Market Wrap

Week Ending 4/20/07

Economy

The Labor Department reported that on a seasonally adjusted basis, the CPI advanced 0.6% in March, following a 0.4% increase in February.

Overall energy costs increased 5.9% in March, with the index for petroleum-based energy up 10.1% and the index for natural gas and electricity up 1.3%. Healthcare was up 3.96%.

Electric Rates on the Rise

For the first three months of 2007, consumer prices increased at a seasonally adjusted annual rate of 4.7%. This compares with an increase of 2.5% for all of 2006.

Excluding food and energy, the CPI advanced at 2.3% in the first quarter, following a 2.6% rise in all of 2006. So, remember - don't eat or use any energy and you're good to go.

The Cleveland Fed's Median CPI increased 3.76% year over year.

Housing starts increased 0.8%, an annualized rate of 1518k. Building permits also increased 0.8%, an annualized level of 1544k.

Talking about housing and whether or not the recent subprime lending fiasco is over or has just begun, Bloomberg reports that:

"Banks began foreclosure proceedings against 47% more U.S. homeowners last month compared with a year ago as falling housing prices made it more difficult for borrowers to refinance mortgages. More than 149,000 filings were posted in March. Owners of 168,829 homes in the first three months of 2007 received notice that lenders had filed for foreclosure due to failure to pay loans or liens."

Perhaps I'm misinterpreting what is being said, but it doesn't sound quite over to me..? Keeping within the topic of financial problems, Bloomberg also reports that:

"Texas owes state workers $50 billion in future retirement benefits and refuses to acknowledge the obligation. Texas Comptroller Susan Combs says she won't follow a new national accounting standard that requires states and cities to disclose the estimated costs of benefits promised to retired workers... The government would need to set aside $4 billion a year over the next decade to keep from falling short on what it owes, according to...the state's Legislative Budget Board."

I hope I'm wrong on this, but just as I said years ago that derivatives and carry trades would become household words, I'm also concerned that the refusal to meet obligations owed is going to become much more prevalent as things unfold. I wish it weren't so - but I'm afraid it is. Another reason to own some gold.

Stocks

The Dow was up 2.8% to a new all time high, while the S&P 500 gained 2.2% to a 6-year high. The Transports also made a record high up 3.4%, and the Utilities added 2.2%, also making a new record high. High fives were the order of the week - all around.

Our first chart shows the Dow Industrials forging to a new all time record high.

The Nasdaq Composite has yet to better its February highs let alone set any new records. To set a new record the index would have to double in value, as it has been cut in half since its previous rise to fame.

And it's not just our market that's making new highs - highs are being made by several world markets. Below is the chart of China's Stock Market that has more than doubled since August of 2006.

Bonds

Two-year yields were down 11bps to 4.65%. Five-year yields lost 12 bps to close the week at 4.57%. Ten-year yields gave up 9 bps to 4.67%. The Long-bond yield lost 8 bps to 4.85%.

The spread between the two-year and the 10-year note closed the week in positive territory at +2 bps. Although yields were down across the curve, lower rates were down a bit more than longer rates - thus providing the positive 2 bps slope to the yield curve.

A few weeks ago the Fed had its coveted inverted yield curve. Now rates have started to revert back to a positive yield curve. It will be interesting to see how interest rates react to the many conflicting elements in today's financial and monetary markets. We still maintain that any surprises will be to the upside with rates.

Fed Foreign Holdings of Treasury Debt rose $4.6 billion last week to a record $1.91 trillion, a 30.4% increase this past year. Custody holdings are up 19.4%.

The chart below has been in the past several weeks' reports. It has improved tremendously. The gap has been filled, but plenty of work remains.

Interest rates have begun to back up some. Below is the chart of the 10-year yield. Resistance is indicated.

Next up is the 30-year bond yield that is bumping up against its falling upper trend line going back to 1984. A break out above this trend line would be very significant.

Below is a chart comparing the 90 day T-Bill rate with the 30 year T-Bond yield. Since March short term rates have been coming down, while long term rates have been going up. This warrants watching, as it would kill the real estate market if it continues.

Russian Helicopters

U.S. Dollar

Ever notice how everyone is always trying to tell the other guy how to fix his currency? No one ever concentrates on the soundness of their own currency. If they did, others wouldn't have to recommend fixing them.

For example, Jean-Claude Trichet, President of the European Central Bank (ECB) stated:

"The Japanese economy is on a sustainable growth path and the exchange rates should reflect these economic fundamentals."

He then went on to say that the U.S. States "still favors a strong dollar policy." It seems that Mr. Trichet hasn't checked with U.S. Treasury Secretary Henry Paulson, who hasn't publicly mentioned a strong dollar policy since February. But perhaps he's still in favor of it and has just forgotten to mention it. He does have a lot to keep track of - trillions and trillions of things.

