Weekly Market Review 03/29/2009

March 29, 2009 · Posted in Membership, Weekly Posts

We are seeing increasing levels of volatility in the currency, bond, equity and commodity markets and this trend should continue for the next few weeks. Stocks have had a good run and should pause here and consolidate with a likely retrenchment. How they trend lower will tell the tale of whether this rally is simply a bear market rally or whether it has legs and may turn into a new bull. The dollar rose strongly late last week though it still is technically in a bear flag pattern and should break lower. The rise caused volatility in most major currencies shaking many players out. Similar volatility impacted the commodity markets with sell-offs in oil, base metals, gold, and agriculture. Natural gas took the prize though. After breaking out of its down trend with a solid breakout and rallying nearly 20% in a matter of days it turned on a dime Thursday and proceeded to give up the entire move and then some. We are not holding any natural gas at this point though we still like it long term.

Oil and copper both have had a good run but they are ahead of the fundamentals even though there are encouraging signs from China that economic growth will still come in close to 7% this year. There are also words that China is seeing increasing orders for machinery, trucks and heavy equipment from Africa and Asia. All good signs. We still favor the commodities as a play on supply reduction coupling with a declining dollar and an eventual rise in demand but we would like to see a pullback in prices and a reduction in volatility. For now then we are playing wait and see.

Last week’s bond auctions did not go well despite the fact that the Fed started buying Treasuries last week. Demand from foreign central banks seems to be dropping off due to the massive supply as well as the Feds quantitative easing strategy leaving market participants distinctly uneasy about the future of the US dollar and US treasuries. Despite the immediate knock-down in interest rates caused by the Fed’s announcement two weeks ago interest rates have headed up ever since. It is starting to look that the massive supply coming to market coupled with the QE strategy is driving people away from our bonds. New data from the Fed indicate that foreigners have been net sellers of late. We have been predicting this for some time. Unfortunately, the market volatility combined with the underlying structure of the ETFs available to short bonds makes playing in the Fed’s sandbox very risky so we will content ourselves with being right.

In summary then we are watching the dollar for its next move down which should spur oil and copper higher. We are watching oil and copper for how they consolidate in this region (see charts below). Specifically, whether they break below the regions we identified on the plots below. If they hold then the declining dollar will probably have put a base under them and going long the commodity and the foreign producers will be our strategy. If they break then we will have more down side before a buy is in order. It is important to watch how oil and copper do with respect to S&P retrenchment as well. All markets are extremely news oriented right now, unpredictably so as evidenced by natural gas. We are also watching China as they hold the key to many of the moves the commodity markets will make in the next months.

US Dollar Index 03/27/2009

West Texas Intermediate Crude 03/27/2009

Copper 03/27/2009

Finally, there are two interesting articles we have come across this week that we’d like to recommend. The first describes one investors views on the coming commodity boom, the second one view on why we may have seen the bottom and what lies ahead in the next few months and the final one on why Asia is now a buy. These will factor into our strategy going forward.

Earlier today we released the Members Only Post The Future of the US Dollar.

Later this week we will release China Part 3 for Members. This will look at the hard asset deals that China is making around the world. The following week we will release China part 4 looking at specific companies that should benefit from Chinese growth resurging.

The following posts are relevant:

Commodities

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

“How a Reserve Currency Collapses”.

“Gold - Reluctantly”

“Why is the Dollar Going Up (and When Will it Stop)”

To view previous Members Only posts simply follow the instructions under the “Become a Member” tab and select the “One Month Free Membership” when you get to the Products page. You must complete the checkout process in order for the Membership to complete. Registration is not sufficient. You are under no obligation to continue beyond the One Month Free Trial and your e-mail and address will not be shared with third parties.

We are entering a critical period of time in the bond and dollar markets staying plugged into what is happening and the likely ramifications is especially important now - stay informed with Murdock Global Insight.

We hold the following positions as of 03/27/2009:

Long oil through DXO