Back in the saddle

It took about 10 days but things eventually normalized here in the nodice household. Korea was a unique experience no doubt and I'm impressed with the country overall. I visited 3 cities including Seoul. Here are some notable things about South Korea from my perspective:

• just about as "developed" as North America with Seoul being the most. For example, lots of people appeared to be using smart phones and you can get HD TV and other tech luxuries.
• streets everywhere I went were well maintained (I never saw 1 pothole) and sidewalks/public areas very clean
• lots of small businesses as opposed to "super stores" like Walmart and Costco.
• very few homeless people and beggars relative to Toronto
• public transportation very cheap - about $0.90 Canadian for a bus/subway ride. (It's $3 in Toronto)
• subway in Seoul is probably the best in the world....you are even able to use your phone!
• taxis about 50-65% cheaper vs Toronto
• gas is expensive - about $1.85/ltr but you have the option of using LPG (liquefied petroleum gas) which goes for about $0.90/ltr as there are several LPG fueling stations available
• coffee very expensive vs Toronto - about double the price
• clothing somewhat expensive vs Toronto
• generally speaking, anything imported is expensive due to heavy taxes/tariffs slapped on them notably autos which is why probably 90% of the cars on the road are from local manufactures (Kia, Hyundai)
• food is cheap expect for certain imported items which can be very expensive (such as watermelons)
• tipping for any service not required nor expected
• Koreans are peaceful people. I got the impression that the crime rate is very low there
• Koreans are noticeably slimmer than North Americans. I saw very few obese people
• Koreans are respectful towards foreigners. I have never once felt anyone had a "get the hell out of my country" feeling toward me. In fact, I often experienced the opposite. Being one of the very few white guys around gave me somewhat of a celebrity status! My wife was both a little jealous and amused!
• Korean kids all learn English as a second language (but most are far from fluent) and spend several additional hours studying via private schools, tutoring or study groups. I remember walking the streets at 11 pm seeing high school kids going home from class. My wife says that this is the result of the poor public schooling system which apparently is a big weakness of Korea.

The late John Templeton was keen on Korea as an area for investment and I can see why. Overall, I got the impression that Korea is a thriving nation with hard working people. By no means am I an expert on Korea...this is just the impression I got.

Switching gears now towards the market. Nothing has changed in my outlook. I continue to believe we are in a consolidation phase here with risks of an upside surprise as opposed to a down one which so many appear to be bracing for. Based upon what I hear on BNN and read in the paper I get the distinct impression that investors are bracing themselves for a major dip in the market. I've said this before, such a thing will be hard to come by when everyone has there guard up even if it's warranted. I mentioned in my previous post to look for a situation where AAII sentiment hits 2:1 bears vs bulls. We just about got that last week but the market isn't quite in a full oversold condition. So, in such cases the likely outcome is a rally but probably not a powefull multi-month one that takes us to significant new highs. If downside continues it would likely be quite limited and would then put the market in a better position to have a powerful and sustainable run like last fall.

Again, I'm not going to try and play the ST wiggles that I think could transpire...that's not my game. I'm going to keep doing what I've been doing which is to maintain core longs with a cash buffer waiting to take advantage of a truly sold out market or unique opportunity. I'm positioned in way that allows me to be comfortable with either outcome in the ST that I described above.

My wife and I at the top of a mountain we had climbed in Jeong Ju, Korea

Quick update

I'm still trying to recover from jet lag. My daughter is the biggest preventer of this and it doesn't help that she's struggling the most and is sick. As far as the market goes, I'll say this....nothing has changed much since I've left and returned. The market is more or less where it was 6 weeks ago. I still sense that there's a large cohort of market participants who look at the market with contempt and are quick to run for cash and hunker down or make bearish bets anytime the market shows a hint of weakness including some noted bulls like Cramer. So long as we keep seeing this type of behavior it will be difficult for a significant correction to take place and more importantly, it suggests the bull market is alive and well.

The main worry out there that I sense right now is the potential for a hard landing in China. So far there hasn't been any material evidence of this concern coming to fruition nor have high energy prices had a material negative impact on Q1 earnings but both of these things could change by next earnings season and that's when we could see a material correction take place. In the meantime the market will probably continue to frustrate bears and possibly make a run back to the highs. That's my best guess for now.

The bottom line is that for any kind of notable correction (drop of 5%+ from the high) for whatever reason to take place it requires complacency from ST trader types and hedgers. They need to drop their guard and embrace the uptrend and that simply has not been happening. You can see it in the daily put/call ratio readings which for weeks have indicated that these folks have had their guard up. On Tuesday the put/call ratio closed at 1.15 which is consistent with ST bottoms.

I suspect that sometime this year we will get a situation like in September of last year where the market is well oversold on an IT basis and we see something like a 2:1 ratio of bears vs bulls in the AAII sentiment survey. It doesn't require a flash crash for this happen. A sideways market or a series of mild declines can do the job similar to what happened from March-September of 2004. Don't be surprised if the market goes sideways or makes additional marginal new highs before we get to this type of situation.

My strategy continues to be the same as it has been coming into this year....maintain core longs with a sizable cash position until we see a situation as described above. If I spot a really good individual story stock or a trading opportunity of some sort I would be willing to commit cash to it regardless of the general market.

