Equities Down, Bonds Forming Bubble?, Commodities Surging

Monday, August 16, 2010

commoditiesBrutal week erases equity market gains for August

August started out well following the S&P 500's 6.9% gain in July but the bears came out of hibernation last week with a vengeance selling the market down 3.8% taking stocks negative for the month. The S&P is now smack in the middle of its recent range at roughly 1,080 between previous lows around 1,020 and recent highs just over 1,120. The next move seems to be anyone's guess.

There has been an oscillating shift in attention between the micro and the macro over the last few months for market participants. The macro picture continues to present justified worries with persistently high unemployment, record high debt and deficit levels and the possible double dip in the housing market. The micro picture, on the other hand, continues to look fairly promising with individual companies showing an improving top line coupled with powerful productivity gains that have resulted in profits nearing 2007 levels again. With earnings season coming to a close, the attention may very well return to the macro picture.

Other markets present interesting divergences

After falling for 9 weeks straight, the dollar finally found a friend following the FOMC meeting. With about 60% of the dollar basket made up of the euro, the dollar has more or less retraced the panic move in the euro once it broke $1.32 and collapsed through $1.20 in short order. The euro is now trading at $1.28 even after the recent sell-off.

Bonds continue to explode in what many are beginning to call a bubble, particularly one of my favorite investors, Jim Rogers. Rogers was recently quoted in the Economic Times:
This is just not normal that government bonds yield this little and especially in a country which is the largest debtor nation in the history of the world and with gigantic amounts of bonds issuances yet to come. In my view too, there is going to be much more inflation which will cause yields to go higher and higher. I am not selling short bonds yet, but I see a bubble building. Eventually, I hope I am smart enough to sell them short.
Since the European debt crisis began in April, equity markets have been down and US Treasury bonds have been decidedly up. The 30-Year bond futures are now up 15.6% year-to-date. Futures on the 10-Year, 5-Year and 2-Year are up 9.5%, 5.4% and 1.1% respectively.

Commodities have also been on a tear lately especially in the agriculture space explaining the impressive snapback in the fertilizer names, think POT, MOS and AGU. The massive wildfires in Russia caused a surge in global wheat prices with futures prices trading around $4.60 per bushel at the end of June. Current prices are now $7.34 per bushel, a whopping 60% higher in just a month and a half. Corn, soybeans, oats, sugar, cotton, you name it and it's higher since June, in many cases much higher.

Disclosure: No relevant positions.
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