Dow Jones At New All Time Highs - Here's Why

The great disconnect between markets and economic reality widens.  Regression will become a four-letter word.

http://www.zerohedge.com/news/2013-04-09/dow-jones-new-all-time-highs-heres-why

Key Chart As Gold, Silver & HUI To Have Massive Advances

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/14_Key_Chart_As_Gold%2C_Silver_%26_HUI_To_Have_Massive_Advances.html

The Last Time The Dow Was Here...

http://www.zerohedge.com/news/2013-03-05/last-time-dow-was-here

Will Gold Make It 9 Out Of 9?

http://www.zerohedge.com/news/2012-12-31/will-gold-make-it-9-out-9

Click on Image to Enlarge

Greyerz - Market Chaos & Incredibly Important 200 Year Chart

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/31_Greyerz_-_Market_Chaos_%26_Incredibly_Important_200_Year_Chart.html

James Turk - Forget $8,000, Gold Headed Much Higher

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/3/8_James_Turk_-_Forget_%248%2C000%2C_Gold_Headed_Much_Higher.html

People don’t understand how much wealth destruction has yet to occur as this financial bust that we are in works to its inevitable conclusion.  In effect, the Dow has to lose 90% vs gold.  This wealth destruction is going to devastate a great many investors, in fact most of them will never recover from this event.

    

As I said earlier Eric, my thinking has changed as we have been going through this cycle.  This time around is not going to be like the gold bull market of the 1970’s.  The dollar is going to lose its status as the world’s reserve currency.  This is fundamentally different than what occurred in the 1970’s.

I’m often asked by people when do I think they should sell their gold?  I tell them this time around it’s going to be easy because you are not going to sell your gold, you’re going to spend it.  In other words, gold will once again become currency.”

The USDollar's decline

This economist sounds like an Elliott Wave loonie until you find out he's the Chief Strategist for the trading desk at Japan's 3rd largest bank, Sumitomo Mitsui (ed. I've have business transactions with Sumitomo before). He also has credibility as he correctly called the Dow Jones Industrials decline to the 6500 level, and the decline of the USDollar relative to the yen.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a_A5nqmw9Dq8

The tragedy becomes comedic when fringe politicians like Ron Paul end up prescient, despite being marginalized by mainstream economists.

Dead cat bounce?

Due to my increasing anxiety with every rally in equities, I gathered some charts of the S & P 500 Index. It recorded a low of 666 in early March 2009, down from the October 2007 high of 1565. This represents a decline of 57.5% from the peak. What came next has been this powerful 50% retracement to approximately the 1000 level. A Fibonacci 61.8% retracement yields a value of 1078 as an intermediate peak for the SP 500. I would be a net seller if and when we approach that level.

For comparison's sake, between the 1929 peak of the Dow Jones Industrials Average to the low in 1932 (see first chart above), the market had a handful of double-digit gains. But in that duration, the market declined by 90%! In other words, for every 1 step up, the market took 3 steps down.

From the 1932 low to the 1937 peak, the DJIA had 3 triple-digit gains, including one for almost 300%--almost a quadruple. But none of these powerful rallies prevented the Great Depression. And investors holding since 1929 weren't whole again until 1953.

The harder a market falls, the higher the market rebounds, but the more difficult it is to get back to even--despite multiple powerful rallies. With the 2007-2009 decline "only" measuring 57.5%, this retracement rally should not have been surprising.

To the trained eye of an electronics engineer, the SP 500 chart between 2007 and 2009 looks like a waveform transitioning between logic "1" to logic "0" (see second chart above). However, instead of being an ideal waveform with uniform horizontal and vertical lines, the signal is distorted with undershoot and high-frequency ringing.

In layman's terms, this market is a dead cat bounce. And gravity will eventually cause it to fall back down before finding a steady-state equilibrium. The hope is that the SP 500 secular low of 666 will not be revisited, and that the index will find a trading range of consolidation above that low until a recovery is well-established.

I still posit this is a bear market rally--and not the beginning of a secular bull market. The world economy is still undergoing a delevering process as corporations, individuals and governments are still awash in debt. Banks haven't honestly accounted for toxic assets on their balance sheets. With unemployment climbing, tight credit conditions, and the American consumer tapped out, any economic recovery will remain muted. Equities may still rise from here, but at some point (soon), the market will become over-extended.

Reflation play intact

Oil, natural gas, commodities, copper, and 30-year T-bond yields are all up big, so I took some profits off the table. Long-term treasury bonds are looking really shaky, so the TBT trade was profitable. I'm hoping we get a correction--even if it means I lose some money, because if we don't, whatever recovery we hope to have will be toast. Having said that, most of the reflation trade is still in play, despite any looming correction, as the long-term trend is high inflation--despite the government's efforts to downplay it. If there's only one thing to learn from this financial crisis, it's not to trust central bankers. The last 2 years should have cleared any doubts.

