DJIA

open 12,003.30

close 12,080.38 up 76.02

day high12,099.87

day low11,971.29

today's volume 127,250,559

3mo avg. daily volume 166,653,114

Average P/E  13.4

1 year change +15.59%

DJTA

open 5,147.51

close 5,201.22 up 42.67

day high 5,220.88

day low 5,141.43

today's volume 15,604,888

3mo avg. daily volume 16,502,725

Average P/E  20.0

1 year change +17.31%

ALL THAT GLITTERS IS NOT PAPER PROMISES

As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.  
As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans. 
The actual rule CLICK HERE; a transaction if it "results in actual delivery within 28 days or such other period as the Commission may determine by rule or regulation based upon the longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved;" Alas, the commission has decided not to intervene and keep the exemption status window so small as to affect virtually all exchanges which transact in the gold and silver spot market. 
(from the Zero Hedge Blog) 

Eliminating the OTC markets on precious metals, and limiting purchases to those which can be delivered within 28 days should cause some minor panic movements in metals prices and OTC markets over the next few weeks.  Short term this should be very good for those looking at increasing positions in the tried-and-true physical positions in these markets as one would assume that sell-off's over the next few weeks will hopefully bring pricing down on the metals market in general.  However, as it limits the exposure available in these markets, the long term outlook for physical product should prove enticing to those who understand the bigger picture.

THIS IS SPARTA!!!

The hottest topic these days is Greece.  With sovereign debt piling up and a European Union debating action, or in a less polite way of saying it, doing their best to shirk the Union's responsibilities, buying Greek debt at 30% or so interest seems rather exciting.  However, with default an expectation, one should force themselves into positions of patience, waiting for the "pennies on the dollar" scenario that is likely to present itself.  The European Union may have gotten ahead of itself with all the additions over the years, extended past the strengths of England, France and Germany to those of lesser capable nations like Spain, Portugal, Ireland, Italy and Greece (what we call the PIIGS).  The question remains, does Greece eventually bow out gracefully or not?  The outspoken Merkel and her German counterparts will likely fall back on the wishes of their domestic constituency and leave the PIIGS for the slaughter.  We all would hate to see another Weimar Republic-esque downfall where neighboring countries are pouring into Greece, or Italy, or Spain searching for huge values, leaving the country bankrupt, and the purpose of the Union was to avoid these situations entirely, but when all else fails, Greece doesn't keep Merkel in office, Germany does, so the political pandering will lean more towards the home-front.

International attention has been on this for, in my mind, one reason.  This is like allowing the opposing coach to watch your practice right before the Super Bowl.  The real game to come is the default of larger markets like larger portions within the Euro zone (ie Italy) and of course impending concerns over our own national debt here in the US.  How the IMF and European Union handle this situation will set precedent for coming incidents further down the line.  

SPEAKING FOR THEMSELVES

Options are limited these days.  After the down days posted last week and the HUGE volume of trades followed by a moderate rise today on average to down volume, one would deduce that the markets have lost their luster.  The average person may not be clawing their way past competition for hedge products like land, certain commodities and metals, but they are certainly using their money for mortgage payments and food instead of their brokerage accounts.  As the future becomes more clouded, we tend to adjust our eyes to something closer.  Why debate growth over the next 20 years when we're busy making sure we're fed over the next 20 days.  Bernanke will keep the system afloat through Quantitative Easing packages as long as the rest of the world will allow, but bailing water on a sinking ship doesn't fix the hole, and over time that hold will get bigger.  The markets are speaking for themselves, the only think that has shown real growth in recent years in unemployment figures.  Deflation may be a bullet in the head, but our current inflationary problem is one in the stomach, and the end result will be the same.

Dow/Gold and Your Financial Triangle

A topic of conversation which will soon hit a water cooler near you is that of the Dow/Gold Ratio and how it affects the growth and income portion of your portfolio.  Around here, we discuss mandates, not assets, and how those purposes and mandates play into the different aspects of a well diversified and organized portfolio.  There are only three things you can do with money; spend it, save it, or try to turn it into more money.  So traditionally there has been a basic understand that for part of your assets are held in cash (spend), part of your assets are held in things that hold long-term preservation in mind like gold or land (save) and the finally, part in the more exciting stuff where there's the issues of both risk and reward (growth).

