Here is a historical look at the Gold/Oil ratio again:

Historical Oil vs Gold

Brad Zigler of Hard Asset Investors analyzed recent activity and made a bullish case for gold and a negative one for oil.

Even more interesting is the fact that the Gold/Oil ratio closed at 15 on Thursday and 16 on Friday. Could we really begin to see 30 multiples again? Zigler and I both say yes. But how will this play out?

I once thought we would see both expensive gold and oil. However, recently it looks like we will see a high multiple of the Gold/Oil ratio due to cheap oil and above $1,000 gold. With Oil trending to $30, that would mean a gold oil ratio of 33! A reversion to the mean of 15 could then take place through an oil rally rather then a gold plunge. Where as before I was bullish on gold and oil, now I am only bullish on gold.

I called for government nationalizations in February. At the time, I had a chance to ask Jim Cramer what he thought about Fannie and Freddie. He actually said to go long both. I almost laughed after hearing the response. As a matter of fact, I was harping on nationalizations before Bear Stearns.

On interest rates, I called for 1% Fed Funds rate before summer end in February. Although I got the timing about one and a half months off, I was calling for rate cuts before the Fed Funds went below the rate of inflation. No one thought this was possible.

On currencies, I called the rise of the Yen before people were thinking about about the Eurozone slashing rates.

On the equity markets, I accurately called a market bottom on March 7th on March 6th as the market tip toed with 12,000. I also said that the next time the market touch 12,000, it would crash through.
On Apple (AAPL), I called its agressive move into gaming and sky rocketing sales. However, I have been short the stock understanding that technical reasons are more important in today’s market.

How did I see so much coming? It is important that everyone who invests develop an investment thesis.

If you look at all of the above predictions came from correctly gauging the gravity of the crisis and government intervention. I presented plenty of evidence on why this crisis was unprecedented and global in nature. Bernanke is a student of the Great Depression. He has written about how absurdly far he would be willing to intervene in order to avoid a Great Depression. With a maniac at the helm, you expect drastic action. That means 1% interest rates and government nationalization. That means reversal of carry trades, international cooperation, and most of all deleveraging. Where positive and negative aspects of the thesis interact it is important to determine the dominant factor to gague the dominant trend.

This post marks my first in a long time due to many restrictions. First off, the lack of available internet at my house is key. Second, work has been taking up a lot of time. Any post from here on needs to disclose two things: I have been interning at the JP Morgan Investment Bank middle office for the Securitized Products Group. This actually happened by pure coincidence.

I have previously claimed that it was me who brought Non Borrowed Reserves to the attention of Wall Street with my Monterroza Research blog. I will admit that I had help from Mish’s Global Economic Trend Analysis who introduced me to Net Free of Borrowed Reserves, but I was pointing out how much non-borrowed cash banks had in their accounts. So I looked for the number and found that the trend was was literally off the charts. Immediately after my first blog post Wall Street began it’s offensive to dismiss the number as irrelevant and as the writer as a conspiracy theorist. Unfortunately for them, the number is neither irrelevant and the writer was an accounting major, economics minor and investor. Shortly after, there was an announcement that the Bush administration was shutting down a website that aggregates major sources of economic indicators from many federal websites. I thought nothing of it at the time but I thought that the reason for shutting down the website was ridiculously idiotic: the website was shut down due to budgetary constraints. However, when I went back to check my favorite data series, Non Borrowed Reserves, I was startled at what I found: the series was altered.

If you check the Fed of St. Louis website right now what you will see is a series entitled Total Non Borrowed Reserves and Term Auction Funds. What is amazing is that the two phrases, “Non Borrowed Reserves” and “Term Auction Funds” are a conundrum when put together. Non Borrowed Reserves are just that non borrowed, while the TAF loans are temporary loans that were invented three months ago. Non Borrowed Reserves have since the 1960s never included any type of borrowing, not even discount window borrowings. If someone does not call the government out on this small data manipulation who knows what they will be inventing next and what crap we’ll be accepting next.

I analyzed the difference between total reserves and non borrowed reserves since the 1960s in excel last month but I did not bother to post the charts since I thought people would get the point. Since people have not, I will release the data and excel soon. It is important to note that I made this during the beginning of February.

I have not blogged about many things that I have followed in the market simply due to time restraints. The truth is I read and analyze a lot more than one post a day of market news. The market is way too complex to accurately analyze properly with minimal analysis, but just simple enough to meaningfully predict profitable trends. With that said, there has been a sad trend that I have followed but not really talked about because I thought it was unimportant to the market. However, this past week I was proved wrong.

If you look back at my posts, you will see that I accurately called the bottom of the market. On March 7^th, I sold my Citigroup puts (I had been shorting from 29 to 20) and began stocking up on Apple options (I began buying at 122). However, I did not put my entire portfolio in Apple since that would be a very risky move. I still held onto my commodity positions in case I was wrong but overexposed myself to Apple. This way if the market crashed, I would lose money on Apple but make money on commodities but still make money if the opposite was true.

