Week Ending 1/05/07
The New Year started off with a bang that even the most die-hard pyromaniacs were in awe of. Just about every commodity traded got whacked by implosions seen and felt around the world. Copper, oil, gold, silver, coffee, and the entire CRB Index put on quite a dismal performance - the carnage was everywhere. So what's the scoop?
The Labor Department reported a gain of 167,000 workers from last month. The jobless rate held at 4.5%. Workers' average hourly earnings rose 0.5%, the largest increase of the past eight months. The conundrum - what to make of the report.
Does it show that the economy is getting stronger, and hence the Fed will not have to lower interest rates in the very near future, or do higher wages increase the odds of wage inflation that can beget unwanted siblings, necessitating a rise in rates to prevent the nasty little critters from popping up?
So the question remains the same: will they or won't they - raise interest rates, and when and by how much? Bonds placed their bets by getting whacked pretty good, and the dollar rallied on the speculation that any further decrease in rates is not needed, and that perhaps interest rates will even rise - god forbid - or at least until traders can get on the right side of the trade.
Where the hell is Greenspan when you need him - ha, ha - he was last seen soaking in a bubble bath, still trying to recognize one when he sees one: pop - there goes another.
Now everyone asks why? - what caused such carnage to occur so fast? We have heard many a reason given: from supply and demand to over speculation. Perhaps, but we think we see the dastardly villain hiding in the shadows - the want of easy money, a carry over from Greenspan's reign of profligacy - the infamous carry trades, with a bit more than a little help from Japan - of course.
After all - we still protect and defend them - don't we? The cost of the protection rackets runs high my child - very high.
The Yen carry trade has played a large role in this past week's market gyrations. Many an investor, including large hedge funds, have been short the yen versus the dollar, and or the Euro - thinking the various carry trades would continue on as before.
This was based primarily on a weak yen, which was due in no small part, to Japan's zero interest rate policy, or almost zero, as they have raised it to the dizzying height of 0.25%. Japanese 10-year JGB yields increased 3 bps this week to 1.71%. Imagine that.
This was the same ploy Sir Alan employed to subsidize the US Treasury Market, being the bastion of strength and sentinel keeper of all things free that he is: ha, ha, - even free money, if you know and dare play the devils game.
It's amazing what fiddling around with interest rates and money supply and demand can cause - but that is what free markets are all about - aren't they? Market intervention isn't market manipulation - is it? Cui Bono? Gee, for some unknown reason, I don't think its us the consumer. Tommy can you hear me?
Many traders have (or had) carry trades with the yen on one side and various commodities on the other. This week's hit on the commodities market, coupled with a rising yen, is a double whammy or curse to such trades - as both sides of the play lost value - fast.
Such weakness begets further weakness, as margin calls were made - causing players to further liquidate in order to pay to play. It is a hard lesson to learn, one not soon forgotten. The hotter it looks - the harder it hooks. Ain't no such thing as easy money.
The yen gained 1.9% versus the euro, which was immediately felt as a sharp pain in the butt to the many players of the various yen carry trades, especially those who had commodities on the other side.
The dollar also gained against the euro, supposedly because of the payroll increases. This may perhaps be the reason, however, we would also consider that too many players were crowded together on the short side of the dollar boat, causing a bit of unbalance and instability.
Once the reckoning began it could not be stopped - it may even continue next week or the week thereafter - until all is square again. But the long term trend of the dollar is down - and that of the Euro is up.
The future of the yen and Japan we will leave up to the reader's discretion, as to which way the land of zero bound interest rates will go - they who with the Chinese buy almost half of our debt market - commonly known as Treasury Securities. We can't help but notice what an odd couple the word debt and securities make.
The Canadian dollar declined to an 11-month low as the price of crude oil and other commodities imploded, reducing the appeal of the currency. This too got in the way of the carry trade.
The Institute of Supply Management reported its non-manufacturing index grew at a slower pace last month. Note that this sector accounts for almost 90% of the economy.
The Commerce Department reported that homebuilding fell by 1.6%, the eighth monthly drop in a row.
The Dow gave back a mere 0.5% and the S&P500 0.6%. The Transports gained 0.6%, and the Utilities lost a significant 1.8%. The NASDAQ100 added 1.5%. Needless to say, the stock markets have been doing quite well.
