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Signs of the Times

Bob Hoye
Institutional Advisors
Nov 30, 2009

Progress requires little else ...but peace, easy taxes and a tolerable administration of justice.Adam Smith

Signs Of The Times

Two Years Ago:

"U.S. Bank shares are so cheap – and dividends so high – that some of the world's biggest investors say the combination is 'unbeatable'". – Bloomberg, October 30, 2007

"Inside a crowded brokerage in a central China city, Zhang Waniong was getting anxious as China's stock market ticked to a new high. The problem: He couldn't find an unoccupied trading terminal to buy shares." – Wall Street Journal, November 1, 2007

The story was noted as being 2 weeks old, and included the information that China was opening 100,000 trading accounts per day. The high was on October 17.

"No U.S. Recession: Bernanke" – Reuters, November 9, 2007

October 2007, of course, was the top of the bull market, and a year later the NBER determined that the recession started in December 2007. One of the features of the end of a great financial mania is that the recession starts virtually with the beginning of the bear market.

"Multi-decade bull market for base metals" – Business News Network, November 27, 2007

The reasoning was the extraordinary demand from China and India. The high for Goldman's metal index was 536 in 2007 and the low was 187 in March 2009.

* * * * *

This Year:

"China, the world's biggest consumer of metals is experiencing 'powerful' growth in demand for all commodities and will lead the global economic recovery."- Bloomberg, November 17, 2009

"Mayors Sound Alarm Over Drop in City Revenues"

"This is unknown for over a generation." – Wall Street Journal, November 19, 2009

"Metal Prices Will Move Much Higher" – Base Metals Price News, November 25, 2009

"A Feast of Good U.S. Data – In Time for Thanksgiving" – Financial Post, November 26, 2009

* * * * *


On the bigger picture, asset inflation continues in the midst of an ongoing credit contraction.

On the near-term, last week's update on the Post-Euphoria Model, along with the Stochastic rolling over, suggested the S&P could correct into mid-December. However, the action has been more positive than the model would suggest.

The reason is the continued decline in the Dollar Index that is making new lows for the move. While still within the Sequential Buy pattern, it has yet to complete. The recent force upon the DX is the relentless intrusion by the Democrats into the normal workings of society. The attempt to get the monstrous health bill through the Senate involves a reported $300 million bribe to the senator from Louisiana.

The economies of Europe and Japan are worse than America's and some think that this should strengthen the dollar. Our view is that the dollar is not so much supported by the economy, but pushed up by urgent liquidation and down by speculation in asset prices. And the latter play has become immense as the carry trade has been encompassing most anything that trades.

Of course the main ingredients of the carry is low short rates, attractive spreads and rising bond prices. And now the world has been using irresistibly low short rates against any price series that is rising.

By now, the more observant policymakers must be concluding that the "stimulus" does not go into losers, but into the trading tactic de jour.

Let's face it, the "lender of last resort" scheme, itself, has been a losing concept.

In the stock market, we thought that an exceptionally bullish Daily Sentiment reading at 92% compared to 87% in October 2007 was a signal to be respected. This with an RSI momentum we thought would be followed by an intermediate decline. A couple of setbacks followed by fresh highs has been the result.

We had thought that the trend in widening short-dated spreads was anticipating widening for corporate bonds and this has not been the case.


The dollar continues to decline and it seems that it will require some dramatic event to end the party.

Veteran traders have been aware of this for many weeks now and investors may have been uncomfortably underweighted. On the latter the only offset is that conditions are rather speculative – within a post-bubble credit contraction.

The other hazard is the ambitious pursuit of corporatism in Washington. The offset on this is the growing popular opposition to such a reckless experiment in authoritarian government. As noted last week insane politics will drive capital into hiding, which will reduce liquidity.

This is as far as we got yesterday when the news about "Dubai World Seeks to Delay Debt Payments as Default Risk Soars" hit the wires. This occurred as we saw that stock market sentiment was again at exceptional levels.

