Global equity markets are markedly lower this week, but the slide so far has been rather orderly. The situation reminds me of last July or early January. The other, larger financial markets (FX, bonds, credit, commodities, etc) are signalling major problems, yet the equity markets are only just beginning to cotton on. USD/EUR is much lower, short-term government bond yields have collapsed, credit spreads (swaps, LIBOR, corporates, munis, agencies -- you name it) are blowing out, gold is pushing $1,000 and oil is well over $100. Banks are short capital, risk aversion is high, and liquidity is tight. 5 year TIPS real yields are now less than zero! The response? SPX is still above its January lows, and VIX is at 26.5. It's like the equity market has run off a cliff, but is only just realising it now....
Just to throw in one more issue: inflation expectations appear to be rising in the US treasury market. No wonder -- surprising it took so long. This is negative for earnings multiples. And I am not going to discuss the monolines.
As for the economy -- it's not looking good. Not terrible, mind you, but not good either. Both ISM surveys were below 50 this month. As the 4 week moving average of initial unemployment claims remained above 350k for the 3rd week in a row today, I feel comfortably declaring that the US is officially in recession. The ISM and unemployment numbers were not as bad as the market feared, but that does not mean the recession will be short or easy. This is only the beginning. It is natural that the indicators will be mild at the start. It's really the trend that matters. And the trend is not good.
As mentioned above, gold and oil continue to power higher. I am wary of jumping in here. No need to be greedy. Patience will be rewarded on the commodity trade. I think commodity prices will take a big hit sometime soon as people re-equate the US slowdown with lower demand for commodities. They will probably also be affected by the tightening of liquidity and falls in other asset prices. But that will set-up a good buying opportunity. This commodity bull market is far from over -- it's just gotten too far ahead of itself at this point.
MARKET POSITION: EQUITIES - SHORT (11 units); GOLD - LONG (1 unit)
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