When I was a kid, I would anxiously tap my legs from 2:30 to 3:00pm, awaiting certain afternoons to be filled with cartoons and other kid-centered programming. Granted sports, band, other activities take up many kids lives, but occasionally you get those free days where nothing more than playing outside, a few chores and some television seem a breath of fresh air. This may also be why kids enjoy Saturday morning cartoons so much, parents long exhausted from a week of actual work and lacking the youthful exuberance their kids can bring to the table, a great way to keep them entertained and squeeze out that extra hour of sleep while they can.
For a lot of us, Scooby Doo was an innocent group of teenagers tearing masks off of zombies to reveal ole Farmer Hawkins was scaring people away for one reason or another, usually monetary gain of some sort. During these shows was one of my favorite Benny Hill-esque scenes involving a hallway with a lot of doors, and people running in and out of them. Some were chasing, some were fleeing, some crashed head first into each other, and no one was doing the same thing twice, or the same thing as anyone else at the same time. Controlled chaos at its finest.
Fast forward 20 years and I’m walking down a different kind of hallway. Personal financial stability, at least as far as most Americans go, really revolves around five possibly doorways. Just like in the old Scooby Doo scenes, you’re either chasing the monster of Returns into one, or fleeing the moster of Losses into another. Either way, running through one of those doors grants you a sense of security, either bold attemps at gain or protection from loss.
The five doors for most Americans today include, 1) The US Dollar, 2) The Bond Market, 3) The US Stock Market, 4) Foreign Markets (including both equity or currency), or 5) Commodities. So how do these compare today? Let’s also look at some “expert” responses mixed in here as well.
1) The US Dollar – Ben Bernanke has given the impression of a promise in a strengthening US Dollar. The USD is certainly not strengthening NOW, but he’s hinted that it may be in the future given certain expectations, ie. unemployment. I discussed that possibility HERE. The assumption of course is that should we see gains in employment, then the Fed can begin tapering off its purchasing of US Treasuries. Of course gains in employment mean gains in tax revenue as well as decreased expenditures for the US Government, and therefore they can continue their spending levels with a slightly diminished need to monetize (borrow). Of course the US Government will still need to issue new Treasury Bills and the Fed will still need to buy up most of those because foreign entities as well as US Citizens will only do so depending on what the rate is, so that brings us to door number 2.
2) The Bond Market – this is pretty simple, if the rates aren’t high enough, people don’t buy them. If the rates are rising, people no longer want to own what they had purchased previously, because why would you want to keep owning something that only pays 1% when new ones issued now pay 2%. And the majority of bond purchasing does happen by the Fed Reserve. So, as you’d guess, the bond market is getting slaughtered right now. With dismal 1st quarter numbers compared to expected as well as Bernanke’s pseudo-announcement regarding “tapering off” monetization (printing money to purchase Government debt), a lack of faith in the ability of the US Government to sell its debt the old fashioned way is pushing interest rates up. See Bloomberg article HERE. Well, if the Bond Market looks like a dangerous game right now until interest rates level off from recent assumptions about future Fed action, what about equities?
3) The US Equities Market. This is where The Incumbent Market blog got its start, what are the macro moves in the market and why. Along with countless other blogs and financial experts of course… Again, looking through my understanding of how markets operate, I would still be hard pressed to see the US Equities as a safe place for long-term investment money right now as signs point to a turnover into bearing territory. While we’re at it, let’s go ahead and stick in today’s INDU and DJTA numbers.
|Dow Jones Ind Avg||Today’s Close||14,974.96|
|Previous Close||14,909.60||Today’s Volume||120,572,441|
|Open||14,911.60||Avg Daily Volume (3 months)||133,271,672|
|Today’s High||15,083.28||Avg P/E Ratio||16.7|
|Today’s Low||14,911.60||1 Year Change||16.26%|
|Dow Jones Trans Avg||Today’s Close||6,241.53|
|Previous Close||6,173.86||Today’s Volume||10,076,749|
|Open||6,186.07||Avg Daily Volume (3 months)||12,204,636|
|Today’s High||6,286.20||Avg P/E Ratio||18|
|Today’s Low||6,186.07||1 Year Change||19.82%|
Major difference from Friday, substantially down volume compared to Friday, today was an up day. So while I can’t rule in favor of a bearish turn yet, I’m still hesitant to recommend investment in this sector.
4) Foreign Markets. OK, so this one gets a little tricky since there are multiple ways to approach the foreign markets sectors. There’s foreign currency and FOREX trading, foreign and emerging markets, foreign sovereign and corporate bond investment. Usually without feet on the ground in the locale, it’s best to use a trading platform with a major company that does, however be very well informed before venturing onto other countries sovereign soil to invest your hard earned money. Traditionally those developed nations like in and around parts of Europe and Asia (namely Japan and Australia) could be counted on for good reporting data, while your emerging markets like China really can’t. Also, you’re assuming these markets are able to surpass potential gains here stateside, but we must remember the slew of EU issues regarding entire nations needing bailouts (remember the PIIGS- Portugal, Italy, Ireland, Greece and Spain?). Japan has recently committed to devaluing their currency by half and China’s astonishing growth rate is expected to diminish significantly over the next few years.
5) Commodities. So what’s left? The hard stuff. Metals, food, land, etc. Generally your tangible goods have usually represented the best store of wealth long term, but even traders have disrupted this tried-and-true safeguard through recent decades with rampant futures speculation. Tomorrow we will look at CFTC reported numbers again this week. While we’re on the topic I think it pertinent to share, we discussed quantity of outstanding contracts before. Here is what they are stacked up against. By my math on gold contracts right now, 694,000 OI Contracts at 100 oz per contract is roughly 69 million ounces, this includes both short and long contracts. See the chart below, the COMEX currently has roughly 8 million available ounces for deliver. Over 8.5 to 1 leverage. Sure, fractional reserve and future mining expectation accounted for, it’s not “that” bad.
So taking this all into account, what does it mean? US Equities are dangerously close to giving bearish signals, and foreign markets already are. The bond market needs to work its way out of the soup right now. You’re really left with one short-term option with the expectation of moving into a longer-term option. Short term placement into short term cash positions and these slightly increased prices with dollar-cost-averaging into the commodities markets. If Easy Ben the under-maestro is able to continue his rhetoric then we may continue to see marginal rises in the US Dollar worldwide. However, if one of many things come to a head in the commodities markets, namely precious metals then you’re going to wish you acquired some at these prices. Concerns such as pricing now at or below the cost of production, or just a small percentage of outstanding contracts request deliver could turn the small metals market dangerously upwards, causing panic in other markets. Better to be on the right side of a stampede.
- Unprecedented Carnage Happening In The Bond Market? (etfdailynews.com)
- Bond Market’s Memo to the Fed: This Is Not a Misunderstanding, This Is a Blow-Up (minyanville.com)
- Can Bernanke Avoid a Meltdown in the Bond Market? – Bloomberg (bloomberg.com)