Blog for November 26, 2009

Bill,

I can't say I am glad to read your commentary today, but I can say it is reassuring to my sanity to read it.

This week I had two separate conversations with long time friends who think I am acting like Chicken Little and "seeing conspiracies everywhere".

They think I am a nut for continuing to buy gold and for wanting the Fed off our backs. (My comments re Bernanke brought laughs.)

These are well educated individuals I have known for all of my adult life, but they are willing to accept the current policies as a total necessity for solving the "recent crisis".

Last night's local news announced our city is officially at 17.2% unemployment. Yet, we are now in recovery I'm told.

I posted a graph of the 10 week *centered* moving average for $GOLD in the beginning of November. At the time I was unable to plot a graph of this 10 week MA with the mathematically defined curve that I had come up with. What I have done in the attached graph is to plot selected points of the 10 week centered moving average with the sine-cosine curve fit shown as a continuous curve. The curve was based on the period from Oct 2006 to Oct 2009. This represents 36 months. Since I had 13 equally spaced data points, the first data point, numbered 0 in the graph shown represents 1 Oct 06, and the last data point, numbered 12 represents 01 Oct 09. Thus the Oct 09 value for $GOLD is $1025. Extrapolating forward, since each tick mark on the x-axis represents 3 months, the sine-cosine curve is indicating a high for the 10 week moving average of around $1200 end of December beginning January. Since there appears from the graph of the 10 week average that prices vary between $50 above and below the 10 week MA, that means we might be looking at a high of either $1250 at that time or of $1200 about right now. But then markets always overshoot at extremes

Whether this will play out is anybody's guess. However, this is yet another tool in the tool box that is suggestive of where things could go. I have not backtested this curve fit at this point, but in making predictions using this approach, it is best not to advance further than one half period for the shorter frequency. The short frequency curve has a period of 3.5 months which equals about 15 weeks. Thus, you could go as far as say 7 weeks from Oct 1 which would put you at tick mark 13.5 or mid November. DYODD

Comments always appreciated. I hope this is useful for you. I will be doing a similar analysis for the S&P 500.

Good morning Bill - Nice take on Au retail sales in paradise. Thanks again for your insights regarding TCK earlier in the year - went in big for me and that stock keeps me dinking with the DNN's and EVG;s. Happy Trading

http://bit.ly/7TqH2M

A big story in Canada yesterday was news that Russia was adding the Canadian dollar to its foreign currency reserves, which caused a short term pop in the loonie yesterday. I think it may be more of a statement on the US dollar than the Canadian.

http://www.globeinvestor.com/servlet/story/GI.2009...

I appreciate your dispassionate realism this morning Bill, the culmination of weeks and months of railing.

I wish all my American brethren a peaceful respite this next 4 days. I'm taking it easy along with all of you.

If you happen to look here, well then comfort yourself in this. It's never "different this time", popular delusions have been occurring for 800 years and probably longer. Funny thing about us humans huh? We fall for the dummy over and over.

Full article: http://www.theglobeandmail.com/report-on-business/...

Excerpt

The name of the book is This Time Is Different: Eight Centuries of Financial Folly, the assertive subtitle implicitly mocking the hubris of our own era of irrational exuberance. Its message is simple enough. This time was not different. The Great Depression was not different. The Second Great Contraction (as the authors call the first global meltdown of the 21st century) is not different - and is far from finished. Other than in time and place, the financial crises of the past millennium were not, from one to the next, in any significant way unique. Succinctly put, they all followed excessive accumulation of debt.

"The essence of the this-time-is-different syndrome is simple," Profs. Reinhart and Rogoff say. "It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times. The old rules of evaluation no longer apply. We are doing things better. We are smarter. We have learned from past mistakes." The problem is, they assert, that these assumptions are always false.

The historical record, the authors say, shows that the accumulation of debt shoves national economies to the very edge of the financial cliffs - where they wait "for chance and circumstance" to provoke the crisis of confidence that pushes them over. These plunges happen all the time and, in erratic rotation, around the world. No wonder, then, that investors' confidence in debt is a fickle thing.

