|Fascinating find by Lance Lewis regarding what happened to the HUI the last time the USD index crossed above its 200 dma back in May 2005. |
Dollar Bulls Celebrate Even As Financials Resume Their Slide
Asia was mixed overnight. Japan fell a percent. Hong Kong rose over a percent, and China’s Shanghai Comp rose a third of a percent.
Europe was off a touch this morning, and the US futures were lower after AIG, WMT, and TGT all spit up hairballs.
Before the open, we got weekly jobless claims, and learned that they rose to 455,000, which is the highest level since March 2002. Continuing claims rose 31,000 to 3.3 mil. In other words, the jobs situation continues to deteriorate. Surprise... surprise…
The S&Ps weakened a little on that, while the dollar edged lower and gold firmed. Treasuries rallied.
The move in the dollar, however, would reverse quickly once the ECB was out of the way. Despite leaving rates unchanged and Trichet talking fairly hawkishly, the euro still couldn’t rally (just like back in May). In any even, traders took that to be bearish and sold the euro, which initially weighed on gold and oil even though they would later recover.
We gapped down on the open in the S&Ps and immediately began to rally. We then spent the rest of the morning and early afternoon slowly sawing our way higher but never quite filled the opening gap.
Then Moody’s placed the long-term ratings of AXP on review due to “concerns over the companies' asset quality trends and lending exposures, particularly within areas of the U.S. that have experienced sharp home price declines.” As AXP rolled over and plunged on that, the S&Ps followed.
Around the same time, we also learned that $39.5 bil bid for the Fed’s $25 bil TSLF auction for primary dealers, proving once again that despite what people may be hoping, the financial system continues to be largely broken and the investment banks continue to be under severe stress.
From there, the S&Ps eventually blew through the morning lows and collapsed into the close to go out just off the very worst levels of the session.
Volume ran about even with yesterday’s pace (1.2 bil on the NYSE and 2.3 bil on the NASDAQ). Breadth was over 3 to 1 negative on the NYSE and over 2 to 1 negative on the NASDAQ. New lows exceeded new highs on both exchanges (69 to 17 on the NYSE and 65 to 31 on the NASDAQ).
The chips were mostly higher by less than a percent, except for INTC, which popped nearly 4 percent thanks to an analyst tout. The equips were more mixed and were mostly up or down a percent or so. The SOX rose over a percent.
The “Fab Four” were lower. BIDU fell over 3 percent. GOOG fell nearly 2 percent, while AAPL and RIMM both fell a hair.
The rest of tech was mostly lower, with the NASDAQ giving up about half of yesterday’s gains, or about a percent.
The financials were mostly lower again. The BKX fell over 5 percent, while the XBD and XLF both fell just under 5 percent.
LEH tanked 13 percent. GS fell 4 percent, and MER fell over 8 percent.
The derivative king (JPM) fell nearly 4 percent. C fell over 6 percent, and BAC fell just under 6 percent. GE fell over a percent.
GM fell 5 percent. AIG collapsed 18 percent after the company said it lost $5.36 bil in Q2, which resulted from $5.57 bil in losses on its CDS portfolio. For anyone that thinks the writedowns for the financials are over, this should be a wakeup call, and there is much much more of these writedowns to come as the economy slips deeper into recession.
The short squeeze in ABK and MBI apparently ended today, because ABK tanked 21 percent and MBI fell 6 percent.
The subprime consumer lenders were all lower after ACF reported a fiscal Q4 loss. Loan originations fell by two thirds, while the company’s loan loss reserve rose 50 percent year-over-year. Loan charge-offs ballooned to 5.9 percent from 3.3 percent. ACF fell 6 percent but still has a long way to go to make new lows. CCRT tanked 11 percent and back to just shy of its recent lows, while COF fell 6 percent.
The mortgage insurers were down across the board. RDN and MTG both fell 12 percent, and PMI fell 23 percent.
As for the GSEs, FRE fell over 9 percent, and FNM fell over 14 percent.
The retailers were mostly lower after both WMT and TGT indicated that the end of the stimulus checks was resulting in a renewed collapse in consumer spending. The RTH fell over 2 percent.
WMT fell over 6 percent after reporting July same-store sales rose just 3 percent, which was below the 3.4 percent consensus. WMT also said that since the stimulus checks had been spent that consumer spending seemed to return to the prior April pattern of occurring along the “paycheck cycle” once again (hint, hint..).
TGT tumbled 5 percent after the company not only reported weaker than consensus July same-store sales but also guided August same-store sales to be in a range of down 1% to 3%.
People are already calling for a second stimulus package after seeing that the first one amounted to a giant yawn (shocker?), and it’s a good bet that Congress will oblige when it comes back from recess next month. Welcome to stagflation-town.
The homies were mixed and mostly up or down a percent or so.
Crude oil (Brent) traded on both sides of the unchanged mark to end up 86 cents to $117.86.
