10-1-2008

Congress Asserts Itself

Two weeks when speaking about Congress, I wrote, “When in doubt, throw money at the problem.” I went onto explain that when world economies found themselves in jams, Central Bankers came to the risk. Last week, Central Banker, Mr. Bernanke and our Treasurer went to Congress and were turned down.

I did not expect this. Apparently neither did the world equity markets given Monday’s selloff.

What Next?

The “Bailout Bill” failed in the House by 12-votes. Congressmen and woman received lots of TV and Press by offering their view of what was transpiring. Of course all this is taking place as we get ready for November elections, so anyone from Congress who gets face time on TV or in the press in essence gets free advertising.

Is it entirely possible that those of us who are in finance are simply out of touch with what mainstream America is thinking? It’s possible. I have to agree that seeing heads of companies hired but for three or so weeks that that fail and pay that person $1.5 Million Dollars a day is simply ridiculous.  At the same time, shooting ourselves in the foot because of a few companies’ stupid moves makes no sense either.

Our President along with our Treasurer and Central Banker succeeded in putting the fear of God in many of us. When a plan was announced that put forth “King Henry Paulson” and his unbridled powers, many of us at first thought that this was what was needed, as the markets needed to enable a quick fix. In fact in looking back, according to what we heard, things would have been a lot worse than they now are if Congress didn’t immediately enact a new “King”. Wasn’t that the purpose of putting both Mr. Bernanke and Mr. Paulson in front of Congress? In essence that’s all it was.

Congress to their credit had a different take, one I at first strongly disagreed with. I was wrong.

Tonight, at 7:30 PM CST the Senate votes on their version of a revised Bailout Package. Rumors about that the House may vote tomorrow night. I expect tonight’s vote to pass, but than my take on the House vote was that I thought it would also pass. Even if it passes in the Senate, there’s the version of the House’s Bailout Package that has to be considered. In my opinion yesterday’s rally in stocks did little to bolster chances of a passage in the House as it emboldened those against the Bill. Those against the plan will say the financial system can and has survived without passage.

In summary, the Senate is likely to pass a Bailout Plan tonight. The wild card is the House vote.

Inflation

Look at almost any chart of that shows commodity prices. All are substantially, yes substantially, off their highs of the year. Many chartists will say that many are in Bear Markets.

Price pressure on raw materials is not there because of demand destruction. Money is so tight that processors of commodities have basically gone to ordering materials on something akin to a day-to-day basis as there is no incentive to store goods without demand. When you factor in availability of funds and the cost to carry inventory, further demand destruction takes place.

When a rescue package passes and yes, I think one will pass, I would not be surprised to see a coordinated Central Bank Rate Cut occur with many foreign governments. Talk about stimulus! Well a rescue plan along with a lowering of interest rates world wide should be enough to have traders begin to question the current market psychology at work.  

A bailout with rate cuts, the old one-two punch if you will, is the type of medicine needed to slowly change market thinking, to hopefully get banks to lend, to get banks to lower the Libor Rate and to get the November elections fired up.

If this takes place, at some point in time, demand picks up, inflation picks up and metals come to life. Maybe. What if the Dollar soars on this scenario? At that point, Gold loses even more luster, but Silver comes alive. As you can see, it gets tricky.

Until something along this accord takes place, Gold while holding up, simply has little reason to advance. Face it, investors did NOT run to Gold as many expected given Gold’s safe haven status. Yes gold is trading near $900 an ounce. However, given the magnitude of the world financial crisis, many would have thought it should have traded much higher.

Gold’s Seasonal Story

It’s important to look at the Seasonal Chart below, as provided to us by The Moore Research Center...www.mrci.com.

Look at what typically takes place in October. Be it longer term, the past 34-years or shorter-term, the past 15-years. October is rarely friendly to Gold prices.

December Gold

Now lets at a Daily Chart of December Gold Futures.

Price action, another word for trading activity is taking place over the 18-Day Moving Average of Closes. The problem with the “chart pattern” is that the market is making Lower Lows. In order to reverse the pattern, prices need to get back over 932.0. What we currently have in place is a Lower Low and a Higher High. That does not make a trend.

Prices staying over the 18-Day Moving Average of Closes is crucial to keeping the overall bias of the market upwards. However, in terms of a trading pattern, there is a bias in place for prices to return down to the 18-Day Moving Average of Closes unless a move over 932.0 takes place.

This makes new positions difficult to establish and is the reason I am currently refraining from placing new trades in Gold.

Conclusion and Recommendation

Those who follow my Twice Daily Trade Recommendations were told hours ago this morning to liquidate the December Bull Call $1000-$1025 Spread, owned at 6.30 at the market or by the close. The spread has been trading between 3.80 and 4.80 all morning. I am assuming this spread will have a loss somewhere between $150 and $250. It traded up to 5.50 last week. Given the historic chart pattern shown above and the lack of follow through in gold pricing, I believe there is little to gain by holding on any longer.

Silver

Let’s start off by looking at a Seasonal Chart of Silver as provide to us by The Moore Research Center...www.mrci.com.