You Have Seen The Sun, But You Ain't Seen It Shine !

After spending most of May slowly working its way higher, gold has sold off for three straight days this week as the euro-dominated dollar index has risen back to near its mid-May peak. As of this morning, the euro is lower again and the dollar index is higher, yet gold is rallying and up over $8. For me this divergence says this three-day pullback is likely over, and the uptrend in the shares and metal is about to resume.

I would also note that the selling in the gold futures for the past three days (like by bears watching the euro slide and betting against the metal) was never supported by any selling of physical gold from the GLD ETF. In fact, GLD (Streettrack Gold Holdings - an ETF traded in kiasu exchange too) purchased another six tonnes yesterday into the face of the decline. When was the last time we saw action like this? Interestingly enough, it was back at the end of the November/December correction in gold (see the chart above).

Let’s see… oil is over $120, gold has broken out of a 30-year trading range above $850, and the bond market finally broke to a new low for the year yesterday too? Hmmm… Anyone smell any inflation?

Meanwhile, most of the herd remains in denial and is still praying for some sort of disinflationary Shangri-La to magically appear as the dollar and stocks rally and inflation goes to zero overnight as commodities collapse. That's a nice bedtime story for children, but this is the real world. Inflation is not going to magically go away and allow all the money and credit growth that's now occurring to pour back into financial and real estate assets and "reflate" them, as occurred repeatedly following busts in the Greenspan era. That game has been played once too often and is now over.

Those Fertilizer Prices Will Kill You !

Not everyone's complaining about the skyrocketing price of food.

Manufacturers of potash, phosphate and other plant additives have seen demand for their products soar. Tight supply has pushed up prices.

The Wall Street Journal reports fertilizer costs have jumped more than any other agricultural input, up 63% from a year ago compared to a 43% increase for fuel and 30% for seeds. Potash -- a rock that's ground up and used to strengthen plants -- has soared from $230 to over $700 per ton. Phosphate prices are also up more than threefold.

The push for alternative fuels has squeezed acreage, as farmers replace fallow ground and less profitable crops with corn or palm oil trees. Although this pop in demand is partly to blame for higher fertilizer prices, industry experts cite supply constraints as the chief culprit. Decades of weak commodity prices forced manufacturers to ratchet down production capabilities. Now, the structural shift in demand has caught fertilizer producers off guard. Supply-demand dynamics, along with pricing power, has sent prices soaring.

In response, farmers are scrambling to control margins. As feed and other input prices rise, they charge more for meat, chicken and eggs. Food price inflation is amplified, as supplies aren't rising to meet new demand from developing countries.

Irrespective of commodity market gyrations, demand for crop additives remains high. A recent New York Times article cited the availability of chemical fertilizers as one of the primary reasons much of the developing world has turned the tide against chronic malnutrition. As costs outstrip poor farmers' ability to pay for the additives that increase yields, those advances are threatened. Manufacturers around the world are racing to increase production capabilities, but new plants won't come on line for years.

Investors and academics continue the debate over whether commodity prices are operating in a bubble. Speculators, many of whom are large enough to move markets on their own, are contributing to the spike in prices. Meanwhile, consumers in both the developed and developing world face higher prices for what they need most: food and fuel.

S&P 1375.93 - " ALL.. YOURS ..! and How Left You ? "

Walking on hot coals is a dangerous phenomenon, but yet, even after such a horrifying beginning to 2008, individual greed levels never cease to amaze when it comes to the “possibility of missing out.”

Since the 2007 year-end report, Kevin A. Tuttle of the coveted - Tuttle Asset Management has been discussing the “highly probable” topping of the U.S. equity markets and end to the cyclical bull run. Obviously this is neither a revelation nor an under-discussed topic by any stretch.

Over the years in its technical pieces readers have seen, a multitude of times, the term“Inflection Point.” In short, the time is now and now is the time!

Many market pundits have been clamoring about the March lows being the market lows and “it’s off to the races!” Well, let me play devil’s advocate for a second and assist you in making a more “informed” decision. When the SPY broke the 4-year cyclical bull market trend (which was tested nine times throughout the years), it was like a waterfall reminiscent of 2001 – except it was financials, not the Internet. Nonetheless, when devastation of this magnitude occurs it is not typically resolved overnight (or even in a month). Quite often it’s actually the start of something bigger, and more sinister.. Regardless, the tendency is to retest and confirm.

