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Market Noise, But Not Much Movement

The morning began with a stronger than expected report from the Commerce Department for February Durable Goods Orders. The number came in showing an increase of 2.5%, while expectations called for an increase of 1.5%. Stocks and bonds showed little reaction to the news, as one trader interviewed on CNBC said that floor traders jokingly refer to the report as the “dirty goods orders.” He explained that traders don’t react strongly because it is expected the number will be revised significantly when the dust finally settles. In fact, the initial report for January indicated a decline of 1.8%, the first revision brought it down to negative 2.3% and the final number showed a decline of 2.7%. The headline number will sound good in the news, but experienced traders and analysts know better. Stocks opened higher, but flip-flopped throughout most of the day showing little conviction in either direction.

The NASDAQ Composite Index was stronger than the Dow Industrials through today’s trading session, but I attribute the gain to more of a “dead cat bounce” after the pounding it has taken since last Friday. Note the NASDAQ is down nearly 12% since the high reached in late January. Overall for the day, the Dow Industrials dropped 15 points, but still hung onto the 10,000 level by closing at 10,048, the NASDAQ gained 7 points to 1,909 and the S&P 500 split the difference by dropping 2 points to close at 1,091.

Same Old Song!

Treasury notes and bonds looked like they were in a coma today as the Treasury Department auctioned another $26 billion of two-year notes. It sure sounds fluffy to hear they “auctioned” Treasury Notes, since it could also be said that the government was forced to borrow another $26 billion to keep the doors open for business. At risk of sounding like a broken record, I have made the observation many times in the past that NOTHING MOVES when the Treasury is forced to borrow more money. I remembered writing specifically on this topic before, so I went back and took a peak at my archived Wrap-ups. Back on October 8^th last year I wrote, “Freeze Frame, Nothing Moved Today” at a similar time with Treasury auctions taking place.

Upon glancing through the article a couple things caught my eye. The most significant thing I noticed was silver being slapped down below $5.00 per ounce. I mentioned silver at $4.85 per ounce, and “Don’t be afraid of the take-down, just buy more!” Wouldn’t you love to have a shot at $5 silver again? It is a thing of the past, so don’t get your hopes up! Today spot silver closed at $7.61, an increase of over 50% since I wrote in October! I also noticed the government released inventory data for oil supplies that worked to push the price of crude below the $30 mark. The same exact thing happened today when the Energy Department announced inventories increased by 7.5 million barrels. Crude fell more than 2% to a low of $36.65 today, but traders didn’t take the head-fake and took advantage of the lower price to buy the dip. Crude closed at $37.03 per barrel today, a far cry from $30 just five months ago. According to a survey by AAA this week, the average price of self-serve regular unleaded gas moved to a new record of $1.738 per gallon. The peak demand of summer driving season is not even here yet!

April Fool’s Day Approaches

One of the bigger percentage movers today was the U.S. dollar as it closed higher against all major currencies, except the yen. The dollar gained most versus the euro as analysts are now speculating on a potential rate cut from the European Central Bank. ECB President Jean-Claude Trichet said the central bank could change its strategy if consumption and demand do not improve as the bank is currently forecasting. Currency traders sold the euro on the news, dropping the exchange rate to $1.211, a decline of 1.5%.

Adding credibility to the potential of an ECB rate cut was a comment from Ernst Welteke, president of Germany’s central bank, wherein Mr. Welteke told reporters that the German economic recovery this year is “somewhat weaker” than expected. It appears European officials are following the lead of U.S. government officials and Federal Reserve governors by using rhetoric to slow the rate of appreciation of the euro versus the dollar. We will find out on April 1^st (Fool’s Day) when the ECB gets together for their next policy meeting.

On the flip side, Federal Reserve Bank of Atlanta President Jack Guynn is warning business leaders of a potential increase for interest rates here in the U.S. In particular, the following paragraph in a Bloomberg News article today really caught my attention:

“There is a danger that leaving rates too low for too long might lead to ‘some inappropriate kind of behavior’ by business and in financial markets, and ‘excesses’ in housing, Guynn said. He predicted both hiring and inflation may pick up soon as rapid productivity gains fade and warned businesses not to rely on the current policy environment to last.”

The statements caught my attention because they run contrary to Mr. Greenspan’s low inflation due to the miracles of productivity increases. Mr. Greenspan has also said that it is difficult to identify a “bubble” until it actually pops, but Mr. Guynn implies there could possibly be a bubble (excesses) in the housing market. New home sales continue at a blistering pace as 18 out of the last 19 months have posted an annualized rate in excess of one million units. The median price of new homes jumped last month by a whopping 4.8% from $196,100 to $205,500. I’d sure like to know where these $200,000 new homes are hiding, because all the homes I look at are at least two to three times that amount!  I believe his reference to “inappropriate behavior” points a direct finger to rampant speculation in the financial markets with “hot money” causing unwanted volatility in stocks, bonds, and currencies. He could also be alluding to the current carry trade caused by the steep yield curve, where the hot money borrows short-term at 1% to buy longer dated maturities yielding 4% or better.

It appears the Europeans are talking the euro down while officials in the U.S. are talking the dollar stronger. Can the rhetoric be enough to offset the possibility that the Bank of Japan will stop intervening to support the dollar? Based on the many billions of dollars the Japanese have spent, I doubt it. We could possibly see the dollar stabilize for a few months as we approach the summer doldrums, but mark my words, the dollar decline will last at least another five years or more. If the ECB drops the interest rate and pushes more liquidity into the Eurozone, it will be very friendly for precious metals investors. The “Freeze Frame” identified earlier in conjunction with sales of Treasury debt has only served to weaken gold on a very temporary basis. All currencies are still measured against the only true money that has lasted for thousands of years.

As geopolitical tensions continue to increase and governments around the world fiddle with currency valuations, more and more investors will seek the safety and stability offered by gold, silver, and tangible items of all descriptions. Commodity prices across the board are telling us that paper products (stocks, bonds, and currencies) are losing credibility with investors around the globe. We are now transitioning to a point where the price of gold will begin to increase in all currencies. It is certain to be a volatile ride with “printing presses” running at full tilt in all the central banks.

I’m asked regularly via email, “What is the best way to invest in precious metals and commodities?” There is no pat answer, because it depends so very much on each investors’ financial needs, their investment time-frame, and most importantly their risk-tolerance. My preference is for resource stocks, especially junior mining companies along with commodity futures contracts and physical bullion, but it’s not for everyone! There are many different investment vehicles out there, but the first place to start in my mind is the security of holding physical bullion. Once you are satisfied with your level of “security,” then move on to varying degrees of leverage. It has been and will continue to be a fun ride as long as patience and discipline are at the forefront of your thinking process!

Have a great evening!

Mike Hartman

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