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.

Since my previous post on momentum in commodities , the movement in commodities have proceeded pretty much as I had expected. On the successful break of $700/oz level, I had predicted higher prices this time around and sure enough gold December 2007 futures contract touched $848.50 on NYMEX (New York Metal Exchange) last week. Silver touched a high of around $16.20 / oz during Asian trading hours on 11/6, crude touched a high of $98.60/per barrel during the same time frame and USD weakened further against most major currencies.

Now I am sensing a loss in momentum in these markets and also the Yen has strengthened from around 115 to around 110.00 pretty sharply. I have a feeling this can adversely impact the carry trade (sell low interest Yen and buy high yielding currencies , commodities etc). As such we can see some profit taking/ fund liquidations in the commodity markets. I think any pullback in Gold around $750-$780/oz level would be an excellent buying opportunity, similarly pullback in Silver to $14.50/oz could be a good entry point for those who missed out the rally. Crude, I am not sure, it has already touched its inflation adjusted high whereas Gold and Silver are way off( around $2200/oz for Gold!!), I wouldn’t be surprised if crude oil stays range bound now and consolidates its gain for a while.

Some people may say these markets are getting ahead of themselves and fundamentals do not support these prices. There may be some validity to that reasoning, I am getting anecdotal evidences that high prices are causing lower demand for physical gold and attendance has thinned down in jewelery shops, particularly in major gold markets like India. This is bearish for the metals and the gold/silver bulls need to keep this in mind! Time to take some profit off the table, I know I am

>
Since my previous post on momentum in commodities , the movement in commodities have proceeded pretty much as I had expected. On the successful break of $700/oz level, I had predicted higher prices this time around and sure enough gold December 2007 futures contract touched $848.50 on NYMEX (New York Metal Exchange) last week. Silver touched a high of around $16.20 / oz during Asian trading hours on 11/6, crude touched a high of $98.60/per barrel during the same time frame and USD weakened further against most major currencies.

Now I am sensing a loss in momentum in these markets and also the Yen has strengthened from around 115 to around 110.00 pretty sharply. I have a feeling this can adversely impact the carry trade (sell low interest Yen and buy high yielding currencies , commodities etc). As such we can see some profit taking/ fund liquidations in the commodity markets. I think any pullback in Gold around $750-$780/oz level would be an excellent buying opportunity, similarly pullback in Silver to $14.50/oz could be a good entry point for those who missed out the rally. Crude, I am not sure, it has already touched its inflation adjusted high whereas Gold and Silver are way off( around $2200/oz for Gold!!), I wouldn’t be surprised if crude oil stays range bound now and consolidates its gain for a while.

Some people may say these markets are getting ahead of themselves and fundamentals do not support these prices. There may be some validity to that reasoning, I am getting anecdotal evidences that high prices are causing lower demand for physical gold and attendance has thinned down in jewelery shops, particularly in major gold markets like India. This is bearish for the metals and the gold/silver bulls need to keep this in mind! Time to take some profit off the table, I know I am