I’m currently long this market even though there are clear signs of a slowing economy. First, let me clarify my thinking on the recent retail sales report, which on Thursday was supposedly the trigger of a triple digit Dow decline. Although April’s number was a much below anticipated -2.3%, March’s was a very strong +6%. I believe the proper way of accounting is to take a two months average due to the early Easter, which leaves a +1.85% per month nominal growth. The number shows weakness in the consumer sector: even if you believe the CPI accurately reflects inflation, retail sales declined in real terms. Nonetheless, the number does not (yet) spell doom and gloom as many bears would have you believe. At any rate, the market may and does act quite independently of the real economy. The Dow, which has been leading the charge, it safely retreat to the 13100 level without violating the most recent power-up trend.

One thing that convinces me that this bull market has one more leg in it is the lack of retail investor participation which is reflected in the behavior of the online brokers like ETrade (EFTC) and TDAmeritrade (AMTD). In the 1-year chart, they both notably underperformed S&P and XLF (the financials ETF). Zero-commission brokers that should be siphoning off business from these two did not appear untill this year, so the weaknesses in EFTC and AMTD do appear to be a reflection of lack of conviction on the part of retail investors who’re invariably the bag-holders. Right now I don’t expect this rally to end until they are sucked in. On shorter time frames, AMTD especially has been perking up, which may indicate some shift in psychology. At any rate, buying begets more buying, if (or when) the S&P makes a new all time high, I expect people will come back to the stock market en masse.

Click to enlarge

To be perfectly clear, I’m in the camp of a mild recession coming later this year. The lackluster personal consumption numbers sealed the deal for me. But I fully expect the pundits to be talking up business CapEx spending and a possible rate-cut, as they always do. That said, I’m not going to pick the top, instead I’ll let the market tell me when to get out.

Let us start from the big money, forex. Even though US dollar is very close to breaking the support, the fall is simply not for sure. In fact, I probably would bet the US dollar will have a small rebound. Among all currencies, Japanese Yen is probably one of the weakest major currency. One must ponder why. Without Yen rising against US dollar, US dollar will simply NOT going to go down hard. I guess that Japan has teamed up with USA to make sure the doomsday doesn’t come. Flooding the market with more Yen for more carry-trade will ensure plenty of liquidity for any potential stock market fall. Because US dollar is probably not going to break the support this time around, my guess is that it makes a gold bull market doubly hard. Gold could rise against a rising US dollar as it did before, but it’s just harder.

Here is the long term chart of US dollar. (Click to see better details)

And the short term chart of US dollar. It is currently VERY oversold.

Here is Yen vs Dollar. As you can see, it’s even weaker.

Global stock markets obviously have benefited from the abundant liquidity. However, if you watch the market actions closely, there is plenty of evidence that when the drop comes, it will be so swift that unless you glue your eyes to trading screen or use an automatic market sell for stop loss, there is no way of getting out of your positions. Look at the market actions for this week:

Two days (Tuesday,Wed) of gap-down open, and Thursday was a SHARP sell-off. In the span of 30 minutes, the market fell without ANY support. It appears that there are many ready sellers.

As for my own investment in precious metals, I see two big problems:
1. US dollar will likely to rise in the short term.
2. Stock market is overbought and can take down PM along with it. Despite that the technical and fundamental pictures of PM are pretty solid, the external factors are not so great. I continue to hold significant amount of sideline cash, refraining myself from being over-greedy to put the cash back into the general or PM markets.

HUI gold-mining index is forming a pattern of successive higher low which is bullish. But given the above backdrop, I have some reservations.

Overall, I suggest to be very vigilant and conservative. Don’t chase the market nor squeeze out the last 3% gain. But the distribution top is likely to be extended I believe because the Yen carry trades are still alive and well. The reversal however could be very quick as I have said above.

It’s 1am, and I am still working for my company. I am probably a total workalcoholic by most standard.

Why am I still working? I just want to get this project done. The “problem” is that this project is due in June, actually June 2008. I want to finish this project so that I can move on to the next project which I have volunteered. Talk about passion for work, I probably have too much (well, it depends on what kind of work).

Yeah, I’m very glad that I’m almost done with this June 2008 project. Still haven’t figure out one single mis-placed bit out of 16384 random bits tonight. But I’m sure I can figure it out tomorrow. I’ve probably squeezed in 4 months worth of work into 1 single month. Probably another week to go and I will be all done.

I found the following article describing the true workalcoholic. By those criteria, I’m actually not that close as one:

Why am I still working? Not for money, not for recognition. You can call this the self-motivation to be driven to success, or you can call me nuts. Either way I am determined to finish what I am doing so that I would get more “fun” to do. I guess the bottom line is that I like to do what I do at my work. The rest is secondary. But one very important distinction that I have from the above workalcoholic is that I know too well that my job is not my number one priority. Family definitely ranks higher. In fact, I have been going home earlier since my work progress has been too far along.

Well, but then I come home, and work from home some more. Yeah, today I didn’t even have much time to blog on money/finance because of my work.

Market will again trade in a tight range before the Fed meeting. With $USD trading at the important technical level, US Fed can ill-afford to cut interest rate.

