Up 25%. That is the difference between last year and this year. Other than the price level, markets are technically similar except for one glaring inconsistency; fundamentals are arguably 25% worse. How can this be justified? Is it “great earnings” that grants us a better valuation level? Is it a fundamental turn in our economic situation? Neither. It is simply a couple trillion newly created digital dollars, leveraged and parked in risky but liquid assets that marks the difference between July 2010 and July 2011.
Just last month it appeared that the renewed weakening economy, joblessness, Euro banking problems, government spending, political rancor, etc. were coming home to roost after a spectacular bout of inflation was bought (QEII) to combat the deflation of bank assets. Instead we were treated to the “Magical Mystery Rally” (MMR) of 82 SPX points in just five days. In an equity market as thin and seemingly illiquid as ours, it didn’t take much to kill the doubters (again) and lift almost every stock in existence. It was one of the broadest and fastest rallies in history. But adjusting for the markets recent action since the Credit Crash, it was just another correlated ramp job like we have seen so many times in the last two years.
Since the MMR, we have given back about half of the rally and the SPX is “doing work” around the 1300 area and–even with all the noise and fury–that is where we stand today with one exception; gold and silver and going through the roof.
Precious metals are all the rage because of the ongoing Dollar printing, Euro and domestic bank issues, but even more because of the political gridlock in Washington with regard to the debt ceiling. And I thought Gridlock is supposed to be good for markets! Not this time. In 2008, oil was perceived to be the only safe haven until all the wheels came off the bus. Now it is gold and silver as the safe havens. Isn’t that the way it supposed to be? Indeed!
Now, here we are on the verge of either austerity or more unchecked and profligate spending, and neither is good for markets or currencies in a normally functioning marketplace. But obviously we are not witness to a normal marketplace. When the debt ceiling agreement is finally made, the markets will spike but they will quickly morph into a sell the news reaction. If it is not passed, then there will be no spike higher, just more angst. But both scenario’s should lead to the Swan Song of precious metals for the time being or until the next great political escapade.
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I remember trying to short the biggest sell the news event in market history (QE2). Didn’t work out too well that one. I think, like you have stated in the past, we’re going to play out very similar to last year. I see a lot of people getting really bearish while we’re still well off the lows, just like last year. Setting themselves up to get squeezed.
The “squeeze” may have been the “Magical Mystery Rally”…
Is it really all that magical and mysterious to have an unprecedented two week rally shortly after an unprecedented 6 week sell off? We are at worst at the tail end of a two year bull market where we had yet to see a sell off last that long and where it’s been drilled into everyone to buy the dip. I know the data is terrible, but clearly people are still hanging on to the idea that there will be a dip to buy. I don’t see anything all that strange about the move. I see a lot of leaders still leading and a lot of big rounded topping processes that are breaking out to new highs despite all those bears spending months looking for a break down. Not sure if we’ll see new highs, but if we do, the magical and mysterious thing about the market will be the amount of picture perfect rounded tops that didn’t bring this thing down. Maybe in a week or two I’ll feel different, but not right now.