Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

European Central Banks at Cusp of Major Policy Blunder

With European credit problems still largely unresolved, especially in England and Germany, the region’s largest central banks remain steadfast on interest rates. And that might be their Achilles heel this fall as credit markets continue to freeze despite multiple injections of bank credit in the open markets since August 9th.

Over the last seven weeks, the European Central Bank (ECB) has pumped the financial system with over $500 billion dollars (€352 billion euro) in an attempt to instill confidence – hoping cross-border banks can start lending to one another again. However valiant an effort this may be, it isn’t enough to placate fragile debt markets across Europe. What Europe needs now is lower interest rates.

Euro Libor rates, or euro inter-bank lending rates remain elevated and in excess of the European Central Bank’s base rate of 4%. This morning, the ECB 3-month benchmark Euro Libor rate sits at 4.79% -- way above the base rate. The Federal Reserve, which cut the Fed Funds rate last Tuesday, has successfully managed to reduce credit risk and has effectively opened the lending spigots, at least gradually. But the Europeans, including The Bank of England, are making a serious policy mistake by not reducing lending rates. As my colleague, Mike Burnick, pointed out this week, the credit crunch isn’t over.

Earlier this week, the Norwegian central bank raised lending rates as booming oil exports and a thriving consumer market continue to threaten economic overheating in Europe’s most prosperous economy this decade. The krone has been mighty strong over the last few years, rising another 5.8% in 2007 vis-à-vis the euro. Amid soaring oil prices and strong consumption, the Norwegians are right to boost lending rates, especially since they harbor no sub-prime exposure. But that’s not the case with the rest of Europe, which is slowing markedly this fall amid a credit squeeze and a soaring euro, stifling exports.

One of the biggest policy blunders now is occurring in the United Kingdom where The Bank of England (BOE) made a huge mistake not creating enough liquidity in overnight money-markets earlier in August, exacerbating the mortgage-backed crisis.

So far, the only casualty, Northern Rock, has been rescued by The Bank of England following a run on the mortgage lender earlier in September. But the damage has already been done as most British banks are still reluctant to lend in overnight markets, extending the credit crunch. The above 3-month sterling Libor chart depicts a big spike in rates over the last six weeks in England, the same phenomenon plaguing the ECB now and the Federal Reserve earlier this month. The message is clear: Injecting money-markets with periodic doses of liquidity isn’t enough; what the markets want is lower lending rates.

Overall, the Europeans continue to talk a tough game on inflation, reluctant to cut interest rates. But historically, all central banks walk the same line, and that means the ECB and the BOE will eventually join the Fed and cut rates this fall. This will also boost gold prices in 2008 as non-dollar fiat currencies are debased. The Europeans are getting killed on fresh dollar weakness as the buck hits a 15-year low against major world currencies; lower rates would offset the currency drag now pressuring exports.

In Europe, like the Fed, it’s Print or Die.

Have a good weekend.

Avoid Bottom-Fishing Post-Bubbles

On September 18th, the day the Federal Reserve cut the Federal Funds rate to 4.75%, the distressed home-building stocks surged more than 6%. But today, just nine days following the Fed’s half-point cut, the smashed-out sector trades below where it was last week as the sellers returns en masse. Year-to-date, the SPDRs S&P Homebuilders Index ETF (see below) has crashed 43%.

Lower short-term interest rates won’t help the home-builders, but lower long-term rates will. And since the Fed cut rates last week, the entire yield-curve has steepened as long-term rates rise on growing inflation concerns. Higher long-term rates, which are not controlled by the Fed, are a bad omen for housing.

Bottom-fishing, though a value-based contrarian strategy, can sometimes kick an investor in the face. That’s because bottom-fishing means buying securities that most investors are still selling; investors or speculators who purchased the homebuilders last week – after a massive decline heading into September 18th, are now down another 14%.