Not surprisingly, by means of the traditional human spirit, we take the first and last of those three categories the most seriously, the first because it means we get to eat today, and the last because we want to drink champagne with our steak, not Bud Light with our burgers.  Although those people who focus on the Cinderella of the story, the mandate that encompasses insurance and long-term asset preservation, tend to have the greatest net-worth gains throughout the course of lifetimes and certainly generations.  The rest of us who are unfortunately not quite on the billionaire list, but hold true to our disillusion of grandeur to attain that status eventually, think those small handful of brilliant money managers who make those assets in only one short lifetime got "lucky," and we can get lucky too...

I digress from the point, but only to emphasize the importance of segregating those three mandates from each other and treating each with equal value.  The easy ones are cash and preservative assets.  At all times hold a position in both cash and long-term preservation assets like gold or dirt.  Those mandates never change and the assets that work best for them rarely change either (although every fiat currency inevitably fails, but that is a story for another day).  However, what to do about that pesky growth portion that gets the most interest and attention.  That does not mean that allocating within a certain asset class is proper planning, like buying a lot of different equities in different industries, but that is what the average Wall Street mogul needs to sell you, because it's an easy way to package and liquidate off the shares of certain items their firm wants to get rid of.  Instead, consider allocating your growth portion among different asset classes that serve different purposes at different times of your life. 

What the heck do I mean?  Since I disagree that holding a broad-based stock portfolio long enough will just naturally cause gains, I recommend viewing that benefits of different industries depending on important factors like Dow Theory, unemployment and inflation/deflation figures, and of course, the Dow to Gold Ratio.  Sure, the US Stock Market has made marginal corrections off of the tragedy that befell 401k and pension plans nationwide back in 2008/2009, but where's the growth?  The rule of 72 helps us ball-park the frequency of a doubling effect on our investments, but it's been 10 years and most people are only up the money they've put in.  All the while, our cost of living has more than doubled. Why not, instead of becoming addicted to any particular growth asset, you consider buying the right growth asset at the right time.  And most importantly, having a reasonable exit strategy.


The unfortunate reality is that this only works because not everyone does it.  We know what happens when everyone plays the game at the same time, the game gives up on them.  For examples, look at the "(insert financial term here)" - bubble.

And now here's the topic at hand, the great and magical Dow/Gold Ratio and how it has played out over the last hundred years or so.

When all that is said and done, how does it apply practically?  Look at the spreadsheet below.  Assuming an initial investment of $30,000.00 in precious metals in the year 2000 at a rounded $300.00 per ounce.  Or, 100 ounces of exposure to the gold market.

At that time you could have purchased 100 ounces of gold or 500 shares of General Electric Stock.  I use GE because they are the original big boy and only remaining one on the DJIA today.  The Dow/Gold Ratio was at 40:1 at the time.  Today, we are roughly 8:1.  By swapping that gold out you could now pick up over 8,000 shares of GE, and at roughly 0.48 cents per share annual dividend, you're now picking up $4,000.00 a year. But look how things compound from here if we move to a 3:1, 2:1, and maybe even a 1:1 ratio between gold and the DJIA.  A swap out of gold into GE at today's dividend yield, and in 10 short years you have leveraged your purchasing power into GE 116 fold, and are earning annually in dividends almost what your initial investment was, 58,100 shares netting $27,888 a year.

For more information, please click on the LINK at the top right of this blog, The McAlvany Weekly Recap and read the article for Sept. 17th, 2010.

DJIA

open 10,631.82

close 10,378.83 down 265.42

day high 10,631.90

day low10,367.33

today's volume 216,390,518

3mo avg. daily volume 219,867,588

DJTA

open 4,449.17

close 4,262.24 down 189.89

day high 4,449.17

day low4,240.14

today's volume 16,618,604

3mo avg. daily volume 21,386,961

The last two days volume has approached something a little more "average."  The markets had gotten so bored it's nice to see some interest, however childish it may be.  I equate today to a spoiled child holding his breath until mom gives him his candy.  Not getting the QE that was hoped for the market responded by telling the fed just how scary deflation seems and that if  the fed is not going to run the presses then Wall Street isn't going to play along.  Deflation has the potential to shift drastically and quickly to an inflation or hyper-inflation, we're just not there yet.

I am surprised by gold holding at $1,200 (or just below).  I traditionally would have assumed a market move like today would have some effect, but nothing-doing.  Perhaps the stand-alone store of value has become stand-alone once more.  The USD  index jumped up almost 2 today, it was certainly due, trading at the low end of it's 200-dma for a while now, but it is still lagging compared to the Euro.  There may be an excellent exit point from the dollar into the Euro coming, but I'm no currency trader, so I'd have to spend some time picking my targets... if I were so inclined. 

If I were a betting man...
 
