Its a beautiful Monday here in the Rockies sitting in my office while watching my wife read from her kindle and my screens watching Europe implode.
This is why we’ve been imploring readers and clients to remain cautious and why we still have our hedges: Euro markets are down from 4-5% today, US futures indicate -203 S&P 500 and Gold up 1.39%.
Greece and Italy are holding Europe hostage in their failure to rein in their budgets while Europe and especially Germany decide whether to support and save the hapless Mediterranean countries. Big vote in Germany on Wednesday that could provide a temporary pause in the great reset or just provide be the catalyst for Europe to implode further.
Just hours ago, UBS cut their view on global equities and raised their outlook on commodities and the VIX. Gee, ya think?
Strategy: This is becoming too easy to game. Sure there are enough nitwits in politics denying reality to remain bearish longer term. However, a climactic selloff on Tuesday could set the stage for another short term bounce. Our S/T indicators will become very stretched on the downside if the SPX gets whacked tomorrow. This could be a nice exit point for at least a fraction of our SDS hedges. I’ll retain our positions in metals and currencies. I have no interest in buying anything for the time being.
If we do liquidate a portion of our SDS position, it will be with the idea of buying back on any market strength later in the week. These thoughts are still fluid and the situation may change whereby we do nothing. Otherwise its a nice position to be in, lessons learned from 2008.
Long SDS, GLD
Monetary policy is not very effective during periods of mass deleveraging. A sound fiscal policy geared towards job creation is where our leaders should be focused. The politicians don’t seem to understand that a steroid shot of quantitative easement has little effect on the economy other than to raise the price of commodities and devalue the currency along with the lingering effects of increased debt. So now we’re hearing talk that QE 3 is imminent which is propelling the price of Gold, Silver and bond prices higher. How many attempts at QE will be attempted before politicians determine that perhaps this is not the most effective method of boosting employment or housing? My view is that Bernanke and the Fed alone cannot boost employment and our political leaders are less than helpful with self destructive partisanship. This may serve the Republicans as I don’t believe they intend to cooperate with our President and actually intend to bring about a lack of cooperation that will stymie any effective fiscal policy in the hopes that crushing the US economy will spur a Republican victory for the Presidency in 2012.
Trading comment: The Dow is down 255 at present while GLD is up $5.17, SLV is up $1.65 and the SDS is up $1.25. Since we have a high percentage of cash on hand in client portfolios, our accounts on average are positive for the day despite the losses in stocks.
The leadership in Gold and bonds is troubling and its possible that the retest of the lows is near. Time will tell.
Long all mentioned
Datalink is up $1 so far today at $9.68. Last quarter they posted very strong earnings and are ranked at the top of our proprietary equity model. The stock did suffer from the market sell off a few weeks ago but now it appears the stock is once again gaining traction.
This mornings ISM report came in a bit stronger than expected and not indicating a recession, but its close. Many of the underlying components are weak. Treasuries remain strong with the 10-year yield at 2.18%, this remains a negative for equities along with the strength in Gold.
Accounts remain hedged as I do not believe this is an appropriate time to allocate cash to equities. Perhaps in September we’ll have a better set up if we successfully retest the August lows.
Long GLD and DTLK
With the plethora of issues facing the world economy right now its almost incomprehensible that we’ll witness a V bottom in the S&P 500. The odds are high that we’ll revisit the low of 1120 soon. Very few bottoms are of the V shaped variety, more likely is the multiple retest of 1120 which if it holds will represent a much better buying opportunity.
There is also the chance that 1120 will not hold, especially when considering that September is the worst performance month for equities. Considering that the Euro can go either way, Gold remains a solid holding.
I continue to add to SDS hedges as the markets rise.
Other than that I’m standing pat.
Long GLD and SDS
For the past few trading having trading hedges appears as a very unenlightened strategy as markets rebound sharply. But these are unpredictable and volatile times where the chances of staging a major rally appear to be very small while the real risk is exactly how much downside do we face in earnings?
On the Bear side of the trade (where I am):
Stocks follow earnings and while earnings for 2011 are almost locked in, earnings for 2012 have now rolled over. Our primary model is now Bearish/Hedge. Earnings in the average recession fall approximately 22% which implies $77 in 2012 earnings. Earnings cannot take that kind of a hit in the hope that stocks hold, they won’t. John Hussman of Hussman funds in his weekly commentary makes note of corroborating economic indicators which we’re experiencing now with 100% sensitivity to economic recessions.
On the Bull side of the trade:
Sentiment is very extreme at this point. I would have to agree that current sentiment based on news that we know at present is likely reflected in current stock prices. In 2008 when sentiment reached the current present level the major waterfall selling was over. However, afterwards there was a second and third wave of selling, a series of events that represents the “process” of forming a market bottom. The Bear ended in March 2009 but you can take only microscopic comfort that the climactic low was in the previous November.
Trading comments: I missed the top in the parabolic move in the Swiss Franc and have begun liquidating our FXF hedge. I’m kicking myself for that one since parabolic moves almost always end the same way……really badly.
I’ve added some additional SDS into client accounts as we’re now at the point where the previous rally faded and sentiment in the very short term is extreme.
Long SDS, FXF
Recognition of the woes of the economy and earnings appear to be fully realized hence the extreme readings in investor sentiment. The 1120 area of the S&P 500 appears for now to a relatively solid floor and its becoming hard to be as bearish as we have been going forward. During periods of market selling down in the 1130 area we’re seeing a dissipation of selling and a reduction in the number of stocks marking new lows. While we will look for market weakness to cut back on our hedges we are starting to build bullish equity positions for the end of the year time period.
Gold and Silver need a period of price consolidation. The frenzy in Gold is a likely sign of a near term top in prices and a consolidation would be normal lasting for a few months.
This current period is beginning to resemble the October and November 2008 time period where stocks started to bottom out even while earnings continued to deteriorate. While the major rally didn’t occur until March ’09 there was a two month window where stocks rallied sharply into January ’09, I think we could see something similar to that.
There are rumors of a major asset allocation switch from bonds to stocks in U.S. corporate pensions. Given the low yields on bonds and low valuations and high dividends on equities there is a good chance this rumor has some validity.
Long GLD, SLV