The housing market is still in a bear market with no signs of a bottom until at least the second half of 2008. Historically, housing bear markets in the United States last up to 36 months. Considering the incredible appreciation recorded by many markets since 2000, it wouldn’t surprise me if this bear markets runs into 2009. But on a brighter note, if we strip the most speculative markets from popular housing benchmarks – Miami, Orlando, Phoenix and Las Vegas, then housing values are not dropping at all. Many regional markets are still strong, including most cities in Texas, the American farm-belt and the mid-west, excluding Michigan. The American housing market is vast; it’s inaccurate to coin the entire market in a freefall because that’s just not the case.

Bottom-fishing can yield enormous long-term profits – if you’re patient and extremely timely on your acquisition. But usually, it’s a one-way ticket to the poorhouse. Many investors thought they were buying great values in Japan in the early 1990s following the big bust in Tokyo stocks and real estate. Guess what? They’re still waiting for a recovery from those levels. The same is true for technology stocks, which peaked in March 2000 and of course, speculators in Miami and Las Vegas real estate just 12 months ago.

Contrarian Madness: Sell Euro and C$s for U.S. Large-Caps

I think this heading will definitely raise some eyebrows this morning, but I’ve got tell you how I feel just the same.

U.S. large-cap stocks are probably one of the best bargains in the world today and not just for local currency investors in the United States. For European investors, including British sterling-based and Canadian dollar-based investors, American multinationals are literally one of the best deals of the decade – and getting cheaper by the day as the U.S dollar continues to slide. The American buck is now trading at a 15-year low versus major world currencies and for the first time since 1976 trades at par-value vis-à-vis the Canadian dollar.

I don’t have a euro-based chart of the S&P 500 Index, but I can tell you it’s incredibly compelling. The above chart of the S&P 500 Index (you can expand it by left clicking your mouse) shows the value of the broader market expressed in dollars; but if we converted the same chart to euros, the cumulative 36% total return since September 2004 would be reduced to just 24% in euro terms. Over the last 12 months, the same index has gained 13.5% in dollars but only 3.2% in euro as the dollar’s depreciation has accelerated following Fed rate cuts last week.

For Canadian dollar investors, whose currency has soared more than 60% since hitting a 125-year low six years ago versus the greenback, American stocks look even cheaper.

The Canadian dollar has gained a cumulative 26% since September 2004. If a Canadian dollar-based investor bought the broader market in the United States three years ago, his resulting net gain would be just 10% after adjusting for the C$s rally.

The best time to buy stocks in a foreign market is when your currency is expensive and the target market stocks’ are undervalued in local currency terms. That’s the case now with stocks in the United States, Japan and most fast-growing markets in Asia and even parts of Africa.

Over the next 12 months, the U.S. broader market is going to post double-digit gains, surprising most investors who are still bearish and worried about sub-prime and housing-related issues. Historically, stock market declines have preceded economic recessions; but thus far, stocks are just 2% from their all-time highs, credit spreads are still tight and commodities prices are soaring – hardly a macro environment for a recession.

U.S. stocks are the bargain of the decade for foreign investors because the dollar is dirt-cheap, earnings are still growing and American multinationals will yield a bonanza from overseas corporate earnings over the next few quarters following a U.S. dollar nosedive.

Call me contrarian, but 12 months from now, you’ll be happy you sold some expensive euro and C$s for undervalued U.S. blue-chip stocks.

The ABCs of Offshore Investing in Nassau, November 7-11

From November 7-11, The Sovereign Society will host its Second Annual Offshore Advantage Academy in the Bahamas, a terrific venue for novice and seasoned global-minded individuals seeking to learn everything from A to Z as it pertains to the offshore world.

Last year’s event was a huge sell-out; attendees from around the world jammed our massive conference hall for four days of lectures, including a valuable information-packed Offshore Advantage Academy binder containing segments from all lessons presented. If you’re debating coming to one conference this year, make it Offshore Academy.

