The Bond King Says "Short U.S. Stock"

Short the SP500.....That’s not something most investors would consider right now. After all, US stocks have been rallying for eight straight years. At this point, it’s hard to even remember what a down market feels like.

But that’s exactly what Jeff Gundlach thinks you should do. Gundlach, as you may know, is one of the world’s brightest investors. He manages more than $100 billion at his firm DoubleLine Capital.

On Monday, he told a room full of investors at the Sohn Investment Conference in New York to short (bet against) the SPDR S&P 500 ETF (SPY). This fund tracks the S&P 500. It’s the most heavily traded ETF on the planet.

It’s a bold call, to say the least.…
But Gundlach has a history of nailing calls like this. At last year’s Sohn Conference, he told investors to short the Utilities Select Sector SPDR Fund (XLU) and buy the iShares Mortgage Real Estate Capped ETF (REM). If you had taken Gundlach’s advice, you’d be up 40% on this trade today. Gundlach was also one of the few people to predict that Donald Trump would become president of the United States. In June, he told CNBC:

People aren't getting along, they're not happy because of technology taking jobs, and sort of this long, slow grind of a new economy. And so they're looking for change, and I think Trump is going to win on the basis of that.

In other words, it pays to listen to Gundlach.…
But here’s the thing. Gundlach doesn’t think you should get out of stocks completely. Instead, he thinks you should “go long” emerging markets. These are countries that are on their way to becoming “developed” countries like the United States. Brazil, Russia, India, and China (also known as the “BRICs”) are the largest emerging markets.

On Monday, Gundlach told investors at the Sohn Conference to buy the iShares MSCI Emerging Markets ETF (EEM), which tracks over 800 emerging market stocks. It’s one of the safest and most diversified ways to play emerging markets. Of course, you would have already known that if you’ve been reading the Dispatch.

After all, I’ve been pounding the table on emerging market stocks for months.…
In February, I outlined the bullish case for emerging markets. A month later, I told investors to “forget about US stocks” and consider emerging market stocks. I even recommended checking out EEM, just like Gundlach. Not only that, Gundlach likes emerging markets for the same reasons we do. I’ll share those with you in a moment. But let’s first look at why the “Bond King” thinks you should short the S&P 500.

U.S. stocks are incredibly expensive.…
Just look at this chart. It compares the total market value of the S&P 500 with the annual economic output of the United States, as measured by gross domestic product (GDP). This key ratio is now at the highest level since the dot com bubble.

US stocks aren’t just expensive from a historical perspective, either.…
They’re also much more expensive than emerging market stocks. Gundlach explained to CNBC on Monday:

The valuation of emerging markets is half the valuation of the S&P 500 when you look at things like price to sales, price to book, [and] Dr. Shiller’s CAPE ratio.

Dispatch readers know CAPE stands for cyclically adjusted price to earnings. It’s the cousin of the popular price to earnings (P/E) ratio. The only difference is that it uses 10 years’ worth of earnings instead of one. But just like the P/E ratio, a high CAPE ratio means stocks are expensive. You can see below that the CAPE ratio has surged to 29.5. That’s 76% higher than the S&P 500’s historical average. US stocks have only been this expensive two times in history: just before the Great Depression and during the dot com bubble. Meanwhile, the CAPE ratio for EEM is floating around 14, meaning it’s 52% cheaper than SPY.

To be fair, emerging market stocks have been cheaper than US stocks for years.…
And they’ve still underperformed them. But that’s starting to change. Just look at the chart below. It compares the performance of the S&P 500 with EEM. When this line is rising, it means US stocks are doing better than emerging market stocks.

You can see that’s been the case for years. But this key ratio just broke a long term upward trend line.
This tells us that emerging market stocks should outperform US stocks for years to come.

If you haven’t already, I recommend you pick up some emerging market stocks today.…
The easiest way to do this is with EEM or another major emerging market fund. These funds will give you broad exposure to emerging markets. Once you build a core position in emerging markets, you could consider investing in individual emerging markets. Right now, three of our favorite emerging markets are Poland, Colombia, and India.

As for U.S. stocks, I wouldn’t encourage everyday investors to short the S&P 500 like Gundlach recommends. Instead, I suggest you be very selective about what U.S. stocks you own. Avoid stocks trading at nosebleed valuations. Own companies with resilient business models and little debt.

The article “The Bond King” Says Short US Stocks was originally published at caseyresearch.com.

The Next Big Short

The "Next Big Short" is a collection of looming market risks from The Heisenberg. This 37 page special report will show you the risks in the markets. How to explain The Heisenberg?

Essentially, it's a collective brain trust of skilled traders willing to discuss markets with the freedom of anonymity. You can enjoy Heisenberg's lively market commentary in the TheoDark Report section of their public blog.

