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Of Bubbles and Bottoms and Various Kinds of Sniffing

By Jon Nadler       Printer Friendly Version
Sep 5 2008 2:21PM

www.kitco.com

Good Afternoon,

Gold prices rode wildly, and over a wide, near-$30 range in the time elapsed since yesterday at this time. On the very anniversary of the jobs report that sparked the Fed's non-stop rate cutting campaign one year ago, the markets got another employment diagnosis to remember. The five year-high 6.1% unemployment rate recorded in the US served to confirm that the economy is still shedding jobs and looking recessionary, and that such a pattern only aggravates the negative feedback-loop as regards housing; to wit, mortgage foreclosures rose at their fastest rate in nearly thirty years. Whatever ails the US, however is sure to contaminate the rest of the world - and it has. That acrid whiff of deflation hangs in the air. We cannot forget that the US makes up for 21% of the global $45 trillion economy, and that over $6 trillion of that $9.5 trillion slice of economic pie is made up of US consumer spending. Take a significant portion out of these numbers on account of the fast-emptying American pocketbook and equally fast-emptying American McMansion, and you have the makings of a global-scale slowdown, if not worse. Moving company stocks, anyone?

Little wonder that over the past four days, global investors took flight like our Canadian common loon does in the fall, and they sent world markets of various kinds reeling. Their flight is no longer one headed towards other assets, warmer climes, or safe havens; it is merely a plain and simple flight - for the "Exit" signs. And, into cash. The theme that bubbles cannot deflate slowly appears to be catching on not only in commodities, but the other theme - that the world is possibly headed for a deflationary or stagflationary phase - also has global investors suddenly looking to cash as a very friendly alternative. And, as cash goes, they appear to be returning to that jilted partner which looked so darn unappealing one year ago; the good ol' US dollar. The greenback tripped and fell hard on the employment news early today, but it got up, dusted itself off, and marched right on - to within 0.06 of the 79 level on the trade weighted index, at last check. The greenback's sharp rise is beyond the most optimistic of expectations issued earlier this spring and summer. Surely, there will be a pullback or consolidation at some point, but if it ignores 'perfect storm' -type of news that broadside it as they could have today, the greenback has no fear of such Kryptonite. Not at this time.

Gold prices behaved quite badly today - an unfortunate pattern, given the fact that the jobs data likely signals a Fed "on hold" come September 16th. In fact, the numbers may even signal an (gasp!) accommodative Fed, should the situation deteriorate further. Bullion's initial reaction was to undertake its best rally in two weeks' time. All sorts of bullish cheer went up, expecting a return to the 'end of the world scenarios' that had been shelved of late. The rally however, failed at $820 once again and might just be called a key reversal that puts the metal back on track to the test of the $775 support zone. Should that number not hold (and some are not expecting it to) the charts at least, are pointing to the $720-$740 zone as the likely probability. The sell-off after the lunch-hour was deep and swift - much of it smelled like fund liquidation (whether forced or not, remains to be seen later). But then, what else is new?

The pattern repeated itself in crude oil as well. Prices were off by nearly $2.50 and edged closer to $105.50 per barrel as the same apprehensions about global slowing were at work behind its own scenes. OPEC meets next week in Vienna and has its agenda cut out for it, as it seeks to now find a floor to the price of its product. Some members feel that such a floor is to be set near $80 per barrel. To be sure, none of the delegates can really get any warm-fuzzies if oil prices return to above $120 (let alone $145...). The US dollar edged closer to 78.90 on the index and was last seen at $1.425 against the common European currency. The Nikkei average mirrored yesterday's 345-point drop in the Dow with one of its own - of equal magnitude. The hunch we offered up yesterday, that the US market was factoring in a Democratic victory in 50 days' time was reinforced by analysis from Ned Davis Research and may be found in a Mark Hulbert article on Marketwatch. At the very least, the decline is also factoring in such an outcome, in addition to the many worrisome economic trends it is reflecting.

New York spot dealings were as turbulent as any in recent memory as the roller-coaster ride unfolded on Friday. Gold returned to under $800 and was last seen at $796 per ounce, finishing the week with about a $35 net loss. Silver was off a whopping 63 cents at $12.13 after the mid-$12 and $12.25 areas presented no viable support, while platinum continued much lower, dropping $36 to $1344 per ounce. Palladium lost $12, and was quotes at $269 at last check. The Dow went into the dumps early in the day following the poor employment figures and they also showed worries about a downgrade on Merrill Lynch and about Dell intending to sell all of its factories. Rumors that hedge fund Atticus was liquidating positions swirled around in the market, but the firm denied the allegations. Once the dollar recovered and oil fell apart, the Dow regained most of its composure and returned to unchanged on the day. Yesterday's damage was apparently sufficient for two sessions.

The Atticus story, fictional as it may be, fits recent patterns however. The implosion of Ospraie's fund this week could be the tip of an iceberg that recently cleaved off the world's market shelf - itself shrinking fast. Let's take a look at what the big play may have been all about when it comes to the commodities niche. Marketwatch's John Ogg fills us in on the details:

" The new mantra creating a deflating speculative bubble is taking a new twist. Even before Ospraie blew out its fund (and now after) there have been more rumors about commodity-related funds or commodity-stock related fund blow-ups. In fact, today is no different and much of that is being tied to selling as new credit issues are bring about more and more de-leveraging. All you have to do is look at some of the top commodity stocks (below) to see how this is not just sector rotation. Or you can just look at the yield on the 10-Year T-Note at 3.65% today. In mid-August this was 4% and if these levels hold here this will mark the lowest yields since mid-April. Today feels like one of those days after a weak week where nothing works. Only two of our old "defensive stocks for a crummy market" are trading up today.