Great fanfare is being made of the fact that the dollar is rallying and how that should crush oil and gold prices. Remember back in March when great fanfare was made of the dollar index’s March bottom and how that would create a top in crude oil because so many thought oil was merely rallying because the dollar was falling?
Oil was $100 back in March near that low in the dollar. Even after the recent correction, it’s still up nearly 20 percent since then even as the dollar has bounced. Whether the dollar rallies or doesn’t rally against the euro or any other currency Is irrelevant to the primary inflationary trend. Global inflation is what is driving oil and gold, and a rally in the dollar doesn’t change that. Although, it does push more of the inflationary burden on to the Europeans unless they push back by continuing to resist the temptation to ease (more on this below).
The XOI fell 2 percent. The XNG fell over 2 percent, and the OSX fell over a percent. SU rose over a percent.
The GSCI rose over a percent, and the CCI-CRB rose half a percent. The DBA Ag ETF rose over 2 percent.
The base metals were mostly higher, with the GSCI Industrial Metals Index picking up a percent. The XLB fell a third of a percent.
Dec gold opened up $7 in the US this morning. Then, in the wake of the ECB meeting, the euro weakened precipitously, and initially, gold seemed to resist the decline. But as the euro weakened further and crude oil also softened up, gold finally succumbed and slid to as low as $875. Nevertheless, the metal bounced into the close as crude oil began to recover and eventually ended down just $5.10 to $877.90.
Spot gold fell $6.75 to $873.05. Spot silver fell 2 percent to $16.20 and back to its May low. Spot platinum fell 2 percent but continues to hang on to its recent mid-week low for the moment.
The GLD gold ETF’s holdings were unchanged.
The GDM fell over a percent and back to just shy of its recent low for the move, but unlike gold did not make a new low for the move, which is a slight positive divergence.
The South Africans were mixed, with the rand falling over a percent. GFI rose a freckle. AU and HMY both fell under a percent, and ASA fell over a percent and back to just shy of its recent low.
The XAU/Gold ratio rose a freckle to 0.173. The GDX/GLD ratio fell a freckle, and the gold/oil ratio fell 2 percent to 7.28.
Our junior basket was virtually flat. NSU rose over 4 percent, while MFN, CGR, and GRS rose a percent. GRS also reports its Q2 earnings in the morning. Among the losers, GSS fell another percent to a new multiyear low, while SA fell 2 percent and just shy of its recent lows.
As I alluded to yesterday, I sort of had a nagging feeling that the euro might sell off in the wake of the ECB simply because it would have simply been too easy to have it rally. The selloff certainly wasn’t because the ECB was dovish, just as it wasn’t back in May when the euro weakened after the ECB meeting either.
In any event, the euro made a new 4-month low below its May and June lows today, and the euro-heavy US dollar index made a new 4-month high above its June peak and moved slightly above its 200 dma for the first time since May of 2005. But note that Spot gold did not make a new low below its May and June lows, just as was the case back in June when the euro broke its May low and gold did not. That June divergence also set up the June to July rally in gold I might add.
Now, how many talking heads have we seen on HeeHaw say that “gold moves inversely to the dollar so when the dollar rallies it’s time to sell gold”? This is simply not true. Gold has been rallying in all fiat currencies due to rising global inflation, not simple because the US dollar index has been plunging. The dollar index has in fact been plunging precisely because the Fed has been too easy in an inflationary environment. People are mistaking a symptom of the problem (i.e. - easy money, which has led to inflation) as the actual problem.
The fact that the Fed kept rates too low from 2000-2003 and then lowered them again recently in order to inflate away the housing bust despite what was an obvious inflation problem only meant that the dollar weakened relative to other currencies where their central banks did not ease aggressively. Should these central banks (primarily the ECB) continue to resist easing aggressively, then the dollar will resume its downward trend eventually, and rising global inflation will be felt even more by those who own dollars once again as a result of the combination of the decline in the currency and rising inflation.
It’s almost too perfect to be true, and I actually just noticed it today. But do you know the last time the US dollar index crossed above its 200 dma on the charts? It was in May of 2005. It’s a little ironic that the HUI also hit a low nearly to the day back in May of 2005 in front of what would be a rise of over 100 percent over the next 11 months.
Given the historic plunge in the XAU/Gold ratio recently, there’s more than good reason to believe that we’re seeing the same “cycle / head fake” as we saw in 2005 repeat here once again to some degree as well (albeit with a few different wrinkles and much more violent along the lines of the August 2007 plunge), especially given that the gold/oil ratio has already turned up, which didn’t occur until August back in 2005. The reasons for the head fake might be different this time around (i.e. - because of the financial dislocation that the SEC set off back in July), but the identical picture that is painted is equally bullish.
