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August 01, 2007 Honest Money Gold and Silver Report: Market Wrap |
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Market Wrap Economy Real gross domestic product (GDP) increased 3.4 percent in the second quarter of 2007 after increasing 0.6 percent (revised) in the first, according to estimates released today by the Bureau of Economic Analysis. The acceleration in real GDP growth reflected the following:
Prices of goods and services purchased by U.S. residents increased 3.9 percent after increasing 3.8 percent. Excluding food and energy, prices increased 1.7 percent, following a 3.1-percent increase. Personal Income Real disposable personal income (DPI) decreased 0.8 percent in the second quarter, following an increase of 5.9 percent in the first quarter. The downturn reflected a deceleration in current-dollar personal income, which was boosted in the first quarter by large bonus payments, and acceleration in consumer prices. My Comment So according to "them" everybody is doing great in paper fiat land. Is this a great place to live or what? Just last month alone the gross domestic product was up 3.4%. The printing presses are rolling on all across the land; Bush has vowed to make one last stand. Neither the Dems nor the Republicans care what they say; hell, they were brought up that way. Citizens now get thrown out of public places for just being there during a press rally and asking the wrong questions, while merchants of death grow coldly brazen without any fear of getting caught. Bunches of useless mouths are in their way, of making fatter pay checks by the day. I'm reminded of the line from Through the Looking Glass: "the less there is for you, the more there is of mine." We had better wake up people or there isn't going to be any more "mine", it's going to be all "theirs". A quick mathematical rendering of the numbers by a third grader easily exposes some questions that have harsh implications: "Well isn't it just a bit screwed up on one side of the ledger?" "Why what do you mean there boy", a face hardened by political intrigue bellows out from his overstuffed mouth, as he coldly attempts to stare into my eyes, but wisely chooses not to go there. "Well sir it says here that the GDP went up by 3.4%, which appears to be a healthy number. But then it says that personal income was down by .8 percent and we know that personal savings is at a minus 1.4%." "The report also states that Consumer spending, which accounts for about 70 percent of the economy, slowed to a 1.3 percent annual pace, the weakest level during the last three months." "Oh you're fretting about nothing there boy, the economy is doing just find, why its stronger then my kid is on steroids, or look at my wife on those diet pills, hell she's cleaned the house 8 times in the last 7 days she's so wired." "But sir, if our income is down .8% and our savings rate is -1.4%, where are we getting the money from to pay for a 1.3% increase in our spending?" Suddenly everyone in the room stopped talking and they were all staring at me. You could have heard a pin drop it was so freaking quite. Then some woman pulled a credit card out of her pocket book and raised it above her head in the air and yelled "charge it charge it shop till you drop, pay for it later, don't be a debt hater," and the entire room started dancing around in a mad frenzy all yelling "charge it charge it, pay for it later", as they waved their credit cards in the air. So apparently, although they tell us things are better off, and all we need to do is to take a look around at all the new toys everyone has to see the proof that our standard of living must be rising, I still say to myself that that can't possibly be true. If we are spending more money then we earn as income and have saved, in order to buy all these new toys, the only other means by which we can get the money to pay for them with, is by taking out credit, which is just a nicer sounding way of saying taking on more debt. How can our standard of living possibly go up if we owe more debt, especially if we owe more debt then we have in the equity of all the things we own? Our bottom line of wealth is what we own after we subtract away all that we owe. If the number is positive our standard of living or wealth is positive, as we own more than we owe. If the number is negative, however, then we owe more than we own and our standard of living is going downhill, not up. It doesn't matter how many toys we have, what matters is who really owns the toys - us or the bank. If the bank owns them they are not really ours, we are simply using them as long as we can keep up the interest payments on the loan used to buy them with. In other words as long as we can service the debt we get to use the toys. Stop servicing the debt and they will take the toys away. The fact that the GDP is expanding may very well mean that we are worse off, as the number really represents the total of what we as consumers buy or consume. What really determines our standard of living is where we are getting the money from to pay for the total amount of toys - what they call GDP - gross domestic product. If we earn all the money and have it as disposable cash available to spend on the toys then things are good. Even if we have to use some of our hard earned savings of past earned income to buy everything we need - things are still good. But if we have to borrow the money on credit, which in turn creates debt, then things aren't too good, as not only do we owe the price of the things we are using, we also own the interest our friendly banker gets to collect for loaning us money he didn't have. "Never a borrower nor a lender be." Moving on to other news we have: The Reuters/University of Michigan's index of consumer sentiment rose to 90.4 from 85.3 in June. Sales of new homes declined 6.6 percent in June while building permits fell to their lowest level in a decade. Prices of homes in 20 U.S. metropolitan areas fell by the most in the last six years. Auto sales last month were the lowest since 1997. New York mortgage foreclosures rose 13 percent last month from a year earlier. Foreclosures were up 87 percent across the U.S. in June. Falling home prices and stricter lending standards are making it more difficult for borrowers to sell their property or to refinance loans.
