-Rush Limbaugh

Is there anything more fun than a mixed metaphor? Who doesn’t want to circle the wagons around alligators in a swamp? On Wednesday morning I did my usual Wednesday morning elliptical machine workout, and I watched the Squawk Box crew on CNBC make fun of someone, I can’t remember who, mix the “walk in the park” and “piece of cake” metaphors to create “a walk in the cake.” Yup, that’s messy, and that’s mixing your metaphors.

If you want to amuse yourself this week, keep track of how many mixed metaphors you hear or read. Good sources for mixed metaphors are:

• Your boss at work trying to motivate you (‘it’s our turn at bat, so let’s score a touchdown for the company”) (thanks to Grammar Girl for this mixed metaphor);
• Politicians: “This is the moment when we must defeat terror and dry up the well of extremism that supports it.” (Wells don’t support anything).
• The media: “So now what we are dealing with is the rubber meeting the road, and instead of biting the bullet on these issues, we just want to punt.” (Chicago Tribune).

Good luck finding them; it will keep you amused during these dismal economic times. (Post your favourites over on the Buy High Sell Higher Forum; maybe I can write a book about it someday).

The reason for a mixed metaphor, I assume, is because the speaker is mixed up. We try to make sense of two incongruous concepts, and it backfires.

Last week I discussed My Conundrum; how can I reconcile the fact that the S&P 500 is actually up for the year, and yet we have record unemployment, massive levels of personal, corporate and government debt, and a financial system that remains in crisis? For me, there are only two possible explanations:

One explanation is that the recession has ended, and we are now on our way to recovery. The stock market is a leading indicator, so the “smart money” is buying in advance of the upturn that will eventually be obvious to everyone.

The other explanation is that in every depression, in every bear market, there are short term rallies, and that’s what’s happening now. The smart money is driving up prices so that they can liquidate their dogs in advance of the inevitable correction that often happens in the summer.

I have been wrestling with these two competing views for quite some time. Back on April 9 I wrote a long dissertation on cognitive dissonance, which is that uncomfortable feeling caused by attempting to believe and follow two contradictory ideas or cognitions at the same time: the market has rallied huge in the last two months, but over the last two years we are still in a bear market. So which is it: up or down? (You know my thoughts).

Here’s another area where we appear to be out of sync: Here in Canada public companies are moving towards International Financial Reporting Standards (IFRS), as is the rest of the world. The impact: financial statements and disclosure documents will be much longer and more complex. Is this a positive development? In the wake of the Enron scandal and the collapse of our banking system it can be argued that more disclosure and regulation is a necessary development.

But ask yourself this: you own many stocks, so you get many annual and quarterly reports in the mail each year. Do you read them? Cover to cover? Do you read all of the notes to the financial statements? Personally, I have a university degree, an accounting designation, and a bunch of other letters after my name to signify my expertise in all things financial, and I don’t read them. By the time an annual report is issued the information is so outdated that it is virtually worthless.

The conundrum, the cognitive dissonance, the mixed metaphor, comes from the fact that we are piling on the IFRS regulations and increased reporting in a 140 character Twitter world. Do we want more, or do we want our information in quick, immediate, 140 character bursts of information?

I don’t know, but I can only assume that we are entering a period of intense dislocation and change. The forces of more regulation are smashing up against the forces of the 140 character sound bite. The forces of unrestrained free market capitalism are crashing into the power of governments to run a deficit of $2 trillion in a single year to “fix” the economy. We are in the middle of a hurricane, financially and socially speaking.

And being in the middle of a hurricane is not a fun place to be. You may get carried up, or you may get crashed down.

Which is why I have made the decision to remain on the sidelines. On June 4 I covered all of my optionable gold and silver stocks. In the medium term I am a strong believer in gold and silver, so I don’t want to sell everything. But I also know that the summer is a historically poor time for gold and silver stocks, and I fully expect the general stock market to melt down over the next two months as well. So, I covered my bets by selling June calls against the stocks I own.

For example, on June 4 I sold June 21 calls against K.TO – Kinross Gold Corp. I took in a premium of $1.30. If Kinross closes above $21 on June 19 (the third Friday of the month), I will be required to sell my shares for $21, which is roughly what they were trading for on June 4 when I covered. If the shares are worth less than $21 the options expire worthless, and I keep the $1.30, which helps mitigate my loss.

Since June 4 Kinross has fallen over 7%, and closed on Friday at $19.68; if there is no upswing this week, I pocket the premium, and I still own the stock. If it recovers to $22 I sell the stock for $21, but I keep the $1.30, so in effect I sold the stock for $22.30, so I’m still happy. I only “lose” if the stock is over $22.30 on Friday, in which case it was a mistake to cover, since I gave up some profits.

Some may argue that if I was expecting weakness I should have sold the stock outright, and/or purchased some puts. That’s true, but I don’t know for sure that the stock will go down, and it would be silly to be betting against gold in a potentially hyper inflationary environment. Expecting a slight correction over a two week period is a relatively safe bet; going short is an entirely different matter.

