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11.24.09
Thanksgiving Rally Continues

It does not pay to get bearish on this market. Not yet, anyway.

The Dow was down just 14 points on Friday, which set the stage for the surprise rally on Monday morning. The dollar weakened about half a percent over the weekend. Since U.S. equities are priced in dollars, the declining greenback creates buying pressure, since shares look cheaper to overseas buyers. We think this trend is likely to continue until the Dollar Index falls to its 2008 low, about 5% lower than Monday's close.

11.11.09
Pausing Near Highs

Yesterday, the Dow closed up for the 5th day in a row, but just barely. Basically, Tuesday was a consolidation day. Lately, such pauses have punctuated a series of strong advances.

News flow was also downbeat yesterday. Various Fed officials noted the weak employment picture and the increasing prospects for a jobless recovery. Dennis Lockhart, president of the Atlanta Fed, warned that non-performing commercial real estate loans will be affecting smaller banks. Consequently, these troubled banks will not be making loans to small businesses, thereby crimping the recovery. If you are a small business person you know this is already the case.

11.03.09
Pause before the drop

On Monday, the Dow closed up 76 points, only its fourth up day in the last ten trading days. The intraday action was volatile, however, with a range greater than 200 points peak to trough.

The volatility catalyst was a report from the Institute for Supply Management that indicated manufacturing activity grew in October at the fastest pace since April 2006. The 55.7 reading, if annualized, would imply GDP growth of 4.5%. Manufacturing activity improved worldwide, as well, suggesting that this is a synchronized global upturn. Things did not get better in Russia, however, and we think that country remains a short sale candidate. In other words, we are bullish on BIC not BRIC.

10.29.09
T-Bills and ETFs

There is only one ETF that invests exclusively in T-Bills, SPDR’s Barclays Capital 1-3 Month T-Bill EFT (BIL).  This fund holds nine different T-Bills and charges an expense ratio of 0.14%.  BIL trades in an extremely narrow range and currently pays a minuscule dividend, due to the current interest rates set by the Fed.

10.23.09
Easy Money

The Dow hit 10,000 this week, then stumbled, then regained its footing, then stumbled again. Despite their overbought conditions and high valuation metrics, the major U.S. indices are being supported by the Fed policy of super-easy money and the consequent carry trade in the U.S. dollar. The carry trade is causing continued downward pressure on the dollar and a commensurate rise in commodities and in other assets such as the stock market. Enjoy the ride for now and consider selling overvalued companies at what we consider to be more than fair prices. It is easy money, after all.  

10.23.09
Free Money

This capital is used to invest in assets with potentially higher returns. The transaction is almost like printing money because the high leverage these institutions use allows them to buy relatively safe bonds and other fixed rate instruments denominated in foreign currencies. Plus, as the dollar falls, they get the benefit of the currency differential when paying back the loan. It is a doubly sweet deal and it is one of the most lucrative investment games in the world right now. No wonder banks such as Goldman Sachs, Morgan Stanley and JP Morgan are reporting such excellent numbers.

09.23.09
170-470 Points to Go

Thirty Dow points here, fifty Dow points there and pretty soon you have real progress.

All four major indices made new highs for the year yesterday, but without fanfare. Based on comments we are hearing from brokers, you could call this the Reluctant Rally. Despite skepticism about the economic underpinnings, investors don’t want to miss out on a rising market, so selling pressure remains mild. When the music stops, we expect a sharp down day or two, but the first selling spree will probably be bought after a few days of purging.