I don’t like the current market or rally much.
Stock prices at current levels aren’t supported by today’s economic fundamentals. Or by tomorrow’s either in all likelihood.
The last leg of this rally has been built almost solely on speculative cash flows in my opinion. Borrowing in the global dollar carry trade—where traders borrow U.S. dollars at interest rates near 0% and then use that cash to buy commodities, commodity stocks, commodity-backed currencies, and emerging market equities—has been the biggest source of that cash.
Which is why I don’t think the rally that started on March 9 is over yet. The carry trade has taken a brief leave of absence as the U.S. dollar has bounced from an oversold position. But the fundamental weakness of the U.S. dollar is too strong to deny.
Traders may be nervous—they’re more optimistic than I am but they don’t really trust the economic foundations of this market either—but they’re also greedy. Tell me why, in the absence of evidence that the Federal Reserve is about to raise interest rates or that the global economy is ready to collapse, traders should abandon a trade that looks guaranteed to net profits for months to come?
I don’t know if the correction—so far a mini-correction of less than 6% on the Standard & Poor’s 500 stock index—is over. I suspect not. But I can already see signs that that ol’ devil of a trading game is reasserting itself.
For example, look what happened in Asia’s currency markets the morning after figures showed a pickup manufacturing activity in the United States.
Seven of Asia’s most traded currencies—aside from the Japanese yen—climbed against the dollar with South Korea’s won leading the way on predictions of rising exports if the U.S. economy was strengthening.
In Australia expectations are that the Reserve Bank of Australia will increase its target interest rate to 3.5% from 3.25%. That increase, which would be the second in four weeks, would widen the gap between Australian rates and those in the United States and lead to further strength in the Australian dollar and in Australia equities. Let’s see: borrow at 0% in the United States and invest at 3.5% in Australia. Tell me why you wouldn’t make that trade?
The Australian dollar climbed to just short of 91 cents. Economists and currency traders are predicting that the Australian dollar will hit parity with the U.S. dollar sometime in 2010.
In the last week or so fear has put a pause to the carry trade and its profits. I can’t see current levels of fear holding greed at bay for very long, however.
And that’s why I think this is just a correction.
chapmame, when I left MSN Money and stated my own blog I had to decide what portfolios and lists that I’d created there I should recreate on the blog. Watch lists age quickly, especially in the midst of a 65% rally. So the return for recreating that list struck me as small. I’ll have a post in the next week or so looking at new developments in the smart grid and I’ll have something to way abouit Itron then.
sheba, Jim’s position on the MOO ETF is prety much what my position is on any ETF. If you like the sector AND you like the ETF portfolio, then it’s a great way to buy in to the sector with one buy. But the problem sometimes is that the market cap weighted ETF portfolio is crowded with the big names in the sector when you’d like exposure to some of the smaller companies. Here’s the MOO top 10 positions, for example:
Potash Corporation of Saskatchewan, Inc. 8.11%
Monsanto Company 8.00%
Wilmar International Limited 7.94%
Syngenta AG ADR 7.68%
The Mosaic Company 7.42%
Archer Daniels Midland Corporation 4.57%
Deere & Company 4.53%
Kubota Corporation 4.24%
Sociedad Quimica Y Minera De Chile SA ADR 4.09%
BRF – Brasil Foods SA ADR 3.98%
Percentage of holdings 60.56%
POT and Deere I love. Monsanto is currently a drag because of problems in its Roundup franchise. I’d rather own Yara than Mosaic.
YOu see what I mean? At some point you have decide if the low cost and convenience of the ETF is outwieghed by any problems with the portfolio. Your call.
That’s why I posted previously “Sit tight!”
Hi Jim,
Keep up the good work.
There are a couple things going on right now that your average investors might not know about. First, market is way oversold, it hit close to march oversold levels and we all know what happened after that. But the current situation, I mean buffett made such a big m & a deal you would of figured the market would of been way up then it was, with the oversold condition. What I do know is the dollar short trade is overcrowded, the market seems to want to hit 1020 on the s and p in the short term before we resume any uptrend. That being said its all on the fed statement where I actually epect a suprise. Let me know your feedback Jim thanks niick
Hi Jim,
I think your conclusion is correct. But then I do believe that headwinds will grow stronger once the Fed gives clear signal to raise rates. Most probably they will be forced to do so to avoid another asset bubble instead of inflation fighting.
By the way, could you look into why some your posts do not show dates but only the time of posting.
You’ve mentioned Roubini’s view that there’s a bubble in commodities, and it looks like there’s one in stocks. All the federal stimulus money that didn’t go to infrastructure projects or jobs creation is more or less equal to the amount poured into investments. Had to go someplace. Asset inflation invisible to the CPI. Keynesianism without the middle steps.
Jim,
You have previously been very high on the long term aspects of Itron. Do you think that $61 a share is a good entry point? Did I miss a post or explanation why you dumped most of the stocks on your watch list from last winter/spring?
what is Jim’s position on market vectors agri symbol moo?
How does a individual investor take part in the “carry trade” where one borrows U.S. dollars at interest rates near 0%?
This mini correction so far is already so painful since I have a lot of energy and agricultural stocks from the Jubak Picks portfolio. (Why didnt I buy Burlington? :)) I can only imagine how much worse it would be if this goes on for a while, but at this point I rather just wait it out.
Reading this article makes me want to borrow a bunch of dollars and put it in Australia too :p