Precious Metals Outlook: Major uptrend intact albeit under pressure. No change in bullish investment thesis. Pressure typical this time of month as futures and options expire. Expect pressure to lift after July 30th.

Thoughts on the price movement of Gold from trusted sources…

Adrian  Douglas:

There are 176,066 contracts of Open Interest in the Gold August contract. This is 17.6 Mozs. This is large for this time of the month and no doubt the continual bashing of gold as seen today is to encourage liquidation over rolling or standing for delivery. First notice day is July 30 by which time these contracts need to be rolled, sold or fully paid for if they are standing for delivery.

Fleckenstein: The next few days might set up a buying opportunity in the metals complex

Gold itself has been weak and was further pressured today by option expiration and First Notice day in the futures market, which oftentimes can be a minor inflection point. My contacts in the gold market said that a lot of “negative whip” exists at the moment due to the size of the open interest, especially in the option market. Thus, they said that a large spike lower could easily occur in the next couple of days, though if that happens it may reverse just as fast.

This is the time of year where weakness in gold is not unusual. I hadn’t quite expected it to play out like this, because it seemed so predictable, but sometimes the obvious does in fact occur. The next few days might set up a buying opportunity in the metals complex, but we will have to see.

 It’s the 50% Off Sale – Just for a Few Days More – So Hurry  (Click Link for Charts)

Don’t you just get sick of those annoying commercials always throwing some ‘50% off’ hype into the mix of their pitch – just to get you to come in and give them your money?  I do.

Well, there is something about 50% and gold and, tell you what, it’s not hype.
This large chart is a single chart of 4 charts….all glued together.  It begins with the C and D waves of the previous ABCD gold pattern in 2009. The second chart moves a step forward in time to look at the A and B waves of our current ABCD gold wave pattern. The third chart progresses another step forward in time to focus on the two weekly cycles of our current C wave. The fourth and final chart focuses on the weekly cycle that is Weekly Cycle #2 – which is the current weekly cycle we most likely conclude either today or tomorrow.
Why will it likely conclude today or tomorrow you ask?  Well, because we have (or will have) retraced 50% of the cycle.  The magic number is 1154, or close to it.
Now I did not make this stuff up.  Believe you me, I am nowhere near smart enough to make this stuff up.  But there it is.  And I think it is simply astounding.

Credit update by MJ The Credit Guru… Equity remains cheap to credit. The CDX IG14 Index traded in the 102.5bps range yesterday afternoon and could easily break through the 100bps psychological level and stay there. (It did this morning.) The positive reaction AA CDS is likely to have given the performance of its new bond deal, as well as the performance of APC CDS is likely to drive the outperformance. The last time the CDX index traded below 100bps the SPX was at 1171…

The primary news story making the rounds today involves the European bank stress test results. I have included the official results and accompanying statement below for your perusal. If you would rather the cliff notes I will summarize: Completely worthless nonevent.

CBES releases results of the EU Stress Test — 7 banks fail test

The exercise includes a sample of 91 European banks, representing 65% of the European market in terms of total assets, in coordination with 20 national supervisory authorities. It has been conducted over a 2 years horizon, until the end of 2011, under severe assumptions. In total, aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to 566bn € over the years 2010-2010. The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise. The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital support provided until 1 July 2010, which represents 1.2 percentage point of the aggregate Tier 1 ratio. As a result of the adverse scenario after a sovereign shock, 7 banks would see their Tier 1 capital ratios fall below 6%… See release here.

Once again traditional financial news outlets fail to focus on issues that actually move the markets and instead waste time and energy on government sponsored propaganda. The typical word on the street from this story is as follows: ‘Street expected 10-11 banks to fail test and only 7 failed so things are better than expected.’

Enough said about the theater of the absurd a.k.a. European banking stability. Please follow me into the realm of reality as I focus on events that are actually having a tangible impact on the equity markets. Committed RCM blog readers will recall this quote from my July 14th post, “The above chart also suggests a change in trend may be in the offing”. At week’s end, it would appear suggestion has turned into sage advice as the rally that began July 7th makes new highs.

