Fed Asset Purchases Vs. Bond Yields

How counter intuitive it may seem, when the Federal Reserve tapers (reduces asset purchases of bonds and mortgages), the bonds actually go up instead of down. Bond yields decline. So you can predict what bond yields will do by listening to the asset purchase plans of the Federal Reserve. Then profit on it.

The obvious reason is that reduction of QE is good for the dollar (and good for bonds), while QE is bad for the dollar because it generates inflation concerns (hence bad for bonds). So QE will send bond yields higher because of inflation concerns, while reducing QE will send bond yields lower.

The second reason is that all of the money printing goes into capital goods like stocks. When QE ends, stocks will drop and that money goes back into bonds.

The third reason why central bank asset purchases coincide with higher bond yields is because the central bank usually acts when bond yields are going higher. The chart below shows that the Fed started buying bonds when bond yields went higher (in order to push yields down). Once yields are normalized again, the central bank stops its purchases.

Conclusion: Expanding Fed balance sheet coincides with higher bond yields and vice versa.

Gold Mining Stocks Volume Speaks For Itself

If you didn't know it yet, Michael Pento went long gold mining stocks last month and I can know why. I only need one chart.

If we just look at the junior miners GDXJ, we can see that trading volume has grown into an exponential rise. See red circle below.

Such rising volume on a rising price level in GDXJ says to me there are conviction buyers in this sector and it marks a true bottom.

The Case for Hong Kong Stocks

This week, Marc Faber came in with a new recommendation. He is advising investors to invest in Hong Kong stocks as we can see in this interview with CNBC. The reason for that is because we see a technical breakout on the upside for China. As a result also the Hong Kong stock market is up. See chart of the Hang Seng Index below from Google Finance.

Now why is China doing so well? I have already hinted on that in this article. Basically, we see many signs of a recovery in China. First off, the PMI had surged to 52 after several months if not years of decline. A surging PMI indicates that GDP growth is accelerating. And the evidence of an accelerated growth in GDP can also be seen in the Chinese power consumption numbers (chart below created by Correlation Economics). As our correlation shows, the rising power consumption numbers go hand in hand with GDP growth.

Next on, this China GDP growth translates itself into a positive development in the commodities market. The zinc and copper prices for example have bottomed out just recently. Also China and Hong Kong real estate have been bottoming out. I have been recommending Tai Cheung Holdings here, which has seen a nice 10% return.

To put some more evidence on display, we can see that the CRB Commodity index has seen a surge since the start of 2014, indicating a recovery in commodity prices. See chart below from Bloomberg.

And last but certainly not least we have a very important development in the currency market. Not only has the Chinese yuan stopped dropping against the U.S. dollar. The Hong Kong dollar is said to finally de-peg from the U.S. dollar, which will boost Hong Kong stocks even more.

If U.S. investors want to buy Hong Kong stocks, I recommend Hang Seng Bank (HSNGY), because this bank is based in Hong Kong and is highly correlated to the Hang Seng Index. And while you wait for the rise, you get to be paid a handsome dividend of 4%.

CYNK Evaporating

Investing in OTC pennystocks like CYNK? Watch all of your money evaporate in one day. 

6 billion market cap to 500 million market cap.

Zinc is on the rise

A couple weeks ago, KBC Securities of Belgium issued an alert that the price of zinc could start its rise again as zinc supply is going to deteriorate in the coming years. The severity of this supply disruption could be twice as severe as in the years 2000.

Let's take up a chart of the price of zinc (chart provided by InfoMine.com)

If we just look at what zinc did in the year 2000, we see that zinc had a 300% increase to its all time high at 2 USD/lb. If the supply disruptions are twice as severe today, imagine what the zinc price can do at this stage.

Let's go on to the fundamental picture of zinc supply and demand. Read on here.

U.S. Treasury Yields

This page is created to monitor the U.S. treasury yields. Recessions can be predicted clearly as they coincide with narrowing yield spreads.

As you can see, the yield spread narrowed in 2000 and 2007, which were the omens of two recessionary events: NASDAQ bubble and 2008 crisis.

The following dynamic yield curve chart shows how the top of the stock market can be predicted by the flattening yield curve.

On the following chart we can also see that the yield curve is a predictor of the economy (coincident indicator).

A comparison of other countries: