Separation & Liftoff: 3 Charts

The USDollar DX index has hit my 72 target on this latest leg of its breakdown. The news is all wretched. Iran, Nigeria, and even tiny Vietnam are rebelling against the crippled buck. The Persian Gulf Arab nations are trying to find a graceful way to detach from their devastating US$ peg that has wrought horrendous price inflation to the region. The end of the defacto Petro-Dollar standard will be the biggest external event concerning the USDollar this year, while the failure of prime Exploding ARMs will be the biggest internal event. The prime adjustable mortgages of unique detonation design and typical amplified destructive leverage are due to explode this summer, sure to change the false label promoted. The current bank problems originated with subprime mortgages, but they have extended inroads into primes and now have begun to enter commercial avenues.

However, the big story in my view is the contrasting price movement in the upward bound HUI precious metals mining stock index, versus the downward bound S&P500 stock index. We can see separation and liftoff. The S&P and Dow Jones Industrial indexes have suffered critical breakdowns. The HUI has enjoyed a powerful breakout into high ground. The ratio of the two amplifies the story of the disconnection in vivid terms. Many people ask in private emails, public readers and Hat Trick Letter subscribers alike, whether the mining stocks will suffer the same fate as the mainstream paper chase stocks. My answer is NO, not a chance, unless the USFed and Dept of Treasury fall asleep. Mining stocks might possibly endure some brief damage during powerful bouts of illiquidity, collateral damage from down drafts that strike the stock markets. People also frequently ask if the USDollar will bottom out soon. My answer is also NO, since nothing is seeing anything remotely described as remedy, and most all arenas continue to worsen. Another expected official USFed rate cut has been anticipated, enough to send the damaged USDollar even lower against most currencies. The Swiss franc has almost hit my 100 target stated in January. Even the Japanese yen is shooting at 100 parity.

HUI EXTENDS BREAKOUT

The HUI has once again made new highs, showing some reluctance along the way. The HUI index has eclipsed intermediate targets. Without any doubt, the mining companies face uncertain costs, made clear by the rise in both crude oil and natural gas prices. The cyclicals show strength, and can remain overbought for some period of time, like in the late summer. If an extension to this breakout does not occur imminently, it will soon enough after a visit to the uptrend support offered by the 20-week moving average, which has provided excellent support since December. Numerous reasons for the stock breakout catching up to the physical metal are possible. The USFed is finally setting the stage for delivering some meaningful liquidity to the upside-down banking sector. The hedge funds are receiving margin calls, which are likely to force them to cover widespread short positions in a wide assortment of juniors. Institutional investors are heeding the rally cry for commodities, the latest big ones being CALPERS and the Texas Teachers Union. Alternatives to numerous conventional failed strategies are being sought. With a recession more widely perceived and admitted outside the halls of frontmen in the USGovt and conmen on Wall Street, commodities generally, but precious metals and energy specifically, are being recognized as having tremendous future prospects. Up ahead lies a crossroad, as a wedge is forming. Moving averages look stable and rising. It could turn into a more stable uptrend. Time will tell.

S&P STOCK INDEX BREAKS DOWN

The S&P500 stock index displays a strange pattern, one inherently suffering a breakdown though. A deadly crossover of the 20-week moving average below the 50-wk MA was seen in January, but the big plunge occurred just prior to that signal, now a confirmation. This chart might be described as a Head & Shoulders bear pattern with a built-in positive tilt. The neckline broke at that time, one that featured an upward bias trendline. Next to break was the shoulder line, also with an upward bias but with bigger spacing. The S&P chart screams bear market with a loud echo of USEconomic recession. The next downside targets are 1230 and later on, 1180. The Dow Jones Industrial index shows a much clearer gigantic Head & Shoulders ravaging bear pattern, featured in the March Hat Trick Letter report this weekend. My belief is that the prevailing knucklehead opinion being put forward in end of year, of problems finally resolved and admitted, was smashed quickly in the first month of the year. The breakdown has been powerful, at its worst a 17% decline. That is minor compared to the nasty 30% plunge in the Japanese Nikkei stock index. Much worse is yet to come. This is a multi-year bear reversal breakdown, one to require a couple years to clean up.

