Bill Cara: "Bear rally is over", Mon., Sept. 11, 2006, 11:30 AM

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September 11, 2006

"Bear rally is over", Mon., Sept. 11, 2006, 11:30 AM

On Wed. Sept 6 at 10:26am ET, I submitted an article to ADVFN.com which was not published until Sat. Sept 9. In it I opined that the rally in the U.S. Bear market was probably over.

Gold (Dec) is down $26 to $591 today. But traders who figure that gold is the problem had better check the whole market.

What is happening today around the world is that the equity Bear is in full motion. Nothing has changed from my continual forecast of a much lower U.S. equity market. The equity market is unfolding as I thought it would for the reasons I have consistently expressed here.

What is different, and perplexes me, is that the $USD has gained much strength, and that commodity prices (oils and metals) are falling so quickly. While I did note about ten days ago that the $CRB had broken down technically, I am surprised at the rapidity of the move, and with it the depth to which precious metals have fallen.

I suspect that hedge funds and momentum traders are playing this commodity sell-off move with a $USD hedge. Unfortunately, the speculation that took oil to 80 and gold to 730 could drive oil to 55 (-31.3 pct) and gold to 540 (-26 pct).

I don't know the extent of the decline, but I do know that at the present level, gold is a bargain, and for every $10 lower it goes, it will be a bigger bargain.

If the commodities Bear phase continues at this pace, and works through to the levels noted, then there is no doubt in my mind that the economy is headed for a hard landing, many hedge funds will collapse, and corporate earnings will be quickly turned to losses in some cases, and major disappointments in others.

In that event, I do see the worst case Dow = 8800 forecast I made early in the year to be the most probable result.

But, and this is critical, the problems with the U.S. twin deficits continues, and the only way out of this stagflation mess is for the Treasury/Fed to reflate, which is the same solution that central bankers took in the mid-70's (the last time stagflation existed).

And we all by now recall what happened to gold at that point. It traded wildly both up and down, but went on to set a record high that was close to $800. In inflation-adjusted terms, a comparable gold price in the next Bull cycle would be much higher than any gold price I have forecasted here.

Why I am writing this, at this point, is to remind you that the past year corporate financing market has resulted in almost all gold companies, including explorers and even penny stocks, to be debt-free and cash-rich. The properties these companies control and are presently exploring will result in new discoveries and much market promotion in the future. The lower energy costs, if sustainable, will result in lower production costs.

And when you look at the current cash operating costs of companies like Goldcorp and potentially with Crystallex, and you look at a gold price of $540, you have to smile.

Then you consider what the profitability will be with the gold price at $700-$850-$1000-$2000, and you can only conclude that the present price pull-back is resulting in the Buy of the Generation.

Unlike the Internet Bubble of 2000 when debt-laden corporate shells were trading at billion dollar market caps, these precious metal miners are cash and property rich and can immediately sell their production. They can easily withstand ANY price that precious metals are going to reach in the Bear phase of the current cycle.

Today is a day when you should be making plans to attend gold shows in Toronto and Denver on the 24th-25th of this month. That will present you an opportunity to meet the management of the companies you might wish to be investing in.

If you can't attend and see for yourself that lower gold prices do not present a deterent to these companies, then go to their websites and read the literature.

I'm going to organize a group of readers who wish to collaborate on research of the micro and small cap precious metal exploration and development companies. There is so much data out there that one person operating independently couldn't possibly do it all. But together, we can do what's needed. Whoever wishes to join such a group, send me an e-mail marked "Micro-cap precious metals".

We can have our first info meeting at the Toronto Gold Show on Sept. 24.

Posted by Posted by Bill Cara on September 11, 2006 11:30:28 AM | Category: Cara Today in the Market

Discourse

Hey Bill, are you only looking for professional traders to join your "micro-cap PM" group?

Posted by: Fazeli at September 11, 2006 12:00 PM [link]

The erroneous assumption in your USD prediction is that foreign central banks won't inflate their currencies at an even faster rate than the US Federal Reserve. Japan and China are inflating at a faster rate, especially under their Keynes/Mercantilist economic policies. The Europeans probably aren't doing much better. Gold should be climbing irrelevant of any currency because they're all being inflated. The USD/GLD hedges are likely holding gold in its current range.