Investors Intelligence reckoning on "bears, bulls and chickens" is at 74.2 percent, which compares to the 76 percent reached at the peak in October 2007. This sentiment calculation is slower moving than the Daily and is at a high for the move. The low was 28 percent in last fall's crash.

The irony is that the best levels on stock market sentiment has been reached with the best headlines on economic numbers just as a nasty reminder arrived that the credit contraction has not concluded. And it won't conclude until the consensus despairs that it will never end.

On the Dubai story, the telltale was the 131 bps increase in the default risk during the month, with yesterday's 116 bps jump sounding the tocsin.

Geographically, the Dubai Islands are in the Red Sea, but financially it is further away than Ireland or Iceland, but not isolated from the rest of the world. For example, the Abu Dhabi central bank owns their bonds, etc.

Market adjustments today seem appropriate. Various credit spreads have widened, global stock markets fell by 2 to 3 percent, the dollar firmed as crude oil declined. Base metal prices fell some 2.5%. The gold/silver ratio increased.

This coming when the establishment was celebrating the wonders of applied Keynesianism provides an excruciating moment in financial history. In an instant, markets have turned from "easy" credit to "diseased" credit.

Stock markets seem even more eligible for an intermediate decline.

* * * * *


The big thing is that the financial markets had become confident enough to be vulnerable to a profound change – Dubai represents profound change. In the 1600s, what is now called the Netherlands was the commercial and financial center of the world. After a speculative binge, the Dutch called the inevitable disappearance of liquidity "diseased" credit. Works for us.

The next few trading days will be interesting and it is worth looking back at some alerts.

As we have been noting, short-dated credit spreads such as the TED-Spread have been widening. At the longer end, the sub-prime mortgage bond has been declining in price since mid October. But, long corporates have been in la-la land with spreads narrowing into Tuesday. Wednesday recorded a couple of beeps widening.

Old reliable – the gold/silver ratio – increased on the week from 60 to the close of 63.3 yesterday. Last week we noted that rising to 65 would "confirm at least an intermediate setback to most asset classes".

Another indicator that was useful going into the credit change in May-June. 2007 and then in October 2007 was the preceding increase in gold's real price. Our Gold/Commodities Index had reversed by early September and this jump from 371 last week to a new high for the move at 392 is also a warning.

Obviously, risk aversion is returning and we have been advising to reduce exposure as much as possible.

Of interest is that the long bond has been rallying this month with the party in other assets. Bonds gained a half-point in Canada today and we are uncertain how far this may go, or if it is the last thrust of the rally that started at 117.8. There is overhead resistance at the 123 level.

A reversal in the curve to flattening would be another indicator of credit concerns.

Currencies seem to be stretched to the limit. On the DX, an uptick to 75.5 would conclude the Sequential Buy pattern. Yesterday's close was 74.3 and today's was 74.8. Technically, the Dollar Index is poised for an intermediate rally.

Fundamentally, the financial world is at the brink of the next phase of the post-bubble contraction and one of the features would be a rising dollar – against most currencies and most commodities.


Energy Prices: At 82 in late October crude was overbought and we thought eligible for a seasonal decline until the end of the year. As we have been noting, the extended decline in the dollar kept the price in a 78 to 80 trading range. Crude was down 1.72 today with the Dubai problem which decline could continue as credit problems shake down the Sheikhs.

Oil stocks (XOI) set their high at 1133 in the third week of October and declined to 1042. The rebound was to 1112 two weeks ago and it stayed near this level until Wednesday. As concluded last week, taking out the 50-day ma would set the downtrend. Taking out 1042 would extend it.

Natural gas stocks (XNG) set their high at 549 on October 20, and last week we noted that the 50-day moving average had been taken out, which would start the decline. Taking out last week's low of 492 would set the downtrend.

Base Metal Prices: Last week's theme was impetuosity. Goldman's metal index had reached new highs for the rebound at 370, making an 8 percent gain in only 3 days.

This was accompanied by glowing forecasts, some of which are noted above.

However, it seems that China may have built a huge position. Not so much for consumption, but as a hedge against insane U.S. policymakers.

China has not been the only big account playing the game as many pension funds have been at it again.

