RY, Royal Bank of Canada.

On previous occasions I have pointed out the dangers of double tops and also emphasized the only rule that has to be followed at all times – buy low, sell high. Therefore I assume you do not own the Royal Bank or did you fall for the myth that somehow the Canadian banks and the government are better? Here are the charts.

RY June 2010 ry june 2010 2

As is clear from the long-term chart , the Royal essentially double topped recently, one of the few to do so and quite an accomplishment. But since then it has lost ,give or take, 20% of its value and has done so , perhaps, in 5 waves the last of which is not yet complete. This is not a particularly good sign, in fact it is quite POSSIBLE  that the stock will revisit its lows of a year and a half ago. Why, if this is the cream of the crop, the best of the Canadians that are the best in the world ?

    Glass-Steagall was formally taken off the books in 2004 (by Rubin among others) to accommodate the otherwise illegal creation of Citigroup. In Canada we began to dismantle the “four pillar” concept a lot earlier (1987) allowing the (reverse)takeover of our investment dealers by the banks fulfilling a long time dream of combining pure capitalism with the socialist backstop of government deposit insurance. Not to mention the million different ways that competition was effectively killed and the banks themselves given exceptional powers under the Bank Act (which is why a homeowner cannot simple give the bank the house keys and walk). So not much difference there.    Back in ‘98 when the banks wanted to merge our government disallowed it to happen not because they did not agree with the banks’ position that they needed to grow in order to compete in the big world, but because they feared job losses. Now , of course, the word is that they presciently avoided the too big to fail situation. By the way, we have our own Fannies by way of the CMHC, a crown corporation that guarantees all non regular mortgages, it does not have reserves worth mentioning so it is entirely dependent on the Federal government.

   Our banks did not receive the bailouts that were made available in the States, according to our minister of finance, conveniently forgetting that 75bln worth of mortgages were shifted to the Bank of Canada (proportional to the US situation). Furthermore the biggest bailout provided by the government comes from the artificially low rates and the steepness of our yield-curve, all this courtesy of pension funds and retirees that have seen their returns decimated. This transfer of income is comparable to that in the US.

   I can go on and on but the point really is that the myth of the Canadian banks being sort of impervious to what is happening in the world is simple wrong. Once the rules with regard to proprietary trading and all sorts of other issues revert back to the good old days the Canadian banks will be just as vulnerable.

GOLD , the stuff , by way of GLD

gold.june 2010

I do not like making predictions with respect to gold as, in my mind , the stuff is schizophrenic by nature and consequently seldom behaves in a logical fashion. However, just watching BNN a few moments ago there was a gentlemen stating that gold is an excellent hedge against whatever and therefore should be owned. This is blatant nonsense and not at all supported by the facts. If you run a chart of gold against , say, the S&P, you will find that when stocks go up most of the time gold does so as well. In other words ,there is generally a positive correlation which puts the lie to the notion that in times of stress when life as we know it is imminently supposed to come to an end, gold would be a good hedge. As far as being an inflation hedge this too is complete nonsense. In 1984 I inherited a number of Kruger Rands that I immediately took to the bank, receiving US$ 540 a piece for a total of about $11000 Canadian which I then used to buy a swimming pool. Recently I needed to renew the liner and just for the fun of it inquired as to what the pool would cost today – about $40.000 + or nearly four times as much! Gold should be at $2160 or higher if it held inflation. Also as it yields nothing (whereas the pool was great for the kids) the real value should be more like $3000 to $4000, it is not!

    So much for that, now more to the point, gold yesterday had a key reversal day (first a new high followed by a lower low than the day before).  Usually a sign of exhaustion  so it is possible that this is one more signal to suggest that we are already in the 3d wave of the big C wave down! Notice that the RSI and the MACD are confirming the possibility that this may be a high (for  quite a while). Looking at the CRB , or any other commodity index, it is quite apparent that none are even near their peaks of a year or two ago so perhaps gold is just the last one to peak simple because, like Pavlov dogs, most advisors cannot accept that their understanding of gold is not based on fact! A quick look at ABX (Barrick) which is, for the umpteenth time trying and failing to break its glass ceiling, tells you that stocks are underperforming the stuff itself.

