Bank of America issues `bond crash' alert on Fed tightening fears

The return of confidence and healthy growth in the US risks setting off a “bond crash” comparable to 1994 and triggering a string of upsets across the world, Bank of America has warned.

The US lender said investors face a treacherous moment as central banks start fretting about inflation and shift gears, threatening a surge in bond yields.

This happened in 1994 under Federal Reserve chief Alan Greenspan when yields on US 30-year Treasuries jumped 240 basis points over a nine-month span, setting off a “savage reversal of fortune in leveraged areas of fixed income markets”.

A similar shock this year is “likely” if the US economy continues to gather strength. “The moment we hear the first rhetorical talk of exit strategies by central banks this could turn,” said chief investment strategist, Michael Hartnett. There was already a whiff of this in the most recent Fed minutes.

“The period of Maximum Liquidity is close to an end. Yes, the Japanese reflation is gaining steam in 2013 but we regard this as the last of the great reflations. The big picture is a transition from deflation to normal growth and rates,” he said.

The 1994 bond shock - and seared in the memories of bond-holders - ricocheted through global markets. It bankrupted Orange Country, California, which was caught flat-footed with large bond positions. It set off the Tequila Crisis in Mexico as the cost of rolling over `tesobonos’ linked to the US dollar suddenly jumped.   (more)

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Withdrawn: $114 Billion From Big U.S. Banks

More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.

The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11, 2001, attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.

The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. The TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in non-interest-bearing accounts. That guarantee ended on Dec. 31, so a decrease in deposits would be expected first thing in January.

But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. “I think [customers] are going to go back to the mega banks,” the head of a regional bank in Bethesda, Md., told The Washington Post in December. “They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought-out situation.” Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.  (more)


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Marc Faber on Investment Strategy, Markets

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Portrait of the fiscal cliff

I included this chart of the US dollar index against a basket of global currencies in a presentation I did in Vancouver on the weekend. It helps put some big picture perspective on the US dollar and how its movements as the benchmark currency have impacted asset prices over the past 20 years.




First of all, we can see the surge in strength during the 1990′s tech bubble where the US could do no wrong and the world fell in love with their technological innovation in computers and the internet. The US dollar strengthened 50% during this period peaking with global stock markets in 2000. During this period, commodities were under-loved, under-invested, and under-priced (given their inverse price moves to the Greenback). After the tech bubble burst, people came to experience the financial trauma of their over-optimism, and over-investment began to flow back out of US dollars. Then came the 2001 downturn and the Greenspan led Fed began its epic and misguided efforts to re-inflate risk appetite by slashing interest rates from 5.5% to 1% by 2002. Next came 9/11 and the Bush administration opted to slash tax rates and commit to 2 massive military initiatives in Iraq and then Afghanistan while at the same time increasing spending in other areas. This was the real fiscal cliff, when spending went parabolic while tax revenues plummeted thanks to the weaker economy and lower tax collection. These were also the catalysts which drove the over-valued US dollar from its over-exuberant peak in 2000 through a 40% decline by 2008. Not surprisingly, commodities soared through this period, as prices moved from deeply under-valued in 2000 to deeply over-valued by 2008.

As the US dollar bounced off the depths of negative sentiment in 2008, over-valued stock and commodity prices tanked in sequence. Waves of government and Central Bank stimulus managed to force a cyclical bounce for risk markets from 2009 to 2011, and then the US dollar turned back up just as very few people expected it.

The precious metals and commodities crowd that had been decimated in 2008 found renewed hope in the speculative resurgence in liquidity fueled trading and stockpiling into 2011. They naturally believed they had been given reprieve and went back to over-confident bets just as the world economy turned back down. Since then the resource and mining sector has been hammered afresh as captured in this next chart of the Canadian Venture Exchange.




Now down some 63% from the 2008 bubble and some 50% from the 2011 rebound, the good news is that the resource sector has been through a large correction and while a further 20%+ downside is needed to retest its secular support, the space is surely moving closer to reasonable value now than it was in recent peaks. The bad news, is that as in other bubble aftermaths, it is likely that some 70%+ of companies in the sector are likely to go out of business and disappear in one way and another over the next couple of years. Investment success as always, will depend on one’s ability to determine who will be left standing and what price to pay for the new lower growth environment. As massive, reckless leverage continues to move out of this sector, investors may well do best to let the players settle a little further before stepping in.


