What a world and what a market.
Despite ongoing economic weakness and now a potential sovereign default (Dubai), the major market equity averages closed the week generally unchanged. The Treasury market benefited the most from the reality that risks remain abundant and, in a flight to safety, capital poured into this sector. The dollar continued its descent into hell while supporting a large number of market segments, primarily commodities and especially gold.
Despite seeming investor indifference to major fundamental developments over the last six months, we disregard the situation in Dubai at our peril. Why? As Bloomberg writes, Dubai Crisis May End in ‘Major’ Default, BofA Says:
Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.
“One cannot rule out — as a tail risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
A default would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, they wrote.
Let’s address economic data released this week prior to reviewing the month to date market returns.
1. Existing Home Sales: increased by 10.1%. The expectation of Uncle Sam’s tax credit for housing being discontinued has served to pull demand forward in this sector. I’ll believe that health is returning to housing when mortgage delinquencies, defaults, and foreclosures decline on a regular basis. We’re a long way from that happening.
2. GDP: revised lower to a 2.8% increase from last month’s initial reading of 3.5% increase. Things that make you go hmmmm!!
3. Consumer Confidence: registered a reading of 49.5, which does not compare favorably to an August reading of 54.5. Confidence is all about jobs and housing. Unless and until we see signs of real health return to those sectors, do not expect a robust rebound in consumer confidence.
4. Durable Goods: declined by .6% versus an expectation of a .5% increase. This negative reading is offset somewhat by October’s Durable Goods report being revised from a 1.0% increase to a 2.0% increase. Again, I do not expect to see consistent growth in these figures without real consistency in the housing and automotive sectors.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
$/Yen: 86.69 versus 89.99, -3.7%
Euro/Dollar: 1.4960 versus 1.4717, +1.7%
U.S. Dollar Index: 75.01 versus 76.39, -1.8%
Commentary: the overall U.S. Dollar Index once again turned tail and continued its descent versus most other major currencies. In the process, the weak dollar supported our markets despite mixed/poor economic reports and Dubai being on the precipice of default. The Japanese specifically are getting increasingly concerned about the negative impact on its exports from the strengthening yen. To wit, I continue to reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (”Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
I also would like to reiterate that although Fed officials play up the lack of inflation as a positive and an overriding reason for its easy money policy, they provide little to no commentary on deflationary pressures at work in large segments of the economy. I firmly believe these deflationary pressures are the Fed’s gravest concerns and they hope the weak dollar creates hints of inflation to offset these deflationary pressures. Can rising asset valuations support underlying economic fundamentals which provide little to no pricing power for many companies?
Oil: $75.95/barrel versus $76.95, -1.3%
Gold: $1179.2/oz. versus $1045.7, +12.8% ….!!! ON FIRE !!!
DJ-UBS Commodity Index: 135.77 versus 131.862, +3.0%
Commentary: while oil slipped, there was a solid rebound in commodities in general. All eyes remain fixed on the red hot returns in gold. What is going on there? Concerns of a meltdown in sovereign currencies, primarily the greenback.
DJIA: 10,309 versus 9712, +6.1%
Nasdaq: 2138 versus 2045, +4.5%
S&P 500: 1091 versus 1036, +5.3%
MSCI Emerging Mkt Index: 958 versus 921, +4.0%
DJ Global ex U.S.: 195.55 versus 192.02, +1.8%
Commentary: equity markets ended the week largely unchanged despite generally negative fundamental economic news, including reports of an incipient default by Dubai. Don’t fight the Fed. The fact is, the Fed is now acknowledging the increased potential that a bubble is being created. In fact, the Fed wants some ‘bubbling over’ in hopes that the ‘bubbly bubbliciousness’ supports consumer spending. And we are supposed to invest our good, hard earned money into a market such as that? Remain defensive and flexible while realizing that equities may very likely continue higher into year end.
I reiterate: You’ve ‘got to be in it to win it.’ While I could expound on fundamental issues, I may bore you in the process. This market has not been about fundamentals in a long time. I think we are beginning to enter into a blowoff phase in which investors who have missed the market move to get in while those who are outright short the market are forced to cover. I view the current price action more akin to gambling than anything else.
2yr Treasury: .69% versus .90%, -17 basis points or .17% (rates down, prices up)
10yr Treasury: 3.21% versus 3.40%, -3 basis points or .03% (rates down, prices down)
COY (High Yield ETF): 6.42 versus 6.20, +3.6%
FMY (Mortgage ETF): 17.67 versus 17.90, -1.3%
ITE (Government ETF): 58.53 versus 57.96, +1.0%
NXR (Municipal ETF): 14.81 versus 14.79, +.1%
Commentary: please review my post, “The Message of the 2yr Treasury, Deflation, and Japan,” in which I highlighted how I believe deflationary pressures are growing in our economy.
The Treasury market remains the prime beneficiary of the global economic risks increasingly exposed.
We live in a very fragile world economically and politically. Our global economic risks remain deeply embedded in the debt burdens of nations, corporations, and consumers. These debts are disguised and covered by central bank liquidity. The water may appear fine, but it remains shark-filled. Remain on guard.
American anxiety and rage continue to boil. I can understand and appreciate the anger and the rage. That said, let’s not lose sight of the forest for the trees so that we can best position ourselves in the short run and over the long haul to benefit personally and professionally.