Thursday, September 10, 2009

Something doesn't add up

I am starting to see some very strange divergences as stocks continue their daily climb.

Let's take a took at some weekly charts.

Stocks have been soaring as seen here on the SPY(S&P 500):

Treasuries have remained relatively flat despite a large rise today. Here is the TNX(10 year) and its sharp drop in yields:


Gold has also steadily risen throughout the week as seen here via GLD:


While the dollar has sold off severely:


Some Questions:

These are the big 4 that I follow each day, and I think the price action here over the past week is very interesting.

My first question is why are flight to safety assets performing so well after such a huge move in equities?

Bonds should be selling off hard as stocks rise and yet yields have stayed relatively flat. There was a strong BTC of about 2.9 on a 30 year bond auction today which is why yields dropped so sharply today.

This leads me to my second question: Why did a 30 year bond auction see such huge demand with a yield of only 4.2%? This is telling you the bond market is not worried about inflation. In fact, if anything, this is a signal that the market is scared to death about deflation.

This leads to my next question. Why is gold soaring in price if the bond market is worried about deflation? Gold typically trades higher when inflation fears are present although this is disputed by some economists.

My next question. Why is the market acting so afraid as stocks soar to new highs? Strong inflows into bonds and gold are fear indicators. Could there be a lack of confidence among the bulls regarding this recent rally?

Finally, my last question.

How far does the dollar have to freefall before the stock market takes notice? Folks, this crashing dollar is extremely worrisome for me. A strong economy is almost always is accompanied with a strong currency.

There will come a time when the dropping dollar turns into a serious headwind for the bulls. At what level? Who knows the way this wacky market is trading.

What I do know is energy prices are creeping up along with other commodity prices as the dollar drops. Meanwhile, here in the US, wages are flat and we are losing jobs by the hundreds of thousands each month.

This has the potential to stop the consumer dead in its tracks. Just go back to the days of $147 oil if you need to refresh your memory.

The Bottom Line:

None of these correlations add up folks. The market is trading like it has 5 different personalities. You might as well just call it Sybil these days.

Today alone: Sybil acted bullish, feared deflation, feared inflation, and traded the US currency like its not worth the paper its printed on(which it probably isn't).

Sybil's price action is extremely unstable and inconsistent folks.

This should concern all investors regardless if you are bullish or bearish.

20 comments:

getyourselfconnected said...

Jeff,
Great post. I am working on a short one with just some linkage as I want to watch the football game. I agree the Titans are a tough team!

As far as the dollar drop, 72 on the index is my "red light" area. Still room to drop, but should 72 not hold I will be pretty scared.

Great summary of all the divergences amongst market indices. Plenty to think about.

Jeff said...

Get

Thanks a lot.

72 is an area I am looking at too.

Yeah I am getting out my terrible towel.

Here we go Steelers here we go!

getyourselfconnected said...

Jeff,
featured this one tonight, really found it thoughtful, especially about the gold/dollar pair not jibing with defaltion (should be a super dollar in deflation, yes?). A puzzling market to be sure. I am long SPAM (through HRL) and soups for swine flu season (through CPB) so I have the fear trade covered.

Anonymous said...

Speaking of sports, whether it is football, basketball or baseball, don't you think it has gone from pure competition to nothing but greed? Seems to me sports have a lot of similarities with Wall Street.

1) Do you think these players are worth millions and millions of salary for doing so LITTLE work out of the year? Furthermore, most workers get paid based on their skills. Bonuses are giving when they perform well. Why doesn't that rule apply to sport players? They get the huge salary (ie Barry Zito of Oakland A) first without proving their worth. Doesn't that sound like a WS executive salary plan?

2) Is it really true competition or just money grabbing? Look at the players skipping high school or college. Look at players jumping from team to team just because of higher salary. A good example is the Boston Red Sox. It took them so many years to finally win a championship. You would think all players would stay together next year to try for another trophy. But no one of their star player jumped because of the salary. At the end of the season, win or lose, they already get their big salary in the bank. Why should the fans care whether the team win or lose? I don't think most players REALLY CARE. DO THEY?

3)People look at these players like stars, even when they lie and cheat. Look at the baseball steroid scandals. Look at cheaters such as Barry Bond and many others.

In the old days, sports were pure competition. Today, it is nothing more than ass raping for the fans. I mean how much does a family has to pay for the tickets? I never understand why people are willing to spend their hard earned money to feed these overpaid athletes. It is just stupid!

CT-Hilltopper said...

"All That's Old Is New Again"

The playbook from the Great Depression is being used yet again.

The Fed and Treasury officials are colluding with the banks to keep how bad things really are from the public, because as long as confidence is high, the fleecing can continue. Confidence in the markets and the currency equals sheeple who will still play the game, keep their money in the banks, and keep paying those exhorbitant fees on their credit cards.

"That One" is the new Hoover. Enough said.

The remarkable thing is, the closer things get to falling apart, the calmer I've become.

Things are close now. Did you ever think you would hear a member of Congress call the President of the United States a liar during a speech on prime time TV. Not that I disagree with the guy, but the lack of decorum was appalling.

Stick a fork in us, we're done.

CT-Hilltopper said...

When I posted before I didn't get a chance to read the post from "anonymous".

I agree wholeheartedly. The contracts that ballplayers get today have made going to ballpark out of the budget of many people who love sports.

