"No warning can save people determined to grow suddently rich" - Lord Overstone

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Pivotal Events

The following is part of Pivotal Eventsthat was published for our subscribers Thursday, April 15, 2010.


Some Oldies, But Goodies:

"Those who want to understand clearly the events which happened in the past and which (human nature being what it is) will at some time or other and in much the same ways be repeated in the future."

- Thucydides, Peloponnesian Wars, 431 BCE,
Translation by Rex Warner

"If you wish to make a fortune, take the necessary means; study statistics, and attend to great political and commercial changes."

- How To Excel In Business, 1893

The US is undergoing an immense political change that while popular with the intelligentsia is not popular with growing number of citizens. The turn to experimental monetary policy and interventionist economics began a hundred years ago and seems to be culminating in a thrust to extremely radical politics.

The word "thrust" was used to indicate a big squeeze in stock or commodity markets. On these, the bulls get very ambitious and it forces premature shorts to cover. Once the squeeze completes there are few bids left and the market falls into a vacuum. The simile is appropriate because in a boom everyone gets active. That includes commerce, industry, mining, agriculture and finance. The latter particularly so under a regime of central bank reckless mess.

The other part of a boom is that politics gets busy as well as the left applies its ambitions using the sales pitch of the day. In the early part of the 1900s the goal was to improve the people's economic behaviour through central planning and to improve mankind itself through eugenics. In the mid 1960s economists ardently believed that their manipulations had eliminated business cycle recessions. More recently, the audacity of the left has become breathtaking as it ardently believes it can not only manage the economy but that it can manage the climate as well.

While seeming unembarrassed in moving from preventing recessions to preventing "Great Depression 2.0", the establishment has gone from worrying about "Global Cooling" to great anguish about "Global Warming". Of course, the only "cure" for state-promoted anxiety is more regulation and more taxation.

And that has been what it is all about - unlimited ambition and unlimited government that seems to be reaching an hysterical climax. It is no accident that this is coincidental with fabulous speculation in most markets. The Federal Reserve has been very aggressive throughout our era of asset inflation and ramped up the age-old experiment in manipulation within a normal post-bubble crash.

Our view has been that when the panic exhausted in March a year ago a vigorous rebound would follow. It has been vigorous and has run for many months longer than we originally thought. However signs of market excess have been accumulating and the next phase of the post-bubble contraction will confound the establishment. The realization of policy-failure will further inspire the independent "Tea Party" movement in its attempt to restore America's traditional checks and balances upon government ambition.

The "Tea Party" will eventually find a leader - perhaps the equivalent of Lech Walesa in Poland during Eastern Europe's bitter political struggle in the 1980s.

The "stimulus" seems to have extended the rebound, but its main goal has been, as always, to transfer power and private wealth to the state. The establishment does not tolerate criticism and the following by Kenneth Galbraith is applicable to politics. Just think about "Global Warmers" and skeptics:

"The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore, exorcize or condemn those who express doubt."

- John Kenneth Galbraith, A Short History of Euphoria

The most exciting times in history for most of the people is when a populist movement brings ambitious government to heel. It has happened before and it is happening now.

We are looking to "great political and commercial changes".

* * * * *

This Year:

"Dow 11,000 Is Only the Beginning"

"Leaner inventories and more efficient work force...will make profits when the economy falters."

- Wall Street Journal, April 7, 2010

"The Recession is Over"

- The New York Times, April 8, 2010

"The Housing Boom Rolls On"

- Financial Post, April 10, 2010
(This is the boom in Canada.)

"Short Sellers Throw in the Towel"

- Financial Post, April 10, 2010


Exuberance is building. In that it is happening close to schedule, perhaps it can be called "Rational Exuberance"?

Rational because the rally out of the January tumble was likely to run through March. Exuberance shows in some of the above quotations, including yesterday's WSJ "Everything is coming up roses for stocks", as well as in the rapidly growing list of individual stocks registering Upside Exhaustions. This only happens at important tops.

Of interest is that the NASDAQ has accomplished an outstanding daily RSI at 82.4. This is the highest reading since 2000, which was a fateful year.

What is needed now is the concluding signal, which would be a week with a lower low or lower high than the week before.

It is worth reviewing the "helpers" that assisted the February 4th call for another leg up. Crude oil prices have increased enough for the establishment to worry about the recovery. That stocks and crude prices go up and down together is still invisible. However, crude which has been likely to rally well into April has reached an RSI that can limit the move. Much the same holds for copper.

Another reliable indicator, the gold/silver ratio also reached an RSI that can limit the move.

Banks have been in play with the BKX rallying from 43 in early February to 57 today. This is at an RSI of 76, which is higher than last week's 73 and that was higher than the 71.3 set at the record high of 121 in 2007.

It is worth emphasizing that last time the RSI was this high was in 1998. The banking index then plunged from 95 to 55, on a July to October hit that took out the hedge fund LTCM.

Our proprietary Bank Trading Guide set a recent low at 141 in early February and it reached 160 last week. The action lately has been an "alert" to the sector and we are watching for the "sell". It is time to begin taking some money off this gambling table.

It is also time to begin lightening up in the general stock markets.

Link to Friday, April 16, 2010 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1615


Sub-Prime Mortgage Bonds

  • The letter designations do not reflect credit ratings.
  • The AAA is, then, the best of the bad and action over the last month has been outstanding.
  • The AA is working on a double top.
  • The BBB, which is the worst of the bad, is providing a negative divergence.


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