The riskiest borrowers account for over 50% of the $820 billion dollars of adjustable rate loans due to start rising. President Poole of The Federal Reserve Bank of St. Louis had the following comments last week. "The damage, I think, is going to remain primarily in the real estate sector." "We do not have a bank involvement and therefore bank lending for the normal sort of economic projects is alive and well." "I'm not offering a guarantee that there won't be more shoes to drop." "And I think it's going to take a while for it all to get sorted out. How long is that going to be? I don't know." I find Poole's remarks to be far removed from the realty all around him. The bankruptcies, bailouts, write-offs, and mounting problems in the subprime lending arena grow larger by the day. Even the over exuberant stock market has picked up the scent.
"The underlying pace of productivity gains may also have slowed somewhat." "There's really not much the Federal Reserve can do in a short period of time to reverse a jump in oil prices." "What we have to do is look forward a year to two years, which is the horizon over which monetary policy has its effect." "The core measure is an important indicator of the underlying inflation trend." Bernanke keeps his cards closer to his vest. He does not, in general, cast large amounts of bread upon the waters. What I came away from with his speech is that he is big on data, especially data on the core or what he calls the underlying trend of any given indicator. He also said that if the time frames used are too focused on the short term the resulting interpretation can be skewed. Regardless of how close he may at times keep his cards, or how well he plays the game, he still is a central banker who knows which side his bread is buttered on, and that the system he oversees is based on the wealth transference of the majority to the minority, which means that any way you look at it, it is a system of fraud, deceit, and sinister intentions - and he is one of its masters. Stock Market The watchword for the week was down, as just about every market and asset class (besides the dollar, oil, and bonds) was down. The Dow was down a large 585.61 points to close at 13,265.47 for a loss of -4.23%. The Transports were down an even larger -5.98% or 320.65 points to close at 5039.17. The utilities lost 37.06 points or 7.24% to end at 474.79.
The S&P 500 fell 4.9% to close at 1458.95. Financial stocks were hit hard - again. The Banks fell 3.1%. The Broker/Dealers were whacked for a large 5% loss. Up first is the S&P 500, which had a tough week and as we will see is having a tough time - period. It is undergoing a lot of internal deterioration.
I suspect the March low (1363.98) will be tested before the snow flies, perhaps much sooner.
The above monthly chart of the S&P does not paint a pretty picture. As the chart shows, the index has not been able to break above its 2000 year high, yet RSI is higher, forming a negative divergence, while at the same time it is overbought (above 70) and turning down. If it closes the month out in this position it will not be a good omen, as it will suggest there is still a good deal of downside action to come. The weekly chart below isn't much better. It shows a large negative divergence between MACD and the price action. This too hints of further downside action sometime in the future.
Now let's take a look at some of the financial and banking sectors to see if the remarks President Poole of the St. Louis Fed said about the subprime problems in mortgage land agree with the charts or not. First, let's take a look at the financial sector of the market to see how it is responding to the subprime loan problems. The charts below should show if the mortgage debacle is contained to its immediate sphere of influence, or if it is growing wider and wider, affecting more parts of the economy.
