must downsize and close four plants. Now they say 12 plants. They offered buyouts to retire 35,000 employees. They need to shed 45-85,000 jobs and 25 plants but the unions will not permit it. They will be headed to bankruptcy court in late 2006 or 2007 when union contract talks enter stalemate. Annual healthcare costs are $10,000 per current or retired employee. All corporations will be seeking to escape health care expenses partially or entirely. Look for repudiated pensions and healthcare liabilities to be dumped on the federal government. The government’s pension bail-out fund is now broke. They will just print more cash to cover accelerating costs.

(22) The March PPI rose 0.7% in 2005 the highest in four months. Energy costs are the main driver. Oil is holding in the $64.50-66.50 range as we forecast. Unleaded fuel this summer or early fall will be +$3.00 at the pump due to refinery shortages as we reported. Within 18 months gas will be $5 a gallon. Oil is going to $85 a barrel within 12 months or less. Attacks on Syria and Iran could cause it to rise sooner. We expect the violence to begin sometime in 2006 to prevent Iran from using an atomic bomb on New York City. Iran has a big military that could be severely damaged. Israel and the US Stryker Forces are on maneuvers right now in southern Israel. This forecast could be obviated as news is now saying back door talks with the USA and Iran are in process and things are cooling down. (23) The support level for the Dow is 10,400-10,000 and a blow-off top is 11,400. After the 10,000 low is secured, look for 9350 next. A selling slide is imminent.

(24) Hugo Chavez is raising his oil tax on Venezuelan oil producers from 34% to 50%. After he gets away with that, then expect him to steal it all. He and Fidel are spoiling for trouble all over South America. Any foreign corporation operating in Venezuela will be a target for government theft. Indonesia has also joined this anti-business crowd. Expect other countries to follow suit as the bold become bolder in their taking-stealing efforts. (25) Middle Eastern oil rich nations are buying gold more rapidly. These same countries feel abused by the USA and are moving to trade oil in Euros and other non-USA currencies which is very big trouble. (26) Thoughtless American senators, wrangling for attention and votes are running around harassing China and other nations over currency and trade protectionist matters which ensure throwing gasoline on the USA trade deficit making life miserable for American business people.

(27) Grain is suffering from a 100 year global drought and is hitting north China particularly hard. Grain is energy powered. Everything from fertilizer, to seeds, tractors, harvesting machines and market transport will take a cheap food commodity and make it costly. World-wide supplies of grain are at 30 year lows. Supply and demand will eventually prevail. Global weather has entered one of its historically nasty cycles creating havoc for growers and insurance companies.

(28) The precious metals have a long way to rise in price. There will be ups and downs throughout the trade as there are in any market. Naysayers will try to drive you out as these rally markets can wound and perhaps kill “other status quo markets.” It’s going to be you or them. I would rather it be them and get our economy back on solid footing once more. The news is wrong and twisted to promote the status quo viewpoint. Do not ever forget this.

At its extreme, gold is on a one way track to $2,960. Modestly, the top could be $1,250. Currently, gold and silver are topping but stubbornly holding higher prices and refusing to correct. We either get a mild correction and subsequent major rally, or a larger correction followed by the same major rally. History repeats again and again. As of 3-30-06, it appears we are seeing a new gold and silver market beginning to rally.

How to Cope and be Comfortable

“No one really listens to anyone else, and if you try it for awhile you’ll see why.” –Mignon McLaughlin

Focus on the fundamentals first, then invest and trade on the technicals. In my opinion, the more difficult part is staying with the focused fundamentals and not wavering in belief. One thing about beliefs is put rather bluntly by Theodore Sturgeon who says, “Ninety percent of everything is crap.” If you can laugh at this and take it as face value, as focusing on your own beliefs is much easier. Jim Sinclair, one of the very wealthy and experienced gold professionals always suggests simple tools and straight forward beliefs. Do not forget, somebody is going to lose if you win with gold. When the potential losers take a position opposite gold they want to be the winner and you the loser. It’s that simple. This group will do almost anything to disparage gold and enhance their positions. Since they are the news controllers, expect the majority of news to be wrong footed nonsense.

When gold wins fiat paper is not even good toilet tissue. It’s too rough and won’t crinkle. There are some very powerful central bankers, fiat money proponents and securities people who all fear gold. Gold will ruin their happy little status quo which is why gold prices have been smothered. The markets these people cannot control are the CURRENCIES. Bonds can be somewhat controlled but not to the extent they can be bent totally to the satisfaction of manipulators. When the consumer caves in economically which is very soon, nobody will take care of you but you. You must take control and go opposite today’s majority which is very difficult. Those status quo believers are the dominating force. When the game caves in and there is a race to liquidity, non-believers will be seriously damaged causing severe life style changes and perhaps even the end of their happy little bucolic existence.

It will not hurt anybody to get out of debt, lower life style expectations and take steps to protect your future. If I am totally wrong what can you lose? If I am right and you stay with the status quo, what does your future look like? Don’t let the enemies of gold run you off. Hold your gold and have strength of purpose. Remember, that first of all the fundamentals mandate gold and history tells us precious metals are the place to win for several more years. –Trader Rog