Get the "Next Big Short " free special report....Just Click Here

For more backstory, here's Heisenberg in his own words: Heisenberg spent a long time in college. Probably too long. Be that as it may, the experience afforded him extensive cross disciplinary experience. From Aristotle to Kant to Wittgenstein, from Hobbes to Locke to Rousseau, from plain vanilla equities to FX to CDS, Heisenberg is right at home. With degrees in political science and business, as well as extensive post graduate work in political science and public administration, Heisenberg is uniquely positioned to analyze markets from a holistic perspective. He also has a sense of humor, which allows him to fully appreciate how entertaining it is to talk about himself in the third person.

Heisenberg has traded pretty much everything at one time or another and if he hasn’t traded it, he’s studied it enough to drive himself just as crazy as if he had. He doesn’t sleep much because the terminal doesn’t sleep and neither, generally speaking, do currency markets.

Heisenberg once took the law school admission test (LSAT) for fun with no intention of actually going to law school. He then took it again to try and beat his first score. He paid for the second test with profits he made from long calls on a Brazilian water utility ADR that he sold to close from the first iPhone (the 2.5G version that no one remembers) in the middle of a graduate political science class. His score on the verbal section of the graduate management admission test (GMAT) was near perfect. As was his score on the analytical writing portion. Don’t ask about the math section. He got bored after two hours and didn’t care about using the Pythagorean theorem to determine how long Timmy’s shadow was when he was standing next to a 90 degree flag pole.

Professionally, Heisenberg has worked in Manhattan and many other locales and has years of experience generating and monetizing financial web content. He’s continually amused at those who make it seem hard. You provide quality content for users on a consistent basis. Everything else falls into place. Build it, and they will come.

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See you in the markets putting the Next Big Short to work,
The Stock Market Club

A Yen for a Mortgage

By John Mauldin

For some time I have been saying that I was going to close the mortgage on my new apartment and then hedge it in yen. I promised to tell you the story, including what type of loan I got and how I am doing the hedge. This week I was finally able to pull the trigger. This topic will also let us re-examine why I think the Japanese yen is a screaming short. I am going to make this a shorter letter, as Amsterdam is calling, and it is a beautiful day. This is not a big think piece, but I think many of you will find it interesting. It outlines how I put my economic thinking into actual practice, and names names, if you will, of those who helped me do it.

A little background might be in order for those who want to know about the house. Others might skip to the next heading, An ARM and a Leg. I bought my last home in 1991 and sold it around 1998. I bought during the savings and loan crisis, which gave us the Resolution Trust Corporation, which sold me my hew home. I paid about 35% of the original asking price only two years earlier, at the high water mark, so I got a good deal. (Which was partially offset by the fact that I had to bring a check to the closing from the home I sold to get the new one.) Homes in some parts of Texas were literally being auctioned on the courthouse steps and paid for with credit cards.

For that home, I actually offered $50,000 less than several other offers on the table, but I attached a large nonrefundable cashier’s check, as a deposit, to the offer, while other bidders wanted the harried RTC clerk to make some much-needed repairs (the pool was green, fire ants had chewed through wiring, there had been flooding, etc.). But he had a monster stack of homes on his desk to sell, and my offer involved the least work, so he simply took it. I didn’t make all that much when I sold the home seven years later, by the way, but I did OK.

Rental properties in Texas at that time and up until recently have been good deals, in my opinion. For me, the cost of renting was much lower than the total cost of buying a home. About six years ago I moved to downtown Dallas after 40 years on the Fort Worth side of the metroplex. I moved first into a high rise (with some of the kids) and then later rented a larger home in Highland Park during the Great Recession, when larger homes simply couldn’t find buyers. It was stunningly cheap for the value. I was quite happy with my long term set up, but in January the owner called from California and offered to let me out of my lease if I would move in 45 days so he could sell the home in the spring. The market had finally come back, and homes in the “Park Cities” were selling within a few weeks of going on the market.

I was not really interesting in moving, but I had been to an apartment that a good friend of mine (David Tice of Prudent Bear fame) had renovated, in what is called the Uptown area of Dallas. He bought two apartments on the 22^nd floor of a high rise, basically taking the whole south side, then knocked down interior walls and made one large, open apartment He really did it quite nicely. I fell in love with his place, which is rather unusual for me, as I have been in fabulous homes all over the world; and while I admired many of them, none had ever “spoken” to me. But the views of downtown Dallas and the surrounding area just seemed so full of energy to me; and as a writer, I need to feel the energy. It recharges me. (I know, some people want beaches or mountains or a cave, and I have written this letter from many corners of the planet, but I do like a place with energy.)

So I called David’s realtor. Amazingly, two adjoining apartments were just coming on the market. They were basically apartments that had been bought on spec during the crisis, and the market had now come back enough that the owners were ready to sell. One of the apartments had never been lived in or rented. They were the two three bedroom apartments on the east side of the building, but they had the downtown views as well as northern ones.

