Bear Trader "Technical Musings": August 23,2012

MOST RECENT NEWS: The recent previous S&P 500 highs: 1419.04 on April 2, 2012 1418.16 on August 17, 2012 1418.13 on August 20, 2012 Then we see an attempted breakout upward with a 1422.93 open on August 21, opening with a gap from the previous close above the April 2 high on moderate voume, rising to 1426.18 in an hour and ten minutes but on falling volume, the dropping for rest of day to 1413.31 and finishing on the higest peak volume for some time, at least a week (maybe several weeks as Yahoo Finance "forgets" the six minute charts after five days back). So here we have the "classic failed breakout", a bearish short and medium term pattern. Gaping up above resistance followed by a rise to new highs followed by a decline through the gap area to a close for the day at the low for the day (which is lower than the lows of the previous three days lows) on exceptionally high volume. The Wall Street boys are nothing if not superstitious, and this "classic failed breakout" is inauspicious, nay, downright menacing. So now "The Boys" are waiting for the other shoe to drop. MEDIUM TERM NEWS: "Seducing the fair (but shy) Bernanke" - or, "Oh, QE3, QE3, wherefore art thou, QE3?" "The Boys" had just about persuaded themselves that QE3 was coming on the First of September, but now doubts are rising; S&P 500 is too high to make the Fed "ease"; real inflation has dropped from 7% annual increase rate per quarter to 5%, still plenty of inflation but decreasing, whice is good; heavy food inflation is coming because of the drought so the Fed would rather not increase inflation sizeably, which QE3 would do; QE3 would cause a fall in the value of the dollar, making petroleum more expensive (causing inflation) and making the $USD weaker which discourages Chinese, Japanese, European, etc. cash flows into US financial assets, in particularly Federal Treasury and Agency paper, threatening rising rates instead of the declining rates the Fed expects and desires. I believe that we are at the point where attempts to lower US interest rates will instead make US interest rates go higher. Also a declining dollar will make the price of gold in dollars take off. QE3 would become a political football if begun on Sept. 1 as Wall Street hoped but would be ten times more so if triggered Nov. 1. The Fed's power and independence could easily decline, probably markedly, if they get in pissing matches with both the Dems and Pubs at once during a Presidential election. In balance, I don't expect QE3 this year, but the Big Boys are all "Strong Like Bull", sort of like Australian Rugby players, full of testosterone and piss and vinegar, so I am not sure about that. LONG TERM: Soros, Paulson, China, Russia, and the Oracle of Omaha: Soros on his latest SEC filing reports heavy buying of GLD. Paulson has been buying gold in various forms for some time now. (Paulson looks a bit of a loose cannon to me though.) Russian and Chinese national banks are supposed to be buying gold although I don't see anything special in the cash gold price. Berkshire Hathaway dropped a bomb shell Tuesday, reporting that they have bought back credit default swaps covering a collection of State and Municipal Federal income tax free bonds originally sold to Lehman in 2007. The CDS buy back nominal coverage was $8.25 Billion. Bershire still guarantees $8 Billion CDS in the same market for longer duration bonds (a less liquid market). Berkshire must have taken a sizeable loss on the deal as CDS on State and Municipal bonds are much more expensive these days. It seems that Buffett is saying that those bonds are much more risky than Joe and Martha Sixpack think; Joe and Martha have put nigh on to a $1 Billion a month in Fed Income Tax Free bond funds for some time now. Of course old Warren could just be senile. He is eighty one years old, after all. Or, of course, Meridith Whitney was right but early. Looks like a very dark cloud on the horizon. BOILS DOWN TO: Me, I see the S&P 500 stuck under resistance, and stuck good. Unless there is a convincing breakout, gap up, high volume, high above 1425, low and close above 1420 I think that the road is probably down. 1433 is still possible, gives some breathing room. There is good support at the lower bound of the channel that has been building since June 1st. Today that is 1375. There is more support in the 1300 - 1310 area. There is support from last fall around 1150 and Fibonacci support at 855. Uncle Ben would do something around 1300, at a guess. On Tue, Aug 21, 2012 at 12:42 PM, The Evansville Observer wrote: Bear Trader--- I thought I remember you telling me that 1433 was about the top. What does it look like to you.?

A Reflection on Power

Yeah, on the politicians being allowed to inside trade. That law was signed on April 2 (as I recall) of this year but does not go into effect until September 1st, next month. Got to have time to unwind all those insider deals, I guess. Most of the big ones are not in securities nowadays anyway, too easy to track, but in real estate and arranged as payoffs. That is how the Senate Majority leader Harry Reid made his bundle. Or the Obamas getting their Kenwood District house with the "help" of Tony Rezko and his wife. The Clinton magic $100,000 cattle future payoff. People do not "seek" power unless they want power. Power is the ability to have your own way at the margin. More power means more having your own way. Most people want money. Most power seekers want money. This has been going on forever. Even George Washington went after real estate in the Ohio and Shenandoah river valleys (many hundreds if not thousands of square miles) during and after the secession war with the British Empire using his "political connections" extensively. Power is getting what you want. People want money. "Good Government" is an oxymoron. People who want power but not personal wealth are much worse than the personal wealth seeking kind. Antoine Saint-Just, Hitler, Stalin, Richard Speck, Charley Manson, the Batman shooter. There are millions and millions of them. A person trying to get rich is harmless compared to those who are willing, no, eager, to kill to further their ends. Killing at will is the real stuff of power.

