Interesting Possible Trade in Gold and GDX

Gold appears to be forming a higher low on the intermediate-term timeframe. The longer term timeframe is clearly still down with a lower high established on the 3 year chart near $1300 this past January. For traders comfortable with a shorter-term timeframe however, the higher low put in this past week gives an interesting entry point for a possible run back to the 1250 area to start. The miners, as represented by GDX, appear to be confirming and sending a slightly more positive signal with a sharply rising 50 day moving average.

So, risk on a trade at this point for either gold or GDX (some miners like NEM look much more positive) is clearly defined around $1190 for gold with an initial upside possibility of $1250 and reasonable potential for a retest of the downward sloping longer-term trendline between $1250 and $1300. Even a retest of resistance at $1300 would be a major victory for the gold price since I see only lower highs on the long-term chart since October of 2012.

Weekend Update 9/23

Ok, you heard it here first…sometime after the US election and likely early next year we will start to hear chatter about a Fed QE exit strategy…Do I think there will really be a QE exit? No. However I think that by then it will be clear that an open ended commitment has numerous unintended consequences and those consequences (mainly asset inflation) will need to be reined in, if only through open mouth operations.

 

Now that indefinite QE has been loose in the wild for 10 days or so, I have yet to hear even a theoretical argument (let alone actual evidence) of how this particular brand of QE will stoke actual sustainable economic growth…So, for those looking for a reflation trade it is worth noting that all the QE in Europe and the US is likely to do ( and even the “stimulus” in China ) is to potentially slow or stop the ongoing gradual  decline in economic activity, rather than inciting an actual reversal and creating “growth”. I put growth in quotes since any growth will only be the false growth that comes from more debt or money-printing…true growth net of debt is nowhere on the horizon outside of a few select industries such as portions of the energy industry, the smart-phone ecosystem and other niche areas.

It is worth remembering, as Acting-Man recently discussed, that markets are often lagging indicators and tend to ignore deterioration and dangers signals until there is no choice, at which point the sudden collapse mode is triggered. It feels like the slow but steady deterioration of economic indicators globally is setting the stage for a severe correction in US equity prices, but with several key differences from 2007. Markets are nowhere near as overextended now as they were then, and businesses have streamlined significantly, which makes any pullback much more likely to end up looking more like a correction than a collapse. The problem with corrections in a market and economy built on weak underlying fundamentals ( a reliance on printed money being one such weak fundamental) however is that such a correction is only “just a correction” in hindsight. The depth of any pullback will be unclear during the pullback, especially with so much money waiting to jump in on the short side looking for the next coming of a “big short”. However, I have seen no price action so far that suggests a near term severe pull-back is imminent in just about anything.  

And a final word on the “slow but steady deterioration of economic indicators”…the deterioration in the US so far seems to be within the range of a slow-down than can be addressed without drastic action (such as major new downsizing by busnesses), so it has not advanced to the point of being a macro-level self-reinforcing slow-down. However it seems that the odds of the slow-down progressing to the self-reinforcing trend-state are more likely than a sustainable pick-up in economic activity, but there is no reason to speculate pre-maturely…markets and data should reveal the next trend fairly soon.

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Eclectic Wealth is intended to educate and entertain, however the information contained, while believed to be accurate, is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind.

Weekend Update

The potential for counter-intuitive moves in both the market and economy is very high with the advent of QE forever. .. This is a situation where waiting to see how the trends adjust is especially prudent.  The desire to predict is a natural tendency but it is usually better to let the market tell us what it wants to do and this is especially true now.  I can see bullish and bearish scenarios for almost every asset class with one exception…I find it hard to see a significantly bearish scenario for Gold.

That said, I think the highest likelihood move here is a fairly sideways market in US equities  until 1) the next earnings season 2) a fundamental breakdown of can-kicking in Europe or 3) a major geopolitical event (likely negative) although a reduction in Iran-related tensions (an unexpected positive) would likely knock 20 dollars or so off of oil prices.

It is good to remember here that the base case for markets in the absence of fundamental news is a slow steady grind higher since the most active market players, be they man or machine will have a trend- following bias and the trend is up, so that is the other back-drop.

