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Yearly Trend Report

2012 Trend Report

Rather than title this the January Trend Report, I want to look a bit more ahead and provide a more detailed report. So I will just call this the 2012 Trend Report.

Briefly the Jan trend report has the following stats right now

(daily OB)
weekly OB
(weekly divergence in slow stoch (kinda) @115)
monthly downtrend
monthly bearish divergence

Very bearish.

Even if you are a day trader, you still want to heed the market’s longer term warnings so you are more prepared to adapt quickly as conditions change, and recognize the vulnerability of the market. You also may wish to use a small amount of long term holdings to reduce your portfolio’s correlation to the short term moves and reduce volatility of your portfolio. Currently we are near the worst of both world’s the uptrend on the weekly chart is overbought. The monthly downtrend is still intact. Technically, we are vulnerable. But look around you if you doubt the vulnerability of the market. The RSI on a weekly is not overbought, as this is much more rare.

Stocks aside, this month’s trend report will put in focus US 10 year treasury yields. In spite of the downtrend that may continue to bring prices lower into 2012, I think that treasuries are not safe as I wrote about in the posts: “Accept And Respect The Unknown” and “Risk is largely unknown” (currently saved as drafts and not posted yet).

Bubbles typically result in a decline that brings you back to the prebubble level taking you near the previous lows or exceeding them.


Typically post bubble decline’s result in a 50% to 90% decline. In the case of tech bubble there were many tech stocks that were losses of 99% from the top, however the nasdaq top of around 5000 and low of around 1000 was “only” an 80% decline. The duration of time depends on the asset. Oil in 2008 went from high of $140+ to low of $30 or something but it was over 75% and near an 80% decline.

I could go on with other bubble examples, but that’s another post.

Unfortunately Treasuries and Gold have a much longer time frame then say oil. When US treasuries stop selling at auction, gold will probably go up.


10 Year Treasury Rate Chart

Betting against an oil bubble was much more profitable, because time is on your side. Provided you can get in relatively close to the top, which can be very difficult… You can make monster gains, especially if you use options. As an example… Some 50 cent far out of the money options in USO were worth $20 by the end of the Oil Bubble. The oil bubble dropped in a period of 6-8 months from above 140 to below 40, losing over 70% of it’s value in a short period of time. From there, oil then increased in value about 150% from the low to where it is now around $100/barrel. Commodity bubbles in my research seem to be more common, as there are perhaps more volatile swings due to the leverage tied to it. If I wanted exposure to gold, at this point, I would look to miners, and not the metal itself. Due to short term disapointments in expectations of earnings suppressing the prices, miners are very cheap if you just want the exposure to the gold at a discount. Long miners, short gold is a decent hedge to take advantage of the disparity.

There are three plays when you spot a “bubble”.

1)The higher risk method using the “greater fool theory” and watching volume and the parabolic move to try to bank a lot of money in a short period of time.

2) Betting against higher prices, and gradually over time dollar cost averaging into a bearish position such as long term OTM puts

3)Waiting for a decline of at least 50% and then if you think value presents itself, consider the contrarian play of taking a small position size and gradually increasing your exposure as prices decline. (You may also consider only playing deflated bubbles if they hit extremes such as 70% or 80% losses or more). This doesn’t mean to automatically just look at price and not consider whether or not there is a fundamental reason to owning that asset class, but to use those as initial criteria for considering contrarian plays.

Right now the opportunity seems to be available in the contrarian play for betting on treasury yields going higher (which in this case is betting against treasuries), or betting on Dow/gold, or perhaps even betting on natural gas. Natural gas is a play where you will be early on. Inventory is high, access to new natural gas seems pretty abundant. However, it is only out of these conditions that it’s usage will become more comercial, and potentially used in other things or as a solution or alternate source of energy that becomes more common, which eventually will work off the inventory but by the time you realize it, prices could be significantly higher.


