Taylor On US Markets & Gold
ROG'S CORNER 2/25/05
PRECIOUS METALS AND OIL CONTINUE RALLY
"Today was good. Today was fun. Tomorrow is another one." -Dr. Seuss
Kids for many years loved old Dr. Seuss. Everybody enjoys a day when all
lights are green and markets are headed our way. Today, in spite of up
stock markets, gold showed us it is not going weak or will backslide. It
has proven it will only get stronger in the face of a sideways dollar and
positive stocks reports. This is the Goldilocks scenario for precious
metals, energy, grains, and other commodities. Sir Alan's next problem is
how to walk the thin wire between introducing higher rates to tap the
brakes without flipping over our housing markets. You've got to hand it to
him. While the trip wires multiply, he is jumping and dancing over and
around them, delaying and avoiding the finality we know is coming. The Ides
of March is looking quite ominous to me.
Dow Jones Industrial Average: Closed at 10,841.60 +92.81. Dow rallied today
on good news and strong upward movement in housing stocks after Pulte Homes issued a glowing report. Confusion in housing markets is created by
regionalization. Some areas are flat to down, while others on both coasts
and some Sunbelt states continue to expand in the bubble. Trader Tracks had a good week with trades going into the green while gold and silver
continued to rally. Silver finished on a sell-off note after some profit taking, which was expected. Dow chart formed a double top in late December and this February. Prices today have produced another double top just for the month of February. The Nasdaq made a triple top as well, but with three
tops in row, tightly grouped together. Today's Dow triple top completion
finishes the group and delayed the selling only a little. Upward channel
lines are squeezing together in bear flag. Price was over all moving averages. PMO lines have closed together, indicating a side to down movement. Volume was lower indicating lack of buying power in spite of price moving +92.81 points. Short trend is up; intermediate trend is up; long trend is down. Fund managers talk of being stock pickers. This is lingo for "We can't find anything with value to buy, as most is overpriced." Warren Buffet said this long ago, as did we. This is one scary market preparing to dive while trying to hang on. Sell.
S&P 500 Index: Closed at 1211.37 +11.17. Price closed above all moving averages. Chart has a small double top at the lower end of December high in
2004. PMO lines have crossed and are bending up. Daily bar close at top end
tells us more buying power for next Monday. Main support remains at 1165.
Waves show today's up bar might be a last topping indicator before down
pressure begins next week. Short and intermediate trends are up; long trend
is down. Sell.
S&P 100 Index: Closed at 578.57 +4.80. Chart pattern is copy of S&P 500
chart. New triple top is being formed and PMO lines are crossing and
turning down. Price is over all moving averages and closed on an up bar,
showing more buying coming on Monday. This chart group will be the last to
tumble after the Nasdaq, S&P, and Dow. Sick markets cause safety buying in
this top group. It has the same problems the others have but they are not
quite as apparent as yet. Short and intermediate trends are up, and long
trend is down. I view this last rally as a set-up for large sellers to
escape with profits while Sheeple get left holding an empty bag. Sell.
Nasdaq 100 Index: Closed at 1526.90 +9.19. Chart formed a large triple top
in December. Price sold down to 1500 support and now we have a small head
and shoulders pattern between 1500 and 1550. This shows a more advanced
sell off position than Dow and S&P. I see a weaker chart than the other
two, which should lead the three markets in selling off first. PMO is
bending up and crossing over to side. Main support is 200-day price at
1490.72. Once broken it should accelerate in selling. Price is over the
20-day, but under the 50-and 200-day. Short trend is up; intermediate and
long trends are down. Sell.
30-Year Bond Price: Closed at 113.75 -0.09. Price remains in a bear flag
formation but is supporting above the lower channel line. PMO has crossed
over and is down. Price is over the 200-day average but under the 20-and
50-day. Main support is the 200-day at 110.90. Federal Reserve has a
meeting on 3-22-05 and is expected to raise rates ¼ point. Fed governors
intend to keep the housing market rolling as it's the last leg holding up
the consumer who is 70% of all buying power. Inflation and deflation exist
causing stagflation. Corporate bonds offer little return with plenty of
risk. Junk bonds provide high risk and lower than average return. France is
preparing to sell 50-year bonds next week, which are expected to receive a
good buyer reception including from Americans. Pressure is building to
begin selling our 30's once again. Fed says no. Short trend is sideways;
intermediate trend is down; long trend remains up. Confusion dominates.
