 PIVOTAL
EVENTS - JANUARY 21, 2010
Signs of the Times
Bob Hoye
Institutional Advisors
Jan 24, 2010
Signs Of The Times
Last Year:
"The Dubai developer that's building
the world's tallest tower has delayed the project after the global
financial crisis halted a property boom in the Gulf." -Bloomberg, January 14, 2009
The fallout has been of Biblical proportions
and as advised in Luke 14:28 "For which of you, intending
to build a tower, sitteth not down first, and counteth the cost,
whether he have sufficient to finish it."
"A Chinese central bank official
attacked comments by U.S. Treasury Secretary Henry Paulson that
China's high savings rate helped trigger the global credit crisis." -Bloomberg, January 16, 2009
"A nation cannot prosper when
it favors only the prosperous."
-President Obama, January 21, 2009
The liberal-left is definitely removed
from reality, and deserves exile to an isolated and quarantined
place where they can only harm themselves.
* * *
This Year – Wild is Back:
"Banks are boosting their lending
to hedge funds and private-equity firms to levels unseen since
before the financial crisis, raising their risk levels and adding
fuel to the buying power of key players across the stock, debt
and buyout markets." -Wall
Street Journal, January 9, 2010
"High-yield bond issuance is
poised this year to surpass the record-breaking levels of 2009." -Bloomberg, January 12, 2010
"China's property prices rose
at the fastest pace in 18 months in December, highlighting the
government's struggle to rein in speculation while maintaining
economic growth." -Bloomberg,
January 13, 2010
It is worth noting that the most academically
contentious increase in administered rates occurred in August
1929. The Fed had been following a rising trend in market rates
of interest and raised the discount rate from 5% to 6%. With
the announcement the New York Times explained that the move to
restrict credit to Wall Street was accompanied by measures to
provide credit to Main Street.
Generations of academics have claimed
that that increase caused the Depression, which while strong
in interventionist theory is weak in empirical research. Great
Depressions always follow a Great Financial Mania.
On January 19th, NYT columnist David
Brooks was glowing about Obama "In many ways, Barrack
Obama has lived up to his promise. He has created a thoughtful,
pragmatic administration marked by a culture of honest and vigorous
debate." Brooks still imagines that Obama is a liberal
– even worse – that 21st Century liberals are fascists
eludes him.
As William Buckley wrote a couple of
decades ago, "Conservatism is the politics of reality."
* * *
STOCK MARKETS
The big market has been working on a
rounded top that this week seems to have described an "over-thrust",
which often ends an important rally. Last week Toronto set a
weekly outside reversal to the downside. This shows urgency to
get in and then bulls expect a new round of buyers to take it
higher. Accomplishing it on a weekly basis is significant, and
the S&P and DJIA are working on the same reversal this week.
The swings have not been as dramatic as in Toronto and the action
is worth monitoring.
The "news" was Tuesday's special
election in Massachusetts. The conclusion was that a set back
to the White House would be good for business and the stock markets.
Actually, the action seems to following the charts.
Sunday's ChartWorks outlined the possibility
of a noteworthy correction and on January 13 Ross outlined the
pending correction in gold's nominal price.
That date's Pivot noted that the correction
in the DX could conclude within a week or so and that the next
rally "could be disquieting to the status quo".
Yesterday, the Dollar Index made it slightly
above the December high, but it could take some work to establish
the rising trend. Virtually, the whole of the investing world
has become dependent upon currency depreciation.
Recently, this showed up in the TSE with
the compulsive jump and hit to resource sectors, which accompanied
by the sharp rally in the dollar seems like ending action.
Since October we have been concerned
about the underlying contraction that without the joy in stocks
and commodities would return to forefront. One indicator that
contraction was beginning to trump euphoria would have been the
gold/silver ratio rising above 65.
The attempt with the Dubai failure touched
65 and retreated to 60.2 on Tuesday. Today's rebound is appropriate
and on its usual page the ratio will be reviewed in more detail.
Once again there is a reminder that politics
is a fascinating blood sport. Fortunately, Western Democracies
do not have the tradition of political murder, but that does
not exclude the equivalent to financial and currency markets
as well as taxpayers. The gang of political thugs running Washington
are just as mean and nasty as the FDR regime was and, as with
his radical experiments, fiscal and currency manipulations will
not make a post-bubble contraction go away.
Perhaps hyper-active expansion in government
may exaggerate the natural rebounds. This has been the case through
the last few months of 2009, and the image we used some months
ago comes to mind. The Dems have been building the US equivalent
of the Berlin Wall as the independent "Tea Party" is
starting to tear it down – one brick at a time.
The "Independents" were very
influential in upsetting the Democratic Machine in Massachusetts.
It’s a start and America's celebration of Independence
Day is only six months away. Senator Scott Brown ran an essentially
conservative campaign in radical liberal territory. The implication
to the rest of the country is fascinating.
In the meantime, our proprietary Bank
Trading Guide continued the rise that began at 154 in mid December
and made it to 165 on Monday. As noted last week, the BKX was
getting overbought at 47.4, but the Guide had further to go.
The high for the banks was 47.7 last Thursday and for the Guide
RSI momentum has rolled over. This along with the volatility
in the Guide provides an alert on banks and financials.
INTEREST RATES
The long bond nicely bounced off resistance
at the 115 level. Actually, there was a double-bottom that set
up the rally. Rather than a runaway trend, a pop to a trading
range has been our objective. The lower part could be found near
118, which fills the dismal gap set on December 21. The higher
part of the range could be overhead resistance around 119.5.
