Notes From the Rabbit Hole
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Pivotal Events
By Bob Hoye February 18, 2010
The
following is part of Pivotal
Events that was SIGNS
OF THE TIMES: Last Year: "White
House staff have taken direction and control of programmatic areas
that are the statutory responsibility of Senate-confirmed
officials."
Senator Robert Byrd, Politico, February 25, 2009 "Bankers
to Obama: Stop trashing us." "Mr.
President, of over 8000 banks in this country, very few ever made a
sub-prime loan, and they did not engage in the highly-leveraged
activities that brought down Wall Street."
Politico, February 27, 2009 *
* *
* * This
Year: "Picking
the Pearl of Stocks" "Six
names to consider as we enter a stock picker's market."
Financial Post, January 20, 2010 "Survey:
All 54 Economists Expect GDP Growth Through Every Quarter in
2010."
Wall Street Journal, January 30, 2010 "Climate-change
legislation buried under record snowfall in capital." "Sen.
Bingaman (Dem. N.M.) said that blizzards have made it difficult to
argue that global warming is an imminent danger." "Where's
Al Gore when we need him?"
Senator Mitch McConnell, The Hill, February 10, 2010 *
* *
* *
STOCK
MARKETS Last
week we noted that crude oil and copper had been trashed enough such
that it was time to look for a relief rally. This would lift most
stock markets as well. So
far the low on the S&P has been 1047 on Monday and the market is
attempting to stabilize as doom about European sovereign debt
commands the front pages. This phase of the sovereign crisis is in
the news and it is appropriate to review market conditions. In
December we considered that the market was setting up for a rounded
top from where an intermediate decline would follow. Then when the
gold/silver ratio (GSR) rose strongly through 65 and copper got hit
we concluded that an important top had been accomplished. A more
severe decline could follow. This
would be accompanied by the resumption of credit problems, with
widening credit spreads, weakening commodities and a firming dollar. But,
as the opening paragraph notes opinion makers have suffered a sudden
discovery of problems. The stock market and copper became oversold
as the DX and the GSR became overbought. Relief
is happening. However,
the main problem too much debt against precarious collateral and
a precarious economy won't go away soon. What's more, mounting
demands of an extremely ambitious governing class are finally being
met by mounting taxpayer common sense and resistance. This makes for
a political storm that may not be constructive to most markets. Stock
markets have suffered an important hit and could recover for a few
weeks. It is prudent to keep in mind that severe slumps can start
within oversold conditions. INTEREST
RATES The
long bond has been expected to trade between 118.5 to 119.5 for a
while. This generally
worked with one slump to 117.3 on February 3 and today it slipped to
117. The first was in
response to crude ending its plunge and todays to a recovery in
crude as well as in base metal prices. The
main thing is that the trading range is broken and the bond could
decline to support at 115. On
the other hand, some of the price decline could be due to
diminishing liquidity. High-grade and junk also declined, but the
lesser fool kept buying the investment grade high-yield. Albeit at a
lower price than when the greater fool was buying. Corporate
spreads continued to widen. This started the week of January 12,
with the Baa at 38 bps, high-yield at 382 bps and junk at 723 bps.
These are now at 50 bps, 469 bps and 844 bps, with yields increasing
by 122 bps for junk, for example. This
represents not just increasing cost of borrowing, but it is
beginning to put late players to the carry trade offside. Mother
Nature has been changing the game and Mister Margin is sharpening
his axe. Clearly
the corporate market has taken a turn for the worse, and prices are
close to breaking down. However, there is the possibility that crude
and base metals could rebound for some weeks. In which case
corporate bonds could also recover. On
the bigger picture, late in the year it looked as if the corporate
bond market, which has been fabulous since March could be
accomplished, a "turn-of-the-decade" top.
Previous examples include gold and silver in January 1980 and
the Nikkei on the last trading day of 1989. The latter was
celebrated in the January 1990 Outlook by Sanyo Securities: "Japanese
firms' massive equity financing will push up stock prices. Instead
of causing oversupply they will invest the newly raised funds in the
stock market. The Nikkei target is 46,000 at the end of the
year." As
recalled, that famous bubble was fueled by essentially zero-cost
funds raised in Europe through debt plus warrant issues. Zaitech,
otherwise known as financial engineering, at its best. The
term Zaitech may not be as frequently used as twenty years ago, but
today's financial engineering is again stretched to the limit. Currencies:
The Dollar Index reached our initial target of 80 a week ago,
generating the usual astonishment when something happens contrary to
conventional wisdom. More specifically, the high was 80.5 a week
ago, the low was 79.8 and today the test seems to be failing. A
correction into March is possible which could assist a relief rally
in formerly hot games. The
Canadian dollar: Last
week we thought that stability could be found at 93, which was the
support level. The low close was 93.1 last Thursday and the pop to
95 has been a bit of a rush. If this runs for a few weeks without
the test it could again become vulnerable. *
* *
* * That credit market convulsions begin in lesser
countries and eventually afflict the financial capital has been
around for a long time. If
some lose their whole fortunes, they will drag many more down with
them
believe me that the whole system of credit and finance
which is carried on here at Rome in the Forum, is inextricably bound
up with the revenues of the Asiatic province.
If those revenues are destroyed, our whole system of credit
will come down with a crash.
Cicero, 66 B.C. (Translation
by W.W. Fowler, 1909)
bobhoye@institutionaladvisors.com
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