This bull market has simply been incredible. Just one year ago, S&P 500 was at about 122 around last May. A year later S&P 500 is up by almost 25%. Yet the weird thing is that last May when market corrects, majority of people was scared, but now majority of people thinks economy is doing just great, even with the BIGGEST bubble in human history (US housing market) just bursted. Perception can be deception.

Were you that smart to buy with both hands last June? Ask yourself then maybe you won’t be that smart either to sell out your stake at the top?

Of course, with Bernanke’s monetary helicopter being skillfully piloted by Paulson (originally from Goldman Sachs), market just keeps going up, with all kinds of private equity deals forming the best firework show.

Unfortunately for David Tice, the BEARX bear fund manager, and all the bears out there, they may be right about all the fundamental analysis, but they may not make any money. Calculating the singularity point of US GDP, and possibly notional value of deritivates, human population, etc. the mathematical singularity may not come for another 40 years. To be shorting against the market for the long term is probably a road to bankruptcy.

In any case, for the short term I believe that the upside of this market is limited, while the probability of downside is more likely to be bigger. After 25% rise in S&P500 since last year, are you still expecting another 20%? Oh, yeah, of course, I forgot that the US economy is in very “good” shape (same as in 2000).

Best luck.

P.S. I’m shorting QQQQ, XHB.

Do you know anything that can quadruple in about 2 years, and wouldn’t take a substantial fall? The rise of Shanghai stock market has every look of a bubble. I think that there is a possibility that international stock markets will fall together with the bursting of Chinese stock market.

Here is a chart of the 2000 high-tech bubble:

The important thing to note here is that it took about 1.5 year for the Shanghai index to double from 1000 to 2000. But it is only taking 0.5 year for it to almost double again from 2000 to 3841. If it’s 0.75 year (or in less than 3 months from now), this index would be on a super-exponential curve: the time for each doubling shrinks by half. In fact, the curve is closing to 4000 level faster than 3 months away. A super-exponential curve is destined to crash if you are familiar with my “Why stock markets crash” article.

Once again, stock markets are probably due a bigger fall in my opinion. Watch out below.

Interactive Broker at www.interactivebrokers.com has closed its IPO auction yesterday. Given the recent market craze about exchange and financial companies, IBKR has done its IPO at the right time. The IPO was well over-subscribed from 20 million shares at an initial price range of 24 to 27, raised to 40 million shares with price range of 27 to 31. The final clearing price was $30.01, and I assume that other people like me didn’t get the full allocation, but more close to one third. My bid price was actually quite close to the clearing price, but I wish it’s cheaper. At $30.01, I’m inclined not to add anymore shares.

We shall see whether IBKR will open trading today on Friday. The shares that I got are quite minimal. They won’t matter to my overall portfolio whether it’s up or down (even by a lot).

In any case, my cost was just $20 for domestic wire transfer because that was the only way that I could make to the IPO on time.

For those who bought into the IPO of IBKR, best luck to you (and me too).

For the month of April from 4/1/07 to 5/1/07,

1. Net worth is up by 1.03%.
2. Value of my company holdings is down by -2.68%.
3. Everything else excluding my home and cash is up by 3.51%.
4. If including cash in #3, it’s up by 2.70%.

I’m staying put mostly in most of my positions, except nibbling on the short side here and there.

Last month I commented:

I’m not sure whether a higher high will come first before a lower low than the Feb/March low. Although my belief is that a lower low will materialize later this year, my conviction is wavered by the market strength. My current plan is still going short against financial/housing/general market and possibly adding some tiny long positions in energy or gold. But I will take my loss if the bull market runs away to the upside again.

A higher (marginal) high has materialized in the stock market. I am still watching intently over the markets for a potential low that I believe would come. I’m contemplating on whether to take cash out from my 401K or refinance my mortgage to get cash out ready for the next wave. That would more than double my existing large cash position, and I am not sure whether it would be wise to do that. Furthermore, it could really push my comfort limit in my emotional ability to handle the daily up-and-down for an even bigger portfolio. In contemplating to take cash out, my most serious concern is with the state of $USD which is pretty much at the edge of cliff. I think a gradual depreciation is the most likely outcome, and maybe with a last dead cat bounce above the 81 level. Even though a zero-point zero-fee (nothing out of my pocket) loan is like a no-brainer deal, I really have to put the money to work in order to take the cash out (for 30 years is at 6.125%, and for 15 years is at 5.875%, zero-cost).

By the way, in the last 5 to 6 calendar days, my net worth decreased by 4.51%, and my portfolio decreased by 2.35%. Otherwise, it would have been a terrific April month. Gold (stock) is going downhill and my portfolio has taken quite a big toll since the recent peak.

This month my saving is slightly negative due to thousands of extra taxes that I needed to pay to make up my capital gain from last year.

Special note: returns were calculated by subtracting 3.00% APR return of my cash position.

Unless you are not refinancing your loan for at least three years, paying points almost always never make any sense.

I created the following Excel spreadsheet (click here to download the excel) to calculate the money you pay for point after adjusting for tax and inflation:

Pretty much any number you enter from the available lenders, you won’t break even after at least 2 years. However, for 7+ years, it will make sense to pay points.

I hope you find it useful.