Alright, let’s extricate ourselves from the euphoria of smashing new highs in both Dow and S&P Thursday and take a deeper look at the circumstances surrounding this rally. Ostensibly, WalMart’s better than expected June sales figure was the trigger for this 280 Dow point orgiastic frenzy. However, as Barry Ritholtz ably summarized in ”This is a bullshit rally!” much of that performance can be attributed to higher food prices while the other retailers posted rather unconvincing results. Barry must be considered one of the high priests of the bear camp; however, he’s in control of his own emotions and this particular post is highly recommended for those wanting more introspection into their own actions.

To flesh out the background, I also want to mention two great articles at Trader’s Narrative. One dealing with commercials’ record long positions as this market has climbed higher, the other with bullish odd lot data. Taken together, a picture of commercials herding retail traders into the fleecing house emerges. Tuesday’s 140 Dow point drop accompanied by the S&P breaking its 50 DMA was unfortunately a great bear trap. It would seem that technical signals on the daily chart are not very reliable at this moment.

Let me frame my opinion with my own biases. I have long wondered the halls of housing bears and to me their message is preaching to the choir. The difference is that I have been expecting new highs with greater volatility in the near term. Thus far, this month is shaping up to be the best in the past year and half for me. Bulls die hard. I expected this cyclical advance to end only in the face of unequivocally bad data, and I believe such data won’t appear for at least one more quarter.

I constantly probe my thought process and the fact that commercials and retail investors remain so at odds has been a sticking point. One possibility is that the so called “sovereign wealth funds”, of which China’s $200 billion fund is the latest and most reported example, are being setting up as the bag holder this time. I can easily see Paulsen peddle this idea to the Chinese as a way of soaking up excess liquidity while tipping off his Wall St. buddies at the same time. But in a Machiavellian world, what do the Chinese get out of it, if they’re to be the bag-holder? Quite simply, by propping up US equities, it can create an appearance of prosperity and keep the US consumer, um, engaged. So they may consider it a reasonable price to buy it time to transition to an internal demand driven economy. Besides, as long as it can own real assets, fluctuations in the market price hardly matter.

Foreign buying of US equities in May was second only to February 2000 (chart courtesy ContraryInvestor.com). Even if the $25+ billion was all from China, it will still take a while to exhaust its war chest. Who knows, we may even see Dow 36,000!

Speculating aside, we know new highs beget more buying, which is all the reason not to time the top of this market. In fact, I know for certain I’ll miss the top, but the whole point is not to short until the down-trend has been established. This past week has been a perfect example.

My best friend is getting married! I am very happy for him. I don’t have much time to shop at all (or pretty much do anything else), so I plan to just send in a cash gift of $600. Maybe I should buy him an one ounce gold coin instead?

Any other suggestion? Is it too much or too little? I guess it’s all relative (to whatever you want to compare to).

This friend of mine comes from a middle class family without much wealth. He even had to support and pay the tuition for his younger brother through college (he and his brother opted the cheaper universities in Texas). He was in some serious credit card debt, but he has paid off all of his debt several years ago. Now together with his future wife, he would probably be earning a higher combined household income than I do.

Way to go, my best friend. Another great example of building wealth from nothing.

He has refused to take any gift from me by not giving me his mailing address. But I was able to get hold of his work address. It’s going to be tricky to coerce him to take up my gift. Maybe I could ask him to help out my website here a little, so that he can feel as not taking a gift.

For the month of June from 6/1/07 to 7/1/07,

1. Net worth is down by 3.83%.
2. Value of my company holdings is down by -12.05%. My asset allocation strategy using the assumption that my company would positively and strongly correlate to the general stock market is obviously breaking down. The losses from two consecutive month in this category are now at almost 25%.
3. Everything else excluding my home and cash is also down by 3.63%, with the PM market taking a heavy toll at the end of the month.
4. If including cash in #3, it’s down by 2.54%.

Well, but this review is already 9 days late (unintentionally). And PM markets had the biggest July rally for quite a long time, returning ~8% in just 9 calendar days. My company stock went up too, and both probably made up most of the losses if not more.

