Market Comments

The name of the game is LIQUIDITY , and lots of it – to the point of being totally absurd. The Fed continues to create excessive credit in order to keep the patient alive. M3 increased over 40 billion for the week, and over 8% for the year.

Even more ominous, commercial paper has increased by almost 19%. But the winner has been asset backed securities, which have expanded by the incredible rate of 25%. The patient requires ever larger doses just to stay alive.

The dollar [see chart below] got whacked for a - 2.6% loss for the week. Foreign currencies responded with big advances. The Swiss Franc was up 3.49%, and the Australian Dollar 3.63%. The winner was the SA Rand – rocketing up 4.2%.

 It APPEARS that a number of market players believe the Fed will soon be ending its rate hiking campaign. The DOW gained 2.2%, and the broader S & P was up 2.9%. The Nikkei was up 3% and has been a good performer of late – it bears close watching. Several stock indices are at 52-week highs.

 Leading all stocks higher were the precious metals . Both energy and commodity stocks performed well. The HUI soared over 9%, crude was up over 7% the last two weeks, and the CRB is at an ALL TIME HIGH.

 This action is in keeping with our philosophy of investing with the primary market trends. It’s fairly straightforward: the more paper fiat the Feds create, the more powerful will be the response of gold, energy, and commodities [see charts below].

 The precious metal, energy, and commodities are our three main long term investing paradigms, and will continue to be so until such time as they are not.

 The bond market was fairly quiet, with the yield curve essentially flat. The two year yield is slightly ahead of the five year. The spread between 90 day T-Bills and the long bond is down to ½%.

 It appears that the Fed is on the path to an inverted yield curve, while inflating away into oblivion. More than one has flown away over the cuckoo’s nest.  

 Below is the weekly US Dollar Index , which has just violated its uptrend line. It appears quite possible that a new downward leg may be about to get underway.

The dollar is below its 100 dma and is approaching its 40 dma. Gold had already ferreted this all out, as it usually does.

 

 U.S. Dollar Index

Chart Courtesy of StockCharts.com

 

Below is the CRB Index chart, which just put in an ALL TIME NEW HIGH. The commodities remind us of Rodney Daingerfield who just couldn’t get any respect. An important point to realize is that not all commodities are equal.

 We have just recently seen this is the gold and silver stocks as well. Some have performed outstandingly – some have hardly moved. This is all quite normal.  

The commodities are even more fickle. The metals have been hitting new highs, while many grains and lumber have resisted. Both oil and natural gas are well off their recent highs. Natural gas is off 40%.

Once again, however, this is right in keeping with our paradigm theme of precious metals, energy, and commodities.  

It is doubtful that there will be a time when all the precious metals, along with all forms of energy, along with all commodities - will be marching higher in lock step.

 It just ain’t that easy; and if were to happen, you can rest assure that hyperinflation would be fanning the flames. A fun time would not be had.  

Those who wish for $3000 an ounce gold will hopefully NOT get what they wish for, as they know not from whence they speak, nor desire. It is not the place they think it is – but the place they will wish they never saw, if indeed they do.

 It would be time to hug your gold and keep it close at hand, along with a shotgun and some JD straight up. I can think of other things I’d rather be doing.

 

CRB Index

 

Chart Courtesy of StockCharts.com

 

Below is the chart of the energy complex exchange traded fund XLE traded on the Amex, which shows that its upward trend is still in place. Yet the price of oil is well off its high, and natural gas is down nearly 40% from its high.

Several NG producers are beginning to once again appear on our radar screen and will discussed further next week if the action so warrants. Apache looks like it may be getting ready to make a move.

 

SPDR – XLE

 

Chart Courtesy of StockCharts.com

 

Our last chart below is the XAU precious metals index. It has been a stellar performer moving from just under 80 back in May to close at 139.86 on Friday. For all those that have believed and invested in the pm’s – it has been a very good year.

We all should be quite thankful for the moves the precious metals have made, and not become over greedy trying to drain every last drop of profit from the well of prosperity.

In my own portfolio I have been steadily taking profits and will continue to do so on any further strength. This move is starting to get longer, as opposed to shorter in the tooth, which does not mean that more profits do not lie directly ahead.

It does, however, suggest that the odds of risk to reward are increasing and should be duly noted. As always our motto in bull markets is to sell into strength, and to buy into weakness.

 

XAU Gold & Silver Index

 

Chart Courtesy of StockCharts.com

  

Summary

We are staying with the trends that remain the strongest, both technically, and fundamentally: the precious metals, energy, and commodities. We will be looking to book profits on any further rise.

 We are not accumulating any additional positions at this time – patiently waiting for counter-trend corrections to provide lower entry points. The precious metal stocks are presently quite extended, but that’s what bull markets do.

 The Fed wants to slowly create an inverted yield curve, while protecting the 10-year note, which is most critical in preventing the credit bubble from bursting.  

The Fed does not want to see the price of gold break away. A breakout they can deal with – a breakaway could cause the credit markets to implode.  

Patience and forbearance are called for at the present time, as we continue to book profits when presented with the opportunity, and we await to accumulate new positions in some of the energy and commodity stocks.

 When and if the precious metals correct, and most are lamenting – we will slowly but constantly be re-accumulating in our contrarian manner.  

 

By Douglas V. Gnazzo

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