On Tuesday equity markets began a demonstration of long known fact, even a dead cat bounces when thrown into the air. Market corrections can certainly include days of temporary relief. A possible end to the correction is being called by some. More likely it is a bear market trap. Such commentators, having failed to anticipate end of liquidity driven rally, now have ability to identify bottoms. Real ability or expectational biases? Even Mark Hulbert, with his dubious analysis of newsletters, has suddenly been able to find statistics suggesting end of equity correction may be near. Common characteristic of these gurus is that they have something to sell you, something that failed to suggest extracting your money from paper equity markets before the slide.
With economic momentum model now in negative territory, U.S. economy is entering a recession. Collapsing factory orders are simply further confirmation of inherent weakness in U.S. economy. And, the implosion of mortgage mountain is only in early stages. For some time the fantasy forecasters have contended that no one will be hurt by housing slide. Well folks, someone owns the $23+ billion debt of New Century Financial(NEW), and someone is going to pay a price for that ownership. NEW rose by more than 25% at one point on Tuesday. Is that a rational response or a dead cast bounce?
With Japan in economic recovery and U.S. sliding into recession, a small bounce in the yen must be viewed as a transitory event. That giant elephant, the yen carry trade loans, has not suddenly disappeared one Tuesday morning never to be seen again. For 2007 to date, yen carry trade loans invested in U.S. equities have had a negative return. That kind of return does not pay the partners' salaries. Given the size of this elephant, the yen is going a lot higher over time. The real investment stories for the year will be the massive losses of hedge funds in mortgage debt and yen-to-equity trades. A good office pool might be on how many hedge funds disappear before year end as return attrition takes hold. Perhaps a good investment idea out of all this is to short or buy puts on WB.
Market volatility always provides investment opportunities for those looking forward. In the past week, short-term buy signals have been triggered for US$Gold, CN$Gold, €Gold, £Gold and the GDM. Latter is the index used to create the GDX, a Gold stock ETF trading on the Amex. If Hillary Clinton, not a practicing economist as far as we know, can understand the risk facing the U.S. dollar, the rest of us should be able to do so. Gold's sympathetic slide is an opportunity to invest in Gold before the super cycle pushes it to ultimately more than US$1,400.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive a trial subscription to these publications simply email Ned at firstname.lastname@example.org.