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Gary Tanashian is proprietor of Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium newsletter Notes From the Rabbit Hole ( Complimentary analysis and commentary is available at the 'Biiwii Blog'... More
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  • How [They] Learned To Stop Worrying And Love The [Market]

    How I [they] Learned to Stop Worrying and Love the Bomb [Market] paraphrasing Stanley Kubrick's great cold war/nuclear paranoia film Dr. Strangelove (1964).

    The USA thrived during a 20th century rife with war, famine and depression. This was a wealthy country however, founded on principles of self-reliance and valuing thrift, saving and honest work for an honest return. Add in unparalleled productivity and economically at least, the positives more than outpaced the negatives.

    Until the 1980′s the United States had a Federal Reserve that one might argue considered itself a steward of a more honest (though totally paper-based) monetary system.

    (click to enlarge)

    Courtesy SlopeCharts

    The huge spike in interest rates in 1980 was due to the Volcker Fed's apparent intention to pop the bubble in inflation angst and as a by-product, the gold bubble as the post-Bretton Woods US dollar came under the pressure of inflation, which is all too easy to promote in a paper based system not backed by any asset of actual value other than the moving target known as 'confidence'.

    That spike in interest rates loaded the gun for Alan Greenspan and an era of monetary wizardry that continues to this day. I often bemoan Grandma's savings account at the local bank paying 0% due to the Bernanke Fed's current and ongoing ZIRP policy.

    If Grandma wants return these days, she's got to jump into the risk pool. It's as simple as that. Risk-free return is a thing of the past now that T Bills have been pinned to the mat for over 5 years now. More than that, the trend in 'Fed Funds' has been down for decades as the trend in risk taking has gone orbital. The S&P 500 shown above is just one asset market that has responded I assume, as intended.

    How many Grandmas are being put into junk bonds, chasing return and risk ever higher? Do you think some conventional advisers may have a percentage of allocation to these potential weapons of portfolio destruction? What is a conservative asset allocation these days? 30% US & Global Stocks, 20% T bonds, 10% 'High Yield' [junk], 30% Investment Grade and/or CDs, Annuities and 10% Commodity, Resource and Precious Metal?

    I could envision Grandma's adviser allocating somewhat similar to the above. Every last category above represents risk to one degree/form or another. Gold is conspicuous in that grouping however, because it pays no dividend. Therefore it has no assigned liabilities other than pricing risk. But it is an anchor to value and to a time before the graph above began to get wild in its financial extremism. Therefore, gold is unique.

    In NFTRH we have been on a theme whereby a 'fear gap' is being closed from 2008 as markets and the herd's psycho-sentiment makeup have made a 180 degree pivot from the suicidal sentiment of March, 2009, when the current cyclical bull market got under way.

    (click to enlarge)

    Technically by this chart gold could have a little lower to go as measured in S&P 500 units to close the actual 2007 (Lehman & friends meltdown) gap. But the ratio has already declined to Q4, 2008 levels. That was the acute phase of the crisis. So the ratio could be done declining.

    (click to enlarge)

    Regardless, everything from the sleepy VIX and Equity Put/Call ratio to margin and money market cash levels to good old Smart/Dumb money sentiment point to a market that currently enjoys an equal and opposite extreme to the terror that was so prevalent in March of 2008, when the bull began. The green shaded areas show nice, neat 5 year periods for the bubble phase of the previous secular bull ended 2000 and cyclical bull ended 2007.

    We expect that - subject to a near term correction - the bull market can (not will, can) run out to mid-year or so, but March of 2014 makes 5 years, in line (+/-) with the two previous cycles. But as we have been noting for weeks in NFTRH, market risk is very high in general.

    Bottom Line

    The media as well has dutifully come full circle. They gave us every reason to be bearish in 2008. Indeed, NFTRH used the Soup Line on the cover Time magazine in Q4, 2008 as part of a thesis about why the deflation argument was doomed. Since then Ben Bernanke has been named Man of the Year, anointed "The Hero" and generally people are enthralled with policy makers and fully under their spell.

    There is relatively little worry out there; economically and financially everything is getting better and Wall Street is busy extrapolating PE's* and economic growth based on a lie. That lie is in the following chart, which I never tire of highlighting.

    (click to enlarge)

    Courtesy SlopeCharts

    The lie is that general economic performance, corporate profits and thus the US stock market, even with the public's confidence so well repaired compared to 2009 levels, is not vulnerable to any withdrawal of inflationary policy, whether voluntary or compelled. And even if policy is maintained, its continued efficacy is a big question.

    In other words, will the inflation continue to work toward desired assets like US stocks or perhaps fan out to assets that more traditionally benefit from inflation?

    * We do note however that the Vampire Squid, Goldman Sachs has issued analysis about the over valued nature of stocks. So maybe even Wall Street has decided it's time for a cool down with enough 'dumb money' bought in.

