I … Bond vigilantes called interest rates higher on US Treasuries moved higher citing QE 2 as being monetization of US sovereign debt.
Sapna Maheshwari of Bloomberg reports: “U.S. companies are selling the fewest long-maturity bonds in almost two years as a strengthening economy diminishes investors’ appetite for the debt. CenterPoint Energy Inc, CNP, and Enterprise Products Partners LP, are the only issuers of 30-year bonds this month, raising a combined $1.05 billion amid $64.4 billion of overall sales, according to data compiled by Bloomberg. Last month, $1.5 billion of debt maturing in at least three decades was sold, down 85 percent from a year earlier and the least since April 2009.”
Risk aversion to investing in US Treasuries rose after bond vigilantes sustained the yield on 30-year U Government Bond $TYX, above 4% in November on concern that Ben Bernanke’s Quantitative Easing 2 constitutes monetization of debt.
“We see much less value in long-term bonds, EDV, for all but the most dedicated buy-and-hold investor,” said Rob Williams, director of fixed-income for Charles Schwab Corp., which oversees $1.5 trillion in client assets and recommends bonds due in 1 to 10 years. “The risk that rates rise and the price falls is high.”
Longer maturity corporate bonds, BLV, have sold off more than the shorter duration corporation bonds, LQD,
“Issuers look at a very steep yield curve, $TYX:$TXN, like we currently have, and they tend to gravitate more toward issuing in the intermediate part,” said Jim Probert, managing director and head of investment grade capital markets at Bank of America Merrill Lynch in New York. “There’s probably a trend away from 30-year issuance because of the cost.”
Today EDV fell 0.9% and TLT fell 0.7% … and BLV fell 0.3%, LQD fell 0.1%.
World Government Bonds, BWX rose 0.7% and International Corporate Bonds, PICB, rose 0.3% on rising major world currencies, DBV, 0.4%, and emerging market currencies, CEW, 0.7%.
Junk bonds, JNK, rose 0.2% to close at 40.09 which is below their January 6, 2010 high of 40.20.
The bond vigilantes and the currency traders are working in combination to deleverage stocks. The announcement of QE 2 has commenced the age of deleveraging.
II ... US Banks and Banco Santender of Spain rallied global stock markets to new highs.
Stock traders called stocks higher on news that Portugal’s 10 year bond auction met with success at 6.71%.
Spain, EWP, 7.7%
Italy, EWI, 4.7%
Belgium, EWK, 3.7%
Austria, EWO, 2.9%
Europe, VGK, 2.9%
Sweden, EWD, 1.8%
ENI, E, 2.7%
Banco Santander, STD, 12.6%
European Financials, EUFN, 5.3
Emerging Market Financials, EMFN, 3.5
Global Financial, IXG, 2.6
Mortgage Reits, REM, 0.5
Banks, KBE, 1.5
Financial, XLF, 1.7
US Financial Services, IYG, 1.7
Small Cap Pure Value, RZV, 1.6
Small Cap Revenue Shares, RWJ, 1.1
Bank of America, BAC, 2.0; chart suggest that Bank of America has reached its price objective.
Citigroup, C, 2.8
Popular, BPOP, 1.8%; this bank is the investor’s weather vane; and it appears topped out.
Leveraged Buyouts, PSP, 1.8
Insurance, KIE, 1.0
Taiwan, EWT, 1.9%
Taiwan Small Caps, TWON, 3.8
Russia, RSX, 3.4
India, INP, 1.5
India Small Caps, SCIF, 2.5
India Infrastructure, INXX, 1.7
Chile, ECH, 2.3
Brazil, EWZ, 2.3
Brazil Small Caps, BRF, 1.7
Korea, EWY, 2.1%
Korea Small Caps, SKOR, 2.1
Australia, EWZ, 1.2
Australia Small Caps, KROO, 1.4
Japan, EWJ, 1.0
Japan Small Cap, JSC, 0.4
China, YAO, 1.5
China Small Caps, HAO, 1.1
Sweden, EWD, 1.9
Canada Small Caps, CNDA, 0.7
Uranium, URA, 4.5%
Copper Mining, COPX, 3.1
International Materials, DBN, 2.5
Agriculture, MOO, 2.7; with Deere, DE, and Potash, POT, topping out, this is likely topping out as well.
