Deja-Vu from 52 Weeks Ago?

US dollar stabilizes up as US bond yields push higher following the 93K increase in Nov ADP (highest since Nov 2007) and the October revision to +82K from +43K. US 10 year yields jump to 2.91% from 2.79% earlier, further boosting the "good-data-is positive-for-USD" reaction, which was not always apparent. Although the euro is holding firm, general FX dynamics are increasingly similar to exactly a year ago when USD strengthened in early December 2009 on a combination of strong US Nov jobs report (released on December 4, 2009 at -11k vs expectations of -130K) and the triple downgrades of Greece later in the month (Fitch, S&P and Moodys). Are we witnessing a Déjà vu from exactly 52 weeks ago? Such would be the case in the event of double positive surprise (strong NFP, falling unemployment rate) and possibly upside revisions.

Nov manuf ISM is expected at 56.5 from October's 5-month high of 56.9. The report requires an upside surprise (above 59) in order to extend bond yields above their 2.96% barrier reached on Nov 15, which was the highest in 3-months. The key resistance remains at 3.1%, coinciding with the 200-day MA, last broken since in May 13.

Gold hits new highs against EUR €1,070/oz), GBP (£894/oz) and even JPY (117, 015/oz) but has yet to regain its record against USD, AUD and CHF. Gold/EUR was the first to regain the highs amid surging Eurozone bond spreads and Tuesday's broad selloff in the single currency. This is a repeat of the Feb-June period when the gold broke to new highs due to uncertainty with Greece and Spain. The rally in Gold/EUR reflects European investors' refuge towards the safety of the yellow metal, which consequently leads its to rally against all other currencies, albeit at different degrees. The European worries of Ireland, Portugal and Spain are prompting a classic refuge to safety, whereby both gold and the Swiss franc are outperforming the majority of currencies.

Risk appetite improves as China's manuf PMI hits 8-month highs and UK's manuf PMI surges to 16-year highs.EURUSD eyes 1.3120 short term trend line resistance. $1.3180 stands as the next barrier. Gold breaks above the $1387 resistance in overnight Asia and could well extend towards $1400 in the event that it closes the Wednesday session above $1387. Markets await US figures on Nov ADP (exp +69K from +43K) and Nov ISM (exp +56.5 from 56.9). The shooting star on the monthly S&P500 suggests a possible decline towards 1130s but a daily close below 1170 is required first.

All eyes will be on Thursday's ECB meeting and the fate of the bond purchasing program. JC Trichet referred to bond purchases as "ongoing", which raises questions over whether the ECB will unleash its own version of quantitative easing. The €67 bln in purchased Ezone bonds has been dwarfed by the asset purchases of the Fed and the BoE. Recall the euro's initial positive reaction to the May announcement of bond purchases on relief about alleviating liquidity. But the subsequent reaction turned EUR-negative as purchases are a form of further easing, which is always negative for currencies--especially in the case of an about-turn by the ECB on the subject.

The significance of the monthly reversals in EUR (downward) and USDX (upward) bears historical proportions. The last time the USDX (see chart below) has shown a similar monthly rebound (+4% at the end of a multi-month decline) was in December 2009 (part of a +20% rally in USD) and January 2005 (part of a 14% rally in USD). EURUSD is seen remaining capped at $1.3180 before retreating gradually towards $1.2920 and $1.2770. GBPUSD faces $1.5640s as the intermediate resistance, a break of which could retest $1.5760.USDJPY regains 84 mainly on broadening JPY weakness as risk appetite improves across the board. Medium term outlook remains in favour of prolonged gains towards 87.20.



Commodity Prices - On a Knife's Edge

The prices of industrial metals find themselves at crucial levels as indicated by the Economist Metals Price Index in U.S. dollar - the latest number is my estimate. The upward trend since the market bottomed in the first quarter of last year is currently being challenged.

Sources: I-Net Bridge; Plexus Asset Management.

The U.S. dollar prices of industrial metals are heavily influenced by the US$/euro exchange rate, but the drop in the Metals Index significantly outweighed that of the strength of the U.S. dollar. The drop in the Metals Index resulted in a break in the uptrend of the Index in euro.

Sources: I-Net Bridge; Plexus Asset Management.

The marked drop in metal prices, especially those of aluminium and nickel, was also echoed by very weak steel and stainless steel prices.

Sources: I-Net Bridge; Plexus Asset Management.

