Why $21.22 Is Your Inflation Protection Level

Question is… has the bear market rally over the past two weeks been solid enough to generate new buy signals? Well, yes and no…

History Repeating?

While some indexes did establish buy signals, a number of them weren’t able to reach their optimum downside targets. While this is can sometimes create false signals, the bigger picture indicates that the signals are probably valid.

What is much more certain, however, is that the indexes are tracing out a larger consolidation pattern. That movement could mean that the Nasdaq indexes will test their January (and possibly even November) highs before any serious selling resumes.

Long-term consolidation patterns are nothing new for stock indexes. In fact, the current pattern on the S&P bears some striking similarities to the larger one that ended in 2002 – as you can see on the monthly chart below…

The main two similarities that jump out between these two bear market consolidation patterns is that…

• The selloffs began from almost the same levels
• Until March, the number of points lost was practically identical

The key difference between the two time periods, though, is that the 2000-2002 bear market lasted over 2½ years, while the current bear market is only in its 18^th month.

This means that even amid a strong rally at the moment, investors should be very wary about calling this the bottom and jumping back in with a vengeance. Bear market rallies often lure investors back to the party with quick, sharp upward moves… only to run out of steam and head back down.

Practice Patience During March Madness

So don’t expect a new bull market to start here. Before the five-year bull market that followed the last bear market, the indexes went through an eight-month consolidation pattern. And even if we use the November low as the start of the consolidation pattern, this one has only lasted four months.

In addition, when we see steep declines – as we have done recently – it usually requires a longer consolidation period while time plays catch up with price.

In 2003, we didn’t know that the market’s consolidation pattern was complete until weekly buy signals were triggered. And right now, it’s just too early to even consider calculating where the S&P 500 would trigger a weekly buy signal.

What we can say, though, is that since the Nasdaq 100 didn’t violate its November low, it would have to get up to at least 1,387 points just to set up a weekly buy signal.

Fortunately, we can be more definitive with this week’s sector…

Your Inflation Buzz-Phrase: “Trillion-Dollar Bailout”

Last week, the Federal Reserve announced that will buy $1.2 trillion worth of government bonds, which will then be pumped into the U.S. economy,

It wasn’t just stocks that loved the news. Commodities did, too. A lot! For example, gold prices shot $70 higher from Wednesday’s low. And most other dollar-denominated commodities were higher by the end of the week, alongside foreign currencies.

Hot on the heels of that strategy, the government revealed its own trillion-dollar move today. The “Public-Private Investment Program” will buy $1 trillion worth of so-called “toxic assets” in order to shore up U.S. banks’ sagging balance sheets.

Stocks may love all this trillion-dollar bailout news – in the short-term. But over the longer-term, most analysts agree that we’ll see something else rise soon: Inflation. Hardly surprising, with the U.S. mint continuing to run the presses at a rapid clip.

If we do indeed see that result, it means one thing: The value of the U.S. dollar has nowhere to go but down. And that will consequently force commodity prices higher.

Take a look at the daily chart of the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC)…

As you can see, DBC closed above its 50-day moving average (marked in red) – the day before the Fed’s $1.2 trillion announcement. It then closed higher for the rest of last week.

The important number is $21.22 – the level it needs to close above in order to trigger a daily buy signal. If it can do that, it’s a very good area from which investors can buy into the broad commodities sector on pullbacks – something that would provide a good hedge against inflation, as well as price appreciation.

I suggest using a couple of closes below the trendline (blue) as a stop loss.

Source: How to Protect Your Portfolio from Inflation

We’re “officially” in a recession and the panicky markets are bracing for deflation. But what most investors don’t realize is that inflation – not deflation – is the real threat that they face.

For more than a year now, I’ve been telling readers and attendees at financial conferences around the world that the United States has been in a recession since last November.

I was wrong.

But only by a month: According to the National Bureau of Economic Research (NBER) announcement last Monday, we “officially” entered into a recession last December.

Now, I realize that stocks have taken a drubbing in the past few months. And the odds are good that share prices will get beaten down further in the weeks ahead. But that’s actually good news – and for three reasons:

• The NBER, which called the recession — apparently from its suite in the “Better Late Than Never” Department — is not known for being timely. In fact, its timing is so consistently bad that this latest recession pronouncement might actually be viewed as the light near the end of the tunnel. Indeed, of the four recessions since 1980, the NBER announced that we were in a recession in a (somewhat) timely fashion only once. That was in 1981, a full six months after the recession actually started.  But in each of the other three recessions – 1981-1982, 1991 and 2000 – the NBER didn’t officially label the deteriorating economic conditions a “recession” until the downturn was nearly over.

