by Enrico Orlandini
“What no one is willing to admit is that the Fed together with Treasury spent close to US $3 trillion in six weeks to keep the market from going to where it will go anyway. There is a simple lesson that all people in government need to learn: since the industrial revolution began, no one has ever succeeded in changing the primary trend of any major market. Not once, not ever! You would think that Bernanke and Paulson would know that, and I’m sure they do, so that makes me wonder just what they are trying to achieve.” EBO
DT Analysis SAC
One of the best minds on the scene as far as I’m concerned. EBO has been mostly spot on and like is colleague Roger Weigand has a tendencay to tell it exactly as it is. Where as Mr. Saxena is talking of an inflationary tsunami, Mr Orlandini is talking about a deflationary spiral. Could they both be correct? Could there be a shorter term deflationary environment and a longer term inflationary, even hyper-inflationary environment? I think it might be possible. I’ll have more to say on this in the next article. In the meantime, here is the very erudite EBO. The Charts are omitted so you may have to visit http://stockcharts.com/index.html to review them.
WEEKEND REPORT (11/16/08)
Fighting the Trend
What a week! The world has had time to digest the Obama victory and assess the implications with respect to economic, domestic, and foreign policy. I think it’s a safe bet to assume that just about every major world leader will welcome the change. The Bush administration had a knack for alienating all of our allies on more than one occasion.
With the world economic slowdown, the issue of the wars in Iraq and Afghanistan were pushed to the back burner, but Americans continue to die there every day. I will be interested to see how Obama will try to extricate himself from a situation that has no viable way out. In a way Obama was lucky the economy turned down, so he really didn’t have to go into detail on how he would handle the war. Like John McCain and Hilary Clinton, Obama turned a blind eye and allowed Bush to do whatever he wanted in Iraq, so it would have been difficult to criticize something you supported for so long. The expenses for the war are treated as something outside the budget, as if it didn’t count, and it’s something that everybody seems just as happy to sweep under the rug. Unfortunately the war effort will cost somewhere between US $250 and US $400 billion in 2009, and that requires a very large rug! (These wars will cost in excess of 1.5 trillion before all is said and done and of course they are off budge items!! What is IN the budget?? See what I mean aabout telling it like it is!?Ed.)
Here’s something that I haven’t read anywhere. Most of the Arab nations were content to sit by and let the US mire itself in Iraq, because they were more than content watching the price of oil rise from US $50/barrel all the way up to US $147/barrel. When things are good, and the future looks even better, you tend to ignore things like a war in a neighboring country. Now oil has plunged all the way back down to US $52/barrel catching many Arab countries undergoing a huge expansion, based on all those future profits they’re no longer going to receive, and they’re not going to be able to make ends meet. Economic hardships mixed with religious fervor could very well drag many Arab nations into the Iraq war, especially if Mr. Bush tries to do something in Iran before his term ends.
It is very important to understand that the deflationary process that began in the United States is spreading throughout the rest of the world, and the Arab nations will not be an exception to the rule. The rulers in countries like Saudi Arabia are a minority and hang on to power by spreading the wealth, and if there is no wealth to spread, they will find it difficult to reign. What’s more, most Arab countries hold considerable US debt as reserves and they are learning that these reserves may be worth little or nothing. Religion is a major influence in the Arab world and if the economic situation continues to deteriorate, it wouldn’t take much to turn the Arab world openly against the US. In short, Obama has to walk a very fine line and extricate himself from Iraq as soon as possible.
South of the border things aren’t much better. Many folks openly blame the United States for the economic woes that are befalling them. Line the Arab countries, South America was undergoing a huge expansion based on the assumption that commodities prices would rise to infinity and beyond. Surprise, surprise! Trees do not grow to the sky. Commodities continue to fall and, in spite of being severely oversold, look like they’ll fall even more.
It is no exaggeration to say that the exportation of commodities is the lifeblood of South America, and it is also no exaggeration to say that they are bleeding to death.
To make matters worse, countries like Brazil are loaded with US debt and much of that debt is of questionable value. All of this is happening at a time when Latin America is moving to the Left and in some cases the move is extreme. Economic problems will only exacerbate that move, and I find it somewhat ironic. Latin America’s problems are almost always self-imposed, but this time they followed the playbook from the IMF as well as the US, and it’s the US that drags them back down into the mud.
Asia is in the same boat as the Middle East and Latin America; caught in the middle of a huge expansion just as the American consumer abandons his credit card and begins to save. So, well over half of the world’s population used their saving to increase production and/or loan it to the US in return for “AAA” paper. Now there is no one to produce for and the paper is worth a lot less than they thought (I am trying to avoid the word worthless). I don’t think that will sit well with the rest of the world. The last time we saw an economic downturn of this significance was in 1930 and the end result was Latin America going to the far Left while Europe went to the far Right. Hitler and Mussolini came out of the depression as did WW II. So far we are following the same pattern with Latin America and Europe and all we need is for some tyrant to make an appearance.
There is one difference though: the US was a large creditor nation and a positive force in 1930, while today it is the largest debtor nation and I will go so far as to say a divisive force. After all the lies and deception, it will be difficult to get someone to unite behind a US leader.
Once you understand that, you can truly understand the dilemmas that face Obama and what makes it even worse is that he is still unaware of the real problems he faces. We live in very dangerous times.
Given the circumstances surrounding this world-wide deflation, I find it absolutely astounding that the US Federal Reserve and the US Department of Treasury would spend so much time and effort, along with the few resources left at their disposal, trying to change the primary trend of the stock market. As you know by now, I am of the opinion that we entered a bear market for stocks back in October 2007 and absolutely nothing has changed my mind. Take a look at the daily chart for the Dow Jones below
and you’ll see how the index is rolling over into a steeper decline with each passing week (series of blue lines). Aside from that we can see a progression of lower lows and lower highs, dating back to November 2007, most of which were confirmed by the Transportation Index. It was the first such confirmations in November 2007 and again in January 2008 that triggered the bear market signal, and the latest reconfirmation took place just last month.
