Top 5 October Investment Strategy Posts

For your convience, going forward we will be compiling a "most popular blog post" for the previous month as chosen by the readers. The recap post will consist of direct links to the fan favorties for a quick review of the month's commentaries. Enjoy the read...

#1 Gold Hits New High, U.S.$ Approaches New Low, Nouriel Roubini Rants, Geithner and Lamont Looking Similar, Saudi Central Bank Denies Replacement $

#2 Inflation, Hyperinflation, Stagflation and the Investment Strategy to Benefit, Richard Russell, Fed's Lacker, Credit Tightens, Banks Sift Reserves

#3 Investment Strategy Turns More Cautious, Existing Home Sales, Record Auctions This Week, Galleon Grief

#4 Investment Strategy: Batten Down The Hatches, Quantitative Easing to Slow, Consumer Confidence Suffers, CNBC Viewership Plunge

#5 US$ Carry Trade Intensifies, Pound Sterling Advances on BoE Comments, Fed's Yellen's Comments Add to US$ Decline, Mortgage Apps.Decline

Investment Strategy, Equity Market Trouble, "Positive" GDP, Norway Increases Rates

Stock Market Investing: The equity averages are down another 2.5+% today capping off an awful week during which time the uptrends from March and the 50day moving averages have been violated. The price action should not come as a shock but instead as a reminder of the tightrope the Fed must walk in order to keep this economic house of cards from collapsing.

The Fed's quagmire: Use quantitative easing and other liquidity producing programs to save the U.S. economy from a depression while at the same time avoid turning the US$ into the North American equivalent of the Argentine Peso. (This method of saving the economy is a pet project of Ben Bernanke and the culmination of his years in academia, G-d help us. Never in history has the debasement of a currency led to a true and sustainable economic recovery. But I digress.)

So, in order to continue the debasement shell game, the Fed must occasionally make it look as if US$ strength is important. What better time to feign support than at the completion of a $300 billion Q.E. program and in the midst of positive GDP excitement. I have been writing for weeks that when we begin to read about "good" economic numbers we must take action to protect the portfolio. Well, this week was replete with "positive" numbers, so the US$ rallies and asset prices suffer.

Investment Strategy: Remain long a core position of precious metal investments and use inverse ETFs to benefit from market weakness. We expect precious metal investments to outperform on a relative basis and would view any weakness as opportunity. I will note: today the spot price for Gold is down only .15% as I write this; the epitome of relative out performance.

You may wish to know why I place quotes around words like, good and positive, when discussing the recent spat of economic numbers. Well, the answer is simple: when we and our respected colleagues parse the numbers warning signs are uncovered. Please review the following two accounts of the "exciting" GDP data so you can better understand our concerns...

Briefing: Q3 GDP Goes Positive!

As expected, GDP growth in Q3 went positive for the first time in four quarters. GDP performed better than expected as output grew by 3.5% quarter-over-quarter annualized compared with the consensus expectation of 3.2%. Demand was strong across all sectors of the economy as consumption increased 3.4%, gross private domestic investment increased 11.5%, exports increased 14.7%, imports increased 16.4%, and government expenditures rose 2.3%. With all sectors seemingly humming along in Q3, final sales of domestic product jumped 2.5% compared with an increase of only 0.7% in Q2...

Unfortunately, a more detailed look at where economic growth occurred makes it difficult to pronounce a full sustainable recovery is on its way. Government assistance played an extremely large role in producing the positive GDP result. For example, the Cash for Clunkers stimulus package boosted motor vehicle sales and contributed 1.47 percentage points out of the 2.36 percentage points that personal consumption added to GDP. Further, the first-time homebuyers tax break has benefited not only the construction firms, who have ended their decline in manufacturing new homes, but also realtors through increased income/fees. The jump in realtor expenses accounted for a full third of the increase in the residential investment component...

Inventories provided positive growth to GDP for the first time since Q3 2008. However, the data is a little misleading. GDP is measured as a rate of change between quarters. Inventories actually declined by $46.3 billion in Q3. However, the drop in Q2 was so severe that the rate of change was actually positive $29.4 billion. We expect inventories to continue to improve over the next year and provide a strong bonus to GDP.

GDP is...Better Than Expected?: The Market Ticker

You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care - are increasing. MORE...

Meanwhile, Norway becomes the second country behind Australia to increase interest rates. The heat is being turned up on the carry trade and the Fed. This development out of Europe places further pressure on the Fed to reduce Q.E....

