Pivotal Events

By Bob Hoye

Institutional Advisors

June 16, 2009

The following is part of Pivotal Events that was published for our subscribers June 11, 2009.

Signs Of The Times:

Last Year:

"Investing in funds of funds should, in theory, smooth out the volatility of financial markets and generate a steady stream of returns. But, in reality, a rather different picture has emerged in recent months."

– Financial Times, May 30, 2008

This reminded of the buzz in the late 1960s about the massive institutional shift from bonds to stocks. Professional management would reduce the swings in the stock market. What's more, the tout was that there would be a "shortage" of equities. Adjusted for inflation, stocks plunged some 68% to 1982, when some managers were discussing dropping equities to only 25%. It seems that many professionals succumb to fear and greed.

"The action in commodities is turning to lentils and chickpeas."

– Business News Network, June 24, 2008

Last year ago the world was highly excited about commodities and as the play matured the action shifted to "exotics" such as chickpeas. Our index of grains hit its high of 2948 on June 26, and then declined 53% to 1374 in November. The CRB set its high at 473 on July 2 and the explanation was that China was buying and that the dollar would decline for the foreseeable future.

The key low for the DX was 71.7 on July 15. That was the test of the major low at 70.7 that completed out "buy" pattern. And as the saying goes "The rest is history" and it seems to be repeating with the same characters, stories and with building momentum. But at much lower prices, which is the hallmark of a rally within a bear market.

"Avoid the dollar at all costs."

– Jim Rogers. AP News, June 30, 2008

 The DX was at 72, the high in the crash was 89.

*   *   *   *   *

This Year:

"Dollar will crash."

– Jim Rogers, CNBC, June 6, 2009

"We have a global glut of savings, which is why there is, in fact, no upward pressure on interest rates."

– Paul Krugman, May 10, 2009

"Americans are saving more of their paychecks than at any time since February, 1995.  At 5.7% in April, up from 4.5% in March."

– Wall Street Journal, June 3, 2009

"Spanish workers are finding that the cure for a decade-long borrowing binge just makes things worse. As Spain sinks deeper into recession and the jobless rate heads for 20%, the highest in Europe, employees are telling workers to accept wage cuts if they want to stay competitive. "

– Bloomberg, June 3, 2009

*   *   *   *   *

STOCK MARKETS

In the emotional depths of early March it was difficult to imagine having a successful "silly season" that often brews up in the spring. However, there are the examples we have been using from the crash-rebound into the spring of 1930, and 1874. Equal measures of complacency and euphoria are back again, and reasonably close to schedule.

Of some importance is that some items are offering warning signs. This has been noted in some recent ChartWorks. On June 1, it was that the Canadian Dollar was in a topping pattern, suggesting a change in currencies. The C$ has declined a little.

Next, on June 3 it was that crude oil had registered an Upside Exhaustion, which indicated a concluding high within a few weeks (that was also the case in early June last year).

On June 5 it was that gold had become eligible for a correction, and on June 7 it was that the DX was accomplishing a successful test of the December low. The Dollar Index is stabilizing.

Last week's edition noted that the rally in the orthodox world started in early March when we called for an important change in currencies. The feature would be a declining dollar that would likely slump to around May.

Another warning is that grains have soared enough to register an Upside Exhaustion on Goldman's Index (GYX). For agricultural commodities and stocks the best is virtually in. With the Upside Exhaustion on copper, base metal miners have been vulnerable.

Our proprietary Bank Trading Guide has become volatile which often leads the outright "sell" signal. This has sharply increased from 149 in the middle of May to 162 on Thursday, where it became somewhat overbought. We advised reducing exposure in US banks a few weeks ago and with the signal we will advise aggressive selling.

These cover the key items associated with the revival of animated spirits, and it is worth adding that Lowry's work indicates that the rally is not the start of a new bull market. This in-depth work confirms our post-bubble model that expected a strong rally, within a bear market.

A break in speculative items and firming dollar will have profound implications. Beyond nice timing to the conclusion of another "silly season", declining prices will begin to deny the Fed's ambition to depreciate the dollar as a chronic policy tool. This is the old "pushing on string" problem. Globally, there could be a surplus of such strings, as well as a surplus of frustrated central bankers.

Pity.

INTEREST RATES

Monday's memo "Bad News in Interest Rates" reviewed the sharp rise in shorter-term rates. Focusing on the two-year, which was at .96% on Thursday, the jump to 1.31% on Friday was impressive, with follow through on Monday to 1.44%.

This eased on Monday to 1.30%, and today it's at 1.32%. Too many participants had pushed the steepening trend to an unstable condition, and some news on unemployment touched off panic covering. In this case, it was long the two-year and short the long end.

There were few traders to take them off and it was another discovery of illiquidity, when there should be liquidity. Some think it is adjusting for a stronger economy. But, as the chart showed, short rates seem to be following their path in May 1931, when at twenty months from the stock market high the decline ended and rates for most classes and maturities began a serious increase. The initial part of the increase seemed to anticipate that discovery of global banking problems.

It is appropriate to be aware of the possible turn to distress.

Base Metal Prices: We got long in the crash, which was also the seasonal low for metals and mining stocks.

We like the seasonals in this sector, and looked for a good high somewhere around May. Mining stocks (SPTMN) have been an outstanding performer in rallying from 178 in November to 609 in early May, when we thought the best of the play was accomplished. The 'overboughts" were rather good. The gain of 242% was very good, considering that the set back in February was modest.

The SPTMN sold off to 493 when it joined the "silly season" crowd in soaring to 667 today. Within this, Teck has taken flight from the death-like realization that buying all that coal with all the debt was one of the stupidest decisions in Canadian mining history. From a high of 53 the low was 3.35 in early March and now it’s at 21, and the move is becoming rather compulsive. Another week of this and one could say that there is life in outer space.

Base metals continue to rise as our index has rallied from 706 in early December to 1166 this week. Copper, at 2.25, registered the best Upside Exhaustion since the cyclical high two years ago. This would likely correct and then test the high. The test continues to 2.36 and this is still within the time window when seasonal highs have been set.

Early in this edition we noted that a number of items are at momentum levels usually found at turning points. This includes grains at an Upside Exhaustion and the Canadian Dollar in a pattern that concludes a rally.

This mania in commodities is close to ending.

bobhoye@institutionaladvisors.com

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