Juggling Dynamite

A major sell off is underway on over-inflated global commodities and stocks that were looking for any excuse to trade lower from liquidity induced mania over the past several months. A good excuse arrived in the form of weak global economic data over the past few weeks. But the inevitable contagion amongst risk markets is predictable thanks to a dominance of over-levered “players” who are being forced to liquidate assets in bulk in order to meet margin calls across the world. The Canadian market is being hit particularly hard of course, thanks to our rocks and trees focus; but Canadian financials–the last leg of support the past few months–is also faltering. The effect is that the Canadian market has now broken its Q’Eternity support as shown here below.  The 11,000 range becomes the next test area for potential support.

Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

“How tough was Margaret Thatcher? Have a look at this 60 Minutes interview from 1985, in which the “Iron Lady of Britain” lives up to her nickname. At the time, Prime Minister Thatcher was under fire from critics and flailing in public polls– yet she was positively unflappable in this interview, expressing confidence in her conservative politics and the need for “a firm hand” in her leadership of Britain”.

Whatever one may think of her politics, Thatcher was a remarkable character.

Here is a direct link.

Energy and metals are tumbling today, continuing a cyclical downtrend that has been in play since the consumer credit-fueled demand bubble burst in 2008. Gold and silver are leading the fall, down nearly 5 and 4% on the day, oil (WTI) is down nearly 3%.  It is particularly significant that this weakness is accelerating without the help of a rising U$ today, as the Greenback is so far unchanged.  A catalyst here may be Bank of Japan-induced sudden weakness in Japanese bonds this week, forcing levered players to sell other markets/assets to raise cash…yet another reminder of why highly levered global participants present a capital risk for all markets. North American bonds however are not being sold. Yields are sharply lower across the curve: the US 10 year at 1.72 and 30 year at 2.92. The flight to relative safety remains alive and well.

Whatever the precise cause or catalysts, lower commodity prices and interest rates are signaling deflation especially when coupled with weak employment and despite the kamikaze inflationary efforts of central bankers.

Mining companies are being particularly hard hit by the concoction of weak demand, soaring inventories and margin calls. Gold miners (XGD below) are down a further 5% today. This updated chart of the Canadian market internals tells the story, with the TSX down on the week but so far still propped up by the mirage of support from its over-valued financial sector. We are reminded of a reminiscent pattern of weakening internals at the outset of both the 2001 and 2008 bear markets–just before the TSX went on to lose 50% each time.

Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

The broad markets are wobbling over the heads of income investors huddled under the hope that dividend paying stocks will offer shelter from capital losses. Sadly, it has never worked that way.

Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.