The Wall of Worry

April 29, 2009 · Posted in Weekly Posts · Comment

US markets shrugged off just about everything today and rose just about breaking through their previous highs. Volume was ok but not breakout volume. After Monday’s sell-off the market has heard that the economy is leveling off, that from Paul Volker, that Citi and BofA will need 10’s of billions in additional capital, and that swine flu is climbing up the rating scale towards full scale pandemic….and so the market rallied. What is happening here is that clarity is being added to the mix. No we are not in a new bull market most likely and no we are not about to see economic recovery yet. The market instead is encouraged that the stress tests apparently did provide valid insight into the state of the banks and that the issues the banks have are being addressed. We know that the economies uncontrolled plunge has been traded for a slow, descending glide, and we know that over half of he companies in the S&P have beat their lowered earnings.

At the same time we have a large number of folks who are convinced that we have seen the top of this run and are shorting or otherwise predicting imminent slaughter of those who dare to go long this market. Well, that’s nice. What is worth noting are the following:

1) We continue to back and fill as the market moves up - this is healthy

2) Traders are clearly taking profits as we go (as we are sure others who rode this market down are doing as well). We note that the market does not seem to want to create a blow-out day. That is, when it gets up near the 200 point level it comes back late in the session. This strikes us as a healthy fear of what may happen tomorrow.

3) The bears are convinced that the end is nigh

4) There appears to be improvement in Taiwan and Singapore exports to China. This is positive as it signals that Asian trade is picking up.

5) And…we keep getting enough significant companies reporting earnings that beat the street estimates. After the bell today we had Visa, AFLAC, and Starbucks. Further we have Chrysler announcing a deal tomorrow that avoids bankruptcy. Finally BofA shareholders just ousted Lewis as Chairman so that will make everyone happy as well.

All-in-all the market is climbing the proverbial wall of worry. Of course this will end at some point. Maybe next week, maybe in a few days, maybe in August. Most likely, in our view, we will have a back and forth market with a upside bias for the foreseeable future. many will lose their risk money trying to short prematurely. Many will lose when the inevitable, serious correction occurs because they waited too long to enter the market. We do believe that before this rally is over we will see new money enter and a short covering rally. When we see a sharp spike upwards we will begin to get very cautious.

In terms of specifics of our portfolio, we sold out of our gold short yesterday. Gold is meandering without a strong bias either way. If we have a powerful move upwards then we may well see it sell-off. If not, then we expect it will meander more until investor focus and events provide a direction.

The miners sold off due to swine flu…go figure. They recovered somewhat today as did AgFeed as investors began to realize that this flu has nothing material to do with pigs. It will likely be some time before a sustained new move higher occurs. The stock is stabilizing and consolidating which is not a bad thing. We still like it.

We are watching oil, natural gas, and base metals again. We’ll put out a Members Only post on them tomorrow. We are not buying yet. We are also keeping an eye on SINOPEC as they stated last night that they expect profits to be 50% higher due to some government pricing changes. SHI had peaked and sold off somewhat so we took profits last Friday on the bounce. We still like the company but would like to see some consolidation, preferably at lower levels before we re-enter. Ditto with Petrobras.

As of 04/29/2009 we are holding:

Long Brazilian mining and China growth through RIO

Long Australian Iron Ore Supplies to China through Fortescue FSUMF

Long AgFeed Inc FEED

The following posts are relevant:

How the US Dollar Will Lose Reserve Status

Chinese Gold British Debt

Brazil

China Part 4 - Playing the Dragon

China Part 3 Global Hard Assets

Commodities

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

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

“The Coming Bond Debacle”

Fundamental Trends

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