A few words

It's been about a month since my last post. I'm still here in Korea but I'll be leaving Sunday. A few notable things have happened. We saw S&P downgrade US debt which not suprising to me only caused a 1 day knee jerk selloff which eventually got fully recovered and then some. These are the same clowns who had AAA ratings on all those toxic MBS a few years back and were as slow as molasas to change their tune and only did so when it was painfully obvious and even my grandmother knew what a toxic MBS is. And now they downgrade US debt at a time when the economic recovery is gaining momentum with tax revenues recovering and spending is being scrutinized....are these guys in some sort of time zone that is 1-2 years behind the rest of the world? If they ever wanted to downgrade the debt with any shred of credibility it should have been done many, many months ago and now they should be looking to upgrade it not downgrade it now that things are getting better. These rating agencies are as useless as tits on a bull.

It never ceases to amaze me how there are so many so called "professionals" out there who are, quite frankly, morons. But the cold hard truth is you need ignorant, simple, unimaginative and emotional people to exploit in this game otherwise making money in this game would be a lot more difficult. Call me an arrogant prick if you want but you know I'm right. Can you imagine a world where everyone was either Warren Buffet or John Templeton? How could you ever make money? So folks, the next time you are frustrated that a position you have isn't at the price where it deserves to be, look on the bright side and be thankful that few can see the bargain you see which has allow you the opportunity to make a big score....that's assuming of course that you'll be proven right in time and have the patience and conviction to capitalize.

On to the next news item...the dip in commodities triggered largely in part due to higher margin requirement for traders of silver futures. The question on everyone's mind is whether the "bubble" in silver has popped and whether commodities in general have peaked. Well, I gotta say that this selloff in commodities look more like a correction rather than a major cycle peak. Regarding silver specifically, the rise it had prior to this sell off did indeed resemble a bubble with it's parabolic assent. Just prior to the sell off I was contemplating buying Janurary puts on SLV for a trade. I figured whether it's just a bull market correction or a bubble popping crash leading to a new bear market, the odds of a sharp drop in silver are high. But being on vacation and in addition to wanting to see more topping action, I didn't pull the trigger so I'm kicking myself a little but not much. The question remains, is silver in a bubble and did it just burst? Check out these points from an article I read which discussed conditions in the silver market just before this latest drop.

3. Take the Sprott fund, which is in such hot demand that buyers this week were paying $1.22 for every dollar's worth of silver in the portfolio.

4. Silver is trading 82.17% above its 252 MA. This is the 99.5% percentile going back to 1920. The other times were near the 1974 and 1980 tops.

5. Silver is up 412% in the last 625 trading days. This is the 99.75% percentile going back to 1920. All 59 times it has gone that high in that time, silver has dropped at least 85.61%.

6. Silver is trading 15.17% above its 21 MA. This is in the 99.22% percentile going back to 1920. The average drawdown from when it reaches that high is down 64.68%.

7. The 252 MA of gold/silver ratio is 70.21% above the current reading which is in the 99.88% perceile going back to 1920. The indicator’s all time readings occurred in 1933/1934 when FDR changed the price of gold overnight. Since January 1934, the highest this indicator got to was Jan 10, 1980 which was 11 calendar days before the silver peak. The 1980 reading was broken on Wednesday April 20, 2011.

8. Primary silver mine cash costs remained relatively flat year-on-year, falling by less than 1 percent to $5.27/oz. from a revised $5.29/oz. in 2009.

9. Silver performance vs. stocks over a 10 year period is in the 99.7% percentile. The only year it was higher was 1979. Silver peaked on Jan 31, 1980.

Wow, these are some eye popping stats aren't they? There is very strong evidence to support that a major silver collapse is immanent. But you know what? Despite all these points, I saw just as many traders on the message boards bearish on silver as I did bullish just prior to the collapse which suggests we are seeing a correction and not the end of the silver bull/bubble. Now perhaps these bearish traders were just playing for pullback which would negate any bullish contrarian implications of these bearish traders. Price action however, does suggest the drop in silver so far looks more like a correction than a bull market peak. The hallmark of any corrections in a bull trend is a short but sharp drop in the price after just making a fresh high without any topping behavior prior to it. I have found that this type of drop is the difference between a correction in a bull trend vs. the first down leg of a new bear trends which starts with a crash. When you see a crash typically, you will see some sort of topping behavior that lasts at least a couple of weeks. If I'm wrong about this and silver is the midst of a crash and new bear trend, we should see the price drop at least 40% from the peak within the next 3 weeks...that would be consistent with the price action of other bubbles bursting. So far we've seen about a 30%.

The playbook for a bubble bursting aftermath is a 40-60% initial decline followed by some sort of a counter trend bear market rally of 35-50%. So, if you miss out on the crash of a bubble, wait for that counter trend rally which could take several months to play out.

From a fundamental perspective, the requirement of higher margin requirement for silver futures which albeit a negative, doesn't strike me as a bull market killer for silver because it doesn't change the underlying psychological drivers for silver. Silver has been driven upwards by the notion of it being an anti US dollar play coupled with the notion that it's in short supply...but the former factor is more important, in my opinion. Higher margin requirements don't change either of these beliefs.

The bottom line regarding silver is this....let it play out. Market action should tell us whether the party is over or just taking an intermission. As frothy and parabolic as silver has been, I have to honestly say that I believe this is just a correction....we'll just see what happens.