 PIVOTAL
EVENTS - NOVEMBER 26, 2009
Signs of the Times
Bob Hoye
Institutional Advisors
Nov 30, 2009
Progress requires little
else ...but peace, easy taxes and a tolerable administration
of justice. –
Adam Smith
Signs Of The Times
Two Years Ago:
"U.S. Bank shares are
so cheap – and dividends so high – that some of the
world's biggest investors say the combination is 'unbeatable'".
– Bloomberg, October 30, 2007
"Inside a crowded brokerage
in a central China city, Zhang Waniong was getting anxious as
China's stock market ticked to a new high. The problem: He couldn't
find an unoccupied trading terminal to buy shares." –
Wall Street Journal, November 1, 2007
The story was noted as being
2 weeks old, and included the information that China was opening
100,000 trading accounts per day. The high was on October 17.
"No U.S. Recession: Bernanke"
– Reuters, November 9, 2007
October 2007, of course, was
the top of the bull market, and a year later the NBER determined
that the recession started in December 2007. One of the features
of the end of a great financial mania is that the recession starts
virtually with the beginning of the bear market.
"Multi-decade bull market
for base metals" – Business News Network, November
27, 2007
The reasoning was the extraordinary
demand from China and India. The high for Goldman's metal index
was 536 in 2007 and the low was 187 in March 2009.
* * * * *
This Year:
"China, the world's biggest
consumer of metals is experiencing 'powerful' growth in demand
for all commodities and will lead the global economic recovery."-
Bloomberg, November 17, 2009
"Mayors Sound Alarm Over
Drop in City Revenues"
"This is unknown for over
a generation." – Wall Street Journal, November
19, 2009
"Metal Prices Will Move
Much Higher" – Base Metals Price News, November
25, 2009
"A Feast of Good U.S.
Data – In Time for Thanksgiving" – Financial
Post, November 26, 2009
* * * * *
STOCK MARKETS
On the bigger picture, asset
inflation continues in the midst of an ongoing credit contraction.
On the near-term, last week's
update on the Post-Euphoria Model, along with the Stochastic
rolling over, suggested the S&P could correct into mid-December.
However, the action has been more positive than the model would
suggest.
The reason is the continued
decline in the Dollar Index that is making new lows for the move.
While still within the Sequential Buy pattern, it has yet to
complete. The recent force upon the DX is the relentless intrusion
by the Democrats into the normal workings of society. The attempt
to get the monstrous health bill through the Senate involves
a reported $300 million bribe to the senator from Louisiana.
The economies of Europe and
Japan are worse than America's and some think that this should
strengthen the dollar. Our view is that the dollar is not so
much supported by the economy, but pushed up by urgent liquidation
and down by speculation in asset prices. And the latter play
has become immense as the carry trade has been encompassing most
anything that trades.
Of course the main ingredients
of the carry is low short rates, attractive spreads and rising
bond prices. And now the world has been using irresistibly low
short rates against any price series that is rising.
By now, the more observant
policymakers must be concluding that the "stimulus"
does not go into losers, but into the trading tactic de jour.
Let's face it, the "lender
of last resort" scheme, itself, has been a losing concept.
In the stock market, we thought
that an exceptionally bullish Daily Sentiment reading at 92%
compared to 87% in October 2007 was a signal to be respected.
This with an RSI momentum we thought would be followed by an
intermediate decline. A couple of setbacks followed by fresh
highs has been the result.
We had thought that the trend
in widening short-dated spreads was anticipating widening for
corporate bonds and this has not been the case.
Why?
The dollar continues to decline
and it seems that it will require some dramatic event to end
the party.
Veteran traders have been aware
of this for many weeks now and investors may have been uncomfortably
underweighted. On the latter the only offset is that conditions
are rather speculative – within a post-bubble credit contraction.
The other hazard is the ambitious
pursuit of corporatism in Washington. The offset on this is the
growing popular opposition to such a reckless experiment in authoritarian
government. As noted last week insane politics will drive capital
into hiding, which will reduce liquidity.
This is as far as we got yesterday
when the news about "Dubai World Seeks to Delay Debt
Payments as Default Risk Soars" hit the wires. This
occurred as we saw that stock market sentiment was again at exceptional
levels.
