Week Ending 4/17/09
Despite reports that the worst is over, the financial crisis continues unabated. Certain indicators have improved, but to think that the largest bubble in history has run its course in two years time is wishful thinking at best; and delusional at worst.
I wish it was over, but I don't think we are half way through it; or the bear market it breeds. This is the most powerful secular trend the market has ever seen.
Paper fiat debt-money and the financial system built thereon are dying, but they are not going down without a fight. It is inflate or die; and central bankers around the world are doing just that. Death is inevitable, however. It is a lesson we should learn sooner rather than later.
The monetary system and its handlers know this all too well. We must adjust our lives accordingly, including all aspects of money, credit, debt, spending, savings, investing, and survival precautions. The goal of this report is to shed some light on these topics.
Although I don't think the worst is over, I'm not pessimistic about the future - I'm optimistic. I'm also realistic. I know there will be at least two more legs down before the system is purged and a bottom is carved out.
There will be violent moves both up and down along the way. Fortunes will be made and fortunes will be lost. Decisions that will effect generations to come are going to be made. The world is at an important crossroads - may we choose the right way.
This will hold true unless and until honest money of gold and silver coin is restored to its rightful position as the currency mandated by the U.S. Constitution. The healing process will then begin.
The Fed's Beige Book was clear on its appraisal of the unfolding crisis and the various markets involved.
"Housing markets remained depressed overall, but there were some signs that conditions may be stabilizing."
"Nonresidential real estate conditions continued to deteriorate over the past six weeks and may decline the rest of the year, although there were some hopeful reports that the stimulus package may lead to some improvement."
The Beige Book also commented that:
"Employment outlook is generally bleak. Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across districts."
The housing market is still under pressure from an excess supply of unsold houses. Housing starts fell 10.8 percent in March, following a 17.2 percent rebound in Feb. The annualized rate was down 48.4 percent.
Permits declined 9.0 percent following a 6.2 percent rise in February. On an annualized rate, permits were down 45.0 percent.
Consumer price inflation declined 0.1 percent in March, following a 0.4 percent gain in Feb.
Industrial production in March fell 1.5%, the same as in February. Overall capacity utilization continued down, falling to 69.3 percent from 70.3 percent in February.
Manufacturing is taking a hard hit from a fall in demand in the U.S. and overseas. This is what happens when an artificial boom goes bust.
Retail sales fell 1.1 percent in March, following a 0.3 percent gain in February.
The Reuters/University of Michigan preliminary index of consumer sentiment rose to 61.9, from 57.3 in March. The index reached a three-decade low of 55.3 in November.
Net foreign purchases of Treasury notes and bonds were 21.6 billion in February compared with purchases of $10.7 million a month earlier.
U.S. employers cut 663,000 jobs in March, bringing losses since the bust began in December 2007 to about 5.1 million.
China's GDP expanded 6.1 percent in the first quarter from a year earlier, following a 6.8 percent gain during the prior three months. So, things are slowing up. It will be important to see if the trend continues or not.
The Organization for Economic Cooperation and Development predicts a 6.3 percent expansion for China this year, compared with a 4 percent contraction in the U.S. and a 6.6 percent decline in Japan.
Industrial production in China is up 3.8 percent in the first two months of the New Year. Fixed-asset investment surged 30.3 percent. Retail sales were up 14.7 percent in March.
Disposable incomes rose 11.2 percent excluding inflation. Consumer prices fell 1.2 percent compared to a 1.6 percent decline in February.
The People's Bank of China lifted caps on lending toward the end of 2008. New loans jumped more than six times to 1.89 trillion Yuan ($277 billion) in March from a year earlier. This is raising concern that excessive credit creation will cause inflationary asset bubbles and mal-investments - sound familiar?
European Central Bank council member Axel Weber was quoted as saying:
"I'm critical of reducing the main refinancing rate below 1 percent."
He is worried that if interest rates fall too low that banks will stop lending to one another.
"The risk exists that the private interbank market would become completely paralyzed."
Bringing the ECB's benchmark too close to its overnight deposit rate could reduce the incentive for banks to lend to each other.
Instead of lending cash at the overnight market rate, financial institutions could decide (have already to a degree) to deposit funds with the central bank, earning interest while minimizing risk.
