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Free Samples

The following excerpts from TSI commentaries should give those who are unfamiliar with our service a taste of the sort of financial-world analysis provided on a twice-per-week basis to our paying subscribers. Note that during a typical week our subscribers receive two market reports, with each report generally containing 2500-3500 words and 7-12 charts.

This page will usually be updated every Tuesday with one or more excerpts from commentaries posted within the preceding 4 weeks.

Date posted as sample	Commentary Excerpt
22-Jul-08	From the 16th July 2008 Interim Update: Gold Stocks The XAU spiked up to the vicinity of its March high near the start of trading on Tuesday and then reversed lower. Refer to the following daily chart for details. As noted in Tuesday's email alert: "Both short-term gold stock scenarios recently discussed at TSI -- relentless strength for a few months as per the "1973 Model" or choppy action during July-August followed by a big rally during the final 4 months of the year -- remain feasible." The following chart shows that Royal Gold (RGLD) broke above its October-January 'double top' early this week, but was unable to sustain the breakout. It seems that some additional 'backing and filling' will be required before RGLD heads to new highs. Our guess is that this backing and filling process will, at worst, result in a test of support at $32. If we weren't already long we'd buy some RGLD in the low-$34 area. In the 25th June Interim Update we briefly discussed Gold Fields Ltd. (GFI) and speculated that "the recent quick plunge from short-term lateral support at $13 to the intermediate-term channel bottom just below $11 could prove to be the final capitulation in GFI's 2-year bear market." The stock has since steadily recovered and, as evidenced by the following daily chart, moved back above $13. If it can build on recent gains then June's plunge below $13 will be confirmed as the "final capitulation". GFI probably won't make its way back into the TSI Stocks List, but it's a reasonable candidate for investors who are looking for substantial leverage amongst the major gold stocks. For someone who is heavily invested in the gold sector, the following chart of the gold/SPX ratio (gold relative to the broad stock market) is probably the most important chart in the world right now. It shows that gold/SPX moved to a new high for the bull market on Tuesday, but then reversed lower on Wednesday. If gold/SPX makes a sustained move to a new high (above its March high) then the gold-stock indices will surely follow. On the other hand, if the broad stock market begins to trend higher in gold terms then there will be little chance of the gold stock indices breaking out to new highs. We think there is a good chance of the gold/SPX ratio moving to new highs within the coming two months, even if the SPX rebounds in US$ terms.
15-Jul-08	From the 9th July 2008 Interim Update: Longer-term: still too much denial about the economic backdrop As discussed above, the stock market looks very oversold on a short-term basis and will probably rebound for a few months. However, there still appears to be way too much optimism about the economic outlook to allow for a major stock market bottom at this time. Or, to put it more aptly, we don't think there's currently enough economic realism for the coming stock market rebound to be something other than the counter-trend variety (a rebound within a bear market). Importantly, there's still plenty of debate about whether the US economy is in recession. A popular view, for example, is that the US economy could avoid a recession if only the oil price would quickly fall back below $100/barrel. However, this view is an example of putting the cart before the horse in that a severe economic downturn is one of the likely drivers of a substantial decline in the oil price. Another popular view is that the US economy may well enter a recession, but the "emerging market" economies will continue to power ahead. This view makes no sense for several reasons, including the fact that the most important emerging markets have serious inflation problems that will have to be addressed via tighter monetary conditions. Interestingly, the perception that the emerging markets will continue to grow strongly is being used to support continuing 'bullishness' about industrial commodities, but it's the sharp rise in commodity prices that has signaled the inflation problems mentioned above. As a result, large declines in food and energy prices will probably have to occur before China and India return to their steeply-sloped growth paths. Prior to the end of the global equity bear market we suspect that there will be widespread resignation that the US economy is immersed in a severe recession and that the emerging markets are not the 'growth havens' they were made out to be.