This week was the week that I finally went balls out and put all my money into Apple. I bought April 135 calls and scaled up to 145 as the price rose to gain more upside exposure. Although I would love to take you through all the technical analysis that I did to make the money I did, I can’t. That would take a three page paper. However, I will take you through the money losing play I did today. Here is the Apple chart since March 6th with the yellow oval indicating when I advised buying options (click for a larger image):

First off, I’ve written before about the selling on strength or cashing out pattern that Apple has almost always displayed after events. Knowing that, any informed individual would then buy options on the way down, not up.

I erased all my other technical analysis I did by mistake while trying to clear my technical studies. What you see today is why I sold my Apple options. Previously I had bought options at the price points defining the lower extremes that defined that trading channel. Today, when that trading channel broke, I knew it was time to sell. However, that was the last of the confirmations that I needed. Here is a closer look at the sell signal:

What were the other technical signals? From 122 to 140, the pros were at work. There were clearly defined trading patterns that everyone was taking advantage of. Once we got to 143 to 145, those trading patterns disappeared. The price fluctuations started to move in random directions. What did this signal? It was clear to me that this was uncontrolled enthusiasm and a lack of discipline at work. It is the exact opposite of what I saw on March 7^th which marked uncontrolled fear. In laymen’s terms, those late to the party wanted in and were willing to pay any price.

How does this look technically? Look at the Money flow indicator at the bottom of the chart. See how on Wednesday the flow of money into the stock stayed flat while the stock price rose? The experts were selling while the rookies were buying.

So this morning, I woke up knowing this and decided to still go long Apple with caution. As soon as that channel broke, I decided to cut losses. Taking a loss is not easy, but when technical indicators are all pointing south you have to admit defeat. I lost $2000 in about 30 minutes. Ouch. But then again I’m still up $5000 in four days from only $4000 of invested capital. If I wouldn’t have cut losses at that moment, I would be looking at a $5000 dollar loss for the day and a $2000 dollar gain for the week. It’s amazing what a couple of hours can do to returns. Options are not for the uninitiated or stubborn.

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• CORRECT: An inter meeting fed cut is likely to occur or a dramatic fed cut during the meeting (75 basis point).
  • This could be put on hold as inflation concerns, due to the weak dollar, underscore Fed moves. But now we know the Fed could give a rat’s ass about inflation.
  • I think it’s interesting how the market FINALLY agrees with me. It took them long enough. I’ve been saying this for the past month.

Comment on the Prediction:

When everyone said 50 basis point cut, I said 75. When everyone said 100 basis point cut, I said 75. Remember, I said 75 basis point cut back in the beginning of February, so that is foresight. I also put the bond ETF TLT in my original crash portfolio due to this prediction and it has outperformed all other bond ETFs out there. That is amazing. Why didn’t I go with a 100 basis point cut? Strategy. If the Fed cut 100 basis points, it would lose 25 basis points of future “ammunition,” as it is being called nowadays. Furthermore, giving the market less than what they expected is a bullish sign. It is the Fed telling the market, “things aren’t as bad as you think, really.” However, anyone that knows anything knows that completely false.

• CORRECT: The next time we drop to 12,000 we won’t stop there.
  • It just might be this week! If we don’t get there within two-three weeks, I don’t think we’ll test new lows.
  • All the cool kids on the block are talking about, “testing new lows.” The Market is simply comprised a bunch of followers.

Comment on Prediction:

I hit this right on the nose again. I’m even amazed how accurate the time frame I gave was. I said on March 3^rd that we could be seeing new lows within the week and said that if we didn’t cross that 12000 barrier within the next weeks, we wouldn’t test the lows. Now, two weeks later, it just so happened that we retested the lows within the week. Then, I advised wrote about why I was buying Apple call options by the end of the week because we would be seeing a rising market in the near future.

• CORRECT: Further U.S. government bailouts (possible nationalization of some type).
  • Good old BoA is already petitioning hard.
  • UBS has come out and said that the first nationalization will happen before October. Realize he says there is a possible $ 1 TRILLION dollar melt down. Again, the street is way either way behind on this or they are stealing the money of those individual bull investors.

Comment on Prediction:

No one thought the first bailout would come so soon with Bear Stearns. However, do not expect this to be the end.

• CORRECT: TAF loans are here to stay until at least December.
  • The Fed has announced $60 billion in TAF loans for March. Again, just like I’ve been saying.
  • Without the TAF loans, we would see a significant rise in cost of capital.

Comment of the Prediction:

I didn’t see this as the intermeeting action, but it makes a lot of sense. However, my prediction that the TAF loans would become more important is now clear. The Fed even one up-ed me by extending the discount window to investment banks. What I love about this prediction is that two days before it was announced I wrote that Apple would be going up since the last time I saw Apple at 113, the cut rates intermeeting. Whatever action the Fed takes is not really important. All that matters is that the Fed take action and the market receive it as good news.

Things that have yet to happen:

• Smaller banks will start to really feel the pain, declare bankruptcy, shortly after commercial real estate collapses.
  • With H.3 data getting worse and worse there is no end in sight.
  • The Wall Street Journal is finally talking about it! Again, I’ve been weeks ahead on that one. Truth be told, it was Mish at Global Economics’s Blog that informed me about it. He is LIGHT YEARS ahead of the Street.

