Commentary for the Week of March 8

The Dow was up 116 points yesterday – all of them presumably gratuitous -- recouping about half of the previous day’s losses.  This was in odd contrast to an S&P 500 index that barely got off the launching pad  Take a look at the 60-minute chart below if you want to see how S&P buyers spent the day head-butting their way modestly higher. Our guess is that they were outmatched by fresh supply coaxed forth by Monday’s semi-fearsome selloff. Recall that it was attributed by the news media to worries about Italy’s election results. Are the rabble about to seize power in Rome?  It would seem not. Italy didn’t even rate a mention on the Google news page yesterday, unless you count a story about the Pope that had a Vatican dateline. We can only surmise that the panic over Italy’s would-be descent into anarchy that had engulfed newsrooms has not spread to the general populace, let alone to Wall Street. So what to make of these almost daily swings of 100 to 200 points, each opposite the last?  Our suspicion is that the stock market is building a broad top. By definition, that means it has been visiting pain on bulls and bears alike.  We’re in the latter camp, although untouched by pain as yet. About two weeks ago, we be  the “Don’t” line with the acquisition of some put calendar spreads in the Diamonds, a proxy for the Dow Industrial Average.  Although we usually shun options with distant expirations, because time only works against the retail buyer of puts and calls. In this case, however, we put on the spread with the goal of “rolling” it twice by summer. Specifically, we bought the June 130-March 130 put spread for $1.50 when the Diamonds were approaching a Hidden Pivot

Some genius bought $90,000 worth of out-of-the-money calls on Heinz shares a day before Buffett tendered for the company, but it looks like he won’t get to collect a dime of the $1.7 million profit the trade produced.  Actually, the trader is a fugitive from justice at the moment, having failed to show up at an SEC hearing last week to explain his astoundingly good timing.  Don’t these guys ever learn?  Buying call options to profit from insider information is like wearing a mechanical holdout device to a card game.  If and when you get caught, which you will, there’s no way to lie your way out of it.  Why do you think the SEC is so keen on prosecuting insider-trading cases?  Convictions come as easy as shooting fish in a barrel, since the paper trail in nearly every instance is so clear and detailed that the trader might as well have presented regulators with a scrapbook celebrating his crime. This perp reportedly bought the call options through a Swiss account managed by Goldman, so he’s not exactly your average Joe. Goldman claims they don’t have “direct access” to his name, and at this point even the regulators don’t know who he is. But you can bet they’ll collar him eventually, notwithstanding Switzerland’s zeal for protecting the identity of its banking customers, even those who deposit such large sums that the money could only have been stolen. When it comes time for the Swiss to do the right thing, we’re betting they’ll cough up the trader’s identity so that the SEC’s investigators can rack up another score. Switzerland No Place to Hide As a put-and-call dealer on the Pacific Exchange years ago, we ourselves were the prey of inside traders operating through brokerage accounts in Switzerland, Jordan, Saudi Arabia and

[Update: Comex April Gold bounced $30 on Thursday after making a marginal new low at 1554.30.  Bulls are not yet out of the woods, but they should take encouragement from this bear-trap price action. If the short-squeeze does persist for a second day, generating a weekly close above 1594.50, bulls will be back in business if not yet back in the driver's seat. RA] Is it Katie-bar-the-door-time in gold?  We seriously doubt it, although we wouldn’t blame bulls for feeling despondent after yesterday’s sharp decline, the second in a week. The April Comex contract plummeted to an intraday low of 1558 on Wednesday before reflexive buying provided a modest bounce in after-hours trading.  The good news is that the low was pretty close to a trendline that just about every gold trader on earth must have been watching. With such a devoted following, it’s hardly surprising that this technical support was breached marginally, presumably to put the fear of the lord in wanton speculators. But there are some troubling facts as well. For one, considering how many bulls probably got stopped out when the trendline was penetrated, the futures should have shown more pluck on the rebound. This is just simple physics, since, once gold’s fair-weather friends and perhaps more than a few true believers had been shaken loose, profit-taking on the subsequent rally should have been greatly reduced, lightening the ascent. Oh well. Perhaps spirited bargain-hunting will commence on Thursday, driving gold back above $1600 and out of the danger zone. Reason for Caution Even if that were to occur, however, there would still be reason for caution. That’s because at $1558 the futures were trading $12 beneath a Hidden Pivot correction target we disseminated to subscribers a while back. It kept us on the right side of the

