I … Anticipation of Quantitative Easing 2, caused a deleveraging out of bonds and a crack up boom in commodities and stocks.
Bond vigilantes seized control of both short term and long term interest rates and began calling the Interest Rate on the 30 Year US Government Bond, $TYX, higher on October 12, 2010, not only on anticipation of QE 2, but also on awareness that the federal government is not planning any type of fiscal austerity, but rather, it anticipates to borrow. As a result the 30 Year US Government Bond, EDV, began falling rapidly in price.
It was in August that Federal Reserve Chairman Ben Bernanke signaled he was prepared to pump hundreds of billions of dollars into the banking system by buying Treasury securities. His stated goal was to stimulate the economy to avoid a deflationary collapse.
But his in pursuing ZIRP as well as purchasing of US Government debt, he monetized the debt and now rising interest rates will result in a much higher portion of government debt payments being allocated to interest, raising the specter of the Federal Reserve losing its fiscal sovereignty through failed Treasury auctions. The chart of the 30 Year US Government Bonds, EDV, the 10 to 20 Year Goverment Bonds, TLT, together with the longer maturity corporate bonds, BLV, and the shorter duration corporate bonds, LQD, reflects how investors forsook risk in the longer out bonds. This is also seen in the flattening of the 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, with a very sharp derisking on formal announcement of QE 2 in November. The Fed Chairman's announcement is having the effect of rising corporate interest rates which makes business operations more costly.
Chart shows year end bonus buying drove Bank of America, Wall Street Investment Services, IYG, Banks, KBE, and Financials, XLF, higher in December 2010.
With the European Leaders’ Announcement announcement of seigniorage aid for Greece, and a rise in the Euro, FXE, in May, investors had risk appetite for the greater duration, that is longer maturity US sovereign debt and the 30 10 US Government Yield Curve, $TYX:$TNX. steepened, until October 12, 2010 at which time it began to flatten on risk avoidance.
Anticipation of QE 2 inflated Commodities such as Food, FUD, Gasoline, UGA, Heating And Other Oils, DBC, Small Cap Pure Value Stocks, RZV, And Russell 2000 Growth Stocks, IWO, as seen in the chart of EDV, compared with UGA, RZV, and IWO. When the European Stocks, VGK, are added to the chart, it shows that European Shares lost value, after the European Leaders met in Summit on December 15, and failed to come to a comprehensive solution to the European Sovereign Debt and Bank Debt Crisis; this is what analyst John Mauldin referred to as kicking the can down the road. Inflation has not shown up in CPI data (as it strips out food and energy). Housing prices have deflated on both a higher interest rate, and expiration of federal government buying incentives, that is subsidies.
Eileen E. Jacobs writes: “Money flowing into hard assets, especially precious metals, JJP, is another unintended consequence of QE2. As faith in paper currencies drop, investors look for ways to reduce exposure to them. Precious metals have had an outstanding 2010. Although it’s hard to determine what the fair value is for precious metals, particularly gold, GLD, the logic is that they’re inflation proof and it will always be worth something.”
She continues: “Oil prices, food prices, and assets in emerging markets have all been going higher. Investors are sending their capital to foreign countries to find better opportunities. Brazil, India, and China are benefiting from this. An investor has more opportunity from investing in a country with a fast growing economy. Receiving income in a currency that is strengthening against the dollar is an added bonus. The more money the Fed prints, the more money that gets invested elsewhere.”
Australia, EWA, and South Africa, EZA, have been hot money flow destinations with yen carry trade investments levering up their share values. The Australian Dollar - Yen carry trade, seen in FXA:FXY, and the South African Rand - Yen carry trade, SZR:FXY, have maintained strength. Investment value has been sustained in the whole spectrum of Australian shares: Australian Small Caps, KROO, and Australian Banking, WestPac Banking, WBK.