Looking forward, I am preparing my shopping list for more energy (uranium and natural gas) and precious metal stocks (mid to junior, and possibly indexing ETF), in the hope that the correction will materialize. I have sold out all holdings that correlates to the general market this month. Of course, the correction is still nowhere to be seen. If the bull market continues, I will be simply time-averaging back into the market with selected picks. I have been itching to buy several names. Unfortunately, they are running away in price, and I often barely have enough time to watch their prices once a day.

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

You will never see me pounding the table about an imminent break out in PM shares, because the nature of any technical call is fundamentally one of probabilities. Having said that I hope my readers are at least not surprised by the sharp moves in PM shares this week. The background was laid by the weak hands folding as evidenced by the extreme XAU put/call ratio on June 26. Those wanting to make sense of this move can point to a slew of industry positive news this week: the proposed three way merger between AUY, NTO and MDG, good drilling results from EGO and SLW, and last but not least, NEM clearing its hedge book. It all seems logical, but one can just as well point to the wave structure of this PM bull, and view this flutter of activity as no less predestined than phases of the moon. Now that’s food for thought.

What is clear is that PM stocks are breaking out big time. Volume was very high in big caps such as NEM and AEM, indicating institutional interest. A daily chart of HUI is shown below; similar set-ups are repeated in almost all its components. Perhaps more importantly, the HUI:GOLD ratio has also broken out cleanly in the weekly chart. I can now say with a high degree of confidence that the correction since last May was over.

So what now? The immediate resistance level in HUI is 369. HUI has had a habit of taking 3-4 tries to overcome a significant resistance level as it did for 362 in early April. So 369 is likely to fall on the next try. By the same token, some back-and-forth may be necessary before the old high of 401 can be overcome.

Another way to profit from PMs
The usual recommendation to a novice investor interested in harnessing PM shares’ leverage over metals is to buy an ETF (e.g. GDX) or a good mutual fund. I share that opinion. GDX has a high correlation to HUI and is becoming more liquid each day. In mutual funds, my favorite and the one I still own is UNWPX (US Global World Precious Mineral Fund). In fact, I like it so much that I own stock in the mutual fund company (GROW). Besides two PM funds, US Global also has some outstanding funds in natural resources (PSPFX which I also own) and emerging markets. It also manages off-shore accounts for Endeavour. The stock was once such a high flyer that it was on the IBD 100 list and attracted a lot of momentum players. Due to earnings disappointments, it has fallen out of favor and has been flirting with the 200 DMA for some time. It just successfully tested an important trend line and popped 6+% on Friday. The short interest, at 30%, remains very high. It may still face some tough comps this quarter but after that I expect it to respond to PM price action with good leverage.

Disclosure: I own GROW and a number of PM stocks.

Mike Panzner (via the Big Picture) comments on the strength of the agricultural commodities:

Over the past nine months, the Reuters/Jeffries CRB index has essentially gone sideways, and five out of six of its sub-sectors haven’t really moved one way or the other. However, one group stands out: the agriculture sector, with a 33% gain relative to the CRB index.

I noted the break out in DBA (DB agricultural commodity ETF) two weeks ago. Unfortunately, it promptly rolled out of bed and managed to hold the 50 DMA only two days ago. I will continue to monitor this ETF as I’m long term upbeat on this sector. The fantastic volatility should present some interesting trading opportunities.

Now staying with the theme and just to show you a chart that blew my mind, here’s TNH (Terra Nitrogen Co. LP). It’s in the fertilizer business that is enjoying a boom from ethanol and a general lift in the price of agricultural products. Its limited partnership structure probably also attracted yield-seeking investors. I let it go at $75 and $85 and certainly am not recommending buying now. But if you’ve had it for a while, big hat tip to you!

Today is a holiday. Hope everyone goes out and see some good fireworks at night. I’m going to take my kids out for some good fun.

Best regards.

