The following is part of Pivotal Events that was published for our subscribers November 20, 2014.
Signs of The Times
"Iron-ore market is being 'flooded' by 'super-supply' from big miners seeking to gain market share."
- Bloomberg, November 11.
"The riskiest corporate debtors in the U.S. aren't growing fast enough to pay down their borrowings. To make matters worse, their ability to make interest payments is about where it was in 2007."
Bloomberg, November, 12.
"Disinflation is becoming entrenched throughout Asia. Seven out of 10 major Asian economies are experiencing producer-price deflation."
- Bloomberg, November 12.
"It's Saturday afternoon, and more than 500 people have tuned in for a two hour webinar that tells them they can become rich trading foreign currencies."
- Bloomberg, November 12.
"Consumer Confidence Is Roaring: At the Highest Since July 2007"
- Business Insider, November 14.
It was the University of Michigan report and it was at 89.4, up from 87.5 on the previous month.
"There is only one thing in macroeconomics that we know for certain. That is that bad monetary policy can do a lot of damage. But we don't know with the same certainty what good monetary policy can achieve."
At 89.4, the US consumer has clocked the biggest number since July 2007. The cyclical low was 55 set in November 2009.
On the other side, commodity or producer prices remain weak. Over time this will feed pricing pressures into commerce and industry. This impairs cash flow and makes it difficult to service debt.
More specifically, Deutsche Bank calculates that if crude drops to $60 some 30 percent of B and CCC bonds would default.
Charts showing the decline in Iron Ore Prices and South African Coal Prices follow.
Since the summer both have taken out key lows, extending the downtrend that started in 2011.
Last week we reviewed that the business cycle turns with commodity prices, which has been the case for a couple of thousand years anyway. Included were charts of crude oil and producer prices.
Throughout business history rising prices have indicated prosperity and falling prices have indicated hard times. Our era of chronic and deliberate inflation has obscured this.
For too many decades the policymakers and too many Wall Street pundits really believed that rising oil prices were a tax on the system and too high would force a recession. Then of course, low gasoline prices, such as now, will prompt a recovery.
There is scholarly evidence that the 3 to 5-year business cycle prevailed as far back as the 1500s. Crude oil was not a commercial product then.
In any century falling commodity prices signaled a contraction.
Gasoline prices fell from the peak of 3.29 in June 2008 to 0.96 (no typo) in that December. The plunge did not prevent the contraction but was part of it.
It is worth repeating that the consumer is the most ebullient and carefree since 2007.
Stock markets are enjoying ebullience as well, which has pushed the AAII Sentiment up to 57.9 Percent Bulls. The following chart shows that it can get higher in the early stages of a bull market. It also shows that at a potential peak this is the highest reading since 2000.
For the senior indexes the decline was a "correction" and for such as the Small Caps (RUT) and the STOXX it was a hit. As with October 2013, the S&P recorded a Springboard Buy. Last year's target was a rally to around February. This year's correction was greater and the rebound has been outstanding. Perhaps even impetuous. The S&P has been above its 5-Day ma for 20 trading days without a break. This has happened only three times in the past twenty years.
Of interest is that the "big" market, the NYSE comp (NYA) has not made it to new highs.
It is working on a big test.
Last year's "Rotation" theme worked well and seasonal forces seem to be setting up another opportunity. We have been looking for a low for copper in November. So far the low has been 2.96 earlier in the month with some stability last week at 2.98. However, rally attempts since September have been turned back by the 50-Day ma. So it has to get through that.
Base metal miners (SPTMN) declined from 954 reached on the last "Rotation" to 654 on Monday. The latest decline was sharp, driving the Weekly RSI down to 25. This seems oversold enough to pop a brief rally.
The Oil Patch (XLE) set a magnificent high at 101 in June and slumped to 77 in the middle of October. The Weekly RSI got down to 30, which was big change from the overbought at RSI 83. The rebound made it to 89 a couple of weeks ago. This was turned back by the 50-Day ma and the index has slumped to 84.
Crude oil was likely to set an important low in December. Oil stocks still seem vulnerable.
Bank stocks (BKX) could become interesting. The action is describing a big rounded top with highs at 73.90 in March and at 74.49 in early September. Since late 2012 the "dips" found support at the 50-Week ma. That ended in October when the slide from 74.49 to 65 took out the 50-Day. The 12 percent hit was tied to a sharp turn in the yield curve to steepening and credit spreads to widening.
The curve bounced and is testing the highs with quite a swing in momentum. Another run at steepening seems likely. As reviewed below, spreads have continued to widen. The alert on the banks would be the BKX taking out the 50-Day. This is at 71.25 and the index is at 72.50.
Since the beginning of the month, the spread from BBB to treasuries has widened from 167 bps to 179 bps. This is becoming impressive.
Our overall theme has been some distinctive action from Exuberance (back again) to Divergence (late summer) to Volatility (September, October and into this month). The remaining phase "Resolution" has yet to complete.
We keep looking back to the extraordinary spike up in the bond future. The instruction was that at the opening on October 14th there was no liquidity and the price shot up 5 points in an instant.
Weird, but perhaps an indication of what might happen when the world loses confidence in the arbitrary aspirations of central bankers. The October event was up, which implies there could be a down event.
