Commentary for the Week of March 8

Europe’s all-too-predictable relapse into recession is gathering force, threatening not only the pipe dream of economic and political unity, but eroding grandiose illusions that have helped prop up the world’s financial house of cards. The unwillingness of France in particular to play by the EU’s -- i.e.,  Germany’s -- rules appears to have doomed the EU dream. The idea of a borderless Europe bound by a common currency and a shared desire to forever banish war from the Continent was a lofty one, but it was mired from the start in deeply rooted political animosities, grass-roots skepticism and bureaucratic overreach. Now these problems, along with a great many others, have turned the EU project into a Tower of Babel. A million pages of meticulously codified EU rules might as well have been written in cuneiform, so inscrutable and arcane have they become. And useless as well. France’s prolonged economic death rattle has been made possible by running annual deficits larger by half than the 3% “allowed” by Brussels. And now, channeling  de Gaulle for what could turn out to be France’s last hurrah, the French have flouted Merckel’s authority, and common sense itself, by proposing to remedy the problem by hiring more government workers and expanding tax breaks.  Portugal, Greece, Spain and the other deadbeat rabble have been cheering them on, and why not? They think they have nothing to lose -- that Germany is the only country with any skin in the game. Their folly is about to be laid bare, however, unless Germany gives in and allows Europe’s Central Bank to monetize the collective debts of Europe Fed-style. Deflation at Critical Mass This is simply not going to happen. Germany, and even the deadbeats, know it is too late for such remedies. With Germany sliding into recession, full-blown

I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend.  About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.  As Myers noted, every penny of very debt must eventually be paid – if not by the borrower, then by the lender. So far, lenders have hung tough on their terms, and although a recklessly expansive monetary policy has cut mortgage debtors in particular some slack, there is no reason to think private lenders will let homeowners skip free when the second stage of the housing collapse that began in 2007 begins anew. Deflation-wise, this is where the rubber will meet the road, drawing irresistible power from the inevitable implosion of the quadrillion dollar Ponzi scheme popularly known as “derivatives.” I’ll concede that while hyperinflation seems at least possible somewhere down the road, the current state of the global economy could not make it much clearer that we are going to pass through a ruinously deflationary phase first. Even then, a hyperinflation would not be driven by wage pressures or rising prices, or even by a further increase in the money supply, but by the epiphany of the dollar’s worthlessness.  This is fundamentally true even now, as some have long recognized, but it does not seem to be on the minds of most investors. Far more urgent is their dawning realization that the central banks’ main battle, especially in Europe at the moment, is against deflation rather than inflation. Under the circumstances, T-Bonds prices

Netflix has just inked a four-movie deal with Adam Sandler that threatens to shake up the big theater chains by radically altering the way movies are distributed and viewed.  It will allow Netflix to produce movies and to stream them directly to customers’ home entertainment centers and computers, completely bypassing exhibit houses.  The online Washington Post put this ominous headline on the story: “Why the Adam Sandler deal with Netflix could doom theaters…”  Exhibitors, especially big chains like Regal Cinemas, Cinemark and AMC, are understandably upset.  But they needn’t be. When they come to their senses, they’ll realize not only that they have the means to compete with online movie producer/distributors such as Netflix , but to do so in a way that promises to usher in a golden era for the film medium itself. Let me explain. At first glance, it would appear that Netflix has an insurmountable cost advantage over theaters in delivering content to movie-watchers.  Mainly, it takes lots of bandwidth to provide movies-on-demand to subscribers.  And although Netflix pays a very significant premium to carriers to ensure that its subscribers enjoy smooth downloads, the expense of this, even after adding in licensing fees paid to film distributors, is much lower than the cost of building and operating brick-and-mortar theaters across the United States. Regal Cinemas, for one, has 7341 screens in 573 theaters -- a big nut to crack, especially with distributors raking as much as 90% off the top in the first two weeks of a movie’s run. As a result, the theaters have adapted their business model so that their profits come mostly from the concession stand. Lately, as you may have noticed, they’ve upgraded the fare so that movie-watchers can enjoy not just popcorn, Mild Duds and Twizzlers, but a martini and a

