**** The Tinder Box ****THE TINDER BOX
Sometimes investors become caught up in overly negative or bullish sentiment and the emotional distortion leads to errors or missed opportunity. This is perhaps an investors biggest challenge - to separate and filter out the noise.
A news brief this morning states that 10% of all outstanding mortgages are either in arrears 30 or more days (6.99%) or foreclosure (2.97%). That was at the end of September and the mortgage arrears are probably related to unemployment which is rising sharply. There's still a lot more to come with a probable auto industry downsizing. If they carry that excess capacity hoping for a cyclical recovery, it will simple drag the inevitable on longer. There's nothing in sight to arrest the downtrend and the service sector is under pressure too.
So if we consider the immense mortgage arrears, the probability that credit card debt is shoring up the mortgage arrears, the corporate debt problems, and ordinary debt problems weighing upon banks, and everything else, including beleaguered State governments, it leads me to wonder - How can the banking system survive? Whatever's left of the 700 Billion Dollar TARP funds seems very inadequate. Will the banks be overwhelmed into mass failure? Between loaned funds & standby guarantees the Federal government has reportedly assisted the economy with 7.5 to 8.5 Trillion Dollars. Is it enough? How much of the government guarantees will be called for payment? The Trillions are flying by and there's no end in sight. Then there's spending on new programs by an incoming administration along with a push for 'National Healthcare'. How could we be so fortunate to miss hyperinflation? How can we avoid monetizing the deficits? Where in the World could all this money come from other than Monetization?
Meanwhile, Silver seems to have traced out a clear five wave down pattern and is basing here. Gold is less clear, but perhaps is setting up a new base which now spans nine months. The strong demand for physical Gold seems to be a classical removal of supply ahead of a price advance and confirms 'Accumulation' in a basing phase.
Oil? Nearing $40 Barrel, producing Canadian Oil Sands could be at risk for shutdown and the U.S. receives almost 2 Million barrels per day. This price collapse is quite damaging to longer term interests. If the recent I.E.A. report is correct (And it is a study) the depletion rate is 9% per annum while worldwide demand is flat. It does appear that the Oil price decline is a paper driven event as the U.S. government chased speculators from the commidity pits and hedge funds liquidated. By all appearances It does seem that the respite from rising Oil prices will be brief. Worldwide grain supplies are at multi decade lows and plantings for 2009 may be down threatening higher prices ahead.
The U.S. Dollar seems to be struggling under distribution at these levels, but could stay aloft near these levels until March 2009. It should turn out to be another top.
The stock market? It appears that we are in a temporary counter trend that might be capped at or near 1000 on the S & P 500. Indicators and wave counts are notoriously unreliable, but it appears that we are preparing for the final part of the third wave (Down) . The third wave down in the U.S. stock market started in May 2008 and it may end in March 2009. Then we should have a counter trend rally before the final 'Fifth Wave' down. My opinion is that the S & P 500 is heading toward 500 or lower in the second half of 2009.
Once the 'Third Wave' down in U.S. stocks ends around March 2009, the intense part of the decline will have ended and this is the point where the market leaders begin to advance. I can almost promise you that Precious metal issues and the physical precious metals will be the market leaders, probably along with energy which could lag a bit.
Junior exploration issues? Uranium looks interesting again, and it could be basing. Precious metal exploration issues look similarly constructive perhaps because prices are at extremely low levels. The major Gold mining issues should hold above the October 2008 panic bottom as they prepare for a new advance in a 'Third Wave' which should persist for years and years.
So tying it all together ---- ---- The strong underlying fundamentals of Precious Metals & Oil, hyperinflation of the currency & enormous deficits, a new round of stimulus payments ahead, the coming end of the intense 3rd wave down in the stock market, continued economic deterioration and threat of a massive banking failure ---- ---- somewhere around March 2009, perhaps coinciding with mailing of the stimulus checks, the Precious Metals and probably Oil will resume an advance. That would herald the start of a price spiral of consumer goods some months later, around the start of the new decade. By then, most commodity prices will resume their uptrends.
This is a tinder box waiting to go off, and we're almost through the severe correction for resources.