Posted by: CashForFlow at September 11, 2006 12:53 PM [link]

Bill,

Will the findings of this research be available here to non volunteers?

Posted by: NYUgrad at September 11, 2006 12:53 PM [link]

CashForFlow...

I've thought the same thing for a long time.
The US Dollar ain't going down...it ain't going up. Its going nowhere. Its back to its range where it was prior to the 1998 Asian Crisis.

All the dollar bears have been growling for so long -yet they forgot to notice one thing - the dollar stopped going down.

That Gold "Should" be climbing - means little to me. Its going down. So either avoid it or short it.

At the moment "Hard" is being sold.
Some of the money is obviously moving into "paper" - so again all the US Stock Market Bears have also been wrong.

The question is - when the dust settles - and earnings start coming out - was Jun/Jul the internal low - or is it still coming?

If its still coming - I think everything will go lower as people just plain "cash out" of all assets - and struggle to pay their bills and mortgages.

IMHO -Tradesman-

Posted by: Tradesman at September 11, 2006 1:25 PM [link]

Commoditties(CRB index) versus Bons (10YR treaesuries.
I've read somewhere that there is a direct, strong and key relansionship between commodities ans Bonds.
I compared the $CRB and $TNX...

http://stockcharts.com/webcgi/perf.html?$CRB,$TNX

...but acording to the chart, the teory doesn't seems to hold...
Any thoughts on this?

Posted by: Bullion at September 11, 2006 1:36 PM [link]

When I look at the monthly chart of the USD index, I see an inverse H&S pattern and the beginning of what could be a series of higher highs and higher lows. Makes we wonder if we're in the midst of a 50% retracement of the 2002-2004 decline...say to about the 100 level.

I'm looking at this chart:

http://www.tfc-charts.w2d.com/chart/US/M

I also see the USD rose for the first 2 years of the 2000-2002 bear (believe someone mentioned this earlier), so a rising USD does not run counter to the forecast imminent decline in equities.

Any thoughts?

Posted by: glenn-mp at September 11, 2006 2:09 PM [link]

Many of the short positions dictated by historical chart behavior utilized by traders are much less valuable than before, and I might add could even be used in a counter-intuitive way on equity markets for profitable trades.

The powers that be are going full force to keep the equity market up. I would bet that precious metals and oil continue to decline over the next 4-6 weeks based on the fundamental knowlege that maintaining economic stregth before the elections is paramount and keeping these key commodities down plays into their goals.

Posted by: rick s at September 11, 2006 2:19 PM [link]

rick s

I agree with that, part of the reason is that there are so many people playing the market now - every move is faded - it has all become a game: buy bad news, buy terror, sell the rally etc...

However the market cannot be "kept up" unless there is true value there - so time will tell if this is just a game of "hot potato" or if something bigger is happening that all the doomsayers and pessimists have wrong.

Regarding oil and metals - these have a history of manipulation - mostly upward in price. If the market is selling down now - I think it is just that - selling down. Once a market begins falling - it falls often of its own accord - and does not need to be manipulated down.

Regarding "Economic strength before the elections" - this could prove a fallacy if earnings and preaccouncements say otherwise.

Personally I don't think the markets are being "kept up" - money is simply flowing out of 'Hard' asset funds into paper.
But if I'm wrong and the US is intervening in the markets - this probably means we are already in a recession. The Fed must be desparate.

Japan did this (government bought stocks and bonds)- but when traders got wind of this bonds and stocks fell even lower.

Funny thing is, if Americans were asked if their government should support their stock market - I think we all know what the answer would be - a resounding 'Yes'.

I still see this as a very short term trading market. Short commodity stocks, long non-commodity US stocks on sell-offs.

-tradesman

Posted by: Tradesman at September 11, 2006 3:46 PM [link]

tradesman, if what you say is true, what does that really say about Americans?

Posted by: number2son at September 11, 2006 3:49 PM [link]

I wouldn't derive any conclusions from today. Typically the Monday before triple witch is very strong for the markets. This part is going according to script. This should stop playing by early next week.

BTW, dejavu for QQQQ and DJIA going high, and Russell 2000 not quite following.

(Long GLD, thank you Mr. Market)

Posted by: ursus at September 11, 2006 3:50 PM [link]