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Precious Metals Outlook: Sept. Should Be Interesting, Stock Market Strategy: Expected Month End Rally Begins

Precious Metals Outlook: The metals, Gold and Silver, powered higher this week in the face of typical month end Future’s pressure. In fact, the picture becomes even brighter when we realize Silver is leading the charge do to the potential of a massive short squeeze beginning. Moreover, Gold prices have been in backwardation for the last two days a feat only reached a handful of times in Comex history. This backwardation implies a real physical Gold market shortage. Couple this week’s price action with our “Study of the Seasonality in Gold Prices” and September is shaping up to be a very interesting month.

Stock Market Strategy: As expected, “Stock Market Strategy: Double, Double Toil and Trouble…” , equities rally into the end of the week and month. So, while economic date continues to get worse,  ”U Michigan Consumer Sentiment Weakens on Double-Dip Worries” & “Downward revisions to second quarter GDP”, intervention and manipulation ratchets up. Please see the chart below for an obvious graphic example of said intervention….

 audjpy

The AUD/JPY chart represents a pure example of the carry trade. The SPX and the AUD/JPY trade in a highly correlated fashion, add to that fact the reality most trading today is driven by computer models and you have a simple way to goose equity prices. Drive this currency relationship higher and the SPX will follow….

Zero Hedge: Aggressive Push To Ramp Stocks Higher Via AUDJPY Provides Today’s Convergence Arb

Meanwhile a check with MJ The Credit Guru suggests that credit markets continue to heal….

Despite the back up in CDX IG14 Index and bank CDS spreads, banks continue to restructure loans and lend money to corporations (even highly distressed companies), corporate investors are putting money to work in the bond market, and consumer credit losses continue to decline.  Credit markets are also providing funding that will allow corporations to loosen covenants and fund equity enhancing transactions. (IDA did a 30-year first mortgage bond for only 145bps more than their equity dividend yield. Assuming a 30% tax rate, IDA’s 30-year bond pays a slightly lower yield than their equity….these realities should fuel an increase in debt financed share buybacks.)        

JNJ’s new bond deal as well as IBM’s new deal are being put away by retail investors. I cannot believe that retail investors are willing to lock up their money for so little return. At these tight spreads I would rather be in Treasuries than accept any default risk. However, this probably does mean that the debt capital markets will continue to attract cheap retail investment dollars and force fixed income institutional investors down the credit risk spectrum to meet return bogies. This does not mean equities will take off, but it probably means that companies struggling to refinance loan and bond packages are going to attract more demand. The chance for positive credit events remains high.                                                                                                            

The credit sky is not falling…in fact…the credit storm clouds we witnessed in 2007-2009 are not even registering on the best Doppler radar.

…I would add however, the ‘credit tightening equals equity rally’ trade is officially dead for now. Instead, we should view the health of credit as a sign that a collapse of the equity markets as the ‘Head & Shoulders’ fear suggests, seems less likely at least from the credit point of view.

A shock to the system that drives equity lower will need to come from some other arena. The following story is food for thought if equity continues to breakdown. No doubt, Illinois is not the only state in trouble. Couple a mass pension liquidation with the exit of key Hedge Fund advisors and further equity market weakness would not be a surprise….

Illinois state pension system planning to sell assets to pay benefits

Illinois’ five state-funded pension systems are faced with selling assets to pay for retiree pension benefits, in part because state government isn’t paying its share of pension costs.

The sales will drive the systems even deeper into debt because they won’t have either the assets or income from the state to invest.

“Anytime you sell assets, it’s concerning,” said Dave Urbanek, spokesman for the Teachers’ Retirement System, which pays pensions for teachers outside the city of Chicago. “It reduces the amount of money in the portfolio we have to work with. If you want to wipe out the unfunded liability, it’s one step forward, one back.”

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Disclosure: Position in Gold, Silver and related companies; No position in JNJ,IBM or IDA