News Alert
GATA (Gold Antitrust Action Committee) is set to take out a full page ad in Wall Street Journal this Thursday according to this article by FN Arena News.

The Gold Antitrust Action Committee (GATA) is an organisation which has been nipping at the heels of the US Treasury Federal Reserve for several years now. The basis of GATA’s accusations is that these institutions, in coordination with other complicit central banks and the large gold-trading investment banks in the US, have been manipulating the price of gold for decades. Were it not for this manipulation, the gold price would now likely be in the thousands of US dollars, GATA suggests.

The means of manipulation have largely revolved around the gold leasing and gold derivatives markets. GATA believes the US Treasury has been able to effectively sell gold under the radar of the limited disclosure rules of the International Monetary Fund - global bookkeeper of central bank gold transactions - for the purpose of artificially supporting the value of the US dollar. The upshot is that while the IMF, and the world, is led to believe global central bank gold reserves total some 30,000 tons, the reality is more like 15,000 tons. Today’s gold price is a reflection of the former figure.

A PDF version of the ad can be seen here.

Looks like both gold and silver are breaking new highs again. Pring thinks that mining stocks must lead the physical spot market. But I simply don’t agree to that. If there are any rules, it is that rules are meant to be broken. From my own observation, mining stocks, silver, gold, and platinum, are simply different animals in the same running race. Sometimes, one gets ahead or behind another. But the key is to recognize whether the pact is going forward or not.

I’m short-term bullish on gold pact right now, with the caveat of a potential pullback right after Fed’s meeting on Jan 30. I’m afraid that Fed will not cut another 0.5% (which seems to be the current concensus), and then market simply turns down on Feb 1st. I don’t think markets will be down on Jan 31st, since mutual funds need to make a better set of numbers.

In any case, $US has made its moves already. US dollar index has dropped precipitiously in the last 2 sessions to 75.5. All currency pairs are going up against $US.

Maybe we will see $999 gold before we see $800 again (if ever).

Here are two of my most favorite trading stories about traders from my recent readings. You really got to check them out. It’s such a learning experience.

1. Two stories from the confession of the best breed of trader, Todd Harrison, the founder of Minyanville, and the manager of a hedge fund:
Dark days happen to the best of us and Stay humble or the market will do it for you.

I get the best of readings and also market directions from Todd Harrison at Minyanville. He is an astute trader. As I have always believed, the only way to success (trading success or portfolio management success) is to learn from your own mistakes. Why am I glad that I lost 40% in my first year in the stock market? Because the experience humbled me from the very start. And I know so well that I will be humbled yet more. The only way to become better at it is to learn from your trading/investing mistakes.

2. And here is the most hilarious video for this week. Jim Cramer caught on the tape, from bigpicture.typepad.com. Don’t believe everything that you hear on TV. Cramer is simply more into media (TV or book or website) than into trading when he talks. I would rather take advice from other places.

I have discussed before that for my asset allocation, I had chosen to have muni bonds in taxable accounts instead of taxable bonds in tax-deferred accounts. In fact, I purchased some NXZ at the beginning of the year. I got out of them last Tuesday, after the big panic. Although I managed a small profit, the selling price was below Friday’s close. I wasn’t too happy about the move at first, but my prudence may still be rewarded.

The motivation was of course the imminent downgrade of the bond insures Ambac and MBIA, which has been all over the news. To be fair, the muni insurance business is profitable, serves a useful purpose and will never be allowed to fold. However, some has suggested a figure of 200 billion! is needed to bail out the bond insurers. That may be too steep a price even for the billionaires who are circling around the (soon to be) carcasses. In all likelihood the 200 billion figure stems from the write-downs from CDS’s (Bill Gross doesn’t appear to be that far off), and you can bet that the bond insurers are clutching to their muni business like a lifeline. Barclays is now saying that if the bond insurers’ rating are cut too deeply, banks faces additional 143 billion in write-downs. A hundred billion here, a hundred billion there, and pretty soon, we’re talking real money!

