2009

February 8, 2009 · Posted in Weekly Posts · Comment

Last week was an excellent week with ALL of our positions advancing. Precious metals gained, bond rates continued to rise, the US dollar came off it’s highs, the Australian dollar came bounding back and our agricultural position began showing signs of life again.

Yesterday we added the Members Only Post “The Fed and The Bond Market - Will Intervention be Effective?”. For those of you who are not members or who have not availed themselves of the Free 1 Month Trial we urge you to do so. Simply go to the “Become a Member” tab and follow the step-by-step instructions.

US Equities:

US equities rallied last week. We variously saw rallies attributed to unemployment coming in worse than expected leading to greater likelihood that the stimulus package would be quickly passed, a rally of financials on the suggestion by Senator Dodd that suspending mark-to-market accounting could be beneficial in helping the banks through the crisis…that is reducing transparency could help the situation. Frankly, we find both of these narative reasons for the market advancing illogical. If equity investors truly believe that deteriorating unemployment and greater opacity into the conditions of banks is cause for a rally then we will replace our use of the term “impaired” with “deranged”. In addition, various commodity markets have shown price improvement in recent days and the Baltic Dry index, the index that tracks the cost for bulk material shipping, has risen strongly in the past few days reflecting increased Chinese demand for bulk ore - specifically iron. These and other single number measures are being advanced by some as evidence that the turnaround is upon us and equities are set to rally strongly. Murdock Global Insight begs to differ. We maintain that all equity markets are impaired by the financial crisis and will remain impaired for some time. All markets bounce, from Baltic Dry indexes to commodities, and no market goes straight up or straight down. It is possible that we get a bear market rally in here and it is possible that it is a strong one. After all, most stock market participants focus narrowly on the US stock market and never look any deeper into bonds, commodities, or currencies let alone Baltic Dry rates. There is cash on the sidelines and we are about to have a stimulus package passed and a bank bailout plan unveiled (though the cost makes it anything but certain it will face easy passage in Congress). Any equity market rally at this juncture is a bear market rally and will ultimately fail. There was a 50% market rally in 1930 following the 1929 crash as an uptick in prices an indicators signaled to many that the worst was over. Instead it was a bear market rally and stocks subsequently dropped a further 80%. We will stick to our fundamental investment themes as these align with the titanic forces that are at work globally - short treasuries, long precious metals, short US dollar, long agricultural commodities.

Foreign markets generally rallied as well this week as global markets continue to maintain a tight correlation with US markets. The exception is Shanghai which has been putting on quite a nice rally for a few weeks. We will explore this more later this week as we investigate the China situation more thoroughly in a new Members Only post due out Wednesday.

US Bonds:

Bonds rose this week as the market increasingly focused on the deteriorating US fiscal position. The jobs report Friday, which showed weaker than expected numbers, was taken as evidence that further government profligacy is in store. The 10 year bond hit 3.00% briefly on Friday up from 2.05% at it’s lowest some weeks ago. This week sees the Treasury auction over $60 billion in bonds, the passage (we presume) of the stimulus package, and the unveiling of the bank rescue plan by Treasury Secretary Geithner on Tuesday (this is at least the second time the announcement date has been pushed back). All of these events will have significant impacts on the thinking of the bond market and the trajectory of the dollar.

Currencies:

The Australian dollar came storming back this week and the US dollar began losing ground. We believe the Australian dollar was positively impacted by increasing iron ore demand from China as they seek to replenish stocks, an interest rate cut by the central bank and a stimulus plan unveiled by the government. While we retain the view that commodity currencies will do well over time, it remains to be seen whether the Australian dollar can hold on to it’s gains this week. The US dollar dropped against the Euro. It is premature to ascribe this to anything specific or to speculate whether the dollar decline that we have been expecting has finally begun. We need a few weeks of additional data. We analyzed the US dollar strength in our recent Members Only Post “Why is the Dollar Going Up (and When Will it Stop)” and concluded that our analysis that our short position remains valid.

Precious Metals:

Precious metals made good gains and consolidated their prices this week. Gold appears to have successfully tested the $900 level and survived the test. We expect precious metals to continue to move higher though the movement will be volatile from time to time. Our macro view of bonds, the dollar, and precious metals remains intact. We expect to see titanic movements in all three market over time but with attendant volatility. We continue to see comments appearing in the Finacncial Times and elsewhere regarding investors becoming increasingly nervous about paper currencies. Right now paper currency unease is simply at the murmur stage with most of those murmuring likely not taking any concrete action to move into physical assets. When that changes we will see major moves in multiple markets develop very rapidly. We remain long precious metals (our positions are listed at the bottom of this post). We expect to be establishing a physical gold position shortly. We have more to say about the precious metal’s market in the Members Only Post “Gold - Reluctantly”.

Agricultural Commodities:

Our position in RJA stabilized this week after experiencing a gradual drift lower over the past several weeks. The position is underwater but not by much. Conditions are developing world wide for significant price appreciation in agriculturals this year. The African cocoa crop is experiencing serious declines in yields due to the trees passing their maturity point. Little investment has been made on an ongoing basis and so that market is faced with serious loss of supply going forward. Winter wheat production globally is about 5% below last years levels. Drought is hitting China hard at the moment impacting their crops as well. This is an el nino year which generally presents challenging growing conditions to farmers globally. The financial crisis is known to have impacted the quality of seed, fertilizer, pesticide, and acreage planted due to credit restrictions coupled with the dramatic price falls last year. Further, there has been talk in Washington of increasing the ethanol content of gasoline as a means of supporting the ethanol industry which is seeing a fall off in demand due to demand destruction resulting from the economic slowdown. Any such move would take corn out f the food chain and putit into the fuel chain with an attendant rise in prices. This idea is just talk at the moment but it is worth watching.

Summary:

Going into the new week we see precious metals and our short US Treasury positions showing similar price and volume action - that is, both are testing resistance levels, both are exhibiting higher volume on up days and lower volume on down days, both look like they are poised to move higher on news. We expect that the bond auction this week and the announcement of the administrations plan for reviving the banks will provide the stimulus for those positions to move higher. We will look to add to each of these on any pull back from these levels or on a breakout should that occur before a pullback.

Our currency positions and agricultural commodity position all strengthened late this week but we need more data before we will consider adding to them.

What’s New:

We added our latest Member’s Only Post “The Fed and The Bond Market - Will Intervention be Effective?”

Coming Up:

We will publish a new Member’s Only post taking a deeper look at China by mid-week (Wednesday). We also will publish a public post Tuesday analyzing the bank rescue plan that Treasury Secretary Geithner will unveil (unless the announcement is delayed again). The contents of the plan are important but we suspect that the sequence of false starts and leaked discussion of options considered and rejected over the past few weeks coupled with the repeated delays in announcing a plan tell a deeper story.

We recommend the following posts as especially relevant at the moment:

“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 02/06/2009.
Short Treasury Bonds through PST and TBT*
Long gold and silver bullion through CEF
Long gold mining stocks through TGLDX
Long Agricultural commodities through RJA
Short US dollar through UDN**
Long Australian dollar through FXA**

*ProShares leveraged short ETF. Investors need to understand thoroughly the risks associated with these leveraged products in light of their personal investment needs and risk tolerance. They may not be suitable for all investors.

** Position is currently in loss but we are sticking with it as we believe the fundamentals will drive the dollar substantially lower.