THE VIEW FROM 50,000 FEET ON STOCKS, DOLLAR, GOLD/SILVER AND BONDS
Stocks - BULLISH - I have been bullish on equities since last week. The simple reason being that the upside risk outweighs any downside risk remaining in the market. That doesn't mean that a move to 1100 on the S&P won't hurt if you are long. I believe that there is a substantial possibility of that move occurring, which is why I have yet to initiate a long position in stocks. If you are not getting measured on your month to month or quarterly performance, then a slow regimen of accumulation may be in order. If you are measured on your performance by others or have come to expect a certain standard out of yourself, then it may be best to wait a little bit more to do the real buying. Waiting is the course I'm taking.
A close below 1140 on the S&P 500 would be the first step towards a test and probable break of the August lows.
US Dollar - BULLISH - The breakout on the US Dollar over the past couple of weeks is indeed a real event. The velocity behind the move is substantial. The sentiment at the bottom was dismal. Bear in mind that currencies tend to be much more trend driven than stocks. Those who believe that the US Dollar must fall in order for stocks to rally suffer from a lack of imagination that may be better suited for a game of checkers.
Fundamentally the US Dollar may be telling us there will be no QE3. Or perhaps no announced QE3, with the Fed instead opting for a silent moves to bolster the markets and economy. Could it be that QE3 is indeed unnecessary, with talks of an inevitable drawdown in the economy being overblown?
Or is the US Dollar simply moving up because it sucks less than all the alternative? Namely the Euro.
In either case, I continue to hold my position in EUO from 8-29, with no plans of exiting in the near future.
Gold/Silver - BEARISH - On 8-21 I made the argument that either way you slice up the fundamental picture going forward gold and silver are bound to fall. Thus far the thinking has been proven correct as news of further trouble in Europe has failed to drive gold higher, contrary to popular expectations.
Gold/Silver at current levels are essentially CDS contracts on the implosion of the financial and governmental sector in Europe and the United States. A drop back below 1500 on gold would serve to remove that designation.
Those who drove the price of gold up from 1500 to near 2000 were buying for reasons that involved a repeat of the 2008 financial crisis. Should the severity of the current crisis disappoint, then gold will suffer a sharp decline.
And let's not forget the reason gold has been shining so brightly over the past several years. Lost in the midst of the euphoria is the fact that gold is a store of wealth against a weakening primary global reserve currency (read: US Dollar). If that currency should strengthen in the face of a parabolic uptrend in gold, then the downside seems substantial. Well...the currency is strengthening.
I remain long DZZ from 8-31.
Long Dated Treasuries - BEARISH - Any decompression of bearish expectations with respect to economic output over the coming months will send the long bond into a tailspin. Bullish sentiment on bonds is at monstrous heights. Every fund manager in the world is piled into US Treasuries for fear of clients pulling out. There is a massive misallocation that has taken place as a result of the current crisis. Yes, I said misallocation.
I say that because fund managers are so frightened from the trauma of 2008 that they are TOO quick to jump into safety assets. They will also be TOO slow jumping back in.
The trade back into stocks from bonds will be a major bullish catalyst for stocks in the coming 1-2 months and a major bearish catalyst for bonds.
I remain long TMV from 8-31.
I added to the position a bit recently in the $19 range.