Judging by the price action of those closed end funds, muni investors are nonplussed about all this ruckus. However, a little prudence may not be a bad thing. It’s not unreasonable to assume that while Ambac and MBIA are drinking from the CDS cool-aid, some of that good fun got spilled over to the muni insurance side, and the default risks got under priced in some issures. At the least one would expect the balance sheets of municipalities hard hit by the housing crisis not look as sound. So while as the muni insurance business as a whole will never go away, it’s not clear that all the muni bonds will keep their existing ratings in a re-shuffle.

I could pour over the latest quarterly reports of those muni funds to see what may be affected, but given the size of my investment that hardly worth the effort. I’ll keep the cash and jump back in after this brouhaha is over.

Look for your tax rebate in the mail soon, if you didn’t earn too much last year.

The details of the tax rebate are not all out yet, but here is what I can collect:
1. The minimum earned wage needs to be $3000 for you to qualify for at least the $300 per person rebate, or $600 per couple, plus $300 per dependent child.

2. The maximum before phasing out is $75000 for individual, and $150K for couple. As far as I can tell, those numbers are AGI or adjusted gross income. Therefore, all itemized or standard deductions don’t help you in this case. The phase-out goes pretty quickly. Once you reach $187K for couple, you get zilch or nada. But if you have children, the phase-out limits are higher. But I can’t find that number from all the press releases.

3. There seems to be an exception to #1. If you’re a retiree, and only have investment income, it appears that if you have paid some taxes, you can still get the $300 to $600 tax rebate. There was one example from marketwatch.com, and that’s about all that I can find.

Obviously, not all tax rebates will be spent. But this is probably a more fair way of dropping helicopter money. And I must applaud the quick actions by President and the Congress. Anything that is too late will not be useful at all.

A more important thing for the financial markets is that the loan limit on Fanni Mae and Freddie Mac will be raised to $729,750 or 125% of the median house price in the area. That is a huge increase. So it will help the jumbo loan interest rates, if you qualify for the payment. I tried a loan amount of $600K, with $150K or 20% down. Using 30 years fixed at 5.5%, $15K property tax, $1000 home insurance, and $200 monthly HOA fee (about the ballpark for the single family prices in 2006), one must fork out $5000 per month for housing. Since one needs to pay some payroll tax, if not income tax, plus one needs to eat and drive, I assumed that the monthly pre-tax income probably needs to be $12K per month, or $144K annual salary.

Again, I truly wonder how people can afford those homes a few years back (if it wasn’t negative ARM).

I truly expected that I was going to have a BIG down day yesterday. But amazingly it went so much better than I expected. The big caps in PM still held up or went up under such a stormy weather. Of course, needless to say, physical metals simply went straight up again after Fed cutting 0.75%.

Does that mean PM is in safehaven? Absolutely NOT. There is still a possibility of gold pulling back to $800 (or even $700 according to some pessimists out there). If gold goes to $800, and with a gold-to-XAU ratio of 5.4, you get a XAU of about 150, and possibly a HUI of 375 (some 20% off from current level), right in line with the support lines of both indexes. If gold goes to $720, then XAU will probably go to 128, and HUI may go back to 320 (some 30% off from current level). I see that the first scenario probably may hapeen with 75% probability, and the second scenario with 10% probability. Precious metals ALWAYS surprise investors/traders on both upside and downside. So I keep expecting the surprises to come.

Today’s market will be ugly again, because of the outlook from Apple (AAPL). I should have shorted AAPL when it broke 160/180. QQQQ is going down again. And I am short via naked deep-in-the money puts in QID only for 2.5% of my portfolio value.

Buckle up again. It won’t be pretty.

Look at where we are today. Who are the real losers when the housing buble burst, when I first claimed back in 2006? It simply disgusts me why and how everyone needs to be put up with all the pain along with the real culprits of the housing bubbles. Unfortunately, that’s how our financial systems work. Everything and everyone are inter-linked together.

Best luck and take care.

A pre-open cut of 0.75% was good. That’s just about the right size.

If there are any really beat-up stock, now may be time to refill them a little.

If this is a multi-days rally, I think you should sell the rally.

After the fed cut, I see overall markets are still down. But at least less panic indeed.

Unfortunately with 0.75% cut, I think the overall stock market and economy is still heading downward. Today will definitely NOT be the lowest point in 2008. Mark my words.