    NFTRH is busy planning a pivot to a new phase for 2014, gauging its macro fundamentals and technicals every step of the way. Set for pivots are the over bullish, over loved stock markets on the one hand and in the mirror, the utterly despised precious metals. Treasury bonds and their yield relationships also play a pivotal role in coming events. Join me in 2014 for in depth weekly reports and dynamic interim updates. | Notes From the Rabbit Hole | Free eLetter | Twitter

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No positions were mentioned, but I am long precious metals and short (to a modest degree) various broad market equities.

    Jan 14 10:29 AM | Link | 1 Comment
  • Precious Metals: Risk Management To Opportunity

    What Has Been

    A solid 2.5 years of risk management (to varying degrees) has been required of precious metals investors. It was most intensely required after the announcement of QE3, when the net commercial short position in silver began a relentless march toward a very bearish alignment in late 2012 and then the HUI Gold Bugs index lost an important support level at around 460. Here is the chart of silver with a heavy commercial net short position from NFTRH 215, dated 12.2.12:

    (click to enlarge)

    As for the HUI, NFTRH 215 also noted this on 12.2.12:

    "As you know, NFTRH had been contentedly managing a "normal" and expected decline
    in HUI to the support zone (460 area) defined as the neckline to the 2011 topping pattern
    that I thought could be a great buying opportunity. No sir, care to try again?"

    The sharp rally into and through the QE3 announcement corrected as expected to the 460 critical support area. What was unexpected was the utter failure at this support zone. In the financial markets, always have some level of expectation for the unexpected and always be ready to manage risk against it. We have been doing that ever since.

    All through the worst of the precious metals correction we remained on the lookout for signs that the most fervent precious metals bulls had either given up the ship or been forced to walk the plank. Most recently, a deadly article appeared what seemed like moments after the Fed rolled over on tapering and maintained full QE in September. For a contrarian gold investor, this was a chilling moment. Here is the post noting as much: Scary Gold Bug Article, on Cue. The article trotted out a veritable who's who in the gold "community" as if their final vindication and victory had been realized as the Fed declined to taper its bond manipulations.

    I happen to believe that gold is a timeless store of monetary value in a world gone monetarily mad. But these are the financial markets and joining a "community" or cheer leading an ideology can be dangerous. In reference to the article itself (With a Sling and a Stone) we noted:

    "This is the kind of thing that always gets punished. When the "community" starts congratulating itself for a job well done, a big hit is sure to follow. Every time."

    And so the punishment continued.

    What Will Be?

    Why do we manage risk? To be fully intact and ready when it is time to speculate. We manage risk against nefarious official and quasi official entities maybe, but more than that we manage risk against the herd's perceptions. In the case of the precious metals the herd has been absolutely obsessed with QE, inflation (money printing) and fears of the dreaded 'taper'.

    NFTRH has been awaiting a tapering regime in order to start getting bullish the precious metals. There are real fundamental reasons for this, some details of which go beyond the scope of this article. But suffice it to say that the herd and its perceptions have been led astray once again by the evil genius that is the financial markets. The gold herd has been hoping for more of the thing (QE) that has gone hand in hand with so much pain for the "community". Or maybe more accurately, the herd has been dreading the thing (QE tapering) that could be its salvation.

    Gold bulls should want to see the Fed continue to taper out of the bond manipulation game and if certain gold-favorable Treasury yield spread alignments go along with a decline in our long term 'continuum' (below), opportunity will be at hand. An added bonus would be most gold advocates either having turned away from their shiny idol that seemingly did not work the way it was supposed to, or quietly sitting in a corner sucking their thumbs, no longer having the stomach for triumphant declarations of victory against the forces of inflationary evil.

    (click to enlarge)

    Gold bulls and especially gold stock bulls should not fear the deflationary message that a decline in the 30 year yield from the above noted 100 month exponential moving average might portray. Rather, they should realize that the sector is now firmly counter cyclical and the yield, along with stocks, is cyclical to the growing economy.

    Inflation, as represented by the vertical black Monetary Base line below, has gone hand in hand with a cyclical rebound in corporate profits, the stock market and to a lesser extent, the economy itself.

    (click to enlarge)

    Chart courtesy of SlopeCharts

    If upside can continue with the green (profits) and blue (S&P 500) lines in the absence of the black line (which could theoretically decline if the Fed tapers its money printing in service to bond buying) then more power to the Fed and those who unquestioningly jumped into the risk pool at the behest of its policy. But if money supply starts to 'taper' off and profits, the stock market and the economy start to falter then we have… the counter cycle.

