Signs Of The Times:
Stock Markets: Last week, we led off with the observation that dollar depreciation was driving stock and crude oil markets up, and we shouldn't overlook that it was also rallying the long bond. All the favourite asset prices were being marked up.
This seems to have changed. The bond slipped on Tuesday, which extended steepening (bonds to bills) to a warning level. Then, yesterday most of the screen turned red, as stocks, bonds, metals, energies, and grains headed south - perhaps for the winter. Last Thursday's conclusion was "today, the next crisis has started."
Also noted lately has been that the stock market was technically weak, as participants were concentrating on a decreasing number of issues that were soaring, and with today's plunge in RIMM this seems to be ending.
To be serious, there has been a distinctive change in the market place and it seems unrelated to policy utterances, multiples, or next year's earning - just plain forces in the credit markets. The resumption of the crash in the subprime "A" bond beginning in mid-October afflicted traditional corporate spreads last week, which hit the general stock market this week.
And even the plunging dollar doesn't seem to be helping - or maybe in a modest way it is?
Sector Comment: Also noted last Thursday was that late in the day the BKX finally broke below 100, and this was extended this week as it has slumped to 91. The worst with the August panic was 100.33. There is support at 85 with the weekly RSI at below 30.
This week's discouraging news stories included one by the Financial Times that the "superfund" to restore the banking system was stalling out. Who would have thought that such a grand name as Master-Liquidity Enhancement Conduit, or MLEC in its shorter form, would be deemed a looser so soon.
With dollar depreciation, base metal mining stocks have been holding up relatively well. However minor support at 863 was taken out yesterday, and taking out the August low of 668 will confirm our view that a cyclical contraction for the sector is underway.
Considering this week's pressures in the credit markets, this looks all the more realistic.
Credit Spreads are following the pattern outlined in May that led to the initial panic.
Our "Global Warning" on this went out on October 16. That is when the "BBB" subprime bond broke down, then, the "A" failed in the second week of October. Of importance is that the market breaker in early summer was the plunge in the "AAA" in the third week of July. This time, the collapse started on October 19 and again the crash in the "AAA" subprime has spread to other recently hot asset classes.
Over in traditional corporate bondland, spreads have been quietly widening. Junk needed to get above 667 bps to resume the widening trend, and that was accomplished at 684 bps last Thursday. Now it is at 703 bps, which compares to the extreme of 721 bps reached with the initial panic.
Our advice in early summer was to avoid most classes of bonds and to consider that the main use of spread products would be as indicators of a severe credit contraction.
Miscellaneous: The Baltic Freight Rate went straight up until it reached 11,025 on October 29. The gain from the down dip into June amounts to an outstanding 110% - in only 4 months.
The initial correction was to 10,539 on Monday from which it has popped to 10,674.
A few weeks ago, we thought that a possible top for the Shanghai market (FXI) could be associated with the potential top for the Baltic. The ChartWorks proprietary model registered an "Upside Exhaustion" reading on the FXI in late September. The high was 218 on October 17 from which it backed off to 187 and the test made it to 219 at the end of October. It is now threatening the recent low and taking that out would lead to an intermediate correction.
This could put a lid on the Baltic, and the expected next leg of the credit crisis seems to be underway, and in time this could bring the shipping rate down.
Golds: With the long corruption of the term money, there are many ways of looking at gold. In Canadian dollars it has been a poor performer, which has taken the zest out of the exploration small caps. Participants in this sector have also been damaged by the collapse of speculation in the uraniums.
This reminds of an old story from the days of the old and notorious Vancouver Stock Exchange. It was a very depressed market and nobody was making any money - no tax-free capital gains, no fees, and no commissions. In a fit of genius, one guy said that all that was needed was an outstanding mining discovery. The other in reflecting the notion that someone was always running things said "Yeah, but 'they' have been holding back on those lately".
Works for us, but in the meantime gold is getting overbought, as the dollar index is approaching what could be enough of a low to prompt an intermediate rally.
However, the extension of the credit crisis will substantially increase the investment demand for the unique liquidity of gold and this will continue to assist the uptrend in the real price. Our gold/commodities index established what appeared to be a cyclical low at 143 in May, when it turned up with the advent of the initial liquidity crisis. This advanced to 197 on August 16, which was one of the worst days of the panic.
With the "rescue", our index slipped to 175 in late September and has recovered to 196. Obviously rising through 197 would resume the uptrend, which eventually will be a big plus for the sector. In the meantime, stability in the dollar will shake the gold bugs out of the market. With this in mind, we will use this rally to lighten up on the seniors for re employment in the small caps upon opportunity.
The gold/silver ratio did not rise through 56, which would have confirmed the problems in banking. The decline to 53.6 is very much part of the party still going on in the trashing of the dollar, that has created an impressive swing on the daily RSI from overbought to oversold. This could go a little further, but this direction is not compatible with the resumption of a grinding liquidity crisis.
The next rise in the ratio could be a fast catch-up move.
On October 1, John Crudele at the New York Post wrote, "The Securities and Exchange Commission is looking into whether Goldman Sachs cheated on its way to enormous profits - as the rest of the financial industry was suffering a massive downturn."
SIGNS OF THE TIMES - NOVEMBER 12, 2007
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