On the one hand, it pains me to watch the economy crumble, because it’s not just the economy that is careening through this depression; it’s people.

Real people, your family members, friends, and neigbors are losing their jobs, and they don’t know what happened. They worked hard for the same company for many years. They started a family, bought a car and a house. And then, seemingly without warning, their job was gone.

At first, it was no big deal. They had always worked, so they assumed that it wouldn’t be that difficult to find another job.

But there was no “other job”.

It’s very difficult to go from earning $25 per hour, with full benefits and four weeks paid vacation, to finding a job as a greeter at Walmart, part time, for $10 per hour.

You slowly realize that you can’t keep your house, or your car, or your lifestyle.

That is the sad reality of Labour Day (or Labor Day for my American friends).

For many, there is no labour.

The August jobs report showed no jobs added in August. Apparently that’s the first time since 1945 that the economy has reported net job growth of zero.

So now what? What will President Obama’s job plan be, to be revealed this Thursday? Sadly for him, he’s not got a lot of options. The Federal Reserve cut overnight interest rates to near zero in December 2008, and that hasn’t improved the job picture. They’ve also bought $2.3 trillion in securities (ie. they’ve essentially printed money), and that hasn’t helped. In fact, the unemployment rate is higher now than when Obama was elected, and that’s not good, for him.

In fact, let’s flash back to last year, the 2010 Labor Day Weekend; here’s what the President had to say:

THE PRESIDENT:  Good morning, everybody.  As we head into Labor Day weekend, I know many people across this country are concerned about what the future holds for themselves, for their families, and for the economy as a whole.

As I’ve said from the start, there’s no quick fix to the worst recession we’ve experienced since the Great Depression.  The hard truth is that it took years to create our current economic problems, and it will take more time than any of us would like to repair the damage.  Millions of our neighbors are living with that painfully every day.

But I want all Americans to remind themselves there are better days ahead.  Even after this economic crisis, our markets remain the most dynamic in the world.  Our workers are still the most productive.  We remain the global leader in innovation, in discovery, in entrepreneurship.

Now, the month I took office, we were losing 750,000 jobs a month.  This morning, new figures show the economy produced 67,000 private sector jobs in August -– the eighth consecutive month of private job growth.  Additionally, the numbers for July were revised upward to 107,000.  ….

Thank you very much.

Q    Mr. President, what are the other incentives that you mentioned Monday, sir?

THE PRESIDENT:  Well, I will be addressing a broader package of ideas next week.  We are confident that we are moving in the right direction, but we want to keep this recovery moving stronger and accelerate the job growth that’s needed so desperately all across the country.

(Emphasis added by JDH).

Wow. Kind of like deja vu all over again, eh?

A year ago the President was boasting about all the jobs the economy created, telling us there were better days ahead. So far, we haven’t seen it.

He was also announcing a “broader package of ideas” that he would be releasing in the week after Labor Day, just like he’s doing again this year. More of the same, I presume?

The sad fact is that the government cannot create permanent jobs. All the government can do is take money from one person (the taxpayer), and give it to someone else (a government employee, or someone who provides services to the government). That’s it.

So what will President Obama propose to create jobs? More of the same. More spending on “infrastructure”, more changes to the tax code. More deficits.

And perhaps more stupid spending on homeland security, like the silly border controls between Vermont and Quebec.

So why, then, am I conflicted?

I’m conflicted because I’m profiting from misery.

The bulk of my portfolio is in precious metals. Stocks like FNV.TO – Franco-Nevada Corp.

As you can see, it’s been a good summer for Franco Nevada, and it closed on Friday very close to a new high.

Clearly the smart money (probably in China, Russia, and other places) realizes that the next few years won’t be great for the U.S., so they are placing their bets on something that can’t be printed: gold.

I have placed my bets in the same place, so I too stand to profit from the turmoil. Perhaps profit is the wrong word; perhaps I’m just protecting myself from the storm ahead.

“Storm” is a good metaphor, I believe, since storms are volatile, and that too should work to our advantage. I have placed my bids on a number of stocks I would like to own, and I’ve placed them in a “ladder”. If the stock is trading at $40 today, I’ve placed an order for a portion of what I want at $38, with further bids at $35 and $30, so if we have a big drop, I deploy cash.

In the same way I have sales orders in on stocks I recently purchased.

For example, on August 23 I purchased some Franco-Nevada warrants (WTS-FRANCO-NEVADA 13MAR12) for $10.69. The next day I placed a sell order for those warrants at $12.50, which would give me a 15% profit. The warrants closed on Friday at $12.18, so my sell order is not filled yet, but conceivably at some point next week I will cash out, and pocket the cash.

Then, at some point in the next few weeks the market will drop, and my buy orders will get filled. Lather, rinse, repeat.

To be clear, you may be wondering why I would sell warrants in a company I believe is a good investment. The answer, quite simply, is that it’s not a profit until you sell, so there comes a time when you have to take some profits off the table. However, the warrants in the example above are not a significant part of my portfolio. I also own the underlying stock, in larger quantities, and I have no intention of selling that position anytime soon.

So that is a summary of my labours this Labor Day Weekend.

I trust you too will also ponder the nature of labour, hopefully while sipping a cooling beverage.

Thanks for reading; see you next week.

Second, nothing has changed from what I have discussed in recent weeks. Want to know what’s happening? Read last week’s Don’t Worry, Be Happy commentary, or my thoughts from two weeks ago that Gold and the Markets to Pause, or Patience – Gold will shine, but a small pullback is probable from three weeks ago.

The short version of where we are at is this: everything is fine, despite evidence to the contrary.

