With the latest Job September report last week, BLS is revealing its biggest lie yet for all to see, or I shall say anyone with eyes. But of course, people on Wallstreet are either blind, or turning a blind eye. Or maybe, this is a collective bluff on the part of government and Wallstreet, to cheat the mass investors into rallying the stock market?

Here is the direct link to the Burea of the Labor Statistics. In the first paragraph:

Employment rose in September, and the unemployment rate was essentially
unchanged at 4.7 percent, the Bureau of Labor Statistics of the U.S. Department
of Labor reported today. Nonfarm payroll employment rose by 110,000 following
increases of 93,000 in July and 89,000 in August (as revised). In September,
health care, food services, and professional and technical services continued
to add jobs, while employment trended down in manufacturing and construction.
Average hourly earnings rose by 7 cents, or 0.4 percent.

Remember that just last month BLS reported that

Nonfarm payroll employment was essentially unchanged (-4,000) in August, and
the unemployment rate remained at 4.6 percent.

And that gave away all the excuses for Fed Reserve to cut interest rate. But since $US dollar was free falling. I guess BLS September report becomes the latest booster to $US. The “supposed” error in the August number was close to 100% of the value.

Well, but in the last paragraph of the BLS September Job report, here lies the March revision, downward by 297,000 jobs. It doesn’t take a stupid to figure out that something is quite off. Maybe the birth & death statistics model used by BLS has been skewed heavily towards birth of new jobs, rather than death of old jobs? Here is the last paragraph:

Preliminary Estimates of Benchmark Revisions to the Establishment Survey

In accordance with usual practice, the Bureau of Labor Statistics is announcing its preliminary estimates of the upcoming annual bench-mark revision to the establishment survey employment series. The final benchmark revision will be issued on February 1, 2008, with the publication of the January 2008 Employment Situation news release.|

Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for the month of March derived from state unemployment insurance tax records that nearly all employers are required to file. For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent at the total nonfarm level. The preliminary estimate of the benchmark revision for March 2007 is -297,000 (-0.2 percent) for total nonfarm employment.
….

All of the above fishy numbers plus the timing of the reports only tell me that BLS apparently is closely cooperating with other branches of government to financially engineer the markets.

Thinking ahead of the next step in the coming reflation, what would I do to clean up the mess left by Greenspan?

One word, spending (which is the default Keynesian economic solution).

What kind of spending depends on the agenda of voters. However, I think the following industry will probably benefit:

1. Infrastructure: anything that rebuilds the energy, transportation infrastructure, and/or constructions of some sort should benefit. Water and alternative energy are the ones that I can think of, but there can be many other area.
2. Healthcare: with aging boomers, spending in pharmaceutical and healthcare industry probably would increase more than other service industries.
3. Military: with the continuing diversion of strained foreign relationship in Middle East, the military expenses may be ongoing.

By more spending, government could compensate the shortfall of employment in the private industries. Many dollars will go wasted and beefed up unscrupulous government contract bidders/government officials, but they will be just the “necessary evils” that incur as part of the process.

So everything can be made whole? How can any free money/job be created without any consequences? Well, the answer would be that US dollar will continue its descent, and dilute any US dollar holders. I expect that Federal Reserve will continue to support profligate spending in Washington by monetization. By buying up long term treasury bonds, and keeping long term interest rate low, Federal Reserve can keep a higher P/E ratio for stock market, and laying support for crumbling housing market. The only thing that will get destroyed in this gradual process is the value of US dollar. Let’s say the supply of US dollar doubles overnight. Congress can use the new additional trillions of US dollars to boost up the economy, at the expense of diluting the US dollar value by 50%. The obvious losers will be the US dollar and bond holders (China & Japan of course). The lost wealth will then be transferred via government spending to various beneficiaries. The tiny nest egg built by middle class people will be made smaller due to inflation, while the rich and the powerful simply gets even richer in the wealth redistribution process.

Since US government will not dilute US dollar by 50% overnight, it is up to you and me to guard our precious capital against inflation (and tax if possible) before the process is complete.