Investors Intelligence reckoning
on "bears, bulls and chickens" is at 74.2 percent,
which compares to the 76 percent reached at the peak in October
2007. This sentiment calculation is slower moving than the Daily
and is at a high for the move. The low was 28 percent in last
fall's crash.
The irony is that the best
levels on stock market sentiment has been reached with the best
headlines on economic numbers just as a nasty reminder arrived
that the credit contraction has not concluded. And it won't conclude
until the consensus despairs that it will never end.
On the Dubai story, the telltale
was the 131 bps increase in the default risk during the month,
with yesterday's 116 bps jump sounding the tocsin.
Geographically, the Dubai Islands
are in the Red Sea, but financially it is further away than Ireland
or Iceland, but not isolated from the rest of the world. For
example, the Abu Dhabi central bank owns their bonds, etc.
Market adjustments today seem
appropriate. Various credit spreads have widened, global stock
markets fell by 2 to 3 percent, the dollar firmed as crude oil
declined. Base metal prices fell some 2.5%. The gold/silver ratio
increased.
This coming when the establishment
was celebrating the wonders of applied Keynesianism provides
an excruciating moment in financial history. In an instant, markets
have turned from "easy" credit to "diseased"
credit.
Stock markets seem even more
eligible for an intermediate decline.
* * * * *
INTEREST RATES
The big thing is that the financial
markets had become confident enough to be vulnerable to a profound
change – Dubai represents profound change. In the 1600s,
what is now called the Netherlands was the commercial and financial
center of the world. After a speculative binge, the Dutch called
the inevitable disappearance of liquidity "diseased"
credit. Works for us.
The next few trading days will
be interesting and it is worth looking back at some alerts.
As we have been noting, short-dated
credit spreads such as the TED-Spread have been widening. At
the longer end, the sub-prime mortgage bond has been declining
in price since mid October. But, long corporates have been in
la-la land with spreads narrowing into Tuesday. Wednesday recorded
a couple of beeps widening.
Old reliable – the gold/silver
ratio – increased on the week from 60 to the close of 63.3
yesterday. Last week we noted that rising to 65 would "confirm
at least an intermediate setback to most asset classes".
Another indicator that was
useful going into the credit change in May-June. 2007 and then
in October 2007 was the preceding increase in gold's real price.
Our Gold/Commodities Index had reversed by early September and
this jump from 371 last week to a new high for the move at 392
is also a warning.
Obviously, risk aversion is
returning and we have been advising to reduce exposure as much
as possible.
Of interest is that the long
bond has been rallying this month with the party in other assets.
Bonds gained a half-point in Canada today and we are uncertain
how far this may go, or if it is the last thrust of the rally
that started at 117.8. There is overhead resistance at the 123
level.
A reversal in the curve to
flattening would be another indicator of credit concerns.
Currencies seem to be stretched to the limit.
On the DX, an uptick to 75.5 would conclude the Sequential Buy
pattern. Yesterday's close was 74.3 and today's was 74.8. Technically,
the Dollar Index is poised for an intermediate rally.
Fundamentally, the financial
world is at the brink of the next phase of the post-bubble contraction
and one of the features would be a rising dollar – against
most currencies and most commodities.
COMMENTS FOR ENERGY AND METAL PRODUCERS
Energy Prices: At 82 in late October crude was overbought
and we thought eligible for a seasonal decline until the end
of the year. As we have been noting, the extended decline in
the dollar kept the price in a 78 to 80 trading range. Crude
was down 1.72 today with the Dubai problem which decline could
continue as credit problems shake down the Sheikhs.
Oil stocks (XOI) set their
high at 1133 in the third week of October and declined to 1042.
The rebound was to 1112 two weeks ago and it stayed near this
level until Wednesday. As concluded last week, taking out the
50-day ma would set the downtrend. Taking out 1042 would extend
it.
Natural gas stocks (XNG) set
their high at 549 on October 20, and last week we noted that
the 50-day moving average had been taken out, which would start
the decline. Taking out last week's low of 492 would set the
downtrend.
Base Metal Prices: Last week's theme was impetuosity.
Goldman's metal index had reached new highs for the rebound at
370, making an 8 percent gain in only 3 days.
This was accompanied by glowing
forecasts, some of which are noted above.
However, it seems that China
may have built a huge position. Not so much for consumption,
but as a hedge against insane U.S. policymakers.
