Market Wrap
Week Ending 12/5/08
The following is an excerpt from the full market wrap report available at the Honest Money Gold & Silver Report website. This week's report is thirty pages long with thirty-one charts & graphs. Stop by and check it out.
The Economy
The National Bureau of Economic Research finally bit the bullet and declared a recession is occurring.
The Institute for Supply Management's factory index fell to 36.2. This is the lowest reading in 26 years. Factory orders were down 5.1%, the most in 8 years.
We finally have some good news: the Labor Dept. reported that worker productivity rose at an annual rate of 1.3%. Labor costs climbed at a rate of 2.8%.
What caused the climb in productivity? Labor cost reductions are generally one of the leading factors.
Lower labor costs result from either fewer workers and or hours worked; or by lower wages paid out per man hour worked.
Less income is paid out, resulting in falling consumer purchasing power. A negative feedback loop is created. The economy further weakens.
In keeping with the theme that production unit costs are improving due to less workers or hours worked, the Labor Dept. reported that 4.09 million workers were unemployed in the week ended Nov. 22. This is the largest number since 1982 (26 years).
AT&T Inc. announced plans to cut 12,000 jobs and reduce spending next year. The Labor Dept. reported 533,000 jobs were lost in Nov., bringing losses so far this year to about 2 million.
The U.S. economy weakened across all regions according to the Fed's beige book. Credit demand has fallen and what loans are available are tougher to get. Housing is still falling and commercial real estate is weakening.
The above will put a short leash on any stock market rally that gets going; and will most likely provide the impetus for the next leg down in the longer term bear market. Short term a rally remains probable.
All of the above suggests that the central bank will cut interest rates at its Dec. 15-16 meeting. A zero interest rate policy seems to be the goal of today's financial wizards.
World stock market capitalization is around $30 trillion. Last year at the peak it was over $63 trillion. That is more than a 50% loss of over $30 trillion dollars. This is not counting losses in real estate, commodities and other asset classes. There truly has been mass destruction of asset prices.
Many compare the present bear markets with those of the 70's or 30's. Today's environment is different. Derivatives and leverage did not exist back then, as it does today. Debt levels as a percentage of income or GDP were not at the levels they now are. Savings are non-existent. This is the perfect storm.
Commercial real estate is in for a big hit; as is the auto industry. Others will follow. It is obvious that the system is broke. Those at the helm of the financial and monetary systems should admit their mistakes, as the auto industry did before Congress this week.
The monetary system of paper fiat debt-money does not work. The sooner it is admitted - the sooner it can be changed. As of now, those who "manage" monetary policy are in a state of denial - trying to support the unsupportable, while accepting the unacceptable.
Interest Rates
Financial Armageddon is occurring around the world, as central bankers rush towards zero interest rate levels. The ECB lowered interest rates by three quarters of a percentage point to 2.5%.
This followed on the heels of the Bank of England's reduction by one percentage point to 2%. Sweden's central bank lowered rates by 1.75 percentage points.
European Central Bank President Jean-Claude Trichet said the euro region's gross domestic product will shrink around 0.5% next year. This is the first time the ECB has ever predicted a contraction in the economy.
In response to the interest rate cuts, the pound traded close to all-time lows against the euro. Versus the dollar it traded close to the lowest levels in 6 years. The Euro fell against the dollar after the cuts were announced.
There are occasionally some sane words spoken by central bankers. Richmond Fed Bank President Jeffrey Lacker made the following remarks concerning Federal aid via the bailout programs:
"... Aid has extended well beyond the boundaries that previously were understood to constrain such lending..."
"... Has extended public sector support beyond existing supervisory reach, and thus could destabilize the financial system."
"We need to be very careful to withdraw quantitative measures when they are no longer needed in order to prevent an increase in inflation."
"My reading of current conditions is that bank lending is constrained more now by the supply of creditworthy borrowers than the supply of bank capital."
Perhaps more concern should be placed on what caused this situation and the rush to judgment call made in response to it. The cause is the easy credit that paper money breeds - the financial weapons of mass destruction: leverage and derivatives.
