PIVOTAL EVENTS - DECEMBER 3, 2009
Signs of the Times

Bob Hoye
Institutional Advisors
Dec 5, 2009

Signs Of The Times

Corruptimus republica plurimae leges -Tacitus, Annals, 118-123 AD

Translated it reads as "The more corrupt a republic, the more laws." Lately, the politically ambitious have been pushing that only massive increases in taxation and regulation can cure the "health" of the planet.

"The planet hasn't had a PR agent. But now it will with the Alliance for Climate Protection" -Al Gore, AP, July 7, 2007

At an AGW love-in Robert F. Kennedy shouted himself hoarse with "This is treason. And we need to start treating [non-believers] as traitors!" Perhaps as calming measure primatologist, Jane Goodall, gave a greeting in chimpanzee language.

"The climate crisis is not a political issue, it is a moral and spiritual challenge to all of humanity." -Al Gore, National Review, October 12, 2007

It is political - particularly about the money. How about the case that climateactivist, James F. Hansen, has against carbon. He contributed to a paper published in the July 9th, 1971 edition of Science that outlined that particulate carbon emitted to the atmosphere by industry would contribute to climate cooling. This was picked up by the Washington Post: "Warns of Impending Ice Age Within 50 Years". Headlines are a good way to advance a career.

Over the last twenty years, he has been on the warming bandwagon with "Recent warming coincides with rapid growth of human-made greenhouse gases. The observed rapid warming gives urgency to discussions about how to slow emissions."

Then - at the Club of Rome 2009 Assembly - on October 26, his power point started with "Global Warming Time Bomb". His concerns included "Black Carbon". Same prejudices, but with vastly different effect - warming.

Yesterday's WSJ had a column "Climategate: Follow the Money" that included "Phil Jones is the Director of the CRU and the man at the heart of Climategate. According to one of the documents from his center, between 2000 and 2006 Mr. Jones was the recipient (or co-recipient) of some $19 Million worth of research grants."

The article did not mention who provided the $19 million funding, but one can't help but wonder whether they got their money's worth. If it was government grants, they got exactly what they paid for - propaganda. An illustrative cartoon is attached.

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COMMENTS FOR ENERGY AND METAL PRODUCERS

Energy Prices: Last week we noted that crude oil and natural gas prices were in a period of seasonal weakness that could run into early January.

To set the downtrend, oil stocks (XOI) needed to take out the 50-day moving average. The attempt bounced off on Monday and the index made it to 1094.

The ma is now at 1075 and represents the sign of a market slide.

As with the oils, gas stocks (XNG) set an important high in October and have taken out the 50-day moving average. The decline was to 492 and this week's recovery is to just under the ma, which is rolling over. The failure point is at 492 and support could be found at the 200-day ma at 440.

Both oil and gas stocks have been expected to decline into January.

Gold Sector: Last July, Ross did a study on gold and concluded that the nominal price could rally to late in the year. This has been working out, with the distinction that gold has also been moving up relative to most currencies. This makes it a real bull market.

Another measure has been our Gold/Commodities Index (G/C), which soared with the initial phase of the post-bubble contraction. The low was 143 in May 2007 and it turned up as credit markets turned down. The high at 519 occurred a couple of weeks before the crash ended in early March. Then, we considered that the decline was anticipating the big financial rebound.

The decline ran for six months, with a low of 310. The reversal to rising was set in September when it began, as in May, to anticipate credit trouble. It has moved to 400, which reinforces the possibility of a resumption of liquidity concerns.

While working out, this made us prematurely apprehensive of risks in most equity markets, including senior gold stocks. These risks have not gone away.

In the meantime, there have been some outstanding moves for smaller-cap producers and some exploration stocks. These have to be played individually.

In the summer, Ross also compared gold's potential to previous outstanding rallies in commodities, such as copper or wheat. He now thinks that the pending dollar rally would "consolidate" the action in the nominal price.

Real prices were expected to also rally through to late in the year and should credit markets deteriorate from here the rise could continue well into next year. Over 500 seems possible and this would represent a material increase in operating margins and improved valuations for gold deposits. Of importance is that higher real prices have prevailed since 2007 and is having an accumulating effect upon industry dynamics.

We have been expecting that 2010 would be an outstanding year for the gold sector - from big to small. Also the exploration sector could become the equivalent to small-cap high tech stocks in 1994.

Although it has been gentle, the uptrend in the gold/silver ratio is anticipating a set back to the general markets. Two weeks ago, we noted that if the ratio increased through 65 it would indicate that credit troubles were resuming.

Today it closed at 64.2. The last high was 64.4 on Friday with the Dubai default.

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• Reid Bryson has been considered as "the father of scientific climatology". He passed away in 2008, aged 88, and one of his observations was: "If you want to be an eminent scientist you have to have grad students and a lot of grants. You can't get grants unless you say, 'Oh, global warming, yes, yes, carbon dioxide.'"
• "Phil Jones is the Director of the CRU and the man at the heart of Climategate. According to one of the documents from his center, between 2000 and 2006 Mr. Jones was the recipient (or co-recipient) of some $19 Million worth of research grants." -Wall Street Journal, December 2, 2009
• In an equivalent period of intellectual hysteria during the rampant inflation in the early 1800s, Goethe dryly observed: "Most men only care for science so far as they get a living by it, but they will worship error when it affords them a subsistence."