Tangible event number one:

Quantitative Easing round #2 is currently underway. How do we know this you ask? The Fed made no comment in the FOMC minutes release and Ben Bernanke said nothing of note to Congress. So how do we know Q.E.2 has begun? The answer lies in the chart below. As you will see, worldwide liquidity is once again on the upswing. This rise and fall of liquidity has been and should continue to be the single biggest factor determining market direction. Close scrutiny of the graph will reveal the selloff of assets in 2008 was led by liquidity contraction, the rally of 2009 occurred on the heels of liquidity expansion and the first 6 months of 2010 suffered from another reduction of liquidity. However, in the last three weeks worldwide liquidity has expanded progressively, hence a rally in asset prices should not surprise. We can expect further asset gains, equity, commodity or otherwise, as long as this liquidity trend continues….

Tangible event number two:

The credit markets are the first to be effected by the liquidity situation. Our credit guru, Mike Johnson, spotted the positive behavior of the credit markets at the end of June. The liquidity expansion began, credit markets immediately stabilized and true to form equities followed. Another review of MJ’s thinking seems appropriate…  

…intraday credit market volatility continues to decline and this indicates that equity volatility is biased to continue to decline. This is clearly a positive for the broader equity indices.  

One of the reasons we became bullish at the end of June was because of the improvement in bank CDS spreads, the normalizing of GS’ CDX credit curve, improvements in consumer credit losses, and improving CDX IG spreads. COMPARING THE PERFORMANCE OF THE CREDIT MARKETS TO THE EQUITY MARKETS (SPX) would indicate that SPX has the potential to rise to the 1150-1175 range QUICKLY. The steepening of CDX IG credit curve further indicates that this 1150-1175 range is even more likely to be reached relatively soon.

Those of you who are subscribers of the Rosenthal Capital ‘Market Moving Chart of the Day’ will recognize the Graph above (courtesy of ZeroHedge). (Those who wish to subscribe may do so by entering their email address in the box provided at the top right of this page.) I’ve reprinted the Graph here because it bears, no pun intended, close scrutiny.  As the graph illustrates, 2010 is the year of volatility. The month to month swings from highs to lows and back again are at the least capricious. At the worst, these swings may be coordinated and in fact vicious with the intent to injure the unsuspecting. Read the following story and decide for yourself…  

Pimco Sells Black Swan Protection as Wall Street Markets Fear

Wall Street’s hottest new product is fear.

Almost two years after Lehman Brothers Holdings Inc.’s failure caused world markets to seize up, Pacific Investment Management Co. is planning a fund that will offer protection to investors against market declines of more than 15 percent. Morgan Stanley strategists estimate demand for hedges against such cataclysms helped drive as much as a fivefold increase last quarter in trading of credit derivatives that speculate on market volatility.

The efforts to protect against another disaster, which helped drive up the relative costs of the most bearish credit derivatives to the highest in two years, show that investors’ psyches still haven’t recovered from the Lehman bankruptcy on Sept. 15, 2008, which erased $20.3 trillion in stock market value worldwide and caused credit markets to freeze.

Read More…

The always insightful David Rosenberg weighs in on the Bearish outlook and the value of Gold in this environment….

Q&A With David Rosenberg: The Bearish Outlook

…Gold is also a hedge against financial instability and when the world is awash with over $200 trillion of household, corporate and government liabilities, deflation works against debt servicing capabilities and calls into question the integrity of the global financial system. This is why gold has so much allure today. It is a reflection of investor concern over the monetary stability, and Ben Bernanke and other central bankers only have to step on the printing presses whereas gold miners have to drill over two miles into the ground (gold production is lower today than it was a decade ago; hardly the same can be said for fiat currency).

Moreover, gold makes up a mere 0.05% share of global household net worth, so small incremental allocations into bullion or gold-type investments can exert a dramatic impact. Gold cannot be printed by central banks and is a monetary metal that is no government’s liability. It is malleable and its supply curve is inelastic over the intermediate term. And central banks, who were selling during the higher interest rate times of the 1980s and 1990s, are now reallocating their FX reserves towards gold, especially in Asia.

Read More…

While my computer did make the trip to Napa, it was used for portfolio management only. Any free time this past week was spent in the lovely company of Rebecca, my girlfriend and the grape vines of Napa. Needless to say I had a tremendous amount of reading to catch up on upon my return to RCM headquarters.