Last fall, Apple Inc. was on top of the world when its shares reached an all-time high of $705. That made it the most valuable publicly traded company, ranked ahead of Exxon.  Now, with the stock selling for around $460 and AAPL back in second place, it’s getting harder and harder to find someone with a kind word for the Cupertino giant. The news media in particular have turned on Apple with a vengeance, perhaps because they’re embarrassed at having been five months late diagnosing the firm’s declining fortunes. But anyone with half a brain – which perforce excludes mainstream newsmongers – could have seen it coming as early as September, when a whole slew of new Apple products hit the market, including iPhone5 and some iPad models that took display quality to a new level. Trouble was, there were no new products in the pipeline till spring -- and even then, no assurances that Apple’s next big thing, without the guiding hand of Steve Jobs, would be new and different, let alone revolutionary. So now Samsung is breathing down Apple’s neck, borne aloft by the kind of press that advertising can’t buy. A CNN story out yesterday bore the headline, How Samsung Is Out-Innovating Apple. Recall that it was just a few months ago that Apple won a lawsuit against Samsung involving some trivial design issues. We commented at the time that it was bad karma for a supposedly world-beating company to pick a fight with a competitor over such small things. Karma aside, Apple’s aggressive patent attornies didn’t discourage Samsung from taking the offensive with a few products that were very un-Apple-like. The so-called “phablet,” for instance. Essentially a phone combined with the much larger screen of a tablet, it was a product that many critics initially dissed.

Hard to say what has touched off the buying spree on Wall Street, but it surely couldn’t have been the sight of Obamacare's dreadnought bearing down on the U.S. economy.  Have you kept up with the news?  The details that have emerged concerning the Orwellian, badly misnamed Affordable Care Act suggest that it could easily crush the life from our already dying economy. There’s the matter of Medicaid, for one. Half of the states have taken the bait, opting to expand coverage with “free” money from Washington. And why not?  Enlarging the program will cost them nothing extra until 2016, at which point The Guvvamint will cut back on reimbursements by about 10%. So then, why have half the states opted out?  For starters, it will cost them a bundle just to administer the program – money they don’t have even if the care itself will be paid for, at least initially, with OPM.  However, an even bigger reason for saying no is that existing Medicaid programs are already pushing many states toward bankruptcy. Just ask Massachusetts, the home of Romneycare, where runaway healthcare costs are threatening to consume outlays in all other categories, including education, transportation, police, fire and judicial. Opting out would seem to be a no-brainer, but it’s not that simple. Any state that does so will effectively be shifting the financial burden of Obamacare’s Medicaid expansion onto beleaguered employers. That’s because workers are guaranteed some kind of coverage, and if the states themselves are not providing it via Medicaid, businesses will have to pick up the entire tab.  Can’t they simply pay a $2000 fine instead?  Yes, they can.  But it won’t be tax deductible like corporate dollars spent on actual care, and so the decision will be fraught for firms both big and small that

[Fifty years of inflation has been tough on households, but for millions of college grads unable to find work paying more than $10 an hour, it can be defeating. In the guest essay below, Rick’s Picks forum regular John Skerencack (aka John Jay) explains how an  economic tragedy that has trapped young people took shape without anyone much noticing. Until now. RA] A good way to work a scam is to put a microscope on a short-term trend and pretend it is a reversal of the main trend. “Global Warming,” for example. About 15,000 years ago there was a sheet of ice 5,000 feet thick over New England. As the ice age ended it melted away, and as a result sea levels rose about 390 feet. So you can say with confidence, the long-term trend is melting ice, and rising sea levels. All this happened without any human input at all -- a mile of ice melts, sea levels rise 390 feet. Now, in the past 140 years, more ice has melted, and sea levels have risen about a foot. OMG! Quick, let’s create a global tax expressed through carbon credits to stop it before it gets out of hand and we all drown! Al Gore and the CME have a plan to save us! Cue the one minute chart of sea level rise! You get the picture? There is no new trend of rising sea levels, just the last gasp of the main trend, most likely. Rising Seas = Inflation Turning to the “Dismal Science,” the rising sea levels of the past 50 years or so is Inflation. So ceteris paribus, let 50 years be equal to the 15,000 years of melting ice and rising sea levels. For the sake of argument assume the price of everything has gone

