As contrarians, we get real excited when we see bearish commentary about the state of the US economy on the cover of TIME. Notice the covers of Oct 5 “The Tragedy of Detroit” – the industrial heartland of the US and Sept 21st “Out of Work America”. It seems that popular opinion is still very bearish on the prospects of the US economy which is perhaps why we are not. On Friday latest figures revealed that the unemployment rate in the US is “officially” 9.8% - the highest since 1983. It scares us to be on the side of the masses, of course which we aren’t.
Given the unemployment figures it seems too easy to be bearish on the US right now. However, financial markets continue to suggest otherwise.
There remains no credible challenge to the primary trends that began in late 2008. Equity markets have let off some “steam” which is a good thing. In fact we would welcome some more weakness in equities to shake the weak hands out of the market. Yet again the weakness in equities has come on the heels of a somewhat stronger USD. The equal weighted Value Line Index has given up some 7% since its last multi-week high on September 21st. We would not be surprised to see a further 5% downside over the coming days but of course we would not bet betting on any playing the short side.
There seems to be an insatiable appetite for investment grade bonds. If you want to walk the line and look at emerging market sovereign bonds (PCY) and junk grade corporate bonds (HYG) you will probably be surprised to see that intra-week they registered multi-week highs, this is not the sort of behaviour you would expect to see if the market had a genuine bearish undertone.
We have been bullish the commodity market since the start of the year, and although we are very patient we have begun to systematically reduce the hair on our heads over the last few months especially given the weakness of the USD Index. It seems that commodities are just sitting there waiting for something to push them over the edge. We don’t think it will take much.
The USD has bounced somewhat to relieve an oversold condition. Yet no resistance level of significance has been broken and we have little to believe that any such level will be broken over the coming weeks.
This week was quite important for the real estate sector from a fundamental data release perspective. Pending homes sales and housing prices both firmed. Yes it does seem that the housing market has bottomed, the real estate ETF IYR has been suggesting so for some time.
So we go into a new week. We don’t think the weakness in equities will come to much, that the USD should weaken further, bond markets will continue to advance, and as for commodities, well toss a coin, but note that when the breakout to the upside comes it is likely to be violent!
Disclosure: Long VTI GSG IYR AGG UDN