If I could condense this past week’s worth of erudition into a single thought I’d say ‘the more things change the more they stay the same.’ Certainly we have witnessed a significant amount of volatility in 2010.  The ‘change’ component of the above phrase can best be described as nauseating. If you wish to see a graphical interpretation of this 2010 phenomenon feel free to subscribe to our ‘Market Moving Chart of the Day’ located in the top right corner of this page.

As for the ’staying the same’ part of the equation I will simply direct your attention to the following three headlines. In fact, I could have chosen at random any three headlines from the past week and they all sound similar. The basic gist is as follows:

First, a piece of economic news is released that disappoints. However, Wall St. and the powers that be, do their best to put the proverbial lipstick on the ever distending pig… Retail Sales Dip, but It Could Have Been Worse – Briefing. Next, some Fed member chosen to be that week’s puppet (are straws used or is Dictator Ben punishing those who wish to stray?) makes a supposed market soothing comment… Fed’s Hoenig on CNBC says the economy continues to recover modestly, and he still sees 3% economic growth in 2010.  Almost immediately following the sock’s elucidation, a contradicting, real and market troubling story hits the wire…

FOMC minutes from from Jun 22-23 meeting:

The pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted…

The participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period…

We are stuck between intense volatility and an insipid news cycle. At times like this I find the best tonic is a revisit with our trusty steed, technical analysis. Below please scrutinize the daily price chart of our favorite index the NYSE Comp..

As you can see, the major uptrend remains intact. Moreover, three attempts have been made to breach this trend in May, June and July to no avail. You may however, remember that everyone and their proverbial brother on CNBC and the like were calling for an epic Head and Shoulders breakdown at the beginning of this month (labeled 3 & highlighted yellow). Naturally you will not be able to find this obvious prediction on the RCM blog site. Rule number one: When CNBC et all call for imminent market demise expect instantaneous market rally. You may recall that when these jokers were calling for new highs on the market we were ‘Stalking the Bear’.

The above chart also suggests a change in trend may be in the offing. The market price has been locked in a downtrend since the April highs moving from the top of the channel to the bottom. However, as the blue, yellow and red Fibonacci Fan lines illustrate, a change in trend has been signaled.  For your convenience I have highlighted with a green box an initial target area for the current rally.  

Allow me to conclude by writing that fundamentally I can see no reason for the markets to rally. We are firmly of the mind that economic growth will not be able to continue without massive government support. Financial regulation will continue to be a hot button right up to the November elections at the very least. Regulation of the GSEs will continue to cause consternation. I will warn that a fourth breach of the uptrend line will be deadly.

However, our credit guru Michael Johnson continues to write, “ Bank CDS & CDX Index spreads point to continued equity market gains. Being short equities as credit improves is dangerous…”  So, until such time as a fourth breach has commenced, the technical picture of the market remains encouraging.

Enjoy the reads and have a good 4th:

Will Austerity Be The Catalyst For War? http://dld.bz/kcxF

Everything You Ever Wanted To Know About An Israeli Attack On Iran http://dld.bz/j8yC  Worth keeping an eye on, got oil anyone?

Jobless Bill Dies Amid Deficit Fears http://dld.bz/j8Rx

Group of 20 Nations agree on higher bank capital. Could be mkt bearish if anyone believes govt will do what they say.

The $5 trillion rollover http://dld.bz/jN8p 

Why Obamanomics Has Failed http://dld.bz/jNCE 

Russia Buys 22 Tons Of Gold In May http://dld.bz/jQjT 

Fed Made Taxpayers Unwitting Junk-Bond Buyers http://dld.bz/jUNE

For example, as discussed often in my missives, credit markets have been leading equity. However, in the last three weeks that strong almost infallible trend has ceased to exist. If we use the CDX index as a simple guide we will see that credit has improved while equity markets have hit new lows. The last time the S&P 500 traded at these levels in early June the CDX index was priced around the 130 level. Today, the CDX index trades around 120 (and would be 5-6 points tighter without the inclusion of Gulf of Mexico player Anadarko Petroleum (APC)). In the past couple of years a 10 point tighter move in the CDX index would have led to a strong move higher in the S&Ps.

The Euro action today offers more evidence of correlations gone amuck. As the Euro surges higher today and the US$ breaks down we could expect equities to rally. Instead, equities are lower and to add insult to serious injury commodities collapsed.

