Week Ending 5/1/09
The following is a short excerpt from the full market wrap report (40 pgs.) available at the Honest Money Gold & Silver Report website.
Credit has been tight since Lehman Brothers filed for bankruptcy in Sept. 2008. Some signs of improvement are beginning to appear. Banks have slowly started to lend to one another again.
Last fall the TED spread, which is the difference between the London Interbank Offered Rate for three-month dollar loans and the Treasury bill rate, skyrocketed up 4.64 percentage points, causing the credit markets to freeze up. This week the rate narrowed to 96 basis points.
However, the appearance of stabilization in the economy, according to reported economic data, must be viewed in the proper perspective. A huge downturn has occurred, and just the fact that a month or two of readings are not getting worse, or even slightly better, does not mean the worst is necessarily over. The healing is a process not an event. It is not going to happen quickly if the patient is to remain stable well into the future.
Another important indicator is the difference between Libor and the expected average federal funds rate for the next three months: the Libor-OIS spread.
The spread indicates banks' willingness to lend to one another. The narrower the spread is, the less risk the banks perceive. The wider the spread is, the more reluctant the banks are to loan to one another.
Last fall during the height of the financial crisis, the Libor-OIS spread surged to 3.64 percentage points. Today is was 0.85 percentage points, showing that the banks are more willing to take on risk and to loan to one another.
Note, however, the spread is still far above what is considered to be "normal" - 0.25 percentage points. So, things may be slowly getting better, but they are far from being completely healed or "normal". But it is a start, let's see if it continues.
Further to the above, consumer and commercial creditcosts are more important to the health of the economy than inter-bank rates are, and they remain high by any historical measure. Take a look at credit card interest rates or the contraction in commercial loans.
It is one thing for banks to be willing to loan to one another, but if the banks are not lending to the consumer and the business community - the economy can come to a virtual standstill. The charts below offer some perspective - credit remains tight and contracting.
Several weeks ago I mentioned that the Treasury bond market might be the next bubble to pop. As the following charts show, interest rates are breaking out and bond prices are breaking down. Seems the huge supply of debt needed to fuel the bailout is starting to take its toll.
Despite short term weakness on the daily chart, the weekly chart still shows a possible inverse head & shoulders formation, with the right shoulder presently under construction. This formation has been noted in the report now for weeks.
Notice that price could still drop further and not violate the present formation. This does not mean the formation is guaranteed, as until a breakout above the neckline occurs on expanding volume, it is all merely potential not actual.
Nevertheless, the potential does remain, now it remains to be seen if it obtains. Possible upside targets are around 130 if a breakout occurs and holds.
Silver was down around 3% for the week as was gold. The daily SLV chart below shows price testing its lower support line and its 200 dma. Overhead resistance resides at the 50 dma. If price holds its lower trend line and 200 dma than a higher low will be in place from which a move up can begin. Higher lows can be the stepping stones to higher highs.
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