The Midnight Rambler: Dismantling the V-Shaped Recovery, Obama’s “Rosy Forecast”

Thursday, July 23, 2009

Dismantling the V-Shaped Recovery, Obama’s “Rosy Forecast”

“Abridged Version”

Things are bad. Things are going to stay bad for some time, years not months. The government’s forecasts of GDP, deficits, debt, employment will all be revised to the downside over the next year. This is a time to buckle down and to be realistic that a new, virtuous cycle of economic growth requires far lower total debt as a basis for credit expansion. Do not be fooled. Sure we may rally more this summer or fall, but there is another bloodbath in the making. Our political system seems fractured, career politicians manning the ship alongside the invisible hand of major financial institutions. Be smarter than your neighbor. This is the real deal, Evander.

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On Gold and Silver: We all know by now that they move together, so I will discuss gold, the big honcho. Real quick, I don’t like it here. This deflation concept is troubling me. In March, the market was priced for such an event, and we all know what happened. The Fed opened the pipeline of liquidity and capital (different, more intense measure) and the markets have now adjusted. The ‘reflation’ trade, as it’s been called, has been the market’s way of correcting prices to reflect the expansion of the Fed’s balance sheet, amongst other expansionary forces. Now, with inflation far more priced in than before, certainly, the question becomes whether we will we see another bout of deflation worries, just to inflict maximum pain on this shipwrecked crew, scrambling for paddles, convinced they’ve found motorboats—the banks sure did, they’ve done OK thanks to Obama and Paulson/Bush. A “double-dips” as most economists call it, or “Just Plain Suckin Going Forward” as I call it? (God, I wish there was a vowel in there, could have made a tee-shirt,” will take its toll on the metals. Technically speaking, a break of $943 would lead to a test of $927, which, if breached, leaves the market supportless until $875-880. Trust me on this. Gold could still muster an advance if the equities have this final shot to the upside in it, so that’s the concern in selling too much. Again, I like the whole concept of being flat here. No positions. Watching and waiting. Smart as I see it. Despite 18 months into its consolidation, with a nice chart beneath it, my concern is real. If it were to manage to hold those levels, while improving its COT structure, namely the amount of futures owned by hedge funds, I could switch sentiment in a jiffy. But now, I feel the resurgence of deflation shall make this overinvested bunch pay.

All Eyes On August

It doesn’t take too long in the gold business to recognize that August is unkind to say the least, with the word brutal potentially being more representative, to precious metals investors. As gold sits marginally above $950 and silver a sliver at 14 all eyes will once again look towards August as potentially providing that golden moment, that massively oversold gift, whereby aggressive positioning can serve as a base to stay invested for the often lucrative September to March/April period of time. In May of 2007, I wrote my first piece for Kitco, entitled Caution Still Warranted, after the drubbing precious metals had endured from the March “Bear Sterns” high. It had essentially argued that gold and silver typically consolidated around 18 months following massive 7 month run-ups like the one that had begun when Ben Bernanke lowered interest rates by 75 basis points in September 06 in response to deteriorating credit conditions (yes, that long ago, although it was incorrectly argued that the subprime mess would be contained). Sometimes I wonder just how much may have been avoided if the Fed was more worried at that outset about eventual contagion, though the mess was already on the books. Anyhow, now 17 months after the fall of Bear Sterns, we find that gold has done exactly that, lying strong at the upper end of the rather wide consolidation range. It is only fitting that those that have had their expectations in check for that time begin to take a closer look as history suggests we have the potential to move soon if there is to be another major up leg.

I myself have taken this summer particularly easy, passing on the July rally as it struck a tad later than expected. Seasonality has been a touch off this year and I have found an inner hesitance to pay it the typical heed, though in the end, July provided what it usually does, a nice pop. As the pleasant East Coast days of July tick to an end, I am obviously beginning to buckle the seatbelt some more and watch August like a hawk, waiting to see if it can bring that selling, that beautiful selling that makes for the low-risk entry point of the year. It is at such point, that positions can be put on, and an in-the money advantage can be gained. All of a sudden September comes, and if gold breaks through this 17 month triangle to the upside (the most bullish technical achievement in the gold market for sure), one is prepared and can even press the bet. That is how to make big money. Right there. Will it all go down as planned? Well, that I don’t know, but I sure will be prepared.

Let’s take a quick stock of our best indicators. Stock market is overbought yes, but could keep running. Then, it is difficult to predict exactly what effect rising or falling equities will have on gold. Could stocks peak around S&P 1050-1100 by the end of August and then fall hard? Sure. Might their fall drive the price of gold down? Absolutely. Would any of us be surprised to see some brief metal weakness followed by a convincing move above 1000? Probably not. Point is that it is difficult to base much on where the equities sit right now.

Gold and Silver’s RSI is not overbought or oversold. Perhaps we trade a bit higher, for instance gold $980 and 14 some silver before reaching more overbought levels typically associated with rally tops. Again, not a strong read right now.

Cot report—Now this was encouraging, this past Friday’s Cot report, July 24. Large and small Spec gold futures contracts exploded by over 20,000 with the liability where it usually is, on the Commercial short side. This is good news for those hoping for that golden moment in August. Gold’s 18-month pause/major rally/18-month pause pattern from its bull market beginnings is hard to ignore here, especially after such strength. To give you some COT framework, major bottoms like 640 in August of 06 and 680 at the “Credit Crisis lows” typically see large spec gold long positions around 100,000 contracts (now sitting 200,000), and a super surge of large spec gold shorts to around 50,000 contracts (now sitting around 26,900 which is what I consider normal). On the other side 240,000 large spec longs has been the absolute “line in the sand” on the upside. At that point, there are too many weak hands invested, with a good deal of profits to protect. More than anything else, I will be following these numbers. They tell me there is a chance that we may see a decent sell off. August stinks of that time that could jerk it out, as I can’t be the only investor that has learned to avoid being long for them. Consider this my reminder to sit back and watch for the time being. I certainly won’t buy here if I know I’d sell them at $980. No, I’m more of a big-game fisherman. Right now, I’m just polishing my hook, increasing the test of my line.

Extras

For those of you interested in more information, please access the following links. They are all relevant. I will include a mix of easy to understand, and more technical pieces, so there should be something for everyone if you fish around.

Easy

http://www.thestreet.com/story/10538860/1/kass-the-case-for-a-summer-snooze-fest.html

Technical

http://www.John Cassimatis.com/blogs/john_mauldins_outside_the_box/archive/2009/05/18/the-end-game-draws-nigh-the-future-evolution-of-the-debt-to-gdp-ratio.aspx

Video

http://www.youtube.com/watch?v=OwL8KnrVUq4 (Helen Thomas/Robert Gibbs)

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The Midnight Rambler

Thursday, July 23, 2009

Dismantling the V-Shaped Recovery, Obama’s “Rosy Forecast”

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