The week of June 17 2013 in Review -Global Markets Rout-

Markets Sell-OffBears in Control

Dear PGM Capital Blog readers,

In this weekend blog edition, we want to discuss with you some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of June 17th 2013.:

  • June 16-18, 2013, FOMC Meeting-Conclusion
  • Global Market Rout.
  • Rising Bond yield: USA 10-year note at 2-year high.
  • St. Louis Federal Reserve President James Bullard: Bernanke bond announcement ‘inappropriately timed’
  • The Brazil BOVESPA continues to slide.

June 16 – 18, 2012 FOMC Meeting-Conclusion

At the end of the The FOMC Meeting on Wednesday, June 19, 2013, during the subsequent press conference, the FED Chairman, Mr. Bernanke made a statement and comment, emphasizing that,

‘Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.’

‘To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month’

‘The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.’

Source:

Fed Chairman Ben Bernanke laid out a possible roadmap for reducing and then ending the bond purchases at a news conference following the meeting. If the economy and job market continue to improve, Bernanke said a gradual tapering down of the bond purchases could begin “later this year” with continued reductions next year until they stop in mid-2014, assuming the unemployment rate, now 7.6%, falls to about 7% by then.

However, Bernanke emphasized that such a strategy depends on the economy and job market. If they falter, the Fed could stop scaling back the bond purchases or even increase them again.

“If the economy does not improve along the lines we expect, we will provide additional support,” he told reporters.

Please view below FOMC: Press Conference of June 19, 2013.

Global Capital Market Rout

After the June 18-19 FOMC meeting, the U.S. Fed has injected more fear than calm into the markets by stating that the FED could pull back on its easy money policies. Based on this traders fled out of bonds sending interest rates to a two-year high, jarring stocks and other risk markets around the globe.

  • The Dow plunged 560 points Wednesday through Thursday to close on the week at 14.799.40 points as can be seen from below chart.
    DOW 5days chart
  • Major Asian stock markets were down about 2 percent on Thursday June 20 2013.
  • Europe’s biggest markets were down 3 percent or more.
  • From Wednesday to Thursday, gold futures for August delivery tumbled 6.4 percent to US$1,286.20 on the Comex in New York as can be seen from below chart.
    nymex-gold-futures-per-troy-ounce_chart, d.d. June 20 2013
    During Friday trading, gold futures have rebounded slightly to close the week at $1,293.10 an ounce. Year-to-date, the gold futures have declined about 23 percent.
  • On Thursday June 20th 2013, silver was the biggest decliner among the precious metals, sliding nearly 8 percent to US$19.64 an ounce.
  • Platinum dropped 3.6 percent to US$1,359.50 an ounce, while spot palladium slid 4.7 percent to $661.25 an ounce.
  • Crude oil for July delivery declined 2.9 percent to US$95.40 a barrel on the New York Mercantile Exchange on Thursday June 2013.

Rising Bond Yield: USA 10-year note at 2-year high.

The yield on 10-year U.S. treasuries soared during the week from 2.13 percent to close on Friday June 21st at a 2-year high of 2.514 percent as can be seen from below chart.

5 days 10-year note chart

Yields, or interest rates, are set by market demand. Interest rates go up when investors sell off bonds, in order to spur demand and make those bonds more attractive to buyers. Rising yields on U.S. treasuries are a sign that investors are shying away from government debt.

St. Louis Federal Reserve President James Bullard: ‘Bernanke bond announcement ‘inappropriately timed:’

St. Louis Federal Reserve Bank President James Bullard on Friday, June 21st 2013, issued a sharp rebuke of his colleagues’ decision this week to announce a plan to reduce the central bank’s bond buying, calling the move premature and worrying the Fed is risking its credibility as a force for price stability.

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy.

Source:

The Brazil BOVESPA continues to slide.

Over the past week, hundreds of thousands of people have flooded into major cities such as Sao Paulo, Rio de Janeiro and Brasilia to protest against the recent 9 to 20 cent rise in bus and subway fares fare hike, the increasingly corruption, police brutality and social inequality.

About 200,000 people have taken to the streets, making it the biggest protest in Brazil in 20 years and leading to violent clashes between participants and the police, according to Reuters. Another mass demonstration is planned in Rio on Thursday.

Brazilian President Dilma Rousseff said Tuesday, June 19th, in a nationally televised address

“My government is trying and committed to social transformation.”

Before the riots, Rousseff had the highest approval rating in Brazil’s history, but from March to June it fell 8%, the first drop since she took office in January 2011.

More and more investors worldwide are losing their faith in the economic policy of the current Brazilian government.

Brazil’s Bovespa index lost aprox 4.4% during the week to close at a 46-month low of 47,056.04 points as can be seen from below chart.