I don’t know whether it’s alarming to you, but US debt ceiling is going to increase from 8.965 trillion to 9.815 trillion. As far as I can recall, since 2000, such increase in the debt ceiling has become more frequent, and the amount of increase is getting bigger too. Trillion of US dollars goes by really fast in the USA. For any financing shortfall that foreigners and foreign central banks don’t take up, they will end up as pure monetization in the US financial system, and manifest itself as direct inflation. And inflation is the “best policy” for government, since you get to steal another 30% to 50% back via “capital gain”, plus that you can cover yourself up by fudging statistics and the best liar teams at Federal Reserve and BLS, and cut the unofficial inflation rate in half easily. Great, huh? The only thing that US needs to make sure is that it can prolong the confidence game (in US dollar) for as long as possible so that the dilution can last without running into the end-game of hyper-inflation.

Incidentally Mark Hulbert is posting another bullish post “Ahead of the (yield) curve – Commentary: Post-Fed curve much steeper, a good sign for the economy”. I must say that everything of what he said about a smaller chance of recession based on the steepening of yield curve is correct on paper. However, I cannot agree that one can simply use only the yield curve to determine the odds of recession.

For one thing, because the long term bond markets are not collapsing or dropping dramatically after Fed raising interest rate, while the short term interest rates are falling, it appears to be a good sign that Fed still having everything under control for now, except on US dollar index cutting through multi-years support at 80. But based on Bob Hoye’s historical analysis (pg.2 at this link), such post-bubble yield curve steepening is more ominous rather than a bullish sign. Bob’s recent forecast has been quite accurate, and I would trust his words as a market historian rather than Mark Hulbert’s who has been putting out 8 to 9 bullish articles out of 10 this year. Such yield curve steepning according to Bob Hoye is simply part of the post-bubble credit contraction process. Certainly, if long term bond yields start to go up much more, they will simply deepen the housing recession. Now, I don’t care about how accurate the predicative power of yield curve. It is simply a black-and-white matter that housing markets will get worse if the bond yields go up. With the housing bubble unfolding, my only attention would be the absolute level of the long term bond yields, rather than whether the curve is inverted or not.

By the way, if I didn’t make it clear in my yesterday’s post on “is it 1998 or 1970?”, I will now. I believe that more of the emerging markets will be in the 1998-style progression, while more of the senior markets will be in the 1970-style. I think US stock market will be going thru an extended period of sideway with possibly a bullish slant, with $US falling gradually. The best thing for US dollar holders should be trading in this sideway market to make up the $US fall in purchasing power. But you do need to wait for a round of cleansing before jumping into it.

Best luck, and have patience.

I watched quite a bit of CNBC last week. Among other things, I caught the interview with Countrywide’s Angelo Mozilo who called for a recession in no uncertain terms. This of course, is the man who had steadfastly defended CFC’s business while cashing out some $250 million of options in the past year. Nonetheless, the CNBC anchors all went ga ga over this comment and actually put up several economists/strategists of the more pessimistic bend. Long time readers know that I have long held the same view; however, the very fact that the “R” word is mentioned on CNBC about once every 10 minutes may well mean that a short term bottom is in. Sure enough, Friday saw some nice upside action following a strong durable goods report.

While I remain suspicious American consumer’s continuing willingness/ability to pile on debt, I give more credence to the other leg the bulls stand on: strong global growth. Nowhere is this more evident than in China. The Shanghai stock market made consecutive new highs last week to end at 5108. Again recall that not too long ago the ubiquitous worry was for an implosion in the China to bring down global markets. The fact is, since the July 19th peak in US and the rest of world markets, SSEC has gained over 25%. On Friday, FXI, the FTSE/Xinhua 25 ETF, also made a new high, finally confirming the move in Shanghai.

Let me clarify my view on the Chinese market. Many have compared it to the Nasdaq bubble based on price trajectory alone. I will not debate that point. I will even grant that the Chinese market is in a bubble. But in my opinion, that misses the point entirely. Bubbles are grand money making opportunities, during both the expansion and implosion phases if you know which side of the market you’re on! So let’s put emotions aside and look at some relevant recent developments.

First of all, let’s look at some negative factors.

