World Of Wallstreet

Best Of The Web: Hussman on the case for recovery...

Click here for full article, but I think the quote below holds the substance.

 

MontyHigh

 

"In recent weeks, the dominant view of investors and analysts has shifted clearly to the expectation that the U.S. economy is in recovery. Appearing to seal the deal for some analysts was the third consecutive increase in the index of leading economic indicators. For that index, interest rate spreads and the S&P 500 Index have been the strongest contributors in recent months, as 10-year yields have shot higher from near 2% at the beginning of the year to about 4% before retreating a bit, and stocks have similarly rebounded from deeply oversold levels. Unfortunately, as I've noted before, there is little information content in mean reversion following extreme moves, and that's what the LEI is picking up here – to a much greater extent than has typically been the case at the end of recessions. Put another way, the case for an economic recovery is based largely on mean reversion from the early 2009 extremes (not on improvements in jobless claims or other measures to a level that is on par with prior recoveries). The recovery argument also relies strongly on the idea that this is a run-of-the-mill post-war recession."

Best Of The Web: Inflation Adjust S&P 500 Earnings

Barry Ritholtz's chart of the day: http://www.ritholtz.com/blog/2009/07/inflation-adjusted-spx-earnings/

I think its worth clicking thru just to see the first few user comments.

Here's my analysis:

• The S&P 500 is down roughly roughly 37%.
• A 37% drop in earnings from the peak would be to around 57$. Earnings need to rise to this level for the S&P to be properly valued (relative to the peak).
• Either earnings are going to soon sky rocket or the stock market is grossly overvalued. It would take something like at 3000% increase in earnings to meet that 57$ value. That's a pretty big sky rocket.
• I think the stock market is grossly overvalued. Look out below. The only question is: when to go short and how much and in what fashion. I wonder how much S&P 500 $700 put options cost for around a year from now? Actually, I'm looking into Mar 2010 ES Mini futures puts at this point and will probably buy a few tomorrow. We'll see.

MontyHigh, http://www.worldofwallstreet.us/

Best Of The Web: Denninger Claims US GDP Needs To Fall At Least 20%

and gives some good reasons for his thinking, click here.

Here's the money quotes:

"The growth in debt outstanding is therefore responsible for pulling forward demand - that is, increasing GDP - by about 21%."

"This means that GDP must contract until equilibrium is restored, which is likely to be significantly more than 20%, because (1) we've intentionally understated the recent-year impact of this "pulled-forward" demand and (2) as the economy contracts and people are laid off this results in a spiral of less spending, which then feeds back to even more business contraction."

Of course, you have to read the whole thing. I'm wondering if we really have to give back all that "pulled forward" demand prior to the GDP contraction ending. What we can't do is pull more demand forward, that is, we can use additional debt to simulate growth. But can't growth occur the old fashioned way (e.g., via productivity improvements, technology advances)? My question is, can't we grow, albeit slowly, while carrying or slowly paying off the oversized debt load?

Of course, if we have to give back 20% of GDP and we stretch that out over 10 years then you are talking about 10 years where growth is down 2% below the long term mean of 3%. That's a pretty painful average 1% GDP growth. Pretty painful.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 35%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "New jobless claims rise more than expected... The number of newly laid-off workers filing first-time claims for jobless benefits rose last week, the government said, though the increase was mostly due to seasonal distortions."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 507,464 in the week ending July 25, a decrease of 78,111 from the previous week. There were 376,123 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20090730yoy).

Here's my uneducated interpretation - On the crap detector front, AP quotes the US as saying that rising claims are "mostly due to seasonal distortions". Looking at the fine print of the data, on this week (next to last in July) from 2000 to 2008 the seasonally adjusted number fell (usually around 5,000 jobs) in every year and yet this week it rose 25,000 jobs! And we are supposed to think that this is an anomaly due to seasonal distortions!

Yes, there is a lot of seasonality here. Look back at previous years the seasonality indicates falling absolute unadjusted initial claims at this time of year and then staying low until late September. The next couple of weeks will be telling regarding how low this year's seasonal bottom will get. The unadjusted number is still way over the roughly 332K value for end of July 2001 when the previous recession was bottoming and the 338K value in 2002 when the stock market bottomed. I think the outlook is for continued economic contraction and increasing unemployment based on this data. 

Here's a chart of the initial jobless claims since I started gathering them. The diamond dark blue line is the one that I think is key and having it fall to 400,000 would point to a bottoming of the downturn. 

Here's a chart of the initial jobless claims for 2000 thru 2002. The stock market bottomed in the previous recession in the summer of 2002. 

MontyHigh, www.worldofwallstreet.com

Myth: "Gold Bullion Has No Third-Party Risk"

Here's a quote from a recent article that got my attention: "The great advantage of gold bullion is that it has no third party risk." This kind of statement is made frequently in the gold investing world.

This is clearly not true. There is always third party risk with Gold Bullion. The risk is that third parties will steal it.

