Monday, December 15, 2008

50bps Coming?

Top Line: Stocks opened stronger on Monday morning but that was the high for the day...except for the gold mining stocks which held up for the better part of the day. The market seems to be having some trouble going down which means the downward momentum of the past year has at least subsided.

Gold jumped on Monday morning to a two month high and gold mining stocks opened strong, too. Over the past couple of weeks, the dollar has gone down and meanwhile gold has gone up. Did gold signal the dollar going down or confirm it? We usually say that the mining stocks lead the gold. The dollar and gold should generally move in different directions, that is the idea after all.

With today's rally, the GDX has finally come back to our first entry point just around 30. Fortunately, we continued buying it all the way down, with our lowest price just under 17. So far, our GDX position is our best performing asset since we started going long back in October. Our other assets are slightly under water but the GDX is providing some upside balance.

Tuesday's Fed rate decision plays a role in today's dollar decline. The Fed will likely lower rates again on Tuesday with 50bps being the most likely outcome. Frankly, we don't think another rate cut can do anything except show once again that the Fed is willing to do anything to thaw the credit freeze. The plan they have devised may reignite inflation. At least, that is what the market believed for a little while on Monday.

Back to the action, the stock market traded down most of the day. Then with about 45 minutes to go, a violent rally erupted leaving the market much closer to even but still negative on the day. The rally didn't hold up but the market did show some strength in the last hour. The Update gives the late day move a good mark for bullishness.

As we have said many times in the past couple of months, the economy has not recovered and may not recover for a long time. That is not the central theme in the stock market and does keep most risk takers out of the market for now. They will be back next year when the market manages to rally back to a much higher number. That's when the confidence will come back and the volatility indexes will have dropped back to 30 or lower. Meanwhile, we will be enjoying gains and may sell our shares to them.

Will the Fed's decision bring any volatility to the markets? The stock market is looking for a 50bps drop but would really like 75bps. If the Fed gives us 75, the stock market might have a little rally, otherwise, the news of 50bps should not make much difference. Anything less than 50bps will probably provide some movement, down first but then we could get a stronger rally. We don't think there will be much "news" in the Fed's news. We say 50bps.

A possible market mover is the Goldman Sachs' news which is believed to be that GS is going to report a loss for the quarter. These are the guys who told us how well they did in the mortgage market as it was falling. Yes, they are probably some smart traders but the market has gotten to GS, too.

The CPI will probably not move the market either...

One other subject is the Treasury bond market. Monday, the long bond traded higher and in our opinion to a riskier place. In the past couple of weeks, the long bond has held its price which looks like it is at a precipice and ready to dive. These bonds don't seem to realize what is happening...inflationary expansion.

1 comment:

Great Penny Stock Buys said...

I cannot believe that closed end high yield bond funds had a average yield of over 20% in 2008 and 2009.