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Peter Atwater: Dickensian Markets


Depending on your investment, it is the best or worst of times today.

The following was shared with clients of Financial Insyghts on Friday:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

When Dickens first shared these thoughts he was alluding to London and Paris during the era of the French Revolution. Were Dickens to reappear as an astute financial news reporter, I think he might share the same thoughts for the two worlds of technology stocks and gold today. For the former, things have never been better.  For the latter, things have never been worse.

That we're all "going direct to Heaven" can be seen most easily in this stock chart of Amazon (AMZN). Last night's surprise quarterly profit sent the stock up over 17% in after-hours trading. The online retailer is now worth more than Wal-Mart (WMT). 

As this Tweet from Myles Updland of Business Insider highlights, the analyst community voted as a block this morning:

This morning's message is clear. Thank goodness Jeff Bezos ignores short-term investor demands and invests for the long-term. As Josh Brown put it in his blog this morning, "Lucky for shareholders, Jeff Bezos still won't listen.

"Lucky indeed, although most professional investors will demand credit for their skill in overweighting going into earnings last night.

As "best of times" crescendos go, this one looks like it will be one for the history books. Not only have we seen redemption, if not an outright resurrection, for Mr. Bezos, but all of tech is on fire. The bubble bust turned out to be nothing more than the 1987 Crash - the pause that refreshes.

But please appreciate the attention that tech is getting these days.

This week the Economist is using prime real estate to celebrate Silicon Valley's triumphant return. And note, too, how much the NY Times coverage of Silicon Valley mirrors the Amazon stock chart above.

To heaven indeed.

Even more, the economic backdrop now appears to support equity investors' extraordinary enthusiasm. As Tom Keene and the headline writers at Bloomberg put it after yesterday's jobs report:

So what did that "most optimistic chart" look like?

On the surface, Mr. Keene is correct; the figures from yesterday were the best in forty-two years. Things do look great.
But please note that every major bottom turning point in the chart above marked a major peak in the US stock market. At peaks in confidence, everyone is enthusiastic -- employers and investors alike.

And I don't mean to demean yesterday's jobless claims figures even more, but the fact that they were "the best statistic since November 1973" is not helpful. 

As this chart shows, from November 1973 to January 1975, US equity markets lost more than 40% in value!

But there is one other important aspect of the current "best of times" mood that is worth noting. For the equity bulls, winning is no longer enough. Now the victors want the heads of the perma-bears on sticks.

Earlier this week, Michael Johnston, a senior analyst for Fund Reference, went after by name thirteen different "perma-bears" for their now horrific-with-hindsight forecasts.

While it may seem peculiar, as a measure of mood this kind of victory lap article is important, especially when it is praised and celebrated by others, as Mr. Johnson's blog was this week.

Back in the spring of last year, just before the summer correction, this article was posted on Marketwatch:

Mr. Johnson's blog this week took Mr. Gold's column and double-downed.  This time it was personal.

At extreme peaks in confidence, it is personal. An infallible crowd brings out vilification.  The losers must be named and held out as examples of what not to do. 

"Burn the witches!"

And to that point, it is time to now look at the "worst of times": Gold.

If the equity bulls have been hostile to the perma-bears, their attacks are nothing compared to what has been foist onto gold and the gold bugs this week -- most of which is unprintable. 

Among the few that I can share: 

So why, even as Greece has defaulted, the euro has sunk against the dollar, and the Chinese stock market has stumbled, has gold been sitting there like a pet rock?
-Jason Zweig

Gold is bought and sold based on a narrative that has turned out to be patently untrue.
-Barry Ritholtz

And even Mr. Gold got into the action:

With gold at five month lows, articles like this are easy to find online:

In fact, on Tuesday, I counted nine different mentions of gold on the Marketwatch home page:

When I checked last night, there were 38,400,000 search results for "gold sucks"!

As a researcher, I love the overflowing negativity toward gold here, especially when accompanied by analyst and pundit extrapolations of lower and lower prices. 

Even more, that "pet rock" went viral this week fits the extreme in sentiment.  (And not to beat up on Mr. Zweig, I couldn't help but pull together this chart:

For a writer who focuses on the perils of falling victim to our biases, even he succumbed at the extreme!

Can gold still go lower? Absolutely, commodity bottoms are like equity market peaks. They are a process. It is commodity peaks that are "V" shaped like market bottoms.

It would be nice to see some pundit/analyst comments on replacement cost and industrial value - which would suggest that every ounce of speculative value had been beaten out of gold - but I wouldn't stick around for that, especially given charts like this:


There is no long-term correlation between gold and bank stocks. That folks believe that there is today suggests that someone will be especially offside when the US equity and gold markets turn.

But those markets won't be the only place where there is collateral damage. Commodity country currencies have been bludgeoned and a reversal in gold, oil and other commodities could bring sharp reversals to the Australian and New Zealand dollars, the Mexican peso, Russian ruble, the Brazilian real and even the Canadian dollar. That central banks in these countries have already "reacted" suggests that sentiment is quickly approaching an extreme.

Finally, and to the bank chart above, a weakening US dollar accompanied by falling US equity markets and rising gold prices, suggests that the next big move in rates is lower not higher. The rate increase that Mr. Keene and others are calling for could very quickly come off the table.

In summary, and based on what I see now as far as extremes in mood, my recommendations are:

-Long gold

-Short US equities, particularly technology

-Short US dollar against commodity-driven country currencies

-Long long-term US Treasuries

If this series of recommendations makes you not just giggle, but guffaw, they should. They should feel not just out of line with current sentiment, but stridently opposed to it.

The best investing ideas bring back every insecurity from middle school.

Know that that is precisely how I feel in sharing these clearly contrarian recommendations today. 

I am alone. 

Even the others at the geek table have gone and put their lunch trays away.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation

Twitter: @Peter_Atwater
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