Sources: I-Net Bridge; Plexus Asset Management.

Bulk shipping rates such as the Baltic Dry Index are in a free fall, while Chinese containerised freight indices continue to head south, with downward momentum on the U.S. West Coast route accelerating.

Sources: I-Net Bridge; Plexus Asset Management.

Sources: chineseshipping.com; Plexus Asset Management.

In my view the decline in non-U.S. dollar metal prices together with declines in bulk and containerised shipping rates are proof of a sudden weakening of global demand. The manufacturing PMIs for November (to be released next week) are likely to disappoint on the downside. I am still very concerned about how markets will react when China's non-manufacturing PMI is released by the end of next week. If the seasonal trend over the past two years holds true the number is likely to indicate contraction in China's services sectors.

I therefore expect volatility to increase in most financial markets over the next two weeks. Regarding short-term market movements, a possible scenario is as follows.

Stronger markets: U.S. dollar; yen; Swiss franc; mature-market bonds.

Weaker markets: industrial metals; silver; platinum; emerging-market equities; mature-market equities; commodity-related and emerging-market currencies; euro; British pound

Neutral markets: gold bullion

Where are the Bond Vigilantes?

Last seen in full force in the inflationary early 1980s, bond vigilantes were shadowy figures who were said to have rebelled and swore to keep central banks and governments honest by raising long term interest rates whenever the authorities kept their own interest rates too low, or let budget deficits grow out of control.

Yet now, with interest rates at near zero percent and budget deficits in the US stretching the boundaries of belief, not a peep.

Some say that bond vigilantes are re-awakening and showing their power to deeply bankrupt states such as Ireland and Greece. But that's not bond vigilanteism, that's just people selling bonds from an obvious insolvency situation. A bond vigilante would have, or should have, been selling Greek and Irish bonds years ago.

Others say that the bond vigilantes of today are other central banks as they are the largest holder of sovereign debt. But other central banks cannot be vigilantes without being hypocrites. After all, how could the People's Bank of China state they are selling US Treasury Bonds because they are unhappy with the Federal Reserve's Quantitative Easing money printing plan when they themselves have been inflating at rates even higher than the Fed's and just injected a net CNY74 billion (US$11.14 billion) into the Chinese money market this week through its open-market operations, in a bid to "ease a liquidity crunch".

One of the most identifiable bond vigilantes of the past is George Soros who, on September 16, 1992, Black Wednesday, sold short more than US$10 billion worth of pounds against the Bank of England's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.

The BoE finally withdrew the currency from the European Exchange Rate Mechanism, devaluing the pound sterling, earning Soros an estimated US$1.1 billion. He was dubbed "the man who broke the Bank of England".

And so, where is George now? He is clearly now part of the system and is doing embarrassing road shows trying to sell people on the importance of combating "global warming" and on global carbon taxes, years after the global warming ruse has been thoroughly debunked.

As for other big-time capitalists, like Warren Buffett, he recently penned an op-ed to the New York Times on November 16 where he gushingly thanks the US government and the Federal Reserve for bailing out himself and the majority of the defunct, non-free market, US financial system. Not once does he mention that it is the US taxpayer who did the bailing. Nor does he even seem to realize that is the case.

Both George and Warren have become one with the system. As their businesses became more and more entwined with the system, with Warren becoming a major investor in the vampire squid, Goldman Sachs, it has become clear that the older generation of capitalists have no interest in keeping governments in check - and have every interest in continuing to expand the size and scope of government.

Despite the fact that Warren Buffett's father was a massive proponent of gold being an integral part of a money system in order to restrain governments, Warren has long been against any form of free market money.

Warren's father, Howard Buffett, a libertarian-conservative banker who served four terms in Congress, fought against Roosevelt's New Deal and Truman's Fair Deal. The same type of "Deals" that Barack Obama embodies today and that Warren Buffett and George Soros promote.

This quote from Howard Buffett in 1948 on gold stands in stark contrast to the views held by his son, "When you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. There is no more important challenge facing us than this issue - the restoration of your freedom to secure gold in exchange for the fruits of your labors."

Meanwhile, his son Warren, who referred to himself as a "nephew of Uncle Sam" in his recent NY Times Op-Ed has this to say on gold, "It doesn't do anything but cost you charges and stare at you."

Looking at the relative performance of Berkshire stock to gold (chart below) over the last decade, one might be inclined to pay those charges, Warren.



