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COMMODITY BULL RESUMPTION

Mark down June 10, 2005 as the day the great commodity bull market resumed. The USDollar continued to rise, but that story must be put aside. The euro currency finally reacted to the much anticipated EU votes. The real story was the move back above 4.0% in Treasurys, a jump in gold, continued upward momentum in energy, the upward lift in the HUI goldbug stock index, and the move back to 80 cents in the Canadian Dollar. It all happened last Friday. As in the spring of 2004, the lows in long-term interest rates marked the beginning of the renewed dominance of commodities over debt-backed paper.

Unwittingly, the US Federal Reserve engineered a bond rally which might have defined its top, aiding by a “tipped off” General Motors debt downgrade. The final piece was the European vote to reject centralized power. Toss in a clearing of the decks after hedge fund bloodletting. Dominoes fell one after the other to create finally an environment conducive for the next Major Elliott Wave upward for gold and the commodity sector generally. EW1 is done. EW2 has now begun. Never mind crude oil, which will soon be recognized as in what this here analyst has called a “perpetual bull market” from here to eternity. Rumor has it that divine portfolios contain energy stocks in diluvian proportions, as their data on deposits is not tainted by human hands. That is not to say that the ebb & flow of financial market liquidity cannot inflict its own hell & havoc in typically seasonal fashion.

In the last few weeks a remarkable sense of connection has become quite evident. At first, a title came to me, like “Dominoes Fall: The Fed, Taxes, GM, Hedges, China, Bonds, Euro, Gold, then the Aftermath As The Stage is Set For Commodity Bull Resumption” but that was too long and strange. As the dominoes have fallen, change has been swift, enough to cause strong winds and perhaps some electrical sparks, if not storms. The early location of such storm activity is between Asia and the USA, in particular between Beijing and Washington DC. Trade war is on the rise, as drumbeats pound louder and more frequently in response to the frustration of textile floods, jobless trends, even the erosion of job quality. To the USGovt, a job is a job and it counts, worthy of mention from the politician pulpit. To households, a substandard job is a ticket to poverty and despair, worth little to provide for oneself, let alone a family, and surely not enough to cover health care costs.

THE FED, TAXES, GM, HEDGES, BONDS, EURO, GOLD

The key here is the sequence of fallen dominoes to create a wonderful new climate for resource investments, but surely not without pain. This is a story not being told adequately. Some writers and editors report loose links, but a series of fallen dominoes seems evident here, one knocking over the next. A sequence of market events can be identified. To some extent, General Motors stands at the beginning and end of the domino events. Here is what seems to be a sequence. In mid-May the GM woes came to the fore. In early June the GM storm might have finally passed, at least temporarily.

USFed continues to tighten rates, raising their Fed Funds target. The Federal Reserve has been tightening on short-term interest rates. Independent of taxation with puny representation (overridden by lobbyists), the Fed has seen fit to tighten the screws on a system which is utterly dependent on liquidity. Before household credit was liberalized last month, extended credit card deals had become interrupted. Credit card rates charged amount to the prime rate plus a hefty gouge, on the rise to be sure. In late May, interest rates rose to finally hit 3.0% on their target. The S&P500 stock index fell in April by 2.2% after a downward 3.8% swoon.

Income tax payments were due in April of this year. US citizens were obligated to pay income taxes to the federal collectors of the USGovt. Those pushed into Alternative Minimum Tax were more numerous (20% more) this year compared to last. Wait until 2006, ouch, when up to six times as many fall into AMT guidelines. Tax payments were a certain drain to liquidity within the system, exacerbating the Fed tightening. The US Economy and stock markets run on liquidity concerns, not value.

General Motors debt was downgraded on its mountain of bond obligations, in the face of declining market share, rising material costs, and the heavy burden of legacy pensions (with health care costs). Kerkorian notwithstanding, the GM stock price fell and fell hard. One has to wonder if Standard & Poor coordinated their announced debt downgrade with Wall Street brokerage houses, who “got out of the way” to avoid damage. One has to wonder if S&P coordinated their downgrade with the USFed, who could easily see what stood in the shadow of that big domino. Hedge funds were lined up inside the guillotines, with the head basket ready.

