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March 17, 2009

Pivotal Events
by Bob Hoye

The following is part of Pivotal Events that was published for our subscribers Thursday, March 12, 2009.

SIGNS OF THE TIMES:

Last Year:

"Once-in-a-generation financial and economic storm."

"There is a real prospect that [the recession] could be a serious one, without strong policy action."

- Lawrence Summers, Wall Street Journal. March 14, 2008

Again, the establishment believed that strong action would avert a disaster. This is despite his aggressive, if not belligerent, injections of cash at the end of the 2000 tech-bubble, when he was secretary of the treasury.

"Ben Bernanke is smarter than I am and thinks about this 24/7. He leads a superb committee. He is backed by the best monetary policy technical economic staff in the world."

Therefore, nothing could go wrong, according to the March 19, 2008 blog by J. Bradford De Long, NBER Professor at Berkeley.

* * * * *

This Year:

"US oil and gas companies should not receive federal subsidies in the form of tax breaks because their businesses contribute to global warming."

- Timothy Geithner, Reuters, March 5, 2009

"Chavez calls on Obama to follow the path of socialism."

- Drudge Report. March 6, 2009

Too late for Chavez to take any credit for advice. Inauguration day was January 20.

* * * * *

STOCK MARKETS

Recently, we've had a few parameters on equities, one was a price-target on the Dow of 6600, which was revised to 6250. The low was 6470 on Monday.

Another force was the important turn in currencies possible last week. Representing the action, the Dollar Index set its high at 89.4 on Monday and the decline has had a pleasant effect upon stock markets.

The other conditioner was the Post Euphoria model that was looking for an important low some 14 to 16 months from the high. March is the fifteenth month. From time to time, we have mentioned the 1937-1938 failure and this model, as formatted by Ron Griess (TheChartstore.com), also calls for an important low in March.

Needless to say, but sentiment is at "bargain basement" levels. Altogether, it looks like this week's recovery will be more than a two-day wonder. As we have been noting, rallies are for selling and only nimble traders should attempt counter-trend moves.

Fundamental support seems to have been provided by a modest firming of commodities and rising interest rates. The latter may not be sufficient to force an increase in central bank rates, but so far the rise in bill rates has been encouraging.

Of course, we are concerned about the low of 6250 not being reached. The key will be the nature of the test of last week's disaster.

A couple of weeks ago we noted that banks were battered enough to prompt a brief rally and the BKX jumped from 19 to 28. Last week, we thought that the subsequent slump to the low was working on a test. The low was 18.6 on Friday and so far the rebound has made it to 24. This could run into April.

Seasonal forces for crude oil and base metals could pull the stock market recovery into April. This may generate more relief than enthusiasm, but whatever it accomplishes it will be another selling opportunity.

In the meantime, although central banks will continue their compulsion to flood the money markets, as with post-1929 it may not stimulate an immediate return of prosperity. It is worth repeating that after a credit binge, banks still in operation become puritanical and will only lend to prime-rated companies and these companies protect that important rating by not borrowing. The net result has been a collapse in money velocity that overwhelms the Fed's efforts to inflate asset prices. The old "pushing on a string" observation prevails, which used to go with the other banking observation--"Lithic Exsanguinity".

Credit Spreads were expected to reach a disaster in the crash and then narrow out until around March. The advice in November and December was to get long some lower quality corporates. The BBB was yielding 10% and the price rallied 14 points to February 19 when the advice was to start selling, and the following week's advice was to sell.

Since then the yield has increased from 8.76% to 9.47%, as the spread widened from 525 bps to 575 bps on Monday. Lesser credits such as junk have widened to extremes for the move. Yielding 10 % at the height of the market in October 2007, junk is at 41.7 % now, with the spread at 3800 bps over treasuries.

This represents severe deflation in financial assets, that was preceded by the collapse in sub-prime mortgage bonds. Of which, the putative AAA-rated were at 80 a year ago in April, now they are quoted at 33.8. On the same move, the BBB sub-prime has plunged from 11.25 to 2.38. In 2007, when the street was buying risk in 2007 these confections were priced at 100.

There is further to go as our target has been that many issues will trade not in percentage points of par, but in parts per million (PPM).

Gold Sector: The something interesting going on continues, and recalls the old saying "The US dollar is as good as gold." Admittedly, this prevailed long after policymakers became corrupt, but as "sound as a dollar" could be coming back, as well. If so, it would be confounding to the evil ambitions of central bankers.

As we wrote in 2007, the worst thing that could happen would be a stronger dollar. After all, the panacea of policymaking has been to depreciate the dollar. In the typical post-bubble condition, the senior currency becomes chronically strong relative to most currencies and most commodities, for most of the time.

Also typical, is that the real price of gold declines during a mania and increases during the post-bubble contraction. This seeming paradox perplexes goldbugs of all ages, as well as the same for interventionist economists. Wistfully, we noted that without the latter, the former would not exist. Just think - a world without economists and goldbugs.

Fortunately for the record, this bust has been working out. At the height of the stock market infatuation in 2007, gold was at 700, and the DX was at 75. At the recent lamentable dismay in stock markets, gold was at 1007 and the dollar was at 89.6. With this, our measure of gold's real price has increased from the low of 143 in May 2007, which turned up as the credit markets turned to disaster. With the worst of liquidity pressures a few weeks ago our Gold/Commodities index reached 519. This represents a huge increase in prosperity for gold miners.

The following chart illustrates the point we have been making, which is that gold shares are generally undervalued relative to the increase in the real price. The case is clear, either gold stocks soar, or the real price declines.

We have been expecting the latter as commodities rally into April, but even with this correction, gold shares are cheap. This has been behind our recent theme that the stage is set whereby successful exploration programs will build outstanding chart patterns, rather than brief spikes.

Also, the tendency for the big stocks to trade up and down with the S&P will continue. But, over time golds will make outstanding net gains while the general stock market nets out the opposite.

While as bullish the longer term is, the sector has been outstanding and due for a consolidation. Perhaps for a month or so.

Link to (DATE) 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1140

Bob Hoye
Institutional Advisors

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

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Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

Copyright © 2003-2009 Bob Hoye

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