Random musings on the market direction

I want to use this holiday weekend to fill in some gaps on major issues because I think we are at a key turning point. Because the economy has left the freefall stage and I have been more positive, I have been getting the feeling that I am the bull in a room of bears.  So you know something is wrong when Edward Harrison is considered the bullish one.  The last two posts this morning were about the banking sector and the economy more generally.

This one is a sort of stream of consciousness one on the markets – nothing particularly deep. These are my random musings:

  • Treasurys. they are getting stuffed right now. But, the U.S. is not the only one that has seen yields back up.  Germany has got the same.  The question is why?  Bill Gross has said it was an outgrowth of the loss in confidence in the U.S.’s triple AAA rating after the U.K. got put on earnings watch negative.  I can’t say if that’s true.  But, clearly, the U.S. is going to have a monster deficit and the monetary stimulus seems pretty inflationary.  Now, at the beginning of the year, I was fully in the deflation camp. My mantra was “first the deflation, then the inflation.” I saw deflationary forces lasting through 2009, so I pegged gold as a wash and the Treasury bubble as getting even worse.  However, I also said the risk-reward on Treasurys was awful and TIPS were the better trade if you wanted to be long Treasurys.  This has turned out to be true because Treasurys are getting killed and the inflation trade is on.  The Chinese are not happy and have moved to the short end. Hence the backup in yields ONLY on the long end.  Everyone is piling into that short the long-end trade.  If I were Bernanke/William Dudley, I would start buying long-dated Treasurys in an aggressive and sloppy way to nail the shorts.
  • Equities.  The rally since March was way over done and I said the release of the stress test results was a sell the news event. It was. I especially felt the financials were overbought.  So, are we headed lower now?  It is hard to say because it depends on the economy.  A recovery means stocks go higher.  On par, this is not a point where you want to add new money in my opinion. If you want to gauge the recovery trade, look at industrials.  They would be a leader in a real bull market.
  • Precious metals: As I said, the inflation trade is on.  In my view, Chris Wood is right on the money in seeing gold zooming to $3000.  This won’t happen overnight.  But, the Chinese are hedging into gold. I think precious metals are a good place to put some money.
  • Oil: Ditto here.  A recovery also means that demand is going to increase and that means the peak oil trade will be back on.  I said oil was going to drop to $25 and rise to $55 before the year was out.  It dropped to $33 or so and is already above $60.  There is probably a lot of room to run here.  Gold is a better bet perhaps because oil can easily get zapped by a stalled economy.

That’s it.  Feel free to add your two cents in the comments, especially as regards emerging markets or Europe.

Update: onmore thing.  I mentioned on Thursday that a late day selloff would be a bad sign as it would mean selling on heavy volume on bad news – which is what happens in a bear market.  That didn’t happen, the market was up 50 points in the last hour I believe. So, the rally could continue.

  1. Stevie b. says

    Ed – this is my stream-of-consciousness response. The developed world can’t go on like this. Oil prices in particular would be a really severe restraining factor on any sort of global recovery. Fortunately, even assuming a newly-willing consumer (very unlikely), a global recovery is not about to happen any time soon because on top of the rise in oil, the rise in all the other natural resource costs including food would choke it off, never mind rising interest rates/mortgage costs – and if “They” manipulated the bond markets to keep the nascent recovery going, the currencies of those economies that were manipulated this way would crash.

    It can no longer be business-as-usual ever again. We need a new model, or else we’ll just end up right back in the mire, only more so and sooner than we think. The developed world needs to be a little bit more like Cuba and consume less by keeping what we’ve got going for a little longer than before, whilst the rest of the world catches up a bit. This does not mean that technological developments wont eventually lead us forward, but we need a pause to allow e.g battery technology to become mainstream, along with all other energy businesses from wind-power to solar to energy conservation.

    Yes, it may mean a bulge in unemployment and some will suffer – but the same thing happened in the UK under Thatcher and we emerged a better place. It’s a fact that unless we want to end up like the old ossified Russia, we need purges from time to time and this means those in the wrong place or born at the wrong time or with the wrong skills – they will suffer – but better some than everyone. Basically, the majority of us in the developed world need to be more happy with what we’ve got. Frugality does indeed need to be and must be more -in-.

  2. Anonymous says

    Market sold off, although not necessarily on high volume. Still no-man’s land.

  3. aitrader says

    has gotten

    …must be a unique American colloquialism. “Has got” would make Webster a happy(ier) man.

    On(to)more things…I think this is the sucker rally of the century. I’ll buy in when S&P earnings rebound, S&P P/E’s hit 12 or better, the BDI climbs to 20,000+, and oil rallies on fundamentals rather than hot air.

    Lots of learned folks seem to think we’ve hit a parallel to 1938. I assume they also mean skipping WWII and hitting the late ’40’s market climb.

    Why is it recent sentiment seems based more on “recessions only last 24 months or fewer” rather than a read of the core data and fundamentals?

  4. Wag the Dog says

    According to:
    “Speculators have been piling into the oil futures market and buoying up prices but that’s no substitute for real demand.” Oil is in contango but onshore storage for oil is running short with some countries turning to storage at sea (i.e. all those tankers that have gone unused in the recession) If there is no production cut, there will soon be a glut of oil hitting the market.

    For another alternative oil/gold analysis see:
    He does use a rather low estimate for CPI to reach his conclusions. I guess he’s a deflationist.

  5. Glen says

    I’d like to know what we’re suppose to be returning to; surely not what we left off with, that’s just not possible. The markets are returning to normal, what the hell is normal? If we’re looking for a “back to the future” scenario then expect more of the same just the next time around and nil support from a system that’s been milked to the hilt.

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