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Monday, October 15, 2012

Hola De Mendoza



to dchapman
October 13, 2012
Mendoza, Argentina

Hola from Mendoza. Our journey started a week ago when it took something like 18 hours or so to fly from Toronto via Santiago to Montevideo, Uruguay. In the process we lost 2 hours although we gained one back when we crossed from Uruguay to Argentina. Montevideo the capital of this small nation of only 3.3 million people can best be described as decaying colonial grandeur interspersed with boxy 1950’s communist style buildings. Most were just butt ugly. But once you got out of the old city the suburbs were spread out although it was noticeable in the well-off sections the gates, bars and even spikes surrounding the houses. Prisoners in their own homes?

Still we quite enjoyed Montevideo staying in a small guesthouse with a delightful Welsh host. The elevator to the third floor where we were was classic turn of the previous century clickity clack and small with the metal doors to open and close. It barely took us and our luggage. But the apartment and our room were large and well laid out. Not unusual to find the gem hidden off a grungy busy street with buses rumbling by continually. But a block or two away was a grand plaza and theatres and lovely colonial buildings. Even Canada House was on the plaza. Oh and one grungy looking communist building that threatened to dominant the plaza.

Before we left we had some good meals and the best part was the $15 bottles of wine in the restaurant. Uruguayan of course. We topped off our last night with a visit to a tango bar.

We briefly spent a night in Buenos Aries after taking a bus to Colonia a 16th century Portuguese colonial town and then taking the ferry across to BA. BA is big, grand, with buildings like Paris and even a grand alley (18 lanes wide). But BA is also like being in New York City in the 1970’s. Noisy, polluted and lights. Delightful little boutique hotel again off of a noisy street (you don’t hear it much) again 3 floors up. We return to BA later in the trip. From BA we flew to Mendoza and are staying in a small B&B in a suburb of Mendoza called Lujan de Cuyo. Great hosts who speak decent English. Quiet and if you peak through the trees the Andes are in the background. Oh yes and one can’t forget to mention the wineries. They are everywhere.

Driving in Argentina is an adventure. First our rental car was a standard shift. Guess I had to ask for an automatic. Seems that standard shift is common in Argentina. We were told that automatics are expensive and as such Argentinians drive standard shifts. The good news for me was I learned on standard and like riding a bicycle one doesn’t forget how to do it. Driving is a bit crazy. They drive fast darting in and out of traffic rarely signaling. Buenos Aries looked like chaos but no one hit anyone. Ought to be fun going forward.

So onto the markets…..

The Stock Market…

It was inevitable that a correction set in. Indeed the correction that got underway following the 1,474 S&P 500 high of September 14 is unfolding in a fairly normal manner. The question of course is this a topping pattern or merely a correction to the previous run-up? This past week the S&P 500 fell 2.2%. The key here is the breaking of a previous daily low of 1,396 seen on September 4 or the 1,267 weekly low seen back in June. The 1972 cycle may still be in force. That cycle saw a shallow pullback in October before the election. The reelection that year of Richard Nixon a Republican set the market off on the nifty fifty rally into January 1973. Could the same thing happen again? Yes and more likely with the election of a Republican again. It can’t be helped that Romney has taken a slim lead. But no matter who comes faces the so called “fiscal cliff” that everyone is gnashing their teeth over. Assuming a Romney election it is possible that the tax cuts will once again be put in place and it is possible the cuts due to take place will also happen. Obama in handing over is not likely to buck what Romney wants.