Banks could also become leery of borrowing money if they believed that interest rates may drop further in the future.
"It's necessary that we announce a refinancing framework that can be relied on for a certain period of time. That includes the medium-term level for the main refinancing rate."
Confidence in the global economy rose to an 11-month high. There are signs the worst may be over for the world economy. The Global Confidence Index climbed to 21.2 in April from 5.95 in March, the biggest increase since the survey began in November 2007.
However, manufacturing is declining and unemployment rising; and there is a sharp decline in global demand. Some predict that world trade will be down 9-10% this year.
Yields show banks are more willing to lend. The spread between interbank lending rates and the U.S. Treasury three month rate, the TED spread has narrowed to 95 basis points from 2008's high of 4.64.
The London interbank offered rate (Libor) for three-month dollar loans is falling at the fastest rate since January.
So, the signals are mixed. Some nations are doing better than others. Some countries have higher rates than others. But all are in the same boat - they all have paper fiat debt-money systems as their basis. The writing is on the wall. Let's see what we can discern from the charts.
The S&P continued to rally this week, gaining +1.52%. It closed at 869.60, just below significant overhead resistance at its Feb. highs.
If the market can close above the Feb. highs on a three day or weekly closing basis, it will likely make a run at its Jan high.
If the market corrects from here, which is highly probable, it still may make a later assault on the Jan. highs. Either way, I don't see the Jan. high being bettered.
The Feb. or Jan. high will mark the end of what is a counter trend rally in a bear market.
There are those calling for a new bull market. I disagree. This is the mother of all bear markets; and it is far from over.
Next up is the weekly chart. Notice the negative divergences and the falling 40 week (200 day) moving average. That is some serious overhead convergence setting up.
The NYSE advance/decline chart leaves a lot to be desired (hoped for), and suggests more downside lies ahead.
It is interesting to note that currencies of commodity producing nations are performing the best right now: Australia and Canada being two examples. This may portend that the reflation is going to take hold and turn into inflation; and or that inflation is going to turn into hyper-inflation. Trying times are ahead.
Although the Australian Dollar has been performing well, it looks like it is topping out, as the chart below shows. If it can close above overhead resistance it may make a run to the open gap.
Of even more interest is the correlation between the Australian Dollar, the S&P, and copper.
Although the Australian dollar, copper, and the S&P have been trending in the same direction recently, this doesn't mean that they will continue to do so; then again - it doesn't mean they will not. Attention is warranted.
The U.S. dollar may be forming an inverse head and shoulders top; although I don't believe it is, based on the evidence presented thus far.
Notice that the 50 ma represents overhead resistance just above the present price level. MACD has made a positive crossover, which needs to hold for further confirmation.
A short term move up is probable; however, this does not preclude that a head and shoulders formation will result. It remains to be proven.
As of now I say no, but I know enough to let the market call the shots. I'll listen to the market when it's ready to talk.
It has been repeatedly discussed in these reports that many inter-market relationships have been breaking down and or changing. One of the most noticeable has been the relationship between gold and the dollar.
For years the dollar and gold generally moved in opposite directions. Beginning in early 2009, however, they began to move in the same direction. This has to do with how risk is being perceived due to the financial crisis and how it is being "priced."
The dollar's chart may or may not be forming an inverse head and shoulders pattern - gold has; and gold has broken through the neckline twice now. The first was a false break and the second remains to be fully played out or reversed.
In my opinion it doesn't really matter either way. If it is a true head and shoulders formation the downside risk is approximately $100, which would take gold down to around $800. This would shake all the weak hands out of the market.
The only warriors left standing will be the gold warriors; the one's that know how the system works and doesn't work. It doesn't work, which is why there is a financial crisis and why "they" are scared to hell of gold, at least gold in the hands of the people, as the mandated currency and legal tender per the U.S. Constitution.
To know that there are those in high places who claim to be constitutional scholars, while they condone the creation of trillions of dollar bills of paper fiat debt-money, is further proof that the system is broke and needs to be replaced: with gold and silver coin mandated by the U.S. Constitution. Nothing more; or less; is needed.
For those who think it can't be done, perhaps they should get out of the way of those who can. If we are not part of the solution, we are part of the problem.
Each individual American needs to decide if they want to be a free sovereign individual, or an indentured servant of a socialistic corporate fascist state. Patrick Henry knew from whence he spoke.