The US bond future needs to test the high at 147.75. It is at 141.25 now.
On JNK, the big overbought was set at 41.81 in June and the decline to the 39 level in mid-October was severe enough to register a Springboard Buy. The bounce to 40.56 was fast enough to register the opposite signal.
JNK has been following the 50-Day average down, but this week the decline steepened.
Taking out the 39 level would be an important step on the way to credit dislocation.
This shows clearly in the following chart on spreads (mentioned above). This week we have added the chart of spreads on the key reversal in 2007.
Over in Europe, this week the Russian bond yield broke to new highs at 10.42%. The previous high was 10.29% set earlier in the month. In May 2013 the yield declined to 6.46%.
The Spanish yield declined to 5.56% in early in September. With somewhat of a local panic it jumped to 8.88% on October 16. The subsequent low was 7.20% and it has methodically increased to 8.32%.
Other country yields are no longer declining and are building a bottom.
Agriculturals (GKX) became very oversold at the end of September. Enough to suggest a sector that could rally. The low was 290 and with some stair-steps the index made it to 327 last week. Corrections have found support at the 50-Day which is at 308 and gently turning up.
Base metals and energy items were covered above, but merit additional comment.
Copper seems to be working on a double bottom. One low was at 2.96 in the turmoil of mid-October with the other at 2.97 on November 4th. Getting above the 50-Day would be constructive.
Crude oil's plunge has driven the Weekly RSI down to 18.5, which is very oversold. A brief rally is possible. But we remain concerned about a "political failure" similar to the one from late 1985 to early 1986. That failure bankrupted the Soviet Union and this time around it would be very constructive to bankrupt the Neo-Soviet Union as well as terrorist movements in the Middle East.
Will this sector become "precious" again?
Under the old paradigm of what happens in a post-bubble contraction - Yes!
Gold's real price, as tracked by our Gold/Commodities Index, completed a cyclical bear in June and has set a cyclical bull market. Threats to the stocks would be diminishing liquidity in the big stock market and the even bigger credit markets. Going back a few years, the other threat was that in bull markets for orthodox investments, precious metals under-perform or head down.
Our November 6th Pivot noted that the bottom in the sector would be determined by gold shares starting to outperform the bullion price.
The plunge in HUI/Gold was the worst since the crash into late 2000. The numbers say it was more severe. In 2000, the ratio fell to .133 with the Weekly RSI down to 24. This time around, it plunged to .124 (November 4th) with the RSI down to 19.5.
Quite likely this took out the last of the "inflationists" playing the "hate-the-Fed" game that started very quietly in the mid-1960s. It became exceedingly popular in 2011.
HUI/Gold rallied to .141 and tested the low at .130 last week. The rise since has been very constructive and getting though the 50-Day at .152 would set the uptrend.
We think that crude oil is a reasonable proxy for the cost of energy when mining.
Gold/Crude set its bottom at 11.71 in June and with a couple of corrections has made it to 16.20.
It seems that what was needed to determine the cyclical bottom for the precious metals has been accomplished. Gold shares could become outstanding performers and one should buy the dips. The main setbacks to golds will be liquidity concerns in the orthodox markets.
Roy Spencer has an interesting blog on the snow storm that hit Buffalo, N.Y.: http://www.drroyspencer.com
Iron Ore Prices: Twenty-Five Years
- Clearly an extraordinary bubble.
- Based upon China's extraordinary Industrial Revolution.
- Along with peaks in other metals, the blow-off occurred in 1Q2011.
- Our Momentum Peak Forecaster gave the "Peak" signal in April 2011.
- It hasn't given a "sell" since.
- Since our update in July, the price has taken out key support at 99 and has established a methodical decline.
- At 80 now, taking out 60 would retrace the whole bubble.
South African Coal: Five-Year Chart
- The low in 2009 was 58.
- The high in 2011 was 124.
- The latest price is 65.
DJIA and CNBC Audience
- Interesting chart by Bruce Stratton at SafeHaven
- The loss of Audience in the bull market is beyond explanation.
However, there is an amusing story about Bruce selling his Ferrari. This was a "400", bought new in 1980. It is a big car and he describes it as "The least desirable Ferrari".
Bruce lives in a charming community part-way up Vancouver Island and a couple of years ago he decided to sell it. The first sale was to an editor at Car and Driver in Michigan. It was then sold to a guy in Montreal, who then retired and moved with the car to Sooke, B. C.
Sooke is at the southern tip of Vancouver Island, a 2 1/2 hour drive.
- Sentiment can surge to impressive high coming out of a bear market.
- Of interest is what it can do at market peaks.
- At 57.9 now it is the highest at near a peak since 2000.
Subprime Auto Loans
- Some $125 billion were issued in 2007.
- $60 billion were issued in 2009.
- Issuance in 2013 was up to around $125 billion.
- This year's number will be greater.
- Issuance is of bundled loans made to bankrupt car buyers.
- A recent issue priced to yield 18.6% was oversubscribed by a factor of 4.
Spread Reversal: 2014
Spread Reversal: 2007
Link to November 22nd Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/11/central-banks-admit-their-actions-are-reckless