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Signs of the Times

Bob Hoye
Institutional Advisors
Jan 24, 2010

Signs Of The Times

Last Year:

"The Dubai developer that's building the world's tallest tower has delayed the project after the global financial crisis halted a property boom in the Gulf." -Bloomberg, January 14, 2009

The fallout has been of Biblical proportions and as advised in Luke 14:28 "For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it."

"A Chinese central bank official attacked comments by U.S. Treasury Secretary Henry Paulson that China's high savings rate helped trigger the global credit crisis." -Bloomberg, January 16, 2009

"A nation cannot prosper when it favors only the prosperous." -President Obama, January 21, 2009

The liberal-left is definitely removed from reality, and deserves exile to an isolated and quarantined place where they can only harm themselves.

* * *

This Year – Wild is Back:

"Banks are boosting their lending to hedge funds and private-equity firms to levels unseen since before the financial crisis, raising their risk levels and adding fuel to the buying power of key players across the stock, debt and buyout markets." -Wall Street Journal, January 9, 2010

"High-yield bond issuance is poised this year to surpass the record-breaking levels of 2009." -Bloomberg, January 12, 2010

"China's property prices rose at the fastest pace in 18 months in December, highlighting the government's struggle to rein in speculation while maintaining economic growth." -Bloomberg, January 13, 2010

It is worth noting that the most academically contentious increase in administered rates occurred in August 1929. The Fed had been following a rising trend in market rates of interest and raised the discount rate from 5% to 6%. With the announcement the New York Times explained that the move to restrict credit to Wall Street was accompanied by measures to provide credit to Main Street.

Generations of academics have claimed that that increase caused the Depression, which while strong in interventionist theory is weak in empirical research. Great Depressions always follow a Great Financial Mania.

On January 19th, NYT columnist David Brooks was glowing about Obama "In many ways, Barrack Obama has lived up to his promise. He has created a thoughtful, pragmatic administration marked by a culture of honest and vigorous debate." Brooks still imagines that Obama is a liberal – even worse – that 21st Century liberals are fascists eludes him.

As William Buckley wrote a couple of decades ago, "Conservatism is the politics of reality."

* * *


The big market has been working on a rounded top that this week seems to have described an "over-thrust", which often ends an important rally. Last week Toronto set a weekly outside reversal to the downside. This shows urgency to get in and then bulls expect a new round of buyers to take it higher. Accomplishing it on a weekly basis is significant, and the S&P and DJIA are working on the same reversal this week. The swings have not been as dramatic as in Toronto and the action is worth monitoring.

The "news" was Tuesday's special election in Massachusetts. The conclusion was that a set back to the White House would be good for business and the stock markets. Actually, the action seems to following the charts.

Sunday's ChartWorks outlined the possibility of a noteworthy correction and on January 13 Ross outlined the pending correction in gold's nominal price.

That date's Pivot noted that the correction in the DX could conclude within a week or so and that the next rally "could be disquieting to the status quo".

Yesterday, the Dollar Index made it slightly above the December high, but it could take some work to establish the rising trend. Virtually, the whole of the investing world has become dependent upon currency depreciation.

Recently, this showed up in the TSE with the compulsive jump and hit to resource sectors, which accompanied by the sharp rally in the dollar seems like ending action.

Since October we have been concerned about the underlying contraction that without the joy in stocks and commodities would return to forefront. One indicator that contraction was beginning to trump euphoria would have been the gold/silver ratio rising above 65.

The attempt with the Dubai failure touched 65 and retreated to 60.2 on Tuesday. Today's rebound is appropriate and on its usual page the ratio will be reviewed in more detail.

Once again there is a reminder that politics is a fascinating blood sport. Fortunately, Western Democracies do not have the tradition of political murder, but that does not exclude the equivalent to financial and currency markets as well as taxpayers. The gang of political thugs running Washington are just as mean and nasty as the FDR regime was and, as with his radical experiments, fiscal and currency manipulations will not make a post-bubble contraction go away.

Perhaps hyper-active expansion in government may exaggerate the natural rebounds. This has been the case through the last few months of 2009, and the image we used some months ago comes to mind. The Dems have been building the US equivalent of the Berlin Wall as the independent "Tea Party" is starting to tear it down – one brick at a time.

The "Independents" were very influential in upsetting the Democratic Machine in Massachusetts. It’s a start and America's celebration of Independence Day is only six months away. Senator Scott Brown ran an essentially conservative campaign in radical liberal territory. The implication to the rest of the country is fascinating.

In the meantime, our proprietary Bank Trading Guide continued the rise that began at 154 in mid December and made it to 165 on Monday. As noted last week, the BKX was getting overbought at 47.4, but the Guide had further to go. The high for the banks was 47.7 last Thursday and for the Guide RSI momentum has rolled over. This along with the volatility in the Guide provides an alert on banks and financials.


The long bond nicely bounced off resistance at the 115 level. Actually, there was a double-bottom that set up the rally. Rather than a runaway trend, a pop to a trading range has been our objective. The lower part could be found near 118, which fills the dismal gap set on December 21. The higher part of the range could be overhead resistance around 119.5.

