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Today's Market WrapUp 02.05.2007 Mon Tue Wed Thu Fri Hartman Archive Markets
Are Quiet Ahead of Quarterly Refunding So far this morning, the financial markets are exhibiting very low volatility in the absence of significant market-moving news or events. Stock prices are flat with the Dow higher by six points and bonds are slightly higher from Friday’s close. The dollar is stronger versus the pound, euro and Swiss franc, but weaker when priced in Canadian dollars, Australian dollars and yen. Overall, the U.S. dollar index is higher by 0.24% at 84.99…still battling with the resistance at 85 from last week. As the dollar tries to grind its way higher, gold and silver are grinding higher right along with the dollar. Oil touched a high of $59.95, but has since pulled-back to $59.05. I’ll come back later to check the closing prices. Overall for the week I expect to see much of the same low volatility as the Treasury prepares to conduct their quarterly debt refunding as they bring $38 billion of new supply to the Treasury market tomorrow, Wednesday and Thursday. The most significant economic data to hit the markets today came from the Institute for Supply Management with the release of their Services Index posting a gain to 59. Expectations called for a reading of 57. The better-than-expected number did very little to move the markets. The bond market didn’t even flinch (by moving lower) with the stronger-than-expected services report. Bond prices have tumbled seven out of the last nine weeks and finally stabilized last week. It looked like bonds wanted to shoot higher on Friday, but were held in check as we await the debt sales over the next three days. Bonds are in oversold territory, which is just right to create a buying atmosphere for the auctions. I believe bonds are set to rally over the coming weeks once the Treasury auctions are complete. Last Week Last week we learned that weakness persists in the housing and construction sectors. The home price index fell 0.4% in November, 30-year mortgage rates have moved from 6.0% to 6.4% in the last two months, and construction spending fell 0.4% in December. Also on the negative side of the ledger, manufacturing in the U.S. got a weak report card last week as the ISM Manufacturing Index fell to 49.3 depicting a contraction in manufacturing output. Two out of the last three months the index has posted a reading below 50…not good for economic growth. On the good side, last week we also learned that fourth quarter GDP rose 3.5% following expectations of 3.0% growth. Inflation data was muted with the GDP price index posting a gain of 1.5% versus 1.9% the prior quarter. Consumer confidence was reported higher than expected and was reflected in consumer spending which was quite strong with a gain of 4.4% in the fourth quarter. In the month of December, consumer spending rose by 0.7%, but watch out…personal income only increased by 0.5%. Incomes did not rise as much as spending, which pushed the savings rate to negative 1.2%. We have now had 21 consecutive months with a negative savings rate in the USA. Consumer Spending Translates to CONSUMPTION We have growth from emerging nations tracking in the vicinity of 7% to 10% annually and here in the U.S. consumer spending and consumption have continued to move higher. In my mind this all translates to continuing demand for commodities of all kinds. Emerging nations are building-out infrastructure as their economies expand and the commodity demand from China still appears to be insatiable. On Friday, Mineweb.com ran a piece that started with, “Rio Tinto posts a 43% increase in net profits for 2006 for a record $7.44 billion.” The article went on to say: “Rio Tinto is also very bullish on the future of its iron ore. Rio Tinto Chairman Paul Skinner told U.S. metals analysts that the iron ore demand from Chinese steel mills ‘is very, very strong.’ Despite the growth of domestic iron ore mining in China, Skinner insisted that the Chinese steel producers’ ‘appetite for our iron ore is considerable.’” I caught two headlines today from Bloomberg that are also alluding to the fact that the recent correction in commodities prices may have been overdone: “Zinc Gains in London on Speculation Declines Were Exaggerated” “Canadian Stocks May Rise, led by Resource Shares, on Oil, Zinc” I will also back the Bloomberg headlines by saying that the Canadian dollar is nearing the end of its current correction. Over the last six months the Canadian dollar has dropped from 91 to just below 85...I’m looking for a wash-out to 82 or 83, then expect the Canadian currency to strengthen along with energy and metals prices moving into the Spring Season. This should bode especially well for U.S. investors buying junior mining shares on the Canadian exchanges. When the metals break-out from the current consolidation U.S. investors should be rewarded with gains in the mining companies, and also note that the gains will be exaggerated in U.S. dollar terms as the USD moves lower versus the CAD. Put the opposite way, the recent U.S. Dollar strength buys you more shares in Canada. Soft housing data and the recent slowdown in the manufacturing sector have not slowed consumption here in the USA and emerging nations continue with relentless growth. The commodity bull market is far from over. It has just taken a breather, and as the headlines depict…the corrections have probably been overdone to the downside. The growing global economy needs more commodities…inventories are off their lows, but the overall inventories are historically low. I believe Mr. Rob Kirby