For the first time since the first week of May, before the “Flash Crash”, the Dow traded over the 11,000 level. The Dow dropped to 10,933 at 10:30 am Eastern when the September jobs report was issued, but apparently after a few moments no-one cared that the report was bad, and it was on-ward and upward from there.

Was it a good jobs report? That depends on your perspective. My perspective is this: Interest rates are essentially zero, the government has spent a gazzillion on stimulus, and yet we are still stuck with high unemployment. Even after excluding the Census worker layoffs, jobs fell by 18,000. That’s the story. You can’t be in a recovery when jobs are falling, because at this stage in a recovery jobs should be growing fast, not contracting.

I assume the market has a different perspective than me. I assume the markets are thinking “great, poor job growth means another round of stimulus, which will buoy the markets.” Yup, that’s probably it, so we are probably looking at continued stock market strength, at least until the U.S. elections in the first week of November. The government has done a masterful job of pumping things up, in the hopes that voters will vote for the incumbents.

Remember the Obama victory in 2008? It set off a wave of parties and triumphant campaign stops, and the Inauguration was a party for the ages. Will we see the same level of celebration during the first week of November?

Nope.

At least not with President Obama, since as soon as the elections are over, he will be immediately going to India for a 10 day visit. He was going to leave Washington on November 7, but now he will be leaving the night of November 4, as soon as the elections are ending. Strange, eh?

I guess he will miss out on all of the celebratory parties.

Although, if you want to believe the conspiracy theorists, he may be expecting bad things, and therefore wants to be out of the country when they happen. I’ll leave it to you to draw your own conclusions.

But back to the markets. The Dow was up, due to the impending QE2 stimulus, and not surprisingly gold was also up, also due to the impending QE2 stimulus.

I must admit that I am stunned by gold’s almost un-interrupted rise from the lows back at the end of July. It would appear that now a correction lasts for, at most, three days, and that’s it! I have been expecting a pullback so I can deploy more cash, but even Thursday’s one day correction was followed by another up day on Friday, so there was no chance to do any buying.

I will continue to stick to the game plan; I’ll ride the stocks I own, cover where appropriate, and hope that at some point I can deploy my cash, which it would appear may not happen now until November.

Oh well, the weather is great, it’s Canadian Thanksgiving, and Oktoberfest season, so all is good.

Happy Thanksgiving; see you next week.

There was a lot of excellent discussion over on the Buy High Sell Higher Forum this week. Don’t believe me? Pick a spot and start reading; for example, here’s the thread on the October 2009 Stock Market. We don’t all agree, but everyone has contributed well reasoned arguments, and some cool charts. A few months ago the Forum was beginning to degenerate into a bunch of nonsense, political commentary, and generally useless information. Spam was also a problem. I’ve tightened the spam filters, and you have all stepped your game up and posted some very useful information.

Well done. I’m proud of all of you. (If you can all resist the compulsion to comment on Obama, we will all be fine).

I wish I had something intelligent to contribute, but alas it would appear that you are smarter than I am, so all I can offer this week are some anagrams (where you switch letters around to make new words).

Like “yeah, we are screwed” becomes “Raceways weeder, eh?”

Or “Buy High Sell Higher”, when re-arranged, becomes “Beer High Hugs Hilly”.

Okay, so it doesn’t make any sense. (Try it yourself; go to this anagram generator and type in your name, and see what words you can create).

No, I have nothing useful to contribute this week, so all I can comment on is wild speculation that the world is coming to the end.

Specifically, let me comment on the work of George Ure, who writes the six days per week free Urban Survival blog, and the once a week $40 per year subscription Peoplenomics newsletter. George is an interesting guy. He’s an MBA (I won’t hold that against him), and he’s 60+ years old, so he’s been around a while. He is of the view that government intervention has not been a positive development for the human race.

So far, so good. Here’s where it gets interesting. George is loosely affiliated with the the guy who runs the Half Past Human web site. They specialize in “predictive linguistics”, which is a theory that says that changes in language tend to precede changes in reality. They use massive computers to scan I assume billions of pages on the internet to see what people are talking about, and then use that data to predict the future. Their method captures changes in language patterns on the internet. This aggregated data is then processed with software to determine various key words, which they interpret in a predictive fashion.

On a basic level, this makes sense. As I write this today the weather in my corner of Southern Ontario is rainy, windy, cold and generally miserable. From that you can predict that if I was to go outside, I would be cold, wet and miserable.

They believe they can predict other things by reading what words and emotions people are using on internet discussion boards and other places. If everyone is using words like “depressing” to describe our current economy, they predict that the economy will continue to be depressed. Of course I’m over simplifying, but you get the idea.

Every month or two the Half Past Human web site releases a “Shape of Things to Come” report, which is a summary of the language they are picking up on the internet, and their interpretations for what it means. For many, many months these reports have been predicting an “emotional turning” around October 25 and 26, 2009. They are predicting that as a collective group, humanity will see a build up in emotional tension.

What would cause a build up in emotional tension? No-one knows. The speculation is that it could be something like a big earthquake, or terrorist attack, or Israel attacking Iran, or even something as mundane as a top in the stock market, or a sudden collapse of the U.S. dollar.

Do I believe that as human we can sense the future? I don’t think we can sense the future; I think we can create the future, at least for ourselves.

I have created my future. I went to university, and as a result I have a good job. If I did not get an education, and if I did not work hard, I would not have created the future for myself that I did. I have other powers to predict the future. I predict that if I hit my hand with a hammer, I will break my hand. I predict that if I go outside without a coat on a day like today, I will catch cold. These powers of prediction are common to all humans, because we use our past experiences to predict the results of our current actions on future events. So yes, on a limited level we can sense the future, because we create it.