Here’s an easy play for those who have never cashed a winning ticket trading put or call options. Specifically, I am going to tell you how to bet on a junk-bond crash without risking your shirt -- even if junk bonds continue to defy gravity indefinitely. First, let me assert that straight-up directional plays with stock options almost never win. Your odds are better trying to predict precisely when a shooting star will flash across the night sky. Similarly, if you buy call options with the expectation that a stock is about to surge, your timing had better be perfect, since the options you’ll be buying will be priced to discount any such event. Indeed, to make money on the calls, the move in the underlying vehicle would need to be so steep as to lie well outside the stock’s historical behavior.  Moreover, as implied above, you would need to initiate the trade just before the rally takes off, since, if you get in early, time decay will sap the value of your calls quickly. And you can forget about getting aboard after the rally has begun, since option prices will be goosed into the stratosphere mere minutes after the stock lurches higher. Our bet on a junk-bond disaster entails calendar-spreading put options on Barclay’s High-Yield Bond ETF (ARCX: JNK). This trading vehicle is shown in the chart above. As you can see, except for a couple of nasty dips that occurred several years ago, JNK hasn’t done much of anything since recovering from the Great Financial Crisis.  In retrospect, the only way an option trader could have made money on price movement this boring is to have sold straddles (i.e., puts and calls in combination) against JNK, and to have presciently refrained from doing so during the killer declines

When will the bull market end? With money velocity collapsing and ominous divergences developing in both the NYSE Advance/Decline line and the New Highs/New Lows summation, U.S. stocks closed at an all-time high last week. If this were not disconcerting enough, the Hindenburg Omen, which signals an increased probability of a stock market crash, flashed red on Friday. There was also this unequivocal pronouncement from the Elliott Wave Theorist after the Dow Industrials came within a single point last week of fulfilling their long-term rally target at 17280: “Next week, the U.S. stock averages should begin their biggest decline ever.”  As for your editor,  Rick’s Picks has been drum-rolling a key “Hidden Pivot” target at 2028 in the S&P 500 Index that has been 27 years in coming. On Friday, the index hit a record 2019. Is a major top at hand?  It is often said that bells do not ring to signal the end of a bull market. But if the broad averages were in fact to plummet in the weeks ahead, never forget that bells did indeed ring. Of course, permabulls and Wall Street managers charged with throwing Other People’s Money at stocks will not likely have noticed, so intent have they been on headlines proclaiming the soundness of America’s alleged economic recovery. Over the weekend, one such story that would have goosed their confidence to giddy new heights concerned the recovery of home prices in the exurbs.  To the OPM bozos, nothing says “recovery” like renewed growth in subprime mortgage debt. Flashing Red For those trying to decide the bullish/bearish case for themselves, let me add the opinions of three heavyweights in the guru world with whom I’ve corresponded over the years: Peter Eliades, Alan Newman and Bob Hoye. Hoye’s latest Pivotal Events insightfully answers the question

Obama’s pledge to “destroy” ISIS would have been more credible if it had come from the Ames, Iowa police chief, or the head of the Sacramento VFW. Don’t get me wrong, I’m all for destroying these radioactive cockroaches – and the sooner  the better, since they grow bolder and more numerous by the day.  But even the police chief – and for that matter, the librarian, the PTA chairman in Tallahassee and the dog catcher in Turlock -- know that we cannot hope to even hinder ISIS, much less destroy it, with air strikes alone. Leave it to our dangerously inept commander-in-chief to assure the enemy in advance that there will be no U.S. boots on the ground. Instead, Obama has purported to threaten them with an international coalition that in fact does not exist and which, even if it did, would lack the take-no-prisoners mindset required to exterminate an enemy as savage as ISIS.  More likely is that Obama’s politically calculated four-point plan will strike not fear, but contempt and disdain in the hearts of the enemy.  It will soothe their febrile brains like poetry from the Rubaiyat, perhaps inspiring them to believe that planting ISIS’ flag on the roof of the White House is not such a crazy dream after all. ISIS vs. Idaho Vigilantes Many will have difficulty imagining how this could happen. Militarily speaking, it cannot. ISIS wouldn’t survive a confrontation with Idaho’s militia, much less a battle with U.S. troops. So how are they going to take the White House?  Recall the details of 9/11 to read their psychopathic minds. ISIS will not fight its way down Pennsylvania Avenue; rather, it will use radiological or biochemical weapons to extinguish life across a wide swath of Virginia, Maryland and D.C.  Then, when the dust has settled,

