First of the Month Rally

Before the US markets opened on Thursday morning, there was news out of the European Central Bank (ECB) that they were raising rates a quarter of a point to 2.25%.  Initially, that drove up the Euro against the dollar but the ECB made comments that it wasn’t sure that it would raise rates again for a while.  After that the currencies went the other way with the dollar again strong.  

The very interesting thing going on in this time is the price of gold and the dollar are rising together.  Of all of the markets, this seems to conflict the most.  Metals, not just precious metals, were very strong today as copper rose to $2.  We don’t typically follow copper but we can look at a chart and see that about a year ago, copper was trading around $1.  (That double in a year is part of the reason we think that inflation is not being reported properly, but that’s another story.)  

Gold and silver were strong performers today with the HUI following suit but lagging.  Gold and silver made new highs for the move but the HUI didn’t.  They were all strong reports and of course we sold out a little too early.  We are still happy with our BGEIX trade earlier this year and we were hoping to get back into it around now.  Unfortunately, we haven’t ever gotten a good pullback in the precious metals so we have stayed out.  We will get another chance but right now, the prices are too high to get involved.

Tomorrow we get to find out about November jobs.  We don’t really think it will set off anything unusual in the market but it’s always good to know what you are facing as you start off the trading day.  Certainly today’s read on manufacturing from the ISM was not really considered at all as the market was well up before the opening bell sounded.  

We would like to thank Chicken Lit… I mean Erick for his comments about inflation after Wednesday’s post.  With the price of the 12 days of Christmas going up only 6.1% I don’t think the world feels too badly about that.  

We did want to make a comment on Erick’s earlier points on the debt situation here in this country.  If you look at the stock market, or the gold market or the dollar, since the middle of October, you see almost a relentless move up in the price of all.  We believe that this is the magic that the Fed delivers.  After the big Hurricanes, the Fed must have done what it always does in the face of trouble, add money to the system.  The economy is said to have grown by 4.3% in the third quarter, we don’t really know how that is possible given the state of the world watching the hurricane coverage.  

The strong move in the stock market suggests that there is plenty of liquidity around and of course the most visible place you will see liquidity of this magnitude will be in the US stock markets.  Our thought on the debt situation is this:  There will come a point, and we think it will be sooner than later, that no matter how much money is available, there will be no one that wants to borrow, maybe more to the point would be that there will be no one that Can borrow due to servicing debt they have already put on.  

We have said this would occur as the housing market slowed and precluded more extraction of equity from people’s houses.  We don’t think that the consumer will survive Christmas in a very good way.  At some point, there will be a sudden drop in liquidity, not because the Fed will tighten the purse strings, but because the consumer will stop spending so much.  We think that has already started.  

We read with interest that the Congress is introducing bills that will force employers to automatically enroll employees in their 401(k)’s.  They would have to match a certain amount but the initial savings rate would be set at 3% and raised a percent a year after that for a few years.  I realize this is a proposal that may not get passed but this seems a little beyond the government’s authority.  Take a look at the articles and give me your thoughts.

Have a great weekend and we’ll try to do better in the coming weeks.  We feel badly that we missed this tradable October low.  We really felt it would hold off until November but we missed it.  Right now, we think the move is near an end, at least near a flattening if not a drop.  Good luck, be careful and be selling these rallies.

Dow Industrials:   10,912.57  +106.70  (after yesterday’s down 82, net about 25)
RYVNX:  18.32
TLT:  89.47
BGEIX:  14.05
(not a good day for us)