Winding Down with an Xmas Rally
Here we are beginning the final 2 weeks of the year.
The economy continues to limp along, improving, albeit rather slowly. “Recession fatigue” is likely to make this holiday consumption spree appreciably better than the past 2 years.
Markets have looked a bit tired — and yet — every opportunity to see big whackage has been met by liquidity driven buying. The bid beneath equities remains firm. The bias remains firmly to the upside.
With this year all but over, traders are starting to turn their attention to 2011. Corporate profits appear to be strong, but headwinds include unemployment and real estate. I continue to expect further contraction in RE prices, and my participation in the Case Shiller survey reflects that.
Rotation out of bonds is a major source buying buyer, following 18 months of main street preferences for fixed income products. It is ironic that mom and pop were Treasury buyers during what is likely to be the last gasps of a 30 year bull market in bonds.
Talk about late to the party!
History shows us that the public tends to be the last in. From the shoeshine boy in the roaring 1920s, to buyers of the Nifty-Fifty in the Sixties, then dot com stocks in the 1990s, and once again with bonds in the 2000s, main street joins Wall Street when their greed overwhelms their better sense. It is sad but don’t blame me, I am only pointing out this truth.
Don’t be surprised if the public’s rush into commodities marks that as a top, as well — including Gold.
This is a holiday shortened week — markets closed Friday for Christmas — so we could see some interesting action. The week after are little more than rookies manning the terminals, thin trading, and last minute position closings.
Around this time of year, I like to ask traders and investors the following: What is your plan for next year? What have you learned from your mistakes, what did you do right? (The 2009 Investing Mea Culpas were well received; Look for my 2010 mea culpas next month)
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December 20th, 2010 at 7:21 am
“Markets have looked a bit tired — and yet — every opportunity to see big whackage has been met by liquidity driven buying. The bid beneath equities remains firm. The bias remains firmly to the upside.”
_____________
Regardless of being bedridden and on life support, the obese cancer patient is losing weight. Losing weight is good. He’s planning on running a marathon next year.
December 20th, 2010 at 7:53 am
No changes for me. I’m still in a reasonable buy and hold mode. No, it’s not safe to hold forever. There’s not enough credit flowing or enough leverage world wide for another collapse any time soon. All sellers have already sold and only the nutsies threaten a mass of mystery sellers will arrive from the ether and give Ghost Hunters their first documented find.
Economic recovery is gaining traction. Retail is recovering and employment is recovering. Europe is taking care of itself and a lot of their problems are conceptual only. What’s ‘bad’ one week will be ‘fixed’ the next week and forgotten the next.
Bond buyers from late will be moving into stocks once the idiot advisors who told their clients about the horrors of stocks and the virtues of bonds figure out how to change their story without looking like commission whores, fad followers, or 2nd generation insurance salesmen. The ocean of cash that brought 10 year rates to fantasy lows will send stocks back to parabolic highs next year while long term rates rise to levels where real fixed income will be possible again.
Gold and oil will remain trades.Who knows where the highs for gold are. Fortunately, a 20% or 30% drop in gold will happen 1% or 2% per day. That’s plenty of wiggle room to play in gold and bail with profits. Oil will rise until it stops. Repeatedly.
I think the market will rise in a saw tooth pattern, A smart and lucky timer will goose their earnings a little by profit taking at the parabolic highs and buying back in at trend.
I suspect the next big crash will happen when the US joins the PIIGS in 5 or 10 years.
December 20th, 2010 at 7:58 am
[...] This Christmas meltup has some toppyness to it. (TBP) [...]
December 20th, 2010 at 8:01 am
BR,
can you point me to a good data feed that shows mom and pop were buying treasuries, it would seem that in the data I have seen it was not treasuries that they were buying but corporates, muni’s and junk. Mom and Pop were also looking for yield, iow.
December 20th, 2010 at 8:17 am
BR noted:
Markets have looked a bit tired — and yet — every opportunity to see big whackage has been met by liquidity driven buying. The bid beneath equities remains firm. The bias remains firmly to the upside.
reply:
———–
QE2 helps a bunch, too. It’s the deal closer.
December 20th, 2010 at 8:30 am
last post:
Re bond buyers of late and their timing issues:
The smart bond buyers are bailing now. They understand bond math and rudimentary economics. Some might be praying for QE2 to kick in and see rates fall again. This might happen temporarily if something ancillary assists. There will not be a third drop in rates unless the world ends.