There are two ways of "owning" gold bullion:
(a) Storage Service - you own the gold and enter into a contract with someone to store it for you. This kind of gold ownership has counter-party risk in that the service provider may, in one way or another, be unable to provide your gold to you when you want it. The service provider may abscond with it, get robbed and not have insurance or have the government come in and confiscate it, etc.
(b) Personal Possession - you own and lock it up or hide it (or both) in something you own. This type of gold ownership does not have any counter-party risk as there are no contracts involved. It has a much higher risk than an ordinary bank account of someone entering your home and pointing a weapon in your face and demanding that you hand over the gold.

So, let's not kid ourselves. Life is risky. There is no risk-free way of preserving wealth on earth. We need to evaluate the risk and reward trade offs associated with any vehicle for preserving wealth and select our vehicles appropriately. The reduction or absence of counter-party risk may make bullion attractive in some cases, but it clearly has some "third-party risk".

Here's an interesting thought on the subject: "Do not store up for yourselves treasure on earth, where moth and rust corrupt and where thieves break in and steal but rather store up for yourselves treasure in heaven where moth and rust corrupt and where thieves do not break in and steal. For where you treasure is, there will your heart be also."

A really important question is: Is the Lord Jesus a third-party I can trust with my treasure?

MontyHigh, www.worldofwallstreet.us

Bretton Woods: Treasury Yields-Technical look

Thought I would chime in with what I am seeing for treasury's going forward. I have an upper target of about 4.75 on the 10 year but am actively looking for a move to 4.5%. Here's how I get there.

First 3 technical looks at yields(all are same chart looked at in different views):

(1)A look at the channel developed since bottom last year. Updates in green. Price has bounced on 100 day EMA and RSI has dipped below and crossed back above the 40 level, both bullish developments. Now watching the mid range of the channel around 3.9.

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p62483307564&a=172265749

(2)A look at fibonacci retracements since bottom. You can see price also tested and held the 38% retracement level, another bullish development. [Editor's note: There is definitely something to these fibonacci numbers.]

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p75105392655&a=167359335

(3)Another way to look at the bottoming process created at end of 09. Cup and Handle in yields, shows how the above movements are happening on top of a clear reversal pattern:

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p05809609335&a=167550209

Given the obvious internal strength in the near term look at yields I am using the longer term 20 year chart to develop my target as to where this move should come under pressure. Here you can clearly see the longer term downtrending channel. My feel is given the above coupled with all the fundamental factors everyone knows from supply to currency flaws we are going to test the upper end of the channel. Currently it sits at 5%, but since this movement wont happen overnight I see that target coming in towards the 4.5-4.75 range as time passes.

20 year

http://stockcharts.com/h-sc/ui?s=$TNX&p=W&yr=20&mn=0&dy=0&id=p88026856183&a=173970303

Bretton Woods

Unadjusted Year Over Year: Commerce Department New Home Sales Down 20%, Median Price Down 12%

Here's the summary for the Commerce Department's New Home Sales:

• Associated Press Headline And Lead: "June new home sales rise 11 percent... The government says new U.S. home sales rose by the largest amount in nearly nine years last month, in another sign the housing market is finally bouncing back from the worst downturn in decades." 
• Department Of Commerce News Release: click here.
• Key Numbers: New Houses Sold Unadjusted: 36,000, Year Ago: 45,000, Year Over Year %: -20. Median Price Unadjusted: $206200, Year Ago: $234,300, Year Over Year %: -11.99.
• Last Month's Numbers: New House Sold YoY=-34.69%, Median Price Yoy=-3.36%

Here's my uneducated (also not not spun by guys trying to make you a sucker) interpretation - Year-over-year the numbers stink, but not as bad as earlier months. I don't know what to make of that.

MontyHigh, www.worldofwallstreet.us

Denali Guide: What Is The Volume Telling You?

[Editor's Note: Continued thanks to DenaliGuide (click here) for his contributions.]

The top image is direct from the Stockcharts Blog. Looks pretty good doesnt it ?

That is UNTIL you see that the volume has been dropping since the rally started.

Gee I wonder what that means? Maybe I dont know what it means, but I DONT LIKE IT AT ALL. I may ride the tiger, on the way up, but that doesnt mean I think its a BULL RIDE. I think its more like a bear market rally.

Fun is Fun but care is called for, here.

DenaliGuide

Off-Topic: Heisman Trophy Winner Is A Virgin?

Nice piece: http://www.getreligion.org/?p=15424

MontyHigh, www.worldofwallstreet.us

Sumitomo Mining And I Think Alike About Copper

http://www.mining-journal.com/production-and-markets/copper-rally-may-halt-on-china,-sumitomo-mining-says

Here's some snippets: 
'"Excessive imports mean much of the purchased metal was just stored, raising the risk that they may sell it back to the market and depress prices," Koichi Kaku, general manager at the Tokyo-based company’s copper and precious metals sales department, said. Imports may have exceeded manufacturing demand by as much as 1.3Mt in the first half, he said...

"I don’t think copper prices climbed because of a dramatic improvement in supply-demand conditions," Kaku said. "I’m skeptical about a strong recovery in the market."

