Batman [Paulson] & Robin [Bernanke] Batman: "It's time to get set, Robin. It's almost oda wabba simba." Robin: "It's almost what?"

Another interesting day we had. Not in terms of massive movement, but the anticipation that’s building up. I mentioned that this anticipation will keep us in a consolidation area and the reason is because there’s too much uncertainty to overly take one side. I expect passage in the Senate no problem. After an intraday head-and-shoulders pattern, the announcement that Buffett took a $3 billion stake in GE (NYSE: GE) caused an instantaneous spike upward. Without that news, we would probably have been in trouble today.

WE had 2 solid breakouts today: Commerce Bancshares (NSDQ: CBSH) and Epicor Software (NSDQ: EPIC). I added a third, UCBH Holdings (NSDQ: UCBH) for the future.

CBSH is probably the only highly liquid financial stocks that broke higher than its previous short-term high. That’s quite an accomplishment in this difficult environment. But here’s something better: CBSH not only made a new 52-week high, but it’s the stocks highest ever! This is one of the strongest financials to own with a solid long-term (30-year) chart.

EPIC gapped up and formed a breakaway gap. Looking at April’s gap down, EPIC also formed an island reversal. There’s a high chance that EPIC will continue higher based on the success rate of islands. Prior to the breakout, EPIC formed an ascending triangle, known for upside breakouts. Looks out for these formations in your own stocks. Make note of the 200-day MA which could provide some resistance, but otherwise, EPIC has finally started to fill it’s previous 2-point gap down.

UCBH slightly broke out today out of irregular consolidation. This bank has been strong since July and appears to move higher at this point. A break above 200-day MA is a definite buy.

Like the past 3 days, we’ve had numerous breakdowns. We actually hit 116 new lows today vs. 16 new highs…still an unsightly comparison. These stocks are to be entirely avoided, and with all future breakdowns, they are not something to be buying “cheap”, you might end up trying to catch the knife a few times. Today’s breakdowns: SLM Holding (NYSE: SLM), Verso Paper (NYSE: VSR), PHH Corp. (NYSE: PHH), Foundation Coal (NYSE: FCL), Actuant (NYSE: ATU), Crosstex Energy (NSDQ: XTXI), and Finish Line (NSDQ: FINL).

Goodness. SLM broke its 2000 (year) support. There aren’t any remaining major support levels and like the homebuilders, SLM is near the level where they were before the big bull run. Remember, we still have hit bottom before we invest in these types of stocks, and now is not the time.

VRS IPOed in May of this year, a terrible time to IPO in my opinion. Whoever got the stock at $10 has lost 80% of their investment in 5.5 months. The problem with IPOs is that there are no defined support level. These levels are critical to determine where we are and we where we will likely head. Wait this one out until higher lows are made.

PHH has broken its downtrend channel and looks like it will go lower. PHH came out early 2005 at $20, and is sitting pretty close to cutting that in half. A bottom is being hammered out and it will take many months before any long position is considered.

There are still people who are into this ‘coal crazy’ and still think we’re going to head back up. Maybe we will, but is it likely anytime soon? No. Those are the people that still have yet to sell and once this flush out occurs, a series of bottoms will form. This is a classic parabolic ‘boom-and-bus’ pattern. FCL sitting at the last major support level before it goes sub-$10. I suspect we will hit it.

 

If you need a short position for the long-term, and I mean for at least a year, then here it is. I don’t judge that by ATU’s chart below, but by the 10 year chart. ATU is in a mature stage 3. At this point, stocks make erratic and deep corrections and seem to have difficulty making higher highs. You can even consider the $29-$32 consolidation as a possible right should of a head-and-shoulders pattern. There is support at $20, but after that, the stock will freefall.

Want another long-term short? Consider XTXI. The stock IPOed in 2004, jumped to $40 and broke its uptrend earlier this year. There isn’t much credibility in support levels for IPOs that have not been previously tested. XTXI is currently at excessively oversold levels and we should see a small bounce before resuming the downtrend. Take a look at a 4-year chart and tell me if you see what I see.

