The TSE, the Liquidity Trap and Commodities.

Euro Nov 2010 CRB nov 2010

 

The TSE has a lot of commodities underlying it and these tend to be the last things to peak in bull cycles. The reason for that is that at zero interest rates it is the only game in town. I will add two more just to drive home the argument.

moo nov 2010 cow nov 2010

The “liquidity trap” occurs when interest rates are so low that the demand for money becomes perfectly elastic, which also happens to be the point where the Fed. has rendered itself irrelevant and impotent as monetary stimulus ceases to work. Put another way, you can open the flood gates but you cannot control where the water will flow. It flows into commodities as they constitute a real asset that may rise in value if for no other reason than that everybody is buying them. This is all the more so when commodities represent just a fraction of the capitalization of all investible assets and  works exceptionally  well when the funding currency, the US $ , is expected to drop in value. It is perfectly circular and consequently it is hard to say where it will stop. Certainly in this  environment , in which misinformation is rampant (see last weeks payroll number trumpeted with great fanfare as up by 159K, while the broader, barely mentioned,  household stat. was down 330k !) and where the prevailing investment philosophy seems to be entirely predicated on a ‘’ après nous, le déluge”, which may be exactly what we should expect sooner than later.

Given the equitization of commodities and the consequent artificial increase in demand it is hard to say when this has to stop. What we do know is that regardless of the  level of equilibrium between demand and supply in the end the marginal cost of production will be what the market will gravitate to (for gold that is about $400 or so, natural gas about $4 as so many have learned the hard way). Alternatively the income affect of ever higher prices over extended periods, like now with oil, will outweigh other stimulus factors and the whole thing will collapse The TSE is the single greatest recipient of these factors and now that QE2 has been formally launched ( perhaps that was the deluge?) it could be hurt the most.

Just look at how well all these charts correlate. Pork-bellies are of course the classical cyclical asset that performs with text-book precision every time. Also, the financials particularly the best one, RY, appears to have completed its a-b-c correction and has started its next down leg as anticipated a little while ago.

UUU Uranium, a proxy for TSE?

UUU May 5 UUU Nov 2010

 

On May 5th it was suggested that this stock could rise to, at least the highest point of a 4th wave (triangle?), but at the time it was already approaching $4 so when it does reach $5.25 you will only have a return of slightly more than 30% over  6 months. The reason I show this one is that it has the typical structure of a correction, an A-B-C up from the lows, which may be applicable to the TSE overall. We mentioned this with respect to Manulife, which was hinting at this possibility for quite some time and there are many others. (by the way, I would sell MFC now if bought at around $11).

TSE Nov 2010

Problem is I cannot get a clear count on this , other than that the moves from Jan. to June 2010 were, in their entirety, a B wave of some sort, perhaps in an A-B-C X A-B-C  sequence. Irrespective of what the count might be (even the gurus in Gainsville seem to have a problem getting it right) , what is clear is that at a retracement of , give or take , 73+% the issue becomes pretty moot. It would seem like nothing ever happened which is a little hard to stomach. I prefer to think that the whole thing is rigged to the nth degree, that the Feds are so afraid of the consequences that hardly bother to keep up appearances and are not just supporting a plunge protection team of like-minded financial institutions but are blatantly targeting the stock market. The rather nefarious happenings around Potash here in Canada, are a good example of what goes on behind the scenes.

In any case at 73% this has to stop soon or we will be making new highs- this after the second great depression-. One cannot but wonder how much was real and how much was fabricated. Both the RSI and MACD are strongly suggesting a pull back is imminent, perhaps the second C is complete.

LIF.un , Labrador Iron Ore income fund, by special request.

Lately I have been busy moving with all the little and big chores that entails. Furthermore  the market defies logic and consequently I have been wrong on two calls , so I have been a little less outgoing. This will change soon. Here, for starters, and by special request, is my view on LIF.un. For those of you that remember the precipitous drop that this stock had about this time 2 years ago. That was caused, so I understand, by the BMO that chose to discontinue its long standing relationship with Lawrence & Co by making a margin call at precisely the lows in the, then illiquid,  market. That was then, here we are now;

lif.un oct 2010

On this one I do not claim any degree of perfection, just a little market wisdom. There are a number of reasons why this is a sell.

1. There is no shortage of iron ore on this earth. Anyone that has travelled a little around this globe will know that virtually every second country has iron ore deposits, many in abundance , so “peak iron” is not, in my view, around the corner.

2.The overwhelming key to success in this business is simple buying low and selling high. No one actually does that, because high and low are relative concepts and therefore hard to use. Nevertheless I would argue that $20 was low and $57 is high.

3 Both the RSI and the MACD are non confirming the new, recent high, technically not a good situation!

4. The drop in ‘08 is , in EW terms, best described as an A-B-C. Typically these patterns are retraced to the top of the B wave, where we are now

5. Even if we go higher yet the double-top level is not far away and it always makes sense to sell at that level,if only for a brief time period.

6. The channel go up from the lows of $20 or so to the highs in August is very well defined even if no clear count presents itself. However given the large number of overlaps it remains quite plausible that this entire move is corrective, implying that the main trend is in the other direction.

7. The move up from the June ‘10 low looks a lot like a wedge. These tend to retrace in their entirety implying a price of about $42 in the near future.

8.This is the China/commodity trade par excellence. We all know that commodities are invariable the last to peak in a multi decade bull market, so that may be exactly what this one is doing. Concerning China,I have my doubts that they will remain the economic locomotive of the world.

9. As a broker, unless you have the misfortune of buying right at the top, you , or rather your client, should have money in the trade. Nobody ever lost by taking a profit.