I’ll report next week on how it all worked out, but as long as we remain stuck “between a rock and a hard place” I will stay on the sidelines, cover my bets, and hold cash. You can make your own decisions, and of course post your own thoughts and mixed metaphors over on the Buy High Sell Higher Forum. See you next week.

Two weeks ago, and again last week, I showed this chart:

And I said:

From the chart, it’s easy to see a series of lower highs:

1. October 12, 2007: 1,562
2. December 7, 2007: 1,504
3. May 16, 2008: 1,425
4. October 31, 2008: 968
5. January 6, 2009: 935
6. May 8, 2009: 929

Clearly, all is not well with the markets. We have had lots of rallies over the past two years, but each and every rally failed to take out the previous high. The failure after May 8 to surpass the previous 935 level is very bad news. Each successive “lower high” may only be 4 or 5% lower than the previous high (with the exception of the 968 post “crash” high on October 31, which was 32% lower than the previous high), but lower is lower.

On average each successive low after a high is 21% lower, and it takes 77 days to get there. Some are shorter. The drop from the peak on October 31, 2008 at 968 to the valley on November 21, 2008 at 800 was only a 17% drop, and it only took 21 days. The 39% drop ending on October 24, 2008 took 161 days.

If you want to extrapolate the average, from the May 8, 2009 high of 929 we are looking at a 21% drop over 77 days, so we will land at 734 on the S&P 500 on July 24, 2009.

Well, guess what. The S&P 500 is now at 940, it’s highest level all year. Year to date the S&P is actually up 4%. That would appear to be something more than a a Sucker’s Rally. It would appear that Sell in May and Go Away was not the correct strategy. Maybe happy days are here again.

Part of the optimism may be due to President Obama’s impressive performance in Egypt on Thursday. I found myself on my Elliptical machine in my workout room at 6:00 am on Thursday morning, so when the President’s speech aired at 6:10 am I had 35 minutes to watch most of the speech. It was impressive. He said all the right things. Everybody with a brain agrees that it’s a good idea to talk with people who share different points of view, because through talking we may find common ground. And, of course, talking is generally less deadly than starting a war. Markets like peace and prosperity. So perhaps I should just go with the flow and start buying.

But as I did my early morning workout I started to think: will Obama’s speech change anything?

President Obama wants to change things, but will the American’s relationship with the Muslim world really change?

Will the Muslim world embrace democracy? They do in Turkey and Indonesia, but it most other countries, not so much. Egypt’s President Hosni Mubarak is an iron-fisted ruler, not a warm and cuddly advocate of democracy.

Women’s rights? In Saudi Arabia women are not allowed to drive, or get a fair divorce, or avoid a family imposed marriage. Change does not appear evident in this area.

Religious tolerance? Nope. Obama mentioned that there are 1,200 mosques in every state in the union. In the Arab world the Shiites and Sunnis kill each other, so forget about seeing Synagogues or other places of religious worship.

The right of Israel to exist? Nope, that’s against policy in many countries as well.

As regular readers know, I am a Canadian, so I have no voting interest in what happens in the USA. I hope Obama is successful. I hope he brings peace to the world. I admire his guts for taking on Middle East issues this early in his presidency; most of his predecessors wait until their final year in office to get involved, in the hopes of winning the Nobel Peace Prize. Spending some political capital on this now takes guts, and I admire him for it.

Unfortunately, the task is massive, and perhaps impossible. He is a great messenger, and he has a great message. I just don’t think a great speech will repair hatred that goes back a 1,000 years.

And therefore while I’m happy the market’s like it, I still don’t believe it’s real.

Yes, the market is up. Yes, the market is trading above it’s 200 day moving average, for the first time in a long time, and that’s good news. A close above 1,000 will be another decisive break of a down trend line. A close above 1,200 would be a break of the final significant down trend. If that happens, we may be out of the woods.

But look around you. Unemployment is still very high, and increasing, regardless of the positive spin the news media puts on it. Yes, house sales are up this month, but May and June are the busiest months of the year, so comparing them to the winter is a silly comparison.

And let’s not forget that GM went bankrupt this week, and Chrysler already was, so the world is not perfect yet.

So I solve the conundrum by sticking to my guns, and staying in cash, on the sidelines. I believe the Big Boys have created this rally to unload stock. Insider selling remains very high. The banks are issuing stock like crazy to pay off their TARP loans, and obviously if they thought that the market would be higher in six months they would wait six months to issue stock at higher prices. They are selling now because they know we are approaching a near term top.

When the market falls, gold and everything else falls, in the short term, so on Thursday morning I covered all of my remaining gold and silver stock holdings. (I sold June at the money call options against all of the optionable gold and silver stocks I own. I took in a premium for doing so. If my shares are at the same level or lower by the close on June 19, I keep the premium. If shares advance between now and then I lose my stock, but that’s a risk I’m willing to take for the insurance).

I apologize for the lack of happy talk, but I call it as I see it, so I will remain in cash for a while longer yet, until the conundrum resolves itself. I’m not going to let a 4% rally on the year convince me that all is well.

Thanks for reading, as always feel free to post your thoughts on the Buy High Sell Higher Forum, and see you next week.