Knowing that charts look the most bullish just before they turn bearish, we are on the lookout for any cracks that may give a warning of support waning to hold such extreme valuations.
The only cycle you can rely on is the one that takes markets from over valuation to under valuation. It is not possible to predict when, or where, or by how much, as no one knows the future. The markets are, however, the exteriorization of man's greed and fear. The more over valued or under valued a market gets, the more the odds increase that a reversion to the mean is close at hand.
We have noted in past reports that many of the world's bourses were up from 50% to over 100% for 2006; but we also mentioned that the stock markets of the rich middle east oil nations have been hammered down by as much as 50-60% of their value.
Both Saudi Arabia's Tadawul All Share Index and Kuwait's market have continued down so far this new year. We have discussed before what this negative performance and divergence may mean. Whatever it is - it ain't good.
This past week saw the Brazilian stock market complete a full blown reversal, going from making a new all time high, and then reversing and closing down for the day - closing lower than it did the day before. Several other bourses had very similar action. Hmm.
Here in the U.S. we are watching the transportation average, as it has still not confirmed the Dow's new highs. If business is good and the economy is strong - shouldn't the companies that ship all of the goods be doing well? Their stock prices are not showing strength - they are showing weakness. So we can't help but wonder, and ask - why?
The first chart below shows the performance of the Dow with a comparison beneath it to the action in the transports. As can be seen, the transports are headed in the opposite direction.
The next chart up shows the performance of the Brazil iShares. The long term strength can easily be seen, as the chart progresses from the bottom left hand corner up to the upper right hand corner - a bullish signature.
However, note the recent activity that has broken below the bottom trend line - accompanied by a huge surge in volume and a negative MACD cross.
They were not just selling - they were fighting to get out the same door at the same time. As always we wonder - why?
Next up is the XLU Utility sector that shows it breaking below its bottom trend line, as well as its 50 dma. At the bottom of the chart is a comparison to the Dow Utility Average, which has also been headed down.
Bonds & Debt
Two-year yields dropped 6 bps to 4.76%. Five-year yields were down 4.5 bps to 4.65%, and 10-year Treasury yields lost 5 bps to 4.65%. The 30 Year long-bond yield was down 6.5 bps to 4.75%.
The spread between the 2-year and the 10-year closed the week inverted 11 bps. This is the same yield spread from last week, although the individual yields on the 2 & 10 year both fell, they fell by the same ratio as to give the same spread from the previous week.
The chart below shows the yield on the 10 Year Note. At the bottom of the chart are comparisons to the 90 Day T-Bill Rates and below that the 30 Year Treasury Bond Yield.
Last week we mentioned that we had doubts as to how long the Fed could maintain its inverted yield curve before the long end began rising - as it had last week. This past week the Fed did an excellent job in maintaining the status quo.
For whatever the reason, as we know not why - we are getting the feeling that the Fed may be getting ready to disembark from their inverted yield curve. We'll save any discussion for next week. Stay tuned. Same time. Same channel. Same frequency. The twilight zone.
Note that 90 day paper is yielding more than 30 YEAR paper. Seems reasonable - doesn't it?
Fed Foreign Holdings of Treasury Debt increased $10.9 billion last week to a record $1.763 Trillion for a yearly rate increase of almost 16%.
The dollar advanced to $1.3003 against the euro, from $1.3084 on Thursday. It traded at 118.68 yen from 119.05 on Thursday, recouping about half of its earlier losses.
The U.S. dollar rose to its highest level versus the euro in the last six weeks, and a two-month high against the yen. Various indicators of economic strength caused traders to reduce their hedges that the Fed will lower interest rates anytime soon.
The dollar set a two-month high of 119.68 yen two days ago. It has regained 2.7% from a 20-month low of $1.3368 per euro just last month.
As the charts below show, however, any dollar rally against the euro is just that - a counter-trend rally. We expect the longer term trend to prevail: dollar down - euro up.
International reserve assets, excluding gold, were up $760 billion to $4.80 Trillion.
First up is the daily chart of the US Dollar.
Next is the monthly dollar chart, which clearly shows the longer term trend.
