The market has not been able to hold a rally as the dollar strengthens which shows that the 60% rally we witnessed was purely liquidity driven. Essentially, the Fed, in their infinite wisdom, decided to drive investors out of less risky assets into high risk assets in order to re-inflate the asset bubble. While the Fed was busy pumping money into everyone’s pocket, except for the peoples, it has cost the dollar much of its value, or so you think.
Actually, the dollar is not near its lows of 2008 yet, but when the DXY was at 89 and it fell to 75 it felt like it plunged in value and had me concerned. I am still very concerned on a long-term basis, as I see a runaway government with deficits as far as the eye can see, but since everyone and their grandmother was short the USD, it was a given it was going to go up. Since this rally was a liquidity weak dollar rally a strong dollar will drive equities down along with commodities, which I wrote about on Sunday night I believe. As predicted, we had a super rally in the dollar and stocks got clobbered along with commodities and I suspect that will continue for a little while as the dollar rally will soon turn into a fear driven rally.
Whether I or you like the dollar long or short-term is irrelevant as the US government guarantees return of principal. This explains why at one point in time people were paying negative interest rates to the US government to buy short-term treasuries during the crisis. It was worth it for the comfort to know you were going to limit your losses because at that time you did not know if your bank was going to open its doors the next day. Do any of you remember that? Anyhow, this strength in the dollar will create selling in equities, just like a weak dollar drove the risk trade.
This explains why I stopped buying gold and this explains why I got short the market well over a week ago. It is not that I am perfect or a psychic it is just that things change, quickly. The dollar is not going to go in one direction forever and stocks do not always go up. It is also clear to anyone who is paying attention to fundamentals that the market is so far ahead of itself it is bordering on insanity. Valuations do matter and we are at a point where the valuations are just way out of whack with what is real and people are setting themselves up for real pain by not realizing this now.
If you do not pay attention to the things that are happening on the fringe of the markets, like the dollar, then you will miss the things that matter the most and impact your portfolios the most. Long-term the dollar will decline unless Washington gets their act together, but they won’t, so be bearish on the dollar long-term until proven differently, by the way that long-term bearish dollar outlook is also bearish on US equities as well. However, a short-term outlook is completely different and driven by the here and now so don’t confuse the two. I could be wrong about what I think is going to happen, but so far, I am right on the money and I think we are headed for more downside pain in the very near-term.
Cramer Fav RIMM misses its earnings and warns on 3Q09 earnings because higher cost handsets are “delayed” (too expensive for cash strapped consumers) until later in the quarter. While the mobile internet tsunami is real, yet very old news, it is also the least important item on the consumers mind at the moment as mortgage payments and food are front and center. This earnings miss is a warning about all of 3Q09 earnings, the top lines will be light, very light because profits are driven by cost cutting, firings actually.
This miss and warning shot has led to the international markets to open lower tonight, much lower. The Nikkei, Hang Seng, and Titans are down 2.7$, 2.5% and 2%, respectively which is probably how the European and US markets will open tomorrow. Frankly, it is looking pretty ugly and I believe this is the beginning of my long awaited selloff that should have come some 3 months ago, but has not. The only thing that has supported the market has been Dennis Kneale’s hope and huge amounts of liquidity and record low yields. For example of the irrational exuberance look at high yield bonds have had record defaults, but they continue to be bid up so clearly the risk/reward button in peoples head was broken, but it is about to be fixed.
As I have pointed out several times the S&P 500 is trading at 133 time’s current earnings and at a 26 forward p/e, which is very rich. Basically, earnings need to show actual top line revenue growth and GDP had to show a solid 4% growth rate, neither one was going to happen. While I missed a few points of growth I jumped out of the S&P 500, officially, at about 1015, or about August 7th and moved to TIPS and 2 yr treasuries. I did not do too bad, but even the TIPS and treasuries performance made me wonder what was going on, not all investment assets go up at the same time.
So, now we get our selloff and the only question is how big will it be? I have no idea, frankly. It could be as little as 3% or it could be as much as a 50% decline on the S&P, frankly the economic data is not really that good if you take an honest look at it, it is better, but not V shape recovery good. I do believe in the 3Q09 positive GDP number somewhere in the area of 2-3% area, all of which from government spending, but 4Q09 and 1Q10 will be flat to negative as the drugs wear off unless they drug us up again. Unfortunately we will need to hold on to our shorts because it will be a wild ride.
While the Asian markets picked up some strength last night before they closed the selling pressure began to mount again today. As this is being written the Nikkei is down another 4% and the Korean market hit 1,000 which is a key support level for their market.
The scary part is that their economies are relatively sheltered from the whole credit mess which is more of a European and USA problem. However, since we outsourced our manufacturing to this region it is a good gauge as to how the economies of the world will go in the near future. Right now their declines and warning forecasts are indicating a severe recession, I know surprise, surprise.
There is little hope of a strong rally on Friday in the US market. Here is why:
1. No one wants to be long over the weekend, some leveraged position cannot be long anyhow.
2. We have hedge funds still unwinding positions.
3. OPEC is meeting and WILL cut production. Anything over a million barrels is bad, so they will probably cut 1 million to 1.5 million barrels.
4. Credit is still a major problem, the Libor actually up ticked yesterday…go figure.
5. The volatility is taking its toll on investors, they are mentally drained and near capitulation.
6. The technical’s are not there if anything, from a technical point of view, we are heading lower or at best a flat market.
We called an early morning decline and were surprised to see a late morning rally until noon on Thursday. When we posted in the afternoon we were expecting a negative day with the caveat that the last hour of trading is unpredictable now. However, whether someone called a higher close or lower close they would have been right…there was a 400 point swing, again.
Based on what we see tomorrow will be decisively negative throughout the day. We cannot speculate on a close, but we came very close to testing the lows of 10/10/08 today. It is possible to hit the lows and, hopefully, bounce again. That will confirm a bottom and it will be a very good entry point, but not with both feet. Continue dollar cost averaging and start adding more on weakness in the markets. We are almost there, so hang tough.
By the way, to all the anti-annuity people… told you so.
We did not test the lows of Friday, October 10th, but based on the selloff yesterday and the decline in the Asian markets it looks like the testing of the lows will be tomorrow. Currently the Asian-Pacific markets are down 2 to 6% with the Nikkei leading the selloff.
This thing is not over, but we need to hit the lows before the recovery starts. Even after the lows are reached the 1% or higher daily swings will not stop. Volatility will remain high for months as the market reacts to new lows and economic data. We avoided a complete meltdown in the banking sector, but that risk is mitigated now.
That is good news for us, but the market needs to capitulate to stop the constant 5% daily drops. Unfortunately, this means a one day 10 – 20% or more declines in equities, on top of the 38% loss we have already. Yes, this is a tough pill to swallow, but it needs to happen. Buy on extreme weakness, greater than negative 3% daily drops, and be cautious on strength and unload loosing positions or weaker holdings.
Continue dollar cost averaging, carefully. We are not out of the woods yet, but some companies are trading at great prices with high yields. Buy strong balance sheet firms and consumer cyclical as they should hold up under selling pressure and a recession which could last 2 years.
Oil traded down big time which is in part due to a stronger dollar, but also because world demand is declining rapidly. Gold has lost its luster at the moment, but it looks somewhat attractive at the moment. The good news is treasuries, the longer term maturities, are seeing some strength which was not there a week ago, while this is a sign of flight to quality it does represent confidence in the government and should help keep foreign dollars in the dollar, which we need right now.
Be careful and cautious. We have been calling this market pretty well, but if we are right this will turn very bad in the short-term.
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