Frugal

Last week was bracketed on both ends by nasty intraday reversals to the downside. It was quite contrary to the usual quarter end action to be expected from mutual fund “window-dressing”. To be fair, major indexes didn’t move much last week despite those reversals. On the other hand, this week, with the 4th of July falling on a Wednesday, has gotten to a good start.
Although this bull market is long in tooth, I believe it would take real weakness in earnings to knock the bulls off their pedestal. Signs are that things will still look rosy (read: S&P earnings growth just north of 10%) for the June quarter. [Very good read: ”>Real Earnings Yield model from CXOAG, check out the Excel file of S&P earnings estimates]

One very important piece of economic news that came out last week was the Personal Consumption Expenditure report. Following the method explained in Joseph Ellis’ book, Ahead of the Curve, I have been following the YoY change in the three month average of real PCE. This measure has been trending down since last December, but still came in at 3.28% last week. More importantly, the durable goods component increased to 5.13% after spending that last two months below 5%. All in all, the results from the June quarter are unlikely to give the market a reason to decline.

Recall that in 2000, the Nasdaq peaked in March but the S&P didn’t go into a steep downtrend until September as the free-spending dot com’s went belly up. This time around the giant sucking sound is coming from reduced mortgage equity withdrawal (MEW) in a declining housing market. CalculatedRisk has again put together a nice chart that shows the precipitous decline of MEW into Q1’07 (but still well above the long term average). Note that it usually takes consumers two quarters to actually spend the money from MEW. Since a bottom in housing is nowhere in sight, not to mention higher rates and energy prices, Q3 may again bring some nasty surprises.

Practically, it probably means the market will continue grinding higher till the middle of August. I don’t expect companies to lower their expectations anytime soon. Most likely, they’ll be surprised by the “rapid deterioration of economic conditions”. Despite this big picture view, I’m staying long as I have learned that my own opinion is a luxury that I can seldom afford. At the same time, technical breakdowns will be far more alarming in my eyes.

The fanfare on Paris Hilton going to jail was all over the TV. Just when I thought everyone is equal before law, Mr. President Bush again demonstrates how executive branch of the government has gone excessive. Libby, an aide of vice president Cheney, was sentenced to two and half years of prison term plus $250,000 fine because he leaked Valerie Plame’s CIA identity. But President Bush relieved Libby from his prison term, and left the fine intact.

Coining the term WMD to cheat the legislative branch of Congress into going into Iraq war, overriding the decision from judicial branch on the prison term, stripped away the basic human right for detainee on habeas corpus, and with the help of legislative branch of Congress, passing a law to grant himself all immunity from war crimes (see the video below):

The president of USA is becoming like almost an emperor now. The three branches of the government: executive, legislative, and judicial are supposed to have a proper check and balance. It looks like our country is nowhere close to where the founding fathers have envisioned.

For anyone who will face a mortgage ARM reset going forward, but doesn’t have the income to pay for the monthly payment, the Ponzi game is over.

From the latest New York Times news:

The banks obviously don’t like this, because they understand that they have simply played with fire. Now they are getting caught, but still would like to continue to pass these hot potatoes (risks) to unsuspecting income investors. Without being able to extend the loans to these falling subprime borrowers, the current investors and banks will be stuck with the hot potatoes.

But don’t you wonder why banking regulators still want to increase the regulation, possibly knowing what may happen? Well, for the people in politics, they only care that when all the foreclosures are under the sun, they can at least claim that “oh yes, I did do something for this problem (by making it worse?).”

In any case, we will see more of ball kicking between government officials/politicians such as between Greenspan and Ed Gramlich.

But now Edward Gramlich, a former colleague of Greenspan, has reportedly gone on record to say the former Fed chairman blocked a proposal to increase scrutiny of subprime lenders under the Fed’s broad authority. What’s more, he asserted, that additional scrutiny might have helped curtail questionable lending practices that are now blamed for soaring defaults by mostly low-income borrowers many of whom fell prey to predatory lenders’ unscrupulous lending practices and high interest rates.

I am not sure Greenspan’s denial is in any way effective. He has got his fingerprints all over the housing bubble. How can you even deny it?