The price action that was being seen in June in commodities like oil, coal, and gas were just the tip of things in a bubble. For the first time in many of our professional careers the fertilizer business was cool and was rocking. When potash and chicken poop are cool, well you know what it smells like.

So which major sector stocks have been swimming back in the bad-smelling fertilizer?

Integrated Oil... Exxon Mobil Corp. (NYSE: XOM) is within a hair of the 52-week lows which were put in during August and are now down 20% from their 52-week highs and down almost $5.00 in just the last week. Diversified metal & mining... BHP Billiton Ltd. (NYSE: BHP) has lost more than 37% from their 52-week highs and down over $10.00 from the $70+ levels of just last week. Gold... Barrick Gold Corporation (NYSE: ABX) is down almost 45% from its 52-week highs and shares are down about 13% from last week. Coal... Peabody Energy Corp. (NYSE: BTU) shares are down over 40% from their highs and down more than 20% over the last week.Potash/fertilizer... Potash Corp. of Saskatchewan, Inc. (NYSE: POT) shares are down nearly 40% from highs and down about 17% just over the last week.

And there is more bad news. Technology companies aren't proving to be the haven investors were hoping and financial stocks failed to continue their rally. The latest big rally groups were homebuilders and retail stocks as traders were trying to discount the current environment and look six months or nine months out. Wal-Mart Stores Inc. (NYSE: WMT) is still within 1% of its 52-week and multi-year highs as it is winning from the trade-down economy.

This is what de-leveraging and bubbles popping looks like. Would it be fair to call the commodity bubble of 2007 to 2008 the same as the tech bubble of 1999 to 2000? No, it would not. But it does look very similar while it is happening. These are at least real companies with real histories, real products, and real needs that have to be met. But again, the similarities are there.
When you have speculators on Capitol Hill telling Congressional hearings that they play no part in asset prices it becomes a bit like getting advice from the Alzheimer's ward patients at the nursing home. If not, it's no different than asking a fox if he's seen any threats to the chickens. Unfortunately the Volatility Index ("VIX") is up over 2 points today alone at 23.79, and that will have over 25 or get to nearly 30 before the overall level gets too oversold.

But there is good news. When you get to this point with these observation the old adage of "you have to buy when you feel horrible about things" sure comes to mind. But there is another adage too to keep in mind.... What do you call it when bottom fishing doesn't work out? Bottom sniffing.

At least there is no recession. The government keeps telling you that with those economic numbers not technically falling into an official recession. The other good news is that the drop in raw commodities is taking the winds out of the inflation sails. The bad news is that energy and commodities became a pretty big component of the markets, or at least large enough to take away the benefits from the market overall."

Next Monday we expect the trade to be back on their desk in full force. We also expect the market trends which have shown a lot of fits and starts to manifest themselves a bit more aggressively (if that's possible!) as the week wears on.

In closing, I would like to remind our valued readers that Kitco will be an exhibitor and media partner at the 2008 Las Vegas Hard Assets Investment Conference on September 9th and 10th.

Given the opportunity that we will be in Las Vegas, we would like to invite you to come down and meet some of the Kitco Investment Department staff members, including myself. We’d be glad to take the time to talk with you, exchange thoughts on the precious metals markets, and introduce you to Kitco’s newest products and services.

The Las Vegas Hard Assets Investment Conference will be taking place at the:

Mandalay Bay Resort & Casino
3950 Las Vegas Blvd.
South Las Vegas, NV 89110
Phone: (702) 632-7777

Show hours will be: September 9th 8:00am – 5:00pm and September 10th 8:30am – 5:00pm

I will be conducting a Master Class for newsletter editors on September 9th at 11:40am. I will also appear on the Daybreak Power Panel “The most important profit-turning trends in agriculture and metal markets? at 8:30am on September 9th. You are most welcome to attend these informative workshops as well.

This free event (pre-register now at http://www.iiconf.com/pebble.asp?relid=62267) offers both experienced and novice investors the opportunity to gain valuable investment knowledge aimed at preserving wealth and enhancing investment portfolios using natural resources and hard assets. Being in the company of acclaimed industry professionals will expose you to their expertise and place you squarely amongst the industry’s best.

Among the featured speakers, you will hear notables such as Jay Taylor, Al Korelin, Dennis Gartman and David Coffin. I will personally be on hand at our booth to answer your questions and to equip you with key tools you need to better understand the precious metals markets and related investment products.

So, please join our friendly Kitco staff at this prestigious conference and make sure you register today at: http://www.iiconf.com/pebble.asp?relid=62267 or simply call 1.800.282.7469

Stop by Kitco’s booth #417 for free Kitco welcome gifts as well as a chance to win a new Kitco ChipGold bar. We hope to see you there!

Best regards, a Pleasant Weekend, and Happy Trading!

 

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.