I’ll be this year’s Investment Professor deliberating on offshore mutual funds, bonds, stocks, commodities, hedge funds, British investment trusts and currencies. I’ll also delve into international taxation of foreign investments, including dividend withholding and potentially onerous U.S. tax consequences for Americans buying offshore mutual funds and how to successfully defer the taxes on non-U.S.-based funds. I’ll also examine international investments and taxes for Canadian investors – a significant group attending the conference last year.

Currently, over 55,000 offshore mutual funds are available worldwide with Luxembourg still the largest hub for these products. After the United States, Luxembourg is the world’s second-largest mutual fund domicile, offering tax-free funds called Sicavs. But unlike mutual funds offered in North America, offshore funds sold primarily in Europe (Luxembourg, Ireland, Switzerland, Scandinavia) are available in euro, sterling, Swiss francs, the Norwegian krone and of course, the U.S. dollar.

Plus, retail investors can access a whole range of traditional and non-traditional funds like hedge funds, private equity funds, British investment trusts and managed futures funds without being accredited or forking over a few hundred thousand dollars. The entire gamut of offshore funds is far more exciting, more lucrative and for long-term global investors, probably safer on a risk-adjusted basis because of the multiple asset classes available to retail clients. For example, in the United States and Canada, you have to be a high net-worth investor to buy alternative investment products; although smaller investors can access these products through structured vehicles offered by some of the big banks, the fees are colossal and performance is totally uninspiring.

To really get in on the ground floor with some of the best hedge funds, you need millions. That’s not the case overseas. One of the world’s largest multi-manager hedge fund companies since 1983 continues to offer a terrific selection of top-flight money-managers from their Irish umbrella – and starting at just $25,000. The same complex also offers products denominated in dollars, euro, sterling and Swiss francs.

Going offshore certainly has its benefits from an investment perspective. But there’s also several important caveats investors must realize prior to investing their hard-earned dollars or euro. In November, I’ll give you the best investment ideas for 2008 and beyond, combined with important advice on how to avoid offshore taxation pitfalls so you can invest successfully and tax-effectively for long-term profits.

See you in the Bahamas!

Par-Value Heaven as Canuck Buck Soars in 2007

For the first time since 1976, the Canadian dollar is now trading at par-value versus its largest trading partner. On September 21, the Canuck buck or loonie, closed at par-value vis-à-vis the U.S. dollar, meaning one Canadian dollar equaled one American dollar. The last time both currencies traded at par was in 1976 when the secessionist Parti Quebecois was elected in Quebec and commodities prices were in the midst of a secular bull market.

And make no mistake about it -- Canadians are proud in late September…

The news media in Canada has taken the loonie’s new flight by storm since last Friday as a sense of newfound pride is evoked across a country that has almost perpetually harbored a weaker currency against its much larger American brother. Since hitting a 125-year low in February 2002, the loonie has surged a cumulative 62% versus the sagging greenback, now in its sixth year of a secular bear market versus most foreign currencies and gold.

Canada Now a Petro-Currency

Since discovering bitumen or tar sands in Northern Alberta, Canada has become the world’s second-largest source of untapped oil reserves after Saudi Arabia. It’s no surprise the Canadian dollar shadows the price of spot crude. On any given trading day, the loonie tracks the performance of West Texas intermediate crude oil rather than the economic trends affecting its largest trading partner south of the border where over 85% of all Canadian goods are shipped.

Indeed, Canada’s energy exports have skyrocketed this decade amid declining global reserves and China’s insatiable appetite for refined Canadian energy products and raw materials. As a result, Canada’s trade balance has been in a secular uptrend since 2002 while its fiscal performance has been the envy of international markets as tax receipts surge. Despite the country’s enviable twin surpluses, both Liberal and Conservative governments have refused to meaningfully reduce the country’s stifling tax burden on individuals, further bulging Canada’s budget surpluses.

