INSTITUTIONAL ADVISORS

SATURDAY, JULY 6, 2013

BOB HOYE PUBLISHED BY INSTITUTIONAL ADVISORS

The following is part of Pivotal Events that was published for our subscribers June 27, 2013.

Signs Of The Times

“Detroit Recovery Plan Threatens Muni-market Underpinnings”

“Plan to suspend payments on $2 billion of Detroit’s debt threatens basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.”

– Bloomberg, June 16

The problem with too many cities and counties is that unions have been using monopolistic powers to rip off the taxpayer. City Hall will reduce the numbers of firefighters and police in order to keep extortionate pension plans going. The ordinary citizen is expected to service such demands without enjoying the benefits. Or should they be called privileges or prerogatives?

The ordinary citizen will discover the power of “No!” along with pending default.

“Lauren has boosted prices for her wedding-planning services by about 25% since 2009 as the economic expansion puts Americans in the mood for bigger parties and fancier locations.”

– Bloomberg, June 17

We have used it before:

Like civilizations, bull markets are born stoic and die epicurean.

“China’s worst cash crunch in at least seven years is an indicator of shadow lending gone awry.”

– Bloomberg, June 18

“A more prudent approach would have been to wait for tangible signs that the economy was strengthening.” St. Louis Fed on the story about “tapering” the buying program.

– Bloomberg, June 21

*****

Perspective

Once again policymakers are caught between a crock and hard place. How do they continue the image of “being in control” when Mother Nature imposed a mini-panic? They talk about “Taper”.

The mini-panic appeared almost everywhere, including China.

Did the Fed research department know what can happen to a speculative surge in credit markets in the not-so-merry month of May?

It is doubtful that something as simple as old market-lore is grasped by the suits at the top. The establishment still really believes that the Fed is in charge.

Back in the 60s and 70s a bust follow a boom and on the recession the story would be that the Fed induced the recession to bring inflation down. That meant CPI inflation, not inflation in financial assets.

Absolute nonsense.

The 3 to 4-year business cycle has been well-documented back to the 1500s. It comes and goes as it pleases. When it is on the up interventionists look good and, inevitably, when it is down they look bad.

Variation on the shorter term also includes the cycle for share certificates and credit instruments. And when it is time for a significant change it is signaled by the credit markets.

By the last week in May we described the sell-off in bonds as the “Crack of Doom”. Monday’s Disorderly Credit Markets noted that initial slump had become measurably

overdone. A period of relief would follow.

This seems on the path from excitement in April, reversal in May to heavy liquidation in the fall.

In the 1998 (LTCM) example, the main sell-off in lower-grade bonds began in that fateful August.

In the 1997 “Asian Crisis” liquidity problems in Thailand appeared on July 1st. As it rippled out around the world New York corporate bond traders believed the official line that the problem was “contained” and stayed long.

It hit the US corporate market like a freight train in that September.

Global credit markets have recorded a profound change and it has caught most traders, investors and central banks offside. Probably to an unprecedented degree.

The action could be volatile over the next six weeks or so, but as summer progresses more and more investors will become aware of the consequences of reckless policymaking. Not to overlook the implacable nature of the credit cycle.

Stock Markets

Senior indexes in New York were the last to be included in the big Rounding Top pattern. The S&P set its high at 1687 on May 22nd and the “test” made it to 1664 and then took out the previous low. Taking out 1560 will extend the downtrend. This could take a number of weeks.

Action in the senior indexes seems to be completing a cyclical bull market.

China and Hong Kong set tops early in the year and have been hit very hard over the past four weeks.

This seems to be extending their cyclical bear.

Over in the traditional cyclicals, Base Metal Miners (SPTMN) have extended the bear market that began in early 2011 at 1600. The last key low was 719 set in April. Monday’s low was 662 with the Weekly RSI down to 27. This seems low enough to prompt a brief rally.

Financial markets have been perilous with central bankers pushing radical “stimulus” that seems to hook up when the market wants to go up. This financial historian is awe-struck by the audacity of policymakers. The audacity lies in imagining that there is such a thing as a national economy and that, because it is national, it can be managed.

