Thursday, January 29, 2009

Market Update

First, the good news. At Calculated Risk, CR summarizes the Credit Crisis Indicators this evening. The short-term financials are getting better.

The bad news is that all this was the run-up to and of course one of the causations of a vicious global economic downturn. While every recession is scary, the current one is setting various records. Simply scour CR's posts this week, and you will find records ranging from the known housing issues to obscure ones such as trucking tonnage and air cargo volumes. And of course the world is experiencing the lowest short-term rates in multiple countries at least in the past 300+ years. Lots of major bear markets have not had much credit crisis. But we'll take any improvement where we can get it.

That said, the markets are at a most interesting juncture. Here's a summary of the 3 major markets covered here.

1. Treasuries. Currently they are in a correction. The 10-year yield bottomed near 2%. This was a historic breakout in price of the continuous bond. In the last cycle, the 10-year bottomed intra-day around 3.1%. It is now around 2.8%. If it hits 3.1%, that would represent a 50% increase in rates from the bottom. That's about as much as a short-term jump as one ever sees and could represent an attractive purchase, especially considering that this is a seasonally weak time of years for Treasuries and the talk is of an oversupply of Treasuries.

In the meantime, TIPS continue to price in deflation, there is excess capacity everywhere except in gold mining and the only real hiring anywhere is for people to handle unemployment claims.

Long Treasury yields did not bottom until about 19 years after the Crash of 1929.

Treasuries are in a primary bull market. There is near-universal belief that rates are way, way too low. Thus there is every possibility that the correct approach for at least a while longer is to buy a 5-10 year Treasury, make a real return against deflation or minimal inflation, and sell the bond in a year or two at a profit; or at the worst hold till maturity. Unlike the NASDAQ that paid no interest and considering the opportunity cost, is down much more than the raw numbers (from 5100 to 1500), Treasuries really do pay one to own them (remember, it's a bond!). So, all the talk of a bond bubble strikes me as incongruous. Overpriced, perhaps; a bubble: not quite.

2. Gold. The most intriguing market of them all. The gold bull Jesse of Jesse's Cafe Americain links to a Times online article titled "Gold price could treble if China divests dollars, warns mining boss". The article quotes Barrick Gold's chairman as scaring us that "there was even a possibility that central banks, including China’s, might start to switch from dollar holdings to gold, which could cause the price of the metal to treble." It seems that every time that chestnut is trotted out, a peak in the gold price is nigh.

The article goes on to point out that:

"Gold has been one of the best-performing assets of recent months, rising in value by nearly 17 per cent since late October even as the price of other commodities, such as oil and copper, has dropped sharply."

"Investors have bought heavily into physical bullion in the form of coins and bars, and physically backed assets, such as exchange-traded funds, as a safe store of value at a time of increased volatility in other asset prices."

Technically, gold is fairly strong, but its 200 day moving average is pointing down and has not crossed yet but an up-sloping 50 day ma. Gold has had an interesting correlation with the stock market during this bear: it has peaked out of phase with the stock market but made important bottoms with it (gold stayed up in October 2008 but crashed as the stock market made its November bottom). This pattern will continue until one day it will not.

So with the short-to-intermediate technicals inconclusive, the take here is that there is too much optimism in the gold price to suit us. Its outperformance vs. essentially all other physical commodities is breathtaking. India is in or near a recession, as is China, and these locales are huge buyers of gold, and are very price-sensitive. Most gold use remains for jewelry, and no one anywhere on the face of the earth is buying gold jewelry anymore (well, that's a slight exaggeration, but you get the point). So the most likely fundamental direction for the price of gold is to go straight down. Numerous nervous people have already placed their orders; the worst timer of the gold price, Barrick, is a raging bull; and its chairman, who should be in the background quietly accumulating gold or his company's stock, is out in public touting his wares.

Caveat emptor on Au. Adventurous sorts could look at purchasing puts, as this market could fall fast. However, gold is in a long-term bull market, so it's most interesting and most people should be on the sidelines unless they want to own physical gold as a true hedge.

3. Stocks. The single worst-looking of the three major markets remains general stocks. Stocks remain in a major bear market, with aggressive supply meeting every jump in prices. Wednesday's move up looks like one of many panicky short-covering rallies, with no follow-through, and with financial stocks continuing to erode. Most depressing is the action of McDonald's, the Dow leader and the only Dow stock to be at a higher price than 1 year ago. It recently "beat" the Street, which however was unimpressed. The technicals are deteriorating. There have been a series of lower highs since the early August high, though as well there have been higher lows. McDonald's almost has to lead a break-out of the general stock market higher. 14 months into a recession, even meeting expectations should ordinarily let a strong company with a high dividend yield squeeze the shorts and pop higher, but instead the stock acts a bit too "heavy" despite the "beat". If MCD goes the way of Wal-Mart and collapses, this would be very, very bad for the market as a whole. Traders and investors should watch MCD carefully.

There is no leadership anywhere. ConocoPhillips wiped out 2 years of earnings with a "one-time" charge of about 32 billion dollars (real money even for a bank), and happily its otherwise OK quarter was not rewarded, and the stock collapsed today.

GlaxoSmithKline, one of the original roll-ups in the pharmaceutical arena, is back to 1997 stock prices. In the last boom, its stock price never got near its 1999 high. Worse, it is trading as if it were a growth company at 12X tangible book value. Pfizer is being taken apart for its multiple sins of halving the dividend and perhaps going to the well one time too many with its emulation of GSK by becoming another roll-up (see Econblog Review's take on the merger, Pfizer Buys Wyeth: Layoffs Financed by You and Me).

Other medical stocks are providing little leadership, even on good news.

The education stocks that the unemployed go to in a recession are, too predictably to suit us here, strong; the quality of the rally off the November low has been poor.

"Defensive" consumer stocks such as Procter & Gamble have cyclically high operating and net profit margins, which have nowhere to go but down, as well as multi-year low tax rates, which can hardly go lower and therefore should have nowhere to go but up in a world where governments have higher priorities than some marginal extra profits accruing to sellers of staples.

The real geniuses such as Drs. Roubini and Taleb remain bearish, along with most others who "got it right".

And while stocks and headlines can move in quite opposite ways, the stock market is made up of companies which are, for the most part, quietly or not-so-quietly withering on the vine.

Under the earnings/price momentum Value Line-type system that has served this blogger so well over 3 decades of investing, if the stock market were a stock, it would be a 5 (lowest on a 1-5 scale) for "Timeliness". If the bottom has been seen, that would be great news. There's no need to risk your money on that hope.

Where does that leave an individual with new money to put to work?

Consult your financial advisor . . .

Copyright (C) Long Lake LLC 2009

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