Monday, August 18: Week in Review

Last week’s performance in all stock markets was a bit of a let-down, following the week earlier advances – which proved fleeting. Commodity markets, meanwhile, continued to exhibit declining price trends…except that corn and soybeans bucked the downward weekly trend. This could augur well for other commodity prices next week.

Uncertainty about the economy dominated market events last week with inflation coming in at 5.6% for July. This is the highest rate of inflation since January 1991. It seems odd that this only seemed to benefit the corn and soybean sector in commodities. Most likely, precious metals continue to suffer from the seasonal depression in prices during the summer months.

Here’s a link to an informative piece in the Investment Executive about these economic aggregates.

Other highlights from last week --- silver flirted with its seasonal low of $12.08, dropping as low as $12.20 for the week before closing at $12.82 on Friday. It was off a whopping $2.52 / ounce for the week. This could be the final shakeout for the newer investors in physical assets.

Gold also got hammered – dropping to $777.70 / ounce before closing at $792.10 for the week, off almost $73, a decline of almost 10% for the week.

Down-trending prices are not confined to the commodities markets. With the exception of a paltry 2 point rise in the S&P500 index (to 1298) and a 39 point (1.6%) gain in the NASDAQ Composite index, the Dow Jones Average and all major worldwide stock market indexes were down last week.

The strengthening US dollar is the argument most prevalent in the media to explain why the wind has gone out of the sails in both the stock and commodity markets. This would tend to support the points-of-view that due to a slow down in all global economies, the dollar becomes too expensive and many foreigners cannot afford to purchase, or trade in US dollars…causing it to increase in value relative to other currencies. Here’s the link.    

We subscribe to a simpler explanation…in a word, China.  

First of all, recognize a fact that most insular news media organizations miss: The stock market in China continues to perform an “Incredible Shrinking Man” routine – falling 6% just last week to 2451 (on top of the week earlier 7% decline). China’s stock market is now a paralyzing 53% below its level at the end of 2007, when it stood at 5262 (see Research Lab at end of this report).

This is domestic turmoil (domestic to China) and domestic turmoil like this stifles decision-making. If the USA market were to fall 53% in less than 8 months, it is not hard to imagine the ensuing paralysis in making new investments. To place that into an American perspective, the decline in China’s stock market since the beginning of the year would be equivalent to the Dow Jones Average dropping from 13265, where it was on December 31, 2007 to 6200 today…!

Second, China is hosting the Olympics until August 22^nd. It is not hard to imagine all decisions being deferred until after the Olympics is concluded….especially if any of those international business decisions involve the Government of China, which most do, if it is a transaction with any material value. Since imports are a Government decision, and oil is an import, oil’s price decline on the world market in the past 4 weeks coincides perfectly with media efforts to pre-launch the Olympics.

The only focus of the Government of China at this moment in time is the Olympics. Media Economists and investment banking strategists can construct all the fancy models and algorithms to explain why last week was such a bust in commodities, when in fact, it is nothing more complicated than China hanging up what in America would be the equivalent of a “Gone Fishin” sign.

In China’s case, the sign hanging on the door knob at the Ministry of Finance office reads “Out to Lunch. Back on August 23^rd”

Need proof…??? The Chinese Government didn’t like the face of the young Chinese girl who was selected to sing the national anthem at the Olympics, so it substituted a prettier one. The girl shown singing her heart out on television is singing into a dead microphone; the better singing young girl’s voice is piped into the stadium. Any government involved with such minutiae is not paying attention to international capital markets, and it is certainly not paying attention to approving imports.

In conclusion, in this market environment, don’t get spooked by recent price declines in the precious metals and commodities markets. If you subscribe to the belief that China has been a major factor in these markets, which it has been, then recognize that at the moment, China isn’t paying attention. And when it does, it is not likely that gold and silver will remain at these price levels for very long.

As for a strengthening of the US dollar changing this outlook, we quote Elaine Garzarelli of Garzarelli Capital.  Ms. Garzarelli came into the spotlight in the fall of 1987, when she said, on a financial news show, that the stock market would soon drop 500 points in a day. Lo and behold, on October 19, 1987, the Dow Jones Average declined a record-setting 508 points, that day.

Unfortunately, Ms. Garzarelli hasn’t been right in any of her other forecasts since then, and we are now up to 21 years of observation. Here’s what she says about the US dollar: 

“Fundamentals are turning in favor of the US dollar." (August 8^th edition of Stock Market Update)

In closing, we can’t think of a stronger argument to offer that instead, the dollar will continue to deteriorate. With the Chinese getting back to business after the Olympics, and assesses (i) its US dollar-exposure, (ii) its trade deficit with the US, and (iii) recognizes that it owns one-third of the USA’s national debt, deterioration in the US dollar could easily accelerate…sending precious metals prices to record highs.                                                                                                                                                                                                                                                                                                                                    

RESEARCH LAB follows:

Comments

[User 244491:]

You seem to be very intelligent guy who never traded commodities (maybe some FX,1 mini-Silver?),I like your observations but all you said is known before you was born.
The happiest thing in your article that you will never believe may turn true next year,that Dow Jones really will fall to 6200 or lower,why not.
Does it have to do with China,with your mom selling her bleeding mutual fund to pay your tuition or Play Station,does it have to do with anything?
The reason that markets crash lies in one simple psychological aspect,nobody believes in it as 99.99% of investors want market always to go straight up and every investor will say that his stock is the best in the world but there are tens of thousands of stocks and millions of investors,how can be that each stock is the best in the world?
There are so many sectors and every investor in any sector believes this is the best stock in the best sector...
The final countdown is aproaching,those that didn't take money out of the table (how one can sell the best stock in the world, average is already down 30%) doesn't matter if reason is greed or stupidiness,are going to witness BEAR market in it's natural pure form,as bear knows no fear,he spreads blood and destruction whenever he goes whatever he touches.
So play your Playstations in a meantime bear will play with you his game.

2008 Aug 18 05:41 AM