Soaring Loonie Comes at a Price

Since 2002, I’ve repeatedly predicted a par-value currency relationship between the world’s two largest trading partners. Well, it’s finally here. Although the Canadian dollar has appreciated mainly because of a healthy balance-sheet and booming commodities prices, part of that currency gain can also be attributed to protracted U.S. dollar weakness since peaking in mid-2001. The American dollar has been in a virtual freefall over the last five years and has declined versus almost every currency in the world since 2002.

America’s fiscal burden continues to act as a drag on growth as a tirade of bearish developments encourage dollar-based selling, including the ongoing mortgage-backed crisis, housing woes, the Iraq war and exorbitant budget and trade deficits. Canada, on the other hand, has dramatically reduced its foreign debt over the last decade and continues to record trade surpluses almost every quarter.

But the soaring value of the Canadian dollar will exact a toll on Canada’s economy -- eventually.

A strong currency inhibits manufacturing exports as cheaper currencies in foreign markets compete to sell similar goods and services.

Canada does harbor a plethora of raw materials to feed and grow the world’s emerging markets. But the country’s non-commodity exports, including forestry, continue to bleed a slow death in 2007. The strong loonie is resulting is mounting manufacturing job losses, rising labor discontent and seriously damaging the country’s export platforms in Ontario and Quebec. So while Western Canada, loaded with natural resources, continues to benefit from the commodity bull market, the rest of the nation climbs deeper into a hole as exports struggle with an expensive currency and the government’s reluctance to cut tax rates. Business leaders have also increased the call to lower interest rates this year to suppress the loonie’s value and alleviate manufacturing losses. Indeed, until the U.S. sub-prime crisis resurfaced in July, The Bank of Canada had been tightening or raising interest rates.

For now, Canada is enjoying a strong currency. It is the best-performing dollar-based unit in 2007, up 17% versus the U.S. dollar and even rising 8% versus the almighty euro. But at some point over the next several months, I expect the loonie to finally head back to earth after its wings are clipped by a U.S. economic slowdown and easier Bank of Canada monetary policy. Never in Canada’s history has it managed to defy a U.S. economic slowdown or recession.

The loonie has further to sail and will probably fetch a premium against the sagging greenback. But 12 months from now, I’ll bet the Canadian dollar will buy less, not more, American dollars as the economy slows amid declining trade-flows between both markets.

S&P Goldman Sachs Commodity Index Hits All-Time High

If the global economy was headed for a serious slowdown or the United States facing an economic recession, commodities prices would be sharply lower by now. But that’s not the case as we shortly conclude the 3rd quarter – a period mired by severe market volatility, credit shocks and multiple hedge fund failures. In fact, the S&P Goldman Sachs Commodity Index (GSCI), heavily tilted towards energy futures, continues to hit new all-time highs this month while the CRB Index and the Dow Jones-AIG Commodity Index hit fresh 52-week highs yesterday. That’s not consistent with fears of recession or a concerted global economic slowdown.

The GSCI has been propelled this year by soaring crude oil prices, up 36.5% to $83.32 per barrel. The GSCI holds 71% of its constituent assets in energy futures contracts and remains the top-performing commodity benchmark in 2007, up 25.8% -- easily outpacing major market stock indices.

Also boosting the popular index is the huge move in agricultural commodities as wheat and soybeans hit new multi-year highs. Agricultural commodities represent 13.3% of the GSCI with wheat the largest constituent at 4.3%. And precious metals have been running like mad this week with spot gold now sitting at a 28-year high. But the GSCI only holds 2.2% in gold and silver – the smallest allocation to the precious metals among the major commodity indices.

For Commodity Trend Alert, my weekly natural resource investment signature service since 2001, this has literally been an amazing time to be a commodity bull. I’ve been heavily long gold stocks and the grains all year and those trades are now paying off in spades with my primary gold mining recommendations up more than 20% this month alone. Also, our positions in the incredibly profitable offshore oil drillers has resulted in a 43% gain thus far in 2007 as rig rates top over $500,000 per day and a backlog continues as the energy majors desperately try to find new reserves amid Peak Oil.