Hedge Funds were whacked, from GM convertible bonds, from other bond-stock trades, from risk default spreads, and probably numerous other “US style” derivative casino bets. They suddenly appeared in the news, with their cool $1 trillion in (mis)managed funds, 20% greater agency firm counts, and certain strain to report a profit at all. The radar screen suddenly showed a massive blip on the Treasury Bond holdings from Caribbean banks and London banks. Hedge funds unwound their risky losing bets, and hunkered down into the base trade for spreads, the US Treasury Bond. Little reported was how hedge funds also sold heavily in the gold and energy stock sector. They faced margin calls and account redemptions.

China and Japan withdrew from USTBond support in a big but unreported way. From January 1st, Chinese holdings rose from $222.9 billion to only $223.5 billion in March figures. From January 1st, Japanese holdings fell from $689.4 billion to only $679.5 billion in March figures. Despite wholly false media reports of “strong foreign demand” for US Treasurys each and every week for the last several weeks, we have seen the exact opposite. The Caribbean holdings jumped from $71.4B to $137.2B, even as the United Kingdom holdings jumped from $101.0B to $122.9B during the same period. The bond market rally more than offset the Asian withdrawal, which alone should have been major headline news. Even today, Bill Siedman cited strong demand from foreign central banks on a CNBC interview. This is a bold total lie!!! Interviewed guests on financial networks talk of the risk if Asian central banks withdraw their credit support for USTBonds, when they already have done just that!!! Is anyone noticing???

USTBonds surged to offer yields under 4.0%, a repeat of last spring 2004. A year ago, we saw yields drop to 3.75%. This year we saw yields drop to 3.9% on a weekly basis. The bond market rally is reported as powerful. Bear in mind the Fed Valuation Model likes low rates, as that justifies higher price earning ratios and valuation for stocks. Bear in mind that fixed rate mortgages enjoy lower long-term rates which are offered in a bond rally, in support of the housing valuations. Don’t overlook how higher Fed dictated rates govern the adjustable rate mortgage offerings, which are moving upward, not downward. Bear in mind that the USGovt benefits from lower borrowing costs as their bond portfolio shifts from shorter maturities to longer maturities.

My Hat Trick Letter raises a highly controversial motive for this engineered bond market rally, with illicit backroom activities, supported by quoted comments from our financial leaders. The bond rally offered significant cloud cover to hide one certain effect, to take the wind out of the resource sector sails generally, and to provide interference for another possibly illicit ongoing action. Details are shown in the June HTL issue, with means, motive, and opportunity explored like any crime.

The European Union “NO” votes hit the euro currency hard, as the euro fell from 126 to 121. France and the Netherlands have cast their votes so far, with more EU member nations to come. While the vote enables more brisk debt issuance across the old continent, the EMU is not at great risk to crater the euro here. Its foundation is shaky. A monetary union is much easier to maintain than a political union, which requires abdication of power to Brussels. With liberalized EU debt and a slower economy from an exported overvalued currency (from USDollar to euro), the euro fell and fell fast. Expect their export trade to ratchet up this quarter, to surprise many onlookers.

Gold rejected the euro fall as a reason to test $400 per ounce. Gold did see prints at 417, but now is above 430. The news media prefers to stress the strong USDollar, when the real story is the faltering euro and the resurgent gold price. Little reported was the firm yen currency and the firm Canadian currency. Nobody seems to attach any connection to the strong crude oil price and the end of the rally in most foreign currencies. Nowhere in the news is how gold is finally rallying in Europe, surely from euro weakness more than from gold strength. Recall that the single-most important item to measure the prospective power of secular deflation is gold. Here we saw gold reject the euro fall and USDollar rise. European politics next dictate more monetary inflation in Europe to match monetary inflation in the USA and monetary inflation in Japan. This is great news for gold.

