Volume I, Issue 39

US GOVERNMENT ACTION HALTS THE 2008 MORTGAGE MARKET MELTDOWN. WHEN A PROBLEM BECOMES VERY SEIROUS, ENOUGH ENERGY IS EXPENDED TO SOLVE IT. A CHART IS WORTH A THOUSAND OPINIONS. BUY SIGNAL FOR OIL.

The action in financial markets last week, and the responses to it was history in the making. Major global corporations falling like dominos, US Treasury Bill yields falling below zero percent, a run on money market funds and bands on short selling are events that maybe occur once in a lifetime. Yet, by Friday's close, the US S&P 500 up for the week and the Canadian S&P/TSX was at a two-week high.

Since any and all interest costs are tax deductible in the US, the American financial system encourages the accumulation of debt. However, they also have a very good record of getting themselves out of a financial mess too. After analyzing the events that have occurred in North America during my 27 years of experience in the investment business, I have concluded that, when a problem gets bad enough, sufficient energy is expended to solve it. High inflation in the 1970's, a sever recession in the early 1980's, the US Savings and Loan Crisis in the late 1980's, the government deficits in Canada during the 1990's, and the bear market after 2000 were all problems that seem insurmountable. Yet, because the problems were so significant, the regulators and politicians received the support of the public to take tough action to solve it, which they did. Now that the current problems have become so serious, I do not see any reason why the action that will be taken will not eventually lead the markets and the US economy out of this crisis as well.

It is not necessary to repeat all the information and the opinions you can find in the media. What I would like to emphasize is a significant fact that seems to be all but ignored amid the frantic action. As mentioned previously, the BKX (an index of US banking companies) just about always leads the US markets, which, in turn leads global markets. As you can see in the chart below, the BKX bottomed on July 15 low, even though the SP 500 and DJIA made new lows for the year. By the end of last week, the BKX was 79% above the July lows! The only reasonable explanation for this is that the worst case scenario was factored into most of these companies during July. Market prices often reflect what will happen six to 12 months ahead.

Even at the lows last week the US Banking Index was 26% above the July lows. It closed the week 79% above the July lows. This implies that we could have seen the lows in the markets for this correction.

Since the BKX has successfully retested the July low with flying colors and has moved higher even as the markets made new lows, it could mean that the corrective phase which began last summer is over. In the charts below you can see that the long-term trend charts for BKX have also issued a buy signal for US bank stocks by turning green. This is the first time the BKX has turned green since the spring of 2007. Something is different this time. Therefore, we might well have seen the lows for the US and Canadian markets last week, even though there could be volatility and little news of economic improvement for months to come.

As an example of reflecting in the future, the index of US homebuilding stocks (XHB) peaked in 2005, from its July lows even though I cannot bring to mind any positive news on the housing front.

The other major positive factor that has not been emphasized is the massive global stimulus provided by, what was for some, a surprising decline in oil prices to $100 per barrel. (This summer, prominent New York analysts were calling for oil to soon reach $170 shortly before you received a special update from me on July 10 stating that oil prices were peaking). Gasoline, natural gas prices and airline surcharges are finally starting to come down. Some have said this is equivalent to a $100 billion stimulus program for the US alone. We will need a little more evidence that the roller coaster ride this summer has come to an end after a wild ride. I will keep you informed.

Bonds - Previous updates forecast that bond prices were peaking. It looked like that happened last week.

Commodities - The oscillators gave a buy signal for the TSX and energy stocks on Aug. 25, and a buy signal for gold and gold stocks Sept. 15, which was accurate in a spectacular way. As of Friday, the TSX was down 2.9% and XGD was down 8.7% from the buy signals. Since the buy signal last week gold was 10% and XGD was up 16%. Today a buy signal was issued for oil and fertilizer stocks.

Currencies - Buy signals have been given the CAD$ and the euro. The USD$ seems to have peaked. A buy signal was also given for the euro vs. yen. The reduction of risk seems to have ended for a while.

In this long-term trend chart of the BKX, you can see the sharp rise since the July 15 low (in spite of share prices collapsing for many major firms) has turned green for the first time since the spring of 2007. This has positive implications for the overall market trends in the US and Canada. It is different now.

By the end of last week the SP 500 erased all the losses incurred after Sept. 3. After such a big rise last week, there is bound to be some moves to the downside before a move to higher levels.

Even after days of bone jarring declines, the TSX made up for all of the losses earlier this week, the small 40 point loss the week before and even part of the loss in the days right after Labor Day. According to the oscillator, the trend is just in the early stages of a rise. There is bound to be some consolidation after the Friday's 848 point rise.

According to the long-term oscillator, oil stocks are still in the early stages of an up trend. The US financial system is reflating (adding massive liquidity to the economy) to help the mortgage and real estate market, which is good for economic growth and commodities.

Last Monday, the long-term oscillator gave a buy signal for gold and gold stocks, which was accurate in a spectacular way. Since last week's buy signal, gold was up over 10% and the TSX Index of Gold Stocks was up 16% in four days.

Fertilizer stocks like agrium and potash now have a major weighting on the TSX. According to the long-term oscillators, the sharp correction is over and these stocks should recover.

US and GOC bond prices peaked along with the fear in financial markets and dropped sharply by weeks end. This has been forecast in these updates for several weeks. The sharp rise in yields is another sign that fear is subsiding and the flight to quality is reversing. Reflating the financial system is negative for bonds.

After a major decline from $145 to $91 per barrel, the long-term oscillator has finally issued a buy signal for oil. A sell signal was issued on July 10 at $130 per barrel. Since oil had a speculative bubble, this could be more of a stabilizing phase than a rise to new highs. Time will tell. Today's big rise is likely an aberration due to future expiration.

Gold rose from 10.4% from $787 at the time of the buy signal given last Monday to $869 on Friday. This up trend is in the early stages. Reflating the US economy should weaken the US dollar, which should help gold and other commodity prices to move higher.

After a sharp decline during the summer, the euro appears to have reached a low and is in an up trend again.

There was a sharp reduction in leverage and the carry trade over the summer. According to this long-term oscillator, the trend has also come to an end.