To be sure, I’ve been stopped-out of cheap ethanol and took a beating in extraordinarily oversold natural gas this summer. But overall, I’ve been hammering home the message all year that gold mining, the grains and energy would lead this rally in 2007. Indeed, thanks to Ben Bernanke and the resumption of the dollar’s bear market, we’re heading into commodity overdrive this fall.

I’m still heavily overweighted in gold, silver, oil and the grains this fall but would advise waiting for a short-term correction for new money following huge gains over the last seven days.

See you on Monday. Have a good weekend.

Bank of England Next to Cut Interest Rates

The Europeans really talk a tough game on inflation. In some countries, central banks have indeed raised interest rates this year, including the European Central Bank (ECB), The Bank of England, Swedish Riskbank and The Swiss National Bank. But over the next several months, if not sooner, most European central banks will reverse course and begin easing credit conditions as global economic growth wanes.

Make no mistake about it -- sub-prime has spilled over to Europe in late 2007. Banks are still starving for credit and in my eyes, central banks are undermining their economies by stripping their national banks of credit.

Since August, all signs point to a major credit crisis in short-term commercial paper in Europe. Inter-bank lending arteries still remain largely clogged with the ECB injecting over $500 billion dollars of credit into the financial system since August 9 to stimulate lending. Despite this tirade of cash, Euribor or the Euro Interbank Offered Rate remains well above the ECB’s target at 4.72% currently, barely down from a high of 4.75%. But Libor, or the London Interbank Offered Rate for U.S. dollars has started to ease from a high earlier last month at 5.72% to 5.24% for 90-day money this morning.

The Federal Reserve’s injection of credit since Tuesday after cutting the Fed Funds rate to 4.75% has probably killed-off the commercial paper crisis; but in Europe, central banks must do more to alleviate credit problems and that means lower benchmark interest rates. The Bank of England will be first to cut rates very shortly.

Starting on September 14, Northern Rock, England’s fifth-largest mortgage lender, suffered a run on its deposits with depositors lining up outside the banks’ branches.

Previously, the Bank of England remained vigilant, claiming it would not bail-out speculators. But a run on Northern Rock’s assets this week – the worst run in over 30 years in England, was enough for the Bank of England to relent and announce a bail-out.

Sub-prime has now forced The Fed and eventually, The Bank of England, the ECB and The Bank of Canada to cut lending rates.

Just six weeks ago, Fed boss Bernanke was warning about remaining vigilant on inflation; well, you know how that story ended on Tuesday. Other central banks will follow suit shortly.

As central banks cut interest rates over the next several months, I fully expect gold prices to finally surpass their 1980 highs and crack $850 an ounce and beyond in 2008.

Greenspan Owns Foreign Currencies – and So Should You

I pity those traders who shorted this market heading into yesterday’s FOMC meeting. No doubt, part of the Dow’s massive 336-point rally was due to hedge fund short-covering, or traders buying shares they were betting against. The Fed’s 50 basis points (bp) cut surprised most pundits, including myself, who believed Bernanke would reduce rates in 25-bp increments. The economy must really be in dire straights if the Fed unanimously agreed to go for a half-point rate cut.

But what made even bigger news for this investor was the dollar’s new low against the euro and gold’s fresh 28-year high – all indicating the Fed is now on course to reflate the financial system and flood the world with dollars once more. Below is a very bearish chart of the U.S. Dollar Index, which it an all-time low yesterday.

The U.S. Federal Reserve, and eventually the tough-talking British, Europeans and Canadians, will start to expand bank credit in order to avoid a serious economic slowdown. Britain just suffered a run on one of its largest mortgage banks last Friday – Northern Rock.

