Dan’s Blog

The Nature of the Beast

Dan Calandro - Friday, April 26, 2013

Gold bounced this week as traders covered shorts and pushed gold 8% over its April 15, 2013 low. That’s the story this week. 

Aided by rumor, pomp and circumstance, traders create volatility by placing huge bets on future movements of securities. Recently at record highs, short activity for gold has been well publicized. (Shorting is the investment process in reverse, it’s selling high and then buying low – in that order.) The Wall Street establishment not only coordinates this activity (massive gold shorts) but actually advertises it on CNBC, their favorite propaganda network. They do so to fuel the fervor of speculative trading – to create wild swings in price.  

Traders thrive on volatility.

It was just a few weeks ago that rumors surfaced about the Federal Reserve ceasing QE activity. That policy move, it was speculated, would strengthen the U.S. dollar and hurt the advance of gold. As such, gold dropped dramatically. 

I threw cold water on the idea at the time, posing the question: Why would the Fed change course now with high unemployment and low inflation?  It just doesn’t make any sense and not consistent with this Federal Reserve.

In fact, investment markets, including gold, remain extremely manipulated. Along with gold, stock market strength jumped 4% this week while the Dow Average advanced just 1%.  See the chart below.

4-26-13a

The pertinent question for investors right now is: Where is the Dow in its cycle?—Is it mirroring the 15-51 Indicator’s  September 20 trend or is it at the September 5th point?  

I’m not exactly sure of the answer. While uncertainty is not uncommon in times like these, long-term investors who only need to buy low and sell high need not be overly concerned about identifying tops and bottoms (highest and lowest points of valuation). That is not required for successful investment. To put it another way, market timing is not required for making large sums of money in the stock market. Understanding cycles of valuation, however, make your investment decisions more timely and much more profitable.  

Patience comes naturally with a long-term investment view. Today, tomorrow, and next week mean very little in the scope of a five or ten year plan. All the advice in these blogs is directed from a long-term perspective. From this angle, the Dow is high indeed, but it may not be at its highest point before correction commences. The 15-51 Indicator is 24% off its September 20th all-time high, but it may not be at its lowest point because an unavoidable "market" sell-off would produce a lower valuation. 

Gold is volatile, and will get more so if for no other reason than it is extremely difficult to answer the question: What is the fair value of gold?  Like all raw commodities, there is no operating unit for gold, no gross margins, no balance sheet, and no P/E multiples. Its value is determined strictly by the laws of Supply and Demand. 

As mentioned, gold is a money hedge; and when the value of money depreciates the value of gold rises, and vice versa. The perception of need drives gold.  

The 2008 market crash is a great example of this. As we know, it resulted from the "financial crisis" which brought about massive and broad-based currency debasing. Remember, the entire U.S. banking system ran out of cash back then – and so did the Federal Reserve. As a result, the Fed ramped up the printing presses and produced an unprecedented amount of new currency which it infused into the banking system through programs like TARP and QE. This dramatically diminished the perception of monetary worth – and gold exploded. See the chart below.

4-26-13b

Gold bottomed-out several months before stocks did in late ’08 and recovered faster and much more potently than stocks in ’09. Gold’s dominance has continued because the environment for money has been persistently bad, with trillions of newly printed dollars entering the market every year since the crash. 

Corrections happen all the time, and when markets are manipulated (like record gold short positions and subsequent coverings) they seem to happen out of the blue and for little logical reason. That’s the nature of the beast.  

Caution to those who let gold’s recent reset prompt them to place additional capital into stocks. That would be succumbing to said beast.    

Stay tuned…

ShieldThe road to financial independence.™

Market Manipulation

Dan Calandro - Friday, April 19, 2013

I’m hearing more and more confusion about the investment markets these days. The stock market won’t down, some say, and gold is going the wrong way. What’s going on?  

Admittedly, if you have to make money in this market your situation gets much harder. Most of your money should have been made when it was easy. Now it’s tough. The markets are a mess and make little rational sense. Gold should be going up and "the market" should be going down. But the opposite is happening. See below.

4-19-13a

An ill effect of QE is the gross manipulation of widely followed market indexes like the Dow Jones Industrial Average. The Wall Street establishment manipulates the Dow and S&P to confuse investors with mixed signals; they do so to lure idle capital into shark infested waters, so they can feed off the carnage. 

I caution you not to bite.

