The reason for rising food prices

Diners beware!  Restaurant prices everywhere are on the rise.

While enjoying dinner recently at Romano’s Macaroni Grill, I noticed that almost every menu item had increased by at least one dollar from earlier this year.  The same observation was made at other sit-down restaurants I’ve visited in recent weeks. 

In my interview with Bert Dohmen earlier this month, he and I discussed the trend of rising prices at retail food establishments.  Dohmen believes that we can expect to see more inflation (rising prices) in essential consumer goods such as food, and deflation (falling prices) in non-essential durable goods.  I agree.  

I think we can attribute the rising food price trend to the Fed’s policy of artificially boosting retail prices in the face of the long-term deflationary cycle (i.e. the 120-year Kress cycle).  The Fed refuses to let the cyclical forces of deflation take their proper course.  If the Fed/U.S. government stood back and allowed a complete de-leveraging of the excesses from the previous decade to occur, the Great Recession would actually present fabulous opportunities for the savers among us.  Falling prices would encourage long-term investments, and it would be a boon for lower-income families.  An honest de-leveraging process would also save the endangered Middle Class from ultimate extinction. 

Unfortunately, the Fed is determined to maintain its fight against deflation with all its might.  For a while, at least, this means we can expect to see higher prices at grocery stores and restaurants.  But as my late mentor Samuel “Bud” Kress would say, there’s ultimately no way of prevailing against the forces of Mother Nature and Father Time.  The Kress cycle will have the final say in this matter and the Fed will be powerless to stop it.

Gold and the fiscal cliff

The price of gold has been hit by selling under concerns over the upcoming U.S. “fiscal cliff.”  At least that’s what the news media’s explanation for gold’s decline has been.  Here’s what Reuters had to say in a recent news article:

“U.S. stocks sold off late in the day to close at session lows on Wednesday as talks to avert a year-end fiscal crisis turned sour, even as investors still expect a deal….

“President Barack Obama and congressional Republicans are struggling to come up with a deal to avoid early 2013 tax hikes and spending cuts that many economists say could send the U.S. economy into recession.”

Now here’s the problem with trying to apply “rational” analysis of the news headlines in making gold price predictions: because the financial markets are by nature irrational and volatile, you can never know from one day to the next how the market will react to a certain piece of news or legislation. 

For instance, doesn’t it make sense that if the U.S. falls off the fiscal cliff and a recession is thereby caused that gold would benefit from the safe haven inflows that would surely follow?  Logic dictates that scared investors would transfer money from equities and into gold and gold equivalents to escape the punishment that paper assets would presumably suffer in a fiscal cliff scenario.  But as we’ve seen all too many times in the past, the market isn’t always logical. 

All of this is by way of preface to a point that I’ve made many times in this newsletter, namely that the best approach to gold is a trading approach which involves buying only when the technical conditions are clearly ripe for a rally.  And we haven’t had a technical buy signal for gold lately. 

Fundamental analysis, while helpful at times, is no substitute for a good technical discipline.  That’s why gold with all its bullish longer-term fundamentals can be under selling pressure in the short term.  It doesn’t really matter what the actual reason is; the only “reason” we need concern ourselves with is that right now there are more sellers than buyers.  Until this situation reverses we’ll remain in cash and let the gold market sort itself out.

It has been reported that John Paulson’s hedge fund group holds $3.67 billion in shares of the SPDR Gold Trust (GLD).  In July, gold-related assets of one of his funds comprised 44% of total assets.  As one analyst has observed, “The big correction in the mining stocks has hurt his performance and reputation.”  Businessweek reported that two of Paulson’s largest funds, Paulson Advantage and Advantage Plus, lost 36 percent and 52 percent in 2011.  The two flagship funds are down 6.3 percent and 9.3 percent as of the end of May with losses continuing into July. 

Paulson is a giant of sorts in the hedge fund world.  He made a $25 billion fortune for his hedge fund investors during the 2008 credit crisis.  Although Paulson is widely regarded as a true hedge fund king, his mistiming of the gold market has cost him dearly in the near term.  While it’s very possible (I would even say likely) that Paulson will eventually be proven correct on his big bet on gold, the point is that you can be the greatest hedge fund trader on Wall Street and still get punished by Mr. Market for ignoring the short-term technicals in preference for the longer-term fundamentals.  Technicals rule over fundamentals in the short term.  Investors ignore this truism at their peril. 

Now having said all this, there’s a chance that the fiscal cliff resolution could turn out to be favorable for gold.  We’ll let the price and volume action of the gold ETFs speak for us, and a 2-day higher close above the 15-day moving average would speak very loudly indeed. 

