Signs of the Times
"Federal
Reserve Chairman Bernanke calls it his 'nightmare scenario'. Republicans are
considering including a plank in their party platform calling for a full
audit of the central bank."
~ Bloomberg, August 8
Why not?
Health agencies have been calling for
full clinical testing of "alternative health remedies" such as
homeopathic medicine. The latter could be germane as it prescribes small
amounts of some compounds that are toxic. Now we all know that large
expansions of credit are ultimately toxic. But in the early days of tax-payer
seduction, central bankers touted that they knew just how much to issue to
"manage" the economy. They would never be reckless in providing
stability. Then every country had to have a central bank and a "national
economy" resulting in the longest run of high volatility in history.
Sort of a relentlessly forced instability.
Now the Fed is overloaded with
"toxic waste".
Hey, but not to worry! A year after
the 2008 Crash, the Financial Stability Board was formed and based in Basel.
It is made up of finance ministers and central bankers - all specialists in
the arts of homeopathic finance.
Somehow this reminds of the BIS. The
website of the Bank for International Settlements states its mission is "to
promote international stability". It was formed in 1930 - a year
after the 1929 Crash - and is located in Basel.
"Foreign
direct investment in China fell to the lowest level in two years in
July."
~ Bloomberg, August 16
"China Mobile
Ltd., the world's biggest phone company by subscribers, fell the most [-5%]
in more than year as profit growth cooled to the slowest annual pace in 13
years."
~ Bloomberg, August 16
Perspective
Only a few weeks ago, stock market
sentiment figures were at very bearish readings. This was prompted by the
prospect of Spain's insolvency, Euroland splitting
up and the worst drought in the US in fifty years.
Not all could be enduring. Crops will
soon be harvested and the drought will no longer be in the headlines. Grains
will turn down.
In the meantime, often seasonal
optimism could run into early September. Spanish yields have declined and
industrial commodities (base metals and crude) have rallied as well.
Even most classes of bonds have
rallied this week. This could be anticipating a pause in the stock market
advance. Investment-grade corps, treasuries and emerging market debt are
doing well, but the sub-prime seems to be topping (chart follows).
On money market stuff, the Ted-spread
has narrowed significantly since the concerns of late last year. However, in
the past two weeks it has had some unusual swings. Perhaps some volatility
prior to a change.
An overall blessing has been the
decline in the gold/silver ratio. From 59.4 in June it has declined to 54.5.
Much of this has been accomplished in a rush since last week. Enough of a
rush to drive the daily RSI down to 27. This has been the RSI level that has
ended most of the declines over the past decade.
In looking at the ratio from the
other direction, Ross's Silver/Gold Chart is updated and attached. By this
measure, the rally in precious metals is close to ending.
Usually our Pivots are sent out
earlier on each Thursday, but things looked fascinating yesterday and much of
today was spent trading. In order to get this one out a simpler form is being
used.
Also noteworthy is that December corn
has completed a "Sequential Sell" pattern that suggests an
important top is at hand. The rollover would likely take down other hot
agricultural commodities (GKX).
Momentum on the GKX reached 82 a
couple of weeks ago and that has ended important rallies over the past
decade. One of which was with the cyclical high in 2008. That high was 513 on
the index, the next important high was 570 in March
last year. So far, this year's high was 533 a couple of weeks ago - with the
momentum high. Today's close was 513.
Crude oil has accomplished an
outstanding swing from very oversold to rather overbought.
Also yesterday's ChartWorks noted that a
"Sequential 9" had been accomplished. Also the Dollar Index is
approaching support at the 81 level. Last week we noted that the Canadian was
approaching resistance at 102 on good momentum. It reached 101.6 and it has
declined to 100.5. Technically, a test is needed to reverse the trend, but
weakness in the fall has been likely.
While we have been hoping the
sunshine for orthodox investment would run into early September, the actual seasonals for the stock market suggest caution. Over the
past thirty years the S&P has set its August high early in the last week
of the month. Remember the rules for after Labor Day - Don't be overweight
equities and don't wear white shoes.
With the initial discovery of
financial troubles the flight to the liquidity of gold could help the price
in dollars, but the "flight" could also be to the unique liquidity
of US treasury bills, which would firm up the dollar.
Wrap
- The
advice through the summer has been to sell into the rallies for most
investment sectors. The hit to US bond markets has been a big heads up
and the rebound could run for a week or so.
- It
seems that another liquidity problem will not be avoided. The process of
discovery could begin in the next few weeks.
- In
which case, which sector could provide the "safe haven"?
- In
the disaster that began in March 2000 banks became the defensive equity
group. The long bond rallied from 91.8 in March 2000 to 110 as the crash
completed in late 2002.
- In
the 2008 Crash, long bonds also enjoyed the "flight to
quality" in a bull move from 105 in mid-2007 to 143 at the end of
2008. There was no significant defensive equity sector.
- This
time around, there may be no large equity sector that could be
defensive. Moreover, the European bond revulsion could worsen and spread
to the US bond markets. In which case, the long bond will not become the
focus of the next flight to quality. A sound understanding of term risk
could prevail.
Representative Sub-Prime Mortgage
Bond
The RSI of the Silver/Gold ratio
suggests that it is time to start scaling back positions in miners. Optimum
gold targets are $1692 & $1720.
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
specific investment objectives, financial situation and the particular needs
of any specific person who may receive this report. Investors should seek
financial advice regarding the appropriateness of investing in any securities
or investment strategies discussed or recommended in this report and should
understand that statements regarding future prospects may not be realized.
Investors should note that income from such securities, if any, may fluctuate
and that each securitys
price or value may rise or fall. Accordingly, investors may receive back less
than originally invested. Past performance is not necessarily a guide to
future performance.
Neither the information nor any opinion expressed
constitutes an offer to buy or sell any securities or options or futures
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Moreover, from time to time, members of the
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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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