By Bob Hoye
"Italian new car sales plunged in November...Decline of 20.1% Y/Y."
– Dow Jones, December 4
"The European debt crisis has given way to a new wave of corruption as some of the most hard-hit countries have tumbled in an annual graft-ranking study."
– Bloomberg, December 5
This is from a watchdog group called Transparency International. Greece fell to 94th place from 80th, ranking worse than Colombia and Liberia. Greece's "Golden Age of Democracy" was founded not so much on intellectual inspiration, but more upon Athens sitting on one of the richest silver camps in history. Athenians could afford democracy, Spartans could not. The problem recently is that Greece, like any other country, cannot afford interventionist government.
"German industrial production unexpectedly dropped in October."
– Bloomberg, December 7
The number was down 2.6% from September, which was down 1.3% from August.
"U.K. Manufacturing production fell more than economists forecast in October. Food and alcohol slumped."
– Bloomberg, December 7
Progress on this great reformation is being made. The legislature in Michigan passed a "Right to Work" bill. This brings the count to 24 states where people can work without being forced to join a union. They can work without being forced to contribute their money to union leaders with an agenda they may find offensive.
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Global business conditions continue to deteriorate. Normally, we don't follow these types of numbers too closely but they have been interesting since the summer. The ability to service debt is diminishing as federales around the world create huge amounts of paper as their lap-dog central banks buy it.
At some time the spell breaks, but skepticism is better than faith that another government scheme will work. It has been frustrating that our technical overboughts on various bond sectors last summer were not followed by substantial price declines. The long bond dropped 9 points when about 15 were possible. Corporates and Munis eased their overbought conditions and then firmed.
What prevented a significant setback? Central bank bids and the knee-jerk about buying bonds as the economy weakens. Into corporates? Then there was the flight-to-risk bid as stocks and commodities weakened into early November.
The bond future rallied to resistance at the 151 level in the middle of November. The action was only moderately overbought, which makes this week's decline interesting. Yesterday clocked an outside reversal to the downside. Perhaps the one-way-street is beginning to wander.
However, as Fat Jack famously observed "There is nothing too good that it can't be screwed up."
Due to the oversold in early November and seasonal influences a rally has been possible into December. The next phase includes small caps outperforming the big ones from around now until early January. The "Turn-of-the-Year" model.
If the rally was moderate it would be within the Secular Bear Market model.
So far it has been moderate.
The USD was likely to decline into January. Last week, it almost reached support at the 79 level. The low was 79.7 on a weakness that could run into January.
The Canadian dollar has been expected to be firm into January. The low was 99.5 in early November and so far the high has been 101.8.
If commodities stall out over the next few weeks, so will the C$.
After all of the drought excitement in July, wheat continues its "stair-step" down. The high was 947 and today its at 806, a new low for the move. Last week's view that firming then could continue into January seems not to be working.
Other agricultural prices have been sympathetic, with the index (GKX) stair-stepping down from 533 to this morning's 462, a new low for the move.
However, wheat and the index are approaching an oversold condition.
Going the other way, base metal prices have rallied nicely with copper making it to 372 yesterday. The action is close to an overbought condition and close to resistance. Copper is vulnerable.
The index of base metals (GYX) is recording a similar pattern and at 397 seems close to a setback. On the bigger picture, base metals set an important high at 502 in April 2011. We took that as a cyclical high and the subsequent low was 346 in July – during that concern about European insolvencies. The difference between then and now is that the European economy has suffered further deterioration but there is no panic. Not even a little one.
Metals were likely to rally into January, but the action is approaching overbought. Who cares if it continues over the next few weeks. Let's declare a victory and enjoy a "Christmas bowl of smoking" punch. It would help to restore alcohol consumption numbers in England.
BOB HOYE, INSTITUTIONAL ADVISORS