Copper exports by Sumitomo exceeded its domestic sales for the first time in the first half, led by Chinese demand, Kaku said. The company didn’t ship the metal to China this month on the spot market because of a lack of demand, only supplying volumes committed under term contracts, he said.'

I'm short and underwater, but I'm watching the LME copper inventory numbers which seem to indicate a change in the demand/supply situation to over-supply.

"But store up for yourselves treasures in heaven, where neither moth nor rust destroys, and where thieves do not break in or steal; or where your treasure is, there your heart will be also."

MontyHigh

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 41%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "New jobless claims rise to 554K, total rolls fall... The number of newly laid-off workers seeking jobless benefits rose last week, though the government said its report again was distorted by the timing of auto plant shutdowns."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 580,944 in the week ending July 18, a decrease of 90,298 from the previous week. There were 411,408 initial claims in the comparable week in 2008." NOTE: In 2006, when the economy was good (remember "Stronger For Longer?"), this number was around 280,000.
• My Spreadsheet (click Download 20090716yoy).

Here's my uneducated interpretation - Yes, there is a lot of seasonality here. This week unadjusted numbers looked much more bullish (week over week) than the seasonally adjusted numbers. So seasonal adjustment is not entirely "rigging" the numbers. Still things are bad year over year and well above my target 400,000 number for signaling the bottom of the economic downturn.

Here's a chart of the initial jobless claims since I started gathering them. The diamond dark blue line is the one that I think is key and having it fall to 400,000 would point to a bottoming of the downturn.

MontyHigh, www.worldofwallstreet.com

Spengler: Michael Jackson And The Housing Bubble

I really love Asia Times' Spengler (click here). This week (click here) he's written quite nice piece pulling together Michael Jackson's death, the housing bubble and the deflation vs inflation debate. He's usually more of a commentator looking through the prism of religion at geopolitics, but he provides some real economic insight here.

MontyHigh

Here's the key bits from an investing standpoint, but I recommend reading the whole thing:

"The public's grief was unfeigned and profound, for Jackson embodied the desire of a generation, that is, never to grow up."

"Undaunted, Americans stopped speculating in technology stocks and speculated instead in houses. The Peter Pan syndrome continued to afflict the American economy. Rather than save, as aging people should, they borrowed more to acquire bigger houses. The housing bubble prolonged America's collective adolescence for a few more years, for it allowed Americans to spend money on toys rather than saving for the retirement that came rushing at the baby boomers like an oncoming express train."

"My study "Demographics and Depression" appears in the May 2009 issue of First Things. I observed that America's population had risen from 200 million to 300 million since 1970, while the total number of two-parent families with children is the same today as it was in 1968, at 25 million. In 1973, the United States had 36 million large housing units, about in line with the number of two-parent families with children. By 2005, the number of large units stood at 72 million, while America had the same number of two-parent families with children. For all its growth, the number of traditional families with two parents and children has not changed since 1963. The American population is aging, and this has dramatic economic consequences.

America's demographics look frighteningly similar to Japan's at the beginning of its "lost decade" of 1990-2000. Japan's population had just began to age dramatically. In 1990, the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged, their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did. Interest rates of 0.25% or less and spectacular government deficits couldn't make a dent in the vast shift towards a propensity to save. The result was deflation: falling asset values and a strong yen.

Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan's. Americans also have seen their stock prices and home values crater, and have suddenly shown an insatiable appetite for savings.

Savings are deflationary: we don't spend on current good but on future goods (securities). The government may attempt to substitute for household spending but it never quite works, no matter how many public works projects the government sponsors (again, Japan poured more cement than anyone else).

There is another deflationary dimension to aging. Old people are creditors, young people are debtors. Inflation is a transfer of wealth to debtors from creditors (debtors pay back debt in cheaper dollars). A country with a preponderance of old people will show strong political pressures against inflation. That's why the Japanese never objected to deflation. As an aging people, too many of them benefited. "

Semafo (SMF.TO) Buys 40% More Of Samira Hill At Bargain Prices

Here's lead of the press release (click here):
"Montreal, Quebec, July 22, 2009 - SEMAFO Inc. (TSX: SMF) today announced that it has acquired from Etruscan Resources inc. (TSX: EET) their minority interest in the Samira Hill mine located in Niger. SEMAFO now holds an 80% interest in the mine with the balance held by the Government of Niger.

Etruscan’s 40% participation in the operating subsidiary, comprised of preferred shares, loans and common shares, was purchased for $3 million along with a 1.5% net smelter royalty. The royalty comes into effect after which time the mine has produced 750,000 ounces, calculated as from July 1, 2009. SEMAFO has been accorded a right of first refusal should Etruscan decide to sell this royalty."

Here's my quick analysis:
Semafo just bought 40% more of Samira hill for $3 million dollars.

Samira hill is a 65k oz/year operation with measured and indicated of 1.3 million oz.

That means they just bought that 40% at 115$/annual oz and 6$/measured and indicated oz.

