Oct 16, 2010

Prelude to the Crash

“Easing” Hopes & Expectations bound to disappoint

Bonds, Commodities & Gold – Bubble Triplets

The Age of Uncertainty

A nation of destitute retirees

The essential is found from here to Bond Bubble, and again with the charts at the end.

You may skip the rest if you are not interested the news items that affect our portfolio.

Prelude to the Crash

The minimum upside has been met in a colossal Supercycle (a)-(b) transition and a

smaller step-down a-b transition to the downside is in process. There should be no

more upside, and the dramatic, violent reversal should shortly get under way. The entire

move down from the 2007 peak to the April high has been of cycle degree, while this

colossal (a)-(b) transition indicates Supercycle degree waves will follow, where the next

Supercycle wave will be comparable in magnitude to at least 10 waves of cycle degree, to

which we’ve become accustomed. This is the prelude to the Crash.

While bonds will also plunge hard in this Crash, initially they should rally in a knee-jerk

reaction - flight to safety, climbing to at least 107, but no more than 109, in wave ii of a

5-wave decline to complete wave C, beyond the limits of the chart below. Notice the

Diag II in wave i, which indicates the beginning of a long move down, must be retraced

to fill the uppermost gap in the chart at the dashed green line. Notice also that we have

matched the previous low in the RSI at the beginning of April, shown by the dashed blue

line at the bottom.

Meanwhile the VIX has also completed the minimum downside and is itself transitioning

to the upside after completing a Diag II, notice that instead of Diag >s, we now have

only Diag IIs to the upside in the inverse funds, and Diag II to the downside in bonds,

and likely the S&P. Wave (3) in the VIX should easily exceed the top of wave (1) which

peaked in October 2008 in the aftermath of Lehman’s collapse, in the identical pattern,

tracing out a Diag > next and likely peaking 62% higher at ~145. The VIX volatility index

will Spike up next, above the previous high, indicating a far more severe meltdown than

occurred in 2008-2009.

In aggregate, these three charts provide conclusive evidence of the CRASH just ahead.

With the next cycle turn occurring on October 20th ± 1 day, we are likely just a week

away from the Mother of all Crashes.

The dollar about to surge in contrast to expectations

On the same theme, a record dollar short position in anticipation of QE2 is precisely the

wrong bet. In the last week of September, hedge funds increased their bets against the

dollar $10bn, bringing short dollar positions to a frothy $26.1bn. While last week in dollar

shorts ballooned further to $30bn, the highest level since mid-2008. Of course, that’s

just when the last meltdown accelerated in earnest. We are shortly coming to the same

juncture, once again. What’s more dollar shorts are a crowded trade, meaning little

profit if they were right, and big losses when proven wrong.

In the Dollar chart below you see the wave b and its a-b transition are likely complete,

while the RSI at the bottom indicates it’s oversold. The Diag > at the beginning of the b

wave indicates this is a terminal move, with a dramatic reversal ahead. The minimum

upside is 88, to complete wave 2 and overlap the Diag II which began the entire move,

indicating a long way down still ahead. However one month is the likely minimum time

frame, given that wave 1 took two months to travel 2/3 this distance. In effect the dollar

will plunge, but only after rallying back near the top, reversing completely its recent

drop. Note that on Friday the reversal become clear with the hollow black candle.

Technically, our charts show the dollar will soon surge intermediate-term while virtually

everything else, aside from inverse funds, collapse. All this should occur long before the

Fed’s Open Market Committee meets on Nov 3.

Notice in the Ultra-short Euro, EUO below, has the identical pattern as the US$ index

which is overlain in gray dots, meaning the EUO will move up ~ 35%, before reversing

again.

Bond Bubble

Last week Warren Buffet remarked “he could not imagine the rationale” behind buying

bonds at these prices, ergo, he reasoned that stocks were much cheaper. While bonds

are indeed dear, the prospects for stocks of perhaps a 3% gain pitted against a 90%

loss, (identical to the drop from the 1930 peak to the 1932 trough) stocks are not a good

deal, even on Buffet’s extended time horizon. Obviously Microsoft and IBM agree that

bonds are dear and stocks cheap, since they recently sold 3-year bonds at record low

yields of 1% and 0.875%, which they are using to buy back their own stock yielding 2.6

and 1.9% respectively. By midyear, these two biggest buyers had already spent $14bn

combined in stock buy-back programs. In retrospect, these buy-back programs will turn

out to have been some of the most poorly timed corporate decisions of the century. If

they were to just wait out the crash, they could likely by 9-10 times as much stock, and

make a real difference to stockholder wealth, when needed the most.

