…and what a week it was. Without further ado, let’s just dig right in.

Equities

Both the DOW and S&P rallied back at the end of last week. We saw tech shares lead the way after some fine earnings reports from Google, Microsoft, and others. The chip makers struggled a little bit, but the real story was the horrible earnings by the financials.

Just about every investment bank and commercial bank came out with either net losses, or significant reductions in earnings. Goldman Sachs was the one exception, but that is a story for another day. The leader of rat pack was Merrill Lynch, who wrote down $8.4 billion in bad loans and had its worst quarter in its 93 year history. I’m not going to sit here and type up all of the earnings for all the big investment banks. Instead, I just want to show you a chart.

Forgive me for the awkward chart, I am new to this format, and not the most technologically savvy person. I will get the kinks worked out soon. Anyways…

This is an inverse ETF that shorts the DOW Jones Financials Index. The strength from the two weeks starting Oct. 8 is very apparent. As the chart shows, it seems that in the past couple of days momentum has begun to shift.

This is very true throughout the whole sector. There are two culprits. The first is that the general feeling on both Wall Street and Main Street is that the financials attempted to bottle up all of their losses in one bad quarter. They tried to ‘kitchen sink’ the bit. Well, I don’t think it takes a rocket scientist to look at these balance sheets and see that we haven’t seen a bottom, or anything close in the financials sector. I am waving my ‘investor beware’ flag for the financials sector going forward.

The main reason for the late week rally in all the equities, minus the transports, has been the market’s pricing in of a rate cut. I hate this time of the month. Bad economic data rallies stocks as investors hope for a rate cut, and visa versa. All I have to say, is be careful what you wish for. More on this topic going forward…

Precious Metals

My favorite two words…precious metals. I would like to inform you that I am heavily invested in PMs and PM stocks. I am a dollar bear and a PM bull. Knowing that, let’s dig right in.

Here is a very pretty chart for you:

Gold has been on an absolute tear ever since the rate cut in August, and it is starting to price in another rate cut. As a true PM bull you’d think I would be ecstatic, but I would be much more comfortable if we could see a healthy correction in PMs. I have been waiting for a correction for a week and a half, while PMs continue to push higher and higher. Now I promise you, just as the sun will rise tomorrow, we will see a correction in PMs. I can’t say exactly when, but the longer this market runs up the sharper the correction will be.

I like to look at the 50% Fibonacci retracement line when trying to figure out when to start buying on the dip — when the correction comes. Look for a pull back to the $730 area. It is always nice to have some cash on the table to buy these dips when they come about. Keep on your toes here.

Energy

One of the main drivers in the gold market has been the extreme price run in crude. I know this is last week’s analysis, but we did touch $93/barrel in overnight trading.

The obvious item to look at in this recent push higher is the geopolitical conflict between the Turks and Kurds along the Turkish and Northern Iraqi border. There is a pipeline that transports 1.1 million barrels a day of crude oil. A supply disruption would be downright nasty.

But the bigger picture here is that there isn’t excess supply like their used to be. The growth of the BRIC economies and other emerging economies has essentially gobbled up the excess supply. This notion of importance is that there just isn’t a lot of wiggle room in crude markets anymore. Despite what they say, OPEC CANNOT increase the production. If they could, they would obviously be pumping every freaking barrel of oil they could with prices at $90+ /barrel.

Off of the crude topic, let’s move onto the market for uranium. It seems that yellow cake has found an interim bottom at $75/lb after running up to nearly $140/lb.

Uranium was obviously not in market equilibrium at $140, but I also do not believe it is at market equilibrium at $75/lb. The growth in nuclear energy is just getting going. I have a long term price target of approximately $125/lb, but don’t expect it to run up there like it did earlier this year.  I have my eye on this market, and will be looking for some buying opportunities.

Forex Markets

Just as we saw an exciting week in gold, we saw a very exciting week for the currencies. The Euro is currently trading over 1.44, while the pound is holding the 2.06 handle steady. How about the parity between the loonie and the greenback? Parity…more like the loonie holding 1.04 and pushing 1.05. Parity is already old news. We saw the Japanese Yen move to 113 before retreating back to 114 and is holding there presently. The Aussie dollar has seen quite the run and is currently trading at the .92 handle. I believe parity is around the corner with this one.

We have euro-zone inflation data set to come out this week, as well as interest rate decisions by the U.S., Sweden, and Norway. It looks like the U.S. has at least a 25 bp rate cut coming, and Sweden and Norway could both be on the rate hike team. I see more strength in the Krone and Krona going forward.

As far as the U.S. Federal Reserve goes; like I said, look for a 25 bp move in the Fed Funds rate, but I would be paying more attention to the discount rate. We could see a 50 bp cut at the discount window.

The last item that I want to talk about in this week’s report is of extreme importance.  I would like to discuss the rather alarming TIC data.  Now I know that this is two week old news, but the shear relevance of this piece of news on everything we do requires that I write about it.

The TIC data that came out a couple of weeks ago, simply put, said that foreigners were net sellers of U.S. treasuries in August.  The implications of this are huge.  Allow me to break this down for you…

The U.S. budget and trade deficit are deep in the red.  Now most Americans assume that this is probably a bad thing, but they don’t really know what it means.  Essentially, for every dollar short we are in our current account deficit, we need to have one dollar of investment abroad.

Now if foreigners decide to not buy, or even sell our treasuries we have to pay the bill some other way, because it’s not like our government will suddenly stop spending money.  What occurs when foreigners aren’t buying enough treasuries to cover out current account deficit is monetization.  Essentially this is when the U.S. treasury creates bonds, and the Federal Reserve prints the money to pay for them.

Monetization is the government and Federal Reserve’s way of sticking the American consumer with the bill in the form of inflation.  In other words, if foreigners don’t cover our deficit, you, me, and all the other holders of American dollars are forced to pay the price, and you don’t have to look much past the grocery store or gas pump to notice these things.

Now I haven’t even told you the scariest part regarding the TIC data.  The data was from August.  Those are PRE rate cut numbers.  It’s really scary to think what those same sellers are doing now with their treasuries.  On that note…got gold.

What Am I Buying

Well, I’m not really buying anything right now…not exactly, but here’s the thing.  Everything is VERY expensive right now.  Oil, precious metals, and base metals are very expensive.  Equities are VERY expensive, despite what the pundits are telling you on CNBC.

I unloaded my short positions in the Financials and real estate sectors last week for a nice profit.  I am not holding anything short.  I am holding my PMs still and I am also sitting in some oil.  I do have some cash on the side at present to wait and see the aftermath of the FOMC meeting this week.

There are two things that can be considered reasonable investments RIGHT NOW.  Uranium is starting to look good again.  After two straight positive weeks, and I have an unconfirmed source telling me that we saw another $4 tick higher in the spot price, it’s not a bad place to have your money.

Even though I didn’t discuss it in this weeks report, I like natural gas.  We saw a sizable run up in the price of nat. gas over the past month or so, but this still has much more upside potential.  Remember that at present prices, it still costs about half the price to produce a BTU from nat. gas than it does to produce a BTU from crude.   That relationship can’t hold for long.

Well I hope you enjoyed the first of many weekly reports.  As you can see it is kind of a schmorgasborg of info.  I will always devote more time to issues that are more prevalent in the week of reference.  PLEASE feel free to email me questions, comments, disagreements, or recommendations.  You can always let me know if you have a topic of interest that you would like me to cover more in depth.  Also, for the most part, you can look for this report on Friday afternoons.  Sometimes things come up, but I will try and keep it as consistent as possible.

Regards,

Nick Jones

njfinancial@gmail.com