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Saturday, October 27, 2012

More On David Chapman's Adventures In Argentina


October 27, 2012
Salta, Argentina               

Hola from Salta. Well maybe it was inevitable. My netbook was knocked onto the floor and while initially nothing appeared to be amiss my wireless is acting up. It comes and goes and right now working… But!!!  Anyway we will see going forward as to how things work and whether I can get another one out.

The Salta region was everything it was supposed to be. Before Salta we spent 3 nights in Cordoba, Argentina’s second largest city. Attractive clean city. We were in a place out in the burbs so we had interesting jostling rides downtown by bus. Salta, however, is something else again. Beautiful old colonial town dating from 1582 (slightly younger than Cordoba). But unlike Cordoba its feel and look is more like colonial towns in Mexico like Merida in the Yucatan. Possibly it is the presence of a strong Amerindian population. The Amerindian natives of Argentina are in the Northwest and the Northeast. To the south – they were wiped out by the Spanish. Nothing new there.

Salta also has wineries but they are not as well-known as the Mendoza region. They should be. Many are down near the town of Cafayate where we passed a couple of nights in a posada run by a Frenchman. Our hostess in Salta was German. Indeed it has been an interesting variety of hosts. In Montevideo our hostess was Welsh. All were married to Argentinians or Uruguayans.  Our hosts in Cordoba and Mendoza were Argentinians all of who spoke pretty decent English.

Driving in the cities remains an adventure. Streets corners with no discernible street signs so one doesn’t know where he is. But that is nothing compared to street corners with no stop lights, no stop signs or anything. It is just everyman for himself. The traffic can sometimes be considerable. Yet oddly it seems to work even if a bit on a first come basis. Have yet to see any accidents. Driving in Argentina is definitely an adventure.

Driving through the countryside especially here in the Northwest when one is in the mountains (which seems to be constantly) can only be described as breathtaking. It is an arid world punctuated with rock formations some of which appear to be from another world. It is a hard world where plants, animals and humans eke out survival. In driving we have seen Llamas, foxes and other smaller critters near the road or crossing it. Birds are a constant and seem to thrive the best in this world. When one stops all one hears is the birds. Hawks swirl overhead. But the real prize was coming on a group of vultures in a leafless tree staring off into the distant aridness. Humans have goats, sheep and occasionally cows all of which wander free range. We have also seen horses and donkeys seemingly wild. Donkeys wandered down the streets of Cafayate just like deer might in Waterton, Alberta. In the plazas of the towns and cities dogs are everywhere seemingly with no owners. Gets interesting when they sit by your outdoor table while dining begging for a scrap. They are though very polite. LOL.

Now onto the markets.

The Stock Markets…

The S&P 500 lost 1.5% this past week while the TSX Composite was off 0.9%. The intermediate trends for the two stock markets is weakening but remains up. The S&P 500 short term trend is down while the TSX Composite short term trend is neutral.

For all the October correction continues but the correction still appears to be shallow. Both continue to trace out what could be a significant top so investors cannot be complacent at this stage. But the patterns are ambiguous enough that they could also be tracing out a consolidation pattern.

The S&P 500 broke its first area of support at 1,420. This suggests a potential decline to objectives near 1,370. 1,395 is the next important support zone and if that goes a decline to 1,370 becomes very likely. If 1,370 fails to hold then under 1,350 probably means a test of the last significant weekly lows at 1,267. Under 1,267 and a bear market decline is most likely confirmed. A break under 1,370 would most likely for sure turn the intermediate trend to the downside as well.

The TSX Composite has support at 12,120 but under that level it would break down. Potential objectives are down to 11,700. That would break the last significant weekly low seen in August 2012 near 11,870. These weekly lows are very important and if they are broken a new bear market would be confirmed to be underway.

The S&P 500 needs to regain above 1,440 to demonstrate that it may have more staying power. The upcoming election could still be key. A Romney win could trigger a repeat of 1972 and see the S&P 500 run to 1,525, 1,550 and even 1,600. QE appears to be helping the banks the most and they remain key for the market. Of late the banks have been outperforming everything else in the S&P 500. If the banks breakdown then odds are a bear is underway. Many believe that an Obama re-election would trigger liquidation before Christmas. It does, however, seem simplistic that Romney wins stocks go up, Obama wins and stocks go down.

For either it doesn’t matter. The first year of the Presidential cycle is invariably the weakest and many other cycles are pointing to a potentially very weak 2013. It is possible that the October 2011 low was an early 3-5 year cycle low. It did occur at the front end that cycle. The weak rise since has been consistent with a bear market rally and while new highs were seen on this rise no one should pretend that the market has been strong despite what many pundits might be saying. QE helps keep the whole thing afloat and Bernanke’s commitment to maintain essentially zero percent interest rates until 2015 supports the sad state of the global economy and the overburden of debt. Everyone complains about the US debt or the Euro debt but remember in the last go around trillions of dollars of public debt was added to essentially bail out the banking system.