Even rigged markets are entitled to a little rest now and then, wouldn’t you say?  If so, they passed up the opportunity to do so on Friday ahead of a three-day holiday weekend. Instead, while nearly everyone in America was fixing to usher out summer in whatever way might retain its savor best , stocks were ratcheting higher with a cheerless determination that was about as laid back as a buzz saw. You can see this in the chart below. The Dow Industrials bottomed a little more than an hour into the session;  then they forged ceaselessly higher until the closing bell imposed a mandatory time-out.  If buyers are acting this aggressively in the lazy, hazy, waning days of summer, just imagine what they are capable of between now and Thanksgiving, when the country traditionally gets back to work with a vengeance. Whatever happens, and no matter how convinced we are that the stock market is forming a broad top, we’ve grown weary of trying to short it. Some would say we’re crazy to even try to get in the way of a bull that has been rampaging for 65 months. The Dow is on its way to 20,000, permabulls insist, so why try to swim against the tide?  Maybe they’re right. Although we can think of a dozen great reasons why the Dow shouldn't keep rising in the months ahead, the arguments would be the same ones we’ve made all along. The simplest and most compelling of them is that the stock market’s stellar performance has gotten way ahead of an economy that can’t seem to get off the launching pad. But that’s been true for years, and it’s difficult to imagine what might change this dynamic, no matter how perverse it may seem. As for the spurt in

I’m starting to warm once again to gold. Like many of you, I never gave up on it, I just grew too bored to care. With the bear market in bullion about to enter its fourth year, who could be blamed for losing interest?  Gold has looked so punk for so long that every time it rallies sharply, I get that nagging feeling, as you probably do, that we’re about to get sandbagged for the umpteenth time.  So why the change of heart? All credit to Richard “Doc” Postma, a friend and regular guest panelist with me on interviews with the (Al ) Korelin Economic Report. Doc, a physician by training, is also an astute investor and market timer. A patient sort as well, he is that rare bird who can watch and wait for months or even years while exceptional opportunities slowly take shape. I hasten to add that on more than one occasion, he has been a crucial step ahead of me in calling some important price swings in gold. Naturally, that got my attention. He now thinks gold and silver are about to take off -- as soon as late September or early October.  The very idea of it caused me to look with fresh eyes at my charts for corroborating signs.  The inescapable conclusion is that Doc is onto something. The evidence is there for anyone who cares to look. For one, bullion continues to hit marginal new lows, but without breaking down.  Rallies have been fleeting, followed by slumps that continue to wear down even gold’s most loyal followers. Most telling of all, mining shares have shown increasing reluctance to give ground on days when demand for physical is weak. Signs of Bottoming Although the meaning of these signs when taken together seems clear to

Who would have believed when the Great Financial Crisis was winding down five years ago that the feather merchants, unrepentant as always and eager to make up for lost time, would be right back at it, erecting an even bigger, shakier house of cards?  A recent Wall Street Journal headline offers a hint of their dubious success so far: “With Rates Low, Firms Near Borrowing Record.”  Fresh evidence that epic malinvestment is more robust than ever would be scary enough by itself. But to make matters worse, Wall Street and the news media, if not the American public, continue to treat the architects of the next crash with fawning deference and respect, hanging on Janet Yellen’s every word as though the patronizing blather she spews each week to “manage our expectations” were somehow of great import. Same Old Story To underscore the point, the stock market erupted into the usual, embarrassing histrionics last Friday when the Fed’s latest double-speak hit the tape. This, despite the fact that the Open Market Committee’s most recent minutes did little more than reaffirm that the Masters of the Universe plan only to perpetuate the status quo. Interest rates will have to be raised at some point , we were reminded yet again, but the economy is not quite strong enough for it yet. Give the Fed and its shiftless, stupid lackeys in the news media credit for holding our attention with such drivel for as long as they have.  It is a tricky balancing act, to be sure, since it requires the banksters to aggressively promote the lie that the economy is just a few widgets shy of booming even though a majority of Americans polled on the subject believe the Great Recession never ended.  The reason this stark paradox can persist is not