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November 25, 2003

Beginning of the End
by David Chapman

It was not a good week. I do suppose that some of us might find amusement in the fact that the target of the Bush administration against China was started by putting tariffs on imported bras and undergarments. Certainly sounds sexier then steel tariffs but it is just as dumb if not dumber (sorry Jim Carey and Jeff Daniels). But there was nothing dumb about the reaction of the Chinese who promptly withdrew their trade mission.

Lurking in the background was the threat of further trade tariffs being imposed on the US by Europe as a result of the steel tariffs that were declared illegal by the WTO. One of their targets will be imports from Florida; a state that is controlled by Dubyas brother Jeb and is crucial to his re-election in 2004. Politics is crossing with economics and the result could be disastrous. Even Allan Greenspan got into the act warning against "creeping protectionism". Obviously the ones perpetrating the trade wars haven't read their history books or they would realize that Smoot-Hawley and trade wars were a major contributor to the Great Depression. But this time it is different isn't it.

But the looming trade wars are only a part of last week's disaster. There were bombings directed against the British in Turkey as Dubya visited Blair in Britain. Turkey sitting on the edge of Europe showed that there are those who appear more than willing to escalate the war to a new level. And there were further bombings in Iraq as the US was trying to escalate their war against the guerrilla insurgents.

And there were scandals. First there was the foreign exchange scandal in New York involving a host of top banking institutions including employees of J.P. Morgan, Union Bank of Switzerland (UBS), Societe Generale, Warburg Dillon Read and Dresdner Kleinwort Benson amongst others. Following the Putnam mutual fund scandal that threatens to spread to numerous other mutual fund companies' consumer confidence in big financial institutions could be on the verge of taking a beating as the enormity of this slowly sinks in.

And speaking of cover-ups and scandals Freddie Mac was finally forced to restate their earnings to the tune of $5 billion. Some mistake. We are sure his kissing cousin Fannie is not far behind. Why would anyone want to own these companies? Many do unfortunately and they are all in the portfolios of the major mutual and pension fund institutions. Can even others be far behind Citibank, BankAmerica, GE?

And Canada was not exempt as Conrad (Lord Black of Crossharbour) Black, Chairman of Hollinger Inc. (HLG.C-TSX) was rocked by a scandal of improper payments made to Black and others resulting in numerous resignations and a major crisis in the Hollinger newspaper empire as an SEC probe got underway. Following the scandals at numerous companies such as Enron, WorldCom and others over the past few years including the revealing of the mega spending of the principles of the firms Lord Black was threatening to leave another black (pun intended) mark on the ranks of tycoons and capitalists. As a cartoon in the Toronto Star noted with a nod to the IBM advertisements, - Tycoonis Obsoletus - "Come on Kids .... Let's go and see the Woolly Mammoth".

The market tried all week to yawn and say don't look at the scandals, the bombings and the looming trade wars look at the great economic numbers. If they only knew how slanted those numbers were they might of course realize that there was another scandal that should break. But reality was beginning to finally set in and the market sold off and broke the up trend lines from the March lows as well as the 50 day moving average for both the S&P 500 and the NASDAQ. The TSX composite did not join them only because gold and energy stocks put in an up week thus saving its drop for later.

Of course gold was up because the US$ was falling now below its earlier 2003 lows and is now targeting 84 to 85 and ultimately 65. The only question on our mind is will we have a panic. Gold is threatening to break out over $400 which could possibly jeopardize a whole host of interests that have short calls sitting at the $400 and $420 strike prices and there remains an unusual number of shorts still in the market. Still they might manage to prevent gold from reaching the heights but a trigger with a bombing on US soil would jar everyone as we keep getting warnings of impending terrorist attacks that as we discovered in the Turkish bombings could strike anywhere, anytime.

One hundred years ago in 1903 there was a financial panic that started in late February and did not bottom until November. The market lost 23%. Of course we can point and say well the cycle did not work as we are well past February and it is now November. But what may have happened is an inversion whereby the market bottomed when it should have topped and is topping when it should have bottomed. So this is no time for complacency. It is instead time to batten down the hatches and get ready for what could be a rapid drop. The fact that we are moving into a presidential election year is not something to necessarily feel fuzzy about. We are to be reminded that 1974, 1984 and 1994 all saw bear markets so years ending in four are not necessarily good years. But even if we do fall here we expect the major weakness to be over by the first quarter or so.

A lot of stocks and other indices appear to be at tops or are starting down moves. The SOX Semiconductor Index, Microsoft which broke down here a few weeks ago and now appears to be setting up an endless downward drift, General Electric which despite the rally bounce back this week appears to be making a massive top that should soon collapse, Citicorp where the Chairman took early retirement and pocketed hundreds of millions of dollars to tide him over, Intel which is overvalued by almost any measurement and a host of others. Over in the big NASDAQ stocks Amazon, eBay, Yahoo and Adobe all look like accidents waiting to happen. You can never make money buying stocks with 100 P/E's.

But if some are going down others are going up. We are still looking for rotation into the energy sector. The gold sector from an intermediate basis still looks good as long as gold holds $375. It would break down under that level now. The Gold Bugs Index is vulnerable below 210-215 and would be breaking its up trend from the July lows. OF course Golds are dependent on the US Dollar but as long as we have the threat of trade wars the Dollar cannot go up. Despite our bullishness on gold we are wary that we may be getting long in this leg up and a more significant correction may soon be due.

Allan Greenspan said once that he would love to be the Fed Chairman at the time of the Kondratieff winter. Of course he is now getting his wish and he seems to believe that if you throw enough money at the problem it will muddle its way through and we will survive. Of course as we noted above he must be blanching over the obviously petty, idiotic and politically motivated trade wars. But can he stop it? We doubt it and over the next several months we are about to find out once again the true meaning of what a bear market is all about.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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