Stay out.
Gold: Closed at 434.70 +0.50. Price remains over key resistance and support
level of 429. PMO lines are moving up and spreading showing strength. Price
is over all three moving averages and broke through overhead channel line
last week. All indicators are up and if the current wave is a continuation
of a long wave one, this portends to be a powerful up thrust for the
market. We forecast 455 minimum in this cycle and possibly 476. We have
three to four weeks left in the gold up cycle. Short, intermediate, and
long trends are all up. Buy.
Gold & Silver Index XAU: Closed at 98.88 +0.35. Five-step down wave selling
pattern is completed and the second wave up is underway. Presidents' Day
news shocked this market creating a gap up at 95-96, which must be filled.
Question is do we go back and fill it now or will this come later at the
end of the gold rally cycle? I think it comes at the end with selling after
we peak out on gold and silver stocks prices in this current rally. Short
trend is side; intermediate trend is up; and long trend is up. Buy.
U.S. Dollar Index: Closed at 82.87 +0.10. As we expected, dollar formed a
solid head and shoulder pattern with a 30-day left shoulder and probably a
right shoulder to come and match it in width and size. Dollar should stay
between .8200 and .8400 through March, barring any major upsets. Price is
under the 200- and 50-day averages and above the 20-day. PMO is down and
price has found the + or - Fibonacci retracement level of -50% from the
top. Short and intermediate trends are down while long trend is side to
down. Stay out.
Light Sweet Crude Oil: Closed at 51.39 +0.22. Price remains in a bullish up
channel in a powerful third wave expected to go to $55 resistance and
possibly $60. PMO is up. Price is significantly above all moving averages
and resides at the inside top of channel lines trying to go higher. Price
gapped at $49, which must be filled, probably on selling, profit taking
much later on. I expect this three wave up to continue for another four to
six weeks. Topping and early selling will occur when definite prices are
settled on the April unleaded gasoline contract at the end of March. Short,
intermediate, and long trends are all up. This is the market leader now. Buy.
CRB Index: Closed at 298.04 -1.12. Price has powered through top main trend line. This was primarily driven by oil and grain rallies this week. Price
over all moving averages and the PMO lines are apart and moving almost
straight up which is inflationary. Bull pennant channel lines will close
together way out in time, probably 1-2 years. Price has topped and hit main
resistance at the magic 300 price marker. After a brief rest here, we
expect more power buying with the push coming mostly from grains and oil
and with more from gold and silver. Inflation is going to hit hard for now
and later on be overcome with deflation. All trends are up. Buy on a small
setback in prices. -Trader Rog
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SUBSCRIBER CHALLENGE TO DEFLATION VIEWS
QUESTION: Jay, Appreciate your analyses of gold stocks in your monthly and weekly newsletters but totally disagree with Professor Fekete's and Bob
Hoye's deflation scenarios.
- Firstly, I believe that your explanation of the yen carry trade on page 6
of the currently Weekly is flawed. In the first instance, the Japanese
investor must take out a fixed yen loan amount to purchase the fixed U.S.
Treasury investment. His purchase is thereby fixed at the exchange rate
then in effect. The U.S. Treasury will subsequently depreciate in yen terms
well into the future (likely tending to zero value). On the other hand, the
yen loan will be renegotiated every 3 months but always for the original
amount borrowed. As the loan is denominated in yen and fixed in amount, it
will not be subject to future changes in the yen/USD exchange rate. The
loan must also be repaid in yen. Unless he simultaneously purchases a
forward exchange contract, the Japanese investor has purchased a real
"dog." He will not make any capital gains from future changes in the
yen/dollar exchange rate. Furthermore, his investment can only yield
positive interest returns if (a) his borrowing rates remain below the yield
on the U.S. Treasury; and (b) the yen depreciates at least as fast as the
USD.