The ETF, FUE, tracks not only alternative fuels, but cooking oils, as well; it has seen strong growth. These oils along with agricultural commodities, RJA, and food commodities, FUD, are likely to continue to see investment support and moneyness coming from fears of sovereign default. I believe that China money tightening, that is higher interest rates, will turn down base metal prices, DBB. Given eventual debasement of the US Dollar, $USD, by central bank activities, investors are likely to pour money into heating and specialty oils, DBC, as well as West Texas Intermediate Crude, $WTIC, traded by the oil ETF, USO. I believe falling aluminum prices, JJA, and falling copper prices, JJC, will turn down Alcoa Aluminum, AA, Southern Peru Copper, SCCO, and Freeport McMoRan Copper and Gold, FCX. And fertilizer manufacturer Potash Corp, POT, having double topped out, will be turning down.
It’s my belief that as more and more experience unemployment, Gasoline Prices, UGA, will effectively be inflationary, as they consume a greater proportion of ones limited income.
I believe that timber prices, CUT, have double topped and that investment asset prices of wood and lumber manufactures such as Koppers Holdings, KOP, will fall.
Javier Blas of Financial Times reports on December 22, 2010: “Mexico has taken the unusual step of insuring itself against the effect of rising corn prices on tortilla, a food staple for millions in the country, in the latest sign of growing concern about food inflation in emerging countries. Rising food inflation has become a big headache in countries from Mexico to China and India as bad weather has ruined crops, forcing prices up. Food accounts for up to half of all household spending in emerging countries, compared to just 10 to 15% in Europe and the US.”
Tushar Dhara and Pratik Parija of Bloomberg report on December 23, 2010: “India’s food inflation accelerated to a six-week high, adding pressure on authorities to curb a jump in onion prices that has forced the nation to halt exports of the staple this week and toppled governments in the past. An index measuring wholesale prices of agricultural products including lentils, rice and vegetables compiled by the commerce ministry rose 12.13%. .. from a year earlier."
Barry Gray of WSWS.org writes “Natural disasters are also playing a role. Drought in the Black Sea region cut Russia's wheat harvest by a third this year. Unusually hot and dry weather in Argentina and other Latin American crop exporting nations is threatening to further reduce the volume of corn, wheat and soybeans on world markets.”
“Such natural factors, however, are exacerbated by the impact of national divisions on the global economy. Russia responded to the failure of its crop by imposing an export ban on wheat. Similarly, India has imposed an export ban on onions. The effect of such measures is to increase the upward pressure on prices worldwide.”
“A major factor in the rise in corn prices is the diversion of a third of US corn production to the more profitable production of ethanol in 2010. On the global commodity markets, wheat and corn have increased almost 50 percent over last year. Wheat prices soared to their highest level in over two years this week.”
“Overall, world commodity prices, DJP, have risen by 25 percent over the past six months. The European debt crisis and the Federal Reserve's cheap-dollar policy have, according to the Journal (December 27), “driven investors to hard assets.”
“Oil, $WTIC, is now at $90 a barrel, nearing a 26-month high. The sharp increase in oil prices drives up transport costs for food and other commodities.”
Michael Pinto relates Rising Rates Reveal Debt Reality: “As the issuer of the world's reserve currency, the US government has enjoyed the benefits of low interest rates despite its inflationary practices. When we run a trade deficit with a country like China, they have a strong incentive to 'recycle' the deficit back into our dollars and Treasuries. This practice has hidden what would otherwise be much higher borrowing costs and much lower purchasing power for the dollar. This artificial price signal allows people like Paul Krugman to claim that the Obama Administration's stimulus programs should be much larger. Because our yawning fiscal deficits have not driven bond yields significantly higher, he sees no reason to curtail spending. Krugman wants to spend like its World War III, and then has the nerve to call those worried about the budget mindless zombies!”
“Krugman is just one partisan Democrat shouting at mirrors, but the misunderstanding has struck the right-wing as well. Last week, in a debate with me on CNBC's The Kudlow Report, Brian Wesbury, Chief Economist of First Trust Advisors and writer for The American Spectator, claimed that our $9.3 trillion national debt is of little consequence because our GDP is a far greater. However, he failed to note that our $14.7 trillion of GDP only yields about $2.2 trillion in revenue for the Treasury. To fully access that entire GDP, the government would have to raise all tax brackets to 100% without producing any reduction in output or decrease in revenue. This is, of course, preposterous. As was demonstrated in the 1970s, even small increases in marginal tax rates have a substantial negative impact on output. A healthier appraisal would center on the fact that our publicly traded debt is now 422% of our annual tax revenue.”
