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07182001 July 17, 2011

Posted by easterntiger in economy, financial, markets, stocks.
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Current Positions  (Changes)

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

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 7/15

-14.92, 28.52, 30.95, 24.27

(3wks ago/2wks ago/1 wk ago/last week)

It’s time to fold up my tent and get out of the weather, because, it could get rough.

I’ve exited my remaining 20% F fund allocation that I left to suffer at the hands of the rapid interest rate jump last month.  To sell it all last month would have meant ‘locking in a loss’, since rates are now again at their ‘pre-jump’ lows.

The focus shifted to other fundamentals in the past two weeks, lowering rates right back down to the previous low level, keeping intact my gains from the rate plunge that started in early April. Signals indicate a possibility of slightly lower rates, but, after  a trend that has lasted 3 months, a reversal in the other direction is much more likely.

Plus, the story of the day/week/month is the debt ceiling battle.  Apart from the political discussions, opinions or indications, it’s very clear that the U.S. MUST take a much wider view than politics (the word ‘backfire’ comes to mind), and not fail to deliver on the guarantee expressed to the bond buyers upon whom we depend at our regular bond auctions, including some of the $1 trillion worth in the hands of the Chinese (who’ve explicitly warned against more ceiling/default drama) when it’s time to make those payments next month.  Some damage has already been done with the handling of this exercise.

Among the damage we can see that has already begun:

* Moody’s put U.S. ratings on review for downgrade. S&P says the damage is done and they may downgrade the US even if a deal is done.  So, now we see that, in fact, the debt ceiling debate has done damage to the credibility of the US.

* The manager of the world’s largest bond fund, Bill Gross of PIMCO, put it this way.

“Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008…

If our government doesn’t give a damn about the greenback dollar and its solvency, why should we expect others to protect its status as a reserve currency — a privilege that, by the way, lowers our interest expenses by an estimated $30 billion annually?

The answer to our modern-day Hamlet’s question then, is that there should be no question at all. The debt ceiling must be raised and not be held hostage by budget negotiations. Don’t mess with the debt ceiling, Washington. Bond and currency vigilantes will make you pay.

Bonds, interest rates and all related markets are likely to be very volatile for an undetermined period of time.  The Federal Reserve has not made formal commitments to buy our treasury bonds, assisting in lowering rates, with the completion of QE2.   These short term plans have once again run into a ‘….what do we do now…’.

The one-week stock surge from June 27th looked impressive.  Many commodities surged at the same time.  This could have been nothing more than ‘position adjustments’ in anticipation of the end of market feeding by the Fed.   On the bigger picture, it merely created the third point of a three-peak formation (earlier peaks in February and May near the same levels), similar to what appeared in chart formations right at the end of several of the all time high levels (these current peaks/levels are lower than those peaks/levels of 2007), and just before the year-long slump began prior to the crash.

Until the dust clears, I will be clear of all of our rate sensitive funds, F, C, S & I.  This is particularly true of the C/S/I funds, with technical measures showing multi-year ceilings at hand, and, when combined with the ratios of ‘smart money’ moving into protective positions also at multi-year highs, indicates a much greater probability of downside motion than at any time since all time peak in late 2007.

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