Financial Evisceration Awaits You

January 31, 2010 · Posted in Weekly Posts

Markets continued their declining ways on Friday and are set to continue this week. We can expect some violent days down as the sense of slipping is evident. The charts are universally ugly, and ugly in a 2007-2008 way. In all seriousness, this is a market to stay clear of unless you are actively trading. For those who are not actively trading, park your money in cash until some form of bottom or cathartic sell-off is achieved….and plan to go to Europe this summer, the Euro is getting hammered.

Some specifics before we get to the charts:

1) No amount of good news is helping - US markets want to go lower as evidenced by the GDP report Friday.

2) The dollar is still moving higher, bonds are ready to break out, Shanghai is BELOW its 200 day MA, commodities are declining. All this points to money flowing out of risk assets and into the US dollar. The carry trade in US dollars is estimated at 1.5 trillion dollars so that unwinding will send the dollar and bonds sharply higher in the near term. One caveat is some tentative bottoming action in gold but this remains to be seen if it plays out. This trend may reverse very suddenly when it bottoms sending the dollar sharply lower, bond prices into the basement and precious metals skyward. That scenario is in the future however, for now all risk assets are headed down.

3) The drops in oil and copper are signaling that he famed economic recovery thesis is failing. Perhaps they recover in the next few days or perhaps not. Many of these assets are over-owned by speculative interests so the unwinding can be fast and furious.

4) US equities are slipping. We have not seen charts this ugly since 2007-2008. We are not predicting a crash (just lower prices) but we will state that there is nothing written in stone that says financial markets can only crash in October.

5) We had been stating that the dates towards the end of last week looked likely to see a decline and we were correct. The previous consolidation range was again broken to the downside on rising volume. We see the US equity markets as inexorably slipping downwards as if sliding to a cliff where they will then fall sharply. We may be wrong but so far we are doing very well with this thesis.

For the month of January our portfolio was up 4.7% while almost every other market was down. We will stick with our thesis until we see the market behave contrary to our expectations.

The charts below are divided into three sections:

Part 1: The dollar, bonds, and Shanghai - demonstrating the unwinding of the carry trade. We have also included a long term dollar chart to show how the dollar rose during the 2007-2008 crisis.

Part 2: Oil, copper, gold, basic material and gold mining stocks.

Part 3: US equity markets.

We urge you to take the time and understand each chart so that the full picture can be appreciated.

PART 1: Dollar, Bonds, Shanghai