Weekend January 21, 2012
Overview
I think it will all come together this week. Bonds look to be breaking down as thCommitment of Trader report shows commericals short bonds and long the Euro. That should finally collapse TLT and the Dollar. While headlines have shownn an increase in confidence we are nowhere near the
Why You Must own Stocks Now
headline that typically signals overt bullishness. We hope that you have bought in at our suggested lows August 8 and Ocdt 4 as well as added gold positions in GDXJ and CEF at the end of December.
Now let's get to it.
Bonds
TLT looks like the head and shoulders formation is finally breaking down. MACD has trailed off, and TLT appears to be breaking the suggested neckline. We shortened the time to three months to better illustrate out H and S top but TLT easily has the potential to fall to 104 or lower here.
Currencies
The Dollar in green and the Euro in red black have swapped places almost exactly from their early May extremes. Another reversal should be at hand .It appears to already be underway with the improved bond auctions in Europe. Now th Euro should rally and the Dollar fall. This should, along with the collapse in bonds above, result in specatacular rallies in stocks, oil and gold , as well as improved sentiment and headlines. The latter in particular has been lacking in the 10 point rise in the SPX from 1200 to 1300.
Sootheby's BID
BiID exhibits a very high correlation to the overall stock market. Bidding at an auction is an open expression of economic confidence. And so BID has broken out of its downtrend. Is the previous high of 47 in the cards?
VIX
The VIX Volatilitiy Index is the red black bars, the SPX is the solid green line. Clearly they are inveresely correlated. The high for the SPX was about 1360 in late April when the VIX closed at 14.62 April 28. Friday's big down day in the VIX took it to 18.28. Bottoming in VIX is a process. While the SPX lurched between 1280 and 1360, the VIX was moving sideways all the time. VIX is an indicator of complacency. Once complacency takes hold, investors stop paying a lot of attention, hence the surprise when VIX started back up in June, then took out those highs in July. AT 1315, the SPX is a mere 445 points from ts hihg for the year. SPX hit 1360.48 April 28 and then smidged higer to 1361.22 May 2, and it was over.
Since this whole move is a rebound, let's not stay too long at this party. It will be better to exit with profits and confidence in tact, readying for the next down move than to try to extract every dime from the move.
Energy
The high value of the Dollar has kept energy and energy services from breaking out though they have slowly been moving up. A drop in the Dollar Index from 81 to 76, which is reasonable, should jump oil back near its highs earlier this year at 115. 102.5 Recall in the previous paragraph we note that SPX peaked May 2, remember, it's All One Market.
It's worth posting this chart just to stare at the huge reversal that first week of May! Again, let's not over stay this party! Here RSI at top is over 50 and MACD is moving up, WTIC is above both MAs. It looks to exhibit a reverse head and shoulders pattern.
To be clear, yes i expect another top in oil and then a dramatic reversal like what hapened May, 2011. but nest time that will be the kick off to an extended down move, not just a six month correction.
Gold
Gold moves in a different time frame than stocks. Stocks peaked in early May, gold in late August. Stocks are recovering faster but...gold looks to have successfully re tested its 50 bar MA. The weekly MACD at bottom looks to be recovering nicely.
A Potential Scenario
GDXJ dropped from 40 to 25, 37%
Gold dropped from 1900 to 1550, 18%, half the drop of GDXJ, hence we recommended GDXJ. It too is moving up nicely. We have positions in GDXJ and Central Fund CEF. Now our scenario is that
the US Dollar is topping now and should drop from 80 to say 76.
that should move gold up, priced in dollar terms, along with oil and energy service.
The Euro looks to be recovering now, see the second chart. It will top as the Dollar bottoms.
then a few weeks of months from now, the Dollar makes a higher low, the problems in Europe emerge again and stocks, the Euro, and oil peak.
