Attack on 5,000

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April seems like such a long time ago. What were investors thinking then? As you can see from the chart below, April was the last time the ASX/200 traded near the 5,000 level. The index is nowhere near the 2008 high (as you can see). But maybe it’s getting ready to make a run to 5,000 by the end of the year.

Stocks rally like it’s 2008

Stocks rally like it's 2008

The wire services are reporting that the big miners are driving stocks up on higher copper and gold prices. That’s a pretty shallow explanation. It’s also an explanation that’s riddled with its own internal contradictions.

Copper and gold are both metals. But as market soothsayers…they couldn’t be more different than Cain and Abel…or Batman and Catwoman…or Spiderman and Doctor Octopus. What gives?

In the bullish corner we have the Stock Doctor himself, Alex Cowie. His trip to Africa involved fiels research on an Aussie-listed copper play. Earlier this week he sent us a short note explaining that while copper prices are up 33% this year, stockpiles are low. He says this is usually a slow time of year for copper. That means the price rises are even more bullish.

What could all of that mean?

Well, if Dr. Copper is right – Dr. Copper being the nickname for copper because copper has a PhD in in economics – he’s bullish on the global economy, but in a vague way. He’s telling us to focus on China, India and the next century of growth led by emerging markets (which, in the aggregate, are bigger than America) and to quit droning on in a nostalgic and annoying way about that has-been America and the growth paradigm of the last century. He’s also of the opinion that the Global Financial Crisis is old news.

We asked Slipstream Trader Murray Dawes if copper had figured in any of his recent trades. The question was prefaced by a look at the chart below. The spot copper price is looking a lot like the ASX/200. It hasn’t made a new all-time high yet. But the fake-out move lower earlier this year looks like it’s been rebuffed.

Copper Price

Source: ANZ

“Murray,” we asked, “when copper’s 50-day MA crossed below its 200-day MA in 2008 it was pretty bearish. But it did the same thing in 2007 and again this year and the spot price moved higher. What’s going on now?”

“It looks like it’s got a lot of momentum. But I don’t have any trades on related to it.”

“I do! Or will!” piped up Kris Sayce. He’s the editor of Australian Small Cap Investigtaor, our small cap letter for speculative punts.

“Aren’t you worried that copper is topping out?”

“No. This is a letter for speculators,” Kris replied. His report, which presumably includes a highly speculative copper share, comes out tomorrow.

All of this leaves your editor scratching his head. It’ s not that we think copper is lying. After all, copper is a metal, not a politician. To the extent that it “speaks”, it’s like one of those psychic mediums that channels the voice of the dead. That is, copper doesn’t speak with its own voice. It’s merely telling you what investors and speculators think (or at least what they’re doing, which may or may not include thinking).

We can’t help but think that now feels like 2007 and 2008. Despite all the convincing and bullish arguments for metals – grounded in the Chindia story – it turned out that commodity prices and futures were a big beneficiary from hot money speculators chasing risk and fleeing the U.S. dollar. All the other arguments were just window dressing for some good old fashioned asset price speculation.

Trust gold on this one. The sagely yellow metal leapt to a new all-time high in New York trading yesterday. It traded as high as $1,311 before retreating a bit. And now, institutional brokerages who once couldn’t find the time of day to talk about gold are competing with another to predict how high it will go.

Yes, this should make you nervous. And yes, it’s likely gold will go back below $1,300 before going up again. But below, we turn it over to the Stock Doc for by far the most hyperbolic prediction of where gold could go. Try US$27,000!

But wait! Before you chortle or choke on your chai, you should know that Alex used a very basic comparision between public debt and central bank gold reserves to come up with his number. It was not plucked from thin air. And he’s not saying that gold will go that high. Only that in a theoretic sense, it could.

Alex wrote that article in May. In the same report he recommended Aussie-listed gold shares that should have benefitted from the rise in US gold prices. They have.