[The author of today’s guest commentary is Brad Culkin. A regular in the Rick’s Picks forum, he is the founder and CTO of a medium sized capital-equipment manufacturer. RA] What’s next for investors? It helps to know what’s happening now and what happened in the past. Whatever the facts, don’t expect life to be like the box of chocolates -- “you never know what you’re going to get” -- that Forrest Gump like to offer up. If you think like him, you had better "run, fool, run!" since the future will bring you only inexplicable chaos. For me, at least, trying to predict the future only makes me nostalgic for the past.  When I think of the 1980s, I remember a more innocent time.  Financial intermediation was an actual service.  Bankers and brokers were like Yenta, the matchmaker in Fiddler on the Roof.  To them, savers, investors, borrowers and entrepreneurs were like earnest and forthright men seeking comely brides for happy and productive partnerships.  The marriages didn't always work out -- but hey, that wasn’t Yenta's job; she just made the introductions. By the time the 1990s rolled around, we knew more than a few Yentas who were hooking up savers with, um, inappropriate dates. Economist  Hyman Minsky, who knew a Ponzi scheme when he saw one, would not have approved, since the hookups were creating balance sheets with non-existent assets, poor cash flow, and principal that was unlikely to be returned unless via new investors recruited to keep the game going. Many commented on this sea change at the time, as companies with no history, no seasoned management, no sales, no earnings, and no real assets went public and borrowed.  Bad Yentas indeed. We might have hoped this sort of mass folly would have ended with the dot-com crash of

[With the scandal that has erupted over Beyonce’s still-unconfessed lip-synching of the Star Spangled Banner, some are questioning whether anything that comes to us by way of television or the internet is indeed real. In the guest essay below, our friend and occasional contributor James Tolard suggests that although the digital enhancements that bring us spectacular photographs of distant galaxies and such is nothing short of miraculous, technology may be weaning humans from the visceral pleasures of experiencing reality itself. RA] One little parlor game that amuses my friends begins with a question:  Those beautiful photos that NASA releases daily – with the right equipment, do you think you could equal them? Well, some might answer that they could if they had a telescope like the Hubble. Or access to the Mauna Loa volcano in Hawaii. And so on. Just a matter of a large telescope and a specialist camera. And, that is a kind of answer. But there is more. All these big astronomical bureaus employ “data visualizers” – i.e., men and women who turn data into images. What?  Yes, to repeat: Data visualizers assemble zeros and ones from these telescopes, form some kind of image, colorize it; and then, with the blessings of the director of data or some other official, and of course, a stamp of approval from the director of public relations (someone has to pay those NASA salaries and the costs of launching Rover, Discovery, Hubble, etc.), the images are released onto the web and to select newspapers,  where they bring understandable delight to fans everywhere, myself included. My friends are usually surprised to learn that producing these photos entails simply looking out into the cosmos, snapping an iPhone image, and sharing it with the world. The process of accumulating data can be so complex

My colleague and erstwhile nemesis Gonzalo Lira posed the question above in a recent essay, and it is indeed a most puzzling one.  Given that the world’s central banks -- joined most recently by a shockingly reckless Switzerland -- are waging all-out economic war by inflating their currencies, shouldn’t gold be soaring,?  In fact, prices have continued to meander between $1500 and $1700 since September of 2011, when gold topped out at $1945 after a spectacular run-up from $728 in just three years. What could have caused the bull market to go lifeless since then, even as more and more countries appear hell-bent on devaluing their currencies to keep their exports competitive? The answer that Lira has offered is novel and engaging, but it did not persuade me, perhaps because the underlying conceit seems forced. For he has likened the current gold market to the one for credit default swaps (CDS) prior to the Great Financial Crash of 2008.  Because swaps provided insurance against bond defaults, they rose in value as the crisis mounted. But then, suddenly, they ceased to appreciate, Lira says, because “the markets collectively realized that the counterparties to those CDS contracts might not be able to pay up.”  This, Lira asserts, is exactly what is occurring in gold, as paper certificates have come to greatly exceed the supply of ingots held in vaults. The result, he says, is that “the global precious metals markets are essentially a game of musical chairs, with far fewer seats than players—far less gold than gold holders. And market participants collectively know this. Which is why they don’t trust their counterparties. Which is why gold isn’t rising like a shot.” I think there’s a more convincing explanation for why gold isn’t rising, and I will get to it in a moment.