Saturday, May 16, 2009

Looking for Trends in all the Wrong Places?

Since the salespeople on CNBC want the average Joe to focus on the stock market as a whole, which has a decent hopeful chart in the setting of an economic banana that is so long in the tooth that it likely is winding down, it makes sense to look at trends in key markets and stocks to try to divine what forces of supply and demand have been extant. (Click on any chart to enlarge.)

By far the best-looking chart on the upside is gold. Above is the lifetime chart of its major exchange-traded fund, "GLD". The commodity formed a 20-year base between 1979 and 1999 or so, and is currently holding in nominal dollars just above its 1980 spike high of about $875/ounce. The short-term chart is also strong:

No matter how many formerly depressed common stocks are now above their 50 day moving averages, GLD shows short, intermediate and long-term strength. Gold has been a store of wealthy for millenia. Which will impress Asian creditors in 10 years more: gold, or Federal Reserve notes backed by junk bonds?

Next, let's consider gold's counterparty, the long Treasury bond, as exemplified by the ETF "TLT". Here's a multi-year view; not bad considering that unlike GLD, this has been paying dividends steadily. TLT has come back to former resistance which could now be support. The short-term moving average trends raise a real possibility that at some point this year, a rally at least back to the 200 day ma could occur.

Probably the single best investment characteristic that the intermediate or long Treasury has is that it is hated as an investment by pros and the public alike. A zero-coupon 10 or longer duration Treasury can be held to maturity for the stated yield, preferably in a tax-deferred account; or if rates fall enough, the price upside is leveraged due to the zero coupon feature and thus a nice capital gain can be reaped.

Turning to stocks, former leadership which should still be leadership has vanished. Consider the only two Dow 30 gainers of 2008, MCD and WMT. Here are their one-year charts with moving averages.

Neither chart is strong, and on a 3 month relative strength basis, each is a disaster relative to the market as a whole. Earnings estimates for each company are falling, and each is close to its 12-month low in price.

For what little the opinion here may be worth, EBR is skeptical of the move in the financials, especially with the stock disaster that NTRS is sketching out, is skeptical of the charts of Wal-Mart and McDonald's (but at least their dividend yields beat cash and likely will rise for years to come), believes that the Fed and Treasury do not have your best interests at heart, and believes that the general stock market is nowhere near a level of fundamental undervaluation that justifies a buy and hold strategy. Cash is deliberately being trashed by the Fed, though the current deflation means holding cash is acceptable, and Treasuries over the longer haul look to be in oversupply. Gold is not overvalued on an historical basis. EBR thus favors it largely because competing investments look poor. EBR also likes Brazil for the nonce; a good way to play it is with its high-yielding currency, the ETF "BZF".

Accept that the economy is probably bottoming, at least for now, but from a very low level. The economy bottomed in 1975 and 2001, with much better stock-buying investment opportunities ahead when the fundamentals were better and inflation-adjusted stock prices were lower.

Copyright (C) Long Lake LLC 2009

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