Market Wrap
Week Ending 1/30/09
The Economy
The U.S. economy continues to slow down. The Institute for Supply Management-Chicago reported its business barometer decreased to 33.3 from 35.1 the prior month. It was the lowest reading since 1982.
The Labor Department announced that jobless benefits skyrocketed to a record 4.8 million in the week ended Jan. 17. Orders for durable goods fell 2.6%.
New home sales were down 38% for 2008. The median price ($230,600) was down 7%. The supply of homes at the current sales rate has hit another record high of 12.9 months.
One piece of good news is that the Reuters/University of Michigan index of consumer sentiment rose to 61.2. Americans still walk with their heads held high. It may get worse before it gets better, but that has never stopped us before. It will not stop us this time.
The National Association of Realtors reported that sales of existing homes rose 6.5% last month. Sales fell 3.5% year over year. Resales averaged 4.91 million units in 2008, down 13% from 2007.
The median price fell to $175,400, down 15% from last year. U.S. foreclosures spiked up 81%, as more than 2.3 million properties either defaulted or were seized by lenders.
Gross domestic product (GDP) declined 3.8% in the fourth quarter of 2008. Consumer prices fell 5.5%.
Real economic growth was 1.3 percent in 2008, compared with 2.0 percent in 2007.
The drop in GDP is due to a large fall in exports; a decline in consumer spending; a downturn in business investment; and the ongoing deterioration of the real estate market.
Libor rates spiked to 4.59% in October 2008 and have since come down quite significantly, as the first chart indicates.
The TED spread, the difference between what the U.S. government and companies pay for loans for three months, closed at 100 basis points.
The spread was 464 basis points on Oct. 10, at the height of the financial panic, as reflected in the money markets.
Falling interest rates have helped the money market to loosen up, although credit still remains tight. Until recently the market had become deftly afraid of risk.
Players are slowly taking on more risk; at least they were at the beginning of the week; as the week came to a close, the tendency lessened.
Notice in the chart below how closely the S&P tracks the euro/yen cross. When the cross rises, stocks do well. When the cross falls, stocks go down.
The U.S. dollar appears to be topping out. The Canadian and Australian dollars seem to be bottoming out.
This suggests that commodity prices may rise, as the two latter currencies are from commodity based economies.
The chart below shows the Canadian Dollar having put in a triple bottom and a higher low, forming a symmetrical triangle. Price is above its 50 dma.
A positive MACD crossover has occurred and the histograms are slowly turning up into positive territory.
International Monetary Fund
The International Monetary Fund released a report indicating they have turned negative on the global economy, stating that there are over $2.2 TRILLION of toxic assets and bad debt floating around in the system. They project global growth will contract to 0.5% with bank losses of $2.2 trillion. A quote from the report stated:
"Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth."
Makes one wonder what they mean by forcefully addressed. Perhaps the Federal Reserve's FOMC statement has some clues:
FOMC statement
Published: January 28 2009 19:19
For immediate release
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
Bonds
The above statement makes it abundantly clear what the Fed's policy is regarding "forcefully addressed" - they will expand their balance sheet to buy up any toxic waste others refuse to buy; and they will buy longer-term Treasury securities.
This is known as monetizing debt. It means that debt becomes money and money becomes debt. This is moral hazard of the highest degree and should not be accepted. See Honest Money for details on how to correct such unsound and irresponsible monetary policy.
Market players are starting to sense that everything is not well in bond land. Rates are at historical lows and do not provide enough insurance against the now perceived future risks.
It is becoming more and more obvious that the whole bailout plan is ill advised. For details on just how misguided the financial package is read the article at: http://online.wsj.com/article/SB123310466514522309.html.
As bonds have fallen, interest rates have risen; this in turn propped up the dollar. At this point bonds are oversold and ripe for a bounce.
The Dollar
After putting in a bearish island reversal the week before last, the dollar turned back up this week and filled the gap it had left in its wake. Overhead resistance is fast approaching.
The fate of not only the dollar, but most other markets resides in the resolution of the dollar chart.
Will it break through resistance or bounce off and head back down? I lean toward the latter, but the market will tell us in due time.
Even in the face of a rising dollar gold exhibited strength for a second week in a row. Gold had plenty of excuses to go down, but it didn't. Instead, it went up.
This is very impressive action on gold's part and should grab our attention.
Silver
Silver was up 0.62 cents to close at 12.56 (continuous contract) for a weekly gain of +5.23%.
Price has broken out above a right angle ascending triangle formation that has a possible upside target of $14.
RSI is getting into overbought territory, so a pullback would not be a surprise. Volume has been strong on the up moves and weak on the downside, which bodes well for a sustainable rally.
Silver has been trading at a rate of 75 to 80 ounces of silver to 1 ounce of gold. Recent price history for the gold/silver ratio has been anywhere from 50:1 to 80:1.
This means that according to such measures silver is cheap compared to gold at the present time. Perhaps this is why many claim silver to be a screaming buy at these levels. It is hard to argue with the reasoning.
Gold
Gold was up $30.70 to close at $928.40 (continuous contract) for a +3.42% weekly gain. This was impressive considering the dollar continued to rally (ever so slightly +0.43%).
The dollar and gold have an inverse relationship - they tend to move in the opposite direction. Starting early this year, however, both have been rising together. This tracking will not last for much longer: one of the two is not telling the "truth" and will turn the other way.
Short to intermediate term gold still has some hurdles in front of it to clear. It is presently at the same approximate level as the Sept. - Oct. highs. Gold needs to close and stay above this level to turn resistance into support.
Once this level becomes support, the next target is the July 2008 highs, and from there an assault on the all-time highs. It is doubtful that this will happen all in one move; and it would be better if it doesn't. $1300 by the end of the year is very doable.
Notice on the daily chart below the rising 50 ma which looks to be getting ready to cross over the 200 ma. This would be a strong signal that a bullish change of trend has occurred.
The above excerpt is from the full market wrap report available at the Honest Money Gold & Silver Report website. This week's report contains thirty charts & graphs, including six individual charts on the stock watch list.
Good luck. Good trading. Good health, and that's a wrap.
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