• Chinese exporters enjoy a rebate of value added tax. On June 20, China announced that it will reduce tax rebates on exports of high energy-consuming, resource-intensive and environmentally-harmful products. The measure will take effect around September/October. Given that Chinese exports amounts to 30-40% of its GDP, lowering the rebate is a far more effective way to slow down its red-hot economy than raising interest rates.
• Of course, they can do both at the same time! Chinese CPI was a blistering 5.6% for the month of July. The index was paced by food, especially pork , prices. In response, the PBoC (People’s Bank of China) raised deposit rates by 0.27% to 3.6%, and lending rates by 0.18% to 7.02%. It was the fourth raise this year.
• I’ve always held the non-convertibility of the Yuan as a positive since the individual investor has few choices besides the domestic stocks. For example, some key state owned enterprises have listing in both Hong Kong (H shares, aka red chips) and Shanghai (A shares). But the A shares are far more expensive than H shares because there is too much money chasing the same shares. Two weeks ago I would have said that the day that the Yuan becomes fully convertible would be the top in the Chinese stock market as individual investors diversify out of the country en masse. In a surprise move last week, China declared it would allow individual investors investing abroad, starting with Hong Kong. The news sent the Hong Kong’s Hang Seng index up 10% last week with broader Asian markets following suite. Of course, some capital will be diverted away from the A shares market; on the other hand, this is gradual approach eliminates future shocks. It cools down the domestic market and relieves some exchange rate pressure at the same time – a stroke of genius really.
• The Bank of China (BOC, not to be confused with PBoC, the central bank) and its Hong Kong arm disclosed that they hold $11.25 bn of CDO’s based on US subprime mortgages. The Industrial and Commercial Bank is on the hook for $1.23 bn.
• Recalls of Chinese products, from tooth paste to sea food to toys with lead paints, are grabbing headlines everywhere.

The intriguing thing is that all these happened prior to last week where the Shanghai market had five consecutive up days. You can chalk it up to irrationality but the price action is to be respected nonetheless. In a way, it shows the power of liquidity since Chinese citizens are still pouring money stocks. Let’s now look a few positive factors.

• One of the signs of excess that bears love to point to was the number of new stock trading accounts opened daily. It was somewhere around 100k before the last correction in May. Well, with the market at new highs, that number has increased to 150k or so – TDAmeritrade/eTrade, take that! Anyway, I never understood that logic behind that particular argument in the first place. Common sense says that the flow of money should peak well after the peak of number of accounts open. Besides, while 100k or 150k per day is a huge number, the number of potential investors in China is, well, huger!
• If you’re wondering where all the juice in the Chinese market is from, just look at how fast Chinese wages are growing:
  

  Combined annual wages reached 2.34 trillion yuan ($308 billion) at the end of last year, up from 1.32 trillion ($173 billion) in 2002, representing an average annual rate of increase of 13.5% after inflation, according to a report from state-owned Chinanews.com.cn on official figures released at a meeting put on recently by the China Association for Labor Studies.

  Note this double digit increase is after inflation has been taken factored in. In coastal cities, annual wage increase in the high teens for the college-educated, 25-35 crowd is common. This increased wealth fuels the equity market both by fattening companies’ bottom line from increased consumption, and by channeling disposable income into the stock market.

• Finally, while the health of the export sector may give investors doubts, recent advances in SSEC have been lead by RE developers/construction companies.

Despite new highs in SSEC as well as a clear non-correlation between Shanghai and the rest of global markets investor continue to shun Chinese stocks as indicated by the growing discount in the MS A shares closed-end fund (CAF) that now stands at 20%. For whatever it’s worth, my own view is that aside from the threat of a weak Christmas shopping season in the US, the prospects remain rosy until the Olympics next August.

Disclosure: I own FXI and CAF.

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.

I have been contemplating how I can hedge my portfolio with less risk. I decided to take a look at how Hussman mutual fund managers do it. Using from their semi-annual report, I found out that they had the following outstanding option positions:
Effectivley Long: Call on 10000 S&P 500 index option, expiring 2/17/07 at $1420 strike price.

Effectively Short:
1. Put on 8000 Russell 2000 index option, expiring 03/17/07 at $780.
2. Put on 10000 S&P 500 index option, expiring 03/17/07 at $1330.
3. Put on 6000 S&P 500 index option, expiring 03/17/07 at $1400.
4. Sold Call on 8000 Russel 2000 index option, expiring 03/17/07 at $700.
5. Sold Call on 6000 S&P 500 index option, expiring 03/17/07 at $1250.
6. Sold Call on 10000 S&P 500 index option, expiring 03/17/07 at $1330.

Whether Hussman had gains or losses from these trades, it really depends on how well he timed the market. First, I’m just going to study the hedging strategy these options provide to his portfolio.

