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Money Monitor: From the Icebergs to the Desert Sands


From the polar icebergs to the desert sands a crunch is being heard...


Editor's Note: This is the Money Monitor from Monday April 17, 2006

Observe the text from the statement released on April-5 by Standard and Poor's, announcing that the credit agency had lifted their long-term sovereign credit rating on the Kingdom of Saudi Arabia:

"Foreign reserves of the Saudi Arabian Monetary Agency have increased rapidly in recent years, and are expected to top $200 billion by year-end 2006, which is sufficient to cover about 23 months of current account payments, including private transfers. Furthermore, the central government has no external debt, nor does it plan to incur any."

Indeed, the general government surplus was nearly + 20% of GDP in 2005. And, SAMA's $200 billion in FX reserves represents a doubling of reserve holdings since the beginning of 2005, when reserves totaled $92 billion.

OH, and the Saudi stock market suffered its WORST week ever in the post-announcement period; down (-) 8.3% on Monday, down (-) 8.9% on Tuesday for back-to-back record single-day declines, capped by a plunge in the All-Share Index on Saturday, which plummeted another (-) 8.4%, to its lowest level since last October, ending a week in which the market collapsed by nearly (-) 20%.

The fun started one week ago today, when the Saudi Capital Markets Authority (CMA) suspended a pair of 'dealers' for insider trading in key electricity-generating and petro-chemical stocks. This action follows hard on the heels of January's record $45 million fine assessed on three traders, a penalty that included a three-year suspension, for market manipulation.

Suddenly, speculative funds are changing gears when it comes to plowing money into the Saudi market.

And thus, while coming from a polarized-micro-angle, relative to the liquidity/reflation 'prick' that has 'hit' Iceland (flow into stocks, on the back of solid fundamentals, oil, fiscal versus flow into debt, based on high yields offered thanks to hot reflation, amid soaring debt obligations), the situation in Saudi Arabia is symptomatic of the same macro-dynamic.

In other words, disinflation in liquidity.

The BIG problem is that nowhere is more reflated than Saudi Arabia.

NOT Gold, NOT Energy, NOT Housing, Not South America, and NOT Asia. Nothing had been more 'liquefied' than the Saudi stock market.

Evidence the long-term weekly chart on display below (all of today's index charts are courtesy of Money Monitor's favorite web-site, revealing the explosive rally in the Saudi Industrial Index, from about 2,000 in 2003, to a high above 20,000 less than three years later.

Of course, we also spotlight the recent crack, which has taken the index back to its long-term 52-Week Moving Average, amid a spike in Volatility. A further decline would constitute a more significant technical breakdown.

The reflation-outperformance in Saudi Arabia is clearly evident when we plot the Kingdom's index (black bars) against the S+P 500 Index (blue line) on a daily overlay basis dating back to mid-2002.

Observing the shorter-term daily close-only chart seen below, we note that the technical situation as applies to momentum, has clearly shifted to the negative side. Evidence the 'sell-signal' in the Parabolic indicator, the bearish interaction between the two moving averages, the downside violation of both the 100-Day and 200-day MA, the very poor action in the MACD indicator, and a negative ROC.

Also bothersome is the near-term erosion in that outperformance, as detailed in the shorter-term daily overlay on display below, covering the last twelve months. Note the lower-window-pane in the chart below, reflecting the rally in the ROR differential, with the US almost back to 'even,' in the context of a decline in both markets.

Worse yet, the Saudi market is now underperforming on a YTD basis, as noted in the short-term overlay chart on display below. Indeed, since the middle of March, the Saudi market has given up the torch of upside paper wealth reflation leadership.

AH HAH, paper wealth disinflation, that is the key macro-message to be gleaned from the move in Saudi Arabia, particularly as an upside leader above-and-beyond Energy, Gold, Housing, and South American and Asian equity markets.

We start with the only 'real' challengers for the paper-wealth-reflation title, the South-of-the-Border-Gang's equity indexes, noted in the multi-year daily overlay chart below. In this chart we plot the Saudi Industrial Index, versus the iShare ETF's for Brazil (EWZ, blue line), Latin America (ILF, orange), and Mexico (MXY, red).

Asian equity market reflation, led by Japan, has received a ton of media attention, yet the rallies in these markets pale in comparison to the bull market in Saudi Arabia, as is clearly evident in the next multi-year daily ROR overlay, seen below. In this chart we compare Saudi Arabia to the iShare ETF's for Korea (EWY, red).