That is a steal! For comparison, CSG.V is valued at roughly $1000/annual oz and $50/measured and indicated oz. CSG.V should be a 50K oz/year producer in politically more stable Mexico and is about as undervalued a producer as any I know of.

What a steal! Nice going Semafo! It looks to me like Semafo just bought over 20 million $ of mine for 3 million $. Etruscan will soon be out of business if this is any indication of their level of desperation.

MontyHigh

Disclosure: I'm not holding any Semafo right now. I have in the past and probably will at some time in the future.

John Hussman: Responding Vs Reacting

Hussman, once again, is worth reading (click here for the full article):

"For our part, our focus is to ask the same basic questions every day – “What is the opportunity,” and “What is threatened?” We rarely have any sort of forecast for the market, and certainly don't have short-term forecasts here. Instead, we are responding to market fluctuations as they occur. For example, in response to last week's powerful rally, which brought the market again to overbought conditions, we took profits on the index call option position we established the prior week, and moved back to a fully-hedged investment stance. I certainly don't know whether that shift will be “right” in this instance, but it is the appropriate response from the standpoint of our investment discipline. Meanwhile, we continue to focus on individual stocks demonstrating favorable valuation and market action on our measures, with an eye toward buying higher ranked candidates on short-term weakness, and selling lower ranked holdings on short-term strength.

The distinction between reacting and responding is one that I've emphasized often over the years. To react is essentially to change one's plans abruptly based on what the market has just done – usually involving a certain amount of panic or worry that essentially forces one's hand. In contrast, to respond is to take the most recent market move as a piece of information, and to change the investment position accordingly, following a very specific discipline (ideally which allowed for the move in the first place).

For example, a reactive investor tends to reverse existing investment positions only when provoked by pain. Investment positions are sold when they have declined enough to trigger fear or panic. Investment positions are purchased in a rush to “catch” or “ride” them. My impression is that the single best mark of a reactive investor is the tendency to measure investment success by the amount gained or lost on any particular day. In contrast, the investor who responds puts much more emphasis on daily actions than on daily outcomes. That doesn't mean ignoring outcomes, but it means following a specific, well-studied discipline with the expectation that the results will emerge through repeated application. As usual, those results are best measured in terms of long-term return and risk over the complete market cycle."

MontyHigh

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 38%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "Jobless claims drop, but clouded by auto shutdowns... The number of newly laid-off Americans signing up for unemployment benefits last week, and those using this safety net over a longer period, both plunged."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 667,534 in the week ending July 11, an increase of 86,389 from the previous week. There were 483,981 initial claims in the comparable week in 2008." NOTE: In 2006, when the economy was good (remember "Stronger For Longer?"), this number was around 280,000.
• My Spreadsheet (click Download 20090716yoy).

Here's my uneducated interpretation - First of all, unadjusted, initial claims are up 20% from last week. Wow, that's a lot of seasonality! How can that big a shift in seasonality be accurately removed? Unadjusted claims are the biggest I've seen since I started recording numbers (see blue with diamonds line). Secondly, I'm adjusting my target threshold for the economy bottoming from 350,000 to 400,000 based on a decade-long look at the numbers (see below). We are still way above this revised target for the economy bottoming. This is the highest unadjusted number since I started paying close attention in early May 2009, but there is a seasonally unadjusted spike this time of year every year (again, see below). 

Here's a chart of the initial jobless claims since I started gathering them.

Here's a decade-long look at the Initial Jobless Claims supporting my the view that:

• A target of under 400,000 seems necessary to conclude that the economy has bottomed.
• The current downturn is way worse than the post-Internet bubble recession. 

MontyHigh, www.worldofwallstreet.com

Unadjusted Year Over Year: Producer Price Index Down 4.6%

Here's the summary for the Labor Department's producer price report for June 2009:

• Associated Press Headline And Lead: "Wholesale prices rise more than expected in June... Wholesale prices took a bigger-than-expected leap in June, rising the most since November 2007, led by more expensive energy products." 
• Labor Department News Release: click here. 
• Key Numbers: Monthly Change In Finished Good From 12 Months Ago (unadj.) = -4.6%, Unadjusted Index = 174.81.
• My Spreadsheet (click Download 20090714yoy)

Here's my uneducated interpretation - Need more points for comparison, but clearly the deflation over the last year of all commodity prices is still affecting year over year data. FWIW, gold was basically flat June 08 to June 09, so holding gold would put you up roughly 4% over the last year on a producer price basis.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: USA Retail Sales Down 7.8%

Here's the year over year summary of the Commerce Department's retail sales figures for June 2009:

• Associated Press Spin: "June retail sales rise more-than-expected 0.6 pct... Retail sales advanced in June by the largest amount in five months, led by a surge in gasoline prices and a slight rebound in the battered auto sector." 
• Commerce Department News Release: click here. 
• Key Numbers: Commerce Department Retail And Food Services Sales Unadjusted June 2009: $350,618,000,000 vs June 2008: $380,431,000,000. May 2009: $355,414,000,000.
• My Spreadsheet (click here)

Here's my uneducated interpretation - Unadjusted sales fell by more than 1% while adjusted sales rose by .6%. Those adjustment come in handy, don't they? Year over year retail sales are still shrinking hard, but not as hard as the previous two months. I want to see positive year over year retail sales prior to concluding that the economy is recoverying. 

