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January 15, 2006
Week #02 (2006-01-14) in Review
Overview:
At 4:30pm ET Thursday, the Federal Reserve Bank reported the money supply numbers for the week ending Jan-02. M3 continues to rocket ahead, which caused some major swings out of the USD and into Euros and gold on Friday. That in a nutshell is what is happening today.
This chart shows that the total money supply grew by an annualized rate of +9.5 pct for the quarter-ended Jan-02-06 compared to the quarter-ended Oct-03-05. For all of 2005 compared to 2004, the money supply grew by +7.8 pct. The U.S. economy, measured by GDP, grew by half that. The Administration and the Fed are being more than accommodative to economic needs. They are also paying for a foreign war and for meeting the other special (one-time) costs, such as hurricane recovery and reconstruction.
With the economy slowing in the U.S., the monetary authorities are in a tight bind here. The Treasury yield differential on the 10-year and 3-month paper is now just 22 basis points, and there is no differential whatsoever on 10-year to 2-year paper. That means that presently there is for bankers no economic return from new loans.
That is a situation not unlike the typical U.S. consumer who presently cannot spend on an economic basis, i.e., from income. Consumers today are dipping into savings or they are borrowing against assets.
Both situations can continue for a while, but not for long without a recession.
So the Fed can either stop raising, which would make the yield curve positive, alleviating very difficult operating conditions for banks, but shooting gold up and the USD down, which surely is an indicator that inflation is returning, or they can raise more, which protects the USD but hurts exports, hurts the housing market, and probably for sure sends the economy into the tank.
I think the important meeting in mid-September by the leaders of all the largest U.S. banks held at the N.Y. Fed office resolved matters in a way that the market has now made apparent, which is reflation. At the time, as you may recall, I said that it was crucial for Congress to demand minutes of that meeting.
Herein lies the core of the problem with U.S. "democracy," which is that transparency is a concept preached but not practised by its leaders. And that's the reason -- fundamentally " why these wealthy and connected people pay multi millions to earn a job that pays a few hundred thousands.
If transparency was in fact the policy of the Fed and the Administration, you and I would know what was discussed and agreed to at the September summit among bankers and we'd be much better able to protect our personal wealth.
Instead we are led into the practice of having to listen to talking heads that have received the "new" policy second, third, fourth and fifth hand from the leaders of America's largest bankers. I think this is wrong, but it is a fact we independent traders have to deal with.
My entire blog is based on this core issue that financial services (banking) must be separated from capital markets (trading). For capital markets to work fairly, we all know what is needed, but we are forced to accept what is provided, and be told it is fair when we know it is not.
I have been watching this big picture situation starting to evolve since prior to September, when I told you (week #19 in mid-May) it was time to start buying gold and oil because I could see inflationary trends in many of the world economies.
Then in Sept-Oct, when the banks rallied despite ever narrowing yield differentials, I asked if the U.S. was actually reflating, while having us believe they were tightening.
Decisions by the Fed that are made privately with bankers " the same bankers who hold our assets against their loans and who trade against our wealth while telling us they are our trusted advisors " are decisions that ultimately become known in the capital market. Because of the dubious records we are provided, sometimes it takes from 3 to 12 months to recognize covert policies and vested interests at play.
The seeds of economic booms and busts and stock market bulls and bears are planted slowly and do not spring up overnight. Occasionally the process takes 12 to 18 months to get to see the end result.
As to the end result, a week ago, I came to the conclusion that: "Instead of rampant inflation, I (now) think the economic engine of the world, which is the United States, or, more accurately, the American consumer, will hit the wall (due to credit problems) and a recession will ensue. That recession will spill over into the major trading partners of the U.S., such as Canada, China, Mexico and Japan... The 2002-2006 bull market in U.S. equities will soon end as more capital leaves America in pursuit of markets in Japan, Asia Pacific, India and Latin America. But making gains on equities there too will be difficult. The final blow will be marked by a spike in gold, which I see taking place this 1Q06."
In a world without currency controls, independent traders will take their capital wherever and whenever they please. The American consumer, in choosing foreign goods for good reason, has sown the seeds of future economic hardship in the U.S. The second act in that drama will be played out as and when American capital from Moms and Pops is directed to trade in foreign markets.
It's no longer a matter of "if"; this drama has already been scripted, and will soon be played out.
If there is a villain in the piece, it is not the American worker, it is not the American consumer, and it is not the independent American trader. These are just the Little People.
We all know who is to blame.
International Equities: This week, U.K., Japan and Cdn markets were all quiet. Japan, India and Brazil all had a big down day on the 10th, but then stabilized. UK had a big recovery Friday that saved an even bigger losing week. Topping markets are usually characterized by extreme volatility as the bulls try to prevent the bears from winning. The fight continues but we're in the final hours.
U.S. Equities : All U.S. broad markets sidetracked again this week. Of the major indexes, the Dow 30 and S&P 500 were close to losing on the week, whereas only the Russell small caps did well (+1.3 pct W/W). The same thing happened in Sept-early October 1987, and in the summer of 1982, when small cap promoters cranked up the fax machines to sell as much stock as possible before the ultimate crash.