Steel, SLX, 1.9
US Energy, IEZ, 1.7
Energy Service, OIH, 1.6
Clean Energy, QCLN, 1.5
Clean Energy, ICLN, 2.3
Small Cap Basic Materials, XLBS, 1.6
Small Cap Energy Services, XLES, 1.5
Energy, XLE, 1.4
Timber and Lumber, WOOD, 1.3
Water, FIW, 1.4
Coal, KOL, 0.7
US Basic Materials, IYM, 0.7
International Discretionary, IPD, 1.2
Metal Manufacturing, XME, 0.2%
Biotechnology, XBI, 0,1
Nanotechnology, PXN, 1.3
Leisure And Entertainment, PEJ, 0.5
Home Building, ITB, 0.7
Semiconductor, XSD, 1.9
Small Cap Industrial, XLIS, 1.0
Small Cap Information Technology, XLKS, 1.3
Home Building, ITB, 0.7
Network, IGN, 0.9
Dow Internet, FDN, 0.6
Nasdaq Internet, PNQI, 0.4
Small Cap Health Care, XLVS, 04
Gaming, BJK, 0.5
Nanotechnology, PXN, 1.4
Design Build, PKB, 1.2
Environmental Services, EVX, 1.2
Industrial Office REIT, FIO, 1.0
US Health Care Providers, IHF, 0.2
Small Cap Health Care, XLVS, 0.4
Software, SWH, 0.9
Wind, FAN, 2.9%
Solar, TAN, 2.1
Hedged Japan, DXJ, 0.5%
Hedged S&P, BXUB, 2.1
Emerging market stocks, EEM, 2.0%; Given that emerging market currencies, CEW, are in an Elliott Wave 3 Decline, a market top in the emerging market shares is being achieved.
World small stocks, excluding US, VSS, 1.8%
World stocks VT, 1.5%
US Stocks, VTI, 0.9%%
Russell 2000, IWM, 0.9%
S&P, SPY, 0.9%%
Nasdaq 100, QTEC, 1.4%
New York Composite, NYC, the New York Composite of late has made sweeping moves; today’s 1.1% move is not exceptional, as it it fell from 70.83 on November 8, 2010 to 67.91 on November 30, 2010; but has been in a strong up with today’s action a case in point.
Morgan Stanley Cyclicals Index, $CYC, 0.8% A number of Morgan Stanley Cyclical Index components appear to be topped out. This suggests that a stock market rally high is being achieved: DE, F, JCI, C, AA, FCX, GT, MAS, TIN, IP, and R all seem overbought.
III. The world currencies and the the emerging market currencies rose in sympathy with stocks, causing the US Dollar to move lower.
The World Currencies, DBV, and the the emerging market currencies, CEW, rose in sympathy with stocks. The US Dollar, $USD, fell lower to 80.00. Of note, the emerging market currencies have been in a strong sell off since early November 2010 as is seen in the chart of DBV:CEW. The Milton Friedman Fee To Choose floating currency trade regime is operating to sink emering market currencies: the Hungary Forint being a case.
The optimized carry trade ETN, ICI, is in an Elliott Wave 3 decline.
The US Dollar, $USD, traded by the 200% ETF, UUP, may go into a sideways consolidation, with currencies traders calling major world currencies, DBV, and emerging market currencies, CEW, lower on global sovereign debt, that is world government bonds, BWX, and emerging market bonds, EMB, being called lower bond the bond vigilantes as seen in the chart of BWX together with EMB, DBV and CEW. The announcement of QE 2 and the call of Mrs Merkel for a European Sovereign Default Mechanism, restarted the April 26, 2010 global competitive currency devaluations at the hands of the currency traders, in their currency war on the central banks for control of the world’s people and resources.
