Thu 24 December 2009
VIX has broken down and will support a strongly rising market in 2010

Image source Bloomberg Finance

Click to view graph large

Santa is bringing some early Christmas cheers with the VIX index finally closed below 20 which we have not seen since end of August 2008 from when it started rising exponentially, leading to the US market crash thereon.

From here, we expect the US and global equity markets to rise beyond the previous highs during 2010, buoyed by the massive amount of liquidity and low interest rates held down for a prolong period of time by, in particular, the US Federal Reserve.

Thu 12 November 2009
Dow and S&P 500 broke upside

Image source Bloomberg Finance

Click to view graph large Click to view graph large

While the Nasdaq index broke upside in August this year, the Dow and S&P 500 only broke upside 3 trading sessions ago. After another 100 to 200 points advance, there will probably be a quick pull back first before much further advance. However, the technical signs ahead are extremely positive. Go long equities.

Thu 12 November 2009
Gold to correct soon

Image source Bloomberg Finance

Click to view graph large

The RSI shows that US$ Gold price is gradually moving into a long term overbought position and possibly has upside to US$1,127 before it commences a corrective downturn. Investors should take advantage of the last bit of advance and take profits now.This does not mean the upside in gold is over, but nothing goes up in a straight line and it is prudent to stand aside during corrective down phases. Euro could move up to 1.55 to US dollar which will then complete the upturn as well. In this process, Aussie should get to US 95 cents before consolidation.

Tue 13 October 2009
VIX index to propel equity markets much higher

Image source Bloomberg Finance

Click to view graph large

The VIX index of the US market has broken down as is obvious from the attached chart and is likely to fall below 20 very soon. This is likely to support a push in the US Dow to move beyond 10,000 and the S&P 500 to move beyond 1100 while 1200 by year end is a distinct possibility.

Fri 14 August 2009
Global equity boom pending

Image source Bloomberg Finance

Click to view graph large Click to view graph large Click to view graph large

Image source Bloomberg Finance

Click to view graph large Click to view graph large

The attached charts in order of Dow, S&P 500, Nasdaq, ASX All Ord, and Hang Seng index. You can see that the ASX All Ord and the Hang Seng have both broken upside and so has the Nasdaq. The Dow and S&P 500 are still lagging but I am looking for decisive breakout of the Dow at 10,000 and S&P 500 at 1,100. I also expect all indices to ultimately surpass their previous highs. It is becoming quite clear that all indices have now formed their double bottom of this decade and the next advance will be spectacular. Whether we are heading into a new equity market bubble from here globally depends on the speed of the advance from here but the upward direction is becoming more obvious by the week. Patient investors should hang in there.

Fri 24 July 2009
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Fri 3 July 2009
China Seeks 'Stable' Dollar, Monetary Diversification

"To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review."

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahNuJfheitrI
Source Bloomberg Finance

Almost weekly, China is making a call for a more stable US dollar or an alternative reserve currency to the US dolllar. Unfortunately such calls will end up destabilizing the US dollar instead. Ultimately China will realize that even using the SDR issued by the IMF is not fool proof as the IMF is till heavily influenced if not controlled by the US. To not use sovereign currencies for reserves, what choice would china have except holding more gold. Hence, the strategy to cut trade and currency deals with the BRIC nations and ASEAN nations can only be an interim one while at the same time China will continue to purchase strategic stakes in resource companies and resource projects and "quietly" buy more gold.

Wed 1 July 2009
China Plans to Start Yuan Settlement with ASEAN Soon

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aG7dxkAkzrAk
Source Bloomberg Finance

It was only two weeks ago that China told us she would be settling trades with the BRIC countries in each others' currencies instead of the US dollar. Now quietly, she has done another currency and trade deal with the ASEAN countries without the need to rely on US dollar. China is leading the way in diversifying away from US dollar in world trade between herslf and other countries. China's vocal and very public words of concern against the US dollar are being translated into action country block by country block. The next in line for a similar deal could well be the Euro Zone. We are likely to see more actions in coming months.