As you can see in the 5-year weekly chart above, there is currently a light volume retest of the broken trend and a stochastic (market momentum) which is about to roll once again. But there's more. Looking at a 2-year daily chart we can determine the SPY has come upon a massive 4-conjoining resistance levels… (The downward trend from November '07, the 200-DMA, a 50% Fibonacci retracement level and the Floors & Ceilings going back two and four years).

This note is not to scare, nor force decisions in either direction. It's merely to inform and open discussion to massive possibilities: Consumer? Where will you be in a year?

Looking ahead, please remember that if something miraculous does occur and the trend does in fact change back to bullish, there will be plenty of time to invest accordingly.

Walking on hot coals may be exciting.., but I’d rather have a good pair of shoes! And luck is only for the rabbits ! Hak !

Believe The Oil Hype ?

I think we've run out of metaphors for crude oil. At this stage of the game it's rocketing like a spaceship- just hit USD135.09/barrel today.., but even that image fails to do it justice. I really believe this is as nuts as anything we lived through in the late 1990s. Well, not everything, but I bet crude oil predictions take on an eerie similarity to the Internet stock price sweepstakes that defined the dot-com boom.

It's only a matter of days, maybe hours, before some nutcase predicts crude oil will reach $250 a barrel. Do I hear $300? Without a doubt you will.

Ironically, one of the things that keeps it going is the collective discussion of how goofy and illogical it is. The stock market isn't cut and dry, black and white, rational or irrational. The market doesn't make sense all the time; some might say it doesn't make sense most of the time.

Crude oil is so far off the charts it could retrace to $125 and still hovers well above its key moving averages, or freefall to $95 and it'll only tickle its 200-day moving average.

This lunacy isn't going away soon. Is there anyone out there that wouldn't be a buyer of crude on weakness? Unlike the old Internet hype, there's more than a modicum of truth to the hype in crude.

Ironically, a lot of hot oil and energy stocks stumbled yesterday.

In a strange way, hype is just paving the way for the inevitable. Logic is at work here, it's just been hijacked by hysteria. And logic dictates that at some point -- perhaps over the next few years (or months) -- crude will hit $200 a barrel. Oh boy... !

"In the midnite hour...she cried more, more, more... !" - Billy Idol.

Goldilocks Story Of Our Time.

What is a "Goldilocks economy"? The phrase is customarily used to describe economic conditions that are neither "too hot" nor "too cold."

Once upon a time there was a family of three bears; a mama bear, a papa bear and a baby bear. This family of bears lived in a quiet cottage in the woods. One day, waiting for their porridge to cool, they decided to take a leisurely walk in the woods, as bears are known to do.

While the three bears were out on their walk, a little girl named Goldilocks, who happened to be playing in a field nearby, discovered their house and also the porridge inside, which, let's be honest, is not really porridge, but a metaphor for the collective savings of the three bears which they wisely keep under their mattress for fear of an economic collapse.

Being curious (and an expert burglar) Goldilocks managed to break into the three bears' house, though she later claimed the front door was left "wide open." Once inside, she examined the first bowl of "porridge'" (a metaphor for U.S. Treasuries). "This porridge is too cold!" she exclaimed.

So she whipped out her Motorola and ordered the Federal Reserve to take some kind of policy action to try and force this "cold porridge" out of the hands of domestic holders and the proceeds into equity markets where returns would look great, even to bears, as long as the bears didn't bother to notice that the returns were due solely to the devaluation of their paper currency.

Moving on to the second bowl of "porridge," which is clearly gold, Goldilocks noted, "This porridge is too hot!" So she dumped it onto the open market, even going so far as to sell gol... er, "porridge," that she doesn't even own and can never ever possibly physically deliver in order to make it unattractive to bears.

Finally, she moved to the third bowl of "porridge," which in this case is a metaphor for a stack of U.S. dollars that the baby bear kept under his mattress to use as "writing paper." "Ahhhhh," Goldilocks said. "This porridge is just right." Then, she abruptly fell asleep in the baby bear's bed.

