HOME OF "PICTURES OF A STOCK MARKET MANIA" January 5, 2011
Alan M. Newman's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our January 3rd issue
Rationales & Targets
The public has deserted the domestic stock arena, insiders are selling everything they can, yet optimism builds to excessive levels, leverage once again rises to an extreme and strategist forecasts both can accommodate continuing high unemployment while pegging another 10% onto stock prices. It all seems so bizarre. The Fed has admitted they want stocks higher and many participants believe that the Fed can accomplish just that, despite the fact their strategy on rates is failing. Reliance on the Bernanke Put at this point completely ignores the potential for very major events in the year ahead. The debt crisis in Europe is far from over. Worst of all, the mechanics of our markets remain horribly broken. It was one thing for optimism to build from much lower levels in 2010 and drive stock prices higher, but how can optimism continue to build and drive the market from current excessive levels? It cannot. We expect the cycle to reverse and provide the impetus for the downside. We may see Dow 12,000 this year but we will also likely see Dow 10,000.
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We have repeatedly made the point that derivative risk is so enormous that disaster is always waiting at the door. Doesn’t matter that there is only one bullet in a revolver with a thousand chambers, if you point the gun at your head and keep pulling the trigger often enough, eventually you will blow your head off. The two largest derivative portfolios are those of JPMorgan Chase (JPM) and Bank of America (BAC). We see the potential for some ugly action on the horizon. BAC contnues to make a series of lower highs and JPM seems to have any number of folks concerned about its efforts to corner or control metals prices, including gold, silver and copper. We reach back to April for this story (see http://tinyurl.com/y7byq27) about manipulations in the gold and silver markets and also take you to a recent Zerohedge post (see http://tinyurl.com/2bmjsdo) featuring a couple of cuddly bears resembling the two that previously offered a precise analysis of QE2 (see http://tinyurl.com/2e3le5o). As well, consider that Overstock's (remember Patrick Byrne?) $3.4 billion suit (now with RICO claims) vs. Wall Street banks and brokers is set for September. Mr. Byrne has publicly declared the evidence is “a lock.” This could turn out to be a most interesting year.
Gold To Go Parabolic In 2011?
Gold’s super bull market ascent is beginning to resemble the period as the precious metal started its famous run for the roses in 1979. Gold climbed nearly 20% in 1977 and then soared another 30% in 1978 before finally taking off in an unbelievable straight up move of 102% in 1979. Two years ago, bullion was up a solid 35.8% and last year gained another 29.7%. We should not be surprised to see another yellow mania take hold during 2011, pushing gold up towards our stated resistance point at the January 1980 inflation adjusted high equating to $1908 per ounce.
We believe 911 was the definitive inception of this super bull market, an event that changed our perceptions of the world around us, an event that will not be forgotten in our lifetimes. Hundreds of terrorist events since that fateful day underscore the continuing malady that affects us all. A visit to the Wiki’s list of incidents (http://en.wikipedia....orist_incidents) is most depressing, even more so when you finally begin to realize that the pace has stepped up in recent years.
As well, the uncertainty catalyzed by financial market misdealings in recent years threatens even greater cataclysms down the road. There is now ample speculation that JPMorgan Chase has attempted to influence the price of silver and copper. Two months ago, CFTC Commissioner Bart Chilton cited “fraudulent efforts” to drive silver prices down but failed to name names. Regarding copper, Reuters reported “…..JPMorgan said it does not hold more than 90 percent of copper stock warrants in London Metal Exchange warehouses, but declined on Tuesday to comment on whether it had a smaller position.” Curious! So, they could hold 89%?
Between JPM and Bank of America (BAC), we still see over $147 trillion in notional values of derivative contracts of one kind or another. Not much has to blow up to take down either bank or threaten further dislocations in the world economy. As it has been over the centuries, gold appears to be the best protection against uncertainty. On page three bottom right, we present a most compelling chart, specifying the exact commencement of this super bull market and the obvious next resistance point due to arrive as another parabola, perhaps this year. Furthermore, “resistance” should not be interpreted as all she wrote or the final inning. For many reasons, including very importantly, those we are about to reveal, gold may be headed much, much higher. Paid subscribers are invited to see a new commentary posted (especially and only for subscribers) at http://www.cross-cur.../commentary.asp. Presented are three compelling pictures that show why we believe gold has so much further to run.
Below, the lowest the Dow/Gold ratio has been in nearly twenty years was 7.5, at the 2009 lows for the Dow. It has since ticked below 8 to 1 (barely) this past November and is now 8.1 to 1. This ratio was as low as 1.3 to 1 when gold peaked in January 1980, but we are not convinced we will ever see that ratio again. More likely, the world is just too driven by paper and even in the worst of circumstances, the ratio will likely fall no further than 6 to 1. Of course, even this modest worst case presents a great opportunity to those who favor gold and gold stocks. The mathematics are compelling. Any decline in the ratio means that gold prices must advance more than stock prices. If the Dow is headed for 12,500 (+8%) this year and a 6 to 1 ratio is achieved, bullion will trade at $2049 per ounce, up 44%. Pick a level, any level, it does not matter; a 6 to 1 Dow/Gold ratio means gold must outperform, even on the downside.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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