2012: A little bit about gold

I was going to talk about gold as a hedge and hedges in general. Forgot to. Gold is money. If government scrip declines in value a unit of scrip will buy less gold than it would have before the decline. Gold will probably continue being an effective hedge against loss of the value of the dollar. The stock market, to an extent, and of course depending on stock, sector, etc., also is a hedge against the dollar. The Federal Reserve does QE, money volume increases, and the value of the dollar drops through dilution (just like a stock). The stock market goes up because the new money chases the market up, hedging the loss in the dollar's value. That is why Wall Street loves QE. Remember that the dollar today is worth what sixty cents was worth in 2000. If you look at the S&P 500 monthly chart from 1995 to present you will see two highs very close to 1500 (1498 in Jan. 2000 then 1525 in July 2007). In July 2012 the monthly was 1418. A cyclic view is that we can expect a high 7.5 years after the July 2007 high (as 7.5 years is the time between Jan. 2000 and July 2007). That would be Jan. 2014 and followed by a monthly low about 800 after two and a half years (with no TARP, QE, trillion dollar treasury raid, etc.) to six months (with full bore intervention). Another way to look at this is that as compared to the January 2000 dollar our current dollar is worth 60 cents of Jan 2000 money, then the current S&P 500 is not 1418.16 but instead 851 in Jan 2000 dollars. So what we have, in constant dollars, is a succession of lower highs and lower lows dating back twelve and a half years. The only asset that worked, in constant dollars, over this entire time period, has been gold. If enough people decide that the modern fiscal and monetary system is crooked then the good old modern monetary and fiscal world is history. This will cause really bad stuff like vaporizing every last bank deposit in the world, all the derivatives, all the underlying, the whole thing. The modern world will be stopped in two minutes after all bank accounts become simultaneously valueless. Probably the only institutions to make the transition to the New World will be military. This is why the "establishment" is so hostile to gold. So, hey, I don't know what the price of gold will be. The dollar has strengthened sizeably against various currencies, the Chinese and Indians have stopped importing gold for personal use, new gold production is coming on line fast, and the changes are not well reflected in the various indexes. You just gotta take any authoritative didactic proclamation with a big pinch of salt. Heavy support for gold about $1500 per ounce. If the Fed lays off the QE gold should trend very slowly upward. QE would cause a return to the trend line of Jan 2009 - July 2011. Notice that the gold price line during this period exactly inverted the declining dollar. Gold was holding constant value, that is. The dollar was losing value. One requirement of good money is that it be a reliable store of value. During this period (Jan '09 - Jul '11) gold was a reliable store of value while the dollar was not. Marc Faber likes gold. So does George Soros although he won't say so. As it becomes time to escape the Euro dollars are bought. This is happening now at an increasing rate. If faith is lost in the dollar then really all that is left is gold. The USA is actually in worse financial situation than is the Euro zone, but the USD will still buy you oil, if at a ridiculous price. By the way, the only reason OPEC still accepts dollars for oil purchases is that Saudi, UAE, Qatar, Sudan etc. won't last a minute without American military cover. That means, quid pro quo, that either the USA is willing and able to go to war with Iran and defeat Iran utterly, or a new Persian Empire controls the oil countries and the USA won't be able to buy fuel or sell government bonds. Americans would die in large numbers. Elections would be cancelled for the "duration of the emergency". The "emergency" would end up lasting a long time, longer than you or I have to live. No way to make better estimates of the human costs than the 14th Century Black Death, the Seventeenth Century Thirty Years War, or the American Indian's Sixteenth Century European plagues (smallpox, bubonic plague, typhus, typhoid, cholera). Could also be easier, could also be harder.

"The Reality Facing Us": August 5, 2012

As I have pointed out before, the ACTUAL GDP has been declining steadily since last half of the year 2000, with only one quarter of growth (in 2004) since this "contraction" started. In real GDP there has been a GDP decline of about 30% since the year 2000. The USA population has increased more than 10% in this time, so GDP per capita has decreased to about 63% of what it was in the year 2000. If you use a reasonable figure of 40 million "immigrants" during this time the GDP per capita is 54% of what is was in the year 2000. So if you are wondering why you are suddenly so much poorer, well, this is the reason. And, unfortunately, the really can be no realistic expectation of the situation improving. I expect GDP per capita to continue to decline at the present rate until conditions change and the rate of decline increases, probably markedly. And certainly the mainstream media and the political class will be of no help. The reason I write is to suggest the attached link, which leads to a Power Point like slide show that neatly describes the situation we are all caught up in, which offers a real, but not easy, way out of this ugliness. The first step is to get past the "denial" stage of grief, then the "anger", to "resignation". We must face reality with courage and without illusion and delusion. http://www.businessinsider.com/jon