China has not been the only
big account playing the game as many pension funds have been
at it again.
Because of the intensity of
the bear raid on the dollar the seasonal decline in base metals
has been delayed. It could be starting.
Mining stocks (SPTMN) set a
high at 1009 on October 25. This was also the momentum high at
the highest weekly RSI since 2007. The subsequent low was 862
and the rebound made it to 1015 yesterday, which is the test
of the high – but at a lower RSI. The index is of Toronto
mining stocks and it suffered a 2.7% plunge to 988 today. Taking
out support at 930, which is also the 50-day ma, would set the
downtrend.
We have been looking for an
intermediate decline and the resumption of liquidity concerns
can assist this.
Gold Sector: Last week we noted that while gold's
real price could continue to rise into late December, the nominal
price could reach a trading high "within a week or so".
Today's trade had gold up a
little and silver down a little, such that the ratio increased
from yesterday's close of 63.3 to 64. As noted above, this is
appropriate and if silver continues to decline relative to gold,
it will indicate the resumption of credit concerns around the
world. If silver plunges dramatically relative to gold it would
again be indicating that trouble is arriving quickly.
Last week's advice was to lighten
up on the senior golds with the intention of accumulating smaller
caps on weakness.
* * * * *
POST-SCRIPT
The speech Bob gave to the
Fall Dinner Meeting of the Committee For Monetary Research And
Education introduced the subject that the global movement of
authoritarian government would soon be seen to fail.
The next phase of the post-bubble
contraction will overwhelm the ambitions of interventionist economics.
The failure could prompt the conclusion that interventionist
theories have been contrived, like government credit, out of
thin air.
The other part of the paper
was that Mother Nature runs the climate and temperatures have
been declining. It also noted that climate alarmist theories
were also derived out of thin air.
One of the lines about the
quality of such "research" was:
"Globally, the rate
they have been going through them, there will soon be a shortage
of lies. Why soon? They are already out of half-truths."
Recent revelations about the
cooking of the climate record by the CRU is timely and marks
the realization of the greatest scandal in the history of science.
The attached article from the
Telegraph could be indicating the start of popular reform of
corrupt government policies.
Climategate: five Aussie MPs lead
the way by resigning in disgust over carbon tax
By JAMES DELINGPOLE November
26th, 2009
Australia is leading the revolt
against Al Gore’s great big AGW conspiracy – just
as the Aussie geologist and AGW sceptic Professor Ian Plimer
predicted it would.
ABC news reports that five
frontbenchers from Australia’s opposition Liberal party
resigned their portfolios rather than follow their leader Malcolm
Turnbull in voting with Kevin Rudd’s Government on a new
Emissions Trading Scheme.
The Liberal Party is in turmoil
with the resignations of five frontbenchers from their portfolios
this afternoon in protest against the emissions trading scheme.
Tony Abbott, Sophie Mirabella,
Tony Smith and Senators Nick Minchin and Eric Abetz have all
quit their portfolios because they cannot vote for the legislation.
Senate whip Stephen Parry has
also relinquished his position.
The ETS is Australia’s
version of America’s proposed Cap and Trade and the EU’s
various carbon reduction schemes: a way of taxing business on
its CO2 output. As Professor Plimer pointed out when I interviewed
him in the summer, this threatens to cause enormous economic
damage in Australia’s industrial and mining heartlands,
not least because both are massively dependent on Australia’s
vast reserves of coal. It is correspondingly extremely unpopular
with Aussie’s outside the pinko, libtard metropolitan fleshpots.
Though the ETS squeaked narrowly
through Australia’s House of Representatives, its Senate
is proving more robust – thanks not least to the widespread
disgust by the many Senators who have read Professor Plimer’s
book Heaven
And Earth at the dishonesty and corruption of the AGW industry.
If the Senate keeps rejecting the scheme, then the Australian
government will be forced to dissolve.
For the rapidly increasing
number of us who believe that AGW is little more than a scheme
by bullying eco-fascists to deprive us of our liberty, by big
government to spread its controlling tentacles into every aspect
our lives, and scheming industrialists such as Al Gore to enrich
themselves through carbon trading, this principled act by Australia’s
Carbon Five is fantastic news.
Where they lead, the rest of
the world’s politicians will eventually be forced to follow:
their appalled electorates will make sure of it.
###
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
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