Chart Presentation: At Odds

Aug. 21 (Bloomberg) — Gold jumped the most in almost two months and silver had its biggest gain since 2006 as rising energy costs and a decline in the value of the dollar boosted the appeal of precious metals as hedges against inflation.

Aug. 22 (Bloomberg) — The dollar may decline against the euro for the fourth time in five days on speculation a surge in crude oil prices will prolong the U.S. economic slowdown.

Aug. 21 (Bloomberg) — A decline in mortgage bond prices is raising interest rates on U.S. home loans, even for borrowers least prone to default. Rates on average 30-year fixed mortgages rose to 6.37 percent this week, about the highest in six years, as yields on bonds guaranteed by Fannie Mae and Freddie Mac increased to almost the highest since 1986 relative to Treasuries.

The markets continue to work around in a rather vicious circle. Dollar weakness apparently drives energy prices higher and higher energy prices do damage to the U.S. economy. Meanwhile problems in the U.S. economy weaken real estate prices which, in turn, places pressure on mortgage-related securities which, in turn, hurts Fannie Mae and Freddie Mac which, in turn, increases the cost of their borrowings which forces mortgage rates higher. Rinse and repeat.

We are going to show the same two chart comparisons that we included in yesterday’s issue. At top right we feature the sum of copper and crude oil futures and the sum of the U.S. 30-year T-Bond futures and the U.S. Dollar Index (DXY).

The point is that the sum of the TBonds and dollar had reached critical resistance on Wednesday. The sheer drama involved in yesterday’s price movements suggests that this was indeed a critical juncture. AS the dollar and TBonds weakened energy and metals prices spiked higher.

The set up is quite similar to the middle of last January. The chart at bottom right shows that as the TBonds plus DXY combination reached a peak the share price of natural gas producer Chesapeake (CHK) was at a low along with the ratio between Caterpillar and Coca Cola. The odd thing is that while the media reports that the U.S. economy is sliding into oblivion the markets continue to try to find ways to push the economically sensitive cyclical issues higher at the expense of those sectors that usually do better when the economy is struggling. In that respect this has certainly been a year when the markets were at odds with the news.