What we do upon some great occasion will
probably depend on what we already are. What we are will be the result
of previous years of self-discipline. — Henry Parry Liddon
1829-1890, British Theologian
Petrol prices are up 62% from their average
low price of 1.61, while crude oil prices are 54% below their old
highs. Thus it appears that when crude oil trades back to the 147
mark, petrol prices will most likely be trading at levels in excess of
5 dollars per gallon. If we couple this with the fact that worldwide
supplies are dwindling at a rapid rate and that oil companies have
drastically slashed their exploration budgets, the long term
projection is for the cost of petrol to reach extremely painful
levels.
While we can draw many conclusions from the
above charts the main one to focus on is inflation. These charts are
clearly indicating that inflation is the next major threat and not
deflation as most government economists are projecting. Once again, we
would like to warn our subscribers that they should cut down on all
levels of debt, use excess money to purchase bullion and commodities
related stocks on all strong pull backs. The next 3-6 years are going
to bring about unprecedented changes.
Bonds
Look at the dramatic turnaround in 30 year
rates, from a low of roughly 2.5% in Jan, they spiked to 4.75% and
this is occurring when the Fed is keeping short term rates at close to
zero percent. What do you think will happen when the Feds are forced
to raise long term rates as a result of foreign investors demanding a
higher rate of return in order to compensate for the falling dollar?
This chart clearly also illustrates that the real estate market is not
going to mount a long term recovery any time soon.
Consider the following facts:
Toll brothers one of the leading home
builders reported that its revenues are down approximately 50% for the
year. The MBA mortgage applications' index has fallen over 16% for the
week ending May 29; the week before this, it experienced another 14%
decline. Mortgage applications have dropped by nearly 50% and the
latest figures on the refinancing index indicate that it is down over
24%. Not only are fewer individuals applying for mortgages but banks
are making the qualifying process much harder now, thus not everyone
that applies gets an approval, unlike in the good old days where you
only needed to scratch X on the signature line, and you were approved.
The message is clear avoid the real estate
sector.
Logic dictates that interest rates will
continue to rise and that the bond market will fall to pieces. In the
long run, this is true, but in the short term, we actually expect
rates to drop again and possibly test their lows one more time and
bonds will most likely rally and test or take out their old highs
before the bond market falls apart. One other long term negative
factor is that America’s biggest debt buyers China and Japan are now
deploying less and less money into the bond market, they do not
believe (and rightly so) that the US is doing all it can to defend the
dollar.
In the next 6-12 months, we are looking for
bond prices to rise again (interest rates will drop in the process as
they trade in the opposite direction to bond prices) and possibly put
in new highs but at the very least they will test their recent highs.
For this scenario to remain valid bonds should not trade below 112 for
more than 3 days in a row, if they do trade below 112 for more than 3
days in a row, the intermediate outcome will most likely change and
instead of rallying to new highs bonds will at the most test the lower
limit of their old highs. A break past 126 for more than 5 days in a
row will be the first sign that bonds are on their way to at least
test their old highs.
Assuming that the current picture remains
valid and bonds rally to new highs, the next move will be for bonds to
put in a very long term top and then start their long decent down. We
expect this market to slowly break down and eventually a crash, which
will eventually drive interest rates to the 15-18% ranges and possibly
as high as 25% before the dust settles down. Those that invested in
the bond market should use the upcoming rally to get out of this area
for this will be your last chance. If you have a mortgage and you
cannot sell the property or do not want to sell the property, then
take advantage of the low interest rate environment to refinance your
mortgage at a fixed rate. Avoid getting into real estate, unless its
farmland and make sure you get a good deal on it. Do not rush into
anything; the buyer is now in the driver’s seat so negotiate for the
best possible deal.
We are expecting the bond market to mount
one final rally that should at the very least result in a re test of
the old highs if not in a series of 52 week highs.
Where one person shapes their life by
precept and example, there are a thousand who have shaped it by
impulse and circumstances. — James Russell Lowell 1819-1891, American
Poet, Critic, Editor
All charts supplied courtesy of
www.prophetfiance.com,
www.stockcharts.com and
www.gasbuddy.com