As Goldilocks was sleeping, the three bears returned home."Someone's been eating my porridge," growled the papa bear."Someone's been eating my porridge too," growled the mama bear."And someone's been messing around with my writing paper and used it all up!," cried the baby bear.

Just then, Goldilocks woke up, saw the three bears and screamed. "Help!" she cried. "Print more money!" she demanded. "Buy something... anything!" she screamed.But it was too late.

By 10:30 a.m. the corporate debt market had locked up and forced selling by overleveraged hedge funds was spilling over into commodities and equities markets. By 11 a.m. the first round of trading curbs kicked in, but, perversely, this had the ill effect of actually withdrawing even more liquidity and bids from the market. By noon the Federal Reserve had called a special meeting with Wall Street's money center banks to see which, if any, could remain operable through the end of the week.

Goldilocks, meanwhile, was vilified in the press for her reckless breaking and entering and total disregard for good porridge. The bears felt vindicated, but not particularly good. After all, in a real bear market, no one wins, not even the bears ! Hak !

"May All Beings Be Well And Happy."

".. Let no one deceive another nor despise any person whatsoever in any place. In anger or ill-will, let him not wish any harm to another.."

- The Buddha.

Zakat Or IRD ?

Raja Petra : "I urge all Muslims to pay their zakat and fitrah in any one of the five Pakatan Rakyat states. Are you aware that you can pay zakat in lieu of your income tax? And you can request that your salary be deducted monthly and the money be sent to the state zakat office instead of to the IRD."

"No, it is not exemption from tax like if you were to donate to a tax-exempt charity. It is zakat in lieu of tax. That means when you pay zakat you need not pay income tax.Say you have to pay RM1,000 income tax per month on your salary (or RM12,000 per year if you pay annually). You just pay the money to the zakat office instead and send the receipt to the IRD and consider your income tax fully paid.Why do this? Well, when you pay to the IRD, the money goes to the Federal Government and Umno will use the money. But when you pay zakat the state gets to keep the money and in the five Pakatan Rakyat states for sure Umno will not be able to get its hands on the money."

"Think about it. Zakat is mandatory under Islam. So you will be fulfilling your Islamic duty plus you will be helping the five Pakatan Rakyat states plus you will be denying Umno that money. That’s killing three birds with one stone.Okay, zakat is only 2.5% of your wealth (zakat harta) or income (zakat pendapatan) while income tax is higher. So, pay the higher figure. After all, you will have to pay it anyway whether you pay zakat or income tax. And imagine how many poor and destitute people, the homeless, students who need financial aid or scholarships, orphans, single mothers, old folks who can’t work, handicapped people, etc., can be helped with this zakat money."

Oh, Those Darn CPI Numbers !

Inquiring minds have been pondering Volcker's latest statements regarding stagflation, the Consumer Price Index (CPI), regulation of banks, and even the need for an administrator to watch over the Federal Reserve.

Let's see where Volcker is right and wrong, with his analysis of the current economic situation and what to do about it.

The U.S. economy is not now in the kind of stagflation crisis it had been in, in the late 1970s, former Federal Reserve Board Chairman Paul Volcker told Congress today, but it's not impossible.

"I think there is some resemblance now to inflation in the early 1970s,' he warned the Joint Economic Committee. The economy obviously does not have the full-blown, double-digit inflation crisis that finally appeared, but he said, 'there is an underlying tendency to inflation.'Volcker also told the committee that the Consumer Price Index may understate the actual rate of inflation. For example, during the real estate boom, the housing component of the CPI rose only slightly. And to consumers, 'when food and energy are running high, not for a couple of months and dropping, but running high for years, it doesn't sound quite right, it doesn't feel quite right."

As for not believing the CPI, I believe virtually no one does. Furthermore, as Volcker points out, housing was dramatically understated for years. Housing is overstated now. However, Volcker fails to go far enough with this line of thinking.

Other Problems Inherent With The CPI :-

The CPI cannot measure stock prices or prices falling because of rising productivity. Peak oil is a factor. So is worldwide demand. It's debatable that prices can even be accurately measured or that there is any such thing as a representative basket of goods and services to measure. Most importantly: the CPI is useless in measuring the magnitude of credit bubbles that manifest themselves in other ways besides prices. Finally, the CPI is a lagging indicator.

