What Happened Today? 6/29/06

[Jim Nickerson]

I have the distinct impression rises in interest rates are BAD for the stockmarkets.

Rates went up yet again, and the market at least for the moment lifted off like a rocket going to the moon. Technically I was hopeful of some move up, but this exceeded my expectations.

Is this rational or irrational?

I expect many viewers would enjoy cogent comments from any who can offer his/her understanding of what happened today, and I certainly would be enlightened.

[jk]

rates

rates went down today, not up. the ten year treasury rate dropped 4.5 basis points to 5.2, the 30 year dropped 2.8 basis points to 5.251. the 10yr future rose by 10.5 ticks, the 30 year by 13 ticks.

[Jim Nickerson]

FOMC hiked for 17th straight time.

rates went down today, not up. the ten year treasury rate dropped 4.5 basis points to 5.2, the 30 year dropped 2.8 basis points to 5.251. the 10yr future rose by 10.5 ticks, the 30 year by 13 ticks.

Thanks jk for comment. Given your understanding and perception of what is going on I guess "macroeconomically," was what happened today in the markets, stocks and bonds, rational or irrational?

[jk]

were today's market moves rational?

yes and no.

i think they were rational in a narrow, short term sense - it sounds like the fed was signaling that it was likely to pause after today's hike. therefore liquidity would not be further withdrawn, leverage was safe, and everyone knew that everyone else would perceive this as a bullish development. thus stocks went up, bonds went up, gold went up, oil went up. the only thing down was the dollar.

warren buffet is fond of saying that in the short run the market is a voting machine, but in the long run it's a weighing machine. that means that sentiment and the madness of crowds will move prices in the short run, as market participants "vote" with their buy and sell orders. market prices are in the short run a beauty contest in which you vote not for what you think is beautiful, but for what you think others will vote for.

but in the longer run, values count. and there is no value to be had in u.s. equities at this juncture, and likely none in bonds. i say there is no value in equities based most clearly on john hussman's argument that at a time of record earnings, p/e's should be much lower. [jeremy grantham comes to similar conclusions.] current values are still closer to a market top than a bottom, and the expected earnings on an equities position for the next decade is perhaps 2%, less than t-bills. equities will provide much more excitement, however, along the way. bonds i am less clear about. i think the likeliest outcome is that inflation will destroy the bonds' value in the long run. in the short run, however, bonds may be good for a trade. the only way they're good for the longer run is if we head into recession and deflation.

i think the moves in gold and the dollar are rational in that they take at face value the likelihood of no more interest rate hikes, and the likelihood that that means significant inflation down the road. so there is more of a long term consistancy to those moves.

there's no guaranty that any of these asset classes will do well going forward, so "rational" must mean that there's at least a reasonable possibility that your investment will do well. [i'm focussing solely on investments, meaning long term positions, as i am not competant to say a word about trading.]

anyway, that's my thinking, fwiw.

[blazespinnaker]

I think it was very rational. The fed sounded like a dove, of course people would be bailing out of the dollar into assets.

Sad day.

[jk]

equities and inflation

I think it was very rational. The fed sounded like a dove, of course people would be bailing out of the dollar into assets.

Sad day.

your theory is that it was rational to pile out of the dollar into any other asset.

entering the 70's it was believed that equities provided protection from inflation. we know how well that worked out.

so i think pile out of the dollar- yes, but it matters what you pile INTO.

[Jim Nickerson]

Happy Day.

I think it was very rational. The fed sounded like a dove, of course people would be bailing out of the dollar into assets.

Sad day.

blaze, I am sorry I do not understand "people bailing out of the dollar into assets." If they bailed out of cash into market assets that could/would make market go up, but if they bailed out of cash into other currencies, the currencies would go up which I think they all did.

Do you mind explaining?

Good day=Happy day.