But lurking in the background is the tension surrounding the wars that in our opinion are getting worse. Turkey and Syria are firing on each other. That in turn could bring in NATO. That would be a disaster of course as it could trigger a wider war involving the Russians. Note Turkey pulling aside a Russian passenger plane. Naturally that quickly became a he said and he said game with each countering each other. No Russians were harmed or that might have triggered something. Hezbollah drones are flying over Israel and one was shot down. More tension. Most likely Israeli drones are flying over Hezbollah. Iran and Russia are running arms to Assad but the Americans, the Turks, the Saudis and others are running arms to the rebels. And the rebels include Saudi jihadists who perversely are the sworn enemy of the US and may be Al Qaeda just as it was in Libya. Tension continues in the South China Sea with China and Japan being the prime ones facing off against each other. All this takes is a spark. In 1914 it was the assassination of the Archduke Ferdinand.  History has a bizarre way of repeating as we are approaching the anniversary of the Great War. But a 100 years later the weaponry is more frightening on all sides.

This is not meant to alarm but direction is not encouraging. A 100 years ago when war broke out the stock markets were halted. When they opened again they were largely where they left off. 1915 was a great up year. But remember that was the US and the US was not involved in the war. This time they may be in the center of it. A bankrupt country cannot afford another war without paying for it. It will be paid the same way as the previous ones this past decade and that is by printing more money. Printing money is a sure way to inflation or bankruptcy or both.

Still a Romney election could trigger a run-up ala 1972. A Romney run-up could last into the New Year either January or even March. There are still potential objectives up to 1,525, 1,550 and even 1,600. But when it does top the fall should be at least 50% or more as it was in 2008 and 2002. But it will unfold differently. In the interim this still appears to be a correction but if 1,265 is broken then the high probability shifts to the top being in. In the interim the intermediate uptrend remains up.

Gold…

Gold too is going through a correction. After a nice run from near $1,530 to a high of $1,795 gold has paused. This appears as a normal correction. What probably has a lot of people nervous is that gold is stalling at the same place it stalled in November 2011 and February 2012. The likelihood that this will fall back towards the previous lows, however, is remote. The Fed is printing money with QE3. QE3 is most likely the last QE. It is open ended unlike previous rounds of QE that had specified end dates. The pullback for gold thus far is shallow. Gold fell 1.1% this past week and silver was off 2.5%. Both remain in uptrends as do the gold indices.

This correction is paper induced. It is not occurring in the physical market. Private money and central banks in Asia and Latin America continue to add to their gold reserves. China continues to be a major purchaser of gold. The gold shorts of the bullion banks are probably trying to push things back as the market goes into the election. A pause at this time is not unusual. After the election gold should take off again if not sooner. The risk to the downside is probably to around $1,650 to $1,675. But even that may be optimistic to the downside. I couldn’t help but notice that while the commercial COT this past week remained unchanged at 25% the shorts open interest fell by 7,000 contracts. Not a lot but it was down after rising the past few weeks.

Last year was unusual for gold as it topped in September and never recovered. Once again the rally got underway in late June/July. But if a more normal strong 4th quarter seasonals kick in gold could run up into the New Year and surpass $2,100 and even $2,500. Continued global tensions that could lead to war will help gold. A Romney election will help gold as the deficit will widen further and the money printing machine of the Fed continues. N

Once gold breaks through $1,800 there should be little to stop it on its way to $1,900 and higher. Naturally I would not want to see it break under $1,650 again but the likelihood of that happening is very low as gold enters a period that is potentially cyclically strong.

Oil…

Oil is going through its correction as well. It still remains a mystery what pushed it down suddenly here 4 weeks ago. That also appears as potential manipulation. Since then while oil prices have tried to break under $90 it keeps bouncing back. Oil closed up 2.2% this past week.

So $90 r4mains important but a good close under that would suggest a test of $85. But with global tensions rising the likelihood of a breakdown in oil prices is low. Resistance is at $95 and $100 but over $100 things could heat up. $108 remains important and a breakout over that level suggests a run to at least $146.

Oil is political good. Any outbreak of war in the Mid-East would send oil prices soaring. And it would probably sink the western economies plunging them into a recession.

Conclusions

The markets continue their topping pattern but could run higher if Romney is elected President. Gold is pausing in what could become a major “gold rush” into 2013. And oil is pausing as well but with global tensions high an accident could trigger a wider war and with it sharply rising oil prices.