Continuing on the theme of fall colors, the above picture is from my garden too. Maple leaves falling off from that little thing I planted over five years ago. That little thing ( the maple tree) has now grown over 10 feet

I wanted to touch on the state of the market as we close the month of October. The last two months have been a very strange market. despite watching this market every single day the last 10 years, I could not put my finger on its pulse. Of course if anything I have learned all these years , it is that, expect the unexpected
Normally when bonds rally, when Yen rallies one concludes that there is risk aversion in the air and you would expect a sideways to down equity market, a contracting commodities market. The last two months have been anything but normal, every thing has rallied in sync, the correlation that existed the last few years seems to have all turned upside down.

I have looked for what the pundits are saying in terms of explaining these moves. One answer the QE2 ( Quantitative Easing 2) program which the feds are supposedly going to launch first week of November…although no one knows for sure…yours truly included. Why on earth fed will do quantitative easing when the last easing has not helped much. Doesn’t the fed run the risk of stoking inflation if they did that? In my criticism, I guess I am being moderate , the bond guru Bill Gross has taken it a step further and calls it a Ponzi scheme.

I don’t think this weird market can continue for very long. Something gotta give- either the bonds are going to sell off hard ( which they have already started with a recent 35 basis jump in yields) or Gold, Silver and the likes are going to come crashing down. In the meanwhile, this liquidity driven market has one clear victim- USD is selling off across the board, here are some of the popular currency pairs:

Euro has been flirting with 1.40 , from a recent low of 1.18 ( April 2010)
GBP is above 1.60 compared to a recent low of 1.44 ( April 2010)
CAD ( Canadian Dollar), AUD (Australian dollar)- almost at par with USD (99.9) , compared to in 80s (AUD) and 90s(CAD) back in April. Even slightest of move in the market, and these currencies will overtake USD.
CHF (Swiss Franc) – new all time high: 1.06 from .9 something back in April ( so it has actually overtaken USD).
Japanese Yen -new 15 year high at 80.35 from 90 something back in April ( within striking distance of 79.70- the all time high for this pair).

Precious metals are also on fire
Gold at life time high near $1375 /oz from $1100/oz in April ( not adjusted for inflation).
Silver at life time high $24/oz from $19/oz in April ( not adjusted for inflation).

Other metals like Copper, Iron, Zinc are all in steep bull run.
Agricultural commodities like Wheat , Rice, Sugar, Soybean, Corn are all breaking to new highs ( wheat has jumped 46% since June).

Given the deficit US is running, these macro moves are not unexpected, what worries me is the speed with which these moves are unfolding. A real threat of stagflation- where there is inflation (even hyperinflation), but no growth in real wages or economy to support it. All these forces have been unleashed on the financial markets, thanks to the speculation of QE2 which is now priced in the market. I am not sure if fed ( Federal reserve) will really follow through with its (implied) promise for QE2, it all seems to be setting up for a big disappointment. Meanwhile we are in uncharted territory… with uncontrolled forces unleashed in the markets…time for a new normal.

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Continuing on the theme of fall colors, the above picture is from my garden too. Maple leaves falling off from that little thing I planted over five years ago. That little thing ( the maple tree) has now grown over 10 feet

I wanted to touch on the state of the market as we close the month of October. The last two months have been a very strange market. despite watching this market every single day the last 10 years, I could not put my finger on its pulse. Of course if anything I have learned all these years , it is that, expect the unexpected
Normally when bonds rally, when Yen rallies one concludes that there is risk aversion in the air and you would expect a sideways to down equity market, a contracting commodities market. The last two months have been anything but normal, every thing has rallied in sync, the correlation that existed the last few years seems to have all turned upside down.