Dubai?
I have a friend working with a multinational in Dubai. Two months ago, he checked in and said that Dubai lavish spending had run out and his company had moved their focus to business opps in Abu Dabi. They have oil, Dubai nothing. A discount buyer opportunity is developing.

"down 2% across the board"

This is only what the market looks like when the PPT and Goldman Sachs take the day off. They will be back in force on Friday, and the markets will open up with a large gap down to the LOD and move higher. We might even have a flat close by the End Of Day. I will be selling my ultra-short ETFs pre-market and maybe even go LONG. Bill said that support is at 1080 on the S&P500. So we might go below that for a head fake then up.

Happy Turkey day!

Today this hoard has been valued at £3.285 million.It was found by an amateur metal detector enthusiast,on July 5th. this year.
http://tinyurl.com/y87vxa3
Here is a link to photos of some of the 1500 items.
http://tinyurl.com/y9pczuy

My gut feeling is that within a few days and maybe even by the end of the half day of trading, we will see the dollar continue lower. I don't think there will be a flight to the dollar for very long as people have completely lost faith in the greenback. Look at the dollar against the yen and the swiss franc today...not good. I see commodities spiking on this as well eventually. The world is absolutely pissed at the U.S.'s policy toward the dollar in a period where many countries are getting killed by their own strong currencies. Look at Japan.

A short the market, long commodities play might just work out. At the very least it is a nice hedge should the same relationship continue that has gone on for the past 8 months.

EDIT:
On the flip side we must also remember that Dubai is really not that big of a deal in the grand scheme of things. I mean we're talking like $30 Billion or so of debt at risk. Also, many people don't know this but Dubai is part of the UAE and the UAE only has debt in the amount of 23% of their total GDP so they are in much better shape than countries like the U.S or Japan should a crisis hit like that which is hitting Dubai.

Do you think the Fed is worried now that inflation expectations are starting to loosen their grip on the cleat? The world has kept their part of the bargain, perhaps it is our turn to return the favor...just a rumination.

EDIT:
I could not help but wonder with all the recent hype about strength in Canadian banks how genuine was their depiction. I noticed on Goooglefinance.com that there is now concern about the true strength of the economy in Canada. I remember Bill talking about BA will do better when they take to the air...Ok, perhaps this is obvious in one sense, but still on a serious note, cash flow is important to them if I remember correctly. Also, there is news that Bombardier is to cut jobs...doesn't sound too strong to me. What about taking advantage of any weakness in BA, if it is significant, as in approaching the new equilibrium and possibly enticing valuation...hard to tell since it has not happened yet and any crystal ball I have is fogged by the hot breath of Bernanke, et al.

EDIT2:
By the way if the dollar does firm will that not help the Euro to continue its weakening ways and how would this effect precious metals?

EDIT3:
What if going against common wisdom, dubious at best in my experience, the yen were to weaken, the Euro were to weaken, and the dollar were to strengthen? Would that be so bad...my main question though is this a possible scenario? What are the probabilities? Trillion(s) dollar question, literally!

I see the Shanghai index is only down 0.3% now. I think at first glance a little country like Dubai is a bad reason for a selloff...The entire UAE GDP is $206 Billion, which pales in comparison to the U.S's $14 Trillion. It ranks 51st in the world and remember that Dubai is just a fraction of the UAE.

I'd love to go all in on the short side but I don't see any reason to over react about this sell off.

What a holiday head fake!

I'm glad I waited this out before making any moves yesterday.

60 min chart:
http://futuresource.quote.com/charts/charts.jsp?s=DX%201!&o=&a=V%3A60&z=800x550&d=medium&b=CANDLE&st=

http://www.ritholtz.com/blog/2009/11/asia-trip-dub...

looks like people decided to panic.

I guess this is what happens when the market melts up for months at at time with no fundamental basis, and then when there is a hint that just one of the many chickens are coming home to roost, the bottom falls out as everyone wants to squeeze through the exits at once.