His long position basically cancel out short position #2, without regard to the difference in the calendar dates. The rest of positions, only Put can provide full downside protection. Selling calls only allow your downside protection to the strike price. The thing to note here is that at the time when this report is out (12/31/06 I supposed), the price for S&P 500 was at 1418.30, and Russell 2000 was at 787.66. If you take a look at the calls that were sold, all of them were deep in the money. When deep-in-the-money calls are sold, it basically amounts to short-selling with less time premium (but more downside protection to the strike price). The puts that were purchased were mostly at-the-money. With this combination of calls & puts, Hussman is able to provide a downside protection from both of his calls & puts, assuming that S&P 500 stays above 1250/1330, and Russell 2000 stays above 700. The total hedging power assuming that S&P 500 stays above 1330 would be roughly (6000 + 6000 + 10000) * $100 per contract * S&P 500 value + (8000 + 8000) * $100 per contract * Russell 2000 value = 4.38 billion. (S&P 500 and Russell 2000 values are from 12/31/06). Or 2.96 billion if S&P 500 falls below 1330, but stays above 1250. Since the total NAV is 2.84 billion, and total common stock value is $2.89 billion, Hussman had his portfolio fully hedged.

Now if I look at the actual gain/loss from his positions, his effectively long position lost about $5.8 million, and his puts lost about $5.1 million, while his sold calls lost about $8.8 million. If he has not closed out his hedging positions since 12/31/06, his hedging positions would be losing more money by now since overall the market has moved higher. Obviously, his long stock positions are moving higher too to counter the losses from the hedges. But with a total loss of about $19.7 million, he is able to pretty much fully hedge a portfolio value of $2843 million or 2.843 billion. That’s a loss of about 0.7% (on 12/31/06).

Such hedging strategies definitely provide a very good protection when the market falls. However, because of the hedging, Hussman strategic growth fund has been underperforming the general market in the last 2 to 3 years. Such is the cost of being a market timer when the market does not cooperate with your actions.

In the next post “The price of a free(?) hedge”, I will look at my own hedging strategies using stock options of calls & puts in a similar fashion that Hussman has done. It’s certainly much easier to study what others do than putting everything in action. One can be so grandiose about the term hedging, but after all, what it really means is selling out in a certain way. Whether this “certain way” is smart or not, the performance will speak for itself.

P.S. By the way, the pricing/cost between options on futures market and options on stock market is similar (or else someone can arbitrate between the two). The only difference in cost may be simply the brokerage commissions.

When I had a forex trading account, there is one thing that I’ve learned about yen. Japanese companies close their accounting book at the end of March for the fiscal year, and it causes profits to be repatriated back home, creating temporary demand & strengthening for Yen.

I think the headline news about yen carry trade blowing up the stock market is most likely a big smoke screen. Why? Such yen strengthening has happened several times in March of the past years. You can read more about March repatriation in this link.

There are probably just two kinds of people in the forex. One is short term traders who trade in & out where 0.1% change in exchange rate can be 100% of their profits/loss. The other kind is hedger. These people don’t really trade, but properly hedge their currency positions through currency exchange swap/futures. They don’t care that much about rise and fall because they are mostly properly hedged in the given long timeframe. For these yen carry trades to work, they must be hedgers. They cannot possibly borrow lots of money for a long term, and rely on the currency market to stay the same.

Why is that when Yen strengthened some 30+% from year 2002 to year 2005, and no one said anything about yen carry trades? Such yen carry trades have been going on for a long time even before I opened my forex account back in year 2001. And a 30% change in currency exchange rate would have generated 15X loss for someone in currency forex, leveraging 50X (which is probably on the conservative side for forex traders. www.mgforex.com where I opened my account allows retail investors to leverage 400X. Institutional trades can probably go higher.). Here is the Yahoo chart of Yen vs $US for the past 5 years:

I think either there is something else bigger that is lurking behind, or the news media simply grabs whatever exotic but explainable things to confuse the regular folks further. Most likely $US will strengthen against Yen after April 1st if the history is of any guide. Does that mean that the stock market & news media will be “manipulated” upwards once $US starts to strengthen after April 1st?

Let us wait and see.

My quest for more dividend paying stocks led me to another category that my partner Frugal wrote about a while ago: oil tanker shipping companies. The short list he gave was: Nordic American (NAT), Frontline (FRO), General Maritime (GMR), and Knightsbridge (VLCCF).

Of the group, I like the current chart of NAT (yielding 15.9%) the most: It bounced off its 200 dma recently within the confines of a well formed triangle.