Best luck.

The chance of markets going into freefall mode is increasing as hours go by. Markets are being liquidated. The second strong sector XLE/OIH or the energy companies have fallen right at or below the lower band of Bollinger’s bands. The strongest sector GDX or the precious metals just had a sell signal from MACD signal.

I hate to sell any of my stocks right now, but things just simply do NOT look good. Tuesday opening may be down again it appears for the following reasons:
1. Financial sectors in Europe are crushed on Monday. All global markets have plunged from 4% to 8% on Monday. I have expected emerging markets to fall. But the problem is that they just started falling, with US stocks already breaking supports. Now, I just can’t imagine what would happen when emerging markets are 20%. Will US stocks be 30+% off instead??

2. US dollar index is rising STEEPLY to 76.866 (10:18 on Jan 21). This is ESPECIALLY scary. As I have said many times, for US stock markets to go up, US dollar MUST fall. Here are the currency quotes that I’ve obtained, ALL breaking recent high/low with US dollar gaining strength, except YEN:
EUR vs USD at 1.4485
USD vs JPY at 105.87
GBP vs USD at 1.9458
USD vs AUD at 0.8628
USD vs CAD at 1.0320
This is F***ing scary now, because yen carry trade unwind is in FULL force.

Initially, I expected that precious metal sectors may be spared. My expectation came from the observation of the recent stock market fall as the new year opens. All markets fell, but precious metals went straight up. The currency markets indicated the same phenomenon as of now. However, energy markets later were not spared. Now precious metals stocks have corrected with gold spot almost reaching an all time high and have pulled back to $867. If gold price breaks $850 and then $835, along with Yen strengthening, then I think the black swan dive will be here with us.

Once the market opens on Tuesday, I tentavely think that I probably will purchase puts for February or March expiration (but maybe it’s too late already). The markets show no signs of improving. The last rally on last Wednesday kind of surpised me on the lack of followed-thru, because this sick market canNOT even rally for 1 day. That particular rally was intraday, and was LESS than 1 day. Maybe it is time to face the truth.

I don’t know how ugly this market will get. But the markets are probably more over-sold than the bottom in the last bear market of 2002/2003. Jumping out of the window maybe is the best way to avoid this train wreck now. (Boy, I’m not even panicking at this point. I don’t want to see how low this thing will go when I panic.)

First of all, let me say that I’m glad to be back to 1stmillionat33 after a long absence. I had some hardware issues which took a long time to resolve with HP. I’m glad that they are now behind me and I’m back to blogging full force.

Let me also wish everyone a belated Happy New Year even though the market started on a sour note. After all, money isn’t everything. Health and family count far more towards happiness – a truism reinforced for me during this past holiday season. That said, I remain optimistic, first and foremost, in my ability to navigate the economic waters to provide the best for me and my family. My overall perspective stays the same: I’m long gold and commodities and concerned with the economic prospects in the US due to an over emphasis on consumption. With that I’d like to talk about a long term technical indicator that has had uncanny accuracy in the past 15 years.

I learn about this long term indicator from an article on ContrarianInvestor (I’m a subscriber). I doubt they are the originator as moving average crossovers in general has been in use for a long time. The system looks at the relationship between the 17 and 43 week exponential moving averages (EMA) of the S&P 500 index. When the 17 week EMA is above the 43 week EMA, one should long the S&P, otherwise, one should short the S&P. The weekly EMAs are equivalent to the 85 and 215 day EMAs which I plotted using the new Yahoo charts below. I encourage you to play around with the time intervals for the averages. The signals are fairly “robust”, in the sense that buy/sell signals don’t change much given small variations in the intervals. For example, 85/200, 60/200, or even 60/170 give roughly the same thing.

Click to enlarge

The track record of this system is impressive: it correctly gave a buy signal in 1995, a sell signal in 2001 and a buy signal in 2003. One has to go back to 1991 to see a meaningful whiplash. If you go to a shorter interval, you’ll see that the two moving averages have been converging. Indeed, they crossed on Friday to give a fresh sell signal (using 85/215, shorter intervals would have generated the signal sooner)!

