The Markets must be crazy!

We hear about the bailout terms in Cyprus, which will inevitably lead to deposits leaving Eurozone banks in weaker countries, particularly any banks which hint at financial trouble. Fears of escalating financial crisis which would very likely be countered by the ECB. Gold drops along with commodities and the the S&P.

Then the bank of Japan announces its going to double its balance sheet in the next 2 years, purchasing long term Japanese government bonds with 40 year duration among other things. The Japanese 10 year bond dropped to an all time low of 0.425% according to the WSJ, with the bank of Japan aggressively targeting a 2% interest rate. It’s good to know that Japan is finally taking steps to address its national debt, but you’d think that increasing the duration of its debt while pushing for inflation and thus negative real yields would be good for gold. Instead, the S&P rallies and the Nikkei even more so, but gold continues to drop.

The strange thing is its not just gold and silver dropping, but also oil, natural gas, industrial metals like copper and agricultural commodities as well. This is definitely strange because if equities foretell a growing economy with higher earnings and higher spending, agricultural and industrial commodities should follow.

Perhaps the market distortions of excessive QE and low interest rates are making it difficult to tell what to expect, and money is simply piling on what seemed to be working for the last few months (momentum investing). One strange thing about stocks and bonds is that they are typically the 2 classes of investment you have to choose from in most mutual funds – particularly the choices in 401-k’s. Both of these are rallying while everything else is pulling back, so perhaps money is moving in from the sidelines (cash or money markets) in 401-k’s while the smart money (hedge funds and other market professionals) are pulling back.

I’ll look for articles that seem to make sense of what’s going on behind the scenes, but that’s my best guess… Professional money managers often hold cash to wait for opportunities when they expect a correction while retirement accounts and mutual funds don’t typically have that luxury. If this is the case, they would be anticipating a 2008 post-Lehman style correction where simply everything dropped in relation to US dollars.

As far as I’m concerned I’m convinced that major central banks will really do whatever it takes to keep the economy from slowing, and I’m sticking with the likes of GLD, SAND, RGLD, SLV, SLW, SDR, PER and TNH, and I’ll add to whatever seems cheapest as my paychecks come in (for now I’m thinking PER next – I just added to SAND and SLW recently, and I have too much SDR in relation).

If nothing else, its certainly an interesting time in the markets. My one gainer today was CEG-A, as I’ve already traded in EXC for more gold related plays a couple months back. I’m not diversified, but I’m having fun and looking for a bigger win. If it all works out, maybe I can get my holdings back to pre-MBA levels again next year. If not, I’ve got a promising career developing as a project manager in industrial construction (automation/electrical)- they still need people who are willing to travel.

Best of luck with the strategy you choose,

John Taylor


About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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2 Responses to The Markets must be crazy!

  1. Anonnynom says:

    It’s Cyprus not Cypress.

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