Going the other way, we have been looking
for a top to the action in corporate bonds. For the CYE, this
has registered weekly and daily Upside Exhaustions on the ChartWorks
proprietary model. Typically what is needed on any price series
is a decline in momentum and then a decline in price. This we
have had on the CYE (high-yield) and taking out 6.65 would set
the decline. The high was 6.78 on Tuesday.
Junk (JNK) has also soared – right
up to a weekly RSI of 80, which is almost as high as reached
with the last rally before the massive failure that began in
May 2008.
Of course, the prime mover in price has
been the carry trade that has been making huge returns. It is
well-known that every generation thinks that it has invented
sex. Unfortunately, it's only every other generation that gets
to think that it has invented the carry trade.
In the 1825 financial mania the discovery
was "[It] seemed mathematically demonstrable that wealth
was easily attainable when money could be borrowed from one set
of persons at 4 percent and invested with [others] at 10 or even
20 percent. interest". This was followed by chagrin
and remorse that lasted for a generation.
The attached chart of the spread between
high-yield (CYE) and the 20-year treasury (TLT) shows the dramatic
rise (narrowing) to the most over bought since 2007. That's on
both the daily and weekly measures, and the narrowing trend can
suffer a noticeable correction.
Currencies: The
initial rally for the DX out of the bear raid was from 74.2 in
late November to 78.4 on December 22.
As noted above, the correction could
conclude this week and the low was 77 on Tuesday morning and
the rebound made it to 78.8 earlier today, which sets a new high
for the move.
Last week we noted that the recent rally
for the Canadian unit seemed to be a test of the 97.7 reached
in mid October. The subsequent low was 92 at the first of November
and the test made it to 97.8 last week.
Also noted last week was that the C$
could "drift down as commodities stopped going up".
Well – the decline in both has been distinctive as the
CRB has slipped from 294 to 278 as the currency declined from
97.8 to 95 earlier today. There is support at this level and
if this does not hold the next level would be 93.
The CRB is at support that may not hold,
but there is more support at 267.
COMMENTS FOR ENERGY AND METAL PRODUCERS
Energy Prices
have ended the strong weather rally. Crude reached 84 last Friday
and has slumped to 77 (76 on the March contract).
With the exceptional cold easing, crude's
decline would likely complete in January. So far so good, and
we are watching the technicals for an oversold condition.
Natural gas will likely remain in a tight
supply condition and a narrow trading range for some weeks.
Last week we noted that the rally to
1129 for oil stocks (XOI) was a test of the 1133 high set in
October. In noting the loss of momentum indicated by the set
of declining RSIs we concluded that the sector needed significant
correction. The drop to 1084 was quick and it was concluded that
going through 1080 would take the oil patch down to support at
1040.
Today's low has been 1057.
Gas stocks (XNG) soared to 568 with the
chill and have been trading between 550 and 565 since. This range
could prevail until tight supplies ease.
Base Metal Prices: A couple of weeks ago we thought that the GYX
(metal prices) would reach an RSI of 75, which would limit the
rally. The buying surge drove the RSI to 77, which was sufficient
for us to conclude that an intermediate decline was possible.
The index reached 417 on January 7 and
the decline has been to 390 yesterday which is the latest posting.
LME prices slipped 1.5% today and taking out 380 would set the
downtrend.
Base Metal producers (SPTMN) were also
likely to stall out at an RSI of 75 and it reached 77 on January
12, which seems enough to force an intermediate decline. This
index just does not "do" Upside Exhaustions so we are
using what worked for us at the last big peak.
Gold Sector:
We have been looking for a correction in gold's dollar price
to run to late in the month. The January 13 Chartworks determined
that there were two paths to the next intermediate rally. One
would end at a moderately low price and the other path would
find support at the 20 week moving average. Today's low of 1088
compares to the ma at 1090, and a rebound of some weeks duration
seems likely. Ross will provide some details.
Of course the guide for investors in
the sector has been gold's real price, which reflects profitability
for the industry.
With the Dubai World default, our Gold/Commodities
Index rallied to 400 at the first of December and with the revival
in financial markets it declined to 341 on December 30.
It has since increased to 360 and we
remain aware that when it rises it can indicate growing credit
concerns. This was the case when it reversed off the low at 134
in May 2007. It turned up as the credit markets turned down,
then, after reaching 519 in February the turn down anticipated
the financial rebound that began in early March.
If the current rise continues it will
again signal credit troubles, and let's face it there still is
a huge amount of unserviceable credit out there.
In the meantime, the gold sector is expected
to perform well through this post-bubble contraction. Our view
is that the seniors have yet to fully discount almost two years
of improving conditions as indicated by the real price.
However, the play has turned to the exploration
juniors and while the action for many has been good it is not
yet an encompassing phenomenon. For those familiar with this
sector the advice has been to be aggressively long.
The gold/silver ratio declined with the
December party to the close of 60.7 on Tuesday. The rebound to
today's 63 with the selloff in popular asset plays is appropriate
and if it rises through 65 it would indicate the financial storm
is back.
- Climategate has been followed by “Glaciergate”
whereby even the corrupt IPCC admits the hysteria about Himalayan
glaciers disappearing by 2035 has been based upon no science
at all.
- Tsk, Tsk!
CREDIT SPREAD: HIGH-YIELD TO TREASURIES
- This is plotted to show the “bullish”
character of spread narrowing.
- The “rally” from 233 to
753 has been remarkable.
- Both weekly and daily measures of RSI
are at levels associated with the high in 2007.
###
Jan 21, 2010
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
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