Geo Poltical Risk - International economic slowdown - Markets poised to open sharply lower

It is September 6th, 2011, around 1 am and it is easy to tell this week will be extremely volatile and risk aversion might be in full swing.  The above table  from Bloomberg shows the futures of the three major US indexes.  DJIA is down 2.48%, S&P 500 is down 2.75%, and NASDAQ 100 is down 2.36%.

Why is this happened?  Well one of the reasons can be simply found by looking at the EUR/USD.

The Euro broke, stemming from a critical German vote on the legality of bailing out Eurozone members such as Greece, Portugal, Spain, etc.

An excellent summary can be found in this recent article from the Telegraph:

• German stock markets plunge 5pc ahead of crucial vote on crisis
• "The German stock market plunged to its lowest level for two years - shedding 5pc of its total value in one day - amid fears of the apparent impotence of European leaders in the face of the debt crisis."

 Not to mention that Greek 2 year bonds are Yeilding over 50% -  From Bloomberg: GGGB2YR:IND


Middle east is also heating up, Turkey will be challenging the Gaza blockade in the UN while in the same week working with NATO to build a missile defense system for Europe. 

Along with the Eygpt/Israel row and Syria's continuing uprising.

The fundamental and technical picture looks horrible for the markets and it is expected that without further stimulus the market will pull back substantially over 6 months.  However, more easing will contribute significantly to a seemingly parabolic move gold and silver.  Gold is close or at its all time high as I conclude this blog post:

Wow looks like it did or almost touched 1920... that is an all time high folks.

S&P500 - Bearish Divergence - and why lower prices are likely

This is just one observation that might provide an indication of the market rolling over here.  However, looking back at 2008, similar topping pattern resulted in a choppy and UP market before the bigger months later.

In the RSI, it is clear that there are lower lows between the 9th and the 22nd.  However, the price action which seems to be in a clear bearish triangle pattern, has higher lowers between the 9th and the 22nd.  This type of divergences is expanded better on other sites:


Specifically: RSI Divergence

Other: 
Bullish & Bearish Divergence Pattern
Divergences, Momentum And Rate Of Change


Ben Bernanke has made a Jackson Hole speech - Full Bernanke Speech
This speech did not announce any form of stimulus, and put ball in the Fiscal court.

Lets see how this markets hold up over the next few weeks.


One thing that is clear --- Volatility is going to be huge over the next few months.

Silver Break Out Imminent | Silver and Gold rise on geo-political fear and inflation

Silver is hovering between $40.50 and $41.00 looking to be ready to pop.  Based on many factors such as gold/silver ratio, technical analysis, fundamentals and geo-political climate, it has been MarketScheming belief silver will continue to ride to new highs. 

Below is a Live chart of silver from Kitco.

Gold $ 1700 | Gold breaking to new highs | Precious metals rally of downgrade

Gold's natural reaction occurred as soon as the price started to trade.  Within 5 minutes over $20 gain.  The price is currently sitting at its all time high of 1695.50.

Hang on folks, you ain't seen nothing yet.  Other PMs jumped as well with Silver trading over 4% higher on the open. 
This is related to the US debt downgrade, along with instability in Euroland and in other parts of the world. We are witnessing history and there is a lot more surprises / certainties to come.  Keep focus on PMs as currency wars are heating up.

China adjusts currency peg, flexing muscles as an emerging leader and economic power.  
Bank of Japan intervenes in currency markets to devalue the Yen
ECB continues to buy large quatities of bonds all to help saving Ireland, Greece, Italy, Spain, Portugal, etc

Live Gold, Silver, Platinum, and Palladium below (Kitco.com) 

S&P 500 Analysis | Look out Below | Mid-term bearish but watch for bounce this week

A in-depth analysis on the S&P500 long term outlook was completed last week.  Today we saw something that was "unexpected", when everyone thought the relief rally would occur after the debt deal was signed, the market had different thought process.

