Gold: Bursting Bubble?

Following an impressive 20% gain in just 2 months, gold has dropped $100/oz in the past two weeks. I've seen a number of pundits come out recently stating that gold prices are much too high, gold is a bubble, and/or a significant decline is coming. Some of these comments are coming from the very individuals who've tried calling the top in gold a number of times over the last 5 years, during which time gold has appreciated 200%. Compare that return to the stock or bond markets.



Looking below at the 10-year chart of gold you see price action typical of a long-term secular bull market. Sharp climbs are followed by some retracement and consolidation. This 9-year (so far) bull market has experienced a number of year-long periods of stagnation or decline. The fact that we're experiencing some profit taking after the recent run shouldn't surprise anyone. This is normal and healthy.



So is the current decline a temporary shake-out of weak hands, the beginning of a more significant decline, or the beginning of a period of extended consolidation? Only time will tell, but it's unlikely that the secular bull market in gold has just seen its peak. We've been using the current pullback as an opportunity to once again boost our exposure.

Until the trend of global monetary and political mismanagement is convincingly reversed, there is little reason to sell our precious metals position. Annual gold production has been in decline this decade, central banks will soon be net buyers, the opportunity cost to owning gold is nil, gold is terribly under-owned, the metal is very cheap relative to the monetary base, and the public is just beginning to wake up to the merits of owning gold.

I find gold as attractive today as I did in 2003, although the investment case has changed somewhat. My contrarian nature struggles somewhat with the tremendous performance gold and gold stocks have already posted and the fact that gold is no longer hated and undiscovered. Nevertheless, the investment case remains strong, and there is a very decent chance that a mania phase still lies ahead. I suspect the time to sell will be when virtually everyone can quote you the price of gold.





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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Dr. Doom vs. The Investment Biker

Roubini versus Rogers. Let's recap the match to date. First, Nouriel Roubini gets in the ring by himself and starts shadow boxing. He warns that a "wall of liquidity" and "the mother of all carry trades" (via the dollar) are sparking asset bubbles and could lead to another financial crisis.

Next, for some reason Jim Rogers decides to step into the ring, takes offense that Roubini is swinging, throws a quick jab that lands squarely on Mr. Roubini's feelings. More specifically, Rogers said that "Mr. Roubini hasn't done his homework." Rogers claims that there is no bubble in gold, equities, or commodities. Instead, Rogers asserts that they've all simply had a very good year. He then goes on to say that gold could reach $2,000 per ounce in the next decade.

Not to be outdone, Roubini throws a powerful hook intended to knock out Jim's gold fillings. He states that Jim's claim that gold will reach $2,000 is "utter nonsense."

And that brings us to the end of round three. Ultimately, these two publicity hounds both win from this spat given all of the...well...publicity. If their publicists are worth their salt, Rogers will next come out and claim that Roubini's accent is fake. Roubini then fires back that the only bike Jim could ride is a senior scooter. Someone leaks a sex tape...

Let's ignore the personal jabs for a moment and look at the content of what they're both saying. They both make some valid points. Equity markets and many commodities have indeed had very good years so far. Are they cheap? Not many. Are they in bubble territory today? There are a handful of asset classes in select countries that I would argue are in a bubble, but for the most part, most assets are simply overvalued. Jim is right that we don't have bubbles (for the most part) yet, but Roubini is right in warning that the excess liquidity and dollar carry trade will ultimately create bubbles and another financial crisis. See how easy that was.

As for gold, I have more sympathy for Rogers. I'd be curious to know what Roubini has been saying about gold since it bottomed near $260 per ounce in 2001. I may be wrong, but I doubt that he ever expected it to reach $1,080, a four-fold increase in 8 years. Rogers stated that he expected gold to double to $2,000 in the next decade. 7% per year for 10 years will get you there. Whether it happens or not, it strikes me as somewhat naive to call that "utter nonsense," particularly in light of the currency debasement and massive deficits we're experiencing. Actually, when I put it that way, $2,000 gold in the next decade seems practically assured unless Washington suddenly finds religion when it comes to fiscal restraint (no sign of it today with the extension of the ridiculous home-buying credit).

Bottom line: Whether or not we're yet in bubble territory and regardless of whether gold reaches $2,000 in the next decade, this little spat is probably pushing the speaking fees for Rogers and Roubini squarely into bubble territory.