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Bonds 101: Why Yields Move Inversely to Prices

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Precious Metals & Miners Making Waves and New Trends

The precious metals sector has been dormant since both gold and silver topped in 2011. But the long term bull market remains intact. As long as we do not have the price of gold close below the lower yellow box on the monthly chart then technical speaking precious metals should continue much higher.
Large consolidation periods (yellow boxes) provide investors with great insight for investments looking forward 6-18 months upon a breakout in either direction (up or down). The issue with investing during these times is the passage of time. One can hold a position for months and sometimes years having their investments fluctuate adding extra stress to their life when they really do not need to.
Once a breakout takes place a powerful rally or decline will start putting an investors’ money to work within days of committing to that particular investment compared to money invested waiting months for the breakout and new capital gains to occur.

Gold Price Chart – Monthly

Gold Price Chart – Daily

The chart of gold continues to form a large bull flag pattern with a potential 3 or 5 wave correction. If price reverses this week and breaks above the upper resistance trend line then it will be a 3 (ABC)  wave correction which is very bullish. But there is potential for a full 5 wave correction which is still bullish, but it just means we have another month or two before metals bottom.

Gold Miner Stocks – GDX ETF Chart – Daily

Gold miners do not have the sexiest looking chart. It was formed a strong looking bull flag but has continues to correct and is not nearing a key support level. This level could act as a triple bottom (bullish) or if price breaks below then it would be breaking then neckline of a massive head and shoulders pattern which points to 50% decline. I remain bullish with the longer term gold trend until proven wrong.

Silver Price Chart – Daily

Silver remains in a long term bull market much like the monthly chart of gold shown earlier in this report. Silver continues to work its way through a large bull flag pattern with a positive outlook at this time.

Silver Miner Stocks – SIL ETF – Daily Chart

Reviewing the precious metals sector it seems that silver miners have the sexiest looking chart. All price patterns are showing strength and are in proportion to one other. If this chart plays out to what technical analysis is pointing to then we could see the precious metals sector put in a bottom and rally within the next week or two. And if this is the case then silver miner stocks should provide the most opportunity going forward. 

Precious Metals Trading Conclusion:

In short, what you need to focus on is the yellow consolidation box on the monthly gold chart. A breaking in either direction will trigger a massive move that should last 6-18 months. Until then long term investors can simply sit back and watch the sector while they put their money to work in other active sectors.
From a short term traders point of view, that f mine. I am looking for a signs of a bottom on the daily chart to get my money working earlier to play the bounce/rally that takes place and actively managing the position until a breakout occurs. The charts overall are not that clear as to when a breakout will take place. Metals could start to rally next week or in a few months and all we can do is wait for a reversal to the upside before we get active.
Knowing the big picture trends and patterns at play along with major support and resistance levels (breakout levels) is crucial for success and piece of mind.

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The Short Ratio as a Stock Sentiment Indicator

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US Weekly Economic Calendar

THIS WEEK'S U.S. economic reports
time (et)	report	period	Actual	CONSENSUS forecast	previous
MONDAY, JAN. 28
8:30 am	Durable goods orders	Dec.		2.3%	0.8%
10 am	Pending home sales	Dec.		--	1.7%
TUESDAY, JAN. 29
9 am	Case-Shiller home price index	Nov.		--	4.3% (yoy)
10 am	Consumer confidence	Jan.		64.3	65.1
WEDNESDAY, JAN. 30
8:15 am	ADP employment	Jan.		165,000	215,000
8:30 am	GDP	4Q		1.0%	3.1%
2:15 pm	FOMC announcement	--		--	--
THURSDAY, JAN. 31
8:30 am	Weekly jobless claims	1/26		355,000	330,000
8:30 am	Employment cost index	4Q		0.5%	0.4%
8:30 am	Personal income	Dec.		0.9%	0.6%
8:30 am	Consumer spending	Dec.		0.2%	0.4%
9:45 am	Chicago PMI	Jan.		50.0	48.9
FRIDAY, FEB. 1
8:30 am	Nonfarm payrolls	Jan.		160,000	155,000
8:30 am	Unemployment rate	Jan.		7.8%	7.8%
9 am	Market PMI	Jan.		56.0	56.1
9:55 am	UMich consumer sentiment	Jan.		71.5	71.3
10 am	ISM	Jan.		50.7	50.7
10 am	Construction spending	Dec.		0.7%	-0.3%
TBA	Motor vehicle sales	Jan.		15.2 mln	15.3 mln

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