From the very beginning the Federal Reserve, and later the Department of Treasury, tried to postpone the inevitable by cutting interest rates and injecting liquidity. Each intervention produced a lesser response. This required that both the Fed and Treasury raise the stakes with each intercession until now, we are talking in terms of trillions instead of billions. Interestingly enough the last series of interventions in late September and throughout October produced effects that could be measured in hours rather than weeks, months or years. The cost of these interventions is estimated to be somewhere between US $3 and US $6 trillion dollars, depending on who you ask. There seems to be a line in the sand and with deference to the Dow, I suspect it’s strong Fibonacci support at 8,146. We tested this support on October 10th and then again on October 27th and both times a bounce coincided with intervention. The first bounce lasted all of two days while the second one was extended to six days. Both rallies were hailed as confirmation the bottom was in and better days were ahead.
I have insisted for more than a month that the bottom was not in, given the way that selling pressure never really subsided and buying pressure never really took off to the upside. What’s more, each rally was always followed by one or more 90% down days indicating that there were still plenty of willing sellers out there. That brings us to right here and right now where we are in the midst of a third test of the crucial 8,146 support. This last week started out with declines on Monday, Tuesday, and Wednesday saw progressively larger declines, followed by an upside reversal on Thursday as rumors about another interest rate cut and a US $450 billion stimulus package fueled the move up for 900 points from the intraday low. Strangely enough Thursday’s rally did not produce a 90% up day! On Friday sellers reappeared, especially at the close, and the Dow gave back 337 points, and most of that decline coming after 3 pm. What’s more, buying pressure dropped more on Friday (and selling pressure rallied more) than it rallied on Thursday, a day with much bigger numbers. Finally, on Friday the buying pressure reached a new bear market low and that indicates that prices are not yet low enough to attract buyers.
Given everything that I have said, I have to believe that the third test of the 8,146 support is not yet over and the fat lady has yet to sing. I believe we’ll see a continuation of that test on Monday or Tuesday and I do not believe the support will hold. I think the Dow will test the 2002 low at 7,286 and that might not hold either, but it’s too early to say. Likewise the Transportation Index is in an almost identical situation as it tests strong support at 3,341 for the third time. Again like the Dow I think the Transports will fail to hold support and we’ll head down to the next level at 2,898 before we have any chance of seeing a buyable bottom.
“What no one is willing to admit is that the Fed together with Treasury spent close to US $3 trillion in six weeks to keep the market from going to where it will go anyway. There is a simple lesson that all people in government need to learn: since the industrial revolution began, no one has ever succeeded in changing the primary trend of any major market. Not once, not ever! You would think that Bernanke and Paulson would know that, and I’m sure they do, so that makes me wonder just what they are trying to achieve.
For those of you who can’t convince themselves to sell stocks short, there is only one real alternative and that is physical gold.
Commodities and bonds still have plenty of downside and only the yellow metal is in a position to move higher.
If you take a look at the daily chart for gold below, you can see that the technicals are starting to look better. The RSI, the MACD, and the histogram have all turned up as gold consolidates in a sideways but shrinking price range. As I have mentioned on countless occasions, a compressed trading range in a bull market is almost always resolved to the upside, and this compression is almost a month old. This week saw a run down to 700.00 find willing buyers and they immediately pushed price back up above the important 735.80 level. I know most people are giving up on gold, I read my clients e-mails, and that tells me that we are about to take off to the upside with very few bulls on board. A
SUPPORT RESISTANCE
GOLD 735.80 748.90
715.00 760.60
698.00 772.70
real key will be a close above 772.70 resistance and, if I am right, we’ll see that within a week. If I am wrong the December gold will break down and close below 715.00. We should know shortly.
A few brave souls out there are wondering if gold stocks are ripe for the picking or not, so I thought I would take a look at a two-year daily chart for gold and give you my thoughts. As you know, I exited most of my gold stocks way back in January and wish I would have sold them all. My reasoning was that a declining Dow would eventually sink all ships, and I was right. When I look at this chart, I still can’t get excited about gold stocks. I would much prefer to wait until I have a sure bottom in the Dow instead of buying here and going against the tide.
Finally, I would like to close with a few comments on the dollar. A country’s currency is quite similar to the common stock of a company. As it rises against its principal competitors it implies a favorable outlook for the country. Then if the US is in such bad shape, why is the dollar on the rise? The answer is not quite as complicated as you might think. Many foreign investors took out loans in dollars thinking it would continue to devaluate. They then turned those dollars into assets that would produce local currency. Exports fell sharply, income in local currency did the same, the dollar rallied, and now a lot of these investors are upside down. Not to worry though as the US government is coming to the rescue with mega-bailouts and stimulus packages designed to destroy the dollar. It may take a little bit longer but the greenback will head lower as all the injections finally take their toll. The December US Dollar Index has been playing around on both sides of strong Fibonacci support/resistance at 87.36 for the better part of two weeks. Given that the recent closing highs were not confirmed by RSI, I think there is a good chance that we are putting in some sort of top. Aside from that I think the dollar will begin to price in an Obama spending spree early next year and that can’t be a dollar positive. I have a small short position in the dollar and I will watch closely how things develop this week.
ebo@dtanalysis.com
Dow Theory Analysis SAC
Nov. 16, 2008
Posted by D.Stewart Armstrong in Articles