Saturday, September 3, 2011

Is the sky going to fall?

 Lately the volume and the price action in the markets has not impressed me. By that I mean that the recent declines in the prices of many stocks has not been matched by the significant increase in volume that I would expect given the tenor of the news being reported on the financial channels and the doomsayer blogs. The only indication of panic is in the bond market. Long maturity U.S. Treasurys are at the same price that they were in Dec. '08. That was at the time the S&P was trading at 880. Very near the bottom of the move down. Now we have treasurys at the same price, but the stocks are much higher. If the financial world was going to collapse and take the economy with it, I would expect stock prices to be much lower. Perhaps they WILL move lower. But I can't help but think that investors in bonds will be dissappointed with the returns on the 10 Year U.S. Treasury Bond that yields less than 2%!
There has been talk of the U.S. Federal Reserve selling short maturity bills to buy long term treasury bonds and thus push the long term interest rates lower. It may be a sell on the news event. In any event I can't see how long term rates on U.S. debt will spur the housing market to an improvement since it is the lack of earning power that keeps the public from buying houses, coupled with the banks wanting more money down.
It seems that the generals are fighting the last war, again. The American public is resigned to housing prices staying depressed. And even if the price of their house went up many would sell.
The story, in my mind, must be in China. As the dollar goes down the Chinese and asia will be forced to break the peg with the USD. This will have the effect of putting more buying power in the hands of their own people. In effect they will be spending the money that their govt has been saving for them by buying up dollars and printing yuan. As the Chinese develop a demand for the things they produce, the cost of those things will rise for us in this country. We will buy less of their goods and produce more for ourselves as well as selling to them. I am sure that our trade deficit is the underlying problem in our economic woes. As a country we must earn our keep in the world if we want to survive economically. Just as a family or a company would. And what we do well is grow food. What we don't do well is grow oil! So at the same time that the dollar is going down the cost of oil is going up. That means we must cut our dependence on foreign oil. And we will. But the cost will have to rise for that to happen with any certainty. Economics is everthing. People disparage the actions of govt with good reason. And that reason is that govt. usually trys to act contrary to economic currents, which causes loss of money and failure of the policy. But we are a govt. by the people. And people want cheap energy. And cheap means we will use more. Unfortunately, this country only has cheap natural gas.
But I have digressed.
I think that the appreciation in the long bonds will be short lived. And then the money will look elsewhere. Export companies will do better in the longer term. Agriculture and basic materials. And the charts of those are holding up well.
First bonds:
 This bond chart below shows decreased momentum to the upside. Look at those indicators on the bottom of the chart. Compare them to early '09. I see a rapid loss of momentum in the daily chart. It is going straight up tho, so it is too early to be prudently short...
And the ag market:

The S&P:
It seems everyone has taken cover already. Is there anyone left to sell? Of course there will be sellers. Who are they? Who has been selling stocks? I keep hearing that the public is heavy into bonds. Is the public fighting the last war? Doom and gloom is in all of the news. Everybody knows, right?
As always, limit your risk.

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