Market manipulation and investor confusion are major tactics Wall Street has employed for a very long time. They do it all the time, and they're doing it right now. (see my book for details.)  

That’s why I tell people to follow my blogs and the 15-51 Indicator. Because it’s not yet widely followed by the Wall Street establishment, there is very little market manipulation in the 15-51i. That’s the reason it tells a completely different story than the DJIA -- and a much truer picture of Market reality. Below is the same chart as the above but with the 15-51 Indicator in it.

4-19-13b

Strength is softening because growth is weakening – which started with a surprisingly low fourth quarter 2012 growth rate (just +.4% during the Christmas quarter.)  The 15-51 Indicator predicted that softness in September when in began its correction. Those who have read my book know how the 15-51 Indicator is built, that it is an above-average portfolio designed to outpeform the Dow Jones portfolio over the long-term. And now it is proving to be the leading stock market indicator, as the Dow is clearly following its path seven months in arrears.   

Based on Market fundamentals, stocks should be going down (like the 15-51 Indicator is) and gold should be rising. The 15-51 Indicator is ahead of the game. But gold is down sharply again this week. Why?

I hate to say it, and I’m not suggesting it’s 100% of the reason for gold’s decline, but now with a wide variety of gold exchange-traded funds (ETFs) the price of gold is manipulated now more than ever before. ETF’s make shorting gold easier, and therefore, open to more people (increased demand). This is probably the reason short positions for gold are at record highs. 

Manipulation – it’s a bigger factor than most consider.  

Now I understand that a slowing economy generally reduces demand for metals used in the production of goods, like copper, silver – and gold for jewelry. I get that. But gold is down 12% in the last two weeks in what can be considered nothing short of an awful investment environment, as highlighted by these headlines from this week’s news:


Retail Sales Fall as Consumers Stick to Essentials

China GDP Growth Slows

GE Warns of Europe Weakness

IMF Cuts Global Growth Forecasts

Fitch Downgrades U.K. Rating

The most important element to making investment decisions is to make them for the right reasons and to base those decisions on what’s actually happening in the marketplace. (Let me know if you need help with this.)

I understand how easy it is to question yourself and/or your method when you see "the market" and gold doing something they shouldn’t be doing. It’s easy to think you’ve missed a piece to the puzzle that would have prompted you to buy into the Dow at 13,000 – a move that would have earned you 12% in just a few months.  

Don’t persecute yourself. That piece of the puzzle doesn’t exist. Buying into Dow 13,000 is a pure gamble, total speculation. That's not investment. Investing is easy and requires no luck. Market timing demands luck because it is not based on Market fundamentals, which investors rely on to make long-term decisions.

The global economy is shrinking and the fiscal position of sovereign states continues to weaken. These conditions are bad for stocks and good for gold.  

Mass market manipulation is only temporary; and when "the market" corrects – so will gold.  

Stay tuned…

ShieldThe road to financial independence.™

# # # # #

To my friends in Boston and members of the American family that recently suffered from yet another mindless act of evil -- PEACE, LOVE, and JUSTICE...Godspeed!

HalfFlag

On the Horizon

Dan Calandro - Sunday, April 14, 2013

Analysis of the investment markets is a two part story this week. It starts with gold and ends with stocks.  

Gold took a nose dive this week, dropping 5% on Friday and 7% for the week. Why such a dramatic move?

Speculation.

Gold is widely used as an indication of inflation. The thinking here is that periods of inflation will cause the value of gold to rise; and when there is no threat of inflation, the price of gold will drop.  

I don’t buy into the mindset. Inflation is a possible symptom – not a definite cause – of a move in gold.  

This week gold speculators overreacted to a drop in the Producer Price Index, a measure of wholesale inflation. Relative price stability also appeared on the consumer front as falling gasoline prices diluted the effects of rising food costs. In short, speculators saw these falling price indicators as a reason to sell their gold positions – because inflation seems far away, or presents no immediate risk to economic vitality. 

There were also reports this week indicating that many traders are speculating about the possibility that the Federal Reserve will soon curb its QE activity; such a move, the thought goes, would strengthen the dollar (which would be bad for gold.)  

This speculation is just as far out. Fed chairman Ben Bernanke believes that large cash infusions via QE help or improve the job market. He is convinced as such, or so he testifies.  