So, we are faced with the following question: Will past correlations reassert themselves or are we entering uncharted waters? The following posts from Zero Hedge offer a compelling argument that the water may be new and filled with shoals. Moreover, the last post regarding BP may in fact be the proverbial elephant in the room….

EUR Surging As Banks Scramble To Cover Liquidity Needs With 30 Day Euro Repos Hitting One Year Highs        

An ongoing topic discussed recently is the slash and burn ongoing in Europe as banking counterparties have exactly zero confidence (and less with each passing day) in their counterparties. The backstop by the ECB of everything (for now) is the only thing keeping the system from collapsing. Yet with the ECB now at over $1 trillion in backstop funding for European banks, there will be a point beyond which not even the central bank’s “credibility” will be enough. Today, we are seeing a spike not only in Libor and Euribor (both EUR denominated), but most notably in the 30 Day Repo rate. The result is a scramble to fund EUR positions. Whether the catalyst was this morning’s 6 Day ECB liquidity providing market operation at this point is immaterial: the outcome is one of the biggest surges in the EURUSD in the history of the pair, which at last check was fast approaching $1.25.

Read More….

Gold Below $1,200 As Asset Liquidations Spread Like Wildfire                  

The European liquidations we discussed earlier courtesy of the ECB MRO and the repo rate spike, which resulted in a massive EURUSD covering squeeze, have followed through into industrial commodities such as oil and lastly into gold. And as liquidations are merely emblematic of a broken liquidity system (as the name implies), the unwind behind the scenes must be fierce. On the other hand, as the only recourse to prevent an all out systemic collapse should the deflationary trend continue, from Ben Bernanke’s perspective, is just to print more money and thus solidify the position of the precious metal as undilutable and a currency which can not be backed with toxic MBS and Greek Sov Bonds, today’s sell off is a much welcomed respite for the commodity which traded at record highs as recently as this week. Also, our recent disclosure of PM market manipulation via disclosed COMEX-OTC arbing by such former behemoths as AIG then (and presumably JPM now), should only add to your comfort that once the finger on the scales is removed, the natural reaction will be that of a coiled spring.

Read More….

Morning Gold Fix: June 30, 2010

Commentary courtesy of www.fmxconnect.com

Gold traded in a wide range on Tuesday as markets reacted to frightening news. Slowing growth from China shocked the market, driving oil prices more than $3 lower,dropping the Standard & Poor 500 ~30 handles and leaving gold and the dollar as the prime beneficiaries. More contagion fears from Europe and paltry consumer confidence reports didn’t help matters either. Gold sold as low as $1228 per 100 troy ounces on Tuesday before ultimately closing just over $1246, a $4.80 gain for the day.

Our suspicions are simple: deflationary events drive gold lower, sovereign default risk drives it higher. The dollar, stock market, and bond market are secondary as proxys now (OMG, I can’t believe I said that… Gold is its own asset now!)

Read More….

Guest Post: Sultans Of Swap: BP Potentially More Devastating than Lehman

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market. What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

Read More…. 

First, world economic hopes seem to revolve around Chinese leadership. Late last night the news from Beijing was not helpful…  

China Leading Index Gain Cut to Smallest in Five Months, Hammering Stocks

The Conference Board revised its leading economic index for China to show the smallest gain in five months in April, in a release that contributed to the biggest sell-off in Chinese stocks in more than a month.

The gauge of the economy’s outlook compiled by the New York-based research group rose 0.3 percent, less than the 1.7 percent gain it reported June 15. The Conference Board said in an e-mailed statement that the previous reading contained a calculation error for floor space on which construction began.

Equities slumped in Asia and Europe as the prospect of a slowdown in the fastest-growing major economy fanned concern that the global recovery may weaken. With American consumers boosting their savings rates and European governments moving to cut spending and restrain fiscal deficits, emerging markets in Asia have led the rebound in the past year.

