A Market Top Been May Have Been Achieved As China Shares Fall Lower On Inflation Concerns

Financial Market Report for January 18, 2011

1) … China and some Asian shares fell lower as the risk of “inflation destruction” emerged today.
Shanghai Shares, CAF, -3.1%, China Financials, CHIX, -1.2%, China Small Caps, HAO, -0.7, Turkey, TUR, -1.1, Thailand, THD, -1.7, and Indonesia, IDX, -0.8%, all traded lower today on concerns that inflation in China will turn down investment return in China itself and in Thailand and Indonesia which import from China. Turkey turned down on concerns that a fresh wave of carry trade disinvestment will recommence as the global economy turns lower.  

The ongoing Yahoo Finance Chart of CAF, CHIX, HAO, TUR, THD, IDX, shows these shares turning lower today.  

2) Small Cap Consumer Discretionary, Telecommunications and Airline shares fell lower on a flattening yield curve and falling US Sovereign Debt.
Other shares falling today included: Frontier Markets, FRN, -1.2%, Small Cap Consumer Discretionary, XLYS, -1.4%, Telecommunications, VOX, -0.9%, Airlines,  FAA, -2.4% with United Continental, UAL, -3.3%, Alaska Air, ALK, -1.7%, Also falling lower were Internet Capital Group, ICGE, -1.2%, Chipotle Mexican Grill, CMG, -0.9%, Manufactured Housing firm, Cavco Industries  CVCO, 2.9%

3) The Morgan Stanley Cyclical Index, $CYC, fell 0.18% so far this week.
The Morgan Stanley Cyclical Index, Transportation Component, Ryder, R, -0.9%.
The Morgan Stanley Cyclical Index: Paper Component: International Paper, IP, -1.3%
The Morgan Stanley Cyclical Index: Homebuilders Component: Masco, MAS,  -2.5%
The Morgan Stanley Cyclicals Index: Consumer Component: Goodyear Tire, GT, -0.8%

The chart of the Morgan Stanley Cyclical Index, $CYC, shows the rally from the announcement of the EFSF monetary authority to leaders struggling to come to a decision to add to its funding today.

4) Base Metal commodity prices turn down on a falling 30 10 US Sovereign debt yield curve and falling Bond prices.
Base Metals, DBB, -0.8%.with Aluminum, JJU, -0.9%. Might base metal commodities, DBB, be turning lower with bonds, BND, -0.1%? Base metals, DBB, turned lower at the end of 2010; and Bonds, BND, turned lower when QE 2 was formally announced in early November, 2010.

The news regarding base metal prices has been quite inflationary; the only reason for their decline can be a flattening 30 10 US sovereign debt curve and falling bond prices.   

A flattening 30 10 US sovereign debt yield curve, $TYX:$TNX, that comes with a 30 Year US Interest Rate, $TYX, is now causing disinvestment from the base metal commodities, just as it it did to disconnect the gold mining stocks, GDX, from the price of gold, GLD, as seen in the chart of GDX:GLD   

In summary, the 30 10 Yield Curve, $TYX:$TNX, flattened as the 30 Year US Government Bond, EDV, fell 0.9% and the 10 Year US Government Bond, TLT, fell 0.5%. The Flattner ETN, FLAT, fell 0.9%.

5) A number of shares and sectors rose today.
Real Estate, IYR, made a triple top today.

Energy, XLE, rose and Exxon Mobil, XOM, rose to 78.71.

Energy services, OIH, rose and Transocean, RIG, rose.   

Dow Jones Energy Services, IEZ rose, and National Oilwell Varco, NOV rose

Small Cap Energy Shares, XLES, rose, and Devon Energy, DVN, rose.

Wind Energy, FAN, and Solar Energy, TAN, rose.

Nasdaq Clean Energy, QCLN, and S&P Clean Energy, ICLN, rose.

Canada Small Caps rose, CNDA, forming a lollipop hanging man candlestick.

Internet Retailer, Amazon, AMZN, rose.

Semiconductors, XSD, rose manifesting a questioning doji candlestick.

Mosaic, MOS, and Potash Corp, POT, rose, taking Agriculture Equities, MOO, higher.

Uranez, URZ, and Dennison Min, DNN, rose taking Uranium, URA, higher.  

Iron Ore producer, Cliff Natural Resources, CLF, rose, taking Metal Manufacturing, XME, and Steel, SLX, higher.

The UK shares, EWU, Russia, RSX, the European Shares, VGK, and Germany, EWG, rose to new rally highs.

The European financials, EUFN, Austria, EWO, Spain, EWP, and Banco Santander, STD, rose.

Barclays Leveraged S&P,  BXUB, rose manifesting a lollipop hanging man candlestick.

