Market Update 02/17/2009

February 17, 2009 · Posted in Weekly Posts

Today was nasty for most markets throughout the world and there is likely much more to come in the near term. News of continuing severe degradation in world economies is coming out of all major nations. Japan is seeing its economy contract at an alarming rate, nearly 13 % year over year in the presence of an aging population, and hence a declining work force. In addition the government s led by a prime minister who has an approval rating of under 10%. Japan is hurting.

The biggest contributor to today’s falls in world equities was Europe. In a nutshell, there are multiple European nations who have become part of the Eurozone in the past few years who are teetering on the edge of sovereign default. Couple this with the large exposure that many European banks have to Eastern Europe, especially Austrian banks, and you have all the makings of a systemic banking crisis developing. Further, there is a no bail-out clause in the governing articles of the European Union. That is, there is no mechanism for Europe as an entity to bail these countries out. In fact, it is expressly not required that they be bailed out. Obviously this may be tolerable for one small nation in isolation but when we have multiple small Eurozone nations on the brink the systemic threat to the Euro itself becomes evident.

As a result of all this world equity markets sold off sharply, sell programs were triggered on the Euro, the dollar rebounded somewhat, US Treasury rates dropped as money flowed into them and gold jumped nearly $30 dollars an ounce taking gold mining shares along with it. All in all our accounts netted out to a loss of 0.5% with losses in bonds, agriculture and currencies almost perfectly offset by the rise in our gold related positions. Having said that, the picture immediately in front of us is getting complicated. We can expect further movement to the downside in global equity markets, the Eurozone is in trouble. Treasury short positions are at critical support levels and appear to be in for further pressure if, defaults begin to occur in Europe.

We will look in turn at Gold and Gold Stocks, US Treasury Bonds, and finally the US dollar.

Gold and Gold Stocks:

Gold rose strongly as we stated above. Spot gold ended at just over $970 an ounce a gain of about $28 ounce or just about 3%. Exchange traded funds like CEF and GLD joined in as did many of the gold mining stocks. As can be seen from the charts, we gapped up this morning and stayed above the gap. After last week where exchange traded funds added 3.54 million ounces to their total, a record, the wind is clearly at gold’s back. In an interview on Bloomberg, Dennis Gartman stated that gold was once again becoming the world’s second reserve currency. Gartman also stated that it had been confirmed this weekend that the Russian Central Bank was actively buying gold and hence increasing its reserve holdings. All this is positive for our gold positions.

Having said that, nothing goes straight up or down. Gold needs to be watched very carefully in here for a correction. It is possible we correct tomorrow somewhat, it is possible we rocket past $1000 an ounce before we correct. What we know is the trend is higher. Investors need to determine their own game plan for whether they want to trade in and out or ride out the periodic downdrafts. Our plan, subject to change, is to ride the market higher until we see evidence that a temporary peak has been met. We made no changes to our positions today. We do believe it is important to cross reference the activity in the ETFs, gold mining stocks, and the spot price to get a full picture. What we also expect though is that continued weakness in the Eurozone, declines in global stock markets, and economic and fiscal uncertainty wordwide will continue to provide fuel to gold’s fire. There is no place that is attractive right now that could attract money out of gold. The only possibility for a major downdrfat in gold would be fund liquidations to pay off margin losses in other markets. We do not see this as likely.

Following are the charts for spot gold, CEF, GLD, NEM, ABX, and TGLDX

Spot Gold Price Last 24 Hours 02/17/2009

Central Fund of Canada 02/17/2009

GLD ETF 02/17/2009

Newmont Mining 02/17/2009

Barrick Gold 02/17/2009

Tocqueville Gold Fund 02/17/2009

Taking all of the data together gold is headed higher but, again, we emphasize there may be a correction here shortly. Use it to add to positions.

US Treasury Bonds:

The news from Asia yesterday on the drop in the Japanese economy sent bond yields down overnight. The ructions in Europe today sent them even lower. This put a lot of pressure on our PST and TBT positions. TBT held up better staying nicely above the $45 line but PST is threatening to break lower. We are holding these positions for now but we will not stand and take a break much lower. What we did learn today though was that in January foreigners were net buyers of US treasuries while US funds were net sellers. Stated another way, the locals are selling while the foreign money is still buying. That is bearish for Treasuries and supports our fundamental thesis that Treasury prices are headed lower. The dynamic we have to deal with then is how much money will head towards US treasuries on further equity and Euro weakness vs. how much selling will occur as current domestic holders use this rally to sell? This against the backdrop of increasing evidence that the world economy as well as America’s is grinding down even more and of course the enormous supply that is coming to auction this year. The answer is not known so we have to feel our way unfortunately. For now, we are holding our positions in the expectation that the support levels we have seen do in fact hold and that investorsquickly reaize that the value of government paper is becoming eroded.

7-10 Year Us Treasury Leveraged Short ETF 02/17/2009

20 Year US Treasury Leveraged Short ETF 02/17/2009

US Dollar:

Looking at the chart below of UDN, the US Dollar Bearish ETF we see that we gapped lower today and are re-testing the lows of early December.

US Dollar Index Bearish Fund

Looking at the dollar in a broader context we see that the dollar has been steadily losing strength over the years and for all of the rise recently it has still not broken out of the lower range of recent years. Now what strikes us is that for all of the talk of flight ot quality, despite the fact the world is in the midst of the worse crisis since the 1930’s, the US dollar is still no where near as high as it was in the 2001 time frame. From a macro sense we maintain our view that the dollar is headed lower. From a trading standpoint the threat of collapse of the Euro may force us out of our position.

Real Broad Dollar Index Historical Data

Coming Up:

We have published two new Members Only Posts China: Part 1 dealing with how to time the entry point into the Chinese equity market and China: Part 2 dealing with the interaction between China and the US in the areas of bonds, the dollar and inflation.

We will publish an additional new Members Only post this week - but the topic has not been determined.

We recommend the following posts as especially relevant at the moment:

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

“How a Reserve Currency Collapses”.

“Gold - Reluctantly”

“Why is the Dollar Going Up (and When Will it Stop)”

To view previous Members Only posts simply follow the instructions under the “Become a Member” tab and select the “One Month Free Membership” when you get to the Products page. You must complete the checkout process in order for the Membership to complete. Registration is not sufficient. You are under no obligation to continue beyond the One Month Free Trial and your e-mail and address will not be shared with third parties.

We are entering a critical period of time in the bond and dollar markets staying plugged into what is happening and the likely ramifications is especially important now - stay informed with Murdock Global Insight.

We hold the following positions as of 02/17/2009.
Short Treasury Bonds through PST and TBT*, **
Long gold and silver bullion through CEF
Long gold mining stocks through TGLDX
Long Agricultural commodities through RJA
Short US dollar through UDN**
Long Australian dollar through FXA**

*ProShares leveraged short ETF. Investors need to understand thoroughly the risks associated with these leveraged products in light of their personal investment needs and risk tolerance. They may not be suitable for all investors.

** Position is currently in loss but we are sticking with it as we believe the fundamentals are in our favor.