15-Jul-08	From the 7th July 2008 Weekly Market Update: Gold Stocks During any given week there's no telling whether the gold sector and the broad stock market will move in the same direction or in opposite directions, but over the past year they have been TRENDING in opposite directions. This inverse relationship is depicted by the following chart comparison of the HUI and the S&P500 Index. It seems clear that new trends -- up for the HUI, down for the SPX -- commenced in early June when the HUI successfully tested its May low and the S&P500 broke below the bottom of its upward-sloping channel, although there isn't yet anywhere near enough information to draw channel lines for these new trends. The "1973 Model" suggests that a choppy rebound in the S&P500 Index over the next 2-3 months will be accompanied by a very strong rally in the gold sector, but we shouldn't blindly assume that today's market will continue to mimic the performance of the 1973-1974 market. One alternative is that gold and gold stocks will be held back for a month or two by a sharp decline in the oil price. There's no fundamental reason why a sharp decline in the oil price should hurt the gold sector -- on the contrary, it should help because gold miners are oil consumers -- but so many traders have been conditioned to believe that a rising oil price is bullish for gold that gold-related investments will probably be sold off during the initial phase of an intermediate-term oil correction. One of the most important influences on the gold sector is gold's performance relative to the broad stock market (as measured by the gold/SPX ratio). This makes sense because it's not reasonable to expect the public to increase its demand for gold and gold-related investments unless gold is out-performing the stock market. The gold/SPX ratio's influence on the HUI is evident on the following chart. The chart shows that over the past 4.5 years there have been a few short periods when the HUI and the gold/SPX ratio have diverged, but in those cases they have always moved quickly back into line with each other. The current situation is that the gold/SPX ratio has moved to within 6% of its March peak. If gold/SPX makes a sustained break to new highs for the year then the HUI should follow with new highs of its own.
08-Jul-08	From the 7th July 2008 Weekly Market Update: *The Mythical Wage-Price Spiral* Some central bankers have recently expressed concern that a wage-price spiral could develop. "Wage-price spiral" is the name given to a feedback loop in which rising prices of consumer goods cause workers to demand higher wages, which cause the producers of goods to put up their prices (to offset the higher cost of labour), leading to demands for more wage hikes, and so on. The price of labour is typically the last price to rise during an inflation cycle and looks set to rise substantially over the next few years. However, there can never be any such thing as a "wage-price spiral" because it amounts to saying that rising prices cause rising prices, which is, of course, ridiculous (outside the world of momentum traders, that is). A general rise in prices must be supported by a preceding rise in the supply of money. By the same token, if the supply of money stops rising then there will be a definite limit as to how much the corporate world can increase its prices because at some point the consumers of its products won't have the money to pay the higher prices. The mythical "wage-price spiral" is just another aspect of the propaganda designed to direct attention away from the true cause of purchasing power loss.
08-Jul-08	From the 2nd July 2008 Interim Update: Gold There are times -- the past three months, for example -- when it doesn't feel like it, but the commodity bull market is first and foremost a gold bull market. What we mean is that the primary driving force behind the commodity bull market is the degradation, via inflation, of the official currencies of the world. Currencies are becoming worth less and the prices of commodities are rising in response. Commodities are the major beneficiaries of this trend due to their relative scarcity brought about by two decades of under-investment in commodity production. Most people don't realise that the commodity bull is primarily about the degradation of money. Instead, they attribute the massive price rises to non-monetary causes such as the gradual shift of hundreds of millions of Chinese and Indians from the ranks of the poor to the ranks of the middle class; as if the peasants in the great "emerging markets", having been content with their poverty for decades, suddenly woke up a few years ago and decided that they would like to be better off. As a result of the general belief that non-monetary causes are behind the rising prices -- a belief, by the way, that central bankers encourage at every opportunity -- gold's performance relative to some industrial commodities has not been impressive to date. However, we expect that two things will happen over the next few years to shift the relative performance strongly in gold's favour. First, global economic growth will slow and lead to various government stimulus packages that will act to further reduce the rate of real growth (as discussed earlier in today's report), leading to increased investment demand for the ultimate counter-cyclical investment (gold). Second, currencies will continue to lose purchasing power (the prices of most goods and services will keep rising) while the rate of real economic growth slows, causing more people to realise that its an inflation boom and not a growth boom.