Because of the intensity of the bear raid on the dollar the seasonal decline in base metals has been delayed. It could be starting.

Mining stocks (SPTMN) set a high at 1009 on October 25. This was also the momentum high at the highest weekly RSI since 2007. The subsequent low was 862 and the rebound made it to 1015 yesterday, which is the test of the high – but at a lower RSI. The index is of Toronto mining stocks and it suffered a 2.7% plunge to 988 today. Taking out support at 930, which is also the 50-day ma, would set the downtrend.

We have been looking for an intermediate decline and the resumption of liquidity concerns can assist this.

Gold Sector: Last week we noted that while gold's real price could continue to rise into late December, the nominal price could reach a trading high "within a week or so".

Today's trade had gold up a little and silver down a little, such that the ratio increased from yesterday's close of 63.3 to 64. As noted above, this is appropriate and if silver continues to decline relative to gold, it will indicate the resumption of credit concerns around the world. If silver plunges dramatically relative to gold it would again be indicating that trouble is arriving quickly.

Last week's advice was to lighten up on the senior golds with the intention of accumulating smaller caps on weakness.

* * * * *


The speech Bob gave to the Fall Dinner Meeting of the Committee For Monetary Research And Education introduced the subject that the global movement of authoritarian government would soon be seen to fail.

The next phase of the post-bubble contraction will overwhelm the ambitions of interventionist economics. The failure could prompt the conclusion that interventionist theories have been contrived, like government credit, out of thin air.

The other part of the paper was that Mother Nature runs the climate and temperatures have been declining. It also noted that climate alarmist theories were also derived out of thin air.

One of the lines about the quality of such "research" was:

"Globally, the rate they have been going through them, there will soon be a shortage of lies. Why soon? They are already out of half-truths."

Recent revelations about the cooking of the climate record by the CRU is timely and marks the realization of the greatest scandal in the history of science.

The attached article from the Telegraph could be indicating the start of popular reform of corrupt government policies.

Climategate: five Aussie MPs lead the way by resigning in disgust over carbon tax

By JAMES DELINGPOLE November 26th, 2009

Australia is leading the revolt against Al Gore’s great big AGW conspiracy – just as the Aussie geologist and AGW sceptic Professor Ian Plimer predicted it would.

ABC news reports that five frontbenchers from Australia’s opposition Liberal party resigned their portfolios rather than follow their leader Malcolm Turnbull in voting with Kevin Rudd’s Government on a new Emissions Trading Scheme.

The Liberal Party is in turmoil with the resignations of five frontbenchers from their portfolios this afternoon in protest against the emissions trading scheme.

Tony Abbott, Sophie Mirabella, Tony Smith and Senators Nick Minchin and Eric Abetz have all quit their portfolios because they cannot vote for the legislation.

Senate whip Stephen Parry has also relinquished his position.

The ETS is Australia’s version of America’s proposed Cap and Trade and the EU’s various carbon reduction schemes: a way of taxing business on its CO2 output. As Professor Plimer pointed out when I interviewed him in the summer, this threatens to cause enormous economic damage in Australia’s industrial and mining heartlands, not least because both are massively dependent on Australia’s vast reserves of coal. It is correspondingly extremely unpopular with Aussie’s outside the pinko, libtard metropolitan fleshpots.

Though the ETS squeaked narrowly through Australia’s House of Representatives, its Senate is proving more robust – thanks not least to the widespread disgust by the many Senators who have read Professor Plimer’s book Heaven And Earth at the dishonesty and corruption of the AGW industry. If the Senate keeps rejecting the scheme, then the Australian government will be forced to dissolve.

For the rapidly increasing number of us who believe that AGW is little more than a scheme by bullying eco-fascists to deprive us of our liberty, by big government to spread its controlling tentacles into every aspect our lives, and scheming industrialists such as Al Gore to enrich themselves through carbon trading, this principled act by Australia’s Carbon Five is fantastic news.

Where they lead, the rest of the world’s politicians will eventually be forced to follow: their appalled electorates will make sure of it.


-Bob Hoye
Institutional Advisors

Hoye Archives

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

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