The chart above shows the problem to be growing larger not smaller or self-contained. The March low was broken below like a hot knife through butter. Note the price action dropped far below the 100% fib retracement level, which hints that much more than a normal retracement is underway. It appears that those who partied the longest and hardest at the punch bowl for want of their fill, are now feeling the ill effects that come with such debauchery and overindulgence.
The above chart covers the financial sector going back to 2003. That's a fairly long term trend line in place that has just been broken below. It remains to be seen if the high ground can be regained or if the index tumbles to new lows. Next up is the banking index, which shows that it was apparently hanging out at the punch bowl with the financial sector. Notice that the July, April, and March lows have been sliced through like a hot knife through butter.
Perhaps you have noticed that all these charts appear to be falling off a cliff in the upper right hand corner of the chart, quickly finding their way down a fair piece of real estate in a very short order of time. Next is the chart of Bear Stearns who likes to indulge in hedge funds hoping for some nice fat profits to add to their bottom line. It looks like they got something to add to the bottom line, but I'm not quite sure if it goes on the side of the ledger they were counting on. These charts make one wonder if President Poole has seen them or not, as you would think someone in his position of Admiral over a large area of maritime and commercial industry would want to know exactly what is going on during his watch. July 18 - Bloomberg (John Glover and Hamish Risk): "The risk of owning corporate bonds soared to the highest in two years in Europe after Bear Stearns Cos. said investors in two U.S. subprime hedge funds will get little or no money back, credit-default swap prices show."
The utility sector seems to be joining in the hangover of over indulgence; hopefully it will remain immune to a fall off the cliff and content itself with a mere fall from grace. Bonds
Although on the surface there may be the appearance of a flight to quality for long U.S. bonds, there is even a greater propensity to get out of any risk whatsoever, especially in the emerging markets where spreads have widened considerably. Risk is beginning to be viewed for what it is, especially the aspect that it can have dire consequences when things go wrong, as opposed to the Pollyannaish belief that nothing in paper fiat land ever goes wrong for those in the employment of the moneychangers. Corporate bond spreads widened across the board, while the spread on junk bonds increased as well. This should be a wake up call to those so employed, as to where they think the loyalty, fidelity and allegiance of their bosses is - with them or at the altar they worship at - the altar of Lucre.
The chart above shows the recent drastic fall in interest rates. The long blue vertical line represents significant resistance at 4.7.
The above chart is the price of the 10 Year Note (not the yield or interest rate). It shows a strong rally right up through to significant levels represented by the red horizontal trend lines. The yellow shaded area just above is strong resistance that will not likely give way.
The chart above is the price (not yield or interest rate) of the 30 Year Long Bond. It is a very long term chart that goes back to 1982 or 25 years - over two decades of time. It shows that the price recently broke below and out of its 25 year old channel. Such channels are not to be easily dismissed, as a lot of time and money and price action is contained therein. It remains to be seen if the breach was a one time incident in passing or the start of a trend in a different direction. Currency
We saw that in spades this past week, as markets around the world sold off as yen carry trades were unwound. The yen was up 2.2% to 118.63 per dollar, 3.5% to 161.67 per euro, and 3.7% to 240.11 per pound. The Japanese currency also rallied 6% against the New Zealand dollar and 5.4% versus the Australian dollar. The dollar gained in comparison to 16 of the major world currencies except for the yen. It gained 1.4% against the euro to $1.3636. A little more than a week ago the dollar closed at a 26 year low against the pound. This past week the dollar gained 1.55% versus the pound to $2.0242 per pound. The U.S. currency gained 4% versus the New Zealand dollar, and 3.2 percent against the Australian currency. It "only" gained 1.5% against the Canadian dollar and 0.6 percent versus the Swiss franc - the other currency that is heavily involved in carry trades. Up first is the daily chart of the dollar. Last week I circled the oversold RSI -30 reading that suggested a rally was likely; and a rally we did get.
The weekly chart of the dollar below shows a positive divergence in the RSI indicator, suggesting there might be still more to come in the dollar's favor. The trend line clearly shows, however, the ultimate direction of the dollar's primary trend - down.