Nevertheless, eventually the inventory will be worked off, and if you wait for the growth prospects in this area, the bottom will have already came and gone. Contrarian plays are very tricky. You want to buy enough to take advantage of the low prices, but little enough to have cash to accumulate the position gradually, and not very much to respect the amount of time it may take until the position turns profitable, and also you want to be able to add to the position and increase in how much you add so you can roughly aim for adding the most as close to the bottom as you can. You should be looking to deploy half the capital you use towards this position on the way down, and half on the way up, with as much as possible as close to possible on the bottom. Easier said than done. But always start smaller knowing full well there will probably be lower prices, and that you are probably early. Additionally, contrarian plays should only make up a small amount of your portfolio, unless they are somehow no-brainers that everyone else overlooked except you (not likely, and not often). You may be down for a few years before things turn around though, it is not fun being a contrarian most of the time. Which is why this should only be a very small peice of your portfolio. Much like the theme has been in the past, doing so will reduce your correlation. You will be owning this on a much different time frame than most, be adding in a different way, and be selling on a different wavelength as well.

Right now treasury yields have certainly met both criteria that you often see. A drastic parabolic looking run up in the 80s, and a decline of 50% to 90% (currently above 85%). So from that perspective, the bottom in YIELDS is close if it has not already occurred. If we flip this upside down, we can see that starting from the low demand (or high in yield) of the early 80s treasury demand went parabolic upwards (as yields fell). If that’s the case we have entered bubble territory in treasury demand. By that measurement, it still could have a ways to go as bubbles tend to run a little longer than many expect and the end of it is when the demand skyrockets and you see yearly gains in days or weeks.

edit:15.32 is actually the top on a monthly close basis, I was using a yearly basis. That puts us at a 87% decline. If yields were to decline a full 90% from that top, the yield would be 1.53% at the bottom.

Good luck with timing such a long term move. However, certainly betting on yields going up now seems to make sense if you have a long enough time frame. It would not be unusual to lose 20% or so before the yields bottom, so you have to be able to endure a big loss, and also hold off for a big enough gain in order for it to be worth the loss. Even if yields cut in half again and again, the upside is much greater than yields simply going up to 3.88 (double to offset risk of a near “100% loss”), and I certainly think there is a better than 50% chance of it going up to 3.88 before it goes to zero. So needless to say, I do not feel comfortable referring to US treasuries as “risk off” trade for very long. For this reason, In the “trend trader” I have put emphasis on the dollar, rather than stocks.

Treasuries often function very differently, but the concepts of a closed group of people with a relatively fixed amount of money plus an increase (or a rare decrease) of a few percentage points each year… and among this, people having to determine where to put their capital, it is more similar than many might think. In any asset class there is a certain point that gets reached where demand can’t continue to feed the shift in capital at the same rate. This is when prices generally decline, and capital eventually as a result will shift away. There is a point when the buyers overwhelm the sellers, but eventually the few sellers within a group will not become buyers until prices are much lower. Eventually the buyers simply run out of capital to continue to fund the growth of a particular area. It doesn’t matter what the earnings are or growth rate is. Although certainly those with higher growth rates may have a larger threshold for how much capital increases they can take, and prices can go much higher in those areas, there are also the sudden drop offs when estimates get higher and higher and actual growth must slow. In high growth areas, the decline is going to be much greater. However, in points of extreme, these assets can represent very high return and low risk, where when they are overbought the chances of the rally being fueled higher and higher declines more and more until the return is low and the risk is high.

Contrarianism is about avoiding the blow off tops and even betting against them, and identifying the sell off panics and forced liquidations. It’s about betting against the heard when the heard is very one sided.This comes with the asterisk that you also must avoid situations when the heard is very mixed, which is most of the time in most markets. yet another reason why contrarianism should almost never be your entire strategy.

