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Will 2018 Be A Repeat of 2002 Tariffs on Resource Heavy TSX, ASX and TSXV?


Tariffs are front and center right now in the markets, and during the 2002 steel tariffs, the steel tariffs were not good for the U.S. markets. The Dow Jones Industrial Average, S&P 500, and the NASDAQ were all down between 20-30% during the 2002 steel tariffs, before recovering, when tariffs ended in December 2003. With the US now imposing steel tariffs on Canada, Mexico, and the European Union. While exempting Australia, South Korea, Brazil, and Argentina. What does this mean for the Canadian stock markets, and what will happen to the Australian markets, if Australia gets hit with the steel tariffs? Both the TSX & ASX are heavily weighted to financials and materials, and both experienced huge housing booms over the past decade. Will gold be a safe haven for Canadian and Australian investors?

“I do think that this trade stuff is a negative. It is going to hurt sentiment. Its badly thought through. Its not strategic. There are legitimate complaints about trade. But this is not the way to go about it. And you see it in the volatility in the market” Jamie Dimon (Chairman & CEO of JPMogran Chase)  (Source CNBC)

2002 TARIFFS IMPACT ON CANADA TO THE S&P/TSX Composite & S&P/TSX Venture 

Even though Canada was exempt during the 2002 steel tariffs, S&P/TSX Composite fell by almost 30% during the US imposing the steel tariffs in 2002. The S&P/TSX Composite finished slightly positive by the time the tariffs were over. The S&P/TSX Venture Composite (Venture), Canada’s junior market, not only FELL less during the bear market but significantly outperformed by the end of the tariffs. The Venture was up by almost 50%. The sector rotation out of technology and into commodities had begun, and the Venture saw HUGE fund flows because of its heavily weighted in junior mining (gold stock, silver stocks, copper stocks, etc.) and junior oil & gas stocks. You had capital pull out of speculative tech stocks (Nortel Networks) and venture capital and put into high-risk commodity focused junior explorers, developers, and junior miners. The Venture is the largest venture capital space in the world to invest in small cap natural resource stocks, providing exposure to exploration, development, production, and mining services. If history repeats, then the TSX Venture is set to outperform the broader markets once again.

2002 TARIFFS IMPACT ON THE ASX 200?

The broader ASX 200 fell less than the Canadian and US markets during the 2002 US steel tariffs while the North American equities were selling off in the second half of 2002. The broader ASX Materials Index finished positive, just over 10% by the end of 2003We can see that even in Australia the sector rotation into materials had started to take place following tech burst. What was surprising, in 2002, was that both the ASX 200 bottomed in February 2003, posting modest negative returning during the trade situation. The ASX Materials in contrasts bottomed in September 2002. While only a few months into the US steel tariffs, the overall ASX Market continues to be up, with the ASX materials up but lagging the broader index ASX 200. Gold significantly outperformed the ASX, even when adjusting for currency appreciation.

WHAT IS DIFFERENT THIS TIME FOR CANADA?

Unlike the U.S Federal Reserve, that was decreasing rates, after September 11, only a few months prior to the steel tariffs, and the bursting of the tech bubble. In Canada, the Bank of Canada (BoC) raised its target four times over the same time period, by 125 BPS, from 2.25% to 3.5%. But it didn’t stop there. In July 2003, the tightening was over, and the target was reduced to 3.25%, then again to 3.00% Where the is Bank of Canada today? No change in its target yet since the US steel tariffs started and no reaction yet to them being implemented on Canada. But will they be forced to raise their targets?

The economic progress we have seen makes us more confident that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed,” Governor Poloz said. “We will continue to watch how households and the entire economy are reacting to higher interest rates. And we will be cautious in making future adjustments to monetary policy, guided by incoming data.”

Canadian households have built up about $2 trillion of debt, including $1.5 trillion of mortgage debt….a prolonged period of low interest rates that allowed borrowers to take out larger mortgages for the same payment size. This debt is now a vulnerability, both for the whole economy and for highly indebted households who will face increased debt-service costs when interest rates rise. “We are closely watching the vulnerability represented by this group and the debt they carry, and how it poses a risk to both the financial system and the economy,” Governor Poloz said.  – Bank of Canada

Canadian households continue to be significantly more leveraged than they were before the 2008 recession. But will the Bank of Canada raise rates? They may have no choice. Are household and businesses going to be able to handle inflation pressures they are already experiencing from rising gas prices? Brent crude hits its highest level since 2014. There is also the July 1st deadline of tariffs being added to US imports.

