MUST READ ARTICLES ON "OF TWO MINDS" BLOG

Charles Hugh Smith has some fantastic posts on his blog:
http://www.oftwominds.com

The Big-Picture Economy, Part 3: Scarcity, Risk and Debt 
(September 25, 2013)

The Big-Picture Economy, Part 2: Surplus, Spending and Debt
(September 24, 2013)

The Big-Picture Economy, Part 1: Labor, Imports and the Dollar
(September 23, 2013)

 The Trouble with Asset Bubbles: If You Stop Pumping, They Pop 

(September 20, 2013)

DOW GOLD RATIO

VIX SLIDES AS MARKETS GET COMPLACENT!

As the rally in equity markets continues, let us not forget that we still face headwinds in 2012.

Troubles in the Eurozone, record high oil prices and a possible slowdown in China.......are some of the lingering concerns.

CAVEAT EMPTOR!

Thomas Friedman - on a Theory of Everything (sort of)

A precise article by Thomas Friedman about the current state of unemployment, credit and strained government finances.

A Theory of Everything (Sort Of) - NYTimes.com

You +1'd this publicly. Undo

You +1'd this publicly. Undo

DJIA - THE RALLY GOES ON

As the rally in the US equity market continues, even the most ardent ''bear'' is probably just about ready to throw in the towel.

Can this rally be explained in light of deteriorating fundamental news such as rising unemployment and government debt levels ?

Perhaps now is the time for the prudent investor to re-assess his risk reward matrix.
Does waiting for a possible upside from current levels justify the risk at this stage?
Some analysts are saying that the current rally since 2009 has started to form a bearish ascending wedge formation on the charts, and that it's time to book profits.

The Bullish Bear Blog's view:

• The risk reward ratio is clearly not in favour of the long only investor.



• After a monster rally from the lows back in March 2009, potential downside risk clearly outweighs any possible upside.



• The mega rally has exhausted a large percentage of short positions in the market. This in turn means that the market has much less support on the downside if a correction ensues.



• Meanwhile the market continues to ignore serious issues like the Club med debt crisis, unemployment issues in the US & steadily rising government debt levels in the developed world.

ROBERT PRECHTER : 6 TRENDS ABOUT TO REVERSE

Here's an article I came across in 'The Business Insider' > Robert Prechter: These 6 Trends Are About To Reverse‎

"

Prechter argues there are several themes out there right now that investors, economists, and markets all believe to be true just like they did with interest rates in the 1980s.

• 
  
  The dollar - everyone is bearish.


• 
  
  Interest rates - everyone thinks they're going to rise.


• 
  
  The stock market - everyone is bullish but corporate insiders.


• 
  
  Inflation expectations - everyone thinks it is going to go higher.


• 
  
  Economy - everyone is confident in 2011.


• 
  
  Oil - everyone thinks it is heading higher.

"

He makes some really valid points. Ignore the principles of 'Madness of crowds' and 'mean reversion' at your own risk.

S&P 500 vs The FED's BALANCE SHEET

Investment Guru David Rosenberg in recent writings has commented on the positive correlation of the rally in the US Equity Markets and the size of the Balance Sheet of the US FED.

Here is yet another article from Jim Sinclair's Mineset website that supports Rosenberg's view.
This is some excellent research by Trader Dan Norcini and is worth a read.

S&P 500 Versus The Fed’s Balance Sheet

(LINK FOR CHART FROM JIM SINCLAIRS WEBSITE)

Kick the can down the road, as far as it will go, buy as much time as possible!

As the ongoing bull run in the equity markets continues, I thought that it was appropriate to post some charts from Breakfast with Dave - 18th Jan, 2011.

Complacency and exuberance and ''bullishness'' is blinding speculators and investors to the many structural problems of today's global economy.

Job creation and food security ( in both the developed world and emerging markets) are going to be crucial issues going forward, and unfortunately the ongoing policies of governments worldwide are continuing to fuel asset price inflation and stock market rallies rather than addressing the real problems we have at hand.