Cramer vs. the futures market
On the other hand, Jim Cramer has this to say about Frontline and the rest of the tanker companies (subscription required for the whole article)

Frontline and the rest of the big tanker stocks have yields that are can’t miss, right? I don’t think so. Bloomberg has a great story this morning about how the excessive building in tankers could lead to repossession of the giant ships when the new fleets, the biggest additions in 50 years, hit the market. Big yields are always seductive. I got caught up in one two years ago, Fording Coal, 12%; can’t miss. But there’s always a price to be paid for these things, and an outsized yield is often more of a red flag than a opportunity. I can’t tell you how many times people asked me about these stocks on “Mad Money” when oil was going up. They figured rates had to go up. But these tanker stocks are levered to tanker building’s supply and demand, not oil prices. Now oil prices are plunging and tanker rates are…

Depending on your opinion of Cramer, this could be construed as a positive for this sector I couldn’t find the Bloomberg article he was referring to; however, my cursory glance at the Imarex tanker futures which go out to calendar year 09 did not reveal anything alarming. So I’ll leave you to decide who to believe.

According to its latest letter to shareholders, NAT currently operates 12 double-hull, suezmax tankers with a low break-even of $9,500 per ship per day. The single-hull tankers are facing mandatory phasing out by 2010 (remember Exxon Valdez?). Perhaps the “excessive building in tankers” is related? Anyhow, the chart by itself was convincing enough for me. Crucially, with a clearly defined trend line, it’s easy to figure out where my stop loss should be.

As always, please do your own research before making any financial decisions.

Go and check out this link on the truck business slowdown. The not-so-great Xmas retail seaon plus this news is the precursor of something worse to come I believe. One trillion plus of mortgage resetting in 2007 will definitely have an effect on the US economy. Unfortunately for all the renters and bubble sitters, last time I check, you can still refinance an option ARM into another option ARM and still starting at 1% teaser rate. Each time, you get some 5 years of breathing room, unless you cannot handle the 7.5% annual increase in the payment (which would be a lot if you’re already close to the max).

Tim Wood at financialsense has a very detailed article explaining how Dow Theory can be used to predict the stock market. Here is only a short paragraph from his full article:

Here’s how this works and why. The thinking is that in the economy, goods produced must be shipped. To gauge an accurate read on the economy, production should move hand in hand with shipping. If industrial production is rising, then it stands to reason shipping should be on the rise as well. If industrial production is rising, but shipping is slowing, then it signals something is wrong with the normal flow of the markets. Perhaps excess product has been manufactured, but sales (as measured by shipping) are lagging. If goods are being shipped at a rising clip, but production is falling off, it signals something is wrong with the economy, that perhaps shipping is soon going to follow production lower since there won’t be as much product to ship. If the decision-makers who produce goods based upon orders, or expected orders, are Bearish, it will be reflected in a declining Dow Industrials index. So, for a healthy economy, both the Industrials and the Transports should rise in sync.

I checked into the Yahoo charts. And you can probably guess how the story goes. Dow Transport is NOT confirming the rise in Dow Jones. Something really fishy. This chart is simply confirming what the news in truck business slowdown telling us. WATCH OUT!

(Click on the figure to go to Yahoo’s original chart.)

This is just a short post based on my hunch. Don’t have much time to elaborate. To put it short, I believe that after Jan 1st 2007 holiday, the very first week of the stock market will be DOWN.

If you want to listen to me, you could do so. You can sell TODAY or TOMORROW, and buy back later (at least after 1 week I believe).

Why? I think people will want to lock in their gains for the past 4 to 6 months. Plus that Xmas retails seem to be bad.

And then, after the selling, it will go back up and push for record high again. These talking heads on Wallstreet will keep saying Bernanke will be lowering interest rates very soon (which I don’t believe that he will do after probably mid-March or even till May).

I think I will lighten just a little of my own portfolio, since I’m still under-investing in the general stock market.

Here is what James (who also posts regular here) is saying:

** We are finally getting some clues from commercials in regards to the stock-market: there was significant commercial selling in the Dow Jones and the Nasdaq-100. The stock-market looks like it has made/making a top. Notice also that commercials are buyers of the VIX, this again is forecasting that a healthy dose of volatility / fear is coming to the market indicative of price declines. Will the decline come in the last week of 2006? I would assume not, as the trading is light ahead of the holidays, but I am far from certain. In any case, if it doesn’t come in 2006, watch out in 2007.