“The problem for the Bank of Canada is this. What do they really control? So, when we get the Bank of Canada press statement, what is it they do? They actually just have an influence on the overnight rate and the overnight rate you can say as sort of an impact to the very front end of the curve. But the reality is that the Canadian bond curve is 90% correlated to the US Treasury market. What are US Treasury yields doing? They’re back up. There’s nothing the Bank of Canada can do about that. US Treasury yields are backing up. We are importing a good part of that into Canada. Mortgages are ultimately priced off the bond curve. And so, look at what happened last week. Even just weeks after the Bank of Canada said we’re are on, maybe on hold indefinitely. Mortgage rates went up last week because of the importation of higher bond yields south of the border.

…. This is the shocking statistic. Normally conservative Canadians that historically really went and took out five-year mortgages. They didn’t want to take on refinancing risk. Half of the Canadian residential mortgages rollover in the next year. Almost half, the number if 47%. That shocking” – David Rosenberg (Source BNN Bloomberg)

WHAT IS DIFFERENT THIS TIME FOR AUSTRALIA?

The Reserve Bank of Australia (RBA) during the 2002 episode of tariffs, followed the similar path to the Bank of Canada by raising its cash target rate four times, by 100 BPS from 4.25% to 5.25%. But there were no reductions, only hikes, and holds. Where is the RBA now? The RBA has stayed the course by holding rates, but will it follow history and begin raising rates? What about the impending interest-only loans that need to be refinanced over the next three years? Will the RBA hold back from raising rates? Time will tell.

In Australia interest-only mortgages, which during “their recent peak, they accounted for almost 40 per cent of all mortgages. While interest-only loans have a role to play in Australian mortgage finance, their value has limits.” Will overseas funding costs that are impacted by the US increasing rate, rise well? Over the last 20 years to 30 June 2014 the correlation between Australian and US 10-year yields has been 0.84 measured over quarterly periods with a correlation of 0.71”Source: Franklin Templeton. While not the short-end of the curve, as we have seen recently with many emerging markets rising interest rates is becoming the new normal and Australia will have to raise the cash rate soon if the Fed keeps going.

IMPACT ON CAPITAL MARKETS IN CANADA & AUSTRALIA

Due to the tight correlation that Australian and Canadian rates have to US rates, we could see banks hike their mortgage rates higher if the US Fed continues to raise its target rate. We would also expect this would further put pressure on both of their housing markets and the capital markets if a broader sell-off takes hold because of the tariffs as had previously occurred in the 2002 tariffs. This may present opportunities for royalty stocks like to provide funding to the sector because capital markets funding through equity issuance and commercial lending from banks would dry up.

WINNERS FROM THE US 2002 STEEL TARIFFS

  • Gold was the clear winner in the US Steel Tariffs.
  • Canada’s TSX Venture Index was the clear index winner in terms of performance because it is heavily weighted in small-cap natural resource stocks in mining and oil & gas.
  • If history repeats, the tariffs may be the signal over a 1-2 year time period, the start of the rotation out of technology and into commodity assets, just like the 2002 US tariffs signaled the rotation into the 2000’s commodities boom.

The outlier remains how long will the US Federal Reserve continue to keep raising and removing liquidity until something breaks?

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Upside Dow Breakout May Be Just The Beginning

 

 

At this point, all we can say is “Wow – did you see that breakout?”.  If you have been following our analysis, you already know we’ve been predicting this upside price move for over 4 weeks with our specialized price modeling systems, cycle analysis models and other specialized trading tools.  Last weekend, we posted very detailed analysis of the Elliot Wave and Fibonacci price levels that suggest we could see another upside price move that no one is expecting.

Please take a minute to read our two recent Elliot Wave research posts before you continue reading this post.  We want to make sure you understand the components of this price setup and what we believe will be the most likely outcome.

The upside breakout in price on Monday actually originated with an upside gap Sunday night.  This upside gap was likely the result of a combination of factors, yet it supported our analysis that the US major markets are poised for a dramatic upside price move soon.  Our Elliot Wave analysis suggested we could be setting up for a Wave 3-d upside price move that will end with a corrective price move sometime in early/mid 2019.  In order to confirm this analysis, we have to see new all-time price highs established before the end of 2018 with a solid upside price rally in place.