01-Jul-08	From the 30th June 2008 Weekly Market Update: Gold Stocks Current Market Situation Last Thursday's strong up-move in the HUI was a short-term bullish signal (as noted in last week's Interim Update, all the HUI had to do to break out of its channel was close above 422). The top section of the following chart shows that there is resistance at 460-480 that could limit the near-term gains, but the price action during the final two days of last week was a clear signal that the correction low is in place. The bottom section of the following chart shows the HUI/gold ratio. HUI/gold bottomed in late April and has just made a higher low. A move above the May high would create a higher high and 'lock in' the trend change. The following charts show the upside breakouts achieved by Newmont Mining (NEM) and Kinross Gold (KGC) last week. It would not be surprising to see NEM and KGC pull back to around $50 and $22, respectively, at some point over the next few weeks to test their breakouts, but new upward trends are probably underway. Jumping into the major gold stocks that have just skyrocketed would, we think, be ill advised, but trading opportunities are certainly emerging within the gold sector. We identified an opportunity to buy Hecla Mining in the mid-$7 area in last Wednesday's email alert and an opportunity to buy Gold Fields Ltd. in the mid-$11 area in last Thursday's Interim Update. Another idea is presented below under "Updates on Stock Selections".
23-Jun-08	From the 23rd June 2008 Weekly Market Update: *Working off the excesses* Regardless of whether or not a huge run-up in price over a year or more constitutes a bubble, such run-ups are usually followed by bear markets, or periods of convalescence, lasting 1-3 years. The following set of charts shows two completed examples and one in-progress example of what we are talking about. The completed examples are the NASDAQ Composite Index, which peaked in March of 2000 and bottomed about 2.5 years later, and the homebuilding sector of the US stock market (represented on our chart by Toll Brothers (NYSE: TOL)), which peaked in July-August of 2005 and appears to have bottomed early this year. The in-progress example is China's stock market (represented on our chart by FXI), which peaked in October-November of last year. The above charts show markets that were clearly in 'bubble territory' when they peaked. Working off the excesses that develop during a stock market bubble typically takes years of time and a price decline of at least 70%, but even when a huge run-up in price occurs within the context of a continuing bull market it often takes years of 'corrective activity' before the stage is set for the next major upward leg. A good example is provided by the junior end of the gold/silver sector as represented on the following chart by First Majestic Silver (TSX: FR). We don't think FR was close to being in 'bubble territory' when it peaked in May of 2006, but the spectacular run-up to the peak set the scene for a very lengthy correction. While FR's stock price has been consolidating within a large contracting triangle over the past two years the company has been steadily increasing its production and in-ground resources, so much so that there is a lot more real value underlying an FR share today than there was at the May-2006 peak even though the stock price is now more than 30% lower. The correction could last a few more months, but the price pattern and the value accretion have put the foundations in place for the next major rally. Currently, the oil market and the coal and fertiliser sectors of the stock market are likely in the late stages of price run-ups that will be followed by bear markets or very lengthy corrections.
23-Jun-08	From the 18th June 2008 Interim Update: The Globalisation of the Natural Gas Market Natural Gas, unlike oil, has traditionally been a regional market, with local consumption being satisfied by relatively nearby production, although the increasing trade in Liquefied Natural Gas (LNG) is now making it more of a global market. Many energy analysts previously expected the increasing availability of LNG to result in more LNG being imported into the US and, consequently, a lower NG price, but it's not working out that way because a significant amount of the LNG that the US was expected to import has been 'bid away' by other countries. For example, this 19th April article notes that "...a tanker of liquefied natural gas, or LNG, pulling into port in Japan can command close to $20 per million BTUs, roughly double the price of the U.S. benchmark. As a result, the U.S. is having trouble attracting the imports it needs to supplement homegrown production." The article goes on to say: "...U.S. imports of LNG have slid over the past nine months to a five-year low, and natural-gas inventories are running relatively low. Deutsche Bank commodities chief David Silbert says that if the U.S. is unable to attract LNG supply this summer, prices could spike up sharply within a few months if a hot summer were to reduce the ability to build a cushion of gas going into next winter." A 29th May article in the NY Times makes similar points. Here's an excerpt: "A longstanding assumption of American energy policy has been that natural gas would be plentiful abroad, and therefore readily available for importation, as production falls off in North America, where many fields are tapped out. But some experts are starting to question that idea, saying natural gas could be subject to the same explosion in overseas demand that has made oil so expensive. As it is, the supertankers that were supposed to deliver cargoes of gas from Africa and the Middle East to the United States are taking them to places like Spain and Japan instead, pushing up gas prices and depleting the nationís stockpiles as the hurricane season approaches." It looks like LNG imports into the US will be about 30% lower this year than last, and that this reduction, combined with the fall in Canadian NG production, will offset the expected increase in US domestic production and leave the US market more vulnerable than usual to weather-related price spikes. We aren't interested in speculating on the weather, but due to our stakes in NG-producing companies we don't mind that almost all the weather-related risk in the NG market appears to be skewed to the upside at this time.