At the other extreme, is the revival of 100-year bonds issued by the likes of the Mexican

Government and the Dutch AAA-rated Rabobank. Once again, we see the human

tendency to project the recent past into the infinite future. If we discount Dutch inflation

for the last 100 years of 3.2% on average, bonds still have a real yield of 2.6%. After all,

the Rabobank bonds yielding 5.8% would make investors whole in just 17 years x-

inflation. However, unlike the short-dated bonds issued by IBM and Microsoft, which

bear little risk to maturity, in 100-year bonds you are exposed to tremendous volatility,

without the prospects of capital appreciation commensurate with probable inflation, nor

the dividend increases which might be expected of stocks. With the issue of only

$350m, these 100-year bonds are bound to trade “by appointment” with considerable

spreads between the bid and ask and subsequently a substantial loss if sold prior to

maturity. What’s more, given the Great Bear Market in progress, the next hundred

years will likely be a major departure from the previous hundred.

Doesn’t it seem like the Fed is insulting our intelligence by targeting higher inflation,

while leading us to believe that it will buy Treasuries to lower nominal bond yields?

Even a slight uptick in inflation turns bonds with already ultra-low yields, into

certificates of guaranteed confiscation. This is the logic of a mad man.

Just look at what has happened to inflation-protected US bonds, just six months ago

you could earn 1.5% above inflation by locking your money away for ten years. On

Friday, the real return had dropped to 0.4 points, the smallest ever! Short-dated

Treasury inflation-protected securities (Tips) have deeply negative yields meaning a

loss of 0.5% per year after accounting for inflation. Who in his right mind is going to buy

US Treasuries with the Fed conspiring to strip away the real yield?

The current bond bubble is highly reminiscent of the stock bubble a decade ago, with its

irrational optimism and like it, the product of the Fed’s unbridled credit expansion. Yet

stocks are not cheap by any means, at the 2000 top some utility and tobacco stocks

had higher yields than earnings multiples. That is certainly not true today. And with 90%

of the S&P trading above its 50-day moving average, the chances of these valuations

continuing are slim and none.

Inflation is totally inconsistent with 10% unemployment. By its very nature unemploy-

ment pushes down the prices of everything, which in turn perpetuates a deflationary

spiral. That’s why this is a Deflationary Depression long in the making, and there is

nothing the world’s central bankers, or Bernanke, can possibly do to change that. Yet

they continue to make matters worse, creating bubble after bubble, leading to mal-

investments and miss-allocation of precious capital, only end in misery and tears.

Bernanke has the consciousness of a Goebbels, Hitler’s propaganda minister, who

Bernanke frequently models in his shady tactics. He cannot be trusted, no wonder he

continues to insist on the secrecy and unaccountability of the Fed, he has enough

skeletons in his closet to be tried and convicted for Crimes against Humanity.

Warren Buffet, who honed his money management skills during the Great Bull Market,

has made no attempts to adapt his ways to the Bear Market. Both he and Berkshire

Hathaway face monumental reversals of fortune, even more extreme than their rise to

prominence and celebrity. For one, Berkshire Hathaway’s sale of over $5bn in long-term

“naked” put options was pure hubris; these alone could lead to Lehman-style collapse

of Berkshire Hathaway in the highly probable 90% market collapse.

Gold

In the meantime, gold and silver prices have shot up to the moon. Like bonds, gold and

silver are in a Fed-created bubble, as inflation “expectations” overpower common

sense. Investors fear the creation of even more money and the apparent debasement of

the currency. However a crash will wipe out those fears; when trillions of dollars vanish

into thin air, a credit crisis results, a sharply diminished supply of dollars, given rising

demand means the dollar must strengthen at least intermediate-term. Since the purpose

of gold is a hedge against inflation, as the dollar strengthens, and underlying deflation

comes back with a vengeance, gold is due to plunge hard. In times of deflation gold

becomes a losing investment. In the Global Gold index below you see 5 was the

orthodox top in gold coincided with the short-term market bottom in March 2008. From

then on we transitioned to the downside and completed a large Diag II, indicating the

beginning of a major decline. However the transition from the Diag II which began in

February 2009 has only peaked in the final Diag > this week. From here gold collapses,

violently.

