Pivotal Events

By: Bob Hoye | Mon, Nov 24, 2008
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The following is part of Pivotal Events that was published for our subscribers Thursday, November 19, 2008.


Last Year:

"Our economy is strong, there is no reason to panic."

- Wall Street Journal. September 10, 2007

Op-ed piece by Robert E. Lucas, 1995 Nobel Economics winner.

"The S&P will be up by 9.7% from Friday's close to 1600 at the end of this year [2007]. This would be the steepest year-end rally in some time."

- Bloomberg. November 19, 2007
Abbey Joseph Cohen, Goldman Sachs

"Multi-decade bull market for base metals due to China and India."

- Business News Network, November 27, 2007

* * * * *

This Year:

"The nation's largest pension fund, known as Calpers, is paying dearly for its ill-fated decision to become one of the most aggressive real-estate investors."

- Wall Street Journal, November 13, 2008

"Panic Selling Resumes On TSX"

- Financial Post, November 13, 2008

"Down and Out in Beverly Hills. Rolexes, Picassos Hit Pawnshops."

"Clients need money for alimony, debt-relief, and even plastic surgery."

--Bloomberg, November 14, 2008

Remarks from the head of Beverly Loans Co., who added "We are the bank of last resort!"

Well for the moment at least, or until the Fed gets enough cash to get into pawn broking.

* * * * *

Stock Markets: Well, last year we were looking for a significant slide into around January. This was based upon one of the great bubbles wherein the classic fall crash was delayed and then ran through into January.

Ross noticed that, typically, when the unemployment number turned bad near the end of a business cycle then the stock market would be down some 21 weeks later. The change occurred on September 17, 2007 and the eventual break ran into late January - close enough.

As with any expected change, it is daunting until it actually comes in. Something similar holds as we have been looking forward to this important test of the October lows likely to conclude around mid November. This is the week and conditions seem eligible for the start of a much-deserved rebound.

Once in a while the markets record some interesting numbers (using intra day extremes):


October Panic


November Test

Overall Decline











In 1929, the big hot stocks were in the DJIA, and this time around they are in the NASDAQ. We have been using the classic fall crash model, which is based upon the major post-bubble contractions. Typically, forced selling reached a maximum in late October, when the market briefly rebounded, and tested the lows around mid November.

Occasionally there can be some interesting dates. In 1929 the panic low was on October 29, the bounce was to November 4, and the test was accomplished on November 13. This time around, the equivalent dates were October 28 and November 4.

It is uncertain how long this correlation may last, but generally once the test is completed we have been expecting a tradable rally out to around March. This would likely carry most equity sectors with it.


Credit Spreads: Lower-grade stuff continues under pressure. Since early October the so-called AAA sub-prime bond has plunged from 70 to 42, which is quite a whack. Even worse, in January the price was 84, which compares with 90 in the halcyon days of a year ago. The chart follows:


On the same move, traditional corporate junk yields have soared from 11% to 31.75%, or in price, plunged from 100 to 34.88. The spread has widened from 600 bps to 2759 bps.

Beyond messing up portfolios, the collapse represents another plunging asset class that will constrain the Fed's chronically bad habit of issuing credit on any excuse. We have never expected central bankers to voluntarily reform, but that a massive credit contraction would prevent them from continuing reckless behaviour.

It is difficult to estimate the drop in market cap on the bond side of the equation, but Ron Griess at www.thechartstore.com has estimated the collapse in global equities at $30 trillion and the chart follows.

Chart above was featured in The Chart Store's (http://www.thechartstore.com) Weekly Chart Blog for the week ending November 7, 2008 and permission was obtained to reproduce it here.

However, the last leg of the 2008 liquidity crisis has been expected to conclude in November and some relief into the spring has been possible. Investors have been avoiding spread products since last year and should continue to do so. Traders should begin to cover shorts and to build a modest long position in some Fannie, or Freddie bonds, or in Canada, some stuff with quasi-government protection. Monday's BondWorks will review some opportunities.

Base Metal Prices: Last week's advice was that metal traders should cover shorts and begin to get long. Our index (less nickel) set its panic low at 354 on October 24 and bounced to 418 on October 30. So far the decline with the November test has been to 351 yesterday, and today it is at 354.

Mining stocks continue under severe pressure. The index, SPTMN, set a panic low at 290 on October 27 and bounced to 398. The test of the low expected around now has been a plunge to 210.

This is now registering a Downside Capitulation on the weekly, which means that the mining sector is being trashed in a measurable fashion. The last registration was at the conclusion of the bear that ran from March 1997 to the end of August 1998. The decline amounted to 60% and the reversal occurred within a week of the signal.

With the post-1873 bear market mining stocks had declined by 66% on the equivalent move. That chart, which was discussed recently, is based upon monthly data.

From the high of 955 in July 2007 the SPTMN has plunged 78% and the sector is down when it should be. That is on the forecast of a 1929 type of decline into November, as well as on the target of a seasonal low around now.

Deep pockets can continue to accumulate; smaller pockets can wait for some positive technicals before committing. The usual seasonal high is around March.



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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