In my opinion, the final analysis shows that anyone who believes the CPI is (or is even supposed to be) a measure of inflation is making a huge mistake. The solution is to start with a sound definition of inflation and deflation: Inflation is a net increase in money supply and credit. Deflation is the opposite.

Volcker did not forecast a recession, rather he talked about a necessary rebalancing of an economy that depended too much on consumption financed with borrowing. 'Somehow that has to change,' he said. 'It's a kind of a rough ride but we have to have it happen to avoid more severe consequences.' And in fact, consumption is declining and exports rising, 'laying the basis for a sustained recovery.'

In my opinion, there is clearly a need for rebalancing. However, there is no basis whatsoever for believing a sustained recovery is possible any time soon. The recession is barely a few months old, and some do not even think it has started yet. More to the point: The jobs picture is miserable, banks are horrendously undercapitalized, and foreclosures are mounting. Banks failures are coming.

And, having necessitated Fed intervention to rescue the markets and economy as a result, the investment banks which used the financial innovations now need to face the same kind of regulation as commercial banks. 'I believe there is no escape from the conclusion that, faced with the kind of recurrent strains and pressures typical of free financial markets, the new system has failed the test of maintaining reasonable stability and fluidity,' Volcker said.

I feel the problem is not lack of regulation. The problem, I feel, is that the Fed itself is distorting the free market. Eliminate the Fed, eliminate fractional reserve lending, and eliminate borrowing money into existence and none of this would have happened, at least to any significant degree.

The Crude Oil Super Spike.

If Goldman Sachs is correct, and crude is on the verge of a so-called super spike. Just imagine a move to $200 in crude can now be logically argued. According to a report from Goldman such a scenario is possible during the next six months to two years that sees crude spurting to $150-$200 a barrel. Of course that couldn’t happen if the world wasn’t doing well financially, yet the amount of animosity would be so great that there would be blood.

While all eyes are on a possible super spike in crude oil prices, equities are bubbling up like they're ready to gush significantly higher. For all the speed bumps that lay out in front of the market, stocks have momentum. There's a wind in the sails of the market. I continue to fret (just a tad) about volume - it's the only thing that gives me pause - and I would love to see some 2 billion share days. I also would like to see greater participation but that's a function of thin volume that is always seeking out opportunity. This would suggest a lot of long term money is still parked on the sidelines. This makes sense in part because long term money doesn’t have to sweat all the gyrations of the stock market. The great news is that these investors aren’t interested in picking the bottom and once they’ve committed, they’re in and I have to believe they're ready to put money to work.

One of the positive signs to the market in addition to its obvious resolve is that key sectors are participating including transportation stocks. Despite the surge to record highs in crude, transportation stocks have made a magnificent move, mostly under the radar. That Dow Jones Transportation Average is approaching a double top and that is great news for the broad market. By the way, for you beginning chartists, take a look at the perfect double bottom the index put in back in January.

What ..! MAYBANK Is Buying A Paki Bank !

Following the recent spade of aggressive stakes acquisition of U.S. heavyweight financial institutions by Asian sovereign funds, right after the general election, MAYBANK too is adding MCB Bank of Pakistan into its shopping cart. Generously paying 6 times its book value.. I am sure they have sane rationales behind this shocking purchase when explanations are needed to quell the bewildered shareholders. They "always do"! Hak.. !

How would the market react to this announcement come Monday? The counter closed at RM8.00 on Friday before the trading halt. Spotting a clear bearish divergence with MACD in the monthly chart and closing at the week low, the law of gravity is still very much in forced. Looking down from this precarious perch, this Humpty-Dumpty will be attracted towards the nearest reliable cluster of support area at RM6.80-RM6.30 before obtaining meaningful temporary respite. Wowh ! Just imagine what this can do to the KL Composite Index come Monday!

Presentation at Merrill Lynch’s 2nd Emerging Markets Investor Forum, Singapore (12th-14th Feb’07) http://www.mcb.com.pk/ir/pdf/Singapore-notes%202.pdf