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Gold Advances On Demand While Gold And Silver Mining Stocks Fall On Rising Interest Rates

Financial Market Report for December 14, 2010

I … The investment demand for Gold, GLD, arose again today, as bond vigilantes called the called the Interest Rate on the 30 Year US Government Bond, $TYX, and the Interest Rate on the US Ten Year Note, $TNX, higher, as the US Federal Reserve’s Quantitative Easing constitutes monetization of debt and President Obama is calling for greater US Government deficits.

Gold, $GOLD, rose to 1,396.

Tyler Durden notes that it was a blood bath in the bond market today as investors continued to derisk from US Government bonds, as is seen in that the 30 10 US Yield Curve, $TYX:$TNX, flattened, as investors deleveraged out of their bond positions with the longer maturity bonds sell off hardest, that is the Zeroes, ZROZ, and the 30 Year US Government Bond, EDV, sold off more than the 10 to 20 Year US Government Bonds, TLT; the former fell 2.8%; and the latter 1.5%.

Moneyness is the tradeability and value of a currency or an investment. Anticipation of QE2 provided moneyness to bonds. Announcement of QE2 destroyed the moneyness of bonds as the 30  10 US  Sovereign Debt Yield Curve flattened.  A flattening yield curve destroyed the moneyness of bonds as Ben Bernanke’s QE2 monetized debt and as President Obama’s projected deficit spending develops the risk of a failed US Treasury auction.   

California Municipal Bonds, CMF, and Municipal Bonds, MUB, fell strongly lower.Today was an unwinding of the Quantitative Easing trade. When Ben Bernanke announced QE 2 on November 4, 2010, the world passed from the age of leveraging and into the age of deleveraging.

California Municipal Bonds, CMF

Municipal Bonds, MUB,

Mike Mish Shedlock relates that state and municipal default risk has been rising for quite some time and relates here are several examples of rising default risk:

All it takes is one brave municipality to lead the way and others will follow. When that happens, the baby will likely be thrown out with then bathwater. By the way, bankruptcies are a very deflationary event.

Mortgage backed bonds, MBB, fell lower.

Longer duration corporate bonds, BLV, fell lower.

And to think that the tax free bonds, the corporate bonds and the mortgage backed bond funds like GSUAX were the investment bedrock of the wealthy; these have been rock solid investments to preserve wealth; and now they are “hasta la vista baby” -- gone shattered forever. I encourage one to think about the dire consequences to municipal financing that this municipal debt breakdown will inflict.

World Government Bonds, BWX, fell lower on sovereign debt default risk.

Total Bond, BND, fell lower.

Aaron Task in interview with John Mauldin, president of Millennium Wave Securities, relates that more than a few observers have noted that yields have risen since November 3, 2010, when Ben Bernanke embarked on the voyage known as QE2. But it's not just U.S. yields that have risen, its sovereign debt interest rates have been going up globally, as Mr Task question: "U.K. bond [yields] are moving up as well [and] look at what is happening to German bonds, supposedly the safest in Europe. They are up about as much as their counterparts," he writes in a recent issue of his e-newsletter, Thoughts from the Frontline. "And then we look at Japan and we see the same phenomenon. Japanese real rates going up? Really? What is up with that?"

What's up, Mauldin relates is that global investors, most notably emerging market central banks , "are asking themselves about the wisdom of holding sovereign debt in currencies that are either in trouble (the euro) or have central banks that are printing money (the U.S., U.K., and Japan)," he writes. "Couple that with the U.S. having just done a tax compromise that is one huge stimulus bill, on top of extending the tax cuts, and it is enough to make investors consider the wisdom of holding longer-term debt at low rates."

Mr. Mauldin and Mr. Task discuss the implications of these trends in related video, as well as his fear of a banking crisis in Europe that could mirror the dark days of 2008.

The chart of World Government bonds, BWX, shows that bond vigilantes have been calling sovereign debt interest rates higher, which has called major currencies, DBV, and emerging market currencies, CEW, lower, which has the result of calling the US Dollar, $USD, higher.

II … World Stocks, ACWI, failed to rise to a new high, unable to push past the previous November 4, 2010 high of 46.60.

The S&P, SPY, rose to a new high manifesting a questioning doji at 124.67

The Nasdaq 100, QTEC, has fallen below its December 9, 2010 high

The emerging market shares, EEM, has fallen below its December 3, 2010.

European Shares, VGK, fell below its December 13, 2010 high.