…However, the margin of safety here will now get dramatically lower without a dramatic improvement in fundamentals (i.e. earning streams) and it is hard to see where that could come from outside of the housing-related space in the US, and that is likely to be fairly narrow in impact…This will set up more CMG/PCLN-like implosions somewhere down the road, so start planning to capitalize now, especially since the one area currently in a non-stop risk-on uptrend is the momentum favorites such as those two..

Charts of the week…take a look at the long-term charts of ONN and OFF…When these first appeared, I dismissed them as yet another short-term trading vehicle with a lot of potential for counter-productive results…I was wrong.  The eerily perfect wave pattern (so  far) makes them an interesting vehicle for trend-following and it will be interesting to see if the wave pattern continues once the risk-on trend reverses.

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Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.

A Reminder From the Recent Gold and Silver Action

The week just passed provided a vivid reminder of a concept every investor who includes technical patterns in their analysis should bear in mind: support and resistance levels only matter in an orderly market. I often hear commentary expressing surprise at the lack of expected buying or selling at key technical levels, however time-and-again we see that these levels really only matter when normal volumes are present, and reaction to major news is not in play. The kind of stop-running, self-reinforcing near panic short covering (similar to the opposite action in Silver several months ago) that we saw this week in Gold and Silver (likely exacerbated by major players caught off-side) is especially key for option sellers to bear in mind since these levels will provide decent signals most of the time, but by no means all of the time and in my experience tend don’t tend to reassert themselves with the prior strength they had in calmer markets.

The Housing "Crisis" Resolved: Top Ten Good Things About the Bursting of the Property Bubble

For those who continue to wonder why I and many others consider even the mainstream media to be intellectually sloppy at best and flat wrong quite frequently, consider the continued references to a supposed “housing crisis”. Today’s LA Time article “A federal cure for the housing crisis faces obstacles” reminded me of this, however one cannot open a paper or magazine without seeing something similar. What’s happening now is not a crisis, it is a resolution to a crisis. The easily available and obviously ominous mortgage statistics from 2003-2007 described and ever-increasing crisis for anyone with even a slight knowledge of historical boom/bust cycles in finance, however the media basically cheered this on with no critical thinking to be heard. The Housing bubble was only a good thing if one thinks rising property taxes, widespread misery, and wasteful misallocation of capital is a good thing, but let’s consider a few of the good things the bursting of the housing bubble in the in the United Kingdom, Spain, the United States and Australia has brought about:

Housing is becoming more affordable and will become much more so. Why aren’t headlines screaming “More great news for lower income people!”?
The morally reprehensible of duping of unsophisticated people into taking on debt they cannot reasonably be expected to repay has come to a halt
In the US at least, Amateur Housing Speculation infomercials have been replaced by that-old stand-by, the Abdominal Gizmo infomercial
The inability of the financial industry to resist the temptation of the boom-bust cycle has been demonstrated for anyone who will think of recklessly investing in the next Boom cycle
The complete inability (or lack of desire) of the popular media to report the completely predictable has been demonstrated yet again
Labor in previously undersupplied fields such as truck driving is now much more plentiful
Incessant talk of housing speculation has died down
Less farmland is being turned into subdivisions
Frugality is coming into fashion (see Cool to be Frugal )
Savings coming back into fashion might not be too far behind which would be a true ray of hope for the US economy, at least given the reduction in imports it would likely entail and the corresponding improvement in the balance of trade

Perhaps a future post will address why the same fallacy applies to the term “credit crisis” however this will have to do for now.

Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.

Is That a Real Economy or is that a Sears Economy?

With a tip of the hat to the late, great Frank Zappa, who famously skewered all manner and form of phoniness with comments like the title of this post, almost all economic discourse has become contaminated by a failure to distinguish between real, sustainable economic activity and the largely fleeting credit bubble driven activity we have seen over the past few years. This perversion of concepts like GDP, Recession, etc. has taken hold even among people who would normally know better, and is everywhere in the mainstream media. All the talk about “are we in a recession”, “when will growth return” blah blah blah glosses over the fundamental point that since at least 1997 or so a very significant part of the developed world economy has been a “false economy” supported largely by credit expansion. The problem with excessive credit creation (or money printing, a different but related phenomenon) is not just the debt-deflation hangover that is just now getting started, it is the complete distortion of investment decisions and asset/income stream valuation that results. The Mainstream media is even more clueless than usual on this topic since any talk of “return to growth” implies that there has been real growth in the past few years. Subtracting out the impact of cash-out refis (as Paul Kasriel) and others have done and the impact of overbuilding, and the impact of the artificially inflated lending administration, real-estate activity, and some of the earnings of all of the businesses and people whose receive money form all of the above activity (i.e. essentially everyone in the developed world and a good portion of everyone else) …subtracting all that out suggests there was little if any real growth in western , “developed world” economies.


