What's Behind this Stock Rally?

Tuesday saw the currencies trade right back to the levels they enjoyed versus the dollar last Thursday, before risk assets began to sell off on Friday. These are the types of trading patterns you normally see when the assets involved are getting ready for a break out.

OK, I’m not saying that the break out takes place tonight… But I seriously hope we’re seeing a return to fundamentals.

Speaking of fundamentals… I guess yesterday just shows me that I shouldn’t (and neither should you!) pay attention to the cable news, eh? OK, remember yesterday, I said this: “I saw a news story on the TV yesterday that said, ‘Home Builders were seeing a pick-up of new homes being built.’ Well… That should be our indication that housing starts for April will be stronger! See how easy this stuff is? HAHAHAHAHA!”

And what happened? The government reported that construction on new housing projects slowed to a record-low pace in April. Don’t expect housing to lead us out of this recession/depression folks!

Stocks rebounded too along with currencies yesterday… Long time readers will recall that I’ve pointed my finger at the PPT a few times in the past… Well, I’m pointing it again! Don’t know what I’m talking about here? Well, you see the PPT (Plunge Protection Team) was created by President Reagan after the stock market crash of 1987. It consists of major players (financial institutions) and their job, when called on, is to provide support for a falling stock market. And, what’s the reason for me thinking this has happened now? Well, Friday you would have thought the stock rally was over, but an “Indian election result [pulled] U.S. stocks out of the fire”? I’m not buying it! This rally has somebody’s finger prints all over it.

A news story at the top of the screen this morning says, “U.S. said to consider stripping SEC of power, shifting duties to the Fed.” Hmmm… Doesn’t that bother you? We had this independent regulator (yes they dropped the ball with Madoff, among other gaffes), and the government is thinking about shifting it to the Fed? Yes, I know the Fed is not a government division… But… I don’t like a regulator being directed by the institutions that own the Fed… It’s like giving the fox the keys to the hen house!

OK… A week or so ago I talked to you about the 200-day moving average. I explained it all, and told you how the dollar index had fallen through its 200-day moving average, which would indicate further declines for the dollar index. On May 8th, the euro moved higher through its 200-day moving average and then went on to gain almost 2%… There’s another currency that’s moving stealth-like up to its 200-day moving average. The pound sterling (GBP)! Here’s the skinny as I see it… Pound sterling’s 200-day moving average is 1.5554; the current level of pound sterling is 1.5480… Within spittin’ distance!

And while we’re following price charts… I see where a new “player” has jumped on the Chuck, Mogambo, Bill Bonner, and others gold bandwagon! Gold has gained 6.8% since the last low on April 17th, and an analyst at BNP Paribas believes this is an indication that gold will trade to $1,096 in the coming months, as long as it does NOT fall below key support at $880.

Charts people are interesting, in that they can come up with things that you can’t see with the naked eye!

All I know is that the fundamentals point to a higher gold price, and fundamentals are what cause trends to happen, and together they are the straw that stirs the drink. Everything else is just an explanation of what happened or what they “believe” will happen. But none of it takes place without the fundamentals creating a trend.

And speaking of gold and fundamentals… Recall, that I’ve coined gold the “uncertainty hedge”… And this morning we have more “uncertainty” in the world. According to the Washington Post, Iran has fired a test missile overnight that has a range of 1,200 miles, enough to reach Israel or Southern Europe.

The data cupboard is empty today, so we’ll have to depend on a testimony by Treasury Secretary Geithner to the Senate Banking Committee on TARP… Speaking of TARP, I read a story last night that detailed how some major banks are discussing the repayment of TARP with the Treasury Department. I see the Treasury Dept balking at this… Why? Because, the government wants control of these institutions, folks… And they can’t have control over them if their tentacles aren’t all intertwined in the banks.

I know that this is a touchy subject… But here’s another example of the government taking over control. The Senate overwhelmingly passed a bill that would sharply curtail credit card issuers’ ability to raise interest rates and charge fees. Yes, these institutions took advantage of people for years… But! They also provided credit to people that “signed the papers agreeing to the terms.” I’m NOT talking about whether its right or wrong to raise interest rates on credit cards to “stupid” levels. I AM talking about the government dictating to the bank that issued the credit – and that is on the hook for the credit – just how and how much interest rates will be raised.

OK… Let’s talk about something else; that stuff gets my blood pressure rising! How about… Oh, yeah, the Aussie dollar (AUD) saw a bit of selling overnight after Australia printed a less-than-stellar consumer confidence report. I guess all the money the government of Australia had sent out to consumers is gone, spent, put in coffee cans and buried in the back yard, and now the consumers are sad. You give money to people for no reason, and it’s like a drug, they want more and more. I like the Aussie dollar for the prospects related to China’s economic recovery… But beyond that, Australia seems to be struggling, and it will take a Chinese recover to overcome this struggle.

And, in India… The rupee has not been able to add to its gains that followed the election results this weekend… But, I think it’s more a case of stopping to catch its breath, and not a road block.

Last week, we heard about how China had passed the United States as the number one trade partner of Brazil. Now, I’m hearing about how Brazil and China are in discussions to form a currency swap line, just like the one China signed with Argentina two weeks ago. These currency swap lines are HUGE, folks. Because they allow the two parties that are trading with one another to eliminate the use of dollars, and only use their own respective currencies. That means, China reduces its exposure to the dollars! And if China has less dollars to spend on U.S. Treasuries, that’s not a good thing! But, almost important as that, is the thought that China is spreading the use of their currency. This thought plays well with the idea that China proposed last month… That the U.S. dollar be replaced as the world’s reserve currency.

China has now signed currency swap agreements with: Indonesia, Malaysia, Hong Kong, South Korea, Belarus, and Argentina, with Brazil waiting in the wings.

And then there was the price of oil… I filled up the Pfennig-mobile this morning, and noticed gas prices had gone up… Well… When I came in and checked the screens, I saw the price of oil had reached $60 again! Oil prices have been rising very slowly in recent weeks, and long side of those rising oil prices, we have rising Canadian loonie (CAD) prices! I’ve said this more than once over the years. The Canadian dollar/loonie is so energy driven, and recent moves are a prime example!