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October 16, 2007

Signs of the Times
by Bob Hoye

SIGNS OF THE TIMES:

"Manhattan Office Rents at Record"

"Rents Soared 37% Over 3Q06"

"Financial Firms Largest Driver in the Market"

-- Reuters, October 2

"Manhattan Apartment Prices Rose to a Record Level"

-- Reuters, October 2

"The Existing Home Market is in Freefall"

-- Bloomberg, October 3

"Tenants Face Eviction When Their Buildings Go Into Foreclosure"

-- Wall Street Journal, October 11

There seems to be a growing disparity between Wall Street and Main Street. This may not last much longer as the next phase of disappearing liquidity will begin to introduce Main Street to the cheering Goldilocks crowd. The initial liquidity vacuum has already slammed bonuses.

The subprime bond has quietly declined to new lows in price, despite the resumption of one-way gales of bullishness. This reminds of the old story about the chicken ranch in a part of Texas where the wind blows almost all of the time. On the rare instances when it does stop--all the chickens fall over.

Stock Markets: While a short covering rally with the expected "dramatic" rate cut has been probable, the degree of rejuvenation has been remarkable. Cheerleading has displaced extreme consternation, in a moment's time - so to speak.

However, as we've been noting the price gains have been accompanied with poor trading volumes, A/Ds, as well as Lowry's buying pressures. The rally looks like a necessary test of the highs and the action is getting extreme.

Important assistance has been provided by the rally in crude as well as the plunge in the dollar. As discussed below the action in crude is accomplishing a seasonal high and is eligible for a serious decline. Going the other way, the dollar index is preparing to end its slump.

Essential things to watch would include the time from the decay in the subprime to widening corporate spreads, to a steady dollar as well as further technical deterioration in the stock market. Unessentials would include the usual orthodox items such as balance of payments, employment figures, Fed utterances - not to overlook the seasonally adjusted implicit price deflator or GDP.

Of course we will be also monitoring the not-closely-watched gold/silver ratio for the next critical change.

In the meantime, an oil-service stock (SLB), tech stock (RIMM), and FXI (Shanghai top 25) are building exceptional upside readings. More on these next week.

Sector Comment: Base metal mining stocks have also enjoyed a sharp rally that also appears to be a test of the 955 high set in the halcyon days of July. The decline was to 668 with the August panic and it has soared to today's 958. We bought this sector on seasonal weakness last Fall and have lightened up in July. This rally is a gift and we have advised selling more as there will be much lower prices offered in November - December.

The recovery in daily momentum is almost sufficient to limit the rally.

Over in financial land, the BKX ran out of rebound at 112 on September 19 and has stalled out at 110.

As noted at the time this sector became oversold early in the panic and the index set its low at 101 0n August 3. The high was 121 in late February, and the key failure was at 118 in late May. At that point the banks succumbed to the reversal in the yield curve to steepening as well as to the subprime contagion.

Similarly, banks and financials could be again leading the play - this time to the downside. The latest rally only made it to 111 and it seems to be rolling over.

Our Bank Trading Guide turned up in early August and has made it to 187 yesterday, and any decline in this environment should be taken seriously.

The advice last week was to begin selling again.

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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