5 days Bovespa chart

Comments:

The analysis, statement and comments provided in this section of this blog article, are based solely on professional and dispassionate analysis of the points discussed here above. By no means it is our intention to interfere in the internal policy of a country, organization or person.

First of all it is worth mentioning that populistic governments all over the globe have usually failed in boosting their economies.

For this reason we believe that Brazil under the current rule and policy of current president Dilma Rouseff, will fail to create real economic growth for Brazil to emerge from a country in development to a developed country.

Due to this we have a Hold to Sell rating on almost all Brazilian stocks with the exception of Companhia de Bebidas Das Americas (AMBEV), NYSE: ABV and BRF SA, NYSE: BRFS, for which we have respectively a BUY and STRONG BUY rating.

During the last 4 years we have warned investors several times that the USA bond market is in an huge bubble stage and that it isn’t if, but when this bubble will burst and subsequently send the yield of treasuries through the roof.

A burst of the bond market will have a dramatic effect on savers and retirees. Subsequent spiking interest rates will kill the already fragile housing market and will have a negative effect on all stock markets.

A burst of the bond market will have a dramatic effect on savers and retirees, subsequent spiking interest rates will kill the currenltly fragile housing market and will have a negative effect on all stock market, with the potentential of sending the USA in a worse recession than the “Great Recession” of 2008-2009.

That is why it really amazed us that the FED Chairman announced last Wednesday that the FED might reduce bond buying program. History has proven that in a rising interest rate scenario, Gold, Silver and other precious metals will shoot through the roof.

In view of the FED chairman’s 8-year track record of unparalleled wrong prognoses, and considering that he will soon retire, one may ask oneself what credibility his observations have, especially considering the fact that America’s economy needs a low interest rate to encourage its growth, supporting the fragile housing market, and certainly not an adaptation of interest rates as the FED chairman has suggested for the near future.

With a decline of the price of approx 23% in the price of Gold since the beginning of this year, in our opinion gold has become a screaming buy.

Marc Faber PhD, the famous swiss investor and publisher of the “Gloom Boom & Doom Report“, said on May 10th 2013:

Nobody knows whether it’s a good time to buy gold or not…as I have repeatedly said in my reports, I buy gold every month and on the recent decline I bought more at $1,400 and I have an order at $1,300 and one at $1,200 and one at $1,100 an ounce. But they were not filled, just the $1,400.

Source:

The legendary Investor Jim Rodgers and CEO of Rodgers Holdings, recently said on Friday June 21st 2013:

I am Buying Gold and I own it. I haven’t Sold any.

Source:

Secondly it is worth mentioning that since gold started its bull run in 2000 its price has moved in a tunnel as can be seen in below technical chart.

Gold Technical chart

A quick look at the chart gives you a good idea of this. Gold is now back at a long-term support level.

The last time it bumped against the base of its channel was 2008, and before that 2005. Both times, gold went on to jump over 80 percent in the following twelve months. A repeat of that from here would take gold to US$ 2,500 an ounce.

Below 30-year Gold seasonal chart shows the tendency for gold to exhibit weakness into June before entering the ‘Christmas rally’

Gold Seasonal 30 Years Chart

On the other hand investors and traders must always remember that the capital markets are manic depressive. Due to this chances are that:

  • The selling is likely not over. The capitulation process may not be completed.
  • How low can gold and silver go? You have to be psychic to be able answer this question and we are not. What we do know is that given that the capitulation is under way, the selling will overshoot to the downside, just like surges can overshoot to the upside. Our response should be to prepare to take advantage of that situation.

The good news, however, is that a correction in the long-term bull-market of Gold has happened before:

  • Do you remember the autumn of 2008, when gold fell or the spring of 2006, when the price dropped 22%?
  • In 1976 many claimed that the gold bull-market was overwhen it fell a dramatic 47%.

None of these selloffs dictated the end of the gold bull-market. That won’t be the case this time around, either. A panicked shakeout is just that.

In spite of the downtrend in the price, the conditions that support the long-term bull market are increasing in importance. The US and Japan alone will flood the world with almost $2 trillion over the next 12 months. Europe’s problems have not been solved, and the Eurozone teeters on the edge of a recession. And did you know that not one G20 country currently has a balanced budget?

A lifetime buying opportunity is shaping up. We’re not exaggerating by stating that. Given the waterfall decline in both precious metals and equities, investors with the courage to act and the cash to deploy will not just be rewarded, but could very well change their financial futures. The chance for enormous gains will be remarkable.

In order to ride and profit from these turbulent times, we totally agree with both Jim Rodgers and Marc Farber, not to sell any of your gold or silver but to buy more on any dip. On the other hand, it is advisable to have a high leverage trading account at a different institution at which you have your main portfolio for you to trade the waves and make money during these turbulent times.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

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