Unsettling Trends in Treasury Bond, Dollar and Commodity ETFs

Several days ago, I addressed an unsettling “arrangement” between 3 asset classes… gold, treasuries and U.S. stocks. Uncharacteristically, they’ve been moving in the same general direction since mid-June.

Well, the plot is thickening.

To review: investors began taking significantly more risk in the beginning of March. People wanted stocks and commodities, and they began dumping U.S. treasuries.

In June, however, U.S. Treasuries began gaining fans as well as capital appreciation. Either that, or the U.S. government’s actions to purchase treasuries has created artificial demand for U.S. debt.

Regardless, the iShares 10-20 Year Treasury Bond (TLH) is currently above its 50-day and 200-day exponential moving average. This suggests bullish momentum for longer-maturity U.S. treasury bonds, even at historically unattractive yields.

Typically, when investors run to the safe arms of U.S. treasuries, they may also run to the perceived safety of the largest economy’s currency, the U.S. dollar. Yet nothing could be further from today’s truth.

The U.S. dollar has been getting battered on a daily basis. Moreover, the PowerShares US Dollar Bullish Fund (UUP) demonstrates just how undesirable the greenback has become.

If the dollar is this banged up, wouldn’t that represent trouble for U.S. stocks? Granted, multinationals that earn 50% of their money from abroad might succeed due to their foreign operations. And exporters typically benefit from a weaker dollar.

Still, 70% of the U.S. economy is the consumer, and the consumer is losing purchasing power. A higher cost of living means that fewer folks in the U.S. can afford what businesses sell us. Worse yet, businesses that need to import foreign goods are unable to do so… except at exorbitant costs.

One might think that the dollar’s rapid descent might cause some concerns in equity markets. But alas… U.S. stocks are continuing their ultra-hot streak.

Treasury bonds are climbing (risk aversion), the dollar is falling rapidly (uncertainty), and yet U.S. stocks are flying high? Yep! And U.S. stocks haven’t been this far above moving averages since 1983.

Perhaps some sanity exists out there. Specifically, while gold may be traveling in the same direction as stocks, gold is at least a legitimate hedge against inflation/dollar devaluation. GLD has maintained a steady uptrend above its 200-day moving average for more than 6 months.

Now for one of the most challenging pieces to the puzzle. Up until 12 weeks ago, you could count on a total commodity basket to move in the opposite direction of the U.S. dollar. The weaker the dollar, the higher the price of oil, gas, base metals and a host of popular commodities.

Well, we’ve got an exceptionally weak dollar. Still, commodity indices like the DJ Total Commodity Index (DJP) have been pretty flat over 3 months. Are investors spooked by pending legislation from the Commodities Futures Trading Commission or is this just one more asset whose direction is entirely unnerving?

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Roger Knights]

Thanks for pointing this stuff out. A good follow-up would be for a financial reporter to start questioning quant funds as to what effect these out-of-phase trends are doing to the correlation-assumptions in their algorithms.

2009 Sep 17 05:57 AM

[Archman Investor]

Gold is up because many people know that there "might" be higher inflation coming down the pike, but more so because they know the US dollar appears worthless right now.

Stocks keep going up simply because this a liquidity driven bubble number 3. The same thing happened from 1995 -2000 and from 2003 to 2007. There is no denying it. I am riding that wave, and will happily be selling to the unsuspecting general public when the time is right. That is when (as per history) they finally capitulate on the upside and just "have" to own stocks.

Bonds going up are a sign that many, many people, both private and institutional money, do not believe that with 20% real unemployment, lower net worths, much lower consumer spending, et al, that we are actually having a real recovery.

We are in no mans land right now, where each week we get a glimmer of hope, then a dose of reality.

If you got in the market like I did at S & P 700, just keep riding it. As long as you understand that this is not a "real" market advance, you will make money, guaranteed.

