Yesterday the 4 week moving average of initial unemployment claims was above 350k for the second week in a row. This is a bad sign for the economy. Other data out the past week has been awful -- home sales, durable goods, home prices, consumer confidence, inflation. On Monday the ISM manufacturing will be released, and it should show that manufacturing contracted in February, confirming the start of a US recession. Financials continue to disclose major losses while corporations have started to anounce layoffs. Mortgage rates and spreads for much corporate lending have ticked higher over the past month even though the Fed cut rates by 125 bps.
Despite the abysmal news, the equity markets performed fairly well the past week, rallying higher on several days. I admit this made me uneasy -- a market that can rally on bad news may be a market that had already priced in the bad news, and is now ready to move higher. I am more than willing to admit this is a possibility. But the more likely scenario is that it was a short-covering rally / bull-trap. It seems that I misjudged the level of short interest out there (there is a lot), and probably some people were forced to reduce positions into the rally. My primary rationale for this belief is that the bond / credit / FX markets are not confirming the equity rally. TIP yields are still very weak, treasuries seem to have plateaued, credit spreads are going ever higher, and USD keeps sinking. If equities were really going to mount a sustainable rally, I would expect at least some of these markets to provide some support.
So the million question is: how long can the market hold up in the current barrage of negative economic, financial and corporate news? The answer is: probably not very long. In fact, there are some signs that the rangebound nature of the past few weeks is coming to an end. US equities faltered late-Wednesday of this week then were down about 1% yesterday. European equities are down over 1% this morning. More importantly, JPY/USD has moved downwards by an incredible 4 yen over the past week, including about 2 yen in the past 24 hours. JPY/EUR has moved by 2 yen in the past few hours. Could this signal the start of the next phase of meltdown?
As mentioned last week, gold and oil continue to power higher, and I think this may continue for a while longer. It is instructive that there seem to be no "serious" analysts predicting $120 oil. Everyone seems convinced that the price is so high due to "speculators". Are all the hedge funds in the world long? Perhaps, but the real money investors do not appear to be, setting up the possibility of much more upside to come. I am rather annoyed that I did not get long energy shares in mid-January when I looked at them closely. Oh well, there will be another time -- this is a long-term story and patience is neccesary. What is much more annoying is that the TSX continues to strongly outpeform SPX on the upside, causing immense pain to my holdings of HXD. Given the expected strong performance of commodities for the foreseeable future, I will take advantage of any future weakness in the TSX to exit my HXD positions. Heretofore I will focus the short trades on other markets / sectors.
MARKET POSITION: SHORT - EQUITIES (11 units); GOLD - LONG (1 unit)
Friday, February 29, 2008
Thursday, February 21, 2008
One down, one to go...
I have said that I am looking for 2 things to confirm the start of a US recession: 1) the 4 week moving average of initial unemployment claims above 350k, and 2) the PMI below 50. Number 1 was confirmed today. Number 2 is not quite there. Although the PMI dipped to 48.4 in December, it rebounded to 50.7 in January. But I think it will be below 50 for Feb. Today's Philly Fed index was terrible. Manufacturers seems to be getting dragged down by all the gloom. There is a spreading malaise. Although many companies still have strong sales, they are getting worried about the future, reducing investment and stopping hiring. This is recessionary behaviour.
The big question is whether this will be short-lived, or whether it will morph into something long and severe. There are some good reasons for both. I have not yet decided, though I am leaning towards short-lived. TIPS have ticked up a bit over the past few sessions -- I am going to watch this closely to see if it might be indicating a return of econ. growth later this year.
As I predicted a couple of weeks ago, US equity markets have remained range bound. There seems to be some consolidation going on. I still believe that the next major move is more likely to be downward. The market has not yet fully discounted a recession. VIX is still only 24.5. When it happens, it will be time to cover my shorts and wait for the rally.
The Cdn equity market, on the other hand, has been rather strong over the past couple of weeks, and the divergence between Toronto and NYC is quite large. This is atypical, though perhaps not for this point in the cycle. I mentioned this was a possibility many months ago as I was worried that a strong commodity performance would hold up Cdn equities as US equities fell. It was the major reason I bought some SDS. But I am feeling a bit frustrated now. I am seriously considering two options: 1) reduce my HXD exposure in favour of SDS, or 2) increasing my holdings of gold plus adding energy to provide a sort of hedge. Ideally, the two positions would both perform well. The problem is timing...I am not sure if now is the best time. The one month return difference is quite large, and should narrow.
Gold and energy are up nicely over the past week, prompting me to review my position that they would fall further before moving up again. Gold has reached new highs in the past few days, and $1,000 now seems easily within reach (this seemed ridiculous not so long ago). The most interesting part is that gold cos. seem to be valued at a long-term price of $600-700. Oil related cos. are similarly valued at an oil price of $60-$70. Oil recently reached $100. Everyone thinks the price is crazy and must fall -- few people are predicting $120. This looks like a good contrarian bet from my perspective.
