What do you think? Too early?
I think gold's a no brainer. but as lance lewis says "the reflation trade is being unwound."
here's has commentary tonight. (he gives his permission to post occasionally). I sure hope he's wrong. I think that once the market senses there's trouble, gold will be sought. I sure hope we're close.
dailymarketsummary.com
Bonds Continue To Tumble And Take Stocks Down With Them
Asia was mostly lower overnight once again. Japan fell over a percent to another new low for the move, and Hong Kong fell a percent to end the week back on its lows for the year. Closed end China fund CHN fell 7 percent to another new low for the year. Is China going to raise interest rates this weekend now that the May Day holiday is over? It certainly appears the market is expecting something like that, and perhaps other measures as well. One wouldn’t think that the Chinese would make any change in their currency peg at the moment, but you never know. Any change in China’s currency peg to the dollar obviously would be even more bad news for the US bond market.
Europe was off a touch this morning, and the US futures were also a little lower. The April unemployment rate came in at 5.6%, down slightly from March’s 5.7%. But the nonfarm payrolls were what everybody wanted to see, and it was a whopper: 288,000. The March number was also revised up another 29,000 to 337,000. The bond market immediately fell out of bed on that, with the yield on the 10yr breaking out above its summer high. The equity futures sold off back to yesterday’s lows, the dollar surged, and gold slumped to a new low for the move.
When equities finally opened up, the S&Ps opened at yesterday’s lows and immediately made a straight-up move almost as if somebody was trying their best to defend those levels or something. The move flamed out about as quickly as it began though, and we sold back off to the opening levels. From there, we spent most of the morning in a sideways chop as the bond market continued its slide. Finally, with about two hours to go, we rolled over and took out the lows in the S&Ps. We kept sliding for the next couple hours and went out basically on our very worst levels of the session and to a new low for the move since the April peak. Volume was just OK (1.7 bil on the NYSE and 1.6 bil on the NASDAQ).
Breadth was over 10 to 1 negative on the NYSE (something I personally don’t’ ever recall seeing), and just shy of 3 to 1 negative on the NASDAQ. New lows on the NYSE jumped to 713 vs 27 new highs. We only saw 600 new lows on the lows of the bear market back in October of 2002, just shy of 800 on the lows during the 9/11 collapse, and around 900 on the July of 2002 lows. So, the fact that we’re seeing 713 and still this close to the highs is very ominous. The only other time we have seen anything like that was just days ahead of the 1987 crash. Sure, many of the new lows are closed end bond funds, but breadth is breadth and new lows are new lows. It’s not something that can just be blown off, especially given that stocks were put up a flagpole due to the leverage that low interest rates provided in the first place.
The semis had a bid to them virtually all day for some unknown reason (I think I have a good idea why though… see below), but by the close they had given a chunk of those gains back such that most were only up a percent a or two. The equips faired a little worse and ended mixed. The SOX picked up a percent.
The rest of tech was fairly mixed. I tend to think a good portion of the early bid in the semis was likely due to some optimism over CSCO’s report next week (which I think could be a real disappointment) as well as the misguided notion that tech can outperform during a rising interest rate environment. A piece put out by some tout house was making the rounds today and saying that semiconductor stocks returned an average of 51 percent in the 12 months following an interest rate hike during the previous 3 economic cycles. That might be true if this was a “real” economic recovery and not just the twin asset bubbles of stocks and real estate driving this “recovery.” Remember the old adage about 3 rate cuts always guarantees a rally? That worked great up until 2001 when it stopped working. That’s a perfect example of why you can’t apply a lot of these old “rules” to a bubble that’s in the process of unwinding. All the “rules” are broken during the mania to the upside, and all the “rules” get broken when things fall apart. In any event, I think it’s pretty clear that this sort of thinking that stocks and specifically semis can rally in the face of rising interest rates is totally inaccurate for the current post-bubble backdrop given that the SOX has led us to the downside since interest rates began rising back in early April.
Financials were pounded. The BKX fell over 2 percent to a new low for the year, and the XBD fell 3 percent to a new low for the year. The derivative king fell 3 percent to a new low for the year, BAC fell 2 percent and back to its March lows, and GE fell 2 percent. Credit insurers ABK and MBI both fell 2 percent to new lows for the year, which again suggests to me that the market is deathly afraid of what is ahead for the real economy going forward. Subprime lenders like COF and ACF were ripped for about 4 percent. Mortgage lenders were pounded for between 5 and 7 percent. FRE fell over 2 percent, and FNM fell just over a percent. Both made new lows for the year.
Retailers were spanked for 2 to 3 percent across the board, as people appear to be making the connection between rising interest rates and its effect on the housing bubble, which has been what has supported consumer spending. The RTH fell 2 percent to a new low for the move. Homebuilders were crushed and appear to have potentially begun a crash along with bond market. The HGX housing index fell 4 percent and back to a level on the charts that has held for the past 6 months on every test. A breach of that level would likely open the door to an enormous decline, and my guess is that a further rise in interest rates next week would set such a move off. Individual homebuilders were off anywhere from 5 to 7 percent, although HOV managed to slump 9 percent. The IYR REIT index also fell over 3 percent to a new closing low.
Crude oil rose 56 cent to a new high of $39.98, and I would expect it to probably keep moving up until stocks tank. The XOI and XNG both fell 2 percent and are once again diverging from the price of oil. The CRB fell a touch, but the CRX slumped 3 percent new low for the move. Gold came in initially higher this morning in NY, but when the dollar surged on the back of the big jump in interest rates as a result of the payrolls number, the metal collapsed to a new low for the move and continued to work its way lower until it finally stabilized down almost $12 from yesterday’s close. The metal spent the remainder of the session flopping around on the lows to go out down $9.30 to $379.10 and a new low for the year. Per the COT, the spec net long position in the metal fell to 90,000, which is down from the previous week but not by much.
