An Overview of Markets

First off, thanks, Ana, for helping out on Friday – I was trying to do too much too soon and paid the price.

I was going to examine the 30 Yr Bonds today – but I think a better approach is to lay the foundation for the comments.

In my trading, I look for an idea that places the secular trends in context. Markets have certain relationships that hold true but the relationships differ according to the context in which they occur. The current context is rare and I’d like to examine that next.

The current economic state has brought about bubbles in the stock and housing markets that led to the sub-prime crisis.

What would have been a reasonably short recession now has all the earmarks of a longer term down-term or hyperinflation ; hyperinflation will occur if the Fed fails to act once the results of its actions, since August 2007, filters into the inflation figures. If hyperinflation does not occur, the US, at the very least, will suffer a period of stagflation.

In the meantime, the other economic engine, China, is already suffering rampant inflation, and unless the Chinese authorities take more aggressive actions to cage and curb that tiger, it too will have to deal with hyperinflation.

If both the US and China suffer an economic downturn at the same time, then the rest of the world will catch more than a cold.

In this environment, what can we expect?

  • A strong secular uptrend in commodities – Soybeans, Gold, Wheat etc. This does not mean we won’t have corrections e.g. Crude and Soybeans are in the throes of one now. But it does mean that the commodity boom will continue until the threat of hyperinflation is negated.
  • The start of a new uptrend in interest rate yields (downtrend in price).
  • Global tensions that will add to a strong secular uptrend in Gold and Silver. Again I do not expect a straight line advance. Right now for example, I see Gold forming a sideways market between $1045 and $850.
  • A bear market in the stock indices. In the S&P, we are currently forming either a simple correction or a sideways market between 1256 to 1280 and 1200. We’ll have a better idea of the type of correction when we see a retest of the 1200 to 1210 area.
  • The bear market in the US$ to continue. We can expect a bear market rally once the CPI starts in earnest to rise; that rally will terminate once it becomes clear that hyperinflation is a real threat to the US economy.

These are rare conditions: a current stagflation with the overhanging threat of hype inflation. In addition, we can expect even greater volatility because of the actions of politicians, who failing to understand the cause of the crisis, will look for scapegoats. What better candidates than ‘greedy’ speculators? In their attempts to ‘fix’ the problem, their actions will further disrupt the markets and will cause even greater volatility in price action.

As traders we can expect:

  1. the secular trends in commodities to continue but need to be careful of political action: for example, some sort of bill to restrict the number of contracts we can hold in Crude Oil.
  2. the secular trend in gold to continue
  3. a particular strong secular trend to begin in 10-Yr Notes and 30-yr Bonds.
  4. the stock market bear to begin in earnest.

One thought on “An Overview of Markets”

  1. Ray

    The Weekend edition of the Financial Times by John Gapper shows when times get tough, there will be a fall guy.

    Please read

    When things go wrong, it is handy to have someone to blame. During financial crises, that person is usually the short-seller.

    That happened in the 1929 stock market crash, when Herbert Hoover, the US president, railed against those selling company shares they did not own. It has happened since around the world, including in the Asian financial crisis of the late 1990s. It is happening once again amid the current financial turmoil.

    Since the collapse of Bear Stearns in March, those who run the big investment banks that are now facing falling share prices and an urgent need to raise capital have been getting increasingly annoyed about troublesome short-sellers.

    They especially condemn hedge funds that they believe are ganging up to spread rumours that a healthy financial institution is in trouble and profiting by short-selling. …………..

    The beauty of short-selling is that it gives people with financial expertise a motive to root around in company accounts and look for problems. Although bankers complain about false rumour-mongering, professional short-sellers often do diligent and detailed research.

    One is David Einhorn, who runs a short-selling hedge fund called Greenlight Capital. Mr Einhorn has been in a public battle with Lehman Brothers, which he thinks has been hiding some of its financial woes, and his campaign contributed to the demotion of Erin Callan, its former chief financial officer, who is now leaving to join Credit Suisse.

    Mr Einhorn is obviously a thorn in Lehman’s side – Richard Fuld, the bank’s chief executive, says that he wants to “hurt the shorts” – but he is not a rumour-monger. His presence is inconvenient for Lehman but he has every right to be there.

    Financial regulators have a fine line to walk between punishing malfeasance and allowing people such as Mr Einhorn to get on with their business of being awkward.UNQUOTE

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