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March 31, 2008

Possible Correction in Commodities and Related Stocks Dead Ahead
by Captain Hook

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, March 13th, 2008.

Picking things up from yesterday, first perhaps we should expand more on just how much 'instant credit' is being created by the Fed's new Term Securities Lending Facility (TSLF), and why this will not matter in terms of supporting our bubble economy(s) in the end. Why won't it matter? In a nutshell, and a truism that fits circumstances to a 'T', 'you can lead a horse to water, but you can't make him drink'. In touching on this yesterday within our comments on baby boomers, generally, as they reach retirement age not only will they begin to withdraw more from the stock market to supplement income, but more importantly with respect to the longevity of the credit cycle, the demand for credit will also decline commensurately. This is the natural state of the West's population base, and the baby boomers will increasingly reach retirement age over the next ten-years from this point forward. Thus, we will not only have increasing pressure on the stock market for this reason, any measures taken by the banking community to extend the natural life off the credit cycle will not only fail, but also exacerbate the depths of an unavoidable collapse. Notice I did not say 'extend the time it takes to recover in the end', as this is 'end game dynamics' we are talking about here in terms of the demise of our present financial / monetary system. It's not going to simply be injured, it's destined to die, which is why only physical precious metals, quality gold and silver shares closely held, and other select tangibles will likely escape some degree of decay in this debacle.

In expanding on the above then, like the housing bubble that was a means of attempting to extend the credit cycle, which is of course blowing up in our collective faces and threatens to take the stock market with it a la our comments in this regard yesterday, the TSLF is just another example of the banking community's attempts to extend the credit cycle with the issuance of copious amounts of potential 'instant credit' that could be used by the Fed's agents to expand their balance sheets if so desired. And for some, this temptation will likely be too much to handle given attitudes still prevalent, but as we explained above, this ploy will also fail in the end because no follow through bubble buying by baby boomers should be expected from this point moving forward. You see what the Fed is doing with this TSLF is taking 'bad debt' in the form of questionably valued securities off the books of its dealers and swapping them back Treasuries for this collateral which can be held by the Fed indefinitely if the borrower wishes. (i.e. think monetization.) Presto chango - and what you have here then is not only a government sponsored bailout of the banks / brokers paid for by taxpayers; but also, with these Treasuries now on their books, brokers / banks can extend credit at ratio of nine-to one if they wish against this new and improved collateral, which in effect then is de facto money creation to a degree never witnessed previously by any means. And the thing is the Fed is making $200 billion available weekly, which if fully taken up by its dealers along with all the leverage exercised, would mean almost $2 trillion of new credit could be created to monetize other markets.

The chart below shows how M3 (money supply) expansion has been countering the natural decline in credit growth since the bottom in 2003, and that we are approaching an inflection point of either hyperinflation or collapse. The fact we are in 'recession' naturally warrants expansion, and we my get it at least temporarily (until early summer as per 1948) if the cycle turn discussed below takes hold sooner than later. (See Figure 1)

Figure 1

Source: nowandfutures.com

So, perhaps now you see why despite the best efforts to hide what's happening behind the scenes with this new inflation mechanism, precious metals, the grains, and energies have continued to benefit from hedge fund investors who know this, and continue to push prices higher. Unfortunately for the greedy ones a few surprises might come their way on a short-term basis soon with the passing of the Martin Armstrong Pi Cycle turn next week, but as mentioned previously, and because of all this inflation, any weakness in precious metals should be fleeting, possibly lasting only into the end of April like in 1978. In refreshing your memory on this subject, after next Friday business conditions should improve for credit issuers due to pressure coming off in terms of mortgage resets (See Figure 2), which could stabilize the currency, consumption trends, and stocks as a result. The thinking is, this, combined with a little help from this new credit facility provided by the Fed should stabilize prices. With brokers and bankers increasingly worried about the appearances of their balance sheets however, one must wonder just how much more leverage they will be able to take on, which mean despite a Pi Cycle turn next week, collapsing commodity prices could keep pressure on the broads into spring.

One cannot help but notice that like tech in the year 2000, the commodity complex and its related equities might be set to crash after options expiry here in March to mark the top of what some would view as a rather pronounced bubble. And this could cause the broads to fall even further into April as financials find a temporary bottom. Such an expectation is not unreasonable from the perspective that while financials topped in February of last year marked by a Pi Cycle turn, it took until July to see an initial top in the broads, inferring a bottoming process may also need run past a quick reversal of the buy commodities / sell stocks (and the dollar) trade that is anticipated to dominate price action into next week. The chart below was the one I ran last year in spring pointing out if bank shares did not continue higher a 'fifth-wave failure' would occur and drag the indexes down with them. This happened of course, but again due to the degree of mania that exists in stocks, along with official price management efforts, the completion of a double top in the broads was not witnessed until October, which is amazing from the perspective financials are almost 20-percent of the S&P 500 (SPX). (See Figure 2)

Figure 2

What's equally amazing in my books is how traders have been able to keep the buy commodities / sell stocks trade going to this point in spite of currency trends given the degree of acceleration in credit deterioration, but this might be close to a change soon too if the primary message in the chart below holds merit. What is the primary message? Nothing much (sarcasm), just that energy shares have been running divergent to both the stock market (meaning relatively strong) and crude oil (meaning relatively weak) for some time now, where this divergence will need be closed one way or the other soon. My bet is energy shares will resolve to the downside anytime now, but no later than just after the Pi Cycle turn day next Friday. (See Figure 3)

Figure 3

My thinking is swayed in this direction by the observation the SPX and Amex Oil Index (XOI) had a strong correlation right up until the top in October, which infers the natural flow for energy stock prices should take them down. What's more, although I will not attempt a more basic count on the XOI, it should be noted at present it shares a striking similarity to the patterning seen in the BKX prior to its fifth-wave failure, which is a bit scary considering many participants in this market view it as a 'no brainer', devoid of broad market risk. It should be noted this hypothesis is supported by the observation the New York Composite (NYA), which has a full weighting of energy shares, is poised to break below key supports denoted below in a potential crash signature. (See Figure 4)

Figure 4

Unfortunately we cannot carry on past this point, as the remainder of this 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 68 stocks (and about to grow again) within our portfolios. This is yet 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 in 2008 all.

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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