The HUI went out on the very worst levels of the session along with the stock market and was crushed for over 5 percent, which was also a new low for the year. If the equity market finally begins to come apart next week and interest rates continue to rise, I think there’s a good chance that the gold shares have a quite a bit lower to go. I’ve stated a downside target for the HUI of 140 to 160 (we’re at 168 right now), but I think there could be risk down to 110, which will wipe out the entire rally since March of 2003 (just as I expect to see in the rest of the equity market, as this “reflation trade” nonsense gets completely unwound). So, the moral to the story once again is: all good things come to those who wait. The golds may bottom out before my downside “guesses” are hit, but again, the market action should tell us that, and there will be plenty of time to act when the time comes. So, there’s no rush to pile back into these shares that continue to sink like a lead weights that have been tossed into the ocean. Preserving capital in order to be able to take advantage of bargains at a later date is the name of the game right now.
The US dollar index surged nearly a percent and a half and back to its high for the year. The yen slumped over 2 percent and back to its low for the year. If China raises interest rates this weekend, Japanese stocks are likely in for another tumble (and probably are even without a Chinese rate hike due to the problems over here in the US). That is going to put even more pressure on the yen. At some point, the BOJ may even be forced to sell all the US treasuries that it built up last year during its intervention in order to let all the foreign specs that took the other side of the trade (and are short the dollar and long the yen) out of the trap. The euro fell a percent and a half and appears set to make a new for the year as well. Both the Canadian dollar and Aussie dollar both made new lows for the year also. The dollar’s bear market rally slowly continues. The dollar at its core is a piece of confetti, but that doesn’t mean that it can’t rally against the rest of the world’s confetti for a period of time. Remember, if the US economy catches the flu, the rest of the world is going to catch the Ebola virus, and they will begin slashing interest rates too.
Treasuries were crushed. The 10yr fell a full point to a new 52-week low in price and rose in yield to a new 52-week high of 4.76%. Don’t look now, but the bond market could be on the edge of a crash. The only thing that’s likely going to halt the self reinforcing selling that is resulting from the unwinding of the carry trade is stocks taking out the March lows and collapsing. At some point, rising interest rates will put so much pressure on stocks that they should collapse much like we’ve seen in the HUI lately. At that point treasuries are likely to have a huge rally, but until then, anything goes.
As a side note, Uncle Al was telling everybody a while back to go out and get ARMs instead of fixed rate mortgages. I wonder how people that took his advice like those ARMs now that interest rates are soaring? This is just one more example of how clueless Uncle Al is and why he is so dangerous. All this guy has ever done in his life is print money every time there was a problem, and it’s finally caught up with him. I’ll make this prediction: Uncle Al came into office with the 1987 crash, and he’s going to leave us with an even bigger one. It’s almost poetic justice.
Today’s slide takes us to a new low for the move since the April peak in most of the major indexes. And a few indexes, like the RUT, have already taken out their March lows. Sure, there could be a bounce at any time, but we’re getting very close to taking out the March lows in the NASDAQ and S&Ps as well as 10,000 on the Dow, which should lead to an immediate acceleration in the downtrend in all the major indexes. My guess is that this acceleration begins sometime early next week. I might be wrong about that exact time frame, but I do think it’s only a matter of time now before that acceleration takes place. Everything was highly correlated on the upside as the reflation trade unfolded. Thus, that correlation should apply on the downside as well. So far, the industrial metals shares and gold shares are out in front leading us lower. The HUI basically collapsed once it took out its March 2004 lows, and I think the same can be expected of the rest of the equity market, which should play catch-up at some point in the very near future.
The “reflation trade” (which is really just a fancy way of saying that speculators borrowed a bunch of cheap money thanks to the Fed and went out and bought all sort of crazy things all over the world) is now unwinding at an ever accelerating pace as interest rates rise. This entire bear market rally in equities was based on low interest rates and leverage, and now that rates are rising sharply, it’s going to squeeze the life out of stocks until they plunge right back to from whence they came (the March 2003 lows). As they say on cheesy TV commercial, but wait… that’s not all…. you also get… a real estate collapse as a result of the rise in interest rates. The real economy of the US is supported by the twin asset bubbles in stocks and real estate. Both were inflated due to low interest rates and leverage, and with the housing stocks coming apart today on the back of the break in the bond market, I think it’s pretty clear that the market thinks the housing bubble is about to pop. And that means the US consumer is in big trouble. So, as the reflation trade unwinds and stocks go down again and drag the real economy down behind them, housing and the consumer will not be there to support the real economy this time. Thus, things could get ugly very fast, and I don’t think the March 2003 lows will be the end of it either.
But, in the very near term, the Dow is still above 10,000 and we are still working towards taking out the March 2004 lows. So, let’s not get ahead of ourselves. I just wanted to lay out the big picture (the way I see it anyway) so readers know where I am coming from. In any event, let’s see if the Chinese do anything with monetary policy over the weekend and whether the US bond market can keep from breaking out into all-out crash next week or not. The bear sandwich of a slowdown in China and rising US interest rates continues to put increasing pressure on equities. At some point in the very future the dam holding up equities will break, and the pent up wrath of the bear will finally be unleashed once again. Don’t get in its way…
Lastly, I've decided to start a new feature on the website. It's going to be a weekly piece that will be posted every Sunday evening (the link to it is on the DMS homepage). It's going to be free for anybody to access but not near as detailed as my daily subscription columns (although I may toss in anything that I thought was newsworthy over the weekend that came out since my column on Friday). So, feel free to check it out and pass on the word about it to your friends. |