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STOCK MARKETS

Affection for assets and risk had a brief, but sharp, scare with the Dubai World default. TED-Spread widening, decline in sub-prime mortgage bonds and the slight increase in the gold/silver ratio seem to have been anticipating a problem and with the news these indicators eased. However, the default is a test of all omnipotent and omniscient sovereign investment funds.

Dubai World hosts a tennis court 692 feet above the ground and indoor skiing in a desert. Mainly it is another calamity island in a growing Sea of Red.

After a brief shudder, the stock market continues its advance - along with other assets. All within a grinding credit contraction as indicated by the eight percentage-point increase in real long interest rates.

This, and the increase in gold's real price, have been two of the main features of a postbubble contraction. Another step in the process has been the rebound out of a mighty initial crash. This would have accomplished a 50 percent retracement on the Dow with considerable enthusiasm. Both by as late as September.

However, the retracement was accomplished at 10334 last week along with a high sentiment reading from Investors Intelligence. This one moves slower than the Daily Sentiment reading which set a high in late September. With the benefit of hindsight, that was sort of a momentum high.

How indicative is it? The main thing is that this measure of high enthusiasm coincides with the fifty-percent retrace.

The rally out of the March hole ranks with some of the best and technically, the rally has accomplished an outstanding swing in the weekly RSI from the panic low of 20 to this week's 69. Ross is preparing a ChartWorks that outlines that the concluding action will likely be a rolling top.

Once again, no matter about all the talk about earnings and the recovery, the key item is the decline in the dollar. This has been an unusually longer conclusion to the Sequential Buy pattern. As noted last week, an uptick in the DX to 75.5 would be the next step in reversing the trend.

On the recovery - we don't often talk about GDP, but the financial rebound was expected to be associated with a rebound in business. Our contention has been that the rebound would not lead a recovery, but would be timed with it.

As a sidebar, it seems that the global warming hysteria has reached a precarious pinnacle. Climategate, at last, is beginning to publicize what seems to be the greatest scandal in science since the evolution of methodical scientific enquiry in the late 1500s. As the tide goes out on the mania, it will reveal that huge amounts of government largesse have been wasted on politically exciting promotions. Even in a mania, such as the Tech-Bubble, the private sector can blow a lot on dreams - but it is voluntary.

The AGW mania has essentially been funded by governments, which is the coercive sector. This is a drive to expand state power and influence. Enron was involved with the start of carbon-trading and related derivatives. These have been continued by eager participants in Wall Street, which has been susceptible to manias since the day one. The truly regrettable part has been the corruption of science in a manner unseen since governments were the main supporters of alchemy.

Of course, the comparisons between government, macro-economics, central banking and alchemy are interesting and could be the subject for a separate article.

It is understood that these views may be concerning to some of our readers, but the historical perspective is valid and it is uncertain how quickly the political consensus will change in response to revelations of cooking the climate book. It will change - perhaps in the way markets change.

Two weeks ago, we noted that the Tokyo ETF (EWJ) had taken out the October low. This was a sign of pessimism as well as discounting the sharp rally in the yen. The plunge completed at 9.30 on Friday and the rebound has been straight up to 10.00 today. A natural bounce seems to have been amplified by the drop in the yen and news about a major "stimulus" package.

It is not certain how far this could go, but the "news" is in the market and the Tokyo stock market seems vulnerable to the developing threat to the global financial mania.

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INTEREST RATES

Our theme on the long bond has been that it has been rallying with other hot assets. Last week, we thought it would reach and stall out at the 123 resistance. The intraday high was 123.34 on Friday, with the daily RSI at 70, which is the highest in a year.

The bond has likely started an intermediate decline. Taking out support at 121 seems a natural, and the next level would be around 115. So far, the decline has been some showing some symmetry with the outstanding rally to 142 a year ago. In which case, around 105 is possible with timing uncertain.

That indicates a 5.40% yield, and it could be accomplished as other asset prices are flat to declining. Typical of a post-bubble credit contraction, real rates have increased from -1% with the boom to +7% recently. This may correct, depending upon CPI numbers over the next few months. But the trend could resume next year. Our target has been a twelvepercentage point increase.

Credit spreads at the short-end (TED-Spread) widened until the news of the Dubai disaster. The wide was 260 bps last week and the relief took it to 206 bps this week. The feature at the long-end is still no risk and from junk to Baa was essentially unchanged on the week. However, the High-Yield (CYE) has registered a weekly Upside Exhaustion, which would become vulnerable on the developing MACD "sell".

Considering that this is a proxy on the reckless action in the spread carry-trade the rollover will be interesting.

Particularly, as the last such signal registered on June 8, 2007. Our work, then, expected credit markets to reverse in May-June 2007 to a severe contraction. Now, spreads and prices have essentially made the rebound back to the halcyon days of 2007 when very few knew the true nature of a credit collapse.

The yield curve remains in a narrow trading range that does not lend itself to technical analysis. (It is difficult to analyze "pattern blandness.") A change in spreads could prompt a change to a flattening curve.

Currencies: The Dollar Index needs to rise above 75.5 to conclude the Sequential Buy pattern. It is now at 74.6. The euro stalled out last week as the yen soared up to a daily RSI of 77.3, which level has ended important rallies. The high was 116.21; today's close 113.4.

After bouncing to 96 on recent joy in assets the Canadian dollar will decline as assets turn south. Taking out 94.5 would be the next step and through 93 would take it down to 89. The currency markets seem eligible for a change equivalent but opposite to our call on February 27.

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Dec 3, 2009
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com

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