Yesterday’s trading action seemed more like a pause – there is certainly some confusing issues for investors trying to ascertain the big picture. First is the disconnect between the short-term vs. long-term rates. I feel the long-term rate increase is twofold – a combination of investors pulling their money from bonds and dumping it into equities, but a bigger problem seems to be that the large foreign investments we expect have moved to short-term paper because of their concern about inflation. No doubt the sharp increase in rates brings two problems to the table, first the concern about coming inflation and second it increases upward pressure on mortgage rates (not good if we want the housing market to recover). The other disconnect seems to be the huge commodity rally and equity rally – coupled with a weakening dollar. Higher oil and commodity prices hurt the bottom line of the economy – and will inject higher costs into goods (inflation). The weak dollar also creates concerns on two fronts, first it too creates price inflation and second it creates trepidation by large foreign investors of our treasuries as they loose on the conversion rate.
Something will give and it seems that everyone is coming out of their cave and jumping into one of several camps, there is the bullish equity crowd, the bullish commodity crowd, and the anti-dollar inflation crowd. One thing they all agree on is getting out of treasuries all at once (or so it seems) and with the foreign money not taking up the slack that means that the FED has to print more paper to buy more treasuries. And the crazy cycle continues. If we get a big enough ramp in the 10 year yields we could see a huge pull back in equities as the safe haven investor crowd rushes back into that door.
___________________________________________________
Jobless (ADP Report)
It seems that we are not seeing that bottom yet. ADP reported a higher than expected 532,000 losses in May and worst they revised up April’s number to 545,000. This doesn’t even include the 40+ thousand job losses from GM’s bankruptcy that trickles down to dealerships and part markers (some estimates that the bankruptcy and it’s foot print of jobs could be as high as 100,000 job losses in the next quarter.)
At some point the numbers will decrease, there is a finite amount of works and a finite amount of jobs. It is just getting to the bottom that is painful. The big problem is not the job loss in my view, it is when will we see the job growth and that seems to be pushed out farther and farther. We will find a bottom soon, but when will we see growth again. Companies are puckered up and are not about to expand their job growth until they can see consumer spending rise. It is kind of a circle – people will not spend unless they have a job, companies will not higher unless they can see people spend. Chicken and the egg problem.
____________________________________________________
Commodity Plays….
I was recently introduced to Stephen Leeb, I have only read some of his papers (not his books) – while slightly more extreme than Jimmy Rogers, Pickens, and others – he has a point. Resources are finite and consumption continues to grow, that is certainly a formula that we can all simply understand. Whether we like Supply/Demand economics, regardless of our ideology, that is how the world works. Food, energy, goods, etc are all driven by demand and supply.
The concern that people like Leeb and others have is twofold and it makes sense. First is the increase demand, regardless of consumer spending habits the world population is growing and we need food, shelter, and goods. The second is credit and a fiat currency. China’s demand is growing (sure the growth has slowed, but it is still at 5+%) for the largest population in the world – that is a ton of rice, gas, coal, etc. India is growing, Russia, Brazil, and others.
Commodity plays are also considered inflation hedge plays – because many goods can be sold in different currency as well. That gets me to this interesting story in Bloomberg, JP Morgan is not just investing in commodities, they are hiring supertankers to store those commodities. They just hired a supertanker to store heating oil off Malta. Why? Because they KNOW (we all KNOW) that demand is there – people NEED heating oil. The second part of the question is HOW MUCH heating oil and if the dollar continues to weaken – prices will go up even if demand remains a constant. Additionally – they don’t have to sell it to the U.S. there are many countries. http://www.bloomberg.com/apps/news?pid=20601087&sid=auE79A8VeBis
The point is that we are seeing more global type commodity plays, the world is taking notice of China, India and others are growing economies. The world is questioning the dollar (China and others have asked to drop it as a reserve currency) – that means smart money is going into NEED commodities, hedged against the dollar, with the ability to deliver goods into any currency and any market.
For us investors there are many ETF’s out there to make some commodity plays – from Oil, natural gas, gold, silver, copper, etc. Take the time to look into these, many are very liquid and trade options. They also offer a unique inflation hedge.
____________________________________________________
Futures Pre-market
That ADP number was not looking good and have sent futures lower at the opening. Expect a lower opening.
_____________________________________________________
Support / Resistance
Sugar Rally? Over bought? Most of the professional traders I know (bullish, bearish, and neutral) say take some equity profits off the table or at the very least roll up those hedges.
INDU 8500 / 8750 (We had a pop intra-day, but it pulled off. Do we revisit 8500?)
NDX 1400 / 1475 (We are a little over stretched compared to the SPX and RUT – we look to open below the 1470 level based on the futures. A revisit to 1450?)
SPX 900 / 925 / 950 (Like the other indices we stretched the neck the last couple of days – a cool off is probably in the cards.)
RUT 500? (Do we revisit 500?)
The question is not about the pull back, which is probably going to happen. The question IS it another buying opportunity as every pull back in the last couple months have been?
_________________________________________________________
Conclusion
The futures are pulling the market down a little going into the opening, the ADP numbers didn’t look good, and thus we might have a pull back into the close. The question that everyone is asking – will this be just another buying opportunity? So far every pull back has reflected just that. It is interesting if we watch the 10 year yield track the rally of the market, it feels like you can actually SEE the money coming out of long-term treasuries and into the equity market. However, if we see that rally in the 10-year yield slow or start to contract we could also see a decent pull back in the equity market. It might be a good short-term gauge to see if any pull back is a buying opportunity or not.
Stay frosty!
No comments:
Post a Comment