Disclosure: Aspera Financial, LLC has been and remains overweight gold and gold equities.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Curse Of The Contrarian

It's so ugly out there, it's hard not to be a little bullish. My contrarian sympathies have certainly been helpful in avoiding complete disasters over the years and have been instrumental in all of my most profitable investments. But everything has a cost. The curse of the contrarian is often being early in your calls, sometimes quite a bit early. That has always struck me as a very fair trade.

With the global economy now in tatters, stock markets hitting fresh multi-year lows, and journalists jockeying to see who can use the word "depression" most often in their articles, the contrarian in me is starting to feel a little frisky. Perhaps the stars are aligning for a nice rally. For today's exercise, we'll temporarily set aside all of the doom and gloom (of which I've contributed my share over the years), and we'll take a look at a few positive developments.

1. We can argue about the merits of the stimulus (and I've been against it from the start), but there's a good deal of monetary and fiscal stimulus on the way. The authorities have made it clear that they will stop at nothing to "fix" the economy. Ignoring the potential longer-term negative consequences of their prescription, the current and future stimulus (yes, there will be more) will show up in the economy.
2. Stocks in the U.S. are now off about 48% from their highs. Much bad news has been discounted.
3. Bearish sentiment has been climbing again. The herd of bulls is thinning and those remaining are far less vocal.
   
4. The Leading Economic Indicators rose for 2 straight months. Yes, it can be explained away, but at least it rose.
   
5. The money supply has been rising at a healthy clip. True, it isn't making it's way into the economy -- yet. That could change sooner than expected.
6. On a related note, there is a great deal of cash sitting on the sidelines, waiting for a little more clarity and confidence to move back into risky assets.
7. On a related note, the fixed income markets have been showing some signs of life recently.
   
8. Once again, a number of pundits are questioning Buffett's investment acumen. That's usually a good contrary signal.
   
9. New housing starts are plummeting. This will help with the excess housing inventory problem. It will still take more time, but it's happening.
10. Companies have been fairly quick to reduce costs in this downturn, and corporate balance sheets were in pretty good shape going into it. Once business finally does pick up, we could see some rapid margin expansion.
11. Based on a number of different metrics, equity valuation looks much more reasonable. We're hardly at bear market lows, but some metrics are at levels not seen in a couple of decades.
12. The market has fallen 14% since February 9th. It sure feels like we're oversold near-term.
    

That was refreshing. Again, this is not a bottom call. In the near-term, we are oversold. Markets don't go straight down. It would be more surprising to me if we didn't experience a rally imminently.

In recent days, I've added a little more market exposure, reduced our already small short position, and reduced our gold position (still one of our larger holdings). Gold is due for a healthy pullback after its recent rise, and I suspect a rally in the market may result in a decline in gold as safe haven buying temporarily wanes. Should this occur, I'll be rebuilding the gold position again.

The odds favor any rally being a trading opportunity. In the meantime, I'll enjoy basking in my relative bullishness.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

So, Where Are We Now?

I appreciate all of the inquiries as to my disappearance lately. I'd love to report that I've been relaxing on a beach on a remote telecommunications-free island in the Caribbean, but client business, trading, earnings season, and a beautiful, laughing, 4-month old daughter have kept me very busy these past few weeks. As earnings season slows I hope to have a little more time for the Rubbernecker, sleep, and personal grooming.

I certainly haven't avoided writing due to a lack of material! Let me try and catch up with the past few weeks and recap where we stand.

• As we know, the Fed has driven interest rates to ridiculous below-market rates.
• These low rates are devastating for the savings of retirees who have no business moving out on the risk curve in search of higher yield.
  
• These low rates are also supposed to encourage more borrowing despite the fact that our economy is currently suffering from too much debt.
• Congress is angry that the banks aren't lending their bailout funds to people who already have too much debt in the middle of some type of economic "ession."
• Congress is criticizing bankers for paying themselves too much, over-levering their balance sheets, and maintaining huge off-balance sheet liabilities while Congressfolk continue to pay themselves too much, over-leverage our nation's balance sheet, and maintain huge off-balance sheet liabilities.
  
• The collective earnings of the S&P 500 companies will register its first decline ever in the fourth quarter of 2008. Ever.
  
• Congress just passed a $787 billion stimulus plan that will further increase our national debt and displace private investment. The notion that this and future stimulus is only temporary and will be withdrawn once the economy recovers is laughable.
  
• Over $8 trillion in spending/promises have been incurred in the past year.
  
