ELAM: It's a perfect storm

A peak in positive investing mood lies immediately ahead, but a similar spike in unrest and negative sentiment world-wide is also brewing. The latter is the result of repressive dictatorships, now no longer able to control the news citizens receive. It will also be the result of vastly inflated real estate speculation in commodity-producing countries. Mood shifts to a Risk On Investing Peak with this headline:

“Itchy Investigators Ramp Up the Risk”; this headline suggests the small investor is buying when market risk is the highest since spring 2008.

Small investors typically sell at bottoms and buy at tops. The above headline appeared this past week and, well, the itch to buy near a top is here again.

One adviser in the article is quoted as saying he has received lots of questions about high yield bonds (junk bonds) international bonds, and REITs. This is classic wrong way investment behavior. Amateurs are always seeking yield when the bank offers none. And that increases risk geometrically.

That should result in a peak in various indices to new highs. A close over SPX 1,370 will surely trigger computer programs at hedge funds. Those programs will switch even the pros from betting that stocks go lower to all betting on new highs. Similar patterns exist for crude oil. Crude oil needs a weekly close higher than 103 per barrel to really kick in the buy programs for that market.

We expect further gains in the battered Euro currency; 140 seems a reasonable target. That will take the U.S. dollar lower. And so, gold and oil priced in dollars will move higher to their respective peaks.

Meanwhile the winds of discontent are clearly blowing.

Egypt is putting foreign workers on trial — that won’t sit well with the U.S. Congress.
Russia and China veto an Arab- and U.S.-backed resolution calling for the ouster of Syrian President Bashar Assad. Condoleezza Rice and Hillary, like Captain Renault at Rick’s, are shocked. Hillary calls on an international coalition of our Allies to force Assad to step aside.

Who, pray tell, does she have in mind, Costa Rica perhaps?

It’s a strange season when Russian envoys to Syria plead for less repression and more human rights, but that happened this week. Even the Russians seek to shore up their rationale for the U.N. vote.

Sao Paulo is now one of the most expensive cities in the world thanks to an elevated Brazilian currency. A police strike spurs a crime wave.

Our winner of “Most Naive Expectation of the Day” award is an opinion piece by Alwaleed bin Talal, a member of the Saudi Royal Family, and CEO of Kingdom Holdings. He writes as follows:

“Now is therefore an opportune time, particularly for the Arab monarchical regimes, which still enjoy a considerable measure of public goodwill and legitimacy, to begin adopting measures that will bring about greater participation of the citizenry in their countries’ political life.”
Prince, I suggest you call Mikhail Gorbachev. He reached that same conclusion in 1988, only to be reversed in East Berlin. There is no putting the genie back in the bottle. In a country where women clad in head to toe burkas are forbidden to drive automobiles, the potential for strife is quite high.

Romania’s prime minister resigned this month among nationwide protests over austerity cuts. Neighboring Slovakia had the largest protests recently since the end of communism in 1989. Greece laid off 15,000 public workers

If Israel decides to attempt bombing Iran’s atomic facilities, it will have to be before the U.S. elections.

The president doubles down on whether Catholics are more loyal to Obama or their own Pope. Catholic adoption agencies close rather than place orphans with gay families. Catholic leaders are shocked that the president’s promise to allow for religious exceptions has evaporated. As Sen. Barbara Boxer puts it, “the Church is woven into the fabric of American Society.” Presumably fabric trumps Church doctrine. Recall that Nancy Pelosi had a similar run-in with the Pope in 2009.

A Tunisian street vendor sets himself on fire in Fall 2011. This is the butterfly effect pure and simple. The butterfly effect is the sensitive dependence on initial conditions; where a small change at one place can result in large differences to a later state.

Indeed, large changes lie directly ahead as positive investing mood will encounter increasingly negative social mood.