After Bitter Winter, Brace for Spring Meltdown: The Gold Report Interviews Roger Wiegand
Last October, while the shock waves of the largest bankruptcy filing in U.S. history still reverberated around the world, Trader Tracks Editor Roger Wiegand shared some thoughts with The Gold Report. In what has turned out to be an eerie understatement, he told us, â€śThe American public herd is moving beyond being just nervous. Now they are getting scared. There is real fear in the air with inflation, massive job cuts and a drumbeat of bad news.â€? Not quite six months laterâ€”when many of his peers say the worst is behind us after all, the Dow regained 11% in roughly three days last weekâ€”Roger is among those waiting for the other proverbial shoe(s) to drop. He expects a spring meltdown (and maybe a gold price up to $1,260) on the heels of the much-delayed Obama bounce. While he says so many factors are at play that itâ€™s too soon to call a summer rally, the beleaguered markets will take a beating again in September. Tiptoeing and sifting through the chaos and rubble, though, he suggests that watchful, careful, savvy investors can pick profitable buys at rock-bottom prices.
The Gold Report: You are among those who have been predicting another major downside correction in the market before May. Are we ready for that?
Roger Wiegand: First we sold-off, now we see the Obama Bounce underway. The bounce we expected a few of weeks ago did not occur quite on time but its beginnings are shining through. Itâ€™s been pretty bad. Itâ€™s been all selling; everything sinking. Weâ€™ve been waiting for that much-delayed rally to begin and perhaps last as long as two to eight weeks. The final duration is difficult to determine due to a number of other problems in the markets. But, then after a rally which could continue from Mid-March until early May, we are looking for a very large sell-off in most of the markets.
TGR: What will trigger this rally? Weâ€™ve had no good economic news.
RW: We have two ideas which can create the rally. (1) A change in the Up-Tick Rule (2) A change in the Mark-To-Market Rule. Both of these ideas were openly suggested and hinted at last week. I think those hints were a public relations test for the public. The reactions were positive and those in charge of changing those rules, in my view, are busy, re-writing rule changes for implementation. Keep in mind rate-cutting is done and is not working anyway.
Despite a continuous stream of negative news, we think the rule changes will work to promote a rally. It seems like every time the market tries to pick-up, another problem hits. Another thing that might cause a rally is the marketâ€™s extremely oversold position. Even as bad as this one is, markets can rebound and rebound with a larger bounce. When they get over-stretchedâ€”either on the long side or the short sideâ€”they want to spring back like a rubber band and go back toward the middle. We are expecting this enhanced rebound on those anticipated rule changes.
TGR: Where do you expect the Dow price to go on a recovery?
RW: Weâ€™ve said previously we expected the stock market to come back on Mr. Dow at least as high as 10,400 to 10,800. With our latest pronounced weakness, weâ€™re pretty sure it wonâ€™t rally that far, but, in fact, could go as high as 8,400 to 8,800. Lately weâ€™ve heard news saying theyâ€™re looking for a major summer rally. Iâ€™m not looking that far ahead. I have to see what happens between now and the middle of May before forecasting anything next summer.
The overriding factor through this whole period is the fact the Presidentâ€™s new extreme budget is going to Congress for a big fight. Where this will go, we donâ€™t know. Some Democrats think itâ€™s too far-out and want to vote against it, or modify it greatly. We think theyâ€™ll find middle ground somewhere on some things, but thatâ€™s just a guess. Most of it is waste in our view.
One of the analystâ€™s I was readingâ€”one of the very good onesâ€”made note that P/E ratios were at 23. That surprised me; I thought they were recently more like 16 or 17. In the long pullâ€”say three to five years, or as early as 18 monthsâ€”we are forecasting a P/E ratio of 7. Thatâ€™s a huge drop from 23. If this happens, we think the marketâ€™s going to be at Dow 3,000 or 4,000. Many were saying if the S&P broke 700 and held lower, we would sell even faster. Thatâ€™s not happened, and it surprised me, too. We were clinging to 685 and those two potential rally points (listed above) were tested providing firmer footing. Now we are not only above 700 but above 728 with major support touching 762 on the March E-Mini futures contract March 16, at 10am.
TGR: With this budget fight brewing, the on-going stream of bad news, more banks begging for more bailout money, AIG still having problemsâ€”can this larger rally materialize at all? Or should we just expect to continue a downward slide that still ends up at the same place at the end of the summer?