BOND VIGILANTES ARE OBSOLETE

The truth is that in today's age of fiat currencies and central banking, bond vigilantes have become obsolete. Governments and their central banks the world over are completely unrestricted in their money printing and they have shown that there is one group of people that they will always be there to save, bond investors.

In May, 2010, during the first flare-up of Greek sovereign debt insolvency, Greece's finance minister said that anyone betting against Greece would lose their shirts. And he was right. As soon as Europe's first bailout fund was announced, Greece's ten year bond yield had collapsed a remarkable 47% to 6.6% from 12.4%.

And now it appears the next wave of bond insolvencies will be coming from US municipalities. Municipal bonds had their biggest one-day sell-off since the height of the financial crisis on November 16th (see chart of the Nuveen Municipal Closed End ETF below). The yields on triple A 10-year bonds rose 18 bps to 2.93 per cent, the largest one-day rise since October of 2008, according the MMD index, which is owned by Thomson Reuters.

But what bond vigilante would step in to begin shorting municipal bonds when we live in a world of bailouts?

RISE OF THE DOLLAR VIGILANTE

Can anyone stop out of control governments from eternal deficits, money printing and bailing out the banks and other cogs of the financial system of today? The answer is yes, someone can: Everyone. And they are.

Around the world, individuals are slowly waking up to the tyrannical financial system that coercively forces them to use their paper money and fixes the price of said money (interest rates). Individuals are making the cognizant choice to sell their dollars, yuan, yen, rupees and pesos and buy things of real value with the proceeds.

Obvious beneficiaries of this global shift have been the precious metals, gold and silver. Every time Ben Bernanke fires up the helicopters and begins to clusterbomb the world with federal reserve notes the dollar vigilantes sell more dollars and buy more gold and they have been doing so without pause for ten years running.

Clearly people like Bernanke, Soros and Buffett are unaware of the massive shift in perception that is going on. Every day, thanks to the internet, people are realizing that the current monetary and financial system are far from being free-market and, instead, are tightly owned and controlled by a small group of global financial elites who have been using their power and control to steal and destroy wealth for decades.

A global cast of thieves, murderers and sociopaths can meet for billion-dollar caviar and fine wine gnoshing at the G7 and G20 meetings and talk about the need for a new financial order with a basket of fiat currencies at its core but 6 billion+ individuals around the world have already decided which money has more value and on a nearly daily basis now, with the odd correction, for the past decade they have been making their voices heard.

It won't be too much longer until Bernanke, Soros, Buffett, Geithner, Obama and the like will realize they aren't in charge anymore.

Wild Week

A lot of bombs dropped this week on Wall Street and we can begin by just digging in.

Boeing suffered a big problem with its brand new product and tanked
Apple broke its trendline
Gold and Silver bonked big time
Oil had a fake trading range breakout
Cisco kid was NOT a freind of mine (name that group) but Juniper (direct competitor) sure did like it.
Bonds of several ilks broke down  
And, of course, China, which was to blame for only the oil slick above

On the plus side, the PIIGS were flying on Friday as the EU backstopped them.

Dollar, Euro, Gold, Silver, and VIX Poised For Reversals

Numerous factors and markets are telling us the odds of short-to-intermediate-term reversals are elevated for numerous markets including silver (SLV), gold (GLD), the U.S. dollar (UUP), the euro (FXE), stocks (SPY), and the VIX (VXX). The objective of both fundamental and technical analysis of the financial markets is to help us better understand the risk-reward ratio and relative attractiveness of a wide variety of investments. Since no chart or annual report can help us predict the future, our study of markets deals in probable outcomes.

The possible drivers for market reversals in dollar, euro, gold, silver, and VIX include:

• Concerns about Irish debt
• Uncertainty related to the G20 summit
• High levels of optimism (bullish sentiment/contrarian indicator)
• Near vertical, and correction-less ascents in numerous markets
• Mania-like moves in gold and silver
• Stretched valuations

We at CCM, along with many others, believe the sharp gains in many asset classes off the summer lows were primarily driven by the expectation of money printing and a weaker dollar. As the dollar weakened, many risk assets or inflation-protection assets rose. One example is gold; note the negative correlation between the yellow metal and the U.S. dollar.



These charts can help us from both a bullish and bearish perspective. If the markets reverse near the areas highlighted below, we would be more apt to become risk averse in the short-term, especially in terms of decisions related to cash. If these markets break through areas of potential resistance, then another leg up in risk assets becomes more likely, and we would be more amenable to increasing risk exposure in the short-term.

