The fact of China shutting her market again last night has many readers nervous and uncomfortable. One of our Peoplenomics subscribers, in fact, sent in this:
“Mr. Ure, It is now Midnite MST. China is shutdown again. US Futures and oil commodities are down. US$ steady. PM’s up.
What does this mean? Are world markets hitting a tipping point for a major down turn? Yes I have read Peoplenomics since the end of November and your economic forecasts. Events currently seem to go beyond your forecast.
You have so many readers who hang on your words.
Right now they may need actionable information or just plain reassurance from you. Respectfully,
First, allow me a word to subscribers: We follow an indicator called the Aggregate Index Oscillator. As of yesterday’s report, this indicator was showing that during Wednesday’s trading, a defensive person would have gone to cash (or short). This is not financial advice – you’re on your own there…I just report what I see in markets..
The Saturday morning report will go into additional detail, but we are not yet anywhere near “beyond my forecast.” When posted, look at the chart that will accompany this morning’s UrbanSurvival report.
But now to the general point: When markets begin to move, there is a terrible tendency for people to “pile on” and when that happens, fear begins to propagate.
It is easy to be fearful – all you need to do is shut down your personal onboard processor and go with the flow – following the “mood of the crowd.” That, unfortunately, is a prescription for major losses.
However, a serious long-term investor cares little for the crowd and in very independent-minded in their financial decisions.
Let’s back up:
There are two kinds of investors: The short-term investor and the long-term investor.
What separates them is their “trading horizon.”
Let me give you some personal examples:
When it comes to short-term trades with a maximum of profit potential, I have in the past used very near-to-expiration options as the vehicle.
The idea with an option is that you are gambling on markets being above (or below) a stated point at some time in the future. This means options have two elements to consider: Price and Time.
When an option of the long expiration sort – in other words, there are many months of trading to go before the agreed settlement time and price – the option purchaser is paying a LOT for the time and LESS for the price.
When an option is very close to “running out of time” you end up paying mostly for PRICE not for the TIME.
IF a personal was looking for an interesting trade, it would be in “bottom-fishing” the current decline and speculating in very short-term call options for this cycle. Index options normally expire on the third Thursday of the month.
This means that if you really believed that the world was ending, you might put a few dollars on an option series that will expire in one week, betting things will be lower than they are now.
I think that would be a bad bet.
Without going into too much detail why, it should suffice to say that the people who write options do not like to have their underlying stock called away from them. And, consequently, moves (like the world ending) tend to move much slower than you might realize. Even the big decline in 1987 (where I made some good money on UAL put options) was not the end of the world – just a decent decline in the longer-term view.
The working tools for short-term options trading are pretty simple and relying more heavily on technical analysis. Using tools like “the greeks” ( terms like beta and so forth) or close-in Elliott wave work all makes sense. And so do tools like understanding the directionality changes of the short-term RSI (relative strength indicator) and the MACD (the moving average convergence/divergence).
But all of this analysis is a total waste of time unless a) you are really planning to make a trade with an eye toward a one week time horizon, and b) if you are willing to lose 100% of your money. That’s because when an option expires, if you are not “in the money” the amount you get back is? ZERO!
So much for technical analysis. There’s good money to be made in it, but it is real “catch-falling-knives” and you have to be prepared to get your hand sliced up. Yes, you can make 10-times your money in a single trade, but you may have to suffer a half-dozen losing trades to get there.
I’ve been “up a Lexus” in a day or two of trading and seen it evaporate a few hours later. I very seldom day trade options, anymore. Too stressful.
I can tell you with some very expensive experience that buying put options one week before options expiration next week is a damn fool’s game. You might win, but people who write options have a major interest in seeing prices trend back toward previous levels in order NOT to pay the short side players. That’s why a spring-back rally Friday and into next week is likely, as I see it.
That is not investment advise. That’s like saying “Yeah, next shooter we bet the pass line” in Vegas….
OK, this then gets us to Fundamental Analysis.
This is where owning real estate, our “lone gold coin” and maybe a “lone silver bar” live.
Fundament analysis is really easy to do: You look at home much the government is “watering down money in the long term”” and play the “dilution of money game”
Or, in a stock, you look at the pent-up long-term demand for some product, or other, and make a “best guess” as to what the demand will be over a period that would be minimally six months. Fundamental Analysis would have said “Yes, computers are going to be around for a while and they will all need operating systems and software.” You might have gone with Apple, or Microsoft.
But on the Fundamental side, right now, we are approaching consumer-saturation. Can the number of laptop computers double from here? Maybe, but not likely. Can the number of phones? Maybe, but not likely.
At some point in the “looking into the future” game – which is what investing of any sort is – you need to take a steely-eyed look.
It is about here that other fundamentals come into play.
First remember the late Marty Zweig’s dictate: Never fight the Fed.
