 SIGNS OF THE TIMES - FEBRUARY 16, 2008
To be serious...
Bob Hoye
Institutional Advisors
Posted Feb 18, 2008
The following is part of
Pivotal Events that was published for Institutional Advisors'
subscribers Feb 14, 2008.
SIGNS OF THE TIMES:
Last Year:
"Global investors are
increasingly snapping up corporate bonds backed by Brazilian
beef, Mongolian bank loans and Mexican mortgages"
"The surge in such
bonds is part of a sea change in the capital markets of developing
countries."
-Wall Street
Journal, February 13, 2007
Regretably, that sea change
lasted until May when the reversal in the yield curve and credit
spreads announced that the tide was going out. This always reveals
just how ugly the bottom of the harbour is.
"Hedge Funds Beckon
Small Investors"
-Wall Street
Journal, February 14, 2007
Last year, that was likely
taken as another "Happy Valentine" opportunity.
* * * * *
This Year:
The following has an interesting
way of arranging data on a horror story.
Foreclosures: 100 Worst-Hit
Zip codes
"Las Vegas was the
hardest hit by foreclosures at the end of 2007."
-CNNmoney
February 5, 2008
Today's Valentine is:
"Auction-rate securities
failing to draw bidders"
"It was a quest for
yield. As soon as you get all of these synthetic products based
upon other products, it's a cancer that refuses to stop spreading."
-Wall Street
Journal, February 14, 2008
Stock Markets: Last week's review of the futility
of the theories and practices of interventionist economists left
out that their favourite subject - GDP - does not have a board
lot. So if there is no high, low or last trade why even talk
about it?
To be serious, there is something
very dysfunctional about using economic projections to forecast
the course of the stock market. The course of the stock market
always leads the economy--in this instance, to the bottom of
the harbour.
Our main theme has been that
the change in the credit markets in May was cyclical. With this,
stock markets and industrial commodities would follow, with eventually
all commodities declining with the general contraction. More
specifically by July, credit spreads and curve deterioration
was sufficient to make the conclusion that the greatest train
wreck in the history of credit was underway. It is not over.
More recently, the last decline
was likely to complete in January, and the panic registered a
rare "Downside Exhaustion" on the Nasdaq. A rebound
amounting to a 40% to 50% of the loss was possible into March.
As it turned out, short-covering was brutal and in many cases
the rebound was accomplished in quick time.
Last week, we reviewed this
and noted that the stock market had likely enjoyed the best of
the possible gain, but on the time factor could churn up and
down for a few weeks.
The panic in August was a "heads
up" on the degree of untempered speculation, and its vulnerability
to shock as money-market spreads sharply widened.
The plunge into January was
forced liquidation of equities and lower grade bonds accompanied
by unsettling economic reports and desperate banking conditions.
A few weeks ago we mentioned
that the "Unemployment" model had indicated a possible
low in January. The way this works is that when the rate of change
on unemployment claims rises above zero, which was on September
21, the stock market turns down to a fairly severe hit some four
months later, and the low was on January 23. Usually, the rebound
occurs and the low is tested within 10 to 15 days, which has
been the case.
The rebound has been technical,
and as we noted at the bottom, the rally would make the rescue
packages look like they are actually working. A little more up
and there will be a round of self-congratulations.
However, the credit contraction
and its repercussions are not over.
Often a big squeeze in commodities
can set up a crisis that when it lets go can dislocate other
markets. Wheat is in this excruciating condition now, and typically,
when the game reverses it is usually violent.
While the next dislocation
could be from the grain crisis, there is this week's discovery
of another disaster in synthetic securities. This one is in some
things called "auction-rate" securities and "tender-option"
bonds, which have suddenly gone "no-bid" and "no-tender".
Like us, if you have never
heard of them you are fortunate.
The possibility of a rebound
into March has been due to technical forces. As noted, the action
would be vulnerable to more bad news from the banks. This is
new "bad news" and it could be enough to curb any further
advance.
Technical failure is possible
before March. This would be indicated by the Dow taking out the
last low at 12,069, and for the S&P its 1,317, and for the
Naz its 2,253.
Sector Comment: Dr. Copper had been expected to set
a low late in the year, and then rally out until March, and this
is working out. Base metal mining stocks (SPTMN) took the hit
down to 598 in January, and retraced 50% of the loss on the rebound
to 771. Generally, this is likely the best that could be expected,
and this needs to be tested, which would provide another selling
opportunity.
Base metal prices are in a
cyclical bear, and now so is this stock sector.
As represented by the BKX,
banks and financials also accomplished a very spirited 50% retracement
to 96 early in the month. At 121 a year ago, this sector was
the big bastion of complacency. Now it has made its best on the
rebound and is vulnerable to disastrous reports that will continue.
It is ironical, that every
financial party occurs with a dramatic decline in the real cost
of money, and the contraction occurs as Mother Nature severely
begins to ration credit. This shows up in the typical post-bubble
increase in real long interest rates, which has been huge and
is reviewed below.
INTEREST RATES
The Long Bond: Usually at important lows, we like
to emphasize that for the potential rally "real men trade
long bonds". None of the wussey ten-year stuff for us, indeed.
In looking at the remarkable damage, we should have added that
"real men don't buy bond insurance". What a crock.
Our website (www.institutionaladvisors.com)
has a section on the credit markets. This has been expanded with
a review of all of the key calls made during one of the most
remarkable changes in the credit markets. Also from a few years
ago we have included an early edition of our "Real Men Trade
the Long Bond".
Our January 24 edition noted
the degree of overbought and advised that traders should play
the short side. The high was 122.81 in January 23, which was
just as the general panic was ending, and the decline has been
to today's 116.22. The action appears to be a spike that has
been followed by a damaging stair-step down.
Inevitably, as most traditional
corporate bonds become toxic the revulsion will spread to long
treasuries. It is also worth thinking about all the high-grade
bonds still held by banks and that these could be liquidated
as reserves disappear.
Below is
the link to the February 15th 'Bob [Hoye] and Phil Show' on Howestreet.com:-
http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/778
###
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
SIGNS OF THE TIMES - FEBRUARY
16, 2008
Hoye Archives
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