Just as a declining dollar increased the appetite for risk over the past five months, a countertrend rally in the dollar may open the door to corrective action in stocks and commodities. The Dollar Bear ETF (UDN) was down Tuesday on a 56% increase over average daily volume. As you review the charts below, ask yourself, "Is this market at a logical point for a possible reversal based on the recent action of buyers and sellers?"

The euro may have reached a point where buyers have become less interested. Recent concerns about Irish debt may also give currency traders a reason to cut back their exposure to the euro. Since the euro makes up roughly 60% of the U.S. Dollar Index, a drop in the euro would help propel the dollar higher. The desire to sell the euro ETF (FXE) was not atypical from a volume perspective on Tuesday, which tells us not to assume anything in terms of a reversal. A decline in FXE over the next few days on strong volume would add credence to the trendline. Average daily volume for FXE over the past three months was 1,556,260 shares. A decline over the coming days on more than 1,867,512 would add to our bearish concerns. A break to the upside on more than 1,867,512 would lean toward favorable outcomes for risk (stocks, commodity-dependent currencies, and commodities).

Technical analysis can look complex, but many of the most useful tools are very easy to understand. Trendlines are used to identify areas of past importance in the minds of buyers and sellers. Buyers tend to see value at areas of "support" and sellers tend to see "overvaluation" at areas of resistance.

The VIX, or the "fear index", has reached what many would term as a level of "complacency". A rise in the VIX, especially a sharp one, often occurs during periods of risk aversion. The VIX ETF (VXX) was up Tuesday on strong volume.

Silver tends to outperform gold during periods of risk-taking and when the economic outlook skews toward the more favorable end of the spectrum. Silver may have experienced a blow-off rally yesterday (SLV). Markets cannot logically rise in a vertical fashion forever; silver will correct at some point. Another day of high-volume selling would increase the odds that Tuesday's intraday selloff on extremely high volume was indeed significant from a bearish perspective. As we head into trading on Wednesday, silver gets the benefit of the doubt since the bulls have been firmly in control, but Tuesday was a big yellow flag for the silver bulls.

Gold's appeal has increased as fiat currencies are being debased around the globe. Gold has not had the high degree of mini-mania seen recently in silver, but the yellow metal has also reached a point where the desire to sell may now exceed the desire to buy. The gold ETF (GLD) was down Tuesday on strong volume.

The S&P 500's intraday high on November 5th was 1,227.08. A 61.8% Fibonacci retracement of the October 2007 to March 2009 bear market falls near 1,228 on the S&P 500. These levels can be important to traders, so it is helpful to keep them on your radar, especially when you have trouble understanding why a market is stalling with no apparent resistance nearby.

The chart of the S&P 500 seems to be a little better positioned relative to overhead resistance. If stocks can push higher, a move to 1,234ish to 1,256ish on the S&P 500 seems within reason. The S&P 500 ETF (SPY) was down Tuesday on below average volume, which again highlights the need to pay attention rather than assume reversals are going to take place - no one knows what is going to happen, especially over the short-term. Over the summer, many were convinced the Hindenburg Omen spelled doom for the markets; the S&P 500 is now 16.7% above the Hindenburg Omen lows made in late August 2010, which is just one example of the importance of remaining flexible in terms of market outcomes (bullish and bearish).

Trendlines are broken all the time, which reinforces the probabilistic nature of this analysis. We cannot predict the future, but we can say it makes sense to pay attention over the next week or so. With the information we have in hand now, we believe many market reversals will represent corrections within ongoing trends. We believe gold, silver, and stocks will eventually make higher highs after the next correction, which will come at some point. We recently outlined other concerns about the dollar, and concerns about gold, which still apply to the current market.

If you are a little perplexed by the recent gains in inflation-friendly assets, it may be helpful to scan some of the charts on the lower portion of this Quantitative Easing page. The Fed's objective of re-inflating asset prices and debasing the dollar will probably lend support to gold, silver, and stocks after the next round of corrective activity. Since there will probably be a QE3, QE4, and QE5 over the next few years, it is worth the time to understand how QE works, what the Fed is trying to accomplish, and the possible impact on your purchasing power and investments.

Oil Prices Are Going Higher!

