PIVOTAL EVENTS ­ FEBRUARY 12, 2009
Market Update

Bob Hoye
Institutional Advisors
Feb 16, 2009

Signs Of The Times:

Last Year:

"US commercial property prices have fallen 10 percent since August, after rising 90 percent since 2001."
-Financial Times, February 5, 2008

"Trade deficit declined in 2007 after setting records for 5 years."
-AP, February 14, 2008

The imbalance of trade was one of the professional worries during the boom. The irony is that the imbalance was an indicator of the boom and with the crash it has been going the other way. This is another example such as official worries about rising commodities and rising short interest rates.

With these coming down during a typical post-bubble depression, perhaps policy wonks that live in a world of theory are discovering a world of empirical evidence.

***

This Year:

"Economic Masters Ever So Humble In Davos"

"How could we have been so stupid?"
-The Daily Yomiuri, February 7, 2009

The story by David Ignatius continued with "Davos doesn't do humility, normally" and added that the mood was "collective chagrin."

At the bottom of the article it is noted that Ignatius is a member of the Washington Post Writers Group.

"The Great and Rich Fall Out in a Storm of Blame at Davos."
-The Asahi Shimbun, February 8, 2009

***

COMMENTS FOR ENERGY AND METAL PRODUCERS

Base Metal Prices: Along with other commodities, base metal prices followed the cyclical credit contraction down to a magnificent crash.

From a high of 3200 in May 2007, our index (including nickel) plunged 78% to 706 in early December. The rebound made it to 904 in early January and the correction was to 770 at the end of the month.

So far, the recovery has made it to 847 on Friday and this week's terrors dropped it to 819.

Mining stocks (SPTMN) fell to 178 in late November and early December. We like to get long this sector on seasonal weakness late in the year for a good trade out to around March. As with other examples, the initial rally to 337 was outstanding. The correction was to 233 at the end of January and it reached 303 last week.

Down to 256 on Tuesday, the action is constructive towards our seasonal objectives in March-April.

Both base metals and mining stocks are in a cyclical bear market that could resume after April.

Gold Sector:

Gold's nominal price has been expected to rally out of the crash and into March-April.

The key low close was 704 on November 13, and it has rallied 35% to today's 950.

Needless to say, the chart pattern has been constructive.

With the crash, silver was expected to plunge relative to gold and the low close was 880 -- also on November 13. The gold/silver ratio soared to over 80 during the crisis. Then, it was likely to decline out to March-April, and so far the low has been 69.5. Silver's rally to yesterday's 1352 amounts to a rewarding 54 percent.

The action has further to go, and it is time to review the silver/gold ratio (chart not attached). Plotted this way, the ratio conforms to a hot market for both metals and becomes a reliable guide to the excess. We are monitoring this indicator and will advise when the signal comes.

The last such "sell" signal gave us the "out" in early March, 2008. That was when the HIU was 519. The low was 150 in October and the high has been this week's 320. In the meantime, we have been long the sector and are enjoying the action.

Energy Prices:

Crude oil has registered some Downside Exhaustion readings, that are opposite to those registered in late June and early July as the high was set at 147.9. We have been long the oil sector since November and the XOI set its low at 759 in November. The rebound was to 1057 in early January and it seems to be settling at around 900.

The intention has been to ride the seasonal out to around March and exit the trade. Typically, natural gas can set an important low in January. Perhaps the 4.28 at the end of the month met this and so far the high has been 4.88. Tuesday's general hit took this down to 4.54.

The low for gas stocks (XNG) was 314 with the crash, which we advised buying. The bounce was to 427 in early January and the correction was to 345 on January 20. At 387, gas stocks seem poised for the rally out to March-April.

STOCK MARKETS

Cross currents continue. The dynamics of the fall crash and the too-robust initial rebound provide the technical aspects. The latter was too much too early and the correction was likely to carry into February.

This is accompanied by the discovery that the new administration's economic wand has no more magic than that of the old administration. Treasury Secretary Geithner's "plan without a plan" that is estimated to be around $2 trillion was unsettling to the markets on Tuesday. And it should be unsettling ­ throwing credit at a credit contraction has never made a contraction go away. All this is doing is transferring more wealth and influence to the state.

In the meantime, the action remains within a technical pattern that can resolve with a rally into April. This would conform to the typical rebound out of a classic fall crash. Support for this is suggested by the continuing rise in the treasury bill rate, narrowing spreads, steady commodities, declining gold/silver ratio and the impressive rebound in the Baltic index.

We are staying with the plan to exit positions taken in the crash in the spring.

INTEREST RATES

The Long Bond took a nicely-timed hit down to 125.19 on Monday, when the Geithner debacle popped a rally. There is support at this level, which could be brief. On the bigger picture, the long bond was the last asset class that could be bid up and it is now in a major decline. This will inhibit the ability of the Fed in its chronic efforts to expand credit, and to depreciate the dollar.

The ChartWorks registered an Upside Exhaustion on the bond the week before the top at 142.66 and the advice to traders was to play the short side. For investors it was to again get defensive in the five-year note.

Credit Spreads: The corporate BBB continues to narrow, at 723 bps in mid December the spread has come in to 527 bps. Yielding 10.22% then, and 8.78% now, this is up 14 points on a 10.22% yield, which is an outstanding return.

We would hold the position into March-April.

The Dollar Index continues to rally with stock market hits. This was expected with the crash and the action registered an Upside Exhaustion, from which the initial decline was another too fast - too soon.

Recently, the rally from 77.7 to 86.8 is a big test of the 88.5 high. Despite the pop with Geithner's stumble, the action is attempting to roll over. Now at 86, slipping below 84 reestablishes the downtrend likely to run from the crash out to April.

The Canadian Dollar has been expected to rise with the recovery in resource prices and credit spreads out to around April.

The low was 77 with the crash and the initial bounce made it to 85. In an 80 to 82 range this week, the 85 level could be exceeded by April. Then the downtrend would resume.

Feb 12, 2009
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com

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