So why would Bernanke discontinue a QE program, that under his ascertain, will achieve his self imposed dual mandate of low inflation and low unemployment?—especially now that inflation appears not to be a problem and the job market remains weak. Why would he change now? 

And why, also, should we believe that American QE will end when the current U.S. Treasury Secretary, Jacob Lew, is parading around Europe pushing them to do more of it? 

From one side of his mouth Mr. Lew pressed Euro Zone leaders for more monetary stimulus – codeword for easy money and QE type activity – and less fiscal restraint to "help" the struggling economy. In other words, he urged them to continue weakening their currency to make things "easy."

  

Then out of the other side of his mouth Lew chided Japan and China for doing just that – weakening their currencies – to make things easier for themselves.  

First of all, telling other countries what to do is not leadership – it’s arrogance. And secondly, advocating two different positions to two different regions is not diplomacy – it’s hypocritical. But I digress…

The point here is simple: poor central government policy and/or management are not ingredients to strong currencies and economies. Fair minded investors must acknowledge this as the current state of affairs.  

To expect a Federal Reserve under an easy money and big government bias to shift strategies without an impetus to change seems a little far-fetched right now – especially when unemployment is high and inflation is "hard to see."

That said, speculating on what the Fed will do should not be part of your gold decision if you are a long-term investor. Let speculators speculate on that. The decision now for long-term investors isn’t to determine whether gold is cheap or still too high to buy, but whether or not the dynamics of gold have changed.  

And the answer to that question is no, they haven’t. 

Gold is a currency hedge – not an inflation hedge. Gold rises when currencies weaken – when they depreciate. When money is strong, gold devalues because more people trade money than gold. Because of this, sound monetary policy will always produce more demand for money. Currency is easier to use, exchange, and lug around. As a result, the exchange value of gold is always limited because it is less efficient, and less desired.  

But when currencies collapse, are impotent, and/or worthless – gold becomes a necessity and demand rises. It is needed, if for nothing else, to back trade. That’s why gold always has value. It’s the world’s de facto reserve currency.

People use gold only when they need to use it. The perception of need, therefore, drives its value. The general rise in prices, a.k.a. inflation, has little to do with it.

To prove this, let’s take modern day Japan as an example. Japan recently made good on their previously announced shift in policy and began devaluing their currency to "help" their economy. But let’s be fair, they did so to make their currency more globally competitive. They did so to follow the U.S., Europe, and China, in doing the same thing. They did so to play the same game – in their own way. 

And who could blame them. 

Japan should do what is best for Japan. And for Treasury Secretary Lew to do condemn this while advocating the same devaluing policies to Europe, is, well, arrogantly hypocritical. 

Par for the course.

Doubters of gold should take note that the recent weakening of the Japanese dollar (the Yen) caused gold prices to skyrocket there. As a result, many of the Japanese people are digging out their gold and cashing it in (see Wall Street Journal article: Japanese Rush to Sell Gold, April 9, 2013). Once again, a weak currency market caused gold prices to rise. 

If you ask whether or not that new money in the hands of those consumers will cause inflation there – I say, maybe – but not definitely. That really depends on what other government policies are implemented to manage the economy.  

So to say that gold is a reliable indicator of broad-based economic inflation – nope, I don’t buy it. The drop in gold this week was a false indication by a broken system – short positions of gold are at record highs (which adds downward pressure on its price), and speculators are gambling that money and economies aren’t as bad as they seem. 

All of this sounds so much like 2008.  

If markets didn’t offer mixed signals then no one would be surprised by their severe correction. Markets inflate and correct all the time. In the 90’s it was a technology boom; in the 2000’s it was housing; and now it’s money and debt. This one, too, will burst. And when that happens gold, the consummate money hedge, will benefit. 

So forget about inflation when making your gold decisions. Use instead actual market conditions and whether or not you have enough of it to achieve your financial objectives. You will be better served. 

And then there’s the second part of this week’s story – stocks. 

*

Poor monetary policy kept air pumping into the stock market balloon this week. The Dow Jones Industrial Average ended the week at 14,865, up 13% for the year (3 ½ months), 12% in the most recent 12 months, and 20% in the last two years. The Dow’s value can now be considered irrationally exuberant, reaching the action zone high point for the first time this year. 

That’s always a good time to take a piece off the table. I say this knowing full well that giving buy and sell advice is quite difficult. Everyone has their own plan and objectives, risk tolerances, growth postures, and different points of entry and exit to profit. But as the saying goes, it's buy low and sell high - and stocks are definitely "high" at these levels.   