Commodities in a Bubble

Like gold and bonds, an enormous amount of investment has gone into commodities of

late, deemed the new asset class. Talk of a super-cycle in base metals is fiction created

by the metals industry, expectations for the presumed multi-decade boom will soon

fade. Yet this too is a self-perpetuating expectation of the Fed’s making, as commodities

are viewed as a hedge against inflation and the declining dollar. What inflation? What’s

more, hedge funds and ETFs, backed by physical commodities, stockpile them in

warehouses, creating false shortages by hoarding, which artificially push up prices.

Some metals are back to, or above their bubble peaks of 2008. Once again this is the

“detour to deflation”, when reality dawns that the Fed is merely pulling at straws, the

market can only react violently, as each investor attempts to save his own skin. What’s

more commodities markets are much more emotional that equity markets, once they

Spike up, they invariably come crashing down. Unlike stocks, commodities return to the

same baseline “degree of trend”, rather than building on the previous boom.

In a world of ambulance-chasing trend followers, the more a price goes up the more

they buy. Yet copper prices, which hit new highs last week on the spot market, are 20%

cheaper in futures market 5 years from now, without any warehousing costs. Should not

the “supply” should be scarcer still in 5 years, and “demand” even higher, according to

the current line of reasoning. Like talk of oil running out in the past has always been

resolved through technology, such as the fuel injector, which replaced the carburetor to

used far less for fuel, greatly increasing miles per gallon. High prices and the profit

motive are what create incentives to bring about innovation and viable substitutes.

Dollar-denominated commodities have surged in expectations of a dollar debasement;

the effect has been “temporary” inflation, better described as illusionary inflation, as

price-sensitive buyers cut back or resort to substitutes, thereby permanently reducing

demand. These misconceptions will be reversed in short order, as what is currently

expected is precisely the opposite of what will most likely occur.

My godfather told me a story related to commodities when I was much younger, which I

think will drive home the point. In the aftermath of the 1929 Crash, commodities went

into a tailspin, sugar which had previously sold for $0.60 a pound dropped to $0.02 a

pound - 1/30 the previous price literally overnight. Since this was far less than it cost to

harvest, even before cost of refining, tons the sugar cane were simply left to rot in the

fields.

Effects of QE2

Recent research by the IMF shows that monetary easing by the G4 has in the past been

almost entirely transferred to the emerging economies; likewise monetary policy in Asia

has been almost entirely determined by the G4, led by the Fed. This time the Fed’s

easing must take the form of liquidity injections, since reductions in short-term interest

rates are currently unfeasible. In the past, a weaker dollar was the channel by which

monetary easing was transferred to the emerging economies, leading to higher stock

prices in Asia and Latin America. But this time, with the dollar in the process of

strengthening, an excessive drop, rather than a rise, in emerging market interest rates is

probable, again precisely the inverse of expectations. What’s more, as in 2007-2008,

the sharp downturn in the US and other developed nations will be transferred to

emerging equities and their currencies, along with deflation and much slower growth.

We can expect the brief “out of phase” period in emerging markets, mistaken for de-

coupling, will soon come to an end.

Markets are governed by Nature’s Laws

Let’s face it, another round of the Fed’s monetary experiments, are unlikely to dig the US

economy out of its current hole, any more than an appreciating Renminbi, and are as

irresponsible policies as the Chinese currency manipulation. The economy is not being

held back by high interest rates. Ultra-loose monetary policy, coupled with extremely

high fiscal deficits is NOT a reasonable response to high unemployment and depressed

production. Like the seasons and the tides, Bear Markets and Depressions are

governed by the intractable Laws of Nature, and must be endured. Attempts to keep the

boom going by artificial means are delusional and exorbitant delays to the day of

reckoning, bearing monumental, long-term social, psychological and economic costs.

Deflation

In Japan, where deflation has been around for over a decade, more Japanese feel

deflation is positive, rather than negative. In a survey last year by the Bank of Japan

44% of Japanese find deflation favorable, 35% are neutral, and only 20.7% described it

as unfavorable. While the Fed abhors inflation, it only makes sense since it renders its

policies ineffective. When the velocity of money collapses as in Japan, it is hard to spark

price rises. Peter Fisher, head of fixed income at BlackRock, points out: “Inflation is a

three-variable, not a two-variable equation. It is not just about the quantity of money and the

output gap; it requires a chasing behavior to close the output gap and drive prices higher.”