Below is the weekly chart of the Japanese Yen. It shows the strong rally up that the currency had this past week. Notice that it is just about bumping into its upper trend line, which suggests it may not have much further room to run. The negative divergence in RSI hints at the same conclusion. However, MACD has made a positive crossover, so there are conflicting signals (what else is new).
Next the euro correction can be seen. Notice the several gaps. The vertical horizontal support line that was broken was significant, which together with the MACD Cross and other indicators suggest further downside action is likely. Such would be a headwind to gold's upside progress.
Next is the euro with gold's performance overlaid. As can be seen they pretty much follow the same course, sometimes a bit earlier or later, or to lesser or greater degree, but still along the same lines.
Here is the same comparison between the US dollar and gold. Although there is an inverse correlation present, it is not as well defined as the above comparison of the euro to gold.
Lastly is the Yen compared to gold. The direction is pretty much the same with some varying degrees of conformity.
Commodities
MACD has also put in a negative crossover, both of which suggest that more downside action is probably due.
The DB Commodity Index Fund also shows a negative MACD Crossover and a test of its 50 ma.
The Dow Jones Coal Index has broken out of and below its descending channel and below its 200 ma. RSI shows an oversold condition, as does its MACD, however, much technical damage has been done and will require a lot of work to repair.
The select materials sector also shows a break below its lower trend line (of a rising channel however) along with a negative MACD Cross.
Oil was one of the few commodities up this past week and has been quite strong as of late. It is fast approaching significant overhead resistance, which if broken through and sustained would mean the start of another bull market leg up.
Gold had a tough week, down 24.60 or 3.59% to $684.70. As the weekly chart below shows, however, gold's 65 wk ma has held like a rock all during the gold bull and continues to do so. MACD remains positive and headed up, and RSI looks like it may be ready to cross, while the histograms are receding back towards zero. Somewhat surprising readings of the indicators given the hit gold took this week.
Silver Silver also got whacked last week, falling .69 cents (-5.13%) to $12.72. Its 65 ema has also held like a rock, but is fast approaching. Histograms are receding back towards zero and a MACD Cross may be looming. Once again - somewhat surprising indicator readings considering the hit of the past week.
Xau The Xau closed back below its breakout level (blue horizontal line) for another failed breakout. It remains to be seen if the high ground is once again regained, and if so - when? The index remains well above its 50 ma and MACD also remains positive, although the histograms are receding. STO is still overbought, which suggests there is plenty of room to fall if it has a mind to.
The chart below of the Hui also shows another failed breakout. RSI is headed down and approaching oversold (but not yet there). A negative MACD Crossover has occurred, and the Hui/Gold ratio trend line that was recently broken above is about to be tested as well.
Random Charts Below are several random charts, most of which compare either the stock market to the gold market, or various currencies to one another and or to the gold market. They are fairly self-explanatory, or perhaps open to one's own interpretation would be more apropos - so not much comment if any will be offered. I found them to be quite fascinating and thought you might as well. Maybe, maybe not - I'm easily entertained. Note the Spx moves inversely to the Hui from 1997 until about 2002, and then suddenly they move in the same general direction.
Same here.
This is pretty much in keeping with the first chart comparing the Spx with the Hui, as the Xau is much older going back to 82, whereas the Hui chart started around 98, which in the chart below shows the same inverse relation at that date.
Pretty much follows the same general line with varying degrees in time and magnitude.
Similar.
Notice from 2005 to 2006 they move in the same general direction, however, from 2006 on they have moved in the opposite direction. A bit different then one would have thought...?
Mirror image if there can be such a thing in the markets.
From mid 2005 on a pretty similar direction; so what was going on before then, and why?