Dallas has plenty of high rises, but oddly there are very few larger apartments except for penthouses. And the penthouses command a LARGE premium for what is still just basically floor space. I checked all the local similar offerings to get an idea of relative value, and I again put in a below market offer for the two apartments. After a lot of negotiating by my realtor, Nancy Guerriero, my offer was accepted. Then the hard part began, and that was getting a mortgage. Because I was going to renovate and because there was a tenant in one of the apartments, I could not get anything like a traditional mortgage. My mortgage broker, Ron Schulz, must have shopped several dozen banks. Basically, banks don’t like high rises and homeowners’ associations, as their local experience has not been good. Without going into details, I had to get three different loans to do the deal, and finally got help from a local banker, Joe Goyne, president of Pegasus Bank. Joe is a throwback to the old personal bankers we used to have here in Texas.

We started on the design almost as soon as I committed to the place. I was lucky in that my niece, Jen Mauldin, had trained with one of the largest architectural design firms in the country and done major design projects all over the world (the estates of Abu Dhabi princes, commercial developments in Macau, high roller suites in Vegas, Ritz Carltons, etc., plus lots of very nice homes). She had gone out on her own and was available. We set budgets and timelines. (Cue laughing from all my friends. They were right to laugh.) The planned 120 days of construction stretched into 180+ days – and forget about the budgets. Then there was the shock when it developed that new mortgage rules basically meant that I had to go to a 70% loan instead of the 80% I had been told I would get.

Plus, I was a rookie and did not check a “small” detail. I asked if I could get my construction costs rolled into the new loan. The answer was yes, but what they meant was that I could get the construction loans rolled in but not my out-of-pocket costs, because Texas has a law that you cannot get money out of your mortgage when you refinance, and what I paid out of pocket was considered getting money back. Oops – I had paid a lot out of pocket just to move things along, when I should have gone to Joe and upped my construction loan. Silly me.

All told, I had to come up with way more cash than I thought I would when I started. The difference was large enough that I would not have done the deal if I had known. But I really like my place, so in a sense I am glad that I didn’t know. (You can see some of the work on the place at Jen’s website.)

An ARM and a Leg 

But then came the time to get a takeout mortgage. Joe had lent me the total amount at 3.75% for one year.
It soon became apparent I would get only a 70% loan, which would basically take me out of the construction loans. I got lucky in that the appraisals turned out higher than my cost basis, as values have actually moved up. First feelers were not encouraging, so I began to shop.

I wanted a 5 year adjustable-rate mortgage (ARM) with a 30 year amortization. My feeling is that there will be a recession within the next five years (if we do not have one, it will be the longest span on record with no recession in the US) and that rates will once more go way down – and I can then lock in whatever I want, probably a 15 year fixed, at that time. My risk is that we may never again see rates as low as they are today, but that is a chance I am prepared to take. (I really do eat my own “cooking.”)

Two personal connections turned up offers in the 4.5% range. Ron was beginning to get feelers in the high 3% range. I called my broker at JP Morgan (more below), and Travis Moss in his office went to work and got me an offer for the 5 year ARM at 2.875%; but it was not clear they could actually do the deal, as high-rise financing is complicated in Texas. About that time, my regular bank, Capital One, changed loan officers. The new guy gave me a courtesy call; and upon finding that I needed a mortgage, he jumped into the process. Rather than a loan that they would securitize, they were looking for a loan to put on the books.

They matched the JP Morgan offer and really dropped the closing costs. No points, etc. I sheepishly told Travis (who is a friend) that I was getting a better offer, and within a day he had matched it. We decided to go with JP Morgan, as that is where I am going to do my yen hedge, but it was hard to turn down Clinton Coe from Capital One. He really wanted that loan. When we had our crisis in Texas back in the early ’90s, we “lost” our banks to national banks and lost a lot of that personal touch I had known for the first part of my career. It is nice to see bankers like that again in Texas.

I signed the closing papers and had literally just stood up from the table when I took a call from the banker at Capital One, offering to cut the rate to 2.75% and axe a few other costs as well. WOW. Now, in Texas you can cancel a loan commitment for up to three days. I was tempted for a minute, but decided that because I had told Travis I would do the deal, I was not willing to take that back. But I did call Travis and tell him what had happened, joking about it. He said “wait a minute.” He hung up, then quickly called me back and said, “We will match it. Go cancel your loan.” When was the last time your banker tore up your loan and then lowered the rate for you five minutes after you signed the deal?

So I rescinded the first loan and then had to wait another 30 days (the rules) but finally closed on the way to the airport to come to Amsterdam.

A Yen for Mortgages

Long-time readers know I am a huge bear on the relative value of the Japanese yen versus almost any currency, but especially the dollar. I have been saying for some time that I expect the yen to one day be at 200 and maybe even higher. But that journey is going to take a long time. Forty years ago the yen was at 357 (or thereabouts), and then it rose over time to the high ’70s last year, when it started to fall again. The chart below goes back 43 years. Think, by the way, how your businesses would react if the value of the currency in which you trade rose by a factor of four over 40 years.



Later in the letter I will go more into my reasoning as to why I think the yen will fall over time, but for now let’s look at how I got a “yen mortgage.”