However, do I believe that predictive linguistics can be used to predict earthquakes? No, I don’t believe that. That seems a little far out to me, since I can’t fathom how my actions will cause an earthquake.

What about changes in the stock market? Can we sense that? That’s a more difficult question to answer, since obviously if we were all to decide to sell today, that would crash the market, so on that basis we can predict the future.

So, am I worried about the world ending on October 25 or 26? (Okay, I’m exaggerating; they aren’t predicting the end of the world, just a heating up of the mess we are in, but it makes for more interesting reading if I phrase it as the end of the world). To answer the question, no, I am not worried about the end of the world. I plan to watch some football games on Sunday afternoon, and I plan to go to work on Monday, so I assume life will go on.

I’m not terribly worried because I have followed the Half Past Human predictions for a while, and based on my recollection most of the predictions end up being wrong. Earlier this year they were predicting the “summer of hell.” In fact, the summer was good. The stock market was up. All was well. They have a history of other predictions not working out as well either. They might be correct this time; ask me next week and I’ll tell you for sure.

Okay, you ask, so why am I wasting your time describing the predictions of a possible nut, if I don’t think they will come true?

Two reasons: first, you guys did such a good job this week posting interesting perspectives on the Forum, so I wanted to give you something interesting to ponder, even if it is crazy.

Second, while I can’t wrap my head around the idea that we humans can see the future, I do agree with their general conclusion that we are in a mess. Government spending is way out of control. Unemployment is at very high levels. The only life we have seen in consumer spending (cash for clunkers) and the markets is due largely to government spending. Over the medium term government can’t spend our way out of this mess, so I am a pessimist.

Earnings announced this week for many companies were very good. But, and it’s a big but, most of the improvement is not due to revenue growth; it’s due to cost cutting. You can’t grow earnings long term by cutting costs, so the bump we’ve had over the last few months won’t last forever.

Last week my commentary was called: Dow 10,000: It Was Fun While it Lasted. Will we see 10,000 again this week? Perhaps, but as of today we are below 10,000, again, and I don’t like the look of the near future.

Full disclosure: I have been a pessimist all the way up during the run we’ve had since March. I’ve been wrong all the way up. I may still be wrong, but I can only call them as I see them. And I don’t like what I see.

So, I continue to be 15% invested in gold and silver stocks, and 83% in cash. The other 2%?

This week I took a flyer and bought some puts. If the world does end tomorrow, I’d like to have some insurance. (Yes, I know, if the world ends I won’t be able to collect on my insurance, but I digress).

On Thursday I bought some puts on the S&P 500 Index. I bought the November 925 puts. I paid $1.35. After I bought them the market went up, so on Friday I averaged down and bought more for 95 cents. So I now own a bunch at an average cost of $1.15. The market fell on Friday, so the last trade on Friday was at $1.45. Not bad, a 26% profit in one day, had I sold, which I haven’t.

If the world doesn’t end, I’ll put in a sell order next week, take my money back, hopefully at a profit, and be done with it. I’m only playing with pennies, so either way it won’t matter.

I still expect another down tick, and that’s when my puts will be worth more, and I will be able to deploy my cash for the next leg up.

Those are my thoughts. If the world doesn’t end, I look forward to being further enlightened by your thoughts on the Buy High Sell Higher Forum this week.

Until next week.

I hope.

Well, we got to spend three days flirting with Dow 10,000 this week. It was fun while it lasted, although by the end of the week we were back under the 10,000 level. Not that this was our first flirtation with Dow 10,000; by my count we have crossed 10,000, one way or another, over 20 times before, so it’s no big deal.

Or is it? Perhaps our long day’s journey into night is finally over, and we are shaking the mortal bounds of 10,000 once and for all. It depends on how you look at it:

If you look back over the period from March 12, 1999 to today, you see that the Dow is virtually unchanged; it was around 10,000 then, and more than 10 years later it’s around 10,000 now. Not much glory there.

Since the peak two years ago, in October, 2007, it would appear we are still in a down trend (see the red line). Of course since the bottom of the crash in March, 2009 we are in an uptrend (see the blue line). So which is it? Up or down? I have no idea, but a look at the RSI at the bottom of the chart shows that anything over 70 (the green line) is toppy, so if I had to guess, I’d be guessing that we are near the top, and a correction is imminent.

A look at the 10 year chart shows that Dow 10,000 was a significant support level between 1999 and 2001, and again from 2003 to 2006, so although 10,000 is just a number, it is technically significant. Support levels often turn into resistance levels, so I will be really surprised if we blow through 10,000 and get to 11,000 anytime soon. If we did get to 11,000 that would indicate that the down trend going back to 2007 has been violated, so a new bull market may be in the works.

How does this compare to the last big crash? Something like this:

On September 3, 1929 the Dow peaked at 381.17, and then fell to 198.69 on November 13, 1929, for a drop of 48%.

On October 12, 2007 the Dow peaked at 14,093, and then fell to 6,627 on March 6, 2009, for a drop of 53%.

Yes, I realize that from September 3, 1929 to November 13, 1929 was only 71 days, while the October 2007 to March 2009 drop was 511 days, but history never repeats itself exactly; it only “rhymes.” It could be that the massive government intervention we have witnessed over the last few years has prolonged the crash period, but has not changed it substantively.

Okay, more numbers. From the bottom, here’s the bounce:

From the bottom on November 13, 1929 at 198.69, the market recovered to 294.07 on April 17, 1930, for a bounce up of 48%.

From the bottom on March 6, 2009 at 6,627, the market recovered to 10,062 on October 16, 2009, for a bounce up of 52%.

