Friday, July 27, 2012

Touching Base.

If you still managed to hold onto the Netflix short, fantastic.  We are now searching for a bottom as the stock has started its C-leg towards the support range that starts at around $42.00/share.  If you close out the position from our $220 short entry, you've locked in about 73% gains to date.  I would recommend doing this as the decline has fulfilled the minimum guidelines of two sequential lows and diverging internal momentum on the latest low.  If you wish to hold on to a portion of your winnings to see if we get into an extended decline (true long-term support is still a ways away, and the long-term trendline from IPO comes in at the low $30's per share through the rest of 2012), I would still be looking to hit the trigger as there looks to be about one good short-term leg left in the downtrend within the next several weeks.  In the meantime, here's an opportunity or two:

There's a perfect place you can take these gains and apply them.  The Ultimate Bubble is sweating out its last few drops of exertion, and the mass exodus is about to begin.  You are lucky enough to be able to grab a seat in the front row to watch the fireworks display, and hopefully churn out a boatload of money at the same time.

The greatest bubble in human history is in sovereign debt.  The swiss yields just hit record negative territory this week, as well as German bunds.  The USofA, the most indebted country in the history of the human race (try some GAAP accounting on those government books, and you'll come in closer to $90 trillion than $15 trillion), just saw bond yields below 1.5% over 10 years while inflation rates are coming in over 2% (CPI basis).  People are literally paying governments to hold on to their money to keep it "safe".  The euro crisis has caused widespread fear and turmoil, the balance sheets of the old players are a zombified mess and will never be sorted out without true bankruptcy and auction-style liquidation by creditors (although for half of the financial instruments in those dark, moldy vaults, nobody could tell you the counter-party as it is).

I recommend a fully leveraged short position on long term US treasuries.   Not only that, if you can find an instrument to do it with or have an investment banking account overseas that allows it, short Swiss bonds at maximum leverage, German bunds at maximum leverage, and Japanese sovereign debt at maximum leverage.  The house of cards will completely crash over the next decade and people who are in position early to benefit from it will be handsomely rewarded.  Think shorting subprime in 2006, but hundreds of times the scale and without any collateral to speak of for debt holders.  The only collateral you have as a bond-holder is that of politicking and central banking, which history has demonstrated time and again is absolutely worthless.

As for gold and silver, they have been dredged pretty hard over the past 14 months.  I would have thought that the dredging would have been even harder (it may be much harder yet for silver if the credit contraction starts sooner than later, as it is more sensitive to economies and doesn't bear the same monetary premium as gold).  I have raised my maximum downside target for gold to $1300, and silver to $18.00.  both could turn earlier than that, as the next 3-4 weeks should show if the technical reset is completed with diverging internal momentum indicators and dollar-weighted volume measurements (momentum "less-down" while prices make a final low).

The HUI has retraced heavily, shedding 40% off its peak at $625 to its recent low at $375.  I recommend opening up smaller positions on established gold miners and purchasing small cap gold stocks who have completed the majority of their operational financing or are newly beginning operations.  Financing might be very hard to obtain through any of the traditional channels in the not-too-distant future, even for gold miners.  This might be a boon for solidly-positioned players who have lots of cash right now, as it will present some excellent buyout opportunities at fire-sale prices that could have hefty long-term payouts. Always do your homework on gold companies as there are hundreds of promises flying out of offices these days while there might be 5 or 10% of the exploration projects that actually end up being viable, and at that point there is still the difficulty of financing (or hoping and praying for a buyout or partial royalty sale).

With the price targets for gold and silver near at hand, I recommend re-commencing cost-dollar averaging into the metals.  A new program offered for gold holdings that is actually allocated and regularly audited, and allows for delivery once you have reached a certain amount, is my top recommendation as a method to acquire precious metals regularly and reliably.  It can be found here, and makes buying small amounts of gold or silver as easy as popping a cheque in the mail or setting up a wire transfer.  The most important aspect of this is serial-number allocation and delivery options, which synthetic instruments like GLD and SLV do not offer.  You can purchase gold, silver, platinum, or palladium, as well as swap holdings (if you are like me and do ratio swaps based on historical averages to increase total metal holdings without paying anything extra).

I am still expecting the US Dollar to rally in a big way over the next 1-2 years as credit contraction continues.  Over at, you can see John Williams' work in compiling M3 data and tracking the other monetary measurements.  It will pay to keep your eyes peeled on the aggregate money measures - the world is awash in a tsunami of debt denominated in USD's, to the tune of hundreds of trillions of digital dollars, with an actual cash base of reserves, including money market holdings, at just over $10 trillion.  Something has to give, and something will.   The world is overleveraged at over 30:1, in USD terms.  Just let that mellow for a little while.

I still recommend holding as much physical cash as possible (do not leave more than you have to at the bank) along with your precious metals holdings, and avoiding the long side in almost anywhere that hot money is headed.  The few exceptions to this are in fertilizer producers with strong balance sheets and price:book of less than 2:1, farmland in cheap locations (saskatchewan, some parts of south america, etc.), uranium holdings that have a lot of cash on their balance sheet and minimal debt, natural gas holdings with lots of cash and low debt levels (emerging technologies as a result of the new abundance of the substance are making it a viable competitor for oil in a host of new areas, which should keep demand steady on the upswing for this much cheaper energy source), and a few technology stocks that have been absolutely crushed in the past 12 months, even while their prospects have improved and revenues have started to come in.  I'm not going to touch on those now, but I may in future.  As far as tech goes, look for actual viability (demonstrated performance as opposed to pipe dreams), anything that can make the physical world cheaper or more capable that poses a challenging to an existing solution to a problem.  This is the place where foresight and optimism can make fortunes.