While the YM (DOW) was the only US major to show a clear upside price breakout, we believe the other US major markets will follow along soon enough.  We have highlighted what we believe is a critical support zone on this YM chart to try to illustrate that price rotation is normal.  We expect to see a 1~2% price rotation throughout this upside move that is completely natural and healthy for the markets.

 

Again, this is completely natural as the YM (Dow Jones index) is tied to the DOW Industrials and the Transportation Index which are breaking out this week. A breakout move like this in the YM suggests that the overall US economy is strengthening and that the future expectations are good that increased levels of transportation of goods will unfold. In our next post we will go into detail on these two sectors and show you some new opportunities emerging.

Additionally, we wanted to show you this NQ chart that is waiting for breakout confirmation from price.  Sometimes, the US majors do not always move in unison.  There are times when the S&P or the Nasdaq will move with greater velocity while the other US majors appear to move in a more muted manner.

The NQ, being tech-heavy, relies more on earnings and revenues from the FANG group.  A move higher in the NQ would indicate that future earning and revenue expectations are strengthening.  This is something we believe will happen in the near future as we expect the NQ to follow the YM with an upside price breakout very soon.

We are still very early in this trading week and we have lots of time for this move to unfold.  We can help you find and execute better trades with our advanced market timing and trade setups for active traders.  Our members already know what our predictive modeling systems are suggesting for the next 5+ weeks.

Our 53 years experience in researching and trading makes analyzing the complex and ever-changing financial markets a natural process. We have a simple and highly effective way to provide our customers with the most convenient, accurate, and timely market forecasts available today. Our stock and ETF trading alerts are readily available through our exclusive membership service via email and SMS text. Our newsletter, Technical Trading Mastery book, and 3 Hour Trading Video Course are designed for both traders and investors. Also, some of our strategies have been fully automated for the ultimate trading experience.

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I Like the Penny Stocks Right Here and Right Now

May 16, 2018 By Dudley Pierce Baker http://JuniorMiningNews.com http://CommonStockWarrants.com Hello Investors, Crazy as it may sound, I love this game of investing in the penny stocks and possibly some of the stock warrants trading on resource companies. While some of you may believe this is a crap shoot there is actually some logical reasoning that could make you a substantial amount of money in the up coming bull market in the resource sector. Higher gold, silver and copper prices are coming believe it or not. Yes, gold has just plunged below $1300 for the first time in many months but as I write, it is holding around the .618 retracement of $1290 or so. True, I do not want to see much more of a decline from here and we really need to get back above $1300 ASAP. So, my cautionary warning for you, is that you should be prepared … Continue reading

New Articles from Chris Vermeulen – The Technical Traders


Hello Investors,

I am happy to now be sharing some great investment content with you from
our friend Chris Vermeulen at TheTechnicalTraders.com.

US Indexes Setup Bottom Confirmation Pattern

Congestion Basing Can Present Incredible Opportunities

Enjoy the read,

Dudley Pierce Baker
Founder – Editor
http://JuniorMiningNews.com
http://CommonStockWarrants.com

US Indexes Setup Bottom Confirmation Pattern

May 6, 2018       On Wednesday, May 2, we issued a research post supporting our position that the markets were nearing an apex breakout and that critical support and resistance levels had established within the market.  We indicated that volatility is usually quite high throughout these apex breakout moves with the potential for a “wash-out” price rotation in the works.  In other words, as these apex breakouts happen, price can sometimes, falsely, break to one side or the other and rotate very quickly to the other side – creating what we call a “wash-out” price reversal. Closing out this week, prices broke lower on Thursday, May 3, and reversed sharply before the end of the trading session to create a “wash-out” low formation which is indicative of a price bottom.  We felt strongly that our ADL price modeling system’s analysis as well as this bottom formation are strong evidence that the US … Continue reading

Go Away In May? Not If You Own This NASDAQ 100 Stock

Tom Bowley | April 21, 2018 at 11:43 AM   One of the most over used cliches in the stock market, in my opinion, is “go away in May”.  First of all, it’s simply bad investment advice.  Since 1950 on the S&P 500, the May 1st to July 17th period has produced annualized returns of 6.00%.  So if you decide to “go away in May”, where will you park your long-term money in today’s environment and beat 6%?  Granted, that 6% return is not guaranteed, but it is the historical return for the period listed above and it’s not bad considering that a 10 year treasury note yields 2.95%. A better piece of investment advice, based on history and my opinion, is to go away on July 17th.  One other important fact that the “go away in May” folks overlook is that strategy would completely fail to participate in the Russell 2000’s … Continue reading