The Chinese are shunning T-bonds as I predicted, and opting for gold, base metals, energy and commodities as they rebuild their domestic and export economy. Expect the yield curve to steepen long-term, as it has since December.

The S & P 500 at 920 and Dow Jones Industrials look heavy here, after a big 30% run up. The fundamentals of our economy are still terrible--rising consumer debt defaults, rising jumbo loan mortgage foreclosures, rising commercial real estate defaults, and toxic assets being shoved under the rug with sketchy accounting. A steep yield curve will help banks earning operating profits with widened net interest margins, but the big money centers still are left holding the bag of toxic assets in their basement. I re-entered puts in a certain for-profit educator, and I think all the indices will correct here. This bear market rally has been powerful, but the market's only function is to take down as many suckers as possible. Too many retail investors are just now joining the bandwagon, and I suspect the majority of the move is now behind us. Let's hope the coming correction isn't a whopper.

I'm not a good trader, altho I'm gettng better at valuation, so please do your own due diligence, and good luck to all.

Dow/Gold ratio

I'm looking for the Dow/Gold ratio to reach 4, which means gold could rise to $1350/ounce and the Dow Jones Industrial Average drops to 5400.

Gold is a store of value that doesn't pay any rate of return (interest). However, there is no counterparty risk, as it is accepted as payment anywhere in the world.

When times are good, we look to stocks to give us capital appreciation and dividends. When times are bad, we revert to gold to protect our purchasing power against inflation, and preserve our asset values in a deflationary environment.

Right now we're at a ratio of 7.5. Look at the historical charts and you'll see during the depths of the Great depression, the ratio was 2:1. However, during the 1980 recession, the ratio was 1:1.

I don't even want to think about this possibility, but it has happened before.

Remember, nothing goes up or down in a straight line--expect high volatility. But don't be on the wrong side of this move. Consult your financial advisor, if he/she still is employed.

More Unthinkables

The proverbial "other shoe" is dropping. Citigroup shares dipped below $2 and Bank of America shares are headed toward $3 amongst fears of bank nationalization, which completely wipes out shareholders (instead of just essentially wiping out shareholders). As financials are leading indicators, this does not bode well for the broader averages. The Dow Jones Industrial Average dipped and closed below November 20, 2008 lows, which means that support level now serves as resistance. The charts are basically breaking down toward their 2002 levels, as the technicals are deteriorating faster than you can say "Ponzi".

Gold touched above $1000 an ounce for the 2nd time in history since last spring, before retreating. Gold mining shares have essentially doubled since their November lows and still surging. I've been expecting pullbacks, looking for opportunities to add to my current positions, but the market just hasn't allowed me to. I'll just hold on and see if we penetrate the $1030 all-time high. If that occurs, then all bets are off and we could see a buying mania which would signal an opportunity to take some profits off the table. Long-term, the chart for gold still looks bullish, but locking in some profits just seems prudent to me, considering last year's stunning rise and subsequent collapse in gold.

Eastern European defaults are a huge concern, which would cascade toward western European banks with heavy exposure to the emerging countries in the Baltics. And with European banks even more leveraged than their US counterparts, this is analogous to the US subprime mortgage crisis--only worse and much larger in scope.

Unemployment is soaring with no end in sight, corporate earnings eroding, and consumer confidence shattered, markets are braced for the next shock, with the realization that this is not your garden-variety recession--this is an outright worldwide Depression, with no country spared.

The Dow/Gold ratio is at 7.5 and dropping, and that ratio usually dips below 5 and all the way to 2 at extreme recessionary lows. Hypothetically, gold at $1200 an ounce, and the Dow Jones Industrials at 6000 would yield a DJIA/gold ratio of 5. This is another indicator which has scary implications going forward.

The Volatility Index is climbing once again above 50, so hold on to your hat.

Deflation or Inflation?

I've posed this question before, but if you own gold, the answer is it doesn't matter.

According to Porter Stansberry:

"This is really shaping up as the Great Depression Part II, with Obama's nearly $900 billion bailout package as the first episode of the New New Deal. Protectionism was one of the highly destructive ideas that helped keep the U.S. economy down during the 1930s. The bailout includes "Buy American" language, requiring bailout money to be spent on U.S. goods, something U.S. trading partners like China, India, Russia, and other signers of trade treaties with the U.S. aren't crazy about.


