|
I have never been big advocate of
conspiracy theories. Most of these theories are information that is reported
in the media circus to incite anger towards one group of people. Meanwhile
the real stealth culprits go unnoticed.
Let’s use the mortgage crisis
as an example. There can be no doubt that the mortgage crisis and subsequent
collapse of our financial system was an unprecedented nightmare. Upon a
closer look, however, the people involved were not part of a conspiracy; they
were looking for immediate gratification. The people that were involved have
no idea of the collateral damage that they caused nor do they have clue about
the international global ramifications that were caused. These people had no
idea that the fraud they were perpetrating in the mortgage market would bring
down the entire financial system. They were simply looking at the two feet in
front of their face and were seduced by the specter of the easy buck. These
people see only easy money in front of them and I don’t think most were
capable of connecting the dots and seeing the collateral damage that their
actions would wreak on future generations.
What was done in the name of greed
was far more insidious than shilling for an easy dollar. The real crime was
that they were pulling the bricks out of the foundation of the Global
Financial System. Indeed, far more telling was the meltdown of global
confidence. The lack of global confidence is the cause of higher volatility
in the markets. Confidence in the global markets is collapsing. Herbert Hoover said
that “capital is acting like a loose cannon on the deck of a ship in
the middle of a storm.”
For a moment, let’s forget
about the stock market. Would you go into a grocery store if you were not
confident that the food you were buying was fresh and safe? I don’t
think so. The most fundamental issue that supports all markets is confidence,
be it your local grocery store, the local butcher or the stock market. In the
stock Market you can’t possibly invest unless you understand what you
are buying and have confidence in what is happening. A trader must have the
belief that his understanding of what is driving the market is correct. Our politicians
do not and will never fix the real problems; they only react to them after it
is too late.
If history has taught us anything it
is that as institutions and policy makers grow, there will always the
temptation to stretch the rubber band. Just as individuals can go bankrupt no
matter how rich they are, financial systems can collapse under the pressure
of greed, politics and profits no matter how well regulated they seem to be.
A careful study of history will reinforce the lesson that governments
continually mismanage financial markets, a recipe for the debasement of
currencies and the loss of confidence in our financial markets.
Summer
roller coasters are supposed to be fun but last week's stomach-turning ride
on the stock market (which was the first time in the 115-year history of the
Dow Jones Industrial Average that it moved more than 400 points for four
consecutive days) was more like a terror ride on an out-of-control roller
coaster.
Oddly,
with the VIX hitting a high of 48, the market ended the week just about where
it started. The Dow ended the week off just 1.5%, only 175 points from where
it began. The Standard & Poor's 500-stock index and the Nasdaq Composite
ended down just 1.7% and 0.96%, respectively. All three of the major indexes
are down for the year: 2.7% for the Dow, 6.3% for the S&P 500 and 5.5%
for NASDAQ.
This
leaves investors torn between worries of another recession and hope that
stocks are at bargain-level prices. And that means a further loss of
confidence.
Please see
a chart of the DOW from last week.
A study of
this chart tells me two things. There has been a complete breakdown of
confidence in the market. We can see a drop of 400 points followed by a gain
of 400 points followed by a drop of 600 points followed by a gain of 400
points and 160 points respectively. In a week we went absolutely nowhere,
except that we did manage to further meltdown any confidence there might have
been in the markets. I was shocked to see anyone go long into last
weekend. The two signs to look for in the DOW are a close under 11114 as
a bearish sign and a close below 10053 as capitulation. On the other hand a
close above 12327 (a very unlikely scenario) would be a signal that the
market has turned bullish.
A look at the two charts of
our old friend Gold below tells a similar story.
Both of
these charts tell the same the same thing. The long awaited correction in
gold has begun. With the parabolic run gold has experienced since August 1st I felt it was prudent to take some
profits and did so twice in 15% increments. The question that has everyone
completely confused and confounded is this a real correction? If it is and
history is our guide we should see a bounce at the 150 day moving average or
about $145.00 for GLD or $1485 for the spot price of Gold. However with the
complete loss of confidence that our leaders have shown us and the markets it
seems that healthy or not gold will continue its run up. I mean where are you
going to run for a safe haven? U.S. 10 year treasury’s paying 2%?
Given that
discouraging backdrop, I would advise that you maintain a long position in
gold and silver. If gold continues to sell off don’t fight it, slowly
take profits. I would also advise that it's prudent to keep ample cash on
hand, hold investments that could do well if things deteriorate, and focus on
companies and investments that can prosper in a weak environment.
As I write I am long GLD, SGOL,
PHYS, SLV, PSLV, AGQ, XOM, ED, VZ, T, JNJ, LMT, KMP, CAT and AAPL.
|