And that includes the 15-51 strength Indicator, which has corrected 22% since hitting its all-time high in September 2012. Where it sits today, the P/E ratio for stock market strength is 18 versus revenue and income growth rates of 8% and 6% respectively. That’s still kind of pricey – and still irrationally exuberant. See the two year chart below.

4-12-13

No one loves mixed signals and uncertainty more than the Wall Street establishment, except maybe for the media. Both thrive on the need for advice and information, and neither minds looking stupid when they get caught off guard – so long as they have your assets in their hands, of course.  

One final thought, and it's a important point from a previous blog: the worst thing you can do right now is to buy into this stock market because you think you have to, or because you think you’re missing something or losing something. I can say quite confidently, if you have cold hard cash you haven’t missed anything with stocks.

Better opportunities are on the horizon.

Stay tuned...

Think Again

Dan Calandro - Monday, April 01, 2013

I was a little lost about what to say in this blog this week. I mean, how many times can you say the economy stinks, the stock market is overvalued, and conditions are ripe for gold? But the truth is nothing much has changed. 

There was little new in the news this week, and what did appear, was basically the same old story. Fourth quarter GDP was revised upward again this week – this time to +.4%. You may recall the Fed’s first forecast estimated a contraction of -.1%. The first revision put it at +.1% last month. And while today’s 4th quarter GDP is 500% better than originally thought, forgive me for not getting excited about fractional growth.

A lot was made about the rise in February’s consumer spending, which at .7% beat what most economists expected. However, spending rose just .3% after inflation. 

That stinks.   

Even so, the Wall Street establishment applauded once again. The Dow Jones Industrial Average closed the first quarter up 11% – far surpassing the pace of GDP growth. Even the most overrated portfolio in the world, the S&P 500, closed at a new all-time high, and finally surpassed its October 2007 high on the last day of trading this quarter (March 28, 2013.) 

As you know, the DJIA passed its ‘07 high-water mark more than three weeks ago, on March 5th. Stock market strength via the 15-51 Indicator regained its October 2007 high more than three years ago – on January 4, 2010. So now, some three weeks after the Dow and more than years after 15-51 Indicator, forgive me if I don’t see the S&P 500’s "record" as a big deal with any kind significance. 

In the chart below, significance is not in the omission of the S&P 500 trend-line but the fact that the Dow has finally done something it hasn’t done since the ’08 crash – it reached Nominal GDP. (The 15-51 Indicator did that in August 2009.) See below.

3-28-13


Recent DJIA and S&P 500 milestones have led some people to mislabel the Market as "fully recovered" or to misconstrue lofty stock market prices as "validation" that recovery has actually occurred.  

So not the case.  

Recovery cannot begin until American government begins on a course of eliminating trillion dollar annual deficits. Until then, poor fiscal policy will continue to force poor monetary policy – both of which cause inflation.

To buy into this market is to buy into inflation - and that’s a risky proposition. 

Corrections occur after prolonged periods of inflation; and they are not usually one-day events, but generally occur over the course of many weeks or several months. The correction’s behavior depends on the amount of inflation in "the market" and the severity of its impetus. The specifics, timing and/or behavioral, are not known by anyone. Nor is that information required to be successful in investing. 

Discipline and your gut instincts are most valuable right now. You can’t succumb to your broker’s pitch, which can easily make you feel that you’ve missed something, or are in the process of missing something special. Heck, nothing irks your broker more than idle cash. 

That’s why they manipulate the stock market and then use Dow 14,500 and the S&P 500’s recent milestone as advertising to lure your money back into their game. And while I know it could be difficult watching "the market" rise with perhaps a large portion of your money sitting on the sidelines, it’s definitely not prudent to buy into these lofty valuations. Think of all those people who bought into stocks in October 2007, when the Dow and S&P 500 were last at their current levels. It’s been a long time since they got back here.

Success is most easily had by investing in growth and the potential thereof (not inflation) and by buying low (when stock prices are down.) 

If you’re thinking about buying into the stock market at these levels, think again. Inflation is prevalent, growth is non-existent, and market averages have been manipulated to all-time highs. 

A correction is due.  

Stay tuned...and let me know if you need help.



ShieldThe road to financial independence.™  


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