Signs of The Times
- Bloomberg, November 11.
Bloomberg, November, 12.
- Bloomberg, November 12.
- Bloomberg, November 12.
- Business Insider, November 14.
It was the University of Michigan report and it was at 89.4, up from 87.5
on the previous month.
- Anonymous.
Perspective
At 89.4, the US consumer has clocked the biggest number since July 2007. The
cyclical low was 55 set in November 2009.
On the other side, commodity or producer prices remain weak. Over time this
will feed pricing pressures into commerce and industry. This impairs cash flow
and makes it difficult to service debt.
More specifically, Deutsche Bank calculates that if crude drops to $60 some
30 percent of B and CCC bonds would default.
Charts showing the decline in Iron Ore Prices and South African Coal Prices
follow.
Since the summer both have taken out key lows, extending the downtrend that
started in 2011.
Last week we reviewed that the business cycle turns with commodity prices,
which has been the case for a couple of thousand years anyway. Included were
charts of crude oil and producer prices.
Throughout business history rising prices have indicated prosperity and falling
prices have indicated hard times. Our era of chronic and deliberate inflation
has obscured this.
For too many decades the policymakers and too many Wall Street pundits really
believed that rising oil prices were a tax on the system and too high would
force a recession. Then of course, low gasoline prices, such as now, will prompt
a recovery.
There is scholarly evidence that the 3 to 5-year business cycle prevailed
as far back as the 1500s. Crude oil was not a commercial product then.
In any century falling commodity prices signaled a contraction.
Gasoline prices fell from the peak of 3.29 in June 2008 to 0.96 (no typo)
in that December. The plunge did not prevent the contraction but was part of
it.
It is worth repeating that the consumer is the most ebullient and carefree
since 2007.
Stock Markets
Stock markets are enjoying ebullience as well, which has pushed the AAII Sentiment
up to 57.9 Percent Bulls. The following chart shows that it can get higher
in the early stages of a bull market. It also shows that at a potential peak
this is the highest reading since 2000.
For the senior indexes the decline was a "correction" and for such as the
Small Caps (RUT) and the STOXX it was a hit. As with October 2013, the S&P
recorded a Springboard Buy. Last year's target was a rally to around February.
This year's correction was greater and the rebound has been outstanding. Perhaps
even impetuous. The S&P has been above its 5-Day ma for 20 trading days
without a break. This has happened only three times in the past twenty years.
Of interest is that the "big" market, the NYSE comp (NYA) has not made it
to new highs.
It is working on a big test.
Last year's "Rotation" theme worked well and seasonal forces seem to be setting
up another opportunity. We have been looking for a low for copper in November.
So far the low has been 2.96 earlier in the month with some stability last
week at 2.98. However, rally attempts since September have been turned back
by the 50-Day ma. So it has to get through that.
Base metal miners (SPTMN) declined from 954 reached on the last "Rotation" to
654 on Monday. The latest decline was sharp, driving the Weekly RSI down to
25. This seems oversold enough to pop a brief rally.
The Oil Patch (XLE) set a magnificent high at 101 in June and slumped to 77
in the middle of October. The Weekly RSI got down to 30, which was big change
from the overbought at RSI 83. The rebound made it to 89 a couple of weeks
ago. This was turned back by the 50-Day ma and the index has slumped to 84.
Crude oil was likely to set an important low in December. Oil stocks still
seem vulnerable.
Bank stocks (BKX) could become interesting. The action is describing a big
rounded top with highs at 73.90 in March and at 74.49 in early September. Since
late 2012 the "dips" found support at the 50-Week ma. That ended in October
when the slide from 74.49 to 65 took out the 50-Day. The 12 percent hit was
tied to a sharp turn in the yield curve to steepening and credit spreads to
widening.
The curve bounced and is testing the highs with quite a swing in momentum.
Another run at steepening seems likely. As reviewed below, spreads have continued
to widen. The alert on the banks would be the BKX taking out the 50-Day. This
is at 71.25 and the index is at 72.50.
Since the beginning of the month, the spread from BBB to treasuries has widened
from 167 bps to 179 bps. This is becoming impressive.
Our overall theme has been some distinctive action from Exuberance (back again)
to Divergence (late summer) to Volatility (September, October and into this
month). The remaining phase "Resolution" has yet to complete.
Credit Markets
We keep looking back to the extraordinary spike up in the bond future. The
instruction was that at the opening on October 14th there was no liquidity
and the price shot up 5 points in an instant.
Weird, but perhaps an indication of what might happen when the world loses
confidence in the arbitrary aspirations of central bankers. The October event
was up, which implies there could be a down event.
The US bond future needs to test the high at 147.75. It is at 141.25 now.
On JNK, the big overbought was set at 41.81 in June and the decline to the
39 level in mid-October was severe enough to register a Springboard Buy. The
bounce to 40.56 was fast enough to register the opposite signal.
