Oil and Bonds
July 2, 2009
What we do upon some
great occasion will probably depend on what we already are.
What we are will be the result of previous years of
self-discipline.
Henry Parry Liddon
1829-1890, British Theologian
Petrol prices
are up 62% from their average low price of 1.61, while crude
oil prices are 54% below their old highs. Thus it appears
that when crude oil trades back to the 147 mark, petrol
prices will most likely be trading at levels in excess of 5
dollars per gallon. If we couple this with the fact that
worldwide supplies are dwindling at a rapid rate and that
oil companies have drastically slashed their exploration
budgets, the long term projection is for the cost of petrol
to reach extremely painful levels.
While we can
draw many conclusions from the above charts the main one to
focus on is inflation. These charts are clearly indicating
that inflation is the next major threat and not deflation as
most government economists are projecting. Once again, we
would like to warn our subscribers that they should cut down
on all levels of debt, use excess money to purchase bullion
and commodities related stocks on all strong pull backs. The
next 3-6 years are going to bring about unprecedented
changes.
Bonds
Look at the
dramatic turnaround in 30 year rates, from a low of roughly
2.5% in Jan, they spiked to 4.75% and this is occurring when
the Fed is keeping short term rates at close to zero
percent. What do you think will happen when the Feds are
forced to raise long term rates as a result of foreign
investors demanding a higher rate of return in order to
compensate for the falling dollar? This chart clearly also
illustrates that the real estate market is not going to
mount a long term recovery any time soon.
Consider the
following facts:
Toll brothers
one of the leading home builders reported that its revenues
are down approximately 50% for the year. The MBA mortgage
applications' index has fallen over 16% for the week ending
May 29; the week before this, it experienced another 14%
decline. Mortgage applications have dropped by nearly 50%
and the latest figures on the refinancing index indicate
that it is down over 24%. Not only are fewer individuals
applying for mortgages but banks are making the qualifying
process much harder now, thus not everyone that applies gets
an approval, unlike in the good old days where you only
needed to scratch X on the signature line, and you were
approved.
The
message is clear avoid the real estate sector.
Logic
dictates that interest rates will continue to rise and that
the bond market will fall to pieces. In the long run, this
is true, but in the short term, we actually expect rates to
drop again and possibly test their lows one more time and
bonds will most likely rally and test or take out their old
highs before the bond market falls apart. One other long
term negative factor is that America’s biggest debt buyers
China and Japan are now deploying less and less money into
the bond market, they do not believe (and rightly so) that
the US is doing all it can to defend the dollar.
In the next
6-12 months, we are looking for bond prices to rise again
(interest rates will drop in the process as they trade in
the opposite direction to bond prices) and possibly put in
new highs but at the very least they will test their recent
highs. For this scenario to remain valid bonds should not
trade below 112 for more than 3 days in a row, if they do
trade below 112 for more than 3 days in a row, the
intermediate outcome will most likely change and instead of
rallying to new highs bonds will at the most test the lower
limit of their old highs. A break past 126 for more than 5
days in a row will be the first sign that bonds are on their
way to at least test their old highs.
Assuming that
the current picture remains valid and bonds rally to new
highs, the next move will be for bonds to put in a very long
term top and then start their long decent down. We expect
this market to slowly break down and eventually a crash,
which will eventually drive interest rates to the 15-18%
ranges and possibly as high as 25% before the dust settles
down. Those that invested in the bond market should use the
upcoming rally to get out of this area for this will be your
last chance. If you have a mortgage and you cannot sell the
property or do not want to sell the property, then take
advantage of the low interest rate environment to refinance
your mortgage at a fixed rate. Avoid getting into real
estate, unless its farmland and make sure you get a good
deal on it. Do not rush into anything; the buyer is now in
the driver’s seat so negotiate for the best possible deal.
We are
expecting the bond market to mount one final rally that
should at the very least result in a re test of the old
highs if not in a series of 52 week highs.
Where one person shapes
their life by precept and example,
there are a thousand who have shaped it by impulse and
circumstances.
James Russell Lowell
1819-1891, American Poet, Critic, Editor
All charts supplied courtesy
of
www.prophetfiance.com,
www.stockcharts.com
and www.gasbuddy.com
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