Dow 30: 15 up and 15 down. No winner this week. But look at the 15-min charts for Dow 30 components PG and T and you'll see some high closes that kept them in the plus column for the week.
U.S. Sector ETFs: 5 up and 5 down. No winner, but this could have been 8 down.
10: Energy (XLE): Over-weighted: big winner this week due to Friday
15: Basic Materials (XLB): Over-weighted: DD, AA and PD caused week's # 1 loser
20: Industrials (XLI): Market-weighted: 9th worst performer W/W
25: Cons. Discretionary (XLY): Under-weighted: up +0.7 pct for week's # 2 winner
30: Cons. Staples (XLP): Market-weighted: flat this week
35: Healthcare (IYZ): Under-weighted: down "0.3 pct W/W; out of gas on Mon.
40: Financial (XLF): Under-weighted: peaked, flat yield curve
45: Technology (SMH chips): Market-weighted: peaked on Thurs., then down
50: Telecom Services (IYZ): Market-weighted: up +0.6 pct W/W, but high close Fri.
55: Utilities (XLU): Market-weighted: topped out @ 32.75 4 weeks ago
Bonds: Market was nervous until Thurs. Then prices rocketed as yields collapsed. Probably started by Fed open market operations ahead of terrible M3 numbers at 4:30pm that day
Commodities: The index was down only slightly due to a strong Friday. Capital markets are getting nervous with oil over 64 and gold over 557, but this is what happens with reflation
Oil & Gas: Crude oil gained +2.5 pct W/W; 200-day MA and 50-day MA are now at 59.31 and 59.86 respectively. Looks like 55 will hold for a while
Gold: Gold jumped yet again to set fresh 25-year closing week highs at $557.24; Friday was a break-out to the upside for all precious metals -- prices may (if you are a technical tealeaf reader) now consolidate at about 523, i.e., (489+557)/2, which is a 50-pct retracement from prior cycle low, before running to 593 (i.e., 541 break-out + (541-489 last pullback) :-)
Goldminers: $XAU up +1.5 pct and TSX: XGD up +0.5 pct W/W shows short-term rally burst stalled early in week; but took off like a rocket on Friday
Forex: The trade-weighted USD this week was up +0.05 pct, while the Euro was down "0.16 pct W/W, which is quite flat. But there was a major shift from USD to Euro, probably due to U.S. M3 numbers, and flight to precious metals and oil on Friday
Sector ETF:
Here are the ETF charts I follow for the ten sectors of the U.S. equity market:
10 (energy: XLE)
15 (basic materials: XLB)
20 (industrial: XLI)
25 (consumer discretionary: XLY)
30 (consumer staples: XLP)
35 (healthcare: IYH)
40 (financial: XLF)
45 (technology, semiconductor: SMH)
50 (telecom: IYZ)
55 (utilities: XLU)
Here is the weekly performance of my favorite ten Sector Index Funds. The table is sorted by price performance Week over Week (W/W), i.e. 1W%N, but is otherwise unsorted.
| Symbol | Close | Net | %Net | 1W %Net | 2W %Net | 4W %Net | YTD %Net | 3M %Net | 6M %Net | Yr %Net |
|---|
This week, it was 5 up and 5 down. For the past two weeks, it was 10 and 0 both ways, so I said, "the broad market is gyrating wildly. That's what happens at most tops and bottoms. This one is a top " a final flourish to the 2002-2006 bull market."
If you check the final two hours trading (10-minute data charts) for IYZ, XLU and to a lesser extent XLF, you will see high closes that changed a weekly loss to a gain, so this could have been 8 down and 2 up.
Sector 10 (energy: XLE, IYE, VDE, OIH, PBW and IXC)
Here's the XLE Weekly, Daily and Hourly data charts:
XLE Weekly data:
XLE Daily data:
XLE Hourly data:
JimW sent along this chart from StockCharts on the XLE. Thanks.
XLE was up +1.87 pct W/W (including +1.2 pct Friday) to close at 54.46. Was it the weather forecast (of a storm) or the spin coming out of Washington regarding Iran's nuclear (or as they say in parts of Texas, "nuke-u-lar") intentions or possible intentions or whatever.
A week ago I wrote: "As you know, I am modestly over-weighted in Energy within a portfolio that is grossly over-weighted in cash. But I don't have big hopes, and may soon sell into strength. Last week was a good one to sell oil stocks into strength." So was this one. It's time to scale back by at least one-third.
RSI divergence with the price track indicates that a price peak is close by (which could mean already past :-))
Sector 15 (basic materials: IYM, XLB, IGE and VAW)
Here's the XLB Weekly, Daily and Hourly data charts:
XLB Weekly data:
XLB Daily data:
XLB Hourly data:
Last week I wrote: "Eventually, the non-metal groups in this sector will pull down the ETF. For instance, DD was down "0.23 pct W/W." This week, XLB was the worst performer by far, down "2.70 pct W/W to 30.58.