A lot of people (particularly in the Austrian Economics field) try to say hyperinflation only has a single cause and that’s too much currency. That is far too simple. Supply shortages can contribute just as much as cash excesses. Deflation of debt can potentially put a damper on what otherwise would be inflation. Gold is not at $2000 right now because of the old debt payments coming due and the deleveraging of likely tens of trillions since 2007. ┬áBombed out local supplies or trade embargos can result in too few supply. Individual areas can show hyperinflation if there is shortages, but sometimes there can be shortages of just about everything important. Droughts and shortages of food can occur. On the monetary supply, too FEW dollars can also result in hyperinflation in rare scenarios if confidence is lost. If for example, you try to use Beanie Babies as money in 1999, you could probably get away with it. You could pay for a haircut in Beanie babies and the barber might take money out of his own pocket because he would rather have the Beanie Babies. But when the confidence is lost in the “money” and counter-fitting is possible, and people stop trusting them, and people stop trading in resources for this “currency” it becomes worth less and less. If you use “Disney Dollars” one year when Disney is super popular, you might be able to exchange them to someone for real dollars, even if that amount is discounted significantly from what you paid. They may have value relative to something else. But what if Disney stops making them and people no longer have confidence they will be able to use “Disney dollars” even in Disney World? It’s very possible that you have very little value and won’t be able to find a buyer. The market becomes very inelastic, and can become worthless if you can’t find a buyer. The problem is, since very few people set the market place, if enough people decided they want Disney Dollars, it could become a collector’s item and be worth far too much. Certain antiques without much functionality become worth far too much from a select group of people that want it at any price. I do not think that would be a common response for a long period of time for most currency, but it is possible. Hyperinflation is NOT ever out of the question regardless of how much printing is or isn’t done. However, neither is deflation. The demand or lack thereof can still occur for a reason of confidence.

Just because currencies made of paper tend to go bust at some point does not mean it can’t take hundreds, or thousands of years before they lose their value. In a market place, if everyone can afford something at $1, people may not respect it’s scarcity. It is only when prices start to rise and people become afraid they won’t be able to afford it, that prices really start to climb. It can take a very long time and not be linear at all. Then prices increase and even though a lot of people may be able to afford it at $1, and maybe sellers may be willing to, if the only transactions taking place are between a few very rich people setting the price, prices can become very distorted. Well they may very well be willing to consume the remaining supply and people may do whatever they can to buy it. However, what happens when these few people and those buying on credit as a get rich quick scheme and everyone else in the world that is caught up in the mania suddenly stops buying or runs out of funds to do so? After the people who can no longer afford it bid up the price of an item, it is up to those remaining who can afford it. If they want to continue to buy it and push it until it is above their price range, and then those after them wish to do so, they can, but they have turned it into a ponzi scheme. So this is what the contrarianism is about recognizing when either buying pressures or selling pressures are unlikely to continue. More realistically, it is about what people choose to pay AND can afford. The dot coms had plenty of billionaires on the sideline, while the millionaires (some on paper), and middle class were going nuts bidding up these things based upon expectations that every single dot com name would make it and the Internet would be here forever, and that some of these companies could grow with such huge amounts overnight that it was worth buying everyone of these in hopes you could catch Microsoft or Yahoo, or Google or QCOM or CSCO or JDSU or whatever was hot back then. Even if that was true, more dot coms would join and not go public, some would beat out the public companies, many would not survive, and it could be 10 years before they went up to hopes. In that time, there’s no telling what could happen and in a blink of an eye it could all change as well. More importantly, you can’t have such a large percentage of the market bid up dot com stocks. I am not saying you could have recognized the top, but you certainly could have recognized that owning these was becoming increasingly dangerous as the novelty of owning them grew.

Understanding the “cycle” is about respecting things can change, and positioning yourself away from the risks. Adding lower and selling higher.

I think that treasuries may have a bit of upside left but there’s no telling when that will change. Even though I expect stocks to decline, I no longer feel that buying treasuries is a good trade to protect against the decline. I compare this to somewhere around December 2008, maybe November depending on how much upside in TLT is left. What happened then was treasury demand peaked well before stock prices bottomed. UUP or the long dollar index did well against the grain of TLT for a brief period of time of a few months until March 2009 when stocks bottomed.

There are TWO reasons I point this out
1)To point out that the treasury market will potentially act as a “tell”, when the stock market is NEAR the bottom. (rising bond yields occurs first, as the transfer out of bonds may occur before they put that money into stocks.)
2)To alert you to limit exposure to treasuries, particularly into a big rally the first half the 2012 and perhaps even eventually consider going SHORT for those who can handle enough pain for a long enough time to be a long term contrarian play.