This is really bad news for the US dollar and it will be much more obvious when the Euro Zone is involved. However, the US Administration may actually not mind this, as it will help to sell more US dollar government debt when the US dollar becomes cheaper by the month to all other major sovereign government funds. How else can you protect yourself against the US dollar depreciation other than buying more gold or rather, gold stocks with good exploration upside for a double whammy gain.

 

Thur 25 Jun 2009
China to be the most important factor in the gold equation

Click to view China Gold Reserves

Click to view China Gold Reserves Selective Countries
Image source Bloomberg Finance

China has seen her gold holding as a percentage of her forex reserves shrink significantly in the past 14 years, with the percentage declining from 4.89% in 1996 to 0.94% in 2008. However, in 2009, China has finally responded to her own very public concern with the US dollar and started increasing her gold holding percentage to 1.69% by March this year. Still, this is significantly below that of other major developed nations including the US (78.3%), the Euro zone (62.2%), Japan (2.4%) and Australia (6.7%).

The recent trade agreement between China and  Russia may take on even more significance if China starts purchasing gold from Russia with her own currency, the RMB. This will be a win win for the two countries, with China  not needing to sell her US dollar holding in order to diversify her forex reserves while adding gold to reserves to a more acceptable world level. For Russia, it will be able to gain the RMB as a reserve currency without the need to sell gold to the open market which would depress prices. Russia will gain a new reserve currency, the RMB, which must now be regarded as the hardest currency of all, with China holding the biggest amount of forex reserves in the world.

 
If China is to increase her gold holding in 2009 from 1.69% to 5% of the total reserves by purchasing Russian gold with her own RMB, then China will need to increase her gold holding by  76.22 million ounces this year. However,this increase represents 70.9 % of 2007 world consumption/sales of gold including net central bank sales. Russia's 2008 production was only 5.3 mil ounces so that even if China is willing to buy, Russia cannot supply 76.33 million ounces anyway .

Can you imagine what China can do to the US Dollar gold price by just worrying about the US dollar?

Fri 19 June 2009
Russia, China to Promote Ruble, Yuan Use in Trade = bad news for US$

Having thought long and hard about this news item, I have begun to realize that the implications of this will go far beyond the simple changes in trading agreements between China and Russia.

The fact that Russia and china are prepared to accept the Rubles as a trading currency in exchange for Russian oil, there is also no reason for Russia not to also accept the RMB for its oil and hence gold. This is where the significance of the deal is: China is effectively enabling convertibility of the RMB without saying as much and Russia will soon accept the RMB as a reserve currency.

China is allowing its currency to become a reserve currency as an alternative to the US dollar, not long after she complains about the risk of holding too much US dollars. This change will enable China to diversify its forex holding into more gold without selling its US dollar to exchange for oil and gold but by issuing its own RMB for Russian oil and gold. While in the short term there may be less downward pressure on the US dollar because China will not need to sell her US dollar holding to diversify its forex reserve, in the long run, it will lessen the demand for US dollar and will be very bearish for the US dollar, meaning very bullish for US $ gold price.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aS86kp3_fsuA

The BRIC countries are now serious to replace US Dollar trades with trades intra BRIC with their own currencies, particularly China and Russia. The only thing left to do for them is to buy more gold. This is the ultimate signal for the gold bulls.

Thu 09 April 2009
Dow at 28,479? And I don't even smoke

Image source Bloomberg Finance

Click to view graph large

A lot has been made of the current financial crisis being worse than 1932 and that we are heading towards a Depression. I have previously written that in terms of the RSI (Relative Strength Index) of the Dow Jones Index, June 1932 was only the 4th worst RSI in history whereas February 09 and January 09 gave us the worst and second worst RSI in history. RSI measures the buy/sell investor sentiment as to whether we have overbought or oversold sentiment. Hence, it would be worthwhile seeing what happened after June 1932.

The attached chart shows the Dow between 4/1920 and 4/1940. It shows in particular, the bear market rally starting in July 1932 after the Great Crash of 1929.