I asked readers to help me find a “pure” yen mortgage. I said I thought the market for such a mortgage would be huge, and I would help build it. I must admit, I was somewhat surprised when nothing really turned up. Ten year government paper in Japan is at 0.6%. You would think that getting 2% for a 15 year mortgage would appeal to someone, but running a few connections still brought me nothing. I even found a U.S. bank that would agree to a takeout and mortgage guarantee, but still no takers. I guess a billion isn’t as big a deal as it used to be.

The basic concept is that if the yen falls by 50% (my bet) and I have my loan structured in yen, then I pay less in dollars. Perhaps a lot less. But since no pure yen loan is available that I can find, a synthetic one will have to do.

There are lots of ways to do it. Futures are the obvious way – simply selling the yen short. But I have no way of knowing timing on the yen, and in my view there will be some significant “corrections” along the way, so using futures would be a constant battle of margins, rolling into forwards, paying commissions with every new contract, etc. And given the new Dodd-Frank rules, it is #$%W$#$ hard to simply tell a broker to execute a trade. To do the trade I ended up doing (see below), I had to be on the phone in the middle of the Amsterdam night to verbally confirm that I was sane and really, really did want to do the trade. But given my travel schedule and possible technological issues, updating my futures trade could have been problematic.

So I elected to keep it simple and do a 10 year put option. I want Abe-san and Kuroda-san to pay for about half my mortgage. I will gladly pay the other half. All they have to do is print yen to fulfill their part of the transaction – and they seem pretty committed.

Warning: Don’t try this at home, kids. This is a VERY risky bet, even though my losses are limited to my entire investment. And while my logic might be compelling, at the end of the day I am trading/betting/gambling (all essentially the same thing) that politicians in a country and a culture I don’t live in and don’t truly understand are going to act in a certain way. They might choose another path with different disastrous results that would make the trade go against me. They have no good choices, only disastrous ones, because they have overleveraged their government and cannot possibly meet their obligations without some kind of default. Rather than outright default to their own retirees, I think they will print and inflate and monetize away that debt. But that’s just me making a trade to counter what I think they will do (and what they tell us they will do). With that preface, let’s look at what I am doing.

To execute the trade, I went to The Plumber. That is my rather affectionate name for Erick Kuebler, a JP Morgan broker here in Dallas. Darrell Cain introduced us, with a rather effusive (for Darrell) endorsement. Having met a few brokers over the years, including some really good ones, I just listened and watched. But as Erick is part of that downtown TCU-grad mafia (a local thing – he was in the same frat with Kyle Bass and a group of guys), he kept showing up at places where I was.

Over time, I realized that Erick understood the workings of the market better than anyone I personally knew. Not the normal things you and I think about, but what really happens when you execute a trade. I simply want to go to a screen and buy or sell, in much the same way that I go to a faucet and turn it on and get water. I expect water to come out when I twist the handle.

The Plumber knows what happens when I do that. He knows where the water comes from, who purifies it, what tank it was stored in before it got to me, whether it will be hot or cold, and what the pressure is. He knows whether to use copper or PVC pipe in the construction. He knows who charges what at each step along the line. I have learned a lot from The Plumber. (Simple ETF trades, for instance, are not all that simple. Especially in size.) For the record, I am a registered broker with my own firm, and you would think I would know this stuff. I kind of knew but had no real idea how many toll gates there are if you are not paying attention. Erick specializes in larger trades for clients trying to avoid those tolls. He laughs at the HFT guys.

Plus, Darrell chose Erick and JP Morgan to handle my self-directed defined-benefit pensions plans (which deserve a whole letter – for the right small business they are a marvelous tax preference vehicle), so Erick was the logical choice to help me do this yen trade.

Buying “in-the-money” or close-to-spot options is expensive. While I have no way to know what the yen will be one or two years from now, I truly think that over ten years Japan has no choice but to print massively.

So, if I think the yen will eventually get to 200, I can buy an option that allows me to exercise the put at a strike price of 130. If I do a million dollars notional, that means if the yen goes to 200 I make about $700,000. The rules keep me from disclosing how much that put option costs me, but let’s just say that I end up with a nice multiple if I’m right.

Of course, if the market is right (in its current state of unwavering faith) and the yen doesn’t even top 130, I lose all of my option premium. ALL OF IT. 100%.

I will eventually add two more trades, one option at 140 and another at 150, but as I am notoriously bad at timing, I am going to “feather” those trades in over the next few months. I can see the yen dropping below 100 or going above 105 quickly (it is at 102 and change today); but since I don’t know, it just seems better to me to take some time to put the whole trade on. I now have until May 5, 2024, for the yen to rise above 130 … or I take the loss.

Given that I think 200 is where we’re going – it doesn’t really matter all that much if we start at 98 or 105; but I think that in general it’s good practice to pace your investments when it’s practical to do so.

A Bug In Search of a Windshield

I wrote about four years ago that Japan was a bug in search of a windshield. In January 2013 I actually started to invest personal assets in the “short Japan” story (mainly through funds), and with this week’s action I’m doing so more aggressively. The position represents an outsized portion of my personal portfolio, and it’s one I would not suggest that most people take in such size. But then, you ask, why am I doing it?

