Rationales & Targets
As forecast in our last issue, we got our“briefand modest move to new highs,” and we are now looking for the “swiftandshocking reversal” to commence. However, Friday’s last hour swoonmight have just been last minute profit taking and we will instead relyon key levels to determine the odds for the correction finally gettingunderway. On the hourly charts, there are a series of bottomsjustabove Dow 10,200 dating back to November 12th. When this levelbreaks,we should be on our way and accelerate down to anticipated supportbetween8100-8400. We do not see the Dow testing the March ‘09 bottomunlessthere is a catalyst at least as significant as the crisis that took usto the precipice last year.
The psychological aspect is fascinating. Given the fundamental background of a near economic and financialcollapse,to see investment advisors at their least bearish in 22 years is justmindnumbing. The economy requires jobs. Each decade from the40sto the 90s witnessed at least 20% growth in payroll employment. Therewas ZERO job creation in the 00s. We expect recognition of thisplightto soon surface.
The Odds
The highest odds scenario we offered for lastyearwas 30% for the recession to worsen and clearly, it did. A“doubledip” return to recession is again our biggest fear and highest oddsscenario. Despite the modest gains for the economy in late 2009, we have reasontosuspect that there was a bit of illusion created by the inevitablereboundfrom the abyss. As we have stated before, business is not good,itis just less bad than before. The consumer is not well heeled,justless strapped than before. A double dip into recession is quitepossible.
We have raised the odds for a major TerroristEventfrom 10% to 15%. While we would like to believe the odds growsmallerover time, the reports of terror episodes in other countries have notabated. It is likely only a matter of time before we suffer a disaster thatwhilenot on the scale of 911, may temporarily bring a large segment of ourcommerceto a halt.
We have increased the odds of anotherderivativeevent to 20%. We have conclusive evidence that the skew providedby credit default swaps (CDS) and collateralized debt obligations(CDOs)incentivized parties to create uncertainty where none existed or todramatizeand exaggerate uncertainties to profit from short sales. We needgo no further than a recent NY Times article on the debacle that nearlytook the country to ruin (see http://tinyurl.com/yejhqgd). As well, we hasten to reference David Einhorn’s October 19th speech tothe Value Investing congress (see http://tinyurl.com/ykcb3m5)wherein he claimed, “trying to make safer credit-default swaps is liketrying to make safer asbestos.” As you can see at bottom left,the$136 trillion in notional values for SWAPS comprises roughly two-thirdsof all derivatives, and their share is still growing. Over theyears,we have continually referred to a worst case of 1% to 2% of notionalvaluesat risk. Losses thus far from the 2007-2008 disaster are withinthatrange. The risks remain in place. As always, it’s not aquestionof if, but when.
Armed conflict remains at 15%. Theprincipaltrouble spots appear to be limited to insurgencies but we worry about are-ignition of an Iran-Iraq conflict that would disrupt fuel suppliesas Iran’s radical leadership attempts to re-focus opposition within thecountry. Clearly, U.S. forces are already spread too thinly and any furtherconfrontationwould likely cause the markets great concern.
There is also a modest chance that the FederalReserve will at some point be forced to raise interest rates, even iftheeconomy remains under pressure. Add to the mix the odds of debtimplosions,such as those seen in Iceland, Greece, Dubai, Spain and others, and wehave the backdrop for increased uncertainty and the possibility ofsovereigndebt problems. Uncertainty is never good for stocks.
Bullion Bull
We’ve shown the chart below before but thistimewe are basing our comparison from our belief that bullion’s bull marketcommenced with the terror of 911. Stocks were already well ontheirway to a bear market bottom, thus have had ample time to recover fromtheexcesses of the tech mania. Trouble is, the tech mania wasfollowedby an institutional mania and the subsequent popping anddénouementcatalyzed by derivatives created sufficient uncertainty to guarantee anenormous interest in gold, not only from investors but from centralbanks. Gold has functioned as currency for thousands of years. Despitethemany attempts of a fiat world to devalue gold via paper, bullionremainsa final resort when doubts form.
Since 911 and adjusted for the effects ofinflation,stocks as measured by the Dow are actually down 13.5% from the end ofAugust2001 while bullion is up a staggering 230%. Recently, as goldmovedbriefly above $1200 per ounce, there was much speculation that thesurgewas a blowoff. Not even close. In the blowoff of January1980,bullion exploded, nearly doubling in only one month. Gold’s 27%risein the last four months and the subsequent correction that has erasedmostof the rise is in our view, very healthy bull market action. Fromour perspective, there are so many fundamental problems working at thesame time that the potential upside for gold remains far higher thananyonerealizes. While we see major resistance between $1800-$1900 perounce,a move to those levels is not out of the question for 2010.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor ofCROSSCURRENTSsince the first issue was published in May of 1990. Mr. Newman is alsoa member of the Market Technician's Associationand has been widely quoted for years by the financial press, media, andother newsletters and has written articles for BARRON'S.
The newsletter is published roughly every threeweeks and focuses on economic and stock market commentary, oftencoveringcontroversial subjects. Several proprietary technical indicators areusuallyfeatured in every issue accompanied by current interpretation. Broadsamples of our work can be viewed at
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