Bloomberg Commodity Index Is Near An Upside Breakout

John Murphy | April 21, 2018 at 05:20 PM Editor’s Note: This article was originally published in John Murphy’s Market Message on Thursday, April 19th at 12:11pm ET BLOOMBERG COMMODITY INDEX IS NEAR AN UPSIDE BREAKOUT… This week’s surge in commodity prices is starting to attract a lot of attention. That’s because rising commodity prices are a leading indicator of inflation. Rising commodity prices have a lot of intermarket implications. For one thing, rising commodity prices usually cause Treasury bond prices to fall and yields to rise (as they’re doing today). That usually helps stocks tied to commodities and those that benefit from rising rates (like banks and financials). But it would hurt rate-sensitive bond proxies like staples, utilities, and REITS. Rising bond yields could, however, cause the yield curve to steepen and relieve recent concerns about it falling to the lowest level in a decade. Let’s look at some … Continue reading

Gold Should Be at $16,450 & Silver $761


April 19, 2018

The super powers in the West are doing what they can to provoke Russia and indirectly China and Iran into a world war. Most people alive today were not adults when WWII started and therefore did not follow the lead up to the war. But today the whole world can watch how the West has chosen to attack a country which has no major significance geopolitically and does not threaten any other country. Still the West clearly knows that bombing of Syria can start a global conflict with potentially horrendous consequences.

There is no intelligent reporting of these events in the Western media. Whatever propaganda the media is fed, they just publish it without any analysis or investigation. And the US with its allies do not wait for any independent verification of alleged use of chemical weapons. That a world war could start on such fickle reasoning is absolutely frightening.

UK & US STARTS A WAR TO DIVERT ATTENTION FROM DOMESTIC WOES

Syria is of course only an excuse. As a country it would be of no consequence for the safety of the rest of the world if it was left alone. Most wars are started by nations which are under economic pressure domestically. The US and UK fit that picture perfectly.

With debts growing exponentially and massive budget and trade deficits, both these countries are on the way to bankruptcy. Added to that, their leaders are under major pressure at home. Trump has “Deep State” and impeachment pressures and Theresa May suffers from weak leadership in a minority government with an unresolved Brexit. This is the perfect background for pretending that there is a major global conflict and diverting the attention to the international scene.

It is only Russia’s restraint which has so far stopped this conflict from turning into something very serious for the world. We must remember that Russia only has two military bases outside of their country whilst the US has around 1,000. Also, according to independent experts, Russia’s military might is far superior to that of the US. But in the case of a nuclear war, both countries have more than enough power to destroy the world. So we must hope and pray that it won’t come to that.

PROTECT AGAINST FINANCIAL RISKS

Virtually nobody can protect against a global nuclear conflict. But we can protect against local conflicts and we can protect against a financial crisis. In 2001 we decided as a company that protection against a potential financial crisis was an absolute necessity. Thus we took the decision to invest in physical gold for our clients and ourselves. At the time, I regarded the continuous deficit spending, credit growth and the derivative time bomb as major risks.

The best time to make a strategic and long-term investment decision is when the asset you intend to buy is unloved and undervalued. That was certainly the case with gold at the time. Gold had been going down for 19 years from $850 in 1980 to a low of $250 in 1999. Central banks around the world had been selling a major part of their gold. The UK and Switzerland comes to mind as two countries selling the majority of their gold around the lows – a very good buying signal.

As we were forecasting a potential financial crisis at some point in the future, we recommended, in early 2002 to our investors to buy gold for up to 50% of their financial assets. Gold was then $300. At the time this was quite a radical proposition, especially since gold was then a barbarous relic that was totally out of fashion. The advantage with buying an undervalued asset that is not on the front pages, is that the risk is so much smaller than when the trade becomes crowded.

GOLD READY FOR THE NEXT STRONG MOVE UP

The timing was quite fortunate. As the chart below shows, gold rose every year from $300 in 2002 to $1,920 in 2011. In 2013 a bigger correction started which ended in 2015. Since then gold has only moved up slowly just like it did in 1999-2001.

In my opinion, gold is now in the process of breaking out from the 5 year consolidation. We need to get proper confirmation with a move to $1,400 but the position of the quarterly chart confirmed by the rising MACD indicator is a strong sign that the next move in gold to new highs is imminent.

The chart below also shows that gold is in a strong uptrend and that the correction in the last 5 years is minor and finishing.