The next couple of years are going to very interesting.  We've been floating along on a plateau with two giant monsters fighting it out as to which direction markets are going to go (Do we get long-term capital destruction coupled with huge inflation, effectively wiping out savers, producers, and lenders?  Or deflation that wipes out borrowers and hits the reset button on money levels and, hopefully, money itself?).  My money is on deflation, as we are at the tail end of a multi-decade trend of credit expansion and an almost-insatiable hunger for debt that has never been seen before.  Governments are the last onto this trend, as they are the last to any trend (hence the biggest-bubble-in-human-history - bonds).  The US indexes seem to be the last stalwarts of hope in any developed economy, and we'll soon see if hope (and central bank largesse, exacerbating it) is enough to really form a trend.  Or if we've begun to finally slide down the next leg of bear market and are taking a ride down the "slope of hope". 

As I see interesting things I will post on them periodically, and if I come across any good short term opportunities I will let you know.  Otherwise, stay safe out there!

Ed, I decided to write up a response to you, but the character limit on comments is too large for what I typed it up, so here it is:

Hi Ed.

I plan on posting a study I've been putting together over the past few years about some of the misconceptions about the Federal Reserve - one of those being that their rate-setting is done arbitrarily and based on their idea of "stimulating" demand for the economy, focused on total volume of money (and no, this is not a justification in any way for monopolization of money, fiat currency, just trying to bring a greater understanding to investing in the markets we are dealing with NOW)

Their rate actually short-term lags the T-Bill rate, to a correlation of almost a perfect 1:1 with up to 90 days delay. 

Interest is two things.  Time and Risk.  It is affected by the overall supply of loanable money when banks are not insured and have to attract deposits from a limited stock (market based monies like gold and silver), however the principle is similar even within the banking cartel.  If the money supply/base money available to banks is high, the rate of interest will also be low - the value of time is not as high when supply is high.  On the opposite of the chart, if loanable reserves are dried up, banks will price the time-value of money higher.

Risk is the other factor, which plays large roles and lesser roles, based on overall market conditions.

There are currently about $75 Trillion in open debt instruments floating around the world, denominated in USD's.  in order to repay a debt, someone must repay it with cold, hard currency.  There are two things that have kept the debt-system afloat - The issue of new credit, which is converted to deposits (considered as good as cash, since your deposit slip is just a short-term IOU from your bank to redeem the cash if you request it), and the fact that the majority of money sloshes around within the banking system, since most transactions are done electronically these days.  This creates larger overnight and short-term liabilities between institutions than any time in prior banking history (see 2008 for an example of what can happen when overnight markets stall up, even for a short time).  BUT, these deposits or pseudo-deposits (deposits that exist only because a commensurate loan has been issued against them by the same or another financial institution) are still only promises to pay.

Actual physical cash is in an amount around the $2 trillion mark, supporting a system of around $75 trillion (this is not including derivatives and government unfunded liabilities, which put the total amount of debt worldwide at somewhere between the mind-boggling amounts of $500 - $700 TRILLION dollars, or 10x+ the world's GDP).  The system itself is leveraged at over 30:1 against hard currency, which is what everyone will demand once the credibility of borrowers begins to come into question.

What we will likely see as far as the US government and other western governments are concerned is that their ability to repay any debt is mathematically impossible through the normal channels of taxation/seizure/theft of assets.  Especially with the absolute tsunami that all markets have been throwing at them for the past 4 years, which has created the paradoxical effect of allowing for multiple times the typical amount of debt to be serviced and rolled over into extremely low-yielding shorter-term securities.  The maturity rates for western government debt will hit more than 20% of world GDP within the next 2-3 years (assuming a rosy 3-4% increase in world GDP YoY, to boot).  That is 20% of all the world's capital stock just in refinancing issues, not even new issue of debt.

As credit contracts, it is harder and harder to get your hands on cash.  The first phase of deflation usually results in yields diving off a cliff, followed by spikes in yields for anything with a modicum of doubt as to its viability.  The US government is in a mathematically worse position than most of the EU, Japan is in an even worse position than EU or USA.  They are great shorting opportunities, although you have to account for currency loss, especially in regards to Japan.

My personal strategy on Japan is to short the long term government debt, and at the same time hedge against inflation (Japan's bear market is in its final stages, whereas the US's is maybe halfway done) that will come with a rising equity market and real estate market.  Basically - short anything Japanese government, long anything high-quality Japanese business (some of the yields over there are incredible and the cash-flow is far higher than anything you could find here at those prices).

Anyway, this post went on more than a paragraph or two longer than I had originally intended.  Thanks for stopping by.  I apologize to everyone that my updates have dropped off the map.  Trading has been insanely slow and these are the first positions I have opened up in a good, long while from my cash account.  Business in the brick and mortar world has kept me hopping the last 12 months or so, but hopefully as fall rolls around it will slow off a bit and give me a chance to post some of my swing trades and options plays.