The Market Just Isn't Letting Up

Includes: GLD, IYR, SLV, SRS
by: Toro

First, let me start by noting that The Great American, Larry Kudlow, was haranguing the Fed on his show tonight, imploring the central bank to bail out the mortgage market. "The Fed should buy subprime loans! The Fed should buy Alt-A loans! The Fed should buy jumbo loans!" The Great American lamented.

I find it more than a little ironic that a guy who starts every show with a statement about how much he believes in the greatness of free market capitalism lambastes a government entity for not bailing out the market.

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Is Larry a communist?

Perhaps I'm being unfair, as I did not watch much of the show after that. I usually don't.

Anyways, what is amazing about this market is the intensity of the selling. There is no let up at all. I have been expecting a rally for some time, perhaps a sharp one since we are so oversold. But every time the market begins to rise, they come in and hit the bid hard.

Wednesday was a great example. The Dow was up 85 points when Bubblevision reported that Countrywide Financial's (CFC) asset-backed commercial paper was yielding a whopping 12.5%, which then sent the market into a tailspin.

I was able to add to my net short position near the inter-day peak, luckily I might add since I had no idea we would sell-off so hard. I don't like shorting into an intense sell-off, but I am beginning to wonder if we are going to see an oversold bounce.

Remember last autumn, and winter when the bulls waited in vain for a sell-off to buy, yet the market never gave them a chance? It just kept rising and rising, and established some record for the longest streak without a 1% daily decline in six decades, or something along those lines? I am beginning to think maybe we will experience a similar decline where there is no bounce to sell into. Then, before you know it, the market is down 20%.

On REITs, as regular readers of Running of the Bulls know ("reader?" - ed.), I am short commercial real estate, as I laid out here and here. However, the REITs have been outperforming the financial sector and trading about in line with the market the past few weeks. Though it is only a matter of time before the group is down another 20%-40%, currently, REITs look like a port in the storm relative to other financials.

Many funds must have some exposure to financials, since financials are by far the largest sector in the S&P 500 with a weighting of 25%. REITs, after all, aren't going to collapse in a week like a bank might. (At least the commercial REITs won't. The mortgage REITs may and are.) But the re-rating of commercial real estate valuations is inevitable, and is occurring now.

The iShares Dow Jones Real Estate ETF:

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IYR Chart

The ProShares Ultra-Short Real Estate ETF:

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SRS Chart

I was going to write a piece last night entitled "Short Canada," but frankly, I was too tired. I'd look smarter today if I had.

If you are bearish on the U.S., and global asset markets, you must be even more so on Canada. Canada can best be thought of as a leveraged play on global financial markets. Combined, energy, materials and financials account for about three quarters of the TSE 60. There is not much of a defensive component to Canada.

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XIU Chart

I went short Canada on Wednesday. I hate shorting anything that is has already fallen 11% in a straight line. But again, even though I have been expecting a bounce, I am not sure I will get a better opportunity.

I am also shooting against the Canadian dollar, and my short position is partially a de facto short against the loonie. It clearly is rolling over, at least in the near-term. If hot money is disappearing and credit is contracting, the loonie will crack, regardless of the fiscal rectitude of the Canadian governmen,t or the long-term demand for commodities.

What also makes me near-term bearish on the loonie is the overwhelming opinion about the inevitability of the loonie hitting, and surpassing par relative to the American dollar amongst the Canadian public at large. Or at least that is my perception. Having recently spent more than two weeks up in Canada, and having talked with several market professionals north of the border the past few days, the inevitability of par seems a little too certain to me. I think eventually the loonie will rise to the level of the greenback, but I do not expect it to do so in the near-term.

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CDN Dollar Chart

Finally, it must be galling to be a gold bug these days. Here we are, with credit markets seizing, financial companies imploding, and a potential full-blown panic a Fed official mis-statement away, and gold just sits there. What happened to all these apocalyptic prognostications about gold hitting $2000 when the financial system collapsed? Why isn't gold soaring?

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GLD Chart

Now, perhaps I am jumping the gun, as simply because gold has not risen does not mean it will not. And besides, gold is outperforming stocks.

However, gold is not supposed to be under-performing Treasuries, a curious development for the gold bugs considering that at least part of their case rest on the supposed inevitable collapse of the dollar. Treasuries shouldn't be rising if the dollar is about to collapse. Heck, the dollar is rising!

And, take a look at silver:

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SLV Chart

Silver looks even worse than gold. That chart is not encouraging, to say the least.

I believe the gold bugs have it wrong. Gold may outperform stocks, but I believe the price of gold will fall as credit contracts. Gold prices are, at least partially, a function of liquidity. If liquidity is drying up, the price of gold and silver will fall, all else being equal. I am a long term bull on precious metals, but I think they do not offer safe haven in an environment such as this.

Not much does.