I have looked for what the pundits are saying in terms of explaining these moves. One answer the QE2 ( Quantitative Easing 2) program which the feds are supposedly going to launch first week of November…although no one knows for sure…yours truly included. Why on earth fed will do quantitative easing when the last easing has not helped much. Doesn’t the fed run the risk of stoking inflation if they did that? In my criticism, I guess I am being moderate , the bond guru Bill Gross has taken it a step further and calls it a Ponzi scheme.

I don’t think this weird market can continue for very long. Something gotta give- either the bonds are going to sell off hard ( which they have already started with a recent 35 basis jump in yields) or Gold, Silver and the likes are going to come crashing down. In the meanwhile, this liquidity driven market has one clear victim- USD is selling off across the board, here are some of the popular currency pairs:

Euro has been flirting with 1.40 , from a recent low of 1.18 ( April 2010)
GBP is above 1.60 compared to a recent low of 1.44 ( April 2010)
CAD ( Canadian Dollar), AUD (Australian dollar)- almost at par with USD (99.9) , compared to in 80s (AUD) and 90s(CAD) back in April. Even slightest of move in the market, and these currencies will overtake USD.
CHF (Swiss Franc) – new all time high: 1.06 from .9 something back in April ( so it has actually overtaken USD).
Japanese Yen -new 15 year high at 80.35 from 90 something back in April ( within striking distance of 79.70- the all time high for this pair).

Precious metals are also on fire
Gold at life time high near $1375 /oz from $1100/oz in April ( not adjusted for inflation).
Silver at life time high $24/oz from $19/oz in April ( not adjusted for inflation).

Other metals like Copper, Iron, Zinc are all in steep bull run.
Agricultural commodities like Wheat , Rice, Sugar, Soybean, Corn are all breaking to new highs ( wheat has jumped 46% since June).

Given the deficit US is running, these macro moves are not unexpected, what worries me is the speed with which these moves are unfolding. A real threat of stagflation- where there is inflation (even hyperinflation), but no growth in real wages or economy to support it. All these forces have been unleashed on the financial markets, thanks to the speculation of QE2 which is now priced in the market. I am not sure if fed ( Federal reserve) will really follow through with its (implied) promise for QE2, it all seems to be setting up for a big disappointment. Meanwhile we are in uncharted territory… with uncontrolled forces unleashed in the markets…time for a new normal.

Been a while since I wrote my thoughts on the commodities market or the bond market or the currency market, and there is a reason for it. I am not getting a clear signal in terms of what is going on in the market in the short term. For instance gold market had a sizable pull back ( form $1025/oz to $850/oz), similarly Silver pulled back from around $21/oz to $16.25/Oz. All things being equal, I think this is a buying opportunity, you know pull back in a strong bull market, that is when you buy. But I am staying away and chances are I am going to miss this move back to old highs and beyond. The reason I am on the sideline is because I see great divergence out there. Gold , silver have pulled back but Crude at $136/ barrel is still making new highs, there has been no meaningful pullback so to speak. This animal has rallied from $90/barrel to $136/barrel in a heart beat. The parabolic move means the correction is also going to be very painful, very steep and you don’t want to touch it with a 10 feet pole. Given that the various commodities usually have a highly correlated move, any correction in crude will likely drag all the other metals- gold, silver, copper,platinum..you name it. These commodity markets are notorious for sharp swings both ways. As early as last summer (2007) silver had a precipitous decline, in 2006 natural gas ,silver, gold all had sizable decline resulting in the busting of Amarnath hedge fund. I am thinking when crude corrects, all these markets including currencies will correct( Euro particularly I think has gotten ahead of itself). Euro can easily correct to 1.40 from the current 1.56 or so. As they say in financial markets “trees do not grow to the skies”, these markets will eventually correct, question is when? That would really be a clear signal to me, and be a good buying opportunity, till then I am staying out.

