Alphabet is now in the soup

How to lose $4 Trillion in three months? That is the loss of capital in the S&P 500 since the wave 2 high on July 27. A few more months of that punishment and pretty soon we shall be talking serious money.

Google/Alphabet has been one of the ‘never sell’ shares along with Apple. As one of the Magnificent Seven it has been a top pick among investors large and small. Its search engine has wiped the floor with the competition for years and ad revenues have been monstrous over the years.

But last week’s record breaking two-day loss of 15%, on weaker cloud performance, must have put at least a teeny question mark as to its invincibility in the minds of investors.

But all good things come to an end someday – and this may well be the day.

One of the benefits of having a scientific analytical background is that my knee-jerk reaction to such statements of certainty (never sell) is to immediately question it. Probe for weak links in the argument and keep questioning is the way of a scientist. All real scientists are contrarians at heart.

Most people believe what they want to believe and will not consider solid evidence to the contrary. Awkward evidence is dismissed – until they are shaken by events they can ignore no longer, such as a heavy loss in their accounts. That is why the whole story of the ‘climate emergency’ has become so embedded in much of the public. They see any evidence of bad weather as bolstering their doom-laden emotional beliefs.

We all know that market prices swing from extremes of irrational exuberance to the depths of despair. When most agree that a stock must keep advancing (because of the ‘bullish fundamentals’), that is usually a time to step back and get prepared for some disappointment.

Warren Buffet calls his best investments as having a ‘wide moat’ and Alphabet has certainly conformed up till now. We shall see how wide that moat is as conditions get tougher.

And that ‘never sell’ mantra is exactly why we questioned it for Alphabet for Pro Shares

Odds were high that the final flourish to the $142 high on 14 October was the big wave 2 top at the Fib 76% retrace of the move off the November 2021 ATH. Recall the ATH was made at $154 in February 2022.

As it broke a support zone at the $138 mark on 13 October, we entered shorts. Last week’s sharp two day decline is clearly impulsive and I have high confidence big Elliott wave 3 down has started.

And please note that I had my sell signal well before last week’s disappointing earnings report when the MSM pundits, previously uber bullish, became more bearish – after the drop of course. Correct anticipation is the name of the trading game. That is why many experienced traders use the Buy the Rumour, Sell the News approach.

More bad news on the EV Revolution

Just as I noted in last week’s post on the stalled EV Revolution, I see there are now major problems emerging with setting up battery plants in the USA: “The cost of running (EV battery) plants in the US is already about twice the cost of other regions,” Kim said. “The atmosphere of the industry is not good these days — battery prices are falling, and inventory is rising due to weaker-than-expected demand for EVs.”

And lithium prices are plunging as evidenced by the performance of a large US producer, Lithium Americas

The lithium market is currently way oversupplied (sluggish EV demand) and still EV prices have not descended to ‘affordable’ levels, except for the most basic models. With US labor costs skyrocketing, I do not hold out much hope they will.

Also, it seems that the unionised US car workers want a lot more pay to cover their higher cost of living expenses partly as a result of the high utility and vehicle fuel costs brought abut by the war on fossil. Plus, the work force would shrink as EV production requires fewer workers. Not an attractive proposition for the unions who are being adamant in their demands.

This is another fierce headwind the West’s EV Revolution doesn’t need.

And with China possessing much of the raw materials that go into the batteries, they will have an even greater auto price edge over Western makers – and could also restrict raw material supply to the West making our manufacturers lose bundles and force them to shut down EV production altogether.

As I have been stressing (ad nauseam?), the mad rush into banning fossil fuels in the West (not in China, Indonesia and India!) have many unintended consequences and will inevitably aid the decline in Western living standards that is associated with a recession/depression. Is that the real ‘levelling up’ (of non First World nations)? And our slide into poverty will be reflected in the risk asset markets of which we are mostly concerned here.

For all those who believe EVs and ‘renewables’ will take over the world, here is a little historical perspective: Karl Benz was the first to take a gasoline powered car into production in 1888 (I have seen a superb reproduction of it in the Mercedes-Benz showroom on Unter der Linden in Berlin). That was the first production car on the (rutted) roads of the day. They were very expensive and only for the super-rich (as the first EVs today were)

The first mass production car was Henry Ford’s Model T first introduced in 1908 at premium prices but became affordable in the 1920s (over 30 years after Benz).

Remember, in the early 20th Century the revolutionary ICE vehicles replaced horses because of the obvious advantages. Today we already have modern highly efficient and affordable ICE vehicles and the EVs are aimed at replacing them with no obvious advantage. The stated need is to ‘save the planet’.

Fast forward to today. The first major modern EV in production was the Tesla Roadster in 2008. Even now, 15 years later, most EVs are not in the ‘affordable’ price range. Compare the growing pains of ICE development of 30 years, we are only about half way to achieving a similar level of progress with EVs.

