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sorgmot
106 Comments
Bond Trader: Friday Wrap
The week just passed was one in which:
1. The interest rate available on the 5 yr US Treasury notes fell from 3.06% to 2.95%, as mentioned above.
2. Gold rose from about 850 US$ per oz to 885 US$ per oz.
3. The US$ fell from 105 Yen to 102 Yen more of less.
4. The EURO rose against the US$ by a percent or 2.
5. Other commodity prices from oil to copper to silver rose a percent or 2 in US$ prices.
6. US$ US Government bond's short end prices rose a percent or 2.
7. The US common stock markets indexes fell about 2%.
8. US based real estate fell, too.
It was not a dull week.
Can any one connect the dots? We will venture a guess.
How about, US domestic money jumped from US stocks to US bonds, and foreign currencies and commodities.
How about, foreign owned US dollars made the same jumps.
Now what comes next?
Our guess is more of the same in varying degrees until October 2008.
Make certain to see your investment consultant for advice before making any changes in your asset portfolio.
Where's the Bursting Commodities Bubble?
We believe that commodities are in limited supple due to mining limits and world-wide mining cartels. Also, mining costs are up due to fuel and other costs. Since copper has gone up 100 times in US dollars from its 4 cents per pound low in 1932, other commodities can do the same. That would put the CRB higher than it is now.
S&P 500 Down More Than 1% for First Time in 26 Days
We view the current period as one of downward stock price corrections ending in October, 2009. That is typical for the business cycle which has been through its credit crisis.
Global Dividend Yield Trends
There is more to the graphs which should be of interest to those who buy, sell, and own stocks.
!. The pattern of yields responds to the business cycle and rises when business are exposed to recession periods because price to earnings ratios fall in recessions as investors become more skeptical of growth in future earnings and want more dividend yield in compensation.
2. The long-term trend in rising price to earnings ratios and thus declining dividend ratios from 1980 to 2000 has reversed since 2000. This has placed dividend rations to stock prices in a new long term uptrend with cyclical oscillations. That means the stock price to earning ratios are now in a long-term down trend with dividends now as important or more important than earning to investors.
These changes call for massive firings of board of director and company officers who are looting any company and its shareholders of cash and are really incapable of doing anything else.
Gold: An Interesting Dynamic at Play
Our read of the business cycle is that we are now (2008) in a replay of 2001 with the big cut in interest rates behind us in the USA. If we repeat the last cycle, the Fed Funds rate will hit bottom in 2 years, or in 2010 at 1%. Now, May 2008, it is very inexpensive to own gold at 2% interest. USA debt held by foreigners is yielding less than the USA inflation rate (4%) in USA dollar prices. Interest rates on USA debt are in mid 2008 is rising and the value of the debt is falling in USA dollars. Why not switch to gold from USA debt as did occur in 2002 and 209?
If one looks at your graph, above, one sees an upward 1(up), 2(down), 3(up), 4(down a little extended but not unusual) pattern unfolding. This is within a huge I, II, so far pattern from 2001 to 2008.
Be careful with your bet and the amount of money you risk on a down bet for gold or gold stocks as May 2008 progresses.
Demographics of Jobless Claims
It differentiates the real economy of real labor and assets from the money claims on the real economy. The real economy is contracting at an alarming rate. The Fed is tinkering with interest rates at the short end of the curve while rates at the long end are stuck or are moving up. Credit creation is in reverse, as losses in real asset values of long lived assets reduce the ability to borrow against them and eat away at the equity value in them.
Towns and states are now revising their budgets downward as tax revenue fall.
The Fed will soon have to go to 1% as it did in the last business cycle in 2003.
Fed Days Throughout the Most Recent Hiking and Easing Cycles
There is every reason to plan a repeat if the Fed funds cycle as the crash of stock prices in 2000 to 2003 is now replaced by a crash in real estate prices and an ongoing decline in stock prices and bond prices.
Is the Fed Exporting Stagflation to Europe?
Staggering personal wealth losses are being taken by USA citizens leaving many penny-less. And, then they loose their jobs.
We seem to be replaying the 1930's. Economic performance numbers for the USA are getting worse faster and faster.
The USA dollar falls and consumer costs rise.
USA financial policy should be put in reverse (increase the Fed funds rate). And, all taxes should be slashed and caped particularly real estate taxes.
Will Inflation Keep Bubbling?
Now the game is played backwards. USA interest rates started to rise in 2003 and they are still rising at the long end of the interest rate curve. The Fed has tried to stop the USA interest rate rise but has failed. Except for short loans, interest rates are still going up. Mortgages, which borrowers can no longer qualify for, are at 7%. 2 year and 5 year interest rates are moving up even as the Fed cuts short rates. Bond prices are falling as are stock prices which means interest rates on them are going up. Stock price to earnings ratios are falling and real estate prices are falling. These are indications that interest rates on long contracts are going up.
