In looking back, while there wasn’t any real price progress in the major indices, it was actually quite a week for observers of the stock market. And while the techies will tell you that “the tape tells all,” if you had been simply watching the action on the charts this week, you would have missed an awful lot.
For example, last week we saw the Fed go “all in” and throw everything it could find – including the kitchen sink – at the credit crisis and economic problems. We saw yields plunge to generational lows on the bond market (and by the way, would you really want to tie up money for 10 years with a 2.13% annual yield?). We saw mortgage rates continue to loosen up as the national average on a 30-year fixed mortgage fell to 5.17%, which was down from 6.14% the week before and the lowest since 1971. We saw the soap opera with the automakers come to a happy ending as General Motors (GM) and Chrysler got a “bride to Obama.” We saw the greenback continue to dive and then suddenly rebound. And we saw oil plunge to levels most probably thought they’d never see again after this summer’s spike to $147.
Yet through it all, the major stock market indices barely budged. The DJIA actually gave back -0.59%, while the S&P 500 rose +0.89%, and the NASDAQ gained +1.53%. So, is there anything to take away from the market’s relative lack of movement this week?
No Change In The Outlook
In short, there is no change in our outlook. We believe that the stock market continues to be in a secular bear market that began in 2000. We believe that we’ve probably seen the lows of the current cyclical bear move – although this does not mean that we won’t test those lows a time or two in 2009. We believe that the tone of the market has improved. We continue to believe that the market is setting up for an intermediate-term rally. And finally, we do not believe that we are ready to embark on a new bull market; cyclical or otherwise.
But since we’ve got a few minutes left in our weekly big-picture session, we thought we’d take a look around at some of the macro themes that just might shine in 2009.
US Stocks For A Trade
Our first theme that we expect to play out in the first half of the New Year is the US stock market – for a trade. We’ve spent most of the month of December laying out our reasons for this prognostication, so we won’t dwell on our thesis in detail again here. But, with the Fed pulling out all the stops, the banking system looking like it will not collapse after all, sentiment having reached extreme levels, the major indices having discounted everything except the Great Depression, and a couple of pretty important buy signals – it’s tough to get overly negative on the stock market. Well, until stocks bump into important resistance (about 1200 points higher) and sentiment becomes a little too complacent.
Time To Go The Other Way In Bonds
Although we recognize that the Fed’s goal right now is to make it simply intolerable for banks to hold treasuries and that there has been an unprecedented dash to cash here at the end of the year (fund managers want to show cash on their books at the end of the year in the hope that this will somehow offset the -42% decline seen in the Lipper Growth Fund index), the resulting move in the bond market has caused the situation to look a little bubble-like.
Yes, we do recognize that it doesn’t pay to pick a fight with the Fed when they are on a mission. And right now that mission is to force banks to lend money. So the Fed’s plan is to push rates down so low that holding treasuries will no longer be a profitable strategy in the banking industry.
However, all you have to do in order to get a flavor for the situation in the bond market is look at the chart below. This is a six-month view of the iShares Lehman 3-7 Treasury ETF, which as you can easily see, has spiked straight up in the past two months.
While markets can stay irrational longer than someone looking to go the other way can usually stay solvent, there are some fundamental reasons to be looking to play the short side of the bond market sometime in ’09.
First and foremost, we need to remember that, according to Milton Friedman, inflation is a monetary phenomenon. Thus, with the trillions of dollars being thrown at the credit crisis, the “unintended consequence” of such actions will be inflation. And the long and short of this situation is that with inflation, comes rising interest rates.
So, unless you find yourself in the doom-and-gloom camp on the prospects for the economy, it might be a good idea to put the TBT (ProShares Ultra Short Lehman 20+ Treasury) on your radar.
China Bounces Back
The other macro theme that we think will wind up making the headlines in ’09 will be the comeback of China, which is positive for the Pacific Rim, commodities, and in turn, Latin America.
While it is entirely too early to say that the Chinese stock market has embarked on a new bull market, we can say that an uptrend appears to be taking shape. In looking at a chart of the FXI (iShares Xinhua China 25 Index), we see a series of higher highs and higher lows as well as all three moving averages now sloping upward.
Thus, the price action could be telling us that a recovery is expected in the next six months. And unlike the “hard landing” that is being experienced by the levered and debt-ladened economies such as the U.S. and the U.K, China’s economic data is suggesting a “soft landing” is likely to occur.
Since the Chinese economy does not carry the debt load of the other financial powerhouses; China stands to benefit much more quickly from the massive fiscal and monetary stimulus the government is implementing. In addition, it can be argued that China’s economy is moving toward increased consumption (as evidenced by the $586 billion infrastructure-based stimulus plan) and less reliance on the U.S. And finally, the bottom line is cheaper energy prices will encourage continued development in China.
Therefore, if you believe that the developed economies of the world will begin to make a comeback in the second half of 2009, it appears to be a decent bet that China will be leading the way.
As China Goes, So Goes Commodities
If you will recall, it was the “China Demand” theme that helped push the commodity markets steadily higher over the past couple of years (up until July, that is). Well, with the Chinese government talking infrastructure development and planning to build up its reserves of base