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 43.8%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "U.S. jobless claims drop steeply, skewed by autos... The number of U.S. workers filing new claims for jobless benefits fell sharply last week but the data was distorted by an unusual pattern of layoffs in the automotive industry, which amplified the decline."
• Labor Department News Release: click here. 
• Key Numbers: The advance number of actual initial claims under state programs, unadjusted, totaled 577,506 in the week ending July 4, an increase of 17,612 from the previous week. There were 401,672 initial claims in the comparable week in 2008. NOTE: In 2006, when the economy was good (remember "Stronger For Longer?"), this number was around 280,000.
• My Spreadsheet (click Download 20090709yoy).

Here's my uneducated interpretation - First of all, unadjusted, initial claims are up 3.7%. This is the highest unadjusted number since I started paying close attention in early May 2009. But at this point, I'm looking at the absolute number (blue line below with diamonds) and comparing it to what is was when times "were good". In 2006, when "timers were better", this number was in the 280,000 range. I think we'd have to see the initial jobless claims under 350,000 before we could say they economy had bottomed. In an ordinary recession (an inventory recession) initial jobless claims are a leading indicator. I would guess they are even more of a leading indicator in the current downturn (a credit contraction). As you can see from the graph, last year's initial jobless claims were starting to ramp up about this time of year. This is the cause for the falling (but still very high) year over year percentage number. 

Here's a chart of the initial jobless claims since I started gathering them.

MontyHigh, www.worldofwallstreet.com

Copper Inventories Rise... Closed My Cu Shorts

Copper inventories rose today. I closed my shorts about an hour ago. A nice profitable trade.

I'm still bearish about the price of copper relative to the marginal cost of mining it given the economic slow-down, but I'll wait for the inventories to confirm my outlook prior to actually trading my outlook.

MontyHigh

Gold Takedowns: Another Day, Another Takedown?

Here's what happened today:

Following the previously enunciated system, I would have entered short at the arrow and exited 5 minutes later for a very minor loss. From there the price would continued lower for some time. The more standard trailing stop would have netted a profit.

At this point, I would probably want to change the system's entry to require a more violent takedown prior to entry.

Ma Bol Takedown - Everything on 5-minute candle closes except where noted.

• Setup - wait until gold is due for a Cartel takedown. This is a qualitative criteria. Today it was because the G8 meeting is coming up.
• Enter Short - when the price drops from comfortably above the 24-bar moving average to below the 24, 2 bollinger band in 20 minutes (4 candles) or less.
• Exit - on the close of the first green candle.
• Exit - after making at least $1.50 when half of the maximum profits are gone. 

With this set of exits, the score would be (for the cases logged under the Gold Takedowns heading):

• +1$, 7/6
• -1$ +.1$, 7/2
• -.1$ +.9$, 7/1
• +2.5$, 6/29

For a total of winning +3.4$ over 6 trades or an average winning of .57$ / trade or $228 per contract. I don't know if I'd consider this tradeable or not.

The alternative exit would be something like Exit on losing $1.50 or after making at least $1.50 and then losing half the profits (again on 5 minute candle closes).

With this set of exits the results are:

• +4$, 7/6
• +0$, -$1.5 7/2
• -1.5$, +6.5$, 7/1
• +$1.3, 6/29

For a total winning of $9.8 over 6 trades for an average of $1.63 per trade or $653 per contract. This looks better.

Again, these are just my own notes on studying gold takedowns.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Unemployment Is A Coincident Indicator In A Credit Recession

Karl Denninger, in his weekly Podcast (click here), goes on and on about how this downturn is different from other post-war recessions. The others were "inventory" recessions where inventories built up beyond demand and where "stimulus" causes these inventories to be consumed and thus gets the economy back on track. This is a credit recession where folks have taken on too much debt. To recover from this the debt must either be paid down or be defaulted. Our government is treating the current recession like it was an inventory recession and is trying to keep the debt from being paid down or defaulting. By having the government take on more debt the problem is getting worse.

This seems like a useful distinction to me.

Now, ex-Merrill Lynch chief economist David Rosenberg (according to Barry Ritholtz, click here) goes on to say (not an actual quote: Unemployment is usually a lagging indicator when we are dealing with an inventory or manufacturing recession. During a credit crisis recession, Unemployment is a coincident indicator cycling back into the economy in a negative way.

I think this is a very useful insight. If true, with unemployment increasing the economy must still be contracting.

MontyHigh, www.worldofwallstreet.us

Dynasty Welcomes Ecuador Vice Minister of Mines to Its Zaruma Gold Project

Click here for the full story. Here's the money quote: "Vice Minister Dr. Serrano, commented: 'The National Government considers this project important. It was constructed using a high percentage of Ecuadorian labour and will provide future jobs in the area. For these reasons, Dynasty has our support to commence production as soon as possible. The country needs these projects to help generate employment and economic revenues for the state.'"