In June 1932, the Dow closed at 42.84, with an RSI of 25.07. By the time the market peaked out in March 1937 at 186.41 with RSI of 78.01, the Dow had gained 335.1% in 4 years and 9 months. Now the bears can keep referring to the current rally as a bear market rally and they probably said much the same thing in 1932, but after the worst and second worst RSI in history in February 09 and January 09, surely we are now overdue for a "bear market" rally of even greater proportion than 1932 to 1937. With trillions of cash on the sideline, this current rally is more likely to produce what will be regarded on hindsight as the greatest equity market bubble of all time instead. To just match the 1932 to 1937 performance for the same percentage gain of 335%, this rally could take the Dow up to 28,479 from 6,547 which was the low point reached on 9/3/09. What we do not know is how long it will take to get there.

Just don't go short in the meantime.

Mon 30 March 2009
VIX index , M2 all point to major bull market ahead

Image source Bloomberg Finance

Click to view graph large Click to view graph large

You can see that the attached US VIX or volatility index which has been trending since end of September 2008 in a downward sloping triangle, is nearing the end of the pattern and has also broken below the 200 day moving average in the last few days. The breakdown below the 200 day has not happened since September 2008 when the current volatility on global equity markets started. This is extremely encouraging and may signify that the bearishness on the S&P 500, and as such the Dow and Nasdaq, is about to reverse in a major way. This may well form the basis for the Dow to push towards 9500 in the short term. This will be further supported by the G20 statement which is to be expected by the coming weekend, probably introducing a new world order in financial market regulation. The change in "mark to market" accounting standard will be in place by next week. All these changes could bring in a whole new set of dynamics for equity markets and an era of asset inflation for equities. Oh don't forget the ECB is expected to cut its rate to 1.5% as well.

 

I also notice that M2 has gone to an all time historical high up to week ended 16/3/09 and the world is awash with cash. This still has not taken into account what the Fed has done since the 16/3/09 when it started spending US$1 trillion in buying Treasuries and mortgage backed securities. 

 

Just don't be short equities and get ready for the equity market bubble of a lifetime.

Thur 26 March 2009

The biggest holder of US government debt is ...

If you think it is unusual for the Fed to buy US$300 billions of US Treasuries starting last night, and US$750 billion of mortgage securities, well, it is not unusual at all. But,if you think that China and Japan are the largest holder of US Treasuries bonds, think twice. Total issuance amounts to US$11 trillions. The following excerpts from CNBC.com provide interesting revelations.

In no. 4 position is Japan. " Japan holds a huge amount of the country’s debt, with a stunning $634.8 billion. As recently as January 2008, Japan held  more US debt than any other country."

China only comes third. "The buzz word in the market for US debt has been China. The world’s most populous country is also the largest and most important buyer of US debt. From September 2008 to January 2009, China raised its stake by over $120 billion. Standing at $739.6 billion in January, China’s holdings have skyrocketed from $492.6 billion from a year earlier. Hong Kong, which is not included in China's total, holds an additional $71.7 billion."

Then comes no. 2. "According to the Federal Reserve, mutual funds are the holds the second largest amount of US debt compared to other groups. Including money market funds, mutual funds and closed-end funds, this group of investments has bought up $769.1 billion of US Treasury securities"

And the winner is: "Federal Reserve and US Intragovernmental Holdings That’s right, the biggest holder of US government debt is the United States itself. The Federal Reserve system of banks and other US intragovernmental holdings account for a stunning $4.806 trillion in US Treasury debt. And with recent announcments from the Fed, potentially another $1 trillion could be added... About a decade ago, this number was "only" $2.5 trillion.

Wed 11 Feb 2009

Image source Bloomberg Finance

Click to view graph large

I have now looked back to January 1920 via Bloomberg data, and found that the January 2009 Dow RSI of 21.39 was the lowest since January 1920, WOW !!! The next lowest was September 1974 when it registered 23.09, then the third lowest was June 1932 at 25.07. RSI or relative strength index measures the overbought and oversold sentiment. Below 40 is normally regarded as oversold.