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception.
~~~

November 26, 2009

We’ve spent two weeks traveling almost 20,000 miles and visiting three cities: Tokyo, Hanoi & Singapore. Meetings included quality time spent with central bankers, investors, pension fund managers, academics, commercial bankers, and others. It has been a whirlwind and well worth the fatigue.

We will summarize the observations with some key points.

Our trip confirms that the Asian emerging-market story is real and is likely to accelerate. This is not just a China story, and folks who view it that way are making a mistake. China is the largest player in the region, but the others need respect. This conclusion is true for newly emerging economies and markets like Vietnam (devaluation of currency notwithstanding) and for seasoned and established ones like Singapore.

At Cumberland, our global portfolio strategy maintains an overweighted position on non-Japan Asia. Asian emerging markets are a terrific story. This is true both for the fledgling ones and for the largest one, China. There are many in the region and they need to be examined separately. We will be going back to Shanghai and Hong Kong in January for another look at the region and to examine how US policy is playing out there. Or should I say, how US policy is failing miserably to play out there. More on that below, but first let’s wrap up the Japan report.

We are still not ready to take the Japan weight to a bullishly overweighted position. That may come after next summer’s Japanese elections, and if the new government is strong enough and determined enough to change policy. Both the electoral outcome and the willingness to change policy are open questions. It is the present policy that keeps the yen very strong and keeps deflationary forces at work in Japan. Government officials know it but are not yet compelled to change. Many there believe that a stable price level or a slightly falling price level is a better choice than an inflation-prone policy. Many reject the Bernanke approach of massive monetization. They heard his lecture many years ago and have taken a different view. We shall see what unfolds now that those in Japan have the opportunity to watch Bernanke apply the policy that they rejected. In sum, the final chapters of this book on Japan and deflation and on QE and inflation are not yet written.

Now to the regional takeaway from our trip

We believe that few trust the United States. This is obvious in private conversation. And it is clear to all that confidence in the dollar is low. This is mostly mentioned only in private.

In public there is quiet response when the Treasury Secretary of the United States utters words about a strong dollar. Asians have heard that for years and with the many different accents of the various Treasury Secretaries. Geithner would serve the country better by ceasing to mouth the same words that his predecessor Snow and others used. He is not believed. Frankly, in some circles he is actually seen as an incompetent political hack. He is blamed by some for the insufficiency of the New York Fed under his presidency to supervise the primary dealers that failed – Countrywide, Bear Stearns, and Lehman. And the ethics issues surrounding the NY Fed under his tenure are viewed as appalling; this continues to surface in private conversations. Some folks are puzzled about why Obama maintains his support for Geithner. Some just attribute it to the President’s inexperience as a leader.

My takeaway is that our present Secretary of the Treasury is seriously and sustainably injuring the image of the United States. He has lost credibility. His actions are real and they impact markets. My conversations with those who are attempting to market GSE securities to Asians and getting rebuffed are validation enough for me on this point. When the Fed stops buying GSE mortgage backed securities, this reality will hit the markets in a re-pricing of that asset class. Spreads are going to widen.

The American federal budget deficits are worrisome everywhere. Policy promises from Washington to reduce them are greeted with great skepticism. Often they are privately described as American arrogance. Publicly, Asians are very polite and do not often subject their guests to embarrassing criticism. Privately they are quite candid. In my view they are correct: America is arrogant and seems to pretend that it is still the best and most trustworthy financial and capital market in the world. There is no basis for the US to have such a view of itself. We have squandered our reputational capital as a financial center leader.

This recent financial crisis is quite different from its predecessors. In 1997-1998, the Asian currency crisis and Russian ruble collapse wasn’t viewed as America’s responsibility. We didn’t cause it. We didn’t cause the 1994 Mexican peso crisis either. And while we contributed to the tech-stock bubble, we weren’t the only ones to do so. But the last two years of Madoff scandal, federal agency failure, rating agency restatement, bond insurer demise, Fed primary dealer (Lehman) bankruptcy, and mortgage securitization deception (CDOs) are all Made in the USA. We led the world into crisis. We caused it. And we haven’t fixed it.

