Inflation Will Make its Presence Known

By Michael Pento | October 28, 2008 | 12:05 AM | 4 Comments

One of the universal laws of economics is: when a government increases the supply of a currency by fiat, that currency's purchasing power diminishes. An absolute consequence of that action is that the nominal monetary value of most assets will tend to increase in price over time. That simple rule is the reason why I believe a short-term bottom either has likely been, or will very soon be reached in the major averages and a major secular bottom has been reached in most commodities. Why do I believe commodities have or will put in a long term bottom near today's levels? Because commodity supplies by their nature are limited and cannot be increased by decree nor can they display inflation rates commensurate with that of most currencies.

Most bears correctly believe that the policies being employed by our government will lead to an economy marked by accelerating inflation and weakening G.D.P. growth. However, the one aspect of that scenario they tend not to realize is that inflation boosts most asset classes and that includes even equities. Looking back into the history of past inflationary economies as well as those of today, you will find that the nominal value of their major indexes increased. It should be no different here in the US.

Whereas I firmly believe the efforts by our government will be pernicious for the economy in the long term, investors should not believe that global equities and commodities will perpetually be caught in a deflationary spiral. Fiat currencies rule the world and most central bankers are working overtime trying to inflate their economies into prosperity. Sadly, our Federal Reserve is a leader in that regard.

There can be little doubt that American consumers' balance sheets are under duress. Their $14 trillion in debt has now reached about 100% of annual G.D.P., record territory and far above its multi-decade average. The argument has been raised by many respected economist that since the consumer is unable to expand his balance sheet, the economy must suffer through a protracted period of deleveraging. Of course such a deleveraging process would be the only path to take in order to engender a sustainable economic recovery. But that is not the direction our government has chosen to take and they will not allow that necessary deleveraging process to run its course. Thus, it would be foolish to ignore what the Treasury Department and Federal Reserve are in the process of doing; because of their actions, our battle with deflation will only be cyclical in nature.

The reason why a deflationary depression will not occur at this time is because the consumer's balance sheet is being supplanted by the balance sheet of the government, and the government's balance sheet is unlimited. Currently, consumers may not want or be able to take on more debt. That would normally, if left to market forces, allow a deflationary environment to persist.  However, the Treasury has expanded its issuance of debt, which is being bought by financial institutions. That money goes into the economy and is eventually re-deposited into the banks. The Treasury bonds purchased by the banks are then monetized by the Fed and the money supply grows. This cycle repeats and money supply skyrockets. In fact, the government has succeeded in sending the monetary base to a year-over-year increase of 28.4% and is currently growing at an annual rate of 341%! Do you really believe commodities can remain in a bear market under these monetary conditions?

The government's actions amount to an end run around the consumer. An end run can be defined as a maneuver that is used to avoid impediments, often by trickery or deceit. Unfortunately, as the government tries to "trick" the free market and the consumer, all it will end up accomplishing is engendering intractable inflation while expanding its control over the economy. However, inflation has many different manifestations and investors would be wise to show caution if believing that deflation in most asset prices (including equities) can persist much longer.

Recovering Market Losses

By Brad Zigler | October 23, 2008 | 1:42 PM | 0 Comments

Looking at the screen this morning, it's hard to find uptrend lines in anything except the U.S. dollar, the Japanese yen and the short end of the yield curve. Stocks and commodities have both been battered, catching many investors by surprise. Weren't these two markets supposed to be negatively correlated? When one went down, wasn't the other supposed to go up? Wasn't that supposed to even things out in our portfolios?

Wednesday's Breakouts & Breakdowns (10-22-08)

By John C. Lee | October 23, 2008 | 1:33 AM | 0 Comments

We’re broken “the triangle”, that dreaded zigzagging consolidation zone where most stocks made zero progress for the past 10 days. Today’s gap triggered it all by breaking through two short-term resistance areas and being unable to fill the gap, had no other choice but to “flag and fail”. We also hit a short-term intra-day selling climax which was very visible from 3:00-3:30PM. Is it the bottom? I don’t think so. We have a much greater chance of testing 1) October 16th’s low and finally 2) October 10th’s low.

Today's Breakouts (10-20-08)

By John C. Lee | October 20, 2008 | 8:50 PM | 1 Comment

Emphasis is placed on breakouts rather than breakdowns because today is the first day where I’ve seen more breakouts than breakdowns in a very long time. We are at a weird stage in the market right now. Many stocks have broken out to the upside, but most stocks are still within consolidation. Given that we have hundreds and hundreds of earnings reports this week, the market will continue to be volatile. Even today, the market zigzagged, forming an ascending triangle, which later broke out. Again, I am seeing considerable strength in the materials and industrials sectors and they are leading whatever rally we do get.

Most break outs, including the ones listed below are at a point where they are going to test 1) the 20-day MA, 2) September’s low, and then 3) the 50-day MA. The 20-day MA is not some magical indicator, but it’s what most stocks primarily follow during uptrends and is a secondary indicator for downtrends. These three present key resistance levels that need to be broken for stocks to climb out of their hole. It won’t be easy, but here are several names to focus on:

Today's Breakouts & Breakdowns (10-17-08)

By John C. Lee | October 17, 2008 | 10:28 PM | 0 Comments

We rallied, but failed toward the end of the day. What we’re seeing is a symmetrical triangle form. This is one of the ultimate forms of indecision consolidation for market participants. We may be consolidating in this range for most next week which will make it not as favorable to trade. I, myself, have gone into 100% cash going into the weekend. I’m not going to risk all my gains for this week to some possible moving news that comes out over the weekend. FYI - Friday’s low and Tuesday’s high marks the range’s boundaries. Volume has been terrible and remains weak. During a consolidation, volume dries up, so that’s how I know we’ll be zigzagging for a few days. Make note of any massive explosions or serious declines in volume.