FWIW, DMM.TO is my fourth largest holding gold mining holding (after Gold Resource Corp (GORO.OB, Oceana Gold Corp (OGC.TO) and Castle Gold Corp (CSG.V)). Very undervalued, in my view, apart from political risk. This story backs up the idea that the political risk is overrated. Do your own due-diligence.

MontyHigh

LME Copper Inventories Rise For The First Time In A Long Time

I've been waiting for copper inventories to stop falling and start rising for a while. Today is the day.

Copper inventories have been red in this table (indicating falling inventories) for months even while the world economy was contracting (indicating falling demand) and the price was high enough to allow every copper mine in the world to keep producing. This seemingly was defying the laws of supply and demand.

The explanation for this mystery was China stockpiling. Last week (click here) China announced that it had ceased stockpiling copper as the price had risen too high. Now we see that this was not B.S. I expect the price of copper to fall until the Chinese start buying again. It would probably be in their interest, as the world's largest consumer of copper with a huge amount of U.S. dollar cash sitting around, to let the price fall until the copper miners are on the edge of bankrupcy and then to buy into those copper miners at a low price. 

In any case, the basics of economics are that prices fall when supply exceeds demand. Rising inventories are a measure of supply exceeding demand. And, as you can see in the chart below, inventories trend for months (much more smoothly than prices). So, I'm short copper and will stay that way until either inventories start trending down or until I am stopped out on price. I'm looking for $2.12 as a first target but expect it will fall to at least $1.80 where copper mining starts becoming unprofitable. 

MontyHigh, www.worldofwallstreet.us

Korea To Follow China's Lead And Add To Gold Reserves

http://english.donga.com/srv/service.php3?biid=2009070411578

The above article, referenced by GATA (click here), indicates that Korea is going to start shifting some of its central bank reserves from US dollars to gold, following China's lead. I'm not familiar with the news source, but this makes sense and is, obviously, bullish for gold. Having central banks switch from being sellers of gold to buyers increases demand and increased demand pushes a commodity's price higher.

Here's the money quote: "According to experts, the comment implies that the bank plans to buy gold soon. Korea has the world’s sixth most foreign exchange reserves but ranks just 56th in gold holdings."

MontyHigh, www.worldofwallstreet.com

Gold Takedowns: Monday Morning

We had what appears to be a takedown beginning around 2AM this morning. It was not as forceful as some. The current trading system would have made only around $1. If the exit had been a crossing of the moving average we would have made $7. Will have to consider this.

MontyHigh

Silver Chart Is Short-Term Ugly

The silver chart is plenty short-term ugly having:

• Broken down through the 50 day moving average.
• Broken down through the last fibonacci targeting a sub-12$ price.
• Broken down through a head and shoulder neckline targeting a 10$ price. 

In addition, the whole deflation idea is kicking back in.

I expect I'll be lightening up on silver holdings on Monday and probably going short something (copper, S&P, banking stocks) to hedge the rest of my Jr gold miners.

MontyHigh

Denali Guide: Watch Volume And Breadth [Mud On The Tires, Boots On The Ground]

[Editor's Note: World Of Wallstreet welcomes another bit of technical analysis education from DenaliGuide. Today we learn about the importance of volume and market breadth (fraction of stocks following a price movement) as confirmation of price trends.]

Mud on the tires, Boots on the ground, Friday, July 3, 2009

Well Mr. Nasty [Editor's Note: see the NASI chart] didn’t like the bouncing Advances and Declines, unable to approach, let alone [top] the two peaks, one the 2nd week of May, and then the 2nd week of June. Roughly speaking, the S & P price level, is approximately coincident with the Peaks in Mr. Nasty.
Insert [ MR. NASTY chart]

Typically in price waves, often the 2nd wave is the the more extreme of the two, relative to price. That means the 2nd peak is Higher in advances, and Lower in declines. Again, the S & P 500 has lived up to this pattern.

Tips, hints, clues. All work. BUT, to fail to consider the evidence right before our eyes, will considerably hinder our attempts to SEE.

Looking at the Wilshire [ $WLSH] you see a steep decline of the 200 DMA,and its upward cross of the 50 DMA. Some would attempt to call this a “GOLDEN CROSS”, but classically it is not so defined. CLASSICALLY, a Golden Cross of the 50 DMA above a 200 DMA, is when the DMA is trending upward and positively inclined.

The cross you see here [ Insert WLSH chart] is that of a temporary BLIVIT CROSSING, like the Wandering Figure 8’s we see when trend is NOT DEFINED. Further observed, since a BULL Market creates an UPWARDS sloping 200 DMA, we define this as something OTHER than a Bull Market.. Define that as you may, I call it dangerous ground, thin ice.

INVESTOPEDIA [ I like their stuff] says: Investopedia explains Golden Cross
As long-term indicators carry more weight, the Golden Cross indicates a bull market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new support level in the rising market.