[Goldenhands]

Which is why

today I purchased 4 more January 2008 LEAPS Put Options FNM (Fannie Mae) Strike at 35$ a share, due in part because that Institution is yet to feel the full brunt of even these modest increases. That is only part of the story with Fannie and Freddie. Worldcom and Enron's accounting departments are going to look like virtual angels from Heaven when the storyline breaks about the "cooked books" at the Fed's supported Mortgage store. What was said about "blood in the streets?".
Historically the Interest rates are still within reason, but "reason" went out the window sometime in the early 1990's. I was around in the late 70's and so on, started buying Gold at the first chance I could, when Nixon signed it into law that the Secret Service would not come knocking at Citizen Kane's door for owning it. The late 70's were not a great time to attempt to purchase much of anything with a loan. Home ownership was a total fantasy. 18% (often more) on credit cards and auto loans tended to put a serious bind in the budget to say the least. The flight to some kind of protection from the pressure lead to Gold and Silver. That worked out well for some....just as it will once again. For over 30 years people, I have been waiting in the wings for just this opportunity. Been buying since early 1999 when Gold was in the $260 an ounce range and considered the village idiot for doing so (same as in 1973!). I sold at $820 an ounce and it took 4 hours for the buyer to verify Karat and weight. There was a line of those selling and buying a block long that day. You'll see it again..
Helicopter Ben has once again put us on the path to $1200 or more an ounce as of today...bless his gentle Soul...you count on it. In his defense he has in fact has inherited a nearly impossible battle to fight. The stage was set in 2000..and his current Boss in the Oval Office didn't like what he seen mid May this year.

[blazespinnaker]

blaze, I am sorry I do not understand "people bailing out of the dollar into assets." If they bailed out of cash into market assets that could/would make market go up, but if they bailed out of cash into other currencies, the currencies would go up which I think they all did.

Do you mind explaining?

Good day=Happy day.

Not sure exactly what your question is here.

The USD declined (people are exiting the USD because of a lack of faith in the fed) and GLD has increased (looking for safe haven against inflation).

And it's not a good day for me, I guess.

[Jim Nickerson]

More speculation (about what moved markets--speculation?)

yes and no.

i think they were rational in a narrow, short term sense - it sounds like the fed was signaling that it was likely to pause after today's hike. therefore liquidity would not be further withdrawn, leverage was safe, and everyone knew that everyone else would perceive this as a bullish development. thus stocks went up, bonds went up, gold went up, oil went up. the only thing down was the dollar.

warren buffet is fond of saying that in the short run the market is a voting machine, but in the long run it's a weighing machine. that means that sentiment and the madness of crowds will move prices in the short run, as market participants "vote" with their buy and sell orders. market prices are in the short run a beauty contest in which you vote not for what you think is beautiful, but for what you think others will vote for.

but in the longer run, values count. and there is no value to be had in u.s. equities at this juncture, and likely none in bonds. i say there is no value in equities based most clearly on john hussman's argument that at a time of record earnings, p/e's should be much lower. [jeremy grantham comes to similar conclusions.] current values are still closer to a market top than a bottom, and the expected earnings on an equities position for the next decade is perhaps 2%, less than t-bills. equities will provide much more excitement, however, along the way. bonds i am less clear about. i think the likeliest outcome is that inflation will destroy the bonds' value in the long run. in the short run, however, bonds may be good for a trade. the only way they're good for the longer run is if we head into recession and deflation.

i think the moves in gold and the dollar are rational in that they take at face value the likelihood of no more interest rate hikes, and the likelihood that that means significant inflation down the road. so there is more of a long term consistancy to those moves.

there's no guaranty that any of these asset classes will do well going forward, so "rational" must mean that there's at least a reasonable possibility that your investment will do well. [i'm focussing solely on investments, meaning long term positions, as i am not competant to say a word about trading.]

anyway, that's my thinking, fwiw.

Good answer, jk.

If your first paragraph explains the enthusiam which it may well do, then I see no reasoned thought (rationality) to the herd like behavior. Is smellls to me like "irrational exuberance" all over again.