The next wave will move after they see their end of year statements. Idiot advisors will have to do their best dancing at this time. Ha Ha Ha, idiot advisors. Oh, who am I kidding? The experienced advisor knows the rubes need to be told what to think and many advisors will claim nobody could have seen this coming, or think up something even better. The rubes will quiet down and comply.
Then comes the last wave who will create the parabolic top we all want to see, possible in Spring. Woo Woo.
December 20th, 2010 at 8:49 am
Bloomberg terminal. I believe its “Funds Flow” Go.
The anecdotal evidence you hear from brokers, reps and advisors is confirmed by the Fund Flows for Bonds and Equities.
(Does anyone know if there is a free or cheap service that provides this data?)
December 20th, 2010 at 8:51 am
“History shows us that the public tends to be the last in.”
If it were not for these suckers. Wall Street would never profit.
December 20th, 2010 at 9:17 am
Thanks BR. As a rep, I can give you more of the same anecdotal evidence you heard from other people, no retail investors want safe(r) bonds now. Even PIMCO Total Return is changing fund strategy now to include other allowable investments. Perhaps that reveals something about investor sentiments. That said, I have read a lot of reports like these for over six months now:
http://mobile.bloomberg.com/apps/news?pid=2065100&sid=aEr028w7RVDo
http://www.bloomberg.com/news/2010-09-17/junk-bonds-reach-par-for-first-time-since-07-on-upgrades-credit-markets.html
there were other reports back in August that corporate bond funds took in $26 billion and muni bond funds $5 billion while long term government bond funds took in only $191 million. and this trend has largerly continued if not gotten more extreme as I’m to understand it. I also think last month was the first time PTTAX saw outflows in quite some time.
enough to juice the markets well into 2011? Well, who knows, though there certainly appears to be massive conviction in the “fed’s got ur back” thesis, whether that makes sense or not, I find the attitude to be present everywhere.
Anyway, happy holidays, I got some good ideas of your gift lists this year so thanks for those. Good luck to you in 2011.
December 20th, 2010 at 10:04 am
I bet those “mom & pop” investors who lost money in .coms, in RE, and now in (what i’m sure their “advisers” told them are the safest instruments) treasury bonds will be thrilled… Oh, and thanks to higher mortgage rates the home prices (aka their equity in the house) will crater.
Of course, this in now way threatens the stock and commodity markets, since the Adam Smith’s “invisible hand” has been completely and irrevocably replaced with the Helicopter Ben’s “stealthy bailout paw.”
December 20th, 2010 at 10:16 am
My mistakes? I hedged some corporate bonds with a small position in TBT….shoud have skipped the
short hedge. I am not sure my precious metals trading was better than a simple buy and hold in metals…..I know people keep referring to the gold bubble and lumping it in with commodites but it seems to me it is becoming more of an alternate currency so I will just keep a position there as well as in silveer but loose stops seem appropriate. I did well in a corporate bond position (about 50% of my portfolio up 13% for the year) but closed it all not so long ago…right now I am focusing on big cap dividend paying equities but have plans to raise cash near the end of February or March. My ovrqall approqch is best defined as small positions with stops and just try to muddle through….good luck Barry in the New Year
December 20th, 2010 at 10:22 am
So much for THAT rally!
December 20th, 2010 at 10:32 am
You beat me to it, BR :-)
December 20th, 2010 at 10:37 am
This is a loaded question! This year I was able to get debt free except for a 15 yr mortgage, invested and saved over 26% of my gross income(would have been much more but paid cash for a rather expensive engagement ring and did a full season at the racetrack with the motorcycle). I put a large portion of that into mutual funds and I think that was a good move. They’re all up 13-28% and allowed me to start investing without having to put up a large initial sum. This year I plan on closing out the mutual funds and investing in ETF’s. I’ll correct my asset allocation and get lower expenses. And maybe I’m crazy but I plan to continue buying bond funds in small amounts. I’m young and have a long timeline for needing the money and when I hear people pulling out and an asset falling out of favor, it screams buy (low) to me. Could someone comment on that philosophy?
December 20th, 2010 at 11:22 am
Dead Hobo:
Good luck. Unemployment isn’t going to get better anytime soon. Why? Austerity!! It’s coming to the U.S., if you haven’t noticed.