The 1929 to 1930 bounce took 155 days; the March to October 2009 bounce took 224 days, so the bounce has lasted for a roughly similar period of time.

So, how does this story end? Here’s the chart (go to stockcharts.com to create your own long term chart). I have inserted the above Dow numbers from 2007 to 2009 as noted above.

Dow 1928 to 1935

From the peak of 294.07 on April 17, 1930, the Dow then fell all the way to 41.22 on July 8, 1932, a drop of 86%, over a period of 813 days.

So, if we take the peak of 10,062 on October 16, 2009 and wait for a drop of 86%, we get to 1,409 on the Dow, which would happen 813 days from now, or on January 7, 2012.

Do I actually believe that the Dow will spend the next three years dropping all the way to 1,409? No, I don’t. History doesn’t repeat itself exactly, or else we would all know the exact turning points in the market.

However, I have just given you an example of a market that dropped 48%, and then managed to bounce back up 48%. Stated another way, the market back in 1929/1930 managed to recover all the way to 77% of it’s previous high. Then, it really crashed.

We have just witnessed a market drop 53%, and then manage to bounce back up 52%. Stated another way, this year the market has managed to recover all the way back to 71% of it’s previous high.

(Yes, I guess if you want the exact parallel to 1929/1930, the market will recover to 77% of it’s previous high, or around 10,850, so there could be more room to run. But, as I said earlier, I doubt we will see Dow 11,000).

What do I think will happen. If I had to guess, back in 1929/1930 we saw a 48% drop and a 48% bounce. Last year we had a 53% drop, so I guess I would guess that we will have a 53% bounce, which will take the Dow up to somewhere between 10,100 and perhaps the 10,300 level. In other words, we could see a bit more “up” over the next week or two, but that’s about it. This rally has run out of steam.

(I would be interested to see Fibonacci Retracement levels attached to these charts. But I’m not interested enough to actually do the work of adding them).

Could I be wrong? Of course. I’ve been wrong all the way up, so I could very well be wrong this time as well. The Dow could cruise through 11,000 this week, which would be the exact opposite of what I’m expecting.

But ask yourself this: what happens if I am wrong? Nothing. I’ve been in cash most of this year, only holding selected gold and silver stocks, so the implication of my being wrong is that my portfolio is only up a few small percentage points this year. I haven’t lost anything; I just haven’t made anything.

If I abandon my beliefs now and go head long into the market, I could easily get crushed if the down draft resumes. So, I will continue to play it safe, and stay on the sidelines. Right now I am 15% in gold/silver stocks (as insurance) and 85% cash. If there is a crash, I will deploy the cash. If there is no crash, I make nothing, but I lose nothing.

If I’m expecting the end of the world (which of course according to the Mayans won’t come until either October 28, 2011 or December 21, 2012, depending on who you believe), why am I not loading up on gold? I probably should be, but we all remember the crash of 2008 where the baby got thrown out with the bath water (meaning all the good stuff, like uranium stocks, got sold along with the bad stuff so that traders could cover their margin calls). If that happens over the next few weeks, I would like to have some cash available to take advantage of the bargains.

What some other perspectives? I thought Davidslane’s post on What Should I Do? was quite good.

(Of course I also thought the post on CBS Marketwatch entitled: Obama Fails to Win Nobel Prize in Economics was also hilarious, so you can’t really trust my judgment).

Well, I guess we shall see what we shall see. I will continue to be a pessimist, until I’m proven wrong.

Feel free to agree or disagree over on the Buy High Sell Higher Forum, and if the world is still here, I’ll see you next week.

(And take your final drink, since this is the final time today I will mention the number 10,000).

Since March 6, 2009, the S&P 500 Index is up over 53%, and the rise has been very steady, with virtually no breaks.

That’s a very impressive rally, and it’s a rally that I have totally missed. I didn’t expect it. (Actually, I don’t recall anyone, on March 6, predicting a 50% increase before the end of September). I didn’t expect it because, usually, it takes about three years into a recovery for the markets to bounce back 50%. And usually a recovery is accompanied by rising employment.

We have had neither a recovery, or rising employment.

So here’s the thing:

Two years ago, when this whole “credit crunch” thing started:

• The Fed funds rate was over 5%; today it’s around zero;
• You could get a 30 year fixed mortgage rate for 6.75%; today, around 5%;
• The Fed’s balance sheet was a mere $850 billion; today, over $2 trillion, and growing fast;
• The fiscal deficit to GDP ratio has gone from 2% to 13%.

Yikes.

But wait, it gets better. The Broad Trade Weighted U.S. Dollar Index, is a measure of the value of the US Dollar relative to other world currencies. The math is quite complicated, as shown by this formula, where the index value at time t is given by this formula:

For those of you who don’t get the formula (which would include me), in simple terms the exchange rates of around 30 currencies, weighted based on each countries’ level of trade with the U.S., are compared to the U.S. dollar, to generate the index.

Now, here’s the thing (in chart form):

According to the Federal Reserve Bank of St. Louis (go to their web site and create your own charts; it’s fun), the TWEXB is around the 103 level, which is exactly where it was at this time last year, and exactly where it was at this time two years ago. (Okay, maybe not exactly, but pretty close: look at the red and green lines in the chart). Isn’t that amazing?

I can see by the glazed over look on your eyes that you have no idea what I’m talking about, so let’s start from the beginning:

Pretend you are Mr. Obama, leader of the free world. You inherit the worst depression in three generations. You need to fix it. So you do what rulers do: You lower interest rates, and you spend tons of stimulus money. And for a short period of time it starts to work. Confidence starts to return. The stock market goes up 50%. Things are looking good.

