Sorry its been so quiet around here. Just a heads up: I may not be as consistent with my posts over the next few months due to some health issues within my family.
Alrighty! Lets dig into the market!
Stocks closed basically flat today as the bulls and the bears duked it out. CNBC was out screaming green shoots this morning based on the 11% jump in monthly home sales. They claim this was the biggest percentage in 9 years. That's quite a skewed statement considering we are now selling 300k homes a month vs. the 1 million plus per month at the peak of the bubble back in '05.
So basically, home sales rose by 30+k or so. Whoopty frickin doo! Let's see how home sales are doing a few months from now as the bond market continues to take interest rates higher!
I'll tell ya folks: You need to really read into the "green shoots" headlines when you hear them because 90% of the time they are exaggerated and mean very little when you look at the grand scheme of things.
Speaking of interest rates take a look at the 10 year today:
Yields were up fairly sharply from Friday. The yield closed over the 3.7%. What I wanted to stress with this chart was the volatility seen in the bond market today. Yields came down a bit after two bond auctions went pretty smoothly.
To me, this volatility is a clear sign that the bond market is extremely nervous about the colossal amount of debt that needs to be sold in the oncoming week and months.
Take a look at the number of treasuries that still need to be sold this week alone:
52 week Bills, $27 billion (July 28th) 2 year Notes, $42 billion (July 28th) 5 year Notes, $39 billion (July 29th) 7 year Notes, $28 billion (July 30th)
Folks, in normal times this amount debt would be sold over the course of months not one week! Where is the money going to come from to buy all of this paper? Money doesn't grow on trees!
How long can this be sustained? Let me answer that for you: Not long! China doesn't have unlimited cash! Especially when they keep telling the world that they plan on diversifying their dollar assets by buying other assets.
Speaking of which, the dollar was down once again today. Gold and silver continued to rise. Anyone seeing a trend here?
My holdings remain the same
Until the government ends this spending game I expect these trends to continue.
I thought you all might be curious as to where I am putting my money now. Disclaimer: This is not trading advice. I haven't made a trade in months but here is where I stand. The majority of my retirement remains in cash and bonds with metals and BEARX(see below) as a hedge. My trading account philosophy has been simple recently. Short treasuries, long metals, short the market.
I have had these trades on for months and they have hedged out nicely. I expect at some point that we will see a 1932 scenario where both bonds and the market sell off simultaneously. This would be the best case scenario for my trading portfolio.
In terms of holding short for longer periods of time as a hedge in an investment portfolio, I love the Prudent Bear Fund(BEARX).
The nice thing about BEARX is they hold lots of metals as well as being short. As a result, they hedge each other out in times like this where the market is rising as the dollar drops in value.
When this market rolls over and deflation becomes a short term risk, I expect the shorts to hedge out any losses on the gold holdings in the fund. This is a nice conservative hedge to hold onto in a volatile market. Let me repeat: This is not trading advice. Its simply my approach to this wacky market.
The Bottom Line:
Its all about treasuries this week folks. If the government can continue to successfully sell these auctions in the short term, the market could flat line or drift higher.
I personally believe that at this point the market has come to a standstill. The bulls are not sure how much more upside they have after such a huge move. Meanwhile, the bears are jittery after taking such a beat down. They are also concerned that the slight(and I really mean slight) signs of economic recovery in certain areas of the economy may provide further fuel for the bulls.
This sets us up for a potential borefest that could last throughout the rest of the summer.
I believe at this level on the S&P, both the bulls and the bears simply don't have a lot of conviction as to where the market heads next. IMO, Its going to take some type of large trigger to move this market sharply in either direction.
What could this trigger be?
For the Bears:
A failed bond auction. A large bank failure perhaps?
For the Bulls:
More green shoots? Positive GDP growth in the second half of the year?
One thing seems quite apparent. Bernanke seems hell bent on not allowing any large banks to fail. He ignorantly believes that they can earn their way out of this.
If he really believes this, then we are going to see a generation of slow to zero economic growth in this country. None of the banks will lend to any great extent until their balance sheets are repaired.
If you want to see how well this kinda of response to a banking crisis works out go take a look at Japan. Its been 20 years since their bubble blew up and they still aren't lending!
Its kinda hard to start recovering economically when a potential small business owner has no to access to capital because the banks don't want to lend them any money. God forbid the banks are forced to take their losses.
Stay tuned. The bond selling bonanza continues throughout the week!