For Wednesday October 23, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US markets and watching closely to see if an up-trend develops before investing.  Cash positions (including currency) and price inflation hedges are recommended right now.

Technical Comments:

The S&P 500 advanced 0.57% on Tuesday with volume above Monday and higher than the 30 day moving average.  Tuesday was a strong-volume up-day, marking the 3rd such day in the past 5 trading sessions.  Our automated market forecast remains on a growth trend and we now have a new stop loss baseline.  If the S&P 500 were to decline about 45 points on Wednesday (-2.6%) our stop loss trigger would likely change our forecast to an uncertain trend.

Subjective Comments:

The strong-volume up-day on Tuesday has caught our attention.  We said we’re watching the S&P 500 daily market data closely for signs of market strength, and Tuesday was a strong up-day.  Volume was not incredibly strong, so we are not ready to make an investment recommendation yet.  If strong-volume up-days continue to accumulate over a short span of time combined with evidence of money supply growth then we will change our subjective recommendation.  After months of weak money supply growth and expecting a market decline, we remain skeptical about a possible up-trend in markets.  Our expectations of a crash were based on weak money supply growth.  By the same fundamental understanding of Austrian Business Cycle Theory, should money growth accelerate strongly then the bubble could inflate further before the crash arrives.

Remember all of the Federal Reserve’s money printing (Quantitative Easing) has resulted in some price inflation so far combined with over $2 Trillion Dollars of excess reserves in US banks.  Other nations are growing more concerned about the reckless money printing by the Fed and could begin dumping US Dollar reserves.  If US banks accelerate lending, the money supply growth could accelerate dramatically.  If foreign reserves begin flooding back to the US then the effective money supply within the US borders could grow rapidly.  Both would have similar effects in driving up asset prices (stocks) as well as causing general price inflation.  Official Price Inflation (CPI) is highly manipulated.  If it were still measured and reported with the same methodology used back in 1980, CPI would be just under 10% right now.  Official CPI also does not adjust for “Stealth Inflation”.  If the price of a product does not change, CPI does not change, even if the size of the product is reduced (thus increasing the price/size ratio).  One example just announced of more stealth inflation comes from Kimberly Clark.  They intend to reduce the package count of Huggies diapers in the first quarter of 2014.  The reduction in package content will be about 7%.  We’re guessing price will be unchanged, resulting in a stealth price increase of 7%.  Price inflation could accelerate anytime, so we continue to suggest a portion of your portfolio be invested in price inflation hedges.

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