The following is part of Pivotal Events that was published for our subscribers Thursday, November 13, 2008.
SIGNS OF THE TIMES:
"Inside a crowded brokerage in this [Wuhan] Central Chinese city, Zhang Waniong was getting anxious as China's stock market ticked to a new high. The problem: He couldn't find an unoccupied trading terminal to buy shares."
- Wall Street Journal, November 1, 2007
The story also reported that some 100,000 trading accounts were being opened each day.
"No US Recession"
- Reuters, November 9, 2007, quoting Chairman Bernanke
"Will Rio Gobble Up BHP?"
- Wall Street Journal, November 16, 2007
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"Teck Cominco's Lump of Coal"
- Financial Post, November 12, 2008
"New sponsorship money for Nascar race teams is down 10% this year and may fall more in 2009 as the financial crisis takes a toll on the most-watched U. S. motorsports circuit."
- Bloomberg, October 24, 2008
"Ski Resort For the Super Rich Files for Bankruptcy"
- Reuters, November 11, 2008
"Everything's getting cheaper, including labor"
- Wall Street Journal, November 5, 2008
"US Postal Service To Cut 40,000 Jobs In First Layoff In History"
- Wall Street Journal, November 7, 2008
"Wages A Source of Income for Developing World"
"Nannies and cleaners from the developing world are among the next group of victims of the global recession as Western households tighten their belts."
- Financial Post, November 12, 2008
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Stock Markets: The test of the October low is on. As this is fitting the "model", we are preparing for a change in overall policy. From decidedly pessimistic last summer, and in looking at this week's ugliness, we are now cautiously pessimistic.
Seriously, conditions are daunting, but in that it is happening within the "Fall Classic Crash" we have to assume that because it is down when it should be - it could go up when it should.
We have mentioned that the test could happen around mid November and Ross has two different counts that the low could come in after November 14. There could be some technical indicators that will signal the turn and the ChartWorks will advise.
In the meantime, one of the advantages of independent research is not having to endorse conventional wisdom. This affords the ability to be clinically critical of the wonders of policy making, in particular, central banking. Last year the advice was to ignore their boasts, then during the summer it was to ignore the promises that things had been fixed. In September the advice was that even the most desperate measures would not alter the fall crash pattern. It hasn't.
This critical theme was developed with hopes that our subscribers would not repeat the mantra of central bank infallibility to their clients. There are at least two main failures. One is in the financial markets, the other is in central planning. The notion that that a speculative collapse could have been prevented by more regulation is absurd, and reminds of the old saying from the old and notorious Vancouver Stock Exchange: "So long as it is going up the public will believe the most preposterous story". The most preposterous story in financial history has been that a committee can "manage" the economy.
Somewhere there should be a rule that those who did not anticipate the disaster should be prevented from vain attempts, with taxpayers' money, to end a financial disaster. This would be particularly applicable to those who claimed that with their skills a disaster was impossible.
As the old saying goes: "Capitalism without failure is like Christianity without hell". We used this decades ago and Warren Buffet used it last May.
When it comes to market forces, Mother Nature and Mister Margin have been and will continue to be in control. This will eventually be understood by the benighted policy crowd and while we won't have a technical measure on it - when central bankers eventually capitulate we will likely recognize it when we see it.
Traders should continue to cover shorts and get prepared for a rally from the latter part of this month to around March. This would be within a cyclical bear, one of the symptoms of the next period of vulnerability will be Wall Street strategists again celebrating the "genius" of central planning.
At the washout last January, we used this line and it was rewarded with:
"U S policymakers deserve the Nobel Prize for applied economics. The policy response to financial asset deflation was not only extremely fast, but extremely well coordinated. The second-round effects of asset deflation have been contained."
- Business Times, Singapore, Investment Round Table, May 15, 2008
It seems that the market is rushing to complete the test. There have been six consecutive trading days down. Either up or down, such impetuous moves usually run for 7 days; the one to Black Friday ran 8 days.
Gold Sector: Gold and gold shares were expected to decline with the classic fall liquidity crisis. With this, most pundits expected gold to rally with a tanking dollar. Using the history of crashes the dollar was likely to rally and gold to decline, which has been the case.
The other classic feature is silver plunging relative to gold, with silver experts unable to explain the action. Our advice since October 23 has been to cover silver shorts and that traders and investors should be getting long the sector. This now includes larger silver stocks - keeping in mind that they were created for trading.
The test of all the beat up items has been accompanied by an increase in the gold/silver ratio. With the October pressures the ratio got out to a close of 84, then it came in to 71 a week ago Wednesday. Now with this week's disasters it increased to 78 today.
In looking at the ratio as an indicator of crashes and rebounds any decline now in the ratio would confirm that this phase of the overall crisis is ending.
Tales From The Crypt:
Last week we ran some comments from November, 1873 that covered the transition from disaster to rebound. A few from the equivalent in 1929 follow:
"In the first place, a severe depression like that of 1920-21 is outside the range of probability."
- Harvard Economic Society. Barron's, November 25, 1929
It is worth recalling that policy makers spent the 1920s easing credit in order to keep basic prices from crashing as in 1921. The lolly went into the stock markets.
"Crude oil prices cut by 40 cents to $1.05 per barrel - one of the most drastic cuts ever made in the American oil industry."
- The Economist. October 26, 1929
"New York: The behaviour of the share market in the past week has been quite reassuring, confirming the view that the period of forced liquidation is over."
- The Economist, November 23, 1929
"New York: Tremendous reduction in brokers' loans and a plethora of short term money are reflections of the cleaning up of speculative positions and the great strengthening of the technical position of the market. The [corporate] bond market has been active and stronger and a disposition has been shown to hunt for bargains in investment shares."
- The Economist, November 30, 1929
Link to the November 14, 2008 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1027