SIGNS OF THE TIMES:
"Fears of a
new recession that loomed over the economy this summer have all but
receded."
~ AP, November 5
"I do not
want the same kind of focus on safety and soundness that we have in OCC [Office
of Comptroller of the Currency] and OTS [Office of Thrift
Supervision]"
"I want to
roll the dice a little bit more in this situation towards subsidized
housing."
These highly-reckless statements were
made by Congressman Barney Frank as chairman of the Financial Services
Committee. He and his fellow Democrats encouraged the Fannie and Freddy disaster, that has yet to be resolved.
The good news is that Frank announced
his retirement last week. The bad news is his financial legacy.
Last week's wonderfully oversold
stock market was accompanied by urgent policy statements:
"Germany told
to act to save Europe"
~ Financial Times, November 25
"Euro zone:
Possibility of asking the IMF for more help"
~ Yahoo! Finance, November 26
Then came the big remedy:
"Fed, Five
Central Banks Cut Dollar Swap Rate"
~ Bloomberg, November 30
We have often mentioned that
announcements of these big "fixes" should be timed for when the
market is ready to rally, rather than the other way around. It helps the true
believers.
Perspective
Volatility!
Stocks, bonds, commodities,
"Black Friday" shoppers, occupier-anarchists and even central
bankers have been volatile. The latter have been inspired to again lower
rates and add more stimulus. Old ideas, but as said
in Tudor times, "One beam in a dark place hath exceeding
refreshment".
The attached chart of the VIX shows
the set ups to "buy" signals.
We had been looking for choppy action
that would net out positive into January. The S&P low was 1075 in early
October and the high was 1292 four weeks later. At 1247, the churning-around
level is around 1270.
This week's jump has been outstanding
and we think the accomplishment will be to keep going for some six weeks. The
percent gain is not yet known.
COMMODITIES
Crude oil's action has been very good
- enough to push the CRB up over the past 8 weeks.
Within this, agricultural prices (GKX)
continued their decline. The high was 570 earlier in the year and the low was
406 on Friday. That's a 29% decline. The RSI got down to 30 and a decent
rally is possible.
Over in the base metals, the GYX set
its high at 502 in April and plunged 30% to the 350 level in early October.
The third test was accomplished last week and the pattern suggests up.
In January our Momentum Peak
Indicator expected speculation to surge into April, setting a cyclical high.
CREDIT MARKETS
As the saying goes, credit is money
of the mind, and there is a difference of perception out there. Central
bankers have been reckless in easing, but markets have been tightening.
The action in the money market
continues to indicate tightening conditions.
Three-month Libor continues the rising
trend that began in June at 0.245%. At 0.530% the yield had doubled. Yes, we
are dealing with very small numbers, but the trend is important.
This was the case in 2008 when Libor
turned up in June of that fateful year.
Perhaps increasing regard for risk is
still at work.
This also shows up in the Ted-spread
with its widening trend since July.
Of course, these two are integrated
and the numbers are low. But, if they break out beyond current levels it
would be a warning on the next return of risk.
More than likely, this would be
confirmed by the gold/silver ratio rising above the trading range of the past
two months.
At the long-end, markets have been
tightening - rather severely as corporate spreads have moved to new "wides". With this, sovereign debt yields rose to new
highs.
This is also defying central bank
ambitions to lower rates where it counts, but velocity has a mind of its own
in a post-bubble contraction. Spreads also have a mind of their own in
defying official hopes of narrowing.
Although painful to orthodox
investors and frustrating to policymakers, this is how financial history
works. Interventionists still insist that lower rates will eliminate problems
and restore prosperity. This phase of it essentially began in 2007 when
developing concerns revived the notion that the Fed would cut administered
rates and all would be well.
It still hasn't made it into the
textbooks, but the most dramatic plunges in administered rates occur only
during the first bear market in a post bubble contraction. Following the 1873
bubble, the Bank of England's rate plunged by 650 basis points. Following
1929, the Fed rate plunged by 500 bps as has been the case following the 2007
bubble.
History is working the way it should,
which is the mind of the market. Interventionists
economists and their disciples continue to suffer the consequences of a
closed mind.
THE LONG BOND
The rush to 140 in August was strong
enough to register an Upside Exhaustion on the Chartworks
proprietary model. The action was the flight to long-dated
"quality" on Euro concerns. The jump to 147 in mid-September was on
the new promotion of the old "Operation Twist" from the 1960s.
Technically, following the
"Exhaustion" there was the double top at 147 and 146 in late
September. The test stalled out at the 145 level two weeks ago.
This reminds of the ability of the
S&P to bounce off support in September - only the other way around.
The long bond can decline in price
into the new year. This could be interrupted by year-end portfolio
adjustments.
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 contracts. Foreign currency rates of
exchange may adversely affect the value, price or income of any security or
related investment mentioned in this report. In addition, investors in
securities such as ADRs, whose values are influenced by the currency of the
underlying security, effectively assume currency risk.
Moreover,
from time to time, members of the Institutional Advisors team may be long or
short positions discussed in our publications.
Copyright
© 2003-2008 Bob Hoye
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