But here’s the thing: The unemployment rate in the U.S. is almost 10%, as shown in this chart, thanks to Google (is there nothing that Google doesn’t know?):

10% is higher than it’s been in forever. And when you factor in all the people who are working part time, or are under-employed, or who have given up, the numbers are really big. Since WWII the highest unemployment rate is 10.8%, so we are within spitting distance of a disaster.

By disaster, I mean if you are the leader of the free world, and you want to implement an ambitious health care plan, and a climate change plan, and a bunch of other plans, you must win the mid term elections next year. And it’s really hard to win elections with record unemployment, because those unemployed people actually have time to vote. Last year you could blame George W for the mess; that will be much harder to do two years after George Jr. departed, and after two years of stimulus that was supposed to fix the economy.

It’s a disaster, because the last guy who had visions of health care plans dancing in his head, Wild Bill Clinton, got creamed in his first mid term elections, circa 1994, and The Big O doesn’t want that to happen to him.

So, for the two of you who are still with me, let me pull this together for you:

Bad unemployment. Can’t get my party re-elected next year if there is high unemployment.

Tried to fix it with low interest rates and high spending. Didn’t work.

That leaves only one last thing to try:

Kill the dollar. Or, more specifically, devalue the dollar. Just like our old pal FDR did to end the Great Depression when he bumped up the official price of gold from $20.67 per ounce to $35 per ounce, so to will our modern day FDR, a.k.a. BHO, do the same.

(You can do your own research on this one, but there are lots of interesting articles out there, like this one, or this one, or this one, or this one).

Yes, devaluing the dollar is inflationary, and has a lot of other bad consequences, but the one sure “cure” for falling house prices and general deflation is inflation.

Just think about it: if every dollar was instantly worth $2, then the real estate value in the mortgage bank’s portfolios just got twice as valuable. The mortgage values are fixed, so instantly there is equity in their portfolios where before there were huge losses. Beautiful. Plus your house price went up, so you feel good again, and you start spending.

Remember this chart:

The only metric that has remained the same for the last two years is the U.S. dollar. The only thing left to try, since massive spending and reduced interest rates didn’t do it, is to devalue the dollar.

Of course everyone knows it’s coming. China is moving to convert it’s dollars to other currencies, and to hard assets like gold.

So what do you do? How can you protect yourself when the paper you are holding is losing value?

You know the answer: buy gold. The government can’t print gold. They can’t devalue gold. Or silver. Or uranium. Or any other hard asset.

Of course 2009 is not 1932. We don’t have fixed exchange rates, and we aren’t on the gold standard. The government can’t simply change the exchange rate. But devaluing the dollar can be done in many other ways, and it will, because it’s the last thing to try.

Last week I said:

A pullback to below $1,000 would not be surprising. Even a pullback to $950 would not shock me. So my plan this week? I will place some stink bids below where we are trading now, and continue buying on big drops. Then, two weeks from now, on up days I will do what I did this month: selling calls, out of the money, on my positions. I will continue to pocket premiums until we get through the expected market weakness in October and November, in anticipation of better things ahead in 2010.

Well, not surprisingly, gold pulled back this week. And I started nibbling to increase my gold stock holdings. And I plan to continue buying in what will presumably be a weak October and November.

The train has left the station. The dollar must be devalued, and gold must therefore increase. I don’t know the exact timing, but I’m willing to be patient and wait for the inevitable.

Thanks for following my rambling explanation of my cloudy crystal ball. See you next week.

No, I’m not going to bore you with bad news, because it doesn’t matter. The Dow closed above 9,500 for the first time since November, 2008. The S&P 500 has settled above 1,000 for the first time since October, 2008. Happy days are here again.

So, I capitulate.

I give up.

On Monday morning I will take my portfolio, which is essentially all cash at the moment, and I will invest it in index funds, or stocks, or ETFs, or anything associated with the market. Everything is good, and I want to be a part of it, so I will fully invest.

Every dime.

I was wrong. I was wrong to believe that massive government deficits would be bad for the economy. Obviously spending is good. Obviously encouraging Americans to take perfectly good used cars, with no debt, and trade them in for Toyotas and Hondas, financed with debt, was a good move. I was wrong to believe that living frugally was a good idea. Obviously over-leveraging yourself to buy a new car that you don’t need, and that you wouldn’t have purchased if the government hadn’t given you $4,000 towards the purchase price, is brilliant financial management.

I now hope that the government starts the Cash for Condos program, where homeowners are encouraged to burn their houses to the ground and build new ones, thereby creating jobs. How about Hatchets for Highways where we blow up our highways and build new ones, thereby creating jobs.

Bucks for Bridges! It’ll be great! Blow up bridges, which will be a tourist attraction, and then re-build them, creating jobs.

I was wrong. Obama is smarter than me. He was right. I was wrong. True, he did underestimate the deficit, and next week he will admit that over the next ten years the deficit will be over $9 trillion. Well, I guess he won’t admit it next week, since he’ll be on vacation, but those are the new numbers.

Where should I put my money? I have no idea.

I don’t want to put it into banks, because they keep failing. The car companies aren’t a good bet, because the Cash for Clunkers program ends on Monday, so there won’t be many more car purchases for the next little while. Unemployment remains high, so consumers aren’t spending much these days, so I guess consumer goods aren’t a good bet. Maybe swine flu vaccine makers?

Here’s my plan: The Boys and their families are coming over for a barbecue this afternoon, so after I’ve had a few pops with them I’ll ask them where to put my money, and on Monday morning I’ll dump it all in. If they have no ideas I’ll throw some darts at a board, and wherever they land, that’s what I’ll buy. During boom times like this, what I buy won’t really matter.