I guess I’m a true believer. Japan has a government debt-to-GDP ratio of at least 221% and perhaps as high as 245%, depending on your data source and how you account for certain securities. The interest rates on the Japanese 10-year bond is at 0.6%, yet interest-rate expenses eat up some 23% of total government revenue. (Debt service accounts for 46% of government tax revenue.) If interest rates were to rise to OECD levels, or another 2%, interest-rate expense would eat up 80% of government revenue. That is not a workable business model.

My friends over at Hayman Advisors (Kyle Bass’s fund) sent me the following pieces of data: Added together, Japanese debt service and social security (nondiscretionary spending) exceed government tax revenue and have done so for each of the last five years. The fiscal deficit has been greater than 10% of nominal GDP in each of the last five years. Japan has ~¥1.1 quadrillion of total government debt (~¥1,100 trillion) compared to nominal GDP of~¥481 trillion (a 221% ratio).

Japan has consumed the savings of multiple generations through the sale of government bonds. Japan now has less than 5% of its government debt sourced outside Japan. But the country does not “owe it to itself.” It owes it to the tens of millions of savers and retirees who have played the game correctly, worked hard and saved all their lives, and now want to use those savings in retirement.

The largest pension funds are no longer net buyers of Japanese bonds (JGBs). They are now selling, and that tide to swell with a vengeance, since Japan is rapidly aging. Further, the largest pension funds are starting to roll out of JGBs and into equities. Which makes sense, as who wants to own a 10-year JGB at 0.6% if inflation rises to 2%? What rational investor would choose to do that?

Japan cannot afford interest rates to rise all that much. So there must be a good market for JGBs. But who will buy?

Two weeks ago, there was a day and a half when the Bank of Japan was not in the market for 10-year JGBs. Even though they are buying in size every month with their latest aggressive round of QE, there are times when they are not “in the market.”

During my recent speeches, I have been asking the room how many JGBs they think traded during the period when the BoJ was out of the picture. Make your guess now.

No one gets it right. For that day and a half, the bond market had zero trades. The Bank of Japan is now the market. Think about that! (See: reuters.com/japan-jgb.)

Given the reality of Japanese finance, I think they BoJ will continue to “hit the bid” in order to hold interest rates down. They will space out their buying more to keep those no-trading days out of public view. They will give us a song and dance from time to time to try and keep the valuation of the yen from rising too fast, but in the end they are going to monetize more in absolute terms than the U.S. did in an economy three times Japan’s size. Perhaps as much as $8 trillion over an extended period. That’s the relative equivalent of the US Fed buying $30 trillion and putting it on its balance sheet. If you thought the Fed was going to do that, what would you do now?

What do you think Japanese investors will do when they realize what is happening? Buy equities, of course, but also diversify internationally. This move is going to play havoc with cross border capital flows into all sorts of markets.

This is a brief synopsis of the Japan story. For a much fuller read, I point you to some of my past letters, or better yet, the full story in chapters two and three of Code Red.

I urge you to be cautious about putting on a “yen hedge” for your own mortgage. It is hard to do and more expensive for options with a notional value of less than $1 million, so it might not fit into your portfolio all that well. Talk with your financial advisor or broker, and really do your own homework. There are very smart people who, like me, are yen bears but who think that 140 or 150 is about as high as the yen will go. When I start talking 200, they think I’m smoking some of the stuff sold in the coffee shops here in Amsterdam . If they’re right, my trade will be in the money but not all that good over time, considering the risk and use of capital.

Amsterdam, Brussels, Geneva, San Diego, and Tuscany

I am in Amsterdam today, and it is beautiful. I will soon be off to the new ship museum and other sites before – if all goes well – I rent a car and take a leisurely Sunday drive through the countryside to Brussels, something I have always wanted to do. I may try to get lost, at least for a few hours. Who knows what I might stumble on?

I will be speaking Monday night in Brussels for my good friend Geert Wellens of Econopolis Wealth Management before we fly to Geneva for another speech with his firm, and of course there will be the usual meetings with clients and friends. I find Geneva the most irrationally expensive city I travel to, and the current exchange rates don’t suggest it will be any different this time.

I come back for a few days before heading to San Diego and my Strategic Investment Conference, cosponsored with Altegris. I have spent time with each of the speakers over the last few weeks, going over their topics; and I have to tell you, I am like a kid in a candy store – about as excited as I can get. This is going to be one incredible conference. You really want to make an effort to get there; but if you can’t, be sure to listen to the audio CDs. You can get a discounted rate by purchasing prior to the conference.

I had lunch today with Eddy Markus, the founder and chief economist of ECR, one of the more respected research shops that analyze European credit and currency markets. We have communicated over the years, and he politely sends me a note every so often to broaden my limited understanding of the world. I always listen.