To Asian eyes it appears that this American-made tragedy continues to this day. Proposals for reforms in America are greeted abroad with skepticism and doubt. The political structure of America is seen as a weakness. And confidence abroad is falling, just as it is at home.

Some will view our conclusions as harsh. Maybe so. But the lists of American-made errors that have cost the world billions are factually correct. Say what you want, but Madoff WAS regulated by the SEC, Fannie IS a federal agency, and AAA used to be a respected rating that that has turned out to mean nothing.

This is not just a Democrat or Republican critique. Both political parties have failed the country miserably and both are seen as contributing to the mess, from the Asian perspective. Personally I agree. Our Washington leadership under this president and under the last one has proven to be impoverished. The money influence in politics seems to have overwhelmed any sense of centering ethics.

We come back from this trip more determined than ever that investors must protect themselves. The starting point for that defense is an old principle: diversification of risk. To do that they must take a global view. And Americans need to be very critical of US policy and distrusting of their politicians.

Cumberland’s recommendations include worldwide diversification of security risk and worldwide diversification of currency exposure. Favor spread product in the fixed-income area and avoid US Treasury securities. View all positions as subject to change in strategic ways. Require independent verification of credit rating opinions and do not depend solely on rating agencies. And be prepared to change course as events unfold. Act prospectively and preemptively and not reactively.

Lastly, separate the silos of investment approaches. This may seem self-serving to say, but we believe that the separation of investment management, brokerage, and custody is needed to insure safety. At Cumberland that has always been our view. Not one of our managed client’s accounts had any money exposed to Madoff, Sanford, or any others of their ilk. Separate silos prevent that risk and allow for audit trails.

Cumberland does not take custody of client’s assets; they are held by investment firms or banks. Cumberland believes that a separately managed bond account must be able to “trade away” from the firm where it is domiciled and in whose “wrap” program it is placed. We will not manage an account where we cannot trade independently.

We are finding this view acceptable worldwide. As the globe grows, investors and financial professionals are becoming more and more skilled at their work and less and less trusting of governments and policies. They have good reason, in our view. This approach works for Asians and needs to be the foundation of investing for Americans.

We are often asked if we are optimistic about the future. For the world as a whole the answer is yes. Most of the world is seeking growth and peaceful economic outcomes that enhance the quality of life.

We are less optimistic for the US. Our longer-term trends are working against us. We have squandered our political capital and are neglecting the education of our youth. We practice polices of subsidy and deceit instead of self-determination and transparency.

No, we are not about to abandon our country; we have deep respect for our entrenched American traditions of freedom. But we are directing the harshest of criticism against our politicians of both parties. They are equally accountable and responsible for the mess we have. If only we could limit them – but the citizens are not yet angry enough to do that.

When we Americans have had enough, the voters will throw many of the bums out and start over. That will be a great day of celebration in America. We expect that others in the world will join the celebration. I hope that day arrives sooner, not later. By the way, financial markets will anticipate this change and be moving higher before the votes are actually counted. Markets measure change with sensitivity and find the pulse of that change before events are widely known.

Speaking of events, we built a little cash reserve in the US stock market accounts in the run-up to the Thanksgiving holiday. The Dubai World debt crisis has contagion risk. Insolvency cannot be permanently papered over by excess liquidity, not in the Middle East nor, for that matter, in America. In our global portfolios we are underweight the UK and have zero ETF exposure to the Persian Gulf states. Readers are directed to the Gartman letter. Dennis Gartman identified this Dubai risk well in his Thanksgiving Day missive. At Cumberland, we want to see the market make the adjustment for this risk before we resume a fully invested posture.

