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Pivotal Events

Signs Of The Times:

From A Year Ago:

"There is a 20% carrying cost [on crude oil] in rolling the front month contract into the second month because of the current contango."

- Market Watch, Dow Jones, December 12, 2006

Well, we would have called it a seasonal decline - it's simpler.

"Bernanke Fed Get's Street's Thumbs Up"

"'High Marks' in Knowing When to Pause Rate Hikes"

"All Data 'A Royal Flush'"

- Financial Post, December 26, 2006

The cheers were for not raising administered rates.

"Over the past decade a combination of diverse forces has created a global savings glut."

- Ben Bernanke, Wall Street Journal, December 30, 2006

From This Year:

"Bernanke Blamed For 'Rookie' Mistake"

"The Fed underestimated liquidity heeds of investors and the fallout from the housing recession."

- Financial Post, August 21, 2007

"Debt isn't merely more expensive, it is scarcely available at any price or on any terms."

- Wall Street Journal, August 21, 2007

Over the course of a business cycle conventional wisdom can be many things, but it is not supposed to be so fickle, and the Fed Chairman should know the distinctions between leverage, liquidity, and savings. Of course, with the Fed relentlessly depreciating currency there is little point in savings or positioning in liquid instruments such as treasury bills.

Stock Markets: A little more than three weeks ago, the technical possibility of a stock rally was outlined. This is working out, and where the low was likely to be set near the end of November, the next high was scheduled for mid-December. That's our line and we are sticking with it, so what we are watching for is some overbought conditions.

Part of the research included the pattern that often in a year that liquidity concerns are discovered desperate positions will be cleared in November, making for a better December.

However, as seen yesterday, Washington Mutual (WM) had some bad news to report and the stock tanked by 7%. More generally, the problems for the market have been just such discoveries, which will punctuate relief rallies and exacerbate natural declines.

Those who were shocked by the August panic then had the temerity to claim that all the write offs and bad news would be limited to the third quarter. When troubles resumed in the sub-prime sector in May, these were the same pundits who insisted that the problem was "isolated", supposedly by natural forces. Others insisted that it was within the powers of the Fed to "contain' such troubles.

Not likely, and the changes in the credit markets that began in May had a number of indications that it would be a cyclical change. This had progressed enough that by July we described it as "The greatest train wreck in the history of credit."

The November slump found support near the lows of August, and the rebound should complete around mid December, and traders should be selling into it.

Sometime in the first quarter these key lows will be visited again, and reports by the financial sector about disasters happening in this quarter could combine bad fundamentals with a weakening technical condition to drive the senior stock indexes to new lows.

Sector Comment: Along with the general rally, base metal mining stocks were likely to rebound, and so far the SPTMN has gone from 722 to 828 a couple of days ago. This has been accompanied by more stories about big takeovers, which suggests boards of directors are specialists in corporate finance rather than learned in credit contractions.

In this regard, pressures in the credit markets have been instrumental in reversing some record-breaking rallies in most base metal prices. Our index (less nickel) has declined to new lows. In the past week it has given up 8%, which is not healthy.

In early November we noted that the financial sector (BKX) could find support and the low was 88 on November 26 and the rebound made it to 99.59 on Monday. Then came the punctuating news from WM and that knocked the BKX down by 4%. With one day's hindsight, technically we had 100 as possible target.

This represented overhead "ice", and the hit is very damaging.

Interest Rates: The Long Bond became rather overbought at 118 on its way to 118.88 on November 26. And the November 29 edition noted that the action was just another asset price that was spiking up on the wring story. This was the flight to quality story, and we have been careful to explain that in a real storm the long end represents risk and the traditional flight is to the liquidity and safety of treasury bills.

At any rate, the decline amounted to 4 points to 114.38 on Monday. This was somewhat oversold and at a good level for a brief correction, and the equity hit with the Fed cut prompted a rally. Usually good moves in the bond either up or down will correct after 4 points.

Once again the rally is for the wrong reasons and we it made it to 116.50 yesterday and got whacked again today.

Traders have been advised to be aggressively positioned for steepening.

Credit Spreads were likely to narrow on the stock rally from late November until mid December. The AAA sub-prime bond rallied from 79.97 to 89.35 yesterday, which is a very good rally. Quite likely the best is almost in on the move and the sector will soon take out the November lows.

The importance of this was shown last June when the AAA sub-prime took the plunge that anticipated the credit panic in August. Much the same lead was provided in early October on the pressures that have had a little rest since late November.

A resumption of serious weakness should be considered as engineered by the Grinch. Regrettably, the best that could be seen as character redemption in the credit markets seems difficult to be accomplished on Christmas Day, but will be deferred to another season - perhaps in another year.