17-Jun-08	From the 16th June 2008 Weekly Market Update: Gold The following daily chart of August gold futures shows that the gold market ended last week at its 200-day moving average and marginally above its early-May low. This suggests that gold has either just completed a successful test of its May low and is about to rally or that it is about to plunge to new correction lows (with support at around $800 being a likely near-term target). We think the latter outcome is the more likely, but we do not in this case, and nor do we ever, rely on short-term predictions. Rather, we prepare ourselves for various possible outcomes. For example, we cannot confidently predict that gold will drop to around $800 in the near future, but we can unequivocally state that we will be buyers of gold bullion IF the price drops to the low-$800s. The potential for Fed rate hikes in response to the increasingly obvious inflation problem is not a serious threat to gold because the Fed cannot afford to implement genuinely tight monetary policy. We don't think that rising unemployment or other overt signs of economic weakness will prevent the Fed from hiking if the evidence of an inflation problem continues to mount, but the emergence of more problems within the banking system almost certainly would rule out anything more than a token rate hike. Keep in mind that the Fed exists to support the government and the banks, not to maintain the integrity of the currency or to promote economic growth. Our thinking has been that gold would be weak during the first few months of an intermediate-term US$ rally, but that once the euro bulls had been chased out of the gold futures market the gold price would be able to rally in US$ terms even while the US$ rallied against the euro. To put it another way: we haven't been, and still aren't, anticipating US$ strength; what we are anticipating is euro weakness. Despite last week's market action there is still plenty of uncertainty as to whether the euro is preparing to break out to the downside from its 3-month trading range. If it does break downward then the initial reaction of speculators will be to sell gold, but a sharp decline by the euro would be bullish for gold beyond the very short-term, especially if it is accompanied by a sharp decline in the oil price. The reason is that sharp declines in EUR/USD and the oil price would eliminate the perceived need for tighter monetary policy on the parts of both the ECB and the Fed. Lastly, note that a USD/EUR rally over the coming 3-6 months would be consistent with the "1973 Model" that we've been following since early this year. During 1973-1974, the best gains in gold and gold stocks occurred while the US dollar's exchange rate was trending upward.
17-Jun-08	From the 11th June 2008 Interim Update: Oil versus Oil Stocks Over the long-term the average major gold stock does not act like a leveraged play on gold because the natural upside leverage of the gold mining business tends to be offset by rising input costs, political/environmental issues, management missteps, and share inflation. However, over the intermediate-term a basket of major gold stocks usually will provide leveraged exposure to the price of gold by rising more than gold bullion during the intermediate-term up-trends and falling more than gold bullion during the intermediate-term downtrends. As a result, it generally makes sense for investors to favour gold stocks over gold bullion during the intermediate-term gold rallies. It's a different story altogether in the oil patch, though, in that the major oil stocks -- as represented by the AMEX Oil Index (XOI) -- tend to fare poorly relative to the commodity during intermediate-term oil up-trends and fare relatively well during intermediate-term oil downtrends. We've attempted to illustrate this relationship between oil and the shares of major oil-producing companies via the following chart comparison of the oil price and the XOI/Oil ratio. Notice that the XOI/Oil ratio tends to be either flat or in a downward trend when the oil price is trending upward and in an upward trend when the oil price is trending downward. We can think of two explanations for the apparently backward relationship between oil and the oil stocks that populate the XOI. First, there has always been a positive correlation between oil stocks and the broad stock market, so during those times when an increase in the oil price puts downward pressure on the stock market there will also be some downward pressure on the oil sector of the stock market. Second, the in-ground reserves of some of the world's largest oil producers have fallen as the oil price has risen, resulting in these stocks having progressively less "option value". In any case, our main reason for including the above chart in today's report is to show that oil is now close to a 10-year high relative to the shares of major oil-producing companies. In fact, over the past 10 years the XOI/Oil ratio has only been as low as it is today for a brief period during the first quarter of 2003 -- just prior to the start of the Iraq War. The XOI/Oil ratio is another way of showing how expensive oil is right now. It is, of course, quite possible for a very expensive item to become even more expensive before it starts to get cheaper, but there is clearly a lot of downside POTENTIAL in the current oil price.