But what about gold at that point? The answer is that no one knows. Will Gold and the Dollar become 'safe harbors' for trhe world as other currencies, like the overheated Brazilian Real fall? That seems to be a reasonable guess. Taking out 1900 might, as james Dines has suggested, begin the next big leg up in gold over $2,000. If that is the case our positions here in CEF and GDXJ will be fine long term holds.
BRIC
Here is profile of the cost of living in Brazil, now one of the highest cost countries in the world. Note a combo meal at MCD is $9.17, but wages in Brazil are far lower than in the US. This currencyis wildly inflated. This reflects the massive specualtion still rampant in developing countries which are already broadcasting ther slowdowns. China and Bombay are particularly moribund, here is BRIC.
Here is anothe rarticle on the Outrageous Cost of Living in Brazil.
The party has ended in India and China.
The main panel is India, the top is China; both are under their 50 week MAs.
Remember this represents a substantial plurality of the world population in just these two countries. Then factor in the expectations for hte boom that will never end in BRIC and the fact that the countries surrounding China and India, like Viet Nam, Phillipines, are benefitting from high costs in India and China with work moving to those countries. When the music finally stops, and it is slowing already it won''t be pretty.
Natural Gas
Natural Gas is now trading at 2.4% of the cost of crude oil. This is a lopsided historic low and we continue to monitor for a chance to start accumulating as everyone else has given up. Again thanks to an alert TMP reader for mentioning HGT and SJT. SJT a fund of nat gas producing properties dropped over 12% this week.That of course is the kind of throw the assets out the window mentality that grabs markets at panic bottoms.
Let me explain a how an REIT or a Royalty Trust funcitons. These invest in income producing real estate or in the latter case income producing oil or gas fields. An REIT pays out 90% of its net income to shareholders thereby avoiding income tax on itself. The problem arises when the income falls enough to fail to cover fixed costs. Then there is not income to pay out. This happened to many REITs in 1973-74. This occurred again in the 2008 meltdown. Mesabit Trust MSB is a similar arrangement but in the iron ore business. While MSB has been around since about 1918, the price of iron ore fell so dramatically in 2008 that the dividend had to be suspended. MSB bottomed at $5 and that was a great buy.
When dividends soar to the levels we are seing with HGT and SJT, 8-10%, while T bonds yield 2-3%, this is a warning that the dividend may be in danger. Acutally suspension of the dividend and a final swoon in price would ease the decision. As t is one wonders if either of these will first re visit their 2008 lows.
Research in progress.....
Socionomics
Karl Rove had Romney winning three in a row in his last WSJ column, funny thing it did not work out thaty way, he won only New Hampshire. Recall the Rudi and Hillary were leading in their campaigns at one point in 2008. As Romney reported several times during his 2008 campaign, well, another silver as he put it to describe coming in second. In South Carolina he outspent Gingrich 2 to 1 and lost.
I suspect that nominating Romney and losing the election will truly the the end of the Republican Party as it has been At the momenth the conventional wisdom is that nominating Gingrich will be the end as he will surely lose the White House and the House. This underestimates the anger of conservatives who feel over looked by the elite NY Republicans and the media. And that anger and rejection was clear in the 40-26 defeat that Gingrich scored over Romney last night. To the conservatives, Romney is the reincarnation of Ford, Bush I, Dole, Bush II, and McCain. Perhaps conservatives is not the right way to put it, but the group that wants to see someone make a real fight of it does not see that fight in Romney.
Obama's numbers are coming back with the market and will continue to improve until the market tops. The ensuing decline we expect in the stock market will make this a real race again.
Reagan was of course also rejected multiple times by the party elite. It took Ford's loss to Carter to finally give Reagan his day. Gingrich is much more like Nixon, making a comeback from a loss. After losing the Presidential race, Nixon then lost a race for Governor of CA and was completley written off, as Gingrich has been. Whether Gingrich can truly re-make himself in a way Nixon never really did (Nixon was unable to overcome his deep seated suspcions, and that is what brought him down) remains to be seen.
Dennislelam@gmail.com
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