“Wesbury did mention that if the government could not raise revenue to pay off the bonds, it could simply monetize the debt with few significant consequences. Apparently, paying back one's creditors in worthless paper is not technically "default" to an economist.”
“So neither Krugman nor Wesbury, both intelligent, highly educated economists, see our current course leading to imminent crisis. Unfortunately, both have been led astray by the low debt service ratio which has masked our economy's underlying insolvency. To see through the haze, you have to look at the numbers behind this so-called "deleveraging consumer" and then look at the debt of the nation.”
“Meanwhile, the average maturity on our debt has declined to 5.5 years. Compare that with the UK's gilts, which average about 14 years, or even to Greece's bonds, which average about 8 years. Falling interest rates and reduced durations have merely given the illusion of solvency to the US as compared to these other ailing sovereigns.”
“Right now, the US national debt is the biggest subprime ARM of all time. Much like homeowners who thought they could afford a mortgage that was 10 times their annual incomes, Messrs. Krugman and Wesbury are blinded by deceptively low current rates of interest. These ostriches won't poke their heads up to see the writing on the wall: low rates and quantitative easing cannot coexist for long. As rates continue to rise, the reality of US insolvency will be revealed.”
The so called flight to safety out of Europe and away from the European sovereign debt and European banking debt imbroglio has been so strong, that the US based growth companies, that is the Russell 2000 Growth Stocks, IWO, have soared to an all time monthly high; and investors have embraced the Small Cap Pure Value, RZV, shares to almost the all time high seen in April 2007 when the Financials, XLF, turned down with the onset of sub prime crisis.
The ratio of the Small Cap Pure Value Relative to the Small Cap Pure Growth Weekly, RZV:RZG Weekly, shows moneyness coming to these shares on risk avoidance of the European sovereign crisis since December 1, 2010; as well as on sympathy for the year end bonus rise in the investment banking shares, KCE, such as Goldman Sachs, GS, and American Capital, ACAS, Small Cap Pure Value Shares that were monetized by Ben Bernanke’s QE 2 include Dollar Financial, DLLR, EZ Corp, EZPW, Morningstar, MORN, New Star Financial, NEWS, Nicholas Financial, NICK.
Anticipation of QE 2 and a rising Euro, FXE, coming from anticipation of good bank stress test results, gave moneyness to the Moran Stanley Cyclicals Index, $CYC, that is stimulated investment in the economic growth and expansion stocks, such as Deere, DE, Freeport-McMoRan Copper & Gold, FCX, Temple Inland, TIN,
Utilities are both interest rate sensitive and Euro, FXE, sensitive. Utilities, XLU, entered an Elliott Wave 3 of 3 Down on December 28, 2010.
The year ending with in a upswing in world government bonds, BWX, and international corporate bonds, PICB, putting in a likely Elliott Wave 2 up and ready to enter an Elliott Wave 3 Down.
Falling global interest rates this week stimulated major currencies, DBV, and emerging market currencies, CEW, to rise which took the small caps excluding the US, VSS, higher and emerging Market Shares, EEM higher. Brazil small caps, BRF, South Korea small caps, SKOR, India small caps, SCIF, Canada small caps, CNDA, Taiwan Small Caps, TWON, Australia small caps, KROO, and Japan Small Caps, JSC rose higher. India, INP, Brazil, EWZ, Turkey, TUR, Indonesia, IDX, Chile, ECH, all rose. Japan, EWJ, Mexico, EWW, Russia, RSX, Austria, EWO, Switzerland, EWL, Sweden, EWD, Asia High Yielding Securities, DNH, Europe Small Cap Dividends, DFE, Israel, EIS, and South Africa, EZA, Taiwan, EWT, rose to new rally highs.
