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12072009 May 25, 2010

Posted by easterntiger in Uncategorized.
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Weather Report 12072009

Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) up to 25%;  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks – last 4 weeks, thru 12/05 – -+6.01, +24.51, +9.84, +4.75

American stock markets which have risen and appear to be stable in the midst of last year’s backdrop of financial chaos are nothing more than high-risk, sugar-coated deceptions. In the United States, the infamous “Plunge Protection Team” (PPT), has been busy at work, engineering the most remarkable recovery in the Dow Jones Industrials, since the 1930’s. The Dow Industrials average is up 60% from its 12-year low of 6,500, and is perched near the 10,400-level. The impact of government stimulus has actually encouraged greater risk-taking, as evidenced in the higher returns on speculative stocks as compared to higher quality stocks, which have actually returned lower multiples. This is a repeat of the ‘bull within a bear’ which began in February of 1933. This resulting euphoria and greed that dominates stock market psychology today is completely reversed from the fear and panic meltdowns that prevailed in the aftermath of the default of Lehman Brothers, a year ago.

Operating under the elixir of ultra-low interest rates, and flush with trillions of paper currency of uncertain value at their disposal, courtesy of the world’s top-20 central banks, hedge funds and banking Oligarchs are once again making risky and daring bets in commodities, emerging markets, junk bonds, and blue-chip stocks, defying gravity with trades that would have been un-thinkable just six-months ago.

In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum – the euphoric illusions of V-shaped recoveries, the “Group-of-20” have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe’s annual economic output. The G-20’s spending spree has been used to fund capital injections into banks (mostly for hoarding, not lending), soaking-up toxic assets (once again), guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap, short-term liquidity. The so-called ‘carry trade’ is fuled by the borrowing of money from countries with low interest rates, first Japan, and more recently, the U. S. This cheap money is then traded into higher yielding instruments for high-probability profits. In keeping with the dollar’s 16% slide since late March, crude oil, base metals, gold, and grains have also surged sharply higher. The connection between soaring commodity and stock markets and a falling dollar points to the speculative nature of the carry trade. However, one primary hazard in terms of the U. S. dollar is exemplified by the fact that the Swiss economy is 1/25th the size of our economy, while the Swiss franc has recently reached U. S. dollar parity = 1 U. S. dollar for 1 Swiss franc! Why the difference? The perception is of greater stability in the Swiss economy! The influence of the dollar will continue to wane over time, as well as ANY OTHER ASSETS measured in dollar terms – hello Dow Industrials average, which might be yelled the loudest, but, which doesn’t make it important. One of the technical measures I follow indicates current market weakness as similar to that earlier in the year before the plunge into the March low – it has fallen from over 1100 advancing issues/day in mid-October to under 400/day for much of the past 5 weeks; closer to April lows – below zero indicates a declining market. (A source of mine refers to this a a ‘zombie’ market.) I suspect a a flattening into the end of the year, to maintain most of the year’s appreciation, before heavy selling resumes.

Lacking a better strategy for rescuing the banking system and the global economy from plunging into another Great Depression, global central bankers fired-up their printing presses, deliberately inflating asset values on the stock exchanges. By artificially boosting investor portfolios with cheap money, the top-20 central bankers hoped to boost the ‘spending’ confidence of households through the so-called “wealth effect.”

Last weeks’ “good-news” on the employment picture (lower initial jobless numbers, lower unemployment rate) were further examples of our over-confidence in statistical guesswork – from the oft-maligned Bureau of Labor Statistics ‘birth-death’ model, estimates of growth and shrinking of growing or failing businesses. It habitually fails to account for actual living, breathing, but, struggling people who do not fit accurately into specific statistical categories. And, based on the last two recessions, we’re still more than a year away from a sustained decline in the jobless rate. The model will undergo a major adjustment next quarter, adding about 220,000 to the jobless picture, just to compensate for recent adjustment errors. The broader, but, lesser known U-6 jobless rate, (as opposed to the more widely reported U-3 rate), includes the long-term unemployed, and part timers seeking full-time work, and is hovering at 17%, reminiscent of the Great Depression era. Thus, the US-stock market has been climbing a “wall of worry,” amid a cautious sense of optimism combined with guesswork, but also beset by underlying jitters, that the economy faces a rocky road and the Dow Industrials might not stay above 10,000 for long, without further artificial stimulation.

When measured in “hard money” terms, or in relation to the price of gold, the Dow Industrials is trading at 8.95-ounces, – near the same exchange rate that prevailed when the Dow was at the 8,200-level in January. Thus, utilizing this simple measure of valuation, – more than half of the Dow’s post March 10th rally, or roughly 2,200-points, is simply an optical illusion. More specifically, a stock market bubble has been inflated by the Fed’s money printing scheme, copied from Japan during their slump, and referred to as quantitative easing. However, in spite of the daily ups & downs, the major indexes are stuck at 1% or less from their highs of mid-October.

The combination of ultra-low US$ Libor/interest rates, a sliding US-dollar, higher commodity prices, lifted the gold market above the psychological $1,000 /oz level, where it’s managed to stay for over two months. As such, gold might become the next asset bubble if G-20 central banks continue to print money.

This is especially true in the event of a currency crisis in which gold’s buying power will increase from a devalued US-dollar in the currency markets. The US-dollar has been under selling pressure since October 6th newspaper report said the Arab Oil kingdoms in the Persian Gulf are secretly aiming to replace the US-dollar with a basket of currencies in exchange for their crude oil. The basket of currencies reportedly includes the Japanese yen, Chinese yuan and Euro, as well as Gold. Although a correction appears to be getting underway (rising dollar, falling commodities/stock prices), continued pressure on the dollar with represent a two-edged sword on related assets, and a false sense of security in rising values of dollar-based assets.

Strictly short-term, now might not be the best time to accumulate gold or other precious metals, after such a hot run, powered partially to offset the declining dollar. That is, at least, until a certain correction to the $850-950 range occurs, even if/especially if it continues above $1200 first. Further, silver is now more attractive, having not made the stellar run by gold, which accelerated after the purchase by India of over 200 tons in November. The International Monetary Fund has another gold sale planned, so prices are unlikely to retreat near term.

A short burst in interest rates prior to the jobs report last week removed some of the modest gains in the F fun since late October. I’ll park them away from that fund until the upward correction in the dollar shows signs of reversing, and the dollar drop eventually resumes.

***The Weekly Momentum Indicator is a strength measure of the S&P100, the largest 100 stocks in the U. S., in terms of market capitalization (share price of each of the 100 stocks times the number of shares available to the public).  The WMI is the difference in the S&P100 average opening price for each of the past three Monday mornings and the average closing price for each of the past three Friday afternoons.  This detects upward, sideways or downward movement of the overall market, since the markets generally move in synch from one index to another, and correlates very well with identifying opportunities for reward/gain and for situations for risk/loss in all equity indexes.  Rising numbers from the prior week are positive opportunities, while falling numbers from the prior week are avoidance opportunities.  I have a weekly, ten year history for this indicator at the time of update in this report (12/07/2009).***
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