Obviously the dollar’s rally eventually failed back in 2005 and eventually led to new lows once again, which I suspect will be the case here too. However, I think that failure could be a lot sooner than during the 2005 experience given the crippled state of the US financial system and economy that we have today and the fact that the Fed will be unable to raise interest rates because of those problems despite the continued rise in global inflationary pressures.
The point is that inflation is not going away simply because the dollar index bounces or because crude oil corrects from $150 to $120. And likewise, gold is not going to simply suddenly collapse because the dollar has a rally, which I suspect is another piece of this “short financials/long inflation” trade having been “blown up” back in July when the SEC changed the rules and caught a lot of guys with very wrong footed. That doesn’t change the facts of the real world though. Inflation is still a growing problem, and the US financials system is still insolvent. But it has created one heck of a financial dislocation over the past 4 weeks hasn’t it?
Once again the yellow metal failed to test its May low of $850 today (nor did it test its June low) even though it had ample opportunity to do so given the rally in the dollar to a new 5-month high, and I see that as a sign of strength.
Now that we’re past the ECB and the euro’s break below its May and June lows, I’m beginning to think gold is not going to test $850 at all. And with the shares holding their lows for the week today (per the GDM) even as gold slipped to a new low for the week, the stage is now set for an upside reversal tomorrow or Monday in both the metal and the shares. We’ll obviously only know for sure after the fact, but if we do get a rally tomorrow, odds are that the recent precipitous decline in the gold shares is over in my view, and that should set the stage for a rapid recovery much like we saw off the August 2007 low.
The US dollar index rose nearly half a percent to a new 5-month high and above its 200 dma but also interestingly ran into key technical resistance based on prior downtrends and prior lows. The trade-weighted dollar rose a hair to 96.87 and just shy of its 200 dma.
The yen bounced a third of a percent, and the euro slumped over half a percent despite the ECB leaving rates unchanged and once again saying that inflation remained a problem. The pound fell half a percent after the BOE also left rates unchanged. The AUD and CAD both fell half a percent, and the PBOC bounced the dollar/yuan again by nearly a quarter of a percent up to 6.86.
Just after the close, we learned that foreign central banks boosted their Treasury holdings with the Fed this week by a massive $25.6 bil, to a total of $1.42 trillion. That’s the largest single week increase that I am aware of. Try annualizing that weekly number.
We know China has recently switched from being concerned about inflation to promoting growth and has made various monetary policy moves accordingly. Is this data a signal that China has begun to run the printing presses and is massively buying US Treasury paper in order to try and stimulate the US economy by driving down long-term US interest rates? Or is Japan trying to stimulate the US and depress the yen in order to keep its export economy going, which would explain the ongoing collapse in the yen vs. the dollar? Japan buying dollars to depress her currency is incidentally exactly what happened during the 2005-2006 experience that I discussed above regarding gold too.
I’m not sure who is doing the buying, but it’s a good bet that the buyer is an Asian central bank. This is just a theory at the moment, but it’s probably enough of a risk for me to rip off all of my bearish bond position tomorrow.
Treasuries rose on the back of the weakness in the equity market and a well bid 30yr auction. The yield on the 10yr fell 13 bps to 3.92%. The TLT bond ETF rose nearly 2 percent, and the TBT levered short bond ETF fell over 3 percent. For those that care, I ripped off half my TBT long and half my TLT short today after getting nicely whipsawed. And based on the Asian buying in Treasuries I alluded to above, I will most likely rip off the bear bet on the bonds entirely tomorrow. I don’t know why these Asian central banks continue to play the game and buy US paper like they do, but they do.
The 2/10 spread widened 2 bps to +149 bps, and the 3M/10yr spread narrowed 17 bps to +230 bps. The 3M bill yield rose 3 bps to 1.66%.
The 10yr junk spread to treasuries narrowed 3 bps to 560 bps over treasuries.
Merrill Lynch’s David Rosenberg notes that there have been six 300-point rallies in the Dow since September 2007. He also notes that all previous 300-point Dow rallies have occurred during bear markets. Is there any doubt that this is just another bear market rally?
Stocks appear to have failed back up at the July highs in the case of the Dow and SPX (although the NASDAQ has already broken out to some degree). So, the bear market rally may be already stumbling, much like back in February when we did something very similar on the charts (see the SPX chart). Even then, that wasn’t the end of the bear market rally though because we didn’t make new lows until June and would in fact trade up to an eventual high in May after a retest of the January low.
The benefit of the doubt still needs to be given to the potential for a bear market rally here in my view, especially given next week’s option expiration and the potential for the SEC to soon announce that it is extending its special short selling rules to the entire stock market on a permanent basis when the temporary rules expire for the financials next Tuesday night.
Would the SEC have an interest in springing that on the market right in front of an option expiration, which would augment any potential short covering rally due to the expiration, just as it did in July? You bet they would.
Be careful bears. All the king’s horses and al the king’s men are being marshaled to put Humpty Dumpty back together. It won’t work, but one can still get hurt in the meantime while they try all their tricks.