This trio of Bloomberg headlines (see below) is exactly why I've been cautious about jumping in the crowded trade. (In fact we actually dumped most gold/silver & went long the dollar as an insurance policy last week in case the crowded trade finally burns down.)
Anyone who lived through 2007 and 2008 knows what happens when crowded trades reverse... not to mention those of us around in March 2000. Those who continue to play the crowded trade have been big winners, and it's the right thing to do as long as you can jump off the bubble before the hedge funds all try to exit the narrow door at exactly the same time. That said, trends can play out much longer than anticipated and one day does not change the story. Everything that is reversing could do a 180 degree turn next week... this market has no memory from day to day. And all it will take is the next economic report to be underwhelming and we're back to all the same old trades...
The irony is that the driver of these reversals - the jobs report - is not that good once you look under the headline. I am very curious what the Trimtabs data we cited yesterday will show for November, and how much of a discrepency between the 2 reports there is. But we won't harp on that... reality is not what matters in the stock market; perception of reality is all that matters. Very few people look at details in a stock market where stocks surge or crumble 15%, 10 seconds after an earnings report headline is released... and hundreds of billions of market cap are added / dropped in indexes seconds after an economic headline is reported. Who has time to actually look under the hood for details anymore? HAL9000 doesn't!
Let's look at the 3 headlines one after the other, but I am still sticking to my "no Fed fund rate increase in all of 2010" even as traders are betting it will happen much sooner. I think the market underestimates Ben not wanting to repeat (what is his belief) the mistake that governments and central bankers in the past took the pedal off the metal too soon during previous credit crisis situations. But the headlines display what we've been saying for months... it's an IQ 20 market and everything revolves around the simplistic inverse dollar trade. Any thinking over and above that IQ level is punished.
1) Traders Increase Wagers on Fed Increase after Payroll Report
- Traders increased wagers that the Federal Reserve will begin lifting its target rate for overnight loans next year after the U.S. government reported a smaller-than-estimated decrease in jobs last month.
- Federal-funds futures contracts on the Chicago Board of Trade show a 18 percent probability that the central bank will lift its target rate for overnight bank borrowing to at least 0.5 percent by March, up from 13.1 percent odds yesterday.
- For a similar increase at the June meeting of the Federal Open Market Committee, the probability rose to 52.9 percent from 43 percent yesterday.
- The dollar rose the most since June against the currencies of major U.S. trading partners as the payrolls report encouraged traders to boost bets on Federal Reserve rate increases. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, increased 1.2 percent to 75.559 at 12:25 p.m. in New York, the most based on closing prices since June 5, when the government reported fewer job cuts than forecast.
- “What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.”
- The last time the Dollar Index rose after a payrolls report exceeded expectations was on Aug. 7, when it climbed 1.2 percent. Employers eliminated 247,000 jobs in July, compared with the median forecast of 325,000. (and what happened to the dollar after that? which is exactly why one day does not make a trade)
- Gold fell for the first time this week, heading for the biggest drop in a year, as a rising dollar spurred some investors to sell bullion on the heels of a rally to a record.
- Gold futures fell as much as 4.9% from a record of $1,227.50 an ounce, set yesterday in New York. (this is about where gold fell to a week ago on the Dubai news, before staging a nearly $100 rally Mon-Thursday! Talk about a round trip... another reason I sold my gold last week... far too volatile for me as momentum traders now dominate this commodity)
- “So many people have piled into gold, so this pop in the dollar is freaking people out,” said Matt Zeman, a metals trader at LaSalle Futures Group Inc. in Chicago. “The dollar is rocking and gold is getting its teeth kicked in.” (see lemmings run... see lemmings jump)
- “Gold is going to fall under its own weight,” said Tom Hartmann, an analyst with AltaVista Worldwide Trading Inc. in Mission Viejo, California. “There aren’t a lot of people out there who have been short on gold.”
Based on what central bankers have done and will continue to do - long gold, short dollar is the correct trade in my mind for the next many years. Once the US economy rebounds into a more stable level, the structural issues will separate from the cyclical issues (which are currently mixed together) - and we'll be right back at square one. And flooding the world with easy money is the only policy solution we know in this country. But that doesn't mean gold goes straight up forever.
To reiterate... as we mentioned earlier, testing would be the action post knee jerk, once it dawned on speculators that their free pool of money from the Federal Reserve might actually end at some point. Thus far, they don't like it. Which I think is why Wall Street will prefer weaker days ahead for Main Street. Perverse... but reality.