COMMENTS FROM EUROPEAN CENTRAL BANK CHIEF ECONOMIST “ISSING” IS DRIVING CAPITAL MARKETS THIS MORNING:
His comments this morning that markets are generally ‘correct’ in their predictive value in terms of forecasting lower interest rates. The threat of lower European interest rates has cause the US dollar to rise rather sharply against the Euro and Swiss Franc and even more so against the Japanese Yen – up on average +0.7%; this puts the Euro at a 9-month low versus the USD. This has further caused US bonds to trade lower; the 10-year note is lower by ¼ of a point, stock futures too are showing modest declines. Gold too is lower by 50 cents/oz; with the base metals showing weakness as well. In terms of the world equity markets, we find them to be rather ‘mixed’ around the unchanged level. However, this doesn’t tell the story for Asian stocks opened on their highs and sold off thereafter; in Europe – they too opened on their highs and are selling off. It would appear that lower European interest rates have been ‘expected’ for sometime by market participants – German and French stock markets are up +5.0% and +8.3% respectively for the year. And given the USD is a focus this morning; we believe that the world remains ‘too overweight’ the Euro and everything else in a short-term basis. Hedge funds have added to their short USD positions based on US budget deficits and current account deficits and for whatever other reason there is to be had. But the fact of the matter is that there is absolutely very little correlation with these to the USD…and the USD has and will continue to rally in the fact of the ‘twin deficits’ for quite sometime. Clearly, the rise has caught Mr. Buffet off guard and we would expect to hear rumors about his covering a majority of his short US position given ‘risk management’ dictates that he do so. He will remain bearish on the USD in the longer-term…but would rather allow this rally to unfold and turn lower again before adding againto his position.
THE ENERGY INFORMATION AGENCY BELIEVES IT IS ‘TOO EARLY’ TO WORRY ABOUT HEATING OIL SUPPLIES:
We find this comment ripe for folly; they do not live in the Northeast corridor, and while the overall market may find it not worrisome yet – those of us who reside in the Northeast corridor do find it worrisome because supply contracts that were not signed months ago at lower prices must now be forced to signs contracts at higher prices so that prices won’t get away from us. Higher prices beget higher prices. We find more and more of our friends ‘gaming’ the heating oil market given last year’s exorbitant prices; they are here to stay…and they will get higher and higher. We are worried more about how this will affect consumer spending during the Christmas season; if this winter gets off an early start…stocks will be drawn down faster and faster…and prices rising higher and higher. This is certainly worthy of note…and worthy of filing in the back of one’s collective trading mind.
THE FED’S RISING INTEREST RATE CAMPAIGN IS HAVING A ‘MATERIAL EFFECT’ UPON LIQUIDITY:
Over the past several years, the cyclical bull market rally was ‘led’ by the emerging markets as market participants reached for yield and ‘beta’; this simply means the emerging market provided more ‘bang for the buck’. However, this is clearly changing given the recent formation of lower highs as the US indices approach their highs.
This ‘narrowing’ of the rally attempt forebodes weakness; whether that is today’s business is not yet clear, but when liquidity is removed from the system...then marginal demand for asset classes starts to wane.
CONCLUSION: As this continues, then prudence dictates that rallies are to be sold rather than dips bought; we are to be aggressive sellers of rallies, whilst tepid buyers of dips. This strategy should prove its merit over the coming second half of the year. Be prepared.
TRR PORTFOLIOS TECHNICAL SUMMARY
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ETF : CHART COMMENTS
OUTLOOK: We remain long-term fundamentally and technically bearish, with the short-term condition showing signs of ‘deterioration’. We are selling strength at this juncture; but understand that the underlying intermediate technical condition remains ‘modestly positive’.
The short-term technical outlook remains ‘bearish’, but the fact that the S&P 500 continues to hold increasingly major support at 1190-1195, which argues for another attempt at surpassing the highs. This past week of sideways movement may very well be the ‘pause that refreshes’ with new highs the result – we can certainly make that case...but think once this support level is broken then even more aggressive short positions are warranted.
Thus, we remain on a ‘top picking expedition’ given the still ‘narrowing rally’ coupled with the overbought condition in both terms of price and time. Our overall portfolio trading strategy should be clear: we want to be short both the large caps and technology shares via SPY and QQQQ; we are short TLT given the ‘key reversal’
that developed two Fridays prior...and we are long NEM given gold is breaking out higher in terms of Euros; with both the SPY/TLT and TLT/NEM ratios showing technical strength.
If we were concerned about something...anything, it would certainly concern the short SPY and QQQQ positions. While the markets remain overbought, they can do so for an extended period of time in strong advances. We don’t think this is one of those times, but we certainly hold out that probability and thus will ‘keep a short leash’ on these positions.
“PAID -TO--PLAY” PORTFOLIO CHART COMMENTS
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