10 August 2008

Welcome to the Weekly Report. Last week, in the subscriber only edition we looked to see if the roadmap I use had moved forward:

• "A recap of the scenario:

  bubble, easy money, inflation in fiat money supply, inflation in commodities and hard assets, inflation, fear of inflation, rising rates, YC inverting, flattening, rising and inverting again, tightening, withdrawal of liquidity, corrections, crashes, talk of stagflation, FEAR, withdrawal of speculative funds, further corrections and crashes, demand collapse.......Deflation."

The evidence seemed to be pointing toward a move beyond "FEAR" and the beginning of the withdrawal of speculative funds. This week certainly supported this thought and I would like to share some charts that fly in the face of the events that recently unfolded.

We have been watching the 30yr T-Bond yield closely over the past few weeks, watching for an upside breakout. It looks like the breakout is failing which then had me examining some charts with a bit more urgency, especially given the geo-political events unfolding.

Markets are fickle at the best of times but to ignore the events in Georgia and Ossetia, where Georgia went on the offensive against separatists now actively supported by Russian troops, tanks and aircraft beggar's belief.For instance, after reading the comment below what would you expect to happen to the price of crude oil?

• "The Georgian foreign ministry in Tbilisi said the Black Sea port of Poti, the site of a major oil shipment facility, had also been "devastated" by a Russian air raid."

It's accelerating to the downside. I mean, its not as if the area isn't oil associated:

The map is from 1998 (so this hasn't come as a surprise!) and in April 2006 NPR reported:

• "The tiny former Soviet Republic of Azerbaijan is on the verge of an oil boom. This summer, a 1,000-mile pipeline is expected to begin pumping oil from Azerbaijan's Caspian Sea coast, through neighboring Georgia, to a Turkish port on the Mediterranean Sea.

  Industry experts say this pipeline will allow Azerbaijan to eventually quadruple its oil exports, but political opponents in Azerbaijan worry that the oil money will help the government of the former Soviet republic stifle pro-democracy efforts.

  The $4 billion project is backed by the United States, in part because it gets Caspian Sea oil wealth out to the international market, without going through Azerbaijan's much larger neighbors, Russia and Iran."

This is not a fight in some dustbowl that no one is interested in, this is has the ability to morph into an extremely serious situation that might end up with the US and Russians throwing more than insults at each other.

You would have thought the stampede to hold gold would have been heard on the Moon! So what did we get last week (hourly chart):

We tested the 848 area, massively important support. Major Powers could go head to head, NATO involvement is not out of the question and gold drops?? This isn't bad news being painted as good, the usual market machinations. This is a complete breakdown between risk protection and events and can only be caused by something much, much larger. Are we seeing a re-allocation of resources, a removal of leveraged speculation?

Above is a Dollar/Yen weekly chart, again something we have been watching for sometime because of this (Dow weekly):

A significant move, a rebound by the dollar against the Yen has been in progress since early March and it looks like a new wave of carry trades have been placed in US stocks over the past month. Does this explain the attempted rally by the Dow? Remember, we have support for the 30yr T-Bills too over a similar 4 week period, hence the stalling and falling of yield.

Is this rotation of dollars out of commodities (too many falling charts to publish here) and into cash, US Treasuries and large cap stocks confirmation of last weeks thoughts? If it is then the amounts must be enormous to kill off any effect that should have happened with the Georgia situation. Are we seeing the Hedge Fund sector finally deciding to unwind as the rolling of debt and the unavailability of leverage forces a withdrawal of speculative funds?

What we do know is that right now the money flows are so large that an Oil War can be ignored. That tells me its time to be very cautious about investing or trading and puts me on alert that something else; something that has a potentially bigger impact may have started.

This article will be subscriber only until mid week.