Look carefully at the trading volumes on any exchange during this time period and generally you see a pattern of lower UP-Volume on this rally, than on the rally that led to the previously established peak. VOLUME DOES NOT SUPPORT THE “Continued Rally” Thesis. Without a consistent pick-up in volume to bid for stocks to support the rally, THEREfore, IMO, this is a Bear Market Rally, not supported by volume. VOLUME speaks Volumes. Again, MY Opinion Only, given the financial shenanigans we have witnessed in the last two years, I suggest that the rally we see here, trying to suck in as much money as possible, as a total rear guard action to hold the door open to the escape of PREFERRED capital, before these market levels are breeched to the downside.

Considering what has transpired in the last two years and the continuing trend to the transfer of wealth throughout the world, it would not surprise me that extreme measures are being taken to combat the drain of funds out of established patterns. Therefore, while it’s a bit edgy, in a public place, to suggest that certain groups get preferential treatment, that is what I am saying. The rest of us will have to fend for ourselves.

It is said that the Summation Index [ Mr. Nasty if you use the NASD] shows the flow of funds in and out of the markets , as a matter of observation, I agree.

Basically, Price can lead you merry chase, but BREADTH and VOLUME will confirm both price and each other. Failing the classic interaction of those three, the premise is false. BREADTH & VOLUME, consistently, over time, no matter how you slice them, are the most reliable confirming indicators I have observed.. Given that, I will try to include some charts for you to access in links, so you can check your conclusions against the Volume and Breadth Indicators.

Far as I am concerned, Breadth and Volume are the Boots on the Ground and the Mud on the Tires, they are the real thing.

DenaliGuide

Best Of The Web: "Battle Lines", Mark Van Der Sluys... Matt Taibbi's "Great American Bubble Machhine"

Mark Van Der Sluys (never heard of him before) gives (click here) an excellent overview of what the US (and its bankster allies) strategy is and what the Chinese, Russians and their allies strategy is. The most important insight is that the US (and banksters) controlling the financial markets and in position to cause and exploit market volatility. So, I'm going to expect continued volatility and figure out how to profit from it.

MontyHigh, www.worldofwallstreet.us

P.S., If you haven't read Matt Taibbi's "The Great American Bubble Machine" Rolling Stone article about the role of Goldman Sachs as chief of the Banksters, here's a link to the story (click here). By the way, I heard Michael Savage (far right talk-show host) giving parts of this article nearly verbatim. That's really something having a hard-right talk-show host quoting a hard-left magazine's article.

Here's the quote that got me really angry: "In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 1l,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity." This kind of political corruption has got to be stopped.

Gold Takedowns: Non-Farm Payrolls

Today was the day that non-farm payrolls (monthly unemployment) numbers came out. The Cartel always (at least to my recollection) finds a way to keep gold from going up on non-farm payrolls day. Can't have herd psychology thinking gold is a safe place to be when something scary (like losing your job) comes up.

I woke up at 1:30AM today and saw gold right at that $940 resistance and went short a contract, I exited at the end of the first green 5 minute candle after the numbers came out (8:30AM).

The bollinger band strategy, adjusted to be as follows, had two opportunities to make money today. The second (with adjustments) would have more than covered the smallish loss from the first. Here's the revised strategy.

Ma Bol Takedown - Everything on 5-minute candle closes except where noted.

• Setup - wait until gold has popped above critical resistance, the kind that the cartel fights (in this case $940.
• Enter Short - when the price drops from above the 24-bar moving average to below the 24, 2 bollinger band in 25 minutes (5 candles) or less.
• Exit - on the close of the first green candle.
• Exit - after making at least $1.50 when half of the maximum profits are gone. 

Once I accumulate enough experience eyeballing these charts I will probably put my programming skills to work and methodically backtest them.

MontyHigh

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 51%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "Initial and continuing jobless claims fall in US... The tally of newly laid-off workers filing for unemployment insurance in the U.S. dropped last week, the government said Thursday, a sign job cuts are easing."
• Labor Department News Release: click here. 
• Key Numbers: The advance number of actual initial claims under state programs, unadjusted, totaled 556,863 in the week ending June 27, a decrease of 11,689 from the previous week. There were 368,544 initial claims in the comparable week in 2008. NOTE: In 2006, when the economy was good (remember "Stronger For Longer?"), this number was 276,508.
• My Spreadsheet (click Download 20090702yoy)

Here's my uneducated interpretation - Not much new here. A little better than last week. In 2006, when the economy was good (remember Stronger For Longer?), this number was 276,508. I would think we'd have to see the initial jobless claims under 350,000 before we could say they economy had bottomed as far as unemployment was concerned. That's about where we were a year ago as the unemployment rate was starting to rise. 

Here's a chart of the initial jobless claims since I started gathering them.

 

MontyHigh, www.worldofwallstreet.com

Gold Junior Producing / Near Producer Mid-Year Update

This post provides a mid-year update of my take on Jr producing and near-producing gold mining stocks.