In America we have much to be thankful for. Our great freedoms are our strength. Our ability to speak and write with openness and to articulate diverse views is a powerful force. Our press is permitted to investigate and disclose. Our courts are honest and our legal systems include entrenched respect for individual rights. World travel confirms that for me every trip. I worry for my country but I still love it.

Happy Thanksgiving. Stay safe.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

ALOHA!!

Both gold and silver took hits in the Asian markets probably due to the Dubai story as a trigger for some profit taking and of course the Asian markets took a hit and so did the ASX. Looks as if the European markets are not so bad off as the Asian markets are like the Hang Seng is down 4.8% while the Nikkei is down some 3.2%. Probably more Asian banks tied to Dubai than European ones. I see Dubai as issuing a "reminder" to the World that at any time regional meltdowns are still possible.

As I type this the POG is down some $42USD and now picking up a bounce off the lows around $1140. Silver is bouncing back some after a nearly $1.00 correction. Interesting to note that on the same day the Dubai story broke, Nov 26 that the Dubai Gold Futures for Feb are up $4, while gold priced in other currencies are down. What's with these Arabs don't they know the USD is the safe haven? While there is much talk in the media about how India is where the gold lovers reside, history shows the Arabs are just as eager to own gold. On a percentage basis only the POG priced in Yen is down more than the POG priced in USD. All other currencies are not down as much as the USD POG. Least effected is POG in AUD only down 1.65% compared to the POG in USD down 3.40%. Also the POG in Rubles is only down 1.85%. While most of the other currencies like the Euro POG is down 2.6% range. Meanwhile the USD is stopped cold at 75.50, up .62 right now. Its going to have to do better than that to make some serious headway and the POG priced in other currencies is going to have to meet or exceed the POG percentages priced in USD in order to confirm a major correction. As I read the data the rest of the World is not confirming the US FED effort to aid their member banks and their massive short positions on both gold and silver. JP MORGAN would be at the top of any list of bullion bank shorts being bailed out with aid of the US FED and other central bank coordinated actions. I have no doubts that when the NY trading begins there will be renewed efforts to drag the POG and POS down further.

Looking at my "high risk" ASX PM portfolio, even though the ASX closed down some 100+ points for the day my combined portfolio ended up 1.25%+.

Its beyond ridiculous how the World's wealth from one day to the next revolves solely around these same US FED member banks who continually perpetuate market fraud on a global level. Is James Dimon KING OF THE WORLD? If ever there was a reason to eliminate the US FED in my book the main reason would be to eliminate the likes of James Dimon and Lloyd Blankfein and Ben Bernanke. I believe these people actually believe they "are" doing God's work ... problem is who died and made them GOD? Yet every chance we get we vote them into power. I am truly looking forward to Bernanke's confirmation as it will show what sort of leadership Americans have voted into power and where their true loyalties lie. The fact that Obama has the gaul to even nominate Bernanke for re-appointment speaks volumes. Send the BEARD back to Princeton! Actually Bernanke would follow Greenspan and go onto the speaking circuit(as I call it the TRAITOR TOUR) and make $150,000 per speech ... the BIG PAY DAY!

"On Dubai, it is not a small issue. It is a symbol of the large scale financial problems that are still out there. It is not that there is this one bad 30B deal in a sea of solvency. Just the opposite."

Yes!

If (when) Bernake is reappointed it will also be a symbol.

I hope my friends still in denial will realize just what is the sad and sick reality we are facing at all levels — individually we can still do something — at city,state and national levels reality is about to emerge and trump the pretenders to the detriment of us all.

This Thanksgiving period I am thankful my parents and those of my wife did not live to see a return to what they always most feared post Great Depression.

Thanks; hope all is well. You did deserve the rest and now to work, which I can tell you love from the bottom of your heart...silly or useful structural devices, why does it have to be bottom...could just as easily be top or center.

I, like yourself can only hope normalcy will return to these markets, whatever that is; but it sure would lower my blood pressure.

Yes being a word, one of many powerful words, the SPX level is quite the spectacle. I guess it all will work itself out. If it doesn't then the end should be quick, to quote that character trying to capture what I do not quite know, but the phrase seemed appropriate to the moment...time will tell.