RW: No question, thereâ€™s a chance that could happen. If things are bad enough long enough and thereâ€™s no holding support on some of these technicals, we could slide steadily right through to the end of the summer and even into fall. Thereâ€™s always a return somehow where price comes back on a relief rally, but thatâ€™s just a dead cat bouncing. There could be several of those. Our next question is can the Dow hold above 7250 support? The S&Pâ€™s look better.
What youâ€™re suggesting is that there may be no rally at all; might well happen. If thatâ€™s true, I would be wrong on my trend, which is the first time Iâ€™ve been wrong on trend. Iâ€™ve been wrong on prices and extremes in either direction, but Iâ€™ve always been right on trend. I just have a feeling that somehow theyâ€™re going to find a way to stop the selling, pull it back together for a base, and weâ€™re going to take-off. This dead-cat bounce could have a life of 3-8 weeks on the widest time cycle in my view.
The dollar index has produced a wide and pronounced chart pattern double-top and started to sell. Some say itâ€™s going to keep climbing to 90-92. We disagree. The reason the dollar was recently climbing was because other currencies are significantly weaker. Whatâ€™s happening is people are selling out of major foreign currencies and buying dollars, or using dollars to pay-off debts. The yen has topped out and is ready to drop as itâ€™s been in a long rally. The Swiss franc and Canadian dollar and Euro have had rallies. We like to trade the Euro, the Swiss franc and the Canadian dollar. I donâ€™t like to trade the U.S. dollar because volume is too thin. I believe the dollar has peaked and other currencies might rise. This day of March 16, the Swiss, Canadian and Euro are all in rallies with the dollar selling. The UK pound Sterling is weakest.
TGR: Last fall, when the first big drops caught everyoneâ€™s attentionâ€”after the Lehman Brothers collapse in Septemberâ€”everything went down. Equities went down, the precious metals went down. Oil has since gone down and hasnâ€™t recovered. Will this next drop youâ€™re projecting take everything down again?
RW: I think that it will temporarily. The ferocity of the drop that could hit anywhere after mid-April until the end of May could trigger a big sell-down in global stock markets. Two negative factors behind that will be a second round of residential mortgage foreclosures, which is based strictly on time and cycles, but also the first round of selling REITs. Those are new daily news.
This sell-off includes office buildings and malls. Many of those loans are going bad. Weâ€™ll actually see giant shopping malls in America closing-up. Three weeks ago, some 73,000 retail stores had closed so far this year; Howard Davidowitz, the retail analyst, is projecting another 273,000 more. Thatâ€™s shocking. Thereâ€™s no money. It broke my heart to see the Readerâ€™s Digest file bankruptcy. Several old-time, very strong companies around forever are falling by the wayside. Auditors are saying that General Motors is not going to make it.
TGR: Your points suggest that investors may have two conflicted thoughts. One is to put some money on the sidelines for the rest of 2009 while all of this works itself out, because it doesnâ€™t sound as if anybody really knows whatâ€™s going to happen. The second is that some short-term profits could be made by watching some of these bounces as they kind of rubber-band back up, but ultimately go down. Whatâ€™s your take on that?
RW: Weâ€™re taking the tone weâ€™ll recommend some buying for a shorter-term gain with the idea that when things peak, weâ€™re out the door just for the spring exit. At this time we have open recommendations on November soybean spreads with a short time projected for exit. We recommended gold spreads for December. By using spreads, weâ€™re capped top and bottom, and confident weâ€™ll find our price in the middle, make some money, and then leave. By using spreads, you canâ€™t get knocked out. These are for futures and commodities traders.
TGR: IfÂ PMâ€™s are coupled with the Dow and S&P, will they be coupled on the downside as well?
RW: Itâ€™s hard to say. I think they will, because shocks from negative events could be strong enough to pull everything down. Iâ€™m going to recommend choices when I can see weâ€™re nearing a peak; and thatâ€™s coming in a matter of weeks, not several months.
For the first five months last year, we were up 220% in our futures and commoditiesâ€”at least I was personallyâ€”and I held on and lost it all, then went under water -70% on my original capital. I managed to end the year in the green plus 1%. Big deal. I went through the whole machination last year and made +1%. But at least I wasnâ€™t burned-off the way many traders were. For now, Iâ€™m vacillating between +7% and +15% in the green. But as gold trades higher, silver and some other commodities and currencies should rally, too. We have very high goals.