Initially, back in the day, this was a reference to the US Federal Reserve. But since he uttered that immortal advice, remember the world has become more and more interlinked.
It is an article of faith in my thinking that the Chinese Central Bank does not want their economy to blow-up. So they will not let it. If necessary, I expect them to announce a major monetary stimulus and where such actions in the US have typically resulted in stimulus packages that have been in the vicinity of one-half of one percent of GDP, Chinese is not afraid to “put the hammer down” and go with a much larger – two percent is not out of the question – economic stimulus.
When that is announced, within minutes, the economic clouds will clear and the odds of being on the wrong side of a trade expecting the world to end will be a painful lesson in Ure’s 93rd Axiom: “He who has the gold tends to keep it.”
In other words, Chinese financial leadership is not going to lay down and let their economy implode. they will print, print, print.
And you know what hints in that direction here? The Price of Gold (PoG) is up to almost $1,100 in the U.S.
Gold is a very interesting Truth Detector. A short story.
We bought some of our “lone gold coin” in 2001. Gold was $273 and $276.
Using that $276 and the Minneapolis Fed inflation calculator, what do you suppose the purchasing power parity would be of that $276 today? Well, it’s only $368.73 as of the end of 2015 and toss in another 3% (which will be high) for 2016 assumed inflation and we come out with $380.
But the price of gold is much higher than that: Almost $1,100 now and you don’t read about me selling it, I suppose? No. (Not no, but hell no.)
My fundamental analysis is very simple:
Will governments print up money hand-over-fist in order to beat-back pernicious deflation? Well, sure.
Will the Fed have to “:raise” again? Almost certainly. Another quarter at least, and within months because they don’t want the economy sliding into negative rates.
Thus, there will be central banks around the world printing up paper money (fiat) and we will be off on a round of global competitive currency devaluations.
What does that mean, in practical terms?
Think of it this way: If you owed a gold coin and you had paid $1,000 for it, and you woke up tomorrow and there was twice as much paper money in the world, how much “paper” would your coin be worth? Simple answer: $2,000.
Now assume people notice that your hard asset is doing better than other investments in this process. Where do you think the price could go? I’m guessing (and it’s only that) that we could see $2,500-$3,500 an ounce. And a similar move, or more, in silver. Again, supply and demand.
Real estate should do well, too….at least until a global recognition moment arrives. I don’t expect that until we get into the New President Disappointment Period shortly after (whoever) takes office in 2017.
But in the meantime? The current decline is not out of bounds (more Saturday in Peoplenomics as we discuss the bounds).
What’s more, the real money manipulators stack up like this:
1. Investment managers want a good, lower entry price – which this week may be.
2. Central banks will print like crazy.
4. This especially includes China which needs to cover its stimulus.
3. I expect the Fed to raise again because so far, the 10-year Treasury Note hasn’t moved upward.
4. Buying fixed assets (gold, silver) or appreciating assets (food, real estate) and so on might make some sense.
Ivar Haglund, the late founder of the Ivar’s seafood chain up in the Seattle area famously said “Keep Clam.” Times like this that’s fine advice. “A large clam nectar and a six-piece cod, please.”
With guidance like Ivar’s and Marty Zweig’s books, what could go wrong?
Intraday lows are designed to shake out the “weak hands” in markets and anyone who panics at a modest decline like this one, hasn’t understand how stock charts work either at a fundamental or technical level.
The real “worry level” is down around S&P 1,740-1,787 – that kind of range.
Until we get below that, markets go up, markets go down. Study both kinds of analysis until your fear subsides and you, too, can become one of the clam ones who looks at declines like this as buying opportunities.
But not till our trading model advises its safe, of course. When the bottom comes? As banksters print to save the world? There will be tons more paper flying around and assets will scream, along with stocks. And then we will be into a final blow-off top.
Two other items from the inbox as you reach for the Maalox:
Hi George. Love your peoplenomics newsletter.
Just passing along info:
UBS out today expecting 2Q top and 20%- 30% correction late ’16 into ’17.
Not that you need confirmation, but it still feels good to not be out on a limb by yourself.
Certified Public Accountant
And from our Winnipeg News Analyst fellow:
Dear Mr. Ure,
Thank you for staying up late last night to make the entertaining C2C episode.
I recommend reading “Fooling Houdini: Magicians, Mentalists, Math Geeks, and the Hidden Powers of the Mind ” by Alex Stone.
ISBN 978-0-385-66757-9. Mr. Stone juggles hats as a writer, magician, mentalist, and phd student in physics. The signature piece of his magic routine builds upon a 1950’s study with connections to the late mathematician Dr. John Nash. May we all find luck in that definable fine line between entropy and chaos going forward into the future.
Happy New Year.
I think for our inquiring reader, the general rule might be something like: Sensing panic early is a sure-fire prescription for selling at a good bottom. Which is exactly the point strong hands live by
Write when you break-even,