December 20th, 2010 at 11:25 am
‘History shows us that the public tends to be the last in…’ (see current stock market for details)
December 20th, 2010 at 11:27 am
We will be focusing on debt re-structuring and keeping the housing market pulled to the downside. After continued “strategic” moves we will invest in Freezer bags, silver and low fee etf’s at 52 week lows to put our excess money in. We will buy little and focus on the art of BS to keep our jobs. We will watch our neighborhoods turn into multi family rental camps and will guard our freezer bag assets accordingly.
December 20th, 2010 at 11:29 am
I used to dabble in bonds. Nothing serious: Vanguard market index funds and high class corporate debt, but nothing else, I swear. Early last year I started hitting the hard stuff. It seemed so easy. A utility here, a muni there, and before you know it you have 40% of your portfolio earning 6% fixed.
I keep meaning to give it up, but it is like cigarettes. State universities, city-owned golf courses, anything but mortgages. (Not that I have any pride left, I just don’t like the taste of paint thinner.)
I finally hit rock bottom with the Miami-Dade airport.
Is there a 12-step program?
December 20th, 2010 at 12:00 pm
Barry, do you think the president meeting with CEO’s last week to convince corporations will succeed in them utilizing their cash hoard for hiring and/or new equipment? I’m not so sure, because if they have excess capacity (and most do), why would they?! So I think it’s an open question whether Bernanke and the Obama ‘tax deal’ can keep the ship afloat.
I pivoted well in and out of the bond rally, but was too conservative with equities. Given the paltry returns on CD’s, et al, I’m expecting another 8 to 12 percent gain through 2011 from retail investors looking for growth, but anticipate it will come with a significant amount of whipsaw activity due to ongoing UE and decreased municipal spending. Plan to dollar-cost-average into dips and see if support holds.
December 20th, 2010 at 12:06 pm
My honest assessment of next year is it’s going to be a disaster. Here is why: There is no recovery. Any data that has ‘improved’ is simply reverberating off of the original 2007-2009 volatility. Anything beyond that can be explained by government stimulus via bailouts, QE2, etc.
Private debt simply became public debt thanks to the Obama administration’s shortsightedness. As witnessed on 60 minutes last night, the endgame for all of this debt is fast approaching. At one time all this debt belonged to all the crooked banks and underwater individuals… now it’s on the governments balance sheet and isn’t going anywhere because politics rules the day, not what’s best for the country.
The crash in the stock market will be as significant as the 2008 crash for two reasons. First, the obvious, the real buyers have been few and far between. We’ve risen almost exclusively on the robots pushing the market higher creating huge air pockets on the way up… creating the exact environment that caused the flash crash. Second, the actual investors who have been coaxed back into the market over the last year and a half are determined to not lose their money again. At the first sign of any real trouble in the market they will be falling over each other to get out. All of this ‘wealth effect’ that has just sent people to the malls over Christmas means nothing if the market goes down. If you just maxed out your credit card based on what your Fidelity statement is saying… you’re paying close attention to the stock market and are ready to sell at a moment’s notice.
Most investors have wised up to Wall Street’s propaganda machine and it’s never-ending parade of used car salesmen that fill CNBC’s screen every day. This time they will sell first, ask questions later.
My opinion is that all the big banks, hedge funds, etc. already know most of this and that’s why we’ve had this big, irrational push to new highs. This market has been going up for the exact opposite reason they’ve been telling us it’s going up. They knew this was their last chance to really rake it in and they spared no propaganda to do so. This is how it ALWAYS works. See tech bubble, housing bubble, etc. Their ‘research’ and their ‘outlooks’ are not created with your best interest in mind. Goldman Sachs has one goal: make money. And they can only make money if someone is losing money. Who do you think is going to be losing money? You or them?
My prediction is the year turns South in first half of next year, a small bounce into 4th quarter, then real bad in 2012… with things finally turning around in 2013 for good after a genuine gutting of the system, which we have to have before things ever get better.
December 20th, 2010 at 12:12 pm
“At one time all this debt belonged to all the crooked banks and underwater individuals…”
Some of it still belongs to one of those groups.
December 20th, 2010 at 12:14 pm
Staying firm with large and financially strong multi-national US companies flowing cash to shareholders’ benefit (divid and buybacks) with ROC’s exceeding 13% … but staying alert and flexible in case the one major global irritant – NK – can’t be controlled by it’s bigger bully next door (the guys we buy everything from).