With the current pessimistic mindset, it is unlikely that the Fed can induce households

and businesses to chase goods and investment through a stock market “wealth effect”

alone, since everyone who owns a home has lost 1/3 of its value to date. By pumping

money into the system, the Fed could be actually discouraging this chasing behavior

and instead stimulate higher savings as the Chinese are culturally prone to do. (this is

the fundamental point that westerners miss when viewing China through the eyes of

western consumerism)

The market is a self-correcting mechanism, with a life cycle of 60-70 years, after which it

must go through Depression to be reborn as a new Bull Market. That’s how the

excesses (and inefficiencies) of the past are wrung out of the economy. An analogy can

be drawn to pruning back an old fruit tree ,which has been long neglected, and begins

to bear few fruit. Once pruned, new growth revives the tree to bloom and bear

abundant fruit once more. If you have ever noticed, every commercial orchard and

vineyard gets pruned yearly to maximize its yield.

For the identical reason, Bear Markets renew and recycle previous inefficient

investments, thus freeing up capital for higher value projects. This renews the economy,

so that it can continue growing and expanding. Contrary to pruning back the dry and

weak branches, the Fed seeks bring back the fruit yield by over-fertilizing (stimulus),

while ignoring its structural weaknesses. Without the necessary pruning the new growth

resulting from excess fertilizer is unhealthy and structurally defective, branches tend to

break-off of their own weight. What’s more, if the over-fertilization continues, the tree

becomes poisoned from fertilizer salts, both the leaves and the flowers turn yellow and

fall off, never progressing to fruit. Without leaves to trap the sun’s energy the tree

begins to starve. Meanwhile, the tree still strains to support half-dead weak, old

branches that have long lost their ability to efficiently carry nutrients from the roots to the

leaves and nor the photosynthesized energy back to the roots. Soon the over-fertilized

tree begins to die, now much more of the previously healthy branches must be pruned

back in order to save the tree. So instead of bouncing back the following season with

abundant fruit, it now takes several seasons of low-yield before the tree comes finally

comes back, and even more to get back to the previous level of high fruit-yield. Likewise

the dead, sickly branches of this economy must still be pruned, while Fed’s constant

stimulus now means the tree has been “stimulus-poisoned” and must now be severely

cut back – this is accomplished by a market Crash - commensurate with the amount of

stimulus that must be cut away before the economy can begin to recover.

Age of Uncertainty

As we know from the work of Carmen Reinhart and Kenneth Rogoff, spelled out in This

Time is Different, (a phrase invariably heard from irrationally exuberant investors headed for a

fall) once a nation’s debt increases to 90% of GNP, economic growth begins to be

choked off. When debt reaches 100% of GNP, default is virtually assured. According the

Organization for Economic Co-operation and Development (OECD) as the result of

liabilities driven by the Financial Crisis, including Fiscal stimulus, compounded by

declining tax base, general government debt is estimated to increase to 96% of GDP

this year, and 100% next year. Concurrent sovereign debt default by several, if not most

of the 33 OECD countries, will usher in an “Age of Uncertainty”.

As you see in the below, in the two previous instances that deficits climbed this high,

were in times of war, indicating a temporary increase in government spending, which

was immediately reversed with the end of the war. Meanwhile, tax receipts would surge

as the nation sought to replenish an inventory of consumer goods unavailable or in

short supply during the war, creating near full-employment. Our current deficits do not

have an end date, and as they begin to grow faster than GNP, the ability to service

ever-ballooning interest payments makes the probability of default foremost in lenders

minds.

For clarification, deficit is the yearly amount spent in excess of tax revenues, while the

total deficit accumulated equals the national debt.

In sharp contrast to the US, which so gallantly spends wads on direct foreign aid, and is

waging two “no win” wars simultaneously, while footing the Lion’s share of the bill for the

IMF, the United Nations the World Bank along with a host of other International

Organizations, China with its huge reserve surplus, and zero deficits, wages no wars,

and only provides easy credit to support expanded exports and win international

contracts. It doesn’t take a rocket scientist to deduce why China as the next world

super-power will dwarf the US. From the looks of the way China has been acting, most

recently with respect to detained Fisherman by Japan, China is bound to become an

oppressive bully.