You have to take a look at a 10-year chart of SPAR. It looks SPAR missed the NASDAQ boom-and-bust in 2000 but they finally got it in 2007!. The pattern is nearly identical. That tells me that SPAR won’t be going anywhere for the next several years.

XIDE was a 2004 IPO which cratered from $25 to sub-$5. The stock crawled its way back up to $20 before getting crushed again. There is major support at $5 but I think we go well below that. We haven’t hit ‘puke out’ on this stock yet. Notice the rounded top which is one of my favorite patterns and not just because of its aesthetic qualities.

A few days ago, I presented FINL as a possible short opportunity. Well, here it is. There is some support at $8.50 but I would set a target at $7. FINL had an amazing run up since the beginning of 2008. The $10 level is key because it marks 2002’s high and 2006’s bottom. We should see a nice sized bounce to the 50-day at which point if it fails, I do recommend taking a short position.

 

 

www.weeklyta.blogspot.com

Left to its own devices, the free market would clean up the current mess we find ourselves in relatively short order. Of course, in a free market we would have never grown to a position where total debt is 300% of GDP, the current account (trade) deficit exceeds 6%, and our unfunded liabilities (Social Security, Medicare, etc.) is of an amount we can never hope to pay out ($59 trillion and growing). The clean up would be painful because we would finally be paying the bill for a generation of gross excess. Agonizing is it would be, what the government has in store for us will be much worse.

Bob Hoye of Institutional Investors nails it writing, "The problem that won't go away is that the pitch by the central planners that risk had been eliminated prompted the greatest experiment in leverage in history. Actually this has been a multi-generational accumulation of reckless investment and central banking habits. The consequence, as we concluded last July was that "The credit markets are in the greatest train wreck in history."

Next month we will celebrate the 37th anniversary of totally abandoning the international gold standard. It has been quite a party ever since. Leverage permitted the greatest era of excess in the history of the world. Through money creation and new leveraged securitized toys to for Wall Streeters to play with, consumers and our government were allowed to go on a debt-induced spending spree that future Americans will paying for generations to come. This problem is bigger than subprime as many are coming to quickly realize.

A sharp and painful deflationary purging of the excess is what is called for. But for those who understand the "government to the rescue" culture which has evolved over the past century, we can expect a government response which brings the nation to the brink of bankruptcy. The numbers are just too big. A few years ago when I was working on my graduate thesis Barry Bannister, working at Legg Mason at the time, was kind enough to send me a few reports he had recently completed. I share with you the following two charts:

source: Barry Bannister

Over the past few weeks we endured another breath-taking deflationary scare. As indicated in the first chart, after the debt build in the 1920s, we suffered a deflationary depression in its aftermath. Will we suffer the same fate this go around? If you are caught leaning the wrong way in the "inflation vs. deflation" trade, you could be wiped out in short order. But President Bush, Secretary Paulson, and Fed Chairman Bernanke's coordinated policy response to ill-fated Freddie Mac and Fannie Mae (government equity purchase on the table) is there any question that the debt "will" warrant an inflationary response? Portfolios should make necessary adjustments in order to prepare.

The economists at the institutions that most influence world economic policies are Keynesians. I had a lengthy discussion last weekend with an economist at the IMF who is thoroughly convinced that a drop in aggregate demand will result in taking away of inflationary pressures as the world economy slows. Because they really do not fear inflation further convinces me that it is going to increase much higher than the mainstream is forecasting.

