Daily Updates

As the US fights the former and Europe fights the latter, what are the odds both battles will be lost…?

Last week produced nothing but more disappointment. At the center of it was the Europeans’ inability to make their debt disappear. They had hoped that they could just announce a plan to take care of it…and that would be enough.

But then, the Greeks said they wanted to vote on it…and then, they didn’t. ‘Papandenomium,’ the papers called it. If the voters were allowed to give their opinions everybody knew what would happen; the whole fix would be unfixed quix. So, they all got together and twisted Papandreou’s arms…and his arms gave way.

And then, investors started getting nosey. They wanted details. They wanted to know how the French and the Germans could cover so many potential losses — from Spain, Portugal, Ireland, Greece, and Italy.

Italy is in the worst position. It has scarcely any more debt than the US, but it has an immediate problem. It has to turn over its debt…it has to borrow heavily just to keep the wheels turning. And it lacks America’s key advantage…it doesn’t have a printing press. It gave up the power to print money when it joined the EU. Only the European Central Bank can print money…and it’s controlled by the Germans!

What’s the matter with the Germans, anyway? Why don’t they get on-board with the Fed? Why don’t they want to print money? If they would just give the signal — ‘don’t worry, we’ll print the money’ — the whole crisis would be over. In Europe, as in America, bond investors would be reassured. They would know that they’d get their money. The ECB would buy Italy’s bonds, and Greece’s bonds, and Spain’s bonds… Heck, it would buy everyone’s bonds. Bond investors would get their money. They would stop hiking interest rates. Italy could cover its losses.

Everyone would be better off, no? Just like they are in the USA. Right?

It all seems so simple. Why don’t the Germans get it?

While US policy makers, official economists and jackdaw kibitzers are terrified of another Great Depression, Germany’s officialdom is afraid of hyperinflation. Hardly any Germans are still alive who remember it, but the experience of hyperinflation of the early ’20s is painted on the German character like graffiti on a national monument. They can’t ignore it. They can’t forget it. It will take generations for it to wear off.

After the bitter experience of WWI, hyperinflation wiped out the German’s residual faith in their institutions. Working hard, saving your money, being a good citizen — none of it seemed to pay off. The ex-soldiers were bitterly disappointed. The ruling classes had let them down. The banks had betrayed them. The politicians had stabbed them in the back.

Even their money was worthless!

“How could 2,000 years of accumulated civilization have led to this…” (Or words to that effect) says the hero of Remarque’s famous All Quiet on the Western Front. Having no good answer, the Germans turned away from accumulated civilization, towards armed, mechanized zombieism.

In just a few years, Germany’s factories were working again — producing tanks and planes. It was a solution to the post-WWI unemployment and depression. Unfortunately, the solution was worse than the problem. The trains ran on time. But they were headed for disaster!

But that’s a long story.

Meanwhile, in the US, we have our memories too. Few people alive today recall the Great Depression. But it still haunts economists’ sleep and troubles their vacations.

“Not on my watch,” says Ben Bernanke, or words to that effect.

And so, the Americans fight depression. The Europeans fight hyperinflation.

And what will they get? Depression AND hyperinflation!

Yes, dear reader, that was our forecast as few years ago. We stick with it. The world is entering a depression. Growth has stalled. Even the emerging markets are slowing down…suffering the consumer depression exported from Europe and America and trying to fight the inflation exported, by QE2, from the US.

This depression isn’t going away anytime soon. It will take years to work through, write off, default and foreclose on the mountain of household, business, and financial debt built up over the last 60 years. At first, we thought it would take 7-10 years. We’re in year 5 already…and, at the present rate, it looks like it might take another 15 years!

But the authorities aren’t going to take a depression sitting down. Even the Germans will probably decide that a little bit of printing press money is better than the defaults and bankruptcies that accompany a depression. They’ll all guarantee each other’s credits. The banks guarantee the debts of their big customers. The government guarantees the debt of its big banks. The central banks guarantee the debts of the governments…and all print money to cover them.

What a great system.

Bill Bonner, 08 Nov ’11

Bill Bonner is founder and owner of Agora Inc., one of America’s largest consumer newsletter publishers. Editor of free The Daily Reckoning email – now read by more than 500,000 worldwide – he is also the author of three best-selling investment books, most recently Mobs, Messiahs & Markets (John Wiley, 2007).

The period of seasonal strength in the metals and mining sector is approaching. What are prospects this year?

Thackray’s 2012 Investor’s Guide notes that the metals and mining sector has two periods of seasonal strength: From November 19th to January 5th and from January 23rd to May 5th. The combined periods have recorded an average return per period during the past 22 periods of 16.1%. The trade has been profitable in 17 of the past 22 periods.

China is buying gold as part of a long term strategy to position itself ultimately as the global currency of choice and to the benefit of its citizens who it has encouraged to buy precious metals.

Before this week’s commentary, an update on the upgrades being done toStockscores.com. The main thing we are working to finish now is the installation of the new charting features. I expect that this will be complete this week, giving Stockscores users the ability to add indicators, change timeframes and time intervals. Once that is done, we will clean up any bugs and fine tune the look of the site. Thanks for your patience.