Personally I see a lot of evidence that the capital is going to continue to flea Europe and that Europe is going broke and that the Euro can’t survive. That could mean a HUGE spike in treasury demand at some point in time this year. The last point in time just before market extremes are generally when the biggest moves occur. When everyone races to beat each other out of assets and into other ones, when the panic buttons are then pressed, and when people don’t know what else to do. So if this does happen as expected, it’s wise to be positioned to start shifting the other way into it and going against the grain. Perhaps that price move has already happened in treasuries, it’s hard to say, but although the trend is lower yields, the tendency is for trades like this not to last forever, and right now it is in “contrarian” territory where betting on treasury yields is becoming risky in spite of the mild inverse correlation that bonds have with stocks.
You could also make an argument that it makes more sense to be short treasuries before you are long stock because of the tendency for the “smart money” (bond holders) to use strength to exit bonds early in order to raise capital to deploy gradually into market declines. To me it is more a question of “timing”. I think that I would wait until you get the bearish signal when we come down from overbought levels signaling the momentum change. You can use a monthly, weekly or daily chart and spot overbought readings in treasuries. Some times you have to be willing to do the opposite. The “infinite loss” may seem possible as it did in 2008, but have faith that the market will eventually return and “buy when there is blood in the streets” if people seem to panic in 2012 and liquidity dries up.

Treasuries are in fact very vulnerable even though they may seem like the only safe place, especially when a crisis hits and it seems like the only place that is “safe”. Overbought markets tend to stay overbought for a lot longer than oversold markets, but nevertheless, you should be scared to put your money into treasuries for an extended period of time. It’s always toughest, especially for those who manage money and have people expecting you to produce high returns when the market is producing high returns (like in October) and to hold lots of cash when you can get a yield from treasuries, but sometimes you have to be able to endure, or else be very nimble and ready to go against the grain once the floodgates open and the “boiling point” is reached. Water does not boil in a linear fashion, nor do human emotions function linearly. things get worse and worse and the world holds together and people get worried but only when a major shock hits do they panic, and they may seem to have a good reason to do so at the time, but the profit opportunity starts around the same time panic does.

What’s unclear is if the ECB will be granted the ability to print unlimited amount of money like the Fed can, rather than forcing the rest of the world to. If they do, they will be able to prevent the yields from skyrocketing in Europe, and the contagion will probably not spread to the US. They also could make a “euro bond”. If a solution occurs capital could migrate back towards Europe and away from treasuries. That would be a game changer. However, even if things collapse, there will still be a panic spike high in treasuries, and whatever the resolution is will put money away from treasuries enough to cause rates to rise at least a little bit from here. Now even if there is no solution, and there is major deflation, it’s possible that people sell everything including treasuries, or that at some point the demand is high enough to sell treasuries and the demand is low enough that stocks become attractive.

However, even as the ECB could be allowed to have an elastic money supply, the ratings agencies don’t like the plan for the US to make spending cuts “automatically” and then suddenly these “automatic” cuts are repealed. Another cut by S&P isn’t too unlikely in that scenario.

The more I think about it, the less safe treasuries seem and the more treasuries as the “risk off trade” sounds like an oxymoron. So although it’s possible for capital to shift drastically into treasuries first even more than already done, and perhaps TLT could go parabolic, it should be used as an opportunity to further reduce treasury position, and/or potentially get short, or add to shorts in treasuries, or increase the inverse ETF position. At this moment with the market overbought, I am not personally ready to do so, and even have a small amount of TLT.

This really is starting to shape out to be a no brainer though. Even Buffett called the treasuries a bubble in Februrary 2009 when yields were 2.87 and the yield is now trading at less than 70 cents on the dollar or if you prefer putting it another way, yields were previously 50% higher (when Buffett called them a bubble) than they are now. Buffett has never been known for his timing and yields could still go lower first and as I have said, very likely will at least briefly, when the crisis really hits, but that doesn’t mean the risk is justified because the downside to betting on treasuries (or against yields going any higher), over an extended period of time is tremendous.

