This is the truth, nothing but the truth, and the whole truth, with a waterboard as my witness!

Thursday, October 9, 2008

A signal of a bottom and selling exhaustion

I was surprsied to see Gold is closer to capitulation today. It rose 3.51% while the Dow was down 7.33%. I hear lots of advice but can tell you this, when you see Gold and Dow down the same day, you know that you can put a toe back in the water.

Based on the above my bet is this: My bet is that the Dow will drop to at least 7,200 and at that point without further losses, then the bottom is close.

But if you are looking for the buy signal? It is when Gold and Dow drop the same day.

I based the additional 15% on the ration of Gold to Dow trading ratio. Or twice the current loss at 15%. What is the Gold upside? It will not exceed a 7% gain and hold it when Dow hits 7,200.

Could this happen in one day? Yes.

I have given this some thought while driving and wanted to post this to refer to it later. The Dow will hit 7,200 and that incidentally will meet the range of Oct.97

The two super cycle lows since 1900 occurred in 1932 (89% below the top) and in 1974 (45% below the top).

We are down 30% but my guess is that we have 15% to go.

The early distribution penalty of 10% looks good still now!

Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus followed $72.3 billion of outflows in September, the most in a single month. Investors deposited $185.5 billion into bank accounts last month through Sept. 22, TrimTabs said, citing U.S. Federal Reserve data.

If you go back and look at Gold in deflationary markets, or have studied distressed markets, familiar with Kondratieff and Irving Fisher you will look back on this and wonder why I can make this assertion?

Because this time the market is GLOBAL and the distortions of intra-economy trading on a distressed economy will not delay or retard this process.

My guess we dead cat bounce or hit this low at three points, before XMAS, 3/15 or 9/15 which are bond reclamation/settlement days.

Dow hits 7500 create a shopping list and hope that this is a managed cycle and not the genuine super-cycle. Because it is global, it will be managed.

If you read another money blog that says that money is "created out of thin air" remember that gold is created out of dirt and at the right price they will create more of it, unlike waterfront property.

The markets are complex inter-relationships of math, closer to philosophy and language to anything tangible, it is a concept, an economy, like Bacon's idol states, language and an interaltionship of math. Gold is the inverse bubble, the last bubble, and after many losses always the most cruel.

The markets are extremely oversold, but it can't muster a rally. Why not? The Fed is doing everything it can; it will undoubtedly soon start taking direction positions in financial companies, and may even guarantee loans between banks.

While many are expecting a rally, and some are in fact buying modestly right now, there are other problems.

1) Financials have been hurt by concerns about wider losses (credit card, commercial real estate), and capital raising issues.

Look what happened to BofA[BAC 19.63 -2.47 (-11.18%) ] and Morgan Stanley after they announced capital raises; look what is happening to Wells Fargo [WFC 27.25 -4.65 (-14.58%) ]and Prudential and Protective Life now that many believe they will have to raise capital.

2) But there's a bigger problem: there is no "E" in the P/E. In English, there is no Earnings in the Price/Earnings Ratio.

Look at the estimates now: S&P 500 price is 975; many estimates of earnings for the S&P 500 for 2009 are around $75 for the index.

Do the math: 975/$75 = 13 x earnings. Now, this is modestly cheap. The historic average is 15 x earnings, so 13 x is a little cheap, but not much.

Here's the problem: that $75 estimate is baloney. No one has a CLUE what earnings will be. All we know is they keep dropping.

So the Street is re-jiggering the numbers. Instead of $75 earnings, let's assume, say, $60 earnings. In order to get to a level where the S&P is cheap (13 x earnings), we have to go to 800 on the S&P: 800/$60 = 13.3 x earnings. 800 on the S&P??? Gads, it's at 975 or so now, that's a drop of...another 175 points....1,700 points on the Dow! Sobs and wails.

See why the Street is in despair? With no visibility on earnings, we can't play the game.

That's why the banks have to start lending, in order to get a clear indication of what it costs to borrow money. Getting a grip on a company's lending costs are key.

Cheaper lending costs mean higher margins, which means higher earnings!

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