On January 18, the Dow made its fifth top near 13,650 since October 5. It looked like resistance was being tested. Four daily green days later the indices are at 5-year highs and apparently confirming a secular bull. Before buying a first class ticket to board the express, note that twelve year charts show the averages forming a triple top with the pre-crash peaks of 2000 and October 2007: so buy a 2nd class ticket and be sure you're prepared for the return leg of the jaunt.
Billionaire investing legend Jim Rogers, co-founder with George Soros of the Quantum fund and a believer in agricultural commodities going forward, says sometimes it's better to do nothing. This is one of those times when it's almost best to hold and "monitor aggressively" as billionaire investor Sir John Templeton urged. Templeton is famous for the maxim, "Markets are born in pessimism, grow on skepticism, mature on optimism and die of euphoria." Below l provide ways to prudently play the current inflection point.
Here at a glance are last autumn's highs matched on Friday January 18:
September 14 -- 13,653
September 19 -- 13,626
September 21 -- 13,647
October 05 ---- 13,661
January 18 ---- 13,649
January 22 saw an apparent breakout to 13,712. That day the S & P also put in a 5-year high at 1492. On Thursday January 24th, it broke 1500 intra-day and Friday the 25th closed at 1503. Meanwhile the Dow continued to break resistance and the secular tops that preceded the crashes of 2000 and 2008-09. It ran from 13,712 to 13,896 in four days.
Beware of euphoria. Commenting on stats skewed by government intervention in many aspects of the economy, a money manager last summer returned funds to his clients saying "the numbers are broken." Similarly, our elites have broken the educational system and cultural-moral norms that took millennia to achieve. The resulting terror and uncertainty increasingly affects markets in earned mistrust, skewed allocations and volatility. Cultural dissolution and fantasy (virtual reality) has a correlative in leveraged derivatives that exceed $1.2 quadrillion, more than all the money in the world. Markets "die on euphoria" and societies die when their lies are enthroned as dogmas and fictions disorder reasonable hopes. Economies thrive by free markets but the markets are "rigged," manipulated to death. This is not an accident. Central bankers are intelligent. They are preparing the ground for a world currency. Caveat Emptor ...
The Financial Times reported last week that the "U.S. Fear index [has] Plummeted to 5 year lows." The fear or volatility index is tracked by the CBOE (Chicago Board Options Exchange). The "city of broad shoulders" is known for political clout and manipulation from the time of the first Mayor Daley till today. The waters seem placid, too placid.
Moreover, the expanding divergence of bullish to bearish sentiment signals that happy times, or perhaps "happy hour" is here again or soon will be. The bull/bear gap was like this before the corrections in May and November. At +32 points and rising it is not yet as great as the 40 point divergence of early fall 2007 but is accelerating toward it. Rogers, paraphrasing Templeton has said, "buy panic and sell euphoria." But if the momentum is based on valid optimism it is time to buy on a limited basis.
Some analysts suggesting caution see the consumer staples vs. discretionary ratio shrinking, signaling an overbought market. But those who watch the broad-based Vanguard Consumer Discretionary (VCR) and Consumer Staples (VDC) ETFs (377 and 109 companies respectively) have seen discretionary gains increase their year+ out-performance. This writer believes that consumer discretionary spending will exceed staples through the current bull and the oncoming recession. This is a long term trend engraved in socio-political and socio-economic transformations of wealth and power. Long term, as I've written before, I share Rogers' stress on agricultural land and commodities. However, this bull will run for months albeit with periodic chasms deriving from assorted terrors as America and the world are manipulated toward more manageable top-down governance.
While our markets are inflated and manipulated Europe's economy is a mess and its Byzantine politics filled with conflicts resolvable only by enforced integration that will produce ongoing strife and endless opportunities for crisis management. But remember, the markets don't run on the same tracks as the economy. Eleven quarters show EU GDP walking downstairs. However, the blue chip Euro Stoxx 50 index led by the German DAX have performed powerfully despite a chaotic macro-situation filled with shadowy "Stabilization Mechanisms" that almost make Fed policy look low-key. The Relative Strength Index (RSI) at 63 has "room to run" til 70. And America has its own "Financial Stability Oversight Council" chaired by the secretary of the Treasury. It exists to secure the viability of "systemically important" major banks.
