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UNCERTAINTY & INDECISION
The future course of the Iraqi War (#2) is up in the air, hardly certain. Little doubt remains that US Forces will remain a fixture on their landscape. The USGovt has embarked on the construction of the largest and most expensive embassy in our history. We are there to stay. The doubt centers on several issues. Will oil production ever surpass pre-war levels? Will the religious sectarian friction in their conflict escalate? Will the approved (appointed) ruling council be accepted by their citizens? Will troop counts have to increase, or can they be reduced? Will violent attacks subside? Will the soldier death toll begin to turn down? Will their security forces be able to manage police functions? Will prison abuse go away? Will a draft become necessary to supply adequate troops, when they are currently stressed? and the questions on my personal radar… Will the Saudi Arabian royal family govt fracture and destabilize? Will any growing chaos coincide with declining Saudi oil production? The energy cost (#3) climate is one of a storm brewing, stirring, and threatening to erupt. Supposed expert forecasts in March 2003 called for a 30% retreat in the oil price. Instead we have a 60% oil price increase. We have seen high profile stories about Russian legal warfare against their major energy firm Yukos, and physical attacks against foreign workers in the Saudi oil production industry, as well as isolated strikes in Norway, Venezuela, and Nigeria. Despite the growing clarity of non-existent excess oil capacity, expert forecasts call for the oil price to retreat back to $30 still. As Mark Rostenko says, “For the record, the geniuses here at The Sovereign Strategist officially ridiculed prognostications for $25 oil and predicted $40 oil this year. That figure was revised to $50 after crude hit $40. And we will be right again. Why? Because we are NOT experts on corporate welfare and no one hands us a paycheck for being dead wrong over and over and over again.” He goes on to mock Greenspan’s claim of high energy prices being “transitory” factors, and points out the connection of energy spikes and economic recession, denied widely. The stock market is struggling mightily. The message might be that a recession lies over the horizon, or at least a lengthy period of sluggishness. A curious note on the Saudis. They appear to have taken a page out of the Fed’s playbook. They talk about raising oil production, to use their available 1.3 million barrels per day excess. They talk about demand rising but might soften later. They cannot convince their Persian Gulf partners to raise production. Meanwhile, experts like Matt Simmons in the energy industry question Saudi’s excess capacity, and whether they have passed peak production, especially in their giant Ghawar oil field. Adding insult to injury, hurricane threats have taken some drill platforms offline in the Gulf of Mexico, closer to home. The Venezuelan recall election against Cesar Chavez presents potential aftershocks. The vote is over, but stability has not returned. Wells Fargo economist Sohn claims that energy comprises a mere 1.2% of total business costs, and thus minimizes the crude oil price jump for its economic impact. Such a view seems unusually shallow, since the backbone of the economy is consumer spending. If households are spending more on gasoline (and other items directed related), they have less to spend at Wal-Mart or elsewhere. Analysts report that for every dime rise in gasoline price, Wal-Mart sales drop by 0.6% chainwide. Gasoline makes up 7% of household spending budgets. Higher oil prices inhibit corporate earnings in countless ways. Just three major airlines alone accounted for an extra $2 billion in fuel cost increases in the last year. An estimate was given that the airline industry expects to spend an additional $4 billion in 2004, over last year. Turns are made at the margin, and higher energy costs can turn the economy downward. Energy is to the economy, what blood is to the human body. Last week our esteemed Treasury Secy Snow broke from his pattern of uttering senseless comments, when he went public to state that higher energy costs threaten the fledgling economic recovery. While the crude oil price is registering multi-year highs, above 1980 decade peaks, they are 35% below previous peak prices on an inflation-adjusted basis. The future direction of interest rates (#4) is critical to any economy beset and overloaded by vast debt. Furthermore, rate changes have deep implications to inflated assets, which our knighted Chairman Greenspan boasts as legitimate engines of wealth production. By the way, such a view departs sharply from all historical evidence over three centuries. The 1990 decade was powered by significant mega-trends. One principal source was steadily declining interest rates. The removal of mortgage refinance puts the