Then after decades of accommodation, markets brewed up into a series of bubbles. The private sector has a long history of accomplishing great speculations on its own and created a Great Bubble that climaxed in 2007.

After all of the theorizing and editorials about Fed policy when it was time another 1929, or 1873 it was accomplished in 2007. A typical crash was also accomplished. The first business expansion out of the crash has been typically week. This has been accompanied by a favourable credit cycle that exhausted itself in May.

What has aggressive to belligerent central banking accomplished? It has not materially changed the path of financial history from a Great Bubble to a Great Contraction. What is has done is exaggerate speculative furies when Mother Nature allowed it. She also decides what will become the focus of speculation.

Since last fall this has been in credit instruments and the action became excessive in April and reversed – dramatically – in May.

Typically, this pattern for the curve (charts follow) and spreads sets up forced liquidation in the fall. This will include most classes of stocks.

Based upon the brief recovery in the credit markets the improvement in the general stock market could run well into July.

Link to June 28, 2013 ‘Bob and Phil Show’ on TalkDigitalNetwork.com:

http://talkdigitalnetwork.com/2013/06/doldrum-alert/

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL bhoye.institutionaladvisors@telus.net

WEBSITE: www.institutionaladvisors.com

Treasury Yield Curve

• Typically intense speculation in credit markets ends with a reversal in the curve to steepening.
• In May-June 2007 the curve was likely to reverse to steepening, and it did. 
• Something similar was likely for this time this year.
• The breakout was accomplished at 180 bps at the end of May.
• The move since is impressive.
• In ordinary business conditions, a steepening curve enhances banking spreads.
• In the face of speculative financial markets the reversal is a “Sell” signal for commercial banks.
• Central banks are not traded on any market.
• Pity.

Treasury Yield Curve

• Shows the action in 2008.
• The “breakout” occurred in that fateful June.

Hedge Fund Leverage

European Bond Spreads

Stress Index

“I think this is very much a calm before the storm … the U.S. is out today and the focus is all on non-farm payrolls tomorrow, which I think is potentially the storm – if the data comes in line with expectation there may be more selling for gold” – Quote from the article below, published before the Unemployment number came out

Gold’s Price Moves from the European Perspective

by Przemyslaw Radomski – Sunshine Profits

Despite the lack of trading activity in the United States due to the Independence Day celebrations, yesterday’s session in Europe was very interesting. The players on the foreign exchange market have provided plenty of thrills. Without a doubt, the ECB President’s announcement was fuel for further dynamic declines in the euro. Draghi said the bank expected its key interest rates to remain at current or lower levels for an extended period. The ECB left its main interest rates unchanged as expected at record lows of 0.5 percent. Market reaction was swift and pronounced. The European currencydropped to a five-week low against the dollar.

Another important event was the statement by the Bank of England, which signaled that it won’t be raising interest rates anytime soon, lifting the FTSE 100 and putting big pressure on the British pound which fell 1.2%.

“I think this is very much a calm before the storm … the U.S. is out today and the focus is all on non-farm payrolls tomorrow, which I think is potentially the storm – if the data comes in line with expectation there may be more selling for gold,” Jonathan Butler, precious metals strategist at Mitsubishi, added.

According to Reuters, Friday’s U.S. non-farm payrolls report is expected to show the economy created 165,000 jobs last month. The data could affect when the Federal Reserve will begin tapering off its $85 billion monthly bond-buying stimulus program.

Gold posted its biggest quarterly loss on record in the April-June period, down 23 percent. Selling was exacerbated by comments from the Fed Chairman Ben Bernanke last month that the U.S. economy was recovering strongly enough for the central bank to begin pulling back on its stimulus in the next few months.

This would support a rise in interest rates, making gold less attractive.

