The recent article on calculatedrisk.blogspot.com is going to strike fear into irresponsible lenders’ heart. Stated income HELOC debt is dischargeable in the bankruptcy court. Oops! Where are they going to get their money back? And will they be ever so stupid again to do stated income loans?

Here is a segment of story:

The debtors, the Hills, bought their home in El Sobrante, California, twenty years ago for $220,000. After at least five refinances, their total debt on the home at the time they filed for Chapter 7 in April of 2007 was $683,000. Mr. Hill worked for an automobile parts wholesaler; Mrs. Hill had a business distributing free periodicals. According to the court, their combined annual income never exceeded $65,000.

In April 2006, the Hills refinanced their existing $100,000 second lien through a mortgage broker with National City. Their new loan was an equity line of $200,000; after paying off the old lien and other consumer debt, the Hills received $60,000 in cash. On this application the Hills stated their annual income as $145,716. The property appraised for $785,000.

By October 2006 the Hills were short of money again, and applied directly to National City to have their HELOC limit increased to $250,000 to obtain an additional $50,000 in cash. On this application, six months later, the Hills’ annual income was stated as $190,800, and the appraised value was $856,000.

The housing bubble certainly was great for many willing spenders who have simply taken advantage of the system and used up all the money that they can. Huge bills on credit cards paid off. New car after another. Constant vacations. Now what?

With banks and lenders taking all the losses, everyone loses. There is not many choices left. Hyper-inflation is probably etched into the rocky roads ahead already.

The saddest truth about the whole thing is that we can’t even jail these liars, because the jail is going to totally over-fill with all these liars and irresponsible bankers.

As I have commented many times, you just can’t squeeze money out of these deadbeats. If they’ve got no money (after they spent it all), they’ve got no money. You can ask them to work for 100 years at the minimum living standards, and they may still not be able to pay back the debts. Of course, such obvious truth was never apparent to Wallstreet bankers. They are too filthy rich to see or understand at the level of debtors.

I really should tip my hat to Hussman for his insights. He has been exceedingly successful in navigating the bear/bull markets.

I truly think that the coming 2 months will not be pretty at all for many markets, and unfortunately gold included.

First thing first. Judging from the crude oil chart, it appears that we are probably near the end of wave 3. Of course, calling the top is the hardest thing, especially in a parabolic rise. But wave 3 should be coming to the end. What that means is that probably one should get out of oil stocks. Assuming a sizable correction from this point, I think it’s possible for oil to go from $135.09 down to $86.33, a similar magnitude from $79.86 to $51.03 last time.

It’s quite counter-intuitive that gold is leading the charts of oil, no matter how I look at the charts. I always think that the biggest driving factor for inflation is the rise in the crude oil price. Maybe gold does foretell the future inflation rates. Anyway assuming that is indeed the case, gold may or may not have bottomed already. At the previous oil bottom, the gold/oil ratio was at the peak of 11.94. Gold bottomed at a ratio of 7.72, while the next intermediate bottom was at the ratio of about 9.5. Using the ratio of 7.72 or 9.5, I get a gold price of $666.46 or $820.14. If I try to be more conservative on gold by using a ratio of 9 instead of 9.5, I get a gold price of $776.97.

Now using the ratio charts of Gold/HUI, the extreme values have been at 2.355. Anything above 2.2 is pretty high. Using the gold prices of $820.14 and a ratio of 2.2, I get a HUI at 372.79. If I go more extreme by using $777 gold price and a ratio of 2.40, I get a HUI of 323.75. I don’t believe that it’s possible for HUI to go that low, since HUI always leads gold price plus lower oil prices are good for miners. So if I take the middle road, using a gold price of $835 and a ratio of 2.4 (HUI leads gold), then I get a HUI of 347.92.

While I believe that HUI has seen the bottom already at 384.53, the market can certainly prove me wrong. Whether going down to $372.79 or $347.92, it’s going to be a quite a big ride down. With the stock markets getting quite flaky, I must reckon such possibilities.

