Tuesday, February 19, 2008

Entry for 2/19/07

What an interesting day today. It seems the bulls take the lead today despite relatively unchanged fundamentals. It seems as the Feds were pounding in bad news into the media in order to adjust sentiment. After a 3 day decline however it is only natural for on the fence bulls to live some confirmation bias and take todays news of the Feds willingness to baby the financial markets some more if conditions warrant it so. Based off recent past monetary policy I don't blame the financial sectors in believing the Feds job now is to protect the financial markets. Some people would attribute this rally to effective monetary policy but id argue its more of a pure speculative sentimental expectation reaction.

Weaker economic conditions should have made people naturally expect WMT to have better than expected earnings report, however the stock being down overall, but is in my opinion to end up higher by the end of this quarter. Either way, bulls can be reading into this news all wrong. Adding to this upward momentum (as using WMT as an indicator).

However, I feel tomorrow will be a big day. Unless today overall ends in a down day. If todays rally sustains to the close of today, I believe this rally won't last into the next day. Firstly, I expect housing starts to continue to disappoint or remain some what static. Obviously a static report will give more way to more bullish sentiment. However, I will not think this to be the case. This will not be the case if one looks to commodities. The extremely volatile commodities have rallied significantly over the past week and will only perpetuate a softer consumer. With weak consumerism and softer labor markets, I don't see housing starts jumping out to surprise anyone. Tied to these recent rallies in commodities will be inflation. As we see oil already back up into the 98's along with the rest commodities, Headline CPI numbers should be higher than expected killing any sentiment for larger FED rate cut reductions. If CPI numbers are not higher, as in if people are focusing on the core number, the CPI #'s are lagged and one will see higher #'s for the next month. However core number should not be considered as more important than headline inflation. It is headline inflation that is currently hurting the consumer (energy and commodities).

Furthermore, with expected supply cuts from OPEC I would not be surprised if oil heads into $100+ a barrel. However this would only be short lived as the consumer would simply not tolerate such high prices and demand side would bring it back down into the 90's range.

Eitherway, Id recommend short positions on US domestic equities since I don't buy into this rally.

Based on what I have written about, it would be natural for me to expect commodities to continue to rally.

With Gold rallying with the argument as people hedging against inflation: It seems that inflation is prevalent across the board from Asia with Japan and China to the US with Australia etc... This rally in gold can be substantiated from the fact that the US keeps cutting rates adding pressure for others central banks like the ECB to follow suite (perceived inflation). However you have countries such as Australia where rate hikes are expected to bail out banks, and Japan where they are worried about choking their growth which does not totally substantiate this gold rally on the inflation arguement. With CPI numbers coming out for the US I expect the numbers to be higher than expected but I don't expect them to be a huge surprise in terms of inflation.

Much of this inflation sentiment can be reversed due to oil. As mentioned before the consumer will not tolerate oil prices in the hundreds for very long. Gold and oil have seemed to correlate well with each other in this new range only to diverge when there was significant poor economic data reported.

If anything one could profit from shorting these two commodities with tight stops as it highly possible for the commodities to continue to rally.

However from my view point these commodities maybe a bit over done.

More demand based commodities should however continue to rally unless we see significant world economic slowdown, Which has not been the case throughout this whole sub prime, credit crisis, and poor financial sector conditions mess (I'm not arguing decoupling, as there every country is affected across the board from these problems, however strong demand is still seen from developing nations along with the nations who are exporting these commodities who are fairing well).

In terms of the USD. More rates are to come irregardless to what you think as financial conditions will not be fixed for a long time. Which means the dollar is in an overall downtrend. However, I feel the dollar is due for a rally as soon as financial conditions stabilize, which may only come about from a significant downturn.

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