- What a great day, at least for me. The US Federal Reserve
in its infinite wisdom lowered both the discount rate as well as the fed
funds rate by one half of one percent. The significance of this move
is not lost on me and that's what I am going to talk about tonight. Today
the Fed declared its true colors today as it lowered rates. Back in March
the Fed said its main concern was inflation. Since then oil has risen
from $66 to $82, gold has risen from $650 to $732, wheat has rallied from
$4 to $7, soybeans have rallied from $6 to $9, and cotton has rallied
from $56 to $65. I could go on but I think you get the idea. Today the
CRB hit yet another new all-time closing high as well as an intraday high.
By any measure the Fed was right to be concerned and their concerns bore
fruit. The Fed's mission is to protect the US dollar. Therefore given
an inflationary environment, the proper action would have been to raise
interest rates in order to put a brake on inflation and protect the real
value of the US dollar. That didn't happen.
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- On the other hand we have decreases in consumer spending
and the housing sector is in serious trouble. Consumers are in trouble
because they spent money they didn't have while housing is in trouble
because large institutions loaned money when they shouldn't have. It would
be fair to say that greed got the best of them. Bear Stearns and Goldman
Sachs knew they made bad loans so they packaged them, gave them a fancy
name (Collateralized Debt Obligations or CDO's for short), and then sold
them to widows, orphans, and UK banks. About two months ago the world
found out that these CDO's are pretty much worthless and the widows and
orphans should have read the fine print. It is my opinion that the Fed's
actions have one purpose and one purpose only; to save the Goldman Sachs
of the world. I believe today's actions will be of little or no benefit
to the US consumer.
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- Everything has a cost and the cost is considerable. In
one swift move, the Fed drove a stake through the heart of the US dollar
and the bond. It also mortally wounded commodity bears in general and
gold bears in particular. Also, the Fed has probably managed to recycle
an old bubble (the stock market) so that Goldman Sachs has a place to
recuperate losses. Notice the emphasis on "probably" because
I'm still not sure they'll get away with it. Let's start with the daily
chart of US Dollar Index:
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- Today saw the December US dollar futures contract fall
a large .48 to end the session at 79.06 and that is a new multi-decade
low. There is now nothing between here and 76.45 support and I would say
that it would not be unreasonable to see an initial decline down to support
at 72.00. What is even more bearish is the fact that the December US Dollar
Index actually made a downside reversal today and that is extremely bearish.
Personally I think the US Dollar coffin was nailed shut today. Until the
dust settles, I am long the Swiss Franc, Japanese Yen, Peruvian Sol, and
Canadian dollar while being short the US Dollar.
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- The next victim is the US bond. The whole world is raising
rates and even countries like Brazil, Chile, Argentina, and Peru are
concerned with inflation and are raising rates. The US expresses concern
about inflation but lowers rates. The US dollar and bond must compete
with the rest of the world and the Fed has assured us that it will not
be able to do so. Take a look at the daily chart for the bond below:
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- You can now see that RSI, MACD, and the histograms have
turned down and I believe bonds have finally topped. But shouldn't bonds
be rising if rates are dropping? In a normal world yes but rates are
dropping for the wrong reason and bond holders are not stupid! No one
is going to buy a high risk bond with a low yield when they can buy a
lower risk bond with a higher yield! The real killer for the bond will
be the Fed printing dollars to buy their own bonds and I believe the bonds
will start to discount that now. I sold bonds short on Monday and again
today.
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- I am not going to say a lot about stocks in spite of
the fact the December Dow rallied a huge 332 points to close at 13,835
and is now within two hundred points of its all-time high. The Transports
also rallied 186.23 points to end the day at 4,932.86 but still more
than 500 points from its all-time high. Take a look:
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- I suspect the Dow will make a new all-time high soon
but I seriously doubt if the Transport can confirm, at least not right
away. Given the Fed's actions today, there is a chance the Transports
could confirm and that would lead to a 3,000 to 5,000 point rally in my
opinion. That sounds ridiculous but it could happen. I remember back in
1989 and 1990 Peru was experiencing hyperinflation and terrorist bombs
were going off every day and yet the Lima Stock Exchange shot up like
a rocket. I never saw anything like it and it is counterintuitive, but
never the less it did happen. I still have to believe that the Transports
fail to confirm and the stocks turn down and get ugly. I am on the sidelines
until the market declares its intentions.
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- For those of you who are invested in commodities, I want
to explain the significance of the Fed's actions today. You have just
been given a blank cashier's check and you can fill in the amount you
desire. In particular, anyone holding gold is about to be rewarded for
all those years of suffering. The Fed has guaranteed you a double-digit
inflation and now has its foot squarely in the hyperinflationary door.
That is extremely bullish for gold in particular and commodities in general,
and that is why commodities prices shot up when the Fed announced its
rate hike. Gold rocketed up almost $11 on the news and oil was up over
$1! Any chance the bears had of holding gold here went right out the window
of the Federal Reserve building in Washington, DC. Take a look:
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- I know gold is overbought but I believe it will become
a lot more overbought as the day's pass. Now remember how I drew the
boundaries on the HUI chart last night and said how many times the HUI
has tried to break out and failed? Well, guess what?
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- Today it broke out to the upside! I want to see some
confirmation in the next day or two, but I truly believe this is the
real deal. Buenaventura made a new all-time high today! So I would just
sit tight with your gold stocks for the moment and let nature take its
course.
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- In conclusion, we have been given a real gift, the perfect
financial climate for commodities to rise. Now the best thing you can
do is nothing. Cotton broke out above its old high today, oil made yet
another new all-time high, copper made a major break out today, sugar
is confirming that it is on the move, and coffee is surging. There will
be reactions but it will be just that, a reaction. The course is set so
just sit tight and do nothing.
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- ebo@dtanalysis.com
- Dow Theory Analysis SAC
- September 18, 2007
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- For more information, go to: http://DoeTheoryAnalysis.com
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