While I believe that the Elliot wave count for HUI is probably at 1 of 3 or 2 of 3 in progress, it’s not clear whether gold prices are at the same count. I think the count for gold is probably at the same count of HUI, or 1 count behind (just started intermediate wave 2 down rather than beginning of wave 3). Presented with the evidences & numbers, I think the most probable count for HUI is in 2 of 3, assuming that gold price will correct further. Obviously wave 2 can go down a lot in respect to wave 1. Therefore $347.92 or lower is definitely a possibility.

With that said, the general markets probably will re-visit the lows if not breaking lower. Bond yields should fall, and anyone who wants to refinance should take this “last” chance again. Since the next wave in gold is probably going up or UP, bond yields which hate inflation (a high gold price) will certainly not be low. Most likely after the next wave down, the global markets will “turn the corner” and US dollar may fall precipitiously to jumpstart an extended wave 5 in HUI and maybe wave 3 or 5 in gold.

My crystal ball is cloudy at best. But it’s showing big storms ahead. I hate my own analysis, since I’m emotionally attached to my current investment. But markets will always have the final says.

I’m becoming more dreadful about the markets in general.

The financials are leading on the downside, and that’s just not good. Possibly another shoe is going to drop soon. The most scary thing is certainly that none of the pension funds have yet announced any big losses from the subprime. Articles that indicate the near certainty of death for IndyMac Bank and others just darkens the picture for the stock markets even more.

Yak, yak, yak. I’m truly getting icy cold feet about this market. The fact that Federal Reserve has put its weight behind credit card loans and car loans is actually quite bearish. The amount of loans in the US that need to be underwritten and roll-over is huge. I don’t know how soon, but probably very fast, Federal Reserve will be swamped especially given that foreigners are no longer opening the tap for all the “AAA” rated loans which have been toxic to their portfolio.

The latest H3 release from Federal Reserve paints a totally ugly picture for banking industry. The non-borrowed reserve is at all time low now, at negative 112 billion dollars.

The credit crisis is definitely NOT over. If anything, it may be accelerating in the coming quarter.

I am on vacation earlier today for the long weekend.

I shall see you next Monday or next Tuesday.

Have a happy Memorial holiday.

And yes, gasoline is really expensive now, $4.15 last time I saw for the least expensive refining grade.

Frugal

In the short term, it appears that several markets may reverse directions.

I have been saying that I believe the general stock markets will go up since end of March. I’m changing my short-term stand now. I believe that there are too many clouds in front, and the forward picture is simply not clear at all. Most likely there will be a short pull-back if not already. But more importantly after that, the markets need to decide whether to resume upward or downward move. Right now, that is not clear at all. There are simply too much uncertainties.

While I believe that the more likely resolution is for markets to trade in a range between January/March low to probably with SPY less than 150, I must admit that both breaking new lows and breaking out above 150 are distinct non-zero possibilities. I am moving to the sideline cash again on my general stock market bets.

Definitely the shorts have been hurting, but I think the longs may have gotten too gleeful and ahead of themselves.

On the other hand for precious metals, if it pulls back, I would say buy. If it breaks new low, I would say double your bets. Why? HUI has shown significant correction, on daily, weekly, and monthly charts. That should be very sufficient. Again, it’s likely that precious metals will pull back from current level. But due to the its nature of extreme volatility, the probabilities for both breaking new lows and breaking out are even more significant non-zero. Certainly, I will not want to take a bet on that, but simply staying my current course on my asset allocation.

This is certainly not news, but I just want to plead people to donate for this cause. When we all still have our beloved ones around us, and food on the table, we should be all very grateful, and think of anyone who doesn’t. The two disasters in Asia, cyclone in Myanmar, and earthquake in China, have been just very terrible. Please help out in any ways if you can in.