The Shanghai shares, traded by Morgan Stanley A Share Fund, CAF, entered into an Elliott Wave 3 Down on December 14, 2010 as they fell from a December 13, 2010 price of 28.55; this in response to China Interest tightening. What a difference between shares depreciating in value because of central bank policy and the Small US Energy Producers, XLES, shares inflating in price because of a flight to safety from central bank policy.
Strong risers coming in through a commonly perceived flight to safety, if it be called such include:
SIL, 78%, Silver Mining
GDXJ, 54%, Junior Gold Mining
COPX, 48%, Copper Mining
POT, 38%, Fertilizer Mining
KOL, 31%, Coal Mining
IEZ 31%, Dow Jones Oil Equipment,
IYM 28%, Dow Jones Basic Materials,
XLES 25%, Small Cap Energy
FDN, 26%, Dow Jones Internet
PXQ, 25%, Networking
PNQI, 24%. Nasdaq Internet
GDX, 22%, Gold Mining
MOO 22%, Agriculture Production
XLE, 19%, Energy,
BJK, 19%, Gaming
OIH 18% Energy Service,
KOP 17% Lumber Production
SLX 17% Steel Production
IYM, 18%, Dow Jones Basic Materials
HHH, 17%, Networking
XME, 16%, Metal Manufacturing
EVX, 15%, Environmental,
PEJ, 15%, Leisure and Entertainment
XLIS, 16%, Small Cap Information
XLIS, 15%, Small Cap Industrial
XLKS, 15%, Small Cap Information Technology
XRT, 14%, Retail
XLVS, 13%, Small Cap Health Care
IWM, 12%, Russell 2000
XSD, 11%, Semiconductors
PBE, 11%, Biotechnology
SWH, 10%, Software
CGW, 10%, Water
XLYS, 9%, Small Cap Discretionary
NLR, 9%, Nuclear Energy
IYR, 9%, Real Estate
RWJ, 9%, Small Cap Revenue
SLX, 3%, Steel
RZV, 1%, Small Cap Pure Value
ITB, -2%. Housing
Falling global interest rates and rising currencies gave moneyness to Junk Bonds, JNK, and like BWX and PICB, is coming in with an Elliott Wave 2 up and ready to enter into an Elliott Wave 3 Down.
The US Dollar, $USD, fell lower to support at 78.96 this week as the almost all currencies rose. The inverse of the USD/JPY, JYN, rallied.
The Swiss Franc, FXF, continued its rise on an ascending wedge to close at 106.25.
The Australian Dollar, FXA, broke though a diamond pattern and rose on an ascending wedge to close at 102.66.
The Canadian Dollar, FXC, jumped to 99.55
A soaring Yen, FXY, took The Brazilian Real, BZF, The Indian Rupe, ICN, The New Zealand Dollar, BNZ, and The Swedish Krona, FXS, and the South African Rand, SZR, all parabolically higher.
The following currencies have now put in an Elliott Wave 5 High up: FXA, FXF, FXC, BZF, and the SZR and a ready to begin their decline; as they do, base metal commodities, DBB, such as copper, JJC, aluminum, JJA, Lead, LD, Tin, JJT, Nickel, JJN, will be falling lower.
The following currencies are already in active competitive currency decline: FXB, FXS, BNZ, FXM, ICN, FXE, and FXY. The Euro, FXE, is the deflationary currency loss leader.