I don't think we are going to see Weimer-type hyperinflation like that experienced in Germany in the 1930s, however. During the course of that event, stock markets soared higher along with everything else. More recently, Zimbabwe's stock market was the top performer last year, but after accounting for inflation, the gains are almost worthless. I think we here in the US are going to experience a gradual decline in the asset classes which saw the biggest gains (stocks, housing, and other luxury items) and an increase in price in the items which are the necessities for everyday living and survival (food staples, fuel, basic materials). Regarding the former take a look at the chart below:

source:  thechartstore.com

We did in fact violate the 1974 uptrend line I advised watching in my commentary. This strongly suggests that we will at least test the trendline that dates back to 1885, taking us down to around 6000 on the DJIA. If the Dow/Gold ratio returns back to 1 (one ounce of gold buys one share of the Dow) that takes gold up to $6000/oz. Does that seem absurd? Just like $150/barrel oil might have seemed outrageous at the beginning of the decade. On that point, we see Gold/Oil ratio at an historical low around 6.5:1. The historical average is closer to 10:1 and can run upwards of 16:1. This is very gold bullish. Note that the Dow/Gold and Gold/Oil ratios are pointing to higher gold prices but this does not nessarily indicate that we have an imminent event to trade on. We should, however, be very confident that long/short trades on these two ratios will pay off quite handsomely over time.

Another kicker for gold could be its increased stature as a safehaven investment. US bonds blinked on Friday in the wake of the crisis developing over the Fannie Mae and Freddie Mac. Longer term yields actually significantly backed up during the equity market selloff while gold moved much higher, seemingly capturing much of the money which would have otherwise fled into Treasuries. This bears further monitoring and is not yet the trend. Also notheworthy, though, is the fact that while the US stock market indices have plunged to two year lows, taking out their former March and January lows, yields on the 10-yr and 30-yr treasuries did not.

Certain commodities should also continue to gain. As the rise in the price of tangible assets takes on more of a "world fiat currency value decline" nature and less attributed to its world growth/higher demand characteristics, I expect the precious metals to outperform most, if not all commodities. Some of the other lagging commodities will also play catch up, particularly some of the "softs". Grains also have yet to hit their blowoff tops.

Mohamed El-Erian, Co-CEO and Co-CIO of Pimco and author the recently released book, When Markets Collide, made an excellent point while co-hosting CNBC's Squawk Box last week when he made the point that many commodities will only decline after the rallies exhaust themselves. He went on to say that they will first experience a period of "reverse elasticities," meaning that demand will still be strongly influenced by price, but that it will have the opposite effect which it normally does. Opposite in that at some point during the rally, buyers buy even more at current prices as they expect prices to rise even higher in the future (fear of contango in the commodity world) and suppliers are willing to supply less due to having expectations of receiving even higher prices in the future. You can see how this can lead to prices spiraling out of control.

This is consistent with the final exhaustive commodity rally I have been forecasting for the end of the decade and first wrote about in my commentary. Most commodity bulls see a relatively linear rise in commodity prices continuing for another decade or so. El-Erian's point on reverse elasticities and history tell us a final explosive rally is more likely in store. Such a multi-commodity superspike will likely lead to a world wide recession. This will present the buying opportunity of a lifetime for emerging market equites. Right now we have the still have the buying opportunity of a lifetime for certain commodities. Gold is my favorite, but what else?

I think that, for reasons I discussed in my commentary, finding ways to invest in actual commodites might present greater risk-adjusted returns than the investing in the companies that mine, grow, or produce the commodities. Outside of precious metals, I think that investments in coal companies present some the best remaining commodity opportunities. Coal miners are the exception to simply investing in the the commodities themselves. Their operational leverge is extremely strong in the current pricing environment. I outline the virtues of coal investments in my commentary. I would also like share a another Barry Bannister chart that shows the counter-market nature of the price of coal:

source: Barry Bannister

Along with gold, coal tends to go up when the market goes down. Coal stocks have moved up five and six-fold over the last year. This has been due to infrastructure bottlenecks and increased demand for fuel (thermal coal) for power generation and for steel making (metallurgical coal). Though coal stocks have corrected substanially over the last week or so we still have many non-believers. Fund managers in an April 28 Barron's interview capture much of the negative sector sentiment stating that "We are negative on the coal stocks and the coal industry in general. It's a dirty fuel that has been growing less than 2% annually here in the U.S. and somewhat faster abroad. Coal has one main use on the planet now, and that's to boil water to create steam to generate electricity. There is going to be growing political pressure to reduce coal usage. We think improvements in solar technology over the next decade will dramatically reduce the growth of coal demand."