I note with interest that the aforementioned SPDR Gold Trust (GLD) is hovering slightly under its 150-day (30-week) moving average and is trying to re-establish support around it.  Long-time readers of this report will remember the importance I attached on this longer-term trend line during the boom years of 2009-2011, for the gold ETF always respected the 150-day MA as the proverbial “line in the sand” during corrections in those years.  During the entirety the 2009-2011 rally, the gold ETF never once penetrated the 150-day MA until late 2011 when the last bull swing ended. 

Since then GLD has fluctuated above and below the 150-day MA.  It tried to establish a new long-term base of support above it in this past summer’s rally and is now testing this vital trend line once again.  Note also the extremely high amount of trading volume in GLD that occurred between Dec. 18 and Dec. 20.  This could be a sign of investor capitulation, i.e. a “selling climax,” which in turn would be a bullish sign for the interim gold outlook.  I’d view as very favorable the prospects for a first quarter rally if GLD manages to get back above the 150-day MA next week.

2014: America’s Date With Destiny

Take a journey into the future with me as we discover what the future may unfold in the fateful period leading up to – and following – the 120-year cycle bottom in late 2014. 

Picking up where I left off in my previous work, The Stock Market Cycles, I expand on the Kress cycle narrative and explain how the 120-year Mega cycle influences the market, the economy and other aspects of American life and culture.  My latest book, 2014: America’s Date With Destiny, examines the most vital issues facing America and the global economy in the 2-3 years ahead. 

The new book explains that the credit crisis of 2008 was merely the prelude in an intensifying global credit storm.  If the basis for my prediction continue true to form – namely the long-term Kress cycles – the worst part of the crisis lies ahead in the years 2013-2014.  The book is now available for sale at:

http://www.clifdroke.com/books/destiny.html

Order today to receive your autographed copy and a FREE 1-month trial subscription to the Momentum Strategies Report newsletter. 

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “2014: America’s Date With Destiny.” For more information visit www.clifdroke.com

Will Congress sabotage the economy in 2013?

The lack of a budget deal weighed heavily on investors’ minds on Friday.  There’s a growing sense that Congress may do the unthinkable and allow the U.S. to careen over the edge of the fiscal precipice.  If this happens, the initial shock would have a decidedly negative impact on equity prices, at least in the short term.  A defensive posture is important when the major indices are below the 15-day moving average and internal momentum readings are mostly negative, which is now the case.

With Monday’s deadline for reaching a fiscal agreement imminent, Congress convened a late-night session on Friday in the hope of hammering out a compromise.  Failure to do so would result in automatic tax increases and spending cuts.  I have no inside connections in Washington, so I can only speculate like everyone else what the outcome will be.  Recently I had the privilege of interviewing the venerable investment analyst Bert Dohmen, whose work I’ve long admired.  (FYI, you can read the entire interview by clicking here.)

Mr. Dohmen told me, “Nobody knows if there’s going to be an agreement among the Democrats and Republicans.  The popular view is that there will be a compromise by year end.  But as you know, the popular view is usually wrong.  I can see a situation where there’s a lot to be gained by Democrats by letting the country go over the cliff and then blaming the Republicans.  ‘The Republicans made us do it’ will be the excuse.”

We can only hope that Dohmen’s fearful scenario doesn’t happen.  Regardless of the outcome, the immediate-term trend for equities is bearish based on a reading of the indicators.  We’ll review some of these indications in tonight’s report….

[Next few sections deleted in fairness to subscribers]

Now let’s turn our attention to market volatility.  Last week I cautioned that we’d need to be on our toes from here on out in anticipation of increased volatility.  Along those lines is the disturbing pattern visible in the daily chart of the CBOE Volatility Index (VIX), shown below. 

VIX has since spiked to its highest level of the last six months, which shows us just how worried investors have become in the face of the forthcoming Congressional deadline for averting the fiscal precipice.  A conspicuous rally in the VIX typically means the immediate-term market trend is in its final critical stages and often precedes a short-term market bottom.  But as of Friday, Dec. 28, there’s no indication that a bottom has been made.  Therefore we should be prepared for more potential downside next week.

For the complete report, visit the following link for subscription details:

http://www.clifdroke.com/subscribe_msr.mgi

The problem with “fireman’s poles”

The “fireman’s pole” is a common technical phenomenon of recent years; it’s essentially a conspicuous intraday reversal.  It can be seen in the daily charts of many actively traded stocks and indices, with the most recent example of one occurring in the Volatility Index (VIX). 