However, Buffett eventually will prove to be right, most likely. As far as timing goes, it just feels like we will see a sharp decline and a potential panic if things aren’t resolved in Europe, and I can’t see treasury demand not peaking very soon, perhaps this year (2012).

Correction: 1982 14.59 top is on a YEARLY closing basis. The MONTHLY closing basis high is 15.32.

One thing know is that when rates get high, the levels of inflation the government needs over time in order to inflate away the expense is high.

Additionally this is what the treasury chart looks like. I think we could easily have an early formation of the head and shoulders pattern, which perhaps takes TLT to 130 or so at the peak, maybe 140.

Although TLT is overbought on a monthly time frame, on a weekly it has just begun another uptrend, in spite of just coming off overbought and heading near it again. Nevertheless I think in spite of the potential for it to rally and go parabolic here, and in spite of the fact we are in an uptrend on a daily, weekly AND monthly chart, the risks are far too dangerous unless you are to trade it for maybe 6-7 months or less. It is probably too aggressive as a short as the timing has to be ideal to short unless you are hedging. I would probably wait until TLT gets overbought again on a weekly chart before I think about aggressively entering TBT or TMV (or getting short TLT, UBT or TMF), or until a downtrend is triggered in treasuries. Adding a tiny bit of exposure at some point as a contrarian bet may make some sense, perhaps on the next TLT bounce.

In general, the “risk off” is changing dramatically, as treasury bonds will not continue to be the “risk off” trade. The dollar does diverge from treasuries sometimes, as it did in December 2008. The real “risk” is more so prevalent in the risk of lost money over the next 10 years to inflation. Believe me, I know how ridiculous it seems to some how you could possibly talk about inflation now. But once the Continent of Europe goes all “Atlantis” on us, or actually fixes their problems rather than fiddling as Rome burns, and economic trade starts to take place and increase, there will be inflation. The business cycle will continue to push things higher for another handful of years after that and only then will things be at risk again at unraveling, just for long enough for people to claim the world is ending and for prices to be very cheap again.

There even does exist the possibility of default. That occurs by delaying the payment because of budgets not met. It also can occur because of the rare potential for the government to go all Madoff and try to follow Greece and force a haircut on the bond holders, or potentially to ask the fed to do so thus having the money created float without it being owed or owed plus interest in 10 years. How much spending does the government due just on interest payments to foreigners alone? This is going to force us into more debt to meet our obligations and the more we borrow, the worse it gets, but any “solution” will also seem equally dangerous. Eventually, however the whole system will have to be reformed.
There is the possibility of a currency alignment where the dollar is not the world’s reserve currency. I realize these risks may be small, but when you are only talking about a very small return, there doesn’t need to be a lot of risk there for it to be a problem in the reward/risk ratio department.

Eventually does that money make it back to cash? perhaps. However, I think the market will decline first provided there is no resolution. I think it will decline dramatically at that. AND THEN as treasuries are also declining and everyone is liquidating, suddenly there is a final “bottom” that is made. This decline I feel will be quick and prices will be lower, testing the 2009 bottom and perhaps making new lows. I don’t know where the range exactly is, but below 10,000 seems likely. I think things are most vulnerable around the summer 2012 just as they were in 2011.

As for stocks, earnings multiple compression looks to be in place.

Current 10year trailing PE is 21.17

The year 2000 high was a PE of 43.77
Let’s look at some previous declines
1899-01-01 22.93
1921-01-01 5.12
1929-01-01 27.08
1933-01-01 8.73
1966-01-01 24.06
1980-01-01 8.85

2000-01-01 43.77

Jan 1899 to Jan 1921 there was a 77.6% compression from peak to trough (on yearly closing basis)

1929 until 1933 we had a 67.76% compression

1966 until 1980 we had a 63.22% compression

From 2000 until 2009 we had a 65% compression.

You could also look at that in terms of a “% per year decline” average by dividing by the duration and 2000-2009 represents the 2nd greatest decline with a 7.2% decline per year vs 1929-1933 decline of 16.9% per year.