• We have a Treasury Secretary in charge of both the financial industry bailout and the IRS who either isn't smart enough or honest enough to do his own taxes properly.
• This same Treasury Secretary just announced an eagerly-awaited financial bailout plan that included no details and no plan aside from somehow spending a lot more money.
  
• The Obama administration is now working on some scheme to "save" the housing market. Whatever the details of the plan, we can be sure it will entail using the tax dollars of those who were prudent to "rescue" those who made bad choices. It will also impede the housing market finding a bottom.
  
• This year's Federal budget deficit is creeping towards $1.5 trillion, and is sure to rise further as tax receipts continue to fall.
  

Debt, Debt, and More Debt
Simply put, this massive increase in debt is an inter-generational transfer of wealth. In other words, we're doing this for our own current "benefit" and will be passing the bill to our children. Where's the discussion of fairness? With every bailout of the past year, our leaders have told us that we must act immediately or the global economy will collapse. That hasn't left much time for educated discussion, nor has it prevented the global collapse that their swift undebated action was supposed to prevent. Last week, I explained to my 4-month old daughter that her share of the national debt is well over $200,000. You should have seen the diaper I had to change after that.

It amazes me how accepted it has become that the the cure for any slowdown of any magnitude is always to throw money at it. This is the policy that we've pursued consistently since the Great Depression, and look where it's gotten us. There's a popular quote that seems rather appropriate. "If you keep doing what you've been doing you'll keep getting what you've been getting."

For far too long, our policy makers have increased and encouraged borrowing at every whiff of a slowdown rather than let the market correct the excesses that have built up. Each time, they managed to forestall what would have been a healthy correction at the expense of preordaining a more severe future correction. Ironically, now that it's time to pay the piper, our authorities are laying the blame on the failings of the free market instead of their constant meddling. Unfortunately, their actions will only prolong the length of this downturn.

As I've stated before, the good news is that the market is still doing its job, and many of the excesses (excluding government credit and money supply expansion) are gradually being cleared away. The housing bubble is unwinding, consumers are beginning to save again, global equity markets are back to far more reasonable levels, excess production capacity is starting to dry up, etc. This process will take time, especially with the massive level of government meddling, but it is occurring, and it will eventually take us to a healthier level of economic activity -- one not dependent largely on household credit expansion.

Stock Market Rally?
As ugly as the situation is, there is a strong likelihood that the fiscal and monetary stimulus being dumped on the economy will appear to have a positive impact. As counterproductive and inefficient as most of this spending will eventually prove, the stimulus will at least help slow the rate of decline, probably beginning in the second half of the year. In anticipation of this or at the earliest sign of this, we may experience a fairly strong rally in the equity market as investors come to believe that the worst is behind us. The expected "Obama rally" earlier this year was doomed from the start as too many people were expecting it and were looking to sell into it. With pessimism growing again and less talk of an impending rally, the odds of a rally have actually increased.

To the extent that the credit bubble has not been allowed to correct sufficiently, it's hard to imagine that any such rally will be the real deal. As discussed in prior posts, bear rallies can be powerful. The Great Depression saw a 50% rally over a 6 month period right in the middle of the first leg down. Barring a dramatic change in policy, any rally unaccompanied by a significant correction in the credit bubble is likely to prove a dead cat bounce.

The ballooning national debt and Fed balance sheet also need to be watched. I just can't see all of this stimulus being removed without collapsing any recovery we do eventually get. Government doesn't have a terrific track record of enacting temporary stimulus. Not surprisingly, it typically manages to morph into permanent funding. New constituents will be created who will create lobbying groups, and they won't take kindly to any future talk of decreased funding. The Fed will also find it difficult to withdraw the massive monetary stimulus it has injected. Once the printing presses are humming, it's very difficult to turn them off. Although much of the talk these days is of deflation, I see significant inflation as a much more serious threat down the road.

Strategy Update
As a result, current long-term Treasury yields strike me as unsustainably low. I had shorted the long end of the curve in mid-December and sold that position near the end of January. I didn't anticipate this being a short-term position, but we were fortunate to buy the position close to its low, and it experienced a 25% gain in just over one month. Hopefully, I'll get another crack at it. The Fed has discussed buying long-dated Treasuries. Should they follow through, I would expect another decline in long yields at which time I'll take a hard look at loading up again. Longer-term, this is a position I want to own.