II … Specific commodities and commodity stocks that exploded higher on anticipation of QE
Cotton, BAL 96%
Silver, SLV 82%
Coffee, JO 65%
Cooking Oils, FUE 38%
Food, FUD 32%
Gold, GLD 29%
Grain, GRU 28%
Commodities, DJP 16%
Gasoline, UGA 15%
Timber, CUT 14%
Heating Oil and Petroleum Oil, DBC 11%
Base Metals, DBB 8%
Silver Mining, SIL 78%
Junior Gold Mining, GDXJ 54%
Copper Mining, COPX 48%
Fertilizer Mining, POT 38%
Coal Mining, KOL 31%
Dow Jones Oil Equipment, IEZ 31%
Dow Jones Basic Materials, IYM 28%
Small Cap Energy, XLES 25%
Gold Mining, GDX 22%
Agricultural Production, MOO 22%
Energy, XLE 19%
Energy Service, OIH 18%
Lumber Production, KOP 17%
Steel Production, SLX 17%
200% Basic Material shares, UYM 57%
200% Natural Gas Shares, FCGL 43%
200% Oil And Gas Shares, DIG 33%
Russell 2000, IWM 25%
S&P, SPY 12%
Dow, DIA 11%
Utilities, XLU, 1%
The chart of the Russell 2000 Weekly, IWM Weekly, shows that it topped out last week, having risen for 18 weeks beginning in mid August 2010.
The chart of the World Excluding US Small Cap Shares Weekly, VSS Weekly, shows that it has likely topped out this week with a final pop of 2.5%. Its rally began in early June with the rise of the Euro, FXE after the announcement of the EFSF Monetary Authority.
III … An ominous sign the small cap pure value shares, RZV, fell 2% on December 31, 2010; and the ratio of the small cap pure value shares relative to the small cap pure growth shares manifested bearish engulfing.
The small cap pure value shares, RZV, fell 2% on 12-31-2010; a the ratio of the small cap pure value shares relative to the small cap pure growth share, RZV: RZG, manifested bearish engulfing on 12-31-2010; this suggests that the run up in small cap revenue share, RWJ, is over.
The Russell 2000 Growth Shares Relative To The Russell 20000 Value Shares Weekly, IWO:IWN, has fallen lower for a second week signaling that the rally in the US Small Cap Growth shares is over; this rally began with the anticipation of QE 2 and saw a run up in US basic material, energy, technology, industrial, pharmaceutical shares.
The 200% of the Russell 2000, URTY, shows a 2.1% fall on December 31, 2010.
IV … In as much as the world has entered into the Age of Deleveraging, that has come with higher interest rates and currencies either topping out or falling lower, there are a number of stocks that represent short selling opportunities as these have likely topped out or are in the process of topping out. Generally these are stocks that have rallied the most since September 1, 2010.
The chart patterns of these stocks show completion and thus an opportunity for short selling; I will present these stocks in a followup article. I disclose that I am a blogger and not a licensed investment professional; I am invested in gold gold bullion; and I state that I have no long or short position in any of these companies.
IV … In today’s news
Alexander Ragir and Dawn Kopecki of Bloomberg report on December 20, 2010, from Brazil, EWZ: “The first investigation into Brazil’s asset-backed securities industry, rising consumer delinquencies and the biggest rout of a bank stock in more than a decade are opening cracks in the country’s financial system. Funding costs for smaller banks have climbed since a Nov. 9 bailout of Banco Panamericano SA triggered the probe, pushing average yields on certificates of deposit to 12.9% from 11.8%. The market for selling loan portfolios has dried up, and funds of asset-backed commercial paper have had 2.3 billion reais ($1.3 billion) in redemptions since the rescue, according to Brazil’s capital markets association.”
Wasbir Hussain of the Associate Press reports India's farmers Say Global Warming Has Caused Both Production And Taste Of Tea To Decline. Assam, the lush “breakfast tea” growing northeastern region of India is the source of some of the finest black and British-style teas. Rising temperatures have led not only to a drop in production but to subtle, unwelcome changes in the flavor of their brews. The tea industry employs about 3 million people across India. Most live just a few steps above the poverty line. They are not the only farmers in India suffering because of the weather. Warmer temperatures have cut sharply into wheat farmers' yield in northern India -- their crops are maturing too quickly. Nor are tea growers alone in their concern about how the climate is changing the taste of their product. French vintners, for instance, have seen the taste and alcohol content change for some wines, and are worried they could see more competition as climate change makes areas of northern Europe friendlier to wine-growing
EconomicPolicy Journal reports of regulatory capture in article Dodd-Frank Means 122 New Ways to Influence Regulators. Economists call this state corporatism. Socialists call this oligarchy. I call it beastly.
