Are You Getting It?

I have been asking myself this question about whether I'm getting it. I mean whether I have grasped what's going on with the market so far. To some extent, I just want to affirm my stand again and be fully assured before I make my next move. I think that in stock market, you should take some rest once in a while. Even Jesse Livermore goes for some fishing after some trades and toally ignores the market.

Reflections

Let's reflect on what have happened so far and looked at things from a different point of view. We shall first look at stocks.

1. 2004-2007 Jul

First of all, we have some crazy bull runs from 1980s. It was stopped momentarily during 2001 dot come bubble. Afterwards, it was continued by some nice bull market. Things are looking great. China markets post gains that are simply mind blowing. Everyday, the market is making new historic high.

2. 2007 Jul to Aug

Just when things get too rosy, Bear sterns showed some signs of distress. Two hedge funds were closed. More companies are revealing the sub prime problem. Market corrected 10% for the US markets and 20% for the Asia markets. For example, STI bottomed at 2800.

3. 2007 Aug to Nov

I feel that there is a learning point here. I believe that in the market, there are always signs to look out for. They are very subtle signs which are very important in understanding the environment (remember environmental analysis...). In matter of months, the market shot straight up. You could simply take a ruler and draw a straight line upwards. It will be the graph for most markets. For example, STI shot to 3800. 30% of gains in matter of months.

According to my fuzzy logic, the end of a bull market is always marked by this acceleration period.

Alright, not a very nice picture over here but hopefully it's understandable. Normally in a bull market, gains are steady and small. But at the end of the bull market, there will be this last burst of fire. The last spur that the market will make and everyone will go crazy buying the market. It is very obvious to most that it will not go on. But this is the stock market.

4. 2007 Nov till today

Actually if you apply this theory right, it is the same for the bottoming process. Remember I mention that only when everyone thinks that there is no bottom and begins to sell, then it is a bottom. In a way, I'm also looking for this acceleration stage for the bottom. The day came in the form of a limit sell down for futures. It is not a very strong signal for a pure bottom of course but nonetheless, it is good enough to show a respite in the market.

Commodities

I guess everyone is quite familiar with this short timeline for stocks. The main point that I want to highlight in this post is about commodities.

1. Jan 2007 to Jul 2008

Basically, commodities were scorching hot. Oil went from $50 to $140. Gold reached $1000. These were history. I need to bring in something here - King Dollar. USD went the opposite way of course.

I will like to make some assumptions here actually. This dollar, oil, gold and most commodities are related. Of course they are! But looking more in depth, I will like to assume that a lot of people in particular hedge funds are buying oil and shorting dollar. Keep this in mind. It sounds really simple but I feel that there is some truth into this.

2. Jul 2008 till today

Oil tanked. Dollar rallied. Why? Again, in matter of months, oil dropped from $140 to $45. A bubble in oil initially? Maybe. But looking from another angle, remember that many people are buying oil and shorting dollar. Supposed they are being leveraged and are holding lots of other stuffs that never do well, in particular, stocks.

Because of the losses in other areas, they begin to unwind and sell off some of their positions. So they are selling their oil and covering the dollar. This leads to a massive chain effect. Oil dropped slightly and dollar rallied. This actually forces others to sell more oil and cover more dollar. I'm assuming that lots of money are tied down to these two positions.

So in the end, there is this huge unwinding of commodities and dollar trade that we are seeing right now and we have dollar strengthening and oil at $45.

The catch is this.

Question No.1: When you look at the dollar, is the strength of the dollar justified?
Question No.2: When you look at commodities, is the selling justified?

Answering question No.1 is simple. When you have someone that keeps printing the paper money and a country that is hugely in debt, you will have the most useless piece of paper in the future.

Question No.2 is tricky. True enough, demand will fall due to recession blah blah blah. But have anyone considered about supply side issues. Farms will close down, no one will open new mines, no one to lend money to prop up productions. All these events take time to surface. Demand is straight forward and simple and this is why most people ignore the supply side issue.

In conclusion, I believe that the commodities are grossly oversold. Of course they can go lower. The strength in gold recently reflects what I am preaching thus far. There is certainly some truth in the demand for gold. But the commodities are still quite shaky at the moment. Time is needed for money to go back in because supply issues will surface in the future and supply may fall much more than demand when you look at stuffs like agriculture. This is probably why Jim Rogers said that stocks and commodities prices are inversely related (though it is not reflected today), I believe in the long run when stocks turn down somemore, commodities will rally and that's where the money will be in because there is some truth in the commodities rally.

The Last Bubble

The treasury market is pretty funny at the moment. Yields for the 90 days notes are negative.

This is the two year chart for the 30 year Treasury bonds. Logically speaking, I don't understand why will people want to lend money to the US government. There are of course experts who state that the potential deflation disaster is spurring people into safe haven like bonds to preserve their money. I don't like the word "preserve".

Why will you want to hold an asset that is grossly overpriced (90 days notes yields are negative)? On top of that, you are getting dollars back that will likely to plunge badly in the future. By my own common sense, price of the notes will not go up that much to offset the fall in dollar because yields for some ntoes are way to little. Who in the right mind will buy them?

I believe that all the money are going into the treasuries at the moment and this thing has to unwind. It takes time to unwind. When it does, I think the last bubble in the financial market will be burst and commodities on a whole will rally.

I will study more about the last bubble and make a detailed one on during the weekends.