INDEX	VALUE	CHANGE	% CHANGE	TIME
DOW JONES INDUS. AVG	11,866.60	-265.87	-2.19%	08/02
S&P 500 INDEX	1,254.05	-32.89	-2.56%	08/02
NASDAQ COMPOSITE INDEX	2,669.24	-75.37	-2.75%	08/02

 I sold my bear position today a bit too early at around 1-2pm but with reason.  The markets are extremely over extended, the likelihood is a rally will come the remainder of this week.  My game plan is to wait for the market to trade back to the 1290ish level before getting a 2 month options contract with the expectation of the Head and Shoulders predicted drop which comes in at 1150.  There are serious issues and this market could continue its decline next week.  However, the government of the US has just extended the debt limit by another $2 trillion which means any Stimulus talk, QE3 talk, etc could send this market roaring to the upside.... but remember this roar to the upside is not because companies in the US are doing better or because the economy is getting better it will be due to the fact that the USD which is used by companies to report earnings / Market value will be devaluing.  Making 10% more revenue but the currency which the revenue is based on has declined 10% in the same time frame is still a net value increase of $0.  

If the predicted path of last post is correct, the next couple years will be quite rough.  Again this is a long shot but anything can happen at this stage of the game.

Here is the chart from my previous post without comment

UPDATED: S&P 500 Analysis | Long Term Outlook | Economic End of Days?

See update below.

I want to proposal a "Economic Doomsday" scenario as more of a thought experiment than anything else.  This is a scenario that potentially could unfold based on the current price action and wanted to view this chart with Volume, MACD, and Slow Stochastics to show a technical argument for December 2012 Economic End of Days.  I would highly doubt that the economic powers will let this unfold yet it is interesting nonetheless.

There are 6 key points that will be discussed from the above chart along with supporting evidence from Volume, MACD, and Slow Stochastics.

1. The orange horizontal line is based on March 1994.  This note is combining myth and technical analysis to show that a potential target for a drop could be this orange line (435).  If you look at the intersection of the orange line, red Vertical line (Dec 2012), and the mid line from the Andrew's pitchfork, it seems like a curious coincidence. 
2. Looking at the current retracement in the context of the top (2008) to the bottom (2009), the current move has retraced 76.4% which is a deep but not unheard of correction.  If this does signify the top, a impulsive wave 3 would be expected.
3. This analysis is uses  Andrew's pitchfork which helps track channel lines.  Obviously if this is not the top then the projected path would be incorrect but as stated in point 2, a 76.4% retracement has occurred so looking for a turning point now is likely if the long term bears are still in control.
4. An interesting trend line to watch.  The bulls will have to hold this line if the bears make a run for it. This level sits below all major moving averages (20, 50, 200 month MA) therefore this region should act as significant support on pull backs.  If these levels are sliced through as seen in 2008, limited support remains until 750.  
5. Another interesting trend line as this would technically be considered a neck tie of a 15 year head and shoulders pattern.  It would be impossible for a real head and shoulders pattern to play out as price action would have to drop less than 0 to complete the typical move equal to the distance from the head to neck tie. 
6. As mentioned in point 1, This intersection point seems relatively plausible if major panic selling started taking place.  Another interesting coincidence is from the most recent high a month or so ago to the intersection point 6, is approximately equal to the drop in time and price from peak 2008 to the lows in 2009.

The MACD on a monthly basis looks tired.  It has accomplished to make two strong moves to get above the 0 level however no significant pull back has occurred to reduce the strain on this indicator.
Looking at the Slow Stochastics one of two things are going to happen either the K and D line embed propelling the stock market higher as long as the K and D stay above the 80 level.  If the K like (yellow) falls below the 80 level expect it to head back to the 20 level resulting in a relatively hard sell off also confirming that the momentum has shifted.

I am reluctant to say a top is in, but with the geo-political craziness happening around the Euro Zone, the US debt ceiling, and rising oil prices.

Take this outlook with a grain of salt but know that there are people that consider this view relatively likely, so be wary in the upcoming news, stock market action and currency market.

 UPDATE

 Apparently the trend lines drawn with Andrew's Pitchfork are having some effect on price action.

 The rally today failed precisely at the upper trend channel.  This sharp failure leads me to believe that a decline is imminent.  Short Entry at sub 1300 with a stop at or around 1300 would be a low risk high reward short play.

This post will be updated again with any significant events tomorrow.

Avalon Rare Earth Metals ( TSX : AVL ) | Materials for Clean Technology | Stock Technical and Fundmental Analysis

This is a Weekly Chart of Avalon Rare Earth Metal ( TSX : AVL ).