Norway's central bank hiked rates by a quarter-point to 1.5%, the first interest rate increase in Europe since the global financial crisis bit a year ago. It signaled more tightening to come as the economy recovers. Higher crude prices have helped oil-rich Norway. Commodity-rich Australia hiked rates earlier in Oct. The U.S., U.K. and euro zone are unlikely to hike rates soon.

Next week I will discuss the possible duration of this US$ rally as well as the Fed's ability to remain hawkish. Until then chew on this...

A government big enough to give you everything you want, is strong enough to take everything you have. –Gerald Ford

Investment Strategy: Batten Down The Hatches, Quantitative Easing to Slow, Consumer Confidence Suffers, CNBC Viewership Plunge

Stock Market Investing: The action of the equity markets over the last couple of weeks has been, to say the least, suspect. Today, the averages are testing support at the 50-day moving average and the uptrend line that goes back to March, the beginning of this Fed induced, government sponsored rally. For your edification I will highlight just a few of the warning signs:

• Too many distribution days.
  
• The bullish percentage of NYSE stocks in bullish trends is declining.
  
• The percentage of NYSE stocks trading above their 50-day MA is declining.
  
• The Transportation Average has broken down with Rail stocks leading the way. Last week's price action resulted in an "Outside-Down" week extremely negative behavior.
  
• Momentum as judged by the MACD declined significantly during the markets' last advance.
  
• The reversal down last week occurred at key resistance areas (see Monday's post for details)
  
• The averages were unable to reach the top of their respective channels on the last advance, which often happens at the end of an uptrend. This action signifies the buyers are exhausted.
  
• Even with all these negative developments, the Daily Sentiment Index remains in rarefied territory at 87 %. In 22 years of tracking this number, 87% or higher was reached or exceeded only 5 times. The bulls are ripe for slaughter.

The ultimate question: What happens to a Fed induced, government sponsored rally when the punch bowl is taken away? Probable answer: The drunks left standing around the table get rolled. Investment Strategy: Batten down the hatches we are in for a blow (pun intended).

The US$ is at the epicenter of the mayhem unfolding in equities. I have been writing for weeks that if the US$ continues to slide asset prices will continue to fly in an inflation induced rally. Well, over the last week the US$ has rallied off the lows and asset prices, in a mirror image, have suffered.

The reasons behind the US$'s advance offer the keys to understanding the magnitude and perhaps the duration of the asset price decline.

To begin, this week marks the completion of the $300 billion Fed program to participate in Treasury auctions. In other words, the Fed is curtailing Quantitative Easing for the moment. This change in QE alone would be enough to rally the beleaguered US$, if for no other reason than a relief rally. However, other reasons for the US$ advance abound.

As Jim Sinclaire explains, "November 4th is the FOMC meeting most likely to contain discussions of timing for the exit from economic stimulation." Many questions have been thrown at the Fed about exit strategies and in the event that Nov. 4th may offer some answers the US$ is repricing.

Jim further explains, "November 7th is the G20 meeting at which BRIC nations will anticipate a cessation of QE and a commitment to establish a currency alternative to the US dollar." The best way to delay the movement away from the US$ as the supreme currency is to induce a spirited rally in front of said meeting.

However, can the Fed really afford to reduce the QE? Without Fed buying of Treasuries, rates will surely rise. I will emphatically state that the US economy is in no shape to withstand a raise in rates. Please don't believe all the cheerleading you hear on CNBC about good earnings and economic recoveries. The majority of "good" earnings have been gained through creative accounting (financials) or inventory builds, not real economic growth due to consumer demand.

An economic recovery is not sustainable sans consumer demand and the numbers out today paint a bleak picture: Briefing, "October Consumer Confidence 47.7 vs 53.5 consensus, prior 53.1" Consumers know reality and feel the difficulty of the economic situation. Every day CNBC programming moves farther away from reality which may explain why "Nielsen reported a 50% plunge in CNBC viewership in October year over year. CNBC has experienced a massive 52% decline in overall viewers during business day hours (5 am - 7 pm), and a not much better 49% drop in its demo (25-54) in the month of October as compared to last year October 30th."

Appearances would suggest that the Fed is stuck between a proverbial rock and its corresponding hard place: Continue QE at the risk of the US$ or stop QE at the risk of economic recovery. I, however, would like to offer an altogether different and more troubling take on the situation for the equity markets. I will ask you to accept as a given that the treasury market and the direction of interest rates is more important to the Fed than the equity markets. If you accept this opinion then walk with me a little bit further and acknowledge the fact that as the stock market sells off fear drives investors into the treasury markets. Can you see where I'm going with this?

Until the Fed is ready to resume QE, it is in the best interest of the authorities to have the equity markets sell off and fear to grow thus driving the herd into treasuries to fill the void the Fed's exit creates.