Tuesday, September 1, 2009

End-August Asset Class Review

Sometimes pictures tell the story better than words.
We can think and project all we want, but it is good to know objectively where we have been. You may click on all the charts to enlarge them.

The top chart represents the price of a long Treasury bond, per the ETF with the symbol TLT. It's basically in a 1-year trading range. Not shown is the multi-year chart, in the bull trend toward higher prices and lower yields is entirely intact. The reason it may well continue is that virtually no one believes the trend. Contrast that with the near-universal belief in the late 1990s in technology stocks. TLT did make a lower low in June than the recent ones in late July and early August, and has marginally exceeded the early July interim high. Substantial resistance awaits TLT around 100 if it can push that high.

Not shown is that of gold. You can get it at Kitco.com or chart the ETF GLD. Not only are these charts near-perfect, but the 150 day and 200 day moving averages for GLD have very recently gone to all-time records, exceeding those set around 8/6/08 and 10/10/08 respectively. The 50-day moving average is within about 60 cents of its record of around 4/21/08. At those times, the long-term moving averages were beginning to go convex upward rather than concave, indicating a loss of momentum; theyhave better shape today. The only overhead resistance gold now has is minor, which was the blow-off phase in early 2008 following an approximately $600 up-move from 2005-2008.

The other charts show the ETF for the S&P 500, SPY. From the end of August 2008 to the end of February 2009, SPY fell from 128 to 70. In the ensuing 6 months, it only rose from 70 to 102. What one likes to see is more energy on the upside than the downside; the chart shows the opposite.

Finally, the iconic stock GE shows a pitiful rebound over the last 6 months. GE is a fairly good proxy for the U.S. and to some degree the world economy. 60 days ago, consensus earnings estimates for GE for next year were 95 cents. Now they are 91 cents. No green shoots. GE stock is valued at over 11 times tangible book value and over 35X dividends (2.8% annual rate). It is thought here that GE is a truer gauge of matters than bank holding company stocks such as BAC because it is not a pure play and thus one would not speculate in GE if one wanted to speculate either on the financial sector or the industrial sector.

As I write this, the Shanghai Composite index is around 2700. It was established in 1990 at 100. That's about a 19% growth rate, not counting dividends. China just looks like a bubble floating in on top of a bathtub filled with dirty water. And China's stock market has, amazingly, led ours.

Received wisdom is that it's difficult to knock a stock market very far down once the economy turns; yet it happened in 2002.

Interesting times.

Copyright (C) Long Lake LLC 2009

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