Having one's credit card refused because of being 'maxed out' is never a fun situation. Having all of one's credit cards 'maxed out' at a romantic dinner is a downright 'date ending' event.
According to credit enablers Standard & Poor's - superpower US of A is on the verge of such an embarrassment. On Monday S&P 'finally' downgraded it's outlook for the US debt to 'negative' from 'stable' - meaning US Bonds have a 1-3 chance of also being downgraded. The top 5 holders of US debt are China, Japan, UK, OPEC, and Brazil. Almost .45 cents out of each tax dollar has to be currently borrowed to pay the annual tab. The complete lack of fiscal discipline in Washington appears to have caught up to our inspired visionaries. Discussions of the merits of a 'balanced budget' never passes the lips of our fearless leadership. A 73rd rise in the debt ceiling is all but a forgone conclusion. John Maynard Keynes would be a proud papa indeed!
Of the 18 financially elite countries that are rated 'AAA' - the US is the only sovereign which has the dubious distinction of a 'negative outlook.' The loss of the 'AAA' rating has long lasting and dire implications. Only Cramer of 'Mad Money' would know what the Sharpe Ratio generated 'risk free' (TBill) rate would be if that magic carpet gets pulled.
An immediate response (after a brief knee jerk rally) was a sharp sell off in the US Dollar DXY Index of 2% through important lows of last November and challenging all-time low territory. Remarkable weakness for a currency which is not facing an internal revolution, earthquake, or Royal Wedding! Looks like the US is hoping to be the first economy to 'reflate' it's way to prosperity. I wonder what the Vegas odds are for that?
All in all - a definite 'faith testing' situation for the fiat US greenback to say the least. Fed Chairman Uncle Ben Bernake has kept interest rates at less than zero on an inflation adjusted basis for almost 3 years - and is currently purchasing two thirds of treasury debt issuance. In the last 6 months the PPI has risen to an annual rate of 10%. During the inflation ravaged '70's and 80's inflation was only a meagre 4 % higher (at worst) - and long term bonds yielded a lusty 15+%. Not many companies 'weren't' on the verge of bankruptcy. Earnings were almost non existent. The Leaf's were awful. It was not a pretty scene!
The liquidity driven equity markets effectively ignored such 'trifle' potential monetary collapse banter and have sharply rallied to new recovery high territory. The DJIA and S&P continues it's relentless march fueled by a snappy earnings season and possibly short covering. The key levels of DJIA 12,000 and S&P 1,300 held true to form. To date 20% of companies have reported an overall 7% increase in earnings with about 40% beating street expectations. Multinational blue chips continue to report blowout gang buster earnings. US house prices have retreated a painful 50% from 1996 to 2009 high levels.
Mortgage applications are on the rise as people lock in low rates and very attractive low prices. Commercial and industrial bank lending are on the rise. The volatility sensitive VIX is at muted pre 2006-07 levels and 2 year swap spreads have actually returned to long term 'normal' levels. World Stock Market Capitalization has almost returned to the US$63 Trillion level in 2008-09. Overall a very healthy and productive environment.
The broad commodity market is being somewhat overshadowed by new explosive highs in Gold ($1,500) and Silver ($45) - both personally expected long term target levels. Gold has certainly established itself as the #1 currency in the world as investors attempt to hedge potential negative inflationary effects. Silver has returned to the Hunt brothers - market cornering - 1980 all time high territory. Looks like Nelson and William were right after all. A time when panic buying speculators were lined outside bullion banks and grandma's were melting down silver tea services. The silver-gold ratio has returned to a somewhat 'normal' 33 times. The real 'inflation adjusted' price of silver is closer to $100/oz since 1980.
Crude Oil challenges it's recent high of $114/bbl see sawing between reports of ample OPEC supplies and inventory contractions. Natural Gas appears to be mounting an assault at the very significant US$4.75/mcf as liquefied natural gas is becoming much more of a talking point. The oil-natural gas ratio has hit a stunning (and I believe unsustainable) 25 times and represents low risk - high return potential for natural gas investment. The entire commodity market has short term risk in the event of increasing margin requirements and is very 'over owned' by short term trading types.
UBS has jumped off the TSX band wagon along with Goldman Saks and has cashed in Canadian equity exposure. A short but sweet love affair. In spite of resource strength the TSX broke my key 14,000 level dropping to 13,600 on the downgrade news. It has subsequently rallied and current sits at 14,000 deciding which direction offers the least resistance. The heavily weighted and relatively expensive financial sector has recently corrected a normal 5% but could represent risk in an rising interest rate environment. Most producing senior gold, metal, and oil equities are very reasonably priced relative to resource prices. Look for increasing volatility and wild swings in the TSX-Venture issues over the summer.
We will soon discover if the Conservatives have mustered up enough support for a majority government within 2 weeks. I'll stick with my slight majority call - but a low voter turn out could easily swing results back to the hand holding coalition 'speed dating' days - although nothing like the upcoming romantic Prince William - Princess Katherine nuptials.
Bottom Line: In spite of relentless equity markets attempting to march higher and dire monetary conditions I will stay with my 'transitional' trading market thought. After all the intense geo-political machinations most equity markets have been contained within a 5% range for the year and more than likely will continue to do so. Much of the current positive earnings have been effectively discounted in stock prices
I expect a 10-15% trading range until serious QE II and debt ceiling issues are 'somewhat' resolved. Most markets are historically fairly priced but do not deserve substantial premiums based on underlying fiscal challenges. Any significant downside should be contained by new freshly minted US currency.
Happy Passover/Easter to all.
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