It is not the creditworthiness of the borrowers that caused the problems; it is the creditworthiness of the lenders, pushers, and creators of credit and money that are the problem. The system of paper fiat debt-money is broke and does not work.
Although the Fed is throwing money at the problem, by injecting funds into the system, evidence of it working is nowhere to be seen.
The chart below shows just the opposite: the funds are not being lent out, but are sitting on deposit in the banking system.
It is excess money creation that spawned the global boom - more of the same is not going to fix it. Throwing more money at it is like trying to put out a fire by dumping gasoline on it. It does not work and only makes matters worse. At least Lacker addressed this concern, although it may be little more than lip service.
The United States net international investment position at year end 2007 was minus -$2,441.8 billion, as the value of foreign investments in the United States exceeded the value of U.S. investments abroad.
This means that Foreigners are buying more and more of our country - to the tune of 20% of GDP. At year end 2006, the U.S. net international investment position was -$2,225.8 billion.
This is not a good trend. It will be considerably larger at the end of 2008. We should own our country - not selling it to foreigners.
A financial and monetary policy that permits such wanton abandonment should be abolished. Who will own and thus run the country we are leaving behind to our kids?
Bonds
Since the financial downdraft started, about the only asset class to advance has been U.S. Treasury bonds. In an environment of steadily falling interest rates and asset price deflation, bond prices react favorably; at least for the time being. The chart shows the parabolic rise in T-bonds. This may well be the next bubble to pop.
Secular & Cyclical
I've been receiving quite a few emails and questions on my website about how anyone can claim that commodities are in a bull market. In my opinion commodities are in a bear market - a cyclical bear market.
However, it is possible that although a cyclical bear is on the rampage, a secular bull may still be in effect. A secular trend refers to very long term trends that can last for decades. During a secular bull market, several cyclical bear markets can occur.
With this distinction in mind, several of the next sections will contain very long term (+10 year) charts to show secular trends. Cyclical trends will be shown by monthly charts; intermediate trends by weekly charts; and short term by daily charts.
Oil
Crude had another tough week - down 18% for the week and over 75% from its highs. The chart below shows a two decade old support line coming up quickly at $40.00. This price may act as long term (secular) support.
Gold
Gold was down just under 8% for the week, closing at $752.20 (continuous contract). Last week's report had the following to say on gold:
RSI has started to flatten out, however, and MACD is slowly turning down. Gaps like to fill and a retest of the break may be in the cards. For the intermediate term trend to change $850 needs to become support. If the symmetrical triangle is tested and does not hold then the possibility of the $644 level comes into play.
Gold fell and filled the gaps on the GLD chart shown last week. So far, the bottom trend line has held. Gold performs well when there are negative real interest rates (T-bill minus CPI). Money tends to flow into gold once this is recognized by the market. When a central bank has a zero interest rate policy - negative real interest rates are pretty much assured.
Gold Stocks
Gold stocks had a tough week, falling over 12%. Last week the Hui closed above its 50 dma and a bullish crossover of the 10/20 ema had taken place.
Momentum was stopped dead in its tracks this week, as the index reversed direction. Another false breakout and close below important moving averages occurred.
Patience is needed. Excess money creation is occurring. Real interest rates are negative and are most likely to drop further. The fundamentals are set for gold, now the technicals must fall into place.
Mag Silver (MVG) is a take-over candidate by Fresno. As of now, any such attempt is hostile.
I own a sizable amount of this stock and may buy more. The operative word being - may. Caveat Emptor.
A fair price with all the HIGH grade silver they have in the ground is in double-digits IMO.
Invitation
The latest full-length version of this week's market wrap is available only on the Honest Money Gold & Silver Report website. All major markets are covered with the emphasis on the precious metals.
Just made available on the site is an audio version of the book Honest Money. A free copy is included with new subscriptions along with a free special report: Investment Vehicles for Bull & Bear Markets. A list of over 50 ETF's and other investment vehicles offering profit potential on both the long and short side of the market: stocks, bonds, currencies, gold, oil, water and more.
Good luck. Good trading. Good health, and that's a wrap.
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