Fireman’s poles are creations of hedge fund and High Frequency Trading (HFT) market operations and involve quote stuffing and excessively large in-and-out trades made over the course of a single trading session.   A fireman’s pole is visible whenever the stock price (or in this case, volatility) spikes upward early in the trading session, only to reverse toward the lower end of the day’s range at the close of trading.  The latest instance of a fire pole can be seen in the VIX chart shown below.

The significance of a fireman’s pole is that it paves the way for the same funds/HFTs which created it to ride it back up or down in the immediate term, much like a fireman slides down a pole when responding to a firehouse call.  This corresponds to a re-test of the previous high or low of the trading range.

In the present case, VIX looks like it could easily re-test the intraday high of Thursday’s (Dec. 27) trading range seen in the above chart.  Assuming this happens, it will put some temporary downside pressure on stock prices.  Traders are encouraged to remain aware of this possibility and adjust short-term stop losses accordingly.

A volatility spike

We’ll need to be on our toes from here on out due to the political wrangling in Congress that is clearly roiling the stock market.  There’s a very real possibility that the November-December rally could be unceremoniously cut short in the next few days.  One thing that disturbs me is the chart pattern of the CBOE Volatility Index (VIX), shown below. 

Note the massive intraday reversal in this broad market volatility gauge on Friday, Dec. 21.  Such intraday trading ranges tend to be re-visited in the near term, which means that we could end up seeing a spike in market volatility in the coming days as the “fiscal cliff” debate reaches a climax.  

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Interview with Bert Dohmen

Here is a recent interview I conducted with Bert Dohmen:

 

http://news.goldseek.com/ClifDroke/1355946825.php

 

Bert and I discussed his forecast of the coming China crisis, the global economy, the U.S. “fiscal cliff” and the likelihood of another worldwide financial crisis. 

Interview with Clif Droke

Here is a recent interview I did with Robert Graham of SmartStox Radio:

http://www.smartstox.com/analysts/clif_droke/

Rob and I discussed the outlook for gold, the coming Kress Cycle Tsunami in 2013-2014 and the U.S. fiscal cliff.

The Fed’s fantastic failure

Question: When is an unprecedented economic event tantamount to a non-event?  Answer: When another Fed intervention is announced.

The U.S. Federal Reserve bank announced this week the commencement of a new round of Treasury purchases to the tune of $45 billion a month to replace the expiring Operation Twist.  This is in addition to the recently launched QE3 program that committed the Fed to buying $40 billion a month in mortgage-backed securities.  The grand total of these central bank interventions amounts to some $1 trillion a year in government debt markets.

Financial markets were largely unimpressed with the announcement of QE4, essentially reversing what had been an impressive rally in stocks on the day of the Fed’s policy meeting.  This marks the second time in a row that investors have basically yawned at the commencement of another quantitative easing (QE) program, and for good reason: each successive QE has been followed by diminishing returns in the stock market.  The following graph illustrates the diminution of returns since QE1 was expanded in 2009.

Aside from announcing a new round of bond buying, Fed Chairmain Bernanke also announced that the Fed has modified its guidance, noting its ultra-accommodative stance will remain in place until the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% two years out.  This improved upon the Fed’s previous assertion that low rates would continue until 2015.

The purpose behind the Fed’s Treasury purchases isn’t as much to directly stimulate economic growth as it is to keep interest rates at rock bottom until real estate – the chief economic lynchpin – can fully recover.  The Fed’s hope is that the housing recovery which has been slowly gaining traction will accelerate in 2013 and beyond.  There are good reasons, however, for believing this hope will prove misleading.

The above graphic shows the decreasing effectiveness of the Fed’s quantitative easing programs over the last 3+ years.  You’ll notice that 2009 saw the biggest gain in the stock market of 50%, followed by QE2 in 2010 which saw a 30% gain in the S&P 500.  This was followed by Operation Twist in 2011 which ushered in an 18% gain.  All of these gains were helped by the cyclical factors behind the Fed’s control.

For instance, the powerful 10-year cycle was peaking into late 2009.  This accounted for much of the gains equities saw that year, along with the fact that the market was coming off a major “oversold” condition following the credit crash.  Between 2010 and 2011 the 6-year cycle was peaking, which helped the market maintain is upward trend in those year.  History has shown that Federal Reserve interventions are most effective when a major yearly cycle has either just bottomed and has freshly turned up, or else when a major cycle is in its “hard up” phase prior to peaking.  In years when the broad market trend was down, or when no major cycle was peaking, Fed interventions aren’t as effective.