Credit providers American Express, AXP, and Discover Financial Services, DFS, rose to a rally high.

Mortgage Reits, REM, rose to a rally high.

Nasdaq Community Banks, QABA, rose to a rally high.

Leveraged Buyouts, PSP, rose to a rally high.

Insurance Companies, KIE, rose to a rally high manifesting a lollipop hanging man candlestick.

Global Financial Companies, IYG, rose to a rally high manifesting a lollipop hanging man candlestick.

Financial, XLF, shares fell lower: Bank of America, BAC, Dow Financial Services, IYG, Banks, KBE, small cap revenue shares, RWJ, and the too large to fail banks, RWW, traded lower.

6) The Euro failed to rally further, as the EU finance ministers delay agreement on increasing bail-out fund.
The Euro, FXE, closed up 0.07% at 133.29 which is basically the December 13, 2010 level where the leaders met in summit and failed to come to a comprehensive solution to the European Sovereign Debt and Bank Debt crisis; with the leaders simply kicking the can down the road as John Mauldin related in Safehaven.com article.    

At yesterday’s meeting in Brussels, European finance ministers failed to reach agreement on the future of the European Financial Stability Facility (EFSF).

Open Europe relates: “The WSJ quotes Belgian Finance Minister Didier Reynders saying that, “We are in a good process to increase the capacity of such a fund, not only in the quantity of money but the quality of interventions.” ECB President Jean-Claude Trichet joined calls to enlarge the overall size of the EFSF.

Handelsblatt notes that Germany has stalled agreement on upping the fund, quoting Finance Minister Wolfgang Schäuble saying, “The market developments in the past week have, thank God, taken any urgency out of these discussions. Currently the bail-out plan is not under stress”. However, the paper’s EU Correspondent Ruth Berschens suggests that it is all but agreed that the ‘effective firepower’ of the EFSF will be raised at the EU summit in March to €440bn from around €250bn, with stronger countries taking on a greater burden in guaranteeing the fund. FAZ reports that Austrian Finance Minister Josef Pröll has said that he won’t accept a move that would only place extra demands on the eurozone’s richer countries.

El Pais reports that Germany is asking for more fiscal discipline in return for any changes to the EFSF. Meanwhile, a Reuters poll of banking analysts found that most expect the EFSF to be increased by €260bn to €700bn. The FT reports that last week the ECB purchased the second highest weekly amount of eurozone government bonds since July 2010. At yesterday’s bond auction Spain sold €6bn at record interest rates of 5.6%, reports El Pais.”
Handelsblatt FAZ Die Welt 3 Irish Independent Irish Times Irish Times 2 Washington Post Zero Hedge Zero Hedge 2 Euractiv El Pais 2 IHT Times FT FT 2 FT 3 FT 4 FT 5 Expresso Expansion Expansion 2 European Voice Reuters Reuters 2 WSJ Bloomberg Independent WSJ Telegraph BBC El Pais RP

7) Inflation is seen to be sky-rocketing; “inflation destruction” and “currency deflation” coming on the heels of higher sovereign debt interest rates, will be the two factors driving stock prices lower in the “age of delveraging”, which commenced when the bond vigilantes sustained the Interest Rate on the 30 Year US Government Bond, $TYX, above 4.0%.

Graham Summers of Phoenix Capital Research relates: “Inflation is exploding worldwide, which means paper, money in general is going to be worth less and less on its way to worthless.”

Martin Hutchinson of Money Morning relates: “Furthermore, thanks to several different forms of “quantitative easing,” these countries will also tend to print more money than they should. This means that inflation, already surging in emerging markets like Brazil, India and China will pretty soon become a major worldwide problem.”

Agora Financials 5 Minute Forecast: “The year 2011 is the year when inflation will play the role of wrecking ball,” Chris declares.

“Emerging markets have been a vital part of the investment story of the last decade, for sure. Yet rising food and energy prices pose a big risk to them.

“In India, food prices are at their highest levels in more than a year, rising 18%. The dabbawalla, when he is done delivering lunchboxes, trots off to the market and finds that the price of onions has doubled in only a few months. Even the basics, like potatoes, have become expensive to the average Indian.

“In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it’s the surging price of coal that may prove to be China’s Achilles’ heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs.

“The basics like food and energy are like brakes on these economies.”

The Inflation Wrecking Ball has come to a number of US Coal Producing companies whose value has fallen more than the coal, KOL, group; these include Alpha Natural Resources, ANR, and Arch Coal, ACI.

Alpha Natural Resources, ANR,

Arch Coal, ACI.

The wrecking ball has already come to cement manufacturer, Texas Industries, TXI.