(If you are a religious person, please pray that I come to my senses before Monday morning).

See you next week.

• Retail sales drop in June; The consensus was that retail sales were supposed to be up 0.8% month over month, but instead fell 0.1%. Most amazing was that almost all sectors were down, with the exception of automobiles that increased 2.4% (due entirely to the Cash for Clunkers program that cost a few billion and is already running out of steam), and clothing (up .6%, after a 1.5% slide in June) and minor increases in restaurants and drug stores. Retail sales have been bad for many months, and even with government stimulus they are still falling, so that does not bode well for the economy.
• Economists expected jobless claims to drop, but jobless claims continue to increase.
• Foreclosures rise again in July.
• Record federal deficit in July;
• Large banks continue to fail, as are small banks; in fact, the biggest bank to fail this year just failed;
• Cops called to Jon and Kate’s home (I don’t really know who Jon and Kate are; they apparently have 8 kids, and a TV show, and somehow they are famous, so the news media keeps printing stuff about them, which is probably proof positive that the world is ending).

Clearly I should not be worrying about the headlines, since the market just keeps on going up. Well, they kept going up until a pullback on Friday left the major averages down for the week.

Fundamentals be damned!

There are some people who are worried, like Royal Bank of Scotland chief credit strategist Bob Janjuah, who believes that we will test the March lows at some point in the next few months.

So who do you believe? The markets are up, so the markets are always right, right?

Perhaps. But if that’s true, why are insiders selling, not buying? I assume insiders know more than outsiders, which is why they are selling.

President Obama was elected with great fanfare. He was going to change the world. Unfortunately, even if he had some good ideas, there was no way one man could undo the mess left by George Jr. and all of his predecessors. Alas, Mr. Obama has just made things worse.

The Cash for Clunkers program may go down as the stupidest government program in history. You encourage people who have perfectly good older cars, and no debt, to trash their cars and finance new cars, mostly with debt. Debt is what got us into this mess in the first place, so encouraging consumers to take on more debt is almost criminal. And what about the environmental impact of destroying thousands of cars? Does that make sense?

Mr. Dines, in the August 14, 2009 issue of The Dines Letter, continues to make the case for rare earth metals, his latest crusade. Rare Earth Metals are those metals with names you can’t pronounce, like neodymium and gallium and lanthanum, that are essential for use in cell phones, small batteries, wind turbines, solar cells and electric cars. Even today’s cars have rare earth metals.

So does it make sense to trash a car that has valuable metals in it? So that a consumer with no debt can take on more debt to buy a slightly more energy efficient car? Nope. Fortunately the demand for the program is dropping, and will presumably fizzle out in the next two or three months.

Here’s the sad part: U.S. taxpayers are on the hook for $3 billion to destroy old cars so that consumers can buy cars from Japan! The largest sellers in the cash for clunkers program are Toyotas! Yup, your tax dollars hard at work to support foreign industry; brilliant!

(I’m a Canadian, so I can be smug about the absurdity of the program. Unfortunately the Canadian government is also run by idiots, so of course they are considering an even more stupid cash for clunkers program in Canada).

Sorry, I apologize for that rant. I know I’m supposed to be talking about the markets, and I know I’m not supposed to be talking about politics, and I know many of you will now put comments on the Forum about why Obama is good, or bad, or whatever. Please don’t bother. That’s not my point.

My point is that we are in a mess. A big mess. And massive government spending, by either a guy named Bush or a guy named Obama, is only going to make the problem worse. If you don’t believe me, try this experiment: Go to every bank in town and borrow as much money as you can on mortgages, loans, credit cards, lines of credit, or whatever. And spend it. Then see if you are better off. See if having a massive amount of debt makes you better off. My guess is it won’t.

I know I have been wrong all year. I did not expect the bounce we have had in the markets over the last three months. I have remained largely in cash, so I have missed it. The bounce may continue for many years to come, which means I will continue to be wrong. If so, I promise to refund your entire subscription fee to this weekly report.

(Oh wait, this thing is free, so I guess you get what you pay for. I’m still amazed that, according to my Google Analytics reports, there are over a thousand unique people each week who read this weekly commentary, which is down from around 1,500 that read it weekly during the boom times of a year and a half ago, but it’s still a strangely large number. I wonder how many would read this if I was actually correct in my assessments……….).

But I digress. The markets are due for a fall. The followers of Fibonacci retracement levels tell me that we are getting close to key turning points. They may be right. All I know is that government spending, and swine flu, and Fibonacci levels, don’t bode well for the future.

Me; I’m staying put. At least until next week. Talk to you then.

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.

Huh?

As many of you may know, dissonance is a lack of agreement. In particular, it is an inconsistency between the beliefs one holds or between one’s actions and one’s beliefs. Dissonance is not good, because it means you are out of sync with yourself, and that’s bound to cause problems. If you are out of sync with your ideas or cognitions, you’ve got a real problem.

Thus, cognitive dissonance is that uncomfortable feeling caused by attempting to believe and follow two contradictory ideas or cognitions at the same time. We humans do not like to be out of sync. We have a strong internal drive to reduce dissonance by changing our attitudes, beliefs, and behaviours, or by justifying or rationalizing our attitudes, beliefs, and behaviours. (You can read a nice summary of the original experiments about cognitive dissonance here ).

