PLUS CA CHANGE, PLUS C’EST LA MEME CHOSE
(The More Things Change, The More They Remain The Same)
Every ten years or so, we hear the ardent cry of “this time it’s different” and/or “we have now entered another new paradigm that will lead to UP, UP and away.” In the late 60’s, it was The Nifty 50’s. For those of you who don’t know what that means, fifty or so stocks along with the DJII were breaking out to new all time highs, with such stocks like Polaroid hitting $104 and selling at P/E ratio of 100. At the same time, the Value Line Index as well as all advance decline lines were looking like the Black Diamond runs at your favorite ski slope. What followed was1973–1974 that brought us the worst stock market crash since the 1930’s followed shortly thereafter by America’s worst bout of inflation and Gold’s moon shot from $35/oz to $850/oz by January 1980. The 80’s brought us “the Savings and Loan Crisis’ with over 500 banks and savings and loans going belly up and that was during a Government “Bail-Out.” The 90’s brought us “the Technology Bubble” and its $6 trillion loss in equity culminating with 9/11. Now we are into the “New Millennium” accompanied by the biggest bubble(s) of all time: The Real Estate (accompanied by the sub-prime 1% no money down), the 28-year Bull Bond Market, the Stock Market, the Commodities, the Mutual and highly leveraged Hedge Funds and last but far from least, the Take-Over, Private Equity Buy-Out craze. So instead of having just one bubble bursting to look forward to, we have SEVEN bubbles all predicated on Low and Falling Interest Rates. “LOOK OUT BELOW.”
COMMONALITY
The common factors tying all these and every other burst bubble throughout history is always the same. Too much money and too much easy credit chasing too few good deals led by far too few brains who are able to manage all this easy, created out of thin air, money successfully. There are 10,000 Mutual Funds, 8000 Hedge Funds and 10’s of thousands of everyone from accountants and lawyers to high school dropouts, having become a new cadre of hot shot money mangers of vast pools of funds ranging from $10 million all the way up to $ billions, the vast majority of whom have never witnessed or even read about a BEAR MARKET all trying to play “Follow the Leader.” My friends, there has never been enough brains to go round and this time, not only is it not different today, but it is the greatest shortage in history since most of the brains who had both witnessed and survived the last real Bear Market (1973–1974) have either died or been forced into retirement.
CRACKS IN THE DAM
For the sake of both brevity and clarification, you may want to go back and re-read both (“DENIAL - March 2007) and (“UNCOMMON COMMON SENSE: WHY HASN”T “IT” HAPPENED - November 2006”). The first major crack, as yet still hidden is the worldwide rise in interest rates accompanied, naturally, by the end of Bond’s 28 year Bull Market. Yes, we have all been hearing the excuses and most of all denials, but just take a look at the Bond’s long term charts for yourself and make your own judgment. Yes I know all about Bernanke and his helicopter and the constant hue and cry for rate cuts, but I have been warning you over and over again that the FED has lost control of the money supply and it will be rate hikes not cuts in our foreseeable future that will rule the day. The simple reason being that a few cuts in interest rates will not save real estate, but just think of what they would do to the dollar. (Re-read my past dissertation on Interest Rates and how they work if you want clarification.)
The second crack that should be even more obvious but is being almost completely overlooked (did I mention the lack of brains), is Thursday’s Bear Sterns Hedge Fund debacle. Merrill Lynch may have unwittingly exposed this soon to be widening crack when they and the rest of their gang of thieves, quickly withdrew all of their liquidating orders when they realized that there were just NO BIDS. To stave off a LTCM-like crisis, they (had learned from Greenspan) lent Bear Sterns (an entity that they hopefully deemed to be more solvent than its Hedge Funds) $3.2 billion to inject into its Hedge Funds and for the moment, stave off bankruptcy. And that my friends is how “IT” begins. Has anybody noticed that every Hedge Fund, Mutual Fund, Pension Fund et al, which has any mortgage related securities whatsoever must now revalue them downward and I don’t mean just the ones related to sub-prime, especially in light of the steadily rising interest rates. If you are waiting for the bond rating agencies to lead the way, boy are you in for a rude awakening. Is it just a coincidence that the Blackstone offering hit the market last Thursday? If that was not the straw that broke the camel’s back, then the coming KKR deal will surely be.