And here is precisely what happened: Earnings season has started and Alcoa (NYSE: AA "4.2 pct W/W) and Dupont (NYSE: DD "6.6 pct W/W) both took a bath after reporting earnings "issues", and that took down the XLB. Phelps Dodge (NYSE: PD) was another one that took a huge dive on Tuesday morning. Ouch.
It sure wasn't the golds. :-)
Some of the metals producers like Phelps Dodge have forward selling programmes, which can hurt profitability. But it is too much to expect for most individual traders to understand these issues when even the analysts do not tell us what's going on.
For AA, analysts were projecting between 35 and 37 cents earnings for 4Q05 and the number came in at 26 cents. This was a major story this week. Consequently there were several analyst downgrades.
This chart shows what happened on Tues. and Wed. morning at the open.
Sector 20 (industrial: IYJ, XLI, VIS, and IYT)
Here's the XLI Weekly, Daily and Hourly data charts:
XLI Weekly data:
XLI Daily data:
XLI Hourly data:
XLI was down "0.50 pct W/W to 31.62. It was the 9th worst performer. HON was down "1.9 pct W/W.
Sector 25 (consumer discretionary: XLY, IYC and VCR)
Here's the XLY Weekly, Daily and Hourly data charts:
XLY Weekly data:
XLY Daily data:
XLY Hourly data:
XLY was up +0.69 pct W/W to 33.56 which was a continuation of the Dead Cat Bounce " at least until Wed. The bounce is over.
GM rolled out a concept Camaro this week at the big auto show. GM is not a pretty picture, and the Dodge Camaro (LOL) is the icing on the cake.
To the students of business: when a company has more cash in the treasury than market capitalization, you have to know that management ought to be given the clean sweep. Forget what GM used to be and look at it for what it represents today, which is a fair representation of the problems facing America " from American consumer reliance on foreign goods, to the ills of lobbyists and the consequent government-protected Big Pharma, to Corporate America walking away from their contracts to protect the pensions of their workers past and present, to the damage caused by private capital raiders, and so forth.
Next maybe we'll get to see a Ford Hummer.
Sector 30 (consumer staples: XLP, VDC, RTH and IYK)
Here's the XLP Weekly, Daily and Hourly data charts:
XLP Weekly data:
XLP Daily data:
XLP Hourly data:
XLP (Consumer Staples) was down -0.09 pct W/W to 23.48, which is the opposite of it being up +0.09 pct a week ago, which is two cents.
Just like the Consumer Discretionary: "Spending issues abound." Same old, same old, and it ain't going to change for a while."
Credit, credit, who's got any credit?
Sector 35 (healthcare: IYH, XLV, VHT, IXJ, and IBB)
Here's the IYH Weekly, Daily and Hourly data charts:
IYH Weekly data:
IYH Daily data:
IYH Hourly data:
IYH (Healthcare) was down "0.31 pct W/W to 64.40.
Yes, I still think "This could be the second worst sector for 2006" following Consumer Discretionary. And if there were more Democrats in Congress, I'd be sure of it.
The question is how long can the world's biggest political lobby keep this sham alive? The U.S. spends more on healthcare as a pct of GDP than any nation I know. And for what? In terms of infant mortality and life expectancy from birth, compare the numbers to Canada, which spends much less on health care per capita, where at least 90 pct of the population lives within 100 miles of the U.S. border: infant mortalityâ€â€4.75 vs 6.5 (U.S.) per 1,000 live births, and total population life expectancyâ€â€80.1 vs 77.7 years. To me, this shows that increased healthcare spending cannot solve social issues.
But these are the issues that the Big Pharma cash machine must address if Congress is going to stay on the same road in protecting this industry.
This is not a political discussion: I am merely pointing out the hotspots of the U.S. economy that will surface when recession hits, and healthcare, like the other consumer sectors (discretionary and staples spending) will be in the center of the conflict. Traders need to avoid this group.
Sector 40 (financial: IYG, IYF, XLF, VFH, IXG, VNQ, RWR, IYR, and ICF)
Here's the XLF Weekly, Daily and Hourly data charts:
XLF Weekly data:
XLF Daily data:
XLF Hourly data:
The Financial ETF (XLF) was up +0.15 pct to 32.52, which is 5 cents.
You know, without the 5 cents that XLF gained on the week (vs the 7.5 cents gained in the final 2 hours), and the high close at the end of Friday for IYZ and XLU, there might have been 8 ETF's down and just 2 up.
There were some downgrades in the Financial sector this week, which is to be expected as the Treasury yield curve has now flattened from the 10-year notes to the 3-month bills. Banks can no longer borrow short and lend long, at a profit, so now they have to make their profits by trading against their clients.
Sector 45 (technology: IGM, IGV, IGW, XLK, VGT, IYW, IGN, IXN, MTK and SMH)
Here's the SMH Weekly, Daily and Hourly data charts:
SMH Weekly data:
SMH Daily data:
SMH Hourly data:
The Techs rallied big a week ago, but this week the SMH went from 1st to 8th amongst my 10 U.S. sector ETF's. SMH was down "0.45 pct W/W to 39.47.
