A Recipe For Disaster
Posted on Mon, 17 Sep 2007 @ 14:23:36 PDT by Captain_Hook
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Originally Posted on Thu, 09 Aug 2007
As explained Tuesday,
the Fed was not about to give in to the mob (in terms of official
policy) just yet in consideration of the Presidential Cycle and dollar
($), with the end result being the market thought they were
demonstrating the economy is stronger than people think, which turned
into a credibility boost as stocks continued to squeeze higher. This of
course is really just a bluff on the Fed’s part, as the credit cycle
is turning down, meaning the economy (all Western economies) is in a
great deal of trouble moving forward. Here, as you know, stocks are
rising not because they are discounting better times ahead, as price
managers would have you believe. No, they are rising because of
historically high short positions set against ample liquidity conditions sufficient to spark consecutive short squeezes higher, which is why the stock market never corrects fully.
Additionally, this is why breadth continues to narrow on these rallies, as fewer and fewer stock groups participate, with the most important example at present being financials (including banks). Indeed, key reversals appear to have occurred in the biggest of banks, which again is understandable considering the credit bubble appears to be popped. Enter a potentially rising rate environment brought about by various reasons, and we have a recipe for disaster brewing in the stock market Presidential Cycle or not. This of course is Dave’s view,
that the S&P 500 (SPX) tops out later this year and corrects right
through the election next year. And you know what, if the stock market
does rally on deteriorating internals into October, accompanied by the
right sentiment conditions (sufficient shorts have been squeezed out of
their positions), then, he’s most likely correct in his views.
And
the market action yesterday certainly bolstered the possibility of such
a scenario playing out; where as anticipated, stocks chopped there way
higher in another episode of the perpetual short squeeze witnessed
these past five years. Remember here the view is stocks should continue
to vex the highs as both put / call ratios (note the SPX series has now peaked and is breaking lower) and short positions
work lower; which is exactly what is happening. Add into the equation
now a Fed that’s playing chicken with reality, an increasingly rocky
international landscape most recently characterized by the Chinese
threatening a disorderly ($) fall, and inflation pressures
running rampant, and it should become more apparent to even the
staunchest of Neocon types that a recipe for disaster concerning the
global economy / markets is coming together - and that the intelligent
observer should heed this warning.
Is
that it – is that all we should be concerned about with respect to
‘factors that matter’? As if that’s not enough, how about adding to the
list Chinese stocks
appear to be putting in a fifth of a fifth wave to complete the larger
sequence. Put that together in your head. Let’s see now, shipping costs
appear to be topping, which when combined with the perspective Chinese
stocks (another key barometer of growth in the world) are doing the
same, paints a picture of impending deflation in my books. Am I wrong?
Am I just seeing things? Will the invisible hand
show up again to save the day? One thing is for sure, as professed on
these pages many times over the past few weeks; one had better become
increasingly defensive with respect to portfolio planning, especially
as it pertains to the use of margin.
Oh yes, record high margin thresholds, another key ingredient in this
recipe for disaster that will undoubtedly play a big role in taking the
equity complex down at some point. And that point may be a lot closer
than some people think.
What’s
more scary, at least as far as we are concerned, is that this recipe
might also include our precious metals investments, even our junior
holdings, some of which have already be beaten badly. An unbiased look
at the TSX Venture Composite Index (CDNX), which is the best index
related measure of this segment of the sector essentially, appears to
be building a top, just like it’s big sister, the TSX Composite. (See Figure 1)
Figure 1
And if that’s not bad enough, just look at what happened to Harmony shares
(a large cap producer) the other day, bombed some 30-percent on
earnings concerns. Here, you should find it instructive no less than three high-profile chiefs
managing South African operations have now resigned recently, caught
monkey in the middle between rising cost pressures and rigged commodity
pricing. So you see it’s not just the juniors, or one locale being
affected by macro-conditions, but the entire sector. (See Figure 2)
Figure 2
In
this respect, and in moving our scope out to encompass this view then,
it appears the market is quickly coming to the conclusion something
must give, and with a possible deflation scare eminent this fall, it’s
most likely to be prices. And as per above observations, this rout will
likely spare no companies, big or small, well run or not. Good examples
of this are Etruscan (EET:TSX) which is threatening to break down in a measured move (MM) to $2.30, Orko Silver (OK:TSX-V) which just fell out of a descending / contacting triangle measuring to 50 cents, along with CopperFox Metals (CUU:TSX-V),
which is sporting a measure back down into the 50 cent area as well. I
own all three of these in size, and I’m not afraid to tell you ‘we are
not amused’.
Another
thing I’m not amused about is how our banker buddies get away with
rigging the price of precious metals year in and year out, where again,
I’m not afraid to tell you this practice has undoubtedly cost us a
great deal in lost opportunity all things considered. And it gets
worse, where unfortunately bankers have perpetuated the ultimate ‘rig
job’ on precious metals prices via Exchange Traded Funds (ETF’s), where
as the stock market falls, stressed players will seek to raise capital
to cover margin requirements. So, if a deflation scare were to appear
in coming days, it’s my opinion gold and silver would properly reflect
such a reality by falling.
Deflation
scare – what if this turns out to be more than just a deflation scare?
Of course this could always be the case, but I don’t think our banker
buddies are about to give up screwing the system. This means even if it
runs the risk of gold escaping the bottle, undoubtedly a hyperinflation
agenda will be implemented by the Fed once they realize the game of
chicken with reality referred to above is lost, and prices are falling
precipitously. What’s more, it’s important for you to realize that if
price managers lose control of the stock market because short sellers
are exhausted, then they will need to inflate with abandon, as is the
case with all hyperinflationary episodes, where the 2000 - 2002
sequence will appear tame in comparison to what is coming.
Oh
– what’s this – some of you think hyperinflation in the larger economy
is not possible due to the discipline bond markets are suppose to bring
into the equation. While you may ultimately be correct, don’t be
surprised if Da Boyz try anyway, where not only would I expect to see
the Chinese spend a great deal of their huge foreign currency reserves
supporting US bonds, but more, if you’re going to start this kind of
thing, one might as well go the full nine-yards and attempt monitizing
the bond market too. Just how long these characters think they could
get away with this is of course germane, but at this point currency
considerations will be secondary. The primary concern will be
preserving the asset bubbles, which will be coming apart. This is why
the $ could fall, and gold decline right along side until stability in
the equity complex is re-established.
While
these may not be popular views shared by both you and the investing
public at large, we are not in the popularity business. What’s more, it
should be noted such a scenario developing has always been a real
possibility with me, where just the other day
we again highlighted parallels with the 70’s experience were coming
together. Again here, not only is a parallel of the timing associated
with the 70’s mid-term correction in gold looking more probable every
day, but now we also have reason to believe price parallels are also
possible, if not in pattern and exacting precision, in scale
ultimately. Now wouldn’t that shake some trees? (See Figure 4)
Again,
this is why we are recommending you get your financial house in order
now, because in just a few weeks it could be too late. Once all those
short positions are squeezed out of the stock market price managers
will lose control of the financial markets, at least for a while, and
all hell could break loose.
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