Flip Flop Flip Flop Flip Flop.
TGIF gang.
Well everybody here is how I see it. We now officially have a market that has everyone confused. I haven't seen this many flip flops since the 2000 election.
One minute investors buy stocks thinking that the worst of the credit crunch is behind us, the GDP hasn't hit negative "recessionary" numbers, and the global growth story seems to be alive and well.
The next minute the market sells off because of horrific news like the Case/Shiller housing price report, soaring oil prices, and rising inflation. Throw this on top of almost daily bad news out of the financials, and you have investors starting to question if we really are through the worst of the credit crunch.
Why is everyone so confused?
Because the data on the state of the economy continues to be conflicting. GDP is running below 1%, but its still not in recessionary territory. Some companies continue to beat earnings while others continue to disappoint.
Employent rates seem to still be holding at around 5.1%. Jobless claims are higher than usual, but steady and not increasing. There simply is no clear signal from the data that shows we are in deep do do or coming out of this slowdown. We all can take a guess of where we go from here, and I think you know where I stand(hint: Its not going to be pretty).
Commodities are all over the place. One week it looks like gold is going over $1000, and the next week its crashing due to margin calls and a sometimes strengthening US dollar. A ton of money has poured out of the stock market and flocked into commodities chasing high returns. This has made commodities very difficult and dangerous to trade.
Anyone holding large positions in gold this week are kicking themselves. I think one of the problems the market has right now is its not acting like it has in the past. Historically when inflation soars, gold and health care stocks have been common places to hide.
So far in 2008, health care is the worst performing sector, and gold has been relatively flat since the inflation numbers have risen.
Even the best are confused
The price action in the markets has confused even the best traders on the floor. Take a look at some quotes from Art Cashin's market commentary. This is a subscription service so I have no link. Art is a 40 year veteran trader who is often quoted on CNBC. Here was his take on Thursdays action today.
"Different markets looked at identical facts, or events, and came to very different, even contrary opinions.In Thursday's Comments we had noted that the yield on the Treasury ten year was onthe verge of breaking out above 4.05%.
Sure enough, Treasuries went right into thetank and yields spiked. Commodities went into virtual freefall. Oil plunged over $3and gold fell more than $20. By mid-morning 19 commodities out of a list of 20,were plunging into an abyss.
Even after oil shot up briefly, following a shocking dropin inventories, it rolled over and rejoined the rout.Traders assumed that the spike in rates was squeezing financing costs for carrying commodities and the squeezed holders were flinging them out the window. The yieldon the ten year moved much higher, past 4.11%.
Soon oil was down over $4 andgold had plunged $23.During all this, the stock market seemed to be taking a completely different andsomewhat conflicting view. They appeared to see the rising rates not so much as aninflation reaction. They seemed to think rates were rising because the economy wasfirming impelling the Fed to hike. Stocks were quickly up. The Dow soared 122points and the S&P was pushing against the 1405 resistance we had mentioned inThursday's Comments.
There was also another hypothesis suggesting a linkage in these reactions – at leaststocks vs. bonds.
This thesis suggested that it might have been an asset allocationswap. It might be folks getting out of their "safety bet" in Treasuries and dumpingCashin’s Comments May 30, 2008Page 2 of 3abthe resultant cash into stocks.
It was a nice theory but the selling in the far larger Treasury market looked so vicious andextensive that its value looked to be many more billions of dollars than were showing up in stocks.
Based on decades ofwatching asset swaps, I suggest that the size and scope of the selling in Treasuries would have produced a Dow rally of300 or 400 points. Since the move was much smaller in both points and volume, I have very strong doubts about it being caused by an asset swap.
The stock rally began to roll over around 1:00 and, by the close, gave back half the gains. It was, all in all, one of the strangest days of trading across markets that I've seen in a long, long time.
Colossal Carnage In Commodities – While the headlines and the pundits are concentrating on the oil plunge, almost to the point of obsession, the whole commodity spectrum virtually collapsed. As noted above, some folks felt the spike in rates (yield) may be putting the squeeze on financing commodity positions slightly in the present and most certainly in the near future.
Another possible negative that might collapse commodities across such a broad spectrum would be a sudden sharp stall of the global economy.Our friend, Dennis Gartman, and a few others suggest the catalyst might be the looming review of trading by regulators,and the imposition of position limits that might occur.
It might be better to cut back at your choice rather than being told to by regulators, which might cause a huge rush to the door.We are not sure whether the cause of the carnage was any one, or all of the above. We only know the collapse was widespread and stunning.
It looked very much like a severe case of one of the de-leveraging spasms that we've seen over the last several months. The whole commodity group must be watched closely over the next several days.
Weekend Reading – If you get a chance go on the web to the Dallas Fed.org and pull up the recent speech by Dallas Fed President Richard Fisher.
It is titled "Storms on the Horizon".
It should be mandatory reading for every candidate for public office, especially the presidential candidates. It is a readable, yet sobering, view of what may lie ahead. It is well worth reading."
My Final Take:
As you can see, things are happening in this market that confuse even the best of the best on the floor of the market. I guess Art and I are on the same page with Fisher's speech. I posted this speech a couple days ago in full and I advise everyone to read it.
Its going to take some more conclusive data to see where the market goes from here. I believe the data will continue to deteriorate and stocks will take a nosedive. For now, the market seems to want to take a pause and soak everything in.
Have a great Friday!
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