There are a lot of different ways to slice it, but assuming we are still in a phase of multiple compression may be a little bit on the aggressive side of things. If you are okay with that, fine. We also are on the upper sides of a fairly normal range, so there is some sense in being cautious. Deflation or stagflation is likely and that is probably not so good on stocks. Eventually yields will bottom and multiple expansion will take place over time. Of course in deflationary environment, earnings will contract, and in stagflation they probably will as well so if multiples do expand before the environment changes, it still won’t be all that great for stocks just yet.

The lines are a crude estimation of the range, with the middle area being the more common, and outside of that representing outliers. I didn’t do a statistical analysis of where the top 25% and bottom 25% or “upper quartile and lower quartile” range are. However I would suspect the more likely direction based upon this alone is lower and multiple compression and a retest of the lows. With history as a guide, any post bubble bottom results in a pretty steep increase of price/earnings multiple expansion. It’s entirely possible the bottom hit in 2009. It would certainly not represent anything we haven’t seen before throughout history.

Dow/gold is crashing. In the face of multiple compression. This is a sign of low growth, and monetary expansion.. Stagflation. I mentioned this briefly in the December 2012 report

The good news is it is relatively close to a strong very long term uptrending channel, however we certainly could crash below it first. Dow/gold collapsed from 1966-1980 and from 1929-1933. Treasury yields declined significantly as well during those time-frames. Debt consolidates, people are forced out into cash, and in 1929-1933 cash was gold. 1929-1933 dow/gold declined 89.13% peak to trough. In 1966 until the gold window was closed, it was a decline of around 88.89% before the dead cat bounce, and an overall decline of nearly 97% peak to trough by the time it bottomed. Dow gold was 43.7 in it’s peak around 2000 but went below 5. This is a decline of around 88.56%. So it would not be unusual to see a shift at some point back to dow outperforming gold.

2012 is a major turning point. The reason is a confluence of events, but partially because of the government problem. The treasury bonds peaked around 1982 on a yearly closing basis. Well the 30 years I would venture to guess were also lacking demand at that time, and I would guess that a lot of those are mature and payments come due this year. Much of the debt the US owes simply goes towards paying interest payments. Fortunately in some ways, capital is flowing out of Europe. This will give the false impression that US government bonds are still considered “safe”, rather than a temporary shift of capital away from risk. Additionally, the baby boomer situation is bad. It won’t be until 2016 that the earliest of the baby boomers will hit 70 and be legally required to make minimum withdrawls out of their 401ks, however, the transition to safer portfolios will probably hit before then, and there will be a big need for new money flowing into the market. Social security gets collected as early as the age of 62. When you include these liabilities that have been promised but not been funded, the government comes up short in a big way. The government has a debt of over 15 trillion, but unfunded liabilities of 116 trillion. The debt to GDP in the US without these unfunded liabilities is still over 100% and nations around the world are betting heavily that more money printed=more GDP and that we grow our way out. And we do what seems humane at the time in paying trillions in healthcare (even though specific healthcare companies will benefit more than others), not considering what happens when we can’t pay for it all.

Japan is a culture of tradition. When things get bad, they buckle down and work. They even have a saying “the nail that sticks out gets hammered”. They have started to work hard and working for less, lowering costs. To compete, governments around the world have done different things as well as businesses around the world.

1)Businesses have cut back on employees, benefits, borrowed more money, or all of the above

2)Governments have either cut back on ‘benefits’, borrowed more, or both.

3)Citizens have organized protests due to austerity, special interests and bank bailouts and “tea parties” and so on.

4)Production increased

The nation is a bit divided on how to handle the issue. Unfortunately, it is the consumers that power the demand of businesses, and the demand of businesses dependent upon other businesses, depend on those consumers to keep the businesses around. Production increasing means more goods and there is a shortage of capital due to budget shortfalls. The combination is deflationary. The ECB functions a lot different than the fed. They cannot expand their monetary supply indefinitely as it’s needed. So globally, any printing effort by one country lowers exports and causes pressures on another country to compete with lower prices. Germany, the “tea party of Europe” as The Fly has called it will cut back on spending anytime they feel they can’t keep up on a production basis to remain competitive, and any effort to inflate could potentially just boomerang back at us. There is a balancing act that goes on,. Right now the problem is with real estate which always is a drag on the economy more than any other recession because of the “wealth effect” or in this case the “inverted wealth effect”. If people have no equity in their home, they feel restricted and are forced to be cautious with their expenses. Any effort in stimulating will not take effect until the next part of the cycle, and will only contribute to the excesses of the next bubble. People will only spend when it is too late, and people tend to not realize the severity of the problem until it’s obvious to everyone.