Second, I will be speaking at the Money Talks Insiders Conference in Vancouver on November 19th. For information on this conference, click here. If you wish to buy tickets to attend the conference, use the promotion code SOBC2011 and receive $25 off plus $50 of your ticket price will be donated to the Special Olympics. Even if you can’t make it to Vancouver, it is possible to watch the conference on video, the information page has more details.

Investors have many choices on how to analyze the stock market. Most use some form of fundamental analysis, looking at company information to determine whether the stock’s price is more likely to go higher or lower in the future. This approach makes the most intuitive sense and appeals to our need to make an educated decision. However, it is seriously flawed for most investors.

When considering information about companies, it is not enough to know the news. It is also essential to understand whether that information has already been priced in to the stock. Ultimately, using information is only valuable if the rest of the market is not yet aware of it.

Small investors doing fundamental research are competing against large, institutional investors who have considerable resources, industry knowledge and relationships to uncover hidden value. This is sort of like bringing a knife to a gun fight, although it is probably more accurate to say that you are bringing a stir stick to a nuclear war.

Rather than study fundamentals, I prefer to analyze what the market thinks of the fundamentals. Using price and volume activity, it is possible to understand what investors think about the fundamentals. Since the markets are extremely efficient, they tend to price in information long before it is part of the public base of knowledge. Most importantly, studying a stock’s trading history looks at what all investors are doing with their money, not just what some are saying.

When doing analysis, I begin by collecting information. For me, this means looking at all of the relevant charts and assessing what the message of the market is. In this process, it is important that you avoid biasing the research.

It is a common for people to only look for what they want to see. An investor who is long a number of oil stocks will seek out information that confirms the oil market is going higher. You can be a great reader of charts, but if you don’t look at the right charts, you will get a tainted impression of where a market is headed.

Let’s do this process for analyzing the overall market right now. Here is a list of the ETF charts I focus on:

UUP – US Dollar Index
FXE – Euro Trust
TLT – 20 Year Treasury Bond
GLD – Gold Trust
VXX – Volatility Index Futures
SPY – S&P 500
T.XIU – TSX 60

In each of these charts, I look for a few simple characteristics:

Rising bottoms – the buyers are in control
Falling tops – the sellers are in control
Price volatility – if there is a lot of price volatility, investors are uncertain. If the stock is trading in a narrow range, investors are confident
Price relative to a trend line – price far above an upward trend line indicates buyers are emotional. Closer to the trend line shows investors are rational
Price relative past price ceilings and floors – recent breaks through important areas of support and resistance show a change in the perception of fundamental value

We need to look for these things in the charts and the piece together the puzzle of how different factors work together. Let’s go through the list of ETFs and highlight the characteristics:

UUP – the US Dollar is in the control of the sellers over the past month but the buyers showed strength last week. There is a lot of volatility, so investors are uncertain. UUP is at some short term resistance now so more likely to fall toward support.

FXE – virtually the opposite of the US Dollar, the Euro lost value last week but is up over the past month.

TLT – the long term upward trend was broken early in October but it came back up last week. This is likely an upward bounce in the early stage of a long term downward trend.

GLD – is in a long term upward trend so the buyers are in control.

VXX – going down over the last month but there is a lot of volatility in volatility.

SPY – has moved sideways over the past year but with a lot of volatility. Short term optimism but going through a period of profit taking.

T.XIU – building rising bottoms in the short term but long term pessimism that has not yet been broken.

Based on these quick assessments of these charts, I can start to piece together the puzzle. I consider Gold to be a hedge to currency devaluation, the fact that it is going up indicates the market expects governments to print more money. The US Dollar and the Euro tell me that Europe is getting closer to a solution to their debt problems but there remains a lot of uncertainty. The VXX shows fear is coming down but it still in the minds of investors. The charts of the SPY, TSX and TLT demonstrate that money is coming back to stocks, and coming out of safer government bonds. However, the stock markets are working to overcome a lot of pessimism and we are far from an optimistic market.

For a similar analysis, give my Market Minutes video a look by clicking here.

Stocks continue to slowly strengthen, there remains a lot of uncertainty but I am seeing a small number of stocks start to show optimism. Here are a few charts of stocks that I think are worth checking out:

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1. LLNW
LLNW is breaking through some short term resistance and has had rising bottoms long enough for the Sentiment Stockscore to move above 60, a positive sign. Support at $2.60.

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2. GNW
GNW made an abnormal price jump on Friday with good volume support, the stock is not above resistance that has held up for three months. Support at $5.80.

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3. AFOP
The Sentiment Stockscore is coming up for AFOP because the chart is moving from falling tops to rising bottoms. The stock had a good day on Friday with stronger volume. It may see some short term profit taking but the momentum is switching for the longer term. Support at $7.50.

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    Disclaimer
    This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

  • Gold did exactly as predicted in the update last weekend – it dropped back briefly to touch the bottom of our short-term reaction target range at $1680 before rebounding, as we can see on the 4-month chart below, and we were buyers around $1705 and below. The rebound on Tuesday left behind a clear bull hammer on the chart, which is positive. After the rebound gold advanced to the next resistance level shown, which may force another reaction this coming week, especially as Commercial short positions, which are still overall bullish, rose significantly last week – any such reaction should again be bought, although with downside volume now lighter than upside volume and silver now looking set for another upleg, there may be no reaction at all.

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