The GM stock share price jumped over 2 full points last Friday. Few attempted to attribute any reason to the event. It was surely short covering, as it seemed most of the bad news was out. The GM stock price was not to descend any lower, at least not yet. From my viewpoint, this meant the hedge fund community has cleared their trades, had washed the blood off their decks, had taken their lumps, and had completed their cleanup process. Call it no coincidence that on the same Friday, the 10-yr Treasury yield rose from 3.98% to 4.04%, no longer under that critical watermark. Call it no coincidence that on the same Friday, the gold price rose from 424 to 427 per ounce. Call it no coincidence that on the same Friday, the crude oil price rose from 54.6 to 56.8 per barrel. Call it no coincidence that on the same Friday, the HUI precious metal stock index rose from 184 to 192. The Treasury-based spread trade damage had run its course. The commodity bull market has resumed. The USDollar, unlike what many in the gold community contend, is no longer the driving force for gold. It is now worldwide monetary inflation!!! Let’s repeat that. On Friday June 10-th, the USDollar became a story on the second page, and …..

THE COMMODITY BULL MARKET RESUMED.

In the past week, the financial markets and economic analysts have been scratching their heads trying to figure out what is happening. They guess on how many more USFed rate hikes. It is amusing to watch all the denial or acceptance of the housing market bubble, as the commodity bull climbs its own wall of worry.

AFTERMATH & CONUNDRUM

In the aftermath, the hedge fund community covered their “EuroBond vs TBond” spreads. Borrowed euro money (lower rate) was used to purchase US Treasury bonds (higher rate). The time had come to cover the spread. Sell the USTBond and buy back the EuroBond. Thus the US Treasury 10-yr yield returned above 4.0% just like last year. It is right at 4.1% today. Gold has moved to 437, even as crude oil has moved toward 56. Gold, which for two years moved in lockstep with the euro, now pays little attention to the euro. In fact, gold is benefiting from the last leg in the euro decline. Longstanding European veterans are selling the euro in favor of gold in Switzerland. They recognize the sea change toward European monetary inflation to rescue their ailing economy, damaged from competing currency wars.

US-based brokerage houses and investment firms remain fully confused by the Treasury curve conundrum. Not Hat Trick Letter readers. We answer the riddle by means of the Four Bond Amigos, which easily explain how flexibility is recycled inflation and the business cycle is broken. The US Federal Reserve has lost control of the bond market. The horribly imbalanced US Economy cannot benefit from pricing power, since the USFed inflationary machinery operates in reverse gear, even in certain price inflation statistics. A foreign dependence is far too widespread and cantankerous. The USA exports inflation, imports cheap products, exports an overvalued currency, and builds gigantic bubbles in our homeland. Conundrum? Wake up and observe the reverse machinery sending headwinds into the face of a steroid driven fat slob racing down a pathway. The poor guy is not running as fast as the statistics indicate. No way.

The US financial system recycles inflation in much the same way a sick modern-day Frankenstein ghoul might have his excrement recycled into his bloodstream and midsection. The story behind the solid waste centers on our abandoned manufacturing base. The story behind the liquid waste centers on our fast rising foreign ownership of federal, mortgage, and corporate debts. We condone all such recycles in blindness. These developments are corrosive, yet applauded by a clueless cast of economists and counselors to policy makers. Financial obesity is the consequence, which might match our national condition at a more personal level.

The USFed controls short-term interest rates. They are frustrated that the external world controls the long dated bond securities, despite Fed monetization and plenty of shady games. Foreign central banks, hedge funds, bond speculators, carry trade participants, and the dying US Core Economy control the long-term interest rates. As long as Asians continue to subsidize our economy and financial markets, even our mortgage markets, expect to see US long-term interest rates converge with the Japanese under 3.0% over a long stretch of time. However, don’t expect Asians to continue their subsidies when the US Congress and numerous politicians blame the Chinese for our overpriced labor market, the sad inevitable consequence of thirty years of chronic monetary inflation. TRADE WAR WILL CHANGE EVERYTHING, AND TRADE WAR IS INEVITABLE SINCE MARKET MECHANISMS ARE ROUTINELY INTERFERED WITH BY THE AUTHORITIES AND OFFICIALS, FOR THE GREATER GOOD.