Let me illustrate with two charts. Here is a chart of the Dow over the last two months:

What do you think? You probably think that the Dow is in an uptrend. It looks good. It looks like a bull market. You probably want to be a buyer. Now, try this chart:

This chart of the Dow over the last three years does not look nearly as good. There appear to be a successive series of down trends in place. We appear to be a bear market, that has had a bounce over the last few weeks. However, the last of the down trend lines will not be broken until the Dow is well above 11,000, so we appear to be a in a bear market.

Here’s the cognitive dissonance part: What I believe will effect what I see. As I have stated many times before, I don’t believe the depression is over. I believe that high unemployment, a decimated manufacturing sector in North America, and massive government spending will take more than a few months to correct. A bear market bounce is not uncommon, but an end to the depression is not here yet. Therefore, when I see the short term chart of the Dow, I see a bounce, not the start of a new bull market. I use the “facts” to rationalize my own beliefs. If you believe we are in a new bull market, your interpretation of the “facts” will be different than mine.

Let me give you another example of cognitive dissonance.

Monkeys and Jelly Beans

A monkey likes three colours of jelly beans: blue, red and green. He likes the three colours equally. He is given two jelly beans to choose from: a blue and a red. He chooses the blue one.

With the red one still in front of him, he is now also given a green one, so now he can choose from a red one and a green one. Remember, we know he likes all three colours equally, so it would appear that there is an equal chance that he will either pick the red one or the green one. So which one does he pick?

Most of the time the monkey will pick the green one. Why?

Because once he rejects the red jelly bean, it becomes less desirable. So, given a choice between the “new” green one and the “old” red one that he already rejected, he will pick the green jelly bean. He’s got a good old case of cognitive dissonance, and he can’t reconcile in his mind picking a jelly bean he already rejected, so he picks the new one, even though both jelly beans would be equally good choices. (If you want to play amateur shrink, tune in to the Psych Files podcast, with which I have no affiliation).

Now most of my readers are not monkeys, and I myself don’t like jelly beans, so why do I raise this example?

Because sometimes we sell a stock, and never want to look at it again. Once we “reject” something by selling it, it’s hard to get over our cognitive dissonance and buy it again. We simply are not wired that way.

Uranium Stocks and Cognitive Dissonance

When I started this blog back in 2006, the first stocks we discussed were uranium stocks. Our big winners in 2006 were uranium stocks. I made a lot of money in uranium stocks, as did many of you. Then came 2007. And 2008. We stopped making money in uranium stocks. In fact, we lost a lot of what we made. So now, we don’t want to own uranium stocks.

In fact, to buy uranium stocks after selling them would mean we are buying something we rejected, which sets up a bad case of cognitive dissonance.

(For those of you who are into technical analysis, what role does cognitive dissonance play in resistance levels? I suspect that “overhead resistance” is another way of saying that when a stock hits it’s peak and then falls, we can’t bring ourselves to own it again until it surpasses it’s previous peak, thereby proving us right to own it, thereby eliminating the dissonance).

Here’s the chart of DML.TO – Denison Mines Corp., a senior uranium company, over the last month:

Denison appears to have bottomed, and is on the road to recovery. Of course the three year chart tells a different story:

A quick review of Merv’s Uranium Index shows that at the moment Merv’s indicators are bullish.

So here we potentially have a classic case of cognitive dissonance. On the one hand, I got burned in uranium (not literally; getting burned with uranium would be fatal; I’m talking about stocks here, people), and so I don’t want to own it again. On the other hand, uranium stocks may have bottomed, Merv’s numbers are bullish, and the need for nuclear power hasn’t gone away. In fact, it is quite likely that the Obama administration will realize that nuclear is the only logical way to wean us off foreign energy, which is the only way to ultimately preserve our national security.

The key for all wise investors is to separate their “feelings” from the “facts”, and act accordingly. My take on uranium is this: there are a lot of investors, like me, who got caught in the uranium bubble and didn’t exit soon enough, so for us, we won’t be quick to rejoin the party. We are the overhead resistance. However, the long term fundamentals are just as good as they were back in 2006, probably better. Therefore uranium stocks should have a place in my portfolio.

But, once this bear market rally burns itself out in May, or June, and the market retreats to retest it’s lows, all stocks will get carried down with it, including uranium stocks. Therefore my plan is to place stink bids and accumulate on days of extreme weakness. For Denison a stink bid of 85 cents makes sense.

Even more importantly I will hold a lot of cash. I could try to play the bounce, but I’m not nimble enough to do that. I don’t want to get caught on a big down day, so I will hold my golds and silvers, and yes I will hold some shares of Denison, but the biggest portion of my portfolio will be cash, because when the market retests it’s lows, cash will be king.

I’m an optimist, and I want to buy, but the facts tell me otherwise, so I have to try extra hard to separate my feelings from the facts. Dissonance ain’t pretty, but dis is da way dat it is.

Thanks, and next week I promise to avoid the psychobabble, if you promise to analyze why you buy what you buy; all intelligent thoughts welcome on the Buy High Sell Higher Forum; see you next week, and Happy Easter.

After a walk through Charleston, we stopped at a Ben & Jerry’s ice cream parlour. We have them in Canada, but I don’t frequent them, so I have no first hand experience with them. However, as I stood in line with my family waiting to order, I read the Our Mission sign on the wall. I always assumed that the mission of a company was to make a profit. That’s it. Make a profit. Not so with Ben & Jerry’s.

They do have an Economic Mission which is to have profitable growth, but the first mission listed on their web site is their Product Mission, which is to use natural ingredients that “respect the Earth and the environment”. They also have a Social Mission, “to operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally & internationally.”