Surely the Dow is now setting itself up for a big big upward correction. The market is saying that this recession is worst than 1974 and 1932. However, economic statistics so far have not been worse than the 1974 and 1932 recession/depression in relation to unemployment, number of bank failures, etc. I can only put the extreme fear down to today's instant global communication via internet and 24/7 global TV broadcast by the likes of CNBC and Bloomberg, tansmitting and exaggerating the fear factor.

By end July 1932, the Dow had rallied 26.6% from end of June, and 70.7% by end of August 32.  By end of Ocober 74, it had rallied by 9.5% from end of September 74, and by January 75, by 15.8% and by end of June 75,  9 months later by 45%. We must not fall into the habit of being gloomier than gloom itself.  The kind of extreme RSI will only lead to extreme reversal. I am pleased to report that the reversal was instantaneous on each occasion in the past.

Tue 3 Feb 2009

Image source Bloomberg Finance

Click to view M1 graph large Click to view M2 graph large

In the last 30 years, see attached, there were 3 periods of "run away" growth in US M1 money supply. In 1984-86, 1990-93 and 2008 July to now. The explosiveness of M1 growth in the last 7 months however is unprecedented.

The 1984-86 M1 growth ultimately led to one of the bubbliest periods in equity markets in the world followed by the October 87 crash. The 1990-93 period of M1 growth gave the Dow an impressive  59% growth between the low of early 1990 and end of 1993. 1993 was followed by a sharp slow down in M1 growth between 1994 to 97 and a flat period of little growth between 1998 and 2000. This long period of decelerating or no growth in M1 from 1994 to 2000 starved the tech boom of liquidity and led to its ultimate crash. With so much gloom and doom around at present, it would be unlikely and politically incorrect for M1 growth to be slowed down or indeed be reversed for quite some time. This unprecedented growth in M1 will inevitably be translated into sharply rising asset prices. Which sector or sectors will asset inflation appear in is the question.

With tightening of bank lending standards towards housing, and mortgage securitization market still in its early repair mould, with securitization being the lifeblood of the housing market, we are unlikely to see much reflation of house prices. We have also just witnessed the burst of the commodity bubble since July 2008. Having burst the bubble and many hedge funds that supported this bubble have been decimated, it is also unlikely that commodities will be revived any time soon. We have seen a bubble in US Treasuries and bonds. Many have alluded to this bubble. With so much government debt supply coming onto the market to finance the various stimulatory packages, this bubble is destined to burst if not already. On 18/12/08 US 90 day Treasuries yielded zero to negative but on 30/1/09, it yielded 0.21%, almost matching the upper range of the current Fed Funds rate at 0.25%. See See_graph_M2. That leaves gold and equities for the next bubble possibility.

While gold has certainly enjoyed a good run when everything else has fallen to date, Should the economic stimulus be successful and US GDP stops falling in coming months, the psychology of holding gold in troubled times will dissipate. However, there is also no reason why both gold and equities cannot run up at the same time for the short term until US GDP starts turning up. At that point, I would expect gold price to decline while equities will continue to go up. The whole premise of gold going up from here is that the US banking system is broke and beyond repair. Hence in that scenario, you hold nothing but gold, so say the gold bugs. Hence, from here it is a matter of whether you believe Obama and his team can indeed fix the US banking system and sell their message effectively to the world that He Can Do It. He ran his election campaign successfully on the Can Do It motto. So long as he sticks to the can do attitude, I cannot see how he can lose the race now to get the US economy going again. On balance, I am more convinced there is a greater chance of an equity bubble in the months ahead than a gold bubble arising as a result of the explosive growth in M1 money supply and the burst of the Treasuries bubble, with investors shifting cash from the risk free government debt market to the riskier equity assets.

Tue 20 Jan 2009

US Money Supply M1 growth to impact significantly on Dow in coming months

Image source Bloomberg Finance

Click to view graph large

It took just the past 5 months for M1  (see graph above) to grow in % term, more than twice the % growth of M1 during the two full years 2001 and 2002 and it was after these two years of some 9% growth in M1 that the Dow went on a consistent uptrend from March 2003 to October 07.