NEWS TIDBITS

Andy Xie and McAlinder of Morgan Stanley forecast a massive crash in the oil market as global economic growth slackens, alternative energy gains ground, and financial traders sense a price peak. Sounds like a low in the oil price has been put in place. Xie is concerned specifically about a marked Chinese slowdown. McAlinder offered a $20 per barrel decline as his clueless forecast for the next 12 months. Contrast this with the March event. Goldman Sachs Global Investment Research issued a report that claimed oil markets had entered a “super-spike” period that could see the oil price surge as high as $105. That was a high in the oil price put in place. Why don’t people harbor more suspicion of Wall Street self-serving reports?

OPEC ministers said a capacity crunch on crude supplies and refinery bottlenecks meant its latest agreement on higher output limits was unlikely to cut oil prices. Speaking after a meeting of the Organization of the Petroleum Exporting Countries, ministers said they were already making every effort to topple prices from $55 a barrel. “Patients need medicine but this is not the right medicine. The problem is not a problem of supply, it is a problem of refining,” said Libyan Energy Minister Fathi Bin Shatwan.

Jobless claims edged up 1000 to 333,000 in the week ended June 11, the Labor Department said. Despite occasional volatility, claims have been holding in a fairly tight range for several months. A steep 19,000 decline in the June 4 week was caused by the Memorial Day holiday along with fewer auto industry layoffs.

The Philadelphia Fed index of regional factory activity was minus 2.2 in June, its first negative reading in 25 months, and sharply below the May reading of 7.3. It was also a steep contrast to economist expectations for a reading of 10. A reading below zero indicates a contraction in activity. But Robert Harrington, managing director of cash trading at UBS in Stamford CT noted, “It is just one data point.” Overall, Harrington said, “There’s still good M&A coming into the market. The economy is growing OK. Rates are low.” There you have it. Destructive overpriced mergers are seen as good. The falsified GDP statistics tells of strength in economic growth. Low interest rates from excessive accommodation are seen as positive. What a quack!!!

U.S. housing starts rose 0.2% in May to a 2.009 million unit rate, falling shy of expectations, according to the Commerce Department. Single family housing starts rose 4.7% to a 1.704 million unit pace in May while multifamily starts dropped 19.3% to a 305,000 unit pace. Permits for future groundbreaking, an indicator of builder confidence, fell 4.6% to a 2.050 million unit pace. The drop was the largest monthly decline since June 2004.

US investment bank Goldman Sachs reported its second-quarter profit fell 27% as market swings kept many investors on the sidelines, leading to lower trading activity and some bad bets. Goldman reported net income of $865 million, or $1.71 a share, in the quarter ended May 31. It was Goldman’s first year-over-year drop in quarterly results in three years. Analysts had expected Goldman to earn $1.90 a share in the quarter. “Obviously a tough quarter, as many expected,” said UBS securities industry analyst Glenn Schorr. The “GS” stock price rose over 2% on the news. Go figure, the worst news is out.

The US Senate confirmed Federal Reserve Board Governor Ben Bernanke as a top White House economic adviser, giving President Bush the counsel of a monetary expert as worries grow over trade imbalances and the value of the dollar. Bernanke, a vocal economist who has served at the Fed since August 2002, will now have to turn his focus from monetary policy to the government finance issues. Long known for his “helicopter drops” of money for households, this man has done more to destroy confidence in prudent (not accommodative) central bank policy than any man other besides Alan Greenspan. Look for pure monetization in future quarters to finance the federal debt and compensate for withdrawn Asian central bank support for US Treasurys generally. He will surely shift the credit supply risk to the USDollar.

TODAY’S MARKET

Today the Dow Jones Industrials wrapped up at 10,578 (+12), S&P at 1211 (+4), Nasdaq at 2089 (+14), TENS yield 4.076% (-3.9 bpt). Currencies closed with Euro at 121.39 (-0.18), JYen at 92.49 (+0.17), Can$ at 81.04 (+0.03). Metals finished with gold at 436.8 (+7.0), silver at 737.0 (+4.0), copper at 156.95 (+2.05). Energy ended with crude oil at 56.58 (+1.01), natural gas at 761.3 (+17.2), unleaded at 159.78 (+3.53). Prices are at major futures contracts.

Jim Willie CB

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