• In three of the past four recessions – 1980, 1991 and 2001 – the Standard & Poor’s 500 Index had already reached its recessionary lows at the time the announcements were made.

• Since 1900, the average length of a U.S. recession is 14.4 months. Assuming that historical relationships hold true, the NBER data, despite the fact that it’s a year late, falls in line with our suggestions of a few weeks ago that a late springtime rally may be in the works.

(Whether we believe that last point is another point entirely for reasons we’ve written extensively about in recent months. So we won’t rehash those today.)

But we will point out something that’s vitally important right now: There has not been a recession in history that wasn’t followed by inflationary pressure. And that, in turn, suggests that investors would be wise to shore up their defenses now while everybody is looking the other way … at deflation.

Why?

The U.S. Federal Reserve is expanding our monetary base by more than $11 billion a day since September to nearly $1.5 trillion, which represents an increase of 79.02% since October 2007.

What they are doing is unprecedented in recorded history.

On an annualized basis, the run rate in just the last few months alone works out to more than 369.92% per year – which means the monetary base is accelerating dramatically (See accompanying chart).

According to the Federal Reserve’s latest H.3 report, dated Nov. 28, bank non-borrowed reserves fell to -$362 billion, more than doubling the -$158 billion reported in September. Meanwhile, the preliminary Nov. 19 two-week figures reflect total borrowings are now $652 billion, up 11.85% over the same time period.

At the same time, total borrowings (TOTBORR) of depository institutions from the Federal Reserve have spiked dramatically, which signals still more money is working its way into the system. Note how smooth the TOTBORR chart has been historically for the last 22 years and how dramatically it’s spiked as a result of the financial crisis. When I say unprecedented, this is the kind of chart I’m referring to.

And we’re not done yet. In addition to all the infusions we’ve already mentioned, Club Fed is poised to inject another trillion dollars to bail out banks, insurance companies, Wall Street, possibly Detroit’s “Big Three” automakers and just about anybody else who “needs” a handout to overcome years of inept management,financial malfeasance – and plain old greed.

That’s why – more than any other single reason – deflationary pressures that might exist in the next six months or so aren’t really the enemy.

Carnegie Mellon University economist Allan H. Meltzer was much more in a recent interview with Forbes, stating that “people who say deflation is a threat are either rumormongers or ignorant.”

Added Meltzer:  “They need to take a refresher course in economics.”

As much as we’d like to dismiss Meltzer’s comments, we can’t. At least not entirely, because interest rate swaps are currently pricing in deflationary expectations.  And that speaks to something I’ve pointed out repeatedly: Any time the Fed squares off against the markets, the Fed loses. And it’s clearly fighting a losing battle now.

That’s why the bond markets are indicating deflationary expectations of 1.5% over the next two years and inflation of just over 0.0% over the next five years. Over the next 10- and 20-year periods, the markets are pricing in inflationary expectations below 2.0% respectively.

With an expanding monetary base already screaming inflation, this connotes opportunity.

The best way to capitalize on this in the long term is through Treasury Inflated Protected Securities, or TIPS. Right now they’re comparatively cheap because investors have fled to straight Treasuries, preferring their immediate liquidity. But TIPs are rising nicely and are likely to rise much further and faster with the first whiff of inflation.

Speaking of which, we think there is a 50-50 chance of so-called “core inflation,” which excludes food and energy prices, rising to 4.0%. That doesn’t sound all too bad, but that’s 2.3% more than the recent 1.71% yield on five-year U.S. Treasuries, which means TIPS are a better bet today.

Our favorite, the iShares Lehman TIP (TIP), sports an attractive 8.21% yield and plenty of upside. So it’s not only the good defense we’ve mentioned in the past, but one with plenty of inflation protection built in.

It’s up 14.35% from the low of $84.14 set Oct. 10. That’s something most investors are not focused on right now, but they should be.

Source: Inflation – not Deflation – is the Threat, Now Here’s What to do About it