Lee Brodie of CNBC provides the article Peter Schiff Rising Rates Do Not Signal US Recovery “Rates in the bond market aren't moving higher because the economy is improving it's because the bond vigilantes are coming out of their comas and realizing the Fed is out of ammunition here”
EconomicPolicy Journal reports on inflation in Venezuela in article Venezuela Devalues Currency.
Mike Mish Shedlock reports European Sovereign Debt Crisis in Pictures; PIIGS Spreads to Germany at or Near Record Levels
Neurosoftware Finance Blog in article Estonia Becomes The Last Passenger On The Titanic reports that 2011 is set to arrive in a few hours. With its arrival, Estonia will join the EU currency regime as the last of 17 nations approved to use the Euro. They may be the proverbial last passenger up the gang plank to board the Titanic.
This is a major deal for the nation, as Estonia only left the ruble in 1992. It quickly fixed its own currency to the German mark at the time. Estonia with a population of 1.3 million people is tied to Europe in more ways than one. They have two choices and only one of them is acceptable to the citizens.
Once the Euro came into existence in 1999, Estonia fixed its currency to the Euro. So, while it is the last of 17 nations to officially join the currency, it has been a defacto member for years. Estonia needs to be European more than Europe needs a new client for the Euro currency.
The irony is that while Estonia is formally joining the EU, one of potentially four nations now is seriously considering leaving the EU and reissuing their own currency.
Since May there have been rumors from Berlin that Germany is prepared for a world without the Euro as their principle currency. Those rumors were officially denied in November. Reality is a rumor publicly denied is no longer a rumor.
The New York Times has a great article on Estonia,
“Whatever happens, our currency is tied to the euro,” said Riho Unt, chief executive in Estonia of Skandinaviska Enskilda Banken, or S.E.B., a Swedish bank that is one of the Scandinavian institutions that dominates banking in the country. “Being inside is better than being outside.”
Economic arguments aside, in Estonia the euro is still a symbol — tarnished, perhaps — of hope and prosperity.
“It symbolizes that Estonia has emerged as a full member of the European family,” said Joakim Helenius, chief executive of Trigon Capital, an asset management company based in Tallinn. “For people here that is a very big thing.”
While media portrays Estonia’s adoption of the Euro as the best possible event, not all Estonians are as excited. Nevertheless, many Estonians realize they have little or no choice. They committed to joining a while ago, and any attempt to not joining would be even more damaging to the Estonia economy at this stage.
“Talking about splitting the euro is not the way out,” Jurgen Ligi, the Estonian finance minister, said during an interview. “There would be huge immediate losses for both sides.”
“There is no alternative” to the euro, Mr. Ligi said. “This is the only boat in the sea.”
The reason there is no other choice, is that during the crisis the Estonian government cut spending by the equivalent of 9% of their GDP, to keep the budget in line with new membership expectations. They have by doing so forced their citizens to accept conditions that require joining the Euro, even if its obviously going to shatter in the coming months.
Estonian’s in the last few years, have refinanced their home mortgages in Euro or other like currencies. These loans would become unplayable if Estonia tried to back out of the currency merger at this point. You could say that their population gave up state sovereignty for cheap home payments in a future currency they will have little to no advice in going forward.
Stocks: BAL, SLV, JO, FUE, FUD, GLD, GRU, DJP, UGA, CUT, DBC, DBB, SIL, GDXJ, COPX, POT, KOL, IEZ, IYM, PSCE, GDX, MOO, XLE, OIH, KOP, SLX, UYM, GASL, DIG, IWM, SPY, DIA, XLU, AUSE, DFE, EIS, EZA, EWT, DBV, CEW, UUP, JJP, FXA, FXY, SZR, FXE, JYN, FXF, FXC, BZF, ICN, AUNZ, CAF, VSS, FXS, EDF, TLT, BLV, LQD, IYG, KBE, RZV, RJ