TLT, US 20-year Treasury.

November 16, 2010 Hamilton

Another conundrum? Greenspan did not understand why the long bond did not react as he had anticipated. Bernanke may be sharing that sentiment right now. Despite QE2 and 600 bln of treasury (or other stuff) purchases interest rates in the longer end have actually gone up and quite a bit. The price went from 110 to 94 or somewhere around, there which is pretty close to a full % in terms of yield! We are now back in the range of the past 8 years, say between 100 and 80 and could, if my head & shoulder depiction has any validity, go as low as 60. That would be a surprise!

UUU , POT

November 16, 2010November 16, 2010 Hamilton

We recommended selling UUU at $5.25, it reached $5.30. Also we loudly recommended selling POT at $160 well before it had reached that level. Both these stocks have (stylized) patterns that are indicative (possible) of a longer term top. They are A-B-C s from the lows, clearly corrective at least so far. Both are predicated on the notion that China is going to eat a lot more and a lot better and generate a lot more electricity the nuclear way to satisfy its needs. RBC’s, if I am correctly informed, analyst has opined that POT should target $170 within the year and others have similar targets and some are even higher. Of course the American CEO of the company has already made it abundantly clear that the stock should barrel through $240 no problem. Time will tell but I am just a little agnostic about this one. Looking at the bigchart it seems to me entirely possible and plausible that the $240 or so high WAS the bubble high.Here is the chart.

The “corrective” a-b-c that we had up from the lows may well be just the middle intermission so to speak, of a much larger bear pattern that could have a second leg down ( even after we reach $170). In an environment that has been politically poisoned it may just be that no one else is willing to play ball and that Billiton’s price was correct to begin with. In Saskatchewan they forgot how important it is to make hay while the sun shines.

With regard to uranium I have no idea why it might be peaking here, if that is what it is doing. One interesting possibility might be that we (and the Chinese) are soon going to convert to thorium as a fuel instead of uranium. It has the disadvantage that you cannot make bombs with it (which obviously has secretly been behind the desire to have these plants) but it is available in abundance all over the world, burns up completely so no waste problems, and is easier to control ( no 3-mile island or Chernobels).

Why we still have a problem.

November 13, 2010November 13, 2010 Hamilton

From J Maulding’s latest letter.

"There may be a conflict here between the interests of the financial world and the interests of politicians… We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks rather than those who make a lot of money taking those risks."

Angela Merkel, Chancellor of Germany.

The problem is not that we do not know what it is, it is simple that we do not wish to face the music. We just had a G20 with zero results, not even the usual platitudes. Our own Harper walks around like a know-it-all just because Canada got lucky for a change, but otherwise looks a little spaced out with his toupé , or whatever it is , on his head.The idea to limit exports to a certain fraction of GDP was dead on arrival, if not a lot sooner. On the other hand, income distribution, rather the lack of it, is a huge problem that will not be addressed as long as misguided economists continue to believe in the “pure” model of capitalism and “growth” as a condition sine qua non, conveniently ignoring the fact that the USofA had its best economic times when marginal tax rates were near 90%! The US is contemplating cutting government jobs by 10%, fooling around with the tax-deductability of mortgage payments , cutting defense spending and a whole host of other things that are not that much different from what the Brits are contemplating. In Canada the department of Indian affaires, or whatever it is called , has upped its staff by about 40% since 1995, with no results whatsoever to show for it. Same thing with the OLG, our Ontario Lottery Corp. ,they now have a more than a hundred employees making over $100,000., this as a result of tenure where everybody automatically earns more provided they do not get off their behinds. Yet none of these overpaid civil servants were even remotely aware how their own employees gamed the game and pocketed north of , allegedly, $220mln or so in winnings. What do these people do will be the question!

What really troubles me is that few people seem to understand why if , during your lifetime, you spend the first 20/25 years getting educated and the last 20/25 years in retirement and only the middle 30/40 years working, the model is supposed to work. It requires constant returns of 20%, or contributions of 30% of income or other such draconian measures that nobody is prepared to do. Unless, of course, you opt to become a civil servant. That , now, seems to be coming to an end.

CMI, Cummings (if at first etc.etc.)

November 13, 2010November 13, 2010 Hamilton

My love for diesel engines goes back quite a way. I served in the Dutch navy where I was to become a “stoker”,an officer in charge of the ships engine room which were mostly powered either by steam turbines or diesels. In most of North America the average person hates diesels, they stink, make a lot of noise, are slow to react and, should you spill a little while fueling the car, you smell like a skunk for a few days. Furthermore one of the few attempts to put these things in a normal passenger vehicle by Buick was a complete engineering disaster. Europe, with a slightly lower standard of living and higher fuel taxes, could not afford to share these sentiments as it needed the much higher fuel efficiency. Almost 1/2 of all vehicles there are powered by diesels. Given that, it must be quite surprising to see the Cummings stock at highs well above those established before the 2d great depression meltdown. After all vehicle production dropped from 16/17 million to 10 million and is now barely above 11 million, all this with fuel prices at the pump at least doubling but without the slightest increase in diesels popularity.

Two months ago I opined that the stock was too high at $85 or so. In the mean time it went even further and got to $96. Here are the charts, then and now.

Clearly the stock just charged on despite a dropping RSI and MACD. Now it is approaching , for a second time, the upper channel line and soon will be flirting with that magic number $100, that is, if it even gets there. In the bigger picture there is more reason to be concerned;

The left, normal, chart shows how well this stock has done and in how short a time frame. There is no other time period in which the stock has gained so much, period. Also it has gone well beyond what ANY trend-line would suggest would be resistance, not even a slight hesitation. More interesting is that when looked at on a log scale there is a very distinct rising wedge that has formed over the past 20 odd years ( waves 4 and 2 overlap which may only happen is this particular structure). These tend to be retraced entirely implying a stock value of near zero sometime in the future. Barring that a return to the 4th wave of previous degree at $20 is perfectly normal. For some reason the round number of $100 seems to be very hard to resist,but I would not expect it to reach that, but to play it safe you may want to wait for that and only then short the stock. The stock pays a dividend just over 1% and has a P/E just under 20. Alternatively a put option might do the trick. CAT and DE fall more or less in the same category. Also remember that;

"There are two times in a man’s life when he should not speculate; when he can’t afford it, and when he can." – Mark Twain

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