TIDE TURNS TOWARD MINERS

A very significant breakout is plainly evident in the ratio of the HUI index to the S&P index. The conclusion is that mainstream stocks stink on ice, while gold & silver mining stocks shine brilliantly. Since August when the serious bank & bond problems surfaced, the mining stocks have comparatively outstaged the paper chase stocks of the S&P index, laden with financials, techs, retailers, drugs, consumer goods, builders, as well as the strong energy group. The trend has extended with strong cyclical behavior in the stochastic indicator. This moment has been sought for months. Clear dominance has begun to be demonstrated, as the mining stocks thrive when the mainstream stocks suffer. This theme will likely dominate for most of the year 2008. As the crises with banks and housing and mortgages and household bankruptcies and consumer downturns become entrenched, and as the official response is seen as not providing much remedy, gold & silver will continue to fire on both cylinders, unencumbered by paperweights.

LARGE & SMALL TIDBITS TO FEED THE FIRE

The USFed sequence of lower interest rates will surely continue, possibly to the 1% mark, but hardly a guarantee to fix a single thing!!! Bank insolvency benefits little from cheap money when willingness to lend vanishes. The growth of the money supply has reached ridiculous desperate level of growth at 16.7% in February, even as the US banking system operates with a negative capital core. That is, excluding borrowed funds by banks from the USFed itself. Even the TIPS is showing negative bond yields, an embarrassment. The catch phrase ‘Pushing on a String’ might be better described as ‘Cramming Napkins down Man Hole Covers’ instead. This is getting really ugly. Even the estimates are rising for total bank center losses, working its way to my initial $1 trillion estimate. It will reach $2 trillion easily. The Resolution Trust Corp platform is also beginning to take shape. Too bad it is to be built atop a bankrupt duopoly cesspool factory known as Fannie Mae & Freddie Mac. Come to think of it, a cemetery next to a sewage treatment plant is not all that impractical. Dead entities do not require fresh air, rich food, or clean living spaces after all. As far as gold advocates are concerned, the retreat in interest rates makes money cheaper for speculation in gold and related stocks. As far as gold advocates are concerned, the desperate measures to redeem broken mortgage bond provides an opportunity for massive spillover of relief cash above and beyond their targets into the same speculative arenas.

Countless major and minor stories can be told, for fuel to the fire. DeutscheBank projects the crude oil price to hit $150 by the year 2010. Nigeria no longer wants USDollars in their financial system, preferring domestic naira currency instead in a chest pounding exercise of national pride. Iran now takes in 75% euros and 25% yen for crude oil transactions, having circumvented US efforts to stymie their financial network. Venezuela, Colombia, and Ecuador are dealing with skirmishes on the borders. An important Colombian oil pipeline was blown up by the rebels who have sympathetic support by Venezuelan tyrant Chavez. The Persian Gulf Arabs continue to ponder and debate the inevitable. They must strip the tentacles of the US$ peg. A horrible mismatch exists. The increasingly inappropriate monetary policy of the United States is the penalty imposed upon their powerful little sheikdoms. Imagine a falling official interest rate in boom towns like Abu Dhabi and Dubai, a grotesque misfit when price inflation ramps up to almost 20-year highs. Steering clear of the peg will open the floodgates for more diversification when revolt is worldwide already against the beleaguered USDollar. In time only the Saudis will stand in the US green corner, hardly a Green Zone.

The next few months are certain to see continued breakdowns, rescue attempts, more fire trucks, and vast hoses spewing fake money. Distortions are growing worse from imbalances pushed to the brink, then beyond. An historic dismantlement of a mismanaged corrupted diverse bank & bond & risk management system is underway. It makes great theater to watch powerful institutions attempt to repair an irreparable vast apparatus, like a Greek Tragedy. The Yankee Acropolis is melting down. The Hat Trick Letter tracks the saga, with many events foreseen in advance. Almost everything attempted will fail unless and until a big bad bond cemetery is constructed, one fitted with a new centrifuge that churns mortgage money outward. The ultimate priority is to halt the housing decline. Housing was the grand reckless foundation to an economic recovery since 2002. The main beneficiaries of continued rescue attempts will be gold, silver, and crude oil. When the housing decline is halted, the trio of primary commodities will still be rising in price, since a successful price inflation episode will be accomplished. Then, the big question is what happens to long-term USTreasury Bond yields.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at [email protected]