For a clear analogy, think of the following, visual…You buy a Lake-Front house and move in, enjoying the beauty of the lake. You paid a significant premium but you justify it because you believe you can always sell the house at an equivalent or greater premium and the beauty of the scene is worth the premium. Then one day you come home and the lake is gone and there is nothing but a muddy field. You walk into the field and notice that in the distance on someone else’s property there is a small stream, but there is no other water in sight. A bit of investigation uncovers that in fact the lake was made by a dam made by beavers well downstream, and when the farmer downstream chased out the beavers and their handiwork, the lake was drained unlikely to ever return. What you fully believed was a permanent condition on which you made major commitments, is reveled to have been purely temporary and unlikely to be repeated in the same way anytime soon.

This may sound oversimplified, but you should care. A lot. Especially every time you see what looks like an investment bargain.

The detrimental affect of the false lake of an economy that was created by unsustainable credit duped millions of well-meaning meaning people in all corners of the globe into making fundamentally poor decisions ranging from the annoying to the disastrous. (And this ignores related nonsense like the likely exaggeration of GDP growth through the potential understatement of inflation.) However, unlike our simplistic visual above, the real lake of credit will take years to fully drain and the level of the original stream (economy) is fundamentally unknowable (take my word for it...more on the science of why this is so in a future post.) Most importantly for wealth management and investing, investment decisions you are making right now need to be evaluated in the context of what degree they are supported by a truly real and sustainable economy.

A future post will look at how to do this on the spectrum of available investments.

What will real growth in the developed world economy require? Some ideas in no particular order:

- An increase in the savings rate (be careful with the Retail Sector)
- Opening up of new markets (normalization of relations with Cuba may become an economic necessity in the US, not an option)
- Far fewer imports and far greater exports, especially in the US
- Investment in productive resources, not speculation
- Stable currencies
- Immigration of talented individuals
- A halt to creeping socialism and protectionism


For a more formal discussion of the concept of a real vs. false economy, a review of Austrian Economics is a good place and a good place to start for that is at www.mises.org which Eclectic Wealth highly recommends.


Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.

A Lower-Risk Way To Profit from the Credit Unwind

For reasons I will make clear in later posts, I rarely make short side bets, and disciplined investing requires that one not chase after good ideas that have become overpriced and are late in their cycle. That said, for those of us that believe the ramifications of the Credit Unwind /Reset have a long way to run and that the recent enthusiasm for Financial stocks is premature (especially after last week’s rally), I suggest the following as a reasonably way to play this. I should also point out that one of several reasons for recent self-loathing on my part has been due to having substantially missed the opportunities presented by the early stages of the unwind, so this presents a nice consolation prize and one of those rare opportunities to go back in time and reap the reward of knowing what will happen.

The approach??? Write out of the money puts against SKF.

To explain, SKF is the ultra-short Financial ETF and (as to be explained in future posts) one of, if not the only, truly beneficial feature of an ETF for informed investors is the ability to trade options related to it. In the case of SKF, what this provides is the ability to sell an option to purchase a bet against the major financial stocks only at a price considerably more advantageous than is available today and to earn a significant premium in the meantime. (This strategy assumes a good knowledge of the basics of Put Writing.) and I raise it since the bearish premium on SKF has consistently implied that numerous people are betting that the financials will rally dramatically. If you believe, as I do and has been well documented elsewhere (for example globaleconomicanalysis.blogspot.com ) that the ongoing financial unwind is nowhere near a “bottom” then selling well-out-of-the money puts on SKF gives a reasonably safe and advantageous way to pick up a nice payment whenever the pre-mature rallies in the financials happen.