Gold, GLD, traded up and it would be normal that gold stocks would go higher with them; but there was investment sea change on December 13, 2010 when the European Leaders met in Summit and failed to resolve the sovereign and bank debt crisis, as John Mauldin said in Safehaven.com, they simply were kicking the can down the road. The investment sea change disconnected the gold mining stocks from the price of gold, as is seen in the chart of GDX:GLD. Then on January 3, 2011, the gold mining stocks, GDX, entered an Elliott Wave 3 of 3 down. The 3rd Elliott Wave is the most sweeping of all economic waves it builds wealth on the way up and destroys wealth on the way down. Of note the US Treasuries, EDV, entered their Elliott Wave 3 Down on September 29, 2010 with the first word coming from Ben Bernanke of QE2.
When using the 6 month ongoing Yahoo Finance Chart of GDX, together with EUFN, ZROZ, IYM, FLAT, XME, and BWX, one can see that the long term swing trade that existed in the HUI Precious Metal Stocks, ^HUI, began to end with the formal Announcement of QE 2 in early November 2010. And then the gold mining stocks sold off when the European Leaders, failed to come to a comprehensive resolution to the European Sovereign Debt Crisis on December 13, 2010.
The gold mining stocks rode the global sovereign debt yield curve, and the 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, higher over the years. A rising yield curve gave seigniorage, that is moneyness, to the gold mining stocks. But the greatest swing trade of all time is now done and over. This being documented in the chart of $HUI:$USB, that is the gold mining shares relative to the 30 Year bond, is now turning lower. The Gold mining stocks can only be used for short term trading purposes, as they always turn lower, as the Treasuries pivots and falls lower.
The chart of the gold mining stocks, GDX, relative to Gold, GLD, GDX:GLD, manifested bearish again today, suggesting that more wealth is going to be coming out of gold stocks. A number of the gold mining stocks fell lower or manifested bearish engulfing today; these include: .... NSU … GSS … NEM … KGN ... AAU …AZK … GBG … GFI … UXG
The evidence is clear cogent and convincing that the gold mining shares are falling lower with the US Sovereign Debt. Dwindling US sovereign debt seigniorage is deflating the gold mining stocks. The gold mining stocks will be leading stocks down. This makes sense. The HUI precious metal stocks, ^HUI, began taking stocks higher in 2003, as seen in the chart of the ^HUI, the S&P, SPY, and the Russell 2000, IWM.
A number of other investments have bearish performance or portend bearish.
Silver Standard Resources Inc., SSRI, has a lot of downward potential as it has a tremendous amount of carry trade investment within.
Gold mining stocks have a lot in common with Universal Display, PANL: they have been terrific swing trades and carry trades as well; but the sovereign trade music and the carry trade music has been turned off: both are going down and not further up. Another swing trade has been long term care facilities such as Almost A Family, AFAM. I ask who in the currency deflationary and bond deflationary future is going to care for those who cannot care for themselves?
Small Cap Pure Value, RZV, rose a strong 1.6% but did not rise to a new high; this suggests that carry trade investing has run its course.
Community Banks, QABA, rose 0.5% but has fallen in an Elliott Wave 3 lower
Utilities, XLU, 0.5% but is cresting in an Elliott Wave 2 high and ready to enter an Elliott Wave 3 of 3
Environmental Service, EVX, rose 1.4% but has entered into an Elliott Wave 3 Sell off.
Small Cap Consumer Discretionary, XLYS, rose 1.3% but has entered into an Elliott Wave 3 Down. And Retail, XRT, rose 0.9 % but has fallen lower into an Elliott Wave 3 Down. Short interest has been quite strong on both of these.
The chart of India Small Caps, SCIF, India Infrastructure, INXX, India Earnings, EPI, India, INP, together with the base metal commodiites, DBB, and the agriculture commodities, RJA, … SCIF, INXX, EPI, INP, DBB, RJA shows stress in India Shares that is similar in a sense to the gold mining shares. India, INP, is terribly broken down; it troubles started with a Telecommunications scandal from which it has never recovered.
