Pivotal Events

By: Bob Hoye | Tue, Feb 9, 2010
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The following is part of Pivotal Events that was published for our subscribers February 4, 2010.


"Japan's recent economic decline is faster than that of the U.S., which has been experiencing the worst financial crisis in a century."

- Head of Research, Bank of Japan, Bloomberg, February 9, 2009

"Hillary pleads with Communists to keep buying treasury bonds."

- Drudge Report, February 22, 2009

Let's see now - then the long bond was trading at 3.51%, and now it's at 4.63%. Perhaps if Obama does a very special kowtow - with head to the floor - they will bid rates down by some 100 beeps.

* * * * *

"China has told some banks to limit lending and will restrict overall credit growth."

- Democrat Congressman James Clyburn,
Bloomberg, January 20, 2010

Indirectly, BoC tightening won't help the bid for treasuries - of any maturity - or, sadly, upon any supplication.

"We are not going to save our way out of this recession. We've got to spend our way out of this recession."

- The Hill, February 1, 2010

"In democracies, we elect public servants, not messiahs."

- Catholic News Agency, February 25, 2009

FDR advisor, Raymond Moley, "was impressed by...the scantiness of FDR's knowledge of things he was talking about and by the immense and growing egotism that came from his office." - 1937

"132: the number of times Obama referred to himself in one speech."

- Breitbart, January 27, 2010

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In retail the saying is "Location, Location, Location", in the financial markets perhaps the equivalent is "Pattern, Pattern, Pattern".

On the December rally we thought the conclusion would be a rounded top. Including the brief excitement of an "over thrust" this worked out, and the initial drop was significant. Significant enough to be equivalent to the preceding remarkable run of bullish sentiment.

This, along with other developments changed our post-top outlook from an intermediate decline to something more severe. The high needs to be tested to confirm the reversal, and then taking out the S&P initial hit at 1071 formally set the downtrend.

Developments that support the possibility of a more serious decline include the plunge in copper. This accomplished a rare and dreaded outside reversal to the downside - on the month. A very important example occurred in 1966, which was also a secular high for the stock market. In real terms the Dow declined by more than 60 percent to the secular low in 1982.

Credit-spread widening that began in mid January continues as does the accompanying increase in high-yield bond rates. And "old reliable" - the gold/silver ratio - rose through 65, which we thought would indicate the resumption of credit concerns. With a nice correction the advance to 68 solidified the uptrend. In 2008 the key rise was through 56 in that fateful August.

It is worth looking for some positives and these would include the rebound in crude oil that could run for some weeks. Although copper has been mortally wounded, it could enjoy a seasonal recovery into March.

When rallies become overbought they should be sold. History is in a violent post-bubble contraction, making "buy and hold" so "yesterday". (This part was written on Tuesday.)


The long bond remains in the possible trading range between 118.5 and 119.5. Yesterday's dip to 117.38 was prompted by the brief pop in crude oil. This could expand the downside of the trading range.

Today's discovery of credit problems has firmed the dollar and the bond, but this might not drive the price much beyond the range. Ultimately, the "flight-to-quality" trade may be to shorter treasuries as creeping "bond revulsion" could ripple out from the death spiral in sovereign stuff to corporates.

A few weeks ago, the hot action in the high-yield (CYE) registered an Upside Exhaustion, which in any price series usually leads the top by a couple of weeks. CYE, itself, enjoyed a surge that seems to have tested the high on January 19. This is likely to fail as the street discovers that trouble has a tendency to spread around the world.

As of today, junk (JNK) has broken down and the price decline could eventually be substantial as liquidity disappears - again.

"The fiscal history of Latin America … is replete with instances of governmental default. Borrowing and default follow each other with almost perfect regularity. When payment is resumed, the past is easily forgotten and a new borrowing orgy ensues. This process started at the beginning of this past century and has continued down to this present day. It has taught nothing."

- Max Winkler, Foreign Bonds: An Autopsy,
Rowland Swain Co., Philadelphia 1933

Currencies: The worst nightmare of any policymaker is an outbreak of "sound" money. This follows every great financial mania when eventually the senior currency becomes strong relative to most currencies and most commodities - for most of the time.

Last week's conclusion was "Reaching 80 [on the DX] would derail the ability of speculators - including central bankers - to boost prices." Or, by implication, to depreciate the dollar.

Also, we had thought that getting to 85 would end the great financial rebound out of the initial post-bubble crash. Today's 80 is shaking most markets. Actually, the action was from last week's soaring default spreads for the "Three Amigos" to the extension of the dollar's uptrend.

No matter what is doing the pushing the results are serious.

However, the DX is approaching an RSI that could limit this rally. The target of 85 could take a while.

Last week we thought that the Canadian dollar could find stability at 93, and this level has been reached.

The action has been rather quick and a brief pause in the overall violence seems possible.

* * * * *

On types of economic management:

"The third way [in mixed socialist-capitalist economy] is the fastest way to the Third World. We are not interested in the market socialism dreams of the leftist liberal economists on the east coast of the United States. Right now, the main obstacle to our development is ideological infiltration from the West."

- Vaclav Klaus, Finance Minister, Czechoslovakia, 1989

- How right he was, and is!

Link to the February 5, 2010 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1549



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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