More traditional spreads narrowed a little on the move, as for example, junk came in from 838 bps to 795 on Monday. Widening was likely to resume in mid December, and could run to eventually severe conditions.

The Dollar Index came off the low 74.48 on November 25 and the recovery coincided with the stock market rally. The initial rally made it to 76.82 and a pause is possible. Once this completes the next rise could form a modest uptrend.

The Canadian Dollar zoomed up to extremely overbought condition. The spike up was followed by an even steeper spike down, and near the 98 level the momentum had made the equivalent traverse.

The Canadian could stabilize for a while, and the transition from a petro-currency to its new identity could take some time.

Miscellaneous: After an outstanding rally, the Baltic seems to be working on a double top at 11,033 on October 29 and at 11,039 on November 13. The in between low was taken out on the slide to 9897, and the recovery made it to 10,285 on December 4. Taking out 9897 would establish a modest down turn.

Subsequent action will be interesting, as it seems to be following the breakdown of the Shanghai stock market.


Energy Prices: Last week, we were looking for some stability for crude into mid-month. An intense speculative rush carried the price to 99.29 on November 20, and the initial slump was to 87.14 on December 3.

So far the rebound has made it to 94.39.

With this, oil stocks (XOI) rallied from 1353 to 1492 on Monday. Then with Tuesday's cut in administered rates the index dropped to 1450, and showing neutral momentum it can churn around for a few weeks.

However, we have concluded that the sector is subject to the cyclical contraction going on in the credit markets, so there is not much to be made on the upside and with the prospect of a cyclical bear the risk/reward ratio is not good.

Natgas was also likely to recover and it continues to drift down.

However, gas stocks managed to rally from 525 to 575 yesterday when the XOI declined to 558 at the close.

We have been underweight the oil and gas sectors on the surge the October surge.

Base Metal Prices: Base Metal Prices have been expected to recover with the stock market into mid month, but the action has been weak. From 680 at the end of November our index has declined 8% to 627 yesterday, which is a new low.

The decline from the July high of 826 amounts to 24%, and from the "test" high of 811 in mid October it's 23%.

While missing on a short-term call, the extension of the downtrend confirms our work in June that the change in the credit markets looked like the start of a cyclical contraction. In which case, as each metal made a high it would likely be a cyclical high.

On this cycle, highs were strung out over a long interval. Molybdenum set a spike high at 47 in June 2005, and set a base at 25 until March 2007 when it rallied up to 35 in July. This held until mid October when in a couple of steps it has declined to 33. The point is that moly started its bull market in late 2000 with the rest of the metals, and has been in line with the significant changes through 2007.

Also on the bigger picture, copper and aluminum set their highs in May 2006, and zinc made it in November 2006, with lead hanging on until October of this year. Tin is still in an uptrend, the rest are not.

The periodic table lists uranium as a metal, and it seems to have some of the market characteristics as well. A cyclical bear ended at around 8 in 2001, and climbed to 30 in June 2006 when the irresistible rush carried the price to 138 in July of this year. Then, along with other asset classes it took the hit with the dramatic change in the credit markets and fell to 75 in October. So far the bounce has taken it to 95.

The point is - uranium in its commercial form has cyclical swings and was vulnerable to the initial credit hit, and could be vulnerable to the next big one.

After some recovery, the dollar index is still stabilizing and is eligible for further advance. This is not yet in the metals market.

Golds: This sector is still in the corrective mode, and our advice was to lighten up on the senior golds in order to buy the smaller caps on opportunity.

The high for the XAU was 463 in early November, and the initial decline was to 396. There is support at this level, but more of a correction seems possible and around 370 would likely provide better support.

We are not prepared to make specific recommendations on exploration stocks, but will note that this battered sector will eventually turn. As mentioned last week, this could turn on natural market forces as the impressive increase in real prices hooks up. Or upon a world-class discovery.

In 2005 we had a list of six such stocks selected by a gold-fund manager and one, Aurelian (ARU, on Toronto) was incredible.

It seems time to make another select list as well a general list of "oversolds".

There has been little change in our gold/commodities index since the high of 210 was set on December 4.

Gold/Silver Ratio: With the recovery in the stock markets since late November, the ratio declined from 56.2 to 53.8 on Monday. It has increased to 55.6 and going through 56 would resume the uptrend. Typically, the ratio declines during a boom and increases during the subsequent contraction.

We have also noted that in rising above 56 the gold/silver ratio would likely confirm that the credit contraction is becoming more severe.













Junk Spread 819 804 795 806 ---
Treasury Curve 140 150 158 156 170
Base Metal Prices 632 647 634 627 630
Dollar Index 76.37 76.29 76.08 76.28 76.19
Gold 801.2 794 807.7 811.4 810
Gold/Commodities 204 204 209 209 ----


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