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Pivotal Events

The following is part of Pivotal Events that was published for our subscribers August 11, 2010.


Last Year:

"I don't want the folks who created the mess to do a lot of talking. I want them to get out of the way so that we can clean up the mess."

- President Obama, Breitbart, August 7, 2009.

Considering Obama's ego, this was likely a sincere statement. Obviously much of the "stimulus" went into financial speculation and recent reports indicate the portion that was in political hands went to some rather weird projects--generally described as "pork".

We have been wary of how much damage authoritarian demagogues can do to the wealth and earnings of a country and Obama's term has more than two years to run. Fortunately, Democrats could take a severe hit in the mid-term elections in November, but this will not materially deter the White House in its ambition to reduce the size and influence of the middle-classes. That would be the ones not working for government and although it is not widely discussed--the big issue is the old story about a corrupt intelligentsia versus the productive bourgeoisie.

"New York Fed on Hiring Spree"

"Aggressively hiring traders as it seeks to manage its burgeoning securities holdings."

- Financial Times, August 10, 2009.

The article included that this would increase staff to 400 by the end of 2009. This compares to 240 at the end of 2007.

Just think of the accumulation of brain power. Not just giga-neurons, but giga-neurons--working for government. The ordinary mind boggles at the talent needed to trade toxic waste.

But then:

"The Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability."

- Chairman Bernanke, August 12, 2009.

* * * * *

This Year:

"Investors are waiting for cash-flush firms to put their money to work."

- Financial Post, July 27, 2010.

The article was talking about cash in corporate treasuries, which in the post-bubble condition tends to stay there. Companies strive for credit-worthiness as commercial banks tend only to lend to AAA accounts.

Mutual fund cash positions have been at the low side of the range.

Even civilized countries have an intelligentsia with the urge to tell ordinary people what to do. In the early 1930s that compulsion dealt with individuals and companies hoarding their cash.

Progressives through the Hoover and Roosevelt administrations used the crises to push their dogma. In 1931 Hoover organized a hue and cry against "traitorous hoarding".

Despite massive cunning and power of interventionists, financial history remains rather methodical. Into the trough of a depression people and businesses hoard cash. Subsequently, into the decade of tangible asset inflation the fashion is to hoard things. Then at the inevitable culmination of a great financial mania the compulsion is to hoard tangible and financial assets until "everyone" goes broke.

Then it is back to cash, which seems to be the case in recent years.

In February 2009, the White House Council of Economic Advisers boasted that the big "stimulus" bill would "reduce unemployment down to 7 percent by August 2010."

Chairperson Christina Romer resigned last week.

"Stocks Climb on Stimulus Speculation"

"Slower jobs growth will prompt Fed to more quantitative easing."

- Bloomberg, August 9, 2010.

Yesterday the talking heads were excited about "QE 2". This prompted wonder about why they were going on about a magnificent ship. Today brought the realization that it is inside talk about "Quantitative Easing 2.0". Sort of a "smack my forehead" type of discovery.

Although late to establishment jargon we expect the financial gesture to be of little utility in constraining the next phase of the contraction, which has likely started. Furthermore, the sudden focus upon "QE 2" could be an indicator that the Fed is also seeing trouble.

Hope-mongers at work again.

* * * * *


The ChartWorks has been making some rather good near-term calls on the market--using the S&P. The latest was a pop to the 1125 level.

Ross also has longer-term "models" such as the Presidential that for this year called for a high in late spring and a hard low in October. The Post-Bubble one called for an important high at 121 months from the blow-off high. That counted out to April, with an extended decline to follow.

The April 22 Pivot noted this and brought forward our Check List For A Top. We noted that the great rebound out of the crash had completed and a lengthy decline would follow.

Our July 22 Pivot observed that the market was on a balancing beam as bulls and bears struggled over the next trend. The conclusion was that the NYSE would churn around through August and take the seasonal plunge into October.

This would likely be assisted by widening credit spreads. Particularly in the long end, as spread-players became overly excited going into May we thought the action could reverse. Despite recent relief this pattern could lead to corporate bond turmoil in the fall.

In the last couple of weeks in July base metal prices recorded a buying rush that helped the stock market.

Most of the excitement has been prompted by the latest slide in the Dollar Index. The ChartWorks of August 3 noted that the DX had registered a daily Downside Capitulation and concluded that an important change in the currency markets could start within a few days. The intra-day low was 80.1 on Friday and, so far, it looks like an important change is underway.

And we all know what a rising dollar can do to rejuvenated asset speculators.

On the near term, the gold/silver ratio has become volatile which often indicates an important change. The low was 64.1 at the end of July and increased to a close of 65.4 on Monday. With the stock market swoon on Tuesday morning, the ratio jumped to 66.1 and then with another promise of another "stimulus" it dropped to 64.9.

By the end of a volatile day the ratio had set an Outside Reversal--to the upside.

The rise continued this morning and in reaching 67.4 is approaching the disaster signal, which will be getting through 68. As it is, the "alert" from the other day is obviously effective.

Friday's ChartWorks on the S&P flagged the "Failed Breakout" and today's slide provides confirmation. It is difficult to call for a noticeable decline from conditions that prevailed over the past two weeks, but a number of different tools formed our conclusions.

This slide could continue for a couple of weeks and resume in early September.


As noted above and last week, an important change in the currency market has been likely. The slump in the Dollar Index registered a daily Downside Capitulation as well as completing the Sequential Buy pattern. Both have been evident at important bottoms.

The low was 80.1 on Friday and it bounced to 81.5 yesterday when excitement about the arrival of "QE 2" set it back to 80.6. So far, the high has been 82.4 earlier today.

Last week we noted that just a technical relief bounce could make it to 83.

The DX could trade around this range for a few weeks, but the 85 level is in the chart and it could be reached in mid September.

Going through this level would be your central bankers' worst nightmare.

The Canadian dollar was likely to be firm until recently. The high last week was the 98 level, reflecting the commodity rush. This was higher than we thought was possible and generated a modest overbought.

In only a few trading days the C$ has slipped to 95.5. There is support at 93, which becomes our target. Should "troubles" appear in the fall it could decline to 85.

Link to August 12 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1739


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