Your editor’s concern today, though, is where do we go from here? This is the central question we’ll be taking up at the Gold Show in Sydney in early November. If gold stocks are just an investment and gold is just a commodity, then all these things move in cycles. Gold will make a high at some point and it will be time to sell and buy something else.

But if gold is money – and it IS money – and if it’s being remonetised into the world’s financial system (and into private portfolios) then something greater is afoot. That “something greater” is the breakdown of the debt-backed money model of the Welfare State. And that breakdown means the GFC isn’t over yet and Dr. Copper is a beguiling little metallic liar. More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Does anyone trade triangle patterns? If you draw a straight line on the ASX200 from the 6,800 high over the lower highs and a straight line from the 3,100 bottom to the higher bottoms those 2 lines are about to intersect and form a triangle – is that a bullish or bearish pattern?

    Richo (the Second)
    September 30, 2010
    Reply
  2. NRL Grand Final Preview and the Future

    “This Sunday the 2010 NRL season comes to a climax when the blockbuster battle for the Premiership title and glory takes place with the Grand Final decider between the St George Illawarra Dragons and Sydney Roosters…

    “The Wooden Spooners of last year, the Sydney Roosters, are the underdogs in the betting markets currently at a quote of $2.35 through Sportsbet to win and complete the worst to first fairy tale and become the first team to do so since the Western Suburb Magpies in 1934” (rugbyleaguebetting.com.au, October 1, 2010).

    “There will be plenty of salivating match-ups in the NRL’s first all-Sydney grand final since 2004 – and the first Dragons-Roosters decider since the Tricolours registered a famous 38-0 triumph in 1975…” (Adrian Proszenko, Smith in Benny’s thoughts already, smh.com.au, September 26, 2010).

    (This was of course before the joint venture of St George and Illawarra that started in 1999).

    “Thirty-five years after Graeme “Changa” Langlands and his infamous footwear, St George Illawarra’s star fullback Darius Boyd is preparing to tempt fate by wearing white boots in the grand final on Sunday.
    “Like the entire Dragons line-up Boyd, 23, was not even born when the Roosters thumped Langlands’ side 38-0 in the 1975 grand final” (Chris Barrett & Glenn Jackson, What curse? Boyd game enough to tempt fate, smh.com.au, September 30, 2010).

    In 1934, at the time of the Grand Final the US was 18 months out of recession.

    In 1975, at the time of the Grand Final, the first to be telecast in colour, according to wikipedia, the US was 6 months out of recession.

    In 2010, at the time of the Grand Final, the US was 15 months out of recession.

    The high in the Dow before the May 1937-June 1938 recession was on March 6, 1937 roughly 2 and a half years after the 1934 Grand Final (September 16, 1934). The 1937-38 recession started 2 years and 8 months after the GF

    The high in the Dow before the January-July 1980 recession was on September 21, 1976 one year after the 1975 Grand Final (September 20, 1975). The recession started 4 years and 4 months after the Grand Final.

    The last time St. George won the Grand Final was on September 22, 1979. The next Dow high occurred 1 year and seven months after the Grand Final. The July 1981-November 1982 recession, that followed the Dow high, started just under 2 years after the Grand Final.

    Dow high, using the parameters above, roughly 1 to 2 years away? The next US recession 2 to four years away?

    The recession starting in May 1937 occurred roughly two months after the Dow high; while the recession starting in July 1981 occurred roughly three months after a Dow high.

    But if the recession starts soon after the Dow peaks the recession maybe closer.

    The Dow highs that occurred in 1976 and 1981 were lower than the nominal high of 1973 in the secular bear-market of 1966-1982.

    In a previous post I said “History suggests a market top between December 2010 and November 2011.”

    “We`re getting better than expected economic data which is making investors believe that we are now moving further and further from the deflation and double dip precipice and as a result, that pushed share prices out of the 100 point range we`ve been experienced since April of this year and now I believe from a technical perspective, we`re going to re-challenge that April 23rd high.” (Sam Stovall, Chief Investment Officer, S&p Equity Research, Blue chips go green, pbs.org/nbr, September 24, 2010).

