The following is part of Pivotal Events that was published for our subscribers July 10, 2014.
Signs Of The Times
"The first half of the year is off to the best start since 2000 for U.S. IPOs."
- Fox Business, June 27
"There have been 20 merger deals valued at more than $10 billion this year, the biggest since the first half of 2007."
- Wall Street Journal, June 30
"As investors scour the landscape for income, the first half of the year saw record amounts of new corporate bond issuance as well as record amounts of collateralized loan obligations."
- Dow Jones, July 2
"EU banks to sell E100 bn of loans"
"Fund Managers have a 'wall of money'"
- Financial Times, July 7
Credit Markets
There are only two conditions where one should really focus upon the credit markets. Towards the end of a credit panic and then as a mania in credit markets is blowing out. Consequences to equity market have been important and mainly irresistible.
Unfortunately, even central bankers know that credit markets are important. Otherwise they would not be meddling with them 24/7. And this presents a problem. The establishment has never been able to impose its arbitrary plans on a 24/7 basis.
There have been and there will always be market forces independent of the best of central planners. Up until the end of 1989 MITI in Japan was widely considered as the most outstanding team in policymaking. In 1873 it was the US Treasury System, without the discipline of gold. In 1929 this dreadful instrument of policy was condemned and replaced by the "scientific" Federal Reserve System. You get the picture, and we should not leave out the "Dream Team" at the Fed in 2007.
The point to be made is that the street wholly subscribes to the rise and adds to the intensity of the belief with dependence upon the putative skill of a government agency. Or quasigovernment agency, or in old-style promoters.
The latter were very much part of the old Vancouver Stock Exchange. In its halcyon days the best promoters were legendary. The point was to create "cheap" paper and sell it at a high price. And on the way to the latter, suggests a "rule". So long as the price is going up, the public will believe the most absurd story. All too often such intense beliefs succumbed to the persuasions of Mister Margin.
Somewhat the opposite prevails when government becomes corrupted to the role of a promoter. The issue of currency has at the moment of issue the potential to be sound money. But when government acts as the the promoter, the point is to rob the people by driving the purchasing power down. It has been remarkably successful for a hundred years.
With the "old" promotions a brokerage account would be opened to assist the game. This was called "the box" and it would provide liquidity by shorting stock into the market such that on adverse days there would be a bid. But overall, the point was to distribute the stock into a compelling story. "The box" should not be a net buyer.
Government is absolutely wrong in buying its own paper.
We note that the buying program is scheduled to complete by this October.
An applicable instruction is that so long as credit is seen to be expanding, the public will believe the story. And that story is that the government can depreciate at will and the credit expansion will continue. Forever, or at least well into the foreseeable future.
Sadly this promotion is recording enthusiasms seen only at cyclical peaks, and is becoming precarious. Once the bubble breaks the "story" about supernatural powers of the Fed will vanish - again. The ability of the White House to command the waves will be ridiculed.
Now the Fed has not been the sole instrument of government genius. Obama's teleprompter has been doing an outstanding job of getting the story out about healthcare, climate and immigration. Despite intensifying efforts, the ranks of believers have been diminishing.
According to Gallup, Obama's lowest "Disapproval" number was 18% in January 2009. This was accompanied by 67% "Approval". The financial panic ended in March of that year.
The worst has been 36% and 58% set in December 2012, which was with that fall's uncertainty in the financial markets. Admittedly, the correlation has been vague.
The worst numbers this year have been 39% and 53% set in January. This week's readings are 42% and 54%. Technically, breaking below Approval of 39% would set the downtrend and our target would then become the low of 36% reached in December 2012.
Obama has shown remarkable political ambition and abilities. Our conservative readers may find the prospect of a severe decline in the president's polls difficult to accept.
We think that as with a Vancouver promotion, the public will believe in absurdity so long as the price is rising. When the financial mania fails polls for both Obama and the Fed will plunge.
Remember where you heard it.
Now for the market.
On price action, JNK soared to a Weekly RSI of 81 last week, which is the highest on a chart back to 2008. The top in 2007 is not fully charted. Last year's action drove the RSI to 78 in early May as the ETF soared to 39.17. The decline was to 35.85 on June 24th.