Today we had 6 new highs and 246 new lows. This is a major improvement, but in the short-term it doesn’t matter because of the consolidation and therefore, does not have any significance right now. I was able to find 5 clean breakouts, mostly from the industrials/materials sectors. They did lead the rally for most of today and the reason why I picked them in my last article is because they displayed enormous strength yesterday which was not demonstrated in price action, but volume. I always say that volume confirms price action, but price action doesn’t have to confirm volume. I advise all traders who are very short-term to be very cautious of extremely whipsaw next week.

We’ve had many breakdowns, but this time, they were harder for me to find….a good sign for longs. Before, I could have closed my eyes and randomly picked one and it would have been a breakdown. The market is easing up and consolidating from its major loss last week so I don’t expect many breakouts or breakdowns for the next several days. Like before, I’ve added my comments on how to prevent having your stock end up on my breakdown list unless you’re short.

Today’s Breakouts & Double Bottoms

By John C. Lee | October 16, 2008 | 9:49 PM | 0 Comments

I have to say we did well today by forming a double bottom. I went 100% long into the close given the strength of the rally (which didn’t breakdown in the last half-hour). Looking at a 10-day chart (below) what’s so bullish about this is that the right bottom formed slightly higher than the left bottom and we only needed the nearest support level above Friday’s lows. Another great signal for the right bottom is that today’s particular intra-day bottom formed an Adam-and-Eve bottom. Adam’s arespikes down and Eve’s are rounded cups. Together, the Eve bottom formed the higher low that I needed to confirm entering long positions.

We did very well today forming 7 new highs and 865 new lows (that’s an accomplishment this week). We also had stronger volume than yesterday, but still weak comparing Friday’s bottom. That should be your worry going forward – volume.

I found only one clean breakout and it was AirTran Holdings (AAI). All of the airlines jumped double-digits today as oil fell below $70 today. What’s great about technical analysis is that all you need to do is look at the chart and notice the breakdown at the 40-day MA then the 50-day MA and you’ve steered clear. If not, you probably listened to all these pure-fundamental guys preaching on the way down that “it’s just gotta go back up”! The chart tells you exactly how it is and what all market participants are thinking and that’s represented by price action and volume. IF we do go back up, the chart will tell you if it will hold. AAI has one more resistance area at around $3.50 before it’s able to spike to $4.25. Most importantly, remember to do your own due diligence.

Instead of featuring mostly breakdowns like I have for several days now (like I had a choice), I opted to profile several stocks that exhibited a possible “double-bottom” pattern. This is not to say they’ll all go up, but given the volume and price representation, there’s a good chance that many of these stocks will spike higher (most are in the industrials/materials sector). It could last for only a day or several weeks, who knows, but for the very short-term, I think they’ll be ok. Please use the 20-day MA as initial (major) resistance after (if) they breakout of consolidation resistance.

Weekly Sector Wrap-Up (Oct 6-10)

By John C. Lee | October 12, 2008 | 7:53 PM | 4 Comments

How To Trade Power Spikes

By John C. Lee | October 10, 2008 | 11:05 PM | 0 Comments

Today is one of my favorite days, not because it’s the end of the worst week in market history, but because the end-of-day rally created so many trading opportunities for next week (yes, can you believe it?). I’m talking about trading power spikes, one of my favorite patterns. A stock exhibiting a power spike is one that displays an immediate and forceful change in sentiment from the previous day. Whatever the reason, traders instantly changed their minds on the direction of the stock…a very powerful signal indeed.

Will Commodities Recover From the Credit Crisis?

By Clif Droke | October 01, 2008 | 9:56 AM | 0 Comments

“Money is the lifeblood of the economy.” This famous saying is easy enough to remember, yet how much easier is it to forget it when asset prices are pushed to unreasonable extremities. Consumers and investors alike are now being reminded of the veracity of this statement in a big way as the money panic rages on.

Bailouts and Commodity Prices

By David Enke | September 26, 2008 | 10:25 PM | 0 Comments

As the country and the financial markets struggle to both understand and swallow the need for a $700 billion bailout of the financial system, the impact of using taxpayer money to fund such a bailout could have repercussions beyond the credit markets. The money will have to come from somewhere, i.e., taxes and/or deficit spending. As such, the potential flooding of the economy with money, and a further possible lowering of interest rates, could create increases in inflation. While this will affect nearly all areas of the economy, it could once again provide a catalyst for raising energy and commodity prices. In fact, just recently Barclays predicted that commodities will in fact revive their sharp and historic correction over the summer, and are simply in a normal correction stage rather than a change in demand (see Bloomberg article). If it is true that demand will stay strong, or at least will not collapse due to a global slowdown, any increase in deficit spending, lowering of interest rates, and further devaluation of the dollar could certainly be bullish for commodity prices. But of course, this depends on the strength of the global economy, which will depend to some degree on the handling of the credit crisis - in yet another illustration of the myth of decoupling.

 

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