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My Thoughts On Entering 2005
posted Jan 3, 2005 at 04:09PM

As I enter the new year I am holding a very high percentage of cash. My impression of the charts that I am watching and the other market analysis that I read, seem to be reinforcing the notion that the market will display deflationary like action for good chunks of the year.

On the major US equity markets you have a plethora of bearishly diverging technicals, robustly bullish sentiment, low VIX (no fear), along with high insider selling. Hardly an optimum time to be laying in big, "themed" bets.

Two articles that come to mind. In early December Sy Harding gave some statistics that showed that the Chinese auto market was definitely losing steam. This seems to be confirmed by the recent news that China has suddenly become a net exporter of steel.

Will this spill over to other commodities? I recall on chat board message which opined, that much like the tech boom earlier, customers were so fearful of commodity shortages that they order two of everything, and now could be burdened with a glut. (Remember Ford and palladium?) Marc Faber, in an interview you can read on, speaks of inventory build-ups.

The other thing that come to mind is that the real estate market in Britain is showing definite signs of contracting, and more ominously, it tends to lead US real estate by 15-18 months. Severe contractions in real estate markets will have an impact on the demand side for everything that goes to make and furnish houses.

After a satisfying rally post 2 Nov, the gold complex goes into the new year on less than optimum footing. The HUI gold ratio is in a bearish alignment and bullion has failed to make new highs despite the fact that the USD made new print lows. Indeed, looking at Julian Phillips latest weekly commentary one sees a chart where bullion has broken under trend-line support against the Euro

You have the Arden Sisters calling for a "D" wave decline. Steve Saville calling for an intermediate term rally in the USD. Sol Palha expecting a "brutal" correction and Jeff Kerns sending out a short signal. There are of course a lot of people who comment on gold, but the names above are people I have been following for a while, and not easily dismissed.

Such corrections in gold and oil, will, in the future, be seen as buying opportunities.

It is my belief that neoconservatism is a failed ideology. Politically and economically, US policy is moving America towards a status not too dissimilar to that of any right wing dictatorship of Latin America in the 1980's - no small irony indeed.

But in the end, the use of "right" or "left" is almost meaningless, in the same way that there was not really a lot of practical difference between Stalin's communism and Hitler's Facism. "Dictatorships" make the use of a ever-powerful security apparatus to wage class warfare and to arbitrarily redistribute wealth. In this case we are talking about the destruction of the conservative middle class and redistribution of wealth to a non-productive, non-entrepreneurial, but ideologically pure, elite.

Although media attention has been drawn to the natural disaster in Asia, the situation in Iraq continues to deteriorate. Of course the real wild-card is the potential for the war to expand, particularly into Iran. Any pre-emptive strike on Iran would be viewed by the Muslim world as a wanton act of aggression and a declaration of war. It is difficult to visualize dropping oil prices and a strengthening dollar in such circumstances.

America's involvement in the Ukraine elections and detente with Chechian fundamentalists shows that the initial neo-conservative dream of re-starting the cold war is back on track

Not to be forgotten as well is North Korea. In this case though, China and Japan have considerable economic weapons (ownership of US debt) in which to shape US policy in this arena. Of course deployment of those weapons, i.e. dumping US debt onto the open market, will result in the dollar crashing and interest rates going through the roof in an uncontrolled fashion.

So in terms of trading head-space I am maintaing a high level of cash with up to 20% available for short-term bounce trading. I am waiting for either the HUI/Gold ratio to turn, or for things to get so oversold as to consider a bottom picking contrarian philosophy. Most of my interest in oils are directed at turn around stories and explorers.

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