Pivotal Events

By: Bob Hoye | Wed, Sep 22, 2010
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The following is part of Pivotal Events that was published for our subscribers September 16, 2010.


Signs of the Times:

Last Year:

"The dollar's role in international trade should be reduced by establishing a new currency to protect markets from the 'confidence game' of financial speculation."

Bloomberg, September 7, 2009

One wonders if "they" were thinking of a sound senior currency or gold? Driven by market forces, the dollar is close to resuming its uptrend. Of course, the correct approach to concerns about speculation based upon currency depreciation would be to place the senior currency on a gold standard.

"Appetite for credit remains unabated."

Bloomberg, September 7, 2009

Well it always will when the street is betting that the dollar will collapse.

"Bank of China which led the nation's lending spree ($1.1 Trillion) in the first half, said ample liquidity has caused 'bubbles' in stocks, commodities and real estate."

Bloomberg. September 10, 2009

The rebound high in Shanghai (SSEC) was set at 3478 in August 2009. The rebound high for the CRB was 293 in early January and we can't help wondering about real estate in China.

* * * * *

This Year:

"Copper Looks Golden"

Financial Post, September 8, 2010

"Investors remain keen on commodities"

"Investors turn to commodities when other markets fail to deliver."

Financial Times, September 10, 2010

We reviewed the latter figment of imagination in June 2007 when we noted that the post-bubble credit contraction would take all asset classes down.

Talking about failing to deliver:

"Just as some of us feared, the inadequacies of the Administration's initial economic plan has landed it and the nation in a political trap."

Paul Krugman, The New York Times, September 5, 2010

Of course, the absurdity is that all the interventionists believed their concoctions would work. Krugman went on with "It is possible indeed necessary for the nation to spend its way out of debt."

The latter reminds of the old saying also likely from the 1930s "I drank myself sober."

Importantly, interventionists are seeing that their nostrums have not achieved the "promised land". Instead the vines of hope seem to be withering and it is essential to lay the blame on Obama rather than admit that every post-bubble contraction reveals systemic failure.

The notion that the Fed made an "error" following 1929 was crafted to protect the infallibility of the Federal Reserve System.

* * * * *

Stock Markets

The "Austrian School" of economics has a good description of what leads to a bust and that is "malinvestment". This is definitely revealed in every post-bubble contraction. In 1940, Ludwig von Mises wrote:

"The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last."

Clearly, market forces from 2007 into 2009 revealed a lot of malinvestment. That was in stocks, sub-prime debt, corporate bonds, real estate and commodities. More recently there has been the same discovery in sovereign debt. Past post-bubble contractions have lasted for a number of business cycles.

It might be worth adding the term "mal-disinvestment", which is not found in the literature, but it means shorting too early.

In this regard, September was expected to enjoy some sunshine and Ross has a couple of models that indicate that this could be a topping week.

This week's action has continued positive and this has moved some key items towards limiting RSIs.

The big wind about commodities has lifted the CRB to 280, which is the level reached in August and April. The daily RSI is at 70, and this is close to the limit.

Within this, agricultural prices (DBA) are up to 72 the highest RSI since the spike high in June last year.

Going the other way, the gold/silver ratio is down to 26 on the daily RSI which is lower than the level reached on April 4. The rebound thrust for the stock market took the S&P to 1217 on April 23.

Our April 22nd Pivot included our Checklist For A Top and concluded the best was in for the big rebound.

Wrap: The stock market seems to be enjoying the September sunshine and this week could conclude the move. The DX as well as the gold/silver ratio are indicating a change to adversity, and Ross notes that slipping below S&P 1115 would set the next tradable decline. Adversity could be tempered by the possibility of a significant set-back to Washington's radicals.

Interest Rates

"Louis Pollard, 72, and her husband have decided to shift the bulk of their portfolio into bonds, which are more conservative investments with less volatility."

AP-CNBC Poll, September 13, 2010

With the Upside Exhaustion signal on the 10-year an important top for longer-dated treasuries was possible. The high on the long bond was 136.84 and our initial target was around 130 (on the December contract). The low has been 129.8 and the high needs to be tested.

So far the test has made it to 130.81 and has further to go.

Should the test roll over the target is around 125.

Recently, we have been asked about the relation between the S&P and the 10-year yield. Our stance has been that at the end of a great bubble the key would be the change in the yield curve from being inverted with the boom. Typically this can run for some 12 to 16 months against inversion and then the change to steepening with declining T-bill rates would trash the stock markets.

In 2007 the count ran to June being the sixteenth month and the curve reversed in May of that fateful year.

Some steepening is possible now and it will be interesting to see what it does to the stock market.

In the money market times are lush, which is the opposite of the old term "stringency". Part of this is due to conservative money flowing into the liquidity of US treasury bills. The other is the "stimulus" that has gone into winners in the financial markets rather than into fixing the losing side of the economy.

Associated with the "good stuff" has been rather dramatic narrowing of the Ted-Spread. We don't often mention this one as it can register "oversold" for a long time. However, the last sharp decline was into March and when it turned up (widening) in early April it anticipated the top of the stock market later in the month.

The Ted is still in a downtrend and any turn up would be interesting.

With the sunshine, corporate spreads have continued to narrow. Since the end of August the high-yield has declined in yield from 8.39% to 7.90% as the spread came in from 486 bps to 403 bps. This is a rather quick move and is now eligible for a correction.

Wrap: Credit markets seem to be changing with the treasury curve steepening since the first of September. If this is soon followed by spread widening at the long-end it would dampen the ballooning appetite for risk.


Link to September 17th 'Bob and Phil Show on Howestreet.com:




Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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