Indeed, amid ALL the media-hype centering on the reflation in the precious metals and energy commodities - still, they pale in comparison with the paper-wealth reflation reflected by the rally in Saudi Arabian stocks. Note the comparison below, utilizing the Gold and Silver Mining Index (XAU, red line) and the Oil and Gas Index (XOI, blue line).

In fact, singularly, the Saudi stock market has FAR outperformed the entire Emerging Market stock index universe, as defined by the iShae ETF for this sector (EEM, blue line), as plotted in the overlay chart seen below. Indeed, the reflated 3-year rate-of-return in the Saudi market has been TWICE that of the Emerging Markets Index as a whole.

Voila, the entire picture changes, when we shorten the time frame in the comparison seen above, in the chart below, to reflect the YTD performance in the Saudi market (black line) and the EEM Emerging Market Index ETF (blue line). In the YTD, and specifically in the last six weeks, the Saudi market has completely LOST its 'edge.'

We have detailed stories in recent Money Monitors relating to the real estate speculative boom in places like Dubai and the UAE (recall our piece on the soaring gold trade in Dubai, and the sky-scraper build-out noted during the Dubai Desert Golf Classic) and thus it should be no surprise, that the that appears to be most correlated to the Saudi stock market over the last 12 months, is the US-based Dow Jones Real Estate Index Fund iShare, or IYR, plotted below.

Coincidence?? Or symptomatic of the same macro-dynamic??

Gee, is it merely coincidental that Gold is soaring today?

Observe the monthly chart below, and the spike to what could be the first monthly close above $600 since Gold cracked below $600 in Dec-1980!

Let's also observe another pair of Mid-East regional stock indexes.

First, note the Kuwait market, plotted in the daily chart below, replete with recent downside CRACK, downside reversals in both moving averages, and a VERY negative 'set-up' in the MACD, on the back of significant bearish divergence at the most recent price peak.

Secondly, note the Egyptian stock index, seen in the daily chart on display below. A move below the March low in this index would constitute a fullblown technical breakdown, and bull market trend reversal.

Indeed, such a move would mark the end of a multi-year paper-wealth reflation amounting to a +300% rally in Kuwait, and +400% in Egypt. And then there's Iran.

Note the long-term bear market, and more specifically, the recent slide to new lows, in the Iranian Rial (IRR), as seen ion the long-term daily chart of the USD-IRR on display below.

More pertinent, is the plunge in the Rial since mid-2002, which has taken the USD to more than 9,000 Rials, from less than 2,000 Rials a depreciation in the Iranian currency of nearly eighty percent!!

The weight of the currency has begun to weigh down the reflation experienced by the Iranian Stock Index, the TSE Industrial Average, plotted in the weekly close-only chart seen below. Moreover, the technical situation reflected in the chart below is very negative, case closed.

In fact, the Iranian stock market was among the only indexes in the World that at one point actually challenged the Saudi index, in terms of its multi-year paper-wealth reflation, and in terms of its huge outperformance relative to the S+P 500, as reflected in the chart below.

But, the picture mutates into something downright ugly when we shorten the time frame of our overlay comparison between the Iranian TSE Industrial Average (black line) and the US S+P 500 Index (blue line) to reflect the rate of return posted over the last two years.

Bottom Line: From the polar icebergs to the desert sands a crunch is being heard, in terms of excess liquidity that is disinflating, and eating away at years of paper wealth reflation.

More specifically, All things paper are succumbing to Gold.

Indeed, a most amazing macro-message can be gleaned from the nearly shocking overlay chart on display below, in which we compare the weekly performance on a five-year rate-of-return basis between the Tehran Industrial Average (black line), and the AMEX Gold Bug Index (blue line).

The correlation over the first four years of data in defined in this chart, is tighter than we would have ever imagined.

Thus, the polarized divergence seen since the 2Q of last year, should be taken as a 'macro-warning' in terms of the intensifying risks of holding reflated paper assets, as opposed to Gold.

Indeed, Even in Tehran they are asking, Got Gold??

We remain bullish on metals, and energy.

We remain bearish on JGB and short-term European fixed-income contracts.

We are again, bullish on the EUR.

And, we continue to look for the proper technical-momentum 'set-up' against which to launch a bearish campaign in US stocks, amid an increase in the number of liquidity land-mines that are being detonated across the macro-landscape, from the polar icebergs to the desert sands, from Iceland to Iran.

Position in gold
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