Gold has typically been viewed as an inflation hedge, but it's been one of the best performers in this current deflationary phase (as it was during the Great Depression) as investors flock to its safety and low interest rates minimize the opportunity cost of owning gold. We've been overweight precious metals throughout the gold bull market and have continued to add on pullbacks. In early January, I bought a few junior mining names that had been driven to ridiculously attractive prices. More recently, I eased back on our GLD/DGP position in those accounts where the position grew just a little too large following this recent rally. We still own a healthy precious metals position and would be quick to add on any significant pullback.

Most of the balance of our aggressive portfolios hasn't changed significantly. Our bias at these levels is towards select emerging markets and commodities. I take a long-term approach with these positions and am quick to point out that I have no expectation for these positions in the short-term (less than one year). The countries I'm focusing on have already declined significantly, have experienced an outflow of hot money, are marked by high savings rates, have at least reasonably solid reserves, and are trading at attractive valuation levels. Five years from now, I expect to be pleased with their performance.

We still hold a decent cash position, and we continue to have just a few short positions as the recent leg down in the market has made it more difficult to find many compelling short opportunities. As usual, at the margin I would anticipate selling some long positions and increasing short exposure if we get a strong rally without signs of a significant positive change in the underlying fundamentals.

I think that catches me up from my relative absence the past few weeks. I now have to go explain to my daughter why she'll be learning Chinese and why her savings account is short the dollar. I'll be putting a second "backup" diaper on first.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

O Canada! Currency Update, Eh?

In my November 6th post ("Obama Rally and Market Strategy"), I concluded with the following:

I'm also keeping an eye on the currencies. I sold our yen exposure back on the 24th when it spiked, leaving us with exposure to only the Chinese renminbi. I should have rolled the Yen exposure into the Canadian dollar at the time, but I missed it. The long-term fundamentals of the U.S. do not support its recent strength. The strong move in the dollar has been largely due to short-term technical reasons as well as a knee-jerk flight-to-safety. I am very negative on the dollar (long-term) at these levels and will likely be buying the Canadian dollar if it weakens much further.

Since early December, the long-term fundamentals of the dollar have once again been catching up with it. The chart above shows the dollar's performance relative to a basket of currencies that include the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. The dollar experienced a strong rally beginning in mid-July, as a flight to "quality" swept the globe. Since early December, the dollar has given up a good portion of its gains. The Canadian dollar, however, has not been a beneficiary so far and is actually slightly lower over this period. I don't expect this situation to persist over time. Just prior to the Fed's latest rate cut, I finally initiated a long position in the Canadian dollar.

The weakness in the Canadian dollar can largely be attributed to two factors: political turmoil and the country's heavy reliance on the natural resource industry. Canada's Prime Minister recently suspended Parliament until January 26th in an effort to forestall a bid by the opposition to oust him. The markets don't much care for uncertainty, so the loonie (the nickname given to the Canadian one dollar coin) has come back under pressure. I don't know how long this political turmoil will persist, but in time it is certain to pass, and the political uncertainty discount currently being pinned to the loonie will evaporate.

The other burden impacting the loonie is Canada's heavy exposure to free-falling commodity prices. Although beer, hockey equipment, and cross-border pharmaceutical sales may be sustained, they won't be able to offset the weakness from the country's natural resource sector. Canada will certainly be impacted near-term by the dramatic fall in natural resource prices, but those lower prices are already leading to less exploration and development and are sowing the seeds of the next commodity bull market.

Not surprisingly, Canada's economy has been weakening, but its problems seem almost quaint in comparison to ours. Until just the past few months, Canada had run a budget surplus for 8 years and even managed to pay down some of its national debt -- a debt that stands at roughly 32% of GDP versus a level close to 75% for the U.S. Canada's economy is only 10% the size of ours. While we're likely to run a deficit in 2009 somewhere in the $1 trillion range, the liberals and conservatives in Canada have been busy bickering over whether to run a deficit of $10-20 billion (we just "gave" that much to GM and Chrysler). While we're launching a full-scale offensive on our dollar, the Canadians are having a playful pillow fight with theirs.

Put simply, the fundamentals of Canada are more robust than those of the U.S. Political uncertainty will be resolved, and the foundation of the next bull commodity cycle is currently being established. In the meantime, some comfort can be taken in knowing that Canadian legislators (despite current politiking) are acting in a far more fiscally prudent manner than our government officials.

