The Panic Window Approaches
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, September 27th, 2007.
Adding to the list of things that can go wrong from our last discussion, things that could cause a possible dislocation in the stock market during the possible panic window opening next month, we have an astute observation by Rick Ackerman. Then you have Gary North out further discussing Fed antics associated with a contracting monetary base, which he is suggesting will topple the equity complex, and possibly the system. Here, you can't blame the Fed for instituting such policy. Again, the idea behind constricting growth in the monetary base is to support the dollar ($) and curb the inflationary effects of easing rate policy. And while I agree with the conclusions of both these gentlemen, as stated in our last commentary the timing associated with when such factors will come home to roost is still very much up in the air however, not imminent by any means.
Enter Goldman Sachs, where last week they came out saying the worst of the credit crunch is over, and to bet on a recovery. Obviously this must be the way they are betting now, betting their expanding balance sheet (buyers of last resort) on seasonal tendencies and an easy money environment. One does need wonder just how long this can go on for however if as Rick Ackerman above points out the consumer is saturated with debt. Try as they will however, brokers, bankers, and politicos (the 'authorities') are attempting to get the borrowing binge back on track, attempting to get companies interested in leveraged buyouts again, anything to keep the credit bubble from collapsing. If you believe the message in a rising gold price, one must consider the possibility they will be more successful than is the conventional wisdom at the moment, making short selling a very dangerous prospect indeed. Outcomes in October will tell the story in this respect.
And then we have the Chinese, whose 'upper-ups' are apparently waking up to what Goldman Sachs and the Rothschild's have planned for them now. So, it will be interesting to see just how things develop moving forward. I am looking for profound change in trade related exchange between China and the West developing after the Olympics next year to mark acceleration in the demise of the Western Banking Model known as 'Globalization'. This is when you can expect to see the $ come under intense pressure as the Chinese pull their support, and interest rates rise. (More on this below.) This of course will make above considerations very important because if the monetary base is already shaky by then, a genuine system collapse is possible at the extreme. Continue to buy gold and silver bullion. You will not regret it in the end.
The markets have now completed a close resemblance of a 1987 signature in the trade as month end approaches. That being said, based on the strength of the move in stocks into new all time highs in many cases, this does suggest that despite what authorities would have you believe, money supply growth rates are accelerating. In this regard I will refer you to the attached resource piece pointing out the fact one need be a scientist these days in grappling with increasingly complex accountings and methodologies employed by monetary authorities. Of course we have known this for some time, along with the fact unaccounted for inflation is coming from so many sources now that it's not possible to add the total largesse befalling the larger system today. Here, the only way one can be sure you are on the right track interpretation wise is to watch prices, with gold featuring prominently as a leading indicator. This may become more apparent to Gary North in coming days.
Further to this, end of quarter window dressing of stock markets is now almost complete, with greedy fund managers jamming prices higher into month's end. Moreover, and as mentioned above, the current sequence into month's end has in fact been surprisingly strong; again, witnessing new high / recovery closes in many markets around the world, with tech stocks in the states no exception. Of course one should note that like ending characteristics witnessed in the 1999 / 2000 bubble topping sequence, large cap tech stocks have a tendency to outperform in such circumstances, which is also occurring today as the combination of increasing inflation coupled with more players chasing a 'sure thing' intensifies momentum oriented sectors. With this in mind, it should be pointed out that from a seasonal perspective, and like the timing associated with the tech stock top in 2000, odds favor prices remaining buoyant within what appears to be an accelerating echo-mania right into the first quarter of next year. We are watching for what we will term a 'hyperinflation signal' in the CBOE Volatility Index (VIX) over the next few days to aid in confirming this view. (See Figure 1)
Will prices go straight up like they did in the '99 / '00 sequence, or will significant corrections occur along the way? As alluded to above, the strength in stocks over the past few days has definitely bolstered my opinion that prospects for the markets past potential October / November panic window weakness appear quite good. That is to say no matter how bad things get here in this October / November window, all losses will be retraced into year end, with new highs possible again. Here, what we are expecting is an exogenous event, like China pulling it's support of US debt markets, to trigger another panic of some sort during this period, but that the combined inflation related efforts of Western authorities should keep things glued together until at least Christmas, if not longer. In this respect you should know Congress is to vote on passing a bill that will impose a 20% across the board tariff on all Chinese imports this fall (viewed by some as a declaration of war), which should cause them to retaliate by selling US treasuries. (i.e. pushing interest rates higher.)
And who knows, maybe such a development will be enough to topple stock markets like it did in '87. Such an outcome would be consistent with the sequence witnessed in key markets at the time, where heaven knows calling into question the twenty-five year long bull market in US bonds would be big news. As mentioned the other day however, with increasing numbers getting short these days in the options market, many investors are already insuring themselves against disaster, meaning at least temporarily any weakness in stocks should be fleeting no matter how bad the news. In looking at Dave's view of how trade should unfold in this respect, past strength that could last into early October (like '87), prices should fall sharply into a late October / November bottom, but snap back into year's end; again, as described above. This should cause some variation of a complex bottoming pattern in the short ETF's introduced the other day, where now you may better understand why we suggested keeping exposures to only hedging related positions for now. (See Figure 2)
All that being said, eventually rising market rates are bound to have an effect on prices, especially those of financial shares, where until risk associated with the October / November panic window passes, one must keep an open mind. In this regard we will be watching the financials and bank stocks in coming days for clues in gauging expectations moving forward. In this respect it's important to note that thus far price mangers have been unable to lift bank stocks against benchmarks, meaning unless this changes (unlikely), the broads would eventually succumb to this pressure. Clearly the market expects congress to commit financial suicide this fall by passing the tariff bill on Chinese imports. So again, while efforts to counter this may lift the broads into year end (bonus time on Wall Street), continued relative weakness in financial / bank shares would have ominous implications further out. (See Figure 3)
As alluded to above however, in the meantime all the money that need be printed to pull this off will create significant pressure in the pipe as we move forward, meaning in general prices should continue rising. And sooner or later people will begin to react to this on an increasing basis, meaning increasing numbers should buy into the precious metals sector, led by the shares, on an accelerating basis in coming days. This is definitely the message in the charts, that is for sure, where as mentioned the other day, 10-year scale indicator diamonds in charts of the Amex Gold Bugs Index (HUI) are pointing to significant gains once resistance at the large round number at 400 is overcome. What's more, as you can see below, and past considerations associated with our Progressive Interval System (PI), the next significant resistance point to be considered is at the 625ish level, which is the next Fibonacci resonance related resistance (high confidence measure in nature). Position traders should hold strong on a breakout until this threshold is attained. (See Figure 4)
Unfortunately we cannot carry on past this point, as our stock selections and analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 71 stocks (and growing) within our portfolios. And more recently we have been focusing on the Red Lake gold camp, hosting some very interesting emerging opportunities. In this regard I have just returned from a due diligence trip and will be providing a report to subscribers later this week. This is another good reason to drop by and check us out.
And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.
Good investing all.