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)