Honest Money Gold and Silver Report: Market Wrap
Week Ending 2/13/09
The debate rages on concerning the financial crisis: whether deflation or hyperinflation, or even the dreaded d-word: depression will occur. Everyone has a different opinion, as is the human way.
It is impossible to know how such a complicated set of circumstances will play itself out upon the global stage. The best one can do is to expect the unexpected and be prepared.
With these thoughts in mind, this week's report will try to ferret out the most probable course of events; and to construct a plan accordingly. Recall the adage: "the best laid plans of mice and men."
The global mayhem continues. Every day new records are set to the downside: employment figures, gross domestic product totals, bankruptcies, foreclosures, layoffs, housing statistics, market losses, zero interest rate policies, and bailouts of all denominations. There isn't much that hasn't yet been seen.
A bit of a surprise was the Reuters/University of Michigan index of consumer sentiment, which fell for the first time in three months, to 56.2. In Nov. the index reached a low of 55.3.
After a brief respite consumer confidence is starting to wane once more. Hopefully, this downturn will be short-lived - time will tell.
A loss of confidence exacerbates the negative feed-back loop that has been created between consumer psychology and behavior. This is the wealth effect gone astray.
Mr. Geitner was baptized under fire this week. After announcing his best laid plan of mice and men, the stock market reacted by dropping 300 points. It seems that Mr. Market wasn't too enamored Mr. Geitner.
There are many issues that any bailout plan must address: toxic waste/assets that no one wants; how to price them; where to get the money to buy them with; whether or not a "bad" bank is needed to facilitate the buying of the toxic credit and debt instruments; where and how to inject the TARP money into the markets; and whether the Fed should buy up Treasury bonds. These are just some of the critical issues - there are plenty of others.
The FOMC stated that:
"It is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
It is hoped that the Fed's buying of U.S. Treasury bonds will cause interest rates to fall, not only on government debt, but on mortgages, corporate bonds, and other types of loans; not to mention all the toxic credit waste debris. Some call it wishful thinking - others see the delusion.
China and Japan are drowning in a sea of debt. Foreign holdings of U.S. credit have sustained the United States for years. Neither China nor Japan will increase their holdings of U.S. government paper any time soon.
They will not be a net seller of existing U.S. debt, as to do so would be financial suicide; but they will not purchase any new debt unless they are made an offer too good to refuse, which seems to have been the case so far.
Bill Gross, of Pacific Investment Management Co. had this to say on the subject:
"To the extent that the Chinese and others do not have the necessary funds, someone has to buy them."
"It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets."
Supposedly, because the Fed has been dragging its feet since first mentioning the idea of buying government debt, or so the argument goes, yields on long-term Treasuries have gone up. Costs for home loans have also been rising.
Rates have gone up, this is true; however, correlation does not preclude causality, no matter how bad one wishes it might be so.
This issue has the experts disagreeing with one another on what should be done.
The European Central Bank stated that:
"The credit crisis has not yet reached the bottom of the cycle. The amount of impaired assets is likely to continue growing in the future."
Former Treasury Secretary John Snow said:
"We won't get out of this mess and get lending returned to normal until the toxic assets are purged."
"Private equity, which is pretty good at buying distressed assets, hasn't been buying them because of this massive uncertainty as to what these things are worth."
"What the market needs is a clearly articulated set of policies to move away from the one-off, ad-hoc sorts of things that so unsettled the markets last fall."
"The experience of the last year or so has been to generate a lot of unnecessary uncertainty in the market because policy makers seemed to be making it up as they went along."
Paul O'Neill, secretary from 2001 to 2003, said:
"A significant part of the problem we have now is the suspicion the markets have that everything is poison."
"It is folly to try to value things that can't be valued."
"I know there's not an accounting category for 'quarantine,' but I think this set of issues we have is worthy of creating a new category called 'we don't know.'"
"If assets can't be valued, they can't be valued. So why don't we admit that and why don't we figure out a way not for the taxpayers to take on the burden but in effect put them in a quarantine account?"