09-Jun-08	From the 4th June 2008 Interim Update: *Bonds* The following daily chart shows that T-Bond futures are still sliding lower within the confines of a well-defined channel. We are anticipating an upward reversal this month, but to create some interesting upside potential the bond market will first have to become more 'oversold'. On a longer-term basis, one of the biggest risks facing the US Treasury Bond market is the growing evidence of an inflation problem in Asia (especially China). Here's why: For many years China and other Asian countries have provided immense support to the US bond market in that they have purchased huge amounts of US$-denominated debt securities in an effort to dampen the gains in their respective currencies. For example, to keep its currency (the Yuan) at an artificially low level relative to the US$, China's government has purchased hundreds of billions of dollars of US Treasury and Agency debt. Importantly, an intermediate step in this process is the printing of new Yuan (the government buys US dollars from banks using newly-printed Yuan). However, with the effects of rampant monetary inflation now becoming blatantly obvious in the prices of essential items such as rice, wheat, pork, soybeans, corn, coal and oil, the desire to give the exporting sector an advantage via a cheap currency is in danger of being overridden by the desire to prevent several hundred million peasants from rioting in the streets in response to crippling price increases for food and energy. In other words, the incentive is diminishing for the governments of export-oriented countries to 'soak up' surplus dollars and channel those dollars into the US debt market. The days of the US T-Bond market being supported by massive price-insensitive demand from Asian governments therefore appear to be numbered. If commodity prices decline over the next several months then a fall-off in Asian official-sector demand for bonds probably won't be a big factor this year, but the long-term commodity bull market is not over so it is destined to become a big factor at some point.
03-Jun-08	From the 2nd June 2008 Weekly Market Update: Gold and Gold Stocks Current Market Situation The AMEX Gold BUGS Index (HUI) broke below support in the 420s during the second half of April, but then quickly reversed upward and by mid May was comfortably above this support. This made April's downside breakout look like a 'fakeout'. However, the aforementioned support was breached again last Thursday. The HUI then rebounded on Friday, but not by enough to offset Thursday's breakdown. In response to last week's action we've re-drawn the HUI's short-term channel as shown on the following daily chart. As now drawn, the peak of the rebound from the early May low helps define the channel top. A daily close above the channel top -- currently around 440 -- would confirm an upward trend reversal. Last week's action increases the probability that the HUI's ultimate correction low is not yet in place, and we aren't just referring to the action in the markets for gold and gold shares. Also of significance is the new high for the year achieved last Thursday by the HYG/LQD ratio, a chart of which was presented earlier in today's report. The HYG/LQD ratio is an indicator of what's happening with credit spreads in that it rises when the interest-rate spread between high-yield and investment-grade corporate debt falls. As such, it indicates changes in confidence and financial market liquidity (a rise in HYG/LQD suggests rising confidence and liquidity). The investment demand for gold-related investments tends to fall as financial market confidence rises, so HYG/LQD's new year-to-date high has near-term bearish implications for gold. Actually, it's more apt to say that HYG/LQD's recent move to a new high for the year cancels-out a piece of bullish gold-related evidence rather than adds a piece of bearish evidence because there's still a very good chance that the ratio's next big move will be to the downside. There was additional evidence of expanding liquidity and confidence last week in the form of the US yield curve becoming modestly flatter (short-term interest rates rose a little relative to long-term interest rates). This suggests that the gold sector is not quite ready for 'prime time', although we continue to believe that the next big move will be towards a steeper yield curve. On the bullish side of the gold sector's ledger, the HUI/gold ratio (shown at the bottom of our HUI chart) held up quite well last week and has done nothing to suggest that the late-April low will be breached. Also, signs of life are starting to appear amongst the juniors, and the HUI's price action since the March peak continues to look 'corrective' (it has the look of a pullback within the context of a larger-degree advance). As is the case with the HUI, the June gold futures contract broke below support late last week. The current situation is depicted below. Much of the evidence that the corrections in gold and the gold stock indices had come to an end was negated by last week's action, meaning that we should not be surprised if gold bullion and the HUI make new correction lows over the coming weeks. We don't think the downside risk is great, but the targets we originally had in mind -- the low-800s for gold bullion and the mid-300s for the HUI -- again look feasible. Note that over the next few weeks these targets will coincide with the bottoms of the channels shown on the above charts. Gold bullion and the popular gold-stock indices might not have bottomed, but most junior gold stocks probably have. In other words, we expect that lower lows for the HUI and gold bullion would be accompanied by higher lows for most of our juniors. We also expect the HUI/gold ratio to hold above its late-April low during any further 'corrective' activity.
