March Edition
Panacea
Enrico Orlandini
Lasco
Report
21
March, 2005
We live in a world of instant
gratification and I can think of no better example than the behavior
of the Federal Reserve. The root of all economic evil, and most
of the problems in the U.S., can be found in the following chart:
What the chart doesn't show
is that during his tenure, Mr. Greenspan has printed more dollars
than all the other Federal Reserve Chairmen put together.
It also doesn't quite capture the fact that the monetary growth
seems to be gathering speed. For the week ending March 7, 2005,
the M-3 increased another $31.5 billion and that's more than
$160 billion since the last week in January. If this pace continues,
we are on the road to a staggering trillion dollars plus growth
in the money supply for 2005. Impressive to say the least!
This German-like solution to
America's economic woes has brought about more than its share
of unintended consequences including but not limited to a series
of bubbles that cross the American landscape. The bond, stock,
commodity, and real estate bubbles are just a few that come to
mind. You blow bubbles in order to maintain the illusion of prosperity
and the problem is, once you begin to inflate, it's almost impossible
to stop. The distortions that are normally relieved by natural
corrections don't occur and pressure builds. Sooner or later
holes begin to appear in the economic dike and the only solution
left is to print more and more money at a faster rate. I might
add that it's a self-defeating solution to an age old problem
and it is also the Achilles heel to any paper currency regime.
Your money is just paper. Paper has little value and it's easy
to obtain unlike gold or silver which have to be located and
excavated at great economic cost, not to mention human sacrifice.
The printing press is the panacea
(always loved that word) that all governments and politicians
eventually turn to in order to maintain power. The implementation
of paper money almost always begins with fiscal responsibility
and good intentions, and it almost always ends in war and the
collapse of social order. The United States is somewhat closer
to the latter at this point in time. War is what you turn to
when all else fails and you need to unify the people and justify
further expenditures in an all out effort to stave off the dogs
of Depression. A depression that would have been nothing more
than a normal recession if things had been allowed to run its
natural course. Unfortunately, in an instant gratification society,
no politician can stay in power exercising fiscal responsibility
if the cost is a recession. Sacrifice someone else's tomorrow
so I can have a good today, thank you very much. That mentality
is what gets you wars in Iraq and Afghanistan, record trade and
current account deficits, a non-existent manufacturing base,
a dollar that purchases less in real terms every day, and a man
like George Bush as your president.
I know we're closer to the
end of the game than we are to the beginning due to the
size and frequency of the lies being generated by the Bush regime.
This last week, the markets rallied when it was announced that
foreign governments had once again returned to the bond pits
and were buying US debt at close to a record pace. Bonds, the
dollar, and the stock market all rallied on the great news. A
closer look at the numbers reveals a different reality. It seems
that something called "Caribbean Money Centers" accounted
for more than $23 billion worth of these purchases. Having lived
most of my life in Latin America, and being quite familiar with
the Caribbean, I'm here to tell you that you should not use the
phrase "money center" in the same sentence with the
word "Caribbean." To put this in its proper
perspective, Enron was a product of Caribbean money center manipulation
and we all know how that turned out. The U.S. economy is just
a larger Enron.
Unless I miss my guess, we
haven't seen anything yet. I expect the fellow that runs the
printing press over at the Fed is going to suffer a massive coronary
before it's all said and done. The idea of raising interest rates
to control inflation is ludicrous when the money supply is growing
by leaps and bounds. There is nothing more inflationary than
printing money. The game has lasted as long as it has because
foreigners were willing to loan us money as long as we used it
to buy their goods. Well, I think that party is about over. Three
months ago the Chinese came out and announced that they would
reduce their exposure to the U.S. dollar. The U.S. market went
into a panic so the Chinese came out the next day and said it
was all a misunderstanding. Then several weeks ago, The Koreans
did the same thing. The same panic followed as did the same retraction.
Last week the Japanese came out and announced a cutback in purchases.
You guessed it... market tremors were followed by yet another
retraction. Finally, India then followed suit by announcing a
cutback. Do you see a pattern here? I suspect that all the Asian
Central Banks got together some months ago and decided that they
would all cut back their exposure to the U.S. dollar and thereby
all share proportionally in the losses that will be incurred.