TGR: But wouldnâ€™t they also be the first to be hammered if the market really takes a nosedive?
RW: It can happen in one day, believe me. Things are moving more swiftly now. Money moves quickly. On those types of shares, weâ€™ll let reality get started, make sure we see solid rally legs and then recommend more of that kind of trade. These are solid producers. We expect growth.
What happens after the end of this year will depend greatly upon how markets, investors and traders world-wide can deal with whatâ€™s coming in May and the end of September. In those two cycles Iâ€™m expecting hard selling and lots of bad news-not only this year, but on the same dates next year, too. After that, the worst of this mess might be over, and we can settle down. The subsequent aftermath and re-start can begin from much lower prices on most everything.
TGR: Whatâ€™s your feeling about silver prices?
RW: Silver was oversold in its relationship to gold during the last quarter of 2008. It went to a $21.50 high and fell back to $8 plus change. Meanwhile gold was up much higher and didnâ€™t fall nearly as far. During the last couple of months, silver has been playing catch-up in a faster rally buying mode than gold. It rose to the $13 to $14 range. Thereâ€™s price congestion at $16 and $17 and thereâ€™s an obvious hard resistance at $21.50, where it was before.
We had recommended silver spreads in our letter for March, 2009 last year, way before the September, 2009 event, and obviously they expired worthless. Had we achieved a price anywhere near those spreads, it would have been a much more successful year for us. But by using strong risk control and spreads, weâ€™ve been able to retain capital, hang-on and move to the next market cycle without personal 2008 losses.
For 2009, we must first achieve $21.50 and then see what happens. I donâ€™t expect we can make $21.50 this spring. However, you could see $16 or $17.Â Iâ€™m looking for silver at $21.50 and perhaps something higher in the last quarter of 2009. Presuming we have no more Lehman events, silver might touch $25 to a potential $30 for a 2009 high.
TGR: Can we make $30?
RW: A lot of people say we can. Iâ€™m not sure. But if we canâ€™t make $30, we can get to $25 or $26. Thereâ€™s a lot of price congestion around that price as well. With all the coin demand from retail people, I project silver has a stronger market underpinning. Even when silver was $10, people were willing to pay $20 for coins. Thatâ€™s pretty extreme in my view, but for now price has consolidated and is doing a bit better. And yes, thereâ€™s silver available, but yes, theyâ€™re also having problems keeping-up with demand. Delivery has been restricted by the ability of the mints (Canadian and American Mints) to manufacture coins and keep-up with amazing sales. Their production limitations were market-demand short but are improving.
TGR: Have you seen the premiums come down at all in the coins?
RW: Yes, but itâ€™s so scattered I canâ€™t give you quotes. Some are more available than others. Bars are easier to buy, because for the most part, folks would rather have coins than bars. There are more problems in buying and selling barsâ€”assay, insurance, delivery, storage. Itâ€™s simply easier to trade coins. Personally, I have silver coins; but in the next rally go-round, in the next year or so, I would like to buy gold coins. Then, of course, you can use Kitco, Goldmoney.com, the Central Banks and CEF in Canada. The Perth Mint has availability. You can trade GLD and SLV, but I would not be a long-term ETF holder. Trade them, but be very wary.
TGR: Why is that?
RW: I think if we get into a nasty situation regarding delivery and some other problems, you could be out in the wind on ETF delivery. You are holding paper with a claim. I wouldnâ€™t do it.
TGR: So what do you suggest for investors?
RW: Small traders should start with a good coin program buying steadily from a reputable dealer. By small accounts, I mean somewhere between a few thousand dollars up to maybe $100,000 or $150,000. These traders should have maybe 10% in coins. For larger account sizes, you can only hold so many coins in personal possession. Then we recommend buying bullion in depository storage.
