Friday, November 13, 2009

Bernanke's Lever

How is it possible for 3 often negatively-correlated asset classes to rise simultaneously when neither has been oversold via a selling crisis?

The answer, my friends, is blowing in the Fed.

Leverage is back. Stocks and the long Treasury each rose 1/2% in price today, while gold made up for a one-day "correction" and rose will over 1%. Platinum was very strong, and silver was strong. Metals buyers know that with labor in oversupply, commodities prices can rise without having much effect on "inflation".

Richard Russell, dean of technicians, has a writeup on gold out (h/t Credit Writedowns and Prieur du Plessis). In an excerpt of his Dow theory Letters, he lists 6 reasons to buy gold and for those who would like a concise rundown of the major themes amongst longer-term gold investors and speculators (such as yours truly), his is a good writeup. Interestingly, at the end of the excerpt he quotes from another technician who, as I did last week, questioned whether the gap up following the news that India was buying was a short-term sign of too much froth. It's welcome to see that I was in good company in smelling a setback that never came.

When almost every asset class is going up, then in at least a Zen sense, nothing is going up. There is too much speculation based on cheap printed or electronically-created money, much of it then lent and relent to drive prices higher.

In the meantime, the financials have been notable underperformers. Citi and BofA stocks are below downward-sloping 50 day moving averages. JPM is close. Worse, two smaller (but large) financial services companies I use as canaries in the coal mine are UMB Financial and Northern Trust (UMBF and NTRS). Each has thoroughly broken down judged by moving averages. While Northern Trust provided the mortgage on Barack Obama's home, my sense is that it is cleaner as an institution than the megabanks; it repaid its TARP money quickly. Everyone knows the financials have troubles; we will find out if that it in the stocks.

So far as new leadership, it's hard to say. I'd be very cautious about tech. It presaged the stock recovery via superior relative strength and the former successful bear Bill Fleckenstein (now a precious metals bull) has said recently that he's seeing double ordering in the tech sector and is preparing to short stocks when they are technically ready. Aside from gold, old stalwarts such as MCD and IBM are the belles of this ball. Leadership has changed, as it should, from speculative stuff to giants with large international presences and no problem accessing credit whenever they want.

Dr. Bernanke may be like Archimedes, who would have moved the world but for want of a lever. The Fed can provide an "elastic currency", but that does not guarantee sustainable economic growth. Even bigger and better levers come for the people themselves.

For now, the Street is partying as if it were 2000 and something. Are we already close to October 2007 and another economic and stock market peak? I hope not but would go with quality first and foremost.

Copyright (C) Long Lake LLC 2009

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