Comment on Prediction:

If you think I’m crazy, well then Bernanke is just as crazy. On March 11^th, he opened the TAF loans program to commercial banks with commercial real estate collateral. Why would he do this if he weren’t expecting a commercial real estate bubble collapse?

• We will see 1% fed funds rate before summer’s end.
  • Again, same as above. If the Fed does decide not to cut rates, then it will worsen the financial crisis as banks will not be able to lower their cost of capital.

Comment on the Prediction:

Everyone right now is saying that the Fed will stop cutting rates. Every signal right now indicates a bull market rally, which I called on March 7^th, when I sold all my puts and increased upside exposure to the market by buying deep out of the money options. Sure, for now it seems like the Fed is done, but we have not even started to deal with the commercial real estate bubble burst or the credit default swap tsunami. So expect much lower interest rates. My guess is we could see two 50 point cuts or a 75 and 50 basis point cut. So yeah, I’m saying 1.25% or 1.00% Fed Funds rate.

• Non Borrowed Reserves will become as important as the fed funds rate or discount rate.
  • I don’t think anyone was expecting Non Borrowed Reserves to stay consistently negative.
  • I will take credit for this: I brought Non Borrowed Reserves to Wall Street. Before that people were focusing on Net Borrowed Reserves. I’ll be posting the email I sent out to a colleague of mine.

Comment on Prediction:
I will recant the, “I brought Non Borrowed Reserves to Wall Street,” since many people before me were talking about the exact same thing. However, I did set off a round of articles written about my research in the blogosphere and major news sources like Bloomberg and the Wall Street journal. However, No one quite understands the significance of Non Borrowed Reserves. The last time they were this depleted was during the Great Depression.

• Credit Default Swaps will result in further write downs.
  • JP Morgan alone has $7 trillion riding on these things.
  • By the way, the whole bond insurer thing is because of Credit Default Swaps. That was the insurance that they can’t pay back.
• Precious Metals will soar once the market crashes.
  • Gold will beat $1500 an ounce by year end
  • Silver will be at $30 an ounce by year end
• Commodities will also soar once the market crashes.
  • “Stagflation,” “inflationary depression:” call it what you want to call it. This, along with the metals, is a play on global inflation. That’s why the markt is retarded. Sure things look expensive now, but when the dollar goes to shit and oil sees a dramatic run up in price, I’m going to be laughing my ass off.

Comment on Predictions:

The market has set the stage for one of the greatest straddle opportunities in recent memories. However, I will be probably selling my commodities and gold positions and going cash since it only matters what the market thinks will happen.

Why are you taking risk with your money? Because you hope that the sum of all returns for stocks (1. Capital Gains 2. Dividends 3. Currency Exchange), will outpace inflation. Memorize that. Beat it into your head. Write it on your wall. Tattoo it to the back of your hands. Do something to get that point.

Here are some investment examples:

• When capital gains are going to be negative, take a position that when you add up the sum of all return components will outpace inflation. What does that translate to? A short position.
• When currency exchange gains are going to be negative, take a position that when you add up the sum of all return components will outpace inflation. What does that translate to? Get out of assets denominated in depreciating currency.
• One of the smartest strategies, although not the only and not my preferred, people could have been doing for the past two months is holding short positions in foreign stocks that don’t pay dividends.

Why don’t people invest in this manner? It’s too complicated. As the old marketing saying goes consumers don’t like being confused with the facts. If you don’t understand you are a consumer of stocks, please reevaluate your investment philosophy.

So, what then, is the true definition of a bull? A true bull seeks to maximize all three components of return given any investment environment. Difficult? Yes. Impossible, like most people believe? No. The difficulty lies in predicting where fund managers will put their money to work. If you beat them to the punch, their gain is your gain. Although most people would think that trying to outsmart Wall Street’s best is impossible, the current crisis is a perfect example of how group think can be a devastating thing.

Why will I be stocking up on AAPL options?

As I’ve mentioned before, I have followed Apple for a long time. Yesterday, I saw a pattern I was familiar with: Selling into strength or cashing out. It says nothing about the announcement! It’s just a great buying opportunity! We are truly living in historic times. Apple has just unveiled that the iPhone is the biggest game changer since the advent of the personal computer.

I’ve written about the Nintendo Apple comparison for some time now. Just last month I claimed that Apple was copying Nintendo, not the other way around. Let’s see if I can put this in perspective. Apple has done what Microsoft couldn’t with the iPhone internet browser. Apple beat Google to the completely open platform. Apple beat Nintendo by turning gaming truly mainstream. Absolutely amazing. Now, if Apple buys Yahoo! the technological arsenal will be complete for a technological onslaught in the second half of 2008.

I’ve said it before: Apple won’t be going below $113. Why? I don’t know, it’s just a hunch. Like the 75 basis point cut call three weeks ago or that we would be retesting the lows by early march. The last time it was valued at $113 was last August when the credit markets first came under turmoil, right before the first emergency fed funds rate cut.