Eddy has a somewhat different view of the problems facing Europe. He and I see the same issues (debt, impossible-to-keep government promises, no fiscal union, banking capitalization woes, etc.), but he thinks the euro will break up, not in just a few years but much further down the road, in ten years, perhaps. It is his view that the dream of a unified Europe will be chased by politicians all the way to the bitter end. They will kick the can down the road much further than some of us think possible. He believes they can hold it together longer with promises and halfway measures, promises to fix things at the next meeting, etc. I admit to wondering just how they can accomplish that, and we spent a few pleasant hours over lunch on the canals as he explained his views.

Ten years? Wow. A lot of things will change in 10 years, but Keynes is right about this: the markets can stay irrational longer than you can remain solvent. I find it hard to believe that France can stall that long; but then again, we are talking politics, not economics.

It really is time to hit the send button. Have a great week. I am off to ponder how human beings could pile into such small ships and dare the oceans. (I get seasick relatively easily and find a storm at sea to be such an awful idea that I have a hard time even thinking about getting on a boat.) I therefore find it fascinating that it seemed like a good idea at the time and that so many did it. But then again, I am shorting the yen – who knows what craziness true believers will get up to?

Your still trying to think about Europe in 10 years analyst,
John Mauldin

The article Thoughts from the Frontline: A Yen for a Mortgage was originally published at Mauldin Economics

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The Great American Wall Of Worry – U.S. Stock Market

Traders and investors all around the world is having trouble climbing over the wall of worry/fear with the US stock market, and rightly so. There is a lot of things taking place and unfolding that carry a high level of uncertainty. Let’s face it, who wants to invest money into the market when it’s hard to come by (high unemployment, banks are still extremely tight with their money, companies are nowhere near wanting to hiring new staff).

The hard pill to swallow is the fact that the stock market loves to rise when uncertainty is high. It’s almost doing it just to drive investor’s nuts who sold out near market bottom or recent correction. You must overcome the urge to short the market when the economy looks so bearish in the years ahead, and continue to trade with the trend.....Read the entire story and view the charts.



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How to Spot & Time Stock Market Tops

Since the middle of April everyone and including their grandmother seems to have been building a short position in the equities market and we know picking tops or bottoms fighting the major underlying trend is risky business but most individuals cannot resist.

The rush one gets trying to pick a major top or bottom is flat out exciting and that is what makes it so darn addicting and irresistible. If you have ever nailed a market top or bottom then you know just how much money can be made. That one big win naturally draws you back to keep doing it much like how a casino works. The chemicals released in the brain during these extremely exciting times are strong enough that even the most focused traders fall victim to breaking rules and trying these type of bets/trades.

So if are going to try to pick a top you better be sure the charts and odds are leaning in your favor as much as possible before starting to build a position.

Below are a few charts with my analysis and thoughts overlaid showing you some of the things I look at when thinking about a counter trend trade like picking a top within a bull market.

Utility Stocks vs SP500 Index Daily Performance Chart:

The SPY and XLU performance chart below clearly shows how the majority of traders move out of the slow moving defensive stocks (utilities – XLU) and starts to put their money into more risky stocks. This helps boost the broad market. I see the same thing in bonds and gold this month which is a sign that a market top is nearing.

That being said when a market tops it is generally a process which takes time. Most traders think tops area one day event but most of the times it takes weeks to unfold as the upward momentum slows and the big smart money players slowly hand off their long positions to the greedy emotion drove traders.

Look at the chart below and notice the first red box during September and October. As you can see it took nearly 6 weeks for that top to form before actually falling off. That same thing could easily happen again this time, though I do feel it will be more violent this time around.



SPY ETF Trading Chart Shows Instability and Resistance:

Using simple trend line analysis we see the equities market is trading at resistance and sideways or lower prices are more likely in the next week or two.



Stocks Trading Above 150 Day Moving Average Chart:

This chart because it’s based on a very long term moving average (150sma) is a slow mover and does not work well for timing traded. But with that said it does clearly warn you when stocks are getting a little overpriced and sellers could start at any time.

General rule is not to invest money on the long side when this chart is above the 75% level. Rather wait for a pullback below it.



Stocks Trading Above 20 Day Moving Average Chart:

This chart is based on the 20 day moving average which moves quickly. Because it reacts quicker to recent price action it can be a great help in timing an entry point for a market top or bottom. It does not pin point the day/top it does give you a one or two week window of when price should start to correct.



How to Spot and Time Stock Market Tops Conclusion:

As we all know or will soon find out, trading is one of the toughest businesses or and one of the most expensive hobbies that one will try to master. Hence the 95-99% failure rate of individuals who try to understand how the market functions, position management, how to control their own emotions and to create/follow a winning strategy.

With over 8000 public traded stocks, exchange traded funds, options, bonds, commodities, futures, forex, currencies etc… to pick from its easy to get overwhelmed and just start doing more or less random trades without a proven, documented rule based strategy. This type of trading results in frustration, loss of money and the eventual closure of a trading account. During this process most individuals will also lose friends, family and in many cased self-confidence.