December 20th, 2010 at 12:39 pm
2010 first.
It was a very interesting and challenging year. Thinking the most cynical thoughts possible and trying to understand how the Fed enriches the banks was the most rewarding process, and produced the best strategy.
Early in the year, we realized that banks were rebuilding their balance sheets by borrowing at 0.25% and buying long-dated Treasuries at 3.5-4%. We simply followed suit, ignoring the “Death of Treasuries” mantra chanted at the time and buying every time TNX spiked near 4%.
During the year, we also reluctantly abandoned Perma Bear Ice Nine station. If the world is not in fact going to end, then dividend paying stocks and high yield bonds will provide income. The May and August sell-offs provided excellent entry opportunities into these asset classes, which we still hold.
The anticipation of QE2 ignited a near mania in fixed income, but especially Treasuries, TIPS and investment grade corporate bonds, but not much in high yield. We reasoned (along with a prescient Tony Crescenzi) that QE2 was designed to enable the banks to move out along the risk curve, selling their Treasuries at a profit and buying risk assets. We used the plunge in yields to sell Treasuries into the peak and invested in emerging markets and equities for a month or two. We have since closed these swing trades in equities and hold only dividend stocks once again, along with high yield bonds and some recently acquired TIPS.
All in all, without doing anything radical, we posted double digit returns. This includes a number of trades that went bad, mostly involving precious metals.
December 20th, 2010 at 1:01 pm
Now, 2011, this is much trickier. I see this coming year’s trades as FX-driven, and once again primarily a process of government and central bank arb. The world will not end, but some sovereigns and some munis will default. The big ones will be saved and the can kicked down the road.
A few immediate observations. 1-month bills are trading at 0.01%, so somebody is concerned about the immediate future. We know that there are big problems in Europe. Commodities seem extended. January is not going to be pretty for retail or employment. So a correction is coming, but maybe not on January 3rd. Here is what we see:
Q1. We may get a few days or even weeks of a New Year rally on mutual fund flows, and Treasury yields may back up for a week or two as some of the hedge funds put some more risk on. But the Euro debt issues will be the main issue of Q1, and China will continue to tighten to control domestic inflation. So both EURUSD and AUDJPY will come under pressure, reversing both of the major carry trades that have supported commodities and commodity stocks like the miners. This will inevitably be dollar positive and a resulting risk-off trade will support US fixed income at the expense of European peripherals and emerging markets. This will be especially bad for markets that are very full of materials stocks, like Australia, UK, Canada, South Africa etc. Strong yen will be bad for Japanese equities. The ten year will fall to 2.50-3.00% at least. Munis will be saved, for now.
Q2. A variety of European band-aids will have been applied, supporting EURUSD, and another round of Japanese QE will cap the JPY, allowing carry trades to resume. Q2 will be moderately good for equities and commodities, and Treasury yields will rise again until we reach 3.50-4.00% in May, at which point we will enter a June swoon in equities. At this point, the housing sales season will be dismal, and Case-Shiller will show further declines, except in the Hamptons, of course. Munis will begin to struggle again, with some defaults.
Q3. The summer will be a “Sell in May and Go Away” summer, during which high quality fixed income will outperform equities. During the summer, another ridiculous CB intervention will be launched – QE3 will target the deteriorating muni market. Treasuries will be bought ahead of the QE3 announcement, and then PIMCO will front run the Fed by buying high-quality munis, even as the lower rated bonds are defaulted on.
Q4. Equities will rally. Santa will ride his sleigh once more to the Malls of America. Abby Joseph Cohen will predict the SPX going to 1750 in 2012. Larry Kudlow will wait until equities and Treasury yields rise sharply, before announcing at the top of the equity rally: “Sell Bonds, Buy Stocks”.
December 20th, 2010 at 1:08 pm
[...] down the Christmas rally. (Big Picture also Bonddad [...]
December 20th, 2010 at 1:10 pm
What have you learned from your mistakes, what did you do right?
============================================
Betting on a VIX pop when the Fed owns the markets is a risky trade. Very risky. Bordering on insane/greedy. It can be done but your timing has to be pretty good. Especially in the options pit. Fortunately, the money management lesson is far behind me
What did I do right:
Silver, silver, silver, silver, silver
Nice gains for the year
The rest of my ‘crops’ are growing according to plan. This was a mending year for me. They gave us back our hours that they cut the year before when the company suffered from the recession. So holding on for dear life was another thing done right. Assuming all goes well next year it is time to take on the next financial stage. I’m looking forward to it!