You will sell your shares to the viewers of Cramer and alike and you will be looked upon in awe, as the other side stands there asking themselves: "How do these people keep making money in the market, while every time I get, in the market crashes?"

compdivplan.com

2009 Sep 17 08:12 AM

[sandrab47]

What a surprise - markets aren't "making sense" right now! Given the dislocations that have ocurred in the past year, why be surprised? We are in the process of working it all out and dealing with the new reality - which continues to unfold as we watch. This is what uncertainty and indecision look like. It's like taking a time-delayed snapshot of a physical event: at many isolated moments your snapshot will not show any indication of where action is truly going. This is a time to truly know your own risk profile, to only risk what you can actually afford to lose, to watch, and to learn.

sandrabell47

2009 Sep 17 11:44 AM

[Scared Stiff]

This market does not appear to me to be indecisive at all. Look at a chart of pretty much anything from 10/08-11/08. THAT'S what indecision looks like.

2009 Sep 17 12:23 PM

[Jeff Diercks]

Archman made some great points. This is a liquidity driven market move that continues to confound even the pros. These types of markets tend to go much further than anyone would imagine.

Gold purely reflects anticipation of inflation ahead and, more than that, worries over currencies worldwide as central bankers in developed countries worldwide have flooded their countries with stimulus of various kinds and incurred debt their kid's kids will still be trying to payoff.

The rise in treasuries is purely a safehaven play as nervous investors plot their next moves following the end of this liquidity driven advance. Who can blame them with the likely problems still to come in commercial real estate, more household foreclosures and more high yield defaults.

Believe me this is purely a fairytale market move that you should enjoy while it lasts. When this move ends, this will get very ugly.

2009 Sep 17 01:38 PM

[Kevin_T]

Great article. One thing we all know---these mysterious disconnects will not last indefinitely. The laws of economics will assert themselves and rationality will be restored. Stocks will plunge. Or Treasuries will plunge. Commodities and precious metal will move to reflect the new reality one way or the other. We need to be aware and ready to move quickly, more so than in "normal" times.

2009 Sep 18 01:46 AM

[MikeX]

Treasuries are up because FDIC insurance for money market funds goes away now. Gold is seasonal plus the normal inflation crowd cheering as governments print money. USD is overdone on the downside. There is still deflation to come. Inflated credit of 50 years does not go away with a small crash. Stock are up because people think we will go back to the good old days. Let's look at the earnings at the bottom of this page:

www.tradingstocks.net/...


On Sep 17 08:12 AM Archman Investor wrote:

> Gold is up because many people know that there "might" be higher
> inflation coming down the pike, but more so because they know the
> US dollar appears worthless right now.
>
> Stocks keep going up simply because this a liquidity driven bubble
> number 3. The same thing happened from 1995 -2000 and from 2003 to
> 2007. There is no denying it. I am riding that wave, and will happily
> be selling to the unsuspecting general public when the time is right.
> That is when (as per history) they finally capitulate on the upside
> and just "have" to own stocks.
>
> Bonds going up are a sign that many, many people, both private and
> institutional money, do not believe that with 20% real unemployment,
> lower net worths, much lower consumer spending, et al, that we are
> actually having a real recovery.
>
> We are in no mans land right now, where each week we get a glimmer
> of hope, then a dose of reality.
>
> If you got in the market like I did at S & P 700, just keep riding
> it. As long as you understand that this is not a "real" market advance,
> you will make money, guaranteed.
>
> You will sell your shares to the viewers of Cramer and alike and
> you will be looked upon in awe, as the other side stands there asking
> themselves: "How do these people keep making money in the market,
> while every time I get, in the market crashes?"
>
> compdivplan.com

2009 Sep 18 03:53 PM

[talld]

There is a inverse or negative relationship between the US Dollar and the US Equity market

There is a strong positive relationship between energy and the equities market in general.

Therefore, there is a negative correlation between oil and the dollar.

The correlations are still there, I built a computer program that measures that. IMO the differences you are citing comes from the fact that energy has become partially detached and is running on speculation, because even though the relationships are still measurably there, they are not determining the prices anymore.

2009 Sep 19 10:34 PM

[Analyste de Boston]

Play it again, Sam. Reflation lifts all boats: recall 2003, 2004...

2003: Gold +21%, US Treas: +2%, S&P500: +28%.
YTD 2009: Gold +17%, US Treas: -6%, S&P500: +19%.

Actually, REAL performance proves Treasuries were a terrible investment in this environment. The author seems to imagine differently? Strange.

2009 Sep 20 12:54 PM