When I was in a break room last week, reading newspaper on this, one of my colleague asked me about what is the count on the casualties. I literally couldn’t talk to him because I felt so sad for these people. He sensed my sorrow, but a couple of minutes later, he said, “See the problem is that if you want to donate, it’s the fat cats who are going to get most of your donated money.” I didn’t know what to reply, but I wanted to say to him, “so I should be doing nothing for these unfortunate people?”

I have donated $1500 to Tzu-Chi for the two causes. I have been searching around internet, and the only good charities for this seem to be mercy corp, and red cross in HongKong, and Tzu-Chi. Tzu-Chi was founded by a Buddhist’s monk, and the organization has a very long good record on charitable deeds around the world. I have also checked out Tzu-Chi’s report at charity navigator, and 96+% of the money will go towards the actual people in need. It’s less than what I would like to see (98+%), but at least it’s not less than 90%.

The run-up in gold on last Friday is good for investors, but probably bad for traders.

Oil is at all time high, while gold has sustained a 15% correction. While it is still possible for gold to come back down to $820 to $850, gold is a good buy for longer term horizon. If one looks at the gold to oil ratio chart, the ratio is currently at an extreme value. Sooner or later the ratio is bound to rise up. If you believe in crude oil going up, then you should believe in gold prices going up more.

Here is the recent chart from stockcharts.com:

A chart from Incredible Charts shows how extreme the current ratio is.

In a credit crunch (which is not over yet) where deflation occurs, the value of money goes up. And I expect that the value of real money (gold) goes up even more.

From the ratio chart, one can probably safely say that in the intermediate term, it’s probably good to either buy gold and/or sell oil.

Damn! My laptop is overheating and resetting. Hopefully I can get it done before it crash on me again.

US stock markets are still looking fairly strong, and continue to exhibit a upward bias. However, $US dollar bounce has been pretty weak, despite all the claims that it has bottomed. The bounce has been pretty flat. I don’t think this is the bottom however.

Gold is holding well too. My math trading model did show a weak buy signal about 4 days ago. The buy signal can be invalidated anytime if HUI falls below about 400.

Alright, I will grab a new laptop this coming long weekend. I just can’t work anymore on my completely worn-out laptop.

Sorry I just couldn’t finish my post on the most important things on investing for the next decade. My laptop reset 3 times on me.

Come back tomorrow if you will. I’m going into my trading pits now.

“Market Update: For Stocks, The Worst is Over”. That was the headline from Kiplinger’s Personal Finance magazine. Don’t you hate that?

I mean, what’s the chance of the magazine being right? Kiplinger has signed up Glassman and Jeremy Siegel who are mostly bullish. But I just don’t think the worst is over. We are passing thru the eye of the storm. This lull will probably last for some while (yes, I’m temporarily bullish). But the worst is definitely not over for stocks.

The weird thing is that right after Siegel’s article, there is a two-page article on “What’s Bubbling Over Now”. It listed gold, silver, Brazil, Steel, Euro, Oil, Grains, and Treasury notes, but despite the what the title hints, the article is still mostly longer term bullish on all eight items. It’s kind of confusing. I don’t know whether Kiplinger is trying to straddle both sides, cheering for stocks mostly, but don’t want to miss the boat on commodity either. But certainly the two classes of assets are quite different. If you believe in one, you probably don’t believe in another.

Adding to all the confusion, several pundits that I kind of rely on, Bill Cara and Bob Hoye have been turning in very lackluster predictions. Actually, I should have listened to myself more (and I kept repeating this mistake). I think Bob is again too early. Bill on the other hand seems to be flip-floping somewhat. Both are very good stock technicians. But I guess people do fail from time to time.

Based upon Armstrong’s model, I continue to stick to the same forecast. Stocks will be going up, and probably more so for emerging markets. However, maybe 2 to 3 years out, it will be down at least on an inflation-adjusted value. Let’s hope that I’m right, so that we can all get out of our stock positions for the “last” time, before the nasty fall begins.

And I just can’t wait for crude oil to fall. Come on. Give me some discount or sale. I hate to buy full-valued merchandise.