MarketWatch has an interesting article today on the impact that new accounting rules related to the expensing of corporate stock options will have on tech stocks.
But longer term, I still have confidence in this sector. Even in recession there will be pockets of growth in U.S. technology. There is a lot of substance behind the recent cheerleading for the rapid expansion of a global digital economy. Other than metals, some oils, and export-oriented industrial manufacturers, this tech sector holds the most promise " after a bear phase in the broad equity market in the U.S.
Sector 50 (telecom: IYZ, VOX and IXP)
Here's the IYZ Weekly, Daily and Hourly data charts:
IYZ Weekly data:
IYZ Daily data:
IYZ Hourly data:
The Telco Service ETF (IYZ) had another good week, up +0.64 pct to 23.63. But if you look at the 15-minute price chart, you'll see a high end-of-week close, which skewed the results.
The current cheerleading of the digital communications industry is appropriate, I think. Unfortunately, the biggest companies in this space are also major investors in legacy technologies. So the small to mid-caps in this space is where traders ought to be looking to buy inventory for the "store". :-)
Sector 55 (utilities: IDU, XLU, and VPU)
Here's the XLU Weekly, Daily and Hourly data charts:
XLU Weekly data:
XLU Daily data:
XLU Hourly data:
XLU (Utilities) was up +0.06 pct W/W to 32.20, which is just two cents on the week. And if you look at the 15-minute chart, you'll see that somebody wanted to put on a good end-of-the-week show.
Longer-term, I have to think that water utilities, and wind and nuclear-powered utilities are going to be favored. With crude oil at very high prices (staying above 55 going forward), I also think that the natural gas utilities will continue to do well for traders in the equity market.
But, again, a price correction is needed before these prices become attractive.
Bonds:
The message here continues to be: "If there is going to be a recession in the U.S. in 2006, which is an indication of a flat to inverting yield curve, then bonds ought to relatively out-perform equities. Still I would not expect too much. Total return from bonds in 2006 will likely prove a disappointment."
There was a major move up in yields Tues. and Wed., which dropped back Thurs. and Fri. In fact that seems to be the pattern for many weeks now. Bonds start and end the week strong, but sell off mid-week.
Not being the Bond King, I don't have an explanation.
| Maturity | Yield | Yesterday | Last Week | Last Month |
|---|---|---|---|---|
| 3 Month | 4.13 | 4.11 | 4.01 | 3.71 |
| 6 Month | 4.22 | 3.99 | 4.17 | 4.08 |
| 2 Year | 4.32 | 4.36 | 4.34 | 4.35 |
| 3 Year | 4.28 | 4.33 | 4.31 | 4.35 |
| 5 Year | 4.28 | 4.33 | 4.31 | 4.36 |
| 10 Year | 4.35 | 4.40 | 4.37 | 4.45 |
| 30 Year | 4.52 | 4.58 | 4.55 | 4.66 |
| Maturity | Yield | Yesterday | Last Week | Last Month |
|---|---|---|---|---|
| 2yr AA | 3.06 | 3.02 | 3.02 | 2.97 |
| 2yr AAA | 2.97 | 2.98 | 2.98 | 2.97 |
| 2yr A | 3.07 | 3.06 | 3.14 | 2.95 |
| 5yr AAA | 3.20 | 3.15 | 3.16 | 3.25 |
| 5yr AA | 3.22 | 3.18 | 3.16 | 3.27 |
| 5yr A | 3.36 | 3.26 | 3.24 | 3.34 |
| 10yr AAA | 3.64 | 3.54 | 3.51 | 3.70 |
| 10yr AA | 3.60 | 3.52 | 3.49 | 3.68 |
| 10yr A | 3.59 | 3.58 | 3.62 | 3.82 |
| 20yr AAA | 4.16 | 4.02 | 3.96 | 4.13 |
| 20yr AA | 4.23 | 3.98 | 3.94 | 4.10 |
| 20yr A | 4.02 | 4.11 | 4.06 | 4.21 |
| Maturity | Yield | Yesterday | Last Week | Last Month |
|---|---|---|---|---|
| 2yr AA | 4.45 | 4.51 | 4.47 | 4.48 |
| 2yr A | 4.50 | 4.54 | 4.53 | 4.55 |
| 5yr AAA | 4.58 | 4.63 | 4.60 | 4.63 |
| 5yr AA | 4.58 | 4.64 | 4.63 | 4.69 |
| 5yr A | 4.67 | 4.70 | 4.69 | 4.78 |
| 10yr AAA | 5.11 | 5.15 | 5.08 | 5.17 |
| 10yr AA | 4.94 | 5.02 | 4.99 | 5.01 |
| 10yr A | 5.03 | 5.08 | 5.04 | 5.12 |
| 20yr AAA | 5.51 | 5.54 | 5.45 | 5.54 |
| 20yr AA | 5.72 | 5.59 | 5.55 | 5.67 |
| 20yr A | 5.58 | 5.57 | 5.60 | 5.68 |
On Thursday, the U.S. T-Bill yields began to climb very rapidly, putting the 10-year T-notes minus 3-month T-bills yield spread at just 3 basis points, and the differential on the 30-year T-Bonds minus the 3-month T-bills to be just 39 bp. That is really extreme.