The Europeans still talk a tough game on taming inflation; in reality, the entire banking system is fragile with Germany and especially the United Kingdom, desperate for central bank liquidity. Over the next several months, if not sooner, the European Central Bank and the Bank of England will join the Fed in cutting interest rates. So will the Bank of Canada, whose almighty loonie is just barely above par-value and destroying the export economy as manufacturing job losses continue to mount.

The first thing you want to do now is unload more U.S. dollars in favor of the euro, the Asian currencies, gold and silver. Over the next 12-18 months, however, I expect gold to outpace all currencies against the dollar; I also think gold will smash the euro in relative terms.

On Sunday, I listened attentively to Alan Greenspan’s interview on 60 Minutes with Leslie Stahl. Greenspan’s new book, The Age of Turbulence, is making headlines just about everywhere. Ironically, Greenspan actually created the Age of Financial Turbulence, not to mention killing the dollars’ purchasing power in his 19-year reign as Fed Chairman. No other Fed boss created more dollars since the inception of the Fed in 1913. Yet the average American has no idea about this destruction of currency.

But one thing I noticed was Greenspan’s admission, however reluctant, of his foreign currency holdings. He said he was “diversified” in currencies. I’m also pretty sure he owns gold.

The dollar is now heading to new lows. Though I don’t expect a freefall versus the European units, the dollar will decline hard against gold. From now until early 2009, when I expect the Fed to start tightening again, gold will outpace most asset classes with formidable gains. And the right gold stocks will fare even better. That’s how I’m playing it in my Commodity Trend Alert, now in its 6th year.

Clouds Cover Land of the Rising Sun -- Again

Nobody said contrarian value investing was easy. And when it comes to Japan, that task continues to be a painful exercise in patience as capital markets continue to decline amid a mish-mash of political uncertainty, a strong yen and stalled economic growth since April.

The third quarter has been a bad period for global stocks as investors grapple with a crash in sub-prime mortgage-backed securities, a funding crisis in global short-term money-markets and several hedge fund and bank failures in Europe and the United States. The MSCI World Index of industrialized stock markets has declined 2.2% since June 30. But in Japan, the global sell-off has morphed into an extended bear market where stock-market values continue to get cheaper following the resignation last week of Prime Minister Shinzo Abe. Handcuffed by a minority government and a host of ministerial resignations all summer, Mr. Abe’s departure added fuel to a bear-market fire in Japanese stocks.

Surprising global investors, Japanese second quarter gross domestic product actually contracted 1.2% in the April to June period – the first quarterly contraction in four years following a string of bullish economic data for more than 48 months. Making matters worse, a sharply stronger yen currency since late July has punctured the export sector where Japanese multinationals have relied on a cheap currency to gain international market share.

Japanese stocks, despite offering some of the best values based on a price-to-book-value ratio and price-to-cash-flow basis are still trying to find a bottom. The Nikkei Index of large-cap stocks has declined 6.4% in dollars this year while the even more distressed and cheaper 2nd Section Index of smaller companies have shed more than 10%. Despite generally good corporate results for the entire market this year, investors just don’t want anything to do with Japanese equities.

Will the Carry-Trade Come Back to Life?

What Japan needs now is a leader capable of carrying out the economic reforms implemented by former Prime Minister, Junichiro Koizumi. The main contender to fill Abe’s shoes, Yasuo Fukuda, has vowed to follow in Koizumi’s footsteps. Fukuda doesn’t offer bold economic policies and doesn’t even enjoy wide popular support, but he does have all the right connections in the upper and lower Japanese houses – pivotal if economic reforms are to be continued and even accelerated under the LDP or Liberal Democratic Party. Indeed, international investors -- responsible for more than 50% of daily trading volume in Japanese shares, would probably lift the depressed Nikkei and 2nd Section from the near-abyss on any positive political developments.

