Weekly Update From Puru

It looks as though global equities are in the early stages of a cyclical bull-market. Most emerging markets in Asia and Latin America formed higher lows in March and they've now gone past the January highs. So, in technical terms, nations such as China, India, Brazil, Taiwan and South Korea are already in bull-markets. Now, the sceptics will argue that this isn't possible, that stocks shouldn't be going up! However, in this business, you take what the markets give you and at present, the markets are saying that the worst was discounted last autumn. Although it is possible that we may see new bear-market lows, current market action doesn't feel like an abrupt and swift bear-market rally. Rather, global stocks are rising gingerly and most importantly, not many believe that this advance is sustainable. So, perhaps the new bull-market is doing what it always does - climb the wall of worry!

In the near-term, most markets are overbought and a correction can't be ruled out but so far, the overbought conditions are being relieved by sideways consolidation. At present, stocks are rising despite negative news and horrendous investor sentiment. This is a good sign and with a record-high level of short interest in the emerging markets, we may get an explosive rally as the shorts are forced to cover their positions. Accordingly, we suggest that you hold on to your positions in China, India and Vietnam. Should the markets correct over the following days, perhaps consider allocating additional funds. In terms of sectors, energy, materials and infrastructure plays are likely to provide leadership and technology should also be amongst the winners. In terms of losers, we recommend that you stay well clear of financials (most are cooking their books), utilities and healthcare companies in the US.

Over in the commodities pits, crude oil is rallying nicely and we expect it to rise significantly over the following years. Global oil supplies have peaked, production is in a terminal decline and this may be the last chance to load up on cheap energy. According to the IEA, global depletion is running at roughly 5% per annum and 580 out of 800 of the world's largest oil fields are now past peak production. This doesn't bode well for oil production and as soon as demand stabilises, we'll see sky-rocketing prices followed by shortages. The IEA estimates that we'll see a serious energy crunch by 2012-2013. Our guess is that US$147 per barrel achieved last year will be easily surpassed within the next 4-5 years. So, this is a great time to allocate more capital to the energy sector. Furthermore, the price of natural gas has taken a big hit since last July and it is trying to put in an important low. In our view, the downside is now very limited whereas the upside is huge, so consider allocating some funds to gas.

As per our expectations, most metals are currently correcting. After a sharp rally, copper and platinum have given back some gains and they should decline further in the weeks ahead. So far, gold hasn't declined much but we suspect its price will weaken over the summer months. Same applies to precious metals mining shares. So, our advice is to wait for a pullback before committing additional funds.

Finally, in the currencies markets, the US Dollar Index is weakening and major world currencies are likely to rise over the following weeks. If we get a good bounce in the Euro and British Pound, our recommendation would be to sell into strength. The European economy is in a terrible condition and their currencies should reflect this over the medium to long-term. If we were forced to select some currencies, we'd pick the Aussie and Canadian Dollars which are currently depressed.

My Comments: I agree with just about everything. We need to see a pull back and then consolidation in equities, before attempting to buy. With a market that has dropped as much as these have the odds are against a v shaped bottom and lots of indicators are signaling caution. Doesn't mean that we can't rally further.

It is also rather early to call this a new bull market. I'm not ready to say that yet.

Mark Leibovit of VRtrader.com on Gold

The United States has the largest gold supply in the world, estimated to about 261 million ounces, unless there is another huge fraud being perpetuated on the American public at Fort Knox. I have gone out on the limb in the absolute belief the United States will return to the Gold standard which was abandoned back in 1971 by then President, Richard M. Nixon. If the United States allows the Gold price to rise (or drives it higher) and then pegs the US Dollar to an inflated Gold price, a great deal is accomplished. The ever-growing United States debt now has collateral. The national debt would now be on its way to being balanced. If the national debt is 10 trillion dollars and Gold is trading at $10,000 an ounce, the United States now has 2.6 trillion dollars in Gold or roughly a 25% backing. My belief is that the size of the United States Gold reserve is much greater than reported and what the United States doesn’t have it can easily confiscate either by demanding redemption of Gold from private holdings, or by creating a new North American currency (the rumored ‘Amero’) which would then include very valuable mineral resources of Canada and Mexico. Though the latter event currently appears very unlikely, the former could easily occur.

Read full article here

My Comments: I don't buy the assumption that the Govt. has more gold than they say. I would venture a "guess" that they indeed have less. Since gold inventories aren't audited we don't really know but the fact that they aren't and should be creates reasonable doubt. Enough doubt question how much gold the U.S. has and where did it all go? My guess is that its been sold into the market to keep prices low. But only price pays not opinions.

Ten principles for a Black Swan-proof world

By Nassim Nicholas Taleb

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

My comments: I agrre with just about everyting but #6. Standardize, regulate and allow investors to loose if they invest in them. That could be good enough rather than completely banning them. If investors know they will will not be bailed out and the losses are theirs and theirs only they wont take the risks that helped created this problem.

Golds rally

Great rally today. The rally has led us to the 50ema which could be resistance. We will need to break over this level and hold for a few days to negate the bearishness. News on the stress test will be coming out tomorrow so that will run most markets for the day.

What is gold doing?

To me it looks like gold is going to head south from logic or manipulation...

Logic=markets are rallying and m2m has been replace by mark-2-fantasy, so who needs it as a safe haven? Also inflation is coming back and gold is priced in as a deflation hedge and thus overpriced by the small amount of inflation that is coming up. So if inflation is heading back then why not buy gold you say? Well because copper is at 2.1 and oil is under 50 and they are the better bargains right now…this makes logical some sense to me.

Manipulation=the price was strangely brought down before the announcement of the fed buying bonds and we got a $70 reversal in no time. Had gold remained flat like most other markets we would have been north of $1k and been back in the headlines with every trader and investor in a mad panic with gold holding above the $1k with it as support rather than resistance…that day seems like a rather obvious manipulation.

Well instead of being over 1k with it as support we are looking like we will sell off with the safe haven/inflation logic above. And most investors and traders are saying, “well if it could move higher after the fed bought bonds then it may never and we have a solid double top, plus the IMF is selling so there is no reason to buy…the gold move is over”. And for now the charts are saying some of the same things. Technically it does look like it could be a double top(Bearish) or the right shoulder of an inverse head-n-shoulders (Bullish). But the 20 and 50 EMA are crossing which usually means a reversal in trend. MACD is pointing lower but stochastics are oversold. If we rally to the EMA's and fail then prob go rather lower from there. I for one might buy some puts on the GLD as a hedge…

Stay tuned...

Hedge Funds and the Global Economic Meltdown

Hedge Funds and the Global Economic Meltdown from Judd Bagley on Vimeo.

My Comments: deepcapture.com brings a lot of good info to the table on naked short selling in this video. It is criminal and difficult to believe that it goes on. I can only agree with them on is the way these companies collapsed. They were run into bankruptcy by management and made foolish bets. That is why the no longer exist, not naked short selling. Aside for that this is a good video explaining what went on.