So, bank margins continue to narrow, which will obviously present profitability growth challenges in 2006, as noted by an analyst downgrade on JP Morgan (NYSE: JPM) this week.
A flat or negative Treasury yield differential is an excellent long-term predictor of economic slow-downs and recessions. With the economy still cranking on at least three to four cylinders in the U.S., it's easy to see the large numbers of skeptics who refute any talk of recession.
If you happen to be one of those, please give me the latitude to at least say that an inverted yield curve does not represent the picture of a healthy economy.
I believe the Fed is now forced to either slow or stop short-term interest rate hikes and to watch the USD decline and gold really take off. If they continue to raise the overnight commercial bank lending rate, then mortgage loans and other asset-backed loans will have to be priced higher, which will soon reach a tipping point where loan demand will fall, bad debts will rise, and the price of the mortgaged assets will start to deflate.
Yes, I remember 1990.
As for me, I'm playing it both ways today: I think negative GDP growth will likely happen within six quarters in the U.S., but well before that I think gold is going to run up much higher as evidenced by the break-out on Friday, which is confirmation that the secular bull market is intact for gold.
So I think gold will outperform bonds, which will outperform most equities.
Interest rates and bond yields.
US Bond Funds -- Monthly Data Charts
SHY Monthly data series chart:
IEF Monthly data series chart:
TLT Monthly data series chart:
AGG Monthly data series chart:
LQD Monthly data series chart:
TIP Monthly data series chart:
US Bond Funds -- Weekly Data Charts
SHY Weekly data series chart:
IEF Weekly data series chart:
TLT Weekly data series chart:
AGG Weekly data series chart:
LQD Weekly data series chart:
TIP Weekly data series chart:
US Bond Funds -- Daily Data Charts
SHY Daily data series chart:
IEF Daily data series chart:
TLT Daily data series chart:
AGG Daily data series chart:
LQD Daily data series chart:
TIP Daily data series chart:
US Bond Funds -- Hourly Data Charts
SHY Hourly data series chart:
IEF Hourly data series chart:
TLT Hourly data series chart:
AGG Hourly data series chart:
LQD Hourly data series chart:
TIP Hourly data series chart:
Consumer finance equities continue to enjoy a piece of the 4Q05 reflation rally that is now topping out (I think).
One sign to look for when stocks go into distribution is (i) a brief power boost that takes the stock price quickly to higher levels, followed by (ii) slowly declining prices, ending on (iii) a slight price gain on the week to give the appearance of bullishness.
Have a look at the charts for FNM, FRE and SLM for examples of what I mean.
Consumer Finance -USA -- Weekly Data Charts
Consumer Finance -USA -- Daily Data Charts
Consumer Finance -USA -- Hourly Data Charts
Commodities:
The Commodities Research Bureau (CRB) Index was down "0.77 pct W/W at 336.84, but Friday was strong due to (i) bad weather coming, (ii) M3 growth, or (iii) Iran nukes " take your pick.
I'm going to say it was M3, but who really knows. My hunch, by the way, is based on the USD that fled to Europe, which is closer to potential nukes from Iran. In any event, I do think the Iran issue will now be played to the hilt. It started when Pres. Bush, in his Jan-02 State of the Union speech, rhetorically called the Iranian leaders part of an "Axis of Evil", along with Iraq (shortly before he gave the order to invade), and North Korea.
And the USD has been fleeing to China, South Korea and Japan, which sit nearby the missiles of North Korea. Traders listen to the rhetoric, but they don't act on it for long. Capital flight is usually a matter of reality-based issues within the locale from where the capital is fleeing.
Three weeks ago, with the index at 326.31, I wrote: "$CRB seems to be basing for another run at the cycle top of 341.53, which could be the high for many months to come, especially if Crude Oil settles down here." Last week I added, "I still feel that." Last week I added, "(Now) we're almost there!"
$CRB actually did hit 340.65, and would have hit 341, but since I was vacationing in nearby Bahamas I couldn't get the weather in Florida any colder without spoiling my holiday. LOL
Really, it was, "Hennessy or Margarita, Hennessy or Margarita" and I decided against (too much) cognac, which is o.k. (pretty good actually) on a cold night. Cold nights, of course, help commodity prices.
Yes, a week ago I did say that "$WTIC ... may move into the 64's (from 62.86)" and voila, it closed up this week +2.48 pct to 64.42.
Any higher and you know I would have been drinking (more) cognac. :-)
Gold:
This is getting monotonous: "Aren't you happy I wrote two three weeks ago that gold would soon break out to new highs? $Gold jumped up from $502 to $517.03 a week ago to $539.78 this week." Now it's at $557.24.
Without getting a peak at next Thursday's M3 numbers from the Fed, here is where it gets tricky.