Right now the only index that looks anything close to being bullish is the Russell 2000 with commercials currently at a total of 6,793 contracts NET long; as long as we remain above 5,000 I am less bearish than what I would otherwise be. But that could change by the end of this week for all I know, so keep checking the data, because when/if the markets do breakdown they will not wait around.

** Crude oil is not doing much, but remains setup for a rally. Commercials are buyers of gold during the most recent pull-back, I do not see a setup yet, but it is getting close.

** The US dollar broke down while being setup for a rally, this was unusual and presented a buying opportunity. The setup continues to point to higher prices for this market.

I disagree with him that market will top here. I still do not believe that market will top here. I think there is even a slight chance for S&P 500 to come close or exceed its all time high before falling BIG time. That’s simply about 5% up and then S&P 500 will hit 1500. And the entire wallstreet will probably go partying in the first quarter, which would be the time to sell.

I do worry a little about James’ comments on $US rallying. I’m holding tight to my precious metal positions, but I’m still neutral. If a potential war with Israel and Iran breaks out, precious metals should be UP. Other than that, I am still in a holding pattern.

Right now, I believe the following three scenarios could unfold for precious metals & oil & general stock markets (in all scenarios, I believe that stock market will be going up overall in Jan/Feb, and maybe even March. I’ve explained my reasons already.):

1. 30% chance: War between Israel and Iran breaks out in the first or second quarter. Precious metals and oil go up. Stock market goes down first, comes back and rally but fail (lower high), and goes down towards at least October 2007. Precious metals will begin its second phase of rising which according to elliot wave will be the longer wave. In this scenario, precious metals may be falling before the war.
2. 40% chance: No wars. Stock market corrects one to three times with small magnitude. S&P 500 exceeds all time high, while maybe NASDAQ reaches above 2500. Then stock market corrects by 15% or more. In the meantime (starting from Jan), oil stocks rise with smaller magnitude. Precious metals rally are either contained/failed. Then all sectors fall along with general market. Precious metals then make another significant bottom possibly after next June/July. The PM rise after that will be however very solid. It should be that “the train is leaving the station”.
3. 30% chance: anything that I cannot come up with.

I’m guessing that there is a 80% chance of me making myself a big fool, when I look back on this outlook, . The above scenarios are based upon my believes of

1. The correction in precious metal sector is probably NOT long enough. I would feel more comfortable if the correction last at least some 12 months, which would be after May 2007. If it’s 10 months, maybe it’s okay. 10 months will put the next bottom at the end of Feb 2007. The current correction seems to have bottomed in 5 months from May to Oct. I think that’s a little short after a semi-parabolic move in gold/HUI from Jan 1st to May. (I hate parabolic moves. It means it’s game over after the fall. However, I do not certify the May move in gold as fully parabolic.) Maybe all the weak hands have dropped out by now. I do hope that I’m wrong on this. According to Mark Hulbert’s sentiment study, contrarians are pointing to precious metals outperforming stock market somewhat next year. By the way, seasonally before Chinese New Year on Feb 18 2007 should be strong for physical gold markets.
2. I believe that oil sector will FALL along with general stock markets. The fall will be associated with the economy slowdown. The fall may be limited in magnitude. Crude oil would not surpass $80 anytime soon, unless there is a prolonged war between Israel and Iran. Oil stocks however will gradually outperform crude oil due to $45 oil price expectation adjustment. 2008 and beyond should be very good years for oil sectors if oil can consolidate solidly in the first half of 2007.
3. I don’t believe the top of the stock market is in. But I don’t believe stock market can keep its happy face for too long either. I think some people is going to cry uncle next year. And uncle Sam will respond too (if not responding already). Again, I can be wrong.
4. I think it will be necessary for Bernanke to cut interest rates next year. So somehow somebody needs to hammer Wallstreet talking heads and tell them that there is an economy slowdown. Probably Fed’s strategy was to get the stock markets up first so that there is enough room for falling. Bernanke will use that chance to lower interest rate to save the housing market. But long term bond market MUST co-operate. If bond market is not scared by slowdown/deflation talk, then Bernanke will be unable to lower interest rate. Is this the reasons that Bernanke et al went to China recently? It is very possible that bond market does not cooperate, which probably would mean that $US is falling, or gold is rising, or oil is rising, or maybe neither. I do believe that there is just not much more rooms for 10 year and 30 year bond yields to fall further, even if they fall.

Alright, this is really getting too long.