The dollar index declined 0.6% to 81.45. The Japanese yen gained 0.9%. The euro gained 0.5% this week. It is up 1.8% against the dollar this month. The currency is within 1 cent of its record high of $1.3666 set on Dec. 30, 2004.

Even more telling of the dollar's weakness was the gain this week of the British Pound, which broke through the $2 dollar level that marked a 26 year high. This is the same British Pound that the dollar rescued from disaster at the Bretton Woods Conference - how things do change.

The first chart below shows the demise of the U.S. Dollar. The second chart illustrates how close the dollar is to completely breaking down. If the support indicated on the chart by the circled lows does not hold up - the dollar could go into freefall. We do not think that this is likely at this time.

Next up is a chart comparing the euro to the U.S. dollar. The euro is presently bumping up against resistance that has held since 2005. If the euro breaks through and resistance becomes support - the euro will be entering upon another leg up. This tends to favor gold as well.

International reserve assets, excluding gold, were up $432 billion or 29% annualized, to a record $5.2 trillion.

Below is the chart of the British Pound versus the U.S. Dollar. It too is bumping up into overhead resistance - resistance that goes back to 1992.

The Australian dollar isn't waiting around - it has already broken through overhead resistance.

Oil

June crude lost $2.22 to $64.11. May gasoline was down 1.9% and Natural Gas fell 5.4%. As the chart below shows, crude is at a critical stage - it either rallies up from here to hold support, or it breaks through support and starts a new leg down.

The above chart clearly shows the devastating fall that natural gas took right after 911. All the predictions were for much higher gas and oil prices. So, what did gas do - it dropped over 60%.

Commodities

The CRB index was down 1.8% for the week. As we have said and shown many times, the CRB is not the best of indexes for judging the overall commodity sector. It is a weighted index that is heavily tilted towards energy.

There are many different commodities. On any given day - some are up, and some are down. Furthermore, some are in bull markets and some are in bear markets. To use the CRB to determine the strength or weakness of the commodity market is a fool's game.

Below are some charts that show these different realities.

Copper

Platinum

Sugar

Next is the point and figure chart for the CCI Index - an unweighted index of commodities.

Kuwait readies for possible US-Iran War

Silver

Silver was down 1.0% for the week, closing at $13.95. Silver has not yet closed above its Feb. highs, and has been somewhat weaker then gold as of late. Yet certain silver stocks have been the best performers in the precious market arena.

The industrial metals have just broken above their upper trend line.

Nimitz Readies for Duty

Gold

Gold was up $5.90 for the week, closing at $695.80 and within spitting distance of its 25+ year high. It closed above its February high this week, but has yet to test or surpass the May 2006 high near $722.

The daily chart of gold below shows it just peaking above its upper trend line. Notice the negative divergence on the chart per the RSI indicator and the MACD indicator.

The POG needs to do some work to turn these indicators up.

Next is the daily price chart for GLD - the gold ETF or exchange traded fund. It too has just peaked above its upper trend line and has its sites set on the May 2006 high. Time will shortly tell.

Below is the weekly chart of gold going all the way back to the start of the gold bull market. We have listed this for several reasons, which will become self-evident as we proceed further along.

Note the four (4) "stages" in the price action, as well as in the RSI indicator at the bottom of the chart.

HUI Gold Stock Index

Up first is the daily chart of the Hui Index. For the week the Hui was down 8.31 points to close at 356.15 (-2.28%). As the chart below shows, there are several negative indicators flashing, which need to be turned up into positive territory before a sustainable rally up is possible.

Once again the Hui broke above resistance only to close down back below it. We mentioned that this was quite possible in last week's report. RSI shows negative divergence, as well as turning down sharply; however, it was entering overbought territory.

MACD shows a negative divergence with a negative cross over looming as a distinct possibility. These indicators all need some work to turn them up and positive.

Next we have the chart of the Hui/Gold Ratio. This compares the performance of the gold stocks to the performance of physical gold. A sign of a strong gold bull market is when both the gold stocks and physical gold are headed up, with the gold stocks rising more - generally at a 3 to 1 ratio to physical gold.

The chart shows that beginning in March the gold shares were out performing physical gold. Note, however, the change in the chart in April outlined in yellow. During this time physical gold has been outperforming the stocks. Obviously, it remains to be seen how this pans out.

Now we come to le piece de resistance - the Hui Index weekly chart going back to the beginning of the gold bull. This is why we presented a chart of physical gold going back to the start of the bull market at the beginning of the pm section, as the price action of gold is the main determinant of the price action of the gold stocks.