As you know, I had thought the gold rally would take the price up to maybe 535 before settling back to maybe 500 before moving much higher. But this rally is hot, and price weakness has not been permitted.
Apparently Washington keeps fanning the flames. If it's not a story that Iran is going to stand up in defiance of the U.N. sanctions against their having nuclear weapons, it's the weekly report by the Fed on Money Aggregates (M1, M2 and M3), which seems to be a nuclear explosion of its own.
So earlier I wrote that my hi-lo forecast for gold for the next month is 523-593.
If you are a short-term trader, you are watching those hot RSI's and getting ready to sell. But if you are a long-term trader, you'd like to see a brief pull-back to allow you to step in with purchases. And if you believe in the concept of seasonality, then you know that for gold, this is the season for rallies.
So everybody has a perspective. Everybody that is except the majority of people in the world who have not yet caught on to the fact that precious metals are rallying, or (for those who have) to the multiple reasons why this rally is occurring.
In fact there are many reasons: growth of money in the world, USD problems, wealthier middle-class in India and China, war and potential threat of war, jewellery and industrial demand, speculative hoarding, ease of purchase via precious metal-backed securities, short squeezes, and so forth.
Increasingly, the odds are getting stronger for a spike rally. I don't know if that will happen this month or at all, but I think it will start this 1Q06. Just watching the tape, and listening to stories (the same ones you hear), I'd say a rally peak could be in the 625-700 range.
That is a lift from my prior forecast, but gold trading is very emotional, and you have to follow the technical indicators, and one's past experience. Mine are telling me that gold is rising too quickly without resistance for this rally to peak early.
There was a price break-out on Friday. The StockCharts.com charts show the prior cycle peak at $541.00, and cycle bottom at 489.90. Using technical tools I referred to earlier that could mean a new cycle high target of $593. If the consolidation pullback were to start this week (unlikely), then the cycle low target would be 523.
The low target ($523) will rise if, as and when the current price ($557.24) rises. But almost never is a breakout followed by a reversal a couple days later. So, I think the gold price will continue to rise this week.
We'll just have to follow the signs, mostly from the U.S.: (i) the Fed Beige Book to be released on the 18th (ii) the new M3 numbers on the 19th, and (iii) the Consumer Price Index report on the 19th, as well as the RSI on the gold stocks and gold bullion securities, and the other precious metals.
I have been impressed by the price action in the gold equities market 800-pound gorilla Newmont (NYSE: NEM), but I also know that in a gold price spike, it's always the mid-sized and junior producers and explorers that outperform. And when the rally is over, these are the ones that fall fastest and furthest.
To sum up, I think there will be a spike in 1Q06, then a pullback, then continuation of the secular gold bull later in the year. I say that because the world has to rid itself of the credit bubble problem, which will take some time. In a couple years, if a U.S. recession does not happen in a major way before then, then I think there are good prospects for gold going well over $700.
Depending on a number of factors (which I will have to address some other time), I think it is not out of the question that gold will trade well above $1,000 and perhaps well above $2,000, although I think the latter is highly unlikely until some time after today's babies (or at least youngsters) become traders.
Weekly Gold EOD Continuous Contract Index:
Daily Gold EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Gold Bullion index.
Last week I wrote, "$Silver was up +3.60 pct W/W to 9.13. I thought silver would top out about the 9.00 level (for the short-term before consolidating). On Friday alone, $SILVER was up +4.47 pct! That's pure speculation, and cannot be sustained."
This week, $SILVER was down "0.21 pct W/W to 9.11. But, you know, Friday was up +1.92 pct on the day that gold and other precious metals broke to the upside. So, silver is headed higher next week, I think.
Weekly Silver EOD Continuous Contract Index:
Daily Silver EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Silver Bullion index.
Platinum closed up +3.84 pct W/W at $1,035.10, which is a huge move. Platinum is part of the precious metals complex that has broken out to the upside again.
Weekly Platinum EOD Continuous Contract Index:
Daily Platinum EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Platinum metal index.
Palladium was up +3.93 pct W/W to 284.46, which is on top of the gain of +4.65 pct a week earlier. PALL is another of the precious metals complex that has broken out to the upside.
Like silver, PALL is the metal that could prove to be the best indicator of where the precious metals are headed. These are the most volatile.
Weekly Palladium EOD Continuous Contract Index:
Daily Palladium EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Palladium metal index.
$Copper was up again, this time by +1.08 pct W/W to 210.12, which is a fresh all-time record high weekly close. Amazing.
Obviously, an economic recession, should it happen, will pull down the copper price after demand softens. But, really, how far? The emerging nations are on a fast growth track, which is secular and cannot be denied.
Phelps Dodge (NYSE: PD) dropped like a stone on Tuesday am after reporting write-offs. I think their forward selling of copper in the face of this huge metal price run up might have caught them "short". It is not a good thing for a metals producer to be selling forward (i.e., short today with delivery tomorrow) as costs will continue to rise, but the revenue is locked in.