Other factors contributing to market uncertainty is the Bank of Japan and the yen, which has rallied 8% from its lowest point in July versus the U.S. dollar as the infamous carry-trade has lost its momentum since markets peaked on July 19.

The Bank of Japan has threatened to continue raising short-term interest rates following its first hike last spring to a still historically low 0.50%. But throughout the summer, the Bank of Japan threatened to continue tightening monetary policy, hoping to raise interest rates to “normal” levels after years of ultra-loose monetary policy designed to resuscitate the deflationary-plagued economy from 1991 to 2003.

But with global money markets under the gun since July, the Bank of Japan is unlikely to resume rate hikes and that implies a gradual return to the carry-trade following the restoration of market stability, which has already begun since the Federal Reserve cut its discount rate on August 17 and the Fed Funds rate on September 18. The carry-trade has been instrumental in fueling global liquidity and investors and traders alike have borrowed cheap yen at low interest rates and reinvested those proceeds into higher-yielding assets. The odds of the carry-trade returning, even grudgingly, will boost world markets and reduce the yen’s value versus most global currencies. And that event alone should be enough to propel Japanese stocks higher.

Don’t Dump Japanese Stocks Now

At this stage, I would continue to hold Japanese stocks and refrain from selling cheap securities. Cheap is getting cheaper in Japan. But at some point, investors will be rewarded and rather quickly.

Compared to the rest of the world, Japanese smaller companies trade at 65%-80% discounts based on relative price-to-book-value ratios. The current price-to-book-value ratio of the Tokyo 2nd Section Index is 0.90 or a 10% discount to book-value. And unlike larger Japanese companies, they don’t reply on a cheap yen to boost exports, which makes this ongoing bear-market in values even more difficult to comprehend considering earnings have been mostly robust since 2003.

In a market where just about everything has gone from bad to worse this year for investors, Japanese equities remain excellent values and should not be sold at these distressed levels. A new Prime Minister, which will boost market sentiment by reinforcing economic reforms started under Koizumi, will probably act as the catalyst to finally drive equity prices higher. Stay invested in Japan.

Highly Cyclical Technology Stocks at Odds with Recession Risk

Since the re-emergence of the credit crisis in late July, one of the few sectors remaining largely resilient amid a market panic has been the technology sector. More precisely, semiconductor companies continue to report strong demand for their products with Intel Corporation the latest entity to recently boost its Q3 guidance. That’s bullish news for the world economy because technology, highly cyclical to economic trends, is in the midst of a mini-boom in the industrialized and emerging markets in 2007.

In prior economic booms and busts, technology stocks responded with a high degree of correlation to broad-based economic trends. The last boom-bust cycle in the late 1990s notwithstanding, tech booms in the 1980s and 1970s all led to major price declines for sector stalwarts as recession fears mounted, eventually resulting in periods of economic contraction. But this time, recession fears, though rising since August, have not derailed the primary uptrend for sector leaders like Intel, Hewlett-Packard and IBM. That tells me earnings remain strong and demand for their products unfettered by the bearish news still spewing on Wall Street and across European money-markets.

The above chart on Intel, from late June to September 14, shows strong support for the world’s largest semiconductor company by revenue, despite the 10% correction from peak-to-trough for global stocks from July 19 to August 16. Intel’s stock price has actually risen since June 30 – not declined, compared to a major hit inflicted across most sectors of the market since mid-July.

Technology stocks are still cyclical and any threat to global growth would have severely impacted their stock prices by now; the fact that this hasn’t occurred is a very bullish sign for global economic growth and corporate earnings over the next 12 months.

To be sure, the ongoing sub-prime crisis and money-market tumult for mortgage-backed commercial paper will slow economic growth next year. But despite all the damage done to the real estate sector, hedge funds, private equity and massive central bank cash injections since August, the Dow is just a few percentage points below its all-time high. And semiconductor stocks have actually risen over the same period.

Now that’s a resilient bull – at least so far.