So the next time you think about betting against the trend to pick a top or a bottom you better make darn sure you have waited well beyond the first day you feel like the market is topping out. Stocks trading over the 150 and 20 day moving averages should be in the upper reversal zones and money should be flowing out of bonds and other safe haven/defensive stocks to fuel the last rally/surge higher in the broad market.

Also I would like to note that I do follow the index futures and volume very closely on both the intraday and daily charts. This is where the big money does a lot of trading. Knowing when futures contracts are being sold or bought with heavy volume is very important data in helping time tops and bottoms more accurately. And the more experience you have in trading also plays a large part in your success in trading tops and bottoms.

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Correction near but Bull Market has LONG waves to Go!

From guest blogger David Banister at Market Trend Forecast.....

The SP 500 has been on a tear as we all know especially since the SP 500 bottomed at 1343 several months ago. My work centers around forecasting using Elliott Wave Theory along with other technical indicators. This helps with projecting the short, intermediate, and longer term paths in the stock market and also precious metals. This larger picture Bull Cycle started in March of 2009 interestingly after an exact 61.8% Fibonacci retracement of the entire move from 1974 to 2000 lows to highs. At 666, we had completed a major cycle bottom with about 9 years of movement to retrace 26 years of overall bull cycle. That was a major set of 3 waves (Corrective patterns in Elliott Wave Theory) from the 2000 highs to 2002-3 lows, then 2007 highs to 2009 lows. Once that completed its work, we were free to have a huge new bull market cycle off extreme sentiment and generational lows.

It’s important to understand where we were at in March of 2009 just as much as it is today with the market at all time highs. Is this the time to bail out of stocks or do we have a lot more upside yet to go? Our short answer is there is quite a bit more upside left in the indexes, but there are multiple patterns that must take place along the way. We will try to lay those out for you here as best we can.

Elliott Wave theory in general calls for 5 full wave cycles in a Bull pattern, with 1, 3, and 5 bullish and 2 and 4 corrective. We are currently in what is often the most bullish of all the patterns, a 3rd of a 3rd of a 3rd. In English, we are in Primary wave 3 of this bull cycle which will be 5 total primary waves. We are in Major wave 3 of that Primary 3, and in the Intermediate wave 3 of Major wave 3. That is why the market continues its relentless climb. This primary wave 3 still has lots of work to do because Major wave 3 still has a 4th wave down and a 5th wave up to finish, then we need a major 4, then a major 5.

That will complete primary wave 3. This will then be followed by a Primary wave 4 cycle correction that probably lasts several months, and then a Primary wave 5 cycle to finish this part of the bull market from March 2009 generational lows… and all of that work is going to take time. Once that entire process from March 2009 has completed, then we should see a much deeper and uglier correction pattern, but we think that is at least 12 months or more away.

What everyone wants to know then is where are we at right now and what are some likely areas for pivot highs and lows ahead? We should complete this 3rd of a 3rd of a 3rd here shortly and have a wave 4 correction working off what will likely be almost 300 points of upside from SP 500 1343. We could see as much as 90-120 points of correction in the major index once this wave completes. Loosely we see 1528-1534 as a possible top and if not then maybe another 30 or so points above that maximum into early June. This should then trigger that 90-120 point correction, and then be followed by yet another run to highs.

We could go on but then we will lose our readers here for sure, and as it is… this is all projections and postulations, so it’s best to keep the forecast to the next many weeks or few months. Below is a chart we have put together showing the structure of Major wave 3 of Primary 3 since the 1343 lows. Once that Major wave 3 tops out (see the blue 3) then we will have Major 4, then Major 5 to complete Primary wave 3 since the 1074 SP 500 lows. Whew!



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Are you ready? Gold Traders and Investors Better Get Ready To Rumble!

We have talked about how gold, silver and gold mining stocks have been flying under the media radar for over a year and that they were not catching the attention of traders, investors and the public anymore. I also said it would take some sharp price action (breakdown or rally) for it to be front and center again on TV, Radio and Newspapers.

But since gold has plummeted 17.5% dropping from $1600 down to $1320 per ounce with silver and gold stocks falling also they are now headline news once again. This move has caused some serious damage to the charts when looking at it from a technical analysis point of view. Below are some basic analysis points that show a new swing trading entry point.

The Technical Traders Chart Analysis

Broken Support – Once a support level has been broken it becomes resistance. Gold is trading under a major resistance level.

Momentum Bursts - Since the April 15th low, gold has been setting up for another short selling entry point. Remember the market tends to move in bursts of three, seven or ten days then price reverses direction or pauses. It has now been 10 days.

Moving Average Resistance – Gold has worked its way up to the 20 day moving average which can act as resistance.

Bearish Inside Bars – This type of chart pattern points to lower prices. When there is a big down day followed by 3, 7 or 10 up days inside the price action of the down bar we can typically expect another sharp drop which tests the recent lows as shown with the arrow on the chart.



Gold Short Selling Conclusion:

In short, gold is setting up for a low risk entry point that should allow us to profit from lower gold prices. Using an inverse ETF like DZZ or even the gold mining stock inverse ETF DUST could be played. These funds go up in value as the price of gold falls.