Hereâ€™s another thought, too. Iâ€™ve asked the investment advisors at GG if it is possible for an American to buy the shares directly from their company in Toronto and hold them in escrow. This would accomplish two or three things if, in fact, you could do it. As an American, you would own one of the premier gold companies, which is probably going to be in position for the long pull to make a lot of money. Your money is out of the US. Itâ€™s not in a New York brokerage, itâ€™s not in your personal possession; itâ€™s in Canada. Thereâ€™s been talk, of course, of gold confiscation. I donâ€™t know where thatâ€™s going to go. I canâ€™t really say one way or the other. But if, in fact, youâ€™re holding GG shares in Toronto, I would think youâ€™re pretty safe. Thatâ€™s something with a lot of merit in this environment. People wonder how they can have some resources that are unattachable, shall we say, in the United States. Buying directly in Canada might provide the answer. There may be rules that prohibit that, but weâ€™ll find out.
TGR: Youâ€™re suggesting buying shares directly from Goldcorp?
RW: Yes. Most people donâ€™t know its possible. If you want to buy GE stock from GE without a broker, you can do it. The domestic versus foreign share buying has yet to be addressed.
TGR: To summarize, youâ€™re suggesting investors should own gold shares and you see a rally ending somewhere between mid-April through the end of May. What will signal the music has stopped, telling us to run for a chair or get out the door?
RW: You have got to be very careful. On any news out of Washington, you trade the opposite. A lot of traders say that when Tim Geitner starts making a speech, they hit the sell button. The point is that we can forecast selling time within a few days. Most importantly, I would rather be premature on an exit than too late. I can evaluate the technicals using several indicators. There are important interrelationships between different markets, not only domestic but foreign. I am very fortunate Iâ€™m able to see several institutional reports most people never do. One of the best traders in the United Statesâ€”in fact, she won the trading championship the last four years in a rowâ€”is Louise Yamada. Louise said that this Dow is going to 4,000. She wonâ€™t put time frames on it, but she is correct almost all the time. Bob McHugh is extremely correct with his technicals. I read his daily reports and we exchange newsletters.
TGR: Heâ€™s a newsletter writer?
RW: Yes, and heâ€™s a gentleman; just a fine person and he has a fantastic technical letter. Some people prefer a straight recommendation: â€śBuy this, sell this, put a stop hereâ€? and thatâ€™s as far as they want to go with it. But if youâ€™re into charts and numbers, subscribe to Bobâ€™s letter. Itâ€™s 50 pages and like a continuous price chart that just keeps going and going. He covers the U.S. and Australia and more. We very much appreciate what Bob does because his numbers are accurate and technical. I am a technical analyst and rely on 7 other pros to back-check my work. Bob McHugh is one of my seven selected.
TGR: What do you foresee after the spring meltdown?
RW: I expect it shall be quite tricky to find new entry dates. June, July and August are usually not good times to trade. But, anything can happen. If things get crazy enough in May and June, there may be unusual trading opportunities in July and August. I donâ€™t know. Normally there are not and itâ€™s not a good time of year to be fiddling around. Usually the best cycle time is from September until April. Thatâ€™s it pretty much right on through.
So May is a sell; the June, July and August period is choppy flat; and in September youâ€™re getting ready to go. Normally traders get serious and back to work after Labor Day. Last fall, because of unpleasant credit things, that cycle was delayed, too. When Lehman hit; everything went down the drain. Do not be afraid to be in the markets. Just understand your risk and plan your trader very carefully. -Traderrog
Using the nom de plume â€śTraderrog,â€? Roger Wiegand produces the popular Trader Tracks e-newsletter, providing investors with short-term buy-and-sell recommendations and insights into the political and economic factors that drive markets. An insatiable reader, he digests a variety of domestic and international publications, with the economic, political, monetary and market news and commentary woven into his opinions and analyses. For more than 17 years, Roger has devoted intensive research time to the precious metals, currency, energy and financial markets. But his varied backgroundâ€”which includes graphics, writing, editing, sales, marketing, commercial printing, consulting and real estate development (from sand and gravel mines to landfills to residential/commercial projects)â€¦and tradingâ€”also shapes the view he shares. In addition to Trader Tracks, Roger also pounds out a weekly â€śRogâ€™s Corner-After The Bell â€ścolumn for Jay Taylorâ€™s Gold, Energy & Tech Stocks newsletter. For other essays; visit websites such as Kitco.com and of course The Gold Letter. Roger is a frequent speaker at The Cambridgehouse Resource Conferences. Visit roger and Jayâ€™s website at webeatthestreet.com
16th March 2009
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