Foreigners are jumping out of USA assets and selling USA dollars for other currencies where investment asset values expressed in US dollars are not falling as fast as they are in the USA.
The Worst is Not Over and Neither is Fed Easing
Lately, yields across the US Government debt yield curve have been moving up and the value of the dollar has been rising in term of stocks (P/E's down), bonds (prices down and yields up), US wages wages down, and US real estate prices down.
Some individuals complain that the US dollar is falling against commodities and some foreign currencies. That's great because the trade deficit will be reduced and US workers will have more jobs and more pay while foreigners are stuck with bad USA loans of declining value. They had motives for lending the USA citizens money and they did, now they can live with it.
Big Money Is Betting on Inflation, Not the Economy
We believe that the standard market advice "sell in May and go away" should get serious consideration in May 2008. Over history, we see 9 month waves in stock market index price patterns which if applied in 2008 would indicate another low spot in October 2008.
We believe the USA stock markets are now going through the declining index price part of the standard business cycle. We expect that should end by October 2009.
We could be wrong and advise you to see your own advisers before making investment decisions.
Critical Price Juncture For Silver
Now copper brings about $3.50 per pound. It is up almost 100 times from $0.04 or 50 times from the 1932 high of $0.08. Check up current prices related to 1932 prices and they will be up 50 to 100 times. Try candy bars, tools, houses, cars, ears of corn, and etc. The point is that price increases of 50 to 100 times are normal from the 1930's to 2008.
Another interesting comparison is the 1984 to 2002 time period during which commodities prices were level for gold, silver, copper, and other commodities.
Then, all at once all commodities all took off and ran up in almost equal proportional increases. Now one has to explain the long level price period and the subsequent sudden and uniform price gain ratios. Note that foreign (to USA) currencies have also had big run ups in the 2001 to 2008 period.
What happened to cause the run ups in 2001 to 2008?
We believe the 20 years of no commodity price increases relative to US dollars were caused by the competition of vendors to get their hands on $US balances which were appreciating in the form of bond prices and stock prices as USA interest rates fell from 1980 to 2000. To see this take a look by clicking in interest rates and then 5 year bond rates on our site.
All being said, we see no problem to commodities up 50 times from 1932 since everything else is up that much.
Unprecedented Economic Risk: Stick to Multinational Investments
Short positions in a portfolio of USA common stocks to be covered in October 2009 might work out with a gain. We think the factors mentioned by Joe (above) and higher USA interest rates will push down common stocks to lower P/E multiples. A USA depression would push them down more as sales fall and profits do to.
Next, some one year to mature date in USA dollar bonds would save some money to invest starting in late 2009 as world markets and economies start to recover losses and begin growing again.
Some funds can be placed in gold and gold mining companies,
Some money can be placed in Swiss Franc short term notes.
We are looking to preserve and augment USA $ wealth until October 2009 at which time we will switch to long positions and more stock investments and fewer bond positions.
Are We Doomed? Norman and Schiff Debate on America's Future
Any entity which slips deeper and deeper into debt will be charged higher and higher interest rates by its creditors. That means that the debtor's IOU's (US dollar notes held by non USA entities) will be discounted further and further in non USA currencies At some point the creditors will come around and collect the debtor entities assets.
Yes the USA currency will fall relative to its creditors' currencies until the debts are paid off or washed out by a collapse in USA currency value.
?
Why the Dollar Is Rallying
financialtrax.googlepa...
and click on commodities
and then click on Moore
and then click on Swiss Franc.
The CME buying power for US$ ran up in the 60's and 70's as the USA went through stagflation. It peaked in 1978 and fell until 1985 as the USA ran interest rates up while Volker ran the Federal Reserve Bank.
Then, Greenspan took over the FRB and USA interest rates fell and fell and fell until 1996 and the CME went up and up and up to $0.90 at that time.
USA interest rate increases in 1996 to 2000 took the CME back down to $0.60 by 2000.
USA interest rate cutes from 2001 to 2007 took the CME back up to $1.00.
As 2008 progresses, the USA has little reason to defend the $US. Lower USA interest rates are in order to stimulate the economy and inflate USA asset prices up past the prices they have recently sunk to due to the failing economy. Saving USA banks is the first goal of the RRB.
Foreign nations have little reason to run the value of their currencies down against the $US since doing so would increase the oil costs and the costs of base commodities imported from the USA. They have and will continue to take costs out of the products they export to the USA and the world.
Foreigners have little reason to hold $US or invest in the USA except in raw material companies. Thus, they will continue to sell $US by selling $US bonds for their own currencies like EURO's or money substitutes like gold.
Meanwhile the USA FED will be holding short interest rates down to fight the US real asset value collapse now under way.
The CME could finish Elliot wave five of the long post World Was II upward wave at $1.20 in 2009 or later.