The tables below are based on my forecasts for the companies for 2010 assuming $800 / oz gold. In this edition I provide a Price to  EBTDA(Earnings Before Taxes, Depreciation and Amortization) ratio column. I hope to increase my fundamental analysis powers over the next 6 months to be able to include an EBDA column including expected taxes. NOTE: If the price to operating income column is the same as the Price to EBTDA column then I have not yet truly calculated the Price to EBTDA column. I intend to complete filling this column in as Q2 results are announced.

I'll provide updates on individual companies as they appear in tables.

Here's my list of reference gold miners. These are miners which, ideally, are steady producers in the 100 to 300K oz/year range. For this update, I had to remove Western Goldfields which I replaced with its buyer, New Gold (NGD). I'm looking for another reference miner because NGD and AGI.TO seem overpriced to me.

Here's my current favorites list (no particular order).

Here's the latest on my favorites:

• Castle Gold (CSG.V), which has executing according to plan, has announced that it is in the final stage of getting takeover / merger bids from three bidders and "plans to make a final decision no later than July 10, 2009.". Seems like an easy trade would be to buy on the next down gold day and sell on July 8 or 9. I expect they probably will sell the company for a 30% gain, but who knows.
• GORO.OB continues to move towards initial production but has not gotten that final permit. They did just sell more shares (diluting themselves) to Hochshield at $US 4.00 / share. I expected this and they now appear to be finally cashed up to get into production. They are my favorite stocks, because they have excellent rocks, competent share-holder friendly management and promise significant dividend payouts, but I have to admit they never hit their schedule milestones.
• Troy Resources (TRY.TO) is not as cheap by the metrics as some others. Its still a favorite because they are stockholder friendly and pay dividends and are very competent and execute on their plans. The recent news is still under the radar, but politically they look well set to get permitted on their next mine in Argentina and to get it in production even faster than they had previously hoped for.

Here's the list of other Gold producers / near-producer miners I'm holding. I've been adding to these positions.

Here's the latest on these:

• DMM.TO - no news here. Still has excellent rocks, competent management and is very undervalued except for political risk, which Otto Rock of Inca Kola News assures me is overly priced into the stock. I found DMM.TO and Troy Resources through Otto and think his news letter is well worth the price if you are interested in Jr mining stocks. His edge is being on the ground, fluent and really understanding what's going on in Latin America. I think its a real edge.
• OGC.TO - The most undervalued gold producer I know of assuming gold can stay above $800 and nothing really crazy happens in the currency markets to the New Zealand dollar.
• CGA.TO - Bought a little the other day because the price just seemed too low. Not much and I don't know how long I'll hold it.

Here's the other gold producers / near producers that I'm watching closely and considering whether to buy. For one reason or another I'm not holding.

New to the list are:

• Semafo (SMF.TO) - I sold my Semafo because the chart looked like it was breaking down under $2.00 and I promised myself I would use technical analysis to avoid big losses and to retain profits. It immediately shot back up. Its a very admirable company, but not quite as undervalued as some others. Its also reasonably liquid and tracks the price of gold well, so I will probably use it to trade in and out as I gain / lose confidence in gold.
• Apollo Gold (AGT, APG.TO) - This is a board favorite over on the Investor's Hub Junior mining board. They are opening a new mine in Canada. Seems pretty well undervalued. I'm not sure why I never bought, perhaps because I don't want to run with the herd.

Hope you find this helpful. Please leave comments.

MontyHigh, www.worldofwallstreet.us

NOTE: Stocks covered: Alamos Gold Corp, New Gold Corp, Minefinders, Castle Gold Corp, Gold Resource Corp, Troy Resources, Dynasty Metals And Mining Corp, Oceana Gold Corp, CGA Mining, Semafo, B2 Gold Corp, Apollo Gold Corp, Capital Gold Corp, La Mancha Resources, New Guinea Gold Corp.

Gold Takedowns: Push Below Resistance

Yesterday we had two clear rounds of take downs. The first begins at 2:25 AM (London open time) taking gold from above its resistance bollinger band to below its support bollinger bad at 3:15AM. Compared to the previous takedown we see a move from above the moving average to below the support bollinger band in 10 minutes. An entry here would have lost a little if the exit was the first green candle.


The second takedown started shortly after the New York open. We see a move from above the moving average to below the support bollinger band in 15 minutes (8:10 to 8:25). This gives a short enter at roughly 939 with an exit on the first green candle of 935.50 for a $3.50 gain. The take down resumes with a clearly lower low of around 931 at 10:10. I don't know how to trade these second pushes down.

So, our tentative take trading system is as follows:

Ma Bol Takedown - Everything on 5-minute candle closes.

• Setup - wait until gold has popped above critical resistance, the kind that the cartel fights (in this case $940.
• Enter Short - when the price drops from above the 24-bar moving average to below the 24, 2 bollinger band in 15 minutes (3 candles) or less.
• Exit - on the close of the first green candle.

I'll be watching this to see if it "works".

MontyHigh, www.worldofwallstreet.us