From 18 August 08 to 5 January 09, M1 has grown by more than 19.6%. The effect of the past 5 months of money supply explosion has contributed to the biggest bubble in US Treasuries. There are some US$5.8 trillions in US government debt with more than half of this held by foreigners. Any meaningful shift out of US government papers will likely cause significant distortions in other financial markets while these will be offset by the already annunced US Fed buying in the US government debt market instead. I believe the explosion in M1 has simply led to capital being "warehoused" in US Treasuries  for now but sooner rather than later, the same uplifting effect  of M1 growth on  US equity market between 03 and 07 will happen once again particularly if you consider the exponential growth in M1 in the past 5 months.

Obama's inauguration tomorrow will no doubt bring in a new chapter in the way investors both domestic and foreign look at US $ investments. The extreme risk aversion which has led to the build up in the US Treasuries bubble is most likely to subside with the transfer of the "warehoused" capital from US Treasuries to corporate bonds and equities.  The move into corporate bonds has already started  since beginning of 09 and the major move into equities is more likely to commence this week judging by the VIX index and technicals of US equity indices.  Obama has a lot of investors' eyes on him to provide the catalyst and the confidence to buy equities. The weeks ahead will be most interesting to say the least. 

The BoE introduced overnight a second bank support package in buying 50 billion pounds of corporate bonds from commercial banks on condition that they increase their bank lending and the quantity of lending will be audited regularly by the BoE. I would be surprised if Obama's administration will not follow the same strategy with the use of the second tranche of US$350 billions of TARP money.  The government "sponsored" increase in bank credits will further reduce  investors' risk aversion leading to more private sector transfer of capital from US Treasuries to corporate bonds and equities.  Or at least that is what the government strategies are designed to achieve.

The following news article provides furtherinsight into what may happen to US Government debt market.

http://www.forbes.com/reuters/feeds/reuters/2009/01/08/2009-01-08T120008Z_01_N07485888_RTRIDST_0_MARKETS-FOREX-BUBBLE-ANALYSIS.html

Fri 16 Jan 2009

Crude oil contract prices in outer months in dreamland

Click to view 'Commodity Futures Price Quotes' (source Bloomberg Finance)

The attached (source Bloomberg Finance) is a list of crude oil futures contract prices as of last night but also note the volume in outer months which are quite good. These contango premiums are no doubt encouraging hoarding. However, the selling pressure will be enormous to take profit as each front contract month expires, I understand normally on the 22nd day of each month. With a premium of 23% between Feb and March 09 and 33% between Feb and April 09, and 69% between Feb 09 and Feb 10, for instance, the contango premiums are becoming ridiculous. The expectation of such short term rise in price against decline in real consumption is hard to understand. Obviously there are still too many bulls out there in the oil market hanging on hope of a return to the good old days of pre July 2008. This optimism is a complete contrast to the negative sentiment of the equity market. The resultant hoarding will lead to higher and higher inventory buildup in the oil market and ultimately to another dramatic decline perhaps to sub US$20 in coming months. This is already happening as we saw in the massive increase of the previous two weeks of reported oil inventory.

Tue 13 Jan 2009

Thur 8 Jan 2009

Image source Bloomberg Finance

Click to view graph large

Crude oil appears to be establishing a giant head and shoulder formation with the right shoulder peaking at US$55 some time in coming months. However, if the demand and OPEC cutback cannot sustain the rise, then a break below $30 will see it trade between US$20 to $30.  The way oil traders are hoarding oil to take advantage of the contango premium in outer months suggest that the right shoulder may peak at much lower prices instead as market responds to the "surprisingly" high inventory levels.  The lower oil prices will obviously be bullish for industrial equity prices as the effective "tax rebate " to consumers from oil price savings pile up in coming months. Don't be surprised to see A$0.60 a litre petrol price here.