The Stock Market

 

A Scary Moment in Shanghai

In a brief update on stock markets around the world, the AP informs us:

 

“Chinese stocks plunged 7 percent Friday as fears spread that a yearlong bull rally there had gotten overheated. The market is still up more than 100 percent over the past year.”

 

Overheated is the understatement of the still fairly young century in this case. Millions of retail traders have opened new stock trading accounts in recent months, most of whom reportedly know between nothing and less than nothing about the stock market. Two thirds of the new traders entering the market apprently didn’t even finish high school (see chart further below). Margin debt has soared into the stratosphere along with the number of trading accounts and stock prices.

 

china-stock-market-rallyChinese grannies day-trading during lunch

Photo credit: Reuters

 

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The Story of Our Times

Dow up 180 points on Thursday. Gold rose $16, once again breaching the $1,200-an-ounce mark. The first number measures the value of America’s business. The second measures the measure.

We watch the two, but not closely. Most often, nothing important happens. There is no information content in the numbers. Just “noise.” Then, occasionally, they say something…

Many investors and analysts spend their time trying to figure out what the numbers will say next. That is like trying to guess what will come out next from the mouth of a raving lunatic.

 

6-blind-men-hansInvestors busy figuring out where things stand …

Cartoon by Hans Moeller

 

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An Inexperienced Herd

A recent Bloomberg article discusses the fact that most traders active today have never known anything but the era of easy money, and wonders how they will handle the potential end of that era. To this it should be mentioned that the widely expected rate hike cycle may well never begin. The economies of industrialized nations have been severely undermined by loose monetary policy for many years. In concert with over-regulation and over-taxation, this has encouraged ever more capital consumption. Continued economic weakness may encourage the Federal Reserve to simply continue with the ZIRP policy, although it appears to be eager to end it.

 

herd-3Once the herd stampedes, nothing can stop it

Photo via pixshark.com

 

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More Ominous Charts

We have decided to expand a bit on our recent post about “ominous charts” and show a few more charts that should at least give one pause. We hasten to add that none of them should be seen as timing indicators. It must be stressed that we continue to be in unprecedented situation, with central banks worldwide cutting interest rates to the bone with policy rates in the major currency areas having been kept at or near zero for an unusually long time period.

 

roman-orgy-vasily-alexandrovich-kotarbinskyParty on dudes!

Painting by Vasily Alexandrovich Kotarbinsky

 

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A Big Dow Theory Divergence

We briefly want to show a few charts that have caught our eye recently. This is by no means a comprehensive market update (we plan to provide one soon). Here is something though one doesn’t see all too often: the Dow Industrials and Transportation averages have diverged from each other for about six months running. To be sure, no valid Dow theory sell signal has been given yet. For that to happen both averages need to break their previous reaction lows in concert. However, divergences at peaks are a “heads up” signal. Charles Dow would probably at least raise one eyebrow and frown a little.

 

IA_0314_ETFAdvisor_MI600Image via cnbc.com

 

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The Longest, Deepest Depression in US History

Yesterday’s good news was that there will be no 25-year recession. “We should be so lucky,” is the way a New Yorker might react. Because the bad news is much worse. The logic of the “long depression” is simple. Aging populations, debt, zombification – all of which slow growth.

How many old people and zombies do you need before an economy comes to a halt? Nobody knows. But the drag from debt is observable and calculable. Over the last three decades, approximately $33 trillion in excess debt has been contracted – above and beyond the traditional ratio to income – in America alone. And growth rates have fallen in half.

That’s because dollars that would otherwise support current spending are instead used to pay for past spending. Our old debts have to be retired with current income. The money doesn’t disappear, of course. Some goes to creditors who spend it. Some comes back as capital investment, which is a form of spending. But as credit shrinks, generally, so does the economy.

 

Thomas_Nast_Peoples_Money_slideshowHowling, whining and finger-pointing are well-worn traditions. Especially when the question is where the money disappeared to and whodunnit.

Cartoon by Thomas Nast

 

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Extreme Value

Today, everyone is on vacation here. It’s May Day – the international worker’s holiday. But our labors continue. Fortunately, our vocation is also our avocation. “Love and need is one,” as Robert Frost put it.

So even on this holiday, we continue trying to understand what is going on not only on the ranch, but also in the economy. First, we recall with some satisfaction that we told readers in the March 20 Diary to “Sell the US; Buy Russia.”

Naturally, this annoyed some readers, who saw something unpatriotic in investing in Russia. But the idea proved to be a good one. Since then, the big Russian ETF, Market Vector Russia ETF Trust (NYSE:RSX), is up 21%. US stocks are more or less flat. The S&P 500 is down about 0.5% over the same period.

 

original

 

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Stocks and Interest Rates

How important are macro-economic fundamental data and valuations in deciding on whether or not to buy stocks, and how does this influence long term returns? Are there any universally valid rules that can be applied? At the very least we can state that there is plenty of empirical evidence that supports certain conclusions.

Mish has just posted a review of a recent weekly market comment by John Hussman, who probably writes more about market valuations than anyone else we know of. One of the most interesting aspects Mr. Hussman’s discusses in his missives on the topic in our opinion concerns the connection between stock market trends and interest rates, or what we might term his “empirical debunking of the Fed model”.

 

400Photo credit: Issei Kato / Reuters

 

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Insider Buying by Gold Mining Executives Increases Further

In spite of the gold price weakening once again this week and coming dangerously close to breaking an important support zone, gold investors have actually reason to take heart. Readers may recall what we wrote in our most recent update on gold about gold mining margins:

 

“The market has not yet really given any credit to the fact that mining margins are improving due to strength in the real price of gold. Management boards of gold companies may be coming around to a different view though – after all, they are acutely aware that the real gold price is the only thing that counts with respect to their margins.”

 

 rocco fazzariImage credit: Rocco Fazzari

 

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Nonsensical Reasoning is Concocted to “Explain” Day-to-Day Market Moves

We were wondering what could have triggered today’s move in the stock market that so promptly negated Friday’s sell-off. On Friday traders were allegedly worried about a) Greece (what, only now?) and b) China – where it was decided to limit margin trading somewhat and expand stock lending for short sellers in a vain attempt to slow the expansion of the world’s latest and currently strongest stock market bubble.

Neither explanation made any sense. If investors were really worried about Greece, they would have been worrying non-stop since late December at a minimum. Instead European stocks ex-Greece have experienced a near parabolic blow-off move to the upside, pushing them to the highest trailing P/E in history.

 

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