The stock has retraced 50% of its move and looks like it has down bottomed around that level.
The volume has been diminishing however, last weeks volume was notably higher that the previous few weeks which may be a slight hint of more players stepping into the market shortly.  The MACD has been exaggerated and is reaching the "tipping point" of 0.  Given that the stock is over sold and is finding support at the 50% Fibonacci retracement, which also happens to coincided with the 50 week moving average, it leads  me to believe a turning point is into the works over the next few weeks.  The stock is primed for a nice size bounce.  I recently picked up some September Call Options for $7.00 strike price.

Where will that turning point come? The Daily Chart above shows what might be unfolding.  A break of the trend line holding the stock lower since early April.  The MACD seems to want to pop through the 0 level which would be an indicator of the end of a downtrend.  The key is to pick a position and keep a tight stop at 5.80 ish.  Low risk, minimal downsize, large potential with geopolitics playing such an important role within this space.  Since AVL is a Canadian Company and Property, if quotas continue to be squeezed in the global supply (>90% China) then AVL is poised to become a very stable source of Rare Earth metals for Canada and the US.

Related News Links

Rare earth demand on the rise

"With an increased global focus on the introduction and sustainability of green solutions for economic growth as well as easing pressure on the environment, rare earth metals appear to have become increasingly important."

Rare elements needed for high-tech applications

"Rare earth elements are a collection of 17 elements that are critical for civilian and military high-technology applications. The rare earth elements are scandium, yttrium, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium. However, rare earth elements are not really rare. They are distributed globally, with 36 percent of known reserves in China and 13 percent in the United States."

Seagate Blames a "Bubble" In Rare Earth Prices for Causing a Margin Squeeze

"For some time now, rare earth supply, demand, and prices have been hot topics of discussion and debate. While these elements are critical components in many high-tech products, they usually represent a very small part of overall product costs. While the Japanese have clearly been scrambling to reduce their dependence on Chinese exports and to otherwise secure greater supplies, I have never heard a company complain that soaring rare earth prices were materially hurting profit margins, until now."

Oslo, Norway Bombing | Deadly blast hits Norway's capital | Two dead as explosion rocks Norway; shots fired at youth camp

Deadly blast hits Norway's capital - Europe - Al Jazeera English

At least seven people have been killed in Norway in two separate attacks, the first a bomb blast that went off at a government building housing the prime minister's office and the second a shooting incident at an annual youth event.

Two dead as explosion rocks Norway; shots fired at youth camp

A man wearing a police uniform opened fire at youths during the annual gathering of the government’s Labour Party youth section at Utøya, an island outside Oslo, spokesman Per Gunnar Dahl said.

Live updates: Oslo bombing

• A bomb has been detonated at government headquarters in Oslo
• Norwegian police say seven people have been killed and two are badly wounded, Reuters reports
• Oslo police are advising residents to stay at home
• No-one has claimed responsibility for the attack
• Unconfirmed reports say several people have been killed in a separate shooting at a Labour youth camp outside Oslo
• Unconfirmed reports say Prime Minister Jens Stoltenberg had been due to attend the camp

Oslo bombing kills 2, man opens fire at youth camp

 Police in Oslo now say that seven people have been confirmed dead in Friday afternoon's explosions at its government headquarters.

The above link is to Google RSS Feeds under the topic of Oslo Bombing, copy URL and add to RSS subscription service of your choice (Google Reader is Recommended) to stay up to date with this event.

Last year there were early warnings of problems with in Norway.  There was a Bomb lab discovered and arrests made.

Norway "Bomb Plot" Underscores Al Qaeda Pitfalls - August 2010.

An Associated Press investigation shows that authorities learned early on about the alleged cell by intercepting e-mails from an al Qaeda operative in Pakistan and - thanks to those early warnings - were able to secretly replace a key bomb-making ingredient with a harmless liquid when one of the suspects ordered it at an Oslo pharmacy.

Gold break out again; close to all time high | Silver soon to follow

Gold does it again, sneaks up on common observer and is filtering with all time highs ($1577 and change).  Today's move came at 1:45-2:15 where gold jumped $20 to just shy of 1575.  Remember folks the screams and shouts about gold being over priced a few months back as prices started to slide.  This new relevance of gold is putting central banks around the globe into panic mode.  The fear is simply a loss in faith of governments as they ramp up the printing machines to fight this second crunch.  With The US debt debate in full swing it will be interesting to see how it will be resolved and what the market reaction will be.  August 2nd, 2011 is a big day for the US and it is approaching relentlessly.


