Since mid summer (2010) most key equity and commodity markets have rallied strongly (20-30%) - following a 3 to 4 month consolidation period - April 2010 to July 2010.
Equity markets had rallied a spectacular 50% from April 2009 to April 2010 in the largest rally ever recorded in a single annual period - all in the face of very negative, deteriorating, and fearful economic circumstances. The 'Wall of Worry' had been beautifully and methodically scaled!
Since the beginning of 2011 geo-political conditions have sensationally unraveled throughout much of the world. Everything I can think of has been thrown in front of this astonishing bull market and then some - including the proverbial kitchen sink. Japan has now almost become a fully discounted afterthought - a full 3 weeks after their heart breaking Armageddon. Almost anything that happens now in the Middle East hardly raises a 'road rage eyebrow' in money flow traffic. The current rehashing of European sovereign currency and credit issues hardly raises the pulse of hardened bond and foreign exchange types. Anything less that 9.0 on the Richter scale is considered mere indigestion. It sure is going to take a lot to create any kind of excitement or panic after what we've been through.
To say equity and commodity markets have absorbed, consolidated, and held up well during this chaotic period may be the understatement of the year. It is now becoming very obvious that there is plenty of liquidity 'sloshing' around in low or negative return accounts - and is enviously and anxiously looking for a loving 'higher return' home to call their very own. The trebling of the US monetary base since 2008 sure has had it's full and expected effect. We are reminded of the old adage that 'a bull market never ends until the last dollar is spent.'
The most recent February sell off had been contained to a normal & mild, low volume, 5% affair - thereby effectively working off a very overbought condition. The key support levels (DJIA 12,000, TSX 14,000, and S&P 1,300) were fractionally violated probably because of nervous triggered stop-loss activity. Those key indices have quickly been bought up and are on the threshold of recording new recovery all time highs. The recent 2 to 3 month shallow consolidation (3rd since 2008) is setting up what looks to be a very exciting, colorful, and very volatile spring house cleaning. Many important valuation indicators are at statistically normal & fairly valued levels. A few sub indices are over bought, and a tad over valued, and they include materials, energy, consumer staples, telecom services, and health care - but more than likely they will continue to provide critical market leadership.
Most key markets indices are now within a 'relative' eye lash of the historic 'highly levered' all time high territory of 2007-08. The economic 'Fear of God' has substantially dissipated from front page newspaper coverage and investment psyche. Multi-billion dollar debt takeover and merger activity has returned with a vengeance and is now almost an hourly process. A few selected Tech IPO's are even opening 100+% higher on their first day of trading. It is almost impossible to wipe the smiles off Investment Bankers and M&A lawyers faces.
In the US, the dirty dollar and hapless housing continues to be the unloved and unwanted whipping boys du jour! W Buffet is the latest in a long line of impressive financial guru's to warn of 'staying the hell away' from long term bonds. Municipal bonds are either the best or worst opportunities ever. Total tax receipts at the state and local levels have just broken into all time high territory despite apparently being bankrupt? The black hole called 'residential housing' appears to be bottomless in spite of never have been cheaper to the 'average' American and on a square foot basis. Key metrics of rapidly improving labor conditions, lusty corporate profit and earnings pictures, and a key commitment to improving critical corporate capital expenditures are all clear indications of a healthy business expansion. The DJIA is currently at a fair valuation of 16x price to earnings and debt levels have never been better.
In Canada the 'election nobody wants' has officially been called. It is the 4th billion dollar affair called in the last 7 years. Hopefully somebody wins a majority this time around because I'm not sure we can take much more of this 'musical chairs' syndrome. Perhaps a no holds barred 'steel cage match' might be the best way to settle it once and for all. Somehow Valeant Pharmaceuticals International (formerly Biovail) has found US$5.7 billion to take a run a fellow drug maker Cephalon? The frozen debt markets have thawed. RIM reported and unfortunately guided slightly lower which crushed the stock. RIM stock at 8x's earnings appears to be enticingly cheap but they sure have their hands full with the Apple and Google gangs which have invaded their turf! Lundin broke off merger talks with Inmet and appears to have put themselves into play to the highest bidder. The heavily weighted financial stocks have raised dividends and have rallied into new record high territory as expected. The Canadian dollar has new all time highs written all over it. With the pending May 2 election the bank rate looks to remain stable until the dog days of summer.
The commodity sector, like the equity markets, have also consolidated their largess impressively. Gold has held the key $1,400 level in spite of fund liquidation, threat of higher interest rates, and a slight decline in open interest. US$38/oz Silver did not hit US$40 by 'Opening Day' as I expected - and perhaps is waiting for the beginning of the Stanley Cup Playoffs. Crude Oil has broken out on a weekly basis with a near term measurement of US$110+/bbl. Natural Gas is nicely positioned for a 20+% rally to the US$5.50/mcf level before the first air conditioner is switched on. Key USDA planting figures are soon to be released followed by new life of the contract highs for most soft commodities. Looks like yet another great season for our hay seed farmer friends.
Bottom Line: I'm not sure I can be more impressed with how both the commodity and equity (and even bond) markets have absorbed and digested the variety of 'end of world' scenarios which have recently unfolded. QE I & II have obviously been the 'snake oil elixer which had healed all that ails us.' There is even talk of ending that notorious 'life support system' program a month early, and $100b less, because it has been so successful. Who would have thought it was so easy? It may suggest that financial markets are returning to 'normalized' conditions which may be effected by regular seasonal patterns and quarterly cyclical factors once again.
Eventually the relentless central bank monetization, the hyper accommodating interest rate structure & rising commodity prices we have experienced will all be passed through the system. We will indeed experience a nasty snoot full of damaging inflation at some point - but likely later than sooner.
I remain cautiously bullish (but very impressed) and maintain stop levels of DJIA 12k, TSX 14k and S&P 1,300. Gold US$1,400 , Silver US$34, Crude Oil US$100, and Copper US$4.10, are short term levels to be respected.
Keep your hands on the wheel, eyes on the road, and most importantly stay buckled up! We may be 'off road' and into uncharted territory before long!
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