The following is part of Pivotal Eventsthat was published for our subscribers May 13, 2010.
SIGNS OF THE TIMES:
"World Regains a Taste For Risk"
- Wall Street Journal, May 11, 2009
"China Optimism Prompts Investors to Load Up on Commodities"
- BMO Global Commodity Strategy, May 12, 2009
"Americans do want to pay taxes for services. Americans want more government in their lives."
- General (ret.) Colin Powell, May 9, 2009
"Why a commodities super-boom is inevitable"
- Prosperity Network, May 12, 2009
The reasons given were the usual raves about the China phenomenon. The Shanghai Stock market set its rebound high at 3478 last summer and is now at 2650. The CRB Commodities Index set it rebound high at 293 at the end of the year and is now at the 260 level and vulnerable to renewed pressures in global credit markets.
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"Increase exposure to commodities."
"It is different this time, because the power for global recovery comes from Emerging Economies - not the established Industrial Economies."
- Donald Coxe, April 2010
"China's appetite for new cars, trucks shows no signs of abating anytime soon."
- The Vancouver Sun, May 7, 2010
"Canadians are among the most profligate spenders in the developed world."
- Certified General Accountants Association of Canada, May 12, 2010
The report noted that most of the borrowing binge took place in the last two years when the economy has been suffering the worst downturn in 50 years.
As the 1955 song hit by composer Johnny Mercer advises: "Something's Gotta Give".
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Something gave way in global stock markets with the discovery of the sudden loss of liquidity. From perpetrators to victims there were a variety of explanations and rationalizations for the hit, but the simplest is that the "Sudden Deceleration Syndrome" was followed by a sharp loss of bids.
Monday's special memo noted that the gold/silver ratio began to turn down from 69.3 on Thursday at 3 PM suggested that the worst of the panic was ending. The ratio is now down to the 62.4 which could provide support. Stability here could set up the next rise in the ratio, which would signal the next general downturn.
This page spent the latter part of April reviewing sentiment and momentum readings that only attend important highs. Our April 22 edition detailed this and tabled our Check List for a change. In this case it was for a reversal to the downside, and included a few questions about being up when it should be and showing measurable signs of speculation.
We missed asking the usual question about how "sound" the story was behind the rally to the "Goldilocks" condition. The overall story has been that inspired policymaking had ended the crash, managed the recovery and "fixed" the sovereign debt problem.
This week they fixed it again - this time with the notion that an injection of a Trillion dollars will be enough to drive malignant speculators to their deserved doom. This is as doubtful as trying to kick-start an ocean liner.
Apparently politicians have been annoyed with recent setbacks and as President Skarkozy gloated the bailout would "Confront speculators mercilessly" and that they will "know once and for all what lies in store for them".
Had we been his press secretary we would have added "So there!"
In the meantime, last week's Pivot (published on Wednesday) pointed out that the senior indexes had set a lower low for the week and that was the signal for us to push the "sell" button.
The damage to equities has been severe and the rebound may not last too long.
As will be reviewed in their usual sections, one of the "helpers" such as base metals is rebounding as well, but crude is providing little assistance.
Monday's Memo observed that the bond future at 124 had accomplished the highest Daily RSI since the blow off at the end of 2008.
The drop to 120 is testing support at 119.5 and it could briefly rest at this level. However, it is not oversold and getting there seems likely.
With the turmoil, corporate bonds lost the bid as well and the spread for investment grade (Baa) jumped from 22 bps to 57 bps on Friday. It has since eased to 45 bps. Similarly, the high-yield went from 342 bps to 446 bps on Friday and has eased to 409 bps. And junk went from 631 bps to 750 bps on Friday and has narrowed to 714 bps.
One of the plusses for the corporate market has been the tendency to narrow into May and if this becomes exuberant the seasonal reversal can be important. The key now is that spreads have been narrowing on the carry trade since the panic ended 14 months ago. The action until last week had become exuberant, the break has been severe and after a bounce spreads can set a widening trend. Eventually to disorderly conditions - again.
The direction of earnings and, therefore, the ability to service debt and to keep the ratings agencies happy, depends upon pricing power. And that is indicated by rising commodity prices.
The CRB rallied to 294 at the end of the year at an RSI sufficient to end the move. Recently, tt has since been working on a "head and shoulders" top. The failure event would be taking out the 255 level.
This could be assisted by adverse changes in the treasury curve and in credit spreads. This worked in the summer of 2008 and the critical change started a couple of weeks ago.
