Wednesday, May 12, 2010

More Evidence that Stocks Are Ahead of the Real Economy

The ABC News Consumer Comfort Index continues to be abysmal at -49. shows little rebound in consumer spending and hiring; they are off their lows but not much. A newer firm, Consumer Metrics Institute, finds evidence of a mini-double dip (not a true recession). Nouriel Roubini is just beginning to rebound and some leveraged bear market securities recently underwent reverse splits, indicating to contrarians that the bull is tired.

The bull market is in debt-based solutions to problems of too much debt.

Not only are people not talking about their killing in precious metals at cocktail parties, the Rydex Investor Class of its mutual fund investing in precious metals, RYPMX, actually lost assets today, and its asset level of about $143 MM is near its low level of the past year. So I do not believe the public is fully engaged in gold investing, indicating that the technical target of $1350 for gold's next stop is do-able. Will another $100+ surge in the price of gold suck in the public? If that happens, let's see.

Given the lack of volume in stocks on the upmoves and rising volume on the downside, yours truly worries that last Thursday's discontinuous price action in stocks could be a harbinger of things to come before anyone thinks, just as the rising but small number of "fails" in auction rate securities in 2007 presaged the complete shutdown of that market in early 2008. Who knows, but with the S&P 500 yielding at most 2%, with 6% a tradional yield at market bottoms, who needs stocks?

Meanwhile, the simple moving average of silver for the past 40 weeks (200 days) has set an all time high in nominal dollars (for the past 30 years or so, ignoring the post-Hunt brothers craziness). The 150 day and 50 day smas have a ways to go, but for now, silver has passed an important hurdle. Its spot price is below its 2008 high, but when a long term moving average hits a high, it means that the asset has spent more time near its high than previously. China may already be in a post-bubble collapse (or it may not be) and commodities may be in for a big fall thereby, but silver is one step closer to joining gold in a breakout. Speculators should be aware that silver has the potential to collapse in price in a rout far more than most people think is likely to happen to gold.

All in all, prices are rising given that some of the excess credit "money" has been converted to transactional economic activity. Whether much of this activity represents productive use to create more growth is a very open question. Keynesians appear to believe that consumption for its own sake is to be celebrated. I beg to differ.

Methinks gold and perhaps silver have a long way to go before the public is sucked into a precious metals bubble. Of course, policy-makers could surprise on the free market side. But the Sun could rise in the west as well.

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