Next is the chart of the Euro, which shows the longer term trend as well.
Finally we have the chart of the Japanese Yen.
Oil has had a tough go of it lately, and last week saw no reprieve. West Texas Crude lost $5.60 a barrel to close at $55.45 for a 9.17% loss. Warm weather so far this winter, especially in the Northeast has cut demand sharply - causing supply to expand rapidly.
The Energy Department reported that supplies of distillate fuel were up 1.97 million barrels to 135.6 million last week. Gasoline supplies gained 5.68 million barrels to 209.5 million barrels.
OPEC is concerned with the present price and over supply of oil, and may call an emergency meeting prior to their already scheduled conference in March. Abdullah bin Hamad al-Attiyah, the Qatari oil minister, said the Organization of Petroleum Exporting Countries has said he does not want to see prices drop to $50 a barrel, and would considering cutting production to reduce supply if necessary.
The first chart up is the daily chart of West Texas Crude. The short term chart does not look good for oil. It must recover and hold current levels or face devastating losses.
The weekly chart that follows shows a less dire situation. The bottom trend line has been breached, but not by much - at least as of yet. As we said above - near current levels need to hold or there will further losses incurred.
Once again - the monthly looks much less grim then the daily chart, however, as can be seen, there isn't room for much more downside before serious and perhaps irreparable damage will be done to the price of oil.
Although for those trading oil, and who are long oil, the recent price action has been devastating, for the general public and consumer it has been a blessing.
Last week we stated that it looked like oil was attempting to make a bottom. It looks like we were wrong in that assessment, as oil broke down further during the week - over 9% in fact.
We acknowledge that we were wrong in interpreting a bottom forming, at least at last week's level, however, we still are not convinced beyond a doubt that the bull market is over. Investing in oil at this time would be fool hardy and all should stand aside until the dust settles.
Commodity prices fell very hard last week, supposedly because demand has, and is expected to decrease further. The CRB index fell 5.3% for the week. Gasoline sank 7.5%, and Natural Gas declined 1.0%.
Dr. Copper was whacked the most, down 17% in the fourth quarter alone. It started the New Year off on the same foot - losing about 2% for the week. The weakening in the housing market has reduced demand for copper significantly.
The London Metal Exchange says that stockpiles of copper have doubled in the past 12 months. It has also been reported that supply will exceed demand by 230 metric tons. About half of the copper market is used in new home building.
This is why copper is said to be a forward looking indicator of the economy, as its demand is greatly affected by new housing, which if down significantly permeates all through the economy due to the numerous peripheral markets tied to housing.
Below are the weekly and monthly charts of the CRB Index. As the chart shows, the index has fallen below its bottom trend line, below its 200 dma, and below its October low. A great deal of technical damage has been done.
The monthly chart shows the long term trend for commodities. Basically, the CRB has doubled in price since 2002. Presently it is just about at the 38.2% fib retracement level.
So from a long term perspective, the decline although severe, has not as of yet unquestionably signaled the end of the bull market. As the chart shows, the CRB Index did not undergo any severe corrections - both in time and magnitude, in its relentless rise higher.
Significant support is found between the 40% to 50% fib levels. As of now, it is not below its 50 ma on the monthly chart.
The break below the trend line brings the validity of the commodities bull into question, but the question has not as of yet been answered definitively. Investment at this time is not warranted and would be imprudent and extremely risky - if not outright foolish.
Precious Metal Sector
Gold closed the week out at $606.90, down $31.10 or 4.87%. A good proportion of that hit came on Friday when the price fell $19.30 or 3.08%. The daily chart shows gold's bottom trend line being violated, as well as the 50 & 200 dma's.
RSI & MACD are both flashing negative divergences. The $600 resistance turned support line is being tested at the moment. MACD also shows a negative cross over. All of the positive indicators we showed last week have turned negative.
Next up is the weekly gold chart. It shows the 50 ma and the bottom trend line being tested as we speak. If it doesn't hold then $560 would be the next target. Back on October 26, 2005, we wrote an article titled: Gold: Stage One or Two? In that article we said:
"When $500 becomes support rather than resistance - stage two will be here"
Such talk at that time seemed foolish to most. Now it doesn't look quite as
preposterous of a statement. To be honest, we thought that the June low of
$542.27 was the low for the cycle, which it most likely was - but perhaps not.
