DAILY REPORT (9/19/08)
Lately we’ve had three things in abundance, greed, fear and volatility, and on days like today all three were on the field at the same time. There is no better example than gold. On Thursday the December gold futures contract traded all the way down at US
739.40 before buyers finally decided that gold was a bargain. Also, I’m sure it helped that everybody and their brother had sold out or was short the yellow metal. Since that low, which was just above critical support at 736.80, gold has rallied. The rally began to pick up steam early Wednesday morning and December gold closed up $70.00 at 847.00 and that was followed by another $46.50 jump today as we ended the session at 897.00. The intraday high was all the way up at 926.00 as investors suddenly became convinced that the world as we know it may sudden come to a premature end.
Likewise the December silver experienced a similar trajectory after hitting rock bottom on Thursday with an intraday low of 10.31. Today it closed at 12.70 with an intraday high of 13.06. It seems that on Thursday investors were more than willing to
throw gold and silver away (fear), as if it were invested with some sort of plague, and just six session later these same investors were willing to ante up almost $200.00 more for one measly ounce of the yellow metal (greed). Enter the dragon at 3:35pm today as it is announced that Wachovia is buying out Morgan Stanley, I don’t yet know the terms since I was on the road, and December gold fell like a rock down to 840.00 before it found footing (more fear).
One quick comment about the proposed buyout. I have some familiarity with Morgan Stanley, as I do some work for some of their people; it’s a decent company, probably better than the rest. Wachovia on the other hand is on most people’s list of “most likely to fail” and the purchase makes no sense. Then again neither does Bank of America’s purchase of Merrill Lynch. I know that the bank has depositors’ funds and the idea is that they can use that to stop a run on Morgan, but I have also read that they have a lot of debt to write down and when they do, the party will be over. Maybe the Fed figures it’s less conspicuous to channel money to a bank than to another possibly defunct brokerage house, but if it were my money I would much prefer to lend to Morgan. In the end it’s just another bad transaction where the taxpayer gets the raw end of the deal and “friends of Hank” escape with their hide intact. The real trouble is that the line for hand outs is so long, almost infinite, that we don’t have any solution other than a momentary finger in the dam.
Commodities started the day well, but most sold off heavily into the close and make it difficult to take a long position with any real degree of confidence. Grains in particular closed down hard and oil escaped with a 35 cent gain after being up close to five dollars earlier in the day. Deflation will not be alleviated by Wachovia buying Morgan Stanley. Likewise the US dollar traveled a bumpy road as it tried to sell off
most of the day. Late in the session the December US Dollar Index rallied back into positive territory before finishing down .03 at 78.06 and still below good resistance at 78.67. It’s still too early to tell if the dollar has topped, it looks like has, but a better than good indicator will be a close below 77.53. Today’s intraday low was 77.31 and we did register both a lower low as well as a lower high so the scenario is more bearish than before.
As I mentioned earlier, the markets rallied hard into the close on the Morgan news and that includes the December Dow as it closed up 321 and 10,985. I’m sure that many will call a bottom tomorrow based on the rally, but I demure. First of all these announcements are always made after the close so as not to interfere with the markets, but this was released at 3:30 pm. In short, another Paulson rally! Secondly, good bear markets will not bottom on a news item. We have seen upside reversals before and they all fizzled, and this will be no exception. I do not see the December Dow rallying any higher than 11,260 and more than likely will not make it that high. The investors look at the merger, along with Senator Schumer’s proposal for a second Resolution Trust Co., and grasps at straws. What they fail to realize is that every measure proposed by the government fails to deal with the real problem, and therefore the hope for upturn is shorter with each failed attempt. Yesterday’s close well below the 10,725 support level was crucial, and we will be back down below it much sooner than most folks think.
ebo@dtanalysis.com
Dow Theory Analysis SAC
Sept. 18, 2008
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