Uncommon Common Sense

I am No Longer an Investment Advisor. I am retired and I refuse to make any recommendations on individual stocks; nevertheless I get quite a few emails and phone calls asking for specific investment advice. Let me make it perfectly clear; you cannot pay me enough to once again accept the responsibility for someone else's money. Thank you all for your confidence in me, but No Thank You. I write these missives strictly for my own edification and mostly to keep my mind working (use it or lose it) and focused on what is going on, clarify my own thinking so as to better handle my own investments.

To that end, I owe an apology both to myself and to those of you who seem to enjoy and follow my writings religiously. I, we missed a GOLDEN opportunity only because I wasn't watching. I have been so busy concentrating on finishing my book that I stopped doing my normal everyday research and then compounded my error by assuming. Whenever, you ass-u-me, you always end up making an ASS out of U and Me.

When the FED announced that they would no longer report M3, without doing any homework, I automatically assumed that they were just trying to cover up the continuation of their massive monetary expansion. What they and the rest of the world's central bankers had begun doing instead was tightening money and credit. Whenever that happens, you can rest assured a market crash always follows. I'm sorry but I blew it. And it cost me at least $500,000 not counting what I could have or should have made by doubling or tripling the shorts I had already put on and by taking lot a more of my Gold Profits (I would never short Gold). Investing is a full time job and you have all just witnessed why I no longer give investment advice. It's better that I try to educate, so that you are able to make your own informed decisions. That's enough of that B.S. for now.

NEWS vs. HISTORY

First of all, let me remind you that the Market is a discounting mechanism: It discounts what is expected to happen in the future looking 6 to 18 months out.

Secondly: Today's news is not news, its history. Never forget that is why a company can report a tremendous earnings increase and still open up down 10%. What were their projections for the next quarter and next year? Did their gross sales not increase in proportion to their earnings increase or worse, were they flat? The past is over; it's only its future outlook that counts.

Thirdly: Watch out for those talking heads on TV who are just paid touts. They are all journalists who have never taken any courses in economics or finance and yet they readily presume to advise the FED Chairman, Congress and President on what should be done. They know absolutely nothing, yet because they are so good with words they are the most dangerous to your wealth and the country's health. If you just go back a few days, you will notice that the exact same piece of news (history) such as rising oil prices is used to justify why the market went down that day and up the day or week before. Watch out for them, especially now that the Bear Market has resumed. They are one way touts, so be careful; giving them a microphone is like giving a baby a loaded gun.

CHERCHEZ La FEMME

In the sleuthing business, we all know the two cardinal rules: Follow the money and/or Cherchez La Femme. In trying to decipher the direction of the markets, there is only one Rule you must never forget: FOLLOW THE MONEY. Now that we know that the world's central bankers have decided to fight inflation by shrinking the money supply and raising interest rates, taking the minimum lag effects into consideration, we have at least six months worth of Bear Markets in front of us. That doesn't mean there won't be intermittent rallies, but the trend is definitely down, so watch out. A new earning season is upon us, you can rest assured that there will be a lot more surprises to the downside. By September, the down grades and losses will be in full swing given the monetary tightening that has already started to bite.

Don't ever confuse brains with being in a BULL MARKET

You are about to see a whole bunch of hot shots, hedge fund & portfolio managers, analysts, journalists and economists among others, about to get their heads handed to them on a platter. Playing follow the leader is easy on the way up, but it doesn't work on the way down as they all try to squeeze through that one small exit at the same time. Remember Bear Markets move on average three times faster than Bull Markets. You better make sure that you don't get steamrolled by their dash for the exits; don't forget that all those hedge funds are leveraged to the eyeballs and their forced liquidation will make the sell off in gold seem like just a pothole on the road to despair.

A SOFT LANDING

Forget About It: Especially for real estate. There is no such thing as a FED engineered soft landing. Notwithstanding the 2000-2002 crash, which was not all that soft? If it wasn't for that rare confluence of events: Massive interest rate cuts in conjunction with a tremendous increase in liquidity, massive tax cuts and the beginning of a war, we would have continued on into the 21st Century's first depression. As it is, it has only been postponed for a while. The inevitable can be delayed for a short time, but it cannot be permanently stopped. All the imbalances engineered by excessively low interest rates must be resolved before the next sustained robust economy and bull market can begin.