Romney threatens to not renew Bernanke but while Romney may be able to appoint a new chairman his choices are limited and no matter who replaces Bernanke would continue his policies. At the end of the day the Fed Chairman does not work for the President. He works for the banks that own the Fed. It is his job to protect them and his programs of QE and low interest rates are doing just that. But if everything becomes unglued again due to events beyond their control they will once again run back to the public to bail them out. And remember since the end of Glass Steagall in the US (under Democrat Clinton no less) the banks and investment dealers that became banks (like Goldman) have complete access to FDIC insurance to also bail them out. Private leverage that goes awry and the public pays.

The fiscal cliff is also looming but again that is just background noise. A solution to bail out the system or to keep it liquid will prevail and as before it will probably again be at public expense.

In the numbers this past week the GDP seemed to indicate that there was 2% growth in the 3rd quarter. At least that is what they would like you to believe. This of course is the headline number and the pundits picked up on it as if it was prove positive that happy days were soon to be here again. But adjusted for deflation indicator it was not significant even if a bit better than expected. The housing market remains morbid. Durable goods were negative quarter to quarter. Real wages continue to fall.  There was really nothing to get excited about but they will pump it as if there was.

China continues to threaten Japan this time with mass dumping of their bonds. That I admit is an odd one even if the Chinese do hold considerable Japanese bonds. All of this is again over those islands. But one should never underestimate the history between the two nations. The Chinese have a long memory and the invasions of Manchuria and the Rape of Nanking remain even if this all happened some 80 years ago.

There may be more life to the stock markets after the election but do not let a suckers rally fool anyone. It should be the last hurrah. The only question remaining is do we get this one last hurrah or is the top now in. The numbers noted earlier are the ones to watch and if they go the bear has begun and could last upwards of two years. Canada would follow the US.

Gold…

The gold correction continues. Gold fell 0.7% this past week while silver was off 0.2%. The intermediate uptrend for gold is intact but weakening. Silver is in a weak intermediate uptrend that could shift to neutral. The short term trends for both are down. Gold tested down towards $1,700 this past week. A move in that direction was largely anticipated. If $1,700 does break gold could test down to $1,650 to $1,675. However, I believe that would be it. Silver tested $32 this week and could test $31 and even $30 in a worst case scenario. Silver is not expected to break under $30. Short term indicators for both gold and silver are approaching oversold levels. However, on the weekly charts the important MACD indicator has not turned down so that remains a positive.

The fundamentals for gold and silver remain strong because of QE. And that is even as the bullion banks have pushed gold lower through paper selling. But that is weakening. The important commercial COT for gold rose again this past week to 27% from 26% as short open interest fell some 11,000 contracts while long open interest rose 3,000 contracts. For silver the commercial COT was unchanged at 28% but short open interest fell 2,000 contracts. The shorts are covering.

The gold stocks fell as well this past week but again it was shallow. The Gold Bugs Index (HUI) fell 0.9% while the TSX Gold Index (TGD) was off 0.5%. Financials fell more than the gold stocks. This is a positive sign for the gold stocks as despite the $80 drop in gold prices they have not been hit hard. The intermediate trends remain up although weakening while the short term trends are down.

Gold back over $1,730 is positive. Above $1,760 and the highs should be tested and even see new highs.

Gold’s seasonals turn positive once again in November and if this as I suspect a shallow correction only then a powerful move could get under way that takes gold to $2,100 or even $2,500. Silver could soar to $50 or higher.  The lows seen in gold and silver last December 2011 and again in June/July appear to be important cycle lows. The first one was probably gold’s 34 month cycle low and the June/July low was probably the 4.5 year cycle low. I confess I have never seen both occur as it is usually one or the other but not both. Anyhow a repeat of the 2011 collapse is highly unlikely and a new major up leg should be rising from the June/July lows. The bullion banks (and maybe some hedge funds) fought hard near $1,800 to push things back but odds are when it gets through $1,800 they might well scramble to cover their shorts.

Oil…

Oil was clobbered this past week breaking under $90 to test $85 losing 4.6%. Yes it was odd because the threats in the Mid-East have not gone away. Israel was alleged to have hit the Sudan bombing an arms factory. That it was an act of war which under international law is, however, usually irrelevant to Israel. And if they were slammed at the UN the US would veto. Israel has refused comment and has neither confirmed or denied. Allegedly the arms from the factory were bound for Gaza. There are rumours that Iran is also involved with the arms factory.

Irrespective it is a sign that things continue to be amiss in the Mid-East and an accident could trigger something far worse. The Syrian conflict continues and a cease fire didn’t last long. The conflict is threatening to spill over into Lebanon. Any widening of this conflict is dangerous.

Hurricane Sandy churning its way up the US coast could be positive for oil even if it doesn’t hit major oil installations. The concern is it will could seriously disrupt refineries along the east coast. With a cold winter blow also expected any shut down in refineries and the cold snap could send heating oil soaring.

Oil prices are down 13% so far from their highs. Technically now as long as $85 holds then odds favour a recovery to get underway .This would then appear to be a correction to the run up from June to September or from about $78 to just over $100. Resistance is now to $90 and $95. But over $100 oil could race towards the line up near $108 and if that falls objectives range to at least $146. Nonetheless oil has a lot to “chew” through before breaking over $100. Oil is approaching a period of positive seasonals. Recall that in 2011 oil bottomed near $76 in early October and raced to $110 by February.

D.C.