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Weldon's Money Monitor



The Global Combined Manufacturing-and-Service Industry Purchasing Managers Index as compiled by JP Morgan fell during September to its LOWEST level in TWO YEARS.

Note the text extracted from JP Morgan's Survey

"Growth in the global service sector lost momentum in September, reflecting the slowest overall growth of the US economy during its current period of expansion."

Indeed, the Global Service Sector PMI plunged by seven and a-half points, tumbling from 60.6 all the way down to 53.1. For one, within the US Service ISM Survey we note that the Import Index got whacked for the second month in a row during September, continuing a move lower that began prior to the hurricane disaster in the US. This implies that a macro-peak in US Import demand has been seen already, as per July's reading of 62.0.

Worse, prices spiked higher in all surveys with the most pronounced rise posted in the, yes, US Service ISM ala the stratospheric push to 81.4, a new move high, and a HUGE increase from August's reading of 67.1.

Thus, lower import demand, and spiking prices means employment SUFFERS.

Indeed it did, even within the US Manufacturing ISM Survey, which provided strength in New Orders and Output, STILL, the Global PMI Employment Index fell by more than a full point, while the US Service Employment Index plummeted by almost five points.

Overall, the Global PMI Output Index PLUNGED by 3.2 points to its LOWEST level since July of 2003.

BUT, BUT, BUT it is NOT all the US service sector, as we note the readings provided by the Euro-12 Retail Sector PMI Survey, revealing a two-full-point PLUNGE to a level BELOW the 50-level. Worse, this was led by a virtual COLLAPSE in the core-country, Germany, where the Retail PMI cratered, falling 7.5 points to a new LOW of 45.2.

Europe and the US are in MAJOR economic distress, and in BOTH locations, the specter of HIGHER interest rates is HAUNTING.

WORSE yet, and BARELY discussed within the pop-media, is the FACT that this softening is global, thanks specifically to the softening core demand-dynamic in the US AND is linked to the SERVICE SECTOR.

Indeed, for years we have heard, and seen, the transition AWAY from the 'contribution' ratio towards overall US GDP that comes from manufacturing output, replaced by demand for SERVICES. Every time the industrial macro-data softens, the rationalization becomes that manufacturing is such a small contributor in the new-era-economic-regime, that it matters NOT what matters, has been the service sector.

NOW, the service sector is LEADING the way, in terms of softening, and yet NO ONE is sounding the alarm, in terms of the multi-year SECULAR trend towards an oversized contribution to total GDP, from the suddenly SOFT service sector.

For SURE global GDP projections could be shaved and likely will be shaved, potentially in a dramatic manner if the specter of higher rates materializes into a physical presence.

A significant slowdown in the global service sector would be a MOST damaging event, in terms of the degree of macro-economic reflation 'factored-into' the monetarily reflated prices of global share prices.

MARKETS are sniffing this out, now a softening in demand that could crimp monetary-paper-wealth reflation, exposing a savings-less and income-reflation-devoid US consumer, and thus, global exporter enough so to soften the ENERGY sector.

Indeed, globally, stock markets are LOOSE, and threatening to reverse, HARD, to the downside, a move that would appear to incorporate ALL the previous upside reflation leaders, including financials, housing, energy, cyclicals, and the transportation sector. We carve away at the broad market first, dissecting the S+P 500, ala the candlestick breakdown seen below.

Taking a step-back for a longer-term daily perspective, we observe the chart below, revealing a downside violation of the uptrend line dating all the way back to late 2002-early 2003. We also spotlight the NEGATIVE reading in the shorter-term ROC, which failed to reach its own new high during 2005, thus exhibiting major bearish momentum divergence and the downside attack on the long-term 200-day moving average.

Perhaps most 'telling' is the 'evolution' taking place in Volatility, as spotlighted in the long-term weekly chart in which we plot the 6-Month Volatility versus the 2-Year Volatility. Indeed, this week, the shorter-term Vol has risen back above the longer-term Vol, setting up the first 'positive' Volatility 'cross' since these measures crossed in December of 2002, a cross that defined the end of the previous macro-bear move.

The entire reflation rally since has been defined by contracting Volatility, until now, implying that the smooth upside move is OVER, and a resumption of a more violent macro-decline is about to unfold.

VOILA the recent peak in the smooth reflation rally coincides (not) PERFECTLY with the 61% Fibonacci retracement of the entire macro-bear move from the secular peak in 2000. The technical considerations ALSO imply a resumption of that macro-decline, as defined by the breakdown in the long-term rate-of-change, and would be solidified with a downside violation of the long-term 52-week moving average.

