This week’s wrap up:
By: Lynette Zang
The big question we have been getting this week is “What is going on with these markets?” Oh so many things, but the primary issue remains centered around an imminent debt default by Greece, which many say could happen this weekend. We shall see. The IMF (International Monetary Fund) came out with a gloomy global outlook and the Federal Reserve did the same for the US. In addition, the Federal Reserve announced the “Twist” which is supposed to push down long-term interest rates but more importantly, has committed support to the mortgage backed securities market.
Before, when a mortgage backed bond distributed interest or matured, those funds were rolled into treasury bonds, but now they will be rolled back into mortgage backed securities. All of this is about lowering interest rates and stimulating the real estate and mortgage market.
There were an abundance of credit downgrades this week; S&P lowers Italy’s credit rating, one notch and kept its outlook negative. China and Lloyd’s of London has pulled funding to many French banks and peripheral country banks as they became less comfortable with the ability of the ECB to bailout (transfer risk from private banks to taxpayers) those banks. Spain was able to issue more debt this week, but the interest they have to pay and the cost to insure those bonds against default has risen quite a bit.
So we don’t feel left out, here in the US, Moody’s Corp cut the debt ratings of Bank of America Corp, Wells Fargo & Co and Citigroup Inc on Wednesday, saying the U.S. government is getting less comfortable with bailing out large troubled lenders. http://www.reuters.com/article/2011/09/21/us-bankofamerica-downgrade-idUSTRE78K4P020110921
In China and the euro zone manufacturing indexes indicate a slowdown in both economies, marking the first time since July 2009 there has been an indication about a contraction in activity.
In August, employers took 1,587 mass layoff actions involving 165,547 workers. So it doesn’t look like the jobs front is getting any rosier either.
The Dow began the week at 11,509.09 and ended the week at 10,771.48, down 8% on a very nasty week. You may recall that the Dow Jones was forming a wedge, this week it broke down below the wedge. The chart below shows you that breakdown. Therefore the next most likely outcome will be to continue that downward slide, though nothing goes straight up or straight down, so we shall see what next week brings, and of course the global markets are all behaving pretty much the same, so what happens in Greece over this weekend will surely have global impact, one way or the other.
The other thing that I would like to point out is that in efforts to support the stock market, the CME (Chicago Merchantile Exchange) has lowered margin requirements on stocks (and raised them on gold and silver). Meaning that, if you want to borrow to buy a stock, you need to put down less money, and can buy more stock. With interest rates as low as they are, this is a very attractive way to leverage your buying. It works great as stocks rise, but not so good when they fall because when stocks fall you have to come up with cash to meet “margin requirements,” which is exactly what hedge funds have been doing over the past few days. Where did they get that cash? Most likely from their most profitable asset, gold. When you hear the Wall Street pundits refer to the “liquidity trade,” that is what they are referring to.
Starting the week at $1,814.70 and finishing the week at $1,662.00, gold has finally worked off it’s over bought condition, closing the week down 8.4%, yet still 6.5% above the 200 day moving average, in the rush to liquidity required by those margin calls on stocks.
In the chart below you can see that it tested support and bounced off at the end of the day, and I’ve put in the next support level on gold so you can see where it is. Remember that the spot price is primarily digital gold with a component of physical in the form of bullion, which at this time moves with the spot market. When I refer to digital gold, it is because hedge funds and others that buy paper gold, like GLD, never expect to take physical possession, and that is a very different market than the purely physical market.
Remember, wealth never disappears it simply shifts location. So as funds shifted out of global stocks and European bonds, they went to the US dollar and Treasury Bonds. The only explanation to this is that old habits die hard and those two asset classes received the flight to safety trade.
The chart below shows you the dollar against other fiat currencies (debt based). Notice that the dollar is testing a resistance level on the top as people sold stocks and went to cash and treasuries.
The chart below is a relative performance (Perf) chart on all of the asset classes represented by the DJIA, US Dollar, 10 Year Treasury, and Gold. It shows you that as the stock market plunged, those hedge funds that continued to hold stocks used their digital gold to cover margin calls and the funds that came out of the stock market went into cash and bonds. The top position of gold on the Perf chart also shows you that gold continues to out perform all other asset classes over this past year.
This has been a very exciting week as all markets continue to gyrate based on the activity or inactivity of global governments. In addition, I think we are shifting into a new normal as the markets attempt to digest what it means when governments can no longer support the debt they have created. If it happens in one country it is more manageable, but now the contagion is spreading to multiple countries, which can create a domino effect. All fiat currencies are supported by the “Full Faith and Credit of the Government” which is now in question worldwide.