Small Cap Pure Value, RZV, rose 0.6% higher on the rising currencies, but closed below its December 10, 2010 high.

Energy Service, OIH, fell lower on a higher oil, USO, price.

International Utilities, IPU, fell lower as it had a strong day yesterday, while Utility shares, XLU, rose. Utilities, XLU, entered into an Elliott Wave 3 Down on October 19, 2010 at a price of 31.96; and entered into an Elliott Wave 3 of 3 down on November 4, 2010 when the Euro, FXE, topped out.

Small Cap Health Care, XLVS, rose 1.3%

US Health Care provider, IHF, rose 1.0%

Biotechnology, PBE, rose 1.1%

Telecom Holder, TTH, rose, 1.7% as Verizon, VZ, rose 1.7%

Japan Small Caps, JSC, rose 1.0%

The currency yield curve, that is the ratio of small cap pure value shares, RZV, relative to small cap pure growth shares, RZG, RZV:RZG is what gives stocks their moneyness, just as the yield curve gives bonds their moneyness. Today it rose to 0.803, going back to a value going back to October 27, 2010; moneyness in currencies was taken back to before November 4, 2010 when the currency traders sold the currencies on risk aversion coming from higher interest rates. When moneyness washes out of currencies, the toll taken on stocks will be truly stunning.

III … The currency traders called the major currencies, DBV, and the emerging market currencies, CEW, higher while calling the Euro, FXE, the New Zealand, BNZ, the Mexico Peso, FXM, and the UK British Pound, FXB, lower.

The Euro, FXE, fell lower, to close at 133.31, suggesting that it has been stopped out on the European sovereign debt and bank debt imbroglio.

IV … While gold, GLD, rose, Gold Mining stocks, GDX, and Silver Mining stocks, SIL, were taken lower by the 30 Year US Government Bonds, EDV, falling 2.8%

Gold, GLD, rose; however Gold mining stocks, GDX, fell

Silver mining shares, SIL, fell and exploratory silver mining shares, SSRI, fell

The 30 Year US Government Bonds, EDV, have fallen massively lower for three weeks now.

As the Euro, FXE, continues to fall lower, on sovereign crisis concerns, the gold mining stocks are likely to continue to disconnect from the price of gold as is seen in the charts of GLD:GDX.

The HUI Precious Metals, ^HUI, generally turn lower with the 30 Year US Government bonds, EDV, as is seen in the chart of $HUI:$USB.    

IV …  Commodities, DBC, fell lower.

Base metals, DBB, Timber, CUT, and Natural Gas, UNG, fell lower. Natural gas hit resistance on December 9, 2010 and has now turned decisively lower.  

V … Real Estate,. IYR, fell lower

Industrial REITS, FIO, Residential REITS, REZ, …. In particular, AIV, VNO, STWD, SPG

VI …. Notable Fallers over the last two days include

Leisure and Entertainment, PEJ,
Retail, XRT,
Semiconductors, XSD,
Nasdaq Intenet, PNQI,
Small Cap Consumer Discretionary, XLYS,
Networking, PXQ,
Nasdaq Clean Energy, QCLN,
Small Cap Information Technology, XLKS,

Transportation: ATSG,  GMT,  UHAL,  AER,   URI,   WAB

Restaurant: PNRA,  CAKE,  DIN,   CMG, MIDD, RUTH

Joe Wiesenthal provides the chart of the V Recovery in RSAFS; it was that stimulus that gave growth to investment value in PNRA, CAKE, DIN, CMG, MIDD, and RUTH

Consumer Discretionary:  TZOO , PCLN , NFLX ,  SFLY   RCII, SNDK,

Retail,  ZUMZ,

Hard Drives: QTM,  STX, , WDC,

Metal Manufacturing: CBI, WXCO,

Small Caps: SAA this ETF will be the short selling investment rewarder of a lifetime,  but I will keep my gold bullion, thanks very much.

V … News of the day

A … Open Europe in December 14, 2010 Press Summary relates Eurobonds Proposal divides German Government … And the ECB is considering requesting an increase in its capital from eurozone member states
Ahead of this week's European Council summit, Handelsblatt reports that Germany is not satisfied with the treaty change currently proposed and will aim for a stricter clause. A government spokesperson is quoted saying: "From our perspective, a formulation which makes the connection between financial aid and the requirements for budget consolidation much clearer is desirable." Germany will also aim to state in the changes that the aid can only be used as "ultima ratio" in order "to prevent small problems in a single country activating the mechanism."

