Daily Investment Interpretations

October 9, 2008

2008-10-9:   Whew! Bad today and expected to get worse tomorrow: Callaway: Oct. 9 is D-Day for Dow. What should we do? I hesitate to suggest what you should do because this market is so fickle and hyperactive. After thinking about it, I''ve decided that I'm not going to attempt to short the market tomorrow by buying an inverse ultra fund. Rather, I'm going to wait for the inevitable relief rally that has to come somewhere in here. What's taking place right now is panic selling, with the good sold alongside the bad. The only reason I'm not already aggressively buying is that we may still be in the early innings of this meltdown. After all, in 1929, it took three years after Black Monday and Tuesday for the economy and the stock markets to reach bottom in 1932. (The stock market didn't recover until late 1954--25 years after the fall began.) Tomorrow, when the market opens, I plan to buy substantially more gold (GLD) than the 50 shares I currently own. The GLD fund purchases actual physical gold and stores it in proportion to the money invested in the fund. A Minyanville article, Minyan Mailbag: The Gold Disconnect, endeavors to explain why gold hasn't already gone higher. The article observes that investment-grade gold is virtually unobtainable at market prices: see the American Precious Metals Exchange site. This APMEX site will sell you a one-kilogram bar of .9999 Fine Gold at the instantaneous price of $29,978.28, and they will buy it back from you for $29,317.58. The U. S. mint is still selling gold proof coins at their original prices (which have been well above the melt values of the coins... e. g., $1,119.95 for an American Eagle One-Ounce Uncirculated Coin). A week ago Monday, APMEX would sell you the gold coins of your choice for a few dollars over their melt prices. Not any more! The few coins still available run 15%-20% above their melt prices. A this moment, the only American Eagle One-Ounce coins available from APMEX are 2001, 2004, and 2005 proof coins for $1,181.10, and 2002 One-Ounce proof coins$1,146.10. Their inventory is falling more each day, reflecting the run on gold that's taking place around the world. (South African Krugerrands seem to be unavailable.)
    To recap what the markets did today, the Nasdaq fell 95.21 points to 1,645.12; the Dow tumbled 676 points to 8,579.19, and the S&P lost 75.02 points to close at 909.92. The Dow has fallen 40% from its 2007 high exactly one year ago today of 14,199. Since Monday morning, when it opened at 10,325, the Dow has fallen 1,746 points, or about 17% (in four days). But the really interesting index was the VIX, which peaked at almost 65 and ended the day at almost-64 (63.92). That makes the VIX at least one-third higher than its highest prior reading of about 48 over the past 15 years. And that, in turn, makes this already the deepest bear market since 1987. It would be interesting to know whether or not today marked a capitulation of the bulls, with a greater-than-9:1 down-to-up volume ratio but I don't know where to look for that information. Assuming that tomorrow starts as expected with an initial move downward, it could become a turnaround day. There's a reflexive rebound coming up ahead somewhere.
    The markets have fallen about 25% since a week ago Monday. By contrast, in 1974, it took more than three months for the markets to drop 25% after their peak in mid-March, 1974. Also, the S&P 500 took almost five months to fall 10% from the dip at which the updated pink overlay stops to the first dip in early July, 1974. By contrast, the current curve would show a drop from 10,459 on September 18th to 8.579 (1,880 points) on October 9th--an 18% drop in three weeks. The 2008 curve has now deviated sizably from the 1974 curve in that the 2008 market profile is much steeper.
    When I begin to buy ETF's again, I'll probably purchase QLD.
    The two charts below depict the "Sum of currency in circulation, reserve balances with Federal Reserve Banks, and service-related adjustments to compensate for float. Calculated by the Federal Reserve Bank of St. Louis"


    The rate of rise for this measure of money is approximately $50 billion a week.