Junk yield jumped from 5% to 6%.
The yield is now back to around 5%. Accomplished with a much higher Weekly RSI, the action is more precarious than on any rally since 2007.
This is also the case for European bonds with the Spanish yield decline registering a rare Downside Capitulation in May. The yield declined to 2.58% (no typo) on June 9th. The initial rise made it to 2.75% and the yield declined to 2.63%. The increase to 2.80% today has accomplished the trend change.
Much the same holds for the Italian bond and the yield for the Greek bond has increased more.
The Russian action has been out of sync. From the reversal in May 2013, the yield increased from 6.46% to 9.63% with the Ukrainian concerns in April.
It has since declined to 8.43% at the end of June. The slight increase since would set the trend by getting above 8.63%. It is trading at 8.54% today.
The bond future rallied to the 138 level against our target (in January) of 136 to 138. It became overbought and we shortened term. The low was the 135 level and this week's rebound is the "test" of the high. It is a "flight" rally as other markets came under pressure this week.
That the Fed is going to stop the buying program is in the market. In which case, the government will continue to issue bonds (no crop failures here) and the Fed has yet to begin selling. If "The Box" is a consistent buyer for too long it gets to go broke.
Commodities
Last week we thought that crude oil could take another run at the 112 level, but called for a correction in oil stocks.
The slump in crude is impressive and, perhaps, trying to tell us something within the mix of market forces. "Buy the story" maxed on the first news of strife in the Middle East.
That was at 107.5 and the price slumped to 101.6 earlier today, reinforcing that the action in June-July can be volatile.
However, the action is now working on a "Springboard Buy" as well as a "Sequential Buy". It could take a week to complete and a rally well into August could follow. There is a seasonal tendency to be firm from around now into September.
Agricultural prices (GKX) became oversold at 357 a couple of weeks ago. The bounce made it to 368 and then rain. Growing conditions are now described as "perfect", which has forced the index down to 329.
The sell-off is becoming severe and generating a Weekly Capitulation, which is rare. The Weekly RSI is down to 25.
Precious Metals
Evident this week is the opposing action between precious metals and orthodox investments.
Earlier today the sector was up as stocks and lower-grade bonds were down. Silver was up and stronger than gold.
With the discovery of financial concerns, gold has been expected to rise relative to most items, including silver. Precious metal stocks could decline with pressures in the big stock markets.
We have been reviewing this melancholy probability and it seems to have appeared during the trading day.
Broker-Dealer index (BDX) is down more than 1% and JNK has had the biggest drop since February.
As we have been noting, the sector became overbought in driving the silver/gold ratio up to 84, which indicated "dangerous" speculation.
So the sector has been vulnerable and today's Outside Reversals provided some alerts to change.
One of the most important was in Silver Wheaton (SLW) which soared to 27.66 at the open from which it slumped to a low of 26.40. With the lower close, it is a very visible Outside Reversal. The high in March was 26.47.
This was also clocked by GDX and SIL. Pan American Silver (PAAS) reversed as well with a 2.75% drop on the day.
Of importance is that these key examples were testing the high reached in March. It is time, again, to take money off the table.
With the developing change, the gold/silver ratio favoured silver earlier in the day. The low on the ratio was 62.4 and the close was 62.6. Not much change but in rising late in the day it is conforming to a developing banking crisis. Rising above the 200-Day at 63.5 would provide technical confirmation.
Nimble traders could short some silver stocks.
Stock Market Divergences
- We have been monitoring divergences in the order of 4 to 8 months.
- There was one going into the 2007 peak.
- There was a positive divergence with the end of the panic in 2009.
- The one now is ominous, particularly with this week's discovery of insolvency in Portugal.
Portuguese Bank Insolvency
- This is a specific reason why European yields began to rise in June.
- It is also the focus of today's breakout in yields for the European bonds we have been following.
- We have yet to see the boast that the problem can be "isolated" or "contained".
Link to July 7 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/07/euro-banking-crisis-very-much-alive