Meanwhile, the Eurobonds proposal has revealed open divisions within the German government, as Chancellor Angela Merkel appears to have contradicted comments made by Finance Minister Wolfgang Schäuble suggesting that Germany could accept Eurobonds and push for "a political union" in Europe if certain strict conditions were met. Merkel's spokesman Steffen Seibert is quoted in the Irish Times saying: "The chancellor is convinced that what's necessary now is to act to defend a stable euro. Thoughts about what will be or won't be in 20 years are not on the agenda."

Meanwhile, Reuters reports that the ECB is considering requesting an increase in its capital from eurozone member states. The article quotes a source saying, "The issue is that the ECB is worried about potential losses from its bond buying". The ECB declined to comment. El País reports that Spanish banks are exposed by one third of Portuguese banks - making a total of €75bn.

B … Trichet Calls On EMU Govts to Step Up Consolidation Efforts. Market News International via ForexLive reports from Frankfurt: European Central Bank President Jean-Claude Trichet on Monday called on governments throughout the Eurozone to intensify “credible” consolidation efforts and stressed the importance of “appropriately” restructuring the Eurozone’s banking sector.

“By repairing their own balance sheets, implementing sound and effective risk management strategies, the banks in the euro area will increase their resilience to domestic and external shocks, which would
allow them to make their contribution to sustainable growth and financial stability,” Trichet said in the text of a speech delivered here.

The ECB chief also stressed that strengthened fiscal surveillance, “for all its critical importance”, was not sufficient and that “reinforced macroeconomic surveillance” was also needed. Regarding fiscal policies, Trichet stressed that it was no longer possible for authorities to delay the actions necessary to rebuild
public confidence and called on governments to “pursue credible multi-year consolidation plans and fully implement the planned consolidation measures.”

“In this context, let me express the appreciation of the Governing Council for the economic and financial adjustment programme which was recently agreed by the Irish government with the European Commission, in liaison with the ECB and the International Monetary Fund,” Trichet continued.

“I am sure the programme is suited to bring about a sustainable stabilization of the Irish economy and soothe the tensions in financial markets that are associated with the Irish fiscal problems and the
reorganization of the banking sector,” he added. Trichet, however, reiterated his criticism that current Eurozone reform proposals do not go far enough.

“Let me state clearly – also on behalf of the Governing Council of the ECB – that we are not completely satisfied of the proposals put forward by the Commission and the European Council Task Force,” he said.
“These proposals in our view do not yet represent the quantum leap in economic governance that is needed to be fully commensurate with the monetary union we have created.”

C... Joe Bfrennan of Bloomberg reports Ireland seeks to force junior bank debt holders to share losses.
Ireland, EIRL, closed unchanged on the day.

D … Euro Intelligence reports Moody’s Casts Doubt On The Solvency Of The Spanish Financial Sector:
The news is still getting worse. Moody’s yesterday put the losses of the Spanish banking sector at €177bn, according to El Pais, including the Frob, the bank restructuring fund. Outside the Frob, there are still significant losses in the system, which is deteriorating because of the poor state of the housing market and the economy in general. A recession would drive up losses to €300bn, with new capital requirements of €100bn. UBS also published a negative report on the Spanish banking system, which added to the gloom. El Pais reported that Elena Salgado and Miguel Ferdinand Ordonez were both out yesterday trying to reassure investors about the soundness of the Spanish financial system.

Chart of Banco Santander, STD, closed even on the day.

E. Tyler Durden provides the charts that the specter of European sovereign debt default looms larger by the day
European Race To The Insolvency Bottom Round Two: Contestants - Spain, Portugal And Belgium

F. Irvine Renter covers the Pat Regnier Money Magazine article Welcome to Zombieland: Ladera Ranch, California  takes a detailed look at the housing debacle and the squatting phenomenon. Irvine Renter states: “The shadow inventory problem will be much harder to resolve in prime areas where prices are far too high because there are not enough buyers able to pay the inflated prices to absorb the inventory. Prices will have to come down on mid to high priced homes or the banks are going to own them for a very long time.”

And he adds: “Ten percent of Ladera Ranch loan owners are not making their payments. That is a lot of distressed mortgages. If that many houses have to go through the foreclosure meat grinder, prices will get pushed much lower.” I say yes but, will the banks just hold the property as a REO.

Keywords:  QE 2, yield curve, shadow inventory, European sovereign debt curve, European sovereign debt default, moneyness, currency yield curve, sovereign crisis