POLITICS
I know and can appreciate why
most pure financial sites such as Gold-Eagle.com et al try to stay away from
politics for the simple reason that any political opinions end up offending at
least 30% of their readers, but can we really overlook the shenanigans now
going on in
WHERE TOO NOW?
Has the crash begun? Are the last few days of sell off just the beginning? No, I don’t think so. The dam is still holding and the cracks have only just appeared, but they are not yet noticeable. Besides, the “SENTIMENT” (I have been discussing this lately) figures, although they have been turning lately, are still much to Bearish to coincide with a major market TOP. As a mater of fact, they are signaling a further advance. Perhaps that is exactly what it will take to give us that ULTIMATE SELL SIGNAL, a breakout to new all time highs after a few more days (or weeks) of sell-offs, to turn all that Bearishness into a new wave of ecstatic Bullishness as the correction that everyone was expecting will then be deemed to be over and there is now clear sailing into the wild blue yonder; spurred on by a new wave of private equity takeovers. The accompanying euphoria exacerbated and pushed on by the talking heads of the media should push the sentiment figures to new all time highs as well, so as to coincide with and trigger that once in a lifetime MAJOR SELL SIGNAL. Has any body noticed that Congress is beginning to poke its nose into all these takeovers and buy-outs?
WHAT TO DO?
For once, the little guys like you and me have it all over the big guys because they are dead only they are too dumb to lie down (except for all those insiders who have been cashing out like crazy for over two years now.) They and their Funds are beyond help- they can’t get out of their positions. Does anyone remember that old Bob Newhart skit that he performed on the Ed Sullivan show where, after a super run up in the stock that he was being encouraged to accumulate, he stops buying and instructs his broker that he now wants to take his profit. Sell, sell, sell, he yells at his broker. “TO WHOM?” comes the reply, “YOU OWN ALL THE STOCK”. The big boys, especially those super smart (?) Hedge Funds, can’t get out. They and all their Carry Trades are all on the same side of the market- they can’t get out or even reduce their exposure (we all know what ends up happening to all those lemmings). But as far as us little and even not so little guys, there is more than enough liquidity for us to get out. After all, the big guys have no other choice but to support the markets in their attempt to stop them from collapsing. So what do you do now? SELL everything except gold and silver either now or gamble and wait for that last Blow- Off rally.
GOLD
While Gold was in the midst of its 20 year Bear Market, Bonds were into the Biggest Bull Market in History. Falling Gold prices = Falling Interest rates. Do Rising Interest Rates = Rising Gold Prices? Check the long term charts and ignore the B.S. of what rising rates will do to gold prices,
As I have been pointing out to you for quite some time now, Gold is still in its correction (consolidation) Phase or Wave II of the biggest Bull Market to be that began in 2001 and what a correction it is turning out to be. Where the majority are turning Bearish (pre-requisite for the coming explosion; you know the Sentiment and all that stuff) the market is actually correcting upward so that, after 13 months of correction, it is less than 8% off its May 2006 highs. And yet the negative Sentiment figures are reaching major bearish (read Bullish) readings as Gold and its stock ownership shift from weak to strong hands. (Reread “Riding The Golden Bull”)
THE #1 REQUIREMENT IN BECOMING A SUCCESSFUL INVESTOR IS
“PATIENCE”
I hate to sound like a broken record, but the Markets are behaving almost exactly as expected, so what more could you ask for? The Market does not care what you want or think and it will do whatever it has to do to make the majority of people wrong. What is that you may ask?
First: It sells off just enough to trap the last few remaining bears into committing their funds, while not selling off enough to panic very many of the bulls.
Second: The Market unexpectedly reverses breaking out into new all time highs. The euphoria is ecstatic as the last of the Bears cover and any remaining but nervous Bulls fall all over themselves to give away their money.
Third: Gold drifts. It does not sell off enough to allow the shorts to make a profit nor allow the ones who had lost faith and sold to get back in. Meanwhile, Sentiment keeps getting more and more bearish until it approaches and or sets record breaking levels.
Fourth: The Stock Market, Bond Market and Gold are set to explode trapping all the Bulls with huge losses and leaving the nervous sold out Gold Bulls standing at the visitor’s gallery as the Rocket Ship “GOLDEN BULL” takes flight.
GOOD LUCK AND GOD BLESS
Aubie Baltin CFA. CTA. CFP. Ph,D
561-840-9767