I don't know if you could ever have a "dynasty" team anymore. I keep thinking back to the Florida team that won the World Series (I believe it was the Marlins), and then the owners sold off the contracts of all the high priced talent during the off-season, leaving nothing but rookies and second stringers playing the next season. I mean, WTF?

I live close to NYC. I could take my kids to see the Yankees, Mets, Giants, Nets, etc., whenever I want (and I sometimes do), but we seem to have the most fun when we go to watch college games. Or we will go to see the high school team play once in a while.

Those kids play for the joy of the sport. Especially the high school kids.

Jeff said...

Anon

Well Said!

Couldn't agree with you more. I watch 1/10th of the amount of sports that I used to.

Its all about the money just like everything else in our society.

The old days of playing your whole career on just one team are gone.

Sad

Jeff said...

CT

I was shocked at that outburst as well.

Partisan politics may very well destroy this country.

We need them to unite and to seriously start thinking about solutions that can save this country economically.

They could start it off by figuring out how they are going to pay off trillions in debt!

getyourselfconnected said...

Jeff,
Steelers are getting killed on the line, but I think they pull it out for a win cus Titans are clueless.

Dave in Denver said...

Jeff, re: the BTC on the Big Daddy today: there is a valid school of thought that the Fed is clandstinely monetizing a significant part of the longer maturity Treasury auctions. Remember, the Fed has been spending the better part of $300mm buying back paper.

They also are using currency swaps with FCBs, especially the BOE, and these swaps then enable the FCB's to turn around by our Treasury paper.

There isn't anyone in their right mind who would be buying long Treasury paper right now.

The gold price is telling us what we need to know. Remember: In gold there is truth - for over 5000years.

Jeff said...

Dave

Yeah

There are a lot of games going on right now.

There seems to be an unlimited amount of money flowing. there is some serious money being printed somehow.

Just look at the US dollar.

The move in gold is certaianly a fascinating one.

I'm long metals here as well.

GL

Jeff said...

Get

Big stop.

Ben thrives in the last two minutes.

Lets see if he pulls it out!

Macroanalyst said...

There are many different ways to interpret moves in financial markets. For example, if the treasury auction didn't have such a good bid to cover, equity bears will say that US is going to have trouble in financing its debt and is unable to continue to print money to support the economy. Then when the auction is good, the same bears will question why people are flocking to treasuries when equity markets are soaring. So it seems like bulls are dead either way.

The following is my own interpretation of current market moves but it is by no means the only possible explanation. The US is still able to auction off long term treasuries which alleviates the fear of the US being unable to finance its huge deficit. This proves negative for the dollar as people fear the effect of monetizing debt on the currency. The weakening of the dollar leads to people flocking to Gold as the alternative currency. However on the equity front, armageddon fears are receding as witnessed by the narrowing credit spreads and decreasing volatility and cash are starting to be deployed again in this asset class.

Anonymous said...

well may be we need someone to tell liars when they see them. Just think about this: may be we could avoid a lot of deaths and wasted money if someone was brave enough to tell when they saw the lie few years ago?

getyourselfconnected said...

Jeff,
Pretty tough game last night. While both defenses were great, I think both offenses were basically inept. It's only week 1, so you cannot paint a picture yet, but that was some ugly football! Great call though, Steelers by 3 and indeed it was. I had the Titans score (10) coreectly picked.

Jeff said...

Get

Yeah. Hines Ward never makes mistakes like that.

The Steelers were dominant in the 4th quarter. Ben took the game over.

Great start for the black and gold.

Crazy market eh? This gold move has to be scaring the hell out of the banks.

getyourselfconnected said...

Jeff,
I agree huge win, but the play that sticks out to me was a 3rd and 2 on the 12 of the Titans, and Ben just would not get tackled or throw away the ball, and he gets sacked at mid field! I was thinking that I love quarterbacks that never give up, but you gotta have limits!

Jeff said...

thats what makes him so special.

Ben has no limits! 2 time winning Super Bowl QB who drove his team 8o yards to win the Super Bowl! lol

Alrighty the smack talk has started already.

Seriously, I wouldn't want Ben to play any other way. I have seen him make more plays whith people draped all over him than any other QB.

He threw for 380 yards without a running game. I think we had 29 yards rushing.

I thought he was amazing last night.

Anonymous said...

Jeff,

There is a big, big crash coming. I hate to sound like a doomsday prophet, but this latest "recovery" has been nothing but smoke and mirrors. There's no subtance behind it. Did you see the news report the other day that consumer credit has shrunk by the largest amount.... ever!?! That's a classic deflation scenario. The gov't is spending so much freakin' money to the right players... so it's keeping things propped up. Nothing makes sense because the whole economic system is now rigged and controlled by gov't spending and manipulation. I hate to sound like a conspiracy theorist, but what else happens when the gov't pours billions of dollars into an economy (specifically, into the bank & markets)? Eventually, market forces will prevail and a major correction will occur (even bigger than the one that occured a few months ago).

Mainstreet is hurting. Unemployment is huge and growing. People don't have money to spend. Eventually, a big, big, big crash will happen. It's gonna get ugly. I wouldn't be suprised to see it accompanied by a bigtime geo-political event here in the U.S.

Jeff said...

Anon

Well Said!

I see the same thing. I wish I didn't but the government can't continue to replace the consumer forever.

This will all end badly.