'The Summer Wind, Came Blowin In...'

By: Bob Hoye | Wed, Aug 22, 2012
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The following is part of Pivotal Events that was published for our subscribers August 16, 2012.


Signs of the Times

"Is the stock market immune to world angst?"

~ INO.com TradersBlog, August 9

"A new vision of an America in which prosperity is shared."

~ President Obama, Chicago, August 12

Democrats and their mainstream media are becoming increasingly Randian, whereby inspired producers are condemned and constrained by an authoritarian mob. Recently, a rather good definition has been circulating.


A system of government where the least capable to lead are elected by the least capable of producing, and where the members of society least likely to sustain themselves or succeed, are rewarded with goods and services paid for by the confiscated earnings of a diminishing number of producers.

"Indian industrial production slid in June for the third time in four months, with output of capital goods plunging the most on record."

~ Bloomberg, August 9

"Concerns about China's economy intensified Friday on signs that Beijing's attempt to kick start growth aren't working."

~ Wall Street Journal, August 10

"The U.S. mortgage delinquency rate increased for the first time in a year as slowing economic growth left more borrowers struggling to pay their bills."

~ Bloomberg, August 9

These suggest that the global economy is slowing and won't be able to service the huge expansion of credit. That's the old stuff taken on during the joyful bubble, as well as the newer stuff shoveled out by governments in a desperate attempt to end a fairly typical post-bubble contraction.

Our view has been that the contraction of private-sector debt will, eventually, overwhelm government efforts to expand credit.


There are a number of popular summer songs and one from the 1960s has some memorable lines. "The summer wind, came blowin in..." is positive and the stock market has been positive.

Another part of the lyric is "Like painted kites, those days and nights - went flyin by".

And the last line is "My fickle friend, the summer wind".

Needless to say, but we are dancing closer and closer to the exits.

For how long?

Stock Markets

Sentiment numbers such as the AAII reached very low two weeks ago and "Asset Allocations" indicating money manager bullishness is at an exceptional low.

It seems that the establishment became extremely concerned about European insolvencies. Then there are worries about the drought and the harvest. But this is not the traditional season for panics.

Somehow very serious bearish sentiment has to ease - perhaps by a few more weeks of rising stock prices.

Credit Markets

Credit markets have been steady with Spanish yields, for example, trending lower since July 24. Since early June the sub-prime bond has soared from 48 to 58. The reach for risk is almost becoming giddy with excitement.

At the short-end, the Ted-spread has narrowed from .58, with the concerns of late in the year, to .33. This has brought the RSI down from an excessive 90 in the fall to 30. This is a big swing and the reversal, when it comes, will be impressive.

Yesterday's ChartWorks reviewed the excessively bullish sentiment for US bond markets. On technical patterns, Ross called the tops for long treasuries in June on the "Eiffel Tower" story. In taking out the June low, this has now broken down. However, it is getting oversold and a brief bounce seems likely.

A few weeks later in the topping pattern, LQD (investment-grade corps) has also broken down. It is not as oversold as the long bond.

The next in the topping trio was the EMB (emerging debt) set its high at 119.5 on August 6. The price has slipped to 118 and taking out 116 would set the downtrend. This could happen in the fall.

There has been some "stories" with the action. Out of European bonds and into American issues. Perhaps this week has seen some of the opposite.

On the bigger picture, it is tempting to consider another "flight to quality" rally on the first whiff of troubles. Our view has been that, number one, the speculation has been exceptional. Technical patterns suggest at least an intermediate decline.

The other point, number two, is that great financial bubbles have been followed by diminishing abilities to service debt by governments, companies and individuals. We've been calling it the great bond revulsion. It has been seriously damaging European issues; perhaps American and Canadian issues are next?


Cyclical commodities such as base metals (GYX) set their peak in 1Q2011 at 512. Our Momentum Peak Forecaster expected that speculative surge to complete around that March (ü) and then start a cyclical bear market. Last week's low at 346 was a new low for the move.

The action became oversold at the end of June, but in trading sideways is at neutral momentum. A rally into early September seems likely.

Base metal mining stocks (SPTMN) fell in half as the index slumped from 1600 in February 2011 to 781 last week. A sunny rebound could run for a few weeks.

Copper's real price (deflated by the PPI) continues to trade at exceptional highs. This continues to provoke theft of wire and pipe and reminds of when silver soared in 1980 to 48 and accomplished a 16 gold/silver ratio. The latter was historically low on an uptrend that began in the early 1800s and brought silver out of attics and into refineries at an unprecedented rate. The public knew to take the money off the table. The Hunt Brothers were immune to common sense.

High real prices over such a long time are also inspiring huge increases in production capacity. Some has been bought by China for "investment" purposes, which could become a problem. Eventually, copper inventories along with those of other base metals could become so large as to be visible from outer space. Hitherto, the Great Wall of China has been the first man-made object that can be seen by astronauts.

Natural gas seems to be leading the way. Its real price (deflated by PPI) was exceptionally high from 1996 to 2007. Then the change to much lower prices has been driven by new technology. A few years ago, we reviewed Cesare Marchetti's growth to maturity curves for energy and the one for natural gas had yet to be accomplished. It has now and we will dig out the research.

Next on the list of items enjoying high real prices is crude oil, and the condition has prevailed from 2003 to present. Natural gas was essentially a North American price and crude is international with the premium for 7,000 years of Middle East political hysteria. Innovation in production will continue to diminish the impossible region's relative output and influence.

The incredible "Peak Oil" rally registered a weekly Upside Exhaustion in June 2008 and we concluded a cyclical bear would follow. We also concluded that if the Upside registered on the monthly reading a secular bear would follow. That fateful reading was accomplished at the end of June.

Probability of a secular bear was reinforced by the high of 114 in April 2011. That was part of the action on our Forecaster and when commodities are big on the play the signal has been close to a cyclical top.

This has been the case for base metals and the CRB. The question is when will crude oil get in line?

Production from oil shales around the world will continue to increase, Middle East hysteria will continue - as will the post-bubble contraction. Crude's rally could run for a few weeks more and then become vulnerable to problems in the fall.


Last week we were looking for dollar weakness to resume with the "good vibes" lasting for a few weeks. The DX is at neutral momentum and Sunday's ChartWorks concluded "More short term vulnerability".

Going the other way, the Canadian dollar is again popular as the daily RSI has soared from less than 30 in June to 71. Today's 101 compares to the high of 102 reached last May.

The fun can run for a few more weeks.

Summer Wind


The summer wind, came blowin in - from across the sea
It lingered there, so warm and fair - to walk with me
All summer long, we sang a song - and strolled on golden sand
Two sweethearts, and the summer wind

Like painted kites, those days and nights - went flyin by
The world was new, beneath a blue - umbrella sky
Then softer than, a piper man - one day it called to you
And I lost you, to the summer wind

The autumn wind, and the winter wind - have come and gone
And still the days, those lonely days - go on and on
And guess who sighs his lullabies - through nights that never end
My fickle friend, the summer wind

- The 1966 recording by Frank Sinatra is a gem.



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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