For the last two weeks we have thrown the spotlight on the macro-data-erosion taking place within the US wealth reflation leaders, specifically home building, real estate, mortgage lending, commercial banking, basic materials, cyclicals and the consumer. There is NARY a sector escaping the sudden-softening, wealth-wise as we note real estate in the chart below.

Again the Bank Index breaking down, and completing one of the more bizarre technical patterns we have come across lately, a TRIPLE head-and-shoulders top, constructed with three separate, uncompleted, head-and-shoulders patterns that are ALL being reconciled, in synch, to the downside.

Eerily similar is this week's technical breakdown taking place in the Morgan Stanley Cyclical Index, seen in the chart below. Not seen is the lead-breakdown unfolding in the Dow Jones Basic Materials Index, a classic macro-sign to suggest a softening in final demand.

Lenders, Builders, Materials all are softening, and breaking down.

We are keen to monitor the last few men standing, specifically the Transportation Average, observed in the chart on display below, revealing a MONSTROUS topping pattern, and serious downside risk in terms of the multi-year trendline and long-term moving average, both of which are under attack. A breakdown below 3382 in the DJTA would be an OMINOUS signal.

And, of SPECIFIC interest is the impact on the high-flying, reflation-leading, energy sector which is, gasp, softening, and suffering its own mini-technical breakdown, as noted in the chart below in which we plot the Dow Jones Energy Sector Index. Observe the rise in Volume, indicating that investors are BAILING OUT of this sector, a potentially BIG 'deal', and possibly, a major-league bullish factor for precious metals.

Indeed, from petro-to-precious that may become our next macro-strategic rallying cry, particularly if the USD is going to fall back into its macro-funk, amid the softening in global demand, softening enough to 'throw-down' the almighty energy beast, a beast that has provided HUGE support, sight-unseen, for the US Dollar.

Pulling BOTH the oil demand, AND export revenue sides of the 'rug' out from under the feet of the US Dollar, might prove too much, and the buck could tumble back into a macro-secular depreciation focused on providing some sense of monetary stimulation support, against a hawkish Fed backdrop.

Simply less export revenue in the hands of foreigners, AND, less need for USD to be used for purchasing crude oil could provide a knockout BLOW. Note the short-term action in the USD versus the Swiss Franc

and then the long-term action in the US Dollar Index, shown in the weekly chart below, replete with an outside downside reversal that matches the one taking place in the energy markets. Moreover, note the failure of the USD to sustain a break above the MA, and its failure to clear the 2004 high.

Indeed, as defined in the overlay chart on display below in which we compare the S+P 500 Index to a USD-adjusted S+P Index the greenback has LED the way both HIGHER, then LOWER, and then again HIGHER, over the last fifteen years, in EVERY major trend.

The support from energy, and the DEPRECIATION in the USD (prior to its recent mini-rally) have offered MAJOR reflation support for US equity-wealth indexes a support that may dissipate at the same time housing reflation support has vanished.

Thus, the breakdown spotlighted in the chart below becomes a most ominous sign, implying that the 'REFLATED' value of the US equity market has broken down, and violated its reflation-defining uptrend line.

Hence, we appear to be on the verge of or, in the early stages of, a renewed asset-wealth disinflation in synch with a softening in global demand for services, trade, building, and transportation and energy ... at least, less demand at CURRENT PRICES and thus less demand for USD, at a time when supply is rising, debt wise.

Hence, investors may soon be SCRAMBLING in a hunt, NOT for yield, or return, or any story linked to eco-wealth reflation but, rather an asset that protects 'wealth'.

BINGO, note the med-term trend in FAVOR of GOLD over stocks as the price of bullion is breaking out relative to the S+P 500 Stock Index.

and the longer-term upside potential in same, ala the upside violation of a FIFTEEN YEAR downtrend line.

We remain bullish on bullion, and are adjusting our 'stance' to refocus some of our bullishness away from 'foreign' currencies, and towards both the US Dollar, and the US equity market.

Indeed, recall yesterday's Money Monitor focus on the negative Banking sector dynamic relative to the positive Precious Metals action, a point we want to HAMMER HOME, as a key macro-message.

We are increasingly interested in monitoring the US stock market for a potential MAJOR breakdown, and are already overtly bearish on the Banking Index as a precursor to an overtly bearish stance overall on equities.

Now, we might soon be adding petroleum to the breakdown mix (although we would NOT want to be short the energy sector, at all), ala the potential for a "Petro-to-Precious" macro-strategic thought process to become more pronounced.

We close with one more question - has anyone noticed, that Bonds have NOT rallied, in tandem with yesterday's plunge in stocks, or today's plunge in energy ????

Got gold ???

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