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September 29, 2009

Pivotal Events
by Bob Hoye

The following is part of Pivotal Events that was published for our subscribers Thursday, September 24, 2009.

SIGNS OF THE TIMES:

Previous Years:

"Soaring Demand For Grain Roils Global Food Markets"
"The days of cheap grains are over."

- Wall Street Journal. September 28, 2007

Wheat prices have fallen in half since then.

"Coal supplies are likely to remain tight for the foreseeable future."

- Wall Street Journal, September 24, 2008

"Credit Markets Go from Bad to Worse to Ugly"

- Wall Street Journal, October 1, 2008

"Commodities Take a Brutal Beating"

- Wall Street Journal, October 1, 2008

* * * * *

This Year:

"Global banks are in a hiring boom for commodity traders...offering $1 million package for top traders. There is a huge demand for physical traders."

- Bloomberg, September 14, 2009

"Private investors in China, the world's largest metal user, have stockpiled 'substantial' quantities of copper as the government ramps up stimulus."

- Bloomberg, September 17, 2009

"Morgan Stanley, the top advisor in Brazil, has doubled its investment banking staff."

- Bloomberg, September 15, 2009

"The world's largest developer by market volume (Sun Hung Kai) raised the price of two penthouses in Hong Kong to a record $9700 a square foot."

- Bloomberg, September 17, 2009

"More than half of U.S. Residential mortgages are being made by just three large banks. The elite trio: Wells Fargo, Bank of America and J.P. Morgan."

- Wall Street Journal, September 18, 2009

In good markets, sometimes a "silly" season can erupt in the spring. Since the South Sea Bubble of 1720 all of the great bubbles have had their climaxes in May or June. In the 1929 and 1873 examples the high in London was in May and in New York the bust followed a speculative surge into September. Of course, in the Tech-Bubble blow out in 2000 the S&P set its high close at 1527 on March 27 and tested it at 1520 on September 1 of that fateful year.

This September's crop of exuberant quotes is remarkable as enthusiasm triumphs memory. Even erasing just back to March is remarkable. And then there were the horrors of last fall, which must seem like an eternity to suddenly carefree memory banks.

However, as noted last week, the TED-Spread (chart is attached) is working on a reversal that has often anticipated a problem in the financial markets. Of interest, our Precious Metals Trading Guide is working on an important change as well.

Of course, the trading floor cynic would be impressed with the speculative furies recorded in the financial markets over the past couple of decades. Increasingly ambitious central bankers, with goals of steady growth in the economy and tax revenues for the state, have been hyping everything in sight. Against this wave of official speculation the investment community has no choice but to adjust to arbitrary distortions and the result has been an era of unstable inflations in asset prices.

The blow off in asset prices in 2007 and change in the credit markets seems a huge ending action. The crash in stocks commodities and corporate bonds from last September into November was a classic fall crash. The panic into early March was driven by the discovery of Obama's radical nature. The character of the action since has been within the post-crash rebound and it is now overdone.

STOCK MARKETS

In what was essentially the first thorough English dictionary, Samuel Johnson defined "Bear" as "A description of stock-jobbers, who sell unreal stock." It was published in 1755.

When you think about it, this elegantly describes selling what you don't have. The phrase "He that sells what isn't his'n, must ultimately deliver or go to prison." is attributed to Daniel Drew, one of the colourful market operators in the mid 1800s.

For the record, one of the great short sales in history was established in the summer of 1929. The chairman of one of the big banks in New York not only sold all his stock, but got short as well (details will be provided at some time).

Sunshine into September has continued, with a good surge in stocks and corporate bonds. The expected surge in precious metals has run out of momentum. The official and market bear raid on the DX continues, but yesterday's hit with the FMOC "report" was followed by a positive close.

Currencies: It looks like a round trip in the DX. For us, the dollar was expected to rally with last fall's classic crash. It started at the low of 70.7 in 1Q2008 with the weekly RSI at 28, which was very oversold. The high was 88.5 late in the year with the weakly RSI at 75, which was at a multi-year overbought. Now its decline is approaching 30, which could end the plunge that has been so essential to the financial party.

The euro completed the Sequential Sell Pattern as it reached a new high for the move at 148.5 yesterday. Then the violent reversal hit and around 142 is possible on the initial decline.

On closes, the low for the dollar index (DX) was 76.1 on Tuesday. Yesterday's big reversal took it slightly lower as the world was focused on the FMOC nonsense. Then came the big change in currencies, which we take as the equivalent, but opposite, to the change in early March.

The Canadian Dollar also set the big reversal yesterday and closed at 93. Last week's view was that it was vulnerable to a decline in commodities and there was moderate support at 90. The other point was that a crisis could take it down to 85.

* * * * *

We have used the 1873 Great Bubble and its post-bubble contraction as a guide.

During that mania the leading New York newspaper editorialized that nothing could go wrong. The existing treasury system, without a central bank and a limiting gold standard, was proof against a contraction. The irony is that in 1884 leading economists began to call it the "Great Depression". It lasted until 1895.

Fortunately, all were not caught up in the theory that a financial mania could be managed:

"It thus appears that the treasury operations have thus far chiefly benefited the borrowers of Wall and Broad Streets more than the commercial community."

- The New York Commercial and Financial Chronicle, October 10, 1872

Link to Friday, September 25 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1399.

Bob Hoye
Institutional Advisors

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