Naturally I have no way to prove this but the market has born
this out, so far.
In conclusion, watch the money
supply and look for larger and larger increases. And remember,
you can print it but someone still has to want it. Every day
there are less and less people willing to hold dollars. I'm seeing
a trend in Latin America that was unthinkable just a couple of
years ago. Stores are refusing to take dollars and companies
are now writing long term contracts in local currencies. That's
never happened before. Imagine that, banana republics
don't want dollars!? How far have the Americans fallen? Not nearly
as far as they're going to!
MARKET COMMENTARY
DJIA - It has been anything but easy as the JUNE
DJIA traded at a new high for the entire move up of 11,012 on
March 7th and it looked like we were ready to take off as the
DJIA, Transport Index, and the Utility Index all hit new highs
for the Bear Market rally. Under Dow Theory a secondary
confirmation was given, and that's an important distinction to
make. You often have secondary confirmations during rallies or
declines that go against the overall trend. As far as the primary
trend was concerned, we had a major non-confirmation. In essence,
the Transports made a new all-time high while the DJIA failed
to confirm that high by more than 700 points. It should be noted
that primary non-confirmations carry a lot more weight than secondary
confirmations.
Since the March 7th high, the
DJIA has turned down and we closed the week at 10,635. The move
down is significant do to the fact that we've retraced more than
50% of our rally from the January 24th lows up to the recent
highs. I believe that, at the very least we'll test the January
lows of 10,409 and we may even move below it. In order to change
my opinion, I would need to see a move back up above 10,796.
Friday's last minute rally
aside (there's that invisible hand again), the market really
doesn't look very good. We're starting to see some chinks in
the armor. The significant drop in share price in GM, Fannie
Mae, and home builders like Beazer (BZH) is worrisome to say
the least. GM is symptomatic of the death of the industrial base
in the U.S. while Fannie Mae and the homebuilders seem to be
signaling that the housing bubble is about to become a thing
of the past. From a technical perspective, the market is quite
oversold but you can stay oversold for quite some time in a Bear
Market. Also, new lows are now ahead of new highs and all the
majors averages closed below their 50-day moving averages. Finally,
upside momentum is fading as we rally on declining volume a fall
on heavy volume.
The above chart is of the DJIA
and upon closer examination, you'll see that the Index has broken
below the bottom band of the trend line that would extend from
the October lows on up through the January lows. That's also
significant. Given the above, I see very little chance for any
significant upside breakout. At best I see the market in a trading
range that extends from 11,000 down to 10,400. Any move below
the 10,400, confirmed by the Transports, would be a major sell
signal and indicate that the Bear Market rally is finally over.
I am short
the JUNE DJIA from 10,790 and again from 10,650 and I will stay
that way unless we move back above 10,796.
Bonds - The bonds look terrible, Caribbean Money Center
buying aside. If you look at the bond market intelligently, the
Fed is spending billions of dollars in an effort to prop them
up and all they have to show for it is 14 points off the bottom.
The JUNE BOND closed out the week at 110.24 in spite of numerous
intraday sojourns that reached as high as 111.19. In my opinion,
the Asian Central Banks will use any and all Fed intervention
as an opportunity to unload as much worthless paper as they can.
They are no longer concerned with taking profits; rather they
are simply trying to avoid "the big loss." The
following chart shows the bond action over the last six months.
I believe the trend is now down and only one of two courses of
action is possible from here: either they will rally up
to +/-113.00 and then turn down, completing a multi-month head-and-shoulders
formation, or we're building a base here for the next move down
that's do to begin any day. In any event, I'm short the JUNE and DEC BOND
and will stay that way unless I see a close above 113.15. We'll find good support at the 110.00
level and once disposed of, we'll move down to test the 108.21
support.
US$ - Along with bonds, I can't think of a worse
long term investment. A long time ago, one of my clients asked
me to define a "dollar." The normal text book
definition is that it's a store of wealth, but I came up with
something a bit different. A dollar is nothing more and nothing
less than debt. There can be no other explanation. As
debt, and due to the fact that the Fed is printing more
and more debt with no consideration as to the consequences, I
believe that holding dollars is the single worst long term investment
you can make today. Below we have a one-year chart of the dollar
and it's not such a pretty picture:
We can clearly see that the
trend is down and the US$ Index is currently trading at 82.10,
just two point off the twenty year low of 80.00. The dollar peaked
back in 2001 at just over 121.00 and has down nothing but fall
since then with occasional rallies that always seem to die off
when they touch the 14-month moving average.