Summary Remember the show - the week that was? That's how I feel about last week's market action. Just when I thought it was safe to go in the water - bam. As the charts showed, when the Yen rallies just about everything else falls out of bed. Only oil, the dollar, and treasury bonds rallied, which if you think about it is one hell of a strange combination. Oil - first everyone loved it, there wasn't any of it left, then suddenly everyone hated it and peak oil was a crock; now everybody loves it again - why - maybe cause it keeps going up in price? You've got to love it or hate it; I guess it depends on what side of the trade you're on. Well the stock market finally remembered there is a law of gravity and that Newton did get some stuff right. Newton was an interesting guy, as he was the grandmaster of - well let's just say of a group that has grandmasters. He was also head of the mint of England. Newton did get around, of that there is no doubt. I still maintain that the stock markets are nothing but asset bubbles and that the worst bear market every seen lays not to far in the future. When - I don't know, but it's coming. As the charts showed this week, this is a bit more than a "normal" correction. The market may still rally right back up, as the madness of crowds and the delusions of man is a wonder to behold - but like I said - Newton did get at least one thing right. Bonds and the dollar were due for a rally and rally they did. They very well may yet rally some more. I still maintain that any surprises will be to the upside in interest rates, although the Fed may once again try to fight the primary trend, but in the end the market is a force unto itself and it will prevail. The dollar is a bit more obvious, as it has long since given up the ghost. Oil is still doing well but it is about to bump into significant overhead resistance of its old high, which if bettered (and sustained) will mean the start of a new leg up in an ongoing bull market. It may very well not make it through right now (or it could) but that doesn't preclude that it still will not prevail (nor does it guarantee it will - it doesn't guarantee anything). The fall from grace of oil and its subsequent rally that has denied most odds, as well as most analysts, may have a message in it pertinent to gold - then again, maybe not. Speaking of gold and silver, they both had tough weeks, as did the precious metal stocks. I most admit to being somewhat surprised at various indicators on the gold charts - I thought they would be much worse - but perhaps that waits ahead, or perhaps it doesn't. Time will tell. The question has often been asked: if the overall market gets hits hard will the gold stocks go down with it? I have asked myself that same question quite often. I was always of the opinion that they would go down with the sinking ship - until two weeks ago on that day the overall market got whacked but good, yet the gold stocks flew upwards as Icarus reborn. Looks like they got a little too close as well. After this weeks drubbing of just about anything that could take a drubbing, I return to my original stance that the goldies will go down if the market does. But I return this time with my tail between my legs, being once again humbled by the awesome power of the markets. I am but a mouse amongst elephants and must not forget, lest I be squished like a mere rodent of little consequence: just another brick in the wall if you will. As for the gold stocks I still remain resolute and of the opinion that a new leg up in the gold bull is around the corner. A test is certainly underway, and to lose a battle and retreat to fight another day is how wars are often one, and believe me - this is a war - much more than most realize. However, I am tempering that stance with the reinforcement that the gold stocks will go down if the market goes down (by down I mean down hard - very hard). Caveat Emptor. And yes the yellow metal is by far safer to own. I enjoin everyone to take a minute or two out of each day to become more aware of what is going on around us - the getting into position of those that need to get into position, to accomplish what it is they are compelled to accomplish. Please note: they do not care who or what gets in their way. Some call it the loss of freedom, others conquest, some refer to it as plunder - and a few even call it by that which is unspeakable - that which is taboo. Think about it - for your kid's future if nothing else. Good luck, good trading, good health - and that's a wrap.
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Douglas V. Gnazzo Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME). Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.
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U.S.
homeowners will start paying an additional $26 billion in adjustable rate mortgage
payments, as they begin to start kicking in (adjusting upwards) between now
and the end of next year, adding more baggage to the all ready weak subprime
mortgage industry.
During
his semiannual economic testimony before Congress, Federal Reserve Chairman
Ben Bernanke made the following comments.
The
NASDAQ Composite lost 125.26 (-4.66%) to close the week out at 2562.24.
The
two-year note lost a huge 26 basis points this week to 4.50 percent. Ten-year
note yields fell 16.8 basis points during the past week to 4.788%. Thirty year
bonds lost 11.7 bps to close at 4.947%. The difference in yields between 2
year and 10 year notes rose to 28 basis points from 19 points last week.
We
have stated several times in this report that when the yen rallied it would
test the financial mettle of the market.
The
Reuters CCI Index below shows a break below the horizontal support line at
418.59.
Oil
Gold
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