Mon 22 Dec 2008
The 10 day moving average is about to cross under the 75 day moving average in the VIX index, indicating that forward momentum will now drive the VIX index sharply lower. This is the exact reversal of the momentum indicators in late August/mid September 08 when the 10 day crossed over and above the 75 day moving average leading to a sharply higher VIX subsequently and the flight to 3 month Treasuries. I expect the next stop to be 37 in the VIX and then below which will lead to much higher equity indices as well.
Notice that 3 month Treasuries closed at 0.04% on Friday and in fact since 17/12, yield "jumped" from 0.01% to 0.04% and has stayed there since. Money has started coming out of Treasuries and with automakers' rescue now in place, more capital will leave risk free Treasuries and move to equities which is why VIX is poised to collapse.
It is worthwhile looking back to mid September when VIX surged and Dow started collapsing leading to a flight of capital into 3 month Treasuries pushing yield from 1.51% on 11/9 to 0.05% by 19/9. The Dow was at 11,433 on 11/9 and by 10/10 it had got to 8,451, a loss of 26%. On 11/9 the VIX was at 24 and by 10/10, it was at 69.95. 10/10 was the day when the US market had the most number of stocks reaching 52 week low and most technicians regard that day as the day when the structural bottom of the Dow was reached.
With the VIX index now poised to collapse under its forward momentum, it will be an interesting but positive few weeks ahead for equities.
Mon 15 Dec 2008
Image source Bloomberg Finance
Click to view M1 graph large Click to view M2 graph large
The M1 chart shows there had been very little growth in cumulative money supply between 2004 and mid September 08 but since mid September 08, M1 has shot up dramatically. M2 which includes M1 plus money market mutual funds was pretty well steady between March 08 and mid September 08 when it too shot up and finally has gone above the longer term uptrend channel. We have been complaining about the lack of velocity of money circulation and whether the banks are lending or just sitting on their money. The charts show that velocity has actually been moving up dramatically since mid September 08.
Even allowing for a lag effect, both M1 and M2 now indicate that the asset inflation strategy of the US Fed is finally working. However, as we pointed out previously, money has been locked away in risk free assets of US Treasuries even though M1 and M2 have finally exploded upward since September 08. With 3 month Treasuries reaching negative yield, asset inflation has occurred in risk free Treasuries instead of riskier assets in equities. The bubble now created in US Treasuries market may well be the interim step that must happen first before capital is transferred up the risk continuum. With zero to negative yield in 3 month US Treasuries, this asset bubble will burst any time soon. Equities will be major recipients of such capital flows leading thus to higher valuation. The biggest bond fund in the world, Pimco, has recognised this bubble and is already investing in higher yield financial institutions' corporate bonds, then even Pimco is starting to move their capital up the risk continuum. I believe a strong pre-Christmas rally on the Dow is around the corner. The question remains whether the Treasuries asset bubble once burst will lead to the next asset bubble in equities. I think very likely. 2009 will see fantastic upside in equities around the world.
Thu 11 Dec 2008
Forget the bear market, we have just finished a severe correction in a long term bull market.
Image source Bloomberg Finance
Click to view image full size Click to view image full size Click to view image full size
The attached charts are 3 month US Treasury yield, Dow Jones index, and the same two indices overlaying each other between 1990 and up to week ended 5/12/08. As you can see the US Treasury yield has travelled within a well defined 18 year channel with yield trending down over this period while the Dow during this period has also been trending upward with the closing of week ended 21/11/08 hitting the 18 year support line before turning up again.
With US 3 month Treasury now trading at negative yield,
see article. We are now at or close to the support line of the 18 year trend channel of US 3 month Treasury yield. This is indicative of the extreme aversion to risk taking but it is also indicative of the massive cash bubble that has been built up in the US capital market.
The Dow has already bottomed as of week ended 5/11/08 and is leading the way up. As confidence continues to build in the Dow, the Dow will lead the way to prick the cash bubble. I expect US 3 month Treasury yield to rise within next two weeks and the Dow to have an explosive run upward.
These charts say to me that we have actually been trending in a long term bull market of at least 18 years or possibly 21 years dating back to 1987, rather than having entered a bear market. The correction we saw in the last 14 months was a correction within a long term bull market. The turning point in this severe correction was 21/11/08 and the resumption of the bull market trend has started.
Tue 18 Nov 2008
The US Dow was right on support in this trend channel last night. Speculation was strong that there would be massive hedge fund liquidation last night because of redemption notices received up to last Friday for 31/12/08 redemption. The very muted volume did not support this at all. Speaking to one who knows the hedge fund industry, he was told that the funds were 25 to 30% in cash already by last week with cash committed towards or prepared for redemption. I would expect the current selling from hedge funds to have been exhausted by last Friday and with the support held, leading to a good bounce tonight
Click to view image full size
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Image source Bloomberg Finance
Fri 10 Nov 2008
The Shanghai index has broken its multi months' downtrend today decisively when it traded above 1800. It would not be a surprise to see an 8 to 10 % plus up day in Shanghai which will flow on to the entire region and US market. The Chinese stimulatory package amounting to 7% of GDP for each of the next two years is credible and massive. Credible because China with US$ 1.9 trillion of forex reserves, can actually afford it while the US no matter how large their rescue package is, will need to borrow to finance it. With China now sharing the global economic recovery efforts, investors can have the confidence that policy makers now have some solid fundamentals to work from. Commodity prices will be given a floor and so will the Aussie dollar. I expect the US indices to be up solidly tonight as well. Watch for the Dow to break 9250 and S&P 1020.
Fri 5 Nov 2008
Investment guru Harry Dent talked about the first technology boom of 1910 to 1919 and the second technology boom of 1921 to 1929 when the Dow Jones Technology index enjoyed explosive rises in those two periods supported of course by the automobile sector and the wireless, meaning radio. We had the first technology stock boom in 1996 to early 2000 in telecommunication and internet. I think we are entering the second tech stock boom from 2008 onward and it will be telecommunication and internet related just as it was between 1996 to early 2000. So many in the world have written off the American Empire during the latest financial crisis. I have not, but if you look around you, you will see the dominance of US internet and telco brands in the world today. The Google, Yahoo, Apple iPhone, even such basics as Microsoft MSN, Media Player, etc. These are "long" established US brands. If America is to pull herself out of the current economic gloom, she can certainly rely on telecommunication and broadband internet technologies which are areas that she excels in and dominates the world in. I am sure the use of these technologies to reassert the US influence has not been lost on the newest, youngest, transformational American President Obama.
