Peter Brimelow: Harry Schultz suspects market manipulation

Schultz Suspects Market Manipulation;
Veteran Gold Bug Also Worries
About U.S. Recession in 2007

Peter Brimelow
CBSMarketWatch.com
Monday, July 31, 2006

http://www.marketwatch.com/news/story/Story.aspx?guid=%7B88655570%2D6211...

NEW YORK -- A strong week for stocks, but the top-performing letter isn't buying.

The International Harry Schultz Letter's portfolio has gained up 94.9% over the past 12 months according to the Hulbert Financial Digest, vs. 9.8% for the dividend-reinvested Dow Jones Wilshire 5000.

Schultz hasn't always shown up so well in the Hulbert ratings, although over the past five years his portfolio has appreciated at a 21.31% annualized rate, vs. 4.02% annualized for the DJ Wilshire. But he has been around a long time, nearly four decades.

Schultz's latest letter arrived Sunday night. He offers this acid assessment of the recent rally: "There is a paradox in market prices as I write. We have gold, U.S. dollar, oil, and most stock market indexes all showing a readiness to move up. It is an illogical combo. It may be a temporary fluke or it may be there's manipulation of the indexes going on."

Schultz, never afraid of a radical idea, takes manipulation seriously. He says: "It is fairly easy to manipulate stock indexes via just three or four blue chips, and the multinationals appear in several indexes. We've seen it before. Most stock markets were in virtual free fall and suddenly reversed into reverse head-and-shoulders buy patterns. This is a rarity. The U.S. dollar index may also be subject to manipulation."

His diagnosis: "Some governments are getting desperate re some market action in the face of elections. Painting the tape is an old game."

His diagnosis: "So, monitor all these key market charts to see if something breaks rank and reveals a more "logical" picture."

Schultz is almost completely out of the stock market. He believes the primary bear market that began in 2000 is not over. His suggested portfolio is allocated only 10-15% to non-gold stocks, mainly energy and alternative energy stocks. He's 15-20% in Treasury bills and Treasury bonds, 15-20% in commodities, 20-30% in currencies.

And he has just increased his recommended exposure to gold stocks and bullion to 33-40%.

Schultz is an old gold bug, but he has repeatedly warned that gold bull markets are prone to dramatic breaks. He has a good claim to have caught the last one.

Now he's breathing increasingly easier. Schultz writes: "Gold charts are cautious bullish at press time. Gold is in a mega-symmetrical triangle from the May high. If it breaks upside, as I expect, it'll give a massive buy signal at about $680 basis December gold ... $873 provisional upside target."

Schultz's macro analysis continues to be dark: "The world is on a knife edge between inflation, which often suddenly gets out of control when it passes point X, and deflation, when monetary liquidity suddenly falls behind the X-factor point to keep economies afloat (or triggered by a major debt default or by stock market implosions, e.g. South east Asia markets a few years ago). Being wrongly invested when a "flation-tsunami" hits, can (and often does) slash a portfolio's value by 40% in 72 hours."

Fortunately, says Schultz, gold protects against both "flations," "though it is usually 'relative' in deflation."

Oh , and Schultz thinks there's a 40% chance the United States will go into recession in early 2007, 50% if the Federal Reserve raises interest rates to 6%.

My bullish readers won't like this. But, right now, Schultz's statistics are an impressive argument.