- When the Japanese investor finally realizes that it is (initially covert)
U.S. policy to monetize the debt, and especially debt held by
non-Americans, because that is the only way that the U.S. enormous debt can be repaid, he will realize that U.S. hyperinflation, and a seriously
depreciating U.S. dollar, has made his U.S Treasury a very bad investment
indeed. At that point, he will still have a yen-denominated loan but no
offsetting asset of any real value. Notwithstanding the higher and higher
U.S. interest rates that will be available, vis-à-vis Japanese rates, the
yen carry trade will then be totally dead.
- At some point, even competitive devaluations of the yen will make no
further sense. The Japanese economy and currency will be essentially solid,
whereas the dollar will be "toast," the U.S. debts will be on their way to
being liquidated, and a new U.S. currency eventually will be introduced.
Better for the Japanese, and other countries, to await the ultimate demise
of the USD than to further debauch the yen and risk domestic turmoil and a
complete meltdown of the international financial system. Otherwise, the yen
will join the dollar as an historical relic, just like the German mark after WWI. The U.S. dollar investments of the Japanese and others will also
be essentially "toast." Great recriminations against the U.S. will, of
course, be inevitable. International tensions will likely increase greatly
and even conflict may result. However, the U.S. will have positioned itself
for a fresh start.
- As for Bob Hoye's analysis, it misses the basic point that things are
very much different this time around. His assumption is that things are the
same and/or that trends/results will always be identical in nature. However, there is no longer a gold standard or any presumption that the "senior currency" is sound and should be maintained as sound. There will be so such conceit this time around. Indeed, U.S. policy this time definitely will be to debauch the dollar. In this regard, the U.S. really has no other realistic alternative. As such, the best example is that it will follow Argentina and a myriad of other Latin American and other third-world economies who have perfected similar currency debasement policies in the past. In how many of these "banana republics" have we ever seen deflation? That's a most laughable concept! Who would ever want to hoard pesos or the equivalent? Rather, rational holders of such paper dispose of it as quickly as possible for a better store of value. The same future lies ahead for the dollar. Serious inflation is the very best that can now be expected but hyperinflation is perhaps the likeliest possibility.
- Debt is only deflationary if there is a genuine commitment on the part of
the borrower to repay it in real terms. There is no practical possibility of this happening under U.S. economic conditions and the debt realities of
today. How could U.S. citizens, companies and governments tolerate a policy
of allowing deflation and the effective increased valuation of debt in real
terms? This would clearly be political suicide and absurd as a realistic
assumption. Moreover, money is a commodity whose price is subject to supply
and demand. As debt is monetized, the supply of USDs will increase greatly
in the near future while its demand will sink commensurately. This is very
obviously anything but a scenario for deflation.
Best regards,
Larry
ANSWER: Larry there is almost nothing you said here that I agree with so I
hardly know where to start. But I will try:
- There is no reason in the world why the yen carry-speculator would not
borrow short-term yen and then simply roll that loan over for the amount he
needs to borrow to refinance a fixed amount of dollars he laid out to
purchase the U.S. Treasuries. I don't know where you get the notion that
the funding side of this transaction has to be exactly in sync with the
assets side. In fact borrowing short term and lending long term is so
common, especially among major financial institutions such as those who
engage in the yen carry trade, that it would be shocking if they did match
maturities in the trade. Since this is a basic argument that Antal Fekete
advances, if you disagree with this, then there isn't much reason to
continue the discussion. And of course he does simultaneously purchase
forward contract to swap yen for dollars to match the short-term maturity
of his yen loan.
- I don't think the Japanese investors are unaware of the desire to
inflate the dollar away because they have been doing the same thing to
their own currency. In fact, both countries (and in fact the entire world)
have been engaging in a beggar-thy-neighbor competitive devaluation scheme
that is so reminiscent of the 1930s.
- Your assumption that the dollar will be "toast" is much more widely
accepted than my view that there is going to be a dollar short squeeze that
will be triggered by the enormous indebtedness of Americans if called by
the "margin clerks" (as Hoye calls them). But that is what will happen I
believe because as is so clearly true, the amount of new debt money the
U.S. has to create to try to become GDP-positive is growing exponentially.
Once again, I can't help but show the following chart that so clearly makes
the point. Sooner or later, the U.S. becomes insolvent and a process of
liquidation will be underway that will cause stocks, corporate
bonds-especially junk bonds, commodities, real estate, art objects, you
name it-to collapse to values that are a tiny portion of their current
inflated values.
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March 4, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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