Our currency exposure now includes gold, the Chinese renminbi, and the Canadian dollar. We sold our yen exposure (FXY) back on October 24th at prices between $106-107. Although FXY has continued to move higher and currently stands at $111, we rolled our yen proceeds into Chinese stocks (FXI) on the same day at prices between $21-22, and that ETF now stands at $28.

The renminbi has been quiet this year, making it a strong outperformer relative to most assets. I continue to like this currency for the long-term given China's strong reserves position and, more importantly, the country's strong growth prospects in the coming years. My near-term expectations for the currency are very modest given conflicting pressure officials face to both lower and raise the exchange rate. However, the longer-term fundamentals of China and the current account imbalances that exist between China and much of the developed world will continue to exert upward pressure on the renminbi over time.

Finally, we've been long gold for some time, and I continue to feel very good about its prospects. Supply remains constrained while global fiat currency debasement accelerates. Were it not for mass forced de-leveraging, I suspect that gold would already be at new highs. We added to GDX in mid-October, and we recently added a new junior gold position. Gold has had a nice move of late, but each rally since September has subsequently failed. Gold is likely consolidating and moving into stronger longer-term hands. If so, at some point I would expect it to push through to new highs. In the meantime, I continue to opportunistically add to the metal and the mining equities on pullbacks.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Bear Rally Chatter and Strategy Update

This market continues to favor traders and thrill seekers. I've talked about fading this market a number of times in the past few months, and, at the margin, that's what I've been doing. The basic rule has been simple: when my wife has had to talk me off the railing of our one-story deck, its time to buy, and when I start doing Schwarzenegger impressions, it's time to short. Recently, I've been doing Schwarzenegger impressions on the deck railing.

In mid-late November, I added positions in UWM and QLD as the market was again rolling over and the VIX (fear) index was once more spiking towards record levels. Since that time the number of market professionals looking for a bear market rally seems to have grown by the day. I've read quite a few of them just this week talking about a rally into early next year, even those who are very bearish. I'm a bit surprised by the timing of these calls considering that the market has already rallied 20% from its intraday low on November 21st. There's nothing like a good rally to bring out a bunch of predictions for...a rally. The lemmings that went over the cliff are climbing back up for the next jump.

Bear market rallies much greater than 20% aren't exactly common. That certainly doesn't mean that the current rebound can't go significantly higher. Recall, we had a 50% rally during the Great Depression, so there is precedent for very powerful upward moves during bear markets, but these types of moves are very unusual.

In fact, some of the strongest short-term market rallies tend to come during bear markets. It's easy to understand why: fear and greed. On the one hand, the market tends to get oversold in the short-term as fear of a job loss, insolvency, plague, and children who may never leave home grips the masses, and wholesale selling ensues. At the same time, investors who've lost a lot of money are eager to jump on any potential rally that may help them recoup some of their losses in order to help their child with the security deposit on their first apartment. And you never know, the next rally could be the beginning of the next bull market. Who wants to be the idiot who sold at the bottom and kept waiting forever for another chance to buy at those levels?

Back to the present. With a 20% rally already in hand, I have to believe that the easy money from this leg up has been made. That doesn't mean that the market can't go higher, but I'm back at what I call "an inflection point moment." I can't bring myself to add more general market exposure given the move we've already had (though I'm always scouting for individual company opportunities), yet the move up isn't so overdone that there's a clear signal to sell. Unfortunately, I'm just not smart/foolish/prescient/daffy enough to try and call market tops or bottoms, particularly those of a short-term nature. As a result, in this type of environment I tend to build marginal market long and short exposure as the strength or weakness of the market accelerates.

In keeping with that, I haven't yet sold the QLD or UWM positions, but they will be jettisoned should the market rally much further. In the meantime, I'm willing to give them a little more time as the market has finally been responding well to bad news. I have, however, recently added some modest new short exposure in the real estate area. This is partly due to the fact that this sector has had one of the smartest rebounds during this latest market rally. With the market up 20% from its lows, many real estate ETFs are up closer to 50%. This is a logical pool for bottom fishing given the degree of damage we've already seen, but I'm of the opinion that this sector will see further downside, particularly commercial real estate. The current short position is modest, and my intent is to increase the short side of the portfolio (and reduce longs) should the market rally continue.

This particular rally has been gratifying in that many of our core positions in the commodity, mining, industrial, and precious metal sectors have had nice moves. The recent decline in the U.S. dollar from ridiculous levels hasn't hurt. Many of the names/positions in these sectors are trading at very attractive valuation levels for those willing to look beyond the next few days. I've been gradually adding to this space during the downturn and expect to be very pleased with their performance over the next 5-10 years. In the near term, however, they won't be immune to the next sell-off in the market (at which time I'll be adding to them).