With increasing volume on the declines and no new highs being made, one can assume the continuation of the slow drudge downward.  I still don't know if we'll see any major spikes down in potential investments outside of a liquid cash position, or preferably physical precious metals.  I'd bet on a measured increase in the dollar coming with no great FOMC announcements from yesterday in the short run with a play into the Euro before the bottom drops out.  The bottom will drop out of this eventually, I just hope it is further down the road that it would otherwise look right now... below is the Industrials chart where I'm seeing similar movements over the past three years which I've circled.  Noticing both price changes and volume changes.  If this is Dow Theory, than we are still waiting for a few key indicators, but Dow Theory is not the god of the markets, only one of many tools.  Other tools worth having in your kit include understanding of GDP, lending rates, employment figures, and a little common sense.

DJIA

open 10,468.82

close 10,674.38 up 208.44

day high 10,692.20

day low 10,468.59

today's volume 167,642,201

3mo avg. daily volume 234,069,632

DJTA

open 4,425.34

close 4,504.30 up 81.36

day high 4,505.97

day low4,425.34

today's volume 17,924.872

3mo avg. daily volume 23,077,711

Today's missive...

I love days like this... Days when someone, who doesn't understand the correlation between volume and pricing wonders why I still have a smug grin on my face.  I hope I'm a bigger man than to rub it in, but up days have half the volume as down days, and in today's case, it even had about half the volume of the 3 month average.  We've seen a few of these days.

If I were a betting man...

So who needs QE if the market continues to rise until elections?  Probably no one.  But there will be something, I'd bet on it.  I'm holding my long positions where they are, but a few things have been tempting me.

The two charts on the left show first, a pro-shares short fund on Lehman's 20+ year treasury, and below it, the US Dollar index.  What I find interesting is that as the dollar has been declining, the TBT has as well.  As we all know, the market has a remarkable way of discounting every piece of information available.  With the USD approaching it's 200dma and the shorts showing no interest whatsoever, on top of a Dow that HAS to stay up through elections, perhaps my QE predictions will prove incorrect... assuming RSI assumptions can defeat common sense predictions.

Volume still argues a decline in the Industrials which should require a bout of QE.  Perhaps short term QE causes a bump up in the USD as it may tinker with overnight rates and cause a short exodus into the wasteland that is the USD.  Hopefully, unlike Moses and his people, some from this generation will survive on more than just mana, and may end up in the promised land that is the bargain-basement liquidation-priced P/E and Q ratio's when no one else is interested.

I'm comfortable in my shorts and my gold positions, but if I were a betting man, I'd play a short term rise in the USD and then load the boat on the shorts coming into the winter.  As long as I have my working cash position, I don't care how long it would take as any good student of The Theory knows duration and extent are never known, just the trend.

I'm off to read Russell's daily, should be good things.  I'm curious to hear what he has to say about today. 

Premises, Laws, Rules...

... call them what you will... but how do the basic tenants of Dow Theory stack up today... Thanks to Rhea and Russell, here are the 10 principles of Dow Theory and my comments attached.  These were taken from Russell's book, "The Dow Theory Today" and although there is some of my own writing in here, for the sake of respect, assume all the following is direct copies.

"As we have been barking for the past two months, when spring crises are followed by summer rallies that occur without a meaningful change in economic and financial conditions, a more intense crisis tends to resurface in the autumn and stocks deline faster and with a greater magnitude than the summer rally."

- The King Report 07.08.2010

Next week options expire and earnings reports kick off.  I stand by my 10,200 potential secondary trend high on the DJIA.  Today's cooling off of this weeks early "rally" (so to speak) was apparent to more than just me.  I think the markets have some legs left for the next week or so as the options expire a push upwards to cover those positions.  However, average or below average volume screams short term trading manipulation.  I wouldn't be surprised if we close within 20 points either side of our open today.  More to come.

Thank you Russell

Richard Russell points out yesterday that the DJIA has closed below previous lows, but the DJTA needs to confirm, and close below $3,792.89 and HAS NOT.  At the time of this writing the transports are up 68 for the morning at $3,974.42.  As I mentioned regarding volume yesterday, what appears to be a building primary bear trend would not deviate due to no significant decrease in volume of late.  However, Russell's the master, and a short term upside reversal does make since due to the industrials and transports not confirming each other recently.  We shall see.  Perhaps I lean too heavily on volume for the secondary trends.  With all said, this authors set for investments for the primary trend, and should a secondary upside reversal prove itself in the near future, I see it only as an opportunity to increase my positions.