.

.

SHANGHAI COMPOSITE IND. vs. DJIA

The Shanghai Composite is clearly not mirroring the move in the DJIA. Chinese stock markets are testing new lows for the year as concerns of a stumbling recovery in the developed markets continue.

Will we see a revaluation in the Chinese Yuan? Currency markets have been all over the place. The Euro has rebounded of recent panic lows even as sovereign debt troubles in the 'PIIGS' nations remain unresolved.
The USD has given back some of its recent gains, mainly due to an improving risk appetite and the subsequent rebound in global equities.

But as David Rosenberg recently said, are the Chinese Equity markets and the Baltic Dry Index warning investors that we could be in for a difficult second half in FY10?
Perhaps it's now time to be cutting back on risky assets and looking at minimizing portfolio volatility.

VOLATILIE EQUITY MARKETS

Equity markets have been crazily volatile recently. Volatile intraday swings have been a daily occurance!

Here's David Rosenberg on market volatility

FLIGHT TO SAFETY - GOLD & USD.

In 2010, the rally in the USD has coincided with a rally in the Gold.
The USD & Gold, normally share an inverse relationship. Gold has also managed to detach itself from the correction in the CRB commodity Index.

Currency instability, market volatility and concerns over mounting government debt have been considerable tailwinds supporting this rally in Gold.

Year to date, Gold has also outperformed the S&P 500 by a wide margin.

$962 Billion : Bailout of Club Med or the BANKS !!!

The markets certainly loved the mega ECB show of force.

Equity markets in Spain, Portugal and Greece soared, but did anyone notice how the financial stocks in France and Germany reacted yesterday!

AXA +21.87 %

BNP Paribas +20.90 %

Société Générale +23.89 %

Commerzbank + 8.97 %

Deutsche Bank +12.62 %


Here's an interesting take from Socio - Economics History Blog

Europe's Exposure To 'PIGS' Problem! « Socio-Economics History Blog

MANIC MARKETS - 6 May, 2010 !

Well, here we go again.

I don't know what happened, or why, or who, or whom!!

Let' s wait for more clarifications...

Nice move in Gold...........over $1,200 again!

As I said recently, this is just not the time to be taking on any undue risks.

......AND THE 'VIX' SOARS

Over the last couple of years, I've grown wary, well almost fearful when anyone says that any financial mess or crisis is '''contained'''.

Now, whenever I hear that the damage has been contained, I have come to expect the eventual cost of the crisis to be a whole lot more than initially estimated.

Some say that the crisis in Club Med is contained and that there is no risk of contagion.
Still others say that the finances of some states in the U.S.A., are not as terrible as pessimists may fear.

The prudent reader must read between the lines and ignore the noise in financial news as he makes his/her investment decisions.

The US is not immune to the current crisis in the Eurozone. A weak Euro will hurt US exports to Europe and subsidize European exports to the U.S.A.

Emerging market exporters are not immune to a slowdown in developed markets in the west.

As I've said in recent posts, it's not a time to be taking unnecessary risks.
Gold prices in the meantime have held up really well, despite a rally in the USD and a sudden sell off in global equity markets.

David Rosenberg on S&P 500 returns

TRENDING SIDEWAYS : Where are the markets headed?

Since mid October 2009, the markets seem to have got caught in trading range. No new highs!!

I selected the 19th of October 2009, simply to emphasise my point. All of the above indices are stagnating.

( S&P 500 in blue, Bovespa in red, BSE Sensex in green, FTSE 100 in orange, Shanghai Composite in brown and CAC 40 in green)

Perhaps, the ''sugar high'' of multiple stimulus packages is starting to wear off, and issues like sovereign solvency and corcerns over ever expanding government debt have resurfaced.