So, how are they doing? Not well, based on my experience in Charleston. On a Sunday afternoon, in the middle of the tourist district, they had a grand total of one employee on duty. She was clearly in a very bad mood. The wait in line for one tiny scoop of ice cream was about 15 minutes. It would have been longer, but the vast majority of customers in line left before they could order, due to the long wait. (I was one of the ones who left).

If an a time of rising unemployment the socially responsible people running Ben & Jerry’s don’t know enough to have more than one person on duty, the company is in big trouble.

About three doors down the street was a candy shop, and outside the shop was a young man passing out free samples to everyone who walked by; many of the passers buy where potential customers that left Ben & Jerry’s, quite unsatisfied. The free samples lured customers into the shop, and in the small shop there were at least half a dozen employees serving the throng of customers. I didn’t do the math, but I assume the small shop did ten times the business as Ben & Jerry’s did on Sunday afternoon. That means the small, well run shop created more jobs, and therefore was more “socially responsible.” After this experience, I will no longer shop at Ben & Jerry’s (not that I did before, so neither Ben nor Jerry will be losing any sleep over this).

As an aside, how socially responsible is it to run a company that makes a product that contributes to the obesity problem in the United States? Hey, Ben and Jerry, put a fruit cocktail or something on your menu. And yes, there is clearly an obesity epidemic in America. It is obvious that obesity is at epidemic levels in America, even more so than in Canada. I shudder to think what that will cost the U.S. health care system in the future.

On our drive down we had to stop a few times for gas. Apparently at many self serve gas stations you can insert your credit card into the pump to pay; at some stations you are also required to type in your Zip Code. Being Canadian, we don’t have Zip Codes; we have Postal Codes (same concept, but ours contain numbers and letters). The keypads on the pumps have no place to enter letters, so I couldn’t use my credit cards at those pumps. I guess they don’t get many Canadian tourists in these parts. Apparently at Shell and Sam’s Club gas stations postal codes are not required, so guess where I did all of my gas shopping?

A final observation: there are a lot of “For Sale” signs on houses here. We counted the For Sale signs on one stretch of upscale vacation properties in South Carolina, and at least one third of the properties are for sale. That’s a huge number, and does not bode well for the real estate market.

Enough of my observations of life in America. My point is that, based on my unscientific observations, the American economy appears to be in deep trouble. Now, let’s talk about the market.

Last week in my post on Dines, Casey and the Blogosphere I stated that “the game plan from here is to expect further market weakness, so I will remain in cash, and gold and silver stocks, with a few short positions like the RSW to round things out. In the medium term I assume we will be testing much lower market levels, and I assume gold is going much higher, so I will continue to add to my positions on weakness.”

Well, I guess I was half right.

The Dow closed last Friday, March 13, at 7,221, considerably higher than the 6,547 low on March 9. Tuesday and Wednesdays were big up days, with a pullback on Thursday and Friday, where the Dow closed at 7,278, approximately where it started the week. I continue to believe there is more “down” to come, so I am averaging down on my shorts (specifically RSW – Rydex Inverse 2X S&P ETF) on up days.

Gold, it would appear, did much better, thanks to our friends in government, who announced on Thursday they would be spending $1 trillion dollars to buy up securities. The market, quite correctly, interpreted this as the creation of $1 trillion dollars out of thin air, and the rush to safety was on, with gold up big on Wednesday, and gold stocks posting impressive gains on Wednesday, Thursday and to a lesser extent on Friday. Gold traded as low as $885 on Wednesday, and was as high as $961 on Thursday; that’s a big bounce.

I have no idea what gold will do in the short term, but I have no doubt that in April, or May, or June, we will look back on $1,000 gold as a great deal.

And, finally, what’s up with this AIG mess?

The government (meaning you, the American taxpayer) gave AIG $175 billion. AIG then passed that money on to some of it’s counter parties, like $11 billion to a French bank, $8.1 billion to Goldman Sachs, and so on. (You can see the list in the New York Times). Why are the Feds propping up French banks? I have no idea, but it’s not my money, so they can do with it what they want.

What I don’t understand is why are we now upset that American employees of AIG got $165 million in bonus money? The whole point of stimulus spending is to put money in the hands of consumers, who will then spend money and create jobs. That’s exactly what the government, through AIG, has done.

According to NPR, which is not exactly a bastion of conservatism, President Obama and the gang have known for months (or at least for weeks) that the bonuses would be paid. So why should President Obama get all choked up about it now? Sounds like a P.R. gambit to me. Which I guess is why lawmakers want to tax the bonuses out of existence. Give them money, then tax it back. Makes sense to me, in this upside down world we live in.

This is why we don’t want the government running the economy.

This is why we own gold (because government can’t print it).

Please don’t interpret my comments as a condemnation of President Obama. George Bush 2 was no genius. I am neither a Republican or a Democrat (I’m a Canadian, and I’m a pragmatist, of which, alas, there is no political party). I only comment on these matters to illustrate that, no matter who is running the show, things are really, really screwed up. I will continue to short the market, and I will continue to own gold.

And, for the record, I predict that Treasury Secretary Timothy Geitner will be gone by summer. Someone will have to pay for these screw ups; he will be the fall guy. The market rallied 500 points when his nomination was announced. I predict it will rally 500 points when he announces he is stepping down for “personal reasons”.

So buy gold.

That’s it for this week. Sorry for my political rants; I promise to be good next week and confine my comments to the markets, although, as I stated above, my thoughts are indicative of why I think the market is headed for further turbulence. As I sign off I am packing my family into the car for our 14 hour drive back to Ontario; the weather looks good (there was snow in Kentucky as we drove down here, which I thought was strange), so I expect my return trip will be uneventful.

Feel free to post thoughts on the Buy High Sell Higher Forum; see you next week.