China, YAO, rose 1.5% but has been suffering credit tightening and is likely cresting in an Elliott Wave 2 up.
Wealth is best preserved by investing in gold as can be seen in the chart of gold relative to the Australian Dollar, GLD:FXA. Gold has arisen as the sovereign currency as well as the best storehouse of investment wealth.
Interest Rates such as the interest rate on the 30 Year US Government bond, $TYX, will be going higher, deflating sovereign bonds and corporate bonds, which will deflate currencies globally and deleverage investors out of stock positions. China will not tolerate high base metal prices and investors will not be getting carry trade loans to run up base metal commodity prices. Industrial metal producer stock prices will be falling.
V ... Commodities surged higher.
Agriculture, JJA, 2.7, may have a long run higher as they may be in an Elliott Wave 3 up as investors seek a safe haven from falling bond and stock prices and as Scott Kilman and Liam Plevin of WSJ report Prices Soar on Crop Woes
Food, FUD, 0.7
Grains, GRU, 3.3%
Corn, CORN, 3.2
Cooking Oils, FUE, 2.9
Coffee, JO, 2.5
Petroleum and Oil, DBC, 0.9
Oil, USO, 0.3
Base Metals, DBB, 1.3%. The chart of base metals clearly shows that the base metals completed an Elliott Wave 5 up at the end of last year. This means that Global Industrial Metal Producers, CRBI, have topped out; this especially being the case with Alcoa Aluminum, AA and even more so with BHP Billiton, BHP. China has given notice it is tightening credit and will not accept higher base metal prices. China Materials, CHIM, has entered an Elliott Wave 3 Down.
Morgan Stanley Cyclicals Index Components, Alcoa Aluminum, AA, shows a lollipop hanging man candlestick suggesting a market top. And its peer component, Freeport McMoRan Copper and Gold, FCX, shows what may turn out to be an evening doji star or an entrance to a dark cloud cover. US Basic Materials, IYM, shows a lollipop candlestick suggesting a rally high has been achieved. The ongoing Yahoo Finance chart of DBB, JJU, LD, JJC, JJN, JJT shows what is likely a rush to rally high.
Today’s rally lacks broad currency support and cannot be sustained.
Lead, LD, 3.1
Aluminum, JJU, 0.1%
Copper, JJC, 1.7
Nickel, JJN, 5.1%
Tin, JJT, 2.0
Teck Resources, TCK, shows a lollipop hanging man candlestick in its chart suggesting that a top is in. And thus a market top in the Canadian Small Caps, CNDA, and the Canadian Dollar, FXC, has likely been achieved.
That is an evening star in the chart of lead and coal producer Cliffs Natural Resources, CLF.
Fertilizer manufacturer Potash, POT, is putting in a market top.
US Commodities, USCI, 1.4%
Timber, CUT, 1.7%; this is probably the most speculative of all commodities. The downward drop in this commodity will provide great rewards to futures short sellers. Timber producer, Weyerhaueser, WY, has gone parabolically higher on the rising Timber price. The Wood producers, WOOD, will be falling lower.
The Baltic Dry Index, $BDI, fell to 1453. Infrastructure is not profitably supporting today’s high commodity prices. Shipping companies such as Mitcham Industries, MIND, have entered an Elliott Wave 3 Down.
VI … Inflation rises in Romania.
Irina Savu of Bloomberg reports Romania 2010 inflation quickens to 8%
VII …. Japan machinery orders fall for third month.
Associated press reports that Japan machinery orders falls again in November as government warns of new weakness
VIII … Satyajit Das writes in Euro Intelligence article The European Debt Crisis - Part 3 that the fate of the Euro will effect currencies and debt globally.
In December 2010, a special EU meeting, convened to discuss the situation, provided a clear pointer to how events might evolve. At the meeting, the German view, set out by Chancellor Angela Merkel, prevailed. The meeting rejected any attempt to increase the scope and amount of the existing bailout facilities.