Yamana Gold Inc, (YRI on the TSX) has been a company I have been watching for some time now.  Search for YRI for more posted from the past 6-12 months.  This company is outside my normal range of $2-$7 stocks but it is awesome for options as they are relatively liquid.  Currently I have an August option @ $12 strike.

Today's move was dramatic, 3.32%.  Note that since it has blown outside the bollinger bands it would be unwise to jump in now as it is likely to correct.  However, picking this stock up at 12.00-12.10 with a tight stop would be a high potential trade with limited downside.  The slow stochastic is overbought but looking like it my "embed" which means the K and D line will remain above 80 for a few more days while the stock gains another buck or so.  I am looking at the $13 area as a potential time to exit unless it is reached in short order.   This is one of those stocks that reacts very well with gold.

In fact Yri could be considered undervalued relative to gold by about 10%.

S&P500 Update: New short term uptrend established and Wednesday's Greek Austerity Vote

June 28th saw a pop from the markets at the beginning of trading.  This jump was sustained into close.  Interesting enough, using Andrew's Pitchfork, from the lowest low to the high point and the low of the correction, we can see a potential uptrend being established.  This lower channel is where support was found in the morning setting off a rally which ended in the middle of the lower channel.  Watch for retests of this channel for clues to see if a change of trend is actually occurring.

The major caveat is systematic risk.  There is a lot of problems showing up again and the governments around the world are attempting to find answers for them.  Most notable is the Greek austerity vote tomorrow.  This vote will be a sign of things to come, as a rejection of this vote means a renegotiation with IMF and EU on aid packages.  This would bring the markets under pressure as sovereign default becomes a plausible outcome.  In addition, Greece would likely have to vote for a new government one which aligns with the interest of the citizens. 

A summery of the Greek Austerity measures that are on the table can be found at the BBC in this article

The measures are broad based touching taxation, public sector cuts, spending cuts, cutting benefits, and privatization.
A few examples:
"A solidarity levy of between 1% and 5% of income will be levied on households to raise 1.38bn euros."
"The tax-free threshold for income tax will be lowered from 12,000 to 8,000 euros."
"The VAT rate for restaurants and bars will rise to 23% from 13%."
"Nominal public sector wages will be cut by 15%."
"Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses."
"Education spending will be cut by closing or merging 1,976 schools."
"The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions."

I always wonder about the reaction to such measures if they were instituted in Canada or the US.  More interesting would be the government reaction to protests to these measures.

Why China, not America, is in the economic driver’s seat

New Reality Slowly Setting In

It is no surprise that China’s political and economic power has increased dramatically over the last decade.  But what is surprising is the lack of recognition from governments and citizens of the western world that China wields substantial power during current negotiations.  This new reality can be seen from the United States Congress and the White House’s continued pressure for a faster Renminbi appreciation which has been effectively ignored by China.  The major reason for China’s delay is because many developing nations do not agree with the United States’ low interest policy.  Keeping interest rates at 0.25% has caused investors looking for a higher return to turn to developing nations for investment.  The huge inflows of capital are causing rampant inflationary pressures.  Needless to say, the United States government is not easily getting their way, since many would agree that the power lays with the creditor not the debtor.  Therefore United States’ attitude towards China (at least publicly) has a long way to go to catch up with the new economic reality. 

Largest Foreign Creditor: China

To save US economy from the brink in 2008, the United States government had to take unprecedented actions.  The five trillion dollar explosion of public debt from 2007 to 2010 was financed by the Fed as well as foreign creditors. China’s US treasury holdings have almost doubled to $750 billion since 2008, surpassing Japan as the largest holder of US debt.  In December the Federal Reserve past China as the largest holder of US treasuries as the FED’s balance sheet increased from approximated $800 billion in the middle of 2008 to over $2 trillion by the start of 2009 (Rosenbaum, 2010).  With the growing public debt not being addressed in the United States, China has expressed the need to diversify their foreign investments in other currency denominated assets (Reuters, 2011). 

