The following is part of Pivotal Events that was published for our subscribers September 4, 2008.
SIGNS OF THE TIMES:
"The Federal Reserve stands to take additional actions as needed to provide liquidity and promote the orderly functioning of markets."
- Chairman Bernanke at Jackson Hole, National Post, September 1, 2007
"Cheapest Stocks in 12 years Greet Investors After Summer Swoon."
"The market has probably seen the worst of it. The Fed will ride to the rescue."
- Bloomberg, September 4, 2007
"Subprime Woes on Wane."
"I am optimistic about the environment globally for financial institutions."
- CEO Deutschbank AG, Financial Post, September 5, 2007
"Apartment Buildings Lose Their Immunity to Housing's Chill"
"Rent Rates Decline"
- Wall Street Journal, August 20, 2008
"U.S. commercial real estate prices fell for a fourth straight month in June, bringing values to 11.8% below their October 2007 peak."
- Bloomberg, August 20, 2008
"London office space has plunged 25% since August 2007 - the biggest drop since 1992."
- Bloomberg, August 22, 2008
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Stock Markets: For the past few weeks we have been looking for the choppy action to resolve on the upside into this week. This worked out as the S&P rallied from 1279 on August 19 to 1303 on Tuesday. This was part of an outside reversal to the downside. The rush into sunshine this week has been essentially accomplished and Tuesday's reversal is ominous. Such reversals don't necessarily end trends but do display compulsive buying and, we would guess, as compulsive non-selling. Whatever, reflecting increasing instability more such reversals will technically overwhelm fundamental stories.
Further to the technical indicator both high-yield and junk spreads took an ominous jump and seemed to be associated with the stock market reversal. Also negative is resumed weakness in most commodities as well as the uptrend in the U.S. dollar.
Near-term: This week has seen the teeter-totter with financial up as resource sectors declined. The latter include agricultural stocks. Grains have slumped from their rebound and are approaching the lows of early August.
Yesterday the yield curve (30s to 2s) widened from 201 bps to 207 bps which is as concerning as the jump to widening on Tuesday.
It looks like Mother Nature is again draining the swamp of liquidity, and this seems to be coming in quicker than we thought.
COMMENTS FOR ENERGY AND METAL PRODUCERS
Energy Prices: On July 4 we noted that the action in crude had registered a weekly Upside Exhaustion signal that hadn't been seen since 1990. That was with Iraq's invasion of Kuwait and we concluded that a cyclical bear would soon begin and that with the same on the monthly reading we could conclude that a secular bear was possible.
That excessive condition was registered by mid-July and that hadn't been seen since the fabulous blow off in 1980. The action since, with only brief pauses, seems to be confirming a secular bear.
This could be supported by the series of "broken commodities" since last October.
There seems to be two types of business contractions. The "normal" one typically follows the stock market peak by 10 to 12 months. A recent example had the stock market high in March 2000, and the NBER set that business cycle peak in March 2001.
The other kind of slump has been even more dismal. The two most outstanding examples have been 1929 and 1873 when the business peak occurred within a month of the top of the stock market.
Although the NBER wasn't around at the climax of the 1720 Bubble, or the ones until 1873, there is anecdotal evidence that the business contraction started virtually with the bear market.
The nature of great bubbles is that the contraction is rapid and a consequence of a great and glorious abuse of the credit markets.
Base Metal Prices: Two weeks ago we observed that metal prices were oversold enough to prompt a brief rebound.
Then last week's edition advised selling the sector, including metals, into "whatever sunshine" the market brings by early September.
Our base metals index popped from 621 to 647 on Thursday. It has slipped to 611 on Tuesday. This has declined from the last high at 720 in early July. The decline since 811 in early October amounts to 25%.
Our August 20 edition concluded that "Taking out the recent lows of 658 will put the sector and all of its wonderful mergers in the grave." At 611, the sexton is digging the hole.
The Gold Sector: Our concerns about the next phase of the credit crisis are being realized. The August 6 edition concluded that this could reach its full fury sometime around October and that it could be severe enough to weaken gold's real price.
The last high for our gold/commodities index was 234 on August 4 and it declined to 204 on August 21. That was with the first hit to the nominal price down to 786, which is at the 50% retracement level of the whole move from 540 to 1033. This test of that level seems to be holding.
On the bigger picture, gold's real price is doing what it should be doing. During a bubble it goes down and the low was 143 in May of last year. Then with the reversal in credit markets the price improved to 234. As we have been noting, gold's real price declined with the crises so evident in the fall of 1929 and 1873. This seems to be working out this time around and once past October the real price should advance for a couple of years, within a much longer bull market.
Gold stocks will continue to weaken with the general disappearance of liquidity. The next low for the sector will provide an outstanding buying opportunity.
"The Fall of the New York Gold Premium
A few days ago the price was 116, after having been nearly 119 last spring, but since last week the price has steadily declined to 111... We have more than once noticed the gradual diminution of the 'legal tenders' held by New York banks, a plain sign of their scarcity and increasing value."
- The Economist, September 6, 1873
Link to September 5 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/950