"I don't understand what they're doing. It just doesn't seem very clear at all."
I say: listen to Congressman Ron Paul. He was the visionary who saw this all coming long ago.
Dr. Paul is one of few in Washington that understands the problem and how to fix it.
His advice should be listened to with great respect, concentration and the seriousness it deserves. It should be acted on accordingly.
Volatility still reigns supreme. Market action is like the weather in New England: if you don't like it - just wait a minute. This is an important fact that has definitive implications.
All markets are making violent moves in either direction, over the course of days - not weeks. What is a winning trade one day suddenly turns into a losing trade the next day. Taking profits whenever they appear is prudent action under such conditions.
The S&P closed down 42 points or just under 5% for the week. The market remains range bound between 925 and 800. This week's close (826.84) held above the earlier Jan. low of 805.22. If the Jan. low is taken out, look for a test of the Nov. low at 752.44.
The monthly chart of the S&P shows that the lows of 2002-2003 have held so far. If the lows are taken out on a three day closing basis, a new leg of the bear market will begin.
As of now it does not appear that this is going to happen over the short term, but that needs to be confirmed by the lows either being tested and holding; or the market turning up from here.
The monthly chart has extreme oversold readings in RSI and STO that in the past have led to rallies. This does not guarantee it will happen again.
The dollar closed at 86.02, up +0.67 for a weekly gain of +0.79%. It was the highest weekly close since Dec. 5 (86.94). As the chart below shows, however, overhead resistance is fast approaching.
RSI shows a slight positive divergence. STO has broken above its falling trend line; and is not yet overbought. Longer term the dollar is expected to resume its bear market trend down; short term it may have some upside left.
The monthly chart of the dollar shows a long term head & shoulders formation of almost 20 years duration.
Notice STO is flashing overbought conditions that will most likely bring about a change of trend to the downside. A long term sell signal is not far away.
A downside target of 40 is possible (120-40=80; 80-40=40).
This is one of the reasons why I am so bullish on gold long term, as the dollar is toast going forward.
You can thank the Federal Reserve for the near total destruction of our currency.
Gold was up $27.90 to close at $942.20, giving it a weekly gain of just over 3%. The daily chart shows gold in a bullish rising price channel.
RSI is showing a negative divergence and STO is in overbought territory. MACD is still showing a positive crossover, but it may be curling over.
A bullish 50/200 ma crossover has occurred, yet signals remain mixed. There may be more upside price action short term, but the rally is closer to its end than its beginning (short term).
Gold's weekly chart has the July highs as the next upside target. RSI has room to move up. Both MACD and STO are overbought. In bull markets prices can stay overbought for longer periods of time than seem possible.
A correction is likely to develop short term, followed by the next leg up in an on-going bull market. Prices may advance one more time before correcting.
This is one of the few more probable scenarios. Price may decide not to advance prior to a correction. Volatility will be the order of the day until the old highs are taken out and cooler heads prevail.
Gold & Silver Stocks
The gold and silver stocks, as represented by the Gold Miners Index, underperformed the physical metal this week. GDM gained 0.73%, while physical gold was up over 3%. This is negative divergence and suggests that further weakness may lie ahead.
The monthly chart shows a cup and handle formation in effect, with price having regained the "handle" position.
As long as price remains above the horizontal support line at 800, the gold stock bull market is alive.
Presently the index is at 983, so it can correct quite a ways and still remain in a bullish posture.
Notice that STO has put in a positive crossover from oversold levels that in the past have been followed by significant rallies.
The above is an excerpt from the full market wrap report available at the Honest Money Gold & Silver Report website. This week's thirty-two page report contains twenty-nine charts & graphs, including positions held in the model portfolio and on our stock watch list. New positions are posted the day they occur.
Available on site is an audio version of the book Honest Money. A free copy is included with all new subscriptions along with two special reports: Investment Vehicles for Bull & Bear Markets; and How to Protect Your Assets in today's turbulent markets.
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Good luck. Good trading. Good health, and that's a wrap.
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