It shall soon be revealed whether gold needs to go back down to those lower levels before the next move up begins.
Silver closed the week out at $12.72, down 0.22 cents or -1.66%. The chart below shows the fall back in May from $15.21 to the low of $9.48 in June.
Presently silver sits at $12.72, which above its 50% fib level. It is also above its 50 ma at $11.83. Those declaring an end to the silver bull appear to be a bit quick jumping to judgment. See the point & figure charts at the end of this report.
Next up is a chart of the silver/gold ratio. It compares the performance of silver to the performance of gold.
When the numbers on the chart are rising higher it means that silver is out performing gold. If the numbers are headed lower it means gold is out performing silver.
As you can see, presently silver is out performing gold. Generally it is viewed that silver is more of a industrial commodity, and gold is more of a monetary commodity, although both do have both properties.
For silver to be outperforming gold, it is assumed that the economy is viewed to be on a firm footing, thus indicating more industrial use for silver. When gold is out performing, it is generally indicative of fears of disruption to the paper fiat monetary system. This is the conventional belief - we are not sure that it is as black or white as that, but perhaps it is.
If the above view is correct, it imposes a dilemma on the Fed: if the economy is strong then interest rates do not need to be lowered - in fact, they may need to be raised to prevent wage inflation and price inflation from exerting themselves in a deleterious manner.
If inflation increases there will undoubtedly be pressures and imbalances in the monetary system. In other words - the Fed is damned if they do, and damned if they don't - they are stuck between a rock and a hard place of their own making; but it is We The People who will pay. Enough - here is the chart. If such events unfold further then they already have (which seems all but impossible to prevent) it will be positive for gold.
Gold & Silver Stocks
Below is the chart of the HUI Gold stock index compared to the price of gold. The chart is self-explanatory, and shows the HUI to be outperforming gold. This is considered bullish.
Next is the daily chart of the HUI Gold Bugs Index. The HUI is a proxy for the gold and silver stocks in general, as it is composed of the major precious metal stocks.
In last week's report we stated that the indicators/signals were a mixed bag regarding the HUI. This past week saw the positive divergences disappear.
We also stated that it may be necessary for RSI to fall to the 30 level from which all major bullish moves of significance have started from in the recent past. As the chart above shows - RSI is at 35.66 and getting closer to 30. It doesn't have to reach 30, then again it can go lower than 30 - it's just another sign post along the way.
The chart above was shown in last week's report. We stated that the HUI was bumping up against the upper pitchfork line of resistance and that it needed to break above it to signal the next move up was commencing.
Not only did it NOT break out above - it broke down and through both its 50 & 200 dma's. It is also sitting just above its November low by a smidgen. Either the present level will hold as support or further weakness will test the 300 level.
From where the index presently sits (314.12), the minimum price action needed for the next move up to begin in earnest is a cross of 340 and then 362.53. Until 362.53 is broken above and becomes support, all action is still confined within the corrective phase.
The weekly chart does not look anywhere near as corrective as the daily chart, however, if the looming negative MACD cross occurs then more downside action is likely to occur. See the point & figure chart section below.
The monthly chart shows the line in the sand for the HUI Index (258.60). If that level is breached and becomes resistance then the gold bull would be in serious jeopardy. Note that level is over 50 points below where the HUI is presently. Also, support exists above this level at 270.54 and again at 300.
We do not foresee this level being breached, as our own portfolio attests to with our own personal money. Perhaps we are wrong, but what other gold stock writer puts their personal portfolio up in the public domain? We at least put our money where our mouth is. We could not do it any other way.
We are not thrilled with the negative MACD cross over on the monthly chart. Both the daily and monthly charts show such crosses, with the weekly getting very close. Any further downside action of significance will cause the weekly to cross as well. Once again, this does not mean the gold bull is over, however, it would indicate further downside action. See the point and figure chart section below.
Point & Figure Charts
Due to the two false breaks outs in the pm sector, and the angst many gold bugs are feeling, we have decided to include a section of point and figure charts of the pm sector.
Please note that these same charts just last week projected large moves up in all of the pm sectors. Seldom are the projected targets met either up or down. As with all things they can change overnight. Caveat Emptor - buyer beware.