The moves in PM's and US$ strike me as being rational.

Martin Goldberg http://www.financialsense.com/Market/wrapup.htm suggested today's move may have been

1) 'Bernanke's remarks.' No doubt that lit a fuse regardless of the various thoughts for those holding the matches.

2) "Momentum." I do not see this. This week was net down until today, which was up I think from the start. The volume this week was putrid until today.

3) "End of quarter porfolio painting." Possibly correct, I guess there is a lot of some sort of seasonality here: end of quarter, holiday coming up.

4) "A short squeeze." I wish there were some daily stats on this. It makes sense to me that it likely helped move the market up.

I have mentioned Paul Desmond's 90% volume and point days, either up or down, before. I hate to reference Barron's, because I expect not everyone can readily access it online; however, in this past weekend's edtion there was the article "Bad-News Bear" which recounted some bearish orientations by Lowry's Report (this is Desmond's Co.), Ned Davis Research, The Leuthhold Group, Walter Deemer, and Jeremy Grantham. All very bearish with what their indicators are telling them. Try to read it for yourself. Someone (not in Barron's article) has said "they don't ring bells at market tops and bottoms," but it seemed to me this aritcle was "ringing the bell," as the death knell of the cyclical bull run, and it was published in a widely read financial journal.

Desmond said, (and if I am breaking any copyright laws here, someone needs to tell me)

Ordinarily, the arrival of the bear would be confirmed when the market experiences two "90% downside" days, like May 17 and June 5 -- when 90% or more of the trading occurs in declining stocks, says Desmond. But sharp moves of similar magnitude both down and up in a 30-day period since the market peak in early May have led him to discount the significance of the action. Instead, a new watch has begun for the next 90% downside day. And a real bottom.

I think this indicator has been remarkably good, though not perfect. It struck me that possibly Desmond for likely a lot of good reasons is so bearish that he thinks his bullish +90 day buy signal on the NYSE is fallacious. I surmise that could be "denial" on his part. I have begun to keep calculations on the NYA (stock index) myself, and today was the second +90% up day in points and volume in the past 10 days. These follow the two minus 90% days Desmond mentioned plus two more near 90% down days on 6/12 and 6/13. According to Desmond's research on this indicator there is a "buy signal" in place--which Desmond just denied. It would be interesting to know what he says after today.

If I were short equities right now, I hope I would not be so committed to them that I would not get out. Anyone reading this who is short will have to decide for him/herself what action to take.

It would not surprise me to see some reasonable rally between now and the next FOMC meeting--based on whatever makes people want to buy stocks. If the Fed does pause at the next meeting, I guess real irrational exuberance will show itself. No telling what other things may happen 'tween now and then.

[Jim Nickerson]

My confusion.

Not sure exactly what your question is here.

The USD declined (people are exiting the USD because of a lack of faith in the fed) and GLD has increased (looking for safe haven against inflation).

And it's not a good day for me, I guess.

I'm sorry I was not more explicit. If people exited the USD--that means to me they are buying PM's or foreign currencies. Exiting the dollar today, to whatever degree that happened, does not within my understanding account for the US equity markets lifting off so strongly, but you seem to say above in #5 that it did, and I do not understand how anyone getting out of the dollar for any reason accounts for the US equity markets going up.

[Jim Nickerson]

The bother of liquidating.

I sold at $820 an ounce and it took 4 hours for the buyer to verify Karat and weight. There was a line of those selling and buying a block long that day. You'll see it again..

At four hours per customer, it would seem some people must have stood in line for days.

I guess you stood in line to sell your real gold in 1980 whenever exactly the peak was. I was not into the markets in 1980. Given that GLD, SLV, perhaps CEF didn't exist then, I guess only stocks of gold miners existed then, there were somewhat fewer options to invest in gold and silver then, than ways now.