Still I really like PD, and the current price represents a good value. If there is a recession in the U.S., traders will have to look to demand from India and China to see how the price action in PD will be affected. The PD PE multiple is low enough and the copper price is high enough that I don't believe PD stock will drop off the cliff here. But watch the RSI.
Weekly Copper EOD Continuous Contract Index:
Daily Copper EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Copper metal index.
The Philly goldminer index ($XAU) had a good week, which followed a great week. This week, $XAU was up +1.51 pct to 141.97.
Traders ought to start looking at the components to see how they are standing up. Some are fairly small companies, which means their price is quite volatile at times like this.
Remember, since my noted call on May-16-05, $XAU represents almost a double.
The XGD Toronto Exchange-listed goldminer iUnits S&P/TSX Capped Gold Index ETF TSE:XGD was up +0.54 pct W/W to 69.16.
XGD would have had a down week except for the gold break-out on Friday. That move carried the Cdn gold miners up +1.74 pct on the day, and saved the week. So, this market was starting to get real tricky, which is why I started to warn you a week ago that these stocks would not go up forever.
I'd like to say it takes nerves of steel to play the gold market, but that's too corny even for me.
But with the bullion breakout, the Toronto gold stocks should move up some more this coming week.
Here are the Weekly, Daily and Hourly data charts for the TSX Goldshares (XGD) index:
For an interactive look, here are links to the Hourly data charts of three groups of proven goldminer stocks. You can click on the tabs for the Monthly, Weekly and Daily data charts.
Forex:
The trade-weighted USD index was flat on the week, up marginally +0.05 pct W/W to 88.90.
I still feel that a USD crisis is coming, and will likely start this quarter.
Even though the USD gained on the week, on Friday it was down "0.65 pct. There is major support at 88.73 going back to early Oct-05. That's not far off.
I think this quarter the USD will pierce support. The China renminbi is headed higher.
The Euro (priced in USD) was down "0.16 pct W/W to 121.37. On Friday, the Euro gained +0.88 pct against the USD. The 40 week Moving average for $XEU is 121.87, so the cross-over is close at hand.
Later in the year, I see the $XEU moving closer to 130. I believe the U.S. monetary and fiscal problems will come front-and-center to the attention of traders. Every excuse in the book will be used (spun), but the truth is that the problems have yet to be dealt with under the watch of Pres. Bush or Fed chair Alan Greenspan.
For the last few changes of the Fed chairmanship, within a few months there has been a major currency crisis, and this one sure looks likely.
Again, I say "I expect that the Euro will rally with gold. The currency most closely linked to gold, however, is the Canadian Dollar. You can basically overlay the long-term charts of those two and not see much difference."
Weekly Euro Dollar Index, priced in USD:
Daily Euro Dollar Index, priced in USD:
International Equities:
Hot money has been leaving the U.S. to go into Yen and Euros, but the equity markets there did not prosper this week.
Japanese equity market ETF: EWJ
Japan had a down week (in USD), closing "0.85 pct to 14.07 on the EWJ. A week ago, the EWJ was up +5.0 pct W/W, and i remarked: "This is pure speculation by American traders. Sure the Nikkei and TOPIX have been strong, but that rally is unsustainable in my view."
There was a big down day on Tuesday the 10th (which I wrote up), but then the market stabilized, and will now likely follow the U.S. market.
Here is the Japanese (EWJ) equity market ETF Weekly, Daily and Hourly data charts:
U.K. equity market ETF: EWU
A week ago, the U.K. ETF (EWU) was also up sharply on what I called "an unsustainable run". EWU was up +5.44 pct W/W a week ago. This week EWU (priced in USD) was down "0.15 pct to 19.56, which is a loss of just three cents.
Here is the United Kingdom (EWU) equity market ETF Weekly, Daily and Hourly data charts:
EWU Weekly data:
EWU Daily data:
EWU Hourly data:
Canadian equity market ETF: EWC
The Canadian (EWC) equity-market ETF was up +0.13 pct W/W to 22.63, which is a gain of three cents. The big news here is that a Conservative Party is likely to be elected to a majority govt on Jan-23.
I note that the Conservatives (Blue) have dropped the word "Progressive" (Pink) from their TV ads, and the Party leader Stephen Harper is talking up U.S. missile defense, and increased military spending, much like the former PC leader Brian Mulroney, who was a friend to U.S. Administrations at that time.
As a Canadian, I'd be happy to see closer alignment to U.S. foreign policy than ever given by the liberals (Red). Domestic policy reflects the Canadian conservative culture of savings and prudent spending, as well as a liberal directing of wealth into needed social programs, more so than many other countries, I think. I like the balance.
If there is a change of government, clearly the voters are saying they want a house cleaning after various financial scandals in Ottawa, which typically happens when one Party (either Red or Blue) sits too long in power.
Here is the Canadian (EWC) equity market ETF Weekly, Daily and Hourly data charts:
EWC Weekly data:
EWC Daily data:
EWC Hourly data:
(Japan, Taiwan, Hong Kong, Singapore)
(U.K., Germany, France, Italy)
(Canada, Mexico, Brazil, Australia).
