Friday, October 9, 2009
The relentless rise in the market has fooled even the best traders on Wall St. Many of them have taken a time out at this point and sit on the sidelines. I say why shouldn't they? We haven't really seen any meaningful pullback since the March lows.
The economic disconnections seen today are beyond belief: Bonds continue to rise even though we are issuing $100 billion a week at times. Something of note: Yields were up sharply today, but overall, they are priced far too low when you look at the risk of treasuries as the government relentlessly continues to dig itself into unfathonable levels of debt.
The rise in bonds in relation to the massive treasury issuances really makes you wonder if the world has gone mad. Has the law of supply and demand now been thrown out the window? In today's wacky world, does extra supply mean prices go higher? Insanity! Where are the trillions of dollars going to come from in the long term that will be needed to mop up all of the bond supply?
The answer in the short term is two fold: Either the Fed is printing like crazy ,or some very wealthy people(including FCB's) don't trust this rally and continue to hide in bonds.
Gold and the huge drop in the dollar tell you that the world is losing confidence in the US. The dollar is about the only thing that's trading rationally.
As the rally rolls on, I sit here and ask myself why the market moves higher as the economy continues to show zero signs of zero growth. Don't be fooled folks, Alcoa earning a measly .04 a share hardly represents a robust recovery. Earnings estimates have been dropped have been dropped to practically nothing.
If a company earns a profit or just breaks even, the market treats the stock like it's the next Google. The raves around Family Dollar's impressive quarterly beat cracked me up this week. Like that's a positive for the economy! The fact that we are forced to shop at a dollar store speaks volumes where we are today economically.
Despite the obvious, Wall St continues to effectively spin the "recovery" web. How this happens at a time in which the unemployment rate in Detroit hits 29% is any one's guess.
The only answer I have when it comes to explaining the craziness on Wall St is speculation. I believe that the traders have overwhelmed the long term investors in the stock market. "Buy and hold" in this new world means holding a stock for a week versus the old days where long term investors held a stock for a generation.
The quants at Goldman, day traders, hedge funds, and the rest of the trading desks on Wall St have pretty much taken over the trading volume each day in the market. As a result, the market from a fundamental standpoint means nothing. It's all about the short term price action.
The Bottom Line
Too many people keep looking at the market like its a trading mechanism versus a place to invest for the long term.
Anytime a stock, oil, or the dollar makes a big move higher or lower, the first thought is "Wow! There are too many people on one side of the trade!".
The thinking in a traders market like this then becomes"lets take the other side" because its overdone.
This mindset is why I believe you have seen insane moves to the upside on stocks. I mean how many insolvent banks are up 300% since March?
The same price action has been seen in the broke broke REIT's that have doubled since the lows?
I mean granted: The market loved all of their capital raising, but all it has done is allow the REIT's to pay off bad debts on their balance sheets. They are not putting this money to work. This money will not lead to future profits. All this will do is prolong the agony of the inevitable collapse of commercial real estate.
My point here is way too many people have become obsessed with becoming a "trading" contrarion/speculator versus looking at the actual fundamentals!
As a result, the market has gone haywire. The problem with the trader"contrarions/speculators" is they only hold positions for hours or days. This is a big negative for the market longer term.
I say this because the result of such short term trading does nothing scare long term investors out of the market because no longer makes any sense fundamentally. Just look at treasury yields if you don't believe me.
I think it's time that we all stop looking at the market as a speculative casino. The longer we treat the market like MGM Grand, the more distorted the price action will become. The problem with this of course is at some point, the fundamentals will return because they always do.
When this occurs, there will be a lot of people caught with their pants down.
The time to own stocks is when they are trading based on fundamentals. You are asking for a beating if you continue to speculate. Don't believe me? Go find a house flipper and ask them how they are doing
Tuesday, October 6, 2009
The bond market sent a strong statement today about their confidence in both the stock market rally and their fears around inflation.
As you can see below, we had a 4 week treasury auction today that saw a very strong BTC(bid to cover) of 4.7:
Note that the participation in this auction from the indirect bidders(Foreign Central Banks) was over 61% which is a very healthy number. This was an A+ auction in anyone's book.
The problem here folks is it's a 4 week auction with an interest rate of .04%! There is basically ZERO risk if you decided to participate in this auction.
My querstion here is if there was a lot of confidence in the recent stock rally then why would be see such a strong flight(nearly $5 bid for every one dollar accpeted!) into short term bonds that pay virtually nothing?!!!!
Can you say Capital Preservation?
Now let's take a look at the 3 year treasury auction from today:
As you can see above, the BTC was an underwhelming 2.76 and the indirect interest fell below 50%.
Personally I am not impressed.
The Bottom Line
So what is the bond market telling us? It says short term treasuries are safe.
However, over the long term, the lack of interest in the 3 year auction tells you that the bond market has no interest in holding a 3 year bond with an average interest rate of 1.44%.
To me this signals that the bond market is worried about both inflation and the potential of a breakdown in the US dollar. Why wouldn't they be after seeing gold rising above $1040 an ounce today?
The FEAR of inflation and a dollar collapse is why the bond market is acting this way. Keep in mind that there are still tremendous deflationary forces on the economy via the consumer. The Fed is fighting this deflation by throwing trillions of dollars at it?
So who wins? IMO this is still anyone's guess. However, I continue to be attracted to metals in this scenario because I am beginning to believe that the world is losing confidence in the US and their ability to control their deficits and spending.
If they lose confidence in our ability to pay back our debts, then the dollar will eventually breakdown.
As a result, the world now feels they must diversify out of the dollar and into things like commodities and precious metals.
Bond Auction Alert!
We have a huge 10 year auction tomorrow at 1:00 that will be fascinating to watch given today's action in the bond pits. If the world bails on the 10 year auction tomorrow, you could see bonds sell off severely.
I expect a volatile day tomorrow. Hang on tight boys and girls!
Monday, October 5, 2009
I may be away for a few more days depending on how I feel. There hasn't been to much to discuss recently anyway.
The recent move in Gold is an interesting one. We are back up near the recent highs of around 1020 or so.
There are rumors swirling out of England that oil may no longer be priced in the US Dollars.
It's becoming increasingly obvious that the world continues to slowly but steadily lose confidence in the US dollar. The Fed has no problem with this as long as its controlled because it helps them in a variety of ways. They want reflation/inflation because it helps asset prices hold. It's also been pretty bullish for the market....For now that is. That will change if oil gets back up to $140.
At the same time, the consumer is creating tremendous deflationary forces on the US economy as they lose their jobs and their wages decline or stay flat. U-6 unemployment is now a staggering 17% folks.
The unemployment rate for young workers is now closing in on 50%! Although the market moved nicely higher today, the market has been pretty choppy lately.
The recent move higher in equities appears to be as a result of the falling dollar combined with fund managers that are forced to chase prices here in order to keep up with their rivals.
The bulls also expect to see strong GDP growth in Q3 and Q4(I tend to agree) because the comparables from last year are going to be pretty easy to beat.
The question you need to ask yourself here is has the market already priced this in? Could this be a sell the news event when the topline of these companies remain flat or declining while profits increase?
Another question you need to ask is has the "cash for clunkers" and the "first time home buyer rebates" taken some growth out of the economy for the second half of the year. Could we see surprises on the downside?
I am leaning towards mildly strong growth heading into the end of the year because the financial system almost came to a halt last year. This kept everyone including businesses and consumers on the sidelines.
That's about it for me tonight kids. I need some ZZZ's.