Eurozone Support

As one of the major creditors of the world, China has been providing support to another important trade partner, the Eurozone. This initiative has helped diversify foreign reserves by purchased sovereign bonds from countries such as Greece, Portugal, and Spain.  Portugal and Spain had bond auctions on January 12^th and 13^th which went better than expected based on China continued commitment to help stabilize the region (Narioka, 2011).  Prior to the auctions, Japan also has pledged to support the Eurozone by purchasing European Central Bank notes that are raising capital for the European Union’s financial-aid fund.

What happens if Renminbi is adjusted?

Is the Renminbi undervalued? If so, by how much? Is China manipulating the Renminbi? Is the Fed manipulating the USD through quantitative easing measures? Who is right and who is wrong?  These questions are going to be avoided since there are many arguments from around the globe in support and defense of every position one could take.  Therefore, a hypothetical thought experiment is proposed.  Suppose the Renminbi is 10% undervalued, and considering that Tim Geithner, the U.S. Treasury Secretary, has recently stated that the Renminbi is “substantially undervalued”, this estimate is reasonable (Katz, 2011).

What are the implications of an adjustment?  From the United States government’s perspective, an adjustment will make Chinese exports more expensive on the world markets and therefore increase competitiveness of the United States’ export sector.  This would in turn increase jobs in the United States which have scarcely recovered since the 2008 downturn.  This linkage between an undervalued Renminbi and unemployment rate in the United States has been exploited by Government officials and media which has lead to a rise in anti-China sentiment.  There is little discussion surrounding the ramifications of an appreciated Renminbi; remember in economics there is always a trade off. 

What Manufacturing Base?

The US employment in the manufacturing sector is at 1950’s levels (St Louis Fed, 2009).  Most multinationals left the United States in search for lower manufacturing costs in the developing world. Since the 2000 almost five million jobs have be lost in this sector.  How long will it take the United States economy to recapture manufacturing investment and train new workers?  The expectation of quick and dramatic increase of employment after the Renminbi peg is lifted has greatly been overstated.  This is not to say that an increase in jobs will not occur, but it will take years for investment in factories to translate into a sustainable job growth. 

 

No Such Thing as a Free Lunch

The less desired implication of a reevaluation is simply inflation.  Basing this analysis on the assumption of a 10% undervalued Renminbi, the purchasing power of Americans with respect to China will decrease by 10%.  Take the world’s largest retailer as an example; Wal-Mart imports the majority of goods from China.  This in turn allows the Americans to purchase inexpensive goods as a direct result of China undervalued Renminbi.  A 10% increase in prices at local Wal-Mart stores will adversely affect the already struggling low and middle class.  Considering the fact that over 14% of all Americas are currently enrolled in the Supplemental Nutrition Assistance Program (aka food stamps), this inflationary pressure will have dire consequences for the majority of the population (Food and Nutrition Services, 2011).  This inflationary pressure will be felt also in Canada as price increases will occur for all imported Chinese products.  It should be now clear why this side of the story is much less communicated, as it would result in awareness of the true cost of a Renminbi reevaluation.

Works Cited

Food and Nutrition Services. (2011, January 5). SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM: NUMBER OF PERSONS PARTICIPATING. Retrieved January 14, 2011, from SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM: http://www.fns.usda.gov/pd/29SNAPcurrPP.htm

Katz, I. (2011, January 13). Geithner Says China Must Boost ‘Undervalued’ Yuan. Retrieved January 15, 2011, from Bloomberg: http://www.bloomberg.com/news/2011-01-12/geithner-says-china-must-move-to-prop-up-substantially-undervalued-yuan.html

Narioka, K. (2011, January 13). Euro Falls Against Dollar And Yen; Spain Auction Eyed. Retrieved January 14, 2011, from Wall Street Journal: http://online.wsj.com/article/BT-CO-20110113-700301.html

Reuters. (2011, January 9). Central banker urges China to cut U.S. debt holdings: report. Retrieved January 15, 2011, from Reuters: http://www.reuters.com/article/idUSTRE7090W120110110

Rosenbaum, E. (2010, December 15). Fed Surpasses China in Treasury Binge. Retrieved January 14, 2011, from The Street: http://www.thestreet.com/story/10948075/fed-now-the-largest-holder-of-us-debt.html

St Louis Fed. (2009). Graph: Employees on Nonfarm Payrolls: Manufacturing (MANEMP). Retrieved January 15, 2011, from St Louis Fed: http://research.stlouisfed.org/fred2/graph/?s[1][id]=MANEMP

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