Archive for the ‘US Bonds’ Category
The calm always comes before the storm. In world financial markets the bears are tired of calling an end to the year-long rally, while even the bulls are beginning to feel that they are skating on thin ice.
The US treasury market weakened on a poor auction result last week. That might be seen as bullish for equities as an alternative asset class but then higher interest rates are the writing-on-the-wall for global asset prices. Rates go up and asset prices go down.
Indeed, this is the whole problem for the bulls. They know that a bubble is being inflated in stock prices by low interest rates. Traders say this is all down to after hours trading by the big banks. Volumes are light and trading thin.
So why would you wade in and commit fresh funds in such an environment? The potential downside is that new money. The potential upside is a few percentage points on the Dow. Treasuries at four per cent might look more attractive, except that the capital at risk is also a factor there.
The result is something of a stalemate with not much happening. Shorts have been almost all covered in a long rally. Nobody really wants to take on the bulls. But then nobody wants to run with them either.
Judging which way the market might turn next is surely not difficult. The bulls are running out of steam while the bears are resting. And given just how far this market appears to be manipulated it will have to be the bank trading desks who decide to put on their short positions and catch the rest of the market snoozing.
How long will that take? If only we knew. But being positioned away from a crash is more sensible than being in the middle of it, unless you go short too.
Realistically this should not take too much longer. We know from past crashes like the one seen in 2008-9 that a rally is followed by a sharp correction, and the longer the rally the sharper should be the correction.
When the bank trading desks have killed every short then they will go short and kill the bulls. It will not be a pretty sight.
The poorest figures for new home sales in US history were largely ignored by financial commentators yesterday as the markets focused on global debt problems that threaten a rise in interest rates before the fragile global economic recovery can handle it.
Portugal saw its sovereign rating cut by Fitch. US treasuries were hit by poor demand in an auction of five-year notes. Japan approved a new budget with a record $49 billion in new bond issuance. And a pre-election budget in Britain offered no relief for its huge debts.
US dollar surge
The main beneficiary was the US dollar with the euro down to $1.33. US financial markets also took a breather from their endless rally as risk aversion crept back into the market. The S&P is now valued at 22 times earnings, 32 per cent above its 30 year average, and clearly overvalued for this stage in the economic cycle. Gold fell to $1,085.
Meanwhile, the market largely ignored data showing that US new home sales fell to the lowest level on record in February. Sales of new homes dropped unexpectedly, falling 2.2 per cent during the month to 308,000. That was the lowest sales rate on record and much worse than expected.
US new home sales are down 23 per cent since last October. New home sales are off 13 per cent from February 2009. With sales falling for four months running, the inventory of new homes has increased, reaching a supply of 9.2 months.
The construction of new homes in the United States is a critical source of demand for commodities used in building houses. Only a surge in demand from China has prevented a meltdown in building material prices and related commodities from steel to aluminum and timber.
The now frosty relationship between China and the US is symbolized by the Google condemnation of Chinese censorship and its self-imposed exit. The call for tariffs on Chinese goods to protect US industry is growing. At the same time China is tightening up on credit and could start buying less US treasuries.
Far from being in a fragile recovery the world is set for a round of further instability in global financial markets. In the initial stages the chief beneficiary will be the US dollar but the problems in the treasuries’ market is a reminder that dollar strength could be transitory.
Yesterday data showed sales of existing homes falling for a third month in February and the number of properties for sale hitting a two-year high. Actual house sales were running at their lowest level in eight month at an annualized five million sales.
Oversupply is still choking the US housing market, and it is getting worse not better. The number of homes on the market jumped 9.5 per cent, increasing the time it would take to sell all properties at the current pace up to 8.6 months from 7.8 months at the end of January. House prices fell 1.8 per cent to $165,100 from $168,200 a year ago.
Existing home sales comprise 90 per cent of sales activity in the US housing market so these figures are particularly significant.
The expectation in these circumstances is that price falls will continue and inventories continue to rise. Besides over the next two years some three to four million mortgage resets threaten a new wave of foreclosures, increasing the oversupply of property still more.
This was the story that Wall Street did not want to hear yesterday and it was largely brushed over by TV commentators as more ‘boring’ housing data. That was perhaps a defining moment in the annals of superficial television commentary.
For without a recovery in the housing market the US economy is doomed to a double dip. And without a recovery in the housing market it has to be said what does a ‘fragile recovery’ actually mean? Is it just a lot of hot air and profit increases from firing people?
Businesses that downsize are survivors perhaps, but they are not signals of economic recovery. That comes much later when the credit cycle resumes. There is scant sign of that, and interest rates are so low that the next move will still have to be up.
Financial television is peddling make believe by ignoring the evidence right in front of our faces. How much longer can this absurd comedy run? US housing led us into the downturn and is just not leading us out.
When the global financial crisis first struck 18 months ago there was a commendable consensus among the world’s politicians about the need to tackle the crisis, and the actions that followed have done much to offset a fall into an even deeper slump.
However, global governments do not usually work in harmony. National interests are competitive and usually work to undermine a consensus. That is what now appears to be happening. It will not aid what is only a very tentative global economic recovery. It could undermine it completely.
IMF and Greece
Consider the Greek debt crisis. Far from being resolved by Germany it now appears that Greece will be thrown into the arms of the IMF for an austerity package. Which countries from the European Union will follow? Spain, Portugal and Ireland? Italy perhaps?