03-Jun-08	From the 28th May 2008 Interim Update: *The Stock Market* Did the Fed rescue the stock market? A popular line of thinking amongst both the bulls and the bears is that we have the Fed's liquidity-restoring efforts to thank for the stock market's rebound from its first quarter bottom. The corollary to this line of thinking is that the stock market would have continued to trend downward if not for the yeoman-like work of Bernanke and his central banking cohorts. Codswallop! When the stock market was bottoming during the first quarter of this year the 10-day moving average of the equity put/call ratio and the number of shares sold short by the public hit ALL-TIME highs, the number of declining stocks on the NYSE rose to over 1100 for only the 5th time in the past 40 years, and several other sentiment indicators hit extremes similar to those hit at the major stock market bottom of 2002. In other words, on a short- and intermediate-term basis sentiment was as negative as it ever gets. This meant that the market was primed to rebound REGARDLESS of the actions of policymakers. Sentiment reached such an extreme during the first quarter that short-term forecasting become straightforward. Short-term forecasting is not our forte, but even we were able to accurately predict the outcome. Specifically, after the market tanked on 22nd/23rd January we said that the low for the first half of the year had probably just been put in place and that the market would most likely trace out the following pattern: bounce, pullback to test the low during March or April, and then rally for a minimum of two months. We subsequently held to that forecast. The upshot is that the Fed had very little to do with the market's rebound. Instead, the rebound was almost inevitable due to the bearish side of the fence becoming exceedingly overcrowded. Current Market Situation Predicting the market's path following its January selling climax was relatively straightforward because whenever the market had experienced such a climax in the past it had always done roughly the same thing over the ensuing few months, irrespective of whether the long-term trend was bullish or bearish. But now that the almost-obligatory pattern has played out, the short-term is far hazier. We recently turned bearish because the combination of factors we look at suggests that downside risk is now significantly greater than upside potential, but we can't confidently predict the market's path, or even the market's general direction, over the next few weeks. As discussed in the latest Weekly Update, the oil market will probably have a lot to do with the stock market's performance over the coming few weeks. In all likelihood, if the oil market soon establishes a downward trend then the senior stock indices will move up to test their recent highs, but if oil continues to trend upward then things will get very ugly in the stock market. Sentiment indicators are presently in 'no-man's land' and are therefore not offering much guidance.
27-May-08	From the 21st May 2008 Interim Update: *The Stock Market* Current Market Situation Via the first of the following charts we've tried to make the point that the NASDAQ100 Index (NDX) could be in a similar position now to where it was in mid October of last year. Notice that, as was the case last October, momentum indicators have just reversed lower after hitting overbought extremes. Notice, as well, that the NDX went on to make a marginal new high at the end of October-2007 before embarking on a large decline. The second of the following charts shows that the BKX/SPX ratio (the Bank Index relative to the S&P500 Index) has just broken decisively to a new low. This is also similar to what happened last October. Sentiment indicators haven't yet moved as far into 'optimistic territory' as they would normally get near the top of a bear market rally. Ideally, therefore, there will be a final push to new recovery highs within the next few weeks before a large decline gets underway. However, we think the short-term risk/reward is now skewed decidedly toward risk, so we are downgrading our short-term stock market outlook to "bearish".
