FMX | Connect – www.fmxconnect.com - (Reported 10/04/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
SHORT-COVERING DOLLAR RALLY AHEAD?
The economy is weakening and equities are rallying (though again, as we saw on Friday, with volume declining across the board). The U.S. dollar is faltering to six-month lows against the euro despite the fact that Spain was just got downgraded and Ireland’s bank bailout just took its deficit-to-GDP ratio to Zimbabwe-like levels of 32%.
Gold continues to make new highs with the dollar’s weakness; ditto for commodities in general. The Canadian dollar has firmed to the upside even though most of the incoming Canadian data have been coming in worse of late than what we have seen stateside.
It’s all about the dollar. When it goes down, the liquidity spigots gets turned on. When it rallies, it’s a sign of a flight-to-safety. Let’s just say that we could well be in for a big short squeeze here on the U.S. dollar. According to the latest Commitment of Traders, the net speculative long position on euros is at 27,451 contracts (125,000 euros), which is a huge swing from the mid-May net short position of 105,145 contracts and the most that the non-commercial accounts have been long the euro since the week of November 10th, 2009. What happened back then? Well, the euro went from 1.50 to 1.47 a month later, 1.45 two months later and 1.37 three months later.
While we are still huge long-term fans of gold, it looks hugely overbought here and even a 10% correction would not violate any secular trend-line. The net speculative position on gold is 280,300 net long contracts (100 troy ounce) which ranks in the top three crowded trades ever for the yellow metal (silver, however, is not even close at 52,830 net longs — the record is 72,657).
When you assess the correlations, any short-covering rally in the U.S. dollar would be:
•Positive for Treasuries (lower yield)
•Negative for equities
•Positive for the VIX
•Negative for gold
•Negative for commodities
•Negative for risk (credit, small caps, emerging markets)
BOND BUBBLE? GIVE ME A BREAK!
You literally could not pick up a newspaper this weekend and not see an article on the dangers of investing in the bond market. Everywhere there are comparisons of dividend yields to bond yields — of course the key difference that nobody talks about is how capital is preserved with a bond in contrast to a stock and how a bond will inevitably mature at par whereas a stock by definition has an infinite duration. Talk about apples-to-oranges comparisons but they seem to sell nonetheless. Just have a look at How to Play Rising Rates on page B7 of the weekend WSJ to see where the consensus views are on the direction of bond yields. The weekend FT runs with Asia Gambles on U.S. Treasuries.
Then there is the column on page B1 of the weekend WSJ titled The Bond Bubble: Are Small Investors Taking Too Big a Bet?. Well, the answer would seem to be “no” because the retail investor has merely been shifting funds out of money market funds into short-duration bond funds. According to Morningstar, of the $168 billion of the funds that has been ploughed into bond funds, only $1 billion of that has been diverted into long bond funds (33 times that went into short-term bond funds). And keep in mind that the share of all mutual fund assets that is sitting in bonds is 24% — up from 20% at the start of the year but hardly a bubbly level.
PRECIOUS METALS ... PRECIOUS INDEED
Two articles worth reading on one of our favourite topics: First, have a look at Faster, Cheaper and Fairer on page 13 of Barron’s, and note the citation of the venerable Louise Yamada —according to her work, gold will not enter a “bubble unless and until it gets to $5,200 an ounce.” To think we’re bulled up with a $3,000 forecast!
Then turn to Silver Lining on page 83 of the Economist — not only is it also viewed as a safe-haven like gold, but there is a major source of demand coming from solar panels (from photovoltaic cells) which are in a secular growth phase. At the same time, total new supply (75% of which comes from the by-product of copper, zinc and lead mines) has been stagnant now for past six years. In a world awash with monetary easing, it’s nice to own something that has an inelastic supply curve.
PRIVATE SECTOR CONSTRUCTION ALSO SLIDING FAST
Once again, we saw the dominant forces of government intervention in the economy with Friday’s release of the August construction, which received little fanfare. Private sector outlays fell 0.9% on the month and right across the board — residential down 0.3%, lodging down 1.5%, office down 0.1% , commercial down 2.8%, transportation down 1.8% and manufacturing down 0.2%. What saved and helped generate a headline 0.4% gain was the 2.5% surge in public sector construction expenditures (led by a 5% bulge in highway spending).
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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