Thursday, May 7, 2009

Are we there yet?

This is a bear market rally - a reflexive bounce in the parlance of Bill Farrell.
- It all began with the classical 'world in going to end' phase, was followed by 
- "I'm shorting this baby - damn that hurt - maybe next level", through
- the media finds 100 different ways to say "green shoots" (well actually just the one way said over and over),
- until we have reached the "maybe this is the start of the next bull market - geez, I better invest some of this cash".

I'm not yet a convert to the brave new world hypothesis.  The major trends I'm seeing are:
1) USD - still hanging in there but due to breakdown sometime soon - this is good for commodities
2) US treasuries are struggling from oversupply - longer term bear markets are supportive of bonds, but the sheer weight of money that the US government (amongst others) is requiring from the market is going to impact longer dated rates over the near future - this is bad for equities
3) Gold - looks like it'll be a beneficiary of a stagflationary outlook - expect a test of $1000 and push through to around $1300 before its done.
4) Oil - looks overdone to my eyes over the near term - there's just too damn much of it floating around in boats playing the contango trade.  I'm a buyer on a pullback though - higher oil prices are one sure way to pass on aggregate demand in a world where asset deflation prevails
5) Financials - expect a pullback, banks still have a ways to go before they are through the woods - expect the individual, the consumer, the retail client to bear the brunt of this one - if Goldies and Macquarie are issuing equity, then its time to sell 
6) Property - the banks remain unwilling to the realise their bad loans - Schrodinger's cat is alive and well as long as we don't open the box - hiding behind your hands doesn't change the facts - asset based enterprises that are stuffed with debt are naked before the asset price downdraft going on.  It plays out in one of two ways - the banks do pull the pin (not likely at the moment with Ruddbank in tow) or just drags the recapitalisation process out for years (ala Japan).  Great!

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