The last of the major yearly cycles to peak occurred just over two months ago with the peaking of the 4-year cycle.  Moreover, according to the late Bud Kress of SineScope, a major quarterly cycle is scheduled to peak in late March/early April next year.  This is what Kress referred to as the “Catastrophic Cycle” in his writings.  He referenced it as potentially beginning “a 1 ½-year sustained decline a la 1973-74 tantamount to death by a thousand cuts.”  He added that this will happen for “the first time since the beginning of the 120-year Mega Revolutionary cycle which heralded the beginning of the Industrial Revolution in the mid 1890s.”

In one of his final SineScope missives before his passing, Mr. Kress also made the following observation worth mentioning:  “The fourth and final 30-year mini economic super cycle peaked at the 1999/2000 turn of the century.  It produced an all-time high in the S&P of 1,535 which began a 15 year secular bear market scheduled to end with the bottom of the 120-year Mega Cycle in the fourth quarter of 2014.  Halfway in 2007, the S&P achieved an effective double top at 1,565 which began the secular bear market decline which has yet to be equaled.” 

Kress emphasized that the years 2013 and 2014 should prove to be economically disappointing ones.  He pointed out that even with the Fed’s constant intervention in recent years the economy has barely nudged forward since the credit crisis.  Despite record outpourings of liquidity the economy has basically been treading water for the last four years.  Does this not speak to the massive undercurrents of long wave deflation that are currently in force? 

Indeed, the Fed’s notable failure to reverse the economic tide provides strong circumstantial evidence that the long-term deflationary cycle Kress wrote about for many years is a reality.

2014: America’s Date With Destiny

Take a journey into the future with me as we discover what the future may unfold in the fateful period leading up to – and following – the 120-year cycle bottom in late 2014. 

Picking up where I left off in my previous work, The Stock Market Cycles, I expand on the Kress cycle narrative and explain how the 120-year Mega cycle influences the market, the economy and other aspects of American life and culture.  My latest book, 2014: America’s Date With Destiny, examines the most vital issues facing America and the global economy in the 2-3 years ahead. 

The new book explains that the credit crisis of 2008 was merely the prelude in an intensifying global credit storm.  If the basis for my prediction continue true to form – namely the long-term Kress cycles – the worst part of the crisis lies ahead in the years 2013-2014.  The book is now available for sale at:

http://www.clifdroke.com/books/destiny.html

Order today to receive your autographed copy and a FREE 1-month trial subscription to the Momentum Strategies Report newsletter.  

Too few bears...

On Thursday the results of the latest AAII investor sentiment poll was released.  They showed a 1% increase in the percentage of bullish investors, which is statistically insignificant.  The bearish percentage, by contrast, fell 5% from last week’s reading.  

To be exact, 30% of investors polled by AAII declared themselves bearish on the market’s interim outlook.  That’s the lowest percentage of bears since mid-August.  By itself this percentage isn’t earth-shattering in its implication but it does suggest that investors have lost a little too much of their risk aversion in the immediate term.  A few days of “correcting” should suffice to repair the sentiment among individual investors. 

www.clifdroke.com

Some interesting charts

A useful exercise for any technical analyst or asset manager is to peruse the list of actively traded NYSE stocks on a daily basis.  Looking through 100 or so charts a day will normally suffice to give you a good idea of what’s happening in the broad market.  A cursory examination of the daily charts is, in my experience, far superior to looking at the charts of the major indices like the S&P 500, Dow 30, etc.

My daily perusal of the NYSE stock list has taken me through the stocks beginning with the letters “H and “I” as of Wednesday.  Here are a few of the standouts that caught my attention from strictly a chart pattern perspective:

Huntington Ingalls Industries (HII, 42.07).  A strictly short-term speculative play, HII looks like it could carry as high as the 45.00 level or slightly higher.  There hasn’t been enough consolidation at the November-December base for a sustained rally, but immediate-term internal momentum on the NYSE could carry it higher in December.  HII may also play a game of “catch up” with the currently strong defense industry it trades within.

Hyatt Hotels (H, 37.08) looks like it’s ready to emerge from a near-term consolidation/basing pattern.  Watch for resistance between the 38.00-39.00 levels on any future rally attempt.

IHS Inc. (IHS, 95.07) is another stock looking to play catch-up with its publishing industry group leader.  IHS broke out decisively from a narrow, lateral consolidation pattern on Wednesday could rally up to gap resistance between the $100-$105 area.

ING Groep N.S. ADS (ING, 9.43) is one of the few momentum stocks on the NYSE right now.  Having just rallied to a fresh 9-month high, ING is in a technical position to move higher on any further broad market strength.  Volume for ING needs to pick up on the advances, however.

INVESCO Ltd. (IVZ, 25.41) appears to be on the way towards a test of its September high above the 26.00 level.  This asset manager stock is in a strong industry group and could continue feeding off sector strength.

www.clifdroke.com