Steady as She Goes

THIS TIME ITS DIFFERENT
1929-30 = 1972-1973 = 1999-2000 = 2006-2007

History always repeats, but never so that you should notice until long after the fact. Nevertheless the signs are always the same. The DJIA is now trading at a P/E of 21.5 after three years of steady above trend growth and the analysts are falling all over themselves trying to convince everyone that the market is cheap! If a Goldilocks economy is worth 20 X earnings, a Pipe Dream economy should be worth at least 30. Of course they don't bother to mention that for the last three years the only way to achieve increasing earnings per share was through massive share buy backs; since top line growth has been lacking badly. Is that not a good reason to justify multiple expansions?

Now we all know (?) that the market is a forward looking (discounting) mechanism, but is it not strange that no matter what the news is the market goes up? Not really, this is what always happens at major market peaks.

The technical indicators have been telling us that the market is way OVER BOUGHT, yet it keeps going higher day after day without even one 2% pause in over three months. Is that normal? Why yes it is, but only at major market tops preceding a major market breakdown. Go back and do your homework and see for yourself that history always repeats, but you have to be looking very closely for the signs.

Although almost every analyst seems to agree that we are heading for a 2007 first half slow-down, they are also in complete agreement that it will be a "Soft Landing" with the rest of the economy picking up the slack in housing and automobiles. However history teaches us that there has never been a soft landing after a major real estate bubble bursts. Point of fact: The average length of the slide after a bust is a minimum of ten years. Sorry, I forgot, this time it's different. So naturally if the slow down in GDP growth will only drop from 3.5% down to 1 or 1.5%, then there is no reason why we should not be looking past the trough is there? Maybe it's just me, but I always thought that you look past the trough when both stocks and their P/E's are at their lows and dividend payouts are at their highs and not when every method of valuation is telling us that the market is over valued.

AIN'T OPTIMISM GRAND. Just make sure you keep the old guys with the experience who can read and have some memory left quiet, like a Michael Mintz and me and a few others who have been around long enough to have seen it all before. And here I am just being a KILLJOY. Aw well, believe what you will. I only hope that you have noticed that the market is unfolding almost exactly as I have been forecasting, but with less choppiness than I had been expecting. So continue to watch out for that Big HOOK that will develop before that final top is hit.

What exactly am I looking for? Why the bullish percentage readings to hit all time record OPTIMISIM of course on their way to reaching the most bullish projections ever made. All that will happen on steadily falling volume. BUT DON"T WORRY BE HAPPY.

NOTE: We have been living on borrowed time for more than three months now and the BREAKDOWN can always be triggered by an outside force such as a major financial disaster anywhere in the world, a war or a major terrorist attack. Also, remember the World's Financial and Currency Markets are all vulnerable. WATCH OUT.

GOLD

There is a truism that states that an MD who heals himself has a fool for a patient. The same is true for lawyers and most of all, stockbrokers, analysts and portfolio managers. So I owe you all an apology. Since I retired, I have had nothing else to do except trade my own account and being normal when it comes to my own money, I allowed myself to confuse hope with reality and lost my patience. It should have been obvious to me that a two month ABC 36% correction is much too small and definitely too short a time to correct a six year (76 month) 300% ($251 to $730) advance. The absolute minimum consolidation would have to be at least 10% (7 month) time wise, with at least a double ABC sideways consolidation or an ABCDE contracting triangle, which is what it looks like we are getting. Although it's been the ABCDE triangle that I have been looking for in my last three letters, I allowed my impatience to accept the possibility that the buy signal that some well known analysts had called for was enough to do the trick. It now looks like what will be required is one more ABC correction down from Gold's recent highs near $650 to the $540-$560 area by some time in January 2007 to complete Wave II. However, be very careful. Wave E of the contracting Triangle could be a truncated move. Also, gold stocks are showing a lot more strength than bullion and as I have pointed out to you in the past, stocks always lead the way. So whatever you do, do not let yourself get shaken out of your core positions. If you are really nervous, buy some protective puts and be prepared to buy into any sell-off into the targeted zone of $540 - $580. 1999 to 2006 was only Wave I of a major sixteen year Bull Market for Gold. According to Elliott Wave Analysis, Wave III will be a "sight to behold" as it usually is the longest of the three up waves, but in no circumstances is it ever the shortest. Therefore a $480 thrust is the absolute minimum that we can expect with $768 (1.6 X $480) or $1,132 (2.38 X $480) being the most likely targeted move for Wave III.

If you ever want to make that killing in the market that you have always dreamed of, you must at times have the courage to stand alone and keep your head when all those around you are loosing theirs. Hopefully I will live long enough to collect on my last big BET.

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]
561-840-9767

December 19, 2006

DISCLAIMER
The above is my personal opinion, and in no way be deemed investment advice to buy or sell anything. It is submitted purely for informational purposes, based upon my understanding of the markets.