Today, (Cara 100) Lehman Bros (LEH) announced an intended buy-back of 100 million shares ( about $8 billion). To me this is just further confirmation we are in the Distribution Zone for equities. With $8 billion in hand, I’d be buying at the bottom and not the top – unless of course I was looking to off my stock, i.e., cash my chips and await the broad market’s next entry point, i.e., Accumulation Zone.
The fact is that today’s paper is not worth nearly as much as gold. Fiat money is everywhere, available to anybody. Gold on the other hand is being produced (or recovered from prior supplies) at a pace that is far less than demand, which is constant. Central bank selling can no longer meet the supply-demand gap.
How I see the final cyclical Bullish move in equity markets is that assets (physicals like gold, base metals, oil, agricultural) will zoom, and then market rates will lift, causing bonds to fall even more. That will cause softness in the interest-rate sensitive financial groups, and then the consumer econ-sensitive groups. Finally, when the commodity-sensitive oils and metals roll over and (lastly) golds, precious metals and uranium pull back from spike tops, the 2002-2006 equity market cycle will go Bearish.
Yes, I still call it a 2006 long-cycle termination because the pump job starting in July was central bank inspired (not free market driven) and the momentum rolled over then. Into recent strength, I believe that the gnomes have been sellers, not buyers. General Electric (GE) is my bell cow.
Reaching High with Gold
Depending on how high gold prices go in this cycle, we could be at a long-term point of cycle like 1980, which is the point of the last major peak and subsequent blow-off of precious metal prices.
If gold reaches say $750 in the next couple of months before selling off, then I believe that gold (and other precious metals) still are in a secular Bull, but if gold zooms to the $800, $900, $1,000 level (or higher – for longer than say five or six months), then I believe we will have seen a key terminal point for commodities in 2007 rather than a period of undulation through the 2008 Beijing Olympic Games.
If the latter happens, I believe you will see a flood of forward production sales, i.e., hedging, from the gold producers. And, trust me, in those circumstances, I would be all for that if I was running a major gold producer.
I believe that commodity sellers will increasingly not want to sell for $USD (or maybe even Euros or Yen etc.). Like Dennis Gartman was saying on one of the TV channels this morning, the producers will start demanding payment in gold.
Demand for Debt Service
What happens when commodity prices zoom? Interest rates zoom.
Should interest rates pick up from here, it will not take much (as I have been saying) to put the so-called “smoking” economy into recession. Higher interest rates have a way of bringing debt holders to their knees. Over the years, it’s same old, same old. People who take on more debt have the need to service that debt, and when asset prices stop rising and bankers start calling loans, the jig is up.
Credit derivatives, of course, make everybody in the financing business seem secure. Wait until this cycle starts to unwind. We’ll see how many lenders stay in business. Governments that are presently allowing lending rules to change, with respect to permitting longer periods of non-performing loans, can only be carried so far. At some point the banks will cut bait, and full debt service will be demanded.
Pension debt is another issue today. The longer social payment plans go under-funded, the closer we get to a financial Armageddon. Yesterday, when the Fed Head, the President and the Treasury Secretary and their legion of shills were out pumping up financial asset prices, I didn’t hear a single serious comment on the pension problem… Or the healthcare funding problem… Or the rising commodity price problem…
But, with a single pump of the Treasury bond market, I heard lots of hype about falling bond yields. Ha ha ha.
This morning’s ISM Manufacturing Index gives rise to more questions about the Q406 +3.5% GDP growth number. So too did the housing data and the auto sales data.
The truth is that the credit balloon can only be blown up so far before it pops. I expect that popping sound sometime in the next two to six months. Meanwhile, I hope you focus on the Relative Strength Index numbers (i.e., those over 70 on the Monthly-Weekly-Daily) - particularly those companies that carry a lot of debt or bonds as asset holdings) - and that you can find the resolve to sell into strength, or at least switch into stocks of high quality companies that have M-W-D RSI values below 30. The latter will likely be the first to move higher in the next Bull market.