    History also suggest that the next Dow high, which will higher than April 23, will be lower than the nominal high of 2007 in the secular bearmarket that began in 2000; but could possibly be higher with QE2 with the learned ignoramuses in control of the central banks and governments.

    “The first action Mr. Bernanke should take is to resign. If I had messed up the system so badly, as he has done, I would have to resign. He has talked constantly about the Great Depression and what caused the depression but the problem is that he really doesn’t understand what caused the depression, which was also excessive leverage at that time… I mean Mr. Bernanke may be incompetent, but he’s not an evil person per se. He just doesn’t have sufficient knowledge to be a central banker, in my opinion, and has misguided economic theories, but he’s not evil in the sense that he would not wish to debase the currency entirely” (Dr. Marc Faber, in an interview by Ron Hera, Dr Marc Faber on the Federal Reserve and Hyperinflation, 321gold.com, September 23, 2010).

    “Just because the rally is silly, stupid and ultimately leads to the edge of a cliff is no reason why we can’t enjoy and perhaps profit from it” (Rick Ackerman, Wall Street’s Mood Swings Back to Giddy, rickackerman.com, September 27, 2010). (It is good to see that the Pittsburgh Steelers are off to a good season with 3 out of 3 and this without the suspended star quarterback Ben Roethlisberger).

    “As the U.S. economy slid into recession in 1974, the Fed again reversed course to ward off an even deeper recession. Indicators show a renewed monetary expansion that lasted into the late 1970s. The Bernanke-Blinder index from late 1974 into 1977 indicates that monetary policy was strongly expansionary. This expansion was not reflected in high inflation initially, consistent with a partial rebuilding of real balances … and the well-documented fact that inflation only occurs with a delay (see Nelson 1998)… Around 1978, the monetary stance turned slightly contractionary, becoming strongly contractionary in late 1979 and early 1980 under Paul Volcker, as inflation continued to worsen. Once again, the monetary policy stance provides an alternative explanation for the genesis of stagflation” (Robert B. Barsky, University of Michigan, NBER, and Lutz Kilian, University of Michigan CEPR, A Monetary Explanation of the Great Stagflation of the 1970s, fordschool.umich.edu/rsie/workingpapers/Papers451-475/r452.pdf, January 27, 2000).

    It is argued that QE2 will lead to hyperinflation.

    Faber’s view, from the above interview:

    “Eventually, before everything collapses we’ll have an inflationary bout which may not be so strongly felt in consumer prices, as in stocks or housing or precious metals prices or in commodities like oil; or inflation could occur mostly in foreign currencies, in other words, in Asia where the currencies could appreciate”.

    Interest rates will have to be raised to counter inflation.

    “… first rate hikes seldom kill a bull market. In most cases over the past 50 years, profitable gains were still available for 7 to 12 months or longer – until subsequent rate hikes started to take their toll” (James Stack, Investech Research Market Analyst, Vol.4, Iss.6, investech.com, April 30, 2004).

    For the bears:

    * Staff, US stock markets enjoy best September for 71 years, telegraph.co.uk, September 30, 2010:

    Stock markets in the US enjoyed their biggest September rally since 1939 on Thursday despite falling on the day.

    * Leah Schnurr, After Sept rally, stocks eye earnings, jobs, reuters.com, October 1, 2010:

    History is on the market’s side. A strong September usually portends a positive October and fourth quarter, according to Birinyi Associates Inc.

    When September rises 5 percent or more, October is up, on average, 1 percent, according to data from Birinyi. Only in one occurrence following that type of September gain did the fourth quarter deliver a negative result, which happened in 1939.

    Reply
  3. Your line is doing OK so far Watcher. If the faery story balance sheets survive your line might survive too.

    Reply

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