Originally published March 16,2005.

Sign Of The Times:
"Best of All Possible Worlds? Bond Buyers Crave Yield and Show No Fear" - New York Times, January 21, 2005

The headline showed appropriate perspective by putting in the question mark.

Yesterday's ChartWorks concluded that a profound change in the interest rate markets is at hand and this would reverse spreads from narrowing to widening. This was based upon two somewhat different approaches that concluded that lower grade bond yields would likely increase as those for long-dated treasuries decrease.

This will likely be associated with an equally profound change in stock and commodity speculation.

Stock Market: The markets seem to be showing many of the symptoms of an old-fashioned cycle for business and the credit markets. Commodities are strong, short rates have been increasing due to increasing speculative demand for money, credit spreads have been narrowing, and the yield curve has been flattening.

Pundits devoted to the moment are talking about shortages of industrial commodities. We see topping stock groups from the uraniums in late February to the oils more recently, with some of the leading mining stocks building a top.

On the latter, of immediate interest is the usual seasonal high for copper and base metal stocks around March. On the longer term is the record of copper to set significant highs separated by 8 to 10 years. Key highs were set on March 31, 1907, February 28, 1917, April 30, 1929, March 31, 1956, July 31, 1970, February 29, 1980, December 31, 1988, and March 8, 2005.

Note that most of these highs were close to the March seasonal window. The last cyclical low was 59.8 (London) on November 7, 2001, which set up a now endearing 42-month run. The high so far is today's 154.7, making an even more endearing 158% gain.

In looking at the developing change in the credit markets as well as the extension in the bellwether chart BHP, it is appropriate to take some money off the mining table.

By stages over the past few weeks, we gave the same advice on the uraniums, oils, and techs (with the sell on Apple).

Another sector we follow closely is the banks and financials. Our theme has been that the banks got trashed in 1998 and were not the feature of the tech bubble in 2000. With that crash, they were thought to be a safe haven for equity portfolios during the bear that ended in October, 2002. Since then, they have built a huge weighting relative to the S&P. Please visit our website to review the study of "Bank Weightings".

Having reached a 23% weighting, this compares with the energies in 1980 at 29% and with the techs in 2000 at 34%. Against the latter, it is worth noting that the TSE banks and financials have reached 34%. It is also worth mentioning that while this is a big indicator, it can be slow to change.

For more immediate decisions, we have our Bank Trading Guide, which is working on the biggest sell signal since the fateful one in 1998. (It tends to be coincidental at bottoms.) We have been advising lightening up pending the signal from the Guide when more aggressive selling by investors and traders could be implemented.

In the meantime, the ChartWorks analysis on Citigroup concluded that breaking below 47.30 would signal a "sell". This morning, it's at 47.36 (a cliff-hanger). However, the profound change in credit markets seems to have started and on this we would increase the pace of selling.

INTEREST RATES

The Long Bond: Yesterday's ChartWorks outlined the probability of a rally. This was largely based upon technical analysis and is confirmed by our kind of fundamental research that observes that the establishment is short of duration and very bearish in sentiment. The other fundamental is that the commodity mania seems to be blowing out.

On a daily CRB chart from 1999, the move since 276 in December to 318 looks like a series of dots assumed to fill in some missing data. This amounts to a 15% rally in only three months. A quick sweep indicates this is rare, with examples in 1983 and with the explosion of commodity speculation from 1971 to 1974. (That was when the policymakers rebased the CPI from 200 to 100 so the public wouldn't know that the cost of living had doubled.)

The important thing is that this kind of a frenzy was enough to end a cyclical bull market for commodities during one of the greatest inflations in tangible assets history. That's in senior currency terms.

With a break in speculation, which seems imminent, long treasuries will rally. We won't have a price target until the turn is in, but it could run for some six weeks.

Credit Spreads: This was covered in yesterday's ChartWorks and the "fundamental" story about no risk is vulnerable to the change in speculation that will favour long treasuries. Including this morning, four trading days have taken out two months of rally in the MSD. (The "upside exhaustion" reading and alert was noted in the March 10 edition of Pivotal Events.) The profound change has started and, once confirmed, it will have an equivalently profound change upon lending agencies and building stocks, for example.

The Dollar Index seemed to be withstanding this week's raging bullishness about commodities rather well. That's until today's current account deficit number came out.

Today's 81.5 is on "news", but the next thing to consider is the pending break in commodity speculation. This is close and will firm the dollar. Around 81 will likely provide support.

The Canadian Dollar has recovered with the latest surge in commodities and narrowing of credit spreads. Both are close to reversing and the change will take the Canadian unit down.

COMMENTS FOR METAL AND ENERGY PRODUCERS

Energy Prices: The break in some of the leading petroleum stocks suggests that the rush to bid oil and gas prices up could soon roll over.

Crude can have a seasonal high in March, which it seems to be attempting now. After a setback, the next seasonal is usually in May and that will likely be a test of this high.

Natural gas was slow in getting out of its early January low and, typically, has an important high in June. Natgas now seems eligible for a correction.

Base Metals: We have been looking for base metals and the mining sector to set a top in March. Ideally, the high for stocks would anticipate the high for metals.

Since the seasonal low for our metal index of 894 in October, it has rallied 22% to 1090 on March 11. On the same move, an index of mining stocks rallied 41% from 233 on October 20 to 328 on March 8. On the same move, BHP Billiton soared 72% from 18 to 31 on March 9.

As mentioned last week, BHP has been an outstanding performer within the group and its action is stalling out amidst very bullish sentiment. Although not quite as extended as the zooms in the leading energies, the chart is vulnerable to around 22.

Again, it's worth mentioning that the play is vulnerable to the change in the credit markets which, over the past few days, is taking a turn for the worse.

Increase the rate of selling.

Gold: The price in dollars acts well and this was reviewed in the March 9 edition of ChartWorks ("Stairstepping Higher").

But in real terms, gold has been underperforming soaring commodities. Perhaps the goldbugs, for example, have turned into lead bugs. To be serious, gold mining operations and shares won't be outstanding performers until gold is advancing relative to the big stock market, corporate bonds, and most senior currencies.

How can this happen?

In looking at previous post-bubble contractions, this was accompanied by seriously widening credit spreads and a seriously steepening treasury yield curve. Yesterday's ChartWorks called for "A Profound Change" in the credit markets and the drop in the MSD (emerging debt) is significant and is saying "it's happening". This is an important step for gold and we are watching the curve, but steepening would await the culmination of the pending rally in the long treasuries.

In the meantime, the plunge relative to commodities has taken our gold/commodities index from the high of 244 on December 3 to 195 on March 3. Since then, it has recovered to 197. It's worth noting that the dollar price bottomed at 412.6 on February 8 and has gained 7% while our index gave up 7%.

When it starts, the real bull market will become exciting and eventually fabulous. Investors should continue to buy to golds - it will be a multi-year bull market.