Inflation is NOT at Bay

Good commentary from Mike Gibbons:

"Stocks fell on Friday giving back Thursday's gains and closing the week with only the Russell 2000 showing a modest gain. Volumes were low throughout the week as this was the last week of the summer before the Labor Day weekend. The markets received a fillip on Thursday with the release of surprisingly strong GDP numbers but reality returned on Friday with the Commerce Department reporting core inflation had risen to 2.4% and a fall in consumer spending in real terms. With consumers accounting for 70% of the economy and consumption now falling after the stimulus checks were spent , the economy faces difficult times and the markets too.

The NASDAQ could not sustain a rise above the 200 day moving average level a week ago and another attempt to vault that level failed this week. In contrast, the Russell 2000 tested support at the 200 dma level and bounced back. As we have been reporting for several weeks now, the small caps are providing the best breakouts and the best returns.



"A practical example in a fictitious country.

In 2007, Islandia produced 500 coconuts, which residents sold to themselves for $1 each, and imported 1 barrel of oil, which cost $100... Nominal GDP in Islandia for 2007 was $500. If you wanted to describe that in real terms, you'd call it 500 coconuts. You don't count the oil in either nominal or real GDP because Islandia didn't produce any oil...
Here are the numbers for 2008. We grew 510 coconuts, sold them for $1.01 each, and still imported 1 barrel of oil, paying $125 for it. So nominal GDP was $515.10 (a 3% increase) and real GDP was 510 coconuts (a 2% increase). The change in the implicit GDP deflator would be the change in the ratio of nominal GDP to real GDP, namely, +1%...
But wait a minute, Islandia's pundits decry. How can your crummy accounting claim that inflation was only 1%? Last year we bought 500 coconuts and 1 barrel of oil for $600, but this year if we tried to buy the same thing it would cost us $630. The inflation rate, they tell you, is obviously 5%, not 1%."


And, from Floyd:
1. Inflation is NOT at bay.
2. The government facts we are getting do not clearly identify real inflation rates, or unemployment claims. We are deceiving ourselves when we believe this.
3. Gold and Silver (GLD, SLV, and SSRI) remain strong longer term core investments we recommend to all subscribers. Conservative subscribers should hold up to 15% of their total investments in core metals, as we have devalued our own dollar beyond recognition, and if McCain is elected, he'll continue the Bush tradition of supply side economics, in which the fewer get rich, and the many get poorer, and the country loses superpower status. If McCain dies and the Alaska soccer mom becomes President, a person that has travelled only out of the country ONCE (to Kuwait last year) we will have successfully destroyed much of our potential. The answer is not drilling in Alaska, sigh, but finding alternatives that do not create a supply and demand crisis.

And, a journal from an Advanced Mentoring client:

Hey Floyd...

I just wanted to journal a bit and share my thoughts with you pertaining to today.

My day began in a rush....I was running late for an appointment ...and feeling guilty because people were waiting on me. I also did not want to go where I was going this morning and that was causing me to be angry...I would have preferred to stay home on the computer and watch the market because I had a feeling that today was going to be a good trading day....an opportunity to "earn money" from the market.

I had my Blackberry with me and my location was not providing me with the best of service (more frustration and anger). When I left the house in the morning...the futures were down about 15pts....not much at all. I had no communication with the outside world for the next 90 minutes and when the market opened up...My Blackberry was working and I noticed that the DOW was at -60pts. Here I am trying to meet with contractors regarding house renovations and I cannot stay focused b/c all I am "worried" about is trying to read the tape. From what I gather...during the first 5-10 minutes of the opening...the DOW moved from -60pts. to -20pts....Now I knew the signal for the day was a little more upside...maybe a move to 11,850...look for some quick profits and then get ready for some downside.

During this short move up (-60pts.to -20pts.)...I grew more and more frustrated because I felt as though this was the perfect opportunity to purchase a call (below prior day close) and get ready for a quick profit. BUT...my Blackberry was not working well and the skeptic kept telling me that an opening of 60pts. to the downside was not to be taken lightly...that maybe I should wait this out a bit. Meanwhile...I'm trying to have a conversation with builders and contractors regarding ceiling joists and bathroom fixtures. At one point I was able to read some headlines from Bloomberg stating:" US stocks retreat on income, spending data, and poor Dell earnings....hurricane Gustav on the horizon"...With all of this going on I was obviously in no position to trade...so what do I do?

My Blackberry connects to my broker and I buy (2) CALLS for 4.30...and about 1/2 hour later...I'm selling them for 3.80...LIVID at myself for being so stupid!!

First of all...Why did I feel that I "had to" trade this morning?" Why couldn't I be at peace with taking the day off?

Secondly, why couldn't I recognize the brief pullback this morning from the initial drop instead of only seeing upside? Was it because my mind was fixated on what was "supposed to happen?" All I kept saying to myself was "the market is supposed to move to the upside about 100pts...buys some calls and look for some quick profits and then get ready to buy some puts..."

It was like all I could "see" was upside movement...considering downside was not even an option in my mind when in reality...all the signals were pointing in to the downside.

Anyway...my one saving grace was that I was able to see a play that went bad and I was at least able to get our with only a $100 loss. I went back to my meeting and errands...occasionally checking the market from my mobile device and radio.

I had to do some traveling later on in the day and I was able to get better service from my Blackberry. I noticed that we hit a low in the later morning of about 11,540..one of our key support areas. At about 1:30pm...I noticed that the DOW moved back to about 11,600 and was hanging around there for a while (another key support/resistance line...magic number zero's ).

In my mind I was picturing a chart and I said to myself..."I betcha that this is just a brief mid-day pullback before some more downside again...this would be a good time to scalp some puts."

I bought (5) puts for 8.80...about 75 minutes later...I sold them for 9.80...made a nice $500 from my truck...erased my $100 loss earlier and gave myself a $400 profit for the day. Can you believe it? About 6 months ago I had no idea what an option contract even was...but because of your teaching....I was able to shake off a stupid mental mistake that I made in the morning..come back with confidence and poise...visualize what the market was doing (OEX...50% FIBO retracement) ...and use a hand held mobile device to make $400 from my truck while I'm running errands for the family...are you kidding me? Only in America are we blessed with this kind of opportunity.

But here is the best part...as the market was dropping...I needed to decide when to take a profit...and I thought of you...I said to myself..."though the market dropped to 11,540 earlier and will probably retest this low late this afternoon....and though this option hit a high of 10.20 already...you may want to consider placing a sell order in at 9.80 just to be safe...be prepared to leave some money on the table "just in case" she does not go all the way to test the low...you don't need to try to squeeze every last dime out of this trade...a 1.00 profit is a great way to end the day." So that is what I did...I put in a sell order for 9.80 and was thrilled that my position was filled. Who cares that the option made it to 10.80? So what I could have made another dollar profit? The victory of the day was the mental comeback...the ability to "see" what was going on and the courage to take a shot.

I just finished my first two weeks of live trading...after following your recommendation of 90 days of "paper trading" and study...I am happy to say that I am up $2000...and I know much more about myself and the market.

Thanks Floyd...I could not have done it without you...Have a great Labor day weekend.

I'll be catching up on my Advanced Mentoring assignments.