If all good men do nothing, evil wins. Do something: stop feeding the beast. Stop worshipping the beast. Stop the beast. The days of the beast are numbered. Its reckoning is fast approaching.
Notice on the daily gold chart below that the dominant chart feature is the golden cross: the cross over of the 50 dma over the 200 dma, which unless, and until it is negated, indicates gold's long term trend is alive and well.
Positive divergences abound on the chart. This is a counter trend correction, not the beginning of a bear market in gold.
A bull market does whatever they can to throw one off its back. It is not easy to ride the bull to the end. The bull is alive because the beast is dying.
The weekly chart shows a negative MACD cross over and STO headed down. Notice, however, that the oversold 20 level is fast approaching.
If gold drops to the $800-850 price level it will be oversold. I will then be watching for positive divergences as early signs of MACD and STO reversing and heading back up.
Recall that the $850 price level is a key level for the sustainability of the gold bull. It represents the previous bull market high and is therefore a major inflection point.
If gold's correction plays out this way, the only ones left holding or buying at that time will be the hardened players - the strong hands. The weak will be out of the way. Mr. Market loves to have the least number of winning players in the game as possible.
Silver is in a hard correction as well. As with gold, I view this as a counter trend move - not the beginning of a bear market.
Silver actually has more potential than gold, but the going will be quick and violent; and compressed into short bursts of strength; while gold will be much steadier in its progress higher, especially once $1000 becomes support, which should be later this year.
Silver has made a new low from the move off the Feb. high and is now showing several positive divergences.
RSI, MACD, and STO did not confirm by putting in new lows. This does not mean the correction is over, however, it warrants careful attention. My interest is piqued.
The daily chart below shows the new low and the divergences. Also, note: the dominant chart feature is still the golden cross of the 50/200 ma.
Presently, silver is about to test its 50% fib retracement level from the Feb. high. We watch and see what happens then.
Significant support lies between 11.50 - 10.50 and should provide strong support to any further decline.
It will not take much lower prices to signal oversold readings. Then we wait for positive divergences presaging the turn up.
Next up is a weekly silver chart that has two sets of Fibonacci retracement indicators drawn. The first (further left) goes from the 2008 high to the bottom low. It shows the recent March rally high for silver came in just below the 50% level.
The second fib levels go from the Nov. low to the recent March high. It shows price has broken below it first 32% fib and is headed for a test of the 50% level. This should offer support. MACD looks like it is setting up for a negative cross over to the downside. STO is headed down. Price has broken below its 40 week (200 day) moving average.
Platinum has been outperforming both gold and silver; however, that's off its low, which in percentage turns was down much harder and further than gold's. Nonetheless, its performance is noteworthy.
Notice the series of higher highs and higher lows off the Nov. bottom. Platinum has thus far showed excellent strength. Is platinum trying to tell us something? PLG remains one of my largest share positions.
The precious metal stocks are moving down hard with gold and silver. They are down more in percentage turns, which is usually the case.
PM stocks are not for the faint of heart. Where there is more profit potential there is greater risk. It comes with the territory.
If one doesn't like the heat, they should stay out of the kitchen, as it is easy to get burned in the kitchen.
The chart below shows that the long term cup and handle formation is still in effect.
The daily chart below shows price breaking below its lower trend line. MACD is under a negative cross over and STO is nearing oversold territory.
Support is indicated by the horizontal blue lines. If support holds we then look for positive divergences to begin forming - setting the stage for the next move up. Patience is needed. It always is.
Next up is the weekly GDX chart. RSI is flashing a large negative divergence, which has led to the present fall from grace. But one man's rags can be another's riches. It's all in the eye of the beholder.
Marked on the chart are the Fibonacci levels from the March 2008 high to the 2008 fall lows. The GDX recouped about half of its decline. This is an obvious place for resistance to be meant as a subsequent correction unfolds.
MACD is setting up for a negative cross over and STO and the histograms are falling as well. The 40 week (200 day) moving average has been broken below.
Last up is the monthly XAU chart. The entire bull market is shown with its fib retracement levels. Price is presently testing horizontal support and just below that is the 61.8% fib level. This area represents significant support.
Good luck. Good trading. Good health, and that's a wrap.
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