The developed countries are essentially in the same predicament as Greece was last

year, the only difference is we are getting by on a “reputation” for being financially

secure, rather than the current reality of “banana republic” finances. The market is

bound to suddenly perceive the debt of some sovereigns, like the US, as risky. By

triggering escalating interest rates, default becomes self-fulfilling, as debt spirals out of

control, compounding at ever higher rates, so that principle can never be legitimately

repaid.

Rather than slow growth - Severe Economic Contraction

As opposed the current expectations of slow, steady growth, this year will likely end in

severe economic contraction. While linear projections are all that are currently

envisioned, markets react in non-linear fashion, approximating cliff-effects, where the

US dollars is a “safe haven” repository one day, and falls off a cliff the next. Due to

expectations of rapid losses in purchasing power, no one will want to hold dollars and

so mark the end of its safe haven status. As we learned from supposedly AAA-rated

MBOs, (Mortgage-Backed Obligations) market signals in the form of interest rates,

credit default swap spreads and credit ratings can be erroneous and highly deceiving.

In fact, since we are unlikely to go back to the gold standard unless and until the Fed is

abolished, there has never been a more propitious time to unload the gold in Fort Knox.

The government has been sitting on 261m ounces of gold since the Great Depression.

At $1300 per ounce, that’s worth $340bn, which used to reduce the national debt by

2.5%, would trim the budget deficit by $15bn annually, from a reduction in interest

payments. Actually not selling that gold would be a major blunder, the IMF has already

completed selling three-quarters of its 403 metric tons of gold. It only makes sense to

follow their lead. With the proceeds of a sale today, the US could buy back likely ten times as

much gold at the trough, and enable the US to go back on the gold standard.

Just because the market believes the Fed has things under control, does not mean that

it does. On the contrary, guided by a megalomaniac, most of the time the Fed is

operating in uncharted territory, based on nebulous Keynesian-Utopian assumptions

that have been proven wrong time and again. The notion that “Bernanke knows better”

is as delusional as “this time is different”.

Obviously, inflation expectations are being manipulated by the Fed. “Hope” of QE2 has

moved the focus away from fear of a double-dip recession and deflation, to encouraging

the risk trade once again. Central bankers, working in concert, cannot put the broken

world economy back together again, anymore than if it were Humpty Dumpty after his

great fall, these central bankers are merely hoping and praying for a miracle. Highly

indebted corporations and households are not as easily swayed as traders, to go back

to their previous spend-thrift habits, instead they continue prudent paths of deleveraging

in the case of households, while corporations are holding on to their cash in anticipation

of needing it. In essence, these false expectations are transitory at best and due to be

dramatically and violently reversed.

Pension’s security - a thing of the past

According to a recent study by the Northwestern University’s Kellogg School of

Management and the University of Rochester, recession–related years of falling tax

revenues in big US Cities and counties have resulted in a $574bn pension funding gap,

in addition to $3,000bn of unfunded pension liabilities at the municipal level. Given that

bondholders would be competing against pension beneficiaries for scarce government

resources, the combination has raised serious concerns of defaults in the municipal

bond market. At current asset levels, Philadelphia can only pay promised pension

benefits until 2015, while Boston and Chicago would deplete their existing funds by

2019. According to the study, every household owes an average of $14,165 to current

and former municipal employees in the 50 cities and counties covered by the study. In

New York City, San Francisco and Boston the totals are more than $30,000 per

household and the list tops out at $40,000 in Chicago.

What this all means is that public pension security is a thing of the past, as the market

drops 90% and bonds lose most of their value, private retirement plans will be hit just as

hard. There can be no recovery for pensions, and a nation of pension-less retirees,

dependent on an already bankrupt social security system, becomes a tragedy. Only

when you begin to imagine a nation with 25-30% unemployment and another 30%

impoverished retired, can you begin to fathom the severity of the second Great

Depression.

Foreclosure Moratoriums

Foreclosure moratoriums are no more than a last ditch attempt to win votes, as we draw

nearer the November elections. Currently about 8% of all loans or 4.2m are three

months overdue, or in foreclosure, and about 1/3 of existing home sales are those

recently foreclosed. Until this overhang in the market is cleared, there can be no hope of

even modest, sustainable prices increases. In the meantime, banks’ willingness to

underwrite mortgages is certainly being tested, if not permanently diminished by

litigation, carrying and opportunity costs on these delayed foreclosures. While these

people in foreclosure are temporarily getting free rent, it is highly unlikely that they will

be able to come up with the money to remain in these homes once the moratorium is

lifted. In the meantime, banks are losing money and so are real estate agents, lawyers

and title insurers who could be selling these homes. The Austrian School would

certainly side against such distortion of free markets, warning that such meddling, like

the Fed’s, only lengthens the road to housing and overall recovery.