Lets say gold reaches $1K or $5K or more an ounce, and there exists a significant recession or depression and people are poor, angry, perhaps even hungry. Is that possible? I don't know. But were something like that to exist, how willing will you be to go out of your home carrying gold to stand in a line for hours to liquidate it?

What do you see as the downside of not owning phyical PM's when there are other methods--physically safer and certainly more easily liquidated--of profiting from whatever gold does on the upside?

[Goldenhands]

The Wait...and See

The original reasons for collecting the gold was due in part to a man I worked with. He also had begun the same process. One source was Class rings and fraternal jewelry..which at the time of 1972 thru 1977 were common items for sale at garage sales and auctions. Sometimes there were Gold and Silver coins as well, which I would buy of course.
At the time of liqudation the stones of the rings were destroyed/removed and each item was then scratch tested for Karat. This explains the time spent on my sale. There were far fewer individuals with the same amount as I had on the counter, so I had plenty of time to watch the proceedings.
The apartment across from my own at the time was occupied by an attractive lady that was employed in a local bank of fair size. She was the reason I liquidated then. It was her boss that informed her it was his opinion the price would NOT reach $1200 an ounce as was widely touted at the time. Several buyers with checkbooks in hand were in the shop when I liquidated and did indeed purchase Double Eagles or similar at $1000 each..convinced that at least a $200 profit was no more than a week away.
At the time there were dozens of ads in every newspaper and billboards all across the USA with claims of "TOP DOLLAR PAID HERE" and so forth. Silver as well was sought after as you might remember. There were Futures Contracts, Options on those as well..Gold and Silver mine stocks too. I was not educated in these at the time...I simply was aware that the metals were available and more experienced folks than I were interested in obtaining these items, so it might be a good idea to follow suit rather than spend my overtime checks on beer and bar girls.
Indeed!! If the economic structure of the United States were to fail would it be safe to stand in line as we did then with such amounts of PM? I have my doubts. However, the process now is far more liquid...and transactions can be totally out of the public view. Worldwide in fact. You can easily buy or sell if you wish, Rolls of Double Eagles, Maple Leaf,ect.. on E-Bay or other such auction sites in relative safety.. just as I have done in fact.
The accessability issues of not having the metal in your presence might be a larger factor in event of a total implosion of the US economic structure, depending on what happens by Executive Order. For instance, the 1933 Double Eagles are somewhat rare animals compared to how many were struck at the Mint!! Accessability to your own money (not currency mind you) became the issue with the stroke of a pen, it might again...!!!
The question then becomes..what currency is the one to convert into in event of a meltdown? Certinly not US Greenbacks in that event. Euro's? Dinar? Peso? Rouble? Korona? Swiss Franc? I would not have a clue in that event, so I would suppose just stay with the metal itself. You'd have no better choice that I can think of.
I personally do not see the US Dollar driven to the Hyperinflated DeutschMark of 1922 status..but even if not, the conversion to a more favorable and perhaps stable currency might be prudent at least for a time. In 1980 these possibilities were not even in the picture for the common man. No Internet exisited then. I see Gold reaching the $1100 figure. When it does I will begin to sell at panic buying peaks and convert to short term Treasury's. If I see it running up past $1800 (and beyond) I will stop selling any of it. Those are my two indicators. At $1800/$2000 or more an ounce we're looking pretty unstable Plantwide if all the prices move lockstep up no matter what Nation issues the currency.
I don't know what would happen beyond there but I will not be holding printed currency of any kind just to find out, except just enough to pay personal property taxes on my debt free home in nearly worthless US Dollars.

[jk]

do you ever sell gold?

i'm waiting for the dow:gold ratio to go to 5 or below before i even think about whether to sell precious metals.

[Jim Nickerson]

Thursday--Knee Jerk Reaction.

I think it was very rational. The fed sounded like a dove, of course people would be bailing out of the dollar into assets.

Sad day.

This is what Mark Hulbert had to say early Friday 6/30
http://www.marketwatch.com/News/Stor...d=myyahoo&dist=

Makes sense to me.