Then there is also the simmering potential of a trade war between the US and China. Nobel prize winning economist Paul Krugman is calling for a 25 per cent tariff on Chinese goods if China fails to revalue its currency to rebalance global trade. Google is to exit China over censorship.
It is notable that both these cases involve creditor nations protecting their national interests, and refusing to pick up the bill for debtor nations. You can certainly understand the logic of not wanting to pay off the debts of another nation. Why should German pensioners retire late to pay for the Greeks to retire early?
Yet the risk is that we deteriorate into a downward spiral for trade like in the 1930s. Both China and Germany have reason to pay attention as last year was their worst for trade since the Great Depression with export slumps of 16 and 18 per cent respectively.
Horrific trade slump
These are horrific export figures and the bounce back this year, to levels of trade still nowhere near pre-crisis levels is by no means secure.
The problem is that the creditor nations running export surpluses have been relying on the debtor nations to borrow more and more to fund their imports. Now that cycle has reached its limit or will so very soon as national debts grow bigger courtesy of stimulus package spending.
Ironically what the creditor nations say is right. There is no way out for debtor nations apart from austerity, default or devaluation and the latter is not open to eurozone countries. But this is not going to be good for the creditor countries either.
To take the UAE as another example of a creditor nation. A business slump in developed countries will reduce demand for oil and hence the price and revenues. Then there will have to be a draw-down of savings to keep the economy going.
Where creditor nations theoretically win is that they can afford to buy things in a global liquidation sale. That might not be much compensation, however, if the world economy is shattered in the process.
In the meantime, we must hope that mutual self-interest triumphs on the global stage. But the omens are not good right now with nationalism on the rise. This sets the stage for a double dip global recession, not a recovery.
While firmly sticking to his forecast of $5,000 gold within the next few years, ArabianMoney editor and publisher Peter Cooper can see a three-month price correction as the next move for the yellow metal and its best friend silver.
Of course books are frequently published just as major changes of direction occur, and markets do not always move on cue as authors would like. That does not necessarily invalidate a price theory but it certainly does test it.
Stock market crash
Late in 2008 gold bugs saw their precious metal dragged down with other global financial markets in a big sell-off. Basically good assets were sold down with the bad to meet margin calls by investors.
It will most likely happen again. And if this sell-off proves to be as strong as ArabianMoney suspects then gold will also be a big loser. It is even possible that we might test the lows of last April, and fall below $700, although $950 is a more reasonable downside target.
But that really will be the ideal moment to stack up your vault with gold. For the $5,000 target is still there and the bounce back will be very strong with money rotating out of bonds and back into precious metals and particularly associated equities.
Presumably general equities will also offer some rebound potential from these summer lows. But if George Soros and other hedge fund investors in precious metals are right then this is the next and ‘ultimate bubble’.
That leaves investors with little alternative but to park their money in US dollars and bonds before investing in precious metals this summer. Even the normal seasonal upturn in precious metals in the autumn would make this an excellent trade but as readers of ‘Dubai Sabbatical, The Road to $5,000 Gold’ will know there is far more money to be made.
However, whether holders of gold and silver should now sell up and try to buy back at a lower level is always a difficult question. Getting market timing wrong is always a consideration, and with some of the world’s great hedge fund managers presently big hoarders of gold you have to wonder if they know something that is not yet apparent.
A surge in put or sell options in New York, and a decline in call or buy options is a classic signal of a stock market trend reversal, and is now in place. On Friday the S&P 500 also registered its biggest percentage fall in almost a month.
Then again on Friday 89 per cent of stocks in the S&P 500 traded above their 50-day moving average, and by definition a trend line above an average is not sustainable.
Indian rate hike
On Monday Indian stocks will lead the downturn after a surprise interest hike after hours on Friday. Meanwhile, renewed fears over the Greek debt crisis have floored the euro again.
In the US housing dominates the statistical show next week. Housing has been the component of the US recovery that has failed to come right so far. Existing home sales are out on Tuesday and new home sales on Wednesday.
It is also uncertain how the now expected passing of President Obama’s controversial healthcare bill will be received by financial markets. This removes uncertainty but the cost of the measures may be judged anti-business. Then again Google pulling out of China is hardly a positive.
On Friday the dollar gained against all major 16 currencies. This is an indicator of what to expect in a big market sell-off. Bond yields will take a dip and prices jump. All commodity prices, including precious metals will fall.
The flight to the dollar and bonds as a safe haven has started. Partly this is an automatic response to the liquidation of assets like stocks that are denominated in dollars. Partly it is a shift from risky assets to a perceived safe haven.
How long will this dollar rally and stock market correction take? Stock markets generally correct much faster than they rally. So a 12-month rally might be followed by a three-month fall, or it could be an even quicker correction.
However, the higher and longer a market rally then logic suggests the harder and longer the fall. In previous bear market rallies after major financial crises the correction has generally been to a new low and over a matter of several months.
Institutional investors have also been replicating hedge fund strategies so that they can liquidate faster than possible with hedge fund withdrawals. That could add significantly to the velocity of the next downturn.
So successful has the Fed been in sustaining this rally that most investors have forgotten that this now leaves the emperor with no clothes, as the liquidity is spent and it is impossible to lower interest rates meaningfully – and that is how 20 per cent corrections are usually capped.
Is it too late to short the S&P 500 at this point?