The long bond yields have been creeping up ( both 10 years and 30 years), and given that Fed is still on holding pattern means yield curve is getting steeper by the day, unmistakable signal that the market is finally pricing in the inflation concerns. I shorted the 30 year bond when it was flirting with $118 price level just few weeks ago( now at $112-$113) , now I am again on the side line. I think this market needs to consolidate here, although all indications are that the steepening will continue. What happens next with the bond prices is hard to say. I think both sides ( bulls and bears) have strong emotions. The bond bears point to inflation, whereas the bond bulls point to a slowing economy, a recession in the air, the China trade surplus, the petro dollars and so on. Me, I am not going to get trampled in this bull and bear fight, let them fight it out, eventually one side will come out victorious and a new trend will emerge, and I will be happy to join in. For now,my mantra, avoid this.

Last point, S&P futures, Dow futures, what about these? Dow has been flirting with 12000 level to the downside, really scary in here. I am constantly hedging my portfolio with the help of options, writing some covered calls, buying some spreads and so on. I sure hope 12000 works as support and we bounce from here, but you just never know. Lots of skeptics out there who believe credit crises is not done yet, and the market has yet to price these in. Gosh, if that happens Dow can easily go back to 11K in a heart beat, wouldn’t surprise me a single bit! I am staying defensive!

>
Been a while since I wrote my thoughts on the commodities market or the bond market or the currency market, and there is a reason for it. I am not getting a clear signal in terms of what is going on in the market in the short term. For instance gold market had a sizable pull back ( form $1025/oz to $850/oz), similarly Silver pulled back from around $21/oz to $16.25/Oz. All things being equal, I think this is a buying opportunity, you know pull back in a strong bull market, that is when you buy. But I am staying away and chances are I am going to miss this move back to old highs and beyond. The reason I am on the sideline is because I see great divergence out there. Gold , silver have pulled back but Crude at $136/ barrel is still making new highs, there has been no meaningful pullback so to speak. This animal has rallied from $90/barrel to $136/barrel in a heart beat. The parabolic move means the correction is also going to be very painful, very steep and you don’t want to touch it with a 10 feet pole. Given that the various commodities usually have a highly correlated move, any correction in crude will likely drag all the other metals- gold, silver, copper,platinum..you name it. These commodity markets are notorious for sharp swings both ways. As early as last summer (2007) silver had a precipitous decline, in 2006 natural gas ,silver, gold all had sizable decline resulting in the busting of Amarnath hedge fund. I am thinking when crude corrects, all these markets including currencies will correct( Euro particularly I think has gotten ahead of itself). Euro can easily correct to 1.40 from the current 1.56 or so. As they say in financial markets “trees do not grow to the skies”, these markets will eventually correct, question is when? That would really be a clear signal to me, and be a good buying opportunity, till then I am staying out.

The long bond yields have been creeping up ( both 10 years and 30 years), and given that Fed is still on holding pattern means yield curve is getting steeper by the day, unmistakable signal that the market is finally pricing in the inflation concerns. I shorted the 30 year bond when it was flirting with $118 price level just few weeks ago( now at $112-$113) , now I am again on the side line. I think this market needs to consolidate here, although all indications are that the steepening will continue. What happens next with the bond prices is hard to say. I think both sides ( bulls and bears) have strong emotions. The bond bears point to inflation, whereas the bond bulls point to a slowing economy, a recession in the air, the China trade surplus, the petro dollars and so on. Me, I am not going to get trampled in this bull and bear fight, let them fight it out, eventually one side will come out victorious and a new trend will emerge, and I will be happy to join in. For now,my mantra, avoid this.

Last point, S&P futures, Dow futures, what about these? Dow has been flirting with 12000 level to the downside, really scary in here. I am constantly hedging my portfolio with the help of options, writing some covered calls, buying some spreads and so on. I sure hope 12000 works as support and we bounce from here, but you just never know. Lots of skeptics out there who believe credit crises is not done yet, and the market has yet to price these in. Gosh, if that happens Dow can easily go back to 11K in a heart beat, wouldn’t surprise me a single bit! I am staying defensive!