20-May-08	From the 19th May 2008 Weekly Market Update: *Commodities* Natural Gas Update Cycles For many years the natural gas (NG) market has exhibited a strong tendency to make an important bottom during August-September (usually September). Specifically, there were important lows in September of 2001, 2003, 2004, 2006 and 2007, and in August of 2002. In fact, over the past seven years the only failure of the August-September cycle occurred in 2005. This failure can be attributed to Hurricane Katrina. NG's August-September lows are indicated on the following chart. Unless there's some very unusual weather in North America over the coming few months, such as an extended period of much higher-than-normal temperatures or a hurricane in the Gulf of Mexico of sufficient magnitude to curtail NG production, we suspect that there will be another August-September low this year. Current Market Situation Below is a daily chart of June NG futures showing short-term support at $10.50. A daily close below this support would confirm that a short-term peak was in place. Further to the above "Cycles" discussion, in the absence of unusual weather we should see a downward correction in the NG price over the next few months with the next bull-market leg getting underway in August or September. However, we don't think the downward correction will be particularly steep because speculators, as a group, are still net-short NG futures and because NG remains very cheap relative to oil. Therefore, while it makes sense to clip some profits in 'gassy' equities that have run-up in price over the past few months, we don't think this is a time to be selling aggressively. Our guess is that the coming correction will do no worse than take the NG price back to $9.00-$9.50. Moreover, if it materialises it will create an excellent buying opportunity. The NG market is overbought on a short-term basis and is vulnerable to a sell-off in the oil market, but is underpinned by very bullish intermediate- and long-term supply/demand fundamentals. In fact, the relative attractiveness of NG as a fuel source for electricity generation is steadily increasing as a result of increases in the prices of construction materials and labour. This is because the capital cost per unit of energy output of a natural gas-fired power plant is a lot less than the cost of a coal-fired plant and a small fraction of the cost of a nuclear plant. Commodities in general The natural gas market will probably experience a fairly routine multi-month consolidation over the coming few months, but other commodities -- most notably oil -- have a lot more downside potential. Moreover, some commodity-related stock market sectors have been in upside blow-off mode of late. The coal sector is a prime example, but some natural gas, oil, agricultural and mining stocks are also participating. You should never short stocks that are immersed in upside blow-offs, but if you happen to own such stocks then these are times when it makes sense to do some profit taking. Keep in mind that near-vertical rises are usually followed by near-vertical declines.
20-May-08	From the 14th May 2008 Interim Update: *The Stock Market* Intermediate-Term Outlook Has the stock market discounted the worst, as the bulls claim? To answer this question, let's take a look at the market's valuation. The S&P500 Index currently has a price/earnings ratio of about 21, a dividend yield of about 2.1%, and a price/book ratio of 2.75. This combination of measures indicates that the US stock market's current valuation is amongst the highest in its history. In fact, the only time that the market's valuation was substantially higher than it is today was during the final phase of the mania that ended in March of 2000. Today's high valuation for the overall market does not, in isolation, tell us anything about the market's likely performance over the coming 6-12 months because it is not uncommon for over-valued markets to trend upward for lengthy periods. What it tells us, in no uncertain terms, is that the market has NOT discounted major problems. In fact, the S&P500's current valuation tells us that the market expects the year ahead to be characterised by strong earnings growth, high profit margins, relatively low interest rates, and minimal currency depreciation. In other words, rather than having fully discounted major problems the market has fully discounted a rosy scenario. This means that the market will have a problem if anything other than a rosy scenario materialises. One likely spoiler of the rosy scenario presently being discounted by the stock market is the resumption of the debt crisis. The market has come to the conclusion that almost all of the banking sector's woes are in the past, but this conclusion appears to be baseless given that the people running the banks don't even have a clear understanding of the ultimate extent of their companies' liabilities/write-offs. Another likely spoiler is the next 'shoe to drop' in the "global food crisis". The next shoe to drop will be sharp increases in the prices of beef, pork and chicken, potentially leading to more widespread awareness of the global inflation problem. Inflation expectations and price/earnings (P/E) ratios are inversely correlated, so P/E ratios are likely to be pressured lower WHEN -- not IF -- meat prices factor-in the large increases in the cost of producing meat that have occurred over the past 18 months. A third potential spoiler is the on-going housing depression. House prices will probably remain in a downward trend until at least next year, leading to more write-downs on mortgage-backed securities and prompting the government to 'do something' to support prices. But the only thing the government can do to maintain prices at an artificially high level is to implement policies that have the effect of devaluing the currency, meaning that the official response to the bear market in residential property will likely create an even bigger inflation problem. Corporate earnings would probably be boosted under such circumstances, but we suspect that the positive influence on stock prices of higher earnings would be more than offset by a general decline in P/E ratios. In conclusion, the market appears to be priced for good news, not bad, and whenever the market discounts a bright future it's appropriate to be more cautious than usual even if the future really does look bright. The reason is that at such times there is more scope for a negative surprise than a positive one. Right now it is appropriate to be very cautious because the market appears to be discounting a rosy scenario even though the future does not look particularly bright. This creates considerable downside risk.