The Stock Market – Which Side Are You On?

I read a piece this morning by Josh Brown, the Reformed Broker, in which he destroys the 1999 comparison for the stock market.  He makes some excellent points about why the stock market is not only not over valued compared to 1999, but is actually a bargain.  You should read it because we should all be considerate of rational views.

I also read The Fed is NOT Printing Money by Jesse’s Cafe’, which offers a view into a money creation process that is more geared toward the gaming of the financial markets through intermediary banks than it is the normal inflation of old.  I mean seriously, I do not call Ben Bernanke an evil genius for nothing; it seems that he and his associates have taken monetary policy to the Nth degree and figured out how to paint inflation as non-inflationary.  Our hero.

The point is that I think Josh Brown is 100% right.  There is no mania in stocks.  In fact, stocks’ worst offense right now is that they are strenuously over bought and sponsored by ‘dumb money’ aggregates that are equal and opposite to one year ago, when the same dumb money was exactly as bearish as it is bullish today.  As he notes, the mainstream public may no longer be interested in the markets, but whoever that dumb money is, they proved a good indicator on an imminent bull phase last May.  Again, we present the proof compliments of Sentimentrader.com:

smart.dumb

Smart-Dumb money sentiment 1 year ago

smart.dumb

Smart-Dumb money sentiment today

I have absolutely no problem being bullish on the stock market because it is made up of companies both bad and good; very good.  After Memorial Day, my wife will re-start her career at a currently non-public technology company about which we are very excited.  Its technology began as the founder’s MIT thesis and is now rolling out into major markets and outlets.  One brilliant kid, an idea, a market and voila.

I totally believe in human progress and what great companies like Microsoft, Intel and later Google and Apple have brought us.  I believe in the software systems that are making the burdensome healthcare system more manageable and great companies the world over that fill a need, improve lives and win out in the markets of public opinion and financial transaction.

But the point I think the Reformed Broker is missing is what underpins the market of stocks in these corporations.  Looking at the stock market as a stand-alone, I tend to agree with his viewpoint.  But when policy makers are woven into the fabric of the market to this degree, they must be factored.  Questions must be asked like “why on earth, with this excellent and healthy stock market and sufficiently functioning economy are they continuing to repress interest rates by buying $85 billion in bonds per month?”

Aren’t those bonds debt?  Where did that debt come from?  Does bloated debt not imply that the economy in which the stock market’s components ply their trade is a leveraged thing, as opposed to an organically thriving thing?  Why can’t we just let the debt float on the open market and let it get resolved by the market if things are so good beneath the surface?

I think you know the answers to those questions.  That is the main point of bears questioning the stock market’s fundamentals.  Not the old PE Ratio canard.  We are now in the post-PE world.  What matters is policy because it is policy that has created the seemingly healthy stock market.  So which side are you on; the side that sees the stock market and the stock market only, or the side that sees the stock market within the context of the universe in which it exists?

Biiwii.com, Notes From the Rabbit Hole, Twitter, Free eLetter

Did Something Happen Today?

That something was a big smash in gold and especially silver over night and then a head spinning reversal.  Exactly the kind of thing we look for to be buyers.

ag

Silver daily

Silver actually got near my target zone, which is 17-20.  But there is a bump of long-term support elsewhere (noted this morning in an NFTRH update) that could hold for a rally or better.  When items like gold and silver have been this badly decimated and people have come to hate a concept like honest money this vehemently (while being compelled to worship inflationary policy making), you need to give merit to the idea that the next rally could be the rally.

agcot

Silver CoT

Silver’s CoT data still shows some open interest by whatever gamers or evil interests there may be in the paper and digital markets, but its structure is very bullish.  Yet until this morning, everybody hated silver.

Now, lack of follow-through and another flop would reset and extend the agony that honest money advocates have endured, but there seemed to be enough going on today in gold, silver and the associated stock indexes to stand up and take notice.

May/June is after all, the time frame we have been expecting for some pretty important changes in the macro markets.  Did something happen today?  We’ll find out very shortly.

Inflationary Chickens? Crude Oil Prices Would Be One

Inflationary chickens will come home to roost eventually, either in the form of heightened inflation expectations within a bull environment or in the form of a failed inflation (i.e. deflationary reckoning).  Things like crude oil prices and base metals – as discussed in this week’s letter – are poised for potential bull signals and today the US Oil Fund is on the verge of a breakout.

Relax, it’s not confirmed by any means, but the pattern looks good and there are patterns in T bonds implying the same thing as commodities.

uso

USO daily

I do not know a lot of things but one thing I do know is that admiration or at least subservience is near universal toward our great and dear monetary leader with regard to how he is able to inflate without inflating; ha ha ha.  I also know it will not last because he uses dishonesty (i.e. officially sanctioned interest rate manipulation) as a means to what should be a natural ends.

Other than that I have not strong feelings about the matter.

A Little Navel Gazing About Risk Management

As I sit here all cashed up and not doing much, I decided to pass a little time running some figures.

NFTRH was launched on Sunday, September 28, 2008.  The performance of the speculation portfolio has a baseline on that day (actually, the previous market close of Friday the 26th).

Now, I will tell you as a human being I am quite unhappy with the portfolio’s performance over the last two years as it has drawn down slightly.  Human beings live day to day and think and feel on every one of those days.  I feel frustrated about this going nowhere performance, no doubt.

But I ran some figures that helped me see that the path I have been on has not really been a bad one.  By following what the research in NFTRH has told me, both rightly and wrongly along the way (when wrong, I put a high premium on getting right ASAP) the performance from the letter’s 9/28/08 baseline looks like this:

NFTRH Speculation Portfolio:  +144%

S&P 500:  +37% (SPX 9/26/08: 1213, Today: 1666)

HUI Gold Bugs:  -25% (HUI 9/26/08: 329, Today: 246)

To put it in non technical terms, I have crapped it vs. the stock market over the last couple of years.  And at some point there comes a time where you need to reevaluate your assumptions about certain things.  I am not at that point, but then again I don’t need to be as long as I’ve got risk management, which is another way of saying I’ve got a built in mechanism to cap my own greed, naivete and potential to give back gains that I worked hard for.

The best risk management is to make sure you realize you have an ego and that it can be subject to hubris.  Die hard members of the gold “community” are finding that out right now.  Personally, I believe the longer the HUI goes without a sustained rebound, the more powerful the bounce or new bull market is going to be when the bottom does arrive.

But again, the ego needs to be kept in check in order to be alive at such a time.  I mean, all through the bull market bottom callers were made into heroes.  This time?  It ain’t working.  It’s the same thing in reverse over there in greed central, the momentum fueled stock market.  For top callers, it ain’t working.

I gave up shorting the precious metals quite a while ago because that is not me.  I am a hedger, not a downside momentum player.  I know what I am.  I also know that I have a poor psychological makeup with regard to being able to short the stock market and watch it go green day after day.  So I manage risk the best way I know; with cash, which has been NFTRH’s main recommendation for a long time now.

I am getting off topic here and don’t want to write a book.  Got a newsletter to write.  But just manage risk people.  It works.  Our biggest risk being our own sense of what is right and what is wrong, what we think we know and the ego that oversees it all.