U.S. Equities:
The major U.S. equity indexes were largely flat this week. The Dow was up +0.01 pct, which is less than a single point, and the S&P 500 was up +0.17 pct W/W, which is just 2 points. The Naz was up +0.50 pct, and the Russell small cap index up +1.29 pct W/W.
There is a lot of cheerleading from talking heads, and Washington VIPs, but traders know that the Fed and the Administration are in a bind. Keep raising rates and corporate earnings growth will stall out and start to decline. Stop raising rates, but keep printing more money, and gold continues to rally and the USD falls, which is a precursor to inflation. No new taxes means printing more money or stop spending money on foreign wars and domestic pork.
Corporate America has sent jobs away, which means fewer taxes paid to govt, and less incomes for more consumer purchases. And consumers cannot extend asset-back credit any more than they have, and they will have to cut back if interest rates (on mortgages, loans and credit cards) rise.
So choose your poison. There is only poison unfortunately.
Here is the Monthly data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Here is the Weekly data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Here is the Daily data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Here is the Hourly data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
The following table shows the weekly price performance of the Dow 30 stocks, which I sorted by 1-week price change.
| Symbol | Close | Net | %Net | 1W %Net | 2W %Net | 4W %Net | YTD %Net | 3M %Net | 6M %Net | Yr %Net |
|---|
This performance chart of the Dow 30 shows 15 stocks up and 15 down this week. The pause could be a consolidation of recent week's gains or it could be the final topping of the 2002-2006 bull market. Without knowing what the Fed and the Treasury are going to do, it's pretty hard to figure this out.
Lets take a look at what happened:
The six big winners out of 15 Dow winners this week:
HPQ, up +5.49 pct:
DIS, up +3.48 pct:
HD, up +3.79 pct:
CAT, +3.11 pct:
VZ, up +2.65 pct:
XOM, up +2.59 pct:
The six big losers out of 15 Dow losers this week:
DD, down "6.64 pct:
AA, down "4.17 pct:
IBM, down "2.10 pct:
GM, down "2.07 pct:
INTC, down "1.98 pct:
HON, down "1.87 pct:
Here are the links to interactive Dow charts from Investertech.com that I broke into groups of ten, which you can add technical indicators for as well. (list one) (list two) (list three)
The Value Line Reports for this week are GE, HPQ, IBM, and INTC.
(GE) (GE) ( Here is the Jan. 13 Value Line report on GE: next one is due Apr. 14)
(HPQ) (HPQ) (Here is the Jan. 13 Value Line report on HPQ: next one is due Apr. 14)
(IBM) (IBM) ( Here is the Jan. 13 Value Line report on IBM: next one is due Apr. 14)
(INTC) (INTC) ( Here is the Jan. 13 Value Line report on INTC: next one is due Apr. 14)
Last week I wrote in this space: "I would hold off purchases of HD stock until a market pullback occurs. On extreme market weakness, put writing and share purchases are likely to generate excellent returns over the following three years."
HD then ran up +6.5 pct in the next 3 days before falling back half that after it was reported the SEC is looking into Home Depot's return-to-vendor policies. I'm not negative; in fact I am long-term bullish because Home Depot is in the Cara 100. I just think it unwise to be adding to HD positions right now.
For this week's reports, GE and INTC are also Cara 100 companies. And like HD, I feel these are a little overpriced right now, but later this year will be recommended for accumulation as core holdings in long-term accounts.
Wrap up
I was delayed producing this report. I also had to edit some out because of MT Publishing software limitations. My new pdf reports will solve that.
BCara@BillCara.com
Posted by Posted by Bill Cara on January 15, 2006 11:38:23 AM | Category: Cara Week in Review
Discourse
Bookmark this for Money Supply
Posted by: g034 ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
January 15, 2006 1:15 PM [link]
g034/All-
Has anyone seen a source describe how they are going to put together the M3 data once the Fed stops aggregating and publishing? A Fed note after the decision claims it can be done by hand if "anyone is interested" but I've yet to see anyone show how it could be done.
Posted by: MarkM at
January 15, 2006 1:26 PM [link]
Bill - Thanks for the Value Line reports. PowerShares has a 6 weeks young ETF (PIV) that actively holds Value Line "Timeliness" stocks. It is already trading between 150k to 200k shares daily.
Here is a link to Yahoo's comparison of PIV to the S&P for the short time span of its existance- not bad. My guess is that when the S&P tracks higher, PIV has a good chance to beat the index and when the S&P tracks lower, PIV will lose less. [disclosure: I am neither short nor long any PIV anything]
http://finance.yahoo.com/q/bc?t=3m&s=PIV&l=off&z=m&q=b&c=&c=%5EGSPC
Posted by: spot at
January 15, 2006 6:02 PM [link]
Hi Bill-
Your Value Line charts didn't transfer correctly nor your final comments. Just alerting you that your gremlins are still at work.
Best...
Posted by: MarkM![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
January 15, 2006 12:28 PM [link]