The following is part of Pivotal Events that was published for our subscribers Thursday, October 22, 2009

SIGNS OF THE TIMES:

Last Year:

"New sponsorship money for NASCAR race teams is down 10% this year as the financial crisis takes a toll on the most-watched U.S. motorsports circuit."

- Bloomberg, October 24, 2008

For those who are not fans of oval racing, it's a good-news story in a bad year.

"States' tax receipts fall sharply in latest quarter."

- Wall Street Journal, October 25, 2008

"Since credit markets have tightened up and real estate is not very liquid, Calpers has been compelled to sell off stocks."

- Wall Street Journal, October 25, 2008

The article noted that the huge pension fund was 63% weighted in equities just a few months earlier.

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This Year:

"Jack Daniel's whiskey label will end its sponsorship of a NASCAR racing team."

- Business Week, September 21, 2009

More good news.

"There are so many commercial real estate defaults coming, that there's likely a shortage of experienced professionals to deal with them."

- O. C. Register, October 5, 2009

"Statewide, more than 300 hotels are pushed into foreclosure as tourists and businesses scale back their travel plans and owners are unable to pay their mortgages."

"A nearly five-fold increase since the start of the year."

- Los Angeles Times, October 7, 2009

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STOCK MARKETS

There seems to be another "Conundrum" out there. Of course, the earlier one occurred with the big rally in the long bond during the business expansion of 2007. Chairman Greenspan called it the "Conundrum", but we liked the chart action and read it as just another asset to be bid up during a mania of asset inflation. Then on the "Safe Haven" story during the crash the bond soared to 142.

A soaring stock market in the face of a massive credit contraction could be described as another "Conundrum". Private sector credit continues to contract as commercial and residential real estate finance remains under pressure. A chart is attached.

Now that stocks are flying again it is popular to conclude that a business recovery is being discounted - well, it has been celebrated. However, our thesis has been that at the end of a great mania, stocks and the economy turn down together and then turn up on the rebound consequent to a classic financial crash. For us, the best could have been in by May-June, which provided a seasonal trade, or on the six-month count to around August-September.

The latter was looking good until the dollar index slipped below 76 and the party launched. A good portion of the gain has been due to dollar depreciation - as with a number of other assets. And in the past couple of weeks this has become insistent, but not yet compulsive.

However, as we have been noting the "Old Reliable" pattern had yet to kick in. The Sequential Buy pattern is now being accomplished - in which case an important low for the DX could be set within three weeks. The opposite has been set on the euro and it is a couple of weeks overdue on its slump.

This would have a profound effect upon all the hot games whose life-blood is dollar depreciation. The last high on the DX was 89.6 on March 4 and it was a few days earlier on February 27 when our special on currencies headlined "A Significant Change". Stock market sentiment bottomed at a record low of 3 Percent Bulls in early March.

The "Significant Change" was likely to launch a rebound culminating in great enthusiasms, and sentiment got to 92 Percent Bulls in late September. From the distress in March a magnificent rally had to follow. From current excesses an equivalent decline must follow. The latter has been our conclusion since the big sentiment reading was clocked.

On the near term, once again a rally in crude provided the spark. On this we called for a moderate rise in crude from late July until late in September. This was against a seasonal high often set in late September-early October. A number of impetuous rushes during the summer frustrated the move, but the action has made up for it in the past couple of weeks. As the saying goes--better late than never - and it is helping to climax the rebound that started in March.

Over in bank-land risk has been replaced by supreme confidence in taking on most any kind of paper with government assurances to fix any fallout from recklessness. One of the things keeping this sector positive is that government is still absorbing toxic waste. Quite likely this is continuing upon the belief that such toxicity is finite. Not likely - there is more to be discovered.

In September 2007 the Center for Responsible Lending (CRL) testified before the Joint Economic Committee of Congress. The message was that there was a wave of sub-prime foreclosures arriving. For 2009, total foreclosures could run to 2.4 million. Recently, CRL estimates that this could triple over the next four years - driven by a series of resets on mortgage rates. Perhaps the next and natural phase of credit concerns will bring the schedule of resets to the forefront - again.

Our proprietary Bank Trading Guide set its last low at 139 on July 10 with a very oversold on the RSI. The rise carried to 173 in mid September when it reached the highest RSI in a year and a half. Our October 8 edition noted that the Guide was in dangerous territory and vulnerable to the next change in credit conditions. At that point the TED Spread had reversed to widening.

The key to the big "Sell" from the Guide is the test of the high, and that was set at 168 on October 8 and usually the BKX begins the decline within a couple of weeks. The high close was 49.2 on October 14, and a gentle decline was hit by yesterday's outside reversal to the downside. Combined with taking out the 50-day moving average this is the tocsin on the banking sector, which includes too many "walking zombies". Even the Federal Deposit Insurance Corporation is out of reserves and is a zombie.

Investors and traders can sell aggressively.

Currencies: The Dollar Index is in a technical pattern often seen at important lows. Going the other way, the Euro completed the Sequential Sell pattern and is now within the window of failure.

With the end of the financial panic the DX set a high of 79.7 on the weekly RSI. So far, the low RSI figure is yesterday's 28.7, which compares to 26 set at the low of 70.7 in March 2008. Clearly, downside momentum is close to the level that will limit the decline.

We expected credit markets to reverse to disaster by June 2007, and with this published a couple of times a piece by von Mises called the "Dearth of Credit". Based upon first principles it argued that for a boom to turn to a contraction, bankers need not call loans but only with some caution slow the rate of lending. This could apply to the government's buying of toxic waste as well as the financing of the carry trade.

One of this week's dispatches from London had alarming news. England's Financial Services Authority (FSA) is seeking to "get rid of irresponsible practices that put banks and consumers at risk". Irresponsible lending will be curbed by the "strong sanctions" of "homebuyers applying for mortgages will have to undergo RIGOROUS CREDIT CHECKS". (emphasis added)

The mind boggles. Policymakers insisting upon credit worthiness could lose their Keynesian credentials.

Yesterday's reversals in the dollar and some key financial series is a warning on the next phase of credit concerns. In currently excessive conditions even a steady dollar could signal its advent.

Our October 8 edition noted that the DX needed to test the low of 75.8 set on September 22. The low close has been yesterday's 75.1.

The Canadian unit joined the latest explosion in asset prices and jumped to 97.6 last week. As part of a potential reversal in many hot games, the C$ has slumped to 95. This is the start of an intermediate decline.

Link to the Friday, October 23rd 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1439.