Deflation USA, Elliott Waves, Potash, Important Word

Deflation Image Here- Will the Globe Follow Bush?

To all readers of the 'Yellow Rose Street Beat'

I want to begin by saying that as much as I love to write the Yellow Rose Street Beat my time considerations are such that it will be difficult to add consistent posts for the intermediate future. In addition to my regular busy lifestyle I have decided to study for the GMAT (Graduate Management Achievement Test). I am not sure if I will apply to an MBA program but I want to keep this option open. I have done some research and the combination of a science background and a business degree may be of great use to me. At this stage I just want to test the waters.

I am already working hard and for a period of time will probably become almost invisible to many people. I think it's worth it so I'm going for it.

I will not stop writing the Yellow Rose Street Beat. If I have time to squeeze it in I will place an occasional post. Down the road I may resume more active posting. For now, all of the content should remain here (posts already provided) and you may want to pop in every once in a while to see if something new can enlighten you.

I want to say that I highly recommend the blogs in the list on the right of the page. I like them all, equally, though Trader Mark, Earth to Wall, Market Ticker, Junk Yard Dog, and Roubini, and Global Economic Analysis, I like a bit more equally than the others.
---------------------------------------
A word about the potash stocks and Elliot Waves.
I am always trying to learn and I am now, in the sparse minutes I have, reading a bit about Elliot Wave Theory. If you are interested in this I recommend Elliott Wave Principle by Frost and Prechter. It's the best Elliot Wave book out there. I got it used at Amazon for $11 plus shipping. What can you lose? Up to you of course. I also recommend all the books I have on the list on the bottom right of my blog (I own all of the books mentioned).

Regarding MOS and POT... I have used hedging a bit but I still am down big on these two names. This is not a buy and hold market on the long side (as I have said many times) but the fundamentals are so good on these names, and will almost surely continue to be, even in a slowing economy, that I made an exception.

This was a mistake. I openly admit it. I ignored the charts because I just couldn't believe that companies that are so cheap on PE basis, will actually meet earnings guidelines, and have insider buying, etc... would get trounced so much in direct contradiction to fundamentals. However, I did not know about the commodity unwind, the hedge funds that are scrambling to cover margin calls, the Elliot Wave golden ratio and Fibonacci number reliance, nor a number of other factors. These I have sought to learn further for purposes of doing better in the future.

The most important point is that if you are going to go against a chart you had better believe that you know something the market does not. This was the case with CMED and hence I was rewarded for buying a broken down chart. Most of the time the chart has information for you (the brief breakdown at 180 on POT a few months ago proved to be an early warning sign, for example) rather than the other way around. This is especially true of funds with heavy institutional ownership. You can't know what is going on inside the doors of the big firms on the 'Street without being there but the charts may offer some of the scientific evidence you seek. When it comes to MOS and POT, the big houses knew that the earnings would be phenomenal. They knew how good the story was. These are the ones, after all, that got in when POT was around $20. The earnings came as no surprise to anyone. Those holding the big money knew that profit taking was coming and deleveraging was on its way. Earnings or not. Also, if you read about Elliott Waves, you will see that nature itself does not advance in a straight line. At some point there is always a zag before the next zig. Earnings and guidance matter little if you step in front of a zag of this magnitude.

Let me say that I have not sold any of my shares. The longer duration story here remains incredible. However, this is not the kind of market where one can afford to be stubborn or hopeful. I have gone short along with my longs when certain areas were breached to protect myself. As I learn more I may more often go net short despite the incredible longer story. It does not help you to scream with indignation when some stocks refuse to follow fundamentals. You may be right about the value of the company and the fact that the sell-off is unwarranted. But what do you want? A cookie? The market cares not. And if we follow a deflationary course, as Prechter believes we will, money will become so valuable that very few factors, including earnings and guidance, will make stocks more significant than cash.
----------------------------
That leads me to the last part of the post. It is hard to overcome prior training. Stocks go up, right? They have for years. However, stocks do not have to go up and in some cases most must go down. This is the case in this market. This means that, unless you are one of those pitiable ;) individuals who is trying to start a mutual fund and therefore must have a long bias, you should be considering shorts before you consider longs.(Hey Trader Mark, to his credit, is holding up quite well in part because he understands the value of risk management and is flexible enough to bend to the rules of this market.) M*, I saw, came up with a recommended list of shorts, not of buys, and I think this is the right philosophy. We are on the tails side of the quarter right now. We are in the Southern Hemisphere where the toilet flushes the other way. Keep this in mind at all times.

There are naturally always exceptions. You would never buy certain stocks in even the best bull market. Similarly, you should not short certain stocks in certain situations in this market. There are even a few longs that may do quite well overall in this market. I would expect that most of these will be found in the healthcare sector. Know, also, that intermediate trend of the market (See It Pays to Be Trendy under top posts) is very important and Sector Rotation (See The Layers of an Onion-Sector Rotation also under top posts) should also be at least considered. Overall, let me emphasize that the vast majority of our moves in this market on the long side should be considered trades unless we have a very long time horizon. I learned this to be true in even one of the best fundamental stories out there.

The point is that overall cash is king here. Shorting generates cash while stocks require cash. If we go into an inflationary situation a few stocks may be worth more than cash, but if we go into a deflationary scenario watch out... you're going to need all the cash you can get. On the last post I provided links to those who predict an inflationary scenario. Here, I provide the deflationary case. I have to admit that I am leaning more and more towards this side unless the Fed jumps in and starts lowering rates again. Even then, how much further can they lower? I do not believe the hypothesis, proposed by the President of Eurocapital, that we will see inflation from due to the new wealth in the the BRIC countries. That would be true if these countries were so advanced that they could do fine without the US and Europe. One day that may happen just in the past we did not need a strong economic China to be prosperous. However, I don't believe these countries are there yet. I also do not believe that foreigners will suddenly pull money out of the US federal reserve and spend. This would so destabilize the US that the countries that did this would quickly feel the economic effects as well.

This is to be a recession of the global variety. Given that much of it was fueled by false wealth creation in the US, I would have to believe that we are setting up for deflation here. We shall see. There are smart people on both sides of this debate for sure.

Interesting take on Gold and deflation
High quality take from the author I mentioned above



Best, thanks for reading so far, and as I have said the 'Rose' plans to keep running, just less often until the main editor and producer and writer (that would all be me) has the time resource necessary to improve production frequency. That is, without sacrificing what I believe to be the most important aspects of these posts- content quality.


"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.