backbone of the recovery at risk, consumer spending. Home equity loans take up the slack, but with risk transferred to the household on higher borrowing costs. Higher rates put both housing values at risk, and carry trade profit potential at risk. The 25 basis point hike ordered by the Federal Reserve last week was the second. Whether it is the second link in a long chain is uncertain, given economic weakness, and especially given extreme dependence upon low interest rates for the entire economy. The economic recovery (#5) itself is a quandary. Better yet, it is a fraud, a hype, and imbalanced staggered walk across a busy intersection. Reported inflation figures are horribly biased. Economic growth is therefore exaggerated with GDP. Assumed growth enables birth-death models to rack up created jobs which might be no more than fiction. The stock market is not indicating any recovery whatsoever, nor is corporate guidance from the likes of Intel, Seibel, Sears, Target, Coke, TJMax, and many others. As a group, Wall Street is wishing for a recovery, while its brokerage sales force continues to sell a profit recovery, even as the USGovt is lying of a recovery. We have become a hand-to-mouth consumer economy. If people are not given money by the government to spend, if they cannot raid their home equity to spend, then they have no discretionary funds to devote to the economy. Spending patterns are horribly tilted toward consumption, as opposed to savings and business investment. A June swoon in consumer spending might be temporary, timed oddly with an end to IRS tax refunds. The usual flood of refunds came with February ($64 billion), March ($48.5B), April ($56.3B), but then fell off with May ($26B) and June ($3 billion) after the official deadline date. One must seek out which piece of information is the odd element. Retail sales fell in June by 1.1%, excluding transportation June durable goods fell 0.6%, June consumer spending fell 0.7%, July construction spending fell 0.3%. July retail sales recuperated to a 0.7% gain. Corporate guidance was unfavorable by many retail, software, and other major companies. Challenger Gray & Christmas report a 30% decline in large company hires, and a 7% increase in layoffs. The June and July weak jobs reports confirm the general economic weakness, and appear to be final pieces to a mosaic of negative confirmation. INDECISION WITH USDOLLAR, GOLD & BONDS In technical analysis, one chart pattern speaks volumes of indecision. The “pennant pause” enables a price to digest, consolidate, and sort out which direction it wants to go. Three weekly charts over three years are shown in order to demonstrate the indecision known to the pennant pattern, evident in price charts for the USDollar, Gold, and the unhedged goldbugs index HUI.
The USDollar DXY index for the first time since 2001 shows serious indecision. A clear down trend is evident, dating back in February 2001. Although summer 2003 saw a hefty correction over a three-month period, the negative trend resumed without much doubt. New lows were registered after a brief battle at the 92 previous low. In the last seven months, a correction once again occurred, but subsequent highs are lower, and follow-up lows are higher. The pause pattern has yet to reveal the outcome. The MACD (moving average convergence divergence) indicator has quieted since July’s turn of the calendar page. This indicator often displays changes in momentum, but not now. If the downtrend prevails, the 50-week moving average will prevent a revival. So far it has held as a ceiling. Last week, the June trade gap rang in at $55.8 billion, a fundamental that screams retreat from above the 50MA ceiling, at any advancing sprints. The 50MA has not turned upward, and must be viewed as still in decline, which defines the trend and gives the best hints on the resolution of the pause underway. Given all the uncertainties, one might see continued pause, a widening pennant, and no resolution until when? Who knows? Until after the election, probably not, but maybe so. In my view, the DXY=85 represents a Maginot Line. If it breaks in support, foreign holdings of stocks and bonds might be in serious jeopardy.
The gold chart is regarded in a consolidation period of long duration, following a major Elliott Wave up which completed at the end of 2003. Since that time, the uptrend has been honored, evident in the 50-week moving average. Over the past seven months, painful down drafts have delivered blows to the gold price, as successive highs formed lower peaks. The MACD has relaxed in its intensity, giving observers no clear clue about the resolution. The 50MA has not turned downward, the mirror image of the previous chart. The trend is still up, to give the best hints on the resolution of the pause underway. A slower economy would provide a backdrop of second best scenario for gold. Time is needed to sense the strong stench of stagflationary swamps.