Again, I encourage you to play around with the time periods to see how well this system worked (or not worked) before. Although I haven’t done the exact calculation, it seems that this system would handily beat a buy-and-hold approach while having shallower drawdowns since 1950 which is how far the Yahoo data goes back to.

So what’s so magical about 17 and 43 weeks? I can hear you ask. Of course there’s some leeway in those two numbers, but I guess what you’re really asking is the philosophical basis for this system. There is none, or anything a priori that I can tell. This system is based on a long history of observed facts, which by the way, is identical to the reasoning behind statements like “in the long run, stocks go up by x% a year”.

Personally, I’m taking this sell signal very seriously even though I recognize that the market is very oversold and ripe for a bounce. On the other hand, my portfolio is set up to benefit from the on-going global growth story thus is susceptible to a global recession. While I still regard that as unlikely, I will most likely treat any significant bounces in the general market as opportunities to build up a hedge.

Greenspan is going down in history to be the man who created the biggest financial bubble in the history of mankind: housing/mortgage credit bubble, which (will) cause the biggest fall in $US, the yet-to-be legacy of Bernanke. I just want to add my comments to this article “Greenspan legacy questioned amid subprime crisis”.

From Greenspan:
“It is extremely rare to uncover fraud other than through whistle-blowers,” he said. “You don’t get at it through internal audits, you don’t get it through outside audits and you certainly don’t get it through bank examinations.”

My comment:
Every mortgage officer knows what is called a “liar’s loan” back in 2005, if not earlier. It simply goes against the most basic common sense on why wouldn’t someone spends some 20 minutes to document their income/asset, and get a better (1/8 to 1/4) interest rate. For that additional interest income of 1/8 to 1/4 percentage, you’re almost guaranteed to have a fraudulent loan with 99% of the probability. Common sense, Greenspan! Since you are a smart man, I can only conclude that you’re highly negliegent and irresponsible.

A simulation by Stanford University professor John Taylor suggested that much of the housing boom could have been avoided if the Fed hadn’t cut rates so deeply and had raised them back up more quickly.

I think the result of the simulation should be obvious. Greenspan was afraid of dislocating bond markets. For that specific reason, I agree that rates should be raised up gradually. But he should have done it at the double speed, or much earlier instead of leaving the interest rate at 1% for about 1 year.

“There is a growing body of thinking in central banking that one should not let these bubbles run and allow them to burst,” he said. “They should lean against them.”

Greenspan disagrees with such a strategy. “There is no evidence that it works other than in computer models,” the former Fed chief said. He noted that the stock market merely leveled off when the Fed doubled interest rates to 6 percent in 1994-95, then resumed its climb.

The rising of stock markets had nothing to do with stock bubbles. Stock markets were rising in 1994-5 because of increase in globalization and internet and computer technologies, which translated into lower costs for big corporate companies. Greenspan’s example is just lame.

Greenspan maintained that the housing bubble was inflated not by the Fed’s monetary policy but by a global savings glut that held down long-term interest rates worldwide. As the Fed raised its benchmark rate from 1 percent in 2004 to 4.5 percent in 2006, when Greenspan stepped down, the yield on the Treasury’s 10-year note actually fell.

And the explanation from Greenspan just gets more far-fetched. Trying to confuse people by reversing the causal sequence between consequences and causes only works for people who don’t do any thinking. Why is there a global savings glut? Because US dollar dropped so much in interest rate from 6.5% to 1.0%, which caused a weak $US dollar. To compensate the currency exchange effects from that, global central banks simply had to competitively devalued their currencies, which caused a global saving glut in the longer term bond markets. Since the over-night interest rate was paying close to nothing, the only way for savers to get any decent return was to move out in the bond duration. Coupled with some time lag between foreign policies and US policies, the saving glut certainly won’t disappear overnight, but rather with 3 to 12 months out in time horizon.

Sorry, Greenspan. I must attribute a lot of your “personal success” to wage/price arbitrage in globalization and the biggest ramping up in computers and communication technologies (thru internet). It goes similarly for the success in Clinton’s era. But at least, he gets a lot more respect from me.