CORRECTION 2006

This time it will be much worse, beginning with Real Estate. With 40% of the homes over the last two years being owned or built for speculation, all financed by 1% or interest only ARMS mortgages, you can forget about any soft landing. Not withstanding that the average worker hasn't got a prayer of affording the averaged priced home, to whom are they going to sell all those homes to? Last year, 40% of all new mortgages were arms for second homes; because that was the only way most buyers could afford to make their monthly payments. What happens in a year when their monthly payments double or triple? Then to their chagrin, they find out that their insurance and property taxes have also doubled. If that is not bad enough, they have to start paying for their furniture and appliances and yes, even some cars that were all purchased on a buy NOW at 0% interest and start paying only next year. The exits in real estate are even smaller than in the stock and bond markets. Watch out!

SARBANES OXLY

I have been warning you for almost two years now that S.O. was a disaster waiting to happen. Those idiot Socialists in Washington may have finally killed the goose that has been laying all those golden eggs. The biggest advantage that the USA had over the rest of the world was our capital markets; the ability of Entrepreneurs to raise money. That window to the public market is now just about closed to small and mid-sized companies and even large foreign corporations are now choosing to list their shares on exchanges outside the USA. Since 70% of all new jobs are created by small business, what does that portend for the future? Where do you think the recent urge to merge and/or go private comes from? That always happens at market tops, never at bottoms. Sarbanes Oxley, in conjunction with a flood of easy cheap money built up over the last ten years, is now looking for a home since real estate, world stock markets, commodities and bonds are now too risky. What's left? You can rest assured that once more the banks will, like every other time in the past, get left holding the bag as their loose lending practices, encouraged by both the FED and the Government, come back to bite them in the end. Besides, the deal makers at both the banks and brokerage houses get paid for making deals, as do the senior executives and none of them care whether or not the deal will succeed. If you have any doubt, just take a look at the recent tremendous increase in earnings announced by Goldman Sachs and what happened to its stock that same day. And don't feel too bad for our new Secretary of the Treasury being forced to sell his stock for $500 million right at its all time high to take a job that will pay him less than 1/100th his current salary. Just a coincidence I guess.

PE RATIOS and DIVIDENDS

Every second analyst is touting how undervalued the market is by comparing the S&P's 17 P/E to the 35+ PE of 2000; what they neglect to mention is that every other Bear Market did not bottom until the PE had dropped to less than 8; so is a 17 PE all that cheap?

Dividends on the S&P are now below 2%; during every other market low the dividend yield has been above 6%. The only time it has been lower than today in our 200 year market history was 2000-2003. No matter what other valuation ratios you use, they all give the same kind of readings. So if you think the Market is undervalued, you better think again.

GOLD

I missed a golden opportunity and I apologize for that, but nevertheless my opinion has not changed. I am continuing to hold GOLD. The inevitable can be delayed but it is still inevitable. The US Dollar must fall sharply; it cannot sustain its current valuations in the face of $800 billion trade deficits and $500 billion budget deficits. The US Dollar strength is primarily due to the fact that interest rates in the USA are so much higher than the rest of the industrialized world, especially Japan. BUT there are real limits as to how high the FED can raise rates without plunging the US, followed by the rest of the world, into Depression. As the industrialized world begins to raise their rates in their attempt to control inflation, the spreads between them and us will narrow breaking the back of the US dollar's strength and thus launching Gold into its Second phase (Wave III) of its Bull Market.

ELLIOTT WAVE ON GOLD

The first Wave of the Bull Market in Gold began at $255 in 2001 and ended at $730 in May of 2006 and was an almost perfect Elliott Wave formation with all five waves related to each other in almost perfect Elliott Wave fashion, even in the face of round the clock trading in different markets, including twice a day Fixings in London. Normally Wave #3 is the longest and strongest wave, but this time Wave 5 was not only the strongest but it contained an Extension (quite common for commodities).

EXTENSIONS: The beauty of Elliott Wave is that it is not a trend following system. There are definite relationships between waves and it can often make projections where waves should begin and end. There is a hard and fast rule regarding 5th Wave Extensions and that is "5th Waves that are extended are always doubly retraced." What that means to you all is that the $730 high will be revisited either as a Wave B of a giant ABC flat or extended Wave 2 of an ongoing Bull Market or as is also possible (but not probable), Wave 2 of a new Bear Market. BUT in either case, the $730 high will be revisited. Although it's possible that Gold could still go down another $90, I doubt it. It is my educated guess using Elliott Wave that we have seen the lows of this correction and are looking at a $200 move up regardless if you are either long term Bullish or Bearish. DON'T BE LOOKING AT A GIFT HORSE IN THE MOUTH.

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]
561-840-9767

June 27, 2006

DISCLAIMER
The above is my personal opinion, and in no way be deemed investment advice to buy or sell anything. It is submitted purely for informational purposes, based upon my understanding of the markets.