Going the other way, we have been looking for a top to the action in corporate bonds. For the CYE, this has registered weekly and daily Upside Exhaustions on the ChartWorks proprietary model. Typically what is needed on any price series is a decline in momentum and then a decline in price. This we have had on the CYE (high-yield) and taking out 6.65 would set the decline. The high was 6.78 on Tuesday.

Junk (JNK) has also soared – right up to a weekly RSI of 80, which is almost as high as reached with the last rally before the massive failure that began in May 2008.

Of course, the prime mover in price has been the carry trade that has been making huge returns. It is well-known that every generation thinks that it has invented sex. Unfortunately, it's only every other generation that gets to think that it has invented the carry trade.

In the 1825 financial mania the discovery was "[It] seemed mathematically demonstrable that wealth was easily attainable when money could be borrowed from one set of persons at 4 percent and invested with [others] at 10 or even 20 percent. interest". This was followed by chagrin and remorse that lasted for a generation.

The attached chart of the spread between high-yield (CYE) and the 20-year treasury (TLT) shows the dramatic rise (narrowing) to the most over bought since 2007. That's on both the daily and weekly measures, and the narrowing trend can suffer a noticeable correction.

Currencies: The initial rally for the DX out of the bear raid was from 74.2 in late November to 78.4 on December 22.

As noted above, the correction could conclude this week and the low was 77 on Tuesday morning and the rebound made it to 78.8 earlier today, which sets a new high for the move.

Last week we noted that the recent rally for the Canadian unit seemed to be a test of the 97.7 reached in mid October. The subsequent low was 92 at the first of November and the test made it to 97.8 last week.

Also noted last week was that the C$ could "drift down as commodities stopped going up". Well – the decline in both has been distinctive as the CRB has slipped from 294 to 278 as the currency declined from 97.8 to 95 earlier today. There is support at this level and if this does not hold the next level would be 93.

The CRB is at support that may not hold, but there is more support at 267.


Energy Prices have ended the strong weather rally. Crude reached 84 last Friday and has slumped to 77 (76 on the March contract).

With the exceptional cold easing, crude's decline would likely complete in January. So far so good, and we are watching the technicals for an oversold condition.

Natural gas will likely remain in a tight supply condition and a narrow trading range for some weeks.

Last week we noted that the rally to 1129 for oil stocks (XOI) was a test of the 1133 high set in October. In noting the loss of momentum indicated by the set of declining RSIs we concluded that the sector needed significant correction. The drop to 1084 was quick and it was concluded that going through 1080 would take the oil patch down to support at 1040.

Today's low has been 1057.

Gas stocks (XNG) soared to 568 with the chill and have been trading between 550 and 565 since. This range could prevail until tight supplies ease.

Base Metal Prices: A couple of weeks ago we thought that the GYX (metal prices) would reach an RSI of 75, which would limit the rally. The buying surge drove the RSI to 77, which was sufficient for us to conclude that an intermediate decline was possible.

The index reached 417 on January 7 and the decline has been to 390 yesterday which is the latest posting. LME prices slipped 1.5% today and taking out 380 would set the downtrend.

Base Metal producers (SPTMN) were also likely to stall out at an RSI of 75 and it reached 77 on January 12, which seems enough to force an intermediate decline. This index just does not "do" Upside Exhaustions so we are using what worked for us at the last big peak.

Gold Sector: We have been looking for a correction in gold's dollar price to run to late in the month. The January 13 Chartworks determined that there were two paths to the next intermediate rally. One would end at a moderately low price and the other path would find support at the 20 week moving average. Today's low of 1088 compares to the ma at 1090, and a rebound of some weeks duration seems likely. Ross will provide some details.

Of course the guide for investors in the sector has been gold's real price, which reflects profitability for the industry.

With the Dubai World default, our Gold/Commodities Index rallied to 400 at the first of December and with the revival in financial markets it declined to 341 on December 30.

It has since increased to 360 and we remain aware that when it rises it can indicate growing credit concerns. This was the case when it reversed off the low at 134 in May 2007. It turned up as the credit markets turned down, then, after reaching 519 in February the turn down anticipated the financial rebound that began in early March.

If the current rise continues it will again signal credit troubles, and let's face it there still is a huge amount of unserviceable credit out there.

In the meantime, the gold sector is expected to perform well through this post-bubble contraction. Our view is that the seniors have yet to fully discount almost two years of improving conditions as indicated by the real price.

However, the play has turned to the exploration juniors and while the action for many has been good it is not yet an encompassing phenomenon. For those familiar with this sector the advice has been to be aggressively long.

The gold/silver ratio declined with the December party to the close of 60.7 on Tuesday. The rebound to today's 63 with the selloff in popular asset plays is appropriate and if it rises through 65 it would indicate the financial storm is back.

  • Climategate has been followed by “Glaciergate” whereby even the corrupt IPCC admits the hysteria about Himalayan glaciers disappearing by 2035 has been based upon no science at all.
  • Tsk, Tsk!


  • This is plotted to show the “bullish” character of spread narrowing.
  • The “rally” from 233 to 753 has been remarkable.
  • Both weekly and daily measures of RSI are at levels associated with the high in 2007.


Jan 21, 2010
Institutional Advisors

Hoye Archives

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