Which brings to mind that other great asset, your home. From Maulding’s letter I copied this fascinating chart;

Home prices vs income

I found this of particular interest as some 40 years or so ago, I had learned that since mankind lived in caves , there was a fairly static ratio between income, household income that is and the price of a house, which was supposed to be around  3x. Houses, after all, are primarily bought for shelter/comfort and have no other use, so it is not that unreasonable to assume that , over time, there was and is a fairly constant ratio between what one is willing to sacrifice against the utility derived from the house. Notice that the ratio in the US was 4.1 on average over the period in question after having been at 5.1 So far it has dropped back almost to that level but still has a way to go. Wages in the US have not moved for at least 10 years.

Recognizing that there are circumstances that can move this ratio (level of interest rates, tax deductability of interest, capital gains, real estate taxes etc etc. from one country to another it should still yield a little insight into our own Canadian housing market. In the GTA the average house price is presently around $435.000 and household income variously around $75.000/$100.000 depending on after-tax or disposable , putting the ratio between 4.35 to 5.8X.  I would not expect his situation to stay at these levels. At some point regression to the mean is bound to happen.

On a day that, not surprisingly, the Chinese Leading Economic Index for April was “miscalculated” by 1.4% (147.1 was revised to 145), causing a drop of about 4% in some Asian indexes the above mentioned regression to the mean may happen faster than most would expect.

Nasdaq Composite Index, June 2010

Just to elaborate on the above, here is the Nasdaq Composite Index which demonstrates clearly how difficult it is right now to draw definitive conclusions on the basis of EW. Here are two charts, same index , showing the most plausible counts at this time, the 1-2, (1)-(2) series as the start of a very bearish down leg, and the wave 1 wave 2 scenario that should be almost as bearish. The third, and bullish possibility would be a very large and simple a-b-c, however, the subsequent a-b-c back up(if it does not change soon) pretty well negates this possibility. Here are the two charts;

nasdaq june 2010 1 nasdaq june 2010 2

What confuses things is the flash crash which is either most of wave 1 if the 1-2, (1)-(2) scenario applies, or most of wave 3 in the 5-wave down scenario. Either way this is bearish but there is not that much room for error. 2425 would be the absolute max. for these scenarios to be negated but given the near perfect symmetry of the a-b-c wave 2 (the thing in the circle) any move substantially higher now would kill the bear.

TSE, DAX, FTSE and S&P

Stock markets are behaving in rather strange ways lately, volatility is rather high with  about 14 days with more than 90% up or down days over the last two months. Normally there are only 2 such days in an entire year. Only a month ago we had the flash crash and I understand that something like 70% of all trades in the S&P are now of the “frequent trading “ variety which essentially means that they are computer driven and almost always geared to momentum that is to say, mindless  monkey do as monkey sees type of stuff. Very frustrating for both bears and bulls. Furthermore just a few days ago we were at levels fist reached back in September or October last year , meaning that we accomplished nothing for almost an entire year.

    From an EW point of view things are not that much better. In both the S&P and the FTSE a clear 5 wave down can be seen followed by an equally clear counter-trend a-b-c. This very strongly suggests that the large down-leg anticipated has actually started. The TSE does not show the 5-waves down but the start could have been a “diagonal” type 2 (the only impulsive structure that allows overlap). The DAX, to be bearish, must have been a 1-2, 1-2 sequence but the percentage of the retracements is approaching levels that make this scenario less likely by the minute.

For the moment stand aside until things get clearer. Here are the charts;

tsx june 17 2010 DAX june 17 2010

S&P June 17 2010 ftse june 17 2010