JNK has been following the 50-Day average down, but this week the decline
steepened.
Taking out the 39 level would be an important step on the way to credit dislocation.
This shows clearly in the following chart on spreads (mentioned above). This
week we have added the chart of spreads on the key reversal in 2007.
Over in Europe, this week the Russian bond yield broke to new highs at 10.42%.
The previous high was 10.29% set earlier in the month. In May 2013 the yield
declined to 6.46%.
The Spanish yield declined to 5.56% in early in September. With somewhat of
a local panic it jumped to 8.88% on October 16. The subsequent low was 7.20%
and it has methodically increased to 8.32%.
Other country yields are no longer declining and are building a bottom.
Commodities
Agriculturals (GKX) became very oversold at the end of September. Enough to
suggest a sector that could rally. The low was 290 and with some stair-steps
the index made it to 327 last week. Corrections have found support at the 50-Day
which is at 308 and gently turning up.
Base metals and energy items were covered above, but merit additional comment.
Copper seems to be working on a double bottom. One low was at 2.96 in the
turmoil of mid-October with the other at 2.97 on November 4th. Getting above
the 50-Day would be constructive.
Crude oil's plunge has driven the Weekly RSI down to 18.5, which is very oversold.
A brief rally is possible. But we remain concerned about a "political failure" similar
to the one from late 1985 to early 1986. That failure bankrupted the Soviet
Union and this time around it would be very constructive to bankrupt the Neo-Soviet
Union as well as terrorist movements in the Middle East.
Precious Metals
Will this sector become "precious" again?
Under the old paradigm of what happens in a post-bubble contraction - Yes!
Gold's real price, as tracked by our Gold/Commodities Index, completed a cyclical
bear in June and has set a cyclical bull market. Threats to the stocks would
be diminishing liquidity in the big stock market and the even bigger credit
markets. Going back a few years, the other threat was that in bull markets
for orthodox investments, precious metals under-perform or head down.
Our November 6th Pivot noted that the bottom in the sector would be determined
by gold shares starting to outperform the bullion price.
The plunge in HUI/Gold was the worst since the crash into late 2000. The numbers
say it was more severe. In 2000, the ratio fell to .133 with the Weekly RSI
down to 24. This time around, it plunged to .124 (November 4th) with the RSI
down to 19.5.
Quite likely this took out the last of the "inflationists" playing the "hate-the-Fed" game
that started very quietly in the mid-1960s. It became exceedingly popular in
2011.
HUI/Gold rallied to .141 and tested the low at .130 last week. The rise since
has been very constructive and getting though the 50-Day at .152 would set
the uptrend.
We think that crude oil is a reasonable proxy for the cost of energy when
mining.
Gold/Crude set its bottom at 11.71 in June and with a couple of corrections
has made it to 16.20.
It seems that what was needed to determine the cyclical bottom for the precious
metals has been accomplished. Gold shares could become outstanding performers
and one should buy the dips. The main setbacks to golds will be liquidity concerns
in the orthodox markets.
Roy Spencer has an interesting blog on the snow storm that hit Buffalo, N.Y.: http://www.drroyspencer.com
Iron Ore Prices: Twenty-Five Years
- Clearly an extraordinary bubble.
- Based upon China's extraordinary Industrial Revolution.
- Along with peaks in other metals, the blow-off occurred in 1Q2011.
- Our Momentum Peak Forecaster gave the "Peak" signal in April 2011.
- It hasn't given a "sell" since.
- Since our update in July, the price has taken out key support at 99 and
has established a methodical decline.
- At 80 now, taking out 60 would retrace the whole bubble.
South African Coal: Five-Year Chart
- The low in 2009 was 58.
- The high in 2011 was 124.
- The latest price is 65.
DJIA and CNBC Audience
- Interesting chart by Bruce Stratton at SafeHaven
- The loss of Audience in the bull market is beyond explanation.
However, there is an amusing story about Bruce selling his Ferrari. This was
a "400", bought new in 1980. It is a big car and he describes it as "The least
desirable Ferrari".
Bruce lives in a charming community part-way up Vancouver Island and a couple
of years ago he decided to sell it. The first sale was to an editor at Car
and Driver in Michigan. It was then sold to a guy in Montreal, who then retired
and moved with the car to Sooke, B. C.
Sooke is at the southern tip of Vancouver Island, a 2 1/2 hour drive.
High Sentiment
- Sentiment can surge to impressive high coming out of a bear market.
- Of interest is what it can do at market peaks.
- At 57.9 now it is the highest at near a peak since 2000.
Subprime Auto Loans
- Some $125 billion were issued in 2007.
- $60 billion were issued in 2009.
- Issuance in 2013 was up to around $125 billion.
- This year's number will be greater.
- Issuance is of bundled loans made to bankrupt car buyers.
- A recent issue priced to yield 18.6% was oversubscribed by a factor of
4.
Spread Reversal: 2014
Spread Reversal: 2007