MARKET POSITION: EQUITIES - SHORT (11 units); GOLD - LONG (1 unit)
The big question is whether this will be short-lived, or whether it will morph into something long and severe. There are some good reasons for both. I have not yet decided, though I am leaning towards short-lived. TIPS have ticked up a bit over the past few sessions -- I am going to watch this closely to see if it might be indicating a return of econ. growth later this year.
As I predicted a couple of weeks ago, US equity markets have remained range bound. There seems to be some consolidation going on. I still believe that the next major move is more likely to be downward. The market has not yet fully discounted a recession. VIX is still only 24.5. When it happens, it will be time to cover my shorts and wait for the rally.
The Cdn equity market, on the other hand, has been rather strong over the past couple of weeks, and the divergence between Toronto and NYC is quite large. This is atypical, though perhaps not for this point in the cycle. I mentioned this was a possibility many months ago as I was worried that a strong commodity performance would hold up Cdn equities as US equities fell. It was the major reason I bought some SDS. But I am feeling a bit frustrated now. I am seriously considering two options: 1) reduce my HXD exposure in favour of SDS, or 2) increasing my holdings of gold plus adding energy to provide a sort of hedge. Ideally, the two positions would both perform well. The problem is timing...I am not sure if now is the best time. The one month return difference is quite large, and should narrow.
Gold and energy are up nicely over the past week, prompting me to review my position that they would fall further before moving up again. Gold has reached new highs in the past few days, and $1,000 now seems easily within reach (this seemed ridiculous not so long ago). The most interesting part is that gold cos. seem to be valued at a long-term price of $600-700. Oil related cos. are similarly valued at an oil price of $60-$70. Oil recently reached $100. Everyone thinks the price is crazy and must fall -- few people are predicting $120. This looks like a good contrarian bet from my perspective.
MARKET POSITION: EQUITIES - SHORT (11 units); GOLD - LONG (1 unit)
Tuesday, February 12, 2008
Rangebound
First, I think it necessary to address my last post, where I changed my mind about the direction of the market and decided that it was headed lower. In retrospect, this was not a terrible call (the market is currently about where it was that day), but again I was a bit impatient and rushed the trade. I previously had stated that I thought SPX would go to 1380, and I was waiting for some more optimism to return. Well, SPX reached 1396 on Feb. 1st, and again there were stories suggesting that a recession was not certain. Vix also retreated nicely. That would have been the best time to re-establish the short. C'est la vie...
On to today. The market seems to be slightly rangebound, awaiting direction. US equities were up yesterday on no real news, and European bourses are rallying strongly today on fumes. There is a possibility that this could turn into something bigger. Markets are down considerably over the past 2.5 months so a rally is not impossible. A recession still does not appear to have started yet in the US (my two criteria -- initial unemployment claims 4 week moving average above 350k and PMI below 50 -- have not yet been breached), allowing for some optimism that the bullet might be dodged. The Fed reduced rates by a silly 125 bps in one week.
But that does not seem to be the most likely scenario. A bear market rally may come soon, but I think there needs to be a real intermediate washout before it can be sustained. The Fed's inter-meeting cut prevented this from happening in January, but it needs to happen at some point. It is normal. It could happen when investors finally realise that a recession has started, and they can then comfort themselves by hoping that at least it will be short and shallow.
Gold still seems very overbought given conditions in bond markets. There is a good chance that it could fall sharply back to the $650-$700 range. But long-term I remain bullish so I will continue to hold my unit, hoping to add at better prices.
MARKET POSITION: EQUITIES - SHORT (1 unit); GOLD - LONG (11 units)
On to today. The market seems to be slightly rangebound, awaiting direction. US equities were up yesterday on no real news, and European bourses are rallying strongly today on fumes. There is a possibility that this could turn into something bigger. Markets are down considerably over the past 2.5 months so a rally is not impossible. A recession still does not appear to have started yet in the US (my two criteria -- initial unemployment claims 4 week moving average above 350k and PMI below 50 -- have not yet been breached), allowing for some optimism that the bullet might be dodged. The Fed reduced rates by a silly 125 bps in one week.
But that does not seem to be the most likely scenario. A bear market rally may come soon, but I think there needs to be a real intermediate washout before it can be sustained. The Fed's inter-meeting cut prevented this from happening in January, but it needs to happen at some point. It is normal. It could happen when investors finally realise that a recession has started, and they can then comfort themselves by hoping that at least it will be short and shallow.
Gold still seems very overbought given conditions in bond markets. There is a good chance that it could fall sharply back to the $650-$700 range. But long-term I remain bullish so I will continue to hold my unit, hoping to add at better prices.
MARKET POSITION: EQUITIES - SHORT (1 unit); GOLD - LONG (11 units)
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