Read More…

Second, any news that suggests an end to liquidity expansion and/or an end to stimulus spending kills any equity market rally in this environment. The best way to describe said phenomenon is, “live by the sword die…”…

Breaking: ECB Reports Failed Sterilization Auction, Demand For Fixed Term Deposits Comes At 0.6 BTCb

A week ago, when noting the increasingly weaker results of the ECB’s Term Deposit Operation, better known as liquidity sterilization, we said, to the usual ridicule: “With another auction next week, and then many more, all dependent on the amount of debt that Spain et al place “successfully”, we expect the Bid To Cover to decline consistently, until we hit a 1 BTC and the ECB realizes its monetization program is a failure.” It turns out we were right much sooner than expected: the ECB just reported a failed sterilization operation, attracting only €31.9 billion bids for the most recent, seventh sequential €55 billion auction, in which that amount of sovereign bond purchases had to be “laundered” through the system. Only 45 banks placed bids to take down €31.86590 billion or a 0.6 Bid To Cover, compared to the 67 bidding for €71559.9 billion in the prior week, and a “safe” 1.4 BTC. Furthermore, even this failed auction required a massive surge in the rate on the auction: the weighted average allotment rate for today’s operation was 0.54%, compared to 0.31% in last week’s operation. The lowest rate was 0.25% and the highest rate accepted, or the marginal rate, was 1% — the highest allowable under the rules of the term deposit program. This also is a surge from a week ago, when the lowest rate was 0.25%, or the same, and the highest accepted rate was 0.4%, less than half of today’s high rate.

Read More…

The G-20 Failed, Again

They came, they saw, they accomplished nothing.

The leaders of the G-20, representatives of the world’s largest economies, convened in Toronto over the weekend. They need not have bothered. By the time they closed the meeting Sunday, it was clear the grouping had come up short once again.

There was no agreement on a bank tax, and the timetable for bank-capital standards had been relaxed. The group dropped its year-end deadline to complete the much-needed Doha Trade Round. The G-20’s one accomplishment–a pledge to halve fiscal deficits by 2013–was, in the words of IMF chief Dominique Strauss-Kahn, “oversimplifying the problem.” In any event, the promise is sure to be ignored three years from now. On the single most important task the grouping faced–rebalancing the global economy–the G-20 said virtually nothing of substance.

Read More…

Meanwhile, another ’sign post’ discussed on June 15th was the equity market’s reaction to bad economic news.  I explained ‘bad’ was the new ‘good’ because market participants will begin to price in another round of stimulus as well as resumed quantitative easing by the Fed. Today’s downward revision of GDP expectations did not send the markets lower. Moreover, Gold closes the week at a new high and oil trades up over 3%. Why would oil trade higher if GDP growth is headed lower? Don’t textbooks teach economic growth is needed for higher energy prices? The answer: Throw away the text books.  Oil rallies today as the US$ declines. Bad economic numbers means more Q.E. equaling weaker currency and higher commodity prices.

Briefing: The biggest headlines this morning pertain to the agreement by U.S. Congress on financial regulation, which includes some concessions for the financial sector. Under the bill, banks will still be allowed to invest in hedge funds, private equity, albeit with limits, but they must use a subsidiary to trade derivatives. Private equity and hedge funds would have to register with regulators and disclose greater information about their businesses….

Finally The Farce That Is Fin Reg Reform Passes And Wall Street Can Resume Its Rapid March To Financial Armageddon

As if anyone thought otherwise, the final shape of finreg has now been formalized and as Shahien Nasiripour at the Huffington Post notes, “many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant.” Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can’t even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.

Read More…

The Latest Revisions Show Further Deceleration in Q1 GDP Growth - Briefing

The third estimate of Q1 2010 GDP was revised down from 3.0% to 2.7%. The move was a slight disappointment as the Briefing.com consensus estimate did not expect any revision to occur. Even though the negative revision was unexpected, the fact that GDP remained near its potential 2.8% long-term growth rate will not alter our view about the stability of the economic recovery. Since the revisions lag the current data by two months, and the changes were relatively minimal, we do not expect the market to have much reaction to the news. The drop in GDP was primarily driven by negative revisions to personal consumption and an increase in imports. The estimates were partially offset by increases in exports and private inventories. Personal consumption was revised down from 3.5% growth to 3.0% and was caused by weaker-than-expected services consumption. Imports were revised up from 10.4% to 14.8%, which removed an additional 0.5 percentage points from GDP growth. Export growth increased from 7.2% to 11.3% while private inventories were revised up $7.3 bln to $41.2 bln.

