The Silly Season

By: Bob Hoye | Thu, Mar 13, 2014
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The following is part of Pivotal Events that was published for our subscribers March 6, 2014.


Signs Of The Times

"Hedge Funds Place Largest Bets on Commodities Since 2011"

- Reuters, February 23

"China's credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other."

- Bloomberg, February 23

"Those who torment us for our good will torment us without end."

- C.S. Lewis

"But danger also lies in the acceptance of a totalitarian outlook by intellectuals of all colours."

- George Orwell

One of the most elegant criticisms of climate hysteria was made by a member of the Labour Party in England.

"In the twenty-first century what sort of person seriously believes that natural calamities like floods can be blamed upon allegedly 'sinful' behaviour?"

- Ed Miliband, Spiked, February 17

Global warmers have become tribal shamans.

Stock Markets

Big forces are in play.

Stocks have recorded sentiment and momentum numbers only seen at cyclical peaks.

Central bankers continue their unprecedented recklessness. And then the Left is getting highly agitated.

Prince Charles compares climate sceptics to "chickens with their heads cut off". Senate leader Harry Reid calls Americans displaced from their healthcare insurance "liars".

Putin sends thuggish troops into Ukraine whose "uniforms" have no insignia. In August 1939 Hitler send troops into Poland dressed in Polish uniforms prior to declaring war.

The trumped up issue was access to the port city of Danzig.

We have noted that there is no easy way out of the cyclical excesses accomplished.

Speculation has continued with Biotechs (IBB) and the Internet Index (FDN) heading for the parabolic. Tesla has soared from 136 to 265 in six weeks.

A few weeks ago we mentioned the "Silly Season" that can erupt in April.

Notwithstanding the weather, "Spring" seems to be arriving early.

The S&P had a setback with the initial hit to credit spreads and has recovered to new highs. Ross has had a target in the 1885 region.

The bull market run is well beyond the probable 249 weeks and is becoming a very longrunning example.

As with the culmination of every speculative move, we watch the action in credit spreads, which deterioration is coincidental with political distress in Ukraine. The chart follows.

Credit Markets

Over in China, the central bank does not appear too successful lately. Credit spreads have widened - the most distinctive on data back to the carefree days of 2007.

As noted last week, spreads reached their best at the end of December and reversed.

Emerging (EMB/TLT) spreads widened the most in taking out the 200-Day ma and on the latest recovery stalled out at the 200-Day.

It makes sense that the Emerging would reverse with some drama. Spreads for junk, munis and investment-grade are in the pattern but not dramatic. The lid on the rebound was the 50-Day, one line above EMB/TLT.

The pattern in spreads is not healthy and close to failing.

A chart follows.

Price action in JNK, for example, soared into this week and reached a Weekly RSI of 77 on Tuesday. Last week this was 76 and at the precarious high last May it reached 79.

Then "mini-panic".

The bond future slipped from 134 to 131.71 on the rebound in spirits with relief in Ukraine. This is at support and we have had a target of around 136.


The big "Rotation" turned out to be very good, with some outstanding winners, such as coffee and more recently wheat.

Agricultural prices (GKX) had set a double bottom at the 41 level in January. The rally made it to 381 last week with the Daily RSI at 82. The latter compares to 83 reached with the "Drought Rally" of 2012. Today it is at 84.

Outstanding rally.

The Weekly RSI is up to 69 and the best with the drought was 69, so the action is becoming impetuous. This sector was the most dismal and we thought it would have the best chance for a good move. With some corrections the GKX could make to the 450 level. It is at 400 now.

Base metals (GYX) jumped from a multi-year low of 330 in early December to 362 six weeks later. And right back down to 331 in early February. The bounce made it to 347 from which it slipped to 336 last week.

At 346 the rise is working on the resistance level.

Will it break out?

It could, but as we pointed out years ago the real price made exceptional gains to 2011, which prompted significant increases in capacity. And Chinese speculators as "investors" are still in the game.

We had been looking for copper to reach a seasonal high in, or around March.

Natural gas enjoyed a fabulous rally. The expiring contract made it to 6.40 and it has slumped to 4.50 as the market contemplated the end of the "Great Cold".

Some traders have been looking for a hot summer, but it is best to remember that most of the US last summer was unusually cool. This summer could also be on the cool side.

After running on fumes, gasoline ignited and joined the play. As noted the action became overbought at a Daily RSI of 81.

Crude oil rallied from 91 to 105, which level had many of the characteristics of a brick wall. The drop to 100 is at support.

Sometimes crude can set a key high in March and that was behind our "Peak Oil" special of February 19th. The next leg down would be another step towards the "New Paradigm" for crude oil prices. This would be crude's version of the decline in natural gas prices from the "old" level to the "new".

We'll look at the real price as deflated by the CPI.

In the bubble era that climaxed in 1873 crude's real price reached 129, and in the Great Depression that ended in 1895 it fell to 18. In the bubble era that ended in 1929 crude reached 42 and fell to 5.

In the second energy crisis crude soared to 115 in March 1980 and plunged to 23 in March 1986. The rise included the Iranian Hostage story that Ronald Reagan ended. Of course the action became extremely overbought on an outstanding boom in commodities.

The nominal price crashed from 39.50 to 10.40.

With the expressed goal of defeating Communism and the "Evil Empire", Reagan deregulated the domestic oil markets. Also a deal was worked with the Saudis not to support prices on the way down. Petroleum exports were the main source of Russia's cash

flow and the Soviets went broke. It ended that empire. Putin, in a counter-reformation move is trying to restore it.

In real terms, crude has been relatively high for long enough to build a lot of capacity.

Then there is the innovation of fracking. Prices seem eligible for an extended decline that could significantly reduce Russia's cash flow. This could be assisted by reduced or no attempts at price support.

Makes sense.

Coffee has been our bell weather and it has soared from 1.01 to 2.05, reaching 86 on the Weekly RSI. This is the highest since 86 was reached in July 1994. That rally took six months and made a bigger gain. This one is in its fourth month.

Coffee is in the GKX and has been hyping the gain. The ETF trades as "JO" and nimble traders could short a little. Only enough to support the habit for a year.

Most policymakers still do not understand inflation in financial assets and its dangers.

However, they do understand inflation in hard assets and the CPI. Soaring commodities could shift the ideological struggle at the Fed towards those who want to curb the reckless behaviour.

Around March has been our target for the commodity rally and this we have. Overall strength has been remarkable. Speculation is becoming precarious and on a spike like this it is difficult to call the exact end.

Credit Spreads: S&P



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Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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