Signs of the Times
"Is the stock
market immune to world angst?"
~ INO.com TradersBlog,
August 9
"A new vision
of an America in which prosperity is shared."
~ President Obama, Chicago, August 12
Democrats and their mainstream media are becoming increasingly Randian,
whereby inspired producers are condemned and constrained by an authoritarian
mob. Recently, a rather good definition has been circulating.
Ineptocracy:
A system of government where the
least capable to lead are elected by the least capable of producing, and
where the members of society least likely to sustain themselves or succeed,
are rewarded with goods and services paid for by the confiscated earnings of
a diminishing number of producers.
"Indian
industrial production slid in June for the third time in four months, with
output of capital goods plunging the most on record."
~ Bloomberg, August 9
"Concerns
about China's economy intensified Friday on signs that Beijing's attempt to kick start growth aren't working."
~ Wall Street Journal, August 10
"The U.S.
mortgage delinquency rate increased for the first time in a year as slowing
economic growth left more borrowers struggling to pay their bills."
~ Bloomberg, August 9
These suggest that the global economy
is slowing and won't be able to service the huge expansion of credit. That's
the old stuff taken on during the joyful bubble, as well as the newer stuff
shoveled out by governments in a desperate attempt to end a fairly typical
post-bubble contraction.
Our view has been that the
contraction of private-sector debt will, eventually, overwhelm government
efforts to expand credit.
Perspective
There are a number of popular summer
songs and one from the 1960s has some memorable lines. "The summer
wind, came blowin
in..." is positive and the stock market has been positive.
Another part of the lyric is "Like
painted kites, those days and nights - went flyin
by".
And the last line is "My fickle
friend, the summer wind".
Needless to say, but we are dancing
closer and closer to the exits.
For how long?
Stock Markets
Sentiment numbers such as the AAII
reached very low two weeks ago and "Asset Allocations" indicating
money manager bullishness is at an exceptional low.
It seems that the establishment
became extremely concerned about European insolvencies. Then there are
worries about the drought and the harvest. But this is not the traditional
season for panics.
Somehow very serious bearish
sentiment has to ease - perhaps by a few more weeks of rising stock prices.
Credit Markets
Credit markets have been steady with
Spanish yields, for example, trending lower since July 24. Since early June
the sub-prime bond has soared from 48 to 58. The reach for risk is almost
becoming giddy with excitement.
At the short-end, the Ted-spread has
narrowed from .58, with the concerns of late in the year, to .33. This has
brought the RSI down from an excessive 90 in the fall to 30. This is a big
swing and the reversal, when it comes, will be impressive.
Yesterday's ChartWorks
reviewed the excessively bullish sentiment for US bond markets. On technical
patterns, Ross called the tops for long treasuries in June on the
"Eiffel Tower" story. In taking out the June low, this has now
broken down. However, it is getting oversold and a brief bounce seems likely.
A few weeks later in the topping
pattern, LQD (investment-grade corps) has also broken down. It is not as
oversold as the long bond.
The next in the topping trio was the
EMB (emerging debt) set its high at 119.5 on August 6. The price has slipped
to 118 and taking out 116 would set the downtrend. This could happen in the
fall.
There has been some
"stories" with the action. Out of European bonds and into American
issues. Perhaps this week has seen some of the opposite.
On the bigger picture, it is tempting
to consider another "flight to quality" rally on the first whiff of
troubles. Our view has been that, number one, the speculation has been
exceptional. Technical patterns suggest at least an intermediate decline.
The other point, number two, is that
great financial bubbles have been followed by diminishing abilities to
service debt by governments, companies and individuals. We've been calling it
the great bond revulsion. It has been seriously damaging European issues;
perhaps American and Canadian issues are next?
Commodities
Cyclical commodities such as base
metals (GYX) set their peak in 1Q2011 at 512. Our Momentum Peak Forecaster
expected that speculative surge to complete around that March (ü) and
then start a cyclical bear market. Last week's low at 346 was a new low for
the move.