December 20th, 2010 at 2:03 pm
@leftback “… and the can kicked down the road”
Is there ever an end to this kicking of the can down the road?
Out in the Real world, nothing lasts forever. But in the imaginary world of finance, it seems that until such a time comes that somebody seriously miscalculates, central banksters can kick the can until the cows come home (to coin a folksy aphorism).
Predicting the unpredictable is a Fool’s Errand, and I salute you for your low-risk double-digit returns this past year.
December 20th, 2010 at 2:20 pm
Predicting the unpredictable is a Fool’s Errand
Agreed. The 2011 predictions are somewhat tongue in cheek, and we will continue to trade that which appears to be most likely to be in front of us. The point is I think that hyperinflation and deflationary collapse are both off the table. A decade of stagnation and extend and pretend seems more likely.
December 20th, 2010 at 2:45 pm
What did I do right in 2010?
I loaded up on Canroys early in 2010 at prices that delivered a 10% yield. I figured (rightly or wrongly) that global demand for oil would survive, no matter what happened to the EU and Bananamerica.
What did I do wrong? Several things.
1) believing that the troubles that small businesses were facing in their difficulties getting both sales volume and operating capital would eventually reflect itself in their stock prices, I spent ‘way too much time with about 20% “invested” in TZA. Eventually threw in the towel in the 2nd half of the year and made back those losses.
2) After the November ex-dividend date, while the prices were still respectably high, I sold out of the Canroys (taking about a 2% capital gain on top of my 10% dividend stream (8.5% after the Canadian tax bite)), due to an announced dividend cut of 25% in 2011 as they shift from a Canadian tax-favored status in 2010 to an ordinary Canadian corporation in 2011 and beyond, incorrectly expecting the stock to suffer a 25% (or thereabouts) drop in prices after the December ex-dividend date. Still waiting on that, the stock is about 13% higher than when I sold it. Don’t understand it, don’t believe $90 oil can account for a stock gain in the face of a 25% dividend cut) but am satisfied with a gain rather than a loss and happy with the ability to sleep during the year (that counts for something).
I still feel that the economy is so far away from the stock market, that there is significant potential for an ugly surprise, with the possible causes numbering more than I can count . The odds are astronomical that this feeble “recovery” will bring things back up to what would be considered a recovered economy before the next recession hits, wherever it emanates from. But that old Keynes quote about the markets staying irrational longer than you can stay solvent rings true, so I must grudgingly play the game. But I’m not touching any financial stock, and want to stay outside the US with my investments, preferring Canada or Chile as safer domains for my money.
At least until the Great Realignment occurs, and sanity has a place within the Bananamerican investment sphere.
I’m looking forward to the coming great muni scare, when all muni’s are tarred by the default of the few, and one can be picky and acquire some muni bonds yielding 6%-8% with some reliable revenue streams backing them.
December 20th, 2010 at 3:28 pm
http://e.businessinsider.com/view/oy5.1s9/c583fd3f
I could have picked any of many links that point to pages that say the exact same thing.
Bob Farrell’s Rule #9: “When all the experts and forecasts agree — something else is going to happen”.
December 20th, 2010 at 4:17 pm
RE: “Corporate profits appear to be strong, but headwinds include unemployment and real estate.”
Yes, I agree these are two headwinds. There are many more IMHO. Perhaps the one that could become very noteworthy is the growing chasm between the PPI and CPI. I discussed this issue in a blog post here:
http://economicgreenfield.blogspot.com/2010/12/ppi-cpi-trends.html
Otherwise, from a technical analysis perspective there is much that is disconcerting on many levels. Although I expect the stock market to go higher – at least in the (ultra) short-term – IMHO this market is a lot more risky than generally recognized.
December 20th, 2010 at 5:55 pm
Rational thinking of any sort is nearly impossible when Free market is no longer functioning, accounting standard perverted to Zombie Banks and the crooked are flying high with their ill gotten bonanza and still are minding the stores!
December 20th, 2010 at 10:41 pm
[...] jottings from Barry Ritholtz, brief and to the point. http://www.ritholtz.com/blog/2010/12/winding-down-xmas-rally/ This is important, IMHO: Markets have looked a bit tired — and yet — every opportunity to see [...]