Industrials Export Earnings

Due to their export-focused exposure and the 7% weaker dollar, industrials have had

the strongest gains to 3rd Q earnings “expectations” of any sector. According to

estimates compiled by Thomson Reuters, an average of 10% increase in sales are

expected by companies with more than 50% of revenues derived from overseas, versus

a 4% increase in groups with mostly domestic revenues. Compared with optimistic US

growth prospects of 2.6%, the IMF estimates emerging markets growth of 10.5 % for

China, 9.7% for India, and 4.1% for the Middle East & North Africa. What’s more, in the

BRICs there’s a tremendous population shift out of poverty into the middle class

occurring, which drives demand for construction, transportation, consumer durables and

packaging. Of course here’s another example of linear projections in a cyclical world.

With the dollar surging those 3rd Q gains will likely be totally reversed in the 4th Q after

currency translation.

Technical Notes: The rest of our charts

In the SPXU, the inverse S&P, the directional change should begin with a Diag II, to

indicate a big upside ahead, which applies to all our inverse funds in all our inverse

funds.

Above you see the a-b transition in detail needing perhaps an hour on Monday to

complete, before reversing. Notice the first of likely several Diag IIs in inverse funds

indicating a long move up.

Levered bonds, TMF, have the identical chart as the unlevered shown above. The Diag

II means a long way down after the upside to complete wave 2 at the 54, marked by the

green dashed line, to close the uppermost gap in the chart. The dashed blue line in the

RSI, indicates the low on Friday was equal to the previous RSI low in April so it will

likely hold. ( you will notice I use the word “likely” allot, since forecasting is all about

probabilities, picking the most likely outcome is the winning strategy)

FAZ, inverse financials, is not so easy to make out from the daily chart below, where a

Diag II appears to be in process, but the subsequent count is not clear. However in the

15-min chart below…

We see that a Diag > must be followed by an a-b, so 5 waves up are still ahead. A gap

up at the opening could easily take us to fill the highest gap at 13.8, or 13.75 to make

sure we sell it. Afterwards, the min downside to complete the Diag II is 12.1, so at 13.75

traders sell all, pension sell half of (2/3) = 1/3, since there may be less than the min 3

days settlement before we bounce back up. (13.8-12.1)/13.8 = 12.3% is the opportunity

gained by trade. At 12.1 we also want to increase our allocation to FAZ with the

proceeds from rebalancing, after eliminating TYP and SCO.

In DRV above, the inverse Real Estate, wave (iii) of a Diag II should reach 28 to overlap

the first touch point of the Diag > on the upper left, to which we must swiftly retrace, this

coincides with the uppermost gap in the chart to the same level. We know it will be a

Diag II since wave ii dropped below the origin of wave i at 21.3, which can only happen

in a Diagonal, since it breaks Elliott’s rule. As you see from here on out we will have a

preponderance of Diag IIs in inverse funds to indicate the beginning of a big upside

ahead. As in FAZ once we reach 28, we likely drop back to 23.3 to complete the Diag II

before continuing higher to wave 1. The opportunity gain of this trade is 16.8% for

traders, 5.6% for pension.

EDZ inverse Emerging Markets, although a smaller Diag II has occurred in wave i,

another larger one is highly likely where wave (iii) reaches 26.9, where we sell, and buy

back at 23.03, where wave (i) of the Diag II overlaps. As this structure reveals itself we

may decide to sell all at 26.9 for traders.

TZA has the upside targets indicated by the green dashed lines, we have sell limits of

26.5 and 29.3, which we may adjust if necessary.

In SCO we will close out positions in SCO at 14.1 our final exit. Since SCO is slightly

out of phase with the other ETFs often by several days, it is better to buy the new

allocation at the low than to attempt to top tick this one.

We will sell all TYP limit 35.4, the likely wave (iii) high of the Diag II, before it drops back

near the low, and employ the proceeds opportunistically elsewhere.

Best regards,

Eduardo Mirahyes

Exceptional Bear