I would expect gold to pause in 2012. Currently gold is in decline, but the question is whether it will hold up better than the market like in 2008. It perhaps will not.

That means it declined around 85% as well. So both treasury yield and dow/gold is close to approaching it’s limits for what you see in a “typical” post bubble decline. That means the easy money has been made, much to the chagrin of JakeGint’s and Hugh Hendry’s alike.

That doesn’t mean we couldn’t see a larger decline. If you decline 90% rather than 80% the difference between 80% and 90% from it’s peak is a 50% loss from 20% of the peak (80% decline) to 10% (90% decline) and a 100% gain from the low to 80% of the peak if you instead bought at a 90% discount from the peak.

However if you want to use contrarianism to identify VALUE, most likely the areas in which a bubble has deflated is a good place to look, or at least to prepare to do so. For the record, I do think Gold will still be a good hold over the very long run, however I would NOT be surprised if AFTER this downtrend, we see ourselves a tremendous opportunity in DOW. If you mastered the GOLD trade or the TLT trade up until this point, pat yourself on your back and scale back your position a bit. It’s not a “win” until you sell. Complacency can occur when you start telling yourself “I bought gold 50% lower than here, I can afford to lose by holding longer” If you missed out, I believe there will be an opportunity in gold after a pause in the action, but I am much more skeptical about treasuries. Please understand the DRASTIC difference in time frames I am talking here. In other words, if you can trade for a few weeks, or a month or two or handful of months and can get out by then, there certainly could be more upside for a few trades. However, do NOT ignore these signals and fail to make some kind of cautionary adjustment, or you will risk getting caught with the herd when it runs off the cliff.

“Caution” to some people may mean taking the win and taking a vacation. Caution to others may mean smaller position size trades, or increasing your cash position. Contrarians aren’t always the best TIMERS but believe me, when an opportunity to be a contrarian comes along in a rare, generation long signal, do not get caught up in the hype…

Believe me, I do NOT like the market right now… I do not like the risks that everyone seems to be at least somewhat aware of. It makes me sick, but nevertheless a SMALL position is okay and a LARGE cash position is fine. This way you won’t get blindsided by an overnight solution to the Euro such as allowing the ECB to print at will like the fed does. The black Friday Surprise and Santa Clause rally is probably a little more of a shorter term rally, although fundamentally for the long term it probably could/will improve fundamentals, but it does not change the various risks associated with the Euro zone.

Nevertheless, around the corner there is support for an uptrend post Euro Garbage Day rally forming a bottom eventually.

Stocks may be in decline. Mutual fund cash levels may be too low. Treasury yields may be spiking all over the world except the US, and global contagion could be spreading. The economy is not in a good state right now… But, with that being said, there are a few very bullish variables. Personally, I would expect the following to happen
1)Early to mid 2012 we enter a deflationary vortex much like late 2008 into 2009
2)Mutual fund cash levels skyrocket as a result and are forced to capitulate continuing the short upward spike of mutual fund cash levels, perhaps even to extreme “highs”.
3)Meanwhile the foreclosure rates skyrocket again as all the mortgage resets hit the banks putting maximum pressure on the banks to liquidate.
4)Banks are forced to do another round of consolidation (musical chairs) and may initiate a firesale
5)A default takes place, and bond holders are shocked, including US bond holders at some point. The demand could spike on this event forming the top, or they could start migrating away a little earlier
6)The euro will either collapse, or come close to collapse until finally a real solution occurs. A eurobond would be a major start, the ECB having the ability to expand the money supply more like the fed where it is closer to unlimited would be the next best thing yet would have some inflationary risks.
7)During this, gold does NOT outperform the market