The study of long-term secular trends is comparable to that of geology; It is the study of pressure and time – Eric De Groot

Marc Faber: “I Buy Gold, I Don’t Know What Else To Buy” http://dld.bz/huDE Whenever he speaks you would be wise to listen.

Reuters reports that central bank gold reserves collectively rose 276.3 tonnes in the first quarter to 30,462.8 tonnes.

Equity Outflows Unstoppable, As 7th Sequential Outflow Of Domestic Equity Funds Brings Total YTD Redemptions To $29 Bn http://dld.bz/jdPD

BP Demise Would Threaten U.S. Energy Security, Industry http://dld.bz/jdNM

Illinois Sells Build America Bonds as Premium to Treasuries Climbs 40% http://dld.bz/hKna

Don Coxe Dissects Gold, As “The Oldest-Established Store Of Value Moves To Center Stage”

…We think that future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece—and gold climbed right along with it. The asset classes that have been inversely correlated since Keynes’s time suddenly united….

… So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates?

And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative?

… What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions.

… So…as a store of value for future generations,

If you can no longer believe in residential real estate,
and you can no longer believe in bank deposits,
and you can no longer believe in the dollar,
and you can no longer believe in the yen,
and you can no longer believe in the euro…
What can you believe in?
How about gold?

It’s so old, it’s new again.

… Among the arguments routinely adduced against it is that it pays no interest—but with interest rates in the zero range, the opportunity cost is minimal.

Read More…

Stock Market Strategy: Follow Up – Credit Check

Michael Johnson (a.k.a Credit Guru) weighs in on recent credit market performance and shifts his stance:

Last Wednesday we turned from tactically bearish to neutral. We went completely bullish Friday morning. The equity market’s ability to ignore the recent improvements in bank and non-financial CDS profiles appears to be faltering…. and this could lead to a sustained equity rally… …Credit market performance so far this morning indicates that the SPX should be trading in the +25pt range….that would match the note we sent out Friday morning

Bears About to be Gored

Summary:

We now believe investors should be Tactically Bullish as well as fundamentally bullish

Bears should be getting nervous…credit market is improving

GS Credit curve has steepened

New Issue Market reopened

Bank CDS Spreads tightening

Credit market volatility decreasing

How many times do you think credit will tighten before the equity markets jump on the bullish bandwagon? It’s probably sooner rather than later…

Gored… As our readers know, during the recent sell-off we have remained fundamentally positive while turning tactically bearish. We have written numerous pieces highlighting the differences between the feared “sovereign credit crisis that will never be” and the onset of the 2007-2009 credit crisis. The fear of Greece and of Euro viability concerns short-circuiting the global economic recovery is wishful thinking by the bears. This is like the bank nationalization argument….politicians will allow the Euro to fail because they know it will cause global havoc….politicians will nationalize the banks because they know it will cause global havoc…investing based on the hope that politicians will make stupid mistakes does not seem appropriate.

However, the ability of FINREG to destabilize the bank’s access to the credit markets is a truly scary, and much more likely to happen, in our opinion. The inversion of the GS credit curve and the widening of larger US bank credit spreads began a week before the overall equity and credit markets began to sell off. In our opinion, the weakness in the money center bank’s credit profiles made it a lot easier for sovereign risk concerns to find a willing audience.

The combination of the sovereign credit crisis headlines along with money center bank credit fears caused the correlation between banks CDS spreads and CDX IG Index spreads to increase. Credit market volatility materially increased and appeared to spill over into the equity markets. Many of the equity market’s worst sell-offs immediately followed large credit market sell-offs.

However, the reason we are becoming tactically bullish at this point is the reduced likelihood that FINREG will be passed with its most destructive portions. This opinion is working its way through many of the money center banks CDS credit curve profiles and credit spread volatility is decreasing. Additionally, continued improvements in nearly every consumer loan asset class will likely force even the most bearish bank analysts to reduce their loss estimates….

Conclusion:

Being fundamentally bullish and tactically bearish has been a relatively solid approach to the recent sell-off in our opinion. However, the recent decrease in credit market spread volatility and the stabilizing of money center bank CDS profiles makes it difficult to remain tactically bearish when we remain bullish fundamentally. We are now fundamentally and tactically bullish. The recent trend in which the equity markets ignore credit market strength is not likely to last.