Thoughts on Current Markets

by: Thomas MacLeod

We like to keep abreast of the recent movements in the equity, commodity, treasury, currency and real estate markets. We are long term investors, not aggressive traders, and look for longer term trend changes. These are our macro market thoughts at the moment:

The behavior of the broad based Vanguard Total Market ETF (NYSEARCA:VTI) gives a good representation of what is happening within equity markets. We have seen a pick-up in volatility over the last couple of weeks but there is little evidence to suggest that the up-trend depicted below is in trouble. For us to get worried, we would have to see a breakdown in market internals (a major signal for us is small caps diverging from the performance of large caps). To date, the Russell 2000 continues to outperform the Dow. Whilst there is nothing wrong with a bit of profit taking along the way, it should be seen as a healthy adjustment or the market’s way of letting off steam (keeping weak hands out of the market).
VTI Vanguard Total Market VIPERs
(Click to enlarge)

Watching the behavior of broad based commodities indices gives new meaning to the term “watching paint dry.” Yes, initial appearances do suggest that there is nothing happening. However, a number of commodities have either broken to multi-week highs (like gasoline) or are within a whisker of a multi-week highs (like silver). We find little evidence of commodities making new lows. Even natural gas and the grains appear to be basing.
DJP iPath Dow Jones-IBS Commodity Index
(Click to enlarge)

We are completely perplexed as to how US treasury markets are holding out in the face of rising prices in precious metals and crude in addition to rising inflation premiums (just look at how TIPs have been outperforming non inflationary protected treasuries). We are inclined to think that the strength in US Treasuries is more to do with the flight to safe haven caused by the eurozone debt “crisis” than pure fundamental reasons.
TLT iShares 20yr Treasuries
(Click to enlarge)

Real Estate continues to surprise. Our January 11 call options have risen over 200% over the last few months. Bizarrely, if this low credit environment continues, another Real Estate boom is not beyond the realm of possibility. We continue to find very few that are willing to put their necks out and say that the real estate market will be at new highs by Christmas 2011. Okay, we are not saying that real estate indices will be trading at multi-year highs two years from now, all we are saying is that no one wants to believe what is unfolding beneath their very eyes.

IYR iShares Real Estate
(Click to enlarge)

These are the macro market themes that we see at the moment. To our minds, we feel an increased inflationary environment is on the way. We are bullishly positioned for Equities, Commodities, and Real Estate; whilst being bearishly positioned for US Treasuries and USD.

Disclosure: Author long VTI, IYR and DJP