The Fed Should be Seeking Redemption

By: Bob Hoye | Thu, Nov 28, 2013
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The following is part of Pivotal Events that was published for our subscribers November 21, 2013.


Signs Of The Times

"Fitch Ratings has downgraded the credit worthiness of Chicago's bond debt because of its public pension problems."

- Yahoo, November 11

One can't help but wonder how low the rating needs to get before an issue gets on the Fed "Buy" list?

Janet Yellen, pretender to the throne at the Fed, claims that there is not a bubble because she does not "see evidence of asset price misalignments".

She is not reading outside of the box.

"The secret, dirty cost of Obama's power push on ethanol."

The story was in AP on November 11th and covers the remarkable distortions in the corn market due to faculty-lounge utopians.

Because of the "sure thing" in the regulations, farm land in Iowa has soared from $350 per acre ten years ago to $5,000 recently. Some regions are up 25% in just 12 months (to August).

BS and QE have driven farmland and bond prices "over the moon".

"A record $56 billion of junk bonds [was placed] in September."

- Bloomberg, November 12

"Highly-rated companies are selling bonds at the fastest pace on record."

- Wall Street Journal, November 15

The amount placed for the year to that date was $1 trillion.

"Bonds with the lowest possible credit ratings have soared in popularity."

- Financial Times, November 15

"I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."

- Former Fed official on the QEs, Wall Street Journal, November 12


The "backdoor bailout" is no longer a bailout, but likely the final stages of the intense experiment in interventionist economics. Final stages implies that that connection between academic theories, Wall Street and the Federal Reserve has no checks and balances. In engineering terms it is a positive feedback mechanism. More recently, this has been accompanied by a political mania that has been overwhelming the usual checks and balances of the US constitutional system. Another positive feedback mechanism. An illustration follows.

But then, when the excesses are committed on the authoritarian revelations about what is "good" for the public, anything goes.

Well, "they" have said that they will do anything to keep the bubbles going.

The problem is that bubbles will always go parabolic and collapse.

Quick, what is the difference between a corporate treasurer and the Federal Reserve?

Corporate treasurers always issue a lot of bonds at or just after a top in the bond market.

The Fed has been buying a lot of bonds at or close to a top in the bond market.

Treasurers have a long history of having prospectuses "on the shelf" just waiting for the peak in the market, which is wise.

On the other hand, the Fed's insistence in buying high is without precedent. Well, it is the first time it has tried it. However, its intuitions could be similar to those that drove the Treasury to buy bonds out of the market from the 3 percent level in 1950 to 15 percent in 1981.

The record of government agencies buying bonds, or for that matter, selling gold has not been seen so wise. More the opposite.

So we have had an unwise and inexperienced bid in the bond market and with this some 200 hot stocks have gone parabolic.

Where do we go from here?

Credit Markets

Treasury bill rates are and have been at Depression levels since the 2008 Crash, but longterm corporate bond yields are not a Depression-high yields.

The latter is OK, but it should be understood that the first business expansion out of the post-bubble crash has immensely improved the ability to service debt. An improving corporate market makes sense until the economy rolls over.

This is vulnerable to the unwise bid losing its nerve, or gets buried.

Eighty-five billion of Fed buying each month adds up to a trillion a year. So the position must be approaching 1.8 trillion, and a good portion of it is in sub-prime mortgage bonds.

The bond future reached our target level of 135-136, when we noted that the action was vulnerable.

The high was 135.80 and the low was 131.11 on November 12. The bounce made it to 133.32 on Tuesday and it has slumped to 130.81, a new low for the move. It is not oversold.

The future along with JNK, HYG and MUB all accomplished Outside Reversals to the downside. While this shows volatility, it was on a news day from both the Fed and ECB.

A chart on JNK follows. The overall action is impressive and on the near-term, the rally became overbought in late October and the price is bumping against resistance.

And so is the action in spreads, as represented by JNK/TLT.

We will watch to see what it brings, but conditions are still that when the market gets hit the long bond falls faster than junk. Spreads narrow, as they did yesterday. Perhaps fund managers are confident that the Fed's buying of lower-grade bonds will last longer than the average maturity of their portfolio.

Bonds have a redemption date, the Fed should be seeking redemption.

Stock Markets

The senior stock indexes have fully registered momentum and sentiment readings last recorded with the 2007 Bubble. Ross has been noting that almost a couple of hundred "Horsemen" are in parabolic blow-offs.

The current rally began out of a "Springboard" pattern registered on October 9th. The low for the NDX was 3118 and Monday's high was 3429. When we wrote last week the Weekly RSI was at 72.9, which compared to the 72.6 reached in 2007. Also noted was at the full insanity of the Tech Bubble the RSI soared to 84 a couple of months before the mania hit the wall. The numbers of issues participating in that bubble was exceptional and it is doubtful that that excitement could be replicated in the NDX, this time around.

The RSI reached 76 on Friday as some of the leaders such as DDD discovered a brick wall. DDD reached RSI 87 on Monday as the stock soared to 84.85. Yesterday's low was 68.30.

Many investors may consider that the Dow and S&P represent good value. Our view is that parabolic action in the "Horsemen" is a dangerous condition that represents "Ending Action" for the wild stocks. And when these fail the fallout may not be contained.

The S&P has been showing some negative divergences, but the A/D line for the 500 operating companies has yet to provide the negative signal.

However, the market is set up for a significant reversal and this would be clocked by the first week with a lower low than recorded in the previous week.


In late August and early September we reviewed that most commodities could decline into late in year.

The high for the CRB was 296 on August 28th, for base metals it was 360, for the grains it was 388 and for crude the high was 112.24. Copper's high was 3.39.

Our October 31st Pivot noted that the action was becoming oversold and concluded that the low could be set "within the next four weeks".

The plunge reached 25 on the Daily RSI, which was the most oversold in more than a year. The low on the index was 272 on Tuesday.

Crude oil declined to 92.43, copper to 3.12, grains to 358, base metals to 333 - all early in the week.

An intermediate decline was possible and has been accomplished.

An intermediate rally could follow. Perhaps into February.

Resource stock could enjoy a favourable rotation.


Our target for the C anadian dollar, with weak commodities, has been the 95 level. The low was 95 earlier today.

The DX became oversold at 79 in late October and the initial rise took it to 81.58. The correction was to 80.56 last week.

It could spend some time at the 81 level before taking the next leg up.

Precious Metals

Gold has dropped to a Daily RSI of 30. For the silver/gold ratio the decline has been to 32 on Tuesday. GLDX (Gold Explorers) is down to 29.

The September 18th ChartWorks noted the Syrian Crisis and reviewed gold's behaviour through a big political crisis. The conclusion was that the sector could decline for six to eight weeks. An RSI of 33 to 30 could end the move.

With the potential of a turn up in most commodities this could be oversold enough to prompt a worthwhile rally.

Positive Feedback Diagram

Positive Feedback Diagram

Junk Bond Yield

Junk Bond Yield


Flatland Values Have Gone Vertical

Flatland Values Have Gone Vertical



Link to November 23rd Bob Hoye interview on



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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