The goldbugs (Basket of Unhedged Gold Stocks) index HUI offers the last chart of indecisive nature. It differs from the US$ and gold charts, in that it violated the 50-week moving average. One can speculate as to why. Perhaps the uptrend over the past two years was too sharp, incorporating far too much fervor, powered by too much greed, and fueled by too much cheap money. Margin money had been at low cost. Hedge fund positions had been one-sided, undermined since the bond revolt this past spring. The universal consensus of trades positioned against the USDollar had been overdone. The three-year chart exhibits a lower slope in a newly established uptrend line which has not been violated to date. Oftentimes, when an uptrend had been too ambitious (greedy), a new uptrend tends to override the chart and provide new support which is more defensible and sustainable. That could be the case now in the chart. Look to the Canadian Dollar, which has recovered above its own 50MA, as a hint that the mining sector will likely resolve to the upside. The MACD momentum indicator had been badly negative, especially during April. One should always be suspicious of April and tax effects, surely a powerful influence to the Nasdaq breakdown in 2000. In the past month, the MACD has quieted markedly for the HUI, just like with the other two key charts. Clarity is desired and sought out, before these three key charts are resolved up or down respectively. NEWS TIDBITS Motorola and Hewlett-Packard said they agreed to an expanded deal to help mobile telephone service providers use Linux-based computers to run their core network systems. Giant aluminum producer Alcoa is juggling multiple labor disputes at its operations throughout North America. Metal output at the 400 thousand tonne Becancour smelter in Quebec already has been cut by two thirds due to a six-week old strike. Contract talks are set to resume this week. Kmart Holdings reported its third consecutive quarterly profit and boosted its cash pile to $2.6 billion as it cut spending on advertising and discounts. Their gross profit growth suggested that the retailer was selling more high-margin items including clothing and Martha Stewart merchandise. Kmart has also agreed to sell dozens of its stores in recent weeks, moves that will likely boost its cash holdings to more than $3 billion. Toy makers Mattel and rival Hasbro were downgraded by Lehman Brothers, which cited deteriorating industry conditions. Last week, Toys R Us said it may sell its toy store business, the world's second largest, in the face of competition from discounters such as Wal-Mart and Target. Ford Motor has increased cash rebates on two of its 2004 F-Series pickup truck models by $500 to cut inventories of unsold vehicles. Rural hospital operator LifePoint Hospitals agreed to buy rival Province Healthcare for $1.03 billion in cash and stock to broaden its geographic reach. Restaurant supplier Sysco reported the highest increase in food prices in recent history, up 8% in a single quarter. Halliburton said the US Army had decided to give the company more time to resolve a billing dispute before withholding payment of up to 15% of the company's bills in Iraq and Kuwait. Venezuelan president Cesar Chavez apparently survived the election recall attempt with 58% of the vote. His opponents claim widespread fraud in the corruption of electronic voting machines. Venezuela is the world’s $5 oil producer, and a major supplier to the United States. Hurricane Charley struck the Florida coast over the weekend, the most destructive hurricane to hit the USA since Andrew in 1992. Over 250 tons of relief supplies have been flown in. Punta Gorda was the entry point, south of Naples. Wind damage is extensive. Initial estimates of financial loss is $20 billion. State officials put the figure at $11 billion. Insurers to bear the cost are Munich RE, Swiss RE, Scor, Lloyds of London, 21-st Century Holding Company, Allianz, and Converium. The death toll stands at 17, with hundreds injured, and 2300 protected in shelters. One million Florida residents are without electrical power. The citrus crop has been affected, directly in the storm path. More personally, a lifelong family friend in a Clearwater trailer court has not been heard from since before the storm. Yo, Renée? The Athens Summer Olympic Games have begun. Too many details to cite. Swimmer Phelps took a gold medal in his first event, but not in his second or third events. The US basketball team was shocked by Puerto Rico in an early round match, losing by not a small margin. In movie box offices, “Alien vs Predator” took the top spot with $38.3M, followed by “Princess Diaries 2” with $23.0M and “Collateral” with $16.0M. TODAY’S MARKET Today the Dow Jones Industrials rapped up at 9959 (+129), S&P at 1079 (+14.5), Nasdaq at 1783 (+26), TENS yield 4.258% (+4.5 bpt). Currencies closed with Euro at 123.50 (-0.16), JYen at 90.57 (+0.12), Can$ at 76.50 (+0.12). Metals finished with gold at 403.4 (unch), silver at 673.7 (+10.0), copper at 131.55 (-0.20). Energy ended with crude oil at 46.05 (-0.58), natural gas at 537.8 (-14.8), unleaded gasoline at 130.45 (-4.33). Prices are at major futures contracts. Jim Willie CB
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