The action became oversold at the end
of June, but in trading sideways is at neutral momentum. A rally into early
September seems likely.
Base metal mining stocks (SPTMN) fell
in half as the index slumped from 1600 in February 2011 to 781 last week. A
sunny rebound could run for a few weeks.
Copper's real price (deflated by the
PPI) continues to trade at exceptional highs. This continues to provoke theft
of wire and pipe and reminds of when silver soared in 1980 to 48 and
accomplished a 16 gold/silver ratio. The latter was historically low on an
uptrend that began in the early 1800s and brought silver out of attics and
into refineries at an unprecedented rate. The public knew to take the money
off the table. The Hunt Brothers were immune to common sense.
High real prices over such a long
time are also inspiring huge increases in production capacity. Some has been
bought by China for "investment" purposes, which could become a
problem. Eventually, copper inventories along with those of other base metals
could become so large as to be visible from outer
space. Hitherto, the Great Wall of China has been the first man-made object
that can be seen by astronauts.
Natural gas seems to be leading the
way. Its real price (deflated by PPI) was exceptionally high from 1996 to
2007. Then the change to much lower prices has been
driven by new technology. A few years ago, we reviewed Cesare
Marchetti's growth to maturity curves for energy
and the one for natural gas had yet to be accomplished. It has now and we
will dig out the research.
Next on the list of items enjoying
high real prices is crude oil, and the condition has prevailed from 2003 to
present. Natural gas was essentially a North American price and crude is
international with the premium for 7,000 years of Middle East political
hysteria. Innovation in production will continue to diminish the impossible
region's relative output and influence.
The incredible "Peak Oil"
rally registered a weekly Upside Exhaustion in June 2008 and we concluded a
cyclical bear would follow. We also concluded that if the Upside registered
on the monthly reading a secular bear would follow. That fateful reading was
accomplished at the end of June.
Probability of a secular bear was
reinforced by the high of 114 in April 2011. That was part of the action on
our Forecaster and when commodities are big on the play the signal has been
close to a cyclical top.
This has been the case for base
metals and the CRB. The question is when will crude oil get in line?
Production from oil shales around the world will continue to increase, Middle
East hysteria will continue - as will the post-bubble contraction. Crude's
rally could run for a few weeks more and then become vulnerable to problems
in the fall.
Currencies
Last week we were looking for dollar
weakness to resume with the "good vibes" lasting for a few weeks.
The DX is at neutral momentum and Sunday's ChartWorks
concluded "More short term vulnerability".
Going the other way, the Canadian
dollar is again popular as the daily RSI has soared from less than 30 in June
to 71. Today's 101 compares to the high of 102 reached last May.
The fun can run for a few more weeks.
Summer Wind
Songwriters: MERCER, JOHNNY / MAYER,
HENRY / BRADTKE, HANS
The summer wind, came blowin in - from across the sea
It lingered there, so warm and fair - to walk with me
All summer long, we sang a song - and strolled on golden sand
Two sweethearts, and the summer wind
Like painted kites, those days and nights - went flyin
by
The world was new, beneath a blue - umbrella sky
Then softer than, a piper man - one day it called to you
And I lost you, to the summer wind
The autumn wind, and the winter wind - have come and gone
And still the days, those lonely days - go on and on
And guess who sighs his lullabies - through nights that never end
My fickle friend, the summer wind
- The 1966 recording by Frank Sinatra
is a gem.
Bob Hoye
Institutional Advisors
The opinions in
this report are solely those of the author. The information herein was obtained
from various sources; however we do not guarantee its accuracy or
completeness. This research report is prepared for general circulation and is
circulated for general information only. It does not have regard to the
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Neither the information nor any opinion expressed
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This essay is part of Pivotal Events that was published for our subscribers August
16, 2012.
Copyright © 2003-2008 Bob Hoye
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