To be fair, markets have had a fantastic run from their March 2009 lows.
As thing currently stand, stock market valuations seem to have factored in a total recovery, while ignoring many troubled components of the global economy!

Markets face a strong headwind in 2010, and the risk reward ratio clearly does not favour the long only investor.

DAVID ROSENBERG : WHAT WORKED IN 2009 PROBABLY WON’T WORK IN 2010

David Rosenberg at Gluskin Sheff is spot on once again.

Economists and analysts are busy extrapolating last years trends, without fully understanding the ''fragility'' of the ongoing ''recovery''.

.

A firm believer in 'the buy low & sell high' investment philosophy, he is still 'long term bullish on the commodity complex', but believes that 'the positive trend over the past year could experience a near - term pause or even a technical correction that could last for several months.'

US EQUITIES : VALUATIONS NOT SO CHEAP!

As David Rosenberg recently pointed out, the rally in the equity markets continues unabated despite the poor fundamental newsflow.

Just like the rally post the 1929 collapse, the 'V' shaped bounce in stock valuations could prove to be unsustainable. Afterall, factors like employment and real income growth are vital signals of a genuine turnaround in the economy, and we haven't seen any improvement on those fronts yet!

USDX : US DOLLAR REBOUND FOR REAL ??

It's been a good week so far for the USD.

After sliding against most currencies since the start of the year, there are now calls for a USD bottom. Over the last few weeks, I cautioned Gold bugs about taking fresh positions in Gold, given that the USD was considerably oversold at the time.

Reasons for the USD rebound?

The USD has been quite oversold for a while, as money was flowing out of the USD to riskier assets - and equity markets everywhere got their fair share of this fund flow. Is the party over and will we see fundflow reversing back to the USD?

US Consumer confidence continues to stumble: Clearly the guys on Main Street aren't having as good a time as the suits on Wall Street. Could it be that this recovery is built on a foundation of sand!

Almost ironic that poor economic news and data is causing a stampede back into the USD.

Sceptics, contrarians and some conspiracy theorists find the timing of the USD rally and bad economic data quite convenient, given the on going mega USD Bond auction.
Its great to have a USD rally when you're having a humongous debt sale!

USD Carry trade: It seems that the USD has recently become a favoured borrowing currency for carry trade. You can thank Bernanke for his almost zero interest rate policy!
It's always risky when the borrowed currency is oversold. (Look at the 3rd chart)
As the stock markets start to correct and carry trades are unwound, we could see the USD rally still further.

Lastly, could this all be a movie trailer of the 'strong USD ' policy of the USA, before the G 20 meets next month. I mean the Chinese and the Europeans aren't too happy with the performance of the 'strong USD' policy of the US Treasury so far.

CONCLUSION:
It's too early to say if the USD has turned the corner for now.
For the record, I continue to be a long term USD Bear. Bear market rallies in the USD should not be confused with any significant improvements in the fundamentals of the USD!

Stock markets globally have been searching for reasons to continue their upward rise, and did look rather overbought! A USD rally has almost become a reason to sell stocks!
Unwinding carry trade is USD positive.

GOLD: It too was looking for a reason to correct. I think that any consolidation in the PM space is good. Its better to see a stable and sustainable rise rather than an unsustainable short term spike. A rallying USD could see gold drift downwards, as punters and traders close speculative positions in gold.

EDIT: US Dollar Future and a World Currency - by Chris Laird of 'The Prudent Squirrel Newsletter'. He's one of the 'experts' I pay close attention to

Dow Jones Industrial Average over 10,000 again : Is the lost decade behind us ?

.........but adjusted for currency losses, the last decade was terrible as far as net returns are concerned.
Besides, the 'buy and hold' investing approach got you nowhere at all !



While everyone seems to be talking about the recent slide in the USD, as the EUR/USD chart below shows, the USD has been weak since early 2002!

This brings me to a topic I will cover in my next post.
'Can the USA devalue its way to prosperity ? '