Unless confidence returns rapidly or the EU changes its position, it seems restructuring or defaults by several peripheral European sovereigns may be unavoidable. Investor concerns that the Greek and Irish did not solve the fundamental problems may be confirmed. The safety nets are now seen as unlikely to be large enough to rescue larger countries, like Spain and Italy, if they require support. Investors will need to take losses.
Large volumes of maturing debt mean that the test is likely to come sooner than later. The heavily indebted European sovereign states face $2.85 trillion of maturing debt in the period to 2013. Portugal, Italy, Ireland, Greece and Spain have bond maturities of $502 billion in 2011. The financing needs of Greece, Ireland, Portugal and Spain over the last quarter of 2010 and 2011 are Euro 320 billion, rising to Euro 712 billion if Italy is included. In addition, private sector borrower in these countries face maturities of $988 billion of corporate bonds and $200 billion of syndicated bank loans over the same period. Likelihood of low economic growth, failure to meet IMF plan targets, further banking sector problems and credit downgrades exacerbate the risk.
Increasing concerns are evident, as European problems now threaten global recovery. China, which contributed around 80% of total global growth in 2010, has expressed growing concern about the problems in Europe. Trade between China and the EU, its largest export market, totals around $470 billion annually, contributing a trade surplus of Euro 122 billion for China in the first nine months of 2010. Any slowdown in Europe would affect Chinese growth. China is also a major holder of Euro sovereign bonds, standing to lose significantly if problems continue. China has indicated preparedness to use some of its $2.7 trillion of foreign exchange reserves to buy bonds of countries such as Greece and Portugal. A slowdown in China would affect commodity markets, both volumes and prices,
A continuation of the European debt problems, especially restructuring or default of sovereign debt, would severely disrupt financial markets. Losses would create concerns about the solvency of banks, in particular European banks. In a repeat of the events of September 2008 (when Lehman Brothers filed for bankruptcy protection and AIG almost collapsed) and April/ May 2010 (prior to the bailout of Greece), money markets could seize up, as trust about the ability of parties to perform contracts evaporated. In turn, this volatility would feed through into the real economy, undermining the weak recovery.
Unless resolved, the European debt problems will affect currency markets and through that channel the global economy. Any breakdown in the Euro, such as the withdrawal of defaulting countries or change in the mechanism, would result in a sharp fall in the new currencies
In turn, this would, in the first instance, result in large losses to holders of debt of those countries from the devaluation.
Depending on the new arrangements, the US dollar would appreciate abbreviating the nascent American recovery. This may compound existing global imbalances and trigger further American action to weaken the dollar. Further rounds of quantitative easing are possible, setting off inflation and de-stabilising, large scale capital flows into emerging markets. In turn, the risk of protectionism, full-scale currency and trade wars would increase. A breakup of the Euro would adversely affect Germany, which has been growing strongly. A return to the Deutschemark or, more realistically, an Euro without the peripheral countries may result in a sharp appreciation of the currency, reducing German export competitiveness
Events since the announcement of the bailout package in early 2010 have been reminiscent of 2008. Then, the optimism following bailouts of Bear Stearns and other troubled American banks produced premature. The promise of China to purchase Portuguese bonds is similar to the ill-fated investments of Asian and Middle-Eastern sovereign wealth funds in US and European banks.
Eventually with each successive rescue and the reemergence of problems, the capacity and will for further support diminished.
The EU rescue of Greece and Ireland are also reminiscent of US attempts to rescue its banking system, with more and more money being thrown at the problem. The strategy was defective, preventing the creative destruction required to restore the system to health. The actions may have doomed the economy into a protracted period of low growth, laying the foundations for future problems.
In 11 May 1931, the failure of a European bank – Austria’s Credit-Anstalt – was a pivotal event in the ensuing global financial crisis and the Great Depression. The failure set off a chain reaction and crisis in the European banking system. Some 80 years later, European sovereigns may be about to set off a similar sequence of events with unknown consequences. As Mark Twain observed history does not repeat, but it may rhyme.