Inflation destruction is aggressively at work in China Materials, CHIM.

theyenguy defines Inflation Destruction as the fall in investment value that comes from inflation going over a threshold to threaten to job creation, social order, and food security. Once Inflation Destruction commences in a nation it spreads like a virus and infects all stock asset classes globally as is seen in the fall of investment value in China Materials spreading to US Coal Producers. Inflation Destruction accompanies Debt Deflation. Both operate together to destroy all forms of fiat wealth and transition the world from an age of leverage and economic growth … and into an age of deleveraging and economic contraction. Thoughtful investors are those who invest in and take possession of gold and silver bullion.

Evidence of inflation destruction comes the chart of the 30 10 US Sovereign Debt yield curve, $TYX:$TNX, flattening, turning the gold mining stocks, GDX, lower with the 30 Year US Government Bond, EDV, in November 2010 immediately after the announcement of QE 2, and then in December with the failure of the European Leaders to come to a comprehensive solution of the European sovereign crisis, and then again in January 2011. Inflation destruction came to China Materials, CHIM, with the announcement of QE2, then again in early January 2011, and then again January 18, 2011, as inflation reports flooded the news.

R.D. Bradshaw writes in Gold Seek article The Goldsmiths Part 1: The Nov 2002 “Radio Liberty” (p. 4-5) quoted financial advisor James Dines who wrote:  “Money is modern society’s most important commodity:  the fulcrum of every financial transaction.” … “Those who corrupt money are corrupting society right down to its most basic level, as cancer corrupts the cells of the body at the genetic level…the Eastern Roman Empire founded by Constantine lasted 1,000 years beyond the fall of Rome, probably because the beasant maintained the same value for over 800 years without inflation.  Destruction of this currency in 1282 A.D. coincided with the Eastern Roman Empire’s downfall.”

I fully expect that the US Dollar, $USD, and the Euro, FXE, as well as the world’s other major currencies, DBV, and the emerging market currencies, CEW, to all experience competitive currency deflation, that is competitive currency devaluation, at the hands of the currency traders.  

The US Federal Reserve and the European nations have lost fiscal sovereignty, as bond vigilantes called interest rates on world government debt higher. The former lost debt sovereignty with the announcement of Quantitative Easing 2 in Novemeber, and the Interest Rate on the 30 Year US Government Bond, $TYX, being sustained above 4%; and the latter lost debt sovereignty when Mrs Merkel called for a default default mechanism.

Europe is most likely at an inflection point today January 18, 2011, with the European Financials, EUFN, having rallied as much as they can, to close at 23.04. Debt Deflation, that is currency deflation, and now Inflation Destruction, will likely commence a sell off in these banking shares as well as the European shares, VGK.

In as much as leadership has failed to provide a comprehensive solution to sovereign crisis, The Telegraph’s political commentator, Peter Osbourne, has called for destroying the sovereignty of individual European nation states in order to save the Euro. And he has implied reviving the power of Charlemagne who led the Holy Roman Empire in article The only way to save the euro is the destruction of its members.

The European Parliament New Service Former German foreign minister Joschka Fischer and other European Federalists are arguing for the creation of a ‘United States of Europe’ for the common good.

Leigh Phillips in the EU Observer reports Herman Van Rompuy as communicating Europe is ‘Fatherland of peace’: “EU Council President Herman Van Rompuy has issued a robust defence of the European Union in the face of growing “suspicion and fear”, arguing that the bloc must not be seen as a new “Moscow”, but instead, the “Fatherland of peace.” … “Sometimes, in the heat of the debate, the image of ‘Brussels’ is linked to the role of ‘Moscow’ in the Cold War. One should not accept this comparison,” he declared in a speech to students at the University of Warsaw.”

I believe that out of Eurozone inflation destruction and debt deflation, that a European Chancellor, that is a Sovereign, and a Banker, that is a Seignior, will arise to govern Europe.  A Sovereign, such as Herman van Rompuy, Angela Merkel or John Redwood or Tony Blair. And a Seignior, such as Wolfgang Schäuble, or Olli Rehn, or Jean-Claude Trichet, or Gordon Brown or Jose Manuel Barroso, or Giulio Tremonti or Jean-Claude Juncker will rise to provide credit and moneyness.

The Seignior will likely have fiscal sovereignty to control deficit spending, enforce internal country devaluations, provide a common EU Treasury for both taxation and transfer payments, assure mutual guarantees of the EU debt, and as Timothy Geithner called for, implement unified regulation of banking globally. All seigniorage, both credit and fiscal will come and go through the Seignior, who will make decisions on where money is spent. The Seignior will coordinate all aspects of economic policy, includes taxes, wages.


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