I have been
short the US$ Index for almost all of that decline and I have
been long the Swiss Franc for all of it. I see no reason to change. Once the dollar index declines below
80.00, I suspect the game will be over and the real selling will
accelerate as everyone comes to the conclusion that the jig is
up. Above we see a series of trading ranges that go back nine
months. The question now becomes: will the bottom band of the
present range hold? No one knows the answer and it may very well
hold for now, but sooner or later, the dam will burst.
Gold - This is the toughest subject to deal with
because it brings into play the emotions of greed, hope, and
fear more than any other market or commodity. There is something
about gold that transcends time. Paper money will never have
that appeal. In any event, I believe APRIL GOLD bottomed on February
9th at 411.50 and is now embarked on a new leg up. This new leg
up has one of two possibilities:
- We will rally to the 449.00-451.00
range and the correct down to a higher low, or
- If we are entering a stronger
phase of the Bull Market, we'll rally to a new high, possibly
as high as 478.00 before a natural reaction sets in.
In all honesty, I don't know
which case scenario will play out and it really doesn't matter.
What matters is that we're in a once-in-thirty-year Bull
Market for gold and the only way to play it is to get in and
stay in. And I'll admit that it's much easier said than done.
No one likes to ride out a strong reaction as their profits wilt
like flowers on a hot summer's day.
The APRIL GOLD closed the week
at 439.79 and will remain in an uptrend as long as we don't close
below 430.25. We will find support at 438.75, 436.00, 434.67
and 430.25 while resistance is at 440.15, 442.65 and 448.75.
A look at the gold chart below shows us that we could possibly
be forming a large reverse head-and-shoulders formation where
the first shoulder was completed back in early December, the
head came in during early February, and now we should form the
second shoulder with a reaction down to +/- 435.00. Such a scenario,
if it plays out that way, would be quite bullish and should lead
to new highs on this particular drive up. The neckline would
be at 448.50 and any close above this would be quite bullish.
I am long
DEC 06 GOLD and DEC 07 GOLD and will stay that way. I know of no other way to play this
market and survive.
Silver - Actually looks better than gold at this particular
juncture. The MAY SILVER closed out the week at 739.70 and appears
to be consolidating for the next move up through the 768.00 resistance.
We have support at 739.16, 735.50 and 732.15 while resistance
is at 742.50, 745.90 and 753.50. I am long a small position in
DEC SILVER and will stay that way. It will take some time for
me to have a decent comfort level in silver.
Gold Stocks - I know this will sound boring but
I remain 80% invested in the following six stocks:
- Newmont
- Goldcorp
- Buenaventura
- Hecla
- Glamis
- Royal Gold
I will sit
on these stocks, which I consider to be the blue chips of the
industry, until the bull market is over. The only thing that could possibly cause me
to exit would be the imminent collapse of the U.S. financial
system in which case all stocks would be at risk.
Corn - This is my new addition to the group. Commodities
are quite bullish and grains are trending up within that group,
so I am going with the line of least resistance. The MAY CORN
recently broke out when it closed above 225.00 last week. With
respect to beans, it is a laggard. We have support at 218.14,
217.50, and 212.70. If this wasn't a false break, we should hold
support at 217.50. I
was a recent purchaser of MAY CORN at 222.50 and will add on
with a close above 237.60. My stop/loss is at 217.50 on a closing
basis.
OUTSIDE COMMENTARY
Usually it's hard to find intelligent
commentary, but lately I read a number of well-thought-out
articles. I have included two links for your reading pleasure:
A Stephen Roach piece [America
Smells the Coffee] which implies that the end just may be
at hand.
And an article [America's
Has-Been Economy] by Paul Craig Roberts, a former Assistant
Secretary of Treasury.
Mar 2005
Enrico
Orlandini
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you interested in receiving information on the funds we manage,
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