Disclosure: The Rubbernecker is long, short, and inflecting.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

So That's Why Gold Prices Are Up Today

Those who've followed me for some time know I've been a fan of gold for over 5 years now. So I folllow the news on gold, gold prices, gold mining, gold teeth, gold mining stocks, gold pine cones, gold demand, gold supply, and alchemy pretty closely. Those who've followed me for some time also know how ridiculous I think it is when the press attempts to explain away why a particular market or asset class rose or fell in a given day. MarketWatch has obliged both of these interests of mine today with an article entitled "Gold Rises 1% On Speculation Prices Have Bottomed."

The article begins,

Gold futures rose Monday for the first time in three sessions, adding 1% on speculation that the precious metal's prices, after suffering their biggest monthly loss in October, may have bottomed. Gold for December delivery gained $7.30 to stand at $725.50 an ounce on the Comex division of the New York Mercantile Exchange. The contract had surged to $739.50 earlier.

Now, I'm glad that gold is up, but this type of commentary is ridiculous. First of all, in this market a 1% move in just about anything is little more than noise. There haven't been many days in the past few months when gold hasn't moved at least 1%. We even had a gain in gold of 11% back on September 17th. A 1% move may have been significant in prior years, but a move of only 1% makes for a fairly quiet day of late.


It's even more ridiculous that MarketWatch believes it can attribute a minor 1% move in gold to any particular factor or set of factors. In this case, MarketWatch attributes the rise to speculation that gold has bottomed. How can they know this? If there were only one buyer and one seller who both happened to be cousins of Moming Zhou (the author of the piece), then fine. But this is a market with many buyers and sellers. Some are trading to speculate while others are trading to hedge. There is no way to net out the effect of all of these trades and boil it down to only one factor.

Claiming that a price rise is due to speculation that prices have bottomed is also about as weak an explanation as can ever be given. It's akin to saying that prices are rising because people expect prices to go higher. No kidding?

Unfortunately, this claim and rationale could have been proffered (and probably was) for any 1%+ move in gold over the past few months, yet gold is trading only 8% above its 52-week low. So, even if the author truly believes that "speculation of a bottom" was the reason for this massive 1% rise in gold prices, perhaps he/she could have pointed out that prior bottom-fishing speculations have proven to be a false dawn over the past few months. Also, the gain on the day is much smaller than the fall from the intraday high. Why no explanation for the fall in gold prices from the intraday high of $739.50 to $725.50? This $14 fall seems at least as interesting as a $7.30 rise. Actually, it seems almost twice as interesting.

Don't get me wrong. I hope gold has bottomed. At some point it will. If the press keeps attributing any slight hiccup in the price to "speculation that prices have bottomed," one day they'll be right. Even a blind squirrel finds an acorn sometimes.

By the way, gold is now up only $3. It's down $17 from its intraday high.

Disclosure: The Rubbernecker is long dentistry and golden plant organs and short the press.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Nearly A 1000-Point Rally. Whaddya Know!?

When I wrote in last Friday's post that "Just a decrease in the amount or severity of the bad news (second derivative) could propel a near-term 1000-point Dow rally (not necessarily all in one day)," I have to admit that I wasn't expecting it would all come the very next trading day. Although I like to think that my expertise lies in long-term investing, my shorter-term calls of late haven't been too shabby. Our SSO and QLD positions are up 36% on average after 1 1/2 trading days. Since patting oneself on the back in this business is a sure kiss of death, I'll leave the self-congratulations at that and move on. Luck, intelligence or intelligent luck, we'll take it.

As I also wrote in the Friday post, "If we do get the rally, I won't be shy about closing out these positions as this is not some grand market bottom call. In fact, the more powerful the rally, the more likely I'll be to rebuild the short side of the portfolio." With today's 11.5% rally in the S&P 500, let's just say that I'm now 100 S&P points less bullish than I was just yesterday. The earnings outlook hasn't changed in my view since last night, so valuation, which was finally getting interesting, is now 11.5% less compelling than last night.

With that in mind, I'm certainly impressed that the market rallied strongly into the close and closed right near its high. Investors have regained their confidence (at least for the moment) that the entire global monetary system isn't about to implode. Just as they rushed out of the market in fear as it was collapsing, they are now rushing back in -- this time in fear of missing the rebound.