    The inflation has already been promoted and it has not included the precious metals. What we have in front of us now as I see it is one of two things:

    Thing 1: The banks become incentivized by the spreads between the ZIRP-pinned Fed Funds and the theoretical rise in long-term yields (again, note the EMA 100 on the TYX chart above) that a 'taper' regime would imply. This could 'get the money out there' to Main Street, delivering inflation to Mom and Pop. Inflationists talk about such a phenomenon driving up all sorts of cost of living items including oil. Unfortunately, inflationists are also talking about strongly rising oil prices as being the fuse to set off gold's next great moon launch.

    One might want to be careful about this line of thinking, especially if one is a gold stock bull because impulsively rising energy costs would not do the miners any good.

    Thing 2: The yield on the 30 year bond above does indeed turn down (with a component of 'sell the [taper] news' baked in?) into a counter cycle, complete with a potential whiff of deflation. But if short term yields decline in relation to long term yields - which would be expected in a counter cyclical 'risk off' environment, then the stage is set for a real bull phase in the precious metals and most notably, quality mining companies.

    There is so much more to write about this subject that is telling its story each week for patient people to interpret. Having already gotten long-winded, I'll simply note that much of the same ideology that got precious metals boosters into trouble in the first place is still out there making the rounds. I believe the odds are good that 2014 is going to introduce a macro pivot point that puts most people off sides, whether they be stock market bulls, gold bugs or inflation touts.

    NFTRH does not have all the answers, but each week the service (weekly report and 'in-week' updates) refines the difficult questions and signals the markets present to make sure we are in the proper risk mode and ready for opportunity. Where the precious metals are concerned it has been quite a while since I have been able to talk about opportunity as opposed to risk management. I'd be most pleased if you consider checking out this quality service with a successful track record as opportunity may be upcoming. | Notes From the Rabbit Hole | Free eLetter | Twitter

    Jan 07 1:19 PM | Link | Comment!
  • Taper!(?)

    It's 'taper' talk time again and here is a post that is only too happy to join the cacophony…

    Dear Federal Reserve, please signal what would be at least a symbolic gesture to the market and pretend to tighten policy by beginning a tapering of long-term bond buying. We know inflation is being promoted via ZIRP at the discount window and via money printing used for T bond and MBS asset purchases.

    Now it is time to 'taper' and let long-term yields rise if that is what the free market wants them to do. Given the decades-long limit at the 100 month EMA (AKA the deflationary backbone) potentially imposed by this chart, a further rise in yields is debatable anyway if all you plan to do is taper a bit. The 'Continuum' in the Long Bond's yield is at this would-be limit point after all.

    (click to enlarge)

    30 Year Yield, Monthly

    Policy has been more successful than I for one anticipated when QE3 was announced in September of 2012. Yet nearly 1 year ago we (well, those of us who cared to look anyway) began to see the signs of an improving economy and in particular, the manufacturing sector, which was led by the canaries in the coal mine known as the Semiconductor Fab Equipment sector.

    Dial forward a year and growth is now ramping at the instigation of policy to date, with ISM after ISM coming in strong. Now let's see what kind of legs it has. It is time for the banks to leverage the spread you have manufactured for them and it is time for some good old fashioned inflation to hit Main Street.

    (click to enlarge)

    BKX-SPX Ratio, Weekly

    But unlike previous inflations, the current situation is actually a little tricky because on the one hand, the Banks have led the S&P 500 since late 2011, which not coincidentally was when the bottoming pattern (which we noted at the time) began forming on the 30 year yield above. Why? Because the higher long-term yields rise while the Fed holds ZIRP, the higher the banks' implied profit margins.

    So there is some more good rationale (along with the revving economy) for a tapering regime to begin. Sure, the stock market is hopped up on speculation and some of that may take a haircut, but it is not speculation you are promoting, right? Nooo, of course not.

    So what say we begin the transition to a vibrant economy that goes it on its own after a job well done over at Policy Central? What could go wrong, other than maybe that black arrow on the first chart above turning red again in response to some as yet unseen liquidity event? The banks (AKA the delivery mechanism of inflation's cost effects AKA the leaders to the S&P 500 for the last 2 years) sure would not like declining long-term yields.

    Come to think of it dear leaders, this really is tricky because what are odds that the yield is going to simply dwell below the EMA 100 indefinitely and benignly?

    A break out in yields could help the banking sector deliver some money velocity into the system but at what cost? If the backbone breaks the backbone breaks and we are in uncharted waters or at least waters not charted since the Volcker and mid-Greenspan eras.

    If on the other hand yields break down despite a 'taper' signal, what does that tell us? That yields have already anticipated the tapering and eventual exit of the Fed from the bond manipulation game? Again, would yields simply dwell around current levels or take a swan dive into the next liquidity event?

    Maybe the buzzword for 2014 and beyond will be a splendid interest rate 'Dwell' or holding pattern. Then again, maybe it won't. | Notes From the Rabbit Hole | Free eLetter | Twitter

    Dec 17 5:17 PM | Link | Comment!
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