As stated earlier, the HUI Index broke above its December and February highs this past week, but still remains below its May 2006 high of 401.69. Recent price action strongly suggests that the index is going to at least test the May high.

The $64 dollar question is whether the index is going to break out above the new high, and start the next leg up in the gold bull, or if it is just going to test the high and fall back and regroup (or even experience a further correction) before starting the next leg up.

Obviously no one definitively knows the answer to this question. The best one can do is to be aware of the possibilites and the highest probabilities that may occur. To help try to determine that we have gone back and looked at the entire gold bull market to date. We have referenced this chart a few times in the past. It shows the entire bull market in the Hui Index, with the 4 various "stages" delineated.

As the chart clearly shows, each time a new high was reached the market would then correct to an initital low. It would then rally back up and test the high. Subsequently it would once again fall and test the recent low. From there it would finally begin its assault on the next leg up to new highs and the next plateau. A series of higher lows and higher highs was always kept intact.

If you note - this sequence of price action (high/low-retest high/retest low-new highs) was repeated in ALL the stages of the gold bull to date. Does this mean that they are guaranteed to repeat again - NO? However, the probability is present.

Also worth noting is that as the gold bull has progressed, EACH correction/consolidation has taken longer in TIME to complete. So, for those who bemoan the length of time of this correction - it is to be expected.

Based on the above evidence, we are leaning toward a retest of the May 2006 high within the next few weeks, followed by a retest of the recent lows - with a higher low kept intact. We are leaning this way because it follows the course of the previous bull market corrections, however, this does NOT mean it must or will occur in this precise manner.

Also, many of the charts show divergences and negative cross overs, which need to be repaired and turned up. Most players in the precious metals sector are looking for the next leg up to be commencing, which very well may be occurring. However, we will go with discretion being the better part of valor.

The market vectors gold miners' index below shows the index just poking its head above the upper trend line. There is stiff overhead resistance in this area, but once it gets worked off the breakout should be quite strong. The index has rallied to this point several times and then backed off. This indicates that a lot of overhead supply existed, and that a lot of it has been worked off.

Individual PM Stocks

Following are several gold and silver stocks that we either own or are planning on taking a position in. We will not provide any comment, as the charts are self-explanatory. Caveat Emptor.

Summary

Stock markets around the world are rising in unison, buoyed by a rising sea of liquid - of paper fiat debt-money. The United States is the leader of this monetary orgy with Japan close on her heels. Together they have fostered massive liquidity bubbles across the globe, causing other nations to either join in the celebration or go without.

The dollar has been acting very poorly of late; however, an oversold rally is likely. Many players are on the same side of the boat, and when it starts to flip - it will do so very quickly and violently, as we have seen in the past. If the dollar rallies, it will create a headwind for gold.

Oil is at an important juncture - either it breaks out with a new leg up, or it will break down with a new leg down. It will decide very soon which way it goes. The overall commodity market is doing fine, with the metals being one of the strongest sectors.

China is implementing an investment fund to diversify its holdings. Everyone wonders what they will invest in. My guess is stuff; stuff that when you drop it on your foot it hurts - in other words real things - commodities.

China's forex reserves were up a LARGE 36% in the first quarter of 2007, totaling $1.2 trillion (US dollars). 70% of the reserves are in dollar-based assets.

The dollar is the reserve currency of the world. At the Bretton Woods Conference the U.S. dollar replaced the British Pound as the eminent world currency of the time. Just the other day the Pound traded over 2 to 1 to the U.S. dollar. This speaks volumes on the state of the U.S. Dollar.

If and when the dollar breaks below 80, it will be the proverbial shot heard round the world. It could end up being one of the most significant events of the decade, if not the century. Much will depend on how the Federal Reserve and other central banks and players react to the event. Their collective reaction could create more force then the precipitating action of the dollar falling. The cure could be worse than the disease.

The total market capitalization of the US stock market is approximately $15 Trillion. The market cap of all Gold & Silver stocks is under $200 billion. Do the math.

At this time we favor a test of the May 2006 gold stock highs with a subsequent test of the lows - followed by a new leg up of the gold bull market. This is just one of many scenarios that could occur.

Other probable courses are that the Hui keeps going from here and tests and breaks through the old highs and keeps rising. Another is that the Hui goes down from here and then moves back up to test and or surpass the May 2006 highs.

We are watching and waiting for a good entry point to accumulate further positions. Depending on how the price action unfolds, we may also book profits that accrue.

It appears that Mr. Wolfowitz has bit off a bit more than he can chew. Fascinating times we live in. Good luck. Good trading. Good health. And that's a wrap.