Who knows what will happen over the next decade? The DJIA might drop to 3000 and rise to 30000 between now and then. I tend to make investments based on the next two years where I have a little more visibility. But if we sustain the worldwide economic collapse that I envision at the end of the decade, then citizens around the world will be demanding the cheapest heat and electricity available -possible climate concerns in the future be damned! And I can guarantee that the Europeans will be at the jumping off the global warming ship faster than anyone-some things never change. No other fuel will be able to compete with coal over the short term for base load power generation. I am more bullish on the prospects for thermal coal than met coal, given my forecast for a severe economic downturn. Most of the infrastructure bottlenecks will not be removed until we are well into economic decline in the early part of the next decade. The chief economist at the IEA, Fatih Bairol, continues to try to inject a dose of reality into the situation by stating that coal will be leading the world in electricity and power generation for the next 25 years.

Declining home values, stock portfolios, wealth and incomes coupled with higher costs and a deleveraging society where credit is tougher to come by will finally prick the American consumption bubble. This and sharply higher commodity prices will eventually drag down China and other emerging markets. Coal and gold have a record of rising in such periods while stock markets decline.

 

Excerpted from the 7/14/08 Global MegaTrends Portofolio's Newsletter:

To view the full newsletter and gain access to Kurt's market-beating Global MegaTrends Portfolio, click here.

The peaceful co-existence between commodity-related investments and most sectors which comprise the broader US Stock indices, is drawing to a close. As inflation tightens its grip over the world economy, US treasuries and stocks (consumer-related, tech, and financials) will suffer while investments in tangible assets will see their gains accelerate higher. I consider the terms "inflation" and "currency debasement" to be largely synonymous. The bottom line is that purchasing power is going to drastically decline. The portfolio is now 5.17% up from the 4.42 % gain registered as of Friday's close. Not bad considering the DJIA is 160 points lower over the last couple of days and amidst today's tumultuous trading. A higher PPI, record crude oil, and another banking sector downgrade from Meredith Whitney could have been enough to knock down the broader market, but most of the stocks in the trading portfolio have weathered the storm quite well. Here is the updated portfolio as of today's close:     I wrote a piece on here on Green Faucet last Thursday entitled, "Getting Aboard Noah's Arc with Commodity Trades," where I highlighted one of the many trading strategies I intend to use when my Global MegaTrends Portfolio becomes available to the public later this month.  I am happy to report that Noah's Arc looked like a Carnival Cruise Line last week! My last commentary "Pick your Poison Now" touched off a mini-debate between myself and Michael Pento, a proponent of Austrian Economics who gallantly defends his principles against the Keynesian economists and supply-side monetarists when he makes his appearances on CNBC's Kudlow & Company. Arch Coal (ACI) and the Coal industry at large are standing by waiting to solve our energy problems; trouble is, nobody is paying any attention to them. At a time when Politicians are stumbling over one another in order to condemn big oil it is ironic to see so little mention of companies like Arch Coal who are at the forefront of the battle to create zero-emission coal plants by the end of the next decade. Analysts are lining up to pour cold water all over the six-year commodity rally which just experienced a violent correction last week. Caution is warranted over claims that the commodity rally has ended. A question that comes to mind in determining whether a particular analyst bears consideration is whether or not they got the call right to be bullish on commodities early in the rally back in 2002-2003. It is in the interest of most fund managers and equity strategists which you see on TV to be bearish on commodities because it draws money away from the US stocks these guys are peddling. While Patriot Coal (PCX) has only been on its own for little more than 4 months, the company has the pieces in place to sustain what has been a strong move in the company's stock since its spinoff from Peabody (BTU) in October (56.59% as of close on Feb. 27). Of course, this coincides nicely with a healthy coal market which has seen high grade Coal prices on tightening due to global supply constraints and demand growth.