While I expect gold to pullback, I do not think it will make another leg lower. Instead, a test of the recent low or pierce of the low by a few bucks then reverse and start building a bullish basing pattern before going higher.

From our trading partner Chris Vermeulen.

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A Short Gold Position Could Pay Off With This Scenario

In this 4 minute video we explain exactly what we mean by a "short gold position." It does not mean we are bearish on gold, however the scenario we point out in this video could make money by being short gold and long another important market.

The video points out what the scenario is, and which market you should be long in, against a short gold position. This is an interesting twist and a video you shouldn't miss.

As always our videos are free to watch and there is no registration required. Please feel free to re-tweet this video on Twitter or share this video on Facebook. Also take a minute to leave a comment and let us know what you think about the video.

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Has The Gold & Silver Play Gone To Greed?

The past few months it seems the gold and silver play has been getting a little crowed with everyone wanting to own gold. While I am a firm believer that these precious metals are a great hedge/investment long term, I can’t help but notice the price action and volume for both metals which looks to me like they are getting exhausted.

Silver – Daily Chart
The silver chart below shows an extremely high volume reversal candle in early November which typically leads to lower prices and some times a major change in the trend. That being said silver remains in an uptrend with the possibility of a bullish pennant forming. On the other hand there is a possible head and shoulders pattern forming. I will be looking for light volume sideways chop keeping a close eye for a possible neckline breakdown or a momentum thrust to the upside for a possible trade.

Gold – Daily Chart
Gold is forming a bullish and bearish pattern also giving us a mixed signal. I am currently neutral on gold and not really looking to take part until we get some type of clear price action.

US Dollar – 60 Minute Chart
The dollar has shown some strength recently. The US dollar play has been to take the short side, and a couple weeks ago we saw the dollar breakdown from yet another consolidation. It seems like everyone shorted the dollar yet again. That could have been a key pivot low for the dollar. On the weekly chart that bounce was off a major support trend line helping add some fuel to the rally I would think.

The chart below shows the recent rally and breakout to the upside. Currently the dollar is pulling back to test the breakout level (support). It will be interesting to see how this week unfolds. If the dollar bounces then we just may see metals break below their necklines to make another heavy volume drop.

Weekly Precious Metals Update:
In short, I have mixed feelings for gold and silver. Yes I think they are good long term plays, but after the run they have had it is also very possible a much deeper correction is about to take place and we may not see new highs for another year. That is a long time to have money sitting in an investment when it can be put to work in other investments. I know the herd (general public) is all head over heals in love with gold and silver which is one of the reasons why I think we are nearing a top if we didn’t already see it a couple weeks ago.

Don’t get me wrong I’m not saying to sell and go short metals....not yet anyways. They are both still in an up trend but some interesting things are unfolding which could cause big action in the coming weeks.

For now please join my trading newsletter and get my ETF trading signals, daily analysis and educational material at The Gold and Oil Guy.com

Chris Vermeulen


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Spain is in Pain – US Dollar & Gold Are Safe Havens

It’s been an interesting week with Spain being downgraded as Europe debt crisis widens. This has investors looking at the US dollar in a new light thinking that maybe it’s not that bad of an investment after all. This sent the US Dollar higher along with the price of gold so far this week.

The past 7 days we have seen both the US Dollar and Gold rise together which is not something that happens often. With financial crisis’s popping up around the world I think the US dollar and gold will continue to strengthen (with corrections along the way). I think it will take another 12-24 months before another wave if issues arise in the financial markets and until then we just continue to focus mainly on buying the dips and corrections with the occasional short play in the larger corrections.



SP500 – Daily Chart

On April 14th we saw an extreme level of selling which sent the broad market sharply lower. This sell off was followed by value buyers pushing the prices back up to new 2010 highs.

Well this week we have seen the same extreme selling volume and the question we all want to know is will there be buyers this time around?



ETF & Futures Trading Conclusion

Gold is in a bull market but it was setup for another round of selling but this Spain issue has been a pain. If we had another downward word move on gold to the $1115 – 1120 area it would have washed out the majority of gold bulls resetting it’s self up for a big rally.

The Europe debt crisis has thrown a twist into the picture helping boost the price of gold. Gold could still head lower washing out the weak positions but the picture is fuzzy. Silver did not react much to this news as it’s not really seen as the safe haven gold or the US Dollar are.

As for stock picks and the broad market, it looks and feels like we are about to start a correction. But this week we saw fear in the market again with the VIX and selling volume surging higher to levels which have triggered temporary bottoms in the past. The problem I see here is that some key price levels have been taken out, so the odds are pointing to lower prices in the near future. But Tuesdays panic selling has pushed the market into an oversold condition so we should see a drift upwards for 1-4 days before sellers get active again as they want to sell and short the market at premium prices.

In short, precious metals are not giving any clear price action to take advantage of yet, and the SP500 looks like it’s on its last legs before heading lower for a meaningful correction which should provide a short setup and then a nice long setup once it bottoms out.

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