Because of such background, the recent optimism verging on euphoria has brought out the skeptics. Ron Paul recently asked, "If governments or central banks really can create wealth simply by creating money, why does poverty exist anywhere on earth? If Fed money creation really works, and doesn't create inflation why haven't Americans become richer as the money supply has grown?" So the disjunction between Wall and Main Streets grows apace. Paul added, "Fiat currency is not wealth, and the creation of more fiat dollars does not mean that more rice, steel, soybeans, iPads, or Honda Accords suddenly exist. The creation of fiat currency simply strengthens a fantasy balance sheet, either by adding to cash reserves or servicing debt. But this balance sheet wealth is an illusion; just as the notion we can continue to raise the debt limit and borrow money forever is an illusion." As noted above, the macro situation is filled with fictions parading as dogmas. It probably is good for everyone that some voices continue to point to an unlovely reality which must be kept in mind as the euphoria rises. The case for precious metals grows as they, unlike the major indices, consolidate.
With all major central banks printing and digital liquidity floods the markets raising asset prices, some like Jim Sinclair, 1-22-13 expect "currency-induced cost push inflation, which is a derivative of hyperinflation." He believes that this will "propel gold to new record heights starting no later than midyear this year and running into 2017." He expects an accelerating second half to the secular gold market.
Similarly, Egon von Greyerz notes that gold is in an 18 month period of consolidation like those in 2006-07 and 2009-10. He also spoke to the currency wars by which central banks are re-ordering world socio-economic structures and concentrating wealth.
Before offering takeaway suggestions for playing this too-exciting market, let's consider silver. In many ways it is the most fascinating commodity and one of the most remarkable industrial metals. About 75% of silver goes to industrial uses which are broad and increasing in sectors spanning healthcare, info tech, consumer staples and electronics. Its use in silverware and in jewelry is basic to socio-economic patterns. So silver should perform like a balanced fund with strong steady growth. Occasional declines in one sector should be offset by its many other utilities and its perennial status as an alternative currency. Yet despite its remarkable variety of uses, silver suffers extreme and illogical volatility. Its price since the May 2011 highs forms a descending wedge tapering to strong support at $26.50-27/oz. Below $30 it has strong value characteristics. At current levels, the silver ETF (SLV) and Sprott Physical Silver (PSLV) beckon. Strong support for gold is at $1550/oz but there is so much buying by central banks that even the most negative estimates look for lows about $1625 and as von Greyerz noted above, institutional estimates historically err on the low side. Remember: major currencies are being destroyed as part of bringing in a world currency at least partly backed by gold.
As I suggested last week, a weakened yen in the short term can help Japan's exports, debt situation and economy. The Nikkei average was strongly up last Thursday and Friday. It is however likely that Japan only has postponed a hard landing.
Last week America joined Germany in sending planes to help France's military action against Islamic insurgents in Mali. The crisis now is reported to be damped down but the main action will continue to be in Afghanistan. Oswald Spengler foretold that the "formless wars of the era of world peace" would be "more terrible" than any before and that "whole continents and religions would be staked" in the grand game. This is the weather of our times. Spengler wrote that "optimism is cowardice" that refuses to confront the darkness of the big picture.
On the bullish side, Jonas Elmerraji writes that his 300-day trend analysis and charts are "flashing strong buys" for U.S. and international stocks and REITs.
The takeaway from this unsettled period is to add to your equity positions. Commodities, especially metals and miners, are depressed and though Elmerraji says "hold" on these most analysts agree that it is a good time to acquire majors like Barrick Gold (ABX), Gold Corp (GG) and Silver Wheaton (SLW). All are trading far below average target estimates. Barrick and Gold Corp have enormous proven and provable reserves and cash for acquiring or partnering with juniors. The Junior Gold Miners ETF (GDXJ) is near 5 year lows and a value buy.
Get out of Treasuries, which have begun significantly dropping in price, adding to the pain of already negative real returns. To capture a broad sweep of international stocks, look to low cost ETFs like Vanguard's total international small cap (VSS) and Global ex-US REIT (VNQI). Mindful of the many wild cards shuffled into world affairs, establish or increase a position in an index like Vanguard's S&P ETF (VOO), the lowest cost option with no minimum purchase and a Total Market Equity Index (VTI). Ride the train; just be prepared with a proven low-beta balanced fund when storms surge and the tide subsequently recedes like the "sea of faith" Arnold heard withdrawing in "Dover Beach ..."
Disclosure: I am long VOO. I own ABX, SLW and GG.