Note: The above chart as of Jan. 1, 2007 had a bullish price projection of $750.00
Note: The above chart as of Jan. 1, 2007 has a bullish price objective of 472.00. Also note the converging Bolinger bands with the O's below the bottom Bollinger band.
Note: Silver still has a bullish price objective of 21.50, which is consistent with its existing out performance of gold, as shown earlier by the silver to gold ratio chart.
Note: The XAU still has a bullish price objective of 192.00. So according to the point and figure charts we have the following:
Gold has turned negative from positive (one negative chart)
Silver still remains positive with a significant price appreciation objective (one positive chart)
HUI has turned negative from positive (second negative chart)
XAU still remains positive with a significant price objective (second positive chart).
Weight of the Evidence
Two negative charts
Two positive charts
The one final observation we would add concerning the point and figure charts is this. The two bearish price projections are just above and below the 10% level.
The two bullish price projections are 66% for silver; and 35% for the XAU.
The weight of the evidence falls with the bulls. It is what it is - and it's a bull market until it isn't - and we ain't there yet. It may feel like it - but that's what bubble baths are for.
Stock of the Week
The last chart is of Hecla Mining (HL). Hecla was bought this past week during the bloodbath, which is how we prefer it - the hard trade. We also added some KGC to the portfolio.
Many stock markets have recently hit new highs, yet the Middle East is imploding. Brazil and a few other bourses had key reversals this past week.
Knowing what we know about paper fiat land, and the asset price bubbles it gives birth to, we smell something rather fishy in stock market land. We prefer to stand aside and watch (except for the pm stocks).
At the minimum, a correction is about to occur in the stock markets. It may just be a correction of a bull market, or it may be an animal of a different sort. Time will tell.
Further to the above, interest rates have been backing up and bonds backing down. Rising interest rates tend to upset the stock market. We shall see.
If interest rates on the long end rise, there's going to be trouble in mortgage land and hence in unreal estate land. We wait and watch.
The dollar has rallied and may rally some more, however, we are inclined to consider it as a counter-trend rally in the mother of all bear markets. The U.S. is an accident looking for a time and place to happen. When it does - and it will - the ramifications will be heard round the world.
We give thanks to Japan and China, for without them who would buy our Treasury Bonded debt? Maybe Mr. Magoo will come out of retirement and buy them all up - but with whose money.
Oil and natural gas have been the whipping boys for da boyz. I hear bull whips cracking and sounds of laughing. How long can it go on?
Along with the energy market commodities in general have been taking a pretty good licking. Once again - how long can it last? Has the bull turned to bear? We remain in the neutral column.
Finally there is the precious metals arena. The precious metals are dear to our hearts, however, the ideological belief in them as Honest Money is a separate and distinct matter than investing in the precious metals for profit.
Investing is nothing but speculation - some assets are simply more risky then others. When all is said and done, you still have to lay your money down and take your chances.
We are of the opinion that the precious metals are in the last wave of an intermediate term correction. We stated long ago that this correction, once it came, would be longer in duration than severity of price.
It looks like we got the time duration part correct, but were off a bit in the severity part, at least in regards to the retest of its lows. This is why we stress incremental accumulations of positions as prices fall near or below their 200 dma's. This allows for cost price averaging of the total overall accumulations.
This strategy works every time until the last time - the time when the bull turns to a bear. A bull market is until it isn't - until lower highs are confirmed by lower lows; and this has not occurred in the present precious metals market. It is what it is until it isn't.
Always have dry powder just in case it is needed. Forewarned is forearmed. Expect the unexpected and be prepared.
But yes Virginia, sometimes it is tough to sit through. But as Jesse said - sitting and doing nothing is the part that makes you money - and is the part that is hard to do.
Stop by our website and check out the complete market wrap, which covers most major markets. There is also a lot of information on gold and silver, not only from an investment point of view, but from its position as being the mandated monetary system of our Constitution - Silver and Gold Coins as in Honest Weights and Measures.
There is also a live bulletin board where you can discuss the markets from people around the world and many other resources too numerous to list. Drop by and check it out. Good luck. Good trading. Good health. And that's a wrap.