The advice in April was to substantially reduce exposure to long-dated corporate bonds. Three to four-year high-grade issues will provide some return with not too much risk.
The Dollar Index played its role in weakening on the rally for stocks and commodities likely to run from early February into the spring. Because of "off" and "on" fixes for Greece the decline was not as consistent as we originally expected. Nevertheless, the action successfully ran to an important high in the "window" and the jump in the DX was associated with the crisis.
Essentially, the rise with the "problem" was from 80 to the high on Friday of 85.27. The low was 82.91 on Monday and the bounce to the 85 level seems to be a test.
In 2008 the low for the DX was 70.7 in March, but the significant part of the rise was from 72 in June to 88 with the part of the crash that ended in November.
At the moment, the daily RSI is at a level that could limit the rally. But, on the longer term, the DX rally with the 2008 crash amounted to 16 points, which was a grinder. So far with the crisis the gain amounts to 5 points, which suggests a longer-term target.
The Canadian dollar was expected to rally from early February to spring. The low was 93 on February 7 and the high was 100.5 on April 21.
Then as stocks and commodities rolled over the C$ would drift down, and the panic spiked it down to 93, with the low close at 95.2 on "Black Thursday". This was spectacular action as our longer-term target (on May 5) was 93.
The rebound has been to overhead resistance at 98.5 and it is poised to test the 93 level.
COMMENTS FOR ENERGY AND METAL PRODUCERS
Energy Prices: A few weeks ago we had thought that crude's favorable season would run a few weeks more, but it hit the brick wall at the end of April. Our May 5th view was that credit problems would drive the price down.
The initial breeze from the developing financial storm took crude from a close of 86.2 to the low close of 75.1 on Friday. The bounce made it to 76.4 on Tuesday, and it is trading now at 74.3.
The May 9th ChartWorks had a target of 60.
In the meantime, our advice on oil and gas stocks in late April was to lighten up.
Base Metal Prices were likely to rally out to spring, and the leadership provided by the sensational rally in nickel created enough momentum to end the move. On our metals index the high was 1939 on April 16 and our comment on the 22nd was "the change in credit conditions could be a 'killer', as in 2007".
Our index dropped to 1573 on last Thursday and has recovered to 1636 yesterday. The key instruction from last week's hit is that liquidity in any game is precarious and trading discipline should ignore "fundamental" persuasions.
Of course, the most compelling of persuasions has been China. Our work on this has been that China along the India has been the equivalent of America in the 1870s and 1880s when massive population shifts and industrialization were the feature of global history.
Then as now, the "phenomenal" economy is subject to the availability of local credit, which in turn is subject to the availability of credit in the world's financial center. As represented by the course of the Shanghai financial markets and metal prices since 2008, this has been the case.
An aggressive fund manager with connections to China tells us about a recently industrialized region. His acquaintance has a factory that is operating and the rest in the complex are not. The state has clamped down security such that no one goes into the area except workers to the one factory. Media are kept out.
Seems like the opposite to the Potemkin Village story. In Russia's case it was a false-fronted village that duped officials could view from the river. In China's case it exits, but is prevented from being seen.
Our advice in the latter part of April was to lighten up on base metals and mining stocks. Last week's hit confirms our concerns about a "killer" decline.
The action in gold's dollar price has been very good, and even better in most other currencies. Good enough to be wary.
Ross's May 9th ChartWorks on gold had a nearby target of at least 1236, with an RSI of at least 79.
Yesterday's high was 1248 with a daily RSI of 76.44, which is close enough and it is time to take some money off the table.
Particularly as senior gold stocks (HUI) have not made new highs on the move. Yesterday's close of 488 compares to the January high of 519. Another point is that the daily RSI is at 72.5 - the level that has ended HUI rallies over the past two years.
As it began to rise on April 26 the gold/silver ratio signaled the end of the financial party that reignited in early February. It soared to 69.5 at 3 PM on Black Thursday and in declining from there signaled the rebound.
Today's low at 62.4 seems at support and an increase above 64 would mark the start of the next crisis.
Of course, with the big hit to the financial markets gold's real price has increased, which is good for the sector. With the resumption of troubles our Gold/Commodities Index can continue to rise. The real price always does in a post-bubble contraction.
More than that it has been a reliable indicator. With the party the recent low was 313 on April 16 and the turn up led the hit to the general markets by two weeks. This was the case at key hits to the financial markets in May 2007 and in the summer of 2008.
Lighten up on the seniors and on some of the hot small caps. There will be another buying opportunity.
|Base Metal Prices||1593||1657||1585||1637||1627|
Link to May 14 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1647