Whether we've seen the lows of this cycle remains to be seen. Let's not forget that just as bull markets are marked by retrenchments, bear markets are marked by the occasional rally. These rallies are called "sucker rallies" for a reason, and they can be powerful. Following the October crash of 1929, the stock market experienced a nearly 50% rally over a 5 month period before continuing its crushing descent.

Will this rally be short-lived, or will it continue into year-end? There's no way of knowing, but I have no intention of overstaying my welcome. I suspect this move may well have more legs to it, but I also suspect that our recent QQQ and S&P positions will have a fairly short shelf-life in our portfolios. At a minimum, we'll begin scaling out of them very soon should the markets move higher still. Should the rally continue significantly higher, I fully anticipate once again ratcheting up some short positions.

One area that I'm very upbeat on that was left behind by today's rally is gold-related equities. The global flight-out-of-safety that we saw today left gold with a nearly $18 loss on the day. Governments around the globe are publicly announcing that they will print whatever amount of money is necessary to prevent the global financial system from imploding, yet gold is nearly 17% off its high, and gold mining stocks (particularly the junior miners) have been a complete disaster of late.

Events in recent weeks have served to remind the world of gold's value. Mints around the world are unable to keep up with demand for gold coins, and central banks are likely to cherish what gold they have left. On the supply side, exploration is becoming tougher and more expensive, and production is far from robust.

Gold prices and stocks are sure to be volatile, but both look very attractive at the moment, and I'll very likely be putting recent gains and some cash to work in this area imminently. My preference is to have exposure directly to the price of gold as well as to gold mining stocks, but new money will most likely be going into the mining equities given their recent drubbing. I believe that many of these stocks (particularly the juniors) will be triple-digit percentage winners from these levels.

Disclosure: The Rubbernecker is long gift horses and short all of the bottom-calling pundits.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Debt Bomb

It looks like the size of the latest government bailout will total $700 billion, which works out to an additional 8.2 AIGs or roughly the GDP of the Netherlands. Of course, the U.S. doesn't have an extra $700 billion in savings sitting around to fund this program, so we'll have to borrow it. As a result, our government will yet again need to increase the statutory limit on the national debt, this time from $10.6 trillion to $11.3 trillion.

I'm surprised Congress still calls it a debt limit, since it's nothing of the sort. They've never adhered to any limit. Whenever they bump against it they simply vote to increase it further. Usually, they're far more creative with their nomenclature. You'd think by now they would have changed the name to "Government Stimulus Threshold","Graduated Investment Target", or "Super Patriotic Pro-U.S. Funding Goal."

For those of you keeping score, this latest $700 billion payoff works out to $2,333 per U.S. man, woman, and child. It also works out to $6,350 per U.S. household. The new debt limit of $11.3 trillion comes out to $102,700 per U.S. household. These figures ignore unfunded liabilities (Medicare, Medicaid, Social Security) which conservatively come out to another $50 trillion, or $450,000 per U.S. household. All in, your family's share of our country's debt comes to $552,700.

Are there any proposals to offset this $700 billion with tax increases (which I abhor) or expenditure cuts (which I love)? Of course not. To the contrary, there are discussions about another fiscal stimulus program. McCain and Obama certainly have no plans to lower the debt. We haven't heard either talk of any specific and substantive cuts in expenditure.

This is the problem with Keynesian economic theory. It looks good on paper, but it doesn't work in the real world. Everyone loves the front end of the theory -- borrow money and go on a shopping spree. It's the American way! But when times are good, no one wants to take away the punchbowl, upset the voters who are now dependent on the new government programs, and risk not getting reelected.

So, our national debt spirals ever higher, which is a bit ironic since it was ever-rising debt of increasingly poorer quality that led to the current credit collapse in the financial sector. Increasing debt necessitates the printing of ever more dollars. The more of something that exists, the less valuable it becomes. In light of this, it's difficult to be constructive on the dollar long-term. There is no way we can ever repay this mountain of debt short of inflating the currency.

We owe a debt of gratitude to the Chinese for their delicious food, movable-type, a beautiful wall, their inexpensive exports, and their continued purchase of our Treasury securities. So far it's been in their best interest to fund our debt and keep the dollar from imploding. A dollar meltdown would lead to higher interest rates which would kill our economy and severely impact our appetite for Chinese goods. In addition, a falling dollar and rising rates would decimate the value of their U.S. Treasury holdings. Over time, China will become less export driven and less dependent on the U.S. consumer, and at some point, the Chinese are going to view the risk of increased dollar purchases as greater than the reward. That is the day when U.S. interest rates will begin an ugly march higher.