Of course, the EV revolution depends on the availability, security and the price of electricity. Here is a recent headline: “Electricity prices must rise by 70% to pay for more wind farms” says the UK’s biggest energy generator. As we all know, electricity prices are already high and another huge hike would bring carnage to business as well as domestic.

Thus, mandating power prices even higher to rescue wind farm owners will help bring about a slowing economy and increasing unemployment as more businesses fail.

Already US bankruptcies are rising at an alarming rate – and they have about the cheapest energy prices in the West, Here in the UK, we are in a far worse position as our fossil energy companies are politically discouraged from increasing production.

Bank stocks are on the brink of another collapse

A full-fledged banking crisis (yes, another one) looms. Remember, the banking system lies at the very heart of our economy. That is why governments are so anxious to keep banks solvent if possible (with taxpayer money) when danger strikes as it did in 2007 at the start of the Credit Crunch.

We already know the disaster zone that is commercial real estate especially in the USA. Commercial rents are falling with declining occupancy rates and many buildings are either being handed back to the bank lenders or are about to be.

Over here, we have our own version which is highlighted by the ‘bankruptcy’ in several local authorities as they bought commercial RE at the top of the market and are unable to make enough rent to cover their loans with ballooning interest payments. Here, taxpayers are in line to bail them out that’s socialism at work). In the USA, equity investors will be wiped out and bank lenders take a haircut (that’s capitalism at work).

Barclays is one of our largest retail banks with a large investment division and just look at its precarious position on the edge of the cliff:

The 130p pink support/resistance zone goes back to 2011 – twelve years ago – and the touches on them are highly accurate. This makes it a very reliable support level at 130p – just where it is currently trading. Any clear break would turn the zone into resistance and lead to an eventual test of the 2009 Credit Crunch low of 50p.

And Nigel Farage’s favourite bank NatWest lost a cool 23% last week to yesterday’s low. One of my favourite shorts for Pro Shares, Lloyds, is likewise breaking major support levels.

With debt levels far exceeding those in the 2007/2007 Credit Crunch, bank shares will plumb new record lows as loans turn sour and their Gilts bought at much higher prices when interest rates were near zero are losing millions on their balance sheets in a mark-to-market exercise.

Gold has suddenly become a safe haven

Last week, gold was suddenly recognised as a safe haven. It made a ‘Triple Top’ in May at $2,080 and as stocks rallied in ‘benign’ economic conditions this summer to July 27, gold failed the ‘safe haven’ test and moved lower. But the decline is in a clear Elliott a-b-c three-wave decline which is always corrective to the main uptrend.

But early this month, gold caught a massive bid and at first I was suspicious of it since the Dow was bouncing off support (no need to seek a safe haven in gold then!) and did not top and reverse strongly until the 17th. By that time, gold had surged by $130 off the Elliott ‘c’ wave low -a very strong move.

So something was going on that I did not fully understand on the 17th.

But this advance was exactly testing my upper tramline – a critical juncture. Up to that point, gold was in a downtrend (lower highs and lower lows) and a bullish stance was not fully justified than. But as stocks crashed from that point with the Dow off by 1,800 pts to yesterday’s close, gold rocketed out of my trading channel in a true flight to safety:

So now gold is in a new uptrend and has advanced by $190 and is close to testing my T3 – my third tramline equidistant and parallel from the upper tramline. With the market short term very overbought, I expect a decent pullback soon as per my roadmap. We shall see, but with hedge funds still underweight, any corrections should be minor and the trend is strongly up. I expect to see new ATHs soon.

During the decline from May to early October, hedge funds had built up very large short positions in tandem with very large long dollar positions – the traditional relationship. So now we have a classic short squeeze in gold that I believe has a lot further to run especially with crashing stock markets.

So now the big question for currency traders is this: The dollar has been trading contra its traditional relationship with gold so will that be maintained? Lazy economics textbooks maintain that gold declines as the dollar rallies to keep its ‘purchasing power’ constant over the aeons.

While an ounce of gold today will buy a man’s suit and it would have got you a lovely toga with trimmings in Roman times, we have seen lengthy periods in the recent past when gold and the dollar have traded in tandem – as now. Gold’s purchasing power is now in decline compared with the dollar (not so in other currencies, of course).

Thus, the tandem flights to safety rallies in the dollar and gold are telling us that much trouble lurks in the banking and financial systems that is a complete departure from the positive position until the summer.

And as gold strongly rallies, the gold miners have improved and we are long several miners for Pro Shares. Here is the granddaddy of the US miners – Newmont Mining

Although it remains in the down-sloping wedge, any further advance in the metal will send it bursting out and towards my major target at the $55 region.