Since we know the important news from Europe and the economic calendar, let’s summarize gold’s current situation. The yellow metal has increased since hitting its lowest price in almost three years at $1,180 last Friday, but many traders view those gains as a typical short-term rally that follows a significant decline. Is that true? Will we see a further decline? Let’s take a look at the charts and try to find the answers. At the beginning let’s take a look at the long-term gold chart and check the current situation in gold (click on chart for larger image)

In this week’s very long-term gold chart, we see that prices moved close to the lower border of the declining trend channel. This price level was not quite reached, but gold’s price is very close to it, and it seems that prices will decline once again. Gold has been trading sideways below an important resistance line, the first Fibonacci retracement level, verifying this breakdown. With a verified breakdown and the declining trend channel in place, we have a bearish outlook at this time.

Gold could initially decline to the lower border of the trend channel and if it does, a pullback will likely follow. However, since the support line is declining, the support is currently lower than last week – at about $1,150. The strongest support is seen slightly below the $1,100 level where two major support lines intersect.

Therefore, from this perspective, the situation remains bearish for the short term and it doesn’t look so optimistic. However, if we want to have a more complete picture of the situation, let’s take a look at the chart from the non-USD perspective.

Gold viewed from this perspective showed very little change this week as prices moved higher, then lower, and are within 2% or so of where they were a week ago. No significant support level has been reached, so declines could very well continue here.

As we previously mentioned, yesterday the British pound depreciated strongly against the U.S. dollar which means an increase of the strength of the U.S. dollar. Unfortunately, such a development could have negative consequences for gold. In light of this information, we think that another interesting chart may provide important clues about further price movements is the chart of gold from the perspective of the British pound.

Gold priced in British pounds reveals a recent double breakdown. This is a breakdown below two important support levels, in this case the rising long-term support line and the first Fibonacci retracement level on the full bull market.

This is an important breakdown and, at this time, the next significant support line is slightly below the 7 level in this chart. Clearly another significant decline could be seen here. This is similar to what we saw last week when gold moved lower, and we could see a similar move once again later on in the month.

Since we are already in Europe, we think that we can’t forget to take a look at the current situation of the European currency. Thus, to make the European perspective complete let’s see what has changed recently in the Euro Index chart.

In this week’s Euro Index chart, we see that the head-and-shoulders pattern remains in place. The Euro declined once again this week, and it seems to be completing the pattern. The chances for this formation to be invalidated are growing increasingly slim. If the European currency continues to decline and the formation is indeed completed, this may lead to further strength in the U.S. dollar and medium-term weakness in precious metals. From this point of view, this chart is still bearish.

Summing up, gold pulled back this week but the move to the upside did not invalidate the most important resistance levels. From the European point of view, the outlook and trend remain bearish for the short term. The immediate-term could see some strength, but with support lines relatively far away, the next big move will likely be to the downside.

Please note that these are very volatile times for gold investors and the situation may quickly change (become bullish) if we see strong moves up in the USD Index without a meaningful decline in gold and bearish indications from other markets.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold Investment & Silver Investment Website – SunshineProfits.com

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Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Produced by McIver Wealth Management Consulting Group

Mark Jasayko, CFA,MBA, Portfolio Manager with McIver Wealth Management of Richardson GMP in Vancouver.

www.McIverWealth.com

While most retail financial advisors today are counselling clients to remain fully allocated to risk markets near 6 year highs (they always do, at least until after big losses hit and then they will suggest some switching around) institutional managers, traditionally dubbed the “smart money” have become highly risk averse. See more here: Europe’s biggest asset manager favors cash

“Amundi, Europe’s biggest asset manager with almost $1 trillion of funds, said it increased cash holdings at the expense of equities and high-yielding bonds because global growth may be weaker than expected next year.

“Forecasters remain too optimistic about global growth for 2014,” Didier Borowski, head of strategy and economic research at Amundi, said in an interview in Geneva last week. “We have to be very cautious on risky assets in the short term.”

Amundi, which mainly invests on behalf of institutions, said diversified funds have as much as 55 percent of assets in cash as a weaker economic outlook deters riskier investments…

The Stoxx Europe 600 Index fell 8.2 percent since Bernanke spoke, while the MSCI World Index dropped 4.9 percent. Borowski said stocks may decline further if companies and analysts revise down their earnings expectations on weaker-than-expected growth in 2014.

The global economy is expected to grow 3 percent in 2014 compared with 2.13 percent this year, according to data compiled by Bloomberg……read more HERE