Ironically, it was the Chinese who invented paper money.

Disclosure: The Rubbernecker is long gold, silver, and the Renminbi and short the greenback and government bailouts.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Dollar/Gold Irrationality?

One day, the Dow rises nearly 300 points. The next day, it gives it all back. In the morning, Lehman opens up double digits. By the close, the stock is down 40%. United Airlines is down 99% one minute. A few hours later, it's back to even. Bernanke is forming complete sentences at the start of the day...

Fear rules the day. There is a general liquidation underway. About the only things increasing in recent weeks are the U.S. dollar, U.S. treasury securities, alcohol sales, and irritable bowel prescriptions. As for the dollar, there has been speculation that the dollar rally is the product of coordinated intervention from the U.S., Europe, and Japan given recent reports of just such a plan being drafted back in March. Given the fundamentals in the U.S., I wouldn't rule this out.

Aside from possible government intervention, the best thing the dollar has going for it right now is that it's not the Euro or any of the commodity-based or emerging market currencies. People have to keep their money in some currency, and as money is extracted from markets around the world, investors are choosing to move it to the "safe" U.S. dollar. Although this dollar rally has been powerful, its sustainability needs to be seriously questioned given the following:

• The U.S. government is now on the hook for future Fannie/Freddie losses. Total losses will depend on the severity of the housing/credit debacle, but it isn't a stretch to imagine losses in the $1 trillion range.
  
• The U.S. budget deficit in August alone was $112 billion.
  
• The U.S budget deficit is forecast to be $407 billion in 2008 and a record $438 billion in 2009.
• The $438 billion for 2009 does not include any funds used to "conserve" Freddie or Fannie or any new fiscal stimulus package, and it doesn't account for the full cost of the Iraq War (let alone any new incursion into Iran, the Caucusus region, or Pakistan/Afghanistan).
  
• About the only thing supporting GDP growth in the past 2 quarters has been net exports, thanks to the falling value of the dollar. The recent strength in the dollar is likely to blunt this tailwind.
• The risk of competitive currency devaluations is very real as every country battles for a piece of the shrinking pie of investment and consumption spending.
  
• The Fed continues to swap high-quality Treasury securities for garbage securities.
  
• U.S. unfunded liabilities range from $50 trillion to $95 trillion (depending on the assumptions used).
  

Of course, we don't have the money to pay for any of these items since our national debt exceeds $9.6 trillion, and we're already running an annual budget deficit. So, our over-leveraged government will have to rely even more on the kindness of strangers to fund our spending.

A borrower living beyond her means. Using her "home" as an ATM. Deteriorating credit score. Stagnating real income. Dependent on low-cost borrowings. Sound familiar? It's comically implausible that our financial obligations will be repaid with dollars worth anything close to their current value. (The dollar has lost 95% of its purchasing power since the Federal Reserve system was created in 1913. Given our current debt situation, this trend is certain to continue over time.) The difference between the U.S. Government and a subprime borrower is that the government controls the printing presses. There is little doubt that the presses will be working over-time in the years to come.

As history has shown, all fiat currencies are ultimately doomed. The temptation to devalue the currency is just too great over time. The dollar may continue its near-term rally as investors search for "safety" and/or if government intervention is indeed underway. Ultimately, however, the fundamentals will matter again.

Our Chinese Renminbi and Japanese Yen exposure have held up fairly well this year, but the "currency" position that we find the most intriguing currently is one that has stood the test of time and held its value for hundreds of years. This solid currency has been caught up in the recent wave of asset deflation and is now off its recent peak by about 25%.

I'm talking about gold (and silver). As I always caution, trying to pick bottoms is futile, as is trying to time short-term moves. In the current environment, the curtailing of risk, fund redemptions, and losses on a variety of securities is forcing the sale of virtually all liquid assets, including precious metals. However, given the poor and deteriorating financial condition of the U.S., the need for our government to continue depreciating the dollar over time, the historical track record of all fiat currencies, the recent pullback in the price of gold and silver, and the supply constraints facing mining companies today, this may well prove to be another excellent long-term opportunity to add to gold and silver. We are increasing exposure in most portfolios at these levels.

Disclosure: The Rubbernecker is long alchemy and sluice boxes and short printing presses.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.