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:

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  • 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.

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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.

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