I bet you some day soon we get something very much like the New Deal's Committee on Continuity of Business and Employment, which put out a report in 1931 stating: "A freedom of action which might have been justified in the relatively simple life of the last century cannot be tolerated today... We have left the period of extreme individualism and are living in a period in which national economy must be recognized as a controlling factor."


Where do you invest if the Great Depression II is in our future? Believe it or not, gold stocks. Homestake Mining shares rose sixfold from October 1929 to December 1935, during which time the Dow Jones Industrials Average lost 64% of its value. A huge run up in Homestake's share price came after FDR stole everyone's gold. It's foolish to think you can impair gold's value by making it illegal. Prohibition usually increases the price of the outlawed commodity."

Are stocks really cheap?

Many analysts believe the equities market is cheap, after a 40% correction from 2007 highs, based on valuation metrics like dividend yields. Mark Lundeen gathered this chart on dividend yields that goes back to the pre-Great Depression era:

Historically, stocks are "cheap" when dividend yields rise above 6%, and are considered expensive when yields dip below 3%. In fact, at the Depression lows, stocks yielded 10.38%. Today, the DJIA sits at 8,000, yielding 4.06%.

So the question begs: are stocks cheap? That depends--compared to last year, yes. But historically, stocks are not cheap. At a 6% yield, the DJIA would be priced at 5235. At 10% yield...well, let's not go there--it gets really ugly.

The bad news is that companies are either reducing or eliminating their dividends, so the aforementioned figures would be even lower. Let's hope history doesn't repeat itself.

I wrote this letter before the day after...

I wrote this after Obama was declared the winner in the Presidential race:

Obama will perpetuate the welfare state, as people seek handouts instead of being productive members of society.

I agree with all you said about Obama--he's charming, articulate, intelligent, and perhaps even well-meaning. Jimmy Carter was the brightest President we've ever had. Look what happened when he was in charge. Granted, he had a speech impediment, but Obama's ideas are actually more dangerous.

My advice right now is to put your money in tax-free vehicles, whether muni bonds or properly structured, maximum-funded life insurance, or the Mississippi Go Zone. For Growth, buy Wal-Mart and McDonald's, as the strong will get stronger. Natural gas pipelines master limited partnerships are down 80% from their peak, yet reporting recording earnings. And meanwhile, they're giving 20% dividends annually while we wait for a rebound. 200-300% returns won't surprise (between the quarterly dividend and share appreciation), and it's not some speculative high tech play--it's an investment in a gas pipeline company--people will still need to heat their homes and cook, even if they turn the thermostat down. Plus, more municipalities are converting their fleet vehicles to natural gas, as they burn cleaner. T. Boone Pickens made a fortune in oil, then natural gas, and now alternative energy. Bet WITH him, not AGAINST him. Two gas plays I've bought have ex-dividend dates of Nov. 10, so it's too late to buy (it takes 3 business days to settle positions)--there are others, or I will wait another 3 months for the next window.

Kinder Morgan is the safest play, but their dividend is only 6% at today's prices--still solid. My buys have higher yields (20% and 14% dividends, respectively). Since it's an MLP , all its cash flow and earnings go directly to unitholders (me). These MLP's should double within a year, but even if they are flatlining, I still earn the dividend. Disclaimer: this is not a recommendation for any single commpany--these are shares I purchased myself or am considering purchasing.

If you wanna be lazy, just put it in an orange account earning 3%, but realize the big, bad wolf of inflation is just around the corner. The Treasury is printing all kinds of dollars, trying to save this sinking ship, and it's going to make our currency worthless, much like the 70's, when gold, oil, gas, and every other commodity skyrocketed. It's not a matter of if, it's a matter of when. The market will finally wake up to it, and you're going to see a mass exodus OUT of the stock market and real estate markets, and one INTO hard assets.

Meanwhile, watch a lot of TV, read a lot of books, work out, surf the internet, because doing anything else will be expensive.

Yesterday's rant:

Well the markets certainly confirmed my suspicions that Obama is not the answer, even if the average person wanted a "change", as the Dow Jones dropped almost 500 points yesterday. Usually, a change in regime brings hope, a renewal of faith, and optimism, which people are holding on to. But the real money is saying "I don't think so". They're saying growth will be negative or non-existent for years, our future looks grim, and so do our children's and grandchildren's, as we sock them with future taxes on money we spent that we didn't have.

I was wrong--GM lost $6.9 BILLION last quarter--much worse than even the most pessimistic projections. Their collapse is inevitable, as even a bailout by the governement won't help--neither will a merger with Ford or Chrysler.

Hell, at this pace, the US government will be out of business this next decade. At which point, the gun enthusiast with 50 guns will seem prescient instead of crazy.