Once these conditions are met, there will be another bogus plan that will be inflationary, but the key thing is, the worst will be behind us, in spite of the fact that it will seem to be getting worse. Stock prices will be bought ahead of things getting better. The “bullish” things going on such as a low dow/gold will either be better, or not much worse. The low treasury yields in the US will either be lower, or not much higher. More importantly stock prices will be much lower, mutual fund cash levels will be higher, much of the “downside risk” that was unknown will be realized and priced in, and stocks will be able to form an amazing bottom and rally for years. I predict we will see new highs as early as 2013, but that may be pushing it. I do think that once this bear market ends, we will eventually see conditions set themselves up for a very bullish time period in risk asset prices, particularly stocks. In spite of setting “parameters” I may in fact break my rules and go “all in” if everything is aligned perfectly. That may not happen, but I may accept the risks of being early if we get the perfect storm, a climax peak followed by a decline in treasury yields, a raising of cash while stocks are extremely oversold on a monthly chart, mutual fund cash levels spike, stock prices fall to say under 7,000, and UUP spiking to a peak overbought levels and a super fearful event. Finding the courage in such an environment will prove to be difficult. ….



Part of “following the trend” is being able to avoid the stamped off the cliff. It is also about being able to be selective but occasionally recognizing the rare opportunities and getting aggressive. It is about anticipating the NEXT trend and knowing how it could play out.

Well, we had subprime, now we have soverign debt defaults at the same time we are having the next leg down with option ARMs and ALT-A and all the mortgage resets cannot be delayed for too long. We will have lower prices that drive down the neighborhood price, and the deflationary private debt met by the increased inflationary pressures on the public debt. We do have risk that the US government will freeze spending having reached their limits and not wanting to expand government. Things could get much worse. However, they could also get much better, and after the &!*^ hits the fan in terms of prices, eventually assets become cheap, eventually loans are only given out to people who make intelligent investments, eventually the smart and bold take the leap creating a strong foundation. Eventually the people that sell low are not going to have any more to sell, and the buyers are going to start to want in, in anticipation of things getting better. The short sellers eventually want to cover. Eventually things do get better, even as they appear worse, and they have to turn, starting a new trend.

So knowing this, what are some things that could turn it? That’s what you need to look at. Low interest rates means an ATTEMPT to stimulate low economic activity, and when it’s needed is when there is pessimism. This is when things are low priced.

Low interest rates means there is high demand for bonds. It means that it does not need to offer a premium to compete with stocks. In other words, stocks are at a low demand… Investors and lenders are selective. It means people are downplaying RISK of holding treasuries and over pricing risk in stocks. Unfortunately this information is a bit paradoxical when measured with the fact that with interest rates, investors tend to compare returns on a relative basis (stocks are riskier and should have a higher yield than bonds by a few percentage points) and higher interest rates REQUIRE a higher return, meaning prices need to be lower (or growth and growth expectations higher) and yields need to be higher. Fortunately with rising rates, the economy is expanding, and yields are risen to compete with and attempt to attract more capital. Loans are taking place in the private sector, and the public sector will probably spend with higher GDP growth and growth estimates (also governments will spend a lot when they have high treasury demand that occurs just before Rising rates). Money will get injected in the economy when rates are falling and economic climate is bad, and that money will start to be lent out aggressively when it expands and through the functions of the money supply, the money injected will multiply. So rising rates can be bullish as wealth transfers into stocks, and wealth grows. Although in theory it is bearish because the cost of borrowing goes up, it doesn’t always correlate, as rising costs may trigger a “get in now” attitude. In theory people buy more when prices are lower, but in practice they do not do so with investments as much as they are expected.




The following represent decent fundamentals


The time seems right for a BEAR MARKET decline that will likely end fairly soon, perhaps in 2012. Bond Yields are likely to bottom in 2012 first, and a pause in dow/gold or temporary rally is very possible if not probable. We certainly could rally for a month or two before we set up the decline without breaking any of our trends or signals. However, I believe the bias should remain to the downside for now.

List of 2012 predictions to come later. Also, other contrarian plays and a hisstory on contrarianism if I get to it.

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