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I wanted to title this post, "Control Panel: Been up so long it looks like down to me."*

Riding on an immense wave of liquidity pumped by the Federal Reserve, the European Central Bank and the Central Bank of Japan, all asset prices have been strongly rising at the same time, instead of competing for limited investor capital, as they would do in a free market.

All assets have been "pedal to the metal," setting new highs, for so long.

All measures of investor risk-on have been pegged against the stops, setting records repeatedly.

Last week, there was a slight frisson of fear. The Fear & Greed Index moved down slightly into "Fear" (42).

The price of gold fell. Several measures of stock market bullishness fell slightly. The U.S. Treasury price climbed, smacking down Treasury yields after a slight run-up (normal in spring as the mortgage season increases the demand for lending).

The "Risk" Control Panel of ratios shows risky assets (stocks, junk bonds) fell relative to "safe" assets such as the USD, Treasury bonds and gold.

The "mungofitch Lagged MA" fell back from its high.

The short-term chart shows a break in the upward trend that is a little startling. However, the long-term trend lines are still strongly trending upward. This week's moves were just tiny blips -- noise within the trend. The moves were small compared to previous market breaks in 2010, 2011 and 2012, and nothing compared to "the Big One" in 2008.

We have been so high from so much monetary crack cocaine that even the slightest pause in money pumping (as in the past month or so) has the addicts tweaking.

All the risk measurements have been pegged at the top of the charts for so long that this slight downward move made me think, "Been up so long it looks like down to me." You really can't call gold at $1400 "cheap" or a bullish percent of 75% "low."

Like everyone else, I was upset by the tragic terrorist bombing in Boston, but clearly the baying of dogs after an escaping teenager (however dangerous) didn't sway the market. Neither did the even more deadly explosion at the fertilizer plant in West, TX.

No, the roots of the market drop, small as it was, had its roots in two issues: the real economy of the U.S. and China and the drop in the rate of increase of the money supply.

The price of Doctor Copper fell again and is now at the bottom of its 2-year channel.

China importers buy spot copper, push premiums to 16-mth high

Fri Apr 19, 2013

Chinese importers of refined copper have rushed to buy the metal from bonded warehouses in Shanghai and the international market following a near 6 percent fall in London Metal Exchange prices this week, pushing spot premiums to 16-month highs....

"We resold all (our) bonded stocks this week ... more than 10,000 tonnes. We are looking to import spot copper but the problem is there is not much available," a trader at a Chinese trading house said....

A purchaser for a large copper tube producer said his company was looking to import spot copper in May and June due to low prices and having received more orders than expected....[end quote]

Unlike gold, copper is fabricated into building supplies on a grand scale. There has been a lot of talk about a slowing Chinese economy, but if the economy does not slow and if the U.S. economy, especially construction, increase, the price of copper may rise suddenly from this low point.

Housing starts have been increasing, although the absolute level is still at the low of previous recessions. The point for commodity investors is not necessarily how many starts but how the demand for the commodity changes compared to the deliverable supply. If fabricators are forced to pay increased spot prices, the effect will be inflationary for the consumer -- but might be an opportunity for speculators. However, if economic growth actually does slow, the price of copper could continue its downward trend.

The money supply stagnated again this week. MZM (the big boyz money supply) and M2 (the broad household money supply) fell a smidge. They have been stagnant in a tight range since the start of 2013.

National Financial Conditions have been loosening from their already loose level. The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Lending supports leveraged speculation in the asset markets.

On the fiscal (demand) side, Personal Saving is falling and Personal Consumption Expenditures are rising. Government deficits are very high despite a slight attempt to restrain them. These provide demand which stimulates the real economy and supports record high corporate profits.

P/E ratios are relatively high, but not in bubble range despite record stock market indices due to the record high corporate profits.

International stock markets are behaving quite differently than the U.S.

Investors in international stock funds should be aware that foreign markets are far more volatile than the U.S.

The USD reversed from its high to stay within its long-term channel. This might be a good time to buy foreign currencies, though the effect is small.

The frisson of fear that touched the markets last week is just a tiny bit of noise in established trends....or it is the start of a new trend?

If the Fed is determined to stabilize the money supply -- as a toe in the water to see if it is safe to begin decreasing it to normal levels -- the upward trends could dramatically reverse.


* For those who are too young to remember, this is a tongue-in-cheek paraphrase based on the title "Been Down So Long It Looks Like Up to Me," a novel by Richard Fariña.$INDU,$S...$IRX,$US...$USD,$SP...$SPX&p=D&yr=1&m...$STOX5E,...$HSI,$ST...$USD,$XA...
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