hit the nail on the head when he wrote his Wrap-Up on January 29th, “Contrary Views on the News.” Mr. Kirby detailed media-manipulation tactics and the “spin” created to promote insider agendas. Frankly, I’ve observed the same behavior from the mainstream media, so it was no surprise. What I found to be VERY interesting was the explanation offered in his quotes from Jennifer Barry and Jeff Dahl. With reference to China’s desire to diversify their excess foreign reserves Mr. Dahl said: “…I don't think that they [Chinese] would "pre-announce" their trade-agenda (purchasing-plans). My bet is that, probably over 70% of the "touted" trillion is all ready spent in forward purchase contracts around the world, for all forms of commodities, that will be regularly delivered on over the next fifteen years or so.” Even more telling was the analysis by Jennifer Barry regarding the rotational purchases of commodities by China as they deplete LME inventories: “What we are now seeing is rotation - LME stocks in one metal are allowed to build, and price falls inversely. When prices fall sufficiently, warehouse stocks are scooped up. The buyers then move on to another metal, allowing warehouse stocks to rebuild. We have seen this pattern now with copper, nickel, lead, and zinc (and to a lesser extent aluminum). LME stocks in all these metals remain a tiny fraction of what they were several years ago.” We all know that China, India and many other emerging nations are building roads, bridges, hospitals, homes, production plants, water treatment, and all other kinds of infrastructure projects…don’t forget China is still building venues to host the Olympics next year. I have also done some cursory research to learn that China is very actively working to build their military capabilities. The U.S. military most certainly possesses some proprietary technologies for waging war, but the biggest thing that differentiates our military from all other military forces is our “blue-water navy.” No other country comes close to the U.S. in their ability to extend their power to all parts of the globe. China is very much aware of this fact and has said openly they plan to build the navy of the future. They now have a highly sophisticated battleship and are working feverishly to expand their fleet of submarines. You won’t hear much about these developments from the popular press in this country. To this point, all I can do is speculate as to how much steel they will need over the next decade to build 100 to 150 fighting ships to police their sea lanes. If China is indeed stockpiling commodities and locking-in prices today with futures contracts, they could well be in the process of converting their trillion-dollar foreign reserves into a blue water navy for future use. Time will tell. Back to the Closing Numbers From the numbers I reported at the opening of this WrapUp, nothing has changed. The U.S. dollar index held a gain of 0.18% to 84.94, the Dow Industrials closed eight points higher at 12,661, bonds held a modest bid, and oil dropped below the $59 level to $58.71. Gold added $4.10 to $655.90 and silver gained 21 cents to $13.57. The HUI Gold Stock Index added one point to 333.54. I believe the precious metals mining shares are basing for the next move higher. When the mining shares break-out relative to the metals prices, it will signal “Game-On” for the next leg higher in the gold and silver bull market! Here’s the MONEY-CHART that will tell us when it’s time to ROCK!!
Keep your eyes on the down-trending, upper resistance (blue) line. When the ratio breaks-out to the upside, it is Game-On! For a bigger-picture view, have a look at the ten-year weekly chart.
From the beginning of 2001 I see a five-wave sequence, followed by an ABC correction that retraced the entire fifth-wave. Since the ABC correction we have one leg up and a horizontal correction. Wave three higher should begin soon. I know people don’t like to hear it, but I still believe we will have to get beyond the debt auctions before we see any fireworks in the PM sector. I have a tendency to hammer the U.S. government for the incredible debt they are placing on the future of our country. As I have said many times before, they must sell the debt or cease to function. There is no other choice…even though Bloomberg is a mainstream-mouthpiece, they posted an article today about what a dog the long-bond has been for investors. Long
Bond Disappoints as Treasury Prepares Auction (Update1) Feb. 5 (Bloomberg) -- The revival of 30-year Treasury bonds, beloved as much by the most sophisticated speculators as the soberest investors during four U.S. presidencies, is proving to be a bust. Demand for the so-called long bond is fading as trading contracts, the Federal Reserve shows no signs of cutting interest rates and the government prepares to sell more of its longest- maturity debt. Just ask yourself the question: Would I be happy to accept a 5% yield from now until the year 2037? If the answer is “yes,” then you can buy the auction on Thursday. If your answer is “no,” then you can understand why the government is challenged to sell 30-year debt for a 5% price tag. Inflation expectations must be held to a minimum if investors expect to profit from the purchase of long-bonds. For that reason I believe gold and oil will remain in check this week. For now it is time to sell the debt. I am patiently waiting for the auctions to be completed, and then see the final basing in the PM shares before the next move up. Have a Great Evening! Mike Hartman Copyright © 2007 All rights reserved. Contact
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