An Absolutely Critical Week

July 19, 2009 · Posted in Weekly Posts · Comment

Last week saw the thrashing of the head and shoulders top thesis as well as the breaking of the down trend line in many, but not all, of the S&P sectors. Global markets continued to rally smartly as well. The key issue for this week then is: is this rally for real so that we can expect new highs or was this a one wee flash and the down trend will begin to reassert itself? This week should go a long way to understanding which scenario investors should bet on.

On the positive side which argues for further upside, we have seen China release GDP numbers that indicate they will easily beat their 8% growth target for the year. In fact, analysts are now raising their year end estimates into the double digit range. This is important not only from the standpoint of China supplying a strong growth engine to the rest of the world but also from the fact that his growth is being led by China’s domestic economy. Analysts are generally astounded that China is internally demonstrating this level of strong domestic demand. Murdock Global Insight stated some months ago that we believed that the Chinese domestic economy would surprise on the upside and that it is doing so is now becoming apparent. Further, the Chinese government is not letting up on the stimulus so we can expect liquidity to continue to drive Chinese domestic growth.

As for the rest of the world, we may well be in a liquidity driven rally here. Much of the equity market moves in the US since March have been largely trader driven. By some estimates fully 40% of the funds that could find their way into equities remain in money market funds and this represents a huge pool of resources that have not yet fed into the rally. Further, there remain large short positions out there that are becoming increasingly painful for investors to hold. In addition governments continue to pump stimulus into the global economy through easy money and direct spending. This wall of liquidity may now be hitting stocks. Clearly, the market is seizing on good news as a reason to rally and largely ignoring bad news. This is bull market behavior. So if we are in for continued upside then investors need to be positioned for that.

The flip side is that we know that in he US and Europe there regain a significant number of problems and for the US the predictions of persistently high unemployment do not sit well with a consumer oriented economy. If however, the market becomes liquidity driven then this may not matter for equity prices. Or, it may not matter for prices of equities whose focus is Asia. Perhaps we will see decoupling between the US consumer and housing sectors and those sectors that align with global growth.

Either way, we feel it is more dangerous to be short than long and further, we do not believe we will have long to wait until the market signals that getting very long is the best policy. That moment though is not quite yet.

What we need to see is the following:

1) Global markets consolidate their recent gains and begin to move higher. Specifically we want to see US, Australia and Brazil show some signs of consolidation over the next few days. We would rather see contained down days then more upside immediately. In the US this applies also to the Nasdaq which is setting new highs from the March lows.

2) We would like to see stocks in the US that are poised to breakout, and that in many cases did not participate in the recent rally, breakout in the face of broader market consolidation.

3) We would like to see specific sectors consolidate, specifically the basic materials, industrials, and energy. We are uncomfortable with energy at the moment as this sector has not broken out nearly as strongly as have other sectors.

4) We would like to see the markets largely shrug off negative news by simply punishing the individual stock and not the entire market. This week should provide ample opportunity for this as there is a large chunk of earnings coming out.

5) Finally, we would like to see the US dollar continue its renewed downturn. This indicates that global risk appetite is increasing as investors do not seek the depth of the US bond market and also provides a boon for our exports and for commodity prices.

We may see all of these in the next few days. After the run-up US markets had last week we think that a failure here would manifest itself pretty quickly and rather dramatically.

As we stated on the 16th: “for our money we are waiting and only playing selective, very short term plays. As we see the consolidation emerge we will return to the commodity names and plays that we exited from as the correction started and likely and some key technology names that are heavily Asia dependent. In addition we note that the US dollar looks to have broken out of consolidation yesterday and should be starting the next leg down. If this proves to be the case then gold and silver and their miners should present a buy opportunity shortly.” These statements still hold.

For those who are following the looming dollar crisis we urge you to read our free post Watch Out For Sterling where we raise the case that a precipitous fall in Sterling could serve to elevate the dollar near term and trash trading positions betting on an imminent dollar collapse.

Readers should take a look at our post The Most Important Question Facing Investors to understand the risks we are currently facing.

We wrote recently in “The Character of the Dollar Collapse” on the risks to investors in any asset of a dollar collapse.

Murdock Global Insight began discussing the dollar’s impending demise in January when the dollar was still generally strengthening How the US Dollar Will Lose Reserve Status. Now, in June, the idea that the dollar is destined for significantly lower levels at some point has entered the mainstream. The US fiscal position is increasingly being seen as untenable. Interest rates are surging for a variety of reasons but he massive debt issuance by the US is one primary cause. We have established the Murdock Strategic Portfolio for the purpose of growing our wealth in the face of a dollar collapse/surging China scenario The Strategic Portfolioand we have written about the risks that a free fall in the dollar could cause to those investments The Most Important Question Facing Investors.

To find out the details look at our strategic portfolio scorecard. The Strategic Portfolio is how we are investing in the global trend of dollar depreciation and Asian recovery and trading around that trend to ensure we stay profitable. Take advantage of the Free Two Week Trial and read it. We have also update the scorecard for today’s action.

The Strategic Portfolio

Portfolio Scorecard 07/15/2009

In addition, we strongly recommend reading The Most Important Question Facing Investors as recent action illustrates directly what we are faced with if the dollar decline turns into a free-fall.

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.

The following additional posts are highly relevant:

The Strategic Portfolio

The Most Important Question Facing Investors

On the Edge of the Empire, Dollar Influence is Declining

The Dollar and Gold Near Term

How the US Dollar Will Lose Reserve Status

Chinese Gold British Debt

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

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

“The Coming Bond Debacle”

Fundamental Trends