 SIGNS OF THE TIMES - JULY 5, 2007
Exuberance
Bob Hoye
Institutional Advisors
posted Jul 12, 2007
" 'Blank-check' shell
companies, also known as a 'special purpose acquisition company'
raised $4.1 billion on 33 IPOs so far this year, compared with
$1.4 billion on 22 offerings during the same period a year ago."
-Wall Street Journal, June 26
During the final year of the
South Sea Bubble of 1720 there were some 485 new stock issues.
Many were touts about "new" technology, and one was
about a deal that was so good it had to be kept a secret.
"UK pension fund with
£ 8 billion in assets plans to double its commodity allocation
to 2% over the next 18 months.
Chief Investment Officer said
'reducing the volatility of returns is the reason behind our
investment in commodities.' "
-Reuters, June 27
Glad they included the explanation
- thought they were talking their book.
"Regulators Tighten Subprime-Lending
Rules"
-Wall Street Journal, June 30
The BBB subprime mortgage bond
we've been following plunged from 100 in August to 73 on February
27. The rebound took it to 84.60 on May 24 and the old low of
73 was taken out a week ago Wednesday and it only took a few
days to get down to 68.
It is not certain if this is
based upon transaction or a math model.
"United Capital Hedge
Fund Halts Withdrawals [by clients]"
-Bloomberg, July 3
The fund has been positioned
in subprime mortgage bonds. Where is all that "liquidity"
when you really need it?
Stock Market: Last week the BIS published an overview
on the financial markets that was meant to be sobering and, as
belated as it is, sobriety is the usual consequence to "Rational
Exuberance". So far sobriety has been selective.
Our rational exuberance theme
has served to emphasize that certain characteristics of the culmination
of a great boom are common to each one. Other than the signature
of outstanding technical dynamics, the key items include important
changes in the yield curve and in credit spreads.
As we've been noting, typically
the final stages of a bull market are accompanied by 12 to 16
months of curve inversion. This began in February 2006 which
suggests that culminating excesses would be probable in the March
to July window.
So far so good, and the next
step in this pattern has been that typically the wheels start
to fall off the most salient speculations as the curve reverses
to steepening. Inversion reached its maximum in late February
and had reversed to steepening in May.
Outside of credit instruments,
the most intense speculations have been recorded in base metals
and the Shanghai Stock Exchange. The latter generated a rare
"Upside Exhaustion" reading in May. These types
of signals were last seen in the first half of 2000. Opposite
signals ("Downside Capitulation") were registered
on a number of sectors and exchanges in late September 2002 as
that bear concluded.
As represented by nickel and
lead, intense speculation accomplished the biggest percentage
gains in a hundred years of data. That's on a real basis, as
deflated by the PPI and the gains were away beyond previous "bests".
Copper did it to May 2006, nickel to this May, and lead is still
working on a huge record gain (some 3% of concentrate production
has been shut down due to a "lead-poisoning"
investigation).
Since nickel's high on May
21 the decline amounts to 34%. From a sensational high in late
May Shanghai's initial hit amounted to 21%.
Then we have the second phase
of what appears to be an exceptional liquidity problem in the
subprime mortgage game. This is not just a problem presented
by the end of a sensational ramp up of price. Essentially the
markets have to deal with the culture of pricing by mathematic
models. Exacerbating this artificiality has been that with all
the "bundling" of various mortgage bonds has
been the convention of rating the quality by mathematical models
as well.
As if that is not enough, there
is the culture that because of the assumption of infallibility
enormous powers have been granted to central bankers. (One of
the most disastrous promoters in financial history, William Patterson,
backed the formation of the Bank of England in 1694. The promotional
material included the still appealing notion that a central bank
with the power to issue notes beyond reserves would "infallibly"
lower interest rates.
A brief, but comprehensive,
story by Ambrose Evans-Pritchard is worth reading here:
It includes some fine word
craftsmanship with "mutant capitalism", "This
is the big one: all portfolios will be shredded", as
well as some comments from the BIS report.
Our conclusions are that the
immense liquidity problem created by financial engineering will
eventually be cleared through trade-set prices.
Mr. Margin is having serious
meetings with the big brokers with considerable exposure to the
mess. Before it is over Mother Nature will be converting even
Keynesians to the ancient benefits of sound money.
In the meantime, the SSEC has
been working on the test of its May exuberance. The high was
4336 and the test made it to 4312, from which the action has
been dull.
That's until today when the
5.3% slump set a series of descending highs and lows. This violates
the major trend line and taking out the 3600 level will establish
the down trend.
Given the excesses of an "Upside
Exhaustion" on the monthly reading, and changes in global
credit markets, this could be the start of a cyclical bear market.
As this possible transition comes in it will have profound consequences
on the senior stock exchanges.
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
SIGNS OF THE TIMES - JULY 5,
2007
Hoye Archives
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