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November 04, 2004

Bush Wins! Happy Days Ahead?
by David Chapman

While the US election has finally past, the electorate in the US remain as deeply divided as ever. As we write this there remain questions about votes in Ohio and therefore the final Electoral College has not been fully tallied although Kerry has conceded. With the Bush victory assured the market predictably rallied on Wednesday morning. So is this it? Happy days lie ahead? After all that is what Wall Street wanted. A Bush victory is good for oil, good for business, good for drug companies, good for tax cuts, and good for continued deficit spending to buoy the economy.

A Bush victory also makes a mockery of some of the so called superstition indicators - Packers defeated Redskins (incumbent wins when the Redskins win), DJI down in October although other markets were up (no incumbent wins when the DJI is down in October), and as well Bush becomes the first President to win when there were net job losses under his administration.

While the Bush victory is assured we did see a web page that was documenting huge instances of problems at voting polls. Amongst them were voter intimidation, machine malfunctions, voter challenges to eligibility, registration errors, and police called at polls, vote suppression and in states that used the no paper trail computers, exit polls did not agree with the final results whereas where paper trails existed exit polls and results agreed. All of this ensures that the divide that existed in America prior to this election may indeed be deeper after the election.

With the markets up after the election we are over resistance zones of 2000 on the NASDAQ and 1140 on the S&P 500. Can it hold? As the markets progressed during the day the highs at the open soon started to seem a long ways away. Still well below its highs is the Dow Jones Industrials. The bulls rationalize this as demonstrating how strong the market is. We are concerned when the blue chips are lagging the speculative stocks of the NASDAQ and the Russell 2000 that something is seriously amiss. But with the Bush victory everyone believes that we are going to see a continuance of low interest rates, huge government spending (primarily on defence) and encouraging consumers to keep spending and getting deeper in debt. That it is a recipe for a future disaster seems to be lost in the happiness generated by a rising market.

But the problems that were there before November 2 remain afterwards. The economy that was showing signs of slowing continues to show signs that it is sluggish at best and threatening to come off the rails at worst. The US Dollar as a result is sure to go down. The Bush administration does not have a strong US dollar policy. A painful adjustment for America and the world is about to get underway. We doubt that the stock or bond market can withstand a serious decline in the US Dollar. Right now the expectation that the stock market is going higher seems to be almost universal. Sentiment remains very high and the VIX volatility sentiment indicator remains near record low territory. So the impetus or buying power to propel the market higher is very suspect. With a declining US dollar it should be almost impossible.

With a Bush victory the triple deficits of budget, trade and current account can only get bigger. The record budget deficits are being caused almost exclusively by the cost of the War in Iraq and its offshoots of the forgotten war on terrorism, homeland security and maintenance of a military empire. To date the war has cost upwards of $200 billion resulting in the deaths of in excess of 1000 Americans and upwards of 100,000 Iraqis with three quarters of them non-combatants. Iraq is in a constant state of guerrilla war with daily bombings and continued attacks on the oil pipelines. Public services such as electricity remain today below where they were even under Saddam during sanctions.

With the US Dollar sure to fall taking both bond and stock markets with it the huge amounts of debt in the US remain a serious vulnerability. Today the US sits on debt that is 3.5 times GDP. Even at the height of the Great Depression it only reached 2.5 times GDP. The debt has been encouraged by record low interest rates and a very easy monetary policy, policies which "Scoop" calls irresponsible. The actual growth of the debt particularly for consumers has been encouraged by the financial institutions with unprecedented growth in credit cards and encouraging a climate of easy money. Meanwhile despite the rapid growth in money the effect of it in the economy is declining. We call this the velocity of money and what that means is that despite more and more money being thrown at the problem the economy is actually declining. Japan experienced this in the 1990's and are now barely beginning to come out of it.

If there are some positives out of another Bush victory it is that oil (and natural gas) should continue their upward path and with the US Dollar falling Gold should soon break above its ceiling at $430. Oil will rise because supply disruptions and rising global demand which were a mainstay of the first four years should continue. As well subsidies to the oil industry will also continue at the expense of alternative sources of energy thus ensuring that demand remains high.

With the US Dollar on the verge of a serious breakdown gold could soar. Key support at 85 on the US Dollar Index is breaking. The US Dollar Index made its all time low in 1992 just below 79. This is odd because in 1991 the US actually had its last (albeit small) trade surplus. Today it is trade deficits approaching $600 billion and the markets act like it is a great thing. While the 79/80 on the US$ Index should provide support our longer term targets remain 60/65 with some forecasts down to 50. Gold continues to target $480/$500 and as high as $550.

While oil rising is good for oil companies it is not necessarily good for the economy. So deficit spending to stimulate the economy is offset by rising energy costs that will eat away at the economy. We found it interesting today that oil opened higher fell on news of higher than expected inventories but by the end of the day was up back over $50. We continue to hear analysts predicting that oil at these levels is just temporary. Trouble is the temporary rise to $50 is now entering five weeks and we have been over $40 for nearly four months. While still below the inflation adjusted levels of the 1970's there comes a point when the high prices begin to seriously bite into the economy. Rising oil prices, a falling dollar are a recipe for a huge squeeze on the US economy and with it also on the rest of the world.

The markets managed to close over the resistance points of 1140 S&P 500 and 2000 NASDAQ. This tells us that we have to take seriously the possibility that a run to 1225/1250 for the S&P 500 and 2300 NASDAQ could happen. But even if it does investors could and can stick to energy and gold stocks as they will rise with the market. Remember that both the energy and the precious metals stocks are in major bull markets whereas the broader market continues to correct the collapse of 2000/2002. If on the other hand a falling dollar begins to take the market down along with bonds then at least in the near term the precious metals stocks and probably the energy stocks should continue to do well. A meltdown in the markets though may cause all to fall even as the commodities (oil, gold) hold their values.

The Bush administration is back for another four years. While as we noted at the outset that is good for oil, business, drug companies, tax cuts and deficit spending it will also mean a probable expansion of the war possibly to Iran or North Korea but more likely Iran. And as well the insolvable Israeli/Palestinian conflict will probably get worse. As well we expect the economy to continue to be sluggish if not fall into recession and the deficits to get worse not better. It should bring on a debt crisis especially for the US consumer.

Finally second terms are rarely as good as the first term. Nixon had Watergate, Reagan had Iran Gate and Clinton had Monica Gate. The markets suffered through Watergate, treaded water including the crash of 1987 during Iran Gate and only under Monica Gate did the markets not care (it was only sex after all) and soared.

The first term of Bush brought a 42% decline in the NASDAQ, a 20% decline in the S&P 500, a 6% decline in the Dow Jones Industrials and a 26% decline in the US$ but a 54% increase in oil prices and a 60% jump in gold prices. Happy days ahead? We don't think so. But if you are an oil and gold bull "Bring him on".

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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