Pivotal Events

By: Bob Hoye | Fri, Oct 25, 2013
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The following is a portion of Pivotal Events published for our subscribers October 18, 2013.



Signs Of The Times

"Hedge funds have amassed the greatest share of the $1.2 trillion U.S. junkbond market."

- Bloomberg, October 7

"No profits? No problem. Investors are showing increasing hunger for initial public offerings of unprofitable technology companies and the potential for big gains."

- Wall Street Journal, October 11

The US has taken another huge step towards a politicized economy.

"Report: Obama Brings Chilling Effect Upon Journalism"

- Comments by the former executive editor of the Washington Post. AP, October 10

He also noted that it was the "Most aggressive since the Nixon administration".

"Dr. Carson Obamacare: The worst thing that has happened since slavery."

- CBS DC, October 11

"How Vietnam's Burgeoning Civil Society Is Changing The Nation's Political Landscape"

"Vietnamese are gradually rising up against the Communist party, hoping to transform the nation from a one-party state into a democracy."

- Economy Watch, October 16



Perspective

It has been frequently reported that one of the key objectives of the Obama administration has been to destroy the Republican Party going into the 2014 elections. What has been seen with the promotion of Obamacare is that the governing classes will not brook any opposition to its will. That's on any issue and it will continue until financial markets succumb to the burden. This will likely coincide with a popular uprising against another failing experiment in authoritarian government.

When?

Tomorrow would be nice, but who really knows?


Credit Markets

The reversal in the credit markets in May-June was violent and on our work this would be an expected step towards a liquidity crisis possible later in the year.

Well, it is later in the year and this sector is showing little regard for adversity. Junk (JNK) is testing the highs set with the rebound out of the June mini-panic. Much the same holds for HYG. However, the rebound in emerging bonds (EMB) and munis (MUB) the testing level is well below the joyful highs reached in early May.

But there is good momentum.

The rise in the EMB has reached 77 on the Daily RSI, which is close to the level set at the peak at the end of 2012 and at the test of the high in early May. Moreover, the swing from the oversold at 9 set at the end of the mini-panic in June to 77 today is huge.

The chart follows which shows the resistance at the 112 level. The price-high was 119.39 in early May, the initial hit was to 99.54 and the rebound made it to 110.74 in July. Earlier today it reached 111.78.

When this rolls over, and it will, it could take most European bonds with it.

The representative Spanish Ten-Year set its low at 4.16% at the first of the month. In a couple of steps it has increased to 4.30%. Above 4.40% would be a break out.

It should be noted that the Fed was heavily buying the dreadful sub-prime mortgage bonds as the price started to fail in May. That was a five-point hit on a bond priced at 56.

On the nearer-term, the issue is not so much the amount of buying by the Fed - it has been been market forces at work. Quite likely, the announcements about buying or tapering have as much effect as the actual buying. Or, shudder, Fed selling.

After all, no bank is too big to fail, let alone avoid margin calls.

The bond future sold off to 128.47 in early September and with a couple of good swings it is trading at the 134 level. There is minor resistance at this level but the rise is not yet overbought.

Through this and 139 becomes the target.

Hedge funds have been eagerly leveraging yield against an almost zero "carry" in lowergrade markets and avoiding price action in Treasuries (oops, almost wrote high-grade).

Perhaps there could be a rotation from being leveraged yield to being leveraged price.


Stock Markets

The stock market is a mixed bag.

Some key high-flyers, nowadays called the "Four Horsemen" such as NFLX, UA, TSLA and JAZZ (plus others) have registered measurable excesses and are working on rolling over. This could take some time.

A new "Horseman", Twitter, is eagerly awaited. It is uncertain if this will provide new leadership.

It is a guess, but it seems likely that every government agency possible was on the bid during the struggle to continue the expansion of state power. It is also probable that the unusually small short positions in the US and Europe have become even smaller.

This would be very interesting if the serious "no-bear" condition was accomplished in early September. But the time for the usual denouement of one-way positioning is drawing to a close. In so many words, the bullish party has prevailed through most of a possibly dangerous time.

The hype about an immediate US default was mainly from the White House and its nationalized media. It was puff from the start.

However, one would seriously worry if the hype was that a default was impossible.

We noted a number of negative divergences that had developed, but there was one big one that did not register. This is the Advance/Decline Line for S&P operating companies. It has yet to record the key divergence that has been critical in the past.

The last high was set at 28,106 on September 18. The low has been 27,276 on October 4. The signal would register as the S&P sets a new high and the A/D does not.

It will be interesting to see this weekend's number.

Inflation in financial assets is still on and as Ross points out the action has shifted to some "Horsemen" and to small caps. Both are features of ending action.

However, the view now is that the Zaitech, which was the Japanese term for financial engineering, will continue.

We are watching for the event that will trigger the trap door. It could come down to two items - more change in the credit markets and the signal from the A/D line.


Commodities

A couple of weeks ago a friend attended a seminar at Whistler Mountain on exploration geology. One paper outlined that despite China's huge area the country has no geological regions that typically host large copper systems. Curious, but it does in part, explain China's drive to position so much copper. Of course there was the compulsion in official circles to be long a hot commodity.

But, that was a long time ago.

The copper promotion, that encompassed all base metals, drove real prices to the highest percentage gains in a hundred years of data. Extraordinarily high prices prevailed over an unusually long time.

Prices soared, reaching a cyclical peak in 2008 and again in 2011. Copper's high was 4.26 in 2008 and that cyclical bear ended at 1.26 at the end of 2008. Copper has a tendency to set important highs with the culmination of a Great Bubble.

The next cyclical peak was 4.64 set in May 2011. That surge occurred with the signal from our proprietary Momentum Peak Forecaster. The conclusion was that a cyclical bear would follow. The low of 2.98 in June confirmed this melancholy condition. At the time we concluded that technical conditions did not indicate an end to the bear, but a rebound was possible.

In August, the RSI reached 70 which was enough to limit the move.

There could be seasonal weakness into year-end and momentum is neutral.

Crude set a good momentum high in the summer. The high was 112.24 at the end of August and the decline to 100 is not oversold. There is support at the 98 level.

As we have been noting, the grains (GKX) became oversold enough to stabilize and recover. After the initial bounce the action settled down to a modest rise and today is looking good with a 1 percent jump.


Currencies

Last week we described that forecasting the dollar was a precarious exercise and that the chart had become precarious as well.

Yesterday's action dropped it to new lows with a further slide to 79.5 today. There is modest support at this level and much more at the 79 level set last winter.

If the slide continues will it be associated with another run at hot asset prices?


Emerging Market Bonds

iShares JP Morgan USD Emerging Markets Bond Fund Daily Chart

 


 

Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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