PHYSICAL GOLD IS HELD FOR WEALTH PRESERVATION NOT FOR SPECULATION

We must remember that gold is not bought or held as a conventional investment for capital appreciation purposes. No, gold has a much more important function than that. Our company invested in gold in 2002 because we identified the risks in the financial system as very high. But today the risks are substantially higher and the reason for buying physical gold even more compelling.

WE BUY PHYSICAL GOLD BECAUSE:

  • It has been money for 5,000 years
  • It is the only money which has survived throughout history.
  • It guarantees stable purchasing power over time.
  • It is scarce – It cannot be printed. (Unlimited paper gold creation will soon collapse.)
  • It is durable – All the gold ever produced still exists.
  • It is nobody else’s liability – Thus no counterparty risk.
  • It is held and traded outside a fragile financial system – Thus gives independence.
  • It is the ultimate wealth preservation asset and insurance against a rotten world economy.

GOLD BUG?

It might appear that I am a gold bug but that is far from the case. We bought gold in 2002 to protect against the colossal risks we saw in the world economy and financial system. We are not in love with gold but believe that it is the best protection you can buy and own today. At some point gold will be overloved and overvalued. Then we will recommend to our investors to sell some of their gold or swap it against other assets which are unloved and undervalued. But I expect that time to be quite a few years away.

INFLATION ADJUSTED GOLD SHOULD BE $16,450 AND SILVER $761

Today at $1,350, gold is as unloved and undervalued as it was when we bought in 2002 at $300. On an real inflation adjusted basis gold at $1,350 today is at the same level as in 2002. (see chart below) and also at a 300 year low. The 1980 gold peak at $850, adjusted for inflation, would be $16,450 in today’s money – 12x higher than currently. That price is more in line with our own targets.

Silver is even more undervalued. On the same inflation adjusted basis, silver is also at a 300 year low. At $17.20 today, inflation adjusted silver is the same as in 2000 at around $4. And the 1980 silver high of $50 would today be $761 – a 44x increase from here.

Gold at $16,450 and silver at $761, makes the gold-silver ratio 22, which is in line with historical levels. But since the ratio is just below 79 today, it means that silver will move almost 4x as fast as gold.

GOLD AND SILVER ARE AT HISTORICAL LOWS – INFLATION ADJUSTED

Bearing in mind that credit creation has been exponential in this century with global debt having doubled to $250 trillion since 2006, gold has in no way reflected this money printing and total destruction of paper money. So this is still to come. Once the intervention in the paper market fails, which could happen at any time, the moves in gold and silver will be explosive.

The time to own physical gold and silver is today and not when they move to new highs. Both metals are at inflation adjusted historical lows and the downside risk is minimal. Also, they probably are the most undervalued of all assets currently.

With geopolitical, economic and financial risks at an extreme high, please don’t ignore these risks and don’t ignore history. And with the precious metals at extreme lows, it would be very unwise not to own substantial protection in the form of physical gold and silver.

Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG

Silver on the verge of a break out

Silver on the verge of a break out Stefan Wieler April 18, 2018 Silver prices are trading almost 25% below the values predicted by our price model. This is the largest downside deviation we have seen in over 25 years. We believe this is the result of massive short selling in the futures market. In order to maintain this downward pressure on silver, speculators would have to continue to sell over 500 million ounces of paper silver per year. A reversal of this positioning could lead a >30% rally in silver prices in our view. View the Entire Research Piece as a PDF here. About a year ago we introduced our Silver Price Framework (see Silver price framework: Both money and a commodity, March 9, 2017). In that report, we highlighted that silver prices are driven by monetary demand as well as supply and demand for industrial purposes, the latter of which … Continue reading

I Don’t Own Any Shares Selling Over 50 Cents

April 17, 2018 IT’S TRUE Dudley Pierce Baker, here, founder and editor of Junior Mining News and Common Stock Warrants for well over 10 years. I just reviewed my portfolio and I currently do not hold any positions, be they, shares or stock warrants, which are selling for over 50 cents. And since most of my positions are in Canadian shares and Canadian dollars, that is only about 40 cents in U.S. dollars. You can call me crazy but, crazy like a fox, as I am out to hit many home runs in the resource sector as gold and silver breakout, which is coming soon. My portfolio has a balance of oil and gas shares, gold and silver companies, several of which are small producers. I also own several of the uranium companies. While I may be known to investors as ‘the warrant guy’, only 25% of my portfolio is … Continue reading