Global crude oil production has leveled off at 74 million barrels per day. However, now that economies are recovering, consumption levels are back on the rise and the result will be an inevitable rise in oil prices.

Oil Consumption is Crucial for Economic Growth

Ignoring the rest of the world, the U.S., China and India are expected to increase their daily consumption of oil by almost 10 million barrels per day by 2025. Economic advancement over the last 150 years has been highly correlated with the consumption of oil and other fossil fuels and without this increase in consumption of oil at low prices the world will experience no growth. With such large populations and leverage to energy consumption, however, it is unclear if China and India can live up to their high hopes of leading the world out of the current global economic slump.

What An Increase in Oil Price Means For Global GDP

A $100 increase in the price of oil would cost an additional $3 trillion in direct consumption expenses globally effectively reducing global GDP by 5.1 percent. While some of this wealth might be transferred to oil exporting nations, this is not a zero sum game. If oil shale or deep water drilling were used to replace current low cost supplies than oil producers would be spending nearly $100 in additional productions costs and realizing none of the financial gains to offset the losses from consuming nations.

Most developing nations that are driving global economic growth are highly dependent on energy consumption. Although the U.S., EU, and Japan consume large amounts of energy, these nations have less leverage to the price of oil in relation to their GDP. If the price of oil were to rise by $100, China would suffer from a direct 6 percent hit to their economy, India would suffer from an 8 percent hit to their economy and Japan, as probably the most economically vulnerable nation in the world, would be even more adversely affected.

What Oil Dependency Means

Another important consideration for countries is their foreign dependency on oil. While Russia has a high level of leverage in oil consumption, it is also a net exporter. As a result, Russian oil supplies are relatively secure. The two most vulnerable nations in the world to an oil shock are Japan and South Korea as they import more than 97 and 98 percent of their oil respectively. Both nations are also highly urbanized with very little arable land. These nations would not survive a halt in global oil trade. The EU, China and India are also highly dependent on oil imports.

Why Extent of Unused Arable Land is Important

South and Central American nations including Brazil and Argentina may have the best chances of coming out ahead as they are energy independent, have lower populations than Asia, and the most unused arable land.

Capacity of arable land is a strong indicator of potential for economic prosperity if energy prices spike because the arable land supports farming and food production.

Conclusion:

Now that the U.S. and Europe are also financially insolvent energy consumers the world is turning to nations such as India and China to drive global growth but their large population and leverage to the price of energy create a situation of great risk.

If peak oil is realized within the next five years then growth prospects in India and China will be reduced drastically and the result will be negative global GDP growth and a reduced standard of living for virtually all nations.

Gold Breakout vs. Corporate Bonds

Since the financial crisis in 2008, it is undeniable that precious metals have been the best performer. One would assume that market participants have been piling into Precious Metals. Certainly some money has moved into the sector, smartly anticipating the continuance of a major bull market and looming severe inflation in the next several years. Yet, most funds have moved into fixed income (corporate bonds and treasuries) as the chart shows.

Corporate Bonds have been an even better performer than treasuries and rightly so. Not now, but a year or two years ago one could find great yield with the bonds of blue-chip companies, who will be in business for the years to come. Meanwhile, Uncle Sam has taken on the losses of the private sector amid a worsening economy. To begin with, Uncle Sam's balance sheet was a mess.

How does this all relate to Gold? Another way to track fund flows is to compare markets via intermarket analysis. Gold has performed very well but most money has moved into fixed-income. Gold will begin to accelerate when money starts moving out of bonds and into Gold. The chart below shows Gold vs. the total return of Corporate Bonds.

This ratio just brokeout from a 31-month base! Since the crisis, Gold and Corporate Bonds were performing about equally. Now Gold has gained the upper hand. This breakout could be the start of a new trend in fund flows over the next several years. Look for money to favor Gold and other Commodities, as inflation becomes a major concern. Ignore those who are promoting stocks as a way of beating inflation. Their interests are not aligned with yours.

How does this affect Gold right now? Gold is in a correction. We have upside targets of $1450-$1500 with a downside target of $1280-$1290. No one can predict the future but we can assess probabilities and manage risk. If this breakout holds then it means money in fixed-income is starting to worry about inflation. After all, the above chart is providing an early indication. This is what separates our work from the crowd. We analyze numerous charts to decipher and decode the message of the markets.

When analyzing Gold, one needs to compare it to various markets (bonds, currencies, stocks) in order to get a complete handle on everything.